FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-22340
[GRAPHIC OMITTED]
PALOMAR MEDICAL TECHNOLOGIES, INC.
-------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 04-3128178
------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
66 Cherry Hill Drive, Beverly, MA 01915
(Address of principal executive offices)
------------------------------------------
(508) 921-9300
------------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
As of May 13, 1996, 26,036,546 shares of Common Stock, $.01 par value per
share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes____ No X
Page 1 of 19
PALOMAR MEDICAL TECHNOLOGIES, INC.
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 1995 and March 31, 1996 P. 3
Consolidated Statements of Operations - For the Three Months Ended
March 31, 1995 and 1996 P. 4
Consolidated Statements of Stockholders' Equity - For the Three Months Ended
March 31, 1996 P. 5
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 1995 and 1996 P. 6
Notes to Consolidated Financial Statements P. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS P. 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS P. 18
ITEM 2. CHANGES IN SECURITIES P. 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES P. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS P. 18
ITEM 5. OTHER INFORMATION P. 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K P. 18
SIGNATURES P. 19
</TABLE>
-2-
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $17,013,327 $15,349,442
Marketable securities 749,410 1,027,750
Accounts receivable, net of allowance for doubtful
accounts of approximately $156,000 4,623,841 3,952,910
Inventories 3,519,884 5,572,334
Current portion of deferred costs 462,787 348,438
Loans to officers 948,198 1,318,396
Notes receivable from related parties 3,161,375 2,247,408
Other current assets 352,130 618,909
------- -------
Total current assets 30,830,952 30,435,587
---------- ----------
PROPERTY AND EQUIPMENT, AT COST, NET 3,117,331 5,050,768
--------- ---------
OTHER ASSETS:
Cost in excess of net assets acquired, net of accumulated
amortization of $673,167 and $816,731, respectively 3,729,508 3,918,013
Intangible assets, net of accumulated amortization of $73,618
and $149,592, respectively 1,223,373 1,472,399
Deferred costs, net of current portion 346,333 331,833
Long-term investment 500,000 2,650,000
Loan to related party 700,000 1,905,616
Other assets 626,920 990,383
------- -------
Total other assets 7,126,134 11,268,244
--------- ----------
$41,074,417 $46,754,599
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit $1,296,462 $1,249,180
Current portion of long-term debt 2,474,265 2,522,902
Contingent note payable 500,000 --
Accounts payable 3,879,825 5,372,030
Accrued expenses 4,077,555 2,850,074
--------- ---------
Total current liabilities 12,228,107 11,994,186
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION 2,380,172 2,230,337
---------- ----------
MINORITY INTEREST IN SUBSIDIARY -- 19,111
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-
Authorized - 5,000,000 shares
Issued and outstanding -
13,860 shares at December 31, 1995
and 6,000 shares at March 31, 1996 139 60
Common stock, $.01 par value-
Authorized - 40,000,000 shares
Issued and outstanding - 18,133,139 shares at December 31,
1995 and 22,578,450 shares at March 31, 1996 181,331 225,785
Treasury Stock (200,000 shares at cost) (1,211,757) (1,211,757)
Additional paid-in capital 53,326,032 64,190,660
Accumulated deficit (23,840,898) (29,636,283)
Subscriptions receivable from related party (1,988,709) (1,057,500)
---------- ----------
Total stockholders' equity 26,466,138 32,510,965
---------- ----------
$41,074,417 $46,754,599
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Three Months Ended March 31,
1995 1996
---- ----
<S> <C> <C>
REVENUES $3,569,619 $5,306,491
COST OF REVENUES 2,840,437 5,195,167
--------- ---------
Gross profit 729,182 111,324
--------- ---------
OPERATING EXPENSES:
Research and development 617,114 1,279,517
Selling, general and administrative 995,691 4,346,546
Business development and other financing costs 409,909 497,273
--------- ---------
Total operating expenses 2,022,714 6,123,336
--------- ---------
Loss from operations (1,293,532) (6,012,012)
INTEREST EXPENSE (224,529) (290,108)
INTEREST INCOME 30,784 604,198
NET GAIN ON TRADING SECURITIES -- 115,084
MINORITY INTEREST IN LOSS OF SUBSIDIARY 28,158 30,575
--------- ---------
Net loss $(1,459,119) $(5,552,263)
=========== ===========
NET LOSS PER COMMON SHARE $(0.16) $(0.29)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 9,400,929 20,237,034
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
--------------- ------------ --------------
Number $0.01 Number $0.01 Number
of Shares Par Value of Shares Par Value of Shares
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 13,860 $139 18,133,139 $181,331 (200,000)
Sale of common stock pursuant to warrants -- -- 1,013,328 10,133 --
Sale of common stock pursuant to Regulation S -- -- 531,343 5,314 --
Payments received on subscriptions receivable -- -- -- -- --
Issuance of preferred stock 6,000 60 -- -- --
Issuance of common stock pursuant to stock options -- -- 78,000 780 --
Issuance of common stock for 1995 employer 401(k) matching
contributions -- -- 45,885 459 --
Conversion of preferred stock (11,360) (114) 2,315,953 23,160 --
Redemption of preferred stock (2,500) (25) -- -- --
Exercise of underwriter's warrants -- -- 500,000 5,000 --
Exercise of stock options in minority controlled subsidiary -- -- -- -- --
Issuance of common stock for investment banking and merger
and acquisition consulting services -- -- 6,802 68 --
Return of escrowed shares -- -- (46,000) (460) --
Amortization of deferred financing costs -- -- -- -- --
Preferred stock dividends -- -- -- -- --
Net loss -- -- -- -- --
----- --- ---------- -------- --------
BALANCE, MARCH 31, 1996 6,000 $60 22,578,450 $225,785 (200,000)
===== === ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock Additional Total
Paid-in Accumulated Subscriptions Stockholders'
Cost Capital Deficit Receivable Equity
---- ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 ($1,211,757) $53,326,032 ($23,840,898) ($1,988,709) $26,466,138
Sale of common stock pursuant to warrants -- 3,501,254 -- -- 3,511,387
Sale of common stock pursuant to Regulation S -- 2,854,816 -- -- 2,860,130
Payments received on subscriptions receivable -- -- -- 1,988,709 1,988,709
Issuance of preferred stock
Issuance of common stock pursuant to stock options -- 5,964,164 -- -- 5,964,224
Issuance of common stock for 1995 employer 401(k) matching -- 184,470 -- -- 185,250
contributions
Conversion of preferred stock -- 160,139 -- -- 160,598
Redemption of preferred stock -- 210,796 -- -- 233,842
Exercise of underwriter's warrants -- (3,123,127) -- -- (3,123,152)
Exercise of stock options in minority controlled subsidiary -- 1,057,500 -- (1,057,500) 5,000
Issuance of common stock for investment banking and merger -- 50,000 -- -- 50,000
and acquisition consulting services
Return of escrowed shares -- 36,656 -- -- 36,724
Amortization of deferred financing costs -- 460 -- -- --
Preferred stock dividends -- (32,500) -- -- (32,500)
Net loss -- -- (243,122) -- (243,122)
-- -- (5,552,263) -- (5,552,263)
----------- ----------- ------------ ----------- -----------
BALANCE, MARCH 31, 1996 $(1,211,757) $64,190,660 $(29,636,283) $(1,057,500) $32,510,965
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,459,119) $(5,552,263)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 208,566 546,239
Write-off of in-process research and development -- 57,212
Minority interest in loss of subsidiary (28,158) (30,572)
Noncash interest expense related to debt 80,415 16,538
Noncash compensation related to common stock -- 36,724
Unrealized loss on trading securities -- 49,496
Realized gain on trading securities -- (164,640)
Changes in assets and liabilities, net of effects from purchase of
Comtel Electronics, Inc. in 1996
Purchases of trading securities -- (780,056)
Sale of trading securities -- 616,860
Accounts receivable 127,725 434,599
Inventories (519,589) (1,887,276)
Other current assets and loans to officers (413,268) (652,194)
Accounts payable (2,908) 1,336,894
Accrued expenses (16,035) (1,099,198)
------- ----------
Net cash used in operating activities (2,022,371) (7,071,637)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for purchase of Comtel Electronics, Inc., net of cash acquired -- (146,586)
Purchases of property and equipment (316,440) (1,994,051)
Increase in intangible assets -- (325,000)
Increase in other assets (64,513) (381,694)
Loans to related parties -- (1,713,116)
Payments on loans from related parties -- 1,421,467
Investment in nonmarketable securities -- (2,150,000)
---------- ----------
Net cash used in investing activities (380,953) (5,288,980)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable -- 21,816
Payments of notes payable and capital lease obligations (370,465) (219,350)
Net payments on revolving lines of credit (38,000) (47,282)
Payment of contingent note payable -- (500,000)
Proceeds from sale of common stock pursuant to Regulation S -- 2,860,130
Proceeds from the exercise of warrants 1,411,414 3,516,387
Issuance of preferred stock -- 5,964,224
Redemption of preferred stock -- (3,123,152)
Proceeds from exercise of stock options 90,940 235,250
Proceeds from payment of subscription receivable -- 1,988,709
Financing costs related to warrant call (69,317) --
---------- ----------
Net cash provided by financing activities 1,024,572 10,696,732
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,378,752) (1,663,885)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,218,994 17,013,327
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,840,242 $15,349,442
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1995 1996
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $103,973 $90,127
========== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES
Conversion of convertible debt and related accrued interest,
net of financing fees $735,000 $--
========== =======
Subscriptions received in connection with warrant call $4,633,975 $--
========== =======
Amortization of deferred financing costs $-- $32,500
========== =======
Issuance of common stock for 1995 employer 410(k)
matching contribution $-- $160,598
========== ========
Conversion of preferred stock $-- $233,842
========== ========
Dividends payable $-- $243,122
========== ========
ACQUISITION OF COMTEL ELECTRONICS, INC.
Liabilities assumed $-- $(258,144)
Fair value of assets acquired -- 72,661
Cash paid, net of cash acquired -- (146,586)
---------- ---------
COST IN EXCESS OF NET ASSETS ACQUIRED $-- $(332,069)
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-7-
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the interim periods shown in
this report are not necessarily indicative of expected results for any future
interim period or for the entire fiscal year. Palomar Medical Technologies, Inc.
(the "Company" or "Palomar") believes that the quarterly information presented
includes all adjustments (consisting only of normal, recurring adjustments)
necessary for a fair presentation in accordance with generally accepted
accounting principles. The accompanying financial statements and notes should be
read in conjunction with the Company's Form 10-KSB as of and for the year ended
December 31, 1995.
During 1995, the Company entered into a two year cost plus fixed fee
contract with the U.S. Army. The contract provides for the Company to
investigate Compact, Wavelength Diverse, High Efficiency Solid-State Dye Lasers
and is valued at $3,555,223. Revenue on the contract is recognized as costs are
incurred. During the three months ended March 31, 1995 and 1996, the Company did
not incur any cost or recognize any government contract revenue.
2. ACQUISITION OF COMTEL ELECTRONICS, INC.
---------------------------------------
On January 1, 1996, Dynaco Acquisition Corporation ("Dynaco") converted
a $100,000 note receivable from Comtel Electronics, Inc. ("Comtel") into 11,100
shares of Comtel stock (par value $.05), giving Dynaco a 10% interest in Comtel.
Effective March 20, 1996, Dynaco purchased an additional 500,000 shares of
Comtel for $27,500, resulting in 80.35% ownership by Dynaco. The remaining
19.65% ownership is held by two principles of Comtel. This acquisition has been
accounted for as a purchase in accordance with Accounting Principles Board
Opinion No. 16. Accordingly, the Company has allocated the purchase price based
on the fair market value of assets acquired and liabilities assumed. The results
of Comtel have been included with those of the Company since March 20, 1996.
Comtel has entered into a 5 year agreement with New Media, Inc. whereby
New Media subcontracted to Comtel all of its manufacturing and assembly business
over the contract term. Comtel is compensated by New Media to achieve a
guaranteed 15% gross margin to Comtel. Management estimates this contract will
generate $80 million in revenues for Comtel over the life of the agreement.
Subsequent to March 31, 1996, Palomar entered into a preferred stock agreement
with New Media, Inc. whereby Palomar invested $2,000,000 and is committed to
fund an additional $1,000,000. Palomar also received a warrant to purchase
200,000 shares of common stock in New Media, Inc. at $1.20 per share.
3. ACQUISITION OF TISSUE TECHNOLOGIES, INC.
----------------------------------------
On March 9, 1996, the Company signed an Agreement and Plan of
Reorganization 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.
This acquisition closed on May 3, 1996, and the Company is accounting for this
acquisition as a pooling-of-interest in accordance with Accounting Principles
Board Opinion No. 16. The Company will retroactively restate its financial
statements as of May 3, 1996 and for subsequent reporting periods. Tissue
Technologies is engaged in the manufacture, marketing and sale of C02 laser
systems used in skin resurfacing.
-8-
4. CASH AND CASH EQUIVALENTS
-------------------------
The Company considers all highly liquid investments with remaining
maturities of less than three months at the time of acquisition to be cash
equivalents.
5. 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,
1995 and March 31, 1996. 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.
During the three months ended March 31, 1996, the Company sold a
portion of its Trading Securities in two publicly traded companies realizing a
gain of $164,640, which is reflected in the accompanying consolidated statements
of operations.
<TABLE>
<CAPTION>
March 31, 1996
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gain Loss Value
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Trading Securities:
Investments in publicly
traded companies $1,047,143 $27,319 $(46,712) $1,027,750
============ ============ ============= =============
</TABLE>
6. INVENTORIES
-----------
Inventories are stated at lower of cost (first-in, first-out) or
market. Work in process and finished goods inventories consist of material,
labor and manufacturing overhead and consist of the following:
December 31, March 31,
1995 1996
---------------- ----------------
Raw materials $1,819,288 $3,467,069
Work in process and finished goods 2,008,389 2,251,918
Less -- Progress billings 307,793 146,653
--------------- ----------------
$3,519,884 $5,572,334
=============== ===============
[This space intentionally left blank]
-9-
7. PROPERTY AND EQUIPMENT
----------------------
Property and Equipment consist of the following:
December 31, March 31,
1995 1996
---------------- --------------
Equipment under capital leases $1,214,950 $1,364,748
Machinery and equipment 1,967,219 3,873,142
Furniture and fixtures 787,854 873,944
Leasehold improvements 299,043 304,550
---------------- --------------
4,269,066 6,416,384
Less: Accumulated depreciation
and amortization 1,151,735 1,365,616
---------------- --------------
$3,117,331 $5,050,768
================ ==============
Included in machinery and equipment at March 31, 1996, is certain
manufacturing equipment purchased by the Company that is being rented to a
related party under an operating lease. See Note 12.
8. ACCRUED EXPENSES
----------------
Accrued Expenses consist of the following at:
December 31, March 31,
1995 1996
---------------- ---------------
Payroll and consulting costs $852,793 $1,045,826
Professional fees 914,935 294,420
Settlement Costs 700,000 --
Other 1,609,827 1,509,828
---------------- ---------------
Total $4,077,555 $2,850,074
================ ===============
9. NET LOSS PER COMMON SHARE
-------------------------
For the three months ended March 31, 1995, 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 three months ended
March 31, 1996, 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.
[This space intentionally left blank]
-10-
10. NOTES PAYABLE
-------------
<TABLE>
<CAPTION>
Notes payable consist of the following:
December 31, March 31,
1995 1996
--------------- --------------
<S> <C> <C>
7% Note payable 244,782 244,782
8% Convertible debentures, $1,000,000 face amount, principal and interest due October 26, 1997 819,359 835,896
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 1,393,612 1,378,357
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 468,012 274,532
Note payable in connection with the Spectrum acquisition, interest at the prime rate (8.25%
at March 31, 1996) 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 500,000 505,279
Bridge notes payable, prime (8.25% at March 31, 1996) plus 2% 1,350,000 1,350,000
Other notes payable, due currently 78,672 164,393
--------------- --------------
4,854,437 4,753,239
Less -- current maturities 2,474,265 2,522,902
--------------- --------------
$2,380,172 $2,230,337
=============== ==============
</TABLE>
11. STOCKHOLDERS' EQUITY
--------------------
(a) Options
During the three months ended March 31, 1996, the Company issued
options to purchase 150,000 shares of Common Stock at $6.75 per share to two
employees. 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.
(b) Warrants
During the three months ended March 31, 1996, the Company issued
warrants to purchase a total of 2,514,319 shares of the Company's common stock
to certain officers and preferred stock investors at prices ranging from $4.88
to $10.375 per share. In addition, certain warrantholders 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 $3,516,387 and a note receivable for
$1,057,500 related to the exercise of the warrants.
(c) Reserved Shares
At March 31, 1996, the Company has reserved shares of its common stock
for the following:
March 31,
1996
---------------
Convertible debentures 189,753
Stock option plans 1,487,000
Warrants 6,878,062
Employee 401(k) plan 254,115
Preferred stock 1,333,333
---------------
Total 10,142,263
===============
-11-
(d) Preferred Stock
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 conversion price is a rate equal to 80% of the
average closing price of the common stock on ten consecutive preceding trading
days, but in no event less than $4.50 or more than $6.50 per share. The
conversion price is also adjustable for certain antidilutive events, as defined.
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 have preference in liquidation
equal to $1,000 plus accrued but unpaid dividends and accrued by unpaid
interest. Under certain circumstances, the Company has the option to redeem
these shares at the redemption price defined in the agreement. As of March 31,
1996, the preferred stock was convertible into 1,010,444 shares of common stock.
(e) Dividends
In certain circumstances the Company is prohibited from paying any
dividends to the holders of the Series D Convertible Preferred Stock until all
accrued and unpaid dividends have been paid or declared.
12. RELATED PARTY TRANSACTIONS
--------------------------
Included in current assets at December 31, 1995 and March 31, 1996 is
$4,109,573 and $3,565,804, respectively, 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 with in one year will
change in the near term.
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, 1995 and March 31, 1996, $383,198 and $720,099, respectively, with
accrued interest at the rate of 7% per annum, was outstanding to certain
officers/stockholders/directors under the corporate loan policy.
At March 31, 1996, the Company had loans receivable of $99,391 and
$423,906 from two officers of Dynaco, which are evidenced by promissory notes
due by December 31, 1996, with accrued interest at the rate of 8% and the prime
rate per annum, respectively. Both loans receivable are collateralized with a
certain amount of vested stock options in the Company owned by the officers 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 March 31, 1996, 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 $1,739,908
including accrued interest of $89,908 from an affiliated company. The Company's
chairman and CEO personally owns 35% of the affiliated company. The notes
receivable bear interest at the rate of 10% per annum. A $1,500,000 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. A $150,000 note is due
December 31, 1996, with 10% interest per annum. In connection with the loan
receivable, the Company received a warrant from the affiliated company to
purchase 250,000 shares of its common stock at $1.50 per share.
The $1,500,000 note was part of an original $3,000,000 note. On March
29, 1996, the Company entered into an agreement to sell $1,500,000 of the
$3,000,000 note to an unaffiliated individual. In connection with the sale, the
Company was required to pay a loan arrangement fee of $125,000 and agreed to
issue warrants to purchase 50,000 shares of common stock at $10.375 per share.
The agreement also provides for the individual to be able to sell the note
receivable back to the Company after June 30, 1996 and before September 30,
1996. After September 30, 1996, the Company has the right to require this
individual to sell the note back to the Company at a price as defined in the
agreement. If the notes are 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.
-12-
The Company's notes are subordinate to a senior creditor of the
affiliate. An officer\director and certain stockholders, owning an aggregate of
81% of this affiliate, have pledged their common stock holdings as collateral
for these notes receivable. The notes have automatic conversion rights to
preferred stock in the affiliate if the note is not paid by its due date.
During the three months ended March 31, 1996, the Company purchased
$1,400,000 of manufacturing equipment on behalf of a publicly-traded company of
which an officer/director of the publicly-traded company is also a director of
Palomar Medical Technologies, Inc. The Company has entered into an operating
lease agreement to rent this equipment to the publicly traded company for
$35,000 per month for 60 months. The Company has charged this related party
$100,000 as a commitment fee.
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. During the three months ended March 31,
1996, the Company loaned this director unsecured notes totaling $1,057,500 in
connection with the exercise of stock warrants. The notes bear interest at 7.75%
per annum and are due on demand. The Company also loaned this director, $500,000
during the three months ended March 31, 1996, under the same terms as the notes
described above.
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 Palomar Electronics Corporation ("PEC") and Dynaco. During the three months
ended March 31, 1996, the Company loaned an additional $200,000 to this company.
During the three months ended March 31, 1996, the Company granted to
its officers and directors 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 Medical Technologies, Inc. ("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.
13. 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 Inter-Connecting Products, Inc.
have been included with those of the Company since June 5, 1995.
The results of operations related to Intelligent Computer Technologies,
Inc. ("ICT") have been included with those of the Company since
September 18, 1995.
The results of operations related to Comtel have been included with
those of the Company since March 20, 1996.
Unaudited pro forma operating results for the Company, assuming the
acquisitions of ICT and Spectrum had been made as of January 1, 1995, excluding
Comtel which had no operations for the for the three months ended March 31,
1995, and assuming the Comtel acquisition had been made as of January 1, 1996,
are as follows:
Three Months Ended March 31,
-------------------------------------
1995 1996
------------------- ------------------
Revenue $7,161,008 $5,691,491
Net loss $(3,141,403) $(5,590,263)
Net loss per common share $(0.32) $(0.29)
-13-
14. COMMITMENTS
-----------
The Company has issued guarantees to several of its subsidiaries for
payment of trade payables. The total amount guaranteed at March 31, 1996, was
$3,119,000. In addition, the Company has also issued two unlimited guarantees to
two other vendors of Nexar.
15. SUBSEQUENT EVENT
----------------
On April 17, 1996, the Company sold 10,000 shares of its Series E
Convertible Preferred Stock and received net proceeds of $9,488,200. The Company
also issued the investor warrants to purchase 304,259 shares of common stock at
$15.00 per share. The Series E Convertible Preferred Stock is entitled to a
dividend at 7% per annum and has a preference in liquidation. Under certain
conditions the Company has the option to redeem these shares at a redemption
price as defined in the agreement.
[This space intentionally left blank]
-14-
THREE MONTHS ENDED MARCH 31, 1996, COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
For the three months ended March 31, 1996, the Company had revenues of
$5,306,491 as compared to $3,569,619 for the three months ended March 31, 1995.
The 49% increase in revenues from 1995 to 1996 is primarily due to acquisitions.
The majority of the revenues derived for both periods are from sales of
electronic components by the Company's Dynaco subsidiary. During the three
months ended March 31, 1995 and 1996, the Company did not incur any cost or
recognize any government contract revenue.
Gross margins for the three months ended March 31, 1996, were 2.1% as
compared to 20.4% for the three months ended March 31, 1995. The 18.3% decrease
in gross margins was a result of the Company incurring significant pre
production costs in order to prepare for the introduction of a number of new
products in the medical and electronics business segments. The Company has also
implemented new manufacturing processes that have led to start up costs and an
initial decrease in output yields.
Research and development costs increased to $1,279,517 for the three
months ended March 31, 1996, from $617,114 for the three months ended March 31,
1995. This 107% increase in research and development reflects the Company's
continuing 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 $4,346,546
for the three months ended March 31, 1996, from $995,691 for the three months
ended March 31, 1995. This 337% increase is attributable to the acquisition of
Spectrum Medical and CD Titles as well as the formation of Nexar, Dynamem and
Spectrum Financial Services. 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 electronic products segment. Dynaco, Star, Spectrum, Nexar,
CD Titles, Spectrum Financial Services and their subsidiaries maintain their own
sales forces and general and administrative support staffs.
Business Development and Financing Costs increased to $497,273 for the
three months ended March 31, 1996, from $409,909 for the three months ended
March 31, 1995. This 21.3% increase is attributable to the Company's continuing
acquisitions and financing activities during the quarter ended March 31, 1996.
Interest expense increased to $290,108 for the three months ended March
31, 1996, from $224,529 for the three months ended March 31, 1995. This 29%
increase is primarily the result of the convertible debentures and an issuance
of acquisition debt in April 1995 to purchase Spectrum.
Interest income increased to $604,178 for the three months ended March
31, 1996, from $30,784 for the three months ended March 31, 1995. This increase
is primarily the result of interest received on the Company's investments made
as a result of the Company's improved cash position. Net realized and unrealized
trading gains were $115,084 for the three months ended March 31, 1996. 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 $30,575 for the
three months ended March 31, 1996, from $28,158 for the three months ended March
31, 1995. This change is primarily the result of further losses of the Star
subsidiary netted against the percentage of loss Dynaco has recognized for its
majority owned Dynamem and Comtel subsidiaries.
The Company has not recorded a deferred tax benefit for net operating
losses as the utilization of such losses is uncertain.
-15-
As a result of the foregoing, the net loss for the three months ended
March 31, 1996, was $5,552,263, as compared to a net loss of $1,459,119 for the
three months ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had $16,208,301 in cash, cash
equivalents and trading securities. During the three months ended March 31,
1996, the Company generated $2,945,000, $6,000,000 and $4,584,000 in net
proceeds from the sale of its common stock in an unregistered offering to
overseas investors, the sale of its preferred stock and the exercise of stock
warrants, respectively.
The Company's net loss for the three months ended March 31, 1996,
included the following noncash items: $546,239 of depreciation and amortization
expense; $16,538 of additional interest expense relating to the amortization of
the discounts on the convertible debentures; and $36,724 in investment banking
fees paid with common stock and warrants issued below fair market value.
The Company anticipates that capital expenditures for the remaining
nine months of 1996 will total approximately $1,500,000. The Company will
finance these expenditures with cash on hand or the Company will seek to raise
additional funds. However, there can be no assurance that the Company will be
able to raise the funds.
Dynaco has a three-year revolving credit and security agreement with a
financial institution. The agreement provides for the revolving sale of
acceptable accounts receivable, as defined in the agreement, with recourse up to
a maximum commitment of $3,000,000. As of March 31, 1996, the amount of accounts
receivable sold that remained uncollected totaled $1,249,180 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 March 31, 1996.
The interest rate on such outstanding amounts is the bank's prime rate (8.25% at
March 31, 1996) plus 1.5%, and interest is payable monthly in arrears. The
financing is collateralized by the purchased accounts receivable and
substantially all of Dynaco's assets.
The Company 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. Some of these investments are with companies that are related to some
of the directors and officers of the Company. See "Related Party Transactions".
At March 31, 1996, the Company had $4,050,000 of such investments.
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 segment, expand its
electronic products segment, 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.
-16-
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company or statements
made by its employees may contain "forward-looking" information, as that term is
defined in the Private Securities Litigation Reform Act of 1995 (the "Act").
This report may also contain information that is deemed to be forward looking
information under the Act. The Company cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors, including but not limited to the following:
The Company's future operating results are dependent on its ability to
develop, produce, achieve Food and Drug Administration approval for
certain medical products and market new and innovative products and
services. There are numerous risks inherent in this complex process,
including rapid technological change and the requirement that the
Company bring to market in a timely fashion new products and services
which meet customers' changing needs.
The Company and certain of its subsidiaries have a history of losses,
and the Company expects its losses to continue. The Company must 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's business segments operate in a highly competitive
enviornment and in highly competitive industries, which include
significant competitive pricing pressures and intense competition for
skilled employees.
The market price of the Company's securities could be subject to
fluctuations in response to quarter to quarter variations in operating
results, changes in analysts' earnings estimates, market conditions in
the information technology industry, as well as general economic
conditions and other factors external to the Company.
[This space intentionally left blank]
-17-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
In July 1994, the U.S. Government notified the Company's Dynaco
subsidiary that it was investigating three of Dynaco's employees concerning
actions that such employees may have taken in violation of the Government's
procurement laws and regulations pertaining to documentation and inspection. The
Government and Dynaco have reached an agreement pursuant to which the Government
has terminated the investigation and Dynaco has agreed to pay certain legal fees
and expenses incurred by the Government in connection therewith. The Company has
not admitted any wrongdoing and no action was taken against the employees.
On March 14, 1996, the Company was served with a summons and complaint
with respect to Commonwealth Associates v. Palomar Medical Technologies, Inc., a
purported breach of contract action brought in the United States District Court
for the Southern District of New York. The complaint alleges violations of a
letter agreement pursuant to which Commonwealth Associates was to render certain
services to the Company and the Company was to pay certain dollar amounts and
issue a warrant to purchase shares of the Company's Common Stock to Commonwealth
Associates. The Company intends to assert defenses vigorously which it believes
to be meritorious. The proceeding is still in its infancy, and the extent of
exposure of the Company cannot be determined at this time.
ITEM 2. CHANGES IN SECURITIES
---------------------
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION
-----------------
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
None
(b) Reports of Form 8-K.
None
-18-
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant certifies that it has caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Beverly in the
Commonwealth of Massachusetts on May 15, 1996.
PALOMAR MEDICAL TECHNOLOGIES, INC.
----------------------------------
(Registrant)
DATE: May 15, 1996 By: /s/ Steven Georgiev
-----------------------
Steven Georgiev
Chief Executive Officer and
Chairman of the Board
DATE: May 15, 1996 /s/ Joseph P. Caruso
-----------------------
Joseph P. Caruso
Vice President, Chief Financial
Officer
(Principal Financial Officer)
-19-
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<RECEIVABLES> 4,108,910
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