FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-22340
PALOMAR MEDICAL TECHNOLOGIES, INC.
--------------------------------------------------
(Exact name of issuer as specified in its charter)
<TABLE>
<S> <C>
Delaware 04-3128178
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
45 Hartwell Avenue, Lexington, MA 02173
----------------------------------------
(Address of principal executive offices)
(781)676-7300
------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
As of October 31, 1997, 40,276,310 shares of Common Stock, $.01 par
value per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
1
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Consolidated Condensed Balance Sheets - December 31, 1996 and September 30, 1997 P. 3
Consolidated Statements of Operations - For the Three and Nine Months Ended
September 30, 1996 and 1997 P. 4
Consolidated Statement of Stockholders' Equity - For the Nine Months Ended
September 30, 1997 P. 5
Consolidated Statements of Cash Flows - For the Nine Months Ended
September 30, 1996 and 1997 P. 6
Notes to Consolidated Financial Statements P. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS P. 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS P. 22
ITEM 2. CHANGES IN SECURITIES P. 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES P. 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS P. 23
ITEM 5. OTHER INFORMATION P. 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K P. 24
SIGNATURES P. 25
</TABLE>
2
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
<TABLE>
<S> <C> <C> <C>
December 31, September 30,
1996 1997
ASSETS
Current Assets:
Cash and cash equivalents $16,172,731 $12,658,099
Marketable securities 2,893,792 2,432,375
"Accounts receivable, net" 18,308,077 17,403,792
"Inventories, net" 18,790,484 22,393,482
Loans to officers 995,331 1,549,388
Notes receivable related parties 464,153 ---
Other notes receivable 899,937 ---
Other current assets 7,623,161 3,354,142
----------- -----------
Total current assets 66,147,666 59,791,278
----------- -----------
Property and Equipment, at Cost, Net 8,404,605 11,396,181
----------- ----------
Other Assets:
Cost in excess of net assets acquired, net 5,024,299 3,451,106
Intangible assets, net 2,286,058 778,321
Deferred costs 2,895,803 1,571,603
Long-term investments 3,179,554 500,000
Loan to related party 1,100,000 ---
Other assets 1,719,211 1,548,162
---------- ----------
Total other assets 16,204,925 7,849,192
---------- ----------
$90,757,196 $79,036,651
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving lines of credit $4,558,052 $4,315,397
Current portion of long-term debt 2,783,683 4,104,793
Accounts payable 14,304,285 14,311,407
Accrued expenses 14,669,893 23,651,346
---------- ----------
Total current liabilities 36,315,913 46,382,943
---------- ----------
Long-Term Debt, Net of Current Portion 16,204,692 18,974,067
---------- ----------
Minority Interest 160,000 5,148,929
---------- ----------
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Preferred stock, $.01 par value- 182 244
Authorized - 5,000,000 shares
Issued and outstanding -
18,151 shares and 24,397 shares
at December 31, 1996 and September 30, 1997
Common stock, $.01 par value- 305,968 397,506
Authorized - 100,000,000 shares
Issued and outstanding - 30,596,812 shares
and 39,750,574 shares
at December 31, 1996 and September 30, 1997
Additional paid-in capital 104,900,551 143,643,354
Accumulated deficit (64,971,200) (133,366,880)
Unrealized loss on marketable securities (342,500) ---
Subscriptions receivable from related party (604,653) (504,653)
Less: Treasury stock-
(200,000 and 345,000 shares at cost, respectively) (1,211,757) (1,638,859)
---------- ------------
Total stockholders' equity 38,076,591 8,530,712
---------- ------------
$90,757,196 $79,036,651
=========== ============
</TABLE>
The accompanying note are an integral part
of these consolidated financial statements
3
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
--------------------------- --------------------------
Revenues $24,690,970 $18,306,413 $49,153,990 $63,206,446
Cost of Revenues 20,729,923 19,106,809 42,834,703 62,311,152
--------------------------- --------------------------
Gross profit (loss) 3,961,047 (800,396) 6,319,287 895,294
--------------------------- --------------------------
Operating Expenses
Research and development 1,639,712 3,584,942 5,731,009 9,508,833
Sales and marketing 2,167,195 4,041,077 6,338,865 11,913,675
General and administrative 5,581,662 5,596,761 13,793,418 16,681,599
Business development and other financing costs 477,380 597,181 2,419,476 2,061,339
Pooling-of-interest expenses --- --- 443,780 ---
Settlement and litigation costs --- --- --- 3,550,000
Restructuring and asset write-off costs --- 9,426,491 --- 9,426,491
Total operating expenses 9,865,949 23,246,452 28,726,548 53,141,937
Loss from operations (5,904,902) (24,046,848) (22,407,261) (52,246,643)
Interest Expense (510,107) (1,070,692) (1,248,986) (4,640,276)
Interest Income 643,898 140,719 1,847,345 664,276
Net Gain on Trading Securities 1,820,311 445,647 2,548,629 995,624
Asset writeoff --- (13,547,759) --- (13,547,759)
Other Expense --- (847,757) --- (1,298,720)
Minority Interest in Loss of Subsidiary 1,388 1,937,121 47,059 2,905,796
------------------------ ---------------------------
Net loss $(3,949,412) $ (36,989,569) $(19,213,214) $(67,167,702)
=========================== ===========================
Net Loss Per Common Share (Note 6) $(0.15) $(1.11) $(0.80) $(2.15)
=========================== ===========================
Weighted Average Number of
Common Shares Outstanding 27,681,158 34,498,657 25,194,388 32,758,019
=========================== ===========================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
-----------------------------------------------------------------------------------
Number $0.01 Number $0.01 Number
of Shares Par Value of Shares Par Value of Shares Cost
-----------------------------------------------------------------------------------
Balance, December 31, 1996 18,151 $182 30,596,812 $305,968 (200,000) ($1,211,757)
Sale of common stock
pursuant to warants and options -- -- 733,882 7,339 -- --
Sale of common stock for options issued
as legal settlement -- -- 60,845 608 -- --
Payments received on subscriptions
receivable -- -- -- -- -- --
Issuance of preferred stock 16,000 160 -- -- -- --
Issuance of common stock for 1996
employer 401(k) matching
contribution -- -- 41,425 414 -- --
Conversion of preferred stock (9,754) (98) 3,287,708 32,877 -- --
Conversion of convertible debentures -- -- 4,348,082 43,481 -- --
Issuance of common stock for investment
banking, merger and acquisition
and consulting services -- -- 5,000 50 -- --
Value ascribed to the discount feature of
convertible debentures issued -- -- 413,109 4,131 -- --
Issuance of common stock for Employee Stock
Purchase Plan -- -- 8,391 84 -- --
Compensation expense related to warrants
issued to non-employees under
Statement of Financial Accounting
Standards No. 123 -- -- -- -- -- --
Unrealized loss on marketable securities -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Guaranteed value associated with Dermascan
acquisition -- -- -- -- -- --
Issuance of common stock for technology -- -- 255,320 2,553 -- --
Purchase of treasury stock -- -- -- -- (145,000) (427,102)
Gain related to the issuance of common stock
by Nexar Technologies, Inc. -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance, September 30, 1997 24,397 $244 39,750,574 $397,506 (345,000) ($1,638,859)
=================================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Additional Unrealized (Loss) Total
Paid-in Accumulated Gain on marketable Subscriptions Stockholders'
Capital Deficit securities Receivable Equity
-------------------------------------------------------------------------------
Balance, December 31, 1996 $104,900,551 ($64,971,200) ($342,500) ($604,653) $38,076,591
Sale of common stock pursuant
to warrants and options 1,409,429 -- -- -- $1,416,768
Sale of common stock for options
issued as legal settlement 151,505 -- -- -- $152,113
Payments received on subscriptions
receivable -- -- -- 100,000 $100,000
Issuance of preferred stock 14,999,840 -- -- -- $15,000,000
Issuance of common stock for 1996
employer 401(k) matching contribution 268,848 -- -- -- $269,262
Conversion of preferred stock 275,420 -- -- -- $308,199
Conversion of convertible debentures 8,982,760 -- -- -- $9,026,241
Issuance of common stock for investment
banking, merger and acquisition
and consulting services 38,075 -- -- -- $38,125
Value ascribed to the discount feature
of convertible debentures issued 3,750,812 -- -- -- $3,754,943
Issuance of common stock for Employee
Stock Purchase Plan 26,957 -- -- -- $27,041
Compensation expense related to warrants
issued to non-employees under
Statement of Financial Accounting
Standards No. 123 499,465 -- -- -- $499,465
Unrealized loss on marketable securities -- -- 342,500 -- $342,500
Preferred stock dividends -- (1,227,978) -- -- ($1,227,978)
Guaranteed value associated with Dermascan
aquisition (216,562) -- -- -- ($216,562)
Issuance of common stock for technology 1,146,388 -- -- -- $1,148,941
Purchase of treasury stock -- -- -- -- ($427,102)
Gain related to the issuance of common stock
by Nexar Technologies, Inc. 7,409,866 -- -- -- $7,409,866
Net loss -- (67,167,702) -- -- (67,167,702)
-------------------------------------------------------------------------------
Balance, September 30, 1997 $143,643,354 ($133,366,880) -- ($504,653) $8,530,712
===============================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<S> <C> <C> <C>
Nine Months Ended September 30,
1996 1997
Cash Flows from Operating Activities
Net loss $(19,213,214) $(67,167,702)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 2,380,297 3,552,093
Settlement and litigation costs -- 2,900,000
Restructuring and asset write-off costs 22,974,250
Write-off of in-process research and development 57,212 --
Write-off of deferred financing costs associated with
redemption of convertible debentures 201,500 27,554
Valuation allowances for notes and investments -- 1,035,912
Minority interest in loss of subsidiary (30,572) (2,885,493)
Accrued interest receivable on trading securities
and subscription receivable (698,378) --
Foreign currency exchange gain -- (546,316)
Noncash interest expense related to convertible debentures 117,105 2,585,606
Noncash compensation related to common stock and warrants 903,584 689,703
Realized gain on marketable securities (877,632) (195,706)
Unrealized gain on marketable securities (1,670,187) (826,142)
Changes in assets and liabilities, net of effects
from business combinations;
Purchases of marketable securities (10,112,596) (152,938)
Sale of marketable securities and
interest received on marketable securities 10,077,026 1,630,578
Accounts receivable (14,990,154) (5,564,946)
Inventories (11,030,375) (5,133,450)
Other current assets and loans to officers (1,124,646) (2,300,709)
Accounts payable 10,436,765 1,257,183
Accrued expenses 3,606,692 1,356,438
------------- ------------
Net cash used in operating activities (31,967,573) (46,764,085)
------------- ------------
Cash Flows from Investing Activities
Cash paid for purchase of Comtel Electronics, Inc.,
net of cash acquired (146,586) --
Net proceeds received from sale of subsidiary stock -- 3,925,000
Purchases of property and equipment (2,198,017) (8,017,147)
Increase in intangible assets (450,005) (351,059)
Increase in other assets (1,331,652) (308,951)
Loans to related parties (7,433,625) (1,250,000)
Payments received on loans to related parties 8,052,855 941,288
Repurchase of Nexar Technologies, Inc. common stock -- (2,777,484)
Investment in nonmarketable securities (5,172,488) (2,257,631)
------------- ------------
Net cash used in investing activities (8,679,518) (10,095,984)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
6
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<S> <C> <C> <C>
Nine Months Ended September 30,
1996 1997
Cash Flows from Financing Activities
Net proceeds from Nexar Technologies, Inc. initial public offering -- 19,667,910
Proceeds from issuance of convertible debentures 6,680,751 16,715,169
Proceeds from issuance of notes payable -- 3,500,000
Redemption of convertible debentures (930,000) (196,000)
Payments of notes payable and capital lease obligations (1,015,368) (3,899,591)
Net proceeds from revolving lines of credit (135,753) 1,957,345
Proceeds from sale of common stock 3,276,380 27,041
Proceeds from exercise of warrants and stock options 6,876,830 1,416,768
Issuance of preferred stock 30,913,397 15,000,000
Deferred offering costs -- (199,541)
Redemption of preferred stock, including accrued dividends of $71,223 (3,194,375) --
Purchase of treasury stock -- (427,102)
Guaranteed value associated with Dermascan acquisition -- (216,562)
Payments received on subscriptions receivable 2,009,591 --
------------ -----------
Net cash provided by financing activities 44,481,453 53,345,437
------------ -----------
Net increase (decrease) in cash and cash equivalents 3,834,362 (3,514,632)
Cash and cash equivalents, beginning of period 17,138,178 16,172,731
------------ ------------
Cash and cash equivalents, end of period $20,972,540 $12,658,099
============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $324,041 $1,345,984
============ ============
Supplemental Disclosure of Noncash Financing and Investing Activities:
Conversion of convertible debentures and related accrued
interest, net of financing fees $1,172,763 $9,026,241
============ ============
Conversion of preferred stock $417,975 $308,199
============ ============
Dividends payable $826,080 $1,227,978
============ ============
Issuance of common stock for employer 401(k)
matching contribution $160,598 $269,262
============ ============
Common stock issued for repurchase of minority interest $1,710,000 $--
============ ============
Issuance of common stock for technology $-- $1,148,941
============ ============
Acquisition of Comtel Electronics, Inc.
Liabilities assumed (258,144) $--
Fair value of assets acquired 72,661 --
Cash paid, net of cash acquired (146,586) --
------------ ------------
Cost In Excess of Net Assets Acquired (332,069) $--
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
7
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the interim periods shown in
this report are not necessarily indicative of expected results for any future
interim period or for the entire fiscal year. Palomar Medical Technologies, Inc.
(the "Company" or "Palomar") believes that the quarterly information presented
includes all adjustments (consisting 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 amended, as of and for the year
ended December 31, 1996.
The Company has incurred significant losses since inception. The Company
continues to seek additional financing from issuances of common stock and/ or
other prospective sources in order to fund future operations. The Company has
financed current operations, expansion of its core business and non-core
short-term financial investments primarily through the private sale of debt and
equity securities of the Company. The Company anticipates that it will require
additional financing throughout the year to continue to fund operations and
growth. The Company may from time to time be required to raise additional funds
through additional private sales of the Company's debt or equity securities
and/or the liquidation of some of its marketable and long-term investments. The
sale by the Company of some of its marketable securities could result in
additional losses depending on market conditions at the time of these sales.
Securities sold to private investors are sold at a discount to the public market
for similar securities. It has been the Company's experience that these private
investors require the Company to make its best effort to register these
securities for resale to the public at some future time.
2. 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 and other factors.
During the nine months ended September 30, 1997, the Company recorded a charge
of $2.8 million as a result of management's assessment that a permanent
impairment had occurred for some of the Company's non-marketable equity
securities.
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards ("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, 1996 and September 30, 1997.
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 and any unrealized gains or losses are recorded as
a component of stockholders' equity. If an available-for-sale security is
determined to be other than temporarily impaired, the cost basis is written down
to fair value and the write down is included in earnings. During the three
months ended September 30, 1997, the Company recorded a charge of $2.5 million
as a result of management's assessment that a permanent impairment had occurred
of all of its available-for-sale securities. Publicly traded 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
unaudited statements of operations.
<TABLE>
<S> <C> <C> <C> <C>
September 30, 1997
Gross Gross
Unrealized Unrealized Fair
Cost Gain Loss Value
Trading Securities:
Investments in publicly
traded companies $513,544 $2,026,176 $107,345 $2,432,375
======== ========== ======== =========
</TABLE>
8
<PAGE>
3. INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market.
Work in process and finished goods inventories consist of material, labor and
manufacturing overhead and consist of the following:
December 31, September 30,
1996 1997
------------ -------------
Raw materials $13,266,204 $12,704,413
Work in process
and finished goods 5,524,280 9,689,069
------------ -------------
$18,790,484 $22,393,482
============ =============
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<S> <C> <C>
December 31, September 30,
1996 1997
------------ -------------
Equipment under capital leases $2,261,339 $2,519,933
Machinery and equipment 5,429,764 8,547,696
Furniture and fixtures 1,926,948 3,247,107
Leasehold improvements 1,160,814 1,641,387
------------ -------------
10,778,865 15,956,123
Less: Accumulated depreciation
and amortization 2,374,260 4,559,942
------------ -------------
$8,404,605 $11,396,181
============ =============
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<S> <C> <C> <C>
December 31, September 30,
1996 1997
------------ --------------
Payroll and consulting costs $3,456,311 $2,926,158
Professional fees 961,815 563,878
Settlement costs 1,755,000 1,640,095
Warranty 2,854,401 3,224,500
Deferred revenue/gain 256,912 4,289,335
Restructuring --- 2,700,000
Other 5,385,454 8,307,380
------------ --------------
Total $14,669,893 $23,651,346
============ ==============
</TABLE>
6. NET LOSS PER COMMON SHARE
For the three and nine months ended September 30, 1996 and 1997, net
loss per common share has been computed by dividing the net loss, as adjusted
for preferred stock dividends and amortization of the value ascribed to the
discount feature of the Series H Preferred Stock, 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.
9
<PAGE>
The calculation of the Company's net loss per common share for the three and
nine months ended September 30, 1996 and 1997 is as follows:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1997 1996 1997
------------- ------------- ------------ -------------
Net loss $(3,949,412) $(36,989,569) $(19,213,214) $(67,167,702)
Preferred stock dividends (317,736) (500,754) (826,080) (1,227,978)
Amortization of value
ascribed to preferred
stock conversion discount --- (941,176) --- (1,882,352)
------------- ------------- ------------- -------------
Adjusted net loss $(4,267,148) $(38,431,499) $(20,039,294) $(70,278,032)
============= ============= ============= =============
Net loss per common share $(0.15) $(1.11) $(0.80) $(2.15)
============= ============= ============= =============
Weighted average number of
common shares outstanding 27,681,158 34,498,657 25,194,388 32,758,019
============ ============= ============= =============
</TABLE>
In March of 1997, SFAS No. 128, Earnings Per Share, was issued which
established new standards for calculating and presenting earnings per share. The
Company is required to adopt this new standard in its 1997 financial statements.
In accordance with this new standard, basic and diluted earnings per share for
the three months ended September 30, 1996 and 1997 are $(0.15) and $(1.11),
respectively, and the nine months ended September 30, 1996 and 1997 are $(0.80)
and $(2.15), respectively.
7. NOTES PAYABLE AND DEMAND LINE OF CREDIT
Notes payable consist of the following:
December 31, September 30,
1996 1997
----------- -------------
Dollar denominated convertible debentures $7,288,063 $12,042,727
Swiss franc denominated convertible debentures 7,222,846 4,639,213
7.4% to 21% capital lease obligations,
maturities ranging from August 1997 to May 2001 2,290,847 2,062,332
Notes payable at prime plus 3% --- 4,200,000
Other notes payable 2,186,619 134,588
---------- ----------
18,988,375 23,078,860
Less - current maturities 2,783,683 4,104,793
---------- ----------
$16,204,692 $18,974,067
========== ==========
On January 13, 1997 the Company issued $1,000,000 of 5% convertible
debentures. The convertible debentures have a conversion price which represents
a discount of 15% from the price of the Company's average stock price, as
defined. The Company has ascribed a value of $176,471 for the 15% discount
conversion feature.
On March 10, 1997 the Company issued $5,500,000 of 5% convertible
debentures. The convertible debentures have a conversion price of 100% of the
Company's average stock price, as defined, within the first 90 days and 90% of
the average stock price, as defined, thereafter. In addition, after 90 days, the
debentureholder may convert no more than 1/3 of the debenture in any 30 day
period. The Company has ascribed a value of $611,111 for the 10% conversion
discount.
The Company has credited this ascribed value for the discount feature
described above to additional paid-in capital, and this amount is being
amortized to interest expense over the expected life of the convertible
debentures. In addition, the Company incurred deferred financing costs of
$394,333 relating to the issuance of these debentures. These costs have been
reflected in deferred costs in the accompanying consolidated balance sheet and
are amortized to interest expense over the term of the related convertible
debentures. Any remaining unamortized deferred financing costs will be reflected
as a reduction to stockholder's equity.
10
<PAGE>
On March 13, 1997, the Company issued $500,000 of 6% convertible
debentures. The convertible debentures have a conversion price of $11.00, and
may not be converted for the first 180 days following issuance. Thereafter, the
debentureholder may convert no more than 33% in any 30 day period (or 34% of the
debentures in the last 30 day period). The Company has accounted for these
debentures at face value.
On September 30, 1997 the Company issued $7,000,000 of convertible
debentures. The debentures bear interest at varying rates of 6% to 8%, as
defined. The debentureholders were also issued 413,109 shares of common stock
related to this financing. The fair market value of the common stock was
$1,050,000 and this amount is being treated as debt discount and being amortized
to interest expense over the next ninety days. The convertible debentures have a
conversion price of 100% of the Company's average stock price, as defined. In
addition, the debentureholder may convert no more than 33% in any 30 day period
( or 34% of the debentures in the last 30 day period). The Company may be
required to repay these debentures if, among other things, the Company's common
stock is suspended from trading on the NASDAQ Small Cap Market, the required
registration statement is not declared effective by March 30, 1998 or the
Company disposes of substantially all of its assets or merges with another
entity in which the holders of the Company's voting stock do not own at least
50% of the surviving entity. The Company incurred deferred financing costs of
$350,000 relating to the issuance of these debentures. These costs will be
reflected in deferred costs and amortized to interest expense over the life of
the debt or until conversion, at which time the remaining deferred costs will be
reflected as a reduction to stockholder's equity.
Through September 30, 1997, investors converted $4,900,000 in face value
of 4.5% convertible debentures and $6,007,275 of 5% convertible debentures with
accrued interest of $181,485 into 4,348,082 shares of common stock. In addition,
unamortized deferred financing costs totaling $957,545 related to the
convertible debentures has been reflected as a reduction to stockholders'
equity.
During the first quarter ended March 31, 1997, the Company's Comtel
Electronics, Inc. ("Comtel") subsidiary failed to satisfy certain financial
covenants for its line of credit with a bank due on November 30, 1998. In the
third quarter the line of credit was amended and, as of September 30, 1997,
Comtel was in compliance with all financial covenants. The new agreement
restructured the debt so that $2.2 million is now a term loan at the bank's
prime rate plus three percent payable over 24 months beginning in November 1997.
The remaining balance outstanding of $1,829,360 is collateralized by Comtel's
assets and classified as a demand line of credit.
During the second quarter ended June 30, 1997, the Company repaid an
existing $1,200,000 bridge loan plus accrued interest. In addition, the bridge
loan holders were provided 99,001 shares of common stock of Nexar Technologies,
Inc. ("Nexar") and a warrant to purchase 95,625 shares of the common stock of
Dynaco Corp. ("Dynaco") at $1.20 per share in exchange for their Palomar
Electronic Corporation ("PEC") warrants. This exchange was consummated based on
the relative fair market values of Dynaco and Nexar common stock.
On September 25, 1997 the Company borrowed $2,000,000 in exchange for a
promissory note at prime plus three percent. The note and all accrued interest
totaling $13,863 was paid in full on October 17, 1997.
On July 3, 1996, the Company raised $7,669,442 through the issuance of
9,675 units in a convertible debenture financing. These units are traded on the
Luxembourg Stock Exchange. Each unit consists of a convertible debenture
denominated in 1,000 Swiss francs and a warrant to purchase 24 shares of the
Company's common stock at $16.50 per share and is due July 3, 2003. The warrants
are non-detachable and may be exercised only if the related debentures are
simultaneously converted, redeemed or purchased. Interest on the convertible
debentures accrues at a rate of 4.5% per annum and is payable quarterly in Swiss
francs. The convertible debentures may be converted by the holder or the Company
commencing October 1, 1996 at a conversion price equal to from 100% to 77.5% of
the price per share of the Company's common stock, calculated as defined. This
conversion price decreases from the third anniversary to the seventh anniversary
of the Swiss franc convertible debentures, and in no event is less than $7.00.
This conversion floor was decreased by consent of the parties from an original
price of $12.00. The Company ascribed a value of $1,917,360 to this discount
conversion feature of this convertible debenture. This amount will be amortized
to interest expense over the remaining life of the Swiss franc convertible
debenture. (See Note 12 and Part II, Item 1, "Legal Proceedings.")
11
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8. STOCKHOLDERS' EQUITY
(a) Options
During the nine months ended September 30, 1997, the Company issued options
to certain employees to purchase an aggregate of 1,165,000 shares of common
stock at prices ranging from $2.50 to $6.50 per share. During the same period
the Company cancelled options to purchase 1,030,100 shares of common stock at
prices ranging from $2.38 to $10.50 per share. Four individuals exercised
options to purchase an aggregate of 154,000 shares of common stock at prices
ranging from $2.00 to $3.00. The total proceeds received by the Company were
$346,575.
During the nine months ended September 30, 1997, the Company granted
options to certain Tissue Technologies, Inc. ("TTI") employees to purchase an
aggregate of 60,845 shares of common stock at an exercise price of $.01 per
share in settlement of a stock option dispute. The employees simultaneously
exercised these options. The fair market value of the common stock issued totals
$152,113 and has been reflected as a charge in the accompanying consolidated
statement of operations for the three and nine months ended September 30, 1997.
(b) Warrants
During the nine months ended September 30, 1997, the Company issued
warrants to certain employees to purchase an aggregate of 872,500 shares of
common stock at prices ranging from $2.50 to $8.875 per share. In addition, the
Company issued warrants to certain directors and an officer to purchase an
aggregate of 650,000 shares of common stock at prices ranging from $3.25 to
$4.00 per share. During the nine months ended September 30, 1997, the Company
cancelled warrants issued to certain employees and debentureholders to purchase
an aggregate of 797,200 shares of common stock at prices ranging from $6.00 to
$16.50 per share. In addition, the Company cancelled warrants issued to certain
directors and an officer to purchase an aggregate of 200,000 shares of common
stock at prices ranging from $6.75 to $8.00 per share. During the nine months
ended September 30, 1997, certain warrantholders exercised warrants to purchase
an aggregate 559,195 shares of common stock at prices ranging from $.60 to
$2.25. The Company received total proceeds of $1,070,193 related to the exercise
of the warrants. In addition, net warrants to purchase 20,687 share of common
stock were exercised in the nine months ending September 30, 1997.
(c) Reserved Shares
At September 30, 1997, the Company has reserved shares of its common
stock for the following:
September 30,
1997
-------------
Convertible debentures 7,353,599
Stock option plans 3,709,504
Warrants 9,577,940
Employee 401(k) plan 212,690
Employee stock purchase plan 991,606
Convertible preferred stock 6,395,151
-------------
Total 28,240,490
=============
(d) Convertible Preferred Stock
During the nine months ended September 30, 1997, the Company completed
the issuance of 16,000 shares of Series H Convertible Preferred Stock ("Series H
Preferred") for $16,000,000. The Series H Preferred accrues a premium at varying
rates of 6% to 8%, as defined. The Series H Preferred may be converted into
common stock, including any accrued but unpaid interest, at 100% of the average
stock price for the first 179 days from the closing date, 90% of the average
stock price for the following 90 days and 85% of the average stock price
thereafter. The average stock price for the Series H Preferred is the average
closing bid price for the ten trading days immediately preceding the conversion
date, but in no event less than $6.00 on or prior to October 27, 1997 and,
thereafter, at the lower of $6.00 or the average closing bid price for the 20
consecutive trading days prior to October 27, 1997. The conversion price is also
adjustable for certain antidilutive events, as defined. The holder is restricted
12
<PAGE>
for the first 209 days following the closing date to converting no more than 33%
of the Series H Preferred in any 30 day period (or 34% in the last 30 day
period). Under certain conditions, the Company has the right to redeem the
Series H Preferred. The Company has ascribed a value of $2,823,529 to this
discount conversion feature of the Series H Preferred. This amount is being
amortized as an adjustment to earnings available to common shareholders over the
most favorable conversion period attainable to the holders of the Series H
Preferred (270 days from the date of issuance of the Series H Preferred). See
Note 6.
During the nine months ended September 30, 1997, the Company converted
shares of preferred stock, accrued premium, dividends and interest into shares
of common stock as illustrated below:
<TABLE>
<S> <C> <C> <C> <C>
Amount Converted
Including Accrued
Preferred Number of Premium, Dividends Number of Common
Stock Preferred and Interest and Shares
Series Shares Converted Other Related Costs Converted Into
--------- ---------------- ------------------- ----------------
E 2,128 $ 114,539 332,859
G 2,316 71,997 362,824
H 5,310 121,761 2,592,025
---------------- ------------------- ----------------
Total Converted: 9,754 $ 308,297 3,287,708
================ =================== ================
</TABLE>
(e) Stock Purchase Program
During the first nine months of 1997, the Company purchased 145,000
shares of its common stock at an aggregate cost of $427,102 as part of a
treasury stock purchase program approved by its Board of Directors in May of
1997.
(f) Purchased Technology
On February 28, 1997, Nexar entered into an Asset Purchase and
Settlement Agreement as discussed in Note 15 to Financial Statements of the
Company's Form 10-KSB, as amended, as of and for the year ended December 31,
1996. Under the terms of this agreement the Company previously paid $1,250,000
in cash, and paid $351,060 in cash and issued 255,320 shares of Palomar's common
stock during the second quarter ended June 30, 1997. The total value of this
purchased technology of $2,750,000 will be amortized over a period of three
years.
(g) Nexar Initial Public Offering
On April 14, 1997 Nexar completed an initial public offering of
2,500,000 shares at $9.00 per share, for net proceeds of $19,592,910. The
Company has recorded an increase in stockholders' equity of $7,409,866, in
accordance with Staff Accounting Bulletin No. 51 (SAB No. 51) as a result of
Nexar's initial public offering. The Company's accounting policy for gains
arising under SAB No. 51 is to recognize these gains in its statement of
operations to the extent that such gains are realizable at the date of each
transaction.
As of the effective date of Nexar's initial public offering, the Company
owned 6,100,000 shares of Nexar's common stock and 45,684 shares of Nexar's
convertible preferred stock. The convertible preferred stock is convertible into
408,080 shares of Nexar's common stock. Pursuant to an agreement between the
Company and Nexar, 1,200,000 common shares ( the "Contingent Shares") of the
total 6,508,080 common and common equivalent shares of Nexar that are owned by
the Company are to be placed in escrow and subject to a mandatory repurchase, in
whole or part, by Nexar at $0.01 per share after the 48 month anniversary of the
initial public offering of Nexar common stock unless these shares are released
from escrow. The Contingent Shares are subject to the release to the Company in
installments of 400,000 shares each upon the achievement of any three of the
four milestones as specified in the agreement between the Company and Nexar. The
milestones are based on Nexar achieving certain revenue, net income and stock
price levels, as defined in the agreement.
In April 1997, the Company purchased 300,000 shares of Nexar common
stock for $2,777,484 from Nexar's underwriter in a private placement
transaction.
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<PAGE>
9. RELATED PARTY TRANSACTIONS
At December 31, 1996 and September 30, 1997, $578,680 and $1,549,388,
respectively, including accrued interest at the rate of 7% per annum, was
outstanding to certain now former directors under the Company's now terminated
corporate loan policy.
The Company had loans receivable of $186,156 and $146,406, including
accrued interest, from two officers of Dynaco, which were evidenced by
promissory notes due upon demand, with accrued interest at the rate of 7% per
annum. During the third quarter these notes were exchanged for the officers' PEC
warrants to purchase 600,000 shares of PEC common stock at $.30 per share. The
Company has charged to expense $332,562 in the accompanying consolidated
statement of operations for the nine months ended September 30, 1997 related to
this exchange.
In the first quarter of 1997, the Company invested an additional
$250,000 in a privately held medical and cosmetic services company. The
Company's cumulative investment as of September 30, 1997 totaled approximately
$750,000 and represents approximately 12% of the total equity ownership of this
company. An officer of CTI is a former director of the privately held company.
In return for the $250,000 investment, the Company received 250,000 shares of
common stock and a promissory note for $249,900 accruing interest at 12% per
annum. In September 1997, the Company fully reserved for this investment, as
management's assessment is that the Company's investment has been permanently
impaired, resulting in a charge to operations of $750,000.
During the nine months ended September 30, 1997, the Company sold all of
the issued and outstanding common stock of its wholly owned subsidiary, CD
Titles, Inc. ("CD Titles"). In exchange, the Company received three promissory
notes for an aggregate total of $600,000 (the "Notes") and warrants to purchase
750,000 shares of CD Titles common stock at various exercise prices ranging from
$6.00 to $10.00 per share. The sale of CD Titles did not have a material effect
on the Company's financial position or results of operations. The Company
subsequently exchanged the Notes for a personal guarantee by an officer and a
director of CD Titles of a $400,000 claim against the Company, and the
cancellation of an approximately $180,000 obligation of the Company to the
director of CD Titles.
10. ASSET WRITE-OFF AND RESTRUCTURING
During the third quarter, the Company established reserves for certain
operating assets and liabilities that resulted in a charge to expense of
approximately $9,426,000. Included in the reserves, the Company recognized a
restructuring charge of $2,700,000 based on the decision to discontinue some
business units and consolidate others. Management believes this restructuring
meets the criteria set forth in Emerging Task Force Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring).
The Company also assessed its non-core long-term assets and investments
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, and determined that some investments' carrying value will not be
realizable due to the Company's change in strategy. The Company has fully
reserved for all such investments resulting in a charge to third quarter
operations of approximately $13,548,000.
11. PRO FORMA INFORMATION
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
Comtel acquisition had been made as of January 1, 1996, are as follows:
Nine Months Ended September 30,
-------------------------------
1996 1997
--------------- --------------
Revenue $49,533,990 $63,206,446
Net loss $(19,243,214) $(67,167,702)
Net loss per common share $(0.80) $(2.15)
14
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
The Company has issued guarantees to several of its subsidiaries for
payment of trade payables. The total amount guaranteed at September 30, 1997 was
$750,000.
The Company was a defendant in a lawsuit filed on March 14, 1996 in the
United States District Court for the Southern District of New York by
Commonwealth Associates ("Commonwealth"). In its suit, Commonwealth alleged that
the Company had breached a contract with Commonwealth in which Commonwealth was
to provide certain investment banking services in return for certain
compensation. In January 1997, Commonwealth's motion for summary judgment on its
breach of contract claim was granted, and in April 1997 the District Court
awarded Commonwealth $3,174,070 in damages. That judgment was appealed by
Palomar and on August 18, 1997 the case was settled for $1.875 million. During
the nine months ended September 30, 1997, the Company incurred $1.875 million in
settlement costs related to the above matter and another $1.675 million related
to several other claims and associated litigation costs.
The Company is a defendant in litigation involving four of the holders
of the Company's convertible debentures denominated in Swiss francs. These
debentureholders claim Palomar has violated three covenants in the indenture and
are seeking payments totaling $5.1 million. The Company believes it has
meritorious defenses against the suit and a loss is not probable. (See Part II,
Item 1, "Legal Proceedings.")
The Company is a defendant in litigation involving a shareholder. The
shareholder claims disclosure errors and omissions in the Company's proxy
statement and Certificate of Incorporation, as amended and restated. The Company
believes the suit is without merit and a loss is not probable. The potential
exposure cannot be estimated at this time. (See Part II, Item 1, "Legal
Proceedings.")
13. SUBSEQUENT EVENTS
In September the Company signed a letter of intent with a distributor of
medical and cosmetic laser products. Pursuant to the letter of intent, the
parties are drafting a definitive agreement pursuant to which the distributor
will pay an up-front fee for distribution rights to the Company's current hair
removal products and future cosmetic laser products and a warrant to purchase a
predetermined amount of the Company's common stock, among other things.
Subsequent to quarter end, the Company entered into two non-binding
letters of intent with the management of TTI and the management of Dynaco
setting forth terms of a potential management buy-out of TTI and of Dynaco and
its subsidiaries, respectively. The divestiture of TTI is not anticipated to
have a material impact on the Company's financial statements; the divestiture of
Dynaco and its subsidiaries may have a material impact on the Company's results
of operations.
On October 1, 1997 the Company issued 104,348 shares of Nexar common
stock to an investor. In a previous transaction, the Company sold the investor
200,000 shares of Nexar common stock for $10.00 per share and communicated an
expected initial public offering price of $12.00 per share. These additional
shares were issued as consideration for the actual initial public offering price
of $9.00.
On October 1, 1997 the holder of 5,000 shares of Series G Preferred
Stock (the "G Preferred Shares") exchanged the G Preferred Shares for 240,000
shares of Palomar common stock, 956,388 shares of Nexar common stock, and a
$47,731 cash payment. In connection with the agreement, the Company has promised
to file a registration statement registering the resale of the Palomar common
stock with the Securities and Exchange Commission to be declared effective no
later than December 31, 1997. If the registration statement is not declared
effective by this date, the Company is obligated to issue additional shares of
its common stock to the investor as defined in the Registration Rights
Agreement.
[This space intentionally left blank.]
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
MEDICAL SEGMENT REVENUE AND GROSS MARGIN: Three months ended September 30, 1997,
compared to three months ended September 30, 1996
For the three months ended September 30, 1997, the Company had medical
segment revenues of $5.8 million as compared to $5.1 million for the three
months ended September 30, 1996. The increase in the Company's medical segment
of $693,000 or 13% was mainly due to additional sales volume of approximately
$3.3 million associated with the EpiLaser(tm) and other medical laser products
manufactured by the Company's wholly-owned subsidiary Palomar Medical Products,
Inc. ("PMP"). The Company obtained FDA clearance to market and to sell the
EpiLaser product for hair removal in the United States in March 1997. This
increase was offset by a decline of approximately $2.7 million in sales volume
for the Company's TruPulse(r) laser product. The Company believes that overall
revenues from its medical segment will continue to increase due to its improved
manufacturing process, market demand for its EpiLaser and successor products,
and an improved distribution network.
Gross margin in the medical segment for the three months ended September
30, 1997 was $917,000 ( 16% of revenues) versus $1.3 million (25% of revenues)
for the three months ended September 30, 1996. The decline in gross margin
dollars in 1997 occurred mainly due to lower revenues associated with the
Company's TruPulse product, as discussed above. The decline in gross margin
percent was caused by a lower margin attained on the Company's EpiLaser product
due to initial manufacturing and production of this product. The Company
believes that the gross margin for its EpiLaser product should begin to improve
in 1998 as the Company obtains manufacturing efficiencies and volume production
and revenue increases due to an improved distribution network.
ELECTRONICS SEGMENT REVENUE AND GROSS MARGIN: Three Months ended September 30,
1997, compared to three months ended September 30, 1996
For the three months ended September 30, 1997, the Company had
electronics revenues of $12.4 million as compared to $19.5 million (36%
decrease) for the three months ended September 30, 1996. The decrease in the
Company's electronics segment of approximately $7.1 million was principally due
to a decrease in Nexar sales volume of $4.8 million, a decrease in Dynaco
revenues of $1.5 million and a decrease in compact disc sales of $750,000 due to
the Company's disposal of CD Titles. Nexar's decrease in revenue was due to a
delay in the introduction of its proprietary upgradeable XPA ("XPA") personal
computer ("PC") in the third quarter. The XPA was delayed due to manufacturing
delays caused by an offshore supplier of motherboards. Nexar has solved this
problem by entering a partnership with a leading supplier of motherboards and
the Company believes XPA revenues will increase going forward. Dynaco generated
sales of approximately $8.1 million for the quarter ended September 30, 1997
compared to sales of approximately $9.6 million for the quarter ended September
30, 1996, due mainly to a decrease in revenue generated by Dynaco's Comtel
subsidiary. The revenue at Comtel, a contract electronics manufacturer,
decreased due to changes in its customer mix, lower sales volume from its
exiting customers and restructuring of its management team.
In the electronics segment of the Company's business, gross margin
decreased to negative $1.7 million for the quarter ended September 30, 1997 as
compared to a gross margin of $2.7 million (14% of revenues) for the three
months ended September 30, 1996. This decrease in gross margin is the result of
a decrease in gross margin at both Nexar and Dynaco. Nexar's negative gross
margin of $965,000 is due to unabsorbed overhead costs at its manufacturing
facility due to key inventory delays discussed above. Comtel, a subsidiary of
Dynaco, incurred a negative gross margin of $779,000 for the three months ended
September 30, 1997. This gross loss was attributable to unabsorbed overhead
costs caused by Comtel's lower volume and change in customer base.
CONSOLIDATED OPERATING AND OTHER EXPENSES: Three months ended September 30,
1997, compared to three months ended September 30, 1996
Research and development costs increased to $3.6 million (20% of
revenues) for the three months ended September 30, 1997, from $1.6 million (7%
of revenues) for the three months ended September 30, 1996. This 119% increase
in research and development reflects the Company's continuing commitment to
research and development for medical devices and delivery systems for cosmetic
and other medical applications using a variety of lasers, while continuing
dermatology research utilizing the Company's ruby and diode lasers.
Approximately $2.9 million of the $3.6 million expended in the quarter ended
September 30, 1997 is attributed to the medical segment. Management believes
that research and development expenditures will decrease over the next year as
the Company completes its clinical trials of its medical products and begins to
16
<PAGE>
market its newly developed products. The remaining $653,000 expended in the
current year's third quarter was in the electronics segment, mainly due to the
continued development and improvement of Nexar's PC products.
General and administrative expenses remained constant at $5.6 million
(31% of revenues) for the three months ended September 30, 1997, compared to
$5.6 million (23% of revenues) for the three months ended September 30, 1996.
The Company's 1996 general and administrative expenses included non-recurring
charges of $625,000. Excluding the non-recurring charges, general and
administrative expenses increased 13%. This increase is attributable to
increased administrative resources required to oversee the growth of the
Company's medical and electronics business segments. Approximately 19% of
general and administrative expense for the three months ended September 30, 1997
are attributable to the Company's wholly-owned Cosmetic Technology
International, Inc. ("CTI") subsidiary. CTI is in the process of opening and
establishing revenue sharing sites with operating partners. To date, CTI has
opened 14 sites in domestic and international markets. The Company anticipates
general and administrative expense will decrease in the future as a result of
the third quarter restructuring.
Selling and Marketing expenses increased to $4.0 million (22% of
revenues) for the three months ended September 30, 1997, from $2.2 million (9%
of revenues) for the three months ended September 30, 1996. This increase in
substantially all areas of selling and marketing is attributable to the increase
in sales force throughout the Company, in anticipation of increased revenues.
The Company anticipates selling and marketing expense as a percent of revenue
will decrease in the future as a result of the third quarter restructuring and
an anticipated distribution agreement
Business Development and Financing Costs increased to $597,000 (3% of
revenues) for the three months ended September 30, 1997, from $477,000 (2% of
revenues) for the three months ended September 30, 1996. This 25% increase is
attributable to the Company's restructuring efforts. The Company has increased
efforts to divest of non-core subsidiaries and continues to utilize outside
sources for funding of its existing core medical product subsidiaries.
Restructuring and asset write-off costs of $9.4 million were incurred in
the three months ended September 30, 1997. This non-recurring charge to
operating expenses reflects restructuring of the Company's operations and asset
write-off costs for certain operating assets that the Company believes were not
fully realizable for both core and none-core medical product subsidiaries.
Included in this charge is a $2.7 million reserve for severance costs associated
with consolidating the selling, general and administrative functions including
the closing of certain facilities.
Interest expense increased to $1.1 million for the three months ended
September 30, 1997, from $510,000 for the three months ended September 30, 1996.
The 1997 amount includes $284,000 of non-cash interest expense related to the
value ascribed to the discount of the convertible debentures. This 110% increase
is primarily the result of an increase in convertible debenture financings, an
additional outstanding line of credit financing at Dynaco's Comtel subsidiary
which was entered into in December 1996, and interest penalty on the
Commonwealth Associates lawsuit settlement.
Interest income decreased to $141,000 for the three months ended
September 30, 1997, from $644,000 for the three months ended September 30, 1996.
This decrease is primarily the result of a decrease in the Company's average
outstanding cash and cash equivalents balances.
Net realized and unrealized trading gains were $446,000 for the three
months ended September 30, 1997, down from gains of $1.8 million for the three
months ended September 30, 1996. The gains reflect market fluctuations. It is
the Company's intention to continue to liquidate a portion of its trading
investments in the near term, which may result in additional trading gains or
losses in the future.
Asset write-off costs of $13.5 million were incurred in the three months
ended September 30, 1997. This one time charge reflects asset write-off costs
for notes and investments in both non-core subsidiaries and other outside
entities.
Minority interest in the loss of subsidiary was $1.9 million for the
three months ended September 30, 1997 compared to $1,000 for the three months
ended September 30, 1996. This increase in the minority interest in the loss of
a subsidiary is due to the successful completion of Nexar's initial public
offering in which approximately 35% of Nexar's common stock was sold to the
public.
17
<PAGE>
MEDICAL SEGMENT REVENUE AND GROSS MARGIN: Nine months ended September 30, 1997,
compared to nine months ended September 30, 1996
For the nine months ended September 30, 1997, the Company had medical
segment revenues of $15.7 million as compared to $12.8 million for the nine
months ended September 30, 1996. The increase in the Company's medical segment
of $2.9 million or 23% was mainly due to additional sales volume of
approximately $9.5 million associated with the EpiLaser and other medical laser
products manufactured by PMP. The Company obtained FDA clearance to market and
to sell the EpiLaser product for hair removal in the United States in March
1997. This increase was offset by a decline of approximately $6.6 million in
sales volume for the Company's TruPulse laser product. The Company believes that
overall revenues from its medical segment will continue to increase due to its
improved manufacturing process, market demand for its EpiLaser and successor
products, and an improved distribution network.
Gross margin in the medical segment for the nine months ended September
30, 1997 was $1.3 million ( 8% of revenues) versus $2.3 million (18% of
revenues) for the nine months ended September 30, 1996. The decline in gross
margin dollars in 1997 occurred mainly due to lower revenues associated with the
Company's TruPulse product, as discussed above. The decline in gross margin
percentage was caused by lower margins attained on the Company's EpiLaser
product due to initial manufacturing and production of this product. The Company
believes that the gross margins for its EpiLaser product should begin to improve
in 1998 as the Company obtains manufacturing efficiencies and volume production
and revenues increase due to an improved distribution network.
ELECTRONICS SEGMENT REVENUE AND GROSS MARGIN: Nine months ended September 30,
1997, compared to nine months ended September 30, 1996
For the nine months ended September 30, 1997, the Company had
electronics revenues of $47.5 million as compared to $36.4 million (31%
increase) for the nine months ended September 30, 1996. The increase in the
Company's electronics segment of approximately $11.1 million was principally due
to an increase in Nexar sales volume of $11 million. Nexar's revenue has grown
since the introduction in April 1996 of its proprietary upgradeable PC and
revenue at Nexar is expected to continue to grow with the introduction of its
proprietary upgradeable XPA PC in the third quarter.
In the electronics segment of the Company's business, gross margin
decreased to negative $434,000 (negative 1% of revenue) for the nine months
ended September 30, 1997 as compared to a gross margin of $4.1 million (11% of
revenues) for the nine months ended September 30, 1996. This decrease in gross
margin is the result of a decrease in gross margin at both Nexar and Dynaco.
Nexar's nine month ended September 30, 1997 gross margin of $380,000 is due to
unabsorbed overhead costs at its manufacturing facility due to key inventory
delays discussed above. Comtel, a subsidiary of Dynaco, incurred a negative
gross margin of $2.9 million for the nine months ended September 30, 1997. This
gross loss was attributable to unabsorbed overhead costs caused by Comtel's
lower volume and change in customer base.
CONSOLIDATED OPERATING AND OTHER EXPENSES: Nine months ended September 30, 1997,
compared to nine months ended September 30, 1996
Research and development costs increased to $9.5 million (15% of
revenues) for the nine months ended September 30, 1997, from $5.7 million (12%
of revenues) for the nine months ended September 30, 1996. This 66% increase in
research and development reflects the Company's continuing commitment to
research and development for medical devices and delivery systems for cosmetic
and other medical applications using a variety of lasers, while continuing
dermatology research utilizing the Company's ruby and diode lasers.
Approximately $7.6 million of the $9.5 million expended in the nine months ended
September 30, 1997 is attributed to the medical segment. Management believes
that research and development expenditures will decrease over the next year as
the Company completes its clinical trials of its medical products and begins to
market its recently developed products. The remaining $1.7 million expended in
the current year was in the electronics segment, mainly due to the continued
development and improvement of Nexar PC products.
General and administrative expenses increased to $16.7 million (26% of
revenues) for the nine months ended September 30, 1997, compared to $14.2
million (29% of revenues) for the nine months ended September 30, 1996. This
increase is attributable to increased administrative resources required to
oversee the growth of the Company's medical and electronics business segments.
Approximately 15% of general and administrative expenses for the nine months
ended September 30, 1997 are attributable to the Company's CTI subsidiary. CTI
18
<PAGE>
is in the process of opening and establishing revenue sharing sites with
operating partners. To date, CTI has opened 14 sites in domestic and
international markets. The Company anticipates general and administrative
expense will decrease in the future as a result of the third quarter
restructuring.
Selling and Marketing expenses increased to $11.9 million (19% of
revenues) for the nine months ended September 30, 1997, from $6.3 million (13%
of revenues) for the nine months ended September 30, 1996. This increase in
substantially all areas of selling and marketing is attributable to the increase
in sales volume throughout the Company, particularly in the medical products
segment as revenues have begun to increase now that the Company has an
FDA-cleared laser hair removal product. The Company anticipates selling and
marketing expense as a percent of revenue will decrease in the future as a
result of the third quarter restructuring and an anticipated distribution
agreement.
Business Development and Financing Costs decreased to $2.1 million (3%
of revenues) for the nine months ended September 30, 1997, from $2.4 million (5%
of revenues) for the nine months ended September 30, 1996. This 15% decrease is
attributable to the Company's maturation. The Company has decreased its
acquisition and financing activities and is now focused on developing and
growing its existing core medical products and exiting its non-core electronic
businesses.
Settlement and Litigation costs were $3.6 million (6% of revenues) for
the nine months ended September 30, 1997; there were no settlement costs during
the nine months ended September 30, 1996. The costs are attributable to a
lawsuit brought by an investment banker and other smaller claims made against
the Company. In the suit, the investment banker alleged that the Company
breached a contract in which the banker was to provide certain investment
banking services in return for certain compensation. This case was settled on
August 18, 1997 for $1.875 million.
Restructuring and asset write-off costs of $9.4 million were incurred in
the nine months ended September 30, 1997. This one time charge to operating
expenses reflects restructuring and asset write-off costs for certain operating
assets that the Company believes were not fully realizable for both core and
none-core medical product subsidiaries. Included in this charge is a $2.7
million reserve for severance costs associated with consolidating the selling,
general and administrative functions, including the closing of certain
facilities.
Interest expense increased to $4.6 million for the nine months ended
September 30, 1997, from $1.2 million for the nine months ended September 30,
1996. This amount includes $2.6 million of non-cash interest expense related to
the value ascribed to the discount of the convertible debentures. This 272%
increase is primarily the result of an increase in convertible debenture
financings and an additional outstanding line of credit financing at Dynaco's
Comtel subsidiary which was entered into in December 1996.
Interest income decreased to $664,000 for the nine months ended
September 30, 1997, from $1.8 million for the nine months ended September 30,
1996. This decrease is primarily the result of a decrease in the Company's
average outstanding cash and cash equivalents balances.
Net realized and unrealized trading gains were $996,000 for the nine
months ended September 30, 1997, down from gains of $2.5 million for the nine
months ended September 30, 1996. The gains reflect market fluctuations. It is
the Company's intention to continue to liquidate a portion of its trading
investments in the near term, which may result in additional trading gains or
losses in the future.
Asset write-off costs of $13.5 million were incurred in the nine months
ended September 30, 1997. This one time charge reflects asset write-off costs
for notes and investments in both non-core subsidiaries and other outside
entities.
Minority interest in the loss of subsidiary was $2.9 million for the
nine months ended September 30, 1997 compared to $47,000 for the nine months
ended September 30, 1996. This increase in the minority interest in the loss of
a subsidiary is due to the successful completion of Nexar's initial public
offering in which approximately 35% of Nexar's common stock was sold to the
public.
Liquidity and Capital Resources
As of September 30, 1997, the Company had $15.1 million in cash, cash
equivalents and trading securities including $2.7 million of cash and cash
equivalents held at the Company's Nexar subsidiary. During the nine months ended
19
<PAGE>
September 30, 1997 the Company generated $16.7 million, $15.0 million, $19.7
million and $3.9 million in net proceeds from the issuance of convertible
debentures, the sale of its preferred stock, the initial public offering of
Nexar and the sale of Palomar-owned Nexar common stock, respectively.
The Company's net loss for the nine months ended September 30, 1997
included the following non-cash items: $3.6 million of depreciation and
amortization expense; $2.6 million of additional interest expense relating to
the amortization of the discounts on the convertible debentures; $23 million in
restructuring and asset write-off costs; and a legal settlement accrual of $2.9
million in connection with a breach of contract case involving a former
investment banking consultant.
The Company anticipates that capital expenditures for the remaining
three months of 1997 will total approximately $600,000, of which $500,000 is
attributed the purchase of laser products for CTI's laser centers. The Company
will finance these expenditures with cash on hand and equipment leasing lines,
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 at
85% of face value, up to a maximum commitment of $3 million. As of September 30,
1997, the amount of accounts receivable sold that remained uncollected totaled $
2.1 million 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 September 30, 1997. The interest rate on such outstanding amounts is
the bank's prime rate 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. Borrowings under this loan agreement are
guaranteed by the Company.
On December 5, 1996, Comtel entered into a loan agreement with a loan
association which provided for borrowings up to $5,000,000 in the form of
revolving receivable and inventory loans and a term note payable over two years
beginning in November 1997. Borrowings under the revolving receivable and
inventory loans are limited by a borrowing base calculation on eligible accounts
receivable and inventory, and are collateralized by accounts receivable,
inventory, and certain other assets. Borrowings bear interest at the lender's
prime rate plus 3% and amounted to $1.8 million as of September 30, 1997. The
loan agreement terminates on November 30, 1998. Borrowings under the term loan
of $2.2 million bear interest at the bank's prime rate plus 3%. The term loan is
payable in monthly installments over two years beginning in November 1997.
A large part of the Company's medical products business is 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 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 and services, and fund
ongoing operations. 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 strategic partnerships,
additional bank financing, private debt and equity financing, liquidation of
assets and other sources. The Company believes that it will be successful in
obtaining additional financing in order to fund current operations in the near
future.
Factors That May Affect Future Results
The matters described herein contain "forward-looking" information, as
that term is defined in the Private Securities Litigation Reform Act of 1995
(the "Act"), including, without limitation, statements relating to financial and
sales projections, divestiture of non-core subsidiaries, market demand,
manufacturing efficiencies, gross margins, decreases in certain expenses,
execution of a distribution agreement and an improved distribution network, and
results of operations, restructuring and litigation that involve risk and
uncertainties that may individually or mutually impact the matters discussed
herein. The Company cautions investors that there can be no assurance that
20
<PAGE>
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 factors identified in the Company's
Form 10-KSB, as amended, for the year ended December 31, 1996, and the
following:
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 and
services, and fund ongoing operations.
The Company's future operating strategy and results are dependent on its
ability to successfully divest its non-core electronic subsidiaries.
There can be no assurance that the Company will be able to successfully
execute this plan.
The Company's future operating results are dependent on its ability to
develop, produce and 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's business segments operate in a highly competitive
environment 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 high technology sector, as well as general economic conditions and
other factors external to the Company.
In July 1997, one of Nexar's two outside turn-key manufacturers notified
Nexar of its inability to timely manufacture on a going forward basis
Nexar's proprietary motherboards. Nexar has made arrangements with two
new manufacturers to assume timely production of the motherboards. Nexar
does not believe that the transition to the new manufacturers will have
a long-term material adverse effect on Nexar, but the several weeks it
took to resume full production of these key components had a short-term
negative impact on Nexar's results of operations in the third quarter
due to the possibility of limited delays in the initial shipments of
Nexar's new XPA product, and could similarly impact Nexar's results of
operations in the fourth quarter.
The Company and its subsidiaries are involved in disputes with third
parties. Such disputes have resulted in litigation with such parties
and, although the Company is a plaintiff in several matters, the Company
is subject to claims and counterclaims for damages and has incurred, and
likely will continue to incur, legal expenses in connection with such
matters. There can be no assurance that such litigation will result in
favorable outcomes for the Company. The Company is unable to determine
the total expense or possible loss, if any, that may ultimately be
incurred in the resolution of these proceedings. These matters may
result in diversion of management time and effort from the operations of
the business. After consideration of the nature of the claims and the
facts relating to these proceedings, the Company believes that the
resolution of these proceedings will not have a material effect on the
Company's business, financial condition and results of operations;
however, the results of these proceedings, including any potential
settlements, are uncertain and there can be no assurance to that effect.
(See Part II, Item 1, "Legal Proceedings.")
The Company undertakes no obligation to release publicly the results of
any revision to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
[This space intentionally left blank]
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 7, 1996 the Company filed a declaratory judgment action in
the United States District Court for the District of Massachusetts against
MEHL/Biophile ("MEHL") seeking (i) a declaration that MEHL is without right or
authority to threaten or maintain suit against the Company or its customers for
alleged infringement of the patent held by MEHL's subsidiary Selvac Acquisitions
Corp. ("Selvac" and the "Selvac Patent"), that the Selvac Patent is invalid,
void and unenforceable, and that the Company does not infringe the Selvac
patent; (ii) a preliminary and permanent injunction enjoining MEHL from
threatening the Company or its customers with infringement litigation or
infringement; and (iii) an award to the Company of damages suffered in
connection with MEHL's conduct. On March 7, 1997, Selvac filed a complaint for
injunctive relief and damages for patent infringement and for unfair competition
against the Company, its Spectrum Medical Technologies and Spectrum Financial
Services subsidiaries, and a New Jersey dermatologist, in the United States
District Court for the District of New Jersey. Selvac's complaint alleges that
the Company's EpiLaser infringes the Selvac Patent and that the Company unfairly
competed by promoting the EpiLaser for hair removal before it had received FDA
approval for that specific application. The Company and Selvac agreed to dismiss
the Massachusetts litigation without prejudice. Palomar has brought in the New
Jersey action its claims that the Selvac patent is invalid, that the Company has
not infringed the Selvac patent, that MEHL should be enjoined from making
further assertions concerning infringement and unfair competition, and that the
Company should be awarded attorney fees and other appropriate relief. Thus both
the Company's and MEHL's claims will be tried on the merits in New Jersey. The
court has granted Palomar's motion to dismiss Selvac's federal unfair
competition claim so far as it depends on Palomar's supposed violations of FDA
rules. The Company believes that MEHL's claims are without merit. The extent of
exposure of the Company cannot be determined at this time.
On October 16, 1997, the Company brought a declaratory judgment action in
U.S. District Court for the District of Massachusetts against the holders and
the indenture trustee of the Company's 4.5% Subordinated Convertible Debentures
due 2003, denominated in Swiss francs (the "Swiss Franc Debentures"). (At
current exchange rates, the principal amount of the Swiss Franc Debentures is
approximately US$ 6.75 million.) The defendants in this action are Banque SCS
Alliance SA, Arbuthnot Fund Managers, Ltd., Banca Commerciale Lugano,
Privatinvest Bank AG (these four defendants are being referred to collectively
as the "Asserting Holders"), CUF Finance S.A., Fibi Bank (Schweiz) AG, Teawood
Nominees, Ltd., JS Gadd & Cie, SA, Swedbank (Luxembourg) SA, Christiana Bank
Luxembourg SA, (now known as Credit Agricole Indosuez), Landatina Financiera SA
and American Stock Transfer & Trust Co., as trustee. Just prior to this suit,
the Asserting Holders had alleged that the Company is in breach of certain
protective covenants under the indenture. The Company believes that it is not in
default under any protective covenants, and the Company's action seeks a
declaration from the Court to that effect. All payments on the Swiss Franc
Debentures are current. On October 22, 1997, the Asserting Holders sued the
Company and all of its principal subsidiaries in the same court; the October
16th and October 22nd cases have been assigned to the same judge. The Asserting
Holders claim that the Company has breached certain protective indenture
covenants and that the Asserting Holders are entitled to immediate payment of
their indebtedness under the Swiss Franc Debentures. The Asserting Holders
sought a temporary restraining order attaching bank accounts and barring the
Company from transferring any interest in securities of its subsidiearies. At a
hearing on November 6, 1997, the Court denied this motion. A preliminary
injunction hearing concerning essentially the same issues is scheduled to
commence on November 21, 1997. As of November 13, 1997, acting under appropriate
provisions of the indentures, the Company notified the holders of the Swiss
Franc Debentures that is is causing the conversion of all of the Debentures into
an aggregate of 914,024 shares of the Company's Common Stock. The Company
believes that its position in these matters is correct and intends to contest
the claims of the Asserting Holders vigorously.
On August 27, 1997, Pamela Siegman, as Trustee for the Pamela Siegman
Trust, filed an action in the Court of Chancery of the State of Delaware in and
for New Castle County against Palomar and each of its current directors and two
former directors. Siegman, purportedly on behalf of similarly situated
shareholders, claims disclosure errors and omissions in Palomar's annual meeting
proxy statement concerning, among other things, the proposals for (a) a
staggered board; and (b) amendments to the Company's stock option plans. Siegman
also claims that all the Company's preferred stock is void because of a
purported deficiency in Palomar's Certificate of Incorporation. Siegman has
abandoned her disclosure claim concerning the staggered board. Palomar believes
that Siegman's remaining claims are without merit.
22
<PAGE>
Item 2. Changes in Securities
Convertible Debentures
Pursuant to Section 4(2) of the Securities Act of 1933, as amended, on
September 30, 1997, the Company sold a total of $7,000,000 in convertible
debentures to three investors; $3,500,000 to JNC Opportunity Fund, Ltd.,
$1,500,000 to Diversified Strategies Funds, L.P. and $2,000,000 to Southbrook
International Investments, Ltd. Each investor received shares of common stock
upon issuance of the debentures. The number of shares of common stock were equal
to 15% of the original principal amount of the debenture divided by the average
closing bid price for the three trading days commencing on October 1, 1997. The
debentures accrue interest at a rate of 6% over the first 179 days, 7% over days
180-269 and 8% thereafter. The convertible debentures have a conversion price of
100% of the average stock price, as defined. The debentureholder may convert no
more than 33% in any 30 day period (or 34% in the last 30 day period).
Commissions on this transaction totaled $350,000.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on September 15,
1997. At the Annual Meeting, Louis P. Valente, Buster C. Glosson, John M.
Deutch, James G. Martin and A. Neil Pappalardo were elected as directors of the
Company, to serve until the Company's 1998 Annual Meeting of Stockholders or
special meeting in lieu thereof, or until their successors have been duly
elected and qualified. In addition, the stockholders voted upon proposals to (1)
amend the Company's Restated Certificate of Incorporation to (i) divide the
Company's Board of Directors into three classes each class consisting as nearly
as possible of one-third of the whole number of the Board of Directors; (ii)
require that action required or permitted to be taken by stockholders of the
Company be taken at an annual or special meeting of stockholders and not by
written consent by stockholders; and (iii) provide that, unless certain
conditions were met, the proposed amendments could not be amended without a vote
of the holders of 75% of the outstanding shares of stock of the Company entitled
to vote at a meeting of stockholders held for the purpose of voting on such
amendment; (2) amend the Company's 1991, 1993, 1995 and 1996 Stock Option Plans
to provide that the Committee that administers those Plans should have the
right, in its discretion, to accelerate the date of exercise of any option; (3)
amend the Company's 1996 Employee Stock Purchase Plan to eliminate the six month
waiting period for eligibility, and to provide that participating employees may
purchase the Company's common stock for 85% of Fair Market Value on the Entry
Date or the Purchase Date of the Purchase Period, as defined in the Plan; and
(4) ratify the appointment by the Board of Directors of Arthur Andersen LLP as
auditors of the Company for the fiscal year ending December 1997.
A tabulation of the votes on the above-referenced matters follows:
<TABLE>
<S> <C> <C> <C> <C>
Votes Against Broker
Votes For or Withheld Abstentions Non-Votes
Election of Louis P. Valente 29,298,365 1,112,495
Election of John M. Deutch 26,299,105 1,111,755
Election of Buster C. Glosson 26,297,105 1,113,755
Election of James G. Martin 26,286,145 1,124,715
Election of A. Neil Pappalardo 26,299,105 1,111,755
Charter Amendments 7,359,788 1,713,950 323,328 18,022,294
Amendments to Stock Option Plans 23,063,902 2,434,626 475,761 1,438,071
Amendment to Employee Stock
Purchase Plan 23,351,436 2,213,407 412,746 1,440,071
Ratification of
Arthur Andersen LLP
as Independent Auditors 26,664,600 458,651 296,109
</TABLE>
23
<PAGE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Correction of the Certificate of Incorporation of the
Company as filed with the Delaware Secretary of State on September 23,
1997
3.2 Certificate of Correction of the Restated Certificate of Incorporation
of the Company as filed with the Delaware Secretary of State on
September 23, 1997
*3.3 By-laws of the Company, as amended, incorporated by reference to Exhibit
No. 3.5 of the Company's Annual Report on Form 10KSB/A-4 for its year
ending December 31, 1996
4.1 Amended 1996 Employee Stock Purchase Plan
4.2 First Supplemental Indenture
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
* Previously filed on August 14, 1997 as an exhibit to
Registration Statement No. 333-25209.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant certifies that it has caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Lexington in the
Commonwealth of Massachusetts on November 14, 1997.
PALOMAR MEDICAL TECHNOLOGIES, INC.
(Registrant)
DATE: November 14, 1997 By: /s/ Louis P. Valente
------------------------------
Louis P. Valente
President and
Chief Executive Officer
(Principal Executive Officer)
DATE: November 14, 1997 /s/ Joseph P. Caruso
------------------------------
Joseph P. Caruso
Chief Financial Officer and
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
EXHIBIT 3.1
CERTIFICATE OF CORRECTION
OF THE
CERTIFICATE OF INCORPORATION
OF
PALOMAR MEDICAL TECHNOLOGIES, INC.
PALOMAR MEDICAL TECHNOLOGIES, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"Company") does hereby certify pursuant to Section 103(f) thereof that:
FIRST: The Company, then known as Dynamed, Inc., filed a
Certificate of Incorporation with the Office of the Secretary of State
of the State of Delaware (the "Secretary of State") on August 16, 1991.
SECOND: The Certificate of Incorporation set forth an inaccurate
record of the corporate action referred to therein.
THIRD: The Certificate of Incorporation inaccurately reflected
the text of Article FOURTH thereof in that the relevant portion of
Article FOURTH inaccurately states as follows:
Additional designations and powers, the rights and preferences
and the qualifications, limitations or restrictions with respect
to each class of stock of the corporation shall be as determined
by the Board of Directors from time to time.
FOURTH: The correct text of Article FOURTH of the Certificate of
Incorporation intended to be effected by this Certificate of Correction
is as follows:
Additional designations and powers, the rights and preferences
and the qualifications, limitation or restrictions with respect
to each series of such class of stock of the Corporation shall
be as determined by the Board of Directors from time to time.
IN WITNESS WHEREOF, said Palomar Medical Technologies, Inc. has caused
this Certificate of Correction to be signed by its duly authorized officer this
day of September, 1997.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
------------------------------
Name: Louis P. Valente
Title: Chief Executive Officer
and President
2
EXHIBIT 3.2
CERTIFICATE OF CORRECTION
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
PALOMAR MEDICAL TECHNOLOGIES, INC.
PALOMAR MEDICAL TECHNOLOGIES, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"Company") does hereby certify pursuant to Section 103(f) thereof that:
FIRST: The Company, then known as Dynamed, Inc., filed a
Certificate of Incorporation with the Office of the Secretary of State
of the State of Delaware (the "Secretary of State") on August 16, 1991,
and thereafter, under its current name, the Company filed a Restated
Certificate of Incorporation with the Secretary of State on August 14,
1996.
SECOND: The Restated Certificate of Incorporation set forth an
inaccurate record of the corporate action referred to therein.
THIRD: The Restated Certificate of Incorporation inaccurately
reflected the text of Article FOURTH thereof in that the relevant
portion of Article FOURTH inaccurately states as follows:
Additional designations and powers, the rights and preferences
and the qualifications, limitations or restrictions with respect
to each class of stock of the corporation shall be as determined
by the Board of Directors from time to time.
FOURTH: The correct text of Article FOURTH of the Restated
Certificate of Incorporation intended to be effected by this Certificate
of Correction is as follows:
Additional designations and powers, the rights and preferences
and the qualifications, limitation or restrictions with respect
to each series of such class of stock of the Corporation shall
be as determined by the Board of Directors from time to time.
IN WITNESS WHEREOF, said Palomar Medical Technologies, Inc. has caused
this Certificate of Correction to be signed by its duly authorized officers this
day of September, 1997.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
------------------------------
Name: Louis P. Valente
Title: Chief Executive Officer
and President
EXHIBIT 4.1
PALOMAR MEDICAL TECHNOLOGIES, INC.
AMENDED 1996 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose of the Plan
The purpose of the Palomar Medical Technologies, Inc. Employee Stock
Purchase Plan is to encourage ownership of the common stock of Palomar Medical
Technologies, Inc. ("Palomar") by its eligible employees and any and each of its
participating subsidiaries, thereby enhancing such employees' personal interest
in the continued success and progress of Palomar. The plan is intended to
facilitate regular investment in the common stock of Palomar by offering
employees a convenient means to make purchases at a discounted price through
payroll deductions. The Plan is intended to comply with the provisions of
Section 423 of the Internal Revenue Code of 1986, as amended.
2. Definitions
For purposes of the Plan, the following terms shall have the meanings
indicated below:
(a) "Business Day" shall mean a day on which there is trading on the
New York Stock Exchange.
(b) "Code" shall mean the Internal Revenue Code of 1986, as it may
be amended from time to time.
(c) "Committee" shall mean the Compensation Committee of the Board
of Directors of Palomar.
(d) "Common Stock" shall mean Palomar's common stock, par value $.01
per share.
(e) "Company" shall mean Palomar and any of its subsidiaries (within
the meaning of Section 424(f) of the Code) whose Board of
Directors has adopted the Plan, with approval of the Board of
Directors of Palomar, and which has not terminated participation
in or withdrawn from the Plan by action of such subsidiary's
Board of Directors or the Board of Directors of Palomar.
(f) "Compensation" shall mean the amount of a Participant's base
wages, overtime, commissions, cash bonuses, premium pay and
shift differential, before giving effect to any compensation
reductions made in connection with any plans described in
Section 401(k) or Section 125 of the Code.
(g) "Custodian" shall mean the custodian appointed by the Committee
pursuant to Section 7 hereof to hold the shares of Common Stock
purchased under the Plan and subsequent Dividends reinvested or
paid to Participant in cash.
(h) "Dividends" shall mean all cash dividends paid on shares of
Common Stock held in any Employee's Account.
(i) "Account" shall mean a separate account maintained by the
Custodian for each Participant which reflects, at any time, the
number of shares of Common Stock purchased under the Plan by
such Participant as well as reinvested Dividends held by the
Custodian.
(j) "Entry Date" shall mean the first Business Day of each Purchase
Period.
(k) "Eligible Employee" shall mean, with respect to any Purchase
Period, an employee of the Company who is eligible to
participate in the Plan in such Purchase Period under the rules
set forth in Sections 5 and 8 hereof.
(l) The "Fair Market Value" of a share of Common Stock on any
Business Day shall be the closing bid price for such day of the
Common Stock on the principal securities market on which the
Common Stock is traded. If on the date for which Fair Market
Value is to be determined the Common Stock is no eligible for
trading on any securities market, the Fair Market Value of a
share of Common Stock shall be determined by the Committee.
(m) "Participant" shall mean, with respect to any Purchase Period,
each Eligible Employee who has elected to have amounts deducted
from his or her Compensation pursuant to Section 6 hereof for
such Purchase Period.
(n) "Plan" shall mean this 1996 Employee Stock Purchase Plan, as the
same may be amended from time to time.
(o) "Purchase Date" shall mean the last Business Day of each
Purchase Period.
(p) "Purchase Period" shall mean each of the three month periods
ending on the last days of March, June, September and December
during the period when the Plan is in effect. The first Purchase
Period shall begin on October 1, 1996 and end on December 31,
1996.
3. Common Stock Available Under the Plan
The maximum number of shares of Common Stock which may be purchased
under the Plan shall be 1,000,000 shares, except as such maximum number may be
adjusted as provided in Section 12 hereof. Shares of Common Stock purchased
under the Plan may be authorized and previously unissued shares, treasury shares
(including shares purchased from time to time by Palomar), or any combination
thereof.
4. Administration of Plan
The Plan shall be administered by the Committee. The Committee shall
have the authority, consistent with the Plan, to interpret the Plan, to adopt,
amend and rescind rules and regulations for the administration of the Plan and
to make all determinations in connection therewith which may be necessary or
advisable, and all such actions shall be binding for all purposes under the
Plan. The Plan shall be administered at the expense of the Company.
5. Eligibility
Each employee of the Company shall be eligible to participate in the
Plan during each Purchase Period, provided that he or she is not, as of the
Entry Date for such Purchase Period:
(a) an employee who is customarily employed by the Company for fewer
than 20 hours per week, or for five or fewer months in any
calendar year; or
(b) an employee who owns (within the meaning of Section 424(d) of
the Code) stock possessing 5% or more of the total combined
voting power or value of all classes of stock of Palomar,
treating as owned on Entry Date, for purposes of this clause,
Common Stock which such employee would be entitled to purchase
on Purchase Date for such Purchase Period but for this Section
5(c).
6. Participation
(a) On the Entry date for each Purchase Period, Palomar shall grant to each
Participant in the Plan for such Purchase Period an option to purchase
on the Purchase Date for such Purchase Period, at the applicable price
specified in Section 7 hereof, the number of shares of Common Stock,
including any fractional share, which may be purchased, at such price,
with such participant's payroll deductions received during such Purchase
Period, subject to the terms and conditions of the Plan.
(b) Eligible Employees may elect to participate in the Plan as follows:
(i) Each Eligible Employee may elect to participate in the Plan,
effective on the Entry Date for any Purchase Period, by making
an election to participate at least 15 days prior to such entry
Date. Such election shall authorize the Company to deduct an
amount chosen by the employee equal to any whole percentage
between 1 and 15 percent, inclusive from such Employee's
Compensation paid during such Purchase Period.
(ii) After making the election pursuant to Section 6(b)(i) hereof, a
Participant shall automatically continue to participate in the
Plan during subsequent Purchase Periods until the Participant
either withdraws from the Plan or ceases to be an Eligible
Employee. The percentage the Participant's Compensation deducted
in subsequent Purchase Periods shall be the percentage specified
in the election made pursuant to Section 6(b)(i), as it may be
changed from time to time pursuant to Section 6(b)(iii) or
6(b)(iv) hereof.
(iii) Except as provided in Section 6(b)(iv) hereof, after the last
date for making an election described in Section 6(b)(i) hereof
for the Purchase Period, a Participant shall not be permitted to
increase or reduce the percentage of Compensation deducted from
his or her Compensati paid during each purchase period. A
Participant may elect to reduce or increase the percentage of
his or her Compensation deducted pursuant to the Plan to any
whole percentage between 1 and 15, inclusive, effective for a
subsequent Purchase Period by filing an election not later than
15 days prior to the Entry Date for such Purchase Period.
(iv) A Participant may elect at any time to reduce the percentage of
his or her Compensation deducted pursuant to the Plan to zero,
effective commencing with the next payroll period beginning
after the making of such election. All cash amounts already
deducted during a Purchase Period prior to the effectiveness of
any such election shall be refunded to the Participant.
(c) No interest will be paid to Participants on any payroll deductions.
(d) A Participant may at any time elect to withdraw from further
participation in the Plan, effective as of the next Business day
following such election. Any Participant whose employment with the
Company terminates for any reason (including without limitation
termination by reason of death or disability) shall be deemed to have
made a withdrawal, effective the next Business Day following such
<PAGE>
termination of employment. Upon any withdrawal, (i) no further amounts
shall be deducted from such Participant's Compensation effective for any
payroll period beginning after the effective date of withdrawal, (ii)
any outstanding option granted to such Participant under the Plan shall
terminate as of the effective date of the withdrawal, and no further
purchases of Common Stock under the Plan shall be made for such
Participant or after such date, and (iii) as soon as possible the
Company will refund all cash deducted during the Purchase Period.
Following any such withdrawal from the Plan, an employee's eligibility
to participate again in the Plan will be subject to all provisions of
Section 5 and 8 hereof.
(e) Notwithstanding any other provision of the Plan, an employee who has
withdrawn from the Plan pursuant to Section 6(d) hereof shall be deemed
to have made an irrevocable election not to participate in the Plan
during the two consecutive Purchase Periods immediately following the
one in which such withdrawal was made.
(f) Any election permitted by this Section 6 (other than an election deemed
made pursuant to Section 6(e)) shall be made in writing on the form
prescribed for such purpose by the Committee from time to time and shall
be delivered to the person or persons designated by the Committee. Any
such election shall be deemed made when such form is completed, signed
by the Participant and received by such designee.
7. Purchases of Common Stock
On the Purchase Date for each Purchase Period, all options granted under
the Plan on the first Business Day of such Purchase Period shall be deemed to be
exercised, and all amounts deducted pursuant to Section 6 hereof from the
Participant's Compensation during such Purchase Period shall be applied on such
date to purchase whole and fractional shares of Common Stock from the Company,
unless such Participant has withdrawn from the Plan during such Purchase Period
effective on or prior to such Purchase Date. With respect to shares of Common
Stock purchased, the purchase price per share shall be the lesser of (i)
eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on
the Entry Date of the Purchase Period, or (ii) eighty-five percent (85%) of the
Fair Market Value of a share of Common Stock on the Purchase Date of the
Purchase Period. The Committee shall appoint the Custodian for the Plan and to
hold all whole and fractional shares purchased under the Plan and to maintain a
separate Account for each Participant, in which Common Stock purchased by such
Participant under the Plan shall be held and Dividends received will be
reinvested. Each Participant shall receive a statement as soon as practicable
after the end of each Purchase Period reflecting purchases for his or her
account under the Plan through the end of such Purchase Period.
8. Limitation on Number of Shares purchased
Notwithstanding any other provision of the Plan, the maximum number of
whole and fractional shares of Common Stock which a Participant may purchase in
a Purchase Period under the Plan and under all other "employee stock purchase
plans" (within the meaning of Section 423 of the Code) maintained by Palomar and
its subsidiaries (within the meaning of Section 424(f) of the Code) shall be the
number determined by dividing $6,250 by the Fair Market Value of a share of
Common Stock on the Entry Date for such Purchase Period. In the event that the
amount of payroll deductions is greater than $6,250 in any given Purchase
Period, the Company will refund the excess to the Participant as soon as
practicable after such Purchase Date.
<PAGE>
9. Rights as a Stockholder
From and after the Purchase Date on which shares of Common Stock are
purchased by the Participant under the Plan, such Participant shall have all of
the rights and privileges of a stockholder of Palomar with respect to such
shares. Prior to the Purchase Date on which shares of Common Stock may be
purchased by a Participant, such Participant shall not have any rights as a
stockholder of Palomar.
10. Notice of Disposition of Stock
Each Participant agrees, by his or her participation in the Plan, to
promptly notify Palomar in writing of any disposition of any Common Stock
purchased under the Plan occurring within 2 years after the Entry Date of the
Purchase Period in which such stock was purchased.
11. Rights Not Transferable
Rights under the Plan are not transferable, except that the right to
receive shares pursuant to the Plan may be transferred by will or the laws of
descent and distribution. Options granted to a Participant hereunder may be
exercised only by such Participant.
12. Adjustment for Capital Changes
In the event of any capital change by reason of any stock dividend or
split, recapitalization, merger in which Palomar is the surviving entity,
combination or exchange of shares or similar corporate change, the number and
type of shares or other securities of Palomar which Participants may purchase
under the Plan, and the maximum aggregate number of such shares or securities
which may be purchased under the Plan, shall be appropriately adjusted by the
Board of Directors of Palomar.
13. Amendments
The Board of Directors of Palomar may at any time, or from time to time,
amend the Plan in any respect, except that, without stockholder approval, no
amendment shall be made (a) increasing the number of shares which may be
purchased under the Plan (other than as provided in Section 12 herein), (b)
materially increasing the benefits accruing to Participants or (c) materially
modifying the requirements as to eligibility for participation in the Plan.
14. Laws and Regulations
(a) Notwithstanding any other provision of the Plan, the rights of
Participants to purchase Common Stock hereunder shall be subject to compliance
with all applicable Federal, state and foreign laws, rules and regulations and
the rules of each stock exchange upon which the Common Stock is from time to
time listed.
(b) The Plan and the purchase of Common Stock hereunder shall be subject
to additional rules and regulations, not inconsistent with the Plan, that may be
promulgated from time to time by the Committee regarding purchases and sales of
Common Stock.
<PAGE>
15. Employment
The Plan shall not confer any right to continued employment upon any
employee of the Company.
16. Effective Date of the Plan; Termination
(a) The Plan shall become effective on October 1, 1996, subject to
approval by the shareholders of Palomar in accordance with applicable law and
the requirements of Section 423 of the Code.
(b) The Plan and all rights hereunder shall terminate on the earliest to
occur of:
(i) the date on which the maximum number of shares of Common
Stock available for purchase under the Plan as specified in Section 3
hereof has been purchased;
(ii) the termination of the Plan by the Board of Directors of
Palomar; or
(iii) the effective date of any consolidation or merger in which
Palomar is not the surviving entity, any exchange or conversion of
outstanding shares of Palomar for or into securities of another entity
or other consideration, or any complete liquidation of Palomar.
In the event that on any Purchase Date the remaining shares of Common
Stock available for purchase under the Plan are insufficient to fully satisfy
Participants' outstanding options, such remaining available shares shall be
apportioned among and sold to such Participant in proportion to the amounts of
payroll deductions and the excess payroll deduction shall be returned to the
Participant as soon as practicable thereafter.
Upon any termination of the Plan, any shares in the employee's Account
shall be delivered by the Custodian to the employee or his or her legal
representative as soon as practicable following such termination.
EXHIBIT 4.2
FIRST SUPPLEMENTAL INDENTURE
First Supplemental Indenture, dated as of the 15th day of September,
1997, by and between Palomar Medical Technologies, Inc., a Delaware corporation
(the "Company"), and American Stock Transfer & Trust Company, a New York
corporation, as trustee (the "Trustee").
W I T N E S S E T H:
WHEREAS, the Company and the Trustee are the parties to the Indenture
dated as of June 24, 1996 (the "Indenture"), relating to the Company's
4.5% Convertible Subordinated Debentures due 2003 (the "Debentures");
and
WHEREAS, the Company wishes to amend the Indentures as set forth in
paragraph 1 hereof (the "Amendment"); and
WHEREAS, the Board of Directors of the Company has duly authorized the
execution and delivery by the Company of this First Supplemental
Indenture; and
WHEREAS, pursuant to the provisions of Sections 11.2 and 9.1 of the
Indenture, the holders of not less than 66-2/3% of the outstanding
aggregate principal amount of the debentures have duly consented to the
Amendment.
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Amendment of Indenture. The definition of "Stock Price Factor" set forth
in Section 4.1 of the Indenture is hereby amended by the deletion of the
third paragraph of Section 4.1 of the Indenture in its entirety, and the
substitution of the following in lieu thereof: "Stock Price Factor"
means a factor, to be calculated by the Company with respect to each
December 15, February 15, April 15, June 15, August 15, and October 15
(each a "Reset Date"), and to be applicable in the two full calendar
months following the Reset Date, and equal to the average daily Nasdaq
closing price per Share (or, if the Company is listed or quoted on an
exchange in the United States other than Nasdaq, the closing price on
such exchange), for the thirty trading days immediately preceding the
applicable Reset Date; provided that in no event shall the Stock Price
Factor be less than U.S. $7.00 (as adjusted, if required, as provided in
Section 4.5), regardless of the actual Stock Price Factor otherwise
determined.
2. Form of Debenture. The definition of "Stock Price Factor" which is set
forth in each Debenture is hereby amended so as to coincide with the
definition of "Stock Price Factor" set forth in paragraph 1 above.
3. Effective Date. The Amendment shall be effective as of the date of this
First Supplemental Indenture. 4. Notation of Amendment. Debentures which
are authenticated and delivered after the date hereof shall incorporate,
or shall contain a notation of, the Amendment; provided, however, that
neither the failure to so incorporate the Amendment nor the absence of
any of such notation on any Debenture shall impair the validity of the
Amendment. 5. No Other Changes. Except as expressly amended hereby, the
Indenture shall remain in full force and effect in accordance with its
terms, and is hereby ratified, confirmed and approved.
IN WITNESS WHEREOF, Palomar Medical Technologies, Inc. has caused this
First Supplemental Indenture to be signed in its corporate name by Louis P.
Valente, its Chief Executive Officer and President, and its corporate seal to be
affixed hereunto; and American Stock Transfer & Trust Company has caused this
First Supplemental Indenture to be signed by Herbert J. Lemmer, its Vice
President, and its corporate seal to be affixed hereunto, all as of the day and
year first above written.
PALOMAR MEDICAL TECHNOLOGIES, INC.
(CORPORATE SEAL)
By: /s/ Louis P. Valente
------------------------------
Name: Louis P. Valente
Title: Chief Executive Officer
and President
AMERICAN STOCK TRANSFER & TRUST COMPANY,
AS TRUSTEE
(CORPORATE SEAL)
By: /s/ Herbert J. Lemmer
-------------------------------
Name: Herbert J. Lemmer
Title: Vice President
<TABLE> <S> <C>
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<NAME> Palomar Medical Technologies
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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<RECEIVABLES> 24,983,792
<ALLOWANCES> 7,580,000
<INVENTORY> 22,393,482
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<TOTAL-LIABILITY-AND-EQUITY> 79,036,651
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<OTHER-EXPENSES> 1,298,720
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<INTEREST-EXPENSE> 4,640,276
<INCOME-PRETAX> (67,167,702)
<INCOME-TAX> 0
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