FORM 10-K/A-1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1997
Commission file number: 0-22340
PALOMAR MEDICAL TECHNOLOGIES, INC
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(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 04-3128178
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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45 Hartwell Avenue, Lexington, Massachusetts 02173
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(Address of principal executive offices)
(781) 676-7300
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(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
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Not Applicable Not Applicable
Securities registered pursuant to Section 12 (g) of the Act:
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Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 20, 1998, 59,553,243 shares of Common Stock were
outstanding. The aggregate market value of the voting shares (based upon the
closing price reported by Nasdaq on March 20, 1998) of Palomar Medical
Technologies, Inc., held by nonaffiliates was $66,009,188. For purposes of this
disclosure, shares of Common Stock held by entities who own 5% or more of the
outstanding Common Stock, as reported in Amendment No. 3 to a Schedule 13G filed
on March 10, 1998, and shares of Common Stock held by each officer and director
have been excluded in that such persons may be deemed to be "affiliates" as that
term is defined under the Rules and Regulations of the Securities Exchange Act
of 1934. This determination of affiliate status is not necessarily conclusive.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed prior to April
30, 1998, pursuant to Regulation 14A of the Securities Exchange Act of 1934 are
incorporated by reference into Part III of this Form 10-K
Transitional Small Business Disclosure Format: Yes No X
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PART I
Item 1. Business.
(a) Introduction
Palomar Medical Technologies, Inc. (the "Company" or "Palomar" or the
"Registrant") was organized in 1987 to design, manufacture and market lasers,
delivery systems and related disposable products for use in medical procedures.
In December 1992 the Company went public. Subsequently, the Company pursued an
aggressive acquisition program, acquiring companies in its core laser business
as well as others, principally in the electronics industry, in order to spread
risk and bolster operating assets, among other reasons. By the beginning of
1997, the Company had more than a dozen subsidiaries. At the same time, having
obtained FDA clearance to market its EpiLaser(R) hair removal laser system in
March 1997, the Company was well positioned to focus on what it believes is the
most promising product in its core laser business. Hence, under the direction of
a new Board and management, the Company undertook an ambitious program in 1997
of exiting all non-core businesses and investments and focusing only on those
businesses which it believes hold the greatest promise for maximizing
stockholder value. Currently, the Company has four subsidiaries, one of which,
Dynaco Corp. ("Dynaco"), the only remaining electronics subsidiary, the Company
anticipates exiting in 1998. (See Report on Form 8-K filed December 23, 1997.)
The remaining three subsidiaries are Palomar Medical Products, Inc. ("PMP"), in
Lexington, Massachusetts, where the Company's ruby hair removal laser system is
manufactured, Star Medical Technologies, Inc. ("Star") in Pleasanton,
California, where the Company's diode hair and leg vein removal laser is
manufactured, and Cosmetic Technology International, Inc. ("CTI"), also
headquartered in Lexington, Massachusetts, which provides cosmetic laser
services.
(b) Financial Information About Industry Segments
The Company conducts business in one industry segment, medical products
and services. In 1997, the Company began a program of divesting all of its
noncore electronics subsidiaries. The Company expects to complete this program
in 1998. (See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview" and Note 2 to Financial
Statements.)
(c) Description of Business
(i) Principal Products and Services
Lasers for Hair Removal
The word "laser" is the acronym for "light amplification by stimulated
emission of radiation." The emitted radiation oscillates within an optical
resonator and is amplified by an active medium, resulting in a monochromatic
beam of light, which is narrow, highly coherent and thus can be focused to a
small spot with a high degree of precision. In recent years, scientists and
clinicians have developed a concept called tissue optics to describe how the
unique properties of the laser can be used to treat human tissue selectively and
more precisely. By careful selection of laser parameters, such as wavelength
(color), energy and pulse width (exposure time), and with a detailed
understanding of the physical and optical properties of the target tissue, the
clinician can selectively treat the target tissue while minimizing or
eliminating damage to surrounding tissue. The concept of color selectivity has
been useful in developing a number of successful dermatological applications.
The patented hair removal technology utilized by Palomar targets the pigment in
a hair follicle and was developed by Dr. R. Rox Anderson at Massachusetts
General Hospital ("MGH"). Pigment, called melanin, is found in the upper layer
of the skin and in the hair shaft and hair follicle deeper below the surface of
the skin. With the appropriate selection of wavelength (color), energy and pulse
width to allow for the preferential absorption of laser energy by the melanin
present in the hair, there is negligible absorption by the surrounding tissue.
Energy from ruby lasers is particularly well absorbed by melanin and absorption
by other cells and tissue is particularly low. Palomar uses a patented and
proprietary contact cooling technology to protect the upper layer of the skin
while the ruby or diode laser light is targeting and destroying the follicle
deeper within the skin tissue. In addition, Palomar's patented contact cooling
handpiece enables the laser light to penetrate to the correct depth while at the
same time limiting the amount of discomfort associated with the procedure. This
method of hair removal using the cooling handpiece allows for selective
destruction of the target follicle
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without harming the surrounding skin or surface of the skin. The laser light is
pulsed at a rapid rate covering approximately one-eighth square inch at each
pulse. This treatment method allows for a large area of treatment over a
relatively short period of time.
Using its core ruby laser technology, originally developed for tattoo
removal and pigmented lesions, Palomar developed a long pulse ruby laser, the
EpiLaser(R) laser system, that is specifically configured to allow the
appropriate wavelength, energy level and pulse duration to be absorbed
effectively by the hair follicle without being absorbed by the surrounding
tissue. That, combined with the patented ChillTip(TM) cooling handpiece, allows
for safe and effective hair removal.
In an effort to find a way to allow the laser light to pass through top
skin layers and be deeply absorbed in the hair follicle below, a contact cooling
handpiece was developed by MGH and licensed to Palomar on an exclusive
world-wide perpetual basis. This unique cooling handpiece is key to the success
and safety of Palomar's laser hair removal systems, as it permits laser
applications of higher power with better targeting and greater safety. The cold
sapphire tip protects the epidermis while allowing the laser light to
efficiently destroy the target follicles. The Company believes its unique
delivery system enables the user to address a potentially larger market than
electrolysis currently does by offering to treat large areas of the body such as
back, chest, abdomen, legs, arms and other areas. (See "Research and
Development.")
In March 1997, Palomar was the first company to receive FDA clearance
to sell and market a ruby laser in the U.S. for hair removal. In December 1997
and January 1998 respectively, Palomar was also the first company to receive FDA
clearance for a diode laser for hair removal and for leg vein treatment, the
Company's LightSheer(TM) diode laser system.
During 1998, Palomar may upgrade its ruby laser system to include a
fiber delivery system, a higher energy head and a new handpiece. Palomar will
continue to make improvements to the ruby laser systems including higher energy
(for even more effective hair reduction), colder cooling and user selectable
pulse widths (for more comfort and safety with darker skin), and faster pulse
rate (for faster hair removal).
Throughout 1997, the Company's Star subsidiary continued work on the
Company's latest hair removal system, the LightSheer(TM) diode laser. This
revolutionary device incorporates state-of-the-art laser diode technology into a
2,000 watt system that the Company feels will be the ideal complement to the
current ruby laser technology for hair removal. The LightSheer(TM) diode laser
weighs approximately one-eighth the weight of the EpiLaser(R) laser system, can
complete a treatment more rapidly than the ruby laser, and plugs into any wall
outlet. Clinical results after 18 months of testing show comparable results to
the EpiLaser(R) laser system for most hair and skin types. The new system uses
Palomar's exclusive patented contact cooling technology to provide greater
efficacy while maintaining epidermal safety.
The Hair Removal Market
The market for laser-based hair removal is in its early stages and is
rapidly growing. The final size of that market cannot yet be determined;
however, the Company believes that the current electrolysis market is a good
model. Last year, more than one million women in the United States underwent
treatment using electrolysis, spending on average more than $1,000 each,
representing a market of approximately $1 billion annually. In addition, surveys
indicate as many as 15% of men would also like to remove unwanted hair
especially from back and chest areas. Electrolysis is a commonly used method for
the long-term removal of body hair. Other methods of hair removal include
waxing, depilatories, tweezing, depilatory creams and shaving, all resulting in
only short-term hair removal. (See Item 7. "Risk Factors - Dependence on
Developing Market; Product Concentration.")
Electrolysis is a process in which an electrologist inserts a needle
directly into a hair follicle and activates an electric current in the needle,
which disables the hair follicle. The tiny blood vessels in each hair follicle
are heated and coagulated, presumably cutting off the blood supply to the hair
matrix, or are destroyed by chemical action depending upon modality used. The
success rate for electrolysis is variable depending upon the skill of the
electrologist and always requires a series of treatments. Electrolysis is
time-consuming, expensive and sometimes painful. There is also some risk of skin
blemishes and a rising concern relating to needle infection. Since electrolysis
only treats one hair follicle at a time and can only treat visible hair
follicles, the treatment of an area as small as an upper lip may require
numerous visits at an aggregate cost of up to $1,000. Although 70% of all
electrolysis treatments are for facial hair, the neck, breasts and bikini line
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are also treated. Because hair follicles are disabled one at a time,
electrolysis is rarely used to remove hair from large areas such as the back,
chest, abdomen and legs.
Market surveys report that more than 70% of women in the United States
employ one or more techniques for temporary hair removal from various parts of
the body. Pulling hair from the follicle produces the longest-term temporary
results, but is painful and may cause skin irritation. A number of techniques
are used to pull hair from the follicle including waxing, depilatories and
tweezing. In the waxing process, a lotion, generally beeswax-based, is spread on
the area to be treated and allowed to harden, thereby trapping the hairs. The
hardened film is then rapidly peeled off, pulling out the entrapped hairs.
Depilatories employ rotating spring coils or slotted rubber rolls to trap and
pull out the hairs. Tweezing involves removing individual hairs with a pair of
tweezers. Depilatory creams, which contain chemicals to separate hair from the
follicle, frequently leave a temporary, unpleasant odor and may also cause skin
irritation. Shaving is the most widely used method of hair removal, especially
for legs and underarms, but produces the shortest-term results. Hair bleaches do
not remove hair, but instead lighten the color of hair so that it is less
visible. A principle drawback of all of these methods is that they require
frequent treatment.
Studies using Palomar's laser hair removal process demonstrated
significant permanent reduction of hair following treatment with the EpiLaser(R)
laser system. The first treatment causes a portion of the hair (typically the
hair in the growth mode) to be reduced in size, color and/or quantity (based on
studies followed for up to three years) and causes significant growth delay
(three to six months) of most of the rest of the hair. Since the partial
re-growth tends to occur in synchrony, the follow-up treatment is often more
effective than the first treatment. An FDA submission seeking to allow Palomar
to claim permanent reduction of hair from treatments with its EpiLaser(R) laser
system was filed in January of 1998. Benefits of Palomar's laser hair removal
process include: significant long term cosmetic improvement, treatment of larger
areas in each treatment session, relatively painless procedure, reduced risk of
scarring, non-invasive procedure, no risk of cross-contamination, and higher
success rates than with previous methods.
Marketing, Distribution and Service
Pursuant to an agreement executed in November 1997, Coherent, Inc.
("Coherent") is the exclusive distributor for Palomar's hair removal lasers. If
Coherent fails to meet certain minimums sales quotas specified in its agreement
with Palomar, it loses its exclusive distribution rights. Coherent is the
largest medical laser company in the world, with over 200 sales persons
worldwide. Under its agreement with Palomar, Coherent is responsible for sales,
marketing, service, training and education. Coherent has over 50 service
representatives in the US, and over 100 worldwide. (See Item 7. "Risk Factors -
Dependence on New Relationship with Coherent" and Note 12(e) to Financial
Statements.)
Laser for Tattoo and Pigmented Lesion Removal
The Company also sells a Q-switched ruby laser for tattoo removal and
treating pigmented lesions, the RD-1200(TM). In 1997, RD-1200(TM) sales
constituted approximately 10% of the Company's sales, and were primarily
overseas, in Japan, Korea and other parts of the world. Palomar sells and
services the RD-1200(TM) through distributors internationally. In the United
States, Palomar has provided service through its own service organization, but
expects to arrange for third party service beginning in the middle of 1998.
The RD-1200(TM) Q-switched ruby laser has been on the market for nearly
nine years. Competition in the medical device industry is intense and technology
developments have continued at a rapid pace over the past decade. While the
RD-1200(TM) Q-switched ruby laser is still recognized as the "gold standard" for
performance in this market, there are less expensive products now available for
this purpose. Palomar expects sales of this product to continue in 1998 at a low
volume to foreign countries where the advantages of ruby laser for treatment of
pigmented lesions is especially important.
Cosmetic Laser Services
An additional avenue that the Company has explored for its laser
technology is the service business conducted through its CTI subsidiary, which
was incorporated in 1996 for that purpose. During 1997, CTI established a number
of test sites to explore business models.
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In early 1997, CTI entered into a binding letter of intent with
Columbia/HCA, one of the world's largest owners and operators of medical
facilities, to establish revenue-sharing cosmetic laser service sites in
existing Columbia/HCA facilities. To date, three such sites have been
established. CTI provides each of its sites with a turnkey package of laser and
medical device technology, equipment, training and service, operations
personnel, strategic advertising and marketing programs, patient financial
credit programs and management assistance. To date, ten CTI revenue-sharing
sites in addition to the Columbia/HCA sites are open and under development.
During 1997, CTI generated revenues of approximately $1,000,000 and incurred
operating expenses of approximately $4,500,000.
(ii) Products Under Development
Burn Diagnosis Laser System
In 1994, the Company's Star subsidiary was awarded a $60,000 Phase I
Small Business Innovation Research Grant ("SBIR") entitled "High Energy Diode
Laser for Burn Diagnosis" by the U.S. Air Force, Phillips Laboratory. In 1994,
Star obtained an exclusive, worldwide license to a patent relating to the
measurement of burn depth in skin from the Office of Technology Affairs at MGH.
In 1995, Star was granted a $743,000 follow-on Phase II SBIR contract by
Phillips Laboratory for the research and development of the burn diagnostic
system. During the fiscal years ended December 31, 1997, 1996 and 1995, Star
recognized $149,251, $281,991 and $307,000 of government contract revenue,
respectively. In 1996, Star began initial clinical testing of the burn diagnosis
system at the Shriner Burn Center in Boston, Massachusetts and at the Augusta
Medical Center in Augusta, Georgia. The system is designed to illuminate the
wound site with near infrared light from a diode laser and to image the blood
flow using a fluorescence dye as an aid to the doctor in determining the extent
of blood flow within the dermis to more accurately diagnose the degree of a burn
and to enable physicians to improve treatment of burn patients. To date the
system has been tested on a small number of burn patients and has demonstrated
the ability to detect the absence or presence of blood flow deep in the dermis.
The system has also been used clinically to determine blood flow surrounding
skin ulcers and in surgical flaps, again, on a very limited number of patients.
Clinical testing continues at the Augusta Medical Center. The Company expects
that it may take several years before a commercial blood flow diagnostic product
is available.
Laser Tonsillectomy
In June 1994, the Company signed an agreement with the Otolaryngology
Research Center for Advanced Endoscopic Applications at New England Medical
Center, Boston, Massachusetts (the "NEMC Agreement"), to provide a research
grant and to sponsor investigations and development of laser applications,
advanced delivery systems and disposable products in the area of dye and diode
laser applications in otolaryngology and related specialties. Under the NEMC
Agreement, the Company provided a total of $150,000 in funding and $50,000 in
the form of laser hardware. The parties have reached an understanding that the
Company will obtain ownership rights or the right of first refusal to exclusive
worldwide licenses to sell and market any inventions developed with the grant
funding. In August 1994, the NEMC Agreement was amended to support animal
testing with one of the Company's diode lasers in connection with performing
tonsillectomies. In the year ended December 31, 1997, the Company provided
$54,000 in funding. The animal studies were completed successfully in 1997. The
Company intends to fund human clinical studies in this area over the next twelve
month period. The Company expects that it may take several years before a
commercial product for tonsillectomy is available.
Dye Laser
During 1995, the Company entered into a two year cost plus fixed fee
contract with the U.S. Army for the investigation of compact, wavelength
diverse, high efficiency solid-state dye lasers. In 1997, the Company, which
does not anticipate this research will result in a commercial product within the
next few years, concluded with the U.S. Army a Novation Agreement which novates
this contract to Physical Sciences, Inc. ("PSI"). Upon completion of the
contract, PSI has agreed to offer the Company a right of first refusal for a
commercial license to sell, manufacture or otherwise dispose of solid-state dye
laser technology as developed by PSI under the contract for use in medical
products.
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Laser Thrombolysis
In 1993, the Company entered into an agreement with the Edwards LIS
Division of Baxter (the "Baxter Agreement") regarding an integrated system
utilizing lasers and catheters for the removal of blood clots. Under the Baxter
Agreement, Baxter licensed its proprietary technology to the Company, and the
Company cross-licensed its laser thrombolysis technology to Baxter. The Company
also granted to Baxter a license to sell and market products incorporating such
technology. Baxter agreed to transfer its interest in the agreement to Advanced
Cardiovascular Systems, Inc. ("ACS"), a division of Eli Lilly, as part of a
purchase by Eli Lilly of the Baxter LIS division. Eli Lilly subsequently sold
ACS to Guidant Corp.
In January 1997, Palomar became an equity partner in the formation of a
new company, LaTIS, Inc., created to use Palomar's laser thrombolysis technology
to develop a pulsed-dye laser system for treating strokes. All licenses relating
to this technology have been transferred to LaTIS. With the formation of this
new venture, laser thrombolysis is no longer part of Palomar's strategic agenda,
although the Company can still derive some benefits from its research due to its
equity participation.
(iii) Production and Sources and Availability of Materials
Palomar's manufacturing and research and development operations are
located in two locations, Lexington, Massachusetts and Pleasanton, California.
The ruby laser system is manufactured in Massachusetts and the diode laser
system is manufactured in California. Manufacturing consists of the assembly and
testing of components purchased from outside suppliers and contract
manufacturers. Palomar maintains control of and manufactures key components
in-house. The entire fully assembled system is subjected to a rigorous set of
tests prior to shipment to the customer or distributors.
Palomar depends and will depend upon a number of outside suppliers for
components used in its manufacturing process. Most of Palomar's components and
raw materials are available from a number of qualified suppliers. Two critical
components that are available through only one qualified supplier each are ruby
rods for the ruby lasers and diode bars for the diode lasers. To date, the
Company has not experienced, nor does it expect to experience, any significant
delays in obtaining component parts or raw materials. Palomar has expanded its
manufacturing capabilities to satisfy projected demand. Palomar has the approval
for the CE Mark for the EpiLaser(R) laser system, and is working towards
completion of ISO 9001 registrations for both facilities. (See "Risk Factors -
Dependence on Suppliers.")
(iv) Patents and Licenses
Certain processes by which the Company is able to produce its products
are largely proprietary. The Company believes that patent protection of its
technology and products that result from the Company's research and development
efforts is important to the possible commercialization of the Company's
technology. The Company continually attempts to protect its proprietary
technology by obtaining patent application protection and relying on trade
secret laws and non-disclosure and confidentiality agreements with its employees
and persons that have access to its proprietary technology.
To date, the Company and its subsidiaries have filed eleven patent
applications related to its laser products with the United States Patent and
Trademark Office in order to protect its current technology. This includes two
applications that are continuations of previous applications. To date, two of
these patents have been issued. Additionally, the Company extends many of its
domestic filings into foreign applications. To date, four foreign applications
have been filed, and no foreign patents have been issued. The Company intends to
aggressively pursue any person or company that offers products that the Company
believes infringe on one or more of its patents or on patents licensed
exclusively to the Company.
The Company believes it owns, or has the right to use, the basic
patents covering its products. However, each year there are hundreds of patents
granted worldwide related to lasers and their applications. In the past, the
Company has been able to obtain patent licenses for patents related to its
products on commercially reasonable terms. The failure to obtain a key patent
license from a third party could cause the Company to incur liabilities for
patent infringement and, in the extreme case, to discontinue the manufacturing
of products that infringe upon the patent. Management believes that none of the
Company's current products infringe upon a valid claim of any patents owned by
third parties, where the failure to license the patent would have a material and
adverse effect on the Company's financial position or results of operations.
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In March 1997, one of Palomar's competitors, Selvac Acquisitions Corp.
("Selvac"), filed a complaint alleging, among other things, that the EpiLaser(R)
laser system infringes a patent held by Selvac.
Another company has recently informally notified the Company's
distributor that it believes that the Company's contact cooling method as used
in connection with the Company's diode laser for vascular lesions infringes a
patent owned by that company. The Company is evaluating this contention. Based
upon the Company's review to date, it does not appear that this patent should be
successfully assertable against the Company.
Other than the two matters described above, the Company has not been
notified that it is currently infringing on any patents nor has it been the
subject of any patent infringement action. Defense of a claim of infringement is
costly and could have a material adverse effect on the Company's business, even
if the Company were to prevail. (See Item 3. "Legal Proceedings" and Item 7.
"Risk Factors - Patents/Possible Patent Infringements.")
The Company also entered into a four year agreement with MGH whereby
MGH agreed to conduct clinical trials on a laser treatment for hair
removal/reduction invented by Dr. R. Rox Anderson, Wellman Laboratories of
Photomedicine, MGH. As part of the agreement, MGH provided the Company with
prior data already generated by Dr. Anderson with respect to the ruby laser
device at MGH. This information was the basis for the Company's application
filed with the FDA for approval of the Company's EpiLaser(R) laser system for
treating unwanted hair. The Company is obligated to fund the clinical research
in the aggregate amount of approximately $917,000 over the term of its contract
with MGH. Effective February 14, 1997, the Company amended the 1995 agreement
with MGH. Under the terms of this amendment, the Company agreed to provide MGH
with a grant of $203,757 to perform research and evaluation in the field of hair
removal. During 1997, the Company incurred approximately $1,100,000 under its
clinical research agreement with MGH and other clinical studies.
In August 1995, the Company entered into a worldwide exclusive
agreement with MGH to license (with the right to sublicense) U.S. Patent No.
5,595,568 ("Permanent Hair Removal Using Optical Pulses") as well as any other
patents arising out of the Palomar-funded clinical trials. As consideration for
this license, the Company is obligated to pay MGH royalties of 5% of net
revenues on products covered by valid patents licensed to the Company
exclusively; 2.5% of net revenues on products covered by valid patents licensed
to the Company non-exclusively; no less than 2.5% of net revenues for products
sold for hair removal as well as other uses, and a royalty to be negotiated on
services or commercial dispositions (other than sales) involving products
covered by valid patents licensed to the Company.
On February 24, 1993, the principals of the Company's Star subsidiary
applied for a patent. This application was subsequently transferred to Star in
connection with the technology underlying the use of a high-powered diode laser
for the treatment of psoriasis and other derma vascular malformation. The patent
was issued on June 18, 1996. Star has applied for additional patents regarding
the design and use of high-powered diode lasers. On June 22, 1995, the New
England Medical Center ("NEMC") filed a patent application for Coagulation Laser
Tonsillectomy; which application was issued as a patent on May 28, 1996. The
Company has exclusive rights to the NEMC patent. MGH has filed a number of
patents surrounding technology involving laser hair removal. The first patent
was issued on January 21, 1997, and a continuation-in-part of this patent was
issued on April 7, 1998. The Company has licensed this laser hair removal
technology from MGH in accordance with a certain license and research agreement
as previously discussed.
(v) Seasonal Influences
There is no significant seasonal influence on the Company's sales.
(vi) Financing of Operations and Increase in Outstanding Shares
The Company has financed current operations and past expansion of its
core business with short-term financial borrowings and investments through the
private sale of debt and equity securities of the Company. The Company raised a
total of $31,197,709 and $53,534,990 in such financings during the years ended
December 31, 1997, and December 31, 1996, respectively. The Company anticipates
that it will require substantial additional financing during the next twelve
month period. The Company may from time to time be required to raise additional
funds through additional private sales of
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the Company's debt or equity securities. Sales of securities to private
investors have been sold at a discount to the current or future public market
for similar securities. It has been the Company's experience that private
investors require that the Company make its best effort to register their
securities for resale to the public at some future time. There can be no
assurance that the Company will be successful in raising additional capital on
favorable terms. (See Notes 1, 6, 7 and 13 to Financial Statements, Item 5.
"Market for Common Equity and Related Stockholder Matters," and Item 7. "Risk
Factors - Substantial Continuing Losses; Doubt About Ability to Continue as a
Going Concern.")
As a result of financing activities, business developments, mergers and
acquisitions, issuance of incentive stock options and warrants to purchase
common stock to attract and retain key employees, the Company's issued and
outstanding shares of common stock have increased to 45,792,585 at December 31,
1997. The Company also had additional reserved but unissued shares of common
stock of 31,149,432 shares at December 31, 1997. The Company's issued and
outstanding shares of common stock increased subsequent to December 31, 1997 to
59,553,243 shares with additional reserved but unissued shares of common stock
of 28,180,020 shares as of March 20, 1998. A substantial number of the Company's
reserved shares are registered and could be resold into the public market. (See
Item 7. "Risk Factors - Issuance of Reserved Shares; Registration Rights;
Issuance of Preferred Stock and Debenture Could Affect Rights of Common
Stockholders and Significant Outstanding Indebtedness; Subordination of
Debentures.")
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on the Company's working
capital.
(vii) Dependency on a Single Customer
Sales pursuant to the Company's Sales Agency, Development and License
Agreement with Coherent accounted for approximately 11% of the Company's total
revenues in fiscal 1997. (See - Marketing, Distribution and Service, "Risk
Factors - Dependence on New Relationship with Coherent" and Notes 3(i) and 12(e)
to Financial Statements.)
(viii) Backlog
The Company's backlog of firm orders for its continuing operations at
December 31, 1997, and December 31, 1996, was approximately $2.5 million and
$2.2 million, respectively. The backlog as of year-end has already been filled
in 1998. As of March 31, 1998, the Company's backlog of firm orders related to
its laser hair removal systems was approximately $7,000,000.
(ix) Government Contracts
Not applicable.
(x) Competition
The markets in which the Company is engaged are subject to keen
competition and rapid technological change. Four other companies, ThermoLase
Corporation, Laser Industries, Ltd., MEHL/Biophile International and Cynosure,
Inc. have received market clearance from the FDA for laser hair removal and
another company, ESC Medical Systems Limited, has received FDA clearance to
market a laser-like system using filtered intense light to remove hair. The
Company expects that other hair removal devices will be developed and/or
introduced in 1998, making laser hair removal the most competitive application
within the cosmetic laser marketplace. The Company also expects that there will
be further consolidation of companies within the laser hair removal industry via
acquisitions, partnering arrangements or joint ventures; ESC Medical Systems
Limited recently completed the acquisition of Laser Industries. The Company's
products will also compete with other hair removal products and methods. The
Company competes primarily on the basis of technology, product performance,
price, quality, reliability, distribution and customer service and support. To
remain competitive, the Company will be required to continue to develop new
products, periodically enhance its existing products and compete effectively in
the areas described above. (See Item 7. "Risk Factors - Dependence on New
Products; Highly Competitive Industries.")
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In the cosmetic laser services industry, the Company's CTI subsidiary
competes not only with other laser companies which also either revenue-share
with physicians and/or operate their own centers, but also with healthcare
providers. CTI's services will also compete for business with other aesthetic
service providers such as electrologists, beauty salons, spas, and
aestheticians, among others. Product efficacy, location, marketing, a wide
offering of laser procedures, price and customer service are all important
competitive factors. (See Item 7. "Risk Factors - New Ventures.")
(xi) Research and Development
During fiscal 1997, fiscal 1996, and fiscal 1995, the Company incurred
approximately $11,990,332, $6,297,477 and $3,964,920, respectively, of
internally sponsored research and development programs. Due to the intense
competition and rapid technological changes in the laser industry, the Company
believes that it must continue to improve and refine its existing products and
services, and develop new applications for its technology.
Wellman Laboratories ("Wellman Labs"), the world's largest biomedical
laser research facility and part of the MGH Laser Center located in Boston,
Massachusetts, was created to oversee and speed the flow of biomedical laser
research from the laboratory to patient care. Funded in part by a grant from the
Department of Energy, the MGH Laser Center brings together two strengths of MGH:
its clinical departments and the Wellman Labs. The MGH Laser Center works
together with industry, academia and the Department of Energy Laboratories to
access information and technology across a broad spectrum of laser and medical
capabilities. The principals at Wellman Labs study the fundamental photophysical
and photochemical properties and processes of biomolecules excited by
ultraviolet, visible and near infrared radiation. Engineers, laser physicists
and physicians familiar with all aspects of biomolecules, cells and tissue in
vitro staff the labs. The scientists work side by side with the clinicians to
understand the basic principles involved in the complex interactions of light
and tissue. In 1994, the Company began a number of studies for the treatment of
certain dermatological conditions using its diode laser at Wellman Labs. In
1995, those studies were expanded to include the Company's ruby lasers for
cosmetic procedures. In 1997, those studies were again expanded to include the
Company's diode lasers for cosmetic purposes. Wellman Labs and the Company are
currently evaluating the data associated with these treatments. The Company
works closely with Dr. R. Rox Anderson, the Research Director of the MGH Laser
Center and Associate Professor of Dermatology at Harvard Medical School, who is
a recognized expert in laser tissue interaction and the inventor of a number of
laser procedures in use today. Dr. Anderson has authored over 60 papers in
peer-reviewed publications relating to the use of lasers in dermatology, is the
recipient of numerous awards in the field of laser medicine and serves as a
member of the Blue Ribbon Government Liaison Committee of the American Society
for Laser Medicine and Surgery. Dr. Anderson holds ten U.S. patents and has
pending applications for an additional eleven. The Company feels that these
types of relationships are critical in developing effective products for
widespread use in the market on a timely basis, and that this method of
conducting research and development provides a higher level of technical and
clinical expertise than it could provide on its own and in a more cost-efficient
manner.
PMP's Vice President of Research and Development, Gregory Altshuler, is
the former Director of the Laser Center of the St. Petersburg (Russia) Institute
of Fine Mechanics and Optics (the "St. Petersburg Laser Center)" and the Company
continues to work closely with the St. Petersburg Laser Center, contracting out
research and development tasks to them on a project basis. Palomar owns all
inventions, developments and patents which result from the work performed at the
St. Petersburg Laser Institute and funded by Palomar. In 1997, the Company spent
approximately $100,000 on research and development conducted at the St.
Petersburg Laser Institute. Dr. Altshuler holds approximately 50 patents in
Russia in the field of lasers and the application of lasers in medicine, and has
authored approximately 130 papers relating to laser physics, engineering and
medicine.
While MGH focuses on the biological aspects of laser hair removal, Dr.
Altshuler's in-house research and development team focuses on the physical
aspects. Approximately 40 employees of the Company and its subsidiaries were
engaged full time in research and development activities at December 31, 1997.
Pursuant to the Sales Agency, Development and License Agreement that
the Company entered into with Coherent in November 1997, the Company has
committed to spend the following amounts on research and development over the
next three years: at least $5,000,000 in 1998, at least 10% of its 1998 gross
revenues (minus commissions to Coherent) from cosmetic laser products ("Product
Revenues") in 1999, and at least 10% of its 1999 Product Revenues in 2000.
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(See Item 7. "Risk Factors - Dependence on Third Party Researchers" and
Note 8 to Financial Statements.)
(xii) Environmental Protection Regulations
The Company believes that compliance with federal, state and local
environmental regulations will not have a material adverse effect on its capital
expenditures, earnings or competitive position.
(xiii) Impact of Medical Device Regulations
The Company's products are subject to regulation and control by the
Center for Devices and Radiological Health, a branch of the Food and Drug
Administration (FDA) within the Department of Health and Human Services. The FDA
medical device regulations require either an Investigational Device Exemption,
Pre-Market Approval or 510(K) clearance before new products can be marketed to,
or utilized by, the physician. The Company's products are subject to similar
regulations in its major international markets. Complying with these regulations
is necessary for the Company's strategy of expanding the markets for and sales
of its products into these countries. These approvals may necessitate clinical
testing, limitations on the number of sales and controls of end user purchase
price, among other things. In certain instances, these constraints can delay
planned shipment schedules as design and engineering modifications are made in
response to regulatory concerns and requests. The Company's competitors are
subject to the same regulations. (See Item 7. "Risk Factors - Government
Regulation.")
(xiv) Number of Employees
As of December 31, 1997, the Company and its PMP, CTI and Star
subsidiaries employed 165 people, two independent contractors and three
temporary employees. In addition, as of December 31, 1997, the Company's Dynaco
subsidiary employed 187 people.
The Company's ability to develop, manufacture and market its products
and to establish and maintain a competitive position in the industry will
depend, in large part, upon its ability to attract and retain qualified
technical, marketing and managerial personnel. The Company believes that its
relations with its employees are good. None of the Company's employees are
represented by a union. (See Item 7. "Risk Factors - Need for Additional
Qualified Personnel.")
(d) Financial Information About Exports by Domestic Operations
Aggregate export sales for the Company's continuing operations were
approximately $2,468,000 for 1995, $3,935,000 for 1996 and $4,978,000 for 1997.
The 1995 export sales consisted primarily of the RD-1200(TM) tattoo removal
laser, the 1996 export sales of a combination of both the RD-1200(TM) and the
EpiLaser(R) laser system, and the 1997 export sales primarily of the EpiLaser(R)
laser system. (See Note 3(h) to Financial Statements.)
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PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(a) Overview
In the third and fourth quarter of 1997, the Board of Directors
authorized management to focus the Company on its core laser products and
services business principally related to cosmetic hair removal and to proceed
with a restructuring plan to reorganize the Company and divest its electronic
subsidiaries, Dynaco, Dynamem, Inc. ("Dynamem"), Comtel Electronics, Inc.
("Comtel") and Nexar (the "Electronic Subsidiaries"), and other noncore
businesses.
Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company have been
reclassified to reflect the dispositions of the Electronic Subsidiaries.
Accordingly, the revenues, cost and expenses, assets and liabilities and cash
flows of the Electronics Subsidiaries have been reported as discontinued
operations in these consolidated financial statements. (See Note 2 to Financial
Statements.)
As part of the Company's overall restructuring efforts implemented in
the fourth quarter of 1997, the Company made the strategic decision to focus its
operations principally on its cosmetic hair removal products. Accordingly, the
Company also divested its wholly-owned subsidiary Tissue Technologies, Inc.
("Tissue Technologies") due in part to a significant decline in revenues for
Tissue Technologies' Tru-Pulse(R) CO2 skin resurfacing laser caused by an
overall decline in the worldwide CO2 skin resurfacing laser market. This
restructuring also included a reduction in the Company's work force and closing
of the Company's manufacturing facility in Hull, England due to underutilized
plant capacity. The Company has simplified its organization and now conducts
business in only two locations, Lexington, Massachusetts and Pleasanton,
California. Prior to this restructuring, the Company conducted business in over
a dozen different locations. (See Item 1. "Introduction.")
(b) Results
(i) Year Ended December 31, 1997, Compared to Year Ended December
31, 1996
Revenues from continuing operations for the year ended December 31,
1997, were $20,994,546 as compared to $17,606,871 for the year ended December
31, 1996. The 19.2% increase mainly was due to additional sales volume of
approximately $11.3 million associated with the EpiLaser(R) laser system and
service revenue and RD-1200(TM) ruby laser manufactured by the Company. The
Company obtained FDA clearance to market and sell the EpiLaser(R) laser system
for hair removal in the United States in March 1997. This increase in revenues
was offset by a decline of approximately $7.9 million in sales volume for the
Company's Tru-Pulse(R) CO2 laser product. The Company believes that overall
revenues from its medical products will increase in 1998 due to its improved
manufacturing process, growing market demand for its EpiLaser(R) laser system
and recently FDA cleared LightSheer(TM) laser system and an improved
distribution network as a result of the Company's exclusive distribution
arrangement with Coherent. (See "Risk Factors - Dependence on New Relationship
With Coherent.")
Gross margin for the year ended December 31, 1997 was $938,583 (4.5% of
revenues) versus $3,437,400 (19.5% of revenues) for the year ended December 31,
1996. The decline in gross margin percentage was caused mainly by lower margins
attained on the Company's EpiLaser(R) laser system due to manufacturing and
production inefficiencies in the initial manufacturing stage of this product as
well as underabsorbed overhead costs incurred during the fourth quarter of 1997
as the Company transitioned to its exclusive distribution arrangement with
Coherent. The decline in gross margin dollars was due principally to a reduction
in revenues related to the Company's Tru-Pulse(R) CO2 laser product. The
Company's overall strategy was to first demonstrate and prove the overall
efficacy of its proprietary cosmetic hair removal technology licensed from MGH
and gain early entrance to the market. This resulted in higher than anticipated
costs of materials and manufacturing techniques. As a result of this strategy,
the Company believes that during 1997 it demonstrated to the medical community
the efficacy of its technology and its long term benefits and advantages. The
Company believes that its gross margins will improve throughout 1998 as the
Company introduces its successor hair
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removal laser products in the first and second quarter. The Company expects to
obtain manufacturing efficiencies and volume production related to these
successor laser products. In addition, the Company anticipates an increase in
revenues due to an improved distribution network related to its arrangement with
Coherent. (See "Risk Factors - Dependence on New Products; Dependence on New
Relationship with Coherent.")
Research and development costs increased to $11,990,332 (57.1% of
revenues) for the year ended December 31, 1997, from $6,297,477 (35.8% of
revenues) for the year ended December 31, 1996. This 90.4% increase in research
and development reflects the Company's strategic decision to accelerate its
research and development efforts during 1997 to develop and obtain FDA clearance
for its successor hair removal and other cosmetic products using the Company's
proprietary cooling technology licensed from MGH. The Company also continued to
concentrate on the development of additional products for other medical laser
applications. Although as part of its agreement with Coherent, the Company has
committed to certain minimum research and development spending levels,
management believes that research and development expenditures in the aggregate
and as a percentage of revenues will substantially decrease over the next year
as the Company introduces to the market its successor hair removal products.
(See Item 1. "Description of Business Research and Development.")
Selling and marketing expenses increased to $6,959,750 (33.2% of
revenues) for the year ended December 31, 1997, from $5,076,941 (28.8% of
revenues) for the year ended December 31, 1996. This 37.1% increase reflected
the Company's effort to expand its marketing and distribution for the Company's
EpiLaser(R) laser system. The Company anticipates that its aggregate selling and
marketing expenses will increase as revenues increase due to the costs
associated with its distribution agreement with Coherent because Coherent
receives a commission for each of the Company's products that it sells to
compensate it for its selling and marketing efforts. (See "Risk Factors -
Dependence on New Relationship With Coherent.")
General and administrative expenses increased to $15,332,241 (73.0% of
revenues) for the year ended December 31, 1997, from $9,752,922 (55.4% of
revenues) for the year ended December 31, 1996. This 57.2% increase was the
result of additional administrative resources required at the Company's now
closed corporate offices and subsidiaries to oversee the growth of the Company's
medical products and service businesses, the initial public offering of common
stock of Nexar, and divestiture efforts substantially completed during 1997,
totaling approximately $500,000. Additional general and administrative costs
were also incurred at Palomar Medical Products, Inc., CTI and Palomar
Technologies, Ltd. totaling approximately $1,400,000, $2,300,000 and $1,000,000,
respectively. The majority of these general and administrative expenditures
incurred by the subsidiaries were for employee and infrastructure expenses to
manage the transition from a development stage company to the commercialization
stage. The Company anticipates that general and administrative expenses will
decrease in the aggregate amount and as a percentage of revenues in 1998 as a
result of the third quarter restructuring effort.
Business development and financing costs decreased to $2,060,852 (9.8%
of revenues) for the year ended December 31, 1997, from $2,879,603 (16.4% of
revenues) for the year ended December 31, 1996. This 28.4% decrease is
attributable to the Company's restructuring efforts to focus on its core medical
product and service businesses. The Company anticipates that business
development expense will decrease substantially in 1998 as a result of the
restructuring.
Restructuring and asset write-off costs totaling $12,983,000 were
incurred for the year ended December 31, 1997. These charges reflect
restructuring and asset write-off costs for certain operating and nonoperating
assets that the Company believes were not fully realizable for both the
Company's medical business and other nonmedical investments. Included in this
charge is a $2.7 million charge for severance costs associated with
consolidating the selling, general and administrative functions, including the
closing of certain facilities.
Settlement and litigation costs totaled $3,199,000 for the year ended
December 31, 1997, an increase from $880,000 for the year ended December 31,
1996. These costs are attributable to a lawsuit brought by an investment bank
and other claims made against the Company. In this suit, the investment bank
alleged that the Company breached a contract in which the bank was to provide
certain investment banking services in return for certain compensation. This
case was settled on August 18, 1997 for $1.875 million.
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Interest expense from continuing operations increased to $6,993,898 for
the year ended December 31, 1997, from $271,619 for the year ended December 31,
1996. This amount for 1997 includes $5.4 million of noncash interest expense
related to the value ascribed to the discount features of the convertible
debentures issued by the Company.
Interest income decreased to $456,945 for the year ended December 31,
1997, from $1,355,488 for the year ended December 31, 1996. This decrease is
primarily the result of a reduction in interest received due to a decrease in
other loans and investments and a decrease in the Company's average cash
position during 1997.
Loss from discontinued operations was $29,508,755 for the year ended
December 31, 1997 as compared with a loss of $20,895,534 for the year ended
December 31, 1996. The Company also reported a gain of $2,073,943 on the
disposition of its discontinued operations. This amount includes a gain of
$6,221,689 related to the disposition of 1,960,736 shares of Nexar common stock
which was offset by losses incurred and accrued of $4,148,000 on the disposition
of Dynaco and its wholly owned subsidiaries. The Company completed the
disposition of Comtel and Dynamem on December 9, 1997. The Company anticipates
that the disposition of Dynaco and the remainder of its Nexar stock will be
completed by the fourth quarter of 1998.
(ii) Year Ended December 31, 1996, Compared to Year Ended December
31, 1995
For the year ended December 31, 1996, the Company had revenues from
continuing operations of $17,606,871 as compared to $5,610,280 for the year
ended December 31, 1995. The 214% increase in revenues from 1995 to 1996 is
principally attributable to $10.1 million of revenues generated from sales of
Tissue Technologies' Tru-Pulse(R) CO2 skin resurfacing laser in 1996 as compared
to only $114,000 of revenues generated from the Tru-Pulse(R) laser for the year
ended December 31, 1995. The Company began commercial shipment of the
Tru-Pulse(R) laser in the fourth quarter of 1995. Furthermore, revenues
increased approximately $2.3 million for the year ended December 31, 1996 as a
result of the Company's introduction and initial shipments of its EpiLaser(R)
laser system during the third and fourth quarters of 1996.
Gross margin for the year ended December 31, 1996 was $3,437,400 (19.5%
of revenues) versus $2,145,808 (38.2% of revenues) for the year ended December
31, 1995. This decrease in gross profit was due to the novation of the Company's
research and development contract with the U.S. Army in anticipation of the
commercialization of its medical products. (See Item 1. "Description of Business
- - Products Under Development; Dye Laser.") The gross profit percent also
decreased due to underutilization of increased production capacity in
preparation for the anticipated increase in demand for the EpiLaser(R) laser
system in fiscal 1997. A portion of this decrease in gross margins was offset by
an increase in gross margins attributed to the introduction of the Tru-Pulse(R)
laser to the commercial marketplace in the first quarter of 1996.
Research and development costs increased to $6,297,477 (35.8% of
revenues) for the year ended December 31, 1996, from $3,964,920 (70.7% of
revenues) for the year ended December 31, 1995. This 58.8% increase in research
and development reflects the Company's focused efforts during 1996 to obtain FDA
clearance for hair removal using the EpiLaser(R) laser system. The Company
received FDA clearance to market its EpiLaser(R) laser system for hair removal
in March 1997. The Company also continued to concentrate on the development of
additional products for medical and cosmetic laser applications. (See Item 1.
"Description of Business - Research and Development.")
Selling and marketing expenses increased to $5,076,941 (28.8% of
revenues) for the year ended December 31, 1996, from $2,768,541 (49.3% of
revenues) for the year ended December 31, 1995. This 83.4% increase reflects the
Company's effort to expand its marketing and distribution to support its new
internally developed EpiLaser(R) and Tru-Pulse(R) laser product lines.
General and administrative expenses increased to $9,752,922 (55.4% of
revenues) for the year ended December 31, 1996, from $2,141,798 (38.2% of
revenues) for the year ended December 31, 1995. This 355.4% increase is
primarily due to acquisition efforts during 1996 and the transformation of the
Company from the development stage to commercialization combined with the
increased administrative resources required at the Company's now closed
corporate offices and subsidiaries to oversee the growth of the Company's
business. The Company expanded its general and administrative support staff to
accommodate the forecasted growth in the fourth quarter of 1996 and in 1997.
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Business development and financing costs increased to $2,879,603 (16.4%
of revenues) for the year ended December 31, 1996, from $1,409,303 (25.1% of
revenues) for the year ended December 31, 1995. This 104.3% increase was
attributable to the Company's continuing acquisitions and financing activities.
Restructuring and asset write-off costs of $3.06 million were incurred
for the year ended December 31, 1996. These charges reflect restructuring and
asset write-off costs for certain operating and nonoperating assets that the
Company believes were not fully realizable for both the Company's medical
business and other nonmedical investments.
Settlement and litigation costs totaled $880,000 for the year ended
December 31, 1996 up from $700,000 for the year ended December 31, 1995. The
$700,000 of settlement and litigation costs incurred during 1995 resulted from
the pledge of 2,860,000 shares of the Company's common stock as collateral for a
$5,000,000 debt financing that was canceled before it was consummated; the
Company was required to pay $700,000 to a third party in order to secure the
return of these common shares. The $880,000 of settlement and litigation costs
incurred during 1996 was associated with the lawsuit filed by the investment
bank. In this suit, the investment bank alleged that the Company breached a
contract with it in which the bank was to provide certain investment banking
services in return for certain compensation. The Company settled this lawsuit on
August 18, 1997 for $1.875 million.
Interest expense from continuing operations decreased to $271,619 for
the year ended December 31, 1996, from $766,079 for the year ended December 31,
1995. This decrease was principally attributable to the Company's increased use
of preferred stock financing in 1996.
Interest income increased to $1,355,488 for the year ended December 31,
1996, from $912,019 for the year ended December 31, 1995. This increase is
primarily the result of interest received from subscriptions receivable and
other loans and investments made as a result of the Company's improved cash
position as of December 31, 1996.
Net gain on trading securities represents realized and unrealized
trading gains and losses of $2,033,371 for the year ended December 31, 1996.
Included in this amount is an unrealized gain totaling approximately $1,547,000
related to the Company's investment in a publicly traded company and a realized
gain totaling approximately $827,000 related to the Company's investment in
another publicly traded company offset by various unrealized losses aggregating
approximately $340,000. The Company had a net realized trading gain of $201,067
for the year ended December 31, 1995.
Other income totaled $591,853 for the year ended December 31, 1996 as
compared to $102,305 for the year ended December 31, 1995. Included in other
income for the year ended December 31, 1996 is a foreign currency exchange gain
of $446,596.
Loss from discontinued operations was $20,895,534 for the year ended
December 31, 1996 as compared with a loss of $4,231,326 for the year ended
December 31, 1995. The Company also reported a gain on disposition of $3,380,000
on the disposition of 400,000 shares of Nexar common stock that was consummated
during the fourth quarter of 1996.
(c) Liquidity and Capital Resources
During 1996, the Company reorganized its operations, and as such became
a holding company with no significant operations or assets other than its
investments in operating subsidiaries and strategic investments. The Company
depends upon dividends, cash advances and/or other cash payments from its
subsidiaries to meet its cash flow requirements. To date, the Company's
operating subsidiaries have required cash advances from the Company to fund
their operations.
In order to meet these cash flow requirements and fund operating losses
at the Company's subsidiaries, the Company has generated $16.7 million, $15.0
million and $5.6 million in net proceeds from the issuance of convertible
debentures, the sale of its preferred stock, and the private placement of
Palomar-owned Nexar common stock, respectively, during the year ended December
31, 1997. The Company may be required to raise additional funds to meet future
cash flow requirements for the Company's subsidiaries. As of December 31, 1997,
the Company had approximately $4,453,000 million in cash, cash equivalents and
trading securities.
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The Company's net loss for the year ended December 31, 1997 included
the following noncash items: $2.2 million of depreciation and amortization
expense; $5.4 million of additional interest expense relating to the
amortization of the discounts on the convertible debentures and $13.0 million in
restructuring and asset write-off costs.
The Company anticipates that capital expenditures in the normal course
of manufacturing operations and administrative requirements related thereto for
1998 will total approximately $2 million. The Company will finance these
expenditures with cash on hand and equipment leasing lines or the Company will
seek to raise additional funds. If necessary, the Company can reduce these
expenditures. There can be no assurance that the Company will be able to raise
the necessary funds.
The Company has entered into a Loan Agreement with Coherent, pursuant
to which Coherent has agreed to loan the Company money to help finance the
Company's working capital requirements, which loans are collateralized by the
Company's accounts receivable where Coherent has acted as the Company's sales
agent. (See "Risk Factors - Dependence on New Relationship With Coherent.")
The Company has marketable securities for two of its investments in
publicly traded companies whose market value was $17.2 million as of December
31, 1997. The sale of some of these securities may be subject to volume
limitations. As part of the Company's ongoing strategic financing plan, the
Company is evaluating sale of these securities in an effort to raise funds for
ongoing operations.
As of December 31, 1997, accounts receivable totaled approximately
$2,249,000. This amount is net of our allowance for doubtful accounts of
approximately $746,000. During 1997, revenue increased $11.3 million primarily
due to the introduction of the Company's EpiLaser(R) hair removal system. The
Company allowance for doubtful accounts as of December 1997 is primarily
required for sales of the EpiLaser(R) hair removal system to customers whose
accounts receivable balance was potentially uncollectible at year end.
During 1997, the Company funded its CTI service business in the amount
of $5,097,000. The Company is in the process of evaluating its strategic
business plan related to the cosmetic laser service business in an effort to
ascertain the risks and benefits of investing additional resources in this
business. If the Company believes that additional investments in CTI contribute
toward its overall goal of maximizing shareholder value, then the Company may
continue to make substantial additional investments in CTI.
Dynaco has a three year revolving credit and security agreement with a
financial institution. The agreement provides for the revolving sale of
acceptable accounts receivable, as defined in the agreement, with recourse at
85% of face value, up to a maximum commitment of $3 million. As of December 31,
1997, the amount of accounts receivable sold that remained uncollected totaled
$2.1 million net of related reserves and fees, as defined in the agreement. This
amount is included in the net assets of discontinued operations in the
accompanying balance sheet as of December 31, 1997. The interest rate on such
outstanding amounts is the bank's prime rate plus 1.5%, and interest is payable
monthly in arrears. The financing is collateralized by the purchased accounts
receivable and substantially all of Dynaco's assets. The Company guarantees
borrowings under this loan agreement.
In connection with the disposition of Comtel, the Company assumed a
note issued by Comtel to a loan association that totals $3,233,000. This note
bears interest at the loan association's prime rate plus 2.25% and is payable in
24 monthly installments of principal and interest totaling approximately
$150,000, beginning in March 1998. This note is secured by a pledge of 3,250,000
shares of the Company's common stock. In addition, the Company has also
guaranteed up to an additional maximum amount of $2,500,000 under a line of
credit extended by this loan association to Biometric Technologies Corp. (BTC),
the buyer of Comtel. The stockholders of BTC have personally guaranteed to the
Company payment for any amounts borrowed under this line of credit in excess of
approximately $1,500,000 in the event that the Company is obligated to honor
this guarantee. The stockholders of BTC have collateralized this guarantee by
the Company with certain assets personally owned by the stockholders.
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The Company's strategic plan is to continue to fund research and
development for its medical products. This research and development effort
entails extensive clinical trials leading up to FDA submissions. These
activities are an important part of the Company's business plan. Due to the
nature of clinical trials and research and development activities, it is not
possible to predict with any certainty the timetable for completion of these
research activities or the total amount of funding required to commercialize
products developed as a result of such research and development. The rate of
research and the number of research projects underway are dependent to some
extent upon external funding. While the Company is regularly reviewing potential
funding sources in relation to these ongoing and proposed research projects,
there can be no assurance that the current levels of funding or additional
funding will be available, or, if available, on terms satisfactory to the
Company. (See Item 1. "Description of Business - Research and Development.")
The Company has had significant losses to date and expects these losses
to continue through 1998. Therefore, the Company must continue to secure
additional financing to continue to complete its research and development
activities, commercialize its current and proposed medical products and
services, and fund ongoing operations for the next twelve months. There can be
no assurance that events in the future will not require the Company to seek
additional financing sooner. The Company continues to investigate several
financing alternatives, including strategic partnerships, additional bank
financing, private debt and equity financing, sale of assets, including the
Company's marketable securities consisting of Nexar and The American Materials &
Technology Corporation ("AMTK"), and other sources. Based on its historical
ability to raise funds as necessary and ongoing preliminary discussions with
potential financing sources, the Company believes that it will be successful in
obtaining additional financing in order to fund current operations in the near
future. Although the Company believes that it will be successful in obtaining
additional financing, there can be no assurance that any such financing will be
available on terms satisfactory to the Company. (See "Risk Factors Substantial
Continuing Losses; Doubt About Ability to Continue as a Going Concern.")
Subsequent to December 31, 1997, the Company entered into a financing
agreement with a Series G Preferred shareholder to sell this investor 500,000
shares of Nexar common stock for $2,000,000. Under the terms of this agreement,
the Company has guaranteed a $2,000,000 aggregate value to be realized by this
entity. To the extent this amount is not realized by this investor, the Company
will repay any deficiency two years from the date of closing. In connection with
this financing, the Company also agreed to certain amendments of the Series G
Preferred Stock, as defined in the agreement.
In February 1998, the Company sold 7,200,000 shares of its common stock
to a group of investors for $7,200,000. In addition, the Company also issued
warrants to the investors to purchase 7,200,000 shares of common stock at an
exercise price of $3.00 per share.
On March 27, 1998, the Company borrowed $2,000,000. This bridge loan is
payable the earlier of May 26, 1998 or (i) one day following the sale of Dynaco
(ii) the sale of any other Palomar assets in a transaction outside the normal
course of business or (iii) any financing where the use of proceeds to pay back
debt is not prohibited. The Company issued 125,000 warrants to the lender to
purchase 125,000 shares of common stock at an exercise price of $.01 per share
in lieu of interest.
(d) Recently Issued Accounting Standards
In February 1997, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 129, Disclosure of
Information about Capital Structure. In June 1997, FASB issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 129, 130 and 131 are effective
for fiscal years beginning after December 15, 1997. The Company believes that
the adoption of these new accounting standards will not have a material impact
on the Company's financial statements.
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Statement Under the Private Securities Litigation Reform Act
In addition to the other information in this Annual Report on Form 10-K
the following cautionary statements should be considered carefully in evaluating
the Company and its business. Statements contained in this Form 10-K that are
not historical facts (including, without limitation, statements concerning
anticipated operational and capital expense levels and such expense levels
relative to the Company's total revenues) and other information provided by the
Company and its employees from time to time may contain certain forward-looking
information, as defined by (i) the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and (ii) releases by the SEC. The factors identified in
the cautionary statements below, among other factors, could cause actual results
to differ materially from those suggested in such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to release publicly the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events. The
cautionary statements below are being made pursuant to the provisions of the
Reform Act and with the intention of obtaining the benefits of safe harbor
provisions of the Reform Act.
RISK FACTORS
SUBSTANTIAL CONTINUING LOSSES; DOUBT ABOUT ABILITY TO CONTINUE AS A
GOING CONCERN. The Company incurred a net loss from continuing operations of
$58,369,079 for the year ended December 31, 1997. The Company expects to incur
losses for the near term and through the third quarter of 1998. However, there
can be no assurance that the Company will achieve profitable operations or that
profitable operations will be sustained if achieved. At December 31, 1997, the
Company's accumulated deficit and working capital deficit was $6,183,687 and
$9,138,915, respectively. The Company's Star, PMP and CTI subsidiaries each have
had a history of losses. There can be no assurance that these companies will
achieve profitable operations or that profitable operations will be sustained if
achieved. As a result, the report of the Company's independent public
accountants in connection with the Company's Consolidated Balance Sheets at
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the three years
ended December 31, 1997 includes an explanatory paragraph stating that the
Company's recurring losses, working capital deficiency and stockholders' deficit
raises substantial doubts about the Company's ability to continue as a going
concern. The Company must continue to secure additional financing to complete
its research and development activities, commercialize its current and proposed
cosmetic laser products, and fund ongoing operations. The Company anticipates
that it will require substantial additional financing during the next
twelve-month period. The Company believes that the cash generated to date from
its financing activities, continued sale of assets and the Company's ability to
raise cash in future financing activities will be sufficient to satisfy its
working capital requirements through the next twelve-month period. The Company
bases its belief that it has the ability to raise cash in future financings on
its demonstrated historical ability to raise money and its ongoing preliminary
discussions with financing sources. However, there can be no assurance that this
assumption will prove to be accurate or that events in the future will not
require the Company to obtain additional financing sooner than presently
anticipated. The Company may also determine, depending upon the opportunities
available to it, to seek additional debt or equity financing to fund the costs
of acquisitions or expansion. To the extent that the Company finances an
acquisition with a combination of cash and equity securities, any such issuance
of equity securities could result in dilution to the interests of the Company's
shareholders. Additionally, to the extent that the Company incurs indebtedness
to fund increased levels of accounts receivable or to finance the acquisition of
capital equipment or issues debt securities in connection with any acquisition,
the Company will be subject to risks associated with incurring substantial
additional indebtedness, including the risks that interest rates may fluctuate
and cash flow may be insufficient to pay principal and interest on any such
indebtedness. The Company continues to investigate several financing
alternatives, including strategic partnerships, additional bank financing,
private, debt and equity financing and other sources, including the liquidation
of its marketable securities (Nexar and AMTK). While the Company regularly
reviews potential funding sources in relation to its ongoing and proposed
projects, there can be no assurance that the current levels of funding or
additional funding will be available, or if available will be on terms
satisfactory to the Company. Failure to obtain additional financing could have a
material adverse effect on the Company, including requiring it to significantly
curtail its operations. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Item 1. "Description of Business -
Financing of Operations and Increase in Outstanding Shares," and Notes 1, 6 and
7 to Financial Statements.)
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DEPENDENCE ON NEW RELATIONSHIP WITH COHERENT. The Company has entered
into a Sales Agency, Development and License Agreement with Coherent (the
"Agreement") pursuant to which Coherent serves as exclusive distributor for the
Company's laser based hair removal systems. As a result, the Company no longer
has its own sales force. Coherent receives a marketing and sales commission,
based on the end-user price, for each Palomar laser it sells. There can be no
assurance that Coherent will be successful in distributing the Company's hair
removal lasers or that it will give sufficient priority to marketing the
Company's products. In addition, Coherent may develop, market and manufacture
its own lasers that incorporate the Company's proprietary technology and compete
with the Company's lasers, in which case it must pay the Company a royalty on
such sales. If Coherent proves unable to sell Palomar's hair removal lasers in
the volume anticipated, it could have a material adverse effect on the Company's
business, financial condition and results of operations. Pursuant to the
Agreement, if Palomar is unable (as defined) or unwilling to manufacture the
cosmetic laser products to be distributed by Coherent, then Palomar will license
to Coherent the technology necessary to make such products. The initial term of
the Agreement is for three years, commencing on November 17, 1997. At the end of
each year, the Agreement automatically renews for another year, unless either
party provides written notice of its nonrenewal 30 days prior to the renewal
date. In the Agreement, the Company has agreed to upgrade all its EpiLaser(R)
laser systems sold prior to the date of the Agreement. The unanticipated loss of
Coherent as a distributor, any significant reduction in orders from Coherent,
the introduction by Coherent of competitive products, and unanticipated costly
product upgrades would have a material adverse effect on the Company's business,
financial condition and results of operations. (See Notes 3(i) and 12(e) to
Financial Statements.)
DEPENDENCE ON NEW PRODUCTS. The Company expects that a significant
portion of future revenue will continue to be derived from sales of newly
introduced products. The Company must continue to make significant investments
in research and development in order to continue to develop new products,
enhance existing products and achieve market acceptance for such products.
However, there can be no assurance that development stage products will be
successfully completed or, if developed, will achieve significant customer
acceptance. If the Company were unable to successfully define, develop and
introduce competitive new products, and enhance its existing products, its
future results of operations would be adversely affected. Development and
manufacturing schedules for technology products are difficult to predict, and
there can be no assurance that the Company will achieve timely initial customer
shipments of new products. The timely availability of these products in volume
and their acceptance by customers are important to the future success of the
Company. Delays, whether due to manufacturing delays, lack of market acceptance,
delays in regulatory approval, or otherwise, could have a material adverse
effect on the company's results of operations. From time to time, the Company or
its competitors may announce new products, capabilities or technologies that
have the potential to replace or shorten life cycles of the Company's existing
products. No assurance can be given that announcements of currently planned or
other new products will not cause customers to defer purchasing existing Company
products. To the extent that new products are not developed in a timely manner,
do not achieve customer acceptance or do not generate higher sales prices and
margins than existing products, the Company's business, financial condition and
results of operations could be materially adversely affected.
DEPENDENCE ON DEVELOPING MARKET; PRODUCT CONCENTRATION. The market for
laser hair removal is new and rapidly evolving. The Company currently derives
substantially all of its revenues from its laser hair removal products and
expects that revenues from these products will continue to account for
substantially all of its revenues in the foreseeable future. Broad market
acceptance of laser hair removal and, in particular, the Company's EpiLaser(R)
and LightSheer(TM) laser hair removal systems is critical to the Company's
future success.
NEXAR. As of March 20, 1998, the Company owned approximately 31% of the
voting capital stock of Nexar. In order to successfully execute its business
plan, the Company is to a certain degree dependent on the success of Nexar and
Nexar's ability to fund its operations and achieve profitability in the near
term. The Company intends to reduce its ownership of Nexar over time as the
Company continues to focus on its core cosmetic laser business. (See Note 2 to
Financial Statements.)
HOLDING COMPANY STRUCTURE. The Company has no significant operations
other than those incidental to its ownership of the capital stock of its
subsidiaries. As a holding company, the Company is dependent on dividends or
other intercompany transfers of funds from its subsidiaries to meet the
Company's debt service and other obligations. Claims of creditors of the
Company's subsidiaries, including trade creditors, will generally have priority
as to the assets of such subsidiaries over the claims of the Company and the
holders of the Company's indebtedness.
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LIMITED OPERATING HISTORY. The Company's subsidiaries have limited
operating histories and are in the development stage, and the Company is subject
to all of the risks inherent in the establishment of a new business enterprise.
The likelihood of success of the Company must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with the establishment of a new business and
development of new technologies in the cosmetic laser products industry. These
include, but are not limited to, government regulation, competition, the need to
expand manufacturing capabilities and market expertise, and setbacks in
production, product development, market acceptance and sales and marketing. (See
Item 1. "Description of Business.")
NEW VENTURES. The Company's CTI subsidiary has entered into agreements
with healthcare providers to provide cosmetic laser services at laser treatment
centers and plans to enter into more such agreements in the future. While the
Company believes these new partnerships are strategically important, there are
substantial uncertainties associated with the development of new products,
technologies and services for evolving markets. The success of these ventures
will be determined not only by the Company's efforts, but also by those of its
partners. Initial timetables for the development and introduction of new
technologies, products or services may not be achieved, and price/performance
targets may not prove feasible. External factors, such as the development of
competitive alternatives or government regulation, may cause new markets to
evolve in unanticipated directions. (See "- Highly Competitive Industries," and
Item 1. "Description of Business - Cosmetic Laser Services.")
INVESTMENTS IN UNRELATED BUSINESSES. The Company has investments in
marketable securities (consisting principally of Nexar and AMTK common stock).
The Company's basis for financial reporting in these investments totals
approximately $5.1 million. The Company's current market value of these
investments totals approximately $14.0 million. The amount that the Company may
ultimately realize from these investments could differ materially from the value
of these investments recorded in the Company's financial statements, and the
ultimate disposition of these investments could result in a loss to the Company.
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Notes 2 and 3(b) and (c) to Financial Statements.)
HIGHLY COMPETITIVE INDUSTRIES. The cosmetic laser industry is highly
competitive and is characterized by the frequent introduction of new products.
The Company competes in the development, manufacture, marketing and servicing of
cosmetic laser products with numerous other companies, certain of which have
substantially greater financial, marketing and other resources than the Company.
In addition, the Company's cosmetic laser products face competition from
alternative medical products and procedures, such as electrolysis and waxing,
among others. There can be no assurance that the Company will be able to
differentiate its products from the products of its competitors or that the
marketplace will consider the Company's products to be superior to competing
products or medical procedures. There can be no assurance that competitors will
not develop products or that new technologies will not be developed that render
the Company's products obsolete or less competitive. (See "- Technological
Obsolescence.") In addition, in entering areas of business in which it has
little or no experience, such as the opening of laser treatment centers, the
Company may not be able to compete successfully with competitors that are more
established in such areas. (See "- New Ventures," and Item 1. "Description of
Business - Cosmetic Laser Services.")
FLUCTUATIONS IN QUARTERLY PERFORMANCE. The Company's results of
operations have fluctuated substantially and can be expected to continue to vary
significantly. The Company's quarterly operating results depend on a number of
factors, including the timing of the introduction or acceptance of new products
offered by the Company or its competitors, changes in the mix of products sold
by the Company, changes in regulations affecting the cosmetic laser products
industry, changes in the Company's operating expenses, personnel changes and
general economic conditions.
VOLATILITY OF SHARE PRICE. Factors such as announcements of
developments related to the Company's business, announcements by competitors,
quarterly fluctuations in the Company's financial results and other factors have
caused the price of the Company's stock to fluctuate, in some cases
substantially, and could continue to do so in the future. If revenues or
earnings in any quarter fail to meet the investment community's expectations,
there could be an immediate impact on the price of the Company's common stock.
In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market price for many
technology companies and that have often been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Company's common stock.
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GOVERNMENT REGULATION. The Company's laser product business segment is
subject to regulation in the United States and abroad. Failure to comply with
applicable regulatory requirements can result in fines, denial or suspension of
approvals, seizures or recall of products, operating restrictions and criminal
prosecutions, any or all of which could have a material adverse effect on the
Company. Furthermore, changes in existing regulations or adoption of new
regulations could prevent the Company from obtaining, or could affect the timing
of, future regulatory approvals. (See Item 1. "Description of Business - Impact
of Medical Device Regulations.")
All laser medical devices, including those sold by the Company, are
subject to regulation by the FDA under the Medical Device Amendments of the
United States Food, Drug and Cosmetics Act of 1976, as amended (the "FDA Act"),
pursuant to which the FDA regulates the clinical testing, manufacture, labeling,
sale, distribution and promotion of medical devices. Before a new device can be
introduced into the market, the manufacturer must obtain market clearance
through either the 510(k) premarket notification process or the lengthier
premarket approval ("PMA") application process. Compliance with this process is
expensive and time-consuming. Three of the Company's lasers have received
clearance from the FDA through the 510(k) process for certain dermatological
applications: the Q-switched RD-1200(TM) ruby laser for tattoo removal, the
StarLight(TM) diode laser for hair and leg vein removal and the EpiLaser(R) hair
removal laser. The Company is also investigating other applications in
dermatology for its laser systems. It will be required to obtain FDA clearance
before commercially marketing any other application. The Company believes that
it will be able to seek such clearance under the 510(k) application process;
however, no assurance can be given that the FDA will not require the Company to
follow the more extensive and time-consuming PMA process. FDA review of a 510(k)
application currently averages about seven to twelve months and requires limited
clinical data based on substantial equivalence to a product marketed prior to
1976, while a PMA review can last for several years and require substantially
more clinical data. There can be no assurance that the appropriate clearances
from the FDA will be granted, that the process to obtain such clearances will
not be excessively expensive or lengthy or that the Company will have sufficient
funds to pursue such clearances. The Company's business, financial condition and
operations are, and will continue to be, critically dependent upon timely
receipt of FDA clearance for its current and proposed cosmetic laser products.
Delays or failure to obtain such approval would have a material adverse effect
on the Company.
The FDA also imposes various requirements on manufacturers and sellers
of products under its jurisdiction, such as labeling, good manufacturing
practices, record keeping and reporting requirements. The FDA may require
postmarket testing and surveillance programs to monitor a product's effects. The
Company is subject to the laser radiation safety regulations of the FDA Act
administered by the National Center for Devices and Radiological Health ("CDRH")
of the FDA. These regulations require a laser manufacturer to file new product
and annual reports, to maintain quality control, product testing and sales
records, to distribute appropriate operation manuals, to incorporate certain
design and operating features in lasers sold to end-users and to certify and
label each laser sold to end-users as one of four classes of lasers (based on
the level of radiation from the laser). In addition, various warning labels must
be affixed on the product and certain protective devices must be installed
depending upon the class of product. Under the Act, the Company is also required
to register with the FDA as a medical device manufacturer and is subject to
inspection on a routine basis by the FDA for compliance with Quality Systems
Regulations ("QSR"). QSR impose certain procedural and documentation
requirements upon the Company relevant to its manufacturing, testing and quality
control activities. Noncompliance with applicable FDA regulations, including
QSR, can result in, among other things, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
failure of the government to grant premarket clearance or premarket approval for
devices, withdrawal of marketing approvals and criminal prosecution. The FDA
also has the authority to request repair, replacement or refund of the cost of
any medical device manufactured or distributed by the Company. The Company
believes that it is currently in compliance with these regulations.
In order to be sold outside the United States, the Company's products
are subject to FDA permit requirements that are conditioned upon clearance by
the importing country's appropriate regulatory authorities. Many countries also
require that imported products comply with their own or international electrical
and safety standards. Additional approvals may be required in other countries.
The Company's EpiLaser(R) laser system has received the CE Mark pursuant to the
European Medical Device Directive which allows that laser to be sold in all
countries that recognize the CE Mark, including the countries that comprise the
European Community. The Company has not yet sought international approval for
its diode laser for use in cosmetic surgery and dermatology, because it has not
yet begun to ship this laser overseas.
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UNCERTAINTY OF MARKET ACCEPTANCE. The Company continually develops new
products intended for use in the cosmetic laser market. As with any new
products, there is substantial risk that the marketplace may not accept or be
receptive to the potential benefits of such products. Market acceptance of the
Company's current and proposed products will depend, in large part, upon the
ability of the Company or any marketing partners to demonstrate to the
marketplace the advantages of the Company's products over other types of
products. There can be no assurance that the marketplace will accept
applications or uses for the Company's current and proposed products or that any
of the Company's current or proposed products will be able to compete
effectively. (See Item 1. "Description of Business - Competition.")
UNCERTAINTY OF HEALTHCARE REIMBURSEMENT AND REFORM. The healthcare
industry is subject to changing political, economic and regulatory influences
that may affect the procurement practices and operations of healthcare industry
participants. During the past several years, state and federal government
regulation of reimbursement rates and capital expenditures in the United States
healthcare industry has increased. Lawmakers continue to propose programs to
reform the United States healthcare system, which may contain programs to
increase governmental involvement in healthcare, lower Medicare and Medicaid
reimbursement rates or otherwise change the operating environment for the
Company's customers. Healthcare industry participants may react to these
proposals by curtailing or deferring investments, including investments in the
Company's products.
DEPENDENCE ON THIRD PARTY RESEARCHERS. The Company is substantially
dependent upon third party researchers and others, over which the Company will
not have absolute control, to satisfactorily conduct and complete research on
behalf of the Company and to grant to the Company favorable licensing terms for
products which may be developed. The Company has entered into research
agreements with recognized research hospitals and clinical laboratories. At
present, the Company's principal research partner is the Wellman Labs at MGH.
The Company provides research funding, laser technology and optics know-how in
return for licensing agreements with respect to specific medical applications
and patents. Management believes that this method of conducting research and
development provides a higher level of technical and clinical expertise than it
could provide on its own and in a more cost efficient manner. The Company's
success will be highly dependent upon the results of the research, and there can
be no assurance that such research agreements will provide the Company with
marketable products in the future or that any of the products developed under
these agreements will be profitable for the Company. (See Item 1. "Description
of Business - Research and Development" and Note 8 to Financial Statements.)
TECHNOLOGICAL OBSOLESCENCE. The markets for the Company's products are
characterized by rapid and significant technological change, evolving industry
standards and frequent new product introductions and enhancements. Many of the
Company's products and products under development are technologically
innovative, and require significant planning, design, development and testing at
the technological, product and manufacturing process levels. These activities
require significant capital commitments and investment by the Company. The
Company's failure to develop products in a timely manner in response to changes
in the industry, whether for financial, technological or other reasons, will
have a material adverse effect on the Company's business, financial condition
and results of operations. (See Item 1.
"Description of Business.")
PATENTS/POSSIBLE PATENT INFRINGEMENTS. The Company currently holds
several patents and intends to pursue various additional avenues that it deems
appropriate to protect its technology. There can be no assurance, however, that
the Company will file any additional patent applications or that any patent
applications that have been, or may be, filed will result in issued patents, or
that any patent, patent application, know-how, license or cross-license will
afford any protection or benefit to the Company. (See Item 1. "Description of
Business - Patents and Licenses.")
The laser industry is characterized by frequent litigation regarding
patent and other intellectual property rights. Because patent applications are
maintained in secrecy in the United States until such patents are issued and are
maintained in secrecy for a period of time outside the United States, the
Company can conduct only limited searches to determine whether its technology
infringes any patents or patent applications. Any claims for patent infringement
could be time-consuming, result in costly litigation, diversion of technical and
management personnel, cause shipment delays, require the Company to develop
noninfringing technology or to enter into royalty or licensing agreements.
Although patent and intellectual property disputes in the laser industry have
often been settled through licensing or similar arrangements, costs associated
with such arrangements may be substantial and often require the payment of
ongoing royalties, which could have a negative impact on gross margins. There
can be no assurance that necessary licenses would be available to the
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Company on satisfactory terms, or that the Company could redesign its products
or processes to avoid infringement, if necessary. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling some
of its products. This could have a material adverse effect on the Company's
business, results of operations and financial condition. Conversely, costly and
time consuming litigation may be necessary to enforce patents issued to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others.
The Company is aware of patents relating to laser technologies used in
certain applications. The Company intends to pursue such laser technologies in
the future; hence, if the patents relating to those technologies are valid and
enforceable, they may be infringed by the Company. After consulting with outside
counsel to the Company, the Company believes that it is not infringing currently
on patents held by others; however, were the issue ever to be litigated, a court
could reach a different opinion. If the Company's current or proposed products
are, in the opinion of patent counsel, infringing on any of these patents, the
Company intends to seek nonexclusive, royalty-bearing licenses to such patents
but there can be no assurance that any such license would be available on
favorable terms, if at all. One of the Company's competitors has filed suit
against the Company alleging patent infringement, among other things. No
assurance can be given that other infringement claims will not be made or that
the Company would prevail in any legal action with respect thereto. Defense of a
claim of infringement would be costly and could have a material adverse effect
on the Company's business, even if the Company were to prevail. (See Item 3.
"Legal Proceedings.")
DEPENDENCE ON PROPRIETARY RIGHTS. The Company relies on trade secrets
and proprietary know-how which it seeks to protect, in part, by confidentiality
agreements with its collaborators, employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known or be independently developed by competitors.
RISKS ASSOCIATED WITH PENDING LITIGATION. The Company and its
subsidiaries are involved in disputes with third parties. Such disputes have
resulted in litigation with such parties and, although the Company is a
plaintiff in several matters, the Company is subject to claims and counterclaims
for damages and has incurred, and likely will continue to incur, legal expenses
in connection with such matters. There can be no assurance that such litigation
will result in favorable outcomes for the Company. An adverse result in either
the MEHL patent litigation or the action relating to the Swiss Franc Debentures
(both described in detail in Item 3) could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is unable to determine the total expense or possible loss, if any, that may
ultimately be incurred in the resolution of these proceedings. These matters may
result in diversion of management time and effort from the operations of the
business. (See Item 3. "Legal Proceedings" and Note 12(d) to Financial
Statements.)
NEED FOR ADDITIONAL QUALIFIED PERSONNEL. The Company's ability to
develop, manufacture and market all of its products, and to attain a competitive
position within the laser products industry, will depend, in large part, on its
ability to attract and retain qualified personnel. Competition for qualified
personnel in these industries is intense and the Company will be required to
compete for such personnel with companies which may have greater financial and
other resources. There can be no assurance that the Company will be successful
in attracting, assimilating and retaining the personnel it requires to grow and
operate profitably. The Company's inability to attract and retain such personnel
could have a material adverse effect upon its business.
ISSUANCE OF PREFERRED STOCK AND DEBENTURES COULD AFFECT RIGHTS OF
COMMON SHAREHOLDERS. The Company is authorized to issue up to five million
shares of Preferred Stock, $.01 par value. The Preferred Stock may be issued in
one or more series, the terms of which may be determined at the time of issuance
by the Board of Directors, without further action by shareholders, and may
include voting rights (including the right to vote as a series on particular
matters), preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions. In July 1996, the Company issued 9,675 units
in a convertible debenture financing. Each unit consisted of a convertible
debenture denominated in 1,000 Swiss francs and a warrant to purchase 24 shares
of the Company's common stock at $16.50 per share. In February 1997, the Company
redeemed 300 units for an aggregate price of $195,044. In November 1997, the
remaining 9,375 units were converted into 914,028 shares of common stock. (See
Item 3. "Legal Proceedings.") In October 1996, the Company issued $5,000,000 in
4.5% Convertible Subordinated Promissory Notes. As of March 20, 1998, $5,000,000
principal amount was converted into 1,442,073 shares of common stock. In
December 1996 and January 1997, the Company issued a
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total of $6,000,000 in 5% Convertible Debentures. As of March 20, 1998,
$5,533,356 principal amount was converted into 3,707,292 shares of common stock.
In March 1997, the Company issued $5,500,000 in 5% Convertible Debentures. As of
March 20, 1998, $5,500,000 principal amount was converted into 4,355,735 shares
of common stock. In March 1997, the Company issued $500,000 in 6% Convertible
Debentures. In September 1997, the Company issued $7,000,000 in 6%, 7% and 8%
Convertible Debentures. The holders were issued 413,109 shares upon issuance in
lieu of a discount. In addition, as of March 20, 1998, $160,000 principal amount
was converted into 103,021 shares of common stock. The Company also redeemed
$2,000,000 principal amount for $2,196,667. In July 1996, the Company issued
6,000 shares of Series F Convertible Preferred Stock at a price of $1,000 per
share. In September 1996, the Company issued 10,000 shares of Series G
Convertible Preferred Stock at a price of $1,000 per share. As of March 20,
1998, 7,316 shares of the Series G Convertible Preferred Stock were converted
into 602,824 shares of common stock, 956,388 shares of common stock of Nexar and
$47,731 in cash dividends. In March 1997, the Company issued 6,000 shares of
Series H Convertible Preferred Stock at a price of $1,000 per share. In May
1997, the Company issued 10,000 shares of Series H Convertible Preferred Stock
at a price of $1,000 per share. As of March 20, 1998, 11,100 shares of the
Series H Convertible Preferred Stock were converted into 8,289,013 shares of
common stock. In addition, 2,950 shares of the Series H Convertible Preferred
Stock were redeemed for $3,588,715. The issuance of any such additional
Preferred Stock or Debentures could affect the rights of the holders of common
shares, and could reduce the market price of the common shares. In particular,
specific rights granted to future holders of Preferred Stock or Debentures could
be used to restrict the Company's ability to merge with or sell its assets to a
third party, thereby preserving control of the Company by the existing control
group. (See Item 1. "Description of Business," Item 5. "Market for Common Equity
and Related Stockholder Matters," and Notes 6, 7 and 13 to Financial
Statements.)
ISSUANCE OF RESERVED SHARES; REGISTRATION RIGHTS. As of March 20, 1998,
the Company had 59,553,243 shares of common stock outstanding. The Company has
reserved an additional 28,180,020 shares for issuance as follows: (1) 3,707,655
shares for issuance to key employees, officers, directors, consultants and
advisors pursuant to the Company's Stock Option Plans; (2) 166,674 shares for
issuance to employees, officers and directors pursuant to the Company's 401(k)
Plan; (3) 966,014 shares for issuance pursuant to the Company's Employee Stock
Purchase Plan; (4) 9,998,030 shares for issuance upon exercise of three-, four-,
five- and seven year warrants issued to certain lenders, investors, consultants,
directors and officers (a portion of which are subject to certain antidilutive
adjustments); (5) 530,217 shares for issuance upon conversion of $466,644
principal amount of a 5% Convertible Debentures; (6) 45,455 shares for issuance
upon conversion of $500,000 principal amount of 6% Convertible Debentures; (7)
6,396,979 shares for issuance upon conversion of $4,840,000 principal amount of
a 6%, 7% and 8% Convertible Debenture; (8) 600,000 shares for issuance upon
conversion of the 6,000 shares of Series F Convertible Preferred Stock; (9)
3,611,659 shares for issuance upon conversion of the 2,684 shares of Series G
Convertible Preferred Stock; and (10) 2,157,337 shares for issuance upon
conversion of the 1,950 shares of Series H Convertible Preferred Stock. All of
the foregoing reserved shares are, or the Company intends for them shortly to
be, registered with the Securities and Exchange Commission and therefore freely
salable on Nasdaq or elsewhere.
PRODUCT LIABILITY EXPOSURE. Cosmetic laser product companies face an
inherent business risk of financial exposure to product liability claims in the
event that the use of their products results in personal injury. The Company's
products are and will continue to be designed with numerous safety features, but
it is possible that patients could be adversely affected by use of one of the
Company's products. Further, in the event that any of the Company's products
prove to be defective, the Company may be required to recall and redesign such
products. Although the Company has not experienced any material losses due to
product liability claims to date, there can be no assurance that it will not
experience such losses in the future. The Company maintains general liability
insurance in the amount of $1,000,000 per occurrence and $2,000,000 in the
aggregate and maintains umbrella coverage in the aggregate amount of
$25,000,000; however, there can be no assurance that such coverage will continue
to be available on terms acceptable to the Company or that such coverage will be
adequate for liabilities actually incurred. In the event the Company is found
liable for damages in excess of the limits of its insurance coverage, or if any
claim or product recall results in significant adverse publicity against the
Company, the Company's business, financial condition and results of operations
could be materially and adversely affected. In addition, although the Company's
products have been and will continue to be designed to operate in a safe manner,
and although the Company attempts to educate medical personnel with respect to
the proper use of its products, misuse of the Company's products by medical
personnel over whom the Company cannot exert control may result in the filing of
product liability claims or significant adverse publicity against the Company.
22
<PAGE>
INTERNATIONAL OPERATIONS. Because the Company has minimal experience in
marketing and distributing its products internationally, it engaged Coherent, a
company with particular experience in international markets, to serve as its
distributor in international markets. (See "- Dependence on New Relationship
with Coherent" and Item 1. "Description of Business - Marketing, Distribution
and Service.") Accordingly, the Company's success in international markets will
be substantially dependent upon the skill and expertise of Coherent in marketing
the Company's products. There can be no assurance that Coherent will be able to
successfully market, sell and deliver the Company's products in these markets.
In addition, there are certain risks inherent in doing business in international
markets, such as unexpected changes in regulatory requirements, export
restrictions, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, management's lack of international expertise,
political instability and fluctuations in currency exchange rates and
potentially adverse tax consequences, which could adversely impact the success
of the Company's international operations. There can be no assurance that one or
more of such factors will not have a material adverse effect on the Company's
future international operations and, consequently, on the Company's business,
financial condition or operating results. (See Item 1. "Financial Information
About Exports by Domestic Operations.")
NEED FOR CONTINUED PRODUCT DEVELOPMENT. Although the Company received
FDA clearance in March and December 1997, respectively, to commercially market
its EpiLaser(R) and diode laser systems for hair removal, the Company is
continuing its development of both products. The Company is continuing to study
both laser systems to optimize performance and treatment parameters. (See Item
1. "Description of Business.")
DEPENDENCE ON SUPPLIERS. The Company relies on outside suppliers for
substantially all of its manufacturing supplies, parts and components. Several
component parts of the Company's cosmetic laser products are manufactured
exclusively by one supplier. There can be no assurance that the Company will be
able to obtain a sufficient supply of such components at commercially reasonable
prices or at all. A shortage of necessary parts and components or the inability
of the Company to obtain such parts and components would have a material adverse
effect on the Company's business, financial condition and results of operations.
(See Item 1. "Description of Business - Production and Sources and Availability
of Materials.")
SIGNIFICANT OUTSTANDING INDEBTEDNESS; SUBORDINATION OF DEBENTURES. The
Company has incurred substantial indebtedness in relation to its equity capital
and will be subject to all of the risks associated with substantial leverage,
including the risk that available cash may not be adequate to make required
payments to the holders of the Company's debentures. The Company's ability to
satisfy its obligations under the debentures from cash flow will be dependent
upon the Company's future performance and will be subject to financial, business
and other factors affecting the operation of the Company, many of which may be
beyond the Company's control. In the event the Company does not have sufficient
cash resources to satisfy quarterly interest or other repayment obligations to
the holders of the debentures, the Company will be in default under the
debentures, which would have a material adverse effect on the Company. To the
extent that the Company is required to use cash resources to satisfy interest
payments to the holders of the debentures, it will have fewer resources
available for other purposes. Inability of the Company to repay the debentures
upon maturity would have a material adverse effect on the Company, which could
result in a reduction of the price of the Company's shares. The debentures will
be unsecured and subordinate in right of payment to all senior indebtedness of
the Company. The debentures do not restrict the Company's ability to incur
additional senior indebtedness and most other indebtedness. The terms of senior
indebtedness now existing or incurred in the future could affect the Company's
ability to make payments of principal and/or interest to the holders of
debentures. (See Item 5. "Market for Registrant's Common Equity and Related
Shareholder Matters" and Note 6 to Financial Statements.)
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which prohibit the Company from engaging in a business combination with an
interested stockholder for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control
of the Company. The Company's stock option grants generally provide for an
exercise of some or all of the optioned stock, including nonvested shares, upon
a change of control or similar event. The Board of Directors has authority to
issue up to 5,000,000 shares of Preferred Stock and to fix the rights,
preference, privileges and restrictions, including voting rights, of these
shares without any further vote or action by the stockholders. The rights of the
holders of the common stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while
23
<PAGE>
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights senior to the common stock, and, as a result, the issuance of
such Preferred Stock could have a material adverse effect on the market value of
the common stock. (See "- Issuance of Preferred Stock and Debentures Could
Affect Rights of Common Shareholders.")
YEAR 2000. The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The "year 2000" problem is pervasive and complex, as virtually every
computer operation will be affected in the same way by the rollover of the two
digit year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail. The Company is at this time utilizing internal resources
to identify, correct or reprogram, and test the systems for year 2000
compliance. However, there can be no assurance that the systems of other
companies on which the Company's systems rely will also be converted in a timely
manner or that any such failure to convert by another company would not have an
adverse effect on the Company's systems. Management is in the process of
assessing the year 2000 compliance costs; however, based on information to date
(excluding the possible impact of vendor systems), management does not believe
that it will have a material effect on the Company's earnings. (See Note 12(c)
to Financial Statements.)
24
<PAGE>
Item 8. Financial Statements.
PALOMAR MEDICAL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S>
<C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-3
Consolidated Statements of Operations for the years ended December 31, 1995,
1996 and 1997 F-4
Consolidated Statements of Stockholders' Equity (deficit) for the years
ended December 31, 1995, 1996 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997 F-8
Notes to Consolidated Financial Statements F-10
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Palomar Medical Technologies, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Palomar
Medical Technologies, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The summarized
financial data for Nexar Technologies, Inc. contained in Note 2 are based on the
financial statements of Nexar Technologies, Inc. which were audited by other
auditors. Their report has been furnished to us and our opinion, insofar as it
relates to the data in Note 2, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Palomar Medical Technologies, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1, the Company has suffered recurring losses from operations and has a working
capital deficiency and a stockholders' deficit that raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 6, 1998 (except for the
matters discussed in Note 13,
as to which the date is
March 31, 1998)
F-2
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
December 31, December 31,
1996 1997
---------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents $12,292,406 $3,003,300
Marketable securities 2,893,792 1,449,326
Accounts receivable, net of allowance for doubtful accounts of
approximately $1,129,000 and $746,000, respectively 2,171,086 2,248,680
Inventories 5,205,954 4,711,474
Loans to former officers 948,198 478,343
Notes receivable from related parties for sale of Dynaco subsidiary --- 855,379
Subscription receivable 3,500,000 ---
Other current assets 2,983,209 820,219
---------------- ----------------
Total current assets 29,994,645 13,566,721
---------------- ----------------
Net Assets of Discontinued Operations (Note 2) 22,971,380 5,825,602
---------------- ----------------
Property and Equipment, at Cost, Net 3,827,990 6,455,586
---------------- ----------------
Other Assets:
Cost in excess of net assets acquired, net of accumulated amortization of
approximately $725,000 and $1,280,000, respectively 2,856,616 2,302,348
Deferred financing costs 1,943,420 591,609
Other noncurrent assets 5,938,826 225,706
---------------- ----------------
Total other assets 10,738,862 3,119,663
---------------- ----------------
$67,532,877 $28,967,572
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt $497,377 $1,640,465
Accounts payable 3,318,460 4,150,982
Accrued liabilities 10,975,309 16,914,249
---------------- ----------------
Total current liabilities 14,791,146 22,705,696
---------------- ----------------
Long-Term Debt, Net of Current Portion 14,665,140 12,445,563
---------------- ----------------
Commitments and Contingencies (Notes 2, 6 and 10)
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value-
Authorized - 5,000,000 shares
Issued and outstanding -
18,151 shares and 16,397 shares
at December 31, 1996 and December 31, 1997, respectively
(Liquidation preference of $17,714,474 as of December 31, 1997) 182 164
Common stock, $.01 par value-
Authorized - 100,000,000 shares
Issued - 30,596,812 shares and 45,792,585 shares
at December 31, 1996 and December 31, 1997, respectively 305,968 457,926
Additional paid-in capital 104,900,551 147,356,579
Accumulated deficit (64,971,200) (152,359,497)
Unrealized loss on marketable securities (342,500) ---
Subscriptions receivable from related party (604,653) ---
Less: Treasury stock - (200,000 shares and 345,000 shares at cost, respectively) (1,211,757) (1,638,859)
---------------- ----------------
Total stockholders' equity (deficit) 38,076,591 (6,183,687)
---------------- ----------------
$67,532,877 $28,967,572
================ ================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C>
Years Ended December 31,
1995 1996 1997
---------------- -------------- --------------
Revenues $5,610,280 $17,606,871 $20,994,546
Cost of Revenues 3,464,472 14,169,471 20,055,963
---------------- -------------- --------------
Gross profit 2,145,808 3,437,400 938,583
---------------- -------------- --------------
Operating Expenses
Research and development 3,964,920 6,297,477 11,990,332
Sales and marketing 2,768,541 5,076,941 6,959,750
General and administrative 2,141,798 9,752,922 15,332,241
Business development 1,409,303 2,879,603 2,060,852
Restructuring and asset write-off (Note 4) -- 1,660,808 3,325,000
Settlement and litigation costs 700,000 880,000 3,199,000
---------------- -------------- --------------
Total operating expenses 10,984,562 26,547,751 42,867,175
---------------- -------------- --------------
Loss from operations (8,838,754) (23,110,351) (41,928,592)
Interest Expense (766,079) (271,619) (6,993,898)
Interest Income 912,019 1,355,488 456,945
Net Gain (Loss) on Trading Securities 201,067 2,033,371 (52,272)
Asset Write-off (Note 4) -- (1,397,000) (9,658,000)
Other Income (Expense) 102,305 591,853 (193,262)
---------------- -------------- --------------
Net Loss from Continuing Operations (8,389,442) (20,798,258) (58,369,079)
---------------- -------------- --------------
Loss from Discontinued Operations (Note 2):
Loss from operations (4,231,326) (20,895,534) (29,508,755)
Gain on dispositions, net -- 3,830,000 2,073,943
---------------- -------------- --------------
Net Loss from Discontinued Operations (4,231,326) (17,065,534) (27,434,812)
---------------- -------------- --------------
Net Loss $(12,620,768) $(37,863,792) $(85,803,891)
================ ============== ==============
Basic and Diluted Net Loss Per Common Share:
Continuing operations $(0.60) $(0.84) $(1.79)
Discontinued operations (0.30) (0.65) (0.78)
---------------- -------------- --------------
Total Loss Per Common Share $(0.90) $(1.49) $(2.57)
================ ============== ==============
Weighted Average Number of
Common Shares Outstanding 14,164,901 26,166,538 35,105,272
================ ============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
-------------------------------------------------------------------
Number 0.01 Number 0.01 Number
of Shares Par Value of Shares Par Value of Shares Cost
-------------------------------------------------------------------
Balance, December 31, 1994 -- $-- 9,464,963 94,649 -- $--
Sale of common stock pursuant to warrants and options -- -- 2,925,093 29,251 -- --
Sale of common stock -- -- 1,622,245 16,223 -- --
Payments received on subscriptions receivable -- -- -- -- -- --
Issuance of preferred stock, including common stock
issued as a placement fee, net of issuance costs 21,295 213 300,000 3,000 -- --
Purchase of treasury stock -- -- -- -- (200,000) (1,211,757)
Issuance of common stock in lieu of payment of notes -- -- -- -- -- --
payable -- -- 632,144 6,321 -- --
Repayment of convertible debentures -- -- -- -- -- --
Conversion of convertible debentures -- -- 1,943,870 19,438 -- --
Value ascribed to convertible debentures -- -- -- -- -- --
Value ascribed to warrant in exchange for license
technology -- -- -- -- -- --
Issuance of common stock for technology -- -- 739,546 7,395 -- --
Conversion of preferred stock (7,435) (74) 1,775,691 17,757 -- --
Exercise of underwriter's warrants -- -- 200,000 2,000 -- --
Issuance of common stock for Spectrum Medical Tech., Inc. -- -- 364,178 3,642 -- --
Issuance of common stock for investment banking and merger
and acquisition consulting services -- -- 167,676 1,677 -- --
Amortization of deferred financing costs -- -- -- -- -- --
Compensation expense related to warrants issued to
consultants and investment bankers -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------------------------------------------------------------------
Balance, December 31, 1995 $13,860 $139 $20,135,406 $201,353 $(200,000) $(1,211,757)
===================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Unrealized Total
Additional Loss on Stockholders'
Paid-in Accumulated Marketable Subscriptions Equity
Capital Deficit Securities Receivable (Deficit)
------------------------------------------------------------------
Balance, December 31, 1994 $15,773,109 (13,119,279) $-- $-- 2,748,479
Sale of common stock pursuant to warrants and options 7,588,888 -- -- (4,633,975) 2,984,164
Sale of common stock 2,935,921 -- -- -- 2,952,144
Payments received on subscriptions receivable -- -- -- 3,694,840 3,694,840
Issuance of preferred stock, including common stock
issued as as a placement fee, net of issuance costs 19,382,750 -- -- -- 19,385,963
Purchase of treasury stock -- -- -- -- (1,211,757)
Issuance of common stock in lieu of payment of notes payable 1,873,611 -- -- -- 1,879,932
Repayment of convertible debentures (321,533) -- -- -- (321,533)
Conversion of convertible debentures 3,071,302 -- -- -- 3,090,740
Value ascribed to convertible debentures 899,813 -- -- -- 899,813
Value ascribed to warrant in exchange for license technology 100,000 -- -- -- 100,000
Issuance of common stock for technology 292,605 -- -- -- 300,000
Conversion of preferred stock 68,377 -- -- -- 86,060
Exercise of underwriter's warrants 1,049,574 -- -- (1,049,574) 2,000
Issuance of common stock for Spectrum Medical Tech., Inc. 996,358 -- -- -- 1,000,000
Issuance of common stock for investment banking and merger
and acquisition consulting services 416,823 -- -- -- 418,500
Amortization of deferred financing costs (70,583) -- -- -- (70,583)
Compensation expense related to warrants issued to
consultants and investment bankers 95,370 -- -- -- 95,370
Preferred stock dividends -- (124,610) -- -- (124,610)
Net loss -- (12,620,768) -- -- (12,620,768)
-------------------------------------------------------------------
Balance, December 31, 1995 $54,152,385 $(25,864,657) $-- $(1,988,709) $25,288,754
===================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
-------------------------------------------------------------------
Number 0.01 Number 0.01 Number
of Shares Par Value of Shares Par Value of Shares Cost
-------------------------------------------------------------------
Balance, December 31, 1995 $13,860 $139 $20,135,406 $201,353 ($200,000) ($1,211,757)
Sale of common stock pursuant to warrants and options -- -- 2,967,996 29,681 -- --
Sale of common stock -- -- 1,176,205 11,762 -- --
Payments received on subscriptions receivable -- -- -- -- -- --
Issuance of preferred stock, including common stock
issued as a placement fee, net of issuance costs 32,000 320 115,000 1,150 -- --
Issuance of common stock for 1995 employer 401(k)
matching contribution -- -- 45,885 459 -- --
Conversion of preferred stock, including accrued
dividends and interest of $782,602 (25,209) (252) 4,481,518 44,815 -- --
Conversion of convertible debentures -- -- 34,615 346 -- --
Redemption of convertible debentures -- -- -- -- -- --
Value ascribed to convertible debentures -- -- -- -- -- --
Redemption of preferred stock (2,500) (25) -- -- -- --
Exercise of underwriter's warrants -- -- 500,000 5,000 -- --
Exercise of stock options in majority controlled subsidiary -- -- -- -- -- --
Issuance of common stock for conversion of debentures at
Tissue Technologies, Inc. -- -- 813,431 8,134 -- --
Issuance of common stock for minority interest in
Star Medical subsidiary -- -- 224,054 2,241 -- --
Issuance of common stock in exchange for license rights -- -- 56,900 569 -- --
Issuance of common stock for acquisition of Dermascan, Inc. -- -- 35,000 350 -- --
Issuance of common stock for investment banking and merger
and acquisition consulting services -- -- 56,802 568 -- --
Compensation expense related to warrants issued to
non-employees under SFAS No. 123 -- -- -- -- -- --
Return of escrowed shares -- -- (46,000) (460) -- --
Amortization of deferred financing costs -- -- -- -- -- --
Unrealized loss on marketable securities -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------------------------------------------------------------------
Balance, December 31, 1996 $18,151 $182 $30,596,812 $305,968 ($200,000) ($1,211,757)
===================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total
Additional Unrealized Subscriptions Stockholders'
Paid-in Accumulated Loss on Receivable Equity
Capital Deficit Marketable Securities (Deficit)
---------------------------------------------------------------------
Balance, December 31, 1995 $54,152,385 ($25,864,657) $-- ($1,988,709) $25,288,754
Sale of common stock pursuant to warrants and options 7,569,226 -- -- -- 7,598,907
Sale of common stock 6,049,618 -- -- -- 6,061,380
Payments received on subscriptions receivable -- -- -- 2,441,556 2,441,556
Issuance of preferred stock, including common stock
issued as a placement fee, net of issuance costs 30,821,677 -- -- -- 30,823,147
Issuance of common stock for 1995 employer 401(k)
matching contribution 160,139 -- -- -- 160,598
Conversion of preferred stock, including accrued
dividends and interest of $782,602 744,124 -- -- -- 788,687
Conversion of convertible debentures 145,260 -- -- -- 145,606
Redemption of convertible debentures (41,530) -- -- -- (41,530)
Value ascribed to convertible debentures 2,757,860 -- -- -- 2,757,860
Redemption of preferred stock (3,123,127) -- -- -- (3,123,152)
Exercise of underwriter's warrants 1,057,500 -- -- (1,057,500) 5,000
Exercise of stock options in majority controlled subsidiary 50,000 -- -- -- 50,000
Issuance of common stock for conversion of debentures at
Tissue Technologies, Inc. 1,019,022 -- -- -- 1,027,156
Issuance of common stock for minority interest in
Star Medical subsidiary 1,747,482 -- -- -- 1,749,723
Issuance of common stock in exchange for license rights 369,574 -- -- -- 370,143
Issuance of common stock for acquisition of Dermascan, Inc. 489,650 -- -- -- 490,000
Issuance of common stock for investment banking and merger
and acquisition consulting services 476,156 -- -- -- 476,724
Compensation expense related to warrants issued to
non-employees under SFAS No. 123 532,758 -- -- -- 532,758
Return of escrowed shares 460 -- -- -- --
Amortization of deferred financing costs (77,683) -- -- -- (77,683)
Unrealized loss on marketable securities -- -- (342,500) -- (342,500)
Preferred stock dividends -- (1,242,751) -- -- (1,242,751)
Net loss -- (37,863,792) -- -- (37,863,792)
----------------------------------------------------------------------
Balance, December 31, 1996 $104,900,551 ($64,971,200)($342,500) ($604,653) $38,076,591
======================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
-----------------------------------------------------------------------------
Number 0.01 Number 0.01 Number
of Shares Par Value of Shares Par Value of Shares Cost
-----------------------------------------------------------------------------
Balance, December 31, 1996 18,151 182 30,596,812 $305,968 (200,000) (1,211,757)
Sale of common stock pursuant to warrants,
options and Employee Stock Purchase Plan -- -- 815,101 8,151 -- --
Reduction in subscriptions receivable -- -- -- -- -- --
Sale of preferred stock, net of issuance cost
of approximately $1,000,000 16,000 160 -- -- -- --
Issuance of common stock for 1996 employer 401(k)
matching contribution -- -- 87,441 874 -- --
Conversion and redemption of preferred stock (17,754) (178) 6,139,841 61,399 -- --
Conversion of convertible debentures and issuance
of common stock to an investor -- -- 7,464,961 74,650 -- --
Issuance of common stock for investment banking,
merger and acquisition and consulting services -- -- 20,000 200 -- --
Value ascribed to the discount feature of
convertible debentures issued -- -- 413,109 4,131 -- --
Unrealized gain on marketable securities -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Guaranteed value of common stock associated
with Dermascan Acquisition -- -- -- -- -- --
Issuance of common stock for technology -- -- 255,320 2,553 -- --
Purchase of stock for treasury -- -- -- -- (145,000) (427,102)
Gain related to the issuance of common
stock by Nexar Technologies, Inc. -- -- -- -- -- --
Value ascribed to warrant to purchase
common stock issued to Coherent, Inc. -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------------------
Balance, December 31, 1997 16,397 $164 45,792,585 $457,926 (345,000) (1,638,859)
============================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Unrealized Total
Additional (Loss) Gain Stockholders'
Paid-in Accumulated on Marketable Subscriptions Equity
Capital Deficit Securities Receivable (Deficit)
----------------------------------------------------------------------------
Balance, December 31, 1996 104,900,551 $(64,971,200) (342,500) $(604,653) $38,076,591
Sale of common stock pursuant to warrants,
options and Employee Stock Purchase Plan 1,606,083 -- -- -- 1,614,234
Reduction in subscriptions receivable -- -- -- 604,653 604,653
Sale of preferred stock, net of issuance
cost of approximately $1,000,000 14,999,840 -- -- -- 15,000,000
Issuance of common stock for 1996 employer
401(k) matching contribution 317,280 -- -- -- 318,154
Conversion and redemption of preferred stock (3,926,317) -- -- -- (3,865,096)
Conversion of convertible debentures and
issuance of common stock to an investor 16,935,713 -- -- -- 17,010,363
Issuance of common stock for investment
banking, merger and acquisition
and consulting services 52,925 -- -- -- 53,125
Value ascribed to the discount feature of
convertible debentures issued 3,750,812 -- -- -- 3,754,943
Unrealized gain on marketable securities -- -- 342,500 -- 342,500
Preferred stock dividends -- (1,584,406) -- -- (1,584,406)
Guaranteed value of common stock associated
with Dermascan Acquisition (216,562) -- -- -- (216,562)
Issuance of common stock for technology 1,146,388 -- -- -- 1,148,941
Purchase of stock for treasury -- -- -- -- (427,102)
Gain related to the issuance of common stock
by Nexar Technologies, Inc. 7,409,866 -- -- -- 7,409,866
Value ascribed to warrant to purchase common
stock issued to Coherent, Inc. 380,000 -- -- -- 380,000
Net loss -- (85,803,891) -- -- (85,803,891)
-----------------------------------------------------------------------------
Balance, December 31, 1997 147,356,579 $(152,359,497) $-- $-- $(6,183,687)
=============================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
Years Ended December 31,
1995 1996 1997
-------------- ------------- ------------
Cash Flows from Operating Activities
Net loss $(12,620,768) $(37,863,792) $(85,803,891)
Less: Net Loss from Discontinued Operations (4,231,326) (17,065,534) (27,434,812)
------------- ------------- ------------
Net Loss from Continuing Operations (8,389,442) (20,798,258) (58,369,079)
------------- ------------- ------------
Adjustments to reconcile net loss from continuing
operations to net cash
used in operating activities-
Depreciation and amortization 1,006,055 2,343,013 2,246,412
Restructuring and asset write-off costs -- 3,057,808 12,983,000
Write-off of in-process research and development -- 57,212 --
Write-off of intangible assets -- 631,702 --
Loss on sale of wholly owned subsidiary -- -- 165,845
Write-off of deferred financing costs associated with
redemption of convertible debentures -- 201,500 27,554
Valuation allowances for notes and investments -- -- 1,035,912
Accrued interest receivable on note
and subscription receivable -- (568,917) --
Foreign currency exchange gain -- (446,596) (651,970)
Noncash interest expense related to debt 220,280 163,680 5,473,077
Noncash compensation related to common stock
and warrants 95,370 836,982 205,238
Realized gain on marketable securities -- (835,197) (577,969)
Unrealized (gain) loss on marketable securities (133,568) (1,198,174) 669,293
Changes in assets and liabilities, net of effects
from business combinations
Purchases of marketable trading securities (615,842) (10,355,055) (152,938)
Sale of marketable trading securities and
interest received on marketable trading
securities 50,000 10,244,044 2,234,436
Accounts receivable (734,080) (82,025) (1,809,371)
Inventories (614,364) (4,661,443) (3,390,396)
Other current assets and loans to officers (407,575) (1,514,858) (1,005,781)
Accounts payable 1,046,192 1,243,161 1,378,637
Accrued liabilites 2,141,429 4,762,781 6,494,790
------------- ------------- -------------
Net cash used in operating activities (6,335,545) (16,918,640) (33,043,310)
------------- ------------- -------------
Cash Flows from Investing Activities
Cash acquired from purchase of Spectrum Medical 75,087 -- --
Technologies, Inc.
Purchases of property and equipment (649,642) (3,180,112) (5,777,446)
Increase in other assets (828,569) (1,176,527) (95,830)
Loans to related parties (3,861,375) (7,338,625) (1,250,000)
Loans to nonrelated parties -- (2,236,531) --
Payments received on loans to related parties -- 9,322,284 941,288
Guaranteed value associated with --rmascan Acquisition -- -- (216,562)
Investment in nonmarketable securities (500,000) (2,077,054) (1,057,631)
Increase in organizational costs (500,000) -- --
------------- ------------- -------------
Net cash used in investing activities (6,264,499) (6,686,565) (7,456,181)
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
Years Ended December 31,
1995 1996 1997
Cash Flows from Financing Activities ---------- ---------- ----------
Proceeds from issuance of convertible debentures 4,150,000 14,169,441 16,715,169
Proceeds from notes payable 1,280,000 -- 3,500,000
Deferred financing costs incurred related to
convertible debentures (182,000) (1,365,217) --
Redemption of convertible debentures (1,048,967) (930,000) (196,000)
Payments of notes payable and capital lease
obligations (1,291,350) (260,224) (4,856,479)
Proceeds from issuance of common stock 9,631,148 13,715,287 1,462,121
Issuance of preferred stock 19,385,963 30,823,147 15,000,000
Purchase of treasury stock (1,211,757) -- (427,102)
Payment of contingent note payable -- (500,000) --
Redemption of preferred stock, including accrued
dividends of $71,223 -- (3,194,375) --
Payments received on subscriptions receivable -- 2,009,592 --
Deferred costs -- (932,661) --
------------ ------------ ------------
Net cash provided by financing
activities 30,713,037 53,534,990 31,197,709
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 18,112,993 29,929,785 (9,301,782)
Net cash (used in) provided by discontinued operations (8,677,687) (30,073,633) 12,676
Cash and cash equivalents, beginning of year 3,000,948 12,436,254 12,292,406
------------ ------------ ------------
Cash and cash equivalents, end of year $12,436,254 $12,292,406 $3,003,300
============ ============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $125,702 $280,659 $534,037
=========== =========== ============
Supplemental Disclosure of Noncash Financing
and Investing Activities
Conversion of convertible debentures and
related accrued interest, net of
financing fees $3,190,740 $1,172,762 $17,010,363
=========== =========== ============
Subscriptions received in connection with warrant
exercises
notes payable $1,988,709 $1,057,500 $--
=========== =========== ============
Issuance of common stock in lieu of payment of
notes payable $1,879,932 $-- $--
=========== =========== ============
Conversion of preferred stock $86,060 $788,687 $414,904
=========== =========== ============
Exchange of preferred stock for investment in a
discontinued operation $-- $-- ($4,280,000)
=========== =========== ============
Issuance of common stock for purchase of technology
related to a discontinued operation $-- $-- $1,148,941
=========== =========== ============
Investment banking and consulting fees for services
related to the issuance of common stock and
convertible debentures $120,000 $709,224 $53,125
=========== =========== ============
Issuance of common stock for 1995 and 1996 employer 401(k)
matching contribution $-- $160,598 $318,154
=========== =========== ============
Issuance of common stock for minority interest
in Star Medical subsidiary $-- $1,749,723 $--
=========== =========== ============
Acquisition of Spectrum Medical Technologies, Inc.
Liabilities assumed $(1,128,139) $-- $--
Fair value of assets acquired 1,456,920 -- --
Fair value of 364,178 shares of common stock issued (1,000,000) -- --
Promissory note issued (700,000) -- --
Cash paid (300,000) -- --
Acquisition costs incurred (161,138)
------------ ----------- ------------
Cost in Excess of Net Assets Acquired $(1,832,357) $-- $--
============ =========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-9
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Operations
Palomar Medical Technologies, Inc. and subsidiaries ("Palomar" or the
"Company") are engaged in the commercial sale and development of cosmetic and
medical laser systems and services. During the year ended December 31, 1997, the
Company formed and began execution of a plan to dispose of its electronics
segment (see Note 2).
Some of the Company's medical laser products are in various stages of
development, and as such, the success of future operations is subject to a
number of risks similar to those of other companies in similar stages of
development. Principal among these risks are the successful development and
marketing of the Company's products, proper regulatory approval, the need to
achieve profitable operations, competition from substitute products and larger
companies, the need to obtain adequate financing to fund future operations and
dependence on key individuals.
The Company has incurred significant losses since inception. The
Company continues to seek additional financing from issuances of common stock
and/or other potential sources in order to fund its operations over the next
twelve months. The Company has financed current operations, expansion of its
core business and outside short-term financial investments primarily through the
private sale of debt and equity securities of the Company. The Company raised a
total of approximately $30,713,000, $53,535,000 and $31,198,000 in such
financings during the years ended December 31, 1995, 1996 and 1997,
respectively. The Company believes that it will require additional financing
during the next twelve-month period to continue to fund operations and growth.
The Company may raise additional funds through private sales of the Company's
debt or equity securities and sales of its investment in Nexar Technologies,
Inc. ("Nexar") (see below). Sales of securities to private investors are
generally sold at a discount to the public market for similar securities. It has
been the Company's experience that private investors require that the Company
make its best effort to register these securities for resale to the public at
some future time.
(2) Discontinued Operations
During the fourth quarter of 1997, the Company's Board of Directors
approved a plan to dispose of the electronics business segment. The electronics
segment consists of the manufacture and sale of personal computers, high-density
flexible electronics circuitry and memory modules.
Included in the electronics business segment is Nexar. Nexar is an
early-stage company that manufactures, markets and sells personal computers with
a unique circuit board that enables end users to upgrade and replace the
microprocessor, memory and hard drive components. On April 14, 1997, Nexar
completed an initial public offering of 2,500,000 shares at $9.00 per share, for
net proceeds of approximately $19,593,000. The Company recorded an increase in
stockholders' equity of $7,409,866, in accordance with Staff Accounting Bulletin
("SAB") No. 51 as a result of Nexar's initial public offering. The Company's
accounting policy for gains arising under SAB No. 51 is to recognize these gains
in its statement of operations to the extent that such gains are realizable at
the date of each transaction.
As of the effective date of Nexar's initial public offering, the Company
beneficially owned 6,100,000 shares of Nexar's common stock and 45,684 shares of
Nexar's convertible preferred stock. In April 1997, the Company purchased
300,000 shares of Nexar's newly issued publicly registered common stock for
approximately $2,777,000 from Nexar's underwriter in a private placement
transaction. The convertible preferred stock is convertible into 406,080 shares
of Nexar's common stock. Pursuant to an agreement between the Company and Nexar,
1,200,000 common shares (the Contingent Shares) of the total 6,506,080 common
and common equivalent shares of Nexar owned by the Company were placed in escrow
and are subject to a mandatory repurchase, in whole or part, by Nexar at $0.01
per share (or $12,000) after the 48 month anniversary of the initial public
offering of Nexar's common stock unless these shares are released from escrow.
The Contingent Shares are subject to release to the Company in installments of
400,000 shares each upon the achievement of any three of the four milestones as
specified in the agreement between the Company and Nexar. The milestones are
based on Nexar achieving certain revenue and net income levels as defined in the
agreement.
F-10
<PAGE>
On December 10, 1997, the Company sold these contingent shares for $5,000 to an
investor. However, if the investor sells the escrow shares for a price in excess
of $240,000, the excess will be paid to Palomar.
During the fourth quarter of 1997, the Company reduced its ownership in
Nexar through the sale of common stock to private investors. At December 31,
1997, the Company beneficially owned 3,746,343 shares of Nexar's common stock,
representing approximately a 36% ownership. Subsequent to year-end, the Company
further reduced its ownership through the sale of 500,000 shares to a private
investor for $2,000,000; 400,000 of these shares will be held by a custodian and
released for sale by the investor over the next two years. The Company has
guaranteed the investor a minimum selling price of $5.00 a share. The Company
has deferred the gain on the sale of Nexar stock to the investor and will
recognize gains related to these shares as the investor sells them. The Company
plans to liquidate its remaining position in Nexar within the next year. The
Company has accounted for its investment in Nexar as a Discontinued Operation
using the equity method. During the years ended December 31, 1996 and 1997, the
Company has recognized gains on the disposition of Nexar of $3,830,000 and
$6,221,689, respectively. These amounts are included in "Gain on Dispositions"
in the Consolidated Statements of Operations.
The other entities included in the electronics business segment are
Dynaco Corp. ("Dynaco") and Dynaco's wholly owned subsidiaries Comtel
Electronics, Inc. ("Comtel") and Dynamem, Inc. ("Dynamem"). On December 9, 1997,
the Company entered into a two-phase stock purchase agreement with Biometric
Technologies Corporation ("BTC"). BTC was formed jointly by Dynaco's President
and its Chairman of the Board. The first phase was consummated on December 9,
1997 and consisted of the sale of all of the issued and outstanding common stock
of Comtel and Dynamem in exchange for $3,654,000 payable in two installments.
The first installment is an $850,000 promissory note due February 15, 1998
bearing interest at a rate of prime plus two percent and secured by a Pledge and
Security Agreement. The second installment is a $2.8 million promissory note due
in forty-eight monthly installments, beginning February 1, 1999. The note bears
interest at the prime rate. This promissory note was fully reserved by the
Company during 1997, as its ultimate collectability is uncertain.
As part of phase I, the Company entered into a Loan and Subscription
Agreement with a creditor of Comtel for $3,233,000. This promissory note
represents the settlement of amounts owed the creditor by Comtel and guaranteed
by Palomar. Principal and interest payments will be made over twenty-four months
and interest will accrue at the bank's prime rate plus 2.25%. This promissory
note has been collateralized by 3,250,000 shares of the Company's common stock.
The Company also guarantees $2,500,000 of Comtel's borrowings from this creditor
until October 31, 1998. The stockholders of BTC have personally guaranteed to
the Company payment for any amounts borrowed under this line of credit in excess
of approximately $1,500,000 in the event that the Company is obligated to honor
this guarantee. The Company also restructured all assets and investments related
to a significant customer of Comtel into a $4,000,000 note receivable. This
receivable was fully reserved by the Company during 1997, as its ultimate
collectability is uncertain.
In phase II, which shall occur upon the earlier of BTC's initial public
offering of stock or June 30, 1998, BTC will purchase all of the issued and
outstanding stock of Dynaco. The phase II purchase price is $5,346,000, of which
$2,673,000 will be paid in cash and $2,673,000 will be paid in BTC common stock
of equal value. Alternatively, the Company may elect to have the entire phase II
purchase paid in cash at a value of $3,500,000. If phase II is not completed by
June 30, 1998, the Company will exercise alternative options for disposing of
and /or liquidating Dynaco. BTC also has the option to sell Dynaco to a third
party in which case any proceeds greater than $3,500,000 will be split evenly
between BTC and Palomar. The Company recognized a loss of approximately
$4,148,000 related to the phase I and phase II dispositions. The Company has
estimated Dynaco's 1998 operating loss through June 30, 1998 to be approximately
$850,000. These charges have been netted in "Gain on Disposition" in the
accompanying Consolidated Statement of Operations. The Company guarantees
$3,000,000 of amounts borrowed by Dynaco to a creditor. This guarantee expires
in May 1999.
Pursuant to Accounting Principles Board ("APB") Opinion No. 30,
REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A
SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS, the consolidated financial statements of the Company
have been reclassified to reflect the dispositions of the aforementioned
subsidiaries that comprise the electronics segment. Accordingly, the assets and
liabilities, revenues and expenses, and cash flows of the electronics segment
have been excluded from the respective
F-11
<PAGE>
captions in the Consolidated Balance Sheets, Consolidated Statements of
Operations and Consolidated Statements of Cash Flows. The net assets of these
entities have been reported as "Net Assets of Discontinued Operations" in the
accompanying Consolidated Balance Sheets; the net operating losses of these
entities have been reported as "Net Loss from Discontinued Operations" in the
accompanying Consolidated Statements of Operations; the net cash flows of these
entities have been reported as "Net Cash (Used in) Provided by Discontinued
Operations" in the accompanying Consolidated Statements of Cash Flows.
Summarized financial information for the discontinued operations were
as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1996 1997
-------------- --------------
Current Assets $36,153,021 $5,683,694
Total Assets 46,195,699 11,506,145
Current Liabilities 21,524,767 5,375,353
Total Liabilities 23,224,319 5,680,543
-------------- --------------
Net Assets of Discontinued Operations $22,971,380 $5,825,602
============== ==============
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Year Ended December 31,
1995 1996 1997
--------------- ---------------- ----------------
Revenues $16,296,224 $52,491,572 $57,663,080
Net Loss from Discontinued Operations ($4,231,326) ($17,065,534) ($27,434,812)
</TABLE>
The assets and liabilities of the discontinued operations as of
December 31, 1997 represent the financial position of Dynaco. The assets and
liabilities of the discontinued operations as of December 31, 1996 represent the
financial position of Dynaco, Comtel and Dynamem. The loss from operations for
all of the discontinued operations from the measurement date October 1, 1997
through the date of disposition for Comtel and Dynamem or December 31, 1997 for
Dynaco total approximately $3,405,000.
The following is the summarized financial information for Nexar:
<TABLE>
<S> <C> <C> <C>
December 31,
1996 1997
------------------------- ------------------------
Current Assets $16,966,851 $17,810,564
Non-Current Assets 2,622,270 2,098,495
Current Liabilities 6,542,296 7,886,594
Non-Current Liabilities 22,817,998 883,613
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Period Ended December 31,
1995 1996 1997
----------------- ---------------- -----------------
Net Revenues $619,629 $18,695,364 $33,608,063
Gross Profit 45,018 2,302,881 740,151
Net Loss (2,261,434) (7,510,139) (13,346,380)
</TABLE>
F-12
<PAGE>
(3) Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the
application of certain accounting policies described below and elsewhere in the
Notes to Consolidated Financial Statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements reflect the
consolidated financial position, results of operations and cash flows of the
Company and all wholly owned and majority-owned subsidiaries. Nexar, a
discontinued entity, has been accounted for in consolidation under the equity
method in accordance with APB No. 30 as described in Note 2. All other
investments are accounted for using the cost method as the Company owns less
than 20% of the common stock outstanding for these investments. All intercompany
transactions have been eliminated in consolidation.
(b) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. As of
December 31, 1997, the Company has investments in marketable securities totaling
approximately $5,054,000, including amounts totaling $3,604,880 in net assets of
discontinued operations. Included in the amount of $3,604,880 is the Company's
financial reporting basis for 3,746,343 shares of Nexar common stock that the
Company beneficially owns. The amount that the Company may ultimately realize
from these investments could differ materially from the value of these
investments recorded in the accompanying consolidated financial statements as of
December 31, 1997.
(c) Investments
The Company accounts for marketable securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Under SFAS No. 115,
securities that the Company has the positive intent and ability to hold to
maturity are reported at amortized cost and classified as held-to-maturity.
There were no held-to-maturity securities as of December 31, 1996 and 1997.
Securities purchased to be held for indefinite periods of time and not intended
at the time of purchase to be held until maturity are reported at fair market
value and classified as available-for-sale securities. Unrealized gains and
losses related to available-for-sale securities are included as a separate
component of stockholders' equity. Securities that are bought and held
principally for the purpose of selling them in the near term are reported at
fair market value and classified as trading securities. Realized and unrealized
gains and losses related to trading securities are included in the Consolidated
Statements of Operations. The Company's investment portfolios at December 31,
1996 and 1997 consist of the following:
F-13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
December 31, 1996
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------- -------------
Trading Securities:
Equity investments in publicly
traded companies $1,695,618 $1,537,614 $339,440 $2,893,792
Available-for-Sale (long-term):
Equity investments in publicly
traded companies 1,000,000 --- 342,500 657,500
------------ ------------ ------------- -------------
$2,695,618 $1,537,614 $681,940 $3,551,292
============ ============ ============= =============
December 31, 1997
--------------------------------------------------------
Trading Securities:
Equity investments in publicly
traded companies $1,050,649 $479,177 $80,500 $1,449,326
============ ============ ============= =============
</TABLE>
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Work-in-process and finished goods inventories consist of material,
labor and manufacturing overhead. At December 31, 1996 and 1997, inventories
consist of the following:
<TABLE>
<S> <C> <C> <C>
December 31,
1996 1997
---------------- ----------------
Raw materials $4,076,381 $2,928,350
Work-in-process and finished goods 1,129,573 1,783,124
---------------- ----------------
$5,205,954 $4,711,474
================ ================
</TABLE>
(e) Depreciation and Amortization
The Company provides for depreciation and amortization on property and
equipment using the straight-line method by charging to operations amounts that
allocate the cost of assets over their estimated useful lives as follows:
<TABLE>
<S> <C> <C>
Estimated
Asset Classification Useful Life
------------------------------------ ----------------------
Machinery and equipment 5-8 Years
Furniture and fixtures 5 Years
Leasehold improvements Term of Lease
</TABLE>
F-14
<PAGE>
At December 31, 1996 and 1997, property and equipment consist of the following:
<TABLE>
<S> <C> <C> <C>
December 31,
1996 1997
---------------- -----------------
Machinery and equipment $3,177,828 $6,328,442
Furniture and fixtures 1,047,942 1,018,931
Leasehold improvements 407,334 480,453
---------------- -----------------
4,633,104 7,827,826
Less: Accumulated depreciation
and amortization 805,114 1,372,240
---------------- -----------------
$3,827,990 $6,455,586
================ =================
</TABLE>
Included in machinery and equipment as of December 31, 1996 and 1997 is
approximately $884,000 and $3,470,000, respectively, of equipment manufactured
by the Company and used in its service business.
(f) Cost in Excess of Net Assets Acquired
The costs in excess of net assets for acquired businesses are being
amortized on a straight-line basis over 5 to 7 years. Amortization expense for
the years ended December 31, 1995, 1996 and 1997 amounted to approximately
$189,000, $536,000 and $554,000, respectively, and is included in general and
administrative expenses in the Consolidated Statements of Operations.
The Company accounts for long-lived assets in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of. Under SFAS No. 121, the Company is required to assess
the valuation of its long-lived assets, including cost in excess of net assets
acquired, based on the estimated future cash flows to be generated by such
assets (see Note 4). The Company has assessed the realizability of its
long-lived assets as of December 31, 1997 and believes them to be realizable.
(g) Deferred Financing Costs
During the years ended December 31, 1996 and 1997, the Company incurred
financing costs related to several issuances of convertible debentures. Deferred
financing costs are amortized by a charge to interest expense over the period
that the debt is outstanding (see Note 6).
(h) Revenue Recognition
The Company recognizes product revenue upon shipment. Provisions are
made at the time of revenue recognition for any applicable warranty costs
expected to be incurred. Revenues from services, which have not been significant
to date, are recognized as the services are provided. International sales for
the years ended December 31, 1995, 1996 and 1997 were approximately 44%, 22% and
24%, respectively, of total revenue.
(i) Significant Customers
For the year ended December 31, 1997, one customer accounted for 11% of
revenues and 51% of accounts receivable. This customer is the Company's
worldwide distributor of laser systems (see Note 12(e)).
(j) Research and Development Expenses
The Company charges research and development expenses to operations as
incurred.
F-15
<PAGE>
(k) Net Loss per Common Share
In March 1997, the FASB issued SFAS No. 128, Earnings per Share. This
statement establishes standards for computing and presenting earnings per share
and applies to entities with publicly traded common stock or potential common
stock. This statement is effective for fiscal years ending after December 15,
1997. Basic net loss per share was determined by dividing net income by the
weighted average shares of common stock outstanding during the year. Diluted net
loss per share is the same as basic earnings per share because the Company's
potentially dilutive securities, primarily stock options, warrants, redeemable
preferred stock and convertible debentures are antidilutive. The calculation of
the Company's net loss per common share from continuing operations for the years
ended December 31, 1995, 1996 and 1997 are as follows:
<TABLE>
<S><C> <C> <C> <C>
December 31,
1995 1996 1997
--------------- --------------- ----------------
Net loss from continuing operations $(8,389,442) $(20,798,258) $(58,369,079)
Preferred stock dividends (124,610) (1,242,751) (1,584,406)
Amortization of value ascribed to preferred
stock conversion discount --- --- (2,823,529)
--------------- --------------- ----------------
Adjusted net loss from continuing operations $(8,514,052) $(22,041,009) $(62,777,014)
=============== =============== ================
Basic and diluted net loss per common share
from continuing operations $(0.60) $(0.84) $(1.79)
=============== =============== ================
Weighted average number of
common shares outstanding 14,164,901 26,166,538 35,105,272
=============== =============== ================
</TABLE>
Net loss from discontinued operations per common share is computed by
dividing the net loss from discontinued operations by the weighted average
number of common shares outstanding for the period.
In 1995, 1996 and 1997, 11,275,200, 17,636,423 and 29,271,031 weighted
average common equivalent shares, respectively, were not included in the diluted
weighted average shares outstanding as they were antidilutive.
(l) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk, requires disclosure of any significant off-balance-sheet and credit
risk concentrations. Financial instruments that subject the company to credit
risk consist primarily of cash and trade accounts receivable. The Company places
its cash in highly rated financial institutions. The Company has no significant
off-balance-sheet concentration of credit risk such as foreign exchange
contracts, options contracts or other foreign hedging arrangements. To reduce
its accounts receivable risk, the Company relies on its worldwide distributor to
assess the financial strength of its end customers and, as a consequence,
believes that its accounts receivable credit risk exposure is limited. The
Company maintains an allowance for potential credit losses. The Company's
accounts receivable credit risk is not concentrated within any one geographic
area.
F-16
<PAGE>
(m) Disclosures about Fair Value of Financial Instruments
SFAS No. 107, Disclosure about Fair Value of Financial Instruments,
requires disclosure of an estimate of the fair value of certain financial
instruments. At December 31, 1996 and 1997, financial instruments consisted of
principally convertible debentures and preferred stock financings. The fair
value of financial instruments pursuant to SFAS No. 107 approximated their
carrying values at December 31, 1996 and 1997. Fair values have been determined
through information obtained from market sources and management estimates.
(n) Reclassifications
Certain reclassifications have been made to the 1995 and 1996
consolidated financial statements to conform with the current year's
presentation.
(o) Recently Issued Accounting Standards
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure. In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 129, 130 and 131 are effective
for fiscal years beginning after December 15, 1997. The Company believes that
the adoption of these new accounting standards will not have a material impact
on the Company's financial statements.
(4) Asset Write-off and Restructuring
In accordance with SFAS No. 121, the Company determined during the
third quarter of 1997 that certain investments' carrying values for both its
continuing and discontinued operations will not be realizable due to the
Company's change in strategy to divest of its investments in non-core
businesses. The Company has fully reserved for all such investments from
continuing operations resulting in a charge of approximately $10,283,000, which
breaks down approximately as follows:
<TABLE>
<S> <C> <C>
Description Carrying Amount
Notes Receivable $2,250,000
Investments in Non-Core Businesses 8,033,000
-----------------------------
$10,283,000
=============================
</TABLE>
The notes receivable were deemed to be uncollectible by the Company.
The fair values of investments in non-core businesses was determined by
management to be zero based on the book value of these companies, their poor
financial performance to date, and significant uncertainty as to the ultimate
realizability of these investments.
In the third quarter of 1997, the Company recognized a restructuring
charge of $2,700,000 based on the decision to discontinue certain medical
product and service business units and consolidate others. The majority of these
amounts relate to severance benefits for significant reductions in staffing for
all areas of the Company including the elimination of essentially all of the
sales and marketing function as a result of the Coherent transaction (Note
12(e)). Management's plan specifically identified 33 employees who were targeted
for termination almost exclusively in selling, general and administrative
functions. Actual employees terminated as a result of this restructuring totaled
45.
All expenses accounted for as restructuring charges were in accordance
with the criteria set forth in EMERGING TASK FORCE ISSUE 94-3, LIABILITY
RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN
ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING), and are
exclusive of the charges related to discontinued operations, as disclosed in
Note 2. During the three months ended December 31, 1997, the Company paid out
approximately $718,000
F-17
<PAGE>
of severance resulting in a restructuring liability balance of approximately
$1,982,000 at December 31, 1997. This restructuring liability will be paid in
1998. As part of this restructuring, the Company disposed of the following
medical businesses:
(a) Tissue Technologies, Inc.
On December 16, 1997, the Company sold assets and certain liabilities
of Tissue Technologies, Inc. ("Tissue Technologies"), a manufacturer of a
dermatological laser product for the treatment of wrinkles to a newly formed
medical laser manufacturer. This medical laser manufacturer was formed by former
executives of Tissue Technologies Inc. In exchange, the Company received a
$500,000 note receivable due in monthly installments over the next year,
royalties ranging from 2% to 5% on product revenue over the next ten years, a
15% equity position in the newly formed company and a warrant to purchase 10% of
the common stock of the newly formed company at $.50 per share. This transaction
did not have a material effect on the Company's operations for the year ended
December 31, 1997.
(b) Dermascan, Inc.
Subsequent to year end, the Company sold Dermascan, an electrology
marketing subsidiary, back to a Dermascan shareholder for $167,000. This amount
was offset against amounts owed to the Dermascan shareholder under an agreement
terminated in connection with the Company's sale of Dermascan. This transaction
did not have a material effect on the Company's operations for the year ended
December 31, 1997.
F-18
<PAGE>
(c) Palomar Technologies, Ltd.
On January 1, 1998 the Company sold substantially all of the business
assets and liabilities of Palomar Technologies, Ltd., a foreign manufacturer, to
a publicly traded company. The Company received cash of approximately $200,000
and was relieved of obligations related to the building lease and all employment
agreements. This transaction did not have a material effect on the Company's
operations for the year ended December 31, 1997.
(5) Income Taxes
The Company provides for income taxes under the liability method in
accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. At
December 31, 1997, the Company had available, subject to review and possible
adjustment by the Internal Revenue Service, a federal net operating loss
carryforward of approximately $85,000,000 to be used to offset future taxable
income, if any. This net operating loss carryforward will begin to expire in
2003. The Internal Revenue Code contains provisions that limit the net operating
loss carryforwards due to changes in ownership, as defined by the Internal
Revenue Code. The Company believes that its net operating loss carryforwards
will be limited due to its reorganization in 1991 and subsequent stock
offerings. The Company has not recorded a deferred tax asset for the net
operating losses, due to uncertainty relating to the Company's ability to
utilize such carryovers.
(6) Long-Term Debt
At December 31, 1996 and 1997, long-term debt consisted of the
following:
<TABLE>
<S> <C> <C>
December 31,
1996 1997
-------------- ---------------
Dollar denominated convertible debentures $7,288,063 $10,683,440
Swiss franc denominated convertible debentures 7,222,846 --
Note payable in connection with guarantee on behalf of discontinued
subsidiary (See Note 2) -- 3,233,000
Other notes payable 651,608 169,588
-------------- ---------------
15,162,517 14,086,028
Less - current maturities (497,377) (1,640,465)
-------------- ---------------
$14,665,140 $12,445,563
============== ===============
</TABLE>
F-19
<PAGE>
(a) Convertible Debentures
The following table summarizes the issuance and conversion of the
convertible debentures for the years ended December 31, 1996 and 1997.
<TABLE>
<S><C> <C> <C> <C> <C>
Common
Common
Outstanding at Shares
Face December 31, Issued
----------------------------- Upon
Series Value 1996 1997 Conversion
---------------------------------------------------- -------------- -------------- ------------- -------------
3% Series due September 30, 1996 $ 750,000 $ -- $ -- 370,189
6% Series due November 21, 1997 2,000,000 -- -- 1,172,132
7% Series due March 31, 2000 1,100,000 -- -- --
7% Series due July 1, 2000 1,200,000 -- -- 401,549
8% Series due October 26, 1997 1,000,000 -- -- 34,615
4.5% Series due October 21, 1999, 2000, 2001 5,000,000 3,761,038 100,000 1,381,264
5% Series due December 31, 2001 5,000,000 3,527,025 923,439 2,074,992
5% Series due January 13, 2002 1,000,000 -- 1,000,000 --
5% Series due March 10, 2002 5,500,000 -- 1,160,001 3,094,677
6% Series due March 13, 2002 500,000 -- 500,000 --
6%, 7% and 8% Series due September 30, 2002 7,000,000 -- 7,000,000 --
4.5% Series denominated in Swiss francs
due July 3, 2003 7,669,442 7,222,846 -- 914,028
-------------- -------------- ------------- -------------
$37,719,442 $14,510,909 $10,683,440 9,443,446
============== ============== ============= =============
</TABLE>
On January 13, 1997, the Company issued $1,000,000 of 5% convertible
debentures due January 13, 2002. The convertible debentures have a conversion
price equal to 85% of the average closing bid price of the Company's common
stock price as defined, provided that in any thirty-day period, the holder of
these debentures may convert no more than 33% (or 34% in the last thirty-day
period available for conversion) of the debentures. The Company has ascribed a
value of $176,471 for the discount conversion feature. This amount is being
amortized over a six month period which represents the period to the earliest
conversion date.
On March 10, 1997, the Company issued $5,500,000 of 5% convertible
debentures due March 10, 2002. The convertible debentures have a conversion
price of 100% of the Company's average stock price, as defined, within the first
90 days and 90% of the average stock price, as defined, thereafter. The Company
has ascribed a value of $611,111 for the 10% conversion discount. This amount is
being amortized over a six month period which represents the period to the
earliest conversion date.
It is the Company's policy to discount convertible debentures based on
the discount conversion price and amortize the discount to operations over the
expected life of the convertible debentures, which in most cases is less than
the term of the debentures. Accordingly, the Company has credited the ascribed
value for the discount features described above to additional paid-in capital.
This amount is being amortized over a six month period which represents the
period to the earliest conversion date.
On March 13, 1997, the Company issued $500,000 of 6% convertible
debentures due March 13, 2002. The convertible debentures have a conversion
price of $11.00. In addition, after 90 days, the debentureholder may convert no
more than one-third of the debenture in any thirty-day period. The Company has
accounted for these debentures at face value.
F-20
<PAGE>
On September 30, 1997, the Company issued $7,000,000 of convertible
debentures due September 30, 2002. The debentures bear interest at a rate of 6%
for the first 179 days, 7% for days 180-269 and 8% thereafter. The
debentureholders were also issued 413,109 shares of common stock related to this
financing. The fair market value of the common stock was $1,050,000 and this
amount is being treated as debt discount and amortized to interest expense. The
convertible debentures have a conversion price of 100% of the Company's average
stock price as defined. In addition, the debentureholder may convert no more
than 33% in any thirty-day period (or 34% of the debentures in the last thirty
day period). The Company also has redemption rights related to this financing.
(See Note 13.) The Company incurred deferred financing costs of $350,000
relating to the issuance of these debentures.
On July 3, 1996, the Company raised approximately $7,669,000 through
the issuance of 9,675 units in a convertible debenture financing. These units
are traded on the Luxembourg Stock Exchange. Each unit consists of a convertible
debenture denominated in 1,000 Swiss francs and a warrant to purchase 24 shares
of the Company's common stock at $16.50 per share and is due July 3, 2003. The
warrants are non-detachable and may be exercised only if the related debentures
are simultaneously converted, redeemed or purchased. Interest on the convertible
debentures accrues at a rate of 4.5% per annum and is payable quarterly in Swiss
francs. The convertible debentures are convertible by the holder or the Company
commencing October 1, 1996 at a conversion price equal to from 100% to 77.5% of
the applicable conversion price, calculated as defined. The Company ascribed a
value of $1,917,360 to the discount conversion feature of the convertible
debenture. This amount was being amortized to interest expense over the life of
the Swiss franc convertible debenture. During 1997, the Company redeemed 300
units of this convertible debenture financing for $195,044.
On October 16, 1997, the Company brought a declaratory judgment action
in the United States District Court against certain of the Swiss franc
debentureholders. Prior to this suit, those debentureholders had alleged that
the Company was in breach of certain protective covenants and on October 22,
1997, they brought suit based on these claims. On November 13, 1997, the Company
exercised its right to convert 9,375 units into 914,028 shares of common stock
and cash of approximately $36,000. The unamortized discount totaling
approximately $1,784,000 was amortized to interest expense upon conversion. The
Company has accounted for these debentures as converted in the accompanying
financial statements. The ongoing litigation will be accounted for under SFAS
No. 5, Accounting for Contingencies (see Note 12(d)).
The Company incurred deferred financing costs of approximately
$2,038,000 and $769,000 relating to the issuance of convertible debentures
during the years ended December 31, 1996 and 1997, respectively. These costs
have been reflected as deferred financing costs in the accompanying consolidated
balance sheets and are being amortized to interest expense over the term of the
related convertible debentures. During the years ended December 31, 1995, 1996
and 1997, the Company amortized approximately $71,000, $78,000 and $276,000 to
interest expense, respectively. Any remaining unamortized deferred financing
costs are recorded to additional paid-in capital upon conversion. During the
years ended December 31, 1996 and 1997, the Company amortized approximately
$41,000 and $1,820,000, respectively, of unamortized deferred financing costs to
additional paid-in-capital.
During the years ended December 31, 1995, 1996 and 1997, the Company
recorded approximately $168,000, $77,000 and $5,444,000, respectively, of
interest expense related to the amortization of the discount of convertible
debentures.
(b) Future Maturities of Long-Term Debt
Future maturities of notes payable, capital lease obligations and
convertible debentures reflected at face value as of December 31, 1997 are as
follows:
1998 $ 1,640,465
1999 1,699,740
2000 65,237
2001 1,988,679
2002 8,691,907
=============
$14,086,028
=============
F-21
<PAGE>
(7) Stockholders' Equity
(a) Common Stock
On February 28, 1997, the Company and Nexar entered into an Asset
Purchase and Settlement agreement with a former executive of Nexar and
Technovation Computer Labs Inc. (Licensor). The Licensor was affiliated with a
former officer of Nexar. Under the terms of this agreement, the Company agreed
to pay this former executive and certain of his affiliates $1,250,000 in cash
and deliver $1,500,000 worth of Palomar's common stock in exchange for all
right, title and interest in to all the technology licensed under Nexar's
license agreement with the Licensor and a patent application related thereto and
a complete release and settlement of all claims between this former executive
and Nexar.
The Company agreed to assign to Nexar all of its rights to and title in
the technology received under the Asset Purchase and Settlement Agreement and
charged to Nexar the cost associated with this claim and the purchase of the
technology. Nexar allocated $1,375,000 of the consideration to settle this claim
and reflected this amount as a litigation expense in its statement of operations
for the year ended December 31, 1996. The remaining consideration totaling
$1,375,000 was allocated to the purchase of technology and is being amortized by
Nexar over the technology's estimated useful life. The allocation of the
purchased technology was based on the value of anticipated royalty payments to
the Licensor over the three years ended December 31, 1999.
During the year ended December 31, 1997, the Company issued 20,000
shares of common stock in connection with advisory services.
On December 31, 1997, in connection with the discontinuation of
Dynaco's operations, the Company entered a Security Agreement-Stock Pledge with
a bank. Pursuant to this agreement, the Company pledged 3,250,000 shares of its
common stock to the bank as security for a guaranty by the Company (Note 2).
These shares are held in escrow, are not entitled to vote and are not considered
outstanding as of December 31, 1997.
(b) Preferred Stock
The Company is authorized to issue up to 5 million shares of preferred
stock, $.01 par value. As of December 31, 1996 and 1997, preferred stock
authorized, issued and outstanding consists of the following:
<TABLE>
<S> <C> <C> <C>
1996 1997
---- ----
Redeemable convertible preferred stock, Series E, $.01 par value per
share Authorized - 10,000 shares
Issued and outstanding - 2,151 shares in 1996, liquidation preference of $2,235,615 $ 22 $ --
Redeemable convertible preferred stock, Series F, $.01 par value per share
Authorized - 6,000 shares
Issued and outstanding - 6,000 shares in 1997, liquidation preference of $6,748,500
at December 31, 1997 60 60
Redeemable convertible preferred stock, Series G, $.01 par value per
share Authorized - 10,000 shares Issued and outstanding - 2,684 shares
in 1997, liquidation preference of $2,934,742
at December 31, 1997 100 27
Redeemable convertible preferred stock, Series H, $.01 par value per
share Authorized - 16,000 shares Issued and outstanding - 7,690 shares
in 1997, liquidation preference of $8,031,232
at December 31, 1997 -- 77
Total preferred stock $ 182 $ 164
===== =====
</TABLE>
F-22
<PAGE>
The Series F redeemable convertible preferred stock ("Series F
Preferred"), together with any accrued but unpaid dividends, may be converted
into common stock at 80% of the average closing bid price for the ten trading
days preceding the conversion date, but in no event less than $3.00 or more than
$16.00. This conversion floor was decreased by the two parties from an original
price of $7.00. The Series F Preferred may be redeemed at the Company's option
as defined, with no less than 10 days' and no more than 30 days' notice or when
the stock price exceeds $16.80 per share for sixty consecutive trading days, at
an amount equal to the amount of liquidation preference determined as of the
applicable redemption date. Dividends are payable quarterly at 8% per annum in
arrears on March 31, June 30, September 30 and December 31. Dividends not paid
on the payment date, whether or not such dividends have been declared, will bear
interest at the rate of 10% per annum until paid.
The Series G redeemable convertible preferred stock ("Series G
Preferred"), together with any accrued but unpaid dividends, may be converted
into common stock at 85% of the average closing bid price for the five trading
days preceding the conversion date, but in no event less than $.01. On December
31, 1997, the Company and the holder of the remaining 2,684 shares of Series G
Preferred entered into an Exchange Agreement. The conversion floor was decreased
by the two parties from an original floor of $6.00. In addition, beginning on
March 1, 1998, for any thirty-day period, the holder may exchange a limited
amount of the Series G Preferred ("exchangeability amount") and any accrued but
unpaid dividends for common stock at 85% of the average closing bid price for
the five trading days preceding the conversion date ("exchange date"). The
exchangeability amount increases as the exchange rate increases. The
exchangeability amount ranges from 268 shares of preferred stock for an exchange
rate below $2.00 to 1,072 shares of preferred stock for an exchange rate in
excess of $4.00. The Series G Preferred may be redeemed at the Company's option
at any time, with no less than 15 days' and no more than 20 days' notice, at an
amount equal to the sum of (a) the amount of liquidation preference determined
as of the applicable redemption date plus (b) $176.50. Dividends are payable
quarterly at 7% per annum in arrears on January 1, April 1, July 1 and October
1. Dividends not paid on the payment date, whether or not such dividends have
been declared, will bear interest at the rate of 12% per annum until paid.
The conversion price for the Series F and G Preferred is adjustable for
certain dilutive events, as defined. The Series F and G Preferred have a
liquidation preference equal to $1,000 per share of redeemable convertible
preferred stock, plus accrued but unpaid dividends and accrued but unpaid
interest. The Series F and G Preferred stockholders do not have any voting
rights except on matters affecting the Series F and G Preferred.
During the first and second quarters of 1997, the Company issued 16,000
shares of Series H redeemable convertible preferred stock ("Series H Preferred")
for $16,000,000 with attendant financing costs of $1,000,000. The Series H
Preferred accrues dividends at rates varying from 6% to 8% per annum, as
defined. The Series H Preferred, including any accrued but unpaid dividends, may
be converted into common stock at 100% of the average stock price, as defined,
for the first 179 days from the closing date, 90% of the average stock price, as
defined, for the following 90 days and 85% of the average stock price, as
defined, thereafter. The conversion price is adjustable for certain dilutive
events, as defined. The holders are restricted for the first 209 days following
the closing date to converting no more than 33% of the Series H Preferred in any
thirty-day period (or 34% in the last thirty-day period). Under certain
conditions, the Company has the right to redeem the Series H Preferred. The
Company has ascribed a value of $2,823,529 to the discount conversion feature of
the Series H Preferred, which is being amortized as an adjustment to earnings
available to common shareholders over the most favorable conversion period
attainable to the holders (270 days from the date of issuance).
During the year ended December 31, 1997, the following shares of
preferred stock, accrued premium, dividends, interest and other related costs
were converted into shares of common stock as follows:
F-23
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Number of Additional Dollar Amount
Preferred Preferred Dollar Amount of Converted, Including Accrued Number of Common
Stock Shares Preferred Stock Premium, Dividends, Interest Total Dollar Shares Converted
Series Converted Converted and Other Related Costs Amount Converted Into
- ------------ --------------- --------------------- --------------------------------- --------------------- -------------------
E 2,128 $2,128,000 $126,366 $2,254,366 332,859
G 7,316 7,316,000 438,234 7,754,234 602,824
H 8,310 8,310,000 228,411 8,538,411 5,204,158
--------------- --------------------- --------------------------------- --------------------- -------------------
17,754 $17,754,000 $793,011 $18,547,011 6,139,841
</TABLE>
In addition to the 602,824 shares of common stock issued related to the
Series G Preferred conversion, the Company issued to the Series G Preferred
stockholder $47,731 in cash dividends and 956,388 shares of Nexar common stock
valued at $4,671,597. The reduction to stockholder's equity (deficit) as a
result of this transaction was as follows:
Value of Nexar Common Stock $4,671,597
Accrued Interest and Dividend (391,597)
$4,280,000
(c) Stock Option Plans and Warrants
(i) Stock Options
The Company has several Stock Option Plans (the "Plans") that provide
for the issuance of a maximum of 4,350,000 shares of common stock, which may be
issued as incentive stock options ("ISOs") or nonqualified options. Under the
terms of the Plans, ISOs may not be granted at less than the fair market value
on the date of grant (and in no event less than par value); in addition, ISO
grants to holders of 10% of the combined voting power of all classes of Company
stock must be granted at an exercise price of not less than 110% of the fair
market value at the date of grant. Pursuant to the Plans, options are
exercisable at varying dates, as determined by the Board of Directors, and have
terms not to exceed 10 years (five years for 10% or greater stockholders). The
Board of Directors, at the request of the optionee, may, at its discretion,
convert the optionee's ISOs into nonqualified options at any time prior to the
expiration of such ISOs.
During the year ended December 31, 1997, the Company granted options to
certain Tissue Technologies employees to purchase an aggregate of 60,845 shares
of common stock at an exercise price of $.01 per share in settlement of a stock
option dispute. The employees simultaneously exercised these options. The fair
market value of the common stock issued totals approximately $152,000, which has
been reflected as a charge in the accompanying Consolidated Statements of
Operations.
The Company's Star subsidiary, manufacturer of the Company's diode
laser, also has established a stock option plan that provides for the issuance
of both nonqualified options and ISOs. In the year ended December 31, 1996, Star
granted a total of 140,000 options to purchase Star's common stock to officers
and employees at exercise prices ranging from $2.50 to $9.50 per share. In the
year ended December 31, 1996, an individual exercised 20,000 shares at $2.50 per
share; in addition, 12,000 shares at $6.00 per share were canceled. In the year
ended December 31, 1997, Star granted a total of 50,500 options to purchase its
common stock to employees at an exercise price of $19.00 per share. During the
year ended December 31, 1997, no options were exercised or canceled. As of
December 31, 1997, options to purchase 255,500 shares of Star common stock at
prices ranging from $2.50 to $19.00 per share are outstanding.
F-24
<PAGE>
The following table summarizes all stock option activity of the Company
for the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<S> <C> <C> <C>
Number of Exercise Weighted Average
Shares Price Exercise Price
------------- ---------------- ----------------------
Outstanding, December 31, 1994 1,047,500 $1.00-$3.50 $2.25
Granted 820,235 0.40-3.00 1.75
Exercised (285,000) 1.00-3.50 1.76
Canceled (75,000) 2.375 2.375
------------- ---------------- ----------------------
Outstanding, December 31, 1995 1,507,735 $0.40-$3.50 $2.06
Granted 1,520,000 6.00-10.50 7.08
Exercised (366,735) 0.40-3.50 1.28
Canceled (5,000) 3.00 3.00
------------- ---------------- ----------------------
Outstanding, December 31, 1996 2,656,000 $2.00-$10.50 $5.03
Granted 1,747,345 0.01-6.50 2.53
Exercised (214,845) 0.01-3.00 1.62
Canceled (1,206,100) 2.375-10.50 6.23
------------- ---------------- ----------------------
Outstanding, December 31, 1997 2,982,400 $1.50-$8.00 $3.33
============= ================ ======================
Exercisable, December 31, 1997 1,657,565 $2.00-$8.00 $3.48
============= ================ ======================
Available for future issuances under the Plans
as of December 31, 1997 725,255
=============
</TABLE>
The range of exercise prices for options outstanding and options
exercisable at December 31, 1997 is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------ --------------------------------------
Weighted Average
Range of Options Remaining Weighted Average Options Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------- ---------------- ---------------------- ----------------------- -------------- -----------------------
$1.50 - $2.50 2,415,900 3.39 years $2.36 1,257,733 $2.30
$3.00 - $3.50 66,500 1.65 years 3.23 66,500 3.23
$8.00 500,000 3.65 years 8.00 333,332 8.00
---------------- ---------------------- ----------------------- -------------- -----------------------
2,982,400 3.40 years $3.33 1,657,565 $3.48
================ ====================== ======================= ============== =======================
</TABLE>
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, Accounting for Stock Issued to Employees. In October 1995, the
FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which is
effective for fiscal years beginning after December 15, 1995. SFAS No. 123
established a fair-value-based method of accounting for stock-based compensation
plans. The Company has adopted the disclosure-only alternative under SFAS No.
123 which requires disclosure of the pro forma effects on earnings per share as
if SFAS No. 123 had been adopted, as well as certain other information. The
Company accounts for equity instruments issued to non-employees in accordance
with EITF 96-18 by valuing the instrument using the black-sholes pricing model,
as prescribed by FAS 123, and recording a charge to operations for their fair
value. The Company has issued options and warrants to purchase common stock to
certain financial intermediaries in connection with various financings at below
the fair market value of the underlying stock. The costs associated with these
issuances are accounted for as a cost of raising capital and netted against the
proceeds from these issuances.
The majority of options cancelled during the years ended December 31,
1995, 1996 and 1997 were the result of employee terminations. During the year
ended December 31, 1997, a total of 1,005,000 options to purchase common stock
were repriced to the current fair market value of the underlying common stock of
$2.50 per share.
The Company has computed the pro forma disclosures required under SFAS
No. 123 for all stock options granted to employees of the Company in the years
ended December 31, 1996 and 1997 using the Black-Scholes option pricing model
prescribed by SFAS No. 123. The pro forma disclosure for the Company's results
of operations related to stock option plans at its Star subsidiary were
immaterial for the years ended December 31, 1996 and 1997.
F-25
<PAGE>
The assumptions used to calculate the SFAS No. 123 pro forma disclosure
and the weighted average information for the years ended December 31, 1995, 1996
and 1997 for the Company are as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1995 1996 1997
--------------------- ----------------- -------------------
Risk-free interest rate 6.08% 6.37% 6.09%
Expected dividend yield - - -
Expected lives 3.2 years 4.4 years 3.69 years
Expected volatility 55% 79% 79%
Weighted-average grant date fair value of
Options granted during the period $3.92 $4.57 $2.06
</TABLE>
The weighted fair market value and weighted exercise price of options
granted for the Company in the years ended December 31, 1995, 1996 and 1997 are
as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1995 1996 1997
-------------- ----------------- -----------------
Weighted average exercise price for options:
Whose exercise price exceeded fair market value at
the date of grant $3.00 $10.00 $2.53
Whose exercise price was equal to fair market
value at the date of grant $1.614 $6.875 $-
Weighted Average Fair Market Value for options:
Whose exercise price exceeded fair market value at
the date of grant $2.125 $8.875 $1.87
Whose exercise price was equal to fair market
value at the date of grant $5.265 $6.875 $-
</TABLE>
F-26
<PAGE>
(ii) Warrants
The following table summarizes all warrant activity of the Company for
the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<S> <C> <C> <C>
Weighted
Number of Exercise Average
Shares Price Exercise Price
---------------- ---------------- ------------------
Outstanding, December 31, 1994 4,554,862 $0.60-$15.00 $5.39
Granted 4,835,155 0.01-7.50 2.36
Exercised (2,840,093) 0.60-5.00 3.86
---------------- ---------------- ------------------
Outstanding, December 31, 1995 6,549,924 $0.01-$15.00 $3.82
Granted 6,527,576 4.88-16.50 8.16
Exercised (3,101,261) 0.01-7.69 2.66
---------------- ---------------- ------------------
Outstanding, December 31, 1996 9,976,239 $0.60-$16.50 $7.02
Granted 2,793,187 2.50-8.875 4.29
Exercised (584,879) 0.60-7.50 2.10
Canceled (2,186,517) 1.00-16.50 6.65
---------------- ---------------- ------------------
Outstanding, December 31, 1997 9,998,030 $2.00-$15.00 $6.65
================ ================ ==================
Exercisable, December 31, 1997 8,233,020 $2.00-$15.00 $7.01
================ ================ ==================
</TABLE>
The majority of warrants cancelled during the year ended December 31,
1997 were the result of employee terminations. During the year ended December
31, 1997, a total of 240,000 warrants to purchase common stock were repriced to
then current fair market values of the underlying common stock ranging from
$2.50 to $4.00 per share.
The range of exercise prices for warrants outstanding and exercisable
at December 31, 1997 is as follows:
<TABLE>
<S><C> <C> <C> <C> <C> <C>
Warrants Outstanding Warrants Exercisable
- ------------------------------------------------------------------------------------ -------------------------------------
Weighted Average
Range of Warrants Remaining Weighted Average Warrants Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------------- ---------------- ---------------------- ---------------------- -------------- ----------------------
$2.00 - $3.50 2,535,452 3.29 years $2.68 1,970,452 $2.52
$4.00 - $5.25 1,802,420 2.85 years 4.89 1,402,412 4.99
$6.00 - $7.50 3,000,000 3.25 years 6.83 2,399,999 7.03
$7.69 - $15.00 2,660,158 3.25 years 6.83 2,460,157 7.03
------------------ ---------------------- ---------------------- -------------- ----------------------
9,998,030 3.19 years $6.65 8,233,020 $7.01
================== ====================== ====================== ============== ======================
</TABLE>
The Company has computed the pro forma disclosures required under SFAS
No. 123 for all warrants granted in the years ended December 31, 1996 and 1997
using the Black-Scholes option pricing model prescribed by SFAS No. 123.
F-27
<PAGE>
The assumptions used to calculate the SFAS No. 123 pro forma disclosure
and the weighted average information for the years ended December 31, 1995, 1996
and 1997 for the Company are as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1995 1996 1997
---------------- ------------------ ------------------
Risk-free interest rate 6.01% 5.93% 6.13%
Expected dividend yield - - -
Expected lives 4.8 years 5.9 years 4.44 years
Expected volatility 56% 79% 79%
Weighted-average grant date fair value of
warrants granted during the period $1.81 $5.39 $2.17
Weighted-average exercise price of warrants
granted during the period $2.36 $8.16 $4.29
</TABLE>
The weighted average fair-value and weighted average exercise price of
warrants granted by the Company for the years ended December 31, 1995, 1996 and
1997 are as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1995 1996 1997
---------------- --------------- -----------------
Weighted average exercise price for warrants:
Whose exercise price exceeded fair market value at
date of grant $2.72 $11.76 $4.30
Whose exercise price was less than fair market value
at date of grant $3.17 $7.07 $7.50
Whose exercise price was equal to fair market value at
date of grant $1.98 $6.67 $3.25
Weighted average fair market value for warrants:
Whose exercise price exceeded fair market value at
date of grant $2.18 $9.34 $2.09
Whose exercise price was less than fair market value
at date of grant $4.96 $8.82 $8.13
Whose exercise price was equal to fair market value at
date of grant $2.86 $6.67 $3.25
</TABLE>
(iii) Pro Forma Disclosure
The pro forma effect on the Company of applying SFAS No. 123 for all
options and warrants to purchase common stock would be as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
--------------------------------------------------------------------
1995 1996 1997
-------------------- ---------------------- ----------------
Pro forma net loss from continuing operations $(18,499,644) $(48,292,780) $(62,020,782)
Pro forma basic and dilutive net loss per share from
continuing operations $(1.31) $(1.89) $(1.89)
</TABLE>
F-28
<PAGE>
(d) Reserved Shares
At December 31, 1997, the Company has reserved shares of its common
stock for the following:
<TABLE>
<S> <C> <C>
Warrants 9,998,030
Stock option plans 3,709,504
Convertible debentures 8,212,815
Preferred stock 8,077,786
Employee Stock Purchase Plan 984,623
Employee 401(k) Plan 166,674
---------------
Total 31,149,432
===============
</TABLE>
From January 1, 1998 through February 6, 1998, 5,473,265 shares of
common stock were issued in connection with the items above.
(e) Stock Purchase Program
During the year ended December 31, 1997, the Company purchased 145,000
shares of its common stock at an aggregate cost of $427,102 as part of a
treasury stock purchase program approved by its Board of Directors in May of
1997.
(f) Employee Stock Purchase Plan
In June 1996, the Board of Directors established the Palomar Medical
Technologies, Inc. 1996 Employee Stock Purchase Plan (the "Purchase Plan").
Under the Purchase Plan, all employees, as defined, are eligible to purchase the
Company's common stock at an exercise price equal to 85% of the fair market
value of the common stock with a lookback provision of three months. The
Purchase Plan provides for issuance of up to 1,000,000 shares under the Purchase
Plan. During the year ended December 31, 1997, employees purchased 15,377 shares
of the Company's common stock for approximately $40,000 pursuant to the Purchase
Plan.
(8) Research & Product Development Agreements
During 1995, the Company entered into a multiyear agreement with
Massachusetts General Hospital ("MGH"), whereby MGH agreed to conduct clinical
trials on a laser treatment for hair removal/reduction invented by Dr. R. Rox
Anderson, Wellman Laboratories of Photomedicine, MGH. MGH will provide the
Company with data previously generated by Dr. Anderson and further clinical
research on the ruby laser device at MGH and other sites and remit ownership of
all case report forms and data resulting from the study.
Effective February 14, 1997, the Company amended the 1995 agreement
with MGH. The Company agreed to provide MGH with a grant of $203,757 to perform
research and evaluation in the field of hair removal. The Company immediately
paid $50,090 upon execution of this agreement, and the Company paid a license
fee of $10,000 within thirty days of this amendment. As consideration for this
amended license, the Company is obligated to pay to MGH royalties of up to 5% on
net revenues as defined (See Note 12 (b)). In March 1997, the U.S. Patent Office
issued a patent protecting the laser-based hair removal technology developed by
Dr. Anderson at MGH, for which Palomar is the exclusive worldwide licensee.
F-29
<PAGE>
(9) Accrued Liabilities
At December 31, 1996 and 1997, accrued liabilities consist of the
following:
<TABLE>
<S> <C> <C> <C>
December 31,
1996 1997
---------------- ---------------
Payroll and consulting costs $2,596,867 $1,535,013
Royalties 843,345 853,808
Settlement costs 1,755,000 1,457,020
Warranty 2,854,401 2,583,677
Deferred revenue 256,912 3,154,395
Restructuring -- 1,981,907
Interest and preferred stock dividends 579,739 1,659,709
Other 2,089,045 3,688,720
---------------- ---------------
Total $10,975,309 $16,914,249
================ ===============
</TABLE>
(10) Related Party Transactions
At December 31, 1996 and 1997, approximately $948,000 and $478,000 of
loans receivable with interest at the rate of 7% per annum were outstanding from
the former CEO and President, respectively. No amounts are currently outstanding
under these loans. During the fourth quarter of 1997, the Company's former CEO
paid back his outstanding loan balance, which totaled approximately $1,029,000
as of September 30, 1997. The former CEO made payments in both cash and
marketable securities. In the first quarter of 1998, the Company's former
President paid back his outstanding loan.
(11) 401(k) Profit Sharing Plan
The Company has a 401(k) profit sharing plan (the "Profit Sharing
Plan") which covers substantially all employees who have attained the age of 18
and are employed at year-end. Employees may contribute up to 15% of their
salary, as defined, subject to restrictions defined by the Internal Revenue
Service. The Company is obligated to make a matching contribution, in the form
of the Company's common stock, of 50% of all employee contributions effective
January 1, 1995. The Company contributions vest over a three-year period.
During 1997, the Company issued 87,441 shares of its common stock to
the Profit Sharing Plan in satisfaction of its $318,154 employer match of the
1996 employee contributions. For the year ended December 31, 1997, the Company
has accrued $250,000 for the 1997 match, which will be made in common stock in
April 1998.
F-30
<PAGE>
(12) Commitments and Contingencies
(a) Operating Leases
The Company has entered into various operating leases for its corporate
office, research facilities and manufacturing operations. These leases have
monthly rents ranging from approximately $2,000 to $34,000, adjusted annually
for certain other costs such as inflation, taxes and utilities, and expire
through May 31, 2000. The Company guarantees certain subsidiaries' operating
leases.
Future minimum payments under the Company's operating leases at
December 31, 1997 are approximately as follows:
December 31,
1998 $683,000
1999 549,000
2000 246,000
-------------
$1,478,000
=============
(b) Royalties
The Company is required to pay a royalty of up to 5% of "net laser
sales," as defined, under a royalty agreement with MGH (see Note 8). For the
years ended December 31, 1995, 1996 and 1997, approximately $167,000, $175,000
and $854,000 of royalty expense, respectively, was incurred under this
agreement. These amounts are included in cost of sales in the accompanying
consolidated statement of operations.
A former employee and previous owner of one of the Company's
subsidiaries is paid a 1% commission on the net sales of certain ruby lasers and
diode lasers, as defined. These commissions will be paid through March 31, 2000
and are to be no less than $450,000. In accordance with the settlement agreement
with this individual, the Company paid advances on commissions totaling
$450,000: $200,000 in 1997 and $250,000 in January 1998. (See Note 10.)
(c) Year 2000 (Unaudited)
The Company utilizes software and related technologies throughout its
businesses that will be affected by the date change in the year 2000. An
internal study was completed to determine the full scope and related costs to
insure that the Company's systems continue to meet its internal needs and those
of its customers. Anticipated spending for this modification will be expensed as
incurred and is not expected to have a significant impact on the Company's
ongoing results of operations.
(d) Litigation
The Company was a defendant in a lawsuit filed on March 14, 1996 in the
United States District Court for the Southern District of New York by
Commonwealth Associates ("Commonwealth"). In its suit, Commonwealth alleged that
the Company had breached a contract with Commonwealth in which Commonwealth was
to provide certain investment banking services in return for certain
compensation. In January 1997, Commonwealth's motion for summary judgment on its
breach of contract claim was granted, and in April 1997 the District Court
awarded Commonwealth $3,174,070 in damages. That judgment was appealed by
Palomar and on August 18, 1997 the case was settled for $1.875 million. During
the year ended December 31, 1997, the Company incurred $1.875 million in
settlement costs related to the above matter and another $1.324 million related
to several other claims and associated litigation costs.
The Company is involved in litigation regarding an alleged infringement
of a competitor's patent (the "Selvac Patent"). The Company believes that the
Selvac Patent is invalid, void and unenforceable, and that the Company does not
infringe the Selvac Patent. The court has granted Palomar's motion to amend its
complaint previously filed to allege that
F-31
<PAGE>
the Selvac Patent was obtained by inequitable conduct, and the Company has moved
for summary judgment on the grounds that the Selvac Patent is invalid and was
obtained by inequitable conduct. The Company believes that competitor's claims
are wholly without merit. Nonetheless, an adverse result could have a material
adverse effect on the Company.
On October 16, 1997, the Company brought a declaratory judgment action
in U.S. District Court for the District of Massachusetts against the holders and
the indenture trustee of the Company's 4.5% Subordinated Convertible Debentures
due 2003, denominated in Swiss francs (the "Swiss Franc Debentures"). Just prior
to this suit, certain of the debenture holders (the "Asserting Holders") had
alleged that the Company was in breach of certain protective covenants under the
indenture, and on October 22, 1997 they sued the Company and all of its
principal subsidiaries in the same court; the October 16 and October 22 cases
have been assigned to the same judge, and the dispute between the Asserting
Holders and the Company is proceeding under the October 22 case. The Asserting
Holders claim that the Company has breached certain protective indenture
covenants and that the Asserting Holders are entitled to immediate payment of
their indebtedness under the Swiss Franc Debentures (which amounts to
approximately US$5,087,000 at current exchange rates). As of November 13, 1997,
acting under applicable provisions of the indenture, the Company notified the
holders of the Swiss Franc Debentures that it is causing the conversion of all
of the Swiss Franc Debentures into an aggregate of 914,028 shares of the
Company's common stock. The Company believes that it has not breached any of the
protective covenants under this indenture and that its position in these matters
is correct, and intends to contest the claims of the Asserting Holders
vigorously. Nonetheless, an adverse result could have a material adverse effect
on the Company.
The Company is involved in other legal and administrative proceedings
and claims of various types. While any litigation contains an element of
uncertainty, management, in consultation with the Company's general counsel,
presently believes that the outcome of each such other proceeding or claim which
is pending or known to be threatened, or all of them combined, will not have a
material adverse effect on the Company.
The Company is also aware of a claim alleging that the Company had
previously committed to make an additional capital contribution to Nexar. The
Company believes that this claim is without merit.
(e) Distribution Agreement
On November 17, 1997, the Company entered into an exclusive
distribution, sales and service agreement with an established, worldwide laser
company ("the Distributor"). The Distributor has the exclusive right to sell the
EpiLaser(R) and LightSheer(TM) laser systems and future generation products
worldwide. The Company pays the Distributor a per unit commission, adjusted for
certain events as defined. During the year ended 1997, the Company incurred
approximately $800,000 of commission expense to this Distributor. Upon execution
of this agreement, the Distributor made a lump sum payment of $3,500,000 and
received a warrant to purchase one million shares of the Company's common stock
at a share price of $5.25. The valuation of the warrant using the Black-Scholes
option pricing model was approximately $380,000. The value was credited to
additional paid-in-capital during the year ended December 31, 1997. The
remaining amount of $3,120,000, included in deferred revenue, will be amortized
to revenue over the three year life of the agreement.
On January 20, 1998, the Distributor made a loan to the Company of
approximately $2,211,000. This loan is collateralized by the Company's accounts
receivable. Payments against this loan will be made as the Distributor collects
receivables from the end user of the Company's products. Any unpaid principal
will be paid on July 26, 1998 at an interest rate of 1.5% per month or the
highest interest rate permitted by law.
(f) Employment Agreements
The Company and its subsidiaries have employment agreements with
certain executive officers that provide for annual bonuses to the officers and
expire on various dates through 2001. Each of these agreements provides for 12
months severance upon termination of employment.
F-32
<PAGE>
(g) Corporate Guarantees
The Company has issued guarantees for payment of various vendor
liabilities for several electronic subsidiaries that have been accounted for as
discontinued operations (see Note 2). Outstanding guarantees totaled
approximately $7,000,000 as of December 31, 1997.
(13) Subsequent Events
In February 1998, the Company sold 7,200,000 shares of its common stock
to a group of investors for $7,200,000. In addition, the Company also issued
warrants to the investors to purchase 7,200,000 shares of common stock at an
exercise price of $3.00 per share.
Subsequent to year-end the Company redeemed 2,950 shares of Series H
Preferred and paid related dividends and interest for a total of approximately
$3,589,000. The Company also redeemed 6%, 7% and 8% convertible debentures with
a face value of $2,000,000 and related interest for a total of approximately
$2,197,000. On March 30, 1998, in resolution of a dispute regarding the
redemption of certain Series H Preferred shares, the Company agreed with one of
the Series H Preferred stockholders to issue 766,725 shares of common stock for
$914,864 in lieu of redeeming 750 shares of Series H Preferred previously
redeemed.
In the first quarter of 1998, debentureholders converted debentures
with a face value of $3,344,344 into 3,809,922 shares of convertible debentures.
Also in the first quarter of 1998, preferred stockholders converted 268 shares
of Series G Preferred and 3,840 shares of Series H Preferred into 287,908 and
4,103,650 shares of common stock, respectively.
On March 27, 1998, the Company borrowed $2,000,000. This bridge loan is
payable the earlier of May 26, 1998 or (i) one day following the sale of Dynaco
(ii) the sale of any other Palomar assets in a transaction outside the normal
course of business or (iii) any financing where the use of proceeds to pay back
debt is not prohibited. The Company issued 125,000 warrants to the lender to
purchase 125,000 shares of common stock at an exercise price of $.01 per share
in lieu of interest.
F-33
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
<TABLE>
<S> <C> <C>
(a) 1. Index to Consolidated Financial Statements. Page
The following Consolidated Financial Statements of the Company and its
subsidiaries are filed as part of this report on Form 10-K:
Report of Independent Public Accountants F-2
Consolidated Balance Sheets -
December 31, 1997 and December 31, 1996 F-3
Consolidated Statements of Income -
Years ended December 31, 1997, December 31, 1996 and December 31, 1995 F-4
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1997, December 31, 1996 and December 31, 1995 F-5-8
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, December 31, 1996 and December 31, 1995 F-8
Notes to Consolidated Financial Statements F-10
2. Consolidated Financial Statement Schedules
Report of Independent Public Accountants on Schedule II 36
Schedule II - Valuation and Qualifying Accounts 37
Schedules not listed above have been omitted because the
matter or conditions are not present or the information
required to be set forth therein is included in the
Consolidated Financial Statements hereto.
</TABLE>
(b) Reports on Form 8-K.
Form 8-K filed December 23, 1997.
25
<PAGE>
(c) Exhibits.
The following exhibits required to be filed herewith are incorporated
by reference to the filings previously made by the Company where so
indicated below.
Exhibit
No. Title
^^^^2.1 Stock Purchase Agreement Between and Among Biometric Technologies
Corp., Palomar Medical Technologies, Inc. and Dynaco Corp., dated
November 17, 1997.
##2.2 Asset Purchase and Settlement Agreement by and among the Company, Nexar
Technologies, Inc., Technovation Computer Labs, Inc. and Babar I.
Hamirani, dated February 28, 1997.
##2.3 List of exhbiits omitted form the Asset Purchase and Settlement
Agreement. (The Company hereby undertakes and agrees to furnish copies
of the exhibits and schedules set forth in exhibit 2.2 above to the
Commission upon its request.)
- -3.1 Restated Certificate of Incorporation, as filed with the Delaware
Secretary of State on August 14, 1996.
&3.2 Certificate of Designation of Series G Convertible Preferred Stock as
filed with the Delaware Secretary of State on September 26, 1996.
&&3.3 Certificate of Amendment to Certificate of Incorporation, as filed with
the Delaware Secretary of State on December 16, 1996.
##3.4 Certificate of Designation of Series H Convertible Preferred Stock as
filed with the Delaware Secretary of State on March 26, 1997.
- ---3.5 Certificate of Correction to Certificate of Incorporation, as filed
with the Delaware Secretary of State on September 23, 1997.
^3.6 Bylaws, as amended.
&3.7 Certificate of Designation of Series F Convertible Preferred Stock as
filed with the Delaware Secretary of State on July 12, 1996.
- ---3.8 Certificate of Correction to the Restated Certificate of Incorporation,
as filed with the Delaware Secretary of State on September 23, 1997.
^4.1 Common Stock Certificate.
&&&&4.2 Form of 4.5% Convertible Debenture due October 21, 1999, 2000, 2001.
###4.3 Form of 5% Convertible Debenture due December 31, 2001.
###4.4 Form of 4.5% Convertible Debenture (denominated in Swiss Francs) due
July 3, 2003.
*10.1 Patent License Agreement by and between the Company and Patlex
Corporation, effective as of January 1, 1992.
10.2 Amended 1991 Stock Option Plan.
10.3 Amended 1993 Stock Option Plan.
26
<PAGE>
10.4 Amended 1995 Stock Option Plan.
10.5 Amended 1996 Stock Option Plan.
10.6 Amended 1996 Employee Stock Purchase Plan.
**10.7 Form of Stock Option Grant under the 1991, 1993 and 1995 Stock Option
Plans.
##10.8 Form of Stock Option Agreement under the 1996 Stock Option Plan.
#10.9 Form of Company Warrant to Purchase Common Stock.
10.10 Lease for premises at 45 Hartwell Avenue, Lexington, Massachusetts,
dated March, 1996.
- --10.11 The Company's 401(k) Plan.
10.12 Sales Agency, Development and License Agreement between the Company and
Coherent, Inc., dated November 17, 1997. (Portions omitted pursuant to
a request for confidential treatment.)
10.13 Loan Agreement between the Company and Coherent, Inc., dated January
20, 1998.
10.14 Stock Purchase Agreement, dated December 29, 1997.
10.15 Stock Purchase Agreement, dated December 31, 1997.
10.16 Exchange Agreement, dated December 31, 1997.
^^10.17 Form of 6%, 7% and 8% Convertible Debentures Due September 30, 2002
^^10.18 Form of Registration Rights Agreement, dated September 30, 1997.
10.19 Form of Securities Purchase Agreement dated September 30, 1997.
^^^10.20 Securities Purchase Agreement dated December 29, 1997.
&&&10.27 High Risk Opportunities Hub Fund, Ltd. Subscription Agreement, dated
January 14, 1997.
&&&10.28 High Risk Opportunities Hub Fund, Ltd. Debenture, dated January 13,
1997.
##10.29 Form of Subscription Agreement, dated as of March 10, 1997.
##10.30 Form Registration Rights Agreement, dated as of March 10, 1997.
10.31 Form of 5% Convertible Debenture due March 10, 2002.
##10.32 Subscription Agreement between the Company and Soginvest Bank, dated as
of March 13, 1997.
##10.33 6% Convertible Debenture due March 13, 2002.
10.36 Employment Agreement, dated as of September 1, 1997, between the
Company and Steven Georgiev.
10.37 Employment Agreement, dated as of January 1, 1997, between the Company
and Joseph P. Caruso.
10.38 Employment Agreement, dated as of May 15, 1997, between the Company and
Louis P. Valente.
10.39 Securities Purchase Agreement between the Company and RGC International
Investors, LDC, dated March 27, 1997.
##10.40 Registration Rights Agreement between the Company and RGC International
Investors, LDC, dated March 27, 1997.
10.41 Binding Term Sheet between the Company and Hechtor Wiltshire, dated
March 27, 1998.
27
<PAGE>
10.42 Securities Purchase Agreement between the Company and various entities,
dated February 20, 1998.
10.43 Security Agreement - Stock Pledge between the Company and Coast
Business Credit, dated December 31, 1997.
10.44 Secured Promissory Note between the Company and Coast Business Credit,
dated December 31, 1997.
10.45 Continuing Guaranty between the Company and Coast Business Credit,
dated December 5, 1996.
10.46 License Agreement between the Company and Massachusetts General
Hospital, dated August 18, 1995.
10.47 First Amendment to License Agreement between the Company and
Massachusetts General Hospital, dated August 18, 1995.
10.48 Second Amendment to License Agreement between the Company and
Massachusetts General Hospital, dated August 18, 1995.
21 List of Subsidiaries.
23 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule, Restated, for the Period Ended December 31,
1996.
27.2 Financial Data Schedule for the Period Ended December 31, 1997.
^ Previously filed as an exhibit to Form 10-KSB/A-4 filed on July 11,
1997, and incorporated herein by reference.
^^ Previously filed as an exhibit to Registration Statement No. 333-42129
filed on December 12, 1997, and incorporated herein by reference.
28
<PAGE>
^^^ Previously filed as an exhibit to Registration Statement No.
333-42129/A-2 filed on January 9, 1998, and incorporated herein by
reference.
^^^^ Previously filed as an exhibit to Form 8-K filed on December 23, 1997,
and incorporated herein by reference.
* Previously filed as an exhibit to Registration Statement No. 33-47479
filed on April 27, 1992, and incorporated herein by reference.
** Previously filed as and exhibit to Amendment No. 4 to Form S-1
Registration Statement No. 33-47479 filed on October 5, 1992, and
incorporated herein by reference.
# Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995, and incorporated herein by
reference.
## Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996, and incorporated herein by
reference.
### Previously filed as an exhibit to Form S-3 Registration Statement No.
333-22725 filed on March 4, 1997 and incorporated herein by reference.
- - Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1996, and incorporated
herein by reference.
- -- Previously filed as an exhibit to Form S-8 Registration Statement No.
33-97710 filed on October 4, 1995, and incorporated herein by
reference.
- --- Previously filed as an exhibit to the Company's Quarterly Report on
Form 10--Q for the quarter ended September 30, 1997, and incorporated
herein by reference.
& Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1996, and incorporated
herein by reference.
&& Previously filed as an exhibit to Form S-3 Registration Statement No.
333-18003 filed on December 16, 1996, and incorporated herein by
reference.
&&& Previously filed as an exhibit to Form S-3 Registration Statement No.
333-22725 filed on March 4, 1997, and incorporated herein by reference.
&&&& Previously filed as an exhibit to Form S-3 Registration Statement No.
333-28251 filed on May 30, 1997 and incorporated herein by reference.
29
<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 February 12, 1998.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
------------------------------
Louis P. Valente
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
Name Capacity Date
/s/ Louis P. Valente President, Chief Executive February 12, 1998
---------------------------------
Louis P. Valente Officer and Director
/s/ Joseph P. Caruso Chief Financial Officer and Treasurer February 12, 1998
---------------------------------
Joseph P. Caruso (Principal Financial Officer and
Principal Accounting Officer)
/s/ Nicholas P. Economou Director February 12, 1998
---------------------------------
Nicholas P. Economou
/s/ A. Neil Pappalardo Director February 12, 1998
---------------------------------
A. Neil Pappalardo
/s/ James G. Martin Director February 12, 1998
---------------------------------
James G. Martin
</TABLE>
DUFFY HARTWELL LIMITED PARTNERSHIP
COMMERCIAL LEASE
1. PARTIES:
DUFFY HARTWELL LIMITED PARTNERSHIP, a Massachusetts limited partnership located
at 411 Waverley Oaks Rd. Waltham MA., LESSOR, which expression shall include
its, successors, and assigns where the context so admits, does hereby lease to
SPECTRUM MEDICAL TECHNOLOGIES, INC. a Delaware corporation located at 4-B
Strathmore Rd. Natick MA. LESSEE, which expression shall include its heirs,
successors, executors, administrators, and assigns where the context so admits,
and the LESSEE hereby leases the following described Premises:
2. PREMISES:
Twenty-five Thousand (25,000) sq. ft., more or less, (the "Leased Premises") in
the LESSOR'S Building located at 45 Hartwell Ave. Lexington MA, including
exclusive use of the loading platform all as shown on Exhibit A, "Floor Plan",
attached hereto, together with the right to use in common, with others entitled
thereto, any hallways, and stairways necessary for access to said Leased
Premises.
Appurtenant to the Premises the LESSEE shall have the right, in common with
others entitled thereto, to access ways, walkways and any other common
facilities necessary for access to or beneficial use of the Leased Premises.
LESSEE shall have right to use Eighty-eight unassigned parking spaces in the
parking areas adjacent to the Buildings on the site. LESSEE shall have rights in
common with other lessees to use of the common entrance serving the Leased
Premises.
3. TERM:
The term of this lease shall be for Five (5) years commencing on the
Commencement Date (defined below) and ending on May 31, 2000.
The Commencement Date shall be the later of completion of the Lessor's work,
Exhibit B, or June 1, 1995. The Lessor's work shall be deemed complete upon
issuance of a certificate of occupancy for the Premises by the Town of Lexington
MA.
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4. RENT:
The LESSEE shall pay to LESSOR rent at the rates per year, shown below,
which rent shall be payable in advance in the monthly installments shown below
on the first day of each month.
YEARS ANNUAL RENT MO. RENT $/SF RATE
1 - 5 $412,500 $34,375.00 $16.50
5. SECURITY DEPOSIT:
Upon the execution of this lease, the LESSEE shall pay to the LESSOR the amount
of $34,375, which shall be held as a security for the LESSEE'S performance as
herein provided and promptly refunded to the LESSEE at the end of this lease
subject to the LESSEE'S satisfactory compliance with the conditions hereof.
6. RENT ADJUSTMENT:
A. TAX ADJUSTMENT
If in any tax year commencing with the fiscal year 1997 (the fiscal year ending
June 30, 1997), the real estate taxes on the land and buildings, of which the
Leased Premises are a part, are in excess of the amount of the real estate taxes
thereon for the fiscal year 1996 (hereinafter called the "Base Year"), LESSEE
will pay to LESSOR as additional rent hereunder, when and as designated by
notice in writing by LESSOR, Fifty (50%) percent of such excess that may occur
in each year of the term of this lease or any extension or renewal thereof and
proportionately for any part of a fiscal year. LESSOR'S demand shall be
accompanied by a copy of the applicable tax bill or bills and a statement
showing the manner of calculation of LESSEE'S proportionate share of such taxes.
If the LESSOR obtains an abatement of any such excess real estate tax, a
proportionate share of such abatement, less the reasonable fees and costs
incurred in obtaining the same, if any, shall be refunded to the LESSEE. LESSEE
may itself, or with any co-tenant, seek review of the assessed valuation of the
property of witch the Leased Premises are a part, or otherwise seek abatement of
real estate taxes in any year in which the LESSOR declines to seek such review
or reduction, provided it shall do so at its own cost or expense.
For purposes of this adjustment the fiscal year 1996 tax rate shall be $1.08 per
square foot, or $54,472.08 for the land and building of which the lease premises
are a part.
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<PAGE>
B. OPERATING COSTS:
The LESSEE shall pay to the LESSOR as additional rent hereunder when and as
designated by notice in writing by LESSOR, Fifty (50%) per cent of any operating
costs incurred during the calendar year which are in excess of $4.00 per square
foot. LESSOR'S demand shall be accompanied by a statement of the applicable
operating costs and a statement showing the manner of calculation of LESSEE'S
proportionate share of such costs. In the event LESSEE wishes verification of
the costs and its share, LESSOR will authorize its' independent C.P.A. to
provide certification of the statement and charges to the LESSEE, and LESSEE
shall bear the expense of the C.P.A. certification. The operating costs increase
shall be prorated should this lease be in effect with respect to only a portion
of any calendar year, or which pertain to less than a fully occupied building.
Operating costs are defined for the purpose of this agreement as:
Water and Sewer Charges for the Premises
Heating, Ventilation and Air Conditioning
Maintenance Expenses of Lessor
Cleaning Expenses
Management Expenses (allocated at Five (5%) percent of rent)
Insurance
Exceptions to Operating Expenses are defined in Exhibit E.
C. BUILDING ACCESS AND OPERATING EXPENSES
The LESSEE shall have unlimited access to the Building. However, Operating
Expenses are calculated based upon daily operating hours of 7:00 AM to 6:00 PM
five days a week. In the event LESSEE usage outside those hours may be subject
to additional operating expenses.
7. UTILITIES:
The LESSEE shall pay, as they become due, all bills for electricity and other
utilities (whether they are used for furnishing heat or other purposes) that are
furnished to the Leased Premises and which are separately metered. The LESSOR
agrees to provide utility services to the leased premises, all subject to
interruption due to any accident, to the making of repairs, alterations, or
improvements, to labor difficulties, to trouble in obtaining fuel, electricity,
service, or supplies from the sources from which they are usually obtained for
said building, or to any cause beyond the LESSOR'S control.
LESSOR shall have no obligation to provide utilities or equipment other than the
utilities and equipment within the premises as of the Commencement Date of this
lease which include the HVAC now serving the Leased Premises. In the event
LESSEE requires additional utilities or equipment, the installation and
maintenance thereof shall be the LESSEE'S sole obligation,
3
<PAGE>
provided that such installation shall be the subject to the written consent of
the LESSOR. Costs for the installation of separate metering for utilities shall
be borne by the LESSOR.
8. USE OF LEASED PREMISES:
The LESSEE shall use the Leased Premises only for the purpose of office, light
manufacturing and R&D purposes.
9. COMPLIANCE WITH LAW:
The LESSEE acknowledges that no trade or occupation shall be conducted in the
Leased Premises or use made thereof which will be unlawful, improper, noisy or
offensive, or contrary to any law or any municipal by-law or ordinance in force
in the Town of Lexington in which the premises are situated.
10. FIRE INSURANCE:
The LESSEE shall not permit any use of the Leased Premises which will make
voidable any insurance on the property of which the Leased Premises are a part,
or on the contents of said property or which shall be contrary to any law or
regulation from time to time established by the New England Fire Insurance
Rating Association, or any similar body succeeding to its powers. The LESSEE
shall on demand reimburse the LESSOR, and all other tenants all extra insurance
premiums caused by the LESSEE'S use of the premises.
11. MAINTENANCE:
A. LESSEE'S OBLIGATIONS
The LESSEE agrees to maintain the Leased Premises in as good condition as at the
beginning of the term, fair wear and tear and damage by fire and other casualty
only excepted, and whenever necessary, to replace plate glass and other glass
therein, and upon occupancy the LESSEE acknowledges that the Leased Premises are
then in good order and the glass whole. The LESSEE shall not permit the Leased
Premises to be overloaded, damaged, stripped, or defaced, nor suffer any waste.
LESSEE shall obtain written consent of LESSOR before erecting any sign on the
exterior of the Leased Premises, which consent shall not be unreasonably
withheld or delayed.
4
<PAGE>
B. LESSOR'S OBLIGATIONS
The LESSOR agrees to maintain the structure of the building of which the Leased
Premises are a part, the HVAC, mechanical, electrical and plumbing facilities,
fire protection, parking lot, exterior lighting, exterior window frames and the
common areas of the building in the same condition as it is at the commencement
of the term or as it may be put in during the term of this lease, reasonable
wear and tear, damage by fire and other casualty only excepted, unless such
maintenance is required because of the LESSEE or those for whose conduct the
LESSEE is legally responsible. LESSOR shall maintain access ways and common
areas of the land in neat and orderly condition including clearance of snow and
ice in the walk ways and parking lot. LESSOR shall keep the building and common
areas under its control in compliance with all current and future zoning laws
and other applicable municipal laws, regulations and ordinances.
12. ALTERATIONS/ADDITIONS:
The LESSEE shall not make structural alterations or additions to the Leased
Premises, but may make non-structural alterations provided the LESSOR consents
thereto in writing, which consent shall not be unreasonably withheld or delayed.
All such allowed alterations shall be at LESSEE'S expense and shall be in
quality at least equal to the present construction. LESSEE shall not permit any
mechanics' liens, or similar liens, to remain upon the Leased Premises for labor
and material furnished to LESSEE or claimed to have been furnished to LESSEE in
connection with work of any character performed or claimed to have been
performed at the direction of LESSEE and shall cause any such lien to be
released of record forthwith without cost to LESSOR. Any alterations or
improvements made by the LESSEE shall become the property of the LESSOR at the
termination of occupancy as provided herein. Notwithstanding the foregoing
sentence, LESSEE may, at its sole option, submit its plans for any alteration or
improvement to LESSOR in writing before installation with a request for removal
at LESSEE'S expense upon termination of this lease, and LESSOR'S approval of
such request, which may require restoration of damages caused by the removal,
shall not be unreasonably withheld or delayed.
13. ASSIGNMENT SUBLEASING:
The LESSEE shall not assign or sublet the whole or any part of the Leased
Premises without LESSOR'S prior written consent which shall not be unreasonably
withheld or delayed. Notwithstanding such consent, LESSEE shall remain liable to
LESSOR for the payment of all rent and for the full performance of the covenants
and conditions of this lease.
5
<PAGE>
14. SUBORDINATION:
This lease shall be subject and subordinate to any and all mortgages, deeds of
trust and other instruments in the nature of a mortgage, now or any time
hereafter, which may constitute a lien or liens on the property of which the
Leased Premises are a part and the LESSEE shall, when requested, promptly
execute and deliver such written instruments as shall be necessary to show the
subordination of this lease to said mortgages, deeds, of trust or other such
instruments in the nature of a mortgage, provided, however, that the LESSEE may
thereupon request and receive the mortgagee's reciprocal non-disturbance
agreement.
15. LESSOR'S ACCESS:
The LESSOR or agents of the LESSOR may, at reasonable times and upon appropriate
notice, (normally one day's prior notice) enter to view the Leased Premises and
may remove placards and signs not approved and affixed to the exterior of the
Leased Premises as herein provided, and make repairs and alterations as LESSOR
should elect to do. The LESSOR may show the Leased Premises to others, and at
any time within six (6) months before the expiration of the term, may affix to
any suitable part of the lease premises a notice for letting or selling the
Leased Premises or property of which the Leased Premises are a part and keep the
same so affixed without hindrance or molestation. LESSOR shall use best effort
to minimize inconvenience and interference with LESSEE and LESSEE'S business
operations.
16. INDEMNIFICATION & LIABILITY:
The LESSEE shall save the LESSOR harmless from all loss and damage occasioned by
the use or escape of water or by the bursting of pipes, as well as from any
claim or damage resulting from neglect in not removing snow and ice from the
roof of the building or from the sidewalks bordering upon the premises so
leased, or by any nuisance made or suffered on the Leased Premises, unless such
loss is caused by the neglect of the LESSOR. The removal of snow and ice from
the sidewalks bordering upon the Leased Premises shall be LESSOR'S
responsibility. LESSOR shall save the LESSEE harmless from loss or damage
occasioned by acts or omissions of the LESSOR, its employees or agents.
17. LESSEE'S LIABILITY INSURANCE:
The LESSEE shall maintain with respect to the Leased Premises and the property
of which the Leased Premises are a part comprehensive public liability insurance
in the amount of $1 million Combined Single Limit with property damage insurance
in the same limit in responsible companies qualified to do to persons or damage
to property as provided. The LESSEE shall deposit with the LESSOR certificates
for such insurance at or prior to the commencement of the term, and thereafter
within (30) days prior to the expiration of any such policies. All such
insurance certificates shall provide that such policies shall not be canceled
without at least ten (10) days prior written notice to each assured named
therein.
18. FIRE, CASUALTY AND EMINENT DOMAIN:
Should a substantial portion of the Leased Premises, or the property of which
they are a part, be substantially damaged by fire or other casualty, or be taken
by eminent domain, the LESSOR may elect to terminate this lease. When such fire,
casualty, or taking renders the Leased
6
<PAGE>
Premises substantially unsuitable for their intended use, a just and
proportionate abatement of rent shall be made, and the LESSEE, may elect to
terminate this lease if:
(a) the LESSOR fails to give written notice within thirty (30) days of
intention to restore Leased Premises, or
(b) the LESSOR fails to restore the Leased Premises to a condition
substantially suitable for their intended use within ninety (90) days of
said fire, casualty or taking.
The LESSOR reserves, and the LESSEE grants to the LESSOR, all rights which the
LESSEE may have for damages or injury to the Leased Premises for any taking by
eminent domain, except for damage to the LESSEE'S fixtures, property, or
equipment.
19. DEFAULT & BANKRUPTCY:
In the event that:
(a) The LESSEE shall default in the payment of any installment of rent or
other sum herein specified and such default shall continue for ten (10)
days after written notice thereof; or
(b) The LESSEE shall default in the observance of performance of any other
of the LESSEE'S covenants, agreements, or obligations hereunder and such
default shall not be corrected within thirty (30) days after written notice
thereof (except if such default is not cured due to governmental
restrictions or other causes beyond the control of LESSEE, then such thirty
(30) day period shall be extended for a reasonable additional period); or
(c) The LESSEE shall be declared bankrupt or insolvent according to law,
or, if any assignment shall be made of LESSEE'S property for the benefit of
creditors, then the LESSOR shall have the right thereafter, while such
default continues, to re-enter and take complete possession of the Leased
Premises, to declare the term of this lease ended, and remove the LESSEE'S
effects, without prejudice to any remedies which might be otherwise used
for arrears of rent or other default. The LESSOR shall use reasonable
efforts to relet the Premises. The LESSEE shall indemnify the LESSOR
against all loss of rent and other payments which the LESSOR may incur by
reason of such termination during the residue of the term. If the LESSEE
shall default, after reasonable notice thereof, in the observance or
performance of any conditions or covenants on LESSEE'S part to be observed
or performed under or by virtue of any of the provisions in any article of
this lease, the LESSOR without being under any obligation to do so and
without thereby waiving such default, may remedy such default for the
account and at the expense of the LESSEE. If the LESSOR makes any
expenditures or incurs any obligations for the payment of money in
connection therewith, including but not limited to, reasonable attorneys's
fees in instituting, prosecuting or defending any action or proceeding,
such sums paid or obligations incurred, with interest at the rate of 12%
percent per annum and costs, shall be
7
<PAGE>
paid to the LESSOR by the LESSEE as additional rent.
20. NOTICE:
Any notice from the LESSOR to the LESSEE relating to the Leased Premises or to
the occupancy thereof, shall be deemed duly served, if left at the Leased
Premises addressed to the LESSEE, or if mailed to the Leased Premises,
registered or certified mail, return receipt requested, postage prepaid,
addressed to the LESSEE. Any notice from the LESSEE to the LESSOR relating to
the Leased Premises or to the occupancy thereof, shall be deemed duly served, if
mailed to the LESSOR by registered or certified mail, return receipt requested,
postage prepaid, addresses to the LESSOR at such address as the LESSOR may from
time to time advise in writing. Until such advice all rent shall be paid and all
notices sent to the LESSOR at 411 Waverley Oaks Road, Waltham MA 02154.
21. SURRENDER:
The LESSEE shall at the expiration or other termination of this lease remove all
LESSEE'S goods and effects from the Leased Premises, (including, without hereby
limiting the generality of the foregoing all signs and lettering affixed or
painted by the LESSEE, either inside or outside the Leased Premises). LESSEE
shall deliver to the LESSOR the Leased Premises and all keys, locks thereto, and
other fixtures connected therewith and all alterations and additions made to or
upon the Leased Premises, in good condition, fair wear and tear and damage by
fire or other casualty only excepted. In the event of the LESSEE'S failure to
remove any of LESSEE'S property from the premises, LESSOR is hereby authorized,
without liability to LESSEE for loss or damage thereto, and at the sole risk of
LESSEE, to remove and store any of the property at LESSEE'S expense, or to
retain same under LESSOR'S control or to sell at public or private sale, without
notice, any or all of the property not so removed and to apply the net proceeds
of such sale to the payment of any sum hereunder, or to destroy such property.
22. BROKERAGE:
The Brokers named herein: Cushman & Wakefield and Leggat McCall Grubb and Ellis
warrant that they are duly licensed as such by the Commonwealth of
Massachusetts, and join in this agreement and become parties hereto, insofar as
any provisions of this agreement expressly apply to them, and to any amendments
or modifications of such provisions to which they agree in writing.
LESSOR agrees to pay the above named Brokers upon the term commencement date a
fee for
8
<PAGE>
professional services as agreed between LESSOR and Brokers under a separate
agreement.
Each party represents and warrants that it has not retained or dealt with any
other broker or brokers in connection with this Lease, and each party agrees to
indemnify, defend and save harmless the other party from any claims for fees or
commissions arising out of its dealings with a broker with respect to this
Lease.
23. LATE FEES:
LESSEE agrees that because actual damages for a late payment or a dishonored
check are difficult to fix or ascertain, but recognizing that damage and injury
result therefore, LESSEE agrees that if payments of rent and other obligations
are not received in hand by LESSOR five (5) days after the due date, LESSEE
agrees to pay liquidated damages of $100.00 plus 18% per annum on the delinquent
amount from the due date. The postmark on the payment received plus two (2)
days, shall be conclusive evidence of whether the payment is delinquent.
However, LESSOR is not responsible for late deliveries by U.S. Mail. Provided,
however, that on a first occasion of such late payment, LESSOR shall give five
days written notice to LESSEE prior to application of the liquidated damages
charge for late payment. LESSEE agrees to pay a liquidated damage of $25.00 for
each dishonored check. In the event that two or more of the LESSEE'S checks are
dishonored in a 12 month period, the LESSOR, in addition to other Rights, shall
have the right to demand payment by Certified Check or Money Order.
24. OTHER PROVISIONS:
It is also understood and agreed that:
(a) The attached Addendum and Exhibits A., B., C., D., and E. are part of
this Agreement.
(b) LESSEE shall have a Five Year option to renew at market rates
prevailing at the time of exercise of such option(s). Such an option shall
be exercised by written notice to LESSOR six months prior to the expiration
of the then current term. See Addendum Part D for procedure.
(c) LESSOR shall perform the work outlined in Exhibit B, "Build Out
Specifications", at LESSOR'S expense, prior to the Commencement Date.
(d) LESSEE shall have a Right of First Refusal on additional space in the
building, in accordance with provisions of Exhibit D.
IN WITNESS WHEREOF, the said parties hereunto set their hand and seal as of this
day of March, 1996.
SPECTRUM MEDICAL TECHNOLOGIES, INC. DUFFY HARTWELL LIMITED PARTNERSHIP
LESSEE LESSOR
_________________________ _____________________________
NORMAN J. DUFFY,
General Partner
9
<PAGE>
DUFFY HARTWELL LIMITED PARTNERSHIP
COMMERCIAL LEASE ADDENDUM
A. LESSEE OBLIGATIONS
1. Lessee shall not change the color or appearance of the outside of the Leased
Premises except upon the prior written consent of the Lessor.
2. Lessee shall not post signs on or about the Premises except that Lessee shall
be entitled to sign space where provided by Lessor in common with other lessees
in the Building.
3. The parking areas shall not be used for storage of unused, damaged or
unregistered vehicles, nor shall the Lessee store merchandise or other materials
in the parking areas.
4. Lessee shall not otherwise store vehicles, containers, or refuse outside the
Leased Premises, except for routine parking of vehicles and delivery or pickup
of products or materials.
5. Lessee shall be responsible to dispose of Lessee trash and refuse which
emanates from its manufacturing or R&D operations.
6. The Lessee may maintain insurance required by this Lease under a blanket
policy of insurance which insures the Lessee and any affiliates of the Lessee.
7. No animals, reptiles or pets of any kind shall be kept in or about the
building.
B. LESSOR OBLIGATIONS
1. Lessor shall, at its own cost and expense, maintain in good condition and
repair all structural components of the building containing the Leased Premises,
including the foundation, floor, walls and roof, common areas of the Building,
landscaping, parking areas and access ways.
2. Lessor shall remove snow and ice from the access roadway, the parking areas,
and the walkways which serve the building, and Lessor will remove snow or ice
from the roof of the building if, as and when the conditions cause roof leakage
or threaten ice falls over access ways.
3. Lessor shall maintain with insurance companies, licensed in Massachusetts,
all risk fire insurance policies with extended coverage insuring the property
containing the Leased Premises
<PAGE>
against loss or damage caused by fire or casualty in an amount equal to the full
replacement cost of the Building.
4. Lessor shall clean the Leased Premises and common areas in conformance with
Exhibit C. attached hereto.
C. SUBLEASING PROVISION
In the event Lessee requests consent of Lessor for sublease or assignment of all
or a material portion of the Lease Premises, Lessor may refuse consent for the
purpose of re-lease of the Leased Premises or the portion thereof to the
assignee, the sub-lessee or to a third party. Upon the mutual agreement of the
parties, hereto, this lease shall then terminate at a mutually agreed date as to
the Leased Premises or the portion thereof, as if the Lease had expired on its
termination date.
The Lessor shall be deemed to approve any assignment or sub-lease to a parent,
subsidiary or affiliate of the Lessee upon written assurance by Lessee that the
subsequent use will be in conformance with and subject to section 8, above, "USE
OF LEASED PREMISES".
D. MARKET RATE RENT FOR RENEWAL OPTIONS
Upon receipt of written notice from the Lessee of intent to renew, Lessor shall
respond within thirty days with a quote for market rate rent. The Lessee shall
respond within thirty (30) days agreeing to the quotation, rejecting the renewal
or requesting third party determination of market rate. In the later event each
party shall then appoint a realty broker who is familiar with similar commercial
property in the Lexington area, they shall confer, and each shall recommend a
market rate by writing to the parties. In the event their recommendations are
joint or equal, this shall be market rate. If the recommendations differ by 5%
or less, their average shall be deemed market rate. In the event their rates
differ by a greater amount they shall jointly nominate a third such broker who
shall make an independent recommendation of market rate. The two closest of the
three recommendations shall then be averaged to establish the market rate. Each
party hereto shall pay the expense of it nominee broker, and each shall share
equally the expense of a third, if required. However, in no event shall market
rate be less than the rate then payable by the Lessee.
<PAGE>
EXHIBIT A
[FLOOR PLAN]
<PAGE>
EXHIBIT B.
BUILDOUT SPECIFICATIONS
The Lessor shall deliver the layout and location of offices, rooms, corridors,
lighting, bathrooms, plumbing, electrical services, floors, dock area and
climate controls as presently located, in good operating condition. The Lessor
shall repaint wall surfaces, replace carpet and damaged tile flooring up to an
allowance of $15.00 per square yard, replace damaged or stained ceiling tile,
and shall install new light bulbs where applicable, all to building standard, at
Lessor's sole cost.
The Lessor shall provide the building and facilities in compliance with ADA
requirements for accessibility.
The Lessor shall remove cafeteria venting presently in place.
The Lessor shall also provide kitchen cabinets, counter, sink and dishwasher
equipment for the area marked cafeteria, to Lessee specification, at Lessee's
cost. Such costs shall be payable to Lessor upon Occupancy.
The Lessor shall take all necessary steps to correct the condition that has
caused the odor of oil in the Leased Premises.
<PAGE>
EXHIBIT C
CLEANING SCHEDULE
NIGHTLY Between the hours of 5:00 p.m. and 6:00 a.m. Monday through Friday,
Legal Holidays excepted
1. Clean Lavatories as follows:
(a) Sweep and wash floors, using a disinfectant in wash water.
(b) Wash and polish all mirrors, powder shelves, bright work, and enamel
surfaces.
(c) Thoroughly scour, wash and disinfect all basins, bowls and urinals.
(d) Wash and disinfect all toilet seats, both sides.
(e) Wash all partitions, tile walls, towel, paper, and sanitary napkin
dispensers, and receptacles, as required.
(f) Empty and clean paper towel and sanitary disposal receptacles.
(g) Fill toilet tissue holders, soap dispensers and towel dispensers,
materials to be furnished by LESSOR.
2. Empty and clear all waste receptacles, ash trays and sand urns.
3. Wash, clean and disinfect water fountains and water coolers.
4. Remove rubbish and trash from LESSEE'S premises resulting from business
office use, but this shall not include manufacturing or product packaging
materials, the removal of which is LESSEE'S responsibility.
5. Vacuum LESSEE'S carpeted areas as needed.
6. Damp mop floors in entrance foyers, elevator lobbies, and public corridors
if applicable.
7. Wet sponge wipe table tops in LESSEE'S employee lounge, including cleaning
of any spills, if applicable.
8. Keep sidewalks, and parking area clean and rubbish free.
<PAGE>
WEEKLY
1. Damp mop all uncarpeted areas.
2. Keep lawn and landscaping properly maintained, if applicable.
SEMI ANNUALLY
1. Clean all ceiling and wall air supply and exhaust diffusers or grills.
ANNUALLY
1. Wash all windows inside and out.
NOTE:
Manufacturing and Lab areas, and storage sections to be omitted.
HOLIDAYS
During the 10 legal holidays of the year no cleaning will be performed.
<PAGE>
EXHIBIT D.
RIGHT OF FIRST REFUSAL ON ADDITIONAL SPACE
Lessee shall have a right of first refusal on additional lease space as it
becomes available during the term of this Lease Agreement or any extension of
such term. This right is subject to any preexisting rights of other lessees. The
Lessor will use its best efforts to accommodate Lessee's space requirements.
The procedure for effecting the Right of First Refusal shall be exercised in the
following manner:
(i) Lessee shall in any quarter year of the lease term or its
extension give to Lessor written notice of its projected space
requirements and its interest in space that is available or may
become available for lease.
(ii) Lessor, within ten days of Lessee's notice, shall give written
response describing to Lessee the availability of or the
projected availability of floor space. "Availability" shall mean
and include any vacant space and any space which is or may become
free of leasehold commitment. Such Lessor notice will contain the
rental rate for which such space will be offered.
(iii)If the Lessor can provide such space by relocation of an
existing lessee, Lessor shall, at the earliest reasonable date
consistent with discussion with the existing lessee, respond to
the Lessee's notice as set forth in the first paragraph of this
Section.
(iv) Lessee shall have fourteen (14) days to exercise its right by
written notice to Lessor to accept or reject Lessor's notice and
proposal.
(v) In the event Lessee, by writing, accepts such additional space
the parties will forthwith, within 30 days of Lessee's written
response, execute a lease agreement or lease modification to
reflect the additional space, its rental rate, the adjusted term
of Lease, if any, and such other changes as may be required to
reflect the additional space.
(vi) In the event Lessee does not accept the Lessor's proposal within
the 14 day period, or in the event the parties are unable to
conclude a lease agreement for the additional premises within the
above thirty day period, the Lessee shall be deemed to have
refused the space and Lessor may offer and contract for lease of
the space to third parties, the Lessee's rights under this
provision having lapsed as to the proposed premises.
<PAGE>
EXHIBIT E
EXCLUSIONS FROM OPERATING EXPENSES
The following items shall be excluded in computing LESSEE's share of operating
expenses applicable to the Leased Premises:
1. Any ground lease rental;
2. Costs of capital repairs or capital replacements (except as specifically
permitted herein), capital improvements and equipment; except those: (a)
required by laws enacted on or after the date the temporary certificate of
occupancy issued for the LESSEE work shall be validly issued with the cost of
any such improvements and equipment depreciated over the usual life of the
improvement and/or equipment, or (b) installed at the Leased Premises to reduce
operating expenses, with the cost of any such improvements and equipment
depreciated at an annual rate reasonably calculated to equal the amount of
operating expenses to be saved in each calendar year throughout the term (as
determined at the time LESSOR elected to proceed with the capital improvement or
acquisition of the capital equipment to reduce operating expenses);
3. Rentals for items (except when needed in connection with normal repairs
and maintenance of the building which shall be permitted) which if purchased,
rather than rented, would constitute a capital improvement specifically excluded
in Subsection 2, above;
4. Costs incurred by LESSOR for the repair for replacement of damage to the
building or its contents caused by fire or other casualty;
5. Depreciation, amortization, lender's fees and interest payments except
as permitted pursuant to Subsection 2, above, and, if permitted, then determined
in accordance with generally accepted accounting principles, consistently
applied (as applied to commercial real estate) in accordance with the
anticipated useful life of such item (as reasonably determined by LESSOR);
6. Overhead and profit increments paid to LESSOR or to subsidiaries or
affiliates of LESSOR for goods and/or services in the building to the extent the
same exceeds the cost of such goods and/or services rendered by unaffiliated
third parties on a competitive basis;
7. Advertising and promotional expenditures, and the costs of acquiring and
installing signs in or on the building identifying the owner of the building;
8. Interest, principal, points and fees on debts or amortization on any
mortgage or mortgages or any other debt instrument encumbering the building;
<PAGE>
9. Any costs associated with gift taxes, excise taxes, profit taxes or
capital levies;
10. Costs incurred in connection with upgrading the building to comply with
handicap, hazardous material, fire and safety codes which were in effect prior
to the date of the lease or which become effective after lease commencement;
11. Tax penalties incurred as a result of LESSOR's negligence, inability or
unwillingness to make payments when due, not attributable to LESSEE's failure to
make payments to LESSOR for such items in accordance with the lease;
12. Any and all costs arising from the presence of hazardous materials or
substances (as defined by applicable Federal, Massachusetts and local laws) now
or hereafter pertaining to the building ("Hazardous Substances") in or about the
building including, without limitation, Hazardous Substances in the ground,
water, or soil;
13. Costs to repair defects in the construction of improvements described
in Exhibit B. or defects in the building structure.
14. LESSOR's general corporate overhead and general and administrative
expenses except as contained and allowed in the 5% Management Fee per provision
in Clause 6.B., above.
15. Costs of any items for which LESSOR is reimbursed by insurance, or
otherwise compensated by parties other than LESSEE's of the building;
16. Any legal fees associated with the sale or refinancing of the building;
17. Costs for any separate utility meters LESSOR may install in the
building, unless the installation is required by a utility company or
governmental entity.
18. Costs for construction in compliance, or penalties assessed for
non-compliance with the Americans with Disabilities Act of 1990 (42. U.S.C.
1281-1283).
SALES AGENCY, DEVELOPMENT AND LICENSE AGREEMENT
between
COHERENT, INC.
and
PALOMAR MEDICAL TECHNOLOGIES, INC.
COHERENT ADDRESS: 5100 Patrick Henry Drive
Santa Clara, CA 95054 U.S.A.
PALOMAR ADDRESS: 45 Hartwell Avenue
Lexington, MA 02173 U.S.A.
EFFECTIVE DATE: November 17, 1997
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
<PAGE>
TABLE OF CONTENTS
ITEM PAGE NUMBER
AGREEMENT......................................................................1
DEFINITIONS....................................................................1
APPOINTMENT OF SALES AGENT.....................................................4
RESPONSIBILITIES OF COHERENT...................................................6
RESPONSIBILITIES OF PALOMAR....................................................6
COMMISSIONS;TERMS OF PURCHASE OF PRODUCTS BY COHERENT..........................9
COMPLIANCE WITH GOVERNMENT REGULATIONS........................................11
WARRANTY......................................................................11
SERVICE.......................................................................12
LIMITED LIABILITY TO COHERENT AND OTHERS......................................12
PROPERTY RIGHTS...............................................................13
TRADEMARKS AND TRADE NAMES....................................................13
PATENTS AND TRADE SECRETS.....................................................14
INFRINGEMENT..................................................................15
INDEMNIFICATION...............................................................16
DEVELOPMENT PROJECTS..........................................................17
MANUFACTURING RIGHTS..........................................................18
PATENT LICENSE GRANT..........................................................19
INTELLECTUAL PROPERTY NOTICES.................................................21
TERM AND TERMINATION..........................................................21
GENERAL PROVISIONS............................................................22
<PAGE>
EXHIBITS
A Palomar Patents
B Wire Instructions
C Form of Warrant
D Terms and Conditions of Purchase
E Product Warranty
F Confidentiality Agreement
<PAGE>
AGREEMENT
THIS AGREEMENT is made and entered into as of November 17, 1997 by and
between Palomar Medical Technologies, Inc., a Delaware corporation having a
place of business at 45 Hartwell Avenue, Lexington, Massachusetts 02173
(hereinafter "Palomar") and Coherent, Inc., a Delaware corporation having a
principal place of business at 5100 Patrick Henry Drive, Santa Clara, California
95054 ("Coherent").
WHEREAS, Palomar is a diverse technology company that promotes the
development and sale of various high-technology products, including a medical
hair laser removal device known as the EpiLaser;
WHEREAS, Coherent is an established company in laser technology with an
established worldwide network for distribution, sales and service of laser
technology and related products;
WHEREAS, Coherent and Palomar perceive mutual advantage to Palomar
providing Coherent with EpiLaser and successor versions of the EpiLaser for
distribution, sales and service through Coherent's worldwide network;
WHEREAS, Coherent desires to collaborate with Palomar in the development of
lasers for hair removal applications, and distribute such products pursuant to
the terms of this Agreement;
NOW THEREFORE, in consideration of the premises and of the faithful
performance of the covenants herein contained, the parties hereto agree as
follows:
1. DEFINITIONS
Terms not otherwise defined herein shall have the meanings set forth below:
1.1 "Affiliate" shall mean any corporation or other legal entity other than
Coherent in whatever country organized, controlling, controlled by or under
common control with Coherent. The term "control" means possession, direct or
indirect, of the powers to direct or cause the direction of the management and
policies of an entity, whether through the ownership of voting securities, by
contract or otherwise.
1.2 "Anderson Patent" shall mean U.S. Patent No. 5,595,698, including any
division, continuation or any foreign patent application or letters patent or
equivalent thereof issuing thereon or reissue, reexamination or extensions
thereof.
1.3 "Clinical Trial Agreement" shall mean the agreement entered into
between Massachusetts General Hospital, Dr. R. Rox Anderson and Palomar on
August 18, 1995 relating to the use of lasers for the removal of hair.
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<PAGE>
1.4 "Development Projects" shall mean the development work done by Palomar
pursuant to Section 15 of this Agreement.
1.5 "Distributed Products" shall mean Palomar's current EpiLaser laser
system ("Epi1"), its next generation EpiLaser in development ("Epi2"), the
StarLight diode laser in development, any upgrades thereto, and any future
Products added to this list by mutual agreement of the parties or pursuant to
Section 16.2 hereof.
1.6 "Effective Date" shall mean November 17, 1997.
1.7 "GAAP" shall mean generally accepted accounting principles.
1.8 "Gross Margin" shall mean the difference between the purchase price and
the cost of goods, calculated in accordance with GAAP.
1.9 "Invention" shall mean any new and useful process, manufacture, or
composition of matter in the field of laser hair removal conceived or first
reduced to practice during the conduct of Development Projects. The term does
not include any invention made solely by one or more Coherent employees.
1.10 "Licensed Field" shall mean hair reduction and/or hair removal.
1.11 "Licensed Product" shall mean any article, device or composition, the
manufacture, use or sale of which, absent the licenses granted herein, would
infringe a Valid Claim of any of the Palomar Patents.
1.12 "License Term" shall be the period of time during which this Agreement
is in effect.
1.13 "Net Revenues" shall mean the price at which Coherent invoices the
sale or lease of the Licensed Products to its customers, less any reasonable
charges for shipping, import duties, brokerage and use or sales taxes. It is
further understood and agreed that in respect of inter-company sales between
Coherent and any Affiliate, Net Revenues be calculated off the price at which
the Affiliate invoices the sale or lease of the Licensed Products to its
customer. If the competitive product has more than one application, "Net
Revenues" shall be only that portion allocated to the hair removal product based
upon the average sales price of a stand-alone Distributed Product.
1.14 "Palomar Developments" shall mean any invention, improvement,
modification, enhancement, creation, design, method, documentation, know-how or
other development or information of any kind made or acquired by Palomar during
the life of this Agreement that would infringe one or more of the Palomar's
Patents if made, used or sold by an unlicensed person or entity.
1.15 "Palomar Patents" shall mean any rights owned by Palomar in (i) the
patents and patent applications listed on the attached Exhibit A, including,
without limitation, the Anderson Patent, (ii) patents issued from the
applications listed in Exhibit A or from any division or continuation of those
applications, (iii) claims of continuation-in-part applications, and of any
resulting patents, that claim an invention claimed or specifically described in
the applications listed on Exhibit A, and (iv) any reissues of or patents
issuing upon reexamination of any patents described in preceding clauses (i),
(ii), or (iii).
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<PAGE>
1.16 "Palomar Technology" shall include the Palomar Patents and Palomar
Developments.
1.17 "Patent Right" shall mean any United States or foreign patent
application, or the equivalent of such applications, including any division,
continuation, or continuation-in-part, thereof, or any Letters Patent or the
equivalent thereof issuing thereon or reissue or extension thereof, containing
one or more claims to an Invention.
1.18 "Products" shall mean laser products for cosmetic applications,
including the Distributed Products.
1.19 "Territory" shall mean all countries of the world, except Canada.
1.20 "Valid Claim" shall mean any claim of any Palomar Patent that has not
been finally rejected or declared invalid, in the jurisdiction in question, by a
patent office or court of competent jurisdiction in any unappealable decision.
2. APPOINTMENT OF SALES AGENT
2.1 Subject to the terms and conditions set forth in this Agreement,
Palomar hereby appoints Coherent as its exclusive sales agent for the
Distributed Products in the Territory; provided, however, that Palomar retains
the right to sell Distributed Products in the Territory to existing
representatives and distributors until the effective date their termination by
Palomar. Upon the signing of this Agreement, Palomar agrees to use its
commercially reasonable best efforts to terminate all representatives and
distributors for its Distributed Products consistent with its contractual
obligations and governing legal authority. As these relationships are
terminated, they shall automatically be added to the definition of Territory.
For so long as this Agreement is in effect, Palomar shall not appoint any other
sales agent or distributor with responsibility for the sale of Distributed
Products in the Territory, or otherwise license other parties to manufacture the
Distributed Products; provided, however, that this limitation shall not apply to
third parties that contract with Palomar to manufacture the Distributed Products
or parts thereof for sale hereunder.
2.2 In order to remain the exclusive sales agent, Coherent shall be
required to achieve a customer order level of a minimum of 75 Distributed
Products per quarter during the term of the Agreement, except that the minimums
shall be 30 units per quarter until such time as Palomar notifies Coherent in
writing that it can deliver at least 30 units per quarter of either the Epi2 or
Starlight diode laser system. The minimums shall then increase to 50 units for
the next quarter before increasing to 75 per quarter. Orders that are already in
house at the time the Agreement is signed, and orders that are received from
Palomar's distributors and representatives until their rights are terminated,
shall not count towards these minimums. In the event that Coherent fails to
achieve such minimum customer order level during any quarter during the term of
this Agreement, until such time as Palomar notifies Coherent in writing that it
can deliver at least 30 units per quarter of either the Epi2 or Starlight diode
laser system, Coherent may, in its sole discretion, pay Palomar the sum of
$25,000 per unit short of the minimums within ten (10) days of the end of any
such quarter, and maintain exclusivity. Any such payments after such time as
Palomar notifies Coherent in writing that it can deliver at least 30 units per
quarter of either the Epi2 or Starlight diode laser system, will be negotiated
by the parties in good faith at a later date, but in no event shall such
payments be less than $25,000. If Coherent fails to achieve such minimum
customer order level during any quarter during the term of this Agreement and
elects not to make this payment within the ten day period after the end of such
quarter, this Agreement may become non-exclusive, at Palomar's sole discretion,
which shall be exercised within sixty (60) days of the end of any quarterly
period that Coherent fails to achieve such minimum customer order level.
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<PAGE>
2.3 The relationship of Palomar and Coherent established by this Agreement
is that of independent contractors, and nothing contained herein shall be
construed to (i) give either party the power to direct and control the
day-to-day activities of the other, (ii) constitute the parties as partners,
joint venturers, co-owners or otherwise as participants in a joint or common
undertaking, or (iii) allow one party to create or assume any obligation on
behalf of the other for any purpose whatsoever. Under no circumstances,
including without limitation for purposes of this Section 2.3, will Coherent be
deemed to be an employee or agent of Palomar. Each party shall be solely
responsible for, and shall indemnify, defend and hold the other party free and
harmless from, any and all claims, damages, liabilities, fees, losses, claims,
allegations, or lawsuits, threatened or pending, (including attorneys' fees)
arising from or relating to the acts of their employees or its agents.
2.4 Coherent may appoint an independent representative or distributor to
handle its responsibilities under this Agreement in any particular Territory, in
which case Coherent's obligations hereunder shall be satisfied if such
representative or distributor is in compliance with such obligations.
3. RESPONSIBILITIES OF COHERENT
3.1 LUMP SUM PAYMENT. Upon execution of this Agreement, Coherent shall pay
Palomar a lump sum of Three Million Five Hundred Thousand Dollars ($3,500,000)
by wire transfer in accordance with the instructions attached hereto as Exhibit
B.
3.2 PROMOTION OF PRODUCTS. During the term of the Agreement, Coherent shall
use its reasonable best efforts to fully and actively promote the purchase and
use of the Distributed Products in the Territory and to supply Palomar with
regular reports regarding these activities. Without limiting the foregoing,
Coherent shall have the following responsibilities throughout the Territory:
3.2.1 Maintain active contacts with all potential and actual customers
and users of the Distributed Products.
3.2.2 Coherent shall pay sales commissions to its sales
representatives for the sale of Distributed Products which, calculated as a
percentage of the sales price, shall be at least as favorable as that paid
for sales of its own comparable products it may sell from time to time
during the term of this Agreement.
-4-
<PAGE>
3.2.3 Obtain customer orders for the Distributed Products and provide
assistance to customers in fulfilling them.
3.2.4 Use its reasonable best efforts to promote the Distributed
Products by training its sales and service forces, and organizing,
implementing and funding physician training courses and preceptorship
programs.
3.2.5 Undertake publicity in journals for the Distributed Products and
exhibit the Products at suitable trade fairs.
3.2.6 Achieve a sufficient level of understanding of the Distributed
Products to enable Coherent to provide technical support to the customer
and effectively sell and service the Distributed Products.
3.2.7 Provide technical liaison between Palomar and the customer.
3.2.8 On or before the 15th of each month during the term of this
Agreement commencing January 1, 1998, Coherent will provide Palomar with
six-month rolling forecasts of predicted sales by Distributed Product
("Forecast"). It is understood that these Forecasts are good-faith
estimates only, and Coherent shall not be obligated to purchase any
Distributed Products set forth in the Forecast. However, if during the term
of this Agreement Coherent fails to sell to its customers, or purchase for
its own account, at least fifty percent (50%) of the number of Distributed
Products set forth in the first three months of the Forecasts for the
months of January, April, July and October, it shall pay Palomar a deposit
equal to * times the number of Distributed Products set forth in the
first three-months of such Forecast minus the number actually sold during
that period. This deposit shall be either returned to Coherent or used as a
credit against future remittances to Palomar, at Coherent's option, at such
time as Coherent thereafter sells or purchases at least the number of
Distributed Products set forth in the three months of any such Forecast
after any such deposit. Any amounts on deposit on termination of this
Agreement shall be promptly returned to Coherent, without the right of set
off.
3.2.9 Coherent will perform the necessary research, including, without
limitation, legal research, to determine what limitations exist, if any,
for selling the Distributed Products in the Territory.
3.2.10 Keep Palomar fully informed of all governmental, commercial,
and industrial activities, plans and regulations which do or could affect
the sale of Distributed Products in the Territory.
3.2.11 Coherent shall reimburse Palomar for Palomar's out-of-pocket
expenses for advertisements, trade show participation and marketing
materials related to the Products when such marketing activities were
requested to be undertaken by Coherent in writing. Such reimbursements
shall be paid within ten (10) days of date of invoice.
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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<PAGE>
3.3 SALES INFORMATION. Coherent shall maintain and provide to Palomar
during the term of the Agreement, a complete record of all sales of the
Distributed Products, showing customer name, date of sale, shipping date,
instrument model, serial number, and sales order acknowledgment and invoices for
all Distributed Products covered by this Agreement, as well as special terms of
the sale, including warranty, installation date and other appropriate
information.
3.4 MATERIALS. Coherent shall promptly provide Palomar with examples of
marketing and technical information concerning the Distributed Products, that
have been prepared to support the Distributed Products within the Territory.
Coherent shall be responsible for preparing any foreign language verions of
operating manuals for the Disbtibuted Products.
3.5 RESPONSE TO INQUIRIES. Coherent shall promptly respond to all inquiries
from Palomar concerning matters pertaining to this Agreement.
3.6 NEW DEVELOPMENTS. Coherent Medical shall inform Palomar of new Product
developments in the field of hair removal.
3.7 COMPLIANCE WITH LAWS. Coherent shall comply with all applicable laws
relating to the sale and distribution of the Distributed Products in the
Territory.
3.8 CUSTOMER COMPLAINTS. Coherent shall promptly advise Palomar in writing
of any customer complaints reported to it relating to the Products that would
require Palomar, as manufacturer of the Products, to file reports with any
governmental agency.
3.9 SALES AND USE TAX. Coherent shall be responsible for collecting and
remitting any sales and use tax for Distributed Products sold under this
Agreement.
4. RESPONSIBILITIES OF PALOMAR
4.1 WARRANT. Upon execution of this Agreement, Palomar shall provide to
Coherent a three-year warrant to purchase one million shares of the common
stock, par value $.01 per share, of Palomar, with an exercise price of $5.25 per
share in the form attached hereto as Exhibit C.
4.2 MATERIALS. Palomar shall promptly provide Coherent with marketing and
technical information concerning the Distributed Products, that have been
prepared by Palomar and its agents to support the Distributed Products within
the Territory. Palomar agrees to prepare, with Coherent's collaboration and
assistance, and thereafter deliver to Coherent, one copy of the service manual
and operator's manual for each Distributed Product, which Coherent may then
copy.
4.3 RESPONSE TO INQUIRIES. Palomar shall promptly respond to all inquiries
from Coherent concerning matters pertaining to this Agreement.
4.4 TESTING. Palomar shall test all Distributed Products before shipment to
Coherent and provide a copy to Coherent of such test results with the
Distributed Product.
4.5 DELIVERY TIME. Palomar shall use its reasonable best efforts to
minimize delivery time as much as possible and to fulfill delivery obligations
as committed in acceptances.
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<PAGE>
4.6 TERRITORIAL INQUIRIES. Palomar shall submit to Coherent any inquiry
(other than inquiries from or related to House Accounts (as hereinafter defined)
regarding the purchase or potential purchase of Distributed Products)
originating from the Territory rather than answering the inquiry directly.
4.7 QUOTATIONS TO EXPORTERS. Palomar shall refrain from giving quotations
to exporters for Distributed Products to be shipped to the Territory (other than
those relating to House Accounts).
4.8 NEW DEVELOPMENTS. Palomar shall inform Coherent of new Product
developments in the field of hair removal.
4.9 TRAINING. At Coherent's request, Palomar will provide the training
necessary for Coherent to in turn train its sales and service forces and its
clinical educators in the operation and service of the Distributed Products.
Coherent shall reimburse Palomar for its reasonable out-of-pocket expenses for
such training. Cost for transport and living expenses for Coherent's personnel
to attend such seminars will also be borne by Coherent. Coherent shall pay for
any training sessions in excess of two per new Product or upgrade at Palomar's
standard rates.
4.10 CTI CENTERS. In connection with its CTI business, Palomar agrees to
include Coherent's cosmetic laser systems on its list of preferred equipment and
use its commercially reasonable best efforts to place these laser systems in the
CTI center if Coherent has the technology needed.
4.11 UPGRADE OBLIGATIONS. Palomar agrees to upgrade all Epi1 products sold
prior to the Effective Date by providing the following upgrade (including any
replacement parts deemed necessary to complete the upgrade) the Epi1 to Coherent
at no cost:
- Flexible fiber-optic delivery system
- Higher energy output for enhanced effectiveness
- 50 J/cm(2) with a 7 mm spot (+/- 10%)
- 25 J/cm(2) with a 10 mm spot (+/- 10%)
- Streamlined handpiece with improved ergonomics
If the upgrade can be done in the field, Coherent shall provide up to one day's
labor at no cost to Palomar to install the upgrade on a next call basis. If
installing the upgrade takes longer than one day, Palomar shall pay Coherent its
standard and customary rates to complete the upgrade. Palomar shall train
Coherent service personnel in installing the upgrade at no cost to Coherent
other than its out-of-pocket travel expenses. Coherent shall have the exclusive
right to contact customers to schedule the service calls and to explain the
upgrade policy. Palomar agrees to use its commercially reasonable best efforts
to manufacture parts for at least ten (10) upgrades per month until all Epi1
units are upgraded, and to incorporate the upgrades into the Epi1 by April 1,
1998.
4.13 FDA REPORTING OF CUSTOMER COMPLAINTS. Palomar agrees to file any
required reports with the FDA relating to customer complaints forwarded to
Palomar by Coherent where Palomar is the manufacturer of the Distributed Product
in question.
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<PAGE>
5. COMMISSIONS; TERMS OF PURCHASE OF PRODUCTS BY COHERENT
5.1 Except as set forth in Sections 5.2 and 5.3 below, Palomar shall pay
Coherent a commission of $* for each Distributed Product sold by Palomar to
Coherent's customers, subject to adjustment as set forth below:
5.1.1 For Distributed Products sold after April 1, 1998, Coherent's
commission shall be increased by *% of any excess over a $* sales price and
reduced by *% of any shortfall under $*.
5.1.2 For Epi1 products sold between the Effective Date and March 30,
1998 with the upgrades described in Section 4.12 above, Coherent's
commission shall be increased by *% of any excess over a $* sales price and
reduced by *% of any shortfall under $*.
5.1.3 For Epi1 products sold between the Effective Date and March 30,
1998 without the upgrades described in Section 4.12 above, Coherent's
commission shall be increased by *% of any excess over a $* sales price and
reduced by *% of any shortfall under $*.
5.1.4 Notwithstanding the foregoing, Palomar agrees to sell
Distributed Products to Coherent's independent international sales
representatives for $* for the non-upgraded version and $* for the upgraded
version, in both cases Coherent's commission shall be $* (which shall
include the cost of service). Coherent's commission shall be increased by
*% of any excess over a $* sales price for the non-upgraded version and $*
for the upgraded version, except that Coherent shall be entitled to its
full $* commission on sales to independent international sales
representatives pursuant to quotes at lower prices given by Palomar prior
to the Effective Date. Except as set forth above, without the written
approval of Palomar, no non-upgraded Epi1 shall be sold under this Section
for less than $*, and no upgraded Epi1 shall be sold under this Section for
less than $*.
5.1.5 Except as set forth in Section 5.1.4 above, in no event shall
the Epi1 be sold for less than $*.
5.1.6 Subject to the limitations set forth in this Section 5.1,
Coherent shall have the right to set the sales price to the end-customer,
and will inform Palomar of the end-customer price and the corresponding
payment to Palomar at the time the order is placed with Palomar.
5.1.7 For Distributed Products with a list price to the end-customer
below $*, the parties shall negotiate a fair and reasonable commission
based upon the same principles they used to establish the $* commission
herein.
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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<PAGE>
5.2 For orders that have been received by Palomar and not shipped by the
Effective Date, Coherent shall receive a $* commission, less Palomar's sales and
distribution expenses and commissions (not to exceed $*) on each such order.
5.3 For sales by Palomar to House Accounts within the Territory during the
term of this Agreement, Coherent shall be entitled to receive $5,000 per
Distributed Product. House Accounts shall be defined as revenue sharing sites
that are (i) existing as of the date of this Agreement; and/or (ii) chains that
have at least ten sites (at different geographic locations), including, but not
limited to, Columbia/HCA, where, unless the chain requires otherwise, the laser
system is used under the direction of only one doctor (who can designate a
substitute when he or she is out of the office). Palomar covenants that it will
not require, encourage, advocate or suggest that CTI centers permit doctors from
the surrounding community to use the laser system for their patients. If this
happens at any previously designated House Account, notwithstanding Palomar's
efforts, any such site shall be disqualified as a House Account and Coherent
shall be entitled to receive an additional $15,000 per site. Palomar shall also
be permitted to place Distributed Products into accounts that don't fall within
the definition of House Accounts, provided that Palomar provides marketing
services for such account, does not transfer ownership of the laser, and shares
in the revenues generated from its use. For these sales, Coherent shall be
entitled to receive $20,000 per unit. In no event shall Palomar be permitted to
place Distributed Products into more than 300 of the sites referenced in this
paragraph during the first three years of this Agreement. The parties shall
negotiate additions to this number as part of the annual evergreening renewal
process, which shall not be less than 50 additional sites in year four (4), if
this Agreement is extended.
5.4 PURCHASE OF DEMO UNITS. From time to time during the term of this
Agreement, Coherent may require demonstration units to bring to trade shows, as
well as demonstration units for its sales and service force. Accordingly, during
the term of this Agreement, Coherent shall be entitled to purchase up to 25
Distributed Products for demonstration purposes. The purchase of these
demonstration units shall count towards the minimum purchase requirements set
forth in Section 2.2. The purchase price for the demonstration units ("Purchase
Price") shall be $* per unit, payable within ten (10) days of date of invoice by
check or wire transfer, at Coherent's election. If Coherent resells a
demonstration unit within six months of its purchase, it shall pay Palomar any
additional amounts as would be required to be paid pursuant to Section 5.1.
5.5 TERMS AND CONDITIONS. All purchases of Distributed Products by Coherent
from Palomar during the term of this Agreement shall be subject to Coherent's
standard terms and conditions, a copy of which are attached as Exhibit C to this
Agreement. In the event of any inconsistencies between the terms and conditions
contained in Exhibit C and the terms and conditions contained in this Agreement,
this Agreement shall govern.
5.6 SHIPPING. All prices are F.O.B. Palomar's plant. In the absence of
specific instructions, Palomar will select the carrier and ship freight prepaid
and added to the price of the Distributed Product. Coherent shall insure all
shipments to Coherent's customers. Palomar will not be deemed to assume any
liability in connection with any shipment because of the selection of a carrier
or the failure of Coherent to obtain insurance. Title and risk of loss or damage
to each of the Distributed Products will pass to Coherent or its customer when
delivery is made to the possession of the carrier.
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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5.7 ORDER AND ACCEPTANCE. All orders for Distributed Products submitted by
Coherent shall be initiated by written purchase orders sent to Palomar and
requesting a delivery date during the term of this Agreement; provided, however,
that an order may initially be placed orally or electronically if a
conformational written purchase order is received by Palomar within a reasonable
time after said oral or electronic order but in any case before shipment. No
order shall be binding upon Palomar until accepted by Palomar in writing, and
Palomar shall have no liability to Coherent with respect to purchase orders that
are not accepted. Once Palomar has accepted an order, it may not be cancelled by
Coherent. Palomar shall notify Coherent of the acceptance or rejection of an
order and of the assigned delivery date for accepted orders within ten (10)
working days of receipt of the order. Palomar shall use its reasonable best
efforts to deliver Distributed Products at the times specified either in its
quotation or in its written acceptance of Coherent's purchase orders. Preprinted
language in a purchase order is of no effect to modify this Agreement.
5.8 PAYMENTS TO PALOMAR. Coherent shall invoice its customers for the sale
of the Distributed Products on Palomar's behalf and act as collection agent for
the accounts receivable. When collected, Coherent shall remit the purchase price
to Palomar within five (5) business days, less its commission as set forth
herein. Customer deposits shall be forwarded to Palomar within five (5) business
days of receipt. Coherent makes no representations or guarantees relating to the
collection of accounts receivables hereunder. The parties agree that the credit
risk is with the manufacturer of the Distributed Product. Coherent shall apply
its customary and standard policies and procedures for evaluating customers'
credit worthiness before such customers are permitted to purchase Distributed
Products under this Agreement. Any variances shall be approved in advance by
Palomar in writing, at its discretion. The parties acknowledge that neither of
them is under any obligation to pay the other for any sales of Distributed
Products where the customer fails to pay for the Distributed Product.
5.9 LATE CHARGES. If Coherent fails to pay the price or any other payment
due to Palomar promptly and when due, Palomar may recover, in addition to the
price or payment, interest thereon at a rate equal to the lesser of 1-1/2% per
month and the maximum rate of interest allowable under applicable law.
6. COMPLIANCE WITH GOVERNMENT REGULATIONS
6.1 Coherent shall not sell any Products to, or for the use of, any
ultimate purchaser with which Palomar could not deal under the laws or
regulations of the United States, including, without limitation, the regulations
of the United States Food and Drug Administration. Coherent shall comply with
all other laws and regulations of the United States and any other cognizant
jurisdiction relating to the marketing and sale of the Products.
6.2 Palomar and Coherent shall comply with all other laws and regulations
of the United States and any other cognizant jurisdiction relating to the
manufacturing and labeling of the Distributed Products.
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6.3 During the term of this Agreement, Palomar shall use its commercially
reasonable best efforts to maintain in full force and effect all governmental
approvals necessary for the sale and manufacture of the Distributed Products in
the Territory, except for Japan, including, without limitation, the United
States and Europe (CE Mark). The parties shall meet within the next 90 days to
determine whether to apply for the necessary licenses to sell any of the
Distributed Products in Japan. Within that 90 day period, Coherent may notify
Palomar that it will undertake to obtain such licenses, in which case, all costs
thereof shall be borne by Coherent, the licenses shall be in both Coherent's and
Palomar's name. If Coherent has obtained such licenses, upon termination of this
Agreement Palomar may either (i) reimburse Coherent for its out of pocket
expenses incurred in procuring these licenses, in which case Coherent shall
assign its interest in the licenses to Palomar or (ii) elect not to reimburse
Coherent, in which case Palomar shall not sell Distributed Products in Japan
pursuant to such licenses. Nothing contained herein shall restrict Palomar's
ability to obtain its own licenses in Japan.
6.4 During the term of this Agreement, if Coherent determines to sell
Distributed Products in a country within the Territory where regulatory approval
is required but not obtained, Coherent shall use its commercially reasonable
best efforts to obtain, at its sole cost and expense, any such governmental
approvals necessary for the sale of Distributed Products in such country.
7. WARRANTY
For so long as Palomar manufactures the Distributed Product, Palomar warrants
such Distributed Product to the end-user under the terms of Palomar's standard
warranty set forth in Exhibit E, as it may be modified or superceded from time
to time by Palomar. All service work for Distributed Products under warranty
shall be performed by Coherent in accordance with Section 8.
8. SERVICE
8.1 Coherent shall maintain the services of a sufficient number of
certified service engineers, and shall use its best efforts to adequately
service and maintain (both in and out of warranty) all Distributed Products in
the Territory. Coherent shall purchase parts inventory and any specialized tools
necessary for the proper and prompt service of the Distributed Products sold by
Coherent. Palomar agrees to use its commercially reasonable best efforts to ship
parts to Coherent as soon as possible after receipt of order. In regards to
specialized tools, Palomar agrees to sell them to Coherent for its costs plus
25% for tools it manufactures, and at its cost for tools it buys from third
parties, plus shipping and standard handling charges. Coherent shall provide
Palomar with service reports as to the work performed in each instance. During
the term of this Agreement, all warranty and service work on the Products shall
be performed by Coherent personnel. In addition, following the expiration of
this Agreement, Coherent shall continue to perform all warranty and service work
on Distributed Products sold by Coherent pursuant to this Agreement.
8.1.1 For Distributed Products sold by Palomar prior to the date of
this Agreement and still under warranty, Palomar shall supply the parts at
no charge, and Coherent the labor. Palomar shall pay Coherent its standard
and customary service labor rates and out-of-pocket expenses within 30 days
of date of invoice.
8.1.2 For Distributed Products manufactured by Palomar and sold by
Coherent that are under warranty, Palomar shall supply the parts at no
charge, and Coherent the labor. Coherent shall be permitted to deduct
$4,000 for each such Epi1 manufactured and sold in the United States during
the term of this Agreement,
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from the payments due Palomar under Section 5 and, if applicable, Section
16.2 hereof. Palomar shall pay Coherent $* for each Epi1 it manufactures
and places in a CTI under Section 5.3 within 30 days of such placement.
Coherent shall be responsible for providing the labor for warranty service
for these Distributed Products. When the Epi2 and StarLight laser products
are manufactured and sold, the parties shall negotiate an appropriate sum
to be paid for domestic warranty service to be provided by Coherent. If
Coherent manufactures a Product, then Coherent shall bear the entire cost
of parts and service, including warranty service, for such Product.
8.1.3 For Distributed Products not under warranty, Palomar shall be
the exclusive supplier of critical parts (e.g. parts that are not otherwise
generally available) which Coherent shall purchase from Palomar at its cost
plus 25%.
9. LIMITED LIABILITY TO COHERENT AND OTHERS
IN NO EVENT SHALL PALOMAR BE LIABLE TO COHERENT OR ANY OTHER ENTITY FOR ANY
SPECIAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED, WHETHER FOR BREACH OF
CONTRACT, NEGLIGENCE OR OTHERWISE, AND WHETHER OR NOT PALOMAR HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGE. THE ESSENTIAL PURPOSE OF THIS PROVISION IS TO
LIMIT THE POTENTIAL LIABILITY OF PALOMAR ARISING OUT OF THIS AGREEMENT. NOTHING
IN THIS CLAUSE SHALL LIMIT PALOMAR'S OBLIGATION TO INDEMNIFY COHERENT AS SET
FORTH IN SECTION 14.
10. PROPERTY RIGHTS
10.1 PROPERTY RIGHTS. Coherent agrees that Palomar owns all right, title,
and interest in the product lines that include the Products now or hereafter
subject to this Agreement and in all of Palomar's patents, trademarks, trade
names, inventions, copyrights, know-how, and trade secrets relating to the
design, manufacture, operation or service of the Products. The use by Coherent
of any of these property rights is authorized only for the purposes herein set
forth, and upon termination of this Agreement for any reason such authorization
shall cease. Coherent shall not challenge Palomar's attempt to register any
name, mark or logo in use as of the effective date of the Agreement or any name,
mark, or logo substantially similar thereto, except as expressly set forth
herein.
10.2 SALE CONVEYS NO RIGHT TO MANUFACTURE OR COPY. The Products are offered
for sale and are sold by Palomar subject in every case to the condition that
such sale does not convey any license, expressly or by implication, to
manufacture, duplicate or otherwise copy or reproduce, either in whole or in
part, any of the Products, except as expressly set forth herein.
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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11. TRADEMARKS AND TRADE NAMES
11.1 USE. During the term of this Agreement, Coherent shall have the right
to indicate to the public that it is an authorized sales agent for the
Distributed Products. Palomar hereby grants Coherent permission to us any
trademarks, trade names, service marks and logos owned or claimed by Palomar and
used in connection with the Distributed Products ("Palomar Trademarks") solely
in conjunction with the performance by Coherent of its rights and obligations
under this Agreement. To the extent that Coherent is permitted under this
Agreement to use, sell, promote and/or distribute Products, this permission
shall apply and pass through to Coherent's distributors who distribute Products
(i.e., without any modification to the Product, product packaging,
documentation, or other materials) ("Distributor"). Coherent shall provide
notice of these trademark license terms of this Agreement to, and enforce such
terms with and against, Coherent's Distributors. Palomar is a third party
beneficiary of any agreement between Coherent and Coherent's Distributors
arising from or relating to the use by Coherent or Distributor of Palomar
Trademarks, and any such agreement will so provide in express terms. Palomar
shall be entitled to enforce the terms of this Trademark License directly
against any Distributor in the event Coherent fails to do so. At Palomar's sole
cost and expense, Coherent agrees to assist in the registration of the Palomar
Trademarks in the Territory in the name of Palomar, in renewal and maintenance
of such registration and in such recording of Coherent as a registered user as
Palomar may reasonably request. Effective upon the termination of this
Agreement, Coherent shall cease to use all trademarks, marks, and trade names of
Palomar.
11.2 MANUFACTURING BY COHERENT. To the extent Coherent is permitted to make
Products under this Agreement, Coherent agrees to insure that the Palomar
Trademarks are only associated with goods of equal or higher value than the
Products produced by Palomar. Palomar retains the right to inspect goods
manufactured by Coherent for quality to ensure this provision is observed.
11.3 LIMITATIONS ON USAGE. Coherent shall use the Palomar Trademarks only
as approved by Palomar (which approval shall not be unreasonably withheld) and
in conformity with any guidelines or policies as provided by Palomar to Coherent
from time to time. Coherent agrees not to modify, alter or remove any Palomar
Trademark.
11.4 USE OF THE PARTY'S NAME. The parties agree that all Licensed Products
sold under this Agreement and all related materials, including, without
limitation, brochures and advertising materials, shall be labeled with both
Coherent and Palomar's names, each equally prominently displayed. Coherent
expressly disclaims any rights to the goodwill and intellectual property
resident in such Distributed Products, except as expressly set forth herein.
11.5 TRADEMARKS OF SUPPLIERS TO PALOMAR. Palomar may incorporate into or
bundle with the Distributed Products branded products of Palomar's suppliers,
and Palomar may enter into agreements requiring Palomar to use or display the
marks or brand identifiers of suppliers in a manner specified in such agreement;
provided, however, that the foregoing shall not apply to competitors of Coherent
without Coherent's prior written approval. Upon Coherent's receipt of notice of
such agreements from Palomar and thereafter, Coherent agrees to comply with the
applicable terms and conditions of any agreement between Palomar and its
suppliers relating to the use of the trademarks, trade names, service marks
and/or logo(s) of such suppliers.
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<PAGE>
12. PATENTS AND TRADE SECRETS
12.1 Any Invention conceived or reduced to practice solely by Palomar
employees or anyone working with Palomar other than Coherent in the performance
of any Development Project, shall be owned by Palomar. Palomar shall promptly
advise Coherent in writing of each Invention disclosed to Palomar. In the event
of joint inventorship between Coherent and Palomar employees, the Invention will
be deemed to be jointly owned. Patent applications for Inventions owned jointly
by Palomar and Coherent shall be filed as mutually agreed upon by the parties,
except that any such agreement must be reached on terms reasonably calculated to
obtain such patents.
12.2 All patent costs pertaining to any Palomar Patent Rights, including
preparation, filing, prosecution, issuance and maintenance costs, shall be borne
by Palomar, except for Patent Rights owned jointly by the parties, which shall
be shared equally, and which shall be reimbursed as incurred.
13. INFRINGEMENT
13.1 Palomar will protect the Palomar Patent Rights from infringement and
prosecute infringers when, in its sole judgement, such action may be reasonably
necessary, proper and justified.
13.2 If Coherent shall have supplied Palomar with written evidence
demonstrating to Palomar's reasonable satisfaction prima facie infringement of a
claim of a Palomar Patent Right by a third party, Coherent may by notice request
Palomar to take steps to protect such Patent Right. Palomar shall notify
Coherent within sixty (60) days of the receipt of such notice whether Palomar
intends to prosecute the alleged infringement. If Palomar notifies Coherent that
it intends to so prosecute, Palomar shall, within three (3) months of its notice
to Coherent either (i) cause infringement to terminate or (ii) initiate legal
proceedings against the infringer. In the event that Palomar notifies Coherent
that Palomar does not intend to prosecute said infringement, Coherent may, upon
notice to Palomar, initiate legal proceedings against the infringer at
Coherent's expense and in Palomar's name if so required by law. No settlement,
consent judgment or other voluntary final disposition of the suit which
invalidates or restricts the claims of such Patent Rights will be entered into
without the consent of Palomar, which consent shall not be unreasonably
withheld, and shall not be withheld unless Palomar assumes responsibility for
future expenses in litigation. Coherent shall indemnify Palomar against any
order for payment that may be made against Palomar as a result of any
settlement, consent judgment or other voluntary final disposition of the suit
entered into without Palomar's consent.
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<PAGE>
13.3 In the event that one party shall initiate or carry on legal
proceedings to enforce any Patent Right against any alleged infringer, the other
party shall fully cooperate with and supply all assistance reasonably requested
by the party initiating or carrying on such proceedings. The party which
institutes any suit to protect or enforce a Patent Right shall have sole control
of that suit and shall bear the reasonable expenses (excluding legal fees)
incurred by said other party in providing such assistance and cooperation as is
requested pursuant to this paragraph. The party initiating or carrying on such
legal proceedings shall keep the other party informed of the progress of such
proceedings and said other party shall be entitled to counsel in such
proceedings but at its own expense. Any award paid by third parties as the
result of such proceedings (whether by way of settlement or otherwise) shall
first be applied to reimbursement of the unreimbursed legal fees and expenses
incurred by either party, including reimbursement to Palomar, and then the
remainder shall be divided between the parties as follows:
13.3.1 (i) If the amount is based on lost profits, Coherent shall
receive an amount equal to the damages the court determines
Coherent has suffered as a result of the infringement less the
amount of any royalties and other payments that would have been
due Palomar on sales of products lost by Coherent as a result of
the infringement had Coherent made such sales; and
(ii) Palomar shall receive an amount equal to the royalties and
other payments it would have received if such sales had been made
by Coherent, or
13.3.2 As to awards other than those based on lost profits, sixty (60)
percent to the party initiating such proceedings and forty (40)
percent to the other party, provided that in the event that
Palomar has paid for further litigation subsequent to Palomar's
refusal to agree to a settlement, consent judgement or voluntary
final disposition of a suit pursuant to paragraph 13.2, such
awards shall be divided equally between the parties.
13.4 For the purposes of the proceedings referred to in this Section 13,
Palomar and Coherent shall permit the use of their names and shall execute such
documents and carry out such other acts as may be necessary. The party
initiating or carrying on such legal proceedings shall keep the other party
informed of the progress of such proceedings and said other party shall be
entitled to counsel in such proceedings but at tits own expense, said expenses
to be off-set against any damages received by the party bringing suit in
accordance with the foregoing paragraph 13.3
14. INDEMNIFICATION
14.1 DESIGN DEFECT. The party that develops a Product shall indemnify,
defend and hold harmless the other party and its officers, employees and agents
and their respective successors, heirs and assigns (the "Design Defect
Indemnitees"), against any liability, damage, loss or expense (including
reasonable attorney's fees and expenses of litigation) incurred by or imposed
upon the Design Defect Indemnitees or any one of them in connection with any
claims, suits, actions, demands or judgment arising out of any theory of design
defect (including, but not limited to, actions in the form of tort, warranty or
strict liability) concerning such Product.
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<PAGE>
14.2 MANUFACTURING DEFECT. The party that manufactures a Product shall
indemnify, defend and hold harmless the other party and its officers, employees
and agents and their respective successors, heirs and assigns (the
"Manufacturing Defect Indemnitees"), against any liability, damage, loss or
expense (including reasonable attorney's fees and expenses of litigation)
incurred by or imposed upon the Manufacturing Defect Indemnitees or any one of
them in connection with any claims, suits, actions, demands or judgment arising
out of any theory of manufacturing defect (including, but not limited to,
actions in the form of tort, warranty or strict liability) concerning such
Product.
14.3 BREACH OF WARRANTY. The party that sells a Product to the end user
under this Agreement shall indemnify, defend and hold harmless the other party
and its officers, employees and agents and their respective successors, heirs
and assigns (the "Breach of Warranty Indemnitees"), against any liability,
damage, loss or expense (including reasonable attorney's fees and expenses of
litigation) incurred by or imposed upon the Breach of Warranty Indemnitees or
any one of them in connection with any claims, suits, actions, demands or
judgment arising out of any theory of breach of warrant (including, but not
limited to, actions in the form of tort, warranty or strict liability)
concerning such Product.
14.4 LIMITATION. The indemnifications above shall not apply to any
liability, damage, loss or expense to the extent that it is directly
attributable to (i) the negligent activities, reckless misconduct or intentional
misconduct of the Indemnitees; or (ii) a claim that the manufacture, use or sale
of a Product infringes upon a patent or other intellectual property owned by a
third party.
14.5 ATTORNEYS. The indemnifying party agrees, at its own expense, to
provide attorneys reasonably acceptable to the indemnified party to defend
against any actions brought or filed against any party indemnified hereunder
with respect to the subject of indemnity contained herein, whether or not such
actions are rightfully brought.
14.6 PATENT, COPYRIGHT AND TRADEMARK INDEMNIFICATION. Subject to Section
14.7 below, Coherent agrees that Palomar has the right to defend, or at its
option to settle, and Palomar agrees, at its own expense, to defend or at its
option to settle, any claim, suit or proceeding brought against Coherent or its
customer on the issue of infringement of any patent, copyright or trademark by
the Products sold hereunder or the use thereof, subject to the limitations
hereinafter set forth. Palomar shall have sole control of any such action or
settlement negotiations, and Palomar agrees to pay, subject to the limitations
hereinafter set forth, any final judgment entered against Coherent or its
customer on such issue in any such suit or proceeding defended by Palomar. If
Palomar receives any damage award and/or attorneys' fees in any such claim, suit
or proceeding, it shall not be obligated to share any portion thereof with
Coherent. Palomar's obligation under this Section to indemnify, defend and hold
harmless Coherent shall not apply in the case of any Products or Palomar
Trademarks (i) manufactured to Coherent's design or modified by Coherent without
Palomar's permission (except in the situation where the modification did not
cause the Products to infringe the patent, copyright, trademark at issue); (ii)
used in combination with other technology or products not supplied by Palomar
(except in the situation where the combination did not cause the Products to
infringe the patent, copyright, trademark at issue); or (iii) not used pursuant
to Palomar's existing instructions. Coherent agrees that Palomar at its sole
option shall be relieved of the foregoing obligations unless Coherent or its
customer notifies Palomar promptly in writing of such claim, suit or proceeding
and gives Palomar authority to proceed as contemplated herein, and, at Palomar's
expense, gives Palomar proper and full information and assistance to settle
and/or defend any such claim, suit or proceeding for infringement of any patent,
copyright or trademark, or it is adjudicatively determined that the Products, or
any part thereof, infringe any patent, copyright or trademark, or it the sale or
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use of the Products, or any part thereof, is, as a result, enjoined, then
Palomar may, at its option and expense: (i) procure for Coherent and its
customers the right under such patent, copyright or trademark to sell or use, as
appropriate, the Products or such part thereof; or (ii) replace the Products
with suitable non-infringing Products; (iii) suitably modify the Products; or
(iv) if the use of the Products, or part thereof, is prevented by injunction
during the first three years of this Agreement, remove the Products, or part
thereof, and pay Coherent an amount equal to $3.0 million multiplied by a
fraction, the numerator of which is thirty-six (36) minus the number of months
expired from the Effective Date as of the date of the injunction, and the
denominator is thirty-six (36). Palomar shall not be liable for any costs or
expenses incurred by Coherent without its prior written authorization.
14.7 ENTIRE LIABILITY. The foregoing provisions of this Section 14 state
the entire liability and obligations of Palomar and the exclusive remedy of
Coherent and its customers, with respect to any alleged infringement of patents,
copyrights, trademarks or other intellectual property rights by the Products or
any part thereof.
15. DEVELOPMENT PROJECTS
15.1 During the term of this Agreement, Coherent and Palomar shall
collaborate on the definition of Products to be developed hereunder. Palomar
agrees to use its reasonable best efforts to develop Products, and to share the
results of such development work with Coherent during the term of this
Agreement.
15.2 Palomar agrees to spend at least the following amounts (based on GAAP)
for the development of Products during the next three full years ending December
31:
Year 1: $5,000,000
Year 2: 10% of Palomar's gross revenues (after
deducting commissions paid to Coherent) in
Year 1 from Products developed by Palomar
and/or Coherent, and sold by Coherent.
Year 3: 10% of Palomar's gross revenues (after
deducting commissions paid to Coherent) in
Year 2 from Products developed by Palomar
and/or Coherent, and sold by Coherent.
15.3 The parties shall keep each other reasonably informed on the status of
their development efforts related to hair removal products. At least once per
quarter, each party shall prepare a written report and send it to the other
party summarizing the development work done relating to the Products during the
preceding quarter. In addition, Palomar's chief financial officer shall prepare
and deliver to Coherent a certificate on or before January 31 of each year,
certifying to the level of development expenditures by Palomar for the Products
for the preceding 12 months ending December 31.
15.4 Palomar shall use its reasonable best efforts to maintain in full
force and effect its Clinical Trial Agreement with Massachusetts General
Hospital during the term of this Agreement, and not to modify or amend the
Clinical Trial Agreement without Coherent's consent, which will not be
unreasonably withheld.
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16. MANUFACTURING RIGHTS
16.1 From time to time during the term of this Agreement, as Palomar
develops a prototype Product, it shall notify Coherent in writing and Coherent
shall have 30 days thereafter to notify Palomar in writing whether or not it is
interested in having an exclusive right to sell such Product. For purposes of
this provision, the term prototype Product shall be defined as a Product
delivered to a clinical investigator and tested on no less than three patients.
16.2 If Coherent notifies Palomar that it wishes to distribute the
prototype Product, such Product shall automatically be included in the
definition of "Distributed Products" and Palomar and Coherent shall meet to
discuss who shall manufacture the Product. Palomar may choose to (i) manufacture
the Product, in which case it shall pay Coherent a sales commission of *% of the
selling price (other terms, such as purchase minimums and prices shall be
negotiated at that time) or (ii) offer Coherent the right to manufacture the
Product, in which case, if Coherent decides to manufacture, Coherent shall pay
Palomar *% of the Gross Margin for such Product. For purposes of calculating the
Gross Margin, the fully burdened cost of sales (exclusive of royalties under the
Anderson Patent) shall be determined at the time of Palomar's election, and
shall not be revised thereafter. If the parties are unable to agree on terms for
manufacturing or selling future Products developed hereunder, Palomar may
appoint another company to distribute such Products on terms no more favorable
than those offered to Coherent under this Section 16.2, or sell any non-hair
removal Products directly. Palomar shall be prohibited from directly selling
hair removal products to physicians during the term of this Agreement.
16.3 In the event Palomar is unable or unwilling to manufacture any of the
Distributed Products for any reason, including Palomar's bankruptcy, Coherent
shall have the right to manufacture them, on the same terms as set forth in
Section 16.2. If Coherent acquires a license under this Section 16, it shall pay
a royalty to Palomar in the amount of *% of the Gross Margin (as hereinafter
defined) less out of pocket expenses incurred by Coherent to transfer
manufacturing and lost profits on sales to customers who cancel their order due
to the delay. Coherent shall not include any such reimbursed capitalized out of
pocket expenses or lost profits in such Gross Margin. For purposes of this
paragraph, "unable to manufacture" shall be defined as when the backlog for hair
removal products exceeds three months for a period of at least three months, so
long as the orders were within 10% of Coherent's Forecast during the
corresponding period, and provided that such backlog is not attributable to
failure by third parties to perform, including, without limitation, failure to
supply necessary parts.
16.4 If during the term of this Agreement, Coherent manufactures, sells or
otherwise distributes hair removal products that are competitive to any
Distributed Product, it shall pay Palomar a royalty of *% of the Net Revenues of
any such hair removal product sold during the first year of any such sales and
*% for such product sold in each successive year during the term of this
Agreement. These percentages shall be reduced by one-half in the event Palomar
defaults in its obligations to spend money to develop new cosmetic laser
products as set forth in Section 15. Coherent's royalty obligations under this
Section 16 shall survive the termination of this Agreement if it is terminated
by Palomar for cause, for a period of time equal to the remaining term of this
Agreement if it weren't terminated by Palomar and not otherwise extended by the
parties.
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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16.5 Palomar shall cooperate with Coherent in good faith for the purpose of
allowing Coherent to exercise its rights hereunder, including, without
limitation, providing Coherent with copies of all technical data, manufacturing
know-how, drawings and supplier information necessary to manufacture the
Products, all of which shall be subject to the Confidentiality Agreement
attached hereto as Exhibit F.
17. PATENT LICENSE GRANT.
17.1 On the terms and subject to the conditions set forth herein, Palomar
hereby grants to Coherent a non-exclusive, royalty-bearing sublicense (without
the right to sublicense others) under the Palomar Patents to make, have made,
use and sell Distributed Products and competitive Coherent products for which
royalties are paid to Palomar under Section 16.4 ("Coherent Products") in the
Territory during the License Term. For Distributed Products manufactured by
Palomar and sold by Coherent, Palomar shall be solely responsible for paying all
royalty obligations to MGH relating to the Anderson Patent that may arise as a
result of the manufacture, use or sale of Distributed Products during the
License Term. Licensed Products manufactured by Coherent shall bear a royalty of
* of Net Revenues. During the term of this Agreement, such royalty obligations
shall be fulfilled by payment to Palomar of the amounts set forth in Section 16.
17.2 All rights not expressly granted are reserved to Palomar. Nothing
herein shall be construed as granting Coherent, by implication, estoppel or
otherwise, including the first sale doctrine, any license or other right under
any patent or other intellectual property right of Palomar, except for the
licenses expressly granted in Section 17.
17.3 Upon termination of this Agreement, Palomar agrees to grant Coherent
any licenses required for Distributed Products distributed by Coherent pursuant
to this Agreement to any other patents it licenses or owns, on commercially
reasonable terms to be negotiated. The parties shall negotiate in good faith,
but no license shall be granted if the parties are unable to reach agreement on
reasonable terms.
17.4 In addition to the license granted under Section 17.1 above, from and
after the termination date of this Agreement, Palomar hereby grants Coherent a
non-exclusive, worldwide, royalty-bearing license in the License Field to make,
have made, use and sell Licensed Products that infringe the Anderson Patent. The
sublicense shall include the right to grant to the purchasers of Licensed
Products from Coherent and its Affiliates, the right to use such Licensed
Products in a method coming within the scope of the Anderson Patent. Coherent
shall have no right to grant further sublicenses to the Anderson Patent, except
that it shall be permitted to transfer its rights in connection with the sale of
its hair removal product line.
17.4.1 After termination of this Agreement, and in no event less than
three years, Coherent shall pay Palomar running royalties of
*% of Net Revenues so long as the Licensed Product, its
manufacture, use or sale is covered by a Valid Claim of the
Anderson Patent, until such time as Palomar licenses three
companies with sales of aesthetic laser products in excess of $20
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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<PAGE>
million per year at rates in excess of *%, at which time the
running royalty rate shall be adjusted to the average of such
higher prices. However, if Palomar licenses the Anderson Patent
at a rate less than the amount Coherent is then paying, Coherent
shall be entitled to such lower rate for sales occurring after
such lower rate is effective. The sublicense to the Anderson
Patent granted in this Section 17.4, and Coherent's royalty
obligations in connection therewith, shall survive termination of
the Agreement.
17.4.2 Royalties due shall be calculated as of the last day of each
month with respect to transactions made during that month and
within 30 days thereafter Coherent shall remit to Palomar full
payment of royalties due, accompanied by a detailed report of the
calculation thereof, Whenever conversion from any foreign
currency shall be required, such conversion shall be at the rate
of exchange thereafter published in the Wall Street Journal for
the business day closest to the end of the applicable Accounting
Period.
17.4.3 With each payment, Coherent shall deliver to Palomar a full and
accurate accounting to include at least the following information
to the extent necessary to determine royalties:
(a) Quantity of each Licensed Product sold or leased (by
country) by Coherent and its Affiliates;
(b) Total billing for each Licensed Product (by country);
(c) Quantities of each Licensed Product used by Coherent and its
Affiliates;
(d) Revenues from Services paid to Coherent and its Affiliates;
and
(e) Total royalties payable to Palomar.
17.4.4 Unless otherwise terminated as provided for in this Section 17,
the license to the Anderson Patent granted hereunder will
continue until the expiration of the Anderson Patent. Palomar has
the right to terminate this sublicense upon fifteen (15) days
prior written notice to Coherent in the event of any material
breach of the obligation to make royalty payments hereunder,
unless such breach is cured prior to the expiration of such
fifteen (15) day period. Upon termination of the sublicense
granted hereunder, Coherent shall pay Palomar all royalties due
or accrued on the Net Revenues up to and including the date of
termination. In the event of any termination, Coherent shall also
have the right to fill all existing orders for Licensed Products,
provided the royalties set forth herein are paid on such orders.
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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<PAGE>
17.5 Upon termination of this Agreement, Coherent agrees to grant Palomar
any licenses under any patents it licenses or owns to make, use, offer for sale
or sell any Licensed Products, on commercially reasonable terms to be
negotiated. The parties shall negotiate in good faith, but no license shall be
granted if the parties are unable to reach agreement on reasonable terms.
18. INTELLECTUAL PROPERTY NOTICES.
Coherent shall reproduce on all copies of any documentation or Confidential
Information, all copyright, trademark, confidentiality and other notices on the
original. Coherent shall reproduce Palomar's patent notices on Distributed
Products. Coherent shall place on all brochures, flyers, advertisements, all
other promotional, instructional or merchandising materials collateral to
Products sold by Coherent a notice stating that the Products are "Manufactured
and sold under patent license from Palomar Medical Technologies, Lexington, MA."
20. TERM AND TERMINATION
19.1 TERM. This Agreement shall commence on the date hereof and continue
for an initial period of three years, unless terminated earlier under the
provisions of this Section 19. At the end of each year, this Agreement shall
automatically be renewed for an additional one year period, unless either party
provides the other with written notice of its intention not to renew the
Agreement at least thirty (30) days prior to the renewal date.
19.2 TERMINATION FOR CAUSE. If either party defaults in the performance of
any provision of this Agreement, or violates the covenant of good faith and fair
dealing implied by law, then the non-defaulting party may give written notice to
the defaulting party that if the default is not cured within thirty (30) days
the Agreement will be terminated. If the non-defaulting party gives such notice
and the default is not cured during the thirty-day period, or reasonable action
isn't taken to cure any default that can not be cured during the thirty-day
period, then the Agreement shall automatically terminate at the end of that
period.
19.3 TERMINATION FOR INSOLVENCY. This Agreement shall terminate, at the
election of the other party, (i) upon the institution by or against either party
of insolvency, receivership or bankruptcy proceedings or any other proceedings
for the settlement of debts, (ii) upon either party making an assignment for the
benefit of creditors, or (iii) upon either party dissolution or ceasing to do
business.
19.4 FULFILLMENT OF ORDERS UPON TERMINATION. Upon termination of this
Agreement for other than Coherent's breach, Palomar shall continue to fulfill
all orders accepted by Palomar prior to the date of termination, and Coherent's
payment obligations to Palomar hereunder for such orders shall continue.
19.5 RETURN OF MATERIALS. All trademarks, trade names, patents, copyrights,
designs, drawings, formulas or other data, photographs, samples, literature, and
sales aids of every kind provided by Palomar shall remain the property of
Palomar. Within thirty (30) days after the termination of this Agreement,
Coherent shall prepare all such items in its possession for shipment, as Palomar
may direct, at Palomar's expense.
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<PAGE>
19.6 LIMITATION ON LIABILITY. In the event of termination by either party
in accordance with any of the provisions of this Agreement, neither party shall
be liable to the other, because of such termination, for compensation,
reimbursement or damages on account of the loss of prospective profits or
anticipated sales or on account of expenditures, inventory, investments, leases
or commitments in connection with the business or goodwill of Palomar or
Coherent. Termination shall not, however, relieve either party of obligations
incurred prior to the termination.
19.7 SURVIVAL OF CERTAIN TERMS. The provisions of Sections 1, 2.3, 3.2.11,
3.3, 3.8, 3.9, 4.12, 5.5, 5.8, 5.9, 7, 8, 9, 10, 11, 12, 13, 14, 16.4, 17.2,
17.3, 17.4, 17.5, 18, 19, and 20 shall survive the termination of this Agreement
for any reason. All other rights and obligations of the parties shall cease upon
termination of this Agreement. It is the intent of the parties that the licenses
of intellectual propoerty as contemplated by Section 16 and Section 17 by
Palomar shall be considered licenses of intellectual property as contemplated by
Section 325(n) of the Bankruptcy Code (11 U.S.C. section 356(n)).
20. GENERAL PROVISIONS
20.1 CONFIDENTIALITY. The parties agree to enter into a Confidentiality
Agreement in substantially the form attached hereto as Exhibit F.
20.2 DISPUTE RESOLUTION. For any and all claims, disputes, or controversies
arising under, out of, or in connection with this Agreement, (other than those
relating to patent rights, which shall be brought in the United States District
Court for the District of Massachusetts), which the parties shall be unable to
resolve within sixty (60) days, the party raising such dispute shall promptly
advise the other party of such claim, dispute, or controversy in a writing which
describes in reasonable detail the nature of such dispute. By not later than
five (5) business days after the recipient has received such notice of dispute,
each party shall have selected for itself a representative who shall have the
authority to bind such party and shall additionally have advised the other party
in writing of the name and title of such representative. By not later than ten
(10) business days after the date of such notice of dispute, such
representatives shall agree upon a third party which is in the business of
providing Alternative Dispute Resolution (ADR) services (hereinafter, "ADR
Provider") and shall schedule a date with such ADR Provider to engage in ADR.
Thereafter, the representatives of the parties shall engage in good faith in an
ADR process under the auspices of the selected ADR Provider, and each party
shall pay fifty percent (50%) of the ADR expenses. If within the aforesaid
thirty (30) business days after the date of the notice of dispute the
representatives of the parties have not been able to agree upon an ADR Provider
and schedule a date to engage in ADR, or if they have not been able to resolve
the dispute within thirty (30) business days after the termination of ADR, the
parties shall have the rights to pursue any other remedies legally available to
resolve such dispute in either the courts of the Commonwealth of Massachusetts
or in the United States District Court for the District of Massachusetts, to
whose jurisdiction for such purposes the parties hereby irrevocably consent. Any
written evidence originally in a language other than English shall be submitted
in English translation accompanied by the original or true copy thereof.
20.3 INSURANCE. Each party will obtain comprehensive general liability
insurance in amounts reasonable to ensure the performance of their obligations
hereunder, and Coherent will
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<PAGE>
cause Palomar to be named as an additional insured. Each party
shall provide the other with written evidence of such insurance upon request.
Each party shall maintain such comprehensive general liability insurance beyond
the expiration or termination of this Agreement during (i) the period that any
product, process or service, relating to, or developed pursuant to, this
Agreement is being commercially distributed or sold (other than for the purpose
of obtaining regulatory approvals) and (ii) a reasonable period after the period
referred to above which in no event shall be less than five (5) years.
20.4 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and
understanding of the parties relating to the subject matter herein and merges
all prior discussions between them. No modification of or amendment to this
Agreement, nor any waiver of any rights under this Agreement, shall be effective
unless in writing signed by the party to be charged.
20.5 NOTICES. Any notice required or permitted by this Agreement shall be
in writing and shall be sent by prepaid express courier, addressed to the other
party at the address shown at the beginning of this Agreement or at such other
address for which such party gives notice hereunder. Such notice shall be deemed
to have been given three (3) days after deposit with such courier service.
20.6 FORCE MAJEURE. Nonperformance of either party shall be excused to the
extent that performance is rendered impossible by strike, fire, flood,
governmental acts or orders or restrictions, failure of suppliers, or any other
reason where failure to perform is beyond the control and not caused by the
negligence of the non-performing party.
20.7 NONASSIGNABILITY AND BINDING EFFECT. A mutually agreed consideration
for the parties' entering into this Agreement is the reputation, business
standing, and goodwill already honored and enjoyed by them, and accordingly, the
parties agree that, except as otherwise provided herein, their rights and
obligations under this Agreement may not be transferred or assigned directly or
indirectly without the prior written consent of the other party, except that
either party shall be permitted to assign its rights and obligations under the
Agreement, without the other's consent, in connection with the sale of the
company, or substantially all of its assets relating to its cosmetic laser
business. Subject to the foregoing sentence, this Agreement shall be binding
upon and inure to the benefit of the parties hereto, their successors and
assigns.
20.8 SEVERABILITY. If any provision of this Agreement or any part thereof
shall be found to be invalid, illegal or otherwise unenforceable by a court of
competent jurisdiction, such provision shall to such extent be deemed null and
void and severed from this Agreement, and the remainder of the Agreement shall
remain in full force and effect.
20.9 GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced in accordance with, and the relations of the parties shall be
determined in accordance with, the substantive laws of the Commonwealth of
Massachusetts without regard to its principles of conflicts of laws.
20.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
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<PAGE>
20.11 AUDIT RIGHTS. Each party shall keep accurate records and books of
account sufficient to permit verification of the other party's obligations under
this Agreement. The parties shall have the right, at their own expense, and
under reasonable conditions of time and place, to have an independent auditor,
reasonably acceptable to the other party, audit from time to time all records of
the other party relating to any of such party's obligations under this
Agreement. In the event any such audit discloses any breach of this Agreement by
such party or its employees or agents, the audited party shall, in addition to
such other rights and remedies as may be available to the auditing party as the
result of such breach, pay the full cost of such audit to the auditing party.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the day and year first above written.
COHERENT, INC. PALOMAR MEDICAL TECHNOLOGIES, INC.
By:/s/ Bernard Couillard By:/s/ Louis P. Valente
---------------------- ---------------------
Title: Chief Executive Officer Title: Chief Executive Officer
Date: November 17, 1997 Date: November 17, 1997
<PAGE>
2
EXHIBIT A
PALOMAR PATENTS
Issued Patents:
Patent Number Title Issue Date
- ------------------- -------------- ----------
5,595,568
Patent Applications:
Serial Number Title Filing Date
- ---------------------- ------------ ---------------
US 08/314,082 METHOD OF HAIR REMOVAL 9/28/94
PCT/US95/12275 METHOD OF HAIR REMOVAL 9/25/95
US PERMANENT HAIR REMOVAL 2/1/95
USING OPTICAL PULSES
<PAGE>
EXHIBIT B
WIRE INSTRUCTIONS
Bank: Citibank
ABA Routing No.: 021000089
Account Name: Dean Witter Reynolds, Inc.
Account Number: 40611172
For Further Credit to: Palomar Medical Technologies, Inc.
Account No.: 593-109782
<PAGE>
EXHIBIT C
FORM OF WARRANT
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND NEITHER
THIS WARRANT NOR SUCH SHARES MAY BE SOLD, ENCUMBERED OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR AN
EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION SHALL BE
APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Void after 5:00 p.m. Eastern Standard Time, on _________________.
WARRANT TO PURCHASE COMMON STOCK
OF
PALOMAR MEDICAL TECHNOLOGIES, INC.
FOR VALUE RECEIVED, PALOMAR MEDICAL TECHNOLOGIES, INC. (the "Company"),
a Delaware corporation, hereby certifies that ____________________________, or
its permitted assigns, is entitled to purchase from the Company, from time to
time commencing _________________, and prior to 5:00 P.M., Eastern Standard
Time, on _________________, a total of
___________________________________________________________(___________) fully
paid and non assessable shares of the Common Stock, par value $.01 per share, of
the Company for an aggregate purchase price of $_______________ (computed on the
basis of $_____ per share). The vesting schedule is as follows: _________ shares
vest one year after the commencement date of this Warrant, an additional
_________ shares vest two years after the commencement date of this Warrant and
an additional _________ shares vest three years after the commencement date of
this Warrant. Upon termination of employment of ____________________________,
the above vesting ceases immediately. With regard to any Warrant which the
Holder is entitled to exercise on the date on which
____________________________'s employment with the Company is terminated, the
Warrant shall expire three (3) months after such date of termination if such
termination be by reason other than dismissal by the Company for cause. If
dismissal by the Company for cause, then the Warrant shall terminate
immediately. In the event of a sale or acquisition of substantially all of the
stock or assets of the Company, the exercisability of this Warrant shall
automatically accelerate so that it shall, immediately prior to the effective
date of such acquisition, become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to this Warrant.
(Hereinafter, (i) said Common Stock, together with any other equity securities
which may be issued by the Company with respect thereto or in substitution
therefor, is referred to as the "Common Stock", (ii) the shares of the Common
Stock purchasable hereunder are referred to as the "Warrant Shares", (iii) the
aggregate purchase price payable hereunder for the Warrant Shares is referred to
as the "Aggregate Warrant Price", (iv) the price payable hereunder for each of
the Warrant Shares is referred to as the "Per Share Warrant Price", (v) this
Warrant, and all warrants hereafter issued in exchange or substitution for this
Warrant are referred to as the "Warrant" and (vi) the holder of this Warrant is
referred to as the "Holder".).
1. EXERCISE OF WARRANT. This Warrant may be exercised, in whole at any
time or in part from time to time, commencing _________________, and prior to
5:00 P.M., Eastern Standard Time then current, on _________________, by the
Holder of this Warrant by the surrender of this Warrant (with the subscription
form at the end hereof duly executed) at the address set forth in Subsection 8
(a) hereof, together with proper payment of the Aggregate Warrant Price, or the
proportionate part thereof if this Warrant is exercised in part. Payment for
Warrant Shares shall be made by certified or official bank check payable to the
order of the Company. If this Warrant is exercised in part, this Warrant must be
exercised for a minimum of 1,000 shares of the Common Stock, and the Holder is
entitled to receive a new Warrant covering the number of Warrant Shares in
respect of which this Warrant has not been exercised and setting forth the
proportionate part of the Aggregate Warrant Price applicable to such Warrant
Shares. Upon such surrender of this Warrant, the Company will (a) issue a
certificate or certificates in the name of the Holder for the largest number of
whole shares of the Common Stock to which the Holder shall be entitled, and (b)
deliver the proportionate part thereof if this Warrant is exercised in part,
pursuant to the Provisions of the Warrant.
2. RESERVATION OF WARRANT SHARES. The Company agrees that, prior to the
expiration of this Warrant, the Company will at all times have authorized and in
reserve, and will keep available, solely for issuance or delivery upon the
exercise of this Warrant, the shares of the Common Stock as from time to time
shall be receivable upon the exercise of this Warrant.
3. FULLY PAID STOCK; TAXES. The Company agrees that the shares of the
Common Stock represented by each and every certificate for Warrant Shares
delivered on the exercise of this Warrant shall, at the time of such delivery,
be validly issued and outstanding, fully paid and non-assessable, and not
subject to preemptive rights, and the Company will take all such actions as may
be necessary to assure that the par value or stated value, if any, per share of
the Common Stock is at all times equal to or less than the then Per Share
Warrant Price. The Company further covenants and agrees that it will pay, when
due and payable, any and all Federal and State stamp, original issue or similar
taxes that may be payable in respect of the issue of any Warrant Share or
certificate therefor.
4. TRANSFER.
(a) SECURITIES LAWS. Neither this Warrant nor the Warrant Shares
issuable upon the exercise hereof have been registered under the Securities Act
of 1933, as amended (the "Securities Act") or under any state securities laws
and unless so registered may not be transferred, sold, pledged, hypothecated or
otherwise disposed of unless an exemption from such registration is available.
In the event Holder desires to transfer this Warrant or any of the Warrant
Shares issued, the Holder must give the Company prior written notice of such
proposed transfer including the name and address of the proposed transferee.
Such transfer may be made only either (i) upon publication by the Securities and
Exchange Commission (the "Commission") of a ruling, interpretation, opinion or
"no action letter" based upon facts presented to said Commission, or (ii) upon
receipt by the Company of an opinion of Counsel to the Company in either case to
the effect that the proposed transfer will not violate the provisions of the
Securities Act, The Securities Exchange Act of 1934, as amended, or the rules
and regulations promulgated under either such act, or in the case of clause (ii)
above, to the effect that the Warrant or Warrant Shares to be sold or
transferred has been registered under the Securities Act of 1933, as amended,
and that there is in effect a current prospectus meeting the requirements of
Subsection 10 (a) of the Securities Act, which is being or will be delivered to
the purchaser or transferee at or prior to the time of delivery of the
certificates evidencing the Warrant or Warrant Stock to be sold or transferred.
(b) CONDITIONS TO TRANSFER. Prior to any such proposed transfer,
and as condition thereto, if such transfer is not made pursuant to an effective
registration statement under the Securities Act, the Holder will, if requested
by the Company, deliver to the Company (i) an investment covenant signed by the
proposed transferee (ii) an agreement by such transferee to the impression of
the restrictive investment legend set forth herein on the certificate or
certificates representing the securities acquired by such transferee, (iii) an
agreement by such transferee that the Company may place a "stop transfer order"
with its transfer agent or registrar, and (iv) an agreement by the transferee to
indemnify the Company to the same extent as set forth in the next succeeding
paragraph.
(c) INDEMNITY. The Holder acknowledges that the Holder understands
the meaning and legal consequences of this Section 4, and the Holder hereby
agrees to indemnify and hold harmless the Company, its representatives and each
officer and director thereof from and against any and all loss, damage or
liability (including all attorneys' fees and costs incurred in enforcing this
indemnity provision) due to or arising out of (a) the inaccuracy of any
representation or the breach of any warranty of the Holder contained in, or any
other breach, (b) any transfer of the Warrant or any of the Warrant Shares in
violation of the Securities Act, the Securities Exchange Act of 1934, as
amended, or the rules and regulations promulgated under either of such acts, (c)
any transfer of the Warrant or any of the Warrant Shares not in accordance with
this Warrant or (d) any untrue statement or omission to state any material fact
in connection with the investment representations or with respect to the facts
and representations supplied by the Holder to counsel to the Company upon which
its opinion as to a proposed transfer shall have been based.
(d) TRANSFER. Except as restricted hereby, this Warrant and the
Warrant Shares issued may be transferred by the Holder in whole or in part at
any time or from time to time. Upon surrender of this Warrant to the Company or
at the office of its stock transfer agent, if any, with assignment documentation
duly executed and funds sufficient to pay any transfer tax, and upon compliance
with the foregoing provisions, the Company shall, without charge, execute and
deliver a new Warrant in the name of the assignee named in such instrument of
assignment, and this Warrant shall promptly be canceled. Any assignment,
transfer, pledge, hypothecation or other disposition of this Warrant attempted
contrary to the provisions of this Warrant, or any levy of execution, attachment
or other process attempted upon the Warrant, shall be null and void and without
effect.
(e) LEGEND AND STOP TRANSFER ORDERS. Unless the Warrant Shares
have been registered under the Securities Act, upon exercise of any part of the
Warrant and the issuance of any of the shares of Warrant Shares, the Company
shall instruct its transfer agent to enter stop transfer orders with respect to
such shares, and all certificates representing Warrant Shares shall bear on the
face thereof substantially the following legend, insofar as is consistent with
Delaware law:
"The shares of common stock represented by this certificate have
not been registered under the Securities Act of 1933, as amended,
and may not be sold, offered for sale, assigned, transferred or
otherwise disposed of unless registered pursuant to the provisions
of that Act or an opinion of counsel to the Company is obtained
stating that such disposition is in compliance with an available
exemption from such registration."
(f) LOCKUP AGREEMENTS WITH UNDERWRITERS. In the event of a public
offering of the Company's securities, the Holder agrees to enter into an
agreement with the Underwriter or Underwriter's Representative for such offering
restricting the sale, transfer or other disposition of this Warrant or the
Warrant Shares for a period of six months following the public offering.
5. "PIGGY-BACK" REGISTRATIONS. The Company represents that it will
register the shares underlying the Warrants upon demand six months after
issuance or at any time earlier if the Company files a Form S-3 under the
Securities Act. If at any time the Company shall determine to register any of
its securities under the Securities Act, other than on Form S-8 or Form S-4 or
their then equivalents, it shall send to each Holder of the Common Stock or
Warrant Shares (the "Registrable Shares"), including each Holder who has the
right to acquire Registrable Shares, written notice of such determination and,
if within 10 days after receipt of such notice, such Holder shall so request in
writing, the Company shall use its best efforts to include in such registration
statement all or any part of the Registrable Shares such Holder requests to be
registered therein, except that if, in connection with any offering involving an
underwriting of Common Stock to be issued by the Company, the managing
underwriter shall impose a limitation on the number of shares of such Common
Stock which may be included in any such registration statement because, in its
judgment, such limitation is necessary to effect an orderly public distribution,
and such limitation is imposed pro rata with respect to all securities whose
holders have a contractual, incidental ("piggy-back") right to include such
securities in the registration statement and as to which inclusion has been
requested pursuant to such right, then the Company shall be obligated to include
in such registration statement only such limited portion (which may be none) of
the Registrable Shares with respect to which such Holder has requested inclusion
hereunder.
6. LOSS, ETC. OF WARRANT. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed,
and upon surrender and cancellation of the Warrant, if mutilated, the Company
shall execute and deliver to the Holder a new Warrant of like date, tenor and
denomination.
7. WARRANT HOLDER NOT SHAREHOLDER. Except as otherwise provided herein,
this Warrant does not confer upon the Holder any right to vote or to consent to
or receive notice as a shareholder of the Company, as such, in respect of any
matters whatsoever, or any other rights or liabilities as a shareholder, prior
to the exercise hereof.
8. COMMUNICATION. No notice or other communication under this Warrant
shall be effective unless the same is in writing and is mailed by first-class
mail, postage prepaid, addressed to:
(a) the Company at Attn.: Finance Dept., 45 Hartwell Avenue,
Lexington, Massachusetts 02421, or such other address as the Company has
designated in writing to the Holder, or
(b) the Holder at ________________________________________________
or such other address as the Holder has designated in writing to the Company.
9. HEADINGS. The headings of this Warrant have been inserted as a
matter of convenience and shall not affect the construction hereof.
10. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the law of the State of Delaware without giving effect to the
principles of conflicts of law thereof.
IN WITNESS WHEREOF, PALOMAR MEDICAL TECHNOLOGIES, INC. has caused this
Warrant to be signed by its Chairman and CEO and its corporate seal to be
hereunto affixed this ____ day of _____________, 1999.
PALOMAR MEDICAL TECHNOLOGIES, INC. ACKNOWLEDGMENT AND ACCEPTANCE
By: /s/
------------------------------- -----------------------------
Louis P. Valente Print Name:
Chairman and CEO
[Corporate Seal]
<PAGE>
SUBSCRIPTION
The undersigned, _______________________________________________,
pursuant to the provisions of the foregoing Warrant, hereby agrees to subscribe
for the purchase of ___________ shares of the Common Stock of PALOMAR MEDICAL
TECHNOLOGIES, INC. covered by said Warrant, and makes payment therefor in full
at the price per share provided by said Warrant.
Dated: Signature:
-------------------- ---------------------------
Address:
---------------------------
---------------------------
---------------------------
Soc. Sec. # or Fed ID #:
---------------------------
ASSIGNMENT
FOR VALUE RECEIVED ____________________________________ hereby sells,
assigns and transfers unto ____________________________________ the foregoing
Warrant and all rights evidenced thereby, and does irrevocably constitute and
appoint ________________________________________, attorney, to transfer said
Warrant on the books of PALOMAR MEDICAL TECHNOLOGIES, INC.
Signature: Assignee
------------------
Dated:
------------------
Address: Address:
------------------ ------------------
------------------ ------------------
------------------ ------------------
SS/Fed ID #: SS/Fed ID #:
------------------ ------------------
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED ________________________________________ hereby assigns and
transfers unto ____________________________________________ the right to
purchase ___________ shares of the Common Stock of PALOMAR MEDICAL TECHNOLOGIES,
INC. by the foregoing Warrant, and a proportionate part of said Warrant and the
rights evidenced hereby, and does irrevocably constitute and appoint
__________________________________________, attorney, to transfer that part of
said Warrant on the books of PALOMAR MEDICAL TECHNOLOGIES, INC.
Signature: Assignee
------------------
Dated:
------------------
Address: Address:
------------------ ------------------
------------------ ------------------
------------------ ------------------
SS/Fed ID #: SS/Fed ID #:
------------------ ------------------
<PAGE>
EXHIBIT D
TERMS AND CONDITIONS OF PURCHASE
[need from coherent]
<PAGE>
EXHIBIT E
PRODUCT WARRANTY
PALOMAR MEDICAL PRODUCTS, INC.
LIMITED WARRANTY
Palomar Medical Products, Inc. ("Palomar"), warrants to the original
purchaser of any new equipment, except handpieces and consumables, that the
equipment will be free from defects in material and workmanship under
normal use and service for a period of one year from the date of
installation.
Consumables are warranted to have been shipped from Palomar in functional
condition but no additional warranty period shall apply.
The obligation of Palomar under this warranty is limited, in its exclusive
option, to repair or replacement of parts and materials which prove to be
defective.
The happening of one or more of the following events will serve to void the
warranty:
1. Failures resulting from negligence, alteration, modification,
installation by anyone other than factory authorized personnel, abuse or
misuse of the equipment by the purchaser or operation of the equipment
inconsistently with Palomar's published operating instructions.
2. Attempted or actual dismantling, disassembling, service or repair of
equipment not expressly authorized by Palomar.
3. Moving the system from one location to another without Palomar support
All merchandise should be inspected for obvious damage upon arrival. If
merchandise has been damaged in transit, the Palomar Service Department
must be notified within 72 hours.
All claims for nonconforming or defective product must be made in writing
within 10 days after delivery to the purchaser, and any claims not made
within that period shall be deemed waived and released.
In no event shall Palomar be liable for any incidental or consequential
damages due to any cause whatsoever. No suit or action shall be brought
against Palomar more than one year after the related cause of action has
accrued.
THE FOREGOING CONSTITUTES PALOMAR 'S SOLE LIABILITY AND THE PURCHASER'S
SOLE REMEDY WITH RESPECT TO PRODUCTS SOLD BY PALOMAR MEDICAL PRODUCTS, INC.
EXCEPT AS ABOVE PROVIDED, WE DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
<PAGE>
EXHIBIT F
CONFIDENTIALITY AGREEMENT
WHEREAS, Coherent, Inc. and Palomar Medical Technologies, Inc.
(individually, a "party;" collectively, the "parties") have entered into a Sales
Agency, Development and License Agreement (the "Agreement") of even date
herewith, pursuant to which the parties will furnish each other with
Confidential Information (as defined below);
NOW, THEREFORE, in consideration of the parties entering into such
Agreement, and in consideration of the promises exchanged herein, the parties
agree as follows:
The term "Confidential Information" includes all information, whether
written or oral (whatever the form or storage medium), or gathered by
inspection, or acquired, directly or indirectly, by a party or its
Representatives (as defined below) from the other party or its Representatives
in connection with the Agreement. All Confidential Information disclosed
hereunder to a party or its Representatives shall be in writing or other
tangible form (including, without limitation, any computer tapes and computer
stored information), marked with the word CONFIDENTIAL, SECRET or PROPRIETARY
and dated or, if orally disclosed, shall be confirmed in writing within thirty
(30) days of disclosure, marked with the word CONFIDENTIAL, SECRET or
PROPRIETARY and dated. The parties recognize and acknowledge the competitive
value of the Confidential Information and the damage that could result if the
Confidential Information were used or disclosed except as authorized by this
Confidentiality Agreement.
The term "Confidential Information" does not include information which
(i) was known to a party or was in its possession prior to the date of its
disclosure pursuant to the Agreement (except for information which was
previously disclosed to a party under an obligation of confidentiality to the
party or its Representatives and which shall continue to remain subject to those
confidentiality obligations); or (h) is or becomes generally available to the
public other than through an unauthorized disclosure by a party or its
Representatives in violation of this Confidentiality Agreement; (iii) becomes
available to a party from a source other than the other party or its
Representatives, provided that such source is not, to the party's knowledge,
after due inquiry by the party, prohibited from transmitting such confidential
information by a contractual, legal or fiduciary obligation to the other party
or its Representatives; or (iv) is developed by a party independent of the
receipt of Confidential Information. The burden of proving these exceptions to
the confidentiality and use provisions of this Confidentiality Agreement resides
with the party seeking to prove these exceptions.
Except as otherwise required by law, each party agrees to keep
confidential and not disclose, and cause its Representatives to keep
confidential and not disclose, to any person the Confidential Information it
receives from the other party or its Representatives without the other party's
prior written consent, except as provided below. Each party shall protect the
other party's Confidential Information, in strict confidence, including, without
limitation, using at least the degree of effort that it uses to protect its own
information of the highest sensitivity. Each party shall be entitled to disclose
the Confidential Information to those of its Representatives who need to know
such Confidential Information pursuant to the terms of the Agreement. Each party
shall be responsible for any breach of this Confidentiality Agreement caused by
it or any of its Representatives. In this Agreement, (a) "Representatives" means
parent companies, subsidiaries, affiliates and its and their respective
directors, officers, employees, agents or representatives, including, without
limitations, its and their respective attorneys, accountants, consultants and
financial advisors, and (b) "person" shall be broadly interpreted to include,
without limitation, any individual, corporation, company, group, partnership or
other entity.
<PAGE>
In the event that a party is legally requested (by oral questions,
interrogatories, request for information or documents, subpoena, civil
investigative demand or similar process) or otherwise required to disclose any
Confidential Information of the other party, the disclosing party will provide
the other party with prior written notice prior to disclosing such Confidential
Information, so that the other party may seek an appropriate protective order
and/or waive compliance with this Confidentiality Agreement. The disclosing
party will cooperate with the other party in order that the other party may
obtain a protective order. If, in the absence of a protective order or the
receipt of a waiver hereunder, the disclosing party is nonetheless legally
compelled to disclose such Confidential Information, it may, without liability
hereunder, furnish that portion of such Confidential Information that is legally
required and will exercise its best efforts to obtain assurance that
confidential treatment will be accorded such Confidential Information.
Each party's obligations with respect to Confidential Information
disclosed pursuant to the Agreement and this Confidentiality Agreement shall
expire three (3) years from the date of termination of the Agreement. Neither
the execution of this Confidentiality Agreement, nor the furnishing of any
materials hereunder, shall be construed as granting either expressly or by
implication, estoppel or otherwise, any license under any intellectual property
or patent now or hereafter owned by or controlled by the party furnishing the
materials.
Each party's Confidential Information shall remain the property of such
party, and such party may demand the return thereof at any time by notice to the
other party. At such time as a party receives such notice from the other party,
it, at the other party's option, must either (a) return to the other party all
drawings, data, memoranda and other written materials together with any tapes
and computer stored information, including any copies thereof, embodying,
containing or relating to the other party's Confidential Information, in either
it or its Representatives possession; or (b) destroy and cause each of its
Representatives to destroy each and every copy of any such materials or the
parts thereof embodying, containing or relating to the Confidential Information.
Any destruction pursuant to (b) in the preceding sentence shall be promptly
confirmed in writing to the requesting party. In regards to any drawings, data,
memoranda and other w7fitten material prepared by a party that relate to
Confidential Information, and which such party considers to be sensitive or
proprietary, the other party's obligations under this paragraph shall be deemed
satisfied if it complies with subsection (b) above.
If any term, provision covenant or restriction of this Confidentiality
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
<PAGE>
No amendments, changes or modifications to this Confidentiality
Agreement shall be valid unless the same are in writing and signed by a duly
authorized representative of each of the parties hereto.
Each party understands and agrees that no failure or delay by the other
party in exercising any right, power or privilege under this Confidentiality
Agreement shall operate as a waiver thereof nor shall any single or partial
exercise thereof preclude any other or future exercise of any right, power or
privilege hereunder. All counterpart copies will constitute but one agreement
with respect to the subject matter of this Confidentiality Agreement.
It is further understood and agreed that money damages alone would not
be sufficient remedy for any breach of this Confidentiality Agreement and that
the non-breaching party additionally shall be entitled to specific performance
and injunctive relief as remedies for any such breach. Such remedies shall not
be deemed to be the exclusive remedies for a breach of this Agreement but shall
be in addition to all other remedies available at law or equity.
This Confidentiality Agreement shall be binding on the parties and
their respective successors and assigns and shall be governed by, and construed
in accordance with, the laws of the Commonwealth of Massachusetts applicable to
contracts made and to be performed therein.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
---------------------------------
Name: Louis P. Valente
Title: CEO
COHERENT, INC.
By:
---------------------------------
Name:
Title:
Date: November 17, 1997
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of December 31, 1997 (this
"Agreement"), by and between PALOMAR MEDICAL TECHNOLOGIES, INC., a Delaware
corporation, with headquarters located at 45 Hartwell Avenue, Lexington,
Massachusetts 02173 (the "Company"), and the undersigned (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the
conditions of this Agreement, outstanding shares of Common Stock, $.01 par value
(the "Nexar Common Stock"), of Nexar Technologies, Inc., a Delaware corporation
("Nexar"), held by the Company, upon the terms and subject to the conditions of
this Agreement; and
WHEREAS, in connection herewith the Company and the Buyer have executed and
delivered, one to the other, an Exchange Agreement, dated as of the date hereof
(the "Exchange Agreement");
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
(a) PURCHASE OF SHARES. The Buyer hereby agrees to purchase from the
Company on the Closing Date the number of shares (the "Nexar Shares") of Nexar
Common Stock set forth on the signature page of this Agreement for the purchase
price set forth on the signature page of this Agreement.
(b) DELIVERIES TO ESCROW AGENT AND FORM OF PAYMENT. Promptly after the
execution and delivery of this Agreement by the parties hereto, but in no event
later than the Closing Date, the Buyer shall deposit the purchase price for the
Nexar Shares by delivering good funds in United States Dollars to the escrow
agent (the "Escrow Agent") identified in the Joint Escrow Instructions attached
hereto as ANNEX I (the "Joint Escrow Instructions") against delivery of the
Nexar Shares to the Buyer at the closing. Promptly after the execution and
delivery of this Agreement by the parties hereto, but in no event later than the
Closing Date, the Company shall deliver a certificate for the Nexar Shares
(which will include 39,264 shares of Common Stock which are not included in the
Nexar Shares and which are not being sold or transferred to the Buyer pursuant
to this Agreement) to the Escrow Agent against delivery of the purchase price
for the Nexar Shares to the Escrow Agent. By signing this Agreement, the Buyer
and the Company each agrees to all of the terms and conditions of, and becomes a
party to, the Joint Escrow Instructions, all of the provisions of which are
incorporated herein by this reference as if set forth herein in full.
(c) METHOD OF PAYMENT. Deposit of the purchase price for the Nexar Shares
by the Buyer with the Escrow Agent shall be made by wire transfer of funds to:
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
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<PAGE>
ABA#021000089
For Further Credit to A/C#37179446
for credit to the account of Brian W. Pusch
Attorney Escrow Account
Reference: Advantage/Palomar
(d) CLOSING DELIVERIES. At the closing, the Nexar Shares shall be held by
the Escrow Agent until the Escrow Release Date (as defined herein) and an amount
equal to the purchase price to be paid by the Buyer for the Nexar Shares shall
be held by the Escrow Agent until the Escrow Release Date.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
(a) PURCHASE FOR INVESTMENT. The Buyer is acquiring the rights under
Section 8 of this Agreement (the "Price Guarantee Rights") for its own account
for investment only and not with a view towards the public sale or distribution
thereof;
(b) ACCREDITED INVESTOR. The Buyer is an "accredited investor" as that term
is defined in Rule 501 of the General Rules and Regulations under the Securities
Act of 1933, as amended (the "1933 Act"), by reason of Rule 501(a)(3);
(c) REOFFERS AND RESALES. All subsequent offers and sales of the Price
Guarantee Rights by the Buyer shall be made pursuant to registration of the
Price Guarantee Rights under the 1933 Act or pursuant to an exemption from
registration;
(d) COMPANY RELIANCE. The Buyer understands that the Company is agreeing
with the Buyer concerning the Price Guarantee Rights in reliance on exemptions
from the registration requirements of the 1933 Act and exemptions from state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the Buyer
to receive the Price Guarantee Rights;
(e) INFORMATION PROVIDED. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the Price Guarantee Rights which have
been requested by the Buyer; the Buyer and its advisors, if any, have been
afforded the opportunity to ask questions of the Company and have received
satisfactory answers to any such inquiries. Without limiting the generality of
the foregoing, the Buyer has had the opportunity to obtain and to review the
Company's (1) Annual Report on Form 10-KSB for the fiscal year ended December
31, 1996, (2) Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, June 30 and September 30, 1997, (3) Current Report on Form 8-K dated
December 9, 1997, and (4) Amendment No. 1 to the Company's Registration
Statement on Form S-3 (Registration No. 333-42129) (the "Company Registration
Statement") filed with the SEC on December 18, 1997 (collectively, the "SEC
Reports"); the Buyer has had the opportunity to obtain and to review the
Prospectus, dated April 15, 1997 as supplemented to the date of this Agreement,
of Nexar relating to the Nexar Shares (the "Nexar Prospectus"); and the Buyer
understands that the Price Guarantee Rights and its investment in the Nexar
Shares involve a high degree of risk;
(f) ABSENCE OF APPROVALS. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Nexar Shares or the
Price Guarantee Rights;
2
<PAGE>
(g) AGREEMENT. This Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and binding
agreement of the Buyer enforceable in accordance with its terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors'
rights generally; and
(h) FORWARD-LOOKING INFORMATION. The Buyer acknowledges that, except for
the historical material contained herein or in the SEC Reports, the matters
disclosed herein and therein regarding the Company and its subsidiaries are
forward-looking statements under the federal securities laws that involve risks
and uncertainties, including, but not limited to, product demand and market
acceptance risks, the effect of economic conditions, the impact of competitive
products and pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, the results of
financing efforts, actual purchases under agreements, the effect of the
Company's accounting policies, and other risks detailed in the SEC Reports.
Actual results could differ materially from those estimated or anticipated in
these forward-looking statements. Without limiting the generality of the
foregoing, the Buyer acknowledges the Risk Factors set forth in the Company
Registration Statement.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with, the
Buyer that:
(a) ORGANIZATION AND AUTHORITY. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority (i) to own, lease
and operate its properties and to carry on its business as now being conducted,
and (ii) to execute, deliver and perform its obligations under this Agreement
and the other agreements to be executed and delivered by the Company in
connection herewith, and to consummate the transactions contemplated hereby. The
Company is duly qualified to do business as a foreign corporation and is in good
standing in all jurisdictions wherein such qualification is necessary and where
failure so to qualify could have a material adverse effect on the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company.
(b) CONCERNING THE NEXAR SHARES. The Nexar Shares have been duly authorized
by Nexar and are fully paid and non-assessable and will not subject the holder
thereof to personal liability by reason of being such holder. The Nexar Shares
are owned beneficially and of record by the Company, free and clear of all
liens, pledges, charges, equities, encumbrances, claims and rights of others of
any nature whatsoever and, upon transfer of the Nexar Shares to the Buyer
pursuant to this Agreement, the Buyer will acquire good and marketable title to
such shares, free and clear of all liens, pledges, charges, equities,
encumbrances, claims and rights of others of any nature whatsoever. There are no
preemptive rights or similar rights of any stockholder of the Company, as such,
to acquire any of the Nexar Shares or the Price Guarantee Rights.
(c) AGREEMENT. This Agreement has been duly and validly authorized,
executed and delivered by the Company and this Agreement is a valid and binding
agreement of the Company enforceable in accordance with its terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors'
rights generally.
3
<PAGE>
(d) NON-CONTRAVENTION. The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions contemplated by
this Agreement do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under, the
certificate of incorporation or by-laws of the Company, or any indenture,
mortgage, deed of trust or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound,
or any applicable law, rule or regulation or any applicable decree, judgment or
order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or any of its properties or assets.
(e) APPROVALS. No authorization, approval or consent of, or filing with,
any court, governmental body, regulatory agency, self-regulatory organization,
or stock exchange or market or the stockholders of the Company is required to be
obtained or made by the Company for (x) the execution, delivery and performance
by the Company of this Agreement, (y) the transfer and delivery of the Nexar
Shares to the Buyer pursuant to this Agreement and (z) the incurrence or
performance by the Company of its obligations with respect to the Price
Guarantee Rights, other than the requirements of any applicable blue sky laws.
(f) INFORMATION PROVIDED. The information provided by or on behalf of the
Company to the Buyer in connection with the transactions contemplated by this
Agreement (other than the Nexar Prospectus), including, without limitation, the
information referred to in Section 2(e) of this Agreement, does not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they are made, not misleading.
(g) ABSENCE OF CERTAIN CHANGES. Since December 31, 1996, there has been no
material adverse change and no material adverse development in the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company and its subsidiaries taken as a whole, except as
disclosed in the SEC Reports.
(h) ABSENCE OF CERTAIN PROCEEDINGS. Except as disclosed in the SEC Reports,
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board or body pending or, to the knowledge of the Company or any
of its subsidiaries, threatened against or affecting the Company or any of its
subsidiaries, wherein an unfavorable decision, ruling or finding would have a
material adverse effect on the properties, business, condition (financial or
other), results of operations or prospects of the Company and its subsidiaries
taken as a whole or the transactions contemplated by this Agreement or any of
the documents contemplated hereby or which would adversely affect the validity
or enforceability of, or the authority or ability of the Company to perform its
obligations under, this Agreement or any of such other documents.
(i) PROPERTIES. The Company and its subsidiaries have good title to all
property real and personal (tangible and intangible) and other assets owned by
them, free and clear of all security interests, charges, mortgages, liens or
other encumbrances, except such as are described in the SEC Reports or such as
do not materially interfere with the use of such property made, or proposed to
be made, by the Company or its subsidiaries. The leases, licenses or other
contracts or instruments under which the Company and its subsidiaries lease,
hold or are entitled to use any property, real or personal, are valid,
subsisting and enforceable with only such exceptions as do not materially
interfere with the use of such property made, or proposed to be made, by the
Company or its subsidiaries. Neither the Company nor any of its subsidiaries has
received notice of any material violation of any applicable law, ordinance,
regulation, order or requirement relating to its owned or leased properties.
4
<PAGE>
(j) LABOR RELATIONS. No material labor problem exists or, to the knowledge
of the Company, is imminent with respect to any of the employees of the Company
or any of its subsidiaries.
(k) SEC FILINGS. The Company has timely filed all required forms, reports
and other documents with the SEC since December 31, 1996. All of such forms,
reports and other documents complied, when filed, in all material respects, with
all applicable requirements of the 1933 Act and the Securities Exchange Act of
1934, as amended (the "1934 Act").
(l) CONCERNING THE NEXAR SHARES. The Nexar Shares may be sold by the
Company to the Buyer pursuant to the Registration Statement of which the Nexar
Prospectus forms a part and upon acquisition of the Nexar Shares from the
Company pursuant to this Agreement, the Buyer may resell such shares without
registration under the 1933 Act and without restriction on the volume or manner
of sale thereof so long as the Buyer is not an "affiliate" (as such term is
defined for purposes of the 1933 Act) of Nexar, subject to applicable
limitations on trading in securities while in possession of material non-public
information concerning Nexar.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
(a) TRANSFER RESTRICTIONS. The Buyer acknowledges that the Price Guarantee
Rights have not been and are not being registered under the provisions of the
1933 Act and may not be transferred unless (A) subsequently registered
thereunder for resale or (B) the Buyer shall have delivered to the Company an
opinion of counsel, reasonably satisfactory in form, scope and substance to the
Company, to the effect that the Price Guarantee Rights or portion thereof to be
sold or transferred may be sold or transferred without such registration; (2)
any sale of the Price Guarantee Rights made in reliance on Rule 144 promulgated
under the 1933 Act may be made only in accordance with the terms of said Rule
and further, if said Rule is not applicable, any resale of the Price Guarantee
Rights or any portion thereof under circumstances in which the seller, or the
person through whom the sale is made, may be deemed to be an underwriter, as
that term is used in the 1933 Act, may require compliance with some other
exemption under the 1933 Act or the rules and regulations of the SEC thereunder;
and (3) neither the Company nor any other person is under any obligation to
register the Price Guarantee Rights under the 1933 Act or to comply with the
terms and conditions of any exemption thereunder (other than pursuant to Section
4(d) hereof).
(b) REPORTING STATUS. So long as the Company shall have any obligation
under this Agreement with respect to the Price Guarantee Rights, the Company
shall file all reports required to be filed with the SEC pursuant to Section 13
or 15(d) of the 1934 Act, and the Company shall not, prior to the date which is
two years after the Closing Date, terminate its status as an issuer required to
file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would permit such termination.
(c) USE OF PROCEEDS. Neither the Company nor any subsidiary of the Company
owns or has any present intention of acquiring any "margin stock" as defined in
Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve
System ("margin stock"). The proceeds of sale of the Nexar Shares will be used
for general working capital purposes and in the operation of the Company's
business. None of such proceeds will be used, directly or indirectly (1) to make
any loan to or investment in any other person or (2) for the purpose, whether
immediate, incidental or ultimate, of purchasing or carrying any margin stock or
for the purpose of maintaining, reducing or retiring any indebtedness which was
originally incurred to purchase or carry any stock that is currently a margin
stock or for any other purpose which might constitute the transactions
contemplated by this Agreement a "purpose credit" within the meaning of such
Regulation G. Neither the Company nor any agent acting on
5
<PAGE>
its behalf has taken or will take any action which might cause this Agreement or
the transactions contemplated hereby to violate Regulation G, Regulation T or
any other regulation of the Board of Governors of the Federal Reserve System or
to violate the 1934 Act, in each case as in effect now or as the same may
hereafter be in effect.
(d) BLUE SKY LAWS. On or before the Closing Date, the Company shall take
such action as shall be necessary to qualify, or to obtain an exemption for, the
Price Guarantee Rights under such of the securities or "blue sky" laws of
jurisdictions in the United States as shall be applicable to the sale of the
Price Guarantee Rights to the Buyer pursuant to this Agreement. The Company
shall furnish copies of all filings, applications, orders and grants or
confirmations of exemptions relating to such securities or "blue sky" laws on or
before the Closing Date.
(e) CERTAIN EXPENSES. Whether or not the closing occurs, the Company shall
pay or reimburse the Buyer for all reasonable expenses (including, without
limitation, legal fees and expenses of counsel to the Buyer) incurred by the
Buyer in connection with this Agreement and the transactions contemplated
hereby. For purposes of this provision, invoices of the Buyer's legal counsel
in the form customarily given by such counsel to the Buyer shall be satisfactory
detail and evidence of the same.
(f) BEST EFFORTS. Each of the parties shall use its best efforts timely to
satisfy each of the conditions to the other party's obligations to complete the
closing of the transactions contemplated by this Agreement set forth in Section
6 or 7, as the case may be, of this Agreement on or before the Closing Date and
to satisfy each of the other party's conditions to escrow release in Section
5(b)(2) or 5(b)(3), as the case may be, on or before the applicable date.
5. CLOSING DATE; ESCROW RELEASE.
(a) CLOSING DATE. The date of the sale of the Nexar Shares (the "Closing
Date") shall be January 8, 1998. Such closing shall occur on the Closing Date at
the offices of the Escrow Agent. The Buyer and the Company agree that, upon
completion of the closing on the Closing Date, the Nexar Shares shall be deemed
to be sold by the Company and purchased by the Buyer and only delivery of the
Nexar Shares to the Buyer upon release from escrow by the Escrow Agent and
delivery of the purchase price to the Company upon release from escrow by the
Escrow Agent shall not have occurred.
(b) ESCROW RELEASE. (1) The Buyer hereby instructs the Escrow Agent to
submit to Nexar or its transfer agent the certificate for the Nexar Shares
promptly after the Closing Date to register the transfer thereof to the Buyer
and to dispatch the balance of the shares of Common Stock represented by such
certificate to the Company.
(2) The release by the Escrow Agent of the Nexar Shares to the Buyer
shall be subject to the following conditions precedent, any or all of which may
be waived by the Company:
(A) on or before January 15, 1998, the Buyer and the custodian
(the "Custodian") identified in the Custody Agreement, dated as of the
date hereof in the form attached hereto as ANNEX II (the "Custody
Agreement") shall have executed and delivered, one to the other, the
Custody Agreement and the Buyer shall have furnished a copy thereof to
the Company;
(B) on or before January 15, 1998, the closing under the Exchange
Agreement shall have occurred and the Buyer shall have executed and
delivered to the Company a general release and waiver in the form
specified in the Exchange Agreement;
6
<PAGE>
(C) on or before January 29, 1998, the Nexar Shares shall have
been transferred of record to, and registered in the name of, the
Buyer, without restrictive legend; and
(D) on or before January 29, 1998, a certificate for the 39,264
shares of Common Stock included in the certificate for the Nexar
Shares shall have been returned to the Company.
(3) The release by the Escrow Agent to the Company of the purchase
price for the Nexar Shares shall be subject to satisfaction of the following
conditions precedent any or all of which may be waived by the Buyer:
(A) the representations and warranties of the Company in this
Agreement made as of the date of this Agreement and as of the Closing
Date shall have been true and correct in all material respects as of
the date of this Agreement and as of the Closing Date;
(B) the Company shall have performed on or before the Escrow
Release Date all covenants and agreements of the Company required to
be performed on or before the Escrow Release Date.
(C) on or before January 15, 1998, a notification by the Buyer to
the Attorney General of the Commonwealth of Massachusetts pursuant to
G.L. c. 271, Sec. 49(d) of the laws of the Commonwealth of
Massachusetts making the provisions of G.L. c. 271, Sec. 49(a)
inapplicable to the transactions contemplated by this Agreement shall
have been given to and accepted by the Attorney General of the
Commonwealth of Massachusetts;
(D) on or before January 15, 1998, the Buyer shall have received
a certificate, dated the Closing Date, of the Secretary of the Company
certifying (1) the certificate of incorporation and by-laws of the
Company as in effect on the Closing Date, (2) all resolutions of the
Board of Directors (and committees thereof) of the Company relating to
this Agreement and the transactions contemplated hereby and (3) such
other matters as reasonably requested by the Buyer;
(E) on or before January 29, 1998, the Nexar Shares shall have
been transferred of record to, and registered in the name of, the
Buyer, without restrictive legend; and
(F) on or before January 15, 1998, the Buyer shall have received
an opinion of counsel for the Company, dated the Closing Date, in
form, scope and substance reasonably satisfactory to the Buyer, to the
effect set forth in ANNEX III attached hereto.
(G) on or before January 15, 1998, the Buyer shall have received
a certificate, dated the Closing Date, of the Chief Executive Officer
or the Chief Financial Officer of the Company confirming the matters
set forth in Section 7(b).
(4) The date on which all of the conditions precedent in Sections
5(b)(2) and 5(b)(3) are satisfied or waived is referred to herein as the "Escrow
Release Date."
(5) On the Escrow Release Date, the Company and the Buyer shall
instruct the Escrow Agent that the Escrow Release Date has occurred.
7
<PAGE>
(6) If the Escrow Release Date does not occur on or before January 29,
1998, then the Escrow Agent shall release to the Company all shares of Nexar
Common Stock in the possession of the Escrow Agent and shall release an amount
equal to the purchase price for the Nexar Shares to the Buyer. If the Nexar
Shares have been issued in the name of the Buyer, the Buyer shall cooperate in
causing such shares to be re-issued in the Company's name.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the Nexar
Shares to the Buyer pursuant to this Agreement on the Closing Date is
conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Company in its
sole discretion):
(a) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
(b) Delivery by the Buyer to the Escrow Agent of good funds as payment in
full of an amount equal to the purchase price for the Nexar Shares in accordance
with Section 1(c) hereof; and
(c) The accuracy on the Closing Date of the representations and warranties
of the Buyer contained in this Agreement as if made on the Closing Date and the
performance by the Buyer on or before the Closing Date of all covenants and
agreements of the Buyer required to be performed on or before the Closing Date.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligations to purchase and pay
for the Nexar Shares pursuant to this Agreement on the Closing Date are
conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Buyer in its
sole discretion):
(a) Delivery by the Company to the Escrow Agent of the Nexar Shares in
accordance with this Agreement; and
(b) The accuracy on the Closing Date of the representations and warranties
of the Company contained in this Agreement as if made on the Closing Date and
the performance by the Company on or before the Closing Date of all covenants
and agreements of the Company required by this Agreement and all other documents
and instruments relating hereto to be performed on or before the Closing Date.
8. PRICE GUARANTEE RIGHTS.
(a) CUSTODY DEPOSIT. If the Nexar Shares are released by the Escrow Agent
to the Buyer on the Escrow Release Date in accordance with the Joint Escrow
Instructions, immediately following such release on the Escrow Release Date, the
Buyer shall deposit 400,000 of the Nexar Shares with the Custodian pursuant to
the Custody Agreement. Such deposit shall be made solely for purposes of
administering the provisions of this Section 8 with respect to the Price
Guarantee Rights and shall not in any way limit or affect the ownership of the
Nexar Shares by the Buyer and shall not in any manner create any lien, pledge,
charge, equity, encumbrance, claim or right of the Company of any nature
whatsoever in or with respect to the Nexar Shares. For purposes of this Section
8, the Nexar Shares shall be deemed to include any
8
<PAGE>
additional shares of Nexar Common Stock distributed to or received by the
Custodian as a stock dividend, stock split or other distribution on the Nexar
Shares held by the Custodian.
(b) RELEASE FROM CUSTODY. The Buyer shall have the right from time to time
to direct the Custodian to release from custody the Nexar Shares by notice to
the Custodian in the form attached as Exhibit A to the Custody Agreement (each,
a "Release Notice"); PROVIDED, HOWEVER, that the aggregate Release Price (as
defined herein) of all Nexar Shares released from custody by the Buyer during
any period of 30 consecutive days may not exceed $666,667.00; and PROVIDED
FURTHER, HOWEVER, that the Buyer shall be required to direct the Custodian to
release all of the Nexar Shares to the Buyer on or before the date which is two
years after the Closing Date. The Buyer shall furnish to the Company a copy of
each Release Notice given by the Buyer to the Custodian within one Business Day
after the Buyer gives such Release Notice to the Custodian. A Release Notice
given by the Buyer to the Custodian shall be deemed for all purposes to be in
proper form unless the Company notifies the Buyer in writing within three
Business Days after such Release Notice has been given (which notice shall
specify all defects in such Release Notice), and any Release Notice containing
any such defect shall nonetheless be effective on the date given if the Buyer
promptly undertakes to correct all such defects. No such claim of error shall
limit or delay the buyer's right to release of the Nexar Shares to which such
Release Notice relates. Any Nexar Shares as to which the Buyer has not given a
Release Notice on or before the date which is two years after the Closing Date
shall be automatically released on the date which is two years after the Closing
Date (the "Automatic Release") and the Redemption Price for such shares shall be
calculated as of such date.
(C) RELEASE PRICE. For purposes of computing the amount of the Price
Guarantee Rights, a Release Price shall be determined for each Nexar Share
released pursuant to a Release Notice or the Automatic Release. As used herein,
the following terms shall have the following meanings:
"Market Price" of any security on any date means the closing bid price
of such security on such date on the Nasdaq National Market or such other
securities exchange or other market on which such security is listed for trading
which constitutes the principal securities market for such security, as reported
by Bloomberg, L.P. (subject to equitable adjustments from time to time on terms
reasonably acceptable to the Buyer and the Company for (1) stock splits, (2)
stock dividends, (3) combinations, (4) capital reorganizations, (5) issuance to
all holders of Nexar Common Stock rights or warrants to purchase shares of Nexar
Common Stock, (6) the distribution by Nexar to all holders of Nexar Common Stock
of evidences of indebtedness of Nexar or cash (other than regular quarterly cash
dividends), (7) repurchases of shares of Nexar Common Stock in one or more
transactions which, individually or in the aggregate, result in the purchase of
more than ten percent of the Nexar Common Stock outstanding and (8) similar
events relating to the Nexar Common Stock, in each such case which occur, or
with respect to which "ex-" trading of the Nexar Common Stock begins during a
period of five consecutive Trading Days used for determining the Release Price
of any Nexar Shares).
"Release Date" means any date on which a Release Notice is given by
the Buyer pursuant to the Custody Agreement and the date of the Automatic
Release, if any.
"Release Percentage" means, with respect to any Release Date, the
applicable percentage set forth opposite such date below:
DATE RELEASE PERCENTAGE
Closing Date through 30th day thereafter 100%
31st through 60th day after Closing Date 95%
9
<PAGE>
61st through 90th day after Closing Date 90%
91st day after Closing Date and thereafter 85%
"Release Price" means, for any Release Date, the product of (x) the
arithmetic average of the Market Price of the Nexar Common Stock for the five
consecutive Trading Days ending on the Trading Day prior to such Release Date
TIMES (y) the Release Percentage applicable to such Release Date.
"Trading Day" means a day on whichever of (x) the national securities
exchange or (y) the Nasdaq National Market which at the time constitutes the
principal securities market for the Common Stock is open for general trading.
(d) PAYMENT OF PRICE GUARANTEE RIGHTS. If after release of all of the Nexar
Shares by the Custodian under the Custody Agreement the ("Final Release Date"),
the aggregate Release Price for all of the Nexar Shares shall be less than
$2,000,000.00 then the Company shall pay to the Buyer as and when required by
this Agreement an amount equal to the amount by which $2,000,000.00 exceeds the
aggregate Release Price for all of the Nexar Shares. The amount, if any, payable
by the Company to the Buyer pursuant to this Section 8(d) shall be paid by wire
transfer in immediately available funds on the date which is two years after the
Closing Date, to such account as shall be specified for such purpose by notice
from the Buyer to the Company. Any amount due under this Section 8(d) which is
not paid when due shall accrue interest at the rate of 14% per annum until paid.
9. MISCELLANEOUS.
(a) This Agreement shall be governed by and interpreted in accordance with
the laws of the Commonwealth of Massachusetts.
(b) This Agreement may be executed in counterparts and by the parties
hereto on separate counterparts, all of which together shall constitute one and
the same instrument. A facsimile transmission of this Agreement bearing a
signature on behalf of a party hereto shall be legal and binding on such party.
Although this Agreement is dated as of the date first set forth above, the
actual date of execution and delivery of this Agreement by each party is the
date set forth below such party's signature on the signature page hereof. Any
reference in this Agreement or in any of the documents executed and delivered by
the parties hereto in connection herewith to the date of execution and delivery
of this Agreement shall be deemed a reference to the later of such dates set
forth below each party's respective signature on the signature page hereof.
(c) The headings, captions and footers of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
(e) This Agreement may be amended only by an instrument in writing signed
by the party to be charged with enforcement.
(f) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
or any course of dealings
10
<PAGE>
between the parties, shall not operate as a waiver thereof or an amendment
hereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or exercise of any other right or
power.
(g) Any notices required or permitted to be given under the terms of this
Agreement shall be sent by mail or delivered personally (which shall include
telephone line facsimile transmission with answer back confirmation) or by
courier and shall be effective five days after being placed in the mail, if
mailed, or upon receipt, if delivered personally or by courier, in the case of
the Company addressed to the Company at its address shown in the introductory
paragraph of this Agreement, Attention: Director of Finance (telephone line
facsimile transmission number (781) 676-7330) or, in the case of the Buyer, at
its address shown on the signature page of this Agreement, with a copy to
Genesee International, Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue,
Washington 98004-4332 (telephone line facsimile transmission number (425)
462-4645) or such other address as a party shall have provided by notice to the
other party in accordance with this provision.
(h) Prior to the Closing Date, the Buyer shall have the right to assign its
rights and obligations under this Agreement with respect to the purchase of all
or any portion of the Nexar Shares, provided any such assignee, by written
instrument duly executed by such assignee, assumes all obligations of the Buyer
hereunder with respect to the purchase of the portion of the Nexar Shares so
assigned and makes the same representations and warranties with respect thereto
as the Buyer makes in this Agreement, whereupon the Buyer shall be relieved of
any further obligations, responsibilities and liabilities with respect to the
purchase of all or the portion of the Nexar Shares the obligation for the
purchase of which has been so assigned. Any transfer of Nexar Shares by the
Buyer of rights under this Agreement after the Closing Date shall be made in
accordance with Section 4(a).
(i) The respective representations, warranties, covenants and agreements of
the Buyer and the Company contained in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall survive the delivery of
payment for the Preferred Shares and shall remain in full force and effect
regardless of any investigation made by or on behalf of them or any person
controlling or advising any of them.
(j) This Agreement and its Annexes set forth the entire agreement between
the parties hereto with respect to the subject matter hereof and supersede all
prior agreements and understandings, whether written or oral, with respect
thereto.
(k) The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto by their respective officers thereunto duly authorized as of the date
first set forth above.
NUMBER OF NEXAR SHARES: 500,000
PURCHASE PRICE: $2,000,000.00
ADVANTAGE FUND LIMITED
By: /s/ A.P. de Groot
---------------------
A.P. de Groot
President
Address:
c/o CITCO
Kaya Flamboyan 9
Curatao, Netherlands Antilles
Facsimile No.: 011-599-97322008
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Joseph P. Caruso
-------------------------------
Title: Chief Financial Officer
<PAGE>
ANNEX I
TO
STOCK PURCHASE
AGREEMENT
JOINT ESCROW INSTRUCTIONS
Dated as of the date of the Stock Purchase
Agreement to Which These Joint Escrow
Instructions Are Attached
Law Offices of Brian W Pusch,
as Escrow Agent
Penthouse Suite
29 West 57th Street
New York, New York 10019
Attention: Brian W. Pusch, Esq.
Dear Sir or Madam:
As Escrow Agent for both Palomar Medial Technologies, Inc., a Delaware
corporation (the "Company"), and the purchaser (the "Buyer") of shares (the
"Nexar Shares") of Common Stock, $.01 par value per shares, of Nexar
Technologies, Inc., a Delaware corporation, which are owned by the Company, who
is named in the Stock Purchase Agreement between the Company and the Buyer to
which a copy of these Joint Escrow is attached as ANNEX I (the "Agreement"), the
Escrow Agent pursuant to the terms of the Agreement (the "Escrow Funds") and any
interest credited by the depository bank for the Escrow Funds (the "Escrow
Interest"), in accordance with the following instructions:
1. After receipt of written notice from the Company and the Buyer to
the Escrow Agent that their respective conditions precedent to the release from
this escrow have been satisfied or waived by the Company and the Buyer, the
Escrow Agent shall, after deduction of the amount referred to in the next
succeeding sentences, release the Escrow Funds to or upon the order of the
Company and shall release the Nexar Shares and the Escrow Interest to the Buyer.
After receipt of such notices (x) a portion of the Escrow Funds shall be
released to or upon the order of the Buyer in payment of the expenses of the
Buyer payable by the Company in accordance with Section 4(e) of the Agreement in
such amount as may be specified in writing by or on behalf of the Buyer to the
Escrow Agent prior to release of the Escrow Funds and (y) $10,000 of the Escrow
Funds shall be released to or upon the order of the Custodian in payment of the
Custodian's annual fees under the Custody Agreement for two years from the
Closing Date. If Escrow Funds are released to or upon the order of the Company,
the amount thereof shall be reduced by all wire transfer fees in respect of
release of the Escrow Funds. If the Company and the Buyer do not notify the
Escrow Agent on or before January 29. 1998 that their respective conditions
precedent to the release from this escrow have been satisfied or waived, then
the Escrow Agent shall release the Escrow Funds and the Escrow Interest to the
Buyer and shall release the Nexar Shares to the Company. Prior to the return of
the Escrow Funds to the Buyer, the Buyer shall furnish such tax reporting or
other information as shall be appropriate for the Escrow Agent to comply with
applicable United States laws. The Escrow Agent shall deposit all funds received
hereunder in the Escrow Agent's attorney escrow account at Citibank, N.A. Except
as otherwise specifically provided in this paragraph 1, the Escrow Agent shall
not be liable for interest on the Escrow Funds for any reason, including by
reason of any delay or mistake in delivery of the Escrow Funds or any other
funds held by the Escrow Agent hereunder.
<PAGE>
2. The Escrow Agent's duties hereunder may be altered, amended,
modified or revoked only by a writing signed by the Company, the Buyer and the
Escrow Agent.
3. The Escrow Agent shall be obligated only for the performance of such
duties as are specifically set forth herein and may rely and shall be protected
in relying or refraining from acting on any instrument reasonably believed by
the Escrow Agent to be genuine and to have been signed or presented by the
proper party or parties. The Escrow Agent shall not be personally liable for any
act the Escrow Agent may do or omit to do hereunder as Escrow Agent while acting
in good faith, and any act done or omitted by the Escrow Agent pursuant to the
advice of the Escrow Agent's attorneys-at-law shall be conclusive evidence of
such good faith. In no event shall the Escrow Agent incur any liability or be
held responsible, if the Nexar Shares, once released from escrow hereunder,
shall become lost, stolen, destroyed, mutilated or misplaced while in transit to
any person, provided the Escrow Agent shall have dispatched the same by a means
customarily used by the Escrow Agent.
4. The Escrow Agent is hereby expressly authorized to disregard any and
all warnings given by any of the parties hereto or by any other person, firm or
corporation, excepting only order or process of courts of law and is hereby
expressly authorized to comply with and obey orders, judgments or decree, the
Escrow Agent shall not be liable to any of the parties hereto or to any other
person, firm or corporation by reason of such decree being subsequently
reversed, modified, annulled, set aside, vacated or found to have been entered
without jurisdiction.
5. The Escrow Agent shall not be liable in any respect on account of
the identities, authorities or rights of the parties executing or delivering or
purporting to execute or deliver the Agreement or any documents or papers
deposited or called for hereunder.
6. The Escrow Agent shall not be liable for the outlawing of any rights
under the Statute of Limitations with respect to these Joint Escrow Instructions
or any documents or Escrow Funds deposited with or held by the Escrow Agent.
7. The Escrow Agent shall be entitled to employ such legal counsel and
other experts as the Escrow Agent may deem necessary properly to advise the
Escrow Agent in connection with the Escrow Agent's obligations hereunder, may
rely upon the advice of such counsel, and may pay such counsel reasonable
compensation therefor. The Escrow Agent has acted as legal counsel for the Buyer
in connection with the transactions contemplated by the Agreement and may
continue to act as legal counsel for the Buyer notwithstanding its duties as
Escrow Agent hereunder.
8. The Escrow Agent's responsibilities as Escrow Agent hereunder shall
terminate if the Escrow Agent shall resign by written notice to the Company and
the Buyer. In the event of any such resignation, the Buyer shall appoint a
successor Escrow Agent reasonably acceptable to the Company.
9. If the Escrow Agent reasonably requires other or further instruments
in connection with theses Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
10. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the documents
or Escrow Funds held by the Escrow Agent hereunder, the Escrow Agent is
authorized and directed, in its sole discretion(a) to retain in the Escrow
Agent's possession without liability to anyone all or any part of said documents
or Escrow Funds until such disputes shall have been settled either by mutual
written agreement of the parties concerned or by a final order, decree or
judgment of a court of competent jurisdiction after the time for appeal has
expired and no appeal has been perfected, but the Escrow Agent shall be under no
duty whatsoever to institute or defend any such proceedings or (b) at any time,
to deposit the documents or Escrow Funds with any court of competent
jurisdiction in the State of New York, in which event the Escrow Agent shall
give notice thereof to the Buyer and the Company and shall thereupon be relieved
and discharged from all further obligations hereunder.
<PAGE>
11. The Company and the Buyer jointly and severally agree to indemnify
and hold harmless the Escrow Agent from any and all claims, liabilities, costs
or expenses in any way arising from or relating to the duties or performance of
the Escrow Agent hereunder other than any such claim, liability, cost or expense
to the extent the same shall have been determined by final unappealable judgment
of a court of competent jurisdiction to have resulted from the gross negligence
or willful misconduct of the Escrow Agent.
12. Any notice required or permitted hereunder shall be given in
writing (unless otherwise specified herein) and shall be deemed effectively
given upon personal delivery or transmission by telephone line facsimile
transmission or three business days after deposit in the United States Postal
Service, by registered or certified mail with postage and fees prepaid,
addressed to each of the other parties thereunto entitled at the following
addresses, or at such other addresses as a party may designate by ten days
advance written notice to each of the other parties hereto.
COMPANY: At the address set forth in the introductory
paragraph of the Agreement
Attention: Director of Finance
Facsimile No. (781) 676-7330
with a copy to:
At the address set forth in the introductory
paragraph of the Agreement
Attention: General Counsel
Facsimile No. (617) 676-7330
BUYER: At the address set forth in the Stock Purchase
and Exchange Agreement to which these Joint
Escrow Instructions are attached
Facsimile No. (425) 462-4645
ESCROW AGENT: Law Offices of Brian W Pusch
Penthouse Suite
29 West 57th Street
New York, New York 10019
Facsimile No. (212) 980-7055
13. By signing these Joint Escrow Instructions, the Escrow Agent
becomes a party hereto only for the purpose of these Joint Escrow Instructions;
the Escrow Agent does not become a party to the Agreement. The Company ;and the
Buyer have become parties hereto by their execution and delivery of the
Agreement, as provided therein.
14. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns and
shall be governed by the laws of the State of New York.
<PAGE>
15. Capitalized terms used herein and not otherwise defined herein
shall have their respective meanings provided in the Agreement.
ACCEPTED BY ESCROW AGENT:
/s/
- ------------------------------
Brian W. Pusch, as Escrow Agent
<PAGE>
ANNEX II
TO
STOCK PURCHASE
AGREEMENT
CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT, dated as of December 31, 1997 (this
"Agreement"), by and between ADVANTAGE FUND LIMITED, a British Virgin Islands
corporation (the "Company"), and BRIAN W. PUSCH, not in his individual capacity
but as custodian (the "Custodian")
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company and Palomar Medical Technologies, Inc., a Delaware
corporation ("Palomar"), have executed and delivered, one to the other, a Stock
Purchase Agreement, dated as of December 31, 1997 (the "Stock Purchase
Agreement"), pursuant to which, among other things, Palomar has agreed to sell
to the Company, and the Company has agreed to purchase from Palomar, upon the
terms and subject to the conditions of the Stock Purchase Agreement, 500,000
outstanding shares of Common Stock, $.01 par value (the "Nexar Common Stock"),
of Nexar Technologies, Inc., a Delaware corporation ("Nexar"); and
WHEREAS, pursuant to the Stock Purchase Agreement, the Company has
agreed with Palomar, among other things, to execute and deliver this Agreement
and, immediately following the release from escrow in connection with the
closing of the purchase of the Nexar Shares pursuant to the Stock Purchase
Agreement, to deposit 400,000 shares of Nexar Common Stock with the Custodian
pursuant to this Agreement for the purposes set forth in Section 8 of the Stock
Purchase Agreement;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. DEPOSIT OF CERTIFICATES. Immediately following the closing of the
purchase of the Nexar Shares by the Company pursuant to the Stock Purchase
Agreement, the Company shall deposit with the Custodian one or more certificates
for an aggregate of 400,000 shares of Nexar Common Stock. Such shares, together
with any additional shares of Nexar Common Stock distributed to or received by
the Custodian as a stock dividend, stock split or other distribution on the
shares of Nexar Common Stock held by the Custodian are referred to herein as the
"Nexar Shares". The certificates for the Nexar Shares shall be registered in the
name of the Custodian or shall be accompanied by duly executed stock powers in
blank with any necessary signature guarantees. The Custodian shall be entitled,
in its discretion, to retain possession of certificates for the Nexar Shares or
to deposit the Nexar Shares in a segregated brokerage account maintained in the
name of the Custodian with PaineWebber Incorporated or another brokerage firm
which is a member of the National Association of Securities Dealers, Inc.
2. RELEASE OF NEXAR SHARES. At any time or from time to time after the
deposit of the Nexar Shares by the Company with the Custodian, the Company may
give a Release Notice, in the form attached hereto as EXHIBIT A (each, a
"Release Notice"), to the Custodian in order to release Nexar Shares from the
custody of the Custodian. A Release Notice given by the Company shall be deemed
for all purposes to be in proper form unless the Custodian or Palomar notifies
the Company in writing within five business days after such Release Notice has
been given (which notice shall specify all defects in such Release Notice), and
any Release Notice containing any such defect shall nonetheless be effective on
the date given if the Company promptly undertakes to correct all such defects.
No such claim of error shall limit or delay performance of the Custodian's
obligation to release all Nexar Shares not in dispute. As promptly as
practicable following the date on which a Release Notice is given, the Custodian
shall release to the Company the number of Nexar Shares specified in such
Release Notice until such time as the Custodian no longer holds any Nexar
Shares. Any Nexar Shares for which the Company has not given a Release Notice on
or before the date which is two years after the Closing Date (as defined in the
Stock Purchase Agreement) shall be automatically released by the Custodian on
the date which is two years after the Closing Date.
<PAGE>
3. DUTIES OF CUSTODIAN. The Custodian shall be obligated only for the
performance of such duties as are specifically set forth herein and may rely and
shall be protected in relying or refraining from acting on any instrument
reasonably believed by the Custodian to be genuine and to have been signed or
presented by the proper party or parties. In no event shall the Custodian have
any responsibility or liability for the accuracy of the information set forth in
any Release Notice or for the determination of any calculation to be made for
purposes of Section 8 of the Stock Purchase Agreement or otherwise. The
Custodian shall not be personally liable for any act the Custodian may do or
omit to do hereunder as Custodian while acting in good faith, and any act done
or omitted by the Custodian pursuant to the advice of the Custodian's
attorneys-at-law shall be conclusive evidence of such good faith.
4. DISREGARD OF WARNINGS; JUDICIAL ORDERS. The Custodian is hereby
expressly authorized to disregard any and all warnings given by any other
person, firm or corporation other than the Company, excepting only orders or
process of courts of law and is hereby expressly authorized to comply with and
obey orders, judgments or decrees of any court. In case the Custodian obeys or
complies with any such order, judgment or decree, the Custodian shall not be
liable to any of the parties hereto or to any other person, firm or corporation
by reason of such decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
5. NO LIABILITY FOR GENUINENESS. The Custodian shall not be liable in
any respect on account of the identity, authorities or rights of the person
executing or delivering or purporting to execute or deliver the Stock Purchase
Agreement or any notice, document or instrument deposited or called for
hereunder.
6. STATUTE OF LIMITATIONS. The Custodian shall not be liable for the
outlawing of any rights under the Statute of Limitations with respect to this
Agreement or any document or instrument deposited with or held by the Custodian
pursuant to this Agreement.
7. RETENTION AND ADVICE OF LEGAL COUNSEL. The Custodian shall be
entitled to employ such legal counsel and other experts as the Custodian may
deem necessary properly to advise the Custodian in connection with the
Custodian's obligations hereunder, may rely upon the advice of such counsel, and
may pay such counsel reasonable compensation therefor, subject to reimbursement
thereof as and to the extent provided in Section 11. The Custodian has acted as
legal counsel for the Company and the Custodian may continue to act as legal
counsel for the Company notwithstanding its duties as Custodian hereunder.
8 RESIGNATION. The Custodian's responsibilities as Custodian hereunder
shall terminate if the Custodian shall resign by 20 days' notice to the Company
and Palomar. In the event of any such resignation, the Company shall appoint a
successor Custodian who is reasonably acceptable to Palomar. The Custodian shall
transfer any Nexar Shares to any successor Custodian promptly after receipt by
the Custodian of notice from the Company of the appointment of such successor.
<PAGE>
9. FURTHER ASSURANCES. If the Custodian reasonably requires other or
further instruments in connection with this Agreement or obligations in respect
hereto, the Company shall furnish such instruments.
10. DISPUTES. It is understood and agreed that should any dispute arise
with respect to the release and/or right of possession of the Nexar Shares held
by the Custodian hereunder, the Custodian is authorized and directed, in its
sole discretion (a) to retain in the Custodian's possession without liability to
anyone all or any part of the Nexar Shares until such disputes shall have been
settled either by mutual written agreement of the parties concerned or by a
final order, decree or judgment of a court of competent jurisdiction after the
time for appeal has expired and no appeal has been perfected, but the Custodian
shall be under no duty whatsoever to institute or defend any such proceedings or
(b) at any time, to deposit any or all of the Nexar Shares with any court of
competent jurisdiction in the State of New York, in which event the Custodian
shall give notice thereof to the Company and Palomar and shall thereupon be
relieved and discharged from all further obligations hereunder.
11. FEES AND EXPENSES; INDEMNITY. (a) The Company agrees to pay to the
Custodian an annual fee in the amount of $5,000 for the Custodian's services
under this Agreement, which fee shall be payable in advance for two years. In
the event the Custodian resigns, the Custodian shall refund a pro rata portion
of such fee to the Company, less any amounts due to the Custodian pursuant to
Section 11(b)
(b) In addition to the amounts payable pursuant to Section 11(a) the
Company agrees to pay or reimburse the Custodian for, and to indemnify and hold
harmless the Custodian from, any and all claims, liabilities, costs or expenses
in any way arising from or relating to the duties or performance of the
Custodian hereunder other than any such claim, liability, cost or expense to the
extent the same shall have been determined by final, unappealable judgment of a
court of competent jurisdiction to have resulted from the gross negligence or
willful misconduct of the Custodian.
12. NOTICES. Any notice required or permitted hereunder shall be given
in writing (unless otherwise specified herein) and shall be deemed effectively
given upon personal delivery (which shall include telephone line facsimile
transmission or courier service), addressed to each person thereunto entitled at
the following addresses, or at such other address as such person may designate
by ten days advance written notice to each of the other parties hereto.
the Company: c/o CITCO
Kaya Flamboyan 9
Curatao, Netherlands Antilles
Facsimile No.: 011-599-932-2008
with a copy to:
Genesee International, Inc.
10500 N.E. 8th Street
Suite 1920
Bellevue, Washington 98004-4332
Facsimile No.: (425) 462-4645
Custodian: Law Offices of Brian W Pusch
Penthouse Suite
29 West 57th Street
New York, New York 10019
Facsimile No.: 212-980-7055
<PAGE>
Palomar: 45 Hartwell Avenue
Lexington, Massachusetts 02175
Attention: Director of Finance
Facsimile No.: 781-676-7330
with a copy to:
Attention: General Counsel
Facsimile No.: 781-676-7330
13. AMENDMENT, MODIFICATION, ETC. No amendment, modification, waiver,
discharge or termination of any provision of this Agreement nor consent to any
departure by the Custodian 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, or a waiver of any right under,
this Agreement. Notwithstanding any other provision of this Agreement, no
amendment, modification, waiver, discharge or termination of any provision of
this Agreement which materially increases the rights of the Company shall be
effective unless also signed by Palomar, which is hereby expressly made a third
party beneficiary of this Agreement for purposes of this provision of this
Agreement.
14. GOVERNING LAW. This instrument shall be binding upon and inure to
the benefit of the parties hereto, and their respective successors and permitted
assigns and shall be governed by the laws of the State of New York, without
giving effect to principles of conflicts of law.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and delivered by one of its officers thereunto duly authorized and the
Custodian has duly executed this Agreement, in each case as of the date first
set forth above.
ADVANTAGE FUND LIMITED
By:
--------------------------------------
A.P. deGroot
President
--------------------------------------
Brian W. Pusch, as
Custodian
<PAGE>
EXHIBIT A
RELEASE NOTICE
TO: Law Offices of Brian W Pusch,
as Custodian
29 West 57th Street
Penthouse Suite
New York, New York 10019
Facsimile No.: (212) 980-7055
with a copy to:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, Massachusetts 02173
Attention: Director of Finance
Facsimile No.: (781) 676-7330
(1) Pursuant to the terms of the Custody Agreement, dated as of
December 31, 1997 (the "Custody Agreement"), by and between Advantage Fund
Limited, a British Virgin Islands corporation, and Brian W. Pusch, as Custodian
(the "Custodian"), the undersigned hereby elects to release ____________________
Nexar Shares. Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Custody Agreement or, if not
defined in the Custody Agreement, provided in the Stock Purchase Agreement.
(2) Please release ______________ Nexar Shares to the person and
address specified immediately below or, if additional space is necessary, on an
attachment hereto:
Delivery Instructions
for Common Stock:
------------------------------
------------------------------
------------------------------
------------------------------
(3) Release Date: ------------------------------
Applicable Market Prices: $
--------------------------
$
--------------------------
$
--------------------------
$
--------------------------
$
--------------------------
Release Price: $
--------------------------
NAME:
Date By:
------------------- -----------------------------
Title:
<PAGE>
Annex III to Stock Purchase Agreement
January 26, 1998
Advantage Fund Limited
c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
Re: PALOMAR MEDICAL TECHNOLOGIES, INC.
Ladies and Gentlemen:
We have acted as counsel to Palomar Medical Technologies, Inc., a
Delaware corporation (the "Company"), in connection with the sale by the Company
to you of 500,000 shares (the "Nexar Shares") of Common Stock, $.01 par value,
of Nexar Technologies, Inc., a Delaware corporation, pursuant to the Stock
Purchase Agreement, dated as of December 31, 1997 (the "Agreement"), by and
between the Company and you (the "Buyer"). Capitalized terms used and not
otherwise defined herein shall have the respective meanings assigned to such
terms in the Agreement.
In connection with our rendering of the opinions expressed below, we
reviewed (i) the Certificate of Incorporation (the "Charter") and By-Laws (the
"By-Laws") of the Company, each as amended to date; (ii) a certificate issued by
the Secretary of State of the State of Delaware dated January 9, 1998 with
respect to the legal existence and good standing of the Company in Delaware;
(iii) the relevant records of meetings of the directors and stockholders of the
Company and consents of the directors and stockholders filed therewith; (iv) the
Agreement, the Joint Escrow Instructions and the Custody Agreement; (v) the
other documents delivered at the Closing or in connection with the transactions
contemplated by the Agreement; (vi) the agreements, instruments and documents
listed on Exhibit A attached hereto (the "Listed Agreements") and (vii) such
other documents and certificates as we have deemed necessary to enable us to
render the opinions expressed below.
In rendering the opinion expressed in paragraph 1 below with respect to
the legal existence and good standing of the Company in Delaware, we have relied
solely upon the certificate referred to in clause (ii) of the preceding
paragraph, and such opinion is given as of the date of such certificate.
<PAGE>
With respect to the opinion expressed in paragraph 4 below, we note
that we did not observe or supervise the activities of the Company or its
representatives in connection with the offering and sale of the Price Guarantee
Rights. In rendering such opinion we have assumed without investigation that in
connection with such offering and sale there has been no general solicitation or
general advertising by the Company or its representatives with respect to the
Price Guarantee Rights. We have also assumed that no person subject to 950
C.M.R. 14.402(b)(9)(F) has engaged in any activity prohibited thereby and that
no subsequent offer or sale of securities of the Company will adversely affect
the availability of the exemptions from registration referred to in paragraph 4
of this opinion with respect to the offer or sale of the Price Guarantee Rights.
With respect to the opinion expressed in Paragraph 5 below, we have
been orally advised by a representative of the Securities and Exchange
Commission (the "SEC") that the Registration Statement of which the Nexar
Prospectus forms a part was effective on the Closing Date and we have assumed
that such Registration Statement was effective on such date and that the Nexar
Shares constitute shares that were registered under such Registration Statement.
We express no opinion regarding the conformity of such Registration Statement to
the rules and regulations of the SEC or the accuracy or adequacy of the
information set forth therein.
When an opinion set forth below is given to our knowledge, the
knowledge is limited to the facts or other information known to David A.
Broadwin, Esquire, Marcel A. Bryar, Esquire, Dean F. Hanley, Esquire and
Alexander H. Pyle, Esquire, who are the individual lawyers in our firm who were
actively involved in representation of the Company with respect to the
transactions contemplated by the Agreement and, except as expressly stated
herein, without any special or additional investigation undertaken for the
purposes of this opinion.
In rendering the opinions expressed herein, we have also examined and
have relied completely upon all of the representations and warranties as to
matters of fact contained in the Agreement and contained in the related
instruments and other documents delivered by the Company to you in connection
with the Closing or the transactions contemplated by the Agreement, and we have
assumed the completeness and accuracy of all factual matters described in such
representations and warranties.
We have not, except as specifically noted above, made any independent
review or investigation of facts relating to the Company, including without
limiting the generality of the foregoing, any investigation as to the existence
of any actions, suits or proceedings pending or threatened against the Company
or agreements, judgments, injunctions, orders or decrees binding upon the
Company or which might result in the imposition of any lien or other encumbrance
on any assets of the Company.
<PAGE>
We have assumed the authenticity and completeness of all documents
furnished to us as originals, the genuineness of all signatures, the legal
capacity of natural persons, the conformity to the originals of all documents
furnished to us as copies, and the accuracy and completeness of all corporate
records made available to us by the Company.
You have not asked us to pass upon the Buyer's power and authority to
enter into the Agreement, the Joint Escrow Instructions or the Custody
Agreement. Accordingly, for the purposes of this opinion, we have assumed that
the Buyer has all requisite power and authority to enter into the Agreement, the
Joint Escrow Instructions and the Custody Agreement and to effect all of the
transactions thereunder, and that the Agreement, the Joint Escrow Instructions,
the Custody Agreement and each other agreement or instrument we have reviewed
constitutes the legal, valid and binding obligation of all parties thereto other
than the Company.
We have made such examination of Massachusetts law, federal law and the
corporation law of the State of Delaware as we deem necessary for the purposes
of this opinion. We do not purport to pass herein on the laws of any state or
jurisdiction other than the federal law of the United States of America, the law
of The Commonwealth of Massachusetts and the corporation law of the State of
Delaware. Our opinions are given only as of the date hereof, and we expressly
disclaim any continuing obligation or undertaking to supplement or update any of
our statements herein. We have assumed that the Buyer is not an "interested
stockholder" within the meaning of Section 203 of the Delaware General
Corporation Law and is not an "affiliate" of Nexar within the meaning of the
1933 Act.
The opinions herein expressed are qualified to the extent that (i) the
validity or enforceability of any provisions of any agreement or instrument may
be subject to or affected by any bankruptcy, reorganization, insolvency,
moratorium or similar law of general application from time to time in effect and
relating to or affecting the rights or remedies of creditors generally, (ii) the
remedy of specific performance or any other equitable remedy may be unavailable
in any jurisdiction or may be withheld as a matter of judicial discretion and
(iii) the enforcement of any rights or remedies is or may be subject to an
implied duty on the part of the party seeking to enforce such rights to take
action and make determinations on a reasonable basis and in good faith. In
addition, we express no opinion herein as to: prospective waivers of rights to
notice or a hearing or of other rights granted by constitution or statute;
powers of attorney; provisions purporting to relieve parties of the consequences
of their own negligence or misconduct; provisions purporting to establish
evidentiary standards; or provisions to the effect that rights or remedies are
not exclusive, that every right or remedy is cumulative and may be exercised in
addition to any other right or remedy, or that failure to exercise or delay in
exercising rights and remedies will not operate as a waiver of any such right or
remedy. With your permission, we have assumed for all purposes under this
opinion that the Company is not, and following completion of the transactions
contemplated by the Agreement will not be, insolvent, left with unreasonably
small capital, or unable to pay its debts as they mature. We express no opinion
as to the effect of the laws of any jurisdiction other than Massachusetts
wherein the Company or you may be located, or wherein enforcement of the
Agreement may be limited, with respect to the rates of interest legally
chargeable or collectible thereunder.
<PAGE>
Based upon and subject to the foregoing, we are of the opinion that:
(1) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all
requisite corporate power and authority to conduct its business as
currently conducted.
(2) The Company has all requisite power and authority to enter into the
Agreement and to consummate the transactions contemplated thereby. The
execution, delivery and performance of the Agreement and the
consummation of the transactions contemplated thereby have been duly
authorized by all necessary corporate action on the part of the
Company. The Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its terms.
(3) The sale and delivery in accordance with the terms of the Agreement of
the Nexar Shares will pass good and valid title to such shares, free
and clear of all liens, claims or encumbrances, to the Buyer if the
Buyer purchases the Nexar Shares in good faith and without notice of
any such lien, claim or encumbrance or any other adverse claim within
the meaning of the Uniform Commercial Code as now in effect in The
Commonwealth of Massachusetts.
(4) Assuming the accuracy as of the date hereof of the representations and
warranties of the Buyer set forth in the Agreement, the Buyer may
obtain the Price Guarantee Rights pursuant to the Agreement without
registration under the 1933 Act.
(5) The Nexar Shares could be sold by the Company to the Buyer on the
Closing Date pursuant to the Registration Statement of which the Nexar
Prospectus forms a part; and upon acquisition of the Nexar Shares from
the Company pursuant to the Agreement, the Buyer will not be subject to
restrictions on the resale thereof arising under the 1933 Act as a
result of the manner of sale of such shares contemplated by the
Agreement.
(6) No authorization, approval or consent of, or filing with, any
governmental body, regulatory agency or stock exchange, market or
automated quotation system or the stockholders of the Company is
required to be obtained or made by the Company for the sale of the
Nexar Shares to the Buyer pursuant to the Agreement or for the creation
or payment of the Price Guarantee Rights except such as have been
obtained or made.
<PAGE>
(7) Except for the effects, if any, that may arise from lawsuits disclosed
in the SEC Reports, to our knowledge, there is no action, suit,
proceeding, inquiry or investigation before or by any court, public
board or body pending or threatened against or affecting the Company or
any of its subsidiaries, wherein an unfavorable decision, ruling or
finding would have a material adverse effect on the properties,
business, condition (financial or other), results of operations or
prospects of the Company and its subsidiaries taken as a whole or the
transactions contemplated by the Agreement or any of the documents
contemplated thereby or delivered in connection therewith or which
would adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under,
the Agreement or any of such other documents.
(8) The execution, delivery and performance by the Company of the
Agreement, the offer and sale of the Nexar Shares to the Buyer pursuant
to the Agreement and the fulfillment of and the compliance with the
terms of the Agreement by the Company will not result in a breach of
any of the terms or provisions of, or constitute a default under, the
Charter or By-Laws, or any law, statute, rule or regulation to which
the Company is subject or any Listed Agreement.
The opinions are limited to the matters expressly stated herein and are
rendered solely for your benefit and may not be quoted or relied upon for any
other purpose or by any other person.
Very truly yours,
FOLEY, HOAG & ELIOT LLP
By:
------------------------
A partner
cc: American Stock Transfer
& Trust Company
<PAGE>
EXHIBIT A
EXHIBIT A
Agreement and Plan of Reorganization dated March 9, 1996 by and among the
Company, TTI Acquisition Corp., Tissue Technologies, Inc. and Mario Barton
Amendment to Agreement and Plan of Reorganization dated April 29,1996 by and
among the Company, TTI Acquisition Corp., Tissue Technologies, Inc. and Mario
Barton
Letter from the Company to Tissue Technologies, Inc. waiving the Company's right
to receive indemnification under Section 6 of the Agreement and Plan of
Reorganization under certain circumstances
Plan of Merger dated May 3, 1996 by and between the Company, TTI Acquisition
Corp. and Tissue Technologies, Inc.
Stock Purchase Agreement dated March 19, 1996, by and between Dynaco Acquisition
Corp., Comtel Electronics, Inc., Mikel C. Green, Peter Rogal and Palomar
Electronics Corp.
Agreement for Purchase of Stock dated July 12,1996, by and between the Company,
Eleanor Roberts Weisman and Wallace Roberts
Restated Certificate of Incorporation, as amended
Bylaws, as amended
Patent License Agreement by and between the Company and Patlex Corporation,
effective as of January 1, 1992
1996 Stock Option Plan
Amended 1996 Employee Stock Purchase Plan
Form of Stock Option Agreement under the 1996 Stock Option Plan
Securities Purchase Agreement between the Company and The Travelers Insurance
Company dated July 12, 1996
Warrant to purchase Common Stock of the Company, dated July 12, 1996
Subscription Agreement dated September 26, 1996 between the Company and Genesee
Fund Limited
<PAGE>
Registration Rights Agreement dated September 26, 1996 between the Company and
Genesee Fund Limited
Warrant to purchase Common Stock of the Company dated September 27, 1996
Berckeley Subscription Agreement dated December 31, 1996 and Amendment thereto
dated January 10, 1997
Berckeley Debenture dated December 31, 1996
High Risk Opportunities Hub Fund, Ltd. Subscription Agreement dated January 14,
1997
High Risk Opportunities Hub Fund, Ltd. Debenture dated January 13, 1997
Securities Purchase Agreement dated December 31, 1996 between Palomar
Electronics Corporation and Clearwater Fund IV, LLC
Securities Purchase Agreement dated as of December 18, 1996 between Palomar
Electronics Corporation, the Company and The Travelers Insurance Company
Securities Purchase Agreement dated December 31, 1996 between Palomar
Electronics Corporation and GFL Advantage Fund Limited
Option Agreement dated December 31, 1996 between the Company and GFL Advantage
Fund Limited
Common Stock Purchase Warrant dated December 31, 1996
Form of Net Warrant to Purchase Common Stock
Subscription Agreement dated December 27, 1996 between the Company and
Finmanagement, Inc.
Subscription Agreement dated as of April 12, 1996 between the Company and GFL
Advantage Fund Limited
Registration Rights Agreement dated as of April 17, 1996 by and between the
Company and GFL Advantage Fund Limited
Warrant dated as of April 16, 1996
Form of Warrant to purchase Common Stock dated February 1, 1996
<PAGE>
Form of Offshore Stock Subscription Agreement dated February 1, 1996
Form of Subscription Agreement dated as of March 10, 1997
Form Registration Rights Agreement dated as of March 10, 1997
Form of 5% Convertible Debenture due March 10, 2002
Subscription Agreement dated as of March 13, 1997 between the Company and
Soginvest Bank
Form of 6% Convertible Debenture due March 13, 2002
Asset Purchase and Settlement Agreement dated February 28, 1997 by and among the
Company, Nexar Technologies, Inc., Technovation Computer Labs, Inc. and Babar I.
Hamirani
Employment Agreement dated as of May 1, 1996 between the Company and Ronald G.
Wheeland
Employment Agreement dated as of January 1, 1997, between the Company and Steven
Georgiev
Employment Agreement dated as of January 1, 1997, between the Company and
Michael H. Smotrich
Employment Agreement dated as of January 1, 1997, between the Company and Joseph
P. Caruso
Key Employee Agreement dated as of May 15, 1997 between the Company and Louis P.
Valente
Employment Agreement dated as of January 1, 1997, between the Company and
Anthony Fiorillo
Securities Purchase Agreement dated March 27, 1997 between the Company and RGC
International Investors, LDC
Registration Rights Agreement dated March 27, 1997 between the Company and RGC
International Investors, LDC
Form of 4.5% Convertible Subordinated Promissory Note dated October 17,1996
Form of Subscription Agreement dated October 16, 1996
Supplement to Securities Purchase Agreement dated May 5, 1997
Supplement to Registration Rights Agreement dated May 5, 1997
<PAGE>
Supplement to Securities Purchase Agreement dated May 23, 1997
Supplement to Registration Rights Agreement dated May 23, 1997
Agreement dated December 30, 1993 by and between the Company, Dynaco Corporation
and Dynaco West Corporation
First Amendment to Purchase and Sale Agreement dated January 24, 1994 by and
between the Company, Dynaco Corporation and Dynaco West Corporation
Purchase and Sale Agreement dated March 14, 1995, by and between the Company and
SPMT Acquisition Corp., Spectrum Medical Technologies, Inc., Sanford R. Lane and
CSF Investments Ltd.
Purchase and Sale Agreement dated June 5, 1995, by and between Dynaco
Acquisition Corporation and Allard Industries, Inc.
Company's 1991 Stock Option Plan, as amended
Company's 1993 Stock Option Plan
Company's 1995 Stock Option Plan
Form of Stock Option Grant under the Company's 1991, 1993 and 1995 Stock Option
Plans
Form of Company Warrant to Purchase Common Stock
Lease for premises at 66 Cherry Hill Drive, Beverly, Massachusetts, dated May
25, 1993
The Company's 401(k) Plan
Form of 6%, 7% and 8% Convertible Debentures due September 30, 2002
Form of Registration Rights Agreement dated September 30, 1997
Form of Securities Purchase Agreement dated September 30, 1997
Stock Purchase Agreement dated December 9, 1997 between and among Biometric
Technologies Corp., the Company and Dynaco Corp. and certain exhibits thereto.
Securities Purchase Agreement dated as of December 29,1997 by and among the
Company and Clearwater Fund IV, LLC
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT, dated as of December 31, 1997, by and between
PALOMAR MEDICAL TECHNOLOGIES, INC., a Delaware corporation, with headquarters
located at 45 Hartwell Avenue, Lexington, Massachusetts 02173 (the "Company"),
and ADVANTAGE FUND LIMITED a British Virgin Islands corporation, with
administrative offices located at c/o CITCO, Kaya Flamboyan 9, Curatao,
Netherlands Antilles (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and Genesee Fund Limited, a British Virgin Islands
corporation ("GFL") have executed and delivered, one to the other, a
Subscription Agreement, dated as of September 26, 1996 (the "Subscription
Agreement"), pursuant to which the Company issued and sold to GFL, and GFL
purchased from the Company 10,000 shares of Series G Convertible Preferred Stock
(the "Series G Preferred Stock") of the Company, of which 2,684 shares (the
"Series G Preferred Shares") are issued and outstanding and held by the Buyer;
WHEREAS, pursuant to the Securities Purchase Agreement, dated as of
December 31, 1996, by and between Palomar Electronics Corporation, a Delaware
corporation, the Company and the Buyer, the Company sold to the Buyer and the
Buyer purchased from the Company 200,000 shares (the "Outstanding Nexar Shares")
of Common Stock, $.01 par value (the "Nexar Common Stock"), of Nexar
Technologies, Inc., a Delaware corporation ("Nexar") and in connection therewith
the Company and the Buyer executed and delivered, one to the other, an Option
Agreement, dated as of December 31, 1996 (the "Option Agreement"), pursuant to
which, among other things, the Company granted to the Buyer the right, upon the
terms and subject to the conditions of the Option Agreement, to exchange the
Outstanding Nexar Shares for shares of Common Stock, $.01 par value (the "Common
Stock") of the Company;
WHEREAS, the Company and the Buyer wish to provide the Buyer the right to
exchange the Series G Preferred Shares for shares of Common Stock upon the terms
and subject to the conditions of this Agreement;
WHEREAS, disputes have arisen regarding the exercise by the Buyer of its
rights under the Option Agreement and the performance by the Company of its
obligations under the Option Agreement and the Buyer and the Company wish to
resolve such disputes as provided in this Agreement; and
WHEREAS, the Company and the Buyer have executed and delivered one to the
other a Stock Purchase Agreement, dated as of the date hereof (the "Stock
Purchase Agreement") pursuant to which the Buyer is purchasing, upon the terms
and subject to the conditions of the Stock Purchase Agreement, shares of Nexar
Common Stock owned by the Company;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
(a) ACCREDITED INVESTOR. The Buyer is an oaccredited investoro as that term
is defined in Rule 501 of the General Rules and Regulations under the Securities
Act of 1933, as amended (the "1933 Act") by reason of Rule 501(a)(3);
1
<PAGE>
(b) REOFFERS AND RESALES. All subsequent offers and sales by the Buyer of
the shares of Common Stock issuable upon exchange of the Series G Preferred
Shares pursuant to this Agreement (the "Common Shares") shall be made pursuant
to registration of such Common Shares under the 1933 Act or pursuant to an
exemption from registration;
(c) COMPANY RELIANCE. The Buyer understands that the Common Shares are
being offered to it in reliance on the exemption from the registration
requirements of the 1933 Act provided by Section 3(a)(9) of the 1933 Act and may
also be offered in reliance on Regulation D under the 1933 Act ("Regulation D"}
and exemptions from state securities laws, including exemptions available by
reason of satisfying the requirements of Regulation D, and that the Company is
relying upon the truth and accuracy of, and the Buyer's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
the Buyer set forth herein in order to determine the availability of such
exemptions;
(d) INFORMATION PROVIDED. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and its Subsidiaries and materials relating to the offer of the
Common Shares which have been requested by the Buyer; the Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received satisfactory answers to any such inquiries. Without
limiting the generality of the foregoing, the Buyer has had the opportunity to
obtain and to review the Company's (1) Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996, (2) Quarterly Reports on Form 10-Q for the
fiscal quarters ended March 31, June 30 and September 30, 1997, (3) Current
Report on Form 8-K dated December 9, 1997, and (4) Amendment No. 2 to the
Company's Registration Statement on Form S-3 (Registration No. 333-42129) (the
"Company Registration Statement") filed with the Securities and Exchange
Commission (the "SEC") on January 9, 1998 (collectively, the "SEC Reports"); and
the Buyer understands that its investment in the Common Shares involves a high
degree of risk;
(e) ABSENCE OF APPROVALS. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Common Shares; and
(f) AGREEMENT. This Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and binding
agreement of the Buyer enforceable in accordance with its terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors' rights
generally.
(g) The Buyer acknowledges that, except for the historical material
contained herein or in the SEC Reports, the matters disclosed herein and therein
are forward-looking statements under the federal securities laws that involve
risks and uncertainties, including, but not limited to, product demand and
market acceptance risks, the effect of economic conditions, the impact of
competitive products and pricing, product development, commercialization and
technological difficulties, capacity and supply constraints or difficulties, the
results of financing efforts, actual purchases under agreements, the effect of
the Company's accounting policies, and other risks detailed in the SEC Reports.
Actual results could differ materially from those estimated or anticipated in
these forward-looking statements. Without limiting the generality of the
foregoing, the Buyer acknowledges the Risk Factors set forth in the Company
Registration Statement.
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2. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with, the
Buyer that:
(a) ORGANIZATION AND AUTHORITY. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to (i) own, lease
and operate its properties and to carry on its business as now being conducted,
and (ii) to execute, deliver and perform its obligations under this Agreement
and the other agreements to be executed and delivered by the Company in
connection herewith, and to consummate the transactions contemplated hereby. The
Company is duly qualified to do business as a foreign corporation and is in good
standing in all jurisdictions wherein such qualification is necessary and where
failure so to qualify could have a material adverse effect on the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company.
(b) CONCERNING THE COMMON SHARES. The Common Shares have been duly
authorized and, when issued in exchange for the Series G Preferred Shares in
accordance with this Agreement, will be duly and validly issued, fully paid and
non-assessable and will not subject the holder thereof to personal liability by
reason of being such holder. There are no preemptive rights of any stockholder
of the Company, as such, to acquire any of the Common Shares. The Common Stock
has been duly listed for trading on the Nasdaq SmallCap Market ("Nasdaq") and is
currently listed for trading thereon and (1) the Company has not been notified
since December 31, 1994 by Nasdaq of any failure or potential failure to meet
the criteria for continued listing and trading on Nasdaq and (2) no suspension
of trading in the Common Stock is in effect. The transactions contemplated by
this Agreement will not be subject to the rules adopted by Nasdaq which require
stockholder approval of certain transactions, including issuances of common
stock below the lower of book value or market price (the "Nasdaq Stockholder
Approval Rule").
(c) EXCHANGE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT. This Agreement
has been duly and validly authorized, executed and delivered by the Company and
this Agreement is the valid and binding agreement of the Company enforceable in
accordance with its terms, subject as to enforceability to general principles of
equity and to bankruptcy, insolvency, moratorium and other similar laws
affecting the enforcement of creditors' rights generally. The Subscription
Agreement and the Registration Rights Agreement, dated as of September 26, 1996,
by and between the Company and the Buyer (the "Registration Rights Agreement"),
are in full force and effect and are valid and binding agreements of the Company
enforceable in accordance with their respective terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors' rights
generally.
(d) NON-CONTRAVENTION. The execution and delivery of this
Agreement by the Company and the issuance of the Common Shares and the
consummation by the Company of the other transactions contemplated by this
Agreement, do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under, the
certificate of incorporation or by-laws of the Company, or any indenture,
mortgage, deed of trust or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound,
or any applicable law, rule or regulation or any applicable decree, judgment or
order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or any of its properties or assets.
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(e) APPROVALS. No authorization, approval or consent of, or filing with,
any court, governmental body, regulatory agency, self-regulatory organization,
or stock exchange or market or the stockholders of the Company is required to be
obtained or made by the Company for the issuance of the Common Shares upon
exchange of the Series G Preferred Shares pursuant to this Agreement, other than
the requirements of any applicable blue sky laws.
(f) INFORMATION PROVIDED. The information provided by or on behalf of the
Company to the Buyer, including, without limitation, the information referred to
in Section 2(e) of this Agreement, does not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading.
(g) ABSENCE OF CERTAIN CHANGES. Since December 31, 1996, there has been no
material adverse change and no material adverse development in the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company or any of its subsidiaries, except as disclosed in the
SEC Reports.
(h) ABSENCE OF CERTAIN PROCEEDINGS. Except as disclosed in the SEC Reports,
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board or body pending or, to the knowledge of the Company or any
of its subsidiaries, threatened against or affecting the Company or any of its
subsidiaries, wherein an unfavorable decision, ruling or finding would have a
material adverse effect on the properties, business, condition (financial or
other), results of operations or prospects of the Company and its subsidiaries
taken as a whole or the transactions contemplated by this Agreement or any of
the documents contemplated hereby or which would adversely affect the validity
or enforceability of, or the authority or ability of the Company to perform its
obligations under, this Agreement or any of such other documents.
(i) PROPERTIES. The Company and its subsidiaries have good title to all
property real and personal (tangible and intangible) and other assets owned by
them, free and clear of all security interests, charges, mortgages, liens or
other encumbrances, except such as are described in the SEC Reports or such as
do not materially interfere with the use of such property made, or proposed to
be made, by the Company or its subsidiaries. The leases, licenses or other
contracts or instruments under which the Company and its subsidiaries lease,
hold or are entitled to use any property, real or personal, are valid,
subsisting and enforceable with only such exceptions as do not materially
interfere with the use of such property made, or proposed to be made, by the
Company or its subsidiaries. Neither the Company nor any of its subsidiaries has
received notice of any material violation of any applicable law, ordinance,
regulation, order or requirement relating to its owned or leased properties.
(j) LABOR RELATIONS. No material labor problem exists or, to the knowledge
of the Company, is imminent with respect to any of the employees of the Company
or any of its subsidiaries.
(k) SEC FILINGS. The Company has timely filed all required forms, reports
and other documents with the SEC since December 1, 1996. All of such forms,
reports and other documents complied, when filed, in all material respects, with
all applicable requirements of the 1933 Act and the Securities Exchange Act of
1934, as amended (the "1934 Act").
(l) NO COMMISSIONS. The Company has not and will not pay any commission or
other remuneration to any person in connection with the exchange by the Buyer of
the Common Shares for the Series G Preferred Shares.
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(m) RULE 144. The Common Shares may be sold by the Buyer or its nominee
pursuant to Rule 144 promulgated under the 1933 Act or any other similar rule or
regulation of the SEC that may at any time permit the holders of Common Shares
to sell securities of the Company without registration ("Rule 144") (1) prior to
September 26, 1998 if the holder thereof is in compliance with paragraphs (e),
(f), (g), (h) and (i) of Rule 144 at the time of such sale, and (2) on and after
September 26, 1998 pursuant to paragraph (k) of Rule 144 if the holder of the
Common Shares is not and has not been an affiliate (as such term is defined in
Rule 144) during the preceding three months. As of the date hereof, adequate
current public information with respect to the Company is available in
accordance with paragraph (c)(1) of Rule 144.
(n) SUBORDINATED NOTE. The outstanding principal amount under that certain
4.5% Convertible Subordinated Promissory Note dated October 17, 1996 of the
Company in the original principal amount of $2,500,000 is currently $100,000.
The Company is not currently in default under such Note.
3. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
(a) TRANSFER RESTRICTIONS. The Buyer acknowledges that, except as otherwise
provided in Section 3(b), (1) the Common Shares have not been and are not being
registered under the 1933 Act, and may not be transferred unless (A)
subsequently registered thereunder for resale or (B) the Buyer shall have
delivered to the Company an opinion of counsel, reasonably satisfactory in form,
scope and substance to the Company, to the effect that the Common Shares to be
sold or transferred may be sold or transferred without such registration; (2)
any sale of the Common Shares made in reliance on Rule 144 may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such Common Shares under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Common Shares under the 1933 Act or to comply with
the terms and conditions of any exemption thereunder.
(b) RULE 144. With a view to making available to the Buyer and each other
holder of Series G Preferred Stock and Common Shares (the Buyer and each such
other holder, an "Investor") the benefits of Rule 144, the Company agrees to:
(1) make and keep public information available, as that term is
understood and defined in Rule 144;
(2) file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act;
(3) furnish to each Investor so long as such Investor owns shares of
Series G Preferred Stock and Common Shares, promptly upon request, (i) a written
statement by the Company that it has filed all reports required to be filed by
Section 13 or 15(d) of the 1934 Act during the preceding 12 months and has been
subject to such filing requirements for the past 90 days, (ii) a copy of the
most recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company and (iii) such other information as may be
reasonably requested to permit the Investors to sell such securities pursuant to
Rule 144 without registration;
(4) if at any time the Company is not required to file such reports
with the SEC under Sections 13 or 15(d) of the 1934 Act, to use its best efforts
to make publicly available other information, upon the request of an Investor,
so long as is necessary to permit publication
5
<PAGE>
by brokers and dealers of quotations for the Common Stock and sales of the
Common Shares in accordance with Rule 15c2-11 under the 1934 Act; and
(5) within two business days after the provision to the Company of
evidence reasonably satisfactory to the Company (x) of compliance with the
applicable provisions of paragraphs (e), (f), (g) and (h) of Rule 144 in
connection with the sale of Common Shares by an Investor (which evidence may
include an opinion of counsel for the Investor, in form, scope and substance
customary for opinions in comparable transactions, if an opinion of counsel is
reasonably requested by the Company), the Company will take all necessary
actions to permit and cooperate with such Investor in completing the transfer of
such Common Shares including instructing the Transfer Agent (as defined herein)
to effect such transfer, and will not place any restrictive legend on
certificates for the Common Shares or impose any stop-transfer restriction
thereon, and (y) of compliance with the requirements of paragraph (k) of Rule
144, the Company will promptly remove any restrictive legend and cancel any
stop-transfer restriction on Common Shares held by an Investor.
(c) NO RESTRICTIVE LEGEND. The Company shall not place any restrictive
legend on certificates for Common Shares issued on exchange of the Series G
Preferred Shares pursuant to this Agreement or impose any stop-transfer
restriction thereon.
(d) NASDAQ LISTING; REPORTING STATUS. Within ten days after the Closing
Date, the Company shall file with Nasdaq an amended listing application or other
document required by Nasdaq in order that the listing of shares of Common Stock
originally made by the Company in connection with the issuance of the Series G
Preferred Stock will be applicable to the Common Shares and, if required by
Nasdaq because the listing application relating to the Series G Preferred Stock
may not be made applicable to the Common Shares, shall file with Nasdaq a
listing application for the number of Common Shares which may be issuable upon
exchange of the Series G Preferred Shares pursuant to this Agreement, on Nasdaq
and shall provide evidence of such filing to the Buyer promptly after such
filing. The Company shall use its best efforts to obtain such modification or
listing. So long as the Buyer beneficially owns any of the Common Shares, the
Company shall file all reports required to be filed with the SEC pursuant to
Section 13 or 15(d) of the 1934 Act, and the Company shall not, prior to the
date which is two years after the Closing Date, terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would permit such termination.
(e) MARGIN REQUIREMENTS. Neither the Company nor any agent acting on its
behalf has taken or will take any action which might cause this Agreement or the
transactions contemplated hereby to violate Regulation G, Regulation T or any
other regulation of the Board of Governors of the Federal Reserve System or to
violate the 1934 Act, in each case as in effect now or as the same may hereafter
be in effect.
(f) BLUE SKY LAWS. On or before the Closing Date, the Company shall take
such action as shall be necessary to qualify, or to obtain an exemption for, the
Common Shares for issuance to the Buyer pursuant to this Agreement under such of
the securities or oblue skyo laws of jurisdictions in the United States as shall
be applicable to the issuance of the Common Shares to the Buyer pursuant to this
Agreement. The Company shall furnish copies of all filings, applications, orders
and grants or confirmations of exemptions relating to such securities or oblue
skyo laws on or before the Closing Date.
(g) CERTAIN EXPENSES. Whether or not the closing occurs, the Company shall
pay or reimburse the Buyer for all reasonable expenses (including, without
limitation, legal fees and expenses of counsel to the Buyer) incurred by the
Buyer in connection with this Agreement and the transactions contemplated
hereby.
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(h) CERTAIN ISSUANCES OF SECURITIES. If the transactions contemplated by
this Agreement are subject to the Nasdaq Stockholder Approval Rule, unless the
Company obtains Stockholder Approval or a waiver thereof from Nasdaq, the
Company will not issue any shares of Common Stock or shares of any other series
of preferred stock or other securities convertible into, exchangeable for or
otherwise entitling the holder to acquire shares of Common Stock which would be
subject to the requirements of the Nasdaq Stockholder Approval Rule (or any
successor or replacement provision thereof) and which would be integrated with
the sale of the Series G Preferred Shares to the Buyer or the issuance of Common
Shares upon conversion or exchange thereof for purposes of the Nasdaq
Stockholder Approval Rule (or any successor, replacement or other similar
provision applicable to the Company). As used herein, "Stockholder Approval"
means the approval by a majority of the votes cast by the holders of shares of
Common Stock (in person or by proxy) at a meeting of the stockholders of the
Company (duly convened at which a quorum was present), or a written consent of
holders of shares of Common Stock entitled to such number of votes given without
a meeting, of the issuance by the Company of 20% or more of the Common Stock of
the Company for less than the greater of the book or market value of such Common
Stock on conversion or exchange of the Series G Preferred Stock, as and to the
extent required under the Nasdaq Stockholder Approval Rule as in effect from
time to time or any successor, replacement or other similar provision applicable
to the Company.
(i) BEST EFFORTS. Each of the parties shall use its best efforts timely to
satisfy each of the conditions to the other party's obligations to complete the
closing of the transactions contemplated by this Agreement set forth in Section
6 or 7, as the case may be, of this Agreement on or before the Closing Date.
4. EXCHANGE RIGHTS; TRANSFER AGENT INSTRUCTIONS.
(a) EXCHANGE RIGHTS. (i) The Company hereby agrees that, at any time after
the closing under this Agreement, the Buyer and each other holder of Series G
Preferred Stock (the Buyer and each such other holder, a "Holder") may exchange
shares of Series G Preferred Stock for shares of Common Stock in lieu of
converting such shares in accordance with the Certificate of Designations of the
Series G Convertible Preferred Stock (the "Certificate of Designations"). The
terms and conditions pursuant to which shares of Series G Preferred Stock may be
exchanged for shares of Common Stock shall in all respects be identical to the
terms pursuant to which such shares may be converted under the Certificate of
Designations and the provisions of Section 9 of the Certificate of Designations
are hereby incorporated herein by this reference as if set forth in full herein,
except as set forth below:
(a) the Minimum Conversion Price shall be $.01;
(b) The number of trading days used in calculating the arithmetic
average of the Closing Price of the Common Stock described in clause
(a)(i)(z)(II)(B) of Section 9 of the Certificate of Designations shall be
five (such arithmetic average is referred to herein as the "Exchange
Price");
(c) each reference in the provisions of Section 9 of the Certificate
of Incorporation to oconversion o or oconverto or other forms of such words
shall be deemed to be a reference to oexchangeo or the appropriate form of
such word;
(d) each reference in the provisions of Sections 9(a), 9(b) and 9(c)
to the oConversion Amounto shall be deemed to be a reference to the
oExchange Amount,o which initially shall mean $1,000.00, subject to
adjustment in accordance with Sections 9(a), 9(b) and 9(c) of the
Certificate of Designations as if it were the Conversion Amount;
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<PAGE>
(e) each reference in the provisions of Sections 9(a), 9(b) and 9(c)
of the Certificate of Designations to the oConversion Dateo shall be deemed
to be a reference to Exchange Date and, for purposes of this Section 4
oExchange Dateo shall mean the date on which the Notice of Exchange is
actually received by the Company, any transfer agent for the Series G
Preferred Stock or the transfer agent for the Common Stock, in case of an
exchange at the option of a Holder pursuant to Section 4(a).
(b) LIMITATION ON EXCHANGES. So long as the Company shall be in compliance
in all material respects with its obligations to the Holders (including, without
limitation, its obligations under the Subscription Agreement, the Registration
Rights Agreement, this Certificate of Designations and this Agreement, then,
notwithstanding any other provisions of Section 4(a), (x) no Holder shall be
entitled to exercise exchange rights prior to March 1, 1998 and (y) no Holder
shall be entitled on any Exchange Date to exchange any shares of Series G
Preferred Stock to the extent that the sum of (1) the number of shares of Series
G Preferred Stock for which valid notices of exchange were given by such Holder
within 30 days preceding such Exchange Date plus (2) the number of shares of
Series G Preferred Stock held by such Holder with respect to which the
determination in this Section 4(b) is being made would exceed the applicable
Exchangeability Amount.
As used herein, oExchangeability Amounto for any Exchange Date means the
number of shares of Series G Preferred Stock set forth below opposite the
Exchange Rate which is in effect for exchanges on such Exchange Date
EXCHANGE RATE EXCHANGEABILITY AMOUNT
$.01 to $2.00 per share 268
$2.01 to $3.00 per share 536
$3.01 to $4.00 per share 804
$4.01 per share or greater 1,072
; PROVIDED, HOWEVER, that the Exchange Rates shown above shall be subject to
equitable adjustments for stock splits, stock dividends, combinations,
recapitalizations, and similar events which occur on or after the Closing Date.
If at any time by reason of a proposed transfer or otherwise the number of
Holders is to be increased, then the Exchange Amount applicable to each such
Holder shall be allocated between or among the transferring Holder and the new
Holders pro rata, the Company shall be entitled to make a notation thereof on
the particular certificates and any such new Holder, by such Holder's acceptance
of shares of Series G Preferred Stock, agrees to such allocation and notation.
(c) EXCHANGE AT OPTION OF COMPANY. So long as the Company shall be in
compliance in all material respects with its obligations to the holders of the
Series G Preferred Stock (including, without limitation, its obligations under
this Agreement, the Registration Rights Agreement and the Certificate of
Designations), the Company shall have the right, exercisable at any time or from
time to time after February 28, 1998 by at least 15 business days but not more
than 20 business days prior notice (a "Company Exchange Notice") to the holders
of the Series G Preferred Stock, to require such holders to exchange, in
accordance with the provisions, and subject to the limitations, of this Section
4, all or any part of the outstanding shares of Series G Preferred Stock for
shares of Common Stock to the extent the same are at such time exchangeable for
shares of Common Stock. Unless paragraph (k) of Rule 144 is available to the
holder and the Company has complied with all of its obligations in this
Agreement with respect thereto, the number of outstanding shares of Series G
Preferred Stock which the Company may require a holder to exchange on any
exchange date may not exceed such number of shares of Series G Preferred Stock
which are exchangeable for a number of shares of Common
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Stock which, together with the number of shares of Common Stock sold for the
account of such holder within the preceding three months, equals one percent of
the outstanding shares of Common Stock as shown by the most recent report or
statement published by the Company. The Company Exchange Notice shall state (1)
the number of shares of Series G Preferred Stock which the Company seeks to
require to be exchanged for shares of Common Stock and (2) the exchange date
(which shall not be less than 15 business days or more than 20 business days
after the date the Company Exchange Notice is given). If the Company shall give
a Company Exchange Notice, then, unless theretofore exchanged by a Holder, and,
so long as the Company shall be in compliance in all material respects with its
obligations to the holders of the Series G Preferred Stock (including, without
limitation, its obligations under this Agreement, the Registration Rights
Agreement and the Certificate of Designations) on such exchange date, on the
exchange date properly set forth therein, the lesser of (A) the number of shares
of Series G Preferred Stock which the Company seeks to require to be exchanged,
as set forth in such Company Exchange Notice or (B) the maximum number of shares
of Series G Preferred Stock which on such exchange date is exchangeable in
accordance with Section 4(a) hereof, shall be exchanged for such number of
shares of Common Stock as shall be determined pursuant to this Section 4 as if
the exchange of such number of shares of Series G Preferred Stock were made by
the Holders thereof in accordance herewith without any further action on the
part of the holders of such shares of Series G Preferred Stock. Upon receipt by
the Company of certificates for shares of Series G Preferred Stock exchanged for
shares of Common Stock in accordance with this Section 4(c) after a Company
Exchange Notice is given, the Company shall issue and, within three trading days
after such surrender, deliver to or upon the order of such Holder (1) that
number of shares of Common Stock for the number of shares of Series G Preferred
Stock exchanged as shall be determined in accordance herewith and (2) a new
certificate for the balance of shares of Series G Preferred Stock, if any.
(d) CONVERSIONS DEEMED EXCHANGES. On and after March 1, 1998, the Company
shall to treat any request for conversion of Series G Preferred Stock submitted
by a Holder in accordance with the terms and conditions of the Certificate of
Designations as a request for exchange in accordance with the terms and
conditions hereof, subject to Section 4(f). On and after the closing under this
Agreement, any Corporation Conversion Notice submitted by the Company in
accordance with the terms and conditions of the Certificate of Designations
shall be deemed to be a Company Exchange Notice in accordance with the terms and
conditions of Section 4(c).
(e) TRANSFER AGENT INSTRUCTIONS. Prior to the Closing Date, the Company
will (1) execute and deliver the Transfer Agent Instructions substantially in
the form attached hereto as ANNEX I to and thereby irrevocably instruct,
American Stock Transfer & Trust Company, as Transfer Agent and Registrar (the
"Transfer Agent"), to issue certificates for the Common Shares from time to time
upon exchange of the Series G Preferred Shares in such amounts as specified from
time to time to the Transfer Agent in the Exchange Notices surrendered in
connection with such exchanges and (2) appoint the Transfer Agent the exchange
agent for the Series G Preferred Stock. The certificates for the Common Shares
shall be registered in the name of the Buyer or its nominee and in such
denominations to be specified by the Buyer in connection with each exchange of
Series G Preferred Shares. The Company warrants that no instruction other than
such instructions referred to in this Section 4(e) will be given by the Company
to the Transfer Agent and that the Common Shares shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement. Nothing in this Section 4(e) shall limit in any way
the Buyer's obligations and agreement to comply with the registration
requirements of all applicable securities laws upon any resale of Common Shares
by the Buyer. If the Buyer provides the Company with an opinion of counsel
reasonably satisfactory in form, scope and substance to the Company that
registration of a resale by the Buyer of any of the Common Shares in accordance
with clause (1)(B) of Section 3(a) of this Agreement is not required under the
1933 Act, the Company shall permit the transfer
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<PAGE>
of such Common Shares and promptly instruct the Company's transfer agent to
issue upon transfer no later than three days after receipt of such opinion one
or more share certificates in such name and in such denominations as specified
by the Buyer. Nothing in this Section 4(e) shall limit the obligations of the
Company under Section 3(n) of the Registration Rights Agreement.
(f) LIMITATION ON EXERCISE OF CONVERSION RIGHTS. Prior to March 1, 1998,
the Holders shall be entitled to exercise conversion rights in accordance with
the Certificate of Designations. On and after March 1, 1998, so long as the
Company is in compliance in all material respects with its obligations to the
holders of the Series G Preferred Stock (including, without limitation, its
obligations under this Agreement, the Registration Rights Agreement and the
Certificate of Designations), the Buyer and any other holder of shares of Series
G Preferred Stock who is bound by this Section 4(f) shall not exercise the
conversion rights provided in Section 9(a) of the Certificate of Designations.
(g) EXCHANGE NOTICE. Any notice of exchange of shares of Series G Preferred
Stock by a Holder pursuant to Section 4(a) shall be in the form attached hereto
as ANNEX II.
(h) TRANSFERS. The Buyer agrees not to sell, assign or otherwise transfer
any Series G Preferred Shares unless the transferee becomes a party to this
Agreement. The Company agrees to be bound by the terms of this Agreement for the
benefit of each such transferee.
(i) RETIREMENT OF SERIES G PREFERRED STOCK. Upon each exchange of shares of
Series G Preferred Stock pursuant to this Agreement, the Company shall retire
such shares.
5. CLOSING DATE.
The date and time of the closing under this Agreement (the "Closing Date")
shall be 12:00 noon, New York City time, on January 23, 1998. Such closing shall
occur on the Closing Date at the Law Offices of Brian W Pusch.
6. CONDITIONS TO THE COMPANY'S OBLIGATIONS.
The Buyer understands that the Company's obligations under this Agreement
are conditioned upon the satisfaction of the following conditions precedent on
or before the Closing Date (any or all of which may be waived by the Company in
its sole discretion):
(a) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
(b) The accuracy on the Closing Date of the representations and warranties
of the Buyer contained in this Agreement as if made on the Closing Date and the
performance by the Buyer on or before the Closing Date of all covenants and
agreements of the Buyer required to be performed on or before the Closing Date;
and
(c) The Buyer shall have executed and delivered to the Company a General
Release in the form attached hereto as ANNEX III.
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7. CONDITIONS TO THE BUYER'S OBLIGATIONS.
The Company understands that the Buyer's obligation under this Agreement is
conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Buyer in its
sole discretion):
(a) The accuracy on the Closing Date of the representations and warranties
of the Company contained in this Agreement as if made on the Closing Date and
the performance by the Company on or before the Closing Date of all covenants
and agreements of the Company required to be performed on or before the Closing
Date and receipt by the Buyer of a certificate, dated the Closing Date, of the
Chief Executive Officer or the Chief Financial Officer of the Company confirming
such matters and such other matters as the Buyer may reasonably request;
(b) The closing under the Stock Purchase Agreement shall have occurred;
(c) The receipt by the Buyer of a certificate, dated the Closing Date, of
the Secretary of the Company certifying (1) the certificate of incorporation and
by-laws of the Company as in effect on the Closing Date, (2) all resolutions of
the Board of Directors (and committees thereof) of the Company relating to this
Agreement and the transactions contemplated hereby and (3) such other matters as
reasonably requested by the Buyer;
(d) The Company shall have executed and delivered to the Buyer a General
Release in the form attached hereto as ANNEX III; and
(e) Receipt by the Buyer on the Closing Date of an opinion of counsel for
the Company, dated the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer, to the effect set forth in ANNEX IV attached hereto.
8. MISCELLANEOUS.
(a) This Agreement shall be governed by and interpreted in accordance with
the laws of the Commonwealth of Massachusetts.
(b) This Agreement may be executed in counterparts and by the parties
hereto on separate counterparts, all of which together shall constitute one and
the same instrument. A facsimile transmission of this Agreement bearing a
signature on behalf of a party hereto shall be legal and binding on such party.
Although this Agreement is dated as of the date first set forth above, the
actual date of execution and delivery of this Agreement by each party is the
date set forth below such party's signature on the signature page hereof. Any
reference in this Agreement or in any of the documents executed and delivered by
the parties hereto in connection herewith to the date of execution and delivery
of this Agreement shall be deemed a reference to the later of such dates set
forth below each party's respective signature on the signature page hereof.
(c) The headings, captions and footers of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
(e) This Agreement may be amended only by an instrument in writing signed
by the party to be charged with enforcement.
11
<PAGE>
(f) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
or any course of dealings between the parties, shall not operate as a waiver
thereof or an amendment hereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or discontinuance of steps to enforce
such a right or power, preclude any other or further exercise thereof or
exercise of any other right or power.
(g) Any notices required or permitted to be given under the
terms of this Agreement shall be sent by mail or delivered personally (which
shall include telephone line facsimile transmission with answer back
confirmation) or by courier and shall be effective five days after being placed
in the mail, if mailed, or upon receipt, if delivered personally or by courier,
in the case of the Company addressed to the Company at its address shown in the
introductory paragraph of this Agreement, Attention: Director of Finance
(telephone line facsimile transmission number (781) 676-7330) or, in the case of
the Buyer, at its address shown on the signature page of this Agreement, with a
copy to Genesee International, Inc., 10500 N.E. 8th Street, Suite 1920,
Bellevue, Washington 98004-4332 (telephone line facsimile transmission number
(425) 462-4645) or such other address as a party shall have provided by notice
to the other party in accordance with this provision. The Buyer hereby
designates as its address and telephone line facsimile transmission number for
any notice required or permitted to be given to the Buyer pursuant to the
Certificate of Designations or the provisions of Section 4 the address and
telephone line facsimile transmission number shown on the signature page of this
Agreement, with a copy to: Advantage Fund Limited, c/o Genesee International,
Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue, Washington 98004-4332
(facsimile number (425) 462-4645), until the Buyer shall designate another
address for such purpose.
(h) The Buyer shall have the right to assign its rights and obligations
under this Agreement to any transferee of all or any portion of the Series G
Preferred Shares, provided any such assignee, by written instrument duly
executed by such assignee, assumes all obligations of the Buyer hereunder with
respect to the Series G Preferred Shares so transferred, whereupon the Buyer
shall be relieved of any further obligations, responsibilities and liabilities
under this Agreement with respect to the Series G Preferred Shares so
transferred.
(i) The respective representations, warranties, covenants and agreements of
the Buyer and the Company contained in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall survive the closing on the
Closing Date and shall remain in full force and effect regardless of any
investigation made by or on behalf of them or any person controlling or advising
any of them.
(j) This Agreement and its Annexes set forth the entire agreement between
the parties hereto with respect to the subject matter hereof and supersede all
prior agreements and understandings, whether written or oral, with respect
thereto.
(k) The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.
12
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto by their respective officers thereunto duly authorized as of the date
first set forth above.
ADVANTAGE FUND LIMITED
By: /s/ A.P. de Groot
--------------------
A.P. de Groot
President
Address: c/o CITCO
Kaya Flamboyan 9
Curatao, Netherlands Antilles
Facsimile No.: 011-599-9322008
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Joseph P. Caruso
-------------------------------
Title: Treasurer and Chief Financial
Officer
<PAGE>
ANNEX I
TO
EXCHANGE
AGREEMENT
PALOMAR MEDICAL TECHNOLOGIES, INC.
45 HARTWELL AVENUE
LEXINGTON, MASSACHUSETTS 02173
January , 1998
---
American Stock Transfer & Trust Company,
as Transfer Agent and Registrar
40 Wall Street
New York, New York 10005
Dear Sir or Madam:
Pursuant to an Exchange Agreement, dated as of December 31, 1997 (the
"Agreement"), by and between Palomar Medical Technologies, Inc., a Delaware
corporation (the "Company"), and Advantage Fund Limited (the "Original Holder"),
the Company has agreed with the Original Holder and will agree with subsequent
holders (together with the Original Holder, the "Holders") to exchange shares
(the "Series G Preferred Shares") of Series G Convertible Preferred Stock, $.01
par value (the "Series G Preferred Stock") of the Company for shares (the
"Common Shares") of Common Stock, $.01 par value (the "Common Stock"), of the
Company. As a condition precedent to the closing under the Exchange Agreement,
the Original Holder requires the Company to send this letter as the Company's
irrevocable instruction to American Stock Transfer & Trust Company, as Transfer
Agent and Registrar (the "Transfer Agent"), so that the Holders will be assured
of the timely issuance and receipt of shares of Common Stock upon exchange of
shares of Series G Preferred Stock.
The Company hereby appoints the Transfer Agent as exchange agent for
the Series G Preferred Stock. Enclosed with this letter is the form of Notice of
Exchange of Series G Convertible Preferred Stock (the "Exchange Notice")
relating to the Series G Preferred Stock. The Company hereby irrevocably
instructs the Transfer Agent to issue the Common Shares upon exchange of shares
of Series G Preferred Stock from time to time upon receipt of a copy of an
Exchange Notice delivered by a Holder which Exchange Notice shall specify the
number of Common Shares to be issued. The certificates for the Common Shares
shall not bear any restrictive legend and neither the Company nor the Transfer
Agent shall place any stop-transfer restriction against the Common Shares.
This instruction is expressly made for the benefit of the holders of
record from time to time of the Series G Preferred Stock and the Common Shares
and may not be changed,
<PAGE>
amended or modified to diminish or adversely affect the rights of such holders
hereunder without the prior written consent of all such holders so affected.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
-------------------------------
Name:
Title:
<PAGE>
ANNEX II
TO
EXCHANGE
AGREEMENT
NOTICE OF EXCHANGE
OF SERIES G CONVERTIBLE PREFERRED STOCK
OF PALOMAR MEDICAL TECHNOLOGIES, INC.
TO: PALOMAR MEDICAL TECHNOLOGIES, INC.
45 Hartwell Avenue
Lexington, Massachusetts 02173
Attention: Director of Finance
Facsimile: (781) 676-7330
(1) Pursuant to the Exchange Agreement, dated as of December 31, 1997,
by and between Palomar Medical Technologies, Inc., a Delaware corporation (the
"Company"), and Advantage Fund Limited (the "Exchange Agreement"), the
undersigned hereby elects to exchange ________ shares of Series G Convertible
Preferred Stock, $.01 par value per share (the "Preferred Stock"), of the
Company for shares of Common Stock, $.01 par value per share (the "Common
Stock"), of the Company, or such other securities for which the Preferred Stock
is currently exchangeable. Capitalized terms used herein and not otherwise
defined herein have the respective meanings provided in the Exchange Agreement.
(2) Please issue a certificate or certificates for the number of shares
of Common Stock or other securities for which such number of shares of Preferred
Stock is exchangeable in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:
--------------------- ---------------------
Name Name
--------------------- ---------------------
Address Address
--------------------- ---------------------
SS or Tax ID Number SS or Tax ID Number
(3) The Exchange Date is and the Closing Price of the Common
--------
Stock on the five consecutive trading days preceding the Exchange Date and the
arithmetic average thereof are as follows:
DATE CLOSING PRICE
------------ ------------
------------ ------------
------------ ------------
------------ ------------
------------ ------------
Arithmetic Average: $
----------------
(4) In the event of partial exercise, the Company must reissue an
appropriate certificate for the number of shares of Preferred Stock which shall
not have been exchanged.
(5) The undersigned hereby represents to the Company that the exercise
of exchange rights contained herein does not violate the provisions of Section
5(a) of the Exchange Agreement relating to limitation on beneficial ownership of
Common Stock upon exchange of the Preferred Stock.
NAME OF HOLDER
--------------------------------
Date:
----------------
--------------------------------
Signature of Holder (must be
signed exactly as name appears
on the Preferred Stock
Certificate.)
<PAGE>
MUTUAL RELEASE OF ALL CLAIMS
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of
which is hereby acknowledged, Palomar, as hereinafter defined, hereby remises,
releases, and forever discharges Genesee International, Inc., Advantage Fund
Ltd., GFL Advantage Fund Ltd., Advantage Fund II, Ltd., their general and
limited partners, employees, servants, agents, representatives, affiliates,
investors, attorneys and insurers, past and present, and its and their agents,
servants, heirs, successors and assigns (all hereinafter jointly and severally
referred to as "Genesee"), from any and all actions, causes of action, claims,
suits, accounts, covenants, contracts, debts, demands, agreements, damages,
liabilities or obligations whatsoever of every name and nature, whether at law
or in equity, whether in contract or tort or by statute or on any other basis,
known or unknown, suspected or unsuspected, vested or contingent (the "Claims"),
which Palomar now has or ever had from the beginning of the world to this date
(all hereinafter referred to as the "Palomar Claims"); provided, however, that
this shall not include any Claims which Palomar may have against Genesee in
connection with the Exchange Agreement of even date herewith and the Stock
Purchase Agreement dated as of January 8, 1998 between Palomar and Genesee (the
"Excluded Agreements").
Palomar expressly understands and agrees that Genesee does not, by
accepting this Release or providing the consideration set forth herein, admit or
agree that it has, will have or ever had any liability to Palomar.
<PAGE>
Further, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, including the foregoing release of
claims by Palomar against Genesee, Genesee likewise hereby remises, releases and
forever discharges Palomar Medical Technologies, Inc. and its servants,
employees, agents, representatives, affiliates, officers, directors,
subsidiaries, subsidiary officers, subsidiary directors, subsidiary employees,
attorneys and insurers, past and present, and their heirs, executors,
administrators, estates, legal representatives, successors and assigns
("Palomar") from any and all Claims which Genesee now has or ever had from the
beginning of the world to this date (all hereinafter referred to as "the Genesee
Claims"); provided, however, that this shall not include any Claims which
Genesee may have against Palomar in connection with the Excluded Agreements.
Genesee expressly understands and agrees that Palomar does not, by
accepting this Release or providing the consideration set forth herein, admit or
agree that it has, will have or ever had any liability to Genesee.
WARRANTY OF CAPACITY TO EXECUTE AGREEMENT AND RELEASE
The parties represent and warrant that no other person or entity has or
has had any interest in the Palomar Claims or the Genesee Claims, that they have
the sole right and exclusive authority to execute this Agreement and Release,
and that they have not sold, assigned, transferred, conveyed or otherwise
disposed of any of the Palomar Claims or the Genesee Claims.
CONFIDENTIALITY
The parties mutually agree that neither they nor their attorneys shall
reveal to anyone other than the parties and their attorneys and their attorneys'
legal staff, other than as may be mutually agreed to in writing (which agreement
shall not be unreasonably withheld) or required by law, any of the terms of this
Agreement and Release.
<PAGE>
ENTIRE AGREEMENT
This Agreement and Release constitutes the entire agreement between and
among the parties with regard to the subject matter set forth herein and
supersede all prior and contemporaneous agreements, understandings and
representations between or among the parties, oral or written, concerning the
subject matter hereof. No representation, promise, condition, inducement or
statement of intention, express or implied, that is not set forth in this
Agreement and Release has been made by any party concerning such subject matter,
no party has relied upon any representation, promise, condition, inducement or
statement of intention, express or implied, that is not set forth in this
Agreement and Release concerning such subject matter, and no party shall be
bound by any purported representation, promise, condition, inducement or
statement of intention, express or implied, that is not set forth in this
Agreement and Release concerning such subject matter.
REPRESENTATION AS TO COMPREHENSION OF DOCUMENT AND ADVICE OF COUNSEL
In entering into this Agreement and Release the parties represent that
they have relied upon the legal advice of their attorneys, who are the attorneys
of their own choice, and that they have completely read the terms of this
Agreement and Release and had the opportunity to inquire of their attorneys
about these terms, and that those terms are fully understood and voluntarily
accepted by them.
AMENDMENTS
This Agreement and Release may not be amended, supplemented, waived or
changed orally, but only by a writing signed by the party as to whom enforcement
of any such amendment, supplement, waiver or modification is sought and making
specific reference to this Agreement and Release.
<PAGE>
BINDING EFFECT
All of the terms and provisions of this Agreement and Release shall be
operative and binding upon each of the parties hereto upon execution hereof by
the applicable party, binding upon and inure to the benefit of, and be
enforceable by, the parties and their respective heirs, administrators,
executors, estates, legal representatives, successors and assigns, and the
possession of this Agreement and Release was not delivered in escrow or pursuant
to any agreement that it should not be effective until any conditions precedent
or subsequent had been complied with.
GOVERNING LAW
This Agreement and Release shall be governed by and construed and
enforced in accordance with the laws of the Commonwealth of Massachusetts.
COUNTERPARTS
This Agreement and Release may be executed and delivered in any number
of counterparts each of which, when so executed and delivered, shall be and
constitute an original and one and the same document.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.
<PAGE>
WITNESS MY HAND AND SEAL this 22nd day of January, 1998.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
-------------------------------
Name: Louis P. Valente
Title: President and
Chief Executive Officer
State of Massachusetts
County of Middlesex
On this 22nd day of January, 1998, before me personally appeared
Louis P. Valente, who acknowledges himself to be the President and Chief
Executive Officer of Palomar Medical Technologies, Inc., a Delaware corporation,
and as such President and Chief Executive Officer, being authorized so to do,
executed the foregoing instrument for the purposes contained therein on behalf
of Palomar Medical Technologies, Inc. and acknowledged that the foregoing
instrument was Palomar Medical Technologies, Inc.'s free act and deed.
/s/ Marianne Barrett
--------------------------------
Notary Public
Name: Marianne Barrett
My Commission Expires: 11/19/04
WITNESS MY HAND AND SEAL this ____ day of _______________, 1998.
GENESEE INTERNATIONAL, INC.
By: /s/ Michelle Kline
-----------------------------
Name: Michelle Kline
Title: Authorized Agent
State of Wasington
County of King
On this 22 day of January, 1998, before me personally appeared
Michelle Kline, who acknowledges himself to be the authorized agent of Genesee
International, Inc., a Delaware corporation, and as such authorized, being
authorized so to do, executed the foregoing instrument for the purposes
contained therein on behalf of Genesee International, Inc., and acknowledged
that the foregoing instrument was Genesee International, Inc.'s free act and
deed.
/s/ Howard Coleman
--------------------------------
Notary Public
Name: Howard Coleman
My Commission Expires: 2/10/01
WITNESS MY HAND AND SEAL this ____ day of _______________, 1998.
ADVANTAGE FUND LTD.,
GFL ADVANTAGE FUND LTD.,
ADVANTAGE FUND II, LTD.
By: /s/ A.P. de Groot
-----------------------------
Name: A.P. de Groot
Title: President
State of
---------------
County of
-----------------
On this ___ day of ______________, 1998, before me personally appeared
_______________, who acknowledges himself to be the _________________ of
Advantage Fund Ltd., GFL Advantage Fund Ltd., and Advantage Fund II, Ltd.., a
Delaware corporation, and as such ________________, being authorized so to do,
executed the foregoing instrument for the purposes contained therein on behalf
of Advantage Fund Ltd., GFL Advantage Fund Ltd., and Advantage Fund II, Ltd.,
and acknowledged that the foregoing instrument was Genesee International, Inc.'s
free act and deed.
--------------------------------
Notary Public
Name:
My Commission Expires:
<PAGE>
ANNEX IV TO EXCHANGE AGREEMENT
January 26, 1998
Advantage Fund Limited
c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
Re: PALOMAR MEDICAL TECHNOLOGIES, INC.
Ladies and Gentlemen:
We have acted as counsel to Palomar Medical Technologies, Inc., a
Delaware corporation (the "Company"), in connection with the Exchange Agreement,
dated as of December 31, 1997, between Advantage Fund Limited, a British Virgin
Islands corporation ("Advantage"), and the Company (the "Agreement") providing,
among other things, for the right of Advantage and any other holder of shares of
Series G Convertible Preferred Stock, $.01 par value per share (the "Series G
Preferred Stock"), to exchange shares of Series G Preferred Stock of the Company
for shares of Common Stock, $.01 par value (the "Common Stock"), of the Company.
The Series G Preferred Stock was acquired from the Company on September 26,
1996. Capitalized terms used and not otherwise defined herein shall have the
respective meanings assigned to such terms in the Agreement.
In connection with our rendering of the opinions expressed below, we
reviewed (i) the Certificate of Incorporation (the "Company Charter") and
By-Laws (the "Company By-Laws") of the Company, each as amended to date; (ii) a
certificate issued by the Secretary of State of the State of Delaware dated
January 9, 1998 with respect to the legal existence and good standing of the
Company in Delaware; (iii) the relevant records of meetings of the directors and
stockholders of the Company and consents of the directors and stockholders filed
therewith; (iv) the Agreement, the Certificate of Designations and the Transfer
Agent Instructions; (v) the other documents delivered at the Closing, (vi) the
agreements, instruments and documents listed on EXHIBIT A attached hereto (the
"Listed Agreements"); and (vii) such other documents and certificates as we have
deemed necessary to enable us to render the opinions expressed below.
In rendering the opinion expressed in paragraph 1 below with respect to
the legal existence and good standing of the Company in Delaware, we have relied
solely upon the certificate referred to in clause (ii) of the preceding
paragraph, and such opinion is given as of the date of such certificate.
<PAGE>
With respect to the opinion expressed in paragraph 4 below, we note
that we did not observe or supervise the activities of the Company or its
representatives in connection with the offering of the Common Shares. In
rendering such opinion we have assumed without investigation that in connection
with such offering there has been no general solicitation or general advertising
by the Company or its representatives with respect to the Common Shares. We have
also assumed that no person subject to 950 C.M.R. 14.402(b)(9)(F) has engaged in
any activity prohibited thereby and that no subsequent offer or sale of
securities of the Company will adversely affect the availability of the
exemptions from registration referred to in paragraph 4 of this opinion with
respect to the offer or sale of the Common Shares.
We call your attention to the fact that the Company has issued
securities that are convertible into shares of its common stock at rates based
on the market price of its common stock at the time conversion is requested. We
express no opinion as to the sufficiency of the number of authorized shares of
the Company's common stock as of any date.
When an opinion set forth below is given to our knowledge, the
knowledge is limited to the facts or other information known to David A.
Broadwin, Esquire, Marcel A. Bryar, Esquire, Dean F. Hanley, Esquire, and
Alexander H. Pyle, Esquire, who are the individual lawyers in our firm who were
actively involved in representation of the Company with respect to the
transactions contemplated by the Agreement and, except as expressly stated
herein, without any special or additional investigation undertaken for the
purposes of this opinion.
In rendering the opinions expressed herein, we have also examined and
have relied completely upon all of the representations and warranties as to
matters of fact contained in the Agreement and contained in the related
instruments and other documents delivered by the Company to you in connection
with the Closing, and we have assumed the completeness and accuracy of all
factual matters described in such representations and warranties.
We have not, except as specifically noted above, made any independent
review or investigation of facts relating to the Company, including without
limiting the generality of the foregoing, any investigation as to the existence
of any actions, suits or proceedings pending or threatened against the Company
or agreements, judgments, injunctions, orders or decrees binding upon the
Company or which might result in the imposition of any lien or other encumbrance
on any assets of the Company.
We have assumed the authenticity and completeness of all documents
furnished to us as originals, the genuineness of all signatures, the legal
capacity of natural persons, the conformity to the originals of all documents
furnished to us as copies, and the accuracy and completeness of all corporate
records made available to us by the Company.
<PAGE>
You have not asked us to pass upon your power and authority to enter
into the Agreement. Accordingly, for the purposes of this opinion, we have
assumed that you have all requisite power and authority to enter into the
Agreement and to effect all of the transactions thereunder, and that the
Agreement and each other agreement or instrument we have reviewed constitutes
the legal, valid and binding obligation of all parties thereto other than the
Company.
We have made such examination of Massachusetts law, federal law and the
corporation law of the State of Delaware as we deem necessary for the purposes
of this opinion. We do not purport to pass herein on the laws of any state or
jurisdiction other than the federal law of the United States of America, the law
of The Commonwealth of Massachusetts and the corporation law of the State of
Delaware. Our opinions are given only as of the date hereof, and we expressly
disclaim any continuing obligation or undertaking to supplement or update any of
our statements herein. We have assumed that the Buyer is not an "interested
stockholder" within the meaning of Section 203 of the Delaware General
Corporation Law.
The opinions herein expressed are qualified to the extent that (i) the
validity or enforceability of any provisions of any agreement or instrument may
be subject to or affected by any bankruptcy, reorganization, insolvency,
moratorium or similar law of general application from time to time in effect and
relating to or affecting the rights or remedies of creditors generally, (ii) the
remedy of specific performance or any other equitable remedy may be unavailable
in any jurisdiction or may be withheld as a matter of judicial discretion and
(iii) the enforcement of any rights or remedies is or may be subject to an
implied duty on the part of the party seeking to enforce such rights to take
action and make determinations on a reasonable basis and in good faith. In
addition, we express no opinion herein as to: prospective waivers of rights to
notice or a hearing or of other rights granted by constitution or statute;
powers of attorney; provisions purporting to relieve parties of the consequences
of their own negligence or misconduct; provisions purporting to establish
evidentiary standards; or provisions to the effect that rights or remedies are
not exclusive, that every right or remedy is cumulative and may be exercised in
addition to any other right or remedy, or that failure to exercise or delay in
exercising rights and remedies will not operate as a waiver of any such right or
remedy. With your permission, we have assumed for all purposes under this
opinion that the Company is not, and following completion of the transactions
contemplated by the Agreement will not be, insolvent, left with unreasonably
small capital, or unable to pay its debts as they mature.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to conduct its business as currently conducted.
<PAGE>
2. The Company has all requisite power and authority to enter into the
Agreement and the Transfer Agent Instructions and to consummate the transactions
contemplated thereby. The execution, delivery and performance of the Agreement
and the Transfer Agent Instructions and the consummation of the transactions
contemplated thereby have been duly authorized by all necessary corporate action
on the part of the Company. The Agreement and the Transfer Agent Instructions
have been duly executed and delivered by the Company and constitute the legal,
valid and binding obligations of the Company enforceable against the Company in
accordance with their respective terms.
3. The Common Shares have been duly authorized and, when issued in
exchange for shares of Series G Preferred Stock in accordance with the
Agreement, will be validly issued, fully paid and non-assessable.
4. Assuming the accuracy as of the date hereof of the representations
and warranties of the Buyer set forth in the Agreement, the Common Shares may be
issued to you upon exchange of the Series G Preferred Shares pursuant to the
Agreement without registration under the 1933 Act.
5. Other than the filing contemplated by Section 3(d) of the Agreement,
no authorization, approval or consent of, or filing with, any court,
governmental body, regulatory agency or stock exchange, market or automated
quotation system or the stockholders of the Company is required to be obtained
or made by the Company for the issuance of the Common Shares as contemplated by
the Agreement except such as have been obtained or made and other than such as
may be required under the securities or "blue sky" laws of certain jurisdictions
(as to which we express no opinion).
6. Except for the effects, if any, that may arise from lawsuits
disclosed in the SEC Reports, to our knowledge, there is no action, suit,
proceeding, inquiry or investigation before or by any court, public board or
body pending or threatened against or affecting the Company or any of its
subsidiaries, wherein an unfavorable decision, ruling or finding would have a
material adverse effect on the properties, business, condition (financial or
other), results of operations or prospects of the Company and its subsidiaries
taken as a whole or the transactions contemplated by the Agreement or any of the
documents contemplated thereby or delivered in connection therewith or which
would adversely affect the validity or enforceability of, or the authority or
ability of the Company to perform its obligations under, the Agreement or any of
such other documents.
<PAGE>
7. The execution, delivery and performance by the Company of the
Agreement and the Transfer Agent Instructions and the offer and issuance of the
Common Shares and the fulfillment of and the compliance with the respective
terms thereof by the Company will not result in a breach of any of the terms or
provisions of, or constitute a default under, the Company Charter, the Company
By-Laws, or any law, statute, rule or regulation to which the Company is subject
or any Listed Agreement; provided, however, that we express no opinion with
respect to the provisions of Section 6(a) of that certain 4.5% Convertible
Subordinated Promissory Note dated October 17, 1996 which is one of the Listed
Agreements.
8. Assuming (i) compliance by the holder of Common Shares with
paragraphs (e), (f), (g), (h) and (i) of Rule 144 promulgated under the 1933 Act
("Rule 144") at the time of a sale of Common Shares, (ii) compliance by the
Company at such time with paragraph (c) of Rule 144 and (iii) no change in the
terms of Rule 144 as currently in effect, the Common Shares may be sold prior to
September 26, 1998 pursuant to Rule 144 without registration under the 1933 Act.
On and after September 26, 1998, assuming no change in the terms of Rule 144 as
currently in effect, the Common Shares may be sold pursuant to paragraph (k) of
Rule 144 without registration under the 1933 Act, provided that the Common
Shares are sold for the account of a person who is not an affiliate of the
Company at the time of sale, and who has not been an affiliate of the Company
during the preceding three months.
These opinions are limited to the matters expressly stated herein and
are rendered solely for your benefit and may not be quoted or relied upon for
any other purpose or by any other person, except that the opinion expressed in
paragraph 4 above, insofar as it relates to the Common Shares, may be relied
upon by American Stock Transfer & Trust Company, as Transfer Agent and Registrar
for the Common Stock.
Very truly yours,
FOLEY, HOAG & ELIOT LLP
By:
-----------------------
A Partner
cc: American Stock Transfer &
Trust Company, as Transfer
Agent and Registrar
<PAGE>
EXHIBIT A
EXHIBIT A
Agreement and Plan of Reorganization dated March 9, 1996 by and among the
Company, TTI Acquisition Corp., Tissue Technologies, Inc. and Mario Barton
Amendment to Agreement and Plan of Reorganization dated April 29,1996 by and
among the Company, TTI Acquisition Corp., Tissue Technologies, Inc. and Mario
Barton
Letter from the Company to Tissue Technologies, Inc. waiving the Company's right
to receive indemnification under Section 6 of the Agreement and Plan of
Reorganization under certain circumstances
Plan of Merger dated May 3, 1996 by and between the Company, TTI Acquisition
Corp. and Tissue Technologies, Inc.
Stock Purchase Agreement dated March 19, 1996, by and between Dynaco Acquisition
Corp., Comtel Electronics, Inc., Mikel C. Green, Peter Rogal and Palomar
Electronics Corp.
Agreement for Purchase of Stock dated July 12,1996, by and between the Company,
Eleanor Roberts Weisman and Wallace Roberts
Restated Certificate of Incorporation, as amended
Bylaws, as amended
Patent License Agreement by and between the Company and Patlex Corporation,
effective as of January 1, 1992
1996 Stock Option Plan
Amended 1996 Employee Stock Purchase Plan
Form of Stock Option Agreement under the 1996 Stock Option Plan
Securities Purchase Agreement between the Company and The Travelers Insurance
Company dated July 12, 1996
Warrant to purchase Common Stock of the Company, dated July 12, 1996
Subscription Agreement dated September 26, 1996 between the Company and Genesee
Fund Limited
<PAGE>
Registration Rights Agreement dated September 26, 1996 between the Company and
Genesee Fund Limited
Warrant to purchase Common Stock of the Company dated September 27, 1996
Berckeley Subscription Agreement dated December 31, 1996 and Amendment thereto
dated January 10, 1997
Berckeley Debenture dated December 31, 1996
High Risk Opportunities Hub Fund, Ltd. Subscription Agreement dated January 14,
1997
High Risk Opportunities Hub Fund, Ltd. Debenture dated January 13, 1997
Securities Purchase Agreement dated December 31, 1996 between Palomar
Electronics Corporation and Clearwater Fund IV, LLC
Securities Purchase Agreement dated as of December 18, 1996 between Palomar
Electronics Corporation, the Company and The Travelers Insurance Company
Securities Purchase Agreement dated December 31, 1996 between Palomar
Electronics Corporation and GFL Advantage Fund Limited
Option Agreement dated December 31, 1996 between the Company and GFL Advantage
Fund Limited
Common Stock Purchase Warrant dated December 31, 1996
Form of Net Warrant to Purchase Common Stock
Subscription Agreement dated December 27, 1996 between the Company and
Finmanagement, Inc.
Subscription Agreement dated as of April 12, 1996 between the Company and GFL
Advantage Fund Limited
Registration Rights Agreement dated as of April 17, 1996 by and between the
Company and GFL Advantage Fund Limited
Warrant dated as of April 16, 1996
Form of Warrant to purchase Common Stock dated February 1, 1996
<PAGE>
Form of Offshore Stock Subscription Agreement dated February 1, 1996
Form of Subscription Agreement dated as of March 10, 1997
Form Registration Rights Agreement dated as of March 10, 1997
Form of 5% Convertible Debenture due March 10, 2002
Subscription Agreement dated as of March 13, 1997 between the Company and
Soginvest Bank
Form of 6% Convertible Debenture due March 13, 2002
Asset Purchase and Settlement Agreement dated February 28, 1997 by and among the
Company, Nexar Technologies, Inc., Technovation Computer Labs, Inc. and Babar I.
Hamirani
Employment Agreement dated as of May 1, 1996 between the Company and Ronald G.
Wheeland
Employment Agreement dated as of January 1, 1997, between the Company and Steven
Georgiev
Employment Agreement dated as of January 1, 1997, between the Company and
Michael H. Smotrich
Employment Agreement dated as of January 1, 1997, between the Company and Joseph
P. Caruso
Key Employee Agreement dated as of May 15, 1997 between the Company and Louis P.
Valente
Employment Agreement dated as of January 1, 1997, between the Company and
Anthony Fiorillo
Securities Purchase Agreement dated March 27, 1997 between the Company and RGC
International Investors, LDC
Registration Rights Agreement dated March 27, 1997 between the Company and RGC
International Investors, LDC
Form of 4.5% Convertible Subordinated Promissory Note dated October 17,1996
Form of Subscription Agreement dated October 16, 1996
Supplement to Securities Purchase Agreement dated May 5, 1997
Supplement to Registration Rights Agreement dated May 5, 1997
<PAGE>
Supplement to Securities Purchase Agreement dated May 23, 1997
Supplement to Registration Rights Agreement dated May 23, 1997
Agreement dated December 30, 1993 by and between the Company, Dynaco Corporation
and Dynaco West Corporation
First Amendment to Purchase and Sale Agreement dated January 24, 1994 by and
between the Company, Dynaco Corporation and Dynaco West Corporation
Purchase and Sale Agreement dated March 14, 1995, by and between the Company and
SPMT Acquisition Corp., Spectrum Medical Technologies, Inc., Sanford R. Lane and
CSF Investments Ltd.
Purchase and Sale Agreement dated June 5, 1995, by and between Dynaco
Acquisition Corporation and Allard Industries, Inc.
Company's 1991 Stock Option Plan, as amended
Company's 1993 Stock Option Plan
Company's 1995 Stock Option Plan
Form of Stock Option Grant under the Company's 1991, 1993 and 1995 Stock Option
Plans
Form of Company Warrant to Purchase Common Stock
Lease for premises at 66 Cherry Hill Drive, Beverly, Massachusetts, dated May
25, 1993
The Company's 401(k) Plan
Form of 6%, 7% and 8% Convertible Debentures due September 30, 2002
Form of Registration Rights Agreement dated September 30, 1997
Form of Securities Purchase Agreement dated September 30, 1997
Stock Purchase Agreement dated December 9, 1997 between and among Biometric
Technologies Corp., the Company and Dynaco Corp. and certain exhibits thereto.
Securities Purchase Agreement dated as of December 29,1997 by and among the
Company and Clearwater Fund IV, LLC
EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of September
30, 1997, by and among PALOMAR MEDICAL TECHNOLOGIES, INC., a corporation
organized under the laws of the State of Delaware (the "COMPANY"), with
headquarters located at 66 Cherry Hill Drive, Beverly, Massachusetts 01915 and
each of the purchasers (the "PURCHASERS") set forth on the execution pages
hereof (the "EXECUTION PAGES").
WHEREAS:
A. The Company and each Purchaser are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Section 4(2) of the Securities Act of 1933, as amended (the "SECURITIES
ACT");
B. Each Purchaser desires to purchase, upon the terms and conditions
stated in this Agreement; (i) 6%, 7% and 8% Convertible Debenture Due September
30, 2002 of the Company (each a "DEBENTURE" and, collectively, the "DEBENTURES")
convertible into its common stock, par value $.01 per share, of the Company (the
"COMMON STOCK") and (ii) shares of Common Stock (the "COMMON SHARES"). The form
of the Debenture, including the terms upon which such Debenture are convertible
into shares of Common Stock, is attached hereto as Exhibit A. The shares of
Common Stock issuable upon conversion of the Debenture or otherwise pursuant to
the Debentures are referred to herein as the "CONVERSION SHARES". The
Debentures, the Common Shares and the Conversion Shares are collectively
referred to herein as the "SECURITIES."
C. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as Exhibit B (the "REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws;
NOW, THEREFORE, the Company and the Purchasers hereby agree as follows:
1. PURCHASE AND SALE OF DEBENTURES AND COMMON SHARES
a. Purchase of Debentures and Common Shares. On the Closing Date
(as defined below), subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6 and 7 below, the Company shall issue
and sell to each Purchaser and each Purchaser severally agrees to
purchase from the Company, (i) a Debenture in such original principal
amount as is set forth on such Purchaser's signature page hereto and
(ii) a number of Common Shares equal to (A) fifteen percent (15%) of the
original principal amount of the Debenture referred to in clause (i)
divided by (B) the average of the closing bid prices of the Common Stock
on the Nasdaq SmallCap Market for the three (3) trading days commencing
on the first trading day after Closing Date. Each Investor represents
and agrees that neither it nor its affiliates has entered or will enter
into any transactions with respect to any securities of the Company
(other than the transactions contemplated by this Agreement) on the
Closing Date or the three trading days thereafter. The purchase price
(the "PURCHASE PRICE") for such Debenture and Common Shares to be issued
and sold to each Purchaser at such closing shall be as set forth on such
Purchaser's Execution Page hereto.
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<PAGE>
b. Form of Payment. On the Closing Date, each Purchaser shall
pay the aggregate Purchase Price for the Debentures and Common Shares
being purchased by such Purchaser hereunder by wire transfer to the
Company, in accordance with the Company's written wiring instructions,
against delivery of the duly executed Debenture being purchased by such
Purchaser hereunder and the Company shall deliver such Debenture against
delivery of such aggregate Purchase Price. Within twenty (20) days after
the second trading day following the Closing Date, the Company shall
deliver to each Purchaser a duly executed certificate representing the
Common Shares purchased by such Purchaser.
c. Closing Date. Subject to the satisfaction (or waiver) of the
conditions thereto set forth in Section 6 and Section 7 below, the date
and time of the issuance and sale of the Debentures and Common Shares
pursuant to this Agreement (the "CLOSING DATE") shall be 12:00 noon
eastern time on September 30, 1997, or such other time as may be
mutually agreed upon by the Company and the Purchasers. The closing
shall occur at the offices of Foley, Hoag & Eliot LLP, One Post Office
Square, Boston, MA 02109.
2. PURCHASERS' REPRESENTATIONS AND WARRANTIES
Each Purchaser severally represents and warrants to the Company that:
a. Investment Purpose. Purchaser is purchasing the Debentures
and Common Shares for Purchaser's own account for investment only and
not with a present view towards the public sale or distribution thereof,
except pursuant to sales that are exempt from the registration
requirements of the Securities Act and/or sales registered under the
Securities Act. Purchaser understands that Purchaser must bear the
economic risk of this investment indefinitely, unless the Securities are
registered pursuant to the Securities Act and any applicable state
securities or blue sky laws or an exemption from such registration is
available, and that the Company has no present intention of registering
any such Securities other than as contemplated by the Registration
Rights Agreement. Notwithstanding anything in this Section 2(a) to the
contrary, by making the representations herein, the Purchaser does not
agree to hold the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption
under the Securities Act.
b. Accredited Investor Status. Purchaser is an "Accredited
Investor" as defined in Rule 501(a) promulgated under the Securities
Act.
c. Reliance on Exemptions. Purchaser understands that the
Debentures and Common Shares are being offered and sold to Purchaser in
reliance upon specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is
relying upon the truth and accuracy of, and Purchaser's compliance with,
the representations, warranties, agreements, acknowledgments and
understandings of Purchaser set forth herein in order to determine the
availability of such exemptions and the eligibility of Purchaser to
acquire the Debentures and Common Shares.
2
<PAGE>
d. Information. Purchaser and its counsel or representative, if
any, have been furnished all materials relating to the business,
finances and operations of the Company and materials relating to the
offer and sale of the Debentures and Common Shares which have been
specifically requested by Purchaser or its counsel or representative.
Purchaser and its counsel, if any, have been afforded the opportunity to
ask questions of the Company and have received what Purchaser believes
to be complete and satisfactory answers to any such inquiries. Neither
such inquiries nor any other due diligence investigation conducted by
Purchaser or its counsel or any of its representatives shall modify,
amend or affect Purchaser's right to rely on the Company's
representations and warranties contained in Section 3 below. Purchaser
understands that Purchaser's investment in the Securities involves a
high degree of risk.
e. Governmental Review. Purchaser understands that no United
States federal or state agency or any other government or governmental
agency has passed upon or made any recommendation or endorsement of the
Securities.
f. Transfer or Resale. Purchaser understands that (i) except as
provided in the Registration Rights Agreement, the Securities have not
been and are not being registered under the Securities Act or any state
securities laws, and may not be transferred unless (a) subsequently
registered thereunder, or (b) Purchaser shall have delivered to the
Company an opinion of counsel (which opinion shall be in form, substance
and scope customary for opinions of counsel in comparable transactions)
to the effect that the Securities to be sold or transferred may be sold
or transferred pursuant to an exemption from such registration,
including without limitation Rule 144 promulgated under the Securities
Act (or a successor rule) ("RULE 144"), or (c) transferred without
consideration to an affiliate of Purchaser; (ii) any sale of such
Securities made in reliance on Rule 144 may be made only in accordance
with the terms of said Rule and further, if said Rule is not applicable,
any resale of such Securities under circumstances in which the seller
(or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the
rules and regulations of the Securities and Exchange Commission (the
"SEC") thereunder; and (iii) neither the Company nor any other person is
under any obligation to register such Securities under the Securities
Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder (in each case, other than
pursuant to the Registration Rights Agreement).
g. Legends. Purchaser understands that the Debentures and Common
Shares and, until such time as the Conversion Shares have been
registered under the Securities Act as contemplated by the Registration
Rights Agreement or otherwise may be sold by Purchaser pursuant to Rule
144 without any restriction as to the public resale thereof, the
certificates for the Conversion Shares may bear a restrictive legend in
substantially the following form (and a stop-transfer order may be
placed against transfer of the certificates for such Securities):
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<PAGE>
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be
sold, transferred or assigned in the absence of an effective
registration statement for the securities under said Act, or an
opinion of counsel, in form, substance and scope customary for
opinions of counsel in comparable transactions, that
registration is not required under said Act or unless the
Company is provided with reasonable assurances that the
securities were sold pursuant to Rule 144 under said Act.
The legend set forth above shall be removed and the Company
shall issue a certificate without such legend upon conversion of the
Debentures to the holder of any Security upon which it is stamped, if
(a) the resale of such Security is registered under the Securities Act,
or (b) such holder provides the Company with an opinion of counsel, in
form, substance and scope customary for opinions of counsel in
comparable transactions, to the effect that a public sale or transfer of
such Security may be made without registration under the Securities Act
or (c) such holder provides the Company with reasonable assurances that
such Security has been sold pursuant to Rule 144 or can be sold pursuant
to Rule 144 without any restriction as to the number of Securities
acquired as of a particular date that can then be immediately sold.
Purchaser agrees to sell all Securities, including those represented by
a certificate(s) from which the legend has been removed, pursuant to an
effective registration statement and to deliver a prospectus in
connection with such sale (if and to the extent such delivery is
required) or in compliance with an exemption from the registration
requirements of the Securities Act. In the event the above legend is
removed from any Security and thereafter the effectiveness of a
registration statement covering such Security is suspended or the
Company determines that a supplement or amendment thereto is required by
applicable securities laws, then upon reasonable advance notice to
Purchaser the Company may require that the above legend be placed on any
such Security that cannot then be sold pursuant to an effective
registration statement or Rule 144 without any restriction as to the
number of Securities acquired as of a particular date that can then be
immediately sold, which legend shall be removed when such Security has
been sold pursuant to Rule 144 or may be sold pursuant to an effective
registration statement or Rule 144 without any restriction as to the
number of Securities acquired as of a particular date that can then be
immediately sold.
h. Authorization; Enforcement. This Agreement and the
Registration Rights Agreement have been duly and validly authorized,
executed and delivered on behalf of Purchaser and are valid and binding
agreements of Purchaser enforceable in accordance with their respective
terms.
i. Location of Purchaser. Each of the Purchasers has advised the
Company in writing with respect to the jurisdictions wherein the
investment decision regarding Purchaser's acquisition of the Debentures
and the Common Shares has been made.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Purchaser that:
4
<PAGE>
a. Organization and Qualification. The Company and each of its
subsidiaries is a corporation duly organized and existing in good
standing under the laws of the jurisdiction in which it is incorporated,
and has the requisite corporate power to own its properties and to carry
on its business as now being conducted. The Company and each of its
subsidiaries is duly qualified as a foreign corporation to do business
and is in good standing in every jurisdiction where the failure so to
qualify would have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT"
means any material adverse effect on the operations, properties,
condition (financial or otherwise) or prospects of the Company and its
subsidiaries, taken as a whole on a consolidated basis or on the ability
of the Company to perform its obligations in connection with the
transactions contemplated hereby on a timely basis. The Company does not
have any significant subsidiaries (as defined in Rule 1-02 of Regulation
S-X under the Securities Act) other than those subsidiaries set forth on
Schedule 3(a).
b. Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement
and the Registration Rights Agreement, to issue and sell the Debentures
and Common Shares in accordance with the terms hereof, and to issue the
Conversion Shares upon conversion of the Debentures in accordance with
their terms; (ii) the execution, delivery and performance of this
Agreement, the Registration Rights Agreement and the Debentures by the
Company and the consummation by it of the transactions contemplated
hereby and thereby (including without limitation the issuance of the
Debentures and Common Shares and the issuance and reservation for
issuance of the Conversion Shares) have been duly authorized by the
Company's Board of Directors and no further consent or authorization of
the Company, its Board or Directors, or its stockholders is required
(under Rules promulgated by the National Association of Securities
Dealers or otherwise); (iii) this Agreement has been duly executed and
delivered by the Company; and (iv) this Agreement constitutes, and, upon
execution and delivery by the Company of the Registration Rights
Agreement and the Debentures, such agreement and such instrument will
constitute, valid and binding obligations of the Company enforceable
against the Company in accordance with their respective terms.
c. Capitalization. The capitalization of the Company as of the
date hereof, including the authorized capital stock, the number of
shares issued and outstanding, the number of shares reserved for
issuance pursuant to the Company's stock option plans, the number of
shares reserved for issuance pursuant to securities (other than the
Debentures) exercisable for, or convertible into or exchangeable for any
shares of Common Stock and the number of shares to be reserved for
issuance upon conversion of the Debentures is set forth on Schedule
3(c). All of such outstanding shares of capital stock have been, or upon
issuance will be, validly issued, fully paid and nonassessable. No
shares of capital stock of the Company (including the Debentures, the
Common Shares and the Conversion Shares) are subject to preemptive
rights or any other similar rights of the stockholders of the Company or
any liens or encumbrances. Except as disclosed in Schedule 3(c) or as
contemplated herein, as of the date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or
rights convertible into or exercisable or exchangeable for, any shares
of capital stock of the Company or any of its subsidiaries, or
arrangements by which the Company or any of its subsidiaries is or may
become bound to issue additional shares of capital stock of the Company
or any of its subsidiaries, and (ii) there are no agreements or
arrangements under which the Company or any of its subsidiaries is
obligated to register the sale of any of the Company's securities under
the Securities Act (except the Registration Rights Agreement). The
Company has made available to each Purchaser true and correct copies of
the Company's Certificate of Incorporation as in effect on the date
hereof ("CERTIFICATE OF INCORPORATION"), the Company's By-laws as in
effect on the date hereof (the "BY-LAWS"), and all other instruments and
agreements governing securities convertible into or exercisable or
exchangeable for Common Stock of the Company. The Company shall provide
each Purchaser with a written update of this representation signed by
the Company's Chief Executive Officer or Chief Financial Officer on
behalf of the Company as of the Closing Date.
5
<PAGE>
d. Issuance of Securities. The Debentures are duly authorized
and, upon issuance in accordance with the terms of this Agreement, will
be validly issued and free from all taxes, liens, claims and
encumbrances and will not be subject to preemptive rights or other
similar rights of stockholders of the Company. The Common Shares are
duly authorized and, upon issuance in accordance with the terms of this
Agreement, will be validly issued, fully paid and non-assessable, and
free from all taxes, liens, claims and encumbrances and will not be
subject to preemptive rights or other similar rights of stockholders of
the Company. The Conversion Shares are duly authorized and reserved for
issuance, and, upon conversion of the Debentures in accordance with the
terms thereof, will be validly issued, fully paid and non-assessable,
and free from all taxes, liens, claims and encumbrances and will not be
subject to preemptive rights or other similar rights of stockholders of
the Company.
e. No Conflicts. The execution, delivery and performance of this
Agreement, the Registration Rights Agreement and the Debentures by the
Company, the performance by the Company of its obligations hereunder and
thereunder, and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the
issuance and reservation for issuance, as applicable, of the Debentures
and Common Shares and the Conversion Shares) will not (i) result in a
violation of the Certificate of Incorporation or By-laws or (ii)
conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of,
any agreement, indenture or instrument to which the Company or any of
its subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including U.S. federal and state
securities laws and regulations) applicable to the Company or any of its
subsidiaries or by which any property or asset of the Company or any of
its subsidiaries is bound or affected (except for such conflicts,
defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect). Neither
the Company nor any of its subsidiaries is in violation of its
Certificate of Incorporation or other organizational documents and
neither the Company nor any of its subsidiaries is in default (and no
event has occurred which, with notice or lapse of time or both, would
put the Company or any of its subsidiaries in default) under, nor has
there occurred any event giving others (with notice or lapse of time or
both) any rights of termination, amendment, acceleration or cancellation
of, any agreement, indenture or instrument to which the Company or any
of its subsidiaries is a party, except for possible defaults or rights
as would not, individually or in the aggregate, have or reasonably be
expected to result in a Material Adverse Effect. The businesses of the
Company and its subsidiaries are not being conducted, and shall not be
conducted so long as a Purchaser owns any of the Securities, in
violation of any law, ordinance or regulation of any governmental
entity, except for possible violations the sanctions for which either
singly or in the aggregate would not have or reasonably be expected to
result in a Material Adverse Effect. Except as specifically contemplated
by this Agreement and except for the filing of a Form D with the
Securities and Exchange Commission, the filing of the registration
statement contemplated by the Registration Rights Agreement under the
Securities Act, any filings required by applicable state securities laws
and the filing of an application with NASDAQ (as defined below) to list
or approve for quotation the Conversion Shares and the Common Shares,
the Company is not required to obtain any consent, authorization or
order of, or make any filing or registration with, any court or
governmental agency or any regulatory or self regulatory agency in order
for it to execute, deliver or perform any of its obligations under this
Agreement, the Registration Rights Agreement or the Debentures, in each
case in accordance with the terms hereof or thereof. The Company is not
in violation of the listing requirements of the NASDAQ SmallCap Market
("NASDAQ") and does not reasonably anticipate (nor has it received any
notices to such effect from NASDAQ) that the Common Stock will be
delisted by NASDAQ in the foreseeable future.
6
<PAGE>
f. SEC Documents, Financial Statements. Since December 31, 1993,
the Company has timely filed all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant to
the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT") (all of the foregoing, filed prior to the
date hereof and after December 31, 1993, and all exhibits included
therein and financial statements and schedules thereto and documents
(other than exhibits) incorporated by reference therein together with
any registration statements or other documents filed by the Company
pursuant to the Securities Act prior to the date hereof and those
certain news releases attached hereto as Schedule 3(f), being
hereinafter referred to herein as the "SEC DOCUMENTS"). The Company has
made available to each Purchaser true and complete copies of the SEC
Documents, except for such exhibits, schedules and incorporated
documents. As of their respective dates, the SEC Documents complied in
all material respects with the requirements of the Exchange Act or the
Securities Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder applicable to the SEC Documents, and none of
the SEC Documents, at the time they were filed with the SEC, contained
any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial
statements of the Company included in the SEC Documents complied in all
material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto. Such
financial statements have been prepared in accordance with U.S.
generally accepted accounting principles, consistently applied, during
the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of
unaudited interim statements, to the extent they may include footnotes
or may not be condensed or summary statements) and fairly present in all
material respects the consolidated financial position of the Company and
its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). Except as set forth in the financial
statements of the Company included in the SEC Documents, the Company has
no liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to the date of
the most recent financial statements included in the SEC Documents and
(ii) obligations under contracts and commitments incurred in the
ordinary course of business and not required under generally accepted
accounting principles to be reflected in such financial statements,
which, individually or in the aggregate, are not material to the
financial condition or operating results of the Company.
7
<PAGE>
g. Absence of Litigation. Except as disclosed in the SEC
Documents or in Schedule 3(g), there is no action, suit, proceeding,
inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to
the knowledge of the Company or any of its subsidiaries, threatened
against or affecting the Company, any of its subsidiaries, or any of
their respective directors or officers in their capacities as such,
wherein an unfavorable decision, ruling or finding would or could
reasonably be expected to result in a Material Adverse Effect.
h. Disclosure. All information relating to or concerning the
Company set forth in this Agreement or provided to the Purchasers
pursuant to Section 2(d) hereof and otherwise in connection with the
transactions contemplated hereby is true and correct in all material
respects and the Company has not omitted to state any material fact
necessary in order to make the statements made herein or therein, in
light of the circumstances under which they were made, not misleading.
No event or circumstance has occurred or exists with respect to the
Company or its subsidiaries or their respective businesses, properties,
prospects, operations or financial conditions, which, under applicable
law, rule or regulation, requires public disclosure or announcement by
the Company but which has not been so publicly announced or disclosed
(assuming for this purpose that the Company's Exchange Act Reports are
being incorporated into an effective registration statement filed by the
Company under the Securities Act).
i. Current Public Information. The Company is currently eligible
to register the resale of its Common Stock on a registration statement
on Form S-3 under the Securities Act.
j. No General Solicitation. Neither the Company nor any person
acting for the Company has conducted any "GENERAL SOLICITATION," as such
term is defined in Regulation D, with respect to any of the Securities
being offered hereby.
k. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly
or indirectly made any offers or sales of any security or solicited any
offers to buy any security under circumstances that would require
registration of the Securities being offered hereby under the Securities
Act.
l. No Brokers. The Company has taken no action which would give
rise to any claim by any person for brokerage commissions, finder's fees
or similar payments by any Purchaser relating to this Agreement or the
transactions contemplated hereby, except for dealings with Michael
Arnouse whose commissions and fees will be paid for by the Company.
m. Acknowledgment of Dilution. The number of Conversion Shares
issuable upon conversion of the Debentures may increase substantially in
certain circumstances, including the circumstance wherein the trading
price of the Common Stock declines. The Company acknowledges that its
obligation to issue Conversion Shares upon conversion of the Debentures
in accordance with their terms is absolute and unconditional, regardless
of the dilution that such issuance may have on the ownership interests
of other stockholders.
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n. Intellectual Property. Each of the Company and its
subsidiaries owns or possesses adequate and enforceable rights to use
all patents, patent applications, trademarks, trademark applications,
trade names, service marks, copyrights, copyright applications,
licenses, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures) and other similar rights and proprietary knowledge
(collectively, "INTANGIBLES") necessary for the conduct of its business
as now being conducted and as described in the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996, as amended.
Neither the Company nor any subsidiary of the Company infringes or is in
conflict with any right of any other person with respect to any
Intangibles which, individually or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would have or could
reasonably be expected to result in a Material Adverse Effect.
o. Foreign Corrupt Practices. Neither the Company, nor any of
its subsidiaries, nor any director, officer, agent, employee or other
person acting on behalf of the Company or any subsidiary has, in the
course of acting for, or on behalf of, the Company, used any corporate
funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; made any direct or
indirect unlawful payment to any foreign or domestic government official
or employee from corporate funds; violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977; or made any
bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.
4. COVENANTS.
a. Best Efforts. The parties shall use their best efforts timely
to satisfy each of the conditions described in Section 6 and 7 of this
Agreement.
b. Blue Sky Laws. The Company shall take such action as the
Company or the Purchasers shall reasonably determine is necessary to
qualify the Securities for sale to the Purchasers pursuant to this
Agreement under applicable securities or "blue sky" laws of the states
of the United States or obtain exemption therefrom, and shall provide
evidence of any such action so taken to the Purchasers.
c. Reporting Status. So long as any Purchaser beneficially owns
any of the Securities, the Company shall timely file all reports
required to be filed with the SEC pursuant to the Exchange Act.
d. Use of Proceeds. The Company shall use the proceeds from the
sale of the Debentures and Common Shares for internal working capital
purposes, mergers and acquisitions, investments and general corporate
purposes.
e. Financial Information. Upon the written request of any
Purchaser holding any Securities, the Company shall send the following
reports to such Purchaser: a copy of its Annual Report on Form 10-KSB,
its Quarterly Reports on Form 10-QSB, any proxy statements, any Current
Reports on Form 8-K and any press releases issued by the Company or any
of its subsidiaries.
9
<PAGE>
f. Reservation of Shares. The Company shall at all times have
authorized and reserved for the purpose of issuance a sufficient number
of shares of Common Stock to provide for the full conversion of the
outstanding Debentures and issuance of the Conversion Shares in
connection therewith and as otherwise required by the Debentures.
g. Listing. Promptly (and in no event more than ten (10) days)
following the Closing Date, the Company shall secure the listing or
approval for quotation of all of the Common Shares and 3,500,000 shares
of Common Stock issuable upon conversion of the Debentures upon each
national securities exchange or automated quotation system, if any, upon
which shares of Common Stock are then listed (subject to official notice
of issuance) and thereafter shall maintain, so long as any other shares
of Common Stock shall be so listed, such listing of all Common Shares
and all Conversion Shares from time to time issuable upon conversion of
the Debentures. The Company shall also file such additional listing
applications as may be necessary to cover the issuance of all of the
Common Shares and the Conversion Shares as provided in the immediately
preceding sentence. The Company will take all action necessary to
continue the listing and trading of its Common Stock on the NASDAQ, the
NASDAQ National Market ("NNM"), the New York Stock Exchange ("NYSE") or
the American Stock Exchange ("AMEX") and will comply in all respects
with the Company's reporting, filing and other obligations under the
bylaws or rules of the National Association of Securities Dealers
("NASD") and such exchanges, as applicable.
h. Corporate Existence. So long as a Purchaser beneficially owns
any Debentures, the Company shall maintain its corporate existence,
except in the event of a merger, consolidation or sale of all or
substantially all of the Company's assets, as long as the surviving or
successor entity in such transaction (i) assumes the Company's
obligations hereunder and under the agreements and instruments entered
into in connection herewith regardless of whether or not the Company
would have had a sufficient number of shares of Common Stock authorized
and available for issuance in order to effect the conversion of all
Debentures outstanding as of the date of such transaction and (ii) is a
publicly traded corporation whose common stock is listed for trading on
the NASDAQ, NNM, NYSE or AMEX.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall instruct its transfer agent to issue certificates,
registered in the name of each Purchaser or its nominee, for the Conversion
Shares in such amounts as specified from time to time by such Purchaser to the
Company upon conversion of the Debentures. Prior to registration of the
Conversion Shares under the Securities Act or resale of such Securities under
Rule 144, all such certificates shall bear the restrictive legend specified in
Section 2(g) of this Agreement. The Company warrants that no instruction other
than such instructions referred to in this Section 5, and stop transfer
instructions to give effect to Section 2(f) hereof in the case of the Conversion
Shares prior to registration of the Conversion Shares under the Securities Act,
will be given by the Company to its transfer agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement, the Registration Rights Agreement and
10
<PAGE>
the Debentures. Nothing in this Section shall affect in any way each Purchaser's
obligations and agreement set forth in Section 2(f) hereof not to resell the
Securities except pursuant to an effective registration statement (and to
deliver a prospectus in connection with such a sale) or in compliance with an
exemption from the registration requirements of applicable securities law. If a
Purchaser provides the Company with an opinion of counsel, which opinion of
counsel shall be in form, substance and scope customary for opinions of counsel
in comparable transactions, to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from
registration, the Company shall permit the transfer, and, in the case of the
Conversion Shares, promptly instruct its transfer agent to issue one or more
certificates in such name and in such denominations as specified by a Purchaser.
The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to a Purchaser by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that a Purchaser shall be entitled,
in addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Debentures
and the Common Shares to a Purchaser at the closing is subject to the
satisfaction, at or before the Closing Date, of each of the following conditions
thereto, provided that these conditions are for the Company's sole benefit and
may be waived by the Company at any time in its sole discretion.
(a) The applicable Purchaser shall have executed the Execution
Page to this Agreement and the Registration Rights Agreement, and
delivered the same to the Company.
(b) The applicable Purchaser shall have delivered the Purchase
Price for the Debentures and the Common Shares purchased in accordance
with Section 1(b) above and the aggregate purchase price for the
Debentures and Common Shares purchased by all Purchasers hereunder shall
not be less than $5,000,000.
(c) The representations and warranties of the applicable
Purchaser shall be true and correct as of the date when made and as of
the Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date), and the applicable
Purchaser shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the applicable
Purchaser at or prior to the Closing Date.
(d) No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent
jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which prohibits the consummation of any
of the transactions contemplated by this Agreement.
11
<PAGE>
7. CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE.
The obligation of each Purchaser hereunder to purchase the Debentures
and the Common Shares to be purchased by it on the Closing Date is subject to
the satisfaction of each of the following conditions, provided that these
conditions are for such Purchaser's sole benefit and may be waived by such
Purchaser at any time in the Purchaser's sole discretion:
(a) The Company shall have executed the signature page to this
Agreement and the Registration Rights Agreement, and delivered the same
to such Purchaser.
(b) The Company shall have delivered to such Purchaser a duly
executed Debenture in the principal amount being purchased by such
Purchaser in accordance with Section 1(b) above.
(c) The aggregate purchase price for the Debentures and Common
Shares purchased by all Purchasers hereunder shall be $5,000,000.
(d) The Common Stock shall be authorized for quotation on NASDAQ
and trading in the Common Stock (or NASDAQ generally) shall not have
been suspended by the SEC or NASD.
(e) The representations and warranties of the Company shall be
true and correct as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed,
satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the Company at or prior to the Closing
date. Such Purchaser shall have received a certificate, executed by the
chief executive officer of the Company, dated as of the Closing Date to
the foregoing effect and as to such other matters as may be reasonably
requested by such Purchaser.
(f) No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent
jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which prohibits the consummation of any
of the transactions contemplated by this Agreement.
(g) Such Purchaser shall have received the officer's certificate
described in Section 3(c) above, dated as of the Closing Date.
(h) Such Purchaser shall have received an opinion of the
Company's counsel, dated as of the Closing Date, in form, scope and
substance reasonably satisfactory to the Purchaser and in substantially
the form of Exhibit C attached hereto.
(i) The Company shall have executed, and shall have delivered
evidence reasonably satisfactory to the Purchasers that the Company's
transfer agent has agreed to act in accordance with the irrevocable
instructions in the form attached hereto as Exhibit D; PROVIDED,
HOWEVER, if such evidence is not delivered on or prior to the Closing
Date, the Company shall use its best efforts to deliver such evidence as
soon as practicable thereafter.
12
<PAGE>
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law; Jurisdiction. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware
applicable to contracts made and to be performed in the State of
Delaware. The Company irrevocably consents to the jurisdiction of the
United States federal courts located in the County of Kent in the State
of Delaware in any suit or proceeding based on or arising under this
Agreement and irrevocably agrees that all claims in respect of such suit
or proceeding may be determined in such courts. The Company irrevocably
waives the defense of an inconvenient forum to the maintenance of such
suit or proceeding. The Company further agrees that service of process
upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any suit or
proceeding arising hereunder. Nothing herein shall affect a Purchaser's
right to serve process in any other manner permitted by law. The Company
agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on such judgment or in any other lawful manner.
b. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed
by each party and delivered to the other party.
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. Entire Agreement; Amendments. This Agreement and the
instruments referenced herein contain the entire understanding of the
parties with respect to the matters covered herein and therein and,
except as specifically set forth herein or therein, neither the Company
nor the Purchasers make any representation, warranty, covenant or
undertaking with respect to such matters. No provision of this Agreement
may be waived other than by an instrument in writing signed by the party
to be charged with enforcement and no provision of this Agreement may be
amended other than by an instrument in writing signed by the Company and
the Purchasers.
f. Notices. Any notices required or permitted to be given under
the terms of this Agreement shall be sent by certified or registered
mail (return receipt requested) or delivered personally or by courier,
overnight delivery service or by confirmed telecopy, and shall be
effective five days after being placed in the mail, if mailed, or upon
receipt or refusal of receipt, if delivered personally or by courier,
overnight delivery service or confirmed telecopy, in each case addressed
to a party. The addresses for such communications shall be:
If to the Company:
13
<PAGE>
Palomar Medical Technologies, Inc.
66 Cherry Hill Drive
Beverly, Massachusetts 01915
Telecopy: (508) 921-5801
Attention: Paul Weiner, Director of Finance
with a copy to each of the Company's General Counsel at the same address
and to:
Foley, Hoag & Eliot LLP
One Post Office Square
Boston, Massachusetts 02109
Telecopy: (617) 832-7000
Attention: Dean F. Hanley, Esq.
If to any Purchaser, to such address set forth under such Purchaser's
name on the signature page hereto executed by such Purchaser.
Each party shall provide notice to the other parties of any change in
address.
g. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and
assigns. Neither the Company nor any Purchaser shall assign this
Agreement or any rights or obligations hereunder without the prior
written consent of the other. This provision shall not limit a
Purchaser's right to transfer the Securities pursuant to the terms of
the Debentures, the Registration Rights Agreement and this Agreement or
to assign such Purchaser's rights hereunder to any such transferee, nor
shall this provision limit the right of a Purchaser to transfer or
assign its rights under such agreements and instruments to an affiliate
(provided that each Purchaser makes no more than two (2) such transfers)
or a managed account, provided that the representations and warranties
set forth in Section 2 are true and correct with respect to such
affiliate or managed account.
h. Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors
and assigns, and is not for the benefit of, nor may any provision hereof
be enforced by, any other person.
i. Survival. The representations and warranties of the Company
and the agreements and covenants set forth in Sections 3, 4, 5 and 8
shall survive the closing hereunder and any conversion of the
Debentures, notwithstanding any due diligence investigation conducted by
or on behalf of any Purchasers. The Company agrees to indemnify and hold
harmless each Purchaser and each of such Purchaser's officers,
directors, employees, partners, agents and affiliates for loss or damage
arising as a result of or related to any breach or alleged breach by the
Company of any of its representations, warranties or covenants set forth
herein, including advancement of expenses as they are incurred.
j. Publicity. The Company and each Purchaser shall have the
right to approve before issuance any press releases, SEC, NASDAQ or NASD
filings, or any other public statements with respect to the transactions
contemplated hereby; PROVIDED, HOWEVER, that the Company shall be
entitled, without the prior approval of the Purchasers, to describe the
transactions contemplated hereby in any Form 10-Q or Form 10-K filed by
it.
14
<PAGE>
k. Further Assurances. Each party shall do and perform, or cause
to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments
and documents, as the other party may reasonably request in order to
carry out the intent and accomplish the purposes of this Agreement and
the consummation of the transactions contemplated hereby.
l. Termination. In the event that the closing shall not have
occurred on or before September 30, 1997, unless the parties agree
otherwise, this Agreement shall terminate at the close of business on
such date.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
15
<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have
caused this Agreement to be duly executed as of the date first above written.
PURCHASER:
Name: JNC OPPORTUNITY FUND LTD..
OLYMPIA CAPITAL (CAYMAN) LTD.
c/o Olympia Capital (Bermuda) Ltd.
Williams House
20 Reid Street
Hamilton HM11, Bermuda
Fax: 441-295-2305
Attn: Philip Pedro
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
AGGREGATE SUBSCRIPTION AMOUNT
Principal Amount of Debenture:
----------
Purchase Price: $
----------
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
--------------------------------
Name: Louis P. Valente
Title: Chief Executive Officer
and President
16
<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have
caused this Agreement to be duly executed as of the date first above written.
PURCHASER:
Name: DIVERSIFIED STRATEGIES FUND, L.P.
By: /s/ Neil T. Chau
---------------------------
Name: Neil T. Chau
-------------------------
Title:
------------------------
ADDRESS: Diversified Strategies Fund, L.P.
c/o Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Facsimle No.: 703-476-7711
Attn: Neil T. Chau
with a copy to:
Bobinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson and
Eric L. Cohen
AGGREGATE SUBSCRIPTION AMOUNT
Principal Amount of Debenture: $1,500,000
----------
Purchase Price: $1,500,000
----------
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
-----------------------------
Name:
-----------------------------
Title:
----------------------------
<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have
caused this Agreement to be duly executed as of the date first above written.
PURCHASER:
Name: SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.
By: /s/ Kenneth L. Henderson
--------------------------
Name: Kenneth L. Henderson
--------------------------
Title: Attorney in Fact
--------------------------
ADDRESS: Southbrook INternational Investments, Ltd.
c/o Trippoak Advisors, Inc.
630 Fifth Avenue, Suite 2000
New York, New York 10111
Fax: 212-332-3256
Attn: Robert L. Miller
with a copy to:
Bobinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson and
Eric L. Cohen
AGGREGATE SUBSCRIPTION AMOUNT
Principal Amount of Debenture: $2,000,000
Purchase Price: $2,000,000
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have
caused this Agreement to be duly executed as of the date first above written.
PURCHASER:
Name: JNC OPPORTUNITY FUND, LTD.
By: /s/ Philip C. Pedro
--------------------------
Name: Philip C. Pedro
--------------------------
Title: Director
--------------------------
ADDRESS: JNC Opportunity Fund, Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House
20 Reid Street
Hamilton MH11 BERMUDA
Fax: (441)295-2305
Attn: Philip Pedro
with a copy to:
Bobinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson and
Eric L. Cohen
with a copy to:
Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Ste. 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
AGGREGATE SUBSCRIPTION AMOUNT
Principal Amount of Debenture: $3,500,000
Purchase Price: $3,500,000
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
<PAGE>
EXECUTION COPY
EXHIBIT A
TO
SECURITIES PURCHASE
AGREEMENT
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (AND ANY SECURITIES ISSUED OR
ISSUABLE IN RESPECT HEREOF, BY CONVERSION OR OTHERWISE) HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED
FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN
OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF
COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT OR UNLESS THE CORPORATION IS PROVIDED WITH REASONABLE ASSURANCES THAT THE
SECURITIES WERE SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
NO. $
------ -----------
6%, 7% AND 8% CONVERTIBLE DEBENTURE DUE SEPTEMBER 30, 2002
THIS CONVERTIBLE DEBENTURE (this "DEBENTURE") is one of a duly
authorized issue of Debentures of Palomar Medical Technologies, Inc. a
corporation duly organized and existing under the laws of the State of Delaware
and having its principal address at 66 Cherry Hill Drive, Beverly, Massachusetts
01915 (the "CORPORATION"), designated as its 6%, 7% and 8% Convertible
Debentures Due September 30, 2002 in an aggregate principal amount not exceeding
Seven Million U.S. Dollars (U.S. $7,000,000) (the "DEBENTURES").
FOR VALUE RECEIVED, the Corporation promises to pay to
______________________, at the address specified in the Debenture Register (as
hereinafter defined), the holder hereof, or its order (the "Holder"), the
principal sum of ______________________ United States Dollars (U.S. $_______),
or such lesser principal sum as is then outstanding hereunder, on September 30,
2002 (the "MATURITY DATE") and to pay interest on the principal sum outstanding
under this Debenture (i) at the rate of 6% per annum during the period beginning
on the Closing Date (as hereinafter defined) and ending on the date which is one
hundred seventy nine (179) days after the Closing Date, (ii) at the rate of 7%
per annum during the period beginning on the date which is one hundred eighty
(180) days after the Closing Date and ending on the date which is two hundred
sixty nine (269) days after the Closing Date and (iii) at the rate of 8% per
annum thereafter. Interest shall be due and payable in arrears on the Maturity
Date or, if earlier, on the Conversion Date (as hereinafter defined) and shall
be calculated based on a 360 day year of twelve equal months. Accrual of
interest shall commence
1
<PAGE>
on the date hereof and shall continue daily until payment in full of the
principal sum has been made. The interest so payable will be paid to the person
in whose name this Debenture is registered on the records of the Corporation
regarding registration and transfers of the Debentures (the "DEBENTURE
REGISTER"); PROVIDED, HOWEVER, that the Corporation's obligation to a transferee
of this Debenture arises only if the transfer, sale or other disposition is made
in accordance with the terms and conditions of the Securities Purchase
Agreement, dated as of September 30, 1997, between the Corporation and the
original Holder (as amended from time to time and in effect, the "SECURITIES
PURCHASE AGREEMENT"). The Corporation shall be entitled to withhold from all
payments of interest on this Debenture any amounts required to be withheld under
the applicable provisions of the United States income tax laws as evidenced by
an opinion of counsel of the Corporation to the reasonable satisfaction of the
Holder. The principal of and interest on this Debenture are payable only in
United States Dollars at the address last appearing on the Debenture Register of
the Corporation as designated in writing by the Holder hereof from time to time.
Subject to the conversion hereof, in whole or in part, on or before the Maturity
Date pursuant to Article II hereof, the Corporation will pay the principal of
and all accrued and unpaid interest due upon this Debenture on the Maturity
Date, to the Holder of this Debenture as of the tenth (10th) day prior to the
Maturity Date, and addressed to such Holder at the last address appearing on the
Debenture Register.
This Debenture is subject to the following additional provisions:
I. CERTAIN DEFINITIONS
For purposes of this Debenture, the following terms shall have the
following meanings:
A. "CLOSING BID PRICE" means, for any security as of any date, the
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Corporation and reasonably acceptable to holders of a majority
of the then outstanding Debentures if Bloomberg Financial Markets is not then
reporting closing bid prices of such security (collectively, "BLOOMBERG"), or if
the foregoing does not apply, the last reported sale price of such security in
the over-the-counter market on the electronic bulletin board for such security
as reported by Bloomberg, or, if no sale price is reported for such security by
Bloomberg, the average of the bid prices of any market makers chosen by the
Holder for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid Price of
such security on such date shall be the fair market value as reasonably
determined by an investment banking firm selected by the Corporation and
reasonably acceptable to holders of a majority of the then outstanding
Debentures, with the costs of such appraisal to be borne by the Corporation.
B. "CLOSING DATE" means the Closing Date under that certain Securities
Purchase Agreement dated September 30, 1997 by and among the Corporation and the
initial purchasers of the Debentures (the "SECURITIES PURCHASE AGREEMENT").
2
<PAGE>
C. "COMMON STOCK" shall mean the Common Stock, par value $.01 per
share, of the Corporation.
D. "CONVERSION DATE" means, for any Optional Conversion, the date
specified in the notice of optional conversion in the form attached hereto (the
"NOTICE OF OPTIONAL CONVERSION"), so long as the copy of the Notice of Optional
Conversion is faxed (or delivered by other means resulting in notice) to the
Corporation before Midnight, New York City time, on the Conversion Date
indicated in the Notice of Optional Conversion. If the Notice of Optional
Conversion is not so delivered before such time, then the Conversion Date shall
be the date the Holder delivers the Notice of Optional Conversion to the
Corporation. In the case of any Mandatory Conversion, the "Conversion Date"
shall mean the date specified in a written notice (the "NOTICE OF MANDATORY
CONVERSION") delivered by the Corporation to the Holder, so long as the Notice
of Mandatory Conversion is faxed (or delivered by other means resulting in
notice) to the Holder before Midnight, New York City time, not later than the
20th trading day preceding such specified date. If the Notice of Mandatory
Conversion is not so delivered before such time, then the Conversion Date shall
be the 20th trading day following the date the Corporation delivers the Notice
of Mandatory Conversion to the Holder. As used herein, a "TRADING DAY" shall
mean any day on which the Nasdaq Stock Market (or the national securities
exchange or automated quotation system on which the Common Stock is then traded)
is open for business, whether or not shares of Common Stock are traded on such
day.
E. "CONVERSION PRICE" means, as of any date of determination, the
average of the Closing Bid Prices for the Common Stock for ten (10) consecutive
trading days ending on the trading day immediately preceding such date of
determination (subject to equitable adjustments for any stock splits, stock
dividends, reclassifications or similar events during such ten (10) trading day
period), and shall be subject to adjustment as provided herein.
F. "OUTSTANDING AMOUNT " means, as of any date, the principal amount
then outstanding under this Debenture and all accrued but unpaid interest
thereon.
II. CONVERSION
A. CONVERSION AT THE OPTION OF THE HOLDER; CONVERSION AT THE OPTION OF
THE CORPORATION. Subject to the limitations on conversions contained in
Subparagraphs (i) and (ii) of Paragraph C of this Article II and in subparagraph
(i) of Article V.C, all or any portion of the Outstanding Amount may, at any
time and from time to time from and after the Closing Date, be converted at the
option of the Holder (an "OPTIONAL CONVERSION") into a number of fully paid and
nonassessable shares of Common Stock equal to the Outstanding Amount divided by
the Conversion Price then in effect. Subject to the limitations on conversions
contained in Subparagraph (iii) of Paragraph C of this Article II, beginning on
the date which is one (1) year after the Closing Date, all or any portion of the
Outstanding Amount may be converted at the option of the Corporation (a
"MANDATORY CONVERSION") into a number of fully paid and nonassessable shares of
Common Stock equal to the Outstanding Amount divided by the Conversion Price
then in effect, provided that the Closing Bid Price for the Common Stock on each
of the twenty (20) consecutive trading days immediately preceding the date of
the Notice of Mandatory Conversion is equal to or greater than the Closing Bid
Price for the Common Stock on the Closing Date.
3
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B. MECHANICS OF CONVERSION. In order to convert this Debenture into
shares of Common Stock pursuant to an Optional Conversion, the Holder shall: (x)
deliver (by facsimile or otherwise) a copy of the fully executed Notice of
Optional Conversion to the Corporation and (y) surrender or cause to be
surrendered this Debenture along with a copy of the Notice of Optional
Conversion as soon as practicable thereafter to the Corporation. At the request
of the Holder and upon receipt by the Corporation of a facsimile copy of a
Notice of Optional Conversion from the Holder, the Corporation shall immediately
send, via facsimile, a confirmation to such holder stating that the Notice of
Optional Conversion has been received, the date upon which the Corporation
expects to deliver the Common Stock issuable upon such conversion and the name
and telephone number of a contact person at the Corporation regarding the
conversion. In order to convert this Debenture into shares of Common Stock
pursuant to a Mandatory Conversion, the Corporation shall deliver (by facsimile
or otherwise) a copy of the fully executed Notice of Mandatory Conversion to the
Holder, which notice shall specify the Outstanding Amount to be converted.
Promptly following receipt of a Notice of Mandatory Conversion, the Holder shall
surrender or cause to be surrendered this Debenture as soon as practicable to
the Corporation. The Corporation shall not be obligated to issue shares of
Common Stock issuable upon any Optional Conversion or Mandatory Conversion
unless either this Debenture is delivered to the Corporation as provided above,
or the holder notifies the Corporation that such certificates have been lost,
stolen or destroyed (subject to the requirements of Article IX.A).
(i) DELIVERY OF COMMON STOCK UPON CONVERSION. The Corporation
shall, within one trading day after the later of (a) the second trading day
following the Conversion Date in the case of DWAC deliveries and the third
trading day following the Conversion Date in all other cases and (b) the date of
surrender of this Debenture (or, in case this Debenture is lost, stolen or
destroyed, the date on which indemnity pursuant to Article IX.A is provided)
(the "DELIVERY PERIOD"), issue and deliver to or upon the order of the Holder
(x) that number of shares of Common Stock issuable upon conversion of the
Outstanding Amount being converted and (y) a new Debenture representing the
Outstanding Amount not being converted, if any.
(ii) TAXES. The Corporation shall pay any and all taxes which
may be imposed upon it with respect to the issuance and delivery of the shares
of Common Stock upon the conversion of this Debenture.
(iii) NO FRACTIONAL SHARES. If any conversion of this
Debenture would result in the issuance of either a fractional share of Common
Stock, such fractional share shall be disregarded and the number of shares of
Common Stock issuable upon conversion of this Debenture shall be the closest
whole number of shares.
(iv) STATUS AS STOCKHOLDER. Upon the Conversion Date, the
Outstanding Amount being converted shall be deemed converted into shares of
Common Stock as of the Conversion Date and the Holder's rights as a holder of
the Outstanding Amount being converted shall cease and terminate, excepting only
the right to receive certificates for such shares of Common Stock and to any
remedies provided herein or otherwise available at law or in equity to such
holder because of a failure by the Corporation to comply with the terms of this
Debenture (including its right to regain its status as a Holder pursuant to
Article IV.E).
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(v) CONVERSION DISPUTES. In the case of any dispute with
respect to a conversion, the Corporation shall promptly issue such number of
shares of Common Stock as are not disputed in accordance with subparagraph (i)
above. If such dispute involves the calculation of the Conversion Price, the
Corporation shall submit, at its sole cost, the disputed calculations to its
outside accountant via facsimile within two (2) trading days of receipt of the
Notice of Optional Conversion. The accountant shall audit the calculations and
notify the Corporation and the Holder of the results no later than two (2)
trading days from the date it receives the disputed calculations. The
accountant's calculation shall be deemed conclusive, absent manifest error. The
Corporation shall then issue the appropriate number of shares of Common Stock in
accordance with subparagraph (i) above.
C. LIMITATIONS ON CONVERSIONS. (i) In no event shall the Holder be
entitled to receive shares of Common Stock upon an Optional Conversion to the
extent that the sum of (a) the number of shares of Common Stock beneficially
owned by the Holder and its affiliates (exclusive of shares issuable upon
conversion of the unconverted portion of this Debenture or the unexercised or
unconverted portion of any other securities of the Corporation subject to a
limitation on conversion or exercise analogous to the limitations contained
herein) and (b) the number of shares of Common Stock issuable upon the
conversion of this Debenture with respect to which the determination of this
subparagraph is being made, would result in beneficial ownership by the holder
and its affiliates of more than 4.9% of the outstanding shares of Common Stock.
For purposes of this subparagraph, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13 D-G thereunder, except as otherwise provided in
clause (i) above. The provisions of this subparagraph shall terminate upon
delivery by the Holder of a Mandatory Prepayment Notice. The Corporation shall
be entitled to rely, and shall be fully protected in relying, on any statement
or representation made by the Holder to the Corporation in connection with a
particular conversion without any obligation on the part of the Corporation to
make any inquiry or investigation or to examine its records or the records of
any transfer agent for the Common Stock.
(ii) During any thirty (30) day period ending prior to the
earlier of (a) that date which is two hundred and nine (209) days after the
Closing Date and (b) that date (if any) that the Corporation delivers an
Optional Prepayment Notice (as defined below) to the Holder pursuant to clause
(b) of subparagraph (i) of Article V.C, the Holder may not effect an Optional
Conversion with respect to more than thirty-three percent (33%) of the original
principal amount of this Debenture (and the accrued but unpaid interest
thereon); provided, however, if the Holder has already converted sixty-six
percent (66%) of such original principal amount, the Holder may convert the
remaining thirty-four percent (34%) of the original principal amount of this
Debenture (and the accrued but unpaid interest thereon) in the next succeeding
thirty (30) day period or thereafter.
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(iii) The Corporation may not effect a Mandatory Conversion
pursuant to this Article II unless, on the date of the Notice of Mandatory
Conversion and on the date of delivery of such Conversion Shares, (a) a
registration statement under the Securities Act of 1933, as amended, covering
the resale of the Common Stock issuable upon conversion of this Debenture is in
effect which names the Holder as a selling stockholder; (b) the Corporation has
reserved the number of shares of Common Stock required by Article III; (c) the
Corporation has paid in full any liquidated damages hereunder; and (d) the
Holder has not, prior to such date, delivered a Mandatory Prepayment Notice to
the Corporation.
III. RESERVATION OF SHARES OF COMMON STOCK
The Corporation shall at all times have authorized and reserved for the
purpose of issuance a sufficient number of shares of Common Stock to provide for
the full conversion of the outstanding Debentures in accordance with their
terms.
IV. FAILURE TO SATISFY CONVERSIONS
A. CONVERSION DEFAULT PAYMENTS. If, at any time, (x) the Holder submits
a Notice of Optional Conversion and the Corporation fails for any reason to
deliver, on or prior to the first trading day following the expiration of the
Delivery Period for such conversion, the shares of Common Stock to which the
Holder is entitled upon such conversion in the manner required hereunder and
under the Purchase Agreement, or (y) the Corporation provides notice to any
holder of the Debentures at any time of its intention not to issue shares of
Common Stock upon exercise by any holder of its conversion rights in accordance
with the terms of the Debentures (each of (x) and (y) being a "CONVERSION
DEFAULT"), then the Corporation shall pay to the Holder payments for the first
ten (10) trading days following the expiration of the Delivery Period, in the
case of a Conversion Default described in clause (x), and for the first ten (10)
trading days of any other Conversion Default, an amount equal to $1,000 per day.
In the event any Conversion Default continues beyond such ten (10) trading day
period, the Holder shall be entitled to interest on the Outstanding Amount at a
rate per annum equal to the lower of twenty-four percent (24%) and the highest
rate permitted by applicable law from the expiration of the ten (10) trading day
period described above through and including the Default Cure Date. In addition,
upon the occurrence of any Conversion Default, the Holder may, by written notice
to the Corporation, elect to revoke any Optional Conversion and obtain the
return of the unconverted Debenture. As used herein, the "DEFAULT CURE DATE"
means (i) with respect to a Conversion Default described in clause (x) of its
definition, the date the Corporation effects the conversion of the full
Outstanding Amount requested to be converted and (ii) with respect to a
Conversion Default described in clause (y) of its definition, the date the
Corporation begins to honor conversions of the Debentures in accordance with
their terms.
The payments to which the Holder shall be entitled pursuant to this
Paragraph A are referred to herein as "CONVERSION DEFAULT PAYMENTS" and shall be
liquidated damages and not penalties. The Holder may elect to receive accrued
Conversion Default Payments in cash or to convert all or any portion of such
accrued Conversion Default Payments, at any time, into Common Stock at the
Conversion Price in effect at the time of such conversion. In the event the
Holder elects to receive any Conversion Default Payments in cash, it shall so
notify the Corporation in writing. Such payment shall be made in accordance with
and be subject to the provisions of Article IX.D. In the event the Holder elects
to convert all or any portion of the Conversion Default Payments, the Holder
shall indicate on a Notice of Optional Conversion such portion of the Conversion
Default Payments which the Holder elects to so convert and such conversion shall
otherwise be effected in accordance with the provisions of Article II.
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B. ADJUSTMENT TO CONVERSION PRICE. If the Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) trading
day after the expiration of the Delivery Period with respect to a conversion of
this Debenture for any reason, then the Conversion Price in respect of this
Debenture shall thereafter be the lesser of (i) the Conversion Price on the
Conversion Date specified in the Notice of Optional Conversion which resulted in
the Conversion Default and (ii) the lowest Conversion Price in effect during the
period beginning on, and including, such Conversion Date through and including
the day such shares of Common Stock are delivered to the Holder. If there shall
occur a Conversion Default of the type described in clause (y) of Article IV.A,
then the Conversion Price with respect to any conversion thereafter shall be the
lower of (x) the lowest Conversion Price in effect at any time during the period
beginning on, and following, the date of the occurrence of such Conversion
Default through and including the Default Cure Date and (y) the Conversion Price
on the Conversion Date specified in the Notice of Optional Conversion for this
Debenture. The Conversion Price shall thereafter be subject to further
adjustment for any events described in Article VI.
C. BUY-IN CURE. If (i) the Corporation fails for any reason to deliver
during the Delivery Period shares of Common Stock to the Holder upon a
conversion of this Debenture having a Conversion Date on or prior to a date upon
which the Corporation has notified the Holder in writing that the Corporation is
unable to honor conversions and (ii) after the applicable Delivery Period with
respect to such conversion, the Holder purchases (in an open market transaction
or otherwise) shares of Common Stock to deliver in satisfaction of a sale by
such holder of the shares of Common Stock which the Holder anticipated receiving
upon such conversion (a "BUY-IN"), the Corporation shall pay the Holder (in
addition to any other remedies available to the Holder) the amount by which (x)
the Holder's total purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased exceeds (y) the portion of the
Outstanding Amount resulting in the Buy-In. For example, if the Holder purchases
shares of Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted conversion of a total Outstanding Amount of
$10,000, the Corporation will be required to pay the Holder $1,000. The Holder
shall provide the Corporation written notification indicating any amounts
payable to the Holder pursuant to this Paragraph C. The Corporation shall make
any payments required pursuant to this Paragraph C in accordance with and
subject to the provisions of Article IX.D.
D. MANDATORY PREPAYMENT RIGHT. If the Corporation fails, and such
failure continues uncured for five (5) trading days after the Corporation has
been notified thereof in writing by the Holder, for any reason to issue shares
of Common Stock within ten (10) trading days after the expiration of the
Delivery Period with respect to any conversion of this Debenture, then the
Holder may elect at any time and from time to time prior to the Default Cure
Date for such Conversion
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Default, by delivery of a Mandatory Prepayment Notice (as defined in Article
V.B) to the Corporation, to demand payment by the Corporation in cash of all or
any portion of the Outstanding Amount. If the Corporation fails to make such
payment within five (5) trading days after its receipt of a Mandatory Prepayment
Notice, then the Holder shall be entitled to the remedies provided in Article
V.B.
E. RETENTION OF RIGHTS AS DEBENTURE HOLDER. If the Holder has not
received certificates for all shares of Common Stock prior to the tenth (10th)
trading day after the expiration of the Delivery Period with respect to a
conversion of this Debenture for any reason, then the Corporation shall, as soon
as practicable, return this Debenture to the Holder and (unless the Holder
otherwise elects to retain its status as a holder of Common Stock) the Holder
shall regain the rights of a holder of this Debenture. In all cases, the Holder
shall retain all of its rights and remedies (including, without limitation, (i)
the right to receive Conversion Default Payments pursuant to Paragraph A above
to the extent required thereby for such Conversion Default and any subsequent
Conversion Default and (ii) the right to have the Conversion Price with respect
to subsequent conversions determined in accordance with Paragraph B above) for
the Corporation's failure to convert this Debenture.
V. PREPAYMENT DUE TO CERTAIN EVENTS
A. MANDATORY PREPAYMENT. In the event (each of the events described in
clauses (i)-(v) below after expiration of the applicable cure period (if any)
being a "MANDATORY PREPAYMENT EVENT"):
(i) the Common Stock (including all of the shares of Common
Stock issuable upon conversion of this Debenture) is suspended from trading on
any of, or is not listed or designated for quotation (and authorized) for
trading on at least one of, the New York Stock Exchange, the American Stock
Exchange, the NASDAQ National Market or the NASDAQ Small Cap Market ("NASDAQ")
for an aggregate of five (5) full trading days in any nine (9) month period,
(ii) the Registration Statement required to be filed by the
Corporation pursuant to Section 2(a) of the Registration Rights Agreement, dated
as of September 30, 1997, by and among the Corporation and the other signatories
thereto (the "REGISTRATION RIGHTS AGREEMENT"), has not been declared effective
by the 180th day following the Closing Date or such Registration Statement,
after being declared effective, cannot be utilized by the Holder for the resale
of all of their Registrable Securities (as defined in the Registration Rights
Agreement) for an aggregate of more than thirty (30) days in any consecutive
twelve month period as a result of (x) the inclusion in the prospectus contained
in such Registration Statement of an untrue statement of material fact or
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (y) the issuance of any stop
order or other suspension of effectiveness of such Registration Statement.
(iii) the Corporation fails, and any such failure continues
uncured for five (5) trading days after the Corporation has been notified
thereof in writing by the Holder, to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the Holder upon conversion
of this Debenture as and when required by this Debenture, the Securities
Purchase Agreement or the Registration Rights Agreement,
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(iv) the Corporation provides notice to any holder of the
Debentures, including by way of public announcement, at any time, of its
intention not to issue shares of Common Stock to any holder of said Debentures
upon conversion in accordance with the terms thereof,
(v) the Corporation shall:
(a) sell, convey or dispose of all or substantially
all of its assets;
(b) merge, consolidate or engage in any other
business combination with any other entity (other than a
merger, consolidation or business combination in which the
holders of the Corporation's voting securities immediately
preceding such merger, consolidation or business combination
own, on a pro rata basis, at least 50% of the surviving
entity's voting securities); or
(c) have fifty percent (50%) or more of the voting
power of its capital stock owned beneficially by one person,
entity or "group" (as such term is used under Section 13(d) of
the Securities Exchange Act of 1934, as amended),
(vi) Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings, or relief under any bankruptcy law or any law
for the relief of debt shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed within ninety (90) days
after such institution, or the Company shall by any action or answer approve of,
consent to, or acquiesce in any such proceedings or admit to any material
allegations of, or default in answering a petition filed in, any such
proceeding,
(vii) the Corporation shall fail to comply in any material
respect with the agreements and covenants contained in the Purchase Agreement,
the Registration Rights Agreement or this Debenture (including without
limitation a failure to comply with its conversion obligations hereunder), which
failure continues uncured for a period of ten (10) days following delivery of
written notice thereof by the Holder to the Corporation,
(viii) the Corporation shall fail to pay when due any amount
due hereunder free of any claim of subordination, or
(ix) the Corporation shall be prohibited from complying with
its conversion obligations hereunder by reason of any stockholder approval
requirements of NASDAQ,
then, upon the occurrence of any such Mandatory Prepayment Event, the Holder
shall thereafter have the option, exercisable in whole or in part at any time
and from time to time by delivery of a Mandatory Prepayment Notice (as defined
in Paragraph B below) to the Corporation while such Mandatory Prepayment Event
continues, to require the Corporation to pay in cash any or all of the
Outstanding Amount. For the avoidance of doubt, the occurrence of any event
described in clauses (i), (ii), (iv), (v), (vii) and (ix) above shall
immediately constitute a Mandatory Prepayment Event and there shall be no cure
period.
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B. MANDATORY PREPAYMENT DEFAULTS. If, within five (5) trading days of
the Corporation's receipt of a notice from the Holder identifying a Mandatory
Prepayment Event that has occurred and requiring the Corporation to pay any or
all of the Outstanding Amount (a "MANDATORY PREPAYMENT NOTICE"), the Corporation
fails to pay to the Holder the Outstanding Amount specified in the Mandatory
Prepayment Notice, the Holder (i) shall be entitled to interest on such
Outstanding Amount at a per annum rate equal to the lower of twenty-four percent
(24%) and the highest rate permitted by applicable law from the date of the
Mandatory Prepayment Notice until the date of payment hereunder, and (ii) shall
have the right, at any time and from time to time, to require the Corporation,
upon written notice, to immediately convert (in accordance with the terms of
Paragraph A of Article II) all or any portion of such Outstanding Amount into
shares of Common Stock at the lowest Conversion Price in effect during the
period beginning on the date of the Mandatory Prepayment Notice and ending on
the Conversion Date with respect to the conversion of such Outstanding Amount.
In the event the Corporation is not able to pay all of the Debentures subject to
Mandatory Prepayment Notices, the Corporation shall pay the Debentures pro rata,
based on the total Outstanding Amount under the Debentures included by each
holder in the Mandatory Prepayment Notice relative to the total Outstanding
Amount under the Debentures in all of the Mandatory Prepayment Notices.
C. OPTIONAL PREPAYMENT.
(i) At any time (a) on or before that date which is six (6)
months after the Closing Date or (b) on or after that date which is one (1) year
after the Closing Date, the Corporation shall have the right to prepay
("OPTIONAL PREPAYMENT") all or any portion of the Outstanding Amount, provided,
however, that any such prepayment shall be subject to concurrent payment of a
premium (the "OPTIONAL PREPAYMENT PREMIUM") and all other amounts owing
hereunder. An Optional Prepayment shall be made by the Corporation in its sole
discretion by delivery of an Optional Prepayment Notice (as defined below). In
the case of an Optional Prepayment during the period described in clause (a) of
this subparagraph, the Optional Prepayment Premium shall be in an amount equal
to seven and one half percent (7 1/2%) of the principal amount being prepaid and
the Holder's right to effect an Optional Conversion shalL terminate upon receipt
of an Optional Prepayment Notice. In the case of an Optional Prepayment during
the period described in clause (b) of this subparagraph, the Optional Prepayment
Premium shall be in an amount equal to ten percent (10%) of the principal amount
being prepaid and the Holder may convert all or any part of the Outstanding
Amount into Common Stock by delivering a Notice of Optional Conversion to the
Corporation at any time prior to that date which is ten (10) trading days after
receipt of an Optional Prepayment Notice.
(ii) The Corporation shall effect each prepayment under this
Section VIII.B by giving at least twenty (20) trading days' prior written notice
(the "OPTIONAL PREPAYMENT NOTICE") of the date on which such prepayment is to be
made (the "OPTIONAL PREPAYMENT DATE") and the Outstanding Amount to be prepaid
to the Holder at the address and facsimile number of the Holder appearing in the
Debenture Register, which Optional Prepayment Notice shall be deemed to have
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been delivered on the trading day after the Corporation's fax (with a copy sent
by overnight courier) of such notice to the Holder. The Corporation shall pay
the Outstanding Amount specified in the Optional Prepayment Notice, together
with the applicable Optional Prepayment Premium, to the Holder on the Optional
Prepayment Date. The Corporation may not attempt to deliver an Optional
Prepayment Notice if it has previously received a Mandatory Prepayment Notice.
(iii) If the Corporation fails to pay, when due and owing, any
portion of the Outstanding Amount or the Optional Prepayment Premium in
accordance with an Optional Prepayment Notice, then the Holder shall have the
right, at any time and from time to time, to require the Corporation, upon
written notice, to immediately convert (in accordance with the terms of
paragraph A of Article II) any or all of the Outstanding Amount which is the
subject of such prepayment into shares of Common Stock at the lowest Conversion
Price in effect during the period beginning on the date of the Optional
Prepayment Notice and ending on the earlier of the date the Corporation effects
such prepayment in full and the date of the Holder's notice of conversion.
VI. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time
as follows:
A. ADJUSTMENT DUE TO MAJOR ANNOUNCEMENT. In the event the Corporation
(i) makes a public announcement that it intends to consolidate or merge with any
other entity (other than a merger in which the Corporation is the surviving or
continuing entity and its capital stock is unchanged) or to sell or transfer all
or substantially all of the assets of the Corporation or (ii) any person, group
or entity (including the Corporation) publicly announces a tender offer to
purchase 50% or more of the Corporation's Common Stock (the date of the
announcement referred to in clause (i) or (ii) of this Paragraph A is
hereinafter referred to as the "ANNOUNCEMENT DATE"), then the Conversion Price
shall, effective upon the Announcement Date and continuing through the
Abandonment Date (as defined below), be equal to the lesser of (x) the
Conversion Price which would have been applicable for an Optional Conversion
occurring on the Announcement Date and (y) the Conversion Price which would have
been applicable for an Optional Conversion occurring on the Conversion Date.
From and after the Abandonment Date, the Conversion Price shall be determined as
set forth in Article I.E. "ABANDONMENT DATE" means with respect to any proposed
transaction or tender offer for which a public announcement as contemplated by
this Paragraph A has been made, the date upon which the Corporation (in the case
of clause (i) above) or the person, group or entity (in the case of clause (ii)
above) publicly announces the termination or abandonment of the proposed
transaction or tender offer which caused this Paragraph A to become operative.
B. ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time when
this Debenture is outstanding, there shall be (i) any reclassification or change
of the outstanding shares of Common Stock (other than a change in par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged), (iii)
any sale or transfer of all or substantially all of the assets of the
Corporation or (iv) any share exchange pursuant to which all of the outstanding
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shares of Common Stock are converted into other securities or property, then the
Holder shall thereafter have the right to receive upon conversion, in lieu of
the shares of Common Stock immediately theretofore issuable (without giving
effect to any limitations upon conversion imposed by Article II.C), such shares
of stock, securities and/or other property as may be issued or payable with
respect to or in exchange for the number of shares of Common Stock immediately
theretofore issuable upon conversion (without giving effect to any limitations
upon conversion imposed by Article II.C) had such merger, consolidation,
exchange of shares, recapitalization, reorganization or other similar event not
taken place, and in any such case, appropriate provisions shall be made with
respect to the rights and interests of the Holder to the end that the provisions
hereof (including, without limitation, provisions for adjustment of the
Conversion Price and of the number of shares of Common Stock issuable upon
conversion of this Debenture) shall thereafter be applicable, as nearly as may
be practicable in relation to any shares of stock or securities thereafter
deliverable upon the conversion thereof. The Corporation shall not effect any
transaction described in this Paragraph B unless (i) the Holder has received
written notice of such transaction at least ten (10) days prior thereto, but in
any event on or before the record date for the determination of shareholders
entitled to vote with respect thereto, and (ii) the resulting successor or
acquiring entity (if not the Corporation) assumes by written instrument the
obligations of this Paragraph B. The above provisions shall apply regardless of
whether or not there would have been a sufficient number of shares of Common
Stock authorized and available for issuance upon conversion of the Debentures
outstanding as of the date of such transaction, and shall similarly apply to
successive reclassifications, consolidations, mergers, sales, transfers or share
exchanges.
C. PURCHASE RIGHTS. If at any time when this Debenture is outstanding,
the Corporation issues any Convertible Securities or rights to purchase stock,
warrants, securities or other property (the "PURCHASE RIGHTS") pro rata to the
record holders of any class of Common Stock, then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Debenture (without giving effect to any limitations upon conversion imposed by
Article II.C) immediately before the date on which a record is taken for the
grant, issuance or sale of such Purchase Rights, or, if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.
D. NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Article VI, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to the Holder a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of the Holder, furnish to the Holder a like certificate
setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at
the time in effect and (iii) the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would be
received upon conversion of this Debenture.
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VII. NOTICE RIGHTS
The Corporation shall provide the Holder, at its request, with copies
of proxy materials and other information sent to shareholders. If the
Corporation takes a record of its shareholders for the purpose of determining
shareholders entitled to (a) receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation or recapitalization) any share of any
class or any other securities or property, or to receive any other right, or (b)
to vote in connection with any proposed sale, lease or conveyance of all or
substantially all of the assets of the Corporation, or any proposed merger,
consolidation, liquidation, dissolution or winding up of the Corporation, the
Corporation shall mail a notice to the Holder, on or before the record date
specified therein (or ten (10) days prior to the consummation of the transaction
or event, whichever is earlier, but in no event earlier than public announcement
of such proposed transaction), of the date on which any such record is to be
taken for the purpose of such vote, dividend, distribution, right or other
event, and a brief statement regarding the amount and character of such vote,
dividend, distribution, right or other event to the extent known at such time.
VIII. PROTECTION PROVISIONS
So long as this Debenture is outstanding, the Corporation shall not,
without first obtaining the approval (by vote or written consent) of the holders
of all of the then Outstanding Amount under all Debentures:
(a) adversely alter or change the rights, preferences or
privileges of the Debentures; or
(b) alter or change the rights, preferences or privileges of
any capital stock of the Corporation so as to affect adversely the Debentures.
IX. MISCELLANEOUS
A. LOST OR STOLEN DEBENTURES. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of this Debenture and
(ii) (y) in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to the Corporation, or (z) in the case of mutilation, upon
surrender and cancellation of this Debenture, the Corporation shall execute and
deliver a new Debenture of like tenor and date. However, the Corporation shall
not be obligated to reissue this Debenture if the Holder contemporaneously
requests the Corporation to convert this Debenture.
B. [Intentionally omitted.]
C. STATEMENTS OF AVAILABLE SHARES. So long as this Debenture is
outstanding, the Corporation shall deliver to the Holder a written report
notifying it of any occurrence which prohibits the Corporation from issuing
Common Stock upon any conversion. In addition, the Corporation shall provide,
within ten (10) days after delivery to the Corporation of a written request by
the Holder, any
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of the following information as of the date of such request: (i) the total
Outstanding Amount under all Debentures, (ii) the total number of shares of
Common Stock issued upon all prior conversions of the Debentures, and (iii) the
total number of shares of Common Stock which are reserved for issuance upon
conversion of the Debentures.
D. PAYMENT OF CASH; DEFAULTS. Whenever the Corporation is required to
make any cash payment to the Holder under this Debenture (as a Conversion
Default Payment, upon Mandatory or Optional Prepayment or otherwise), such cash
payment shall be made within five (5) trading days after delivery by the Holder
of a notice specifying that the Holder elects to receive such payment in cash
and the method (E.G., by check, wire transfer) in which such payment should be
made. If such payment is not delivered within such five (5) trading day period,
the Holder shall thereafter be entitled to interest on the unpaid amount at a
per annum rate equal to the lower of twenty-four percent (24%) and the highest
rate permitted by applicable law until such amount is paid in full to the
Holder. This provision shall not operate to add any additional grace or cure
period to any grace or cure period expressly set for in this Debenture.
E. REMEDIES CUMULATIVE. The remedies provided in this Debenture shall
be cumulative and in addition to all other remedies available under this
Debenture, at law or in equity (including a decree of specific performance
and/or other injunctive relief), and nothing herein shall limit the Holder's
right to pursue actual damages for any failure by the Corporation to comply with
the terms of this Debenture. The Corporation acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, the Holder shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
F. OBLIGATIONS ABSOLUTE. No provision of this Debenture, other than
conversion as provided herein, shall alter or impair the obligation of the
Corporation, which is absolute and unconditional, to pay the principal of, and
interest on, this Debenture at the time, place and rate, and in the manner,
herein prescribed.
G. WAIVERS OF DEMAND, ETC. The Corporation hereby expressly waives
demand and presentment for payment, notice of nonpayment, protest, notice of
protest, notice of dishonor, notice of intent to accelerate, prior notice of
bringing of suit and diligence in taking any action to collect amounts called
for hereunder and will be directly and primarily liable for the payments of all
sums owing and to be owing hereon, regardless of and without any notice (except
as required by law), diligence, act or omission as or with respect to the
collection of any amount called for hereunder.
H. SAVINGS CLAUSE. In case any provision of this Debenture is held by a
court of competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if possible,
so that it is enforceable to the maximum extent possible, and the validity and
enforceability of the remaining provisions of this Debenture will not in any way
be affected or impaired thereby.
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I. ENTIRE AGREEMENT; AMENDMENTS. This Debenture and the agreements
referred to in this Debenture constitute the full and entire understanding and
agreement between the Corporation and the Holder with respect to the subject
hereof and, except as specifically set forth herein or therein, neither the
Corporation nor the Holder makes any representation, warranty, covenant or
undertaking with respect to such matters. Any provision of this Debenture may be
waived or amended only by an instrument in writing signed by the Corporation and
by all holders of the then Outstanding Amount under all of the Debentures.
J. ASSIGNMENT, ETC. The Holder may, subject to compliance with the
Securities Purchase Agreement and the Registration Rights Agreement, without
prior notice, transfer or assign this Debenture or any interest herein (but in
no event in an amount less than $100,000 in Outstanding Amount or, if less than
$100,000, the total Outstanding Amount hereof) and may mortgage, encumber or
transfer any of its rights or interest in and to this Debenture or any part
hereof, and each assignee, transferee and mortgagee (which may include any
affiliate of the Holder) shall have the right to so transfer or assign its
interest. Each such assignee, transferee and mortgagee shall have all of the
rights and obligations of the Holder under this Debenture. The Corporation
agrees that, subject to compliance with the Securities Purchase Agreement and
the Registration Rights Agreement, after receipt by the Corporation of written
notice of assignment from the Holder or from the Holders' assignee, all
principal, interest, and other amounts which are then due and thereafter become
due under this Debenture shall be paid to such assignee at the place of payment
designated in such notice. This Debenture shall be binding upon the Corporation
and its successors and shall inure to the benefit of the Holder and its
successors and assigns. The Corporation may not transfer or assign its
obligation under this Debenture without the consent of the Holder; provided,
however, that a merger, consolidation or similar business combination of the
Corporation or the sale of all or substantially all of the assets of the
Corporation shall not constitute a transfer or assignment.
K. NO WAIVER. No failure on the part of the Holder to exercise, and no
delay in exercising, any right, remedy or power hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by the Holder of any
right, remedy or power hereunder preclude any other or future exercise of any
other right, remedy or power. Each and every right, remedy or power hereby
granted to the Holder or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.
L. MISCELLANEOUS. Unless otherwise provided herein, any notice or other
communication to a party hereunder shall be deemed to have been duly given if
personally delivered or sent by registered or certified mail, return receipt
requested, postage prepaid with a copy in each case sent on the same day to the
party by facsimile, Federal Express or other such expedited means to said party
at its address set forth herein or such other address as either may designate
for itself in such notice to the other and communications shall be deemed to
have been received when delivered personally or, if sent by mail, when actually
received by the party to whom it is addressed. Copies of all notices to the
Corporation shall be sent to Paul S. Weiner, Director of Finance of the
Corporation, and to the attention of the General Counsel of the Corporation.
Whenever the sense of this Debenture requires, words in the singular shall be
deemed to include the plural and words in the plural shall be deemed to include
the singular. Paragraph headings are for convenience only and shall not affect
the meaning of this document.
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<PAGE>
M. CHOICE OF LAW AND VENUE. This Debenture shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Corporation
irrevocably consents to the jurisdiction of the United States federal courts
located in the County of Kent in the State of Delaware in any suit or proceeding
based on or arising under this Debenture and irrevocably agrees that all claims
in respect of such suit or proceeding may be determined in such courts. The
Corporation irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding. The Corporation further agrees that
service of process upon the Corporation mailed by first class mail shall be
deemed in every respect effective service of process upon the Corporation in any
suit or proceeding arising hereunder. Nothing herein shall affect the Holder's
right to serve process in any other manner permitted by law. The Corporation
agrees that a final non-appealable judgment in any such suit or proceeding shall
be conclusive and may be enforced in other jurisdictions by suit on such
judgment or in any other lawful manner.
N. USURY LAWS. In no event shall any provision of this Debenture be
deemed to permit the Holder to receive any payment, whether of interest or
otherwise, to the extent that such payment would be prohibited under any
applicable usury law or similar law regarding the rates of interest legally
chargeable or collectible hereunder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, this Debenture is executed on behalf of the
Corporation as of the 30th day of September, 1997.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
-------------------------------
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NOTICE OF OPTIONAL CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert $____________ in Outstanding Amount
(the "CONVERSION"), under that certain 6%, 7% and 8% Convertible Debenture Due
September 30, 2002 the ("DEBENTURE") into shares of common stock ("COMMON
STOCK") of Palomar Medical Technologies, Inc. (the "CORPORATION") according to
the conditions of the Debenture, as of the date written below. If securities are
to be issued in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates. No fee will be charged to the holder for any
conversion, except for transfer taxes, if any. The Debenture (or evidence of
loss, theft or destruction thereof) is attached hereto.
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Debenture shall be made pursuant to registration of the Common Stock under the
Securities Act of 1933, as amended (the "ACT"), or pursuant to an exemption from
registration under the Act.
Date of Conversion:
--------------------------
Applicable Conversion Price:
--------------------------
Amount of Conversion Default
Payments to be Converted, if any:
--------------------------
Number of Shares of
Common Stock to be Issued:
--------------------------
By:
---------------------------------
Name:
----------------------------
Title:
---------------------------
(Must be exactly as appears on the Debenture)
Name:
-------------------------------
Address:
----------------------------
----------------------------
Social Security or
Federal Tax I.D. Number:
---------------------
<PAGE>
EXECUTION COPY
EXHIBIT B
TO
SECURITIES PURCHASE
AGREEMENT
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of September
30, 1997 by and among PALOMAR MEDICAL TECHNOLOGIES, INC., a corporation
organized under the laws of the State of Delaware, with headquarters located at
66 Cherry Hill Drive, Beverly, Massachusetts 01915 (the "COMPANY"), and the
undersigned purchasers of Debentures and Common Shares under the Securities
Purchase Agreement (together with affiliates, the "INITIAL INVESTORS").
WHEREAS:
A. In connection with the Securities Purchase Agreement of even date
herewith by and between the Company and the Initial Investors (the "SECURITIES
PURCHASE AGREEMENT"), the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue and sell to the Initial Investors (i) 6%,
7% and 8% Convertible Debentures Due September 30, 2002 (the "DEBENTURES") that
are convertible into shares (the "CONVERSION SHARES") of the Company's common
stock, par value $.01 per share (the "COMMON STOCK"), upon the terms and subject
to the limitations and conditions set forth in the Debentures and (ii) shares of
Common Stock (the "COMMON SHARES"); and
B. To induce the Initial Investors to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"SECURITIES ACT"), and applicable state securities laws;
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 Company and the
Initial Investors hereby agree as follows:
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have
the following meanings:
(i) "INVESTORS" means the Initial Investors and any
transferees or assignees who agree to become bound by the
provisions of this Agreement in accordance with Section 9
hereof.
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(ii) "REGISTER," "REGISTERED," and "REGISTRATION"
refer to a registration effected by preparing and filing a
Registration Statement or Statements in compliance with the
Securities Act and pursuant to Rule 415 under the Securities
Act or any successor rule providing for offering securities on
a continuous basis ("RULE 415"), and the declaration or
ordering of effectiveness of such Registration Statement by
the United States Securities and Exchange Commission (the
"SEC").
(iii) "REGISTRABLE SECURITIES" means the Conversion
Shares (including any Conversion Shares issuable with respect
to Conversion Default Payments under the Debentures or in
redemption of any Debentures) issued or issuable with respect
to the Debentures, the Common Shares and any shares of capital
stock issued or issuable, from time to time (with any
adjustments), on or in exchange for or otherwise with respect
to any of the foregoing.
(iv) "REGISTRATION STATEMENT" means a registration
statement of the Company under the Securities Act.
b. Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. REGISTRATION.
a. MANDATORY REGISTRATION. The Company shall prepare, and, on
or prior to the sixtieth (60th) day after the Closing Date (the "FILING DATE"),
file with the SEC a Registration Statement on Form S-3 (or, if Form S-3 is not
then available, on such form of Registration Statement as is then available to
effect a registration of all of the Registrable Securities, subject to the
reasonable consent of the Investors) covering the resale of a number of
Registrable Shares equal to at least 3,500,000 shares plus the amount of Common
Shares (provided that such number may be proportionally reduced if less than
$7,000,000 in principal amount of Debentures are issued under the Securities
Purchase Agreement), which Registration Statement, to the extent allowable under
the Securities Act and the Rules promulgated thereunder (including Rule 416),
shall state that such Registration Statement also covers such indeterminate
number of additional shares of Common Stock as may become issuable upon
conversion of the Debentures to prevent dilution resulting from stock splits,
stock dividends or similar transactions or as a result of fluctuations in the
market price of the Common Stock. The Registrable Securities included on the
Registration Statement shall be allocated to the Investors as set forth in
Section 11(k) hereof. The Registration Statement (and each amendment or
supplement thereto, and each request for acceleration of effectiveness thereof)
shall be provided to (and subject to the reasonable approval of) the Initial
Investors and their counsel prior to its filing or other submission.
b. UNDERWRITTEN OFFERING. If any offering pursuant to a
Registration Statement pursuant to Section 2(a) hereof involves an underwritten
offering, the Investors who hold a majority in interest of the Registrable
Securities subject to such underwritten offering, with the consent of the
Initial Investors, shall have the right to select a total of one legal counsel
to represent the Investors and an investment banker or bankers and manager or
managers to administer the offering, which investment banker or bankers or
manager or managers shall be reasonably satisfactory to the Company. In the
event the Company determines such banker or manager to be unsatisfactory, the
Company shall bear the difference, if any, in costs of the banker or manager
ultimately accepted and such rejected underwriter or manager.
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<PAGE>
c. PAYMENTS BY THE COMPANY. The Company shall cause the
registration statement to become effective as soon as practicable after filing,
but in no event later than the one hundred twentieth (120th) day following the
Closing Date (the "REGISTRATION DEADLINE"). If (i) the registration statement(s)
covering the Registrable Securities required to be filed by the Company pursuant
to Section 2(a) hereof is not declared effective by the SEC on or before the
Registration Deadline or if, after the registration statement has been declared
effective by the SEC, sales of Registrable Securities (including any Registrable
Securities required to be registered pursuant to Section 3(b) hereof) are not
permitted pursuant to the registration statement (including by reason of a stop
order or the Company's failure to update the registration statement) or (ii) the
Common Stock is not listed or included for quotation on the NASDAQ SmallCap
Market ("NASDAQ"), the NASDAQ National Market (the "NNM"), the New York Stock
Exchange (the "NYSE") or the American Stock Exchange (the "AMEX") at any time
after the Registration Deadline, then the Company will make payments to the
Investors in such amounts and at such times as shall be determined pursuant to
this Section 2(c) as partial relief for the damages to the Investors by reason
of any such delay in or reduction of their ability to sell the Registrable
Securities (which remedy shall not be exclusive of any other remedies available
at law or in equity). The Company shall pay to each Investor an amount equal to
the sum of (i) the aggregate principal amount of the Debentures held by such
Investor (including, without limitation, Debentures that have been converted
into Conversion Shares then held by such Investor) (the "AGGREGATE PURCHASE
PRICE") multiplied by two hundredths (.02) if the Registration Statement filed
pursuant to Section 2(a) is not declared effective on or prior to the
Registration Deadline plus (ii) an amount equal to the Aggregate Purchase Price
multiplied by two hundredths (.02) for each full thirty (30) day period
thereafter that the Registration Statement has not been declared effective or
that sales are not permitted pursuant to the Registration Statement after it has
been declared effective (including by reason of a stop order or the Company's
failure to update the registration statement) or that the Common Stock is not
listed or included for quotation on NASDAQ, the NYSE or AMEX (which amount shall
not be pro rated for periods of less than thirty (30) days); PROVIDED, HOWEVER
that there shall be excluded from each such period any delays which are solely
attributable to changes (other than corrections of Company mistakes with respect
to information previously provided by the Investors) required by the Investors
in the Registration Statement with respect to information relating to the
Investors, including, without limitation, changes to the plan of distribution
and PROVIDED, FURTHER, that the aggregate amount payable to any Investor under
this Section 2(c) shall not exceed ten percent (10%) of such Investor's
Aggregate Purchase Price. (For example, if the Registration Statement is not
effective by the Registration Deadline, the Company would pay $20,000 for each
$1,000,000 of Aggregate Purchase Price and the Company would pay an additional
$20,000 for each $1,000,000 of Aggregate Purchase Price thereafter for each
additional thirty (30) days the Registration Statement is not effective (up to a
maximum of $100,000 for each $1,000,000 Aggregate Purchase Price)). Such amounts
shall be paid in cash or, at each Investor's option, may be convertible into
Common Stock at the "CONVERSION PRICE" (as defined in the Debentures). Any
shares of Common Stock issued upon conversion of such amounts shall be
Registrable Securities. If the Investor desires to convert the amounts due
hereunder into Registrable Securities it shall so notify the Company in writing
within two (2) business days of the date on which such amounts are first payable
in cash and such amounts shall be so convertible (pursuant to the mechanics set
forth under Article II of the Debentures), beginning on the last day upon which
the cash amount would otherwise be due in accordance with the following
sentence. Payments of cash pursuant hereto shall be made within five (5) days
after the end of each period that gives rise to such obligation.
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<PAGE>
d. ELIGIBILITY FOR FORM S-3. The Company represents and
warrants that it meets the requirements for the use of Form S-3 for registration
of the sale by the Initial Investors and any other Investor of the Registrable
Securities and the Company shall file all reports required to be filed by the
Company with the SEC in a timely manner so as to maintain such eligibility for
the use of Form S-3.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration of
the Registrable Securities, the Company shall have the following obligations:
a. The Company shall prepare promptly and file with the SEC
the Registration Statement required by Section 2(a), and cause such Registration
Statement relating to Registrable Securities to become effective as soon as
practicable after such filing, but in no event later than the Registration
Deadline, and keep the Registration Statement effective pursuant to Rule 415 at
all times until such date as is the earlier of (i) the date on which all of the
Registrable Securities have been sold and (ii) the date on which all Registrable
Securities (in the reasonable opinion of counsel to the Initial Investors) may
be immediately sold by the Investors to the public without registration
(including, in accordance with Rule 144(k) promulgated under the Securities Act)
(the "Registration Period"), which Registration Statement (including any
amendments or supplements thereto and prospectuses contained therein and all
documents incorporated by reference therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein not misleading.
b. The Company shall prepare and file with the SEC such
additional Registration Statements and such amendments (including post-effective
amendments) and supplements to any Registration Statement and the prospectus
used in connection with the Registration Statement as may be necessary to keep
the Registration Statement or Statements effective as to all Registrable
Securities at all times during the Registration Period, and, during such period,
comply with the provisions of the Securities Act with respect to the disposition
of all Registrable Securities of the Company covered by the Registration
Statement or Statements until such time as all of such Registrable Securities
have been disposed of in accordance with the intended methods of disposition by
the seller or sellers thereof as set forth in the Registration Statement. In the
event an Investor notifies the Company that the number of shares available
(including, if permissible, shares available by reason of Rule 416 under the
Securities Act) under a Registration Statement filed pursuant to this Agreement
was, for any three (3) consecutive trading days (the date the Investor notifies
the Company of such occurrence being the "REGISTRATION TRIGGER DATE"),
insufficient to cover a number of shares equal to the applicable Registration
Percentage (as defined below) multiplied by all of the Registrable Securities
issued or issuable upon conversion of the Debentures held by such Investor
(without giving effect to any limitations on conversion contained in Article
II.C of the Debentures),
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<PAGE>
the Company shall amend the Registration Statement, or file a new Registration
Statement (on the short form available therefor, if applicable), or both, so as
to cover one hundred fifty percent (150%) of the Registrable Securities issued
or issuable to such Investor (without giving effect to any limitations on
conversion contained in Article II.C of the Debentures), in each case, as soon
as practicable, but in any event within fifteen (15) days after the Registration
Trigger Date (based on the market price of the Common Stock and other relevant
factors on which the Company reasonably elects to rely). The Company shall cause
such amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof. In the event the Company fails to
obtain the effectiveness of any such Registration Statement within ninety (90)
days after a Registration Trigger Date, each Investor shall thereafter have the
option, exercisable in whole or in part at any time and from time to time by
delivery of a written notice to the Company (a "REGISTRATION TRIGGER PREPAYMENT
NOTICE"), to require the Company to pay a portion of such Investor's Outstanding
Amount (as defined in Article I of the Debentures), such that the total number
of shares of Common Stock issuable to such Investor upon conversion of its
Debentures (without giving effect to any limitations on conversion contained in
Article II.C of the Debentures) does not exceed the number of shares then
registered under an effective Registration Statement. If the Corporation fails
to pay any portion of such Outstanding Amount within five (5) business days
after its receipt of a Registration Trigger Prepayment Notice, then such failure
shall be deemed a Mandatory Prepayment Event as defined in the Debentures, and
the Investor shall be entitled to the remedies provided in Article V.B of the
Debentures. As used herein, "REGISTRATION PERCENTAGE" means one hundred percent
(100%) for the period ending on the 150th day following the Closing Date and
means one hundred and thirty-five percent (135%) thereafter.
c. The Company shall furnish to each Investor whose
Registrable Securities are included in the Registration Statement and its legal
counsel (i) promptly after the same is prepared and publicly distributed, filed
with the SEC, or received by the Company, one copy of the Registration Statement
and any amendment thereto, each preliminary prospectus and prospectus and each
amendment or supplement thereto and, in the case of the Registration Statement
referred to in Section 2(a), to counsel to the Investors only, each letter
written by or on behalf of the Company to the SEC or the staff of the SEC, and
each item of correspondence from the SEC or the staff of the SEC, in each case
relating to such Registration Statement (other than the portion, if any, thereof
which contains information for which the Company has sought confidential
treatment) and (ii) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor.
d. The Company shall use reasonable efforts to (i) register
and qualify the Registrable Securities covered by the Registration Statement
under such other securities or "blue sky" laws of such jurisdictions in the
United States as each Investor who holds Registrable Securities being offered
reasonably requests, (ii) prepare and file in those jurisdictions such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; PROVIDED, HOWEVER, that the Company shall not be
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<PAGE>
required in connection therewith or as a condition thereto to (a) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(d), (b) subject itself to general taxation in any such
jurisdiction, (c) file a general consent to service of process in any such
jurisdiction, (d) provide any undertakings that cause the Company undue expense
or burden, or (e) make any change in its charter or bylaws, which in each case
the Board of Directors of the Company determines to be contrary to the best
interests of the Company and its stockholders.
e. In the event the Investors who hold a majority in interest
of the Registrable Securities being offered in an offering select underwriters
for the offering, the Company shall enter into and perform its obligations under
an underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering.
f. As promptly as practicable after becoming aware of such
event, the Company shall notify each Investor of the happening of any event, of
which the Company has knowledge, as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request.
g. The Company shall use its best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement, and, if such an order is issued, to obtain the
withdrawal of such order at the earliest practicable moment and to notify each
Investor who holds Registrable Securities being sold (or, in the event of an
underwritten offering, the managing underwriters) of the issuance of such order
and the resolution thereof.
h. The Company shall permit a single firm of counsel
designated by the Initial Investors to review the Registration Statement, all
amendments and supplements thereto and all written responses by the Company to
the SEC regarding the Registration Statement which relate to the Investors a
reasonable period of time (and in no event less than three (3) business days)
prior to their filing with the SEC, and not file any document in a form to which
such counsel reasonably objects. In the event such counsel fails to convey to
the Company all of its comments (or that it has no comments) to such
Registration Statement prior to the scheduled filing date of such Registration
Statement (which date shall comply with the requirements set forth in this
Section 3(h)), the sixty (60) and the one hundred and twenty (120) day periods
referred to in Section 2(a) and 2(c) shall be extended by such number of
business days after such scheduled filing date that such counsel so conveys such
comments (or that it has no comments).
i. The Company shall make generally available to its security
holders as soon as practical, but not later than ninety (90) days after the
close of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 under the Securities Act) covering a
twelve-month period beginning not later than the first day of the Company's
fiscal quarter next following the effective date of the Registration Statement.
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j. At the request of any Investor, if the Registration
Statement pertains to an underwritten public offering, the Company shall
furnish, on the date of effectiveness of the Registration Statement (i) an
opinion, dated as of such date, from counsel representing the Company addressed
to the Investors and in form, scope and substance as is customarily given in an
underwritten public offering and (ii) a letter, dated such date, from the
Company's independent certified public accountants in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and the
Investors.
k. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to the
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Investors, and (iv) one firm of attorneys
retained by all such underwriters (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "Records"), as shall be reasonably deemed
necessary by each Inspector to enable each Inspector to exercise its due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request
for purposes of such due diligence; PROVIDED, HOWEVER, that each Inspector shall
hold in confidence and shall not make any disclosure (except to an Investor) of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (b) the release of such
Records is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction, or (c) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into confidentiality agreements (in
form and substance satisfactory to the Company) with the Company with respect
thereto, substantially as set forth in this Section 3(k). Each Investor agrees
that it shall, upon learning that disclosure of such Records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. Nothing herein shall be deemed to
limit the Investor's ability to sell Registrable Securities in a manner which is
otherwise consistent with applicable laws and regulations.
l. The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement, or (v) such Investor
consents to the form and content of any such disclosure. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor prior
to making such disclosure, and allow the Investor, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
7
<PAGE>
m. The Company shall use its best efforts to promptly either
(i) cause all the Registrable Securities covered by the Registration Statement
to be listed on the NYSE or the AMEX or another national securities exchange and
on each additional national securities exchange on which securities of the same
class or series issued by the Company are then listed, if any, if the listing of
such Registrable Securities is then permitted under the rules of such exchange,
or (ii) secure the designation and quotation, of all the Registrable Securities
covered by the Registration Statement on the NASDAQ Small Cap Market or the NNM
and, without limiting the generality of the foregoing, to arrange for or
maintain at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities.
n. The Company shall provide a transfer agent and registrar,
which may be a single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.
o. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be offered pursuant to the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
managing underwriter or underwriters, if any, or the Investors may reasonably
request and registered in such names as the managing underwriter or
underwriters, if any, or the Investors may request, and, within three (3)
business days after a Registration Statement which includes Registrable
Securities is ordered effective by the SEC, the Company shall cause legal
counsel selected by the Company to deliver, to the transfer agent for the
Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) an opinion of such
counsel in the form attached hereto as EXHIBIT 1.
p. At the request of any Investor, the Company shall prepare
and file with the SEC such amendments (including post-effective amendments) and
supplements to a Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary in order to change the plan
of distribution set forth in such Registration Statement.
4. OBLIGATIONS OF THE INVESTORS. In connection with the registration of
the Registrable Securities, the Investors shall have the following obligations:
a. It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least ten (10)
business days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Investor in writing of the information
the Company reasonably requires from each such Investor and each such Investor
shall provide such information no later than five (5) business days prior to
such anticipated filing date.
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<PAGE>
b. Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement.
c. Each Investor whose Registrable Securities are included in
a Registration Statement understands that the Securities Act may require
delivery of a prospectus relating thereto in connection with any sale thereof
pursuant to such Registration Statement and each such Investor shall deliver a
prospectus in connection with any such sale.
d. Each Investor agrees to notify the Company promptly, but in
any event within 72 hours after the date on which all Registrable Securities,
Debentures and Common Shares owned by such Investor have been sold by such
Investor, if such date is prior to the expiration of the Registration Period, so
that the Company may comply with its obligation to terminate the Registration
Statement in accordance with Item 512 of Regulation S-K or Regulation S-B, as
the case may be.
e. In the event Investors holding a majority in interest of
the Registrable Securities being offered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement.
f. Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(f)
or 3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
g. No Investor may participate in any underwritten offering of
Registrable Securities hereunder unless such Investor (i) agrees to sell such
Investor's Registrable Securities on the basis provided in any underwriting
arrangements in usual and customary form entered into by the Company, (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements, and (iii) agrees to pay its pro rata share of
all underwriting discounts and commissions and any expenses in excess of those
payable by the Company pursuant to Section 5 below.
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<PAGE>
5. EXPENSES OF REGISTRATION. All expenses incurred by the Company in
connection with registrations, filings or qualifications pursuant to Sections 2
and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, the fees and disbursements of
counsel for the Company and the fees and disbursements contemplated by Section
3(j) hereof shall be borne by the Company. The Investors shall be responsible
for any underwriting discounts and commissions attributable to the Registrable
Securities to be sold by them and the legal fees and disbursements contemplated
by Section 2(b) hereof, except to the extent otherwise set forth in Section
2(b).
6. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify,
hold harmless and defend (i) each Investor who holds such Registrable
Securities, and (ii) the directors, officers, partners, members, employees,
agents and each person who controls any Investor within the meaning of Section
15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), if any, (each, an "INDEMNIFIED PERSON"),
against any joint or several losses, claims, damages, liabilities or expenses
(collectively, together with actions, proceedings or inquiries by any regulatory
or self-regulatory organization, whether commenced or threatened, in respect
thereof, "CLAIMS") to which any of them may become subject insofar as such
Claims arise out of or are based upon: (i) any untrue statement or alleged
untrue statement of a material fact in a Registration Statement or the omission
or alleged omission to state therein a material fact required to be stated or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities (the matters in the foregoing clauses (i) through (iii) being,
collectively, "VIOLATIONS"). Subject to the restrictions set forth in Section
6(c) with respect to the number of legal counsel, the Company shall reimburse
the Investors and each such underwriter or controlling person, promptly as such
expenses are incurred and are due and payable, for any reasonable legal fees or
other reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by such Indemnified Person expressly for use in the Registration
Statement or any such amendment thereof or supplement thereto; (ii) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Company, which consent shall not be
10
<PAGE>
unreasonably withheld; and (iii) with respect to any preliminary prospectus,
shall not inure to the benefit of any Indemnified Person if the untrue statement
or omission of material fact contained in the preliminary prospectus was
corrected on a timely basis in the prospectus, as then amended or supplemented,
if such corrected prospectus was timely made available by the Company pursuant
to Section 3(c) hereof, and the Indemnified Person was promptly advised in
writing not to use the incorrect prospectus prior to the use giving rise to a
Violation and such Indemnified Person, notwithstanding such advice, used it.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall survive
the transfer of the Registrable Securities by the Investors pursuant to Section
9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees severally and not jointly
to indemnify, hold harmless and defend, to the same extent and in the same
manner set forth in Section 6(a), the Company, each of its directors, each of
its officers who signs the Registration Statement, its employees, agents and
each person, if any, who controls the Company within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act, and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the Securities Act or the Exchange Act (each
an "INDEMNIFIED PARTY"), against any Claim to which any of them may become
subject, under the Securities Act, the Exchange Act or otherwise, insofar as
such Claim arises out of or is based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement; and subject to
Section 6(c) such Investor will reimburse any legal or other expenses (promptly
as such expenses are incurred and are due and payable) reasonably incurred by
them in connection with investigating or defending any such Claim; PROVIDED,
HOWEVER, that the indemnity agreement contained in this Section 6(b) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of such Investor, which consent shall not be
unreasonably withheld; PROVIDED, FURTHER, HOWEVER, that the Investor shall be
liable under this Agreement (including this Section 6(b) and Section 7) for only
that amount as does not exceed the net proceeds actually received by such
Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented, and the Indemnified Party failed to utilize
such corrected prospectus.
c. Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed,
11
<PAGE>
to assume control of the defense thereof with counsel mutually satisfactory to
the indemnifying party and the Indemnified Person or the Indemnified Party, as
the case may be; PROVIDED, HOWEVER, that such indemnifying party shall not be
entitled to assume such defense and an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential conflicts of interest between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding or the actual or potential defendants in, or targets
of, any such action include both the Indemnified Person or the Indemnified Party
and the indemnifying party and any such Indemnified Person or Indemnified Party
reasonably determines that there may be legal defenses available to such
Indemnified Person or Indemnified Party which are different from or in addition
to those available to such indemnifying party. The indemnifying party shall pay
for only one separate legal counsel for the Indemnified Persons or the
Indemnified Parties, as applicable, and such legal counsel shall be selected by
Investors holding a majority-in-interest of the Registrable Securities included
in the Registration Statement to which the Claim relates (with the approval of
the Initial Investors if they holds Registrable Securities included in such
Registration Statement), if the Investors are entitled to indemnification
hereunder, or by the Company, if the Company is entitled to indemnification
hereunder, as applicable. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is actually 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.
7. CONTRIBUTION. To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; PROVIDED,
HOWEVER, that (i) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6, (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
such fraudulent misrepresentation, and (iii) contribution (together with any
indemnification or other obligations under this Agreement) by any seller of
Registrable Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE EXCHANGE ACT. With a view to making available to
the Investors the benefits of Rule 144 promulgated under the Securities Act or
any other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("RULE 144"), the Company agrees to:
a. file with the SEC in a timely manner and make and keep
available all reports and other documents required of the Company under the
Securities Act and the Exchange Act so long
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<PAGE>
as the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing and availability of such reports
and other documents is required for the applicable provisions of Rule 144; and
b. furnish to each Investor so long as such Investor owns
Debentures, Common Shares or Registrable Securities, promptly upon request, (i)
a written statement by the Company that it has complied with the reporting
requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy
of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably requested to permit the Investors to sell such securities
pursuant to Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS. The rights of the Investors
hereunder, including the right to have the Company register Registrable
Securities pursuant to this Agreement, shall be automatically assignable by each
Investor to any transferee of all or any portion of the Debentures, Common
Shares or the Registrable Securities if: (i) the Investor agrees in writing with
the transferee or assignee to assign such rights, and a copy of such agreement
is furnished to the Company within a reasonable time after such assignment, (ii)
the Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (a) the name and address of such transferee or
assignee, and (b) the securities with respect to which such registration rights
are being transferred or assigned, (iii) following such transfer or assignment,
the further disposition of such securities by the transferee or assignee is
restricted under the Securities Act and applicable state securities laws, (iv)
at or before the time the Company receives the written notice contemplated by
clause (ii) of this sentence, the transferee or assignee agrees in writing with
the Company to be bound by all of the provisions contained herein, and (v) such
transfer shall have been made in accordance with the applicable requirements of
the Securities Purchase Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with
written consent of the Company, the Initial Investors (to the extent the Initial
Investors still own Debentures, Common Shares or Registrable Securities) and
Investors who hold a majority in interest of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company.
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered
13
<PAGE>
personally or by courier or by confirmed telecopy, and shall be effective five
days after being placed in the mail, if mailed, or upon receipt or refusal of
receipt, if delivered personally or by courier or confirmed telecopy, in each
case addressed to a party. The addresses for such communications shall be:
If to the Company:
Palomar Medical Technologies, Inc.
66 Cherry Hill Drive
Beverly, Massachusetts 01915
Telecopy: (508) 921-5801
Attention: Paul Weiner, Director of Finance
with a copy to each of the Company's General Counsel at the
same address and to:
Foley, Hoag & Eliot LLP
One Post Office Square
Boston, Massachusetts 02109
Telecopy: (617) 832-7000
Attention: Dean F. Hanley, Esq.
and if to any Investor, at such address as such Investor shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 11(b).
c. 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, shall not operate as a waiver thereof.
d. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in the State of Delaware. The Company irrevocably consents
to the jurisdiction of the United States federal courts located in the County of
Kent in the State of Delaware in any suit or proceeding based on or arising
under this Agreement and irrevocably agrees that all claims in respect of such
suit or proceeding may be determined in such courts. The Company irrevocably
waives the defense of an inconvenient forum to the maintenance of such suit or
proceeding. The Company further agrees that service of process upon the Company,
mailed by first class mail shall be deemed in every respect effective service of
process upon the Company in any such suit or proceeding. Nothing herein shall
affect the Investors' right to serve process in any other manner permitted by
law. The Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
e. This Agreement and the Securities Purchase Agreement
(including all schedules and exhibits thereto) constitute the entire agreement
among the parties hereto with respect to the subject matter hereof and thereof.
There are no restrictions, promises, warranties or
14
<PAGE>
undertakings, other than those set forth or referred to herein and therein. This
Agreement and the Securities Purchase Agreement supersede all prior agreements
and understandings among the parties hereto with respect to the subject matter
hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents and other determinations to be made by the
Investors or the Initial Investors pursuant to this Agreement shall be made by
the Investors or the Initial Investors holding a majority of the Registrable
Securities (determined as if all Debentures then outstanding had been converted
into or exercised for Registrable Securities) held by all Investors or Initial
Investors, as the case may be.
k. The initial number of Registrable Securities included on
any Registration Statement and each increase to the number of Registrable
Securities included thereon shall be allocated pro rata among the Investors
based on the number of Registrable Securities held by each Investor at the time
of such establishment or increase, as the case may be. In the event an Investor
shall sell or otherwise transfer any of such holder's Registrable Securities,
each transferee shall be allocated a pro rata portion of the number of
Registrable Securities included on a Registration Statement for such transferor.
Any shares of Common Stock included on a Registration Statement and which remain
allocated to any person or entity which does not hold any Registrable Securities
shall be allocated to the remaining Investors, pro rata based on the number of
shares of Registrable Securities then held by such Investors.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
-------------------------------
Name:
-----------------------------
Its:
------------------------------
Initial Investors:
Name:
-----------------------------
By:
-----------------------------
Name:
-----------------------------
Its:
-----------------------------
<PAGE>
Exhibi1
To Exhibit B
REGISTRATION RIGHTS AGREEMENT
[Date]
VIA FACSIMILE: (718) 331-1852
Herbert Lemmer, Esq.
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 Wall Street
New York, NY 10005
RE: PALOMAR MEDICAL TECHNOLOGIES, INC.
Dear Mr. Lemmer:
We are counsel to PALOMAR MEDICAL TECHNOLOGIES, INC., a corporation organized
under the laws of the State of Delaware (the "COMPANY"), and we understand that
[Name of Investor] (the "HOLDER") has purchased from the Company (i) 6%, 7% and
8% Convertible Debentures Due September 30, 2002 (the "DEBENTURES") that are
convertible into shares of the Company's Common Stock, par value $.01 per share
(the "COMMON STOCK") and (ii) shares of Common Stock (the "COMMON SHARES"). The
Debentures and Common Shares were purchased by the Holder pursuant to a
Securities Purchase Agreement, dated as of September 30, 1997, by and among the
Company and the signatories thereto (the "AGREEMENT"). Pursuant to a
Registration Rights Agreement, dated as of September 30, 1997, by and among the
Company and the signatories thereto (the "REGISTRATION RIGHTS AGREEMENT"), the
Company agreed with the Holder, among other things, to register the Registrable
Securities (as that term is defined in the Registration Rights Agreement) under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), upon the terms
provided in the Registration Rights Agreement. In connection with the Company's
obligations under the Registration Rights Agreement, on ________, 1997, the
Company filed a Registration Statement on Form S-___ (File No. 333-
_____________) (the "REGISTRATION STATEMENT") with the Securities and Exchange
Commission (the "SEC") relating to the Registrable Securities, which names the
Holder as a selling stockholder thereunder.
[Customary introductory and scope of examination language to be inserted]
Based on the foregoing, we are of the opinion that the Registrable Securities
have been registered under the Securities Act.
[Other customary language to be included.]
Very truly yours,
cc: [Name of Investor]
<PAGE>
EXHIBIT C
As of September 30, 1997
JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House
20 Reid Street
Hamilton HM11, Bermuda
Attn: Philip Pedro
Diversified Strategies Fund, L.P.
c/o Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, Virginia 20191
Attn: Neil T. Chau
Southbrook International Investments, Ltd.
c/o Trippoak Advisors, Inc.
630 Fifth Avenue, Suite 2000
New York, New York 10111
Attn: Robert L. Miller
Re: PALOMAR MEDICAL TECHNOLOGIES, INC.
Ladies and Gentlemen:
We have acted as special counsel to Palomar Medical Technologies, Inc.,
a Delaware corporation (the "Company"), in connection with the sale of (a) $7
million principal amount of the Company's 6%, 7% and 8% Convertible Debentures
(the "Debentures"), which are convertible into shares of the Company's Common
Stock, par value $.01 per share (the "Common Stock"), and (b) certain other
shares of Common Stock (the "Common Shares") pursuant to the terms and
conditions of that certain Securities Purchase Agreement dated as of September
30, 1997 (the "Purchase Agreement") by and between the Company and you (the
"Purchasers").
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Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings assigned to such terms in the Purchase
Agreement.
In connection with our rendering of the opinions expressed below, we
reviewed
(a) the Certificate of Incorporation (the "Charter") and By-Laws (the
"By-Laws") of the Company, each as amended to date;
(b) certificates issued by the Secretary of State of the State of
Delaware dated September 26, 1997, with respect to the legal existence and good
standing of the Company, Palomar Medical Products, Inc., Nexar Technologies,
Inc., Cosmetic Technology International, Inc., Spectrum Medical Technologies,
Inc., Palomar Electronics Corporation and Dynaco Corp. in Delaware, and a
certificate issued by the Secretary of State of the State of California dated
September 26, 1997, with respect to the legal existence and good standing of
Comtel Electronics in California (such entities, other than the Company,
hereinafter referred to as the "Subsidiaries");
(c) a certificate issued by the Secretary of State of The Commonwealth
of Massachusetts dated September 29, 1997, as to the qualification of the
Company to conduct business as a foreign corporation;
(d) a certified copy of certain resolutions of the Board of Directors
of the Company;
(e) the Purchase Agreement, the Registration Rights Agreement and the
form of Debenture;
(f) the other documents delivered at the closing of the transactions
contemplated by the Purchase Agreement;
(g) certificates of the Company with respect to certain factual
matters;
(h) the agreements, instruments and documents listed on EXHIBIT A
attached hereto (the "Listed Agreements"); and
(i) such other documents and certificates as we have deemed necessary
to enable us to render the opinions expressed below.
In rendering the opinions expressed in paragraph 1 below with respect
to the legal existence and good standing of the Company in Delaware and of the
Subsidiaries in their respective jurisdictions of organization, and with respect
to qualification and good standing of the Company as a foreign corporation in
The Commonwealth of Massachusetts, we have relied solely upon the certificates
referred to in clauses (b) and (c) of the preceding paragraph, and such
2
<PAGE>
opinions are given as of the date of such certificates. We express no opinion as
to the tax good standing of the Company or any Subsidiary.
With respect to the opinion expressed in paragraph 6 below, we note
that we did not observe or supervise the activities of the Company or its
representatives in connection with the offering and sale of the Debentures. In
rendering such opinion we have assumed based solely upon the factual
representation of the Company made or delivered to us and without other
investigation that in connection with such offering and sale there has been no
general solicitation or general advertising by the Company or its
representatives. We have also assumed that no person subject to 950 C.M.R.
14.402(b)(9)(F) has engaged in any activity prohibited thereby and that no
subsequent offer or sale of securities of the Company will adversely affect the
availability of the exemptions from registration referred to in paragraph 6 of
this opinion with respect to the offer or sale of the Debentures, the Conversion
Shares or the Common Shares.
In rendering the opinions expressed herein, we have also examined and
have relied completely upon all of the representations and warranties as to
matters of fact contained in the Purchase Agreement and contained in the related
instruments and other documents delivered by the Company to you in connection
with the issuance and sale of the Debentures, and we have assumed the
completeness and accuracy of all factual matters described in such
representations and warranties.
We have not, except as specifically noted above, made any independent
review or investigation of facts relating to the Company, including, without
limiting the generality of the foregoing, any investigation as to the existence
of any actions, suits or proceedings pending or threatened against the Company
or agreements, judgments, injunctions, orders or decrees binding upon the
Company or which might result in the imposition of any lien or other encumbrance
on any assets of the Company.
We have assumed the authenticity and completeness of all documents
furnished to us as originals, the genuineness of all signatures (other than on
behalf of the Company), the legal capacity of natural persons, the conformity to
the originals of all documents furnished to us as copies, and the accuracy and
completeness of all corporate records made available to us by the Company.
When an opinion set forth below is given to our knowledge, the
knowledge is limited to the conscious awareness of facts or other information of
Marcel A. Bryar, Esquire, Dean F. Hanley, Esquire, and Alexander H. Pyle,
Esquire, who are the individual lawyers in our firm who were actively involved
in representation of the Company with respect to the transactions contemplated
by the Purchase Agreement and, except as expressly stated herein, without any
special or additional investigation undertaken for the purposes of this opinion.
3
<PAGE>
You have not asked us to pass upon your power and authority to enter
into the Purchase Agreement or the Registration Rights Agreement. Accordingly,
for the purposes of this opinion, we have assumed that each of you has all
requisite power and authority to enter into the Purchase Agreement and the
Registration Rights Agreement and to effect all of the transactions thereunder,
and that the Purchase Agreement, the Registration Rights Agreement and each
other agreement or instrument we have reviewed constitutes the legal, valid and
binding obligation of all parties thereto other than the Company.
We have made such examination of Massachusetts law, Federal law and the
corporation law of the State of Delaware as we deem necessary for the purposes
of this opinion. We do not purport to pass herein on the laws of any state or
jurisdiction other than the federal law of the United States of America, the law
of The Commonwealth of Massachusetts and the corporation law of the State of
Delaware. Our opinions are given only as of the date hereof, and we expressly
disclaim any continuing obligation or undertaking to supplement or update any of
our statements herein. We have assumed that no Purchaser is an "interested
stockholder" within the meaning of Section 203 of the Delaware General
Corporation Law.
We note that the Purchase Agreement, the Registration Rights Agreement
and the Debentures are governed by the law of the State of Delaware. We have
assumed, with your permission, that the substantive law of the State of
Delaware, other than the corporation law of the State of Delaware, is identical
in all respects material to our opinions to the substantive law of The
Commonwealth of Massachusetts.
The opinions herein expressed are qualified to the extent that (a) the
validity or enforceability of any provisions of any agreement or instrument may
be subject to or affected by any bankruptcy, reorganization, insolvency,
moratorium, fraudulent conveyance, fraudulent transfer or similar law of general
application from time to time in effect and relating to or affecting the rights
or remedies of creditors generally, (b) the remedy of specific performance or
any other equitable remedy may be unavailable in any jurisdiction or may be
withheld as a matter of judicial discretion, and (c) the enforcement of any
rights or remedies is or may be subject to an implied duty on the part of the
party seeking to enforce such rights to take action and make determinations on a
reasonable basis and in good faith. In addition, we express no opinion herein as
to: prospective waivers of rights to notice or a hearing or of other rights
granted by constitution or statute; powers of attorney; provisions purporting to
relieve parties of the consequences of their own negligence or misconduct;
provisions purporting to establish evidentiary standards; or provisions to the
effect that rights or remedies are not exclusive, that every right or remedy is
cumulative and may be exercised in addition to any other right or remedy, or
that failure to exercise or delay in exercising rights and remedies will not
operate as a waiver of any such right or remedy. With your permission, we have
assumed for all purposes under this opinion that the Company is not, and
following completion of the transactions contemplated by the Purchase Agreement
will not be, insolvent, left with unreasonably small capital, or unable to pay
4
<PAGE>
its debts as they mature. We express no opinion as to the effect of the laws of
any jurisdiction wherein the Company or you may be located, or wherein
enforcement of the Purchase Agreement or the Debentures may be limited, with
respect to the rates of interest legally chargeable or collectible thereunder.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to own its properties and to conduct its business
as currently conducted. The Company has power and authority to enter into and
perform each of the Purchase Agreement and the Registration Rights Agreement and
to issue the Debentures and the Common Shares and to issue the Conversion Shares
upon conversion of the Debentures. Each of the Subsidiaries is a corporation
validly existing and in good standing under the laws of its state of
incorporation. We have advised you that Tissue Technologies, Inc., a subsidiary
of the Company, is not in good standing in the State of Arizona. The Company is
duly qualified as a foreign corporation and is in good standing in The
Commonwealth of Massachusetts, and, based on factual representations by the
Company to us, there is no other state or jurisdiction in which the failure to
be so qualified would have a material adverse effect on the Company.
2. The Purchase Agreement, the Registration Rights Agreement and the
Debentures have been duly and validly executed and delivered by the Company and
constitute the legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their respective terms, except that we do
not express any opinion as to the validity or enforceability of the
indemnification and contribution provisions of the Registration Rights
Agreement.
3. The authorized capital stock of the Company consists of (a)
100,000,000 shares of Common Stock and (b) 5,000,000 shares of Preferred Stock,
par value $.01 per share.
4. The Common Shares and the Conversion Shares are duly authorized and,
when issued in accordance with the Purchase Agreement and the Debentures,
respectively, will be validly issued, fully paid and non-assessable. The Company
has reserved for issuance upon conversion of the Debentures 3,500,000 shares of
the Company's authorized but unissued Common Stock, as well as such additional
shares of Common Stock as may be required to be issued upon conversion as a
result of the antidilution provisions of the Debentures or as a result of
changes in the market price of the Common Stock.
5. Except for certain contractual rights in favor of the holders of the
Company's Series H Convertible Preferred Stock (the "Series H Preemptive
Rights"), to our knowledge there are no preemptive rights or other similar
rights of stockholders of the Company to acquire the Debentures, the Common
Shares or the Conversion Shares or any other securities of the
5
<PAGE>
Company upon issuance of the Debentures, the Common Shares or the Conversion
Shares contained in the Charter, the By-Laws or the Listed Agreements. We have
been provided you with such documentation as has been furnished to us by the
Company regarding the Company's compliance with its obligations with respect to
the Series H Preemptive Rights, and, with your permission, we express no opinion
with respect to such matters.
6. Assuming the accuracy of the respective representations and
warranties of the Company and the Purchasers set forth in the Purchase
Agreement, the offer, issuance, sale and delivery of the Debentures, the Common
Shares and the Conversion Shares in accordance with the terms of the Purchase
Agreement and the Debentures constitute exempt transactions under the Securities
Act of 1933, as amended.
7. The execution, delivery and performance of the Purchase Agreement
and Registration Rights Agreement by the Company, the performance of its
obligations under the Debentures, and the consummation by the Company of the
transactions contemplated by the Purchase Agreement and the Registration Rights
Agreement, including, without limitation, the issuance of the Debentures and the
issuance and reservation for issuance of the Conversion Shares in accordance
with the terms of the Debentures, do not and will not result in a violation of
the Charter or By-Laws or conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any of the Listed Agreements except for such conflicts,
defaults, terminations, amendments, accelerations, cancellations and violations
as would not, individually or in the aggregate, have a Material Adverse Effect
or a material adverse effect on the Company's ability to perform its obligations
under the Purchase Agreement or the Registration Rights Agreement or the
Purchasers' rights as holders of Debentures.
8. The execution, delivery and performance of the Purchase Agreement,
the Registration Rights Agreement and the Debentures by the Company and the
consummation by the Company of the transactions contemplated by the Purchase
Agreement and the Registration Rights Agreement, including, without limitation,
the issuance of the Debentures and the Common Shares, the issuance and the
reservation for issuance of the Conversion Shares in accordance with the terms
of the Debentures (a) do not and will not result in a violation of the
corporation law of the State of Delaware or any federal or Massachusetts law,
rule, or regulation, or by which, to our knowledge, any property or asset of the
Company is bound or affected, and (b) except as set forth in paragraph 5 hereof
and except with respect to a breach of certain financial covenants under
$100,000 outstanding principal amount of the Company's 4.5% Convertible
Subordinated Promissory Note dated October 24, 1996, will not require the
Company to obtain any approval, consent, authorization, waiver, exemption or
order of, or make any filing or registration with, any court or governmental or
regulatory agency, self regulatory organization or stock market or exchange or,
to our knowledge, any third party, in order for it to execute, deliver or
perform any of its obligations under the Purchase Agreement or the Registration
Rights Agreement or to issue and deliver the Debentures and the Common Shares or
to issue and deliver the Conversion Shares
6
<PAGE>
in accordance with the terms of the Debentures or for you to exercise your
rights and remedies under any of the Purchase Agreement or the Registration
Rights Agreement (other than any SEC, NASD, NASDAQ or state securities filings
which may be required to be made by the Company subsequent to the consummation
of the transactions contemplated by the Purchase Agreement and other than with
respect to any registration statement which may be filed or may be required to
be filed pursuant to the Registration Rights Agreement). We express no opinion
with respect to any provision of the securities or "blue sky" laws of any state
or other jurisdiction other than, with respect to its securities or "blue sky"
laws, The Commonwealth of Massachusetts.
9. To our knowledge, the Company currently meets the registrant
eligibility requirements to register the resale of the Common Shares on form S-3
under the Securities Act.
These opinions are limited to the matters expressly stated herein and
are rendered solely for your benefit and may not be quoted or relied upon for
any other purpose or by any other person.
Very truly yours,
FOLEY, HOAG & ELIOT LLP
By: David A. Broadwin
-------------------
A Partner
<PAGE>
EXHIBIT A
TO
EXHIBIT C
Agreement and Plan of Reorganization dated March 9, 1996 by and among the
Company, TTI Acquisition Corp.,
Tissue Technologies, Inc. and Mario Barton
Amendment to the Merger Agreement dated April 29,1996 by and among the Company,
TTI Acquisition Corp.,
Tissue Technologies, Inc. and Mario Barton
Letter from the Company to Tissue Technologies, Inc. waiving the Company's right
to receive indemnification under Section 6 of the Merger Agreement in certain
circumstances
Plan of Merger dated May 3, 1996 by and between the Company, TTI Acquisition
Corp. and Tissue Technologies, Inc.
List of exhibits and schedules omitted from the Tissue Technologies, Inc. Merger
Agreement
Stock Purchase Agreement dated March 19, 1996, by and between Dynaco Acquisition
Corp., Comtel Electronics, Inc., Mikel C. Green, Peter Rogal and Palomar
Electronics Corp.
Agreement for Purchase of Stock dated July 12,1996, by and between the Company,
Eleanor Roberts Weisman
and Wallace Roberts
Restated Certificate of Incorporation, as amended
Certificate of Amendment to Certificate of Incorporation, as filed with the
Delaware Secretary of State on December 16, 1996
Certificate of Designation of Series G Convertible Preferred Stock as filed with
the Delaware Secretary of State on September 26, 1996
Certificate of Designation of Series H Convertible Preferred Stock as filed with
the Delaware Secretary of State on March 26, 1997
Bylaws, as amended
Form of Common Stock Certificate
Patent License Agreement by and between the Company and Patlex Corporation,
effective as of January 1, 1992
1996 Stock Option Plan
1996 Employee Stock Purchase Plan
Form of Stock Option Agreement under the 1996 Stock Option Plan
Securities Purchase Agreement between the Company and The Travelers Insurance
Company dated July 12, 1996
Warrant to purchase Common Stock of the Company, dated July 12, 1996
Subscription Agreement between the Company and Genesee Fund Limited, dated
September 26, 1996
Registration Rights Agreement between the Company and Genesee Fund Limited,
dated September 26, 1996
Warrant to purchase Common Stock of the Company, dated September 27, 1996
Warrant Agreement between the Company and American Stock Transfer & Trust Co. as
warrant agent, dated June 24, 1996
Palomar Medical Technologies, Inc. and American Stock Transfer & Trust Company
as trustee, Indenture dated as of June 24, 1996, SF 25,000,000, 4.5% Convertible
Subordinated Debentures due 2003
Form of Offshore Securities Subscription Agreement, dated July 3, 1996
Form of Registration Rights Agreement, dated July 3, 1996
Form of Debenture, dated July 3, 1996
Form of Warrant, dated July 3, 1996
Berckeley Subscription Agreement, dated December 31, 1996 and Amendment thereto
dated January 10, 1997
Berckeley Debenture, dated December 31, 1996
High Risk Opportunities Hub Fund, Ltd. Subscription Agreement, dated January 14,
1997
High Risk Opportunities Hub Fund, Ltd. Debenture, dated January 13, 1997
Securities Purchase Agreement between Palomar Electronics Corporation and
Clearwater Fund IV, LLC, dated December 31, 1996
Securities Purchase Agreement between Palomar Electronics Corporation, the
Company and The Travelers Insurance Company, dated as of December 18, 1996
Securities Purchase Agreement between Palomar Electronics Corporation and GFL
Advantage Fund Limited dated December 31, 1996
Option Agreement between the Company and GFL Advantage Fund Limited dated
December 31, 1996
Common Stock Purchase Warrant dated December 31, 1996
Form of Net Warrant to Purchase Common Stock
Subscription Agreement between the Company and Finmanagement, Inc. dated
December 27, 1996
Subscription Agreement dated as of April 12, 1996, between the Company and GFL
Advantage Fund Limited
Registration Rights Agreement dated as of April 17, 1996 by and between the
Company and GFL Advantage Fund Limited
Warrant dated as of April 16, 1996
Form of Wan-ant to purchase Common Stock dated February 1, 1996
Form of Offshore Stock Subscription Agreement dated February 1, 1996
Form of Subscription Agreement dated as of March 10, 1997
Form Registration Rights Agreement dated as of March 10, 1997
Form of 5% Convertible Debenture due March 10, 2002
Subscription Agreement between the Company and Soginvest Bank dated as of March
13, 1997
Asset Purchase and Settlement Agreement by and among the Company, Nexar
Technologies, Inc., Technovation Computer Labs, Inc. and Babar I. Hamirani dated
February 28, 1997
List of exhibits omitted from the Asset Purchase and Settlement Agreement
Employment Agreement dated as of January 1, 1997, between the Company and Steven
Georgiev
Employment Agreement dated as of January 1, 1997, between the Company and
Michael H. Smotrich
Employment Agreement dated as of January 1, 1997, between the Company and Joseph
P. Caruso
Employment Agreement dated as of January 1, 1997, between the Company and
Anthony Fiorillo
Securities Purchase Agreement between the Company and RGC International
Investors, LDC, dated March 27, 1997
Registration Rights Agreement between the Company and RGC International
Investors, LDC, dated March 27, 1997
Form of Promissory Note dated October 17,1996
Form of Subscription Agreement dated October 16, 1996
Supplement to Securities Purchase Agreement dated May 5, 1997
Supplement to Registration Rights Agreement dated May 5, 1997
Supplement to Securities Purchase Agreement dated May 23, 1997
Supplement to Registration Rights Agreement dated May 23, 1997
Consent of Arthur Andersen UP
Agreement, dated December 30, 1993, by and between the Company, Dynaco
Corporation and Dynaco West Corporation
First Amendment to Purchase and Sale Agreement, by and between the Company,
Dynaco Corporation and Dynaco, West Corporation, dated January 24, 1994
Purchase and Sale Agreement dated March 14, 1995, by and between the Company and
SPMT Acquisition Corp., Spectrum Medical Technologies, Inc., Sanford R Lane and
CSF Investments Ltd.
Purchase and Sale Agreement dated June 5, 1995, by and between Dynaco
Acquisition Corporation and Inter-Connecting Products, Inc.
1991 Stock Option Plan, as amended
1993 Stock Option Plan
1995 Stock Option Plan
Form of Stock Option Grant under the 1991, 1993 and 1995 Stock Option Plans
Form of Company Warrant to Purchase Common Stock
Lease for premises at 66 Cherry Hill Drive, Beverly, Massachusetts, dated May
25, 1993
The Company's 401(k) Plan
<PAGE>
EXHIBIT D
October 8, 1997
VIA FACSILIME
Herbert Lemmer, Esq.
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 Wall Street
New York, NY 10005
Facsimile (718) 331-1852
RE: PALOMAR MEDICAL TECHNOLOGIES, INC.
Dear Mr. Lemmer:
Reference is made to that certain Securities Purchase Agreement, dated
September 30, 1997, by and among Palomar Medical Technologies Inc., a Delaware
corporation (the "Company") and the other signatories thereto (each, a "Holder")
pursuant to which the Company is issuing to the Holders $7,000,000 6%, 7% and 8%
Debentures (the "Debentures"). The Debentures are convertible into shares of the
Company's common stock, par value $.01 per share (the "Conversion Shares"). This
letter shall serve as our irrevocable authorization and direction to you to
issue Conversion Shares to Holder from time to time upon the direction of the
Company. Certificates for the Conversion Shares shall not bear any legend
restricting their transfer and should not be subject to any stop-transfer
restriction; PROVIDED, HOWEVER that if the Conversion Shares are not registered
for resale under the Securities Act of 1933, as amended, then the certificates
for the Conversion Shares shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS
SOLD PURSUANT TO RULE 144 UNDER THE ACT."
1
<PAGE>
Please be advised that the Holder is relying upon this letter as an
inducement to enter into the Securities Purchase Agreement and, accordingly,
Holder is a third party beneficiary to these instructions. Moreover, the Company
cannot revoke or modify these instructions without the prior written consent of
Holder.
Please execute this letter in the space indicated to acknowledge your
agreement to act in accordance with these instructions. Should you have any
questions concerning this matter, please contact me at (508) 921-9300.
Very truly yours,
PALOMAR MEDICAL TECHNOLOGIES INC.
By:
------------------------------
Name: LOUIS P. VALENTE
Title: PRESIDENT,
CHIEF EXECUTIVE OFFICER,
CHAIRMAN
Acknowledged:
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By:
-------------------
Name:
-------------------
Title:
-------------------
Date:
-------------------
Enclosure
cc: JNC Opportunity Fund, Ltd.
Diversified Strategic Fund, L.P.
Southbrook International Investment, Ltd.
<PAGE>
SCHEDULE 3(A)
SCHEDULE OF SIGNIFICANT SUBSIDIARIES
PALOMAR MEDICAL PRODUCTS, INC. DYNACO CORP.
66 Cherry Hill Drive 1000 South Priest Drive
Beverly, MA 01915 Tempe, AZ 85281
Tel: 508-921-9300 Tel: 602-968-2000
Fax: 508-921-5801 Fax: 602-921-9830
COSMETIC TECHNOLOGY INTERNATIONAL, INC. COMTEL ELECTRONICS, INC.
66 Cherry Hill Drive 14101 Myford Road
Beverly, MA 01915 Tustin, CA 92680
Tel: 508-921-9300 Tel: 714-453-8754
Fax: 508-921-5801 Fax: 714-450-0276
NEXAR TECHNOLOGIES, INC. TISSUE TECHNOLOGIES, INC.
182 Turnpike Road 4432 Anaheim Ave. NE
Westboro, MA 01581 Albuquerque, NM 87113
Tel: 508-836-8700 Tel: 505-880-1419
800-520-8455 800-658-3185
Fax: 508-836-8729 Fax: 505-828-0525
PALOMAR ELECTRONICS CORPORATION SPECTRUM MEDICAL TECHNOLOGIES, INC.
66 Cherry Hill Drive 45 Hartwell Avenue
Beverly, MA 01915 Lexington, MA 02173
Tel: 508-921-9300 Tel: 617-676-7300
Fax: 508-921-5801 888-876-5400
Fax: 617-676-7330
<PAGE>
SCHEDULE 3(F)
NEWS RELEASE
FOR IMMEDIATE RELEASE
CONTACTS:
<TABLE>
<S> <C> <C>
John J. Ingoldsby Jon Siegal Stanley Wunderlich
Director of Investor Relations Associate Chairman
Palomar Medical Technologies, Inc. Ronald Trahan Assoc., Inc. Consulting for Strategic Growth, Ltd.
508-921-9300 617-332-0101 800-625-2236
</TABLE>
PALOMAR'S PREVIOUSLY FILED PATENT LAWSUIT AGAINST MEHL/BIOPHILE
PRE-DATES MEHL/BIOPHILE'S LEGAL ACTION ANNOUNCED TWO DAYS AGO
BEVERLY, Mass., March 12, 1997 -- Palomar Medical Technologies, Inc. (NASDAQ:
PMTI) today announced that it filed a declaratory judgment several months ago
against MEHL/Biophile International Corp. (NASDAQ: MEHL) seeking a declaration
that Palomar's Epilaser(TM) laser-based hair removal system does not infringe on
MEHL/Biophile's laser hair removal method, and, furthermore, that
MEHL/Biophile's patent is both invalid and unenforceable. Palomar's suit was
filed in United States District Court in Boston, Mass.
Palomar's declaratory judgment action was filed substantially before
MEHL/Biophile's announcement two days ago that its Selvac Acquisition Corp. unit
had filed a lawsuit against Palomar for patent infringement and unfair
competition, essentially the same claims made previously by Palomar in its suit
against MEHL/Biophile. Selvac licenses the patented laser hair removal method
owned by Dr. Nardo Zaias.
"We filed this declaratory judgment months ago after learning that MEHL/Biophile
was misrepresenting to our customers that our product might infringe on their
patent," said Steven Georgiev, chairman and chief executive officer of Palomar.
"We are announcing our lawsuit today since our patent has only issued recently
and, therefore, all of the information is now in the public domain, allowing for
resolution of these issues."
(more)
<PAGE>
PALOMAR / 2
MEHL/Biophile's lawsuit was announced hours after Palomar announced it had
received U.S. Food and Drug Administration (FDA) to sell and market its Epilaser
system. Palomar announced yesterday the issuance of a U.S. patent that discloses
and protects the laser-based hair removal technology developed by Dr. R. Rox
Anderson at Massachusetts General Hospital's Wellman Laboratories, the
technology used in Epilaser and for which Palomar is the exclusive licensee.
Palomar Medical Technologies, Inc. is a leading supplier of proprietary laser
systems for dermatological and cosmetic laser treatment, and also engages in the
development and sale of specialty electronic products.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
With the exception of the historical information contained in this release, the
matters described herein contain forward-looking statements that involve risk
and uncertainties that may individually or mutually impact the matters herein
described, including but not limited to product demand and market acceptance,
the effect of economic conditions, the impact of competitive products and
pricing, governmental regulations, results of litigation, technological
difficulties and/or other factors outside the control of the company, which are
detailed from time to time in the company's SEC reports, including the report on
Form 10-Q for the quarter ended September 30, 1996.
####
Palomar news releases are available through PR
Newswire Company News on-Call by fax at
800-758-5804, Extension 107555, or
http://www.prnewswire.com/(PMTI).
Palomar's home page address is http://www.palmed.com
####
<PAGE>
NEWS RELEASE
FOR IMMEDIATE RELEASE
CONTACTS:
<TABLE>
<S> <C> <C>
John J. Ingoldsby Jon Siegal Stanley Wunderlich
Director of Investor Relations Associate Chairman
Palomar Medical Technologies, Inc. Ronald Trahan Assoc., Inc. Consulting for Strategic Growth, Ltd.
508-921-9300 617-332-0101 800-625-2236
</TABLE>
PALOMAR REPORTS FINANCIAL RESULTS; ELECTRONIC BUSINESS SPIN-OUT
IN PROCESS, SOLE FOCUS IS NOW ON COSMETIC LASER INDUSTRY
BEVERLY, Mass., March 18, 1997 -- Palomar Medical Technologies, Inc. (NASDAQ:
PMTI) today announced that revenues for the fourth quarter ended December 31,
1996, increased 235 percent to $20,944,453, compared with the fourth quarter of
1995. Palomar also reported a loss for the quarter ended December 31, 1996 of
($18,650,578), or ($0.69) per share, of which ($11,500,000), or ($0.40) per
share, is attributable to non-recurring write-offs.
For the year ended December 31, 1996, revenues increased 220 percent to
$70,098,443, compared with the previous year. Palomar also reported a loss for
the year ended December 31, 1996, of ($37,863,792), or ($1.49) per share, of
which ($11,500,000), or ($0.44) per share, is attributable to non-recurring
write-offs.
"Our fourth quarter net loss includes approximately $7.2 million of operating
losses attributed to the following four factors," said Steven Georgiev, chairman
and chief executive officer of Palomar, "They are: the delay in receiving FDA
hair removal clearance for our EpiLaser(TM) system, which was only obtained this
month; start-up costs associated with our new cosmetic laser center services
division; reduced sales volume in our Nexar subsidiary due to unavoidable parts
shortages; and interruption in production caused by the relocation to larger
facilities of our Nexar and Comtel manufacturing plants.
(more)
<PAGE>
PALOMAR / 2
"The majority of the non-recurring losses are a result of the assessment of our
technology and assets related to our electronic businesses. We reserved $8.5
million against technology assets and other costs in the fourth quarter,"
continued Georgiev. "In addition, Nexar settled claims with a former executive
for $1.4 million, which was charged to operations, and under which Nexar is
purchasing previously-licensed core technology and eliminating future royalty
payments on the use of this core technology. As part of our strategy to maximize
shareholder value, we are in the process of spinning out our electronic
businesses, preferably as majority-owned, publicly traded companies."
"The company also assessed its goodwill and joint ventures in related cosmetic
laser businesses and took a charge of $1.6 million," continued Georgiev. "This
write-down, combined with the previously mentioned, non-recurring costs in the
electronics segment, brings the total one-time charges for the year to
approximately ($11,500,000), or ($0.44) per share."
Georgiev added, "The public spin-out of Nexar is anticipated to close by
mid-April. That offering registers 2,500,000 shares of Nexar common stock in an
anticipated range of $11 to $13 per share."
Georgiev also said, "A spin-out of the remainder of our electronics group is
planned for later in 1997. The investments made in our electronics businesses
over the past two years are expected to yield high returns and could provide
liquid assets which can be used to fund our core cosmetic laser business in the
future.
"We are prepared to rapidly expand our cosmetic laser business," stated
Georgiev, "since we believe that all important elements are now in place. We
accomplished a major strategic alliance for the establishment of laser centers
with Columbia/HCA, a $20 billion company and one of the world's largest owners
and operators of medical facilities; we have FDA clearance for our complete
suite of laser systems, including EpiLaser for hair removal; we have a very
strong proprietary position in laser hair removal due to the recent issuance of
the Massachusetts General Hospital patent, for which we are the exclusive
licensee; we have major laser production capacity in place; we have expanded and
strengthened our management team; we are broadening our research and
development, as well as clinical, relationships with the highest-quality
institutions in the world; and we have established a subsidiary in the United
Kingdom to rapidly penetrate European markets.
(more)
<PAGE>
PALOMAR / 3
Georgiev concluded, "With freed-up resources from the electronics segment, we
intend to devote resources from the electronics segment to solely focus on
achieving the largest possible market share in 1997 in our core business --
cosmetic laser products and services. We believe that we are strongly positioned
to capitalize on these multi-billion dollar markets and achieve a dominant
position within the next two years."
Palomar Medical Technologies, Inc. is a leading supplier of proprietary laser
systems for dermatological and cosmetic laser treatment, such as hair removal
and the treatment of wrinkles, spider veins, tattoos, age spots, warts, scars,
and burns. Palomar also engages in the development and sale of specialty
electronic products.
The condensed consolidated statement of operations for the company follows:
PALOMAR MEDICAL TECHNOLOGIES, INC.
(Amounts in thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Year Ended
December 31 December 31
1996 1995 1996 1995
Revenues $20,944 $6,241 $70,098 $21,907
Net loss ($18,651)* ($6,589) ($37,864)* ($12,621)
Net loss per share ($0.69)* ($0.39) ($1.49)* ($0.89)
Weighted-average number
of shares used in computation
of per-share net loss 28,996 17,082 26,167 14,165
</TABLE>
* INCLUDES LOSS OF ($11,500,000), OR ($0.40) AND ($0.44) PER SHARE, FOR THE
THREE MONTHS AND YEAR ENDED DECEMBER 31, 1996 RESPECTIVELY, OF NON-RECURRING
WRITE-OFFS.
A REGISTRATION STATEMENT RELATING TO THE NEXAR SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
(more)
PALOMAR / 4
A copy of the Nexar prospectus may be obtained from John Ingoldsby, Director of
Investor Relations, Palomar Medical Technologies, Inc., 66 Cherry Hill Drive,
Beverly, MA 01915.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
With the exception of the historical information contained in this release, the
matters described herein contain forward-looking statements that involve risk
and uncertainties that may individually or mutually impact the matters herein
described, including but not limited to product demand and market acceptance,
the effect of economic conditions, the impact of competitive products and
pricing, governmental regulations, results of litigation, technological
difficulties and/or other factors outside the control of the company, which are
detailed from time to time in the company's SEC reports, including the report on
Form 10-Q for the quarter ended September 30, 1996.
####
Palomar news releases are available through PR
Newswire Company News on-Call by fax at
800-758-5804, Extension 107555, or
http://www.prnewswire.com/(PMTI).
Palomar's home page address is http://www.palmed.com
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR
OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS
OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
NO. $
----------- ---------------
5% CONVERTIBLE DEBENTURE DUE MARCH 10, 2002
THIS CONVERTIBLE DEBENTURE ("DEBENTURE") is one of a duly authorized issue
of Debentures of Palomar Medical Technologies, Inc. a corporation duly organized
and existing under the laws of the State of Delaware and having its principal
address at 66 Cherry Hill Drive, Beverly, Massachusetts 01915 (the "COMPANY"),
designated as its 5% Convertible Debentures Due March 10, 2002 in an aggregate
principal amount not exceeding Five Million Five Hundred Thousand U.S. Dollars
(U.S. $5,500,000) (the "DEBENTURES").
FOR VALUE RECEIVED, the Company promises to pay to ______________________,
having an address at ______________________, the holder hereof, or its order
(the "HOLDER"), the principal sum of ______________________ United States
Dollars (U.S. $_______) on March 10, 2002 (the "MATURITY DATE") and to pay
interest on the principal sum outstanding under this Debenture, at the rate of
5% per annum due and payable in arrears on the Maturity Date and shall be
calculated based on a 360 day year of twelve equal months. Accrual of interest
shall commence on the date hereof and shall continue until payment in full of
the principal sum has been made. The interest so payable will be paid to the
person in whose name this Debenture is registered on the records of the Company
regarding registration and transfers of the Debentures (the "DEBENTURE
REGISTER"); PROVIDED, HOWEVER, that the Company's obligation to a transferee of
this Debenture arises only if the transfer, sale or other disposition is made in
accordance with the terms and conditions of the Subscription Agreement, dated as
of March 10, 1997, between the Company and the subscriber to the original issue
of the Debentures (as amended from time to time and in effect, the "SUBSCRIPTION
AGREEMENT"). The Company shall be entitled to withhold from all payments of
interest
1
<PAGE>
on this Debenture any amounts required to be withheld under the applicable
provisions of the United States income tax laws as evidenced by an opinion of
counsel of the Company to the reasonable satisfaction of the Holder. The
principal of and interest on this Debenture are payable in United States Dollars
at the address last appearing on the Debenture Register of the Company as
designated in writing by the Holder hereof from time to time. Subject to the
conversion hereof, in whole or in part, on or before the Maturity Date pursuant
to Paragraph 5 hereof, the Company will pay the principal of and all accrued and
unpaid interest due upon this Debenture on the Maturity Date, to the Holder of
this Debenture as of the tenth (10th) day prior to the Maturity Date, and
addressed to such Holder at the last address appearing on the Debenture
Register.
This Debenture is subject to the following additional provisions:
1. EXCHANGE. The Debentures are exchangeable for an equal aggregate
principal amount of Debentures of different denominations, of not less than
$100,000 (or the total principal amount, if less than $100,000) each as
requested by the Holder surrendering the same. No service charge will be made
for such exchange.
2. TRANSFERS. This Debenture has been issued subject to investment
representations of the original purchaser hereof and may be transferred or
exchanged in the United States only in compliance with the Securities Act of
1933, as amended (the "ACT") and applicable state securities laws and in
accordance with other applicable provisions hereof. Prior to due presentment for
transfer of this Debenture, the Company may treat the person in whose name this
Debenture is duly registered on the Company's Debenture Register as the owner
hereof for the purpose of receiving payment as herein provided and all other
purposes, whether or not this Debenture is then overdue, and the Company shall
not be affected by notice to the contrary.
3. DEFINITIONS. For purposes hereof, the following terms shall have the
following meanings:
"CLOSING DATE" shall mean the date of original issuance of this
Debenture.
"COMMON STOCK" shall mean the Common Stock, par value $.01 per share,
of the Company.
2
<PAGE>
"CONVERSION DATE MARKET PRICE" shall mean, at any Holder Conversion
Date or Forced Conversion Date, as the case may be, the lesser of (i) an
amount that is equal to the percentage set forth in the table below (the
"APPLICABLE PERCENTAGE") opposite the period in which the Holder Conversion
Date or the Forced Conversion Date shall have occurred of the average
Market Price for Shares of Common Stock for the five trading days
immediately preceding the Holder Conversion Date or Forced Conversion Date,
and (ii) an amount that is equal to the Applicable Percentage opposite the
period in which the Holder Conversion Date or the Forced Conversion Date
shall have occurred of the average Market Price for Shares of Common Stock
for the ten trading days immediately preceding the Holder Conversion Date
or Forced Conversion Date.
HOLDER CONVERSION DATE OR APPLICABLE PERCENTAGE
FORCED CONVERSION DATE
0 to 89 days after Closing Date 100%
90 days or more after Closing Date 90%
"CONVERSION DEFICIENCY" shall have the meaning set forth in Paragraph
9(b).
"CONVERSION NOTICE" shall have the meaning set forth in Paragraph
5(c).
"CONVERSION RATE" shall have the meaning set forth in Paragraph 5(b).
"EQUITY OFFERINGS" shall mean the issuance or sale by the Company of
any Common Stock or securities which are convertible into or exchangeable
for Common Stock, or any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any such
convertible or exchangeable securities (other than shares or options issued
or which may be issued pursuant to the Company's employee or director
option plans or shares issued upon exercise of options, warrants or rights
outstanding on the Closing Date and listed in the Exchange Act Reports).
EVENT OF DEFAULT" shall have the meaning set forth in Paragraph 17.
"FORCED CONVERSION DATE" shall have the meaning set forth in Paragraph
(5)(c)(ii).
3
<PAGE>
"HOLDER CONVERSION DATE" shall have the meaning set forth in Paragraph
5(c)(i).
"MARKET PRICE FOR SHARES OF COMMON STOCK" shall mean the price of one
share of Common Stock determined as follows:
(i) If the Common Stock is listed on the Exchange, the closing
bid price on the date of valuation, as reported by Bloomberg Financial
Markets; or
(ii) If the Common Stock is listed on any other national
securities exchange, the closing bid price on the date of valuation,
as reported by Bloomberg Financial Markets; or
(iii) If neither (i) nor (ii) apply, but the Common Stock is
quoted in the over-the-counter market on the pink sheets or bulletin
board, the lowest sales price on the date of valuation, as reported by
Bloomberg Financial Markets; or
(iv) If none of clause (i), (ii) or (iii) above applies, the
market value as determined by an independent nationally recognized
investment banking firm or financial advisor retained in good faith by
the Company for such purpose, taking into consideration, among other
factors, the earnings history, book value and prospects for the
Company, and the prices at which shares of Common Stock recently have
been traded. Such determination shall be conclusive and binding on all
persons.
"MINIMUM NUMBER OF SHARES" shall mean, at any time, the sum of (i) the
number of shares of Common Stock issued prior to such time upon conversion
of all or any part of the Debentures, PLUS (ii) the number of shares (as
may be adjusted in accordance with the terms hereof) of Common Stock
issuable at such time upon conversion of the Debentures (without giving
effect to any applicable conversion restrictions), MINUS (iii) the number
of shares of Common Stock described in clause (i) above that have been sold
prior to such time by the Holders pursuant to a registration statement or
Rule 144.
"OUTSTANDING AMOUNT" shall mean the principal sum outstanding under
this Debenture and all accrued but unpaid interest thereon.
"PARAGRAPH 4 TRANSACTION" shall mean a merger, consolidation, or other
transaction referred to in Paragraph 4.
4
<PAGE>
"REDEMPTION DATE" shall have the meaning set forth in Paragraph 6(c).
"REGISTRATION RIGHTS AGREEMENT" shall have the meaning set forth in
the Subscription Agreement.
"SUBSCRIPTION AGREEMENT" shall mean the Subscription Agreement, dated
as of March 10, 1997, between the Company and the Subscriber to the
original issue of the Debentures, as such Subscription Agreement may be
amended from time to time.
Other terms defined in the Subscription Agreement and not otherwise defined
herein shall have the same meanings herein as are set forth for such terms in
the Subscription Agreement.
4. MERGER; CONSOLIDATION. If at any time there occurs any consolidation or
merger of the Company with or into any other corporation or other entity or
person (whether or not the Company is the surviving corporation) or any other
corporate reorganization or similar transaction or series of related
transactions in which greater than 50% of the Company's voting power is
transferred (a "PARAGRAPH 4 TRANSACTION"), the Holder of this Debenture, to the
extent then outstanding, and notwithstanding anything in Paragraph 5(a) to the
contrary, shall participate in any such transaction as a class with common
stockholders of the Company on the same basis as if this Debenture had been
converted one day prior to the record date or effective date of such Paragraph 4
Transaction; PROVIDED, HOWEVER, that if a Paragraph 4 Transaction or the record
date for determination of the Company's stockholders entitled to participate in
such Paragraph 4 Transaction shall occur at any time before the first
anniversary of the effectiveness of the Registration Statement contemplated by
the Registration Rights Agreement, then, at the option of the Holder of this
Debenture, such Holder may treat the effective date of such Paragraph 4
Transaction as a Redemption Date and shall be entitled to receive the redemption
price with respect to such Redemption Date as is provided in Paragraph 6. Such
Holder shall be entitled to make such election at any time up to ten (10)
trading days after the effective time and date of the Paragraph 4 Transaction.
Nothing in this Section 4 shall prohibit the Holder from converting any part or
all of this Debenture in accordance with the terms hereof, up to and including
the effective time and date of the Paragraph 4 Transaction.
5
<PAGE>
5. CONVERSION. This Debenture is subject to conversion as follows:
(a) (i) HOLDER'S RIGHT TO CONVERT. This Debenture shall be convertible
at any time and from time to time during the first 89 days after the
Closing Date, in whole or in part, at the option of the Holder hereof, into
fully paid, validly issued and nonassessable shares of Common Stock. This
Debenture shall be convertible at any time and from time to time commencing
with the 90th day after the Closing Date and until the Maturity Date, in
whole or in part, at the option of the Holder hereof, into fully paid,
validly issued and nonassessable shares of Common Stock; PROVIDED, THAT, in
any 30 calendar day period commencing on such 90th day after the Closing
Date and thereafter, the Holder hereof, together with any affiliates of
such Holder, may convert no more than one-third of the original principal
amount of all Debentures held by such Holder and its affiliates, as a
group. The foregoing conversion restrictions shall immediately terminate,
and the Holder shall be permitted to convert all or any part of this
Debenture without regard to the conversion restrictions, upon the
occurrence of any Event of Default, Paragraph 4 Transaction or upon the
commencement by any person (other than the Holder) of any tender offer for
shares of Common Stock. Notwithstanding anything herein to the contrary, if
the Company obtains any financing through the issuance of convertible,
exercisable or exchangeable securities at any time after February 1, 1997,
and the holders of such securities are permitted to convert such securities
in amounts that are any less restrictive than the restrictions contemplated
by this paragraph (a)(i), then (A) the Company shall immediately notify the
Holders in writing of such financing and the material terms of such
securities, and (B) at the option of any Holder as evidenced by written
notice to the Company, the conversion restrictions set forth in this
paragraph (a)(i) shall be amended, without any further action by the
Company or the Holders, to be no more restrictive than the terms of such
new securities.
(ii) COMPANY'S RIGHT TO FORCE CONVERSION. The Company may require
conversion of all or any part of this Debenture from time to time into
fully paid, validly issued and nonassessable shares of Common Stock;
PROVIDED, THAT
(A) in any 30 calendar day period commencing after the 365th
day described in Paragraph 5(a)(ii)(B) and until the Maturity
Date, the Company may require conversion of no more than
one-third of the original principal amount of this Debenture;
6
<PAGE>
(B) prior to the date on which the Company may require such
conversion, the Registration Statement contemplated by the
Registration Rights Agreement shall have been effective (and not
subject to any stop orders or other prohibitions on sale of
Common Stock thereunder) for at least 365 days during which such
Registration Statement shall have permitted the sale thereunder
of not less than the Minimum Number of Shares;
(C) the Registration Statement shall be effective (and not
subject to any stop orders or other prohibitions on sale of
Common Stock thereunder) as of the date of delivery of the Forced
Conversion Notice (as defined in Paragraph 5(c)(ii)) and for each
trading day commencing with the date of delivery of the Forced
Conversion Notice and ending on the Forced Conversion Date (as
defined in Paragraph 5(c)(ii)) for the sale thereunder of not
less than the Minimum Number of Shares;
(D) the closing bid price per share of Common Stock for each
of the 20 trading days immediately proceeding the delivery of the
Forced Conversion Notice shall have been greater than or equal to
the closing bid price per share of Common Stock on the Closing
Date, subject to adjustments for stock splits, reverse stock
splits or other recapitalizations involving Common Stock;
(E) no Events of Default shall have occurred prior to the
Forced Conversion Date;
(F) no Conversion Deficiency, as defined in Paragraph 9(b),
shall have occurred prior to the Forced Conversion Date; and
(G) any such required conversion shall be made from each
Holder, PRO RATA according to the portion of the total
Outstanding Amount of all Debentures held by each Holder.
(iii) AUTOMATIC CONVERSION. At the Maturity Date, the principal
indebtedness then outstanding hereunder (including without limitation
all interest accrued thereon plus any unpaid charges or amounts) shall
automatically be converted into fully paid, validly issued and
nonassessable shares of Common Stock and, except for the Holder's
right to receive the Common Stock into which this Debenture is
automatically so converted, and except for any portion of this
Debenture which cannot be converted because of the limitations
contained in Sections 5(d) and 9(b) of this Debenture, this Debenture
shall be deemed to have been canceled whether or not surrendered upon
such automatic conversion.
7
<PAGE>
(iv) ACCRUED BUT UNPAID INTEREST. Notwithstanding anything in
this Debenture to the contrary, the Outstanding Amount of this
Debenture on any Holder Conversion Date or any Forced Conversion Date,
as the case may be, shall include, without limitation, all accrued but
unpaid interest under this Debenture through such date.
(b) CONVERSION PRICE FOR HOLDER CONVERTED SHARES. The Outstanding
Amount of this Debenture that is converted into shares of Common Stock
shall be convertible into the number of shares of Common Stock determined
in accordance with the following formula:
P + I
-------------------------------------
Conversion Date Market Price
P = principal amount of this Debenture submitted for
conversion
I = accrued but unpaid interest on the principal amount
of this Debenture submitted for conversion plus any
unpaid charges or amounts through the Holder
Conversion Date or Forced Conversion Date, as the
case may be.
The number of shares of Common Stock into which the Outstanding Amount
of this Debenture may be converted pursuant to this paragraph is hereafter
referred to as the "CONVERSION RATE."
(c) (i) MECHANICS OF CONVERSION BY HOLDER. In order to convert this
Debenture (in whole or in part) into full shares of Common Stock, the
Holder shall surrender this Debenture, duly endorsed, by either overnight
courier or two-day courier, to the Company, and, in case of any conversion
pursuant to Section 5(a)(i), shall give written notice in the form of
EXHIBIT A hereto (the "CONVERSION NOTICE") by facsimile (with the original
of such notice forwarded with the foregoing courier) to the Company that
the Holder elects to convert all or the portion of the Outstanding Amount
of this Debenture specified therein, which notice and election shall be
irrevocable by the Holder unless the Company shall default in or fail to
fulfill any or all of its obligations arising hereunder or otherwise by
reason of such notice or election, in which case, in addition to and not in
lieu of any and all other rights and remedies to which the Holder may
thereby be and become entitled, such notice and election, by
8
<PAGE>
further notice to the Company may be revoked and rescinded at the election
of the Holder exercised in its sole discretion; PROVIDED, HOWEVER, that the
Company shall not be obligated to issue certificates evidencing the shares
of Common Stock issuable upon conversion unless this Debenture with
evidence of the principal amount hereof to be converted is delivered to the
Company as provided above, or the Holder notifies the Company that this
Debenture has been lost, stolen or destroyed and promptly executes an
agreement reasonably satisfactory to the Company to indemnify the Company
from any loss which may be incurred by it in connection with this
Debenture; and PROVIDED, FURTHER, that each Conversion Notice shall provide
for the Holder's election to convert either (A) at least $100,000 of the
Outstanding Amount of this Debenture, or (B) if such Outstanding Amount
shall then be less than $100,000, the entire Outstanding Amount. The date
on which a Conversion Notice is given (the "HOLDER CONVERSION DATE") shall
be deemed to be the date the Company received by facsimile the Conversion
Notice, as evidenced by a printed confirmation of receipt received by the
Holder. Upon receipt of any Conversion Notice, the Company shall
immediately verify the Holder's calculation of the Conversion Rate.
(ii) MECHANICS OF FORCED CONVERSION BY COMPANY. In order to
require conversion of this Debenture pursuant to Section 5(a)(ii)
above, the Company shall give written notice in the form of EXHIBIT B
hereto, appropriately completed (the "FORCED CONVERSION NOTICE"), by
facsimile (with the original of such notice forwarded with the
foregoing courier) to each Holder of Debentures that the Company
elects to force conversion of all or a portion of the Outstanding
Amount of the Debenture of each Holder specified therein, which notice
and election shall be irrevocable by the Company and shall be
delivered at least 20 trading days prior to the date of conversion
specified in the Forced Conversion Notice (the "FORCED CONVERSION
DATE"). Each Holder will within two business days after the Forced
Conversion Date, to the extent the Debenture has not been converted by
such Holder prior to the Forced Conversion Date, deliver such
Debenture evidencing the Outstanding Amount of such Debenture to be
converted to the Company, duly endorsed, by either overnight courier
or two-day courier, or notify the Company that such Debenture has been
lost, stolen or destroyed and promptly execute an agreement reasonably
satisfactory to the Company to indemnify the Company from any loss
which may be incurred by it in connection with such Debenture.
Notwithstanding anything herein to the contrary, any Holder may
convert any portion of its Debentures prior to the Forced Conversion
Date.
9
<PAGE>
(iii) ISSUANCE OF CERTIFICATES. In the case of any Conversion
Notice given by the Holder or any Forced Conversion Notice given by
the Company, the Company shall use its best efforts to cause the
transfer agent to issue and deliver as promptly as practicable and in
no event later than two (2) business days after delivery to the
Company of the Debenture, or after receipt of such agreement and
indemnification, to such Holder or to its designee, a certificate or
certificates for the number of shares of Common Stock to which the
Holder shall be entitled, together with a Debenture for the principal
amount not submitted for conversion or forced to convert, as the case
may be. The person or persons entitled to receive the shares of Common
Stock issuable upon conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on the
Holder Conversion Date or the Forced Conversion Date, as the case may
be. If the Company shall not have the requisite number of shares of
Common Stock issuable upon conversion of the Debentures by any Holder,
then, without limiting the Company's obligation to convert all of the
Debentures, such conversion shall be made for each Holder, PRO RATA
according to the portion of the total Outstanding Amount of the
portion of the Debentures sought to be converted. At the Holder's
option, the request for conversion by the Holder or the required
conversion by the Company shall be null and void for any portion of
the Debentures for which the Company does not have shares of Common
Stock issuable upon conversion as of the Holder Conversion Date or the
Forced Conversion Date.
(d) LIMITATIONS ON CONVERSION. In connection with a conversion of this
Debenture effected pursuant to the terms of this Section 5, in no event
shall the Company issue to the Holder more than that number of shares of
Common Stock which, together with the Common Stock theretofore issued upon
conversion of Debentures would exceed 6,151,451 shares of Common Stock, as
such number is adjusted from time to time pursuant to the provisions hereof
(the "MAXIMUM SHARE AMOUNT"). Once the Maximum Share Amount has been
issued, the entire remaining Outstanding Amount of this Debenture shall be
immediately due and payable by the Company to the Holder in immediately
available funds at an amount equal to the Redemption Price.
6. REDEMPTION.
(a) COMPANY'S OBLIGATION TO REDEEM. Any portion of this Debenture
which, at any time on or before the Maturity Date, shall be required to be
redeemed at the option of the Holder under the provisions hereof or under
any provision of any Related Agreement (as defined in the Subscription
Agreement) shall be redeemed by the Company in accordance with this Section
6.
10
<PAGE>
(b) COMPANY'S OPTION TO REDEEM. Any portion of this Debenture may be
redeemed at the Company's option expressed by a written notice (a
"REDEMPTION NOTICE") to the Holder; PROVIDED THAT
(i) the Redemption Notice delivered by the Company shall be
received by the Holder at least 20 trading days (but not more than 40
trading days) prior to the date (the "REDEMPTION DATE") of redemption;
(ii) at all times from and after the effective date of the
Registration Statement contemplated by the Registration Rights
Agreement (or, if earlier, the 270th day after the Closing Date), the
Registration Statement shall have been effective for sale thereunder
(except pursuant to suspension periods contemplated by the
Registration Rights Agreement) of not less than the Minimum Number of
Shares;
(iii) the Registration Statement shall be effective (and not
subject to any stop orders or other prohibitions on sale of Common
Stock thereunder) on the date of delivery of the Redemption Notice and
on each day from the date of such delivery through the Redemption Date
for the sale thereunder of not less than the Minimum Number of Shares;
(iv) on the date of the Redemption Notice, the Company shall have
deposited at least seventy percent (70%) of the Redemption Price in an
escrow account reasonably satisfactory to the Holder, and shall have
otherwise established to the reasonable satisfaction of the Holder
that the Company shall have adequate liquidity to pay the Redemption
Price on the Redemption Date, and shall not be prohibited under the
terms of any financing or other agreements or applicable law from
redeeming the Debentures on the Redemption Date; and
(v) no Conversion Deficiency, as defined in Section 9(b), shall
have occurred prior to the Redemption Date.
If the Company delivers a Redemption Notice, and then for any reason, other than
conversion by the Holder of this Debenture or the failure for any other reason
of the Holder upon redemption to deliver such Holder's Debentures to the Company
or the failure of such Holder to notify the Company that such Debentures have
been lost, stolen or destroyed and to
11
<PAGE>
promptly execute an agreement reasonably satisfactory to the Company to
indemnify the Company from any loss which may be incurred by it in connection
with such Debentures, fails to pay the entire Redemption Price on the Redemption
Date for the portion of the Debentures identified in the Redemption Notice, then
the Company shall have no further right to require redemption of any portion of
the Debentures pursuant to this Section 6(b).
(c) REDEMPTION PRICE. The redemption price for the portion of this
Debenture being redeemed, except as provided in the Registration Rights
Agreement, shall equal 110% of the Outstanding Amount of this Debenture
being so redeemed, plus all late payment charges and all other amounts
accrued under this Debenture and not previously paid (the "REDEMPTION
PRICE").
(d) MECHANICS OF REDEMPTION. In the event the Company shall be
required or elects to redeem any part or all of the Outstanding Amount of
the Debentures, the Company shall send by either overnight courier or
two-day courier (with a copy sent by facsimile) confirmation of such
determination or obligation to the record Holders of the Debentures being
redeemed (the "REDEMPTION DEBENTURES"), which confirmation shall be
included in the Redemption Notice, if the redemption is made pursuant to
Paragraph 6(b) above. Such confirmation shall specify the Redemption Date,
which shall be (i) no later than seven (7) business days after the receipt
by the Company of the notice requiring redemption pursuant to Paragraph
6(a) above, or (ii) at least 20 trading days (but not more than 40 trading
days) after receipt by the Holder of the Redemption Notice, as applicable.
On the Redemption Date, the Redemption Debentures shall be redeemed
automatically without any further action by the Holders of such Debentures
and whether or not the Debentures are surrendered to the Company (but only
to the extent that the Company complies with its obligation to pay the
Redemption Price therefor); PROVIDED, that the Company shall be obligated
to pay the cash consideration due to a Holder of such Debentures upon
redemption when such Debentures are either delivered to the principal
office of the Company or the Holder notifies the Company that such
Debentures have been lost, stolen or destroyed and executes an agreement
reasonably satisfactory to the Company to indemnify the Company from any
loss which may be incurred by it in connection with such Debenture.
Thereupon, there shall be promptly issued and delivered to such Holder,
within seven (7) business days after the Redemption Date and delivery to
the Company of such Debentures, or after receipt of such agreement and
indemnification, at the address of such Holder on the books of the Company,
payment in immediately available funds to the name as shown on the books of
the Company in the
12
<PAGE>
amount of the redemption price as calculated as set forth in Paragraph
6(c). If the Company shall not have the funds available to pay the
aggregate Redemption Price of all Redemption Debentures, then, without
limiting the Company's obligation to redeem all Redemption Debentures, such
redemption shall be made from each Holder, PRO RATA according to the
portion of the total Outstanding Amount of all Redemption Debentures then
held by each Holder and the Company shall not be permitted to require any
further redemption in accordance with Paragraph 6(b).
Notwithstanding anything to the contrary contained herein, the
Holders' rights of conversion pursuant to Section 5 hereof shall not be
limited in any manner by the Company's rights of redemption pursuant to
this Section 6(d).
(e) FAILURE TO REDEEM. In the event that the Company fails to redeem
any portion of the Outstanding Amount of the Debentures required to be
redeemed on any Redemption Date, the Company shall pay, in cash, to each
Holder on such Redemption Date, and on the last day of each 30-day period
thereafter until the Company redeems such unredeemed portion, an amount
equal to two percent (2%) of the unredeemed portion of the Outstanding
Amount of the Debentures of such Holder.
7. STOCK SPLITS: DIVIDENDS, ADJUSTMENTS, REORGANIZATIONS.
(a) STOCK SPLITS AND COMBINATIONS. The Company shall not effect or fix
a record date for any stock split, subdivision or combination with an
effective date within ten (10) trading days of a Redemption Date, the
receipt of a Conversion Notice, a Forced Conversion Date, or the effective
date of a Paragraph 4 Transaction.
(b) CERTAIN DIVIDENDS AND DISTRIBUTIONS. The Company shall not make,
or fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, with an effective date within ten (10) trading days
of a Redemption Date, the receipt of a Conversion Notice, a Forced
Conversion Date, or the effective date of a Paragraph 4 Transaction.
(c) SUBDIVISIONS, COMBINATIONS, ETC. If the Company shall subdivide
its outstanding Common Stock, by split-up, spin-off, or otherwise, or
combine its outstanding Common Stock, then the Conversion Rate in effect as
of the date of such subdivision, split-up, spin-off or combination shall
forthwith be proportionately adjusted.
13
<PAGE>
(d) ADJUSTMENT FOR DIVIDENDS AND DISTRIBUTIONS. In the event the
Company at any time or from time to time after the Closing Date makes, or
fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities
of the Company other than shares of Common Stock (including, without
limitation, rights to acquire Common Stock or such other securities), then
and in each such event provision shall be made so that the Holders of
Debentures shall receive upon conversion thereof pursuant to Paragraph 5
hereof, in addition to the number of shares of Common Stock receivable
thereupon, the amount of such other securities of the Company to which a
Holder on the relevant record or payment date, as applicable, of the number
of shares of Common Stock so receivable upon conversion would have been
entitled, plus any dividends or other distributions which would have been
received with respect to such securities, had such Holder thereafter,
during the period from the date of such event to and including the Holder
Conversion Date or Forced Conversion Date, as the case may be, retained
such securities, subject to all other adjustments called for during such
period under this Paragraph 7 with respect to the rights of the Holders of
the Debentures. For purposes of this Paragraph 7(d), the number of shares
of Common Stock so receivable upon conversion shall be deemed to be that
number which the Holder would have received upon conversion of the entire
Outstanding Amount hereof if the Holder Conversion Date or Forced
Conversion Date, as the case may be, had been the day preceding the date
upon which the Company announced the making of such dividend or other
distribution.
(e) ADJUSTMENT FOR MERGER, REORGANIZATION; ETC. In the event that at
any time or from time to time after the Closing Date, the Common Stock
issuable upon conversion of the Debentures is changed into the same or a
different number of shares of any class or classes of stock, whether in
connection with a merger or consolidation, by recapitalization,
reclassification, reorganization or otherwise (other than a subdivision or
combination of shares or stock dividend or reorganization provided for
elsewhere in this Paragraph 7 or a merger or consolidation provided for in
Paragraph 4), then and in each such event each Holder of Debentures shall
have the right thereafter to convert such Debenture into the kind of
securities receivable upon such merger, recapitalization, reclassification
or other change, all subject to further adjustment as provided herein. In
such event, the formulae set forth herein for conversion and redemption
shall be equitably adjusted to reflect such change in number of shares or,
if shares of a new class of stock are issued, to reflect the market price
of the class or classes of stock (applying the same factors used in
determining the Market Price for Shares of Common Stock) issued in
connection with the above described transaction.
14
<PAGE>
(f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment pursuant to this Section 7, the Company at its expense shall
furnish to each Holder a certificate from its independent auditors or an
investment banking firm setting forth (i) in reasonable detail the facts
upon which such adjustment is based, and (ii) the number of shares of
Common Stock and the amount of other property or securities that after
giving effect thereto would be received by the Holder upon conversion of
this Debenture.
(g) DISPUTES. In the event of a reasonable, good faith dispute between
a Holder of Debentures and the Company with respect to the adjustments
required by Paragraphs 7(c), (d) or (e), then, at the option of either the
Holders of Debentures evidencing 50% or more of the principal indebtedness
evidenced by all Debentures held by Holders involved in such dispute or the
Company, the dispute shall be submitted to the American Arbitration
Association for resolution according to the then applicable rules thereof.
The cost of such proceeding shall be shared 50% by the Holder or Holders
involved in the dispute and 50% by the Company, except that each party
shall bear its own legal and other expenses.
8. FRACTIONAL SHARES. No fractional shares of Common Stock or scrip
representing fractional shares of Common Stock shall be issuable hereunder. The
number of shares of Common Stock that are issuable upon any conversion shall be
rounded up or down to the nearest whole share.
9. RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
(a) RESERVATION REQUIREMENT. The Company has reserved and the Company
shall continue to reserve and keep available at all times, free of
preemptive rights, shares of Common Stock for the purpose of enabling the
Company to satisfy any obligation to issue shares of its Common Stock upon
conversion of the Debentures; PROVIDED, HOWEVER, that (i) the aggregate
number of shares so reserved shall initially be 1,320,000 shares and (ii) a
PRO RATA portion (based on the respective original principal amount of the
Debentures) of such aggregate amount shall be reserved for conversion of
each Debenture, such portion to be reduced by the number of shares actually
issued upon conversion of such Debenture. The number of shares so reserved
may be reduced by the
15
<PAGE>
number of shares actually delivered pursuant to conversion of Debentures
(provided that in no event shall the number of shares so reserved be less
than the Minimum Number of Shares applicable to any Debenture) and the
number of shares so reserved shall be increased or decreased proportionally
to reflect stock splits, stock dividends and other distributions. In the
event that the number of shares so reserved (either in the aggregate or as
to any Debenture) shall be insufficient for issuance upon conversion of the
Debentures (without giving effect to any applicable conversion
restrictions), or if the Holders of the Debentures would at any time upon
conversion thereof be entitled to the issuance of shares of Common Stock in
excess of the limitation in Paragraphs 5(d) and 9(b) herein, then in either
case, upon receipt by the Company of notice from any Holder, the Company
shall use its best efforts and all due diligence to increase the number of
shares so reserved (without giving effect to any applicable conversion
restrictions) to cure all such deficiencies (either in the aggregate or as
to any Debenture) and, if necessary, to obtain the approval by its
shareholders therefor, including the authorization of such additional
number of shares of Common Stock as may be required to issue such shares in
excess of the number so reserved (either in the aggregate or as to any
Debenture) or in excess of such limitation, as the case may be.
(b) CONVERSION DEFICIENCY. If the Company does not have a sufficient
number of shares of Common Stock available to satisfy the Company's
obligations to issue Common Stock upon conversion of all or any of the
Debentures (whether or not a Conversion Notice shall have been given with
respect thereto) (a "CONVERSION DEFICIENCY"), any Holder of the Debentures
shall have the right to demand from the Company immediate redemption of any
portion of the Debentures with respect to which the Company does not have a
sufficient number of shares available to satisfy such conversion
obligations, in cash at the Redemption Price pursuant to Section 6 hereof,
without regard to Sections 6(d) or 6(e) hereof.
Within three business days of the occurrence of any Conversion Deficiency,
the Company shall notify each Holder whether the Company has adequate liquidity
to redeem such portion of the Debentures as required by the foregoing paragraph
(and, if requested by such Holder, will provide reasonable written support for
its position with respect thereto within ten business days of the occurrence of
any Conversion Deficiency) and whether such redemption is prohibited under the
terms of any financing or other agreements or applicable law.
16
<PAGE>
In the event that the Company establishes to the reasonable satisfaction of
the Holder that the Company has adequate liquidity and is not otherwise
restricted from redeeming such portion of this Debenture, then the Company shall
pay, in cash, to such Holder within three business days after which a Conversion
Deficiency shall have occurred and on the last day of each 30-day period for
which a Conversion Deficiency is continuing, an amount equal to one percent (1%)
of the amount of such portion of the Debentures which such Holder does not
require the Company to redeem, for a maximum of three percent (3%) for such
Conversion Deficiency.
In the event that the Company does not establish to the reasonable
satisfaction of the Holder that the Company has adequate liquidity to redeem
such portion of the Debentures or that the Company is not otherwise restricted
from redeeming such portion of this Debenture, the Company shall pay, in cash,
to such Holder within three business days after which a Conversion Deficiency
shall have occurred and on the last day of each 30-day period for which a
Conversion Deficiency is continuing (or until the Company establishes to the
reasonable satisfaction of the Holder that the Company has adequate liquidity to
and is not otherwise prohibited from redeeming such Holder's Debentures, in
which case the provisions of the foregoing paragraph shall govern), two percent
(2%) of the amount of such portion of the Debentures which such Holder does not
require the Company to redeem.
10. NO IMPAIRMENT. The Company shall not intentionally take any action
which would impair the contractual rights and privileges of the Debentures set
forth herein or of the Holders thereof.
11. HOLDERS' RIGHTS IF SHARES ARE DELISTED OR IF TRADING IN COMMON STOCK IS
SUSPENDED. In the event that at any time on or after the date hereof and prior
to the fifth anniversary of the Closing Date, trading in the shares of the
Company's Common Stock is suspended on the Exchange for a period of five
consecutive trading days, other than as a result of the suspension of trading in
securities in general, or if such Shares are delisted and not relisted within
twenty (20) days thereafter, then, at a Holder's option, the Company shall
redeem such Holder's Debentures on a Redemption Date designated by such Holder,
and at the Redemption Price and in accordance with Section 6 hereof, without
regard to Sections 6(d) or 6(e) hereof.
12. LIMITATIONS ON HOLDER'S OBLIGATION TO CONVERT. Notwithstanding anything
to the contrary contained herein, no Holder shall be required to convert any
part of this Debenture in excess of the portion then convertible into that
number of shares of Common Stock specified in the Holder's representation to the
Company that, after giving
17
<PAGE>
effect to the shares of the Company's Common Stock to be issued pursuant to such
Conversion Notice, the total number of shares of Common Stock deemed
beneficially owned by the Holder, together with all shares of the Company's
Common Stock deemed beneficially owned by the Holder's "affiliates" as defined
in Rule 144 of the Act, would exceed 4.9% of the total issued and outstanding
shares of the Company's Common Stock.
13. OBLIGATIONS ABSOLUTE. No provision of this Debenture, other than
conversion as provided herein, shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of, and
interest on, this Debenture at the time, place and rate, and in the manner,
herein prescribed.
14. WAIVERS OF DEMAND, ETC. The Company hereby expressly waives demand and
presentment for payment, notice of nonpayment, protest, notice of protest,
notice of dishonor, notice of intent to accelerate, prior notice of bringing of
suit and diligence in taking any action to collect amounts called for hereunder
and will be directly and primarily liable for the payments of all sums owing and
to be owing hereon, regardless of and without any notice (except as required by
law), diligence, act or omission as or with respect to the collection of any
amount called for hereunder.
15. REPLACEMENT DEBENTURES. In the event that the Holder notifies the
Company that its Debenture has been lost, stolen or destroyed, a replacement
Debenture identical in all respects to the original Debenture (except for
registration number and Outstanding Amount, if different than that shown on the
original Debenture) shall be issued to the Holder, provided that the Holder
executes and delivers to the Company an agreement reasonably satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection with
the Debenture and provided that the Company is provided a form of Debenture for
such replacement purposes.
16. PAYMENT OF EXPENSES. The Company agrees to pay all debts and expenses,
including reasonable attorneys' fees and expenses, which may be incurred by the
Holder in enforcing the provisions of this Debenture and/or collecting any
amount due under this Debenture, the Subscription Agreement, the Registration
Rights Agreement or any other Related Agreement.
17. DEFAULTS. If one or more of the following events (hereinafter called
"EVENTS OF DEFAULT") shall occur:
18
<PAGE>
(a) Any of the representations or warranties made by the Company
herein, in the Subscription Agreement, in the Registration Rights
Agreement, in any other Related Agreement, or in any certificate,
financial statements or press releases of the Company heretofore
or hereafter furnished by or on behalf of the Company in
connection with the execution and delivery of this Debenture, the
Subscription Agreement, the Registration Rights Agreement or any
other Related Agreement shall be false or (when taken together
with other information furnished by or on behalf of the Company,
including Exchange Act Reports) misleading in any material
respect at the time made; or
(b) The Company shall fail to perform or observe any covenant or
agreement in the Subscription Agreement, the Registration Rights
Agreement or any other Related Agreement or any other covenant,
term, provision, condition, agreement or obligation of the
Company under this Debenture, and such failure shall continue
uncured for a period of ten (10) business days after notice from
the Holder of such failure, or the Company shall fail to make any
payments upon redemption of this Debenture or fail to issue
shares of Common Stock upon conversion of this Debenture; or
(c) The Company shall (i) become insolvent; (ii) admit in writing its
inability to pay its debts generally as they mature; (iii) make a
general assignment for the benefit of creditors or commence
proceedings for its dissolution; or (iv) apply for or consent to
the appointment of a trustee, liquidator or receiver for it or
for a substantial part of its property or business; or
(d) A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business
without its consent and shall not be discharged within sixty (60)
days after such appointment; or
(e) Any governmental agency or any court of competent jurisdiction
shall assume custody or control of the whole or any substantial
portion of the properties or assets of the Company and shall not
be dismissed within sixty (60) days thereafter, or
19
<PAGE>
(f) Any money judgment, writ or warrant of attachment or similar
process in excess of Five Hundred Thousand Dollars ($500,000) in
the aggregate shall be entered or filed against the Company or
any of its properties or other assets and shall remain unpaid,
unvacated, unbonded and unstayed for a period of sixty (60) days
or in any event later than ten (10) days prior to the date of any
proposed sale thereunder; or
(g) Bankruptcy, reorganization, insolvency or liquidation proceedings
or other proceedings, or relief under any bankruptcy law or any
law for the relief of debt shall be instituted by or against the
Company and, if instituted against the Company, shall not be
dismissed within sixty (60) days after such institution, or the
Company shall by any action or answer approve of, consent to, or
acquiesce in any such proceedings or admit to any material
allegations of, or default in answering a petition filed in, any
such proceeding;
then, or at any time thereafter prior to the date on which all continuing Events
of Default have been cured, and in each and every such case, unless such Event
of Default shall have been waived in writing by the Holder (which waiver shall
not be deemed to be a waiver of any subsequent default) at the option of the
Holder and in the Holder's sole discretion, the Holder may, by notice to the
Company declare this Debenture immediately due and payable, and the Holder may
immediately, and without expiration of any period of grace, enforce any and all
of the Holder's rights and remedies provided herein or any other rights or
remedies afforded by law. In such event, the Debenture shall be redeemed at a
redemption price per Debenture equal to the redemption price provided in
Paragraph 6(c).
18. SAVINGS CLAUSE. In case any provision of this Debenture is held by a
court of competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if possible,
so that it is enforceable to the maximum extent possible, and the validity and
enforceability of the remaining provisions of this Debenture will not in any way
be affected or impaired thereby.
20
<PAGE>
19. ENTIRE AGREEMENT. This Debenture and the agreements referred to in this
Debenture constitute the full and entire understanding and agreement between the
Company and the Holder with respect to the subject hereof. Neither this
Debenture nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the Company and a
two-thirds-in-interest of the Holders.
20. ASSIGNMENT, ETC. The Holder may, subject to compliance with the
Subscription Agreement, without notice, transfer or assign this Debenture or any
interest herein (but in no event in an amount less than $100,000 in Outstanding
Amount or, if less than $100,000, the total Outstanding Amount hereof) and may
mortgage, encumber or transfer any of its rights or interest in and to this
Debenture or any part hereof, and each assignee, transferee and mortgagee (which
may include any affiliate of the Holder) shall have the right to so transfer or
assign its interest; PROVIDED, HOWEVER, that before the Registration Statement
contemplated by the Registration Rights Agreement becomes effective, Holder will
furnish the Company with an opinion of counsel to the effect that such
assignment, transfer, mortgage or other encumbrance is exempt from the
registration requirements under the Securities Act. Each such assignee,
transferee and mortgagee shall have all of the rights and obligations of the
Holder under this Debenture. The Company agrees that, subject to compliance with
the Subscription Agreement, after receipt by the Company of written notice of
assignment from the Holder or from the Holders' assignee, all principal,
interest, and other amounts which are then due and thereafter become due under
this Debenture shall be paid to such assignee at the place of payment designated
in such notice. This Debenture shall be binding upon the Company and its
successors and shall inure to the benefit of the Holder and its successors and
assigns.
21. NO WAIVER. No failure on the part of the Holder to exercise, and no
delay in exercising, any right, remedy or power hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by the Holder of any
right, remedy or power hereunder preclude any other or future exercise of any
other right, remedy or power. Each and every right, remedy or power hereby
granted to the Holder or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.
22. MISCELLANEOUS. Unless otherwise provided herein, any notice or other
communication to a party hereunder shall be deemed to have been duly given if
personally delivered or sent by registered or certified mail, return receipt
requested, postage prepaid with a copy in each case
21
<PAGE>
sent on the same day to the party by facsimile, Federal Express or other such
expedited means to said party at its address set forth herein or such other
address as either may designate for itself in such notice to the other and
communications shall be deemed to have been received when delivered personally
or, if sent by mail, when actually received by the party to whom it is
addressed. Copies of all notices to the Company shall be sent to Paul S. Weiner,
Director of Finance of the Company, and to the attention of the General Counsel
of the Company. Whenever the sense of this Debenture requires, words in the
singular shall be deemed to include the plural and words in the plural shall be
deemed to include the singular. Paragraph headings are for convenience only and
shall not affect the meaning of this document.
23. CHOICE OF LAW AND VENUE: WAIVER OF JURY TRIAL. THIS DEBENTURE SHALL BE
CONSTRUED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW THEREOF. The Company hereby (i)
irrevocably submits to the exclusive jurisdiction of the United States District
Court for the Southern District of New York for the purposes of any suit, action
or proceeding arising out of or relating to this Debenture and (ii) waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper. The Company consents to process
being served in any such suit, action or proceeding by mailing a copy thereof to
the Company at the address in effect for notices to it under this Debenture and
agrees that such service shall constitute good and sufficient service of process
and notice thereof. Nothing in this paragraph shall affect or limit any right to
serve process in any other manner permitted by law.
22
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated as of: March 10, 1997
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/
-------------------------------
Name: Joseph P. Caruso
-----------------------------
Title: Chief Financial Officer
----------------------------
66 Cherry Hill Drive
Beverly, MA 01915
ATTEST:
/s/ Paul S. Weiner
- ------------------
<PAGE>
EXHIBIT A
(To Be Executed by Registered Holder
in order to Convert Debenture)
CONVERSION NOTICE
FOR
5% CONVERTIBLE SUBORDINATED DEBENTURE DUE MARCH , 2002
The undersigned, as Holder of the 5% Convertible Debenture Due February , 2002
of Palomar Medical Technologies, Inc. ("Palomar"), No. ________, in the
outstanding principal amount of U.S.$____________ (the "Debenture"), hereby
irrevocably elects to convert U.S.$________ of the outstanding principal amount
of the Debenture and U.S.$________ of interest accrued but unpaid under the
Debenture into shares of Common Stock, par value $.01 per share (the "Common
Stock"), of Palomar according to the conditions of the Debenture, as of the date
written below. The undersigned hereby requests that share certificates for the
Common Stock to be issued to the undersigned pursuant to this Conversion Notice
be issued in the name of, and delivered to, the undersigned or its designee as
indicated below. If shares are to be issued in the name of a person other than
the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto. No fee will be charged to the Holder for any conversion, except
for transfer taxes, if any.
Accompanying this Conversion Notice is a Conversion Rate Computation Schedule
setting forth the determination by the undersigned of the number of shares of
Common Stock issuable pursuant to this Conversion Notice.
Conversion Information: NAME OF HOLDER:
---------------------------------
By:
---------------------------------------------
Print Name:
Print Title:
Print Address of Holder:
---------------------------------------------
---------------------------------------------
Issue Common Stock to:
-----------------------
at:
------------------------------------------
------------------------------------------
Date of Conversion
<PAGE>
CONVERSION RATE COMPUTATION SCHEDULE
Conversion Date Market Price (as such term is defined in the Debenture) equal to
the lesser of (i) the average Market Price for shares of Common Stock for the
five (5) trading days immediately preceding the date of this Conversion Notice
and (ii) the average Market Price for Shares of Common Stock for the ten (10)
trading days immediately preceding the date of this Conversion Notice:
Trading Day Closing Bid Price
----------- -------------
----------- -------------
----------- -------------
----------- -------------
Conversion Date Market Price:
Average of Closing Bid Prices listed above: -------------
Applicable X% thereof: -------------%
Principal To Be Converted
Plus
Interest To Be Converted: -------------
Divided by Conversion Date
Market Price per above: -------------
Shares of Common Stock to be
Issued on Conversion: -------------
<PAGE>
EXHIBIT B
FORCED CONVERSION NOTICE
FOR 5% CONVERTIBLE DEBENTURES
DUE MARCH 10, 2002
The undersigned, an authorized officer of Palomar Medical Technologies,
Inc. (the "Company"), issuer of the 5% Convertible Debenture Due March 10, 2002
of the Company, No. ________, held by _______________ (the "Holder") in the
outstanding principal amount of U.S.$__________ and accrued but unpaid interest
thereon in the amount of U.S.$____________ (the "Debenture"), hereby irrevocably
elects to require conversion of US.$________ of the outstanding principal amount
of the Debenture and U.S. $________ of interest, fees and other amounts accrued
but unpaid under the Debenture into shares of Common Stock, par value $.01 per
share (the "Common Stock") of the Company according to the terms and conditions
of the Debenture, on the Forced Conversion Date written below.1 Capitalized
terms used in this Forced Conversion Notice and not otherwise defined shall have
the meanings ascribed thereto in or by reference in the Debenture.
Accompanying this Forced Conversion Notice is a Computation Schedule
completed by the Company setting forth the determination by the Company of the
Outstanding Amount of such Debenture, plus fees and other charges and amounts,
to be converted. The calculation of the number of shares of Common Stock
issuable pursuant to this Forced Conversion Notice shall be made in accordance
with the terms of the Debenture.
The Company shall issue and deliver to the Holder share certificates
for the Common Stock issuable pursuant to this Forced Conversion Notice. If the
Holder desires the shares to be issued in the name of, and delivered to a person
other than, the Holder, the Holder should so indicate below and deliver a copy
of this Forced Conversion Notice to the Company, Attention: ____________, at
least two business days prior to the Forced Conversion Date. No fee will be
charged to the Holder for this conversion, except for transfer taxes, if any.
------------------------------------
Forced Conversion Date
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
---------------------------------
Name:
Title:
Issue Common Stock To:
------------------------------------
At:
---------------------------------
---------------------------------
[FN]
- --------
1 The Forced Conversion Date shall be at least 20 trading days from the date of
delivery of this Forced Conversion Notice.
</FN>
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of March 27,
1997, by and among PALOMAR MEDICAL TECHNOLOGIES, INC., a corporation organized
under the laws of the State of Delaware (the "COMPANY"), with headquarters
located at 66 Cherry Hill Drive, Beverly, Massachusetts 01915 and each of the
purchasers (the "PURCHASERS") set forth on the execution pages hereof (the
"Execution Pages").
WHEREAS:
A. The Company and each Purchaser are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Section 4(2) of the Securities Act of 1933, as amended (the "SECURITIES
ACT");
B. Each Purchaser desires to purchase, upon the terms and conditions
stated in this Agreement, shares (the "PREFERRED SHARES") of the Company's
Series H Convertible Preferred Stock, par value $.01 per share ("PREFERRED
STOCK") convertible into its common stock, par value $.01 per share, of the
Company (the "COMMON STOCK"). The rights, preferences and privileges of the
Preferred Stock, including the terms upon which such Preferred Stock is
convertible into shares of Common Stock are set forth in the form of Certificate
of Designations, Preferences and Rights attached hereto as EXHIBIT A (the
"CERTIFICATE OF DESIGNATIONS"). The shares of Common Stock issuable upon
conversion of the Preferred Shares or otherwise pursuant to the Certificate of
Designations are referred to herein as the "CONVERSION SHARES". The Preferred
Shares and Conversion Shares are collectively referred to herein as the
"SECURITIES."
C. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as EXHIBIT B (the "REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws;
NOW, THEREFORE, the Company and the Purchasers hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES.
a. PURCHASE OF PREFERRED SHARES. On the Closing Date (as defined
below), subject to the satisfaction (or waiver) of the conditions set forth in
Sections 6 and 7 below, the Company shall issue and sell to each Purchaser and
each Purchaser severally agrees to purchase from the Company, such number of
Preferred Shares as is set forth on such Purchaser's signature page
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hereto. The purchase price (the "PURCHASE PRICE") per Preferred Share at such
closing shall be equal to One Thousand Dollars ($1,000.00) and the aggregate
purchase price for all of the Preferred Shares to be purchased by the Purchasers
shall be Six Million Dollars ($6,000,000.00). For the avoidance of doubt, in no
event shall any Purchaser be required to purchase more than the number of
Preferred Shares being subscribed for hereunder by such Purchaser as set forth
on such Purchaser's Execution Page. The Company may sell up to Fourteen Million
Dollars ($14,000,000.00) of additional Preferred Shares, at One Thousand Dollars
($1,000.00) per Preferred Share at one additional closing within 60 days of the
Closing Date (such closing, if any, is herein referred to as the "ADDITIONAL
CLOSING").
b. FORM OF PAYMENT. On the Closing Date, each Purchaser shall pay the
aggregate Purchase Price for the Preferred Shares being purchased by such
Purchaser hereunder by wire transfer to the Company, in accordance with the
Company's written wiring instructions, against delivery of duly executed
certificates representing the Preferred Shares being purchased by such Purchaser
hereunder and the Company shall deliver such certificates against delivery of
such aggregate Purchase Price.
c. CLOSING DATE. Subject to the satisfaction (or waiver) of the
conditions thereto set forth in Section 6 and Section 7 below, the date and time
of the issuance and sale of the Preferred Shares pursuant to this Agreement (the
"CLOSING DATE") shall be 12:00 noon eastern time on March 31, 1997, (subject to
a two (2) business day grace period at either party's option), or such other
time as may be mutually agreed upon by the Company and the Purchasers. The
closing shall occur at the offices of Foley, Hoag & Eliot, LLP, One Post Office
Square, Boston, MA 02109.
2. PURCHASERS' REPRESENTATIONS AND WARRANTIES
Each Purchaser severally represents and warrants to the Company that:
a. INVESTMENT PURPOSE. Purchaser is purchasing the Preferred Shares for
Purchaser's own account for investment only and not with a present view towards
the public sale or distribution thereof, except pursuant to sales that are
exempt from the registration requirements of the Securities Act and/or sales
registered under the Securities Act. Purchaser understands that Purchaser must
bear the economic risk of this investment indefinitely, unless the Securities
are registered pursuant to the Securities Act and any applicable state
securities or blue sky laws or an exemption from such registration is available,
and that the Company has no present intention of registering any such Securities
other than as contemplated by the Registration Rights Agreement. Notwithstanding
anything in this Section 2(a) to the contrary, by making the representations
herein, the Purchaser does not agree to hold the Securities for any minimum or
other specific term and reserves the right to dispose of the Securities at any
time in accordance with or pursuant to a registration statement or an exemption
under the Securities Act.
b. ACCREDITED INVESTOR STATUS. Purchaser is an "ACCREDITED INVESTOR" as
that term is defined in Rule 501(a) of Regulation D.
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c. RELIANCE ON EXEMPTIONS. Purchaser understands that the Preferred
Shares are being offered and sold to Purchaser in reliance upon specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and Purchaser's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of Purchaser set forth herein in order to
determine the availability of such exemptions and the eligibility of Purchaser
to acquire the Preferred Shares.
d. INFORMATION. Purchaser and its counsel, if any, have been furnished
all materials relating to the business, finances and operations of the Company
and materials relating to the offer and sale of the Preferred Shares which have
been specifically requested by Purchaser or its counsel. Purchaser and its
counsel, if any, have been afforded the opportunity to ask questions of the
Company and have received what Purchaser believes to be complete and
satisfactory answers to any such inquiries. Neither such inquiries nor any other
due diligence investigation conducted by Purchaser or its counsel or any of its
representatives shall modify, amend or affect Purchaser's right to rely on the
Company's representations and warranties contained in Section 3 below. Purchaser
understands that Purchaser's investment in the Securities involves a high degree
of risk.
e. GOVERNMENTAL REVIEW. Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
f. TRANSFER OR RESALE. Purchaser understands that (i) except as
provided in the Registration Rights Agreement, the Securities have not been and
are not being registered under the Securities Act or any state securities laws,
and may not be transferred unless (a) subsequently registered thereunder, or (b)
Purchaser shall have delivered to the Company an opinion of counsel (which
opinion shall be in form, substance and scope customary for opinions of counsel
in comparable transactions) to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration or (c) sold pursuant to Rule 144 promulgated under the Securities
Act (or a successor rule) ("RULE 144"), or (d) sold or transferred to an
affiliate of Purchaser; (ii) any sale of such Securities made in reliance on
Rule 144 may be made only in accordance with the terms of said Rule and further,
if said Rule is not applicable, any resale of such Securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the Securities
Act) may require compliance with some other exemption under the Securities Act
or the rules and regulations of the Securities and Exchange Commission (the
"SEC") thereunder; and (iii) neither the Company nor any other person is under
any obligation to register such Securities under the Securities Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder (in each case, other than pursuant to the Registration Rights
Agreement).
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g. LEGENDS. Purchaser understands that the Preferred Shares and, until
such time as the Conversion Shares have been registered under the Securities Act
as contemplated by the Registration Rights Agreement or otherwise may be sold by
Purchaser pursuant to Rule 144 without any restriction as to the public resale
thereof, the certificates for the Conversion Shares may bear a restrictive
legend in substantially the following form (and a stop-transfer order may be
placed against transfer of the certificates for such Securities):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be sold, transferred or assigned in
the absence of an effective registration statement for the securities
under said Act, or an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions, that
registration is not required under said Act or unless sold pursuant to
Rule 144(k) under said Act.
The legend set forth above shall be removed and the Company shall issue
a certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by state securities laws, (a) the sale of
such Security is registered under the Securities Act, or (b) such holder
provides the Company with an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions, to the effect that
a public sale or transfer of such Security may be made without registration
under the Securities Act or (c) such holder provides the Company with reasonable
assurances that such Security has been sold pursuant to Rule 144 or can be sold
pursuant to Rule 144 without any restriction as to the number of Securities
acquired as of a particular date that can then be immediately sold. Purchaser
agrees to sell all Securities, including those represented by a certificate(s)
from which the legend has been removed, pursuant to an effective registration
statement and to deliver a prospectus in connection with such sale (if and to
the extent such delivery is required) or in compliance with an exemption from
the registration requirements of the Securities Act. In the event the above
legend is removed from any Security and thereafter the effectiveness of a
registration statement covering such Security is suspended or the Company
determines that a supplement or amendment thereto is required by applicable
securities laws, then upon reasonable advance notice to Purchaser the Company
may require that the above legend be placed on any such Security that cannot
then be sold pursuant to an effective registration statement or Rule 144 without
any restriction as to the number of Securities acquired as of a particular date
that can then be immediately sold, which legend shall be removed when such
Security has been sold pursuant to Rule 144 or may be sold pursuant to an
effective registration statement or Rule 144 without any restriction as to the
number of Securities acquired as of a particular date that can then be
immediately sold.
h. [Intentionally Omitted]
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i. AUTHORIZATION; ENFORCEMENT. This Agreement and the Registration
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of Purchaser and are valid and binding agreements of Purchaser
enforceable in accordance with their terms.
j. RESIDENCY. Purchaser is a resident of the jurisdiction set forth
under such Purchaser's name on the signature page hereto executed by such
Purchaser.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Purchaser that:
a. ORGANIZATION AND QUALIFICATION. The Company and each of its
subsidiaries is a corporation duly organized and existing in good standing under
the laws of the jurisdiction in which it is incorporated, and has the requisite
corporate power to own its properties and to carry on its business as now being
conducted. The Company and each of its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
where the failure so to qualify would have a Material Adverse Effect. "MATERIAL
ADVERSE EFFECT" means any material adverse effect on the operations, properties,
financial condition or prospects of the Company and its subsidiaries, taken as a
whole on a consolidated basis or on the transactions contemplated hereby.
b. AUTHORIZATION; ENFORCEMENT. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement and the
Registration Rights Agreement, to issue and sell the Preferred Shares in
accordance with the terms hereof, and to issue the Conversion Shares upon
conversion of the Preferred Shares in accordance with the terms of the
Certificate of Designations; (ii) the execution, delivery and performance of
this Agreement and the Registration Rights Agreement by the Company and the
consummation by it of the transactions contemplated hereby and thereby
(including without limitation the issuance of the Preferred Shares and the
issuance and reservation for issuance of the Conversion Shares) have been duly
authorized by the Company's Board of Directors and no further consent or
authorization of the Company, its Board or Directors, or its stockholders is
required (under Rule 4460(i) promulgated by the National Association of
Securities Dealers or otherwise); (iii) this Agreement has been duly executed
and delivered by the Company; and (iv) this Agreement constitutes, and, upon
execution and delivery by the Company of the Registration Rights Agreement, such
agreement will constitute, valid and binding obligations of the Company
enforceable against the Company in accordance with their terms.
c. CAPITALIZATION. The capitalization of the Company as of the date
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares reserved for issuance pursuant to the
Company's stock option plans, the number of shares reserved for issuance
pursuant to securities (other than the Preferred Shares) exercisable for, or
convertible into or exchangeable for any shares of Common Stock and the number
of shares to be reserved for issuance upon conversion of the Preferred Shares is
set forth on SCHEDULE 3(C). All of such outstanding shares of capital stock have
been, or upon issuance will be, validly issued,
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fully paid and nonassessable. No shares of capital stock of the Company
(including the Preferred Shares and the Conversion Shares) are subject to
preemptive rights or any other similar rights of the stockholders of the Company
or any liens or encumbrances. Except as disclosed in SCHEDULE 3(C) or as
contemplated herein, as of the date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital stock
of the Company or any of its subsidiaries, or arrangements by which the Company
or any of its subsidiaries is or may become bound to issue additional shares of
capital stock of the Company or any of its subsidiaries, and (ii) there are no
agreements or arrangements under which the Company or any of its subsidiaries is
obligated to register the sale of any of the Company's securities under the
Securities Act (except the Registration Rights Agreement). The Company has made
available to each Purchaser true and correct copies of the Company's Certificate
of Incorporation as in effect on the date hereof ("CERTIFICATE OF
INCORPORATION"), the Company's By-laws as in effect on the date hereof (the
"BY-LAWS"), and all other instruments and agreements governing securities
convertible into or exercisable or exchangeable for Common Stock of the Company.
The Certificate of Designations, in the form attached hereto, has been duly
filed with the Secretary of State of the State of Delaware and, upon the
issuance of the Preferred Shares in accordance with the terms hereof, each
Purchaser shall be entitled to the rights set forth therein. The Company shall
provide each Purchaser with a written update of this representation signed by
the Company's Chief Executive Officer or Chief Financial Officer on behalf of
the Company as of the Closing Date.
d. ISSUANCE OF SHARES. The Preferred Shares are duly authorized and,
upon issuance in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and free from all taxes, liens, claims
and encumbrances and will not be subject to preemptive rights or other similar
rights of stockholders of the Company. The Conversion Shares are duly authorized
and reserved for issuance, and, upon conversion of the Preferred Shares in
accordance with the terms thereof, will be validly issued, fully paid and
non-assessable, and free from all taxes, liens, claims and encumbrances and will
not be subject to preemptive rights or other similar rights of stockholders of
the Company.
e. NO CONFLICTS. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement by the Company, the performance
by the Company of its obligations under the Certificate of Designations, and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance and reservation for issuance, as
applicable, of the Preferred Shares and Conversion Shares) will not (i) result
in a violation of the Certificate of Incorporation or By-laws or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, or result
in a violation of any law, rule, regulation, order, judgment or decree
(including U.S. federal and state securities laws and regulations) applicable to
the Company or any of
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its subsidiaries or by which any property or asset of the Company or any of its
subsidiaries is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect). Neither
the Company nor any of its subsidiaries is in violation of its Certificate of
Incorporation or other organizational documents and neither the Company nor any
of its subsidiaries is in default (and no event has occurred which, with notice
or lapse of time or both, would put the Company or any of its subsidiaries in
default) under, nor has there occurred any event giving others (with notice or
lapse of time or both) any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, except for possible defaults or rights as
would not, individually or in the aggregate, have a Material Adverse Effect. The
businesses of the Company and its subsidiaries are not being conducted, and
shall not be conducted so long as a Purchaser owns any of the Securities, in
violation of any law, ordinance or regulation of any governmental entity, except
for possible violations the sanctions for which either singly or in the
aggregate would not have a Material Adverse Effect. Except as specifically
contemplated by this Agreement and as required under the Securities Act and any
applicable state securities laws and the filing of an application with NASDAQ
(as defined below) to list or approve for quotation the Conversion Shares, the
Company is not required to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency or any
regulatory or self regulatory agency in order for it to execute, deliver or
perform any of its obligations under this Agreement or the Registration Rights
Agreement or to perform its obligations under the Certificate of Designations,
in each case in accordance with the terms hereof or thereof. The Company is not
in violation of the listing requirements of the NASDAQ Small Cap Market
("NASDAQ") and does not reasonably anticipate that the Common Stock will be
delisted by NASDAQ in the foreseeable future.
f. SEC DOCUMENTS, FINANCIAL STATEMENTS. Since December 31, 1993, the
Company has timely filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT") (all of the foregoing, filed prior to the date hereof and after December
31, 1993, and all exhibits included therein and financial statements and
schedules thereto and documents (other than exhibits) incorporated by reference
therein together with any registration statements or other documents filed by
the Company pursuant to the Securities Act prior to the date hereof and those
certain news releases attached hereto as SCHEDULE 3(F), being hereinafter
referred to herein as the "SEC DOCUMENTS"). The Company has delivered to each
Purchaser true and complete copies of the SEC Documents, except for such
exhibits, schedules and incorporated documents. As of their respective dates,
the SEC Documents complied in all material respects with the requirements of the
Exchange Act or the Securities Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
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respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with U.S. generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may include
footnotes or may not be condensed or summary statements) and fairly present in
all material respects the consolidated financial position of the Company and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except as
set forth in the financial statements of the Company included in the SEC
Documents, the Company has no liabilities, contingent or otherwise, other than
(i) liabilities incurred in the ordinary course of business subsequent to the
date of the most recent financial statements included in the SEC Documents and
(ii) obligations under contracts and commitments incurred in the ordinary course
of business and not required under generally accepted accounting principles to
be reflected in such financial statements, which, individually or in the
aggregate, are not material to the financial condition or operating results of
the Company.
g. ABSENCE OF CERTAIN CHANGES. Since December 31, 1995, there has been
no material adverse change and no material adverse development in the business,
properties, operations, financial condition, results of operations or prospects
of the Company, except as disclosed in the SEC Documents.
h. ABSENCE OF LITIGATION. Except for the declaratory judgment action
filed by the Company against MEHL/Biophile in the United States District Court
for the District of Massachusetts in October, 1996 and the Declaratory judgment
action filed by Selvac Acquisitions Corp. against the Company and other parties
in the United States District Court for the District of New Jersey in March,
1997, or except as disclosed in the SEC Documents, there is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company or any of its subsidiaries, threatened against or
affecting the Company, any of its subsidiaries, or any of their respective
directors or officers in their capacities as such, wherein an unfavorable
decision, ruling or finding would have a material adverse effect on the
properties, business, condition (financial or other), results of operations or
prospects of the Company and its subsidiaries taken as a whole or the
transactions contemplated by this Agreement or any of the documents contemplated
hereby or which would adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under, this
Agreement or any of such other documents.
i. DISCLOSURE. All information relating to or concerning the Company
set forth in this Agreement or provided to the Purchasers pursuant to Section
2(d) hereof and otherwise in connection with the transactions contemplated
hereby is true and correct in all material respects and the Company has not
omitted to state any material fact necessary in order to make the statements
made herein or therein, in light of the circumstances under which they were
made, not
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misleading. No event or circumstance has occurred or exists with respect to the
Company or its subsidiaries or their respective businesses, properties,
prospects, operations or financial conditions, which, under applicable law, rule
or regulation, requires public disclosure or announcement by the Company but
which has not been so publicly announced or disclosed (assuming for this purpose
that the Company's Exchange Act Reports are being incorporated into an effective
registration statement filed by the Company under the Securities Act).
j. ACKNOWLEDGMENT REGARDING PURCHASERS' PURCHASE OF THE SECURITIES. The
Company acknowledges and agrees that none of the Purchasers are acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to this Agreement or the transactions contemplated hereby, and any
advice given by any Purchaser, or any of their representatives or agents, in
connection with this Agreement and the transactions contemplated hereby is
merely incidental to each Purchaser's purchase of Preferred Shares. The Company
further represents to each Purchaser that the Company's decision to enter into
this Agreement has been based solely on an independent evaluation by the Company
and its representatives.
k. CURRENT PUBLIC INFORMATION. The Company is currently eligible to
register the resale of its Common Stock on a registration statement on Form S-3
under the Securities Act.
l. NO GENERAL SOLICITATION. Neither the Company nor any distributor
participating on the Company's behalf in the transactions contemplated hereby
(if any) nor any person acting for the Company, or any such distributor, has
conducted any "GENERAL SOLICITATION," as such term is defined in Regulation D,
with respect to any of the Securities being offered hereby.
m. NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would require registration of the
Securities being offered hereby under the Securities Act.
n. NO BROKERS. The Company has taken no action which would give rise to
any claim by any person for brokerage commissions, finder's fees or similar
payments by any Purchaser relating to this Agreement or the transactions
contemplated hereby, except for dealings with Michael Arnouse whose commissions
and fees will be paid for by the Company.
o. ACKNOWLEDGMENT OF DILUTION. The number of Conversion Shares issuable
upon conversion of the Preferred Shares may increase substantially in certain
circumstances, including the circumstance wherein the trading price of the
Common Stock declines. The Company acknowledges that its obligation to issue
Conversion Shares upon conversion of the Preferred Shares in accordance with the
Certificate of Designations is absolute and unconditional, regardless of the
dilution that such issuance may have on the ownership interests of other
stockholders.
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p. INTELLECTUAL PROPERTY. Each of the Company and its subsidiaries owns
or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "INTANGIBLES") necessary for the conduct of its
business as now being conducted and as described in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995. Neither the Company
nor any subsidiary of the Company infringes or is in conflict with any right of
any other person with respect to any Intangibles which, individually or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a Material Adverse Effect.
q. FOREIGN CORRUPT PRACTICES. Neither the Company, nor any of its
subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any subsidiary has, in the course of acting for, or
on behalf of, the Company, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977;
or made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.
4. COVENANTS.
a. BEST EFFORTS. The parties shall use their best efforts timely to
satisfy each of the conditions described in Section 6 and 7 of this Agreement.
b. BLUE SKY LAWS. The Company shall, on or before the Closing Date take
such action as the Company shall reasonably determine is necessary to qualify
the Securities for sale to the Purchasers pursuant to this Agreement under
applicable securities or "blue sky" laws of the states of the United States or
obtain exemption therefrom, and shall provide evidence of any such action so
taken to the Purchasers on or prior to the Closing Date.
c. REPORTING STATUS. So long as any Purchaser beneficially owns any of
the Securities, the Company shall timely file all reports required to be filed
with the SEC pursuant to the Exchange Act, and the Company shall not terminate
its status as an issuer required to file reports under the Exchange Act even if
the Exchange Act or the rules and regulations thereunder would permit such
termination.
d. USE OF PROCEEDS. The Company shall use the proceeds from the sale of
the Preferred Shares for internal working capital purposes, mergers and
acquisitions, investments and general corporate purposes.
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e. ADDITIONAL EQUITY CAPITAL; RIGHT OF FIRST OFFER. The Company agrees
that during the period beginning on the date hereof and ending ninety (90) days
following the later of (i) the Closing Date and (ii) the date of the Additional
Closing, if any (the "LOCK-UP PERIOD"), the Company will not, without the prior
written consent of Purchasers (or their designated agents) holding at least two
thirds (2/3rds) of the then outstanding Preferred Shares, issue or sell or
contract with any party to issue or sell any Below Market Security (as defined
below) ("FUTURE OFFERINGS"). In addition, the Company will not conduct any
Future Offering during the period beginning on the date hereof and ending 180
days following the later of (i) the Closing Date and (ii) the Additional
Closing, if any, unless it shall have first delivered to each Purchaser at least
five (5) business days prior to the closing of such Future Offering, written
notice describing the proposed Future Offering, including the terms and
conditions thereof, and providing each Purchaser and its affiliates, an option
during the five (5) business day period following delivery of such notice to
purchase up to the Applicable Portion (as defined below) of the Below Market
Securities being offered in the Future Offering on the same terms as
contemplated by such Future Offering (the limitations referred to in this and
the immediately preceding sentence are collectively referred to as the "CAPITAL
RAISING LIMITATIONS"). The Capital Raising Limitations shall not apply to the
sale of Preferred Shares at the Additional Closing, if any, on the terms set
forth herein or to any transaction involving issuances of securities in
connection with a merger, consolidation, acquisition or sale of assets, or in
connection with any strategic partnership or joint venture (the primary purpose
of which is not to raise equity capital), or in connection with the disposition
or acquisition of a business, product or license by the Company or exercise of
options by employees, consultants or directors. The Capital Raising Limitations
also shall not apply to (i) the issuance of securities pursuant to an
underwritten public offering, (ii) the issuance of securities upon exercise or
conversion of the Company's options, warrants or other convertible securities
outstanding as of the date hereof or (iii) the grant of additional options or
warrants, or the issuance of additional securities, under any Company stock
option or restricted stock plan for the benefit of the Company's employees,
directors or consultants. The "APPLICABLE PORTION" shall mean the product of (i)
a fraction, the numerator of which is the number of Preferred Shares purchased
by such Purchaser hereunder and the denominator of which is the total number of
Preferred Shares purchased by all of the Purchasers hereunder (including
Preferred Shares issued on the Closing Date and on the date of the Additional
Closing, if any). "BELOW MARKET SECURITIES" shall mean any Common Stock or any
security of the Company which is convertible into or exercisable or exchangeable
for Common Stock and which is sold at a "gross selling price per share" of
Common Stock which is less than the average of the Closing Bid Prices (as
defined in the Certificate of Designations) for the five (5) trading days
immediately preceding the date of issuance of such security, where the price per
share of Common Stock for any security convertible into or exchangeable or
exercisable for Common Stock shall be determined by dividing (i) the total
amount, if any, received or receivable by the Company as consideration for
issuance or sale of such security, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise,
conversion or exchange thereof by (ii) the maximum total number of shares of
Common Stock issuable upon the exercise, conversion or exchange of such
security.
11
<PAGE>
f. EXPENSES. On the date of the Closing, the Company shall pay Five
Thousand Dollars ($5,000.00) to RGC International Investors, LDC ("RGC") as a
non-accountable expense allowance to be applied by RGC against all expenses
incurred by RGC and its affiliates in connection with the negotiation,
preparation, execution, delivery and performance of this Agreement and the other
agreements to be executed in connection herewith, including, without limitation,
RGC and its affiliates' attorneys' fees and expenses.
g. FINANCIAL INFORMATION. Upon the written request of any Purchaser
holding any Securities, the Company shall send the following reports to such
Purchaser: a copy of its Annual Report on Form 10-K, its Quarterly Reports on
Form 10-Q, any proxy statements, any Current Reports on Form 8-K and any press
releases issued by the Company or any of its subsidiaries.
h. RESERVATION OF SHARES. The Company shall at all times have
authorized and reserved for the purpose of issuance a sufficient number of
shares of Common Stock to provide for the full conversion of the outstanding
Preferred Shares and issuance of the Conversion Shares in connection therewith
and as otherwise required by the Certificate of Designations. The Company shall
not reduce the number of shares reserved for issuance upon conversion of the
Preferred Shares without the consent of Purchasers holding a majority of the
Preferred Shares then held by all Purchasers.
i. LISTING. Promptly (and in no event more than fifteen (15) days)
following the Company's receipt of a Conversion Notice (as defined in the
Certificate of Designations) with respect to any Preferred Share, the Company
shall secure the listing or approval for quotation of all of the Conversion
Shares upon each national securities exchange or automated quotation system, if
any, upon which shares of Common Stock are then listed (subject to official
notice of issuance) and thereafter shall maintain, so long as any other shares
of Common Stock shall be so listed, such listing of all Conversion Shares from
time to time issuable upon conversion of the Preferred Shares. The Company will
take all action necessary to continue the listing and trading of its Common
Stock on the NASDAQ, the NASDAQ National Market ("NNM"), the New York Stock
Exchange ("NYSE") or the American Stock Exchange ("AMEX") and will comply in all
respects with the Company's reporting, filing and other obligations under the
bylaws or rules of the National Association of Securities Dealers ("NASD") and
such exchanges, as applicable.
j. CORPORATE EXISTENCE. So long as a Purchaser beneficially owns any
Preferred Shares, the Company shall maintain its corporate existence, except in
the event of a merger, consolidation or sale of all or substantially all of the
Company's assets, as long as the surviving or successor entity in such
transaction (i) assumes the Company's obligations hereunder and under the
agreements and instruments entered into in connection herewith regardless of
whether or not the Company would have had a sufficient number of shares of
Common Stock authorized and available for issuance in order to effect the
conversion of all Preferred Shares outstanding as of the date of such
transaction and (ii) is a publicly traded corporation whose common stock is
listed for trading on the NASDAQ, NNM, NYSE or AMEX.
k. [Intentionally Omitted]
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l. If no Additional Closing occurs, or if it occurs for fewer than
14,000 Preferred Shares, the Company shall promptly amend the Certificate of
Designations to reduce the authorized number of Preferred Shares from 20,000 to
the number actually issued and sold hereunder.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall instruct its transfer agent to issue certificates,
registered in the name of each Purchaser or its nominee, for the Conversion
Shares in such amounts as specified from time to time by such Purchaser to the
Company upon conversion of the Preferred Shares. Prior to registration of the
Conversion Shares under the Securities Act or resale of such Securities under
Rule 144, all such certificates shall bear the restrictive legend specified in
Section 2(g) of this Agreement. The Company warrants that no instruction other
than such instructions referred to in this Section 5, and stop transfer
instructions to give effect to Section 2(f) hereof in the case of the Conversion
Shares prior to registration of the Conversion Shares under the Securities Act,
will be given by the Company to its transfer agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way each Purchaser's obligations and
agreement set forth in Section 2(g) hereof to resell the Securities pursuant to
an effective registration statement and to deliver a prospectus in connection
with such sale or in compliance with an exemption from the registration
requirements of applicable securities law. If a Purchaser provides the Company
with an opinion of counsel, which opinion of counsel shall be in form, substance
and scope customary for opinions of counsel in comparable transactions, to the
effect that the Securities to be sold or transferred may be sold or transferred
pursuant to an exemption from registration, the Company shall permit the
transfer, and, in the case of the Conversion Shares, promptly instruct its
transfer agent to issue one or more certificates in such name and in such
denominations as specified by a Purchaser. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to a
Purchaser by vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 5 will be inadequate and agrees, in
the event of a breach or threatened breach by the Company of the provisions of
this Section 5, that a Purchaser shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Preferred
Shares to a Purchaser at the closing is subject to the satisfaction, at or
before the Closing Date, of each of the following conditions thereto, provided
that these conditions are for the Company's sole benefit and may be waived by
the Company at any time in its sole discretion.
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<PAGE>
(a) The applicable Purchaser shall have executed the signature page to
this Agreement and the Registration Rights Agreement, and delivered the same to
the Company.
(b) The applicable Purchaser shall have delivered the Purchase Price
for the Preferred Shares purchased in accordance with Section 1(b) above and the
aggregate number of Preferred Shares purchased by all Purchasers hereunder shall
not be less than 6,000.
(c) The representations and warranties of the applicable Purchaser
shall be true and correct as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date), and the applicable Purchaser shall have performed,
satisfied and complied in all material respects with the covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the applicable Purchaser at or prior to the Closing Date.
(d) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
7. CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE.
The obligation of each Purchaser hereunder to purchase the Preferred
Shares to be purchased by it on the Closing Date is subject to the satisfaction
of each of the following conditions, provided that these conditions are for such
Purchaser's sole benefit and may be waived by such Purchaser at any time in the
Purchaser's sole discretion:
(a) The Company shall have executed the signature page to this
Agreement and the Registration Rights Agreement, and delivered the same to such
Purchaser.
(b) The Certificate of Designations shall have been accepted for filing
with the Secretary of State of the State of Delaware and a copy thereof
certified by the Secretary of State of Delaware shall have been delivered to
such Purchaser.
(c) The Company shall have delivered duly executed certificates (in
such denominations as such Purchaser shall request) representing the Preferred
Shares being so purchased to such Purchaser in accordance with Section 1(b)
above.
(d) The aggregate number of Preferred Shares purchased by all
Purchasers hereunder shall be 6,000 (plus in the case of the Additional Closing,
if any, up to, but not more than, 14,000).
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<PAGE>
(e) The Common Stock shall be authorized for quotation on NASDAQ and
trading in the Common Stock (or NASDAQ generally) shall not have been suspended
by the SEC or NASD.
(f) The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Closing date. Such Purchaser shall have received a certificate, executed
by the chief executive officer of the Company, dated as of the Closing Date to
the foregoing effect and as to such other matters as may be reasonably requested
by such Purchaser.
(g) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(h) Such Purchaser shall have received the officer's certificate
described in Section 3(c) above, dated as of the Closing Date.
(i) Such Purchaser shall have received an opinion of the Company's
counsel, dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Purchaser and in substantially the form of EXHIBIT C
attached hereto.
(j) The Company shall have executed, and shall have delivered evidence
reasonably satisfactory to the Purchasers that the Company's transfer agent has
agreed to act in accordance with the irrevocable instructions in the form
attached hereto as EXHIBIT D; PROVIDED, HOWEVER, if such evidence is not
delivered on or prior to the Closing Date, the Company shall use its best
efforts to deliver such evidence as soon as practicable thereafter.
8. GOVERNING LAW; MISCELLANEOUS.
a. GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts
located in the County of Kent in the State of Delaware in any suit or proceeding
based on or arising under this Agreement and irrevocably agrees that all claims
in respect of such suit or proceeding may be determined in such courts. The
Company irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding. The Company further agrees that service
of process upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company
15
<PAGE>
in any suit or proceeding arising hereunder. Nothing herein shall affect a
Purchaser's right to serve process in any other manner permitted by law. The
Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
b. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party.
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. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Purchasers make any
representation, warranty, covenant or undertaking with respect to such matters.
No provision of this Agreement may be waived other than by an instrument in
writing signed by the party to be charged with enforcement and no provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and the Purchasers.
f. NOTICES. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
If to the Company:
Palomar Medical Technologies, Inc.
66 Cherry Hill Drive
Beverly, Massachusetts 01915
Telecopy: (508) 921-5801
Attention: Paul Weiner, Director of Finance
with a copy to each of the Company's General Counsel at the
same address and to:
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<PAGE>
Foley, Hoag & Eliot, LLP
One Post Office Square
Boston, Massachusetts 02109
Telecopy: (617) 832-7000
Attention: David Broadwin
If to RGC International Investors, LDC:
RGC International Investors, LDC
c/o Rose Glen Capital Management, L.P.
440 E. Swedesford Road
Suite 2025
Wayne, PA 19087
Telecopy: (610) 971-2212
Attention: Andrew Daley
If to any other Purchaser, to such address set forth under such
Purchaser's name on the signature page hereto executed by such Purchaser.
Each party shall provide notice to the other parties of any change in
address.
g. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. Neither
the Company nor any Purchaser shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other.
Notwithstanding the foregoing, any Purchaser may assign its rights hereunder to
any of its "AFFILIATES," as that term is defined under the Exchange Act, without
the consent of the Company. This provision shall not limit a Purchaser's right
to transfer the Securities pursuant to the terms of the Certificate of
Designations and this Agreement or to assign such Purchaser's rights hereunder
to any such transferee.
h. THIRD PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. SURVIVAL. The representations and warranties of the Company and the
agreements and covenants set forth in Sections 3, 4, 5 and 8 shall survive the
closings hereunder notwithstanding any due diligence investigation conducted by
or on behalf of any Purchasers. The Company agrees to indemnify and hold
harmless each Purchaser and each of such Purchaser's officers, directors,
employees, partners, agents and affiliates for loss or damage arising as a
result of or related to any breach or alleged breach by the Company of any of
its representations or covenants set forth herein, including advancement of
expenses as they are incurred.
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<PAGE>
j. PUBLICITY. The Company and each Purchaser shall have the right to
approve before issuance any press releases, SEC, NASDAQ or NASD filings, or any
other public statements with respect to the transactions contemplated hereby;
PROVIDED, HOWEVER, that the Company shall be entitled, without the prior
approval of the Purchasers, to make any press release or SEC, NASDAQ or NASD
filings with respect to such transactions as is required by applicable law and
regulations (although the Purchasers 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).
k. FURTHER ASSURANCES. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. TERMINATION. In the event that the closing shall not have occurred
on or before March 31, 1997, unless the parties agree otherwise, this Agreement
shall terminate at the close of business on such date.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have
caused this Agreement to be duly executed as of the date first above written.
PURCHASER:
RGC International Investors, LDC
By:
------------------------------
Name:
-------------------------
Title:
-------------------------
RESIDENCE: Cayman Islands
ADDRESS:
RGC International Investors, LDC
c/o Rose Glen Capital Management, L.P.
440 E. Swedesford Road
Suite 2025
Wayne, PA 19087
Telecopy: (610) 971-2212
Attention: Andrew Daley
AGGREGATE SUBSCRIPTION AMOUNT
Number of Preferred Shares: 6,000
Purchase Price: $6,000,000
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
-------------------------------
Name:
-------------------------
Title:
-------------------------
<PAGE>
EXHIBIT A
TO
SECURITIES
PURCHASE
AGREEMENT
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES H CONVERTIBLE PREFERRED STOCK
OF
PALOMAR MEDICAL TECHNOLOGIES, INC.
Pursuant to Section 151 of the
Delaware General Corporation Law
Palomar Medical Technologies, a corporation organized and existing
under the laws of the State of Delaware (the "CORPORATION"), hereby certifies
that the following resolutions were adopted by the Board of Directors of the
Corporation pursuant to authority of the Board of Directors as required by
Section 151 of the Delaware General Corporation Law.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "BOARD OF DIRECTORS" or the "BOARD")
in accordance with the provisions of its Certificate of Incorporation, the Board
of Directors hereby authorizes a series of the Corporation's previously
authorized Preferred Stock, par value $.01 per share (the "PREFERRED STOCK"),
and hereby states the designation and number of shares, and fixes the relative
rights, preferences, privileges, powers and restrictions thereof as follows:
Series H Convertible Preferred Stock:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 20,000 shares of
Preferred Stock, is the Series H Convertible Preferred Stock (the "SERIES H
PREFERRED STOCK") and the face amount shall be One Thousand U.S. Dollars
($1,000.00) per share (the "FACE AMOUNT").
II. NO DIVIDENDS
The Series H Preferred Stock will bear no dividends, and the holders of
the Series H Preferred Stock shall not be entitled to receive dividends on the
Series H Preferred Stock.
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<PAGE>
III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designations, the following terms
shall have the following meanings:
A. "CLOSING BID PRICE" means, for any security as of any date, the
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Corporation and reasonably acceptable to holders of a majority
of the then outstanding shares of Series H Preferred Stock if Bloomberg
Financial Markets is not then reporting closing bid prices of such security
(collectively, "BLOOMBERG"), or if the foregoing does not apply, the last
reported sale price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
sale price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as reasonably determined by an investment banking firm selected by the
Corporation and reasonably acceptable to holders of a majority of the then
outstanding shares of Series H Preferred Stock, with the costs of such appraisal
to be borne by the Corporation.
B. "CLOSING DATE" means the Closing Date under that certain Securities
Purchase Agreement dated March 27, 1997 by and among the Corporation and the
initial purchasers of the Series H Preferred Stock (the "SECURITIES PURCHASE
AGREEMENT").
C. "CONVERSION DATE" means, for any Optional Conversion, the date
specified in the notice of conversion in the form attached hereto (the "NOTICE
OF CONVERSION"), so long as the copy of the Notice of Conversion is faxed (or
delivered by other means resulting in notice) to the Corporation before
Midnight, New York City time, on the Conversion Date indicated in the Notice of
Conversion. If the Notice of Conversion is not so delivered before such time,
then the Conversion Date shall be the date the holder delivers the Notice of
Conversion to the Corporation. The Conversion Date for the Required Conversion
at Maturity shall be the Maturity Date (as such terms are defined in Paragraph D
of Article IV).
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<PAGE>
D. "CONVERSION PERCENTAGE" shall have the following meaning and shall
be subject to adjustment as provided herein:
IF THE CONVERSION DATE IS: THEN THE CONVERSION PERCENTAGE IS:
On or prior to the 179th day 100%
after the Closing Date
On or after the 180th and on or prior
to the 269th day after the Closing Date 90%
On or after the 270th day after 85%
the Closing Date
E. "CONVERSION PRICE" means, (i) with respect to any Conversion Date
occurring prior to the 210th day after the Closing Date, the Variable Conversion
Price and (ii) with respect to any Conversion Date occurring on or after the
210th day after the Closing Date, the lower of the Conversion Price Ceiling and
the Variable Conversion Price, each in effect as of such date and subject to
adjustment as provided herein.
F. "CONVERSION PRICE CEILING" means the average of the Closing Bid
Prices for the Common Stock for the twenty (20) consecutive trading days ending
on the trading day immediately preceding the 210th day after the Closing Date
(subject to equitable adjustment for any stock splits, stock dividends,
reclassifications or similar events during such twenty (20) trading day period),
and shall be subject to adjustment as provided herein.
G. "CONVERSION PRICE FLOOR" means (i) on or prior to that date which is
two hundred ten (210) days after the Closing Date, $6.00, and (ii) after that
date which is two hundred ten (210) days after the Closing Date, the lower of
(a) $6.00 and (b) the product of (.65) and the Conversion Price Ceiling, and
shall be subject to adjustment as provided herein.
H. "N" means the sum of (a) the number of days from, but excluding, the
date of issuance of such share of Series H Preferred Stock, through and
including the earlier of (i) the Conversion Date for such share of Series H
Preferred Stock and (ii) such date (if any) that the average of the Closing Bid
Prices for the Common Stock for ten (10) consecutive trading days is greater
than one hundred and seventy five percent (175%) of the initial Conversion Price
Ceiling determined under Paragraph F of this Article III (subject to equitable
adjustment for any of the events described in Article XI.A) plus (b) the number
of days not included in clause (a) of this Paragraph H (if any) during the
period beginning on, but excluding, the date such share of Series H Preferred
Stock was required to be (but was not) redeemed by the Corporation pursuant to
Article VIII.B and the subsequent Conversion Date for such share of Series H
Preferred Stock.
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<PAGE>
I. "PREMIUM" means an amount equal to: (i) (.06)x(N/365)x(1,000) for
the period beginning on the Closing Date and ending on that date which is 179
days after the Closing Date, (ii) (.07)x(N/365)x(1,000) for the period beginning
on the 180th day after the Closing Date and ending on that date which is 269
days after the Closing Date, and (iii) (.08)x(N/365)x(1,000) for the period
beginning on the 270th day after the Closing Date and thereafter.
I. "VARIABLE CONVERSION PRICE" means, as of any date of determination,
the amount obtained by multiplying the Conversion Percentage then in effect by
the average of the Closing Bid Prices for the Common Stock for ten (10)
consecutive trading days ending on the trading day immediately preceding such
date of determination (subject to equitable adjustments for any stock splits,
stock dividends, reclassifications or similar events during such ten (10)
trading day period), and shall be subject to adjustment as provided herein.
IV. CONVERSION
A. CONVERSION AT THE OPTION OF THE HOLDER. Subject to the limitations
on conversions contained in Paragraph C of this Article IV, each holder of
shares of Series H Preferred Stock may, at any time and from time to time,
convert (an "OPTIONAL CONVERSION") each of its shares of Series H Preferred
Stock into a number of fully paid and nonassessable shares of Common Stock
determined in accordance with the following formula:
1,000 + THE PREMIUM
---------------------
CONVERSION PRICE
B. MECHANICS OF CONVERSION. In order to convert Series H Preferred
Stock into shares of Common Stock, a holder shall: (x) deliver (by facsimile or
otherwise) a copy of the fully executed Notice of Conversion to the Corporation
and (y) surrender or cause to be surrendered the original certificates
representing the Series H Preferred Stock being converted (the "PREFERRED STOCK
CERTIFICATES"), duly endorsed, along with a copy of the Notice of Conversion as
soon as practicable thereafter to the Corporation. At the request of a holder
and upon receipt by the Corporation of a facsimile copy of a Notice of
Conversion from a holder, the Corporation shall immediately send, via facsimile,
a confirmation to such holder stating that the Notice of Conversion has been
received, the date upon which the Corporation expects to deliver the Common
Stock issuable upon such conversion and the name and telephone number of a
contact person at the Corporation regarding the conversion. The Corporation
shall not be obligated to issue shares of Common Stock issuable upon such
conversion unless either the Preferred Stock Certificates are delivered to the
Corporation as provided above, or the holder notifies the Corporation that such
certificates have been lost, stolen or destroyed (subject to the requirements of
Article XIV.B).
(i) DELIVERY OF COMMON STOCK UPON CONVERSION. The Corporation
shall, within one business day after the later of (a) the second business day
following the Conversion Date in the case of DWAC deliveries and the third
business day following the Conversion date in all other cases
4
<PAGE>
and (b) the date of such surrender (or, in the case of lost, stolen or destroyed
certificates, the date on which indemnity pursuant to Article XIV.B is provided)
(the "DELIVERY PERIOD"), and provided the holder has surrendered Preferred Stock
Certificates, issue and deliver to or upon the order of the holder (x) that
number of shares of Common Stock issuable upon conversion of such shares of
Series H Preferred Stock being converted and (y) a certificate representing the
number of shares of Series H Preferred Stock not being converted, if any.
(ii) TAXES. The Corporation shall pay any and all taxes which
may be imposed upon it with respect to the issuance and delivery of the shares
of Common Stock upon the conversion of the Series H Preferred Stock.
(iii) NO FRACTIONAL SHARES. If any conversion of Series H
Preferred Stock would result in the issuance of either a fractional share of
Common Stock, such fractional share shall be disregarded and the number of
shares of Common Stock issuable upon conversion of the Series H Preferred Stock
shall be the closest whole number of shares.
(iv) STATUS AS STOCKHOLDER. Upon submission of a Notice of
Conversion by a holder of Series H Preferred Stock, the shares covered thereby
shall be deemed converted into shares of Common Stock as of the Conversion Date
and the holder's rights as a holder of such converted shares of Series H
Preferred Stock shall cease and terminate, excepting only the right to receive
certificates for such shares of Common Stock and to any remedies provided herein
or otherwise available at law or in equity to such holder because of a failure
by the Corporation to comply with the terms of this Certificate of Designations
(including its right to regain its status as a Series H Preferred Stockholder
pursuant to Article VI.E).
(v) CONVERSION DISPUTES. In the case of any dispute with
respect to a conversion, the Corporation shall promptly issue such number of
shares of Common Stock as are not disputed in accordance with subparagraph (i)
above. If such dispute involves the calculation of the Conversion Price, the
Corporation shall submit the disputed calculations to its outside accountant via
facsimile within two (2) business days of receipt of the Notice of Conversion.
The accountant shall audit the calculations and notify the Corporation and the
holder of the results no later than two (2) business days from the date it
receives the disputed calculations. The accountant's calculation shall be deemed
conclusive, absent manifest error. The Corporation shall then issue the
appropriate number of shares of Common Stock in accordance with subparagraph (i)
above.
C. LIMITATIONS ON CONVERSIONS. (i) Except in a Required Conversion at
Maturity, in no event shall a holder of shares of Series H Preferred Stock be
entitled to receive shares of Common Stock to the extent that the sum of (a) the
number of shares of Common Stock beneficially owned by the holder and its
affiliates (exclusive of shares issuable upon conversion of the unconverted
portion of the shares of Series H Preferred Stock or the unexercised or
unconverted portion of any other securities of the Corporation subject to a
limitation on conversion or exercise analogous to the limitations contained
herein) and (b) the number of shares of Common Stock issuable upon the
conversion of the shares of Series H Preferred Stock with respect to which the
determination of this
5
<PAGE>
subparagraph is being made, would result in beneficial ownership by the holder
and its affiliates of more than 4.9% of the outstanding shares of Common Stock.
For purposes of this subparagraph, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13 D-G thereunder, except as otherwise provided in
clause (i) above. The Corporation shall be entitled to rely, and shall be fully
protected in relying, on any statement or representation made by a holder of
Series H Preferred Stock to the Corporation in connection with a particular
conversion without any obligation on the part of the Corporation to make any
inquiry or investigation or to examine its records or the records of any
transfer agent for the Common Stock. The restriction contained in this Paragraph
C shall not be altered, amended, deleted or changed in any manner whatsoever
unless the holders of a majority of the Common Stock and each holder of Series H
Preferred Stock shall approve such alteration, amendment, deletion or change.
(ii) Except as otherwise provided in Article XIII, during any
thirty (30) day period beginning on the Closing Date and ending on the earlier
of (a) that date which is two hundred and nine (209) days after the Closing Date
and (b) that date (if any) that the Corporation delivers an Optional Redemption
Notice (as defined below) to the holders of Series H Preferred Stock pursuant to
Article VIII.B, no holder of Series H Preferred Stock may convert in excess of
thirty-three percent (33%) of the shares of Series H Preferred Stock initially
purchased by such Holder; provided, however, if such holder has already
converted sixty-six percent (66%) of the shares of Series H Preferred Stock so
purchased, such holder may convert the remaining thirty-four percent (34%) of
the shares so purchased in the next succeeding thirty day period or thereafter.
D. REQUIRED CONVERSION AT MATURITY. Provided all shares of Common Stock
issuable upon conversion of all outstanding shares of Series H Preferred Stock
are then (i) authorized and reserved for issuance, (ii) registered under the
Securities Act of 1933, as amended (the "SECURITIES ACT") for resale by the
holders of such shares of Series H Preferred Stock and (iii) eligible to be
traded on either the NASDAQ, the New York Stock Exchange or the American Stock
Exchange, each share of Series H Preferred Stock issued and outstanding on March
27, 2002 (the "MATURITY DATE") (and any accrued and unpaid Conversion Default
Payments), automatically shall be converted into shares of Common Stock on such
date in accordance with the conversion formulas set forth in Paragraph A of this
Article IV (the "REQUIRED CONVERSION AT MATURITY"). If a Required Conversion at
Maturity occurs, the Corporation and the holders of Series H Preferred Stock
shall follow the applicable conversion procedures set forth in Paragraph B of
this Article IV; PROVIDED, HOWEVER, that the holders of Series H Preferred Stock
are not required to deliver a Notice of Conversion to the Corporation.
V. RESERVATION OF SHARES OF COMMON STOCK
A. RESERVED AMOUNT. Upon adoption of this Certificate of Designations
by the Corporation's Board of Directors, the Corporation shall have reserved
4,500,000 authorized but unissued shares of Common Stock for issuance upon
conversion of the Series H Preferred Stock and
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thereafter the number of authorized but unissued shares of Common Stock so
reserved (the "RESERVED AMOUNT") shall at all times be sufficient to provide for
the conversion of the Series H Preferred Stock outstanding at the then current
Conversion Price. The Reserved Amount shall be allocated to the holders of
Series H Preferred Stock as provided in Article XIV.D.
B. INCREASES TO RESERVED AMOUNT. If the Reserved Amount for any three
(3) consecutive trading days (the last of such three (3) trading days being the
"AUTHORIZATION TRIGGER DATE") shall (i) during the period beginning on the
Closing Date and ending on that date which is one hundred fifty (150) days after
the Closing Date be less than 100% of the number of shares of Common Stock
issuable upon conversion of the Series H Preferred Stock on such trading days,
or (ii) on or after that date which is one hundred fifty one (151) days after
the Closing Date, be less than 135% of the number of shares of Common Stock
issuable upon conversion of the Series H Preferred Stock on such trading days,
the Corporation shall immediately notify the holders of Series H Preferred Stock
of such occurrence and shall take immediate action (including seeking
shareholder approval to authorize the issuance of additional shares of Common
Stock) to increase the Reserved Amount to 150% of the number of shares of Common
Stock into which the Series H Preferred Stock are then convertible. In the event
the Corporation fails to so increase the Reserved Amount within ninety (90) days
after an Authorization Trigger Date, each holder of Series H Preferred Stock
shall thereafter have the option, exercisable in whole or in part at any time
and from time to time by delivery of a Redemption Notice (as defined in Article
VIII.D) to the Corporation, to require the Corporation to purchase for cash, at
an amount per share equal to the Redemption Amount (as defined in Article
VIII.C), a portion of the holder's Series H Preferred Stock such that, after
giving effect to such purchase, the holder's allocated portion of the Reserved
Amount exceeds 135% of the total number of shares of Common Stock issuable to
such holder upon conversion of its Series H Preferred Stock. If the Corporation
fails to redeem any of such shares within five (5) business days after its
receipt of a Redemption Notice, then such holder shall be entitled to the
remedies provided in Article VIII.D.
VI. FAILURE TO SATISFY CONVERSIONS
A. CONVERSION DEFAULT PAYMENTS. If, at any time, (x) a holder of shares
of Series H Preferred Stock submits a Notice of Conversion and the Corporation
fails for any reason (other than because such issuance would exceed such
holder's allocated portion of the Reserved Amount, for which failure the holders
shall have the remedies set forth in Article V) to deliver, on or prior to the
fourth business day following the expiration of the Delivery Period for such
conversion, the shares of Common Stock to which such holder is entitled upon
such conversion, or (y) the Corporation provides notice to any holder of Series
H Preferred Stock at any time of its intention not to issue shares of Common
Stock upon exercise by any holder of its conversion rights in accordance with
the terms of this Certificate of Designations other than because such issuance
would exceed such holder's allocated portion of the Reserved Amount (each of (x)
and (y) being a "CONVERSION DEFAULT"), then the Corporation shall pay to the
affected holder, in the case of a Conversion Default described in clause (x)
above, and to all holders, in the case of a Conversion Default described in
clause (y) above, payments for the first ten (10) business days following the
expiration of the Delivery Period, in the case of a Conversion Default described
in clause (x), and for the first ten (10) business days of any other Conversion
Default, an amount equal to $1,000 per day. In the event any
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Conversion Default continues beyond such ten (10) business day period, the
Corporation shall pay to the holder an additional amount equal to:
(.24) x (D/365) x (the Default Amount)
where:
"D" means the number of days after the expiration of the ten (10)
business day period described above through and including the Default Cure Date;
"DEFAULT AMOUNT" means (i) the total Face Amount of all shares of
Series H Preferred Stock held by such holder plus (ii) the total Premium as of
the first day of the Conversion Default on all shares of Series H Preferred
Stock included in clause (i) of this definition; and
"DEFAULT CURE DATE" means (i) with respect to a Conversion Default
described in clause (x) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series H Preferred Stock and (ii)
with respect to a Conversion Default described in clause (y) of its definition,
the date the Corporation begins to honor all conversions of Series H Preferred
Stock in accordance with Article IV.A.
The payments to which a holder shall be entitled pursuant to this
Paragraph A are referred to herein as "CONVERSION DEFAULT PAYMENTS." A holder
may elect to receive accrued Conversion Default Payments in cash or to convert
all or any portion of such accrued Conversion Default Payments, at any time,
into Common Stock at the Conversion Price in effect at the time of such
conversion. In the event a holder elects to receive any Conversion Default
Payments in cash, it shall so notify the Corporation in writing. Such payment
shall be made in accordance with and be subject to the provisions of Article
XIV.F. In the event a holder elects to convert all or any portion of the
Conversion Default Payments, the holder shall indicate on a Notice of Conversion
such portion of the Conversion Default Payments which such holder elects to so
convert and such conversion shall otherwise be effected in accordance with the
provisions of Article IV.
B. ADJUSTMENT TO CONVERSION PRICE. If a holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion of
Series H Preferred Stock for any reason (other than because such issuance would
exceed such holder's allocated portion of the Reserved Amount, for which failure
the holders shall have the remedies set forth in Article V), then the Conversion
Price in respect of any shares of Series H Preferred Stock held by such holder
shall thereafter be the lesser of (i) the Conversion Price on the Conversion
Date specified in the Notice of Conversion which resulted in the Conversion
Default and (ii) the lowest Conversion Price in effect during the period
beginning on, and including, such Conversion Date through and including the day
such shares of Common Stock are delivered to the holder and (iii) the Conversion
Price (calculated in accordance with Article III.E) on the Conversion Date
specified in the Notice of Conversion for such share of Series H Preferred
Stock. If there shall occur a Conversion Default of the type described in clause
(y) of Article VI.A,
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then the Conversion Price with respect to any conversion thereafter shall be the
lower of (x) the lowest Conversion Price in effect at any time during the period
beginning on, and following, the date of the occurrence of such Conversion
Default through and including the Default Cure Date and (y) the Conversion Price
(calculated in accordance with Article III.E) on the Conversion Date specified
in the Notice of Conversion for such share of Series H Preferred Stock.. The
Conversion Price shall thereafter be subject to further adjustment for any
events described in Article XI.
C. BUY-IN CURE. If (i) the Corporation fails for any reason to deliver
during the Delivery Period shares of Common Stock to a holder upon a conversion
of shares of Series H Preferred Stock having a Conversion Date on or prior to a
date upon which the Corporation has notified the applicable holder in writing
that the Corporation is unable to honor conversions and (ii) after the
applicable Delivery Period with respect to such conversion, such holder
purchases (in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by such holder of the shares of Common Stock
which such holder anticipated receiving upon such conversion (a "BUY-IN"), the
Corporation shall pay such holder (in addition to any other remedies available
to the holder) the amount by which (x) such holder's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (y) the total Face Amount (plus the accrued Premium thereon)
of the portion of the Series H Preferred Stock resulting in the Buy-In. For
example, if a holder purchases shares of Common Stock having a total purchase
price of $11,000 to cover a Buy-In with respect to an attempted conversion of
Series H Preferred Stock having a total Face Amount and accrued Premium of
$10,000, the Corporation will be required to pay the holder $1,000. A holder
shall provide the Corporation written notification indicating any amounts
payable to such holder pursuant to this Paragraph C. The Corporation shall make
any payments required pursuant to this Paragraph C in accordance with and
subject to the provisions of Article XIV.F.
D. REDEMPTION RIGHT. If the Corporation fails, and such failure
continues uncured for five (5) business days after the Corporation has been
notified thereof in writing by the holder, for any reason (other than because
such issuance would exceed such holder's allocated portion of the Reserved
Amount, for which failure the holders shall have the remedies set forth in
Article V) to issue shares of Common Stock within ten (10) business days after
the expiration of the Delivery Period with respect to any conversion of Series H
Preferred Stock, then the holder may elect at any time and from time to time
prior to the Default Cure Date for such Conversion Default, by delivery of a
Redemption Notice (as defined in Article VIII.D) to the Corporation, to have all
or any portion of such holder's outstanding shares of Series H Preferred Stock
purchased by the Corporation for cash, at an amount per share equal to the
Redemption Amount (as defined in Article VIII.C). If the Corporation fails to
redeem any of such shares within five (5) business days after its receipt of a
Redemption Notice, then such holder shall be entitled to the remedies provided
in Article VIII.D.
E. RETENTION OF RIGHTS AS SERIES H PREFERRED STOCKHOLDER. If a holder
has not received certificates for all shares of Common Stock prior to the tenth
(10th) business day after the expiration of the Delivery Period with respect to
a conversion of Series H Preferred Stock for any reason, then the Corporation
shall, as soon as practicable, return such unconverted shares of Series H
Preferred
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Stock to the holder and (unless the holder otherwise elects to retain its status
as a holder of Common Stock) the holder shall regain the rights of a holder of
Series H Preferred Stock with respect to such shares. In all cases, the holder
shall retain all of its rights and remedies (including, without limitation, (i)
the right to receive Conversion Default Payments pursuant to Paragraph A above
to the extent required thereby for such Conversion Default and any subsequent
Conversion Default and (ii) the right to have the Conversion Price with respect
to subsequent conversions determined in accordance with Paragraph B above) for
the Corporation's failure to convert Series H Preferred Stock.
VII. [INTENTIONALLY OMITTED]
VIII. REDEMPTION DUE TO CERTAIN EVENTS
A. REDEMPTION BY HOLDER. In the event (each of the events described in
clauses (i)-(v) below after expiration of the applicable cure period (if any)
being a "REDEMPTION EVENT"):
(i) the Common Stock (including all of the shares of Common
Stock issuable upon conversion of the Series H Preferred Stock) is
suspended from trading on any of, or is not listed or designated for
quotation (and authorized) for trading on at least one of, the New York
Stock Exchange, the American Stock Exchange, the NASDAQ National Market
or the NASDAQ Small Cap Market ("NASDAQ") for an aggregate of ten (10)
trading days in any nine (9) month period,
(ii) the Registration Statement required to be filed by the
Corporation pursuant to Section 2(a) of the Registration Rights Agreement, dated
as of March 27, 1997, by and among the Corporation and the other signatories
thereto (the "REGISTRATION RIGHTS AGREEMENT"), has not been declared effective
by the 180th day following the Closing Date or such Registration Statement,
after being declared effective, cannot be utilized by the holders of Series H
Preferred Stock for the resale of all of their Registrable Securities (as
defined in the Registration Rights Agreement) for an aggregate of more than
thirty (30) days in any consecutive twelve month period,
(iii) the Corporation fails, and any such failure continues
uncured for five (5) business days after the Corporation has been notified
thereof in writing by the holder, to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the holders of Series H
Preferred Stock upon conversion of the Series H Preferred Stock as and when
required by this Certificate of Designations, the Securities Purchase Agreement
or the Registration Rights Agreement,
(iv) the Corporation provides notice to any holder of Series H
Preferred Stock, including by way of public announcement, at any time, of its
intention not to issue shares of Common Stock to any holder of Series H
Preferred Stock upon conversion in accordance with the terms of this Certificate
of Designations (other than due to the circumstances contemplated by Article V,
for which the holders shall have the remedies set forth in such Article), or
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(v) the Corporation shall:
(a) sell, convey or dispose of all or
substantially all of its assets;
(b) merge, consolidate or engage in any
other business combination with any other entity (other than a
merger, consolidation or business combination in which the
holders of the Corporation's voting securities immediately
preceding such merger, consolidation or business combination
own, on a pro rata basis, at least 50% of the surviving
entity's voting securities); or
(c) have fifty percent (50%) or more of the
voting power of its capital stock owned beneficially by one
person, entity or "group" (as such term is used under Section
13(d) of the Securities Exchange Act of 1934, as amended),
then, upon the occurrence of any such Redemption Event, each holder of shares of
Series H Preferred Stock shall thereafter have the option, exercisable in whole
or in part at any time and from time to time by delivery of a Redemption Notice
(as defined in Paragraph D below) to the Corporation while such Redemption Event
continues, to require the Corporation to purchase for cash any or all of the
then outstanding shares of Series H Preferred Stock held by such holder for an
amount per share equal to the Redemption Amount (as defined in Paragraph C
below) in effect at the time of the redemption hereunder. For the avoidance of
doubt, the occurrence of any event described in clauses (i), (ii), (iv) or (v)
above shall immediately constitute a Redemption Event and there shall be no cure
period.
B. REDEMPTION BY CORPORATION.
(i) If at any time after that date which is two (2) years after the
Closing Date, the average of the Closing Bid Prices for the Common Stock for ten
(10) consecutive trading days is greater than the Conversion Price Ceiling
multiplied by 1.5 (subject to equitable adjustments for stock splits, stock
dividends, reclassifications or similar events during such ten (10) trading day
period), then the Corporation shall have the right to redeem up to fifty percent
(50%) of the Series H Preferred Stock for a price per share equal to the
Optional Redemption Amount (as defined below). If at any time after the Closing
Date the average of the Closing Bid Prices for the Common Stock for ten (10)
consecutive trading days is greater than the Conversion Price Ceiling multiplied
by 2.0 (subject to equitable adjustments for stock splits, stock dividends,
reclassifications or similar events during such ten (10) trading day period)
then the Corporation shall have the right to redeem (such right, collectively
with the Corporation's redemption rights pursuant to the immediately preceding
sentence, shall be referred to as "REDEMPTION AT CORPORATION'S ELECTION") any or
all of the Series H Preferred Stock for an amount equal to the Optional
redemption Amount. A Redemption at Corporation's Election shall be exercisable
by the Corporation in its sole discretion by delivery of an Optional Redemption
Notice (as defined below). Holders of Series H Preferred Stock may convert all
or any part of their shares of Series H Preferred Stock into Common Stock by
delivering a Notice of Conversion to the Corporation at any time prior to that
date which is ten (10) days after receipt of an Optional Redemption Notice. The
"OPTIONAL REDEMPTION Amount" with respect
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to each share of Preferred Stock means (a) for redemptions pursuant to the first
sentence of this subparagraph (i), an amount equal to:
(1,000 + P) X 1.5
-------------------
CCP
and (b) for redemptions pursuant to the second sentence of this subparagraph
(I), an amount equal to:
(1,000 + P) X 2.0
--------------------
CCP
where:
"P" means the accrued Premium on such share of Series H Preferred Stock through
the date of redemption; and
"CCP" means the Conversion Price Ceiling on the date of the redemption.
(ii) The Corporation shall effect each redemption under this Section
VIII.B by giving at least ten (10) trading days but not more than twenty (20)
trading days (subject to extension as set forth below) prior written notice (the
"OPTIONAL REDEMPTION NOTICE") of the date which such redemption is to become
effective (the "EFFECTIVE DATE OF REDEMPTION") and the Optional Redemption
Amount to (a) the holders of Series H Preferred Stock selected for redemption at
the address and facsimile number of such holder appearing in the Corporation's
register for the Series H Preferred Stock and (b) the transfer agent for the
Common Stock, which Optional Redemption Notice shall be deemed to have been
delivered on the business day after the Corporation's fax (with a copy sent by
overnight courier) of such notice to the holders of Series H Preferred Stock.
(iii) The Optional Redemption Amount shall be paid to the holder of the
Series H Preferred Stock being redeemed within three (3) business days of the
Effective Date of Redemption; PROVIDED, HOWEVER, that the Corporation shall not
be obligated to deliver any portion of the Optional Redemption Amount until
either the certificates evidencing the Series H Preferred Stock being redeemed
are delivered to the office of the Corporation, or the holder notifies the
Corporation that such certificates have been lost, stolen or destroyed and
delivers the documentation in accordance with Article XIV.B hereof.
Notwithstanding anything herein to the contrary, in the event that the
certificates evidencing the Series H Preferred Stock redeemed are not delivered
to the Corporation prior to the 3rd business day following the Effective Date of
Redemption, the redemption of the Series H Preferred Stock pursuant to this
Article VIII.B shall still be deemed effective as of the Effective Date of
Redemption and the Optional Redemption Price shall be paid to the holder of
Series H Preferred Stock redeemed within five (5) business days of the date the
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certificates evidencing the Series H Preferred Stock redeemed are actually
delivered to the Corporation.
(iv) Notwithstanding the provisions of Article IV hereof, if the
Conversion Price on the date a holder delivers a Conversion Notice is less than
or equal to the Conversion Price Floor then in effect, the Corporation may, at
its option, elect to redeem the shares of Series H Preferred Stock which are the
subject of such Conversion Notice at a price per share equal to the Floor
Redemption Amount (as defined below) in lieu of converting such shares to Common
Stock. Each holder of Series H Preferred Stock shall have the right, by sending
a written request to the Corporation, to require the Corporation to provide
advance written notice to such holder stating whether the Corporation will elect
to exercise its redemption rights pursuant to this paragraph (iv). The
Corporation shall have five (5) business days from receipt of such request to
reply in writing to such holder. In the event Corporation either fails to so
reply or replies that it will not elect to exercise such redemption rights, the
Corporation shall forfeit its rights to redeem shares of Series H Preferred
Stock pursuant to this paragraph (iv) during the thirty (30) day period
immediately following the expiration of the Corporation's reply period or
receipt of such election not to redeem, as the case may be. In the event the
Corporation notifies a holder of its intention to redeem shares of Series H
Preferred Stock pursuant to this paragraph (v) and such holder delivers a
Conversion Notice at any time during which the Corporation has redemption rights
pursuant to this paragraph (iv) and the Corporation, prior to the date of such
Conversion Notice, has not provided such holder with written notice that it no
longer intends to exercise its redemption rights pursuant to this paragraph
(iv), the Corporation shall, no later than thirty (30) days from the date of
such Conversion Notice, pay to such holder the Floor Redemption Amount for each
share of series H Preferred which is covered by such Conversion Notice. The
Floor Redemption Amount per share means an amount equal to:
(1000+P) x (RAP)
where:
"P" means the accrued Premium on such share of Series H Preferred Stock
through the date of redemption.
"RAP" means:
If the Redemption occurs: RAP
On or prior to the 209th
day after the Closing Date 110%
On or after the 210th and on or prior
to the 299th day after the Closing Date 112%
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On or after the 300th and on or prior
to the 394th day after the Closing Date 115%
On or after the 395th day
after the Closing Date 120%
(v) If the Corporation fails to pay, when due and owing, any Optional
Redemption Amount or Floor Redemption Amount, then the holder of Series H
Preferred Stock entitled to receive such Optional Redemption Amount or Floor
Redemption Amount, as the case may be, shall have the right, at any time and
from time to time, to require the Corporation, upon written notice, to
immediately convert (in accordance with the terms of paragraph A of Article IV)
any or all of the shares of Series H Preferred Stock which are the subject of
such redemption, into shares of Common Stock at the lowest Conversion Price in
effect during the period beginning on the date the Corporation elected to redeem
such shares of Series H Preferred Stock and ending on the earlier of the date
the Corporation effects such redemption and the twentieth trading day following
either the Conversion Date which gave rise to the right of redemption (in the
case of a redemption pursuant to subparagraph (iv) of this Paragraph B) or the
Effective Date of Redemption (in the case of a Redemption at Corporation's
Election), as the case may be. In addition, if the Corporation fails to pay a
Floor Redemption Amount, when due and owing, the Corporation shall thereafter
forfeit its rights this Paragraph B to effect any redemption with respect to any
or all issued and outstanding shares of Series H Preferred Stock, and in the
case of a failure to pay all or any portion of an Optional Redemption Amount,
shall pay the holder entitled to such Optional Redemption Amount an amount equal
to:
ORA
____ x (ORF-LCBP)
OCP
where:
"ORA" means the amount of the Optional Redemption Amount which the
Corporation failed to so pay;
"OCP" means the Conversion Price in effect on the Effective Date of
Redemption;
"ORF" means (i) with respect to any redemption pursuant to the first
sentence of Article VIII.B (I), the product obtained by multiplying 1.5 by the
Conversion Price Ceiling and (ii) with respect to any redemption pursuant to the
second sentence of Article VIII.B(ii), the product obtained by multiplying 2.0
by the Conversion Price Ceiling; and
"LCBP" means the lowest Closing Big Price of the Corporation's Common
Stock during the Twenty (20) trading day period beginning on the Effective Date
of redemption.
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C. DEFINITION OF REDEMPTION AMOUNT. The "REDEMPTION AMOUNT" with
respect to a share of Series H Preferred Stock means an amount equal to:
1,000 + P
------------ X M
CP
where:
"P" means the accrued Premium on such share of Series H Preferred Stock
through the date of redemption;
"CP" means the Conversion Price in effect on the date of the Redemption
Notice; and
"M" means the highest Closing Bid Price of the Corporation's Common
Stock during the period beginning on the date of the Redemption Notice and
ending on the date of the redemption.
D. REDEMPTION DEFAULTS. If the Corporation fails to pay any holder the
Redemption Amount with respect to any share of Series H Preferred Stock within
five (5) business days of its receipt of a notice requiring such redemption (a
"REDEMPTION NOTICE"), then the holder of Series H Preferred Stock delivering
such Redemption Notice (i) shall be entitled to interest on the Redemption
Amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest rate permitted by applicable law from the date of the Redemption
Notice until the date of redemption hereunder, and (ii) shall have the right, at
any time and from time to time, to require the Corporation, upon written notice,
to immediately convert (in accordance with the terms of Paragraph A of Article
IV) all or any portion of the Redemption Amount, plus interest as aforesaid,
into shares of Common Stock at the lowest Conversion Price in effect during the
period beginning on the date of the Redemption Notice and ending on the
Conversion Date with respect to the conversion of such Redemption Amount. In the
event the Corporation is not able to redeem all of the shares of Series H
Preferred Stock subject to Redemption Notices, the Corporation shall redeem
shares of Series H Preferred Stock from each holder pro rata, based on the total
number of shares of Series H Preferred Stock included by such holder in the
Redemption Notice relative to the total number of shares of Series H Preferred
Stock in all of the Redemption Notices.
IX. RANK
All shares of the Series H Preferred Stock shall rank (i) prior to the
Corporation's common stock, par value $.01 per share (the "COMMON STOCK"); (ii)
PARI PASSU with any class or series of capital stock of the Corporation now
outstanding or hereafter created other than the Common Stock or classes or
series of capital stock of the Corporation specifically ranking, by their terms,
junior to the Series H Preferred Stock (the "PARI PASSU SECURITIES"); and (iii)
junior to any class or series of
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capital stock of the Corporation hereafter created (with the consent of
the holders of Series H Preferred Stock obtained in accordance with
Article XIII hereof) specifically ranking, by its terms, senior to the
Series H Preferred Stock (the "SENIOR SECURITIES"), in each case as to
distribution of assets upon liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary.
X. LIQUIDATION PREFERENCE
A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of sixty (60) consecutive
days and, on account of any such event, the Corporation shall liquidate,
dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve
or wind up (a "LIQUIDATION EVENT"), no distribution shall be made to the holders
of any shares of capital stock of the Corporation (other than Senior Securities)
upon liquidation, dissolution or winding up unless prior thereto the holders of
shares of Series H Preferred Stock shall have received the Liquidation
Preference with respect to each share. If, upon the occurrence of a Liquidation
Event, the assets and funds available for distribution among the holders of the
Series H Preferred Stock and holders of PARI PASSU Securities shall be
insufficient to permit the payment to such holders of the preferential amounts
payable thereon, then the entire assets and funds of the Corporation legally
available for distribution to the Series H Preferred Stock and the PARI PASSU
Securities shall be distributed ratably among such shares in proportion to the
ratio that the Liquidation Preference payable on each such share bears to the
aggregate Liquidation Preference payable on all such shares. After payment in
full of the Liquidation Preference of the shares of the Series H Preferred Stock
and the PARI PASSU Securities, the holders of such shares shall not be entitled
to any further participation in any distribution of assets by the Corporation.
B. The purchase or redemption by the Corporation of stock of any class,
in any manner permitted by law, shall not, for the purposes hereof, be regarded
as a liquidation, dissolution or winding up of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other entity nor the
sale or transfer by the Corporation of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation, dissolution or
winding up of the Corporation.
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C. The "LIQUIDATION PREFERENCE" with respect to a share of Series H
Preferred Stock means an amount equal to the Face Amount thereof plus the
Premium thereon through the date of final distribution. The Liquidation
Preference with respect to any PARI PASSU Securities shall be as set forth in
the Certificate of Designations filed in respect thereof.
XI. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time
as follows:
A. STOCK SPLITS, STOCK DIVIDENDS, ETC. If at any time on or after a
determination of the Conversion Price Ceiling or Conversion Price Floor, the
number of outstanding shares of Common Stock is increased by a stock split,
stock dividend, combination, reclassification or other similar event, the
Conversion Price Ceiling and Conversion Price Floor shall be proportionately
reduced, or if the number of outstanding shares of Common Stock is decreased by
a reverse stock split, combination or reclassification of shares, or other
similar event at anytime on or after the determination of the Conversion Price
Ceiling or Conversion Price Floor, the Conversion Price Ceiling and Conversion
Price Floor shall be proportionately increased. In such event, the Corporation
shall notify the transfer agent for the Common Stock of such change on or before
the effective date thereof.
B. ADJUSTMENT DUE TO MAJOR ANNOUNCEMENT. In the event the Corporation
(i) makes a public announcement that it intends to consolidate or merge with any
other entity (other than a merger in which the Corporation is the surviving or
continuing entity and its capital stock is unchanged) or to sell or transfer all
or substantially all of the assets of the Corporation or (ii) any person, group
or entity (including the Corporation) publicly announces a tender offer to
purchase 50% or more of the Corporation's Common Stock (the date of the
announcement referred to in clause (i) or (ii) of this Paragraph B is
hereinafter referred to as the "ANNOUNCEMENT DATE"), then the Conversion Price
shall, effective upon the Announcement Date and continuing through the
Abandonment Date (as defined below), be equal to the Conversion Price which
would have been applicable for an Optional Conversion occurring on the
Announcement Date. From and after the Abandonment Date, the Conversion Price
shall be determined as set forth in Article III.F "ABANDONMENT DATE" means with
respect to any proposed transaction or tender offer for which a public
announcement as contemplated by this Paragraph B has been made, the date upon
which the Corporation (in the case of clause (i) above) or the person, group or
entity (in the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer which caused this
Paragraph B to become operative.
C. ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time when
any Series H Preferred Stock is issued and outstanding, there shall be (i) any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value, or from par value to no par value, or from no par value
to par value, or as a result of a subdivision or combination), (ii) any
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consolidation or merger of the Corporation with any other entity (other than a
merger in which the Corporation is the surviving or continuing entity and its
capital stock is unchanged), (iii) any sale or transfer of all or substantially
all of the assets of the Corporation or (iv) any share exchange pursuant to
which all of the outstanding shares of Common Stock are converted into other
securities or property, then the holders of Series H Preferred Stock shall
thereafter have the right to receive upon conversion, in lieu of the shares of
Common Stock immediately theretofore issuable (without giving effect to any
limitations upon conversion imposed by Article IV.C), such shares of stock,
securities and/or other property as may be issued or payable with respect to or
in exchange for the number of shares of Common Stock immediately theretofore
issuable upon conversion (without giving effect to any limitations upon
conversion imposed by Article IV.C) had such merger, consolidation, exchange of
shares, recapitalization, reorganization or other similar event not taken place,
and in any such case, appropriate provisions shall be made with respect to the
rights and interests of the holders of the Series H Preferred Stock to the end
that the provisions hereof (including, without limitation, provisions for
adjustment of the Conversion Price and of the number of shares of Common Stock
issuable upon conversion of the Series H Preferred Stock) shall thereafter be
applicable, as nearly as may be practicable in relation to any shares of stock
or securities thereafter deliverable upon the conversion thereof. The
Corporation shall not effect any transaction described in this Paragraph C
unless (i) each holder of Series H Preferred Stock has received written notice
of such transaction at least thirty (30) days prior thereto, but in no event
later than ten (10) days prior to the record date for the determination of
shareholders entitled to vote with respect thereto, and (ii) the resulting
successor or acquiring entity (if not the Corporation) assumes by written
instrument the obligations of this Paragraph C. The above provisions shall apply
regardless of whether or not there would have been a sufficient number of shares
of Common Stock authorized and available for issuance upon conversion of the
shares of Series H Preferred Stock outstanding as of the date of such
transaction, and shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
D. ADJUSTMENT DUE TO DISTRIBUTION. If the Corporation shall declare or
make any distribution of its assets (or rights to acquire its assets) to holders
of Common Stock as a partial liquidating dividend, by way of return of capital
or otherwise (including any dividend or distribution to the Corporation's
shareholders in cash or shares (or rights to acquire shares) of capital stock of
a subsidiary (I.E. a spin-off)) (a "Distribution"), then the holders of Series H
Preferred Stock shall be entitled, upon any conversion of shares of Series H
Preferred Stock after the date of record for determining shareholders entitled
to such Distribution, to receive the amount of such assets which would have been
payable to the holder with respect to the shares of Common Stock issuable upon
such conversion (without giving effect to any limitations upon conversion
imposed by Article IV.C) had such holder been the holder of such shares of
Common Stock on the record date for the determination of shareholders entitled
to such Distribution.
E. [Intentionally Omitted]
F. PURCHASE RIGHTS. If at any time when any Series H Preferred Stock is
issued and outstanding, the Corporation issues any Convertible Securities or
rights to purchase stock, warrants,
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securities or other property (the "PURCHASE RIGHTS") pro rata to the record
holders of any class of Common Stock, then the holders of Series H Preferred
Stock will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have acquired if
such holder had held the number of shares of Common Stock acquirable upon
complete conversion of the Series H Preferred Stock (without giving effect to
any limitations upon conversion imposed by Article IV.C) immediately before the
date on which a record is taken for the grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record holders
of Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights.
G. NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Article XI, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each holder of Series H Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
H Preferred Stock, furnish to such holder a like certificate setting forth (i)
such adjustment or readjustment, (ii) the Conversion Price at the time in effect
and (iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon conversion of a
share of Series H Preferred Stock.
XII. VOTING RIGHTS
The holders of the Series H Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Delaware General Corporation Law
(the "GENERAL CORPORATE LAW"), in this Article XII and in Article XIII below.
Notwithstanding the above, the Corporation shall provide each holder of
Series H Preferred Stock, at its request, with copies of proxy materials and
other information sent to shareholders. If the Corporation takes a record of its
shareholders for the purpose of determining shareholders entitled to (a) receive
payment of any dividend or other distribution, any right to subscribe for,
purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or (b) to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the
Corporation, or any proposed merger, consolidation, liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least twenty (20) days prior to the record date specified therein (or
thirty (30) days prior to the consummation of the transaction or event,
whichever is earlier, but in no event earlier than public announcement of such
proposed transaction), of the date on which any such record is to be taken for
the purpose of such vote, dividend, distribution, right or other event, and a
brief statement regarding the amount and character of such vote, dividend,
distribution, right or other event to the extent known at such time.
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To the extent that under the General Corporate Law the vote of the
holders of the Series H Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the shares
of the Series H Preferred Stock represented at a duly held meeting at which a
quorum is present or by written consent of a majority of the shares of Series H
Preferred Stock (except as otherwise may be required under the General Corporate
Law) shall constitute the approval of such action by the class. To the extent
that under the General Corporate Law holders of the Series H Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series H Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which it is then
convertible (without giving effect to any limitations upon conversion imposed by
Article IV.C) using the record date for the taking of such vote of shareholders
as the date as of which the Conversion Price is calculated. Holders of the
Series H Preferred Stock shall be entitled to notice of (and copies of proxy
materials and other information sent to shareholders) all shareholder meetings
or written consents with respect to which they would be entitled to vote, which
notice would be provided pursuant to the Corporation's by-laws and the General
Corporate Law.
XIII. PROTECTION PROVISIONS
So long as any shares of Series H Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the General Corporate Law) of the holders of at least a
majority of the then outstanding shares of Series H Preferred Stock:
(a) alter or change the rights, preferences or privileges of
the Series H Preferred Stock;
(b) alter or change the rights, preferences or privileges of
any capital stock of the Corporation so as to affect adversely the Series H
Preferred Stock;
(c) create any new class or series of capital stock having a
preference over the Series H Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article IX hereof, "SENIOR SECURITIES");
(d) increase the authorized number of shares of Series H
Preferred Stock;
(e) issue any shares of Series H Preferred Stock other than
pursuant to the Securities Purchase Agreement; or
(f) redeem, or declare or pay any cash dividend or
distribution on, any capital stock of the Corporation ranking junior to the
Series H Preferred Stock as to distribution of assets upon liquidation,
dissolution or winding up of the Corporation (including the Common Stock).
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If holders of at least a majority of the then outstanding shares of Series H
Preferred Stock agree to allow the Corporation to alter or change the rights,
preferences or privileges of the shares of Series H Preferred Stock pursuant to
subsection (a) above, then the Corporation shall deliver notice of such approved
change to the holders of the Series H Preferred Stock that did not agree to such
alteration or change (the "DISSENTING Holders") and the Dissenting Holders shall
have the right, for a period of thirty (30) days, to convert all of their shares
of Series H Preferred Stock pursuant to the terms of this Certificate of
Designations as they existed prior to such alteration or change or to continue
to hold their shares of Series H Preferred Stock.
XIV. MISCELLANEOUS
A. CANCELLATION OF SERIES H PREFERRED STOCK. If any shares of Series H
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series H Preferred Stock.
B. LOST OR STOLEN CERTIFICATES. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to the Corporation, or (z) in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Corporation shall execute and deliver new Preferred Stock
Certificate(s) of like tenor and date. However, the Corporation shall not be
obligated to reissue such lost or stolen Preferred Stock Certificate(s) if the
holder contemporaneously requests the Corporation to convert such Series H
Preferred Stock.
C. [Intentionally Omitted]
D. ALLOCATIONS OF RESERVED AMOUNT. The Reserved Amount and each
increase to the Reserved Amount shall be allocated pro rata among the holders of
Series H Preferred Stock based on the number of shares of Series H Preferred
Stock held by each holder at the time of the establishment of or increase in the
Reserved Amount, as the case may be. In the event a holder shall sell or
otherwise transfer any of such holder's shares of Series H Preferred Stock, each
transferee shall be allocated a pro rata portion of such transferor's Reserved
Amount. Any portion of the Reserved Amount which remains allocated to any person
or entity which does not hold any Series H Preferred Stock shall be allocated to
the remaining holders of shares of Series H Preferred Stock, pro rata based on
the number of shares of Series H Preferred Stock then held by such holders.
E. STATEMENTS OF AVAILABLE SHARES. So long as any shares of Series H
Preferred Stock are outstanding, the Corporation shall deliver to each holder a
written report notifying the holders of any occurrence which prohibits the
Corporation from issuing Common Stock upon any conversion. In addition, the
Corporation shall provide, within ten (10) days after delivery to the
Corporation of a written request by any holder, any of the following information
as of the date of such request: (i) the total number of shares of Series H
Preferred Stock outstanding, (ii) the total
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number of shares of Common Stock issued upon all prior conversions of Series H
Preferred Stock, (iii) the total number of shares of Common Stock which are
reserved for issuance upon conversion of the Series H Preferred Stock, (iv) the
total number of shares of Common Stock which may thereafter be issued by the
Corporation upon conversion of the Series H Preferred Stock before the
Corporation would exceed the Reserved Amount.
F. PAYMENT OF CASH; DEFAULTS. Whenever the Corporation is required to
make any cash payment to a holder under this Certificate of Designations (as a
Conversion Default Payment, upon redemption or otherwise), such cash payment
shall be made to the holder within five (5) business days after delivery by such
holder of a notice specifying that the holder elects to receive such payment in
cash and the method (E.G., by check, wire transfer) in which such payment should
be made. If such payment is not delivered within such five (5) business day
period, such holder shall thereafter be entitled to interest on the unpaid
amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest rate permitted by applicable law until such amount is paid in full
to the holder.
G. REMEDIES CUMULATIVE. The remedies provided in this Certificate of
Designations shall be cumulative and in addition to all other remedies available
under this Certificate of Designations, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Corporation to comply with the terms of this Certificate of Designations. The
Corporation acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the holders of Series H Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, the holders of
Series H Preferred Stock shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of
showing economic loss and without any bond or other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, this Certificate of Designations is executed on
behalf of the Corporation this 26th day of March, 1997.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Sarah Burgess Reed
-------------------------------
Sarah Burgess Reed
Assistant Secretary
<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series H Preferred Stock)
The undersigned hereby irrevocably elects to convert ____________ shares of
Series H Preferred Stock (the "CONVERSION"), represented by stock certificate
No(s). ___________ (the "PREFERRED STOCK CERTIFICATES") into shares of common
stock ("COMMON STOCK") of Palomar Medical Technologies, Inc. (the "CORPORATION")
according to the conditions of the Certificate of Designations, Preferences and
Rights of Series H Convertible Preferred Stock (the "CERTIFICATE OF
DESIGNATIONS"), as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates. No fee will be charged to the holder for any conversion, except
for transfer taxes, if any. A copy of each Preferred Stock Certificate is
attached hereto (or evidence of loss, theft or destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series H Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "ACT"), or pursuant to
an exemption from registration under the Act.
Date of Conversion:
Applicable Conversion Price:
Amount of Conversion Default
Payments to be Converted, if any:
Number of Shares of
Common Stock to be Issued:
By:
Name:
itle:
(Must be _____ exactly as _____ appears on the Preferred
Stock Certificate)
Name:
Address:
Social Security or
Federal Tax I.D. Number:
* The Corporation is not required to issue shares of Common Stock until the
original Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation. The
Corporation shall issue and deliver shares of Common Stock to an overnight
courier not later than the business day following the later of (a) the second
business day following the Conversion Date in the case of DWAC deliveries and
the third business day following the Conversion Date in all other cases and (b)
receipt of the original Preferred Stock Certificate(s) (or evidence of loss,
theft or destruction thereof) to be converted, and shall make payments pursuant
to the Certificate of Designations for the number of business days that such
issuance and delivery is late.
<PAGE>
EXHIBIT B
TO
SECURITIES PURCHASE
AGREEMENT
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of March 27,
1997 by and among PALOMAR MEDICAL TECHNOLOGIES, INC., a corporation organized
under the laws of the State of Delaware, with headquarters located at 66 Cherry
Hill Drive, Beverly, Massachusetts 01915 (the "COMPANY"), and the undersigned
purchasers of Preferred Shares under the Securities Purchase Agreement (together
with affiliates, the "INITIAL INVESTORS").
WHEREAS:
A. In connection with the Securities Purchase Agreement of even date
herewith by and between the Company and the Initial Investors (the "SECURITIES
PURCHASE AGREEMENT"), the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue and sell to the Initial Investors shares
of its Series H Convertible Preferred Stock (the "PREFERRED STOCK") that is
convertible into shares (the "CONVERSION SHARES") of the Company's common stock,
par value $.01 per share (the "COMMON STOCK"), upon the terms and subject to the
limitations and conditions set forth in the Certificate of Designations, Rights
and Preferences with respect to such Preferred Stock (the "CERTIFICATE OF
DESIGNATIONS"); and
B. To induce the Initial Investors to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"SECURITIES ACT"), and applicable state securities laws;
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 Company and the
Initial Investors hereby agree as follows:
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have the
following meanings:
(i) "INVESTORS" means the Initial Investors and any
transferees or assignees who agree to become bound by the provisions of this
Agreement in accordance with Section 9 hereof.
(ii) "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("RULE 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
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(iii) "REGISTRABLE SECURITIES" means the Conversion Shares
(including any Conversion Shares issuable with respect to Conversion Default
Payments under the Certificate of Designations or in redemption of any Preferred
Stock) issued or issuable with respect to the Preferred Stock and any shares of
capital stock issued or issuable, from time to time (with any adjustments), on
or in exchange for or otherwise with respect to any of the foregoing.
(iv) "REGISTRATION STATEMENT" means a registration statement
of the Company under the Securities Act.
b. Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
a. MANDATORY REGISTRATION. The Company shall prepare, and, on or prior
to the sixtieth (60th) day after the Closing Date (the "FILING DATE"), file with
the SEC a Registration Statement on Form S-3 (or, if Form S-3 is not then
available, on such form of Registration Statement as is then available to effect
a registration of all of the Registrable Securities, subject to the consent of
the Initial Investors (as determined pursuant to Section 11(j) hereof)) covering
the resale of at least 4,500,000 shares of Registrable Securities (provided that
such number may be proportionally reduced if fewer than 20,000 shares are issued
under the Securities Purchase Agreement), which Registration Statement, to the
extent allowable under the Securities Act and the Rules promulgated thereunder
(including Rule 416), shall state that such Registration Statement also covers
such indeterminate number of additional shares of Common Stock as may become
issuable upon conversion of the Preferred Stock to prevent dilution resulting
from stock splits, stock dividends or similar transactions. The Registrable
Securities included on the Registration Statement shall be allocated to the
Investors as set forth in Section 11(k) hereof. The Registration Statement (and
each amendment or supplement thereto, and each request for acceleration of
effectiveness thereof) shall be provided to (and subject to the approval of) the
Initial Investors and their counsel prior to its filing or other submission.
b. UNDERWRITTEN OFFERING. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Investors who hold a majority in interest of the Registrable Securities subject
to such underwritten offering, with the consent of the Initial Investors, shall
have the right to select a total of one legal counsel to represent the Investors
and an investment banker or bankers and manager or managers to administer the
offering, which investment banker or bankers or manager or managers shall be
reasonably satisfactory to the Company.
c. PAYMENTS BY THE COMPANY. The Company shall cause the registration
statement to become effective as soon as practicable after filing, but in no
event later than the one hundred twentieth (120th) day following the Closing
Date (the "REGISTRATION DEADLINE"). If (i) the registration statement(s)
covering the Registrable Securities required to be filed by the Company pursuant
to Section 2(a) hereof is not declared effective by the SEC on or before the
Registration Deadline or if, after the registration statement has been declared
effective by the SEC, sales of all the Registrable Securities (including any
Registrable Securities required to be registered pursuant to Section 3(b)
hereof) cannot be made pursuant to the registration statement
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(by reason of a stop order or the Company's failure to update the registration
statement or any other reason outside the control of the Investors) or (ii) the
Common Stock is not listed or included for quotation on the NASDAQ Small Cap
Market ("NASDAQ"), the NASDAQ National Market (the "NNM"), the New York Stock
Exchange (the "NYSE") or the American Stock Exchange (the "AMEX") at any time
after the Registration Deadline, then the Company will make payments to the
Investors in such amounts and at such times as shall be determined pursuant to
this Section 2(c) as partial relief for the damages to the Investors by reason
of any such delay in or reduction of their ability to sell the Registrable
Securities (which remedy shall not be exclusive of any other remedies available
at law or in equity). The Company shall pay to each Investor an amount equal to
the sum of (i) the aggregate Purchase Price of the Preferred Stock held by such
Investor (including, without limitation, Preferred Stock that has been converted
into Conversion Shares then held by such Investor) (the "AGGREGATE SHARE PRICE")
multiplied by two hundredths (.02) if the Registration Statement filed pursuant
to Section 2(a) is not declared effective on or prior to the Registration
Deadline plus (ii) an amount equal to the Aggregate Share Price multiplied by
two hundredths (.02) for each thirty (30) days thereafter that the Registration
Statement has not been declared effective or that sales cannot be made pursuant
to the Registration Statement after it has been declared effective or that the
Common Stock is not listed or included for quotation on NASDAQ, the NYSE or
AMEX; PROVIDED, HOWEVER that there shall be excluded from each such period any
delays which are solely attributable to changes (other than corrections of
Company mistakes with respect to information previously provided by the
Investors) required by the Investors in the Registration Statement with respect
to information relating to the Investors, including, without limitation, changes
to the plan of distribution and PROVIDED, FURTHER, that the aggregate amount
payable to any Investor under this Section 2(c) shall not exceed ten percent
(10%) of such Investor's Aggregate Share Price. (For example, if the
Registration Statement is not effective by the Registration Deadline, the
Company would pay $20,000 for each $1,000,000 of Aggregate Share Price and the
Company would pay an additional $20,000 for each $1,000,000 of Aggregate Share
Price thereafter for each additional thirty (30) days the Registration Statement
is not effective (up to a maximum of $100,000 for each $1,000,000 Aggregate
Share Price)). Such amounts shall be paid in cash or, at each Investor's option,
may be convertible into Common Stock at the "CONVERSION PRICE" (as defined in
the Certificate of Designations). Any shares of Common Stock issued upon
conversion of such amounts shall be Registrable Securities. If the Investor
desires to convert the amounts due hereunder into Registrable Securities it
shall so notify the Company in writing within two (2) business days of the date
on which such amounts are first payable in cash and such amounts shall be so
convertible (pursuant to the mechanics set forth under Article IV of the
Certificate of Designations), beginning on the last day upon which the cash
amount would otherwise be due in accordance with the following sentence.
Payments of cash pursuant hereto shall be made within five (5) days after the
end of each period that gives rise to such obligation.
d. [Intentionally Omitted]
e. ELIGIBILITY FOR FORM S-3. The Company represents and warrants that
it meets the requirements for the use of Form S-3 for registration of the sale
by the Initial Investors and any other Investor of the Registrable Securities
and the Company shall file all reports required to be filed by the Company with
the SEC in a timely manner so as to maintain such eligibility for the use of
Form S-3.
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3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
a. The Company shall prepare promptly and file with the SEC
the Registration Statement required by Section 2(a), and cause such Registration
Statement relating to Registrable Securities to become effective as soon as
practicable after such filing, but in no event later than the Registration
Deadline, and keep the Registration Statement effective pursuant to Rule 415 at
all times until such date as is the earlier of (i) the date on which all of the
Registrable Securities have been sold and (ii) the date on which all Registrable
Securities (in the reasonable opinion of counsel to the Initial Investors) may
be immediately sold by the Investors to the public without registration
(including, in accordance with Rule 144(k) promulgated under the Securities Act)
(the "Registration Period"), which Registration Statement (including any
amendments or supplements thereto and prospectuses contained therein and all
documents incorporated by reference therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein not misleading.
b. The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to a
Registration Statement and the prospectus used in connection with the
Registration Statement as may be necessary to keep the Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the Securities Act with respect to the disposition
of all Registrable Securities of the Company covered by the Registration
Statement until such time as all of such Registrable Securities have been
disposed of in accordance with the intended methods of disposition by the seller
or sellers thereof as set forth in the Registration Statement. In the event an
Investor notifies the Company that the number of shares available under a
Registration Statement filed pursuant to this Agreement was, for any three (3)
consecutive trading days (the date the Investor notifies the Company of such
occurrence being the "REGISTRATION TRIGGER DATE"), is insufficient to cover a
number of shares equal to the applicable Registration Percentage (as defined
below) multiplied by all of the Registrable Securities issued or issuable upon
conversion of the Preferred Stock held by such Investor (without giving effect
to any limitations on conversion contained in Article IV.C of the Certificate of
Designations), the Company shall amend the Registration Statement, or file a new
Registration Statement (on the short form available therefor, if applicable), or
both, so as to cover one hundred fifty percent (150%) of the Registrable
Securities issued or issuable to such Investor (without giving effect to any
limitations on conversion contained in Article IV.C of the Certificate of
Designations), in each case, as soon as practicable, but in any event within
fifteen (15) days after the Registration Trigger Date (based on the market price
of the Common Stock and other relevant factors on which the Company reasonably
elects to rely). The Company shall cause such amendment and/or new Registration
Statement to become effective as soon as practicable following the filing
thereof. In the event the Company fails to obtain the effectiveness of any such
Registration Statement within ninety (90) days after a Registration Trigger
Date, each Investor shall thereafter have the option, exercisable in whole or in
part at any time and from time to time by delivery of a written notice to the
Company (a "REDEMPTION NOTICE"), to require the Company to purchase for cash, at
an amount per share equal to the Redemption Amount (as defined in Article VIII.C
of the Certificate of Designations), a portion of the Investor's Preferred Stock
such that the total number of shares of Common Stock issuable to such Investor
upon conversion of its Preferred Stock (without giving effect to any limitations
on conversion contained in Article IV.C of the Certificate of Designations) does
not exceed 135% of the Registrable Securities issued or issuable upon conversion
of such Investor's Preferred Stock (without giving effect to any limitations on
conversion contained in Article IV.C of the Certificate of Designations). If the
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Corporation fails to redeem any of such shares within five (5) business days
after its receipt of a Redemption Notice, then such Investor shall be entitled
to the remedies provided in Article VIII.D of the Certificate of Designations.
As used herein, "REGISTRATION PERCENTAGE" means one hundred percent (100%) for
the period ending on the 150th day following the Closing Date and means one
hundred and thirty-five percent (135%) thereafter.
c. The Company shall furnish to each Investor whose
Registrable Securities are included in the Registration Statement and its legal
counsel (i) promptly after the same is prepared and publicly distributed, filed
with the SEC, or received by the Company, one copy of the Registration Statement
and any amendment thereto, each preliminary prospectus and prospectus and each
amendment or supplement thereto, and, in the case of the Registration Statement
referred to in Section 2(a), each letter written by or on behalf of the Company
to the SEC or the staff of the SEC, and each item of correspondence from the SEC
or the staff of the SEC, in each case relating to such Registration Statement
(other than any portion, if any, thereof which contains information for which
the Company has sought confidential treatment), and (ii) such number of copies
of a prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor.
d. The Company shall use reasonable efforts to (i) register
and qualify the Registrable Securities covered by the Registration Statement
under such other securities or "blue sky" laws of such jurisdictions in the
United States as each Investor who holds Registrable Securities being offered
reasonably requests, (ii) prepare and file in those jurisdictions such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; PROVIDED, HOWEVER, that the Company shall not be
required in connection therewith or as a condition thereto to (a) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(d), (b) subject itself to general taxation in any such
jurisdiction, (c) file a general consent to service of process in any such
jurisdiction, (d) provide any undertakings that cause the Company undue expense
or burden, or (e) make any change in its charter or bylaws, which in each case
the Board of Directors of the Company determines to be contrary to the best
interests of the Company and its stockholders.
e. In the event the Investors who hold a majority in interest
of the Registrable Securities being offered in an offering select underwriters
for the offering, the Company shall enter into and perform its obligations under
an underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering.
f. As promptly as practicable after becoming aware of such
event, the Company shall notify each Investor of the happening of any event, of
which the Company has knowledge, as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request.
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g. The Company shall use its best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement, and, if such an order is issued, to obtain the
withdrawal of such order at the earliest practicable moment and to notify each
Investor who holds Registrable Securities being sold (or, in the event of an
underwritten offering, the managing underwriters) of the issuance of such order
and the resolution thereof.
h. The Company shall permit a single firm of counsel
designated by the Initial Investors to review the Registration Statement and all
amendments and supplements thereto a reasonable period of time (and in no event
less than three (3) business days) prior to their filing with the SEC, and not
file any document in a form to which such counsel reasonably objects. In the
event such counsel fails to convey to the Company all of its comments (or that
it has no comments) to such Registration Statement prior to the scheduled filing
date of such Registration Statement (which date shall comply with the
requirements set forth in this Section 3(h), the sixty (60) and the one hundred
and twenty (120) day periods referred to in Section 2(a) and 2(c) shall be
extended by such number of business days after such scheduled filing date that
such counsel so conveys such comments (or that it has no comments).
i. The Company shall make generally available to its security
holders as soon as practical, but not later than ninety (90) days after the
close of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 under the Securities Act) covering a
twelve-month period beginning not later than the first day of the Company's
fiscal quarter next following the effective date of the Registration Statement.
j. At the request of any Investor, the Company shall furnish,
on the date of effectiveness of the Registration Statement (i) an opinion, dated
as of such date, from counsel representing the Company addressed to the
Investors and in form, scope and substance as is customarily given in an
underwritten public offering and (ii) in the case of an underwriting, a letter,
dated such date, from the Company's independent certified public accountants in
form and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and the Investors.
k. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to the
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Investors, and (iv) one firm of attorneys
retained by all such underwriters (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "RECORDS"), as shall be reasonably deemed
necessary by each Inspector to enable each Inspector to exercise its due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request
for purposes of such due diligence; PROVIDED, HOWEVER, that each Inspector shall
hold in confidence and shall not make any disclosure (except to an Investor) of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (b) the release of such
Records is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction, or (c) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into confidentiality
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agreements (in form and substance satisfactory to the Company) with the Company
with respect thereto, substantially in the form of this Section 3(k). Each
Investor agrees that it shall, upon learning that disclosure of such Records is
sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt notice to the Company and allow the Company, at
its expense, to undertake appropriate action to prevent disclosure of, or to
obtain a protective order for, the Records deemed confidential. Nothing herein
shall be deemed to limit the Investor's ability to sell Registrable Securities
in a manner which is otherwise consistent with applicable laws and regulations.
l. The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement, or (v) such Investor
consents to the form and content of any such disclosure. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor prior
to making such disclosure, and allow the Investor, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
m. The Company shall use its best efforts to promptly either
(i) cause all the Registrable Securities covered by the Registration Statement
to be listed on the NYSE or the AMEX or another national securities exchange and
on each additional national securities exchange on which securities of the same
class or series issued by the Company are then listed, if any, if the listing of
such Registrable Securities is then permitted under the rules of such exchange,
or (ii) secure the designation and quotation, of all the Registrable Securities
covered by the Registration Statement on the NASDAQ Small Cap Market or the NNM
and, without limiting the generality of the foregoing, to arrange for or
maintain at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities.
n. The Company shall provide a transfer agent and registrar,
which may be a single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.
o. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be offered pursuant to the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
managing underwriter or underwriters, if any, or the Investors may reasonably
request and registered in such names as the managing underwriter or
underwriters, if any, or the Investors may request, and, within three (3)
business days after a Registration Statement which includes Registrable
Securities is ordered effective by the SEC, the Company shall cause legal
counsel selected by the Company to deliver, to the transfer agent for the
Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) an opinion of such
counsel in the form attached hereto as EXHIBIT 1.
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p. At the request of any Investor, the Company shall prepare
and file with the SEC such amendments (including post-effective amendments) and
supplements to a Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary in order to change the plan
of distribution set forth in such Registration Statement.
4. OBLIGATIONS OF THE INVESTORS.
In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:
a. It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least ten (10)
business days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Investor in writing of the information
the Company requires from each such Investor and each such Investor shall
provide such information no later than five (5) business days prior to such
anticipated filing date.
b. Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement.
c. Each Investor whose Registrable Securities are included in
a Registration Statement understands that the Securities Act may require
delivery of a prospectus relating thereto in connection with any sale thereof
pursuant to such Registration Statement and each such Investor shall deliver a
prospectus in connection with any such sale.
d. Each Investor agrees to notify the Company promptly, but in
any event within 72 hours after the date on which all Registrable Securities and
Preferred Shares owned by such Investor have been sold by such Investor, if such
date is prior to the expiration of the Registration Period, so that the Company
may comply with its obligation to terminate the Registration Statement in
accordance with Item 512 of Regulation S-K or Regulation S-B, as the case may
be.
e. In the event Investors holding a majority in interest of
the Registrable Securities being offered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement.
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f. Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(f)
or 3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
g. No Investor may participate in any offering of Registrable
Securities hereunder unless such Investor (i) agrees to sell such Investor's
Registrable Securities on the basis provided in any underwriting arrangements in
usual and customary form entered into by the Company, (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and any expenses in excess of those
payable by the Company pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
All expenses incurred by the Company in connection with registrations,
filings or qualifications pursuant to Sections 2 and 3, including, without
limitation, all registration, listing and qualifications fees, printers and
accounting fees, the fees and disbursements of counsel for the Company and the
fees and disbursements contemplated by Section 3(j) hereof shall be borne by the
Company. The Company shall also reimburse the Investors for the reasonable fees
and disbursements of one counsel selected by the Investors pursuant to Section
2(b) hereof. The Investors shall be responsible for any underwriting discounts
and commissions attributable to the Registrable Securities to be sold by them.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify,
hold harmless and defend (i) each Investor who holds such Registrable
Securities, and (ii) the directors, officers, partners, members, employees,
agents and each person who controls any Investor within the meaning of Section
15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), if any, (each, an "INDEMNIFIED PERSON"),
against any joint or several losses, claims, damages, liabilities or expenses
(collectively, together with actions, proceedings or inquiries by any regulatory
or self-regulatory organization, whether commenced or threatened, in respect
thereof, "CLAIMS") to which any of them may become subject insofar as such
Claims arise out of or are based upon: (i) any untrue statement or alleged
untrue statement of a material fact in a Registration Statement or the omission
or alleged omission to state therein a material fact required to be stated or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements
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made therein, in light of the circumstances under which the statements therein
were made, not misleading, or (iii) any violation or alleged violation by the
Company of the Securities Act, the Exchange Act, any other law, including,
without limitation, any state securities law, or any rule or regulation
thereunder relating to the offer or sale of the Registrable Securities (the
matters in the foregoing clauses (i) through (iii) being, collectively,
"VIOLATIONS"). Subject to the restrictions set forth in Section 6(c) with
respect to the number of legal counsel, the Company shall reimburse the
Investors and each such underwriter or controlling person, promptly as such
expenses are incurred and are due and payable, for any reasonable legal fees or
other reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by such Indemnified Person expressly for use in the Registration
Statement or any such amendment thereof or supplement thereto; (ii) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Company, which consent shall not be
unreasonably withheld; and (iii) with respect to any preliminary prospectus,
shall not inure to the benefit of any Indemnified Person if the untrue statement
or omission of material fact contained in the preliminary prospectus was
corrected on a timely basis in the prospectus, as then amended or supplemented,
if such corrected prospectus was timely made available by the Company pursuant
to Section 3(c) hereof, and the Indemnified Person was promptly advised in
writing not to use the incorrect prospectus prior to the use giving rise to a
Violation and such Indemnified Person, notwithstanding such advice, used it.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall survive
the transfer of the Registrable Securities by the Investors pursuant to Section
9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees severally and not jointly
to indemnify, hold harmless and defend, to the same extent and in the same
manner set forth in Section 6(a), the Company, each of its directors, each of
its officers who signs the Registration Statement, its employees, agents and
each person, if any, who controls the Company within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act, and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "INDEMNIFIED PARTY"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Investor expressly for use in
connection with such Registration Statement; and subject to Section 6(c) such
Investor will reimburse any legal or other expenses (promptly as such expenses
are incurred and are due and payable) reasonably incurred by them in connection
with investigating or defending any such Claim; PROVIDED, HOWEVER, that the
indemnity agreement contained in this Section 6(b) shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of such Investor, which consent shall not be unreasonably
withheld; PROVIDED, FURTHER, HOWEVER, that the Investor shall be liable under
this Agreement (including this Section 6(b) and Section 7) for only that amount
as does not exceed the net proceeds actually received by such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable
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Securities by the Investors pursuant to Section 9. Notwithstanding anything to
the contrary contained herein, the indemnification agreement contained in this
Section 6(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented, and the Indemnified Party
failed to utilize such corrected prospectus.
c. Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; PROVIDED, HOWEVER, that such indemnifying party shall not be
entitled to assume such defense and an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential conflicts of interest between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding or the actual or potential defendants in, or targets
of, any such action include both the Indemnified Person or the Indemnified Party
and the indemnifying party and any such Indemnified Person or Indemnified Party
reasonably determines that there may be legal defenses available to such
Indemnified Person or Indemnified Party which are different from or in addition
to those available to such indemnifying party. The indemnifying party shall pay
for only one separate legal counsel for the Indemnified Persons or the
Indemnified Parties, as applicable, and such legal counsel shall be selected by
Investors holding a majority-in-interest of the Registrable Securities included
in the Registration Statement to which the Claim relates (with the approval of
the Initial Investors if it holds Registrable Securities included in such
Registration Statement), if the Investors are entitled to indemnification
hereunder, or by the Company, if the Company is entitled to indemnification
hereunder, as applicable. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is actually 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.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; PROVIDED, HOWEVER, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
such fraudulent misrepresentation, and (iii) contribution
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(together with any indemnification or other obligations under this Agreement) by
any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.
8. REPORTS UNDER THE EXCHANGE ACT.
With a view to making available to the Investors the benefits of Rule
144 promulgated under the Securities Act or any other similar rule or regulation
of the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("RULE 144"), the Company agrees to:
a. file with the SEC in a timely manner and make and keep
available all reports and other documents required of the Company under the
Securities Act and the Exchange Act so long as the Company remains subject to
such requirements (it being understood that nothing herein shall limit the
Company's obligations under Section 4(c) of the Securities Purchase Agreement)
and the filing and availability of such reports and other documents is required
for the applicable provisions of Rule 144; and
b. furnish to each Investor so long as such Investor owns
shares of Preferred Stock or Registrable Securities, promptly upon request, (i)
a written statement by the Company that it has complied with the reporting
requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy
of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably requested to permit the Investors to sell such securities
pursuant to Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights of the Investors hereunder, including the right to have the
Company register Registrable Securities pursuant to this Agreement, shall be
automatically assignable by each Investor to any transferee of all or any
portion of the shares of Preferred Stock or the Registrable Securities if: (i)
the Investor agrees in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned,
(iii) following such transfer or assignment, the further disposition of such
securities by the transferee or assignee is restricted under the Securities Act
and applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with written consent of the Company, the
Initial Investors (to the extent the Initial Investors still own shares of
Preferred Stock or Registrable Securities) and Investors who hold a majority
interest of the Registrable Securities. Any amendment or waiver effected in
accordance with this Section 10 shall be binding upon each Investor and the
Company.
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11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
If to the Company:
Palomar Medical Technologies, Inc.
66 Cherry Hill Drive
Beverly, Massachusetts 01915
Telecopy: (508) 921-5801
Attention: Paul Weiner, Director of Finance
with a copy to each of the Company's General Counsel at the
same address and to:
Foley, Hoag & Eliot, LLP
One Post Office Square
Boston, Massachusetts 02109
Telecopy: (617) 832-7000
Attention: David Broadwin
If to RGC International Investors, LDC:
RGC International Investors, LDC
c/o Rose Glen Capital Management, L.P.
440 E. Swedesford Road
Suite 2025
Wayne, PA 19087
Telecopy: (610) 971-2212
Attention: Andrew Daley
and if to any other Investor, at such address as such Investor shall have
provided in writing to the Company, or at such other address as each such party
furnishes by notice given in accordance with this Section 11(b).
13
<PAGE>
c. 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, shall not operate as a waiver thereof.
d. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in the State of Delaware. The Company irrevocably consents
to the jurisdiction of the United States federal courts located in the County of
Kent in the State of Delaware in any suit or proceeding based on or arising
under this Agreement and irrevocably agrees that all claims in respect of such
suit or proceeding may be determined in such courts. The Company irrevocably
waives the defense of an inconvenient forum to the maintenance of such suit or
proceeding. The Company further agrees that service of process upon the Company,
mailed by first class mail shall be deemed in every respect effective service of
process upon the Company in any such suit or proceeding. Nothing herein shall
affect the Investors' right to serve process in any other manner permitted by
law. The Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
e. This Agreement and the Securities Purchase Agreement
(including all schedules and exhibits thereto) constitute the entire agreement
among the parties hereto with respect to the subject matter hereof and thereof.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein and therein. This Agreement and the
Securities Purchase Agreement supersede all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents and other determinations to be made by the
Investors or the Initial Investors pursuant to this Agreement shall be made by
the Investors or the Initial Investors holding a majority of the Registrable
Securities (determined as if all shares of Preferred Stock then outstanding had
been converted into or exercised for Registrable Securities) held by all
Investors or Initial Investors, as the case may be.
k. The initial number of Registrable Securities included on
any Registration Statement and each increase to the number of Registrable
Securities included thereon shall be
14
<PAGE>
allocated pro rata among the Investors based on the number of Registrable
Securities held by each Investor at the time of such establishment or increase,
as the case may be. In the event an Investor shall sell or otherwise transfer
any of such holder's Registrable Securities, each transferee shall be allocated
a pro rata portion of the number of Registrable Securities included on a
Registration Statement for such transferor. Any shares of Common Stock included
on a Registration Statement and which remain allocated to any person or entity
which does not hold any Registrable Securities shall be allocated to the
remaining Investors, pro rata based on the number of shares of Registrable
Securities then held by such Investors.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
-------------------------------
Name:
-----------------------------
Its:
------------------------------
Initial Investors:
RGC International Investors, LDC
By:
-------------------------------
Name:
-----------------------------
Its:
------------------------------
<PAGE>
EXHIBIT 1
TO
REGISTRATION
RIGHTS
AGREEMENT
[Date]
VIA FACSILIME
Herbert Lemmer, Esq.
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 Wall Street
New York, NY 10005
Facsimile (718) 331-1852
RE: PALOMAR MEDICAL TECHNOLOGIES, INC.
Dear Mr. Lemmer:
We are counsel to PALOMAR MEDICAL TECHNOLOGIES, INC., a corporation
organized under the laws of the State of Delaware (the "COMPANY"), and we
understand that [Name of Investor] (the "HOLDER") has purchased from the Company
shares of the Company's Series H Convertible Preferred Stock (the "PREFERRED
STOCK") that are convertible into shares of the Company's Common Stock, par
value $.01 per share (the "COMMON STOCK"). The Preferred Stock were purchased by
the Holder pursuant to a Securities Purchase Agreement, dated as of March 27,
1997, by and among the Company and the signatories thereto (the "AGREEMENT").
Pursuant to a Registration Rights Agreement, dated as of March 27, 1997, by and
among the Company and the signatories thereto (the "REGISTRATION RIGHTS
AGREEMENT"), the Company agreed with the Holder, among other things, to register
the Registrable Securities (as that term is defined in the Registration Rights
Agreement) under the Securities Act of 1933, as amended (the "SECURITIES ACT"),
upon the terms provided in the Registration Rights Agreement. In connection with
the Company's obligations under the Registration Rights Agreement, on ________,
1997, the Company filed a Registration Statement on Form S-___ (File No. 333-
_____________) (the "REGISTRATION STATEMENT") with the Securities and Exchange
Commission (the "SEC") relating to the Registrable Securities, which names the
Holder as a selling stockholder thereunder.
[Customary introductory and scope of examination language to be
inserted]
Based on the foregoing, we are of the opinion that the Registrable
Securities have been registered under the Securities Act.
[Other customary language to be included.]
Very truly yours,
cc: [Name of Investor]
<PAGE>
EXHIBIT C
TO
SECURITIES
PURCHASE
AGREEMENT
FOLEY, HOAG & ELIOT LLP
ONE POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109-2170
TELEPHONE 617-832-1000
FACSIMILE 617-832-7000
http:/www.fhe.com
March 31, 1997
The Subscribers listed on
EXHIBIT A attached hereto
Re: Palomar Medical Technologies, Inc.
Ladies and Gentlemen:
We have acted as counsel to Palomar Medical Technologies, Inc., a
Delaware corporation (the "Company"), in connection with the sale of the
Company's Series H Convertible Preferred Stock, par value $.01 per share (the
"Preferred Shares"), convertible into shares of the Company's Common Stock, par
value $.01 per share (the "Common Stock"), pursuant to the terms and conditions
of that certain Securities Purchase Agreement, dated as of March 28, 1997 (the
"Purchase Agreement"), by and between the Company and each of the Subscribers
listed on EXHIBIT A attached hereto (the "Subscribers"). Capitalized terms- used
herein and not otherwise defined herein shall have the respective meanings
assigned to such terms in the Purchase Agreement.
In connection with our rendering of the opinions expressed below, we
reviewed (i) the Certificate of Incorporation (the "Charter") and By-Laws (the
"By-Laws") of the Company, each as amended to date; (ii) certificates issued by
the Secretary of State of the State of Delaware dated March 27, 1997, with
respect to the legal existence and good standing of the Company and Palomar
Medical Products, Inc., Nexar Technologies, Inc., Cosmetic Technology
International, Inc., Spectrum Medical Technologies, Inc., Palomar Electronics
Corporation and Dynaco Corp. in Delaware, a certificate issued by the Secretary
of State of the State of Arizona dated March 27, 1997, with respect to the legal
existence and good standing of Tissue Technologies, Inc. in Arizona and a
certificate issued by the Secretary of State of the State of California dated
March 27, 1997, with respect to the legal existence and good standing of Comtel
Electronics in California (such entities, other than the Company, hereinafter
referred to as the "Subsidiaries"); (iii) a certificate issued by the Secretary
of the Commonwealth of The Commonwealth of Massachusetts as to the qualification
of the Company to conduct business as a foreign corporation; (iv) the relevant
records of meetings of the directors and stockholders of the Company and
consents of the directors and stockholders filed therewith; (v) the Purchase
Agreement, the Certificate of Designation and the Registration Rights Agreement;
(vi) the other documents delivered at the Closing; (vii) a certificate of the
Company with respect to certain factual matters; and (viii) such
<PAGE>
other documents and certificates as we have deemed necessary to enable us to
render the opinions expressed below.
In rendering the opinions expressed in paragraph 1 below with respect
to the legal existence and good standing of the Company in Delaware, and with
respect to qualification and good standing of the Company as a foreign
corporation in The Commonwealth of Massachusetts, we have relied solely upon the
certificates referred to in clauses (ii) and (iii) of the preceding paragraph,
and such opinions are given as of the date of such certificates. We express no
opinion as to the tax good standing of the Company.
With respect to the opinion expressed in paragraph 7 below, we note
that we did not observe or supervise the activities of the Company or its
representatives in connection with the offering and sale of the Preferred
Shares. In rendering such, opinion we have assumed without investigation that in
connection with such offering and sale there has been no general solicitation or
general advertising by the Company or its representatives.
With respect to the opinion expressed in paragraph 8 below, the term
Material Agreement, Indenture or Instrument shall mean those documents proposed
by the Company to be filed as exhibits to its Annual Report on Form 10-KSB (and
any other documents of which we have actual knowledge that in our opinion are
required to be so filed by the Company) in satisfaction of the requirements of
Item 13 of Part III of such Form, which previously have not been filed by the
Company as an SEC Document or an exhibit to an SEC Document ("Material
Agreement, Indenture or Instrument"). In rendering such opinion we have relied
completely upon the Company's representation that the documents listed on
EXHIBIT JR attached hereto comprise all such documents.
In rendering the opinions expressed herein, we have also examined and
have relied completely upon all of the representations and warranties as to
matters of fact contained in the Purchase Agreement and contained in the related
instruments and other documents delivered by the Company to you in connection
with the issuance and sale of the Preferred Shares, and we have assumed the
completeness and accuracy of all factual matters described in such
representations and warranties.
We have not, except as specifically noted above, made any independent
review or INVESTIGATION OF FACTS RELATING TO THE COMPANY, INCLUDING, without
limiting the generality of the foregoing, any investigation as to the existence
of any actions, suits or proceedings pending or threatened against the Company
or agreements, judgments, injunctions, orders or decrees binding upon the
Company or which might result in the imposition of any lien or other encumbrance
on any assets of the Company.
<PAGE>
We have assumed the authenticity and completeness of all documents
furnished to us as originals, the genuineness of all signatures (other than on
behalf of the Company), the legal capacity of natural persons, the conformity to
the originals of all documents furnished to us as copies, and the accuracy and
completeness of all corporate records made available to us by the Company.
When an opinion set forth below is given to our actual knowledge, the
knowledge is limited to the conscious awareness of facts or other information of
the individual lawyers in our firm who were actively involved in representation
of the Company and without any special or additional investigation undertaken
for the purposes of this opinion.
You have not asked us to pass upon your power and authority to enter
into the Purchase Agreement or the Registration Rights Agreement. Accordingly,
for the purposes of this opinion, we have assumed that each of you has all
requisite power and authority to enter into the Purchase Agreement and the
Registration Rights Agreement and to effect all of the transactions thereunder,
and that the Purchase Agreement, the Registration Rights Agreement and each
other agreement or instrument we have reviewed constitutes the legal, valid and
binding obligation of all parties thereto other than the Company.
We have made such examination of Massachusetts law, Federal law and the
corporation law of the State of Delaware as we deem necessary for the purposes
of this opinion. We do not purport to pass herein on the laws of any state or
jurisdiction other than the federal law of the United States of America, the law
of The Commonwealth of Massachusetts and the Delaware General Corporation Law.
We note that the Purchase Agreement is governed by the law of the State
of Delaware. We have assumed, with your permission, that the substantive law of
the State of Delaware, other than the corporation law of the State of Delaware,
is identical in all respects material to our opinions to the substantive law of
The Commonwealth of Massachusetts.
THE OPINIONS herein expressed are qualified to the extent that (i) the
validity or enforceability of any provisions of any agreement or instrument may
be subject to or affected by any bankruptcy, reorganization, insolvency,
moratorium, fraudulent transfer, usury or similar law of general application
from time to time in effect and relating to or affecting the rights or remedies
of creditors generally, (n) the remedy of specific performance or any other
equitable remedy may be unavailable in any jurisdiction or may be withheld as a
matter of judicial discretion, and (iii) the enforcement of any rights or
remedies is or may be subject to an implied duty on the part of the party
seeking to enforce such rights to take action and make determinations on a
reasonable BASIS AND IN GOOD FAITH. In ADDITION, WE EXPRESS NO OPINION herein as
to: prospective waivers of rights to notice or a hearing or OF OTHER RIGHTS
GRANTED BY CONSTITUTION or statute; powers of
<PAGE>
attorney; provisions purporting to relieve parties of the consequences of their
own negligence or misconduct; provisions purporting to establish evidentiary
standards; or provisions to the effect that rights or remedies are not
exclusive, that every right or remedy is cumulative and may be exercised in
addition to any other right or remedy, or that failure to exercise or delay in
exercising rights and remedies will not operate as a waiver of any such right or
remedy.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing, in good
standing under the laws of the State of Delaware and has all requisite
corporate power and authority to conduct its business as currently
conducted. Each of the Subsidiaries is a corporation duly organized,
validly existing, in good standing under the laws of its state of
incorporation and has all requisite corporate power and authority to
conduct its business as currently conducted. The Company is duly
qualified as a foreign corporation and is in good standing in The
Commonwealth of Massachusetts, which is the only jurisdiction in which
failure to so qualify would have a Material Adverse Effect. The Company
has power and authority to enter into and perform each of the Purchase
Agreement and the Registration Rights Agreement and to issue the
Preferred Shares and to issue the Conversion Shares upon conversion of
the Preferred Shares.
2. The Purchase Agreement, the Registration Rights Agreement and the
Certificate of Designation have been duly and validly executed and
delivered by the Company and constitute the legal, valid and binding
obligations of the Company enforceable against the Company in
accordance with their respective terms. You have not requested and we
do not express any opinion as to the validity or enforceability of the
indemnification and contribution provisions of the Registration Rights
Agreement.
3. The authorized capital stock of the Company consists of (a) 100,000,000
SHARES OF COMMON STOCK AND (B) 5,000,000 shares of Preferred Stock, par
value $.01 per share.
4. The Certificate of Designation has been filed with the Secretary of
State of the State of Delaware, and the holders of the Preferred Shares
are entitled to the rights and privileges set forth therein subject to
the exceptions set forth in paragraphs 8 and 9.
<PAGE>
5. The Preferred Shares and the Conversion Shares are duly authorized, the
Preferred Shares are validly issued, fully paid and non-assessable and
the Conversion Shares, when issued in accordance with the Certificate
of Designation, will be validly issued, fully paid and non-assessable.
The Company has reserved for issuance upon conversion of the Conversion
Shares 4,500,000 shares of Common Stock, as well as such additional
shares of Common Stock as may be required to be issued upon conversion
as a result of the antidilution provisions of the Preferred Shares.
6. To our knowledge, there are no preemptive rights to acquire the
Preferred Shares or the Conversion Shares or any other securities of
the Company upon issuance of the Preferred Shares or the Conversion
Shares. The Common Stock was authorized for trading on the NASDAQ Small
Cap Market as of the close of business on March 28, 1997. No suspension
of trading in the Common Stock on the NASDAQ Small Cap Market is in
effect or threatened.
7. Assuming the accuracy of the respective representations and warranties
of the Company and the Subscribers set forth in the Purchase Agreement,
the offer, issuance, sale and delivery of the Preferred Shares and the
Conversion Shares in accordance with the terms of the Purchase
Agreement and the Certificate of Designation constitute exempt
transactions or exempt securities, as the case may be, under the
Securities Act of 1933, as amended.
8. The execution, delivery and performance of the Purchase Agreement and
Registration Rights Agreement by the Company and the consummation by
the Company of the transactions contemplated by the Purchase Agreement
and the Registration Rights Agreement, including, without limitation,
the issuance of the Preferred Shares and the issuance of the Conversion
Shares in accordance with the terms of the Certificate of Designation,
do not and will not result in a violation of the Company's Certificate
of Incorporation or By-Laws or conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument
that is filed as an exhibit to the SEC Documents or any other Material
Agreement, Indenture or Instrument except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations
as would not, individually or in the aggregate, have a Material Adverse
Effect or a material adverse effect
<PAGE>
on the Company's ability to perform its obligations under the Purchase
Agreement or the Registration Rights Agreement or the Subscribers'
rights as a holder of Preferred Shares.
9. The execution, delivery and performance of the Purchase Agreement and
the Registration Rights Agreement by the Company and the consummation
by the Company of the transactions contemplated by the Purchase
Agreement and the Registration Rights Agreement, including, without
limitation, the issuance of the Preferred Shares and the issuance of
the Conversion Shares in accordance with the terms of the Certificate
of Designation, (i) do not and will not result in a violation of any
federal, Delaware General Corporation or Massachusetts law, rule, or
regulation, or, to our knowledge, any order, judgment or decree,
applicable to the Company, or by which any property or asset of the
Company is bound or affected, and (ii) will not require the Company to
obtain any approval, consent, authorization, waiver, exemption or order
of, or make any filing or registration with, any court or governmental
or regulatory agency, self regulatory organization or stock market or
exchange or, to our knowledge, any third party, in order for it to
execute, deliver or perform any of its obligations under the Purchase
Agreement or the Registration Rights Agreement or to issue and deliver
the Preferred Shares or to issue and deliver the Conversion Shares in
accordance with the terms thereof or for you to exercise your rights
and remedies under any of the Purchase Agreement or the Registration
Rights Agreement (other than any SEC, NASD, NASDAQ or state securities
filings which may be required to be made by the Company subsequent to
the consummation of the transactions contemplated by the Purchase
Agreement, and any registration statement which may be filed pursuant
to the Registration Rights Agreement). We express no opinion under this
paragraph 9 with respect to any usury or similar laws or any provision
of the securities or "blue sky" laws of any state or other jurisdiction
other than, with respect to its securities or "blue sky" laws, The
Commonwealth of Massachusetts.
10. Except as disclosed in the Purchase Agreement or the SEC Documents, to
our knowledge, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body pending or
threatened against or affecting the Company or any of its subsidiaries,
wherein an unfavorable decision, ruling or finding would have a
Material Adverse Effect.
<PAGE>
11. To our knowledge, the Company currently meets the registrant
eligibility requirements to register the resale of the Common Shares on
form S-3 under the Securities Act.
These opinions are limited to the matters expressly stated herein and
are rendered solely for your benefit and may not be quoted or relied upon for
any other purpose or by any other person.
Very truly yours,
FOLEY, HOAG & ELIOT LLP
By: /s/ David A. Broadwin
-----------------------
A Partner
cc: Nancy Lau, American Stock Transfer
& Trust Company
<PAGE>
EXHIBIT A
To
Exhibit C
RGC International Investors, LDC
<PAGE>
EXHIBIT B
To
Exhibit C
1. Stock Purchase Agreement dated March 19, 1996, by and between Dynaco
Acquisition Corp., Comtel Electronics, Inc., Mikel C. Green, Peter
Rogal and Palomar Electronics Corp.
2. Agreement for Purchase of Stock dated July 12, 1996, by and between the
Company, Eleanor Roberts Weisman and Wallace Roberts.
3. Form of Stock Option Agreement under the 1996 Stock Option Plan.
4. Securities Purchase Agreement between Palomar Electronics Corporation
and Clearwater Fund IV, LLC, dated December 31, 1996.
5. Securities Purchase Agreement between Palomar Electronics Corporation,
the Company and The Travelers Insurance Company, dated as of December
18, 1996.
6. Security Purchase Agreement between Palomar Electronics Corporation and
GFL Advantage Fund Limited dated December 31, 1996.
7. Option Agreement between the Company and GFL Advantage Fund Limited
dated December 31,1996.
8. Common Stock Purchase Warrant dated December 31, 1996.
9. Form of Net Warrant to Purchase Common Stock
10. Subscription Agreement between the Company and Finmanagement, Inc.
dated December 27, 1996.
11. Subscription Agreement dated as of April 12, 1996, between the Company
and GFL Advantage Fund Limited.
12. Registration Rights Agreement dated as April 17, 1996 by and between
the Company and GFL Advantage Fund Limited.
13. Warrant dated as of April 16, 1996.
14. Form of Warrant to Purchase Common Stock dated February 1, 1996.
15. Form of Offshore Stock Subscription Agreement dated February 1, 1996.
16. Form of Subscription Agreement dated as of March 10, 1997.
<PAGE>
17. Form of Registration Rights Agreement dated as of March 10, 1997.
18. Form of 5% Convertible Debenture due March 10, 2002.
19. Subscription Agreement between the Company and Soginvest Bank dated as
of March 13, 1997.
20. 6% Convertible Debenture due March 13, 2002.
21. Asset Purchase and Settlement Agreement by and among the Company, Nexar
Technologies, Inc., Technovation Computer Labs, Inc. and Barbar I.
Hamirani, dated February 28, 1997.
22. List of exhibits omitted from the Asset Purchase and Settlement
Agreement.
23. (The Company hereby undertakes and agrees to furnish copies of the
exhibits and schedules set forth in exhibit 10(dddd) above to the
Commission upon its request.)
24. Employment Agreement dated as of January 1, 1997, between the Company
and Steven Georgiev.
25. Employment Agreement dated as of January 1, 1997, between the Company
and Michael H. Smotrich.
26. Employment Agreement dated as of January 1, 1997, between the Company
and Joseph P. Caruso.
27. Employment Agreement dated as of January 1, 1997, between the Company
and Anthony Fiorillo.
28. Securities Purchase Agreement between the Company and RGC International
Investors, LDC, dated March 27, 1997.
29. Registration Rights Agreement between the Company and RGC International
Investors, LDC, dated March 27, 1997.
30. Consent of Arthur Andersen LLP.
<PAGE>
EXHIBIT D
TO
SECURITIES
PURCHASE
AGREEMENT
March 31, 1997
VIA FACSILIME
Herbert Lemmer, Esq.
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 Wall Street
New York, NY 10005
Facsimile (718) 331-1852
RE: PALOMAR MEDICAL TECHNOLOGIES, INC.
Dear Mr. Lemmer:
Reference is made to that certain Securities Purchase Agreement, of even date
herewith, be and among Palomar Medical Technologies, Inc., a Delaware
corporation (the "Company") and the other signatories thereto (each, a "Holder")
pursuant to which the Company is issuing to the Holders 20,000 shares of its
Series H Preferred Stock, par value, $.01 per share (the "Preferred Shares").
The Preferred Shares are convertible into shares of the Company's common stock,
par value $.01 per share (the "Conversion Shares"). This letter shall serve as
our irrevocable authorization and direction to you to issue Conversion Shares to
Holder from time to time upon the direction of the Company. Certificates for the
Conversion Shares shall not bear any legend restricting their transfer and
should not be subject to any stop-transfer restriction; PROVIDED, HOWEVER that
if the Conversion Shares are not registered for resale under the Securities Act
of 1933, as amended, then the certificates for the Conversion Shares shall bear
the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS
SOLD PURSUANT TO RULE 144 UNDER THE ACT.
Please be advised that the Holder is relying upon this letter as an
inducement to enter into the Securities Purchase Agreement and, accordingly,
Holder is a third party beneficiary to these instructions. Moreover, the Company
cannot revoke or modify these instructions without the prior written consent of
Holder.
<PAGE>
Please execute this letter in the space indicated to acknowledge your
agreement to act in accordance with these instructions. Should you have any
questions concerning this matter, please contact me at (508)921-9300.
Very truly yours,
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Paul S. Weiner
-------------------------------
Name: Paul S. Weiner
Title: Director of Finance
Acknowledged:
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By:
Name:
Title:
Date:
Enclosure
cc: RGC International Investors, LDC
<PAGE>
SCHEDULE 3(C)
TO
SECURITIES
PURCHASE
AGREEMENT
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nasdaq Issue Symbol: PMTI Total C/S Outstanding 31,971,145 10,687 None None
---------- ------
Total Number
of Number of
Authorized Total Shares Number Number of Date
Shares/ Shares Reserved of Date of Shares Registration Late
Conversion Outstanding for Shares Board to be must be Registration
Specify Type of Plan/Reason for Shares Exercised Issuance Cancelled Approval Registered Effective Penalty
- -------------------------------- -------- ----------- ----------- --------- --------- ----------- ------------- ------------
1991 Stock Option Plan 350,000 248,100 101,900 0 8/30/91 0
& 9/1/92
1993 Stock Option Plan 500,000 175,000 325,000 0 4/23/93 0
1995 Stock Option Plan 1,000,000 29,400 970,600 0 8/3/94 0
1996 Stock Option Plan 2,500,000 0 2,500,000 0 6/7/96 0
-------- -------- ----------- ----- ---------
Total Stock Option Plans 4,350,000 452,500 3,897,500 0 0
1996 ESPP Plan 1,000,000 580 999,420 0 6/7/96 0
Employee 401(k) Plan 300,000 45,885 254,115 0 8/18/95 0
Warrants 15,781,086 6,095,549 9,685,534 0 various dates 530,687 Various None
FORM S-8 2,190,000 Various None
Debentures 4.5%
SF9.375M=$7.432M 840,892 0 840,892 0 6/13/96 840,892 10/3/96 None
Issued 7/3/96, Due 7/3/03 S-3 Filed 3/4/97
Conversion Discount 333-22725
0% yr 1-3, 5% yr 4,
10% yr 5, 15% yr 6,
20% yr 7
Debentures 4.5% $5M 750,000 353,191 396,809 0 10/16/96 0
Issued 10/17/96, Due
10/17/99-10/17/01
Conversion Discount 15%,
Floor $6.44,
Ceiling $9.66
Debentures 5% $6M 1,200,000 0 1,200,000 0 1/23/97 1,020,000 3/31/97 Inc. interest
Issued 12/31/96 & 1/13/97, from 5% by .5%
Due 12/31/01 & 1/13/02 every 30 days
Conversion Discount 15%, until effective
Floor $5.25, Ceiling $15 S-3 Filed 3/4/97
333-22725
Debentures 5% $5.5M 1,320,000 0 1,320,000 0 3/4/97 1,320,000 7/8/97 2% of face (max
Issued 3/10/97, Due 3/10/02 of 10%)
Conversion Discount
greater than 90 days=0%
less than 89 days=10%
Debentures 6% $500K 45,455 0 45,455 0 3/__/97 45,455 9/7/97 2% of face (max
Issued 3/13/97, Due 3/13/02 of 10%)
Conversion at $11
Preferred Stock 4%-8%
Series F $6M 600,000 0 600,000 0 7/12/96 0
Issued 7/12/96 &12/16/96
Conversion Discount 20%, Floor
$7, Ceiling $16
Preferred Stock 7%
Series G $10M 1,700,000 362,824 1,337,176 0 9/23/96 0
Issued 9/27/96 &12/16/96
Conversion Discount 15%,
Floor $6, Ceiling $8-$11.50
Nexar Technology Acquisition 250,000 0 250,000 0 250,000 Pre Nexar
(Estimate) IPO Close
Will Issue Prior to
Nexar IPO Closing
----------- ----------
Total 20,826,901 Form S-3 4,017,721
Reserved
Shares
-----------
Total 31,971,145 Form S-8 2,190,000
Shares
Outstanding
=========== ==========
Total 52,798,046 Total 6,207,721
Shares to be
Outstanding Registered
&
Reserved
===========
Total 100,000,000
Shares
Authorized
===========
Total 47,201,954
Shares
Available
</TABLE>
<PAGE>
SCHEDULE 3(F)
TO
SECURITIES
PURCHASE
AGREEMENT
NEWS RELEASE
FOR IMMEDIATE RELEASE
CONTACTS:
<TABLE>
<S> <C> <C>
John J. Ingoldsby Jon Siegal Stanley Wunderlich
Director of Investor Relations Associate Chairman
Palomar Medical Technologies, Inc. Ronald Trahan Assoc., Inc. Consulting for Strategic Growth, Ltd.
508-921-9300 617-332-0101 800-625-2236
</TABLE>
PALOMAR'S PREVIOUSLY FILED PATENT LAWSUIT AGAINST MEHL/BIOPHILE
PRE-DATES MEHL/BIOPHILE'S LEGAL ACTION ANNOUNCED TWO DAYS AGO
BEVERLY, Mass., March 12, 1997 -- Palomar Medical Technologies, Inc. (NASDAQ:
PMTI) today announced that it filed a declaratory judgment several months ago
against MEHL/Biophile International Corp. (NASDAQ: MEHL) seeking a declaration
that Palomar's Epilaser(TM) laser-based hair removal system does not infringe on
MEHL/Biophile's laser hair removal method, and, furthermore, that
MEHL/Biophile's patent is both invalid and unenforceable. Palomar's suit was
filed in United States District Court in Boston, Mass.
Palomar's declaratory judgment action was filed substantially before
MEHL/Biophile's announcement two days ago that its Selvac Acquisition Corp. unit
had filed a lawsuit against Palomar for patent infringement and unfair
competition, essentially the same claims made previously by Palomar in its suit
against MEHL/Biophile. Selvac licenses the patented laser hair removal method
owned by Dr. Nardo Zaias.
"We filed this declaratory judgment months ago after learning that MEHL/Biophile
was misrepresenting to our customers that our product might infringe on their
patent," said Steven Georgiev, chairman and chief executive officer of Palomar.
"We are announcing our lawsuit today since our patent has only issued recently
and, therefore, all of the information is now in the public domain, allowing for
resolution of these issues."
(more)
PALOMAR / 2
MEHL/Biophile's lawsuit was announced hours after Palomar announced it had
received U.S. Food and Drug Administration (FDA) to sell and market its Epilaser
system. Palomar announced yesterday the issuance of a U.S. patent that discloses
and protects the laser-based hair removal technology developed by Dr. R. Rox
Anderson at Massachusetts General Hospital's Wellman Laboratories, the
technology used in Epilaser and for which Palomar is the exclusive licensee.
Palomar Medical Technologies, Inc. is a leading supplier of proprietary laser
systems for dermatological and cosmetic laser treatment, and also engages in the
development and sale of specialty electronic products.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
With the exception of the historical information contained in this release, the
matters described herein contain forward-looking statements that involve risk
and uncertainties that may individually or mutually impact the matters herein
described, including but not limited to product demand and market acceptance,
the effect of economic conditions, the impact of competitive products and
pricing, governmental regulations, results of litigation, technological
difficulties and/or other factors outside the control of the company, which are
detailed from time to time in the company's SEC reports, including the report on
Form 10-Q for the quarter ended September 30, 1996.
####
Palomar news releases are available through
PR Newswire Company News on-Call by
fax at 800-758-5804, Extension
107555, or
http://www.prnewswire.com/(PMTI).
Palomar's home page address is http://www.palmed.com
####
<PAGE>
NEWS RELEASE
FOR IMMEDIATE RELEASE
CONTACTS:
<TABLE>
<S> <C> <C>
John J. Ingoldsby Jon Siegal Stanley Wunderlich
Director of Investor Relations Associate Chairman
Palomar Medical Technologies, Inc. Ronald Trahan Assoc., Inc. Consulting for Strategic Growth, Ltd.
508-921-9300 617-332-0101 800-625-2236
PALOMAR REPORTS FINANCIAL RESULTS; ELECTRONIC BUSINESS SPIN-OUT
IN PROCESS, SOLE FOCUS IS NOW ON COSMETIC LASER INDUSTRY
BEVERLY, Mass., March 18, 1997 -- Palomar Medical Technologies, Inc. (NASDAQ:
PMTI) today announced that revenues for the fourth quarter ended December 31,
1996, increased 235 percent to $20,944,453, compared with the fourth quarter of
1995. Palomar also reported a loss for the quarter ended December 31, 1996 of
($18,650,578), or ($0.69) per share, of which ($11,500,000), or ($0.40) per
share, is attributable to non-recurring write-offs.
For the year ended December 31, 1996, revenues increased 220 percent to
$70,098,443, compared with the previous year. Palomar also reported a loss for
the year ended December 31, 1996, of ($37,863,792), or ($1.49) per share, of
which ($11,500,000), or ($0.44) per share, is attributable to non-recurring
write-offs.
"Our fourth quarter net loss includes approximately $7.2 million of operating
losses attributed to the following four factors," said Steven Georgiev, chairman
and chief executive officer of Palomar, "They are: the delay in receiving FDA
hair removal clearance for our EpiLaser(TM) system, which was only obtained this
month; start-up costs associated with our new cosmetic laser center services
division; reduced sales volume in our Nexar subsidiary due to unavoidable parts
shortages; and interruption in production caused by the relocation to larger
facilities of our Nexar and Comtel manufacturing plants.
(more)
PALOMAR / 2
"The majority of the non-recurring losses are a result of the assessment of our
technology and assets related to our electronic businesses. We reserved $8.5
million against technology assets and other costs in the fourth quarter,"
continued Georgiev. "In addition, Nexar settled claims with a former executive
for $1.4 million, which was charged to operations, and under which Nexar is
purchasing previously-licensed core technology and eliminating future royalty
payments on the use of this core technology. As part of our strategy to maximize
shareholder value, we are in the process of spinning out our electronic
businesses, preferably as majority-owned, publicly traded companies."
"The company also assessed its goodwill and joint ventures in related cosmetic
laser businesses and took a charge of $1.6 million," continued Georgiev. "This
write-down, combined with the previously mentioned, non-recurring costs in the
electronics segment, brings the total one-time charges for the year to
approximately ($11,500,000), or ($0.44) per share."
Georgiev added, "The public spin-out of Nexar is anticipated to close by
mid-April. That offering registers 2,500,000 shares of Nexar common stock in an
anticipated range of $11 to $13 per share."
Georgiev also said, "A spin-out of the remainder of our electronics group is
planned for later in 1997. The investments made in our electronics businesses
over the past two years are expected to yield high returns and could provide
liquid assets which can be used to fund our core cosmetic laser business in the
future.
"We are prepared to rapidly expand our cosmetic laser business," stated
Georgiev, "since we believe that all important elements are now in place. We
accomplished a major strategic alliance for the establishment of laser centers
with Columbia/HCA, a $20 billion company and one of the world's largest owners
and operators of medical facilities; we have FDA clearance for our complete
suite of laser systems, including EpiLaser for hair removal; we have a very
strong proprietary position in laser hair removal due to the recent issuance of
the Massachusetts General Hospital patent, for which we are the exclusive
licensee; we have major laser production capacity in place; we have expanded and
strengthened our management team; we are broadening our research and
development, as well as clinical, relationships with the highest-quality
institutions in the world; and we have established a subsidiary in the United
Kingdom to rapidly penetrate European markets.
(more)
PALOMAR / 3
Georgiev concluded, "With freed-up resources from the electronics segment, we
intend to devote resources from the electronics segment to solely focus on
achieving the largest possible market share in 1997 in our core business --
cosmetic laser products and services. We believe that we are strongly positioned
to capitalize on these multi-billion dollar markets and achieve a dominant
position within the next two years."
Palomar Medical Technologies, Inc. is a leading supplier of proprietary laser
systems for dermatological and cosmetic laser treatment, such as hair removal
and the treatment of wrinkles, spider veins, tattoos, age spots, warts, scars,
and burns. Palomar also engages in the development and sale of specialty
electronic products.
The condensed consolidated statement of operations for the company follows:
PALOMAR MEDICAL TECHNOLOGIES, INC.
(Amounts in thousands, except per share data)
Three Months Ended Year Ended
December 31 December 31
1996 1995 1996 1995
Revenues $20,944 $6,241 $70,098 $21,907
Net loss ($18,651)* ($6,589) ($37,864)* ($12,621)
Net loss per share ($0.69)* ($0.39) ($1.49)* ($0.89)
Weighted-average number
of shares used in computation
of per-share net loss 28,996 17,082 26,167 14,165
</TABLE>
* INCLUDES LOSS OF ($11,500,000), OR ($0.40) AND ($0.44) PER SHARE, FOR THE
THREE MONTHS AND YEAR ENDED DECEMBER 31, 1996 RESPECTIVELY, OF NON-RECURRING
WRITE-OFFS.
A REGISTRATION STATEMENT RELATING TO THE NEXAR SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
(more)
PALOMAR / 4
A copy of the Nexar prospectus may be obtained from John Ingoldsby, Director of
Investor Relations, Palomar Medical Technologies, Inc., 66 Cherry Hill Drive,
Beverly, MA 01915.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
With the exception of the historical information contained in this release, the
matters described herein contain forward-looking statements that involve risk
and uncertainties that may individually or mutually impact the matters herein
described, including but not limited to product demand and market acceptance,
the effect of economic conditions, the impact of competitive products and
pricing, governmental regulations, results of litigation, technological
difficulties and/or other factors outside the control of the company, which are
detailed from time to time in the company's SEC reports, including the report on
Form 10-Q for the quarter ended September 30, 1996.
####
Palomar news releases are available through
PR Newswire Company News on-Call by
fax at 800-758-5804, Extension
107555, or
http://www.prnewswire.com/(PMTI).
Palomar's home page address is http://www.palmed.com
COAST BUSINESS CREDIT
Continuing Guaranty
Borrower: Comtel Electronics, Inc.
Guarantors: Palomar Medical Technologies, Inc.
Palomar Electronics Corporation
Date: December 5, 1996
THIS CONTINUING GUARANTY is executed by the above-named guarantors Oointly and
severally, the "Guarantor"), as of the above date, in favor of COAST BUSINESS
CREDIT, a division of Southern Pacific Thrift & Loan Association ("Coast"), a
California corporation, with offices at 12121 Wilshire Boulevard, Suite I I 11,
Los Angeles, California 90025, with respect to the Indebtedness of the
above-named borrower Oointly and severally, the "Borrower").
<TABLE>
<S> <C>
1. CONTINUING GUARANTY. Guarantor hereby debtor in possession under the federal Bankruptcy Code,
unconditionally guarantees and promises to pay on and any trustee, custodian or receiver for Borrower or any
demand to Coast, at the address indicated above, or at of its assets, should Borrower hereafter become the
such other address as Coast may direct, in lawful money subject of any bankruptcy or insolvency proceeding,
of the United States, and to perform for the benefit of voluntary or involuntary; and all indebtedness, liabilities
Coast, all Indebtedness of Borrower now or hereafter and obligations incurred by any such person shall be
- -owing to or held by Coast. As used herein, the term included in the Indebtedness guaranteed hereby. This
"Indebtedness" is used in its most comprehensive sense Guaranty is given in consideration for credit and other
and shall mean and include without limitation: (a) any financial accommodations which may, from time to time,
and all debts, duties, obligations, liabilities, be given by Coast to Borrower in Coast's sole discretion,
representations, warranties and guaranties of Borrower or but Guarantor acknowledges and agrees that acceptance
any one or more of them, heretofore, now, or hereafter by Coast of this Guaranty shall not constitute a
made, incurred, or created, whether directly to Coast or commitment of any kind by Coast to extend such credit or
acquired by Coast by assignment or otherwise, or held by other financial accommodation to Borrower or to permit
Coast on behalf of others, however arising, whether Borrower to incur Indebtedness to Coast. All sums due
voluntary or involuntary, due or not due, absolute or under this Guaranty shall bear interest from the date due
contingent, liquidated or unliquidated, certain or until the date paid at the highest rate charged with respect
uncertain, determined or undetermined, monetary or to any of the Indebtedness.
nonmonetary, written or oral, and whether Borrower may 2. Waivers. Guarantor hereby waives:
be liable individually orjointly with others, and regardless (a) presentment for payment, notice of dishonor, demand,
of whether recovery thereon may be or hereafter become protest, and notice thereof as to any instrument, and all
barred by any statute of limitations, discharged or other notices and demands to which Guarantor might be
uncollectible in any bankruptcy, insolvency or other entitled, including without limitation notice of all of the
proceeding, or otherwise unenforceable; and (b) any and following: the acceptance hereof; the creation, existence,
all amendments, modifications, renewals and extensions or acquisition of any Indebtedness; the amount of the
of any or all of the foregoing, including without limitation Indebtedness from time to time outstanding; any
amendments, modifications, renewals and extensions foreclosure sale or other disposition of any property which
which are evidenced by any NEW OR ADDITIONAL instrument, secures any or all of the Indebtedness or which secures the
document or agreement; and (c) any and all attorneys' obligations of any other guarantor of any or all of the
fees, court costs, and collection charges incurred in Indebtedness-, any adverse change in Borrower's financial
endeavoring to collect or enforce any of the foregoing position; any other fact which might increase Guarantor's
against Borrower, Guarantor, or any other person liable risk; any default, partial payment or non-payment of all or
thereon (whether or not suit be brought) and any other any part of the Indebtedness; the occurrence of any other
expenses of, for or incidental to collection thereof. As Event of Default (as hereinafter defined); any and all
used herein, the term "Borrower" shall include any agreements and arrangements between Coast and
successor to the business and assets of Borrower, and Borrower and any changes, modifications, or extensions
shall also include Borrower in its capacity as a debtor or thereof, and any revocation, modification or release of any
<PAGE>
COAST BUSINESS CREDIT Continuing Guaranty
guaranty of any or all of the Indebtedness by any person judgment, decree or order of any court or administrative
(including without limitation any other person signing this body having jurisdiction over Coast or any of its property,
Guaranty); (b) any right to require Coast to institute suit or by reason of any settlement or compromise of any such
against, or to exhaust its rights and remedies against, claim effected by Coast with any such claimant (including
Borrower or any other person, or to proceed against any without limitation the Borrower), then and in any such
property of any kind which secures all or any part of the event, Guarantor agrees that any such judgment, decree,
Indebtedness, or to exercise any right of offset or other order, settlement and compromise shall be binding upon
right with respect to any reserves, credits or deposit Guarantor, notwithstanding any revocation or release of
accounts held by or maintained with Coast or any this Guaranty or the cancellation of any note or other
indebtedness of Coast to Borrower, or to exercise any instrument evidencing any of the Indebtedness, or any
other right or power, or pursue any other remedy Coast release of any of the Indebtedness, and the Guarantor shall
may have; (c) any defense arising by reason of any be and remain liable to Coast under this Guaranty for the
disability or other defense of Borrower or any other amount so repaid or recovered, to the same extent as if
guarantor or any endorser, co-maker or other person, or such amount had never originally been received by Coast,
by reason of the cessation from any cause whatsoever of and the provisions of this sentence shall survive, and
any liability of Borrower or any other guarantor or any continue in effect, notwithstanding any revocation or
endorser, co-maker or other person, with respect to all or release of this Guaranty. Until all of the Indebtedness has
any part of the Indebtedness, or by reason of any act or been irrevocably paid and performed in full. Guarantor
omission of Coast or others which directly or indirectly hereby expressly and unconditionally waives all rights of
results in the discharge or release of Borrower or any subrogation, reimbursement and indemnity of every kind
other guarantor or any other person or any Indebtedness against Borrower, and all rights of recourse to any assets
or any security therefor, whether by operation of law or or property of Borrower, and all rights to any collateral or
otherwise; (d) any defense arising by reason of any failure security held for the payment and performance of any
of Coast to obtain, perfect, maintain or keep in force any Indebtedness, including (but not limited to) any of the
security interest in, or lien or encumbrance upon, any foregoing rights which Guarantor may have under any
property of Borrower or any other person; (e) any defense present or future document or agreement with any
based upon any failure of Coast to give Guarantor notice Borrower or other person, and including (but not limited
of any sale or other disposition of any property securing to) any of the foregoing rights which Guarantor may have
any or all of the Indebtedness, or any defects in any such under any equitable doctrine of subrogation, implied
notice that may be given, or any failure of Coast to contract, or unjust enrichment, or any other equitable or
comply with any provision of applicable law in enforcing legal doctrine. Neither Coast, nor any of its directors,
any security interest in or lien upon any property securing officers, employees, agents, attorneys or any other person
any or all of the Indebtedness including, but not limited to, affiliated with or representing Coast shall be liable for any
any failure by Coast to dispose of any property securing claims, demands, losses or damages, of any kind
any or all of the Indebtedness in a commercially whatsoever, made, claimed, incurred or suffered by
reasonable manner; (f) any defense based upon or arising Guarantor or any other party through the ordinary
out of any bankruptcy, insolvency, reorganization, negligence of Coast, or any of its directors, officers,
arrangement, readjustment of debt, liquidation or employees, agents, attorneys or any OTHER PERSON AFFILIATED
dissolution proceeding commenced by or against with or representing Coast.
Borrower or any other GUARANTOR OR ANY ENDORSER, CO- 3. CONSENTS. Guarantor hereby consents and agrees
maker or other person, including without limitation any that, without notice to or by Guarantor and without
discharge of, or bar against collecting, any of the affecting or impairing in any way the obligations or
Indebtedness (including without limitation any interest liability of Guarantor hereunder, Coast may, from time to
thereon), in or as a result of any such proceeding; and time before or after revocation of this Guaranty, do any
(g) the benefit of any and all statutes of limitation with one or more of the following in Coast's sole and absolute
respect to any action based upon, arising out of or related discretion: (a) accelerate, accept partial payments of,
to this Guaranty. Until all of THE INDEBTEDNESS HAS BEEN compromise or settle, renew, extend the time for the
paid, performed, and discharged in FULL, nothing shall payment, discharge, or performance of, refuse to enforce,
discharge or satisfy the liability of Guarantor hereunder and release all or any parties to, any or all of the
except the FULL performance and payment of all of the Indebtedness; M grant any other indulgence to Borrower
Indebtedness. If any claim is ever made upon Coast for or any other person in respect of any or all of the
repayment or recovery of any amount or amounts received Indebtedness or any other matter; (c) accept~ release,
by Coast in payment of or on account of any of the waive, surrender, enforce, exchange, modify, impair, or
Indebtedness, because of any claim that any such payment extend the time for the perfortnance, discharge, or
constituted a preferential transfer or fraudulent payment of, any and all property of any kind securing any
conveyance, or for any other reason whatsoever, and or all of the Indebtedness or any guaranty of any or all of
Coast repays all or part of said amount by reason of any the Indebtedness, or on which Coast at any time may have
-2
<PAGE>
COAST BUSINESS CREDIT Continuing Guaranty
a lien, or refuse to enforce its rights or make any Indebtedness or any GUARANTY THEREOF, INCLUDING without
compromise or settlement or agreement therefor in respect limitation judicial foreclosure, nonjudicial foreclosure,
of any or all of such property; (d) substitute or add, or exercise of a power of sale, and taking a deed, assignment
take any action or omit to take any action which results in or transfer in lieu of foreclosure as to any such property,
the release of, any one or more endorsers or guarantors of and Guarantor expressly waives any defense based upon
all or any part of the Indebtedness, including, without the exercise of any such right or remedy, notwithstanding
limitation one or more parties to this Guaranty, regardless the effect thereof upon any of Guarantor's rights, including
of any destruction or impairment of any right of without limitation, any destruction of Guarantor's right of
contribution or other right of Guarantor; (e) amend, alter subrogation against Borrower and any destruction of
or change in any respect whatsoever any term or provision Guarantoes right of contribution or other right against any
relating to any or all of the Indebtedness, including the other guarantor of any or all of the Indebtedness or against
rate of interest thereon; (f) apply any sums received from any other person, whether by operation of Sections 580a,
Borrower, any other guarantor, endorser, or co-signer, or 580d or 726 of the California Code of Civil Procedure, or
from the disposition of any collateral or security, to any any comparable provisions of the laws of any other
indebtedness whatsoever owing from such person or jurisdiction, or any other statutes or rules of law now or
secured by such collateral or security, in such manner and hereafter in effect, or otherwise. Without limiting the
order as Coast determines in its sole discretion, and (renerality of the foregoing. (a) Guarantor waives all ri(-,hts
regardless of whether such indebtedness is part of the and defenses arising out of an election of reniedies by
Indebtedness, is secured, or is due and payable; (g) apply Coast, even though that election of remedies, such as a
any sums received from Guarantor or from the disposition nonjiudicial foreclosure with respect to security for any of
of any collateral or security securing the obligations of the Indebtedness. has destroyed tile : P-Liarantor's rights of
Guarantor, to any of the Indebtedness in such manner and subro-ation and reimbursement aeainst the principal by
order as Coast determines in its sole discretion, regardless the operation of Section 580d of & Code of Civil
of whether or not such Indebtedness is secured or is due Procedure or otherwise. (b) Guarantor further waives all
and payable. Guarantor consents and agrees that Coast rights and defenses arisina out of an election of remedies
shall be under no obligation to marshal any assets in favor by Coast. even though that election of remedies. such as a
of Guarantor, or against or in payment of any or all of the nonjudicial foreclosure with respect to securit), for any of
Indebtedness. Guarantor further consents and agrees that the indebtedness. has destroyed the g arantor's rights of
Coast shall have no duties or responsibilities whatsoever subrogation, reimbursement and contribution aeainst any
with respect to any property securing any or all of the other guarantor of the guaranteed obligation, by the
Indebtedness. Without limiting the generality of the operation of Section 580d of the Code of Civil Procedure
foregoing, Coast shall have no obligation to monitor, or otherwise. (c) Guarantor understands that if Coast
verify, audit, examine, or obtain or maintain any insurance forecloses any present or future trust deed, which secures
with respect to, any property securing any or all of the any or all of the Indebtedness or which secures any other
Indebtedness. guaranty of any or all of the Indebtedness, by nonjudicial
4. ACCOUNT STATED. Absent manifest error, Coast's foreclosure. Guarantor may, as a result. have a complete
books and records showing the account between it and the defense to liability under this Guaranty, based on the legal
Borrower shall be admissible in evidence in any action or doctrine of estoppel and Sections 580a. 580d or 726 of the
proceeding as prima facie proof of the items therein set California Code of Civil Procedure, and Guarantor hereby
forth. Coast's monthly statements rendered to the expressly waives all such defenses. (d) Guarantor
Borrower shall be binding upon the Guarantor (whether or understands and agrees that, in the event Coast in its sole
not the Guarantor receives copies thereof), and shall discretion forecloses any trust deed now or hereafter
constitute an account stated between Coast and the securing any or all of the Indebtedness, by nonjudicial
Borrower, unless Coast receives a written statement of the foreclosure, Guarantor will remain liable to Coast for any
Borrowees exceptions within 30 days after the statement deficiency, even though Guarantor will lose his right of
was mailed to the Borrower. The Guarantor assumes full subrogation against the Borrower, and even though
responsibility for obtaining copies of such monthly Guarantor will be unable to recover from the Borrower the
statements from the Borrower, if the Guarantor desires amount of the deficiency for which Guarantor is liable,
such copies. and even though Guarantor may have retained his right of
5. EXERCISE OF RIGHTS AND REMEDIES; FORECLOSURE subrogation against Borrower if Coast had foreclosed said
of TRUST DEEDS. Guarantor consents and agrees that, trust deed by judicial foreclosure as opposed to
without notice to or by Guarantor and without affecting or nonjudicial foreclosure, and even though absent the
impairing in any way the obligations or liability of waivers set forth herein Guarantor may have had a
Guarantor hereunder, Coast may, from time to time, complete defense to any liability for any deficiency
before or after revocation of this Guaranty, exercise any hereunder. (e) Guarantor understands and agrees that. in
right or remedy it may have with respect to any or all of the event Coast in its sole discretion forecloses any trust
the Indebtedness or any property securing any or all of the deed now or hereafter securing any other guaranty of any
-3-
<PAGE>
COAST BUSINESS CREDIT Continuing Guaranty
or all of the Indebtedness, by nonjudicial foreclosure, bankruptcy, insolvency, arrangement, readjustment of
Guarantor will remain liable to Coast for any deficiency. debt, dissolution or liquidation law or statute of any
even though Guarantor will lose his right of subrogation jurisdiction, now or hereafter in effect or (i) Borrower or
or contribution against the other guarantor, and even Guarantor shall be deceased or declared incompetent by
though Guarantor will be unable to recover from the other any court or a guardian or conservator shall be appointed
guarantor any part of the deficiency for which Guarantor for either of them or for the property of either of them; or
is liable, and even though Guarantor may have retained 0) Guarantor or Borrower shall generally not pay their
his right of subrogation or contribution against the other respective debts as they become due or shall enter into any
guarantor if Coast had foreclosed said trust deed by agreement (whether written or oral), or offer to enter into
judicial foreclosure as opposed to nonjudicial foreclosure, any such agreement, with all or a significant number of its
and even though absent the waivers set forth herein creditors regarding any moratorium or other indulgence
Guarantor may have had a complete defense to any with respect to its debts or the participation of such
liability for any deficiency hereunder. creditors or their representatives in the supervision,
6. Acceleration. Notwithstanding the terms of all management, or control of the business of either of them;
or any part of the Indebtedness, the obligations of the or (k) Borrower or Guarantor shall conceal, remove or
Guarantor hereunder to pay and perform all of the permit to be concealed or removed any part of its
Indebtedness shall, at the option of Coast, immediately property, with intent to hinder, delay or defraud its
become due and payable, without notice, and without creditors, or make or suffer any transfer of any of its
regard to the expressed maturity of any of the property which may be fraudulent under any bankruptcy,
Indebtedness, in the event: (a) any warranty, fraudulent conveyance or similar law, or shall make any
representation, statement, report, or certificate made or transfer of its property to or for the benefit of any creditor
delivered to Coast by Borrower or Guarantor, or any of at a time when other creditors similarly situated have not
their respective officers, partners, employees, or agents, is been paid; or (1) the board of directors or shareholders of
incorrect, false, untrue, or misleading when given in any Borrower or Guarantor shall adopt any resolution or plan
material respect; or (b) Borrower or Guarantor shall fail to for its dissolution or the liquidation of all or substantially
pay or perform when due al I or any part of the all of its assets; or (m) Guarantor shall revoke this
Indebtedness; or (c) Guarantor shall fail to pay or perform Guaranty or contest or deny liability under this Guaranty.
when due any indebtedness or obligation of Guarantor to All of the foregoing are hereinafter referred to as "Events
Coast or to any parent, subsidiary or corporate affiliate of of Default".
Coast, whether under this Guaranty or any other 7. RIGHT TO ATTACHMENT REMEDY. Guarantor
instrument, document, or agreement heretofore or agrees that, notwithstanding the existence of any property
hereafter entered into; or (d) there occurs in Coasfs securing any or all of the Indebtedness, Coast shall have
judgment a material impairment of the prospect of all of the rights of an unsecured creditor of Guarantor,
payment or performance of any or all of the Indebtedness; including without limitation the right to obtain a
or (e) any event shall occur which may or does result in temporary protective order and writ of attachment against
the acceleration of the maturity of any indebtedness of Guarantor with respect to any sums due under this
Borrower or Guarantor to others (regardless of any Guaranty. Guarantor further agrees that in the event any
requirement of notice, opportunity to cure or other property secures the obligations of Guarantor under this
condition prior to the exercise of any right of Guaranty, to the extent that Coast, in its sole and absolute
acceleration); or (f) Borrower or Guarantor shall fail discretion, determines prior to the disposition of such
promptly to perform or comply with any term or condition property that the amount to be realized by Coast therefrom
of any agreement with any third party which does or may may be less than the indebtedness of the Guarantor under
result in a material adverse effect on the business of this Guaranty, Coast shall have all the rights of an
Borrower or Guarantor, or (g) there shall be made or exist unsecured creditor against Guarantor, including without
any levy, assessment, attachment, seizure, lien, or limitation the right of Coast, prior to the disposition of
encumbrance for any cause or reason whatsoever upon ail said property, to obtain a temporary protective order and
OR ANY MATERIAL PART OF THE PROPERTY OF BORROWER or writ of attachment against Guarantor. Guarantor waives
Guarantor (unless discharged by payment, release or bond the benefit of Section 483.0 1 O(b) of the California Code
not more than ten days after such event has occurred); or of Civil Procedure and of any and all other statutes and
(h) there shall occur the dissolution, termination of rules of law now or hereafter in effect requiring Coast to
existence, insolvency, or business failure of Borrower or first resort to or exhaust all such collateral before seeking
Guarantor, or the appointment of a receiver, trustee or or obtaining any attachment remedy against Guarantor.
custodian for Borrower or Guarantor or all or any material Coast shall have no liability to Guarantor as a result
part of the property of either of them, or the assignment thereof, whether or not the actual deficiency realized by
for the benefit of creditors by Borrower or Guarantor, or Coast is less than the anticipated deficiency on the basis of
the commencement of any proceeding by or against which Coast obtains a temporary protective order or writ
Borrower or Guarantor under any reorganization, of attachment.
-4
<PAGE>
COAST BUSINESS CREDIT Continuing Guaranty
8. INDEMNITY. Guarantor hereby agrees to Guarantor hereby expressly waives any right to set-off or
indemnify Coast and hold Coast harmless from and assert any counterclaim against Borrower.
against any and all claims, debts, liabilities, demands, 10. REVOCATION. This is a Continuing Guaranty
obligations, actions, causes of action, penalties, costs and relating to all of the Indebtedness, including Indebtedness
expenses (including without limitation attorneys' fees), of arising under successive transactions which from time to
every nature, character and description, which Coast may time continue the Indebtedness or renew it after it has
sustain or incur based upon or arising out of any of the been satisfied. Guarantor waives all benefits of California
Indebtedness, any actual or alleged failure to collect and Civil Code Section 2815, and agrees that the obligations
pay over any withholding or other tax relating to of Guarantor hereunder may not be terminated or revoked
Borrower or its employees, any relationship or agreement in any manner except by giving 90 days' advance written
between Coast and Borrower, any actual or alleged failure notice of revocation to Coast at its address above by
of Coast to comply with any writ of attachment or other registered first-class U.S. mail, postage prepaid, return
legal process relating to Borrower or any of its property, receipt requested, and only as to new loans made by Coast
or any other matter, cause or thing whatsoever occurred, to Borrower more than 90 days after actual receipt of such
done, omitted or suffered to be done by Coast relating in written notice by Coast. No termination or revocation of
any way to Borrower or the Indebtedness (except any such this Guaranty shall be effective until 90 days following the
amounts sustained or incurred as the result of the gross date of actual receipt of said written notice of revocation
negligence or willful misconduct of Coast or any of its by Coast. Notwithstanding such written notice of
directors, officers, employees, agents, attorneys, or any revocation or any other act of Guarantor or any other
other person affiliated with or representing Coast). event or circumstance, Guarantor agrees that this
Notwithstanding any provision in this Guaranty to the Guaranty and all consents, waivers and other provisions
contrary, the indemnity agreement set forth in this Section hereof shall continue in full force and effect as to any and
shall survive any termination or revocation of this all Indebtedness which is outstanding on or before the
Guaranty and shall for all purposes continue in full force 90th day following actual receipt of said written notice of
and effect. revocation by Coast, and all extensions, renewals and
9. SUBORDINATION. Any and all rights of Guarantor modifications of said Indebtedness (including without
under any and all debts, liabilities and obligations owing limitation amendments, extensions, renewals and
from Borrower to Guarantor, including any security for modifications which are evidenced by new or additional
and guaranties of any such obligations, whether now instruments, documents or agreements executed before or
existing or hereafter arising, are hereby subordinated in after expiration of said 90-day period), and all interest
right of payment to the prior payment in full of all of the thereon, accruing before or after expiration of said 90-day
Indebtedness. No payment in respect of any such period, and all attorneys' fees, court costs and collection
subordinated obligations shall at any time be made to or charges, incurred before or after expiration of said 90-day
accepted by Guarantor if at the time of such payment any period, in endeavoring to collect or enforce any of the
Indebtedness is outstanding. If any Event of Default has foregoing against Borrower, Guarantor or any other
occurred, Borrower and any assignee, trustee in person liable thereon (whether or not suit be brought) and
bankruptcy, receiver, or any other person having custody any other expenses of, for or incidental to collection
or control over any or all of Borrowees property are thereof.
hereby authorized and directed to pay to Coast the entire 11. INDEPENDENT LIABILITY. Guarantor hereby
unpaid balance of the Indebtedness before making any agrees that one or more successive or concurrent actions
payments whatsoever to Guarantor, whether as a creditor, may be brought hereon against Guarantor, in the same
shareholder, or otherwise; and insofar as may be necessary action in which Borrower may be sued or in separate
for that purpose, Guarantor hereby assigns and transfers to actions, as often as deemed advisable by Coast. The
Coast all rights to any and all debts, liabilities and liability of Guarantor hereunder is exclusive and
obligations owing from Borrower to Guarantor, including independent of any other guaranty of any or all of the
any security for and guaranties of any such obligations, Indebtedness whether executed by Guarantor or by any
whether now existing or hereafter arising, including other guarantor (including without limitation any other
without limitation any payments, dividends or persons signing this Guaranty). The liability of Guarantor
distributions out of the business or assets of Borrower. hereunder shall not be affected, revoked, impaired, or
Any amounts received by Guarantor in violation of the REDUCED BY ANY one or more of the following: (a) the fact
foregoing provisions shall be
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<PAGE>
COAST BUSINESS CREDIT Continuing Guaranty
continuing or restrictive guaranty or undertaking or any Guarantor for such periods of time as Coast may
limitation on the liability of any other guarantor (whether designate, (ii) any other information concerning
under this Guaranty or under any other agreement); or Guarantoes business, financial condition or affairs as
(d) any payment on or reduction of any such other Coast may request, and (iii) copies of any and all foreign,
guaranty or undertaking; or (e) any revocation, federal, state and local tax returns and reports of or
amendment, modification or release of any such other relating to Guarantor as Coast may from time to time
guaranty or undertaking; or (f) any dissolution or request. Guarantor hereby intentionally and knowingly
termination of, or increase, decrease, or change in waives any and all rights and privileges it may have not to
membership of any Guarantor which is a partnership. divulge or deliver said tax returns, reports and other
Guarantor hereby expressly represents that he was not information which are requested by Coast hereunder or in
induced to give this Guaranty by the fact that there are or any litigation in which Coast may be involved relating
may be other guarantors either under this Guaranty or directly or indirectly to Borrower or to Guarantor.
otherwise, and Guarantor agrees that any release of any Guarantor further agrees immediately to give written
one or more of such other guarantors shall not release notice to Coast of any adverse change in Guarantor's
Guarantor from his obligations hereunder either in full or financial condition and of any condition or event which
to any lesser extent. If Guarantor is a married person, constitutes an Event of Default under this Guaranty. All
Guarantor hereby expressly agrees that recourse may be reports and information furnished to Coast hereunder shall
had against his or her separate property for all of his or be complete, accurate and correct in all respects.
her obligations hereunder. Whenever requested, Guarantor shall further deliver to
12. FINANCIAL CONDITION OF BORROWER. Guarantor is Coast a certificate signed by Guarantor (and, if Guarantor
Mly aware of the financial condition of Borrower and is is a partnership, by all general partners of Guarantor, in
executing and delivering this Guaranty at Borrower's their individual capacities, and, if Guarantor is a
request and based solely upon his own independent corporation, by the president and secretary of Guarantor,
investigation of all matters pertinent hereto, and Guarantor in their individual capacities) warranting and representing
is not relying in any manner upon any representation or that all reports, financial statements and other documents
statement of Coast with respect thereto. Guarantor and information delivered or caused to be delivered to
represents and wan-ants that he is in a position to obtain, Coast under this Guaranty, are complete, correct and
and Guarantor hereby assumes Ul responsibility for thoroughly and accurately present the financial condition
obtaining, any additional information concerning of Guarantor, and that there exists on the date of delivery
Borrower's financial condition and any other matter of said certificate to Coast no condition or event which
pertinent hereto as Guarantor may desire, and Guarantor is constitutes an Event of Default under this Guaranty.
not relying upon or expecting Coast to furnish to him any 14. REPRESENTATIONS AND WARRANTIES. Guarantor
information now or hereafter in Coast's possession hereby represents and warrants that (i) it is in Guarantor's
concerning the same or any other matter. By executing direct interest to assist Borrower in procuring credit,
this Guaranty, Guarantor knowingly accepts the full range because Borrower is an affiliate of Guarantor, furnishes
of risks encompassed within a contract of continuing goods or services to Guarantor, purchases or acquires
guaranty, which risks Guarantor acknowledges include goods or services from Guarantor, and/or otherwise has a
without limitation the possibility that Borrower will incur direct or indirect corporate or business relationship with
additional Indebtedness for which Guarantor will be liable Guarantor, (ii) this Guaranty has been duly and validly
hereunder after Borrower's financial condition or ability to authorized, executed and delivered and constitutes the
pay such Indebtedness has deteriorated and/or after valid and binding obligation of Guarantor, enforceable in
bankruptcy or insolvency proceedings have been accordance with its terms, and (iii) the execution and
commenced by or against Borrower. Guarantor shall have delivery of this Guaranty does not violate or constitute a
no right to require Coast to obtain or disclose any default under (with or without the giving of notice, the
information with respect to the Indebtedness, the financial passage of time, or both) any order, judgment, decree,
condition or character of Borrower, the existence of any instrument or agreement to which Guarantor is a party or
collateral or security for any or all of the Indebtedness, the by which it or its assets are affected or bound.
filing by or against Borrower of any bankruptcy or 15. COSTS. Whether or not suit be instituted,
insolvency proceeding, the existence of any other Guarantor agrees to reimburse Coast on demand for all
guaranties of all or any part of the Indebtedness, any reasonable attorneys' fees and all other reasonable costs
action or non-action on the part of Coast, Borrower, or and expenses incurred by Coast in enforcing this
any other person, or any other matter, fact, or occurrence. GUARANTY, OR ARISING out of or RELATING IN ANY WAY TO THIS
13. REPORTS AND FINANCIAL STATEMENTS of Guaranty, or in enforcing any of the Indebtedness against
GUARANTOR. Guarantor shall, at its sole cost and expense, Borrower, Guarantor, or any other person, or in
at any time and from time to time, prepare or cause to be connection with any property of any kind securing all or
prepared, and provide to Coast upon Coast's request any part of the Indebtedness. Without limiting the
(i) such financial statements and reports concerning generality of the foregoing, and in addition thereto,
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<PAGE>
COAST BUSINESS CREDIT Continuing Guaranty
Guarantor shall reimburse Coast on demand for all Coast or any other person authorized to accept service of
reasonable attorneys' fees and costs Coast incurs in any process on behalf of Coast, within 30 days thereafter.
way relating to Guarantor, Borrower or the Indebtedness, Guarantor agrees that such one year period is a reasonable
IN ORDER to: obtain legal advice; enforce or seek to enforce and sufficient time for Guarantor to investigate and act
any of its rights; commence, intervene in, respond to, or upon any such claim or cause of action. The one year
defend any action or proceeding; file, prosecute or defend period provided herein shall not be waived, tolled, or
any claim or cause of action in any action or proceeding extended except by a specific written agreement of Coast.
(including without limitation any probate claim, This provision shall survive any termination of this
bankruptcy claim, third-party claim, secured creditor Guaranty or any other agreement.
claim, reclamation complaint, and complaint for relief 18. CONSTRUCTION; SEVERABILITY. If more than one
from any stay under the Bankruptcy Code or otherwise); person has executed this Guaranty, the term "Guarantor"
protect, obtain possession of, sell, lease, dispose of or as used herein shall be deemed to refer to all and any one
otherwise enforce any security interest in or lien on any or more such persons and their obligations hereunder shall
property of any kind securing any or all of the bejoint and several. Without limiting the generality of
Indebtedness; or represent Coast in any litigation with the foregoing, if more than one person has executed this
respect to Borrower's or Guarantoes affairs. In the event Guaranty, this Guaranty shall in all respects be interpreted
either Coast or Guarantor files any lawsuit against the as though each person signing this Guaranty had signed a
other predicated on a breach of this Guaranty, the separate Guaranty, and references herein to "other
prevailing party in such action shall be entitled to recover guarantors" or words of similar effect shall include
its attorneys' fees and costs of suit from the non-prevailing without limitation other persons signing this Guaranty. As
party. used in this Guaranty, the term "property" is used in its
16. Notices. Any notice which a party shall be most comprehensive sense and shall mean all property of
required or shall desire to give to the other hereunder every kind and nature whatsoever, including without
(except for notice of revocation, which shall be governed limitation real property, personal property, mixed
by Section 10 of this Guaranty) shall be given by personal property, tangible property and intangible property.
delivery or by telecopier or by depositing the same in the Words used herein in the masculine gender shall include
United States mail, first class postage pre-paid, addressed the neuter and feminine gender, words used herein in the
to Coast at its address set forth in the heading of this neuter gender shall include the masculine and feminine,
Guaranty and to Guarantor at his address set forth under words used herein in the singular shall include the plural
his signature hereon, and such notices shall be deemed and words used in the plural shall include the singular,
duly given on the date of personal delivery or one day wherever the context so reasonably requires. If any
after the date telecopied or 3 business days after the date provision of this Guaranty or the application thereof to
of mailing as aforesaid. Coast and Guarantor may change any party or circumstance is held invalid, void,
their address for purposes of receiving notices hereunder inoperative or unenforceable, the remainder of this
by giving written notice thereof to the other party in Guaranty and the application of such provision to other
accordance herewith. Guarantor shall give Coast parties or circumstances shall not be affected thereby, the
immediate written notice of any change in his address. provisions of this Guaranty being severable in any such
17. CLAIMS. GUARANTOR AGREES THAT ANY CLAIM or instance.
cause of action by Guarantor against Coast, or any of 19. GENERAL PROVISIONS. Coast shall have the right
Coast's directors, officers, employees, agents, accountants to seek recourse against Guarantor to the full extent
or attorneys, based upon, arising from, or relating to this provided for herein and in any other instrument or
Guaranty, or any other present or future agreement agreement evidencing obligations of Guarantor to Coast,
between Coast and Guarantor or between Coast and and against Borrower to the full extent of the
Borrower, or any other transaction contemplated hereby Indebtedness. No election in one form of action or
or thereby or relating hereto or thereto, or any other proceeding, or against any party, or on any obligation,
matter, cause or thing whatsoever, whether or not relating shall constitute a waiver of Coast's right to proceed in any
hereto or thereto, occurred, done, omitted or suffered to other form of action or proceeding or against any other
be done by Coast, or by Coast's directors, officers, party. The failure of Coast to enforce any of the
employees, agents, accountants or attorneys, whether provisions of this Guaranty at any time or for any period
sounding in contract or in tort or otherwise, shall be of time shall not be construed to be a waiver of any such
barred unless asserted by Guarantor by the provision or the right thereafter to enforce the same. All
commencement of an action or proceeding in a court of remedies hereunder shall be cumulative and shall be in
competent jurisdiction within Los Angeles County, addition to all rights, powers and remedies given to Coast
California, by the filing of a complaint within one year by law or under any other instrument or agreement. Time
after the first act, occurrence or omission upon which such is of the essence in the performance by Guarantor of each
claim or cause of action, or any part thereof, is based and and every obligation under this Guaranty. If Borrower is
service of a summons and complaint on an officer of a corporation, partnership or other entity, Guarantor
-7-
<PAGE>
COAST BUSINESS CREDIT Continuing Guaranty
hereby agrees that Coast shall have no obligation to 21. MUTUAL WAIVER OF RIGHT TO JURY TRIAL.
inquire into the power or authority of Borrower or any of COAST AND GUARANTOR HEREBY WAIVE THE
its officers, directors, partners, or agents acting or RIGHT TO TRIAL BY JURY IN ANY ACTION,
purporting to act on its behalf, and any Indebtedness made CLAIM, LAWSUIT OR PROCEEDING BASED
or created in reliance upon the professed exercise of any UPON, ARISING OUT OF, OR IN ANY WAY
such power or authority shall be included in the RELATING TO: (i) THIS GUARANTEE OR ANY
indebtedness guaranteed hereby. This Guaranty is the SUPPLEMENT OR AMENDMENT THERETO; OR
entire and only agreement between Guarantor and Coast (ii) ANY OTHER PRESENT OR FUTURE
with respect to the guaranty of the Indebtedness of INSTRUMENT OR AGREEMENT BETWEEN
Borrower by Guarantor, and all representations, COAST AND GUARANTOR; OR (III) ANY
warranties, agreements, or undertakings heretofore or BREACH, CONDUCT, ACTS OR OMISSIONS OF
contemporaneously made, which are not set forth herein, COAST OR GUARANTOR OR ANY OF THEIR
are superseded hereby. No course of dealings between the RESPECTIVE DIRECTORS, OFFICERS,
parties, no usage of the trade, and no parol or extrinsic EMPLOYEES, AGENTS, ATTORNEYS OR ANY
evidence of any nature shall be used or be relevant to OTHER PERSON AFFILIATED WITH OR
supplement or explain or modify any term or provision of REPRESENTING COAST OR GUARANTOR; IN
this Guaranty. There are no conditions to the MI EACH OF THE FOREGOING CASES, WHETHER
effectiveness of this Guaranty. The terms and provisions SOUNDING IN CONTRACT OR TORT OR
hereof may not be waived, altered, modified, or amended OTHERWISE.
except in a writing executed by Guarantor and a duly 22. Receipt of Copy. Guarantor acknowledges
authorized officer of Coast. All rights, benefits and receipt of a copy of this Guaranty.
privileges hereunder shall inure to the benefit of and be
enforceable by Coast and its successors and assigns and
shall be binding upon Guarantor and his heirs, executors, Palomar Medical Technologies, Inc.
administrators, personal representatives, successors and
assigns. Neither the death of Guarantor nor notice thereof
to Coast shall terminate this Guaranty as to his estate, and,
notwithstanding the death of Guarantor or notice thereof By: /s/ Steve Georgiev
to Coast, this Guaranty shall continue in full force and -------------------------------
effect with respect to all Indebtedness, including without Its
limitation Indebtedness incurred or created after the death
of Guarantor and notice thereof to Coast. Section Guarantor's Address:
headings are used herein for convenience only. Guarantor 66 Cherry Hill Drive
acknowledges that the same may not describe completely Beverly, MA 0 1915
the subject matter of the applicable Section, and the same
shall not be used in any manner to construe, limit, define
or interpret any term or provision hereof.
20. GOVERNING LAW; VENUE AND JURISDICTION. This Palomar Electronics Corporation
instrument and all acts and transactions pursuant or
relating hereto and all rights and obligations of the parties
hereto shall be governed, construed, and interpreted in
accordance with the internal laws of the State of By: /s/ Joseph P. Caruso
California. In order to induce Coast to accept this -----------------------------
Guaranty, and as a material part of the consideration Its
therefor, Guarantor (i) agrees that all actions or
proceedings relating directly or indirectly hereto shall, at Guarantor's Address:
the option of Coast, be litigated in courts located within
Los Angeles County, California, (ii) consents to the 66 Cherry Hill Drive
jurisdiction of any such court and consents to the service Beverly, M.A 0 1915
of process in any such action or proceeding by personal
delivery or any other method permitted by law; and
(iii) waives any and all rights Guarantor may have to
transfer or change the venue of any such action or
proceeding.
<PAGE>
COAST BUSINESS CREDIT Continuing Guaranty
</TABLE>
STATE OF CALIFORNIA )
)ss.
COUNTY OF )
On 199 , before me,
--------------------------------- -- ----------------
Notary Public, personally appeared
- ---------------------------------------------
personally known to me (or proved to me on the
- ---------------------------------
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
Witness my hand and official seal.
- -----------------------------------
(Seal)
<PAGE>
STATE OF CALIFORNIA )
)ss.
COUNTY OF )
On 199 , before me,
--------------------------------- -- ----------------
Notary Public, personally appeared
- ---------------------------------------------
personally known to me (or proved to me on the
- ---------------------------------
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
Witness my hand and official seal.
- -----------------------------------
(Seal)
LICENSE AGREEMENT
THIS AGREEMENT, effective as of August 18, 1995 (EFFECTIVE DATE)
between THE GENERAL HOSPITAL CORPORATION, a not-for-profit corporation doing
business as Massachusetts General Hospital, having a place of business at Fruit
Street, Boston, Massachusetts 02114 ("GENERAL") and Palomar Medical
Technologies, a Delaware corporation having offices at 66 Cherry Hill Drive,
Beverly, MA 01915 ("PALOMAR").
WITNESSETH
WHEREAS, under research programs funded by GENERAL and the U.S.
Government, GENERAL through research conducted by Dr. R. Rox Anderson, has
developed an invention pertaining to the use of lasers for hair removal;
WHEREAS, GENERAL and PALOMAR have entered into a Clinical Trial
Agreement of even date, attached hereto as Exhibit A ("Clinical Trial
Agreement"), under which PALOMAR is providing funds and equipment to support
clinical trials of said invention at GENERAL;
WHEREAS, GENERAL has filed a U.S. Patent Application covering said
invention and all of the rights, title and interest of the named inventors--Dr.
R. Rox Anderson, Dr. Melanie C. Grossman and William Farinelli--in said
application have been assigned to GENERAL;
WHEREAS, GENERAL represents to the best of its knowledge and belief
that it is the owner of all rights, title and interest in said patent
application and has the right and ability to grant the license hereinafter
described;
WHEREAS, as a center for research and education, GENERAL is interested
in licensing PATENT RIGHTS and thus benefiting the public and GENERAL by
facilitating the dissemination of the results of its research in the form of
useful products, but is without capacity to commercially develop, manufacture,
and distribute any such product; and
WHEREAS, PALOMAR having such capacity, desires to commercially develop,
manufacture, use and distribute such products throughout the world;
NOW THEREFORE, in consideration of the premises and of the faithful
performance of the covenants herein contained, the parties hereto agree as
follows:
1
<PAGE>
1. DEFINITIONS
1.1 (a) The term "ACCOUNTING PERIOD" shall mean each six month period
ending June 30 and December 31.
(b) The term "AGREEMENT YEAR" shall mean the twelve (12) month
period beginning on August 18, 1995 and each succeeding twelve (12) month period
thereafter for the term of the Agreement. If not otherwise specified, terms
involving time periods shall be applied pro rata according to any time frame in
which less than the full specified period is involved.
1.2 The term "AFFILIATE" shall mean any corporation or other legal
entity other than PALOMAR in whatever country organized, controlling, controlled
by or under common control with PALOMAR. The term "control" means possession,
direct or indirect, of the powers to direct or cause the direction of the
management and policies of an entity, whether through the ownership of voting
securities, by contract or otherwise. The term "AFFILIATE" with respect to
GENERAL shall mean any company controlling, controlled by, or under common
control, directly or indirectly, with GENERAL.
1.3 The term "LICENSE FIELD" shall, subject to Exhibit B hereof, mean
hair reduction and/or removal.
1.4 The term "FIRST COMMERCIAL EXPLOITATION" shall mean in each country
the first exploitation by way of sale of any PRODUCT or performance of a
SERVICE, by PALOMAR, its AFFILIATES or SUBLICENSES, (a) following approval, when
such approval is necessary, for the marketing of such PRODUCT or the performance
of such SERVICE, by the appropriate governmental agency for the country in which
the exploitation is to be made, or (b) when such government approval is not
required in a country, the first sale of such PRODUCT or performance of such
SERVICE in that country.
1.5 The term "SUBLICENSEE" shall mean any non-AFFILIATE third party
licensed by PALOMAR or by an AFFILIATE to make, have made, use or sell any
PRODUCT or SERVICE.
1.6 The term "NET REVENUES" shall mean the GROSS REVENUES as defined in
(b) below received by PALOMAR or any of its AFFILIATES or SUBLICENSEES for the
sale or distribution of any PRODUCT or for the performance of any SERVICE, less
(to the extent appropriately documented) the following amounts actually paid out
by PALOMAR, its AFFILIATE or SUBLICENSEES or credited against the GROSS REVENUES
received by them:
(a) (i) credits and allowances for price adjustment, rejection, or
return of PRODUCTS previously sold or SERVICES previously
performed, including reductions imposed by Medicare, Medicaid
or an HMO;
(ii) rebates and cash discounts to customers allowed and taken;
(iii) amounts for transportation, insurance, handling or shipping
charges to customers;
2
<PAGE>
(iv) taxes, duties and other governmental charges levied on or
measured by the sale of PRODUCTS or SERVICES, whether absorbed
by PALOMAR or paid by the purchaser so long as PALOMAR'S price
is reduced thereby, but not franchise or income taxes of any
kind whatsoever;
(v) for any revenues in which the United States government on the
basis of its royalty-free license pursuant to 35 USC Sec.
202(C) to any PATENT RIGHT requires that the GROSS REVENUES of
any PRODUCT or SERVICE subject to such PATENT RIGHT, be
reduced by the amount of such royalty owed GENERAL pursuant to
paragraph 3.1, the amount of such royalty.
(b) For any bone fide sale, lease, license, rental or other disposition
of a PRODUCT or bona fide performance of a SERVICE to a bona fide customer by
PALOMAR, its AFFILIATES or SUBLICENSEES, the GROSS REVENUE shall be the gross
billing price of the PRODUCT or the gross billing price for the SERVICES,
respectively.
(c) If PALOMAR or any of its AFFILIATES or SUBLICENSEES sell any
PRODUCT in a bona fide sale as a component of a combination of active functional
elements, the GROSS REVENUE of the PRODUCT shall be determined by multiplying
the GROSS REVENUE of the combination by the fraction A over A + B, in which "A"
is the GROSS REVENUE of the PRODUCT portion of the combination when sold
separately during the ACCOUNTING PERIOD in the country in which the sale was
made, and "B" is the GROSS REVENUE of the other active elements of the
combination sold separately during said ACCOUNTING PERIOD in said country. In
the event that no separate sale of either such PRODUCT or active elements of the
combination is made during said ACCOUNTING PERIOD in said country, the GROSS
REVENUE of the PRODUCT shall be determined by multiplying the GROSS REVENUE of
such combination by the fraction C over C + D, in which "C" is the standard
fully-absorbed cost of the PRODUCT portion of such combination, and "D" is the
sum of the standard fully-absorbed costs of the other active elements
component(s), such costs being arrived at using the standard accounting
procedures of PALOMAR which will be in accord with generally accepted accounting
practices.
(d) If PALOMAR, or any of its AFFILIATES or SUBLICENSEES, commercially
uses or disposes of any PRODUCT by itself (as opposed to a use or disposition of
the PRODUCT as a component of a combination of active functional elements) other
than in a bona fide sale to a bona fide customer, the GROSS SALES PRICE
hereunder shall be the price which would be then payable in an arm's length
transaction. If PALOMAR, or any of its AFFILIATES or SUBLICENSEES, commercially
uses or disposes of any PRODUCT as a component of a combination of active
functional elements other than in a bona fide sale to a bona fide customer, the
GROSS SALES PRICE of the PRODUCT
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shall be determined in accordance with paragraph (c) above, using as the GROSS
SALES PRICE of the combination that price which would be then payable in an
arm's length transaction.
(e) Transfer of a PRODUCT within PALOMAR or between PALOMAR and an
AFFILIATE for sale by the transferee shall not be considered a sale, commercial
use or disposition for the purpose of the foregoing paragraphs; in the case of
such transfer the GROSS REVENUE shall be based on sale of the PRODUCT by the
transferee.
1.7 The term "PATENT RIGHT" shall mean the U.S. Patent Application
filed by Dr.Anderson, et.al. on February 1, 1995 entitled "Permanent Hair
Removal Using Optical Pulses," or the equivalent of such application, including
any division, continuation or any foreign patent application or Letters Patent
or the equivalent thereof issuing thereon or reissue, reexamination or extension
thereof. Subject to Exhibit B hereof, PATENT RIGHTS shall also include those
claims in any continuation-in-part of the aforementioned patent application
which claim an invention described or claimed in said patent application. PATENT
RIGHTS shall also include GENERAL's rights assigned to GENERAL by an
Investigator under the Clinical Trial Agreement, in any patent application or
patent claiming a Study Invention as defined in the Clinical Trial Agreement and
as to which PALOMAR has notified GENERAL of PALOMAR's desire to have a patent
application filed in accordance with paragraph 2.3 of the Clinical Trial
Agreement.
1.8 The term "PRODUCT" shall mean any article, device or composition,
the manufacture, use, or sale of which
(a) absent the licenses granted herein, would infringe a VALID
CLAIM of any PATENT RIGHT, or
(b) does not infringe a VALID CLAIM of any PATENT RIGHT licensed
to PALOMAR hereunder but the discovery, development,
manufacture or use of which employs TECHNOLOGICAL INFORMATION.
1.9 The terms "SERVICE" shall mean any method or service the use,
performance of sale of which:
(a) absent the licenses granted herein, would infringe a VALID
CLAIM of any PATENT RIGHT, or
(b) does not infringe a VALID CLAIM of any PATENT RIGHT licensed
to PALOMAR hereunder but the discovery, development,
manufacture or use of which employs TECHNOLOGICAL INFORMATION.
1.10 The term "TECHNOLOGICAL INFORMATION" shall mean any research data,
designs, formulas, process information, clinical data and other information
pertaining to any invention claimed in
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PATENT RIGHT which is known to Dr. Anderson on the EFFECTIVE DATE and disclosed
to Palomar within thirty (30) days of the date on which this Agreement is fully
executed. This term shall also include information which is disclosed to PALOMAR
by GENERAL in accordance with, and during the term of, the Clinical Trial
Agreement and which pertains to any PATENT RIGHT claiming an Invention as
defined in said Agreement.
1.11 The term "VALID CLAIM" shall mean any claim of any PATENT RIGHT
that has not been (i) finally rejected or (ii) declared invalid by a patent
office or court of competent jurisdiction in any unappealed and unappealable
decision.
2. LICENSE
2.1 GENERAL hereby grants PALOMAR, subject to the rights of the United
States Government:
(a) an exclusive, worldwide, royalty-bearing license in
the LICENSE FIELD under GENERAL's rights in PATENT
RIGHTS to make, have made, use and sell PRODUCTS and
to perform SERVICES;
(b) the right to sublicense (i) PATENT RIGHTS exclusively
licensed to PALOMAR and (ii) PATENT RIGHTS
non-exclusively licensed to PALOMAR to the extent
such a sublicense is required for a customer to use a
PRODUCT or to practice a SERVICE.
All licenses pursuant to this paragraph 2.1 are subject to the rights,
conditions and limitations imposed by U.S. law with respect to inventions made
in the performance of federally funded research.
The above licenses to sell PRODUCTS include the right to grant to the
purchaser of products from PALOMAR, its AFFILIATES, and SUBLICENSEES the right
to use such purchased PRODUCTS in a method coming within the scope of PATENT
RIGHT.
2.2 The granting of any license hereunder is subject to GENERAL's and
GENERAL's AFFILIATES' right to make and to use the subject matter described and
claimed in PATENT RIGHT for research and clinical purposes but for no other
purpose.
2.3 Within thirty (30) days of EFFECTIVE DATE, upon request by PALOMAR,
GENERAL shall disclose to PALOMAR, TECHNOLOGICAL INFORMATION which PALOMAR will
be entitled to use to the extent such use does not infringe any GENERAL patent
not licensed to PALOMAR hereunder. GENERAL represents to the best of its
knowledge after reasonable enquiry there are no GENERAL patents or applications
not licensed hereunder which would be infringed by such use.
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2.4 Subject to Exhibit B hereof, GENERAL shall have the right to
license any PATENT RIGHT to any other party for the purpose of manufacturing,
using or selling of any PRODUCT or performance of any SERVICE outside of the
LICENSE FIELD.
2.5 It is understood that nothing herein shall be construed to grant
PALOMAR a license express or implied under any patent owned solely or jointly by
General other than the PATENT RIGHTS expressly licensed hereunder, provided
that, in the event that GENERAL's Office of Technology Affairs ("OTA") is
notified of a patentable invention assigned or assignable to GENERAL which OTA
believes would, if patented, be infringed by the manufacture, use or sale of a
PRODUCT or SERVICE ("Dominant Invention"), and in the event that at the time OTA
is notified of said Dominant Invention, no third party has been granted
exclusive rights, or an option to exclusive rights, in said Dominant Invention,
OTA shall give PALOMAR notice of said Dominant Invention and give PALOMAR an
opportunity to negotiate an exclusive or non-exclusive license under GENERAL's
rights in said Dominant Invention, whichever is available, it being understood
that GENERAL shall have no obligation to enter into such a license with PALOMAR.
3. DUE DILIGENCE OBLIGATIONS
3.1 PALOMAR shall itself, or through its AFFILIATES or SUBLICENSEES,
use reasonable efforts to develop and make commercially available PRODUCTS for
commercial sales and distribution throughout the world in the LICENSE FIELD.
Such efforts shall consist of:
(a) Entering into the Clinical Trial Agreement with General attached
hereto as Exhibit A and providing the funding specified in said Agreement;
(b) Commencing the commercial sale of the PRODUCT or SERVICES outside
the United States within three (3) months after tests on a normal mode ruby
laser have been completed and approval has been received from the Principal
Investigator (see Clinical Trial Agreement) that such laser works acceptably;
(c) Filing with the U.S. Food and Drug Administration for a 510(k) on
any PRODUCT within three (3) months of receipt of clinical data from GENERAL
sufficient for such filing, it being understood that GENERAL is providing such
data to PALOMAR pursuant to the Clinical Trial Agreement. In the event that
GENERAL fails to provide such data, GENERAL and PALOMAR shall confer to
establish a reasonable procedure and schedule to secure approval for such
PRODUCT, and in the event that GENERAL and PALOMAR cannot agree on such
procedure and schedule they shall resolve this issue in accordance with the
dispute resolution provisions of paragraph 10.9;
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(d) Commencing the commercial sale of the PRODUCT or SERVICES within
the United States within six (6) months after FDA clearance is received.
However, GENERAL shall not unreasonably withhold its consent to any
revision in such time periods whenever requested in writing by PALOMAR and
supported by evidence of technical difficulties or delays in clinical studies or
regulatory processes that the parties could not have reasonably avoided. Failure
to achieve one or more of the above objectives within the above stated time
periods or within any extension granted by GENERAL shall result in GENERAL
having the right to cancel upon thirty (30) days notice any exclusive license
granted hereunder or convert any exclusive license to a non-exclusive license.
3.2 At intervals no longer than every six (6) months, PALOMAR shall
report in writing to GENERAL on progress made toward the foregoing objectives.
4. FILING, PROSECUTION AND MAINTENANCE OF PATENT RIGHT
4.1 GENERAL shall be responsible for the preparation, filing,
prosecution and maintenance of all patent applications and patents included in
PATENT RIGHTS. PALOMAR shall reimburse GENERAL for all reasonable costs
("Costs") incurred by GENERAL for the preparation, filing, prosecution and
maintenance of all PATENT RIGHTS as follows:
(a) Subject to paragraph 4.2, for all Costs incurred by GENERAL from
and after the EFFECTIVE DATE, PALOMAR shall pay such Costs directly to legal
counsel upon receipt of invoices from GENERAL or legal counsel;
(b) For all Costs incurred by GENERAL prior to the EFFECTIVE DATE,
PALOMAR shall reimburse GENERAL within thirty (30) days of the date on which
this Agreement is executed by the last party to sign.
4.2 With respect to any PATENT RIGHT, each document or a draft thereof
pertaining to the filing, prosecution, or maintenance of such PATENT RIGHT,
including but not limited to each patent application, office action, response to
office action, request for terminal disclaimer, and request for reissue or
reexamination of any patent issuing from such application shall be provided to
PALOMAR as follows. Documents received from any patent office or counsel's
analysis thereof shall be provided promptly after receipt. For a document to be
filed in any patent office, a draft of such document shall be provided
sufficiently prior to its filing, to allow for review and comment by the other
party. If as a result of the review of any such document, PALOMAR shall elect
not to pay or continue to pay the Costs for such PATENT RIGHT, PALOMAR shall so
notify GENERAL within thirty (30) days of
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PALOMAR's receipt of such document and PALOMAR shall thereafter be relieved of
the obligation to pay any additional Costs regarding such PATENT RIGHT incurred
after the receipt of such notice by GENERAL. Such U.S. or foreign patent
application or patent shall thereupon cease to be a PATENT RIGHT hereunder and
GENERAL shall be free to license its rights to that particular U.S. or foreign
patent application or patent to any other party on any terms. PALOMAR shall also
have the right to provide comments and recommendations on any action proposed to
be taken by GENERAL and GENERAL agrees to take into account PALOMAR's
recommendations. Where a course of action is followed on a PATENT RIGHT which is
both contrary to PALOMAR's recommendations and which increases costs over such
recommendation, PALOMAR shall only be responsible for costs which would have
been incurred had its recommendation been followed.
5. ROYALTIES; LICENSE FEES
5.1 (a) PALOMAR shall pay GENERAL a license issue fee of Two Hundred
and Fifty Thousand Dollars ($250,000) as follows:
(i) Within thirty (30) days of the date of the execution of this
Agreement by the last party to sign hereunder, PALOMAR shall pay
GENERAL Fifty Thousand Dollars ($50,000), one half of which shall be
creditable against future royalties paid pursuant to paragraphs 5.1 (b)
hereunder;
(ii) On or before January 10, 1996, PALOMAR shall pay GENERAL Two
Hundred Thousand Dollars ($200,000) no portion of which shall be
creditable against future royalties.
(b) Beginning with the FIRST COMMERCIAL EXPLOITATION in any
country, on all sales of PRODUCTS anywhere in the world by PALOMAR, its
AFFILIATES or SUBLICENSEES, PALOMAR shall pay GENERAL royalties in accordance
with the following schedule, subject to Exhibit B hereof, such undertaking and
schedule having been agreed to for the purpose of reflecting and advancing the
mutual convenience of the parties.
(i) For: (A) each PRODUCT sold by PALOMAR or its AFFILIATES
and SUBLICENSEES consisting of (1) a ruby laser or (2) any
other laser sold solely for hair removal, or (3) any non-laser
equipment/disposables used for the practice of a SERVICE, and
(B) any non-laser equipment/disposable sold by PALOMAR or
AFFILIATES and SUBLICENSEES which are not PRODUCTS hereunder
but which are used for the practice of a SERVICE,
(I) Five percent (5%) of NET REVENUES so long as the
PRODUCT, its manufacture, use or sale is
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covered by a VALID CLAIM of any PATENT RIGHT licensed
exclusively to PALOMAR in the country in question;
(II) Two and one-half percent (2-1/2%) of the NET
REVENUES whenever the PRODUCT, its manufacture, use
or sale is covered by a VALID CLAIM of any PATENT
RIGHT licensed non-exclusively to PALOMAR in the
country in question;
(III) During each of the eight (8) years next
following the FIRST COMMERCIAL EXPLOITATION anywhere
in the world by PALOMAR, its AFFILIATES or LICENSEES,
One and one quarter percent ( 1-1/4%) of the NET
REVENUES of PRODUCT on which no royalty is payable
under paragraph 5.1(a) or 5.1(b) above.
Paragraph 1.6(c) notwithstanding, it is understood that for
purposes of calculating the above royalty, the royalty on any
PRODUCT which constitutes a laser which is produced or
manufactured such that it incorporates, is combined with, or
is designed to incorporate or be combined with, accessories
that are used for hair removal ("Modified Laser") shall be
based on the NET REVENUES for such Modified Laser, and the
royalty on any PRODUCT which constitutes accessories used in
modifying a laser but which is sold independently of the laser
("Modification Kits") shall be based on the NET REVENUES for
such Modification Kits.
(ii) For each PRODUCT sold by PALOMAR consisting of a laser (other than
the ruby laser, the sales of which shall in any event be subject to the
5% royalty described is subparagraph 5(b)(i) above) sold for hair
removal as well as other uses, the parties agree to negotiate in good
faith a commercially reasonable royalty to be paid to GENERAL in
accordance with the formula provided for in paragraph 1.6 (c),
provided, that in no event shall said royalty be less than two and a
half percent (2-1/2%) of NET REVENUES received by PALOMAR, its
AFFILIATES or SUBLICENSEES.
(iii) (A) (1) For any SERVICE performed by (a) PALOMAR or its
AFFILIATES or SUBLICENSEES or (b) any other third party by virtue of
any right or license granted by PALOMAR or its AFFILIATES or
SUBLICENSEES, and
(2) For any commercial disposition (other than sale) of any
PRODUCT by PALOMAR or its AFFILIATES or SUBLICENSEES,
PALOMAR shall pay GENERAL a commercially reasonable percentage of the
NET REVENUES received by PALOMAR or its AFFILIATES or SUBLICENSEES, the
percentage to be established by the parties
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at such time as PALOMAR has knowledge of the method by which NET
REVENUES for said SERVICES or PRODUCTS will be calculated and paid, and
in no event later than the FIRST COMMERCIAL EXPLOITATION of such
PRODUCT or SERVICES by said method, and said percentage shall remain in
effect for so long as the SERVICE or PRODUCT is marketed in accordance
with said method. In order to aid the parties in establishing said
percentage, PALOMAR shall provide GENERAL with complete information
relevant thereto, including projected NET REVENUES and PALOMAR's
projected net profit margins.
(B) The payments to be made to GENERAL pursuant to paragraph
5(b)(iii) for PRODUCTS and SERVICES covered by a VALID CLAIM of any
PATENT RIGHT, shall be a commercially reasonable royalty rate targeted
to be in the range of three to five percent (3-5%) of NET REVENUES
received by PALOMAR its AFFILIATES or SUBLICENSEES (which royalty rate
the parties anticipate will fall within the range of twenty to thirty
percent (20-30%) of PALOMAR's estimated profit margin on said PRODUCTS
or SERVICES).
(C) The payments to be made to GENERAL pursuant to 5(b)(iii)
for PRODUCTS and SERVICES not covered by a VALID CLAIM of any PATENT
RIGHT, shall be made for eight (8) years following FIRST COMMERCIAL
EXPLOITATION of such PRODUCT or SERVICE, and shall be a commercially
reasonable rate targeted to be in the range of seventy-five hundredths
of one percent to one and one quarter percent (.75%-1-1/4%) of NET
REVENUES received by PALOMAR, its AFFILIATES or SUBLICENSEES, which the
parties anticipate will fall within the range of five to six and one
quarter percent (5-6 1/4%) of PALOMAR's estimated profit margin on said
PRODUCTS or SERVICES.
(D) Annual minimum royalties:
(1) PALOMAR shall pay GENERAL an annual minimum royalty due
and payable no later than the end of the AGREEMENT YEAR during
which the FDA grants 510K approval (actual or deemed), or
comparable approval, of any PRODUCT or SERVICE ("First 510K"),
and at the end of each AGREEMENT YEAR thereafter, provided
that no such payment shall be due in the event that the amount
of royalties paid to GENERAL hereunder in an AGREEMENT YEAR
are equal to or greater than the annual minimum royalty due
and payable for said AGREEMENT YEAR.
(2) The parties agree to establish the annual amounts of such
minimum royalties due for all Agreement Years within sixty
(60) days of PALOMAR's receipt of notice of the First 510K.
The parties intend that the annual minimum royalty shall be an
amount established by the following
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formula: Multiply one-tenth the royalty rate due hereunder for
PRODUCTS and SERVICES (or, in the event that more than one
royalty rate is anticipated to be due hereunder, a royalty
rate which reflects a reasonable weighted averaged of the
anticipated royalty rates) times PALOMAR's projected NET
REVENUES for each Agreement Year.
(3) PALOMAR shall owe GENERAL minimum royalties pursuant to
this paragraph until the expiration of the last AGREEMENT YEAR
in which PALOMAR holds an exclusive license to PATENT RIGHTS
hereunder.
(iv) In the event that the parties fail to agree on the payments or
annual minimum royalties due and payable under paragraphs 5(b)(ii) or
5(b)(iii), the parties agree to resolve this issue in accordance with
the dispute resolution provisions set forth in paragraph 10.9 below.
5.2 (a) In the event that more than one royalty rate under paragraph
5.1 is applicable to a PRODUCT or SERVICE, the highest of the applicable
royalties shall apply.
(b) Only one royalty under paragraph 5.1 shall be due and payable to
GENERAL by PALOMAR for any PRODUCT or SERVICE regardless of the number of PATENT
RIGHTS covering such PRODUCT or SERVICE.
5.3 If any license granted pursuant to Section 2 shall be or become
non-exclusive and GENERAL shall license any PATENT RIGHT to another licensee for
the purpose of making, using, practicing or selling PRODUCTS and/or SERVICES in
the LICENSE FIELD and accept financial terms which, taken as a whole, are more
favorable to such licensee than herein provided for PALOMAR, GENERAL shall give
written notice thereof to PALOMAR and PALOMAR shall have the option, upon
PALOMAR's written notice to GENERAL, to revise its license hereunder to such
more favorable terms, effective as of the effective date of GENERAL's license to
said other licensee.
5.4 In addition to the royalties provided for above, PALOMAR shall pay
GENERAL ten percent (10%) of any and all income, other than a royalty or other
payment made pursuant to paragraphs 5.1, above, including, by way of example,
license issue fees and milestone payments received by PALOMAR from its
AFFILIATES and SUBLICENSEES, in consideration for the sublicensing of any right
or license granted to PALOMAR hereunder.
5.5 In addition to the payments provided for in paragraphs 5.1 through
5.4, PALOMAR shall pay GENERAL the following amounts upon the occurrence of the
following events, one half of which payments shall be creditable against future
royalties paid pursuant to paragraphs 5.1(b) hereof:
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$20,000 upon FDA allowance of the first Investigational
Device Exemption with respect to a PRODUCT
incorporating or combined with a ruby, alexandrite
and diode laser.
$35,000 upon FDA approval (actual or deemed), by the FDA of
the first 510(k) or comparable application with
respect to each PRODUCT incorporating or combined
with a ruby, alexandrite laser and diode laser.
$75,000 upon first issuance in the United States of a PATENT
RIGHT with claims that covers a PRODUCT or SERVICE.
5.6 In the event that the royalty paid to GENERAL is a significant
factor in the return realized by PALOMAR so as to diminish PALOMAR's capability
to respond to competitive pressures in the market, GENERAL agrees to consider a
reasonable reduction in the royalty paid to GENERAL as to each such PRODUCT and
SERVICE for the period during which such market condition exists. Factors
determining the size of the reduction will include profit margin on PRODUCT and
SERVICES and on analogous products, prices of competitive products and services,
total prior sales by PALOMAR, and PALOMAR's expenditures in PRODUCT and SERVICE
development.
5.7 The payments due under this Agreement shall, if overdue, bear
interest until payment at a per annum rate equal to one percent (1%) above the
prime rate in effect at the Bank of Boston on the due date, not to exceed the
maximum permitted by law. The payment of such interest shall not preclude
GENERAL from exercising any other rights it may have as a consequence of the
lateness of any payment.
5.8 PALOMAR shall provide GENERAL at least twice each AGREEMENT YEAR
with reports setting forth PALOMAR's marketing plans (including the financial
terms on which PRODUCTS and SERVICES will be made available to SUBLICENSEES and
end-users) and market projections (including projected NET REVENUES) for any
PRODUCT or SERVICE on which payments to GENERAL have not been determined
hereunder and which PALOMAR contemplates marketing within said AGREEMENT YEAR or
the following AGREEMENT YEAR.
6. REPORTS AND PAYMENTS
6.1 PALOMAR shall keep, and shall cause each of its AFFILIATES and
SUBLICENSEES, if any, to keep full and accurate books of accounts containing all
particulars that may be necessary for the purpose of calculating all royalties
payable to GENERAL. Such books of account shall be kept at their principal place
of business and, with all necessary supporting data shall, during all reasonable
times for the three (3) years next following the end of the calendar year to
which each shall pertain be open for inspection at reasonable times and on
reasonable notice by GENERAL
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or its designee at GENERAL's expense for the
purpose of verifying royalty statements or compliance with this Agreement. Such
inspections shall be conducted no more than twice during any twelve (12) month
period.
6.2 In each year the amount of royalty due shall be calculated
semiannually as of the end of each ACCOUNTING PERIOD and shall be paid
semiannually within the sixty (60) days next following such date, every such
payment to be supported by the accounting prescribed in paragraph 6.3 and to be
made in United States currency. Whenever conversion from any foreign currency
shall be required, such conversion shall be at the rate of exchange thereafter
published in the Wall Street Journal for the business day closest to the end of
the applicable ACCOUNTING PERIOD.
6.3 With each semiannual payment, PALOMAR shall deliver to GENERAL a
full and accurate accounting to include at least the following information to
the extent necessary to determine royalties:
(a) Quantity of each PRODUCT sold or leased (by country)
by PALOMAR, and its AFFILIATES or SUBLICENSEES;
(b) Total billings for each PRODUCT (by country);
(c) Quantities of each PRODUCT used by PALOMAR and its
AFFILIATES or SUBLICENSEES;
(d) Revenues from SERVICES paid to PALOMAR and its
AFFILIATES OR SUBLICENSEES;
(e) Names and addresses of all SUBLICENSEES of PALOMAR;
and
(f) Total royalties payable to GENERAL.
7. INFRINGEMENT
7.1 GENERAL will protect its PATENT RIGHTS from infringement and
prosecute infringers when, in its sole judgement, such action may be reasonably
necessary, proper and justified.
7.2 If PALOMAR shall have supplied GENERAL with written evidence
demonstrating to GENERAL's reasonable satisfaction prima facie infringement of a
claim of a PATENT RIGHT by a third party, PALOMAR may by notice request GENERAL
to take steps to protect the PATENT RIGHT. GENERAL shall notify PALOMAR within
sixty (60) days of the receipt of such notice whether GENERAL intends to
prosecute the alleged infringement. If GENERAL notifies PALOMAR that it intends
to so prosecute, GENERAL shall, within three (3) months of its notice to PALOMAR
either (i) cause infringement to terminate or
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(ii) initiate legal proceedings against the infringer. In the event GENERAL
notifies PALOMAR that GENERAL does not intend to prosecute said infringement
PALOMAR may, upon notice to GENERAL, initiate legal proceedings against the
infringer at PALOMAR's expense and in GENERAL's name if so required by law. No
settlement, consent judgment or other voluntary final disposition of the suit
which invalidates or restricts the claims of such PATENT RIGHTS may be entered
into without the consent of GENERAL, which consent shall not be unreasonably
withheld, and shall not be withheld unless GENERAL assumes responsibility for
future expenses in litigation. PALOMAR shall indemnify GENERAL against any order
for payment that may be made against GENERAL in such proceedings. During the
period of any such proceedings initiated by PALOMAR, PALOMAR shall have the
right to escrow fifty percent (50%) of the royalties which would otherwise be
paid under this Agreement and to use such escrowed funds to offset fifty percent
(50%) of the expenses of the proceedings. On the termination of the proceedings,
and the payment of (50%) of all expenses in connection therewith, any funds
remaining in the escrow will be promptly paid to GENERAL.
7.3 In the event one party shall initiate or carry on legal proceedings
to enforce any PATENT RIGHT against any alleged infringer, the other party shall
fully cooperate with and supply all assistance reasonably requested by the party
initiating or carrying on such proceedings. The party which institutes any suit
to protect or enforce a PATENT RIGHT shall have sole control of that suit and
shall bear the reasonable expenses (excluding legal fees) incurred by said other
party in providing such assistance and cooperation as is requested pursuant to
this paragraph. The party initiating or carrying on such legal proceedings shall
keep the other party informed of the progress of such proceedings and said other
party shall be entitled to counsel in such proceedings but at its own expense.
Any award paid by third parties as the result of such proceedings (whether by
way of settlement or otherwise) shall first be applied to reimbursement of the
unreimbursed legal fees and expenses incurred by either party, including
reimbursement to GENERAL or any escrowed royalties not otherwise refunded, and
then the remainder shall be divided between the parties as follows:
(a) (i) If the amount is based on lost profits, PALOMAR shall
receive an amount equal to the damages the court determines
PALOMAR has suffered as a result of the infringement less the
amount of any royalties that would have been due GENERAL on
sales of PRODUCT lost by PALOMAR as a result of the
infringement had PALOMAR made such sales; and
(ii) GENERAL shall receive an amount equal to the royalties it
would have received if such sales had been made by PALOMAR; or
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(b) As to awards other than those based on lost profits, sixty
(60) percent to the party initiating such proceedings and
forty (40) percent to the other party, provided that in the
event that GENERAL has paid for further litigation subsequent
to GENERAL's refusal to agree to a settlement, consent
judgement or voluntary final disposition of a suit pursuant to
paragraph 7.2, such awards shall be divided equally between
the parties.
7.4 For the purpose of the proceedings referred to in this Article 7,
the GENERAL and PALOMAR shall permit the use of their names and shall execute
such documents and carry out such other acts as may be necessary. The party
initiating or carrying on such legal proceedings shall keep the other party
informed of the progress of such proceedings and said other party shall be
entitled to counsel in such proceedings but at its own expense, said expenses to
be off-set against any damages received by the party bringing suit in accordance
with the foregoing paragraph 7.3.
8. INDEMNIFICATION
8.1 (a) PALOMAR shall indemnify, defend and hold harmless GENERAL and
its trustees, officers, medical and professional staff, employees, and agents
and their respective successors, heirs and assigns (the "Indemnitees"), against
any liability, damage, loss or expense (including reasonable attorney's fees and
expenses of litigation) incurred by or imposed upon the Indemnitees or any one
of them in connection with any claims, suits, actions, demands or judgments
arising out of any theory of product liability (including, but not limited to,
actions in the form of tort, warranty, or strict liability) concerning any
product, process or service made, used or sold pursuant to any right or license
granted under this Agreement.
(b) Licensees' indemnification under (a) above shall not apply to any
liability, damage, loss or expense to the extent that it is directly
attributable to the negligent activities, reckless misconduct or intentional
misconduct of the Indemnitees.
(c) PALOMAR agrees, at its own expense to provide attorneys reasonably
acceptable to the GENERAL to defend against any actions brought or filed against
any party indemnified hereunder with respect to the subject of indemnity
contained herein, whether or not such actions are rightfully brought.
(d) This paragraph 8.1 shall survive expiration or termination of this
Agreement.
8.2 (a) At such time as any product, process or service relating to, or
developed pursuant to, this Agreement is being commercially distributed or sold
(other than for the purpose of obtaining regulatory approvals) by PALOMAR or by
a licensee,
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AFFILIATE or agent of PALOMAR, PALOMAR shall, at its sole cost and expense,
procure and maintain comprehensive general liability insurance in amounts not
less than $2,000,000 per incident and $2,000,000 annual aggregate and naming the
Indemnitees as additional insureds. Such comprehensive general liability
insurance shall provide (i) product liability coverage and (ii) broad form
contractual liability coverage for PALOMAR's indemnification under paragraph 8.1
of this Agreement. If PALOMAR elects to self-insure all or part of the limits
described above (including deductibles or retentions which are in excess of
$250,000 annual aggregate) such self-insurance program must be acceptable to the
GENERAL and the Risk Management Foundation. The minimum amounts of insurance
coverage required under this paragraph 8.2 shall not be construed to create a
limit of PALOMAR's liability with respect to its indemnification under paragraph
8.1 of this Agreement.
(b) PALOMAR shall provide GENERAL with written evidence of such
insurance upon request of GENERAL. PALOMAR shall provide GENERAL with written
notice at least fifteen (15) days prior to the cancellation, non-renewal or
material change in such insurance; if PALOMAR does not obtain replacement
insurance providing comparable coverage prior to the expiration of such fifteen
(15) day period, GENERAL shall have the right to suspend this Agreement
effective at the end of such fifteen (15) day period without notice or any
additional waiting periods until such coverage is obtained. If such coverage is
not obtained within forty-five (45) days of the original cancellation, GENERAL
shall have the right to immediately terminate this Agreement.
(c) PALOMAR shall maintain such comprehensive general liability
insurance beyond the expiration or termination of this Agreement during (i) the
period that any product, process, or service, relating to, or developed pursuant
to, this Agreement is being commercially distributed or sold (other than for the
purpose of obtaining regulatory approvals) by PALOMAR or by a licensee,
AFFILIATE or agent of PALOMAR and (ii) a reasonable period after the period
referred to in (c) (i) above which in no event shall be less than fifteen (15)
years.
(d) This paragraph 8.2 shall survive expiration or termination of this
Agreement.
8.3 Each party warrants to the other that it has the right to enter
into this Agreement, that this Agreement is not in conflict with any other
Agreement of the party, and that the party will not do anything during the term
of this Agreement, or enter into any other Agreement during the term of this
Agreement which is inconsistent herewith. GENERAL further warrants that it is
the owner of the PATENT RIGHTS, that except for certain non-exclusive license
rights in the U.S. Government, no other party has any rights or interest in the
PATENT RIGHTS. While GENERAL makes no
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warranty as to the efficacy of this technology for hair removal, PRINCIPAL
INVESTIGATOR does represent that he has completely and accurately disclosed to
PALOMAR all information in his possession as of the date of this Agreement
concerning the efficacy and safety of the PRODUCT and SERVICES, to the extent
the PRODUCT and SERVICES are known to him, and PRINCIPAL INVESTIGATOR agrees
that he will continue to disclose any information which he learns of in these
areas to PALOMAR for so long as PALOMAR is funding his research in the field of
lasers for hair removal at GENERAL.
8.4 OTHER THAN WARRANTIES SET FORTH HEREIN, GENERAL MAKES NO WARRANTY,
EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE WITH
RESPECT TO ANY PATENT, TRADEMARK, SOFTWARE, TRADE SECRET, TANGIBLE RESEARCH
PROPERTY, INFORMATION OR DATA LICENSED OR OTHERWISE PROVIDED TO PALOMAR
HEREUNDER AND HEREBY DISCLAIMS THE SAME.
9. TERMINATION
9.1 Unless otherwise terminated as provided for in this Agreement, the
license to PATENT RIGHT granted hereunder will continue until the last to expire
of any PATENT RIGHT, the claims of which but for this Agreement would be
infringed by the manufacture, use, practice or sale of any PRODUCT or SERVICE.
9.2 GENERAL shall have the right to terminate any license under U.S.
PATENT RIGHTS granted under this Agreement in the event that, after the FIRST
COMMERCIAL EXPLOITATION in the United States there is a continuous two (2) year
period in which no NET REVENUES are generated in the United States. With respect
to PATENT RIGHTS in any other country, GENERAL shall have the right to convert,
on a country by country basis, any exclusive license under PATENT RIGHTS granted
under this Agreement to a non-exclusive license upon written notice in the event
that, after the FIRST COMMERCIAL EXPLOITATION in a country there is a continuous
two (2) year period in any country in which no NET REVENUES are generated in
said country. Notwithstanding the foregoing, GENERAL shall not have the right to
terminate a license in the United States or convert an exclusive license to a
non-exclusive license in any other country, in the event that the generation of
NET REVENUES is prevented by force majeure, government regulation or
intervention, or institution of a law suit by any third party.
9.3 If either party shall fail to faithfully perform any of its
obligations under this Agreement except the due diligence milestones specified
in Section 3 herein, the nondefaulting party may give written notice of the
default to the defaulting party. Unless such default is corrected within thirty
(30) days after such notice, the notifying party may terminate this Agreement
and the license hereunder upon thirty (30) days prior written notice, provided
that only one such thirty (30) day grace period shall be
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available in any twelve (12) month period with respect to a default of any
particular payment provision hereunder. Thereafter, at the option of the
non-defaulting party, notice of default of said provision shall constitute
termination.
9.4 In the event that any license granted to PALOMAR under this
Agreement is terminated, any sublicense under such license granted prior to
termination of said license shall remain in full force and effect, provided
that:
(i) the SUBLICENSEE is not then in breach of its sublicense agreement;
(ii) the SUBLICENSEE agrees to be bound to GENERAL as the licensor
under the terms and conditions of this sublicense agreement, as modified by the
provisions of this paragraph 9.4;
(iii) the SUBLICENSEE, at GENERAL's written request, assumes in a
signed writing the same obligations to GENERAL as those assumed by PALOMAR under
Articles 8 and 10 hereof;
(iv) GENERAL shall have the right to receive any payments payable to
PALOMAR under such sublicense agreement to the extent they are reasonably and
equitably attributable to such SUBLICENSEE's right under such sublicense to use
and exploit PATENT RIGHTS and/or TECHNOLOGICAL INFORMATION;
(v) any exclusive SUBLICENSEE agrees to be bound by the due diligence
obligations of PALOMAR pursuant to paragraph 3.1 hereof (whether set by the
parties or by arbitration) in the field and territory of the sublicense;
(vi) GENERAL has the right to terminate such sublicense upon fifteen
(15) days prior written notice to PALOMAR and such SUBLICENSEE in the event of
any material breach of the obligation to make the payments described in clause
(iv) of this paragraph 9.3, unless such breach is cured prior to the expiration
of such fifteen (15) day period, and shall further have the right to terminate
such sublicense in the event of SUBLICENSEE's failure to meet its due diligence
obligations pursuant to clause (v) hereof;
(vii) GENERAL shall not assume, and shall not be responsible to such
SUBLICENSEE for, any representations, warranties or obligations of PALOMAR to
such SUBLICENSEE, other than to permit such SUBLICENSEE to exercise any rights
to PATENT RIGHTS and TECHNOLOGICAL INFORMATION that are granted under such
sublicense agreement consistent with the terms of this AGREEMENT.
9.5 Upon termination of any license granted hereunder, PALOMAR shall
pay GENERAL all royalties due or accrued on the NET REVENUES up to and including
the date of termination. In the event of any termination, PALOMAR shall also
have the right to fill all
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existing order for PRODUCTS, provided the royalties set forth herein are paid on
such orders. Further, in the event of any termination as a result either of a
default by GENERAL or as a result of the bankruptcy, insolvency, or other
termination of doing business by GENERAL, PALOMAR shall have the option of
maintaining the licenses granted herein in effect provided it continues to pay
royalties on NET REVENUES.
10. MISCELLANEOUS
10.1 This Agreement, including the Exhibits thereto, constitutes the
entire understanding between the parties with respect to the subject matter
hereof and all prior agreements, whether oral or written, are merged herein.
10.2 In order to facilitate implementation of this Agreement, GENERAL
and PALOMAR are designating the following individuals to act on their behalf
with respect to this Agreement for the matter indicated below:
(a) with respect to all royalty payments, any correspondence
pertaining to any PATENT RIGHT, or any notice of the use of
GENERAL's name, for GENERAL, Vice-President, Patents,
Licensing and Industry Sponsored Research, and for PALOMAR,
President; provided that correspondence relating to the
billing of patent costs shall be copied to, for GENERAL, the
Business Manager, Office of Technology Affairs, and for
PALOMAR, the President.
(b) any amendment of or waiver under this Agreement, any written
notice including progress reports or other communication
pertaining to the Agreement: for GENERAL, the Vice-President,
Patents, Licensing and Industry Sponsored Research, and for
PALOMAR, the President.
(c) the above designations may be superseded from time to time by
alternative designations made by: for GENERAL, the President
or the Senior Vice President for Research and Technology
Affairs, and for PALOMAR, the President.
10.3 This Agreement may be amended and any of its terms or conditions
may be waived only by a written instrument executed by the parties or, in the
case of a waiver, by the party waiving compliance. The failure of either party
at any time or times to require performance of any provision hereof shall in no
manner affect its rights at a later time to enforce the same. No waiver by
either party of any condition shall be deemed as a further or continuing waiver
of such condition or term or of any other condition or term.
10.4 This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors and
permitted assigns.
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10.5 Any delays in or failures of performance by either party under
this Agreement shall not be considered a breach of this Agreement if and to the
extent caused by occurrences beyond the reasonable control of the party
affected, including but not limited to: Acts of God; acts, regulations or laws
of any government; strikes or their concerted acts of worker; fires; floods;
explosions; riots; wars; rebellion; and sabotage. Any time for performance
hereunder shall be extended by the actual time of delay caused by such
occurrence.
10.6 Neither party shall use the name of the other party or of any
staff member, officer, employee or student of the other party or any adaptation
thereof in any advertising, promotional or sales literature, publicity or in any
document employed to obtain funds or financing without the prior written
approval of the party or individual whose name is to be used. For GENERAL, such
approval shall be obtained from the Director of Public Affairs. GENERAL agrees
to respond within ten (10) business days of GENERAL's receipt of any request for
approval under this paragraph, provided that such request is delivered to the
Director of Public Affairs, 101 Merrimac Street, Fourth Floor, Boston, MA 02114
(Tel. #617-726-2206; fax #726-6465) and is prominently marked "Urgent -- Please
respond within ten days." GENERAL shall not unreasonably withhold its consent to
any use of its name which accurately and appropriately describes the
licensee-licensor relationship of the parties under this Agreement and of the
parties' participation in the Study conducted under the Clinical Trial
Agreement, and which does not imply directly or indirectly any endorsement by
General of any product or service. Company shall not unreasonably withhold its
consent to any use of its name which accurately and appropriately describes the
licensee-licensor relationship of the parties under this Agreement and the
parties' participation in the Study under the Clinical Trial Agreement.
10.7 This Agreement shall be governed by and construed and interpreted
in accordance with the laws of the Commonwealth of Massachusetts.
10.8 This Agreement shall not be assignable by GENERAL without
PALOMAR'S written consent except for the right to receive royalties or other
payments payable herein. PALOMAR may at its own discretion and without approval
by GENERAL transfer its interest or any part thereof under this Agreement to a
wholly-owned subsidiary or any assignee or purchaser of the portion of its
business associated with the manufacture and sale of PRODUCT or provision of
SERVICES. In the event of any such transfer, the transferee shall assume and be
bound by the provisions of this Agreement. Otherwise this Agreement shall be
assignable by PALOMAR only with the consent in writing of GENERAL.
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10.9 For any and all claims, disputes, or controversies arising under,
out of, or in connection with this Agreement, except issues relating to the
validity, construction or effect of any PATENT RIGHT, which the parties shall be
unable to resolve within sixty (60) days, the party raising such dispute shall
promptly advise the other party of such claim, dispute, or controversy in a
writing which describes in reasonable detail the nature of such dispute. By not
later than five (5) business days after the recipient has received such notice
of dispute, each party shall have selected for itself a representative who shall
have the authority to bind such party and shall additionally have advised the
other party in writing of the name and title of such representative. By not
later than ten (10) business days after the date of such notice of dispute, such
representatives shall agree upon a third party which is in the business of
providing Alternative Dispute Resolution (ADR) services (hereinafter, "ADR
Provider") and shall schedule a date with such ADR Provider to engage in ADR.
Thereafter, the representatives of the parties shall engage in good faith in an
ADR process under the auspices of the selected ADR Provider, and each party
shall pay fifty percent (50%) of the ADR expenses. If within the aforesaid
thirty (30) business days after the date of the notice of dispute the
representatives of the parties have not been able to agree upon an ADR Provider
and schedule a date to engage in ADR, or if they have not been able to resolve
the dispute within thirty (30) business days after the termination of ADR, the
parties shall have the right to pursue any other remedies legally available to
resolve such dispute in either the Courts of the Commonwealth of Massachusetts
or in the United States District Court for the District of Massachusetts, to
whose jurisdiction for such purposes GENERAL and PALOMAR hereby irrevocably
consents and submits, provided that, with respect to royalties and payments to
be determined pursuant to Section 5 above, and due diligence obligations to be
determined in accordance with paragraph 3.1(a), the parties agree that, no later
than sixty (60) days after (a) they have failed to designate an ADR provider in
accordance with this paragraph or (b) the termination of ADR without resolution,
either party may demand in writing submitted to the other party that the dispute
be submitted to binding arbitration as provided for in the next succeeding
paragraph. Notwithstanding the foregoing, nothing in this Paragraph 10.9 shall
be construed to waive any rights or timely performance of any obligations
existing under this Agreement.
The parties agree that any dispute submitted to binding arbitration
shall be conducted in Boston, Massachusetts under the then prevailing rules of
the American Arbitration Association ("AAA") before a single arbitrator agreed
upon by both parties within twenty (20) days after the serving of a demand for
arbitration. In the event the parties fail to select an arbitrator within the
required time period, the arbitrator shall be selected in accordance with the
rules of the AAA. Each party shall pay fifty percent (50%) of the AAA
arbitration expenses.
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10.10 If any provision(s) of this Agreement are or become invalid, are
ruled illegal by any court of competent jurisdiction or are deemed unenforceable
under then current applicable law from time to time in effect during the term
hereof, it is the intention of the parties that the remainder of this agreement
shall not be effected thereby, provided the Agreement without such provision is
still operative to accomplish its intended functions. It is further the
intention of the parties that in lieu of each such provision which is invalid,
illegal or unenforceable, there be substituted or added as part of this
Agreement a provision which shall be as similar as possible in economic and
business objectives as intended by the parties to such invalid, illegal or
enforceable provision, but shall be valid, legal and enforceable.
THE PARTIES have duly executed this Agreement as of the date first
shown above written.
PALOMAR THE GENERAL HOSPITAL CORPORATION
BY /s/ Michael H. Smotrich BY /s/ Marvin C. Guthrie, JD
------------------------- -----------------------------
TITLE President TITLE VP Patents, Licensing
and Industry Sponsored
Research
DATE August 18, 1995 DATE August 18, 1995
22
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EXHIBIT A
EXHIBIT A
CLINICAL TRIAL AGREEMENT
Agreement made this 18th day of August, 1995 ("Effective Date") between
The General Hospital Corporation, a not-for-profit corporation doing business as
Massachusetts General Hospital, having a principal place of business at Fruit
Street, Boston, Massachusetts 02114 ("General"), R. Rox Anderson, M.D.
("Principal Investigator"), Wellman Laboratories of Photomedicine, Massachusetts
General Hospital, Boston, Massachusetts 02114 ("Principal Investigator") and
Palomar Medical Technologies, a Delaware corporation having an office at 66
Cherry Hill Drive, Beverly, MA 01915 ("Palomar").
Whereas, Dr. Anderson has conducted clinical research on, and General
has filed a patent application relating to, the use of lasers for the removal of
hair (the "Field") for which an exclusive license to Palomar has been executed
as of the Effective Date hereof (the "License Agreement");
Whereas, all of the parties to this Agreement share a common mission of
improving the public health by engaging in research for the purpose of
discovering and making available to the public new and improved medical drugs
and devices.
Whereas, in connection with this mission, Palomar desires to use the
data already generated by Dr. Anderson and to have further clinical research
conducted on its device described below and General and Dr. Anderson, having
particular expertise and opportunity, desire to provide this research.
Accordingly, the parties agree as follows.
SECTION 1: STUDY PERFORMANCE
1.1 PROTOCOL Subject to approval by General's Institutional Review
Board ("IRB") Principal Investigator agrees to conduct a clinical study of a
ruby laser device furnished by Palomar (hereinafter referred to as the "Study
Device, and together with any other devices provided by Palomar in accordance
with paragraph 1.4, as the "Study Device(s)") in accordance with the study
protocol attached hereto as Schedule A and including any changes to such
protocol as may be required by General's IRB (which protocol and any other
protocol added hereto in accordance with paragraph 1.4 are hereinafter referred
individually to as the "Study" and collectively as the "Studies."). In the event
of any conflict between Schedule A and the provisions of this Agreement, the
provisions of this Agreement shall govern.
<PAGE>
1.2 STUDY REVIEW Principal Investigator shall conduct the Studies at
General with the prior approval and ongoing review of all appropriate and
necessary review authorities and in accordance with all applicable federal,
state and local laws and regulations. Principal Investigator shall, when
applicable, provide Palomar with written evidence of review and approval of the
Studies by General's IRB prior to the initiation of the Studies and shall inform
Palomar of the IRB's continuing review promptly after such review takes place,
which shall be at least once per year. All volunteers shall meet the legal age
requirements of the Commonwealth of Massachusetts, the state in which the Study
is to be conducted.
1.3 STUDY DEVICES Palomar agrees to support the Study by delivering the
Study Devices, placing such Study Devices in proper operating condition for the
conduct of the Study, and maintaining such Study Devices in such operating
condition during the term of this Agreement, all at no charge to General.
General and Principal Investigator shall have no liability for any failure to
fulfill their obligations as a result of unavailability of a Study Device. Study
Devices will remain Palomar's property unless otherwise agreed. The General and
Principal Investigator shall safeguard such property with the degree of care
used for its own property and, in accordance with Palomar's instructions at any
time, shall return or otherwise dispose of all such property. General and
Principal Investigator shall not use any Study Device for any purpose other than
the Study, unless otherwise agreed.
1.4 SECOND YEAR STUDY On or before July 1, 1996, Principal Investigator
shall submit to Palomar a study protocol for an additional one year clinical
study pertaining to the use of a Study Device provided by Palomar for hair
removal, and a budget attendant thereto, which shall not exceed Two Hundred and
Thirty Thousand Seven Hundred and Sixty Seven Dollars ($230,767). Palomar shall
have the opportunity to review and comment on such proposal. Upon approval of
Palomar and General's IRB, said protocol shall be attached hereto and the study
described therein shall be a Study hereunder subject to the terms and conditions
of this Agreement, and payments therefore shall be made as set forth in the
proposal or as otherwise agreed by the parties in writing. It is the intent of
the parties that said Study shall commence or before September 1, 1996.
1.5 STUDIES AT OTHER SITES
a. Palomar agrees to use best efforts to sponsor Dr. Melanie
C. Grossman in New York City, New York, to conduct a clinical trial of hair
removal using a diode laser provided by Palomar.
<PAGE>
b. Principal Investigator shall be consulted in the selection
of other sites and investigators participating in clinical trials of hair
removal using laser devices provided by Palomar.
SECTION 2: RESULTS OF THE STUDY; INVENTIONS
2.1 OWNERSHIP OF RECORDS, DATA AND INTELLECTUAL PROPERTY Palomar shall
own its case report forms and the data resulting from the Study. General shall
own its medical records, research notebooks and related documentation and any
intellectual property resulting from the Studies subject to paragraph 2.3 below
regarding Inventions. General shall have the right to use the data for research,
educational and patient care purposes as well as to comply with any federal,
state or local government laws or regulations. In recognition of Palomar's
legitimate business interest in keeping unpublished research results from being
made available to its commercial competitors, General and Principal Investigator
agree that they shall not knowingly:
(i) disclose the research results to third party commercial
entities in a form or in sufficient detail suitable for use to
obtain pre-marketing approval from the FDA prior to a
publication of the Study; and
(ii) provide the case report forms to third party commercial
entities.
Notwithstanding the above, the Palomar shall not use any patient names, or
identifying information, photographs, or other likenesses without first
obtaining the specific written informed consent of such patient for such use,
except for purposes of obtaining FDA approval.
2.2 PUBLICATION The Principal Investigator shall be free to publish the
results of the Studies subject only to the provisions of Section 3 regarding
Palomar's Proprietary Information. The Principal Investigator shall furnish
Palomar with a copy of any proposed publication for review and comment prior to
submission for publication, at least thirty (30) days prior to submission for
manuscripts and at least seven (7) days prior to submission for abstracts. At
the expiration of such thirty (30) day or seven (7) day period, Principal
Investigator may proceed with submission for publication provided, however, that
upon notice by Palomar within said thirty (30) or seven (7) day period that
Palomar reasonably believes a patent application
<PAGE>
claiming an Invention (as defined in paragraph 2.3) should be filed prior to
such publication, such submission for publication shall be delayed until any
patent application or applications have been filed by General, pursuant to
paragraph 2.3.
2.3 INVENTIONS The Principal Investigator and any other General
personnel performing the Study under his direction ("Investigators") who makes
an invention in the performance of the Study (" Study Invention") shall promptly
report and assign such Study Invention to General. General shall promptly
disclose in writing any Inventions to Palomar. Within sixty (60) days of Palomar
receiving an enabling disclosure from General (except in the case of any
disclosure received by Palomar in a proposed publication, to which Palomar shall
have an obligation to respond within the time periods designated in paragraph
2.2 above), Palomar shall notify General in writing if it wishes General to file
a patent application claiming the Study Invention at Palomar's expense. Any such
application shall be added as a Patent Right under the License Agreement and to
the extent General has ownership rights in the Study Invention by virtue of an
assignment by an Investigator hereunder, such Patent Right shall be treated in
accordance with the terms of such License Agreement. In the absence of such
notice, General shall be free to license such patent application to any third
party on any terms.
2.4 FURTHER RESEARCH
(a) Investigators shall be free at any time to seek and accept
funding for any research in the Field, from any state or federal agency, private
or public foundation except foundations owned or operated by a commercial entity
other than Palomar ("Non-Profit Sponsored Study"). In the event that during the
term of this Agreement an Investigator makes an invention in the Field and in
the performance of any Non-Profit Funded Study, General agrees to give Palomar
prompt notice of said invention and to give Palomar an opportunity to negotiate
an exclusive license under General's rights in said invention assigned to
General by an Investigator, it being understood that General shall have no
obligation to enter into such a license with Palomar.
(b) In the event that an Investigator during the term of this Agreement
or for six (6) months thereafter wishes to seek funding from any for profit
entity for additional research in the Field (it being understood that for
funding sought during the term of this Agreement or any extension hereof such
additional research will be research other than that which is described in the
study protocols appended hereto as Schedule A), said Investigator shall do so in
accordance with this paragraph. The
<PAGE>
Investigator shall submit to Palomar a description of such additional research
and a budget of the costs to be funded by Palomar and a schedule of payment of
such costs. Unless the parties shall otherwise agree in writing, negotiations
between them over any such proposal shall not extend beyond the sixtieth (60)
day next following the date when the proposal shall have first been so made.
(c) Whenever such negotiations shall end without agreement between the
parties to proceed with the proposed research, the party proposing the
additional research may go ahead without the other party and seek funding from
any other sponsor including but not limited to a commercial sponsor for such
proposal, so long as the subject matter of the proposal is not so closely
related scientifically to the Study that sponsorship of such proposal by such
other commercial sponsor (i) would in the opinion of General's Trustee's
Committee on Technology Affairs after consultation with Palomar create a
conflict of interest for General or any Investigator performing the Study or
(ii) would conflict with the terms and conditions of this Agreement. It is
understood that, in the event that General proceeds to seek support from such
other commercial sponsor, for a period of one year after first offering said
proposal to Palomar, General shall not enter into an agreement with a third
party to fund such proposal upon more favorable financial terms than those
offered to Palomar without first offering Palomar the more favorable terms.
(d) When such proposal is accepted by the General and Palomar, it shall
be appended hereto as an additional study protocol and shall be subject to the
terms and conditions of this Agreement unless otherwise specified, and the Study
described therein shall commence and budgeted amounts shall be paid as set forth
in the proposal. In the event that the parties reach agreement under this
paragraph 2.4 (d) on a proposal for a non-clinical study, the parties will
execute a separate agreement pertaining to said study, it being the intent of
the parties that the terms and conditions of said non-clinical study be
substantially the same as those of this agreement, subject to the policies of
General in effect at the time with respect to non-clinical sponsored research.
The budgeted amounts paid by Palomar in support of any such clinical or
non-clinical study shall be credited toward the sums made available to General
pursuant to paragraph 2.4(e) and 4.3.
(e) On or before both September 1, 1997 and September 1, 1998, Palomar
shall make grants to General as described in paragraph 4.3 for research of
mutual interest to General and Palomar and to be conducted in the Wellman
Laboratories of
<PAGE>
Photomedicine under the direction of Dr. R. Rox Anderson, or any other
investigator at General mutually agreeable to General and Palomar, it being
understood that said grants may be used to support further research in the
Field. Said research and the budgets attendant thereto shall be agreed upon in
writing by General and Palomar prior to the commencement of said research. In
the event that General and Palomar reach agreement under this paragraph on a
proposal and budget for a clinical study in the Field, said study shall become a
Study hereunder and subject to terms and conditions as this Agreement. In the
event that General and Wellman reach agreement under this paragraph on a
proposal and budget for a clinical study outside the Field, it is the intent of
the parties that said study be subject to terms and conditions substantially the
same as this Agreement. In the event that General and Wellman reach agreement
under this paragraph on a proposal for a non-clinical study, it is the intent of
the parties that the terms and conditions of said non-clinical study be
substantially the same as those of this agreement, subject to the policies of
General in effect at the time with respect to non-clinical sponsored research.
2.5 USE OF NAME No party to this Agreement shall use the name of any
other party or of any staff member, employee or student of any other party or
any adaptation, acronym or name by which any party is commonly known, in any
advertising, promotional or sales literature or in any publicity without the
prior written approval of the party or individual whose name is to be used. For
General, such approval shall be obtained from the Director of Public Affairs and
for Palomar, from the President. GENERAL agrees to respond within ten (10)
business days of GENERAL's receipt of any request for approval under this
paragraph, provided that such request is delivered to the Director of Public
Affairs, 101 Merrimac Street, Fourth Floor, Boston, MA 02114 (Tel.
#617-726-2206; fax #726-6465) and is prominently marked "Urgent -- Please
respond within ten days." General shall not unreasonably withhold its consent to
any use of its name which accurately and appropriately describes parties'
participation in the Study conducted under this Clinical Trial Agreement, and
which does not imply directly or indirectly any endorsement by General of any
product or service. Company shall not unreasonably withhold its consent to any
use of its name which accurately and appropriately describes the relationship of
the parties under this Agreement and the scope and nature of the parties'
participation in the Study under the Clinical Trial Agreement.
2.6 STUDY RECORDS General shall make Study records available to Palomar
representatives upon request for comparison
<PAGE>
with case report forms. General shall also make such records available upon
reasonable request for review by representatives of the U.S. Food and Drug
Administration. General shall retain records of the Studies including either the
original or a copy of all volunteer consent forms in conformance with applicable
federal regulations. Palomar shall notify Principal Investigator of the date the
required approval (e.g., 510K, Pre-Market Approval application (PMA)) is
received for a Study Device; or if the application is not approved, Palomar
shall notify Principal Investigator when all clinical investigations of the
Study Devices have been discontinued and the FDA notified.
2.7 USE OF DATA GENERATED UNDER PRIOR STUDY Principal Investigator
shall provide to Palomar the data generated in the prior clinical trial
referenced in the introduction to this Agreement ("Prior Data") and Palomar
shall pay General for such data in accordance with paragraph 4.2 as
reimbursement to General for its expenses in generating such data. General
grants to Palomar the right to use the Prior Data for submission to the FDA for
approval of the use of a laser device for hair removal, provided that Palomar
shall not use any patient names, or identifying information, photographs, or
other likenesses without first obtaining the specific written informed consent
of such patient for such use.
SECTION 3: PALOMAR PROPRIETARY INFORMATION
3.1 It is anticipated that in the performance of the Studies, Palomar
shall provide to General, Principal Investigator and other General personnel who
are designated in writing by the Principal Investigator as being authorized to
receive Proprietary Information and who agrees in writing to the following
confidentiality obligations (each such institution or person individually
referred to in this paragraph 3.1 as "a Recipient" and collectively as
"Recipients"), or shall give Recipients access to, certain information which the
Palomar considers proprietary. The rights and obligations of the parties with
respect to such information are as follows:
(a) For the purposes of this Agreement, "Proprietary Information"
refers to information of any kind which is disclosed by Palomar to a Recipient
and which, by appropriate marking, is identified as confidential and proprietary
at the time of disclosure. In the event that proprietary information must be
provided visually or orally, obligations of confidentiality shall attach only to
that information which is confirmed by Palomar in writing within twenty (20)
working days as being confidential.
<PAGE>
(b) For a period of five (5) years after the Effective Date of this
Agreement, each Recipient agrees to use reasonable efforts, no less than the
protection given their own confidential information, to use Proprietary
Information received from the Palomar and accepted by that Recipient only in
accordance with this paragraph 3.1(b).
(i) Each Recipient shall use the Palomar's Proprietary Information
solely for the purposes of conducting the Study, obtaining any required
review of the Study or its conduct, or ensuring proper medical
treatment of any patient or subject. Each Recipient agrees to make
Proprietary Information available only to those employees and students
of General who require access to it in the performance of this Study
and to inform them of the confidential nature of such information.
(ii) Except as provided in subsection 3.1(b)(i), each Recipient shall
keep all Proprietary Information confidential unless the Palomar gives
specific written consent for release.
(iii) If any Recipient becomes aware of any disclosure not authorized
hereunder, that Recipient shall notify Palomar and take reasonable
steps to prevent any further disclosure or unauthorized use.
(c) No Recipient shall be required to treat any information as
Proprietary Information under this Agreement in the event: (i) it is publicly
available prior to the date of the Agreement or becomes publicly available
thereafter through no wrongful act of any Recipient; (ii) it was known to any
Recipient prior to the date of disclosure or becomes known to any Recipient
thereafter from a third party having an apparent bona fide right to disclose the
information; (iii) it is disclosed by any Recipient in accordance with the terms
of the Palomar's prior written approval; (iv) it is disclosed by Palomar without
restriction on further disclosure; (v) it is independently developed by any
Recipient; or, (vi) any Recipient is obligated to produce it pursuant to an
order of a court of competent jurisdiction or a facially valid administrative,
Congressional or other subpoena, provided that the Recipient subject to the
order or subpoena (A) promptly notifies the Palomar and (B) cooperates
reasonably with the Palomar's efforts to contest or limit the scope of such
order.
SECTION 4: PAYMENTS
4.1 (a) Palomar agrees to support the agreed expenses of the Study
appended hereto on the Effective Date with a research
<PAGE>
grant of Two Hundred Seventeen Thousand Six Hundred and Sixty Seven Dollars ($
217,667) which includes indirect costs and indirect costs attendant thereto.
Agreed expenses by Palomar are enumerated in attached Schedule B, and are
payable as follows:
Fifty percent (50%) equalling One Hundred Eight Thousand Eight Hundred
and Thirty Three Dollars ($ 108,833) upon execution of this Agreement
by all parties.
Twenty Five Percent (25%) equalling Fifty Four Thousand Four Hundred
and Seventeen Dollars ($54,417) upon initial radiation of twenty five
(25) patients in the Study.
Twenty Five Percent (25%) equalling Fifty Four Thousand Four Hundred
and Seventeen Dollars ($54,417) upon completion of the study and notice
thereof to Palomar.
(b) Palomar agrees to support the expenses of the Study to be performed
pursuant to paragraph 1.4 hereof, with a grant of Two Hundred and Thirty
Thousand Seven Hundred and Sixty Seven Dollars ($230,767) to be paid in
accordance with the terms of said paragraph.
(c) General agrees to keep complete records of expenses incurred in
performing the studies and Palomar shall have a right to audit such records at
the place where such records are maintained, or at another location mutually
agreeable to the parties, on reasonable notice to General provided such audit
shall be conducted no more than twice during any twelve (12) month period. To
the extent such audit reveals an error in amounts paid, the parties agree that
suitable adjustments will be made.
4.2 Pursuant to paragraph 2.7, Palomar shall pay General for Prior Data
the sum of Sixty Eight Thousand Five Hundred Dollars ($68,500) within thirty
(30) days of the date on which the last party signs this Agreement.
4.3 On or before both September 1, 1997 and September 1, 1998, Palomar
shall make grants to General of Two Hundred Thousand Dollars ($200,000) per year
to be used in accordance with paragraph 2.4(e) hereof.
4.4 Checks should be made payable to "The General Hospital Corporation"
and sent, along with a letter indicating the name of the Principal Investigator
and Project Number (#5950) for which the funds are intended, to:
<PAGE>
Vice President for Patents, Licensing and
Industry Sponsored Research
Office of Technology Affairs
Massachusetts General Hospital
Thirteenth Street, Building 149, Suite 1101
Charlestown, MA 02129
SECTION 5: TERM AND TERMINATION
5.1 (a) The term of this Agreement shall be until the completion of the
Studies, which is anticipated to be two (2) year(s) from the Effective Date,
unless terminated in accordance with paragraph 5.2 or 5.3, or unless continued
in accordance with paragraph 2.4 (e) above.
5.2 Any party hereto shall have the right to terminate any Study
hereunder in the event that the emergence of any adverse reaction or side effect
with the Study Device is of such magnitude or incidence, in the opinion of such
party, to support termination.
5.3. If either party shall substantially fail faithfully to perform any
of its obligations under this Agreement, the nondefaulting party may give
written notice of the default to the defaulting party. Unless such default is
corrected within sixty (60) days after such notice, the notifying party, upon
thirty (30) days prior written notice may terminate this Agreement, provided
that only one such sixty (60) day grace period shall be available in any twelve
(12) month period with respect to a default of any particular provision
hereunder.
5.4 Any delays in or failures of performance by either party under this
Agreement shall not be considered a breach of this Agreement if and to the
extent caused by occurrences beyond the reasonable control of the party
affected, including but not limited to: Acts of God; acts, regulations or laws
of any government; strikes or other concerted acts of workers; fires; floods;
explosions; riots; wars; rebellion; and sabotage; and any time for performance
hereunder shall be extended by the actual time of delay caused by such
occurrence, provided the affected party has used reasonable efforts to overcome
the cause of delay.
5.5 The obligations of the parties under Sections 2, 3 and 6 shall
survive the termination or expiration of this Agreement.
SECTION 6: INDEMNIFICATION AND INSURANCE
6.1 INDEMNIFICATION (a) Palomar shall indemnify, defend and hold
harmless General and its trustees, officers,
<PAGE>
medical and professional staff, employees, and agents and their respective
successors, heirs and assigns (the "Indemnitees"), against any liability,
damage, loss, or expense (including reasonable attorney's fees and expenses of
litigation) incurred by or imposed upon the Indemnitees or any one of them in
connection with any claims, suits, actions, demands or judgements arising out of
any theory of product liability (including, but not limited to, actions in the
form of tort, warranty, or strict liability) concerning a Study Device or any
modification thereof including any side effect or adverse reaction, illness or
injury attributable to a Study Device and occurring to any person involved in
such Study, provided Palomar shall have no obligation to indemnify, defend and
hold harmless Indemnitees under this paragraph to the extent that such claim,
suit, action, demand or judgement is attributable to any modification to a Study
Device that is physically made by an Indemnitee without the permission of
Palomar. General agrees to notify Palomar promptly of any such claim, suit,
action, demand or judgement and General and Principal Investigator agree to
reasonably cooperate with Palomar in the handling thereof.
(b) Palomar's indemnification under (a) above shall not apply to any
liability, damage, loss or expense to the extent that it is attributable to the:
(i) negligent activities, reckless misconduct or intentional misconduct of the
Indemnitees; or (ii) failure of the Indemnitees to adhere to the terms of the
protocol for a Study.
(c) Palomar agrees, at its own expense, to provide attorneys reasonably
acceptable to the General to defend against any actions brought or filed against
any party indemnified hereunder with respect to the subject of indemnity
contained herein, whether or not such actions are rightfully brought.
(d) Company also agrees to reimburse General for the costs of the care
and treatment of any illness or injury to a subject resulting from his or her
participation in a Study arising under any theory of product liability
pertaining to a Study Device to the extent that such costs are not covered by
the subject's medical or hospital insurance or governmental programs providing
such coverage provided, however, that Company's obligation under this paragraph
6.1(d) shall not apply to any such illness or injury to the extent that it is
attributable to the negligence, reckless misconduct or intentional misconduct of
the Indemnitees or the failure of the Indemnitees to adhere to the terms of the
protocol for a Study.
<PAGE>
6.2 INSURANCE (a) At such time as a Study Device or any modification
thereof is being commercially distributed or sold (other than for the purpose of
obtaining regulatory approvals) by Palomar or by a licensee, affiliate or agent
of Palomar, Palomar shall, at its sole cost and expense, procure and maintain
commercial general liability insurance in amounts not less than $2,000,000 per
incident and $2,000,000 annual aggregate and naming the Indemnitees as
additional insureds. Such commercial general liability insurance shall provide
(i) product liability coverage and (ii) broad form contractual liability
coverage for Palomar's indemnification under paragraph 6.1 of this Agreement. If
Palomar elects to self-insure all or part of the limits described above
(including deductibles or retentions which are in excess of $250,000 annual
aggregate) such self-insurance program must be acceptable to the General and the
Risk Management Foundation of the Harvard Medical Institutions, Inc. The minimum
amounts of insurance coverage required under this paragraph 6.2 shall not be
construed to create a limit of Palomar's liability with respect to its
indemnification under paragraph 6.1 of this Agreement.
(b) Palomar shall provide General with written evidence of such
insurance upon request of General. Palomar shall provide General with written
notice at least fifteen (15) days prior to the cancellation, non-renewal or
material change in such insurance.
(c) Palomar shall maintain such commercial general liability insurance
during (i) the period that the Study Drug or any modification thereof is being
commercially distributed or sold (other than for the purpose of obtaining
regulatory approvals) by Palomar or by a licensee, affiliate or agent of Palomar
and (ii) a reasonable period after the period referred to in (c)(i) above which
in no event shall be less than fifteen (15) years.
SECTION 7: MISCELLANEOUS
7.1 The terms of this Agreement can be modified only by a writing which
is signed by General, Principal Investigator and Palomar.
7.2 The provisions of this Agreement shall be interpreted under the
laws of the Commonwealth of Massachusetts.
7.3 No party to this Agreement may assign its obligations hereunder
without the prior written consent of the other parties.
7.4 This Agreement constitutes the entire understanding between the
parties, and supersedes and replaces all prior
<PAGE>
agreements, understandings, writings and discussions between the parties, with
respect to the subject matter of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
Palomar THE GENERAL HOSPITAL CORPORATION
(Federal Tax ID No.: 042 697 983)
BY: /s/ Michael H. Smotrich BY: /s/ Marvin C. Guthrie
----------------------- -----------------------------
TITLE: President TITLE: Vice President For Patents,
Licensing And Industry
Sponsored Research
DATE: August 18, 1995 DATE: August 18, 1995
PRINCIPAL INVESTIGATOR
/s/ R. Rox Anderson
- ------------------------------
R. Rox Anderson, M.D.
DATE: August 18, 1995
<PAGE>
SCHEDULE A
Evaluation of a Pulsed Laser System for Selective
Destruction of Hair Follicles
R. Rox Anderson, NID
John A- Parrish, NID
Christine Diericky, NM
OVERVIEW AND BACKGROUND:
Unwanted excess growth of tem-dnal (coarse) hair due to endocrine
disorders, tumors, drugs, or heredity is a significant cosmetic problem. In the
extreme of hirsutism, abnormal hair growth is disfiguring. Removal of hair from
skin grafts is a problem also. However, the vast majority of people who dislike
excess hair do not have a medical or iatrogenic problem. Removal of hair is
easily done temporarily by shaving or by epilation with wax or various devices.
Permanent hair removal is traditionally done with electrolysis in which a
negative electrode is inserted into each follicle individually. Electrolysis is
painful, tedious, expensive, and often ineffective. The average number of
treatments per follicle is about 6. An altemative, more effective, safe, less
tedious method is needed. Selective photothermolysis using laser pulses may
offer this method.
In a previous study (MGH accession # 937286) we showed that
normal-mode ruby laser PULSES ARE effective and well tolerated for producing
selective destruction of hair follicles in normal adult caucasians with brown or
black hair. Based on the principles of selective photothermolysis, and confirmed
in an in-vitro study prior to human studies, we chose a wavelength and pulse
duration which "targets" melanin in the hair follicles. Because melanin is also
present in the epidermis, a handpiece for laser light delivery was devised which
tends to spare the epidermis, while maximizing light intensity deep in the
dermis where the follicles are. MGH filed a patent on this device, which will be
licensed under an agreement with Palomar, Inc, who will be supporting this human
study.
In the first human study, 200 gs, 694nm ruby laser pulses were
delivered to shaved vs. EPILATED sites on the back or extremities, in a range of
fluences. The exposures were moderately painful but typically tolerated without
local anesthesia (which itself is painful). No significant adverse events
occured (e.g. ulceration, scarring, depigmentation). In all subjects, there was
a fluence-dependent growth delay of approximately 6 months for regrowing hairs
in the exposure SITES. At the highest fluence, 6 months after exposure there was
an average of about 30% permanent hair loss. There was no significant difference
between epilated and shaved sites, suggesting that the hair shaft itself is not
important for light absorption. Hypopigmentation was NOTED in most subjects, and
was transient.
<PAGE>
THE STUDY PROPOSED HERE:
- Uses a longer pulse duration, to better match follicle thermal
relaxation times.
- Examines response to more than one treatment, given 4 weeks apart.
- Tests the hypothesis that hair growth cycle (anagen, telogen, catagen
phase) affects response.
- Provides treatment of a hair-bearing area of concern to the subject,
based on response in each subject's test sites.
SUBJECTS:
EXCLUSIONS:
Fifty (50) adults with brown or black hair present on the back or legs.
Keloid history, pregnant, history of radiation treatment or surgery to
test or treatment sites, active infections, hypersensitivity to retin-A,
hydroquinone, or mupincin.
LASER AND DELIVERY DEVICE:
A normal-mode ruby laser (Spectrum, Inc.) emitting up to 30 J pulses at
1-5 ms pulse duration,~Arill be used. Pulses are delivered through an optical
handpiece which provides refractive index matching, cooling to -10*C, a
convergent entrance beam at the skin surface, and compression of the skin.
The optical manipulations maxirnize delivery of light deep into the
dern-iis; cooling raises the tolerated fluence, provides partial anesthesia, and
spares the epidermis by conduction during LASER PULSE DELIVERY; compression
decreases the distance to the deep follicular papillae and drives blood away,
eliminating a competing chromophore. We have established that under these
conditions, the primary site of photothermal injury is the pigmented hair
follicles, all the way down to their deep papillae.
PROTOCOL:
MAPPING AND DETERMINATION OF HAIR GROWTH CYCLES.
One month prior to laser exposures, ten test areas of 5x5 cm, each
containing about 100200 follicles, will be mapped on the thighs or back. The
sites will be clipped, using a barber's clipper such that the hairs are all 3 mm
long. Digtal images with a CCD camera and COMPUTER FRAME-CAPTURE BOARD WILL THEN
BE taken at a normal angle of incidence, to record the position and length of
each hair in each test area. The same sites will be imaged again prior to laser
exposure. Anagen hairs will be identified as those with active growth (much
greater than 3 nun length) between the two sets of images. The images will also
provide a permanent record of follicle density, hair shaft density, and
individual follicle locations.
<PAGE>
PRE-TREATMENT WITH RETIN-A, HYDROQUINONE:
For one month prior to laser exposures, a standard regimen of 0. 1%
retin-A cream and 4% hydroquinone cream will be applied daily by each subject to
the test sites. Retin-A causes increased epidermal turnover and as a
pre-treatment improves wound healing. Hydroquinone decreases epidermal
pigmentation without influencing follicular pigmentation. Subjects will also be
instructed to avoid sun exposure to the test areas before and during this study.
Retin-A can be irritating with prolonged use, and will be discontinued in any
subject experiencing irritation at the application sites.
LASER EXPOSURES AND FLUENCES:
Subjects and investigators will wear laser protective eyewear. Eight
sites will be shaved before laser exposures, two sites will be wax-epilated, and
all will be cleaned with isopropanol. Laser exposures will be administered in
contiguous exposure spots covering each of the test areas, at a maximim of 1 Hz,
according to the table below. Three fluences will be tested in each subject,
beginning with 25, 50, and 75 j/CM2 as shown in the table below. Fluence may be
increased to 50, 75 and 100 j/CM2 'based on evaluation of response in the first
three subjects. Specifically, the fluence range will be increased if there is no
erosion, ulceration, scarring, or depigmentation at the one-month followup
visit. Based on the same criteria, fluence may be increased again to 75, 100,
and 125 j/CM2 following evaluation of the second set of three subjects.
Local anesthesia will be offered, using 2% xylocaine with epinephrine,
given by intradermal injections around each site. In our experience anesthesia
will not be routinely needed, but will always be offered for the subjects'
comfort.
Subjects will return 1 month after the first set of laser exposures for
evaluation and a second set of exposures. Each skin site will be photographed
and digitally imaged using the CCD camera system. Responses will also be scored
visually for changes in pigmentation, inflammation, hair reqrowth, and textural
changes, using an arbitrary scale shown in a table below. After evaluations are
recorded, a second series of exposures will be performed in those test sites to
be treated twice (see table).
LASER EXPOSURES TABLE
<TABLE>
<S> <C> <C>
Test sites
(back or thigh) Single treatment 2 treatments at 1 month interval
75 J/cn-L2 75 J/cm2
50 J/cm2 50 J/cm2
25 J/cm2 25 J/cm17
75 J/cm2 75 J/cm2
epilated epilated
75 J/cm2 75 J/cm2
2 passes 2 passes
</TABLE>
<PAGE>
SINGLE-TREATMENT:
A treatment may be performed in a site up to 100 cm2 with excess hair
growth of concem to the subject, using the maximum tolerated fluence according
to test site results. We do not expect to see scarring, ulcreation, or
depigmentation. However, if any of these unwarranted effects do occur, the
treatment fluence will be less than that causing these responses. Skin
preparation, anaesthesia, exposure techniques, and post-exposure care will be
identical to that of the test sites.
POST-EXPOSURE SKIN CARE:
After the laser exposures, mupircin ointment (Bactroban) will be
applied and a sterile dressing applied. Subjects will be instructed to gently
cleanse the sites with warrn water and mild soap (e.g. Dove), and to re-apply
mupiricin ointment twice a day until any weeping or crusting has subsided.
Subjects will also be asked to avoid sun exposure, which can cause
hyperpigmentation.
RESPONSE GRADING (SUBJECTIVE SCALE)*
- --------------------------------------------------------------------------------
hair regrowth | none | sparse | moderate | full
- -------------------------|---------|---------------|--------------|-------------
hypigmentation | absent | present | |
- -------------------------|---------|---------------|--------------|-------------
hyperpigmentation | absent | present | |
- -------------------------|---------|---------------|--------------|-------------
depigmentation | absent | present | |
- -------------------------|---------|---------------|--------------|-------------
erythema | none | mild | moderate | violaceous
- -------------------------|---------|---------------|--------------|-------------
edema | none | mild | moderate | tumescent
- -------------------------|---------|---------------|--------------|-------------
textural change | none | mild | moderate | severe
(includes scarring) | | | |
- -------------------------|---------|---------------|--------------|-------------
ulceration | absent | present | |
- --------------------------------------------------------------------------------
* objective and quantitative endpoints are also included in this study
FOLLOW-UP SCHEDULE:
Hair regrowth and skin response will be recorded at I month, 3 months and 6
months after exposures in all test and treatment sites.
<PAGE>
FLOW CHART OF SUBJECT VISITS
Month 0 Evaluation, consent and entry into study. Mapping, clipping and
imaging of 10 test sites. Retin-A, hydroquinone, sun avoidance
instructions
Month 1 Mapping and imaging of test sites. Shave, anesthetize if necessary.
Laser exposures per protocol. Wound dressing and wound care
instructions. Retin-A, hydroquinone, sun avoidance for site.
Month 2 Mapping.and imaging of test sties. Response recording (subjective).
Mapping and recording of treatment site. Laser exposures per protocol
(test and treatment sites). Wound care and wound care instructions.
MONTH 3 MAPPING, imaging AND recording of responses.
Month 6 Mapping, imaging and recording of responses.
Month 9 Mapping, imaging and recording of responses. Conclusion of study.
Subject REMUNERATION ($500).
<PAGE>
DATA ANALYSIS:
Hair follicle counts, growth cycle and shaft diameter will be determined from
digital imaging prior to laser exposure. The site subject to wax epilation
serves primarily as a control for the presence of hair shafts at the time of
exposure, but will also produce a direct measure of hair follicle depth, by
measuring the depth from skin surface, to the papillae of the epilated hairs.
Responses graded subjectively and objectively (digital imaging) will be
correlated against laser fluence and number of treatments. Computer mapping of
regrowing hair against the baseline hair follicle images will be used to
determine the relative sensitivity of amagen vs. telogen/catagen follicles. Data
at I month, 3 months, and 6 months will be compared to establish growth delay
patterns and the fraction of regrowing hairs, as a function of exposure
conditions. Changes in hair shaft diameter for those hairs which regrow will
also be compared against baseline values.
RISKS:
The goal of this study is to selectively and permanently destroy hair follicles.
Alopecia (baldness) may result in the test areas and in the treatment area. As
with any form of tissue destruction, there is a risk of infection and/or
scarring, which is minin-dzed by proper wound care. In a previous human study of
this hair removal technique, there was no scarring seen in approximately 100
test sites. Therefore, the risk of scarring appears to be low. Laser exposures
can also cause temporary or permanent changes in skin pigmentation (skin color).
A transient decrease in skin pigmentation occurred in all of those treated
previously, lasting about 3 months. This is more noticable in darker skin.
Permanent lightening or darkening of skin color is a possibility, which HAS NOT
been observed. The laser removes freckles and common brown "moles" permanently.
In people with extensive freckling, this can cause a color change. New freckles
will eventually form in laser-treated skin, but may take years to do so.
BENEFITS:
The subjects may or may not benefit from removal of unwanted hair in the test
and/or treatment sites. There is no guarantee of success.
REMUNERATION:
Subjects will be paid $500 for participation, to defray travel and other costs.
<PAGE>
VOLUNTEERS NEEDED
FOR HAIR REMOVAL STUDY
Healthy adult volunteers are sought for a medical study at the Massachusetts
General Hospital, aimed at permanent hair removal. A laser will be tested in
hair-bearing skin areas on the back or upper legs. One month later, an area with
unwanted hair may also be treated, depending on the test results. Six visits
will be required over nine months, and volunteers must be able to accommodate
this schedule. Subjects will be paid $500 for participation in the study. There
is no guarantee that permanent hair removal will be achieved.
For more information, contact:
Christine Diericky, MD
726-7900
<PAGE>
SCHEDULE B
INVESTIGATOR: R.R. Anderson, M.D.
TITLE OF STUDY: TBD
SPONSOR: Palomar
BUDGET PERIOD: 9/1/95-8/31/96
PERSONNEL:
<TABLE>
<S> <C> <C> <C> <C>
Fringe
Name % Effort Salary Benefits Total
HMS-APPNT. 26.04%
R.R.Andemon,M-D. 10% 12,854 $3,347 $16,201
Christine Dierickx, M.D. 100% 40,000 $10,416 $50,416
NON-HMS APPNT. 21.51%
Senior Technician 50% 17,500 $3,764 $21,264
Engineer 50% 17,500 $3,764 $21,264
Secretary 5% 1,500 $323 $1,823
TEMPORARYSTAFF 11.02%
Student 100% 9,000 992 $9,092
Total Personnel 120,960
EQUIPMENT
CCD, digital hair count system 8,000
SUPPLIES
Misc. optics, sources, filters
and macro lens 1,800
Imaging software 1,000
Film purchase and developing 1,000
Epliators, mv, markers and tapes 600
Retin A 2,500
Hydroquinone 2,000
Sunscreen 1,000
Anesthetic (EEMLA; l.d.xylocaine) 1,000
Misc. disposables 600
Misc. office supplies 600
TRAVEL 3,000
PATIENT CARE COSTS
50 patients @$500 each 25,000
MISCELLANE0US COSTS
Advertising and telephone expenses 1,000
TOTAL DIRECT COSTS 170,060
INDIRECT COSTS(28%) -TDC- 47,617
----------
TOTAL COSTS $218.788
==========
</TABLE>
<PAGE>
EXHIBIT B
MASSACHUSETTS GENERAL HOSPITAL
Office of Technology Affairs
Buiding 149
Thirteenth Street - Suite 1101
Charlestown, MA 02129
617-726-2128 FAX: 617-726-1668
Marvin C. Guthrie, J.D.
Vice President, Patents,
Licensing and Industry Sponsored Research
August 18, 1995
Michael Smotrich, Ph.D.
Palomar Medical Technologies, Inc.
66 Cherry Hill Drive
Beverly, MA 01915
Tel: 508-921-9300
Fax: 508-921-5801
Dear Dr. Smotrich:
A License Agreement between the General Hospital Corporation
("General") and Palomar Medical Technologies, Inc. ("Palomar") has been entered
into on this date ("License Agreement") pertaining to the U.S. Patent
Application filed by Dr. R. Rox Anderson, et.al. on February 1, 1995 entitled
"Permanent Hair Removal Using Optical Pulses," (Licensed Patent Application")
and Palomar has indicated its interest in paying the costs of seeking advice
from General's patent counsel with respect to the possibility of adding to the
Licensed Patent Application one or more cont inuat ions -in -part which would
expand the claimed applications of the device described in the Licensed Patent
Application to uses other than hair removal, e.g. for removal of congenital
nevi, tatoos and port wine stains ("New Use (s) 11) . In the event that counsel
advises in favor of filing such cont inuat ions - in-part, we understand that
Palomar will pay the costs of preparing and filing same. General hereby
acknowledges that Dr. Anderson's rights, assigned to General, in said
continuations - in-part will, once so filed, be treated as PATENT RIGHTS under
the License Agreement subject to the following:
1. The LICENSE FIELD described in paragraph 1.3 of the License
Agreement shall be amended to include the field(s) of the New Use(s)'.
2. For each New Use claimed in a continuation-in-part, General and
Palomar shall establish, within twelve (12) months of the filing of said
continuation-in-part, due diligence milestones appropriate to the New Use which
shall be incorporated into Section 3 of the License Agreement. It is understood
that General may require funding of research at General in the field of the New
Use as part of the due diligence milestones, which funding will be creditable
against the sums due General under paragraph 4.3 of the Clinical Trial Agreement
which is appended as Exhibit A to the License Agreement. In the event that
Palomar and General fail to reach agreement on said milestones, this matter
shall be determined
<PAGE>
in accordance with the dispute resolution provisions set forth in paragraph 10.9
of the License Agreement.
3. The royalty owed General by Palomar under paragraph 5.1(b)(ii) on
NET REVENUES for a PRODUCT consisting of a non-ruby laser sold for hair removal
as well as other uses shall be five percent (5-%) so long as the other uses
include as least one New Use.
4. Royalties due General by Palomar on NET REVENUES derived by Palomar,
its AFFILIATES and SUBLICENSEES on:
(a) a PRODUCT constituting either a laser, or any product
constituting any non-laser equipment/disposables, which in either case is sold
solely f or New Uses or f or New Uses in combination with uses other than hair
removal, and
(b) SERVICES and other commercial dispositions described in
paragraph 5. 1 (b) (iii) (A) (1) and (2) of the License Agreement, which
SERVICES and other commercial dispositions involve the use or sale of New Uses,
shall be negotiated in good f aith by the partids in accordance with the
procedure described in paragraph 5.1(iii) and 5.1(iv).
5. Minimum annual royalties on PRODUCTS or SERVICES made, used, or sold
for New Uses (whether or not sold in combination with other uses) shall be
calculated in accordance with paragraph 5. 1 (b) (iii) (C) .
6. In all other respects, the PATENT RIGHTS claiming New Use(s) shall
be treated as PATENT RIGHTS under the License Agreement.
Kindly sign the enclosed copy of this letter agreement to indicate
Palomar's assent to the above terms.
Sincerely,
/s/ Marvin C. Guthrie
---------------------
Marvin C. Guthrie
The terms of this Letter AGreement are agreed to by Palomar:
Name: /s/ Michael H. Smotrich
-----------------------
Title: President
-----------------------
Date: August 18, 1995
-----------------------
<PAGE>
FIRST AMENDMENT
This is a First Amendment to the License Agreement between THE GENERAL
HOSPITAL CORPORATION, a not-for-profit corporation doing business as
Massachusetts General Hospital, having a place of business at Fruit Street,
Boston, Massachusetts 02114 ("GENERAL") and Palomar Medical Technologies, a
Delaware corporation having offices at 66 Cherry Hill Drive, Beverly, MA 01915
("PALOMAR"), effective August 18, 1995 ("License Agreement").
For good and valuable consideration GENERAL and PALOMAR hereby agree to
amend the License Agreement as follows:
1. In paragraph 5.1(b)(iii)(B), delete the following words:
"(which royalty rate the parties anticipate will fall within the range
of twenty to thirty percent (20-30%) of PALOMAR's estimated profit
margin on said PRODUCTS or SERVICES)"
2. In paragraph 5.1(b)(iii)(C), delete the following words:
"which the parties anticipate will fall within the range of five to six
and one quarter percent (5-6 1/4%) of PALOMAR's estimated profit margin
on said PRODUCTS or SERVICES"
3. This First Amendment shall be effective as of August 18, 1995.
Agreed to:
PALOMAR THE GENERAL HOSPITAL CORPORATION
BY: /s/ Michael H. Smotrich BY: /s/ Nikki J. Zapol
----------------------- ---------------------------
TITLE: President TITLE Managing Director
Office of Technology
Affairs
DATE December 14, 1995 DATE January 2, 1996
SECOND AMENDMENT
This is a Second Amendment to the License Agreement between THE GENERAL
HOSPITAL CORPORATION, a not-for-profit corporation doing business as
Massachusetts General Hospital, having a place of business at Fruit Street,
Boston, Massachusetts 02114 ("GENERAL") and Palomar Medical Technologies, a
Delaware corporation having offices at 66 Cherry Hill Drive, Beverly, MA 01915
("PALOMAR"), effective August 18, 1995 ("LICENSE AGREEMENT").
For good and valuable consideration GENERAL and PALOMAR hereby agree to
amend the License Agreement by amending certain paragraphs and adding the
following new paragraphs to the LICENSE AGREEMENT, effective February 14, 1997
("THE AMENDMENT EFFECTIVE DATE"):
Add the following "Whereas" clauses after the sixth existing "Whereas" clause:
WHEREAS, under research programs funded by GENERAL and the U.S.
Government, GENERAL, through research conducted by Dr. R. Rox Anderson, has
developed inventions pertaining to methods of hair removal using epilation
("Additional Invention"); and
WHEREAS, GENERAL and PALOMAR have entered into a Research Agreement
effective March 1, 1997, attached hereto as Exhibit A-2 ("Epilation Research
Agreement"), under which PALOMAR is providing funds and equipment to support
research at GENERAL of said invention pertaining to methods of hair removal
using epilation; and
WHEREAS, GENERAL is interested in licensing the Additional Invention to
PALOMAR so that PALOMAR can commercially develop, manufacture, use and
distribute products and services based on said Additional Invention throughout
the world;
IN SECTION 1, "DEFINITIONS", AMEND PARAGRAPH 1.10 TO READ AS FOLLOWS:
1.10 The term "TECHNOLOGICAL INFORMATION" shall mean any research data,
designs, formulas, process information, clinical data and other information
pertaining to any invention claimed in PATENT RIGHT which is known to Dr.
Anderson on the EFFECTIVE DATE and disclosed to Palomar within thirty (30) days
of the date on which this Agreement is fully executed. THE TERM SHALL ALSO
INCLUDE ANY RESEARCH DATA, DESIGNS, FORMULAS, PROCESS INFORMATION, CLINICAL DATA
AND OTHER INFORMATION PERTAINING TO ANY INVENTION CLAIMED IN EPILATION PATENT
RIGHT WHICH IS KNOWN TO DR. ANDERSON ON THE AMENDMENT EFFECTIVE DATE AND
DISCLOSED TO PALOMAR WITHIN THIRTY (30) DAYS OF THE AMENDMENT EFFECTIVE DATE.
This term shall also include information which is disclosed to PALOMAR by
GENERAL in accordance with, and during the term of, the Clinical Trial Agreement
OR THE EPILATION RESEARCH AGREEMENT and which pertains to any PATENT RIGHT
claiming an Invention as defined in EITHER said Agreement.
<PAGE>
IN SECTION 1, "DEFINITIONS", ADD THE FOLLOWING NEW PARAGRAPHS:
1.12 The term "EPILATION PATENT RIGHT" shall mean the U.S. Patent
Application Serial Number 08/314,082, filed September 28, 1994, naming Dr. R.
Rox Anderson as inventor, and titled "Method of Hair Removal", and the PCT
Application Serial Number PCT/US95/12275 filed September 22, 1995, or any
division, continuation and any foreign counterparts of the aforementioned patent
applications or the equivalent claims of any Letters Patent or the equivalent
thereof issuing thereon or reissue, reexamination or extension thereof.
EPILATION PATENT RIGHTS shall also include those claims in any
continuation-in-part of the aforementioned patent applications which claim an
invention described or claimed in said patent applications.
1.13 The term "EPILATION PRODUCT" shall mean any article, device or
composition, the manufacture, use or sale of which would, absent the licenses
granted herein, infringe a VALID CLAIM of an EPILATION PATENT RIGHT, or does not
infringe a VALID CLAIM of any EPILATION PATENT RIGHT licensed to PALOMAR
hereunder but the discovery, development, manufacture or use of which employs
TECHNOLOGICAL INFORMATION.
1.14 The term "EPILATION SERVICE" shall mean any method or service, the
use, performance, or sale of which would, absent the licenses granted herein,
infringe a VALID CLAIM of an EPILATION PATENT RIGHT, or does not infringe a
VALID CLAIM of any EPILATION PATENT RIGHT licensed to PALOMAR hereunder but the
discovery, development, manufacture or use of which employs TECHNOLOGICAL
INFORMATION.
1.15 The term "EPILATION LICENSE FIELD" shall mean hair reduction
and/or removal using chromophores which, when excited by laser pulses, destroy
hair follicles by mechanisms other than photochemical mechanisms.
IN SECTION 2, "GRANT", ADD THE FOLLOWING NEW PARAGRAPHS:
2.6 GENERAL hereby grants PALOMAR, subject to the rights of the United
States Government, an exclusive, worldwide, royalty-bearing license in the
EPILATION LICENSE FIELD to make, have made, use and sell EPILATION PRODUCTS and
to perform EPILATION SERVICES. In the event an exclusive license is not
available in a country, GENERAL will grant PALOMAR the most exclusive license
available in that country.
2.7 The above licenses to sell EPILATION PRODUCTS include the right to
grant to the purchaser of products from PALOMAR, its AFFILIATES, and
SUBLICENSEES the right to resell and to use such purchased EPILATION PRODUCTS in
a method coming within the scope of the corresponding PATENT RIGHT.
2.8 The granting of any license hereunder is subject to GENERAL's and
GENERAL's AFFILIATES' right to make and to use the subject matter described and
claimed in EPILATION
<PAGE>
PATENT RIGHT for research and clinical purposes but, for those PATENT RIGHTS
exclusively licensed, for no other purpose.
IN SECTION 3, "DUE DILIGENCE", ADD THE FOLLOWING NEW PARAGRAPH:
3.3 PALOMAR shall itself, or through its AFFILIATES or SUBLICENSEES,
use reasonable efforts to develop and make commercially available EPILATION
PRODUCTS or EPILATION SERVICES for commercial sales and distribution throughout
the world in the EPILATION LICENSE FIELD. Such efforts shall consist of:
(a) Entering into the Epilation Research Agreement with General
attached hereto as Exhibit A-2 and providing the funding specified in said
Agreement;
(b) Within six (6) months of the conclusion of the research governed by
said Agreement, but in no case greater than three (3) years from the AMENDMENT
EFFECTIVE DATE hereof, PALOMAR and GENERAL shall establish (i) additional
objective milestones for the development of EPILATION PRODUCTS or EPILATION
SERVICES, and (ii) a schedule of the dates by which PALOMAR shall achieve such
milestones.
Failure to achieve one or more of the above objectives or the
objectives selected in accordance with (b) above within the agreed upon time
periods or within any extension granted by GENERAL shall result in GENERAL
having the right to cancel upon thirty (30) days notice any exclusive license to
EPILATION PATENT RIGHTS granted hereunder or convert any exclusive license to
EPILATION PATENT RIGHTS to a non-exclusive license. If the parties do not agree
on any such milestones, or if PALOMAR decides not to develop EPILATION PRODUCTS
or EPILATION SERVICES, PALOMAR's license to EPILATION PATENT RIGHTS shall be
terminated. Notwithstanding the foregoing, provided that PALOMAR is in
compliance with the due diligence milestones in paragraph 3.1 of the License
Agreement, and has complied with milestone (a) in this paragraph 3.3, GENERAL
shall only be entitled to terminate PALOMAR's license to EPILATION PATENT RIGHTS
on account of PALOMAR's breach of this Agreement, including but not limited to
any failure by PALOMAR to make the annual minimum royalty payments specified in
paragraph 5.12(a) herein.
IN SECTION 4: "FILING, PROSECUTION AND MAINTENANCE OF PATENT RIGHT", ADD THE
FOLLOWING NEW PARAGRAPHS:
4.3 GENERAL shall be responsible for the preparation, filing,
prosecution and maintenance of all patent applications and patents included in
EPILATION PATENT RIGHTS, and shall keep PALOMAR informed of the prosecution of
such patents and applications in accordance with Paragraph 4.2 of the LICENSE
AGREEMENT.
4.4 PALOMAR shall reimburse GENERAL for one-half of its Costs for the
prosecution and maintenance of EPILATION PATENT RIGHTS incurred prior to and
subsequent to the AMENDMENT EFFECTIVE DATE, provided that, if GENERAL grants
license rights in EPILATION PATENT RIGHTS to DUSA Pharmaceuticals, Inc. and any
other
<PAGE>
entity, PALOMAR shall pay the same fraction of Costs as said other licensees,
which in no event will exceed one-third.
IN SECTION 5, "ROYALTIES", ADD THE FOLLOWING NEW PARAGRAPHS:
5.9 PALOMAR shall pay a license fee of ten thousand ($10,000) dollars
within thirty (30) days of execution of this Amendment, which is attributable to
EPILATION PATENT RIGHTS. No portion of said license fee shall be creditable
against future royalties.
5.10 For sales of any PRODUCT or SERVICE as defined in the LICENSE
AGREEMENT that is, or incorporates, an EPILATION PRODUCT or an EPILATION
SERVICE, the royalties shall be determined as follows:
(a) For sales governed by Paragraph 5.1(b)(i) of the LICENSE AGREEMENT,
the royalty specified therein shall be increased by one-half (0.5%) percent,
except those sales governed by Paragraph 5.1(b)(i)(B)(III), for which the
royalty specified therein shall be increased by one-quarter (0.25%) percent, in
addition to any increase in accordance with Paragraph 5.10(a) hereunder.
(b) For sales governed by Paragraphs 5.1(b)(ii) or 5.1(b)(iii) of the
LICENSE AGREEMENT, the parties will negotiate a commercially reasonable royalty
as specified in the LICENSE AGREEMENT, provided that the maximum value specified
for said commercially reasonable royalty rate shall be increased by one-half
(0.5%) percent, except those sales governed by Paragraph 5.1(b)(iii)(C), for
which the maximum value specified for the royalty specified therein shall be
increased by one-quarter (0.25%) percent, either of which increase shall be in
addition to any increase in accordance with Paragraph 5.10(b) hereunder.
5.11 For sales of any EPILATION PRODUCT or EPILATION SERVICE within the
LICENSE FIELD specified in Paragraph 1.3 of the LICENSE AGREEMENT that is not a
PRODUCT or SERVICE, as the case may be, under the LICENSE AGREEMENT, the
applicable royalty shall be that specified in paragraph 5.1(b) of the LICENSE
AGREEMENT which would have been the case if the EPILATION PRODUCT or EPILATION
SERVICE, were a PRODUCT or a SERVICE, as the case may be.
5.12 The annual minimum royalties specified in Paragraph 5.1(b)(iii)(D)
of the LICENSE AGREEMENT shall be calculated based on the royalty rates selected
for PRODUCTS and SERVICES in accordance with paragraphs 5.1(b)(ii) and
5.1(b)(iii) of the LICENSE AGREEMENT and paragraph 5.10 of this Amendment. In
addition, PALOMAR shall pay the following annual minimum royalties.
(a) In consideration for the licenses to EPILATION PATENT RIGHTS
granted herein, twenty thousand ($20,000) dollars per AGREEMENT YEAR, beginning
with the AGREEMENT YEAR next following the completion of PALOMAR-funded clinical
trials at GENERAL, until the last AGREEMENT YEAR in which PALOMAR holds an
exclusive license in the EPILATION LICENSE FIELD to EPILATION PATENT RIGHTS
hereunder.
<PAGE>
IN SECTION 5, "ROYALTIES", AMEND PARAGRAPH 5.4 TO READ AS FOLLOWS:
5.4 In addition to the royalties provided for above, PALOMAR shall pay
GENERAL ten percent (10%) of any and all income, other than a royalty or other
payment made pursuant to paragraphS 5.1, 5.10 OR 5.11 of the LICENSE AGREEMENT,
including, by way of example, license issue fees and milestone payments received
by PALOMAR from its AFFILIATES and SUBLICENSEES, in consideration for the
sublicensing of any right or license granted to PALOMAR under this Amendment.
IN SECTION 7, "INFRINGEMENT", ADD THE FOLLOWING NEW PARAGRAPH:
7.5 The provisions of this Section 7 shall apply only to any PATENT
RIGHTS exclusively or co-exclusively licensed to PALOMAR in the country in which
the alleged infringement is taking place.
Agreed to:
PALOMAR THE GENERAL HOSPITAL CORPORATION
BY /s/ Michael H. Smotrich BY /s/ Nikki J. Zapol
TITLE President TITLE Managing Director
Office of Technology Affairs
DATE February 14, 1997 DATE February 18, 1997
<PAGE>
EXHIBIT A-2
RESEARCH AGREEMENT
This Agreement is made as of the 1st day of March, 1997 ("Effective
Date"), between Palomar Medical Technologies, a Delaware corporation having
offices at 66 Cherry Hill Drive, Beverly, MA 01915 ("PALOMAR"), (hereinafter
called "PALOMAR"), and The General Hospital Corporation, a not-for-profit
Massachusetts corporation doing business as Massachusetts General Hospital,
Fruit Street, Boston, Massachusetts 02114 (hereinafter called "GENERAL").
WHEREAS, in an Amendment to the License Agreement between GENERAL and
PALOMAR effective August 18, 1995, effective on February 14, 1997 and executed
on even date herewith ("the AMENDED LICENSE AGREEMENT"), GENERAL has granted
PALOMAR an exclusive license within the EPILATION LICENSE FIELD (as hereinafter
defined) to certain patent rights relating to hair removal; and
WHEREAS PALOMAR desires GENERAL to perform research and evaluation in
the field of hair removal relating to said patent rights, herein described upon
the terms provided.
NOW THEREFORE, the parties hereto agree as follows:
1. The research project described in Appendix A and funded by PALOMAR
("Project") shall be performed by Dr. R. Rox Anderson (the "Principal
Investigator") and other GENERAL personnel working under the direction of the
Principal Investigator ("Investigators"). At the conclusion of the Project, a
report disclosing the results of the research shall be provided to PALOMAR,
which shall have the right to use such results to the extent such use does not
infringe any GENERAL patent not expressly licensed to PALOMAR herein.
2. This agreement shall remain in effect for a term of two years from
the Effective Date, provided however that, prior to the commencement of the
human study that is the subject of "Aim 4" in Appendix A, the parties will
execute a clinical trial agreement substantially equivalent to the agreement
included in Exhibit A of the AMENDED LICENSE AGREEMENT, and the terms of said
clinical trial agreement shall govern said human study.
3. PALOMAR agrees to provide GENERAL with a grant of two hundred three
thousand seven hundred fifty seven dollars ($203,757) which includes the full
direct costs of the Project and the full indirect costs attendant thereto, as
shown in the Budget attached hereto as Appendix B. The foregoing grant shall be
paid on the following schedule:
$50,090 upon execution of this Agreement;
$50,000 on or before September 1, 1997;
$ 51,833.50 on or before March 1, 1998; and
<PAGE>
$ 51,833.50 on or before September 1, 1998.
Payment shall be made to "The General Hospital Corporation" and shall be sent
to:
Vice President for Patents, Licensing and Industry Agreements
Office of Technology Affairs
Massachusetts General Hospital
Thirteenth Street, Building 149, Suite 1101
Charlestown, MA 02129
4. In the event that PALOMAR discloses to any GENERAL personnel any
information which relates to the Project that PALOMAR considers confidential,
the rights and obligations of the parties with respect to such information shall
be governed by the terms and conditions set forth in Appendix C.
5. The Principal Investigator shall have the right to present or
publish the results of the research done at GENERAL and shall provide an early
draft of any such presentation or manuscript or abstract for review by PALOMAR
prior to its first presentation or submission for publication, at least thirty
(30) days in advance in the case of a presentation or manuscript, and at least
seven (7) days in advance in the case of an abstract. At the end of such thirty
or seven days, as the case may be, the Principal Investigator shall have the
right, in his/her discretion, to make such presentation or to submit such
manuscript for publication, provided, however, that upon notice by PALOMAR
within said thirty or seven day period that PALOMAR reasonably believes a patent
application claiming an Invention (as defined in paragraph) should be filed
prior to such publication, such submission for publication shall be delayed
until any patent application or applications have been filed by GENERAL,
pursuant to paragraph 6.
6. The Principal Investigator and any other Investigator who shall
conceive and reduce to practice an invention, solely or jointly, in the
performance of Project (hereinafter referred to as "Invention") shall promptly
report such Invention to GENERAL and shall assign all of his or her rights,
title and interest in the Invention to GENERAL. GENERAL shall promptly advise
PALOMAR in writing of each Invention disclosed to GENERAL and shall discuss with
PALOMAR whether a patent application or applications (Hereinafter referred to,
together with any patents issued thereon, as "Patent Rights") pertaining to such
Invention should be filed and in which countries. In the event of joint
inventorship between PALOMAR personnel and GENERAL Investigators, PALOMAR
personnel shall assign all of their rights, title and interest in the Invention
to PALOMAR, and GENERAL Investigators shall assign all of their rights, title
and interest in the Invention to GENERAL, and the Invention will be deemed to be
jointly owned. If both parties mutually agree that Patent Rights should be
filed, applications assigned solely to GENERAL shall be filed by GENERAL, and
applications owned jointly by GENERAL and PALOMAR shall be filed as mutually
agreed upon by the parties. In the event PALOMAR is not interested in having
Patent Rights filed with respect to a particular Invention, PALOMAR shall advise
GENERAL of such fact within ninety (90) days from the date on which the
Invention was
<PAGE>
disclosed to PALOMAR by GENERAL and GENERAL shall be free to file and prosecute
Patent Rights on such Invention at its own expense and to license such Patent
Rights to any other party.
All information given to PALOMAR by GENERAL in accordance with this
paragraph 6 will be held in confidence by PALOMAR so long as such information
remains unpublished or publicly undisclosed by GENERAL.
All patent costs pertaining to any Patent Rights filed by mutual
agreement of PALOMAR and GENERAL, including preparation, filing, prosecution,
issuance and maintenance costs, shall be borne by PALOMAR as follows. For any
Patent Right, the scope of which is no broader than the EPILATION LICENSE FIELD
defined below, PALOMAR shall bear one hundred percent (100%) of patent costs,
and for any Patent Right, the scope of which is broader than the EPILATION
LICENSE FIELD or which contains embodiments outside the EPILATION LICENSE FIELD,
PALOMAR shall bear patent costs as provided in paragraph 4.4 of the AMENDED
LICENSE AGREEMENT.
As to any Patent Rights assigned in whole or in part to GENERAL and
filed by mutual agreement of the parties, to the extent not prohibited by the
United States Government or prevented by the obligations of GENERAL to any other
sponsor of research at GENERAL, PALOMAR shall have for the twelve (12) months
next following the filing of such Patent Rights in the United States Patent and
Trademark Office the option to obtain a world-wide, royalty bearing, exclusive
license under GENERAL's rights therein with the right to sublicense, in the
field of hair reduction and/or removal using chromophores which, when excited by
laser pulses, destroy hair follicles by mechanisms other than photochemical
mechanisms (the "EPILATION LICENSE FIELD"). In the event that GENERAL is
prohibited or prevented as aforesaid from granting an exclusive license within
the EPILATION LICENSE FIELD to any Patent Right hereunder, GENERAL will grant to
PALOMAR the most exclusive license within the EPILATION LICENSE FIELD that it is
able to grant to PALOMAR. It is understood that GENERAL will reserve the right
to use any Invention for research, clinical and educational purposes, and that
if federal funding supports the Invention, PALOMAR's license will be subject to
the royalty-free non-exclusive license granted to the U.S. government by statute
(35 USC sec.202(c)(4)).
This option is to be exercised by written notice to GENERAL during said
twelve month period and the negotiation, during the six (6) months next
following such notice, of an amendment to the AMENDED LICENSE AGREEMENT granting
PALOMAR a license to Patent Rights under the terms thereof, unless the parties
otherwise agree in writing. In the absence of such notice by COMPANY and
agreement on license terms, GENERAL may grant a license to such Patent Rights to
any other party.
7. GENERAL and PALOMAR shall each be responsible and shall hold the
other harmless for any injury to persons or damage to property to the extent
that such injury or damage is caused by the negligence or willful misconduct of
their employees or staff in carrying out the Project; provided, however, PALOMAR
will defend, indemnify and hold harmless GENERAL
<PAGE>
and its trustees, employees and staff against any and all actions, suits,
claims, demands or prosecutions that may be brought or instituted against
GENERAL and/or its trustees, employees and staff based on or arising out of the
manufacture, use, sale or other distribution of any product by PALOMAR, its
affiliates or licensees excepting any such action, suit, claim, demand or
prosecution which is based solely on the negligence or willful misconduct of
GENERAL and/or its trustees, employees or staff in the use of such product.
8. Each party agrees that it will not use the name or logo of the other
party or of any employee or staff member of the other party in any advertising,
promotional material or publicity without the prior written approval of the
party or person whose name or logo is to be used.
9. If either party shall fail to faithfully perform any of its
obligations under this Agreement, the non-defaulting party may give written
notice of the default to the defaulting party. Unless such default is corrected
within thirty (30) days after such notice, the notifying party may terminate
this Agreement upon written notice.
10. The obligations of the parties under Paragraphs 5,6,7 and 8 shall
survive the termination of this Agreement.
11. This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts, regardless of the choice of law rules of any jurisdiction.
IN WITNESS WHEREOF, GENERAL and PALOMAR have caused this instrument to
be executed.
PALOMAR THE GENERAL HOSPITAL CORPORATION
BY: /s/ Michael H. Smotrich BY: /s/ Nikki J. Zapol
TITLE: President TITLE: Manging Director
Office of Technology Affairs
DATE: February 14, 1997 DATE: February 18, 1997
I have read paragraphs 5 and 6 of the foregoing Agreement and agree to comply
with the obligations of the Principal Investigator stated therein. In addition,
I have read Appendix C and agree to comply with the obligations of GENERAL
stated therein.
/s/ R. Rox Anderson
---------------------------------
DATE: February 14, 1997
<PAGE>
APPENDIX A
Dye-assisted laser injury to hair follicles
R. Rox Anderson, MD
Christine Dierickx, MD
Salvadore Gonzales, MD
The broad goal is to evalute dye-assisted laser hair removal.
Aim 1: (6 months) Screen FDA=-approved aqueous dyes which absorb at 690-800 nm.
for the ability to penetrate deeply into hair follicles and/or stain follicular
epithelium, in skin IN VITRO.
a. 3 dyes (ICG; carbon suspension; MB)
b. effect of vehiccle (range of C1-C4 alcohols; effect of
surfactants; DMSO)
c. role of epilation
Aim 2: (4 months) Quantify follicular injury with vs. without dye, in skin IN
VITRO.
a. most promising dye + ruby
b. most promising dye(s) + diode
Aim 3: (2 months) Write and submit human study for approval of IRB, FDA.
Aim 4: (9 months) Compare laser hair removal with vs. witout dye in a pilot
human study.
a. one dye and one laser -- depends on findings of aims 1, 2
b. open-label bilateral comparison study in 12 volunteers,
backs/thighs
c. fluence and dye concentrations depend on findings in aims 1, 2
d. quantitative hair counts and re-growth (paired comparison in
each volunteer)
<PAGE>
APPENDIX B
INVESTIGATOR: R.R. Anderson, M.D.
TITLE OF STUDY: Dye-assisted laser injury to hair follicles
SPONSOR: Palomar
BUDGET PERIOD: 3/1/97-2/28/99
PERSONNEL
<TABLE>
<S> <C> <C> <C> <C> <C>
NAME % EFFORT SALARY FRINGE YEAR 1 YEAR 2
BENEFITS TOTAL TOTAL
HMS-APPNT 26.20%
R.R. Anderson, MD A.N. None Requested 0 0 0
Christine Dierickx, MD A.N. None Requested 0 0 0
Salvador Gonzalez, MD 80% $48,000 12,576 60,576 62,999
NON-HMS APPNT 21.90%
Senior Technician 25% $9000 1,971 10,971 11,410
Total Personnel 71,547 74,409
EQUIPMENT 0 0
SUPPLIES
Misc. Disposables 1,000 1,000
Misc. Dyes 1,000 1,000
Film And Film Developing 525 525
Cryostat Baldes 500 500
Barrier Filters For Dye Detection 400 400
Office Supplies And Screening Time 750 750
Total Supplies 4,175 4,175
TRAVEL 600 600
PATIENT CARE COSTS
Subject reimbursement (estimate) 2,000 2,000
MISCELLANEOUS COSTS
Advertising and telephone expenses 250 250
Histology 1,500 1,500
Total Miscellaneous 1,750 1,750
TOTAL DIRECT COSTS 80,072 82,934
INDIRECT COSTS (25%) 20,018 20,733
TOTAL COSTS $100,090 $103,665
======== ========
</TABLE>
/s/ Marcia L. Smith 2/13/97
-------------------------------------
Marcia L. Smith
Director for Proposal and Award Mgmt.
<PAGE>
APPENDIX C
PALOMAR PROPRIETARY INFORMATION
It is anticipated that in the performance of the Project, the Principal
Investigator will be provided with or given access by PALOMAR to certain
information which PALOMAR considers proprietary (GENERAL and Principal
Investigator are referred to herein each as a "RECIPIENT" and collectively as
"RECIPIENTS.") The rights and obligations of the parties with respect to such
information are as follows:
1. PROPRIETARY INFORMATION. For the purposes of this Agreement, "Proprietary
Information" refers to information of any kind which is disclosed by PALOMAR to
RECIPIENTS and which, by appropriate marking, is identified as confidential and
proprietary at the time of disclosure. In the event that proprietary information
must be provided visually or orally, obligations of confidence shall attach only
to that information which is confirmed by PALOMAR in writing within ten (10)
working days as being confidential.
2. USE AND CARE OF PROPRIETARY INFORMATION. For a period of three (3) years
after receipt of Proprietary Information, each RECIPIENT agrees to use
reasonable efforts, no less than the protection given its, his or her own
confidential information, to use Proprietary Information received from PALOMAR
and accepted by that RECIPIENT only in accordance with this paragraph 2.
(a) Each RECIPIENT shall use PALOMAR's Proprietary Information solely
for the purposes of carrying out the Project described in the Research Agreement
attached hereto. Each RECIPIENT agrees to make Proprietary Information available
only to those employees and students of GENERAL who require access to it in the
performance of the Research Agreement and to inform them of the confidential
nature of such information.
(b) Except as provided in subparagraph 2(a), each RECIPIENT shall keep
all Proprietary Information confidential unless PALOMAR gives specific written
consent for release.
(c) If any RECIPIENT becomes aware of any disclosure not authorized
hereunder that RECIPIENT shall notify PALOMAR and take reasonable steps to
prevent any further disclosure or unauthorized use.
(d) When the Proprietary Information is no longer required for the
purposes of this Research Agreement, each RECIPIENT shall return or dispose of
any tangible records of it as directed by PALOMAR.
(e) It is agreed by PALOMAR and GENERAL that the transfer of
Proprietary Information shall not be construed as a grant of any right or
license with respect to the information delivered except as set forth herein or
in a duly executed research or license agreement.
<PAGE>
3. INFORMATION NOT COVERED It is agreed by PALOMAR and GENERAL that information
shall not be deemed Proprietary Information in the event:
(a) it is publicly available prior to the date of the Agreement or
becomes publicly available thereafter through no wrongful act of GENERAL;
(b) it was known to GENERAL prior to the date of disclosure or becomes
known to GENERAL thereafter from a third party having no obligation to PALOMAR
to keep such information confidential;
(c) it is disclosed by GENERAL in accordance with the terms of
PALOMAR's prior written approval;
(d) it is disclosed by PALOMAR without restriction on further
disclosure;
(e) it is independently developed by GENERAL; or
(f) GENERAL is obligated to produce it pursuant to an order of a court
of competent jurisdiction or a valid administrative or Congressional subpoena,
provided that GENERAL (i) promptly notifies PALOMAR and (ii) cooperates
reasonably with PALOMAR's efforts to contest or limit the scope of such order.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Palomar Medical Products, Inc. Delaware corporation
Star Medical Technologies, Inc. California corporation
Cosmetic Technology International, Inc. Delaware corporation
Dynaco Corp. Delaware corporation
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements, File Numbers 33-47479, 33-879650, 33-96436, 33-97760,
33-99792, 33-99794, 333-000140, 333-001070, 333-3424, 333-5781, 333-7097,
333-10681, 333-18003, 333-87908, 33-97710, 333-18347, 333-21095, 333-22725,
333-25209, 333-28251, 333-42129, 333-55821, 333-57261, 333-57403 and 333-70391.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 7, 1998
