FORM 10-KSB/A-4
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-22340
[GRAPHIC OMITTED]
PALOMAR MEDICAL TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
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<S> <C>
Delaware 04-3128178
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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66 Cherry Hill Drive, Beverly, MA 01915
(Address of principal executive offices)
(508) 921-9300
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
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Not Applicable Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
Common Stock , $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days). Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The issuer's revenues for its fiscal year ended December 31, 1996 were
$70,098,443.
As of March 20, 1997, 30,945,824 shares of Common Stock, $.01 par value
per share, and 16,000 shares of Preferred Stock $.01 par value per share were
outstanding. The aggregate market value, held by non-affiliates, of shares of
the Common Stock, based upon the average of the bid and ask prices for such
stock on that date was approximately $195,345,514.
Transitional Small Business Disclosure Format: Yes X No
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Palomar Medical Technologies, Inc., a Delaware corporation, (the
"Company" or "Palomar") was organized in 1987 to design, manufacture and market
lasers, delivery systems and related disposable products for use in cosmetic and
medical procedures. The Company currently operates in two business segments:
medical products and services and electronic products. In the medical products
segment, the Company manufactures and markets U.S. Food and Drug Administration
("FDA") approved ruby and CO2 lasers for hair removal, skin resurfacing and
wrinkle treatment, among other things. The Company has and continues to develop
ruby and diode medical lasers for use in clinical trials and is engaged in the
research and development of additional laser products. The Company has expanded
its efforts in the cosmetic laser area through a series of product development
activities, acquisitions and strategic alliances that target patient self-pay
procedures performed in doctors' offices and clinics. Principal among these are
the development of the EpiLaserTM, a ruby laser system for removing unwanted
hair. The laser hair removal, skin resurfacing and wrinkle treatment products
are significant to the Company's strategic plan and are discussed in further
detail below. The Company has entered into a number of research agreements with
recognized research hospitals and clinical laboratories. The Company provides
research funding, laser technology and optics expertise in return for licensing
agreements to specific medical applications and patents as more fully described
below. See "Patents and Licenses." Management believes that this method of
conducting research and development provides a higher level of technical and
clinical expertise than it could provide on its own, and in a more
cost-efficient manner.
In February 1997, Palomar Medical Products, Inc. ("Palomar Medical
Products") was formed as a wholly-owned subsidiary of the Company with the
purpose of consolidating the management and operations of the medical products
companies. In January 1997, the Company named an outside party as the President
and CEO of Palomar Medical Products to oversee and manage the operations.
Included in the medical products group are the following companies: Spectrum
Medical Technologies, Inc., Tissue Technologies, Inc., Star Medical
Technologies, Inc., Dermascan, Inc. and Palomar Technologies, Ltd., all of which
remain wholly-owned subsidiaries of the Company (see "Formation of Palomar
Technologies, Ltd."). Included as part of the medical business segment but
excluded from the medical products group is a newly formed, wholly owned
subsidiary of the Company, Cosmetic Technology International, Inc., which
intends to establish a worldwide network of cosmetic and dermatological laser
sites with medical service partners (see "Formation of Cosmetic Technology
International, Inc.").
In September 1995, the Company established Palomar Electronics
Corporation as a wholly-owned subsidiary of Palomar Medical Technologies, Inc.
as part of a plan to separate the electronics and computer segments of the
business from the medical laser segments of the business.
In the electronic products segment, the Company's Nexar Technologies,
Inc. subsidiary manufactures, markets and sells personal computers with a unique
circuit board design that enables end users to easily upgrade and replace the
microprocessor, memory and hard drive components, which management believes will
decrease the level of technical obsolescence associated with most desktop
personal computers in the market. Dynaco Corp. manufactures high density,
flexible electronic circuitry for use in industrial, military and medical
devices and is also introducing a number of proprietary products targeted to
service the personal computer industry, including high density memory modules.
These new proprietary computer memory modules double the memory capacity of
traditional memory modules using the same interface. Comtel Electronics is a
contract manufacturer which provides turnkey manufacturing and test services of
electronic assemblies.
THE COMPANY'S STRATEGIC PLAN
The Company's near-term strategy is to increase its focus on the
medical segment portion of the business. The Company hopes to spin out companies
in the non-core electronics segment in the form of publicly traded companies.
The Company believes that with the attainment of FDA clearance for marketing and
sales of its lasers for the treatment of hair removal, skin resurfacing, and
wrinkle treatment, the medical segment of its business is positioned for
success. The Company will continue to develop, acquire or license technologies
that can be integrated into its current and proposed products in the medical
business segment. Through its Cosmetic Technology International, Inc.
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subsidiary, the Company will also focus on the services segment of the business.
The Company intends to address very large markets incorporating its core
technology with proprietary products and services and structure its operations
to strive to be the low-cost producer and provider of these products and
services. The Company intends to seek agreements or arrangements with other
medical products and high technology companies in order to acquire technical and
financial assistance in the research and development of such products and in the
extensive experimentation and testing required to obtain regulatory approvals in
the United States and elsewhere. The Company will continue to seek marketing and
distribution agreements with established companies to enable it to market some
of its products quickly and more efficiently and will also utilize and enhance a
direct sales force.
The Company has already begun to spin out companies in its electronics
segment. On April 30, 1997, the Company entered into an agreement to sell its CD
Titles subsidiary to the management of CD Titles for a promissory note of
$600,000 due April 30, 1999. In addition, the Company also received a warrant to
purchase 750,000 shares of CD Titles common stock at various exercise prices
ranging from $6.00 to $10.00 Management is currently evaluating various
alternatives and methods for spinning out Dynaco Corp. and its subsidiaries.
Although the Company cannot guarantee successful completion of such spinouts,
the intention is to complete these transactions during 1997. In addition, the
Company's subsidiary Nexar Technologies, Inc. completed the initial public
offering of its Common Stock on April 14, 1997 (See "Formation of Nexar
Technologies, Inc.").
The Company believes that the expansion and success of its business is
significantly influenced by key employees at its operating subsidiaries. The
Company has and intends to continue to create incentive programs that allow
management as well as key members of senior management of the Company at these
operating subsidiaries to participate in the success of these operating
subsidiaries by participating in the equity of each subsidiary or profit sharing
plans.
The Company also makes early stage investments in core technologies and
companies that management feels are strategic to the Company's business or will
yield a higher than average financial return to support the Company's core
business. Some of these investments are with companies that are related to some
of the directors and officers of the Company. (See "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Item 12. Certain Relationships and Related
Transactions.")
RECENT FINANCING OF OPERATIONS AND INVESTMENTS
The Company has financed current operations and expansion of its core
business with short-term financial borrowings and investments through the
private sale of debt and equity securities of the Company. The Company raised a
total of $56,112,391 and $31,083,892 in such financings during the years ended
December 31, 1996, and December 31, 1995, respectively. The Company anticipates
that it will require substantial additional financing during the next
twelve-month period. 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. Sales of securities to private investors are sold at a
discount to the current or future public market for similar securities. It has
been the Company's experience that private investors require that the Company
make its best effort to register their securities for resale to the public at
some future time. The Company increased its authorized shares on July 19, 1996
from 40,000,000 shares of common stock to 100,000,000 shares of common stock.
There can be no assurance that the Company will be successful in raising
additional capital on favorable terms. (See Notes 5 and 15 in the "Notes to
Consolidated Financial Statements," and "Item 5. Market for Common Equity and
Related Stockholder Matters.")
INCREASE IN OUTSTANDING SHARES
As a result of financing activities, business developments, mergers and
acquisitions, issuance of incentive stock options and warrants to purchase
common stock to attract and retain key employees, the Company's issued and
outstanding shares of common stock have increased to 30,596,812 at December 31,
1996. The Company also had additional reserved but unissued shares of common
stock of 20,467,819 shares at December 31, 1996. The Company's issued and
outstanding shares of common stock increased subsequent to December 31, 1996 to
30,996,283 shares with additional reserved but unissued shares of common stock
of 33,083,190 shares as of July 7, 1997. A substantial number of the Company's
reserved shares are registered and could be resold into the public market.
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RELATED PARTY INVESTMENTS AND TRANSACTIONS
The Company has entered into a number of transactions with related
parties. To date, the Company has an aggregate of $5,584,064 of notes receivable
and investments with related parties. Included in the aggregate amount are loans
to certain officers, directors and key employees of $1,828,499; notes receivable
to related parties of $464,153; a loan of $1,100,000 to a public company of
which a former director is the director and chief financial officer; an
unsecured note of $604,653 to the Company's underwriter; and trading securities
of $1,912,614 in a publicly traded company in which a director of the Company is
an approximately 13% owner. See Note 11 in the "Notes to Consolidated Financial
Statements."
MEDICAL PRODUCTS SEGMENT
BUSINESS DEVELOPMENTS
ACQUISITION OF STAR MEDICAL TECHNOLOGIES, INC.
On July 1, 1993, the Company acquired 80% of the common stock of Star
Medical Technologies, Inc. ("Star"), a development stage company formed on April
1, 1993. Star develops medical and commercial products using high power laser
diodes. To date, Star has developed a number of medical diode laser prototypes
under clinical investigation. The acquisition price was $600,000 in cash and
five-year nonqualified stock options granted to certain officers of Star to
purchase up to an aggregate of 100,000 shares of the Company's common stock at
an exercise price of $1.78 (50% of the fair market value of the Company's common
stock on July 1, 1993). In addition, during 1994, the Company acquired an
additional 5% of the common stock of Star for cash payments of $970,000.
In April 1996, the Company purchased the remaining 15% of the
outstanding common stock of Star from its founders, bringing its ownership to
100%, in exchange for 217,943 shares of Palomar's common stock valued at $7.85
per share. This agreement restricts for a period of two years the sale of the
Company's common stock issued in connection with this agreement. The purchase
price has been recorded as additional goodwill and is being amortized over a
period of five years. In connection with this agreement the original founders of
Star have agreed to rescind all royalties due to them under a Rights Agreement
dated July 1, 1993. To date, revenue from the Star subsidiary has not been
significant.
ACQUISITION OF SPECTRUM MEDICAL TECHNOLOGIES, INC.
On April 5, 1995, the Company acquired all of the outstanding common
stock of Spectrum Medical Technologies, Inc. ("Spectrum"). The purchase price
consisted of $300,000 in cash, a $700,000 two-year promissory note, 364,178
shares of the Company's common stock with an aggregate fair market value of
$1,000,000, acquisition costs of $161,138 and assumed liabilities totaling
$1,128,139. In addition, the purchase price consists of a 20% contingency
payment, payable in the Company's common stock, based upon the future earnings
performance of Spectrum over a three to five-year period. Spectrum develops,
manufactures, sells and services ruby lasers throughout the world for
dermatological applications.
FORMATION OF SPECTRUM FINANCIAL SERVICES LLC
On June 30, 1995, Spectrum Financial Services LLC ("SFS"), a financial
services leasing company and a minority- owned subsidiary of the Company, was
formed. As of December 31, 1996 and 1995, the Company had funded the minority
subsidiary with cash in the amount of $1,680,919 and $856,300, respectively. SFS
arranges for financing of medical products sold by the Company. In addition,
during 1996 as part of its business strategy, the Company aligned itself with
Copelco Capital, one of the world's largest and most established leasing
companies, to become the exclusive label leasing company for the Company's
complete line of cosmetic lasers.
LICENSE AND RESEARCH AGREEMENT WITH MASSACHUSETTS GENERAL HOSPITAL FOR
LASER HAIR REMOVAL
In August 1995, the Company entered into an exclusive, worldwide,
perpetual license for certain technology that applies to a patented method of
delivering laser energy to treat unwanted hair. The Company also entered into a
four-year agreement with the Massachusetts General Hospital ("MGH"), whereby MGH
agreed to conduct clinical trials on a laser treatment for hair
removal/reduction invented by Dr. R. Rox Anderson, Wellman Laboratories of
Photomedicine, MGH. As part of the agreement, MGH provided the Company with
prior data already generated by Dr. Anderson with respect to the ruby laser
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device at MGH. This information was the basis for an application filed on
December 8, 1995 with the FDA for approval of the Company's EpiLaser(TM) for
treating unwanted hair. The Company is obligated to fund the clinical research
in the aggregate amount of approximately $917,000 over the term of its contract
with MGH. On August 18, 1995, the Company also entered into a worldwide
exclusive license agreement with MGH. Upon completion of a valid product or
service, or new uses (not related solely to hair removal) based on the findings
of the clinical studies, the Company shall be given the right of first refusal
to negotiate an exclusive or non-exclusive license agreement. As consideration
for this license, the Company is obligated to pay MGH royalties of 5% of net
revenue on products covered by valid patents licensed to the Company
exclusively; 2.5% of net revenues on products covered by valid patents licensed
to the Company non-exclusively; no less than 2.5% of net revenues for products
sold for hair removal as well as other uses, not covered above and a royalty to
be negotiated on services or commercial dispositions (other than sales)
involving products covered by valid patents licensed to the Company,
ACQUISITION OF TISSUE TECHNOLOGIES, INC.
On May 3, 1996 the Company acquired 100% of Tissue Technologies, Inc.
("Tissue Technologies"), an Albuquerque, New Mexico based manufacturer of
dermatology laser products, in exchange for 3,200,000 shares of the Company's
common stock. The Company has accounted for this acquisition as a
pooling-of-interest in accordance with Accounting Principles Board Opinion
No.16. Tissue Technologies is engaged in the manufacture, marketing and sales of
C02 laser systems used in skin resurfacing and treatment of wrinkles.
ACQUISITION OF DERMASCAN, INC.
On July 18, 1996 the Company purchased 80 shares of common stock (80%
of total issued and outstanding capital stock) of Dermascan, Inc. ("Dermascan")
from a Dermascan stockholder in exchange for 35,000 shares of common stock of
the Company. The Company included these 35,000 shares in a registration
statement that became effective February 28, 1997. In addition, the Company has
agreed to pay the Dermascan stockholder an amount equal to the difference
between $14.00 and $7.8125, the closing bid price on February 28, 1997. The
agreement also includes a put right by the remaining 20% stockholder of
Dermascan, which provides that, at any time after three years from the date of
the agreement, the Company will be required to purchase the stockholders' 20%
interest for $130,000 in cash. In connection with the agreement, the Company
entered into a five year employment agreement with the President of Dermascan
which guarantees annual payments of up to $125,000. Dermascan's operations prior
to acquisition were not material. The Company has recorded the acquisition at
the guaranteed stock price of $490,000 in total. Dermascan markets and sells
electrology equipment and supplies to the electrology market. To date, the
operations of Dermascan have not been significant.
FORMATION OF PALOMAR TECHNOLOGIES, LTD.
On November 13, 1996, the Company formed Palomar Technologies, Ltd.
located in Hull, England. This company was formed to establish a European
resource to manufacture, sell and service laser products throughout Europe and
provide a low-cost sourcing alternative for specialty components. Operations
have not yet begun and will not begin until mid-1997. Through February 28, 1997,
the Company has funded this subsidiary with $1,592,180 for the purchase and
lease of its manufacturing facilities and the hiring of certain key employees.
FORMATION OF PALOMAR MEDICAL PRODUCTS, INC.
On February 18, 1997, the Company formed Palomar Medical Products,
Inc., a wholly-owned subsidiary, for the purpose of consolidating the management
and operations of the medical products companies. Included in the medical
products group are the following companies, all of which remain wholly-owned
subsidiaries of the Company: Spectrum, Tissue, Star Medical, Dermascan and
Palomar Technologies, Ltd.
MEDICAL SERVICES SEGMENT
FORMATION OF COSMETIC TECHNOLOGY INTERNATIONAL, INC.
On December 20, 1996, Cosmetic Technology International, Inc. ("CTI")
was formed as a 100%-owned subsidiary of the Company. As of December 31, 1996
the Company had funded CTI with cash of approximately $650,000. CTI is a
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services company which intends to establish a worldwide network of
cosmetic dermatological laser and medical device sites with medical services
partners (both fixed and mobile) in key geographic locations. Each site will be
provided a turnkey package of laser and medical device technology, equipment,
training and service, operations personnel, strategic advertising and marketing
programs, patient financial credit programs and management assistance. In early
1997, a binding letter of intent was completed with Columbia/HCA, a $20 billion
company and one of the world's largest owners and operators of medical
facilities, to establish revenue sharing sites throughout the country in
existing Columbia/HCA facilities. CTI and Columbia/HCA are working together to
determine the location and opening dates of such sites; to date, none have been
established. To date, CTI has opened and is operating two sites that are
wholly-owned by CTI, one in Los Angeles and one in Phoenix. CTI has also
established revenue-sharing sites in St. Louis, Missouri; Chula Vista,
California and in Australia. During 1996 the operations of CTI were not
significant.
MEDICAL PRODUCTS AND LASERS IN MEDICINE
EPILASER PRODUCT FOR LASER HAIR REMOVAL
In recent years, scientists and clinicians have developed a concept
called TISSUE OPTICS to describe how the unique properties of the laser can be
used to treat human tissue selectively and more precisely. By careful selection
of laser parameters, such as wavelength (color), energy and pulse width
(exposure time), and with a detailed understanding of the physical and optical
properties of the target tissue, the clinician can selectively treat the target
tissue while minimizing or eliminating damage to surrounding tissue. The concept
of color selectivity has been useful in developing a number of successful
dermatologic applications. With the appropriate selection of energy and pulse
width to allow for the preferential absorption by the melanin present in the
target area or by the hemoglobin in blood there is negligible absorption by the
surrounding tissue. This concept of tissue optics applies to all of the medical
laser products under development by the Company.
Spectrum has developed a long pulse ruby laser, using its core ruby
laser technology developed for tattoo removal and pigmented lesions, that is
specifically configured to allow the appropriate wavelength, energy level and
pulse duration to effectively be absorbed by the hair follicle without being
absorbed by the surrounding tissue. In March 1997 Spectrum received FDA
clearance to sell and market the EpiLaser in the U.S. for hair removal. In July
1996 the Company received clearance from the FDA to sell and market the EpiLaser
for a wide range of dermatological applications, not including hair removal.
During April of 1996, clearance was given to market the laser-based hair removal
system in Canada. This method of hair removal allows for selective destruction
of the target follicle without harming the surrounding skin. The laser operates
in the 20-25 J energy range, delivering fluences in the range of 10-50J/cm2 in a
3-ms pulse. The beam delivering system produces a round beam with a nearly
flat-top energy distribution, thereby avoiding local hot spots. The hair-removal
technology utilized by Palomar targets the pigment in a hair follicle and was
developed by Dr. Rox Anderson at MGH. The laser incorporates a proprietary
handpiece delivery system that enables the laser light to penetrate to the
correct depth while at the same time limiting the amount of discomfort
associated with the procedure. The laser light is pulsed at a rapid rate
covering approximately one half square inch at each pulse. This treatment method
allows for a large area of treatment over a short period of time.
In an effort to find a way to allow the laser light to pass through top
skin layers and be deeply absorbed in the hair follicle below, a contact
handpiece applicator was developed by MGH and licensed to Spectrum on an
exclusive world-wide perpetual basis. This unique delivery device is the key to
the success and selectivity of the ruby based laser hair removal system. The
Company believes this unique delivery system enables the user to address a
potentially larger market than electrolysis currently does by offering to treat
large areas of the body such as back, chest, abdomen, legs, arms and other
areas. See "License and Research Agreement with Massachusetts General Hospital
for Laser Hair Removal".
THE HAIR-REMOVAL MARKET
The market for laser-based hair removal is in its early stages and, as
such, market segment information is only now being formulated. However,
management believes that the current electrolysis market is a good model. Last
year, more than one million women in the United States underwent treatment using
electrolysis, spending on average more than $1,000 each, representing a market
of approximately $1 billion annually. In addition, surveys indicate as many as
15% of men would also like to remove unwanted hair especially from back and
chest areas. Electrolysis is the only proven commercially available method for
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the long-term removal of body hair. Other methods of hair removal include
waxing, depilators, tweezing, depilatory creams and shaving, all resulting in
only short-term hair removal.
Electrolysis is a process in which an electrologist inserts a needle
directly into a hair follicle and activates an electric current in the needle,
which disables the hair follicle. The tiny blood vessels in each hair follicle
are heated and coagulated, presumably cutting off the blood supply to the hair
matrix or are destroyed by chemical action depending upon modality used. The
success rate for electrolysis is variable depending upon the skill of the
electrologist and always requires a series of treatments. Electrolysis is
time-consuming, expensive and sometimes painful. There is also some risk of skin
blemishes and a rising concern relating to needle infection. Since electrolysis
only treats one hair follicle at a time and can only treat visible hair
follicles, the treatment of an area as small as an upper lip may require
numerous visits at an aggregate cost of up to $1,000. Although 70% of all
electrolysis treatments are for facial hair, the neck, breasts and bikini line
are also treated. Because hair follicles are disabled one at a time,
electrolysis is rarely used to remove hair from large areas such as the back,
chest, abdomen and legs.
Market surveys report that more than 70% of women in the United States
employ one or more techniques for temporary hair removal from various parts of
the body. Pulling hair from the follicle produces the longest term temporary
results, but is painful and may cause skin irritation. A number of techniques
are used to pull hair from the follicle including waxing, depilators and
tweezing. In the waxing process, a lotion, generally beeswax-based, is spread on
the area to be treated and allowed to harden, thereby trapping the hairs. The
hardened film is then rapidly peeled off, pulling out the entrapped hairs.
Depilators employ rotating spring coils or slotted rubber rolls to trap and pull
out the hairs. Tweezing involves removing individual hairs with a pair of
tweezers. Depilatory creams, which contain chemicals to separate hair from the
follicle, frequently leave a temporary, unpleasant odor and may also cause skin
irritation. Shaving is the most widely used method of hair removal, especially
for legs and underarms, but produces the shortest term results. Hair bleaches do
not remove hair, but instead lighten the color of hair so that it is less
visible. A principle drawback of all of these methods is that they require
frequent treatment.
Preliminary studies using Spectrum's laser hair removal process
demonstrated significant prolonged hair growth delay ranging from six to nine
months to in excess of two years in some cases. In some cases, the hair is
permanently removed following treatment with the EpiLaser. Potential benefits of
laser hair removal include: treatment of larger areas in each treatment session,
relatively painless procedure, reduced risk of scarring, non-invasive procedure,
carries no risk of cross-contamination, and higher success rates than with
previous methods.
COMPETITION
Currently, there are three other companies, ThermoLase (Division of
Thermo Electron Corp.), Laser Industries, Ltd. and MEHL/Biophile International
that have FDA clearance for a laser-based hair removal system in the United
States. ThermoLase, a publicly traded company, received clearance from the FDA
in April 1995 to commercially market services using its laser-based hair removal
system. The ThermoLase system uses a low-energy, dermatology laser in
combination with a carbon based lotion that absorbs the laser's energy to
disable hair follicles. ThermoLase has opened spas in California, Texas, Florida
and Colorado. ThermoLase is also opening or plans to open additional spas,
including in suburban Detroit, Michigan; Greenwich, Connecticut; Manhasset, New
York; Minneapolis, Minnesota; and Palm Beach, Florida. As part of its
commercialization strategy, ThermoLase plans to establish a network of
ThermoLase-owned centers in major metropolitan areas in the U.S., third-party
licensees in selected smaller U.S. markets and joint ventures in foreign
markets. Laser Industries, Ltd., received FDA clearance in March 1997 to market
its EpiTouchTM ruby laser for hair removal. The EpiTouchTM will be sold in the
U.S. through Sharplan 2000, Inc., a joint venture of Laser Industries, Ltd. and
MEHL/Biophile International Corp. MEHL/Biophile's wholly owned subsidiary,
Selvec Acquisitions Corp., received FDA clearance in March 1997 to market its
SLS CHROMOS 694 (R) long pulse ruby laser hair removal system.
In July 1997, ESC Medical Systems Ltd. received clearance from the FDA
to market its EpiLight Hair Removal System, a depilation device based on pulsed
light technology. Several other companies have also indicated interest in
developing and/or introducing hair removal devices in 1997, making laser hair
removal the most competitive application within the cosmetic laser marketplace.
As more companies complete development of cosmetic/medical laser
products and/or receive FDA clearance it is expected that there will be a
consolidation of companies within the industry via acquisitions, partnering
arrangements or joint ventures. In February 1997, ESC Medical Systems Ltd.
announced a definitive stock swap agreement under which it would acquire Luxar
Corporation, a privately held manufacturer of surgical lasers.
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MARKETING, DISTRIBUTION AND SERVICE FOR THE EPILASER
Spectrum sells and markets the EpiLaser through an established network
of distributors in the U.S. and worldwide and will also enhance and develop a
direct sales force during 1997. Management feels that this combination allows
for a level of coverage that is more than adequate to service all its major
market segments. As part of Spectrum's marketing efforts, the sales force
provides the doctors a level of local market support including in-office
marketing brochures, advertising copy and clinical data in a marketing kit that
the doctor uses to educate the doctors' patient base. Using this marketing
approach, Spectrum is able to establish long term relationships with its
customers providing Spectrum with an installed base of customers. This base of
customers is an important factor in introducing new products to the market.
Spectrum provides for service in the U.S. through its own service
organization with regional representation. Spectrum's international sales are
serviced by its distributor network. All service technicians are trained by
Spectrum. Spectrum's recommended preventive maintenance schedule provided by
these trained technical representatives provides for a high level of product
reliability.
MANUFACTURING AND SUPPLIERS FOR THE EPILASER
Spectrum's manufacturing operations consist of the assembly and testing
of components purchased from outside suppliers and contract manufacturers.
Spectrum maintains control and manufactures key components in-house. The entire
fully assembled system is subjected to a rigorous set of tests prior to shipment
to the customer or distributors.
Spectrum depends and will depend upon a number of outside suppliers for
components used in its manufacturing process. Most of Spectrum's components and
raw materials are available from a number of qualified suppliers. One critical
component that is available through only one supplier is ruby rods. To date, the
Company has not experienced, nor does it expect to experience, any significant
delays in obtaining component parts or raw materials. Spectrum has expanded its
manufacturing capabilities in the United States to satisfy projected demand and
allow for manufacturing capacity for additional products. Spectrum is pursuing
both CE mark and ISO 9001 Registrations to meet international standards needed
to pursue European markets.
TRU-PULSE(R) C02 LASER FOR SKIN RESURFACING AND TREATMENT OF WRINKLES
Tissue Technologies manufactures and sells the Tru-Pulse Laser. In late
1995, Tissue Technologies received FDA clearance to sell and market its
Tru-Pulse laser in the U.S. for skin resurfacing. To date, Tissue Technologies
has shipped approximately 250 laser systems to dermatologists and other medical
specialists worldwide. In October of 1996 Tissue Technologies received both CE
Mark and ISO 9001 registrations, meeting the international standards that allow
products to be sold and shipped primarily to European countries. On February 18,
1997, Tissue Technologies received additional clearance from the FDA to sell and
market its Tru-Pulse Laser for the treatment of wrinkles, scar revision and burn
debridement.
The Tru-Pulse laser offers skin ablation as a means of reducing
wrinkles. The laser uses certain patented C02 technology designed especially for
skin ablation. The Tru-Pulse operates at 10,000 watts of peak power delivering
500 millijoules per pulse in a 65 microsecond pulse. The Tru-Pulse has the
ability to deliver the required amount of energy in a relatively short pulse as
compared to competitors' systems. The Tru-Pulse also has a unique beam profile.
Most C02 lasers have a gaussion beam with a central hot spot. In contrast, the
Tru-Pulse has a non-gaussion beam with power evenly distributed throughout its
cross section. Clinical data suggests that the combination of these unique C02
laser properties may account for the shorter healing time and reduced erythema
reported by doctors who use the Tru-Pulse.
The Tru-Pulse is currently being sold through distributors in the
United States as well as internationally. Tissue Technologies utilizes the same
distributors as Spectrum Medical and is in the process of enhancing/utilizing a
joint direct sales force within the Palomar Medical Products Group. The system
is also sold to dermatologists, plastic surgeons and other medical specialists
directly.
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MANUFACTURING AND SUPPLIERS FOR TRU-PULSE LASER
Tissue Technologies' manufacturing operations consist of the assembly
and testing of components purchased from outside suppliers and contract
manufacturers. Tissue Technologies depends upon a number of outside suppliers
for components used in its assembly process. To date Tissue Technologies has not
experienced any significant delays or other difficulties in obtaining parts or
components. The Tissue Technology CO2 technology is based on recent technology
advances and as such is yet to be optimized. Currently, the most critical
component is manufactured by one supplier that has experienced problems in tube
reliability. The Company is currently seeking other alternative tube suppliers
as well as considering manufacturing and producing the CO2 tubes themselves, and
believes that this reliability issue will be rectified during 1997.
COMPETITION FOR TISSUE'S TRU-PULSE LASER
Currently, there are three main competitors to the Tru-Pulse Laser:
Laser Industries (Sharplan), Coherent, Inc. and Luxar (recently acquired by ESC
Medical Systems). Laser Industries and Coherent, combined, account for
approximately 50% of the world market. The estimated U.S. patient services
market for skin resurfacing and treatment of wrinkles is $500-plus million. The
annual worldwide cosmetic skin resurfacing product laser market is estimated to
be approximately $115 million. These numbers are expected to increase as "baby
boomers" age into their fifties. Coherent had been pricing its UltraPulse System
at the high end of the market with a high power laser that lists for $120,000,
but recently introduced new models which are priced from $75,000 to $90,000.
Tissue Technologies, Sharplan and Luxar average list price is $40,000 - $70,000.
RUBY LASER FOR TATTOO REMOVAL
In April 1995, the Company acquired all of the outstanding common stock
of Spectrum. This acquisition provided the Company with an operating subsidiary
concentrating on sales and marketing to the cosmetic laser market including
dermatologists and plastic surgeons. The majority of Spectrum's sales in the
past have been Q-Switched Ruby Lasers for tattoo removal and treating pigmented
lesions, but in 1996 more than half of Spectrum's sales were from the newly
developed EpiLaser. The EpiLaser will clearly be the focus in 1997, but the
RD-1200 ruby laser for tattoo removal will continue to be marketed and sold as
it is already approved for sale in the U.S., Japan and in certain other parts of
the world. The basic ruby laser technology includes core laser technology that
the Company believes is applicable to other lasers for additional applications.
Spectrum sells and markets the RD-1200 through an established network of
distributors and direct sales force in the U.S. and through distributors
worldwide. Spectrum provides for service in the U.S. through its own service
organization with regional representation. Spectrum's international sales are
serviced by its distributor network.
COMPETITION FOR SPECTRUM'S RUBY LASER FOR TATTOO REMOVAL
Competition in the medical device industry is intense and technology
developments are expected to continue at the rapid pace experienced over the
past few decades. Spectrum relies on proprietary technology, performance,
product features, price, reputation in the marketplace and its installed base as
leverage to keep its competitive edge in the marketplace. Spectrum competes with
other manufacturers, some with similar technology and others with competing
technology. Some of these competitive companies have greater financial,
marketing and technical resources than that of Spectrum. The Company anticipates
competition for its tattoo removal laser will continue.
FUTURE PRODUCTS
RELATIONSHIP WITH WELLMAN LABORATORIES
Wellman Laboratories ("Wellman Labs"), the world's largest biomedical
laser research facility and part of the MGH Laser Center located in Boston,
Massachusetts, was created to oversee and speed the flow of biomedical laser
research from the laboratory to patient care. Funded in part by a grant from the
Department of Energy, the Laser Center brings together two strengths of MGH: its
clinical departments and Wellman Labs. The MGH Laser Center works together with
industry, academia, and the Department of Energy Laboratories to access
information and technology across a broad spectrum of laser and medical
capabilities.
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The principals at Wellman Labs study the fundamental photophysical and
photochemical properties and processes of biomolecules excited by ultraviolet,
visible, and near infrared radiation. The labs are staffed by engineers, laser
physicists and physicians familiar with all aspects of biomolecules, cells, and
tissue IN VITRO. The scientists work side by side with the clinicians to
understand the basic principles involved in the complex interactions of light
and tissue.
In 1994, the Company began a number of studies for the treatment of
certain dermatologic conditions using its diode laser at Wellman Labs. In 1995,
these studies were expanded to include the Company's ruby lasers for cosmetic
procedures. The data associated with these treatments is currently being
evaluated by Wellman Labs and the Company. Pursuant to its research agreement
with MGH (see "License and Research Agreement with Massachusetts General
Hospital"), the Company works closely with Dr. R. Rox Anderson, the Research
Director of the MGH Laser Center and Associate Professor of Dermatology at
Harvard Medical School, who is a recognized expert in laser tissue interaction
and the inventor of a number of laser procedures in use today. Dr. Anderson has
authored over 60 papers in peer-reviewed publications relating to the use of
lasers in dermatology, is the recipient of numerous awards in the field of laser
medicine and serves as the Chairman of the Blue Ribbon-Government Liaison
Committee of the American Society for Laser Medicine and Surgery. Dr. Anderson
holds eight U.S. patents and has pending applications for an additional eleven.
The Company feels that these types of relationships are critical in developing
effective products for widespread use in the market on a timely basis.
DIODE LASER PRODUCT DEVELOPMENT
BURN DIAGNOSIS SYSTEM - U.S. AIR FORCE CONTRACT
In March 1994, the Company's Star subsidiary was notified that their
proposal entitled "High Energy Diode Laser for Burn Diagnosis," submitted to the
Phillips Laboratory Kirkland Air Force Base, New Mexico under DOD Solicitation
94.1 Topic AF94-110, had been selected for funding. The initial contract, a
phase I Small Business Innovation Research Grant ("SBIR") for approximately
$60,000, was completed.
On June 21, 1994, Star was granted an exclusive worldwide license for
the measurement of the Burn Depth in Skin from the Office of Technology Affairs
at MGH.
In March 1995, Star was granted a follow-on phase II SBIR contract with
the U.S. Air Force, Phillips Laboratory, for the research and development of the
burn diagnosis system. The aggregate contract value is approximately $743,000
over a two-year performance period. During the fiscal years ended December 31,
1996 and 1995, the Company recognized $281,991 and $307,000 of government
contract revenue, respectively.
In January 1996, Star began initial clinical testing of the burn
diagnosis system at the Shriner Burn Center in Boston, Massachusetts and at the
Augusta Medical Center in Augusta, Georgia in November 1996. The system is
designed to illuminate the burn site with near infrared light from a diode laser
and to image the blood flow using fluorescence from an FDA cleared dye as an aid
to the doctor in determining the burn depth. The treatment of the burn differs
greatly depending on the degree of burn. This technique has been licensed by MGH
exclusively to Star. To date the system has been tested on five burn victims and
has demonstrated the ability to detect the absence or presence of blood flow
deep in the dermis. The Company expects that it may take several years before a
commercial product for the measurement of burn depth is available.
LASER TONSILLECTOMY RESEARCH AGREEMENT WITH THE NEW ENGLAND MEDICAL
CENTER ("NEMC")
In June 1994, the Company signed an agreement (the "NEMC Agreement")
with the Otolaryngology Research Center for Advanced Endoscopic Applications at
New England Medical Center, Boston, Massachusetts, to provide a research grant
and to sponsor investigations and development of laser applications, advanced
delivery systems and disposable products in the area of dye and diode laser
applications in otolaryngology and related specialties. As defined under the
NEMC Agreement, the Company will provide a total of $150,000 over a one-year
period, of which $50,000 has been paid in the form of laser hardware and an
additional $100,000 has been incurred through December 31, 1995. The parties
have reached an understanding that the Company will obtain ownership rights or
the right of first refusal to exclusive worldwide licenses to sell and market
any inventions developed with the grant funding. In August 1994, the NEMC
Agreement was amended to support animal testing with one of the Company's diode
lasers in connection with performing tonsillectomies. The Company has provided
funding of $54,813 and $36,534 for the years ended December 31, 1995 and 1996
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respectively. The Company intends to fund human clinical studies in this area
over the next twelve-month period. The Company expects that it may take several
years before a commercial product for tonsillectomy is available.
DYE LASER PRODUCTS
U.S. ARMY CONTRACT
During 1995, the Company entered into a two-year cost plus fixed fee
contract with the U.S. Army. The contract provides for the Company to
investigate Compact, Wavelength Diverse, High Efficiency Solid-State Dye Lasers
and is valued at $3,555,223. Revenue on the contract is recognized as costs are
incurred. During the fiscal years ended December 31, 1995, and December 31, 1996
the Company recognized $1,305,542 and $190,694, respectively, of government
contract revenue. The Company does not anticipate this research will result in a
commercial product within the next few years. In April 1997, the Company novated
this contract to Physical Sciences, Inc. ("PSI"). Upon completion of the
contract, PSI has agreed to offer the Company a right of first refusal for a
commercial license to sell, manufacture or otherwise dispose of solid-state dye
laser technology as developed by PSI under the contract for use in medical
products.
THROMBOLYSIS AGREEMENT
On September 10, 1993, the Company entered into the Baxter Agreement
with the Edwards LIS Division of Baxter. Under the Baxter Agreement, the two
companies intend to develop, market, and sell an integrated system utilizing
lasers and catheters for the removal of blood clots. Baxter is responsible for
sales and marketing of the product after FDA clearance and the Company is
responsible for the development and manufacture of the product. Following FDA
clearance the Company will receive 80% of the net sales for laser equipment and
50% of the net sales for catheter and disposable components. Prior to FDA
clearance, the Company will receive 100% of the revenue received from the laser
and the catheter. Under the Baxter Agreement, Baxter licensed its proprietary
technology to the Company, and the Company cross-licensed its technology to
Baxter. The Company also granted to Baxter a license to sell and market products
incorporating such technology. Baxter agreed to transfer its interest in the
agreement to ACS, a division of Eli Lilly, as part of a purchase by Eli Lilly of
the Baxter LIS division. Eli Lilly subsequently sold ACS to Guidant Corp.
In January 1997, Palomar became an equity partner in the formation of a
new company, LaTIS, Inc., created to use Palomar's Laser Thrombolysis technology
to develop a pulsed-dye laser system for treating stroke. With the formation of
this new venture, Laser Thrombolysis is no longer part of Palomar's strategic
agenda, although the Company can still derive the benefits from its research by
potentially being the laser supplier for this large market.
PATENTS AND LICENSES
On February 24, 1993, the principals of the Company's Star subsidiary
applied for a patent. This application was subsequently transferred to Star in
connection with the technology underlying the use of a high powered diode laser
for the treatment of psoriasis and other derma vascular malformation. The patent
was issued on June 18, 1996. On June 22, 1995, the NEMC filed a patent for
Coagulation Laser Tonsillectomy. The patent was issued on May 28, 1996. Star has
applied for additional patents regarding the design and use of high powered
diode lasers. The Company has exclusive rights to the NEMC patent. MGH has filed
a number of patents surrounding technology involving laser hair removal. The
first patent was issued on January 21, 1997. The Company has licensed this laser
hair removal technology from MGH in accordance with a certain license and
research agreement as previously discussed.
In the medical products segment, the Company is aware of patents
relating to laser technologies used in certain applications. The Company intends
to pursue such laser technologies in the future; hence, if the patents relating
to those technologies are valid and enforceable, they may be infringed by the
Company. After consulting with outside counsel to the Company, the Company
believes that it is not infringing currently on patents held by others; however,
were the issue ever to be litigated, a court could reach a different opinion.
In March 1997, Selvac Acquisitions Corp. ("Selvac") filed a complaint
in the United States District Court for the District of New Jersey alleging,
among other things, that the EpiLaser infringes a patent held by Selvac. The
Company filed an action against Selvac's parent MEHL/Biophile in the United
States District Court for the District of Massachusetts in October 1996 seeking,
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among other things, a declaration that the Company does not infringe Selvac's
patent and that Selvac's patent is invalid, void and unenforceable. See "Item 3.
Legal Proceedings." Other than the Selvac action, the Company has not been
notified that it is currently infringing on any patents nor has it been the
subject of any patent infringement action. Defense of a claim of infringement is
costly and could have a material adverse effect on the Company's business, even
if the Company were to prevail.
The United States Patent and Trademark Office has granted certain
patents covering basic laser technology to Dr. Gordon Gould, an individual not
affiliated with the Company. In October 1988, Dymed, the Company's predecessor,
entered into a License Agreement with Patlex Corporation ("Patlex") whereby
Dymed was granted a worldwide non-exclusive license to several laser related
patents developed by Dr. Gould and assigned to Patlex ("Dymed Agreement"). In
exchange for payment of royalties, Patlex granted to Dymed the right to
manufacture lasers using its patented technologies until the expiration of its
patents and agreed not to sue the Company or any of its customers for
infringement of the licensed patents. In January 1992, the Company entered into
a new Patent License Agreement with Patlex (the "Patlex Agreement") that
superseded the Dymed Agreement. Under the terms of the Patlex Agreement, the
Company is required to pay, during the term of the applicable licenses (which
are for the life of the patents covered), royalties of 5% of the "net selling
price" (as defined therein) of lasers which are manufactured, used or sold by
the Company, and incorporate Patlex's patent rights. These patents expire on
various dates through May 4, 2005. During the years ended December 31, 1996 and
1995, the Company recorded $167,000 and $620,000, respectively, of royalty
expense relating to this agreement.
GOVERNMENT REGULATION
All medical devices are subject to FDA regulation under the Medical
Device Amendments of the United States Food, Drug and Cosmetics Act (the "FDA
Act"). The Company's business, financial condition and operations are critically
dependent upon timely receipt of FDA regulatory clearances.
FDA CLEARANCE STATUS FOR COSMETIC LASER PRODUCTS
The FDA clearance process in dermatology may be accomplished through a
pre-market approval ("PMA") or under Section 510(k) of the FDA Act. Based upon
discussions with several experts familiar with the FDA clearance process,
management believes that the appropriate FDA clearance process for most
dermatology laser systems is via the 510(k) process which historically has
required less clearance time than the PMA clearance process. The Company is
subject to FDA regulation governing the use and marketing of medical devices.
In December 1995, the Company filed an application for clearance with
the FDA to commercially market the EpiLaser system pursuant to the FDA's 510(k)
process. The data submitted in the filing was based on clinical information
obtained at Wellman Laboratories under the direction of Dr. R. Rox Anderson. The
purpose of the data was to illustrate the safety and effectiveness of using a
ruby laser for removing unwanted hair. In March 1997 the Company received FDA
clearance to sell and market the EpiLaser in the U.S. for hair removal. In July
1996 the Company received clearance from the FDA to sell and market the EpiLaser
for a wide range of dermatological applications, not including hair removal. The
Company's other FDA cleared lasers include the Tru-Pulse for skin resurfacing
and treatment of wrinkles and the RD-1200(TM) Q-switched ruby laser for
treatment of age spots and tattoos. In the event the Company changes laser
specifications of its lasers, it may be required to obtain FDA clearance
pursuant to a new 510(k) application.
OTHER GOVERNMENT APPROVALS FOR MEDICAL PRODUCTS
In order to be sold outside the United States, the Company's products
are subject to FDA permit requirements that are conditioned upon clearance by
the importing country's appropriate regulatory authorities. Many countries also
require that imported products comply with their own or international electrical
and safety standards. Additional approvals may be required in other countries.
The Company has yet to apply for international approval for its diode laser for
use in cosmetics and dermatology. In October 1996, Tissue Technologies received
both CE Mark and ISO 9001 registrations, meeting international standards that
allow the Tru-Pulse laser to be sold and marketed in certain European countries.
Another significant certification the Company will pursue will be Shonin, which
allows sales and marketing of the Company's lasers in Japan.
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The Company is subject to the laser radiation safety regulations of the
FDA Act administered by the National Center for Devices and Radiological Health
("CDRH") of the FDA. These regulations require a laser manufacturer to file new
product and annual reports, to maintain quality control, product testing and
sales records, to distribute appropriate operation manuals, to incorporate
certain design and operating features in lasers sold to end-users and to certify
and label each laser sold to end-users as one of four classes of lasers (based
on the level of radiation from the laser). In addition, various warning labels
must be affixed to the product and certain protective devices must be installed,
depending upon the class of product. Under the FDA Act, the Company is also
required to register with the FDA as a medical device manufacturer and is
subject to inspection on a routine basis by the FDA for compliance with Good
Manufacturing Practice ("GMP") regulations. The GMP regulations impose certain
procedural and documentation requirements upon the Company relevant to its
manufacturing, testing and quality control activities. The CDRH is empowered to
seek fines and other remedies for violations of these regulatory requirements.
The Company believes that it is currently in compliance with these regulations.
ELECTRONIC PRODUCTS SEGMENT
BUSINESS DEVELOPMENTS
ACQUISITION OF DYNACO CORPORATION
On February 9, 1994, the Company acquired substantially all of the
assets and business of Dynaco Corp. ("Dynaco"), Tempe, AZ, for $1,300,000 in
cash and the assumption of approximately $6 million in liabilities. At the time
of the acquisition, Dynaco had been operating under Chapter 11 of the U.S.
Bankruptcy Code. Dynaco now operates as a wholly-owned subsidiary of the Company
and is a manufacturer of high density flexible electronic circuitry with
commercial and government applications. The flexible circuit technology utilized
by Dynaco offers advantages over traditional circuit board technology in
applications where space constraints and performance specifications demand
compact packaging and a high level of reliability. Dynaco has developed a number
of unique products using the flexcircuit core technology that it plans to market
over the next twelve months.
FORMATION OF NEXAR TECHNOLOGIES, INC.
On March 7, 1995, the Company formed Nexar Technologies, Inc. ("Nexar),
a wholly-owned subsidiary. Nexar is an early stage company which manufactures,
markets, and sells personal computers with a unique circuit board design that
enables end users to upgrade and replace the microprocessor, memory and hard
drive components. Nexar markets its products using various proprietary brand
names through multiple channels of distribution, including the wholesale, retail
and direct response channels. Revenue recognized during 1996 was $18,695,364.
In December 1996 the Company sold 400,000 shares of Nexar common stock
for $4,000,000, of which $2,000,000 was collected prior to year end and
$2,000,000 is in other current assets in the consolidated balance sheet. One of
the purchasers of 200,000 shares is a shareholder of the Company. The Company
recognized a gain on this sale of $3,830,000 in the consolidated statement of
operations. Subsequent to year end, the Company sold an additional 200,000
shares of Nexar common stock for $2,000,000 to another Company shareholder. The
subsequent to year end sale of Nexar common stock includes an option
arrangement, whereby the purchaser has the option to exchange the shares of
Nexar common stock, as defined, for $2,000,000 of the Company's common stock
based on a discounted value as defined, if an option exercise event occurs,
based on the value of the Company's stock on the exchange date. The option
exercise terminates upon the completion of Nexar's initial public offering.
On April 14, 1997 Nexar completed its initial public offering of
2,500,000 shares of its common stock for its own account, as well as shares held
by Nexar shareholders. The price per share was $9.00 and Nexar raised net
proceeds of approximately $20.3 million. Following this offering, Palomar will
beneficially own approximately 67% of Nexar's common stock. Included in this
percentage is (i) 1,200,000 shares of Nexar's common stock owned by Palomar that
are subject to a contingent repurchase right by Nexar for an aggregate price of
$12,000 in the event that Nexar does not achieve certain performance milestones
set forth in an agreement between Nexar and Palomar, and (ii) 408,000 shares of
Nexar common stock which Palomar may acquire upon the conversion of 45,684
shares of Nexar Convertible Preferred Stock that is also owns. The 1,200,000
shares of common stock subject to the contingent repurchase right of Nexar will
be held in escrow and released to Palomar upon Nexar attaining certain revenue
levels ranging from $100 million to $400 million and net income levels ranging
from $7 million to $28 million over a four year period ending December 31, 2000,
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as defined in the agreement between Nexar and the Company. These shares may also
be released from escrow upon Nexar attaining a specified minimum stock price
ranging from $15.75 per share to $29.25 per share over this four year period
ending December 31, 2000, and if the Company achieves cumulative net income
totaling $70,000,000 through December 31, 2000. These shares will also be
released if Nexar is party to any merger or sale of substantially all of its
assets.
Following the offering, Nexar has repaid the Company approximately
$7,500,000 from the net proceeds received from the offering.
FORMATION OF DYNAMEM, INC.
On September 29, 1995, Dynaco formed a new company called Dynamem, Inc.
("Dynamem") with an outside party who is a joint owner of the patent underlying
certain FRAMM technology (a technology utilized to package two rigid-flex
printed circuit boards in the same slot arrangement that customarily houses a
single board). The joint owner became an employee of the new subsidiary,
Dynamem. Dynamem issued 80% of its authorized and outstanding capital stock to
Dynaco and the remaining 20% to the joint owner. The joint owner granted Dynamem
a non-exclusive license to manufacture, use, sell and sublicense the patented
FRAMM technology in exchange for certain royalty payments. The royalties are
guaranteed by Dynaco. Dynaco and the joint owner also entered into a
stockholders' agreement which grants the joint owner the right, upon the earlier
of December 29, 2000 or the termination of his employment with Dynamem, to
require Dynaco to purchase a total of 75% of the securities owned by the joint
owner in Dynamem. In addition, if the Company purchases the joint owner's
shares, the joint owner may elect to receive between 35% and 100% of the
purchase price in the form of common stock of the Company.
LICENSE AGREEMENT WITH TECHNOVATION COMPUTER LAB, INC.
Nexar's current PCs are shipped with motherboards based on technology
licensed from Technovation Computer Lab, Inc. ("Technovation"), a Nevada
corporation which, to the best of the Company's knowledge, is owned by Babar I.
Hamirani, a former executive officer of Nexar whose employment was terminated on
November 29, 1996. The Company has acquired all such technology and a patent
application related thereto, and settled all claims between Mr. Hamirani and
Nexar pursuant to an Asset Purchase and Settlement Agreement by and among Mr.
Hamirani, Technovation, Nexar and the Company dated as of February 28, 1997 (the
"Asset Purchase and Settlement Agreement"). Pursuant to the Asset Purchase and
Settlement Agreement and a separate asset purchase agreement between the Company
and Nexar, the Company will first acquire the subject technology and then convey
such technology to Nexar.
FORMATION OF PALOMAR ELECTRONICS CORPORATION
On September 15, 1995, the Company formed Palomar Electronics
Corporation ("PEC"), a wholly-owned subsidiary, as part of a reorganization to
separate the electronics and computer operations of the Company's business from
the laser segments of its business. On September 29, 1995, as part of this
reorganization, the Company contributed all of its outstanding capital stock of
Dynaco and Nexar to PEC in exchange for all of the outstanding common stock of
PEC.
ACQUISITION OF CD TITLES, INC.
On July 13, 1995, CD Titles, Inc. ("CD Titles") was incorporated with
the Company owning substantially all of CD Titles' common stock. Certain
minority stockholders of CD Titles loaned CD Titles a total of $600,000. On July
31, 1995, CD Titles purchased certain assets and assumed certain liabilities of
CDRP, Inc. The purchase price consisted of $625,000 in cash and a $600,000 note
due September 30, 1995, which was guaranteed by the Company. The notes to
minority stockholders and CDRP, Inc. were repaid in December 1995 with 386,144
shares of the Company's common stock. CD Titles is a CD ROM publishing company
which distributes various materials on CD ROM through personal computer
wholesale channels in the United States. On April 30, 1997, the Company entered
into an agreement to sell its CD Titles subsidiary to the management of CD
Titles for a promissory note of $600,000 due April 30, 1999. In addition, the
Company also received a warrant to purchase 750,000 shares of CD Titles common
stock at various exercise prices ranging from $6.00 to $10.00
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ACQUISITION OF COMTEL ELECTRONICS, INC.
During 1996, Dynaco acquired 80.32% of Comtel Electronics, Inc.
("Comtel") by converting a $100,000 note receivable into equity of Comtel and
paying $27,500 in cash. Effective December 31, 1996, as part of a
recapitalization of Comtel, Dynaco exchanged $2,200,000 in intercompany
receivables from Comtel issued by Comtel to fund its operations for an
additional 16.98% ownership in Comtel, resulting in Dynaco owning 97.3% of
Comtel. The remaining 2.7% ownership is held by two individuals. This
acquisition has been accounted for as a purchase in accordance with Accounting
Principles Board (APB) Opinion No. 16. Accordingly, the Company has allocated
the purchase price based on the fair market value of assets acquired and
liabilities assumed. The results of Comtel have been included with those of the
Company since March 20, 1996.
Comtel has entered into a five-year agreement with New Media, Inc.
("New Media") whereby New Media subcontracted to Comtel all of its manufacturing
and assembly business over the contract term. On April 5, 1996, Palomar invested
$2,690,000 in New Media Series E Preferred Stock and common stock and loaned New
Media an additional $1,000,000. Palomar also received a warrant to purchase
200,000 shares of common stock in New Media at $1.20 per share. Palomar has
accounted for this investment under the cost method.
On February 14, 1997 Palomar invested an additional $1,200,000 and
converted its $1,000,000 note plus accrued interest totaling $76,931 into New
Media Series F Preferred Stock. In addition, Palomar also entered into a
settlement agreement together with Lucent Technologies and New Media whereby
Palomar agreed to purchase 33,000 LapTalk(TM) speaker/microphone products from
Lucent Technologies and New Media for $1,200,000, which was paid March 1997.
During the twelve months ended December 31, 1996 Comtel had sales to
New Media of $15,664,967. At December 31, 1996, $4,896,632 of accounts
receivable was due from New Media, of which $2,475,929 was collected through
March 20, 1997.
GENERAL
Through its wholly-owned subsidiary Nexar, PEC is marketing and
manufacturing a new family of personal computers that incorporates user-oriented
printed circuit boards and computer chassis designs that allow an end-user to
conveniently alter or upgrade the computer's processor, memory and hard drive
capacity, thereby reducing the rate of obsolescence in the rapidly changing and
technology-driven arena of personal computers. Nexar offers PCs to its resellers
without the CPU, RAM, cache and hard drive pre-installed, allowing them to
configure the PC with their customers' choice of components. Unlike other
upgradeable or modular computers, Nexar PCs are not based on a proprietary
architecture. Industry standard components can be used. The customer, not the
manufacturer's technicians, is in control of enhancements to the system. The
removable hard drive is a feature that is particularly desirable where security
is an issue or when a user wants portable data to go. It also makes possible the
use of multiple operating systems on a single PC. See "Formation of Nexar
Corporation".
PEC, through its wholly-owned subsidiary Dynaco, designs, develops and
manufactures interconnect products, principally flexible circuits, for
electronic systems. Dynaco currently designs flexible interconnect solutions for
complex military and commercial applications where high reliability, precision
tolerances and multilayer packaging are important. Dynaco's traditional
customers serve diverse markets, including the defense, aerospace, electronics
and telecommunications industries. Dynaco has recently developed two new,
lower-cost flexible circuit products which it believes will enable it to develop
more cost-effective interconnect solutions for commercial applications. Comtel,
which is a majority owned subsidiary of Dynaco, is a contract manufacturer that
specializes in thin core and high density surface mount assemblies for the
computer and telecommunication industries. Dynaco, through its majority-owned
subsidiary Dynamem, has developed, and plans to manufacture and market to the
personal computer industry, foldable rigid assembly memory modules which it
believes will have between 50% and 100% more memory capacity than currently
available memory modules.
PERSONAL COMPUTER INDUSTRY BACKGROUND
In 1991, there were over 100 vendors competing in the personal computer
marketplace with intense competition in both price and product specification.
Nexar believes that, over the past five years, the personal computer industry
has become oversaturated with manufacturers of varying degrees of financial
stability and marketing expertise. Since 1995, many personal computer
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manufacturers have exited the industry for a variety of reasons, and many more
have reported significant losses.
Nexar believes that aggressive channel expansion played an important
role in the demise of many second and third tier personal computer
manufacturers. Since 1995, many first tier manufacturers have expanded their
channels of distribution to include national distributors, mass merchants,
computer superstores, office superstores, end-user direct sellers and wholesale
buying clubs. Prior to 1992, these channels were almost exclusively the domain
of the second and third tier manufacturers. The channel expansion of the top
tier manufacturers reduced the available retail shelf space for second and third
tier manufactures through these once alternative channels. Consequently, second
and third tier suppliers, which compete primarily on the basis of price and
availability, are facing ever-increasing competition.
NEXAR STRATEGY
The Nexar strategy is to provide products that benefit wholesalers and
resellers by reducing their commitment to inventory with specific unit
configuration and permitting them to satisfy customers with systems easily
configured to their needs, and that benefit end-users by permitting them to
upgrade components from time to time without incurring the expense of a new
system.
LEVERAGE NEXAR'S XPA(TM) (CROSS-PROCESSOR ARCHITECTURE) TECHNOLOGY.
Nexar develops, manufactures and markets high-performance,
competitively-priced desktop personal computers (PCs) based on patent-pending
technologies. Unlike conventional PCs, Nexar systems permit an end user to
easily upgrade or switch important components of the PC to accommodate emerging
and future technologies resulting in a significant extension of the computer's
useful life. Nexar sells a high-performance system which is typically shipped to
resellers without the key system defining components (microprocessor, memory and
hard drive), but which is otherwise fully configured. This approach:
Enables the end-user, whether corporate or individual, to buy a
system configured exactly to that customer's technical and
budgetary requirements and, later, to easily upgrade the PC's key
components with industry-standard products;
Enables Nexar's channel resellers to reduce their exposure to
inventory depreciation caused by rapid advances in technology and
frequent price reductions of the key system components, which
typically account for more than 50% of the cost of a PC;
Enables Nexar's resellers to compete with direct marketers, such
as Dell Computer and Gateway 2000, because a Nexar PC provides
resellers with the ability to promptly deliver a
custom-configured, high performance PC at a competitive price;
Enables Nexar to maintain profit margins unaffected by the
forecasting risks borne by conventional PC manufacturers who
operate within a several-month-long cycle from component
procurement to assembly to date-of-sale, all conducted in an
environment of rapid technological advances and frequent price
reductions.
Nexar's current PCs are based on an industry standard, open
architecture design, co-engineered by HCL Hewlett Packard LTD., which allows the
central processing unit (CPU), random access memory (RAM), and cashe memory to
be replaced by end-users without technical assistance and without opening the
entire chassis. Nexar's current model accepts Intel Corporation's Pentium and
compatible CPUs, including the recently released Pentium processor with MMX
multimedia extension technology. Nexar PCs also include, as a standard feature,
a removable hard drive, permitting its replacement and the further advantages of
increased data portability and security, and the use of multiple operating
systems in a single PC. The Nexar PC is configured with the following
components: system chassis with removable side panels, custom designed
motherboard, power supply, video controller, input/output controller, floppy
disk drive, caddy for removable hard disk, keyboard, mouse, and hardware
manuals. Nexar occasionally includes additional components, including the key
system defining components (CPU, memory and hard drive) and peripherals such as
monitors and modems at the customer's request. Nexar PCs sold by resellers fully
configured have list prices generally ranging from $1,200 to $2,500, depending
upon the components included.
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Nexar's objective is to become the industry leader in designing and
marketing PCs with technology that enables resellers and end-users, in an easy
and cost-effective manner, to upgrade and transition the CPU and the other key
system defining components in accordance with the known and anticipated roadmaps
of various makers of fundamental and leading-edge PC technology. Accordingly,
Nexar has developed and will soon market a new generation of PCs featuring the
Company's patent-pending Cross-Processor ArchitectureTM (Nexar XPATM ) in which
any one of the several state-of-the-art CPUs can be initially included or later
installed, including Intel's Pentium or Pentium Pro and Compatible CPU's. The
Nexar XPATM technology will also accommodate microprocessors based on other
technologies, such as the Alpha CPU made by Digital Equipment Corporation or the
PowerPC processor offered jointly by IBM, Motorola, and Apple Computer.
ENGAGE IN PRIVATE LABELING.
Nexar believes that as personal computer users become increasingly
computer literate, they will tend to shift away from branded products and
towards private label products. Nexar anticipates that contemporary technology
and design, upgradability, value, reliability and system flexibility will
continue to be essential requirements, but the method of presentation and
product distribution will adapt to satisfy the requirements of resellers and
users alike. A primary component of Nexar's overall channel strategy is to
bypass the OEM and provide custom, private label systems directly to major
channel resellers. Nexar believes that there will be a proliferation of private
label personal computers by channel resellers, and that private label branding
will become an increasingly standard practice in various reseller channels.
Nexar intends to be one of the first manufacturers to capitalize upon this
opportunity.
EXPLOIT SPECIALIZED GOVERNMENT MARKETS.
Nexar believes that, in addition to the other advantages of Nexar PCs
and the increased security and other benefits of the removable hard disk drive
described herein, the Nexar PC is particularly appealing to many government
buyers because the time required for ordering entirely new systems is often
prohibitive under government regulations, while component parts can be more
timely requisitioned, thereby allowing a government office to more easily remain
technologically current. In 1996, Nexar recognized approximately 66% of its
total year revenue from Government Technology Services, Inc. (GTSI), a leading
supplier of desktop systems to the U.S. government.
COMPETITION
The desktop PC industry is intensely competitive and may become more so
as the result of, among other things, the introduction of new competitors
(including large multi-national, diversified companies) and possibly weakening
demand. Nexar currently competes in the desktop PC market principally with Acer,
Apple Computer, Compaq Computer, Dell Computer, Gateway 2000, Hewlet-Packard,
IBM and Packard Bell NEC. In addition, Nexar plans to compete in the network
server market by late 1997 with established companies such as ALR, Compaq, Dell,
Hewlett-Packard and IBM. All of these companies have stronger brand recognition,
significantly greater financial, marketing, manufacturing, technological and
distribution resources, broader product lines and larger installed customer
bases than Nexar. Principal competitive factors include product features,
product performance, quality and reliability, the ability to deliver product to
customers in a timely fashion, customer service and support, marketing and
distribution capabilities and price. The ability of Nexar to compete
successfully will depend on factors within and outside its control, including
the acceptance of its Nexar XPA(TM) system and general market and economic
conditions.
MANUFACTURING AND SUPPLIERS
Nexar's manufacturing process requires a high volume of quality
components that are procured from third party suppliers. Most of these
components are generally available from multiple sources; however, Nexar relies
on two outside contractors to manufacture motherboards used in PCs and plans to
rely on a sole outside contractor to manufacture the motherboards to be used in
its planned server product. In addition, Nexar relies on a single supplier to
produce its customized chassis and has several other single supplier
relationships for less critical components. In some cases, alternative sources
of supply are not readily available for some of Nexar's single sourced
components. Nexar occasionally experiences delays in receiving certain
components, which can and has caused delays in shipment of products.
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ENVIRONMENTAL CONTROLS AND GOVERNMENT CERTIFICATIONS
Although Nexar conducts certain manufacturing operations, those
operations consist primarily of product assembly and do not involve the use of
material quantities of hazardous or other regulated substances. Nexar believes
that it has substantially complied with existing environmental laws and
regulations, but has not conducted any environmental studies of its operations
to determine whether contamination has occurred at its facilities. Nexar's
computer products are subject to certain FCC guidelines. Nexar believes they are
in compliance with these FCC guidelines.
INTELLECTUAL PROPERTY
Nexar has rights to two pending patent applications covering the
essential technology which enables the easy installation, removal and
replacement of key components in the Nexar PC. Nexar filed a patent application
in late 1996 covering its proprietary Nexar XPATM technology, which is expected
to be used in Nexar's PCs by mid-1997. Also Nexar has agreed to acquire, no
later than the closing of its initial public offering, a patent application
originally filed in March 1995 together with the related technology which is
currently included in Nexar's PCs under an exclusive license agreement.
DYNACO CORP. BUSINESS INTRODUCTION
DYNACO CORP. ("DYNACO")
Dynaco is a leading U.S. supplier of high-density, multilayer, flexible
printed circuit products for original equipment manufacturers ("OEMs"),
value-added resellers and contract manufacturers of sophisticated electronics
equipment. Specifically, Dynaco designs, develops and manufactures products that
provide electrical connections between components in electronic systems.
Dynaco's interconnect solutions use 3-dimensional packaging techniques to
enhance space utilization and increase signal speed via thin, multilayer
substrates. Dynaco's principal products are flexible circuits and rigid-flex
circuits. Dynaco's flexible circuits are flexible, multilayer printed circuit
boards that can be bent or folded to fit into spaces too small or too oddly
shaped for traditional rigid printed circuit boards. Dynaco's rigid-flex
circuits consist of one or more rigid, multilayer printed circuit boards
combined with flexible circuitry. The multiple layers of circuitry in Dynaco's
products increase reliability and reduce the overall size of its interconnect
systems by reducing the number of circuit boards, connectors and wires. Dynaco
also manufactures specialty interconnect cable harnesses that are sold with
Dynaco's traditional flexible circuit products and that are sold independently.
Dynaco currently designs flexible interconnect solutions for complex
military and commercial applications where high reliability, precision
tolerances and multilayer packaging are important. Dynaco's traditional
customers serve diverse markets, including defense, aerospace, electronics,
telecommunications, global positioning systems navigation, medical electronics,
interactive displays and semiconductor wafer fabrication equipment. For example,
Dynaco's products have been used in guidance systems for the Tomahawk and AMRAAM
missiles, and Dynaco has developed applications for lasers, night vision
systems, digital imaging and engine monitoring controls.
FLEXIBLE INTERCONNECT SUBSTRATE INDUSTRY BACKGROUND
Generally, interconnect substrates are printed circuits, consisting of
copper traces (circuitry) and an insulating (dielectric) base, that provide
electrical connections between electronic components such as microprocessors,
resistor networks and capacitors. Interconnect substrates include rigid printed
circuit boards, ceramic hybrid circuits and flexible circuits. Each type of
substrate has specific performance and price ratios which affect usage and
demand in the marketplace.
Dynaco believes that its multilayer flexible circuits offer the
following advantages over rigid printed circuit boards and ceramic substrates
for sophisticated, compact electronic equipment:
Flexible circuits are thinner and better able to conform to smaller
volumes and unusual container shapes;
Flexible circuits allow 3-dimensional interconnect packaging
techniques;
Flexible circuits are lighter and more space-efficient because they
eliminate the need for connectors and wires;
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Film-based flexible substrates cost significantly less per
input/output connection than ceramic-based interconnect systems;
and
The use of multiple layers can provide significant performance
enhancements over single-sided and double-sided interconnect
packages.
The 3-dimensional packaging and flexure characteristics of multilayer
flexible circuits and multilayer rigid-flex circuits have made them the fastest
growing segment of the U.S. printed circuit market. According to a May 1996
report by TechSearch International, Inc., a technology licensing and consulting
firm, the world market for flexible printed circuits in 1995 was approximately
$1.8 billion to $2.0 billion, of which the U.S. market was approximately $550
million, an increase of nearly 18% from $470 million in 1994. Japanese
manufacturers and their affiliated offshore operations had approximately 60%
share of the world market. According to Flexible Circuits Engineering, an
industry publication, sales of flexible circuits in North America have grown
from $300 million in 1985 to an estimated $650 million in 1995. The publication
points out that the market has grown erratically, growing principally in the
periods from 1985 through 1987 and from 1993 through the present. According to
Flexible Circuits Engineering, the first growth phase reflected a short-lived
increase in the use of flexible circuits in missiles, "black boxes" and other
defense-related products shortly before the end of the Cold War, and the current
growth phase reflects the increased use of flexible circuits in commercial
markets, including the personal computer, automotive, consumer and instrument
markets. As a result of these market trends, Dynaco believes there is a
significant market opportunity for manufacturers that can timely deliver complex
multilayer flexible and rigid-flex circuits to leading suppliers of electronic
equipment.
DYNACO STRATEGY
Dynaco's objective is to be the preferred supplier of multilayer
flexible circuits and rigid-flex circuits in the electronics industry and to
expand its business to include high density memory modules. Dynaco's strategy is
to capitalize on its significant investment in flexible circuit technology,
modern facilities and multilayer packaging expertise in order to participate in
the growth of the worldwide electronics market. In order to achieve its
objective and benefit from the trends in the industry, Dynaco's strategy
includes the following:
MAINTAIN AND IMPROVE THE COMPANY'S MARKET POSITION IN THE
DEFENSE/AEROSPACE MARKETS
Dynaco seeks to capitalize on a growing trend among electronics
manufacturers in the defense and aerospace markets to reduce the number of
suppliers with which they do business and to increase their out-sourcing of
higher level assemblies. Dynaco is currently a preferred supplier with leading
prime contractors such as Hughes Aircraft Company, Lockheed Martin Corporation,
Loral Corporation, McDonnell Douglas Corporation and Raytheon Company. A
preferred supplier is one of a select number of suppliers whose products and
facilities have been determined by the customer to meet certain performance and
quality specifications. Because customers frequently contact only preferred
suppliers for particular products, Dynaco intends to obtain and maintain the
status of preferred supplier with its current and prospective customers.
In January 1997, Raytheon announced a tentative agreement to purchased
the defense operations of Texas Instruments, Inc. and GM Hughes Electronics
Corp. for $2.95 billion and $9.5 billion respectively. These three companies
combined accounted for approximately one third of Dynaco's 1996 revenue. It is
too early to determine how this proposed consolidation will affect Dynaco.
Another market trend is the growth occurring in defense electronics due
to electronic upgrades, re-packaging for lower cost, and the commercialization
of defense hardware. Dynaco is currently developing new flat-panel displays,
night-vision systems, digital electronic upgrades, global positioning system
navigation products and enhanced communication systems that use flexible
circuits as the principal electronic interconnect. Dynaco also plans to utilize
its packaging expertise to convert wire bundles and cable harnesses into
flexible circuits to reduce weight, space and cost. Dynaco has designed and
currently expects to convert at least five wire and cable electronic
interconnect systems.
COMMERCIALIZE THE DYNAFLEX PRODUCTS
Dynaco believes that the demand for smaller electronic products will
increasingly cause commercial designers to consider high-density multilayer
flexible packaging. Historically, Dynaco's flexible circuit products have been
too costly to make most commercial applications feasible. Dynaco has recently
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developed, and in June, 1995, submitted patent applications for, Dynaflex-D
(Dynamic) and Dynaflex-S (Static), two new flexible circuit products that
utilize less expensive, commercial-grade substrates. Dynaco believes that these
proposed products will permit it to expand into commercial markets. Dynaco
believes that its proposed Dynaflex-D and Dynaflex-S products will ultimately be
used in commercial applications such as automotive engine monitoring controls,
disk drives, personal computers, workstations, and cellular communication
systems.
EXPLOIT MANUFACTURING AND MARKETING CAPABILITIES
Dynaco believes there are few domestic or foreign high-volume
multilayer flexible and rigid-flex circuit manufacturers with comparable
expertise and know-how. As the manufacture of multilayer flexible circuits for
commercial applications proliferates, Dynaco intends to license its
manufacturing and marketing expertise to high volume, highly capitalized printed
circuit board manufacturers throughout the world. Dynaco recently signed a
license agreement with Wong Circuits International, a Hong Kong corporation, to
manufacture certain flexible circuit products in Hong Kong and China. In
addition, the Company is currently conducting negotiations with other
manufacturers in the United States and Europe. By working with these
manufacturers, Dynaco hopes to expand the customer base for its flexible
circuits technology.
ACQUIRE, DEVELOP AND MARKET FLEXIBLE CIRCUIT PRODUCTS
Dynaco through its Dynamem subsidiary and internal research and
development, intends to produce and market additional flexible circuit products.
Dynaco has recently obtained certain rights to the patented FRAMM technology.
See "Acquisition of Dynamem."
COMTEL ELECTRONICS, INC. BUSINESS INTRODUCTION
COMTEL ELECTRONICS, INC. ("COMTEL")
Comtel, which was acquired in 1996, is an electronic and
electro-mechanical, contract manufacturer. Comtel's business is to provide a
lower cost alternative (outsourcing) to OEM in-house, or captive manufacturing.
Comtel's primary product is turnkey, build-to-print (versus its own design)
circuit card assemblies. These circuit card assemblies range in complexity from
very high volume, relatively simple (few components) assemblies in support of
the consumer electronics industry, to very complex, full "black and white box"
builds for high technology industry.
CONTRACT MANUFACTURING INDUSTRY BACKGROUND
Contract electronics manufacturers (CEMs) are playing an even more
important role in the electronics market. The world market for contract
manufacturing services exceeded $30 billion in 1996, and industry analysts
recently estimated the U.S. contract manufacturing market will grow from $11
billion in 1994 to over $36 billion by the year 2001, a compound average annual
growth rate of 20%. Based on industry data, the Company believes that OEMs are
increasingly relying upon independent manufacturers of complex, electronic
interconnect products, such as Comtel, rather than on internal captive
production. Factors which Comtel believes will lead OEMs to utilize contract
manufacturers include:
LIMITED RESOURCES USED ON CORE COMPETENCIES: In recent years the
electronics industry has experienced greater levels of competition and technical
changes forcing OEMs to focus their resources on critical product activities. By
offering comprehensive turnkey manufacturing services, CEMs afford OEMs the
resources to focus on core activities such as product development, marketing and
product distribution.
IMPROVED PURCHASING POWER AND MATERIAL MANAGEMENT: OEMs are faced with
increasing difficulties planning, procuring and managing their inventories
efficiently due to frequent design changes, short product life-cycles, component
price fluctuations, and the need to achieve economies of scale in material
procurement. By using the CEMs' combined purchasing power and required expertise
in inventory management, OEMs can reduce capital required for production and
inventory.
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REDUCED CAPITAL INVESTMENT: As electronic products become more
technologically advanced, including the transition from through-hole to surface
mount assembly, the manufacturing operation has become more sophisticated and
automated, requiring a greater level of capital investment in equipment. By
outsourcing, OEMs can reduce their overall capital equipment investment,
maintain access to the latest advanced manufacturing technology, and enjoy the
lower costs associated with higher capacity utilization experienced by CEMs.
DESIGN/PACKAGING EXPERTISE: The customer benefits from the ever
accumulating design and packaging capabilities of CEMs. For example, Comtel
works on hundreds of different designs each year and certain packaging solutions
can be applied to a multitude of new applications. OEMs are motivated to work
with a CEM in order to gain access to this process expertise and manufacturing
know-how.
Comtel Electronics believes they can exploit this market with the
latest manufacturing capabilities in surface mount assembly and thin core PC
card assembly.
COMTEL STRATEGY
Comtel is a CEM who provides turnkey manufacturing and test services of
electronic assemblies. Comtel specializes in thin core and high density surface
mount assemblies. Comtel's services consist of design, procurement,
manufacturing and test.
DESIGN: Working closely with customers and the substrate manufacturer,
Comtel designs a specific packaging configuration to satisfy the customer's
requirements for reliability and lowest cost of ownership. In selection of
substrate materials, Comtel advises its customers with respect to issues such as
size, power consumption and package configuration.
PROCUREMENT: Early involvement in the design process allows Comtel to
assist in the selection of suppliers and components to enhance time to market,
manufacturability and logistical support of volume ramp-ups. As part of the
procurement process, Comtel offers its customers material planning and
procurement, inventory management, and material handling services. From time to
time, material suppliers must allocate components among their customers in
response to supply shortages. By assuming responsibility for procurement, Comtel
and the Company may be required to bear the risks of price fluctuations and
availability. However, in certain cases, Comtel can pool its purchasing power
and leverage its position as a manufacturing partner to receive more favorable
pricing and volume allocations.
ASSEMBLY: Substrate assembly involves the exact placement and soldering
of a wide size range of electronic components. Comtel's current assembly
techniques range from manual assembly of through-hole connectors to highly
automated screen printing and placement of miniaturized SMT components. SMT is a
method of affixing electronic components, including integrated circuits, onto
the surface of a substrate. Components mounted in SMT assemblies can be of
relatively small size due to the use of fine lead-to-lead spacing (called
"pitch") which currently can be as small as 12 Mils. Comtel's SMT assembly
process has become increasingly complex because of these smaller dimensions and
tight tolerances, and accordingly requires the use of expensive automated
assembly and test equipment.
TEST: Using sophisticated in-circuit and functional test systems,
Comtel tests complex assemblies in order to determine whether the electronic
assembly is performing to customer satisfactions. Comtel's current and planned
investment in manufacturing defect analyzer testers enables customers to specify
a wide range of test options.
DYNAMEM, INC. BUSINESS INTRODUCTION
DYNAMEM, INC. ("DYNAMEM")
Dynamem spent most of 1996 developing the 64MB, 128MB, and 256MB FRAMM
high density memory modules. These memory modules are currently being
technically evaluated by a number of potential OEM users. A memory module
usually consists of various configurations of memory chips or other memory
devices mounted on a printed circuit board inserted into a slot on a computer's
motherboard. Memory modules currently in use include single in-line memory
modules ("SIMMs") and double in-line memory modules ("DIMMs"), both of which
utilize rigid printed circuit boards. Industry standards limit the number of
memory chips that can be mounted on a rigid printed circuit board within a given
length and height. Consequently, a traditional memory module that has reached
the maximum length and height has also reached maximum memory capacity. Dynamem
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believes its proposed memory modules will overcome this limitation of memory
capacity by utilizing the FRAMM technology to fit two rigid printed circuit
boards in the same slot arrangement that customarily houses SIMMs and DIMMs.
Dynaco's proposed memory modules will mount thin, small outline package memory
chips onto two rigid printed circuit boards, connected by flexible circuits,
that are folded for insertion into the motherboard.
HIGH-DENSITY MEMORY MODULES
A memory module usually consists of various configurations of memory
devices or chips mounted on a printed circuit board inserted into a slot on a
computer's motherboard. Dynamem's memory modules consists of two rigid printed
circuit boards connected by flexible circuits that are folded for insertion. In
recent years, the overall size of computers, especially that of portable
computers, has shrunk while the newest program applications, such as Windows 95,
continue to use increasing amount of random-access memory ("RAM"). Meanwhile,
computer manufacturers are shipping an increasing number of systems with limited
RAM in order to maintain price competitiveness. As a result, end-users who
desire to run the latest applications must add memory modules or buy new systems
with greater memory capacity. Dynaco believes that these trends will favor
manufacturers of high density memory modules as requirements for RAM increase
from 16MB to 32MB, 64MB, 128MB and beyond.
DYNAMEM STRATEGY
Dynaco has introduced high density memory modules based on the patented
FRAMM technology. These memory modules overcome the current limitation on memory
capacity by utilizing the FRAMM technology to fit two rigid printed circuit
boards in the same slot arrangement that customarily houses SIMMs and DIMMs.
Dynaco's memory modules will mount thin, small outline package memory chips onto
two rigid printed circuit boards, connected by flexible circuits, that are
folded for insertion into the motherboard. This combination produces a module
that is no wider or taller than conventional rigid boards but that offers four
substrate surface areas, twice the area offered by rigid boards. Dynaco believes
that FRAMM represents a novel and innovative packaging approach which will have
between 50% and 100% more memory capacity than currently available memory
modules.
This is in comparison to a traditional memory module that consists of
various configurations of memory chips or other memory devices mounted on a
printed circuit board inserted into a slot on a computer's motherboard. Industry
standards limit the number of memory chips that can be mounted on a rigid
printed circuit board within a given length and height. Consequently, a
traditional memory module that has reached the maximum length and height has
also reached maximum memory capacity. Dynaco is designing a full memory product
line around the FRAMM technology. Initial products are planned for
IBM-compatible personal, portable, laptop and notebook computers, Apple
Computer's Macintosh computers and Sun Microsystems' workstations. Dynaco also
plans to design custom modules for certain special needs and is investigating
other applications.
SALES AND DISTRIBUTION
Dynaco markets its products through a direct sales force and through a
network of four independent sales representatives and distributors specializing
in electronics equipment. Dynaco principally targets large OEM corporations and
government prime contractors. These and other customers often employ competitive
bidding techniques with respect to large, multi-year contracts, for which Dynaco
competes with other qualified suppliers of flexible circuits.
Comtel presently utilizes a combination of direct factory and
independent manufacturers representatives sales personnel and is moving towards
complete direct selling. Comtel relocated its manufacturing facility in November
1996 to a much larger (65,000 square feet) facility to increase its capacity to
fulfill the expected increase in demand.
Dynaco's Dynamem subsidiary markets its FRAMM products through both a
separate sales organization and through Nexar. Dynaco believes that this
approach will enable the Dynamem sales force to develop specific industry
contacts and a focused knowledge base of the high-density memory market.
Dynaco has generally utilized selected sources to obtain volume
discounts.
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CUSTOMERS
DYNACO
Dynaco's traditional customers include OEMs, prime contractors and
contract manufacturers of defense and aerospace electronics, telecommunications
equipment, navigational systems and medical products. Dynaco's new Dynaflex
products have attracted prototype orders from customers in the automotive,
computer and data storage markets.
For the year ended December 31, 1996, sales to Hughes, Raytheon, and
Lockheed Martin accounted for approximately 20%, 10% and 5%, respectively, of
Dynaco's net sales. For the year ended December 31, 1995, sales to Raytheon ,
Hughes Electronics and Loral accounted for 15%, 9% and 6%, respectively, of
Dynaco's net sales. Sales to Dynaco's top 10 customers accounted for
approximately 55% of Dynaco's net sales for the year ended December 31, 1996.
Approximately 100 other customers accounted for the remainder of Dynaco's net
sales for the year ended December 31, 1996.
COMTEL
Comtel entered into a five year agreement New Media, whereby New Media
subcontracted to Comtel all of its manufacturing and assembly business over the
contract term. Comtel recognized approximately $17.1 million of total revenue of
which 91% was from New Media. Comtel's intention in 1997 is to increase and
diversify its overall revenue base and reduce the percentage of New Media
concentration. The Company has received orders in 1997 from customers such as
MCI, MGE UPS Systems and others, thereby reducing the New Media customer
concentration. However, the Company cannot ensure that the New Media
concentration will significantly decrease in 1997.
COMPETITION
The flexible circuit industry is characterized by intense competition.
Dynaco and its competitors have developed various technologies to serve niche
packaging requirements. Dynaco has focused its development efforts on more
complex multilayer circuit technology rather than single sided or double sided
circuit technology. Among others, Dynaco's competitors include Packard-Hughes
Interconnect Co., Parlex Corporation and Teledyne, Inc. Dynaco believes it
competes principally on the basis of design, quality, price and customer
service. Some of Dynaco's competitors include larger companies that have
substantially greater managerial, financial, technical and marketing resources
than Dynaco.
Other flexible circuit companies such as Adflex Solutions, Inc.,
Sheldahl, Inc., MFlex and Smartflex primarily market single sided and double
sided circuit technology. Although Dynaco does not currently compete with such
companies with respect to those products, Dynaco believes that the customers of
these companies have begun to demand multilayer flexible circuits and that such
companies will become competitors in the near future.
The contract manufacturing market is estimated to be $30 billion plus
worldwide made up of many competitors. Comtel primarily competes with smaller
sized regional competitors. The same is true for Dynamem which competes in a $20
plus billion computer memory market.
ENVIRONMENTAL CONTROLS AND GOVERNMENT CERTIFICATIONS
The manufacture of substrate interconnect products involves numerous
chemical solvents and other solid, chemical and hazardous wastes and materials.
Dynaco incurs approximately $200,000 per year in waste treatment costs. Dynaco
is subject to a variety of environmental laws relating to the generation,
storage, handling, use, emission, discharge and disposal of these substances.
Dynaco believes that it operates its facilities in substantial compliance with
existing environmental laws and regulations. In June 1989 and April 1994, Dynaco
conducted environmental studies of its Tempe, Arizona substrate manufacturing
facility and did not discover any contamination requiring remediation.
Certain sales of flexcircuits are subject to certain military and
government certifications. Dynaco maintains military certifications for
Mil-Q-50884C, Mil-T-55110, Mil-I-45208 and Mil-Std. 2000, and various subsets of
such certifications. In January 1996, Dynaco obtained ISO 9001 certification.
Dynaco is further subject to various federal, state and local regulations
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regarding environmental protection and hazardous substance controls. Management
believes that its Dynaco operations are in compliance with governmental
environmental regulations.
MANUFACTURING AND SUPPLIERS
Dynaco relies upon a number of outside suppliers for all of its
manufacturing supplies, parts and components and, to date, has not experienced
any significant delays in obtaining parts and components. Although most of the
supplies, parts and components are available from multiple sources, Dynaco has
generally utilized selected sources to obtain volume discounts. Pyralux(R), a
substrate material used in substantially all of the products sold by Dynaco in
1994, is available only from DuPont. In addition, certain customers issue, from
time to time, narrow product specifications that can be fulfilled only by a
single component available from a single source. Because such specifications
vary from product to product, Dynaco is unable to anticipate its future needs
for such components and therefore cannot make advance arrangements for the
supply of such components. Dynaco believes that it will continue to be able to
obtain most of the required components and parts from a number of different
suppliers. Dynaco may subcontract production of certain subsystems, such as heat
exchangers, power supplies and electronic control modules, in order to minimize
production overhead and to avoid rapid fluctuations in capacity utilization as
the demand for Dynaco's product changes.
PATENTS IN THE ELECTRONIC BUSINESS SEGMENT
The Company's Nexar subsidiary has filed a patent for the construction
method facilitating replacement of CPU memory and other modules in a personal
computer. This technology allows the end user a simple, quick and easy platform
for upgrading the most volatile components in a personal computer.
The Company, through its Dynaco subsidiary has filed a patent for
flexible circuit boards and method for their manufacture. This technology covers
a unique method of manufacturing, using proprietary materials that enable the
manufacturer to be cost competitive with rigid board manufacturers. Dynaco is
awaiting first office action from the U.S. Patent Office. As part of the
formation of Dynamem discussed previously, Dynamem became joint owner of an
issued patent surrounding technology that uses two rigid printed circuit boards
attached by flex circuitry that can be folded with low profile memory chips
attached to be inserted into the motherboard of a computer. This design, while
no larger than conventional rigid board designs, doubles the capacity of
conventional memory modules.
RESEARCH AND DEVELOPMENT
For the fiscal year ended December 31, 1996, and December 31, 1995, the
Company incurred $7,977,085 and $4,419,487, respectively, in product research
and development costs. Due to the intense competition and rapid technological
changes in the medical device and electronic industry, the Company believes that
it must continue to improve and refine its existing products and services, and
develop new applications for its technology. The Company also intends to obtain
additional technology and expand its product line through strategic
partnerships, joint ventures, licensing and acquisitions.
EMPLOYEES
As of December 31, 1996 the Company and its subsidiaries had 522
full-time employees and 64 temporary employees. When necessary, the Company also
relies on consultants with particular expertise for specific research and
consulting assignments. The Company's ability to develop, manufacture, and
market its products and to establish and maintain a competitive position in the
industry will depend, in large part, upon its ability to attract and retain
qualified technical, marketing and managerial personnel. The Company believes
that its relations with its employees are good.
None of the Company's employees are represented by a union.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases approximately 11,500 square feet of
research and development and office space in Beverly, Massachusetts under a
seven year lease, expiring in June 2000, for laser research and as corporate
headquarters. The Company's Dynaco subsidiary leases approximately 55,000 square
feet in Tempe, Arizona under a lease from a partnership consisting of Dynaco's
Chief Executive Officer and Chief Operating Officer which expires in July 1997.
The Company's Comtel subsidiary leases 65,000 square feet in Tustin, California,
which is used as a manufacturing facility under a lease that expires in August
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2002. The Company's Star subsidiary leases an office and research facility of
approximately 6,200 square feet in Pleasanton, California for diode laser
research and manufacturing under a lease expiring in April 1999. The Company's
Spectrum subsidiary leases an office, manufacturing and research facility of
approximately 25,000 square feet in Lexington, Massachusetts under a lease
expiring in June 2000. The Company's Tissue Technologies subsidiary leases an
office and manufacturing facility of 17,000 square feet in Albuquerque, New
Mexico under a lease expiring in October 1999. The Company's Nexar subsidiary
leases an office and telemarketing facility of approximately 7,000 square feet
in Westboro, Massachusetts under a lease expiring in August 1998, and a
manufacturing facility of approximately 100,000 square feet in Haywood,
California under a lease expiring in August 2001. The Company's Palomar
Technologies, Ltd. subsidiary owns an office and leases a manufacturing facility
in Hull, England. In the opinion of management, the properties leased by the
Company and its subsidiaries are currently suitable and adequate for their
intended purposes.
ITEM 3. LEGAL PROCEEDINGS
On October 7, 1996 the Company filed a declaratory judgment action
against MEHL/Biophile ("MEHL") in the United States District Court for the
District of Massachusetts 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 have 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. Automatic discovery will shortly commence. The extent of exposure of the
Company cannot be determined at this time.
The Company is a defendant in a lawsuit filed by Commonwealth
Associates ("Commonwealth") on March 14, 1996 in the United States District
Court for the Southern District of New York. In its suit, Commonwealth alleges
that the Company 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, after a damages trial before a
magistrate judge, in April 1997 the court awarded Commonwealth $2,917,500 (and
interest of $256,570.56). The Company will appeal the matter and believes its
grounds for appeal are meritorious.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company's Annual Meeting of Stockholders was held on November 14,
1996. Holders of record of the Company's common stock at the close of business
on October 7, 1996 were entitled to vote at the meeting. On that date, the
Company had 28,409,007 shares of its common stock outstanding. Each stockholder
was entitled to one vote per share on all matters voted on at the meeting. A
majority of the outstanding shares constituted a quorum at the meeting.
Abstentions and broker non-votes were counted for purposes of determining the
presence or absence of a quorum for the transaction of business. Abstentions
were counted in tabulations of the votes cast on proposals presented to
stockholders, whereas broker non-votes were not counted for purposes of
determining whether a proposal had been approved. At the Annual Meeting, the
stockholders elected four (4) Directors.
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The tabulation of votes with respect to the election of such Directors is as
follows:
Total Votes Total Votes
For Withheld
----------- -----------
Steven Georgiev 25,014,274 348,728
Michael H. Smotrich 25,014,274 348,728
Joseph E. Levangie 25,014,274 348,728
Buster Glossen 25,014,274 348,728
The stockholders also ratified and approved the selection of Arthur
Andersen, LLP as the Company's independent auditor for the 1996 fiscal year by a
vote of 25,106,794 shares in favor, 155,717 shares against and 100,491 shares
abstaining.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The company's common stock is currently traded on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) under the
symbol PMTI. The following table sets forth the high and low bid prices quoted
on NASDAQ for the Common Stock for the periods indicated. Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
do not necessarily represent actual transactions.
Fiscal Year Ended
December 31, 1995
-----------------
High Low
-----------------
Quarter Ended March 31, 1995 3 5/8 2 1/2
Quarter Ended June 30, 1995 2 5/8 1 15/16
Quarter Ended Sept. 30, 1995 6 11/16 1 7/8
Quarter Ended Dec. 31, 1995 7 1/8 4 7/16
Fiscal Year Ended
December 31, 1996
-----------------
High Low
-----------------
Quarter Ended March 31, 1996 13 1/8 5
Quarter Ended June 30, 1996 16 3/8 9 1/8
Quarter Ended Sept. 30, 1996 14 5/8 7 7/8
Quarter Ended Dec. 31, 1996 9 1/8 6
As of March 24, 1997, the Company had 600 holders of record of common
stock. This does not include holdings in street or nominee names.
The Company has not paid dividends to its common stockholders since its
inception and does not plan to pay dividends to its common stockholders in the
foreseeable future. The Company intends to retain any earnings to finance the
growth of the Company.
PRIVATE PLACEMENT OF COMMON STOCK
Pursuant to Regulation S under the Act, the Company sold 365,533 shares
of common stock and 182,765 warrants to purchase common stock to a total of 23
overseas individuals and corporations on February 1, 1996 for an aggregate
purchase price of $1,783,800. The warrants were issued at a price of $5.00 per
share, are immediately exercisable and expire on February 1, 1999. The common
stock, and common stock underlying the warrants, were registered on a Form S-3
filed on February 6, 1996.
Pursuant to Regulation D and Section 4(2) of the Act, the Company sold
a total of 165,810 shares of common stock on March 29, 1996 for an aggregate
purchase price of $1,364,842. 114,810 shares of common stock were sold to Arista
High-Tech Growth Fund, Ltd. for an aggregate purchase price of $936,442; 45,000
shares of common stock were sold to Histon Financial Services, Inc. for an
aggregate purchase price of $378,000 and 6,000 shares of common stock were sold
to Berkshire International Finance, Inc. Pension Plan for an aggregate purchase
price of $50,400. The common stock was registered on a Form S-3 filed on June
28, 1996.
Pursuant to Regulation D and Section 4(2) of the Act, the Company sold
a total of 44,862 shares of common stock on April 15, 1996 to Egger & Co. for an
aggregate purchase price of $450,000. The common stock was registered on a Form
S-3 filed on June 28, 1996.
Pursuant to Section 4(2) of the Act, the Company sold 600,000 shares of
common stock on December 27, 1996 to Finmanagment, Inc. for an aggregate
purchase price of $3,150,000. In addition to the common stock, Finmanagment
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received 420,000 net warrants to purchase common stock at $7.50 per share,
300,000 net warrants to purchase common stock at $9.50 per share and 180,000 net
warrants to purchase common stock at $11.50 per share. The net warrants are
subject to a cashless exercise for common stock in which the number of shares of
common stock issuable upon such cashless exercise shall be determined by
multiplying (1) the difference between (a) the closing bid price of the common
stock on the day prior to the date exercised, as reported by NASDAQ, and (b) the
exercise price, by (2) the number of net warrant shares; divided by the closing
bid price of the common stock on the day prior to the date exercised. The net
warrants are exercisable immediately and expire on February 28, 1997. The common
stock, and common stock underlying the warrants, were registered on a Form S-3
filed on February 4, 1997.
CONVERTIBLE DEBENTURES
Pursuant to Regulation S of the Act, the Company sold 9,675 units of
convertible debentures to a total of 11 overseas individuals on July 3, 1996 for
an aggregate purchase price of $7,669,441. Each unit consists of a convertible
debenture due July 3, 2003 denominated in 1,000 Swiss Francs and a warrant to
purchase 24 shares of the Company's common stock at $16.50 per share. The
warrants are immediately exercisable and expire on June 27, 2003. The common
stock underlying the debentures and warrants was registered on a Form S-3 filed
on March 4, 1997.
Pursuant to Section 4(2) of the Act, the Company sold a total of
$5,000,000 4.5% Convertible Debentures on October 17, 1996 to Cameron Capital
Ltd. and Wood Gundy London Limited. The debentures, due October 17, 2001, may be
converted at any time after 75 days from issuance at the option of the holder
into shares of the Company's common stock at a price equal to 85% of the average
trailing five day bid price from the date of conversion. The common stock
underlying the debentures was registered on a Form S-3 filed on February 4,
1997.
Pursuant to Section 4(2) of the Act, the Company sold a total of
$6,000,000 5% Convertible Debentures as follows: $3,000,000 to High Risk
Opportunities Hub Fund Ltd. on December 31, 1996; $2,000,000 to Berckeley
Investment Group, Ltd. on December 31, 1996; and $1,000,000 to High Risk
Opportunities Hub Fund Ltd. on January 13, 1997. The debentures, due December
31, 2001, December 31, 2001 and January 13, 2002, respectively, are convertible
into shares of common stock at a conversion price equal to 85% of the average
trailing 10 day bid price from the date of conversion, provided that in any 30
day period the holder of these debentures may convert no more than 33% (or 34%
in the last 30 day period available for conversion) of the debentures. The
common stock underlying the debentures was registered on a Form S-3 filed on
March 4, 1997.
PREFERRED STOCK
Pursuant to Section 4(2) of the Act, the Company sold 6,000 shares of
Series D Convertible Preferred Stock on February 14, 1996 to the Travelers
Insurance Company for an aggregate purchase price of $6,000,000. All of the
Series D Convertible Preferred Stock was converted into 1,116,918 shares of
common stock (including accrued dividends of $342,092 and accrued interest of
$9,183) as of December 31, 1996. In connection with the issuance of Series D
Convertible Preferred Stock the Company issued 600,000 warrants to purchase
common stock at a price of $7.50 per share, and 200,000 warrants to purchase
common stock at a price of $8.00 per share, both of which expire on February 14,
2001 and are immediately exercisable. The common stock underlying the Preferred
Stock and the warrants was registered on a Form S-3 filed on June 28, 1996.
Pursuant to Section 4(2) of the Act, the Company sold 10,000 shares of
Series E Convertible Preferred Stock on April 17, 1996 to GFL Advantage Fund
Limited for an aggregate purchase price of $10,000,000. All of the Series E
Preferred Stock was converted into 1,381,506 shares of common stock (including
accrued dividends of $326,174 and accrued interest of $7,536) as of January 28,
1997. In connection with the issuance of Series E Convertible Preferred Stock,
the Company issued 304,259 warrants to purchase common stock at a price of $15
per share, which expire on April 17, 2001 and are immediately exercisable. The
common stock underlying the Preferred Stock and the warrants was registered on a
Form S-3 filed on June 28, 1996.
Pursuant to Section 4(2) of the Act, the Company sold 6,000 shares of
Series F Convertible Preferred Stock on July 12, 1996 to the Travelers Insurance
Company for an aggregate purchase price of $10,000,000. The Series F Convertible
Preferred Stock, together with any accrued but unpaid dividends, may be
converted into common stock at 80% of the daily average closing price of the
common stock on the ten trading days preceding such conversion, but in no event
27
<PAGE>
less than $7.00 or more than $16.00. Series F Preferred stock may be redeemed at
any time, with no less than 10 days and no more than 30 days notice or when the
stock price exceeds $16.50 per share, at an amount equal to the amount of
liquidation preference determined as of the applicable redemption date. In
connection with the issuance of Series F Convertible Preferred Stock, the
Company issued 500,000 warrants to purchase common stock at a price of $11 per
share, which expire on July 12, 2001 and are immediately exercisable. The common
stock underlying the Preferred Stock and the warrants was registered on a Form
S-3 filed on August 23, 1996.
Pursuant to Section 4(2) of the Act, the Company sold 10,000 shares of
Series G Convertible Preferred Stock to Genesee Fund Limited on September 26,
1996 for an aggregate purchase price of $10,000,000. Genesee Fund Limited
subsequently transferred 5,000 of its shares of Series G Convertible Preferred
Stock to GFL Advantage Fund and the remaining 5,000 shares to GFL Performance
Fund. The Series G Convertible Preferred Stock, together with any accrued but
unpaid dividends, may be converted into common stock at 85% of the average
closing bid price for the three trading days immediately preceding the
conversion date, but in no event at less than $6.00 or more than $11.50 for the
5,000 shares of Series G Convertible Preferred Stock held by GFL Advantage Fund
and no less than $6.00 or more than $8.00 for the 5,000 shares of Series G
Convertible Preferred Stock held by GFL Performance Fund. The warrants are
immediately exercisable and expire on December 31, 2001. Series G Convertible
Preferred Stock may be redeemed at any time, with no less than 10 days and no
more than 20 days notice, at an amount equal to the sum of (a) the amount of
liquidation preference determined as of the applicable redemption date plus (b)
$176.50. In connection with the issuance of Series G Convertible Preferred
Stock, the Company issued 323,799 warrants to purchase common stock at a price
of $12 per share, which expire on September 27, 2001, and 50,000 warrants to
purchase common stock at a price of $6.5625 per share, which expire on December
31, 2001 and are immediately exercisable. The common stock underlying the
Preferred Stock and the warrants was registered on a Form S-3 filed on February
4, 1997.
STOCKHOLDER SERVICES
Stockholders of the Company who desire information about the Company
are invited to contact John Ingoldsby, Director of Investor Relations, Palomar
Medical Technologies, Inc., 66 Cherry Hill Drive, Beverly, Massachusetts 01915,
508-921-9300, e-mail at [email protected]. A mailing list is maintained to
enable stockholders whose stock is held in street name, and other interested
individuals, to receive quarterly reports, annual reports and press releases as
quickly as possible. (Quarterly reports and press releases are also available
through the Internet at the Company's home page on the World Wide Web
(http://www.palmed.com)).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.,
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996, the Company had revenues of
$70,098,443 as compared to $21,906,504 for the year ended December 31, 1995. The
220% increase in revenues from 1995 to 1996 is primarily the result of
acquisitions, additional product lines and the transition of certain
subsidiaries from the development stage to commercialization in both the medical
and electronic business segments. Net revenues by the Company's business
segments are as follows:
Year ended
December 31,
-------------------------------------
1995 1996
------------- ------------
Medical $ 5,610,280 $ 17,824,158
16,296,224 52,274,285
------------- ----------
Total $ 21,906,504 $ 70,098,443
============ ============
The increase in revenues for the Company's medical segment was
principally attributable to $10.1 million of revenues generated from the
Company's Tissue Technologies subsidiary during the year ended December 31, 1996
as compared to only $114,000 for the year ended December 31, 1995. Tissue
Technologies began commercial shipment of its product in the fourth quarter of
1995. Approximately $6.1 million of medical revenues were generated by the
Company's Spectrum subsidiary during the year ended December 31, 1996, as
compared to approximately $3.8 million of revenues for the year ended December
31, 1995. This increase in revenues at Spectrum was due to the introduction and
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initial shipments of its EpiLaser during the third and fourth quarters of 1996.
The Company expects its revenue from the medical segment to continue to increase
as the Company further penetrates the domestic and international medical markets
with its Tru-Pulse CO2 laser for treatment of wrinkles and skin resurfacing and
begins marketing and shipping its EpiLaser for hair removal which was approved
by the FDA in March of 1997.
The increase in revenues for the Company's electronics segment was
attributable to approximately $18.6 million of revenues generated from the
Company's Nexar subsidiary which introduced its proprietary upgradeable PC in
April of 1996, as compared to only approximately $620,000 of revenues generated
from the sale of non-proprietary PCs during the year ended December 31, 1995.
The remaining increase in 1996 in the electronics segment was principally due to
$17.1 million of sales by Dynaco's Comtel subsidiary acquired in the first
quarter of 1996. The Company believes that the revenue in the electronic segment
will continue to increase as Nexar further expands its production capabilities,
marketing and distribution efforts and as Comtel expands its contract
manufacturing operations. However, the Company intends to divest a portion of
its interest in companies in the electronics segment, and such increase in
revenue may not be reflected in the consolidated results of the Company to the
extent it is successful in its divesture.
Gross margin for the year ended December 31, 1996 was $6,920,888 (9.9%
of revenues) versus $4,714,034 (21.5% of revenues) for the year ended December
31, 1995. Gross margin by the Company's business segments are as follows:
Year ended
December 31,
-----------------------------------
1995 1996
-----------------------------------
Medical $ 2,145,808 $ 3,437,399
Electronic 2,568,226 3,483,489
------------ ------------
Total $ 4,714,034 $ 6,920,888
============ ===========
The increase in gross profit dollars was a result of the additional
revenues generated from new products introduced during the year ended December
31,1996 as discussed above. In the medical segment the principal reason for the
decrease in the gross profit percent was the phase-out of the Company's research
and development contract with the U.S. Army in anticipation of the
commercialization of its medical products. The gross profit percent also
decreased due to underutilization of increased production capacity at Spectrum
in preparation for the anticipated increase in demand of its EpiLaser in fiscal
1997. A portion of this decrease in gross margins was offset by an increase in
gross margins attributed to the acquisition of Tissue Technologies, which
introduced its Tru-Pulse CO2 laser to the commercial marketplace in the first
quarter of 1996.
In the electronic segment, the principal reason for the decrease in the
gross profit percent was a decrease in yields at Dynaco due to an increase in
production costs attributable to a change in Dynaco's product mix and an
inventory valuation write-off of $643,000 at Dynaco's Comtel subsidiary offset
by an increase in the gross margin as a result of Nexar's introduction and
initial volume shipments of its proprietary upgradeable PC in 1996.
Research and development costs increased to $7,977,085 (11% of
revenues) for the year ended December 31, 1996, from $4,419,487 (20% of
revenues) for the year ended December 31, 1995. This 80.5% increase in research
and development reflects the Company's continuing commitment to research and
development for both its medical and electronic business segments. In the
Company's medical segment the Company focused its efforts during 1996 to obtain
FDA clearance for hair removal using the EpiLaser. The Company received FDA
clearance for hair removal in March of 1997. The Company also continued to
concentrate on the development of additional products for medical laser
applications. In the electronics segment, the Company's Nexar subsidiary
continues to enhance and further develop its current proprietary upgradeable PC
product in order to stay competitive in a rapidly changing high technology
industry. In addition, Dynaco began funding a new process engineering and
materials development program, and has filed several patents. Management
believes that research and development expenditures will increase over the next
few years as the Company continues clinical trials of its medical products and
develops additional applications for its lasers and delivery systems. However,
management anticipates that research and development expenditures as a
percentage of revenue will decrease as its revenues increase with
commercialization of its products.
General and Administrative expenses increased to $21,569,054 (31% of
revenues) for the year ended December 31, 1996, from $7,879,694 (36% of
revenues) for the year ended December 31, 1995. This 173.7% increase is
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primarily due to acquisitions and the transition of certain subsidiaries from
the development stage to commercialization combined with the increased
administrative resources required at the Company's corporate offices to oversee
the growth of the Company's medical and electronic business segments. In the
medical segment, the Company acquired Tissue Technologies and expanded its
general and administrative support staff at Spectrum to accommodate the
forecasted growth in the fourth quarter of 1996 and in 1997. In the electronics
segment, the Company's Dynaco subsidiary acquired Comtel and formed Dynamem.
Additionally, the Company's Nexar subsidiary has expanded its executive,
administrative and finance staffs to support Nexar's growing operations. The
Company has continued to increase its support staffs in anticipation of several
new product introductions in 1996. All the Company's subsidiaries maintain their
own general and administrative support staffs. The increase in general and
administrative expenses is also due to write-downs and valuation allowances
totaling approximately $3,100,000 related to accounts receivable, intangibles
and the accrual of severance costs.
Selling and Marketing expenses increased to $11,420,943 (16% of
revenues) for the year ended December 31, 1996, from $2,768,541 (13% of
revenues) for the year ended December 31, 1995. This 312.5% increase reflects
the Company's effort to increase its marketing and distribution as a result of
its new product lines developed internally within the medical segment. This
increase is attributable to the Company's Spectrum subsidiary and the
acquisition of Tissue Technologies, both increasing its sales and marketing
expenditures to coincide with the addition of two new product lines. In the
electronics segment, this increase reflects the change in focus of the Company's
Nexar subsidiary from product development to selling and marketing its
proprietary upgradeable PC. During 1996 Nexar began its efforts to increase its
selling, marketing and distribution which resulted in additional costs of $4.8
million in 1996 as compared to $0.6 million in 1995.
Business Development and Financing Costs increased to $2,879,603 (4% of
revenues) for the year ended December 31, 1996, from $1,409,303 (6% of revenues)
for the year ended December 31, 1995. This 104.3% increase is attributable to
the Company's continuing acquisitions and financing activities. The Company
anticipates that it will continue to expend funds to raise additional sources of
financing and to focus its efforts to acquire other technologies to broaden its
scope of product applications and services in both the medical and electronic
business segments.
Settlement and litigation costs increased to $2,255,000 for the year
ended December 31, 1996 from $700,000 for the year ended December 31, 1995. This
increase is a result of a settlement of potential claims with a former executive
of Nexar for approximately $1,400,000 and under which Nexar is purchasing
previously-licensed core technology and eliminated future royalty payments on
the use of Nexar's core technology, a settlement of approximately $525,000 in
connection with a suit brought against the Company and the chief executive
officer of Nexar upon Nexar's organization, and other claims against the
Company, combined with the associated legal costs.
Merger expenses totaled $443,780 for the year ended December 31, 1996
and are comprised of professional fees associated with the merger of Tissue
Technologies and the Company.
Interest expense increased to $1,443,564 for the year ended December
31, 1996, from $1,374,199 for the year ended December 31, 1995. This 5% increase
is primarily the result of the issuance of acquisition debt in April 1995 to
purchase Spectrum, and the issuance of the 4.5% Swiss Franc convertible
debentures in July 1996.
Interest income increased to $1,586,620 for the year ended December 31,
1996, from $913,050 for the year ended December 31, 1995. This increase is
primarily the result of interest received from subscriptions receivable and
other loans and investments made as a result of the Company's improved cash
position.
Net gain on trading securities represents realized and unrealized
trading gains and losses of $2,033,371 for the year ended December 31, 1996.
Included in this amount is an unrealized gain totaling approximately $1,547,000
related to the Company's investment in a publicly traded company in which the
Company's chief executive officer owns approximately 13% and a realized gain
totaling approximately $827,000 related to the Company's investment in another
publicly traded company offset by various unrealized losses aggregating
approximately $340,000. The Company had a net realized trading gain of $201,067
for the year ended December 31, 1995. It is the Company's intention to continue
to invest in trading securities, which may result in additional realized and
unrealized trading gains or losses in the future
Gain on the sale of stock of a subsidiary stock represents a gain of
$3,830,000 related to the private placement sale by the Company of 400,000 Nexar
common shares. See Note 10 of the Notes to the Consolidated Financial
Statements.
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Other income and expense totaled $4,245,642 of expense for the year
ended December 31, 1996 as compared to $102,305 income for the year ended
December 31, 1995. Significant amounts included in this amount for 1996 is a
charge to operations of $3,690,000 related to the Company's New Media investment
and additional reserves totaling $1,306,038 required for other loans to joint
ventures. Offsetting these losses is a foreign currency exchange gain of
$446,596.
See Note 9 of the Notes to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had $19,066,523 in cash, cash
equivalents and trading securities. During the year ended December 31, 1996, the
Company generated the following net cash proceeds from its financing and
investing activities to fund operations, acquisitions and the development of its
products:
YEAR ENDED
DECEMBER 31, 1996
-----------------
Sale of common stock $ 6,061,380
Sale of preferred stock 30,823,147
Issuance of convertible debentures 14,169,441
Sale of Stock of a subsidiary 2,000,000
Exercise of stock options and warrants 7,653,907
--------------
Total $60,707,875
==============
The Company's net loss for the year ended December 31, 1996, included
the following noncash items: $3,916,221 of depreciation and amortization
expense; $70,130 of interest expense relating to the amortization of the
discounts on the convertible debentures; and $741,982 related to common stock
and warrants issued to non-employees and consultants of which approximately
$532,758 results from the issuance of warrants for services in accordance with
SFAS No. 123.
The Company anticipates that capital expenditures for 1997 will total
approximately $16 million, with nearly 60% of this amount funding lasers needed
for CTI laser centers. The Company intends to finance the majority of the CTI
expenditures under equipment leasing arrangements with various financing
institutions. However, there can be no assurance that the Company will be able
to obtain the necessary financing.
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 $3,000,000. As of December 31,
1996, the amount of accounts receivable sold that remained uncollected totaled
$1,787,057 net of related reserves and fees, as defined in the agreement. This
amount is classified as a revolving line of credit in the accompanying
consolidated balance sheet as of December 31, 1996. The interest rate on such
outstanding amounts is the bank's prime rate (8.25% at December 31, 1996) plus
1.5%, and interest is payable monthly in arrears. The financing is
collateralized by the purchased accounts receivable and substantially all of
Dynaco's assets. Borrowings under this line 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 $4,500,000 in the form of
revolving receivable and inventory loans. Borrowings under the loan agreement
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 2.25% and
amounted to $2,770,375 as of December 31, 1996. The loan agreement terminates on
November 30, 1998. Borrowings under this loan agreement are guaranteed by the
Company.
Some of the Company's medical products businesses are still in the
development 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,
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there can be no assurance that the current levels of funding or additional
funding will be available, or, if available, on terms satisfactory to the
Company.
The Company also makes investments in core technologies and companies
that management feels are strategic to the Company's business or hopes will
yield a higher than average financial return to support the Company's core
business. For example, the Company has invested money in Nexar (see Item 1.
Description of Business -- Formation of Nexar Technologies, Inc.); the American
Materials & Technologies Corporation, a manufacturer of advanced composite
materials, of which the Company owns 13% as of December 31, 1996; GreenMan
Technologies, Inc., a developer and manufacturer of "environmentally friendly"
plastic and thermoplastic rubber parts and products that are manufactured using
recycled materials, in which the Company has invested $1,200,000; and HealthCare
2000, a privately held medical and cosmetic services company in which the
Company has invested $500,000. (See Note 11 to Financial Statements.) Some of
these investments are with companies that are related to some of the directors
and officers of the Company. In addition, the Company has made loans to various
affiliated parties. (See "Item 12. Certain Relationships and Related
Transactions.") At December 31, 1996, the Company had $1,564,153 of such related
party investments and loans.
The Company has had significant losses to date and expects these losses
to continue for the near future. Therefore, the Company must continue to secure
additional financing to complete its research and development activities,
commercialize its current and proposed medical products segment, spin-off its
electronic products segment, execute its acquisition business plan and fund
ongoing operations. The Company believes that the cash generated to date from
its financing activities and amounts available under its credit agreement will
be sufficient to satisfy its working capital requirements through at least the
next twelve months. However, there can be no assurance that events in the future
will not require the Company to seek additional financing sooner. The Company
continues to investigate several financing alternatives, strategic partnerships,
additional bank financing, private debt and equity financing and other sources.
The Company believes that it has adequate cash reserves or will be successful in
obtaining additional financing in order to fund current operations in the near
future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Annual Report on Form
10-KSB the following cautionary statements should be considered carefully in
evaluating the Company and its business. Statements contained in this Form
10-KSB that are not historical facts (including, without limitation, statements
concerning anticipated operational and capital expense levels and such expense
levels relative to the Company's total revenues) and other information provided
by the Company and its employees from time to time may contain certain "forward
looking" information, as that term is defined by (i) the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") and (ii) in releases by the
SEC. The factors identified in the cautionary statements below, among other
factors, could cause actual results to differ materially from those suggested in
such forward looking statements. The cautionary statements below are being made
pursuant to the provisions of the Reform Act and with the intention of obtaining
the benefits of "safe harbor" provisions of the Reform Act.
SUBSTANTIAL AND CONTINUING LOSSES. The Company incurred a net loss of
$37,863,792 for the year ended December 31, 1996 and a net loss of $15,365,145
for the quarter ended March 31, 1997. Losses of this magnitude are expected to
continue for the near term, and there can be no assurance that the Company will
achieve profitable operations or that profitable operations will be sustained if
achieved. At December 31, 1996, the Company's accumulated deficit was
$64,971,200 and at March 31, 1997, the Company's accumulated deficit was
$80,631,341. Dynaco Corp. ("Dynaco"), Star Medical Technologies, Inc. ("Star"),
CD Titles, Inc. ("CD Titles"), Dynamem, Inc. ("Dynamem"), Comtel Electronics,
Inc. ("Comtel"). Tissue Technologies, Inc. ("Tissue"), Spectrum Technologies,
Inc. ("Spectrum") and Nexar Technologies, Inc. ("Nexar") each have had a history
of losses. There can be no assurance that these companies will achieve
profitable operations or that profitable operations will be sustained if
achieved. The Company anticipates incurring substantial research and development
expenses, which will reduce cash available to fund current operations. The
Company must continue to secure additional financing to complete its research
and development activities, commercialize its current and proposed cosmetic
laser products, expand its current electronics business, execute its acquisition
business plan and fund ongoing operations. The Company anticipates that it will
require substantial additional financing during the next twelve-month period.
The Company believes that the cash generated to date from its financing
activities; amounts available under its credit agreement and the Company's
ability to raise cash in future financing activities will be sufficient to
satisfy its working capital requirements through the next twelve-month period.
The Company bases its belief that it has the ability to raise cash in future
financings on its demonstrated historical ability to raise money and its current
and ongoing discussions with financing sources. However, there can be no
assurance that this assumption will prove to be accurate or that events in the
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future will not require the Company to obtain additional financing sooner than
presently anticipated. The Company may also determine, depending upon the
opportunities available to it, to seek additional debt or equity financing to
fund the costs of acquisitions or continuing expansion. To the extent that the
Company finances an acquisition with a combination of cash and equity
securities, any such issuance of equity securities could result in dilution to
the interests of the Company's shareholders. Additionally, to the extent that
the Company incurs indebtedness to fund increased levels of accounts receivable
or to finance the acquisition of capital equipment or issues debt securities in
connection with any acquisition, the Company will be subject to risks associated
with incurring substantial additional indebtedness, including the risks that
interest rates may fluctuate and cash flow may be insufficient to pay principal
and interest on any such indebtedness. The Company continues to investigate
several financing alternatives, including strategic partnerships, additional
bank financing, private, debt and equity financing and other sources. While the
Company regularly reviews potential funding sources in relation to its 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 will
be on terms satisfactory to the Company. Failure to obtain additional financing
could have a material adverse effect on the Company, including possibly
requiring it to significantly curtail its operations. (See "Item 1. Description
of Business" and Note 1 to Financial Statements, "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations"; March
31, 1997 Form 10-Q Part I "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.")
HOLDING COMPANY STRUCTURE. The Company has no significant operations
other than those incidental to its ownership of the capital stock of its
subsidiaries. As a holding company, the Company is dependent on dividends or
other intercompany transfers of funds from its subsidiaries to meet the
Company's debt service and other obligations. Claims of creditors of the
Company's subsidiaries, including trade creditors, will generally have priority
as to the assets of such subsidiaries over the claims of the Company and the
holders of the Company's indebtedness.
LIMITED OPERATING HISTORY; RECENT ACQUISITIONS. Many of the Company's
subsidiaries have limited operating histories and are in the development stage,
and the Company is subject to all of the risks inherent in the establishment of
a new business enterprise. The likelihood of success of the Company must be
considered in light of the problems, expenses, difficulties, complications and
delays frequently encountered in connection with the establishment of a new
business and development of new technologies in the cosmetic laser products and
electronic products industries. These include, but are not limited to,
government regulation, competition, the need to expand manufacturing
capabilities and market expertise, and setbacks in production, product
development, market acceptance and sales and marketing. The Company's prospects
could be significantly affected by its ability to subsequently manage and
integrate the operations of several distinct businesses with diverse products,
services and customer bases in order to achieve cost efficiencies. There can be
no assurance that the Company will be able to successfully manage and integrate
the operations of newly acquired businesses into its operations or that the
failure to do so will not increase the costs inherent in the establishment of
new business enterprises. (See "Item 1. Description of Business" and Note 1 to
Financial Statements.)
RISKS ASSOCIATED WITH ACQUISITIONS. Since going public, the Company has
acquired seven companies. In the normal course of business, the Company
evaluates potential acquisitions of businesses, products and technologies that
would complement or expand the Company's business. Promising acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory approvals.
Acquisitions may result in the incurrence of additional debt, the write-off of
in-process research and development or technology acquisition and development
costs and the amortization of expenses related to goodwill and other intangible
assets, any of which could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flow. Acquisitions
involve numerous additional risks, including difficulties in the assimilation of
the operations, services, products and personnel of the acquired company, the
diversion of management's attention from other business concerns, entering
markets in which the Company has little or no direct prior experience and the
potential loss of key employees of the acquired company. In order to finance
acquisitions, it may be necessary for the Company to raise additional funds
through public or private financings. Any equity or debt financing, if available
at all, may be on terms which are not favorable to the Company and, in the case
of equity financing, may result in dilution to the Company's stockholders. (See
"Item 1. Description of Business" and Note 1 to Financial Statements.)
NEW VENTURES. The Company's Cosmetic Technology International, Inc.
("CTI") subsidiary has entered into several agreements with physician groups to
provide cosmetic laser services at laser treatment centers, and plans to enter
into more such agreements in the future. While the Company believes these new
partnerships are strategically important, there are substantial uncertainties
associated with the development of new products, technologies and services for
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evolving markets. The success of these ventures will be determined not only by
the Company's efforts, but also by those of its partners. Initial timetables for
the development and introduction of new technologies, products or services may
not be achieved, and price/performance targets may not prove feasible. External
factors, such as the development of competitive alternatives or government
regulation, may cause new markets to evolve in unanticipated directions. (See
"Highly Competitive Industries," and "Item 1. Description of Business.")
INVESTMENTS IN UNRELATED BUSINESSES. The Company has investments in
marketable and non-marketable securities and loans to related and unrelated
parties, including approximately $8 million invested in equity securities of
high-tech companies, both public and privately held. The amount that the Company
may ultimately realize from these investments could differ materially from the
value of these investments recorded in the Company's financial statements, and
the ultimate disposition of these investments could result in a loss to the
Company. (See "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Notes 2 and 11 to Financial
Statements; "Item 12. Certain Relationships and Related Transactions"; March 31,
1997 Form 10-Q Notes 3 and 10 to Financial Statements and Part I "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.")
MANAGEMENT OF GROWTH. In light of management's views of the potential
for future growth, the Company has adopted an aggressive growth plan that
includes substantial investments in its sales, marketing, production and
distribution organizations, the creation of new research and development
programs and increased funding of existing programs, and investments in
corporate infrastructure that will be required to support significant growth.
This plan carries with it a number of risks, including a higher level of
operating expenses, the difficulty of attracting and assimilating a large number
of new employees, and the complexities associated with managing a larger and
faster growing organization. Depending on the extent of future growth, the
Company may experience a significant strain on its management, operational,
manufacturing and financial resources. The failure of the Company's management
team to effectively manage growth, should it continue to occur, could have a
material adverse effect on the Company's financial condition and results of
operations. (See "Item 1. Description of Business.")
HIGHLY COMPETITIVE INDUSTRIES. The cosmetic laser and electronics
industries are characterized by intense competition. The cosmetic laser industry
is highly competitive and is characterized by the frequent introduction of new
products. The Company competes in the development, manufacture, marketing and
servicing of laser technology products with numerous other companies, certain of
which have substantially greater financial, marketing and other resources than
the Company. In addition, the Company's cosmetic laser products face competition
from alternative medical products and procedures, such as dermabrasion, chemical
peels, pharmaceutical treatment, electrolysis, waxing and surgery, among others.
There can be no assurance that the Company will be able to differentiate its
products from the products of its competitors or that the marketplace will
consider the Company's products to be superior to competing products or medical
procedures. There can be no assurance that competitors will not develop products
or that new technologies will not be developed that render the Company's
products obsolete or less competitive. (See "Technological Obsolescence.") In
addition, in entering areas of business in which it has little or no experience,
such as the opening of laser treatment centers, the Company may not be able to
compete successfully with competitors that are more established in such areas.
(See "New Ventures.")
In the electronics industry, the Company competes with Packard-Hughes
Interconnect Co., Parlex Corporation, Teledyne Inc., IBM, Apple Computer, Compaq
and Dell Computer, among others. Many, if not most, of the Company's current and
prospective competitors are substantial in size and have substantial financial,
managerial, technical, manufacturing, marketing and other resources, and may
introduce additional products that compete with those of the Company. There can
be no assurance that the Company's products will compete favorably with the
products of its competitors or that the Company will have the resources
necessary to compete effectively against such companies. As a result of the
intense competition in the personal computer market, the Company expects that
gross margins on sales of its upgradeable personal computers will be extremely
narrow and will require the Company to manage carefully its cost of goods sold.
There can be no assurance that the Company will be able to manage its cost of
goods sold to the degree necessary for sales of upgradeable computer products to
generate significant gross margins. The Company currently has limited marketing
capabilities and expects to place significant reliance on independent
distributors and resellers for the distribution and marketing of its products.
The Company will be dependent upon the efforts of such third parties. The
inability to establish and maintain a network of independent distributors and
resellers, or a reduction in their sales efforts, could have a material adverse
effect on the Company's financial condition and results of operations. In
addition, there can be no assurance as to the viability or financial stability
of the Company's independent distributors and resellers. The computer industry
has been characterized from time to time by financial difficulties of
distributors and resellers; any such problems could lead to reduced sales and
could have a material adverse effect on the Company's financial condition and
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results of operations. There can be no assurance that the Company's products
will compete favorably with the products of its competitors or that the Company
will have the resources necessary to compete effectively against such companies.
(See "Item 1. Description of Business.")
FLUCTUATIONS IN QUARTERLY PERFORMANCE. The Company's results of
operations have fluctuated substantially and can be expected to continue to vary
significantly. The Company's quarterly operating results depend on a number of
factors, including the timing of the introduction or acceptance of new products
offered by the Company or its competitors, changes in the mix of products sold
by the Company, changes in regulations affecting the cosmetic laser products or
electronics industry, changes in the Company's operating expenses, personnel
changes and general economic conditions.
The Company's stock price, like that of other technology companies, is
subject to significant volatility. If revenues or earnings in any quarter fail
to meet the investment community's expectations, there could be an immediate
impact on the price of the Company's common stock. The price of the Company's
common stock may also be affected by broader market trends unrelated to the
Company's performance. (See "Volatility of Share Price;" "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations; March
31, 1997 Form 10-Q "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.")
VOLATILITY OF SHARE PRICE. Factors such as announcements of
developments related to the Company's business, announcements by competitors,
quarterly fluctuations in the Company's financial results and other factors have
caused the price of the Company's stock to fluctuate, in some cases
substantially, and could continue to do so in the future. In addition, the stock
market has experienced extreme price and volume fluctuations that have
particularly affected the market price for many technology companies and that
have often been unrelated to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of the Company's
common stock. The trading prices of many technology companies' stocks are at or
near their historical highs, and reflect price/earnings ratios substantially
above historical norms. There can be no assurance that the trading price of the
Company's common stock will remain at or near its current level.
GOVERNMENT REGULATION. The Company's laser product business segment
and, to a lesser degree, its electronics business segment are subject to
regulation in the United States and abroad. Failure to comply with applicable
regulatory requirements can result in fines, denial or suspension of approvals,
seizures or recall of products, operating restrictions and criminal
prosecutions, any or all of which could have a material adverse effect on the
Company. Furthermore, changes in existing regulations or adoption of new
regulations could prevent the Company from obtaining, or could affect the timing
of, future regulatory approvals. (See "Item 1. Description of Business -
Government Regulation.")
LASER PRODUCT SEGMENT. All laser product devices, including those sold
by the Company, are subject to regulation by the FDA under the Medical Device
Amendments of the United States Food, Drug and Cosmetics Act (the "FDA Act").
The Company's business, financial condition and operations are critically
dependent upon timely receipt of FDA regulatory clearance.
FDA CLEARANCE STATUS FOR COSMETIC LASER PRODUCTS. Three of the
Company's lasers have received clearance from the FDA for certain dermatological
applications: the Q-switched Ruby laser, the Tru-Pulse laser and the Epilaser
system. The Company's diode laser has not yet received FDA clearance, and is
currently under an Investigative Device Exemption.
The Company is also investigating other applications in dermatology for
its laser systems. It will be required to obtain FDA clearance before
commercially marketing any other application. The Company believes that it will
be able to seek such clearance under the 510(k) application process; however, no
assurance can be given that the FDA will not require the Company to follow the
more extensive and time-consuming Pre-Market Approval ("PMA") process. FDA
review of a 510(k) application currently averages about seven to twelve months
and requires limited clinical data based on "substantial equivalence" to a
product marketed prior to 1976, while a PMA review can last for several years
and require substantially more clinical data.
The FDA also imposes various requirements on manufacturers and sellers
of products under its jurisdiction, such as labeling, good manufacturing
practices, record keeping and reporting requirements. The FDA also may require
post-market testing and surveillance programs to monitor a product's effects.
There can be no assurance that the appropriate clearances from the FDA will be
granted, that the process to obtain such clearances will not be excessively
expensive or lengthy or that the Company will have sufficient funds to pursue
such clearances.
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No assurance can be given that FDA approval will be obtained for the
Company's current or proposed laser products on a timely basis, if at all. The
laser products segment of the Company's business, is, and will continue to be,
critically dependent upon FDA approval of its current and proposed cosmetic
laser products. Delays or failure to obtain such approval would have a material
adverse effect on the Company.
OTHER GOVERNMENT APPROVALS FOR LASER PRODUCTS; GOOD
MANUFACTURING PRACTICES. In order to be sold outside the United States, the
Company's products are subject to FDA permit requirements that are conditioned
upon clearance by the importing country's appropriate regulatory authorities.
Many countries also require that imported products comply with their own or
international electrical and safety standards. Additional approvals may be
required in other countries. The Company's Tru-pulse laser has received the CE
Mark pursuant to the European Medical Device Directive which allows that laser
to be sold in all countries that recognize the CE Mark, including the countries
that comprise the European Community. The Company is currently seeking to obtain
the CE Mark registration for its Epilaser. The Company has yet to apply for
international approval for its diode laser for use in cosmetic surgery and
dermatology.
The Company is subject to the laser radiation safety regulations of the
FDA Act administered by the National Center for Devices and Radiological Health
("CDRH") of the FDA. These regulations require a laser manufacturer to file new
product and annual reports, to maintain quality control, product testing and
sales records, to distribute appropriate operation manuals, to incorporate
certain design and operating features in lasers sold to end-users and to certify
and label each laser sold to end-users as one of four classes of lasers (based
on the level of radiation from the laser). In addition, various warning labels
must be affixed on the product and certain protective devices must be installed
depending upon the class of product. Under the Act, the Company is also required
to register with the FDA as a medical device manufacturer and is subject to
inspection on a routine basis by the FDA for compliance with Good Manufacturing
Practice ("GMP") regulations. The GMP regulations impose certain procedural and
documentation requirements upon the Company relevant to its manufacturing,
testing and quality control activities. The CDRH is empowered to seek fines and
other remedies for violations of these regulatory requirements. The Company
believes that it is currently in compliance with these regulations.
ELECTRONIC SEGMENT. A significant percentage of the total sales of the
flexible circuit board component business of the Company, which presently
accounts for a significant amount of the sales of the Company, are the result of
either a subcontract or a direct contract for government programs funded by the
U.S. military. Generally, government contracts and subcontracts are terminable
at the convenience of the government. Cutbacks in military spending for certain
programs or lack of military spending in general could have a material adverse
effect on the Company. There can be no assurance that termination of contracts,
cessation of purchase orders, or a failure to appropriate funds will not occur
in the future. Any termination, cessation, or failure to appropriate funds with
respect to contracts or subcontracts having a significant dollar value would
have a material adverse effect on the Company's business, financial condition
and results of operation. The unpredictable nature of the government procurement
process also may contribute to fluctuations in the Company's quarterly
performance. (See "Fluctuations in Quarterly Performance.")
Flexible circuit board component sales to the U.S. military are subject
to certain military certifications. These certifications are based upon
compliance with specification standards set by the U.S. military. The
certification for the Company's Mil-T-55110 product expires in the fourth
quarter of 1998, and, for the Company's Mil-Q-50884C product, in the first
quarter of 1999. The Company is subject to periodic audit and review from U.S.
government agencies to ensure compliance under criteria set forth by these
agencies. The Company has passed all government audits. Failure to meet or
exceed criteria set forth could result in a suspension or disqualification of
certain certifications. Such suspension or disqualification could have a
material adverse effect on the Company.
One customer of Nexar, Government Technology Services, Inc. (GTSI), a
leading supplier of desktop systems to United States government agencies,
accounted for a majority of Nexar's revenues. The Company expects that GTSI will
continue to be an important customer, and that while Nexar's revenues from GTSI
will increase, such sales as a percentage of total revenues will decline
substantially as Nexar further expands its distribution network and increases
its overall sales. Nexar has entered into an agreement with GTSI pursuant to
which GTSI serves as Nexar's exclusive federal reseller with respect to
Government Services Administration (GSA) scheduled purchases, provided that GTSI
purchases at least $35 million of Nexar's products in 1997. GTSI is under no
obligation, however, to purchase any products of Nexar's. If GTSI makes fewer
purchases in 1997 than Nexar anticipates, that would have a material adverse
effect on the Company.
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UNCERTAINTY OF MARKET ACCEPTANCE. The Company continually develops new
products intended for use in the cosmetic laser products segment and the
electronic products segment. As with any new products, there is substantial risk
that the marketplace may not accept or be receptive to the potential benefits of
such products. Market acceptance of the Company's current and proposed products
will depend, in large part, upon the ability of the Company or any marketing
partners to demonstrate to the marketplace the advantages of the Company's
products over other types of products. There can be no assurance that
applications or uses for the Company's current and proposed products will be
accepted by the marketplace or that any of the Company's current or proposed
products will be able to compete effectively. (See "Item 1. Description of
Business.")
UNCERTAINTY OF HEALTHCARE REIMBURSEMENT AND REFORM. The healthcare
industry is subject to changing political, economic and regulatory influences
that may affect the procurement practices and operations of healthcare industry
participants. During the past several years, state and federal government
regulation of reimbursement rates and capital expenditures in the United States
healthcare industry has increased. Lawmakers continue to propose programs to
reform the United States healthcare system, which may contain programs to
increase governmental involvement in healthcare, lower Medicare and Medicaid
reimbursement rates or otherwise change the operating environment for the
Company's customers. Healthcare industry participants may react to these
proposals by curtailing or deferring investments, including investments in the
Company's products.
DEPENDENCE ON THIRD PARTY RESEARCHERS. The Company is substantially
dependent upon third party researchers and others, over which the Company will
not have absolute control, to satisfactorily conduct and complete research on
behalf of the Company and to grant to the Company favorable licensing terms for
products which may be developed. The Company has entered into a number of
research agreements with recognized research hospitals and clinical
laboratories. These research institutions include the Oregon Medical Laser
Center at the Heart Institute of St. Vincent Hospital and Medical Center in
Portland, Oregon, the Wellman Labs at Massachusetts General Hospital and the
Otolaryngology Research Center for Advanced Endoscopic Applications at New
England Medical Center, Boston, Massachusetts. The Company provides research
funding, laser technology and optics know-how in return for licensing agreements
with respect to specific medical applications and patents. Management believes
that this method of conducting research and development provides a higher level
of technical and clinical expertise than it could provide on its own and in a
more cost efficient manner. The Company's success will be highly dependent upon
the results of the research, and there can be no assurance that these research
agreements will provide the Company with marketable products in the future or
that any of the products developed under these agreements will be profitable for
the Company. (See "Item 1. Description of Business" and Note 6 to Financial
Statements.)
TECHNOLOGICAL OBSOLESCENCE. The markets for the Company's products are
characterized by rapid and significant technological change, evolving industry
standards and frequent new product introductions and enhancements. Many of the
Company's products and products under development are technologically
innovative, and require significant planning, design, development and testing,
at the technological, product and manufacturing process levels. These activities
require significant capital commitments and investment by the Company. The
Company's failure to develop products in a timely manner in response to changes
in the industry, whether for financial, technological or other reasons, will
have a material adverse effect on the Company's business, financial condition
and results of operations.
The flexible circuit board component, electronics interconnect and
personal computer industries are characterized by large capital investments in
new automated processes and state-of-the-art fabrication techniques. In order to
participate effectively in those industries, the Company must continue to make
large capital investments in new automated processes and state-of-the-art
fabrication techniques. Development by others of new or improved products,
processes or technologies may make the Company's products or proposed products
obsolete or less competitive. The Company will be required to devote continued
efforts and financial resources to enhancement of its existing products and
development of new products. There can be no assurance that the Company will
have the financial resources or the technological capability necessary to carry
out such product enhancement and development. Nor can there be any assurance
that any of the products currently being developed by the Company, or those to
be developed in the future, will be technologically feasible or accepted by the
marketplace, that any such development will be completed in any particular time
frame, or that the Company's products or proprietary technologies will not
become uncompetitive or obsolete. (See "Item 1.
Description of Business.")
LACK OF PATENT PROTECTION. The Company currently holds several patents
and intends to pursue various additional avenues that it deems appropriate to
protect its technology. There can be no assurance, however, that the Company
will file any additional patent applications or that any patent applications
that have been, or may be, filed will result in issued patents, or that any
patent, patent application, know-how, license or cross-license will afford any
protection or benefit to the Company.
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The cosmetic laser device market has been characterized by substantial
litigation regarding patent and other intellectual property rights. One of the
Company's competitors in the cosmetic laser business has filed suit against the
Company alleging patent infringement, among other things. In both the cosmetic
laser products and the electronic products segments, litigation, which could
result in substantial cost to and diversion of effort by the Company, may be
necessary to protect trade secrets or know-how owned by or licensed to the
Company or to determine the enforceability, scope and validity of the
proprietary rights of others. Adverse determination in litigation or
interference proceedings could subject the Company to significant liabilities to
third parties, require the Company to seek licenses from third parties and could
prevent the Company from manufacturing and selling its products, all of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. (See "Risk Associated with Pending
Litigation"; "Item 1. Description of Business"; "Item 3. Legal Proceedings;"
March 31, 1997 10-Q, Part II "Item 1. Legal Proceedings.")
POSSIBLE PATENT INFRINGEMENTS. In the medical products segment, the
Company is aware of patents relating to laser technologies used in certain
applications. The Company intends to pursue such laser technologies in the
future; hence, if the patents relating to those technologies are valid and
enforceable, they may be infringed by the Company. After consulting with outside
counsel to the Company, the Company believes that it is not infringing currently
on patents held by others; however, were the issue ever to be litigated, a court
could reach a different opinion. If the Company's current or proposed products
are, in the opinion of patent counsel, infringing on any of these patents, the
Company intends to seek non-exclusive, royalty-bearing licenses to such patents
but there can be no assurance that any such license would be available on
favorable terms, if at all. One of the Company's competitors in the cosmetic
laser business has filed suit against the Company alleging patent infringement,
among other things. In the electronic products segment, the Company has not been
notified that it is currently infringing on any patents nor has it been the
subject of any patent infringement action. No assurance can be given that
infringement claims will not be made or that the Company would prevail in any
legal action with respect thereto. Defense of a claim of infringement would be
costly and could have a material adverse effect on the Company's business, even
if the Company were to prevail.
DEPENDENCE ON PROPRIETARY RIGHTS. The Company relies on trade secrets
and proprietary know-how which it seeks to protect, in part, by confidentiality
agreements with its collaborators, employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known or be independently developed by competitors.
NEED FOR ADDITIONAL QUALIFIED PERSONNEL/DEPENDENCE ON KEY PERSONNEL.
The Company's ability to develop, manufacture and market all of its products,
and to attain a competitive position within the laser products and electronics
industries, will depend, in large part, on its ability to attract and retain
qualified personnel. Competition for qualified personnel in these industries is
intense and the Company will be required to compete for such personnel with
companies which may have greater financial and other resources; there can be no
assurance that the Company will be successful in attracting, assimilating and
retaining the personnel it requires to grow and operate profitably. The
Company's inability to attract and retain such personnel could have a material
adverse effect upon its business.
(See "Management of Growth.")
The Company's future success depends to a significant extent on its
executive officers and certain technical, managerial and marketing personnel.
The loss of the services of any of these individuals or group of individuals
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is dependent on various sales representatives and
distributors to market and sell its medical products. The Company is in the
process of expanding its direct sales force to ensure that it satisfactorily
masters and controls the expected growth of its medical product sales. (See
"Item 1. Description of Business.")
ISSUANCE OF PREFERRED STOCK AND DEBENTURES COULD AFFECT RIGHTS OF
COMMON SHAREHOLDERS. The Company is authorized to issue up to 5 million shares
of Preferred Stock, $.01 par value. The Preferred Stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by shareholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions. In July 1996, the Company issued 6,000 shares of
Series F Convertible Preferred Stock at a price of $1,000 per share. In
38
<PAGE>
September 1996, the Company issued 10,000 shares of Series G Preferred Stock at
a price of $1,000 per share. As of July 8, 1997, 2,316 shares were converted
into 362,824 shares of common stock. In March 1997, the Company issued 6,000
shares of Series H Convertible Preferred Stock at a price of $1,000 per share.
In May 1997, the Company issued 10,000 shares of Series H Convertible Preferred
Stock at a price of $1,000 per share. In July 1996, the Company issued 9,675
units in a convertible debenture financing. Each unit consisted 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. In February 1997, 300 units
were redeemed by the Company for an aggregate price of $195,044. In October
1996, the Company issued $5,000,000 in 4.5% Convertible Subordinated Promissory
Notes. As of July 8, 1997, $3,900,000 principal amount was converted into
896,657 shares of common stock. In December 1996 and January 1997, the Company
issued a total of $6,000,000 in 5% Convertible Debentures. Also, In March 1997,
the Company issued $5,500,000 in 5% Convertible Debentures. In March 1997, the
Company issued $500,000 in 6% Convertible Debentures. The issuance of any such
additional Preferred Stock or Debentures could affect the rights of the holders
of Shares, and could reduce the market price of the Shares. In particular,
specific rights granted to future holders of Preferred Stock or Debentures could
be used to restrict the Company's ability to merge with or sell its assets to a
third party, thereby preserving control of the Company by the existing control
group. (See "Item 1. Description of Business," and "Item 5. Market for Common
Equity and Related Stockholder Matters," Notes 4 and 5 to Financial Statements;
March 31, 1997 Form 10-Q, Part II, "Item 2. Changes in Securities" and Note 9 to
Financial Statements.)
ISSUANCE OF RESERVED SHARES; REGISTRATION RIGHTS. As of July 8, 1997,
the Company had 33,123,190 Shares of Common Stock outstanding. The Company has
reserved an additional 31,371,850 Shares for issuance as follows: (1) 3,872,500
Shares for issuance to key employees, officers, directors, consultants and
advisors pursuant to the Company's Stock Option Plans; (2) 212,690 Shares for
issuance to employees, officers and directors pursuant to the Company's 401(k)
Plan; (3) 997,586 Shares for issuance pursuant to the Company's Employee Stock
Purchase Plan; (4) 9,577,940 Shares for issuance upon exercise of three-, four-
five- and seven-year Warrants issued to certain lenders, investors, consultants,
directors and officers (a portion of which are subject to certain antidilutive
adjustments); (5) 600,000 Shares for issuance upon conversion of the 6,000
shares of Series F Preferred Stock; (6) 1,337,176 Shares for issuance upon
conversion of the 7,684 shares of Series G Preferred Stock (7) 1,275,000 Shares
for issuance upon conversion of the debentures sold in the Swiss
Franc-Denominated Offering; (8) 403,503 Shares for issuance upon conversion of
$1,500,000 principal amount of a 4.5% Convertible Subordinated Promissory Note;
(9) 2,300,000 Shares for issuance upon conversion of $6,000,000 principal amount
of a 5% Convertible Debentures; (10) 2,750,000 Shares for issuance upon
conversion of $5,500,000 principal amount of a 5% Convertible Debenture; (11)
45,455 Shares for issuance upon conversion of $500,000 6% Convertible Debentures
and (12) 8,000,000 Shares for issuance upon conversion of the 16,000 shares of
Series H Preferred. All of the foregoing reserved Shares are, or the Company
intends for them shortly to be, registered with the Commission and therefore
freely salable on Nasdaq or elsewhere.
PRODUCT LIABILITY EXPOSURE. Cosmetic laser product companies face an
inherent business risk of financial exposure to product liability claims in the
event that the use of their products results in personal injury. The Company's
products are and will continue to be designed with numerous safety features, but
it is possible that patients could be adversely affected by use of one of the
Company's products or that deaths could occur. Further, in the event that any of
the Company's products prove to be defective, the Company may be required to
recall and redesign such products. Although the Company has not experienced any
material losses due to product liability claims to date, there can be no
assurance that it will not experience such losses in the future. The Company
maintains general liability insurance in the amount of $1,000,000 per occurrence
and $2,000,000 in the aggregate and maintains umbrella coverage in the aggregate
amount of $25,000,000; however, there can be no assurance that such coverage
will continue to be available on terms acceptable to the Company or that such
coverage will be adequate for liabilities actually incurred. In the event the
Company is found liable for damages in excess of the limits of its insurance
coverage, or if any claim or product recall results in significant adverse
publicity against the Company, the Company's business, financial condition and
results of operations could be materially and adversely affected. In addition,
although the Company's products have been and will continue to be designed to
operate in a safe manner, and although the Company attempts to educate medical
personnel with respect to the proper use of its products, misuse of the
Company's products by medical personnel over whom the Company cannot exert
control may result in the filing of product liability claims or significant
adverse publicity against the Company.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. As part of its business
strategy, the Company intends to seek opportunities to expand its product and
service offerings into international markets. In marketing its products and
services internationally, the Company will likely face new competitors. There
can be no assurance that the Company will be successful in marketing or
distributing products and services in these markets or that its international
revenue will be adequate to offset the expense of establishing and maintaining
international operations. The Company's international business may be adversely
affected by changing economic conditions in foreign countries. The majority of
the Company's sales are currently denominated in U.S. dollars, but there can be
no assurance that a significantly higher level of future sales will not be
39
<PAGE>
denominated in foreign currencies. To the extent the Company makes sales
denominated in currencies other than U.S. dollars, gains and losses on the
conversion of those sales to U.S. dollars may contribute to fluctuations in the
Company's business, financial condition and results of operations. In addition,
fluctuations in exchange rates could affect demand for the Company's products
and services. Conducting an international business inherently involves a number
of other difficulties and risks, such as export restrictions, export controls
relating to technology, compliance with existing and changing regulatory
requirements, tariffs and other trade barriers, difficulties in staffing and
managing international operations, longer payment cycles, problems in collecting
accounts receivable, political instability, seasonal reductions in business
activity in Europe and certain other parts of the world during the summer
months, and potentially adverse tax consequences. There can be no assurance that
one or more of these factors will not have a material adverse effect on any
international operations established by the Company and, consequently, on the
Company's business, financial condition and results of operations.
The Company plans to expand its business into international markets and
has set up a manufacturing and distribution center in Hull, England. To date,
the Company has minimal experience in marketing and distributing its products
internationally and plans to establish alliances with sales representative
organizations and resellers with particular experience in international markets.
Accordingly, the Company's success in international markets will be
substantially dependent upon the skill and expertise of such international
participants in marketing the Company's products. There can be no assurance that
the Company will be able to successfully market, sell and deliver its products
in these markets. In addition, there are certain risks inherent in doing
business in international markets, such as unexpected changes in regulatory
requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, management's lack of
international expertise, political instability and fluctuations in currency
exchange rates and potentially adverse tax consequences, which could adversely
impact the success of the Company's international operations. There can be no
assurance that one or more of such factors will not have a material adverse
effect on the Company's future international operations and, consequently, on
the company's business, financial condition or operating results. (See "Item 1.
Description of Business.")
NEED FOR CONTINUED PRODUCT DEVELOPMENT. Although the Company received
FDA clearance in February 1997 to commercially market its Tru-Pulse(R) laser for
wrinkle treatment, and in March 1997 to commercially market its Epilaser(TM) for
hair removal, the Company is continuing its development of both products. The
Company is continuing to study both laser systems to optimize performance and
treatment parameters.
DEPENDENCE ON SOLE SUPPLIERS. The Company relies on outside suppliers
for substantially all of its manufacturing supplies, parts and components.
Pyralux(R), an integral component of most of the Company's flexible circuit
products, is manufactured exclusively by E.I. du Pont de Nemours and Company
("DuPont"). Although the Company has a written agreement with DuPont under which
DuPont will supply the Company with all of its requirements for Pyralux, there
can be no assurance that the Company will be able to obtain a sufficient supply
of Pyralux to fulfill orders for its products in a timely manner, if at all.
In addition, CO2 laser tubes, an integral component of Tissue's
Tru-Pulse Laser system, are manufactured exclusively by Pulse Systems, Inc.
There can be no assurance that the Company will be able to obtain sufficient
supply of CO2 laser tubes to fulfill orders for its products in a timely manner,
if at all. Furthermore, several other component parts of the Company's cosmetic
laser products and electronic segment products are manufactured exclusively by
one supplier. There can be no assurance that the Company will be able to obtain
a sufficient supply of such components at commercially reasonable prices or at
all. A shortage of necessary parts and components or the inability of the
Company to obtain such parts and components would have a material adverse effect
on the Company's business, financial condition and results of operations. (See
"Item 1. Description of Business.")
DEPENDENCE ON SUBSTANTIAL CUSTOMERS. In the year ended December 31,
1996, one customer of Nexar, Government Technology Services, Inc. ("GTSI), a
leading supplier of desktop systems to United States government agencies,
accounted for 17.5% of the Company's revenues and 23.2% of the Company's
accounts receivable balance. In the quarter ended March 31, 1997, GTSI accounted
for 9.0% of the Company's revenues and 9.4% of the Company's accounts receivable
balance. The Company expects that GTSI will continue to be an important
customer, and that, while Nexar's revenues from GTSI will increase, such sales
as a percentage of total revenue will decline substantially as the Company
further expands its distribution network and increases its overall sales. Nexar
has entered into an agreement with GTSI pursuant to which GTSI serves as the
Company's exclusive federal reseller with respect to Government Services
Administration (GSA) scheduled purchases, provided that GTSI purchases at least
$35 million of Nexar's products in 1997. GTSI is under no obligation, however,
to purchase any products of Nexar. If GTSI makes fewer purchases in 1997 than
the Company anticipates, that would have a material adverse effect on the
Company.
40
<PAGE>
In the year ended December 31, 1996, one customer of Comtel, New Media,
Inc. ("New Media"), a related party, accounted for 22.3% of the Company's
revenues and 26.7% of the Company's accounts receivable balance. In the quarter
ended March 31, 1997, New Media accounted for 11.6% of the Company's revenues
and 18.3% of the Company's accounts receivable balance. Comtel has entered into
a five (5) year agreement with New Media whereby New Media, subcontracted to
Comtel all of its manufacturing and assembly business over the contract term. On
April 5, 1996, Palomar invested $2,345,000 in New Media preferred and common
stock and loaned New Media an additional $1,000,000. Palomar also received a
warrant to purchase 200,000 shares of common stock in New Media at $1.20 per
share. In February 1997, the note receivable was converted into equity and the
Company invested an additional $1,200,000 in New Media. The Company expects that
New Media will continue to be an important customer, but that sales to New
Media, Inc. as a percentage of total revenue will decline substantially as the
Company further expands its distribution network and increases its overall
sales. New Media has had a history of losses. There can be no assurance that New
Media will achieve profitable operations or that profitable operations will be
sustained if achieved.
A loss from either customer could have a material, adverse effect on
the Company's business in the short term. (See "Item 1. Description of Business"
and Note 2 to Financial Statements.)
HAZARDOUS SUBSTANCE AND ENVIRONMENTAL CONCERNS; LACK OF ENVIRONMENTAL
IMPAIRMENT INSURANCE. The manufacture of substrate interconnect products
involves numerous chemical solvents and other solid, chemical and hazardous
wastes and materials. Dynaco is subject to a variety of environmental laws
relating to the generation, storage, handling, use, emission, discharge and
disposal of these substances and potentially significant risks of statutory and
common law liability for environmental damage and personal injury. The Company,
and in certain circumstances, its officers, directors and employees, may be
subject to claims arising from the Company's manufacturing activities, including
the improper release, spillage, misuse or mishandling of hazardous or
non-hazardous substances or material. The Company may be strictly liable for
damages, regardless of whether it exercised due care and complied with all
relevant laws and regulations. The Company does not currently maintain
environmental impairment insurance. There can be no assurance that the Company
will not face claims resulting in substantial liability for which the Company is
uninsured or that hazardous substances are not or will not be present at the
Company's facilities. The Company believes that it operates its Dynaco
facilities in substantial compliance with existing environmental laws and
regulations. In June 1989 and April 1994, Dynaco conducted environmental studies
of its Tempe, Arizona substrate manufacturing facility and did not discover any
contamination requiring remediation. Failure to comply with proper hazardous
substance handling procedures or violation of environmental laws and regulations
would have a material adverse effect on the Company. (See "Item 1. Description
of Business.")
SIGNIFICANT OUTSTANDING INDEBTEDNESS; SUBORDINATION OF DEBENTURES. The
Company has incurred substantial indebtedness in relation to its equity capital
and will be subject to all of the risks associated with substantial leverage,
including the risk that available cash may not be adequate to make required
payments to the holders of the Company's debentures. The Company's ability to
satisfy its obligations under the debentures from cash flow will be dependent
upon the Company's future performance and will be subject to financial, business
and other factors affecting the operation of the Company, many of which may be
beyond the Company's control. In the event the Company does not have sufficient
cash resources to satisfy quarterly interest or other repayment obligations to
the holders of the debentures, the Company will be in default under the
debentures, which would have a material adverse effect on the Company. To the
extent that the Company is required to use cash resources to satisfy interest
payments to the holders of the debentures, it will have less resources available
for other purposes. Inability of the Company to repay the debentures upon
maturity would have a material adverse effect on the Company, which could result
in a reduction of the price of the Company's Shares. The debentures will be
unsecured and subordinate in right of payment to all senior indebtedness of the
Company. The debentures do not restrict the Company's ability to incur
additional senior indebtedness and most other indebtedness. The terms of senior
indebtedness now existing or incurred in the future could affect the Company's
ability to make payments of principal and/or interest to the holders of
debentures. (See "Item 5. Market for Common Equity and Related Shareholder
Matters"; March 31, 1997 Form 10-Q, Part II "Item 2. Changes in Securities" and
Note 8 to Financial Statements.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which prohibit the Company from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control
41
<PAGE>
of the Company. The Company's stock option grants generally provide for an
exercise of some or all of the optioned stock, including non-vested shares, upon
a change of control or similar event. The Board of Directors has authority to
issue up to 5,000,000 shares of Preferred Stock and to fix the rights,
preference, privileges and restrictions, including voting rights, of these
shares without any further vote or action by the stockholders. The rights of the
holders of the Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change in control of the Company. Furthermore, such
Preferred Stock may have other rights, including economic rights senior to the
Common Stock, and, as a result, the issuance of such Preferred Stock could have
a material adverse effect on the market value of the Common Stock. (See
"Issuance of Preferred Stock and Debentures Could Affect Rights of Common
Shareholders.")
RISKS ASSOCIATED WITH PENDING LITIGATION. 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.
On October 7, 1996 the Company filed a declaratory judgment action
against MEHL/Biophile ("MEHL") in the United States District Court of the
District of Massachusetts 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 or hair removal before it had received FDA
approval for that specific application. The Company and Selvac have 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. Automatic discovery will commence shortly. The extent of exposure of the
Company cannot be determined at this time.
The Company is a defendant in a lawsuit filed by Commonwealth
Associates ("Commonwealth") on March 14, 1996 in the United States District
Court for the Southern District of New York. In its suit, Commonwealth alleges
that the Company 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, after a damages trial before a
magistrate judge in April 1997, the court awarded Commonwealth $2,917,500 (and
interest of $256,570.56). The Company will appeal the matter and believes its
grounds for appeal are meritorious. (See March 31, 1997 Form 10-Q "Part II, Item
1. Legal Proceedings.")
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ITEM 7. FINANCIAL STATEMENTS
PALOMAR MEDICAL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-3
Consolidated Statements of Operations for the years ended December 31, 1995
and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995
and 1996 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995
and 1996 F-7
Notes to Consolidated Financial Statements F-10
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Palomar Medical Technologies, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Palomar
Medical Technologies, Inc. (a Delaware corporation) and subsidiaries, as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Palomar Medical
Technologies, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts,
March 7, 1997 (Except with respect
to the matter discussed in Note15(a) as
to which the date is March 31, 1997)
F-2
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
December 31, December 31,
1995 1996
ASSETS
Current Assets:
Cash and cash equivalents $17,138,178 $16,172,731
Marketable securities 749,410 2,893,792
Accounts receivable, net of allowance for doubtful accounts of 4,737,766 18,308,077
approximately $445,000 and $3,113,000, respectively
Inventories 3,649,884 18,790,484
Loans to officers 948,198 995,331
Notes receivable related parties 3,161,375 464,153
Other notes receivable --- 899,937
Other current assets 352,130 7,623,161
----------- -----------
Total current assets 30,736,941 66,147,666
----------- -----------
Property and Equipment, at Cost, Net 3,165,015 8,404,605
Other Assets:
Cost in excess of net assets acquired, net of accumulated 3,729,508 5,024,299
amortization of approximately $673,000 and $1,480,000,
respectively
Intangible assets, net of accumulated amortization of approximately 1,597,745 2,286,058
and $1,025,000, respectively
Deferred costs 809,120 2,895,803
Long-term investments 500,000 3,179,554
Loan to related party 700,000 1,100,000
Other assets 631,831 1,719,211
---------- ----------
Total other assets 7,968,204 16,204,925
---------- ----------
$41,870,160 $90,757,196
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving lines of credit $1,296,462 $4,558,052
Current portion of long-term debt 2,574,265 2,783,683
Contingent note payable 500,000 ---
Accounts payable 4,246,950 14,304,285
Accrued expenses 4,633,557 14,669,893
---------- ----------
Total current liabilities 13,251,234 36,315,913
---------- ----------
Long-Term Debt, Net of Current Portion 3,330,172 16,204,692
---------- ----------
Minority Interest in Subsidiary --- 160,000
---------- ----------
Commitments and Contingencies (Note 13)
Stockholders' Equity:
Preferred stock, $.01 par value- 139 182
Authorized - 5,000,000 shares
Issued and outstanding -
13,860 shares and 18,151 shares
at December 31, 1995 and 1996
(Liquidation preference of $18,645,956 as of December 31,
1996)
Common stock, $.01 par value- 201,353 305,968
Authorized - 100,000,000 shares
Issued and outstanding - 20,135,406 shares
and 30,596,812 shares at December 31, 1995 and 1996
Additional paid-in capital 54,152,385 104,900,551
Accumulated deficit (25,864,657) (64,971,200)
Unrealized loss on marketable securities --- (342,500)
Subscriptions receivable from related party (1,988,709) (604,653)
Less: Treasury Stock (200,000 shares at cost) (1,211,757) (1,211,757)
---------- ------------
Total stockholders' equity 25,288,754 38,076,591
---------- ------------
$41,870,160 90,757,196
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1995 1996
Revenues $21,906,504 $70,098,443
Cost of evenues 17,192,470 63,177,555
----------- -----------
Gross profit 4,714,034 6,920,888
----------- -----------
Operating Expenses
Research and development 4,419,487 7,977,085
Sales and marketing 2,768,541 11,420,943
General and administrative 7,879,694 21,569,054
Business development
and other financing costs 1,409,303 2,879,603
Settlement and Litigation Costs 700,000 2,255,000
Merger expenses -- 443,780
---------- -----------
Total operating expenses 17,177,025 46,545,465
---------- -----------
Loss from operations (12,462,991) (39,624,577)
Interest Expense (1,374,199) (1,443,564)
Interest Income 913,050 1,586,620
Net Gain on Trading Securities 201,067 2,033,371
Gain On Sale of Stock of a Subsidiary -- 3,830,000
Other Income (Expense) 102,305 (4,245,642)
----------- -----------
Net loss $(12,620,768) $(37,863,792)
=========== ============
Net Loss Per Common Share $(0.89) $(1.49)
========== ============
Weighted Average Number of
Common Shares Outstanding 14,164,901 26,166,538
========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<S> <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, 1994 -- $-- 9,464,963 $94,649 -- $--
Sale of common stock pursuant to warrants and options -- -- 2,925,093 29,251 -- --
Sale of common stock -- -- 1,622,245 16,223 -- --
Payments received on subscriptions receivable -- -- -- -- -- --
Issuance of preferred stock, including common stock
issuedas a placement fee, net of issuance costs 21,295 213 300,000 3,000 -- --
Purchase of treasury stock -- -- -- -- (200,000) (1,211,757)
Issuance of common stock in lieu of payment of notes payab -- -- 632,144 6,321 -- --
Repayment of convertible debentures -- -- -- -- -- --
Conversion of convertible debentures -- -- 1,943,870 19,438 -- --
Value ascribed to convertible debentures -- -- -- -- -- --
Value ascribed to warrant in exchange for license technolo -- -- -- -- -- --
Issuance of common stock for technology -- -- 739,546 7,395 -- --
Conversion of preferred stock (7,435) (74) 1,775,691 17,757 -- --
Exercise of underwriter's warrants -- -- 200,000 2,000 -- --
Issuance of common stock for Spectrum Medical Tech., Inc. -- -- 364,178 3,642 -- --
Issuance of common stock for investment banking and merger
and acquisition consulting services -- -- 167,676 1,677 -- --
Amortization of deferred financing costs -- -- -- -- -- --
Compensation expense related to warrants issued to
consultants and investment bankers -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
Balance, December 31, 1995 13,860 $139 20,135,406 $201,353 (200,000 $(1,211,757)
Additional Unrealized Total
Paid-in Accumulated Loss On Subscriptions Stockholders'
Capital Deficit Marketable Securities Receivable Equity
--------------------------------------------------------------------------
Balance, December 31, 1994 $15,773,109 $(13,119,279) $-- $-- $2,748,479
Sale of common stock pursuant to warrants and options 7,588,888 -- -- (4,633,975) 2,984,164
Sale of common stock 2,935,921 -- -- -- 2,952,144
Payments received on subscriptions receivable -- -- -- 3,694,840 3,694,840
Issuance of preferred stock, including common stock
issued as as a placement fee, net of
issuance costs 19,382,750 -- -- -- 19,385,963
Purchase of treasury stock -- -- -- -- (1,211,757)
Issuance of common stock in lieu of payment of notes
payable 1,873,611 -- -- -- 1,879,932
Repayment of convertible debentures (321,533) -- -- -- (321,533)
Conversion of convertible debentures 3,071,302 -- -- -- 3,090,740
Value ascribed to convertible debentures 899,813 -- -- -- 899,813
Value ascribed to warrant in exchange for license technolo 100,000 -- -- -- 100,000
Issuance of common stock for technology 292,605 -- -- -- 300,000
Conversion of preferred stock 68,377 -- -- -- 86,060
Exercise of underwriter's warrants 1,049,574 -- -- (1,049,574) 2,000
Issuance of common stock for Spectrum Medical Tech., Inc. 996,358 -- -- -- 1,000,000
Issuance of common stock for investment banking and merger
and acquisition consulting services 416,823 -- -- -- 418,500
Amortization of deferred financing costs (70,583) -- -- -- (70,583)
Compensation expense related to warrants issued to
consultants and investment bankers 95,370 -- -- -- 95,370
Preferred stock dividends -- (124,610) -- -- (124,610)
Net loss -- (12,620,768) -- -- (12,620,768)
----------------------------------------------------------------------
Balance, December 31, 1995 $54,152,385 $(25,864,657) $-- $(1,988,709) $25,288,754
=======================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(continued)
<TABLE>
<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, 1995 13,860 $139 20,135,406 $201,353 (200,000) $(1,211,757)
Sale of common stock pursuant to warrants and options -- -- 2,967,996 29,681 -- --
Sale of common stock -- -- 1,176,205 11,762 -- --
Payments received on subscriptions receivable -- -- -- -- -- --
Issuance of preferred stock, including common stock
issued as a placement fee, net of issuance costs 32,000 320 115,000 1,150 -- --
Issuance of common stock for 1995 employer 401(k)
matching contribution -- -- 45,885 459 -- --
Conversion of preferred stock, including accrued
dividends and interest of $782,602 (25,209) (252) 4,481,518 44,815 -- --
Conversion of convertible debentures -- -- 34,615 346 -- --
Redemption of convertible debentures -- -- -- -- -- --
Value ascribed to convertible debentures -- -- -- -- -- --
Redemption of preferred stock (2,500) (25) -- -- -- --
Exercise of underwriter's warrants -- -- 500,000 5,000 -- --
Exercise of stock options in majority controlled
subsidiary -- -- -- -- -- --
Issuance of common stock for conversion of
debentures at Tissue Technologies, Inc. -- -- 813,431 8,134 -- --
Issuance of common stock for minority interest
in Star Medical subsidiary -- -- 224,054 2,241 -- --
Issuance of common stock in exchange for license
rights -- -- 56,900 569 -- --
Issuance of common stock for acquisition of
Dermascan, Inc. -- -- 35,000 350 -- --
Issuance of common stock for investment banking
and merger and acquisition consulting services -- -- 56,802 568 -- --
Compensation expense related to warrants issued to
non-employees under SFAS No. 123 -- -- -- -- -- --
Return of escrowed shares -- -- (46,000) (460) -- --
Amortization of deferred financing costs -- -- -- -- -- --
Unrealized loss on marketable securities -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------------
Balance, December 31, 1996 18,151 $182 30,596,812 $305,968 (200,000) $(1,211,757)
======================================================================
</TABLE>
<TABLE>
<C> <C> <C> <C> <C> <C>
Additional Unrealize Total
Paid-in Accumulated Loss on Subscriptions Stockholders'
Capital Deficit Marketable Receivable Equity
Securities
----------------------------------------------------------------------
Balance, December 31, 1995 $54,152,385 $(25,864,657) $-- $(1,988,709) $25,288,754
Sale of common stock pursuant to warrants
and options 7,569,226 -- -- -- 7,598,907
Sale of common stock 6,049,618 -- -- -- 6,061,380
Payments received on subscriptions receivable -- -- -- 2,441,556 2,441,556
Issuance of preferred stock, including common
stock issued as a placement fee, net
of issuance costs 30,821,677 -- -- -- 30,823,147
Issuance of common stock for 1995 employer 401(k)
matching contribution 160,139 -- -- -- 160,598
Conversion of preferred stock, including accrued
dividends and interest of $782,602 744,124 -- -- -- 788,687
Conversion of convertible debentures 145,260 -- -- -- 145,606
Redemption of convertible debentures (41,530) -- -- -- (41,530)
Value ascribed to convertible debentures 2,757,860 -- -- -- 2,757,860
Redemption of preferred stock (3,123,127) -- -- -- (3,123,152)
Exercise of underwriter's warrants 1,057,500 -- -- (1,057,500) 5,000
Exercise of stock options in majority
controlled subsidiary 50,000 -- -- -- 50,000
Issuance of common stock for conversion
of debentures at Tissue Technologies, Inc. 1,019,022 -- -- -- 1,027,156
Issuance of common stock for minority interest
in Star Medical subsidiary 1,747,482 -- -- -- 1,749,723
Issuance of common stock in exchange for
license rights 369,574 -- -- -- 370,143
Issuance of common stock for acquisition
of Dermascan, Inc. 489,650 -- -- -- 490,000
Issuance of common stock for investment
banking and merger and acquisition
consulting services 476,156 -- -- -- 476,724
Compensation expense related to warrants
issued to non-employees under SFAS No. 123 532,758 -- -- -- 532,758
Return of escrowed shares 460 -- -- -- --
Amortization of deferred financing costs (77,683) -- -- -- (77,683)
Unrealized loss on marketable securities -- -- (342,500) -- (342,500)
Preferred stock dividends -- (1,242,751) -- -- (1,242,751)
Net loss -- (37,863,792) -- -- (37,863,792)
-------------------------------------------------------------------------
Balance, December 31, 1996 $104,900,551 $(64,971,200) $(342,500) $(604,653) $38,076,591
=========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<C> <C> <C>
Year ended December 31,
1995 1996
------------- -------------
Cash Flows from Operating Activities
Net loss $(12,620,768) $(37,863,792)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 1,825,673 3,916,221
Settlement and litigation costs 700,000 2,255,000
Gain on sale of stock of a subsidiary -- (3,830,000)
Write-off of in-process research and development -- 57,212
Write-off of intangible assets -- 631,702
Write-off of deferred financing costs associated with
redemption of convertible debentures -- 201,500
Valuation allowances for notes and investments -- 4,996,038
Minority interest in loss of subsidiary (102,305) --
Accrued interest receivable on note
and subscription receivable -- (568,917)
Foreign currency exchange gain -- (446,596)
Noncash interest expense related to debt 220,280 163,680
Noncash compensation related to common stock and warrant 95,370 836,982
Realized gain on marketable securities -- (835,197)
Unrealized gain on marketable securities (133,568) (1,198,174)
Changes in assets and liabilities, net of effects
from business combinations;
Purchases of marketable securities (615,842) (10,355,055)
Sale of marketable securities and
interest received on marketable securities 50,000 10,244,044
Accounts receivable, net (1,479,532) (13,806,643)
Inventories (1,419,030) (14,975,426)
Other current assets and loans to officers (658,012) (1,809,381)
Accounts payable 1,770,100 9,902,024
Accrued expenses 2,159,702 6,251,560
------------ -------------
Net cash used in operating activities (10,207,932) (46,233,218)
------------ -------------
Cash Flows from Investing Activities
Cash paid for purchase of Comtel Electronics, Inc., net of -- (146,586)
Cash acquired from purchase of Spectrum Medical
Technologies, Inc., and CD Titles, Inc. 101,207 --
Cash paid for purchase of Inter-connecting Products, Inc. (397,199) --
Proceeds from sale of subsidiary stock -- 2,000,000
Purchases of property and equipment (1,147,945) (5,142,128)
Increase in intangible assets -- (410,647)
Increase in other assets (695,673) (1,125,333)
Loans to related parties (3,861,375) (7,338,625)
Loans to non-related parties -- (2,236,531)
Payments received on loans to related parties -- 9,322,284
Investment in nonmarketable securities (500,000) (5,767,054)
Increase in organizational costs (500,000) --
------------ -------------
Net cash used in investing activities (7,000,985) (10,844,620)
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<C> <C> <C>
Year ended December 31,
1995 1996
--------- ----------
Cash Flows from Financing Activities
Proceeds from issuance of convertible debentures 4,150,000 14,169,441
Proceeds from notes payable 2,630,000 --
Deferred financing costs incurred related to
convertible debemtures (182,000) (1,365,217)
Redemption of convertible debentures (1,048,967) (930,000)
Payments of notes payable and capital lease obligations (1,653,957) (944,413)
Net (payments) proceeds from revolving lines of credit (616,538) 3,261,590
Proceeds from sale of common stock 2,952,144 6,061,380
Exercise of warrants 6,194,955 7,111,684
Issuance of preferred stock 19,385,963 30,823,147
Purchase of treasury stock (1,211,757) --
Payment of contingent note payable -- (500,000)
Redemption of preferred stock, including accrued dividends -- (3,194,375)
Payments received on subscriptions receivable -- 2,009,592
Deferred costs -- (932,661)
Proceeds from exercise of stock options 484,049 542,223
----------- ----------
Net cash provided by financing activities 31,083,892 56,112,391
----------- ----------
Net increase (decrease) in cash and cash equivalents 13,874,975 (965,447)
Cash and cash equivalents, beginning of year 3,263,203 17,138,178
----------- ----------
Cash and cash equivalents, end of year $17,138,178 $16,172,731
=========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $542,294 $599,011
=========== ===========
Supplemental Disclosure of Noncash Financing and Investing Activities:
Conversion of convertible debentures and related accrued
interest, net of financing fees $3,190,740 $1,172,762
=========== ===========
Subscriptions received in connection with warrant
exercises $1,988,709 $1,057,500
=========== ===========
Issuance of common stock in lieu of payment of
notes payable $1,879,932 $--
=========== ===========
Conversion of preferred stock $86,060 $788,687
=========== ===========
Property acquired under capital leases $196,321 $1,135,189
=========== ===========
Issuance of common stock in exchange for license rights $300,000 $370,143
=========== ===========
Purchase of technology $--- $1,375,000
=========== ===========
Investment banking and consulting fees for services
related to the issuance of common stock and
convertible debentures $120,000 $709,224
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<C> <C> <C>
Year ended December 31,
1995 1996
--------- -----------
Supplemental Disclosure of Noncash Financing and Investing Activities
Value ascribed to warrants in exchange for
license technology $100,000 $--
========= ===========
Issuance of common stock for 1995 employer 401(k)
matching contribution $-- $160,598
========= ===========
Issuance of common stock for minority interest
in Star Medical subsidiary $-- $1,749,723
========= ===========
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)
========= ===========
Acquisition of Dermascan, Inc.
Liabilities assumed $-- $(39,980)
Fair value of assets acquired -- 28,126
Fair value of common stock issued -- (490,000)
--------- -----------
Cost In Excess of Net Assets Acquired $-- $(501,854)
========= ===========
Acquisition of Spectrum Medical Technologies, Inc.
Liabilities assumed $(1,128,139) $--
Fair value of assets acquired 1,456,920 --
Fair value of 364,178 shares of common stock issued (1,000,000) --
Promissory note issued (700,000) --
Cash paid (300,000) --
Acquisition costs incurred (161,138)
------------ -----------
Cost in Excess of Net Assets Acquired $(1,832,357) $--
============ ===========
Acquisition of CD Titles, Inc.
Liabilities assumed $(1,271,345) $--
Fair value of assets acquired 1,271,345 --
------------ -----------
Cost In Excess of Net Assets Acquired $-- $--
============ ===========
Acquisition of Inter-connecting Products, Inc.
Liabilities assumed $(201,761) $--
Fair value of assets acquired 598,960 --
Cash Paid (397,199) --
------------ -----------
Cost In Excess of Net Assets Acquired $-- $--
============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND OPERATIONS
Palomar Medical Technologies, Inc. and subsidiaries ("Palomar" or the
"Company") is engaged in two business segments: medical device products and
services and electronic products and services. The medical device products
segment consists of the commercial sales and development of cosmetic and medical
laser systems and services. The electronics products segment consists of the
manufacture and sale of personal computers, high density flexible electronics
circuitry and memory modules.
The Company also makes early stage investments in core technologies and
companies that management feels are strategic to the Company's business or will
yield a higher than average financial return to support the Company's core
business. Some of these investments are with companies associated with some of
the directors and officers of the Company (See Note 11).
Some of the Company's medical laser and electronic products are in
various stages of development, and, as such, success of future operations is
subject to a number of risks similar to those of other companies in similar
stages of development. Principal among these risks are the successful
development and marketing of its products, proper regulatory approval, the need
to achieve profitable operations, competition from substitute products and
larger companies, the need to obtain adequate financing to fund future
operations and dependence on key individuals.
The Company has incurred significant losses since inception. 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 outside
short-term financial investments primarily through the private sale of debt and
equity securities of the Company. The Company raised a total of $56,112,391 and
$31,083,892 in such financings during the years ended December 31, 1996 and
1995, respectively. The Company anticipates that it will require additional
financing during the next twelve-month period 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.
Sales of securities to private investors are sold at a discount to the public
market for similar securities. It has been the Company's experience that private
investors require that the Company make its best effort to register these
securities for resale to the public at some future time.
MEDICAL SEGMENT BUSINESS DEVELOPMENTS
STAR MEDICAL TECHNOLOGIES, INC.
On April 22, 1996, the Company purchased the remaining 14.5% of the
outstanding common stock of Star Medical Technologies, Inc. ("Star") which it
did not already own in exchange for 224,054 shares of Palomar's common stock
valued between $6 and $8 per share. This agreement restricts, for a period of
two years, the sale of the Company's common stock issued in connection with this
agreement. The purchase price has been recorded as additional goodwill and is
being amortized over a period of five years. In connection with this agreement
the original founders of Star have agreed to rescind all royalties due to them
under a Rights Agreement dated July 1, 1993. To date, revenues from Star have
not been significant.
SPECTRUM MEDICAL TECHNOLOGIES, INC.
On April 5, 1995, the Company acquired all of the outstanding common
stock of Spectrum Medical Technologies, Inc. ("Spectrum"). The purchase price
consisted of $300,000 in cash, a $700,000 two-year promissory note, 364,178
shares of the Company's common stock with an aggregate fair market value of
$1,000,000, acquisition costs of $161,138 and assumed liabilities totaling
F-10
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
$1,128,139. In addition, the purchase price includes a 20% contingency payment,
payable in the Company's common stock, based upon the future earnings
performance of Spectrum over a three to five-year period, which will be recorded
as additional goodwill if earned. Spectrum develops, manufactures, sells and
services ruby lasers throughout the world for dermatological applications
including the recently (March 1997) FDA approved EpiLaser. The acquisition has
been accounted for as a purchase in accordance with Accounting Principles Board
("APB") Opinion No. 16.
SPECTRUM FINANCIAL SERVICES LLC
On June 30, 1995, the Company formed Spectrum Financial Services LLC
("SFS"), a Limited Liability Company. SFS provides financial leasing services
for medical and electronic manufacturers both related and unrelated to the
Company. The Company has majority control over the operating activities of this
entity. Accordingly, the Company has consolidated the results of operations and
financial position of SFS since the date of formation. To date, the operations
of SFS have not been a significant.
TISSUE TECHNOLOGIES, INC.
On May 3, 1996, the Company acquired 100% of Tissue Technologies, Inc.
("Tissue Technologies"), a manufacturer of a dermatology laser product for the
treatment of wrinkles, in exchange for 3,200,000 shares of the Company's common
stock. The Company has accounted for this acquisition as a pooling-of-interest
in accordance with APB No. 16. Tissue Technologies is engaged in the
manufacturing, marketing and sales of the Tru-Pulse C02 laser system used in
skin resurfacing and treatment of wrinkles.
DERMASCAN, INC.
On July 18, 1996 the Company purchased 80 shares of common stock (80%
of total issued and outstanding capital stock) of Dermascan, Inc. ("Dermascan")
from a Dermascan stockholder in exchange for 35,000 shares of the Company's
common stock. The Company included these 35,000 shares in a registration
statement that became effective February 28, 1997. In addition, the Company
agreed to pay the Dermascan stockholder an amount equal to the difference
between $14.00 and the $7.8125, the closing bid price on February 28, 1997. The
Company has recorded the acquisition at a price of $490,000 in total. Dermascan
markets and sells electrology equipment and supplies to the electrology market.
To date, the operations of Dermascan have not been significant.
PALOMAR TECHNOLOGIES, LTD.
On November 13, 1996, the Company formed Palomar Technologies, Ltd.
located in Hull, England. The purpose of the formation of this company was to
establish a European entity to manufacture, sell and service laser products
throughout Europe and provide a low-cost sourcing alternative for specialty
components. Operations are expected to begin in mid-1997. Through March 7, 1997,
the Company has funded this subsidiary with approximately $1,600,000 for the
purchase of office building and lease of its manufacturing facilities and the
hiring of certain key employees, and is committed to fund this subsidiary an
additional $1 million. Subsequent to year end, Palomar Technologies Ltd. entered
into employment agreements with several individuals and issued stock options to
purchase up to 49% of the outstanding common shares of Palomar Technologies Ltd.
Under the terms of the employment agreements, the optionholders have the right
to require the Company to purchase all or a portion of these common shares
exercised pursuant to such stock option at a purchase price based on an earnings
formula as defined.
PALOMAR MEDICAL PRODUCTS, INC.
In February 1997, Palomar Medical Products, Inc. ("Palomar Medical
Products") was formed with the purpose of consolidating the management and
operations of the medical products companies. In January 1997, the Company named
an outside party as the President and CEO of Palomar Medical Products to oversee
and manage the operations. Included in the medical products group are the
following companies; Spectrum, Tissue, Star, Dermascan and Palomar Technologies,
Ltd.
F-11
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
COSMETIC TECHNOLOGY INTERNATIONAL, INC.
On December 20, 1996, the Company formed Cosmetic Technology
International, Inc. ("CTI"). CTI is a service company which intends to establish
a worldwide network of cosmetic, dermatological laser and medical device sites
with medical service partners (both fixed and mobile) in key geographic
locations. Each site will be provided a turnkey package of laser and medical
device technology, equipment and services. To date, the operations of CTI have
not been significant. ELECTRONICS SEGMENT BUSINESS DEVELOPMENTS
NEXAR TECHNOLOGIES, INC.
On March 7, 1995, the Company formed Nexar Technologies, Inc.
("Nexar"). Nexar is an early-stage company that manufactures, markets and sells
personal computers with a unique circuit board design that will enable end users
to upgrade and replace the microprocessor, memory and hard drive components.
Nexar markets its products using various proprietary brand names through
multiple channels of distribution, including the wholesale, retail and direct
response channels.
In December 1996 the Company sold 400,000 shares of Nexar common stock
for $4,000,000, of which $2,000,000 was collected prior to year end and
$2,000,000 is in other current assets in the consolidated balance sheet. One of
the purchasers of 200,000 shares is a shareholder of the Company. The Company
recognized a gain on this sale of $3,830,000 in the consolidated statement of
operations. Subsequent to year end, the Company sold an additional 200,000
shares of Nexar common stock for $2,000,000 to another Company shareholder. The
subsequent to year end sale of Nexar common stock includes an option
arrangement, whereby the purchaser has the option to exchange the shares of
Nexar common stock, as defined, for $2,000,000 of the Company's common stock
based on a discounted value as defined, if an option exercise event occurs,
based on the value of the Company's stock on the exchange date. The option
exercise terminates upon the completion of Nexar's initial public offering.
On April 14, 1997 Nexar completed its initial public offering of
2,500,000 shares of its common stock for its own account, as well as shares held
by Nexar shareholders. The price per share was $9.00 and Nexar raiseed net
proceeds of approximately $20.3 million. Following this offering, Palomar will
beneficially own approximately 67% of Nexar's common stock. Included in this
percentage is (i) 1,200,000 shares of Nexar's common stock owned by Palomar that
are subject to a contingent repurchase right by Nexar for an aggregate price of
$12,000 in the event that Nexar does not achieve certain performance milestones
set forth in an agreement between Nexar and Palomar, and (ii) 408,000 shares of
Nexar common stock which Palomar may acquire upon the conversion of 45,684
shares of Nexar Convertible Preferred Stock that it also owns. The 1,200,000
shares of common stock subject to the contingent repurchase right of Nexar will
be held in escrow and released to Palomar upon Nexar attaining certain revenue
levels ranging from $100 million to $400 million and net income levels ranging
from $7 million to $28 million over a four year period ending December 31, 2000,
as defined in the agreement between Nexar and the Company. These shares may also
be released from escrow upon Nexar attaining a specified minimum stock price
ranging from $15.75 per share to $29.25 per share over this four year period
ending December 31, 2000, and if the Company achieves cumulative net income
totaling $70,000,000 through December 31, 2000. These shares will also be
released if Nexar is party to any merger or sale of substantially all of its
assets.
Upon completion of the offering, Nexar will repay the Company
approximately $8,200,000 from the net proceeds received from this offering.
CD TITLES, INC.
On July 13, 1995, CD Titles, Inc. ("CD Titles") was incorporated. The
Company owns substantially all of CD Titles' outstanding common stock. During
July 1995, certain minority stockholders of CD Titles loaned CD Titles a total
of $600,000. On July 31, 1995, CD Titles purchased certain assets and assumed
certain liabilities of CD Titles totaling $1,271,345. The purchase price
consisted of $625,000 in cash and a $600,000 note payable due September 30,
1995, which was guaranteed by the Company. CD Titles is a CD ROM publishing
company that distributes various materials on CD ROM through personal computer
F-12
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
wholesale channels in the United States. The acquisition has been accounted for
as a purchase in accordance with the APB No. 16.
CD Titles defaulted on its loans to the minority stockholders, and on
October 30, 1995 the Company negotiated a settlement with the minority
stockholders by agreeing to issue 257,144 shares of the Company's common stock
in lieu of the then outstanding principal and accrued interest (approximately
$794,000 at October 30, 1995). The common stock was issued at a 35% discount of
the closing bid price of the stock on October 30, 1995. The discount represented
the Company's cost of acquiring capital and was consistent with discounts
offered in similar financings during 1995.
In addition to the settlement of the minority stockholders' notes, the
Company entered into a settlement agreement with the former stockholders.
Pursuant to the settlement agreement, the Company registered 175,000 shares of
its authorized, but unissued common stock (the "pledged shares") which were then
issued to the former shareholders of CD Titles for resale. As part of the
agreement, the former shareholders of CD Titles would sell only the amount of
pledged shares to receive proceeds equal to the outstanding principal and
accrued interest on the note payable, which totaled $628,531, due on September
30, 1995, as part of the acquisition of CD Titles. In 1996, the former
shareholders of CD Titles returned 46,000 of the pledged shares, which
represents the unused portion. The Company has retired the returned shares.
DYNAMEM, INC.
On September 28, 1995, Dynaco Corp. ("Dynaco") formed Dynamem
Corporation ("Dynamem") (a Delaware Corporation) and contributed $8,000 for a
majority (80%) ownership in this subsidiary. The remaining 20% ownership is
owned by the president of Dynamem (the "Joint Owner"). Dynamem was formed to
manufacture and distribute a patented, high-density memory packaging technology.
The Joint Owner granted Dynamem a non-exclusive license to manufacture, use,
sell and sublicense certain patented FRAMM technology in exchange for certain
royalty payments. The royalities are guaranteed by Dynaco. Dynaco and the Joint
Owner also entered into a stockholders' agreement which grants the Joint Owner
the right, upon the earlier of December 29, 2000, or the termination of his
employment with Dynamem, to require Dynaco to purchase a total of 75% of the
securities owned by the Joint Owner in Dynamem. In addition, if the Company
purchases the Joint Owner's shares, the Joint Owner may elect to receive between
35% and 100% of the purchase price in the form of common stock of the Company.
PALOMAR ELECTRONICS CORPORATION
On September 15, 1995, the Company formed Palomar Electronics
Corporation ("PEC"), as part of a reorganization to separate the electronics and
computer operations of the Company's business from the medical laser segments of
its business. On September 29, 1995, as part of this reorganization, the Company
contributed all of its outstanding capital stock of Dynaco and Nexar, together
with certain intercompany indebtedness, to PEC in exchange for 4,500,000 shares
of common stock of PEC. On December 21, 1995, PEC issued 10% bridge notes
payable to certain investors for an aggregate consideration of $1,350,000 (see
Note 4). In connection with these notes, PEC issued to the noteholders warrants
to purchase up to 240,000 shares of its common stock. During the year ended
December 31, 1995, the Company started, but did not complete, an initial public
offering of PEC and incurred costs of approximately $438,000. This amount is
included in business development and other financing costs in the accompanying
consolidated statement of operations for the year ended December 31, 1995.
COMTEL ELECTRONICS, INC.
During 1996, Dynaco acquired 80.23% ownership Comtel Electronics, Inc.
("Comtel") by converting a $100,000 note receivable into equity of Comtel and
paying $27,500 in cash. Effective December 31, 1996, as part of a
recapitalization of Comtel, Dynaco exchanged $2,200,000 in intercompany
receivables due from Comtel and used by Comtel to fund its operations for an
additional 11.98% ownership in Comtel. This transaction resulted in Dynaco
owning 97.3% of Comtel. The remaining 2.7% ownership is held by two individuals.
The acquisition has been accounted for as a purchase in accordance with APB No.
16. Accordingly, the Company has allocated the purchase price based on the fair
market value of assets acquired and liabilities assumed. The results of Comtel
have been included with those of the Company since March 20, 1996.
F-13
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
PRO FORMA INFORMATION
The results of operations related to Spectrum have been included with
those of the Company since April 5, 1995.
The results of operations related to CD Titles, Inc./CDRP have been
included with those of the Company since July 31, 1995.
The results of operations related to Comtel have been included with
those of the Company since March 20, 1996.
The results of operations related to Dermascan have been included with
those of the Company since July 18, 1996
F-14
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Unaudited pro forma operating results for the Company, assuming the
acquisitions of Spectrum and Comtel had been made as of January 1, 1995, are as
follows (operations of CD Titles and Dermascan prior to acquisition were
insignificant):
Year Ended
1995 1996
----------- -----------
Revenue $31,051,600 $70,483,048
Net loss (16,827,709) (37,901,990)
Net loss per common share $(1.20) $(1.49)
Separate and combined results of the Company and Tissue Technologies
preceding the merger were as follows:
<TABLE>
<S> <C> <C> <C> <C>
Tissue Palomar Combined
Four Months Ended May 3, 1996 (unaudited)
Net Revenues $3,093,804 $10,255,380 $13,349,184
Net Loss $(1,731,775) $(8,259,386) $(9,991,161)
Year Ended December 31, 1995
Net Revenues $114,425 $21,792,079 $21,906,504
Net Loss $(1,969,793) $(10,650,975) $(12,620,768)
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain accounting policies described below and elsewhere in the
Notes to Consolidated Financial Statements.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the
consolidated financial position, results of operations and cash flows of the
Company and all wholly-owned and majority-owned subsidiaries. All other
investments are accounted for using the cost method as the Company owns less
than 20% of the common stock outstanding for these investments. All intercompany
transactions have been eliminated in consolidation.
(B) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. As of
December 31, 1996, the Company also has investments in marketable and
nonmarketable securities and loans to related parties totaling $8,632,830. The
amount that the Company may ultimately realize from these investments could
differ materially from the value of these investments recorded in the
accompanying consolidated financial statements as of December 31, 1996.
(C) INVESTMENTS
The fair values for the Company's marketable securities are based on
quoted market prices. The fair values of nonmarketable equity securities which
totaled $2,400,000 at December 31, 1996 represent equity investments in early
stage technology companies, and are based on the financial information provided
by these ventures. The Company periodically performs a financial analysis to
F-15
<PAGE>
evaluate whether a permanent impairment has occurred. The amount that the
Company realizes from these investments may differ significantly from the
amounts recorded in the accompanying consolidated financial statements.
The Company accounts for marketable securities in accordance with SFAS
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under
SFAS No. 115, securities that the Company has the positive intent and ability to
hold to maturity are reported at amortized cost are classified as
held-to-maturity. There were no held-to-maturity securities as of December 31,
1995 and 1996. Securities purchased to be held for indefinite periods of time
and not intended at the time of purchase to be held until maturity are
classified as available-for-sale securities. Unrealized gains and losses
relating to available-for-sale securities are included as a separate component
of stockholders' equity. 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 in the accompanying consolidated statements of operations. The Company
has deemed its portfolios at December 31, 1995 and 1996 to consist of
available-for-sale and trading securities summarized as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
December 31, 1995
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gain Loss Value
------------ ------------ ------------- -------------
Trading Securities:
Investments in publicly
traded companies $615,842 $137,170 $3,602 $749,410
============ ============ ============= =============
December 31, 1996
------------------------------------------------------
Trading Securities:
Investments in publicly
traded companies $1,695,618 $1,537,614 $339,440 $2,893,792
Available-for-Sale (long-term):
Investments in publicly
traded companies 1,000,000 --- 342,500 657,500
------------ ------------ ------------- -------------
$2,695,618 $1,537,614 $681,940 $3,551,292
============ ============ ============= =============
</TABLE>
(D) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Work-in-process and finished goods inventories consist of material,
labor and manufacturing overhead. At December 31, 1995 and 1996, inventories
consist of the following:
<TABLE>
<S> <C> <C>
December 31,
1995 1996
---------------- ----------------
Raw materials $1,949,288 $13,266,204
Work-in-process and finished goods 1,700,596 5,524,280
---------------- ----------------
$3,649,884 $18,790,484
================ ================
</TABLE>
F-16
<PAGE>
(E) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization on property and
equipment using the straight-line method, by charging to operations amounts that
allocate the cost of assets over their estimated useful lives as follows:
Estimated
Asset Classification Useful Life
------------------------------------ -----------------
Equipment under capital leases Term of Lease
Machinery and Equipment 5-8 Years
Furniture and Fixtures 5 Years
Leasehold improvements Term of Lease
Property and Equipment consist of the following:
December 31,
1995 1996
---------------- -----------------
Equipment under capital leases $1,214,950 $2,261,339
Machinery and equipment 1,992,157 5,429,764
Furniture and fixtures 806,252 1,926,948
Leasehold improvements 308,158 1,160,814
---------------- -----------------
4,321,517 10,778,865
Less: Accumulated depreciation
and amortization 1,156,502 2,374,260
---------------- -----------------
$3,165,015 $8,404,605
================ =================
(F) COST IN EXCESS OF NET ASSETS ACQUIRED AND INTANGIBLE ASSETS
The costs in excess of net assets acquired for Dynaco, Spectrum, Star
and Comtel are being amortized on a straight-line basis over periods ranging
from 5 to 10 years, and are as follows:
December 31,
1995 1996
---------------- ----------------
Dynaco $2,570,318 $2,570,318
Spectrum 1,832,357 1,832,357
Star --- 1,749,722
Comtel --- 352,220
---------------- ----------------
4,402,675 6,504,617
Less: accumulated amortization 673,167 1,480,318
================ ================
$3,729,508 $5,024,299
================ ================
Amortization expense for the years ended December 31, 1995, and 1996,
amounted to approximately $445,000 and $807,000, respectively, and is included
in general and administrative expenses in the accompanying consolidated
statements of operations.
The Financial Accounting Standards Board issued 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, in March 1995.
Under SFAS No. 121, the Company is required to assess the valuation of its
long-lived assets, including cost in excess of net assets acquired, based on the
f-17
<PAGE>
estimated future cash flows to be generated by such assets. The Company had
write-offs totaling approximately $1,032,000 associated with the realizability
of certain licenses and goodwill. This amount is included in general and
administrative expenses in the accompanying consolidated statement of operations
for the year ended December 31, 1996.
Other intangibles include the cost of licenses and technologies
acquired through the purchase of product rights and licenses during 1995 and
1996. These intangibles are being amortized over a period of five years.
Amortization expense for the years ended December 31, 1995 and 1996 were
approximately $149,000 and $876,000 respectively, and is recorded in general and
administrative expenses in the accompanying consolidated statements of
operations.
On February 28, 1995, Tissue Technologies entered into a license
agreement to license a patent on a low pressure discharge apparatus (a key
instrument in Tissue Technologies' product) with a corporation. As consideration
for entering into the agreement, the corporation received $50,000 in cash and a
warrant to purchase 160,000 shares of common stock at a price of $.01 per share.
Tissue Technologies ascribed a value to the warrant of $100,000. The former
majority stockholder and officer of Tissue Technologies also assigned his right
to license the technology to Tissue Technologies, on an exclusive basis, and
exchanged his note payable of $100,000 for 600,000 shares of Tissue
Technologies' common stock, which was subsequently exchanged in the merger
discussed in Note 1. Tissue Technologies has capitalized $450,000 which
represents the cash paid plus the value ascribed to the equity consideration
given in exchange for the license.
As part of the formation and organization of PEC and Nexar, the Company
agreed to settle a complaint brought against the Company and the chief executive
officer of Nexar. As part of the settlement, the Company was required to pay
$525,000 and agreed to issue warrants to purchase 108,000 shares of the
Company's common stock at $5.00 per share. The Company has fully expensed this
amount in 1996 which is included in settlement and litigation costs in the
accompanying consolidated statement of operations.
(G) DEFERRED COSTS
Deferred costs consisted of the following at December 31, 1995 and
1996:
December 31,
1995 1996
--------------- --------------
Prepaid Investment banking fees $290,816 $---
Deferred initial public offering costs --- 952,383
Deferred financing costs, net 518,304 1,943,420
=============== ==============
$809,120 $2,895,803
=============== ==============
On August 19, 1994, the Company entered into an investment services
agreement whereby an investment banker would provide merger and acquisition
consulting services over a two-year period ending August 1996. The Company
expensed approximately $436,000 and $291,000 of these prepaid fees during the
years ended December 31, 1995 and 1996, respectively.
As of December 31, 1996, the Company has incurred costs of
approximately $952,383 in connection with the proposed initial public offering
of Nexar's common stock. These costs have been deferred as of December 31, 1996
and upon the consummation of the proposed initial public offering the deferred
offering costs will be charged to stockholder's equity as reduction of the gross
proceeds.
During the years ended December 31, 1995 and 1996, the Company incurred
financing costs related to several issuances of convertible debentures (see Note
4). Deferred financing costs related to convertible debentures totalled $238,333
and $1,943,420 at December 31, 1995 and 1996, respectively.
F-18
<PAGE>
(H) REVENUE RECOGNITION
The Company recognizes product revenue upon shipment. Design and
tooling revenue is recognized upon customer acceptance. Occasionally, revenue is
recognized by the Company's Dynaco subsidiary upon completion of a phase of the
order when contractually accepted by the customer. Provisions are made at the
time of revenue recognition for any applicable warranty costs expected to be
incurred.
Nexar recognizes product revenue upon shipment. Nexar has established
programs which, under specified conditions, provide price protection and or
enable customers to return products. The effects of these programs are estimated
and current period revenue and cost of revenue are reduced accordingly. This is
standard industry practice, and no other contingencies exist relating to these
programs. Provisions are made at the time of sale for any applicable warranty
costs expected to be incurred.
During the year ended December 31, 1996, Nexar recognized revenue
totaling approximately $2,500,000 for products whose title passed to a
significant customer (see Note 2(i)) and such customer instructed the Company to
hold the product at its manufacturing facility on the customer's behalf.
Subsequent to December 31, 1996, all of this product had been shipped to this
customer. Included in accounts receivable at December 31, 1996 is approximately
$160,000 due from this customer related to this transaction. The Company has
recognized this revenue in accordance with the SEC Accounting and Auditing
Enforcement Release No. 108.
(I) SIGNIFICANT CUSTOMERS
For the year ended December 31, 1995 one customer accounted for 10.3%
of revenues and 11.2% of accounts receivable. For the year ended December 31,
1996 one customer accounted for 22.3% of revenues and 26.7% of accounts
receivable. The two largest customers in 1996 accounted for 39.9% of revenue and
represented 49.9% of the December 31, 1996 accounts receivable balance of which
approximately $5,056,000 was collected subsequent to year end. Accounts
receivable included $4,896,632 from a customer of Comtel's in which the Company
has approximately 14% equity ownership as of December 31, 1996. (See Note 11.)
(J) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as
incurred.
(K) NET LOSS PER COMMON SHARE
For the years ended December 31, 1995 and 1996 the net loss per common
share has been computed by dividing net loss, as adjusted for preferred stock
dividends, by the weighted average number of shares of common stock outstanding
during the period. Common stock equivalents are not considered as outstanding,
as the result would be antidilutive.
The net loss was adjusted by the aggregate amount of dividends totaling
$124,610 and $1,242,751 on the Company's preferred stock during the years ended
December 31, 1995 and 1996, respectively. 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 will be required to adopt this new
standard in the 1997 consolidated financial statements. In accordance with this
new standard, basic and diluted loss per share for 1995 and 1996 would be
$(0.89) and $(1.49).
(L) CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATION OF
CREDIT RISK, requires disclosures of any significant off-balance-sheet and
credit risk concentrations. Financial instruments that subject the company to
credit risk consist primarily of cash and trade accounts receivable. The Company
places its cash in highly rated financial institutions. The Company also has
convertible debentures denominated in Swiss francs of $7,222,846 at December 31,
F-19
<PAGE>
1996 (see Note 4(c)). The Company currently does not have a foreign currency
hedging arrangement and plans to hedge this amount in 1997. The Company has no
other significant off-balance-sheet concentration of credit risk such as foreign
exchange contracts, options contracts or other foreign hedging arrangements. To
reduce its accounts receivable risk, the Company routinely assesses the
financial strength of its customers and, as a consequence, believes that its
accounts receivable credit risk exposure is limited. The Company maintains an
allowance for potential credit losses. The Company's accounts receivable credit
risk is not within any geographic area. The Company has issued notes and made
investments to various related parties totaling $5,076,751as of December 31,
1996 (see Note 11). Included in this amount are unsecured loans of $604,653 to
and for the benefit of a director of the Company's underwriter. As of December
31, 1996, the Company also made strategic equity investments totaling $2,587,500
in four technology companies. Subsequent to year-end, the Company loaned money
to, prepaid fees for, purchased inventory on behalf of and made investments in
certain related entities totaling $3,060,000.
(M) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
requires disclosure of an estimate of the fair value of certain financial
instruments. The fair value of financial instruments pursuant to SFAS No. 107
approximated their carrying values at December 31, 1995 and 1996. Fair values
have been determined through information obtained from market sources and
management estimates.
(N) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated
financial statements to conform with the current year's presentation.
(3) INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with the provisions of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. At
December 31, 1996, the Company had available, subject to review and possible
adjustment by the Internal Revenue Service, a federal net operating loss
carryforward of approximately $45,917,000 to be used to offset future taxable
income, if any. This net operating loss carryforward will begin to expire in
2002. The Internal Revenue Code contains provisions that limit the net operating
loss carryforwards due to changes in ownership, as defined by the Internal
Revenue Code. The Company believes that its net operating loss carryforwards
will be limited due to its reorganization in 1991 and subsequent stock
offerings. The Company has not recorded a deferred tax asset for the net
operating losses, due to uncertainty relating to the Company's ability to
utilize such carryovers. In connection with Nexar's proposed initial public
offering it is contemplated that the Company's ownership of Nexar will fall
below 80%. Accordingly, $6,375,000 of net operating losses generated by Nexar as
of December 31, 1996 will not be available for to Company to utilize in future
periods.
F-20
<PAGE>
(4) LONG-TERM DEBT
(A) NOTES PAYABLE
<TABLE>
<S> <C> <C>
December 31,
1995 1996
-------------- ---------------
Dollar denominated convertible debentures $ 819,359 $7,288,063
Swiss franc denominated convertible debentures -- 7,222,846
7% Note payable 244,782 244,782
7.4% to 21% Capital lease obligations, maturities ranging from August 1997 to
May 2001 1,393,612 2,290,847
Present value of notes payable, discounted at 8%, maturities ranging from
February 1996 to February 1998 468,012 337,606
Note payable in connection with the Spectrum acquisition, interest at the prime
rate (8.25% at Dec. 31, 1996) plus 1%, due April 1997 500,000 150,000
Bridge notes payable, interest at 10% until March 1996, then prime (8.25% at
December 31, 1996) plus 2% 1,350,000 1,200,000
8% Convertible debentures 950,000 --
Other notes payable 178,672 254,231
-------------- ---------------
5,904,437 18,988,375
Less - current maturities 2,574,265 2,783,683
-------------- ---------------
$3,330,172 $16,204,692
============== ===============
</TABLE>
On December 21, 1995, PEC issued $1,350,000 face value bridge notes
payable. The notes will be due 18 months after their inception or 10 days
following the closing of a public offering of PEC. Payment of principal and
accrued interest is guaranteed by the Company. In connection with the bridge
financing, PEC issued to the noteholders at nominal value warrants to purchase
up to 240,000 shares of PEC's common stock at $1.20 per share. In 1996 the
Company paid back one bridge noteholder a principal amount of $120,000 plus
accrued interest. As of December 31, 1995, the Company had $950,000 of
convertible debentures that were issued by the Company's subsidiary Tissue
Technologies. These notes were converted into 813,431 shares of the Company's
common stock on May 3, 1996 in connection with the merger of Tissue Technologies
with Palomar.
(B) DOLLAR DENOMINATED CONVERTIBLE DEBENTURES
During the years ended December 31, 1995 and 1996, the Company issued
several series of convertible debentures. The interest on certain of these
convertible debentures is forgiven if the debentures are converted before
specified dates; otherwise, interest is payable on their respective due dates.
During 1995 and 1996, approximately $152,000 and $10,500, respectively, of
accrued interest was forgiven and is included in additional paid-in capital. The
convertible debentures outstanding on December 31, 1996 have a conversion price
which represents a discount of 15% of the Company's common stock at the time of
conversion. It has been the Company's policy to discount those convertible
debentures using an assumed implicit rate ranging from 12% to 15% as a result of
the discount conversion feature of the convertible debentures. The Company
believes that the intent of the debentureholders is to convert the debentures
into common stock at their discounted conversion price. Accordingly, the Company
has credited this ascribed value to additional paid-in-capital, and this amount
is being amortized to interest expense over the terms of the convertible
debentures. During the years ended December 31, 1995 and 1996, the Company
recorded $168,393 and $76,721, respectively, of additional interest expense
relating to the amortization of the discounts relating to the convertible
debentures.
In addition, the Company has incurred financing costs of $380,000 and
$1,055,400 during the years ended December 31, 1995 and 1996, respectively,
relating to these debentures. Given the debentureholders' intent to convert,
these costs have been reflected in deferred costs in the accompanying
F-21
<PAGE>
consolidated balance sheet as of December 31, 1995 and 1996, and are amortized
to additional paid-in capital over the term of the related convertible
debentures. Any remaining unamortized deferred financing costs are also recorded
to additional paid-in-capital upon conversion of the debentures. During the
years ended December 31, 1995 and 1996, the Company amortized deferred financing
costs of $70,583 and $77,683 to additional paid-in capital, respectively. Also,
as a result of the conversions of certain convertible debentures during 1995 and
1996, the Company amortized another $253,158 and $40,658, respectively, to
additional paid-in capital.
The following table summarizes the issuance and conversion of the
convertible debentures for the years ended December 31, 1995 and 1996.
<TABLE>
<S> <C> <C> <C> <C> <C>
Value Common
Ascribed to Shares
Additional Outstanding at Issued
Face Paid-In December 31, Upon
---------------------------
Series Value Capital 1995 1996 Conversion
----------------------------------------------- ------------- ------------- ------------- ------------ -------------
3% Series due September 30, 1996 $ 750,000 $ 150,000 $ -- $ -- 370,189
6% Series due November 21, 1997 2,000,000 400,000 -- -- 1,172,132
7% Series due March 31, 2000 1,100,000 350,000 -- -- --
7% Series due July 1, 2000 1,200,000 350,000 -- -- 401,549
8% Series due October 26, 1997 1,000,000 199,813 819,359 -- 34,615
4.5% Series due October 21, 1999, 2000, 2001 5,000,000 1,284,705 -- 3,761,038 --
5% Series due December 31, 2001 5,000,000 1,472,975 -- 3,527,025 --
------------- ------------- ------------- ------------ -------------
$16,050,000 $4,207,493 $819,359 $7,288,063 1,978,485
============= ============= ============= ============ =============
</TABLE>
During the years ended December 31, 1995 and 1996, all of the 7%
convertible debentures due on March 31, 2000 and $775,000 face value of the 8%
convertible debentures, respectively, were redeemed by the Company together with
accrued interest. Accordingly, $321,533 and $41,530 for the years ended December
31 1995 and 1996, respectively, representing the unamortized amount previously
credited to additional paid-in capital for the ascribed value of the discount,
was reversed.
During 1995, the debentureholders converted the 3%, 6% and 7% series
convertible debenture due September 30, 1996, November 21, 1997, and July 1,
2000, respectively. During 1996, the debentureholders converted $225,000 in face
value of the 8% convertible debentures. Upon their conversion, in 1995 and 1996
these convertible debentures totaled $2,964,209 and $191,139 with related
accrued interest of $126,531 and $10,500, respectively, on the dates of
conversion.
In connection with the 6% convertible debentures, each holder is
entitled to receive one warrant to purchase common stock of the Company
(expiring no later than three years from the date of conversion) for every five
shares of common stock of the Company issued, at 150% of the market price, as
defined, at the time of conversion. As a result, the Company issued 242,655
warrants to purchase common shares of the Company during 1995 at stock prices
ranging from $3.09 to $3.75. These warrants expire through July 28, 1998.
(C) SWISS FRANC DENOMINATED CONVERTIBLE DEBENTURES
On July 3, 1996, the Company raised $7,669,442 through the issuance of
9,675 units in 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 100% to 77.5% of the
price per share of the Company's common stock, calculated as defined. This
F-22
<PAGE>
conversion price decreases from the third anniversary to the seventh anniversary
of the convertible debentures but in no event is less than $12.00 per share.
Because of this decreasing conversion feature and the non-detachable nature of
the debentures, the Company believes that the intent of the debentureholder is
to hold the debenture through the life of the debt and no discount has been
ascribed to this debt. In addition, the Company has the option to redeem these
debentures after the third anniversary of the issuance. The Company is required
to set up a mandatory sinking fund beginning on July 3, 2000 through July 3,
2003, for 25% of the aggregate principal amount of the convertible debentures.
The debenture is payable in Swiss Francs and the Company adjusts the debt based
on fluctuations in the exchange rate. The translated value of these convertible
debentures as of December 31, 1996 was $7,222,846 and the difference of $446,596
was recognized as a foreign exchange gain and included in other income (see Note
9) in the consolidated statement of operations for the year ended December 31,
1996. The Company incurred financing costs of $982,365 relating to these
debentures and is amortizing this asset over the life of the debentures.
(D) FUTURE MATURITIES OF LONG-TERM DEBT OBLIGATIONS
Future maturities of notes payable, capital lease obligations and
convertible debentures reflected at face value as of December 31, 1996 are as
follows:
1997 $ 2,783,683
1998 1,359,208
1999 1,881,242
2000 1,732,169
2001 6,721,163
Thereafter 7,222,846
=============
$21,700,311
=============
(5) STOCKHOLDERS' EQUITY
(A) COMMON STOCK OUTSTANDING
During 1995, the Company pledged 2,860,000 shares of its common stock
as collateral for an anticipated $5,000,000 debt financing with Whetstone
Ventures Corporation, Inc. ("Whetstone"). The Company received only $400,000
from Whetstone, and the debt financing was canceled before being consummated. On
March 13, 1996, the Company filed a complaint against the third party to whom
Whetstone had pledged the shares, demanding return of the shares and obtained a
restraining order prohibiting transfer of the shares. On March 22, 1996, the
third party agreed to return the shares in exchange for the $400,000 previously
received by the Company and an additional $700,000. The Company charged the
additional $700,000 to settlement and litigation cost during the year ended
December 31, 1995. Accordingly, the Company did not consider these shares as
outstanding in the accompanying consolidated financial statements as of December
31, 1995.
On February 1, 1996, the Company issued 365,533 shares of common stock
and warrants to purchase 182,765 shares of common stock at $5.00 per share in a
private placement for net proceeds of $1,530,776. Under the terms of the private
placement agreement, the Company can only use the proceeds to finance the
development and premarketing activities of certain products.
F-23
<PAGE>
(B) PREFERRED STOCK
The Company is authorized to issue up to 5 million shares of preferred
stock, $.01 par value.
As of December 31, 1995 and 1996, preferred stock authorized, issued and
outstanding consists of the following:
<TABLE>
<S> <C> <C> <C>
Par Value
December 31,
------------
1995 1996
---- ----
Redeemable convertible preferred stock, Series I Class A, $.01 par value
Authorized - 7,000 shares
Issued and outstanding - 1,960 shares in 1995, liquidation preference of $1,989,500 $ 20 --
Redeemable convertible preferred stock, Series II Class A, $.01 par value
Authorized - 9,000 shares
Issued and outstanding - 4,400 shares in 1995, liquidation preference of $4,456,415 44 --
Redeemable convertible preferred stock, Series A, $.01 par value
Authorized - 2,500 shares
Issued and outstanding - 2,500 shares in 1995, liquidation preference of $2,512,329 25 --
Redeemable convertible preferred stock, Series B, $.01 par value
Authorized - 2,500 shares
Issued and outstanding - 2,500 shares in 1995, liquidation preference of $2,512,329 25 --
Redeemable convertible preferred stock, Series C, $.01 par value
Authorized - 2,500 shares
Issued and outstanding - 2,500 shares in 1995, liquidation preference of $2,512,329 25 --
Redeemable convertible preferred stock, Series E, $.01 par value
Authorized - 10,000 shares
Issued and outstanding - 2,151 shares in 1996, liquidation preference of $2,235,615 -- 22
Redeemable convertible preferred stock, Series F, $.01 par value
Authorized - 6,000 shares
Issued and outstanding - 6,000 shares in 1996, liquidation preference of $6,229,333 -- 60
Redeemable convertible preferred stock, Series G, $.01 par value
Authorized - 10,000 shares
Issued and outstanding - 10,000 shares in 1996, liquidation preference of $10,181,008 -- 100
Total preferred stock $139 $182
==== ====
</TABLE>
During 1996, all of the outstanding Series I and II preferred shares
(including accrued dividends of $110,689) were converted into 1,527,242 shares
of the Company's common stock. In addition, all of the 5,000 shares of Series A
and B redeemable convertible preferred stock (including dividends of $125,625)
were converted into 788,711 shares of the Company's common stock. The Company
also redeemed all the 2,500 shares of Series C convertible redeemable preferred
stock (including accrued dividends of $71,223) on March 20, 1996 for $3,194,375.
In February 1996, the Company issued 6,000 shares of Series D
redeemable convertible preferred stock, all of which were converted into
1,116,918 shares of common stock (including accrued dividends of $342,092) as of
December 31, 1996. In April 1996, the Company issued 10,000 shares of Series E
redeemable preferred stock, 7,849 shares of which were converted into 1,048,647
shares of common stock (including accrued dividends of $204,196) as of December
31, 1996, and the remaining were converted after year end as discussed in Note
15.
In July 1996, the Company issued 6,000 shares of Series F redeemable
convertible preferred stock at a price of $1,000 per share. The Series F
redeemable convertible preferred stock, together with any accrued but unpaid
dividends, may be converted into shares at 80% of the daily average closing
price of the shares on the ten trading days preceding such conversion, but in no
F-24
<PAGE>
event less than $7.00 or more than $16.00. The Series F redeemable convertible
preferred stock may be redeemed as defined, with no less than 10 days and no
more than 30 days notice or when the stock price exceeds $16.80 per share for
sixty consecutive trading days, at an amount equal to the amount of liquidation
preference determined as of the applicable redemption date. Dividends are
payable quarterly at 8% per annum in arrears on March 31, June 30, September 30
and December 31. Dividends not paid on the payment date, whether or not such
dividends have been declared, will bear interest at the rate of 10% per annum
until paid.
On September 26, 1996, the Company issued 10,000 shares of Series G
redeemable convertible preferred stock at a price of $1,000 per share to two
investors. The Series G redeemable convertible preferred stock, together with
any accrued but unpaid dividends, may be converted into common stock at 85% of
the average closing bid price for the three trading days immediately preceding
the conversion date, but in no event at less than $6.00 or more than $11.50 for
5,000 shares of Series G redeemable convertible preferred stock or $8.00 for the
other 5,000 shares of Series G redeemable convertible preferred stock. The
Series G redeemable convertible preferred stock may be redeemed at any time,
with no less than 15 days and no more than 20 days notice, at an amount equal to
the sum of (a) the amount of liquidation preference determined as of the
applicable redemption date plus (b) $176.50. Dividends are payable quarterly at
7% per annum in arrears on January 1, April 1, July 1 and October 1. Dividends
not paid on the payment date, whether or not such dividends have been declared,
will bear interest at the rate of 12% per annum until paid.
The conversion price for Series F and G redeemable convertible
preferred stock is adjustable for certain dilutive events, as defined. The
Series F and G redeemable convertible preferred stock have a liquidation
preference equal to $1,000 per share of redeemable convertible preferred stock,
plus accrued but unpaid dividends, and accrued but unpaid interest. The Series F
and G redeemable convertible preferred stockholders do not have any voting
rights except on matters effecting the Series F and G redeemable convertible
preferred stock. The Company has registered 2,100,000 shares of common stock
underlying the conversion of the Series F and G redeemable convertible preferred
stock into common shares.
(C) STOCK OPTION PLANS AND WARRANTS
(I) STOCK OPTIONS
The Company has 1991, 1993, 1995 and 1996 Stock Option Plans (the "Plans")
that provide for the issuance of a maximum of 350,000, 500,000, 1,000,000 and
2,500,000 shares of common stock, respectively, which may be issued as incentive
stock options (ISOs) or nonqualified options. Under the terms of the Plans, ISOs
may not be granted at less than the fair market value on the date of grant (and
in no event less than par value), provided that ISO grants to holders of 10% of
the combined voting power of all classes of Company stock must be granted at an
exercise price of not less than 110% of the fair market value at the date of
grant. Pursuant to the plans, options are exercisable at varying dates, as
determined by the Board of Directors, and have terms not to exceed 10 years
(five years for 10% or greater stockholders). The Board of Directors, at the
request of the optionee, may, in its discretion, convert the optionee's ISOs
into nonqualified options at any time prior to the expiration of such ISOs.
During 1995, Tissue Technologies granted options to purchase 224,235 shares
of the Company's common stock at prices ranging from $0.40 to $0.81 per share.
These options were not granted pursuant to the above mentioned plans. These
options were exercised on May 3, 1996 in connection with the Company's merger
with Tissue Technologies as discussed in Note 1.
F-25
<PAGE>
The following table summarizes all stock option activity for the
Company:
<TABLE>
<S> <C> <C> <C>
Number of Exercise Weighted Average
Shares Price Exercise Price
------------- ---------------- ----------------------
Outstanding, December 31, 1994 1,047,500 $1.00-3.50 $2.25
Granted 820,235 0.40-3.00 1.75
Exercised (285,000) 1.00-3.50 1.76
Canceled (75,000) 2.375 2.375
------------- ---------------- ----------------------
Outstanding, December 31, 1995 1,507,735 $0.40-$3.50 $2.06
Granted 1,520,000 6.00-10.50 7.08
Exercised (366,735) 0.40 -3.50 1.28
Canceled (5,000) 3.00 3.00
------------- ---------------- ----------------------
Outstanding, December 31, 1996 2,656,000 $2.00-$10.50 $5.03
============= ================ ======================
Exercisable as of December 31, 1996 1,600,998 $2.00-$10.50 $3.79
============= ================ ======================
Available for future issuances under the plans
as of December 31, 1996 1,266,500
=============
</TABLE>
The range of exercise prices for options outstanding and options
exercisable at December 31, 1996 are as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------ --------------------------------------
Weighted Average
Range of Options Remaining Weighted Average Options Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------- ---------------- ---------------------- ----------------------- -------------- -----------------------
$2.00-$3.50 1,136,000 3.04 $2.29 1,136,000 $2.29
6.00-10.50 1,520,000 4.75 7.08 464,998 7.46
---------------- ---------------------- ----------------------- -------------- -----------------------
2,656,000 4.01 $5.03 1,600,998 $3.79
================ ====================== ======================= ============== =======================
</TABLE>
In August 1995, Nexar established its 1995 Stock Option Plan (the "Nexar
Plan"), which provides for the issuance of a maximum of 4,800,000 shares of
common stock, which may be issued as incentive stock options (ISOs) or
nonqualified stock options. Subsequent to December 31, 1996, the Nexar Board of
Directors increased the number of shares issuable under the Nexar Plan to
5,300,000.
On January 30, 1996 and July 19, 1996 Nexar granted options to purchase
3,234,480 and 83,000 respective shares of Nexar's common stock at an exercise
price of $0.0025 and $4.25 per share. The price per share was based on the fair
market value of Nexar's Common Stock as determined by the Board of Directors of
Nexar on the date of grant.
Nexar has also agreed to issue, upon consummation of Nexar's initial public
offering, options to purchase 50,000 and 50,000 shares of Nexar's common stock
at 85% and 50% of the initial public offering price, respectively. Upon the
granting of these options, the Company will record deferred compensation expense
for the difference between the exercise price and the price of the initial
public offering, if any. In addition, the Board of Directors of Nexar approved
the issuance of stock options to purchase 1,050,000 shares of Nexar's common
stock at the initial public offering price upon the effectiveness of Nexar's
proposed initial public offering price to certain employees, directors and
officers of the Company and Nexar. These stock options will vest over periods
ranging from four to five years, except for stock options to purchase 800,000
shares of Nexar's common stock, which may vest earlier, upon the achievement of
certain revenue, net income and stock price milestones, as defined, through
December 31, 2000.
F-26
<PAGE>
In December 1996, the Director Plan was adopted by the Board of Directors
of Nexar. The Director Plan will become effective upon the closing of the
proposed initial public offering. Under the terms of the Director Plan, initial
options (the "Initial Options") to purchase 15,000 shares of common stock will
be granted to each person who becomes a non-employee director of Nexar after the
closing date of the proposed initial public offering and who is not otherwise
affiliated with Nexar, effective as of the date of election to the Board of
Directors. The Initial Options will vest in equal annual installments over three
years after the date of grant. In addition, each non-employee director will
receive annually options to purchase 10,000 shares (the "Annual Options") on the
date of each annual meeting of Nexar's stockholders held after the closing of
Nexar's initial public offering. The Annual Options will vest one year from the
date of grant. A total of 100,000 shares of common stock may be issued upon the
exercise of stock options granted under the Director Plan. Unless sooner
terminated pursuant to its terms, the Director Plan will terminate in December
2006.
Subsequent to December 31, 1996, the Board of Directors of Nexar authorized
amendments to employment agreements accelerating the vesting of certain options
to purchase 451,950 shares of Nexar's common stock upon the closing of Nexar's
initial public offering contemplated herein. In addition, the Board of Directors
of Nexar approved amendments to employment agreements accelerating the vesting
of options to purchase 903,900 shares of Nexar's common stock to vest one year
from the closing of Nexar's initial public offering contemplated.
The following table summarizes stock option activity for Nexar:
<TABLE>
<S> <C> <C>
Number of Exercise
Shares Price
------------------------ -----------------
Inception, March 7, 1995 - $ -
Granted 20,640 .001
------------------------ -----------------
Outstanding, December 31, 1995 20,640 .001
Granted 3,396,840 .0025-10.00
Canceled (361,560) .0025
------------------------ -----------------
Outstanding, December 31, 1996 3,055,920 $.001-$10.00
======================== =================
Exercisable as of December 31, 1996 1,063,973 $.001-$ .0025
======================== =================
</TABLE>
Star also has established a stock option plan which provides for the
issuance of both nonqualified and ISOs. As of December 31, 1994, Star granted a
total of 97,000 options to purchase Star's common stock to officers and
employees ranging from $2.50 to $6.00 per share. In the fiscal year ending
December 31, 1996, Star granted a total of 140,000 options to purchase Star's
common stock to officers and employees ranging from $2.50 to $9.50 per share. In
the fiscal year ending December 31, 1996, 20,000 shares at $2.50 per share were
exercised by an individual; in addition, 12,000 shares at $6.00 per share were
canceled. As of December 31, 1996, 205,000 ranging from $2.50 to $9.50 per share
are outstanding, of these, 105,000 are exercisable.
PEC has also established a stock option plan, which provides for the
issuance of both nonqualified and incentive stock options. On December 1, 1995,
PEC granted stock options to purchase 1,590,000 shares of PEC common stock for
$.30 per share, the fair value of PEC's common stock, as determined by PEC's
Board of Directors. Of the total stock options granted, 1,230,000 vested
immediately, and the balance vest over a four-year period. In 1996, options to
purchase 870,000 shares of PEC common stock were canceled. No additional stock
options were granted by PEC during 1996.
Comtel has established a stock option plan which provides for the issuance
of both nonqualified and incentive stock options. During 1996, Comtel issued
423,675 options to purchase Comtel common stock for $.55 per share, the fair
market value as determined by Comtel's Board of Directors.
CTI has established a stock option plan which provides for the issuance of
both nonqualified and inventive stock options. During 1996, CTI issued 1,750
options to purchase CTI common stock for $.01 per share, the fair market value
at the date of grant as determined by CTI's Board of Directors.
F-27
<PAGE>
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. In October 1995, the
Financial Accounting Standards Board issued SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which is effective for fiscal years beginning after
December 15, 1995. SFAS No. 123 established a fair-value-based method of
accounting for stock-based compensation plans. The Company has adopted the
disclosure-only alternative under SFAS No. 123 which requires disclosure of the
pro forma effects on earnings per share as if SFAS No. 123 had been adopted, as
well as certain other information.
The Company has computed the pro forma disclosures required under SFAS No.
123 for all stock options and warrants granted to employees of the Company and
its Nexar subsidiary in fiscal years ending December 31, 1995 and 1996 using the
Black Scholes option pricing model prescribed by SFAS No. 123. The pro forma
disclosure for the Company's results of operations related to stock option plans
at its Dynaco, Star, PEC, Comtel and CTI subsidiaries were immaterial for the
years ended December 31, 1995 and 1996.
The assumptions used to calculate the SFAS 123 pro forma disclosure and the
weighted average information for the fiscal years ending December 31, 1995 and
1996 for Palomar are as follows:
<TABLE>
<S> <C> <C>
1995 1996
------------------------ -----------------------
Risk-free interest rate 6.08% 6.37%
Expected dividend yield - -
Expected lives 3.2 years 4.4 years
Expected volatility 55% 79%
Weighted-average grant date fair value of
options granted during the period $3.92 $4.57
</TABLE>
The weighted fair-value and weighted exercise price of options granted
for the Company in fiscal years ending December 31, 1995 and 1996 are as
follows:
<TABLE>
<S> <C> <C>
1995 1996
-------------------- -------------------
Weighted Average Exercise Price for options:
whose exercise price exceeded fair market value at the $3.00 $10.00
date of grant
whose exercise price was equal to fair market value at $1.614 $6.875
the date of grant
Weighted Average Fair Market Value for options:
whose exercise price exceeded fair market value at the $2.125 $8.875
date of grant
whose exercise price was equal to fair market value at $5.265 $6.875
the date of grant
</TABLE>
F-28
<PAGE>
The assumptions used to calculate the SFAS No. 123 pro forma disclosure and
the weighted average information for the fiscal years ending December 31, 1995
and 1996 for Nexar are as follows:
<TABLE>
<S> <C> <C>
1995 1996
------------------------ -----------------------
Risk-free interest rate 6.11% 5.87%
Expected dividend yield - -
Expected lives 4.5 years 4.5 years
Expected volatility 51% 51%
Weighted-average grant date fair value of
options granted during the period $0.001 $0.28
Weighted-average exercise price of options granted
during the period $0.001 $0.45
Weighted-average remaining contractual life of
options outstanding 4.58 years 4.13 years
Weighted-average exercise price of 5,733 and
1,063,973 options exercisable at December
31, 1995 and 1996, respectively. $0.001 $0.0025
</TABLE>
(II) WARRANTS
In connection with the Company's initial public offering, the Company
issued 2,442,621 warrants to purchase one share of common stock per warrant as
adjusted in certain antidilution provisions in the warrant agreement. In January
1995, the Company announced its intention to redeem the warrants. Through
February 10, 1995, the date the warrant call ended, certain warrantholders
exercised such warrants to purchase a total of 1,852,012 shares of common stock.
The remaining unexercised warrants to purchase 590,609 shares were redeemed by
the Company for $29,530. As a result of these warrant exercises, the Company
received cash proceeds totaling $1,286,931 and received demand promissory notes
in the total principal amount of $4,633,975 with interest at 7.75% per annum. In
September 1995, $3,694,840 of the notes were repaid.
The remaining balance of $939,135 from the demand promissory note
discussed above relates to warrants exercised by a director of the Company's
underwriter. In addition, on May 12, 1995, this director exercised warrants to
purchase a total of 200,000 shares of the Company's common stock. The Company
received another demand promissory note in the principal amount of $1,049,574
with interest at 7.75% per annum. These promissory notes are unsecured and there
are no restrictions on transfer or sale of the shares of common stock received
in connection with the exercise of these warrants. In 1996, the Company loaned
this underwriter $1,057,500 in connection with the exercise of warrants for a
total of 500,000 shares of the Company's common stock. In 1996, the underwriter
paid off loans totaling $2,509,591 in connection with the exercise of stock
warrants. Of this amount $2,009,591 was paid in cash and $500,000 was paid
through investment banking services in connection with the 5% convertible
debentures issued on December 31, 1996.
In the years ending December 31, 1995 and 1996, the Company issued to
certain investment bankers, consultants (including related parties to the
Company - see Note 11), directors, noteholders and officers, warrants to
purchase common stock. In 1995, the Company issued warrants totaling 82,500 at
an exercise price of $1.25 to certain investment bankers. The warrants to
purchase 82,500 shares were issued below the fair market value of the Company's
common stock at the date of grant. Accordingly, the Company charged $95,370 to
business development and other financing costs in the accompanying consolidated
statement of operations for the year ended December 31, 1995.
The Company issued 182,765 warrants during 1996 in connection with the
private placement of common stock for a total Black Scholes value of $599,465;
these amounts are exclusive of 900,000 shares of net warrants issued in
connection with the sale of 600,000 shares of common stock to Finmanagement on
December 27, 1996. The Company issued 232,200 warrants during 1996 in connection
with convertible debentures for a total Black Scholes value of $2,468,286. The
F-29
<PAGE>
Company issued 1,978,058 warrants during 1996 in connection with preferred stock
for a total Black Scholes value of $13,325,477. The Company issued 36,553
warrants during 1996 in investment banking fees in connection with financings
for a total Black Scholes value of $119,894. The Company has not reflected the
value attributable to these warrants in the consolidated statement of
stockholders' equity due to the fact that the issuance of these warrants were
directly associated with the issuance of convertible debentures, common and
preferred stock and the Company believes it is the intent of the debenture
holders to convert their debentures into common stock on a short-term basis.
Accordingly, the value of those warrants would both increase and decrease
additional paid-in capital.
In January 1995, the Company issued a warrant to purchase 160,000
shares of the Company's common stock at $0.01 per share in connection with a
license agreement. See Note 2(f). This warrant was exercised on May 3, 1996 in
connection with the Company's merger with Tissue Technologies, as discussed in
Note 1.
From January 1, 1997 through March 7, 1997, certain warrantholders
exercised warrants to purchase 155,532 shares of common stock at a price of
$2.25 per share. The total proceeds received by the Company were $349,947.
The following table summarizes all warrant activity for the Company:
<TABLE>
<S> <C> <C> <C>
Average
Number of Exercise Weighted
Shares Price Exercise Price
---------------- ---------------- ------------------
Outstanding, December 31, 1994 4,554,862 $0.60 - $15.00 $5.39
Granted 4,835,155 0.01 - 7.50 2.36
Exercised (2,840,093) 0.60 - 5.00 3.86
---------------- ---------------- ------------------
Outstanding, December 31, 1995 6,549,924 0.01 - 15.00 3.82
================ ================ ==================
Exercisable as of December 31, 1995 6,549,924 0.60 - 15.00 3.82
================ ================ ==================
Granted 6,527,576 4.88 - 16.50 8.16
Exercised (3,101,261) 0.01 - 7.69 2.66
---------------- ---------------- ------------------
Outstanding, December 31, 1996 9,976,239 $0.60 - $16.50 $7.02
================ ================ ==================
Exercisable, December 31, 1996 8,161,237 $0.60 - $16.50 $5.80
================ ================ ==================
</TABLE>
The range of exercise prices for warrants outstanding and exercisable at
December 31, 1996 are as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Warrants Outstanding Warrants Exercisable
- ------------------------------------------------------------------------------------ --------------------------------------
Weighted Average
Range of Warrants Remaining Weighted Average Warrants Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------- ---------------- ---------------------- ----------------------- -------------- ----------------------
$0.60-$1.00 98,660 .39 $ .67 98,660 $ .67
2.00-4.88 2,343,579 2.43 2.30 2,343,579 2.30
5.00-7.69 4,773,742 4.58 6.57 3,375,407 4.80
8.00-16.50 2,760,258 4.45 12.03 2,343,591 10.68
--------------------------------------------------------------------------------------------------------
9,976,239 4.00 $ 7.02 8,161,237 $ 5.80
========================================================================================================
</TABLE>
The Company has computed the pro forma disclosures required under SFAS No.
123 for all warrants granted in fiscal years ending December 31, 1995 and 1996
using the Black Scholes option pricing model prescribed by SFAS No. 123.
F-30
<PAGE>
The assumptions used to calculate the SFAS No. 123 pro forma disclosure and
the weighted average information for the fiscal years ending December 31, 1995
and 1996 for the Company are as follows:
<TABLE>
<S> <C> <C>
1995 1996
------------------------ -----------------------
Risk-free interest rate 6.01% 5.93%
Expected dividend yield - -
Expected lives 4.8 years 5.9 years
Expected volatility 56% 80%
Weighted-average grant date fair value of
warrants granted during the period $1.81 $5.39
Weighted-average exercise price of warrants
granted during the period $2.36 $8.16
</TABLE>
The weighted fair-value and weighted exercise price of warrants granted
for the Company in fiscal years ending December 31, 1995 and 1996 are as
follows:
<TABLE>
<S> <C> <C>
1995 1996
-------------------- -------------------
Weighted Average Exercise Price for warrants:
whose exercise price exceeded fair market value at $2.72 $11.76
date of grant
whose exercise price was less than fair market value 3.17 7.07
at date of grant
whose exercise price was equal to fair market value at 1.98 6.67
date of grant
Weighted Average Fair Market Value for warrants:
whose exercise price exceeded fair market value at 2.18 9.34
date of grant
whose exercise price was less than fair market value 4.96 8.82
at date of grant
whose exercise price was equal to fair market value at $2.86 $6.67
date of grant
</TABLE>
During 1996, the Company issued 300,000 warrants to purchase common
stock at $7.69 per share to three non-employees who provided consulting
services. These warrants vest over a period of two to three years. The Company
valued these warrants in accordance with SFAS No. 123 at $1,598,298 to be
amortized over the vesting period. The Company recorded $266,375 of this amount
as business development and other financing costs in the accompanying
consolidated statement of operations and $266,383 as capitalized deferred Nexar
initial public offering costs in 1996 in the accompanying consolidated balance
sheet.
(III) PRO FORMA DISCLOSURE
The pro forma effect of applying SFAS No. 123 for all options and
warrants to purchase common stock for the Company and its Nexar subsidiary would
be as follows:
<TABLE>
<S> <C> <C>
Year Ended December 31,
1995 1996
------------------------- -----------------------
Pro forma net loss $(22,730,970) $(65,358,314)
Pro forma net loss per share $(1.60) $(2.50)
</TABLE>
F-31
<PAGE>
(D) RESERVED SHARES
At December 31, 1996, the Company has reserved shares of its common
stock for the following:
Warrants 9,976,239
Stock option plans 3,922,500
Convertible debentures 2,617,800
Preferred stock 2,697,165
Employee Stock Purchase Plan 1,000,000
Employee 401(k) Plan 254,115
---------------
Total 20,467,819
===============
From January 1, 1997 through March 7, 1997 740,826 shares of common
stock were issued in connection with certain of the items above.
(E) COMMON STOCK ISSUED IN LIEU OF PAYMENT
In August 1995, the Company issued to an officer of Dynaco a total of
200,000 shares of common stock in lieu of two demand promissory notes totaling
$355,000 (see Note 11).
In connection with the organization and purchase of CD Titles and CDRP,
Inc. (see Note 1), certain related parties of the officers of the Company and
Dynaco loaned CD Titles $300,000. On October 27, 1995, the Company agreed to
issue common stock at a 35% discount to these individual noteholders, (as well
as the remaining noteholders in CD Titles), in lieu of payment on the related
promissory notes. The related parties received 128,572 shares of the Company's
common stock in satisfaction of the notes payable and accrued interest totaling
approximately $397,000. In 1996 the Company issued 56,900 shares of common stock
to purchase the license rights to product line on behalf of CD Titles.
During the year ended December 31, 1995, the Company issued 167,676
shares of its common stock for investment banking, merger and acquisition
services, with a fair market value of $421,500. The Company included $398,250 of
this amount in deferred costs, as the shares were issued in connection with the
convertible debenture financings and other prepaid investment banking services
(See Note 2(g)). The remaining amount was expensed to and included in business
development and other financing costs in the accompanying consolidated statement
of operations. In 1996, the Company issued 36,802 shares of common stock for
investment banking services in connection with the sale of common stock and the
issuance of convertible debentures for a value of $209,224. The Company issued
20,000 shares of common stock for acquisition services of $267,500 relating to
the Tissue Technologies acquisition and recognized this expense in the
accompanying consolidated statement of operations.
(F) EMPLOYEE STOCK PURCHASE PLAN
In June 1996, the Board of Directors established the Palomar Medical
Technologies, Inc. 1996 Employee Stock Purchase Plan (the "Purchase Plan").
Under the Purchase Plan, all employees, as defined, are eligible to purchase the
Company's common stock at an exercise price equal to 95% of the fair market
value of the common stock. The Purchase Plan provides for up to 1,000,000 shares
for issuance under the Purchase Plan. As of December 31, 1996, rights to
purchase 580 shares were outstanding.
(6) RESEARCH & PRODUCT DEVELOPMENT AGREEMENTS
The Company has an agreement with the New England Medical Center
("NEMC") and Dr. Stanley M. Shapshay to provide a research grant and to sponsor
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<PAGE>
investigations and development of laser applications, advanced delivery systems
and disposable products in the agreed-upon medical applications. The Company
also agreed to provide a total of $150,000 over a one-year period, of which
$50,000 was paid in the form of laser hardware. The parties have reached an
understanding that the Company will obtain ownership rights or the right of
first refusal to exclusive worldwide licenses to sell and market any products
developed with the grant funding. In August 1994, this agreement was amended to
support animal testing with one of the Company's diode lasers in connection with
performing tonsillectomies. The Company recorded approximately $95,000 and
$37,000 of research and development expenses for the years ended December 31,
1995 and 1996 related to this agreement.
The Company entered into a multiyear agreement with Massachusetts
General Hospital ("MGH") effective August 18, 1995, whereby MGH agreed to
conduct clinical trials on a laser treatment for hair removal/reduction invented
by Dr. R. Rox Anderson, Wellman Laboratories of Photomedicine, MGH. MGH will
provide the Company with data previously generated by Dr. Anderson, further
clinical research on the ruby laser device at MGH and other sites, and remit
ownership of all case report forms and data resulting from the study. The
Company is obligated to fund the clinical research obligation of $917,000 and
pay a license fee of $250,000 over the term of the contract, until completion of
the studies which is anticipated to be two years from the effective date unless
amended or terminated. During 1995, the Company expensed approximately $177,000
representing the cost of research and development and capitalized approximately
$50,000 as a license fee, which is being amortized over five years. In 1996, the
Company paid the remaining $200,000 for the license fee and in early 1997 made
payments of $54,417 per the terms of the agreement. The Company has agreed to
enter into a worldwide exclusive license agreement with MGH upon completion of a
valid product or service, or new uses (not related solely to hair removal) based
on the findings of the clinical studies.
Effective February 14,1997, the Company amended the August 18, 1995
agreement with MGH. The Company agrees to provide MGH with a grant of $203,757
to perform research and evaluation in the field of hair removal. The Company
immediately paid $50,090 upon execution of this agreement, and the Company shall
pay a license fee of $10,000 within thirty days of this amendment. As
consideration for this amended license, the Company is obligated to pay to MGH
royalties of 5.5% of net revenues of products/services covered by valid patent
licensed to the Company exclusively; 2.5% of net revenues of products/services
covered by valid patent licensed to the Company nonexclusively; 1.5% of net
revenues of products developed and exploited, not covered above and no less than
3% on the sale of any other laser using other technology as defined for the use
of hair removal. In March of 1997 the U.S. Patent Office issued a patent
protecting the laser-based hair removal technology developed by Dr. Rox Anderson
at MGH, for which Palomar is the exclusive worldwide licensee. The Company
incurred $175,000 of royalties under this license in 1996.
On March 11, 1996 the Company entered in an agreement with Dr. R.G.
Geronemus, M.D., P.C ("Geronemus") a New York State professional corporation, to
conduct clinical studies using the ruby laser for hair removal with longer pulse
duration than in previous studies. The studies will be performed on
approximately 70 patients. The total contract is for $178,750, of which $44,688
was recorded as research expense for the year ended December 31, 1996.
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<PAGE>
(7) SEGMENT INFORMATION
The Company has two operating business groups, medical products and
electronics products. All of the operations of Dynaco, Nexar, CD Titles, PEC and
their subsidiaries are reported below as the Electronics Products Group. All
other operations are focused in the areas of cosmetology and dermatology, which
are included in the Medical Products Group.
Information with respect to industry segments is set forth as follows:
<TABLE>
<S> <C> <C> <C> <C>
As of and for the year ended December 31, 1995
Electronic Medical
Products Products Total
----------------------------------------------------------
Revenues $16,296,224 $5,610,280 $21,906,504
Loss from Operations (3,668,083) (8,794,908) (12,462,991)
Identifiable Assets 17,048,106 24,822,054 41,870,160
Depreciation and Amortization 881,530 944,143 1,825,673
Capital Expenditures $540,725 $908,062 $1,448,787
As of and for the year ended December 31, 1996
Electronic Medical
Products Products Total
----------------------------------------------------------
Revenues $52,274,285 $17,824,158 $70,098,443
Loss from Operations (17,189,563) (22,435,014) (39,624,577)
Identifiable Assets 43,501,440 47,255,756 90,757,196
Depreciation and Amortization 1,243,666 2,672,555 3,916,221
Capital Expenditures $3,066,056 $3,257,632 $6,323,688
</TABLE>
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<S> <C> <C> <C>
December 31, December 31,
1995 1996
---------------- ---------------
Payroll and consulting costs $852,793 $3,456,311
Professional fees 914,935 961,815
Settlement costs 700,000 1,755,000
Warranty 295,962 2,854,401
Other 1,869,867 5,642,365
---------------- ---------------
Total $4,633,557 $14,669,892
================ ===============
</TABLE>
(9) OTHER INCOME (EXPENSE)
Other Income (Expense) consist of the following:
<TABLE>
<S> <C> <C> <C>
December December 31,
31,
1995 1996
---------------- ----------------
Foreign Currency Gain $ --- $ 446,596
Write-down of notes and
investments -- (4,996,038)
Other 102,305 303,800
================ ================
Total $102,305 $(4,245,642)
================ ================
</TABLE>
F-34
<PAGE>
(10) REVOLVING LINES OF CREDIT
On May 31, 1995, Dynaco entered into a three year revolving credit and
security agreement with a financial institution, which provides for the
revolving sale of acceptable trade accounts receivable with recourse at 85% of
face value, up to a maximum commitment of $3 million. The outstanding balance
under the line bears interest at the lender's prime rate (8.25% as of December
31, 1996) plus 1.5%, payable monthly, and amounted to $1,296,462 and $1,787,057
as of December 31, 1995 and 1996, respectively. Borrowings under this line are
collateralized by the purchased receivables and substantially all of Dynaco's
assets and 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 $4,500,000 in the form of
revolving receivable and inventory loans. Borrowings under the loan agreement
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 2.25% and
amounted to $2,770,375 as of December 31, 1996. The loan agreement terminates on
November 30, 1998.
(11) RELATED PARTY TRANSACTIONS
Included in current assets at December 31, 1995 and 1996 are $4,109,573
and $1,459,484 of notes receivable from various officers and related entities
and investments in related entities. Also included in trading securities at
December 31, 1996 is a $1,912,614 investment in a related entity. It is
reasonably possible that the Company's estimate that it will collect these
receivables or realize its investment within one year will change in the near
term.
Dynaco leases its Tempe, Arizona, facility from a partnership
consisting of the Chief Executive Officer and Chief Operating Officer of Dynaco.
The Company also has certain capital leases which are personally guaranteed by
an officer.
The Board of Directors have established a corporate loan policy under
which loans may be granted to certain officers/stockholders/directors of the
Company for amounts up to an aggregate of $800,000. All of such loans must be
collateralized by certain stockholdings of these individuals, as defined. At
December 31, 1995 and 1996, $383,198 and $578,680, respectively, with interest
at the rate of 7% per annum, was outstanding to certain
officers/stockholders/directors under the corporate loan policy.
At December 31, 1996, the Company had loans receivable of $134,000 and
$151,363 from two officers of Dynaco, which are evidenced by promissory notes
due upon demand, respectively, with interest at the rate of 8% and the prime
rate per annum, respectively. The $151,363 loan receivable is collateralized
with a certain amount of vested stock options in the Company owned by the
officer with a market price in excess of the exercise price. At December 31,
1996, the Company had an additional loan receivable for $75,000 from an officer
of Dynaco, which is evidenced by a demand promissory note and bears interest at
7%. The total accrued interest relating to all of the Company loans to officers
of the Company and Dynaco was $56,288 as of December 31, 1996.
At December 31, 1995, the Company had notes receivable for $3,150,000
from an affiliated company. The Company's chairman and CEO personally owns
approximately 13% of the affiliated company as of December 31, 1996. The notes
receivable were repaid during 1996, upon the affiliated company's successful
completion of an initial public offering. In connection with the notes the
Company received 173,874 shares of common stock and two warrants to purchase
289,790 shares of common stock at $1.29 from the affiliated company. The Company
fully exercised these warrants and at December 31, 1996 still owned 463,664
shares. The shares are registered and the Company plans to sell these shares in
1997. The Company recognized an unrealized gain of $1,537,614 in the
accompanying consolidated statement of operations in connection with these
shares. The Company also has a demand note of $500,000 from a manufacturer that
is collateralized by a portion of the Chairman's common stock in this affiliated
company.
A former director of Palomar is also a director of a publicly traded
company. The Company loaned $1,700,000 during 1996 to this publicly traded
F-35
<PAGE>
company, of which $500,000 was paid back as of December 31, 1996. The remaining
balance outstanding of $1,200,000 is a note receivable which is collateralized
by a security agreement for manufacturing equipment owned by the publicly traded
company. The note is also convertible to common stock at the discretion of the
Company at a conversion price of $1.00 per share, subject to adjustment as
defined. The Company also has three warrants to purchase a total of 300,000
shares of common stock at a price of $1.13.
On September 30, 1996 the Company purchased two limited liability
partnership units for $500,000 in a full service investment banking and
securities brokerage firm. A director of the partnership is a former director of
the Company and a current director of Nexar.
The Company has a $500,000 equity investment in a privately held
technology company. A director of the Company's underwriter, H.J. Meyers, is
also a director of the investee company. In addition, at December 31, 1996, the
Company had unsecured notes receivable from this director totaling $1,059,548,
of which $604,653 was in connection with the exercise of stock warrants (see
Note 5). In 1996 the Company loaned $500,000 to an affiliate of the underwriter.
This amount was paid back in full as of year end. Subsequent to year end, the
Company made a deposit of $450,000 towards the purchase of a publicly traded
affiliate of the underwriter and prepaid the underwriter $200,000 relating to
future investment banking services. Both the deposit and the prepayment are
refundable upon demand. Also subsequent to year end, the Company loaned $500,000
to the underwriter which has been paid back in full.
During the year ended December 31, 1996 the Company made a $1,000,000
equity investment in a publicly traded technology company. In connection with
this investment, a director of Palomar joined the Board of Directors of this
publicly traded company. In 1996, the Company loaned $5,800,000 and paid
$109,000 in consulting fees to a company owned by this director. This loan has
been paid back as of December 31, 1996.
During the year ended December 31, 1996 the Company purchased 2,325,581
shares of Series E preferred stock and 1,000,000 shares of common stock for
$2,690,000 in the privately held former parent of Comtel. The Company also
loaned the privately held company $1,000,000 in the form of a subordinated note
and sold 500,000 shares of the privately held company's common stock to
employees of the company for non-recourse promissory notes totaling $345,000.
Both the notes and the investments were written off by the Company at year end,
as the Company believes there has been an impairment in the net realizable value
of this investment. The privately held company was a significant customer as
disclosed in Note 2(i). Subsequent to year end, the Company invested an
additional $1,200,000 and converted the $1,000,000 subordinated note into
764,665 shares of Series F preferred stock. The Company also purchased $960,000
of inventory and is committed to purchase an additional $240,000 of inventory
from a major supplier on behalf of the privately held company. The Company has
entered into an agreement to resell this inventory back to this privately held
company in 1997 at an estimated loss of $210,000.
On October 11, 1996 the Company paid $500,000 to a privately held
medical and cosmetic services company. An officer of CTI is a director of the
privately held company. In return the Company received 500,000 shares of common
stock and a promissory note for $499,500 due on October 11, 1997 accruing
interest at 8% per annum. Subsequent to year end, the Company paid $250,000 for
100,000 shares of common stock and a promissory note of $249,900 accruing
interest at 12% per annum and was due February 28, 1997. For every thirty day
period this note goes unpaid, the Company will receive 50,000 shares of the
privately held company's common stock, to a maximum of 250,000 shares. The
privately held company intends to file an initial public offering in 1997 and
will register the Company's shares subsequent to the filing.
During the year ended December 31, 1996, the Company granted to its
officers and directors warrants to purchase 1,700,000 shares of the Company's
common stock, at prices ranging from $6.00 - $8.00, and expiring five years from
the date of grant. These warrants were issued at the fair market value on the
date of grant. In addition, the Company issued to these individuals options to
purchase 500,000 shares of the Company's common stock, at a price of $8.00 and
expiring five years from the date of grant.
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<PAGE>
(12) 401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan (the "Plan") which covers
substantially all employees who have satisfied a six-month service requirement,
have attained the age of 18 and are employed at year-end. Employees may
contribute up to 15% of their salary, as defined, subject to restrictions
defined by the Internal Revenue Service. The Company is obligated to make a
matching contribution, in the form of the Company's common stock, of 50% of all
employee contributions effective January 1, 1995. The Company contributions vest
over a three-year period.
On March 25, 1996, the Company issued 45,885 shares of its common stock
to the Plan in satisfaction of its $160,595 employer match of the 1995 employee
contributions. For the year ended December 31, 1996 the Company has accrued
$225,000 for the 1996 match which will be made in common stock in April 1997.
(13) COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
The Company has entered into various operating leases for its corporate
office, research facilities and manufacturing operations. These leases have
monthly rents ranging from approximately $2,000 to $49,000, adjusted annually
for certain other costs such as inflation, taxes and utilities and expire
through August 2002. The Company also leases certain automobiles under operating
leases expiring through January 2000. The Company guarantees certain
subsidiaries' operating leases.
Future minimum payments under all leases at December 31, 1996 are approximately
as follows:
December 31,
1997 $2,151,000
1998 1,983,000
1999 1,692,000
2000 1,350,000
2001 940,000
Thereafter 1,002,000
-------------
$9,118,000
=============
Rental expense related to all operating leases was approximately
$695,000 and $1,383,000 for years ended December 31, 1995 and 1996,
respectively.
(B) ROYALTIES
The Company is required to pay a royalty of up to 5% of "net laser
sales", as defined, under a royalty agreement with MGH (see Note 6). For the
years ended December 31, 1995 and 1996, approximately $167,000 and $620,000 was
incurred under this agreement.
As discussed in Note 2(f), Tissue Technologies has a license agreement
to license a patent on a low pressure discharge apparatus. Under the terms of
this license, Tissue Technologies is required to pay a 3% royalty on net sales
of product as defined. During 1996, the Company incurred approximately $301,000
under this license agreement.
In connection with the formation of Dynamem, the Company entered into a
license agreement with the 20% minority shareholder of Dynamem to license a
patent on a foldable electronic assembly module on an exclusive basis. The
license agreement gives Dynamem the right to manufacture, sell and use the
foldable electronic assembly module for a royalty, payable to the minority
F-37
<PAGE>
shareholder of Dynamem, equal to 2% of net sales proceeds, as defined in the
license agreement. The license agreement expires upon expiration of the patent,
and royalties are guaranteed by Dynaco. For the years ended December 31, 1995
and 1996, amounts incurred under this agreement were immaterial.
On August 1, 1995, Nexar entered into a license agreement with
Technovation Computer Lab Inc. (the "licensor"). The licensor is controlled by
one current and one former officer of Nexar. The license agreement gives Nexar
the right to manufacture, sell and use a system designed by the licensor which
allows external replacement of certain component parts. In exchange for these
rights, Nexar will pay a royalty on each unit sold, as defined. The term of the
agreement is for five years (three years on an exclusive basis), renewable for
an additional five-year period at the option of Nexar. For the period from
inception of Nexar (March 7, 1995) to December 31, 1995 and for the year ended
December 31, 1996, royalties charged to operations were immaterial. Subsequent
to December 31, 1996, the Company and the Licensor entered into an Asset
Purchase and Settlement Agreement, see Note 15(b).
(C) CONSULTING AGREEMENTS
The Company has entered into various consulting agreements with a
former treasurer and director of the Company. During the years ended December
31, 1995 and 1996, the Company incurred an aggregate of $124,300 and $258,891,
respectively, in consulting expenses relating to these agreements. On January 1,
1997, a new three year consulting agreement was executed which replaced the
existing two year agreement. From January 1, 1997 to December 31, 1997 the
Company shall pay the consultant at a rate of $15,000 per month for performance
of services, which rate shall be increased by 10% per annum therafter for the
term of the agreement. This agreement can be terminated by the Company upon
twelve months written notice to the former director and upon other circumstances
as defined.
On August 1, 1995, the Company entered into a consulting agreement with
an individual pursuant to which the individual provides certain business
development and consulting services for a monthly fee of $10,000 which expired
on July 31, 1996. During the year ended December 31, 1995, the Company incurred
an aggregate of $50,000 in consulting expenses relating to this agreement, of
which $10,000 remained unpaid at December 31, 1995. In addition, the Company
issued warrants to purchase 1,500,000 common shares of the Company's common
stock at $2.25, the fair market value on the date of issuance. These warrants
were fully vested on July 31, 1996. On August 1, 1996, the consulting agreement
was renewed for a period of one year for a monthly fee of $10,000. During 1996,
$120,000 of consulting finances were incurred relating to this agreement.
On January 1, 1996, the Company entered into a consulting agreement with a
strategic investment banking and financial services company. Under the terms of
this agreement, the Company is required to pay $5,000 monthly. In addition, on
February 7, 1996, the Company granted two individuals, who are employees of this
investment banking and financial services company, 150,000 warrants to purchase
shares of common stock at $7.69, the fair market value on the date of issuance.
These stock options vest based on milestones defined in the agreement. The
company incurred expenses of $143,830 for consulting services received during
the year ended December 31, 1996.
On February 7, 1996, the Company entered into a consulting agreement
whereby the consultant would provide investment banking services for one year to
the Company in exchange for a warrant to purchase 150,000 shares of the
Company's common stock at $7.69.
(D) GOVERNMENT CONTRACTS
The Company, like other companies doing business with the U.S.
government, is subject to routine audit and, in certain circumstances, inquiry,
review or investigation by U.S. government agencies for its compliance with
government procurement policies and practices. Based on government procurement
regulations, under certain circumstances, a contractor violating or not
complying with procurement regulations can be subject to legal or administrative
proceedings, including fines and penalties, as well as be suspensed or debarred
from contracting with the government. The Company's policy has been, and
continues to be, to conduct its activities in compliance with all applicable
rules and regulations.
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<PAGE>
(E) CONTINGENCIES
On December 19, 1996 the Company signed a price quotation with a
vascular laser manufacturer for the purchase of up to 120 vascular lasers. The
price quotation requires the Company to place a deposit of $1,200,000 for the
purchase of 120 vascular lasers. After a minimum of 40 units are purchased at a
per unit average price of $147,250, the remaining down-payment will be refunded
if no additional purchases are made. The Company also paid $400,000 for tooling
and other costs to ensure the vascular laser is manufactured with the Palomar
name. The Company plans to use this vascular laser in the CTI sites in order to
provide a full suite of lasers.
On October 17, 1996 the Company entered into an option purchase
agreement with Enviro-Invest Oy ("Enviro"), a privately held Finnish company
with technology related to the detection of nuclear and chemical compounds.
Under the option purchase agreement the Company has the right to acquire all of
the issued and outstanding shares of Enviro at any time through October 1, 1997.
The purchase price is $400,000 in cash, a range of $3,750,000 to $5,250,000 in
the Company's common stock based on certain milestones, and other contingent
cash payments not to exceed $325,000. The purchase agreement also calls for the
Company to fund Enviro with a $400,000 loan. As of December 31, 1996 the Company
has paid $300,000 and has recognized a liability for the remaining $100,000,
payable on March 31, 1997. The Company intends to exercise the purchase option
in 1997 and has accounted for the $400,000 loan as a long term investment.
Enviro has a distribution agreement with Sensor Applications Inc.
("Sensor"), a Delaware corporation. On November 14, 1996 the Company entered
into a option purchase agreement with Sensor. The purchase agreement calls for
the Company to pay $150,000 in cash and issue 150,000 shares of Palomar stock
for all the issued and outstanding shares of Sensor and extends to November 1,
1997. The purchase agreement calls for the Company to make payments of $200,000,
payable in four installments for consulting services. During the year ended
December 31, 1996, the Company incurred $50,000 related to these consulting
services. The Company is also committed to make payments to Sensor of $15,000 a
month to cover 50% of monthly operating expenses which the Company has expenses
as incurred. The Company intends to exercise this purchase agreement in
conjunction with the option for Enviro.
(F) LETTERS OF CREDIT
Dynaco has a three irrevocable letters of credit outstanding totaling $295,000
with a bank to secure payment to a vendor.
(G) CORPORATE GUARANTEES
The Company has issued guarantees for payment of various vendor
liabilities for several subsidiaries. Outstanding guarantees totaled
approximately $975,000 as of December 31, 1996.
(H) LITIGATION
The Company is a defendant in a lawsuit filed by a former consultant to the
Company on March 14, 1996. In the suit, the former consultant alleges that the
Company breached a contract with the consultant in which the consultant was to
provide certain investment banking services in return for certain compensation.
In January 1997, this consultant's motion for summary judgment on a breach of
contract claim was granted. The consultant has alleged that he suffered up to
$3,381,250 in damages on a breach of contract claim, exclusive of interest. The
Company has not accrued for the full cost of the alleged damages and intends to
vigorously defend this action and appeal this matter after damages have been
determined. The Company believes its grounds for appeal are meritorious.
The Company is also involved in legal and administrative proceedings and
claims of various types, including a patent infringement and unfair competition
claim by a competitor of the Company. While any litigation contains an element
of uncertainty, management, based upon the opinion of the Company's general
counsel, presently believes that the outcome of each such proceeding or claim
which is pending or known to be threatened (including the actions described
above), or all of them combined, will not have a material adverse effect on the
Company.
F-39
<PAGE>
(14) EMPLOYMENT AGREEMENTS
The Company and its subsidiaries have employment agreements with
certain executive officers that provide for annual bonuses to the officers and
expire on various dates through 2001. Each of these agreements provide for 12
months severance upon termination of employment. One of the officers at the
Company's Spectrum subsidiary receives a bonus equal to .75% of Spectrum's net
sales, as defined.
Dynamem entered into an employment agreement on September 29, 1995,
with its minority shareholder to serve as President and director of Dynamem for
a period of five years. At the end of five years from the date of employment,
the minority shareholder will have the option to sell 75% of his outstanding
shares of Dynamem to PEC at a price equal to 10 times the average net income of
Dynamem for the preceding 48-month period. A portion (35%) of the payment will
be made in the Company's common stock, with the balance to be paid in cash. The
minority shareholder also has the option to increase the percentage of the
payment to be paid in common shares of the Company. Dynaco has also guaranteed
the compensation due its President under this agreement. The Company is
accounting for the option related to the restricted stock in the subsidiary in
accordance with Financial Accounting Standard Board Interpretation No. 28,
ACCOUNTING FOR STOCK APPRECIATION RIGHTS AND OTHER VARIABLE STOCK OPTION OR
AWARD PLANS. Accordingly, compensation is measured annually based on the
increase in value of the subsidiary. Total compensation has been insignificant
to date. In the event of a public offering of Dynamem, the minority
shareholder/officer has certain registration rights as defined in the employment
agreement.
Nexar has an employment agreement with its Chief Executive Officer
(CEO) expiring in March 2002, unless extended. The agreement provides for annual
salary and bonus for the CEO and a commission of $2.00 per computer sold by
Nexar. Upon termination of employment with Nexar, the CEO will be entitled to
amounts ranging from $1,000,000 to $3,000,000 in cash, three to five years
salary, bonus and participation in Nexar's benefit plans, immediate vesting of
unvested stock options and an income tax "gross up" for all the above items in
the event of a change of control. This termination payment is guaranteed by the
Company for as long as the Company owns greater than 50% of Nexar.
Nexar also has an employment agreement with another executive officer
expiring in March 2002, unless extended. The agreement provides for annual
salary and bonus for the officer and a commission of $2.00 per unit sold by
Nexar. Upon termination of employment with Nexar, the officer will be entitled
to up to $750,000 in cash, one year of salary, bonus and participation in
Nexar's benefit plans, immediate vesting of unvested stock options and an income
tax "gross up" for all the above items in the event of a change of control. This
termination payment is guaranteed by the Company for as long as the Company owns
greater than 50% of Nexar.
(15) SUBSEQUENT EVENTS
(A) EQUITY AND FINANCING TRANSACTIONS
On January 13, 1997 the Company raised $1,000,000 through the issuance
of 5% series convertible debentures due January 13, 2002. The Company incurred
financing costs of $100,000 relating to investment banking services. The
financing costs were offset against a note receivable from a director of the
investment bank. This debenture has been accounted for similar to the other
dollar denominated convertible debentures as discussed in Note 4(b).
Subsequent to year-end, all of the outstanding shares of Series E
preferred stock (including accrued dividends of $121,978) were converted into
332,859 shares of the Company's common stock. In addition, as of February 28,
1997, 680 shares of Series G convertible preferred stock (including accrued
dividends of $19,833) were converted into 102,508 shares of the Company's common
stock.
On February 28, 1997, the Company redeemed 300 units of the outstanding
Swiss franc denominated convertible debentures for $196,000.
F-40
<PAGE>
Subsequent to year end, the Company raised an additional $12,000,000 to
help sustain 1997 operations. The Company raised $6,000,000 through the issuance
of Series H redeemable convertible preferred stock. The Company raised
$5,500,000 through the issuance of 5% convertible debentures and $500,000
through the issuance of 6% convertible debentures. The Company will account for
these financings similar to the 1996 preferred stock and convertible debenture
issuances as discussed in Notes 5 and 4, respectively.
(B) LEGAL SETTLEMENTS
In 1996, a former executive officer of Nexar threatened to file a
lawsuit or seek arbitration proceedings against Nexar regarding Nexar's
termination of his employment and Nexar's license agreement with the Licensor.
On February 28, 1997, Nexar entered into an Asset Purchase and
Settlement Agreement with this former executive and the Licensor. Under the
terms of this agreement, the Company has agreed to pay this former executive and
certain of his affiliates $1,250,000 in cash and deliver $1,500,000 worth of the
Company's common stock in exchange for all right, title and interest in and to
all the technology licensed under Nexar's license agreement with the Licensor
and a patent application thereto and a complete release and settlement of all
claims between this former executive and Nexar. The Company will first acquire
the subject technology and then convey such technology to Nexar. Accordingly,
the Company paid $75,000 upon execution of this agreement. The Company will
issue its common shares and remit $475,000 to this former executive on the
earlier of April 30, 1997 or the closing of the initial public offering of
Nexar. The $700,000 balance of the cash consideration will be held in escrow,
subject to release to the former executive and/or Licensor in the absence of a
breach of a representation, warranty or covenant within one year after closing.
The Company has agreed to assign to Nexar all of its rights and title
in the technology to be received under the Asset Purchase and Settlement
Agreement immediately upon the receipt thereof, and has charged to Nexar the
cost associated with this claim and the purchase of the technology. Nexar has
allocated $1,375,000 of the consideration to settle this claim and the Company
has reflected this amount in settlement and litigation costs in its accompanying
statement of operations for the year ended December 31, 1996. The remaining
consideration totaling $1,375,000 has been allocated to the purchase of the
technology as of December 31, 1996 and will be amortized over the technology's
estimated useful life. The allocation of the purchased technology was based on
the value of anticipated royalty payments to the Licensor over the three years
ended December 31, 1999.
On March 14, 1997, CTI entered into an agreement with a medical service
company in settlement of CTI's claims of breach of the contract. The settlement
calls for the medical service company to reimburse CTI for all expenses
incurred, not to exceed $900,000, and an additional lump sum payment of
$400,000. In addition, the medical service company is required to purchase
lasers from CTI under certain circumstances. The medical service company also is
not to compete with CTI, as defined, for a period of six months.
(C) COMMITMENTS AND CONTINGENCIES
Subsequent to year end, the Company entered into an exclusive
relationship with a private label leasing company. CTI then entered into a
master lease agreement with this private label leasing company. This master
lease agreement is guaranteed by the Company.
F-41
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in the Company's accountants during the
Company's two most recent fiscal years, nor were there any disagreements on any
matter of accounting principle or practice of financial statement disclosure
which would be required to be reported on a Form 8-K.
43
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth certain information concerning each
director and nominee for election as a director and each executive officer of
the Company.
<TABLE>
<S> <C> <C> <C>
Name Age Position
Louis P. Valente 66 Chief Executive Officer, President and Director
Michael H. Smotrich (1) 64 Secretary, Chief Technical Officer and Vice Chairman of the Board
Steven Georgiev(1) 62 Chairman of the Board
Buster C. Glosson 54 Director
John M. Deutch 58 Director
A. Neil Pappalardo 55 Director
James G. Martin 61 Director
Joseph P. Caruso 37 Treasurer, Vice President and Chief Financial Officer
</TABLE>
(1) Each of those persons may be deemed a parent and/or promoter of
the Company as these terms are defined in the Rules and
Regulations promulgated under the Securities Act of 1933, as
amended.
Shortly after year end, Mr. Joseph Levangie resigned as a director of
the Company and was replaced by Mr. Deutch; Mr. Valente also joined the Board at
that time. Messrs. Pappalardo and Martin joined the Board in June of this year.
Messrs. Georgiev and Smotrich will not run for re-election as directors of the
Company at the Company's 1997 Annual Meeting of Stockholders.
The background of each director, officer and key employee of the Company is as
follows:
LOUIS P. VALENTE. Mr. Valente became a director of the Company on
February 1, 1997; on May 14, 1997, he became Chief Executive Officer and
President of the Company. From 1968 to 1995 Mr. Valente held numerous positions
at EG&G, Inc., a diversified technology company which provides optoelectronic,
mechanical and electromechanical components and instruments to manufacturers and
end-user customers in varied markets that include aerospace, automotive,
transportation, chemical, petrochemical, environmental, industrial, medical,
photography, security and other global arenas. In 1968 he began his career at
EG&G, Inc. as an Assistant Controller and held executive positions including
Assistant Treasurer and Corporate Treasurer before becoming a Senior Vice
President of EG&G, Inc. In this position he presided over and negotiated
acquisitions, mergers and investments. Since his retirement in 1995, Mr. Valente
has served in a similar role on a consulting basis. Currently, Mr. Valente
serves as a director in Micrion Corporation, a publicly held company. Mr.
Valente is a Certified Public Accountant and a graduate of Bentley College.
MICHAEL H. SMOTRICH. Dr. Smotrich is the Company's Chief Technical
Officer and, since May 14, 1997, Vice Chairman of the Board of Directors. Dr.
Smotrich was a consultant to Dymed from May 1992 until its merger with the
Company in September 1992, at which time he became the Company's Executive Vice
President, Chief Operating Officer, Secretary and a director. In August 1994,
Dr. Smotrich became the Company's President, a position in which he served until
May 14, 1997. From July 1988 until May 1991, Dr. Smotrich was an independent
consultant specializing in the development and manufacture of laser based
medical products. Dr. Smotrich was Vice President of Operations at Candela Laser
Corp. from June 1987 to June 1988, where he was responsible for medical laser
production and product development. From July 1984 to June 1987, as Corporate
Vice President of Research and Development, Dr. Smotrich was responsible for the
design and development of surgical laser products at Merrimack Laboratories,
Inc., which was acquired by the LaserSonics division of Cooper Laboratories,
Inc. From 1972 to 1984, Dr. Smotrich was Vice President in charge of the
Electro-Optics Group at Avco Everett Research Laboratory, Inc., working in the
laser technology field. Dr. Smotrich received a certificate from the Advanced
44
<PAGE>
Management Program at Harvard Graduate School of Business Administration and has
a B.S. in Physics from the Massachusetts Institute of Technology and an M.S. and
Ph.D. in Physics from Columbia University.
STEVEN GEORGIEV. Mr. Georgiev is Chairman of the Company's Board of
Directors. Mr. Georgiev served as Chief Executive Officer of the Company between
November 12, 1993 and May 14, 1997, and became a full time employee of the
Company on January 1, 1995. Mr. Georgiev was a consultant to Dymed from June
1991 until its September 1991 merger with the Company, at which time he became
the Chairman of the Company's Board of Directors. Mr. Georgiev is a financial
and business consultant to a variety of emerging, high growth companies. Mr.
Georgiev has been a director of Excel Technology, Inc. since 1992, and of
Dynagen, Inc. since 1996. Mr. Georgiev was Chairman of the Board of Directors of
Dynatrend, Inc., a publicly-traded consulting firm that he co-founded in 1972,
until February 1989. Mr. Georgiev has a B.S. in Engineering Physics from Cornell
University and an M.S. in Management from the Massachusetts Institute of
Technology (Sloan Fellow).
BUSTER GLOSSON. Mr. Glosson has been a director of the Company since
September 1, 1996. From 1965 until June 1994, he was an officer in the United
States Air Force (USAF). Most recently, he served as a Lieutenant General and
Deputy Chief of Staff for plans and operations, Headquarters USAF, Washington,
D.C. Mr. Glosson is a veteran of combat missions in Vietnam and, during the Gulf
War, he commanded the 14th Air Force Division and was the director of campaign
plans for the United States Central Command Air Forces, Riyadh, Saudi Arabia. In
1994 he founded and has since served as President of Eagle Ltd., a consulting
firm concentrating on international business opportunities in the
high-technology arena. He is also Chairman and CEO of Alliance Partners Inc., an
investment holding company with a focus on international business. He also
serves as a director of The American Materials and Technologies Corporation, and
Skysat Communication Network Corporation, both publicly held companies.
JOHN M. DEUTCH. Dr. Deutch became a director of the Company on February
1, 1997. In May 1995 he was sworn in as Director of Central Intelligence (DCI)
following a unanimous vote in the Senate, and served as DCI until December 1996.
In this position he was head of the Intelligence Community (all foreign
intelligence agencies of the United States) and directed the Central
Intelligence Agency. From March 1994 to May 1995 he served as the Deputy
Secretary of Defense. From March 1993 to March 1994, Dr. Deutch served as Under
Secretary of Defense for Acquisitions and Technology. Dr. Deutch has been a
member of the faculty of the Massachusetts Institute of Technology (M.I.T.) from
1970 to the present, where he was an associate professor and professor of
chemistry, Chairman of the Department of Chemistry, Dean of Science and Provost.
Currently, Dr. Deutch is an MIT Institute Professor and serves as director for
the following publicly held companies: Ariad Pharmaceutical, Citicorp, CMS
Energy and Schlinberger Ltd. Dr. Deutch has a B.A. in history and economics from
Amherst College and both a B.S. in chemical engineering and a Ph.D. in physical
chemistry from M.I.T. He holds honorary degrees from Amherst College, the
University of Lowell and Northeastern University.
A. NEIL PAPPALARDO. Mr. Pappalardo became a director of the Company on
June 2, 1997. Mr. Pappalardo is the founder and serves as the Chairman and CEO
of Medical Information Technology, Inc. ("Meditech"), a provider of software
systems to hospitals in the United States, Canada and the United Kingdom with
over 2,000 employees. Mr. Pappalardo received his B.S. in electrical engineering
from M.I.T. in 1964. Mr. Pappalardo serves on the Executive as well as various
other operational and academic committees at M.I.T., and is a trustee of the New
England Aquarium and serves on its Board of Governors.
JAMES G. MARTIN. Dr. Martin became a director of the Company on June 2,
1997. From 1995 through the present, Dr. Martin has served as the Vice President
of Research at the Carolinas Medical Center. He has also been the Chairman of
the Research Development Board of the Carolinas Medical Center since 1993. Dr.
Martin was the Governor of North Carolina from 1985 to 1993. Prior to that, he
served as a United States Congressman from North Carolina for six terms, from
1973 to 1984. Dr. Martin currently serves as a director for the following
publicly held companies: Duke Power Company and Family Dollar, Inc. Dr. Martin
has a B.S. in chemistry from Davidson College and a Ph.D. in chemistry from
Princeton University.
JOSEPH P. CARUSO. Mr. Caruso joined the Company in March 1992 as
Controller in a part-time capacity and became a full-time employee on June 15,
1992. Effective January 1, 1993, Mr. Caruso became Vice President and Chief
Financial Officer. From October 1989 to June 1992, Mr. Caruso was the Chief
Financial Officer of Massachusetts Electrical Manufacturing Co., Inc., a
45
<PAGE>
privately held manufacturer of power distribution equipment. From September 1987
to October 1989, Mr. Caruso was a manager with Robert Half, an international
consulting firm. From December 1982 to September 1987, Mr. Caruso was a manager
with Pannell Kerr Forster, an international public accounting firm. Mr. Caruso
became a Certified Public Accountant in 1984 and has a B.S. in accounting from
Merrimack College.
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's Common Stock ("10% Stockholders"), to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership of the Company's
Common Stock and other equity securities on Form 3 and reports of changes in
such ownership on Form 4 and Form 5. Officers, directors and 10% Stockholders
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company during, and with respect to, its most
recent fiscal year, or written representations that Form 5 was not required, the
Company believes that all Section 16(a) filing requirements applicable to its
officers, directors and 10% Stockholders were fulfilled in a timely manner.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning the
compensation for services rendered in all capacities to the Company for the
fiscal years ended December 31, 1995 and 1996 of (i) the Chief Executive Officer
of the Company during 1996 and (ii) the other executive officers of the Company
serving on December 31, 1996 whose salary and bonuses for 1996 exceeded $100,000
(the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C> <C> <C>
Long-Term
Compensation
Awards
----------------
Securities All
Underlying Other
Name and Fiscal Salary Bonus Options(1) Compensation
Principal Position Year ($) ($) (#) ($)
-------------- ------------ ---------------- ---------------- -----------------------
Steven Georgiev 12/31/96 $ 275,000 $305,000 800,000 $ --
Chief Executive Officer 12/31/95 $ 161,800 $ 50,000 450,000 $ --
12/31/94 $ -- $ -- -- $ 80,000(2)
Michael H. Smotrich 12/31/96 $214,000 $ 50,000 300,000 $ --
President, Chief 12/31/95 $149,400 $ 50,000 250,000 $ --
Operating Officer, 12/31/94 $ 92,000 $ 20,000 170,000 $ --
Secretary
Joseph P. Caruso 12/31/96 $180,000 $ 64,000 450,000 $ --
Vice President and Chief 12/31/95 $109,600 $ 75,000 250,000 $ --
Financial Officer 12/31/94 $ 70,400 $ 20,000 170,000 $ --
</TABLE>
(1) During fiscal 1996 and fiscal 1995, the Company did not grant any
restricted stock awards or stock appreciation rights or make any long-term
incentive plan payouts to any of the Named Executive Officers.
(2) Represents monies paid by the Company to Mr. Georgiev during the
year ended December 31, 1994 pursuant to a consulting arrangement between the
Company and Mr. Georgiev.
46
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock
options and warrants granted during 1996 by the Company to the Named Executive
Officers:
<TABLE>
<S> <C> <C> <C> <C>
OPTION GRANTS
- -----------------------------------------------------------------------------------------------------------
Number of Shares Percent of
Underlying Total Options
Options Granted Exercise Price
Name and Granted to Employee Per Share Expiration
Principal Position (#) in Fiscal Year ($/Sh) Date
- -----------------------------------------------------------------------------------------------------------
Steven Georgiev
Chief Executive Officer 300,000(1) 5.87% 6.75 2/5/01
Chairman of the Board 200,000(1) 3.91% 6.00 12/18/01
300,000(1) 5.87% 8.00 8/26/01
Michael H. Smotrich
President, Chief 250,000(2) 4.89% 6.75 2/5/01
Operating Officer, 50,000(2) .98% 6.00 12/18/01
Secretary
Joseph P. Caruso
Vice President and Chief 200,000(3) 3.91% 8.00 8/26/01
Financial Officer 150,000(3) 2.94% 6.75 2/5/01
100,000(3) 1.96% 6.00 12/18/01
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) On February 5, 1996, the Company granted Mr. Georgiev 300,000 shares of
Common Stock, issuable upon exercise of a five year warrant at an
exercise price of $6.75 per share, all of which vests immediately. On
December 19, 1996, the Company granted Mr. Georgiev 200,000 shares of
Common Stock, issuable upon exercise of a five year warrant at an
exercise price of $6.00 per share, of which 66,666 shares vest
immediately, 66,667 shares vest a year from issuance and the final
66,667 shares vest two years from issuance. On August 27, 1996, the
Company granted Mr. Georgiev 300,000 shares of Common Stock issuable
upon exercise of a five year stock option at an exercise price of $8.00
per share, of which 100,000 shares vest immediately, 100,000 shares vest
one year from issuance and the final 100,000 shares vest two years from
issuance.
(2) On February 5, 1996, the Company granted Dr. Smotrich 250,000 shares of
Common Stock, issuable upon exercise of a five year warrant at an
exercise price of $6.75 per share, all of which vests immediately. On
December 19, 1996, the Company granted Dr. Smotrich 50,000 shares of
Common Stock, issuable upon exercise of a five year warrant at an
exercise price of $6.00 per share, of which 16,666 shares vest
immediately, 16,667 shares vest a year from issuance and the final
16,667 shares vest two years from issuance.
(3) On February 5, 1996, the Company granted Mr. Caruso 150,000 shares of
Common Stock, issuable upon exercise of a five year warrant at an
exercise price of $6.75 per share, all of which vests immediately. On
December 19, 1996, the Company granted Mr. Caruso 100,000 shares of
Common Stock, issuable upon exercise of a five year warrant at an
exercise price of $6.00 per share, of which 33,333 shares vest
immediately, 33,333 shares vest a year from issuance and the final
33,334 shares vest two years from issuance. On August 27, 1996, the
Company granted Mr. Caruso 200,000 shares of Common Stock issuable upon
exercise of a five year stock option at an exercise price of $8.00 per
share, of which 66,666 shares vest immediately, 66,667 shares vest one
year from issuance and the final 66,667 shares vest two years from
issuance.
47
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST YEAR AND FISCAL YEAR-END; OPTION/SAR VALUES
The following table sets forth information on an aggregated basis
regarding the exercise of stock options during the last completed fiscal year by
each of the Named Executive Officers and the value of unexercised options at
December 31, 1996:
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Shares Options/SARs Options/SARs
Acquired Value at FY-End (#) at FY-End ($)(1)
Name and on Exercise Realized Exercisable/ Exercisable/
Principal Position (#) ($) Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
Steven Georgiev
Chief Executive Officer 260,000 426,200 703,666/333,334(2) 1,115,750/100,000
Michael H. Smotrich
President, Chief -- -- 686,666/33,334(3) 1,881,249/25,000
Operating Officer,
Secretary
Joseph P. Caruso
Vice President and Chief -- -- 699,999/200,001(4) 2,041,250/50,000
Financial Officer
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Value is based on the December 31, 1996 closing price on the Nasdaq Small
Cap Market of $6.75 per share. Actual gains, if any, on exercise will depend on
the value of the Common Stock on the date of the sale of the shares.
(2) Includes warrants to purchase Common Stock and stock options with exercise
prices ranging from $2.00-$8.00, all of which expire on or before December 18,
2001.
(3) Includes warrants to purchase Common Stock and stock options with exercise
prices ranging from $2.125-$6.75, all of which expire on or before December 18,
2001.
(4) Includes warrants to purchase Common Stock and stock options with exercise
prices ranging from $2.00-$8.00, all of which expire on or before December 18,
2001.
(5) Consists of a warrant to purchase Common Stock at an exercise price of
$6.00 per share expiring on December 19, 2001.
Between the time they joined the Board and June 2, 1997, Mr. Glosson and
Dr. Deutch were paid $30,000 for their services as director. Mr. Valente was
paid $17,500 for his services as a director until he became Chief Executive
Officer and President of the Company on May 14, 1997. Effective June 2, 1997,
outside directors will receive $30,000 per year for their services as director,
and $5,000 per year, per committee, for their services as members of any
committee of the Board of Directors. For his services as a director, Mr. Glosson
received a warrant to purchase 100,000 shares of Common Stock at an exercise
price of $8.00 per share. This warrant vests over a period of three years and
expires on August 26, 2001. For his services as a director, Dr. Deutch received
a warrant to purchase 50,000 shares of Common Stock at an exercise price of
$6.75 per share. This warrant vests immediately and expires on December 27,
2001. In accordance with Company policy, directors who are employees of the
Company serve as directors without compensation. (Upon becoming Chief Executive
Officer and President of the Company, Mr. Valente relinquished the warrant to
purchase 50,000 shares of Common Stock that he had received for his services as
an outside director.) Directors are also reimbursed for reasonable out-of-pocket
expenses incurred in attending Board of Directors meetings.
48
<PAGE>
EMPLOYMENT AGREEMENTS
Effective January 1, 1997, the Company entered into three-year key
employment agreements with Mr. Georgiev, Dr. Smotrich and Mr. Caruso. Pursuant
to these agreements, Dr. Smotrich served as President and Chief Operating
Officer at a base salary of $250,000 and Mr. Georgiev served as Chief Executive
Officer at a base salary of $350,000 until their respective resignations on May
14, 1997. Mr. Caruso serves as Chief Financial Officer, at an annual base salary
of $200,000. The agreements provide for bonuses as determined by the Board of
Directors or Executive Committee, and employee benefits, including vacation,
sick pay and insurance, in accordance with the Company's policies.
The agreements provide that, in the event of termination (i) by the
Company without cause, as defined, or by the executive for good reason, as
defined, other than within one year of a change in control, the Company shall
pay the executive four times the executive's annual base salary then in effect,
and continue the executive's employee benefits for the remaining term of the
agreement; (ii) within one year following a change in control, the Company shall
pay the executive eight times the executive's annual compensation, as defined,
and continue the executive's employee benefits for the remaining term of the
agreement; and (iii) by the executive for good reason within one year following
an approved change in control, as defined, the Company shall pay the executive
eight times the executive's annual base salary then in effect and any bonus
compensation to which the executive would have been entitled if he had remained
as an employee under the agreement to the end of the fiscal year, and continue
the executive's employee benefits for the remaining term of the agreement. In
the event of resignation, the agreements provide that the Company shall pay the
executive any base salary or other compensation earned (and a pro rata portion
of any bonus payable with respect to the year in which resignation occurred) but
not paid to the executive prior to the effective date of such resignation.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of July 7, 1997, the number of shares
of the Company's Common Stock owned by each director, by the Company's Principal
Executive Officer and each of the other Named Executive Officers, by all
directors and executive officers as a group, and by any persons (including any
"group" as used in Section 13(d)(3) of the Securities Exchange Act of 1934),
known by the Company to own beneficially 5% or more of the outstanding Common
Stock. Except as otherwise indicated, the stockholders listed in the table below
have sole voting and investment power with respect to the shares indicated.
<TABLE>
<S> <C> <C>
Percentage
Number of Shares of Class
Name and Address of Beneficial Owner Beneficially Owned (1)
- ------------------------------------ ------------------ ----------
Louis P. Valente(2) 404,000 1.22
66 Cherry Hill Drive
Beverly, MA 01915
Joseph P. Caruso(3) 901,590 2.72%
66 Cherry Hill Drive
Beverly, MA 01915
Michael H. Smotrich(4) 1,214,256 3.67%
66 Cherry Hill Drive
Beverly, MA 01915
Steven Georgiev(5) 1,272,871 3.84%
66 Cherry Hill Drive
Beverly, MA 01915
Buster C. Glosson(6) 119,999 *
66 Cherry Hill Drive
Beverly, MA 01915
John M. Deutch(7) 50,000 *
66 Cherry Hill Drive
Beverly, MA 01915
49
<PAGE>
A. Neil Pappalardo(8 ) 50,000 *
66 Cherry Hill Drive
Beverly, MA 01915
James G. Martin( 8) 50,000 *
66 Cherry Hill Drive
Beverly, MA 01915
All Directors and Executive Officers as a Group 4,062,716 12.28%
(8 persons)(9)
</TABLE>
* Less than one percent.
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options and warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person shown in the
table. Percentage ownership is based on 33,083,190 shares of Common Stock
outstanding.
(2) Includes 400,000 shares of Common Stock which Mr. Valente has the right to
acquire within 60 days pursuant to the exercise of warrants.
(3) Includes 833,332 shares of Common Stock which Mr. Caruso has the right to
acquire within 60 days pursuant to the exercise of options and warrants,
and 1,432 shares held in the Company 401(k) Plan.
(4) Includes 686,666 shares of Common Stock which Mr. Smotrich has the right to
acquire within 60 days pursuant to the exercise of options and warrants,
and 8,000 shares of Common Stock owned by family members.
(5) Includes 903,666 shares of Common Stock which Mr. Georgiev has the right to
acquire within 60 days pursuant to the exercise of options and warrants,
40,000 shares of Common Stock held by family members and 2,051 shares held
in the Company 401(k) Plan.
(6) Includes 119,999 shares of Common Stock which Mr. Glosson has the right to
acquire within 60 days pursuant to the exercise of options and warrants.
(7) Includes 50,000 shares of Common Stock which Mr. Deutch has the right to
acquire within 60 days pursuant to the exercise of warrants.
(8) Includes 50,000 shares of Common Stock which Messrs. Martin and Pappalardo
have the right to acquire within 60 days pursuant to the exercise of
warrants.
(9) Total issued and outstanding shares includes an aggregate of 2,406,997
shares issuable pursuant to options and warrants exercisable within 60
days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From January 1996 to March 1997 the Company has advanced varying amounts
to Steven Georgiev, the Company's Chairman of the Board; the total outstanding
indebtedness, with interest, at June 5, 1997 was $985,872.99. These advances are
evidenced by demand promissory notes which bear interest at 7% and are fully
collateralized by stock in the Company and American Materials & Technologies
Corporation ("AM&T).
50
<PAGE>
From January 1996 to February 1997 the Company has advanced varying
amounts to Michael H. Smotrich, the Company's Chief Technical Officer; the total
outstanding indebtedness, with interest, at June 5, 1997 was $508,314.48. These
advances are evidenced by demand promissory notes which bear interest at 7% and
are collateralized by stock in the Company at a 90% loan to value ratio.
At December 31, 1995, the Company had notes receivable for $3,150,000
from AM&T evidenced by a $3,000,000 promissory note and a $150,000 promissory
note, both with interest at the rate of 10% per annum. Steve Georgiev is
Chairman of the Board of AM&T and owns 13% of AM&T's outstanding common stock.
On March 29, 1996, the Company assigned a portion of its notes receivable at a
face value of $1,500,000 to a non-affiliated individual for $1,500,000. The
remaining outstanding portions of the notes was paid off in 1996. The Company
owns a total of 463,664 shares of AM&T's common stock at March 31, 1997. These
shares were purchased at a cost of $375,000 and have a market value at March 31,
1997 of $2,781,984.
In 1996 the Company had loans outstanding at various points in time
totaling $5,800,000 to Alliance Partners, Inc. Buster Glosson, a director of the
Company, is Chairman and Chief Executive Officer of Alliance Partners, Inc.
These loans accrued interest at a rate of 10% per annum.
In 1996 the Company made consulting payments totaling $109,000 to Eagle
Limited. Buster Glosson is President of Eagle Limited.
On December 18, 1996, Steven Georgiev pledged 77,000 shares of his AM&T
common stock in favor of the Company to secure a loan of $500,000 made by the
Company to Trani, Inc.; on April 16, 1997, Mr. Georgiev increased the number of
pledged AM&T shares to 100,000.
On March 31, 1997, Steven Georgiev pledged 112,000 shares of his AM&T
common stock in favor of the Company to secure a loan of $500,000 made by the
Company to JCV Capital Corp.; on April 16, 1997, Mr. Georgiev decreased the
number of AM&T shares pledged to 100,000
(See also "Employment Agreements.")
The Company believes the foregoing transactions were on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
The Company's policy, as adopted by its Board of Directors on December 16, 1996,
is that, in order to reduce the risks of self-dealing or a breach of the duty of
loyalty to the Company, all transactions between the Company and any of its
officers, directors or principal stockholders must be for bona fide purposes,
will be subject to approval by a majority of the disinterested members of the
Board of Directors of the Company, and must be on terms no less favorable to the
Company than could be obtained from unaffiliated parties. On May 13, 1997, the
Board of Directors unanimously adopted a resolution prohibiting any further
loans to officers, directors or stockholders of the Company.
51
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits required to be filed herewith are incorporated
by reference to the filings previously made by the Company where so indicated
below.
<TABLE>
<S> <C>
Exhibit
No. Title
*****2.1 Stock Purchase Agreement, dated July 1, 1993, by and between the Company and Star Medical Technologies,
Inc.
+++2.2 Agreement, dated December 30, 1993, by and between the Company, Dynaco Corporation and Dynaco West
Corporation.
+++2.3 First Amendment to Purchase and Sale Agreement, by and between the Company, Dynaco Corporation and
Dynaco West Corporation, dated January 24, 1994.
- -2.4 Purchase and Sale Agreement dated March 14, 1995, by and
between the Company and SPMT Acquisition Corp., Spectrum
Medical Technologies, Inc., Sanford R. Lane and CSF
Investments Ltd.
- --2.5 Purchase and Sale Agreement dated June 5, 1995, by and between Dynaco Acquisition Corporation and
Inter-Connecting Products, Inc.
&&&&2.6 Agreement and Plan of Reorganization dated March 9, 1996 by and among the Company, TTI Acquisition
Corp., Tissue Technologies, Inc. and Mario Barton
&&&&2.7 Amendment to the Merger Agreement dated April 29, 1996 by and among the Company, TTI Acquisition Corp.,
Tissue Technologies, Inc. and Mario Barton.
&&&&2.8 Letter from the Company to Tissue Technologies, Inc. waiving the Company's right to receive
indemnification under Section 6 of the Merger Agreement in certain circumstances.
&&&&2.9 Plan of Merger dated May 3, 1996 by and between the Company, TTI Acquisition Corp. and Tissue
Technologies, Inc.
&&&&2.10 List of exhibits and schedules omitted from the Tissue Technologies, Inc. Merger Agreement.
(The Company hereby undertakes and agrees to furnish copies of the exhibits and schedules set forth in
exhibit 2f above to the Commission upon its request.)
###2.11 Stock Purchase Agreement dated March 19, 1996, by and between Dynaco Acquisition Corp., Comtel
Electronics, Inc., Mikel C. Green, Peter Rogal and Palomar Electronics Corp.
###2.12 Agreement for Purchase of Stock dated July 12, 1996, by and between the Company, Eleanor Roberts Weisman
and Wallace Roberts.
- ----3.1 Restated Certificate of Incorporation, as amended.
&&3.2 Certificate of Amendment to Certificate of Incorporation, as filed with the Delaware Secretary of State
on December 16, 1996.
52
<PAGE>
&3.3 Certificate of Designation of Series G Convertible Preferred
Stock as filed with the Delaware Secretary of State on
September 26, 1996.
###3.4 Certificate of Designation of Series H Convertible Preferred Stock as filed with the Delaware Secretary
of State on March 26, 1997.
3.5 Bylaws, as amended
4.1 Form of Common Stock Certificate.
*10.1 Patent License Agreement by and between the Company and Patlex Corporation, effective as of January 1,
1992.
**10.2 1991 Stock Option Plan, as amended.
#10.3 1993 Stock Option Plan.
####10.4 1995 Stock Option Plan.
- ----10.5 1996 Stock Option Plan
- ----10.6 1996 Employee Stock Purchase Plan
**10.7 Form of Stock Option Grant under the 1991, 1993 and 1995 Stock Option Plans.
###10.8 Form of Stock Option Agreement under the 1996 Stock Option Plan.
##10.9 Form of Company Warrant to Purchase Common Stock.
****10.10 Lease for premises at 66 Cherry Hill Drive, Beverly, Massachusetts,
dated May 25, 1993.
- ---10.11 The Company's 401(k) Plan.
&10.12 Securities Purchase Agreement between the Company and The Travelers Insurance Company dated July 12,
1996.
&10.13 Warrant to purchase Common Stock of the Company, dated July 12, 1996.
&10.14 Subscription Agreement between the Company and Genesee Fund Limited, dated September 26, 1996.
&10.15 Registration Rights Agreement between the Company and Genesee Fund Limited, dated September 26, 1996.
&10.16 Warrant to purchase Common Stock of the Company, dated September 27, 1996.
&10.17 Warrant Agreement between the Company and American Stock Transfer & Trust Co. as warrant agent, dated
June 24, 1996.
&10.18 Palomar Medical Technologies, Inc. and American Stock Transfer & Trust Company as trustee, Indenture
dated as of June 24, 1996, SF 25,000,000, 4.5% Convertible Subordinated Debentures due 2003.
&&&10.19 Form of Offshore Securities Subscription Agreement, dated July 3, 1996.
53
<PAGE>
&&&10.20 Palomar Medical Technologies, Inc. and American Stock Transfer & Trust Company as trustee, Indenture
dated as of June 24, 1996, SF 25,000,000 4.5% Convertible Subordinated Debentures due 2003.
&&&10.21 Warrant Agreement between the Company and American Stock Transfer & Trust Company as warrant agent,
dated June 24, 1996.
&&&10.22 Form of Registration Rights Agreement, dated July 3, 1996.
&&&10.23 Form of Debenture, dated July 3 1996.
&&&10.24 Form of Warrant, dated July 3, 1996.
&&&10.25 Berckeley Subscription Agreement, dated December 31, 1996 and Amendment thereto dated January 10, 1997.
&&&10.26 Berckeley Debenture, dated December 31, 1996.
&&&10.27 High Risk Opportunities Hub Fund, Ltd. Subscription Agreement, dated January 14, 1997.
&&&10.28 High Risk Opportunities Hub Fund, Ltd. Debenture, dated January 13, 1997.
###10.29 Securities Purchase Agreement between Palomar Electronics Corporation and Clearwater Fund IV, LLC, dated
December 31, 1996.
###10.30 Securities Purchase Agreement between Palomar Electronics Corporation, the Company and The Travelers
Insurance Company, dated as of December 18, 1996.
###10.31 Securities Purchase Agreement between Palomar Electronics Corporation and GFL Advantage Fund Limited
dated December 31, 1996.
###10.32 Option Agreement between the Company and GFL Advantage Fund Limited dated December 31, 1996.
###10.33 Common Stock Purchase Warrant dated December 31, 1996.
###10.34 Form of Net Warrant to Purchase Common Stock.
###10.35 Subscription Agreement between the Company and Finmanagement, Inc. dated December 27, 1996.
###10.36 Subscription Agreement dated as of April 12, 1996, between the Company and GFL Advantage Fund Limited.
###10.37 Registration Rights Agreement dated as of April 17, 1996 by and between the Company and GFL Advantage
Fund Limited.
###10.38 Warrant dated as of April 16, 1996.
###10.39 Form of Warrant to Purchase Common Stock dated February 1, 1996.
###10.40 Form of Offshore Stock Subscription Agreement dated February 1, 1996.
###10.41 Form of Subscription Agreement dated as of March 10, 1997.
###10.42 Form Registration Rights Agreement dated as of March 10, 1997.
54
<PAGE>
###10.43 Form of 5% Convertible Debenture due March 10, 2002.
###10.44 Subscription Agreement between the Company and Soginvest Bank dated as of March 13, 1997.
###10.45 6% Convertible Debenture due March 13, 2002.
###10.46 Asset Purchase and Settlement Agreement by and among the Company, Nexar Technologies, Inc., Technovation
Computer Labs, Inc. and Babar I. Hamirani, dated February 28, 1997.
###10.47 List of exhibits omitted from the Asset Purchase and Settlement Agreement.
(The Company hereby undertakes and agrees to furnish copies of
the exhibits and schedules set forth in exhibit 10(dddd) above
to the Commission upon its request.)
###10.48 Employment Agreement dated as of January 1, 1997, between the Company and Steven Georgiev.
###10.49 Employment Agreement dated as of January 1, 1997, between the Company and Michael H. Smotrich.
###10.50 Employment Agreement dated as of January 1, 1997, between the Company and Joseph P. Caruso.
###10.51 Employment Agreement dated as of January 1, 1997, between the Company and Anthony Fiorillo.
###10.52 Securities Purchase Agreement between the Company and RGC International Investors, LDC, dated March 27,
1997.
###10.53 Registration Rights Agreement between the Company and RGC International Investors, LDC, dated March
27, 1997.
&&&&&10.54 Form of Promissory Note dated October 17, 1996.
&&&&&10.55 Form of Subscription Agreement dated October 16, 1996.
10.56 Supplement to Securities Purchase Agreement dated May 5, 1997.
10.57 Supplement to Registration Rights Agreement dated May 5, 1997.
10.58 Supplement to Securities Purchase Agreement dated May 23, 1997.
10.59 Supplement to Registration Rights Agreement dated May 23, 1997.
23 Consent of Arthur Andersen LLP.
* Previously filed as an exhibit to Registration Statement No. 33-47479 filed on April 27, 1992, and
incorporated herein by reference.
** Previously filed as and exhibit to Amendment No. 4 to Form S-1 Registration Statement No. 33-47479 filed
on October 5, 1992.
*** Previously filed as an exhibit to Amendment No. 8 Registration Statement on Form S-1, No. 33-37379,
filed on December 17, 1992.
**** Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB date March 31, 1993, and
incorporated herein by reference.
***** Previously filed as an exhibit to the Current Report on Form 8-K date July 1, 1993, and incorporated
herein by reference.
# Previously filed as an exhibit to the Company's Annual Report
on Form 10-KSB for the year ended March 31, 1994, and
incorporated herein by reference.
## Previously filed as an exhibit to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1995, and
incorporated herein by reference.
### Previously filed as an exhibit to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996, and
incorporated herein by reference.
55
<PAGE>
- - Previously filed as an exhibit to the Current Report on Form 8-k dated April 20, 1995, and incorporated
herein by reference.
- -- Previously filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1995, and incorporated herein by reference.
- --- Previously filed as an exhibit to Form S-8 Registration Statement No. 33-97710 filed on October 4, 1995,
and incorporated herein by reference.
- ---- Previously filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996, and incorporated herein by reference.
& Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30,
1996, and incorporated herein by reference.
&& Previously filed as an exhibit to Form S-3 Registration Statement No. 333-18003 filed on December 16,
1996, and incorporated herein by reference.
&&& Previously filed as an exhibit to Form S-3 Registration Statement No. 333-22725 filed on March 4, 1997,
and incorporated herein by reference.
&&&& Previously filed as an exhibit to the Current Report on Form 8-K dated May 16, 1996, and incorporated
herein by reference.
&&&&& Previously filed as an exhibit to Form S-3 Registration Statement No. 333-28251 filed on May 30, 1997
and incorporated herein by reference.
+ Previously filed as an exhibit to the Current Report on Form 8-K dated September 10, 1993, and
incorporated herein by reference.
++ Previously filed as an exhibit to the Current Report on Form 8-K dated February 7, 1994, and
incorporated herein by reference.
+++ Previously filed as an exhibit to the Current Report on Form 8-K dated February 9, 1994, and
incorporated herein by reference.
++++ Previously filed as an exhibit to the Current Report on Form 8-K dated February 14, 1994, and
incorporated herein by reference.
</TABLE>
(B) REPORTS ON FORM 8-K
None
56
<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 Beverly in the
Commonwealth of Massachusetts on July 28Ma, 1997.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
-------------------------------
Louis P. Valente
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
Name Capacity Date
/s/ Louis P. Valente President, Chief Executive July 11, 1997
---------------------------------
Louis P. Valente Officer and Director
/s/ Joseph P. Caruso Chief Financial Officer and Treasurer July 11, 1997
---------------------------------
Joseph P. Caruso ( Principal Financial Officer and
Principal Accounting Officer)
/s/ Dr. Michael H. Smotrich Chief Technical Officer, July 11, 1997
---------------------------------
Dr. Michael H. Smotrich and Director
/s/ Steven Georgiev Chairman of the Board July 11, 1997
---------------------------------
Steven Georgiev
/s/ Buster C. Glosson Director July 11, 1997
---------------------------------
Buster C. Glosson
/s/ John M. Deutch Director July 11, 1997
---------------------------------
John M. Deutch
/s/ James G. Martin Director July 11, 1997
---------------------------------
James G. Martin
/s/ A. Neil Pappalardo Director July 11, 1997
---------------------------------
A. Neil Pappalardo
</TABLE>
As Amended June 2, 1997
BY-LAWS
OF
PALOMAR MEDICAL TECHNOLOGIES, INC.
ARTICLE I
Offices
SECTION 1. Registered Office. The registered office of Palomar Medical
Technologies, Inc. (the "Corporation") in the State of Delaware, shall be 32
Loockerman Square, Suite L-100, Dover, Kent County, Delaware 19901. The
registered agent at such address is The Prentice Hall Corporation System, Inc.
SECTION 2. Other Offices. The Corporation may also have offices at such
other places either within or without the State of Delaware as the Board of
Directors (the "Board"" may from time to time determine.
ARTICLE II
Meetings of Stockholders
SECTION 1. Annual Meetings. The annual meeting of the stockholders of
the Corporation for the election of directors and for the transaction of such
other business as may properly come before the meeting shall be held at such
hour and place as the Board may determine on the third Tuesday in May in each
year. If for any reason the annual meeting shall not be held on the date fixed
herein, a special meeting in lieu of the annual meeting may be held, with all
the force and effect of an annual meeting, on such date and at such place and
hour as shall be designated by the Board in the notice thereof. At the annual
meeting any business may be transacted whether or not the notice of such meeting
shall have contained a reference thereto, except where such a reference is
required by law, the Certificate of Incorporation or these By-Laws.
SECTION 2. Special Meetings. A special meeting of the stockholders for
any purpose or purposes may be called at any time by the Board, by the President
or by the holders of at least forty (40) percent of the outstanding shares of
the Corporation's capital stock entitled to vote thereat, and such meeting shall
be held on such date and at such place and hour as shall be designated in the
notice thereof.
SECTION 3. Notice of Meetings. Except as otherwise expressly required by
these By-laws or by law, notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of record entitled to notice of, or to vote at,
such meeting by delivering a typewritten or printed notice thereof to such
stockholder personally or by depositing such notice in the United States mail,
directed to such stockholder at such stockholder's address as it appears on the
stock records of the Corporation. Every such notice shall state the place, date
and hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called. Notice of any adjourned meeting of the
stockholders shall not be required to be given if the time and place thereof are
announced at the meeting at which the adjournment is taken and a new record date
for the adjourned meeting is not thereafter fixed.
SECTION 4. Quorum and Manner of Acting. Except as otherwise expressly
required by law, if stockholders holding of record a majority of the shares of
stock of the Corporation issued, outstanding and entitled to be voted at the
particular meeting shall be present in person or by proxy, a quorum for the
transaction of business at any meeting of the stockholders shall exist. In the
absence of a quorum at any such meeting or any adjournment or adjournments
thereof, a majority in voting interest of those present in person or by proxy
and entitled to vote thereat may adjourn such meeting from time to time until
stockholder holding the amount of stock requisite for a quorum shall be present
in person or by proxy. At any such adjourned meeting at which a quorum is
present any business may be transacted which might have been transacted at the
meeting as originally called.
SECTION 5. Organization of Meetings. At each meeting of the
stockholders, one of the following shall act as chairman of the meeting and
preside thereat, in the following order of precedence:
(a) the President;
(b) any other office or a stockholder of record
designated by a majority in voting interest of the
stockholders present in person or by proxy and entitled
to vote thereat.
The Secretary of the Corporation (the "Secretary") or, if the Secretary shall be
absent from or presiding over the meeting in accordance with the provisions of
this Section, the person whom the chairman of the meeting shall appoint, shall
act as secretary of the meeting and keep the minutes thereof.
SECTION 6. Order of Business. The order of business at each meeting of
the stockholders shall be determined by the chairman of the meeting, but such
order of business may be changed by a majority in voting interest of those
present in person or by proxy at such meeting and entitled to vote thereat.
SECTION 7. Voting. Except as otherwise provided in the Certificate of
Incorporation, each stockholder shall, at each meeting of the stockholders, be
entitled to one vote in person or by proxy for each share of stock of the
Corporation which has voting power on the matter in question held by such
stockholder and registered in such stockholder's name on the stock record of the
Corporation:
(a) on the date fixed pursuant to the provisions of Section 6 of
Article VII of these By-laws as the record date for the determination of
stockholders who shall be entitled to receive notice of and to vote at
such meeting; or
(b) if no record date shall have been so fixed, then at the
close of business on the day next preceding the day on which notice of
the meeting shall be given or, if notice of the meeting shall be waived,
at the close of business on the day next preceding the day on which the
meeting shall be held.
Any vote of stock of the Corporation may be held at any meeting of the
stockholders by the person entitled to vote the same in person or by proxy. At
all meetings of the stockholders all matters, except as otherwise provided in
the Certificate of Incorporation, in these By-laws or by law, shall be decided
by the vote of a majority in voting interest of the stockholders present in
person or by proxy and entitled to vote thereat, a quorum being present.
SECTION 8. Consent in Lieu of Meeting. Any action required to be taken
or any other action which may be taken at any annual or special meeting of
stockholders, may be taken without a meeting, without prior notice and without a
vote if a consent in writing, setting forth the action so taken, shall be signed
by the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted, provided that
prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing.
SECTON 9. Inspectors. Either the board or, in the absence of a
designation of inspectors by the Board, the chairman of the meeting may, in the
discretion of the Board or the chairman, appoint one or more inspectors, who
need not be stockholders, who shall receive and take charge of ballots and
proxies and decide all questions relating to the qualification of those
asserting the right to vote and the validity of ballots and proxies. In the
event of the failure or refusal to serve of any inspector designated by the
Board, the chairman of the meeting shall appoint an inspector to act in place of
each such inspector designated by the Board.
SECTION 10. Notice of Stockholder Business at a Meeting of the
Stockholders. The following provisions of this Section 10 shall apply to the
conduct of business at any meeting of the stockholders. (As used in this Section
10, the term annual meeting shall include a special meeting in lieu of an annual
meeting.)
(a) At any meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting (i) pursuant
to the Corporation's notice of meeting, (ii) by or at the direction of
the board of directors or (iii) by any stockholder of the Corporation
who is a stockholder of record at the time of giving of the notice
provided for in paragraph (b) of this Section 10, who shall be entitled
to vote at such meeting and who complies with the notice procedures set
forth in paragraph (b) of this Section 10.
(b) For business to be properly brought before any meeting of
the stockholders by a stockholder pursuant to clause (iii) of paragraph
(a) of this Section 10, the stockholder must give timely notice thereof
in writing to the secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation (i) in the case of an
annual meeting (or a special meeting in lieu of the annual meeting), not
less than ninety (90) days prior to the date for such annual meeting,
regardless of any postponements, deferrals or adjournments of that
meeting to a later date; PROVIDED, HOWEVER, that if the annual meeting
of stockholders or a special meeting in lieu thereof is to be held on a
date prior to the Specified Date, and if less than one hundred (100)
days' notice or prior public disclosure of the date of such annual or
special meeting is given or made, notice by the stockholder to be timely
must be so delivered or mailed and received not later than the close of
business on the tenth (10th) day following the earlier of the date on
which notice of the date of such annual or special meeting was mailed or
the day on which public disclosure was made of the date of such annual
or special meeting; and (ii) in the case of a special meeting (other
than a special meeting in lieu of an annual meeting), not later than the
tenth (10th) day following the earlier of the day on which notice of the
date of the scheduled meeting was mailed or the day on which public
disclosure was made of the date of the scheduled meeting. A
stockholder's notice to the secretary shall set forth as to each matter
the stockholder proposes to bring before the meeting (i) a brief
description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (ii) the name
and address, as they appear on the Corporation's books, of the
stockholder proposing such business, the name and address of the
beneficial owner, if any, on whose behalf the proposal is made, and the
name and address of any other stockholder or beneficial owners known by
such stockholder to be supporting such proposal, (iii) the class and
number of shares of the Corporation which are owned beneficially and of
record by such stockholder of record, by the beneficial owner, if any,
on whose behalf the proposal is made and by any other stockholders or
beneficial owners known by such stockholder to be supporting such
proposal, and (iv) any material interest of such stockholder of record
and/or of the beneficial owner, if any, on whose behalf the proposal is
made, in such proposed business and any material interest of any other
stockholders or beneficial owners known by such stockholder to be
supporting such proposal in such proposed business, to the extent known
by such stockholder.
(c) Notwithstanding anything in these by-laws to the contrary,
no business shall be conducted at a meeting except in accordance with
the procedures set forth in this Section 10. The person presiding at the
meeting shall, if the facts warrant, determine that business was not
properly brought before the meeting in accordance with the procedures
prescribed by these by-laws, and if the person presiding should so
determine, he or she shall so declare at the meeting and any such
business not properly brought before the meeting shall not be
transacted. Notwithstanding the foregoing provisions of this Section 10,
a stockholder shall also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended (or any successor
provisions), and the rules and regulations thereunder with respect to
the matters set forth in this Section 10.
(d) This provisions shall not prevent the consideration and
approval or disapproval at the meeting of reports of officers, directors
and committees of the board of directors, but, in connection with such
reports, no new business shall be acted upon at such meeting unless
properly brought before the meeting as herein provided.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. General Powers. The property, business, affairs and policies
of the Corporation shall be managed by or under the direction of the Board.
SECTION 2. Number and Term of Office. The number of directors which
shall constitute the initial Board shall be one (1) and thereafter the Board
shall consist of not less than one (1) person, the number, within said limits to
be fixed from time to time by a vote of the stockholders at the annual meeting
or at a special meeting called for the purpose by the Board. Each of the
directors of the Corporation shall hold office until the annual meeting after
such director's election and until such director's successor shall be elected
and shall qualify or until such director's earlier death or resignation or
removal in the manner hereinafter provided. Subject to the first sentence of
this Section 2, the Directors in office at any time may increase the number of
directors between stockholders' meetings, and the additional directorships thus
created may be filled by a majority of the directors in office at the time of
the increase or, if not so filled prior to the next annual meeting of
stockholders, by the stockholders. Vacancies in the Board may be filled by the
remaining Directors, although less than a quorum, for the unexpired term or
terms.
SECTION 3. Election. Unless otherwise provided by the Certificate of
Incorporation, at each annual meeting of the stockholders for the election of
directors at which a quorum is present, the persons receiving the greatest
number of votes, up to the number of directors to be elected, shall be the
directors. Directors need not be stockholders of the Corporation.
SECTION 4. Meetings.
(A) Annual Meetings. The annual meeting of the Board, for the purpose of
organization, the elections of officers and the transaction of other business,
shall be held at the place of and immediately following final adjournment of the
annual meeting of stockholders or the special meeting in lieu thereof.
(B) Regular Meetings. Regular meetings of the Board or any committee
thereof shall be held as the board or such committee shall from time to time
determine.
(C) Special Meetings. Special meetings of the Board may be called by
order o the President or by any two of the directors then in office.
(D) Notice of Meetings. No notice of regular meetings of the Board or of
any committee thereof or of any adjourned meeting thereof need be given. The
Secretary shall give prior notice to each director of the time and place of each
special meeting of the Board or adjournment thereof. Such notice shall be given
to each director in person or by telephone, telegraph or ordinary mail, not less
than two days before the meeting if given in person or by telephone or telegraph
and, if give by mail, post marked at least four (4) days prior to the special
meeting if given by mail, and sent to such director at the director's residence
or usual business address. Notice of any special meeting of the Board or any
committee thereof shall not be required to be given to any director who shall
attend such meeting. Any meeting of the Board or any committee thereof shall be
a legal meeting without any notice thereof having been given if all the
directors then in office shall be present thereat. The purposes of a meeting of
the Board or any committee thereof need not be specified in the notice thereof.
(E) Time and Place of Meeting. Regular meetings of the Board or any
committee thereof shall be held at such times and place or places as the Board
or such committee may from time to time determine. Special meetings of the Board
or any committee thereof shall be held at such times and places as the callers
thereof may determine.
(F) Quorum and Manner of Acting. Except as otherwise expressly required
by these By-laws or by law, a majority of the directors then in office and a
majority of the members of any committee shall be present in person at any
meeting thereof in order to constitute a quorum for the transaction of business
at such meeting, and the vote of a majority of the directors present at any such
meeting at which a quorum is present shall be necessary for the passage of any
resolution or for an act to be the act of the Board or such committee. In the
absence of a quorum, a majority of the directors present thereat may adjourn
such meeting either finally or from time to time to another time and place until
a quorum shall be present thereat. In the latter case notice of the adjourned
time and place shall be given as aforesaid to all Directors.
(G) Organization of Meetings. At each meeting of the Board, one of the
following shall act as chairman of the meeting and preside thereat, in the
following order of precedence:
(a) the President;
(b) any director chosen by a majority of the directors present
thereat.
The Secretary or, in case of the Secretary's absence, the person whom the
chairman of the meeting shall appoint, shall act as secretary of such meeting
and keep the minutes thereof. The order of business at each meeting of the Board
shall be determined by the chairman of such meeting.
(H) Consent in Lieu of Meeting. Any action required or permitted to be
taken at any meeting of the Board or any committee thereof may be taken without
a meeting if all members of the Board or committee, as the case may be, consent
thereto in a writing or writings and such writing or writings are filed with the
minutes or the proceedings of the Board or committee. Such consents shall be
treated for all purposes as a vote at a meeting.
(I) Action by Communications Equipment. The directors may participate in
a meeting of the Board or any committee thereof by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other and such participation shall constitute
presence in person at such meeting.
SECTION 5. Compensation. Each director, in consideration of serving as
such, may receive from the Corporation such amount per annum and such fees and
expenses incurred for attendance at meetings of the Board or of any committee,
or both, as the Board may from time to time determine. Nothing contained in this
Section shall be construed to preclude any director from serving the Corporation
in any other capacity and receiving compensation therefor.
SECTION 6. Resignation, Removal and Vacancies. Any director may resign
at any time by giving written notice of such resignation to the President or the
Secretary.
Any such resignation shall take effect at the time specified therein or,
if not specified therein, upon receipt. Unless otherwise specified in the
resignation, its acceptances shall not be necessary to make it effective. Any or
all of the directors may be removed at any time for cause or without cause at a
meeting of stockholders by vote of a majority of shares then entitled to vote at
an election of directors. Any director also may be removed as a director at any
time for cause by vote of a majority of the directors then in office.
If the office of any director becomes vacant at any time by reason of
death, resignation, retirement, disqualification, removal from office or
otherwise, or if any new directorship is created by any increase in the
authorized number of directors, a majority of the directors then in office,
though less than a quorum, or the sole remaining director, may choose a
successor or fill the newly created directorship and the director so chosen
shall hold office, subject to the provisions of these By-laws, until the next
annual election of directors and until his successor shall be duly elected and
shall qualify. In the event that a vacancy arising as aforesaid shall not have
been filled by the Board, such vacancy may be filled by the stockholders at any
meeting thereof after such office becomes vacant. If one or more directors shall
resign from the Board, effective at a future date, a majority of the directors
then in office, including those who have so prospectively resigned, shall have
the power to fill such vacancy or vacancies, the vote thereon to take effect
when such resignation or resignations shall become effective, and each director
so chosen shall hold office as herein provided in the filling of other
vacancies.
SECTION 7. Committees. The directors may, by vote of a majority of the
directors then I office, appoint from their number one or more committees and
delegate to such committees some or all of their powers to the extent permitted
by law, the Certificate of Incorporation or these By-laws. Except as the Board
of Directors may otherwise determine, any such committee may, by majority vote
of the entire committee, make rules for the conduct of its business. The
directors shall have the power at any time to fill vacancies in any such
committee, to change its membership or to discharge the committee.
SECTION 8. Advisory Council. The directors may, by vote of a majority of
the directors then in office, establish an advisory council to the Board of
Directors. The advisory council shall have no duties, but may provide the Board
with advice relating to the business of the Corporation. The members of this
council, in their capacity as advisory council members, shall not be entitled to
vote at any annual, regular, or special meetings of the Board and shall attend
such meetings only at the discretion of the Board of Directors. The directors
shall have the power at any time to fill vacancies in any such council, to
change its membership or to discharge the council. No member of the advisory
council as a result of such capacity shall be deemed to be an officer or a
member of the Board of Directors.
ARTICLE IV
Officers
SECTION 1. Election and Appointment and Term of Office. The officers of
the corporation shall be a President, such number, if any, of Vice Presidents
(including any Executive or Senior Vice Presidents) as the Board may from time
to time determine, a Secretary and a Treasurer. Each such officer shall be
elected by the Board at its annual meeting and hold office for such term as may
be prescribed by the Board. Two or more offices may be held by the same person.
The President may, but need not, be chosen from among the Directors.
The Board may elect or appoint (and may authorize the President to
appoint) such other officers (including one or more Assistant Secretaries and
Assistant Treasurers) as it deems necessary who shall have such authority and
shall perform such duties as the Board or the President may from time to time
prescribe.
If additional officers are elected or appointed during the year, each
shall hold office until the next annual meeting of the Board at which officers
are regularly elected or appointed and until such officer's successor is elected
or appointed and qualified or until such officer's earlier death or resignation
or removal in the manner hereinafter provided.
SECTION 2. Duties and Functions.
(A) President. The President shall be the chief executive officer of the
Corporation and shall have general direction and supervision over the business
and affairs of the Corporation, subject to the directions and limitations
imposed by the Board and these By-laws, and shall see that all orders and
resolutions of the Board are carried into effect. The President shall, if
present, preside at all meetings of stockholders and of the Board and shall also
perform such other duties and have such other powers as are prescribed by these
By-laws or as may be from time to time prescribed by the Board, or these
By-laws.
(B) Vice Presidents. Each Vice President shall have such powers and
duties as shall be prescribed by the Board.
(C) Secretary. The Secretary shall attend and keep the records of all
meetings of the Stockholders, the Board and all other committees, if any, in one
or more books kept for that purpose. The Secretary shall give or cause to be
given due notice of all meetings in accordance with these By-laws and as
required by law. The Secretary shall notify the several officers of the
Corporation of all action taken by the Board concerning matters relating to
their duties and shall transmit to the appropriate officers copies of all
contracts and resolutions approved by the Board. The Secretary shall be
custodian of the seal of the Corporation and of all contracts, deeds, documents
and other corporate papers, records (except financial and accounting records)
and indicia of title to properties owned by the Corporation as shall not be
committed to the custody of another officer by the Board or by the President.
The Secretary shall affix or cause to be affixed the seal of the Corporation to
instruments requiring the same when the same have been signed on behalf of the
Corporation by a duly authorized officer. The Secretary shall perform all duties
and have all powers incident to the office of Secretary and shall perform such
other duties as shall be assigned by the Board or the President. The Secretary
may be assisted by one or more Assistant Secretaries, who shall, in the absence
or disability of the Secretary, perform the duties and exercise the powers of
the Secretary.
(D) Treasurer. The Treasurer shall have charge and custody of the
corporate funds and other valuable effects, including securities. The Treasurer
shall keep true and full accounts of all assets, liabilities, receipts and
disbursements and other transactions of the Corporation and shall cause regular
audits of the books and records of the Corporation to be made. The Treasurer
shall perform all duties and have all powers incident to the office of Treasurer
and shall perform such other duties as shall be assigned by the Board or the
President. The Treasurer may be assisted by one or more Assistant Treasurers,
who shall, in the absence or disability of the Treasurer, perform the duties or
exercise the powers of the Treasurer.
SECTION 4. Resignation, Removal and Vacancies. Any officer may resign at
any time by giving written notice of such resignation to the President or the
Secretary of the Corporation. Any such resignation shall take effect at the time
specified therein or, if not specified therein, when accepted by action of the
Board.
Any officer, agent or employee may be removed, with or without cause, at
any time by the Board or by the officer who made such appointment.
A vacancy in any office may be filled for the unexpired portion of the
term in the same manner as provided in these By-laws for election or appointment
to such office.
ARTICLE V
Waiver of Notices; Place of Meetings
SECTION 1. Waiver of Notices. Whenever notice is required to be given by
the Certificate of Incorporation, by these By-laws or by law, a waiver thereof
in writing, signed by the person entitled to such notice, or by attorney
thereunto authorized, shall be deemed equivalent to notice, whether given before
or after the time specified therein. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except where the person attends
the meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.
SECTION 2. Place of Meetings. Any meeting of the Stockholders, the Board
or any committee of the Board may be held within or outside the State of
Delaware.
ARTICLE VI
Execution and Delivery of Documents;
Deposits; Proxies, Books and Records
SECTION 1. Execution and Delivery of Documents; Delegation. The Board
shall designate the officers, employees and agents of the Corporation who shall
have power to execute and deliver deeds, contracts, mortgages, bonds,
debentures, checks, drafts and other orders for the payment of money and other
documents for and in the name of the Corporation and may authorize such
officers, employees and agents to delegate such power (including authority to
redelegate) by written instrument to other officers, employees or agents of the
Corporation.
SECTION 2. Deposits. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation or
otherwise as the Board or the President or any other officer, employee or agent
of the Corporation to whom power in that respect shall have been delegated by
the Board or these By-laws shall select.
SECTION 3. Proxies in Respect of Stock or Other Securities of Other
Corporations. The President or any officer of the Corporation designated by the
Board shall have the authority from time to time to appoint and instruct an
agent or agents of the Corporation to exercise in the name and on behalf of the
Corporation the powers and rights which the Corporation may have as the holder
of stock or other securities in any other corporation, to vote or consent in
respect of such stock or securities and to execute or cause to be executed in
the name and on behalf of the Corporation and under its corporate seal or
otherwise, such written proxies, powers of attorney or other instruments as the
President or such officer may deem necessary or proper in order that the
Corporation may exercise such powers and rights.
SECTION 4. Books and Records. The books and records of the Corporation
may be kept at such places within or without the State of Delaware as the Board
may from time to time determine.
ARTICLE VII
Certificates; Stock Record; Transfer and
Registration; New Certificates; Record Date; etc.
SECTION 1. Certificates for Stock. Every owner of stock of the
Corporation shall be entitled to have a certificate certifying the number of
shares owned by such stockholder in the Corporation and designating the class of
stock to which such shares belong, which shall otherwise be in such form as the
Board shall prescribe. Each such certificate shall be signed by the President or
a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Corporation. Any of or all such signatures may
be facsimiles. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may nevertheless be issued by the Corporation with the same effect
as if such person were such officer, transfer agent or registrar at the date of
issue. Every certificate surrendered to the Corporation for exchange or transfer
shall be canceled and a new certificate or certificates shall not be issued in
exchange for any existing certificate until such existing certificate shall have
been so canceled, except in cases provided for in Section 4 of this Article.
SECTION 2. Stock Record. A stock record in one or more counterparts
shall be kept of the name of the person, firm or corporation owning the stock
represented by each certificate for stock of the Corporation issued, the number
of shares represented by each such certificate, the date thereof and, in the
case of cancellation, the date of cancellation.
SECTION 3. Transfer and Registration of Stock.
(A) Transfer. The transfer of stock and certificates of stock which
represent the stock of the Corporation shall be governed by Article 8 of the
Uniform Commercial Code, as adopted I the State of Delaware and as amended from
time to time.
(B) Registration. Registration of transfer of shares of the Corporation
shall be made only on the books of the Corporation by the registered holder
thereof, or by such holder's attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary, and on the surrender of the
certificate or certificates for such shares properly endorsed or accompanied by
a stock power duly executed, with any necessary transfer stamps affixed and with
such proof of authenticity of signatures and such proof of authority to make the
transfer as may be required by the Corporation or its transfer agent.
SECTION 4. New Certificates.
(A) Lost, Stolen or Destroyed Certificates. The Board may direct a new
share certificate or certificates to be issued by the Corporation for any
certificate or certificates alleged to have been lost, stolen, mutilated or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate to be lost, stolen, mutilated or destroyed. When authorizing
such issue of a new certificate or certificates, the Board may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, mutilated or destroyed certificate or certificates,
or such owner's legal representative, to give the Corporation a bond in such sum
and in such form as it may direct as indemnity against any claim that may be
made against the Corporation with respect tot he certificate alleged to have
been lost, stolen, mutilated or destroyed.
SECTION 5. Regulations. The Board may make such rules and regulations as
it may deem expedient, not inconsistent with these By-laws, concerning the
issue, transfer and registration of certificates for stock of the Corporation.
SECTION 6. Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board
may fix, in advance, a record date, which shall not be more than 60 or less than
10 days before the date of such meeting, nor more than 60 days prior to any
other action. A determination of stockholders entitled to notice of or to vote
at a meeting of the stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
ARTICLE VIII
Seal
The Board shall provide a corporate seal which shall bear the full name
of the Corporation and the year and state of its incorporation.
ARTICLE IX
Indemnification
SECTION 1. Actions, Etc. Other Than by or in the Right of the
Corporation. The Corporation shall, to the full extent legally permissible,
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, including a grand jury
proceeding, and all appeals (but excluding any such action, suit or proceeding
by or in the right of the Corporation), by reason of the fact that such person
is or was a director, executive officer (as hereinafter defined) or advisory
council member of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the conduct in question was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that such person did not act in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, that such person had reasonable cause to believe
that the conduct in question was unlawful. As used in this Article IX, an
"executive officer" of the Corporation is the president, treasurer, a vice
president given the title of executive vice president, or any officer designated
as such pursuant to vote of the Board of Directors.
SECTION 2. Actions, Etc., by or in the Right of the Corporation. The
Corporation shall, to the full extent legally permissible, indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit, including appeals, by or in the right of
the Corporation to procure a judgment in its favor, by reason of the fact that
such person is or was a director or executive officer of the Corporation as
defined in Section 1 of this Article, or is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable tot he
Corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnify for such
expenses which the Court of Chancery or such other court shall deem proper.
SECTION 3. Determination of Right of Indemnification. Any
indemnification of a director or officer (unless ordered by a court) shall be
made by the Corporation only as authorized in the specific case upon a
determination that such indemnification is proper in the circumstances because
the director or executive officer has met the applicable standard of conduct as
set forth in Section s 1 and 2 hereof. Such a determination shall be reasonably
and promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding,
or (ii) (if such a quorum is not obtainable, or, even if obtainable if a quorum
of disinterested directors so directs) by independent legal counsel in a written
opinion, or (iii) by the stockholders.
SECTION 4. Indemnification Against Expenses of Successful Party.
Notwithstanding any other provision of this Article, to the extent that a
director or officer of the Corporation has been successful in whole or in part
on the merits or otherwise, including the dismissal of an action without
prejudice, in defense of any action, suit or proceeding or in defense of any
claim, issue or matter therein, such person shall be indemnified against all
expenses incurred in connection therewith.
SECTION 5. Advances of Expenses. Expenses incurred by a director or
officer in any action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition thereof, if such person shall undertake to pay
such amount in the event that it is ultimately determined, as provided herein,
that such person is not entitled to indemnification. Notwithstanding the
foregoing, no advance shall be made by the Corporation if a determination is
reasonably and promptly made (i) by the Board of Directors by a majority vote of
a quorum of disinterested directors, or (ii) (if such a quorum is not obtainable
or, even if obtainable, if a quorum of disinterested directors so directs) by
independent legal counsel in a written opinion, that, based upon the facts known
to the Board of Directors or such counsel at the time such determination is
made, such person has not met the relevant standards set forth for
indemnification in Section 1 or 2, as the case may be.
SECTION 6. Right to Indemnification Upon Application; Procedure Upon
Application. Any indemnification or advance under Sections 1, 2, 4 or 5 of this
Article shall be made promptly, and in any event within ninety days, upon the
written request of the person seeking to be indemnified, unless a determination
is reasonably and promptly made by the Board of Directors that such person acted
in a manner set forth in such Sections so as to justify the Corporation's not
indemnifying such person or making such an advance. In the event no quorum of
disinterested directors is obtainable, the Board of Directors shall promptly
appoint independent legal counsel to decide whether the person acted in the
manner set forth in such Sections so as to justify the Corporation's not
indemnifying such person or making such an advance. The right to indemnification
or advances as granted by this Article shall be enforceable by such person in
any court of competent jurisdiction, if the Board of Director or independent
legal counsel denies the claim therefor, in whole or in part, or if no
disposition of such claim is made within ninety days.
SECTION 7. Other Right and Remedies; Continuation of Rights. The
indemnification and advancement of expenses provided by this Article shall not
be deemed exclusive of any other rights to which any person seeking
indemnification or advancement of expenses may be entitled under any By-law,
agreement, vote of stockholders or disinterested directors, the General
Corporation Law of the State of Delaware or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office. All rights to indemnification or advancement under this Article
shall be deemed to be in the nature of contractual rights bargained for and
enforceable by each director and executive officer as defined in Section 1 of
this Article who serves in such capacity at any time while this Article and
other relevant provisions of the General Corporation Law of the State of
Delaware and other applicable laws, if any, are in effect. All rights to
indemnification under this Article or advancement of expenses shall continue as
to a person who has ceased to be a director or executive officer, and shall
inure to the benefit of the heirs, executors and administrators of such a
person. No repeal or modification of this Article shall adversely affect any
such rights or obligations then existing with respect to any state of facts then
or theretofore existing or any action, suit or proceeding theretofore or
thereafter brought based in whole or in part upon any such state of facts. The
Corporation shall also indemnify any person for attorneys' fees, costs, and
expenses in connection with the successful enforcement of such person's rights
under this Article.
SECTION 8. Other Indemnitees. The Board of Directors may, be general
vote or by vote pertaining to a specific officer, employee or agent, advisory
council member or class thereof, authorized indemnification of the Corporation's
employees and agents, in addition to those executive officers and to whatever
extent it may determine, which may be in the same manner and to the same extent
provided above.
SECTION 9. Insurance. Upon resolution passed by the Board of Directors,
the Corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee, advisory council member or agent of the
Corporation, or is or was serving at the request of the Corporation, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the Corporation would have the power to
indemnify such person against such liability under the provisions of this
Article.
SECTION 10. Constituent Corporations. For the purposes of this Article,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporations (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors and officers so that any person who is or was a director or officer of
such a constituent corporation or is or was serving at the request of such
constituent corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article with respect to the resulting or
surviving corporation as such person would have with respect to such constituent
corporation if its separate existence had continued.
SECTION 11. Savings Clause. If this Article or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, executive officer,
advisory council member, and those employees and agents of the Corporation
granted indemnification pursuant to Section 3 hereof as to expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement with respect
to any action, suit or proceeding, whether civil, criminal, administrative or
investigative, including a grand jury proceeding, and all appeals, and any
action by the Corporation, to the full extent permitted by any applicable
portion of this Article that shall not have been invalidated or by any other
applicable law.
SECTION 12. Other Enterprises, Fines, and Serving at Corporation's
Request. For purposes of this Article, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of any employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article.
ARTICLE X
Dividends
Subject to the applicable provision of the Certificate of Incorporation,
if any, dividends upon the outstanding shares of the Corporation may be declared
by the Board of Directors at any regular or special meeting pursuant to law and
may be paid in cash, in property, or in shares of the Corporation.
ARTICLE XI
Fiscal Year
The fiscal year of the Corporation shall be determined by resolution of
the Board of Directors.
ARTICLE XII
Amendments
These By-laws may be amended, altered or repealed by the vote of a
majority of the entire Board, subject to the power of the holders of a majority
of the outstanding stock of the corporation entitled to vote in respect thereof,
to amend or repeal any By-law made by the Board.
NUMBER SHARES
PALOMAR MEDICAL TECHNOLOGIES, INC.
Incorporated under the laws of the State of Delaware
THIS IS TO CERTIFY THAT:
-------------------------------------------------------
IS THE OWNER OF
-------------------------------------------------------
Fully-paid and non-assessable shares of the common
stock, par value $.01, of PALOMAR
MEDICAL TECHNOLOGIES, INC.
(hereinafter called the "Company"), transferable on the books of the Company by
the holder in person or by duly authorized attorney upon surrender of this
certificate properly endorsed or assigned for transfer. The shares represented
by this certificate are subject to the laws of the State of Delaware, the
provisions of the Certificate of Incorporation and the By-Laws of the Company as
now or hereafter amended, copies of which are or will be on file at the
principal office of the Company, to all of which the holder by acceptance hereof
assents.
This certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Company and the facsimile signatures of its
duly authorized officers.
Dated:
-----------------------
S E A L
/s/ Sarah Reed /s/ Michael H. Smotrich
------------------- ------------------------
Assistant Secretary President
<PAGE>
THE CORPORATION WILL FURNISH TO THE HOLDER UPON REQUEST WITHOUT CHARGE THE
DESIGNATIONS, PREFERENCES AND RELATIVE PARTICIPATING, OPTIONAL OR OTHER SPECIAL
RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - . . . . Custodian. . . . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act. . . . . . . . . . . . . . . . .
in common (State)
Additional abbreviations
may also be used though not
in the above list.
</TABLE>
FOR VALUE RECEIVED HEREBY SELL, ASSIGN AND TRANSFER UNTO
----------
Please insert Social Security or other
identifying number of assignee
- --------------------------------------
- --------------------------------------------------------------------------------
(please print or typewrite name and address, including zip code, of assignee)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- SHARES
OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT ATTORNEY
------------------------------------
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED:
-------------------------------------
---------------------------------------------------------
NOTICE:
The signature to the assignment must
correspond with the name as written upon
the face of the certificate in every
particular, without alteration or enlargement
or any change whatever.
SIGNATURE(S) GUARANTEED:
------------------------------------------------------
The signature(s) should be guaranteed by an eligible
guarantor institution (banks, stockbrokers, savings
and loan associations and credit unions with
membership in an approved signature guarantee
medallion program), pursuant to S.E.C. Rule 17Ad-15.
SUPPLEMENT TO SECURITIES PURCHASE AGREEMENT
SUPPLEMENT TO SECURITIES PURCHASE AGREEMENT (this "SUPPLEMENT"), dated
as of May 5, 1997, by and among PALOMAR MEDICAL TECHNOLOGIES, INC., a
corporation organized under the laws of the State of Delaware (the "Company"),
with headquarters located at 66 Cherry Hill Drive, Beverly, Massachusetts 01915,
RGC INTERNATIONAL INVESTORS, LDC ("RGC") and (i) each of the investors (the
"CURRENT INVESTORS") set forth on the execution pages hereof (the "EXECUTION
PAGES") and (ii) each of the investors (the "SUBSEQUENT INVESTORS" and together
with the Current Investors, the "ADDITIONAL INVESTORS") set forth on the
Execution Pages which may hereafter be appended to this Supplement in accordance
with Section 7 hereof.
WHEREAS:
A. The Company and RGC are parties to a Securities Purchase Agreement
dated as of March 27, 1997 (the "ORIGINAL SECURITIES PURCHASE AGREEMENT" and as
supplemented by this Supplement, the "SECURITIES PURCHASE AGREEMENT") pursuant
to which the Company sold to RGC, and RGC purchased from the Company, 6,000
shares of the Company's Series H Convertible Preferred Stock ("SERIES H STOCK");
B. Contemporaneous with their execution and delivery of the Original
Securities Purchase Agreement, the Company and RGC executed and delivered a
Registration Rights Agreement, in the form attached as Exhibit B to the
Securities Purchase Agreement (the "ORIGINAL REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws;
C. The Original Securities Purchase Agreement contemplates the sale by
the Company of up to an additional 14,000 shares of Series H Stock thereunder
and the Company desires to sell to each Additional Investor, and each Additional
Investor desires to purchase from the Company, pursuant to and upon the terms
and conditions stated in the Securities Purchase Agreement, such number of
shares of the Company's Series H Stock as are set forth on the Execution Page
hereof executed by such Additional Investor, up to an aggregate of 14,000
shares;
D. Contemporaneous with the execution and delivery of this Supplement,
the Company, RGC and the Current Investors are executing and delivering (or will
execute and deliver in the case of the Subsequent Investors) a Supplement to the
Registration Rights Agreement, in the form attached hereto as Exhibit A (the
Original Registration Rights Agreement as supplemented thereby, being
hereinafter referred to as the "REGISTRATION RIGHTS AGREEMENT"), pursuant to
which the Company has agreed to extend to the Additional Investors the benefits,
rights and obligations set forth in the Original Registration Rights Agreement.
E. All other capitalized terms used herein and not otherwise defined in
this Supplement shall have the meanings set forth in the Original Securities
Purchase Agreement.
NOW, THEREFORE, the Company, RGC and the Additional Investors hereby
agree to amend and supplement the Original Securities Purchase Agreement as
follows:
1. DEFINITIONS. The definitions of the following terms contained in the
Original Securities Purchase Agreement are amended as follows:
(a) "RGC" shall mean RGC International Investors, LDC.
(b) "PURCHASERS" shall be deemed to include RGC and each of the
Additional Investors.
(c) "PREFERRED SHARES" shall mean all of the shares of Series H Stock
purchased by the Purchasers pursuant to the Securities Purchase Agreement
(whether on the initial Closing Date or on an Additional Closing Date (as
defined in Section 1(e)(ii) of the Securities Purchase Agreement)).
(d) "ADDITIONAL INVESTORS," "CURRENT INVESTORS," "SUBSEQUENT INVESTORS,"
"SECURITIES PURCHASE AGREEMENT" and "REGISTRATION RIGHTS AGREEMENT" shall have
the meanings set forth in the recitals to this Supplement.
(e) "SEC DOCUMENTS" shall have the meaning set forth in the Original
Securities Purchase Agreement but shall include all reports, schedules, forms,
statements and other documents filed by the Company with the SEC pursuant to the
Exchange Act prior to the date of the Additional Closing contemplated by Section
1(b) of the Securities Purchase Agreement.
2. Section 1 of the Original Securities Purchase Agreement is hereby
amended and restated in its entirety to read as follows:
"1. PURCHASE AND SALE OF PREFERRED SHARES.
(a) Purchase of Preferred Shares by RGC. On the Closing Date (as defined
below), subject to the satisfaction (or waiver) of the conditions set forth in
Sections 6 and 7 below, the Company shall issue and sell to RGC and RGC
severally agrees to purchase from the Company, such number of Preferred Shares
as is set forth on RGC's signature page hereto. The purchase price (the
"PURCHASE PRICE") per Preferred Share at such closing shall be equal to One
Thousand Dollars ($1,000.00) and the aggregate purchase price for all of the
Preferred Shares to be purchased by RGC shall be Six Million Dollars
($6,000,000.00). For the avoidance of doubt, in no event shall RGC be required
to purchase more than the number of Preferred Shares being subscribed for
hereunder by RGC as set forth on RGC's Execution Page. The Company may sell up
to Fourteen Million Dollars ($14,000,000.00) of additional Preferred Shares, at
One Thousand Dollars ($1,000.00) per Preferred Share, at the additional closings
(the "ADDITIONAL CLOSINGS") contemplated by Sections 1(b) and 1(c) below.
(b) Purchase of Preferred Shares by Current Investors. The Purchase of
the Preferred Shares by the Current Investors may take place at an Additional
Closing; PROVIDED, HOWEVER, that such Additional Closing may not occur after May
7, 1997. On such Additional Closing Date, subject to the satisfaction (or
waiver) of the conditions set forth in Sections 6 and 7 below, the Company shall
issue and sell to each Current Investor purchasing Preferred Shares on such
Additional Closing Date and each Current Investor purchasing Preferred Shares on
such Additional Closing Date severally agrees to purchase from the Company, such
number of Preferred Shares as is set forth on such Current Investor's signature
page hereto. The purchase price per Preferred Share at such Additional Closing
shall be equal to the Purchase Price. For the avoidance of doubt, in no event
shall any Current Investor be required to purchase more than the number of
Preferred Shares being subscribed for hereunder by such Current Investor as set
forth on such Current Investor's Execution Page.
(c) Purchase of Preferred Shares by Subsequent Investors. The purchase
of the Preferred Shares by the Subsequent Investors may take place at one or
more Additional Closings; PROVIDED, however, that no Additional Closing may
occur after June 19, 1997 or if the additional conditions set forth in Section
1(f) hereof for such Additional Closing are not satisfied. On each such
Additional Closing Date, subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6 and 7 below, the Company shall issue and sell
to each Subsequent Investor purchasing Preferred Shares on such Additional
Closing Date and each Subsequent Investor purchasing Preferred Shares on such
Additional Closing Date severally agrees to purchase from the Company, such
number of Preferred Shares as is set forth on such Subsequent Investor's
signature page hereto. The purchase price per Preferred Share at each such
Additional Closing shall be equal to the Purchase Price and the aggregate
purchase price for all of the Preferred Shares to be purchased by the Subsequent
Investors shall not exceed Seven Million Dollars ($7,000,000).
(d) Form of Payment. On the Closing Date or Additional Closing Date (as
applicable), the Purchaser shall pay the aggregate Purchase Price for the
Preferred Shares being purchased by such Purchaser at such closing by wire
transfer to the Company, in accordance with the Company's written wiring
instructions, against delivery of duly executed certificates representing the
Preferred Shares being purchased by the Purchaser hereunder and the Company
shall deliver such certificates against delivery of such aggregate Purchase
Price.
(e) Closing Date and Additional Closing Date.
(i) Subject to the satisfaction (or waiver) of the conditions
thereto set forth in Section 6 and Section 7 below, the date and time of
the issuance and sale of the Preferred Shares to RGC pursuant to this
Agreement (the "CLOSING DATE") was at 12:00 noon eastern time on March
31, 1997. This closing occurred at the offices of Foley, Hoag & Eliot,
LLP, One Post Office Square, Boston MA 02109.
(ii) Subject to the satisfaction (or waiver) of the conditions thereto
set forth in Section 6 and Section 7 below, the date, place and time of each
issuance and sale of Preferred Shares to an Additional Investor pursuant to this
Agreement (each, an "ADDITIONAL CLOSING DATE") shall be on such date as may be
mutually agreed upon by the Company and such Additional Investor."
(f) Additional Closing Conditions With Respect to Sales to Subsequent
Purchasers. If (i) a Subsequent Investor has not been approved in writing by
State Capital Market Group, Ltd. and (ii) the average of the Closing Bid Prices
(as defined in the Certificate of Designation) for the Common Stock for the five
(5) trading days immediately preceding an Additional Closing Date is not greater
than or equal to $4.50 per share, the Company may not sell Preferred Shares to a
Subsequent Investor; PROVIDED, HOWEVER, that the restriction contained in clause
(ii) of this sentence shall not apply to the first three thousand (3,000)
Preferred Shares sold by the Company to Subsequent Investors.
3. Sections 6 and 7 of the Original Securities Purchase Agreement are
amended and restated in their entireties to read as follows:
"6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Preferred
Shares to RGC on the Closing Date or to the Additional Investors on the
Additional Closing Date is subject to the satisfaction, at or before the Closing
Date or Additional Closing Date (as applicable), of each of the following
conditions thereto, provided that these conditions are for the Company's sole
benefit and may be waived by the Company at any time in its sole discretion.
(a) The applicable Purchaser shall have executed the signature page to
the this Agreement and the Registration Rights Agreement, and delivered the same
to the Company.
(b) The applicable Purchaser shall have delivered the Purchase Price for
the Preferred Shares purchased in accordance with Section 1(c) above.
(c) The representations and warranties of the applicable Purchaser shall
be true and correct as of the date when made and as of the Closing Date (solely
in the case of RGC) or the Additional Closing Date (solely in the case of the
Additional Investors) as though made at that time (except for representations
and warranties that speak as of a specific date), and the applicable Purchaser
shall have performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the applicable Purchaser at or prior to the
Closing Date (solely in the case of RGC) or the Additional Closing Date (solely
in the case of the Additional Investors). (d) No statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction or any self-regulatory organization having authority over the
matters contemplated hereby which prohibits the consummation of any of the
transactions contemplated by this Agreement.
7. CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE.
The obligation of each Purchaser hereunder to purchase the Preferred
Shares to be purchased by it on the Closing Date or Additional Closing Date (as
applicable) is subject to the satisfaction of each of the following conditions,
provided that these conditions are for each Purchaser's sole benefit and may be
waived by a Purchaser at any time in the Purchaser's sole discretion:
(b) The Company shall have executed the signature page to this Agreement
and the Registration Rights Agreement, and delivered the same to such Purchaser.
(c) The Certificate of Designation shall have been accepted for filing
with the Secretary of State of the State of Delaware and a copy thereof
certified by the Secretary of State of Delaware shall have been delivered to
such Purchaser.
(d) The Company shall have delivered duly executed certificates (in such
denominations as such Purchaser shall request) representing the Preferred Shares
being so purchased to such Purchaser in accordance with Section 1(c) above.
(e) The Common Stock shall be authorized for quotation on NASDAQ and
trading in the Common Stock (or NASDAQ generally) shall not have been suspended
by the SEC or NASD.
(f) The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date (solely in the case
of RGC) and Additional Closing Date (solely in the case of the Additional
Investors) as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date (solely in the
case of RGC) and Additional Closing Date (solely in the case of the Additional
Investors). Such Purchaser shall have received a certificate, executed by the
chief executive officer of the Company, dated as of the Closing Date (in the
case of the certificate to be delivered to RGC) or the Additional Closing Date
(in the case of the certificate to be delivered to the Additional Investors) to
the foregoing effect and as to such other matters as may be reasonably requested
by such Purchaser.
(g) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(h) Such Purchaser shall have received the officer's certificate
described in Section 3(c) above, dated as of the Closing Date (in the case of
the certificate to be delivered to RGC) or the Additional Closing Date (in the
case of the certificate to be delivered to the Additional Investors).
(i) Such Purchaser shall have received an opinion of the Company's
counsel, dated as of the Closing Date (in the case of the opinion to be
delivered to RGC) or the Additional Closing Date (in the case of the opinion to
be delivered to the Additional Investors), in form, scope and substance
reasonably satisfactory to the Purchaser and in substantially the form of
Exhibit C attached hereto.
(j) The Company shall have executed, and shall have delivered evidence
reasonably satisfactory to the Purchasers that the Company's transfer agent has
agreed to act in accordance with, the irrevocable instructions in the form
attached hereto as Exhibit D."
4. Section 3 of the Original Securities Purchase Agreement is hereby amended to
add at the end of the ninth word thereof: "(which representations and warranties
shall be true and correct as of the date hereof and as of the Closing Date and
each Additional Closing Date)".
5. Except as expressly supplemented and/or modified herein, the terms of the
Original Securities Purchase Agreement shall continue in full force and effect
(including, without limitation, the terms of Section 4(e)). This Supplement may
only be modified with the consent of the Company, RGC and each Additional
Investor.
6. In the event that an Additional Closing shall not have occurred on or before
May 7, 1997, unless the Company, RGC and the Current Investors agree otherwise,
this Supplement shall terminate at the close of business on such date and shall
be of no further force or effect.
7. A Subsequent Investor shall become a party to the Securities Purchase
Agreement upon execution of an Execution Page by such Subsequent Investor on or
before June 19, 1997. Upon execution, such Subsequent Investor shall be entitled
to all of the benefits conferred thereby and shall be subject to all of the
obligations thereunder.
<PAGE>
IN WITNESS WHEREOF, the undersigned Investor, RGC and the Company have
caused this Supplement to be duly executed as of the date first above written.
This signature page constitutes an Execution Page under the Securities Purchase
Agreement.
INVESTOR:
CREDIT SUISSE FIRST BOSTON CORPORATION
- --------------------------------------
By:
Name:
Title:
RESIDENCE: New York
ADDRESS:
Credit Suisse First Boston Corporation
11 Madison Avenue
New York, NY 10010
Telecopy:_(212) 325-6519
Attn: Allan D. Weine
AGGREGATE SUBSCRIPTION AMOUNT
Number of Preferred Shares: 4,000
------
Purchase Price: $ 4,000,000
-----------
PALOMAR MEDICAL TECHNOLOGIES, INC.
- ----------------------------------
By:
Name:
Title:
RGC INTERNATIONAL INVESTORS, LDC
- --------------------------------
By:
Name:
Title:
<PAGE>
IN WITNESS WHEREOF, the undersigned Investor, RGC and the Company have
caused this Supplement to be duly executed as of the date first above written.
This signature page constitutes an Execution Page under the Securities Purchase
Agreement.
INVESTOR:
CC INVESTMENTS, LDC
- -----------------------------
By: CSS Corporation Ltd.
Corporate Secretary
By:
Name:
Title:
RESIDENCE: Cayman Islands
ADDRESS:
CC Investments, LDC
c/o Citco Fund Services (Cayman Islands) Ltd.
Corporate Center, West Bay Road
P.O. Box 31106
SMB Grand Cayman, Cayman Islands
AGGREGATE SUBSCRIPTION AMOUNT
Number of Preferred Shares: 3,000
Purchase Price: $3,000,000
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
Name:
Title:
RGC INTERNATIONAL INVESTORS, LDC
By:
Name:
Title:
EXHIBIT A
TO SUPPLEMENT TO
SECURITIES PURCHASE
AGREEMENT
SUPPLEMENT TO REGISTRATION RIGHTS AGREEMENT
SUPPLEMENT TO REGISTRATION RIGHTS AGREEMENT (this "SUPPLEMENT"), dated
as of May 5, 1997 by and among PALOMAR MEDICAL TECHNOLOGIES, INC., a corporation
organized under the laws of the State of Delaware, with headquarters located at
66 Cherry Hill Drive, Beverly, Massachusetts 01915 (the "COMPANY"), RGC
INTERNATIONAL INVESTORS, LDC ("RGC") and the other Initial Investors.
WHEREAS:
A. The Company and RGC are parties to a Registration Rights Agreement
dated as of March 27, 1997 (the "ORIGINAL REGISTRATION RIGHTS AGREEMENT" and as
supplemented by this Supplement, the "REGISTRATION RIGHTS AGREEMENT") pursuant
to which the Company granted to RGC certain registration rights under the
Securities Act and the rules and regulations promulgated thereunder, and
applicable state securities laws;
B. Contemporaneous with their execution and delivery of the Original
Securities Purchase Agreement, the Company and RGC executed and delivered a
Registration Rights Agreement, in the form attached as Exhibit B to the
Securities Purchase Agreement (the "ORIGINAL REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws;
C. In connection with the Supplement to Securities Purchase Agreement
of even date herewith by and between the Company and each of the Initial
Investors (the "SECURITIES PURCHASE AGREEMENT SUPPLEMENT" and together with the
Securities Purchase Agreement dated as of March 27, 1997 by and between the
Company and RGC, the"SECURITIES PURCHASE AGREEMENT"), the Company has agreed,
upon the terms and subject to the conditions contained therein, to issue and
sell to the undersigned shares of its Series H Convertible Preferred Stock, par
value $.01 per share; and
D. To induce the Initial Investors to execute and deliver the
Securities Purchase Agreement Supplement, the Company has agreed to amend the
terms of the Original Registration Rights Agreement to provide the Initial
Investors the rights and benefits set forth in the Original Registration Rights
Agreement;
E. All other capitalized terms used herein and not otherwise defined in
this Supplement shall have the respective meanings set forth in the Original
Registration Rights Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company, RGC and
each of the other Initial Investors hereby agree to supplement the Original
Registration Rights Agreement as follows:
1. DEFINITIONS. The definitions of the following terms contained in the
Original Registration Rights Agreement are amended as follows:
a. "INITIAL INVESTORS" shall be deemed to include RGC and each of the
other Initial Investors set forth on the Execution Page hereto and each of the
other Initial Investors set forth on Execution Pages which may hereafter be
appended to this Supplement in accordance with Section 4 hereof (each, together
with their affiliates).
b. "PREFERRED STOCK" means the shares of the Company's Series H
Convertible Preferred Stock, par value $.01 per share, issued or to be issued to
Initial Investors pursuant to the Securities Purchase Agreement on the initial
Closing Date or on any Additional Closing Date (as defined in the Securities
Purchase Agreement Supplement). For the avoidance of doubt the term "Conversion
Shares" includes all shares of Common Stock issuable on or with respect to all
of the shares of Preferred Stock.
c. "REGISTRATION RIGHTS AGREEMENT" and "SECURITIES PURCHASE
AGREEMENT" shall have the meanings set forth in the recitals to this Supplement.
d. "RGC" means RGC International Investors, LDC.
2. Except as expressly supplemented and/or modified herein, the terms of the
Original Registration Rights Agreement shall continue in full force and effect.
3. In the event an Additional Closing under the Securities Purchase Agreement
shall not have occurred on or before May 7, 1997, unless each of the original
parties hereto agrees otherwise, this Supplement shall terminate at the close of
business on such date and shall be of no further force or effect.
4. An Initial Investor shall become a party to the Registration Rights Agreement
upon execution of an Execution Page by such Initial Investor on or before June
19, 1997. Upon execution, such Initial Investor shall be entitled to all of the
benefits conferred thereby and shall be subject to all of the obligations
thereunder.
<PAGE>
IN WITNESS WHEREOF, the undersigned Initial Investors and the Company
have caused this Supplement to be duly executed as of the date first above
written.
PALOMAR MEDICAL TECHNOLOGIES, INC.
- ----------------------------------
By:
Name:
Title:
INITIAL INVESTORS:
CREDIT SUISSE FIRST BOSTON CORPORATION
By:
-------------------------------
Name:
Title:
CC INVESTMENTS, LDC
By: CSS Corporation Ltd., Corporate Secretary
By:
--------------------------------------
Name:
Title:
RGC INTERNATIONAL INVESTORS, LDC
By:
-------------------------------------
Name:
Title:
SUPPLEMENT TO SECURITIES PURCHASE AGREEMENT
SUPPLEMENT TO SECURITIES PURCHASE AGREEMENT (this "SUPPLEMENT"), dated
as of May 23, 1997, by and among PALOMAR MEDICAL TECHNOLOGIES, INC., a
corporation organized under the laws of the State of Delaware (the "Company"),
with headquarters located at 66 Cherry Hill Drive, Beverly, Massachusetts 01915,
RGC INTERNATIONAL INVESTORS, LDC ("RGC") and (i) each of the investors (the
"CURRENT INVESTORS") set forth on the execution pages hereof (the "EXECUTION
PAGES") and (ii) each of the investors (the "SUBSEQUENT INVESTORS" and together
with the Current Investors, the "ADDITIONAL INVESTORS") set forth on the
Execution Pages which may hereafter be appended to this Supplement in accordance
with Section 7 hereof.
WHEREAS:
A. The Company and RGC are parties to a Securities Purchase Agreement
dated as of March 27, 1997 (the "ORIGINAL SECURITIES PURCHASE AGREEMENT" and as
supplemented by this Supplement, the "SECURITIES PURCHASE AGREEMENT") pursuant
to which the Company sold to RGC, and RGC purchased from the Company, 6,000
shares of the Company's Series H Convertible Preferred Stock ("SERIES H STOCK");
B. Contemporaneous with their execution and delivery of the Original
Securities Purchase Agreement, the Company and RGC executed and delivered a
Registration Rights Agreement, in the form attached as Exhibit B to the
Securities Purchase Agreement (the "ORIGINAL REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws;
C. The Original Securities Purchase Agreement contemplates the sale by
the Company of up to an additional 14,000 shares of Series H Stock thereunder
and the Company desires to sell to each Additional Investor, and each Additional
Investor desires to purchase from the Company, pursuant to and upon the terms
and conditions stated in the Securities Purchase Agreement, such number of
shares of the Company's Series H Stock as are set forth on the Execution Page
hereof executed by such Additional Investor, up to an aggregate of 14,000
shares;
D. Contemporaneous with the execution and delivery of this Supplement,
the Company, RGC and the Current Investors are executing and delivering (or will
execute and deliver in the case of the Subsequent Investors) a Supplement to the
Registration Rights Agreement, in the form attached hereto as Exhibit A (the
Original Registration Rights Agreement as supplemented thereby, being
hereinafter referred to as the "REGISTRATION RIGHTS AGREEMENT"), pursuant to
which the Company has agreed to extend to the Additional Investors the benefits,
rights and obligations set forth in the Original Registration Rights Agreement.
E. All other capitalized terms used herein and not otherwise defined in
this Supplement shall have the meanings set forth in the Original Securities
Purchase Agreement.
NOW, THEREFORE, the Company, RGC and the Additional Investors hereby
agree to amend and supplement the Original Securities Purchase Agreement as
follows:
1. DEFINITIONS. The definitions of the following terms contained in the
Original Securities Purchase Agreement are amended as follows:
(a) "RGC" shall mean RGC International Investors, LDC.
(b) "PURCHASERS" shall be deemed to include RGC and each of the
Additional Investors.
(c) "PREFERRED SHARES" shall mean all of the shares of Series H Stock
purchased by the Purchasers pursuant to the Securities Purchase Agreement
(whether on the initial Closing Date or on an Additional Closing Date (as
defined in Section 1(e)(ii) of the Securities Purchase Agreement)).
(d) "ADDITIONAL INVESTORS," "CURRENT INVESTORS," "SUBSEQUENT INVESTORS,"
"SECURITIES PURCHASE AGREEMENT" and "REGISTRATION RIGHTS AGREEMENT" shall have
the meanings set forth in the recitals to this Supplement.
(e) "SEC DOCUMENTS" shall have the meaning set forth in the Original
Securities Purchase Agreement but shall include all reports, schedules, forms,
statements and other documents filed by the Company with the SEC pursuant to the
Exchange Act prior to the date of the Additional Closing contemplated by Section
1(b) of the Securities Purchase Agreement.
2. Section 1 of the Original Securities Purchase Agreement is hereby
amended and restated in its entirety to read as follows:
"1. PURCHASE AND SALE OF PREFERRED SHARES.
(a) Purchase of Preferred Shares by RGC. On the Closing Date
(as defined below), subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6 and 7 below, the Company shall issue
and sell to RGC and RGC severally agrees to purchase from the Company,
such number of Preferred Shares as is set forth on RGC's signature page
hereto. The purchase price (the "PURCHASE PRICE") per Preferred Share
at such closing shall be equal to One Thousand Dollars ($1,000.00) and
the aggregate purchase price for all of the Preferred Shares to be
purchased by RGC shall be Six Million Dollars ($6,000,000.00). For the
avoidance of doubt, in no event shall RGC be required to purchase more
than the number of Preferred Shares being subscribed for hereunder by
RGC as set forth on RGC's Execution Page. The Company may sell up to
Fourteen Million Dollars ($14,000,000.00) of additional Preferred
Shares, at One Thousand Dollars ($1,000.00) per Preferred Share, at the
additional closings (the "ADDITIONAL CLOSINGS") contemplated by
Sections 1(b) and 1(c) below.
(b) Purchase of Preferred Shares by Current Investors. The
Purchase of the Preferred Shares by the Current Investors may take
place at an Additional Closing; PROVIDED, HOWEVER, that such Additional
Closing may not occur after May 7, 1997. On such Additional Closing
Date, subject to the satisfaction (or waiver) of the conditions set
forth in Sections 6 and 7 below, the Company shall issue and sell to
each Current Investor purchasing Preferred Shares on such Additional
Closing Date and each Current Investor purchasing Preferred Shares on
such Additional Closing Date severally agrees to purchase from the
Company, such number of Preferred Shares as is set forth on such
Current Investor's signature page hereto. The purchase price per
Preferred Share at such Additional Closing shall be equal to the
Purchase Price. For the avoidance of doubt, in no event shall any
Current Investor be required to purchase more than the number of
Preferred Shares being subscribed for hereunder by such Current
Investor as set forth on such Current Investor's Execution Page.
(c) Purchase of Preferred Shares by Subsequent Investors. The
purchase of the Preferred Shares by the Subsequent Investors may take
place at one or more Additional Closings; PROVIDED, however, that no
Additional Closing may occur after June 19, 1997 or if the additional
conditions set forth in Section 1(f) hereof for such Additional Closing
are not satisfied. On each such Additional Closing Date, subject to the
satisfaction (or waiver) of the conditions set forth in Sections 6 and
7 below, the Company shall issue and sell to each Subsequent Investor
purchasing Preferred Shares on such Additional Closing Date and each
Subsequent Investor purchasing Preferred Shares on such Additional
Closing Date severally agrees to purchase from the Company, such number
of Preferred Shares as is set forth on such Subsequent Investor's
signature page hereto. The purchase price per Preferred Share at each
such Additional Closing shall be equal to the Purchase Price and the
aggregate purchase price for all of the Preferred Shares to be
purchased by the Subsequent Investors shall not exceed Seven Million
Dollars ($7,000,000).
(d) Form of Payment. On the Closing Date or Additional Closing
Date (as applicable), the Purchaser shall pay the aggregate Purchase
Price for the Preferred Shares being purchased by such Purchaser at
such closing by wire transfer to the Company, in accordance with the
Company's written wiring instructions, against delivery of duly
executed certificates representing the Preferred Shares being purchased
by the Purchaser hereunder and the Company shall deliver such
certificates against delivery of such aggregate Purchase Price.
(e) Closing Date and Additional Closing Date.
(i) Subject to the satisfaction (or waiver) of the
conditions thereto set forth in Section 6 and Section 7 below,
the date and time of the issuance and sale of the Preferred
Shares to RGC pursuant to this Agreement (the "CLOSING DATE")
was at 12:00 noon eastern time on March 31, 1997. This closing
occurred at the offices of Foley, Hoag & Eliot, LLP, One Post
Office Square, Boston MA 02109.
(ii) Subject to the satisfaction (or waiver) of the
conditions thereto set forth in Section 6 and Section 7 below,
the date, place and time of each issuance and sale of
Preferred Shares to an Additional Investor pursuant to this
Agreement (each, an "ADDITIONAL CLOSING DATE") shall be on
such date as may be mutually agreed upon by the Company and
such Additional Investor."
(f) Additional Closing Conditions With Respect to Sales to
Subsequent Purchasers. If (i) a Subsequent Investor has not been
approved in writing by State Capital Market Group, Ltd. and (ii) the
average of the Closing Bid Prices (as defined in the Certificate of
Designation) for the Common Stock for the five (5) trading days
immediately preceding an Additional Closing Date is not greater than or
equal to $4.50 per share, the Company may not sell Preferred Shares to
a Subsequent Investor; PROVIDED, HOWEVER, that the restriction
contained in clause (ii) of this sentence shall not apply to the first
three thousand (3,000) Preferred Shares sold by the Company to
Subsequent Investors.
3. Sections 6 and 7 of the Original Securities Purchase Agreement are
amended and restated in their entireties to read as follows:
"6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the
Preferred Shares to RGC on the Closing Date or to the Additional Investors on
the Additional Closing Date is subject to the satisfaction, at or before the
Closing Date or Additional Closing Date (as applicable), of each of the
following conditions thereto, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion.
(a) The applicable Purchaser shall have executed the signature page to
the this Agreement and the Registration Rights Agreement, and delivered the same
to the Company.
(b) The applicable Purchaser shall have delivered the Purchase Price for
the Preferred Shares purchased in accordance with Section 1(c) above.
(c) The representations and warranties of the applicable Purchaser shall
be true and correct as of the date when made and as of the Closing Date (solely
in the case of RGC) or the Additional Closing Date (solely in the case of the
Additional Investors) as though made at that time (except for representations
and warranties that speak as of a specific date), and the applicable Purchaser
shall have performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the applicable Purchaser at or prior to the
Closing Date (solely in the case of RGC) or the Additional Closing Date (solely
in the case of the Additional Investors).
(d) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
7. CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE.
The obligation of each Purchaser hereunder to purchase the
Preferred Shares to be purchased by it on the Closing Date or Additional Closing
Date (as applicable) is subject to the satisfaction of each of the following
conditions, provided that these conditions are for each Purchaser's sole benefit
and may be waived by a Purchaser at any time in the Purchaser's sole discretion:
(b) The Company shall have executed the signature page to this Agreement
and the Registration Rights Agreement, and delivered the same to such Purchaser.
(c) The Certificate of Designation shall have been accepted for filing
with the Secretary of State of the State of Delaware and a copy thereof
certified by the Secretary of State of Delaware shall have been delivered to
such Purchaser.
(d) The Company shall have delivered duly executed certificates (in such
denominations as such Purchaser shall request) representing the Preferred Shares
being so purchased to such Purchaser in accordance with Section 1(c) above.
(e) The Common Stock shall be authorized for quotation on NASDAQ and
trading in the Common Stock (or NASDAQ generally) shall not have been suspended
by the SEC or NASD.
(f) The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date (solely in the case
of RGC) and Additional Closing Date (solely in the case of the Additional
Investors) as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date (solely in the
case of RGC) and Additional Closing Date (solely in the case of the Additional
Investors). Such Purchaser shall have received a certificate, executed by the
chief executive officer of the Company, dated as of the Closing Date (in the
case of the certificate to be delivered to RGC) or the Additional Closing Date
(in the case of the certificate to be delivered to the Additional Investors) to
the foregoing effect and as to such other matters as may be reasonably requested
by such Purchaser.
(g) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(h) Such Purchaser shall have received the officer's certificate
described in Section 3(c) above, dated as of the Closing Date (in the case of
the certificate to be delivered to RGC) or the Additional Closing Date (in the
case of the certificate to be delivered to the Additional Investors).
(i) Such Purchaser shall have received an opinion of the Company's
counsel, dated as of the Closing Date (in the case of the opinion to be
delivered to RGC) or the Additional Closing Date (in the case of the opinion to
be delivered to the Additional Investors), in form, scope and substance
reasonably satisfactory to the Purchaser and in substantially the form of
Exhibit C attached hereto.
(j) The Company shall have executed, and shall have delivered evidence
reasonably satisfactory to the Purchasers that the Company's transfer agent has
agreed to act in accordance with, the irrevocable instructions in the form
attached hereto as Exhibit D."
4. Section 3 of the Original Securities Purchase Agreement is hereby amended to
add at the end of the ninth word thereof: "(which representations and warranties
shall be true and correct as of the date hereof and as of the Closing Date and
each Additional Closing Date)".
5. Except as expressly supplemented and/or modified herein, the terms of the
Original Securities Purchase Agreement shall continue in full force and effect
(including, without limitation, the terms of Section 4(e)). This Supplement may
only be modified with the consent of the Company, RGC and each Additional
Investor.
6. In the event that an Additional Closing shall not have occurred on or before
May 7, 1997, unless the Company, RGC and the Current Investors agree otherwise,
this Supplement shall terminate at the close of business on such date and shall
be of no further force or effect.
7. A Subsequent Investor shall become a party to the Securities Purchase
Agreement upon execution of an Execution Page by such Subsequent Investor on or
before June 19, 1997. Upon execution, such Subsequent Investor shall be entitled
to all of the benefits conferred thereby and shall be subject to all of the
obligations thereunder.
<PAGE>
IN WITNESS WHEREOF, the undersigned Investor, RGC and the Company have
caused this Supplement to be duly executed as of the date first above written.
This signature page constitutes an Execution Page under the Securities Purchase
Agreement.
INVESTOR:
SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.
By:
---------------------------------------
Name:
Title:
RESIDENCE: New York
ADDRESS: Southbrook International Investments, Ltd.
c/o Trippoak Advisors, Inc.
630 Fifth Avenue, Suite 2000
New York, NY 10111
Attn: Robert Miller
Facsimile No.: (212) 332-3256
with copies to: Robinson, Silverman, Pearce, Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Attn: Eric L. Cohen
Facsimile No.: (212) 541-4630
AGGREGATE SUBSCRIPTION AMOUNT
Number of Preferred Shares: 3,000
------
Purchase Price: $ 3,000,000
-----------
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
-------------------------------
Name:
Title:
RGC INTERNATIONAL INVESTORS, LDC
By:
------------------------------
Name:
Title:
EXHIBIT A
TO SUPPLEMENT TO
SECURITIES PURCHASE
AGREEMENT
SUPPLEMENT TO REGISTRATION RIGHTS AGREEMENT
SUPPLEMENT TO REGISTRATION RIGHTS AGREEMENT (this "SUPPLEMENT"), dated
as of May 23, 1997 by and among PALOMAR MEDICAL TECHNOLOGIES, INC., a
corporation organized under the laws of the State of Delaware, with headquarters
located at 66 Cherry Hill Drive, Beverly, Massachusetts 01915 (the "COMPANY"),
RGC INTERNATIONAL INVESTORS, LDC ("RGC") and the other Initial Investors.
WHEREAS:
A. The Company and RGC are parties to a Registration Rights Agreement
dated as of March 27, 1997 (the "ORIGINAL REGISTRATION RIGHTS AGREEMENT" and as
supplemented by this Supplement, the "REGISTRATION RIGHTS AGREEMENT") pursuant
to which the Company granted to RGC certain registration rights under the
Securities Act and the rules and regulations promulgated thereunder, and
applicable state securities laws;
B. Contemporaneous with their execution and delivery of the Original
Securities Purchase Agreement, the Company and RGC executed and delivered a
Registration Rights Agreement, in the form attached as Exhibit B to the
Securities Purchase Agreement (the "ORIGINAL REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws;
C. In connection with the Supplement to Securities Purchase Agreement of
even date herewith by and between the Company and each of the Additional
Investors (the "SECURITIES PURCHASE AGREEMENT SUPPLEMENT" and together with the
Securities Purchase Agreement dated as of March 27, 1997 by and between the
Company and RGC, the "SECURITIES PURCHASE AGREEMENT"), the Company has agreed,
upon the terms and subject to the conditions contained therein, to issue and
sell to the undersigned shares of its Series H Convertible Preferred Stock, par
value $.01 per share; and
D. To induce the Initial Investors to execute and deliver the Securities
Purchase Agreement Supplement, the Company has agreed to amend the terms of the
Original Registration Rights Agreement to provide the Initial Investors the
rights and benefits set forth in the Original Registration Rights Agreement;
E. All other capitalized terms used herein and not otherwise defined in
this Supplement shall have the respective meanings set forth in the Original
Registration Rights Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company, RGC and
each of the other Initial Investors hereby agree to supplement the Original
Registration Rights Agreement as follows:
1. DEFINITIONS. The definitions of the following terms contained in the
Original Registration Rights Agreement are amended as follows:
a. "INITIAL INVESTORS" shall be deemed to include RGC and each of the
other Initial Investors set forth on the Execution Page hereto and each of the
other Initial Investors set forth on Execution Pages which may hereafter be
appended to this Supplement in accordance with Section 4 hereof (each, together
with their affiliates).
b. "PREFERRED STOCK" means the shares of the Company's Series H
Convertible Preferred Stock, par value $.01 per share, issued or to be issued to
Initial Investors pursuant to the Securities Purchase Agreement on the initial
Closing Date or on any Additional Closing Date (as defined in the Securities
Purchase Agreement Supplement). For the avoidance of doubt the term "Conversion
Shares" includes all shares of Common Stock issuable on or with respect to all
of the shares of Preferred Stock.
c. "REGISTRATION RIGHTS AGREEMENT" and "SECURITIES PURCHASE AGREEMENT"
shall have the meanings set forth in the recitals to this Supplement.
d. "RGC" means RGC International Investors, LDC.
2. Except as expressly supplemented and/or modified herein, the terms of the
Original Registration Rights Agreement shall continue in full force and effect.
3. In the event an Additional Closing under the Securities Purchase Agreement
shall not have occurred on or before May 7, 1997, unless each of the original
parties hereto agrees otherwise, this Supplement shall terminate at the close of
business on such date and shall be of no further force or effect.
4. An Initial Investor shall become a party to the Registration Rights Agreement
upon execution of an Execution Page by such Initial Investor on or before June
19, 1997. Upon execution, such Initial Investor shall be entitled to all of the
benefits conferred thereby and shall be subject to all of the obligations
thereunder.
<PAGE>
IN WITNESS WHEREOF, the undersigned Initial Investors and the Company
have caused this Supplement to be duly executed as of the date first above
written.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
-------------------------------
Name:
Title:
INITIAL INVESTOR:
SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.
By:
---------------------------------------
Name:
Title:
RGC INTERNATIONAL INVESTORS, LDC
By:
--------------------------------------
Name:
Title:
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-KSB/A-4 into the Company's
previously filed Registration Statements, File Numbers 33-47479, 33-879650,
33-96436, 33-97760, 33-99792, 33-99794, 333-000140, 333-001070, 333-3424,
333-5781, 333-7097, 333-10681, 333-18003, 333-21095, 333-22725, 333-87908,
33-97710, 333-18347, 333-25209 and 333-28251.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 7, 1997
