The petition contemplates that Diomed (evlt.com) will sell certain of its operating assets to Biolitec AG, a German-based manufacturer of medical lasers, optical fibers and other products, thereby enabling Biolitec to continue to operate Diomed’s business in the United States.

Diomed and Biolitec have entered into a non-binding letter of intent for the sale of specified assets for a purchase price of between $6 and $7 million. Biolitec reported revenues of €39 million and profits of €5.6 million for its fiscal year ended June 30, 2007.

Its shares are listed on the Prime Standard of the Frankfurt Stock Exchange. Biolitec is headquarted in Jena, Germany, and employs approximately 60 personnel at its U.S. operations based in East Longmeadow, Mass.

Lawsuits Complicated Difficulties
“The decision to pursue the sale of the company’s assets and operations through the bankruptcy process was an extremely difficult but appropriate decision for our Board of Directors to make,” CEO James A. Wylie Jr. said.

“In spite of our intensive efforts to seek a buyer for the company outside of bankruptcy and to work with our secured lenders to avoid seeking bankruptcy protection, the impact of infringement of the company’s products in the marketplace and delays in the judicial process proved impossible to overcome.
“We believe that, given the ongoing financial and legal challenges facing Diomed, bankruptcy is the best means available to protect the company’s assets and allow the company’s operations to be sold through an orderly process.”

Breaking Up the Company
With court approval, Diomed will continue operating in the ordinary course of business as a debtor-in-possession while it pursues the sale of specified assets to Biolitec and the sale of its other assets to third parties.
Diomed expects to complete the asset sale to Biolitec within approximately 60 to 90 days and to sell its remaining assets in due course, under the court’s direction.

These other assets include judgments in Diomed’s favor of approximately $14.7 million arising from Diomed’s successful patent infringement litigation in 2007 against defendants AngioDynamics Inc. and Vascular Solutions Inc. regarding Diomed’s U.S. Patent Number 6,398,777 for the endovascular laser treatment of varicose veins.

This litigation is currently on appeal, under bond, with a hearing on the appeal that was to have been held April 10 at the appellate court.

Debtor In-possession Financing
Diomed and Biolitec’s letter of intent contemplates that to fund its operations during bankruptcy, Diomed will use its cash and receipts and will obtain debtor-in-possession financing from its senior secured creditor, Hercules Technology Growth Capital Inc.

The indebtedness under the Hercules term loan and the debentures is secured by all of Diomed’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. manufacturing subsidiary, Diomed Ltd.
If Hercules and Diomed are unable to reach agreement on the terms of such financing, Biolitec has agreed in principle under the letter of intent to provide necessary financing of up to $2 million during the transition period. Such debtor-in-possession financing will be subject to court approval.
In a related development, Diomed’s wholly owned subsidiary, Diomed Ltd, has determined to file for Administration locally under the laws of the United Kingdom, contemporaneously with Diomed’s bankruptcy filing in the United States.

“We believe that Biolitec’s acquisition of Diomed’s operating assets and U.S. sales and marketing organization provides our loyal physician partners the best opportunity for an improved level of service, flow of new and innovative technologies, and continuity of supply of lasers and disposable products,” Wylie said.

“Finally, I would be remiss if I did not thank each and every employee of the company for their loyalty, dedication and commitment during the last several months. They stood the course and performed above all expectations during this very difficult time.”
Diomed develops and commercializes minimal and micro-invasive medical procedures that use its proprietary laser technologies and disposable products. Diomed’s EVLT laser vein ablation procedure is used in varicose vein treatments.

 Diomed also provides photodynamic therapy (PDT) for use in cancer treatments, and dental and general surgical applications.
The EVLT procedure and the company’s related products were cleared by the U.S. FDA in January of 2002.
Along with lasers and single-use procedure kits for its EVLT laser vein treatment, the company provides its customers with state of the art physician training and practice development support.

Portside Growth Alleges Default
On March 5, Diomed Holdings Inc. received a notice from Portside Growth and Opportunity Fund alleging that certain events of default had occurred under the company’s Secured Subordinated Variable Rate Convertible Debentures due Oct. 25, 2008, the principal amount of which is $1,334,035.64.
Portside is one of four holders of outstanding debentures, which were initially issued on Oct. 25, 2004. The four outstanding debentures have an aggregate face amount (without any prepayment premium) of $3,536,090.

Portside asserted that, as a result of the purported events of default, the debenture (including the principal amount, accrued interest and other fees) 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 percent annually.

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. to the company on Sept. 28, 2007, pursuant to which the company has to date borrowed $6 million.

The debenture holders and Hercules are parties to an Intercreditor Agreement, dated Sept. 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. Diomed is not a party to, or a third-party beneficiary of, the Intercreditor Agreement.

On March 7, Hercules wrote a letter to Portside alleging that Portside had violated the terms of the Intercreditor Agreement and demanding, among other things, that Portside stop further breaches of the Intercreditor Agreement. In the agreement, Hercules was to receive initial notification that a default had occurred and was continuing for at least 150 days before accelerating the amounts due under the debentures; and would not accelerate the company’s indebtedness under the debentures without at least five business days prior notice to Hercules.

AMEX to Delist
The financially troubled company was notified about March 10 that the American Stock Exchange had decided to delist the company’s common stock Diomed had not demonstrated a reasonable probability that it would regain compliance with Sections 1003(a)(ii) and (iii) of the AMEX Company Guide’s standards for continued listing on the Exchange.

The standards require that a company maintain at least $4 million in stockholders’ equity if the company has sustained losses from continuing operations in three of its four most recent fiscal years and at least $6 million in stockholders’ equity if the company has sustained losses from continuing operations in its five most recent fiscal years.

The company had previously submitted a compliance plan to the AMEX seeking to demonstrate its ability to regain compliance with these listing standards by Feb. 3, 2009, the deadline that the AMEX established for compliance with these listing standards.

In its notice, the AMEX also advised the company that it had determined that the low trading price of the company’ common stock raises concern that the common stock may not be suitable for auction market trading, which would necessitate a reverse stock split within a reasonable period of time under Section 1003(f)(v) of the AMEX Company Guide. VTN