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 June 30, 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
PALOMAR MEDICAL TECHNOLOGIES, INC
(Exact name of issuer as specified in its charter)
<TABLE>
<S> <C> <C> <C>
Delaware 04-3128178
- - -------------------------------------------------------------------- ---------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
45 Hartwell Avenue, Lexington, Massachusetts 02421
--------------------------------------------------
(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 July 31, 1998, 65,558,954 shares of Common Stock, $.01 par value
per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
-- --
Page 1 of 19
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Condensed Balance Sheets -
December 31, 1997 and June 30, 1998 P. 3
Consolidated Statements of Operations -
For the Three and Six Months Ended
June 30, 1997 and 1998 P. 4
Consolidated Statement of Stockholders' Deficit -
For the Six Months Ended
June 30, 1998 P. 5
Consolidated Statements of Cash Flows -
For the Six Months Ended
June 30, 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. 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS P. 17
ITEM 2. CHANGES IN SECURITIES P. 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES P. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS P. 17
ITEM 5. OTHER INFORMATION P. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K P. 18
SIGNATURES P. 19
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<S> <C> <C> <C>
December 31, June 30,
1997 1998
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,003,300 $1,205,856
Marketable securities 1,449,326 289,875
Accounts receivable, net 2,248,680 6,676,604
Inventories 4,711,474 2,766,992
Other current assets 2,153,941 1,408,643
---------------- ----------------
Total current assets 13,566,721 12,347,970
---------------- ----------------
NET ASSETS OF DISCONTINUED OPERATIONS 5,825,602 ---
---------------- ----------------
PROPERTY AND EQUIPMENT, AT COST, NET 6,455,586 4,087,597
---------------- ----------------
OTHER ASSETS:
Cost in excess of net assets acquired, net 2,302,348 2,001,166
Deferred financing costs 591,609 103,241
Other noncurrent assets 225,706 177,161
---------------- ----------------
Total other assets 3,119,663 2,281,568
---------------- ----------------
$28,967,572 $18,717,135
================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $1,640,465 $6,967,815
Accounts payable 4,150,982 3,200,235
Accrued liabilities 13,759,854 10,559,217
Current portion of deferred revenue 1,284,395 1,247,305
---------------- ----------------
Total current liabilities 20,835,696 21,974,572
---------------- ----------------
NET LIABILITIES OF DISCONTINUED OPERATIONS --- 1,765,217
---------------- ----------------
LONG-TERM DEBT, NET OF CURRENT PORTION 12,445,563 3,577,667
---------------- ----------------
DEFERRED REVENUE, NET OF CURRENT PORTION 1,870,000 1,370,000
---------------- ----------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value-
Authorized - 5,000,000 shares
Issued and outstanding -
16,397 shares and 8,603 shares
at December 31, 1997 and June 30, 1998, respectively 164 86
Common stock, $.01 par value-
Authorized - 120,000,000 shares
Issued - 45,792,585 shares and 65,168,030 shares
at December 31, 1997 and June 30, 1998, respectively 457,926 651,680
Additional paid-in capital 147,356,579 157,954,019
Accumulated deficit (152,359,497) (166,937,247)
Less: Treasury stock - (345,000 shares at cost) (1,638,859) (1,638,859)
---------------- ----------------
Total stockholders' deficit (6,183,687) (9,970,321)
---------------- ----------------
$28,967,572 $18,717,135
================ ================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<S> <C><C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
------------- ------------- -------------- --------------
REVENUES $7,119,595 $9,090,396 $9,852,055 $16,157,801
COST OF REVENUES 6,425,121 4,812,456 9,440,837 11,148,701
------------- ------------- -------------- --------------
Gross margin 694,474 4,277,940 411,218 5,009,100
------------- ------------- -------------- --------------
OPERATING EXPENSES
Research and development 2,693,085 1,943,523 4,873,902 4,108,523
Sales and marketing 1,636,186 3,526,770 2,607,165 6,029,885
General and administrative 4,844,972 2,359,142 9,058,749 5,203,001
Settlement costs 400,000 -- 3,199,000 --
------------- ------------- -------------- --------------
Total operating expenses 9,574,243 7,829,435 19,738,816 15,341,409
------------- ------------- -------------- --------------
Loss from operations (8,879,769) (3,551,495) (19,327,598) (10,332,309)
INTEREST EXPENSE (1,353,387) (408,023) (2,532,394) (829,335)
OTHER (EXPENSE) INCOME (954,784) (8,935) 378,539 354,509
------------- ------------- -------------- --------------
NET LOSS FROM CONTINUING OPERATIONS (11,187,940) (3,968,453) (21,481,453) (10,807,135)
LOSS FROM DISCONTINUED OPERATIONS (NOTE 9)
Loss from operations (3,625,048) (1,090,885) (8,696,680) (1,090,885)
Loss on disposition -- (1,533,295) -- (1,533,295)
------------- ------------- -------------- --------------
NET LOSS FROM DISCONTINUED OPERATIONS (3,625,048) (2,624,180) (8,696,680) (2,624,180)
------------- ------------- -------------- --------------
NET LOSS $(14,812,988) $(6,592,633) $(30,178,133) $(13,431,315)
============= ============= ============== ==============
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Continuing operations $(0.38) $(0.07) $(0.73) $(0.21)
Discontinued operations (0.11) (0.04) (0.28) (0.05)
------------- ------------- -------------- -------------
TOTAL LOSS PER COMMON SHARE $(0.49) $(0.11) $(1.01) $(0.26)
============= ============= ============== =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 32,699,944 63,330,295 31,528,613 57,643,346
============= ============= ============== =============
</TABLE>
The accompanying note are an integral part of
these consolidated financial statements.
4
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
------------------------------------------------------------------------
Number of $0.01 Number of $0.01 Number
Shares Par Value Shares Par Value of Shares Cost
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 16,397 $164 45,792,585 $457,926 (345,000) $(1,638,859)
Sale of common stock pursuant to warrants, options
and Employee Stock Purchase Plan -- -- 162,582 1,626 -- --
Conversion of preferred stock (4,728) (47) 5,088,535 50,886 -- --
Conversion of convertible debentures -- -- 6,512,441 65,124 -- --
Redemption of preferred stock (3,066) (31) -- -- -- --
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 -- -- 311,887 3,118 -- --
contribution
Common stock issued for advisory services -- -- 100,000 1,000 -- --
Costs incurred related to issuance of common stock -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------------------------------------------------------------------
BALANCE, JUNE 30, 1998 8,603 $86 65,168,030 $651,680 (345,000) $(1,638,859)
===================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Deficit
--------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $147,356,579 $(152,359,497) $(6,183,687)
Sale of common stock pursuant to warrants, options
and Employee Stock Purchase Plan 32,856 -- 34,482
Conversion of preferred stock 429,820 -- 480,659
Conversion of convertible debentures 6,011,870 -- 6,076,994
Redemption of preferred stock (3,066,269) -- (3,066,300)
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 contributions 251,163 -- 254,281
Common stock issued for advisory services 99,000 -- 100,000
Costs incurred related to issuance of common stock (100,000) -- (100,000)
Preferred stock dividends -- (1,146,435) (1,146,435)
Net loss -- (13,431,315) (13,431,315)
--------------------------------------------------------------
BALANCE, JUNE 30, 1998 $157,954,019 $(166,937,247) $(9,970,321)
==============================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated findancial statements.
5
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<S> <C> <C> <C>
Six Months Ended June 30,
1997 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(30,178,133) $(13,431,315)
Less: Net loss from discontinued operations (8,696,680) (2,624,180)
------------ ------------
Net loss from continuing operations (21,481,453) (10,807,135)
------------ ------------
Adjustments to reconcile net loss from continuing
operations to net cash
used in operating activities-
Depreciation and amortization 1,092,435 1,372,120
Settlement and litigation costs 2,900,000 --
Write-off of deferred financing costs associated with
redemption of convertible debentures 27,554 --
Valuation allowances for notes and investments 435,912 --
Foreign currency exchange gain (608,357) --
Noncash interest expense related to debt 2,302,012 171,000
Noncash compensation related to common
stock and warrants 371,102 --
Realized loss on marketable securities 49,693 --
Unrealized gain on marketable securities (599,639) (332,965)
Changes in assets and liabilities -
Net (purchase) sale of marketable trading securities 1,036,563 1,840,395
Accounts receivable 102,906 (3,033,274)
Inventories (4,112,868) 1,785,358
Other current assets (1,574,579) 604,470
Accounts payable (174,175) (649,765)
Accrued expenses 232,459 400,354
------------ ------------
Net cash used in operating activities (20,000,435) (8,649,442)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (3,851,751) (233,069)
Decrease (increase) in other assets (307,695) (470,252)
Decrease in notes receivable 171,288 (86,818)
Increase in intangible assets (351,059) --
Investment in nonmarketable securities (2,257,631) --
------------ ------------
Net cash used in investing activities (6,596,848) (790,139)
------------ ------------
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 and 1,450,621 3,394,070
advances from distributor
Net proceeds from issuance of common stock 1,158,677 6,874,482
Issuance of preferred stock 15,000,000 --
Purchase of treasury stock (139,851) --
Costs incurred related to issuance of common stock -- (100,000)
Redemption of preferred stock -- (3,791,889)
------------ ------------
Net cash provided by financing activities 27,498,616 4,179,996
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 901,333 (5,259,585)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 4,985,117 3,462,141
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 8,091,611 3,003,300
------------ ------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $13,978,061 $1,205,856
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $135,972 $1,022,863
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Conversion of convertible debentures and related
accrued interest, net of financing fees $3,066,815 $6,076,994
============ ============
Conversion of preferred stock $186,492 $480,659
============ ============
Issuance of common stock for 1996 and 1997
employer 401(k) matching contribution $269,262 $254,282
============ ============
</TABLE>
The accompanying notes are an inegral part of
these consolidated financial statements.
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; the success of future operations is hence 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. Securities are sold to private investors at market or 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
its securities for resale to the public at some future time. The sale by the
Company of some of its marketable investments could result in additional losses
depending on market conditions at the time of these sales.
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.
June 30, 1998
-------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ------------ ------------ ------------
Marketable Securities:
Investments in
publicly traded
companies $239,940 $49,935 $--- $289,875
============ ============ ============ ============
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:
<TABLE>
<S> <C> <C> <C>
December 31, June 30,
1997 1998
---------------- ----------------
Raw materials $2,928,350 $1,500,454
Work-in-process and finished goods 1,783,124 1,266,538
--------------- ----------------
$4,711,474 $2,766,992
================ ================
</TABLE>
4. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consist of the following:
<TABLE>
<S> <C> <C> <C>
December 31, June 30,
1997 1998
---------------- ---------------
Machinery and equipment $6,328,442 $4,983,171
Furniture and fixtures 1,018,931 963,647
Leasehold improvements 480,453 431,766
---------------- ---------------
7,827,826 6,378,584
Less: Accumulated depreciation
and amortization 1,372,240 2,290,987
---------------- ---------------
$6,455,586 $4,087,597
================ ===============
</TABLE>
5. ACCRUED LIABILITIES
-------------------
Accrued liabilities consist of the following:
<TABLE>
<S> <C> <C> <C>
December 31, June 30,
1997 1998
---------------- ---------------
Payroll and employee costs $1,535,013 $1,300,713
Royalties 853,808 1,226,991
Settlement costs 1,457,020 520,454
Warranty 2,583,677 3,056,790
Restructuring 1,981,907 1,035,622
Interest and preferred stock dividends 1,659,709 1,499,603
Other 3,688,720 1,919,044
================ ===============
Total $13,759,854 $10,559,217
================ ===============
</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 and six months ended June 30,
1997 and 1998 is as follows:
<TABLE>
<S><C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
--------------- -------------- --------------- ---------------
Net loss from continuing operations $(11,187,940) $(3,968,453) $(21,481,453) $(10,807,135)
Amortization of value ascribed to
preferred stock conversion
discount (941,176) --- (941,176) ---
Preferred stock dividends (432,228) (401,614) (727,224) (1,146,435)
--------------- -------------- --------------- ---------------
Adjusted net loss $(12,561,344) $(4,370,067) $(23,149,853) $(11,953,570)
=============== ============== =============== ===============
Basic net loss per common share from
continuing operations $(.38) $(.07) $(.73) $(.21)
=============== ============== =============== ===============
Weighted average number of
common shares outstanding 32,699,944 63,330,295 31,528,613 57,643,346
=============== ============== =============== ===============
</TABLE>
As of June 30, 1997 and 1998, 25,285,938, and 27,496,581 weighted
average common equivalent shares, respectively, were not included in the diluted
weighted average shares outstanding as they were antidilutive.
7. NOTES PAYABLE
-------------
Notes payable consist of the following:
<TABLE>
<S> <C> <C>
December 31, June 30,
1997 1998
---------------- ---------------
Convertible debentures $10,683,440 $2,500,000
Note payable issued in connection with guaranty on behalf of discontinued subsidiary 3,233,000 2,694,167
Short-term notes payable from distributor --- 4,000,000
Advance from distributor --- 1,351,315
Other notes payable 169,588 ---
---------------- ---------------
14,086,028 10,545,482
Less - current maturities (1,640,465) (6,967,815)
--------------- ---------------
$12,445,563 $3,577,667
================ ===============
</TABLE>
9
<PAGE>
(a) CONVERTIBLE DEBENTURES
During the six months ended June 30, 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; 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; and
$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.
During the second quarter of 1998, the Company converted $2,840,000 of
6%, 7% and 8% convertible debentures due September 30, 2002 into 2,702,519
shares of the Company's common stock. Accrued interest totaling $107,999 was
included in the above conversions. The Company amortized deferred financing
costs totaling $128,156 to additional paid-in capital related to this
conversion.
During the first quarter of 1998, the Company redeemed $2,000,000,
including interest and premium, of 6%, 7% and 8% convertible debentures due
September 30, 2002 for $2,196,667. Deferred financing cost totaling $95,000 was
charged to interest expense upon redemption.
(b) SHORT-TERM NOTES PAYABLE
On May 22 and June 22, 1998, the Company borrowed $3,000,000 and
$1,000,000, respectively, from the Company's worldwide distributor. The notes
are due on October 15, 1998 and accrue interest at 8.5% per annum. The notes are
secured by all of the inventory owned by the Company's Star Medical Technologies
Inc. subsidiary.
(c) ADVANCE FROM DISTRIBUTOR
The Company's worldwide laser distributor advanced funds to the Company
during 1998. The advances are secured by specific accounts receivable
outstanding at the time of the advance by the distributor. Payments against this
advance are made as the distributor collects receivables from the end user of
the Company's products.
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 callable
warrants to the investors to purchase 7,200,000 shares of common stock at an
exercise price of $3.00 per share. The callable warrants are not exercisable for
the first six months after issuance and, thereafter, are callable by the Company
if the closing price of the Company's common stock equals or exceeds $5.00 for
ten consecutive trading days. Under the terms of this private placement, the
Company is obligated to pay the investors a fee of 5% per annum (payable
quarterly) of the dollar value invested in the Company as long as the investors
continue to hold their common stock in their name. 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
Series G Preferred Stock and accrued dividends and interest of $30,255 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.
10
<PAGE>
During the second quarter of 1998, the Company converted 536 shares of
Series G Preferred Stock and accrued dividends and interest of $66,485 into
616,378 shares of the Company's common stock. During the second quarter of 1998,
the Company converted 84 shares of Series H Preferred Stock and accrued
dividends of $24,112 into 85,000 shares of the Company's common stock.
During the second quarter of 1998, the Company redeemed 866 shares of
Series H Preferred Stock including related accrued dividends and premiums for
$1,118,039.
(c) OPTIONS TO PURCHASE COMMON STOCK
During the six months ended June 30, 1998, the Company cancelled
options to purchase 2,871,400 shares of the Company's common stock at exercise
prices ranging from $1.50 to $8.00 per share. In addition, the Company granted
2,198,900 options at above market prices. No options were issued or exercised
during the six months ended June 30, 1998.
(d) WARRANTS TO PURCHASE COMMON STOCK
During the six months ended June 30, 1998, the Company cancelled
warrants to purchase 1,175,000 shares of the Company's common stock at exercise
prices ranging from $2.50 to $6.75 per share and issued warrants to purchase
9,385,000 shares of the Company's common stock at exercise prices ranging from
$.01 to $3.25 per share. During the six months ended June 30, 1998, a warrant
for 125,000 shares was exercised for $1,250. This warrant was held by an
investor.
(e) RESERVED SHARES
As of June 30, 1998, the Company had reserved shares of its common
stock for the following:
<TABLE>
<S> <C> <C>
June 30,
1998
---------------
Convertible debentures 3,739,915
Stock option plans 6,707,655
Warrants 17,508,030
Employee 401(k) plan 554,787
Employee stock purchase plan 449,041
Convertible preferred stock 5,132,041
Common stock reserved for guarantee 3,250,000
issued in connection with note
payable on behalf of discontinued
subsidiary ---------------
Total 37,341,469
===============
</TABLE>
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. During
the second quarter of 1998, the Company sold all of the issued and outstanding
common stock of Dynaco Corp. ("Dynaco") for net proceeds of approximately
$2,381,000. Due to the delay in the sale of Dynaco the Company was required to
fund Dynaco with an additional $500,000 for operations in excess of the amount
accrued for at year end. Accordingly, the Company recognized a loss from
discontinued operations of approximately $1,091,000 related to the operations of
Dynaco through disposition. During the second quarter of 1998, the Company
recorded a charge to discontinued operations of $1,525,000 due to management's
decision to write down the carrying value of its investment in Nexar
Technologies, Inc. ("Nexar").
11
<PAGE>
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 / liabilities of these
entities have been reported as "Net Assets / Liabilities 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> <C> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
1997 1998 1997 1998
---------------- ---------------- ---------------- --------------------
Revenues $17,654,000 $2,125,580 $35,047,978 $5,745,750
Net Loss from Discontinued Operations ($3,625,048) ($2,624,180) ($8,696,680) ($2,624,180)
</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 six months ended June 30, 1998, the Company paid out
approximately $946,000 of severance leaving a restructuring liability of
approximately $1,036,000 at June 30, 1998. This remaining restructuring
liability will be paid during the remainder of 1998.
11. SUBSEQUENT EVENTS
-----------------
In July 1998, the Company sold 3,000,000 shares of common stock to a
group of investors for $3,000,000. In addition, the Company issued warrants to
the investors to purchase 3,000,000 shares of common stock at an exercise price
of $3.00 per share. The callable warrants are not exercisable for the first six
months after issuance and, thereafter, are callable by the Company if the
closing price of the company's common stock equals or exceeds $5.00 for ten
consecutive trading days. Under the terms of this private placement, the Company
is obligated to pay the investors a 5% annual fee (payable quarterly) of the
dollar value invested in the Company as long as the investors continue to hold
their common stock in their name.
[This space intentionally left blank.]
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
REVENUE AND GROSS MARGIN: THREE MONTHS ENDED JUNE 30, 1998, COMPARED TO
THREE MONTHS ENDED JUNE 30, 1997
For the three months ended June 30, 1998, the Company had revenues of
$9.1 million as compared to $7.1 million for the three months ended June 30,
1997. The increase in the Company's revenue of $2.0 million or 28% from the
quarter ended June 30, 1997 was mainly due to additional sales volume of $8.1
million associated with the introduction of the LightSheer(TM) diode laser
system combined with a decrease in revenue of approximately $6.1 million in
other cosmetic product revenue principally related to the Company's EpiLaser(R)
laser hair removal system. The decrease in sales volume associated with the
Company's EpiLaser(R) laser hair removal system was due to the Company's focus
on bringing the LightSheer(TM) diode laser system to market while further
developing the technology related to the EpiLaser(R) laser hair removal system.
The Company obtained FDA clearance to market and sell its LightSheer(TM) diode
laser system for hair removal and leg vein treatment in the United States at the
end of 1997. In addition, in July 1998 the Company obtained FDA clearance to
market and sell its EpiLaser(R) laser hair removal system in the United States
for "permanent hair reduction." The Company believes that revenues will continue
to increase due to its improved manufacturing process, growing market demand for
its LightSheer(TM) diode laser system, and an improved distribution network as a
result of the Company's exclusive distribution arrangement with Coherent, Inc.
("Coherent").
Gross margin for the three months ended June 30, 1998 was approximately
$4.3 million (47% of revenues) versus $694,000 (10% of revenues) for the three
months ended June 30, 1997. The increase in gross margin dollars and gross
margin percentage was caused by the introduction of the LightSheer(TM) diode
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) diode laser system. This new laser system has a significantly
higher gross margin than the Company's EpiLaser(R) laser hair removal system.
OPERATING AND OTHER EXPENSES: THREE MONTHS ENDED JUNE 30, 1998, COMPARED TO
THREE MONTHS ENDED JUNE 30, 1997
Research and development costs were $1.9 million for the three months
ended June 30, 1998 and $2.7 million for the three months ended June 30, 1997.
Research and development expenses as a percent of revenue totaled 21% for the
three months ended June 30, 1998 and 38% for the three months ended June 30,
1997. The decline in spending is primarily the result of the Company receiving
FDA clearance for the LightSheer(TM) diode laser system at the end of 1997. The
continued spending on research and development reflects the Company's 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 $3.5 million (39% of
revenues) for the three months ended June 30, 1998, from approximately $1.6
million (23% of revenues) for the three months ended June 30, 1997. The increase
in selling and marketing expenses is attributable to the costs associated with
the Company's 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 Coherent's worldwide distribution network.
General and administrative expenses decreased to $2.4 million (26% of
revenues) for the three months ended June 30, 1998, compared to $4.8 million
(68% of revenues) for the three months ended June 30, 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.
13
<PAGE>
For the three months ended June 30, 1998, the Company did not incur
settlement expenses. Settlement costs of $400,000 were incurred in the three
months ended June 30, 1997. These charges represented an additional legal
accrual related to a case involving an investment bank which was settled on
August 18, 1997.
Interest expense decreased to $408,000 for the three months ended June
30, 1998, from $1.4 million for the three months ended June 30, 1997. This 70%
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.
The loss from discontinued operations for the three months ended June
30, 1998 was $1.1 million compared to a loss of $3.6 million for the three
months ended June 30, 1997. The loss from discontinued operations in 1998 was
due to a delay in the disposition of Dynaco resulting in operating expenses
above the $850,000 estimated at December 31, 1997. A loss on disposition of
discontinued entities for the three months ended June 30, 1998 of $1.5 million
was incurred. The majority of this charge relates to management's decision to
write down the carrying value of its investment in Nexar.
REVENUE AND GROSS MARGIN: SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO
SIX MONTHS ENDED JUNE 30, 1997
For the six months ended June 30, 1998, the Company had revenues of
$16.2 million as compared to $9.9 million for the six months ended June 30,
1997. The increase in the Company's revenue of $6.3 million or 64% from the six
months ended June 30, 1997 was mainly due to additional sales volume of $9
million associated with the introduction of the LightSheer(TM) diode laser
system combined with a decrease in revenue of approximately $2.7 million in
other cosmetic product revenue. The decrease in sales volume associated with the
Company's EpiLaser(R) laser hair removal system was due to the Company's focus
on bringing the LightSheer(TM) diode laser system to market while further
developing the technology related to the EpiLaser(R) laser hair removal system.
The Company obtained FDA clearance to market and sell its LightSheer(TM) diode
laser system for hair removal and leg vein treatment in the United States at the
end of 1997. In addition, in July 1998 the Company obtained FDA clearance to
market and sell its EpiLaser(R) laser hair removal system in the United States
for "permanent hair reduction." The Company believes that revenues will continue
to increase due to its improved manufacturing process, growing market demand for
its LightSheer(TM) diode laser system, and an improved distribution network as a
result of the Company's exclusive distribution arrangement with Coherent.
Gross margin for the six months ended June 30, 1998 was approximately
$5 million (31% of revenues) versus $411,000 (4% of revenues) for the six months
ended June 30, 1997. The increase in gross margin and gross margin percentage
was caused by the introduction of the LightSheer(TM) diode 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) diode
laser system. This new laser system has a significantly higher gross margin than
the Company's EpiLaser(R) laser hair removal system.
OPERATING AND OTHER EXPENSES: SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO
SIX MONTHS ENDED JUNE 30, 1997
Research and development costs were $4.1 million for the six months
ended June 30, 1998 and $4.9 million for June 30, 1997. Research and development
expenses as a percent of revenue totaled 25% for the six months ended June 30,
1998 and 49% for the six months ended June 30, 1997. The decline in spending is
primarily the result of the Company receiving FDA approval for the
LightSheer(TM) diode laser system at the end of 1997. The continued spending on
research and development reflects the Company's persevering 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.
14
<PAGE>
Selling and marketing expenses increased to $6 million (37% of
revenues) for the six months ended June 30, 1998, from approximately $2.6
million (26% of revenues) for the six months ended June 30, 1997. The increase
in selling and marketing expenses is attributable to the costs associated with
the Company's distribution agreement with Coherent. The Company anticipates
selling and marketing expenses will increase in the future, but will remain
relatively constant as a percentage of revenue as the Company realizes the
benefits of Coherent's worldwide distribution network.
General and administrative expenses decreased to $5.2 million (32% of
revenues) for the six months ended June 30, 1998, as compared to $9.1 million
(92% of revenues) for the six months ended June 30, 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 used management's time and allocated resources to developing
businesses outside of the medical and cosmetic laser industry and financing the
non-core 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 six months ended June 30, 1998, the Company did not incur
settlement expenses. Settlement costs of $3.2 million were incurred in the six
months ended June 30, 1997. These charges consisted mainly of a legal accrual
related to a legal settlement with an investment bank.
Interest expense decreased to $829,000 for the six months ended June
30, 1998, from $2.5 million for the six months ended June 30, 1997. This 67%
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.
The loss from discontinued operations for the six months ended June 30,
1998 was $1.1 million compared to a loss of $8.7 million for the six months
ended June 30, 1997. The loss from discontinued operations in 1998 was due to a
delay in the disposition of Dynaco resulting in operating expenses above the
$850,000 estimated at December 31, 1997. A loss on disposition of discontinued
entities for the six months ended June 30, 1998 of $1.5 million was incurred.
The majority of this charge relates to management's decision to write down the
carrying value of its investment in Nexar.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had $1.5 million in cash, cash
equivalents and trading securities. During the six months ended June 30, 1998
the Company generated $6.9 million and $3.4 million in net proceeds from the
issuance of common stock and short-term notes payable, respectively. The
Company's net cash used in operating activities for the six months ended June
30, 1998 was approximately $8.7 million.
The Company's net loss for the six months ended June 30, 1998 included
approximately $1.4 million of non-cash depreciation and amortization expense.
The Company anticipates that capital expenditures for the remaining six
months of 1998 will total approximately $500,000. 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.
In connection with the disposition of Comtel, Inc. ("Comtel"), a former
wholly-owned subsidiary in the electronics segment, the Company guaranteed
$2,500,000 of a $3,300,000 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 guaranty. The stockholders of BTC, who are
former officers and directors of a former subsidiary of the Company, have
collateralized this guaranty of the Company with certain assets personally owned
by them. The amount BTC has outstanding under the line of credit at June 30,
1998 was approximately $2,979,000.
15
<PAGE>
The Company's strategic plan is to continue to fund research and
development for its medical and cosmetic laser 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.
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. 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 the
American Materials & Technology Corporation, 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 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.
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex, as virtually every computer operation
will be affected in the same way by the rollover of the two digit year value to
00. The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company is at this time utilizing internal resources to identify,
correct or reprogram, and test the systems for year 2000 compliance. However,
there can be no assurance that the systems of other companies on which the
Company's systems rely will also be converted in a timely manner or that any
such failure to convert by another company would not have an adverse effect on
the Company's systems. Management is in the process of assessing the year 2000
compliance costs; however, based on information to date (excluding the possible
impact of vendor systems), management does not believe that it will have a
material effect on the Company's earnings.
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; gross margin, distribution and
product improvements; growing market demand; additional financings; 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 Annual Report on 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.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
On March 7, 1997, Selvac Acquisition Corp. ("Selvac"), a subsidiary of
Mehl Biophile International, Inc. ("Mehl"), 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
alleged that the Company's EpiLaser(R) laser hair removal system infringed a
patent licensed to Selvac (the "Selvac Patent") and that the Company unfairly
competed by promoting the EpiLaser(R) laser hair removal system for hair removal
before it had received FDA approval for that specific application. On May 18,
1998 the court granted the Company's motion for partial summary judgment on the
ground that the Selvac patent is invalid because prior art anticipated it. The
court has since denied Selvac's motion for reconsideration of the summary
judgment ruling. On August 6, 1998, Mehl's principal unsecured creditor filed a
petition for involuntary bankruptcy against Mehl.
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
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). 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. Palomar filed a motion for summary judgment, asserting that its
conversion of the debentures into Palomar common stock deprives the plaintiffs
of standing to bring a claim. That motion has been denied without prejudice, and
the court also denied the plaintiffs' motion for summary judgment. The case is
scheduled for trial in October 1998. The Company believes that its position in
these matters is correct and intends to contest the claims of the Asserting
Holders vigorously.
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.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS
10.1 Second Amended 1996 Employee Stock Purchase Plan.
10.2 Second Loan Agreement between Palomar Medical Technologies, Inc. and
Coherent, Inc., dated May 7, 1998.
10.3 Loan Agreement between Palomar Medical Technologies, Inc. and Coherent,
Inc., dated May 22, 1998. (Portions omitted pursuant to a request for
confidential treatment.)
27.1 Financial Data Statement, Restated, for the period ended June 30, 1997.
27.2 Financial Data Statement, for the period ended June 30, 1998.
(b) REPORTS ON FORM 8-K.
Form 8-K filed June 3, 1998.
18
<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 August 14, 1998.
PALOMAR MEDICAL TECHNOLOGIES, INC.
(Registrant)
DATE: August 14, 1998 By: /S/ LOUIS P. VALENTE
-------------------------------
Louis P. Valente
Chief Executive Officer
(Principal Executive Officer)
DATE: August 14, 1998 /S/ JOSEPH P. CARUSO
-------------------------------
Joseph P. Caruso
Chief Financial Officer
and Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
REVISED: 7/23/98
PALOMAR MEDICAL TECHNOLOGIES, INC.
SECOND AMENDED 1996 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose of the Plan
The purpose of the Palomar Medical Technologies, Inc. Employee Stock
Purchase Plan is to encourage ownership of the common stock of Palomar Medical
Technologies, Inc. ("Palomar") by its eligible employees and any and each of its
participating subsidiaries, thereby enhancing such employees' personal interest
in the continued success and progress of Palomar. The plan is intended to
facilitate regular investment in the common stock of Palomar by offering
employees a convenient means to make purchases at a discounted price through
payroll deductions. The Plan is intended to comply with the provisions of
Section 423 of the Internal Revenue Code of 1986, as amended.
2. Definitions
For purposes of the Plan, the following terms shall have the meanings
indicated below:
(a) "Business Day" shall mean a day on which there is trading on the
New York Stock Exchange.
(b) "Code" shall mean the Internal Revenue Code of 1986, as it may be
amended from time to time.
(c) "Committee" shall mean the Compensation Committee of the Board of
Directors of Palomar.
(d) "Common Stock" shall mean Palomar's common stock, par value $.01
per share.
(e) "Company" shall mean Palomar and any of its subsidiaries (within
the meaning of Section 424(f) of the Code) whose Board of Directors has
adopted the Plan, with approval of the Board of Directors of Palomar, and
which has not terminated participation in or withdrawn from the Plan by
action of such subsidiary's Board of Directors or the Board of Directors of
Palomar.
(f) "Compensation" shall mean the amount of a Participant's base
wages, overtime, commissions, cash bonuses, premium pay and shift
differential, before giving effect to any compensation reductions made in
connection with any plans described in Section 401(k) or Section 125 of the
Code.
(g) "Custodian" shall mean the custodian appointed by the Committee
pursuant to Section 7 hereof to hold the shares of Common Stock purchased
under the Plan and subsequent Dividends reinvested or paid to Participant
in cash.
(h) "Dividends" shall mean all cash dividends paid on shares of Common
Stock held in any Employee's Account.
(i) "Account" shall mean a separate account maintained by the
Custodian for each Participant which reflects, at any time, the number of
shares of Common Stock purchased under the Plan by such Participant as well
as reinvested Dividends held by the Custodian.
1
<PAGE>
(j) "Entry Date" shall mean the first Business Day of each Purchase
Period.
(k) "Eligible Employee" shall mean, with respect to any Purchase
Period, an employee of the Company who is eligible to participate in the
Plan in such Purchase Period under the rules set forth in Sections 5 and 8
hereof.
(l) The "Fair Market Value" of a share of Common Stock on any Business
Day shall be the closing bid price for such day of the Common Stock on the
principal securities market on which the Common Stock is traded. If on the
date for which Fair Market Value is to be determined the Common Stock is no
eligible for trading on any securities market, the Fair Market Value of a
share of Common Stock shall be determined by the Committee.
(m) "Participant" shall mean, with respect to any Purchase Period,
each Eligible Employee who has elected to have amounts deducted from his or
her Compensation pursuant to Section 6 hereof for such Purchase Period.
(n) "Plan" shall mean this 1996 Employee Stock Purchase Plan, as the
same may be amended from time to time.
(o) "Purchase Date" shall mean the last Business Day of each Purchase
Period.
(p) "Purchase Period" shall mean each of the three month periods
ending on the last days of March, June, September and December during the
period when the Plan is in effect. The first Purchase Period shall begin on
October 1, 1996 and end on December 31, 1996.
3. Common Stock Available Under the Plan
The maximum number of shares of Common Stock which may be purchased under
the Plan shall be 500,000 shares, except as such maximum number may be adjusted
as provided in Section 12 hereof. Shares of Common Stock purchased under the
Plan may be authorized and previously unissued shares, treasury shares
(including shares purchased from time to time by Palomar), or any combination
thereof.
4. Administration of Plan
The Plan shall be administered by the Committee. The Committee shall have
the authority, consistent with the Plan, to interpret the Plan, to adopt, amend
and rescind rules and regulations for the administration of the Plan and to make
all determinations in connection therewith which may be necessary or advisable,
and all such actions shall be binding for all purposes under the Plan. The Plan
shall be administered at the expense of the Company.
5. Eligibility
Each employee of the Company shall be eligible to participate in the Plan
during each Purchase Period, provided that he or she is not, as of the Entry
Date for such Purchase Period:
(a) an employee who is customarily employed by the Company for fewer
than 20 hours per week, or for five or fewer months in any calendar year;
or
(b) an employee who owns (within the meaning of Section 424(d) of the
Code) stock possessing 5% or more of the total combined voting power or
value of all classes of stock of Palomar, treating as owned on Entry Date,
2
<PAGE>
for purposes of this clause, Common Stock which such employee would be
entitled to purchase on Purchase Date for such Purchase Period but for this
Section 5(c).
6. Participation
(a) On the Entry date for each Purchase Period, Palomar shall grant to
each Participant in the Plan for such Purchase Period an option to purchase
on the Purchase Date for such Purchase Period, at the applicable price
specified in Section 7 hereof, the number of shares of Common Stock,
including any fractional share, which may be purchased, at such price, with
such participant's payroll deductions received during such Purchase Period,
subject to the terms and conditions of the Plan.
(b) Eligible Employees may elect to participate in the Plan as
follows:
(i) Each Eligible Employee may elect to participate in the Plan,
effective on the Entry Date for any Purchase Period, by making an
election to participate at least 15 days prior to such entry Date.
Such election shall authorize the Company to deduct an amount chosen
by the employee equal to any whole percentage between 1 and 15
percent, inclusive from such Employee's Compensation paid during such
Purchase Period.
(ii) After making the election pursuant to Section 6(b)(i)
hereof, a Participant shall automatically continue to participate in
the Plan during subsequent Purchase Periods until the Participant
either withdraws from the Plan or ceases to be an Eligible Employee.
The percentage of the Participant's Compensation deducted in
subsequent Purchase Periods shall be the percentage specified in the
election made pursuant to Section 6(b)(i), as it may be changed from
time to time pursuant to Section 6(b)(iii) or 6(b)(iv) hereof.
(iii) Except as provided in Section 6(b)(iv) hereof, after the
last date for making an election described in Section 6(b)(i) hereof
for the Purchase Period, a Participant shall not be permitted to
increase or reduce the percentage of Compensation deducted from his or
her Compensation paid during each purchase period. A Participant may
elect to reduce or increase the percentage of his or her Compensation
deducted pursuant to the Plan to any whole percentage between 1 and
15, inclusive, effective for a subsequent Purchase Period by filing an
election not later than 15 days prior to the Entry Date for such
Purchase Period.
(iv) A Participant may elect at any time to reduce the percentage
of his or her Compensation deducted pursuant to the Plan to zero,
effective commencing with the next payroll period beginning after the
making of such election. All cash amounts already deducted during a
Purchase Period prior to the effectiveness of any such election shall
be refunded to the Participant.
(c) No interest will be paid to Participants on any payroll
deductions.
(d) A Participant may at any time elect to withdraw from further
participation in the Plan, effective as of the next Business day following
such election. Any Participant whose employment with the Company terminates
for any reason (including without limitation termination by reason of death
or disability) shall be deemed to have made a withdrawal, effective the
next Business Day following such termination of employment. Upon any
withdrawal, (i) no further amounts shall be deducted from such
Participant's Compensation effective for any payroll period beginning after
the effective date of withdrawal, (ii) any outstanding option granted to
such Participant under the Plan shall terminate as of the effective date of
the withdrawal, and no further purchases of Common Stock under the Plan
shall be made for such Participant or after such date, and (iii) as soon as
possible the Company will refund all cash deducted during the Purchase
3
<PAGE>
Period. Following any such withdrawal from the Plan, an employee's
eligibility to participate again in the Plan will be subject to all
provisions of Section 5 and 8 hereof.
(e) Notwithstanding any other provision of the Plan, an employee who
has withdrawn from the Plan pursuant to Section 6(d) hereof shall be deemed
to have made an irrevocable election not to participate in the Plan during
the two consecutive Purchase Periods immediately following the one in which
such withdrawal was made.
(f) Any election permitted by this Section 6 (other than an election
deemed made pursuant to Section 6(e)) shall be made in writing on the form
prescribed for such purpose by the Committee from time to time and shall be
delivered to the person or persons designated by the Committee. Any such
election shall be deemed made when such form is completed, signed by the
Participant and received by such designee.
7. Purchases of Common Stock
On the Purchase Date for each Purchase Period, all options granted under
the Plan on the first Business Day of such Purchase Period shall be deemed to be
exercised, and all amounts deducted pursuant to Section 6 hereof from the
Participant's Compensation during such Purchase Period shall be applied on such
date to purchase whole and fractional shares of Common Stock from the Company,
unless such Participant has withdrawn from the Plan during such Purchase Period
effective on or prior to such Purchase Date. With respect to shares of Common
Stock purchased, the purchase price per share shall be the lesser of (i)
eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on
the Entry Date of the Purchase Period, or (ii) eighty-five percent (85%) of the
Fair Market Value of a share of Common Stock on the Purchase Date of the
Purchase Period. The Committee shall appoint the Custodian for the Plan and to
hold all whole and fractional shares purchased under the Plan and to maintain a
separate Account for each Participant, in which Common Stock purchased by such
Participant under the Plan shall be held and Dividends received will be
reinvested. Each Participant shall receive a statement as soon as practicable
after the end of each Purchase Period reflecting purchases for his or her
account under the Plan through the end of such Purchase Period.
8. Limitation on Number of Shares purchased
Notwithstanding any other provision of the Plan, the maximum number of
whole and fractional shares of Common Stock which a Participant may purchase in
a Purchase Period under the Plan and under all other "employee stock purchase
plans" (within the meaning of Section 423 of the Code) maintained by Palomar and
its subsidiaries (within the meaning of Section 424(f) of the Code) shall be the
number determined by dividing $6,250 by the Fair Market Value of a share of
Common Stock on the Entry Date for such Purchase Period. In the event that the
amount of payroll deductions is greater than $6,250 in any given Purchase
Period, the Company will refund the excess to the Participant as soon as
practicable after such Purchase Date.
9. Rights as a Stockholder
From and after the Purchase Date on which shares of Common Stock are
purchased by the Participant under the Plan, such Participant shall have all of
the rights and privileges of a stockholder of Palomar with respect to such
shares. Prior to the Purchase Date on which shares of Common Stock may be
purchased by a Participant, such Participant shall not have any rights as a
stockholder of Palomar.
4
<PAGE>
10. Notice of Disposition of Stock
Each Participant agrees, by his or her participation in the Plan, to
promptly notify Palomar in writing of any disposition of any Common Stock
purchased under the Plan occurring within 2 years after the Entry Date of the
Purchase Period in which such stock was purchased.
11. Rights Not Transferable
Rights under the Plan are not transferable, except that the right to
receive shares pursuant to the Plan may be transferred by will or the laws of
descent and distribution. Options granted to a Participant hereunder may be
exercised only by such Participant.
12. Adjustment for Capital Changes
In the event of any capital change by reason of any stock dividend or
split, recapitalization, merger in which Palomar is the surviving entity,
combination or exchange of shares or similar corporate change, the number and
type of shares or other securities of Palomar which Participants may purchase
under the Plan, and the maximum aggregate number of such shares or securities
which may be purchased under the Plan, shall be appropriately adjusted by the
Board of Directors of Palomar.
13. Amendments
The Board of Directors of Palomar may at any time, or from time to time,
amend the Plan in any respect, except that, without stockholder approval, no
amendment shall be made (a) increasing the number of shares which may be
purchased under the Plan (other than as provided in Section 12 herein), (b)
materially increasing the benefits accruing to Participants or (c) materially
modifying the requirements as to eligibility for participation in the Plan.
14. Laws and Regulations
(a) Notwithstanding any other provision of the Plan, the rights of
Participants to purchase Common Stock hereunder shall be subject to
compliance with all applicable Federal, state and foreign laws, rules and
regulations and the rules of each stock exchange upon which the Common
Stock is from time to time listed.
(b) The Plan and the purchase of Common Stock hereunder shall be
subject to additional rules and regulations, not inconsistent with the
Plan, that may be promulgated from time to time by the Committee regarding
purchases and sales of Common Stock.
15. Employment
The Plan shall not confer any right to continued employment upon any
employee of the Company.
16. Effective Date of the Plan; Termination
(a) The Plan shall become effective on October 1, 1996, subject to
approval by the shareholders of Palomar in accordance with applicable law
and the requirements of Section 423 of the Code.
5
<PAGE>
(b) The Plan and all rights hereunder shall terminate on the earliest
to occur of:
(i) the date on which the maximum number of shares of Common
Stock available for purchase under the Plan as specified in Section 3
hereof has been purchased;
(ii) the termination of the Plan by the Board of Directors of
Palomar; or
(iii) the effective date of any consolidation or merger in which
Palomar is not the surviving entity, any exchange or conversion of
outstanding shares of Palomar for or into securities of another entity
or other consideration, or any complete liquidation of Palomar.
In the event that on any Purchase Date the remaining shares of Common Stock
available for purchase under the Plan are insufficient to fully satisfy
Participants' outstanding options, such remaining available shares shall be
apportioned among and sold to such Participant in proportion to the amounts of
payroll deductions and the excess payroll deduction shall be returned to the
Participant as soon as practicable thereafter.
Upon any termination of the Plan, any shares in the employee's Account
shall be delivered by the Custodian to the employee or his or her legal
representative as soon as practicable following such termination.
SECOND LOAN AGREEMENT
This Loan Agreement is made and entered into this 7th day of May, 1998
by and between Coherent, Inc., a Delaware corporation ("Coherent"), and Palomar
Medical Technologies, Inc., a Delaware corporation ("PMTI").
Subject to the terms and conditions contained herein, the parties agree
as follows:
1. LOAN. At Coherent's sole election and discretion, Coherent shall
loan PMTI from time to time amounts to be agreed upon between them, to help
finance PMTI's working capital requirements (the "Loans"), which loans shall be
evidenced by a promissory notes in the form set forth in Exhibit A (the "Note").
The parties agree that the outstanding loan balance as of the date hereof is
$1,780,315.22
2. PAYMENT. In accordance with the Sales Agency, Development and
License Agreement entered into between parties on November 17, 1997 (the
"Agreement"), Coherent will be using its reasonable best efforts to collect
PMTI's accounts receivable that are Collateral for the Note. As such accounts
receivable are collected by Coherent, the amounts due PMTI under the Agreement,
less a one-time 1.5% interest charge, shall be credited against the outstanding
balance of the Note.
3. SECURITY INTEREST. PMTI hereby creates and grants to Coherent a
security interest in the collateral described in Section 3 hereof to secure the
payment and performance of the following obligations of PMTI to Coherent:
(a) Payment of the indebtedness evidenced by the Note and any and all
modifications, extensions or renewals thereof,
(b) Performance and discharge of each and every obligation, covenant,
condition and agreement of PMTI herein contained.
4. COLLATERAL. The collateral in which the security interest is created
(the "Collateral") shall consist of those PMTI's accounts receivable identified
on Schedule A to the Note where Coherent has acted as PMTI's sales agent
pursuant to the Agreement, together with all proceeds thereto.
5. RECORDING. PMTI will execute, deliver and cause to be recorded or
filed in the manner and place required by law, any document or instrument that
may be requested by Coherent, including financing statements or other
instruments of similar character, to perfect and protect the lien of this
Security Agreement upon any and all of the Collateral.
6. EVENTS OF DEFAULT. An Event of Default (as hereinafter defined) of a
Note issued under this Agreement shall cause the Note to be immediately due and
payable. As used herein, an "Event of Default" shall be any of the following:
(a) The failure of PMTI to punctually and properly pay the indebtedness
evidenced by the Note in accordance with its terms.
(b) The failure of PMTI punctually and properly to observe, keep or
perform any covenant, agreement or condition required to be observed, kept or
performed by this Agreement.
(c) The failure of PMTI to make due and punctual performance of any
covenant, obligation or agreement in any note, bond, indenture, loan agreement,
note agreement, mortgage, security agreement or other instrument evidencing or
related thereto which constitutes an event of default under any such instrument
(or would give the holder of such instrument the right to accelerate payment of
<PAGE>
such obligation), or such obligation is not paid as to principal or interest
when due, and such default shall continue for more than the period of notice
and/or grace, if any, therein specified and shall not have been waived or
otherwise cured.
7. RIGHTS OF SECURED PARTY. Coherent shall have all the rights as a
secured party under the laws of California, including the right to sell any part
of the Collateral at a public or private sale or bid as a purchaser of the
Collateral.
8. APPLICATION OF PROCEEDS OF SALE. The proceeds of the sale of any
Collateral sold pursuant to Section 6 hereof
shall be applied as follows:
FIRST: To the payment of costs and expenses of such sale,
including the fees and out-of-pocket expenses of counsel employed in connection
therewith, and the payment of all other costs and expenses incurred by Coherent
and in connection with the administration and enforcement of this Agreement;
SECOND: To the payment and discharge in full of all
obligations described in Section 3 hereof including, without limitation, sums
then owing in respect of the Note; and
THIRD: The balance (if any) of such proceeds shall be paid to
PMTI, its successors and assigns, or as a
court of competent jurisdiction may direct.
9. COVENANTS OF PMTI. PMTI covenants and warrants that, unless
compliance is waived by Coherent in writing:
(a) PMTI will immediately notify Coherent of any change in PMTI's name,
identity or corporate structure.
(b) PMTI will not further encumber, sell, contract for sale or
otherwise dispose of any of the Collateral until such time as the security
interest created by this Agreement has terminated.
(e) PMTI will take all actions necessary or appropriate to preserve and
defend its title to the Collateral and the validity of the lien created by this
Agreement.
(f) PMTI will promptly notify Coherent in writing of any event which
materially and adversely affects the ability of PMTI or Coherent to dispose of
the Collateral, or the rights or remedies of Coherent in relation thereto,
including, but not limited to, the levy of any legal process against the
Collateral.
(g) PMTI will, without expense to Coherent, do, execute, acknowledge
and deliver, or cause to be done, executed, acknowledged and delivered, all such
further acts and instruments as Coherent shall from time to time require in
order to facilitate the performance of this Agreement.
10. MISCELLANEOUS.
(a) No failure or delay by Coherent in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, and no single or partial
exercise thereof shall preclude any other of further exercise of the exercise of
any other right, power or privilege.
(b) Should any one or more of the provisions hereof be determined to be
illegal or unenforceable, all other provisions hereof shall be give effect
separately therefrom and shall not be affected thereby.
(c) The security interest created by this Agreement shall fully
terminate immediately upon the full and complete satisfaction and discharge of
all of the Obligations set forth in paragraph 3 hereof. Upon such termination,
<PAGE>
Coherent shall execute and deliver to PMTI such termination statements and other
instruments of release of such security interest as PMTI may reasonably require.
(d) All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered or
mailed first class, postage prepaid, to the parties at the following addresses
(or such other address as shall be given in writing by either party to the
other):
To Coherent:
Coherent, Inc.
5100 Patrick Henry Drive
Santa Clara, CA 95054
Attn: General Counsel
Facsimile No.: (408) 970-9998
To PMTI:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02173
Attn: President
Facsimile No.: 781-676-7377
(e) This Agreement and security interest created hereby shall inure to
the benefit of the Coherent, its successor and assigns and any transferee of any
of the Obligations secured hereby, and shall be binding upon PMTI and his
successors and heirs.
(f) The laws of the State of California shall govern the validity of
this Agreement, the construction of its terms and the interpretation of the
rights and duties of the parties.
The foregoing Agreement is hereby executed as of the date first above
written.
COHERENT, INC.
a Delaware corporation
By: /s/
------------------------------
Scott H. Miller
Title: Sr. VP and General Counsel
PALOMAR MEDICAL TECHNOLOGIES, INC.
a Delaware corporation
By: /s/
-------------------------------
Anthony A. Brandano
Title: Vice President of Finance
<PAGE>
PROMISSORY NOTE
$1,780,315.22 Santa Clara, California
May 7, 1998
FOR VALUE RECEIVED, the undersigned, Palomar Medical Technologies,
Inc., a Delaware corporation ("PMTI"), promises to pay to Coherent, Inc., a
Delaware corporation ("Coherent"), or order, the principal sum of ONE MILLION
SEVEN HUNDRED EIGHTY THOUSAND THREE HUNDRED FIFTEEN DOLLARS AND TWENTY-TWO CENTS
($1,780,315.22).
In accordance with the Sales Agency, Development and License Agreement
entered into between parties on November 17, 1997 (the "Agreement"), Coherent
will be using its reasonable best efforts to collect PMTI's accounts receivable
that collateralize this note. As such accounts receivable are collected, the
amounts due PMTI under the Agreement, less a one-time 1.5% interest charge,
shall be credited against the outstanding balance of this Note. This Note shall
be immediately due and payable in the Event of Default (as defined in the
Agreement).
PMTI shall reimburse Coherent for all costs and expenses incurred by it
and shall pay the reasonable fees and disbursements of counsel to Coherent in
connection with the enforcement of Coherent's rights hereunder.
No amendment, modification or waiver of any provision of this Note nor
consent to any departure by PMTI therefrom shall be effective unless the same
shall be in writing and signed by Coherent and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given.
PMTI hereby waives any requirement of notice of dishonor, notice of
protest and protest.
This Note shall be deemed to be a contract made under the laws of the
State of California and shall be construed in accordance with the laws of said
State. This Note shall be binding upon PMTI and its successors and assigns and
the terms hereof shall inure to the benefit of Coherent and its successors and
assigns, including subsequent holders hereof. The holding of any provision of
this Note to be invalid or unenforceable by a court of competent jurisdiction
shall not affect any other provisions and the other provisions of this Note
shall remain in full force and effect.
This Note is secured with certain collateral pursuant to the terms of
an agreement between the undersigned and Coherent, Inc. dated May 7, 1998. A
description of the accounts receivables constituting the collateral for this
Note is set forth on the attached Schedule A.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/
-----------------------------
Anthony A. Brandano
Vice President of Finance
<PAGE>
SCHEDULE A
Description of Accounts Receivables
<TABLE>
<S> <C> <C> <C> <C>
NAME OF CUSTOMER AMOUNT OF A/R DESCRIPTION OF EQUIPMENT DATE DUE DATE
- - ---------------- ------------- ------------------------ ---- --------
</TABLE>
LOAN AGREEMENT
This Loan Agreement is made and entered into this 22nd day of May, 1998
by and between Coherent, Inc., a Delaware corporation ("Coherent"), and Palomar
Medical Technologies, Inc., a Delaware corporation ("PMTI").
Subject to the terms and conditions contained herein, the parties agree
as follows:
1. LOAN. Coherent shall loan PMTI a total of $4,000,000, to help
finance PMTI's working capital requirements (the "Loans"), which loans shall be
evidenced by one or more promissory notes in the form set forth in Exhibit A.
The parties agree that the initial loan shall be $3,000,000. The remaining
$1,000,000 shall be loaned to PMTI at its request at any time during the next 30
days. The promissory notes, together with any other promissory notes issued by
PMTI to Coherent that recite that they are secured by this Agreement, are
collectively referred to herein as the "Notes". The Note shall bear interest at
8.5 % per annum. The principal balance shall be due on or before 5:00 p.m.
California time on September 15, 1998. [By a side letter agreement between the
parties, dated June 25, 1998, this date has been extended to October 15, 1998.]
Interest shall be paid monthly. Should the principal not be paid in a timely
manner, interest shall accrue on the outstanding principal balance at the lesser
of 1 1/2 % per month or the highest rate permitted by law.
2. SECURITY INTEREST. PMTI hereby creates and grants to Coherent a
security interest in the collateral described in Section 3 hereof to secure the
payment and performance of the following obligations of PMTI to Coherent:
(a) Payment of the indebtedness evidenced by the Note and any and all
modifications, extensions or renewals thereof,
(b) Performance and discharge of each and every obligation, covenant,
condition and agreement of PMTI herein contained.
3. COLLATERAL. The collateral in which the security interest is created
(the "Collateral") shall consist of all of the inventory owned by Star Medical
Technologies, a wholly-owned subsidiary of PMTI ("Star Medical") from time to
time during the term of this Agreement. Coherent agrees that PMTI and/or Star
Medical may sell such inventory to its customers in the ordinary course of
business, provided that Coherent is granted a security interest in the proceeds
thereof to the extent that the book value of the Collateral is less than the
total indebtedness represented by the Note.
4. RECORDING. PMTI will execute (or cause Star Medical to execute),
deliver and cause to be recorded or filed in the manner and place required by
law, any document or instrument that may be requested by Coherent, including
financing statements or other instruments of similar character, to perfect and
protect the lien of this Loan Agreement upon any and all of the Collateral.
<PAGE>
5. EVENTS OF DEFAULT. An Event of Default (as hereinafter defined) of
any Note issued under this Agreement shall cause all Note to be immediately due
and payable. As used herein, an "Event of Default" shall be any of the
following:
(a) The failure of PMTI to punctually and properly pay the indebtedness
evidenced by the Note in accordance with its terms.
(b) The failure of PMTI punctually and properly to observe, keep or
perform any covenant, agreement or condition required to be observed, kept or
performed by this Loan Agreement.
6. RIGHTS OF SECURED PARTY. Coherent shall have all the rights as a
secured party under the laws of California, including the right to sell any part
of the Collateral at a public or private sale or bid as a purchaser of the
Collateral.
7. APPLICATION OF PROCEEDS OF SALE. The proceeds of the sale of any
Collateral sold pursuant to Section 6 hereof shall be applied as follows:
FIRST: To the payment of costs and expenses of such sale,
including the fees and out-of-pocket expenses of counsel employed in connection
therewith, and the payment of all other costs and expenses incurred by Coherent
and in connection with the administration and enforcement of this Agreement;
SECOND: To the payment and discharge in full of all
obligations described in Section 2 hereof including, without limitation, the
unpaid principal and interest and other sums then owing in respect of the Note;
and
THIRD: The balance (if any) of such proceeds shall be paid to
PMTI, its successors and assigns, or as a court of competent jurisdiction may
direct.
8. COVENANTS OF PMTI. PMTI covenants and warrants that, unless
compliance is waived by Coherent in writing:
(a) PMTI will not further encumber, sell, contract for sale or
otherwise dispose of any of the Collateral until such time as the security
interest created by this Agreement has terminated. PMTI will not permit Star
Medical to further encumber, sell, contract for sale or otherwise dispose of any
of the Collateral until such time as the security interest created by this
Agreement has terminated.
(b) PMTI will take all actions necessary or appropriate to preserve and
defend its title to the Collateral and the validity of the lien created by this
Agreement.
(c) PMTI will promptly notify Coherent in writing of any event which
materially and adversely affects the ability of PMTI or Coherent to dispose of
the Collateral, or the rights or remedies of Coherent in relation thereto,
including, but not limited to, the levy of any legal process against the
Collateral.
(d) PMTI will, without expense to Coherent, do, execute, acknowledge
and deliver, or cause to be done, executed, acknowledged and delivered, all such
further acts and instruments as Coherent shall from time to time require in
order to facilitate the performance of this Agreement.
(e) *
[FN]
* Indicates that material has been omitted pursuant to a request for
confidential treatment, and separately filed with the SEC.
</FN>
<PAGE>
9. MISCELLANEOUS.
(a) No failure or delay by Coherent in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, and no single or partial
exercise thereof shall preclude any other of further exercise of the exercise of
any other right, power or privilege.
(b) Should any one or more of the provisions hereof be determined to be
illegal or unenforceable, all other provisions hereof shall be give effect
separately therefrom and shall not be affected thereby.
(c) The security interest created by this Loan Agreement shall fully
terminate immediately upon the full and complete satisfaction and discharge of
all of the Obligations set forth in paragraph 3 hereof. Upon such termination,
Coherent shall execute and deliver to PMTI such termination statements and other
instruments of release of such security interest as PMTI may reasonably require.
(d) All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered or
mailed first class, postage prepaid, to the parties at the following addresses
(or such other address as shall be given in writing by either party to the
other):
To Coherent:
Coherent, Inc.
5100 Patrick Henry Drive
Santa Clara, CA 95054
Attn: General Counsel
Facsimile No.: (408) 970-9998
<PAGE>
To PMTI:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02173
Attn: General Counsel
Facsimile No.: (781) 676-7330
(e) This Loan Agreement and security interest created hereby shall
inure to the benefit of the Coherent, its successor and assigns and any
transferee of any of the Obligations secured hereby, and shall be binding upon
PMTI and its successors and heirs.
(f) The laws of the State of California shall govern the validity of
this Agreement, the construction of its terms and the interpretation of the
rights and duties of the parties.
The foregoing Agreement is hereby executed as of the date first above
written.
COHERENT, INC.
a Delaware corporation
By: /s/
-------------------------------
Scott H. Miller
Title: Sr. VP and General Counsel
PALOMAR MEDICAL TECHNOLOGIES, INC.
a Delaware corporation
By: /s/
--------------------------------
Louis P. Valente
Title: Chairman & Chief Executive Officer
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$3,000,000 Santa Clara, California
May 22, 1998
FOR VALUE RECEIVED, the undersigned, Palomar Medical Technologies,
Inc., a Delaware corporation ("PMTI"), promises to pay to Coherent, Inc., a
Delaware corporation ("Coherent"), or order, the principal sum of Three Million
Dollars ($3,000,000). Interest shall accrue on the outstanding principal balance
at a rate of 8.5% per annum and shall be payable monthly. The principal amount
shall be due and payable on or before 5:00 p.m. California time on September 15,
1998.
Should the principal and interest not be paid in a timely manner,
interest shall accrue on the outstanding principal and interest balance at the
lesser of 1 1/2 % per month or the highest rate permitted by law. This
promissory note shall be immediately due and payable in the Event of Default (as
defined in the Loan Agreement between PMTI and Coherent of even date herewith
(the "Loan Agreement")).
This note may be prepaid by PMTI at any time without penalty.
PMTI shall reimburse Coherent for all costs and expenses incurred by it
and shall pay the reasonable fees and disbursements of counsel to Coherent in
connection with the enforcement of Coherent's rights hereunder.
No amendment, modification or waiver of any provision of this Note nor
consent to any departure by PMTI therefrom shall be effective unless the same
shall be in writing and signed by Coherent and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given.
PMTI hereby waives any requirement of notice of dishonor, notice of
protest and protest.
This Note shall be deemed to be a contract made under the laws of the
State of California and shall be construed in accordance with the laws of said
State. This Note shall be binding upon PMTI and its successors and assigns and
the terms hereof shall inure to the benefit of Coherent and its successors and
assigns, including subsequent holders hereof. The holding of any provision of
this Note to be invalid or unenforceable by a court of competent jurisdiction
shall not affect any other provisions and the other provisions of this Note
shall remain in full force and effect.
This Note is secured with all of the inventory of PMTI's wholly-owned
subsidiary, Star Medical Technologies, pursuant to the terms of the Loan
Agreement.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/
-------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000881695
<NAME> PALOMAR MEDICAL TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 13,978,061
<SECURITIES> 2,401,550
<RECEIVABLES> 4,282,571
<ALLOWANCES> 467,000
<INVENTORY> 9,216,447
<CURRENT-ASSETS> 34,944,181
<PP&E> 8,112,390
<DEPRECIATION> 1,531,913
<TOTAL-ASSETS> 75,677,739
<CURRENT-LIABILITIES> 21,439,165
<BONDS> 18,861,659
0
298
<COMMON> 330,832
<OTHER-SE> 35,045,785
<TOTAL-LIABILITY-AND-EQUITY> 75,677,739
<SALES> 9,852,055
<TOTAL-REVENUES> 9,852,055
<CGS> 9,440,837
<TOTAL-COSTS> 9,440,837
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,532,394
<INCOME-PRETAX> (21,481,453)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,481,453)
<DISCONTINUED> (8,696,680)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,178,133)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> (1.01)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000881695
<NAME> PALOMAR MEDICAL TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,205,856
<SECURITIES> 289,875
<RECEIVABLES> 7,945,370
<ALLOWANCES> 1,268,766
<INVENTORY> 2,766,992
<CURRENT-ASSETS> 12,347,970
<PP&E> 6,378,584
<DEPRECIATION> 2,290,987
<TOTAL-ASSETS> 18,717,135
<CURRENT-LIABILITIES> 21,974,572
<BONDS> 3,577,667
0
86
<COMMON> 651,680
<OTHER-SE> (10,622,087)
<TOTAL-LIABILITY-AND-EQUITY> 18,717,135
<SALES> 16,157,801
<TOTAL-REVENUES> 16,157,801
<CGS> 11,148,701
<TOTAL-COSTS> 11,148,701
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 829,335
<INCOME-PRETAX> (10,807,135)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,807,135)
<DISCONTINUED> (2,624,180)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,431,315)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
