SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT /X/
FILED BY A PARTY OTHER THAN THE REGISTRANT / /
--------------------------------------------------------------------
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, For Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
PALOMAR MEDICAL TECHNOLOGIES, INC.
------------------------------------------------
(Name Of Registrant As Specified In Its Charter)
NOT APPLICABLE
------------------------------------------
(Name Of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
N/A
2) Aggregate number of securities to which transaction applies: N/A
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
$54,000,000
4) Proposed maximum aggregate value of transaction: $54,000,000
5) Total fee paid: $10,900,000
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:_____
2) Form, Schedule or Registration Statement No.:_____
3) Filing Party:_____
4) Date Filed: _____
<PAGE>
PROXY/VOTING INSTRUCTION CARD
PALOMAR MEDICAL TECHNOLOGIES, INC.
C/O THE AMERICAN STOCK TRANSFER & TRUST COMPANY
40 WALL STREET, 41ST FLOOR, NEW YORK, NEW YORK 10005
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
I (WHETHER ONE OR MORE OF US) APPOINT JOSEPH P. CARUSO AND SARAH
BURGESS REED TO BE MY PROXIES. THE PROXIES MAY VOTE ON MY BEHALF, IN ACCORDANCE
WITH MY INSTRUCTIONS, ALL OF MY SHARES ENTITLED TO VOTE AT THE SPECIAL MEETING
OF STOCKHOLDERS OF PALOMAR MEDICAL TECHNOLOGIES, INC. THE MEETING IS SCHEDULED
FOR APRIL 21, 1999, BUT THIS PROXY INCLUDES ANY ADJOURNMENT(S) OF THAT MEETING.
THE PROXIES MAY VOTE ON MY BEHALF AS IF I WERE PERSONALLY AT THE MEETING.
PLEASE COMPLETE, DATE AND SIGN ON REVERSE SIDE AND
RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
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^ DETACH HERE BEFORE MAILING TOP PORTION ^
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY ( )
IN THEIR DISCRETION, THE PROXIES MAY VOTE ON ANY OTHER BUSINESS THAT
PROPERLY COMES BEFORE THE MEETING. THIS PROXY WHEN PROPERLY EXECUTED WILL BE
VOTED AS INSTRUCTED BELOW BY THE UNDERSIGNED STOCKHOLDER. IF NO MARKING IS MADE,
THIS PROXY WILL BE DEEMED TO BE DIRECTION TO VOTE FOR PROPOSALS 1 AND 2.
The Board of Directors recommends a vote FOR:
1. The sale of Palomar's Star Medical Technologies, Inc. subsidiary to
Coherent, Inc.
FOR ( ) AGAINST ( ) ABSTAIN ( )
2. A proposal to amend our Certificate of Incorporation to effect a plan
of recapitalization that will result in a one-for-seven reverse split
of our common stock and a reduction in our authorized capital stock to
45,000,000 shares of common and 1,500,000 shares of preferred.
FOR ( ) AGAINST ( ) ABSTAIN ( )
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED OR, IF
NO DIRECTION IS GIVEN WITH RESPECT TO ONE OR MORE OF THE PROPOSALS SET
FORTH ABOVE, WILL BE VOTED FOR SUCH PROPOSAL OR PROPOSALS.
DATED: _________________, 1999
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Signature of Stockholder(s)
Please promptly date and sign this proxy and mail it in the enclosed envelope to
assure representation of your shares. No postage need be affixed if mailed in
the United States. PLEASE SIGN EXACTLY AS NAME(S) APPEAR ON STOCK CERTIFICATE.
If stockholder is a corporation, please sign full corporate name by president or
other authorized officer and, if a partnership, please sign full partnership
name by an authorized partner or other person.
Mark here if you plan to attend the meeting. / /
[NOTE THAT YOU MAY ATTEND THE MEETING
EVEN IF YOU DO NOT CHECK THE BOX.]
For any questions or requests for assistance,
please call our proxy solicitor Kissel-Blake,
a division of Shareholder Communications
Corporation at 1-800-849-4134.
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[GRAPHIC OMITTED]
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PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
to be held on April 21, 1999
and
PROXY STATEMENT
================================================================================
IMPORTANT
Please mark, sign and date your proxy
and promptly return it in the enclosed envelope.
<PAGE>
March 12, 1999
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders
which will be held on April 21, 1999, at the offices of Medical Information
Technologies, Inc., 7 Blue Hill River Road, Canton, Massachusetts 02021. The
meeting will begin at 10:00 a.m.
EST.
A summary of the matters to be voted upon at the Special Meeting is at
page 3 of the enclosed proxy statement.
The formal notice of the meeting follows on the next page. No admission
tickets or other credentials will be required for attendance at the meeting.
Directors and officers, and a representative from Arthur Andersen LLP,
our independent auditor, are expected to be available before and after the
meeting to speak with you. During the meeting, we will answer your questions
regarding and will consider the matters explained in the notice and proxy
statement that follow.
Please vote, date, sign and return the enclosed proxy as soon as
possible, whether or not you plan to attend the meeting. Your vote is important.
Sincerely,
/s/ Louis P. Valente
-------------------------
Chairman of the
Board of Directors,
President and
Chief Executive Officer
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
Notice of Special Meeting of Stockholders
March 12, 1999
To the holders of common stock of
Palomar Medical Technologies, Inc.
We will hold a Special Meeting of Stockholders of Palomar Medical
Technologies, Inc., a Delaware corporation, at Medical Information Technologies,
Inc., 7 Blue Hill River Road, Canton, Massachusetts 02021, on April 21, 1999 at
10:00 a.m. The meeting's purpose is to vote upon (1) the sale of Palomar's Star
Medical Technologies, Inc. subsidiary to Coherent, Inc., and (2) a proposal to
amend our Certificate of Incorporation to effect a plan of recapitalization that
will result in a one-for-seven reverse split of our common stock and will reduce
our authorized capital stock from 120,000,000 shares of common and 5,000,000
shares of preferred to 45,000,000 shares of common and 1,500,000 shares of
preferred. These proposals and the reasons that our Board recommends you vote
for them are summarized at page 3 of the proxy statement.
Tucker Anthony, Inc., our financial advisor, has rendered its opinion
that, as of December 7, 1998 (the date of its opinion), the consideration that
we will receive in connection with the sale of Star is fair from a financial
point of view. A copy of this opinion, which sets forth the assumptions made,
procedures followed, matters considered and limitations on the review undertaken
by Tucker Anthony, is attached as Exhibit A to the proxy statement.
You should read carefully the accompanying proxy statement for details
of the sale of Star, the reverse split and additional related information.
OUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE SALE OF STAR AND
DETERMINED THAT THE SALE OF STAR IS IN THE BEST INTERESTS OF PALOMAR AND ITS
STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE FOR THE SALE OF STAR.
OUR BOARD OF DIRECTORS ALSO BELIEVES THAT ADOPTION OF THE PROPOSED
AMENDMENT TO OUR CERTIFICATE OF INCORPORATION IS IN THE BEST INTERESTS OF
PALOMAR AND ITS STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE FOR THE PROPOSED
AMENDMENT.
The affirmative vote of holders of a majority of the outstanding shares
of our common stock is necessary to approve the sale of Star and the proposed
amendment to our Certificate of Incorporation.
I look forward to meeting with those stockholders who are able to be
present at the Special Meeting; however, whether or not you plan to attend the
Special Meeting, please complete, sign and date the enclosed proxy card and
return it promptly in the enclosed postage-paid envelope. If you attend the
Special Meeting, you may vote in person if you wish, even though you previously
have returned your proxy card. Your prompt cooperation will be greatly
appreciated.
Only stockholders of record of common stock at the close of business on
March 2, 1999 are entitled to receive notice of and to vote at the meeting. A
list of the stockholders entitled to vote will be available for examination at
the meeting by any stockholder for any purpose relevant to the meeting. The list
will also be available on the same basis for ten days prior to the meeting at
our principal executive office, 45 Hartwell Avenue, Lexington, Massachusetts,
02421-3102
Thank you for your cooperation.
Sincerely,
Louis P. Valente
Chairman of the Board of Directors,
President and Chief Executive Officer
PLEASE VOTE - - YOUR VOTE IS IMPORTANT
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
45 Hartwell Avenue
Lexington, Massachusetts 02421-3102
--------------------
SPECIAL MEETING OF STOCKHOLDERS
PROXY STATEMENT
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<TABLE>
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Special Meeting: April 21, 1999 Medical Information Technologies, Inc.
10:00 a.m. 7 Blue Hill River Road
Canton, Massachusetts 02021
Record Date: 5:00 p.m., EDT, March 2, 1999, if you were a stockholder at that
time, you may vote at the meeting. Each share is entitled to one
vote. On the record date, we had 75,614,405 shares of our common
stock outstanding.
Agenda: 1. Vote on a proposal to sell Palomar's Star Medical Technologies,
Inc. subsidiary to Coherent.
2. 2. Vote on proposal to amend our Certificate of Incorporation
to effect a plan of recapitalization that will result in a one-for-seven
reverse split of our common stock and a reduction in our authorized
capital stock to 45,000,000 shares of common and 1,500,000 of preferred.
3. Any other proper business.
Proxies: Unless you tell us on the proxy card to vote differently, we will
vote signed, returned proxies FOR agenda items 1 and 2. The Board or
We will follow your proxy holders will use their discretion on other matters.
voting instructions.
If none, we will vote
signed proxies for each
proposal.
Proxies The Board of Directors
Solicited By:
First Mailing We anticipate first mailing this proxy statement
Date: and attached proxy card on Date: March 15, 1999.
Revoking Your Proxy:
Proxies may be
revoked if you: 1. Deliver a signed revocation letter, dated
later than the proxy, to Sarah Reed, Esq.,
Palomar Medical Technologies, Inc., 45 Hartwell Avenue,
Lexington, Massachusetts 02421.
You can change
your mind after 2. Deliver a signed proxy, dated later than the first one, to American Stock
sending in a proxy, Transfer & Trust, 40 Wall Street, 46th Floor, New York, New York, 10005.
until the meeting, by
following these 3. Attend the meeting and vote in person or by proxy. Attending the meeting alone will not
procedures. revoke your proxy.
<PAGE>
Voting
Procedures: If you fail to return a proxy or attend the meeting, or if you abstain from voting on
either proposal, it will have the same effects if you voted your shares against the
proposal. If you just sign the proxy card with no further instructions, your shares
will be counted as a vote FOR each proposal.
Required Votes: The affirmative vote of holders of a majority of the outstanding shares of our common stock is
necessary to approve the sale of Star and the proposed amendment to our Certificate of
Incorporation.
Proxy Kissel-Blake, a professional proxy solicitation firm, will help us solicit proxies at a cost to
Solicitation: Palomar of $20,000 plus expenses. Our employees may also solicit proxies for no additional
compensation. We will reimburse banks, brokers, custodians, nominees and fiduciaries
for reasonable expenses they incur in sending these proxy materials to you if you are a
beneficial holder of our shares.
Adjournment: Pursuant to our By-laws, the Special Meeting may be adjourned from time to time, and
notice of the adjourned meeting need not be given if the time and place of the adjourned
meeting are announced at the Special Meeting and no new record date is fixed for the
adjourned meeting.
Additional
Information: This proxy statement is accompanied by a copy of our Annual Report on Form 10-K for
the year ended December 31, 1997 as amended (as well as the portions of our proxy
statement for our 1998 Annual Meeting of Stockholders incorporated by reference into
that Form 10-K) and a copy of our Quarterly Report on Form 10-Q for the period ended
September 30, 1998 as amended. We will provide you with the Exhibits to the Annual
and the Quarterly Report upon your request.
</TABLE>
PLEASE VOTE - YOUR VOTE IS IMPORTANT
Prompt return of your proxy will help reduce the costs of resolicitation.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
WHERE YOU CAN FIND MORE INFORMATION...............................................................................1
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS/RISK FACTORS......................................................2
SUMMARY...........................................................................................................3
SUMMARY FINANCIAL DATA............................................................................................4
PROPOSAL NUMBER ONE - THE SALE OF STAR............................................................................5
Description of Palomar's Business........................................................................5
Description of Star's Business...........................................................................6
Description of Coherent's Business.......................................................................7
Background of the Sale...................................................................................8
High and Low Sales Prices of Our Common Stock............................................................9
Recommendation of the Palomar Board and Reasons for the Sale.............................................9
Opinion of Our Financial Advisor........................................................................12
Effective Time..........................................................................................15
Purchase Price..........................................................................................15
Federal and State Income Tax Consequences...............................................................16
Accounting Treatment....................................................................................16
THE MERGER AGREEMENT.............................................................................................16
Mechanics of the Merger.................................................................................16
Representations and Warranties..........................................................................16
Acquisition Proposals and Right of Palomar Board to Withdraw Recommendation.............................20
Fees and Expenses.......................................................................................22
Certain Additional Agreements...........................................................................22
Conditions to the Consummation of the Sale..............................................................26
Survival of Representations and Warranties and Indemnification..........................................28
i
<PAGE>
Termination, Amendment and Waiver.......................................................................28
Dispute Resolution......................................................................................29
Escrow..................................................................................................30
Patent License Agreement................................................................................30
OTHER MATTERS....................................................................................................31
Letter Agreement Between Coherent and Palomar...........................................................31
Bonus Agreement.........................................................................................32
Regulatory Approval Required............................................................................32
PROPOSAL NUMBER TWO - PROPOSED AMENDMENT OF
THE COMPANY'S CERTIFICATE OF INCORPORATION..............................................................33
PURPOSES OF THE PLAN OF RECAPITALIZATION.........................................................................33
Eligibility for Continued Listing on Nasdaq SmallCap Market.............................................33
Greater Availability of Common Stock for Future Issuances...............................................35
EFFECT OF THE REVERSE SPLIT......................................................................................36
EXCHANGE OF STOCK CERTIFICATES AND
ELIMINATION OF FRACTIONAL SHARE INTERESTS...............................................................37
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE SPLIT.............................................................37
PALOMAR SHARE OWNERSHIP..........................................................................................38
SUBMISSION OF STOCKHOLDER PROPOSALS..............................................................................40
OTHER BUSINESS...................................................................................................40
EXPENSES AND SOLICITATION........................................................................................40
PALOMAR MEDICAL TECHNOLOGIES, INC. FINANCIAL STATEMENTS.........................................................F-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................................................F-38
PALOMAR MEDICAL TECHNOLOGIES, INC. PRO FORMA
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS...........................................................F-47
STAR MEDICAL TECHNOLOGIES, INC. FINANCIAL STATEMENTS...........................................................F-53
</TABLE>
ii
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
EXHIBIT A Tucker Anthony, Inc. Opinion
EXHIBIT B Amount to be Received by Each Star Stockholder
EXHIBIT C Merger Agreement (with Exhibit A (Escrow Agreement), Exhibit E (Patent License Agreement), and
Schedules 1.6 (Breakdown of Proceeds) and 7.2 (Escrow Contributions))
EXHIBIT D Proposed Amendment of Certificate of Incorporation
EXHIBIT E Glossary of Defined Terms
</TABLE>
iii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
A copy of our Annual Report on Form 10-K for the year ended December
31, 1997 as amended (as well as the sections of our proxy statement for our 1998
Annual Meeting of Stockholders incorporated by reference into that Form 10-K)
and our Quarterly Report on Form 10-Q for the quarter ended September 30, 1998
as amended accompany this proxy statement.
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). You
can inspect and copy these reports, proxy statements and other information at
the public reference facilities of the SEC, in Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New
York 10048; and Suite 1400, Citicorp Center, 500 W. Madison Street, Chicago,
Illinois 60661. You can also obtain copies of these materials from the public
reference section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. The SEC also maintains a web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC
(http://www.sec.gov).
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring to those documents. The information incorporated by reference is an
important part of this prospectus. We incorporate by reference the following
documents we filed with the SEC pursuant to Section 13 of the Exchange Act of
1934:
o Annual Report on Form 10-K for the year ended December 31,
1997, as amended;
o Quarterly Reports on Form 10-Q for the quarters ended March
31, 1998, June 30, 1998 and September 30, 1998, as amended;
o Current Report on Form 8-K filed on June 3, 1998 and Current
Report on Form 8-K filed on November 3, 1998; and
o Description of our common stock contained in our registration
statement on Form 8-A filed with the SEC on June 6, 1992,
including the amendment on Form 8 dated December 17, 1992.
1
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS/RISK FACTORS
This proxy statement contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Such statements relate to, among other things, consummation of the sale of
our Star subsidiary, products under development, including the attributes,
introduction dates and gross margins of those products, effects of the proposed
reverse split, the possibility of patent license agreements, and the
availability of product distributors, and are indicated by words or phrases such
as "anticipate," "estimate," "plans," "projects," "continuing," "ongoing,"
"expects," "management believes," "we believe," "we intend" and similar words or
phrases. The following factors are among the principal risk factors that could
cause actual results to differ materially from the forward-looking statements:
o failure to consummate the sale of our Star Medical
Technologies, Inc. subsidiary;
o inability to maintain our Nasdaq listing;
o further increase in the number of our shares issued and
outstanding;
o inability to successfully develop and introduce new products;
o pricing pressures and other competitive factors;
o our dependence on third party researchers, principally,
Massachusetts General Hospital;
o lack of broad market acceptance of laser hair removal;
o government regulations, including inability to obtain and
maintain all necessary regulatory approvals;
o opportunities or acquisitions that we pursue;
o the availability and terms of financing;
o inability to protect, defend and leverage our intellectual
property;
o issues arising from addressing year 2000 information
technology issues; and
o a claim for indemnification by Coherent, if the sale of Star
is consummated.
Consequently, actual events and results may vary significantly from
those included in or contemplated or implied by our forward-looking statements.
2
<PAGE>
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SUMMARY
General. We are asking for you to vote on two items. The first is our
proposal to sell Star Medical Technologies, Inc., a subsidiary of Palomar, to
Coherent, Inc. Coherent currently acts as our exclusive distributor. The
proposed sale of Star is more fully detailed on pages 5 through 32 below.
The second is our proposed amendment to our Certificate of
Incorporation that, if approved, will effect a plan of recapitalization that
will result in a one-for-seven reverse split of our common stock and a reduction
in our authorized common stock to 45,000,000 shares and authorized preferred
stock to 1,500,000 shares. The proposed amendment is more fully detailed on
pages 33 through 37 below.
Sale of Star. The Board of Directors of Palomar recommends that you
vote for the sale of Star. If you approve the sale, a subsidiary of Coherent
will be merged into Star. Palomar owns 82.46% of Star (assuming the exercise of
all outstanding options to purchase Star stock) and will receive, after taxes,
approximately $46 million of Coherent's $65 million purchase payment. While
approximately 80% of our revenue and substantially all of our gross profit in
1998 was attributable to Star's business, the Board concluded the cash that we
will receive from the sale, to be used, among other things, as expansion capital
for future growth, to accelerate product development, and to fund a stock
buyback program, is more valuable to Palomar and its stockholders than the cash
flows and residual value we expected to generate from Star in the reasonable
future.
If we sell Star to Coherent, we will receive a royalty on Coherent's
sales of hair removal products, including Star's LightSheer(TM) diode laser
system. We will also, however, gain a new competitor, namely Coherent itself,
and we will have to distribute our new products through channels in addition to
Coherent, as Coherent will cease to be our exclusive distributor. On balance,
the Board believes that the proceeds from the sale of Star will assist Palomar
to more rapidly market and improve our second generation hair removal systems,
to produce lower cost products addressing larger markets, and to focus on
dermatology and cosmetic procedure markets other than laser hair removal to a
greater extent than would otherwise be possible.
Amendment to Certificate of Incorporation. The Board of Directors also
recommends that you vote in favor of our proposed amendment to our Certificate
of Incorporation that, if approved, will effect a plan of recapitalization that
will result in a one-for-seven reverse split of Palomar's common stock and a
reduction in our authorized capital stock from 120,000,000 shares of common and
5,000,000 shares of preferred to 45,000,000 shares of common and 1,500,000
shares of preferred stock. We believe that this proposed amendment is beneficial
to stockholders. We have been notified by the Nasdaq Stock Market that for
continued listing we must meet Nasdaq's minimum bid price of $1.00 per share;
Palomar's stock fell below $1.00 for a 30 day trading period between August 28
and October 9, 1998. Nasdaq has scheduled a hearing on our delisting for March
18, 1999. If the reverse split is effected, we believe we will meet the $1.00
required minimum bid price. Otherwise, we would likely be quoted on "pink
sheets" maintained by the National Quotation Bureau, Inc. or Nasdaq's OTC
Bulletin Board. These listings can make trading more difficult for stockholders
and reduce the liquidity of our common stock.
Of course, we cannot guarantee that even with a reverse split we will
meet all Nasdaq's listing criteria, or that the prices for shares of our common
stock after the reverse will be seven times the prices for shares immediately
before the split. Nonetheless, the reverse split not only helps us meet listing
requirements, but also ought to make our shares more attractive to investors, as
our present low-priced stock may be deemed unduly speculative to investors, and
brokerage firms may be reluctant to recommend it to their clients.
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3
<PAGE>
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SUMMARY FINANCIAL DATA
The selected financial data set forth below as of December 31, 1997 and
1998 and for the years ended December 31, 1996, 1997, and 1998, are derived from
our consolidated financial statements included in this proxy, which have been
audited by Arthur Andersen LLP, our independent public accountants. The selected
financial data set forth below as of December 31, 1994, 1995 and 1996 and for
the nine months ended December 31, 1994 and the year ended December 31, 1995 are
derived from audited consolidated financial statements that are not included in
this proxy. This data should be read in conjunction with our consolidated
financial statements and related notes thereto, contained in our Report on Form
10-K for the year ended December 31, 1997 as amended and contained in our report
on the consolidated financial statements for the year ended December 31, 1998
included in this proxy.
Selected Financial Data
(in thousands, except per share data)
<TABLE>
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Nine months (1) Pro Forma (3)
ended Year ended Year ended
December 31, December 31, December 31,
------------ ------------ ------------
Statement of Operations Data 1994 1995 1996 1997 1998 1998
------------ ------------------------------------------ ------------
Revenues $40 $5,610 $17,607 $20,995 $44,514 $8,932
Gross Profit (loss) 22 2,146 3,437 939 21,463 (1,385)
Operating Expenses 5,740 10,985 26,548 42,867 30,897 14,074
Loss from Operations (5,718) (8,839) (23,110) (41,929) (9,434) (15,458)
Net Loss from Continuing Operations (5,689) (8,390) (20,798) (58,369) (9,967) ($15,187)
Net Loss from Discontinued Operations (3) (4,231) (17,066) (27,435) (2,624)
Net Loss $(5,692) $(12,621) $(37,864) $(85,804) $(12,591)
Basic and Diluted Net Loss Per Common
Share:
Continuing Operations $(0.84) $(0.60) $(0.84) $(1.79) $(0.18) $(0.26)
Discontinued Operations 0.00 (0.30) (0.65) (0.78) (0.04)
Total Loss Per Common Share $(0.84) $(0.90) $(1.49) $(2.57) $(0.22)
Weighted Average Number of
Common Shares Outstanding 6,759 14,165 26,167 35,105 62,869 62,869
Balance Sheet Data: (4)
Working Capital $2,491 $12,998 $15,203 ($7,269) ($6,004) $44,611
Total Assets 6,551 33,656 67,533 28,968 23,526 62,526
Long-term Debt 2,322 1,765 14,665 12,446 3,150 3,150
Stockholders' Equity (Deficit)(2) 2,794 25,289 38,077 (6,184) (6,463) 42,362
</TABLE>
(1) Palomar changed it fiscal year end to December 31, effective for the
nine months ended December 31, 1994.
(2) Palomar has not declared cash dividends in any of the periods
presented.
(3) The pro forma selected operations data presented above are required to
reflect Palomar's sale of its majority owned subsidiary, Star, to
Coherent as of January 1, 1998, the beginning of Palomar's fiscal year
ended December 31, 1998. The pro forma selected operations data do not
include the effect of the gain of approximately $48.8 million from
Palomar's sale of Star to Coherent. See pro forma consolidated
condensed statement of operations and notes thereto.
(4) The pro forma selected balance sheet data reflects Palomar sale of its
majority owned subsidiary, Star, to Coherent as of December 31, 1998 (
the balance sheet date). See pro forma consolidated condensed balance
sheet and notes thereto.
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4
<PAGE>
PROPOSAL NUMBER ONE
THE SALE OF STAR
Description of Palomar's Business
- ---------------------------------
The principal offices of Palomar Medical Technologies, Inc. are located
at 45 Hartwell Avenue, Lexington, Massachusetts 02421-3102 (781-676-7300).
Palomar was organized to design, manufacture and market lasers, delivery systems
and related disposable products for use in medical procedures. After a period of
rapid growth and expansion in which we acquired and invested in a number of
businesses, many of which were outside our core laser business, within the last
18 months we have refocused on our core competency and divested those non-core
subsidiaries and investments. Our exclusive focus now is the use of lasers in
dermatology and cosmetic procedures, with an emphasis on laser hair removal and
research and development relating to that and other cosmetic laser products. In
addition to manufacturing lasers for hair removal, as a small part of our
operations we place our lasers in clinical and cosmetic settings and receive in
exchange a share of the revenue generated from laser hair removal procedures.
We have four lasers that have been cleared by the Food and Drug
Administration (the "FDA") for dermatological/cosmetic applications, three of
which (the RD-1200(TM), EpiLaser(R), and Palomar E2000(TM)) we will continue to
sell following the sale of Star. (PLEASE NOTE THAT FOR YOUR CONVENIENCE A
GLOSSARY OF DEFINED TERMS IS ATTACHED AS EXHIBIT E TO THIS PROXY STATEMENT.) Our
first laser to be cleared by the FDA is the RD-1200(TM), a ruby laser for tattoo
removal and treating pigmented lesions that has been on the market for almost
ten years. Last year, sales of this laser were less than 5% of our total sales.
Purchasers were primarily overseas. Intense competition in the medical device
industry and market saturation for this type of laser has reduced RD-1200(TM)
sales over the last five years, and while we expect to continue to sell the
device, sales will likely be at a low volume.
Our next FDA-cleared laser, the EpiLaser(R) hair removal system, is
based in part on the ruby laser technology originally developed in our corporate
headquarters in Massachusetts for tattoo and pigmented lesion removal, described
above. The EpiLaser(R) is specifically configured to allow the appropriate
wavelength, energy and pulse duration to be delivered to the hair follicle
without energy being absorbed by the surrounding tissue. That delivery method,
combined with our patented cooling handpiece, allows safe and effective hair
removal. The EpiLaser(R) is manufactured at our headquarters in Massachusetts.
Assuming our sale of Star to Coherent is completed, we will continue to
manufacture and develop cosmetic lasers at our Massachusetts facility. We have
just introduced our second generation ruby laser, the Palomar E2000(TM), a
product which we anticipate will be superior to hair removal lasers currently
available in a number of respects, including speed and efficacy. The Palomar
E2000(TM) has already received FDA clearance for hair removal. The EpiLaser(R)
and the Paloamr E2000(TM) are the only hair removal lasers on the market that
havd been cleared by the FDA for "permanent hair reduction" labeling. We will
consider a number of alternatives with respect to our future products, including
manufacturing them ourselves and selling them directly and/or through
distributors or (as in the case of Star) selling the product line and/or
technology to others. We will continue to choose the alternative which we
believe best maximizes long-term stockholder value.
We believe that the market for laser-based hair removal remains a
growing one. Although the final size of the market cannot easily be determined,
the electrolysis market provides a useful comparison. (In electrolysis, an
electrologist inserts a needle directly into a hair follicle, then sends an
electric current through the needle to disable the follicle. As the process is
hair by hair, electrolysis is time consuming; successful hair removal depends on
the skill of the electrologist and multiple treatments.) It is estimated that
each year more than one million women go to electrologists to remove unwanted
hair, and that the market is about $1 billion in annual spending.
Almost three-quarters of all women in the United States use some form
of temporary hair removal to rid themselves of unwanted hair. Those methods
include, in addition to electrology, waxes, depilatories and tweezing. Shaving,
of course, is the most widely used method of hair removal, but its results are
the most temporary. Increasingly, men also want to remove unwanted hair,
particularly from the back and chest. Benefits from
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Palomar's laser-based method of hair reduction/removal include not only higher
success rates than with previous methods, but also treatment of larger areas in
each treatment session and a relatively painless and non-invasive procedure.
If Star is sold to Coherent, Coherent will continue to act as a
distributor of our products, but on a non-exclusive basis. On December 14, 1998,
we signed a letter of intent with Continuum Biomedical, Inc., a medical division
of the scientific laser-based company Continuum Electro-Optics (which is in turn
a wholly-owned subsidiary of Hoya Corp. of Japan), to distribute our products on
a non-exclusive basis. We intend to tailor distribution methods to different
geographic regions and may include a combination of exclusive and non-exclusive
distributors, independent representatives or direct salespeople. In exchange for
the payment of $2,740 per day from January 20, 1999 until the satisfaction of
all of Coherent's closing conditions (other than the expiration/termination of
the Hart-Scott-Rodino Act waiting period) (see "THE MERGER AGREEMENT -
Conditions to the Consummation of the Sale - Conditions to Coherent's and the
Merger Sub's Obligation to Effect the Merger"), Coherent has agreed to waive its
exclusive rights under our Sales Agency Agreement to market and sell our ruby
laser products, so that we may begin to sell the Palomar E2000(TM) immediately
through other channels, including Continuum Biomedical, without the necessity of
paying commissions to Coherent or waiting for the Sales Agency Agreement to
terminate upon Closing. We may at any time terminate our obligation to pay
$2,739.73 per day by notifying Coherent in writing that exclusive rights to
market and sell our ruby laser products are reverting back to them; the
obligation will in any case terminate upon the Closing.
Our core research and development also takes place in Massachusetts,
under the guidance of a team of scientists who work closely with our research
partners at Massachusetts General Hospital ("MGH") and the Institute of Fine
Mechanics and Optics Laser Center in St. Petersburg, Russia. MGH's Wellman
Laboratories is the world's largest biomedical laser research facility. It is
part of the MGH Laser Center in Boston, and was created to attempt to organize
and speed the flow of biomedical laser research from the laboratory to patient
care. In the Wellman Labs, scientists work side by side with clinicians to
understand the principles involved in the complex interactions of light and
tissue. We work closely with Dr. R. Rox Anderson, the research director of MGH's
Laser Center and Associate Professor of Dermatology at Harvard Medical School.
Dr. Anderson is a recognized expert on the effect of lasers on human tissue and
a patent holder and inventor of a number of laser procedures in use today. It is
Dr. Anderson's patented laser hair removal methods which we have licensed from
MGH. We believe our method of funding university research and thereby obtaining
development and patent rights provides a high level of both technical
achievements and clinical results, a productivity that would be hard to achieve
cost-efficiently on our own.
Among our research and development goals in the field of laser hair
removal are to design systems that 1) permit more rapid treatment of large
areas, 2) have high gross margins, and 3) are lower cost, thus addressing
broader markets. Further, we aim to address dermatology and cosmetic procedure
markets other than hair. Our ongoing product development efforts target both
products and markets in which Coherent does not currently compete. Under the
terms of the Merger Agreement, Coherent has agreed not to manufacture, market or
sell ruby hair removal lasers for a period of two years following the Closing.
(See "THE MERGER AGREEMENT - Non-Competition Agreements.")
To enhance stockholder value and increase revenues, we will also
consider licensing our intellectual property (in particular, the patents
licensed exclusively to us by MGH under which we practice our proprietary method
of skin cooling and hair removal), selling intellectual property rights that we
do not intend to exploit, and mergers, acquisitions or other transactions. As
part of the sale of Star, Coherent has agreed to pay us an ongoing 7.5%
sublicensing royalty on future sales of its hair removal lasers, which rate is
subject to downward adjustment if we grant a license to a third party at a lower
rate. (See "THE MERGER AGREEMENT - Patent License Agreement.") Thus, although
the LightSheer(TM) diode laser will no longer be in the Palomar family of
products after the sale of Star, Palomar will continue to receive an ongoing
royalty on sales of that product. (Palomar, in turn, pays a royalty to MGH for
its exclusive license to the sublicensed patents.)
Description of Star's Business
- ------------------------------
Star is located at 1249 Quarry Lane, Suite 100, Pleasanton, California
94566 (925-484-2140). It develops medical and commercial products using
high-power laser diodes.
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In July 1993, we acquired 80% of the common stock of Star, which was
then a development stage company that had been formed in April 1993. In March
1998, Star began manufacturing and shipping the LightSheer(TM), the first
FDA-cleared diode laser system for hair removal. The LightSheer(TM) incorporates
a patented contact cooling system that helps ensure safety and efficacy during
treatment. Star's unique, high-powered diode system is a compact, solid-state
laser that is significantly smaller than most current systems, and relatively
easy to install and service. The LightSheer(TM) has been met with solid
acceptance in the marketplace, evidenced, in part, by approximately $13 million
in sales for each of the third and fourth quarters of 1998. The LightSheer(TM)
remains the only high-energy short pulse diode laser hair removal system
available on the market today.
Among the principal differences between the E2000(TM) ruby-based and
the LightSheer(TM) diode-based laser hair removal systems are:
o The E2000(TM) allows for higher speed of treatment than the
LightSheer(TM) (although the LightSheer(TM) allows for faster
treatment than Palomar's original EpiLaser(R) hair removal
system).
o The E2000(TM) handpiece has contact sensing, permitting the
user to trigger delivery of laser energy following proper
contact with the skin and helping to assure consistent
treatment.
o The E2000(TM) uses a shorter wavelength than the
LightSheer(TM). The shorter wavelength is better absorbed by
its target, melanin, which is in both hair and skin, and so to
protect the epidermis requires carefully controlled cooling
and unique pulses, while the longer wavelength LightSheer's
energy better protects the skin but correspondingly affects
the hair less.
o The E2000(TM) has pulse durations of 3 and 100 milliseconds
and the LightSheer(TM) has pulse durations of 5-20
milliseconds and 30 milliseconds. (Shorter pulse durations are
useful in treating thin hairs, and longer pulse durations are
useful in treating thicker hairs.)
o Although the patented contact cooling handpieces for the
E2000(TM) and the LightSheer(TM) are in many respects similar,
the E2000(TM) handpiece is only about one tenth the weight of
the LightSheer(TM) and is colder than the LightSheer(TM)
handpiece (-10(degree)C vs. approximately +10(degree)C).
o The LightSheer(TM) is lighter and more compact than the
E2000(TM); while the E2000(TM) weighs over 500 pounds, the
more portable LightSheer(TM) weighs only approximately 100
pounds. As a result, the LightSheer(TM) may be shipped back to
the factory for repair, while the E2000(TM) must be repaired
on location. However, the net cost of replacing the most
expensive part of each system (diode arrays and ruby bars,
respectively) is higher for the LightSheer(TM) than the
E2000(TM).
o The LightSheer(TM)operates on standard 110 volt AC power; the
E2000(TM)requires 220 volt 30 amp power.
Star also owns four patents, and has other patent applications pending.
In addition to its patents for treatment of psoriasis and leg vein conditions,
Star holds a patent for laser diode array packaging that has commercial and
industrial as well as medical device applications. These patents would be
transferred to Coherent in connection with the sale of Star. (See "THE MERGER
AGREEMENT - Patent License Agreement.")
Description of Coherent's Business
- ----------------------------------
The principal offices of Coherent, Inc. are located at 5100 Patrick
Henry Drive, Santa Clara, California 95056 (408-764-4000). It is a leading
designer, manufacturer and supplier of electro-optical systems and medical
instruments utilizing laser, precision optic and microelectronic technologies.
Its major markets include the scientific research community, medical
institutions, clinics and private practices and commercial and OEM applications
ranging from semiconductor processing and disk mastering to light shows and
entertainment. Coherent also sells optical and laser components to other laser
system manufacturers.
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Coherent's business structure reflects its two major business segments:
medical (38% of net sales) and electro-optical (62% of net sales). Medical
serves the medical-surgical community while electro-optical serves the needs of
scientific and commercial customers.
Coherent pioneered the development of lasers used in medical
applications 28 years ago and remains a global leader and innovator in this
market. Coherent developed lasers used in ophthalmology, paving the way for a
host of dramatic surgical alternatives to treat many sight-threatening diseases.
To date, more that 25,000 Coherent laser-based systems have shipped to
ophthalmic offices and operating rooms worldwide. In addition, Coherent lasers
are used in such other diverse medical applications as refractive surgery,
orthopedics, urology, gynecology, and oncology, to offer just a few examples.
Coherent also sells a number of lasers used for aesthetic surgery, including
such applications as skin resurfacing, tattoo removal and the treatment of
vascular and pigmented lesions.
As part of Palomar's business, Star contributed only one product - a
hair removal laser. Coherent, by contrast, has opportunities and intends to
exploit Star's laser diode stacking technology in the broader commercial and
medical laser markets in which it participates. Coherent has indicated that it
believes that this proprietary technology of Star's will play a strategic role
in the expansion of Coherent's Semiconductor Group's laser diode markets.
Coherent has also indicated that it believes that Star's diode stacking
capabilities will broaden Coherent's applications in a variety of other medical
fields and material processing such as soldering, welding and thermal treating,
laser pumping and illuminators. For these reasons Star's diode technology may be
more valuable to Coherent than it is to Palomar.
Coherent's sales for fiscal year 1998 (ending 9/26) were $410.4
million, and its net income for that year was $18.8 million. Its stockholders'
equity is $262,623 million, and its market capitalization is $316 million.
Coherent has 20 production, research and service facilities worldwide,
and employed 2,261 people at the end of fiscal 1998.
At present, Coherent acts as the exclusive distributor of our laser
hair removal products. If you approve the Merger, Coherent will become a
non-exclusive distributor of our products, as well as a competitor.
Background of the Sale
- ----------------------
Since November 1997, Coherent has been the exclusive worldwide
distributor of our EpiLaser(R) and LightSheer(TM) hair removal lasers. On May
22, 1998, we entered into a loan agreement with Coherent. Under that agreement,
Coherent agreed to loan us $4 million to fund our working capital requirements
so that we could finance an increase in our manufacturing capacity to meet the
growing demand for our lasers distributed by Coherent. In connection with that
loan agreement, we agreed to enter into good faith negotiations with Coherent
regarding the sale of Star. We further agreed with Coherent to use reasonable
diligence to negotiate and enter into a letter of intent containing the material
terms of the transaction by June 22, 1998.
On July 9, 1998, we received a proposed letter of intent from Coherent
regarding the sale of Star. On July 22, 1998, our CEO sent a letter rejecting
Coherent's proposal and noting it contained a number of unacceptable terms,
including the proposed purchase price. Thereafter, informal discussions between
our executives and Coherent executives occurred from time to time, but no letter
of intent was ever signed.
Following an exchange of telephone calls between our CEO and Coherent's
CEO, on August 21, 1998 Coherent's CEO met with our CEO to determine whether
further discussions regarding the sale of Star, or, alternatively, the sale or
licensing of certain technology owned by Star, were warranted.
On September 9, 1998, at the next regular meeting of our Board, our CEO
reported to the Board on his August 21 discussions with Coherent. The Board
authorized our CEO to pursue negotiations. On September 10, 1998, our CEO sent a
letter to Coherent which detailed the parties' agreement to postpone the
repayment of the amounts outstanding under the loan agreement until such time as
the parties consummated a sale of Star, or 90 days after the termination of
negotiations between the parties.
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Thereafter, negotiations regarding the sale of Star to Coherent
continued, and an Agreement and Plan of Reorganization (the "Merger Agreement")
among Palomar, Coherent, a subsidiary of Coherent (the "Merger Sub"), three
founders of Star and Star with respect to the merger of the Merger Sub with and
into Star as provided for in the Merger Agreement (the "Merger") was executed on
December 7, 1998.
High and Low Sales Prices of Our Common Stock
- ---------------------------------------------
On October 30, 1998, the business day preceding our public announcement
that we were in negotiations with Coherent relative to the sale of Star, the
high and low sales price of our common stock were $1.125 and $1.00,
respectively. On December 7, 1998, the business day preceding our public
announcement that we and Coherent had entered a definitive agreement with
respect to the sale of Star, the high and low sales prices of our common stock
were $.813 and $.719, respectively.
Recommendation of the Palomar Board and Reasons for the Sale
- ------------------------------------------------------------
At a December 4, 1998 meeting, our Board determined that the terms of
the Merger are fair to and in the best interests of Palomar and its stockholders
and unanimously approved the Merger Agreement while authorizing and directing
the appropriate officers of Palomar to execute the Merger Agreement on behalf of
Palomar.
Section 271 of the Delaware General Corporation Law requires
stockholder approval for a sale of substantially all of a company's assets. We
believe that the Star transaction may not meet the technical requirement for a
sale of substantially all assets, as Star's total assets represent 64% of
Palomar's consolidated assets based on Palomar's December 31, 1998 balance
sheet. Nevertheless, because Star's contribution to Palomar's gross revenues for
1998 was in excess of 80%, our Board determined that the most prudent course was
to seek your approval of the sale of Star. Given the significance of the Star
sale, our Board determined that the decision should ultimately lie with our
stockholders.
THE PALOMAR BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT,
DETERMINED THAT THE SALE OF STAR IS IN THE BEST INTERESTS OF PALOMAR AND ITS
STOCKHOLDERS, AND RECOMMENDS THAT YOU VOTE FOR THE SALE OF STAR PURSUANT TO THE
MERGER AGREEMENT.
The Board considered the following factors which in its view weighed in
favor of the Star sale:
1. The net (after tax) consideration that Palomar would receive
as a result of the sale is more than we project (based on
discounted cash flow analysis of revenues) we would derive
from Star over the next five years if we continued to operate
Star ourselves.
o The Board further considered the fact that our cash
flow analysis of Star's projected revenues does not
take into account the very real risk of Star's diode
hair removal product becoming obsolete or outmoded in
this rapidly changing and highly competitive market.
2. Palomar believes that the Palomar E2000(TM) hair removal laser
which it recently introduced is superior to hair removal
lasers currently on the market (including the Star
LightSheer(TM) ) in terms of speed, efficiency and safety, and
further believes that its next generation of hair removal
laser currently in development will be even more competitive
in a number of respects, including price.
3. With the cash from the sale of Star, Palomar will be the only
well-funded company exclusively focused on light-sourced
dermatological laser products, giving it a unique competitive
ability to exploit the rapidly expanding market for cosmetic
laser products in particular.
o While some of Palomar's competitors also have the
ability to make large R&D expenditures, a substantial
portion of their R&D efforts are focused on medical
(as opposed to cosmetic) lasers.
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o Palomar has a demonstrated track record of
successfully developing cosmetic lasers and its
principal R&D scientists as well as its partnership
with Massachusetts General Hospital will remain in
place after the sale of Star.
o The additional funding provided by the Star sale will
permit Palomar to extend and expand the scope of its
research relationship with Massachusetts General
Hospital.
o The additional funding provided by the Star sale will
permit Palomar to defend and enforce its proprietary
patent positions which it believes, in at least some
areas, may provide a barrier to entry to competitors.
4. In the opinion of our financial advisor, Tucker Anthony, the
consideration to be received by Palomar in connection with the
sale of Star was fair to Palomar from a financial point of
view on the date of its opinion. (A copy of the Tucker Anthony
opinion is attached to this proxy statement as Exhibit A.
Please review the opinion carefully. See " Opinion of
Financial Advisor.")
o The Board reasoned that, among other things, if the
consideration is fair to Palomar, then it is also
fair to Palomar's stockholders.
o Tucker Anthony's analysis also indicated to the Board
that the net consideration to be received by Palomar
was in excess of (1) the value of publicly traded
companies which Tucker Anthony deemed to be most
comparable when considering the value of Star; (2)
the value derived from transactions which Tucker
Anthony concluded to be most nearly comparable; and
(3) the discounted cash flows and the terminal value
of Star as determined by Tucker Anthony based on
financial statements and projections through the year
ending December 31, 2001.
5. If we continued to sell our products through Coherent as our
exclusive distributor, the return we would be able to realize
on our products would be limited for the next two years by the
substantial commissions we are required to pay Coherent under
our Sales Agency Agreement with Coherent.
o As part of the Star transaction, we negotiated for
early termination of the Sales Agency Agreement (to
occur simultaneous with the Closing), which otherwise
would not have terminated until November 2000.
o At the time that we entered into the Sales Agency
Agreement, Coherent was able to obtain a generous
commission structure because, among other things, (1)
as a well-established company with substantial
goodwill in the medical marketplace, it could put its
reputation behind our (at the time) new and unproven
products, and (2) it has a sales force and marketing
capabilities we could not hope to emulate at that
time, because of our limited resources.
o Now not only are our products proven, with
demonstrated market acceptance, but we will have the
funds to build up our own direct sales force, should
we so choose, and to aggressively promote and market
our products.
6. The Board could terminate the Merger Agreement and accept a
Superior Proposal (as defined in the Merger Agreement and
discussed below under the heading " - Acquisition Proposals
and Right of Palomar Board to Withdraw Recommendation") if it
determined that it had to do so in order to discharge its
fiduciary obligations.
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Our Board also identified and considered the following risks and
potentially negative factors in its deliberations concerning the sale of Star:
1. That in selling Star, we are selling the source of over 80% of
Palomar's 1998 gross revenues, and those revenues may not
easily be replaced, particularly in the short-term. Reducing
this risk factor, in the Board's consideration, were:
o Palomar has another hair removal system that it
considers superior to the LightSheerTM, namely the
E2000(TM) ruby laser.
o Palomar has another product in an advanced stage of
development that has significant competitive
advantages over existing products, particularly in
price.
o Palomar, should it close the Star transaction, can
acquire technology and/or products from others, if
such technology and/or products are compatible and
particularly promising (at present, no such purchases
are contemplated).
2. Palomar will lose the key managers and technical personnel
with proven product development capability who work for Star.
Reducing this risk factor, in the Board's consideration, were:
o The Board believed that if the sale of Star went
through, Palomar would retain a highly qualified team
of managers, engineers, and technicians in its
Lexington, Massachusetts headquarters, and would
continue to obtain substantial benefits from its
research partnership with Massachusetts General
Hospital and from the technical work performed for
the Company by the Laser Center of St. Petersburg.
o There is no guaranty that, even if Star is not sold
to Coherent, key Star personnel will remain at Star.
3. The possibility that, as a practical matter, the Merger
Agreement could affect our ability to enter into a more
attractive transaction with another bidder for Star or a
proposed acquisition of Palomar as a whole. Reducing this risk
factor, in the Board's consideration, were:
o The Board determined it could continue to exercise
its business judgment and meet its fiduciary
obligations to the Company because it is permitted to
accept a Superior Proposal. Further, there were when
the Board made its approval decision, and there are
at present, no other offers more attractive than
Coherent's.
o The risk remains that under the Merger Agreement, we
could become obligated to pay to Coherent the
break-up fee of $2,000,000 upon the termination of
the Merger Agreement before the Effective time under
certain circumstances, including if the Palomar Board
recommends a Superior Proposal to its shareholders.
Palomar and Star also owes Coherent approximately $4
million (and may borrow up to an additional one
million) under loan agreements to fund Star's working
capital. This debt will be reflected on Star's
Closing Balance Sheet, and Palomar will have to
reimburse Coherent only to the extent that Star's
Closing Balance Sheet reflects a negative book value
(which we believe is unlikely, because amounts due
from Star to Palomar will be contributed to the
assets on Star's Balance Sheet). Our ability to repay
that loan was not a factor in the Board's
recommendations, nor was our negative net working
capital. At the time the Board approved Coherent's
acquisition of Star, no other acquisition proposals
had been made. If competitive bids for Star were
triggered by Coherent's proposal, that should benefit
Palomar's shareholders, even if any Superior Proposal
had to be more than $2 million greater than
Coherent's.
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4. The possibility that, after the expenditure of significant
Company resources, the sale of Star to Coherent would not be
consummated, and thus the attention and expense would be lost.
However, from what our Board can determine, Coherent was and
remains committed to the acquisition of Star; and the Board
believed some loss of executive time was a marginal risk.
Outside costs related to the sale of Star are not expected to
exceed $750,000.
In sum, our Board concluded the risks of the transaction, including
those of a failed sale, were substantially outweighed by the potential benefits
of the merger. Palomar's risk in operating Star would be eliminated, and Star's
expected future profits would be converted into a present after tax
consideration to us of approximately $46 million, which is more than Palomar
could reasonably expect to earn from operating Star itself. Our proceeds from
the sale of Star will let us better exploit the market for light-sourced
dermatological products, with even better funded research and product
development.
Opinion of Our Financial Advisor
- --------------------------------
General
-------
On September 29, 1998, the Board of Directors of the Company engaged
Tucker Anthony to provide our Board of Directors with a fairness opinion in
connection with the proposed transaction. Tucker Anthony delivered a written
opinion to the Board on December 7, 1998 which concluded, based on and subject
to the assumptions and qualifications set forth in that written opinion, that
the consideration to be received by Palomar pursuant to the Merger Agreement is
fair to Palomar, from a financial point of view, as of the date of that written
opinion. The amount of the consideration was determined by Coherent's offer, and
not by any analysis of Tucker Anthony. THE FULL TEXT OF THE OPINION, SETTING
FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND CERTAIN
LIMITATIONS ON THE REVIEW UNDERTAKEN BY TUCKER ANTHONY, IS ATTACHED AS EXHIBIT
A. PLEASE READ THE OPINION IN ITS ENTIRETY. THE OPINION IS DIRECTED TO PALOMAR'S
BOARD OF DIRECTORS ONLY AND IS NOT A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW
YOU SHOULD VOTE AT THE SPECIAL MEETING.
We engaged Tucker Anthony to give advice only to our Board. We and
Tucker Anthony agreed that we do not believe that any person other than our
Board has the legal right to rely on Tucker Anthony's opinion and that, absent
any controlling precedent, we and Tucker Anthony would resist any assertion
otherwise. The engagement letter between Palomar and Tucker Anthony contains an
express disclaimer of the ability of any party other than the Board of Directors
to rely on the opinion. We and Tucker Anthony are not aware of any controlling
precedent that would create a statutory or common law right for persons other
than the Board to rely on their opinion. We and Tucker Anthony base our belief
that that no such person may rely on the opinion on the limited nature of Tucker
Anthony's contractual duty and the absence of such controlling precedent. In the
absence of any such controlling precedent, the ability of a stockholder to rely
on the opinion would be resolved by a court of competent jurisdiction.
Resolution of the question of a stockholder's ability to rely on the opinion
will have no effect on the rights and responsibilities of the Board under
applicable state law or on the rights and responsibilities of either Tucker
Anthony or the Board under federal securities laws.
Analyses of Tucker Anthony
--------------------------
In giving its opinion, Tucker Anthony, among other things:
o reviewed the Merger Agreement;
o reviewed certain historical financial and other information
concerning Palomar for the three fiscal years ended December
31, 1997, and for the quarters ended March 31, 1998, June 30,
1998 and September 30, 1998, including Palomar's reports on
Forms 10-K and 10-Q;
o reviewed certain historical financial and other information
concerning Star for the three fiscal years ended December 31,
1997, and the nine months ended September 30, 1998, including
Star's unaudited financial statements for the three fiscal
years ended December 31, 1997 and draft audited financial
statements for the nine months ended September 30, 1998;
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<PAGE>
o held discussions with the senior management of Palomar and
Star about Star's past and current financial performance,
financial condition and future prospects;
o reviewed certain internal financial data, projections and
other information of Palomar and Star, including financial
projections prepared by the management of Star, and performed
a discounted cash flow analysis using such projections;
o analyzed certain publicly available information of other
companies that operate in similar industries, and compared
Star from a financial point of view to these companies; and
o reviewed the consideration received by stockholders in
acquisitions of companies that operate in similar industries
or that Tucker Anthony otherwise deemed relevant to its
inquiry.
In its review, Tucker Anthony also took into account an assessment of
general economic, market and financial conditions and certain industry trends
and related matters. Its opinion was necessarily based upon market, economic and
other conditions as they existed and could be evaluated on December 7, 1998, and
the information made available to Tucker Anthony through that date.
Our Board did not impose any limitations on Tucker Anthony with respect
to its investigations or procedures followed in its review and analysis. In its
review and analysis and in arriving at its opinion, Tucker Anthony assumed and
relied upon the accuracy and completeness of all the financial information
publicly available or provided to it by us and by Star, and did not attempt to
verify any of that information. Tucker Anthony assumed (i) that the financial
projections of Star provided to it were prepared on a basis reflecting the best
available estimates and judgments of Palomar's and Star's management as to the
future financial performance and results of Star, and (ii) that such forecasts
and estimates would be realized in the amounts and in the time periods
estimated. Tucker Anthony did not make or obtain any independent valuations or
appraisals of any assets or liabilities of Palomar or Star, and did not verify
any of Palomar's or Star's books or records.
On Friday, December 4, 1998, Tucker Anthony made a presentation to our
Board, and furnished its opinion that our proposed sale of Star was on that date
fair to Palomar from a financial point of view. Tucker Anthony issued that
opinion in writing on Monday, December 7, 1998. Tucker Anthony's opinion is
based, in part, on financial analyses whose principal elements are summarized
here. In performing its analyses, Tucker Anthony made numerous assumptions and
predictions with respect to industry performance, general business and economic
conditions, and other matters, many of which concern events beyond the control
of Palomar and Star. Tucker Anthony's preparation of this opinion also involved
determinations about the most appropriate and relevant methods of financial
analysis and the application of those methods to these circumstances based upon
experience and judgment. Accordingly, Tucker Anthony believes that its analyses
must be considered as a whole and that the selective summary provided here, if
read without reference to the full text of the opinion and its supporting
materials, could lead a reader to an incomplete understanding of the evaluation
process underlying the opinion.
Analysis of Publicly Traded Reference Companies
-----------------------------------------------
Tucker Anthony compared selected financial data and financial ratios of
Palomar and Star to the corresponding data and ratios of certain publicly traded
manufacturers of lasers for cosmetic hair removal and skin treatment and/or
providers of cosmetic laser hair removal and skin treatment services. The
companies included in Tucker Anthony's review were: BioLase Technology, Inc.,
Candela Corporation, Coherent, Inc., ESC Medical Systems Limited, IRIDEX
Corporation, Laserscope and ThermoLase Corporation. While none of these
companies was identical to Palomar or Star, Tucker Anthony believed that certain
valuation parameters established by the public markets and imputed from stock
prices with respect to these companies, when viewed in conjunction with certain
qualitative factors, were relevant when considering the valuation of Star, since
these companies exhibited certain business characteristics similar to those
exhibited by Palomar and Star. Tucker Anthony selected these companies because
their lasers are used primarily for cosmetic hair removal and for skin and
visible vein treatments. These are the same markets that are primarily served by
Star. Tucker Anthony also gave consideration to total capitalization and
revenues when selecting these companies. Tucker Anthony did not select
manufacturers of lasers that are used primarily in opthalmic and surgical
procedures. Other than manufacturers of opthalmic and surgical lasers, Tucker
Anthony did not exclude any publicly traded companies which satisfied these
criteria.
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Tucker Anthony also compared multiples for the Merger implied by the
merger consideration and certain financial data of Star to the corresponding
trading multiples of the companies. In this portion of its analysis, since Star
was not yet profitable, Tucker Anthony focused on:
o enterprise value (value of equity plus net debt) as a multiple
of latest 12 months' revenue (1998 revenue in the case of
Star);
o equity value as a multiple of projected 1999 net income; and
o equity value as a multiple of book value (in accordance with
the terms of the Merger Agreement, Star's book value was
adjusted by treating an inter-company payable due to Palomar
as part of Star's stockholders' equity).
Projected net income figures for the companies were based on
information from independent research analysts; projected net income for Star
was based on the projections provided by management.
The implied multiples for the Merger compare as follows with the mean
multiples for the reference companies: (i) enterprise value to revenue of 2.0x
for the Merger versus 1.1x for the reference companies; (ii) equity value to
projected 1999 net income of 24.7x for the Merger versus 8.9x for the reference
companies; and (iii) equity value to book value of 16.0x for the Merger versus
1.9x for the reference companies.
Analysis of Reference Transactions
----------------------------------
Tucker Anthony conducted a review of merger and acquisition
transactions announced since January 1, 1993 in which the target company was
engaged in areas of business similar to those of Palomar and Star. This review
produced 12 such reference companies from which meaningful enterprise value to
revenue multiples could be derived. Once again, because Star was not yet
profitable, the enterprise value to revenue multiple was the only meaningful
multiple to use for comparison. The enterprise value to revenue multiple of 2.0x
for the Merger exceeds the mean multiple of 1.6x derived from the reference
transactions.
Discounted Cash Flow Analysis
-----------------------------
Tucker Anthony developed a discounted cash flow analysis of Star based
on projected financial statements through the fiscal year ending December 31,
2001. For the purposes of this analysis, Tucker Anthony used the projections
provided by the managements of Star and Palomar. The analysis assumed closing of
the proposed transaction would take place on December 31, 1998. The projected
cash flows consisted of the after-tax free cash flow for the fiscal years ending
December 31, 1999, 2000 and 2001 plus a terminal value at December 31, 2001. In
estimating the appropriate terminal value, Tucker Anthony applied a range of
multiples from 9.0x to 13.0x to estimated earnings before interest, taxes,
depreciation and amortization in fiscal year 2001 and a range of multiples from
12.0x to 20.0x to estimated earnings before interest and taxes in fiscal year
2001. These ranges were selected based on a review of the corresponding
multiples derived from the reference transactions and the reference companies.
The low ends of these ranges were chosen in order to reflect multiples derived
from the reference companies and the high ends of these ranges were chosen to
reflect multiples at least as large as the median multiples derived from the
reference transactions. Acquisition and trading multiples from time to time
fluctuate considerably, and no assurance can be made that future trading
multiples will be comparable to historical or projected multiples.
The present value of the stream of projected cash flows was obtained by
discounting the cash flows to December 31, 1998 using weighted average costs of
capital ranging from 20% to 40%. A review of the cost of capital for companies
within the electromedical and electrotherapeutic apparatus industry indicated a
cost of capital ranging from 20% to 30%. Rates higher than 30% were also
considered appropriate due to Star's early stage of development and its lack of
profitable historical results. For all combinations of costs of capital and
terminal multiples, the Merger consideration exceeded the present value of Star
resulting from the discounted cash flow analysis.
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Engagement Terms
----------------
As compensation for its services in connection with issuing the
opinion, we agreed to pay Tucker Anthony a total of $125,000, the full amount of
which has been paid. We also agreed to reimburse Tucker Anthony for its expenses
up to a limit of $15,000 and to indemnify Tucker Anthony against liabilities
arising out of its services.
We selected Tucker Anthony for a variety of reasons, including its
familiarity with us and our business and its experience and reputation in the
area of valuation and financial advisory work. Tucker Anthony is a nationally
recognized investment banking firm and is regularly engaged in the valuation of
businesses and their securities in connection with mergers, acquisitions,
leveraged buyouts, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements and valuations for estate, corporate
and other purposes. In the ordinary course of its business, Tucker Anthony may
actively trade Palomar's securities for its own account or for the accounts of
its customers and, accordingly, may at any time hold long or short positions in
our securities.
Effective Time
- --------------
The Merger will become effective when a Certificate of Merger is filed
with and accepted by the Secretary of State of California. Coherent intends to
file the Certificate of Merger as soon as reasonably possible after all
conditions to consummation of the sale have been satisfied, which we believe
will be shortly after the date of the Special Meeting. See "THE MERGER AGREEMENT
Conditions to the Consummation of the Merger."
Purchase Price
- --------------
By resolution of Star's Board of Directors, and pursuant to the terms
of Star's 1994 Stock Option Plan, all of the outstanding options to purchase
Star common stock will become fully vested and exercisable on the date ten days
prior to the Effective Time. At the Effective Time, Star's 1994 Stock Option
Plan will be terminated without any further action on the part of Star's Board
or officers, and all options granted under that Stock Option Plan will be
terminated to the extent that they have not already been exercised.
When all the options issued under Star's Stock Option Plan have been
exercised, Palomar will own 82.46% of Star's common stock, and Star employees
will collectively own 17.54%.
At the Effective Time, Coherent will pay to each shareholder of Star
(including employee optionholders who will exercise their options prior to the
Closing) an amount in cash equal to the product of (i) $65,000,000 plus the
aggregate amount which would be necessary to exercise all of the outstanding
vested options to purchase Star common stock ($9,198,033) multiplied by (ii) the
number of shares owned by such Star stockholder divided by the total number of
outstanding shares of Star common stock (1,411,807) minus (iii) the exercise
price for all the Star stock options held by such stockholders and any amounts
required to be withheld under applicable law. The purpose of this formula is to
permit all of Star's optionholders to effect a cashless exercise of their Star
options.
In addition, $89,100 shall be deducted from the amounts payable to each
of three Star minority optionholders (an aggregate of $267,300) and the $267,300
shall be added to the amount payable to Palomar. This adjustment to the
consideration to be received by Palomar and the three Star optionholders arises
out of the following: Pursuant to an agreement dated October 13, 1998, each of
three Star employees, Robert Grove, James Holtz and David Mundinger, exercised
options to purchase 2,000 shares of Star common stock and Palomar then purchased
those shares from each individual for an aggregate consideration of $267,300
($89,100 each). In connection therewith, these three employees agreed to reduce
the proceeds that they were otherwise to receive from Coherent for the sale of
their remaining Star shares, and that Palomar's proceeds from the sale
commensurately would be increased by $267,300.
Last, amounts shall be withheld from Palomar and three minority
optionholders' payments, to be kept in escrow for one year. See "THE MERGER
AGREEMENT- Escrow." The amounts to be received by each Star stockholder in
connection with the Merger are set forth in Exhibit B to this proxy statement.
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Federal and State Income Tax Consequences
- -----------------------------------------
Palomar's sale of Star to Coherent is a transaction taxable to Palomar.
Taxes will be assessed by the federal government and the State of California.
The Internal Revenue Service permits companies, in certain circumstances, to
apply past losses, called net operating losses, to offset gains. By the date of
Closing the Merger, we expect to have net operating loss carryforwards of about
$98.95 million. Accordingly, we believe our net operating losses will entirely
offset the expected gain from the sale of Star. As our net operating losses
exceed the expected gain from the sale, we believe the IRS's alternative minimum
tax provisions should apply. The application of those provisions to our sale of
Star would result in a tax in the range of $1 million to $1.5 million.
The State of California limits the net operating loss we can use in any
one year to offset the gain from the sale of Star. Therefore, we expect the
California tax on the transaction to be between $1.5 million and $2 million.
Accounting Treatment
- --------------------
For accounting purposes, we will treat the sale of Star as the sale of
our investment in Star common stock. Our gain on the sale will equal the gross
proceeds we receive less the basis of our investment in Star's common stock. We
believe that our net gain before taxes will be about $49 million at the Closing.
A representative of Arthur Andersen LLP is expected to be present at
the Special Meeting of Stockholders, will have the opportunity to make a
statement if he or she desires to do so, and is expected to be available to
respond to appropriate questions from stockholders.
THE MERGER AGREEMENT
- --------------------
We have summarized below what we believe are the key provisions of the
Merger Agreement. Again, we remind you that the Merger Agreement (along with all
of the Exhibits to that Agreement which are currently available) is attached as
Exhibit C to this proxy statement. Please read the Merger Agreement (and the
attached Exhibits) in its entirety for the complete terms of the Merger
Agreement.
Mechanics of the Merger
- -----------------------
The Merger Agreement provides that at the Effective Time the Merger Sub
(a California corporation and wholly-owned subsidiary of Coherent formed
expressly for the purposes of effecting the Merger) will be merged with and into
Star and Star shall continue as the surviving corporation and a wholly-owned
subsidiary of Coherent. The Effective Time will be when the Certificate of
Merger has been filed with and accepted by the Secretary of State of California.
At the Effective Time, all the property, rights, privileges, powers and
franchises of Star and the Merger Sub shall belong to the surviving corporation,
and all of the debts, liabilities and duties of Star and the Merger Sub shall
similarly become the debts, liabilities and duties of the surviving corporation.
The Bylaws of the Merger Sub shall become the Bylaws of the surviving
corporation. So too the Articles of Incorporation of the Merger Sub shall become
the Articles of Incorporation of the surviving corporation (except that the name
of the corporation will be changed to "Star Medical Technologies, Inc."). At the
Effective Time, all of the outstanding shares of Star common stock will be
automatically cancelled and extinguished and converted into the right to receive
the consideration described above under the headings "- Merger Consideration,"
and set forth on Exhibit B to this proxy statement.
Representations and Warranties
- ------------------------------
In the Merger Agreement, Palomar and Star make certain representations
and warranties to Coherent and the Merger Sub, and Coherent and the Merger Sub
make certain representations and warranties to Palomar and Star, of the type
that are customary in this kind of agreement.
The Merger Agreement includes representations and warranties by Palomar
and Star as to, among other things:
o organization, standing and corporate power of Star;
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o absence of any subsidiaries of Star;
o Star's capital structure;
o the authorization, execution, delivery, performance and
enforceability of the Merger Agreement on behalf of both Star
and Palomar and related matters;
o the Merger Agreement's noncontravention of any agreement, law,
or charter or bylaw provision and the absence of the need for
governmental or third-party filings, consents, approvals or
actions with respect to any transaction contemplated by the
Merger Agreement (except for certain filings specified in the
Merger Agreement);
o compliance as to form and the accuracy of information
regarding Star contained in documents filed by Palomar with
the Securities and Exchange Commission;
o compliance as to form and the accuracy of information
contained in Star's financial statements;
o the absence of certain material changes or events since the
date of Star's most recent audited balance sheet, including
the absence of any declaration of a dividend (other than
certain payments to Palomar) or other distribution, any split,
combination or other reclassification of Star's capital stock;
o no increases in compensation, severance or termination pay;
o no new employment, severance or termination agreements;
o no restriction on material business activities;
o no changes in accounting methods, principles or practices;
o the absence of material litigation (except as disclosed);
o compliance with laws applicable to the business of Star;
o the filing of tax returns and payment of taxes;
o the receipt of an opinion by Palomar's financial advisor;
o ownership of Star customer information;
o Star's title to/leasehold interest in its properties and
assets and the absence of liens and encumbrances thereon;
o Star's ownership of its intellectual property;
o Star's lack of infringement of other's intellectual property;
o protection of Star's confidential information and trade
secrets;
o Year 2000 compliance of Star's products;
o compliance with material contracts;
o lack of interested party transactions;
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o accuracy and collectability of accounts receivable;
o compliance with environmental laws and absence of
contamination; and
o compliance with employee benefit and other employment-related
laws.
The Merger Agreement includes representations and warranties by
Coherent and the Merger Sub as to, among other things:
o organization, standing and corporate power of Coherent and the
Merger Sub;
o the authorization, execution, delivery, performance and
enforceability of the Merger Agreement and related matters and
the Merger Agreement's noncontravention of any agreement, law,
or charter or bylaw provision and the absence of the need for
governmental or third-party filings, consents, approvals or
actions with respect to any transaction contemplated by the
Merger Agreement (except for certain filings specified in the
Merger Agreement); and
o Coherent's ability to obtain the cash necessary for it to
perform its obligations under the Merger Agreement. Coherent
is working with a world-wide banking institution that is
acting as placement agent for a bond financing part of which
would be used to pay the purchase price. This agent has agreed
to make Coherent a bridge loan of $65 million if the bond
financing is not in place in time for the Closing. As of its
fiscal year ended September 26, 1998, Coherent had cash of $33
million and a $20 million credit agreement with Bank of
America.
Conduct of Star's Business Pending the Sale
-------------------------------------------
Star and Palomar have agreed that, prior to the Effective Time (except
as expressly provided for in the Merger Agreement or consented to or caused by
Coherent):
o Star's business will be conducted in the usual, regular and
ordinary course in substantially the same manner as previously
conducted;
o Star's debts and taxes will be paid when due, consistent with
Star's past practices;
o Star will pay or perform its other obligations when due;
o Star and Palomar will use their commercially reasonable best
efforts consistent with past practices and policies to (1)
preserve intact Star's business organization, (2) keep
available the services of Star's present officers and key
employees and (3) preserve Star's relationships with
customers, suppliers, distributors, licensors, licensees and
others having business dealings with Star, all with the goal
of preserving unimpaired Star's goodwill and ongoing business
at the Effective Time; and
o Star and Palomar will promptly notify Coherent of any event or
occurrence or emergency not in the ordinary course of business
of Star and any material event involving Star.
In addition, prior to the Effective Time (again except as expressly
provided for in the Merger Agreement or consented to or caused by Coherent),
Star may not, nor may it allow any of its directors, officers or employees to:
o make any capital expenditure or commitment or incur any
liability in excess of $25,000, except in the ordinary course
of business and consistent with past practices or in
connection with the consummation of the Merger;
o amend (or agree to amend) Star's Articles of Incorporation;
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o destroy, damage or lose any material assets or properties of
Star, whether or not covered by insurance, materially and
adversely affecting its properties, assets, business,
financial condition or prospects;
o suffer any labor trouble or claim of wrongful discharge or
other unlawful labor practice or action;
o change its accounting methods or practices;
o revalue any of its assets, including without limitation
writing down the value of inventory or writing off notes or
accounts receivable, other than in the ordinary course of
business consistent with past practices;
o except for certain amounts permitted to be paid to Palomar and
except as otherwise agreed to by Coherent, declare, set aside
or pay any cash or stock dividend or other distribution in
respect of capital, or redemption or other acquisition of any
Star capital stock;
o pay or authorize payment of any bonus, salary increase or
special remuneration to any director, officer, employee or
independent contractor of Star, including any amounts for
accrued but unpaid salary or bonuses (other than normal
amounts made on a regular basis, consistent with past
practices), or enter into any employment, retention, severance
or similar contract or arrangement with any such person, other
than employment agreements with temporary contract employees,
none of whom is paid more than $25 per hour (exclusive of fees
paid directly to any temporary employee agency);
o adopt or increase the payments to or benefits under any
profit-sharing, bonus, deferred compensation, savings,
insurance, pension, retirement or other employee benefit plan
for or with any employee of Star;
o sell, lease, license, grant a lien on or otherwise dispose of
(i) any Star intellectual property or (ii) any of the assets
or properties of Star, other than dispositions of scrap
material or sales of inventory in the ordinary course of
business and consistent with past practices and other than
sales of assets valued at less than $10,000 and other than
permitted liens;
o execute, amend, terminate, violate or modify (or agree to do
so) any material contract, agreement or license to which Star
is a party, by which it is bound or to which it is a
beneficiary, other than in the ordinary course of business
consistent with past practices;
o lend money to any person or entity, guarantee any material
indebtedness, issue or sell any debt securities of Star,
indemnify or provide surety for any obligation, or guarantee
any debt of others, except for advances to employees for
travel and business expenses in the ordinary course of
business, consistent with past practices;
o waive or release any right or claim of Star including any
write-off or other compromise of any account receivable of
Star, other than in the ordinary course of business consistent
with past practices;
o commence or receive notice or threat of any lawsuit or
proceeding against Star or its affairs or Star capital stock;
o receive notice of any claim or potential claim of ownership by
any person other than Star of Star's intellectual property or
of infringement by Star of any other person's intellectual
property;
o issue, grant, deliver or sell, or contract to issue or sell,
any shares of Star capital stock or securities exchangeable,
convertible or exercisable therefor, or any securities,
warrants, options or rights to purchase any of the foregoing;
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o suffer any event or condition of any character that has a
material adverse effect (as defined in the Merger Agreement)
on Star;
o pay, discharge or satisfy, in an amount in excess of $25,000
(in any one case) or $50,000 (in the aggregate), any claim,
liability or obligation of Star other than (i) payments to
Palomar, including the payment of any debts owed by Star to
Palomar or permitted dividends (as defined in the Merger
Agreement), in accordance with the Merger Agreement or (ii)
the payment, discharge or satisfaction of liabilities in the
ordinary course of business consistent with past practices;
o elect or change any material election in respect of taxes,
adopt or change any accounting method in respect of taxes,
enter into any closing agreement, settlement of any claim or
assessment in respect of taxes, or consent to any extension or
waiver of the limitation period applicable to any claim or
assessment in respect of taxes or with respect to Star's
products or assets;
o encumber or permit the encumbrance of (i) any of Star's
assets, except in the ordinary course of business consistent
with past practices and except for permitted liens (as defined
in the Merger Agreement), or (ii) Star's capital stock;
o fail to maintain Star's equipment or other material assets in
good working condition and repair according to the standards
Star or Palomar has maintained up to the date of the Merger
Agreement;
o subdivide or combine the outstanding shares of any class or
series of Star capital stock or enter into any
recapitalization affecting the number of outstanding shares of
any class or series of Star capital stock or affecting any
other of its securities;
o release any contaminants (as defined in the Merger Agreement)
to the environment or expose persons to a contaminant as a
consequence of Star's acts or omissions in violation of any
applicable environmental requirement; or
o negotiate or agree to do any of the things described above
(other than negotiations with Coherent and its
representatives).
Acquisition Proposals and Right of Palomar Board to Withdraw Recommendation
- ---------------------------------------------------------------------------
The Merger Agreement provides that, until the earlier of the Effective
Time or the date of termination of the Merger Agreement, neither we nor Star may
(nor will we or Star permit any of our respective officers, directors, agents,
representatives or affiliates to), directly or indirectly, take any of the
following actions with any party other than Coherent:
o solicit, encourage, initiate or participate in any
negotiations or discussions with respect to any offer or
proposal to acquire all, substantially all or a significant
portion of Star's business, properties or technologies or any
portion of Star capital stock (whether or not outstanding) or
assets whether by merger, purchase of assets, tender offer or
otherwise, or effect any such transaction;
o disclose any information to any person concerning Star's
business, technologies or properties or afford to any person
or entity access to its properties, technologies, books or
records in connection with an Acquisition Proposal (as defined
below) or in connection with any inquiry regarding the making
of an Acquisition Proposal;
o assist or cooperate with any person to make any proposal to
purchase all or any part of Star capital stock or assets;
o enter into any agreement with any person providing for the
acquisition of all or any portion of Star capital stock or
assets; or
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o make or authorize any statement, recommendation or
solicitation in support of any possible acquisition of Star
(whether by way of merger, purchase of capital stock, purchase
of assets or otherwise) or any portion of Star capital stock
or Star's assets (whether by way of merger, purchase of
assets, tender offer or otherwise).
However, if at any time prior to the Effective Time, our Board and
Star's Board determine in good faith, after consultation with non-employee legal
counsel and non-employee financial advisors, that failure to take any of the
actions set forth above would result in a breach of the Board's fiduciary duties
to its stockholders, then Star, in response to an Acquisition Proposal that (a)
was unsolicited or that did not otherwise result from a breach of the
obligations outlined above and (b) constitutes a Superior Proposal (as defined
below), may
o furnish non-public information with respect to Star to the
person or entity who made such Acquisition Proposal; and
o participate in negotiations regarding such Acquisition
Proposal.
In addition, Palomar, Star and our respective officers and directors
may not cause, permit, or encourage any investment banker, financial advisor,
attorney, accountant, consultant or other representative of Star or Palomar
consulted by Star or in connection with the sale of Star to Coherent to violate
the restrictions set forth above and must take reasonable precautions to prevent
any such person from violating those restrictions.
Neither the Palomar Board nor the Star Board may:
o withdraw or modify, or propose to withdraw or modify, in a
manner adverse to Coherent, its approval or recommendation of
the Merger Agreement or the Merger unless there is a Superior
Proposal outstanding;
o approve or recommend, or propose to approve or recommend, an
Acquisition Proposal that is not a Superior Proposal; or
o cause Star or Palomar to enter into any letter of intent,
agreement in principle, acquisition agreement or other similar
agreement with respect to an Acquisition Proposal that is not
a Superior Proposal, unless, in each case, the Board has
determined in good faith, after consultation with non-employee
legal counsel, that failure to do so would result in a breach
of its fiduciary duties to its stockholders.
We must advise Coherent orally and in writing within 48 hours of any
Acquisition Proposal or any inquiry regarding the making of an Acquisition
Proposal (including any request for information which we reasonably believe
would lead to an Acquisition Proposal), the material terms and conditions of
such request, Acquisition Proposal or inquiry and the identity of the person or
entity making such request, Acquisition Proposal or inquiry. We must keep
Coherent fully informed of the status and details, including amendments or
proposed amendments, of any such request, Acquisition Proposal or inquiry.
"Acquisition Proposal" means any proposal or offer from any person
relating to any direct or indirect acquisition or purchase of 10% or more of the
assets of Star taken as a whole (measured in terms of net book value) or 10% or
more of any class of outstanding equity securities of Star taken as a whole, any
tender offer or exchange offer that if consummated would result in any person
beneficially owning 10% or more of any class of equity securities of Star or any
merger, consolidation, business combination, sale of substantially all the
assets, recapitalization, liquidation, dissolution or similar transaction
involving Star, other than the transactions contemplated by the Merger
Agreement.
"Superior Proposal" means any good faith proposal made by a third party
to acquire, directly or indirectly, 100% of the voting power of the Star capital
stock or all or substantially all the assets of Star and otherwise on the terms
which the Star Board and the Palomar Board determine in good faith (based on the
written opinion of Tucker Anthony or another non-employee financial advisor of
similar standing) to be more favorable to the Star
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stockholders than the Merger and for which financing, to the extent required by
the terms of such proposal, is then committed or which, in the good faith
judgment of the Star Board and the Palomar Board, is reasonably capable of being
obtained by such third party.
Fees and Expenses
- -----------------
If the sale of Star is not consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions it contemplates
must be paid by the party incurring such cost or expense. However, if either the
Star Board or the Palomar Board withhold, withdraw or modify in a manner adverse
to Coherent its recommendation in favor of adoption and approval of the Merger
Agreement and approval of the Merger, or if either recommends a Superior
Proposal to its stockholders, then we must pay to Coherent a break-up fee of $2
million within ten business days following the earlier to occur of the
termination of the Merger Agreement, or a Negative Vote (as defined below).
Alternatively, if the Merger Agreement and Merger are not approved by
either the Star stockholders or the Palomar stockholders (a "Negative Vote") and
prior to such Negative Vote a publicly disclosed and still pending Acquisition
Proposal is made with respect to Star (a "Competing Proposal") and within 12
months following such Negative Vote, Star or Palomar enter into a definitive
agreement with respect to an Acquisition Proposal with the party (or any
affiliate of the party) that made the Competing Proposal or an Acquisition
Proposal with such party (or any such affiliate) shall have been consummated,
then we must pay to Coherent $1.5 million within one business day following the
closing of the Competing Proposal.
Certain Additional Agreements
- -----------------------------
The Merger Agreement contains additional agreements on the part of
Star, Palomar and Coherent.
Palomar's and Star's Agreements
-------------------------------
We and Star have agreed that we will:
o Promptly submit the Merger Agreement and the transactions
contemplated by that Agreement to our stockholders for
approval and adoption, and will use our best efforts to obtain
the consent of our stockholders sufficient to approve the
Merger and the Merger Agreement and to enable the Closing to
occur as soon as possible.
o Afford Coherent and its accountants, counsel and other
representatives reasonable access during normal business hours
during the period prior to the Effective Time to (a) all of
Star's properties, books, contracts, commitments and records,
(b) all other information concerning the business, properties
and personnel (subject to restrictions imposed by applicable
law) of Star as Coherent may reasonably request and (c) all
key employees of Star as identified by Coherent or Star. We
will also provide to Coherent and its accountants, counsel and
other representatives copies of internal financial statements
(including returns and supporting documentation) promptly upon
request.
o Use our commercially reasonable efforts to obtain the
consents, waivers, assignments and approvals under any of the
material contracts (as defined in the Merger Agreement) as may
be required in connection with the Merger so as to preserve
all the rights of and benefits to Star under those contracts.
o Deliver to Coherent on the Closing Date a properly executed
statement in a form reasonably acceptable to Coherent for
purposes of satisfying Coherent's obligations under Treasury
Regulation Section 1.1445-2(c)(3) (certifying that Star is not
a U.S. real property holding company).
o If the Merger Agreement is terminated, then for a period of
two years following such termination Palomar and Star will not
solicit to employ any employee of
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Coherent or induce any employee of Coherent to leave his or
her employment, other than as part of a general solicitation
of employees not directed specifically to employees of
Coherent.
o Not modify, amend or terminate the blanket purchase agreement
dated April 8, 1997 with Opto Power Corporation (to supply
laser diode arrays to Star) without Coherent's prior written
consent.
Palomar's Agreements
--------------------
We have additionally agreed that:
o We will prepare and file on a timely basis all tax returns
with respect to Star for all taxable periods ending on or
before the Closing Date and shall pay, and shall indemnify and
hold Coherent harmless from (i) all taxes of Star for all
taxable years or periods which end on or before the Closing
Date; (ii) all taxes for all taxable years or periods of all
members of any affiliated group of which Star is or has been a
member prior to the Closing Date; and (iii) with respect to
any taxable period commencing before the Closing Date and
ending after the Closing Date (a "Straddle Period") all taxes
of Star attributable to the portion of the Straddle Period
prior to and including the Closing Date (the "Pre-Closing
Period").
o If an audit or examination of any of our tax returns for any
taxable period ending on or before the Closing Date results
(by settlement or otherwise) in any adjustment the effect of
which is to increase deductions, losses or tax credits or
decrease income, gains, premiums, revenues or recapture of tax
credits ("Changes") reflected on a tax return of Coherent or
Star for any taxable period ending after the Closing Date, we
will notify Coherent and provide it with all necessary
information so that it can reflect on its tax returns any
appropriate Changes.
o We will indemnify Star and Coherent for any losses (as defined
in the Merger Agreement) incurred by Star or Coherent arising
from, related to, or as a result of any dispute or claims made
with respect to a class of our convertible securities which
are the subject of pending litigation.
o Upon Coherent's request prior to or following the Closing, we
will promptly provide Coherent with such financial
information, schedules and audited financial statements of
Star that we prepared prior to Closing as reasonably requested
by Coherent in connection with Coherent's preparation of any
reports or filings required under the Exchange Act.
o We will deliver a balance sheet dated as of the Closing Date
prepared by Star and audited by our auditors within 60 days of
the Effective Time (the "Closing Balance Sheet"). The Closing
Balance Sheet will fairly present, in all material respects,
the financial condition of Star as of the Closing Date and
will be prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a basis consistent
with our and Star's past practices. We will immediately repay
to Coherent that amount by which the Net Book Value (as
defined in the Merger Agreement) of Star is less than zero as
reflected on the Closing Balance Sheet. Any such amounts which
we must pay to Coherent will also include interest at 12% per
annum for the period between the Closing and the date of such
payment. However, we do not anticipate that the Net Book Value
of Star as reflected on the Closing Balance Sheet will be less
than zero, for the following reasons: Palomar will contribute
amounts due from Star to Palomar to the capital of Star on
Star's Closing Balance Sheet. In addition, Star will dividend
up to Palomar any amounts necessary to bring Star's Closing
Balance Sheet to zero. We will pay to Fleet Bank any amounts
in addition to amounts paid by Coherent necessary to ensure
that the Aggregate Bank Liabilities (as such term is defined
in our agreement with Fleet Bank, and in the Glossary, Exhibit
E to this proxy statement) will not exceed the Borrowing Base
(as such term is defined in our agreement with Fleet Bank, and
in the Glossary) without reference to any Receivables of Star
(as such term is defined in our agreement with Fleet Bank, and
in the Glossary).
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o We will use all commercially reasonable efforts to ensure that
Fleet Bank releases any security interest or liens that it has
in the assets of Star at the Closing, and will comply with all
reasonable requests made by Coherent or Fleet Bank in
furtherance of obtaining such release(s).
Coherent's Agreements
---------------------
Coherent has agreed that:
o It will provide Star and Palomar with copies of such publicly
available information about Coherent as we and Star may
reasonably request. Upon request, Coherent will provide us
with such information concerning Coherent's business,
properties and personnel as we may be reasonably required to
provide to our stockholders in connection with this proxy
statement. After the Closing Date, Coherent shall also provide
Palomar, upon request, with such information concerning
Coherent's business, properties and personnel and the
surviving corporation as we may be reasonably required to
disclose pursuant to federal and state securities laws.
o Each employee of Star who remains an employee of Coherent
after the Effective Time will be eligible to receive salary
and benefits (such as medical benefits and 401(k) plan)
consistent with Coherent's standard human resource benefits
and policies.
o Within ten (10) days following the Closing Date, Coherent will
pay us an amount equal to the LightSheer(TM)Margin (as defined
below) for LightSheer(TM)units that were (i) manufactured by
Star prior to the Closing pursuant to Coherent's sales
forecast for the period commencing December 7, 1998 and ending
on the Closing Date (appropriately pro-rated) and (ii) not
sold by Coherent prior to the Closing. "LightSheer(TM)Margin"
shall mean the amount that we would have received on account
of such sales if they were made prior to the Closing Date
pursuant to the Sales Agency, License and Development
Agreement between us and Coherent dated November 17, 1997
(assuming that such sales would have been made at the average
sales price for all sales of LightSheer(TM)units by Coherent),
less the inventory carrying value of such units reflected on
the Closing Balance Sheet.
o If the Merger Agreement is terminated, then for a period of
two years following such termination Coherent will not solicit
to employ any employee of Star or Palomar or induce any
employee of Star or Palomar to leave his or her employment,
other than as part of a general solicitation of employees not
directed specifically to employees of Star or Palomar.
o Within 90 days after Closing, Coherent will provide us with a
schedule setting forth the proposed allocation of that portion
of the Merger consideration paid in connection with the Merger
among the assets of Star.
o Coherent will prepare and file (or cause to be prepared and
filed) on a timely basis all tax returns of Star relating to
periods ending after the Closing Date and will pay, and will
indemnify and hold Palomar harmless against and from (i) all
taxes of Star for any taxable year or period commencing after
the Closing Date and (ii) all taxes of Star for any Straddle
Period other than taxes attributable to the Pre-Closing
Period.
o If, as a result of Changes (as defined above), Coherent enjoys
a net tax benefit from an increase in deductions, losses or
tax credits and/or a decrease in income, gains, premiums,
revenues or recapture of tax credits ("Coherent Benefits") for
taxable periods ending after the Closing Date, it shall pay to
us the amount of such Coherent Benefits, as and when such
Coherent Benefits are realized by Coherent.
o If an audit examination of any Coherent tax return for any
taxable period ending on or before the Closing Date shall
result (by settlement or otherwise) in any Change reflected on
a Palomar tax return for any taxable periods ending on or
before the Closing Date, it will notify us and provide us with
all necessary information so that we can reflect any
appropriate Changes on our tax return.
24
<PAGE>
o Within one year of the Closing Date, Coherent will not
directly or indirectly initiate or participate in any
negotiations or discussions with respect to a public offering
of the surviving corporation's stock individually or as part
of a larger offering that relates to a subsidiary of Coherent
engaged in a business substantially similar to that of Star,
nor sell all or substantially all of the assets of the
surviving corporation in one or more transactions.
o All rights to indemnification now existing in favor of the
employees, agents, directors or officers of Star as provided
in its charter or bylaws will survive the Merger and will
continue in full force and effect to the fullest extent
permitted by applicable law, for a period not less than three
years from the Closing Date with respect to matters occurring
prior to the Closing Date.
o Within 60 days of the Effective Time, Coherent will not take
any action which triggers any notification requirements under
the Worker Adjustment and Retraining Notification Act.
o It will cause any Permitted Dividend (as defined in the Merger
Agreement) reflected on Star's Closing Balance Sheet to be
paid directly to us. At the Closing, it will cause any amounts
we borrowed from Fleet Bank on behalf of Star to be paid
directly to Fleet Bank, which amounts shall not exceed $10
million.
Mutual Agreements
-----------------
The parties have jointly agreed that:
o We will use commercially reasonable efforts to take promptly
all actions, and to do promptly all things necessary, proper
or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by
the Merger Agreement, to obtain all necessary waivers,
consents and approvals and to effect all necessary
registrations and filings and to remove any injunctions or
other impediments or delays, legal or otherwise, in order to
consummate and make effective the transactions contemplated by
the Merger Agreement.
o We will promptly notify each other of (i) the occurrence or
non-occurrence of any event likely to cause any representation
or warranty of any party, contained in the Merger Agreement,
to be untrue or inaccurate at or prior to the Effective Time
and (ii) any failure of Coherent, Palomar or Star, as the case
may be, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it under the
Merger Agreement.
o At the request of another party, we each will execute and
deliver such other instruments and do and perform such other
acts and things as may be necessary or desirable for effecting
completely the consummation of the Merger Agreement and the
transactions contemplated by it.
o We will each use all commercially reasonable efforts to
prepare and file a Hart-Scott-Rodino Act pre-merger
notification as promptly as possible after executing the
Merger Agreement and shall use all commercially reasonable
efforts to obtain early termination of the applicable waiting
period. (See "OTHER MATTERS - Regulatory Approval Required.")
o We will each elect to treat the sale of Star as an asset
purchase for federal tax purposes, and as a stock purchase for
California state tax purposes.
o We will each, at our own expense, control any audit or
examination by any taxing authority, and have the right to
initiate any claim for refund or amended return, and contest,
resolve and defend against any assessment, notice of
deficiency or other adjustment or proposed adjustment of taxes
for any taxable period for which they are charged with payment
or indemnification responsibility under the Merger Agreement.
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Non-Competition Agreements
--------------------------
o For the period commencing with the Closing Date and ending 24
months later (the "Palomar Restricted Period"), we (i) will
not engage in the Palomar Restricted Business (as defined
below); (ii) will cause our subsidiaries and affiliates not
to, individually or jointly with others, whether for their own
account or for that of any other person or entity, engage in
Palomar Restricted Business; and (iii) will not own or hold
any debt interest in, or control or otherwise participate in,
or act as a partner or principal of any person or entity that
engages in Palomar Restricted Business (except for ownership
of one percent or less of any entity with registered
securities). "Palomar Restricted Business" means the
commercial manufacture, marketing or sale of Restricted
Semiconductor Laser Devices. "Restricted Semiconductor Laser
Devices" means any semiconductor laser device (and any system
that incorporates such devices) that operates in a continuous
wave mode or in quasi continuous wave mode that delivers more
than 5 joules in any 50 millisecond period. No entity that
succeeds to our rights and obligations under the Merger
Agreement as a result of merging with or acquiring us (a
"Successor"), is bound by this restriction so long as the
business of such Successor and our business are "held
separate." Our business is "held separate" from a Successor's
business if (i) such Successor is not provided with, and
otherwise has no access to, our confidential information
relating to the Palomar Restricted Business; (ii) no director,
officer or employee of Palomar or its subsidiaries or
affiliates controls or directs the activities of such
Successor relating to the Palomar Restricted Business; and
(iii) such Successor receives no, and has not received any,
license or transfer of any of our intellectual property
relating to the Palomar Restricted Business.
o For the period commencing with the Closing Date and ending 24
months later (the "Coherent Restricted Period"), Coherent and
its subsidiaries and affiliates will not, individually or
jointly with others, whether for their own account or for that
of any other person or entity, engage in, or own or hold any
equity or debt interest in, or control or otherwise
participate in, or act as a partner or principal of any person
or entity that engages in the manufacture, marketing or sale
of ruby-powered lasers for hair removal anywhere in the world;
provided, however that Coherent may market or sell ruby lasers
manufactured by Palomar or own one percent (1%) or less of any
entity whose securities have been registered under the
Securities Act or Section 12 of the Exchange Act.
In brief, for Coherent among the purposes of this non-competition
agreement is to prevent us, once we have sold Star, from competing with Coherent
in Star's own field of expertise, namely the sale of high-powered semiconductor
lasers. Particularly, we are prevented from commercially manufacturing or
selling our own version of Star's LightSheer(TM) diode laser for hair removal.
For us, Coherent is prevented from competing with us by manufacturing or selling
ruby lasers for hair removal. That prevents Coherent from selling its own
versions of Palomar's EpiLaser(R) or E2000(TM) ruby lasers.
Conditions to the Consummation of the Sale
- ------------------------------------------
Conditions to Palomar's and Star's Obligations to Effect the Merger
-------------------------------------------------------------------
The obligations of Star and Palomar to consummate and effect the Merger
Agreement and the transactions contemplated by it are subject to the
satisfaction at or prior to the Effective Time of the following conditions:
o The representations and warranties of Coherent and the Merger
Sub in the Merger Agreement must be true and correct in all
material respects (i) when made on the date of the Merger
Agreement (December 7, 1998) and (ii) on and as of the
Effective Time as though such representations and warranties
were made on and as of such time, except for the
representations and warranties made as of a specific date
which must be true and current in all material respects as of
such date, and each of Coherent and the Merger Sub must have
performed and complied in all material respects with all
covenants and obligations required to be performed and
complied with by it as of the Effective Time, except for such
breaches of representations and warranties as shall not have a
Material Adverse Effect (as defined in the Merger Agreement)
on Coherent.
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o No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger can be in effect,
nor can any proceeding brought by an administrative agency or
commission or other governmental authority or instrumentality,
domestic or foreign, seeking any of the foregoing be pending;
nor can there be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or applicable
to the Merger, which makes consummation of the Merger illegal.
o Coherent must provide us with a certificate signed by its
Chief Executive Officer to the effect that, as of the
Effective Time: (1) all representations and warranties made by
Coherent and the Merger Sub in the Merger Agreement are true
and correct in all material respects (i) when made on the date
of the Merger Agreement and (ii) on and as of the Effective
Time as though such representations and warranties were made
on and as of such time except for the representations and
warranties made as of a specific date which must be true and
current in all material respects as of such date; and (2) all
covenants and obligations in the Merger Agreement to be
performed by Coherent on or before such date have been so
performed in all material respects.
o The applicable waiting period under the Hart-Scott-Rodino Act
relating to the Merger must have expired or been terminated.
o Palomar must have received a legal opinion from legal counsel
to Coherent in the form prescribed in the Merger Agreement.
Conditions to Coherent's and the Merger Sub's Obligation to Effect the
Merger
-----------------------------------------------------------------------
The obligations of Coherent and the Merger Sub to consummate and effect
the Merger Agreement and the transactions contemplated by it are subject to the
satisfaction at or prior to the Effective Time of the following conditions:
o The representations and warranties of Star and Palomar in the
Merger Agreement shall be true and correct in all material
respects (i) when made on the date of the Merger Agreement
(December 7, 1998) and (ii) on and as of the Effective Time as
though such representations and warranties were made on and as
of such time, except for the representations and warranties
made as of a specific date which shall be true and current in
all material respects as of such date, and each of Star and
Palomar must have performed and complied in all material
respects with all covenants and obligations of the Merger
Agreement required to be performed and complied with by it as
of the Effective Time, except for such breaches of
representations and warranties (excluding breaches of certain
specified representations and warranties), as shall not have a
Material Adverse Effect (as defined in the Merger Agreement)
on Star or Palomar.
o No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger can be in effect,
nor can any proceeding brought by an administrative agency or
commission or other governmental authority or instrumentality,
domestic or foreign, seeking any of the foregoing be pending;
nor can there be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or applicable
to the Merger, which makes the consummation of the Merger
illegal.
o Coherent must have received a legal opinion from legal counsel
to Star and Palomar in the form prescribed in the Merger
Agreement.
o Holders of a majority of the outstanding shares of our common
stock must have voted to adopt the Merger Agreement and
consummate the Merger.
o Shareholders of Star holding at least fifty-one percent (51%)
of Star's capital stock must have approved the Merger
Agreement, the Merger and the transactions contemplated by the
Merger
27
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Agreement, and no more than 5% of Star's capital stock shall
qualify as dissenting shares (as defined in the Merger
Agreement). All of Star's shareholders have already approved
the Merger Agreement, the Merger and the transactions
contemplated by the Merger Agreement.
o We must provide Coherent with a certificate signed by our
Chief Executive Officer, and Star must provide a certificate
signed by its Chief Executive Officer, as of the Effective
Time: (1) to the effect that all representations and
warranties made by Star and Palomar in the Merger Agreement
are true and correct in all material respects (i) when made on
the date of the Merger Agreement, and (ii) on and as of the
Effective Time as though such representations and warranties
were made on and as of such time, except for the
representations and warranties made as of a specific date
which shall be true and current in all material respects as of
such date; (2) to the effect that all covenants and
obligations of the Merger Agreement to be performed by Star or
Palomar on or before such date have been so performed in all
material respects; (3) to the effect certain of the conditions
set forth above have been satisfied; and (4) setting forth the
amount borrowed by Palomar from Fleet Bank on behalf of Star,
the amount borrowed by Palomar from Fleet Bank on its own
behalf, the total amount borrowed by Palomar from Fleet Bank
on behalf of both Palomar and Star (which amount shall not
exceed $10 million) and the Aggregate Bank Liabilities, the
Borrowing Base and the Receivables of Star (as such terms are
defined in the Fleet Letter Agreement and in the Glossary to
this proxy statement).
o The applicable waiting period under the Hart-Scott-Rodino Act
relating to the Merger must have expired or been terminated.
o Each Star stockholder must have executed and delivered to
Coherent a shareholder certificate representing, in the
aggregate, all of the outstanding Star capital stock, a
certificate exercising and terminating any rights to acquire
Star capital stock or an affidavit and an indemnification
agreement.
Survival of Representations and Warranties and Indemnification
- --------------------------------------------------------------
The Merger Agreement provides that, with certain limited exceptions
relating to tax and intellectual property matters, all of Star and Palomar's
representations and warranties (as summarized above) will survive for a period
of one year following the Closing Date. We and Star have agreed to indemnify
(that is, to compensate) Coherent and the surviving corporation for any losses
incurred by Coherent or the surviving corporation as a result of (1) any
inaccuracy or breach of Star and Palomar's representations and warranties (as
summarized below) or (2) any failure by Star or Palomar to perform or comply
with any of our additional agreements (also as summarized above). However,
Coherent may not seek such indemnification unless and until such losses,
combined, exceed $500,000, and then Coherent may seek compensation only for
those losses that are in excess of $500,000. In addition, Coherent may not seek
to recover for losses in excess of one quarter of the Merger consideration, that
is, $16,250,000 (unless such losses result from fraud, intentional
misrepresentation or gross negligence). Any claim for indemnification must be
made in writing prior to the end of the one year survival period for the
representations and warranties, or else it is waived.
If Coherent becomes aware of a claim which it reasonably believes may
result in indemnification, it must promptly notify us. We will represent all of
the Star stockholders for this purpose. We may then assume the defense of the
claim. If we have not assumed defense of the claim within 20 days from receipt
of Coherent's notice of the claim, Coherent has the right to undertake the
defense of, or settle, such claim on behalf of and for the account, expense and
risk of Star's stockholders.
Termination, Amendment and Waiver
- ---------------------------------
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time:
o By mutual consent of Palomar, Star and Coherent.
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o By Coherent, if the Star Board or Palomar Board recommends a
Superior Proposal to its respective stockholders, or if the
Star Board or Palomar Board withhold, withdraw or modify in a
manner adverse to Coherent their recommendation in favor of
adoption and approval of the Merger Agreement and approval of
the Merger.
o By Coherent or Palomar if: (1) the Effective Time has not
occurred by May 1, 1999 (so long as the action or failure to
act of the party seeking to terminate after that date has not
been a principal cause of or resulted in the failure of the
Merger to occur on or before that date, and such action or
failure to act constitutes a breach of the Merger Agreement);
(2) there is a final nonappealable order of a federal or state
court in effect preventing consummation of the Merger; or (3)
there is a statute, rule, regulation or order enacted,
promulgated or issued or applicable to the Merger by any
governmental entity that would make consummation of the Merger
illegal.
o By Coherent if there is any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or
deemed applicable to the Merger by any governmental entity,
which would: (i) prohibit Coherent's or the Merger Sub's
ownership or operation of any material portion of the business
of Star or (ii) compel Coherent or Star to dispose of or hold
separate all or a significant portion of the business or
assets of Coherent or Star as a result of the Merger.
o By Coherent if it is not in material breach of its obligations
under the Merger Agreement and there has been a material
breach of any representation, warranty, covenant or agreement
contained in the Merger Agreement on the part of Star or
Palomar which has a Material Adverse Effect (as defined in the
Merger Agreement) on Star and such breach has not been cured
(1) within fifteen calendar days after written notice to us if
such breach is capable of cure within 15 days or (2) within a
commercially reasonable time period after written notice to us
if such breach is not capable of cure within 15 days;
provided, however, that no cure period shall be required for a
breach which by its nature cannot be cured and that no cure
period shall in any case extend beyond May 1, 1999.
o By us if neither we nor Star is in material breach of our
respective obligations under the Merger Agreement and there
has been a material breach of any representation, warranty,
covenant or agreement contained in the Merger Agreement on the
part of Coherent or the Merger Sub which has a Material
Adverse Effect (as defined in the Merger Agreement) on
Coherent or the Merger Sub and such breach has not been cured
within fifteen (15) calendar days after written notice to
Coherent; provided, however, that no cure period shall be
required for a breach which by its nature cannot be cured and
that no cure period shall in any case extend beyond May 1,
1999.
The Merger Agreement may be amended by the parties at any time by a
document signed on behalf of each of the parties. At any time prior to the
Effective Time, Coherent and the Merger Sub, on the one hand, and we and Star on
the other hand, may, to the extent legally allowed, (1) extend the time for the
performance of any of the obligations of the other party, (2) waive any
inaccuracies in the representations and warranties made to such party or in any
document delivered pursuant to the Merger Agreement and (3) waive compliance
with any of the agreements or conditions that is for its benefit. Any agreement
to any such extension or waiver will be valid only if it is in writing.
We intend to amend this proxy statement and resolicit your proxy to the
extent that any provisions or conditions of the Merger Agreement are waived,
modified or amended and we are materially adversely affected thereby, or as
otherwise required by law.
Dispute Resolution
- ------------------
In the event of a dispute between the parties to the Merger Agreement,
they must first attempt in good faith to resolve such dispute promptly by
negotiation between executives who have authority to settle the dispute.
If the executives are not able to resolve the dispute by negotiation
within 30 days of when notice of the dispute has been delivered by one party to
another, then the parties must make a good faith attempt to settle the dispute
by mediation before resorting to arbitration, litigation or any other dispute
resolution procedure.
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If the dispute has not been resolved by negotiations, discussion or
mediation, only then may the parties proceed by litigation, or, should they
agree, by any other method of dispute resolution, including arbitration.
Escrow
- ------
We and Star's seven largest minority stockholders have agreed to put $4
million of the Merger consideration in escrow for one year as a security for the
indemnification obligation described above. (See "- Survival of Representations
and Warranties and Indemnification.") (The eight contributors to the escrow fund
will make a pro-rata contribution to the escrow, based on the percentage of the
Merger consideration to be received by each.) The terms of the escrow are set
forth in a separate Escrow Agreement, which is attached to the Merger Agreement
as Exhibit A. (The Merger Agreement, along with selected exhibits including the
Escrow Agreement, is attached as Exhibit C to this proxy statement.) We have
summarized below what we believe are the key provisions of the Escrow Agreement.
Please read the Escrow Agreement in its entirety for the complete terms of that
Agreement.
Palomar may invest the money in the escrow fund in a number of
conservative investments (treasury bills and certificates of deposit, for
example). At the end of the one year escrow period, to the extent that no claims
for indemnification have reduced the amount of money in the fund, the money will
be returned with interest to the original contributors to the escrow fund, in
proportion to their original contribution. Coherent will pay the escrow agent's
fees.
Once the escrow agent (U.S. Bank Trust, N.A.) receives a claim on the
escrow fund, it may not deliver money out of the escrow to Coherent for a period
of 30 days unless it has received written authorization from Palomar to do so.
It may deliver the money at the end of the thirty day period as long as it has
not received a written objection from Palomar to doing so. If Palomar does
object to the delivery of money from the escrow, then Palomar and Coherent must
first attempt to resolve the dispute themselves. If that is unsuccessful, then
either party may demand arbitration (unless the amount of loss is at issue in
pending litigation, in which case arbitration will take place only when the
amount of the loss is ascertained or the parties otherwise jointly agree to
arbitration).
Patent License Agreement
- ------------------------
A Patent License Agreement among Palomar, Star and Coherent is attached
as Exhibit E to the Merger Agreement. The purpose of the Patent License
Agreement is to allocate between Coherent and Palomar rights to certain patents,
some of which are owned by Star and will be transferred to Coherent as part of
the Merger, and some of which are (and will remain) licensed exclusively to
Palomar but which are necessary to the conduct of Star's business, and hence
will be sublicensed to Coherent after the Merger. We have summarized below what
we believe are the key provisions of the Patent License Agreement. Again, we
remind you that the Merger Agreement (along with the Patent License Agreement,
which is Exhibit E to the Merger Agreement) is attached as Exhibit C to this
proxy statement. Please read the Patent License Agreement in its entirety for
the complete terms of that Agreement.
Palomar has the exclusive license to two patents owned by MGH, namely,
United States Patent Nos. 5,595,568 ("Permanent Hair Removal Using Optical
Pulses") and 5,735,844 ("Hair Removal Using Optical Pulses"). At present, Star's
diode hair removal laser is manufactured and used under Palomar's patent license
from MGH; without this license, Star's LightSheer(TM) laser would infringe MGH's
patents.
Under the Patent License Agreement, Palomar will grant to Coherent and
Star a non-exclusive sublicense in the field of hair removal under the MGH
patents. In exchange, Coherent and Star will be obligated to pay Palomar a
royalty of 7.5% of the net sales price of all licensed products. Licensed
products means products manufactured by Coherent or Star which infringe one or
more claims of either of the two MGH patents. If Star is sold to Coherent, then
Coherent will have to pay Palomar this 7.5% royalty on all LightSheer(TM) lasers
that are sold by Coherent or Star.
Star itself owns four patents: United States Patents Nos. 5,835,518
("Laser Diode Array Packaging"), 5,527,350 ("Pulsed Infrared Laser Treatment of
Psoriasis"), 5,707,403 ("Method for the Laser Treatment of
30
<PAGE>
Subsurface Blood Vessels") and 5,743,901 ("High Fluence Diode Laser Device and
Method for the Fabrication and Use Thereof").
The Patent License Agreement provides that Star will grant to Palomar a
royalty-free license on the patents relating to treatment of psoriasis and
treatment of subsurface blood vessels, in the following limited respect: Palomar
may sublicense these patents only to other companies in connection with their
manufacture and sale of so-called "dual use devices," that is, lasers that
perform both hair removal and the treatment of subsurface blood vessels (for
example, leg veins). Palomar requested this provision in the Patent License
Agreement because it may sublicense other companies in the laser hair removal
industry on the two MGH patents, many of whom sell "dual use devices." Palomar
felt that the sublicensing package which it could offer these other companies
would be more attractive if it could sublicense them on not only the hair
removal but also the leg vein treatment applications of their products. If
Palomar does enter into such sublicensing agreements, it will not have to pay
any royalty amounts back to Coherent.
However, for a period of two years (the length of Palomar's
non-competition period under the Merger Agreement), Palomar may not offer to
sublicense the psoriasis and leg vein patents for Restricted Semiconductor Laser
Devices (as defined in the Merger Agreement). (See "THE MERGER AGREEMENT -
Additional Agreements - Non-Competition.") This is because, although Coherent
was willing to allow Palomar a royalty-free license to sublicense other laser
companies on these patents, it did not want to give this competitive advantage
to direct competitors of the LightSheer(TM). After the two year period, Palomar
may sublicense dual use devices that are Restricted Semiconductor Laser Devices,
but then it must pay a royalty back to Coherent.
The Patent License Agreement further provides that Star will grant to
Palomar a royalty-free license to the high-fluence diode laser patent for uses
other than in the Palomar Restricted Business (as defined in the Merger
Agreement). (See "THE MERGER AGREEMENT - Additional Agreements -
Non-Competition."). Palomar sought this license because it believes that it may
require rights under this patent in connection with its future business. Once
again, Palomar may license this patent in connection with Restricted
Semiconductor Laser Devices at the end of the two year non-competition period,
but only if it pays a royalty back to Coherent.
Finally, Coherent has agreed that Star will negotiate with Palomar a
fair royalty on the burn diagnostics patent if Palomar ever decides that it
needs rights to that patent in connection with its future business.
All licenses granted under the Patent License Agreement are granted for
the life of the respective patents. The Patent License Agreement also includes a
so-called "most favored licensee" provision, which means that, should either
party grant to a third party a license to any of these patents on more favorable
royalty terms than those established in the Patent License Agreement, then the
other party can immediately obtain that same lower royalty going forward
(assuming that all of the other material terms of the license agreement with the
third party are essentially like those in the Patent License Agreement).
OTHER MATTERS
- -------------
Letter Agreement Between Coherent and Palomar
- ---------------------------------------------
In connection with the Merger Agreement, we entered into a letter
agreement with Coherent. The primary purpose of this letter agreement was to
resolve various issues relating to the Sales Agency, Development and License
Agreement (the "Sales Agency Agreement") pursuant to which Coherent has been
acting as the exclusive distributor for our hair removal lasers.
In the letter agreement we agreed that, assuming the sale of Star is
completed:
o We will terminate the Sales Agency Agreement, and replace it
with a one-year non-exclusive distribution agreement, which
Palomar can terminate on 15 days' notice.
o We will not owe Coherent any commissions for any sales of our
ruby laser products that occur between the date of signing the
Merger Agreement and the date of Closing, and the parties will
release each other from all obligations under the Sales Agency
Agreement.
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<PAGE>
o The warrant to purchase one million shares of our common stock
which we issued to Coherent in connection with the Sales
Agency Agreement will be cancelled.
o For a period of one year following the expiration of the
Palomar Restricted Period, Coherent will have a right of first
refusal to sell any of our products that fall within the
definition of Palomar Restricted Business. (See " Additional
Agreements - Non-Competition Agreements.") If we and Coherent
are not able to come to agreement on the terms of a
distribution agreement for such products within 30 days, then
we may enter into an agreement with a third party on terms no
more favorable than those offered to Coherent.
o We will buy from Coherent certain EpiLasers(R)that they have
in inventory for a total of $1,008,000.
In addition, we agreed that we will take over all responsibility for
service of our EpiLasers(R) installed in the United States beginning on January
1, 1999, and, connected with that, three Coherent service technicians will come
to work for us. Within 90 days of our taking over this service obligation, we
will finish performing certain upgrades (or other results satisfactory to
customers) to the EpiLaser(R) units sold by Coherent.
Bonus Agreement
- ---------------
Palomar entered a bonus agreement dated December 7, 1998 with three key
employees of Star, Robert Grove, James Holtz, and David Mundinger. Under the
terms of the bonus agreement, Palomar has agreed to pay certain employees,
including Robert Grove, James Holtz and David Mundinger, a total of up to
$950,000, provided that Messrs. Grove and Holtz can certify that Star met a
production schedule on LightSheer(TM) diode lasers through the Closing Date.
That schedule requires Star to produce for the month ending prior to Closing a
defined number of hair removal lasers, namely 20 LightSheer(TM) lasers in
January 1999, 20 in February 1999, and 45 in March 1999. If such a certification
cannot be provided, and Star fails to produce and ship the requisite units, then
the three employees shall be entitled to a bonus of $950,000 times a fraction,
the numerator of which is equal to the cumulative number of units shipped
through the month ending prior to Closing plus the total number of units in
finished goods at the end of the month ending prior to Closing, and the
denominator of which is equal to the cumulative number of units in the shipment
forecast through the month ending prior to Closing. If the amount due hereunder
is less than $475,000, then no payments will be due, and in no case shall the
amount paid be in excess of $950,000.
Regulatory Approval Required
- ----------------------------
Under the Hart-Scott-Rodino Act and the rules promulgated thereunder by
the Federal Trade Commission (the "FTC"), certain acquisition transactions may
not be consummated unless notice has been given and certain information has been
furnished to the Antitrust Division of the United States Department of Justice
(the "Antitrust Division") and the FTC and specified waiting period requirements
have been satisfied. Palomar and Coherent each filed with the Antitrust Division
and the FTC a Notification and Report Form with respect to the Merger on
February 19, 1999.
Palomar and Coherent do not believe that any other material
governmental approvals or actions will be required for consummation of the
Merger. See "- Conditions to Consummation of the Sale."
32
<PAGE>
PROPOSAL NUMBER TWO
PROPOSED AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO
EFFECT A PLAN OF RECAPITALIZATION THAT WILL RESULT IN A
ONE-FOR-SEVEN REVERSE STOCK SPLIT AND A REDUCTION IN OUR
AUTHORIZED CAPITAL STOCK TO 45,000,000 SHARES
OF COMMON AND 1,500,000 SHARES OF PREFERRED
The Board of Directors has determined that it is advisable, and is
therefore submitting to you for your approval, a proposal to amend our
Certificate of Incorporation to effect a recapitalization pursuant to which each
seven shares of our issued and outstanding common stock will be automatically
converted into one new share of common stock and our authorized capital stock
will be reduced from 120,000,000 shares of common and 5,000,000 shares of
preferred to 45,000,000 shares of common and 1,500,000 shares of preferred
stock. The text of the proposed Certificate of Amendment is set forth in Exhibit
D to this proxy statement. Our common stock does not have preemptive or similar
rights. The reverse split will become effective as of 5:00 p.m. EST (the
"Reverse Split Effective Date"), on the date that the Certificate of Amendment
to our Certificate of Incorporation is filed with the Secretary of State of
Delaware. If for any reason the Board of Directors deems it advisable, the
proposed amendment may be abandoned at any time before the Reverse Split
Effective Date, whether before or after the Special Meeting of Stockholders
(even if such proposal has been approved by the stockholders).
No scrip or fractional share certificates for common stock will be
issued in connection with the reverse split. Instead, a certificate or
certificates evidencing the aggregate of all fractional shares otherwise
issuable will be issued to American Stock Transfer & Trust Company (the
"Exchange Agent") or its nominee, as agent for the accounts of all holders of
common stock otherwise entitled to have a fraction of a share issued to them in
connection with the reverse split. The Exchange Agent will sell the fractional
interests as soon as practicable on the basis of prevailing market prices of our
common stock on the Nasdaq SmallCap Market at the time of sale. After the
Reverse Split Effective Date, the Exchange Agent will pay to such stockholders,
promptly after they have surrendered their stock certificate(s), their pro rata
share of the net proceeds derived from the sale of their fractional interests.
Stockholders will not have to pay any service charges or brokerage commissions
in connection with the sale of fractional interests. We will bear those costs.
As soon as practicable after the Reverse Split Effective Date, we will
send a letter to each holder of record of a stock certificate or certificates
which represent issued common stock outstanding on the Reverse Split Effective
Date. The letter will instruct you on how to surrender your certificate(s) to
the Exchange Agent in exchange for certificates representing the number of whole
shares of common stock into which your shares of common stock have been
converted as a result of the reverse split. You will not receive any new
certificates or, if applicable, cash payment (for fractional share interests)
until you have surrendered your old certificate(s) together with a form letter
(which we will provide, along with the instructions) to our Exchange Agent. See
"-- Exchange of Stock Certificates."
THE BOARD OF DIRECTORS BELIEVES THE ADOPTION OF THE PROPOSED AMENDMENT
IS IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS THAT
YOU VOTE FOR THE PROPOSED AMENDMENT.
PURPOSES OF THE PLAN OF RECAPITALIZATION
- ----------------------------------------
Eligibility for Continued Listing on Nasdaq SmallCap Market
- -----------------------------------------------------------
Our common stock has been listed on the Nasdaq Stock Market and has
traded on the Nasdaq SmallCap Market since December 18, 1992, when we completed
our initial public offering.
New rules promulgated by Nasdaq require that, as a condition of the
continued listing of a company's securities on the SmallCap Market, a company
must satisfy at least one of several sets of alternative maintenance
33
<PAGE>
requirements, which generally require that a company meet certain minimum
criteria relating to its financial condition, results of operations and trading
market for its listed securities. In August 1997, the SEC approved a proposal to
revise maintenance criteria for securities traded on the SmallCap Market. Under
the new listing criteria, the minimum bid price of common stock also must equal
or exceed $1.00, among other criteria. If the closing bid price falls below
$1.00 per share for 30 consecutive trading days, the common stock is subject to
delisting. The closing price of our common stock fell below $1.00 per share for
30 consecutive trading days between August 28 and October 9, 1998.
On October 13, 1998, Nasdaq sent us a letter bringing to our attention
their concern regarding the continued listing of our common stock on the Nasdaq
SmallCap Market, because our stock had failed to maintain a closing bid price
greater or equal to $1.00 over the previous thirty consecutive trading days.
They informed us that we had until the close of business on January 13, 1999 to
regain compliance with the $1.00 minimum bid price requirement. We did not
regain compliance with the minimum bid price requirement by that date. Nasdaq
has scheduled an oral hearing on the delisting for March 18, 1999. The delisting
will be stayed pending that hearing. We do not anticipate that we can complete
the reverse split before the hearing date. However, even if that hearing results
in our being delisted, we nevertheless plan to proceed with the reverse split,
as we believe it is in the best interest of our stockholders, for all the
reasons described in this proxy statement.
We believe that if the proposed amendment is approved at the Special
Meeting and the reverse split is effected, we will regain compliance with the
$1.00 per share minimum bid requirement. However, we also need to satisfy other
criteria to meet the new maintenance requirement. These other criteria consist
of maintaining (i) a market capitalization of at least $35,000,000, or net
tangible assets of $2,000,000, or net income of $500,000 in the latest fiscal
year or two of the last three fiscal years, (ii) a public float (i.e., shares
held other than by officers, directors and owners of more than 10% of the total
shares outstanding) of at least 500,000 shares, (iii) a market value of the
public float of at least $1 million, (iv) at least 300 stockholders (round lot
holders), (v) at least two market makers and (vi) compliance with certain
corporate governance requirements. To date, we believe that we meet all of these
additional requirements. However, even if the proposed amendment is approved and
the reverse split effected, there can be no assurance that we will satisfy these
maintenance criteria. The delisting of our common stock from the SmallCap Market
could adversely affect the liquidity of our common stock and our ability to
raise capital. If our common stock were to be delisted from the SmallCap Market,
it would likely be quoted in the "pink sheets" maintained by the National
Quotation Bureau, Inc. or the OTC Bulletin Board maintained by Nasdaq. If our
common stock is listed on the OTC Bulletin Board or the pink sheets, then the
spread between the bid and ask price of shares of our common stock is likely to
be greater than at present and stockholders may experience a greater degree of
difficulty in engaging in trades of shares of our common stock.
As long as our common stock has a market price of less than $5.00 per
share, if it is not traded on Nasdaq and another exception is not available, it
will be considered a "penny stock" within the meaning of relevant SEC
regulations. Under these regulations, any transaction involving a penny stock,
unless exempt, requires the delivery, prior to the transaction, of a disclosure
schedule prepared by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. These penny stock rules may restrict the ability
of broker-dealers to sell our securities and may affect the ability of
purchasers to sell our securities in the secondary market, particularly if we
are delisted from Nasdaq.
In addition, the Board of Directors believes that the present market
price of our common stock makes it less attractive to members of the financial
community and the investing public. Theoretically, the number of shares
outstanding should not, by itself, affect the marketability of the stock, the
type of investor who acquires it or a company's reputation in the financial
community, but in practice this is not necessarily the case, as many investors
look upon low priced stock as unduly speculative in nature and, as a matter of
policy, avoid investment in such stocks. In addition, the structure of trading
commissions also tends to have an adverse impact upon holders of low priced
stock because the brokerage commission on a sale of low priced stock generally
represents a higher percentage of the sales price than the commission on higher
priced issues. The reverse split may lessen these adverse effects if it results
in a higher price per share of our common stock.
34
<PAGE>
We caution you that the effect of the reverse split upon the market
prices for our common stock cannot be accurately predicted. In particular, there
is no assurance that the market prices for our common stock after the reverse
split will be seven times the market prices immediately prior to the reverse
split. Furthermore, we cannot be certain that the proposed reverse split will
achieve the desired results which have been outlined above, nor can we be
certain that the reverse split will not adversely impact the market price of the
common stock or, alternatively, that any increase in the market price of our
common stock immediately after the reverse split will be sustained for any
prolonged period of time. In addition, the reverse split may have the effect of
creating odd lots of stock for some stockholders and such odd lots may be more
difficult to sell or have higher brokerage commissions associated with their
sale.
Greater Availability of Common Stock for Future Issuances
- ---------------------------------------------------------
If the proposed amendment is approved and our authorized common stock
is reduced to 45,000,000 shares, then, because there would be approximately
10,000,000 shares of common stock issued and outstanding and 4,643,000 reserved
for additional issuances after giving effect to the split, the Board of
Directors will have the authority to issue approximately 30,357,000 additional
shares of common stock without further stockholder approval (without regard to
any of such shares that would be required to maintain an adequate reserve of
shares for issuance upon conversion of any of our convertible securities). Our
Board believes that the reduced number of shares of authorized common stock
would provide sufficient shares for issuance upon conversion of our convertible
securities, as well as for such corporate purposes as the Board may determine to
be necessary or desirable. These purposes may include (but are not limited to):
o acquiring other businesses in exchange for shares of common
stock;
o entering into collaborative research arrangements with other
companies, or acquiring complementary technologies, products
or businesses from others in exchange for common stock;
o issuing shares of common stock in connection with research and
development relationships, strategic alliances or other
corporate partnering programs;
o issuing shares of common stock to raise additional working
capital for ongoing operations or planned research projects;
o issuing additional shares of common stock to attract and
retain valuable employees by the issuance of additional stock
options, including additional shares reserved for future
option grants under our existing stock plans.
Our issuance of any additional shares of capital stock may, depending
on the circumstances under which those shares are issued, may have the effect of
diluting the earnings per share and book value per share, as well as the stock
ownership and voting rights, of outstanding common stock. We do not have any
current commitments or agreements relating to any acquisitions. Under the
Delaware General Corporation Law, our Board generally may issue authorized but
unissued shares of our stock without further stockholder approval. The Board
does not currently intend to seek stockholder approval prior to any future
issuance of additional shares of common or preferred stock unless stockholder
action is required in a specific case by applicable law, the rules of any
exchange or market on which our stock may then be listed, or our Certificate of
Incorporation or By-laws.
We also note that shares of capital stock which are authorized but not
issued could be used to make a change in control of Palomar more difficult. For
example, such shares could be sold to purchasers who might side with the Board
of Directors in opposing a takeover bid that the Board determines not to be in
the best interests of Palomar and its stockholders. At present, approximately
42% of Palomar's authorized common stock is unissued. Following the reverse
split, approximately 78% of our authorized common stock will be unissued.
Accordingly, as the reverse split and the reduction in the authorized capital
stock will result in an increase in the percentage of authorized but unissued
shares of common stock (as opposed to issued shares of common stock), it may
have an anti-takeover effect by permitting the issuance of shares to purchasers
who might oppose a hostile takeover bid or oppose any efforts to amend or repeal
certain provisions of the Company's Certificate of Incorporation or By-laws.
35
<PAGE>
(The recapitalization will result in a reduction in the percentage of authorized
but unissued shares of preferred stock). Therefore, the proposed amendment to
our Certificate of Incorporation may be beneficial to management in a hostile
tender offer and may have an adverse impact on stockholders who may want to
participate in such a tender offer.
The Board has no present plans to propose any anti-takeover measures in
future proxy solicitations, nor are we aware of any pending or threatened
efforts to obtain control of Palomar. Existing provisions which could have an
anti-takeover effect include:
o We are subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law, which prohibit us
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.
o Our stock option grants generally provide for an exercise of
some or all of the optioned stock, including non-vested
shares, upon a change in control or similar event.
o Our Board has authority to issue up to 5,000,000 shares of
preferred stock and to fix the rights, preference, privileges
and restrictions, including voting rights, of these shares
without any further vote or action by the stockholders. The
rights of the holders of the common stock will be subject to,
and may be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more
difficult for a third party to acquire a majority of our
outstanding voting stock, thereby delaying, deferring or
preventing a change in control.
o Our By-laws contain a provision requiring stockholders to give
notice of matters of any business to be brought before the
Annual Meeting 90 days in advance of the meeting or, in the
case of a Special Meeting, the earlier of ten days following
when notice of the meeting was first mailed or the date on
which such meeting was publicly disclosed.
EFFECT OF THE REVERSE SPLIT
- ---------------------------
As a result of the reverse split, the number of whole shares of common
stock which you hold as of the close of business on the Reverse Split Effective
Date will be equal to the number of shares of you hold immediately prior to the
close of business on the Reverse Split Effective Date divided by seven, ignoring
any fraction resulting from the reverse split which will be converted into cash
as a result of the Exchange Agent's sale of any fractional shares. The reverse
split will not affect your percentage ownership interest in the company or
proportional voting power, except for minor differences resulting from the
payment of cash in lieu of fractional shares. The terms of our common and
preferred stock, and the rights and privileges of the holders of such shares,
will be unaffected by the reverse split. The number of shares of common stock
issued and outstanding will be reduced. Consequently, the reverse split will
reduce the aggregate par value of the issued common stock.
Dissenting stockholders will not have appraisal rights under Delaware
law or under our Certificate of Incorporation or By-laws.
As discussed above, the reverse split may leave certain stockholders
with an odd lot of our common stock (i.e., a number of shares less than 100).
These shares may be more difficult to sell, or require a greater commission to
sell, than shares in multiples of 100.
Our common stock is currently registered under Section 12(g) of the
Exchange Act and, as a result, we are subject to the periodic reporting and
other requirements of the Exchange Act. The reverse split will not affect the
registration of our common stock under the Exchange Act.
36
<PAGE>
Upon consummation of the reverse split, the total number of shares
currently reserved for outstanding warrants, grants of stock options and all
stock options previously granted would be decreased proportionately. The cash
consideration payable per share upon exercise of stock warrants and options
would be increased proportionately.
EXCHANGE OF STOCK CERTIFICATES AND ELIMINATION OF FRACTIONAL SHARE INTERESTS
- ----------------------------------------------------------------------------
As soon as practicable after the Reverse Split Effective Date, we will
ask you to exchange your stock certificates ("Old Certificates") for new
certificates ("New Certificates") representing the number of whole shares of
common stock into which your shares of common stock have been converted as a
result of the reverse split. At the appropriate time we will furnish you with
the necessary materials and instructions for the surrender and exchange of your
stock certificates by our transfer agent. You will not be required to pay a
transfer or other fee in connection with the exchange of certificates. You
should not submit any certificates to the Exchange Agent until requested to do
so.
As discussed above, no scrip or fractional share certificates for
common stock will be issued in connection with the reverse split. Instead, a
certificate or certificates evidencing the aggregate of all fractional shares
otherwise issuable shall be issued to the Exchange Agent or its nominee, as
agent for the accounts of all holders of common stock otherwise entitled to have
a fraction of a share issued to them in connection with the reverse split. The
Exchange Agent will sell the fractional interests as soon as practicable on the
basis of prevailing market prices of the common stock at the time of sale. After
the Reverse Split Effective Date, the Exchange Agent will pay to such
stockholders their pro rata share of the net proceeds derived from the sale of
their fractional interests upon surrender of their stock certificate(s). You
will not have to pay any service charges or brokerage commissions in connection
with the sale of fractional interests. We will bear all such costs.
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE SPLIT
- ----------------------------------------------------
The following is a general discussion of certain federal income tax
consequences of the proposed reverse split. This discussion does not purport to
deal with all aspects of federal income taxation that may be relevant to you as
a holder of our common stock. It is also not intended to be applicable to all
categories of investors, some of which, such as dealers in securities, banks,
insurance companies, tax-exempt organizations and foreign persons, may be
subject to special rules. Furthermore, the following discussion is based on
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and administrative and judicial interpretations as of the date of this
proxy, all of which are subject to change. Please consult with your own tax
advisor regarding the federal, state, local and foreign tax consequences of the
reverse split.
We believe that the reverse split will constitute a reorganization
within Section 368(a) of the Code. Accordingly, you will recognize no gain or
loss upon your exchange of old shares of common stock for new shares of common
stock. If, however, you receive cash in respect of fractional share of new
common stock, you will generally be treated as having received that cash as a
distribution in redemption of the fractional share, as provided in Section
302(a) of the Code. You should consult your own tax advisor for the tax effect
of such a redemption (i.e., capital gain or dividend treatment) in light of your
particular facts and circumstances. The new shares of common stock issued in the
reverse split will have an aggregate basis for computing gain or loss equal to
the aggregate basis of the shares of common stock that you held immediately
prior to the reverse split, reduced by the amount of cash, if any, that you
receive in exchange for fractional interests and increased by any gain you
recognize as a result of the receipt of that cash.
Your holding period for the new shares of common stock will include
your holding period for your old shares of common stock which you exchanged for
the new shares, provided that all such shares exchanged were held as capital
assets immediately prior to the reverse split.
37
<PAGE>
PALOMAR SHARE OWNERSHIP
- -----------------------
The following tables list our share ownership for the persons or groups
specified. Ownership includes direct and indirect (beneficial) ownership, as
defined by SEC rules. To our knowledge, each person, along with his or her
spouse, has sole voting and investment power over the shares unless otherwise
noted. Information for our directors and officers is as of February 16, 1999.
Information for the beneficial owners of at least 5% of our shares is as of the
latest reports by those entities received by us.
<TABLE>
<S> <C> <C> <C> <C>
Number of Shares Percentage
Name and Address of Beneficial Owner Beneficially Owned of Class (1)
- ------------------------------------ -------------------------- -------------------
Louis P. Valente(2) 415,000 *
45 Hartwell Avenue
Lexington, MA 02173
Joseph P. Caruso(3) 943,142 1.3%
45 Hartwell Avenue
Lexington, MA 02173
A. Neil Pappalardo(4)(5) 250,000 *
45 Hartwell Avenue
Lexington, MA 02173
James G. Martin(4) 50,000 *
45 Hartwell Avenue
Lexington, MA 02173
Nicholas P. Economou(4) 60,000 *
45 Hartwell Avenue
Lexington, MA 02173
The Travelers Insurance Company(6)
One Tower Square 6,694,947 9.3%
Hartford, CT 06183
The Travelers Insurance Group Inc.(6)
One Tower Square 6,694,947 9.3%
Hartford, CT 06183
PFS Services, Inc.(6)
3120 Breckinridge Blvd. 6,694,947 9.3%
Duluth, GA 30199-0001
Associated Madison Companies, Inc.(6)
153 East 53rd Street 6,694,947 9.3%
New York, NY 10013
Citigroup Inc.(6)
153 East 53rd Street 6,776,597 9.4%
New York, NY 10043
The Rockside Foundation(7) 12,161,650 16.9%
524 North Avenue
New Rochelle, NY 10801
38
<PAGE>
Logg Investment Research(7) 12,161,650 16.9%
P.O. Box 4985
Stateline, NV 89449
Thomas O'Brien(7) 12,161,650 16.9%
P.O. Box 4985
Stateline, NV 89449
Mark T. Smith(7) 12,161,650 16.9%
7670 First Place
Oakwood, OH 44146
The R. Templeton Smith Foundation(7) 12,161,650 16.9%
3001 Fairmont Blvd.
Cleveland Heights, OH 44118
All Directors and Executive Officers as a 1,718,142 2.4%
Group
(5 persons)
</TABLE>
* Less than one percent.
(1) Pursuant to the rules of the Securities and Exchange Commission, shares
of common stock which an individual or group has a right to acquire
within 60 days pursuant to the exercise of options and warrants are
deemed to be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of
any other person shown in the table. Percentage ownership is based on
71,791,475 shares of common stock outstanding as of February 16, 1999.
(2) Includes 200,000 shares of common stock which Mr. Valente has the right
to acquire within 60 days pursuant to the exercise of warrants.
(3) Includes 870,000 shares of common stock which Mr. Caruso has the right
to acquire within 60 days pursuant to the exercise of options and
warrants, and 6,316 shares held in our 401(k) Plan.
(4) Includes 50,000 shares of common stock which each of these directors
has the right to acquire within 60 days pursuant to the exercise of
warrants.
(5) Includes 200,000 shares of common stock which Mr. Pappalardo has the
right to acquire within 60 days pursuant to the exercise of warrants.
(6) Based on information provided in Amendment No. 4 to a Schedule 13G,
filed on January 22, 1999. Includes shares beneficially owned with
respect to which this entity shares voting and dispositive power with
the affiliated entities listed, and further assumes exercise/conversion
of certain securities which by their terms may not be currently
exercisable within 60 days. The entities may disclaim that they
constitute a "group" for purposes of owning these shares.
(7) Based on information provided in Amendment No. 3 to a Schedule 13D,
filed on February 16. 1999. Includes shares beneficially owned with
respect to which this entity/individual shares voting and dispositive
power with the affiliated entities/individuals listed. Includes
3,000,000 shares of common stock which the entity/individual has the
right to acquire within 60 days pursuant to the exercise of warrants.
The entities/individuals may disclaim that they constitute a "group"
for purposes of owning these shares.
39
<PAGE>
SUBMISSION OF STOCKHOLDER PROPOSALS
- -----------------------------------
From time to time, stockholders seek to nominate directors or present
proposals for inclusion in the proxy statement and form of proxy for
consideration at the annual meeting. To be included in the proxy statement or
considered at an annual or any special meeting, you must timely submit
nominations of directors or proposals, in addition to meeting other legal
requirements. We must receive proposals for the 1999 annual meeting no later
than 90 days prior to the meeting, for possible consideration at the meeting,
which is expected to take place on May 26, 1999. Direct any proposals, as well
as related questions, to the undersigned.
OTHER BUSINESS
- --------------
The Board of Directors knows of no other matters for consideration at
the meeting. If any other business should properly arise, the persons appointed
in the enclosed proxy have discretionary authority to vote in accordance with
their best judgment.
EXPENSES AND SOLICITATION
- -------------------------
We will bear the cost of solicitation of proxies. In addition to
soliciting stockholders by mail through our regular employees, we may request
banks and brokers to solicit their customers who have our common stock
registered in the name of a nominee and, if so, will reimburse such banks and
brokers for their reasonable out-of-pocket costs. Also, we will retain a
professional proxy solicitation firm to assist in the proxy solicitation and
will pay such solicitation firm customary fees plus expenses. Solicitation by
officers and employees of the Company may also be made of some stockholders in
person or by mail, telephone or telegraph, following the original solicitation.
By Order of the Board of Directors,
/s/ Louis P. Valente
-----------------------------------
Louis P. Valente
Chairman of the Board and
Chief Executive Officer
March 12, 1999
THE BOARD OF DIRECTORS HOPES THAT YOU WILL ATTEND THE MEETING. WHETHER
OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL GREATLY
FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION IS APPRECIATED.
PLEASE VOTE. YOUR VOTE IS IMPORTANT.
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Reports of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-4
Consolidated Statements of Operations for the years ended December 31, 1996,
1997 and 1998 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1996,
1997 and 1998 F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1997 and 1998 F-9
Notes to Consolidated Financial Statements F-11
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Palomar Medical Technologies, Inc:
We have audited the accompanying consolidated balance sheets of Palomar
Medical Technologies, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The summarized
financial data for Nexar Technologies, Inc. as of and for the year ended
December 31, 1997 contained in Note 2 are based on the financial statements of
Nexar Technologies, Inc. which were audited by other auditors. Their report has
been furnished to us and our opinion, insofar as it relates to the data in Note
2, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Palomar Medical Technologies, Inc. and subsidiaries as
of December 31, 1997 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1, the Company has suffered recurring losses from operations and has a working
capital deficiency and a stockholders' deficit that raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 11, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Nexar Technologies, Inc.
Southborough, Massachusetts
We have audited the accompanying consolidated balance sheet of Nexar
Technologies, Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. These financial statements (which are not shown
separately herein) are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of Nexar Technologies, Inc. and
subsidiary as of December 31, 1996 and for the periods ended December 31, 1995
and 1996 (not shown separately herein), were audited by other auditors whose
report dated January 24, 1997 (except with respect to the purchased technology
matter discussed in Note 2 as to which the date is February 28, 1997), expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the financial position of Nexar Technologies, Inc. and
subsidiary as of December 31, 1997 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
----------------------------
BDO Seidman, LLP
February 13, 1998 (except for
Note 10 which is as of
March 20, 1998)
F-3
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,003,300 $1,874,718
Marketable securities 1,449,326 -
Accounts receivable, net of allowance for doubtful accounts of
approximately $746,000 and $364,000 in 1997 and 1998, respectively 2,248,680 9,938,121
Inventories 4,711,474 5,416,342
Other current assets 2,153,941 1,056,388
---------------- ----------------
Total current assets 13,566,721 18,285,569
---------------- ----------------
NET ASSETS OF DISCONTINUED OPERATIONS (NOTE 2) 5,825,602 -
---------------- ----------------
PROPERTY AND EQUIPMENT, NET 6,455,586 3,314,087
---------------- ----------------
OTHER ASSETS:
Cost in excess of net assets acquired, net of accumulated amortization of
approximately $1,280,000 and $1,882,000 in 1997 and 1998, respectively 2,302,348 1,699,983
Deferred financing costs 591,609 58,923
Other non-current assets 225,706 167,352
---------------- ----------------
Total other assets 3,119,663 1,926,258
---------------- ----------------
$28,967,572 $23,525,914
================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $1,640,465 $6,290,041
Accounts payable 4,150,982 6,553,745
Accrued liabilities 13,759,854 10,301,624
Current portion of deferred revenue 1,284,395 1,143,796
---------------- ----------------
Total current liabilities 20,835,696 24,289,206
---------------- ----------------
NET LIABILITIES OF DISCONTINUED OPERATIONS - 1,680,171
---------------- ----------------
LONG-TERM DEBT, NET OF CURRENT PORTION 12,445,563 3,150,000
---------------- ----------------
DEFERRED REVENUE, NET OF CURRENT PORTION 1,870,000 870,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value-
Authorized - 5,000,000 shares
Issued and outstanding -
16,397 shares and 6,993 shares
at December 31, 1997 and 1998, respectively
(Liquidation preference of $8,228,082 as of December 31, 1998) 164 69
Common stock, $.01 par value-
Authorized - 120,000,000 shares
Issued - 45,792,585 shares and 70,524,027 shares
at December 31, 1997 and 1998, respectively 457,926 705,240
Additional paid-in capital 147,356,579 160,733,433
Accumulated deficit (152,359,497) (166,263,346)
Less: Treasury stock - (345,000 shares at cost) (1,638,859) (1,638,859)
---------------- ----------------
Total stockholders' deficit (6,183,687) (6,463,463)
---------------- ----------------
$28,967,572 $23,525,914
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
------------------ ----------------- ----------------
<S> <C> <C> <C>
REVENUES $17,606,871 $20,994,546 $44,514,057
COST OF REVENUES 14,169,471 20,055,963 23,050,834
------------------ ----------------- ----------------
Gross profit 3,437,400 938,583 21,463,223
------------------ ----------------- ----------------
OPERATING EXPENSES:
Research and development 6,297,477 11,990,332 7,029,348
Sales and marketing 5,076,941 6,959,750 15,132,595
General and administrative 9,752,922 15,332,241 8,866,530
Business development
and other financing costs 2,879,603 2,060,852 -
Restructuring and asset write-off (Note 4) 1,660,808 3,325,000 (131,310)
Settlement and litigation costs 880,000 3,199,000 -
------------------ ----------------- ----------------
Total operating expenses 26,547,751 42,867,175 30,897,163
------------------ ----------------- ----------------
Loss from operations (23,110,351) (41,928,592) (9,433,940)
INTEREST EXPENSE (271,619) (6,993,898) (1,290,905)
INTEREST INCOME 1,355,488 456,945 33,080
NET GAIN (LOSS) ON TRADING SECURITIES 2,033,371 (52,272) 703,211
ASSET WRITE-OFF (NOTE 4) (1,397,000) (9,658,000) -
OTHER INCOME (EXPENSE) 591,853 (193,262) 21,311
------------------ ----------------- ----------------
NET LOSS FROM CONTINUING OPERATIONS (20,798,258) (58,369,079) (9,967,243)
------------------ ----------------- ----------------
LOSS FROM DISCONTINUED OPERATIONS (NOTE 2):
Loss from operations (20,895,534) (29,508,755) (1,090,885)
Gain (Loss) on dispositions, net 3,830,000 2,073,943 (1,533,295)
------------------ ----------------- ----------------
NET LOSS FROM DISCONTINUED OPERATIONS (17,065,534) (27,434,812) (2,624,180)
------------------ ----------------- ----------------
NET LOSS $ (37,863,792) $ (85,803,891) $(12,591,423)
================== ================= ================
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Continuing operations $(0.84) $(1.79) $(0.18)
Discontinued operations (0.65) (0.78) (0.04)
------------------ ----------------- ----------------
TOTAL LOSS PER COMMON SHARE $(1.49) $(2.57) $(0.22)
================== ================= ================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 26,166,538 35,105,272 62,868,696
================== ================= ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock Treasury Stock
----------------------------------------------------------------
Number $0.01 Number $0.01 Number
of Shares Par Value of Shares Par Value of Shares Cost
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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>
<CAPTION>
Additional Unrealized
Paid-in Accumulated (Loss) Gain on Subscriptions
Capital Deficit Marketable Receivable
Securities
------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $54,152,385 $(25,864,657) $-- $(1,988,709)
Sale of common stock pursuant to warrants and
options 7,569,226 -- -- --
Sale of common stock 6,049,618 -- -- --
Payments received on subscriptions receivable -- -- -- 2,441,556
Issuance of preferred stock, including common stock issued
as a placement fee, net of issuance costs 30,821,677 -- -- --
Issuance of common stock for 1995 employer 401(k)
matching contribution 160,139 -- -- --
Conversion of preferred stock, including accrued
dividends and interest of $782,602 744,124 -- -- --
Conversion of convertible debentures 145,260 -- -- --
Redemption of convertible debentures (41,530) -- -- --
Value ascribed to convertible debentures 2,757,860 -- -- --
Redemption of preferred stock (3,123,127) -- -- --
Exercise of underwriter's warrants 1,057,500 -- -- (1,057,500)
Exercise of stock options in majority controlled
subsidiary 50,000 -- -- --
Issuance of common stock for conversion of debentures at
Tissue Technologies, Inc. 1,019,022 -- -- --
Issuance of common stock for minority interest in
Star Medical subsidiary 1,747,482 -- -- --
Issuance of common stock in exchange for license
rights 369,574 -- -- --
Issuance of common stock for acquisition of
Dermascan, Inc. 489,650 -- -- --
Issuance of common stock for investment banking and merger
and acquisition consulting services 476,156 -- -- --
Compensation expense related to warrants issued to
non-employees under SFAS No. 123 532,758 -- -- --
Return of escrowed shares 460 -- -- --
Amortization of deferred financing costs (77,683) -- -- --
Unrealized loss on marketable securities -- -- (342,500) --
Preferred stock dividends -- (1,242,751) -- --
Net loss -- (37,863,792) -- --
------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $104,900,551 $(64,971,200) $(342,500) $(604,653)
============================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders
Equity (Deficit)
-------------------
<S> <C>
BALANCE, DECEMBER 31, 1995 25,288,754
Sale of common stock pursuant to warrants and
options 7,598,907
Sale of common stock 6,061,380
Payments received on subscriptions receivable 2,441,556
Issuance of preferred stock, including common stock issued
as a placement fee, net of issuance costs 30,823,147
Issuance of common stock for 1995 employer 401(k)
matching contribution 160,598
Conversion of preferred stock, including accrued
dividends and interest of $782,602 788,687
Conversion of convertible debentures 145,606
Redemption of convertible debentures (41,530)
Value ascribed to convertible debentures 2,757,860
Redemption of preferred stock (3,123,152)
Exercise of underwriter's warrants 5,000
Exercise of stock options in majority controlled
subsidiary 50,000
Issuance of common stock for conversion of debentures at
Tissue Technologies, Inc. 1,027,156
Issuance of common stock for minority interest in
Star Medical subsidiary 1,749,723
Issuance of common stock in exchange for license
rights 370,143
Issuance of common stock for acquisition of
Dermascan, Inc. 490,000
Issuance of common stock for investment banking and merger
and acquisition consulting services 476,724
Compensation expense related to warrants issued to
non-employees under SFAS No. 123 532,758
Return of escrowed shares --
Amortization of deferred financing costs (77,683)
Unrealized loss on marketable securities (342,500)
Preferred stock dividends (1,242,751)
Net loss (37,863,792)
------------
BALANCE, DECEMBER 31, 1996 $ 38,076,591
=== ==== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
-----------------------------------------------------------------------
Number $0.01 Number $0.01 Number
of Shares Par Value of Shares Par Value of Shares Cost
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 18,151 $182 30,596,812 $305,968 (200,000) $(1,211,757)
Sale of common stock pursuant to warrants,
options and Employee Stock Purchase Plan -- -- 815,101 8,151 -- --
Reduction in subscriptions receivable -- -- -- -- -- --
Sale of preferred stock, net of issuance costs of
approximately $1,000,000 16,000 160 -- -- -- --
Issuance of common stock for 1996 employer 401(k)
matching contribution -- -- 87,441 874 -- --
Conversion and redemption of preferred stock (17,754) (178) 6,139,841 61,399 -- --
Conversion of convertible debentures and issuance
of common stock to an investor -- -- 7,464,961 74,650 -- --
Issuance of common stock for investment banking, merger
and acquisition and consulting services -- -- 20,000 200 -- --
Value ascribed to the discount feature of
convertible debentures issued -- -- 413,109 4,131 -- --
Unrealized gain on marketable securities -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Guaranteed value of common stock associated with
Dermascan acquisition -- -- -- -- -- --
Issuance of common stock for technology -- -- 255,320 2,553 -- --
Purchase of stock for treasury -- -- -- -- (145,000) (427,102)
Gain related to the issuance of common stock by
Nexar Technologies, Inc. -- -- -- -- -- --
Value ascribed to warrant to purchase common
stock issued to Coherent, Inc. -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 16,397 $164 45,792,585 $457,926 (345,000) $(1,638,859)
======================================================================
</TABLE>
<TABLE>
<CAPTION>
Additional Unrealized (Loss)
Paid-in Accumulated Gain on Marketable Subscriptions
Capital Deficit Securities Receivable
----------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $104,900,551 $(64,971,200) $(342,500) $(604,653)
Sale of common stock pursuant to warrants,
options and Employee Stock Purchase Plan 1,606,083 -- -- --
Reduction in subscriptions receivable -- -- -- 604,653
Sale of preferred stock, net of issuance costs of
approximately $1,000,000 14,999,840 -- -- --
Issuance of common stock for 1996 employer 401(k)
matching contribution 317,280 -- -- --
Conversion and redemption of preferred stock (3,926,317) -- -- --
Conversion of convertible debentures and issuance
of common stock to an investor 16,935,713 -- -- --
Issuance of common stock for investment banking, merger
and acquisition and consulting services 52,925 -- -- --
Value ascribed to the discount feature of
convertible debentures issued 3,750,812 -- -- --
Unrealized gain on marketable securities -- -- 342,500 --
Preferred stock dividends -- (1,584,406) -- --
Guaranteed value of common stock associated with
Dermascan acquisition (216,562) -- -- --
Issuance of common stock for technology 1,146,388 -- -- --
Purchase of stock for treasury -- -- -- --
Gain related to the issuance of common stock by
Nexar Technologies, Inc. 7,409,866 -- -- --
Value ascribed to warrant to purchase common
stock issued to Coherent, Inc. 380,000 -- -- --
Net loss -- (85,803,891) -- --
----------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $147,356,579 $(152,359,497) $ -- $ --
==========================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholder
Equity (Deficit)
----------------
<S> <C>
BALANCE, DECEMBER 31, 1996 $38,076,591
Sale of common stock pursuant to warrants,
options and Employee Stock Purchase Plan 1,614,234
Reduction in subscriptions receivable 604,653
Sale of preferred stock, net of issuance costs of
approximately $1,000,000 15,000,000
Issuance of common stock for 1996 employer 401(k)
matching contribution 318,154
Conversion and redemption of preferred stock (3,865,096)
Conversion of convertible debentures and issuance
of common stock to an investor 17,010,363
Issuance of common stock for investment banking, merger
and acquisition and consulting services 53,125
Value ascribed to the discount feature of
convertible debentures issued 3,754,943
Unrealized gain on marketable securities 342,500
Preferred stock dividends (1,584,406)
Guaranteed value of common stock associated with
Dermascan acquisition (216,562)
Issuance of common stock for technology 1,148,941
Purchase of stock for treasury (427,102)
Gain related to the issuance of common stock by
Nexar Technologies, Inc. 7,409,866
Value ascribed to warrant to purchase common
stock issued to Coherent, Inc. 380,000
Net loss (85,803,891)
------------
BALANCE, DECEMBER 31, 1997 $(6,183,687)
=== ==== ============
</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 STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-----------------------------------------------
Number $0.01 Number
of Shares Par Value of Shares
----------------------------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 16,397 $ 164 45,792,585
Sale of common stock pursuant to warrants, options and Employee
Stock Purchase Plan -- -- 192,211
Issuance of common stock for 1997 employer 401(k) matching contribution -- -- 311,887
Conversion of preferred stock (5,888) (59) 6,891,682
Conversion of convertible debentures -- -- 7,035,662
Issuance of common stock net of investment banking fees -- -- 10,200,000
Redemption of preferred stock (3,516) (36) --
Value ascribed to warrants issued to investment banker -- -- --
Common stock issued for advisory services -- -- 100,000
Costs incurred related to the issuance of common stock -- -- --
Preferred stock dividends and penalties -- -- --
Net loss -- -- --
------------- ------------- -----------
BALANCE, DECEMBER 31, 1998 6,993 $ 69 70,524,027
============= ============= ===========
</TABLE>
<TABLE>
Common Stock Treasury Stock
----------------------------------------------------
$0.01 Number
Par Value of Shares Cost
----------------------------------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 457,926 (345,000) ($ 1,638,859)
Sale of common stock pursuant to warrants, options and Employee
Stock Purchase Plan 1,923 -- --
Issuance of common stock for 1997 employer 401(k) matching contribution 3,118 --
Conversion of preferred stock 68,917 --
Conversion of convertible debentures 70,356 -- --
Issuance of common stock net of investment banking fees 102,000 -- --
Redemption of preferred stock -- -- --
Value ascribed to warrants issued to investment banker -- -- --
Common stock issued for advisory services 1,000 -- --
Costs incurred related to the issuance of common stock -- -- --
Preferred stock dividends and penalties -- -- --
Net loss -- -- --
------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 $ 705,240 (345,000) ($ 1,638,859)
============= ============= =============
</TABLE>
<TABLE>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity (Deficit)
---------------------------------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 147,356,579 ($152,359,497) ($ 6,183,687)
Sale of common stock pursuant to warrants, options and Employee
Stock Purchase Plan 64,208 -- 66,131
Issuance of common stock for 1997 employer 401(k) matching contribution 251,163 -- 254,281
Conversion of preferred stock 583,310 -- 652,168
Conversion of convertible debentures 6,368,820 -- 6,439,176
Issuance of common stock net of investment banking fees 9,738,000 -- 9,840,000
Redemption of preferred stock (3,615,522) -- (3,615,558)
Value ascribed to warrants issued to investment banker 171,000 -- 171,000
Common stock issued for advisory services 99,000 -- 100,000
Costs incurred related to the issuance of common stock (283,125) -- (283,125)
Preferred stock dividends and penalties -- (1,312,426) (1,312,426)
Net loss -- (12,591,423) (12,591,423)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 $ 160,733,433 ($166,263,346) ($ 6,463,463)
============= ============= =============
</TABLE>
F-8
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Years Ended December 31,
1996 1997 1998
--------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(37,863,792) $(85,803,891) $(12,591,423)
Less: Net Loss from Discontinued Operations (17,065,534) (27,434,812) (2,624,180)
------------ ------------ ------------
Net Loss from Continuing Operations (20,798,258) (58,369,079) (9,967,243)
------------ ------------ ------------
Adjustments to reconcile net loss from continuing operations to net cash
used in operating activities-
Depreciation and amortization 2,343,013 2,246,412 2,676,651
Restructuring and asset write-off costs 3,057,808 12,983,000 (131,310)
Write-off of in-process research and development 57,212 -- --
Write-off of intangible assets 631,702 -- --
Loss on sale of wholly-owned subsidiary -- 165,845 --
Write-off of deferred financing costs associated with -- -- --
redemption of convertible debentures 201,500 27,554 --
Valuation allowances for notes and investments -- 1,035,912 --
Accrued interest receivable on note -- -- --
and subscription receivable (568,917) -- --
Foreign currency exchange gain (446,596) (651,970) --
Non-cash interest expense related to debt 163,680 5,473,077 63,652
Non-cash compensation related to common stock and warrants 836,982 205,238 171,000
Realized gain on marketable securities (835,197) (577,969) --
Unrealized (gain) loss on marketable securities (1,198,174) 669,293 (703,211)
Changes in assets and liabilities,
Purchases of marketable securities (10,355,055) (152,938) --
Net sale of marketable securities 10,244,044 2,234,436 2,152,537
Accounts receivable (82,025) (1,809,371) (7,689,441)
Inventories (4,661,443) (3,390,396) (704,868)
Other current assets (1,514,858) (1,005,781) 1,097,553
Accounts payable 1,243,161 1,378,637 2,402,763
Accrued liabilities 4,727,008 3,546,543 639,934
Deferred revenue 35,773 2,948,247 (1,140,599)
------------ ------------ ------------
Net cash used in operating activities (16,918,640) (33,043,310) (11,132,582)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (3,180,112) (5,777,446) (403,189)
Increase in other assets (1,176,527) (95,830) (19,628)
Loans to related parties (7,338,625) (1,250,000) --
Loans to unrelated parties (2,236,531) -- --
Payments received on loans to related parties 9,322,284 941,288 --
Guaranteed value associated with Dermascan acquisition -- (216,562) --
Net proceeds from notes receivable -- -- --
Investment in nonmarketable securities (2,077,054) (1,057,631) --
------------ ------------ ------------
Net cash used in investing activities (6,686,565) (7,456,181) (422,817)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-9
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
Years Ended December 31,
1996 1997 1998
----------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures 14,169,441 16,715,169 --
Proceeds from notes payable -- 3,500,000 --
Deferred financing costs incurred related to convertible debentures (1,365,217) -- --
Redemption of convertible debentures (930,000) (196,000) (2,196,667)
Payments of notes payable and capital lease obligations (260,224) (4,856,479) 3,010,817
Proceeds from issuance of common stock 13,715,287 1,462,121 9,840,000
Proceeds from exercise of warrants, stock options
and Employee Stock Purchase Plan -- -- 66,131
Issuance of preferred stock 30,823,147 15,000,000 --
Purchase of treasury stock -- (427,102) --
Payment of contingent note payable (500,000) -- --
Cost incurred in connection with the issuance of common stock -- -- (283,125)
Redemption of preferred stock, including accrued dividends of $71,223
and $771,876 in 1996 and 1998, respectively (3,194,375) -- (4,387,434)
Proceeds from line of credit -- -- 1,000,000
Payments received on subscription receivable 2,009,592 -- --
Deferred costs (932,661) -- --
============ ============= ============
Net cash provided by financing activities 53,534,990 31,197,709 7,049,722
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,929,785 (9,301,782) (4,505,677)
NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS (30,073,633) 12,676 3,377,095
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 12,436,254 12,292,406 3,003,300
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 12,292,406 $ 3,003,300 $ 1,874,718
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 280,659 $ 534,037 $ 1,094,759
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Conversion of convertible debentures and related accrued
interest, net of financing fees $ 1,172,762 $ 17,010,363 $ 6,439,176
============ ============ ============
Subscription received in connection with warrant
exercises $ 1,057,500 $ -- $ --
============ ============ ============
Conversion of preferred stock $ 788,687 $ 414,904 $ 652,168
============ ============ ============
Issuance of common stock for purchase of technology
related to discontinued operations $ -- $ 1,148,941 $ --
============ ============ ============
Exchange of preferred stock for investment in a
discontinued operation $ -- $ (4,280,000) $ --
============ ============ ============
Investment banking and consulting fees for services related
to the issuance of common stock and convertible debentures $ 709,224 $ 53,125 $ --
============ ============ ============
Issuance of common stock for employer 401(k)
matching contribution $ 160,598 $ 318,154 $ 254,281
============ ============ ============
Issuance of common stock for minority interest
in Star Medical Technologies subsidiary $ 1,749,723 $ -- $ --
============ ============ ============
Issuance of common stock for advisory services performed
in 1997 $ -- $ -- $ 100,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-10
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND OPERATIONS
Palomar Medical Technologies, Inc. and subsidiaries ("Palomar" or the
"Company") are engaged in the commercial sale and development of cosmetic and
medical laser systems and services. During the year ended December 31, 1997, the
Company formed and began execution of a plan to dispose of its electronics
segment (see Note 2). The Company substantially completed the divestiture
program in May of 1998.
Some of the Company's medical laser products are in various stages of
development; and, accordingly, the success of future operations is subject to a
number of risks similar to those of other companies with products in similar
stages of development. Principal among these risks are the successful
development and marketing of the Company's products, obtaining regulatory
approval, the need to achieve profitable operations, competition from substitute
products and larger companies, the need to obtain adequate financing to fund
future operations and dependence on key individuals.
The Company has incurred significant losses since inception. The Company
continues to seek additional financing from issuances of common stock and/or
other potential sources including the pending sale of its Star Medical
Technologies, Inc. ("Star") to Coherent, Inc. ("Coherent), as discussed below,
in order to fund its operations over the next twelve months. The Company has
financed current operations, expansion of its core business and outside
short-term financial investments primarily through the private sale of debt and
equity securities of the Company. Net cash provided by financing activities
totaled approximately $53,535,000, $31,198,000 and $7,050,000 for the years
ended December 31, 1996, 1997 and 1998, respectively. If the Company does not
complete the sale of Star to Coherent the Company believes that it will require
additional financing during the next twelve-month period to continue to fund
operations and growth. This additional financing could be in the form of sales
of securities to private investors which are generally sold at a discount to the
publicly quoted market price for similar securities. It has been the Company's
experience that private investors require that the Company make its best effort
to register these securities for resale to the public at some future time.
On December 7, 1998, the Company entered into a Agreement and Plan of
Reorganization (the "Agreement") with Coherent to sell all of the issued and
outstanding common stock of Star, its 99.96% majority-owned subsidiary, to
Coherent. The Company currently owns substantially all of the issued and
outstanding common shares of Star. However, options outstanding granted to
Palomar and employees of Star to purchase shares of Star's common stock remain
outstanding. When all of the outstanding options under Star's Stock Option Plan
have been exercised, the Company will own 82.46% of Star's common stock and the
employees will collectively own 17.54%. See Note 7. Under the terms of the
Agreement, the selling price of Star is $65 million. In addition, the Company
will receive an ongoing royalty of 7.5% from Coherent on the sale of any
products by Coherent that use certain patents currently licensed by the Company
on an exclusive basis from Massachusetts General Hospital. See Note 12(b). This
sale is subject to the approval of the stockholders of Palomar.
The Agreement may only be terminated by (i) mutual consent of the Company,
Star and Coherent, or (ii) Coherent, if Palomar's Board of the Company approves
a superior proposal to sell Star to a different party, or (iii) either party
after May 1, 1999. The Company anticipates that this sale will close by May 1,
1999, so long as the Company obtains stockholder approval.
(2) DISCONTINUED OPERATIONS
During the fourth quarter of 1997, the Company's Board of Directors
approved a plan to dispose of the electronics business segment. The electronics
segment consist of the manufacture and sale of personal computers, high-density
flexible electronics circuitry and memory modules. The Company substantially
completed this plan in May of 1998.
F-11
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Nexar Technologies, Inc. ("Nexar") was included in the electronics business
segment. Nexar is an early-stage company that manufactures, markets and sells
personal computers. On April 14, 1997, Nexar completed an initial public
offering of 2,500,000 shares at $9.00 per share, for net proceeds of
approximately $19,593,000. The Company recorded an increase in stockholders'
equity of $7,409,866, in accordance with Staff Accounting Bulletin ("SAB") No.
51 as a result of Nexar's initial public offering. The Company's accounting
policy for gains arising under SAB No. 51 is to recognize these gains in its
statement of operations to the extent that such gains are realizable at the date
of each transaction.
During the fourth quarter of 1997, the Company reduced its ownership in
Nexar through the sale of common stock to private investors. At December 31,
1997, the Company beneficially owned 3,746,343 shares of Nexar's common stock,
representing approximately a 36% ownership. As of December 31, 1998 the Company
beneficially owned 2,406,080 shares of Nexar's common stock, representing
approximately a 19% ownership interest and had no other significant obligations
related to Nexar, other than the guaranty to GFL Advantage Fund Limited ("GFL")
discussed below. The Company has been actively trying to sell its remaining
shares of Nexar common stock; however, the Company may not be successful since
Nexar filed in the United States Bankruptcy Court a petition for reorganization
under Chapter 11 of Title 11 of the United States Code on December 17, 1998.
Furthermore, Nexar has been delisted from The Nasdaq Stock Market due to Nexar's
failure to satisfy Nasdaq minimum listing requirements.
The Company has accounted for its investment in Nexar as a discontinued
operation using the equity method. During 1998, the Company recorded a charge to
discontinued operations of $1,524,966 as a result of management's decision to
write-down the carrying value of its investment in Nexar. During the years ended
December 31, 1996 and 1997, the Company recognized gains on the disposition of
shares of Nexar common stock of $3,830,000 and $6,221,689, respectively. These
amounts are included in "Gain (Loss) on Dispositions, net" in the Consolidated
Statements of Operations.
The following is the summarized financial information for Nexar:
<TABLE>
December 31,
1996 1997
------------------------- ------------------------
<S> <C> <C>
Current Assets $16,966,851 $17,810,564
Non-Current Assets 2,622,270 2,098,495
Current Liabilities 6,542,296 7,886,594
Non-Current Liabilities 22,817,998 883,613
Year Ended December 31,
1996 1997
------------------------- ------------------------
Net Revenues $18,695,364 $33,608,063
Gross Profit 2,302,881 740,151
Net Loss (7,510,139) (13,346,380)
</TABLE>
On December 31, 1997 the Company entered into an Exchange Agreement and
sold 500,000 shares of Nexar's common stock to GFL for $2,000,000. Under the
terms of the Exchange Agreement, Palomar guaranteed GFL a minimum selling price
of $5.00 per share with respect to 400,000 shares of Nexar's common stock over a
two-year time period. The Company is obligated to pay GFL on January 1, 2000 the
difference between $5.00 and the price at which GFL sells the shares of Nexar's
common stock. As of December 31, 1998, the deferred liability related to this
transaction totaled $1,680,171 and represents the total amount due to GFL after
GFL sold their 400,000 common shares of Nexar stock.
F-12
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The other entities that were included in the electronics business segment
are Dynaco Corp. ("Dynaco") and Dynaco's wholly owned subsidiaries Comtel
Electronics, Inc. ("Comtel") and Dynamem, Inc. ("Dynamem"). On December 9, 1997,
the Company entered into a two-phase stock purchase agreement with Biometric
Technologies Corporation ("BTC"). BTC was formed jointly by Dynaco's President
and its Chairman of the Board. The first phase was consummated on December 9,
1997 and consisted of the sale of all of the issued and outstanding common stock
of Comtel and Dynamem in exchange for $3,654,000 payable in two installments.
The first installment was a $850,000 unsecured promissory note that was due on
February 15, 1998. The second installment was a $2.8 million unsecured
promissory note due in forty-eight monthly installments, beginning February 1,
1999. This promissory note was fully reserved by the Company during 1997, as its
ultimate collectibility was believed to be uncertain. BTC did not make the first
installment on February 1, 1998 and on October 7, 1998 the Company and BTC
agreed to reduce the principal balances of the $850,000 note and the $2.8
million note to a total of $1,000,000. BTC paid $500,000 during 1998 and the
balance is due April 5, 1999. The amended note is guaranteed by the principal
shareholders of BTC.
As part of phase I, the Company entered into a Loan and Subscription
Agreement with a creditor of Comtel for $3,233,000. This promissory note
represents the settlement of amounts owed the creditor by Comtel and guaranteed
by Palomar. Principal and interest payments are being made over twenty-four
months, beginning December 31, 1997 and interest will accrue at the bank's prime
rate (7.75% at December 31, 1998) plus 2.25%. This promissory note has been
collateralized by 3,250,000 shares of the Company's common stock that are held
in escrow, are not entitled to vote and are not considered outstanding. The
Company also guaranteed up to $2,500,000 of Comtel's borrowings from this
creditor until November 30, 1999. The stockholders of BTC have personally
guaranteed to the Company payment for any amounts borrowed under this line of
credit in excess of approximately $1,500,000 in the event that the Company is
obligated to honor this guarantee.
In connection with the disposition of Comtel, the Company also restructured
all assets and investments related to a significant customer of Comtel into a
$4,000,000 note receivable. This receivable was fully reserved by the Company
during 1997, as its ultimate collectibility is uncertain. To date, no amounts
have been received under this restructured note receivable from the customer,
nor does the Company anticipate receiving any amounts from this note receivable
in the foreseeable future.
In phase II, BTC agreed to purchase all of the issued and outstanding stock
of Dynaco. The phase II purchase price was $5,346,000, of which $2,673,000 was
to be paid in cash and $2,673,000 was to be paid in BTC common stock of equal
value. Alternatively, the Company could have elected to have the entire phase II
purchase paid in cash at a value of $3,500,000. During phase II BTC had the
option of selling Dynaco to a third party if agreed to by the Company and BTC.
Phase II was required to be completed by June 30, 1998. Consistent with the
terms of the agreement with BTC, the Company entered into a Stock Purchase
Agreement with Quick Turn Circuits, Inc. ("QTC") on May 26, 1998 pursuant to
which QTC purchased 100% of the issued and outstanding shares of common stock of
Dynaco for $3,200,000.
As of December 31, 1997, the Company recognized a loss of approximately
$4,148,000 related to the phase I and phase II dispositions. These charges have
been netted in "Gain (Loss) on Dispositions, net" in the accompanying
Consolidated Statements of Operations. As of December 31, 1997, the Company
accrued for the estimate of Dynaco's 1998 operating loss through June 30, 1998
of approximately $850,000. Through the date of disposition of Dynaco, the
Company recognized additional operating losses totaling $1,090,885. During 1998,
the Company recorded a loss on disposition of $8,329 related to the ultimate
sale of Dynaco to QTC.
F-13
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Pursuant to Accounting Principles Board ("APB") Opinion No. 30, REPORTING
THE RESULTS OF OPERATIONS REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A
BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND
TRANSACTIONS, ("APB No. 30") the consolidated financial statements of the
Company have been reclassified to reflect the dispositions of the aforementioned
subsidiaries that comprise the electronics segment. Accordingly, the assets and
liabilities, revenues and expenses, and cash flows of the electronics segment
have been excluded from the respective captions in the Consolidated Balance
Sheets, Consolidated Statements of Operations and Consolidated Statements of
Cash Flows. The net assets (liabilities) of these entities have been reported as
"Net Assets (Liabilities) of Discontinued Operations" in the accompanying
Consolidated Balance Sheets; the net operating losses of these entities have
been reported as "Net Loss from Discontinued Operations" in the accompanying
Consolidated Statements of Operations; the net cash flows of these entities have
been reported as "Net Cash (Used in) Provided by Discontinued Operations" in the
accompanying Consolidated Statements of Cash Flows.
Summarized financial information for the discontinued operations were as
follows:
<TABLE>
<S> <C> <C>
December 31,
1997 1998
-------------- --------------
Current Assets $5,683,694 $ -
Total Assets 11,506,145 -
Current Liabilities 5,375,353 -
Total Liabilities 5,680,543 (1,680,171)
-------------- --------------
Net Assets (Liabilities) of Discontinued
Operations $5,825,602 $(1,680,171)
============== ==============
</TABLE>
The assets and liabilities of the discontinued operations as of December
31, 1997 represent the financial position of Dynaco and the Company's liability
associated with the sale of Nexar common stock to GFL. The net liability as of
December 31, 1998 represents the Company's liability associated with the sale of
Nexar common stock to GFL.
<TABLE>
<S> <C> <C> <C>
Year Ended December 31, Period Ended May 26,
1996 1997 1998
---------------- ---------------- ------------------------
Revenues $52,491,572 $57,663,080 $6,471,701
Net Loss from Discontinued Operations $(17,065,534) $(27,434,812) $(2,624,180)
</TABLE>
The loss from operations for all of the discontinued operations from the
measurement date, October 1, 1997, through the date of disposition for Comtel
and Dynamem or December 31, 1997 for Dynaco, total approximately $3,405,000.
Dynaco's loss from operations for the period beginning January 1, 1998 and
ending May 26, 1998, the date of disposition, totaled $1,940,885.
F-14
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies described below and elsewhere in the Notes to
Consolidated Financial Statements.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the consolidated
financial position, results of operations and cash flows of the Company and all
wholly owned and majority-owned subsidiaries including Star, a 99.96% majority
owned subsidiary as of December 31, 1998. Nexar, a discontinued entity, has been
accounted for in consolidation under the equity method in accordance with APB
No. 30 as described in Note 2. All other investments are accounted for using the
cost method as the Company owns less than 20% of the common stock outstanding
for these investments. All intercompany transactions have been eliminated in
consolidation.
(B) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) INVESTMENTS
The Company accounts for marketable securities in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under SFAS No. 115, securities that
the Company has the positive intent and ability to hold to maturity are reported
at amortized cost and classified as held-to-maturity. There were no
held-to-maturity securities as of December 31, 1997 and 1998. Securities
purchased to be held for indefinite periods of time and not intended at the time
of purchase to be held until maturity are reported at fair market value and
classified as available-for-sale securities. Unrealized gains and losses related
to available-for-sale securities are included as a separate component of
stockholders' equity. There were no available-for-sale securities as of December
31, 1997 and 1998. Securities that are bought and held principally for the
purpose of selling them in the near term are reported at fair market value and
classified as trading securities. Realized and unrealized gains and losses
related to trading securities are included in the Consolidated Statements of
Operations. As of December 31, 1997, marketable securities consisted of American
Material & Technologies Corporation, held for trading purposes. As of December
31, 1998, the Company did not have any investments in marketable securities.
(D) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Work-in-process and finished goods inventories consist of material,
labor and manufacturing overhead. At December 31, 1997 and 1998, inventories
consist of the following:
<TABLE>
<S> <C> <C>
December 31,
1997 1998
--------------- ----------------
Raw materials $2,928,350 $2,478,289
Work-in-process 727,284 1,330,822
Finished goods 1,055,840 1,607,231
--------------- ----------------
$4,711,474 $5,416,342
=============== ================
</TABLE>
F-15
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Included in finished goods inventory at December 31, 1998 is approximately
$938,000 of service inventory and finished good test units currently being
evaluated by medical professionals.
(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>
Estimated
Asset Classification Useful Life
------------------------------------ ----------------------
Machinery and equipment 3-8 Years
Furniture and fixtures 5 Years
Leasehold improvements Term of Lease
</TABLE>
At December 31, 1997 and 1998, property and equipment consist of the
following:
<TABLE>
<S> <C> <C>
December 31,
1997 1998
---------------- ----------------
Machinery and equipment $6,328,442 $6,022,320
Furniture and fixtures 1,018,931 1,120,450
Leasehold improvements 480,453 567,216
---------------- ----------------
7,827,826 7,709,986
Less: Accumulated depreciation
and amortization 1,372,240 4,395,899
---------------- ----------------
$6,455,586 $3,314,087
================ ================
</TABLE>
Included in machinery and equipment as of December 31, 1997 and 1998 is
approximately $3,470,000 and $2,726,000, respectively, of equipment manufactured
by the Company and used in its service business.
(F) COST IN EXCESS OF NET ASSETS ACQUIRED
The costs in excess of net assets for acquired businesses are being
amortized on a straight-line basis over 5 to 7 years. Amortization expense for
the years ended December 31, 1996, 1997, and 1998 amounted to approximately
$536,000, $554,000 and $602,000 respectively, and is included in general and
administrative expenses in the Consolidated Statements of Operations.
The Company accounts for long-lived assets in accordance with SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. Under SFAS No. 121, the Company is required to assess the
valuation of its long-lived assets, including cost in excess of net assets
acquired, based on the estimated future cash flows to be generated by such
assets. The Company has assessed the realizability of its long-lived assets as
of December 31, 1998 and believes them to be realizable.
(G) DEFERRED FINANCING COSTS
During the year ended December 31, 1996, the Company incurred financing
costs related to several issuances of convertible debentures. Deferred financing
costs are amortized by a charge to interest expense over the period that the
debt is outstanding (see Note 6).
F-16
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(H) REVENUE RECOGNITION
The Company recognizes product revenue upon shipment. The Company's sales
of its product do not include any rights of return. Provisions are made at the
time of revenue recognition for any applicable warranty costs expected to be
incurred. Revenues from services, which have not been significant to date, are
recognized as the services are provided.
(I) SIGNIFICANT CUSTOMERS
For the years ended December 31, 1997 and 1998, Coherent acted as the sales
agent for products sold to the Company's customers that represented 11% and 89%
of revenues and 51% and 89% of accounts receivable, respectively. Coherent is
the Company's worldwide distributor of laser systems (see Note 12(d)).
International sales (including sales for which Coherent was the sales agent) for
the years ended December 31, 1996, 1997 and 1998 were approximately 22%, 24% and
39% respectively, of total revenue.
(J) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as
incurred.
(K) NET LOSS PER COMMON SHARE
Basic net loss per share was determined by dividing net loss by the
weighted average shares of common stock outstanding during the year. Diluted net
loss per share is the same as basic loss per share because the Company's
potentially dilutive securities, primarily stock options, warrants, redeemable
preferred stock and convertible debentures are antidilutive. The calculation of
the Company's net loss per common share from continuing operations for the years
ended December 31, 1996, 1997 and 1998 are as follows:
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1996 1997 1998
---------------- --------------- ----------------
Net loss from continuing operations $(20,798,258) $(58,369,079) $(9,967,243)
Preferred stock dividends (1,242,751) (1,584,406) (1,312,426)
Amortization of value ascribed to preferred
stock conversion discount --- (2,823,529) ---
---------------- --------------- ----------------
Adjusted net loss from continuing operations $(22,041,009) $(62,777,014) $(11,279,669)
================ =============== ================
Basic and diluted net loss per common share
from continuing operations $(0.84) $(1.79) $(0.18)
================ =============== ================
Weighted average number of common shares
outstanding 26,166,538 35,105,272 62,868,696
================ =============== ================
</TABLE>
Net loss from discontinued operations per common share is computed by
dividing the net loss from discontinued operations by the weighted average
number of common shares outstanding for the period.
In 1996, 1997 and 1998, 16,140,688, 32,358,446 and 28,451,024 weighted
average common equivalent shares, respectively, were not included in the diluted
weighted average shares outstanding, as they were antidilutive.
F-17
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(L) CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that subject the Company to credit risk
consist primarily of cash and trade accounts receivable. The Company places its
cash in established financial institutions. The Company has no significant
off-balance-sheet concentration of credit risk such as foreign exchange
contracts, options contracts or other foreign hedging arrangements. To reduce
its accounts receivable risk, the Company relies on its worldwide distributor to
assess the financial strength of its end customers and, as a consequence,
believes that its accounts receivable credit risk exposure is limited. The
Company maintains an allowance for potential credit losses. The Company's
accounts receivable credit risk is not concentrated within any one geographic
area. The Company has not experienced significant losses related to receivables
from any individual customers or groups of customers in any specific industry or
by geographic area. Due to these factors, no additional credit risk beyond
amounts provided for collection losses is believed by management to be inherent
in the Company's accounts receivable.
(M) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of an estimate of the fair value of certain financial
instruments. At December 31, 1997 and 1998, financial instruments consisted
principally of convertible debentures and preferred stock financings. The fair
value of financial instruments pursuant to SFAS No. 107 approximated their
carrying values at December 31, 1997 and 1998. Fair values have been determined
through information obtained from market sources and management estimates.
(N) COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income/loss and its components in the financial
statements. The components of the Company's comprehensive loss are as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1996 1997 1998
---------------- --------------- ----------------
Net loss from continuing operations $(20,798,258) $(58,369,079) $(9,967,243)
Unrealized (loss) gain on marketable securities (342,500) 342,500 ---
---------------- --------------- ----------------
Comprehensive loss from continuing operations $(21,140,758) $(58,026,579) $(9,967,243)
================ =============== ================
</TABLE>
(O) RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements to conform with the current year's presentation.
F-18
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4) ASSET WRITE-OFF AND RESTRUCTURING
The Company, in accordance with applicable accounting principles,
determined during the third quarter of 1997 that certain investments' and notes
receivables' carrying values would not be realizable due to the Company's change
in strategy to divest of its investments in non-core businesses. These
investments did not qualify for discontinued operations in accordance with APB
No. 30. During 1997, the Company fully reserved for all such investments
resulting in a charge of approximately $10,283,000 to continuing operations, as
follows:
<TABLE>
<S> <C>
Description Carrying Amount
----------- ---------------
Notes Receivable $ 2,250,000
Investments in Non-Core Businesses 8,033,000
-----------
$10,283,000
-----------
-----------
</TABLE>
The write-offs of the notes receivable and investment related to a number
of strategic investments and loans in non-medical businesses that the Company
made during 1996 and 1997. The notes receivable were principally mezzanine
investments whereby the Company loaned money and, in some cases, received equity
in early stage companies as a condition to making these loans. During 1996 and
1997, the Company also made other equity investments in companies that at the
time were believed to be strategic to the Company's business or had the
potential to yield a higher than average financial return. During 1997, based on
a number of factors, including the Company's change in strategy, the book value
of these companies and their poor financial performance to date, it became
apparent to management that there was significant uncertainty as to the ultimate
realizability of these investments and notes receivable. Accordingly, the
Company wrote off these investments and notes receivable in 1997.
In the third quarter of 1997, the Company recognized a restructuring charge
of $2,700,000 based on the decision to discontinue certain medical product and
service business units and consolidate others. The majority of these amounts
relate to severance benefits for significant reductions in staffing for all
areas of the Company, including the elimination of essentially all of the sales
and marketing function as a result of the Coherent transaction (Note 12(d)).
Management's plan specifically identified 33 employees who were targeted for
termination almost exclusively in selling, general and administrative functions.
Actual employees terminated as a result of this restructuring totaled 45.
All expenses accounted for as restructuring charges were in accordance with
the criteria set forth in EMERGING TASK FORCE ISSUE 94-3, LIABILITY RECOGNITION
FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING), and are exclusive of the
charges related to discontinued operations, as disclosed in Note 2. Through
December 31, 1998, the Company paid out $2,289,690 of severance costs and has a
remaining liability of $279,000 to two individuals that will be paid out in 1999
resulting in total restructuring costs incurred of $2,568,690. Accordingly, the
Company reversed the balance of this restructuring accrual of $131,310 in its
consolidated statement of operations during the fourth quarter of fiscal 1998.
As part of this restructuring, the Company disposed of the following
medical businesses:
(A) TISSUE TECHNOLOGIES, INC.
On December 16, 1997, the Company sold assets and certain liabilities of
Tissue Technologies, Inc. ("Tissue Technologies"), a manufacturer of a
dermatological laser product for the treatment of wrinkles, to a newly formed
medical laser manufacturer. This medical laser manufacturer was formed by former
executives of Tissue Technologies. In exchange, the Company received a $500,000
note receivable due in monthly installments over the 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%
F-19
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
of the common stock of the newly formed company at $.50 per share. The Company
placed zero value on the equity position in the newly formed company.
(B) PALOMAR TECHNOLOGIES, LTD.
On January 1, 1998 the Company sold substantially all of the business
assets and liabilities of Palomar Technologies, Ltd., a foreign manufacturer, to
a publicly-traded company. The Company received cash of approximately $200,000
and was relieved of obligations related to the building lease and all employment
agreements. This transaction did not have a material effect on the Company's
operations for the year ended December 31, 1997.
(5) INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with the provisions of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. At
December 31, 1998, the Company had available, subject to review and possible
adjustment by the Internal Revenue Service, a federal net operating loss
carryforward of approximately $101,000,000 to be used to offset future taxable
income, if any. This net operating loss carryforward will begin to expire in
2003. The Internal Revenue Code contains provisions that limit the net operating
loss carryforwards due to changes in ownership, as defined by the Internal
Revenue Code. The Company believes that its net operating loss carryforwards
will be limited due to its reorganization in 1991 and subsequent stock
offerings. The Company has completed an analysis of its availability to utilize
its operating loss in connection with the anticipated sale of Star to Coherent
(See Note 1). The Company estimates that its has net operating losses of
approximately $75,000,000 that are not subject to limitation under the Internal
Revenue Code. The Company has a net deferred tax asset of approximately
$40,400,000, comprised mainly of the net operating tax carryforwards discussed
above, and the tax effect of certain expenses and reserves not currently
deductible. However, the Company has placed a full valuation allowance against
the deferred tax asset, due to uncertainty relating to the Company's ability to
realize the asset.
(6) LONG-TERM DEBT
At December 31, 1997 and 1998, long-term debt consisted of the following:
<TABLE>
<S> <C> <C>
December 31,
1997 1998
--------------- ---------------
Convertible debentures $10,683,440 $2,150,000
Revolving line of credit with a bank -- 1,000,000
Note payable in connection with guarantee on behalf of discontinued
subsidiary (See Note 2) 3,233,000 2,290,041
Short-term notes payable to Coherent -- 4,000,000
Other notes payable 169,588 --
--------------- ---------------
$14,086,028 $9,440,041
Less - current maturities (1,640,465) (6,290,041)
--------------- ---------------
$12,445,563 $3,150,000
=============== ===============
</TABLE>
F-20
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONVERTIBLE DEBENTURES
The following table summarizes the issuance and conversion of the
convertible debentures for the years ended December 31, 1997 and 1998.
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Shares
Initial Amount Outstanding Issued Upon
Face December 31, Conversion
----------------------------- --------------------------
Series Value 1997 1998 1997 1998
---------------------------------------------------- -------------- -------------- ------------- ---------------- ----------
4.5% Series due October 21, 1999, 2000, 2001 $5,000,000 $100,000 $-- 1,381,264 60,809
5% Series due December 31, 2001 5,000,000 923,439 -- 2,074,992 1,160,999
5% Series due January 13, 2002 1,000,000 1,000,000 -- -- 924,029
5% Series due March 10, 2002 5,500,000 1,160,001 -- 2,794,677 1,561,064
6% Series due March 13, 2002 500,000 500,000 500,000 -- --
6%, 7% and 8% Series due September 30, 2002 7,000,000 7,000,000 1,650,000 -- 3,328,761
4.5% Series denominated in Swiss francs
due July 3, 2003 7,669,442 -- -- 914,028 --
-------------- -------------- ------------- --------------- ----------
$31,669,442 $10,683,440 $2,150,000 7,164,961 7,035,662
============== ============== ============= =============== ==========
</TABLE>
It is the Company's policy to discount convertible debentures based on the
discount conversion price and amortize the discount to operations over the
expected life of the convertible debentures, which in most cases is less than
the term of the debentures. Accordingly, the Company credits the ascribed value
for the discount features described above to additional paid-in capital. This
ascribed amount is amortized over a period to the earliest conversion date,
which is six months for the convertible debentures outstanding in 1997 and 1998.
During 1996 and 1997, the Company recorded approximately $77,000 and
$5,444,000, respectively, of interest expense related to the amortization of the
discount of convertible debentures. There was no amortization of the discount of
convertible debentures in 1998.
On March 13, 1997, the Company issued $500,000 of 6% convertible debentures
due March 13, 2002. The convertible debentures have a conversion price of
$11.00. The debentureholder may convert no more than one-third of the debenture
in any thirty-day period. The Company has accounted for these debentures at face
value.
On September 30, 1997, the Company issued $7,000,000 of convertible
debentures due September 30, 2002. The debentures bear interest at a rate of 6%
for the first 179 days, 7% for days 180-269 and 8% thereafter. The
debentureholders were also issued 413,109 shares of common stock related to this
financing. The fair market value of the common stock was $1,050,000 and this
amount is being treated as debt discount and amortized to interest expense. The
convertible debentures have a conversion price of 100% of the Company's average
stock price, as defined. In addition, the debentureholder may convert no more
than 33% of their debentures in any thirty-day period (or 34% of the debentures
in the last thirty-day period). The Company also has redemption rights related
to this financing. During the year ended December 31, 1998 the Company redeemed
$2,196,667 of these convertible debentures. This amount includes accrued
interest of $196,667.
F-21
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On July 3, 1996, the Company raised approximately $7,669,000 through the
issuance of 9,675 units in a convertible debenture financing. These units are
traded on the Luxembourg Stock Exchange and consist of a convertible debenture,
due July 3, 2002, denominated in 1,000 Swiss francs and a warrant to purchase 24
shares of the Company's common stock at $16.50 per share. The warrants are
non-detachable and may be exercised only if the related debentures are
simultaneously converted, redeemed or purchased. Interest on the convertible
debentures accrued at a rate of 4.5% per annum and was payable quarterly in
Swiss francs. The convertible debentures were convertible by the holder, or the
Company, commencing October 1, 1996 at a conversion price equal to from 100% to
77.5% of the applicable conversion price, calculated as defined. The Company
ascribed a value of $1,917,360 to the discount conversion feature of the
convertible debenture. This amount was being amortized to interest expense over
the life of the Swiss franc convertible debenture. During 1997, the Company
redeemed 300 units of this convertible debenture financing for $195,044.
On October 16, 1997, the Company brought a declaratory judgment action in
the United States District Court against certain of the Swiss franc
debentureholders. Prior to this suit, those debentureholders had alleged that
the Company was in breach of certain protective covenants and on October 22,
1997, they brought suit based on these claims. On November 13, 1997, the Company
exercised its right to convert 9,375 units into 914,028 shares of common stock
and cash of approximately $36,000. The unamortized discount totaling
approximately $1,784,000 was amortized to interest expense upon conversion. The
Company has accounted for these debentures as converted in the accompanying
financial statements. The ongoing litigation will be accounted for under SFAS
No. 5, ACCOUNTING FOR CONTINGENCIES (see Note 12(c)).
The Company incurred deferred financing costs of approximately $2,038,000
and $769,000 relating to the issuance of convertible debentures during the years
ended December 31, 1996 and 1997, respectively. These costs are reflected as
deferred financing costs in the accompanying consolidated balance sheets and are
being amortized to interest expense over the term of the related convertible
debentures. During the years ended December 31, 1996, 1997 and 1998, the Company
amortized approximately $78,000, $276,000 and $64,000 to interest expense,
respectively. Any remaining unamortized deferred financing costs are charged to
additional paid-in capital upon conversion. During the years ended December 31,
1996, 1997 and 1998, the Company charged approximately $41,000, $1,820,000 and
$374,000, respectively, of unamortized deferred financing costs to additional
paid-in-capital.
(B) REVOLVING LINE OF CREDIT WITH A BANK
The Company has a $10,000,000 revolving line of credit with a bank. This
line of credit will mature on March 31, 2000 and bears interest at the bank's
prime rate (7.75% at December 31, 1998). Borrowings under this line of credit
are secured by substantially all assets of the Company and are limited to 80% of
qualified accounts receivables. A director of Palomar has guaranteed all
borrowings under this line of credit. In connection with this guarantee the
Company issued this director 200,000 warrants with a three-year term to purchase
the Company's common stock at $1.50 per share. These warrants were valued at
approximately $69,000. This amount is being amortized to interest expense over
the term of the revolving line of credit.
(C) BRIDGE LOAN
On March 27, 1998, the Company borrowed $2,000,000 from an individual. The
Company subsequently repaid this note during 1998. Interest on this note was in
the form of a warrant to purchase 125,000 shares of common stock for $.01 per
share exercisable over five years. This warrant was valued at $171,000 using the
Black-Scholes option pricing model. The Company accounted for this warrant as a
discount to the note through additional paid-in capital and amortized the
discount to interest expense over the period that the note was outstanding.
F-22
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(D) NOTES PAYABLE TO COHERENT
On May 22 and June 22, 1998, the Company borrowed $3,000,000 and
$1,000,000, respectively, from the Company's worldwide distributor, Coherent.
These notes accrue interest at 8.5% per annum. The notes are secured by all of
the inventory owned by the Company's Star subsidiary.
Under the terms of the Loan Agreement between Coherent and the Company, in
the event that sale of Star to Coherent is not completed, the $4,000,000 of
funds borrowed by the Company from Coherent are due 90 days from the date of
termination of the Agreement to sell Star to Coherent as discussed in Note (1).
(E) FUTURE MATURITIES OF LONG-TERM DEBT
Future maturities of notes payable and convertible debentures reflected at
face value as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $6,290,041
2000 1,000,000
2001 --
2002 2,150,000
-------------
$9,440,041
=============
</TABLE>
(7) STOCKHOLDERS' EQUITY
(A) COMMON STOCK
During 1998, the Company sold 10,200,000 shares of common stock to a group
of investors for $10,200,000. In addition, the Company issued callable warrants
with a three-year term to these investors to purchase 10,200,000 shares of
common stock at an exercise price of $3.00 per share. The callable warrants are
not exercisable for the first six months after issuance and thereafter are
callable by the Company if the closing price of the Company's common stock
equals or exceeds $5.00 for ten consecutive trading days. Under the terms of
this private placement, the Company is obligated to pay the investors a fee of
5% per annum (payable quarterly) of the dollar value invested in the Company as
long as the investors continue to hold their common stock in their name at the
Company's transfer agent. During 1998, the Company paid $283,125 related to this
fee. This amount has been charged to additional paid-in capital. The Company
also paid $360,000 for investment banking fees related to the issuance of these
common shares. The Company netted this amount against the proceeds through a
reduction in additional paid-in capital.
On February 28, 1997, the Company and Nexar entered into an Asset Purchase
and Settlement agreement with a former executive of Nexar and Technovation
Computer Labs, Inc. ("Licensor"). The Licensor was affiliated with a former
officer of Nexar. Under the terms of this agreement, the Company agreed to pay
this former executive and certain of his affiliates $1,250,000 in cash and
deliver $1,500,000 worth of Palomar's common stock. In exchange, the Company and
Nexar received the rights to certain technology previously licensed to Nexar and
a complete release and settlement of all claims between this former executive
and Nexar.
F-23
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company assigned to Nexar all of its rights to the technology and
charged Nexar for the cost associated with this claim and the purchase of the
technology. Nexar recorded $1,375,000 of the consideration to settle this claim
as a litigation expense in its statement of operations for the year ended
December 31, 1996. The remaining consideration totaling $1,375,000 was recorded
as purchased technology and was being amortized by Nexar over the technology's
estimated useful life. The allocation of the purchased technology was based on
the value of anticipated royalty payments to the Licensor over the three years
ended December 31, 1999.
(B) PREFERRED STOCK
The Company is authorized to issue up to 5 million shares of preferred
stock, $.01 par value. As of December 31, 1997 and 1998, preferred stock
authorized, issued and outstanding consist of the following:
<TABLE>
<S> <C> <C>
1997 1998
---- ----
Redeemable convertible preferred stock, Series F, $.01 par value per
share Authorized, issued and outstanding - 6,000 shares
(liquidation preference of $7,072,917 at December 31, 1998) $60 $60
Redeemable convertible preferred stock, Series G, $.01 par value per
share Authorized - 10,000 shares Issued and outstanding - 2,684 shares
and 743 shares in 1997 and 1998, respectively,
(liquidation preference of $874,603 at December 31, 1998) 27 7
Redeemable convertible preferred stock, Series H, $.01 par value per
share Authorized - 16,000 shares Issued and outstanding - 7,690 shares
and 250 shares in 1997 and 1998, respectively,
(liquidation preference of $280,562 at December 31, 1998) 77 2
Total preferred stock $164 $ 69
==== =====
</TABLE>
The Series F redeemable convertible preferred stock ("Series F Preferred"),
together with any accrued but unpaid dividends, may be converted into common
stock at 80% of the average closing bid price for the ten trading days preceding
the conversion date, but in no event less than $3.00 or more than $16.00. This
conversion floor was decreased by the two parties from the original price to
$7.00. The Series F Preferred may be redeemed at the Company's option, with no
less than 10 days' and no more than 30 days' notice or when the stock price
exceeds $16.80 per share for sixty consecutive trading days, at an amount equal
to the amount of liquidation preference determined as of the applicable
redemption date. Dividends are payable quarterly at 8% per annum in arrears on
March 31, June 30, September 30 and December 31. Dividends not paid on the
payment date, whether or not such dividends have been declared, will bear
interest at the rate of 10% per annum until paid.
F-24
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Series G redeemable convertible preferred stock ("Series G Preferred"),
together with any accrued but unpaid dividends, may be converted into common
stock at 85% of the average closing bid price for the five trading days
preceding the conversion date, but in no event less than $.01. On December 31,
1997, the Company and the holder of the remaining 2,684 shares of Series G
Preferred entered into an Exchange Agreement. The conversion floor was decreased
by the two parties from the original floor to $6.00. In addition, beginning on
March 1, 1998, for any thirty-day period, the holder may exchange a limited
amount of the Series G Preferred ("exchangeability amount") and any accrued but
unpaid dividends for common stock at 85% of the average closing bid price for
the five trading days preceding the conversion date ("exchange date"). The
exchangeability amount increases as the exchange rate increases. The
exchangeability amount ranges from 268 shares of preferred stock for an exchange
rate below $2.00 to 1,072 shares of preferred stock for an exchange rate in
excess of $4.00. The Series G Preferred may be redeemed at the Company's option
at any time, with no less than 15 days' and no more than 20 days' notice, at an
amount equal to the sum of (a) the amount of liquidation preference determined
as of the applicable redemption date plus (b) $176.50. Dividends are payable
quarterly at 7% per annum in arrears on January 1, April 1, July 1 and October
1. Dividends not paid on the payment date, whether or not such dividends have
been declared, will bear interest at the rate of 12% per annum until paid.
The conversion price for the Series F and G Preferred is adjustable for
certain dilutive events, as defined. The Series F and G Preferred have a
liquidation preference equal to $1,000 per share of redeemable convertible
preferred stock, plus accrued but unpaid dividends and accrued but unpaid
interest. The Series F and G Preferred stockholders do not have any voting
rights except on matters affecting the Series F and G Preferred.
During the first and second quarters of 1997, the Company issued 16,000
shares of Series H redeemable convertible preferred stock ("Series H Preferred")
for $16,000,000 less associated financing costs of $1,000,000. The Series H
Preferred accrues dividends at rates varying from 6% to 8% per annum, as
defined. The Series H Preferred, including any accrued but unpaid dividends, may
be converted into common stock at 100% of the average stock price for the first
179 days from the closing date, 90% of the average stock price, as defined, for
the following 90 days and 85% of the average stock price, as defined,
thereafter. The conversion price is adjustable for certain dilutive events. The
holders are restricted for the first 209 days following the closing date to
converting no more than 33% of the Series H Preferred in any thirty-day period
(or 34% in the last thirty-day period). Under certain conditions, the Company
has the right to redeem the Series H Preferred. The Company has ascribed a value
of $2,823,529 to the discount conversion feature of the Series H Preferred,
which has been amortized as an adjustment to earnings available to common
shareholders over the most favorable conversion period attainable to the holders
(270 days from the date of issuance).
During the year ended December 31, 1997, the following shares of preferred
stock, accrued premium, dividends, interest and other related costs were
converted into shares of common stock as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Number of Additional Dollar Amount
Preferred Preferred Dollar Amount of Converted, Including Accrued Number of Common
Stock Series Shares Preferred Stock Premium, Dividends, Interest Total Dollar Shares Converted
Converted Converted and Other Related Costs Amount Converted Into
- -------------- -------------- --------------------- --------------------------------- --------------------- -------------------
E 2,128 $2,128,000 $126,366 $2,254,366 332,859
G 7,316 7,316,000 438,234 7,754,234 602,824
H 8,310 8,310,000 228,411 8,538,411 5,204,158
- -------------- -------------- --------------------- --------------------------------- --------------------- -------------------
17,754 $17,754,000 $793,011 $18,547,011 6,139,841
</TABLE>
F-25
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition to the 602,824 shares of common stock issued related to the
Series G Preferred conversion, the Company issued to the Series G Preferred
stockholder $47,731 in cash dividends and 956,388 shares of Nexar common stock
valued at $4,671,597. The reduction to stockholder's equity (deficit) as a
result of this transaction was as follows:
<TABLE>
<S> <C>
Value of Nexar Common Stock $4,671,597
Accrued Interest and Dividend (391,597)
-----------
$4,280,000
===========
</TABLE>
During the year ended December 31, 1998, the following shares of preferred
stock, accrued premium, dividends, interest and other related costs were
converted into shares of common stock as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Number of Additional Dollar Amount
Preferred Preferred Dollar Amount of Converted, Including Accrued Number of Common
Stock Series Shares Preferred Stock Premium, Dividends, Interest Total Dollar Shares Converted
Converted Converted and Other Related Costs Amount Converted Into
- -------------- -------------- --------------------- --------------------------------- --------------------- -------------------
G 1,941 $1,941,000 $268,245 $2,209,245 2,703,032
H 3,947 3,946,700 383,923 4,330,623 4,188,650
- -------------- -------------- --------------------- --------------------------------- --------------------- -------------------
5,888 $5,887,700 $652,168 $6,539,868 6,891,682
</TABLE>
In addition to the 4,188,650 shares of common stock issued related to the
Series H Preferred conversion, the Company redeemed 3,516 shares of Series H
Preferred for $4,387,434. This amount includes accrued dividends and interest
totaling $771,876.
(C) STOCK OPTION PLANS AND WARRANTS
(I) STOCK OPTIONS
The Company has several Stock Option Plans (the "Plans") that provide for
the issuance of a maximum of 7,350,000 shares of common stock, which may be
issued as incentive stock options ("ISOs") or nonqualified options. Under the
terms of the Plans, ISOs may not be granted at less than the fair market value
on the date of grant (and in no event less than par value); in addition, ISO
grants to holders of 10% of the combined voting power of all classes of Company
stock must be granted at an exercise price of not less than 110% of the fair
market value at the date of grant. Pursuant to the Plans, options are
exercisable at varying dates, as determined by the Board of Directors, and have
terms not to exceed 10 years (five years for 10% or greater stockholders). The
Board of Directors, at its discretion, may convert the optionee's ISOs into
nonqualified options at any time prior to the expiration of such ISOs.
F-26
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes all stock option activity of the Company for
the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Number of Exercise Weighted Average
Shares Price Exercise Price
------------- ---------------- ----------------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 1,507,735 $0.40-$3.50 $2.06
Granted 1,520,000 6.00-10.50 7.08
Exercised (366,735) 0.40-3.50 1.28
Canceled (5,000) 3.00 3.00
------------- ---------------- ----------------------
Outstanding, December 31, 1996 2,656,000 $2.00-$10.50 $5.03
Granted 1,747,345 0.01-6.50 2.53
Exercised (214,845) 0.01-3.00 1.62
Canceled (1,206,100) 2.375-10.50 6.23
------------- ---------------- ----------------------
Outstanding, December 31, 1997 2,982,400 $1.50-$8.00 $3.33
Granted 2,294,900 1.50 1.50
Canceled (2,924,400) 1.50-8.125 3.38
------------- ---------------- ----------------------
Outstanding, December 31, 1998 2,352,900 $1.50-$2.50 $1.51
============= ================ ======================
Exercisable, December 31, 1998 1,851,371 $1.50-$2.50 $1.51
============= ================ ======================
Available for future issuances under the Plans
as of December 31, 1998 4,354,755
=============
</TABLE>
The exercise prices for options outstanding and options exercisable at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------- --------------------------------------
Weighted Average
Range of Options Remaining Weighted Average Options Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------- ---------------- ---------------------- ----------------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C>
$1.50 2,327,900 2.88 years $1.50 1,834,705 $1.50
$2.50 25,000 2.96 years 2.50 16,666 2.50
================ ====================== ======================= =============== ======================
2,352,900 2.88 years $1.51 1,851,371 $1.51
================ ====================== ======================= =============== ======================
</TABLE>
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. In October 1995, the
FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED Compensation, which is
effective for fiscal years beginning after December 15, 1995. SFAS No. 123
established a fair-value-based method of accounting for stock-based compensation
plans. The Company has adopted the disclosure-only alternative under SFAS No.
123 which requires disclosure of the pro forma effects on earnings per share as
if SFAS No. 123 had been adopted, as well as certain other information. The
Company accounts for equity instruments issued to non-employees in accordance
with EITF 96-18 by valuing the instrument using the Black-Scholes pricing model,
as prescribed by SFAS No. 123, and recording a charge to operations for their
fair value. The Company has issued options and warrants to purchase common stock
to certain financial intermediaries in connection with various financings at
below the fair market value of the underlying stock. The costs associated with
these issuances are accounted for as a cost of raising capital and netted
against the proceeds from these issuances.
During the year ended December 31, 1997 and 1998, a total of 1,005,000 and
2,184,900 options to purchase common stock were repriced to above the fair
market value of the underlying common stock to $2.50 and $1.50 per share,
respectively. The majority of the remainder of the options canceled during the
years ended December 31, 1996, 1997 and 1998 were the result of employee
terminations.
F-27
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company has computed the pro forma disclosures required under SFAS No.
123 for all stock options granted to employees of the Company in the years ended
December 31, 1996, 1997 and 1998 using the Black-Scholes option pricing model
prescribed by SFAS No. 123.
The assumptions used to calculate the SFAS No. 123 pro forma disclosure for
the years ended December 31, 1996, 1997 and 1998 for the Company are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Risk-free interest rate 6.37% 6.09% 5.60%
Expected dividend yield - - -
Expected lives 4.4 years 3.69 years 2.94 years
Expected volatility 79% 79% 93%
Grant date fair value of options granted during
the period $4.57 $2.06 $0.64
</TABLE>
The weighted average fair-value and weighted average exercise price of
options granted by the Company for the years ended December 31, 1996, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
------------- ----------------- -----------------
<S> <C> <C> <C>
Weighted average exercise price for options:
Whose exercise price exceeded fair market value at
the date of grant $10.00 $2.53 $1.50
Whose exercise price was equal to fair value at the
date of grant $6.875 $- $-
Weighted average fair market value for options:
Whose exercise price exceeded fair market value at
the date of grant $8.875 $2.06 $0.64
Whose exercise price was equal to fair market value
at the date of grant $6.875 $- $-
</TABLE>
F-28
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company's majority owned Star subsidiary, a manufacturer of the
Company's diode laser, also has established a stock option plan that provides
for the issuance of a maximum of 650,000 shares of common stock, which may be
issued as nonqualified options and ISOs. The following table summarizes the
employee stock option activity for Star:
<TABLE>
<CAPTION>
Weighted
Average
Number of Shares Exercise Price Exercise Price
---------------- -------------- --------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 95,000 $2.50 - $5.00 $3.68
Granted 150,000 6.00 - 19.00 6.27
Exercised (20,000) 2.50 2.50
Canceled (10,000) 6.00 6.00
----------------- --------------- -----------------
Outstanding, December 31, 1996 215,000 2.50 - 19.00 5.44
Granted 40,500 19.00 19.00
Canceled (1,917) 19.00 19.00
----------------- --------------- -----------------
Outstanding, December 31, 1997 253,583 $2.50-$19.00 $8.04
Exercised (6,300) 2.50-5.00 4.21
----------------- --------------- -----------------
Outstanding, December 31, 1998 247,283 $2.50-$19.00 $8.13
================= =============== =================
================= =============== =================
Exercisable, December 31, 1998 218,870 $2.50-$19.00 $7.22
================= =============== =================
================= =============== =================
Available for future issuances under the
Plan as of December 31, 1998 24,493
=================
</TABLE>
The exercise prices for options outstanding and options exercisable at
December 31, 1998 for Star are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
Weighted
Average Weighted Weighted
Options Remaining Average Options Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$2.50 28,000 5.45 years $ 2.50 28,000 $ 2.50
$5.00 40,700 5.43 years 5.00 40,700 5.00
$6.00 120,000 7.13 years 6.00 113,332 6.00
$9.50 10,000 7.63 years 9.50 7,777 9.50
$19.00 48,583 8.20 years 19.00 29,061 19.00
--------------- ---------- -------------- --------------- --------------
247,283 6.89 years $ 8.13 218,870 $ 7.22
=============== ========== ============== =============== ==============
</TABLE>
During 1998, Star also issued options to purchase 378,224 shares of common
stock of Star to Palomar at $19.00 per share.
F-29
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(II) WARRANTS
The following table summarizes all warrant activity of the Company for the
years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Weighted
Number of Exercise Average
Shares Price Exercise Price
--------------- ----------------- -------------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 6,549,924 $0.01-$15.00 $3.82
Granted 6,527,576 4.88-16.50 8.16
Exercised (3,101,261) 0.01-7.69 2.66
--------------- ----------------- -------------------
Outstanding, December 31, 1996 9,976,239 $0.60-$16.50 $7.02
Granted 2,793,187 2.50-8.875 4.29
Exercised (584,879) 0.60-7.50 2.10
Canceled (2,186,517) 1.00-16.50 6.65
--------------- ----------------- -------------------
Outstanding, December 31, 1997 9,998,030 $2.00-$15.00 $6.65
Granted 12,585,000 0.01-3.00 2.75
Exercised (125,000) 0.01 0.01
Canceled (2,878,452) 2.25-6.75 4.13
--------------- ----------------- -------------------
Outstanding, December 31, 1998 19,579,578 $1.50-$15.00 $4.38
=============== ================= ===================
Exercisable, December 31, 1998 19,359,578 $1.50-$15.00 $4.37
=============== ================= ===================
</TABLE>
During the years ended December 31, 1997 and 1998, a total of 1,240,000 and
1,300,000 warrants to purchase common stock were repriced to above the then
current fair market values of the underlying common stock. These repriced
exercise prices ranged from $2.50 to $4.00 per share in 1997 and ranged from
$1.50 to $2.00 per share in 1998. The majority of the remainder of the canceled
warrants during the years ended December 31, 1997 and 1998 were the result of
employee terminations. During 1998, the Company also issued warrants for an
aggregate of 250,000 shares of common stock to various parties in connection
with certain financing arrangements. The Company valued these warrants using the
Black-Scholes pricing model, as prescribed by SFAS No.123, and recorded a charge
to operations for their fair value for approximately $47,000.
The range of exercise prices for warrants outstanding and exercisable at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
- ------------------------------------------------------------------------------------- --------------------------------------
Weighted Average
Range of Warrants Remaining Weighted Average Warrants Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------- ---------------- ---------------------- ----------------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C>
$1.50 - $2.125 2,739,500 2.44 years $1.71 2,619,500 $1.72
$3.00 - $3.00 10,560,000 4.26 years 3.00 10,560,000 3.00
$3.25 - $9.50 5,102,020 2.07 years 6.45 5,002,020 6.39
$10.38 - $15.00 1,178,058 2.07 years 13.98 1,178,058 13.98
---------------- ---------------------- ----------------------- --------------- ----------------------
19,579,578 3.30 years $4.38 19,359,578 $4.37
================ ====================== ======================= =============== ======================
</TABLE>
The Company has computed the pro forma disclosures required under SFAS No.
123 for all warrants granted in the years ended December 31, 1997 and 1998 using
the Black-Scholes option pricing model prescribed by SFAS No. 123.
F-30
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The weighted-average assumptions used to calculate the SFAS No. 123 pro
forma disclosure for the years ended December 31, 1996, 1997 and 1998 for the
Company are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
---------------- ------------------ ------------------
<S> <C> <C> <C>
Risk-free interest rate 5.93% 6.13% 5.44%
Expected dividend yield - - -
Expected lives 5.9 years 4.44 years 2.58 years
Expected volatility 79% 79% 93%
Grant date fair value of warrants granted during
the period $5.39 $2.17 $0.76
</TABLE>
The weighted average fair value and weighted average exercise price of
warrants granted by the Company for the years ended December 31, 1996, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
----------------- -------------- -----------------
<S> <C> <C> <C>
Weighted average exercise price for warrants:
Whose exercise price exceeded fair market value at date
of grant $11.76 $4.30 $2.78
Whose exercise price was less than fair market value at
date of grant $7.07 $7.50 $0.01
Whose exercise price was equal to fair market value at
date of grant $6.67 $3.25 $-
Weighted average fair value for warrants:
Whose exercise price exceeded fair market value at date
of grant $9.34 $1.10 $0.76
Whose exercise price was less than fair market value at
date of grant $8.82 $0.62 $1.24
Whose exercise price was equal to fair market value at
date of grant $6.67 $2.18 $-
</TABLE>
(III) PRO FORMA DISCLOSURE
The pro forma effect on the Company of applying SFAS No. 123 for all
options and warrants to purchase common stock of the Company and Star would be
as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
------------------- ---------------------- -----------------
<S> <C> <C> <C>
Pro forma net loss from continuing operations $(48,292,780) $(62,020,782) $(23,169,514)
Pro forma basic and dilutive net loss per share from
continuing operations $(1.89) $(1.89) $(0.39)
</TABLE>
F-31
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(D) RESERVED SHARES
At December 31, 1998, the Company has reserved shares of its common stock
for the following:
<TABLE>
<CAPTION>
<S> <C>
Warrants 19,579,578
Stock option plans 6,707,655
Convertible debentures 3,216,694
Preferred stock 3,328,894
Employee stock purchase plan 419,412
Employee 401(k) plan 554,787
---------------
Total 33,807,020
===============
</TABLE>
(E) EMPLOYEE STOCK PURCHASE PLAN
In June 1996, the Board of Directors established the Palomar Medical
Technologies, Inc. 1996 Employee Stock Purchase Plan (the "Purchase Plan").
Under the Purchase Plan, all employees, are eligible to purchase the Company's
common stock at an exercise price equal to 85% of the fair market value of the
common stock with a lookback provision of three months. The Purchase Plan
provides for issuance of up to 500,000 shares under the Purchase Plan. During
the year ended December 31, 1997 and 1998, employees purchased 15,377 and 65,211
shares of the Company's common stock for approximately $40,000 and $50,000,
respectively, pursuant to the Purchase Plan.
(8) RESEARCH AND PRODUCT DEVELOPMENT AGREEMENTS
During 1995, the Company entered into a multi-year agreement with
Massachusetts General Hospital ("MGH"), whereby MGH agreed to conduct clinical
trials on a laser treatment for hair removal. MGH will provide the Company with
data previously generated by Dr. Anderson and further clinical research on the
ruby laser device at MGH and other sites and remit ownership of all case report
forms and data resulting from the study.
The Company agreed to provide MGH with a grant of $203,757 to perform
research and evaluation in the field of hair removal. The Company immediately
paid $50,090 upon execution of this agreement, and the Company paid a license
fee of $10,000 within thirty days of this amendment. As consideration for this
amended license, the Company is obligated to pay to MGH royalties of up to 5% on
net revenues as defined (See Note 12 (b)). In March 1997, the U.S. Patent Office
issued a patent covering the laser-based hair removal technology developed by at
MGH, for which Palomar is the exclusive worldwide licensee.
F-32
<PAGE>
(9) ACCRUED LIABILITIES
At December 31, 1997 and 1998, accrued liabilities consist of the
following:
<TABLE>
<CAPTION>
December 31,
1997 1998
---------------- ---------------
<S> <C> <C>
Payroll and consulting costs $1,535,013 $1,148,898
Royalties 853,808 1,106,352
Settlement costs 1,457,020 --
Warranty 2,583,677 2,798,836
Restructuring 1,981,907 279,000
Interest and preferred stock dividends 1,659,709 1,550,662
Other 3,688,720 3,417,876
---------------- ---------------
Total $13,759,854 $10,301,624
================ ===============
</TABLE>
(10) RELATED PARTY TRANSACTION
At December 31, 1997, approximately $478,000 of loans receivable with
interest at the rate of 7% per annum were outstanding from the Company's former
President. In the first quarter of 1998, the Company's former President paid
back his outstanding loan.
(11) 401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan (the "Profit Sharing Plan")
which covers substantially all employees who have attained the age of 18 and are
employed at year-end. Employees may contribute up to 15% of their salary, as
defined, subject to restrictions defined by the Internal Revenue Service. The
Company is obligated to make a matching contribution, in the form of the
Company's common stock, of 50% of all employee contributions effective January
1, 1995. The Company contributions vest over a three-year period. The Company
has reserved 554,787 shares of its common stock for issuance in connection with
the Profit Sharing Plan.
During 1997 and 1998, the Company issued 87,441 and 311,887 shares of its
common stock to the Profit Sharing Plan in satisfaction of its $318,154 and
$254,281 employer match for the 1996 and 1997 employee contributions,
respectively. For the year ended December 31, 1998, the Company has accrued
$206,000 for the 1998 match. The Company contributed 227,930 shares of its
common stock for this match in February of 1999.
(12) COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
The Company has entered into various operating leases for its corporate
office, research facilities and manufacturing operations. These leases have
monthly rents ranging from approximately $2,000 to $34,000, adjusted annually
for certain other costs such as inflation, taxes and utilities, and expire
through July 2003. The Company guarantees Star's facility operating lease
F-33
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Future minimum payments under the Company's operating leases at December
31, 1998 are approximately as follows:
<TABLE>
<CAPTION>
December 31,
<S> <C>
1999 $548,000
2000 264,000
2001 96,000
2002 101,000
2003 60,000
-------------
$1,069,000
=============
</TABLE>
(B) ROYALTIES
The Company is required to pay a royalty of up to 5% of "net laser sales,"
as defined, under a royalty agreement with MGH (see Note 8). For the years ended
December 31, 1996, 1997 and 1998, approximately $175,000, $854,000 and
$1,332,000 of royalty expense, respectively, was incurred under this agreement.
These amounts are included in cost of sales in the accompanying consolidated
statements of operations.
A former employee and previous owner of one of the Company's subsidiaries
is paid a 1% commission on the net sales of certain ruby lasers and diode
lasers, as defined. These commissions will be paid through March 31, 2000 and
are to be no less than $450,000. In accordance with the settlement agreement
with this individual, the Company paid advances on commissions totaling
$450,000: $200,000 in 1997 and $250,000 in January 1998.
(C) LITIGATION
The Company was a defendant in a lawsuit filed on March 14, 1996 in the
United States District Court for the Southern District of New York by
Commonwealth Associates ("Commonwealth"). In its suit, Commonwealth alleged that
the Company had breached a contract with Commonwealth in which Commonwealth was
to provide certain investment banking services in return for certain
compensation. In January 1997, Commonwealth's motion for summary judgment on its
breach of contract claim was granted, and in April 1997 the District Court
awarded Commonwealth $3,174,070 in damages. That judgment was appealed by
Palomar and on August 18, 1997 the case was settled for $1.875 million. During
the year ended December 31, 1997, the Company incurred $1.875 million in
settlement costs related to the above matter and another $1.324 million related
to several other claims and associated litigation costs.
F-34
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On March 7, 1997, Selvac Acquisition Corp. ("Selvac"), a subsidiary of Mehl
Biophile International, Inc. ("Mehl"), filed a complaint for injunctive relief
and damages for patent infringement and for unfair competition in the United
States District Court for the District of New Jersey against the Company, two of
its subsidiaries and a New Jersey dermatologist. Selvac's complaint alleged that
the Company's EpiLaser(R)- ruby laser hair removal system infringed a patent
licensed to Selvac (the "Selvac Patent") and that the Company unfairly competed
by promoting the EpiLaser(R)- ruby laser hair removal system for hair removal
before it had received FDA approval for that specific application. On May 18,
1998 the court granted the Company's motion for partial summary judgment on the
ground that the Selvac patent is invalid because prior art anticipated it. The
court has since denied Selvac's motion for reconsideration of the summary
judgment ruling. On September 25, 1998, the court denied Selvac's motion for
reconsideration of its prior order dismissing so much of Selvac's unfair
competition claim as relied on interpreting the Food, Drug and Cosmetics Act or
FDA regulations, and dismissed without prejudice the state law remainder of
Selvac's unfair competition claim. On October 26, 1998, Selvac filed its notice
of appeal to the Court of Appeals for the Federal Circuit. Selvac subsequently
filed its opening brief on appeal; the Company's opposition was filed in March,
1999.
On October 16, 1997, the Company brought a declaratory judgment action in
U.S. District Court for the District of Massachusetts against the holders and
the indenture trustee of the Company's 4.5% Subordinated Convertible Debentures
due 2003, denominated in Swiss francs (the "Swiss Franc Debentures"). Just prior
to this suit, certain of the debenture holders (the "Asserting Holders") had
alleged that the Company was in breach of certain protective covenants under the
indenture, and on October 22, 1997 they sued the Company and all of its
principal subsidiaries in the same court; the October 16 and October 22 cases
have been assigned to the same judge, and the dispute between the Asserting
Holders and the Company is proceeding under the October 22 case. The Asserting
Holders claim that the Company has breached certain protective indenture
covenants and that the Asserting Holders are entitled to immediate payment of
their indebtedness under the Swiss Franc Debentures (which amounts to
approximately US$5,600,000 at December 31, 1998 exchange rates). As of November
13, 1997, acting under applicable provisions of the indenture, the Company
notified the holders of the Swiss Franc Debentures that it is causing the
conversion of all of the Swiss Franc Debentures into an aggregate of 914,028
shares of the Company's common stock. The Company believes that it has not
breached any of the protective covenants under this indenture and that the debt
cannot properly be accelerated, and intends to contest the claims of the
Asserting Holders vigorously. Nonetheless, an adverse result could have a
material adverse effect on the Company in the range of $5,600,000 to $7,000,000.
By mutual agreement, the Asserting Holders and the Company requested that the
case be removed from the Court's trial calendar. The parties have discussed ways
to resolve their dispute, including the restructuring of the debentures, but
there can be no absolute assurance that all of the debentureholders, including
the Asserting Holders, and the Company will agree and complete a proposed
settlement.
The Company has learned that a motion has been filed to amend the complaint
in the class action of VARLJEN V. H.J. MEYERS, INC. ET AL. pending in the United
States District Court of the Southern District of New York to add the Company, a
former officer and a current officer as defendants. The Company has not been
served with any pleadings in this action and, to the best of the Company's
knowledge, the complaint has not been so amended to date. Accordingly, the
Company is unable to estimate any possible outcome or range of loss in this
matter at this time.
The Company is also aware of a claim alleging that the Company had
previously committed to make an additional capital contribution to Nexar. The
Company believes that this claim is without merit.
The Company is involved in other legal and administrative proceedings and
claims of various types. While any litigation contains an element of
uncertainty, management, in consultation with the Company's general counsel,
presently believes that the outcome of each such other proceeding or claim which
is pending or known to be threatened, or all of them combined, will not have a
material adverse effect on the Company.
F-35
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(D) DISTRIBUTION AGREEMENT
On November 17, 1997, the Company entered into an exclusive distribution,
sales and service agreement with Coherent, an established, worldwide laser
company. Under this agreement, Coherent has the exclusive right to sell the
EpiLaser(R) and LightSheer(TM) laser systems and future generation products
worldwide. The Company pays Coherent a per unit commission, adjusted for certain
events as defined. During 1997 and 1998, the Company incurred approximately
$800,000 and $14,108,000, respectively, of commission expense related to this
agreement which is included in sales and marketing expense in the accompanying
consolidated statement of operations. Upon execution of this agreement, Coherent
made a lump sum payment of $3,500,000 and received a warrant to purchase one
million shares of the Company's common stock at a share price of $5.25. The
valuation of the warrant using the Black-Scholes option pricing model was
approximately $380,000. The value was credited to additional paid-in capital
during the year ended December 31, 1997. The remaining amount of $3,120,000,
included in deferred revenue, is being amortized to revenue over the three year
life of the agreement. If the Company completes its anticipated sale of Star to
Coherent as discussed in Note 1, the current distribution agreement with
Coherent will be terminated and replaced with a one year non-exclusive
distribution agreement that will enable Coherent to sell the Company's
ruby-based laser products. The Company will amortize the deferred revenue
related to Coherent over this one year non-exclusive period.
In exchange for the payment at closing of $2,740 per day from January 20,
1999 until Palomar shareholder approval of the Agreement, Coherent has agreed to
waive its exclusive rights under the distribution agreement to market and sell
our ruby laser products, so that we may begin to sell the Palomar E2000(TM)
immediately through other channels without the obligation of paying a commission
to Coherent or waiting for the distribution agreement to terminate upon the
closing of the sale of Star to Coherent.
(E) EMPLOYMENT AGREEMENTS
The Company and its subsidiaries have employment agreements with certain
executive officers that provide for annual bonuses to the officers and expire on
various dates through 2001. Each of these agreements provides for 12 months
severance upon termination of employment.
(13) SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED Information in the fiscal year ended December 31, 1998.
SFAS 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker, or decision
making group, in making decisions how to allocate resources and assess
performance. The Company's chief decision-maker, as defined under SFAS 131, is a
combination of the Chief Executive Officer and the Chief Financial Officer. To
date, the Company has viewed its operations and manages its business as
principally one segment, cosmetic laser sales. Associated services are not
significant. As a result, the financial information disclosed herein represents
all of the material financial information related to the Company's principal
operating segment.
Product revenues from international sources were approximately $3.87
million, $5.03 million and $17.36 million in 1996, 1997 and 1998, respectively.
The Company's revenues from international sources were primarily generated from
customers located in Europe, Canada, Latin America and Asia/Pacific. All of the
Company's product sales for the years ended December 31, 1996, 1997 and 1998
were shipped from its facilities located in the United States.
F-36
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table represents percentage of product revenue by geographic
region from customers for 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
United States 78% 76% 61%
Europe 3 6 17
Asia/Pacific 10 6 13
Canada 9 4 3
Latin America -- 8 6
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
F-37
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(a) Overview
On December 7, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Coherent, Inc. ("Coherent") to sell all of
the issued and outstanding common stock of Star Medical Technologies, Inc.
("Star"), its 99.96% majority-owned subsidiary, to Coherent for $65 million in
cash. The Company currently owns substantially all of the issued and outstanding
common shares of Star. However, options that have been granted to Palomar and
employees of Star to purchase shares of Star's common stock remain outstanding.
When all of the outstanding options under Star's Stock Option Plan have been
exercised, the Company will own 82.46% of Star's common stock and the employees
will collectively own 17.54% at the time of the sale of Star. Therefore, the
Company anticipates that it will receive net proceeds from this sale of
approximately $46 million after taxes (see Note 7 to the Consolidated Financial
Statements). Under the terms of the Agreement, the Company will also receive an
ongoing royalty of 7.5% from Coherent on the sale of any products by Coherent
that employ certain patented technology related to laser hair removal currently
licensed by the Company on an exclusive basis from Massachusetts General
Hospital ("MGH") (see Note 12(b) to the Consolidated Financial Statements). The
sale is subject to stockholder and governmental regulatory approval, as well as
customary closing conditions.
If this transaction is consummated, revenues would decline significantly in
the near term and the successful introduction and marketing of new products will
become more critical to the Company's long-term success. A significant portion
of the Company's current revenue base will need to be replaced with future
revenues from the Company's other laser products, including the Palomar E2000TM
hair removal laser introduced in February of 1999 and other products currently
in development. For the year ended December 31, 1998, gross revenues associated
with Star's LightSheer(TM) diode laser comprised 80% of the Company's total
revenues. There can be no assurance that the Palomar E2000TM or the Company's
future products will achieve market acceptance or generate sufficient margins.
Broad market acceptance of laser hair removal is critical to the Company's
success. The Company recognizes the need and intends to broaden its product line
by developing cosmetic laser products other than hair removal lasers.
In the third and fourth quarters of 1997, the Board of Directors authorized
management to focus the Company on its core laser products and services
business, principally related to laser hair removal, and to proceed with a
restructuring plan to reorganize the Company and divest its electronic
subsidiaries, Dynaco Corp. ("Dynaco"), Dynamem, Inc. ("Dynamem"), Comtel
Electronics, Inc. ("Comtel") and Nexar Technologies, Inc. ("Nexar")
(collectively, the "Electronic Subsidiaries"), and other non-core businesses.
Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company have been
reclassified to reflect the dispositions of the Electronic Subsidiaries.
Accordingly, the revenues, cost and expenses, assets and liabilities and cash
flows of the Electronics Subsidiaries have been reported as discontinued
operations in these consolidated financial statements (see Note 2 to
Consolidated Financial Statements).
The Company has simplified its organization and now conducts business in
only two locations, Lexington, Massachusetts and Pleasanton, California. Prior
to this restructuring, the Company conducted business in over a dozen different
locations.
F-38
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
(b) Results
(i) REVENUES AND GROSS MARGIN: Year Ended December 31, 1998, Compared to
Year Ended December 31, 1997
For the year ended December 31, 1998, the Company's revenues increased to
$44.5 million as compared to $21.0 million for the year ended December 31, 1997.
The increase in the Company's revenue of $23.5 million or 112% from the year
ended December 31, 1997 was mainly due to additional sales volume of $35.6
million associated with the introduction of the LightSheer(TM) diode laser,
partially offset by a decrease in revenue of approximately $12.1 million in
other cosmetic laser product revenue. The Company obtained FDA clearance to
market and sell its LightSheer(TM) laser for hair removal and leg vein treatment
in the United States at the end of 1997. The decrease in sales volume associated
with other cosmetic laser product revenue was principally due to declining sales
of the Company's EpiLaser(R) ruby laser. The Company focused on bringing the
LightSheer(TM) laser to market while further developing a new generation of ruby
hair removal lasers during 1998. Using its core ruby laser technology,
originally developed for tattoo and pigmented lesion removal, Palomar developed
its long pulse EpiLaser(R) ruby laser that is specifically configured to allow
the appropriate wavelength, energy level and pulse duration to be absorbed
effectively by the hair follicle without being absorbed by the surrounding
tissue. That, combined with Company's patented cooling handpiece, allows safe
and effective hair removal. Palomar expects its new generation long pulse ruby
laser, the Palomar E2000TM, to permits more rapid treatment of large areas of
the body. In July 1998, the Company obtained FDA clearance to market and sell
its EpiLaser(R) laser system in the United States for "permanent hair
reduction." In March of 1999, the Company also obtained FDA clearance to market
and sell its Palomar E2000TM laser system in the United States for "permanent
hair reduction."
Gross margin for the year ended December 31, 1998 was approximately $21.5
million (48% of revenues) compared to $939,000 (4% of revenues) for the year
ended December 31, 1997. The increase in gross margin and gross margin
percentage was due to sales of the LightSheer(TM) diode laser system. This new
laser system has a significantly higher gross margin than the Company's
EpiLaser(R) laser and other cosmetic products. The Company anticpates that if
the sale of Star is consummated its gross margin percentage from the sale of
Palomar E2000TM will decrease compared to the current gross margin from the sale
of its LightSheer(TM) product unless and until the Palomar E2000TM achieves
volume production and manufacturing efficiencies.
(ii) OPERATING AND OTHER EXPENSES: Year Ended December 31, 1998, Compared
to Year Ended December 31, 1997
Research and development costs decreased to $7.0 million for the year ended
December 31, 1998 from $12.0 million for the year ended December 31, 1997.
Research and development expenses as a percentage of revenue totaled 16% for the
year ended December 31, 1998 and 57% for the year ended December 31, 1997. The
decline in spending is primarily the result of the Company's receipt of FDA
approval for the LightSheer(TM) laser at the end of 1997. The continued spending
on research and development reflects the Company's commitment to research and
development for medical devices and delivery systems for cosmetic laser
applications and other medical applications using a variety of lasers, while
continuing dermatology research utilizing the Company's ruby and diode lasers.
Among the Company's research and development goals in hair removal is to design
systems permitting more rapid treatment of large areas, and to produce systems
with high gross margins. Management believes that research and development
expenditures will remain constant over the next year as the Company continues
F-39
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
product development and clinical trials for additional applications for its
lasers and delivery systems in the cosmetic and dermatological markets.
Selling and marketing expenses increased to $15.1 million (34% of revenues)
for the year ended December 31, 1998, from approximately $7.0 million (33% of
revenues) for the year ended December 31, 1997. The increase in selling and
marketing expenses is attributable to the costs associated with the Company's
distribution agreement with Coherent, which increase in direct proportion to
sales volume (see Note 12(d) to the Consolidated Financial Statements) because
Coherent receives a commission for each of the Company's products that it sells
to compensate it for its selling and marketing efforts. The amounts received by
Coherent (as a percentage of the Company's net revenues) are greater than the
Company's selling and marketing expenses when it performed these functions
internally during 1997. The Company anticipates that its selling and marketing
expenses will decrease as a percentage of revenue after the completion of the
sale of Star to Coherent as the Company begins to sell the Palomar E2000TM
through other sales channels, including distribution through Continuum
Biomedical, a distributor of medical products. The Company also will consider
establishing its own direct sales force to compliment these sales channels. The
Company anticipates that its selling and marketing costs incurred through other
sales channels and its own direct sales force will be less than the commissions
currently earned by Coherent as a percentage of the Company's net revenues.
General and administrative expenses decreased to $8.9 million (20% of
revenues) for the year ended December 31, 1998, as compared to $15.3 million
(73% of revenues) for the year end ended December 31, 1997. This decrease is
attributable to the Company's restructuring and consolidation of administrative
functions in the third and fourth quarters of 1997, including a reduction in
costs attributable to Palomar Technologies, Ltd., Esthetica, Inc. (formerly
Cosmetic Technology International, Inc.), Palomar Medical Products, Inc. and
corporate costs totaling $1.0 million, $2.4 million, $1.9 million and $2.0
million, respectively. This reduction was offset by an increase of $900,000 for
general and administrative expenses incurred at the Company's Star subsidiary to
support its successful introduction of its LightSheer(TM) laser. In previous
years, the Company used management's time and allocated resources to developing
businesses outside of the medical and cosmetic laser industry and financing the
non-core businesses. Beginning in the fourth quarter of 1997, the Company
focused its efforts on its core business. The Company anticipates general and
administrative expense will continue to stabilize in the future and after the
sale of Star as the Company focuses on its core operations in the cosmetic laser
business.
The Company incurred no business development and financing costs during the
year ended December 31, 1998 as compared to $2.1 million (10% of revenues) for
the year ended December 31, 1997. This decrease is attributable to the Company's
restructuring efforts to focus on its core medical business.
Restructuring and asset write-off costs were approximately $13.0 million
for the year ended December 31, 1997. These charges reflect restructuring and
asset write-off costs for certain operating and non-operating assets that the
Company believes were not fully realizable for both the Company's medical
business and other non-medical investments. Included in this charge is a $2.7
million reserve for severance costs associated with consolidating selling,
general and administrative functions, including the closing of certain
facilities. Through December 31, 1998, the Company paid out $2.3 million of
severance costs and has a remaining liability of $279,000 related to two
individuals that will be paid out in 1999, resulting in actual restructuring
costs incurred of $2.6 million. Accordingly, the Company reversed the balance of
this restructuring accrual of approximately $131,000 in its consolidated
statement of operations during the fourth quarter of fiscal 1998 (see Note 4 to
Consolidated Financial Statements).
F-40
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
For the year ended December 31, 1998, the Company did not incur settlement
expenses. Settlement costs of $3.2 million were incurred in the year ended
December 31, 1997. These charges consisted mainly of a legal accrual related to
a legal settlement with an investment bank.
Interest expense decreased to $1.3 million for the year ended December 31,
1998, from $7.0 million for the year ended December 31, 1997. The amount for
1997 includes $5.4 million of non-cash interest expense related to the value
ascribed to the discount features of the convertible debentures issued by the
Company during 1996 and 1997. This 82% decrease is primarily the result of a
decrease in convertible debenture financings and the Company's increased use of
conventional financing. Also, operations did not require as much financing in
1998 as compared to 1997.
Interest income decreased to $33,000 for the year ended December 31, 1998,
from approximately $457,000 for the year ended December 31, 1997. This decrease
is primarily the result of a reduction in interest received due to a decrease in
other loans and investments and a decrease in the Company's average cash
position during 1998.
Net gain on trading securities represents a realized gain of approximately
$703,000 for the year ended December 31, 1998 related to the Company's
investment in a publicly traded company that was sold during 1998. The Company
does not have any marketable trading securities as of December 31, 1998.
The loss from discontinued operations for the year ended December 31, 1998
was $2.6 million compared to a loss of $27.4 million for the year ended December
31, 1997. The loss from discontinued operations in 1998 was due to a delay in
the disposition of Dynaco resulting in operating expenses of approximately $1.1
million above the estimated operating expenses accrued at December 31, 1997. A
loss on disposition of discontinued entities for the year ended December 31,
1998 of $1.5 million was incurred. The majority of this charge relates the
write-off of the Company's carrying value of its investment in Nexar during the
second quarter of 1998.
(iii) REVENUES AND GROSS MARGIN Year Ended December 31, 1997, Compared to
Year Ended December 31, 1996
Revenues from continuing operations for the year ended December 31, 1997
were $21.0 million as compared to $17.6 million for the year ended December 31,
1996. The 19.2% increase mainly was due to additional sales volume of
approximately $11.3 million associated with the EpiLaser(R) hair removal laser
system and service revenue and with the RD-1200(TM) tattoo removal and pigmented
lesion treatment laser manufactured by the Company. The Company obtained FDA
clearance to market and sell the EpiLaser(R) laser system for hair removal in
the United States in March 1997. This increase in revenues was offset by a
decline of approximately $7.9 million in sales volume for the Company's
Tru-Pulse(R) CO2 laser product.
Gross margin for the year ended December 31, 1997 was $939,000 (4% of
revenues) compared to $3.4 million (20% of revenues) for the year ended December
31, 1996. The decline in gross margin percentage was caused mainly by lower
margins attained on the Company's EpiLaser(R) laser system due to manufacturing
and production inefficiencies in the initial manufacturing stage of this product
as well as under-absorbed overhead costs incurred during the fourth quarter of
1997 as the Company transitioned to its exclusive distribution arrangement with
Coherent. The decline in gross margin dollars was due principally to a reduction
in revenues related to the Company's Tru-Pulse(R) CO2 laser product. The
Company's overall strategy was to first demonstrate and prove the overall
efficacy of its proprietary cosmetic hair removal technology licensed from MGH
and gain early entrance to the market. This resulted in higher than anticipated
costs of materials and manufacturing techniques. As a result of this strategy,
the Company believes that during 1997 it demonstrated to the medical community
the efficacy of its
F-41
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
technology and its long-term benefits and advantages which led to the
successful introduction and sales of its LightSheer(TM) laser in 1998.
(iv) OPERATING AND OTHER EXPENSES: Year Ended December 31, 1997, Compared
to Year Ended December 31, 1996
Research and development costs increased to $12.0 million (57% of revenues)
for the year ended December 31, 1997, from $6.3 million (36% of revenues) for
the year ended December 31, 1996. This 90% increase in research and development
reflects the Company's strategic decision to accelerate its research and
development efforts during 1997 to develop and obtain FDA clearance for its
successor hair removal and other cosmetic products using the Company's
proprietary cooling technology licensed from MGH. The Company also continued to
concentrate on the development of additional products for other medical laser
applications.
Selling and marketing expenses increased to $7.0 million (33% of revenues)
for the year ended December 31, 1997, from $5.1 million (29% of revenues) for
the year ended December 31, 1996. This 37% increase reflected the Company's
effort to expand its marketing and distribution for the Company's EpiLaser(R)
laser system.
General and administrative expenses increased to $15.3 million (73% of
revenues) for the year ended December 31, 1997, from $9.8 million (55% of
revenues) for the year ended December 31, 1996. This 57% increase was the result
of additional administrative resources required at the Company's now closed
separate corporate offices and subsidiaries to oversee the growth of the
Company's medical products and service businesses, the initial public offering
of common stock of Nexar, and divestiture efforts substantially completed during
1997, totaling approximately $500,000. Additional general and administrative
costs were also incurred at Palomar Medical Products, Inc., Esthetica and
Palomar Technologies, Ltd. totaling approximately $1.7 million, $2.3 million and
$1.0 million, respectively. The majority of these general and administrative
expenditures incurred by the subsidiaries were for employee and infrastructure
expenses to manage the transition from a development stage company to the
commercialization stage.
Business development and financing costs decreased to $2.1 million (10% of
revenues) for the year ended December 31, 1997, from $2.9 million (16% of
revenues) for the year ended December 31, 1996. This 28% decrease is
attributable to the Company's restructuring efforts to focus on its core medical
product and service businesses.
Restructuring and asset write-off costs totaling $13.0 million were
incurred for the year ended December 31, 1997 as compared to $1.7 million for
the year ended December 31, 1996. These charges reflect restructuring and asset
write-off costs for certain operating and non-operating assets that the Company
believes were not fully realizable for both the Company's medical business and
other non-medical investments. Included in this charge for 1997 is a $2.7
million charge for severance costs associated with consolidating the selling,
general and administrative functions, including the closing of certain
facilities. Through December 31, 1998, the Company paid out $2.3 million of
severance costs and has a remaining liability of $279,000 to two individuals
that will be paid out in 1999 resulting in total restructuring costs incurred of
$2.6 million. Accordingly, the Company reversed the balance of this
restructuring accrual of approximately $131,000 in its consolidated statement of
operations during the fourth quarter of fiscal 1998 (see Note 4 to Consolidated
Financial Statements).
F-42
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Settlement and litigation costs increased to $3.2 million for the year
ended December 31, 1997 from $880,000 for the year ended December 31, 1996.
These costs are primarily attributable to a lawsuit brought by an investment
bank. In this suit, the investment bank alleged that the Company breached a
contract in which the bank was to provide certain investment banking services in
return for certain compensation. This case was settled on August 18, 1997 for
$1.9 million.
Interest expense from continuing operations increased to $7.0 million for
the year ended December 31, 1997, from $272,000 for the year ended December 31,
1996. This amount for 1997 includes $5.5 million of non-cash interest expense
related to the value ascribed to the discount features of the convertible
debentures issued by the Company.
Interest income decreased to $457,000 for the year ended December 31, 1997,
from $1.4 million for the year ended December 31, 1996. This decrease is
primarily the result of a reduction in interest received due to a decrease in
other loans and investments and a decrease in the Company's average cash
position during 1997.
Loss from discontinued operations was $27.4 million for the year ended
December 31, 1997 as compared with a loss of $17.1 million for the year ended
December 31, 1996. The Company also reported a gain of $2.1 million on the
disposition of its discontinued operations. This amount includes a gain of $6.2
million related to the disposition of 1,960,736 shares of Nexar common stock
which was offset by losses incurred and accrued of $4.1 million on the
disposition of Dynaco and its wholly owned subsidiaries. The Company completed
the disposition of Comtel and Dynamem on December 9, 1997. The disposition of
Dynaco was completed in May of 1998 (see Note 2 to the Consolidated Financial
Statements).
(c) Liquidity and Capital Resources
The Company is a holding company with no significant operations or assets
other than its investments in operating subsidiaries and strategic investments.
The Company depends upon dividends, cash advances and/or other cash payments
from its subsidiaries to meet its cash flow requirements. To date, the Company's
operating subsidiaries have required cash advances from the Company to fund
their operations.
As of December 31, 1998, the Company had $1.9 million in cash and cash
equivalents. In order to meet its cash flow requirements and fund operating
losses at its subsidiaries, the Company generated $9.8 million and $3.0 million
in net proceeds from the issuance of common stock and short-term notes payable,
respectively, during the year ended December 31, 1998. The Company's net cash
used in operating activities for the year end ended December 31, 1998 was
approximately $11.1 million which includes approximately $2.1 million of net
cash generated from Star's operating activities. The Company's net loss for the
year ended December 31, 1998 included approximately $2.7 million of non-cash
depreciation and amortization expense.
As of December 31, 1998, the Company's accounts receivable totaled $9.9
million as compared to $2.2 million as of December 31, 1997. The amount at
December 31, 1998 is principally related to accounts receivable from the sale of
Star's LightSheer(TM) diode laser. The Company began shipping this product in
the first quarter of 1998. The increase in this balance from 1997 is related to
the sale of Star's LightSheer(TM) diode laser product. The Company's allowance
for doubtful accounts totaled approximately $364,000 as of December 31, 1998,
compared to $746,000 as of December 31, 1997. This reduction was principally due
to a decrease in the allowance for doubtful accounts for write-offs during 1998
of certain accounts receivable related to the sales of the Company's EpiLaser(R)
laser systems sold in 1997 totaling
F-43
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
approximately $565,000, and an increase in the allowance for doubtful accounts
for the Company sale of its LightSheer(TM) diode laser products during 1998.
As of December 31, 1998 accounts payable totaled approximately $6.6 million
as compared to $4.2 million as of December 31, 1997. This increase of $2.4
million is principally due to the additional purchases of inventory and
additional plant cost for the manufacturing of the Company's LightSheer(TM)
product during the fourth quarter of 1998 and the buildup of inventory for the
anticipated sales of Palomar E2000(TM) laser system.
The Company anticipates that capital expenditures for 1999 will total
approximately $1.0 million, consisting primarily of machinery, equipment and
computers and peripherals. The Company expects to finance these expenditures
with cash on hand, its line of credit and equipment leasing lines. However,
there can be no assurance that the Company will be able to obtain the necessary
financing.
The Company has a $10,000,000 revolving line of credit from a bank. This
revolving line of credit matures on March 31, 2000 and bears interest at the
bank's prime rate (7.75% at December 31, 1998). Borrowings are limited to 80% of
domestic accounts receivable under 90 days from invoice. A director of the
Company has personally guaranteed borrowings under the line of credit.
The Company entered into a Loan Agreement with Coherent, pursuant to which
Coherent agreed to loan the Company money to help finance the Company's working
capital requirements. These loans are collateralized by the Company's accounts
receivable associated with sales where Coherent has acted as the Company's sales
agent. As of December 31, 1998, the total amount outstanding under this loan
agreement was $4.0 million (see Note 6 to the Consolidated Financial
Statements). This $4 million indebtedness is currently reflected on Star's
balance sheet as of December 31, 1998 and will be assumed by Coherent at the
closing of the Star sale.
In connection with the disposition of Comtel, a former wholly-owned
subsidiary in the electronics segment, the Company guaranteed $2.5 million of a
$3.3 million line of credit extended by a loan association to Biometric
Technologies Corp. ("BTC"), the buyer of Comtel. The stockholders of BTC have
personally guaranteed to the Company payment for any amounts borrowed under this
line of credit in excess of approximately $1.5 million in the event the Company
is obligated to honor this guaranty. The amount BTC has outstanding under the
line of credit at December 31, 1998 was approximately $2.1 million.
Regardless of whether the sale of Star to Coherent is consummated, the
Company's strategic plan is to continue to fund research and development for its
medical and cosmetic laser products. The Company expects to expand the scope and
extend the term of its current Clinical Trial Agreement with MGH following the
sale of Star. This research and development effort entails extensive clinical
trials. These activities are an important part of the Company's business plan.
Due to the nature of clinical trials and research and development activities, it
is not possible to predict with any certainty the timetable for completion of
these research activities or the total amount of funding required to
commercialize products developed as a result of such research and development.
The rate of research and the number of research projects underway are dependent
to some extent upon external funding. While the Company is regularly reviewing
potential funding sources in relation to these ongoing and proposed research
projects, there can be no assurance that the current levels of funding or
additional funding will be available, or, if available, on terms satisfactory to
the Company.
The Company will consider a number of alternatives with respect to its
future products, including manufacturing them itself and selling them directly
and/or through distributors or selling the product line
F-44
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
and/or technology to others. The Company will in each case choose the
alternative which it believes best maximizes profitability and long-term
shareholder value.
The Company has historically incurred significant losses. While the Company
achieved profitable operations for the three and six months ended December 31,
1998, primarily related to the operations of Star, there can be no assurance
that this will continue. Therefore, the Company may need to continue to secure
additional financing to complete its research and development activities,
commercialize its current and proposed medical products and services, and fund
ongoing operations.
There can be no assurance that the sale of Star to Coherent will be
completed and that events in the future will not require the Company to seek
additional financing. The sale must be approved by the Company's stockholders,
and is also subject to regulatory approval and other standard closing
conditions. Financing of the Company's future operating plan is now to a great
extent dependent on completing the sale. If the sale of Star is not completed
the Company will require additional financing during 1999 and there can be no
assurance that any such financing will be available on terms satisfactory to the
Company. Based on its historical ability to raise funds as necessary and ongoing
discussions with potential financing sources, the Company believes that it will
be successful in obtaining additional financing, if required, in order to fund
future operations.
The report of the Company's independent public accountants in connection
with the Company's Consolidated Balance Sheets at December 31, 1998 and 1997,
and the related Consolidated Statements of Operations, Stockholders' Equity
(Deficit) and Cash Flows for the three years ended December 31, 1998 includes an
explanatory paragraph stating that the Company's recurring losses, working
capital deficiency and stockholders' deficit raises substantial doubt about the
Company's ability to continue as a going concern.
(d) Year 2000 Issues
During 1998, the Company has been actively engaged in addressing Year 2000
(Y2K) issues, which result from the use of two-digit, rather than four-digit,
year dates in software, a practice which could cause date-sensitive systems to
malfunction or fail because they may not recognize or process date information
correctly.
State of Readiness: To manage its Y2K program, the Company has divided its
efforts into four program areas:
o Information Technology (computer hardware and software)
o Physical Plant (manufacturing equipment and facilities)
o Products (including product development)
o Extended Enterprise (suppliers and customers)
For each of these program areas, the Company is using a four-step
approach:
o Ownership (creating awareness, assigning tasks)
o Inventory (listing items to be assessed for Y2K readiness)
o Assessment (prioritizing the inventoried items, assessing their
Y2K readiness, planning corrective actions, developing initial
contingency plans)
o Corrective Action Deployment (implementing corrective actions,
verifying implementation, finalizing and executing contingency
plans)
F-45
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
At December 31, 1998, the Ownership, Inventory and Assessment steps were
essentially complete for all program areas. The Company expects to complete
Corrective Action Deployment by June 1999.
Costs to Address Y2K Issues: The Company's estimated aggregate costs for its Y2K
activities from 1998 through 2000 are expected to be less than $100,000. Through
December 31, 1998 the Company has spent approximately $20,000.
Risks of Y2K Issues and Contingency Plans: The Company continues to assess the
Year 2000 issues relating to its physical plant, products and suppliers. The
Company intends to develop a contingency planning process to mitigate worst-case
business disruptions such as delays in product delivery, which could potentially
result from events such as supply chain disruptions. The Company expects its
contingency plans to be complete by June 1999.
(e) Nasdaq Stock Market Listing
The Company has been notified by the Nasdaq Stock Market ("Nasdaq") that
for continued listing on the Nasdaq SmallCap Market the Company must meet
Nasdaq's minimum bid price requirement of $1.00 per share. Because the Company's
stock price fell below $1.00 for a 30 day trading period between August 28 and
October 9, 1998, it is now subject to delisting. Nasdaq has scheduled a hearing
on the delisting for March 18, 1999. Nasdaq will stay the delisting of the
Company's common stock while the appeal is pending. To regain compliance with
the minimum bid price requirement, the Company is asking its stockholders to
approve a reverse split of the Company's common stock. However, there can be no
assurance that the Company will obtain stockholder approval of the reverse
split. (In addition, the reverse split could itself hurt the market price of the
Company's common stock.) Even if stockholder approval is obtained, a reverse
split may not enable the Company to regain compliance with the minimum bid price
requirement in time to prevent delisting. The Company's management anticipates
that the absence of the Nasdaq listing for the Company's common stock would have
an adverse effect on the market for, and potentially the market price of, the
Company's common stock. The delisting of the common stock would likely reduce
stockholders' ability to buy and sell Company common stock, and the Company's
ability to raise capital. If the Company's common stock is delisted from Nasdaq,
the Company expects that brokers would continue to make a market in the
Company's common stock on the OTC Bulletin Board.
(f) Recently Issued Accounting Standard
In February 1997, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No.133 Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999. The Company believes that the adoption of
this new accounting standard will not have a material impact on the Company's
financial statements.
F-46
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
INDEX TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
Index F-47
Introduction F-48
Pro Forma Consolidated Condensed Balance Sheet as of December 31, 1998 F-49
Pro Forma Consolidated Condensed Statement of Operations for the year ended
December 31, 1998 F-50
Notes to Pro Forma Consolidated Condensed Balance Sheet as of December 31, 1998
and Pro Forma Consolidated Condensed Statement of Operations for the
year ended December 31, 1998 F-51
</TABLE>
STAR MEDICAL TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
Balance Sheets as of December 31, 1997 and 1998 F-53
Statements of Operations for the years ended December 31, 1996, 1997 and 1998 F-54
</TABLE>
F-47
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
INTRODUCTION TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR
THE YEAR ENDED DECEMBER 31, 1998
On December 7, 1998, the Company entered into an Agreement and Plan of
Reorganization to sell all of the issued and outstanding shares of common stock
of Star Medical Technologies, Inc. ("Star") a 99.96% majority owned subsidiary
of Palomar Medical Technologies, Inc. ("Palomar" or the "Company") to Coherent,
Inc. ("Coherent") for $65,000,000 in cash. Palomar's fully diluted ownership
percentage of Star is 82.46% assuming the exercise of outstanding options to
purchase 625,507 shares of Star's common stock at exercise prices ranging from
$2.50 per share to $19.00 per share. Under the terms of this transaction,
Palomar will receive gross proceeds of approximately $54,000,000. The Company
anticipates that it will receive net proceeds of approximately $48,825,000. This
amount reflects transaction costs of approximately $600,000, income taxes of
approximately $2,500,000, costs associated with the repurchase of Coherent's
EpiLaser(R) inventory of $1,125,000 and $950,000 reflecting an earnout bonus for
the employees of Star based on the attainment of certain production milestones
through the date of closing.
The accompanying pro forma consolidated condensed balance sheet as of December
31, 1998 assumes that Palomar sold its majority owned subsidiary, Star, to
Coherent on the last reported balance sheet date, December 31, 1998. The
accompanying pro forma consolidated condensed Statement of Operations for the
year ended December 31, 1998 assumes the sale of Star took place on January 1,
1998 the beginning of Palomar's fiscal year ended December 31, 1998. The pro
forma consolidated condensed statement of operations do not include the effect
of the gain from Palomar's sale of Star to Coherent.
The accompanying pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the financial position or results of
operations which would actually have been reported had the sale of Star occurred
during the periods presented, or which may be reported in the future.
The accompanying pro forma consolidated condensed financial statements should be
read in conjunction with the historical financial statements and related notes
thereto for Palomar and Star.
F-48
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
As of December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
Consolidated Star Other Adjustments Pro Forma
------------ -------- ---------------------------- --------------
ASSETS (a)
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,874,718 $ (310,088)(b) $ 50,757,547 $ -- 52,322,177
Accounts receivable, net 9,938,121 (9,339,566) -- -- 598,555
Inventories, net 5,416,342 (3,072,843) -- -- 2,343,499
Escrow amount due from Coherent, Inc. -- --(c) 3,254,908 -- 3,254,908
Other current assets 1,056,388 (500,016) -- -- 556,372
------------- ------------- ------------- ------------- -------------
Total current assets 18,285,569 (13,222,513) 54,012,455 -- 59,075,511
------------- ------------- ------------- ------------- -------------
PROPERTY AND EQUIPMENT, AT COST, NET 3,314,087 (933,050) -- -- 2,381,037
============= ============= ============= ============= =============
OTHER ASSETS:
Cost in excess of net assets acquired, net 1,699,983 (816,537) -- -- 883,446
Deferred financing costs 58,923 -- -- -- 58,923
Other non-current assets 167,352 (40,420) -- -- 126,932
Total other assets 1,926,258 (856,957) -- -- 1,069,301
$ 23,525,914 $ (15,012,520) $ 54,012,455 $ -- $ 62,525,849
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 6,290,041 $ (4,000,000) $ -- $ -- $ 2,290,041
Accounts payable 6,553,745 (5,244,694) -- -- 1,309,051
Accrued expenses 10,301,624 (3,080,371) --(d) 2,500,000 9,721,253
Current portion of deferred revenue 1,143,796 -- -- -- 1,143,796
------------- ------------- ------------- ------------- -------------
Total current liabilities 24,289,206 (12,325,065) -- 2,500,000 14,464,141
------------- ------------- ------------- ------------- -------------
NET LIABILITIES OF DISCONTINUED OPERATIONS 1,680,171 -- -- -- 1,680,171
------------- ------------- ------------- ------------- -------------
LONG-TERM DEBT, NET OF CURRENT PORTION 3,150,000 -- -- -- 3,150,000
------------- ------------- ------------- ------------- -------------
DEFERRED REVENUE, NET OF CURRENT PORTION 870,000 -- -- -- 870,000
------------- ------------- ------------- ------------- -------------
INTERCOMPANY PAYABLE -- (12,885,893) --(e) 12,885,893 --
------------- ------------- ------------- ------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value- 69 -- -- -- 69
Common stock, $.01 par value- 705,240 (2,488,800) --(e) 2,488,800 705,240
Additional paid-in capital 160,733,433 (1,874,823) --(e) 1,874,823 160,733,433
Accumulated deficit (166,263,346) 14,562,061(e) 14,562,061(f) 48,825,000 (117,438,346)
Less: Treasury stock- (345,000 shares
at cost) (1,638,859) -- -- -- (1,638,859)
------------- ------------- ------------- ------------- -------------
Total stockholders' equity (deficit) (6,463,463) 10,198,438 14,562,061 53,188,623 42,361,537
------------- ------------- ------------- ------------- -------------
$ 23,525,914 $ (15,012,520) $ 14,562,061 $ 68,574,516 $ 62,525,849
============= ============= ============= ============= =============
</TABLE>
F-49
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
For The Year Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
Consolidated Star Other Adjustments Pro Forma
(g)
------------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
REVENUES $ 44,514,057 $(35,581,717) $ -- $ 8,932,340
COST OF REVENUES 23,050,834 (12,733,833) -- 10,317,001
------------ ------------ ------------ ------------
Gross margin 21,463,223 (22,847,884) -- (1,384,661)
------------ ------------ ------------ ------------
OPERATING EXPENSES
Research and development 7,029,348 (3,869,088)(h) 1,333,333 4,493,593
Sales and marketing 15,132,595 (13,872,735)(j) 1,333,333 2,593,193
Restructuring and asset write-off (131,310) (131,310)
General and administrative 8,866,530 (5,748,432)(j) 4,000,000 7,118,098
------------ ------------ ------------ ------------
Total operating expenses 30,897,163 (23,490,255) 6,666,666 14,073,574
------------ ------------ ------------ ------------
Loss from operations (9,433,940) 642,371 (6,666,666) (15,458,235)
------------ ------------ ------------ ------------
INTEREST EXPENSE, NET (1,257,825) 1,030,065(i) (225,535) (453,295)
OTHER INCOME 724,522 -- -- 724,522
------------ ------------ ------------ ------------
NET LOSS FROM CONTINUING OPERATIONS $ (9,967,243) $ 1,672,436 $ (6,892,201) $(15,187,008)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM:
Continuing Operations $ (0.18) $ (0.26)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 62,868,696 62,868,696
============ ============
</TABLE>
F-50
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR
THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
NOTE (1) PRO FORMA BALANCE SHEET ADJUSTMENTS
The following pro forma adjustments are required to reflect the Company's sale
of its majority owned subsidiary, Star, to Coherent as of December 31, 1998 (the
balance sheet date). Such allocations may be revised to reflect the actual costs
of this transaction as of the closing date.
(a) To eliminate Star's assets, liabilities and equity.
<TABLE>
<CAPTION>
Other Pro Forma Adjustments Net Amount
--------------------------- ----------
<S> <C> <C> <C>
(b) To account for Palomar's net cash received from the sale
of Star to Coherent. $50,757,547
(c) To account for the amount due from Coherent for the escrow
related to the sale of Star. $3,254,908
(d) To record income taxes due related to the sale of Star $2,500,000
(e) To eliminate Palomar's intercompany balance due from Star
and net investment basis of Star. $2,687,455
(f) To reflect the gain, net of related income taxes, on the
sale of Star as follows:
Net proceeds to be
received by Palomar
from Coherent $48,825,000
Add: Net negative book
value of Star 10,198,438
Add: dividends to 2,687,455
Palomar to cause the
net book value of Star
to be zero
Less: Amounts due to
Palomar from Star (12,885,893) $48,825,000
------------
</TABLE>
F-51
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR
THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
NOTE (2) PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
The following pro forma adjustments are required to reflect the pro forma
consolidated condensed statements of operations as a result of the Company's
anticipated sale of its majority owned subsidiary, Star, to Coherent as of
December 31, 1997. For purposes of the pro forma statement of operations, it is
assumed that the sale of Star and resulting gain of approximately $48.8 million,
occurred on December 31, 1997 so that the statement of operations would only
include results from continuing operations.
(g) To eliminate the effects of Star's operations on the consolidated
statements of operations for the year ended December 31, 1998.
<TABLE>
<CAPTION>
Other Pro Forma Adjustments December 31, 1998
--------------------------- -----------------
<S> <C> <C>
(h) Represents the elimination of research and development
expense allocated to Star by Palomar. $1,333,333
==========
(i) Total interest expense reduction for Palomar due to the
sale of Star to Coherent..................................... $804,530
Less: 10% interest expense charged to Star by
Palomar based on the weighted average
outstanding intercompany balances and
reflected on the historical statements of
Star............................................ (1,030,065)
-----------
Net pro forma adjustment interest expense
increase.................................... $(225,535))
(j) To eliminate expenses allocated to Star by Palomar as follows:
General and Administrative $4,000,000
Selling and Marketing $1,333,333
</TABLE>
F-52
<PAGE>
STAR MEDICAL TECHNOLOGIES, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31,1998
ASSETS 1997 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $34,622 $310,088
Accounts receivable, net - 9,339,566
Inventories 400,000 3,072,843
Other current assets 15,226 500,016
---------- -----------
Total current assets 449,848 13,222,513
---------- -----------
PROPERTY AND EQUIPMENT, AT COST, NET 910,683 933,050
---------- -----------
OTHER ASSETS:
Cost in excess of net assets acquired, net 1,166,482 816,537
Other assets 28,188 40,420
Total other assets 1,194,670 856,957
---------- -----------
$2,555,201 $15,012,520
========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short term payable to Coherent, Inc. $ - $ 4,000,000
Accounts payable 589,006 5,244,694
Accrued expenses 247,121 3,080,371
---------- -----------
Total current liabilities 836,127 12,325,065
---------- -----------
AMOUNTS DUE TO PALOMAR MEDICAL TECHNOLOGIES, INC. 10,513,876 12,885,893
---------- -----------
STOCKHOLDERS' DEFICIT:
Common stock, no par value-
Authorized -2,000,000 shares
Issued and Outstanding - 780,000 and 786,300 shares
in 1997 and 1998, respectively 2,220,000 2,488,800
Additional paid-in capital 1,874,823 1,874,823
Accumulated deficit (12,889,625) (14,562,061)
---------- -----------
Total stockholders' deficit (8,794,802) (10,198,438)
---------- -----------
$2,555,201 $15,012,520
========== ===========
</TABLE>
F-53
<PAGE>
STAR MEDICAL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $897,820 $394,000 $35,581,717
COST OF REVENUES 525,167 180,000 12,733,833
----------- ----------- -----------
Gross profit 372,653 214,000 22,847,884
----------- ----------- -----------
OPERATING EXPENSES:
Research and development 1,010,986 8,402,863 3,869,088
Sales and marketing 23,200 -- 13,872,735
General and administrative 813,329 1,077,000 5,748,432
----------- ----------- -----------
Total operating expenses 1,847,515 9,479,863 23,490,255
----------- ----------- -----------
Loss from operations (1,474,862) (9,265,863) (642,371)
INTEREST EXPENSE - 402,000 1,030,065
----------- ----------- -----------
NET LOSS $(1,474,862) $(9,667,863) $(1,672,436)
=========== =========== ===========
</TABLE>
F-54
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
EXHIBIT A Tucker Anthony, Inc. Opinion
EXHIBIT B Amount to be Received by Each Star Stockholder
EXHIBIT C Merger Agreement (with Exhibit A (Escrow Agreement), Exhibit E (Patent License Agreement), and
Schedules 1.6 (Breakdown of Proceeds) and 7.2 (Escrow Contributions))
EXHIBIT D Proposed Amendment of Certificate of Incorporation
EXHIBIT E Glossary of Defined Terms
</TABLE>
<PAGE>
EXHIBIT A
---------
TUCKER ANTHONY INCORPORATED
One Beacon Street
Boston, Massachusetts 02108
(617) 725-1762
(617) 725-2483 Fax
Investment Banking
December 7, 1998
Board of Directors
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02173
Members of the Board:
You have requested the opinion of Tucker Anthony Incorporated ("Tucker Anthony")
as to the fairness, from a financial point of view, of the consideration to be
received by Palomar Medical Technologies, Inc. (the "Company") pursuant to the
Agreement and Plan of Reorganization (the "Agreement") by and among the Company,
Star Medical Technologies, Inc. ("Star"), Coherent, Inc. (the "Buyer"), a wholly
owned subsidiary of the Buyer and certain individuals who hold options to
purchase shares of common stock of Star. Pursuant to the Agreement, a newly
formed, wholly owned subsidiary of the Buyer will be merged with and into the
Company in accordance with applicable law (the "Merger"). Pursuant to the terms
of the Agreement, the Buyer will pay cash consideration of a n-tinimum of $65
million (the "Gross Merger Consideration"), of which the Company will receive a
minimum of $54 million (the "Palomar Merger Consideration").
Tucker Anthony, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, private placements and valuations
for corporate and other purposes. In connection with our procedures outlined
herein and the preparation of our opinion, Tucker Anthony has not been
authorized by the Company to solicit, nor have we solicited or evaluated,
third-party indications of interest for the acquisition of the common stock or
assets of Star. Tucker Anthony has not participated in the negotiations leading
to the Agreement. The fees that Tucker Anthony will receive for rendering this
opinion are not contingent upon the closing of the Transaction. In the ordinary
course of our business, we may actively trade the securities of both the Company
and the Buyer for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
In arriving at our opinion, we have among other things:
(i) Reviewed the Agreement;
(ii) Reviewed certain historical financial and other information concerning
Star for the three fiscal years ended December 31, 1997 and for the
first nine months of 1998, including Star's unaudited financial
statements for the three fiscal years ended December 31, 1997 and draft
audited financial statements for the nine months ended September 30,
1998;
(iii) Reviewed certain historical financial and other information concerning
the Company for the three fiscal years ended December 31, 1997 and
quarterly results for the quarters ended March 31, 1998 and June 30,
1998, including the Company's reports on Forms 10-K and 10-Q;
1
<PAGE>
(iv) Held discussions with the senior managements of the Company and Star
with respect to Star's past and current financial performance, financial
condition and future prospects;
(v) Reviewed certain internal financial data, pr 'ections and other
information of the Company, including financial projections prepared by
managements of Star and the Company, and performed a discounted cash
flow analysis using such projections;
(vi) Analyzed certain publicly available information of other companies that
operate in similar industries, and compared Star from a financial point
of view with certain of these companies;
(vii) Reviewed the consideration received by stockholders in acquisitions of
companies that operate in similar industries or that we otherwise deemed
relevant to our inquiry; and
(viii) Conducted such other financial studies, analyses and investigations and
reviewed such other information as we deemed appropriate to enable us to
render our opinion. In our review, we have also taken into account an
assessment of general economic, market and financial conditions and
certain industry trends and related matters.
In our review and analysis and in arriving at our opinion we have assumed and
relied upon the accuracy and completeness of all the financial information
publicly available or provided to us by Star and the Company and have not
attempted to verify any of such information. We have assumed (i) that the
financial projections of Star provided to us have been prepared on a basis
reflecting the best currently available estimates and judgments of Star's and
the Company's management as to the future financial performance and results of
Star, and (ii) that such forecasts and estimates will be realized in the amounts
and in the time periods estimated. We did not make or obtain any independent
evaluations or appraisals of any assets or liabilities of Star or the Company
nor did we verify any of Star's or the Company's books or records. Our opinion
is necessarily based upon market, economic and other conditions as they exist
and can be evaluated as of the date hereof, and the information made available
to us through the date hereof.
This opinion is being furnished for the use and benefit of the Company's Board
of Directors and is not a reconunendation to shareholders. Tucker Anthony has
advised the Board of Directors that it does not believe any person other than
the Board of Directors has the legal right to rely on the opinion and, absent
any controlling precedent, would resist any assertion otherwise.
Based upon and subject to the foregoing, it is our opinion that the Palomar
Merger Consideration to be received by the Company pursuant to the Agreement is
fair, from a financial point of view, as of the date hereof.
Very truly yours,
/s/
- -----------------
Tucker Anthony Incorporated
<PAGE>
EXHIBIT B
---------
Palomar Medical Technologies, Inc.
Amounts to be Received by Each Star Stockholder
Employees: Amount (1)
- --------- -----------
James Holtz $2,946,492
Robert Grove 2,946,492
David Mundinger 3,046,241
Mark Weckwerth 430,554
Tony Island 335,554
Brain Guscott 503,331
Kenneth Anderson 251,666
Deborah Briggs 36,341
David Van Lue 134,222
Dana Rivinius 100,666
Albert Zakowski 100,666
Yong Kim 167,777
-------
Total Employees 11,000,002
Palomar Medical Technologies, Inc. 53,999,998
----------
Total $65,000,000
===========
(1) The amounts above do not reflect the escrow of $4,000,000 to be withheld by
Coherent nor any withholding taxes required to be withheld by both the
Federal and State Taxing Authorities nor the payment of $276,000 from three
Star Minority optionholders to Palomar.
<PAGE>
EXHIBIT C
---------
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
COHERENT, INC.
MEDICAL TECHNOLOGIES ACQUISITION, INC.
PALOMAR MEDICAL TECHNOLOGIES, INC.
STAR MEDICAL TECHNOLOGIES, INC.
ROBERT E. GROVE
JAMES Z. HOLTZ
AND DAVID C. MUNDINGER
DATED AS OF DECEMBER___, 1998
<PAGE>
INDEX OF EXHIBITS AND SCHEDULES
EXHIBIT DESCRIPTION
Exhibit A Escrow Agreement
Exhibit B Merger Certificate
Exhibit C Fairness Opinion
Exhibit D Form of Legal Opinion
Exhibit E Patent License Agreement
Exhibit F Form of Legal Opinion of Counsel to Palomar and Star
SCHEDULES
Schedule 1.6
Schedule 5.19(a)(ii)
Schedule 7.2
DISCLOSURE SCHEDULE
2.1 2.3(a)
2.3(b) 2.5
2.6 2.8
2.10 2.11
2.13 2.12(b)(iii)
2.14(a) 2.14(b)
2.14(c) 2.14(f)
2.14(g) 2.15(a)
2.15(b) 2.15(c)
2.15(f) 2.15(g)
2.15(h) 2.15(l)
2.15(o) 2.15(p)
2.15(q) 2.16(a)
2.17 2.18
2.19 2.20
2.22(l) 2.23
2.24(b) 2.24(d)
2.24(g) 2.24(i)
2.24(j) 2.24(k)
2.25 7.1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
PAGE
ARTICLE I THE MERGER.................................................................................................2
1.1 The Merger.......................................................................................2
1.2 Effective Time...................................................................................2
1.3 Effect of the Merger.............................................................................2
1.4 Articles of Incorporation; Bylaws................................................................2
1.5 Directors and Officers...........................................................................3
1.6 Effect of Merger on the Star Capital Stock.......................................................3
1.7 Dissenting Shares................................................................................4
1.8 Surrender of Certificates........................................................................5
1.9 No Further Ownership Rights in Star Capital Stock................................................5
1.10 Dissenting Shares After Payment of Fair Value....................................................6
1.11 Tax and Accounting Consequences..................................................................6
1.12 Taking of Necessary Action; Further Action.......................................................6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF STAR AND PALOMAR........................................................6
2.1 Organization of Star.............................................................................6
2.2 Subsidiaries.....................................................................................7
2.3 Star Capital Structure...........................................................................7
2.4 Authority........................................................................................7
2.5 No Conflict......................................................................................8
2.6 Consents.........................................................................................8
2.7 SEC Filings; Financial Statements................................................................8
2.8 Star Financial Statements........................................................................9
2.9 Customer Information.............................................................................9
2.10 No Undisclosed Liabilities.......................................................................9
2.11 No Changes.......................................................................................9
2.12 Tax Matters.....................................................................................12
2.13 Restrictions on Business Activities.............................................................14
2.14 Title of Properties; Absence of Liens and Encumbrances;
Condition of Equipment ...................................................................14
2.15 Intellectual Property...........................................................................15
2.16 Agreements, Contracts and Commitments...........................................................19
2.17 Interested Party Transactions...................................................................21
<PAGE>
2.18 Governmental Authorization......................................................................21
2.19 Litigation......................................................................................21
2.20 Accounts Receivable.............................................................................21
2.21 Minute Books....................................................................................22
2.22 Environmental Matters...........................................................................22
2.23 Brokers' and Finders' Fees; Third Party Expenses................................................25
2.24 Employee Benefit Plans and Compensation.........................................................25
2.25 Insurance.......................................................................................29
2.26 Compliance with Laws............................................................................30
2.27 Fairness Opinion................................................................................30
2.28 Representations Complete........................................................................30
2.29 Fleet Bank Lien.................................................................................30
ARTICLE III REPRESENTATIONS AND WARRANTIES OF COHERENT AND MERGER SUB...............................................30
3.1 Organization, Standing and Power................................................................31
3.2 Authority.......................................................................................31
3.3 Consents........................................................................................31
3.4 Consideration...................................................................................31
3.5 No Conflicts....................................................................................31
3.6 Sales Tax.......................................................................................32
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME......................................................................32
4.1 Conduct of Business of Star.....................................................................32
4.2 No Solicitation.................................................................................32
ARTICLE V ADDITIONAL AGREEMENTS.....................................................................................34
5.1 Star Shareholder Approval.......................................................................34
5.2 Palomar Stockholder Approval....................................................................35
5.3 Access to Information...........................................................................35
5.4 Expenses........................................................................................35
5.5 Public Disclosure...............................................................................36
5.6 Consents........................................................................................36
5.7 FIRPTA Compliance...............................................................................37
5.8 Reasonable Efforts..............................................................................37
<PAGE>
5.9 Notification of Certain Matters.................................................................37
5.10 Additional Documents and Further Assurances.....................................................37
5.11 Deleted.........................................................................................37
5.12 Employee Compensation...........................................................................37
5.13 HSR Filing......................................................................................38
5.14 Palomar Non-Competition.........................................................................38
5.15 Coherent Non-Competition........................................................................38
5.16 Coherent Sales of LightSheer Diode Lasers.......................................................39
5.17 Palomar and Star Non-Solicit....................................................................39
5.18 Coherent Non-Solicit............................................................................39
5.19 Tax Matters.....................................................................................39
5.20 Public Offering.................................................................................42
5.21 Indemnification.................................................................................42
5.22 WARN Act........................................................................................42
5.23 Swiss Franc Debenture Litigation................................................................42
5.24 No Amendment of Opto Power Agreement............................................................42
5.25 Preparation of Star Financial Statements........................................................43
5.26 Delivery of Closing Balance Sheet...............................................................43
5.27 Fleet Bank Release..............................................................................43
ARTICLE VI CONDITIONS TO THE MERGER.................................................................................43
6.1 Conditions to Obligations of Star and Palomar...................................................43
6.2 Conditions to the Obligations of Coherent and Merger Sub........................................45
6.3 Failure to Use Best Efforts.....................................................................47
ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW......................................................47
7.1 Survival of Representations and Warranties......................................................47
7.2 Escrow Fund.....................................................................................47
7.3 Indemnification.................................................................................47
7.4 Procedures with respect to Third-Party Claims...................................................48
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER......................................................................49
8.1 Termination.....................................................................................49
8.2 Effect of Termination...........................................................................50
8.3 Amendment.......................................................................................51
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8.4 Extension; Waiver...............................................................................51
ARTICLE IX DISPUTE RESOLUTION.......................................................................................51
9.1 Negotiations Between Senior Party Representatives...............................................51
9.2 Mediation.......................................................................................51
9.3 Litigation; Arbitration.........................................................................53
ARTICLE X GENERAL PROVISIONS .......................................................................................53
10.1 Notices.........................................................................................53
10.2 Interpretation..................................................................................54
10.3 Counterparts....................................................................................54
10.4 Entire Agreement; Assignment....................................................................54
10.5 Severability....................................................................................55
10.6 Other Remedies..................................................................................55
10.7 Governing Law; Jurisdiction.....................................................................55
10.8 Rules of Construction...........................................................................55
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") is made and
entered into as of December 7, 1998 (the "AGREEMENT DATE") among Coherent, Inc.,
a Delaware corporation ("COHERENT"), Medical Technologies Acquisition, Inc., a
California corporation and a wholly owned subsidiary of Coherent ("MERGER SUB"),
Palomar Medical Technologies, Inc., a Delaware corporation ("PALOMAR"), Star
Medical Technologies, Inc., a California corporation and a consolidated
subsidiary of Palomar ("STAR"), Robert E. Grove, an individual residing at 28
Grey Eagle Court, Pleasanton, California 94566, ("GROVE"), James Z. Holtz, an
individual residing at 2405 Sheffield Drive, Livermore, California 94550,
("HOLTZ"), and David C. Mundinger, an individual residing at 1544 Frederick
Michael Way, Livermore, California 94550, ("MUNDINGER").
RECITALS
A. The Boards of Directors of each of Palomar, Star, Coherent and Merger
Sub believe it is in the best interests of each corporation and the
stockholders of each corporation that Coherent acquire Star through
the statutory merger of Merger Sub with and into Star (the "MERGER")
and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, all of the issued and
outstanding shares of capital stock of Star (the "STAR CAPITAL STOCK")
together with all outstanding options to purchase Star Capital Stock
shall be converted into the right to receive the merger consideration
(as set forth in Section 1.6 hereof).
C. A portion of the merger consideration otherwise payable by Coherent in
connection with the Merger shall be placed in escrow by Coherent, the
release of which amount shall be contingent upon certain events and
conditions, as set forth in this Agreement and the Escrow Agreement
attached hereto as EXHIBIT A (the "ESCROW AGREEMENT").
D. Star, Palomar, Coherent and Merger Sub desire to make certain
representations, warranties, covenants and other agreements in
connection with the Merger.
The parties hereby agree as follows:
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ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time (as defined in Section 1.2 hereof)
and subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the General Corporation Law of California (the
"CALIFORNIA LAW"), Merger Sub shall be merged with and into Star, the separate
corporate existence of Merger Sub shall cease and Star shall continue as the
surviving corporation and as a wholly-owned subsidiary of Coherent. The
surviving corporation after the Merger is hereinafter sometimes referred to as
the "SURVIVING CORPORATION."
1.2 EFFECTIVE TIME. Unless this Agreement is earlier terminated pursuant to
Section 8.1 hereof, the closing of the Merger (the "CLOSING") will take place as
promptly as practicable, but no later than five (5) business days following
satisfaction or waiver of the conditions set forth in Article VI hereof, at the
offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California 94304-1050, or by exchange of original documentation by each of the
attorneys of the respective parties hereto via Federal Express or similar
overnight courier service, unless another place, manner or time is agreed to in
writing by Coherent and Palomar. The date upon which the Closing actually occurs
is herein referred to as the "CLOSING DATE." On the Closing Date, the parties
hereto shall cause the Merger to be consummated by filing a Certificate of
Merger in substantially the form attached hereto as EXHIBIT B (or like
instrument) (the "MERGER CERTIFICATE") with the Secretary of State of
California, in accordance with the relevant provisions of applicable law (the
time of acceptance by the Secretary of State of California of such filing being
referred to herein as the "EFFECTIVE TIME").
1.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of California Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of Star and
Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities
and duties of Star and Merger Sub shall become the debts, liabilities and duties
of the Surviving Corporation.
1.4 ARTICLES OF INCORPORATION; BYLAWS.
(a) Unless otherwise determined by Coherent prior to the Effective
Time, at the Effective Time, the Articles of Incorporation of Merger Sub
shall be the Articles of Incorporation of the Surviving Corporation until
thereafter amended as provided by law and such Articles of Incorporation;
PROVIDED, HOWEVER, that Article I of the Articles of Incorporation of the
Surviving Corporation shall be amended to read as follows: "The name of the
corporation is Star Medical Technologies, Inc."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
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1.5 DIRECTORS AND OFFICERS. The sole director of the Surviving Corporation
immediately after the Effective Time shall be Bernard Couillaud, who shall hold
office in accordance with the Articles of Incorporation and Bylaws of the
Surviving Corporation. The officers of the Surviving Corporation immediately
after the Effective Time shall be Bernard Couillaud as President and Chief
Financial Officer, and Scott H. Miller as Vice President and Secretary, each to
hold office in accordance with the Bylaws of the Surviving Corporation.
1.6 EFFECT OF MERGER ON THE STAR CAPITAL STOCK. At the Effective Time, by
virtue of the Merger and without any action on the part of Palomar, Star, Merger
Sub, Coherent or the holders of any shares of the Star Capital Stock, the
following shall take place:
(a) CONSIDERATION FOR STAR CAPITAL STOCK. Each share of the Star
Capital Stock issued and outstanding immediately prior to the Effective
Time (other than any Dissenting Shares, as defined in Section 1.7 and
shares of Star Capital Stock owned by Coherent, Merger Sub or held in the
treasury of Star) will be automatically canceled and extinguished and be
converted automatically into the right to receive, upon surrender of the
certificate representing such share of Star Capital Stock in the manner
provided in Section 1.8, without interest, an amount of cash as calculated
below upon the terms and subject to the conditions set forth in this
Agreement (including, without limitation, the escrow provisions set forth
in Article VII hereof) and in the Escrow Agreement:
(i) CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms shall have the meanings set forth below:
(a) "MERGER CONSIDERATION" shall mean $65,000,000.
(b) "ESCROW AMOUNT" shall mean $4,000,000.
(c) "OUTSTANDING SHARES" shall mean issued and outstanding
shares of Star Capital Stock on a fully diluted basis
assuming conversion of all securities convertible or
exercisable for shares of Star Capital Stock.
(d) "TOTAL OUTSTANDING SHARES" shall mean all Outstanding
Shares.
(ii) PAYMENT FOR STAR CAPITAL STOCK. At the Closing, Coherent
shall pay or cause to be paid to each shareholder of Star (each, a
"STAR SHAREHOLDER") and each holder of an option to purchase shares of
Star Common Stock (to the extent the shares subject to option are
vested) (a "STAR OPTION HOLDER") in cash, by wire transfer of
immediately available funds an amount equal to the product of (i) the
sum of the Merger Consideration plus the aggregate amount which would
be necessary to exercise all of the outstanding vested options to
purchase Star Common Stock multiplied by (ii) the number of
Outstanding Shares owned by such Star Shareholder or Star Option
Holder divided by the Total Outstanding Shares; provided, that there
shall be withheld from any amount payable to each Star Option Holder
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an amount equal to the exercise price of all vested options to
purchase Star Common Stock held by such Star Option Holder and any
amounts required to be withheld from such Star Option Holder under
applicable law; provided further, that $89,100 shall be deducted from
the amounts payable to each of Grove, Holtz and Mundinger and $267,300
shall be added to the amount payable to Palomar; provided further,
that there shall be deducted from the escrow amounts payable to
Palomar, Grove, Holtz and Mundinger the amounts set forth on Section
7.2 of the Disclosure Schedule. The amounts to be received by each
Star Shareholder and Star Option Holder as of the date hereof are set
forth on Schedule 1.6.
(b) CAPITAL STOCK OF MERGER SUB. Each share of Common Stock of Merger
Sub issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock of the Surviving Corporation. Each
stock certificate of Merger Sub evidencing ownership of any such shares
shall continue to evidence ownership of such shares of capital stock of the
Surviving Corporation.
1.7 DISSENTING SHARES.
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Star Capital Stock held by a holder who has exercised and
perfected appraisal rights for such shares in accordance with Chapter 13 of
the California Law and who, as of the Effective Time, has not effectively
withdrawn or lost such appraisal rights ("DISSENTING SHARES"), shall not
represent a right to receive the Merger Consideration as provided in
Section 1.6, but the holder thereof shall only be entitled to such rights
as are granted by the California Law.
(b) Notwithstanding the provisions of subsection (a), if any holder of
Dissenting Shares shall effectively withdraw or lose (through failure to
perfect or otherwise) his or her appraisal rights, then, as of the later of
the Effective Time and the occurrence of such event, such holder's shares
shall automatically be converted into and represent only the right to
receive the Merger Consideration to which such holder would otherwise be
entitled under Section 1.6, upon surrender of the certificate representing
such shares.
(c) Palomar and Star shall give Coherent (i) prompt notice of any
written demand for appraisal received by Palomar or Star (as the case may
be) pursuant to the applicable provisions of the California Law and (ii)
the opportunity to participate in all negotiations and proceedings with
respect to such demands. Star shall not, except with the prior written
consent of Coherent, voluntarily make any payment with respect to any such
demands or offer to settle or settle any such demands. To the extent that
Coherent or Star makes any payment or payments in respect of any Dissenting
Shares, the Merger Consideration payable under Section 1.6 hereof shall be
reduced by an amount equal to the aggregate consideration paid for
Dissenting Shares.
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1.8 SURRENDER OF CERTIFICATES.
(a) COHERENT TO PROVIDE CASH; ESCROW FUNDING; EXCHANGE OF
CERTIFICATES. At the Closing, the shareholders of Star (the "STAR
SHAREHOLDERS") shall deliver to Coherent certificates representing all of
the issued and outstanding shares of Star Capital Stock duly endorsed for
transfer to Coherent against Coherent's wire transfer of immediately
available funds in the aggregate amount of the Merger Consideration (less
the Escrow Amount as applicable) to the Star Shareholders as set forth on
Schedule 1.6. At the Closing, Coherent shall provide the Star Shareholders
with a copy of the payment and/or instructions pursuant to which the Escrow
Amount is delivered to the Escrow Agent.
(b) TRANSFERS OF OWNERSHIP. If any payment is to be made to a person
other than the holder in whose name the share certificate surrendered in
exchange therefor is registered, it will be a condition of the payment
thereof that the share certificate so surrendered will be properly endorsed
and accompanied by all documents required to evidence and effect such
transfer and to evidence that any applicable stock transfer taxes have been
paid.
(c) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any
certificates evidencing shares of Star Capital Stock shall have been lost,
stolen or destroyed, Coherent shall make payment in exchange for such lost,
stolen or destroyed certificates, upon the making of an affidavit of that
fact by the holder thereof, in such amount, if any, as may be required
pursuant to Section 1.6 hereof; PROVIDED, HOWEVER, that Coherent may, in
its sole discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificates to deliver
an agreement (in form and substance satisfactory to Coherent) to indemnify
Coherent against any claim that may be made against Coherent with respect
to the certificates alleged to have been lost, stolen or destroyed.
(d) NO LIABILITY. Notwithstanding anything to the contrary in this
Section 1.8, neither the Surviving Corporation nor any party hereto shall
be liable to a holder of shares of Star Capital Stock for any amount
properly paid to a public official pursuant to any applicable abandoned
property, escheat or similar law.
1.9 NO FURTHER OWNERSHIP RIGHTS IN STAR CAPITAL STOCK. The Merger
Consideration paid upon the surrender for exchange of shares of Star Capital
Stock in accordance with the terms hereof shall be deemed to be full
satisfaction of all rights pertaining to such shares of Star Capital Stock, and
there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Star Capital Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time, share
certificates representing Star Capital Stock are presented to the Surviving
Corporation for any reason, they shall be canceled and extinguished and be
converted automatically into the right to receive, upon surrender of the
certificate representing such share of Star Capital Stock in the manner provided
in Section 1.8, without interest, an amount of cash as provided in this Article
I.
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1.10 DISSENTING SHARES AFTER PAYMENT OF FAIR VALUE. Dissenting Shares, if
any, after payments of fair value in respect thereto have been made to
dissenting Star Shareholders pursuant to the California Law, shall be canceled.
1.11 TAX AND ACCOUNTING CONSEQUENCES. It is acknowledged by the parties
that the Merger shall constitute a taxable acquisition of the stock of the
Company under the Internal Revenue Code (the "CODE"), and may be treated as a
"purchase" of Star Capital Stock for financial and accounting purposes. Each
party has consulted with its own tax advisors and accountants with respect to
the tax and accounting consequences to them, respectively, of the Merger.
1.12 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time after the
Effective Time, any such further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Star and Merger Sub, the officers and directors of the
Surviving Corporation are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF STAR
AND PALOMAR
Subject to such exceptions as are specifically disclosed in the disclosure
schedule (referencing the appropriate section and paragraph numbers) supplied by
Star and Palomar to Coherent (the "DISCLOSURE SCHEDULE") and dated as of the
date hereof, that as of the date hereof and as of the Effective Time (as though
made at the Effective Time), each of Star and Palomar hereby, jointly and
severally, represents and warrants to Coherent and Merger Sub, as follows:
2.1 ORGANIZATION OF STAR.
(a) Star is a corporation duly organized, validly existing and in good
standing under the laws of the State of California. Star has the corporate
power to own its properties and to carry on its business as now being
conducted and as contemplated by the parties hereto. Attached to Section
2.1 of the Disclosure Schedule are true and correct copies of the Articles
of Incorporation and Bylaws of Star, each as amended to date. Section 2.1
of the Disclosure Schedule lists the directors and officers of Star. Except
as set forth in Section 2.1 of the Disclosure Schedule, the operations now
being conducted by Star have not been conducted under any other name.
(b) Star is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the failure to be so
qualified could have a Material Adverse Effect. For all purposes of this
Agreement, the term "MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE"
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means any change, event or effect, or any change, event or effect which can
reasonably be foreseen to be likely to result in a change, event or effect,
that is materially adverse to the business, assets (including intangible
assets), condition (financial or otherwise) or results of operations of
Star, excluding changes, events or effects proximately caused by Coherent's
acts or omissions.
2.2 SUBSIDIARIES. There are no subsidiaries of Star, or other entities in
which Star owns or has owned any shares in the capital of or any interest in, or
control, directly or indirectly of any corporation, partnership, association,
joint venture or other business entity (a "SUBSIDIARY").
2.3 STAR CAPITAL STRUCTURE.
(a) AUTHORIZED AND OUTSTANDING CAPITAL STOCK. The authorized capital
stock of Star consists of 2,000,000 shares of authorized Common Stock, no
par value per share, of which 786,300 shares are issued and outstanding as
of the date hereof. All of the Star Capital Stock is held by Palomar,
except as set forth in Section 2.3(a) of the Disclosure Schedule which sets
forth the name and addresses of any other shareholder. All outstanding
shares of Star Capital Stock are duly authorized, validly issued, fully
paid and non-assessable and not subject to preemptive rights created by
statute, the Articles of Incorporation or Bylaws of Star or any agreement
and have been issued in compliance with federal and state securities laws.
There are no declared or accrued unpaid dividends with respect to any
shares of Star Capital Stock that would decrease the net book value as
determined in accordance GAAP (the "NET BOOK VALUE") of Star to less than
$0.00. Star has no other capital stock authorized, issued or outstanding.
(b) STOCK OPTIONS. As of the date hereof, except as set forth in
Section 2.3(b) of the Disclosure Schedule, there are no options, warrants,
conversion privileges or other rights, agreements, arrangements or
commitments obligating Star to issue or sell any shares of, or make any
payments based on the value or appreciation of any, Star Capital Stock or
securities or obligations of any kind convertible into or exchangeable for
any shares of Star Capital Stock or any other person. The holders of
outstanding shares of Star Capital Stock are not entitled to any
contractual or statutory preemptive or other similar rights. Upon
consummation of the Merger in accordance with the terms of this Agreement,
Coherent will own the entire equity interest in Star, and there will be no
options, warrants, conversion privileges or other rights, agreements,
arrangements or commitments obligating the Surviving Corporation to issue
or sell any shares of capital stock of the Surviving Corporation.
2.4 AUTHORITY. Each of Star and Palomar has all requisite power and
authority to enter into this Agreement to which it is a party and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of Star and
Palomar, and no further action is required on the part of Star and Palomar to
authorize the Agreement and the transactions contemplated hereby, subject only
to the approval of this Agreement by the holders of Star Capital Stock and
Palomar capital stock. This Agreement and the Merger have been unanimously
approved by both the Board of Directors of Star and the Board of Directors of
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Palomar. This Agreement has been duly executed and delivered by Star and
Palomar, as the case may be, and, assuming the due authorization, execution and
delivery by the other parties hereto, constitutes the valid and binding
obligation of Star and Palomar enforceable in accordance with its terms, subject
to the laws of general application relating to bankruptcy, insolvency and the
relief of debtors and to rules of law governing specific performance, injunctive
relief or other equitable remedies.
2.5 NO CONFLICT. Except as set forth in Section 2.5 of the Disclosure
Schedule, the execution and delivery of this Agreement by either Star or Palomar
does not, and, the consummation of the transactions contemplated hereby will
not, conflict with, or result in any violation of, or default under (with or
without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit under (any such event, a "CONFLICT") (i) any provision of
the Articles of Incorporation and Bylaws of Star, (ii) any material mortgage,
indenture, lease, instrument of indebtedness, security interest, contract or
other agreement or instrument, permit, concession, franchise or license to which
Star or, to the extent it relates to Star's business, Palomar or any of their
respective properties or assets are subject, (iii) any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Star, or to the extent
it relates to Star's business, Palomar or their respective properties or assets,
or (iv) imposition of a security interest, lien, pledge, charge, claim,
restrictions on transfer, mortgage, security interests or other encumbrances of
any sort (collectively, "LIENS") or instrument, permit, concession, franchise or
license to Star's properties or assets.
2.6 CONSENTS. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("GOVERNMENTAL ENTITY") or any
third party, including a party to any agreement with Star or Palomar (so as not
to trigger any Conflict), is required by or with respect to Star or Palomar in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable securities laws, Delaware law and the Hart
Scott Rodino Act (the "HSR ACT") thereby, (ii) the filing of the Merger
Certificate with the Secretary of State of the State of California, or (iii) the
consents set forth in Section 2.6 of the Disclosure Schedule.
2.7 SEC FILINGS; FINANCIAL STATEMENTS. Accurate and complete copies of
all registration statements, proxy statements and other statements, reports,
schedules, forms and other documents (other than Forms 4 and 5) filed by
Palomar, Star or their respective affiliates with the Securities and Exchange
Commission (the "SEC") since January 1, 1997 are available on the World Wide Web
at the SEC's website, the address of which is www.sec.gov, and Palomar will
notify Coherent within 24 hours following filing of any registration statements,
proxy statements and other statements, reports, schedules, forms and other
documents filed after the date of this Agreement and prior to the Effective Time
(collectively, the "PALOMAR SEC DOCUMENTS"). All statements, reports, schedules,
forms and other documents required to have been filed by Palomar or Star with
the SEC have been so filed. As of the time it was filed with the SEC (or, if
amended or superseded by a later filing, then on the date of such filing), none
of the Palomar SEC Documents as they relate to Star and its business contained
any untrue statement of 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.
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2.8 STAR FINANCIAL STATEMENTS. Section 2.8 of the Disclosure Schedule
includes true, correct and complete copies of Star's unaudited balance sheets
for the year ended December 31, 1997, and the related unaudited statements of
income for the twelve-month period ended December 31, 1997 (the "STAR YEAR-END
FINANCIALS"), Star's audited balance sheet as of September 30, 1998 and the
related audited statements of income for the nine-month period ended September
30, 1998 (the "STAR NINE-MONTH FINANCIALS") (the Star Year-End Financials and
the Star Nine-Month Financials shall collectively be referred to as the "STAR
FINANCIALS"). The Star Financials have been prepared in accordance with GAAP,
and, except as set forth in Section 2.8 of the Disclosure Schedule, applied on a
basis consistent throughout the periods indicated and consistent with each
other. The Star Financials fairly present, in all material respects, the
consolidated financial condition, consolidated operating results and cash flows
of Star as of the dates and during the periods indicated therein and are
consistent with the books and records of Star.
2.9 CUSTOMER INFORMATION. Other than Coherent, Star and Palomar have sole
and exclusive ownership, free and clear of any Liens, of all customer files and
other customer information relating to Star's current and former customers (the
"CUSTOMER INFORMATION").
2.10 NO UNDISCLOSED LIABILITIES. Star has no liability, indebtedness,
obligation, expense, claim, deficiency, guaranty or endorsement of any type,
whether accrued, absolute, contingent, matured, unmatured or other (whether or
not required to be reflected in financial statements in accordance with GAAP),
except liabilities which (i) have been reflected in the Star Financials, (ii)
have arisen in the ordinary course of business consistent with past practices
since September 30, 1998, or (iii) have been set forth in Section 2.10 of the
Disclosure Schedule.
2.11 NO CHANGES. Except as set forth in Section 2.11 of the Disclosure
Schedule and other than as proximately caused by the acts or omissions of
Coherent, since September 30, 1998, there has not been, occurred or arisen any:
(a) capital expenditure, commitment or transaction or the incurrence
of any liability in excess of $25,000 on the part of Star, except in the
ordinary course of business as conducted on that date and consistent with
past practices or in connection with the consummation of the Merger;
(b) amendments to (or agreements to amend) Star's Articles of
Incorporation or Bylaws;
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(c) destruction of, damage to or loss of any material assets or
properties of Star, whether or not covered by insurance, materially and
adversely affecting its properties, assets, business, financial condition
or prospects;
(d) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action by Star;
(e) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by Star;
(f) revaluation by Star of any of its assets, including without
limitation writing down the value of inventory or writing off notes or
accounts receivable, other than in the ordinary course of business
consistent with past practices;
(g) except for dividends necessary to bring the Net Book Value of Star
to $0.00 following the payment of such dividends ("PERMITTED DIVIDENDS")
and except as otherwise agreed to by Coherent, declaration, set aside or
payment of any cash or stock dividend or other distribution in respect of
capital, or redemption or other acquisition of any of Star Capital Stock;
(h) increase, payment or authorization of payment of any bonus,
increased salary or special remuneration to any director, officer, employee
or independent contractor of Star, including any amounts for accrued but
unpaid salary or bonuses (other than normal amounts made on a regular
basis, consistent with past practices), or entering into any employment,
retention, severance or similar contract or arrangement by Star with any of
the foregoing persons, other than employment agreements with temporary
contract employees, none of whom is paid more than $25 per hour (exclusive
of fees paid directly to any temporary employee agency);
(i) adoption of, or increase in the payments to or benefits under, any
profit-sharing, bonus, deferred compensation, savings, insurance, pension,
retirement or other employee benefit plan for or with any employee of Star;
(j) sale, lease, license, granting a lien on or other disposition of
(i) any Star Intellectual Property (as defined in Section 2.15(a)) or (ii)
any of the assets or properties of Star, other than dispositions of scrap
material or sales of inventory in the ordinary course of business and
consistent with past practices and other than sales of assets valued at
less than $10,000 and other than Permitted Liens;
(k) execution, amendment, termination, violation by Star or Palomar,
or modification (or agreement to do so) of any material contract, agreement
or license to which Star is a party, by which it is bound or to which it is
a beneficiary, other than in the ordinary course of business consistent
with past practices;
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(l) loan by Star to any person or entity, guarantee by Star of any
material indebtedness, issuance or sale of any debt securities of Star,
indemnification of or surety for any obligation, or guarantee of any debt
securities of others, except for advances to employees for travel and
business expenses in the ordinary course of business, consistent with past
practice;
(m) waiver or release of any right or claim of Star including any
write-off or other compromise of any account receivable of Star, other than
in the ordinary course of business consistent with past practices;
(n) the commencement of any lawsuit or proceeding or, to Star's or
Palomar's Knowledge, notice or investigation against Star or its affairs or
the Star Capital Stock or threat thereof. For purposes of the Agreement,
"KNOWLEDGE", when used with respect to Star, shall mean information which
would be within the actual knowledge of Grove, Holtz or Mundinger after
reasonable investigation and within the actual knowledge of Joseph P.
Caruso, Louis P. Valente, Michael H. Smotrich or Anthony D. Fiorillo and,
when used with respect to Palomar, shall mean information within the actual
knowledge of Joseph P. Caruso, Louis P. Valente, Michael H. Smotrich or
Anthony D. Fiorillo;
(o) notice of any claim or potential claim of ownership by any person
other than Star of the Star Intellectual Property or of infringement by
Star of any other person's Intellectual Property;
(p) issuance, grant, delivery or sale, or contract to issue or sell,
by Star of any shares of Star Capital Stock or securities exchangeable,
convertible or exercisable therefor, or any securities, warrants, options
or rights to purchase any of the foregoing;
(q) any event or condition of any character that has had a Material
Adverse Effect on Star;
(r) payment, discharge or satisfaction, in an amount in excess of
$25,000 (in any one case) or $50,000 (in the aggregate), of any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) of Star other than (i) payments to Palomar,
including the payment of any debts owed by Star to Palomar or Permitted
Dividends, in accordance with this Agreement, or (ii) the payment,
discharge or satisfaction of liabilities in the ordinary course of business
consistent with past practices;
(s) election or change by Star or Palomar of any material election in
respect of Taxes (as defined in Section 2.12 hereof), adoption or change of
any accounting method in respect of Taxes, entering into any closing
agreement, settlement of any claim or assessment in respect of Taxes, or
consent to any extension or waiver of the limitation period applicable to
any claim or assessment in respect of Taxes with Star or with respect to
Star's products or assets;
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(t) encumbrance or permitting the encumbrance of (i) any of Star's
assets, except in the ordinary course of business consistent with past
practices and except for Permitted Liens, or (ii) Star's Capital Stock;
(u) failure to maintain Star's equipment or other material assets in
good working condition and repair according to the standards Star or
Palomar has maintained up to the Agreement Date;
(v) subdivision or combination of the outstanding shares of any class
or series of Star Capital Stock or entering into any recapitalization
affecting the number of outstanding shares of any class or series of Star
Capital Stock or affecting any other of its securities;
(w) any release by Star or its agents, employees or contractors of any
Contaminants (as defined in Section 2.22 hereof) to the environment or any
exposure of persons to a Contaminant as a consequence of the acts or
omissions of Star or its agents, employees and contractors, which in either
case violates any applicable Environmental Requirement;
(x) negotiation or agreement by Star or any officer or employees
thereof to do any of the things described in the preceding clauses (a)
through (w) (other than negotiations with Coherent and its representatives,
including without limitation, regarding the transactions contemplated by
this Agreement).
2.12 TAX MATTERS.
(a) DEFINITION OF TAXES AND TAX RETURNS. For the purposes of this
Agreement, "TAX" or, collectively, "TAXES", means: (i) any and all federal,
state, local and foreign taxes, assessments and other governmental charges,
duties, impositions and liabilities, including taxes based upon or measured
by gross receipts, income, profits, sales, use and occupation, and value
added, ad valorem, transfer, franchise, withholding, payroll, recapture,
employment, excise and property taxes, together with all interest,
penalties and additions imposed with respect to such amounts; (ii) any
liability for the payment of any amounts of the type described in clause
(i) as a result of being a member of an affiliated, consolidated, combined
or unitary group for any period; and (iii) any liability for the payment of
any amounts of the type described in clause (i) or (ii) as a result of any
express or implied obligation to indemnify any other person or as a result
of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes
of a predecessor entity.
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(b) TAX RETURNS AND AUDITS.
"TAX RETURNS" shall mean federal, state, local and foreign returns,
estimates, information statements and reports ("RETURNS") relating to any
and all Taxes concerning or attributable to Star or its operations prior to
the Effective Time and such Returns are true and correct and have been
completed in accordance with applicable law.
(i) Star has filed all Tax Returns that it was required to file.
All such Tax Returns were correct and complete in all material
respects. All Taxes owed by Star (whether or not shown on any Tax
Return) have been paid. Star is not currently the beneficiary of any
extension of time within which to file any Tax Return.
(ii) There is no material dispute or claim concerning any Tax
liability of Star either (A) claimed or raised by any authority in
writing or (B) as to which Palomar is aware.
(iii) Section 2.12(b)(iii) of the Disclosure Schedule lists all
federal, state, local, and foreign Tax Returns filed with respect to
Star for taxable periods ended on or after December 31, 1995,
indicates those Tax Returns that have been audited, and indicates
those Tax Returns that currently are the subject of audit. Palomar has
delivered to the Buyer correct and complete copies of all federal Tax
Returns, examination reports, and statements of deficiencies assessed
against, or agreed to by Star since December 31, 1995. Neither Palomar
nor Star has waived any statute of limitations in respect of Taxes or
agreed to any extension of time with respect to a Tax assessment or
deficiency.
(iv) Star has not filed a consent under Code ss. 341(f)
concerning collapsible corporations. Star has not made any material
payments, is not obligated to make any material payments, and is not a
party to any agreement that could obligate it to make any material
payments that will not be deductible under Code ss. 280G. Star has not
been a United States real property holding corporation within the
meaning of Code ss. 897(c)(2) during the applicable period specified
in Code ss. 897(c)(1)(A)(iii). Star is not party to any tax allocation
or sharing agreement. Star has not been a member of an Affiliated
Group filing a consolidated federal Tax Return (other than a group the
common parent of which was Palomar) or has any liability for the taxes
of any person (other than any of Star) under Reg. ss. 1.502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
(v) The unpaid Taxes of Star (A) did not, as of September 30,
1998, exceed by any material amount the reserve for Tax liability
(rather than any reserve for deferred taxes established to reflect
timing differences between book and tax ) set forth on the face of the
balance sheet contained in the Star Nine-Month Financials (rather than
in any notes thereto) and (B) will not exceed by any material amount
that reserve as adjusted for operations and transactions through the
Closing Date in accordance with the past custom and practice of Star
in filing its Tax Returns.
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(vi) Star is (and will be at the Effective Time) a member of the
"selling consolidated group" of which Palomar is the common parent
within the meaning of Section 338(h)(10).
2.13 RESTRICTIONS ON BUSINESS ACTIVITIES. Except as set forth in Section
2.13 of the Disclosure Schedule and other than agreements to which Coherent is a
party, there is no agreement (noncompete or otherwise), commitment, judgment,
injunction, order or decree to which Star or any of its officers, directors or
employees is a party or otherwise binding upon Star or any of its officers,
directors or employees which has or may have the effect of prohibiting or
impairing any material business practice of Star, any acquisition of material
property (tangible or intangible) by Star or the conduct of business by Star.
Without limiting the foregoing, neither Star nor, to the Knowledge of Star or
Palomar, any of Star's officers, directors, or employees has entered into any
agreement under which Star or such officer, director, or employee is restricted
from selling, licensing or otherwise distributing any of Star's technology or
products to or providing services to, customers or potential customers or any
class of customers, in any geographic area, during any period of time or in any
segment of the market except as set forth in Section 2.13 of the Disclosure
Schedule.
2.14 TITLE OF PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES; CONDITION OF
EQUIPMENT
(a) REAL PROPERTY. Section 2.14(a) of the Disclosure Schedule sets
forth a list of all real property currently or previously owned and/or
leased by Star or at which the operations of Star is conducted (separately
designated as owned or leased currently or in the past), and, with respect
to currently leased property, the name of the lessor, the date of the lease
and each amendment thereto and, with respect to any current lease, the
aggregate annual rental and/or other fees payable under any such lease. All
such current leases are in full force and effect, are valid and effective
in accordance with their respective terms, and there is not, under any of
such leases, any existing material default or material event of default (or
event which with notice or lapse of time, or both, would constitute a
material default) by Star or Palomar or, to the Knowledge of Star and
Palomar, by the Lessor, except as set forth in Section 2.14(a) of the
Disclosure Schedule.
(b) TITLE; LEASEHOLD INTEREST. Except as set forth in Section 2.14(b)
of the Disclosure Schedule, Star has good and valid title to, or, in the
case of leased properties and assets, valid leasehold interests in, all of
its tangible properties and assets, real, personal and mixed, used or held
for use in its business or reflected in its financial statements, free and
clear of any Liens, except as reflected in the Closing Balance Sheet and
except for Liens for Taxes not yet due and payable, the Liens and
exceptions to title against the owned real property of Star specified in
Section 2.14(b) of the Disclosure Schedule and such imperfections of title
and encumbrances with respect to other personal properties, which are not
material in character, amount or extent, and which do not detract from the
value, or interfere with the present use, of the property subject thereto
or affected thereby ("PERMITTED LIENS").
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(c) EQUIPMENT. Section 2.14(c) of the Disclosure Schedule lists all
items of equipment (the "EQUIPMENT") owned or leased by Star or required
for the conduct of Star's business or reflected in its financial statements
(except for Equipment which individually has a value not exceeding $50,000
and is otherwise immaterial to the operation of the business of Star as
presently conducted).
(d) REAL ESTATE LAW COMPLIANCE. To the Knowledge of Star and Palomar,
the real property owned or leased by Star, and the use thereof, complies in
all material respects with the laws, rules, regulations, zoning ordinances,
use permits, governmental orders and stipulations, and private covenants,
conditions, and restrictions applicable thereto ("REAL ESTATE LAWS") and
have been reasonably maintained consistent in all material respects with
standards generally followed by similar businesses and buildings, and are
sufficient for the conduct of Star's business as presently conducted in all
material respects.
(e) PROCEEDINGS. To the Knowledge of Star or Palomar, no condemnation,
environmental, zoning, land-use or other regulatory proceedings or rule
making procedures have been instituted or planned to be instituted with
respect to the owned or leased real property, personal property and, if
applicable, Equipment ("FACILITIES"), used by Star or for the conduct of
Star's business nor has Star or Palomar received notice of any proceedings
to impose any new Taxes or operating restrictions upon any of such
Facilities or Star's conduct of business therein. Star and Palomar shall
notify Coherent promptly of any such proceedings of which Star and/or
Palomar become aware prior to the Closing.
(f) DEMOLITION, ALTERATIONS AND IMPROVEMENTS. Except as set forth in
Section 2.14(f) of the Disclosure Schedule, on the Closing Date there will
be no outstanding written or oral contracts for any demolition, alterations
or improvements on or to Star's Facilities, which have not been fully paid
and performed.
(g) REQUIRED EQUIPMENT AND PROPERTY. Except as set forth in Section
2.14(g) of the Disclosure Schedule, Star owns all of the tangible property
required to conduct its business as currently conducted, other than
tangible property which individually has value less than $10,000 and is
readily available from third parties, and all such property owned or leased
by Star is in good operating condition, regularly and properly maintained,
subject to normal wear and tear which does not interfere with the conduct
of the business of Star as presently conducted.
2.15 INTELLECTUAL PROPERTY
(a) For the purposes of this Agreement, the following terms have the
following definitions:
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"INTELLECTUAL PROPERTY" shall mean any or all of the following and all
rights in, arising out of, or associated with: (i) all United States,
foreign and international patents and applications (including provisional
applications) therefor and all reissues, divisions, renewals, extensions,
continuations, and continuations-in-part thereof; (ii) all inventions
(whether patentable or not), invention disclosures, improvements, trade
secrets, proprietary information, know how, technology, technical data and
customer lists, and all documentation relating to any of the foregoing;
(iii) all copyrights, copyright registrations and applications therefor and
all other rights corresponding thereto throughout the world; (iv) all mask
works, mask work registrations and applications therefor; (v) all
industrial designs and any registrations and applications therefor
throughout the world; (vi) all trade names, logos, common law trademarks
and service marks, trademark and service mark registrations and
applications therefor and all goodwill associated therewith throughout the
world, and all World Wide Web Internet addresses, sites and domain names;
(vii) all databases and data collections and all rights therein throughout
the world; (viii) any similar, corresponding or equivalent rights to any of
the foregoing; and (ix) all documentation related to any of the foregoing.
"STAR INTELLECTUAL PROPERTY" shall mean any Intellectual Property that
is owned by Star, but does not include Palomar Registered Intellectual
Property. "PALOMAR REGISTERED INTELLECTUAL PROPERTY" shall mean all
Registered Intellectual Property of Palomar set forth on Section 2.15(a) of
the Disclosure Schedule.
"COHERENT INTELLECTUAL PROPERTY" shall mean any Intellectual Property
that is owned by Coherent.
"REGISTERED INTELLECTUAL PROPERTY" shall mean all United States,
international and foreign: (i) patents, patent applications (including
provisional applications); (ii) registered trademarks, applications to
register trademarks, intent-to-use applications, or other registrations or
applications related to trademarks; (iii) registered copyrights and
applications for copyright registration; (iv) any mask work registrations
and applications to register mask works; and (v) any other Intellectual
Property that is the subject of an application, certificate, filing,
registration or other document issued by, filed with or recorded by, any
state, government or other public legal authority.
(b) Section 2.15(b) of the Disclosure Schedule lists all Registered
Intellectual Property owned in whole or in part by, or filed in the name
of, Star (the "STAR REGISTERED INTELLECTUAL PROPERTY") and lists any
proceedings or actions before any court, tribunal (including the United
States Patent and Trademark Office (the "PTO") or equivalent authority
anywhere in the world) related to any Star Registered Intellectual
Property. Star has good and exclusive title to each item of Star Registered
Intellectual Property.
(c) Except as set forth in Section 2.15(c) of the Disclosure Schedule,
each item of Star Intellectual Property, including all Star Registered
Intellectual Property listed in Section 2.15(b) of the Disclosure Schedule
and all Intellectual Property licensed to Star, is free and clear of any
Liens.
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(d) Except for patent licenses impliedly granted to customers of Star
to use products purchased from Star and except as provided in the Patent
License Agreement (as defined below), within the 12-month period
immediately preceding the Agreement Date, Star has not transferred
ownership of or granted any license of or right to use or authorized the
retention of any rights to use any Intellectual Property, which license,
right, or authorization survives the Closing, that is or was Star
Intellectual Property, to Palomar, any Palomar Subsidiary, or any third
party.
(e) Other than "shrink-wrap" and similar widely available commercial
end-user licenses, the contracts, licenses and agreements listed in Section
2.16(a) of the Disclosure Schedule include all contracts, licenses and
agreements currently in effect to which Star is a party with respect to any
Intellectual Property. No person who has licensed Intellectual Property to
Star has ownership rights or license rights to improvements made by Star in
such Intellectual Property which has been licensed to Star. Star is not in
breach of, nor has Star failed to perform under, any of such contracts,
licenses or agreements, and, to the Knowledge of Star, no other party to
any such contract, license or agreement is in breach of or has failed to
perform under such contract, license or agreement.
(f) Section 2.15(f) of the Disclosure Schedule lists all contracts,
licenses and agreements (other than those in which Coherent has acted as
Palomar's or Star's agent in the execution thereof) between Star and any
other person wherein or whereby Star has agreed to, or assumed, any
material obligation or duty to warrant, indemnify, reimburse, hold
harmless, guaranty or otherwise assume or incur any obligation or liability
or provide a right of rescission with respect to the infringement or
misappropriation by Star or such other person of the Intellectual Property
of any person other than Star.
(g) Except for works of authorship authored by Coherent and except as
set forth in Section 2.15(g) of the Disclosure Schedule, Star owns
exclusively, and has good title to, all copyrighted works that are, or are
a part of, (i) Star products and (ii) other works of authorship that Star
otherwise purports to own.
(h) The operation of the business of Star as it currently is
conducted, including but not limited to Star's design, development, use,
import, branding, advertising, promotion, marketing, manufacture and sale
of the products, technology or services (including products, technology or
services currently under development as set forth on Section 2.15(h) of the
Disclosure Schedule) of Star does not, and will not, when conducted by
Coherent in substantially the same manner following the Closing, infringe
or misappropriate the Intellectual Property of any other person, violate
the rights of any person (including rights to privacy or publicity), or
constitute unfair competition or trade practices under the laws of any
jurisdiction. Except as set forth in Section 2.15(h) of the Disclosure
Schedule, Star has not received notice from any person claiming that such
operation or any act, product, technology or service (including products,
technology or services currently under development) of Star infringes or
misappropriates any Intellectual Property of any person or constitutes
unfair competition or trade practices under the laws of any jurisdiction
(nor is Star or Palomar aware of any basis therefor).
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(i) All necessary registration, maintenance and renewal fees in
connection with such Star Registered Intellectual Property have been paid
and all necessary documents and certificates in connection with such
Registered Intellectual Property have been filed with the relevant patent,
copyright, trademark or other authorities in the United States,
international or foreign jurisdictions, as the case may be, for the
purposes of maintaining such Registered Intellectual Property. In each case
in which Star has acquired any Intellectual Property from any person, Star
has obtained a valid and enforceable assignment sufficient to irrevocably
transfer all rights in such Intellectual Property (including the right to
seek past and future damages with respect to such Intellectual Property) to
Star and, to the maximum extent provided for by and in accordance with
applicable laws and regulations, Star has recorded each such assignment
with the relevant governmental authorities, including the PTO, the U.S.
Copyright Office, or their respective equivalents in any relevant foreign
jurisdiction, as the case may be, except where failure to do so would not
and will not have a Material Adverse Effect.
(j) Star has not claimed "Small Entity" status or other particular
status in the application for any Registered Intellectual Property, which
claim of status (i) was not true and accurate at the time made or (ii) has
since become inaccurate or false.
(k) There are no contracts, licenses or agreements between Star and
any other person with respect to Star Intellectual Property under which
there is any dispute, to the Knowledge of Star or Palomar, regarding the
scope of such agreement, or performance under such agreement including with
respect to any payments to be made or received by Star thereunder.
(l) Star has taken all steps that are reasonably necessary and/or
consistent with standard industry practices to protect confidential
information and trade secrets of Star or provided by any other person to
Star. Without limiting the foregoing, Star has, and enforces, a policy
requiring each employee, consultant and contractor to execute proprietary
information, confidentiality and assignment agreements substantially in
Star's standard forms, and, except as set forth in Section 2.15(l) of the
Disclosure Schedule, all current and former employees, consultants and
contractors of Star have executed such an agreement.
(m) No Star Intellectual Property or product, technology or service of
Star is subject to any proceeding or outstanding decree, order, judgment,
agreement or stipulation that restricts in any manner the use, transfer or
licensing thereof by Star or may affect the validity, use or enforceability
of such Star Intellectual Property.
(n) All of Star's products (including products currently under
development) will record, store, process, calculate and present calendar
dates falling on and after (and if applicable, spans of time including)
January 1, 2000, and will calculate any information dependent on or
relating to such dates in the same manner, and with the same functionality,
data integrity and performance, as the products record, store, process,
calculate and present calendar dates on or before December 31, 1999, or
calculate any information dependent on or relating to such dates.
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(o) Except as otherwise provided herein or as set forth in Section
2.15(o) of the Disclosure Schedule, neither the consummation of the
transactions contemplated by this Agreement nor the transfer to Coherent in
connection therewith of any contract, license, agreement or Star
Intellectual Property (i) will cause or obligate Coherent to grant to any
third party any right or license with respect to any Intellectual Property,
(ii) will cause or obligate Coherent to pay any royalty or other amount in
excess of that being paid by Coherent prior to the Closing or (iii) will
obligate Coherent not to compete in any particular market or territory or
will subject Coherent to any other restriction relating to the conduct of
its business.
(p) Except as set forth in Section 2.15(p) of the Disclosure Schedule,
all material Star Intellectual Property, including any item thereof, will
be fully transferable, alienable and licensable by, or between, Star and
Coherent without restriction and without payment of any kind being due to
any third party.
(q) Except as set forth in Section 2.15(q) of the Disclosure Schedule,
the consummation of the transactions contemplated by this Agreement will
not result in the loss of, or otherwise adversely affect, any ownership
rights of Star in any Star Intellectual Property or result in the breach or
termination of any contract, license or agreement to which Star is a party.
2.16 AGREEMENTS, CONTRACTS AND COMMITMENTS
(a) Except as specifically identified in the Star Financials and as
set forth in Sections 2.14(a), 2.15(f), or 2.16(a) of the Disclosure
Schedule, and other than agreements to which Coherent is a party, Star is
not a party to nor is it bound by:
(i) any material contract, license or agreement currently in
effect (A) with respect to Star Intellectual Property licensed or
transferred to any third party or (B) pursuant to which a third party
or employee has licensed or transferred any Intellectual Property to
Star;
(ii) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or
other organization material to the conduct of Star's business as
presently conducted, which is not either immediately terminable at a
cost of less than $10,000 or terminable within 60 days without
penalty;
(iii) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting
of benefits of which will be accelerated, by the occurrence of any of
the transactions contemplated by this Agreement or the value of any of
the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement;
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(iv) any lease of personal or real property having a
value individually in excess of $25,000 or $50,000 in the aggregate;
(v) any agreement, contract or commitment containing any covenant
limiting the freedom of Star to engage in any line of business or to
compete with any person;
(vi) any agreement, contract or commitment currently in effect
relating to capital expenditures and involving future payments in
excess of $25,000 individually or $50,000 in the aggregate;
(vii) any agreement, contract or commitment outside the ordinary
course of Star's business relating to the disposition or acquisition
of material assets or any interest in any business enterprise;
(viii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the
material borrowing of money or extension of credit;
(ix) any purchase order or contract for the purchase of materials
involving in excess of $25,000 individually or $50,000 in the
aggregate that is not cancelable without material penalty within sixty
(60) days;
(x) any material construction contracts in excess of $200,000;
(xi) any material distribution, joint marketing or development
agreement;
(xii) any other agreement, contract or commitment that involves
$100,000 or more or is not cancelable without material penalty within
sixty (60) days; or
(xiii) any agreement to indemnify, or otherwise perform any
remedial activities, relating to Contaminants, which is likely to
result in a cost exceeding $100,000.
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(b) Except as set forth in Section 2.16(b) of the Disclosure Schedule,
Star is in compliance with and has not breached, violated or defaulted
under, or received notice that it has materially breached, violated or
defaulted under, any of the terms or conditions of any material agreement,
contract, covenant, instrument, lease, license or commitment to which Star
is a party or by which it is bound or with respect to which Star is a
beneficiary (individually a "MATERIAL CONTRACT" and, collectively,
"MATERIAL CONTRACTS"), nor is Star or Palomar aware of any event that would
constitute such a breach, violation or default with the lapse of time,
giving of notice or both. Each Material Contract is in full force and
effect and is not, to the Knowledge of Star, subject to any default
thereunder by any party obligated to Star pursuant thereto. Star has
obtained, or will use its commercially reasonable best efforts to obtain
prior to the Closing Date, all necessary consents, waivers and approvals of
parties to any Material Contract as are required thereunder in connection
with the Merger or for such Material Contracts to remain in effect without
modification after the Closing. Following the Effective Time, Star will be
permitted to exercise all of Star's rights under the Material Contracts
without the payment of any material additional amounts or consideration
other than ongoing fees, royalties or payments which Star would otherwise
be required to pay had the transactions contemplated by this Agreement not
occurred.
2.17 INTERESTED PARTY TRANSACTIONS. Except for Palomar and its subsidiaries
and except as disclosed in Section 2.17 of the Disclosure Schedule, no officer
or director of Star or Palomar or Star Shareholder (nor any ancestor, sibling,
descendant or spouse of any of such persons, or any trust, partnership or
corporation in which any of such persons has or has had an interest), has or has
had directly or indirectly (i) an interest in any entity which furnished or
sold, or furnishes or sells, services, products or technology that Star
furnishes or sells, or proposes to furnish or sell, or (ii) any interest in any
entity that purchases from or sells or furnishes to Star any goods or services
or (iii) a beneficial interest in any Material Contract; PROVIDED, HOWEVER, that
ownership of no more than one percent (1%) of the outstanding voting stock of a
publicly traded corporation shall not be deemed an "interest in any entity" for
purposes of this Section 2.17.
2.18 GOVERNMENTAL AUTHORIZATION. Section 2.18 of the Disclosure Schedule
accurately lists each consent, license, permit, grant or other authorization
issued to Star or Palomar by a Governmental Entity (i) pursuant to which Star
currently operates or holds any interest in any of its properties or (ii) which
is required for the operation of Star's business or the holding of any such
interest (herein collectively called "STAR Authorizations"). The Star
Authorizations are in full force and effect and constitute all Star
Authorizations required to permit Star to operate or conduct its business as now
conducted or hold any interest in its properties or assets, except where the
failure to have any such Star Authorization would not constitute a Material
Adverse Effect on Star.
2.19 LITIGATION. Except as set forth in Section 2.19 of the Disclosure
Schedule, there is no action, suit, proceeding or governmental investigation of
any nature pending, or, to the Knowledge of Star or Palomar, threatened against
Star or Palomar, with respect to Star's past or present operations or its former
or present properties or any of its officers or directors. No Governmental
Entity has at any time challenged or questioned the legal right of Star to
conduct its operations as presently or previously conducted.
2.20 ACCOUNTS RECEIVABLE. All accounts receivable of Star set forth on the
Star Nine-Month Financials ("ACCOUNTS RECEIVABLE") arose in the ordinary course
of business, are carried at values determined in accordance with GAAP
consistently applied and are collectible except to the extent of reserves
therefor set forth on the Star Nine-Month Financials. Except as set forth in
Section 2.20 of the Disclosure Schedule, no person has any Lien on any of such
Accounts Receivable and no request or agreement for deduction or discount has
been made with respect to any of such Accounts Receivable other than in the
ordinary course of business consistent with past practices.
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2.21 MINUTE BOOKS. The minutes of Star made available to counsel for
Coherent are the only minutes of Star and contain a reasonably accurate summary
of all meetings of the Board of Directors (or committees thereof) of Star (the
"STAR BOARD") and Star Shareholders or actions by written consent since the time
of incorporation of Star.
2.22 ENVIRONMENTAL MATTERS.
(a) CONTAMINATION. Neither Palomar nor Star has at any property that
Star has at any time owned, operated, used, occupied or leased: (i)
operated any underground storage tanks; or (ii) released any amount of any
substance that has been designated by any Governmental Entity or by
applicable federal, state or local law to be radioactive, toxic, hazardous
or otherwise a danger to health or the environment, including, without
limitation, PCBs, asbestos and petroleum and all substances listed as
hazardous substances pursuant to CERCLA (as that term is defined in
subsection (o) below), or defined as a hazardous waste pursuant to the
United States Resource Conservation and Recovery Act of 1976, as amended,
and the regulations promulgated pursuant to said laws, but excluding
typical office and janitorial supplies legally and properly and safely
maintained.
(b) PERMITS. Star has obtained and currently possesses all permits and
approvals required for the conduct of its business as presently conducted
under Environmental Requirements (as that term is defined in subsection (o)
below), including, without limitation, all material environmental, health
and safety permits, licenses, approvals, authorizations, variances,
agreements and waivers of federal, state and local governmental authorities
("ENVIRONMENTAL PERMITS"), and all such Environmental Permits are in good
standing and Star is in material compliance with all terms and conditions
of such Environmental Permits.
(c) CONTAMINATION. No Contamination (as defined herein) is present on,
in or under any facility which Star currently owns, leases or otherwise
uses (a "STAR FACILITY") or, to the Knowledge of Star or Palomar, is
reasonably likely to migrate to a Star Facility from other property, and no
release of Contaminants has occurred or is occurring on or about any Star
Facility which has caused or is likely to cause Contamination on or about
Star Facilities or any other property in the vicinity thereof or any
adverse health effect to any person. As used herein the term
"CONTAMINATION" means the presence of any Contaminants in the soil,
groundwater, surface water or ambient air of a property in a concentration
that (i) exceeds the concentrations allowed by Environmental Requirements,
(ii) requires investigation, remediation, removal, or monitoring, or (iii)
otherwise presents a significant risk to human health or the environment.
(d) EMPLOYEE EXPOSURE. No Contamination present on any Star Facility
and no Hazardous Materials Activities conducted by Star, at any Star
Facility or elsewhere, has resulted in the exposure of any employee of Star
or any other person to a Contaminant in a manner which has, could or will
cause an adverse health effect to said employee or person.
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(e) STORAGE OF CONTAMINANTS. Other than Contaminants which are
reasonably necessary for the conduct of the business of Star as currently
conducted and are properly stored and properly contained in accordance with
applicable Environmental Requirements, no Contaminant will be present at
Star Facilities as of the Closing.
(f) ASBESTOS. Any asbestos-containing material which is on or part of
Star Facilities (excluding any raw materials used in the manufacture of
products or products themselves) is in good repair according to the current
standards and practices governing such material, and its presence or
condition does not violate any applicable Environmental Requirements.
(g) NO NOTICES OR REPORTS. Neither Star nor Palomar with respect to
Star business operations or Star Facilities, has filed or is required to
file, any notice or report under or pursuant to any Environmental
Requirement reporting a release of Contaminants or any violation of any
Environmental Requirement with any Governmental Entity or third party.
(h) DISCLOSURE AND TRANSFER OBLIGATIONS. Star has complied, and on or
before the Closing, will comply with all environmental disclosure and
property or business transfer obligations imposed upon Star with respect to
this transaction by applicable law.
(i) POTENTIALLY RESPONSIBLE PARTY; WRITTEN ORDERS AND AGREEMENTS. Star
has not received notice that it has been named as a potentially responsible
party nor is it subject to any outstanding written order from or agreement
with any federal, state or local governmental authority or other person or
to any judicial or docketed administrative proceeding involving any of its
currently or previously owned or leased property or operations inconsistent
with any (x) Environmental Requirements, (y) Remedial Action (as that term
is defined in subsection (o) below) or (z) any Environmental Liabilities
and Costs (as that term is defined in subsection (o) below).
(j) ENVIRONMENTAL LIABILITIES AND COSTS. Except as set forth on
Section 2.22(j) of the Disclosure Schedule, there are no conditions or
circumstances associated with Star's use of its currently or previously
owned or leased properties or operations of Star which are likely to give
rise to Environmental Liabilities and Costs.
(k) POTENTIAL CLAIMS. Star has not received any notice or claim to the
effect that it is or is reasonably expected to be liable to any person as a
result of a Release (as that term is defined in subsection (o) below) or
threatened Release or any notice letter or request for information under
CERCLA.
(l) ENVIRONMENTAL LIENS. No Environmental Lien (as that term is
defined in subsection (o) below) and no unrecorded Environmental Lien of
which Star has notice has attached to any property of Star.
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(m) DEFINITIONS. For purposes of this Agreement, the following terms
shall have the meanings set forth below:
(i) "CONTAMINANT" means any waste, pollutant, hazardous material,
hazardous substance, toxic substance, hazardous waste, special waste,
petroleum or petroleum-derived substance or waste or other material,
substance, or organism regulated by any applicable Governmental Entity
as a threat to health or the environment, or any constituent of any
such pollutant material, substance or waste, including, without
limitation, any pollutant material, substance or waste regulated under
any Environmental Requirement.
(ii) "ENVIRONMENTAL REQUIREMENT" means all federal, state, local
and foreign laws or regulations, codes, orders, decrees, judgments or
injunctions issued, promulgated, approved or entered thereunder and
all court decisions, settlement agreements, and binding private
agreements applicable to Star relating to pollution or protection of
the environment or occupational health and safety, including the
release or threatened release of any hazardous material into the
environment (including, without limitation, ambient air, surface
water, ground water, land surface or subsurface strata) or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Contaminants or the
emission, or exposure of humans, plants or animals to Contaminants.
Environmental Requirements shall include, without limitation, the
Comprehensive Environmental Response, Compensation Liability Act (42
U.S.C. Section 9601, ET. SEQ.), as amended or supplemented from time
to time ("CERCLA"), the Hazardous Material Transportation Act (49
U.S.C. Section 1801, ET SEQ.), the Solid Waste Disposal Act (42 U.S.C.
Section 6901, ET SEQ.), the Federal Water Pollution Control Act (33
U.S.C. Section 1251, ET SEQ.), the Clean Air Act (42 U.S.C. Section
7401, ET SEQ.), the Toxic Substances Control Act (15 U.S.C. Section
2601, ET SEQ.), the Occupational Safety and Health Act (29 U.S.C.
Section 651, ET SEQ.), the Federal Insecticide Fungicide and
Rodenticide Act (7 U.S.C. Section 136, ET SEQ.), the Food, Drug and
Cosmetic Act (21 U.S.C. Section 301, ET SEQ.), the Medical Waste
Tracking Act of 1988, and the similar laws of the various states and
nations, Pub. L. No. 100-582, 102 Stat. 2950 (1988), and the similar
laws of the various states and nations, as such laws have been amended
or supplemented from time to time, and any similar future federal, or
present or future state, local or foreign, statutes, ordinances or
bylaws.
(iii) "ENVIRONMENTAL LIABILITIES AND COSTS" means all
liabilities, obligations, responsibilities, Remedial Actions, losses,
damages, punitive damages, consequential damages, treble damages,
costs and expenses (including all reasonable fees, disbursements and
expenses of counsel, expert and consulting fees and costs of
investigation and feasibility studies), fines, penalties, sanctions
and interest incurred as a result of any claim or demand, whether
based in contract, tort, implied or express warranty, strict
liability, criminal or civil statute, including, without limitation,
any Environmental Requirement, order, variance or agreement with a
federal, state or local governmental authority or other person,
arising from Contamination located on or about any facility now or
previously owned, used, occupied or leased by Star or from any
environmental, health or safety conditions or a Release or threatened
Release resulting from the past operations of Star (or any of its
predecessors in interest), or any release for which Star is otherwise
responsible under any Environmental Requirement.
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(iv) "ENVIRONMENTAL LIEN" means any lien or similar interest in
favor of any federal, state or local governmental authority for
Environmental Liabilities and Costs.
(v) "HAZARDOUS MATERIALS ACTIVITIES" means any disposition,
transportation, manufacture or sale of any product containing a
Contaminant.
(vi) "RELEASE" means any release, spill, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, pouring,
emptying, escaping, dumping, discarding, leaching or migration of a
Contaminant into the indoor or outdoor environment including the
movement of Contaminants through or in the air, soil, surface water,
groundwater or property, including the abandonment or discarding of
barrels, containers and other closed receptacles containing any
Contaminant.
(vii) "REMEDIAL ACTION" means all actions necessary to (i) clean
up, remove, treat or in any other way address Contaminants in the
indoor or outdoor environment, (ii) prevent a Release or condition
that is reasonably likely to result in a Release or minimize further
release of Contaminants so they do not migrate or endanger or threaten
to endanger present or future public health or welfare or the indoor
or outdoor environment or (iii) perform pre-remedial studies and
investigations and post-remedial monitoring and care.
2.23 BROKERS' AND FINDERS' FEES; THIRD PARTY EXPENSES. Except as set forth
in Section 2.23 of the Disclosure Schedule, Star has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with the Agreement or
any transaction contemplated hereby. Section 2.23 of the Disclosure Schedule
sets forth the principal terms and conditions of any agreement, written or oral,
with respect to such fees. Section 2.23 of the Disclosure Schedule sets forth
Star's current reasonable estimate of all fees and expenses of third parties,
including, but not limited to legal, accounting and financial advisory services
of Star expected to be incurred by Star in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby.
2.24 EMPLOYEE BENEFIT PLANS AND COMPENSATION.
(a) DEFINITIONS. With the exception of the definition of "Affiliate"
set forth in Section 2.24(a)(i) hereof (which definition shall apply only
to this Section 2.24), for purposes of this Agreement, the following terms
shall have the meanings set forth below:
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(i) "AFFILIATE" shall mean any other person or entity under
common control with Star within the meaning of Section 414(b), (c),
(m) or (o) of the Code and the regulations issued thereunder;
(ii) "COBRA" shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended;
(iii) "DOL" shall mean the Department of Labor;
(iv) "EMPLOYEE" shall mean any current or former employee,
consultant or director of Star;
(v) "EMPLOYEE AGREEMENT" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation, visas,
work permit or other agreement, contract or understanding between Star
or any Affiliate and any Employee in such person's capacity as an
Employee;
(vi) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended;
(vii) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
(viii) "IRS" shall mean the Internal Revenue Service;
(ix) "MULTIEMPLOYER PLAN" shall mean any "Pension Plan" (as
defined below) which is a "multiemployer plan," as defined in Section
3(37) of ERISA;
(x) "PBGC" shall mean the Pension Benefit Guaranty Corporation;
(xi) "PENSION PLAN" shall mean each Star Employee Plan which is
an "employee pension benefit plan," within the meaning of Section 3(2)
of ERISA; and
(xii) "STAR EMPLOYEE PLAN" shall mean any plan, program, policy,
practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, deferred compensation,
performance awards, stock or stock-related awards, fringe benefits or
other employee benefits or remuneration of any kind, whether written
or unwritten or otherwise, funded or unfunded, including without
limitation, each "employee benefit plan," within the meaning of
Section 3(3) of ERISA which is or has been maintained, contributed to,
or required to be contributed to, by Star or any Affiliate for the
benefit of any Employee in such person's capacity as an Employee, or
with respect to which Star or any Affiliate has or may have any
liability or obligation in connection with benefits for any Employee.
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(b) SCHEDULE. Section 2.24(b) of the Disclosure Schedule contains an
accurate and complete list of each Star Employee Plan and each Employee
Agreement under each Star Employee Plan or Employee Agreement. Star does
not have any plan or commitment to establish any new Star Employee Plan or
Employee Agreement, to modify any Star Employee Plan or Employee Agreement
(except to the extent required by law or to conform any such Star Employee
Plan or Employee Agreement to the requirements of any applicable law, in
each case as previously disclosed to Coherent in writing, or as required by
this Agreement), or to enter into any Star Employee Plan or Employee
Agreement.
(c) DOCUMENTS. Star has provided to Coherent: (i) correct and complete
copies of all documents embodying each Star Employee Plan and each Employee
Agreement including (without limitation) all amendments thereto and all
related trust documents; (ii) the most recent annual actuarial valuations,
if any, prepared for each Star Employee Plan; (iii) the three (3) most
recent annual reports (Form Series 5500 and all schedules and financial
statements attached thereto), if any, required under ERISA or the Code in
connection with each Star Employee Plan; (iv) if the Star Employee Plan is
funded, the most recent annual and periodic accounting of Star Employee
Plan assets; (v) the most recent summary plan description together with the
summary(ies) of material modifications thereto, if any, required under
ERISA with respect to each Star Employee Plan; (vi) all IRS determination,
opinion, notification and advisory letters, and all material applications
and correspondence to or from the IRS or the DOL with respect to any such
application or letter related to Star; (vii) all material written
agreements and contracts relating to each Star Employee Plan, including,
but not limited to, administrative service agreements, group annuity
contracts and group insurance contracts; (viii) all communications material
to any Employee or Employees relating to any Star Employee Plan and any
proposed Star Employee Plans, in each case, relating to any amendments,
terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would
result in any material liability to Star; (ix) all material correspondence
to or from any governmental agency relating to any Star Employee Plan; (x)
all policies pertaining to fiduciary liability insurance covering the
fiduciaries for each Star Employee Plan; (xi) all discrimination tests for
each Star Employee Plan for the most recent plan year; and (xii) all
registration statements, annual reports (Form 11-K and all attachments
thereto) and prospectuses prepared in connection with each Star Employee
Plan.
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(d) EMPLOYEE PLAN COMPLIANCE. Except as set forth on Section 2.24(d)
of the Disclosure Schedule, (i) Star has performed in all material respects
all obligations required to be performed by it under, is not in default or
violation of, and has no Knowledge of any default or violation by any other
party to each Star Employee Plan, and each Star Employee Plan has been
established and maintained in all material respects in accordance with its
terms and in compliance with all applicable laws, statutes, orders, rules
and regulations, including but not limited to ERISA or the Code; (ii) each
Star Employee Plan intended to qualify under Section 401(a) of the Code and
each trust intended to qualify under Section 501(a) of the Code has either
received a favorable determination, opinion, notification or advisory
letter from the IRS with respect to each such Plan as to its qualified
status under the Code, including all amendments to the Code effected by the
Tax Reform Act of 1986 and subsequent legislation, or has remaining a
period of time under applicable Treasury regulations or IRS pronouncements
in which to apply for such a letter and make any amendments necessary to
obtain a favorable determination as to the qualified status of each such
Star Employee Plan; (iii) no "prohibited transaction," within the meaning
of Section 4975 of the Code or Sections 406 and 407 of ERISA, and not
otherwise exempt under Section 408 of ERISA, has occurred with respect to
any Star Employee Plan; (iv) there are no actions, suits or claims pending,
or, threatened or reasonably anticipated (other than routine claims for
benefits) against any Star Employee Plan or against the assets of any Star
Employee Plan; (v) each Star Employee Plan can be amended, terminated or
otherwise discontinued after the Effective Time in accordance with its
terms, without liability to Coherent, Star or any of its Affiliates (other
than ordinary administration expenses); (vi) there are no audits, inquiries
or proceedings pending or, to the Knowledge of Star, Palomar or any
Affiliates, threatened by the IRS or DOL with respect to any Star Employee
Plan; and (vii) neither Star, Palomar nor any Affiliate is subject to any
penalty or tax with respect to any Star Employee Plan under Section 502(i)
of ERISA or Sections 4975 through 4980 of the Code.
(e) PENSION PLAN. Neither Star nor an Affiliate has ever maintained,
sponsored, participated in or contributed to, nor does Star or any
Affiliate currently maintain, sponsor, participate in or contribute to, a
Pension Plan which is subject to Title IV of ERISA or Section 412 of the
Code.
(f) MULTIEMPLOYER PLANS. At no time has Star or any Affiliate
contributed to or been obligated to contribute to any Multiemployer Plan.
(g) NO POST-EMPLOYMENT OBLIGATIONS. Except as set forth in Section
2.24(g) of the Disclosure Schedule, no Company Employee Plan provides, or
reflects or represents any liability to provide, retiree life insurance,
retiree health or other retiree employee welfare benefits to any person for
any reason, except as may be required by COBRA or other applicable statute,
and Star has never represented, promised or contracted (whether in oral or
written form) to any Employee (either individually or to Employees as a
group) or any other person that such Employee(s) or other person would be
provided with retiree life insurance, retiree health or other retiree
employee welfare benefit, except to the extent required by statute.
(h) COBRA. Neither Star nor any Affiliate has, prior to the Effective
Time and in any material respect, violated any of the health care
continuation requirements of COBRA, the requirements of FMLA or any similar
provisions of state law applicable to its Employees.
(i) EFFECT OF TRANSACTION.
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(i) Except as set forth in Section 2.24(i) of the Disclosure
Schedule, the execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event
under any Star Employee Plan, Employee Agreement, trust or loan that
will or may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with
respect to any Employee.
(ii) Except as set forth in Section 2.24(i) of the Disclosure
Schedule, no payment or benefit which will or may be made by Star or
its Affiliates with respect to any Employee as a result of the
transactions contemplated by this Agreement or otherwise will be
characterized as a "parachute payment," within the meaning of Section
280G(b)(2) of the Code (but without regard to clause (ii) thereof).
(j) EMPLOYMENT MATTERS. Star: (i) has withheld and reported all
amounts required by law or by agreement to be withheld and reported with
respect to wages, salaries and other payments to Employees; (ii) is not
liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing; (iii) is not liable for any payment to
any trust or other fund governed by or maintained by or on behalf of any
governmental authority, with respect to unemployment compensation benefits,
social security or other benefits or obligations for Employees (other than
routine payments to be made in the normal course of business and consistent
with past practice); and (iv) has issued all options and other rights to
purchase shares of its capital stock at the fair market value of such stock
on the date of issuance of options and rights. Except as set forth in
Section 2.24(j) of the Disclosure Schedule, there are no pending or, to the
Knowledge of Star and Palomar, threatened or reasonably anticipated claims
or actions against Star under any worker's compensation policy or long-term
disability policy.
(k) LABOR. No work stoppage or labor strike against Star is pending,
threatened or reasonably anticipated. Star does not know of any activities
or proceedings of any labor union to organize any Employees. Except as set
forth in Section 2.24(k) of the Disclosure Schedule, there are no actions,
suits, claims, labor disputes or grievances pending, or, to the Knowledge
of Star and Palomar, threatened or reasonably anticipated relating to any
labor, safety or discrimination matters involving any Employee, including,
without limitation, charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
aggregate, result in any material liability to Star. Star has not engaged
in any unfair labor practices within the meaning of the National Labor
Relations Act. Except as set forth in Section 2.24(k) of the Disclosure
Schedule, Star is not presently, nor has it been in the past, a party to,
or bound by, any collective bargaining agreement or union contract with
respect to Employees and no collective bargaining agreement is being
negotiated by Star.
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2.25 INSURANCE. Section 2.25 of the Disclosure Schedule lists all insurance
policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of Star. There is no
material claim by Star pending under any of such policies or bonds as to which
coverage has been questioned, denied or disputed by the underwriters of such
policies or bonds. All premiums due and payable under all such policies and
bonds have been paid, and Star and its affiliates are otherwise in compliance
with the terms of such policies and bonds (or other policies and bonds providing
substantially similar insurance coverage).
2.26 COMPLIANCE WITH LAWS. Star has complied with, is not in violation of,
and neither Palomar nor Star has received any notices of violation with respect
to, any foreign, federal, state or local statute, law or regulation except for
such violations as would not cause or constitute a Material Adverse Change.
2.27 FAIRNESS OPINION. Attached as EXHIBIT C hereto is a copy of the
fairness opinion regarding the Merger prepared for Palomar by its financial
advisors.
2.28 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by Star or Palomar (as modified by the Disclosure Schedule), nor any
statement made in any schedule or certificate furnished by Star or Palomar
pursuant to this Agreement or furnished in or in connection with documents
mailed or delivered to the stockholders of Palomar (the "PALOMAR STOCKHOLDERS")
and the Star Shareholders for use in soliciting their consent to this Agreement
and the Merger contains or will contain at the Effective Time, any untrue
statement of a material fact, or omits or will omit at the Effective Time to
state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which made, not
misleading.
2.29 FLEET BANK LIEN. Notwithstanding any provision to the contrary in this
Agreement, upon payment to Fleet National Bank, including any affiliates or
transferees thereof ("FLEET BANK") at the Closing in the amount set forth on the
certificate provided to Coherent pursuant to Section 6.2(h) hereof, Coherent
shall own all of the assets (including, without limitation all of the Star
Intellectual Property (as such term is defined in Section 2.15 hereof)) of Star
free and clear of any Liens held by Fleet Bank and that the Star Guaranty (as
such term is defined in the letter agreement between Palomar and Fleet National
Bank dated November 16, 1998 (the "FLEET LETTER AGREEMENT")) will be released.
Notwithstanding any provision to the contrary in this Agreement or the
Disclosure Schedule, this Section 2.29 shall not be in any way modified or
limited by the Disclosure Schedule or any provision of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COHERENT AND MERGER SUB
As of the date hereof and as of the Effective Time (as though made at the
Effective Time), each of Coherent and Merger Sub hereby, jointly and severally,
represents and warrants to Palomar and Star, as follows:
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3.1 ORGANIZATION, STANDING AND POWER. Coherent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of California. Each of Coherent and
Merger Sub has the corporate power to own its properties and to carry on its
business as now being conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified would
have a material adverse effect on the ability of Coherent and Merger Sub to
consummate the transactions contemplated hereby.
3.2 AUTHORITY. Each of Coherent and Merger Sub has all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Coherent and Merger
Sub, and no further action is required on the part of Coherent or Merger Sub to
authorize this Agreement and the transactions contemplated hereby. This
Agreement and the Merger have been approved by the Board of Directors of
Coherent and the Board of Directors of Merger Sub. This Agreement has been duly
executed and delivered by Coherent and Merger Sub and constitutes the valid and
binding obligations of Coherent and Merger Sub, enforceable in accordance with
their terms, except as such enforceability may be limited by principles of
public policy and subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies.
3.3 CONSENTS. Except for (i) such consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable securities laws and the HSR Act thereby and (ii) the filing of the
Merger Certificate with the Secretary of State of the State of California, no
consent, waiver, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other federal, state, county, local or other foreign governmental authority,
instrumentality, agency or commission ("GOVERNMENTAL ENTITY") or any third
party, including a party to any agreement with Coherent (so as not to trigger
any Conflict), is required by or with respect to Coherent in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby and thereby.
3.4 CONSIDERATION. At the Effective Time of the Merger, Coherent shall have
available, sufficient cash to enable it to perform its obligations under this
Agreement.
3.5. The execution and delivery of this Agreement by Coherent does not,
and, the consummation of the transactions contemplated hereby will not, (i)
Conflict with any provision of the Certificate of Incorporation and Bylaws of
Coherent, (ii) Conflict with any material mortgage, indenture, lease, instrument
of indebtedness, security interest, contract or other agreement or instrument,
permit, concession, franchise or license to which Coherent or any of its
properties or assets are subject, (iii) Conflict with any judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Coherent or
its properties or assets, or (iv) cause the imposition of a security interest,
or instrument, permit, concession, franchise or license to Coherent's properties
or assets.
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3.6 SALES TAX. Coherent has collected and remitted all sales taxes, which
are now or in the past have become due and payable, for products that were sold
by Coherent pursuant to the Sales Agency, Development and License Agreement
between Coherent and Palomar dated as of November 17, 1997.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 CONDUCT OF BUSINESS OF STAR. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, each of Star and Palomar agree (except as expressly
contemplated by this Agreement and to the extent that Coherent shall otherwise
consent in writing and except for changes proximately caused by Coherent's acts
or omissions), to carry on Star's business in the usual, regular and ordinary
course in substantially the same manner as heretofore conducted, to pay the
debts and Taxes of Star when due, consistent with past practices, to pay or
perform other obligations when due, and, to the extent consistent with such
business, use their commercially reasonable best efforts consistent with past
practice and policies to preserve intact Star's present business organizations,
keep available the services of Star's present officers and key employees and
preserve Star's relationships with customers, suppliers, distributors,
licensors, licensees, and others having business dealings with it, all with the
goal of preserving unimpaired Star's goodwill and ongoing businesses at the
Effective Time. Star and Palomar shall promptly notify Coherent of any event or
occurrence or emergency not in the ordinary course of business of Star and any
material event involving Star. Except as expressly contemplated by this
Agreement, and without limiting the generality of the foregoing, prior to the
Effective Time Star shall not, without the prior written consent of Coherent:
(i) take any of the actions set forth in Section 2.11 hereof, (ii) permit or
suffer any director, officer or employee of Star to do any of the actions set
forth in Section 2.11 (other than negotiations with Coherent and its
representatives regarding the transactions contemplated by this Agreement), or
(iii) take or agree in writing or otherwise to take any other action that would
prevent Star from performing or cause Star not to perform its covenants
hereunder.
4.2 NO SOLICITATION
(a) IMPERMISSIBLE ACTIONS; INJUNCTION; FIDUCIARY DUTIES. Until the
earlier of the Effective Time or the date of termination of this Agreement
pursuant to the provisions of Section 8.1 hereof, neither Star nor Palomar
shall (nor will Star nor Palomar permit any of their respective officers,
directors, agents, representatives or affiliates to), directly or
indirectly, take any of the following actions with any party other than
Coherent and its designees: (i) solicit, encourage, initiate or participate
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in any negotiations or discussions with respect to any offer or proposal to
acquire all, substantially all or a significant portion of Star's business,
properties or technologies or any portion of Star Capital Stock (whether or
not outstanding) or assets whether by merger, purchase of assets, tender
offer or otherwise, or effect any such transaction, (ii) disclose any
information to any person concerning Star's business, technologies or
properties or afford to any person or entity access to its properties,
technologies, books or records in each case in connection with an
Acquisition Proposal (as defined in Section 4.2(d)) or in connection with
any inquiry regarding the making of an Acquisition Proposal, (iii) assist
or cooperate with any person to make any proposal to purchase all or any
part of Star Capital Stock or assets, (iv) enter into any agreement with
any person providing for the acquisition of all or any portion of Star
Capital Stock or assets, or (v) make or authorize any statement,
recommendation or solicitation in support of any possible acquisition of
Star (whether by way of merger, purchase of capital stock, purchase of
assets or otherwise) or any portion of Star Capital Stock or Star's assets
(whether by way of merger, purchase of assets, tender offer or otherwise).
The parties hereto agree that irreparable damage would occur in the event
that the provisions of this Section 4.2 were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly
agreed by the parties hereto that Coherent shall be entitled to seek an
injunction or injunctions to prevent breaches of the provisions of this
Section 4.2 and to enforce specifically the terms and provisions hereof in
any court of the United States or any state having jurisdiction, this being
in addition to any other remedy to which Coherent may be entitled at law or
in equity. Notwithstanding the foregoing provisions (except for the notice
provisions set forth in subsection (c) below), if at any time prior to the
Effective Time, the Board of Directors of Palomar (the "PALOMAR BOARD") and
the Star Board determine in good faith after consultation with non-employee
legal counsel and non-employee financial advisors, that failure to take
action set forth in (i), (ii), (iii), (iv) or (v) above would result in a
breach of such Board's fiduciary duties to the stockholders of the
applicable entity, under applicable law, Star, in response to an
Acquisition Proposal that (I) was unsolicited or that did not otherwise
result from a breach of this Section 4.2, and subject to compliance with
Section 4.2(c) hereof, and (II) constitutes a Superior Proposal (as defined
in Section 4.2(d) hereof), may (x) furnish non-public information with
respect to Star to the person or entity who made such Acquisition Proposal
pursuant to a customary and reasonable confidentiality agreement and (y)
participate in negotiations regarding such Acquisition Proposal. In
addition, Palomar, Star and the respective officers and directors of
Palomar and Star (i) will not cause, allow, permit, encourage, induce,
persuade or suffer any investment banker, financial advisor, attorney,
accountant, consultant or other representative of Star or Palomar consulted
by Star, Palomar or any representative thereof in connection with the
transactions contemplated hereby to violate the restrictions set forth in
this Section 4.2 and (ii) will take reasonable precautions to prevent any
such person from violating the restrictions set forth in this Section 4.2.
(b) BOARD APPROVAL. Neither the Star Board, the Palomar Board nor any
committee thereof shall (i) withdraw or modify, or propose to withdraw or
modify, in a manner adverse to Coherent, the approval or recommendation by
the Star Board, the Palomar Board or such committee of this Agreement or
the Merger unless there is a Superior Proposal outstanding, (ii) approve or
recommend, or propose to approve or recommend, an Acquisition Proposal that
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is not a Superior Proposal or (iii) cause Star or Palomar to enter into any
letter of intent, agreement in principle, acquisition agreement or other
similar agreement (an "ACQUISITION AGREEMENT") with respect to an
Acquisition Proposal that is not a Superior Proposal, unless, in each case,
the Star Board and the Palomar Board shall have determined in good faith,
after consultation with non-employee legal counsel, that failure to do so
would result in a breach of its fiduciary duties to the Star Shareholders
or the Palomar Stockholders under applicable law.
(c) NOTICE. Star and/or Palomar shall promptly, but in any event
within 48-hours, advise Coherent orally and in writing of any Acquisition
Proposal or any inquiry regarding the making of an Acquisition Proposal
including any request for information which Star and/or Palomar reasonably
believes would lead to an Acquisition Proposal, the material terms and
conditions of such request, Acquisition Proposal or inquiry and the
identity of the person or entity making such request, Acquisition Proposal
or inquiry. Star and/or Palomar shall keep Coherent fully informed of the
status and details, including amendments or proposed amendments, of any
such request, Acquisition Proposal or inquiry.
(d) DEFINED TERMS. For purposes of this Agreement, "ACQUISITION
PROPOSAL" means any proposal or offer from any person relating to any
direct or indirect acquisition or purchase of 10% or more of the assets of
Star taken as a whole (measured in terms of Net Book Value) or 10% or more
of any class of outstanding equity securities of Star taken as a whole, any
tender offer or exchange offer that if consummated would result in any
person beneficially owning 10% or more of any class of equity securities of
Star or any merger, consolidation, business combination, sale of
substantially all the assets, recapitalization, liquidation, dissolution or
similar transaction involving Star, other than the transactions
contemplated by this Agreement. For purposes of this Agreement, "SUPERIOR
PROPOSAL" means any bona fide proposal made by a third party to acquire,
directly or indirectly, 100% of the voting power of the Star Capital Stock
or all or substantially all the assets of Star and otherwise on the terms
which the Star Board and the Palomar Board determine in good faith (based
on the written opinion of Tucker Anthony Incorporated or another
non-employee financial advisor of similar standing (a copy of which written
financial opinion shall be provided to Coherent)) to be more favorable to
the Star Shareholders than the Merger and for which financing, to the
extent required by the terms of such proposal, is then committed or which,
in the good faith judgment of the Star Board and the Palomar Board, is
reasonably capable of being obtained by such third party.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 STAR SHAREHOLDER APPROVAL. Star shall promptly submit this Agreement
and the transactions contemplated hereby to the Star Shareholders for approval
and adoption as provided by California Law, its Articles of Incorporation and
Bylaws. Star and Palomar shall use their respective best efforts to obtain the
consent of the Star Shareholders sufficient to approve the Merger and this
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Agreement and to enable the Closing to occur as soon as possible. The materials
submitted to the Star Shareholders shall have been subject to review and
approval, which approval shall not be unreasonably withheld, by Coherent and
include information regarding Star, Palomar, the terms of the Merger and this
Agreement and the unanimous recommendation of both the Star Board and the
Palomar Board in favor of the Merger and this Agreement. Palomar agrees that it
shall vote in favor of the Merger upon approval by the Palomar Stockholders.
5.2 PALOMAR STOCKHOLDER APPROVAL. Palomar shall promptly submit this
Agreement and the transactions contemplated hereby to the Palomar Stockholders
for approval and adoption as provided by Delaware law, its Certificate of
Incorporation and Bylaws. Palomar shall use its best efforts to obtain the
consent of the Palomar Stockholders sufficient to approve the Merger and this
Agreement and to enable the Closing to occur as soon as possible. The materials
submitted to the Palomar Stockholders shall have been subject to review by
Coherent and shall incorporate the revisions requested by Coherent, subject to
Palomar's right to reasonably exclude any of such revisions if Palomar believes
such revisions are contrary to the best interests of Palomar, and shall include
information regarding Star, Palomar, the terms of the Merger and this Agreement
and the unanimous recommendation of both the Star Board and the Palomar Board in
favor of the Merger and this Agreement.
5.3 ACCESS TO INFORMATION. Star and Palomar shall afford Coherent and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of
Star's properties, books, contracts, commitments and records, (b) all other
information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of Star as Coherent may reasonably
request and (c) all key employees of Star as identified by Coherent or Star.
Star and Palomar agree to provide to Coherent and its accountants, counsel and
other representatives copies of internal financial statements (including returns
and supporting documentation) promptly upon request. Coherent shall provide Star
and Palomar with copies of such publicly available information about Coherent as
Star and Palomar may reasonably request. Upon request, Coherent shall provide
Palomar with such information concerning the business, properties and personnel
of Coherent as Palomar may be reasonably required to provide to the Palomar
Stockholders in connection with the submission of this Agreement and the
transactions contemplated hereby to the Palomar Stockholders for their approval.
After the Closing Date, Coherent shall also provide Palomar, upon request, with
such information concerning the business, properties and personnel of Coherent
and the Surviving Corporation as Palomar may be reasonably required to disclose
pursuant to federal and state securities laws. No information or knowledge
obtained in any investigation pursuant to this Section 5.3 shall affect or be
deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties hereto to consummate the Merger.
5.4 EXPENSES
(a) GENERAL. Except as set forth in this Section 5.4, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses
whether
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or not the Merger is consummated; PROVIDED, HOWEVER, all accrued and unpaid
expenses of Star will be reflected on the Closing Balance Sheet of Star.
(b) BREAK-UP FEES.
(i) If (x) the Star Board or the Palomar Board shall have
withheld, withdrawn or modified in a manner adverse to Coherent its
recommendation in favor of adoption and approval of this Agreement and
approval of the Merger, or (y) the Star Board or the Palomar Board
recommends a Superior Proposal to the Star Shareholders or the Palomar
Stockholders, Palomar shall pay to Coherent an amount equal to
$2,000,000 within ten business days following the earlier to occur of
(A) the termination of this Agreement pursuant to Section 8.1(b)
herein, or (B) a Negative Vote (as defined in Section 5.4(b)(ii)
hereof);
(ii) If no payment shall be required pursuant to Section
5.4(b)(i) herein, and if (x) the vote of the Star Shareholders or the
Palomar Stockholders approving and adopting this Agreement approving
the Merger shall not have been obtained by reason of the failure to
obtain the required vote upon a vote taken at a meeting of Star
Shareholders or Palomar Stockholders duly convened therefor or at any
adjournment thereof (a "NEGATIVE VOTE") and (y) prior to such Negative
Vote there shall have occurred an Acquisition Proposal with respect to
Star which shall have been publicly disclosed and not withdrawn (a
"COMPETING PROPOSAL") and (z) within 12 months following such Negative
Vote, Star or Palomar enter into a definitive agreement with respect
to an Acquisition Proposal with the party (or any affiliate of the
party) that made the Competing Proposal or an Acquisition Proposal
with such party (or any such affiliate) shall have been consummated,
then Palomar shall pay to Coherent an amount equal to $1,500,000
within one business day following the closing of a Competing Proposal;
and
(c) DAMAGES. Payment of the fees described in Sections 5.4(b) hereof
shall not be in lieu of damages incurred in the event of breach of this
Agreement.
5.5 PUBLIC DISCLOSURE. Unless otherwise required by law, prior to the
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Coherent and Palomar prior to release, provided that such approval
shall not be unreasonably withheld. Notwithstanding anything to the contrary in
the foregoing sentence, the parties hereto agree to release a joint press
release in form and substance acceptable to Coherent, Palomar and Star following
the execution of this Agreement disclosing the subject matter of this Agreement.
5.6 CONSENTS. Star and Palomar shall use their respective commercially
reasonable efforts to obtain the consents, waivers, assignments and approvals
under any of the Material Contracts as may be required in connection with the
Merger (all of such consents, waivers and approvals are set forth in the
Disclosure Schedule) so as to preserve all rights of and benefits to Star
thereunder.
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5.7 FIRPTA COMPLIANCE. On the Closing Date, Star shall deliver to Coherent
a properly executed statement in a form reasonably acceptable to Coherent for
purposes of satisfying Coherent's obligations under Treasury Regulation Section
1.1445-2(c)(3).
5.8 REASONABLE EFFORTS. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use commercially reasonable
efforts to take promptly, or cause to be taken, all actions, and to do promptly,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby, to obtain all necessary waivers, consents and approvals and
to effect all necessary registrations and filings and to remove any injunctions
or other impediments or delays, legal or otherwise, in order to consummate and
make effective the transactions contemplated by this Agreement for the purpose
of securing to the parties hereto the benefits contemplated by this Agreement;
provided that Coherent shall not be required to agree to any divestiture by
Coherent or Star or any of Coherent's Subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Coherent or its
Subsidiaries or affiliates or of Star, its affiliates, or the imposition of any
material limitation on the ability of any of them to conduct their businesses or
to own or exercise control of such assets, properties and stock.
5.9 NOTIFICATON OF CERTAIN MATTERS. Coherent, Palomar and Star each agree
to promptly give notice to the other parties of (i) the occurrence or
non-occurrence of any event, the occurrence or non-occurrence of which is likely
to cause any representation or warranty of any party, contained in this
Agreement to be untrue or inaccurate at or prior to the Effective Time and (ii)
any failure of Coherent, Palomar or Star, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; PROVIDED, HOWEVER, that the delivery of any notice pursuant to
this Section 5.9 shall not limit or otherwise affect any remedies available to
the party receiving such notice. No disclosure by Star or Palomar pursuant to
this Section 5.9 shall be deemed to amend or supplement the Disclosure Schedule
or prevent or cure any misrepresentations, breach of warranty or breach of
covenant. In addition, no disclosure by Coherent pursuant to this Section 5.9
shall be deemed to amend or supplement the Coherent Disclosure Schedule or
prevent or cure any misrepresentations, breach of warranty or breach of
covenant.
5.10 ADDITIONAL DOCUMENTS AN FURTHER ASSURANCES. Each party hereto, at the
request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.11 DELETED.
5.12 EMPLOYEE COMPENSATION. Each employee of Star who remains an employee
of Coherent after the Effective Time shall be eligible to receive salary and
benefits (such as medical benefits, 401(k)) consistent with Coherent's standard
human resource benefits and policies.
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5.13 HSR FILING. Coherent, Merger Sub, Star and Palomar shall each use all
commercially reasonable efforts to prepare and file a HSR Act pre-Merger
notification as promptly as possible after executing the Agreement and shall use
all commercially reasonable efforts to obtain early termination of the
applicable waiting period.
5.14 PALOMAR NON-COMPETITION. For the period commencing with the Closing
Date and ending twenty-four months later (the "PALOMAR RESTRICTED PERIOD"),
Palomar agrees that (i) it shall not engage in the Palomar Restricted Business
(as defined herein); (ii) it shall cause its Subsidiaries and affiliates not to,
individually or jointly with others, whether for their own account or for that
of any other person or entity, engage in Palomar Restricted Business; and (iii)
it shall not own or hold any debt interest in, or control or otherwise
participate in, or act as a partner or principal of any person or entity that
engages in, Palomar Restricted Business (except for ownership of one percent
(1%) or less of any entity whose securities have been registered under the
Securities Act of 1933, as amended, or Section 12 of the Securities Exchange Act
of 1934, as amended). For purposes of this Agreement, "PALOMAR RESTRICTED
BUSINESS" shall mean the commercial manufacture, marketing or sale of Restricted
Semiconductor Laser Devices. For the purposes of this Agreement, "RESTRICTED
SEMICONDUCTOR LASER DEVICES" shall mean any semiconductor laser device (and any
system that incorporates such devices) that operate in a continuous wave mode or
in quasi continuous wave mode that deliver more than 5 joules in any 50
millisecond period. No entity that succeeds to rights and obligations of Palomar
or its Subsidiaries hereunder as a result of a merger with, or an acquisition
of, Palomar or such Subsidiaries or otherwise (a "SUCCESSOR"), shall be bound by
the provisions of this Section 5.14 so long as the business of such Successor
and the business of Palomar are "held separate." As used in the foregoing
sentence, the business of Palomar or its Subsidiaries or affiliates is "HELD
SEPARATE" from the business of a Successor if (i) such Successor is not provided
with, and otherwise has no access to, the confidential information of Palomar or
its Subsidiaries or affiliates relating to the Palomar Restricted Business; (ii)
no director, officer or employee of Palomar or its Subsidiaries or affiliates
controls or directs the activities of such Successor relating to the Palomar
Restricted Business; and (iii) such Successor receives no, and has not received
any, license or transfer of any intellectual property right of Palomar or its
Subsidiaries or affiliates relating to the Palomar Restricted Business.
5.15 COHERENT NON-COMPETITION. For the period commencing with the Closing
Date and ending twenty-four months later (the "COHERENT RESTRICTED PERIOD"),
Coherent agrees that it shall not, and it shall cause its Subsidiaries and
affiliates not to, individually or jointly with others, whether for their own
account or for that of any other person or entity, engage in, or own or hold any
equity or debt interest in, or control or otherwise participate in, or act as a
partner or principal or any person or entity that engages in, the manufacture,
marketing or sale of ruby-powered lasers for hair removal anywhere in the world;
PROVIDED, HOWEVER that the foregoing shall not prevent Coherent from marketing
or selling ruby lasers manufactured by Palomar or from owning one percent (1%)
or less of any entity whose securities have been registered under the Securities
Act of 1933, as amended, or Section 12 if the Securities Exchange Act of 1934,
as amended.
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5.16 COHERENT SALES OF LIGHTSHEER DIODE LASERS. Within ten (10) days
following the Closing Date, Coherent agrees to pay Palomar an amount equal to
the LightSheer Margin (as hereinafter defined) for LightSheer units that were
(i) manufactured by Star prior to the Closing pursuant to Coherent's sales
forecast dated November 20, 1998 for the period commencing on the date hereof
and ending on the Closing Date (appropriately pro-rated) and (ii) not sold by
Coherent prior to the Closing. "LIGHTSHEER MARGIN" shall mean the amount that
Palomar would have received on account of such sales if they were made prior to
the Closing Date pursuant to the Sales Agency, License and Development Agreement
between Palomar and Coherent dated November 17, 1997 (assuming that such sales
would have been made at the average sales price for all sales of LightSheer
units by Coherent), less the inventory carrying value of such units reflected on
the Closing Balance Sheet.
5.17 PALOMAR AND STAR NON-SOLICIT. Should this Agreement terminate prior to
the Closing Date (the "TERMINATION DATE"), during the period beginning on the
Termination Date and ending on the second anniversary of the Termination Date,
neither Palomar, Star nor any of their respective affiliates or Subsidiaries
shall solicit to hire or solicit to employ any employee of Coherent or induce or
endeavor to induce any employee of Coherent to leave his or her employment,
other than as part of a general solicitation of employees not directed
specifically to employees of Coherent.
5.18 COHERENT NON-SOLICIT. During the period beginning on the Termination
Date and ending on the second anniversary of the Termination Date, neither
Coherent nor any of its affiliates or Subsidiaries shall solicit to hire or
solicit to employ any employee of Star or Palomar or induce or endeavor to
induce any employee of Star or Palomar to leave his or her employment, other
than as part of a general solicitation of employees not directed specifically to
employees of Star or Palomar.
5.19 TAX MATTERS
(a) SECTION 338(H)(10) ELECTION.
(i) Palomar shall join with Coherent in making a timely election
under Section 338(h)(10) of the Code and any corresponding elections
under state and local tax laws (collectively, the "ELECTION") with
respect to the Acquisition of Star; PROVIDED, HOWEVER, that no
election shall be made for California tax purposes unless otherwise
agreed to by the parties and the parties shall take any steps required
to elect out of Section 338(h)(10) for California tax purposes unless
such agreement is reached. Coherent and Palomar shall, as promptly as
practicable following the Closing Date, cooperate with each other to
take all actions necessary and appropriate (including filing such
forms, returns, elections, schedules and other documents as may be
required) to effect and preserve a timely Election in accordance with
Section 338(h)(10) of the Code or any successor provisions (and all
corresponding state and local tax laws). Coherent and Palomar shall
report the Acquisition pursuant to this Agreement consistent with the
Election.
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(ii) In connection with the Election, within 90 days after
Closing, Coherent shall provide to Palomar Schedule 5.19(a)(ii), which
shall set forth the proposed allocation (the "ALLOCATION SCHEDULE") of
that portion of the Merger Consideration paid in connection with the
Merger among the assets of Star. Such allocations shall be made in
accordance with Section 338(h)(10) of the Code and any applicable
Treasury Regulations, which allocation is set forth on Schedule
5.19(a)(ii).
(b) RETURNS; INDEMNIFICATION; LIABILITY FOR TAXES.
(i) Notwithstanding any other provision of this Agreement,
Palomar shall prepare and file (or cause to be prepared and filed) on
a timely basis all Tax Returns with respect to Star for all taxable
periods ending on or before the Closing Date ("STAR TAX RETURNS") and
shall pay, and shall indemnify and hold Coherent harmless against and
from (i) all Taxes of Star for all taxable years or periods which end
on or before the Closing Date; (ii) all Taxes for all taxable years or
periods of all members of any affiliated group of which Star is or has
been a member prior to the Closing Date; and (iii) with respect to any
taxable period commencing before the Closing Date and ending after the
Closing Date (a "STRADDLE PERIOD") all Taxes of Star attributable to
the portion of the Straddle Period prior to and including the Closing
Date (the "PRE-CLOSING PERIOD"). For purposes of this Agreement, the
portion of any Tax that is attributable to the Pre-Closing Period
shall be (i) in the case of a Tax that is not based on net income,
gross income, premiums or gross receipts, the total amount of such Tax
for the period in question multiplied by a fraction, the numerator of
which is the number of days in the Pre-Closing Period, and the
denominator of which is the total number of days in such Straddle
Period, and (ii) in the case of a Tax that is based on any of net
income, gross income, premiums or gross receipts, the Tax that would
be due with respect to the Pre-Closing Period if such Pre-Closing
Period were a separate taxable period, except that exemptions,
allowances, deductions or credits that are calculated on an annual
basis (such as the deduction for depreciation or capital allowances)
shall be apportioned on a per diem basis. For purposes hereof, all
Taxes which are the subject of this Section 5.19 arising from the
Merger, including Taxes resulting from the Election, shall be deemed
to be Taxes attributable to the period ending on the Closing Date and
shall be the responsibility of Palomar.
(ii) Coherent shall prepare and file (or cause to be prepared and
filed) on a timely basis all Tax Returns of Star relating to periods
ending after the Closing Date and shall pay, and shall indemnify and
hold Palomar harmless against and from (i) all Taxes of Star for any
taxable year or period commencing after the Closing Date; and (ii) all
Taxes of Star for any Straddle Period other than Taxes attributable to
the Pre-Closing Period; PROVIDED, HOWEVER, that any Straddle Period
Tax Return shall be prepared in accordance with applicable law and
past practices consistently applied and Palomar shall have the
opportunity to review and approve the Tax Returns for any Straddle
Period prior to filing. To the extent the parties cannot reach
agreement as to the proper treatment of any item on a Tax Return for a
Straddle Period, the matter shall be referred to a mutually acceptable
independent accounting firm for resolution.
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(c) COOPERATION; REFUNDS AND CREDITS.
(i) All refunds or credits of Taxes for or attributable to
taxable years or periods of Star ending on or before the Closing Date
(or the Pre-Closing Period, in the case of a Straddle Period) shall be
for the account of Palomar; all other refunds or credits of Taxes, for
or attributable to Star shall be for the account of Coherent.
Following the Closing, Coherent shall cause Star to forward to Palomar
any such refunds or credits due Palomar pursuant to this section in
the case of a refund, no later than 10 business days after receipt of
such refund, and in the case of a credit, no later than 30 business
days after the relevant taxing authority has paid such credit, and
Palomar shall forward (or cause to be forwarded) to Coherent any
refunds or credits due to Coherent pursuant to this section in the
case of a refund, no later than 10 business days after receipt of such
refund, and in the case of a credit, no later than 30 business days
after the relevant taxing authority has paid such credit.
(ii) If an audit examination of any Tax Return of Palomar or its
subsidiaries for any taxable period ending on or before the Closing
Date shall result (by settlement or otherwise) in any adjustment the
effect of which is to increase deductions, losses or tax credits or
decrease income, gains, premiums, revenues or recapture of tax credits
("CHANGES") reflected on a Tax Return of Coherent or Star for any
taxable period ending after the Closing Date, Palomar will notify
Coherent and provide it with all necessary information so that it can
reflect on the appropriate Tax Return of Coherent any appropriate
Changes. If as a result of such Changes, Coherent or its subsidiaries
enjoy a net Tax benefit from an increase in deductions, losses or tax
credits and/or a decrease in income, gains, premiums, revenues or
recapture of tax credits ("COHERENT BENEFITS") for taxable periods
ending after the Closing Date, Coherent shall pay to Palomar the
amount of such Coherent Benefit, as and when such Coherent Benefits
are realized by Coherent.
(iii) If an audit examination of any Tax Return of Coherent or
its subsidiaries for taxable periods ending after the Closing Date
shall result (by settlement or otherwise) in any Change reflected on a
Tax Return of Palomar or its subsidiaries for any taxable periods
ending on or before the Closing Date, Coherent will notify Palomar and
provide it with all necessary information so that Palomar can reflect
any appropriate Changes on its Tax Return. If as a result of such
Changes, Palomar or its subsidiaries enjoy a net Tax benefit from an
increase in deductions, losses or tax credits and/or a decrease in the
income, gains, premiums, revenues or recapture of tax credits
("PALOMAR BENEFITS") for taxable periods ending on or before the
Closing Date, Palomar shall pay to Coherent the amount of such Palomar
Benefits as and when such Palomar Benefits are realized by Palomar.
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(d) CONDUCT OF AUDITS AND OTHER PROCEDURAL MATTERS. Coherent, Palomar
and Star shall, at their own expense, control any audit or examination by
any taxing authority, and have the right to initiate any claim for refund
or amended return, and contest, resolve and defend against any assessment,
notice of deficiency or other adjustment or proposed adjustment of Taxes
("PROCEEDINGS") for any taxable period for which that party is charged with
payment or indemnification responsibility under this Agreement. Each of
Coherent, Palomar and Star shall promptly forward to the other all written
notifications and other written communications, including if available the
original envelope showing any postmark, from any taxing authority received
by such party or its affiliates relating to any liability for Taxes for any
taxable period for which such other party or any of its affiliates is
charged with payment or indemnification responsibility under this Agreement
and each such indemnifying party shall promptly notify, and consult with,
each indemnified party as to any action it proposes to take with respect to
any liability for Taxes for which it is required to indemnify another party
and shall not enter into any closing agreement or final settlement with any
taxing authority with respect to any such liability without the written
consent of the indemnified parties, which consent shall not be unreasonably
withheld. In the case of any Proceedings relating to any Straddle Period,
Coherent shall control such Proceedings and shall consult in good faith
with Palomar as to the conduct of such Proceedings. Palomar shall reimburse
Coherent for such portion of the costs, including legal costs, of
conducting such Proceedings as is represented by the portion of the Tax
with respect to such Straddle Period for which Palomar is liable pursuant
to this Agreement. Each of Coherent, Palomar and Star shall, at the expense
of the requesting party, execute or cause to be executed any powers of
attorney or other documents reasonably requested by such requesting party
to enable it to take any and all actions such party reasonably requests
with respect to any Proceedings which the requesting party controls.
5.20 PUBLIC OFFERING. Coherent agrees that, within one year of the Closing
Date, it will not directly or indirectly initiate or participate in any
negotiations or discussions with respect to a public offering of the Surviving
Corporation's stock individually or as part of a larger offering that relates to
a subsidiary of Coherent engaged in a business substantially similar to that of
Star nor sell all or substantially all of the assets of the Surviving
Corporation in one or more transactions.
5.21 INDEMNIFICATION. Coherent and the Surviving Corporation agree that all
rights to indemnification now existing in favor of the employees, agents,
directors or officers of Star as provided in its charter or bylaws shall survive
the Merger and shall continue in full force and effect to the fullest extent
permitted by applicable law, for a period not less than three years from the
Closing Date with respect to matters occurring prior to the Closing Date.
5.22 WARN ACT. Within 60 days of the Effective Time, Coherent will not take
any action which triggers any notification requirements under the Worker
Adjustment and Retraining Notification Act.
5.23 SWISS FRANC DEBENTURE LITIGATION. Palomar agrees to indemnify Star and
Coherent for any Losses (as defined in Section 7.3 of this Agreement) incurred
by Star or Coherent arising from, related to, or as a result of any dispute or
claims made with respect to Palomar's 4.5% Subordinated Convertible Debentures
due 2003 denominated in Swiss Francs.
5.24 NO AMENDMENT OF OPTO POWER AGREEMENT. Palomar and Star agree not to
modify, amend or terminate the blanket purchase agreement dated April 8, 1997
with Opto Power Corporation without the prior written consent of Coherent.
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5.25 PREPARATION OF STAR FINANCIAL STATEMENTS. Palomar agrees that upon the
request of Coherent prior to or following the Closing, Palomar will promptly
provide Coherent with such financial information, schedules and audited
financial statements of Star prepared by Star or Palomar prior to Closing as
reasonably requested by Coherent in connection with Coherent's preparation of
any reports or filings required under the Securities and Exchange Act of 1934,
as amended.
5.26 DELIVERY OF CLOSING BALANCE SHEET. Palomar shall deliver a balance
sheet dated as of the Closing Date prepared by Star and audited by Palomar's
auditors within 60 days of the Effective Time (the "CLOSING BALANCE SHEET").
Such Closing Balance Sheet shall fairly present, in all material respects, the
financial condition of Star as of the Closing Date and shall be prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
basis consistent with Palomar's and Star's past practices. Palomar shall
immediately repay to Coherent that amount by which the Net Book Value of Star is
less than $0.00 as reflected on the Closing Balance Sheet, and Coherent shall
cause any Permitted Dividend reflected on the Closing Balance Sheet to be paid
directly to Palomar. Any such amounts to be paid by Palomar to Coherent shall
also include interest at 12% per annum for the period between the Closing and
the date of such payment. At the Closing, Coherent shall cause any amounts
borrowed by Palomar from Fleet Bank on behalf of Star to be paid directly to
Fleet Bank, which amounts shall not exceed $10 million and which amounts shall
be reflected on the Certificate provided by Palomar pursuant to Section 6.2(h)
hereof. Palomar shall pay any amounts in addition to the amounts that are paid
by Coherent that are required to be paid to Fleet Bank so that the Aggregate
Bank Liabilities (as such term is defined in the Fleet Letter Agreement) will
not exceed the Borrowing Base (as such term is defined in the Fleet Letter
Agreement) without reference to any Receivables of Star (as such term is defined
in the Fleet Letter Agreement). Any such amounts to paid by Coherent to Fleet
Bank at the Closing will be included as outstanding debt of Star in calculating
the Net Book Value.
5.27 FLEET BANK RELEASE. Palomar shall use all commercially reasonable
efforts to ensure that Fleet Bank releases any security interest or Liens that
it has in the assets of Star at the Closing and shall comply with all reasonable
requests made by Coherent or Fleet Bank in furtherance of obtaining such
release(s).
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 CONDITIONS TO OBLIGATIONS OF STAR AND PALOMAR. The obligations of Star
and Palomar to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by Palomar:
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(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of Coherent and Merger Sub in this Agreement shall be true and
correct in all material respects (i) when made on the date hereof and (ii)
on and as of the Effective Time as though such representations and
warranties were made on and as of such time except for the representations
and warranties made as of a specific date which shall be true and current
in all material respects as of such date, and each of Coherent and Merger
Sub shall have performed and complied in all material respects with all
covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time, except for such breaches of
representations and warranties as shall not have a Material Adverse Effect
on Coherent.
(b) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any
of the foregoing be pending; nor shall there be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, which makes the consummation of the Merger
illegal.
(c) CERTIFICATE OF COHERENT. Palomar shall have been provided with a
certificate executed on behalf of Coherent by the Chief Executive Officer
of Coherent to the effect that, as of the Effective Time:
(i) all representations and warranties made by Coherent and
Merger Sub in this Agreement are true and correct in all material
respects (i) when made on the date hereof and (ii) on and as of the
Effective Time as though such representations and warranties were made
on and as of such time except for the representations and warranties
made as of a specific date which shall be true and current in all
material respects as of such date; and
(ii) all covenants and obligations of this Agreement to be
performed by Coherent on or before such date have been so performed in
all material respects.
(d) HSR. The applicable waiting period under the HSR Act relating to
the Merger shall have expired or been terminated.
(e) LEGAL OPINION. Palomar shall have received a legal opinion from
legal counsel to Coherent, in the form attached hereto as EXHIBIT D.
(f) ESCROW. Coherent and Merger Sub shall have entered into the Escrow
Agreement.
(g) PATENT LICENSE AGREEMENT. Palomar and Coherent shall have executed
the Patent License Agreement attached hereto as EXHIBIT E (the "PATENT
LICENSE AGREEMENT").
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6.2 CONDITIONS TO THE OBLIGATIONS OF COHERENT AND MERGER SUB. The
obligations of Coherent and Merger Sub to consummate and effect this Agreement
and the transactions contemplated hereby shall be subject to the satisfaction at
or prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Coherent:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of Star and Palomar in this Agreement shall be true and correct
in all material respects (i) when made on the date hereof and (ii) on and
as of the Effective Time as though such representations and warranties were
made on and as of such time except for the representations and warranties
made as of a specific date which shall be true and current in all material
respects as of such date, and each of Star and Palomar shall have performed
and complied in all material respects with all covenants and obligations of
this Agreement required to be performed and complied with by it as of the
Effective Time, except for such breaches of representations and warranties
(excluding breaches of the representations and warranties set forth in
Sections 2.1(a), 2.2, 2.3, 2.4, 2.5(i), 2.8, 2.11(b), 2.11(e), 2.11(j)(i),
2.11(o), 2.11(p), 2.11(t)(ii), 2.11(v), 2.12(b), (iv) and (vi), 2.13, 2.15
(o), 2.16(a)(i), (iii) & (v), 2.16(b), 2.21, 2.27 and 2.28), as shall not
have a Material Adverse Effect on Star or Palomar.
(b) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any
of the foregoing be pending; nor shall there be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or applicable
to the Merger, which makes the consummation of the Merger illegal.
(c) DELETED.
(d) LEGAL OPINION. Coherent shall have received a legal opinion from
legal counsel to Star and Palomar in the form attached hereto as EXHIBIT F.
(e) PALOMAR STOCKHOLDER APPROVAL. Palomar Stockholders holding a
majority of Palomar's capital stock eligible to vote thereon shall have
approved this Agreement, the Merger and the transactions contemplated
hereby and thereby.
(f) STAR SHAREHOLDER APPROVAL. Star Shareholders holding at least
fifty-one percent (51%) of Star's Capital Stock shall have approved this
Agreement, the Merger and the transactions contemplated hereby and thereby
and no more than 5% of the Star Capital Stock shall qualify as Dissenting
Shares.
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(g) STAR OPTION PLAN. The Star 1994 Option Plan shall have been
terminated, so that no options exercisable for Star Capital Stock and no
other rights to acquire Star Capital Stock shall be outstanding following
the Closing.
(h) CERTIFICATE OF STAR AND PALOMAR. Coherent shall have been provided
with a certificate executed on behalf of Palomar by its Chief Executive
Officer and executed on behalf of Star by its Chief Executive Officer as of
the Effective Time:
(i) to the effect that all representations and warranties made by
Star and Palomar in this Agreement are true and correct in all
material respects (i) when made on the date hereof and (ii) on and as
of the Effective Time as though such representations and warranties
were made on and as of such time except for the representations and
warranties made as of a specific date which shall be true and current
in all material respects as of such date;
(ii) to the effect that all covenants and obligations of this
Agreement to be performed by Star or Palomar on or before such date
have been so performed in all material respects; and
(iii) to the effect that the provisions set forth in Sections 6.2
(c), (f), (g), (h) , (i) and (j) hereof have been satisfied.
(iv) setting forth the amount borrowed by Palomar from Fleet Bank
on behalf of Star, the amount borrowed by Palomar from Fleet Bank on
its own behalf, the total amount borrowed by Palomar from Fleet Bank
on behalf of both Palomar and Star (which amount shall not exceed $10
million) and the Aggregate Bank Liabilities, the Borrowing Base and
the Receivables of Star (as such terms are defined in the Fleet Letter
Agreement).
(i) HSR. The applicable waiting period under the HSR Act relating to
the Merger shall have expired or been terminated.
(j) SHAREHOLDER CERTIFICATE. Each Star Shareholder shall have executed
and delivered to Coherent a shareholder certificate representing, in the
aggregate, all of the outstanding Star Capital Stock, a certificate
exercising and terminating any rights to acquire Star Capital Stock or an
affidavit and an indemnification agreement meeting the requirements of
Section 1.8(c) of this Agreement.
(k) PATENT LICENSE AGREEMENT. Palomar and Coherent shall have executed
the Patent License Agreement.
(l) ESCROW. Palomar, Star, Grove, Holtz and Mundinger shall have
entered into the Escrow Agreement.
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(m) INTELLECTUAL PROPERTY PROTECTION. At the Closing, Palomar and Star
will provide Coherent with written notification of all actions that must be
taken by Star within sixty (60) days of the Closing Date, including the
payment of any registration, maintenance or renewal fees or the filing of
any documents, applications or certificates for the purposes of
maintaining, perfecting, continuing, persevering or renewing any Star
Registered Intellectual Property.
6.3 FAILRUE TO USE BEST EFFORTS. No party may rely on the failure of a
condition in this Section 6 to be satisfied if such failure was caused, directly
or indirectly, by such party's failure to use its reasonable best efforts to
satisfy such condition and consummate the Merger and the other transactions
contemplated by this Agreement.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of Star's and Palomar's
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Merger and continue until 11:59
p.m., California time, on the date which is one year following the Closing Date
except as provided in Section 7.1 to the Disclosure Schedule. The Closing shall
not be deemed a waiver of any breach by Palomar or Star of any of Star's or
Palomar's representations and warranties.
7.2 ESCROW FUND. As security for the indemnity provided for in Section 7.3
of this Agreement, the Star Shareholders listed on Schedule 7.2 hereto will be
deemed to have received and deposited with the Escrow Agent (as defined below)
the Escrow Amount, with each such Star Shareholder deemed to have contributed
the amount set forth opposite such Star Shareholder's name on Schedule 7.2, and
the Escrow Amount shall be deposited in the name of the Escrow Agent in the
Escrow Fund (as defined below). At or promptly following the Effective Time, the
Escrow Amount, without any act of any Star Shareholder, will be deposited with
Bank of America (or other institution acceptable to Coherent and Palomar) as
Escrow Agent (the "ESCROW AGENT"), such deposits to constitute an escrow fund
(the "ESCROW FUND") to be governed by the terms set forth herein and in the
Escrow Agreement. The portion of the Escrow Amount deemed to be contributed on
behalf of each Star Shareholder shall be its Pro Rata Portion (as defined
herein) of the Escrow Amount. "PRO RATA PORTION" shall mean, with respect to
each Star Shareholder listed on Schedule 7.2, the amount determined at the
Effective Time equal to the quotient obtained by dividing (x) the amount deemed
to be contributed by each such Star Shareholder to the Escrow Fund as set forth
on Schedule 7.2, by (y) the Escrow Amount.
7.3 INDEMNIFICATION
(a) Star and Palomar jointly and severally indemnify and hold
Coherent, the Surviving Corporation and their officers, directors,
affiliates, lenders, successors and assigns (the "INDEMNITEES") harmless
against all claims,
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losses, liabilities, damages, deficiencies, costs and expenses, including
without limitation reasonable attorneys' and experts' fees and expenses of
investigation and defense (hereinafter individually a "LOSS" and
collectively "LOSSES") incurred by Coherent, the Surviving Corporation or
any other Indemnitee directly or indirectly as a result of or in connection
with (i) any inaccuracy or breach of a representation or warranty of Star
and/or Palomar contained in this Agreement, or (ii) any failure by Star or
Palomar to perform or comply with any covenant or other agreement or
obligation contained in this Agreement or any agreement attached hereto as
an exhibit or entered into in connection with the Merger, including, but
not limited to, covenants set forth in Section 5.19 related to tax matters.
The Escrow Fund shall be available to compensate the Indemnitees for any
Loss. The Indemnitees shall not be entitled to receive any indemnification
unless and until Losses as identified in Officer's Certificates (as defined
in the Escrow Agreement), the aggregate amount of which exceeds $500,000,
have been delivered to the Escrow Agent as provided in the Escrow Agreement
within the time periods set forth in Section 7.1, in such case the
Indemnitees may (subject to the next sentence) recover all of their Losses
in excess of $500,000. Coherent's sole remedy for any Loss shall be the
indemnification set forth in this Article VII, and Palomar's
indemnification liability for Losses shall not exceed 25% of the Merger
Consideration; PROVIDED, HOWEVER, that nothing herein shall limit Palomar's
liability for a claim by an Indemnitee for fraud, intentional
misrepresentation or gross negligence by Palomar (or Star prior to the
Effective Time). Palomar shall not have any right of contribution from Star
with respect to any Loss claimed by the Indemnitees after the Closing. The
foregoing limitations shall not apply to limit Palomar's indemnification
obligation for (A) Taxes required to be paid by Palomar (or Losses
attributable to the failure of Palomar to perform any covenants required to
be performed by Palomar) pursuant to Section 5.19 of this Agreement, (B)
Losses attributable to the breach of any representation or warranty
contained in Section 2.12 or (C) Palomar's obligations to repay that amount
by which the Net Book Value of Star is less than $0.00 as reflected on the
Closing Balance Sheet, and such indemnity shall not be limited by the
Escrow Amount. Any claim for indemnification shall be waived if not made in
writing prior to the end of the survival period for the relevant
representation warranty.
(b) For purposes of this Section 7.3, the amount of any Loss hereunder
shall be calculated after taking into account any net tax benefit actually
realized by the Indemnitee as a result of the circumstances giving rise to
the indemnifiable event (and after taking into account the tax detriment
attributable to the receipt of any indemnity hereunder).
7.4 PROCEDURES WITH RESPECT TO THIRD-PARTY CLAIMS
(a) In the event Coherent becomes aware of a third-party claim which
Coherent reasonably believes may result in an indemnification, Coherent
shall promptly notify the Shareholder Representative of such claim. The
Shareholder Representative (as defined in the Escrow Agreement) shall be
entitled, if the Shareholder Representative so elects by written notice
within 20 days of being notified by Coherent of such claim, to assume the
defense thereof with counsel satisfactory to Coherent. Notwithstanding the
foregoing, (i) Coherent shall also have the right to employ its own counsel
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in any such case, but the fees and expense of such counsel shall be at the
expense of Coherent unless Coherent or its affiliates shall reasonably
determine that there is a conflict of interest between the Indemnitees and
Star Shareholders with respect to such claim, in which case the fees and
expenses of such counsel will be paid out of the Escrow Fund as additional
Losses, (ii) Coherent shall have no obligation to give any notice of any
assertion of liability by a third party unless such assertion is in writing
(provided that Coherent may not collect any sum from the Escrow Fund
without giving notice to the Shareholder Representative), and (iii) the
rights of the Indemnitees to be indemnified hereunder in respect of Losses
resulting from the assertion of liability by third parties shall not be
adversely affected by the failure to promptly give notice pursuant to the
foregoing unless, and, if so, only to the extent, that Palomar and the Star
Shareholders are materially prejudiced by the delay in giving such notice.
With respect to any assertion of liability by a third party that may result
in a Loss, the parties hereto shall make available to each other all
relevant information in their possession material to any such assertion.
(b) In the event that the Shareholder Representative, within 20 days
after receipt of the aforesaid notice of a claim, fails to assume the
defense of the Indemnitees against such claim, Coherent or its affiliates
shall have the right to undertake the defense, compromise, or settlement of
such action on behalf of and for the account, expense, and risk of the Star
Shareholders.
(c) Notwithstanding anything in this Section 7.4 to the contrary, if
there is a reasonable probability that a claim may materially adversely
affect the Indemnitees, Coherent, or its affiliates shall have the right to
participate in such defense, compromise, or settlement and the Shareholder
Representative shall not, without Coherent's written consent (which consent
shall not be unreasonably withheld), settle or compromise any claim or
consent to entry of any judgment in respect thereof unless such settlement,
compromise, or consent includes as an unconditional term thereof the giving
by the claimant or the plaintiff to the Indemnitees a release from all
liability in respect of such claim.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 TERMINATION. Except as provided in Section 8.2, this Agreement may be
terminated and the Merger abandoned at any time prior to the Effective Time:
(a) by mutual consent of Palomar, Star and Coherent;
(b) by Coherent, if the Star Board or Palomar Board recommends a
Superior Proposal to the Star Shareholders or Palomar Stockholders, or if
the Star Board or Palomar Board shall have withheld, withdrawn or modified
in a manner adverse to Coherent its recommendation in favor of adoption and
approval of this Agreement and approval of the Merger;
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(c) by Coherent or Palomar if: (i) the Effective Time has not occurred
by the date which is three (3) months from the date hereof; PROVIDED,
HOWEVER, that the right to terminate this Agreement under this Section
8.1(c) shall not be available to any party whose action or failure to act
has been a principal cause of or resulted in the failure of the Merger to
occur on or before such date and such action or failure to act constitutes
a breach of this Agreement; (ii) there shall be a final nonappealable order
of a federal or state court in effect preventing consummation of the
Merger; or (iii) there shall be any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Merger by any
Governmental Entity that would make consummation of the Merger illegal;
(d) by Coherent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would: (i)
prohibit Coherent's or Merger Sub's ownership or operation of any material
portion of the business of Star or (ii) compel Coherent or Star to dispose
of or hold separate all or a significant portion of the business or assets
of Star or Coherent as a result of the Merger;
(e) by Coherent if it is not in material breach of its obligations
under this Agreement and there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement
on the part of Star or Palomar which would be a failure of conditions set
forth in Section 6.2(a) and such breach has not been cured (i) within
fifteen (15) calendar days after written notice to Palomar if such breach
is capable of cure within 15 days or (ii) within a commercially reasonable
time period after written notice to Palomar if such breach is not capable
of cure within 15 days; PROVIDED, HOWEVER, that no cure period shall be
required for a breach which by its nature cannot be cured and that no cure
period shall extend beyond the date which is three (3) months from the date
hereof;
(f) by Palomar if neither it nor Star is in material breach of their
respective obligations under this Agreement and there has been a material
breach of any representation, warranty, covenant or agreement contained in
this Agreement on the part of Coherent or Merger Sub which would be a
failure of conditions set forth in Section 6.2(b) and such breach has not
been cured within fifteen (15) calendar days after written notice to
Coherent; PROVIDED, HOWEVER, that no cure period shall be required for a
breach which by its nature cannot be cured and that no cure period shall
extend beyond the date which is three (3) months from the date hereof; or
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement as
provided in Section 8.1 hereof, this Agreement shall forthwith become void and
there shall be no liability or obligation on the part of Coherent, Merger Sub,
Palomar or Star, or their respective officers, directors or stockholders,
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provided that each party shall remain liable for breaches of this Agreement by
such party prior to its termination; provided further that, in such event the
provisions of Section 5.4, (Expenses), Section 5.5, (Public Disclosure), Section
5.17 (Palomar and Star Non-Solicit), Section 5.18, (Coherent Non-Solicit),
Article IX and this Section 8.2 shall remain in full force and effect and
survive any termination of this Agreement.
8.3 AMENDMENT. This Agreement may be amended by the parties hereto at any
time by execution of an instrument in writing signed on behalf of each of the
parties hereto, provided that the written agreement of the Escrow Agent (as
defined in the Escrow Agreement) and the Shareholder Representative (as defined
in the Escrow Agreement) shall be required to Sections 7.2, 7.3 and 7.4.
8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, Coherent
and Merger Sub, on the one hand, and Star and Palomar, on the other hand, may,
to the extent legally allowed, (i) extend the time for the performance of any of
the obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
DISPUTE RESOLUTION
9.1 NEGOTIATIONS BETWEEN SENIOR PARTY REPRESENTATIVES. The parties shall
attempt in good faith to resolve any controversy, claim or dispute arising out
of or relating to this Agreement or the construction, interpretation,
performance, breach, termination, enforceability or validity thereof, whether
such claim existed prior to or arises on or after the date of this Agreement (a
"DISPUTE"), promptly by negotiation between executives who have authority to
settle the Dispute ("SENIOR PARTY REPRESENTATIVES").
9.2 MEDIATION
(a) If the Dispute has not been resolved by negotiation between Senior
Party Representatives within 30 days of when notice of the Dispute has been
delivered by one party to another, the parties shall make a good faith
attempt to settle the Dispute by mediation pursuant to the provisions of
this Section 9.2 before resorting to arbitration, litigation or any other
dispute resolution procedure.
(b) Unless the parties agree otherwise, the mediation shall be
conducted in accordance with the Commercial Mediation Rules of the American
Arbitration Association then in effect by a mediator who (i) has the
qualifications and experience set forth in subsection (c) of this Section
9.2 and (ii) is selected as provided in subsection (d) of this Section 9.2.
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(c) Unless the parties agree otherwise, the mediator shall be a
neutral and impartial lawyer with excellent academic and professional
credentials (i) who is or has been practicing law for at least 15 years,
specializing in either general commercial litigation or general corporate
and commercial matters, and (ii) who has had both training and experience
as a mediator or (iii) who is a retired judge.
(d) After the period set forth in Section 9.2(c) has elapsed, either
party (the "INITIATING PARTY") may initiate mediation of the Dispute by
giving the other party (the "RECIPIENT PARTY") written notice (a "MEDIATION
NOTICE") setting forth a list of the names and resumes of qualifications
and experience of three impartial persons who the Initiating Party believes
would be qualified as a mediator pursuant to the provisions of subsection
(c) of this Section 9.2. Within 15 days after the delivery of the Mediation
Notice, the Recipient Party shall give a counter-notice (the
"COUNTER-NOTICE") to the Initiating Party in which the Recipient Party may
designate a person to serve as the mediator from among the three persons
listed by the Initialing Party in the Mediation Notice (in which event such
designated person shall be the mediator). If none of the persons listed in
the Mediation Notice is designated by the Recipient Party to serve as the
mediator, the Counter-Notice should set forth a list of the names and
resumes of three impartial persons who the Recipient Party believes would
be qualified as a mediator pursuant to the provisions of subsection (c) of
this Section 9.2. Within 10 days after the delivery of the Counter-Notice,
the Initiating Party may designate a person to serve as the mediator from
among the three persons listed by the Recipient Party in the Counter-Notice
(in which event such designated person shall be the mediator). If the
parties cannot agree on a mediator from the three impartial nominees
submitted by each party, each party shall strike two names from the other
party's list, and the mediator shall be selected by lot between the two
remaining persons on both lists.
(e) Within 30 days after the mediator has been selected as provided
above, both parties and their respective attorneys shall meet with the
mediator for one mediation session of at least four hours, it being agreed
that each party representative attending such mediation session shall be a
Senior Party Representative with full authority to settle the Dispute. If
the Dispute cannot be settled at such mediation session or at any mutually
agreed continuation thereof, either party may give the other and the
mediator a written notice declaring the mediation process at an end, in
which event then the Dispute shall be resolved as provided in Section 9.3
hereof.
(f) All conferences and discussions which occur in connection with the
mediation conducted pursuant to this Agreement shall be deemed settlement
discussions, and nothing said or disclosed, nor any document produced,
which is not otherwise independently discoverable shall be offered or
received as evidence or used for impeachment or for any other purpose in
any current or future arbitration or litigation.
(g) The costs of the mediation shall be shared equally between the
parties.
(h) The mediation will take place in the county in which the Recipient
Party is located, or any other place by agreement of the parties.
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9.3 LITIGATION; ARBITRATION
If the Dispute has not been resolved by negotiations by discussion or
mediation as provided in Sections 9.1 and 9.2, then the parties may proceed by
litigation, or, should they agree, by any other method of dispute resolution,
including arbitration.
ARTICLE X
GENERAL PROVISIONS
10.1 NOTICES. Every notice, consent or other communication required or
permitted to be given by any provision of the Agreement shall be in writing.
Each such notice, shall be deemed to have been duly and properly given, served
or made for all purposes on the date such notice is (a) delivered personally or
(b) sent by registered or certified mail, return receipt requested, postage and
charges prepaid and addressed as follows:
(a) if to Coherent or Merger Sub, to:
Coherent, Inc.
5100 Patrick Henry Drive
Santa Clara, California 95054
Attention: Scott Miller, Vice President and
General Counsel
Telephone No.: (408) 764-4000
Facsimile No.: (408) 970-9998
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Judith Mayer O'Brien, Esq.
Telephone No.: (415) 493-9300
Facsimile No.: (415) 493-6811
(b) if to Palomar or Star, to:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, Massachusetts 02421
Attention: Chief Executive Officer and
General Counsel
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Telephone No.: (781) 676-7300
Facsimile No.: (781) 676-7330
with a copy to:
Foley, Hoag & Elliot LLP
One Post Office Square
Boston, Massachusetts 02109
Attention: David A. Broadwin, Esq.
Telephone No.: (617) 832-1000
Facsimile No.: (617) 832-7000
(c) if to Grove, Holtz or Mundinger, to:
Robert Grove
1249 Quarry Lane, Suite 100
Pleasanton, CA 94566
Telephone: (952) 484-2140
Fax:
10.2 INTERPRETATION. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart. The Escrow Agent may execute the
Escrow Agreement following the date hereof and prior to the Effective Time, and
such later execution, if so executed after the date hereof, shall not affect the
binding nature of this Agreement as of the date hereof between the other
signatories hereto.
10.4 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, the Exhibits hereto, the
Disclosure Schedule, and the documents and instruments and other agreements
among the parties hereto referenced herein: (a) constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings both written and oral, among the parties
with respect to the subject matter hereof, PROVIDED HOWEVER that the
Confidentiality Agreement between Coherent and Star dated November 17, 1997 (the
"CONFIDENTIALITY AGREEMENT") shall remain in full force and effect as it relates
to the confidentiality and non-disclosure of Confidential Information (as
defined in the Confidentiality Agreement) provided by the parties; (b) except as
expressly provided herein are not intended to confer upon any other person any
54
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rights or remedies hereunder; and (c) shall not be assigned by operation of law
or otherwise, except that Coherent and Merger Sub may assign their respective
rights and delegate their respective obligations hereunder to their respective
affiliates.
10.5 SEVERABILITY. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
10.6 OTHER REMEDIES. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
10.7 GOVERNING LAW; JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED BY,
CONSTRUED AND ENFORCED IN ACCORDANCE WITH DELAWARE LAW.
10.8 RULES OF CONSTRUCTION. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefor, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE IMMEDIATELY FOLLOWS]
55
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The parties have caused this Agreement to be signed, all as of the day
and year first written above.
COHERENT, INC. PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Bernard Couillaud By: /s/ Louis P. Valente
---------------------------------- -------------------------------
Title: President Title: Chief Executive
Officer and
President
MEDICAL TECHNOLOGIES
ACQUISITION, INC. STAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Bernard Couillaud By:
----------------------------------- -------------------------------
Title: President Title:
- --------------------------------------
Robert E. Grove
- --------------------------------------
James Z. Holtz
- --------------------------------------
David C. Mundinger
[SIGNATURE PAGE TO REORGANIZATION AGREEMENT]
<PAGE>
EXHIBIT A
to Agreement and
Plan of Reorganization
ESCROW AGREEMENT
This Escrow Agreement, dated December 7, 1998 (the "ESCROW AGREEMENT"), is
entered into by and among Coherent, Inc., a Delaware corporation ("COHERENT,,),
Medical Technologies Acquisition, Inc., a California corporation and a wholly
owned subsidiary of Coherent ("MERGER SUB,,), Palomar Medical Technologies,
Inc., a Delaware corporation ("PALOMAR,,), Robert Grove, James Holtz, David
Mundinger, Mark Weckwerth, Tobin Island, Brian Guscott and Kenneth Anderson
(collectively, with Palomar, the "STAR SHAREHOLDERS,,), and Star Medical
Technologies, Inc., a California corporation and a consolidated subsidiary of
Palomar ("STAR,,), and US Bank Trust, N.A. as escrow agent (the "ESCROW
AGENT,,).
RECITALS
A. Coherent, Merger Sub, Palomar and Star have entered into that certain
Agreement and Plan of Reorganization, dated as of December 7, 1998
(the "REORGANIZATION AGREEMENT"), pursuant to which Coherent will
acquire Star through the statutory merger of Merger Sub with and into
Star (the "MERGER,,). The surviving corporation after the Merger is
hereinafter sometimes referred to as the "SURVIVING CORPORATION."
B. Pursuant to the Merger, among other things, the outstanding shares of
capital stock of Star are to be converted into the right to receive
certain cash payments from Coherent (the "MERGER CONSIDERATION").
C. Pursuant to the Reorganization Agreement, a portion of the Merger
Consideration is to be deposited by Coherent into an escrow fund to be
governed by Article VII of the Reorganization Agreement and the escrow
provisions of this Agreement.
D. Palomar and Star have made to Coherent and Merger Sub certain
representations and warranties, covenants and agreements in the
Reorganization Agreement, in the agreements attached thereto as
exhibits, or in the agreements entered into in connection with the
Merger.
E. As set forth in Article VII of the Reorganization Agreement, it is a
condition to the Merger that Palomar and Star indemnify Coherent and
the Surviving Corporation for breaches of the representations and
warranties, covenants and agreements in the Reorganization Agreement,
in the agreements attached thereto as exhibits, and in the agreements
entered into in connection with the Merger.
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AGREEMENT
Now, therefore, as a material inducement to Coherent and Merger Sub to
enter into the Reorganization Agreement, and in consideration of the foregoing
recitals and the mutual covenants set forth below, the parties hereto agree as
follows:
1. DEFINED TERMS. Each capitalized term used in this Escrow Agreement
without definition shall have the same meaning as is ascribed to such term in
the Reorganization Agreement.
2. ESCROW.
2.1. DEPOSIT OF ESCROW FUND. As security for the indemnity provided
for in Article VII of the Reorganization Agreement and by virtue of this
Escrow Agreement, the Star Shareholders listed on EXHIBIT A hereto will be
deemed to have received and deposited with the Escrow Agent the Escrow
Amount, with each such Star Shareholder deemed to have contributed the
amount set forth opposite such Star Shareholder's name on EXHIBIT A hereto,
and the Escrow Amount shall be deposited in the name of the Escrow Agent in
the Escrow Fund (as defined below). At or promptly following the Effective
Time, the Escrow Amount, without any act of any Star Shareholder, will be
deposited with the Escrow Agent, such deposits to constitute an escrow fund
(the "ESCROW FUND,,) to be governed by the terms set forth herein. The
portion of the Escrow Amount deemed to be contributed on behalf of each
Star Shareholder shall be its Pro Rata Portion (as defined herein) of the
Escrow Amount. "PRO RATA PORTION,, shall mean, with respect to each Star
Shareholder listed on EXHIBIT A, the amount determined at the Effective
Time equal to the quotient obtained by dividing (x) the amount deemed
contributed by each such Star Shareholder to the Escrow Fund as set forth
on EXHIBIT A by (y) the Escrow Amount.
2.2 ACCEPTANCE OF ESCROW FUND.
(a) The Escrow Agent agrees to accept delivery of the Escrow
Funds and to hold, preserve and disburse the Escrow Funds in
accordance with the terms and conditions of this Escrow Agreement.
(b) The Escrow Funds shall be invested by the Escrow Agent at the
direction of the Shareholder Representative (as defined in Section 6.1
hereof) as follows:
(1) Direct obligations of the United States or any agency
thereof with maturities of three months or less from the date of
acquisition thereof;
(2) Certificates of deposit, bankers' acceptance and other
"money market instruments" issued by any bank or trust company
organized under the laws of the United States or any state
thereof and having capital and surplus in excess of $50,000,000
and having a rating of "A" or better by a nationally recognized
rating agency, with maturities of three months or less from the
date of acquisition thereof;
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(3) Shares of "money market funds",each having net assets in
excess of $50,000,000; in each case maturing or being due or
payable in full not more than three months after the acquisition
thereof;
(4) Time deposits, maturing no more than six months from the
date of creation thereof with commercial banks or savings banks
or savings and loan associations, each having membership either
in the Federal Deposit Insurance Corporation or any successor
thereto and in amounts not exceeding the maximum amount of
insurance thereunder; or
(5) Following any such direction, the Shareholder
Representative may, at any time and from time to time, direct
that the Escrow Funds be, and the Escrow Agent agrees that in
such event the Escrow Funds shall be, reinvested by the Escrow
Agent pursuant to the terms of this Section 2.2.
(c) During the period from the date hereof to the date that the
Escrow Agent has received any such direction from the Shareholder
Representative in accordance with this Section 2.2, the Escrow Agent
shall deposit such funds in a money market fund maintained by the
Escrow Agent.
(d) The Escrow Agent may accept and act upon oral investment
instructions of the Shareholder Representative as so instructed.
Furthermore:
(1) The Escrow Agent will confirm all oral investment
instructions in writing within 3 business days. If there is any
discrepancy between any oral instructions and a written
confirmation of that instruction, the Escrow Agent's records of
the oral investment instructions shall govern.
(2) The parties to this Agreement shall indemnify and hold
the Escrow Agent harmless from any and all liability for acting
on an oral investment instruction purported to be given by the
Shareholder Representative.
(3) The Escrow Agent shall not be responsible for the
authenticity of any instructions, or be in any way liable for any
unauthorized instruction or for acting on such an instruction
whether or not the person giving the instructions was in fact the
Shareholder Representative.
(4) In no event shall the Escrow Agent be liable to the
parties to this Agreement for any consequential, special, or
exemplary damages, including, but not limited to lost profits,
from any cause whatsoever arising out of, or in any way connected
with acting upon oral instructions believed by the Escrow Agent
to be genuine.
(e) The Escrow Agent will act upon investment instructions the
day that such instructions are received, provided the requests are
communicated within a sufficient amount of time to allow the Escrow
Agent to make the specified investment. Furthermore:
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<PAGE>
(1) Instructions received after an applicable investment
cutoff deadline will be treated as being received by the Escrow
Agent on the next business day and the Escrow Agent shall not be
liable for any loss arising directly or indirectly, in whole or
in part, from the inability to invest funds on the day the
instructions are received.
(2) The Escrow Agent shall not be liable for any loss
arising by error, failure or delay in the making of an investment
which is caused by circumstances beyond the Escrow Agent's
reasonable control.
2.3 ESCROW PERIOD; DISTRIBUTION UPON TERMINATION OF ESCROW PERIOD.
Subject to the following requirements, the Escrow Fund shall be in
existence immediately following the Effective Time and shall terminate at
11:59 p.m., California time, on the date one year following the Closing
Date (the "ESCROW PERIOD,,), and upon termination, the Escrow Agent shall
promptly distribute all remaining funds to the Star Shareholders in
proportion to their respective original contributions to the Escrow Fund;
PROVIDED, HOWEVER, that the Escrow Period shall not terminate with respect
to any amount which, in the reasonable judgement of Coherent, subject to
the objection of the Shareholder Representative and the subsequent
arbitration of the matter in the manner provided in Section 4.2 below, is
necessary to satisfy any unsatisfied pending or threatened claims specified
in any Officer's Certificate (as defined in Section 3.1 hereof) delivered
to the Escrow Agent prior to termination of such Escrow Period with respect
to facts and circumstances existing prior to the termination of such Escrow
Period. As soon as all such claims have been resolved, the Escrow Agent
shall notify Coherent of its intent to deliver to Star Shareholders the
remaining portion of the Escrow Fund not required to satisfy such claims
(the "SETTLEMENT AMOUNT,,). Deliveries of amounts out of the Escrow Fund to
Star Shareholders pursuant to this Section 2.3 shall be made in proportion
to their respective original contributions to the Escrow Fund.
2.4 PROTECTION OF ESCROW FUND. The Escrow Agent shall hold and
safeguard the Escrow Fund during the Escrow Period in accordance with the
terms of this Agreement and shall hold and dispose of the Escrow Fund only
in accordance with the terms hereof and the provisions of Article VII of
the Reorganization Agreement.
2.5 ACCRUED INTEREST. Except as provided below, all interest and
earnings accrued on the Escrow Fund shall be retained in the Escrow Fund
for the account of Coherent to the extent attributable to that portion of
the Escrow Fund necessary to satisfy claims for indemnification of Losses,
and for the account of the Star Shareholders to the extent attributable to
that portion of the Escrow Fund remaining after the foregoing distribution
to Coherent. Until disbursement, such interest and earnings shall be held
in the Escrow Fund upon the terms and conditions set forth herein. Earnings
and interest on the monies in the Escrow Fund to be distributed to the Star
Shareholders at the time of disbursement in accordance with Section 2.3
shall be distributed exclusively to the Star Shareholders. For tax
reporting and payments purposes, during the pendency of the Escrow Fund,
the Escrow Agent shall allocate earnings and interest on monies in the
Escrow Fund to the Star Shareholders; provided that, notwithstanding
anything to the contrary in this Section 2, the Escrow Agent shall
distribute to the Star Shareholders an amount from the Escrow Fund on each
estimated and final tax payment date equal to the federal and state income
taxes due with respect to such income for such period as set forth in a
notice provided by the Shareholder Representative to the Escrow Agent and
Coherent, which taxes shall be certified with respect to each Star
Shareholder by such Star Shareholder's accountant if so reasonably
requested by Coherent. The Star Shareholders shall provide the Escrow Agent
with such taxpayer identification numbers and related documentation as may
be reasonably necessary for reporting of interest and earnings on the
Escrow Fund.
4
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3. CLAIMS.
3.1 CLAIMS UPON ESCROW FUND. Once the Escrow Agent has received, at
any time on or before the last day of the Escrow Period, a certificate
signed by any officer of Coherent (an "OFFICER'S CERTIFICATE,,): (i)
stating that an Indemnitee or Indemnitees have incurred or paid or properly
accrued Losses, or would be required in accordance with GAAP to reflect
potential Losses in its financial statements or footnotes thereto if
prepared at that time, the aggregate amount of which Losses exceeds
$500,000, and (ii) specifying in reasonable detail the individual items of
Losses included in the amount so stated, the date each such item was paid
or properly accrued, or the basis for such anticipated liability, and, if
applicable, the nature of the misrepresentation, breach of warranty or
covenant to which such item is related, the Escrow Agent shall, subject to
the provisions of Sections 2.3 and 3.2 hereof, deliver to the Indemnitee
out of the Escrow Fund, in accordance with Section 3.2, such amount held in
the Escrow Fund that equals all Losses in excess of $500,000 and shall
provide notice to the Star Shareholders of such claims.
3.2 OBJECTIONS TO CLAIMS. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall
be delivered to the Shareholder Representative, and for a period of thirty
(30) days after such delivery, the Escrow Agent shall make no delivery to
Coherent from the Escrow Fund pursuant to Sections 3.1 and 3.2 hereof
unless the Escrow Agent shall have received written authorization from the
Shareholder Representative to make such delivery. After the expiration of
such thirty (30) day period, the Escrow Agent shall make delivery of the
amount from the Escrow Fund in accordance with Sections 3.1 and 3.2 hereof;
PROVIDED, HOWEVER, that no such payment or delivery may be made if the
Shareholder Representative shall object in a written statement to the claim
made in the Officer's Certificate, and such statement shall have been
delivered to the Escrow Agent prior to the expiration of such thirty (30)
day period.
4. RESOLUTION OF CLAIMS.
4.1. GOOD FAITH NEGOTIATION. In case the Shareholder Representative
shall object in writing to any claim or claims made in any Officer's
Certificate within thirty (30) days after delivery of such Officer's
Certificate, the Shareholder Representative and Coherent shall attempt in
good faith to agree upon the rights of the respective parties with respect
to each of such claims. If the Shareholder Representative and Coherent
should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both Coherent and the Shareholder Representative and
shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled
to rely on any such memorandum and distribute portions of the Escrow Amount
from the Escrow Fund in accordance with the terms thereof.
5
<PAGE>
4.2 ARBITRATION. If no such agreement can be reached after good faith
negotiation, either Coherent or the Shareholder Representative may demand
arbitration of the matter unless the amount of the damage or Loss is at
issue in pending litigation with a third party, in which event arbitration
shall not be commenced until such amount is ascertained or Coherent and the
Shareholder Representative agree to arbitration; and in either such event
the matter shall be settled by arbitration conducted by one arbitrator
mutually agreeable to Coherent and the Shareholder Representative. In the
event that within twenty (20) days after submission of any dispute to
arbitration, Coherent and the Shareholder Representative cannot mutually
agree on one arbitrator, Coherent and the Shareholder Representative shall
each select one arbitrator, and the two arbitrators so selected shall
select a third arbitrator. The arbitrator or arbitrators, as the case may
be, shall set a limited time period and establish procedures designed to
reduce the cost and time for discovery while allowing Coherent and the
Shareholder Representative an opportunity, adequate in the sole judgement
of the arbitrator or majority of the three arbitrators, as the case may be,
to discover relevant information from the opposing party about the subject
matter of the dispute. The arbitrator or a majority of the three
arbitrators, as the case may be, shall rule upon motions to compel or limit
discovery and shall have the authority to impose sanctions, including
attorneys' fees and costs, to the extent as a competent court of law or
equity, should the arbitrators or a majority of the three arbitrators, as
the case may be, determine that discovery was sought without substantial
justification or that discovery was refused or objected to without
substantial justification. The decision of the arbitrator or a majority of
the three arbitrators, as the case may be, as to the validity and amount of
any claim in such Officer's Certificate shall be binding and conclusive
upon the parties to this Agreement. Such decision shall be written and
shall be supported by written findings of fact and conclusions which shall
set forth the award, judgment, decree or order awarded by the
arbitrator(s).
4.3 JUDGMENT; RULES; EXPENSES. Judgment upon any award rendered by the
arbitrator(s) may be entered in any court having jurisdiction. Any such
arbitration shall be held under the commercial arbitration rules then in
effect of the American Arbitration Association. The arbitrator(s) shall
determine how all expenses relating to the arbitration shall be paid,
including without limitation, the respective expenses of each party, the
fees of each arbitrator and the administrative fee of the American
Arbitration Association.
4.4 THIRD-PARTY CLAIMS. Section 7.4 of the Reorganization Agreement
shall govern the rights and obligations of the parties with respect to
third-party claims that may result in a demand against the Escrow Fund.
5. FEES. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid by Coherent in accordance with the standard fee schedule
of the Escrow Agent. It is understood that the fees and usual charges agreed
upon for services of the Escrow Agent shall be considered compensation for
ordinary services as contemplated by this Agreement. In the event that the
conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent
renders any service not provided for in this Agreement, or if the parties hereto
request a substantial modification of its terms, or if any controversy arises,
or if the Escrow Agent is made a party to, or intervenes in, any litigation
pertaining to the Escrow Fund or its subject matter, the Escrow Agent shall be
reasonably compensated for such extraordinary services and reimbursed for all
costs, attorney's fees, including allocated costs of in-house counsel, and
expenses occasioned by such default, delay, controversy or litigation.
6
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6. SHAREHOLDER REPRESENTATIVE
6.1 APPOINTMENT. In the event that the Merger is approved, effective upon
such vote, and without further act of any Star Shareholder, Palomar shall be
appointed as agent and attorney-in-fact (the "SHAREHOLDER REPRESENTATIVE,,) for
each Star Shareholder, for and on behalf of all Star Shareholders, to give and
receive notices and communications, to authorize payment to Coherent of the
appropriate portions of the Escrow Amount from the Escrow Fund in satisfaction
of claims by Coherent, to object to such payments, to agree to, negotiate, enter
into settlements and compromises of, and demand arbitration and comply with
orders of courts and awards of arbitrators with respect to such claims, and to
take all actions necessary or appropriate in the judgment of the Shareholder
Representative for the accomplishment of the foregoing. Such agency may be
changed by Star Shareholders from time to time upon not less than thirty (30)
days prior written notice to Coherent; PROVIDED, HOWEVER, that the Shareholder
Representative may not be removed unless holders of a majority interest of the
Escrow Fund agree to such removal and to the identity of the substituted agent.
Any vacancy in the position of Shareholder Representative may be filled by
approval of the holders of a majority in interest of the Escrow Fund. No bond
shall be required of the Shareholder Representative, and the Shareholder
Representative shall not receive compensation for his or her services. Notices
or communications to the Shareholder Representative shall constitute notice to
each of the Star Shareholders.
6.2 LIABILITY. The Shareholder Representative shall not be liable for any
act done or omitted hereunder as Shareholder Representative in the exercise of
commercially reasonable judgment. The Star Shareholders on whose behalf the
Escrow Amount was contributed to the Escrow Fund shall severally indemnify the
Shareholder Representative and hold the Shareholder Representative harmless
against any loss, liability or expense incurred without negligence or bad faith
on the part of the Shareholder Representative and arising out of or in
connection with the acceptance or administration of the Shareholder
Representative's duties hereunder, including the reasonable fees and expenses of
any legal counsel retained by the Shareholder Representative.
6.3 FINALITY OF DECISION. A decision, act, consent or instruction of the
Shareholder Representative shall constitute a decision of all Star Shareholders
for whom a portion of the Escrow Amount otherwise payable to them is deposited
in the Escrow Fund and shall be final, binding and conclusive upon each of such
Star Shareholders, and the Escrow Agent and Coherent may rely upon any such
decision, act, consent or instruction of the Shareholder Representative as being
the decision, act, consent or instruction of each and every such Star
Shareholder. The Escrow Agent and Coherent are hereby relieved from any
liability to any person for any acts done by them in accordance with such
decision, act, consent or instruction of the Shareholder Representative.
7
<PAGE>
7. ESCROW AGENT'S DUTIES.
7.1 LIABILITY. The Escrow Agent shall be obligated only for the
performance of such duties as are specifically set forth herein, and as set
forth in any additional written escrow instructions which the Escrow Agent
may receive after the date of this Agreement which are signed by an officer
of Coherent and the Shareholder Representative, and may rely and shall be
protected in relying or refraining from acting on any instrument reasonably
believed to be genuine and to have been signed or presented by the proper
party or parties. The Escrow Agent shall not be liable for any act done or
omitted hereunder as Escrow Agent while acting in good faith and in the
exercise of reasonable judgment, and any act done or omitted pursuant to
the advice of counsel shall be conclusive evidence of such good faith.
7.2. ORDERS, JUDGMENTS AND DECREES. 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, 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 Escrow Agent obeys
or complies with any such order, judgment or decree of any court, the
Escrow Agent shall not be liable to any of the parties hereto or to any
other person by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
7.3 IDENTITY, AUTHORITY OR RIGHTS OF PARTIES. The Escrow Agent shall
not be liable in any respect on account of the identity, authority or
rights of the parties executing or delivering or purporting to execute or
deliver this Agreement or any documents or papers deposited or called for
hereunder.
7.4 STATUTE OF LIMITATIONS. The Escrow Agent shall not be liable for
the expiration of any rights under any statute of limitations with respect
to this Agreement or any documents deposited with the Escrow Agent.
7.5 DAMAGES, LOSSES, OR EXPENSES. In performing any duties under the
Agreement, the Escrow Agent shall not be liable to any party for damages,
losses, or expenses, except for negligence or willful misconduct on the
part of the Escrow Agent. The Escrow Agent shall not incur any such
liability for (a) any act or failure to act made or omitted in good faith,
or (b) any action taken or omitted in reliance upon any instrument,
including any written statement of affidavit provided for in this Agreement
that the Escrow Agent shall in good faith believe to be genuine, nor will
the Escrow Agent be liable or responsible for forgeries, fraud,
impersonations, or determining the scope of any representative authority.
In addition, the Escrow Agent may consult with legal counsel in connection
with Escrow Agent's duties under this Agreement and shall be fully
protected in any act taken, suffered, or permitted by him/her in good faith
in accordance with the advice of counsel. The Escrow Agent is not
responsible for determining and verifying the authority of any person
acting or purporting to act on behalf of any party to this Agreement.
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7.6 CONTROVERSY. If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of this
Agreement, its terms or conditions, the Escrow Agent will not be required
to determine the controversy or to take any action regarding it. The Escrow
Agent may hold all documents and cash balances and may wait for settlement
of any such controversy by final appropriate legal proceedings or other
means as, in the Escrow Agent's discretion, the Escrow Agent may be
required, despite what may be set forth elsewhere in this Agreement. In
such event, the Escrow Agent will not be liable for damage. Furthermore,
the Escrow Agent may at its option, file an action of interpleader
requiring the parties to answer and litigate any claims and rights among
themselves. The Escrow Agent is authorized to deposit with the clerk of the
court all documents and cash balances held in escrow, except all cost,
expenses, charges and reasonable attorney fees incurred by the Escrow Agent
due to the interpleader action and which the parties hereto jointly and
severally agree to pay. Upon initiating such action, the Escrow Agent shall
be fully released and discharged of and from all obligations and liability
imposed by the terms of this Agreement.
7.7 INDEMNIFICATION. The parties hereto and their respective
successors and assigns agree jointly and severally to indemnify and hold
Escrow Agent harmless against any and all losses, claims, damages,
liabilities, and expenses, including reasonable costs of investigation,
counsel fees, including allocated costs of in-house counsel and
disbursements that may be imposed on Escrow Agent or incurred by Escrow
Agent in connection with the performance of its duties under this
Agreement, including but not limited to any litigation arising from this
Agreement or involving its subject matter other than arising out of its
negligence or willful misconduct.
7.8 RESIGNATION. The Escrow Agent may resign at any time upon giving
at least thirty (30) days written notice to the parties hereto; PROVIDED,
HOWEVER, that no such resignation shall become effective until the
appointment of a successor escrow agent which shall be accomplished as
follows: the parties shall use their best efforts to mutually agree on a
successor escrow agent within thirty (30) days after receiving such notice.
If the parties hereto fail to agree upon a successor escrow agent within
such time, the Escrow Agent shall have the right to appoint a successor
escrow agent authorized to do business in the state of California. The
successor escrow agent shall execute and deliver an instrument accepting
such appointment and it shall, without further acts, be vested with all the
estates, properties, rights, powers, and duties of the predecessor escrow
agent as if originally named as escrow agent. Upon appointment of a
successor escrow agent, the Escrow Agent shall be discharged from any
further duties and liability under this Agreement. Notwithstanding anything
else herein, any entity into which the Escrow Agent may be merged or with
which it may be consolidated, or any entity to whom Escrow Agent may
transfer a substantial amount of its escrow business, shall be the
successor to the Escrow Agent without the execution or filing of any paper
or any further act on the part of any of the parties to this Agreement
anything herein to the contrary notwithstanding.
8. GENERAL PROVISIONS.
8.1 NOTICES. Every notice, consent or other communication required or
permitted to be given by any provision of the Agreement shall be in
writing. Each such notice, shall be deemed to have been duly and properly
given, served or made for all purposes on the date such notice is (a)
delivered personally or (b) sent by registered or certified mail, return
receipt requested, postage and charges prepaid and addressed as follows:
9
<PAGE>
(a) if to Coherent or Merger Sub, to:
Coherent, Inc.
5100 Patrick Henry Drive
Santa Clara, California 95054
Attention: Scott Miller, Vice President and
General Counsel
Telephone No.: (408) 764-4000
Facsimile No.: (408) 970-9998
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Judith Mayer O'Brien, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
(b) if to Palomar or Star, to:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, Massachusetts 02421
Attention: President and General Counsel
Telephone No.: (781) 676-7300
Facsimile No.: (781) 676-7330
with a copy to:
Foley, Hoag & Elliot LLP
One Post Office Square
Boston, Massachusetts 02109
Attention: David A. Broadwin, Esq.
Telephone No.: (617) 832-1000
Facsimile No.: (617) 832-7000
10
<PAGE>
(c) If to the Shareholder Representative, to:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, Massachusetts 02421
Telephone No.: (781) 676-7300
Facsimile No.: (781) 676-7330
(d) If to the Escrow Agent, to:
US Bank Trust, N.A.
1 California Street, Suite 400
San Francisco, CA 94111
Telephone No: (415) 273-4536
Facsimile No.: (415) 273-4593
Attention: Carol Andreacchi
8.2 INTERPRETATION. The words "include,,, "includes,, and "including,,
when used herein shall be deemed in each case to be followed by the words
"without limitation.,, The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed
by each of the parties and delivered to the other party, it being
understood that all parties need not sign the same counterpart.
8.4 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement: (a) constitutes the
entire agreement among the parties with respect to the subject matter
hereof and supersede all prior agreements and understandings both written
and oral, among the parties with respect to the subject matter hereof; (b)
except as expressly provided herein is not intended to confer upon any
other person any rights or remedies hereunder; and (c) shall not be
assigned by operation of law or otherwise, except that Coherent and Merger
Sub may assign their respective rights and delegate their respective
obligations hereunder to their respective affiliates.
8.5 SEVERABILITY. In the event that any provision of this Agreement or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement
with a valid and enforceable provision that will achieve, to the extent
possible, the economic, business and other purposes of such void or
unenforceable provision.
8.6 OTHER REMEDIES. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative
with and not exclusive of any other remedy conferred hereby, or by law or
equity upon such party, and the exercise by a party of any one remedy will
not preclude the exercise of any other remedy.
11
<PAGE>
8.7 GOVERNING LAW; JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED BY,
CONSTRUED AND ENFORCED IN ACCORDANCE WITH CALIFORNIA LAW. ANY ARBITRATION
PROCEEDINGS AS SET FORTH HEREIN SHALL BE HELD IN ENGLISH IN SANTA CLARA
COUNTY, STATE OF CALIFORNIA.
8.8 RULES OF CONSTRUCTION. The parties hereto agree that they have
been represented by counsel during the negotiation and execution of this
Agreement and, therefor, waive the application of any law, regulation,
holding or rule of construction providing that ambiguities in an agreement
or other document will be construed against the party drafting such
agreement or document.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
12
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Escrow Agreement as
of the day and year first above written.
COHERENT, INC. PALOMAR MEDICAL TECHNOLOGIES, INC.
(as "Palomar" and as a
"Star Shareholder" herein)
By: By:
------------------------- -------------------------------
Title: Title:
MEDICAL TECHNOLOGIES
ACQUISITION, INC. STAR MEDICAL TECHNOLOGIES, INC.
By: By:
------------------------- -------------------------------
Title: Title:
US BANK TRUST, N.A. STAR SHAREHOLDERS
By:
------------------------ -----------------------------------
Title: Robert Grove
-----------------------------------
James Holtz
-----------------------------------
David Mundinger
<PAGE>
STAR SHAREHOLDERS (continued)
-----------------------------------
Mark Weckwerth
-----------------------------------
Tobin Island
-----------------------------------
Brian Guscott
-----------------------------------
Kenneth Anderson
<PAGE>
EXHIBIT A
CONTRIBUTION TO ESCROW FUND
<TABLE>
<S> <C> <C>
NAME CONTRIBUTION PRO RATA PORTION
Palomar Medical Technologies, Inc. $3,254,907 81.4%
Robert Grove $200,000 5%
James Holtz $200,000 5%
David Mundinger $200,000 5%
Brian Guscott $51,208 1.28%
Mark Weckwerth $34,140 0.84%
Tobin Island $34,140 0.84%
Kenneth Anderson $25,605 0.64%
------------ ----------------
TOTAL $4,000,000 100%
</TABLE>
<PAGE>
EXHIBIT B
to Agreement and
Plan of Reorganization
MERGER CERTIFICATE
(To Be Delivered at Closing)
<PAGE>
EXHIBIT C
to Agreement and
Plan of Reorganization
TUCKER ANTHONY INCORPORATED
One Beacon Street
Boston, Massachusetts 02108
(617) 725-1762
(617) 725-2483 Fax
Investment Banking
December 7, 1998
Board of Directors
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02173
Members of the Board:
You have requested the opinion of Tucker Anthony Incorporated ("Tucker Anthony")
as to the fairness, from a financial point of view, of the consideration to be
received by Palomar Medical Technologies, Inc. (the "Company") pursuant to the
Agreement and Plan of Reorganization (the "Agreement") by and among the Company,
Star Medical Technologies, Inc. ("Star"), Coherent, Inc. (the "Buyer"), a wholly
owned subsidiary of the Buyer and certain individuals who hold options to
purchase shares of common stock of Star. Pursuant to the Agreement, a newly
formed, wholly owned subsidiary of the Buyer will be merged with and into the
Company in accordance with applicable law (the "Merger"). Pursuant to the terms
of the Agreement, the Buyer will pay cash consideration of a n-tinimum of $65
million (the "Gross Merger Consideration"), of which the Company will receive a
minimum of $54 million (the "Palomar Merger Consideration").
Tucker Anthony, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, private placements and valuations
for corporate and other purposes. In connection with our procedures outlined
herein and the preparation of our opinion, Tucker Anthony has not been
authorized by the Company to solicit, nor have we solicited or evaluated,
third-party indications of interest for the acquisition of the common stock or
assets of Star. Tucker Anthony has not participated in the negotiations leading
to the Agreement. The fees that Tucker Anthony will receive for rendering this
opinion are not contingent upon the closing of the Transaction. In the ordinary
course of our business, we may actively trade the securities of both the Company
and the Buyer for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
In arriving at our opinion, we have among other things:
(i) Reviewed the Agreement;
(ii) Reviewed certain historical financial and other information concerning
Star for the three fiscal years ended December 31, 1997 and for the
first nine months of 1998, including Star's unaudited financial
statements for the three fiscal years ended December 31, 1997 and draft
audited financial statements for the nine months ended September 30,
1998;
(iii) Reviewed certain historical financial and other information concerning
the Company for the three fiscal years ended December 31, 1997 and
quarterly results for the quarters ended March 31, 1998 and June 30,
1998, including the Company's reports on Forms 10-K and 10-Q;
1
<PAGE>
(iv) Held discussions with the senior managements of the Company and Star
with respect to Star's past and current financial performance, financial
condition and future prospects;
(v) Reviewed certain internal financial data, pr 'ections and other
information of the Company, including financial projections prepared by
managements of Star and the Company, and performed a discounted cash
flow analysis using such projections;
(vi) Analyzed certain publicly available information of other companies that
operate in similar industries, and compared Star from a financial point
of view with certain of these companies;
(vii) Reviewed the consideration received by stockholders in acquisitions of
companies that operate in similar industries or that we otherwise deemed
relevant to our inquiry; and
(viii) Conducted such other financial studies, analyses and investigations and
reviewed such other information as we deemed appropriate to enable us to
render our opinion. In our review, we have also taken into account an
assessment of general economic, market and financial conditions and
certain industry trends and related matters.
In our review and analysis and in arriving at our opinion we have assumed and
relied upon the accuracy and completeness of all the financial information
publicly available or provided to us by Star and the Company and have not
attempted to verify any of such information. We have assumed (i) that the
financial projections of Star provided to us have been prepared on a basis
reflecting the best currently available estimates and judgments of Star's and
the Company's management as to the future financial performance and results of
Star, and (ii) that such forecasts and estimates will be realized in the amounts
and in the time periods estimated. We did not make or obtain any independent
evaluations or appraisals of any assets or liabilities of Star or the Company
nor did we verify any of Star's or the Company's books or records. Our opinion
is necessarily based upon market, economic and other conditions as they exist
and can be evaluated as of the date hereof, and the information made available
to us through the date hereof.
This opinion is being furnished for the use and benefit of the Company's Board
of Directors and is not a reconunendation to shareholders. Tucker Anthony has
advised the Board of Directors that it does not believe any person other than
the Board of Directors has the legal right to rely on the opinion and, absent
any controlling precedent, would resist any assertion otherwise.
Based upon and subject to the foregoing, it is our opinion that the Palomar
Merger Consideration to be received by the Company pursuant to the Agreement is
fair, from a financial point of view, as of the date hereof.
Very truly yours,
/s/
- -----------------
Tucker Anthony Incorporated
<PAGE>
EXHIBIT D
to Agreement and
Plan of Reorganization
Form of Legal Opinion
(To Be Delivered at Closing
<PAGE>
EXHIBIT E
to Agreement and
Plan of Reorganization
PATENT LICENSE AGREEMENT
THIS PATENT LICENSE AGREEMENT (this "AGREEMENT") is entered into this 7th
day of December, 1998, by and among Palomar Medical Technologies, Inc., a
Delaware corporation, with offices at 45 Hartwell Avenue, Lexington,
Massachusetts 02421-3102 ("PALOMAR"), Star Medical Technologies, Inc., a
California corporation with offices at 1249 Quarry Lane, Suite 100, Pleasanton,
California 94566 ("STAR"), and Coherent, Inc., a Delaware corporation with
offices at 5100 Patrick Henry Drive, Santa Clara, California 95056 ("COHERENT"),
(each, a "PARTY"; together, the "PARTIES").
WITNESSETH:
WHEREAS, Palomar is the exclusive licensee of certain United States patents
pursuant to a license agreement between Palomar and Massachusetts General
Hospital ("MGH");
WHEREAS, Coherent and Star desire to acquire licenses under such patents;
and
WHEREAS, Star is the assignee of certain patents under which Palomar
desires to obtain licenses.
NOW THEREFORE, the Parties hereby agree as follows:
AGREEMENT:
1. DEFINITIONS. The following terms shall have the meanings set forth
below:
A. "'306 PATENT" shall mean United States Patent No. 5,074,306,
entitled "Measurement of Burn Depth in Skin," issued on December 24, 1991,
and any reissue or reexamination thereof or any patent issuing from a
divisional application, continuation or continuation-in-part from the
application from which such patent issued.
B. "'350 PATENT" shall mean United States Patent No. 5,527,350,
entitled "Pulsed Infrared Laser Treatment of Psoriasis," issued on June 18,
1996, and any reissue or reexamination thereof or any patent issuing from a
divisional application, continuation or continuation-in-part from the
application from which such patent issued.
C. "'403 PATENT" shall mean United States Patent No. 5,707,403,
entitled "Method for the Laser Treatment of Subsurface Blood Vessels,"
issued on January 13, 1996, and any reissue or reexamination thereof or any
patent issuing from a divisional application, continuation or
continuation-in-part from the application from which such patent issued.
D. "'568 PATENT" shall mean United States Patent No. 5,595,568
entitled "Permanent Hair Removal Using Optical Pulses," issued on January
21, 1997, and any reissue or reexamination thereof or any patent issuing
from a divisional application, continuation or continuation-in-part from
the application from which such patent issued.
1
<PAGE>
E. "'844 PATENT" shall mean United States Patent No. 5,735,844
entitled "Hair Removal Using Optical Pulses," issued on April 7, 1998, and
any reissue or reexamination thereof or any patent issuing from a
divisional application, continuation or continuation-in-part from the
application from which such patent issued.
F. "'901 PATENT" shall mean United States Patent No. 5,743,901,
entitled "High Fluence Diode Laser Device and Method for the Fabrication
and Use Thereof," issued on April 28, 1998, and any reissue or
reexamination thereof or any patent issuing from a divisional application,
continuation or continuation-in-part from the application from which such
patent issued.
G. "ACQUISITION AGREEMENT" shall mean that certain "Agreement and Plan
of Reorganization" entered into by and among Coherent, Medical Technologies
Acquisition, Inc., Palomar, Star, Robert E. Grove, James Z. Holtz and David
C. Mundinger, of even date herewith.
H. "AFFILIATE" shall mean an entity of which Coherent owns or controls
at least fifty-one percent (51%) of the outstanding shares of stock
entitled to vote for such entity's board of directors.
I. "AVERAGE SALES PRICE" shall mean, with respect to a Palomar
Licensed Product, the average selling price of such Palomar Licensed
Product by Coherent to third parties not Affiliates during the preceding
calendar quarter.
J. "DUAL USE DEVICE" shall mean an apparatus (i) that is commercially
and medically suitable for both hair removal and leg vein treatment and
(ii) whose principal use is hair removal.
K. "DUAL USE DEVICE SUBLICENSEE" shall mean a third party unaffiliated
with Palomar to whom Palomar has granted a license (a "DUAL USE LICENSE"),
under the `568 Patent and under the `844 Patent, to make, use, offer for
sale, sell and import any devices and perform and practice any processes.
L. "MGH AGREEMENT" shall mean that certain "License Agreement" between
Palomar and MGH dated as of August 18, 1995, and any amendments thereto.
M. "NET SALES" shall mean, with respect to Palomar Licensed Products
sold or leased by Coherent during a calendar quarter, the amount invoiced
by Coherent for the sale or lease ("ACTUAL AMOUNTS") for such Palomar
Licensed Products, less credits and allowances for price adjustment;
rebates and cash discounts to customers; amounts for transportation,
insurance, handling or shipping; taxes; discounts, and allowances actually
shown on such invoices; and allowances for any rejection or return of
Palomar Licensed Products previously sold; provided that, when calculating
Net Sales with respect to a Palomar Licensed Product sold to an Affiliate
at a price less than the Average Sales Price, the Actual Amount with
respect thereto shall be deemed equal to the Average Sales Price; and
provided further that if Coherent sells or leases one or more Palomar
Licensed Product(s) in combination with other Coherent Products at a single
price (a "BUNDLED PACKAGE") and the Actual Amount invoiced by Coherent for
such Palomar Licensed Product(s) included in such Bundled Package is less
than the Average Sales Prices for the Palomar Licensed Product(s) contained
in the Bundled Package, the Actual Amount received by Coherent for such
Palomar Licensed Product(s) included in such Bundled Package shall be
deemed to be equal to the Average Sales Prices for the Palomar Licensed
Product(s) contained in the Bundled Package.
2
<PAGE>
N. "PALOMAR LICENSED PRODUCT" shall mean any product that infringes a
valid claim of either the `568 Patent or the `844 Patent sold or leased by
Coherent after the date hereof.
O. "ROYALTY RATE" means seven and one-half percent (7.5%) or such
other lower rate as may be determined in accordance with Section 11.A.
2. LICENSES TO COHERENT AND STAR.
Subject to all the terms and conditions of this Agreement, Palomar hereby grants
to both Coherent and Star a worldwide, irrevocable, perpetual, royalty-bearing,
non-exclusive sublicense, in the field of hair reduction and/or removal, under
the `568 Patent and the `844 Patent and all renewals, extensions and foreign
counterparts thereof to make, have made, use, sell, offer for sale, or import
any apparatus and practice any process or method, and to sublicense Coherent's
and Star's customers to use the Palomar Licensed Products in accordance with the
claims in such patents. Except as expressly provided above, Coherent and Star
shall not have the right to sublicense, in whole or in part, the `568 Patent or
the `844 Patent.
3. LICENSES TO PALOMAR.
A. `306 PATENT. Upon Palomar's written request, Star and Palomar shall
negotiate in good faith the terms and conditions, including without
limitation a royalty payment, of an agreement ("'306 LICENSE AGREEMENT")
pursuant to which Star would grant to Palomar a license under the `306
Patent to make, have made, use, sell, offer for sale and import any
apparatus.
B. `350 AND `403 PATENTS.
(i) Subject to all the terms and conditions of this Agreement,
Star hereby grants to Palomar a worldwide, irrevocable, perpetual,
non-exclusive, royalty-free, non-transferable license to grant to Dual
Use Device Sublicensees sublicenses under the `350 Patent and under
the `403 Patent, during the term of the relevant Dual Use License, to
make, have made, use, sell, offer for sale, and import Dual Use
Devices, but not Restricted Semiconductor Laser Devices (as such term
is defined in Section 5.14 of the Acquisition Agreement).
(ii) Subject to all the terms and conditions of this Agreement,
Star hereby grants to Palomar a worldwide, irrevocable, perpetual,
non-exclusive, royalty-bearing, non-transferable license to grant to
Dual Use Device Sublicensees, following the expiration of the Palomar
Restricted Period (as defined in Section 5.14 of the Acquisition
Agreement), sublicenses under the `350 Patent and under the `403
Patent to make, have made, use, sell, offer for sale, and import
Restricted Semiconductor Laser Devices; PROVIDED that Palomar shall
not exercise the foregoing license prior to the Parties' agreeing,
following their good-faith negotiation, upon a royalty to be paid by
Palomar to Star in connection with such third-party Dual Use Licenses.
3
<PAGE>
(iii) Upon Palomar's written request, Star and Palomar shall
negotiate in good faith the terms and conditions, including without
limitation a royalty payment, of an agreement pursuant to which Star
would grant to Palomar a license under the `350 Patent (the "'350
LICENSE AGREEMENT") and of an agreement pursuant to which Star would
grant Palomar a license under the `403 Patent (the "'403 LICENSE
AGREEMENT") to make, have made, use, sell, offer for sale and import
any apparatus.
C. `901 PATENT.
(i) Subject to all the terms and conditions of this Agreement,
Star hereby grants to Palomar a worldwide, irrevocable, perpetual,
non-exclusive, royalty-free, non-transferable license under the `901
Patent to make, have made, use, sell, offer for sale, and import
devices other than Restricted Semiconductor Laser Devices.
(ii) After the expiration of the Palomar Restricted Period, upon
Palomar's written request, the Parties shall negotiate in good faith
commercially reasonable terms, including royalty payments, pursuant to
which Star would license Palomar under the `901 Patent to make, have
made, use, sell, offer for sale, and import Restricted Semiconductor
Laser Devices (the "'901 LICENSE AGREEMENT").
4. COMPENSATION.
A. Within thirty (30) days after the last day of each calendar
quarter, Coherent shall pay to Palomar a royalty (the "ROYALTY") equal to
the product of (x) the Royalty Rate times (y) Coherent's Net Sales of
Palomar Licensed Products during such calendar quarter.
B. Coherent shall only pay one royalty hereunder as to each Palomar
Licensed Product whether or not it is covered by more than one (1) claim of
a patent licensed hereunder, by the claims of more than one (1) patent
licensed hereunder, or by the claims of patents licensed hereunder of more
than one (1) country.
C. For each calendar quarter, Coherent shall provide Palomar with a
written royalty statement in a form reasonably acceptable to Palomar. Such
royalty statement shall recite per country the stock number, item, units
sold, description, quantity shipped, gross invoice, amount billed customers
less discounts, allowances, returns and reportable sales for each Palomar
Licensed Product. Such statement shall be furnished to Palomar regardless
of whether any Palomar Licensed Products were sold during the calendar
quarter or whether any actual Royalty was owed.
D. Royalty obligations shall accrue upon the sale of the Palomar
Licensed Products regardless of the time of collection by Coherent. A
Palomar Licensed Product shall be considered "sold" when such Palomar
Licensed Product is billed, invoiced, shipped or paid for, whichever occurs
first.
E. The receipt or acceptance by Palomar of any royalty statement or
payment shall not prevent Palomar from subsequently challenging the
validity or accuracy of such statement or payment.
4
<PAGE>
F. Upon expiration or termination of this Agreement, all royalty
obligations incurred prior to such expiration or termination shall be
accelerated and shall immediately become due and payable.
G. All payments due Palomar shall be made in United States currency by
check drawn on a United States bank, unless otherwise specified by Palomar.
H. Overdue payments hereunder shall be subject to a late payment
charge calculated at a one and one-half percent (1 1/2%) per month during
delinquency. If the amount of such charge exceeds the maximum permitted by
law, such charge shall be reduced to such maximum.
I. Coherent shall pay any tax (and any related interest and penalty),
however designated, imposed as a result of the existence or operation of
this Agreement, including any tax which Coherent is required to withhold or
deduct from payments to Palomar, except any income tax imposed upon Palomar
by the United States or any subdivision thereof.
J. The foregoing notwithstanding and without limiting any other remedy
that Coherent or Star may have, in the event that either Palomar or MGH
terminates the MGH Agreement and Coherent or Star continue to exercise,
pursuant to Section 9.4 of the MGH Agreement, license rights under the `568
Patent and the `844 Patent, neither Coherent nor Star shall have any
obligations to Palomar pursuant to this Section 4, provided, however that
all royalty obligations incurred prior to such expiration or termination
shall be accelerated and shall immediately become due and payable
K. If the Term expires as to either the `568 Patent or the `864 Patent
or if either of such patents are held invalid or unenforceable, the Parties
shall renegotiate in good faith the Royalty Rate to be paid by Coherent to
Palomar to take into account such occurrence.
5. RELEASE.
In consideration of the rights granted hereunder and other good and
valuable consideration paid by Coherent to Palomar, the receipt and sufficiency
of which Palomar hereby acknowledges, Palomar, for itself and for its present
affiliates, hereby releases (a) Star and Coherent, their present affiliates and
all purchasers and users of products of the kind herein licensed as of the
effective date, from all claims, demands and rights of action which Palomar or
its present affiliates may have on account of any infringement or alleged
infringement of any patent issued in any country of the world by reason of the
manufacture, use, lease, sale, offer for sale or importation of any of such
products which were used or furnished by Star, or any of their affiliates prior
to the effective date hereof and (b) Coherent, its present affiliates and all
purchasers and users of products of the kind herein licensed as of the effective
date, from all claims, demands and rights of action which Palomar or its present
affiliates may have on account of any infringement or alleged infringement of
any patent licensed hereunder by reason of the manufacture, use, lease, sale,
offer for sale or importation of any of such products which were used or
furnished by Star, or any of their affiliates prior to the effective date hereof
5
<PAGE>
6. RECORD INSPECTION AND AUDIT.
A. PALOMAR INSPECTION RIGHTS.
(i) Each of Palomar and MGH shall have the right, upon reasonable
notice, to inspect Coherent's books and records and all other
documents and materials in Coherent's possession or control for the
limited purpose of verifying Coherent's obligations to Palomar
pursuant to Section 4. Each of Palomar and MGH shall have free and
full access thereto for such purpose. In no event shall either Palomar
or MGH have the right to examine information with respect to
Coherent's costs, pricing formulae or percentages of mark-up.
(ii) In the event that such inspection reveals an underpayment by
Coherent of the actual Royalty owed, Coherent shall pay the difference
plus interest calculated at the rate of one and one-half percent (1
1/2%) per month. If such underpayment is in excess of Five Thousand
United States Dollars ($5,000.00) for any calendar quarter, Coherent
shall also reimburse Palomar for the cost of such inspection.
(iii) All books and records relative to Coherent's obligations
hereunder shall be maintained and made accessible to each of Palomar
and MGH for inspection for at least two (2) years after termination of
this Agreement.
B. COHERENT INSPECTION RIGHTS.
(i) Coherent shall have the right, upon reasonable notice, to
inspect Palomar's books and records and all other documents and
material in Palomar's possession or control for the limited purpose of
determining Palomar's compliance with this Agreement. Coherent shall
have free and full access thereto for such purposes. In no event shall
Coherent have the right to examine information with respect to
Palomar's costs, pricing formulae or percentages of mark-up.
(ii) All books and records relative to Palomar's obligations
hereunder shall be maintained and made accessible to Coherent for
inspection for at least two (2) years after termination of this
Agreement.
7. PATENT MARKING AND PUBLICITY.
A. PATENT MARKING.
(i) Coherent and Star shall mark or label the Palomar Licensed
Products with the patent numbers of the relevant licensed patents in
accordance with 35 U.S.C. ss. 287.
(ii) Palomar shall mark or label any product manufactured or sold
under any of the relevant licensed patents with the patent numbers of
such patents in accordance with 35 U.S.C. ss. 287.
B. PUBLICITY. Except as provided above, nothing in this Agreement
shall be construed as conferring upon either Party or their affiliates any
right to include on advertising, packaging or other commercial activities
related to any product, any reference to Coherent or Star, if by Palomar,
or to Palomar or Massachusetts General Hospital, if by Coherent or Star, or
any of their respective trade names, trademarks or service marks without
the other Party's written consent.
6
<PAGE>
8. TERM AND TERMINATION.
A. Unless sooner terminated as otherwise provided for herein, all
licenses granted, and any royalty obligations due, under each of the
patents licensed hereunder shall continue until the expiration of such
patent (such period with respect to each such patent, the "TERM").
B. If either Party defaults in the performance of any of its material
obligations hereunder, such Party shall use its best efforts to correct
such default within thirty (30) days (or such additional time as the
Parties may agree) after written notice thereof from the other Party. If
any such default cannot be, or is not, corrected within such thirty
(30)-day period, then the non-defaulting Party shall have the right, in
addition to any other remedies it may have, to terminate this Agreement and
all rights and licenses granted by the non-defaulting Party hereunder by
giving written notice to the Party in default.
9. REPRESENTATIONS, WARRANTIES, AND INDEMNIFICATION.
A. Each party represents and warrants to the best of its knowledge and
belief that it has the right and ability to grant the licenses described
herein.
B. Palomar represents and warrants that: (i) the MGH Agreement is in
full force and effect; and (ii) Palomar is not in breach of any material
provision of the MGH Agreement.
C. INDEMNIFICATION. Palomar shall defend, indemnify and hold Coherent
and Star, and their customers, harmless from and against any and all
losses, damages, liabilities, costs, and expenses (including but not
limited to attorneys' fees) arising out of or in connection with any claim,
suit, action, or proceeding, to the extent based on the infringement of the
`844 Patent or the `568 Patent, brought or threatened by MGH against
Coherent or Star, or any of their customers.
D. Each Party disclaims any warranty as to non-infringement of any
product made, had made, used, offered for sale, sold, or imported pursuant
to a license granted hereunder or any warranty as to the accuracy,
sufficiency or suitability of any such product or method and assumes no
responsibility or liability for loss or damages, whether direct, indirect,
consequential or incidental which might arise out of other Party's use
thereof, which shall be entirely at such Party's risk and peril.
7
<PAGE>
10. LIMITATION OF LIABILITY.
EXCEPT AS PROVIDED IN SECTION 9.C, IN NO EVENT SHALL EITHER PARTY BE LIABLE
TO THE OTHER FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES,
WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT
LIABILITY, OR OTHERWISE, AND WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGE.
11. MOST FAVORED LICENSEE.
A. If Palomar grants to a third party a license under the `568 Patent
or the `844 Patent having materially the same terms as this Agreement and
having a royalty rate that is lower than that provided in this Agreement
then Palomar will promptly notify Coherent of any such license, and the
Royalty Rate set forth in this Agreement shall be set equal to such lower
royalty rate, effective as of the date such license becomes effective.
B. If Coherent grants to a third party a license under the `306
Patent, the `350 Patent, the `403 Patent or the `901 Patent pursuant to an
agreement having materially the same terms as the `306 License Agreement,
the `350 License Agreement, the `403 License Agreement or the `901 License
Agreement, respectively, and having a royalty rate that is lower than that
provided in the `306 License Agreement, the `350 License Agreement, the
`403 License Agreement or the `901 License Agreement, respectively, then
Coherent will promptly notify Palomar of any such license, and the royalty
rate set forth in the `306 License Agreement, the `350 License Agreement,
the `403 License Agreement or the `901 License Agreement, respectively,
shall be set equal to such lower royalty rate, effective as of the date
such license becomes effective.
12. NOTICES.
A. Any notices required to be given pursuant to this Agreement shall
be in writing and mailed by certified or registered mail, return receipt
requested or delivered by a national overnight express service.
B. Either party may change the address to which notice or payment is
to be sent by written notice to the other party pursuant to the provisions
of this paragraph.
13. ADDRESSES.
A. Any notice or other communication hereunder shall be sufficiently given
to Coherent or Star when sent by certified mail addressed to:
Coherent, Inc.
5100 Patrick Henry Drive
Santa Clara, California 95056
Attn.: Chief Executive Officer
With a copy to General Counsel
8
<PAGE>
or to Palomar when sent by certified mail addressed to:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02421-3102
Attn: Chief Executive Officer
with a copy to General Counsel.
B. Payments by Coherent shall be made to Palomar at the address
specified in this section. Alternatively, payments to Palomar may be made
by bank wire transfers to Palomar's account:
Palomar Medical Technologies, Inc.
Account Number: 0501395874
Fleet National Bank
ABA Number: 011 000 206
14. JURISDICTION AND DISPUTES.
A. This Agreement shall be governed by the laws of the state of
Delaware, without regard to its principles of conflict of laws.
B. All disputes hereunder shall be resolved in accordance with Article
9 of the Acquisition Agreement.
15. AGREEMENT BINDING ON SUCCESSORS.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto, their heirs, administrators, successors and assigns.
16. WAIVER.
No waiver by either party of any default shall be deemed as a waiver of any
prior or subsequent default of the same or other provisions of this Agreement.
17. SEVERABILITY.
If any provision hereof is held invalid or unenforceable by a court of
competent jurisdiction, such invalidity shall not affect the validity or
operation of any other provision and such invalid provision shall be deemed to
be severed from the Agreement.
18. ASSIGNABILITY.
This Agreement and any licenses and rights granted to it hereunder may be
assigned to any successor in interest of all or substantially all of the stock
or assets of either party, provided that such successor agrees in writing to be
bound by the terms and conditions of this Agreement, which successor shall
thereafter be deemed substituted as the party hereto, effective upon such
assignment. Except as set forth herein, neither this Agreement nor any licenses
or rights hereunder shall be otherwise assignable or transferable by either
party without the express written consent of the other party.
9
<PAGE>
19. INTEGRATION.
This Agreement constitutes the entire understanding of the parties, and
revokes and supersedes all prior agreements between the parties and is intended
as a final expression of their Agreement. It shall not be modified or amended
except in writing signed by the parties hereto and specifically referring to
this Agreement. This Agreement shall take precedence over any other documents
with which it may be in conflict.
20. SURVIVAL.
Any termination of this Agreement shall not affect Coherent's or Star's
licenses, rights and obligations with respect to any Palomar Licensed Product
made prior to such termination, provided that Coherent has complied with its
royalty obligations hereunder with respect to such Palomar Licensed Product.
Without limiting the generality of the foregoing, the provisions of Sections 5
(Release), 6 (Record Inspection and Audit), 9 (Representations, Warranties, and
Indemnification), 10 (Limitation of Liability), 14 (Jurisdiction and Disputes),
and 20 (Survival) shall survive expiration or termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have each caused to be affixed hereto its or his/her hand and seal the
day indicated.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
-------------------------------
Title:
Date:
STAR MEDICAL TECHNOLOGIES, INC.
By:
-------------------------------
Title:
Date:
COHERENT, INC.
By:
-------------------------------
Title:
Date:
10
<PAGE>
EXHIBIT F
to Agreement and
Plan of Reorganization
Form of Legal Opinion of Counsel to Palomar
(To Be Delivered at Closing)
<PAGE>
Schedule 1.6
to Agreement and
Plan of Reorganization
STAR MEDICAL TECHNOLOGIES, INC
PROCEEDS DUE TO COMMON STOCKHOLDERS
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
|-------------------------------------------------------------------------------------|
| PRICE PER SHARE |
- -----------------|----------|---------------|-------------------------------------------------------------------------------------|
|EMPLOYEE | | ISSUE DATE | $2.50 $5.00 $6.00 $9.50 $19.00 $19.00 |
- -----------------|----------|---------------|-------------------------------------------------------------------------------------|
| NUMBER OF SHARES |
|-------------------------------------------------------------------------------------|
James Holtz ISO 23-May-94 12,900
James Holtz ISO 17-Feb-96 50,000
Robert Grove ISO 23-May-94 12,900
Robert Grove ISO 17-Feb-96 50,000
David Mundinger NQ 01-Jun-94 27,900
David Mundinger ISO 23-May-94 15,000
David Mundinger ISO 17-Feb-96 20,000
Mark Weckwerth NQ 19-Aug-96 10,000
Tony Island ISO 06-Jan-97 10,000
Brain Guscott ISO 20-Jan-97 15,000
Kenneth Anderson ISO 31-Mar-97 7,500
Deborah Briggs ISO 31-Mar-97 1,083
David Van Lue ISO 22-May-97 4,000
Dana Rivinius ISO 22-May-97 3,000
Albert Zakowski ISO 22-May-97 3,000
Yong Kim ISO 14-Jul-97 5,000
---------------------------------------------------------------------------------------
27,900 40,800 120,000 10,000 48,583
=======================================================================================
OPTION EXERCISES:
Jim Holtz 100
Bob Grove 100
Dave Mundinger 100
Total Empolyee Group
PALOMAR MEDICAL:
Options 378,224
Common Stock
Total
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
|------------------|---------------|
| GROSS VALUE | VALUE PER | |--------------|
|-------------|-----------| FOR OPTIONS HELD| SHARE |---------------|---------------| PALOMAR |
|----------------------| | |------------------|---------------| EXERCISE | NET | REPURCHASE |
|EMPLOYEE | TOTAL | | $12,996,060 | $52.555416 | PRICE | VALUE | ADJUSTMENT |
|----------------------|-------------|-----------|------------------|---------------|---------------|---------------|--------------|
James Holtz 12,900 0.914% $677,965 $64,500 $613,465 -$89,100
James Holtz 50,000 3.542% $2,627,771 $300,000 $2,327,771
Robert Grove 12,900 0.914% $677,965 $64,500 $613,465 -$89,100
Robert Grove 50,000 3.542% $2,627,771 $300,000 $2,327,771
David Mundinger 27,900 1.976% $1,466,296 $69,750 $1,396,546 -$89,100
David Mundinger 15,000 1.062% $788,331 $75,000 $713,331
David Mundinger 20,000 1.417% $1,051,108 $120,000 $931,108
Mark Weckwerth 10,000 0.708% $525,554 $95,000 $430,554
Tony Island 10,000 0.708% $525,554 $190,000 $335,554
Brain Guscott 15,000 1.062% $788,331 $285,000 $503,331
Kenneth Anderson 7,500 0.531% $394,166 $142,500 $251,666
Deborah Briggs 1,083 0.077% $56,918 $20,577 $36,341
David Van Lue 4,000 0.283% $210,222 $76,000 $134,222
Dana Rivinius 3,000 0.212% $157,666 $57,000 $100,666
Albert Zakowski 3,000 0.212% $157,666 $57,000 $100,666
Yong Kim 5,000 0.354% $262,777 $95,000 $167,777
-----------------------------------------------------------------------------------------------------------
247,283 17.52% $12,996,061 $2,011,827 $10,984,234 -$267,300
===========================================================================================================
OPTION EXERCISES:
Jim Holtz 100 0.007% $5,256 $5,256
Bob Grove 100 0.007% $5,256 $5,256
Dave Mundinger 100 0.007% $5,256 $5,256
-------------------------------------------- ----------------
300 0.021% $15,768 $15,768
|---------------| |---------------|
Total Empolyee Group | $13,011,829 | |$11,000,002 |
|---------------| |---------------|
PALOMAR MEDICAL:
Options 378,224 26.79% $19,877,720 $7,186,256 $12,691,464
Common Stock 786,000 55.67% $41,308,534 n/a $41,308,534 267,300
-------------------------------------------- --------------- ---------------- -------------
1,164,224 82.46% $61,186,254 $7,186,256 $53,999,998
-------------------------------------------- ----------------------------------------------
Total 1,411,807 100.00% $74,198,083 $9,198,083 $65,000,000 $0
===========================================================================================================
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------|----------------|---------------|---------------|-----------|----------|---------------|--------------------
| WITHHOLDING | CALIFORNIA | MEDICARE | FICA | ESCROW* | NET | REPORTING
EMPLOYEE | 28% | 6.00% | 1.45% | 6.20% | $800,000 | DISTRIBUTION | ORDINARY INCOME
- ----------------------|----------------|---------------|---------------|-----------|----------|---------------|--------------------
James Holtz $524,365 $613,465
James Holtz $200,000 $2,127,771 $2,327,771
Robert Grove $524,365 $613,465
Robert Grove $200,000 $2,127,771 $2,327,771
David Mundinger $391,033 $83,793 $20,250 $4,501 $807,869 $1,396,546
David Mundinger $713,331 $713,331
David Mundinger $200,000 $731,108 $931,108
Mark Weckwerth $120,555 $25,833 $6,243 $4,501 $34,140 $239,282 $430,554
Toby Island $34,140 $301,414 $335,554
Brian Guscott $51,207 $452,124 $503,331
Kenneth Anderson $25,605 $226,061 $251,666
Deborah Briggs $36,341 $36,341
David Van Lue $134,222 $134,222
Dana Rivinius $100,666 $100,666
Albert Zakowski $100,666 $100,666
Yong Kim $167,777 $167,777
------------------------------------------------------------------------------------------------------------
$511,588 $109,626 $26,493 $9,002 $745,092 $9,315,133 $10,984,234
------------------------------------------------------------------------------------------------------------
OPTION EXERCISES:
Jim Holtz $5,256
Bob Grove $5,256
Dave Mundinger $5,256
------------
$15,768
|------------|
Total Empolyee Group |$9,330,901 |
|------------|
PALOMAR MEDICAL:
Options $12,691,464
Common Stock $3,254,908 $38,320,926
-------------------------------------------------------------------------------------
$3,254,908 $50,745,090
-------------------------------------------------------------------------------------
Total $511,588 $109,626 $26,493 $9,002 $4,000,000 $60,343,291
=====================================================================================
</TABLE>
<PAGE>
Schedule 5.19(a)(ii)
to Agreement and
Plan of Reorganization
[To Be Delivered At Closing]
<PAGE>
Schedule 7.2
to Agreement and
Plan of Reorganization
SCHEDULE 7.2
Robert E. Grove $200,000
James Z. Holtz $200,000
David C. Mundinger $200,000
Brian Guscott $51,208
Mark Weckwerth $34,140
Toby Island $34,140
Kenneth Anderson $25,605
Palomar Medical Technologies, Inc. $3,254,908
<PAGE>
EXHIBIT D
---------
RESOLVED: That the following paragraph be inserted prior to the first
paragraphof Paragraph 4 of the Certificate of Incorporation:
Upon the filing date of the Certificate of Amendment of the
Certificate of Incorporation of the Corporation pursuant to
which this paragraph shall replace the first paragraph of this
Article 4 (the "Reverse Split Effective Date"), a
one-for-seven reverse split of the Corporation's issued and
outstanding common stock (as defined below) shall be effected,
so that each seven shares of common stock outstanding and held
of record by each stockholder of the Corporation (including
treasury shares) immediately prior to the Reverse Split
Effective Date shall represent one share of common stock from
and after the Reverse Split Effective Date, the total number
of shares which the Corporation shall have the authority to
issue is forty-six million five hundred thousand (46,500,000)
shares, consisting of forty five million (45,000,000) shares
of common stock, having a par value of one cent ($.01) per
share (the "Common Stock") and one million five hundred
thousand (1,500,000) of preferred stock, having a par value of
one cent ($.01) per share (the "Preferred Stock").
<PAGE>
EXHIBIT E
---------
GLOSSARY OF DEFINED TERMS
Acquisition Agreement: Any letter of intent, agreement in principle,
acquisition agreement or other similar agreement.
Acquisition Proposal: Any proposal or offer relating to any direct or
indirect acquisition or purchase of 10% or more of
the assets of Star taken as a whole or 10% or more of
any class of outstanding equity securities of Star
taken as a whole, any tender offer or exchange offer
that if consummated would result in any person
beneficially owning 10% or more of any class of
equity securities of Star or any merger,
consolidation, business combination, sale of
substantially all the assets, recapitalization,
liquidation, dissolution or similar transaction
involving Star, other than the transactions
contemplated by the Merger Agreement.
Aggregate Bank
Liabilities: The sum of (i) the principal amount of all revolving
loans then outstanding, plus (ii) all then undrawn
amounts of letters of credit issued by the bank for
the account of the borrower, plus (iii) all amounts
then drawn on any such letter of credit which at said
date shall not have been reimbursed to the Bank by
the borrower.
Borrowing Base: The sum of (i) 80%of the aggregate principal amount
of the qualified receivables of the Borrower and/or
Star then outstanding, plus (ii) 90% of the aggregate
principal amount of the letter-of-credit-backed
foreign receivables of the borrower and/or Star then
outstanding, plus (iii) 85% of the aggregate
principal amount of the insured receivables of the
borrower and/or Star then outstanding, plus (iv) 100%
of the principal amount of (A) any certificate of
deposit hereafter issued by the bank and purchased
from the bank by the borrower which is pledged to the
bank by instruments satisfactory in form and
substance to the bank an in which the bank has a
fully perfected first priority security interest or
(B) any deposit account now or hereafter established
by the borrower with the bank, which account is
blocked as to withdrawals by the borrower, is pledged
to the bank by instruments satisfactory in form and
substance to the bank and in which the bank has a
fully perfected first priority security interest.
Code: The Internal Revenue Code of 1986, as amended.
Changes: Any adjustment the effect of which is to increase
deductions, losses or tax credits or decrease income,
gains, premiums, revenues or recapture of tax credits
reflected on a tax return of Coherent or Star for any
taxable period ending after the Closing Date.
Closing or
Closing Date: The date on which the parties to the Merger
Agreement exchange original executed documents and
consummate the Merger by filing with the Secretary of
State of California a Certificate of Merger.
Closing Balance Sheet: A balance sheet dated as of the
Closing Date prepared by Star and audited by
Palomar's auditors within 60 days of the Effective
Time.
Coherent: Coherent, Inc.
Coherent Benefits: A net tax benefit from an increase in
deductions, losses or tax credits and/or a decrease
in income, gains, premiums, revenues or recapture of
tax credits enjoyed by Coherent for taxable periods
ending after the Closing Date.
<PAGE>
Coherent
Restricted Period: The period commencing with the Closing Date and
ending 24 months later.
Competing Proposal: A publicly disclosed and still pending Acquisition
Proposal made with respect to Star prior to a
Negative Vote.
Effective Time: The time when the Secretary of State of California
accepts the filing of the Certificate of Merger.
Exchange Agent: American Stock Transfer & Trust Company.
Exchange Act: The Securities Exchange Act of 1934, as amended.
FDA: Food and Drug Administration.
FTC: Federal Trade Commission.
GAAP: Generally accepted accounting principles.
LightSheer(TM) Margin: The amount that we would have received on account of
LightSheer(TM) sales if they were made prior to the
Closing Date pursuant to the Sales Agency, License
and Development Agreement between us and Coherent
dated November 17, 1997, less the inventory carrying
value of such units reflected on the Closing Balance
Sheet.
MGH: Massachusetts General Hospital.
Merger: The merger of the Merger Sub with and into Star as
provided for in the Merger Agreement.
Merger Agreement: The Agreement and Plan of Reorganization by and among
Star, Coherent, Palomar, Medical Acquisition
Technologies, Holtz, Grove and Mundinger, dated
December 7, 1998.
Merger Sub: Medical Technologies Acquisition, Inc., a subsidiary
of Coherent.
Negative Vote: Non-approval by either the Star or Palomar
stockholders of the Merger Agreement and Merger.
New Certificates: Certificates representing the number of whole shares
of common stock into which your shares of common
stock have been converted as a result of the reverse
split.
Old Certificates: Stock certificates representing the number of shares
of common stock held by you prior to the reverse
split.
Palomar: Palomar Medical Technologies, Inc.
Palomar Restricted
Business: The commercial manufacture, marketing or sale of
Restricted Semiconductor Laser Devices.
<PAGE>
Palomar Restricted
Period: The period commencing with the Closing Date and
ending 24 months later .
Pre-Closing Period: That portion of the Straddle Period prior to and
including the Closing Date.
Receivables of
Star: All of Star's present and future accounts, accounts
receivable and notes, drafts, acceptance and other
instruments representing or evidencing a right to
payment for goods sold or for services rendered.
Restricted
Semiconductor
Laser Devices: Any semiconductor laser device (and any
system that incorporates such devices) that operates
in a continuous wave mode or in quasi continuous wave
mode that delivers more than 5 joules in any 50
millisecond period.
Reverse Split
Effective Date: 5:00 p.m. EST on the date that the Certificate of
Amendment to Palomar's Second Restated Certificate of
Incorporation is filed with the Secretary of State of
Delaware.
Sales Agency
Agreement: The Sales Agency, Development and License Agreement
between Coherent and Palomar dated November 17, 1998.
SEC: Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended.
Superior Proposal: Any good faith proposal made by a third party to
acquire, directly or indirectly, 100% of the voting
power of the Star capital stock or all or
substantially all the assets of Star and otherwise on
the terms which the Star Board and the Palomar Board
determine in good faith (based on the written opinion
of Tucker Anthony or another non-employee financial
advisor of similar standing) to be more favorable to
the Star stockholders than the Merger and for which
financing, to the extent required by the terms of
such proposal, is then committed or which, in the
good faith judgment of the Star Board and the Palomar
Board, is reasonably capable of being obtained by
such third party.
Star: Star Medical Technologies, Inc., a subsidiary of
Palomar.
Straddle Period: Any taxable period commencing before the Closing Date
and ending after the Closing Date.
Successor: An entity that succeeds to our rights and obligations
under the Merger Agreement as a result of merging
with or acquiring us.
Tucker Anthony: Tucker Anthony, Inc., our financial advisor.
