SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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 Rule 14a-11(c) or Rule 14a-12
PALOMAR MEDICAL TECHNOLOGIES, INC.
--------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
NOT APPLICABLE
-----------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
| | $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
|_| $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6
(i)(3).
|_| 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:
(2) Aggregate number of securities to which transaction applies:
(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):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|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:
* * * * *
June 11, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
(the "Special Meeting") of Palomar Medical Technologies, Inc. (the "Company") to
be held on July 19, 1996 at 10:30 a.m. at the Bank of Boston Auditorium, 100
Federal Street, Boston, Massachusetts 02110, and thereafter as it may be
adjourned from time to time.
At the Special Meeting, you will be asked to approve an amendment to
the Company's Certificate of Incorporation and to approve and adopt a stock
option plan and an employee stock purchase plan.
Details of the matters to be considered at the Special Meeting are
contained in the Proxy Statement, which we urge you to consider carefully.
Whether or not you plan to attend the Special Meeting, please complete,
date, sign and return your proxy card promptly in the enclosed envelope, which
requires no postage if mailed in the United States. If you attend the Special
Meeting, you may vote in person if you wish, even if you have previously
returned your proxy.
Sincerely,
/s/ Steven Georgiev
Steven Georgiev
Chief Executive Officer
Chairman of the Board of Directors
June 11, 1996
Dear Stockholder:
I am pleased to report that over the last year our Company has made
very good progress in meeting our principal business objectives, including
positioning the Company to become a dominant factor in the cosmetic laser
marketplace, and exploiting our electronics capability by bringing to market
several specialty electronic products. We have addressed these objectives
through both internal product and market development as well as through
strategic acquisitions.
As a result of these activities we are experiencing strong revenue
growth which placed the Company as #8 on INC Magazine's 1996 list of the 100
fastest growing small public companies in the U.S.
Public awareness of our Company is also increasing steadily, as
evidenced by several favorable articles on Palomar that have appeared in
Business Week, Barron's, The Wall Street Journal and Investor's Business Daily.
In addition, Standard and Poor's recently initiated research coverage on Palomar
with its highest rating (five stars), which is defined by Standard & Poor's as a
buy-expected to be among the best performers over the next 12 months.
As Palomar's activities and prospects have gained visibility in the
public markets, our individual and institutional investor base has greatly
increased, leading to a stock price increase from $2 per share to over $15 per
share over the past twelve months. We are gratified by the market response and
we are committed to continuing the successful development of our Company.
To achieve our objectives, the Board of Directors needs your
affirmative vote at the July 19, 1996 Special Meeting of Stockholders to
increase the number of authorized shares and to approve the 1996 Incentive Stock
Option Plan and the 1996 Employee Stock Purchase Plan.
We believe that an increased number of authorized shares is essential
for the Company to be able to:
(1) Position the Company's stock price to maximize appreciation. We
believe that if the stock price continues to increase it may be in the best
interest of the stockholders to declare a stock split or stock dividend.
(2) Make additional potential strategic acquisitions for stock. The
increased stock price and stock availability will make it possible to pursue
additional and larger acquisitions using the Company's stock on favorable terms.
(3) Obtain additional equity financing. As the Company's business
expands, we believe that a combination of debt and equity financing is the ideal
way to fund our working capital requirements.
(4) In order to maintain and manage growth, we need to attract, retain
and provide incentives for high level executives and key employees. Incentive
stock options for key employees are one of our most important competitive
elements in attracting top people. Furthermore, we have always believed that
widespread employee stock ownership is highly motivating and leads to
exceptional performance. Consequently, we consider the Incentive Stock Option
Plan and Employee Stock Purchase Plan very important to the development of the
Company.
The management of your Company is focused, highly motivated and
committed to building a large, profitable and dynamic business enterprise that
will result in increasing shareholder value. We greatly appreciate the support
of our stockholders. Please do not hesitate to call with any questions that you
may have.
Sincerely yours,
/s/ Steven Georgiev
Steven Georgiev
Chief Executive Officer
Chairman of the Board of Directors
PALOMAR MEDICAL TECHNOLOGIES, INC.
66 CHERRY HILL DRIVE
BEVERLY, MA 01915
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the Stockholders of PALOMAR MEDICAL TECHNOLOGIES, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of
PALOMAR MEDICAL TECHNOLOGIES, INC. (the "Company"), a Delaware corporation, will
be held on July 19, 1996 at 10:30 A.M. at the BANK OF BOSTON AUDITORIUM, 100
FEDERAL STREET, BOSTON, MASSACHUSETTS 02110, and thereafter as it may be
adjourned from time to time.
At the Special Meeting, the Stockholders will be asked:
1. To approve an amendment to the Company's Certificate of
Incorporation to authorize an increase in the authorized Common Stock, $.01 par
value per share, of the Company ("Common Stock").
2. To approve and adopt the Company's 1996 Incentive and Nonqualified
Stock Option Plan;
3. To approve and adopt the Company's 1996 Employee Stock Purchase
Plan; and
4. To transact such other business as may properly come before the
Special Meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on June 10,
1996, as the record date for the determination of Stockholders entitled to
notice of and to vote at the Special Meeting and any adjournment or adjournments
thereof.
We hope that all Stockholders will be able to attend the Special
Meeting in person. In order to assure that a quorum is present at the Special
Meeting, please date, sign and promptly return the enclosed Proxy whether or not
you expect to attend the Special Meeting. A postage prepaid enveloped, addressed
to American Stock Transfer & Trust Company, the Company's transfer agent and
registrar, has been enclosed for your convenience. If you attend the meeting,
you may revoke your Proxy and vote your shares in person.
-1-
- --------------------------------------------------------------------------------
IT IS IMPORTANT THAT PROXY CARDS BE RETURNED PROMPTLY.
PLEASE FILL IN, DATE AND SIGN THE PROXY CARD AND RETURN IT IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. THE PROXY
MAY BE REVOKED AT ANY TIME PRIOR TO EXERCISE, AND IF YOU ARE PRESENT AT THE
SPECIAL MEETING YOU MAY, IF YOU WISH, REVOKE YOUR PROXY AT THAT TIME AND
EXERCISE THE RIGHT TO VOTE YOUR SHARES PERSONALLY.
- --------------------------------------------------------------------------------
By Order of the Board of Directors
Dr. Michael H. Smotrich
President & Secretary
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PALOMAR MEDICAL TECHNOLOGIES, INC.
PROXY STATEMENT
The enclosed Proxy is solicited by the Board of Directors of PALOMAR
MEDICAL TECHNOLOGIES, INC. (the "Company") for use at the Special Meeting of
Stockholders (the "Special Meeting") to be held at the Bank of Boston
Auditorium, 100 Federal Street, Boston, Massachusetts 02110, at 10:30 a.m. on
July 19, 1996, and at any adjournment or adjournments thereof.
Management intends to mail this Proxy statement and the accompanying
form of Proxy to all Stockholders entitled to vote, on or about June 11, 1996.
The costs of soliciting Proxies will be borne by the Company.
Only Stockholders of record at the close of business on June 10, 1996,
will be entitled to vote at the Special Meeting or any adjournment thereof. As
of June 7, 1996, 26,243,761 shares of common stock, $.01 par value ("Common
Stock") of the Company were issued and outstanding. Each share entitles the
holder to one vote with respect to all matters submitted to Stockholders at the
Special Meeting. There is no other class of voting securities of the Company
entitled to vote at the Special Meeting.
To establish a quorum to transact business at the Special Meeting,
there must be present at the Meeting, in person or by proxy, a majority of the
shares of Common Stock issued, outstanding, and entitled to vote at the Special
Meeting. Shares represented by executed Proxies received by the Company will be
counted for purposes of establishing a quorum, regardless of how or whether such
shares are voted on any specific proposal.
The affirmative vote of a majority of the outstanding Common Stock
entitled to vote thereon is necessary to approve the amendment to the Company's
Certificate of Incorporation. The affirmative vote of a majority of the Common
Stock, present in person or represented by proxy at the Special Meeting and
entitled to vote thereon, is necessary to approve the Company's 1996 Stock
Option Plan and 1996 Employee Stock Purchase Plan.
Execution of a Proxy will not in any way affect a Stockholder's right
to attend the Special Meeting and vote in person. The Proxy may be revoked at
any time before it is exercised, by written notice to the Secretary prior to the
Special Meeting, or by giving to the Secretary a duly executed Proxy bearing a
later date than the Proxy being revoked at any time before such Proxy is voted,
or by appearing at the Special Meeting and voting in person. The shares
represented by all properly executed Proxies received in time for the Special
Meeting will be voted as specified therein. Proxies which are executed, but
which do not contain any specific instructions will be voted in favor of all
items set forth herein.
In accordance with Delaware law, abstentions and "broker non-votes"
(i.e. Proxies from brokers or nominees indicating that such persons have not
received instructions from the beneficial owner or other persons entitled to
vote shares as to a matter with respect to which the brokers or nominees do not
have discretion to vote) will be treated as present for purposes of determining
the presence of a quorum. For purposes of determining approval of a matter
presented at the Special Meeting, abstentions will be deemed present and
entitled to vote and will, therefore, have the same legal effect as a vote
against a matter presented at the Special Meeting. Broker non-votes will be
deemed not entitled to vote on the
-1-
subject matter as to which the non-vote is indicated and will therefore, have no
legal effect on the vote on that particular matter.
The Board of Directors knows of no other matter to be presented at the
Special Meeting. If any other matter should be presented at the Special Meeting
upon which a vote may be taken, such shares represented by all Proxies received
by the Board of Directors will be voted with respect thereto in accordance with
the judgment of the persons named as attorneys in the Proxies.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of June 7, 1996, the number of
shares of the Company's Common Stock owned by each director, by each executive
officer named in the Summary Compensation Table appearing on page 4, by all
directors and officers as a group, and by any persons (including any "group" as
used in Section 13(d)(3) of the Securities Exchange Act of 1934), known by the
Company to own beneficially 5% or more of the outstanding Common Stock. Except
as otherwise indicated, the Stockholders listed in the table below have sole
voting and investment powers with respect to the shares indicated.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address of Beneficial Owner Beneficially Owned(1) Class(1)(2)(3)(4)
------------------------------------ --------------------- -----------------
<S> <C> <C>
Michael H. Smotrich(5) 1,223,590 4.67%
66 Cherry Hill Drive
Beverly, MA 01915
Steven Georgiev(6) 931,654 3.56%
Joseph P. Caruso(7) 666,826 2.55%
Joseph E. Levangie(8) 632,485 2.42%
Sanford R. Lane 170,158 .65%
Maurice E. Needham, Jr.(9) 150,000 .57%
All Directors and Executive Officers
(six persons)(10) 3,774,713 14.41%
</TABLE>
- --------------------------------
(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 or warrants are deemed
to be outstanding for the purpose of computing the number and percentage
of shares owned by 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.
(2) Does not include 149,500 shares reserved for issuance pursuant to the
Company's 1991 Stock Option Plan, 337,500 shares reserved for issuance
pursuant to the Company's 1993 Stock Option Plan, or 868,500 shares
reserved for issuance pursuant to the Company's 1995 Stock Option Plan,
except as indicated in notes 5 and 7.
(3) Does not give effect to an aggregate of up to 4,836,061 shares issuable
upon exercise of (i) a warrant issued to H.J. Meyers & Co., Inc. (the
"Representative") in connection with the
-2-
Company's initial public offering, including the warrants included in the
units issuable upon exercise of the Representative's warrant; (ii)
warrants issued or to be issued to certain lenders; and (iii) warrants
issued to certain investors, consultants, principal Stockholders, and
employees, except as indicated in notes 5, 6, 7, 8 and 9.
(4) Does not give effect to an aggregate of up to 1,189,753 shares issuable
upon (i) conversion of certain convertible debentures and (ii) exercise
of certain warrants issued to Baxter Healthcare Corporation.
(5) Includes 70,000 shares of Common Stock issuable upon exercise of
five-year options expiring April 6, 1999, at an exercise price of $2.375
per share; 100,000 shares of Common Stock issuable upon exercise of
five-year options expiring October 6, 1999, at an exercise price of
$2.375 per share; 150,000 shares of Common Stock issuable upon exercise
of five-year options expiring July 4, 2000, at an exercise price of
$2.375 per share; 100,000 shares issuable upon exercise of five-year
warrants granted in August 1995, at an exercise price of $2.125 per
share; 250,000 shares issuable upon exercise of five-year warrants
granted in February 1996, at an exercise price of $6.75 per share; and
24,000 shares held by family members. Each of the foregoing options and
warrants was issued in consideration of services rendered to the Company.
(6) Includes 67,000 shares issuable upon exercise of five-year warrants
granted in March 1992, at an exercise price of $.60 per share; 350,000
shares issuable upon exercise of five-year warrants granted in July 1995,
at an exercise price of $2.00 per share; 100,000 shares issuable upon
exercise of five-year warrants granted in August 1995, at an exercise
price of $2.125 per share; and 300,000 shares issuable upon exercise of
five-year warrants granted in February 1996, at an exercise price of
$6.75 per share. Each of the foregoing warrants was issued in
consideration of services rendered to the Company.
(7) Includes 30,000 shares of Common Stock issuable upon the exercise for
five-year options expiring June 14, 1998, at an exercise price of $3.50
per share; 70,000 shares of Common Stock issuable upon exercise of
five-year options expiring April 6, 1999, at an exercise price of $2.375
per share; 100,000 shares of Common Stock issuable upon exercise of
five-year options expiring October 6, 1999, at an exercise price of
$2.375 per share; 150,000 shares of Common Stock issuable upon exercise
of five-year options expiring July 4, 2000, at an exercise price of $2.00
per share; 100,000 shares issuable upon exercise of five-year warrants
granted in August 1995, at an exercise price of $2.125 per share; and
150,000 shares issuable upon exercise of five-year warrants granted in
February 1996, at an exercise price of $6.75 per share. Each of the
foregoing options and warrants was issued in consideration of services
rendered to the Company.
(8) Includes 60,000 shares issuable upon exercise of five-year warrants
granted in March 1992, at an exercise price of $.60 per share; 150,000
shares issuable upon exercise of five-year warrants granted in July 1995,
at an exercise price of $2.00 per share; 100,000 shares issuable upon
exercise of five-year warrants granted in August 1995, at an exercise
price of $2.125 per share; and 150,000 shares issuable upon exercise of
five-year warrants granted in February 1996, at an exercise price of
$6.75 per share. Each of the foregoing warrants was issued in
consideration of services rendered to the Company.
(9) Includes 50,000 shares issuable upon exercise of five-year warrants
granted in February 1996, at an exercise price of $6.75 per share; and
100,000 shares of Common Stock issuable upon exercise of five-year
options expiring October 6, 1999, at an exercise price of $2.375 per
share. Each of the foregoing options and warrants was issued in
consideration of services rendered to the Company.
-3-
(10) For purposes of this calculation, total issued and outstanding shares
include an aggregate of 1,877,000 shares issuable upon exercise of the
warrants described in footnotes 5, 6, 7, 8 and 9 above and an aggregate
of 670,000 shares issuable upon exercise of options described in
footnotes 5 and 7 above.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the
Company to each executive officer of the Company who earned $100,000 or more for
the year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
----------------------
(a) (b) (c) (d) (e) (f) (g)
Other Restricted Securities
Annual Stock Underlying
Name and Compensa- Award(s)(2) Options/
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Position Year Salary($) Bonus($) tion(1)($) ($) SARs(#)
<S> <C> <C> <C> <C> <C> <C>
Steven Georgiev 12/31/95 $161,800 $ 50,000 $ -- $ -- 450,000
Chief Executive Officer 12/31/94 $ -- $ -- $ 80,000 $237,500 --
3/31/94 $ -- $ -- $ 70,500 $ -- --
Michael H. Smotrich 12/31/95 $149,400 $ 50,000 $ -- $ -- 250,000
President, Chief Operating 12/31/94 $ 92,000 $ 20,000 $ -- $415,625 170,000
Officer, Secretary 3/31/94 $110,000 $ -- $ -- $ -- --
Joseph P. Caruso 12/31/95 $109,600 $ 75,000 $ -- $ -- 250,000
Vice President and 12/31/94 $ 70,400 $ 20,000 $ -- $154,374 170,000
Chief Financial Officer 3/31/94 $ 96,300 $ -- $ -- $ -- 30,000
Maurice E. Needham, Jr. 12/31/95 $155,000 $ -- $ -- $ -- --
Chairman of the Board of 12/31/94 $119,200 $ -- $ -- $ -- 100,000
Palomar Electronics Corp. and 3/31/94 $ 17,900 $ -- $ 12,000 $ -- --
CEO of Dynaco Acquisition
Corporation
Sanford R. Lane 12/31/95 $101,250 $ 25,300 $ -- $ -- --
President and CEO of Spectrum 12/31/94 $ -- $ -- $ -- $ -- --
Acquisition Corporation 3/31/94 $ -- $ -- $ -- $ -- --
</TABLE>
(1) With respect to Mr. Georgiev, includes $80,000 and $70,500 paid by the
Company to Mr. Georgiev during the years ended December 31, 1994 and
March 31, 1994, respectively, pursuant to consulting arrangements
between the Company and Mr. Georgiev. With respect to Mr. Needham,
includes $12,000 paid by the Company to Mr. Needham during the year
ended March 31, 1994 pursuant to a consulting arrangement between the
Company and Mr. Needham.
(2) In October 1994, the Company issued to certain officers, directors and
consultants shares of Common Stock at par value. Upon issuance of all
these shares, the Company recorded compensation expense, representing
the fair market value of the stock on the date of grant.
-4-
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the option grants by the Company to each
executive officer of the Company who earned $100,000 or more for the year ended
December 31, 1995:
OPTION GRANTS
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options
Underlying Granted
Name and Options to Employees Exercise Expiration
Principal Position Granted (#) in Fiscal Year ($/Sh) Date
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Steven Georgiev 350,000(1) 28.1% $2.00 7/4/00
Chief Executive Officer 100,000(1) 8.0% $2.125 8/18/00
Michael H. Smotrich 150,000(2) 12.1% $2.00 7/4/00
President, Chief Operating 100,000(2) 8.0% $2.125 8/18/00
Officer, Secretary
Joseph P. Caruso 150,000(3) 12.1% $2.00 7/4/00
Vice President and Chief 100,000(3) 8.0% $2.125 8/18/00
Financial Officer
Maurice E. Needham, Jr. -- -- -- --
Chairman of the Board of
Palomar Electronics Corp.
and CEO of Corporation
Sanford R. Lane -- -- -- --
President and CEO
Spectrum Medical
Technologies, Inc.
Financial Officer
</TABLE>
(1) Mr. Georgiev was granted 350,000 shares issuable upon exercise of
five-year warrants granted in July 1995, at an exercise price of $2.00
per share; and 100,000 shares issuable upon exercise of five-year
warrants granted in August 1995, at an exercise price of $2.125 per
share.
(2) On July 5, 1995, the Company granted to Dr. Smotrich incentive stock
options expiring July 5, 2000, to purchase 150,000 shares of Common
Stock, at an exercise price of $2.00 per share, pursuant to its 1995
Stock Option Plan. Options to purchase 75,000 shares vested immediately
and options to purchase 75,000 shares vest on July 5, 1996, if Dr.
Smotrich is still employed by the Company on that date. In addition,
Dr. Smotrich was granted 100,000 shares issuable upon exercise of
five-year warrants granted in August 1995, at an exercise price of
$2.125 per share.
(3) On July 5, 1995, the Company granted to Mr. Caruso incentive stock
options expiring July 5, 2000, to purchase 150,000 shares of Common
Stock, at an exercise price of $2.00 per share, pursuant to its 1995
Stock Option Plan. Options to purchase 75,000 shares vested immediately
and options to purchase 75,000 shares vest on July 5, 1996, if Mr.
Caruso is still employed by the Company on that date. In addition, Mr.
Caruso was granted 100,000 shares issuable upon exercise of five-year
warrants granted in August 1995, at an exercise price of $2.125 per
share.
-5-
AGGREGATED OPTION/SAR EXERCISES IN LAST YEAR AND FISCAL YEAR-END; OPTION/SAR
VALUES
The following table sets forth information on an aggregated basis
regarding the exercise of stock options during the last completed fiscal year by
each of the executive officers named in the Summary Compensation Table and the
value of unexercised options at December 31, 1995:
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options Options
Shares at FY-End (#) at FY-End ($)
Name and Acquired Value Exercisable/ Exercisable/
Principal Position on Exercise(#) Realized($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Steven Georgiev -- -- 517,000/-0- $2,900,370/$-0-
Chief Executive Officer
Michael H. Smotrich -- -- 345,000/75,000 $1,935,450/$420,750
President, Chief Operating
Officer, Secretary
Joseph P. Caruso 75,000 $90,378 275,000/75,000 $1,542,750/$420,750
Vice President and Chief
Financial Officer
Maurice E. Needham, Jr. -- --
Chairman of the Board of
Palomar Electronics Corp.
and CEO of Corporation
Sanford R. Lane -- --
President and CEO
Spectrum Medical
Technologies, Inc.
Financial Officer
</TABLE>
LONG-TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
The Company does not maintain any long-term compensation plans for its
officers, directors or employees.
COMPENSATION OF DIRECTORS
The Company does not provide any compensation to its directors for
their service as directors. For a discussion of the compensation arrangements
between the Company and Mr. Georgiev, Mr. Levangie and Dr. Smotrich, refer to
the discussions set forth under the headings below entitled "Employment
Agreements" and "Consulting Agreements."
-6-
EMPLOYMENT AGREEMENTS
On April 1, 1994, the Company entered into two-year key employee
agreements with Dr. Smotrich and Messrs. Aldag, Maciejewski and Caruso. Pursuant
to these agreements, Dr. Smotrich serves as Executive Vice President, Mr. Aldag
served as Vice President of Advanced Technology, Mr. Maciejewski served as Vice
President of Marketing and Business Development and Mr. Caruso served as Vice
President of Finance and Chief Financial Officer, at base salaries of $121,000,
$100,000, $110,000 and $92,000 per annum, respectively. Effective January 1,
1995, the Company entered into new two-year key employment agreements with Mr.
Georgiev, Dr. Smotrich and Messrs. Aldag and Caruso. Pursuant to these
agreements, Mr. Georgiev serves as Chief Executive Officer, Dr. Smotrich serves
as President and Chief Operating Officer, Mr. Aldag serves as Vice President of
Advanced Technology and Mr. Caruso serves as Vice President of Finance and Chief
Financial Officer, at base salaries of $165,000, $150,000, $125,000 and $110,000
per annum, respectively. Effective January 1, 1996, the Company amended its
employment agreements with Mr. Georgiev, Dr. Smotrich and Mr. Caruso to increase
their base salaries to $275,000, $215,000 and $180,000 per annum, respectively.
Effective February 9, 1994, the Company entered into a two-year key employment
agreement with Mr. Needham. Pursuant to this agreement, Mr. Needham serves as
Chief Executive Officer of Dynaco Corporation, at a base salary of $155,000 per
annum. Effective April 5, 1995, the Company entered into a five-year key
employment agreement with Mr. Lane. Pursuant to this agreement, Mr. Lane serves
as President and CEO of Spectrum Acquisition Corporation at a base salary of
$135,000 per annum. The agreements provide for bonuses as determined by the
Board of Directors or Executive Committee, and employee benefits, including
vacation, sick pay and insurance, in accordance with the Company's policies.
Upon termination of employment without cause, the agreements provide for lump
sum severance payments equal to six to twelve months of base salary, or, if the
termination is the result of a change of control of the Company, the lesser of
six to twelve months of base salary or the remaining payments due under the
Agreement.
CONSULTING AGREEMENTS
Effective January 1, 1994, the company entered into Consultant
Agreements with Messrs. Levangie and Georgiev, pursuant to which they provided
certain financial management and consulting services for monthly fees of $4,000
and $8,500 respectively, until December 31, 1994. Effective January 1995, Mr.
Georgiev became a full-time employee of the Company and entered into the
two-year key employee agreement discussed above. Effective June 1, 1995, the
Company entered into a new Consultant Agreement with Mr. Levangie, pursuant to
which Mr. Levangie provides certain financial management and consulting services
for a monthly fee of $7,000.
INCREASE IN COMPANY'S AUTHORIZED COMMON STOCK
SUMMARY OF AMENDMENTS TO ARTICLE 4
The Board of Directors unanimously proposes the adoption of an
amendment to Article 4 of the Company's Certificate of Incorporation which would
increase the authorized Common Stock to 100,000,000 shares from 40,000,000
shares.
REASONS FOR PROPOSED AMENDMENT TO ARTICLE 4
Article 4 of the Company's Certificate of Incorporation (as amended)
currently authorizes the Company to issue up to 40,000,000 shares of Common
Stock, and 5,000,000 shares of preferred stock, $.01 par value per share
("Preferred Stock").
-7-
The Board of Directors believes that adoption of the amendment is
advisable because it will provide the Company with greater flexibility in
connection with:
o STOCK DIVIDENDS OR STOCK SPLITS
The Company's stock price has experienced a significant rise
over the past year and the Board of Directors anticipates that
it may be in the best interests of the Company's Stockholders
to declare a stock dividend or stock split if the stock price
continues to increase.
o ACQUISITIONS
The Company completed a number of strategically important
mergers and acquisitions in order to expand the business
rapidly. The Board of Directors feels that a critical part of
its plans for expansion could include additional mergers and
acquisitions.
o EMPLOYEE INCENTIVE PLANS
The Board of Directors has added a number of key employees
throughout the organization in operational roles critical to
the expansion of the business. The Board of Directors feels
that a proper incentive to attract and retain key employees
includes equity participation in the Company.
o FINANCING
The Company has expanded its business within the medical
device and electronics business segments. As the Company
introduces a number of new products in both areas, the Board
of Directors feels that a combination of both equity and debt
financing would be ideal in order to maximize product
introduction, expand research and development activities and
fund current operations.
Although the Company has no present plans, agreements or understandings
regarding the issuance of the proposed additional shares, having such additional
authorized shares available will give the Company the ability to issue shares
without the expense and delay of holding a special meeting of Stockholders at
the time that an issuance of Common Stock is contemplated. Such a delay might
deprive the Company of the flexibility the Board views as important in
facilitating the effective use of the Company's shares. Except as otherwise
required by applicable law or stock exchange rules, authorized but unused shares
of Common Stock may be issued at such time, for such purposes, and for such
consideration as the Board of Directors may determine to be appropriate, without
further authorization by Stockholders.
As of June 7, 1996 the company had 26,243,761 shares of Common Stock
outstanding. The Company has reserved 1,464,400 shares of Common Stock for
issuance to key employees, officers, directors, consultants and advisors
pursuant to the Company's Stock Option Plans. The Company has reserved 254,115
remaining shares of Common Stock for issuance to employees, officers and
directors pursuant to the Company's 401(k) Plan. The Company has also reserved
6,480,321 shares of its Common Stock for issuance upon exercise of three, four,
five and seven year warrants issued to certain lenders, investors, consultants,
directors and officers. The Company has reserved 2,779,074 shares of
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its Common Stock for issuance upon conversion of 6,000 shares of Series D
Preferred Stock and 10,000 shares of Series E Preferred Stock. Therefore, the
total number of shares available is 2,778,329.
Because of the limited number of shares of Common Stock available to be
issued, the Board of Directors has declared it advisable that the Certificate of
Incorporation of the Company, as amended, be further amended, subject to
approval by the Stockholders, to increase the authorized Common Stock to
100,000,000 shares from 40,000,000 shares. The Board recommends that the
Stockholders approve the amendment of Article 4 of the Company's Certificate of
Incorporation.
The additional shares of Common Stock would become part of the existing
class of Common Stock, and the additional shares, when issued, would have the
same rights and privileges as the shares of Common Stock now issued. There are
no preemptive rights or cumulative voting rights relating to the Common Stock.
If the proposed amendment is approved by the Stockholders, it will become
effective upon filing and recording a Certificate of Amendment as required by
the General Corporation Law of Delaware. The complete text of Article 4 as
proposed to be amended is attached to this Proxy Statement as Exhibit A.
Since the issuance of additional shares of Common Stock, other than on
a pro rata basis to all current Stockholders, would dilute the ownership
interest of a person seeking to obtain control of the Company, such issuance
could be used to discourage a change in control of the Company by making it more
difficult or costly. The Company is not aware of anyone seeking to obtain
control of the Company and has no present intention to use the additional
authorized shares to deter a change in control.
The shares of Common Stock represented by Proxies will be voted FOR the
proposal to amend the Company's Certificate of Incorporation, as set forth
above, in the absence of contrary instructions.
STOCK OPTION PLAN
If the proposed amendment to the Company's Certificate of Incorporation
to increase the Company's authorized stock is not approved by the Stockholders,
then the Company's 1996 Incentive and Nonqualified Stock Option Plan (the "Stock
Option Plan") will be withdrawn from consideration, as the Company's authorized
stock will be insufficient for issuance under the Stock Option Plan.
Description of the Stock Option Plan
The Company's Board of Directors has adopted, subject to approval by
the Stockholders of the Company, the Stock Option Plan. A total of 2,500,000
shares of Common Stock are reserved for issuance under the Stock Option Plan.
The Stock Option Plan authorizes (i) the grant of options to purchase Common
Stock intended to qualify as incentive stock options ("Incentive Options"), as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and (ii) the grant of options that do not so qualify ("Nonqualified
Options"). The Board of Directors unanimously recommends that the Stockholders
approve the Stock Option Plan. A copy of the Stock Option Plan is attached to
this Proxy Statement as Exhibit B.
The Stock Option Plan shall terminate on the tenth anniversary of its
adoption unless earlier terminated by the Board of Directors.
The Stock Option Plan is administered by a committee of no less than
two members of the Board of Directors (the "Committee"). All members of the
Committee must be "disinterested persons" as that term is defined under rules
promulgated by the SEC. The Committee will select the individuals to whom
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awards will be granted and determine the option exercise price and other terms
of each award, subject to the provisions of the Stock Option Plan.
Incentive Options may be granted under the Stock Option Plan to
employees and officers of the Company, including members of the Board of
Directors who are also employees. Nonqualified Options may be granted under the
Stock Option Plan to employees, officers, individuals providing services to the
Company and members of the Board of Directors, whether or not they are employees
of the Company.
No options may extend for more than ten years from the date of grant
(five years in the case of employees or officers holding 10% or more of the
total combined voting power of all classes of stock of the Company or any
subsidiary or parent (a "greater-than-ten-percent-stockholder")). The exercise
price for Incentive Options may not be less than the fair market value of the
Common Stock on the date of grant or, in the case of a
greater-than-ten-percent-stockholder, no less than 110% of the fair market
value. The aggregate fair market value (determined at the time of grant) of
shares issuable pursuant to Incentive Options which first become exercisable by
an employee or officer in any calendar year may not exceed $100,000.
Options are non-transferable except by will or by the laws of descent
or distribution. Options generally may not be exercised (i) ninety days after
the optionee ceases to be employed by the Company, and (ii) one year following
an optionee's retirement from the Company in good standing by reason of
disability or death.
Payment of the exercise price for shares subject to options may be made
with cash, shares of Common Stock of the Company owned by the optionee for at
least six months, or by such other means as is authorized by the Board of
Directors. Full payment for shares exercised must be made at the time of
exercise.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The grant of an Incentive Option or a Nonqualified Option would not
result in income for the grantee or in a deduction for the Company.
The exercise of a Nonqualified Option would result in ordinary income
for the grantee and a deduction for the Company measured by the difference
between the Option price and the fair market value of the shares received at the
time of exercise. Income tax withholding would be required.
The exercise of an Incentive Option would not result in income for the
grantee if the grantee (i) does not dispose of the shares within two years after
the date of grant and one year after the transfer of shares upon exercise and
(ii) is an employee of the Company or a subsidiary of the Company from the date
of grant until three months before the exercise date. If these requirements are
met, the basis of the shares upon later disposition would be the option price.
Any gain will be taxed to the employee as long-term capital gain and the Company
would not be entitled to a deduction. The excess of the market value on the
exercise date over the option price is an item of tax preference, potentially
subject to the alternative minimum tax.
If the grantee disposes of the shares prior to the expiration of either
of the holding periods, the grantee would recognize ordinary income and the
Company would be entitled to a deduction equal to the lesser of the fair market
value of the shares on the exercise date minus the option price or the amount
realized on disposition minus the option price. Any gain in excess of the
ordinary income portion would be taxable as long-term or short-term capital
gain.
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The shares of Common Stock represented by Proxies will be voted FOR
approval of the Stock Option Plan in the absence of contrary instructions.
STOCK PURCHASE PLAN
If the proposed amendment to the Company's Certificate of Incorporation
to increase the Company's authorized stock is not approved by the Stockholders,
then the Company's 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan")
will be withdrawn from consideration, as the Company's authorized stock will be
insufficient for issuance under the Stock Purchase Plan.
DESCRIPTION OF THE STOCK PURCHASE PLAN
The Board of Directors has adopted the Stock Purchase Plan and
unanimously recommended its approval by Stockholders. The Stock Purchase Plan
authorizes the issuance of up to an aggregate of 1,000,000 shares of Common
Stock to participating employees. A copy of the Stock Purchase Plan is attached
to this Proxy Statement as Exhibit C.
Under the terms of the Stock Purchase Plan, all employees of the
Company (other than seasonal employees) who, as of October 1, 1996, have
completed six full calendar months of employment with the Company and whose
customary employment is more than 20 hours per week are eligible to participate
in the Stock Purchase Plan. Employees who own five percent or more of the
outstanding Common Stock of the Company and Directors who are not employees are
not eligible to participate. The Stock Purchase Plan is administered by the
Compensation Committee.
The right to purchase Common Stock under the Stock Purchase Plan will
be made available through a series of three-month offerings (each a "Purchase
Period"). On the first day of a Purchase Period, the Company will grant to each
eligible employee who has elected in writing to participate in the Stock
Purchase Plan an option to purchase shares of Common Stock. The employee will be
required to authorize an amount (between one and fifteen percent of such
employee's base compensation) to be deducted by the Company from such employee's
pay during the Purchase Period. On the last day of the Purchase Period, the
employee will be deemed to have exercised the option, at the option exercise
price, to the extent of accumulated payroll deductions. An employee shall
automatically continue to participate during subsequent Purchase Periods until
the employee withdraws or ceases to be an eligible employee. Under the terms of
the Stock Purchase Plan, the option exercise price is an amount equal to 95% of
the fair market value per share of Common Stock on either the first or last day
of the Purchase Period, whichever fair market value is lower.
No employee may be granted an option that would permit the employee's
rights to purchase Common Stock to accrue at a rate in excess of $6,250 in fair
market value of the Common Stock, determined as of the date the option is
granted, in any Purchase Period.
-11-
The affirmative vote of a majority of the outstanding shares of Common
Stock entitled to vote at the meeting is needed to approve the Stock Purchase
Plan. The shares of Common Stock represented by Proxies will be voted FOR
approval of the Stock Purchase Plan in the absence of contrary instructions.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Company believes that the Stock Purchase Plan is an "employee stock
purchase plan" as defined in Section 423 of the Internal Revenue code of 1986,
as amended, (the "Code"). Under the applicable provisions of the Code, an
employee will incur no federal income tax upon either the grant of the right to
purchase shares or the actual purchase of shares under the Stock Purchase Plan
if he or she is an employee of the Company (or a parent or subsidiary of the
Company) at the time the right to purchase the shares is granted and continues
to be an employee to a date at least three months before the date on which the
shares are acquired by the employee.
If an employee acquires shares of Common Stock pursuant to the Stock
Purchase Plan and does not dispose of them within two years after the
commencement of the Purchase Period pursuant to which the shares were acquired,
nor within one year after the date on which the shares were acquired, any gain
realized upon subsequent disposition will be taxable as a long-term capital
gain, except that the portion of such gain equal to the lesser of (a) the excess
of the fair market value of the shares on the date of disposition over the
amount paid to the Company upon purchase of the shares, or (b) the excess of the
fair market value of the shares on the first day of the Purchase Period over the
amount paid upon purchase of the shares, is taxable as ordinary income. There is
no corresponding deduction for the Company, however. If the employee disposes of
the shares at a price less than the price at which the employee acquired the
shares, the employee realizes no ordinary income and has a long-term capital
loss measured by the difference between the purchase price and the selling
price.
If the employee disposes of shares acquired pursuant to the Stock
Purchase Plan within two years after the first day of the Purchase Period
pursuant to which the shares were acquired or within one year after the date on
which the shares were acquired, the difference between the purchase price and
the fair market value of the shares at the time of purchase will be taxable to
the employee as ordinary income in the year of disposition. In this event, the
Company may deduct from its gross income an amount equal to the amount treated
as ordinary income to each such employee. Any excess of the selling price over
the fair market value at the time the employee purchased the shares will be
taxable as long-term or short-term capital gain, depending upon the period for
which the shares were held. If any shares are disposed of within either the
two-year or one-year period at a price less than the fair market value at the
time of purchase, the same amount of ordinary income (i.e., the difference
between the purchase price and the fair market value of the shares at the time
of purchase) is recognized, and a capital loss is recognized equal to the
difference between the fair market value of the shares at the time of purchase
and the selling price.
If a participating employee should die while owning shares acquired
under the Stock Purchase Plan, ordinary income may be reportable on the
employee's final income tax return.
NEW PLAN BENEFITS
The Company is unable to determine the dollar value and number of
options or other benefits or amounts which will be received by or allocated to
any Directors, executive officers or employees as a result of the adoption of
the Stock Option Plan or the Stock Purchase Plan. Adoption of the Stock Option
Plan, if it had been effective during fiscal 1995, would not have affected the
dollar value or number of options or other benefits or amounts received by or
allocated to such persons during fiscal 1995.
-12-
DEADLINE FOR SUBMISSION OF
STOCKHOLDER PROPOSALS AND NOMINATIONS
The Company currently anticipates that its 1996 Annual Meeting of
Stockholders will be held in September 1996. Stockholders who wish to present
proposals appropriate for consideration at the Company's 1996 Annual Meeting of
Stockholders must submit the proposals in proper form to the Company at its
address set forth on the first page of this proxy statement not later than July
1, 1996 in order for the proposals to be considered for inclusion in the
Company's Proxy statement and form of Proxy relating to such Annual Meeting.
OTHER INFORMATION
Proxies for the Special Meeting will be solicited by mail, telephone
and through brokerage institutions and all expenses involved, including printing
and postage, will be paid by the Company.
The Board of Directors is aware of no other matters, except for those
incidental to the conduct of the Special Meeting, that are to be presented to
Stockholders for formal action at the Special Meeting. If, however, any other
matters properly come before the Special Meeting or any adjournments thereof, it
is the intention of the persons named in the Proxy to vote the Proxy in
accordance with their judgment.
By Order of the Board of Directors
DR. MICHAEL H. SMOTRICH
President & Secretary
June 11, 1996
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EXHIBIT A
PROPOSED AMENDMENT TO ARTICLE 4 OF THE CERTIFICATE OF
INCORPORATION OF PALOMAR MEDICAL TECHNOLOGIES, INC.
The total number of shares which the corporation shall have the
authority to issue is one hundred and five million (105,000,000) shares of which
one hundred million (100,000,000) shares shall be Common Stock with a par value
of One Cent ($.01) per share and five million (5,000,000) shares shall be
Preferred Stock with a par value of One Cent ($.01) per share.
Additional designations and powers, the rights and preferences and the
qualifications, limitations or restrictions with respect to each class of stock
of the corporation shall be as determined by the Board of Directors from time to
time.
EXHIBIT B
1996 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
PALOMAR MEDICAL TECHNOLOGIES, INC.
PALOMAR MEDICAL TECHNOLOGIES, INC.
1996 STOCK OPTION PLAN
TABLE OF CONTENTS
Page
ARTICLE I. Purpose of the Plan 1
ARTICLE II. Definitions 1
ARTICLE III. Administration of the Plan 2
ARTICLE IV. Eligibility 4
ARTICLE V. Stock Option Awards 4
ARTICLE VI. Exercise of Option 6
ARTICLE VII. Reporting Person Limitations 8
ARTICLE VIII. Terms and Conditions of Options 8
ARTICLE IX. Benefit Plans 9
ARTICLE X. Amendment, Suspension or Termination
of the Plan 9
ARTICLE XI. Changes in Capital Structure 10
ARTICLE XII. Effective Date and Term of the Plan 11
ARTICLE XIII. Conversion of ISOs into Non-Qualified
Options; Termination of ISOs 11
ARTICLE XIV. Application of Funds 12
ARTICLE XV. Governmental Regulation 12
ARTICLE XVI. Withholding of Additional Income Taxes 12
ARTICLE XVII. Notice to Company of Disqualifying
Disposition 12
ARTICLE XVIII. Governing Law; Construction 13
PALOMAR MEDICAL TECHNOLOGIES, INC.
1996 STOCK OPTION PLAN
ARTICLE I
Purpose of the Plan
The purpose of this Plan is to encourage and enable employees,
consultants, directors and others who are in a position to make significant
contributions to the success of PALOMAR MEDICAL TECHNOLOGIES, INC. and of its
affiliated corporations upon whose judgment, initiative, and efforts the
Corporation depends for the successful conduct of its business, to acquire a
closer identification of their interests with those of the Corporation by
providing them with opportunities to purchase stock in the Corporation pursuant
to options granted hereunder, thereby stimulating their efforts on behalf of the
Corporation and strengthening their desire to remain involved with the
Corporation.
ARTICLE II
Definitions
2.1 "Affiliated Corporation" means any stock corporation of which a majority of
the voting common or capital stock is owned directly or indirectly by the
Corporation.
2.2 "Award" means an Option granted under Article V.
2.3 "Board" means the Board of Directors of the Corporation.
2.4 "Code" means the internal Revenue Code of 1986, as amended from time to
time.
2.5 "Committee" means a committee of not less than two members of the Board
appointed by the Board to administer the Plan, each of whom is a "disinterested
person" within the meaning of Rule 16b-3 under the Securities Exchange Act of
1934, as amended, or any successor provision. In the event that two
"disinterested persons" are not available to administer the Plan, the Board may
appoint to the Committee two members of the Board, either or both of whom are
not "disinterested persons," in which event this Plan shall not qualify under
Rule 16b-3, but this Plan shall be valid and operative in all other respects.
2.6 "Corporation" means PALOMAR MEDICAL TECHNOLOGIES, INC., a Delaware
corporation, or its successor.
1
2.7 "Employee" means any person who is a regular full-time or part-time employee
of the Corporation or an Affiliated Corporation on or after May 17, 1996.
2.8 "Option" means an Incentive Stock Option or Non- Qualified Option granted by
the Committee under Article V of this Plan in the form of a right to purchase
Stock evidenced by an instrument containing such provisions as the Committee may
establish.
2.9 "Participant" means a person selected by the Committee to receive an award
under the Plan.
2.10 "Plan" means this 1995 Stock Option Plan.
2.11 "Incentive Stock Option" ("ISO") means an option which qualifies as an
incentive stock option as defined in Section 422 of the Code, as amended.
2.12 "Non-Qualified Option" means any option not intended to qualify as an
Incentive Stock Option.
2.13 "Stock" means the Common Stock, $.01 par value, of the Corporation or any
successor, including any adjustments in the event of changes in capital
structure of the type described in Article XI.
2.14 "Reporting Person" means a person subject to Section 16 of the Securities
Exchange Act of 1934, as amended, or any successor provision.
2.15 "Restricted Period" means the period of time selected by the Committee
during which an Award may be forfeited by the person.
ARTICLE III
Administration of the Plan
3.1 Administration by the Committee. This Plan shall be administered by the
Committee as defined herein. From time to time the Board may increase the size
of the Committee and appoint additional members thereto, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan. No member of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any options
granted under it.
2
3.2 Powers. The Committee shall have full and final authority to operate,
manage, and administer the Plan on behalf of the Corporation. This authority
includes, but is not limited to:
(a) The power to grant Awards conditionally or unconditionally,
(b) The power to prescribe the form or forms of the instruments evidencing
Awards granted under this Plan,
(c) The power to interpret the Plan,
(d) The power to provide regulations for the operation of the incentive features
of the Plan, and otherwise to prescribe and rescind regulations for
interpretation, management and administration of the Plan,
(e) The power to delegate responsibility for Plan operation, management and
administration on such terms, consistent with the Plan, as the Committee may
establish,
(f) The power to delegate to other persons the responsibility of performing
ministerial acts in furtherance of the Plan's purpose, and
(g) The power to engage the services of persons, companies, or organizations in
furtherance of the Plan's purpose, including but not limited to, banks,
insurance companies, brokerage firms, and consultants.
3.3 Additional Powers. In addition, as to each Option to buy Stock of the
Corporation, the Committee shall have full and final authority in its
discretion: (a) to determine the number of shares of Stock subject to each
Option; (b) to determine the time or times at which Options will be granted, (c)
to determine the option price of the shares of Stock subject to each Option,
which price shall be not less than the minimum price specified in Article V of
this Plan; (d) to determine the time or times when each Option shall become
exercisable and the duration of the exercise period (including the acceleration
of any exercise period), which shall not exceed the maximum period specified in
Article V; and (e) to determine whether each Option granted shall be an
Incentive Stock Option or a Non-Qualified Option.
In no event may the Corporation grant an Employee any
Incentive Stock Option that is first exercisable during any one calendar year to
the extent the aggregate fair market value of the Stock (determined at the time
the options are granted) exceeds $100,000 (under all stock options plans of the
Corporation and any Affiliated Corporation); provided, however, that this
paragraph shall have no force and effect if its
3
inclusion in the Plan is not necessary for Incentive Stock Options issued under
the Plan to qualify as such pursuant to Section 422(d)(1) of the Code.
ARTICLE IV
Eligibility
4.1 Eligible Employees. All Employees (including Directors and Officers who are
Employees and who have not irrevocably elected to be ineligible to participate
in the Plan) are eligible to be granted Incentive Stock Option and Non-Qualified
Option Awards under this Plan.
4.2 Consultants, Directors and other Non-Employees. Any Consultant, Director
(whether or not an Employee) and any other Non-Employee is eligible to be
granted Non-Qualified Option Awards under the Plan provided the person has not
irrevocably elected to be ineligible to participate in the Plan, and provided
further that upon appointment to the Committee at the first Board of Directors
meeting following the Annual Meeting of the Shareholders, each non-employee
director appointed to the Committee shall be deemed to be ineligible to
participate under the Plan during his or her period of service on the Committee.
4.3 Relevant Factors. In selecting individual Employees, Consultants, Directors,
and other Non-Employees to whom Awards shall be granted, the Committee shall
weigh such factors as are relevant to accomplish the purpose of the Plan as
stated in Article 1. An individual who has been granted an Award may be granted
one or more additional Awards, if the Committee so determines. The granting of
an Award to any individual shall neither entitle that individual to, nor
disqualify him from, participation in any other grant of Awards.
ARTICLE V
Stock Option Awards
5.1 Number of Shares. Subject to the provisions of Article XI of this Plan, the
aggregate number of shares of Stock for which Options may be granted under this
Plan shall not exceed 2,500,000 shares. The shares to be delivered upon exercise
of Options under this Plan shall be made available, at the discretion of the
Committee, either from authorized but unissued shares or from previously issued
and reacquired shares of Stock held by the Corporation as treasury shares,
including shares purchased in the open market.
4
Stock issuable upon exercise of an option granted under the
Plan may be subject to such restrictions on transfer, repurchase rights or other
restrictions as shall be determined by the Committee.
5.2 Effect of Expiration, Termination or Surrender. If an Option under this Plan
shall expire or terminate unexercised as to any shares covered thereby, or shall
cease for any reason to be exercisable in whole or in part, or if the Company
shall reacquire any unvested shares issued pursuant to Options under the Plan,
such shares shall thereafter be available for the granting of other Options
under this Plan,
5.3 Term of Options. The full term of each Option granted hereunder shall be for
such period as the Committee shall determine. In the case of incentive Stock
Options granted hereunder, the term shall not exceed ten (10) years from the
date of granting thereof. Each Option shall be subject to earlier termination as
provided in Sections 6.4 and 6.5. Notwithstanding the foregoing, the term of
options intended to qualify as "Incentive Stock Options" shall not exceed five
(5) years from the date of granting thereof if such option is granted to any
employee who at the time such option is granted owns more than ten percent (10%)
of the total combined voting power of all classes of stock of the Corporation.
5.4 Option Price. The option price shall be determined by the Committee at the
time any Option is granted. In the case of Incentive Stock Options, the exercise
price shall not be less than 100% of the fair market value of the shares covered
thereby at the time the Incentive Stock Option is granted (but in no event less
than par value), provided that in the case where an Incentive Stock Option is
granted hereunder to any Employee who at the time of grant owns Stock possessing
more than 10% of the combined voting power of all classes of stock of the
Corporation and its Corporations, the Incentive Stock Option price shall equal
not less than 110% of the fair market value of the shares covered thereby at the
time the Incentive Stock Option is granted. In the case of Non-Qualified Stock
Options, the exercise price shall not be less than par value.
5.5 Fair Market Value. If, at the time an Option is granted under the Plan, the
Corporation's Stock is publicly traded, "fair market shall be determined as of
the last business day for which the prices or quotes discussed in this sentence
are available prior to the date such Option is granted and shall mean (i) the
average (on that date) of the high and low prices of the Stock on the principal
national securities exchange on which the Stock is traded, if the Stock is then
traded on a national securities exchange; or (ii) the last reported sale price
(on that date) of the Stock on the NASDAQ National Market List, if the Stock is
not then traded on a national securities exchange;
5
or (iii) the closing bid price (or average of bid prices) last quoted (on that
date) by an established quotation service for over-the-counter securities, if
the Stock is not reported on the NASDAQ National Market List. However, if the
Stock is not publicly traded at the time in Option is granted under the Plan,
"fair market value" shall be deemed to be the fair value of the Stock as
determined by the Committee under Section 3.3.
5.6 Non-Transferability of Options. Except as provided below, no Option granted
under this Plan shall be transferable by the grantee otherwise than by will or
the laws of descent and distribution, and such Option may be exercised during
the grantee's lifetime only by the grantee. Notwithstanding the above, in the
event the federal securities laws and the relevant tax laws change so as to
permit the transferability of the options provided by this Plan then to such
extent permitted by law, such options may be transferred in accordance with this
Plan.
5.7 Foreign Nationals. Awards may be granted to Participants who are foreign
nationals or employed outside the United States on such terms and conditions
different from those specified in the plan as the Committee considers necessary
or advisable to achieve the purpose of the Plan or comply with applicable laws.
ARTICLE VI
Exercise of Option
6.1 Exercise. Each Option granted under the Plan shall be exercisable on such
date or dates and during such period and for such number of shares as shall be
determined pursuant to the provisions of the instrument evidencing such Option.
The Committee shall have the right to accelerate the date of exercise of any
option, provided that the Committee shall not accelerate the exercise date of
any Incentive Stock Option granted if such acceleration would violate the annual
vesting limitation contained in Section 422(d)(1) of the Code.
6.2 Notice of Exercise and Payment. A person electing to exercise an Option
shall give written notice to the Corporation of such election and of the number
of shares he or she has elected to purchase and shall at the time of exercise
tender the full purchase price, in cash, Corporation Stock, owned by him or her
for at least six months, or by such other means as is authorized by the Board of
Directors, for the shares he or she has elected to purchase.
6.3 Delivery of Stock. No shares shall be delivered pursuant to any exercise of
an Option until payment in full of
6
the option price therefor is received by the Corporation. Such payment may be
made in whole of in part in cash or, to the extent permitted by the Committee at
or after the grant of an Option, by delivery of a note or shares of the Stock
owned by the optionee, including Restricted Stock, valued at their fair market
value on the date of delivery, or such other lawful consideration as the
Committee may determine. Until such person has been issued a certificate or
certificates for the shares so purchased, he or she shall possess no rights of a
record holder with respect to any of such shares.
6.4 Option Unaffected by Change In Duties. No Incentive Stock Option, and,
unless otherwise determined by the Committee, no Non-Qualified Option granted to
a person who is, on the date of the grant, an Employee of the Corporation or an
Affiliated Corporation, shall be affected by any change of duties or position of
the optionee (including transfer to or from an Affiliated Corporation), so long
as he or she continues to be an Employee. Employment shall be considered as
continuing and uninterrupted during any bona fide leave of absence (such as
those attributable to illness, military obligations or governmental service)
provided that the period of such leave does not exceed 90 days or, if longer,
any period during which such optionee's right to reemployment is guaranteed by
statute. A bona fide leave of absence with the written approval of the Committee
shall not be considered an interruption of employment under the Plan, provided
that such written approval contractually obligates the Corporation or any
Affiliated Corporation to continue the employment of the optionee after the
approved period of absence.
If the optionee shall cease to be an Employee for any reason
other than death, such Option shall thereafter be exercisable only to the extent
of the purchase rights, if any, which have accrued as of the date of such
cessation; provided that (i) the Committee may in its absolute discretion, upon
any cessation of employment, determine (but be no under no obligation to
determine) that such accrued purchase rights shall be deemed to include
additional shares covered by such Option, and (ii) unless the Committee shall
otherwise provide in the instrument evidencing any Option, upon any such
cessation of employment, such remaining rights to purchase shall in any event
terminate upon the earlier of (A) the expiration of the original term of the
Option; or (B) where such cessation of employment is on account of disability,
the expiration of one year from the date of such cessation of employment and,
otherwise, the expiration of three months from such date. For purposes of the
Plan, the term "disability" shall mean "permanent and total disability" as
defined in Section 22(e)(3) of the Code.
6.5 Death of Optionee. Should an optionee die while in possession of the legal
right to exercise an Option or Options
7
under this Plan, such persons as shall have acquired, by will or by the laws of
descent and distribution, the right to exercise any Options theretofore granted,
may, unless otherwise provided by the Committee in any instrument evidencing any
Option, exercise such Options at any time prior to one year from the date of
death; provided, that such Option or Options shall expire in all events no later
than the last day of the original term of such Option; provided, further, that
any such exercise shall be limited to the purchase rights that have accrued as
of the date when the optionee ceased to be an Employee, whether by death or
otherwise, unless the Committee provides in the instrument evidencing such
Option that, in the discretion of the Committee, additional shares covered by
such Option may become subject to purchase immediately upon the death of the
optionee.
6.6 Reload Option Grants. The Committee, in its discretion, may also grant stock
options with "reload provisions" that permit the option holder to exercise his
or her stock options and receive new stock option grants for the equivalent
amount of stock underlying the option exercise at the fair market value on the
date of such exercise. The reload options shall have the same expiration date as
the options they replace.
ARTICLE VII
Reporting Person Limitations
Notwithstanding any other provision of the Plan, to the extent
required to qualify for the exemption provided by Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, and any successor provision, (i)
any Stock or other equity security offered under the Plan to a Reporting Person
may not be sold for at least six (6) months after grant of an option acquire
such Stock or other equity security, except in case of death or disability and
(ii) any Option, or other similar right related to an equity security, issued
under the Plan to a Reporting Person shall not be transferable other than by
will or the laws of descent and distribution or in accordance with section 5.6
hereof, shall not be exercisable for at least six (6) months except in the case
of death or disability, provided in the provisions of section 5.6 hereof, shall
be exercisable during the Participant's lifetime only by the Participant or the
Participant's guardian or legal representative.
ARTICLE VIII
Terms and Conditions of Options
Options shall be evidenced by instruments (which need not be
identical) in such forms as the Committee may from time to
8
time approve. Such instruments shall conform to the terms and conditions set
forth in Articles V and VI hereof and may contain such other provisions as the
Committee deems advisable that are not inconsistent with the Plan, including
restrictions applicable to shares of Stock issuable upon exercise of Options. In
granting any Non-Qualified Option, the Committee may specify that such
Non-Qualified Option shall be subject to the restrictions set forth herein with
respect to Incentive Stock Options, or to such other termination and
cancellation provisions as the Committee may determine. The Committee may from
time to time confer authority and responsibility on one or more of its own
members and/or one or more officers of the Corporation to execute and deliver
such instruments. The proper officers of the Corporation are authorized and
directed to take any and all action necessary or advisable from time to time to
carry out the terms of such instruments.
ARTICLE IX
Benefit Plans
Awards under the Plan are discretionary and are not a part of
regular salary. Awards may not be used in determining the amount of compensation
for any purpose under the benefit plans of the Corporation, or an Affiliated
Corporation, except as the Committee may from time to time expressly provide.
Neither the Plan, an Option or any instrument evidencing an Option confers upon
any Employee the right to continued employment with the Corporation or an
Affiliated Corporation.
ARTICLE X
Amendment, Suspension or Termination of the Plan
The Board may suspend the Plan or any part thereof at any time
or may terminate the Plan in its entirety. Awards shall not be granted after
Plan termination.
The Board may also amend the Plan from time to time, except
that amendments which affect the following subjects must be approved by
stockholders of the Corporation, unless and to such extent, that applicable
federal or state law or regulation permit amendment thereto:
(a) Except as provided in Article XI relative to capital
changes, and except as permitted by law or regulation where such change is not
deemed material, the number of shares as to which Options may be granted
pursuant to Article V;
(b) The maximum term of Options granted;
9
(c) The minimum price at which Options may be granted;
(d) The term of the Plan; and
(e) The requirements as to eligibility for
participation in the Plan.
Awards granted prior to suspension or termination of the Plan
may not be cancelled solely because of such suspension or termination, except
with the consent of the grantee of the Award.
ARTICLE XI
Changes in Capital Structure
The instruments evidencing Options granted hereunder shall be
subject to adjustment in the event of changes in the outstanding Stock of the
Corporation by reason of stock dividends, stock splits, recapitalizations,
reorganizations, mergers, consolidations, combinations, exchanges or other
relevant changes in capitalization occurring after the date of an Award to the
same extent as would affect an actual share of stock issued and outstanding on
the effective date of such change. Such adjustment to outstanding Options shall
be made without change in the total price applicable to the unexercised portion
of such options, and a corresponding adjustment in the applicable option price
per share shall be made. In the event of any such change, the aggregate number
and classes of shares for which Options may thereafter be granted under Section
5.1 of this Plan may be appropriately adjusted as determined by the Committee so
as to reflect such change. Notwithstanding the foregoing, any adjustments made
pursuant to this Article XI with respect to Incentive Stock Options shall be
made only after the Committee, after consulting with counsel for the
Corporation, determines whether such adjustments would constitute a
"modification" of such Incentive Stock Options (as that term is defined in
Section 425 of the Code) or would cause any adverse tax consequences for the
holders of such Incentive Stock Options. If the Committee determines that such
adjustments made with respect to Incentive Stock Options would constitute a
modification of such Incentive Stock Options, it may refrain from making such
adjustments.
In the event of the proposed dissolution or liquidation of the
Corporation, each Option will terminate immediately prior to the consummation of
such proposed action or at such other time and subject to such other conditions
as shall be determined by the Committee.
Except as expressly provided herein, no issuance by the
Corporation of shares of stock of any class, or securities
10
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
subject to Options. No adjustments shall be made for dividends paid in cash or
in property other than securities of the Corporation.
No fractional shares shall be issued under the Plan and the
optionee shall receive from the Corporation cash in lieu of such fractional
shares,
ARTICLE XII
Effective Date and Term of the Plan
The Plan shall become effective upon its adoption the Board,
provided that the stockholders of the Corporation shall have approved this Plan
within twelve months following the adoption of this Plan by the Board. The Plan
shall continue until such time as it may be terminated by action of the Board;
provided, however, that no Options may be granted under this Plan on or after
the tenth anniversary of the effective date hereof.
ARTICLE XIII
Conversion of ISO's into Non-Qualified Options;
Termination of ISO's
The Committee, at the written request of any optionee, may in
its discretion take such actions as may be necessary to convert such optionee's
Incentive Stock Options, that have not been exercised on the date of conversion,
into Non-Qualified Options at any time prior to the expiration of such Incentive
Stock Options, regardless of whether the optionee is an employee of the
Corporation or an Affiliated Corporation at the time of such conversion. Such
actions may include, but not be limited to, extending the exercise period or
reducing the exercise price of such Options. At the time of such conversion, the
Committee (with the consent of the optionee) may impose such conditions on the
exercise of the resulting Non-Qualified Options as the Committee in its
discretion may determine, provided that such conditions shall not be
inconsistent with the Plan. Nothing in the Plan shall be deemed to give any
optionee the right to have such optionee's Incentive Stock Options converted
into Non- Qualified Options, and no such conversion shall occur until and unless
the Committee takes appropriate action. The Committee, with the consent of the
optionee, may also terminate any portion of any Incentive Stock Option that has
not been exercised at the time of such termination.
11
ARTICLE XIV
Application of Funds
The proceeds received by the Corporation from the sale of
shares pursuant to Options granted under the Plan shall be used for general
corporate purposes.
ARTICLE XV
Governmental Regulation
The Corporation's obligation to sell and deliver shares of
Stock under this Plan is subject to the approval of any governmental authority
required in connection with the authorization, issuance or sale of such shares.
ARTICLE XVI
Withholding of Additional Income Taxes
Upon the exercise of a Non-Qualified Option or the making of a
Disqualifying Disposition as defined in Article XVII the Corporation, in
accordance with Section 3402(a) of the Code, may require the optionee to pay
additional withholding taxes in respect of the amount that is considered
compensation includable in such person's gross income. The Committee in its
discretion may condition the exercise of an Option on the payment of such
additional withholding taxes.
ARTICLE XVII
Notice to Company of Disqualifying Disposition
Each employee who receives an Incentive Stock Option must
agree to notify the Corporation in writing immediately after the employee makes
a Disqualifying Disposition of any Stock acquired pursuant to the exercise of an
Incentive Stock Option. A Disqualifying Disposition is any disposition
(including any sale) of such Stock before the later of (a) two years after the
date the employee was granted the Incentive Stock Option or (b) one year after
the date the employee acquired Stock by exercising the Incentive Stock Option.
If the employee has died before such stock is sold, these holding period
requirements do not apply and no Disqualifying Disposition can occur thereafter.
12
ARTICLE XVIII
Governing Law; Construction
The validity and construction of the Plan and the instruments
evidencing Options shall be governed by the laws of the State of Delaware. In
construing this Plan, the singular shall include the plural and the masculine
gender shall include the feminine and neuter, unless the context otherwise
requires.
13
EXHIBIT C
PALOMAR MEDICAL TECHNOLOGIES, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose of the Plan
The purpose of the Palomar Medical Technologies, Inc. Employee Stock
Purchase Plan is to encourage ownership of the common stock of Palomar Medical
Technologies, Inc. ("Palomar") by its eligible employees and any and each of its
participating subsidiaries, thereby enhancing such employees' personal interest
in the continued success and progress of Palomar. The plan is intended to
facilitate regular investment in the common stock of Palomar by offering
employees a convenient means to make purchases at a discounted price through
payroll deductions. The Plan is intended to comply with the provisions of
Section 423 of the Internal Revenue Code of 1986, as amended.
2. Definitions
For purposes of the Plan, the following terms shall have the meanings
indicated below:
(a) "Business Day" shall mean a day on which there is trading on the
New York Stock Exchange.
(b) "Code" shall mean the Internal Revenue Code of 1986, as it may be
amended from time to time.
(c) "Committee" shall mean the Compensation Committee of the Board of
Directors of Palomar.
(d) "Common Stock" shall mean Palomar's common stock, par value $.01
per share.
(e) "Company" shall mean Palomar and any of its subsidiaries (within
the meaning of Section 424(f) of the Code) whose Board of Directors has adopted
the Plan, with approval of the Board of Directors of Palomar, and which has not
terminated participation in or withdrawn from the Plan by action of such
subsidiary's Board of Directors or the Board of Directors of Palomar.
(f) "Compensation" shall mean the amount of a Participant's base wages,
overtime, commissions, cash bonuses, premium pay and shift differential, before
giving effect to any compensation reductions made in connection with any plans
described in Section 401(k) or Section 125 of the Code.
(g) "Custodian" shall mean the custodian appointed by the Committee
pursuant to Section 7 hereof to hold the shares of Common Stock purchased under
the Plan and subsequent Dividends reinvested or paid to Participant in cash.
(h) "Dividends" shall mean all cash dividends paid on shares of Common
Stock held in any Employee's Account.
(i) "Account" shall mean a separate account maintained by the Custodian
for each
Participant which reflects, at any time, the number of shares of Common Stock
purchased under the Plan by such Participant as well as reinvested Dividends
held by the Custodian.
(j) "Entry Date" shall mean the first Business Day of each Purchase
Period.
(k) "Eligible Employee" shall mean, with respect to any Purchase
Period, an employee of the Company who is eligible to participate in the Plan in
such Purchase Period under the rules set forth in Sections 5 and 8 hereof.
(l) The "Fair Market Value" of a share of Common Stock on any Business
Day shall be the average of the high and low prices of the Common Stock as
published in the New York Stock Exchange Composite Transactions listing for such
day; provided that in the event that such prices of the Common Stock shall not
be so published, the Fair Market Value of a share of Common Stock shall be
determined by the Committee.
(m) "Participant" shall mean, with respect to any Purchase Period, each
Eligible Employee who has elected to have amounts deducted from his or her
Compensation pursuant to Section 6 hereof for such Purchase Period.
(n) "Plan" shall mean this 1996 Employee Stock Purchase Plan, as the
same may be amended from time to time.
(o) "Purchase Date" shall mean the last Business Day of each Purchase
Period.
(p) "Purchase Period" shall mean each of the three month periods ending
on the last days of March, June, September and December during the period when
the Plan is in effect. The first Purchase Period shall begin on October 1, 1996
and end on December 31, 1996.
3. Common Stock Available Under the Plan
The maximum number of shares of Common Stock which may be purchased
under the Plan shall be 1,000,000 shares, except as such maximum number may be
adjusted as provided in Section 12 hereof. Shares of Common Stock purchased
under the Plan may be authorized and previously unissued shares, treasury shares
(including shares purchased from time to time by Palomar), or any combination
thereof.
4. Administration of Plan
The Plan shall be administered by the Committee. The Committee shall
have the authority, consistent with the Plan, to interpret the Plan, to adopt,
amend and rescind rules and regulations for the administration of the Plan and
to make all determinations in connection therewith which may be necessary or
advisable, and all such actions shall be binding for all purposes under the
Plan. The Plan shall be administered at the expense of the Company.
5. Eligibility
Each employee of the Company shall be eligible to participate in the
Plan during each Purchase Period, provided that he or she is not, as of the
Entry Date for such Purchase Period:
2
(a) an employee who has been employed by the Company for less than six
months; or
(b) an employee who is customarily employed by the Company for fewer
than 20 hours per week, or for five or fewer months in any calendar year; or
(c) an employee who owns (within the meaning of Section 424(d) of the
Code) stock possessing 5% or more of the total combined voting power or value of
all classes of stock of Palomar, treating as owned on Entry Date, for purposes
of this clause, Common Stock which such employee would be entitled to purchase
on Purchase Date for such Purchase Period but for this Section 5(c).
6. Participation
(a) On the Entry date for each Purchase Period, Palomar shall grant to
each Participant in the Plan for such Purchase Period an option to purchase on
the Purchase Date for such Purchase Period, at the applicable price specified in
Section 7 hereof, the number of shares of Common Stock, including any fractional
share, which may be purchased, at such price, with such participant's payroll
deductions received during such Purchase Period, subject to the terms and
conditions of the Plan.
(b) Eligible Employees may elect to participate in the Plan as follows:
(i) Each Eligible Employee may elect to participate in the
Plan, effective on the Entry Date for any Purchase Period, by making an election
to participate at least 15 days prior to such entry Date. Such election shall
authorize the Company to deduct an amount chosen by the employee equal to any
whole percentage between 1 and 15 percent, inclusive from such Employee's
Compensation paid during such Purchase Period.
(ii) After making the election pursuant to Section 6(b)(i)
hereof, a Participant shall automatically continue to participate in the Plan
during subsequent Purchase Periods until the Participant either withdraws from
the Plan or ceases to be an Eligible Employee. The percentage of the
Participant's Compensation deducted in subsequent Purchase Periods shall be the
percentage specified in the election made pursuant to Section 6(b)(i), as it may
be changed from time to time pursuant to Section 6(b)(iii) or 6(b)(iv) hereof.
(iii) Except as provided in Section 6(b)(iv) hereof, after the
last date for making an election described in Section 6(b)(i) hereof for the
Purchase Period, a Participant shall not be permitted to increase or reduce the
percentage of Compensation deducted from his or her Compensation paid during
each purchase period. A Participant may elect to reduce or increase the
percentage of his or her Compensation deducted pursuant to the Plan to any whole
percentage between 1 and 15, inclusive, effective for a subsequent Purchase
Period by filing an election not later than 15 days prior to the Entry Date for
such Purchase Period.
(iv) A Participant may elect at any time to reduce the
percentage of his or her Compensation deducted pursuant to the Plan to zero,
effective commencing with the next payroll period beginning after the making of
such election. All cash amounts already deducted during a Purchase Period prior
to the effectiveness of any such election shall be refunded to the Participant.
(c) No interest will be paid to Participants on any payroll
deductions.
3
(d) A Participant may at any time elect to withdraw from further
participation in the Plan, effective as of the next Business day following such
election. Any Participant whose employment with the Company terminates for any
reason (including without limitation termination by reason of death or
disability) shall be deemed to have made a withdrawal, effective the next
Business Day following such termination of employment. Upon any withdrawal, (i)
no further amounts shall be deducted from such Participant's Compensation
effective for any payroll period beginning after the effective date of
withdrawal, (ii) any outstanding option granted to such Participant under the
Plan shall terminate as of the effective date of the withdrawal, and no further
purchases of Common Stock under the Plan shall be made for such Participant or
after such date, and (iii) as soon as possible the Company will refund all cash
deducted during the Purchase Period. Following any such withdrawal from the
Plan, an employee's eligibility to participate again in the Plan will be subject
to all provisions of Section 5 and 8 hereof.
(e) Notwithstanding any other provision of the Plan, an employee who
has withdrawn from the Plan pursuant to Section 6(d) hereof shall be deemed to
have made an irrevocable election not to participate in the Plan during the two
consecutive Purchase Periods immediately following the one in which such
withdrawal was made.
(f) Any election permitted by this Section 6 (other than an election
deemed made pursuant to Section 6(e)) shall be made in writing on the form
prescribed for such purpose by the Committee from time to time and shall be
delivered to the person or persons designated by the Committee. Any such
election shall be deemed made when such form is completed, signed by the
Participant and received by such designee.
7. Purchases of Common Stock
On the Purchase Date for each Purchase Period, all options granted
under the Plan on the first Business Day of such Purchase Period shall be deemed
to be exercised, and all amounts deducted pursuant to Section 6 hereof from the
Participant's Compensation during such Purchase Period shall be applied on such
date to purchase whole and fractional shares of Common Stock from the Company,
unless such Participant has withdrawn from the Plan during such Purchase Period
effective on or prior to such Purchase Date. With respect to shares of Common
stock purchased, the purchase price per share shall be the lesser of (i)
ninety-five percent (95%) of the Fair Market Value of a share of Common Stock on
the Entry Date of the Purchase Period, or (ii) ninety-five percent (95%) of the
Fair Market Value of a share of Common Stock on the Purchase Date of the
Purchase Period. The Committee shall appoint the Custodian for the Plan and to
hold all whole and fractional shares purchased under the Plan and to maintain a
separate Account for each Participant, in which Common Stock purchased by such
Participant under the Plan shall be held and Dividends received will be
reinvested. Each Participant shall receive a statement as soon as practicable
after the end of each Purchase Period reflecting purchases for his or her
account under the Plan through the end of such Purchase Period.
8. Limitation on Number of Shares purchased
Notwithstanding any other provision of the Plan, the maximum number of
whole and fractional shares of Common Stock which a Participant may purchase in
a Purchase Period under the Plan and under all other "employee stock purchase
plans" (within the meaning of Section 423 of the Code) maintained by Palomar and
its subsidiaries (within the meaning of Section 424(f) of the Code)
4
shall be the number determined by dividing $6,250 by the Fair Market Value of a
share of Common Stock on the Entry Date for such Purchase Period. In the event
that the amount of payroll deductions is greater than $6,250 in any given
Purchase Period, the Company will refund the excess to the Participant as soon
as practicable after such Purchase Date.
9. Rights as a Stockholder
From and after the Purchase Date on which shares of Common Stock are
purchased by the Participant under the Plan, such Participant shall have all of
the rights and privileges of a stockholder of Palomar with respect to such
shares. Prior to the Purchase Date on which shares of Common Stock may be
purchased by a Participant, such Participant shall not have any rights as a
stockholder of Palomar.
10. Notice of Disposition of Stock
Each Participant agrees, by his or her participation in the Plan, to
promptly notify Palomar in writing of any disposition of any Common Stock
purchased under the Plan occurring within 2 years after the Entry Date of the
Purchase Period in which such stock was purchased.
11. Rights Not Transferrable
Rights under the Plan are not transferrable, except that the right to
receive shares pursuant to the Plan may be transferred by will or the laws of
descent and distribution. Options granted to a Participant hereunder may be
exercised only by such Participant.
12. Adjustment for Capital Changes
In the event of any capital change by reason of any stock dividend or
split, recapitalization, merger in which Palomar is the surviving entity,
combination or exchange of shares or similar corporate change, the number and
type of shares or other securities of Palomar which Participants may purchase
under the Plan, and the maximum aggregate number of such shares or securities
which may be purchased under the Plan, shall be appropriately adjusted by the
Board of Directors of Palomar.
13. Amendments
The Board of Directors of Palomar may at any time, or from time to
time, amend the Plan in any respect, except that, without stockholder approval,
no amendment shall be made (a) increasing the number of shares which may be
purchased under the Plan (other than as provided in Section 12 herein), (b)
materially increasing the benefits accruing to Participants or (c) materially
modifying the requirements as to eligibility for participation in the Plan.
14. Laws and Regulations
(a) Notwithstanding any other provision of the Plan, the rights of
Participants to purchase Common Stock hereunder shall be subject to compliance
with all applicable Federal, state and foreign laws, rules and regulations and
the rules of each stock exchange upon which the Common Stock is from time to
time listed.
5
(b) The Plan and the purchase of Common Stock hereunder shall be
subject to additional rules and regulations, not inconsistent with the Plan,
that may be promulgated from time to time by the Committee regarding purchases
and sales of Common Stock.
15. Employment
The Plan shall not confer any right to continued employment upon any
employee of the Company.
16. Effective Date of the Plan; Termination
(a) The Plan shall become effective on October 1, 1996, subject to
approval by the shareholders of Palomar in accordance with applicable law and
the requirements of Section 423 of the Code.
(b) The Plan and all rights hereunder shall terminate on the earliest
to occur of:
(i) the date on which the maximum number of shares of Common
Stock available for purchase under the Plan as specified in Section 3 hereof has
been purchased;
(ii) the termination of the Plan by the Board of Directors of
Palomar; or
(iii) the effective date of any consolidation or merger in
which Palomar is not the surviving entity, any exchange or conversion of
outstanding shares of Palomar for or into securities of another entity or other
consideration, or any complete liquidation of Palomar.
In the event that on any Purchase Date the remaining shares of Common
Stock available for purchase under the Plan are insufficient to fully satisfy
Participants' outstanding options, such remaining available shares shall be
apportioned among and sold to such Participant in proportion to the amounts of
payroll deductions and the excess payroll deduction shall be returned to the
Participant as soon as practicable thereafter.
Upon any termination of the Plan, any shares in the employee's Account
shall be delivered by the Custodian to the employee or his or her legal
representative as soon as practicable following such termination.
6
PALOMAR MEDICAL TECHNOLOGIES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
SPECIAL MEETING OF STOCKHOLDERS -- JULY 19, 1996
The undersigned stockholder of Palomar Medical Technologies, Inc. (the
"Company") hereby appoints Steven Georgiev, Michael H. Smotrich and Joseph P.
Caruso, and each or any of them, proxies, with full power of substitution to
each and to each substitute appointed pursuant to such power, of the undersigned
to vote all shares of stock of the Company which the undersigned may be entitled
to vote at the Special Meeting of Stockholders of the Company to be held on
Friday, July 19, 1996, and at any and all adjournments thereof, with all powers
the undersigned would possess if personally present. The proxies are authorized
to vote as indicated below and on the reverse side upon the matters set forth
herein and in their discretion upon all other matters which may properly come
before said Meeting. The undersigned hereby acknowledges receipt of a copy of
the accompanying Notice of Special Meeting of Stockholders and Proxy Statement
for the Special Meeting of Stockholders and hereby revokes all proxies, if any,
heretofore given by him to others for said Meeting.
If this Proxy is properly executed and returned, the shares represented
hereby will be voted. If a choice is specified below or on the reverse side by
the stockholder with respect to any matter to be acted upon, the shares will be
voted upon that matter in accordance with the specification so made. The
undersigned understands that, if Proposal 1 regarding the amendment to the
Company's Certificate of Incorporation to increase the Company's authorized
stock is not approved, then Proposals 2 and 3 regarding the Company's 1996
Incentive and Nonqualified Stock Option Plan and 1996 Employee Stock Purchase
Plan, respectively, will be withdrawn from consideration, as the Company's
authorized stock will be insufficient for issuance under those Plans. IN THE
ABSENCE OF ANY SPECIFICATION, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED
FOR PROPOSALS 1, 2, and 3.
1. Proposal to amend the Certificate of Incorporation to increase authorized
Common Stock.
|_| FOR |_| AGAINST |_| ABSTAIN
2. Proposal to approve and adopt the Company's 1996 Incentive and Nonqualified
Stock Option Plan.
|_| FOR |_| AGAINST |_| ABSTAIN
3. Proposal to approve and adopt the Company's 1996 Employee Stock Purchase
Plan.
|_| FOR |_| AGAINST |_| ABSTAIN
Please date, sign exactly as name appears hereon and
return promptly. If the shares are registered in the
names of two or more persons, each should sign.
Executors, administrators, trustees, guardians,
custodians, attorneys and corporate officers should add
their titles.
......................................................
Signature
Date: ................................................
......................................................
Signature
Date: ................................................
-2-
PALOMAR ANNUAL REPORT 1995
[LOGO]
PALOMAR
MEDICAL
PALOMAR INTENDS TO BE THE WORLD'S LEADING SUPPLIER OF LASER SYSTEMS TO THE
COSMETIC AND HEALTH CARE INDUSTRIES BY OFFERING A BROAD BASE OF UNIQUE PRODUCTS
FOR LARGE AND GROWING MARKETS; AND TO LEVERAGE PROPRIETARY HIGH DENSITY
ELECTRONIC PACKAGING TECHNOLOGY INTO HIGH VOLUME APPLICATIONS IN MULTIBILLION
DOLLAR MARKETS.
REVENUES
(in thousands)
BAR GRAPH shown using plot points below:
March 1993 $ 470
March 1994 $ 1,569
December 1994* $13,059
December 1995 $21,792
* 9 months reporting period
MARKET CAP
(in thousands)
BAR GRAPH shown using plot points below:
March 1993 $13,585
March 1994 $16,022
December 1994 $31,096
December 1995 $98,763
LETTER TO SHAREHOLDERS
from Steven Georgiev, Chairman & CEO of Palomar
[4/COLOR PHOTO]
Nineteen-ninety-five was a strikingly successful and especially gratifying year
for Palomar as we met virtually all of the management challenges and product
goals that we had set for the company. During the past year, we established each
of the business activities, product development programs and marketing and sales
channels necessary to establish Palomar over the next several years as the
premier cosmetic laser company in the world.
For the fiscal year ended December 31, 1995, revenues increased 66 percent
to $21,792,079, compared with revenues of $13,058,523 during the nine-month
fiscal year ended December 31, 1994. Palomar also reported an expected loss for
the year ended December 31, 1995, of ($10,650,975), or a loss of ($0.88) per
share, compared with a loss of ($5,638,121), or a loss of ($0.87) per share,
during the nine-month fiscal year ended December 31, 1994. Palomar changed its
fiscal year-end to December 31 from March 31, constituting the nine-month
reporting period.
Our rapid revenue growth earned us the number eight ranking on INC.
magazine's 1996 list of the 100 fastest-growing public companies in the United
States.
With the recent acquisition of Tissue Technologies, Inc., Palomar is now
the only laser company offering four distinct products that can perform the full
range of cosmetic procedures currently offered through laser technology.
Two of the four products are a ruby laser, which removes tattoos and other
blemishes such as age spots and warts, and our copper vapor laser for the
removal of spider veins. We are currently selling each of these products, both
of which received U.S. Food and Drug Administration (FDA) clearance to be sold
and marketed, through our Spectrum Medical Technologies subsidiary located in
Massachusetts.
The two other laser systems have been recently added to our product line.
They address
1
the two largest- and fastest-growing cosmetic markets: skin resurfacing, a
market estimated at $850 million in 1995; and hair removal, estimated to be $1
billion last year.
Palomar entered, and gained a considerable share of, the market for skin
resurfacing through the acquisition of Tissue Technologies. This Company had a
$20 million backlog (as of February 1996) for its superior carbon dioxide laser
product for this cosmetic market.
Over the next several months we expect to receive FDA clearance of our
recently developed ruby laser for removal of unwanted hair. If cleared, the
laser will join our cosmetic laser product line and begin serving a $1 billion
market ($2 billion internationally) through the existing distribution channels
of our Spectrum subsidiary.
No other laser company offers these four products for these markets. We
have a unique market presence in the industry, and believe that we can exploit
it readily and become the leader in the laser cosmetics business. We can help
our customers establish cosmetic laser centers that address most procedures, and
make it easy for them to finance the laser systems through our leasing
subsidiary. Our objective is to become the dominant laser company in the
cosmetic procedures market.
Through strategic alliances and funded research, Palomar has exclusive
worldwide access to the newest technology in laser applications from some of the
world's leading medical institutions such as the Wellman Laboratories at
Massachusetts General Hospital, the New England Medical Center/Tufts Medical,
and the Oregon Medical Laser Center. Additionally we operate a world-class diode
laser development group for both medical and industrial applications at Star
Medical Technologies, our subsidiary in California. Several of the products
developed by Star over the last two years are in medical trials and are expected
to be coming to market in 1997 and 1998.
Palomar plans to achieve high gross margins and obtain large market
shares, by being a low-cost producer through our electronics subsidiary, Palomar
Electronics Corporation, which offers us this manufacturing infrastructure.
Facilities located in Tempe, Arizona, provide Palomar with a 50,000 sq. ft.
efficient, low-cost, self-supporting electronics and electro-mechanical
manufacturing and assembly capability so that we can produce laser systems
profitably and in large volume.
Already a first-class electronic interconnect house, Palomar Electronics
Corporation embarked in 1995 upon a product development effort which has
successfully yielded three major products, all of which are proprietary, all of
which have patent protection, and all of which are geared toward the fastest
growing segments of the electronic markets.
2
The first set of products involves an improved, and less expensive
approach to making multi-layer flexible circuits that decrease manufacturing
costs by an estimated 30 to 40 percent. We expect these flexible circuits to be
sold to the automotive, computer, digital imaging, medical equipment and
telecommunications industries in large volumes at competitive prices. We have
entered into licensing agreements for high-volume manufacturing and we expect
this business to grow rapidly as the applications for multiple layer, flexible
circuit boards continue to expand.
The second set of products derive from a patented method of increasing
computer memory through flexible circuit boards and low-profile memory chips.
Our memory modules for computer systems have exactly the same space and
interface configuration as standard modules, but can house twice the amount of
memory. We are currently working with several major manufacturers of PC servers
and high-end graphics workstations to incorporate these memory modules in their
computer systems.
The third electronic product developed in 1995 is a proprietary,
upgradeable personal computer system from our Nexar subsidiary. The unique
design of its motherboard allows the average user to replace the microprocessor,
memory modules and disk drive with no training or tools. The PC is as easy to
upgrade as changing a light bulb. It will assist retailers and resellers of PCs
in avoiding inventory obsolescence. With our Nexar product line, retailers and
resellers can buy the basic machine, which rarely changes, and then decide at a
later time, depending on advances in technology and market demand, the kind of
processor, memory, and hard disk drive that they and their customers need. This
next generation PC may revolutionize the economics of the personal computer
business. We shipped our first production units in March 1996 and we expect to
increase production quantities to between 8,000 and 10,000 units per month.
The net effect of the new product development in our electronics group is
that backlog and shipments are increasing dramatically.
In summary, in 1995 we made substantial investments in market and product
development, as well as acquisitions, in order to lay the basic underpinnings
and foundations for sustained future revenue and profit performance. In 1996 we
anticipate strong and rapid growth leading to profitability in 1997.
Sincerely,
/s/ Steven Georgiev
Steven Georgiev
Chairman & CEO of Palomar
3
COSMETIC LASERS
PALOMAR IS THE ONLY COMPANY IN THE WORLD OFFERING A COMPLETE SUITE OF MEDICAL
LASER PRODUCTS TO PERFORM ALL OF THE MAJOR PROCEDURES EMPLOYING COSMETIC LASERS.
To improve their revenue streams, today's health care providers are seeking
medical procedures and sources of income that are not dependent on third-party
reimbursements. It is becoming increasingly clear that cosmetic procedures lead
the list of treatments that people are willing to purchase directly.
Because American society as a whole is greatly concerned about personal
appearance and maintaining youthful features, there is an enormous interest in,
and large sums of money are being spent on, making people look and feel better.
Today's dermatology-cosmetic surgery market is estimated at $1.5 billion
annually.
Among the cosmetic procedures are various treatments to improve the
skin: removing blemishes and unwanted hair, and enhancing the skin's overall
appearance. Because lasers can be easily tuned and tailored to perform varying
interactions with the skin, laser skin procedures are extremely effective for
cosmetic applications.
Palomar is the only laser company with a full range of laser products
for applications in dermatology and cosmetic laser surgery that include tattoo
and skin lesion treatments, spider vein treatments, skin resurfacing and,
pending FDA-clearance, hair removal.
4
SPECTRUM MEDICAL TECHNOLOGIES
THE EPILASER LASER SYSTEM IS A SAFE, SIMPLE, COST-EFFECTIVE SOLUTION FOR
REMOVING UNWANTED HAIR.
[4/COLOR PHOTO]
Palomar's Spectrum Medical Technologies subsidiary is already recognized as a
leader in the cosmetic laser market, with two of its products enjoying
considerable success among dermatologists and cosmetic surgeons. Spectrum's ruby
laser-based systems for the removal of tattoos, age spots, warts and moles are
currently in use. In addition, Palomar is selling and distributing a copper
vapor laser for the removal of spider veins, a condition affecting an estimated
35 percent of American adults. Both products are cleared by the FDA.
We are currently awaiting FDA clearance of our ruby laser for removal
of unwanted hair. If approved, Spectrum's EpiLaser system for hair removal will
propel Palomar into a huge, billion dollar market. An estimated one million
women in the United States alone pay on average $1,000 each year for
electrolysis treatment to remove unwanted facial hair. The process is time
consuming, painful, and can leave scars. Our proprietary laser-based hair
removal system takes less time, requires fewer visits, and is expected to be
more cost effective than other choices.
5
TISSUE TECHNOLOGIES
[4/COLOR PHOTO]
Less than three years ago, virtually no physicians reported using laser
procedures for skin resurfacing. In 1995 the marketplace grew to an estimated
$850 million. With the acquisition of Tissue Technologies, Inc., Palomar has an
immediate presence in this market, and completes its line of laser-based
products for cosmetic applications.
The carbon dioxide laser from Tissue Technologies, which received FDA
clearance to be sold and marketed, performs as well or better than competing
systems, and is substantially less expensive. The marketplace has already
demonstrated strong support for the system: Tissue Technologies has a $20
million order backlog of 400 laser systems (as of February 1996).
With the addition of this laser system to its product line, Palomar
believes it is in the best position in the industry to offer the medical
establishment a complete, turnkey installation of a cosmetic laser center as a
source of incremental revenue and high profitability.
THE RECENT ACQUISITION OF TISSUE TECHNOLOGIES, INC., GIVES PALOMAR A VERY STRONG
PRODUCT ENTRY INTO THE LARGE AND RAPIDLY-GROWING MARKET FOR SKIN RESURFACING.
6
STAR MEDICAL TECHNOLOGIES
[4/COLOR PHOTO]
WE ARE CONFIDENT THAT WE WILL CONTINUE TO BE IN THE FOREFRONT OF DEVELOPING NEW
LASER TECHNOLOGIES AND PRODUCTS TO MEET THE NEEDS OF THE MARKETPLACE.
Over the past year our subsidiary, Star Medical Technologies, has developed
diode laser products for medical and industrial applications. Some of the
products, notably a diode laser for hair removal that will complement our
Spectrum system, are currently in clinical trials. A pulsed laser is under
evaluation as a diagnostic instrument for determining the severity of burns,
while another is being tested for treating tonsillitis without surgery
We believe that diode-based lasers have a bright future and that
development of such systems is critical to the future of our business. Diode
lasers are smaller, more compact, more efficient and less expensive than current
solid-state laser systems. We anticipate some of these products coming to market
in 1997 and 1998.
7
DYNACO
Palomar's Dynaco Division has long been recognized by the aerospace industry as
an innovative supplier of unique flexible printed circuits for demanding
military applications. Now, through its patented Dynaflex process, the company
has lowered its manufacturing costs of "rigid-flex" circuits by a third to make
them more attractive to price-sensitive industrial and consumer markets.
Dynaco ventured into new markets in 1995, designing and manufacturing
rigid-flex applications for the automotive, computer, digital imaging and
telecommunications industries. When space is at a premium, Dynaco's ability to
fold and thereby add a third dimension to the traditional flat circuit board is
particularly attractive. In anticipation of large orders, the company has
entered into agreements with several companies recognized as high volume
manufacturers. For example, licensing arrangements with Wongs Circuits of Hong
Kong, a major supplier to Ford Automotive, gives Dynaco a major foothold in the
automotive industry.
Dynaco's second application of flexible circuitry is a patented
technology called FRAMM (Foldable Rigid Assembly Memory Module) for PC servers
and high-end graphics workstations, which promises significant revenues in 1996.
This product can double memory density yet still occupy the same footprint on a
computer motherboard: a particularly valuable feature for a market that
continuously demands greater memory capacity.
DYNACO'S RIGID-FLEX PRINTED CIRCUITS GIVE THE ELECTRONICS INDUSTRY A RELIABLE,
HIGH PERFORMANCE, LOW-COST PRODUCT THAT CAN FIT INTO A SMALL SPACE.
[4/COLOR PHOTO]
8
NEXAR
[4/COLOR PHOTO]
THIS PERSONAL COMPUTER IS AS EASY TO UPGRADE AS CHANGING A LIGHT BULB. JUST
REMOVE THE SIDE PANEL, UNPLUG THE OUTDATED COMPONENT AND PLUG IN THE NEW ONE.
Palomar's Nexar subsidiary has developed the proprietary and easily upgradeable
personal computer system that could change forever the way in which computers
are sold. The motherboard has been designed so that the microprocessor, memory
boards and hard drive can be replaced easily and quickly by the average user
with no training or tools.
Such a "revolutionary" feature offers a huge advantage to computer
retailers and resellers who face the problem of inventory obsolescence.
Currently, this segment of the computer market must anticipate which
configuration of a computer (processor, memory, hard drive) will sell best, and
then make their order. If they misjudge the market, the resellers and retailers
are left with a large inventory that is difficult and costly to move.
With Nexar's upgradeable PC, resellers and retailers order the basic
"computer box" and then order the right number, size and mix of processor,
memory, and hard drive to meet the prevailing market demand.
9
CORPORATE ORGANIZATION
<TABLE>
<CAPTION>
PALOMAR
MEDICAL GROUP ELECTRONICS GROUP
STAR SPECTRUM TISSUE DYNACO NEXAR
TECHNOLOGIES
<S> <C> <C> <C> <C>
PLEASANTON, CA BOSTON, MA ALBUQUERQUE, NM TEMPE, AZ BOSTON/SAN JOSE
Diode Lasers Ruby & CVL Lasers CO2 Lasers Flex Circuits Upgradeable PCs
Burn Diagnostics Tattoos Skin Resurfacing Aerospace
Tonsillectomy Pigmented Lesions Automotive
Hair Removal Spider Veins Communications
Psoriasis
</TABLE>
[4/COLOR PHOTO]
Palomar's Chief Financial Officer Joseph Caruso, Chairman and Chief Executive
Officer Steven Georgiev and President Michael Smotrich.
Many of the members of Palomar's senior management team, including those
directing the subsidiaries, have extensive experience in operating their own
companies - in several instances public companies - and understand the
real-world requirements of cost-effective operations. The strength and growth of
the Company, to a large degree, is dependent on recruiting the very best people
and giving them the responsibility and authority to grow for success.
10
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
<TABLE>
<S> <C>
12 Management's Discussion and Analysis of Financial Condition and Results of Operations
15 Report of Independent Public Accountants
16 Consolidated Balance Sheets as of December 31, 1994 and December 31, 1995
17 Consolidated Statements of Operations for the nine months ended December 31, 1994
and for the year ended December 31, 1995
18 Consolidated Statements of Stockholders' Equity for the nine months ended December 31, 1994
and for the year ended December 31, 1995
20 Consolidated Statements of Cash Flows for the nine months ended December 31, 1994
and for the year ended December 31, 1995
22 Notes to Consolidated Financial Statements
</TABLE>
11
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
PALOMAR MEDICAL TECHNOLOGIES, INC.
GENERAL
The Company has two business segments: medical products and electronic
products. The majority of the Company's revenues in the year ended December 31,
1995 were derived from the sale of electronic products. The Company does,
however, expect to generate more medical product revenues from increased sales
of the Spectrum Ruby Laser system, the primary product of Spectrum, during the
next twelve-month period both in the U.S. and internationally, as well as the
Copper Vapor Laser, distributed by Spectrum under a distribution agreement with
an unaffiliated company. The Company is awaiting clearance from the FDA to sell
its Epilaser(TM) product for hair removal, however, management is unable to
predict when its Epilaser(TM) product will be cleared for sale in the U.S., if
at all. The Company has signed a purchase and sale agreement with an unrelated
company that sells a C02 laser for skin resurfacing that received FDA clearance
to be sold and marketed. If this acquisition is consummated, the Company feels
that the combined operations will generate a significant level of medical
product revenue. The Company also believes a portion of its revenues will be
derived from government-funded research and development contracts over the next
twelve-month period. The Company is also expecting to introduce a number of new
electronic products during the next twelve months. The effect on revenue can not
at present be determined. The Company has made and will continue to make equity
investments in early stage companies that may generate trading gains and losses.
FISCAL YEAR ENDED DECEMBER 31, 1995, COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1994
For the fiscal year ended December 31, 1995, the Company had revenues of
$21,792,079 as compared to $13,058,523 for the nine months ended December 31,
1994. The majority of the revenues derived for both periods are from sales of
electronic components by the Company's Dynaco subsidiary, which was acquired by
the Company in February 1994.
Gross margins for the fiscal year ended December 31, 1995, were 22% as
compared to 21% for the nine months ended December 31, 1994. The 1% increase in
gross margins was a result of the acquisition of Spectrum in April 1995.
Spectrum, representing 18% of the Company's revenues, had gross margins on
medical laser sales for the year ended December 31, 1995, of 31%.
Research and development costs increased nominally to $3,115,540 for the
fiscal year ended December 31, 1995, from $2,935,563 for the nine months ended
December 31, 1994. This stabilization of Research and Development expenses is
two-fold. First, the Company entered into a cost plus fixed fee research
contract with the U.S. Army in March 1995. As a result, previously self-funded
research and development costs are now funded by this contract and included in
cost of revenues. Also, the Company's Star subsidiary was awarded an SBIR II
contract with the U.S. Air Force, the costs for which are also included in cost
of revenues. Second, the Company is continuing its 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.
The Company is expending some research and development funding for new process
engineering and materials development at Dynaco and has filed several patents to
date as a result of this funding. Management believes that research and
development expenditures will increase over the next few years as the Company
continues clinical trials of its medical products, develops additional
applications for its lasers and delivery systems and develops commercial
applications for unique electronic interconnect packaging.
Selling, General and Administrative expenses increased to $10,004,184 for
the fiscal year ended December 31, 1995, from $3,831,856 for the nine months
ended December 31, 1994. This 161% increase is attributable to the acquisition
of Spectrum Medical and CD Titles as well as the formation of Nexar, Intelesys,
Dynamem and Spectrum Financial Services during the current year. These new
subsidiaries are concentrating on increased sales and marketing of medical and
electronic products. The Company is dramatically increasing its sales and
marketing capabilities in order to support anticipated widespread product
introduction of four major products in 1996. Two of these products are
associated with the medical products segment and two are associated with the
electronics segment. Dynaco, Star, Spectrum, Nexar, CD Titles, Spectrum
Financial Services and their subsidiaries maintain their own sales forces and
general and administrative support staffs.
12
Business Development and Financing Costs increased to $2,109,303 for the
fiscal year ended December 31, 1995, from $1,240,248 for the nine months ended
December 31, 1994. This 70% increase is attributable to the Company's
acquisitions and financing activities during the year.
Interest expense increased to $1,341,617 for the fiscal year ended
December 31, 1995, from $472,348 for the nine months ended December 31, 1994.
This 184% increase is primarily the result of the debt assumed as part of the
Dynaco acquisition, the convertible debentures and other debt issued in late
fiscal 1994 and 1995. Interest expense will continue to increase substantially
during the coming year, as a result of the Company's servicing of approximately
$6,952,590 of senior debt and capital leases resulting from the acquisition of
Dynaco and other debt financing required to meet working capital requirements of
the Company's operating business units.
Interest income increased to $894,062 for the fiscal year ended December
31, 1995, from $36,356 for the nine months ended December 31, 1994. This
increase is primarily the result of interest received on the subscription
receivables and the Company's investments made as a result of the Company's
improved cash position. Trading gains were $201,064 for the fiscal year ended
December 31, 1995. These gains resulted from the sale of certain marketable
securities during the year. It is the Company's intention to continue to invest
in trading securities, which may result in additional trading gains or losses in
the future.
Minority interest in loss of subsidiary increased to $102,305 for the
fiscal year ended December 31, 1995, from $67,601 for the nine months ended
December 31, 1994. This 51% increase is primarily the result of further losses
of the Star subsidiary
The Company has not recorded a deferred tax benefit for net operating
losses as the utilization of such losses is uncertain.
As a result of the foregoing, the net loss for the fiscal year ended
December 31, 1995, was $10,650,975, as compared to a net loss of $5,638,121 for
the nine months ended December 31, 1994.
NINE MONTHS ENDED DECEMBER 31, 1994, COMPARED TO FISCAL YEAR ENDED MARCH 31,
1994
For the nine months ended December 31, 1994, the Company had revenues of
$13,058,523, as compared to $1,568,994 for the fiscal year ended March 31, 1994.
Substantially all of the revenues derived for both periods are from sales of
electronic components by the Company's Dynaco subsidiary, which was acquired by
the Company in February 1994.
Gross margins for the nine months ended December 31, 1994, were a
positive 21% as compared to negative 3.7% for the fiscal year ended March 31,
1994. The 17.3% increase in gross margins was a result of Dynaco's integrating
all manufacturing operations within one facility, thereby increasing the overall
efficiency of the operation.
Research and development cost increased to $2,935,563 for the nine months
ended December 31, 1994, from $1,910,753 for the fiscal year ended March 31,
1994. The 54% increase reflects the Company's continuing commitment to research
and development for medical devices and delivery systems for cardiology,
dermatology, and other medical applications using pulsed dye and diode lasers.
The Company is also expending some research and development funding for new
process engineering and materials development at Dynaco. During the preceding
fiscal year, substantially all of these costs were incurred by the medical
products segment. Over the past nine months, the Company has established
clinical sites for its medial products and the Company has included in total
research and development expenses the costs associated with the manufacture of
these lasers for clinical sites. Management believes that research and
development expenditures will continue to increase over the next few years,
although not necessarily at the current rate, as the Company continues clinical
trials of its medical products and develops additional products for its lasers
and delivery systems.
Selling, General and Administrative expenses increased from $2,137,659
for the fiscal year ended March 31, 1994, to $3,831,856 for the nine months
ended December 31, 1994. This 80% increase is substantially attributable to
Palomar's Dynaco subsidiary being included for the full nine-month period as
compared to a little more than a month for the fiscal year ended March 31, 1994.
Dynaco and Star maintain their own general and administrative support staffs.
Interest expense increased from $91,499 for the fiscal year ended March
31, 1994, to $472,348 for the nine months ended December 31, 1994. This 416%
increase is primarily the result of the debt assumed as part of the Dynaco
Acquisition.
The Company has not recorded a deferred tax benefit for net operating
losses as the utilization of such losses is uncertain.
As a result of the forgoing, the net loss for the nine months ended
December 31, 1994, was $5,638,121 as compared to a net loss of $4,062,905 for
the fiscal year ended March 31, 1994.
13
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995, the Company had $17,762,737 in cash, cash
equivalents and trading securities. During the fiscal year ended December 31,
1995, the Company raised approximately $2,514,000, $3,118,000, $19,385,000 and
$6,195,000 in net proceeds from the sale of its common stock in an unregistered
offering to overseas investors, the issuance of 7% and 8% convertible
debentures, the sale of its preferred stock and the exercise of stock warrants,
respectively. Subsequent to year end, the Company has received total proceeds of
approximately $13,033,000 from the sale of common stock, Series D Convertible
Preferred Stock, the exercise of stock warrants and payment of subscription
receivables.
The Company's net loss for the year ended December 31, 1995, included the
following noncash items: $1,745,279 of depreciation and amortization expense;
$220,280 of additional interest expense relating to the amortization of the
discounts on the convertible debentures; and $95,370 in investment banking fees
paid with common stock and warrants issued below fair market value.
On May 31, 1995, Dynaco's revolving credit and term loan agreement with a
bank, which provided Dynaco with a $2,000,000 revolving line of credit and a
$750,000 term loan expired, and was replaced by a three-year revolving credit
and security agreement with a financial institution. The agreement provides for
the revolving sale of acceptable accounts receivable, as defined in the
agreement, with recourse up to a maximum commitment of $3,000,000. As of
December 31, 1995, the amount of accounts receivable sold that remained
uncollected totaled $1,296,462 net of related reserves and fees, as defined in
the agreement. This amount is classified as a revolving line of credit in the
accompanying balance sheet as of December 31, 1995. The interest rate on such
outstanding amounts is the bank's prime rate (8.5% at December 31, 1995) plus
1.5%, and interest is payable monthly in arrears. The financing is
collateralized by the purchased accounts receivable and substantially all of
Dynaco's assets. In addition, on August 31, 1995, Spectrum's revolving line of
credit with a bank expired.
The Company has been successful in obtaining external research funding,
including approximately $4.5 million in two-year U.S. government research and
development contracts awarded to the Company in March 1995. A large part of the
Company's medical products businesses are still in the developmental stage, with
significant research and development costs and regulatory constraints that
currently limit sales of its medical products. 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 also makes early stage investments in core technologies and
companies that management feels are strategic to the Company's business or will
yield a higher than average financial return to support the Company's core
business. At December 31, 1995, the Company had $1,200,000 outstanding relating
to these investments. Subsequent to year end, the Company has invested an
additional $3,598,525 in technology companies in the form of marketable and
nonmarketable equity securities. Some of these investments are with companies
that are related to some of the directors and officers of the Company. See
"Related Party Transactions".
The Company has had significant losses to date and expects these losses
to continue for the near future. Therefore, the Company must continue to secure
additional financing to complete its research and development activities,
commercialize its current and proposed medical products, expand its current
non-medical business, execute its acquisition business plan and fund ongoing
operations. The Company believes that the cash generated to date from its
financing activities and amounts available under its credit agreement will be
sufficient to satisfy its working capital requirements through at least the next
twelve months. However, there can be no assurance that events in the future will
not require the Company to seek additional financing sooner. The Company
continues to investigate several financing alternatives, including additional
government research grants, strategic partnerships, additional bank financing,
private debt and equity financing and other sources. The Company believes that
it has adequate cash reserves or it will be successful in obtaining additional
financing in order to fund current operations in the near future.
14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
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, 1994 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for the nine months and year
then ended, respectively. 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.
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, 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, 1994 and 1995, and the
results of their operations and their cash flows for the nine months and year
then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSON, LLP
Boston, Massachusetts,
March 26, 1996.
15
CONSOLIDATED BALANCE SHEETS
PALOMAR MEDICAL TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995
----------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,218,994 $ 17,013,327
Marketable securities 50,000 749,410
Accounts receivable, net of allowance for doubtful accounts of
approximately $445,000 and $156,000, respectively 2,378,738 4,623,841
Inventory 1,458,274 3,519,884
Current portion of deferred costs 436,225 462,787
Loans to officers 306,813 948,198
Notes receivable from related party -- 3,161,375
Other current assets 135,158 352,130
-------------- --------------
Total current assets 7,984,202 30,830,952
-------------- --------------
Property and Equipment, at Cost, Net 2,382,478 3,117,331
-------------- --------------
Other Assets:
Cost in excess of net assets acquired, net of accumulated amortization
of $228,328 and $673,167, respectively 2,341,990 3,729,508
Intangible assets, net of accumulated amortization of $73,618 -- 1,223,373
Deferred costs, net of current portion 467,760 346,333
Long-term investment -- 500,000
Loan to related party -- 700,000
Other assets 395,962 626,920
-------------- --------------
Total other assets 3,205,712 7,126,134
-------------- --------------
$ 13,572,392 $ 41,074,417
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving lines of credit $ 1,613,000 $ $1,296,462
Current portion of long-term debt 1,814,203 2,474,265
Contingent note payable -- 500,000
Accounts payable 1,816,216 3,879,825
Accrued expenses 1,412,545 4,077,555
-------------- --------------
Total current liabilities 6,655,964 12,228,107
-------------- --------------
Long-Term Debt, Net of Current Portion 4,041,422 2,380,172
-------------- --------------
Minority Interest in Subsidiary 80,936 --
-------------- --------------
Commitments and Contingencies (Note 11)
Stockholders' Equity:
Preferred stock, $.01 par value
Authorized - 5,000,000 share
Issued and outstanding - 13,860 shares at December 31, 1995 -- 139
(Liquidation preference of $13,982,903)
Common stock, $.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 8,432,735 shares at December 31, 1994
and 18,133,139 shares at December 31, 1995 84,327 181,331
Treasury Stock (200,000 shares at cost) -- (1,211,757)
Additional paid-in capital 15,775,056 53,326,032
Accumulated deficit (13,065,313) (23,840,898)
Subscriptions receivable from related party -- (1,988,709)
-------------- --------------
Total stockholders' equity 2,794,070 26,466,138
-------------- --------------
$ 13,572,392 $ 41,074,417
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
16
CONSOLIDATED STATEMENT OF OPERATIONS
PALOMAR MEDICAL TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
December 31, 1994 December 31, 1995
----------------- -----------------
<S> <C> <C>
Revenues $ 13,058,523 $ 21,792,079
Cost of Revenues 10,320,586 17,069,844
-------------- --------------
Gross profit 2,737,937 4,722,235
-------------- --------------
Operating Expenses
Research and development 2,935,563 3,115,540
Selling, general and administrative 3,831,856 10,004,184
Business development and other financing 1,240,248 2,109,303
-------------- --------------
Total operating expenses 8,007,667 15,229,027
-------------- --------------
Loss from operations (5,269,730) (10,506,792)
Interest Expense (472,348) (1,341,617)
Interest Income 36,356 894,062
Net Gain on Trading Securities -- 201,067
Minority Interest in Loss of Subsidiary 67,601 102,305
-------------- --------------
Net loss $ (5,638,121) $ (10,650,975)
============== ==============
Net Loss Per Common Share $ (0.87) $ (0.88)
============== ==============
Weighted Average Number of
Common Shares Outstanding 6,511,677 12,285,426
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF STOCKHOLDER EQUITY
PALOMAR MEDICAL TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Number $0.01 Number $0.01
of Shares Par Value of Shares Par Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, March 31, 1994 -- $ -- 5,231,575 $ 52,316
Sale of common stock, net of issuance costs -- -- 2,409,000 24,090
Sale of common stock pursuant to warrants -- -- 25,000 250
Issuance of common stock for technology -- -- 60,000 600
Issuance of common stock for investment banking, merger
and acquisition consulting services -- -- 282,160 2,821
Issuance of restricted stock to officers and consultants
for services rendered -- -- 425,000 4,250
Compensation expense related to stock options -- -- -- --
Compensation expense related to warrants issued
to consultants and investment bankers -- -- -- --
Value ascribed to convertible debentures -- -- -- --
Amortization of deferred financing costs -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
---------- ------------ ---------- -----------
Balance, December 31, 1994 -- -- 8,432,735 84,327
Sale of common stock pursuant to warrants -- -- 2,640,093 26,401
Sale of common stock pursuant to Regulation S -- -- 1,391,752 13,918
Payments received on subscriptions receivable -- -- -- --
Issuance of preferred stock, including common stock issued
as a placement fee, net of issuance costs 21,295 213 300,000 3,000
Purchase of treasury stock -- -- -- --
Issuance of common stock pursuant to stock options -- -- 285,000 2,850
Issuance of common stock in lieu of payment of notes payable -- -- 632,144 6,321
Repayment of convertible debentures -- -- -- --
Conversion of convertible debentures -- -- 1,943,870 19,438
Value ascribed to convertible debentures -- -- -- --
Conversion of preferred stock (7,435) (74) 1,775,691 17,757
Exercise of underwriter's warrants -- -- 200,000 2,000
Issuance of common stock for Spectrum Medical Technologies, Inc. -- -- 364,178 3,642
Issuance of common stock for investment banking and merger
and acquisition consulting services -- -- 167,676 1,677
Amortization of deferred financing costs -- -- -- --
Compensation expense related to warrants issued to
consultants and investment bankers -- -- -- --
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
---------- ------------ ---------- -----------
Balance, December 31, 1995 13,860 $ 139 18,133,139 $ 181,331
========== ============ ========== ===========
</TABLE>
18
<TABLE>
<CAPTION>
Treasury Stock
-------------- Total
Number Additional Additional Subscriptions Deferred Stockholders'
of Shares Cost Paid-in Capital Deficit Receivable Compensation Equity
- --------- ---- --------------- ------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
-- $ -- $ 8,929,614 $ (7,427,192) $ -- (89,008) $ 1,465,730
-- -- 3,937,295 -- -- -- 3,961,385
-- -- 23,417 -- -- -- 23,667
-- -- 209,400 -- -- -- 210,000
-- -- 992,323 -- -- -- 995,144
-- -- 872,313 -- -- -- 876,563
-- -- 125,000 -- -- -- 125,000
-- -- 151,250 -- -- -- 151,250
-- -- 550,000 -- -- -- 550,000
-- -- (15,556) -- -- -- (15,556)
-- -- -- -- -- 89,008 89,008
-- -- -- (5,638,121) -- -- (5,638,121)
- -------- ------------- ------------ --------------- ---------------- ------------- --------------
-- -- 15,775,056 (13,065,313) -- -- 2,794,070
-- -- 7,107,689 -- (4,633,975) -- 2,500,115
-- -- 2,500,226 -- -- -- 2,514,144
-- -- -- -- 3,694,840 -- 3,694,840
-- -- 19,382,750 -- -- -- 19,385,963
(200,000) (1,211,757) -- -- -- -- (1,211,757)
-- -- 481,199 -- -- -- 484,049
-- -- 1,873,611 -- -- -- 1,879,932
-- -- (321,533) -- -- -- (321,533)
-- -- 3,071,302 -- -- -- 3,090,740
-- -- 899,813 -- -- -- 899,813
-- -- 68,377 -- -- -- 86,060
-- -- 1,049,574 -- (1,049,574) -- 2,000
-- -- 996,358 -- -- -- 1,000,000
-- -- 416,823 -- -- -- 418,500
-- -- (70,583) -- -- -- (70,583)
-- -- 95,370 -- -- -- 95,370
-- -- -- (124,610) -- -- (124,610)
-- -- -- (10,650,975) -- -- (10,650,975)
- -------- ------------- ------------ --------------- ---------------- ------------- --------------
(200,000) $ (1,211,757) $ 53,326,032 $ (23,840,898) $ (1,988,709) $ -- $ 26,466,138
======== ============= ============ =============== ================ ============= ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
PALOMAR MEDICAL TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Nine Months ended Year ended
December 31, 1994 December 31, 1995
----------------- -----------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (5,638,121) $ (10,650,975)
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization 610,385 1,745,279
Loss on disposal of equipment 12,250 --
Write-off of in-process research and development 110,746 --
Inventory used in clinical trials 494,782 --
Minority interest in loss of subsidiary (67,601) (102,305)
Noncash interest expense related to debt 77,076 220,280
Amortization of deferred compensation costs 89,008 --
Noncash compensation related to common stock,
stock options and warrants 1,630,917 95,370
Unrealized gain on marketable securities -- (133,568)
Changes in assets and liabilities, net of effects from purchase of
Spectrum Medical Technologies, Inc., CD Titles, Inc. and
Inter-connecting Products, Inc.
Purchases of marketable trading securities -- (615,842)
Sale of marketable trading securities -- 50,000
Accounts receivable (1,219,807) (1,365,607)
Inventories 148,388 (1,289,030)
Other current assets and loans to officers (365,578) (658,012)
Accounts payable 913,290 1,402,975
Accrued expenses (258,656) 2,295,887
-------------- --------------
Net cash used in operating activities (3,462,921) (9,005,548)
-------------- --------------
Cash Flows from Investing Activities
Cash acquired from purchase of Spectrum Medical
Technologies, Inc. and CD Titles, Inc. -- 101,207
Cash paid for purchase of Inter-connecting Products, Inc. -- (397,199)
Purchases of property and equipment (649,861) (1,095,495)
Increase in other assets (174,331) (427,845)
Loans to related parties -- (3,861,375)
Investment in nonmarketable securities -- (500,000)
Increase in organizational costs -- (500,000)
Increase in deferred costs -- (215,304)
-------------- --------------
Net cash used in investing activities (824,192) (6,896,011)
-------------- --------------
Cash Flows from Financing Activities
Proceeds from issuance of convertible debentures 550,000 3,300,000
Proceeds from notes payable 2,200,000 2,530,000
Deferred financing costs incurred related to convertible debentures (192,500) (182,000)
Repayment of convertible debentures -- (1,048,967)
Payments of notes payable and capital lease obligations (181,158) (1,653,957)
Net proceeds (payments) from revolving lines of credit 111,000 (616,538)
Proceeds from sale of common stock pursuant to Reg S 3,985,052 2,514,144
Exercise of warrants, net of redemption of $29,118 in 1995 -- 6,194,955
Issuance of preferred stock -- 19,385,963
Purchase of treasury stock -- (1,211,757)
Proceeds from exercise of stock options -- 484,049
-------------- --------------
Net cash provided by financing activities 6,472,394 29,695,892
-------------- --------------
Net increase in cash and cash equivalents 2,185,281 13,794,333
Cash and cash equivalents, beginning of period 1,033,713 3,218,994
-------------- --------------
Cash and cash equivalents, end of period $ 3,218,994 $ 17,013,327
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
PALOMAR MEDICAL TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Nine Months ended Year ended
December 31, 1994 December 31, 1995
----------------- -----------------
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 249,097 $ 542,294
============== ==============
Supplemental Disclosure of Noncash Financing Activities
Conversion of convertible debt and related accrued
interest, net of financing fees $ -- $ 3,090,740
============== ==============
Subscriptions received in connection with warrant
exercises $ -- $ 1,988,709
============== ==============
Amortization of deferred financing costs $ 15,556 $ 70,583
============== ==============
Issuance of common stock in lieu of payment of notes payable$ $ -- $ 1,879,932
============== ==============
Conversion of preferred stock $ -- $ 86,060
============== ==============
Dividends payable $ -- $ 124,610
============== ==============
Acquisition of Spectrum Medical Technologies, Inc.
Liabilities assumed $ -- $ (1,128,139)
Fair value of assets acquired -- 1,456,920
Fair value of 364,178 shares of common stock issued -- (1,000,000)
Promissory note issued -- (700,000)
Cash Paid -- (300,000)
Acquisition costs incurred -- (161,138)
-------------- --------------
Cost In Excess of Net Assets Acquired $ -- $ (1,832,357)
============== ==============
Acquisition of CD Titles, Inc.
Liabilities assumed $ -- $ (1,271,345)
Fair value of assets acquired -- 1,271,345
-------------- --------------
Cost In Excess of Net Assets Acquired $ -- $ --
============== ==============
Acquisition of Inter-connecting Products, Inc.
Liabilities assumed $ -- $ (201,761)
Fair value of assets acquired -- 598,960
Cash paid -- (397,199)
-------------- --------------
Cost In Excess of Net Assets Acquired $ -- $ --
============== ==============
Prepaid investment banking fees resulting from stock
issued in lieu of cash payment $ 890,625 $ 120,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(1) ORGANIZATION AND OPERATIONS
Palomar Medical Technologies, Inc. ("Palomar" or the "Company") is
engaged in two business segments: medical device products and electronic
products. The medical device products segment consists of the commercial sales
and development of cosmetic and medical laser systems for use in dermatology and
cardiology. Through the Company's wholly-owned subsidiary, Palomar Electronics
Corporation, the Company is also engaged in the manufacture and sale of high
density, flexible electronic circuitry for use in industrial, military and
medical devices. The Company is also introducing a number of proprietary
products targeted to service the personal computer industry. The Company also
makes early stage investments in core technologies and companies that management
feels are strategic to the Company's business or will yield a higher than
average financial return to support the Company's core business. Some of these
investments are with companies associated with some of the directors and
officers of the Company (See Notes 9 and 13).
Some of the Company's medical laser and electronic products are in the
development stage, and, as such, success of future operations is subject to a
number of risks similar to those of other companies in the same stage of
development. Principal among these risks are the successful development and
marketing of its products, proper regulatory approval, the need to achieve
profitable operations, competition from substitute products and larger
companies, the need to obtain adequate financing to fund future operations and
dependence on key individuals.
The Company has incurred significant losses since inception; information
subsequent to year-end indicates that losses are continuing. The Company
continues to seek additional financing from common stock and/or other
prospective sources in order to fund future operations. During the year ended
December 31, 1995, the Company raised approximately $2,514,144 in funding from
the sale of 1,391,752 shares of common stock under Regulation S of the
Securities and Exchange Act of 1933, approximately $3,118,000 in private
convertible debentures under Regulation S and Regulation D of the Securities and
Exchange Act of 1933, and approximately $19,500,000 from the sales of preferred
stock.
MEDICAL SEGMENT BUSINESS DEVELOPMENTS
ACQUISITION OF STAR MEDICAL TECHNOLOGIES, INC.
On July 1, 1993, the Company acquired 400,000 shares (representing 80%
ownership) of common stock of Star Medical Technologies, Inc. ("Star"), a
development stage company that was formed on April 1, 1993. Since July 1993, the
Company has acquired an additional 190,000 shares (representing a total
ownership of 85.5%) for $970,000 in cash. The acquisition of these shares has
been accounted for as a purchase in accordance with Accounting Principles Board
Opinion No. 16 Accounting for Business Combinations (APB 16). Accordingly, the
Company has allocated the purchase price based on the fair market value of the
assets acquired and liabilities assumed. The Company expensed approximately
$111,000 during the nine months ending December 31, 1994 representing the excess
purchase price over the fair market value of assets acquired as in-process
research and development technology in the accompanying statements of
operations.
ACQUISITION OF SPECTRUM MEDICAL TECHNOLOGIES, INC.
On April 5, 1995, the Company acquired all of the outstanding common
stock of Spectrum Medical Technologies, Inc. ("Spectrum"). The purchase price
consisted of $300,000 in cash, a $700,000 two-year promissory note, 364,178
shares of the Company's common stock with an aggregate fair market value of
$1,000,000, acquisition costs of $161,138 and assumed liabilities totaling
$1,128,139. In addition, the purchase price consists of a 20% contingency
payment, payable in the Company's common stock, based upon the future earnings
performance of Spectrum over a three-to five-year period. Spectrum develops,
manufactures, sells and services Ruby Lasers throughout the world for
dermatological applications. The acquisition has been accounted for as a
purchase in accordance with APB 16.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(1) ORGANIZATION AND OPERATIONS (CONTINUED)
FORMATION OF SPECTRUM FINANCIAL SERVICES LLC
On June 30, 1995, the Company formed Spectrum Financial Services LLC
("SFS"), a Limited Liability Company. SFS provides financial leasing services
for medical and electronic manufacturers both related and unrelated to the
Company. The Company has majority control over the operating activities of this
entity. Accordingly, the Company has consolidated the results of operations and
financial position of SFS since the date of formation. The operations of SFS
during 1995 were not significant.
ELECTRONICS SEGMENT BUSINESS DEVELOPMENTS
FORMATION OF DYNASYS SYSTEMS CORPORATION
On March 7, 1995, the Company formed Dynasys Systems Corporation
("Dynasys"), a wholly-owned subsidiary. The subsidiary was subsequently renamed
Nexar Technologies, Inc. ("Nexar"). Nexar is an early-stage company that plans
to manufacture, market and sell personal computers with a unique circuit board
design that will enable end users to upgrade and replace the microprocessor,
memory and hard drive components. Nexar intends to market its products using
various proprietary brand names through multiple channels of distribution,
including the wholesale, retail and direct response channels. Operations to date
have not been significant.
ACQUISITION OF INTER-CONNECTING PRODUCTS, INC.
On June 5, 1995, Dynaco acquired certain assets and assumed certain
liabilities of Inter-Connecting Products, Inc. ("ICP"), a division of ALLARD
Industries, Inc., for $397,199 in cash, and assumed certain liabilities totaling
$201,761. ICP specializes in cable and wire harness assemblies, coaxial cable
assemblies and electromagnetic assemblies. ICP supplies complimentary products
to Dynaco and its customers. The acquisition has been accounted for as a
purchase in accordance with APB 16. Accordingly, the Company has allocated the
purchase price based on the fair market value of the assets acquired and
liabilities assumed.
ACQUISITION OF CDRP, INC.
On July 13, 1995, CD Titles, Inc. ("CD Titles") was incorporated, and the
Company owns substantially all of CD Titles' common stock. During July 1995,
certain minority stockholders loaned CD Titles a total of $600,000 (see Note 9).
On July 31, 1995, CD Titles purchased certain assets and assumed certain
liabilities of CDRP, Inc. totaling $1,271,345. The purchase price consisted of
$625,000 in cash and a $600,000 note payable to CDRP due September 30, 1995,
which was guaranteed by the Company. CD Titles is a CD ROM publishing company
that distributes various materials on CD ROM through personal computer wholesale
channels in the United States. The acquisition has been accounted for as a
purchase in accordance with the APB 16.
CD Titles defaulted on its loans to the minority stockholders, and on
October 30, 1995, the Company negotiated a settlement with the minority
stockholders by agreeing to issue 257,144 shares of the Company's common stock
in lieu of the then outstanding principal and accrued interest (approximately
$794,000 at October 30, 1995). The common stock was issued at a 35% discount of
the closing bid price of the stock on October 30, 1995. The discount represented
the Company's cost of acquiring capital and was consistent with discounts
offered in similar financings.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(1) ORGANIZATION AND OPERATIONS (CONTINUED)
ACQUISITION OF CDRP, INC. (CONTINUED)
In addition to the settlement of the minority stockholders' notes, the
Company entered into a settlement agreement with the former stockholders of
CDRP, Inc. Pursuant to the settlement agreement, the Company registered 175,000
shares of its authorized, but unissued, common stock (the "pledged shares")
which were then issued to CDRP for resale. As part of the agreement, CDRP would
sell only the amount of pledged shares to receive proceeds equal to the
outstanding principal and accrued interest on the note payable, which totaled
$628,531, due on September 30, 1995, as part of the acquisition of CDRP, Inc.
Subsequent to year-end, CDRP returned 46,000 of the pledged shares, which
represents the unused portion. The Company has retired the returned shares.
FORMATION OF DYNAMEM, INC.
On September 28, 1995, Dynaco formed Dynamem Corporation ("Dynamem") (a
Delaware corporation) and contributed $8,000 for a majority (80%) ownership in
this subsidiary. The remaining 20% ownership is owned by the President of
Dynamem. Dynamem was formed to manufacture and distribute a patented,
high-density memory packaging technology.
FORMATION OF PALOMAR ELECTRONICS CORPORATION
On September 15, 1995, the Company formed a wholly-owned subsidiary,
Palomar Electronics Corporation ("PEC"), as part of a reorganization to separate
the electronics and computer operations of the Company's business from the
medical laser segments of its business. On September 29, 1995, as part of this
reorganization, the Company contributed all of its outstanding capital stock of
Dynaco and Nexar, together with certain intercompany indebtedness, to PEC in
exchange for 4,500,000 shares of common stock of PEC. On December 21, 1995, PEC
issued 10% bridge notes payable to certain investors for an aggregate
consideration of $1,350,000 (see Note 4). In connection with these notes, PEC
issued to the noteholders warrants to purchase up to 240,000 shares of its
common stock. During the year ended December 31, 1995, the Company started, but
did not complete an initial public offering of PEC and incurred costs of
approximately $438,000. This amount is included in business development and
other financing costs in the accompanying statements of operations for the year
ended December 31, 1995.
FORMATION OF INTELLIGENT COMPUTER TECHNOLOGIES, INC. AND ACQUISITION OF
INTELESYS INC.
On August 25, 1995 the Company formed Intelligent Computer Technologies,
Inc. ("ICT"). On November 10, 1995, ICT acquired substantially all of the assets
of Intelesys Inc. by paying $125,00 in cash and assumed certain liabilities. As
a result of the acquisition, the Company acquired the lease to a modern 16,600
square foot manufacturing facility capable of producing approximately 7,000
computer units per month.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(1) ORGANIZATION AND OPERATIONS (CONTINUED)
PRO FORMA INFORMATION
The results of operations related to Spectrum have been included with those of
the Company since April 5, 1995.
The results of operations related to ICP have been included with those of the
Company since June 5, 1995.
The results of operations related to CD Titles, Inc./CDRP have been included
with those of the Company since July 31, 1995.
The results of operations related to ICT have been included with those of the
Company since August 24, 1995.
Unaudited pro forma operating results for the Company, assuming the acquisitions
of Spectrum and ICP had been made as of April 1, 1994, are as follows
(operations of CDRP prior to acquisition were insignificant):
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
December 31, 1994 December 31, 1995
----------------- -----------------
<S> <C> <C>
Revenue $ 46,149,493 $ 29,665,918
Net loss (6,379,060) (14,886,706)
Net loss per common share $ (0.93) $ (1.20)
</TABLE>
(2) 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) CHANGE IN FISCAL YEAR
During 1994, the Company changed its fiscal year-end from March 31 to
December 31.
(B) 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. Other investments
are accounted for using the cost method. All intercompany transactions have been
eliminated in consolidation.
(C) 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. The Company
also has investments in marketable and nonmarketable securities and loans to
related parties totaling $8,047,692. The amount that the Company may ultimately
realize from these investments could differ materially from the value of these
investments recorded in the accompanying financial statements as of December 31,
1995.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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, 1994 and 1995, inventories
consist of the following:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995
----------------- -----------------
<S> <C> <C>
Raw Materials $ 619,238 $ 1,819,288
Work in process and finished goods 1,161,948 2,008,389
Less--Progress billings 322,912 307,793
---------------- ----------------
$ 1,458,274 $ 3,519,884
</TABLE>
(E) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization on property and
equipment using the straight-line method, by charging to operations amounts that
allocate the cost of assets over their estimated useful lives as follows:
Estimated
Asset Classification Useful Life
-------------------- -----------
Equipment under capital leases Term of Lease
Machinery and Equipment 5-8 Years
Furniture and Fixtures 5 Years
Leasehold improvements Term of Lease
Property and Equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995
----------------- -----------------
<S> <C> <C>
Equipment under capital leases $ 1,070,000 $ 1,214,950
Machinery and equipment 1,098,437 1,967,219
Furniture and fixtures 426,230 787,854
Leasehold improvements 278,062 299,043
---------------- ----------------
2,872,729 4,269,066
Less: Accumulated depreciation
and amortization 490,251 1,151,735
---------------- ----------------
$ 2,382,478 $ 3,117,331
================ ================
</TABLE>
(F) REVENUE RECOGNITION
The Company recognizes product revenue upon shipment. Design and tooling
revenue is recognized upon customer acceptance. Occasionally, revenue is
recognized upon completion of a phase of the order when contractually accepted
by the customer. Provisions are made at the time of revenue recognition for any
applicable warranty costs expected to be incurred.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) COST IN EXCESS OF NET ASSETS ACQUIRED AND OTHER INTANGIBLES
The cost in excess of net assets acquired for Dynaco and Spectrum is
being amortized on a straight-line basis over a period of 10 and 7 years,
respectively, and is as follows:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995
----------------- -----------------
<S> <C> <C>
Dynaco $ 2,570,318 $ 2,570,318
Spectrum -- 1,832,357
---------------- ----------------
2,570,318 4,402,675
Less: accumulated amortization 228,328 673,167
---------------- ----------------
$ 2,341,990 $ 3,729,508
================ ================
</TABLE>
Amortization expense for the nine months ended December 31, 1994, and
year ended December 31, 1995, amounted to approximately $196,000 and $445,000,
respectively, and is included in selling, general and administrative expenses in
the accompanying consolidated statements of operations.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets To Be Disposed Of (SFAS No. 121), in March 1995. 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 is not required to
adopt SFAS No. 121 until January 1, 1996. However, management believes that the
adoption of SFAS No. 121 will not have a material impact on the Company's
financial position or results of operations.
Other intangibles include the cost of licenses and technologies acquired
through the purchase of product rights and licenses during 1995. These
intangibles are being amortized over a period of five years. Amortization
expense for the year ended December 31, 1995 amounted to $73,618, and is
recorded in selling, general and administrative expenses in the Company's
consolidated statements of operations.
As part of the formation and organization of PEC and Nexar, the Company
agreed to settle a complaint brought against Palomar and the president of Nexar.
As part of the settlement, the Company was required to pay $525,000 and agreed
to issue warrants to purchase 108,000 shares of the Company's common stock at
$5.00 per share. The Company has reflected these amounts as an organizational
cost, which is included in intangible assets and is being amortized over four
years.
(H) NET LOSS PER COMMON SHARE
For the nine months ended December 31, 1994, net loss per common share
has been computed by dividing the net loss by the weighted average number of
shares of common stock outstanding during the period. For the year ended
December 31, 1995, net loss per common share has been computed by dividing net
loss, as adjusted for preferred stock dividends, by the weighted average number
of shares of common stock outstanding during the period. Common stock
equivalents are not considered as outstanding, as the result would be
antidilutive.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) NET LOSS PER COMMON SHARE (CONTINUED)
The loss was adjusted by the aggregate amount of accrued by unpaid
dividends on the Company's preferred stock as follows during the year ended
December 31, 1995:
Series A Redeemable Convertible Preferred Stock $ 12,500
Series B Redeemable Convertible Preferred Stock 12,500
Series C Redeemable Convertible Preferred Stock 12,500
Series I Class A Redeemable Convertible Preferred Stock 29,910
Series II Class A Redeemable Convertible Preferred Stock 57,200
----------------
$ 124,610
================
(I) INVESTMENTS
The fair values for the Company's marketable equity securities are based
on quoted market prices. The fair values of nonmarketable equity securities,
which represent equity investments in early stage technology companies, are
based on the financial information provided by these ventures. The amount that
the Company realizes from these investments may differ significantly from the
amounts recorded in the accompanying consolidated financial statements.
The Company accounts for investments in accordance with 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 will be reported at amortized cost and are classified as
held-to-maturity. There were no held-to-maturity securities as of December 31,
1994 and 1995. Securities purchased to be held for indefinite periods of time
and not intended at the time of purchase to be held until maturity are
classified as available-for-sale securities. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities. Realized and unrealized gains and losses relating to trading
securities are included currently in the accompanying statements of operations.
<TABLE>
<CAPTION>
December 31, 1994
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gain Loss Value
----- ---- ---- -----
<S> <C> <C> <C> <C>
Available-for-Sale:
Investment in a publicly traded company $ 50,000 $ -- $ -- $ 50,000
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gain Loss Value
----- ---- ---- -----
<S> <C> <C> <C> <C>
Trading Securities:
Investments in publicly traded companies $ 615,842 $ 137,170 $ 3,602 $ 749,410
</TABLE>
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) INVESTMENTS (CONTINUED)
During the year ended December 31, 1995, the Company sold its
Available-for-Sale Securities in a publicly traded company realizing a gain of
$67,500, which is reflected in the accompanying consolidated statement of
operations.
(J) DEFERRED COSTS
Deferred costs consisted of the following at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995
----------------- -----------------
<S> <C> <C>
Prepaid investment banking fees $ 727,041 $ 290,816
Deferred financing costs, net 176,944 518,304
---------------- ----------------
903,985 809,120
Less-current portion 436,225 462,787
---------------- ----------------
$ 467,760 $ 346,333
================ ================
</TABLE>
On August 19, 1994, the Company entered into an investment services
agreement whereby an investment banker would provide merger and acquisition
consulting services over a two-year period ending August 1996. In exchange for
these services, the Company issued the investment banker 250,000 shares of
common stock valued at the fair market value of the Company's common stock at
the date of grant. The Company expensed approximately $164,000 and $436,000 of
these prepaid fees during the nine months ended December 31, 1994, and year
ended December 31, 1995, respectively.
During the nine months ended December 31, 1994, and year ended December
31, 1995, the Company incurred financing costs related to several issuances of
convertible debentures (see Note 4) and bridge notes payables (see below).
Deferred financing costs related to convertible debentures totaling $238,333
remained outstanding at December 31, 1995. In addition, during 1995, the Company
also issued 60,000 shares of common stock, valued at the fair market of the
Company's common stock of $120,00 at the date of grant, for various consulting
services to be performed over a five-year period. The Company amortized $12,000
during the year ended December 31, 1995, related to the prepaid fees.
On December 21, 1995, PEC issued $1,350,000 of bridge notes payable and
incurred $175,500 of financing costs. This amount is being amortized over the
expected life of the bridge notes. However, it is the Company's intention to
repay these notes by December 31, 1996. Accordingly, the unamortized balance of
$171,971 at December 31, 1995 has been classified as a current portion of
deferred cost in the accompanying consolidated balance sheet.
(K) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as
incurred.
(L) SIGNIFICANT CUSTOMERS
For the nine months ended December 31, 1994, one customer accounted for
19.4% of revenues and 30.4% of accounts receivable. For the year ended December
31, 1995, one customer accounted for 10.4% of revenues and 11.5% of accounts
receivable. The Company's Dynaco subsidiary conducts business with two suppliers
who are critical to the procurement of certain inventory items.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(M) CONCENTRATION OF CREDIT RISK
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosures of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentration
of credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements. The Company's accounts receivable credit risk is
not within any geographic area. The Company has issued notes and made
investments to various related parties totaling $7,595,532 as of December 31,
1995 (see Note 9). Included in this amount are unsecured loans of $1,988,709 to
and for the benefit of a Director of the Company's underwriter. During the year
ended December 31, 1995, the Company also made strategic equity investments
totaling $1,200,000 in two privately held technology companies. Subsequent to
year-end, the Company purchased additional marketable and nonmarketable
securities totaling $3,598,525 in several companies and has loaned to or made
other investments in certain related entities totaling $5,140,000.
Also subsequent to year-end, the Company sold $250,653 of its investment
in a publicly traded stock classified as a trading security at December 31,
1995, and recognized a gain of $286,256. As of March 26, 1996, the Company also
liquidated in the form of cash $5,146,096 of investments and notes receivable
made as of and subsequent to December 31, 1995, associated with various related
parties as discussed above.
(N) 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. The fair value of financial instruments pursuant to SFAS No. 107
approximated their carrying values at December 31, 1994 and 1995. Fair values
have been determined through information obtained from market sources and
management estimates.
(O) RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 consolidated
financial statements to conform with the current year's presentation.
(3) 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, 1995, the Company had available, subject to review and possible
adjustment by the Internal Revenue Service, a federal net operating loss
carryforward of approximately $17,458,000 to be used to offset future taxable
income, if any. This net operating loss carryforward will begin to expire in
2002. The Internal Revenue Code contains provisions that limit the net operating
loss carryforwards due to changes in ownership, as defined by the Internal
Revenue Code. The Company believes that its net operating loss carryforwards
will be limited due to its reorganization in 1991 and subsequent stock
offerings. The Company has not recorded a deferred tax asset for the net
operating losses, due to uncertainty relating to the Company's ability to
utilize such carryovers.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(4) LONG-TERM DEBT
(A) NOTES PAYABLE
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995
----------------- -----------------
<S> <C> <C>
Demand notes payable to an officer, repaid in 1995 $ 550,000 $ --
7% note payable, due July 1, 1994 244,782 244,782
7.4% to 21% Capital lease obligations, monthly principal and interest
payments ranging from $2,290 to $51,235, maturities
ranging from August 1997 to January 1999 1,411,200 1,393,612
Present value of notes payable, discounted at 8% and due in annual
installments of principal and interest of $100,000, $200,000, $200,000
and $100,000 in fiscal 1995, 1996, 1997 and 1998,respectively 532,727 468,012
Term loan, interest at the bank's prime rate plus 2%, paid in full
on January 31, 1995 601,575 --
Note payable in connection with the Spectrum acquisition, interest at
the prime rate (8.5% at Dec. 31, 1995) plus 1%, principal of
$200,000, $150,000, $200,000 and $150,000 plus interest due in
October 1995, April 1996, October 1996 and April 1997, respectively -- 500,000
Bridge notes payable, interest at 10% until March 1996, then prime
(8.5% at December 31, 1995) plus 2% -- 1,350,000
Other notes payable, due currently 273,673 78,672
---------- ----------
3,613,957 4,035,078
Less--current maturities 1,814,203 2,474,265
---------- ----------
$1,799,754 $1,560,813
========== ==========
</TABLE>
The notes payable to an officer were paid in full by the Company in
August 1995, with $250,000 in cash and 200,000 shares of the Company's common
stock.
The Company has not made the required payment on the 7% note payable,
which was due on July 1, 1994. This is an installment of a deferred purchase
price for advanced technology, and the Company is currently negotiating
alternative terms. Until the note is fully satisfied, the Company will continue
to accrue interest at 7% per annum.
On December 21, 1995, PEC issued $1,350,000 face value bridge notes
payable. The notes bear interest at 10% for the first three months outstanding
and, thereafter, at the prime rate (8.5% at December 31, 1995) plus 2%. The
notes will be due 18 months after their inception or 10 days following the
closing of a public offering of PEC. Payment of principal and accrued interest
is guaranteed by the Company. In connection with the bridge financing, PEC
issued to the noteholders at nominal value, warrants to purchase up to 240,000
shares of PEC's common stock at $1.20 per share.
On May 31, 1995, Dynaco's revolving credit and term loan agreement with a
bank, which provided Dynaco with a $2,000,000 revolving line of credit and a
$750,000 term loan, expired and was replaced by a three-year revolving credit
and security agreement with a financial institution. The new agreement provides
for the revolving sale of acceptable accounts receivable, as defined in the
agreement, with recourse up to a maximum commitment of $3,000,000. As of
December 31, 1995, the amount of accounts receivable sold that remained
uncollected totaled $1,296,462, net, of related reserves and fees, as defined in
the agreement. This amount is classified as a revolving line of credit in the
accompanying consolidated balance sheet, as of December 31, 1995. The interest
rate on such outstanding amounts is the bank's prime rate (8.5% at December 31,
1995) plus 1.5%, and interest is payable monthly in arrears. The financing is
collateralized by the purchased accounts receivable and substantially all of
Dynaco's assets.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(4) LONG-TERM DEBT (CONTINUED)
On August 31, 1995, Spectrum's revolving line of credit with a bank,
which provided Spectrum with a $300,000 line of credit, expired. The line of
credit has not been replaced.
(B) CONVERTIBLE DEBENTURES
During the nine months ended December 31, 1994, and the year ended
December 31, 1995, the Company issued several series of convertible debentures.
The interest on certain of these convertible debentures is forgiven if the
debentures are converted before specified dates; otherwise interest is payable
on their respective due dates. During 1995, approximately $152,000 of accrued
interest was forgiven and is included in additional paid-in capital. The
convertible debentures have a conversion price which represents a discount,
ranging from 20% to 27% of the Company's common stock at the time of conversion.
It has been the Company's policy to discount the convertible debentures using an
assumed implicit rate of 15% as a result of the discount conversion feature of
the convertible debentures. The Company believes that the intent of the
debentureholders is to convert the debentures into common stock at their
discounted conversion price. Accordingly, the Company has credited this ascribed
value to additional paid-in-capital, and this amount is being amortized to
interest expense over the terms of the convertible debentures. During the nine
months ended December 31, 1994, and year ended December 31, 1995, the Company
recorded $41,668 and $168,393, respectively, of additional interest expense
relating to the amortization of the discounts relating to the convertible
debentures.
In addition, the Company has incurred financing costs of $192,500 and
$380,000 during the nine months ended December 31, 1994, and the year ended
December 31, 1995, respectively, relating to these debentures. Given the
debentureholders' intent to convert, these costs have been reflected in deferred
costs in the accompanying consolidated balance sheet as of December 31, 1994 and
1995, and are amortized to additional paid-in capital over the term of the
related convertible debentures. Any remaining unamortized deferred financing
costs are also recorded to additional paid-in-capital upon conversion. During
the nine months ended December 31, 1994, and the year ended December 31, 1995,
the Company amortized deferred financing costs of $15,556 and $70,583 to
additional paid-in capital, respectively. Also, as a result of the conversions
of certain convertible debentures during 1995, the Company amortized another
$253,158 to additional paid-in capital.
The following table summarizes the issuance and conversion of the
convertible debentures for the nine months ended December 31, 1994 and the year
ended December 31, 1995.
<TABLE>
<CAPTION>
Value
Ascribed to Amount Outstanding Shares
Additional at December 31, Issued
Face Paid-in --------------- Upon
Value Capital 1994 1995 Conversion
----- ------- ---- ---- ----------
<C> <C> <C> <C> <C> <C>
3% Series due September 30, 1996 $ 750,000 $ 150,000 $ 625,000 $ -- $ 370,189
6% Series due November 21, 1997 2,000,000 400,000 1,616,668 -- 1,172,132
7% Series due March 31, 2000 1,100,000 350,000 -- -- --
7% Series due July 1, 2000 1,200,000 350,000 -- -- 401,549
8% Series due October 26, 1997 1,000,000 199,813 -- 819,359 --
---------- ---------- ---------- ----------- ----------
$6,050,000 $1,449,813 $2,241,668 $ 819,359 $1,943,870
---------- ---------- ---------- ----------- ----------
</TABLE>
During the year ended December 31, 1995, all of the 7% convertible
debentures due on March 31, 2000 were redeemed by the Company together with
accrued interest. Accordingly, $321,533, representing the unamortized amount
credited to additional paid-in capital for the ascribed value of the discount,
was reversed.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(4) LONG-TERM DEBT (CONTINUED)
(B) CONVERTIBLE DEBENTURES (CONTINUED)
During 1995, the debentureholders converted the 3%, 6% and 7% Series
Convertible Debentures due September 30, 1996, November 21, 1997, and July 1,
2000, respectively. These convertible debentures totaled $2,964,209 with related
accrued interest of $126,531 on the dates of conversion.
In connection with the 6% convertible debentures, each holder is entitled
to receive one warrant to purchase common stock of the Company (expiring no
later than three years from the date of conversion) for every five shares of
common stock of the Company issued, at 150% of the market price, as defined, at
the time of conversion. As a result, the Company issued 242,655 warrants to
purchase common shares of the Company, during 1995 at stock prices ranging from
$3.09 to $3.75. These warrants expire through July 28, 1998.
Future maturities of other notes payable, capital lease obligations and
convertible debentures as of December 31, 1995 are as follows:
1996 $ 2,474,265
1997 1,679,709
1998 649,666
1999 50,797
$ 4,854,437
------------
============
(5) STOCKHOLDERS' EQUITY
(A) COMMON STOCK OUTSTANDING
During 1995, the Company pledged 2,860,000 shares of its common stock as
collateral for an anticipated $5,000,000 debt financing with Whetstone Ventures
Corporation, Inc. ("Whetstone"). Before pledging the shares as collateral, the
Company placed a stop transfer on the shares, which prohibited the Company's
transfer agent from transferring the shares. The Company received only $400,000
from Whetstone, and the debt financing was canceled before being consummated.
The Company demanded return of the escrowed shares that were collateralizing the
debt, but was informed that Whetstone, had in turn pledged the shares as
collateral to a third party who had loaned money to Whetstone, and the third
party refused to return the shares. On March 13, 1996, the Company filed a
complaint against the third party demanding return of the shares and obtained a
restraining order prohibiting transfer of the shares. On March 22, 1996, the
third party agreed to return the shares in exchange for the $400,000 previously
received by the Company and an additional $700,000. The Company charged the
additional $700,000 to operations during the year ended December 31, 1995.
Accordingly, the Company has not considered the shares as outstanding in the
accompanying consolidated financial statements. As consideration for the
$700,000 paid, the third party assigned a $1,000,000 note receivable from
Whetstone to the Company. The Company has fully reserved for this note
receivable as its collectibility is not assured.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(B) PREFERRED STOCK
The Company is authorized to issue preferred stock as follows:
<TABLE>
<S> <C>
Series I Class A Redeemable Convertible Preferred Stock 7,000
Series II Class A Redeemable Convertible Preferred Stock 9,000
Series A Redeemable Convertible Preferred Stock 2,500
Series B Redeemable Convertible Preferred Stock 2,500
Series C Redeemable Convertible Preferred Stock 2,500
------
23,500
======
</TABLE>
As of December 31, 1995, preferred stock consists of the following:
<TABLE>
<S> <C>
Redeemable convertible preferred stock, Series I Class A, $.01 par value
Authorized - 7,000 shares
Issued and outstanding - 1,960 shares, liquidation preference of $ 1,989,500 $ 20
Redeemable convertible preferred stock, Series II Class A, $.01 par value
Authorized - 9,000 shares
Issued and outstanding - 4,400 shares, liquidation preference of $ 4,456,415 44
Redeemable convertible preferred stock, Series A, $.01 par value
Authorized - 2,500 shares
Issued and outstanding - 2,500 shares, liquidation preference of $ 2,512,329 25
Redeemable convertible preferred stock, Series B, $.01 par value
Authorized - 2,500 shares
Issued and outstanding - 2,500 shares, liquidation preference of $ 2,512,329 25
Redeemable convertible preferred stock, Series C, $.01 par value
Authorized - 2,500 shares
Issued and outstanding - 2,500 shares, liquidation preference of $ 2,512,329 25
----
Total preferred stock $139
====
</TABLE>
SERIES I AND II CLASS A REDEEMABLE CONVERTIBLE PREFERRED STOCK
Certain Series I and II Class A Redeemable Convertible Preferred
Stockholders (Series I and II Preferred Stock) converted 7,435 shares, including
accrued dividends of $86,059, into 1,775,691 shares of common stock as of
December 31, 1995. The Series I and II Preferred Stock is convertible into
shares of common stock at any time after 41 days after issuance, at the lesser
of (i) $5.00 or (ii) 80% of the average closing bid price of the common stock
over the three preceding trading days. The Series I and II Preferred Stock have
a liquidation preference equal to $1,000 per share, plus accrued and unpaid
dividends and are entitled to voting rights equal to the number of common shares
into which the preferred stock may be converted. The Series I and II Preferred
Stock may be redeemed by the Company 120 days after issuance at 100% of
redemption value, provided the average closing bid price of the common stock for
five consecutive days is greater than $4.50 per share. Dividends on the Series I
and II Preferred Stock are payable quarterly at 9% per annum in arrears. Under
the terms of the Series I and II Preferred Stock subscription agreements, the
use of proceeds is restricted to general working capital purposes.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(B) PREFERRED STOCK (CONTINUED)
SERIES A, B AND C REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue up to 7,500 shares of Series A, B and
C Redeemable Convertible Preferred Stock for $1,000 per share. During 1995, the
Company issued 7,500 shares, none of which were converted into shares of common
stock. The value of each share, including accrued but unpaid dividends and
accrued but unpaid interest on the dividends, is convertible into shares of
common stock at any time subsequent to 20 days after the underlying common
shares are registered. The conversion price is a rate equal to 80% of the mean
average closing price of the common stock on the seven preceding trading days,
but in no event less than $4.75 or more than $6.50. The conversion price is
adjustable for certain antidilutive events, as defined. The Series A, B and C
Redeemable Convertible Preferred Stock have a liquidation preference equal to
$1,000, plus accrued but unpaid dividends, and accrued but unpaid interest. The
Series A, B and C Redeemable Preferred Stockholders do not have any voting
rights except on matters effecting the Series A, B and C Redeemable Convertible
Preferred Stock. The Company has agreed to register at least 1,452,635 common
shares underlying the preferred stock. The preferred stock may be redeemed at
any time, at an amount equal to the sum of (a) the amount of the liquidation
preference determined as of the applicable redemption date plus (b) $250.00.
Dividends are payable at 9% per annum in arrears on February 1, May 1, August 1
and November 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. All of the shares were either converted or redeemed subsequent to
year-end (See Note 13).
(C) TREASURY STOCK
During 1995, PEC acquired 200,000 shares of the Company's common stock at
a cost of $1,211,757 and placed them in treasury for use in a contemplated PEC
stock option plan.
(D) STOCK OPTION PLANS
The Company has 1991, 1993 and 1995 Stock Option Plans (the "Plans") that
provide for a maximum of 350,000, 500,000 and 1,000,000 shares of common stock,
respectively, 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), provided that ISO grants to holders of 10% of the combined voting
power of all classes of Company stock must be granted at an exercise price of
not less than 110% of the fair market value at the date of grant. Pursuant to
the plans, options are exercisable at varying dates, as determined by the Board
of Directors, and have terms not to exceed 10 years (five years for 10% or
greater stockholders). The Board of Directors, at the request of the optionee,
may, in its discretion, convert the optionee's ISOs into nonqualified options at
any time prior to the expiration of such ISOs.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(D) STOCK OPTION PLANS (CONTINUED)
The following table summarizes stock option activity under the Plans:
<TABLE>
<CAPTION>
Number of Exercise
Options Price Range
------- -----------
<S> <C> <C>
Options Outstanding, March 31, 1994 $ 316,000 $ 1.00 - 3.50
Options Granted 734,000 2.38
Options Canceled (2,500) 3.50
-------------- -------------
Options Outstanding, December 31, 1994 1,047,500 1.00 - 3.50
Options Granted 596,000 2.00 - 3.00
Options Exercised (285,000) 1.00 - 3.50
Options Canceled (75,000) 2.375
-------------- -------------
Options Outstanding, December 31, 1995 1,283,500 $ 2.00 - 3.50
============== =============
Options Exercisable as of December 31, 1995 1,270,500 $ 2.00 - 3.50
============== =============
Options Available for future issuances as of December 31, 1995 281,500
==============
</TABLE>
Subsequent to year-end, the Company issued options to purchase 150,000
shares of Common Stock at $6.15 per share to two individuals. Certain
individuals also exercised stock options to purchase 78,000 shares of common
stock at prices ranging from $2.00 to $3.50. The total proceeds received by the
Company were $185,250.
In 1993, the Company issued to certain officers of Star five-year
nonqualified stock options to purchase up to an aggregate of 100,000 shares of
the Company's common stock at an exercise price of $1.78 (50% of the fair market
value of the Company's common stock on July 1, 1993). The Company recorded the
stock option issuance as deferred compensation, which was amortized to expense
during the nine months ended December 31, 1994.
In addition to the Company's plans, Star has established a stock option
plan which provides for the issuance of both nonqualified and incentive stock
options. Under this plan, Star has granted options to an employee to purchase
2,000 shares and granted options to two officers/stockholders to purchase 15,000
shares each of Star's common stock at a price of $5.00 per share. Also under
this plan, Star has granted an employee of Star options to purchase 15,000 and
50,000 shares at $5.00 and $2.50 per share, respectively, during the nine months
ended December 31, 1994. The Company has recorded compensation expense on these
latter options of $125,000, which represents the excess of the fair value over
the exercise price of these options. All options granted under the Star stock
option plan vest 100% six months from the date of grant. Subsequent to year-end,
Star granted stock options to purchase 120,000 shares of Common Stock at $6.00
per share.
PEC has also established a stock option plan, which provides for the
issuance of both nonqualified and ISO's. On December 1, 1995, PEC granted stock
options to purchase 1,590,000 shares of PEC common stock for $.30 per share, the
fair value of PEC's common stock, as determined by PEC's Board of Directors. Of
the total stock options granted, 1,230,000 vested immediately, and the balance
vest over a four-year period. In connection with the approval and formation of
the PEC Stock Option Plan, the Company canceled and rescinded stock options to
purchase 10,000 and 300,000 shares of common stock in Dynaco and Nexar,
respectively.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(E) WARRANTS
During fiscal 1991 and 1992, the Company issued to certain former
noteholders warrants to purchase 294,997 shares of the Company's common stock
ranging from $.60 to $1.00 per share. The warrants expire five years from the
date of issuance. During December 1994, certain bridge warrantholders exercised
their warrants to purchase 25,000 shares of common stock. In January and
February 1995, certain bridge warrantholders exercised their warrants to
purchase 164,248 shares of common stock.
In November 1992, the Company issued five-year warrants, valued at
$2,700, to purchase an aggregate of 15,000 shares of the Company's common stock
at an exercise price of $1.00 per share.
During October 1994, the Company issued to certain investment bankers and
consultants warrants to purchase a total of 625,000 shares of common stock at
exercise prices ranging from $2.00 to $3.50 per share, expiring in October 1997.
Upon issuance of these warrants, the Company recorded compensation expense of
approximately $151,000, which represents the excess of the fair value over the
exercise price of certain shares of common stock underlying the warrants.
In connection with the Company's initial public offering, the Company
issued 1,782,000 warrants to purchase one share of common stock at a price of
$6.00 per share, subject to antidilutive adjustments, as defined. The Company
has the right to redeem these warrants at $.05 per warrant. On January 5, 1995,
the Company announced its intention to redeem the common stock purchase warrants
issued as part of the Company's initial public offering. Each warrant (as
adjusted for dilutive events) entitled the holder the right to purchase 1.57
shares of common stock at a price of $3.19 per share. Through February 10, 1995,
the date the warrant call ended, certain warrantholders exercised such warrants
to purchase a total of 1,852,012 shares of common stock. The remaining
unexercised warrants to purchase 590,609 shares were redeemed by the Company for
$29,530. As a result of these warrant exercises, the Company received cash
proceeds totaling $1,286,931 and received demand promissory notes in the total
principal amount of $4,633,975 with interest at 7.75% per annum. In September
1995, $3,694,840 of the notes was repaid.
The remaining balance of $939,135 relates to warrants exercised by a
director of the Company's underwriter. In addition, on May 12, 1995, this
director exercised warrants to purchase a total of 200,000 shares of the
Company's common stock. The Company received another demand promissory note in
the principal amount of $1,049,574 with interest at 7.75% per annum. These
promissory notes are unsecured and there are no restrictions on transfer or sale
of the shares of common stock received in connection with the exercise of these
warrants.
During 1995, the Company issued to certain investment bankers,
consultants (including related parties to the Company - see Note 9), directors,
noteholders and officers, warrants to purchase a total of 4,400,155 shares of
common stock at exercise prices ranging from $1.25 to $7.50 per share, with
expirations ranging from April 1998 to August 2000. In addition, during 1995,
the Company also issued warrants totaling 82,500 at an exercise price of $1.25
to certain investment bankers. The warrants to purchase 82,500 shares were
issued below the fair market value of the Company's common stock at the date of
grant. Accordingly, the Company charged $95,370 to business development and
other financing costs in the accompanying consolidated statement of operation
for the year ended December 31, 1995.
Subsequent to year-end, the Company issued warrants to purchase 2,369,319
shares of the Company's common stock at prices ranging from $4.80 to $8.00 per
share. In addition, certain warrantholders also exercised warrants to purchase
1,513,328 shares of common stock at prices ranging from $0.60 to $3.75. The
Company received total proceeds of $4,575,205. The following table summarizes
warrant activity for the nine months ended December 31, 1994, and the year ended
December 31, 1995.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(E) WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
Number of Shares Exercise
Underlying Warrants Price
------------------- -----
<S> <C> <C>
Warrants Outstanding, March 31, 1994 3,646,997 $ .60 - 15.00
Warrants Granted 625,000 2.00 - 3.50
Warrants Exercised (25,000) .80 - 1.00
---------- -------------
Warrants Outstanding, December 31, 1994 4,246,997 .60 - 15.00
Warrants Granted 4,470,167 1.25 - 7.50
Warrants Exercised (2,840,093) .60 - 5.00
---------- -------------
Warrants Outstanding, December 31, 1995 5,877,071 $ .60 - 15.00
========== =============
</TABLE>
(F) RESERVED SHARES
At December 31, 1995, the Company has reserved shares of its common stock for
the following:
<TABLE>
<CAPTION>
December 31,1995
----------------
<S> <C>
Convertible debentures 189,753
Stock option plans 1,565,000
Warrants 5,877,071
Employee 401(k) plan 300,000
Preferred stock 3,402,242
----------
Total 11,334,066
==========
</TABLE>
Subsequent to year-end 3,890,781 shares of common stock were issued in
connection with certain of the items above. In addition, 3,810,652 shares were
reserved relating to the common stock pursuant to Series D convertible Preferred
Stock, and other stock purchase warrants (See Note 13).
(G) RESTRICTED STOCK ISSUANCES
In October 1994, the Company issued to certain officers, directors and
consultants a total of 400,000 shares of common stock at no cost. In addition,
the Company issued to a consultant 25,000 shares of common stock at no cost,
subject to certain restrictions, as defined, through October 1, 1996. Upon
issuance of all these shares, the Company recorded compensation expense of
approximately $876,000, representing the fair value of the stock on the date of
grant.
(H) STOCK ISSUED IN LIEU OF PAYMENT
In August 1995, the Company issued to an officer of Dynaco a total of
200,000 shares of common stock in lieu of two demand promissory notes totaling
$355,000 (see Note 9).
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(H) STOCK ISSUED IN LIEU OF PAYMENT (CONTINUED)
In connection with the organization of CD Titles and purchase of CDRP,
Inc. (see Note 1), certain related parties of the officers of the Company and
Dynaco loaned CD Titles $300,000. On October 27, 1995, the Company agreed to
issue common stock at a 35% discount to these individual noteholders, (as well
as the remaining noteholders in CD Titles), in lieu of payment on the related
promissory notes. The related parties received 128,572 shares of the Company's
common stock in satisfaction of the notes payable and accrued interest totaling
approximately $397,000.
In addition, in connection with the issuance of the Series I and II
Preferred Stock, the Company issued to an investment banker 300,000 shares of
common stock as a placement fee, with a value of $1,782,000. This amount was
reflected as a reduction in the gross proceeds received from the sale of the
Series I and II Preferred Stock.
During the year ended December 31, 1995, the Company issued 167,676
shares of its common stock for investment banking, merger and acquisition
services, with a fair market value of $421,500. The Company included $398,250 of
this amount in deferred costs, as the shares were issued in connection with the
convertible debenture financings and other prepaid investment banking services
(See Note 2(k)). The remaining amount was expensed to and included in business
development and other financing costs.
During the nine months ended December 31, 1994, the Company issued a
total of 32,160 shares of common stock for investment banking, merger and
acquisition consulting services and recorded a corresponding charge to business
development and financing expenses of $105,000.
In December 1994, 60,000 shares of common stock were issued to an
affiliated company, whose director is also an officer and director of the
Company, in exchange for the right of first refusal, to develop and provide to
the Company certain technology. The Company charged $210,000 to expense, which
represented the fair value of the Company's common stock.
(6) RESEARCH & PRODUCT DEVELOPMENT AGREEMENTS
The Company has signed an agreement to provide a research grant to Dr.
Kenton W. Gregory of the Heart Institute to sponsor investigations and
development of laser applications, advanced delivery systems and disposable
products. The Company will provide up to $450,000, over a three-year period
ending January 1996, in support of the Heart Institute's catheter development
program. The agreement will provide the Company with shared ownership rights or
the right of first refusal to exclusive worldwide licenses to sell and market
any products developed under this agreement. The Company has recorded $90,000
and $150,000 of research and development expenses for the nine months ended
December 31, 1994, and the year ended December 31, 1995, respectively, in
connection with this agreement. As of December 31, 1995, the Company has a
liability of $180,000 recorded in the accompanying consolidated balance sheets
in connection with this agreement.
The Company has signed an agreement with the New England Medical Center
and Dr. Stanley M. Shapshay to provide a research grant and to sponsor
investigations and development of laser applications, advanced delivery systems
and disposable products in the agreed-upon medical applications. The Company
also agreed to provide a total of $150,000 over a one-year period, of which
$50,000 was paid in the form of laser hardware. The parties have reached an
understanding that the Company will obtain ownership rights or the right of
first refusal to exclusive worldwide licenses to sell and market any products
developed with the grant funding. In August 1994, this agreement was amended to
support animal testing with one of the Company's diode lasers in connection with
performing tonsillectomies. On August 24, 1994, the Company amended this
agreement with NEMC. Under the amended agreement, the Company will provide an
additional $61,500 to fund this additional research. The Company recorded
approximately $110,000 and $95,000 of research and development expenses for the
nine months ended December 31, 1994, and for the year ended December 31, 1995,
respectively, in connection with this agreement.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(6) RESEARCH & PRODUCT DEVELOPMENT AGREEMENTS (CONTINUED)
The Company's Star subsidiary has an agreement with the Massachusetts
General Hospital ("MGH"), who has agreed to conduct a clinical study of the
diode array laser device furnished by Star. MGH will furnish Star with the data
resulting from the study in signed case report forms within two weeks after
completion of each case. Star shall have the unrestricted right to use such
data, but only to the extent that subjects' consents have been obtained. The
total research grant is $80,000, which is payable by Star to MGH as certain
milestones, as defined, are achieved. Star recorded $15,000 and $10,000 of
research and development expenses for the nine months ended December 31, 1994,
and year ended December 31, 1995, respectively, in connection with this
agreement.
The Company's Star subsidiary has an agreement with the Regents of the
University of California (the "Regents"), effective October 24, 1994, for a
five-year term. The Regents granted Star a U.S. nontransferable, limited-term,
nonexclusive royalty-bearing license under the Regents' patent rights to make,
use and sell licensed products, as described below. As consideration for this
license, Star shall pay to the Regents royalties on sales of licensed products.
The royalty payment shall be the greater of 4% of the net selling price of the
component products, as defined, or 1% of the net selling price of an integrated
system, as defined. Royalties begin to accrue on July 1, 1996, or when
cumulative gross sales reach $1,000,000; whichever occurs first. Minimum annual
royalty payments due under the agreement if Star does not achieve gross sales of
$1,000,000 by July 1, 1996 range from $10,000 to $25,000 beginning July 1, 1997.
The Company entered into a multiyear agreement with the MGH effective
August 18, 1995, whereby MGH agreed to conduct clinical trials on a laser
treatment for hair removal/reduction, invented by Dr. R. Rox Anderson, Wellman
Laboratories of Photomedicine, MGH. MGH will provide the Company with data
previously generated by Dr. Anderson, 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 will have 60 days
subsequent to completion of the study in order to express a desire to patent any
resulting invention at the Company's expense. The Company is obligated to fund
the clinical research obligation of $917,000 and pay a license fee of $250,000
over the term of the contract, until completion of the studies which is
anticipated to be two years from the effective date unless amended or
terminated. A total of $287,000 has been incurred through December 31, 1995.
During 1995, the Company expensed approximately $177,000 representing the
cost of research and development and capitalized approximately $50,000 as a
license fee, which is being amortized over five years. In addition, subsequent
to year-end, the Company paid the remaining $200,000 for the license fee. The
Company has agreed to enter into a worldwide exclusive license agreement with
MGH upon completion of a valid product or service, or new uses (not related
solely to hair removal) based on the findings of the clinical studies. As
consideration for this license, the Company is obligated to pay to MGH,
royalties of 5% of net revenues of products/services covered by valid patent
licensed to the Company exclusively; 2.5% of net revenues of products/services
covered by valid patent licensed to the Company nonexclusively; 1.25% of net
revenues of products developed and exploited, not covered above and no less than
2.5% on the sale of any other laser using other technology as defined for the
use of hair removal.
(7) SEGMENT INFORMATION
The Company has two operating business groups, medical products and
electronics products. All of the operations of Dynaco, Nexar, PEC and their
subsidiaries are reported below as the Electronics Products Group. All other
operations are focused in the areas of cardiology and dermatology, which are
included in the Medical Products Group. Information with respect to industry
segments are set forth as follows:
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(7) SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
As of and for the nine months ended December 31, 1994
-----------------------------------------------------
Electronic Medical
Products Products Total
-------- -------- -----
<S> <C> <C> <C>
Operating Revenues $ 12,958,367 $ 100,156 $ 13,058,523
Operating Income/Loss $ 497,728 $ (5,767,458) $ (5,269,730)
Identifiable Assets $ 8,582,303 $ 4,990,089 $ 13,572,392
Depreciation and Amortization $ 552,176 $ 58,209 $ 610,385
Capital Expenditures $ 363,092 $ 286,769 $ 649,861
</TABLE>
<TABLE>
<CAPTION>
As of and for the year ended December 31, 1995
-----------------------------------------------------
Electronic Medical
Products Products Total
-------- -------- -----
<S> <C> <C> <C>
Operating Revenues $ 16,296,224 $ 5,495,855 $ 21,792,079
Operating Loss $ (4,201,836) $ (6,449,139) $(10,650,975)
Identifiable Assets $ 17,048,106 $ 24,026,311 $ 41,074,417
Depreciation and Amortization $ 881,530 $ 863,749 $ 1,745,279
Capital Expenditures $ 540,725 $ 855,612 $ 1,396,337
</TABLE>
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995
----------------- -----------------
<S> <C> <C>
Payroll and consulting costs $ 633,878 $ 852,793
Professional fees 206,527 914,935
Settlement costs -- 700,000
Other 572,140 1,609,827
---------------- ----------------
Total $ 1,412,545 $ 4,077,555
================ ================
</TABLE>
(9) RELATED PARTY TRANSACTIONS
Included in current assets at December 31, 1995 is $4,406,823 of notes
receivable and investments from various officers and related entities. It is
reasonably possible that the Company's estimate that it will collect these
receivables within one year will change in the near term.
Notes payable to an officer (see Note 4) consisted of two notes due on
demand. One note beared interest at 7%, the other note beared interest at 10%
until December 31, 1994, and at prime plus 1% thereafter. Both notes were repaid
in August 1995 in the form of $250,000 in cash and 200,000 shares of the
Company's common stock.
Dynaco leases its Tempe, Arizona, facility from a partnership consisting
of the Chief Executive Officer and Chief Operating Officer of Dynaco. The
Company also has certain capital leases which are personally guaranteed by an
officer.
The Company has a $500,000 note payable to an officer of Spectrum in
connection with the acquisition of Spectrum (see Notes 1 and 4).
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(9) RELATED PARTY TRANSACTIONS (CONTINUED)
The Board of Directors have established a corporate loan policy under
which loans may be granted to certain officers/stockholders/directors of the
Company for amounts up to an aggregate of $800,000. All of such loans must be
collateralized by certain stockholdings of these individuals, as defined. At
December 31, 1994 and 1995, $183,813 and $383,198, respectively, with interest
at the rate of 7% per annum, was outstanding to certain
officers/stockholders/directors under the corporate loan policy.
At December 31, 1995, the Company had loans receivable of $90,000 and
$400,000 from two officers of Dynaco, which are evidenced by promissory notes
due June 29, 1996, and March 24, 1996, respectively, with interest at the rate
of 8% and the prime rate per annum, respectively. The $400,000 loan receivable
is collateralized with a certain amount of vested stock options in the Company
owned by the officer with a market price in excess of the exercise price. As
defined in the agreement, 100% of the then outstanding principal and accrued but
unpaid interest must never be below the sum of the excess of the market price
over the exercise price of the unexercised vested stock options. At December 31,
1995, the Company had an additional loan receivable for $75,000 from an officer
of Dynaco, which is evidenced by a demand promissory note and bears interest at
7%.
At December 31, 1995, the Company had notes receivable for $3,150,000
from an affiliated company. The Company's chairman and CEO personally owns 35%
of the affiliated Company. The notes receivable are evidenced by a $3,000,000
promissory note receivable and a $150,000 promissory note receivable, both with
interest at the rate of 10% per annum. The $3,000,000 note shall be prepaid by
October 1, 1996, with principal and interest, under the provisions of the note,
or the Company shall be remedied as defined. The $150,000 note is due December
31, 1996, with 10% interest per annum. In connection with the loan receivable,
the Company received a warrant in the affiliated company to purchase 250,000
shares of its common stock at $1.50 per share. In addition, if the $3,000,000
note is not paid by October 1, 1996, or January 31, 1997, the Company will
receive a warrant to purchase 250,000 and 150,000 shares, respectively, of the
affiliate's common stock at $1.50 per share.
The Company's notes are subordinate to a senior creditor of the
affiliate. An officerand certain stockholders, owning an aggregate of 81% of
this affiliate, have pledged their common stock holdings as collateral for these
notes receivable. The $3,000,000 note has automatic conversion rights to
preferred stock in the affiliate if the note is not paid by its due date.
During the year ended December 31, 1995, the Company received 41,000
shares of a publicly traded company, with a value of $297,250, as partial
payment for a loan to the Company's CEO. An officer/director of the
publicly-traded Company is also a director of Palomar Medical Technologies, Inc.
Subsequent to year end, the Company purchased $1,400,000 of manufacturing
equipment on behalf of the publicly traded company and has entered into an
operating lease agreement to rent this equipment to the publicly traded company.
The Company has charged this related party $100,000 as a commitment fee.
As discussed in Note 2(m), the Company has a $500,000 equity investment
in a privately held technology company. A director of the Company's underwriter,
H.J. Meyers is also a director of the investee company. In addition, through
December 31, 1995, the Company loaned this director unsecured notes totaling
$1,988,709 in connection with the exercise of stock warrants (see Note 5(e)).
Subsequent to year end, the Company loaned this director an additional unsecured
note totaling of $1,062,500 in connection with the exercise of stock warrants.
The notes bear interest at 7.75% per annum and are due on demand. The Company
has also loaned this director, $500,000 subsequent to year-end, under the same
terms as the notes described above. This director repaid $2,146,096 of these
notes on March 26, 1996.
The Company loaned $700,000 in the form of a note receivable, bearing
interest at 10% per annum, and due April 1996, to a company owned by a director
of PEC and Dynaco. Subsequent to year-end, the Company loaned an additional
$3,200,000 to this company.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(9) RELATED PARTY TRANSACTIONS (CONTINUED)
Two of the minority investors in CD Titles are related parties to
officers of the Company and its subsidiaries. These minority investors loaned
$300,000 to CD Titles in connection with its formation and the purchase of CDRP,
Inc., and received 128,572 shares of common stock of the Company, in
satisfaction of this loan, on October 30, 1995.
During the year ended December 31, 1995, the Company granted to its
officers and directors warrants to purchase 900,000 shares of the Company's
common stock, at prices ranging from $2.00 - $2.125, and expiring five years
from the date of grant. These warrants were issued at the fair market value on
the date of grant. In addition, subsequent to year-end, the Company issued to
these individuals, warrants to purchase 1,000,000 shares of the Company's common
stock, at prices ranging from $6.750 to $7.690, and expiring five years from the
date of grant.
On February 22, 1996, the Company entered into an agreement with a former
director of Star, whereby the Company issued this director warrants to purchase
50,000 shares of the Company's common stock at $7.00 per share. In addition, the
Company also agreed to pay this director $50,000.
The Company has various consulting agreements with directors and officers
of the Company (see Note 11).
(10) 401(K) PROFIT SHARING PLAN
On December 21, 1994, the Company established a 401(k) profit sharing
plan (the "Plan"), effective January 1, 1995, which covers substantially all
employees who have satisfied a six-month service requirement and have attained
the age of 18. 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.
On March 25, 1996, the Company issued 45,885 shares of its common stock
to the Plan in satisfaction of its $160,595 employer match of the 1995 employee
contributions.
(11) 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 $1,600 to $27,500, adjusted annually
for certain other costs such as inflation, taxes and utilities. The Company also
leases certain automobiles under operating leases expiring through March 1996.
The Company guarantees certain subsidiaries' operating leases.
Future minimum payments under all leases at December 31, 1995 are as
follows:
December 31,
1996 $ 769,291
1997 677,857
1998 648,325
1999 560,356
2000 500,426
Thereafter 691,000
------------
$ 3,847,255
============
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(A) OPERATING LEASES (CONTINUED)
Rental expense related to all operating leases was approximately $468,000
and $680,000 for the nine months ended December 31, 1994, and year ended
December 31, 1995, respectively.
(B) ROYALTIES
The Company may be required to pay certain officers/stockholders of Star
royalties of 5%, up to an aggregate, not to exceed $1,500,000, based on future
product sales for a period of no longer than seven years from the acquisition
date, July 1, 1993, if certain sales and gross profit levels of Star are
achieved.
The Company is required to pay a royalty of 5% of "net laser sales", as
defined, under a royalty agreement. For the year ended December 31, 1995,
approximately $167,000 was incurred under this agreement.
The Company has also agreed to make contingent royalty payment to a
former stockholder in the amount of 1.7% of net laser sales. For the nine months
ended December 31, 1994, and the year ended December 31, 1995, no amounts were
incurred under this agreement.
The Company's Nexar subsidiary is required to pay a royalty payment on
each unit sold, as defined, as consideration for a certain license agreement.
The term of the agreement is for five years renewable for an additional
five-year period at the option of Nexar. For the year ended December 31, 1995,
no amounts were incurred under this agreement.
In connection with the formation of Dynamem, the Company entered into a
license agreement with the 20% minority shareholder of Dynamem to license a
patent on a foldable electronic assembly module on an exclusive basis. The
license agreement gives Dynamem the right to manufacture, sell and use the
foldable electronic assembly module for a royalty, payable to the minority
shareholder of Dynamem, equal to 2% of net sales proceeds, as defined in the
license agreement. The license agreement expires upon expiration of the patent,
and royalties are guaranteed by Dynaco. For the year ended December 31, 1995, no
amounts were incurred under this agreement.
On August 1, 1995, Nexar entered into a license agreement with
Technovation Computer Lab Inc. ("Licensor"). The Licensor is controlled by two
officers of Nexar. The license agreement gives Nexar the right to manufacture,
sell and use a system designed by the Licensor which allows external replacement
of CPU boards. In exchange for these rights, Nexar will pay a royalty on each
unit sold, as defined. The term of the agreement is for five years, renewable
for an additional five-year period at the option of Nexar. For the year ended
December 31, 1995, no amounts were incurred under this agreement.
(C) INCENTIVE COMPENSATION PLANS
The Company has implemented incentive compensation plans for Dynaco and
ICP effective for fiscal 1996. Under the Dynaco plan, all Dynaco employees
meeting certain conditions are eligible for a bonus in the event that net
profits before taxes in any quarter exceed 3% of sales for that quarter. Bonuses
will be based on a percentage of base salary, and increase ratably with the
excess of net profits before taxes over 3% of sales. Under the ICP plan, 25% of
net profits in excess of 10% of sales will be allocated among eligible full-time
ICP employees, based on base salary.
In addition, certain commission and bonus agreements are in effect for
various Dynaco, ICP, Dynamem and ICT salespersons based on sales, net profits
before taxes and sales orders booked.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(D) CONSULTING AGREEMENTS
On January 1, 1994, the Company entered into consulting agreements with
the Company's Treasurer and Chief Executive Officer ("CEO"), respectively,
pursuant to which they provide certain financial management and consulting
services for a monthly fee of $4,000 and $8,500 each, respectively, until
December 31, 1995. The consulting agreement with the CEO was terminated on
January 1, 1995, and replaced with a two-year employment agreement. The
consultant agreement with the Treasurer was terminated on June 1, 1995 and
replaced with a two-year consulting agreement with a minimum monthly fee of
$7,000. During the nine months ended December 31, 1994, and year ended December
31, 1995, the Company incurred an aggregate of $112,500 and $124,300,
respectively, in consulting expenses relating to these agreements.
The Company has a consulting agreement with a stockholder, which provides
that the stockholder be paid an hourly rate for services provided. On October 1,
1994, this agreement with the stockholder was terminated and replaced with a
two-year consulting agreement for a monthly fee of $2,000. During the nine
months ended December 31, 1994, and year ended December 31, 1995, the Company
incurred $13,187 and $24,000, respectively, under these agreements, of which
$6,000 remained unpaid at December 31, 1995.
On January 1, 1996, the Company entered into a consulting agreement with
a business owned by a director of Dynaco and PEC, for certain business
development and consulting services for a monthly fee of $10,000 until December
1997. During the year ended December 31, 1995, the Company incurred an aggregate
of $60,000 in consulting expenses with this director.
On February 1, 1995, the Company entered into a consulting agreement with
an individual. Under the terms of this agreement, the Company is required to pay
a monthly retainer of $10,000 plus up to $5,000 in expenses. In addition, this
individual will receive 5% of certain revenues and a per unit fee for sales
generated by Nexar in the Middle East, as defined.
On August 1, 1995, the Company entered into a consulting agreement with
an individual pursuant to which the individual provides certain business
development and consulting services for a monthly fee of $10,000 until July 31,
1996. During the year ended December 31, 1995, the Company incurred an aggregate
of $50,000 in consulting expenses relating to this agreement, of which $10,000
remained unpaid at December 31, 1995. In addition, the Company issued warrants
to purchase 1,500,000 common shares of the Company's common stock at $2.25, the
fair market value on the date of issuance. These warrants vest quarterly through
July 31, 1996.
On October 31, 1995, the Company entered into a consulting agreement with
a business broker to assist the Company in merger and acquisitions. As part of
the agreement, the Company is required to pay a $5,000 monthly retainer for a
one-year period. The Company is also required to pay the broker a fee ranging
from 1.25% to 5%, as defined, based on the total consideration paid by the
Company for an acquisition. In no event will the fee be less than $50,000.
On December 15, 1995, the Company entered into a three-year consulting
agreement, pursuant to which the consultant is to provide business and financial
consulting services for a fee of $180,000, which is prepaid in equal
installments of $15,000 per month over the first 12 months of the agreement.
Under the terms of this agreement, this consultant also received warrants to
purchase 225,000 shares of the Company's common stock at $4.00 per share, the
fair market value on the date of issuance.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(D) CONSULTING AGREEMENTS (CONTINUED)
On January 1, 1996, the Company entered into a consulting agreement with
a strategic investment banking and financial services company. Under the terms
of this agreement, the Company is required to pay $5,000 monthly. In addition,
on February 7, 1996, the Company granted two individuals, who are employees at
this company, 150,000 warrants to purchase shares of common stock at $7.69, the
fair market value on the date of issuance. These stock options vest based on
milestones defined in the agreement.
(E) ESCROWED SHARES
In connection with the Company's initial public offering in December
1992, certain officers/stockholders placed an aggregate of 500,000 shares of
common stock in escrow. The shares were to be released from escrow 10 years from
the date of the offering, or earlier upon the achievement of a minimum income
per share or a minimum stock price, as defined. These shares have been
considered outstanding for purposes of calculating net loss per share for the
nine months ended December 31, 1994 and for the year ended December 31, 1995.
Subsequent to year-end, the Company achieved the milestones, as defined and the
shares were released from escrow.
(F) GOVERNMENT CONTRACTS
The Company, like other companies doing business with the U.S.
government, is subject to routine audit and, in certain circumstances, inquiry,
review or investigation by U.S. government agencies for its compliance with
government procurement policies and practices. Based on government procurement
regulations, under certain circumstances, a contractor violating or not
complying with procurement regulations can be subject to legal or administrative
proceedings, including fines and penalties, as well as suspension or debarrment
from contracting with the government. The Company's policy has been, and
continues to be, to conduct its activities in compliance with all applicable
rules and regulations.
Certain Star common stockholders have pro rata co-sale rights for any
proposed sales by the Company of Star's common stock. After July 1, 1996, if the
Company has 25% or more of the then outstanding Star equity, certain of Star's
stockholders shall have the right to exchange their Star shares into the
company's common stock at an exchange rate determined by the fair market value
of the respective shares.
(H) CONTINGENCY
Subsequent to year-end, the Company received notification of a complaint
from an investment banking firm seeking damages of approximately $2,562,500 for
the Company's failure to issue warrants to purchase 250,000 shares of the
Company's common stock at $2.50 per share. Management believes that this suit is
without merit, as no services were performed by this investment banking firm.
The Company intends to contest this suit vigorously. Management believes this
claim will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
(I) LETTER OF CREDIT
PEC has a $500,000 irrevocable letter of credit outstanding with a bank
to secure payment to a vendor.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
(12) EMPLOYMENT AGREEMENTS
Dynamem entered into an employment agreement on September 29, 1995, with
its minority shareholder to serve as President and director of Dynamem for a
period of five years. At the end of five years from the date of employment, the
minority shareholder will have the option to sell 75% of his outstanding shares
of Dynamem to PEC at a price equal to 10 times the average net income of Dynamem
for the preceding 48-month period. A portion (35%) of the payment will be made
in the Company's common stock, with the balance to be paid in cash. The minority
shareholder also has the option to increase the percentage of the payment to be
paid in common shares of the Company. Dynaco has also guaranteed the
compensation due the President under this agreement. The Company is accounting
for the option related to the restricted stock in the subsidiary in accordance
with Financial Accounting Standards Board Interpretation No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans (FASB
No. 28). Accordingly, compensation is measured annually based on the increase in
value of the subsidiary. Total compensation has been insignificant to date. In
the event of a public offering of Dynamem, the minority shareholder/officer has
certain registration rights as defined in the employment agreement.
(13) SUBSEQUENT EVENTS
(A) TISSUE TECHNOLOGIES, INC.
On February 9, 1996, the Company signed a Purchase and Sale Agreement
with the stockholders of Tissue Technologies, Inc. ("Tissue Technologies") to
acquire 100% of Tissue Technologies' outstanding stock. The purchase price
consists of the number of shares of the Company's common stock which equals $20
million divided by the lesser of (1) $6.25 or (2) the average closing "ask"
price for the Company for the 10 trading days immediately prior to the closing,
as quoted on the NASDAQ stock market, divided by the total number of shares of
common stock outstanding immediately before the effective date. Tissue
Technologies is engaged in the manufacture, marketing and sales of C02 laser
systems used in skin resurfacing.
(B) EQUITY TRANSACTIONS
On February 1, 1996, the Company issued 365,533 shares of Common Stock
and warrants to purchase 182,766 shares of Common Stock at $5.00 per share in a
private placement for net proceeds of $1,530,776. Under the terms of the private
placement agreement, the Company can only use the proceeds to finance the
development and premarketing activities of certain products.
Subsequent to year-end, all of the outstanding Series I and II Preferred
shares (including accrued dividends of $110,689) were converted into 1,527,242
shares of the Company's common stock. In addition 5,000 shares of Series A and B
Redeemable Convertible Preferred Stock (including accrued dividends of $125,625)
were converted into 788,711 shares of the Company's common stock. The Company
also redeemed the outstanding Series C Convertible Redeemable Preferred Stock
and accrued dividends of $68,750 on March 20, 1996, for $3,194,375.
On February 14, 1996, the Company completed the issuance of 6,000 shares
of Series D Convertible Preferred Stock. The Company also issued warrants to
purchase 800,000 shares of Common Stock at prices varying from $7.50 to $8.00
per share expiring in 2001. The Series D Convertible Preferred Stock is entitled
to dividends at rates ranging from 4% to 8%, based on the length of time from
the issue date. The Series D Convertible Preferred stockholders also has
preference in liquidation. The Company has the option to redeem these shares at
the redemption price defined in the agreement.
(C) INVESTMENTS
The Company invested an additional $3,200,000 in the form of two notes
receivable bearing interest at 10% per annum, and due through June 1996, in a
company owned by a director of PEC and Dynaco.
The Company has made an investment in common stock of a publicly-held
company totaling $1,276,025. In addition, the Company has made several other
investments in nonmarketable equity and debt securities of unrelated businesses
totaling $2,322,500. In connection with two $1,000,000 investments made in
nonmarketable equity securities of publicly traded companies, the Company has
certain registration rights as defined in the Private Placement Memorandum.
47
SHAREHOLDER INFORMATION
PALOMAR MEDICAL TECHNOLOGIES, INC.
STOCK PRICE, DIVIDEND AND SHAREHOLDER
INFORMATION
Palomar's Common Stock is currently traded on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) under the symbol PMTI.
The following table sets forth the high and low bid prices quoted on NASDAQ for
the Common Stock for the period indicated. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and do not necessarily
represent actual transactions.
Fiscal Year Ended
-------------------
December 31, 1995
------------------
High Low
Quarter Ended March 31, 1995 3 5/8 2 1/2
Quarter Ended June 30, 1995 2 5/8 1 15/16
Quarter Ended Sept. 30, 1995 6 11/16 1 7/8
Quarter Ended Dec. 31, 1995 7 1/8 4 7/16
As of March 26, 1996, the Company had approximately 7,284
stockholders of record.
The Company has not paid dividends to its common stockholders since its
inception and does not plan to pay dividends to its common stockholders in the
foreseeable future. The Company intends to retain any earnings to finance the
growth of the Company.
AVAILABILITY OF 10-K AND
QUARTERLY REPORTS
Palomar's Form 10-K was filed in March 1995. The Form 10-K is an annual filing
with the Securities and Exchange Commission. Shareholders may obtain a copy of
the 10-K annual report for fiscal 1995, as well as Form 10-Q filed with the
Securities and Exchange Commission, by contacting our Shareholder Relations.
There is no charge for these reports.
SHAREHOLDER RELATIONS
Palomar maintains investor and shareholder relations programs to keep
shareholders and potential investors informed about company activities. We
welcome comments and questions from our shareholders. Any time you would like
information about Palomar, we encourage you to call or write our Shareholder
Public Relations Counsel.
Ronald Trahan Associates, Inc.
One Apple Hill, Suite 316
Natick, MA 01760
(508) 651-1180
CORPORATE HEADQUARTERS
Palomar Medical Technologies, Inc.
66 Cherry Hill Drive
Beverly, MA 01915
508-921-9300 Tel
508-921-5801 Fax
DIRECTORS & EXECUTIVE OFFICERS
Steven Georgiev
Director
Chairman & Chief Executive Officer
Michael H. Smotrich
Director
President & Secretary
Joseph E. Levangie
Director
Chief Executive Officer of JEL & Associates
Buster C. Glosson
Director
Consultant
Joseph P. Caruso
Treasurer, Vice President & Chief Financial Officer
STOCK TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
(718) 921-8275
INDEPENDENT AUDITORS
Arthur Andersen LLP
One International Place
Boston, MA 02110-2604
48
[LOGO]
PALOMER
MEDICAL
Palomar Medical Technologies, Inc.
66 Cherry Hill Drive
Beverly, MA 01915 USA
508-921-9300 Tel
508-921-5801 Fax
