FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-22340
[GRAPHIC OMITTED]
PALOMAR MEDICAL TECHNOLOGIES, INC.
(Exact name of 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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45 Hartwell Avenue, Lexington, Massachusetts 02173
--------------------------------------------------
(Address of principal executive offices)
(781) 676-7300
-----------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--
As of April 30, 1998, 64,732,561 shares of Common Stock, $.01 par value
per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--
Page 1 of 17
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Condensed Balance Sheets - December 31, 1997 and March 31, 1998 P. 3
Consolidated Statements of Operations - For the Three Months Ended
March 31, 1997 and 1998 P. 4
Consolidated Statement of Stockholders' Deficit - For the Three Months Ended
March 31, 1998 P. 5
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 1997 and 1998 P. 6
Notes to Consolidated Financial Statements P. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS P. 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS P. 15
ITEM 2. CHANGES IN SECURITIES P. 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES P. 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS P. 16
ITEM 5. OTHER INFORMATION P. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K P. 16
SIGNATURES P. 17
</TABLE>
2
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
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December 31, March 31,
1997 1998
-------------------- --------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,003,300 $3,858,028
Marketable securities 1,449,326 1,644,791
Accounts receivable, net 2,248,680 3,922,829
Inventories 4,711,474 2,074,209
Other current assets 2,153,941 2,333,777
-------------------- --------------------
Total current assets 13,566,721 13,833,634
-------------------- --------------------
NET ASSETS OF DISCONTINUED OPERATIONS (NOTE 9) 5,825,602 4,510,529
-------------------- --------------------
PROPERTY AND EQUIPMENT, AT COST, NET 6,455,586 4,233,404
-------------------- --------------------
OTHER ASSETS:
Cost in excess of net assets acquired, net 2,302,348 2,151,757
Deferred financing costs 591,609 287,985
Other noncurrent assets 225,706 227,464
-------------------- --------------------
Total other assets 3,119,663 2,667,206
-------------------- --------------------
$28,967,572 $25,244,773
==================== ====================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $1,640,465 $4,424,611
Accounts payable 4,150,982 3,483,358
Accrued liabilities 13,759,854 12,502,124
Current portion of deferred revenue 1,284,395 1,416,583
-------------------- --------------------
Total current liabilities 20,835,696 21,826,676
-------------------- --------------------
LONG-TERM DEBT, NET OF CURRENT PORTION 12,445,563 6,821,792
-------------------- --------------------
DEFERRED REVENUE, NET OF CURRENT PORTION 1,870,000 1,620,000
-------------------- --------------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value- 164 101
Authorized - 5,000,000 shares
Issued and outstanding -
16,397 shares and 10,089 shares
at December 31, 1997 and March 31, 1998, respectively
Common stock, $.01 par value- 457,926 614,749
Authorized - 100,000,000 shares
Issued - 45,792,585 shares and 61,474,947 shares
at December 31, 1997 and March 31, 1998, respectively
Additional paid-in capital 147,356,579 155,943,314
Accumulated deficit (152,359,497) (159,943,000)
Less: Treasury stock - (345,000 shares at cost) (1,638,859) (1,638,859)
-------------------- --------------------
Total stockholders' deficit (6,183,687) (5,023,695)
-------------------- --------------------
$28,967,572 $25,244,773
==================== ====================
</TABLE>
3
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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<S> <C> <C> <C> <C> <C> <C>
Three Months Ended March 31,
1997 1998
------------- ------------
REVENUES $2,732,460 $7,067,405
COST OF REVENUES 3,015,716 6,336,245
------------- ------------
Gross Margin (283,256) 731,160
------------- ------------
OPERATING EXPENSES
Research and development 2,180,817 2,165,000
Sales and marketing 970,979 2,503,115
General and administrative 4,213,777 2,843,859
Settlement costs 2,799,000 --
------------- ------------
Total operating expenses 10,164,573 7,511,974
------------- ------------
Loss from operations (10,447,829) (6,780,814)
INTEREST EXPENSE (1,179,007) (421,312)
INTEREST INCOME 140,637 28,479
NET GAIN ON TRADING SECURITIES 1,079,917 332,965
OTHER INCOME 112,769 2,000
------------- ------------
NET LOSS FROM CONTINUING OPERATIONS (10,293,513) (6,838,682)
LOSS FROM DISCONTINUED OPERATIONS (NOTE 9) (5,071,632) --
------------- ------------
NET LOSS $(15,365,145) $(6,838,682)
============= ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Continuing operations $(0.34) $(0.15)
Discontinued operations (0.16) --
------------- ------------
TOTAL LOSS PER COMMON SHARE $(0.50) $(0.15)
============= ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 31,037,426 51,893,210
============= ============
</TABLE>
4
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
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Preferred Stock Common Stock
-----------------------------------------------------
Number 0.01 Number 0.01
of Shares Par Value of Shares Par Value
-----------------------------------------------------
Balance, December 31, 1997 $16,397 $164 $45,792,585 $457,926
Sale of common stock pursuant to Employee Stock Purchase Plan -- -- 18,609 186
Conversion of preferred stock (4,108) (41) 4,387,157 43,872
Conversion of convertible debentures -- -- 3,809,922 38,099
Redemption of preferred stock (2,200) (22) -- --
Issuance of common stock net of investment banking fees -- -- 7,200,000 72,000
Value ascribed to warrants issued to investor -- -- -- --
Issuance of common stock for 1997 employer 401(k) matching contribution -- -- 166,674 1,666
Common stock issued for advisory services -- -- 100,000 1,000
Preferred stock dividends and interest penalties -- -- -- --
Net loss -- -- -- --
-----------------------------------------------------
Balance, March 31, 1998 $10,089 $101 $61,474,947 $614,749
=====================================================
</TABLE>
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Treasury Stock
----------------- Additional Total
Number Paid-in Accumulated Stockholders'
of Shares Cost Capital Deficit Deficit
------------------------------------------------------------------
Balance, December 31, 1997 (345,000) $(1,638,859) $147,356,579 $(152,359,497) $(6,183,687)
Sale of common stock pursuant to Employee
Stock Purchase Plan -- -- 18,423 -- 18,609
Conversion of preferred stock -- -- 346,231 -- 390,062
Conversion of convertible debentures -- -- 3,219,052 -- 3,257,151
Redemption of preferred stock -- -- (2,199,978) -- (2,200,000)
Issuance of common stock net of investment banking fees -- -- 6,768,000 -- 6,840,000
Value ascribed to warrants issued to investor -- -- 171,000 -- 171,000
Issuance of common stock for 1997 employer 401(k)
matching contribution -- -- 165,007 -- 166,673
Common stock issued for advisory services -- -- 99,000 -- 100,000
Preferred stock dividends and interest penalties -- -- -- (744,821) (744,821)
Net loss -- -- -- (6,838,682) (6,838,682)
------------------------------------------------------------------
Balance, March 31, 1998 (345,000) $(1,638,859) $155,943,314 $(159,943,000) $(5,023,695)
==================================================================
</TABLE>
5
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31,
1997 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(15,365,145) $(6,838,682)
Less: Net Loss from discontinued operations (5,071,632) --
------------- -------------
Net Loss from continuing operations (10,293,513) (6,838,682)
------------- -------------
Adjustments to reconcile net loss from continuing operations to net cash
used in operating activities-
Depreciation and amortization 553,964 672,352
Settlement and litigation costs 2,149,000 --
Write-off of deferred financing costs associated with
redemption of convertible debentures 27,554 --
Valuation allowances for notes and investments 250,000 --
Foreign currency exchange gain (548,552) --
Noncash interest expense related to debt 1,025,865 --
Noncash compensation related to common stock and warrants 204,614 --
Unrealized gain loss on marketable securities (1,079,886) (332,965)
Changes in assets and liabilities,
Net (purchase) sale of marketable trading securities (146,294) 485,479
Accounts receivable 756,325 (675,176)
Inventories (3,166,282) 2,478,141
Other current assets 642,386 (119,145)
Accounts payable 34,554 (367,120)
Accrued expenses (618,121) 1,210,185
------------- -------------
Net cash used in operating activities (10,208,386) (3,486,931)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,863,142) (180,656)
Decrease (increase) in other assets 194,194 (492,227)
(Increase) in notes receivable (750,000) (86,818)
Investment in nonmarketable securities (1,764,431) --
------------- -------------
Net cash used in investing activities (4,183,379) (759,701)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures 10,225,169 --
Redemption of convertible debentures (196,000) (2,196,667)
Net proceeds from the issuance of notes payable 351,510 1,798,195
Proceeds from issuance of common stock 601,177 6,858,609
Issuance of preferred stock 5,700,000 --
Redemption of preferred stock including accrued dividends of $437,850 -- (2,673,850)
------------- -------------
Net cash provided by financing activities 16,681,856 3,786,287
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,290,091 (460,345)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 911,056 1,315,073
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,292,406 3,003,300
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $15,493,553 $3,858,028
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $56,843 $687,894
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Conversion of convertible debentures and related accrued
interest, net of financing fees $1,507,663 $3,257,151
============= =============
Conversion of preferred stock $186,492 $390,062
============= =============
Issuance of common stock for 1996 and 1997 employer 401(k)
matching contribution $269,262 $166,674
============= =============
</TABLE>
6
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the interim periods shown in
this report are not necessarily indicative of expected results for any future
interim period or for the entire fiscal year. Palomar Medical Technologies, Inc.
(the "Company" or "Palomar") believes that the quarterly information presented
includes all adjustments (consisting of normal, recurring adjustments) necessary
for a fair presentation in accordance with generally accepted accounting
principles. The accompanying financial statements and notes should be read in
conjunction with the Company's Form 10-K, as of and for the year ended December
31, 1997.
Some of the Company's medical laser products are in various stages of
development, and as such, the 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 the Company's 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 and its subsidiaries. The Company anticipates
that it will require additional financing throughout the year to continue to
fund operations and growth. The Company may from time to time be required to
raise additional funds through additional private sales of the Company's debt or
equity securities and/or the liquidation of some of its marketable and long-term
investments. The sale by the Company of some of its marketable securities could
result in additional losses depending on market conditions at the time of these
sales. Securities are sold to private investors 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.
2. INVESTMENTS
The fair values for the Company's marketable equity securities are
based on quoted market prices. The amount that the Company realizes from these
investments may differ significantly from the amounts recorded in the
accompanying unaudited consolidated financial statements.
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under SFAS No. 115, securities that
are bought and held principally for the purpose of selling them in the near term
are classified as trading securities. Realized and unrealized gains and losses
relating to trading securities are included currently in the accompanying
unaudited statements of operations.
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<S> <C> <C> <C> <C>
March 31, 1998
-------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ------------ ------------ ------------
Marketable Securities:
Investments in publicly
traded companies $832,649 $812,142 $--- $1,644,791
============ ============ ============ ============
</TABLE>
7
<PAGE>
3. INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or
market. Work in process and finished goods inventories consist of material,
labor and manufacturing overhead and consist of the following:
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<S> <C> <C> <C>
December 31, March 31,
1997 1998
---------------- ----------------
Raw materials $2,928,350 $892,901
Work in process and finished goods 1,783,124 1,181,308
---------------- ----------------
$4,711,474 $2,074,209
================ ================
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and Equipment consist of the following:
<TABLE>
<S> <C> <C>
December 31, March 31,
1997 1998
---------------- ---------------
Machinery and equipment $6,328,442 $4,688,817
Furniture and fixtures 1,018,931 943,998
Leasehold improvements 480,453 426,837
---------------- ---------------
7,827,826 6,059,652
Less: Accumulated depreciation
and amortization 1,372,240 1,826,248
---------------- ---------------
$6,455,586 $4,233,404
================ ===============
</TABLE>
5. ACCRUED LIABILITIES
Accrued Liabilities consist of the following:
<TABLE>
<S> <C> <C>
December 31, March 31,
1997 1998
---------------- ---------------
Payroll and consulting costs $1,535,013 $1,499,845
Royalties 853,808 873,141
Settlement costs 1,457,020 1,457,020
Warranty 2,583,677 2,239,635
Restructuring 1,981,907 1,296,633
Interest and preferred stock dividends 1,659,709 1,481,122
Other 3,688,720 3,654,728
================ ===============
Total $13,759,854 $12,502,124
================ ===============
</TABLE>
8
<PAGE>
6. NET LOSS PER COMMON SHARE
In March 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, EARNINGS PER SHARE. This statement establishes standards for
computing and presenting earnings per share and applies to entities with
publicly traded common stock or potential common stock. This statement is
effective for fiscal years ending after December 15, 1997. Basic net loss per
share was determined by dividing net income by the weighted average shares of
common stock outstanding during the period. Diluted net loss per share is the
same as basic net loss per share because the Company's potentially dilutive
securities, primarily stock options, warrants, redeemable preferred stock and
convertible debentures, are antidilutive. The Company's net loss per common
share from continuing operations for the three months ended March 31, 1997 and
1998 is as follows:
<TABLE>
<S> <C> <C>
Three Months Ended
March 31,
1997 1998
----------------- ---------------
Net loss from continuing operations $(10,293,513) $(6,838,682)
Preferred stock dividends (294,996) (744,821)
----------------- ---------------
Adjusted net loss $(10,588,509) $(7,583,503)
================= ===============
Basic net loss per common share from
Continuing operations $(.34) $(.15)
================= ===============
Weighted average number of
Common shares outstanding 31,037,426 51,893,210
================= ===============
</TABLE>
7. NOTES PAYABLE
Notes payable consist of the following:
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December 31, March 31,
1997 1998
---------------- ---------------
Convertible debentures $10,683,440 $5,340,000
Short term note payable --- 1,829,000
Note payable in connection with guarantee on behalf of discontinued subsidiary 3,233,000 3,098,292
Advance from distributor --- 955,638
Other notes payable 169,588 23,473
---------------- ---------------
14,086,028 11,246,403
Less - current maturities (1,640,465) (4,424,611)
---------------- ---------------
$12,445,563 $6,821,792
================ ===============
</TABLE>
(a) CONVERTIBLE DEBENTURES
On February 17, 1998, the Company converted the remaining $100,000 of
its 4.5% convertible debentures due October 21, 1999, 2000 and 2001 into 60,809
shares of the Company's common stock. During the first quarter of 1998, the
Company converted the remaining $3,084,344 of its 5% convertible debentures due
December 31, 2001, January 13, 2002 and March 10, 2002 into 3,646,092 shares of
the Company's common stock. On February 13, 1998, the Company converted $160,000
of its 6%, 7% and 8% convertible debentures due September 30, 2002 into 103,021
shares of the Company's common stock. Accrued interest totaling $158,685 was
included in the above conversions. The Company amortized deferred financing
costs totaling $245,878 to additional paid-in capital related to these
conversions.
On January 23, 1998, the Company redeemed $2,000,000 of its 6%, 7% and
8% convertible debentures due September 30, 2002 including interest and premium
for $2,196,667. Deferred financing cost totaling $95,000 was charged to interest
expense upon redemption.
9
<PAGE>
(b) SHORT TERM NOTES PAYABLE
On March 27, 1998, the Company borrowed $2,000,000 from an individual.
The note is due the earlier of May 26, 1998 or one day following the sale of
Dynaco or any other Palomar assets outside the normal course of business or upon
raising additional capital where the use of proceeds to pay back debt is not
prohibited. If the note is not repaid by the maturity date, the note becomes
convertible at market value at the option of the debentureholder, as defined. If
the note is not paid by the maturity date and/or June 23, 1998 penalties of
$100,000 and $125,000, respectively, payable in the Company's common stock, will
become due. Interest on this note is in the form of a warrant to purchase
125,000 shares of common stock for $.01 per share exercisable over five years.
This warrant is valued at $171,000 using the Black-Scholes option pricing model.
The Company has accounted for this warrant as a discount to the note through
additional paid-in capital and will amortize the discount to interest expense
over the expected life of the note.
(c) ADVANCE FROM DISTRIBUTOR
On January 20, 1998, the Company's worldwide laser distributor made an
advance of funds to the Company of approximately $2,211,000. This advance is
collateralized by the Company's accounts receivable from end users for product
sold by the distributor. Payments against this advance are made as the
distributor collects receivables from the end user of the Company's products.
During the first quarter, amounts totaling approximately $1,255,000 were
collected against this advance.
8. STOCKHOLDERS' DEFICIT
(a) ISSUANCE OF COMMON STOCK
In February 1998, the Company sold 7,200,000 shares of common stock to
a group of investors for $7,200,000. In addition, the Company issued warrants to
the investors to purchase 7,200,000 shares of common stock at an exercise price
of $3.00 per share. The Company paid a 5% commission of $360,000 related to this
issuance which has been netted against the proceeds through a reduction in
additional paid-in capital.
(b) CONVERTIBLE PREFERRED STOCK
During the first quarter of 1998, the Company converted 268 shares of
its Series G Preferred Stock and accrued dividends of $28,140 into 283,507
shares of the Company's common stock. Also, during the first quarter of 1998,
the Company converted 3,840 shares of its Series H Preferred Stock and accrued
dividends of $359,807 into 4,103,650 shares of the Company's common stock.
During the first quarter of 1998, the Company redeemed 2,200 shares of
Series H Preferred Stock including related accrued dividends and premiums for
$2,673,850.
(c) OPTIONS TO PURCHASE COMMON STOCK
During the three months ended March 31, 1998 the Company cancelled
options to purchase 75,000 shares of common stock at $2.50 per share. No options
were issued or exercised during the three months ended March 31, 1998.
(d) WARRANTS TO PURCHASE COMMON STOCK
During the three months ended March 31, 1998, the Company issued
warrants to purchase 220,000 shares of common stock at $2.00 per share to a
former employee. Also, during the three months ended March 31, 1998, the Company
cancelled the former employee's warrants to purchase 220,000 shares of common
stock at a price of $3.25 per share. No warrants were exercised during the three
months ended March 31, 1998.
10
<PAGE>
(e) RESERVED SHARES
At March 31, 1998, the Company has reserved shares of its common stock
for the following:
March 31,
1998
---------------
Convertible debentures 6,442,434
Stock option plans 3,709,504
Warrants 9,998,030
Employee stock purchase plan 966,014
Convertible preferred stock 5,829,018
---------------
Total 26,945,000
===============
9. DISCONTINUED OPERATIONS
During the fourth quarter of 1997, the Company's Board of Directors
approved a plan to dispose of the Company's electronics business segment. On
March 31, 1998, the Company still owned 100% of Dynaco Corp. and beneficially
owned approximately 30% of Nexar Technologies Inc.
Pursuant to Accounting Principles Board ("APB") Opinion No. 30,
REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A
SEGMENT OF A BUSINESS AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS, the consolidated financial statements of the Company
have been reclassified to reflect the disposition of the electronics segment.
Accordingly, the assets and liabilities, revenues and expenses, and cash flows
of the electronics segment have been excluded from the respective captions in
the Consolidated Condensed Balance Sheets, Consolidated Statements of Operations
and Consolidated Statements of Cash Flows. The net assets of these entities have
been reported as "Net Assets of Discontinued Operations" in the accompanying
Consolidated Condensed Balance Sheets; the net operating losses of these
entities have been reported as "Net Loss from Discontinued Operations" in the
accompanying Consolidated Statement of Operations; the net cash flows of these
entities have been reported as "Net Cash Provided by Discontinued Operations" in
the accompanying Consolidated Statements of Cash Flows.
Summarized financial information for the discontinued operations were
as follows:
<TABLE>
<S> <C> <C>
Three Months Ended March 31,
1997 1998
-------------------- ------------------
Revenues $17,393,978 $3,620,170
Net Loss from Discontinued Operations ($5,071,632) $---
</TABLE>
10. RESTRUCTURING
In the third quarter of 1997, the Company recognized a restructuring
charge of $2,700,000 based on the decision to discontinue certain medical
product and service business units and consolidate others. The majority of these
amounts related to severance benefits. All expenses accounted for as
restructuring charges were in accordance with the criteria set forth in Emerging
Task Force Issue 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION
BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED
IN A RESTRUCTURING), and are exclusive of the charges related to discontinued
operations. During the three months ended March 31, 1998, the Company paid out
approximately $685,000 of severance resulting in a restructuring liability of
approximately $1,297,000 at March 31, 1998. This restructuring liability will be
paid in the remainder of 1998.
[This space intentionally left blank.]
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
REVENUE AND GROSS MARGIN: THREE MONTHS ENDED MARCH 31, 1998,
COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
For the three months ended March 31, 1998, the Company had revenues of
$7.1 million as compared to $2.7 million for the three months ended March 31,
1997. The increase in the Company's revenue of $4.3 million or 159% was mainly
due to additional sales volume associated with the EpiLaser(R) and
LightSheer(TM) laser systems combined with a decrease in revenue of
approximately $700,000 in other cosmetic product revenue from the quarter ended
March 31, 1997. The Company obtained FDA clearance to market and to sell its
EpiLaser(R) laser system in the United States in March of 1997 and its
LightSheer(TM) laser system for hair removal and leg vein treatment in the
United States at the end of 1997. The Company believes that revenues will
continue to increase due to its improved manufacturing process, growing market
demand for its LightSheer(TM) laser system, and an improved distribution network
as a result of the Company's exclusive distribution arrangement with Coherent.
Gross margin for the three months ended March 31, 1998 was
approximately $731,000 (10% of revenues) versus negative $283,000 (negative 10%
of revenues) for the three months ended March 31, 1997. The increase in gross
margin dollars in 1998 was mainly due to greater revenues associated with the
Company's EpiLaser(R) laser system, as discussed above. The increase in gross
margin percentage was caused by the introduction of the LightSheer(TM) laser
system. The Company believes that its gross margin dollar and percentage will
continue to improve as the Company achieves higher revenue from its
LightSheer(TM) laser system. This new laser system has a significantly higher
gross margin than the Company's EpiLaser(R) laser system.
OPERATING AND OTHER EXPENSES: THREE MONTHS ENDED MARCH 31, 1998,
COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Research and development costs were $2.2 million for the three months
ended March 31, 1998 and 1997. Research and development expenses as a percent of
revenue totaled 31% for the three months ended March 31, 1998 and 80% for the
three months ended March 31, 1997. The consistent spending on research and
development reflects the Company's continuing commitment to research and
development for medical devices and delivery systems for cosmetic laser
applications and other medical applications using a variety of lasers, while
continuing dermatology research utilizing the Company's ruby and diode lasers.
Management believes that research and development expenditures will remain
constant over the next year 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
as a percentage of net revenues will decrease as revenues increase with the
commercialization of its laser medical products.
Selling and marketing expenses increased to $2.5 million (35% of
revenues) for the three months ended March 31, 1998, from approximately $971,000
(36% of revenues) for the three months ended March 31, 1997. The increase in
selling and marketing expenses is attributable to the costs associated with its
distribution agreement with Coherent. The Company anticipates selling and
marketing expense dollars will increase in the future, but will remain
relatively constant as a percent of revenue as the Company realizes the benefits
of its worldwide distribution network.
General and administrative expenses decreased to $2.8 million (40% of
revenues) for the three months ended March 31, 1998, as compared to $4.2 million
(154% of revenues) for the three months ended March 31, 1997. This decrease is
attributable to the Company's successful restructuring and consolidation of
administrative functions in the third and fourth quarters of 1997. In previous
years, the Company focused management time and allocated resources to developing
business outside of the medical and cosmetic laser industry and financing those
businesses. Beginning in the fourth quarter of 1997, the Company focused its
efforts on its core business. The Company anticipates general and administrative
expense will continue to decrease in the future as the benefits of the third and
fourth quarter restructuring are realized.
For the three months ended March 31, 1998, the Company did not incur
settlement expenses. Settlement costs of $2.8 million were incurred in the three
months ended March 31, 1997. These charges consisted mainly of a $1.875 million
legal settlement to an investment bank, which case was settled on August
18,1997, and other potential claims outstanding.
12
<PAGE>
Interest expense decreased to approximately $421,000 for the three
months ended March 31, 1998, from $1.2 million for the three months ended March
31, 1997. This 64% decrease is primarily the result of a decrease in convertible
debenture financings and the Company's increased use of conventional financing.
Also, operations did not require as much financing in 1998 as compared to 1997.
Interest income decreased to approximately $28,000 for the three months
ended March 31, 1998, from approximately $141,000 for the three months ended
March 31, 1997. This decrease is primarily the result of a decrease in the
Company's average outstanding cash and cash equivalents balances.
Net realized and unrealized trading gains were approximately $333,000
for the three months ended March 31, 1998, down from net realized and unrealized
trading gains of $1.1 million for the three months ended March 31, 1997. The
gains principally reflect market fluctuations associated with the Company's
investment in The American Materials & Technologies Corporation (AMTK). It is
the Company's intention to continue to liquidate its trading investments in the
near term, which may result in additional trading gains or losses in the future.
There were no losses incurred from discontinued operations for the
three months ended March 31, 1998 compared to a loss of $5.1 million for the
three months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had $5.5 million in cash, cash
equivalents and trading securities. During the three months ended March 31,1998
the Company generated $6.9 million and $1.8 million in net proceeds from the
issuance of common stock and short term notes payable, respectively.
The Company's net loss for the three months ended March 31, 1998
included approximately $672,000 of non-cash depreciation and amortization
expense.
The Company anticipates that capital expenditures for the remaining
nine months of 1998 will total approximately $1.8 million. The Company will
finance these expenditures with cash on hand and equipment leasing lines, or the
Company will seek to raise additional funds. However, there can be no assurance
that the Company will be able to raise the funds.
Dynaco has a three-year revolving credit and security agreement with a
financial institution. The agreement provides for the revolving sale of
acceptable accounts receivable, as defined in the agreement, with recourse at
85% of face value up to a maximum commitment of $3 million. As of March 31,
1998, the amount owed totaled $1.3 million. This amount is included in the net
assets from discontinued operations in the accompanying Consolidated Condensed
Balance Sheet as of March 31, 1998. The interest rate on such outstanding
amounts is the bank's prime rate plus 1.5%, and interest is payable in arrears.
The financing is collateralized by the purchased accounts receivable and
substantially all of Dynaco's assets. The Company guarantees borrowings under
this loan agreement.
In connection with the disposition of Comtel, a former wholly-owned
subsidiary in the electronics segment, the Company guaranteed $2,500,000 under a
line of credit extended by a loan association to Biometric Technologies Corp.
(BTC), the buyer of Comtel. The stockholders of BTC have personally guaranteed
to the Company payment for any amounts borrowed under this line of credit in
excess of approximately $1,500,000 in the event the Company is obligated to
honor this guarantee. The stockholders of BTC have collateralized this guarantee
by the Company with certain assets personally owned by the stockholders.
The Company's strategic plan is to continue to fund research and
development for its medical products. This research and development effort
entails extensive clinical trials. These activities are an important part of the
Company's business plan. Due to the nature of clinical trials and research and
development activities, it is not possible to predict with any certainty the
timetable for completion of these research activities or the total amount of
funding required to commercialize products developed as a result of such
research and development. The rate of research and the number of research
projects underway are dependent to some extent upon external funding. While the
Company is regularly reviewing potential funding sources in relation to these
ongoing and proposed research projects, there can be no assurance that the
current levels of funding or additional funding will be available, or, if
available, on terms satisfactory to the Company.
13
<PAGE>
The Company has had significant losses to date and expects these losses
to continue for the near future. Therefore, the Company must continue to secure
additional financing to complete its research and development activities,
commercialize its current and proposed medical products and services, and fund
ongoing operations. There can be no assurance that events in the future will not
require the Company to seek additional financing sooner. The Company continues
to investigate several financing alternatives, including strategic partnerships,
additional bank financing, private debt and equity financing, sale of assets,
including the Company's marketable securities consisting of Nexar and AMTK, and
other sources. Based on its historical ability to raise funds as necessary and
ongoing preliminary discussions with potential financing sources, the Company
believes that it will be successful in obtaining additional financing in order
to fund current operations in the near future. Although the Company believes it
will be successful in obtaining additional financing, there can be no assurance
that any such financing will be available on terms satisfactory to the Company.
The report of the Company's independent public accountants in connection with
the Company's Consolidated Balance Sheets at December 31, 1997 and 1996, and the
related Consolidated Statements of Operations, Stockholders' Equity (Deficit)
and Cash Flows for the three years ended December 31, 1997 includes an
explanatory paragraph stating that the Company's recurring losses, working
capital deficiency and stockholders' deficit raises substantial doubt about the
Company's ability to continue as a going concern.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company or statements
made by its employees may contain "forward-looking" information, as that term is
defined in the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). This report may also contain statements that are deemed to be
forward-looking information under the Reform Act, including, without limitation,
statements relating to financial projections; growing market demand; additional
financings; an improved distribution network; increases in revenues; and
research and development, selling and marketing, general and administrative and
capital expenditures. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to release publicly the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. The Company cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors, including but not limited to the risk factors identified in
the Company's Form 10-K for the year ended December 31, 1997, which cautionary
statements are 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.
[This space intentionally left blank]
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
On October 7, 1996 the Company filed a declaratory judgment action in
the United States District Court for the District of Massachusetts against
MEHL/Biophile ("MEHL") seeking (i) a declaration that MEHL is without right or
authority to threaten or maintain suit against the Company or its customers for
alleged infringement of the patent held by MEHL's subsidiary Selvac Acquisitions
Corp. (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 in the United States District
Court for the District of New Jersey against the Company, two of its
subsidiaries and a New Jersey dermatologist. Selvac's complaint alleges that the
Company's EpiLaser(R) laser system infringes the Selvac Patent and that the
Company unfairly competed by promoting the EpiLaser(R) laser system for hair
removal before it had received FDA approval for that specific application. The
Company and Selvac agreed to dismiss the Massachusetts litigation without
prejudice. The Company 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 presented on the merits in New Jersey. The court has granted the
Company's motion to dismiss Selvac's federal unfair competition claim so far as
it depends on the Company's supposed violations of FDA rules. The court has also
granted the Company's motion to amend its complaint to allege that Selvac's
patent was obtained by inequitable conduct. The Company has moved for summary
judgment on the ground that the Selvac patent is invalid. Discovery in the case
has been stayed by court order pending a ruling on the Company's dispositive
motion. The Company believes that MEHL's claims are without merit.
On October 16, 1997, the Company brought a declaratory judgment action
in United States District Court for the District of Massachusetts against the
holders and the indenture trustee of the Company's 4.5% Subordinated Convertible
Debentures due 2003, denominated in Swiss francs (the "Swiss Franc Debentures").
The defendants in this action are Banque SCS Alliance SA, Arbuthnot Fund
Managers, Ltd., Banca Commerciale Lugano, Privatinvest Bank AG (these four
defendants being referred to collectively as the "Asserting Holders"), CUF
Finance S.A., Fibi Bank (Schweiz) AG, Teawood Nominees, Ltd., JS Gadd & CIE, SA,
Swedbank (Luxembourg) SA, Christiana Bank Luxembourg SA, (now known as Credit
Agricole Indosuez), Landatina Financiera SA and American Stock Transfer & Trust
Co., as trustee ("Trustee"). Just prior to this suit, the Asserting Holders had
alleged that the Company is in breach of certain protective covenants under the
indenture. The Company believes that it is not in default under any protective
covenants, and the Company's action seeks a declaration from the Court to that
effect. All payments on the Swiss Franc Debentures were current to the time of
suit. On October 22, 1997, the Asserting Holders sued the Company and all of its
principal subsidiaries in the same court; the October 16th and October 22nd
cases have been assigned to the same judge, and the dispute between the
Asserting Holders and the Company is proceeding under the October 22nd case.
(The Company has moved to dismiss without prejudice the October 16, 1997 case;
the court has not yet acted on that motion.) The Asserting Holders claim that
the Company has breached certain protective indenture covenants and that the
Asserting Holders are entitled to immediate payment of their indebtedness under
the Swiss Franc Debentures (which amounts to about US$5,000,000 at recent
exchange rates). The Asserting Holders sought a temporary restraining order
attaching bank accounts and barring the Company from transferring any interest
in securities of its subsidiaries. The Court denied this motion, and the
Asserting Holders withdrew a preliminary injunction motion concerning
essentially the same issues. As of November 13, 1997, acting under applicable
provisions of the indenture, the Company notified the holders of the Swiss Franc
Debentures that it is causing the conversion of all of the Swiss Franc
Debentures into an aggregate of 914,028 shares of the Company's common stock.
The court thereafter denied without prejudice the Company's motion to dismiss
the complaint on the ground the Asserting Holders had failed to proceed through
the Trustee, as required, and denied without prejudice the Company's motion for
summary judgment as to its conversion. The court scheduled a time-limited
evidentiary hearing, further to clarify the legal and factual issues. After that
hearing, the court denied the Asserting Holders' motion for summary judgment,
and concluded that there remain disputed issues and the case must be tried
before a factfinder. The Company believes that its position in these matters is
correct and intends to contest the claims of the Asserting Holders vigorously.
On August 27, 1997, Pamela Siegman, as Trustee for the Pamela Siegman
Trust, filed an action in the Court of Chancery of the State of Delaware in and
for New Castle County against the Company and each of its
15
<PAGE>
current directors and two former directors. Siegman, purportedly on behalf of
similarly situated shareholders, claimed disclosure errors and omissions in the
Company's annual meeting proxy statement, and sought a declaration that the
Company's preferred stock is void because of a purported deficiency in the
Company's Certificate of Incorporation. On March 9, 1998, the Court of Chancery
ruled against Siegman on all of her claims (she had abandoned some of her claims
prior to the Court's ruling). The Company does not know whether Siegman will
appeal the ruling, as the court's final order has not of this date been entered.
Siegman has filed a request for attorney fees, which the Company has opposed.
ITEM 2. CHANGES IN SECURITIES
---------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS
27.1 Financial Data Statement, Restated, for the period ended March 31, 1997
27.2 Financial Data Statement, for the period ended March 31, 1998
(a) REPORTS ON FORM 8-K.
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant certifies that it has caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Lexington in the
Commonwealth of Massachusetts on May 13, 1998.
PALOMAR MEDICAL TECHNOLOGIES, INC.
(Registrant)
DATE: May 13, 1998 By: /S/ LOUIS P. VALENTE
-----------------------------
Louis P. Valente
Chief Executive Officer
(Principal Executive Officer)
DATE: May 13, 1998 /S/ JOSEPH P. CARUSO
-----------------------------
Joseph P. Caruso
Chief Financial Officer and
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
17
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
FINANCIAL DATA STATEMENT
<ARTICLE> 5
<CIK> 0000881695
<NAME> PALOMAR MEDICAL TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 15,493,553
<SECURITIES> 4,127,472
<RECEIVABLES> 1,961,677
<ALLOWANCES> 493,000
<INVENTORY> 8,372,236
<CURRENT-ASSETS> 33,715,470
<PP&E> 6,041,703
<DEPRECIATION> 1,143,207
<TOTAL-ASSETS> 70,710,502
<CURRENT-LIABILITIES> 19,084,473
<BONDS> 19,407,789
0
198
<COMMON> 320,144
<OTHER-SE> (31,897,898)
<TOTAL-LIABILITY-AND-EQUITY> 70,710,502
<SALES> 2,732,460
<TOTAL-REVENUES> 2,732,460
<CGS> 3,015,716
<TOTAL-COSTS> 3,015,716
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,179,007
<INCOME-PRETAX> (10,293,513)
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<NET-INCOME> (15,365,145)
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
FINANCIAL DATA STATEMENT
<ARTICLE> 5
<CIK> 0000881695
<NAME> PALOMAR MEDICAL TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,858,028
<SECURITIES> 1,644,791
<RECEIVABLES> 4,513,829
<ALLOWANCES> 591,000
<INVENTORY> 2,074,209
<CURRENT-ASSETS> 13,833,634
<PP&E> 6,059,652
<DEPRECIATION> 1,826,248
<TOTAL-ASSETS> 25,244,773
<CURRENT-LIABILITIES> 21,826,676
<BONDS> 6,821,792
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<COMMON> 614,749
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<TOTAL-LIABILITY-AND-EQUITY> 25,244,773
<SALES> 7,067,405
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