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Item
2.04
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Triggering
Events That Accelerate or Increase a Direct Financial Obligation
or an
Obligation under an Off-Balance Sheet
Arrangement.
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On
March
5, 2008, Diomed Holdings, Inc. (the “Company”) received a notice from Portside
Growth and Opportunity Fund (“Portside”) alleging that certain events of default
had occurred under the Company’s Secured Subordinated Variable Rate Convertible
Debentures due October 25, 2008 (the “Debenture”), the principal amount of which
is $1,334,035.64. Portside asserted that, as a result of the occurrence of
the
purported events of default, the Debenture (including the principal amount
thereof and accrued interest and other amounts payable thereunder) was
accelerated and immediately due and payable in cash, in the amount of
$1,761,509.24 (including a premium for prepayment). Portside also asserted
that
on the fifth day following the occurrence of the event of default, interest
on
the Debenture increases to 18% annually. Portside is one of four holders of
outstanding Debentures, which were initially issued on October 25, 2004. The
four outstanding Debentures have an aggregate face amount (without any
prepayment premium) of $3,536,090.
The
Company’s indebtedness under the Debentures is secured by certain collateral of
the Company. The Debenture holders’ security interest is subordinated to the
Company’s indebtedness under a senior secured term loan made by Hercules
Technology Growth Capital, Inc. (“Hercules”) to the Company on September 28,
2007, pursuant to which the Company has to date borrowed $6,000,000. The
Debenture holders and Hercules are parties to an Intercreditor Agreement, dated
as of September 28, 2007, which governs their rights and obligations as they
relate to the Company’s indebtedness and the collateral that secures the
Company’s obligations. The Company is not a party to, or a third party
beneficiary of, the Intercreditor Agreement.
On
March
7, 2008, Hercules wrote a letter to Portside alleging that Portside had violated
the terms of the Intercreditor Agreement and demanding, among other things,
that
Portside cease and desist from further breaches of the Intercreditor Agreement.
In
the
Intercreditor Agreement, the Debenture holders and Hercules agreed that if
a
Debenture holder were to assert that an event of default in payment of the
Debentures had occurred, the holder would first deliver to Hercules a notice
to
the effect that such event of default had occurred and was continuing for at
least 150 days prior to accelerating the amounts due under the Debentures and
would not thereafter accelerate the Company’s indebtedness under the Debentures
without at least five business days prior notice to Hercules.
The
indebtedness under the Hercules term loan and the Debentures is secured by
collateral comprising all of the Company’s U.S. assets, including a pledge of
all of the shares of the Company’s U.S. operating subsidiary, Diomed, Inc., and
a majority of the shares of the Company’s U.K. operating subsidiary, Diomed
Limited. These assets include the judgment of approximately $14.7 million
awarded to the Company in March 2007 in connection with its successful patent
infringement lawsuit regarding
the
Company’s U.S. Patent Number 6,398,777 for the endovascular laser treatment of
varicose veins.
That
judgment is currently on the appeal (under bond). A hearing on the appeal has
been scheduled by the court for April 10, 2008.
The
declaration by Portside of an event of default could form the basis of a
declaration of an event of default by any or all of the other Debenture holders.
If the other Debenture holders declare an event of default and all four
Debentures are accelerated, then the Company’s obligations under the Debentures
will be approximately $4.7 million (assuming a prepayment premium applies),
the
Debentures will be immediately due and payable and interest will accrue at
18%
until repaid. To date, none of these other three holders of the outstanding
Debentures has provided written notice to the Company (or, the Company’s
knowledge, to Hercules) that it believes an event of default has
occurred.
Portside’s
declaration of an event of default could also form the basis of a declaration
of
an event of default by Hercules and an alleged acceleration of the $6,000,000
principal amount of the Hercules term loan, plus accrued interest, as well
as an
increase of 5% to the applicable annual interest rate due under the term loan.
Hercules could also claim that a prepayment charge of 3% of the amount
outstanding under the term loan (or, $180,000), an end-of-term fee of 9.5%
of
the amount advanced under the term loan (or, $570,000) and a further termination
fee of $900,000 are due and payable upon acceleration. To date, however,
Hercules has not provided written notice to the Company asserting that an event
of default has occurred or otherwise seeking to accelerate the term
loan.
After
the
Company received the Portside notice of default, on March 5, 2008, the Company
and Portside entered into a Standstill Agreement. Pursuant to the Standstill
Agreement, the Company, on the one hand, agreed not to enter into a new
agreement (or amend its existing loan agreement) with Hercules, not to settle
the appeal of the judgments in the patent infringement litigation and not to
dispose of any collateral in which Portside has a security interest (other
than
the sale of products, collection of accounts receivable and otherwise conducting
business in the ordinary course consistent with past practices), and Portside,
on the other hand, agreed not to institute any legal, equitable, statutory
or
other action or proceeding against the Company, Diomed, Inc. or their officers
or directors, in each case without providing at least one full business day’s
advance notice to the other party.
The
Company has been, and expects to continue to be, engaged in negotiations with
Portside and Hercules with respect to the Portside default notice, with a view
to evaluating and arriving at a mutually acceptable resolution of the asserted
default and related matters.
Documentation
pertaining to the Hercules term loan (including forms of the Debentures, the
Loan and Security Agreement governing the Hercules term loan and the
Intercreditor Agreement), is included among the exhibits filed by the Company
with its Current Report on Form 8-K filed with the Commission on October 1,
2007, which is incorporated herein by reference.