SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported): May 3, 1996
-----------
Palomar Medical Technologies, Inc.
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-22340 04-3128178
- -------- ------- ----------
(state or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) Number)
66 Cherry Hill Drive, Beverly, Massachusetts 01915
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 508-921-9300
------------
Item 7: Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The unaudited financial statements of Tissue Technologies,
Inc. for the year ended September 30, 1995 and the six months ended March 31,
1996 are filed herewith.
(b) Supplemental Financial Statements.
The supplemental financial statements of the Registrant and
the supplemental management's discussion and analysis of financial condition and
results of operations for the year ended December 31, 1995 and the three months
ended March 31, 1996 are filed herewith.
(c) Exhibits.
No amendments have been made to the Exhibits as originally
filed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PALOMAR MEDICAL
TECHNOLOGIES, INC.
June , 1996 By: /s/ Steve Georgiev
- ------------ -----------------------
Date Steve Georgiev, Chairman
INDEX TO FINANCIAL STATEMENTS
1. Unaudited financial statements of Tissue Technologies, Inc. for the year
ended September 30, 1995 and the six months ended March 31, 1996.
2. Supplemental consolidated financial statements of the Registrant for the
year ended December 31, 1995.
3. Management's discussion and analysis of financial condition and results of
operations (supplemental) for the year ended December 31, 1995.
4. Supplemental consolidated financial statements of the Registrant for the
three months ended March 31, 1996.
5. Management's discussion and analysis of financial condition and results of
operations (supplemental) for the three months ended March 31, 1996.
ITEM 1. UNAUDITED FINANCIAL STATEMENTS OF TISSUE TECHNOLOGIES, INC. FOR THE YEAR
ENDED SEPTEMBER 30, 1995 AND THE SIX MONTHS ENDED MARCH 31, 1996
TISSUE TECHNOLOGIES, INC.
Financial Statements
as of September 30, 1995 and March 31, 1996
TISSUE TECHNOLOGIES, INC.
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, MARCH 31,
1995 1996
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ -- $ 393,080
Accounts receivable -- 514,210
Inventories -- 695,384
Prepaid expenses -- 141,528
------- -------
Total current assets -- 1,744,202
------- ---------
Property and Equipment, at cost:
Computer equipment 13,927 56,875
Office furniture 7,951 19,812
Leasehold improvements 9,114 9,114
----- -----
30,992 85,801
Less--Accumulated depreciation 2,007 2,795
----- -----
28,985 83,006
------ ------
Other Assets:
Security deposits 4,911 4,911
License agreement, net of accumulated amortization of $53,002 and $98,128,
respectively 396,998 351,872
------- -------
401,909 356,783
------- -------
Total assets $ 430,894 $ 2,183,991
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 211,630 $ 1,508,367
Accrued expenses 27,487 1,375,237
Refundable deposits 45,000 344,971
Short-term notes payable 125,000 1,000,000
------- ---------
Total current liabilities 409,117 4,228,575
------- ---------
Long-Term Debt (Note 3) 400,000 950,000
------- -------
Commitments (Note 4)
Stockholders' Deficit:
Common stock, no par value-
Authorized--5,000,000 shares
Issued and outstanding--1,624,455 shares 746,375 746,375
Warrant 100,000 100,000
Accumulated deficit (1,224,598) (3,840,959)
---------- ----------
Total stockholders' deficit (378,223) (2,994,584)
-------- ----------
Total liabilities and stockholders' deficit $ 430,894 $ 2,183,991
=========== ===========
</TABLE>
F-1
TISSUE TECHNOLOGIES, INC.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 24,
1994) TO SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
1995 1996
<S> <C> <C>
Revenues $ -- $ 1,732,935
Cost of Revenue -- 2,211,225
--------- ---------
Gross profit -- (478,290)
--------- --------
Operating Expenses:
Research and development 818,999 922,919
Selling, general and administrative 402,723 1,170,540
------- ---------
Total operating expenses 1,221,722 2,093,459
--------- ---------
Loss from Operations (1,221,722) (2,571,749)
---------- ----------
Interest Expense (21,701) (48,211)
Other Income, net 18,845 3,699
------ -----
Net Loss $(1,224,598) $(2,616,361)
=========== ===========
</TABLE>
F-2
TISSUE TECHNOLOGIES, INC.
Statement of Stockholders' Deficit
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
NUMBER NO ACCUMULATED STOCKHOLDERS'
OF SHARES PAR VALUE WARRANTS DEFICIT DEFICIT
<S> <C> <C> <C> <C> <C>
Inception, October 24, 1994 - $ - $ - $ - $ -
Initial issuance of common stock 837,455 8,375 - - 8,375
Sale of common stock 187,000 338,000 - - 338,000
Issuance of common stock in exchange
for license rights and convertible
note payable 600,000 400,000 - - 400,000
Value ascribed to common stock
warrants in exchange for license
rights - - 100,000 - 100,000
Net loss - - - (1,224,598) (1,224,598)
---------- ---------- --------- ---------- ----------
Balance, September 30, 1995 1,624,455 746,375 100,000 (1,224,598) (378,223)
Net loss - - - (2,616,361) (2,616,361)
---------- ---------- --------- ---------- ----------
Balance, March 31, 1996 1,624,455 $ 746,375 $ 100,000 $ (3,840,959) $ (2,994,584)
========= =========== ============ ============== ===============
</TABLE>
F-3
TISSUE TECHNOLOGIES, INC.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 24,
1994) TO SIX MONTHS
SEPTEMBER 30, ENDED MARCH 31,
1995 1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(1,224,598) $(2,616,361)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 55,009 49,856
Noncash compensation related to issuance of stock 50,000 --
Change in assets and liabilities-
Accounts receivable -- (514,210)
Inventory -- (695,384)
Prepaid expenses -- (141,528)
Accounts payable 211,630 1,296,737
Accrued expenses 27,487 1,347,750
Refundable deposits 45,000 299,971
------ -------
Net cash used in operating activities (835,472) (973,169)
-------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment (30,992) (58,751)
Other assets (54,911) --
-------
Net cash used in investing activities (85,903) (58,751)
------- -------
Cash Flows from Financing Activities:
Borrowing of long-term debt 500,000 550,000
Borrowings on short-term debt 125,000 1,000,000
Payments on short-term debt -- (125,000)
Proceeds from issuance of common stock 346,375 --
-------
Net cash provided by financing activities 921,375 1,425,000
------- ---------
Net Increase in Cash -- 393,080
Cash and Cash Equivalents, beginning of period -- --
------- ---------
Cash and Cash Equivalents, end of period $ -- $ 393,000
=========== ===========
Supplemental Disclosure of Noncash Financing Activities:
Value ascribed to warrants issued in connection with license agreement $ 100,000 $ --
Common stock issued in exchange for license rights and convertible note payable =========== ===========
$ 400,000 $ --
=========== ===========
</TABLE>
F-4
TISSUE TECHNOLOGIES, INC.
Notes to Financial Statements
March 31, 1996
(Unaudited)
(1) Operations and Significant Accounting Policies
Tissue Technologies, Inc. (the Company) was incorporated on October 24,
1994 under the laws of the State of Arizona. The Company has operating
facilities in Paradise Valley, Arizona, and Albuquerque, New Mexico. The
Company is a manufacturer of lasers and related components for surgical
purposes. The Company's customers include medical doctors, as well as
small businesses.
On May 3, 1996, the Company and Palomar Medical Technologies, Inc.
(Palomar) merged under a transaction accounted for as a pooling of
interests in accordance with Accounting Principals Board Opinion No. 16,
Accounting for Business Combinations. Under this transaction, Palomar
exchanged 3,200,000 shares of its common stock for all of the Company's
common stock and common stock equivalents.
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. The Company believes that the
unaudited information presented includes all adjustments (consisting only
of normal, recurring adjustments) necessary for a fair presentation in
accordance with generally accepted accounting principles.
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 accompanying financial statements reflect the application of certain
significant accounting policies as described below and elsewhere in the
accompanying financial statements and notes.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with
original maturities of 90 days or less to be cash equivalents. Cash
equivalents at March 31, 1996 consist of money market accounts.
F-5
TISSUE TECHNOLOGIES, INC.
Notes to Financial Statements
March 31, 1996
(Unaudited)
(Continued)
(1) Operations and Significant Accounting Policies (Continued)
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 March 31, 1996,
inventories consist of the following:
MARCH 31,
1996
Raw materials $ 525,062
Work-in-process and finished goods 170,322
-------------
$ 695,384
=============
Depreciation
The Company provides for depreciation, computed using the double
declining-balance method, by charges to income in amounts that allocate
the costs of these assets over their estimated useful lives, as follows:
ESTIMATED
USEFUL LIFE
Computer equipment 5 Years
Office furniture 5 Years
Leasehold improvements 5 Years
Research and Development Expenses
The Company charges research and development expenses to operations as
incurred.
Revenue Recognition
The Company recognizes product revenue upon shipment.
F-6
TISSUE TECHNOLOGIES, INC.
Notes to Financial Statements
March 31, 1996
(Unaudited)
(Continued)
(1) Operations and Significant Accounting Policies (Continued)
Refundable Deposits
The Company receives cash deposits from its customers and records the
amounts as a current liability. The deposits are recorded as revenue upon
product shipment.
Accrued Expenses
Accrued expenses consist of the following:
SEPTEMBER 30, MARCH 31,
1995 1996
Royalties $ - $ 62,784
Warranty - 1,112,500
Commissions - 111,274
Interest 21,721 70,032
Other 5,766 18,647
----- ------
$ 27,487 $ 1,375,237
========== =============
Disclosures about Fair Value of Financial Instruments
SFAS No. 107, Disclosures 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 September 30, 1995 and March
31, 1996. Fair values have been determined through information obtained
from market sources and management estimates.
(2) Short-Term Debt
At September 30, 1995 short-term debt consists of a promissory note
payable for $100,000 to an investor. This promissory note to an investor
bears interest at 8%. The Company repaid this note during the six months
ended March 31, 1996.
As of March 31, 1996, in connection with the merger discussed in Note 1,
Palomar loaned the Company $1,000,000 under two 90-day $500,000 notes
payable. These notes bear interest at 10% and 8% per annum, respectively.
F-7
TISSUE TECHNOLOGIES, INC.
Notes to Financial Statements
March 31, 1996
(Unaudited)
(Continued)
(3) Long-Term Debt
At September 30, 1995 and March 31, 1996, long-term debt consists of
various convertible notes payable to individuals. The notes bear interest
at 8% and are due in December 1997. The notes are convertible into the
Company's common stock, at the holder's option, at prices ranging from
$.43 to $3.00 per share. Upon the completion of an initial public
offering of the Company, the unpaid principal balance of the notes shall
be automatically converted into the Company's common stock. These notes
were converted into 651,665 shares of the Company's common shares on May
3, 1996 in connection with the merger of the Company with Palomar.
(4) Commitments
Leases
The Company leases its office space and manufacturing facility and a
corporate apartment under noncancelable operating leases expiring through
July 1998. The manufacturing facility lease is guaranteed by the majority
stockholder and officer of the Company. Future minimum lease commitments
under this lease are approximately as follows:
AMOUNT
Year Ending September 30,
1996 $ 35,000
1997 29,000
1998 17,000
------
$ 81,000
===========
Rent expense for the period from inception (October 24, 1994) to
September 30, 1995 and the six months ended March 31, 1996 was
approximately $11,000 and $15,000, respectively.
License Agreement
On February 28, 1995, the Company entered into a license agreement to
license a patent on a low-pressure discharge apparatus (a key instrument
in the Company's product) with a corporation (Licensor). The majority
stockholder and president of the Company also assigned his right to
license the technology to the Company, on an exclusive basis, and
converted his note payable of $100,000 in exchange for 600,000 shares of
the Company's common stock.
F-8
TISSUE TECHNOLOGIES, INC.
Notes to Financial Statements
March 31, 1996
(Unaudited)
(Continued)
(4) Commitments (Continued)
License Agreement (Continued)
The License Agreement gives the Company the right to manufacture, sell
and use the technology in exchange for a royalty equal to 3% of net
income, as defined in the License Agreement. As consideration for
entering into the agreement, the Licensor received $50,000 in cash and a
warrant to purchase 129,809 shares of common stock at a price of $.01 per
share. The Company ascribed a value to the warrant of $100,000. This
warrant was exercised in connection with the merger of the Company and
Palomar. The Company has capitalized $450,000, which represents the cash
paid plus the value ascribed to the equity consideration given in
exchange for the license. This amount is being amortized over a period of
five years. The Company has amortized $53,002 and $22,500 for the periods
ended September 30, 1995 and March 31, 1996, respectively.
(5) Stock Options
At March 31, 1996, the Company had outstanding options to purchase
181,924 shares of the Company's common stock. These options were vested
and exercisable at prices ranging from $.50 to $1.00. These options were
exercised on May 3, 1996 in connection with the merger of the Company and
Palomar.
(6) Income Taxes
The Company provides for income taxes under the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. At September
30, 1995, the Company had available, subject to review and possible
adjustment by the Internal Revenue Service, a federal net operating loss
carryforward of approximately $1,200,000 to be used to offset future
taxable income, if any. This net operating loss carryforward will begin
to expire in 2010. 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 merger with
Palomar on May 3, 1996. 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.
F-9
ITEM 2. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS OF THE REGISTRANT FOR THE
YEAR ENDED DECEMBER 31, 1995
PALOMAR MEDICAL TECHNOLOGIES, INC.
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Supplemental Consolidated Balance Sheets as of December 31, 1994 and
December 31, 1995 F-3
Supplemental Consolidated Statements of Operations for the nine months
ended December 31, 1994 and for the year ended December 31, 1995 F-4
Supplemental Consolidated Statements of Stockholders' Equity for the nine
months ended December 31, 1994 and for the year ended December
31, 1995 F-5
Supplemental Consolidated Statements of Cash Flows for the nine months
ended December 31, 1994 and for the year ended December 31, 1995 F-6
Notes to Supplemental Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO PALOMAR MEDICAL TECHNOLOGIES, INC.:
We have audited the accompanying supplemental consolidated balance
sheets of Palomar Medical Technologies, Inc. (a Delaware corporation) and
subsidiaries, as of December 31, 1994 and 1995, and the related supplemental
consolidated statements of operations, stockholders' equity and cash flows for
the nine months and year then ended, respectively. The supplemental consolidated
statements give retroactive effect to the merger with Tissue Technologies, Inc.
on May 3, 1996, which has been accounted for as a pooling of interest as
described in Note 1. These supplemental financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental 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 supplemental financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the supplemental financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
supplemental financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, based upon our audits, the supplemental consolidated
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, after giving retroactive
effect to the merger with Tissue Technologies, Inc. as described in Note 1, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts,
March 26, 1996 (except with respect
to the matter discussed in Note 1,
as to which the date is May 3, 1996)
F-2
PALOMAR MEDICAL TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,263,203 $ 17,138,178
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 4,737,766
Inventories 1,458,274 3,649,884
Current portion of deferred costs 436,225 462,787
Loans to officers 306,813 948,198
Notes receivable from related parties -- 3,161,375
Other current assets 135,158 352,130
------------ ------------
Total current assets 8,028,411 31,199,728
------------ ------------
PROPERTY AND EQUIPMENT, AT COST, NET 2,382,478 3,165,015
------------ ------------
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 $149,246 -- 1,597,745
Deferred costs, net of current portion 467,760 346,333
Long-term investment -- 500,000
Loan to related party -- 700,000
Other assets 398,349 631,831
------------ ------------
Total other assets 3,208,099 7,505,417
------------ ------------
$ 13,618,988 $ 41,870,160
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit $ 1,613,000 $ 1,296,462
Short term notes payable -- 100,000
Current portion of long-term debt 1,814,203 2,474,265
Contingent note payable -- 500,000
Accounts payable 1,816,216 4,246,950
Accrued expenses 1,404,732 4,633,557
------------ ------------
Total current liabilities 6,648,151 13,251,234
------------ ------------
LONG-TERM DEBT, NET OF CURRENT PORTION 4,141,422 3,330,172
------------ ------------
MINORITY INTEREST IN SUBSIDIARY 80,936 --
------------ ------------
COMMITMENTS AND CONTIGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value- -- 139
Authorized - 5,000,000 shares Issued and
outstanding - 13,860 shares at December 31, 1995
(Liquidation preference of $13,982,903)
Common stock, $.01 par value- 94,649 201,353
Authorized - 40,000,000 shares
Issued and outstanding - 9,464,963 shares at
December 31, 1994 and 20,135,406 shares at
December 31, 1995
Treasury Stock (200,000 shares at cost) -- (1,211,757)
Additional paid-in capital 15,773,109 54,152,385
Accumulated deficit (13,119,279) (25,864,657)
Unrealized holding gain on available for sales securites -- --
Subscriptions receivable from related party -- (1,988,709)
------------ ------------
Total stockholders' equity 2,748,479 25,288,754
------------ ------------
$ 13,618,988 $ 41,870,160
============ ============
</TABLE>
The accompaning notes are an integral part of these supplemental consolidated
financial statements.
F-3
PALOMAR MEDICAL TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
December 31, December 31,
1994 1995
------------ ------------
<S> <C> <C>
REVENUES $13,058,523 $21,906,504
COST OF REVENUES 10,320,586 17,192,470
------------ ------------
Gross profit 2,737,937 4,714,034
------------ ------------
OPERATING EXPENSES:
Research and development 2,939,124 4,419,487
Selling, general and administrative 3,883,822 10,648,235
Business development and other financing costs 1,240,248 2,109,303
------------ ------------
Total operating expenses 8,063,194 17,177,025
------------ ------------
Loss from operations (5,325,257) (12,462,991)
INTEREST EXPENSE (472,348) (1,374,199)
INTEREST INCOME 37,917 913,050
NET GAIN ON TRADING SECURITIES -- 201,067
MINORITY INTEREST IN LOSS OF SUBSIDIARY 67,601 102,305
------------ ------------
Net loss $(5,692,087) $(12,620,768)
============ ============
NET LOSS PER COMMON SHARE
$(0.84) $(0.89)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 6,759,411 14,164,901
============ ============
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-4
PALOMAR MEDICAL TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
-----------------------------------------------------------------------
Number $0.01 Number $0.01 Number
of Share Par Value of Shares Par Value of Shares Cost
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994 -- $ -- 5,231,575 $ 52,316 -- $ --
Sale of common stock, net of issuance costs -- -- 3,441,228 34,412 -- --
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 -- -- 9,464,963 94,649 -- --
Sale of common stock pursuant to warrants -- -- 2,640,093 26,401 -- --
Sale of common stock pursuant to Regulation S and
private placements -- -- 1,622,245 16,223 -- --
Payments received on subscriptions receivable -- -- -- -- -- --
Issuance of preferred stock, including common stock
issued as as a placement fee, net of
issuance costs 21,295 213 300,000 3,000 -- --
Purchase of treasury stock -- -- -- -- (200,000) (1,211,757)
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 -- -- -- -- -- --
Value ascribed to warrant in exchange for license
technology -- -- -- -- -- --
Issuance of common stock for technology -- -- 739,546 7,395 -- --
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 Tech., 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 20,135,406 $201,353 (200,000) $(1,211,757)
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Paid-in Accumulated Subscription Deferred Stockholders'
Capital Deficit Receivable Compensation Equity
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994 $8,929,614 $(7,427,192) -- $(89,008) $1,465,730
Sale of common stock, net of issuance costs 3,935,348 -- -- -- 3,969,760
Sale of common stock pursuant to warrants 23,417 -- -- -- 23,667
Issuance of common stock for technology 209,400 -- -- -- 210,000
Issuance of common stock for investment banking, merger
and acquisition consulting services 992,323 -- -- -- 995,144
Issuance of restricted stock to officers and consultants
for services rendered 872,313 -- -- -- 876,563
Compensation expense related to stock options 125,000 -- -- -- 125,000
Compensation expense related to warrants issued to
consultants and investment bankers 151,250 -- -- -- 151,250
Value ascribed to convertible debentures 550,000 -- -- -- 550,000
Amortization of deferred financing costs (15,556) -- -- -- (15,556)
Amortization of deferred compensation -- -- -- 89,008 89,008
Net loss -- (5,692,087) -- -- (5,692,087)
----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 15,773,109 (13,119,279) -- -- 2,748,479
Sale of common stock pursuant to warrants 7,107,689 -- (4,633,975) -- 2,500,115
Sale of common stock pursuant to Regulation S and
private placements 2,935,921 -- -- -- 2,952,144
Payments received on subscriptions receivable -- -- 3,694,840 -- 3,694,840
Issuance of preferred stock, including common stock
issued as as a placement fee, net of
issuance costs 19,382,750 -- -- -- 19,385,963
Purchase of treasury stock -- -- -- -- (1,211,757)
Issuance of common stock pursuant to stock options 481,199 -- -- -- 484,049
Issuance of common stock in lieu of payment of notes
payable 1,873,611 -- -- -- 1,879,932
Repayment of convertible debentures (321,533) -- -- -- (321,533)
Conversion of convertible debentures 3,071,302 -- -- -- 3,090,740
Value ascribed to convertible debentures 899,813 -- -- -- 899,813
Value ascribed to warrant in exchange for license
technology 100,000 -- -- -- 100,000
Issuance of common stock for technology 292,605 -- -- -- 300,000
Conversion of preferred stock 68,377 -- -- -- 86,060
Exercise of underwriter's warrants 1,049,574 -- (1,049,574) -- 2,000
Issuance of common stock for Spectrum Medical Tech., Inc. 996,358 -- -- -- 1,000,000
Issuance of common stock for investment banking and
merger and acquisition consulting services 416,823 -- -- -- 418,500
Amortization of deferred financing costs (70,583) -- -- -- (70,583)
Compensation expense related to warrants issued to
consultants and investment bankers 95,370 -- -- -- 95,370
Preferred stock dividends -- (124,610) -- -- (124,610)
Net loss -- (12,620,768) -- -- (12,620,768)
----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $54,152,385 $(25,864,657) $(1,988,709) $ -- $25,288,754
=======================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-5
PALOMAR MEDICAL TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
December 31, December 31,
1994 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,692,087) $(12,620,768)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 610,385 1,825,673
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 1,680,917 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) (1,479,532)
Inventories 148,388 (1,419,030)
Other current assets and loans to officers (365,578) (658,012)
Accounts payable 913,290 1,770,100
Accrued expenses (266,469) 2,859,702
------------ ------------
Net cash used in operating activities (3,474,700) (10,207,932)
------------ ------------
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) (1,147,945)
Increase in other assets (176,718) (480,369)
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 (826,579) (7,000,985)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures 600,000 4,150,000
Proceeds from notes payable 2,200,000 2,630,000
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 3,993,427 2,952,144
Exercise of warrants, net of redemption of $29,188 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 6,530,769 31,083,892
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,229,490 13,874,975
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,033,713 3,263,203
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,263,203 $ 17,138,178
============ ============
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-6
PALOMAR MEDICAL TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
December 31, December 31,
1994 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 $-- $ 3,190,740
======== ===========
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
======== ===========
Common Stock issued in exchange for license rights $-- $ 300,000
======== ===========
Prepaid investment banking fees resulting from stock
issued in lieu of cash payment $890,625 $ 120,000
======== ===========
Value ascribed to warrant issued in connnection
with license agreement $-- $ 100,000
======== ===========
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 CD TITLES, INC.
Liabilities assumed $-- $ (201,761)
Fair value of assets acquired -- 598,960
Cash Paid -- (397,199)
-------- -----------
COST IN EXCESS OF NET ASSETS ACQUIRED $-- $--
======== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(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.
These supplemental consolidated financial statements of the Company
have been prepared to give retroactive effect to the acquisition of Tissue
Technologies, Inc. ("Tissue"), which occurred on May 3, 1996. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Palomar after
financial statements covering the date of consummation of the business
combination are issued.
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.
F-8
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND OPERATIONS (CONTINUED)
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.
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.
F-9
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND OPERATIONS (CONTINUED)
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.
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.
F-10
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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):
Nine Months
Ended Year Ended
December 31, December 31,
1994 1995
--------------- ---------------
Revenue $46,149,493 $29,780,343
Net loss (6,433,026) (16,856,499)
Net loss per common share $(0.90) $(1.18)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying supplemental 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 and Tissue, as
discussed above. 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.
F-11
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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:
December 31, December 31,
1994 1995
---------------- ----------------
Raw materials $ 619,238 $1,949,288
Work in process and finished goods 1,161,948 2,008,389
Less -- Progress billings 322,912 307,793
---------------- ----------------
$1,458,274 $3,649,884
================ ================
(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:
December 31, December 31,
1994 1995
--------------- ------------------
Equipment under capital leases $1,070,000 $1,214,950
Machinery and equipment 1,098,437 1,992,157
Furniture and fixtures 426,230 806,252
Leasehold improvements 278,062 308,158
--------------- ------------------
2,872,729 4,321,517
Less: Accumulated depreciation
and amortization 490,251 1,156,502
--------------- ------------------
$2,382,478 $3,165,015
=============== ==================
(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.
F-12
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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:
December 31,
-------------------------------
1994 1995
------------- --------------
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
============= ==============
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 $149,246, and is
recorded in selling, general and administrative expenses in the Company's
consolidated statements of operations.
On February 28, 1995, the Company entered into a license agreement to
license a patent on a low pressure discharge apparatus (a key instrument in the
Company's product) with a corporation (Licensor). As consideration for entering
into the agreement, the Licensor received $50,000 in cash and a warrant to
purchase 160,000 shares of common stock at a price of $.01 per share. The
Company ascribed a value to the warrant of $100,000. The former majority
stockholder and officer of Tissue also assigned his right to license the
technology to the Company, on an exclusive basis, and exchanged his note payable
of $100,000 for 600,000 shares of the Company's common stock. The Company has
capitalized $450,000 which represents the cash paid plus the value ascribed to
the equity consideration given in exchange for the license.
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.
F-13
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENATL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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. The shares of the Company's common stock issued in connection with
the business combination with Tissue have been included in the weighted average
shares outstanding as of the original date of issuance by Tissue.
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
============ ============ ============= ===========
December 31, 1995
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gain Loss Value
------------ ------------ ------------- -----------
Trading Securities:
Investments in publicly
traded companies $615,842 $137,170 $3,602 $749,410
============ ============ ============= ===========
</TABLE>
F-14
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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:
December 31,
--------------------------------
1994 1995
--------------- --------------
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
=============== ==============
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 10.3% of revenues and 11.2% of accounts
receivable. The Company's Dynaco subsidiary conducts business with two suppliers
who are critical to the procurement of certain inventory items.
F-15
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 $18,658,000 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, subsequent stock offerings
and the merger with Tissue discussed in Note 1. 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.
[This space intentionally left blank]
F-16
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT
(a) Notes Payable
<TABLE>
<CAPTION>
December 31, December 31,
1994 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.
F-17
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 at Shares
Additional December 31, Issued
Face Paid-In --------------------------- Upon
Series 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.
F-18
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT (CONTINUED)
(b) Convertible Debentures (continued)
During 1995, the debentureholders converted the 3%, 6% and 7% series
convertible debenture 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 2,629,709
1998 649,666
1999 50,797
-------------
$5,804,437
=============
As of December 31, 1994 and 1995, the Company had $100,000 and $950,000
of convertible debentures that were issued by the Company's subsidiary Tissue.
The convertible debentures bear interest at 8% and are due December 1997. The
notes are convertible into the Company's common stock, at the holder's option,
at prices ranging from $0.35 to $2.43 per share. Upon completion of an initial
public offering of the Company, the unpaid principal balance of the notes shall
be automatically convert into the Company's common stock. These notes were
converted into 813,498 shares of the Company's common shares on May 3, 1996 in
connection with the merger of the Company with Palomar.
(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.
F-19
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(b) Preferred Stock
<TABLE>
<CAPTION>
The Company is authorized to issue preferred stock as follows:
<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
=========
As of December 31, 1995, preferred stock consists of the following:
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.
F-20
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
During 1995, the Company granted options to purchase 324,235 shares of the
Company's common stock at prices ranging from $0.40 to $0.81 per share. These
options were not granted pursuant to the above mentioned plans. These options
were exercised on May 3, 1996 in connection with the merger with Tissue as
discussed in Note 1.
[This space intentionally left blank]
F-21
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(d) Stock Option Plans (continued)
The following table summarizes stock option activity:
<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 820,235 0.40-3.00
Options Exercised (285,000) 1.00-3.50
Options Canceled (75,000) 2.375
------------ ---------------
Options Outstanding, December 31, 1995 1,507,735 $0.40-$3.50
============ ===============
Options Exercisable as of December 31, 1995 1,494,735 $0.40-$3.50
============ ===============
Options Available for future issuances under the plans
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.
F-22
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
In January 1995, the Company issued a warrant to purchase 160,000
shares of the Company's Common Stock at $0.01 per share in connection with a
license agreement. See Note 2(g). This warrant was exercised on May 3, 1996, in
connection with Tissue, as discussed in Note 1.
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
F-23
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(e) Warrants (continued)
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.
<TABLE>
<CAPTION>
Number of
Shares Underlying Exercise
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:
December 31,
1995
---------------
Convertible debentures 1,003,251
Stock option plans 1,789,235
Warrants 6,037,071
Employee 401(k) plan 300,000
Preferred stock 3,402,242
---------------
Total 12,531,799
===============
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).
F-24
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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
F-25
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) RESEARCH & PRODUCT DEVELOPMENT AGREEMENTS (CONTINUED)
amended this agreement with NEMC. Under the amended agreement, the Company will
provide an additional $61,500 tofund 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.
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:
F-26
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 $(5,822,985) $(5,325,257)
Identifiable Assets $8,582,303 $5,036,685 $13,618,988
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 $5,610,280 $21,906,504
Operating Loss $(3,700,665) $(8,794,908) $(12,495,573)
Identifiable Assets $17,048,106 $24,822,054 $41,870,160
Depreciation and Amortization $881,530 $944,143 $1,825,673
Capital Expenditures $540,725 $908,062 $1,448,787
</TABLE>
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, December 31,
1994 1995
---------------- ---------------
Payroll and consulting costs $633,878 $852,793
Professional fees 206,527 914,935
Settlement costs -- 700,000
Other 564,327 2,165,829
---------------- ---------------
Total $1,404,732 $4,633,557
================ ===============
(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 with in 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).
The Company's lease for its manufacturing facility for Tissue is
guaranteed by an officer of Tissue.
F-27
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 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 $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.
F-28
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 $804,291
1997 706,857
1998 665,325
1999 560,356
2000 500,426
Thereafter 691,000
-------------
$3,928,255
=============
F-29
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(a) Operating Leases (continued)
Rental expense related to all operating leases was approximately
$468,000 and $695,000 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.
Tissue has a license agreement that gives the Company the right to
manufacture, sell and use certain technology in exchange for a royalty equal to
3% of net income, as defined in the license agreement. Royalty expense for the
year ended December 31, 1995, was immaterial to the Company's operations.
(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.
F-30
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(c) Incentive Compensation Plans (continued)
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.
(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.
F-31
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(d) Consulting Agreements (continued)
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.
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 be 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.
F-32
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(i) Letter of Credit
PEC has a $500,000 irrevocable letter of credit outstanding with a bank
to secure payment to a vendor.
(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. 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. 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.
F-33
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) SUBSEQUENT EVENTS (CONTINUED)
(b) Equity Transactions (continued)
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.
[This space intentionally left blank]
F-34
ITEM 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (SUPPLEMENTAL) FOR THE YEAR ENDED DECEMBER 31, 1995
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 EpilaserTM product for hair removal, however, management is unable to
predict when its EpilaserTM product will be cleared for sale in the U.S., if at
all. In May 1996, the Company acquired Tissue Technologies, Inc.
("Tissue").which sells an FDA approved C02 laser for skin resurfacing. 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 $21,906,504 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 $4,419,487 for
the fiscal year ended December 31, 1995, from $2,939,124 for the nine months
ended December 31, 1994. This 51% increase in Research and Development expenses
is primarily due to extensive research and development performed at Tissue to
bring its Tru-Pulse C02 laser to market beginning in the fourth quarter of 1995.
The Company's remaining research and development activities stabilized somewhat
for two reasons. 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 $10,648,235
for the fiscal year ended December 31, 1995, from $3,883,822 for the nine months
ended December 31, 1994. This 174% increase is attributable to the acquisition
of Spectrum Medical, CD Titles, and Tissue (acquried in May 1996 and accounted
for as a pooling of interest) 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
-25-
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.
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 $1,374,199 for the fiscal year ended
December 31, 1995, from $472,348 for the nine months ended December 31, 1994.
This 190% 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 $913,050 for the fiscal year ended
December 31, 1995, from $37,917 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 $12,620,087, as compared to a net loss of $5,692,087 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 $2,939,124 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.
-26-
Selling, General and Administrative expenses increased from $2,137,659
for the fiscal year ended March 31, 1994, to $3,883,822 for the nine months
ended December 31, 1994. This 82% 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 $5,692,087 as compared to a net loss of $4,062,905 for
the fiscal year ended March 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995, the Company had $17,887,588 in cash, cash
equivalents and trading securities. During the fiscal year ended December 31,
1995, the Company raised approximately $3,002,000, $3,968,000, $19,385,000 and
$6,195,000 in net proceeds from the sale of its common stock in an unregistered
offering to overseas investors and private placements, the issuance of
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: $1,825,673 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.
The Company anticipates that capital expenditures for 1996 will total
approximately $2,000,000. 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 funds.
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
-27-
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.
[This space intentionally left blank]
-28-
ITEM 4. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS OF THE REGISTRANT FOR THE
THREE MONTHS ENDED MARCH 31, 1996
PALOMAR MEDICAL TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $17,138,178 $15,597,522
Marketable securities 749,410 1,027,750
Accounts receivable, net of allowance for doubtful
accounts of approximately $156,000 4,737,766 4,467,120
Inventories 3,649,884 6,267,718
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 352,130 760,437
------------- -------------
Total current assets 31,199,728 32,034,789
------------- -------------
PROPERTY AND EQUIPMENT, AT COST, NET 3,165,015 5,133,774
------------- -------------
OTHER ASSETS:
Cost in excess of net assets acquired, net of accumulated 3,729,508 3,918,013
amortization of $673,167 and $816,731, respectively
Intangible assets, net of accumulated amortization of $149,246 1,597,745 1,824,271
and $247,720, respectively
Deferred costs, net of current portion 346,333 331,833
Long-term investment 500,000 1,650,000
Loan to related party 700,000 1,905,616
Other assets 631,831 995,294
------------- -------------
Total other assets 7,505,417 10,625,027
------------- -------------
$41,870,160 $47,793,590
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit $1,296,462 $1,249,180
Short term notes payable 100,000 --
Current portion of long-term debt 2,474,265 2,522,902
Contingent note payable 500,000 --
Accounts payable 4,246,950 6,735,397
Accrued expenses 4,633,557 4,570,282
------------- -------------
Total current liabilities 13,251,234 15,077,761
------------- -------------
LONG-TERM DEBT, NET OF CURRENT PORTION 3,330,172 3,180,337
------------- -------------
MINORITY INTEREST IN SUBSIDIARY -- 19,111
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value- 139 60
Authorized - 5,000,000 shares
Issued and outstanding - 13,860
shares at December 31, 1995 and 6,000 shares at March 31,
1996
Common stock, $.01 par value- 201,353 245,807
Authorized - 40,000,000 shares
Issued and outstanding - 20,135,406 shares at December 31,
1995 and 24,580,717 shares at March 31, 1996
Treasury Stock (200,000 shares at cost) (1,211,757) (1,211,757)
Additional paid-in capital 54,152,385 65,017,013
Accumulated deficit (25,864,657) (33,477,242)
Subscriptions receivable from related party (1,988,709) (1,057,500)
------------- -------------
------------- -------------
Total stockholders' equity 25,288,754 29,516,381
------------- -------------
$41,870,160 $47,793,590
============= =============
</TABLE>
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
-3-
PALOMAR MEDICAL TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1995 1996
------------- -------------
<S> <C> <C>
REVENUES $3,569,619 $6,925,001
COST OF REVENUES 2,840,437 7,283,766
------------- -------------
Gross profit (Loss) 729,182 (358,765)
------------- -------------
OPERATING EXPENSES:
Research and development 658,936 1,716,803
Selling, general and administrative 1,028,672 5,223,792
Business development and other financing costs 409,909 497,273
------------- -------------
Total operating expenses 2,097,517 7,437,868
------------- -------------
(Loss) from operations (1,368,335) (7,796,633)
INTEREST EXPENSE (224,529) (324,682)
INTEREST INCOME 32,223 606,194
NET GAIN ON TRADING SECURITIES -- 115,084
MINORITY INTEREST IN LOSS OF SUBSIDIARY 28,158 30,575
------------- -------------
Net (loss) $(1,532,483) $(7,369,462)
============= =============
NET LOSS PER COMMON SHARE
$(0.13) $(0.33)
============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 11,471,169 22,239,301
============= =============
</TABLE>
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
-4-
PALOMAR MEDICAL TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Treasury
Preferred Stock Common Stock 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 20,135,406 $201,353 (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 contribution -- -- 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 24,580,717 $245,807 (200,000)
======================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury
Stock Additional Total
----------- Paid-in Accumulated Subscription Stockholders'
Cost Capital Deficit Receivable Equity
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $(1,211,757) $54,152,385 $(25,864,657) $(1,988,709) $25,288,754
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 -- 5,964,164 -- -- 5,964,224
Issuance of common stock pursuant to stock options -- 184,470 -- -- 185,250
Issuance of common stock for 1995 employer 401(k)
matching contribution -- 160,139 -- -- 160,598
Conversion of preferred stock -- 210,796 -- -- 233,842
Redemption of preferred stock -- (3,123,127) -- -- (3,123,152)
Exercise of underwriter's warrants -- 1,057,500 -- (1,057,500) 5,000
Exercise of stock options in minority controlled subsidiary -- 50,000 -- -- 50,000
Issuance of common stock for investment banking and merger
and acquisition consulting services -- 36,656 -- -- 36,724
Return of escrowed shares -- 460 -- -- --
Amortization of deferred financing costs -- (32,500) -- -- (32,500)
Preferred stock dividends -- -- (243,123) -- (243,123)
Net loss -- -- (7,369,462) -- (7,369,462)
---------------------------------------------------------------
BALANCE, MARCH 31, 1996 $(1,211,757) $65,017,013 $(33,477,242) $(1,057,500) $29,516,381
==============================================================
</TABLE>
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
-5-
PALOMAR MEDICAL TECHNOLOGIES, INC.
SUPPLEMENTAL 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 $(1,532,483) $(7,369,462)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 216,192 570,710
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 34,314
Inventories (519,589) (2,452,661)
Other current assets and loans to officers (413,268) (793,722)
Accounts payable (2,908) 2,333,136
Accrued expenses 2,065 65,008
---------------- ----------------
Net cash used in operating activities (2,070,009) (7,811,115)
---------------- ----------------
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) (2,031,344)
Increase in intangible assets -- (325,000)
Increase in other assets (114,513) (381,694)
Loans to related parties -- (1,713,116)
Payments on loans from related parties -- 1,421,467
Investment in nonmarketable securities -- (1,150,000)
---------------- ----------------
Net cash used in investing activities (430,953) (4,326,273)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable -- 21,816
Payments of notes payable and capital lease obligations (370,465) (319,350)
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 sale of common stock 55,000 --
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 1,079,572 10,596,732
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,421,390) (1,540,656)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,263,203 17,138,178
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,841,813 $15,597,522
================ ================
</TABLE>
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
-6-
PALOMAR MEDICAL TECHNOLOGIES, INC.
SUPPLEMENTAL 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
================ ================
Common stock issued in exchange for license rights $300,000 $--
================ ================
Value ascribed to warrant issued in connection with license agreement $100,000 $--
================ ================
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 supplemental
consolidated financial statements.
-7-
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL 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.
These supplemental consolidated financial statements of the Company
have been prepared to give retroactive effect to the acquisition of Tissue
Technologies, Inc. ("Tissue"), which occurred on May 3, 1996. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interest method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Palomar after
financial statements covering the date of consummation of the business
combination are issued.
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
-8-
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.
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:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
---------------- ----------------
<S> <C> <C>
Raw materials $1,949,288 $3,992,132
Work in process and finished goods 2,008,389 2,422,239
Less -- Progress billings 307,793 146,653
----------------
================
$3,649,884 $6,267,718
================ ================
</TABLE>
-9-
7. PROPERTY AND EQUIPMENT
----------------------
Property and Equipment consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
---------------- --------------
<S> <C> <C>
Equipment under capital leases $1,214,950 $1,364,748
Machinery and equipment 1,992,157 3,930,017
Furniture and fixtures 806,252 893,756
Leasehold improvements 308,157 313,664
---------------- --------------
4,321,516 6,502,185
Less: Accumulated depreciation
and amortization 1,156,501 1,368,411
---------------- --------------
$3,165,015 $5,133,774
================ ==============
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
---------------- ---------------
<S> <C> <C>
Payroll and consulting costs $852,793 $1,045,826
Professional fees 914,935 294,420
Settlement Costs 700,000 --
Warranty - 1,112,500
Other 2,165,829 2,117,536
================ ===============
Total $4,633,557 $4,570,282
================ ===============
</TABLE>
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. The shares of the Company's common stock issued in connection with
the business combination with Tissue have been included in the weighted average
shares outstanding as of the original date of issuance by Tissue.
[This space intentionally left blank]
-10-
10. NOTES PAYABLE
--------------
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
--------------- --------------
<S> <C> <C>
7% Note payable 244,782 244,782
8% Convertible debentures, issued by Tissue due December 1997 950,000 950,000
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
--------------- --------------
5,804,437 5,703,239
Less -- current maturities 2,474,265 2,522,902
--------------- --------------
$3,330,172 $3,180,337
=============== ==============
</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 1,003,251
Stock option plans 1,871,235
Warrants 6,878,062
Employee 401(k) plan 254,115
Preferred stock 1,333,333
---------------
Total 11,339,996
===============
-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 $7,275,433 $7,310,001
Net loss $(3,940,564) $(7,407,462)
Net loss per common share $(0.34) $(0.33)
-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-
ITEM 5. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (SUPPLEMENTAL) FOR THE THREE MONTHS ENDED MARCH 31, 1996
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
$6,925,001 as compared to $3,569,619 for the three months ended March 31, 1995.
The 94% 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 margin for the three months ended March 31, 1996, was a loss of
$358,765 versus a profit of $729,182 for the three months ended March 31, 1995.
The 28.9% decrease in gross margin 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 $1,716,803 for the three
months ended March 31, 1996, from $658,936 for the three months ended March 31,
1995. This 161% 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 $5,223,792
for the three months ended March 31, 1996, from $1,028,672 for the three months
ended March 31, 1995. This 407% increase is attributable to the acquisition of
Spectrum Medical, CD Titles, Tissue 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 $324,682 for the three months ended March
31, 1996, from $224,529 for the three months ended March 31, 1995. This 44%
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 $606,192 for the three months ended March
31, 1996, from $32,223 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.
-15-
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 three months ended
March 31, 1996, was $7,369,462, as compared to a net loss of $1,532,483 for the
three months ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had $16,625,272 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: $570,710 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
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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.
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.
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