FORM 10-K/A-1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1998
Commission file number: 0-22340
[OBJECT OMITTED]
PALOMAR MEDICAL TECHNOLOGIES, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <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 02173
--------------------------------------------------
(Address of principal executive offices)
(781) 676-7300
--------------
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
- ------------------------------------------------------------
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Not Applicable Not Applicable
Securities registered pursuant to Section 12 (g) of the Act:
-----------------------------------------------------------
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 2, 1999, 72,145,509 shares of Common Stock were outstanding.
The aggregate market value of the voting shares (based upon the closing price
reported by Nasdaq on March 20, 1998) of Palomar Medical Technologies, Inc.,
held by nonaffiliates was $$43,549,606. For purposes of this disclosure, shares
of Common Stock held by entities who own 5% or more of the outstanding Common
Stock, as reported in Amendment No. 4 to a Schedule 13G filed on January 22,
1999 and Amendment No. 3 to a Schedule 13D filed on February 16, 1999, and
shares of common stock held by each officer and director have been excluded in
that such persons may be deemed to be "affiliates" as that term is defined under
the Rules and Regulations of the Securities Exchange Act of 1934. This
determination of affiliate status is not necessarily conclusive.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed prior to April 30,
1998, pursuant to Regulation 14A of the Securities Exchange Act of 1934 are
incorporated by reference into Part III of this Form 10-K
Transitional Small Business Disclosure Format: Yes X No
--- ---
<PAGE>
INDEX
<TABLE>
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Item Page No.
- ---- --------
PART II
Item 8. Financial Statements............................................................................1
Reports of Independent Public Accountants.............................................................1
Consolidated Balance Sheets as of December 31, 1997 and 1998..........................................3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998............4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1996, 1997 and 1998.................................................................5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998............8
Notes to Consolidated Financial Statements...........................................................10
SIGNATURES....................................................................................................36
</TABLE>
-i-
<PAGE>
PART II
Item 8. Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Palomar Medical Technologies, Inc:
We have audited the accompanying consolidated balance sheets of Palomar
Medical Technologies, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The summarized
financial data for Nexar Technologies, Inc. as of and for the year ended
December 31, 1997 contained in Note 2 are based on the financial statements of
Nexar Technologies, Inc. which were audited by other auditors. Their report has
been furnished to us and our opinion, insofar as it relates to the data in Note
2, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Palomar Medical Technologies, Inc. and subsidiaries as
of December 31, 1997 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 11, 1999 (except for the
matters discussed in Notes 1 and
12(c) as to which the dates are
April 27, 1999 and March 17, 1999),
respectively.
-1-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Nexar Technologies, Inc.
Southborough, Massachusetts
We have audited the accompanying consolidated balance sheet of Nexar
Technologies, Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. These financial statements (which are not shown
separately herein) are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of Nexar Technologies, Inc. and
subsidiary as of December 31, 1996 and for the periods ended December 31, 1995
and 1996 (not shown separately herein), were audited by other auditors whose
report dated January 24, 1997 (except with respect to the purchased technology
matter discussed in Note 2 as to which the date is February 28, 1997), expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the financial position of Nexar Technologies, Inc. and
subsidiary as of December 31, 1997 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
----------------------------
BDO Seidman, LLP
February 13, 1998 (except for
Note 10 which is as of
March 20, 1998)
-2-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31, December 31,
1997 1998
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,003,300 $1,874,718
Marketable securities 1,449,326 -
Accounts receivable, net of allowance for doubtful accounts of
approximately $746,000 and $364,000 in 1997 and 1998, respectively 2,248,680 9,938,121
Inventories 4,711,474 5,416,342
Other current assets 2,153,941 1,056,388
---------------- ----------------
Total current assets 13,566,721 18,285,569
---------------- ----------------
NET ASSETS OF DISCONTINUED OPERATIONS (NOTE 2) 5,825,602 -
---------------- ----------------
PROPERTY AND EQUIPMENT, NET 6,455,586 3,314,087
---------------- ----------------
OTHER ASSETS:
Cost in excess of net assets acquired, net of accumulated amortization of
approximately $1,280,000 and $1,882,000 in 1997 and 1998, respectively 2,302,348 1,699,983
Deferred financing costs 591,609 58,923
Other non-current assets 225,706 167,352
---------------- ----------------
Total other assets 3,119,663 1,926,258
---------------- ----------------
$28,967,572 $23,525,914
================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $1,640,465 $6,290,041
Accounts payable 4,150,982 6,553,745
Accrued liabilities 13,759,854 10,301,624
Current portion of deferred revenue 1,284,395 1,143,796
---------------- ----------------
Total current liabilities 20,835,696 24,289,206
---------------- ----------------
NET LIABILITIES OF DISCONTINUED OPERATIONS - 1,680,171
---------------- ----------------
LONG-TERM DEBT, NET OF CURRENT PORTION 12,445,563 3,150,000
---------------- ----------------
DEFERRED REVENUE, NET OF CURRENT PORTION 1,870,000 870,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value-
Authorized - 5,000,000 shares
Issued and outstanding -
16,397 shares and 6,993 shares
at December 31, 1997 and 1998, respectively
(Liquidation preference of $8,228,082 as of December 31, 1998) 164 69
Common stock, $.01 par value-
Authorized - 120,000,000 shares
Issued - 45,792,585 shares and 70,524,027 shares
at December 31, 1997 and 1998, respectively 457,926 705,240
Additional paid-in capital 147,356,579 160,733,433
Accumulated deficit (152,359,497) (166,263,346)
Less: Treasury stock - (345,000 shares at cost) (1,638,859) (1,638,859)
---------------- ----------------
Total stockholders' deficit (6,183,687) (6,463,463)
---------------- ----------------
$28,967,572 $23,525,914
================ ================
</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
<TABLE>
Years Ended December 31,
1996 1997 1998
------------------ ----------------- ----------------
<S> <C> <C> <C>
REVENUES $17,606,871 $20,994,546 $44,514,057
COST OF REVENUES 14,169,471 20,055,963 23,050,834
------------------ ----------------- ----------------
Gross profit 3,437,400 938,583 21,463,223
------------------ ----------------- ----------------
OPERATING EXPENSES:
Research and development 6,297,477 11,990,332 7,029,348
Sales and marketing 5,076,941 6,959,750 15,132,595
General and administrative 9,752,922 15,332,241 8,866,530
Business development
and other financing costs 2,879,603 2,060,852 -
Restructuring and asset write-off (Note 4) 1,660,808 3,325,000 (131,310)
Settlement and litigation costs 880,000 3,199,000 -
------------------ ----------------- ----------------
Total operating expenses 26,547,751 42,867,175 30,897,163
------------------ ----------------- ----------------
Loss from operations (23,110,351) (41,928,592) (9,433,940)
INTEREST EXPENSE (271,619) (6,993,898) (1,290,905)
INTEREST INCOME 1,355,488 456,945 33,080
NET GAIN (LOSS) ON TRADING SECURITIES 2,033,371 (52,272) 703,211
ASSET WRITE-OFF (NOTE 4) (1,397,000) (9,658,000) -
OTHER INCOME (EXPENSE) 591,853 (193,262) 21,311
------------------ ----------------- ----------------
NET LOSS FROM CONTINUING OPERATIONS (20,798,258) (58,369,079) (9,967,243)
------------------ ----------------- ----------------
LOSS FROM DISCONTINUED OPERATIONS (NOTE 2):
Loss from operations (20,895,534) (29,508,755) (1,090,885)
Gain (Loss) on dispositions, net 3,830,000 2,073,943 (1,533,295)
------------------ ----------------- ----------------
NET LOSS FROM DISCONTINUED OPERATIONS (17,065,534) (27,434,812) (2,624,180)
------------------ ----------------- ----------------
NET LOSS $ (37,863,792) $ (85,803,891) $(12,591,423)
================== ================= ================
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Continuing operations $(0.84) $(1.79) $(0.18)
Discontinued operations (0.65) (0.78) (0.04)
------------------ ----------------- ----------------
TOTAL LOSS PER COMMON SHARE $(1.49) $(2.57) $(0.22)
================== ================= ================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 26,166,538 35,105,272 62,868,696
================== ================= ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
----------------------------------------------------------------
Number $0.01 Number $0.01 Number
of Shares Par Value of Shares Par Value of Shares Cost
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 13,860 $139 20,135,406 $201,353 (200,000) $(1,211,757)
Sale of common stock pursuant to warrants and
options -- -- 2,967,996 29,681 -- --
Sale of common stock -- -- 1,176,205 11,762 -- --
Payments received on subscriptions receivable -- -- -- -- -- --
Issuance of preferred stock, including common stock issued
as a placement fee, net of issuance costs 32,000 320 115,000 1,150 -- --
Issuance of common stock for 1995 employer 401(k)
matching contribution -- -- 45,885 459 -- --
Conversion of preferred stock, including accrued
dividends and interest of $782,602 (25,209) (252) 4,481,518 44,815 -- --
Conversion of convertible debentures -- -- 34,615 346 -- --
Redemption of convertible debentures -- -- -- -- -- --
Value ascribed to convertible debentures -- -- -- -- -- --
Redemption of preferred stock (2,500) (25) -- -- -- --
Exercise of underwriter's warrants -- -- 500,000 5,000 -- --
Exercise of stock options in majority controlled
subsidiary -- -- -- -- -- --
Issuance of common stock for conversion of debentures at
Tissue Technologies, Inc. -- -- 813,431 8,134 -- --
Issuance of common stock for minority interest in
Star Medical subsidiary -- -- 224,054 2,241 -- --
Issuance of common stock in exchange for license
rights -- -- 56,900 569 -- --
Issuance of common stock for acquisition of
Dermascan, Inc. -- -- 35,000 350 -- --
Issuance of common stock for investment banking and merger
and acquisition consulting services -- -- 56,802 568 -- --
Compensation expense related to warrants issued to
non-employees under SFAS No. 123 -- -- -- -- -- --
Return of escrowed shares -- -- (46,000) (460) -- --
Amortization of deferred financing costs -- -- -- -- -- --
Unrealized loss on marketable securities -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
-----------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 18,151 $182 30,596,812 $305,968 (200,000) $(1,211,757)
=================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Additional Unrealized
Paid-in Accumulated (Loss) Gain on Subscriptions
Capital Deficit Marketable Receivable
Securities
------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $54,152,385 $(25,864,657) $-- $(1,988,709)
Sale of common stock pursuant to warrants and
options 7,569,226 -- -- --
Sale of common stock 6,049,618 -- -- --
Payments received on subscriptions receivable -- -- -- 2,441,556
Issuance of preferred stock, including common stock issued
as a placement fee, net of issuance costs 30,821,677 -- -- --
Issuance of common stock for 1995 employer 401(k)
matching contribution 160,139 -- -- --
Conversion of preferred stock, including accrued
dividends and interest of $782,602 744,124 -- -- --
Conversion of convertible debentures 145,260 -- -- --
Redemption of convertible debentures (41,530) -- -- --
Value ascribed to convertible debentures 2,757,860 -- -- --
Redemption of preferred stock (3,123,127) -- -- --
Exercise of underwriter's warrants 1,057,500 -- -- (1,057,500)
Exercise of stock options in majority controlled
subsidiary 50,000 -- -- --
Issuance of common stock for conversion of debentures at
Tissue Technologies, Inc. 1,019,022 -- -- --
Issuance of common stock for minority interest in
Star Medical subsidiary 1,747,482 -- -- --
Issuance of common stock in exchange for license
rights 369,574 -- -- --
Issuance of common stock for acquisition of
Dermascan, Inc. 489,650 -- -- --
Issuance of common stock for investment banking and merger
and acquisition consulting services 476,156 -- -- --
Compensation expense related to warrants issued to
non-employees under SFAS No. 123 532,758 -- -- --
Return of escrowed shares 460 -- -- --
Amortization of deferred financing costs (77,683) -- -- --
Unrealized loss on marketable securities -- -- (342,500) --
Preferred stock dividends -- (1,242,751) -- --
Net loss -- (37,863,792) -- --
------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $104,900,551 $(64,971,200) $(342,500) $(604,653)
============================================================
</TABLE>
<TABLE>
<S> <C>
Total
Stockholders
Equity (Deficit)
-------------------
BALANCE, DECEMBER 31, 1995 25,288,754
Sale of common stock pursuant to warrants and
options 7,598,907
Sale of common stock 6,061,380
Payments received on subscriptions receivable 2,441,556
Issuance of preferred stock, including common stock issued
as a placement fee, net of issuance costs 30,823,147
Issuance of common stock for 1995 employer 401(k)
matching contribution 160,598
Conversion of preferred stock, including accrued
dividends and interest of $782,602 788,687
Conversion of convertible debentures 145,606
Redemption of convertible debentures (41,530)
Value ascribed to convertible debentures 2,757,860
Redemption of preferred stock (3,123,152)
Exercise of underwriter's warrants 5,000
Exercise of stock options in majority controlled
subsidiary 50,000
Issuance of common stock for conversion of debentures at
Tissue Technologies, Inc. 1,027,156
Issuance of common stock for minority interest in
Star Medical subsidiary 1,749,723
Issuance of common stock in exchange for license
rights 370,143
Issuance of common stock for acquisition of
Dermascan, Inc. 490,000
Issuance of common stock for investment banking and merger
and acquisition consulting services 476,724
Compensation expense related to warrants issued to
non-employees under SFAS No. 123 532,758
Return of escrowed shares --
Amortization of deferred financing costs (77,683)
Unrealized loss on marketable securities (342,500)
Preferred stock dividends (1,242,751)
Net loss (37,863,792)
------------
BALANCE, DECEMBER 31, 1996 $ 38,076,591
=== ==== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
-----------------------------------------------------------------------
Number $0.01 Number $0.01 Number
of Shares Par Value of Shares Par Value of Shares Cost
-----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 18,151 $182 30,596,812 $305,968 (200,000) $(1,211,757)
Sale of common stock pursuant to warrants,
options and Employee Stock Purchase Plan -- -- 815,101 8,151 -- --
Reduction in subscriptions receivable -- -- -- -- -- --
Sale of preferred stock, net of issuance costs of
approximately $1,000,000 16,000 160 -- -- -- --
Issuance of common stock for 1996 employer 401(k)
matching contribution -- -- 87,441 874 -- --
Conversion and redemption of preferred stock (17,754) (178) 6,139,841 61,399 -- --
Conversion of convertible debentures and issuance
of common stock to an investor -- -- 7,464,961 74,650 -- --
Issuance of common stock for investment banking, merger
and acquisition and consulting services -- -- 20,000 200 -- --
Value ascribed to the discount feature of
convertible debentures issued -- -- 413,109 4,131 -- --
Unrealized gain on marketable securities -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Guaranteed value of common stock associated with
Dermascan acquisition -- -- -- -- -- --
Issuance of common stock for technology -- -- 255,320 2,553 -- --
Purchase of stock for treasury -- -- -- -- (145,000) (427,102)
Gain related to the issuance of common stock by
Nexar Technologies, Inc. -- -- -- -- -- --
Value ascribed to warrant to purchase common
stock issued to Coherent, Inc. -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 16,397 $164 45,792,585 $457,926 (345,000) $(1,638,859)
======================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Additional Unrealized (Loss)
Paid-in Accumulated Gain on Marketable Subscriptions
Capital Deficit Securities Receivable
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $104,900,551 $(64,971,200) $(342,500) $(604,653)
Sale of common stock pursuant to warrants,
options and Employee Stock Purchase Plan 1,606,083 -- -- --
Reduction in subscriptions receivable -- -- -- 604,653
Sale of preferred stock, net of issuance costs of
approximately $1,000,000 14,999,840 -- -- --
Issuance of common stock for 1996 employer 401(k)
matching contribution 317,280 -- -- --
Conversion and redemption of preferred stock (3,926,317) -- -- --
Conversion of convertible debentures and issuance
of common stock to an investor 16,935,713 -- -- --
Issuance of common stock for investment banking, merger
and acquisition and consulting services 52,925 -- -- --
Value ascribed to the discount feature of
convertible debentures issued 3,750,812 -- -- --
Unrealized gain on marketable securities -- -- 342,500 --
Preferred stock dividends -- (1,584,406) -- --
Guaranteed value of common stock associated with
Dermascan acquisition (216,562) -- -- --
Issuance of common stock for technology 1,146,388 -- -- --
Purchase of stock for treasury -- -- -- --
Gain related to the issuance of common stock by
Nexar Technologies, Inc. 7,409,866 -- -- --
Value ascribed to warrant to purchase common
stock issued to Coherent, Inc. 380,000 -- -- --
Net loss -- (85,803,891) -- --
----------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $147,356,579 $(152,359,497) $ -- $ --
==========================================================
</TABLE>
Total
Stockholder
Equity (Deficit)
----------------
BALANCE, DECEMBER 31, 1996 $38,076,591
Sale of common stock pursuant to warrants,
options and Employee Stock Purchase Plan 1,614,234
Reduction in subscriptions receivable 604,653
Sale of preferred stock, net of issuance costs of
approximately $1,000,000 15,000,000
Issuance of common stock for 1996 employer 401(k)
matching contribution 318,154
Conversion and redemption of preferred stock (3,865,096)
Conversion of convertible debentures and issuance
of common stock to an investor 17,010,363
Issuance of common stock for investment banking, merger
and acquisition and consulting services 53,125
Value ascribed to the discount feature of
convertible debentures issued 3,754,943
Unrealized gain on marketable securities 342,500
Preferred stock dividends (1,584,406)
Guaranteed value of common stock associated with
Dermascan acquisition (216,562)
Issuance of common stock for technology 1,148,941
Purchase of stock for treasury (427,102)
Gain related to the issuance of common stock by
Nexar Technologies, Inc. 7,409,866
Value ascribed to warrant to purchase common
stock issued to Coherent, Inc. 380,000
Net loss (85,803,891)
------------
BALANCE, DECEMBER 31, 1997 $(6,183,687)
=== ==== ============
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<S> <C> <C> <C>
Preferred Stock Common Stock
-----------------------------------------------
Number $0.01 Number
of Shares Par Value of Shares
----------------------------------------------
BALANCE, DECEMBER 31, 1997 16,397 $ 164 45,792,585
Sale of common stock pursuant to warrants, options and Employee
Stock Purchase Plan -- -- 192,211
Issuance of common stock for 1997 employer 401(k) matching contribution -- -- 311,887
Conversion of preferred stock (5,888) (59) 6,891,682
Conversion of convertible debentures -- -- 7,035,662
Issuance of common stock net of investment banking fees -- -- 10,200,000
Redemption of preferred stock (3,516) (36) --
Value ascribed to warrants issued to investment banker -- -- --
Common stock issued for advisory services -- -- 100,000
Costs incurred related to the issuance of common stock -- -- --
Preferred stock dividends and penalties -- -- --
Net loss -- -- --
------------- ------------- -----------
BALANCE, DECEMBER 31, 1998 6,993 $ 69 70,524,027
============= ============= ===========
</TABLE>
<TABLE>
<S> <C> <C> <C>
Common Stock Treasury Stock
----------------------------------------------------
$0.01 Number
Par Value of Shares Cost
----------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 457,926 (345,000) ($ 1,638,859)
Sale of common stock pursuant to warrants, options and Employee
Stock Purchase Plan 1,923 -- --
Issuance of common stock for 1997 employer 401(k) matching contribution 3,118 --
Conversion of preferred stock 68,917 --
Conversion of convertible debentures 70,356 -- --
Issuance of common stock net of investment banking fees 102,000 -- --
Redemption of preferred stock -- -- --
Value ascribed to warrants issued to investment banker -- -- --
Common stock issued for advisory services 1,000 -- --
Costs incurred related to the issuance of common stock -- -- --
Preferred stock dividends and penalties -- -- --
Net loss -- -- --
------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 $ 705,240 (345,000) ($ 1,638,859)
============= ============= =============
</TABLE>
<TABLE>
<S> <C> <C> <C>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity (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 64,208 -- 66,131
Issuance of common stock for 1997 employer 401(k) matching contribution 251,163 -- 254,281
Conversion of preferred stock 583,310 -- 652,168
Conversion of convertible debentures 6,368,820 -- 6,439,176
Issuance of common stock net of investment banking fees 9,738,000 -- 9,840,000
Redemption of preferred stock (3,615,522) -- (3,615,558)
Value ascribed to warrants issued to investment banker 171,000 -- 171,000
Common stock issued for advisory services 99,000 -- 100,000
Costs incurred related to the issuance of common stock (283,125) -- (283,125)
Preferred stock dividends and penalties -- (1,312,426) (1,312,426)
Net loss -- (12,591,423) (12,591,423)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 $ 160,733,433 ($166,263,346) ($ 6,463,463)
============= ============= =============
</TABLE>
-7-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
--------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(37,863,792) $(85,803,891) $(12,591,423)
Less: Net Loss from Discontinued Operations (17,065,534) (27,434,812) (2,624,180)
------------ ------------ ------------
Net Loss from Continuing Operations (20,798,258) (58,369,079) (9,967,243)
------------ ------------ ------------
Adjustments to reconcile net loss from continuing operations to net cash
used in operating activities-
Depreciation and amortization 2,343,013 2,246,412 2,676,651
Restructuring and asset write-off costs 3,057,808 12,983,000 (131,310)
Write-off of in-process research and development 57,212 -- --
Write-off of intangible assets 631,702 -- --
Loss on sale of wholly-owned subsidiary -- 165,845 --
Write-off of deferred financing costs associated with -- -- --
redemption of convertible debentures 201,500 27,554 --
Valuation allowances for notes and investments -- 1,035,912 --
Accrued interest receivable on note -- -- --
and subscription receivable (568,917) -- --
Foreign currency exchange gain (446,596) (651,970) --
Non-cash interest expense related to debt 163,680 5,473,077 63,652
Non-cash compensation related to common stock and warrants 836,982 205,238 171,000
Realized gain on marketable securities (835,197) (577,969) --
Unrealized (gain) loss on marketable securities (1,198,174) 669,293 (703,211)
Changes in assets and liabilities,
Purchases of marketable securities (10,355,055) (152,938) --
Net sale of marketable securities 10,244,044 2,234,436 2,152,537
Accounts receivable (82,025) (1,809,371) (7,689,441)
Inventories (4,661,443) (3,390,396) (704,868)
Other current assets (1,514,858) (1,005,781) 1,097,553
Accounts payable 1,243,161 1,378,637 2,402,763
Accrued liabilities 4,727,008 3,546,543 639,934
Deferred revenue 35,773 2,948,247 (1,140,599)
------------ ------------ ------------
Net cash used in operating activities (16,918,640) (33,043,310) (11,132,582)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (3,180,112) (5,777,446) (403,189)
Increase in other assets (1,176,527) (95,830) (19,628)
Loans to related parties (7,338,625) (1,250,000) --
Loans to unrelated parties (2,236,531) -- --
Payments received on loans to related parties 9,322,284 941,288 --
Guaranteed value associated with Dermascan acquisition -- (216,562) --
Net proceeds from notes receivable -- -- --
Investment in nonmarketable securities (2,077,054) (1,057,631) --
------------ ------------ ------------
Net cash used in investing activities (6,686,565) (7,456,181) (422,817)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-8-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
----------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures 14,169,441 16,715,169 --
Proceeds from notes payable -- 3,500,000 --
Deferred financing costs incurred related to convertible debentures (1,365,217) -- --
Redemption of convertible debentures (930,000) (196,000) (2,196,667)
Proceeds from (payments of) notes payable and capital lease obligations (260,224) (4,856,479) 3,010,817
Proceeds from issuance of common stock 13,715,287 1,462,121 9,840,000
Proceeds from exercise of warrants, stock options
and Employee Stock Purchase Plan -- -- 66,131
Issuance of preferred stock 30,823,147 15,000,000 --
Purchase of treasury stock -- (427,102) --
Payment of contingent note payable (500,000) -- --
Cost incurred in connection with the issuance of common stock -- -- (283,125)
Redemption of preferred stock, including accrued dividends of $71,223
and $771,876 in 1996 and 1998, respectively (3,194,375) -- (4,387,434)
Proceeds from line of credit -- -- 1,000,000
Payments received on subscription receivable 2,009,592 -- --
Deferred costs (932,661) -- --
============ ============= ============
Net cash provided by financing activities 53,534,990 31,197,709 7,049,722
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,929,785 (9,301,782) (4,505,677)
NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS (30,073,633) 12,676 3,377,095
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 12,436,254 12,292,406 3,003,300
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 12,292,406 $ 3,003,300 $ 1,874,718
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 280,659 $ 534,037 $ 1,094,759
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Conversion of convertible debentures and related accrued
interest, net of financing fees $ 1,172,762 $ 17,010,363 $ 6,439,176
============ ============ ============
Subscription received in connection with warrant
exercises $ 1,057,500 $ -- $ --
============ ============ ============
Conversion of preferred stock $ 788,687 $ 414,904 $ 652,168
============ ============ ============
Issuance of common stock for purchase of technology
related to discontinued operations $ -- $ 1,148,941 $ --
============ ============ ============
Exchange of preferred stock for investment in a
discontinued operation $ -- $ (4,280,000) $ --
============ ============ ============
Investment banking and consulting fees for services related
to the issuance of common stock and convertible debentures $ 709,224 $ 53,125 $ --
============ ============ ============
Issuance of common stock for employer 401(k)
matching contribution $ 160,598 $ 318,154 $ 254,281
============ ============ ============
Issuance of common stock for minority interest
in Star Medical Technologies subsidiary $ 1,749,723 $ -- $ --
============ ============ ============
Issuance of common stock for advisory services performed
in 1997 $ -- $ -- $ 100,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-9-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND OPERATIONS
Palomar Medical Technologies, Inc. and subsidiaries ("Palomar" or the
"Company") are engaged in the commercial sale and development of cosmetic and
medical laser systems and services. During the year ended December 31, 1997, the
Company formed and began execution of a plan to dispose of its electronics
segment (see Note 2). The Company substantially completed the divestiture
program in May of 1998.
Some of the Company's medical laser products are in various stages of
development; and, accordingly, the success of future operations is subject to a
number of risks similar to those of other companies with products in similar
stages of development. Principal among these risks are the successful
development and marketing of the Company's products, obtaining 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.
On December 7, 1998, the Company entered into a Agreement and Plan of
Reorganization (the "Agreement") with Coherent to sell all of the issued and
outstanding common stock of Star, its 99.96% majority-owned subsidiary, to
Coherent. The Company currently owns substantially all of the issued and
outstanding common shares of Star. However, options outstanding granted to
Palomar and employees of Star to purchase shares of Star's common stock remain
outstanding prior to the consummation of this sale. When all of the outstanding
options under Star's Stock Option Plan have been exercised, the Company will own
82.46% of Star's common stock and the employees will collectively own 17.54%.
See Note 7. This sale was approved by a majority of the stockholders of Palomar
on April 21, 1999 and on April 27, 1999, the Company completed the sale of Star
to Coherent and received gross proceeds of approximately $49 million. In
addition, under the terms of the Agreement the Company will receive an ongoing
royalty of 7.5% from Coherent on the sale of any products by Coherent that use
certain patents currently licensed by the Company on an exclusive basis from
Massachusetts General Hospital. See Note 12(b).
The Agreement may only be terminated by (i) mutual consent of the
Company, Star and Coherent, or (ii) Coherent, if Palomar's Board of the Company
approves a superior proposal to sell Star to a different party, or (iii) either
party after May 1, 1999. The Company anticipates that this sale will close by
May 1, 1999, so long as the Company obtains stockholder approval.
(2) DISCONTINUED OPERATIONS
During the fourth quarter of 1997, the Company's Board of Directors
approved a plan to dispose of the electronics business segment. The electronics
segment consist of the manufacture and sale of personal computers, high-density
flexible electronics circuitry and memory modules. The Company substantially
completed this plan in May of 1998.
Nexar Technologies, Inc. ("Nexar") was included in the electronics
business segment. Nexar is an early-stage company that manufactures, markets and
sells personal computers. On April 14, 1997, Nexar completed an initial public
offering of 2,500,000 shares at $9.00 per share, for net proceeds of
approximately $19,593,000. The Company recorded an increase in stockholders'
equity of $7,409,866, in accordance with Staff Accounting Bulletin ("SAB") No.
51 as a result of Nexar's initial public offering. The Company's accounting
policy for gains arising under SAB No. 51 is to recognize these gains in its
statement of operations to the extent that such gains are realizable at the date
of each transaction.
During the fourth quarter of 1997, the Company reduced its ownership in
Nexar through the sale of common stock to private investors. At December 31,
1997, the Company beneficially owned 3,746,343 shares of Nexar's common stock,
representing approximately a 36% ownership. As of December 31, 1998 the Company
beneficially owned 2,406,080 shares of Nexar's common stock, representing
approximately a 19% ownership
-10-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
interest and had no other significant obligations related to Nexar, other than
the guaranty to GFL Advantage Fund Limited ("GFL") discussed below. The Company
has been actively trying to sell its remaining shares of Nexar common stock;
however, the Company may not be successful since Nexar filed in the United
States Bankruptcy Court a petition for reorganization under Chapter 11 of Title
11 of the United States Code on December 17, 1998. Furthermore, Nexar has been
delisted from The Nasdaq Stock Market due to Nexar's failure to satisfy Nasdaq
minimum listing requirements.
The Company has accounted for its investment in Nexar as a discontinued
operation using the equity method. During 1998, the Company recorded a charge to
discontinued operations of $1,524,966 as a result of management's decision to
write-down the carrying value of its investment in Nexar. During the years ended
December 31, 1996 and 1997, the Company recognized gains on the disposition of
shares of Nexar common stock of $3,830,000 and $6,221,689, respectively. These
amounts are included in "Gain (Loss) on Dispositions, net" in the Consolidated
Statements of Operations.
The following is the summarized financial information for Nexar:
<TABLE>
<CAPTION>
December 31,
1996 1997
------------------------- ------------------------
<S> <C> <C>
Current Assets $16,966,851 $17,810,564
Non-Current Assets 2,622,270 2,098,495
Current Liabilities 6,542,296 7,886,594
Non-Current Liabilities 22,817,998 883,613
Year Ended December 31,
1996 1997
------------------------- ------------------------
Net Revenues $18,695,364 $33,608,063
Gross Profit 2,302,881 740,151
Net Loss (7,510,139) (13,346,380)
</TABLE>
On December 31, 1997 the Company entered into an Exchange Agreement and
sold 500,000 shares of Nexar's common stock to GFL for $2,000,000. Under the
terms of the Exchange Agreement, Palomar guaranteed GFL a minimum selling price
of $5.00 per share with respect to 400,000 shares of Nexar's common stock over a
two-year time period. The Company is obligated to pay GFL on January 1, 2000 the
difference between $5.00 and the price at which GFL sells the shares of Nexar's
common stock. As of December 31, 1998, the deferred liability related to this
transaction totaled $1,680,171 and represents the total amount due to GFL after
GFL sold their 400,000 common shares of Nexar stock.
The other entities that were included in the electronics business
segment are Dynaco Corp. ("Dynaco") and Dynaco's wholly owned subsidiaries
Comtel Electronics, Inc. ("Comtel") and Dynamem, Inc. ("Dynamem"). On December
9, 1997, the Company entered into a two-phase stock purchase agreement with
Biometric Technologies Corporation ("BTC"). BTC was formed jointly by Dynaco's
President and its Chairman of the Board. The first phase was consummated on
December 9, 1997 and consisted of the sale of all of the issued and outstanding
common stock of Comtel and Dynamem in exchange for $3,654,000 payable in two
installments. The first installment was a $850,000 unsecured promissory note
that was due on February 15, 1998. The second installment was a $2.8 million
unsecured promissory note due in forty-eight monthly installments, beginning
February 1, 1999. This promissory note was fully reserved by the Company during
1997, as its ultimate collectibility was believed to be uncertain. BTC did not
make the first installment on February 1, 1998 and on October 7, 1998 the
Company and BTC agreed to reduce the principal balances of the $850,000 note and
the $2.8 million note to a total of $1,000,000.
-11-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
BTC paid $500,000 during 1998 and the balance is due April 5, 1999. The amended
note is guaranteed by the principal shareholders of BTC.
As part of phase I, the Company entered into a Loan and Subscription
Agreement with a creditor of Comtel for $3,233,000. This promissory note
represents the settlement of amounts owed the creditor by Comtel and guaranteed
by Palomar. Principal and interest payments are being made over twenty-four
months, beginning December 31, 1997 and interest will accrue at the bank's prime
rate (7.75% at December 31, 1998) plus 2.25%. This promissory note has been
collateralized by 3,250,000 shares of the Company's common stock that are held
in escrow, are not entitled to vote and are not considered outstanding. The
Company also guaranteed up to $2,500,000 of Comtel's borrowings from this
creditor until November 30, 1999. 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 that the Company is
obligated to honor this guarantee.
In connection with the disposition of Comtel, the Company also
restructured all assets and investments related to a significant customer of
Comtel into a $4,000,000 note receivable. This receivable was fully reserved by
the Company during 1997, as its ultimate collectibility is uncertain. To date,
no amounts have been received under this restructured note receivable from the
customer, nor does the Company anticipate receiving any amounts from this note
receivable in the foreseeable future.
In phase II, BTC agreed to purchase all of the issued and outstanding
stock of Dynaco. The phase II purchase price was $5,346,000, of which $2,673,000
was to be paid in cash and $2,673,000 was to be paid in BTC common stock of
equal value. Alternatively, the Company could have elected to have the entire
phase II purchase paid in cash at a value of $3,500,000. During phase II BTC had
the option of selling Dynaco to a third party if agreed to by the Company and
BTC. Phase II was required to be completed by June 30, 1998. Consistent with the
terms of the agreement with BTC, the Company entered into a Stock Purchase
Agreement with Quick Turn Circuits, Inc. ("QTC") on May 26, 1998 pursuant to
which QTC purchased 100% of the issued and outstanding shares of common stock of
Dynaco for $3,200,000.
As of December 31, 1997, the Company recognized a loss of approximately
$4,148,000 related to the phase I and phase II dispositions. These charges have
been netted in "Gain (Loss) on Dispositions, net" in the accompanying
Consolidated Statements of Operations. As of December 31, 1997, the Company
accrued for the estimate of Dynaco's 1998 operating loss through June 30, 1998
of approximately $850,000. Through the date of disposition of Dynaco, the
Company recognized additional operating losses totaling $1,090,885. During 1998,
the Company recorded a loss on disposition of $8,329 related to the ultimate
sale of Dynaco to QTC.
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, ("APB No. 30") the consolidated financial statements of
the Company have been reclassified to reflect the dispositions of the
aforementioned subsidiaries that comprise 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 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 Balance Sheets; the net operating
losses of these entities have been reported as "Net Loss from Discontinued
Operations" in the accompanying Consolidated Statements of Operations; the net
cash flows of these entities have been reported as "Net Cash (Used in) Provided
by Discontinued Operations" in the accompanying Consolidated Statements of Cash
Flows.
-12-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Summarized financial information for the discontinued operations were as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1998
-------------- --------------
<S> <C> <C>
Current Assets $5,683,694 $ -
Total Assets 11,506,145 -
Current Liabilities 5,375,353 -
Total Liabilities 5,680,543 (1,680,171)
-------------- --------------
Net Assets (Liabilities) of Discontinued
Operations $5,825,602 $(1,680,171)
============== ==============
</TABLE>
The assets and liabilities of the discontinued operations as of
December 31, 1997 represent the financial position of Dynaco and the Company's
liability associated with the sale of Nexar common stock to GFL. The net
liability as of December 31, 1998 represents the Company's liability associated
with the sale of Nexar common stock to GFL.
<TABLE>
<CAPTION>
Year Ended December 31, Period Ended May 26,
1996 1997 1998
---------------- ---------------- ------------------------
<S> <C> <C> <C>
Revenues $52,491,572 $57,663,080 $6,471,701
Net Loss from Discontinued Operations $(17,065,534) $(27,434,812) $(2,624,180)
</TABLE>
The loss from operations for all of the discontinued operations from
the measurement date, October 1, 1997, through the date of disposition for
Comtel and Dynamem or December 31, 1997 for Dynaco, total approximately
$3,405,000. Dynaco's loss from operations for the period beginning January 1,
1998 and ending May 26, 1998, the date of disposition, totaled $1,940,885.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain accounting policies described below and elsewhere in the
Notes to Consolidated Financial Statements.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the
consolidated financial position, results of operations and cash flows of the
Company and all wholly owned and majority-owned subsidiaries including Star, a
99.96% majority owned subsidiary as of December 31, 1998. Nexar, a discontinued
entity, has been accounted for in consolidation under the equity method in
accordance with APB No. 30 as described in Note 2. All other investments are
accounted for using the cost method as the Company owns less than 20% of the
common stock outstanding for these investments. All intercompany transactions
have been eliminated in consolidation.
(B) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
-13-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(C) INVESTMENTS
The Company accounts for marketable securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under SFAS No. 115,
securities that the Company has the positive intent and ability to hold to
maturity are reported at amortized cost and classified as held-to-maturity.
There were no held-to-maturity securities as of December 31, 1997 and 1998.
Securities purchased to be held for indefinite periods of time and not intended
at the time of purchase to be held until maturity are reported at fair market
value and classified as available-for-sale securities. Unrealized gains and
losses related to available-for-sale securities are included as a separate
component of stockholders' equity. There were no available-for-sale securities
as of December 31, 1997 and 1998. Securities that are bought and held
principally for the purpose of selling them in the near term are reported at
fair market value and classified as trading securities. Realized and unrealized
gains and losses related to trading securities are included in the Consolidated
Statements of Operations. As of December 31, 1997, marketable securities
consisted of American Material & Technologies Corporation, held for trading
purposes. As of December 31, 1998, the Company did not have any investments in
marketable securities.
(D) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Work-in-process and finished goods inventories consist of material,
labor and manufacturing overhead. At December 31, 1997 and 1998, inventories
consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
--------------- ----------------
<S> <C> <C>
Raw materials $2,928,350 $2,478,289
Work-in-process 727,284 1,330,822
Finished goods 1,055,840 1,607,231
--------------- ----------------
$4,711,474 $5,416,342
=============== ================
</TABLE>
Included in finished goods inventory at December 31, 1998 is
approximately $938,000 of service inventory and finished good test units
currently being evaluated by medical professionals.
-14-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(E) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization on property and
equipment using the straight-line method by charging to operations amounts that
allocate the cost of assets over their estimated useful lives as follows:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
------------------------------------ ----------------------
<S> <C>
Machinery and equipment 3-8 Years
Furniture and fixtures 5 Years
Leasehold improvements Term of Lease
</TABLE>
At December 31, 1997 and 1998, property and equipment consist of the
following:
<TABLE>
<CAPTION>
December 31,
1997 1998
---------------- ----------------
<S> <C> <C>
Machinery and equipment $6,328,442 $6,022,320
Furniture and fixtures 1,018,931 1,120,450
Leasehold improvements 480,453 567,216
---------------- ----------------
7,827,826 7,709,986
Less: Accumulated depreciation
and amortization 1,372,240 4,395,899
---------------- ----------------
$6,455,586 $3,314,087
================ ================
</TABLE>
Included in machinery and equipment as of December 31, 1997 and 1998 is
approximately $3,470,000 and $2,726,000, respectively, of equipment manufactured
by the Company and used in its service business.
(F) COST IN EXCESS OF NET ASSETS ACQUIRED
The costs in excess of net assets for acquired businesses are being
amortized on a straight-line basis over 5 to 7 years. Amortization expense for
the years ended December 31, 1996, 1997, and 1998 amounted to approximately
$536,000, $554,000 and $602,000 respectively, and is included in general and
administrative expenses in the Consolidated Statements of Operations.
The Company accounts for long-lived assets in accordance with SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. Under SFAS No. 121, the Company is required to assess
the valuation of its long-lived assets, including cost in excess of net assets
acquired, based on the estimated future cash flows to be generated by such
assets. The Company has assessed the realizability of its long-lived assets as
of December 31, 1998 and believes them to be realizable.
(G) DEFERRED FINANCING COSTS
During the year ended December 31, 1996, the Company incurred financing
costs related to several issuances of convertible debentures. Deferred financing
costs are amortized by a charge to interest expense over the period that the
debt is outstanding (see Note 6).
-15-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(H) REVENUE RECOGNITION
The Company recognizes product revenue upon shipment. The Company's
sales of its product do not include any rights of return. Provisions are made at
the time of revenue recognition for any applicable warranty costs expected to be
incurred. Revenues from services, which have not been significant to date, are
recognized as the services are provided.
(I) SIGNIFICANT CUSTOMERS
For the years ended December 31, 1997 and 1998, Coherent acted as the
sales agent for products sold to the Company's customers that represented 11%
and 89% of revenues and 51% and 89% of accounts receivable, respectively.
Coherent is the Company's worldwide distributor of laser systems (see Note
12(d)). International sales (including sales for which Coherent was the sales
agent) for the years ended December 31, 1996, 1997 and 1998 were approximately
22%, 24% and 39% respectively, of total revenue.
(J) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as
incurred.
(K) NET LOSS PER COMMON SHARE
Basic net loss per share was determined by dividing net loss by the
weighted average shares of common stock outstanding during the year. Diluted net
loss per share is the same as basic loss per share because the Company's
potentially dilutive securities, primarily stock options, warrants, redeemable
preferred stock and convertible debentures are antidilutive. The calculation of
the Company's net loss per common share from continuing operations for the years
ended December 31, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
---------------- --------------- ----------------
<S> <C> <C> <C>
Net loss from continuing operations $(20,798,258) $(58,369,079) $(9,967,243)
Preferred stock dividends (1,242,751) (1,584,406) (1,312,426)
Amortization of value ascribed to preferred
stock conversion discount --- (2,823,529) ---
---------------- --------------- ----------------
Adjusted net loss from continuing operations $(22,041,009) $(62,777,014) $(11,279,669)
================ =============== ================
Basic and diluted net loss per common share
from continuing operations $(0.84) $(1.79) $(0.18)
================ =============== ================
Weighted average number of common shares
outstanding 26,166,538 35,105,272 62,868,696
================ =============== ================
</TABLE>
Net loss from discontinued operations per common share is computed by
dividing the net loss from discontinued operations by the weighted average
number of common shares outstanding for the period.
In 1996, 1997 and 1998, 16,140,688, 32,358,446 and 28,451,024 weighted
average common equivalent shares, respectively, were not included in the diluted
weighted average shares outstanding, as they were antidilutive.
-16-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(L) CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF
CREDIT RISK, requires disclosure of any significant off-balance-sheet and credit
risk concentrations. Financial instruments that subject the Company to credit
risk consist primarily of cash and trade accounts receivable. The Company places
its cash in established financial institutions. The Company has no significant
off-balance-sheet concentration of credit risk such as foreign exchange
contracts, options contracts or other foreign hedging arrangements. To reduce
its accounts receivable risk, the Company relies on its worldwide distributor to
assess the financial strength of its end customers and, as a consequence,
believes that its accounts receivable credit risk exposure is limited. The
Company maintains an allowance for potential credit losses. The Company's
accounts receivable credit risk is not concentrated within any one geographic
area. The Company has not experienced significant losses related to receivables
from any individual customers or groups of customers in any specific industry or
by geographic area. Due to these factors, no additional credit risk beyond
amounts provided for collection losses is believed by management to be inherent
in the Company's accounts receivable.
(M) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of an estimate of the fair value of certain financial
instruments. At December 31, 1997 and 1998, financial instruments consisted
principally of convertible debentures and preferred stock financings. The fair
value of financial instruments pursuant to SFAS No. 107 approximated their
carrying values at December 31, 1997 and 1998. Fair values have been determined
through information obtained from market sources and management estimates.
(N) COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
effective January 1, 1998. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income/loss and its components in the financial
statements. The components of the Company's comprehensive loss are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
---------------- --------------- ----------------
<S> <C> <C> <C>
Net loss from continuing operations $(20,798,258) $(58,369,079) $(9,967,243)
Unrealized (loss) gain on marketable securities (342,500) 342,500 ---
---------------- --------------- ----------------
Comprehensive loss from continuing operations $(21,140,758) $(58,026,579) $(9,967,243)
================ =============== ================
</TABLE>
(O) RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1997
consolidated financial statements to conform with the current year's
presentation.
-17-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4) ASSET WRITE-OFF AND RESTRUCTURING
The Company, in accordance with applicable accounting principles,
determined during the third quarter of 1997 that certain investments' and notes
receivables' carrying values would not be realizable due to the Company's change
in strategy to divest of its investments in non-core businesses. These
investments did not qualify for discontinued operations in accordance with APB
No. 30. During 1997, the Company fully reserved for all such investments
resulting in a charge of approximately $10,283,000 to continuing operations, as
follows:
<TABLE>
<CAPTION>
Description Carrying Amount
----------- ---------------
<S> <C>
Notes Receivable $ 2,250,000
Investments in Non-Core Businesses 8,033,000
-----------
$10,283,000
-----------
-----------
</TABLE>
The write-offs of the notes receivable and investment related to a
number of strategic investments and loans in non-medical businesses that the
Company made during 1996 and 1997. The notes receivable were principally
mezzanine investments whereby the Company loaned money and, in some cases,
received equity in early stage companies as a condition to making these loans.
During 1996 and 1997, the Company also made other equity investments in
companies that at the time were believed to be strategic to the Company's
business or had the potential to yield a higher than average financial return.
During 1997, based on a number of factors, including the Company's change in
strategy, the book value of these companies and their poor financial performance
to date, it became apparent to management that there was significant uncertainty
as to the ultimate realizability of these investments and notes receivable.
Accordingly, the Company wrote off these investments and notes receivable in
1997.
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 relate to severance benefits for significant reductions in staffing for
all areas of the Company, including the elimination of essentially all of the
sales and marketing function as a result of the Coherent transaction (Note
12(d)). Management's plan specifically identified 33 employees who were targeted
for termination almost exclusively in selling, general and administrative
functions. Actual employees terminated as a result of this restructuring totaled
45.
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, as disclosed in
Note 2. Through December 31, 1998, the Company paid out $2,289,690 of severance
costs and has a remaining liability of $279,000 to two individuals that will be
paid out in 1999 resulting in total restructuring costs incurred of $2,568,690.
Accordingly, the Company reversed the balance of this restructuring accrual of
$131,310 in its consolidated statement of operations during the fourth quarter
of fiscal 1998.
As part of this restructuring, the Company disposed of the following
medical businesses:
(A) TISSUE TECHNOLOGIES, INC.
On December 16, 1997, the Company sold assets and certain liabilities
of Tissue Technologies, Inc. ("Tissue Technologies"), a manufacturer of a
dermatological laser product for the treatment of wrinkles, to a newly formed
medical laser manufacturer. This medical laser manufacturer was formed by former
executives of Tissue Technologies. In exchange, the Company received a $500,000
note receivable due in monthly installments over the
-18-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
next year, royalties ranging from 2% to 5% on product revenue over the next ten
years, a 15% equity position in the newly formed company and a warrant to
purchase 10% of the common stock of the newly formed company at $.50 per share.
The Company placed zero value on the equity position in the newly formed
company.
(B) PALOMAR TECHNOLOGIES, LTD.
On January 1, 1998 the Company sold substantially all of the business
assets and liabilities of Palomar Technologies, Ltd., a foreign manufacturer, to
a publicly-traded company. The Company received cash of approximately $200,000
and was relieved of obligations related to the building lease and all employment
agreements. This transaction did not have a material effect on the Company's
operations for the year ended December 31, 1997.
(5) INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with the provisions of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. At
December 31, 1998, the Company had available, subject to review and possible
adjustment by the Internal Revenue Service, a federal net operating loss
carryforward of approximately $101,000,000 to be used to offset future taxable
income, if any. This net operating loss carryforward will begin to expire in
2003. The Internal Revenue Code contains provisions that limit the net operating
loss carryforwards due to changes in ownership, as defined by the Internal
Revenue Code. The Company believes that its net operating loss carryforwards
will be limited due to its reorganization in 1991 and subsequent stock
offerings. The Company has completed an analysis of its availability to utilize
its operating loss in connection with the anticipated sale of Star to Coherent
(See Note 1). The Company estimates that its has net operating losses of
approximately $75,000,000 that are not subject to limitation under the Internal
Revenue Code. The Company has a net deferred tax asset of approximately
$40,400,000, comprised mainly of the net operating tax carryforwards discussed
above, and the tax effect of certain expenses and reserves not currently
deductible. However, the Company has placed a full valuation allowance against
the deferred tax asset, due to uncertainty relating to the Company's ability to
realize the asset.
(6) LONG-TERM DEBT
At December 31, 1997 and 1998, long-term debt consisted of the
following:
<TABLE><CAPTION>
December 31,
1997 1998
--------------- ---------------
<S> <C> <C>
Convertible debentures $10,683,440 $2,150,000
Revolving line of credit with a bank -- 1,000,000
Note payable in connection with guarantee on behalf of discontinued
subsidiary (See Note 2) 3,233,000 2,290,041
Short-term notes payable to Coherent -- 4,000,000
Other notes payable 169,588 --
--------------- ---------------
$14,086,028 $9,440,041
Less - current maturities (1,640,465) (6,290,041)
--------------- ---------------
$12,445,563 $3,150,000
=============== ===============
</TABLE>
-19-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(A) CONVERTIBLE DEBENTURES
The following table summarizes the issuance and conversion of the
convertible debentures for the years ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
Common Shares
Initial Amount Outstanding Issued Upon
Face December 31, Conversion
----------------------------- --------------------------
Series Value 1997 1998 1997 1998
---------------------------------------------------- -------------- -------------- ------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
4.5% Series due October 21, 1999, 2000, 2001 $5,000,000 $100,000 $-- 1,381,264 60,809
5% Series due December 31, 2001 5,000,000 923,439 -- 2,074,992 1,160,999
5% Series due January 13, 2002 1,000,000 1,000,000 -- -- 924,029
5% Series due March 10, 2002 5,500,000 1,160,001 -- 2,794,677 1,561,064
6% Series due March 13, 2002 500,000 500,000 500,000 -- --
6%, 7% and 8% Series due September 30, 2002 7,000,000 7,000,000 1,650,000 -- 3,328,761
4.5% Series denominated in Swiss francs
due July 3, 2003 7,669,442 -- -- 914,028 --
-------------- -------------- ------------- --------------- ----------
$31,669,442 $10,683,440 $2,150,000 7,164,961 7,035,662
============== ============== ============= =============== ==========
</TABLE>
It is the Company's policy to discount convertible debentures based on
the discount conversion price and amortize the discount to operations over the
expected life of the convertible debentures, which in most cases is less than
the term of the debentures. Accordingly, the Company credits the ascribed value
for the discount features described above to additional paid-in capital. This
ascribed amount is amortized over a period to the earliest conversion date,
which is six months for the convertible debentures outstanding in 1997 and 1998.
During 1996 and 1997, the Company recorded approximately $77,000 and
$5,444,000, respectively, of interest expense related to the amortization of the
discount of convertible debentures. There was no amortization of the discount of
convertible debentures in 1998.
On March 13, 1997, the Company issued $500,000 of 6% convertible
debentures due March 13, 2002. The convertible debentures have a conversion
price of $11.00. The debentureholder may convert no more than one-third of the
debenture in any thirty-day period. The Company has accounted for these
debentures at face value.
On September 30, 1997, the Company issued $7,000,000 of convertible
debentures due September 30, 2002. The debentures bear interest at a rate of 6%
for the first 179 days, 7% for days 180-269 and 8% thereafter. The
debentureholders were also issued 413,109 shares of common stock related to this
financing. The fair market value of the common stock was $1,050,000 and this
amount is being treated as debt discount and amortized to interest expense. The
convertible debentures have a conversion price of 100% of the Company's average
stock price, as defined. In addition, the debentureholder may convert no more
than 33% of their debentures in any thirty-day period (or 34% of the debentures
in the last thirty-day period). The Company also has redemption rights related
to this financing. During the year ended December 31, 1998 the Company redeemed
$2,196,667 of these convertible debentures. This amount includes accrued
interest of $196,667.
On July 3, 1996, the Company raised approximately $7,669,000 through
the issuance of 9,675 units in a convertible debenture financing. These units
are traded on the Luxembourg Stock Exchange and consist of a convertible
debenture, due July 3, 2002, denominated in 1,000 Swiss francs and a warrant to
purchase 24 shares of the Company's common stock at $16.50 per share. The
warrants are non-detachable and may be exercised only if the related debentures
are simultaneously converted, redeemed or purchased. Interest on the convertible
debentures accrued at a rate of 4.5% per annum and was payable quarterly in
Swiss francs. The convertible debentures were convertible by the holder, or the
Company, commencing October 1, 1996 at a conversion price equal to from 100%
-20-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
to 77.5% of the applicable conversion price, calculated as defined. The Company
ascribed a value of $1,917,360 to the discount conversion feature of the
convertible debenture. This amount was being amortized to interest expense over
the life of the Swiss franc convertible debenture. During 1997, the Company
redeemed 300 units of this convertible debenture financing for $195,044.
On October 16, 1997, the Company brought a declaratory judgment action
in the United States District Court against certain of the Swiss franc
debentureholders. Prior to this suit, those debentureholders had alleged that
the Company was in breach of certain protective covenants and on October 22,
1997, they brought suit based on these claims. On November 13, 1997, the Company
exercised its right to convert 9,375 units into 914,028 shares of common stock
and cash of approximately $36,000. The unamortized discount totaling
approximately $1,784,000 was amortized to interest expense upon conversion. The
Company has accounted for these debentures as converted in the accompanying
financial statements. The ongoing litigation will be accounted for under SFAS
No. 5, ACCOUNTING FOR CONTINGENCIES (see Note 12(c)).
The Company incurred deferred financing costs of approximately
$2,038,000 and $769,000 relating to the issuance of convertible debentures
during the years ended December 31, 1996 and 1997, respectively. These costs are
reflected as deferred financing costs in the accompanying consolidated balance
sheets and are being amortized to interest expense over the term of the related
convertible debentures. During the years ended December 31, 1996, 1997 and 1998,
the Company amortized approximately $78,000, $276,000 and $64,000 to interest
expense, respectively. Any remaining unamortized deferred financing costs are
charged to additional paid-in capital upon conversion. During the years ended
December 31, 1996, 1997 and 1998, the Company charged approximately $41,000,
$1,820,000 and $374,000, respectively, of unamortized deferred financing costs
to additional paid-in-capital.
(B) REVOLVING LINE OF CREDIT WITH A BANK
The Company has a $10,000,000 revolving line of credit with a bank.
This line of credit will mature on March 31, 2000 and bears interest at the
bank's prime rate (7.75% at December 31, 1998). Borrowings under this line of
credit are secured by substantially all assets of the Company and are limited to
80% of qualified accounts receivables. A director of Palomar has guaranteed all
borrowings under this line of credit. In connection with this guarantee the
Company issued this director 200,000 warrants with a three-year term to purchase
the Company's common stock at $1.50 per share. These warrants were valued at
approximately $69,000. This amount is being amortized to interest expense over
the term of the revolving line of credit.
(C) BRIDGE LOAN
On March 27, 1998, the Company borrowed $2,000,000 from an individual.
The Company subsequently repaid this note during 1998. Interest on this note was
in the form of a warrant to purchase 125,000 shares of common stock for $.01 per
share exercisable over five years. This warrant was valued at $171,000 using the
Black-Scholes option pricing model. The Company accounted for this warrant as a
discount to the note through additional paid-in capital and amortized the
discount to interest expense over the period that the note was outstanding.
(D) NOTES PAYABLE TO COHERENT
On May 22 and June 22, 1998, the Company borrowed $3,000,000 and
$1,000,000, respectively, from the Company's worldwide distributor, Coherent.
These notes accrue interest at 8.5% per annum. The notes are secured by all of
the inventory owned by the Company's Star subsidiary.
-21-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Under the terms of the Loan Agreement between Coherent and the Company,
in the event that sale of Star to Coherent is not completed, the $4,000,000 of
funds borrowed by the Company from Coherent are due 90 days from the date of
termination of the Agreement to sell Star to Coherent as discussed in Note (1).
(E) FUTURE MATURITIES OF LONG-TERM DEBT
Future maturities of notes payable and convertible debentures reflected
at face value as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $6,290,041
2000 1,000,000
2001 --
2002 2,150,000
-------------
$9,440,041
=============
</TABLE>
(7) STOCKHOLDERS' EQUITY
(A) COMMON STOCK
During 1998, the Company sold 10,200,000 shares of common stock to a
group of investors for $10,200,000. In addition, the Company issued callable
warrants with a three-year term to these investors to purchase 10,200,000 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 at the
Company's transfer agent. During 1998, the Company paid $283,125 related to this
fee. This amount has been charged to additional paid-in capital. The Company
also paid $360,000 for investment banking fees related to the issuance of these
common shares. The Company netted this amount against the proceeds through a
reduction in additional paid-in capital.
On February 28, 1997, the Company and Nexar entered into an Asset
Purchase and Settlement agreement with a former executive of Nexar and
Technovation Computer Labs, Inc. ("Licensor"). The Licensor was affiliated with
a former officer of Nexar. Under the terms of this agreement, the Company agreed
to pay this former executive and certain of his affiliates $1,250,000 in cash
and deliver $1,500,000 worth of Palomar's common stock. In exchange, the Company
and Nexar received the rights to certain technology previously licensed to Nexar
and a complete release and settlement of all claims between this former
executive and Nexar.
The Company assigned to Nexar all of its rights to the technology and
charged Nexar for the cost associated with this claim and the purchase of the
technology. Nexar recorded $1,375,000 of the consideration to settle this claim
as a litigation expense in its statement of operations for the year ended
December 31, 1996. The remaining consideration totaling $1,375,000 was recorded
as purchased technology and was being amortized by Nexar over the technology's
estimated useful life. The allocation of the purchased technology was based on
the value of anticipated royalty payments to the Licensor over the three years
ended December 31, 1999.
-22-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(B) PREFERRED STOCK
The Company is authorized to issue up to 5 million shares of preferred
stock, $.01 par value. As of December 31, 1997 and 1998, preferred stock
authorized, issued and outstanding consist of the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Redeemable convertible preferred stock, Series F, $.01 par value per
share Authorized, issued and outstanding - 6,000 shares
(liquidation preference of $7,072,917 at December 31, 1998) $60 $60
Redeemable convertible preferred stock, Series G, $.01 par value per
share Authorized - 10,000 shares Issued and outstanding - 2,684 shares
and 743 shares in 1997 and 1998, respectively,
(liquidation preference of $874,603 at December 31, 1998) 27 7
Redeemable convertible preferred stock, Series H, $.01 par value per
share Authorized - 16,000 shares Issued and outstanding - 7,690 shares
and 250 shares in 1997 and 1998, respectively,
(liquidation preference of $280,562 at December 31, 1998) 77 2
Total preferred stock $164 $ 69
==== =====
</TABLE>
The Series F redeemable convertible preferred stock ("Series F
Preferred"), together with any accrued but unpaid dividends, may be converted
into common stock at 80% of the average closing bid price for the ten trading
days preceding the conversion date, but in no event less than $3.00 or more than
$16.00. This conversion floor was decreased by the two parties from the original
price to $7.00. The Series F Preferred may be redeemed at the Company's option,
with no less than 10 days' and no more than 30 days' notice or when the stock
price exceeds $16.80 per share for sixty consecutive trading days, at an amount
equal to the amount of liquidation preference determined as of the applicable
redemption date. Dividends are payable quarterly at 8% per annum in arrears on
March 31, June 30, September 30 and December 31. Dividends not paid on the
payment date, whether or not such dividends have been declared, will bear
interest at the rate of 10% per annum until paid.
The Series G redeemable convertible preferred stock ("Series G
Preferred"), together with any accrued but unpaid dividends, may be converted
into common stock at 85% of the average closing bid price for the five trading
days preceding the conversion date, but in no event less than $.01. On December
31, 1997, the Company and the holder of the remaining 2,684 shares of Series G
Preferred entered into an Exchange Agreement. The conversion floor was decreased
by the two parties from the original floor to $6.00. In addition, beginning on
March 1, 1998, for any thirty-day period, the holder may exchange a limited
amount of the Series G Preferred ("exchangeability amount") and any accrued but
unpaid dividends for common stock at 85% of the average closing bid price for
the five trading days preceding the conversion date ("exchange date"). The
exchangeability amount increases as the exchange rate increases. The
exchangeability amount ranges from 268 shares of preferred stock for an exchange
rate below $2.00 to 1,072 shares of preferred stock for an exchange rate in
excess of $4.00. The Series G Preferred may be redeemed at the Company's option
at any time, with no less than 15 days' and no more than 20 days' notice, at an
amount equal to the sum of (a) the amount of liquidation preference determined
as of the applicable redemption date plus (b) $176.50. Dividends are payable
quarterly at 7% per annum in arrears on January 1, April 1, July 1 and October
1. Dividends not paid on the payment date, whether or not such dividends have
been declared, will bear interest at the rate of 12% per annum until paid.
The conversion price for the Series F and G Preferred is adjustable for
certain dilutive events, as defined. The Series F and G Preferred have a
liquidation preference equal to $1,000 per share of redeemable convertible
-23-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
preferred stock, plus accrued but unpaid dividends and accrued but unpaid
interest. The Series F and G Preferred stockholders do not have any voting
rights except on matters affecting the Series F and G Preferred.
During the first and second quarters of 1997, the Company issued 16,000
shares of Series H redeemable convertible preferred stock ("Series H Preferred")
for $16,000,000 less associated financing costs of $1,000,000. The Series H
Preferred accrues dividends at rates varying from 6% to 8% per annum, as
defined. The Series H Preferred, including any accrued but unpaid dividends, may
be converted into common stock at 100% of the average stock price for the first
179 days from the closing date, 90% of the average stock price, as defined, for
the following 90 days and 85% of the average stock price, as defined,
thereafter. The conversion price is adjustable for certain dilutive events. The
holders are restricted for the first 209 days following the closing date to
converting no more than 33% of the Series H Preferred in any thirty-day period
(or 34% in the last thirty-day period). Under certain conditions, the Company
has the right to redeem the Series H Preferred. The Company has ascribed a value
of $2,823,529 to the discount conversion feature of the Series H Preferred,
which has been amortized as an adjustment to earnings available to common
shareholders over the most favorable conversion period attainable to the holders
(270 days from the date of issuance).
During the year ended December 31, 1997, the following shares of
preferred stock, accrued premium, dividends, interest and other related costs
were converted into shares of common stock as follows:
<TABLE>
<CAPTION>
Number of Additional Dollar Amount
Preferred Preferred Dollar Amount of Converted, Including Accrued Number of Common
Stock Series Shares Preferred Stock Premium, Dividends, Interest Total Dollar Shares Converted
Converted Converted and Other Related Costs Amount Converted Into
- -------------- -------------- --------------------- --------------------------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
E 2,128 $2,128,000 $126,366 $2,254,366 332,859
G 7,316 7,316,000 438,234 7,754,234 602,824
H 8,310 8,310,000 228,411 8,538,411 5,204,158
- -------------- -------------- --------------------- --------------------------------- --------------------- -------------------
17,754 $17,754,000 $793,011 $18,547,011 6,139,841
</TABLE>
In addition to the 602,824 shares of common stock issued related to the
Series G Preferred conversion, the Company issued to the Series G Preferred
stockholder $47,731 in cash dividends and 956,388 shares of Nexar common stock
valued at $4,671,597. The reduction to stockholder's equity (deficit) as a
result of this transaction was as follows:
<TABLE>
<CAPTION>
<S> <C>
Value of Nexar Common Stock $4,671,597
Accrued Interest and Dividend (391,597)
-----------
$4,280,000
===========
</TABLE>
During the year ended December 31, 1998, the following shares of preferred
stock, accrued premium, dividends, interest and other related costs were
converted into shares of common stock as follows:
<TABLE>
<CAPTION>
Number of Additional Dollar Amount
Preferred Preferred Dollar Amount of Converted, Including Accrued Number of Common
Stock Series Shares Preferred Stock Premium, Dividends, Interest Total Dollar Shares Converted
Converted Converted and Other Related Costs Amount Converted Into
- -------------- -------------- --------------------- --------------------------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
G 1,941 $1,941,000 $268,245 $2,209,245 2,703,032
H 3,947 3,946,700 383,923 4,330,623 4,188,650
- -------------- -------------- --------------------- --------------------------------- --------------------- -------------------
5,888 $5,887,700 $652,168 $6,539,868 6,891,682
</TABLE>
-24-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition to the 4,188,650 shares of common stock issued related to
the Series H Preferred conversion, the Company redeemed 3,516 shares of Series H
Preferred for $4,387,434. This amount includes accrued dividends and interest
totaling $771,876.
(C) STOCK OPTION PLANS AND WARRANTS
(I) STOCK OPTIONS
The Company has several Stock Option Plans (the "Plans") that provide
for the issuance of a maximum of 7,350,000 shares of common stock, which may be
issued as incentive stock options ("ISOs") or nonqualified options. Under the
terms of the Plans, ISOs may not be granted at less than the fair market value
on the date of grant (and in no event less than par value); in addition, ISO
grants to holders of 10% of the combined voting power of all classes of Company
stock must be granted at an exercise price of not less than 110% of the fair
market value at the date of grant. Pursuant to the Plans, options are
exercisable at varying dates, as determined by the Board of Directors, and have
terms not to exceed 10 years (five years for 10% or greater stockholders). The
Board of Directors, at its discretion, may convert the optionee's ISOs into
nonqualified options at any time prior to the expiration of such ISOs.
The following table summarizes all stock option activity of the Company
for the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Number of Exercise Weighted Average
Shares Price Exercise Price
------------- ---------------- ----------------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 1,507,735 $0.40-$3.50 $2.06
Granted 1,520,000 6.00-10.50 7.08
Exercised (366,735) 0.40-3.50 1.28
Canceled (5,000) 3.00 3.00
------------- ---------------- ----------------------
Outstanding, December 31, 1996 2,656,000 $2.00-$10.50 $5.03
Granted 1,747,345 0.01-6.50 2.53
Exercised (214,845) 0.01-3.00 1.62
Canceled (1,206,100) 2.375-10.50 6.23
------------- ---------------- ----------------------
Outstanding, December 31, 1997 2,982,400 $1.50-$8.00 $3.33
Granted 2,294,900 1.50 1.50
Canceled (2,924,400) 1.50-8.125 3.38
------------- ---------------- ----------------------
Outstanding, December 31, 1998 2,352,900 $1.50-$2.50 $1.51
============= ================ ======================
Exercisable, December 31, 1998 1,851,371 $1.50-$2.50 $1.51
============= ================ ======================
Available for future issuances under the Plans
as of December 31, 1998 4,354,755
=============
</TABLE>
-25-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The exercise prices for options outstanding and options exercisable at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------- --------------------------------------
Weighted Average
Range of Options Remaining Weighted Average Options Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------- ---------------- ---------------------- ----------------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C>
$1.50 2,327,900 2.88 years $1.50 1,834,705 $1.50
$2.50 25,000 2.96 years 2.50 16,666 2.50
================ ====================== ======================= =============== ======================
2,352,900 2.88 years $1.51 1,851,371 $1.51
================ ====================== ======================= =============== ======================
</TABLE>
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. In October 1995, the
FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED Compensation, which is
effective for fiscal years beginning after December 15, 1995. SFAS No. 123
established a fair-value-based method of accounting for stock-based compensation
plans. The Company has adopted the disclosure-only alternative under SFAS No.
123 which requires disclosure of the pro forma effects on earnings per share as
if SFAS No. 123 had been adopted, as well as certain other information. The
Company accounts for equity instruments issued to non-employees in accordance
with EITF 96-18 by valuing the instrument using the Black-Scholes pricing model,
as prescribed by SFAS No. 123, and recording a charge to operations for their
fair value. The Company has issued options and warrants to purchase common stock
to certain financial intermediaries in connection with various financings at
below the fair market value of the underlying stock. The costs associated with
these issuances are accounted for as a cost of raising capital and netted
against the proceeds from these issuances.
During the year ended December 31, 1997 and 1998, a total of 1,005,000
and 2,184,900 options to purchase common stock were repriced to above the fair
market value of the underlying common stock to $2.50 and $1.50 per share,
respectively. The majority of the remainder of the options canceled during the
years ended December 31, 1996, 1997 and 1998 were the result of employee
terminations.
The Company has computed the pro forma disclosures required under SFAS
No. 123 for all stock options granted to employees of the Company in the years
ended December 31, 1996, 1997 and 1998 using the Black-Scholes option pricing
model prescribed by SFAS No. 123.
The assumptions used to calculate the SFAS No. 123 pro forma disclosure
for the years ended December 31, 1996, 1997 and 1998 for the Company are as
follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Risk-free interest rate 6.37% 6.09% 5.60%
Expected dividend yield - - -
Expected lives 4.4 years 3.69 years 2.94 years
Expected volatility 79% 79% 93%
Grant date fair value of options granted during
the period $4.57 $2.06 $0.64
</TABLE>
-26-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The weighted average fair-value and weighted average exercise price of
options granted by the Company for the years ended December 31, 1996, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
------------- ----------------- -----------------
<S> <C> <C> <C>
Weighted average exercise price for options:
Whose exercise price exceeded fair market value at
the date of grant $10.00 $2.53 $1.50
Whose exercise price was equal to fair value at the
date of grant $6.875 $- $-
Weighted average fair market value for options:
Whose exercise price exceeded fair market value at
the date of grant $8.875 $2.06 $0.64
Whose exercise price was equal to fair market value
at the date of grant $6.875 $- $-
</TABLE>
The Company's majority owned Star subsidiary, a manufacturer of the
Company's diode laser, also has established a stock option plan that provides
for the issuance of a maximum of 650,000 shares of common stock, which may be
issued as nonqualified options and ISOs. The following table summarizes the
employee stock option activity for Star:
<TABLE>
<CAPTION>
Weighted
Average
Number of Shares Exercise Price Exercise Price
---------------- -------------- --------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 95,000 $2.50 - $5.00 $3.68
Granted 150,000 6.00 - 19.00 6.27
Exercised (20,000) 2.50 2.50
Canceled (10,000) 6.00 6.00
----------------- --------------- -----------------
Outstanding, December 31, 1996 215,000 2.50 - 19.00 5.44
Granted 40,500 19.00 19.00
Canceled (1,917) 19.00 19.00
----------------- --------------- -----------------
Outstanding, December 31, 1997 253,583 $2.50-$19.00 $8.04
Exercised (6,300) 2.50-5.00 4.21
----------------- --------------- -----------------
Outstanding, December 31, 1998 247,283 $2.50-$19.00 $8.13
================= =============== =================
================= =============== =================
Exercisable, December 31, 1998 218,870 $2.50-$19.00 $7.22
================= =============== =================
================= =============== =================
Available for future issuances under the
Plan as of December 31, 1998 24,493
=================
</TABLE>
-27-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The exercise prices for options outstanding and options exercisable at
December 31, 1998 for Star are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
Weighted
Average Weighted Weighted
Options Remaining Average Options Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$2.50 28,000 5.45 years $ 2.50 28,000 $ 2.50
$5.00 40,700 5.43 years 5.00 40,700 5.00
$6.00 120,000 7.13 years 6.00 113,332 6.00
$9.50 10,000 7.63 years 9.50 7,777 9.50
$19.00 48,583 8.20 years 19.00 29,061 19.00
--------------- ---------- -------------- --------------- --------------
247,283 6.89 years $ 8.13 218,870 $ 7.22
=============== ========== ============== =============== ==============
</TABLE>
During 1998, Star also issued options to purchase 378,224 shares of
common stock of Star to Palomar at $19.00 per share.
(II) WARRANTS
The following table summarizes all warrant activity of the Company for
the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Weighted
Number of Exercise Average
Shares Price Exercise Price
--------------- ----------------- -------------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 6,549,924 $0.01-$15.00 $3.82
Granted 6,527,576 4.88-16.50 8.16
Exercised (3,101,261) 0.01-7.69 2.66
--------------- ----------------- -------------------
Outstanding, December 31, 1996 9,976,239 $0.60-$16.50 $7.02
Granted 2,793,187 2.50-8.875 4.29
Exercised (584,879) 0.60-7.50 2.10
Canceled (2,186,517) 1.00-16.50 6.65
--------------- ----------------- -------------------
Outstanding, December 31, 1997 9,998,030 $2.00-$15.00 $6.65
Granted 12,585,000 0.01-3.00 2.75
Exercised (125,000) 0.01 0.01
Canceled (2,878,452) 2.25-6.75 4.13
--------------- ----------------- -------------------
Outstanding, December 31, 1998 19,579,578 $1.50-$15.00 $4.38
=============== ================= ===================
Exercisable, December 31, 1998 19,359,578 $1.50-$15.00 $4.37
=============== ================= ===================
</TABLE>
During the years ended December 31, 1997 and 1998, a total of 1,240,000
and 1,300,000 warrants to purchase common stock were repriced to above the then
current fair market values of the underlying common stock. These repriced
exercise prices ranged from $2.50 to $4.00 per share in 1997 and ranged from
$1.50 to $2.00 per share in 1998. The majority of the remainder of the canceled
warrants during the years ended December 31, 1997 and 1998 were the result of
employee terminations. During 1998, the Company also issued warrants for an
aggregate of 250,000 shares of common stock to various parties in connection
with certain financing arrangements.
-28-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company valued these warrants using the Black-Scholes pricing model, as
prescribed by SFAS No.123, and recorded a charge to operations for their fair
value for approximately $47,000.
The range of exercise prices for warrants outstanding and exercisable
at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
- ------------------------------------------------------------------------------------- --------------------------------------
Weighted Average
Range of Warrants Remaining Weighted Average Warrants Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------- ---------------- ---------------------- ----------------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C>
$1.50 - $2.125 2,739,500 2.44 years $1.71 2,619,500 $1.72
$3.00 - $3.00 10,560,000 4.26 years 3.00 10,560,000 3.00
$3.25 - $9.50 5,102,020 2.07 years 6.45 5,002,020 6.39
$10.38 - $15.00 1,178,058 2.07 years 13.98 1,178,058 13.98
---------------- ---------------------- ----------------------- --------------- ----------------------
19,579,578 3.30 years $4.38 19,359,578 $4.37
================ ====================== ======================= =============== ======================
</TABLE>
The Company has computed the pro forma disclosures required under SFAS No.
123 for all warrants granted in the years ended December 31, 1997 and 1998 using
the Black-Scholes option pricing model prescribed by SFAS No. 123.
The weighted-average assumptions used to calculate the SFAS No. 123 pro
forma disclosure for the years ended December 31, 1996, 1997 and 1998 for the
Company are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
---------------- ------------------ ------------------
<S> <C> <C> <C>
Risk-free interest rate 5.93% 6.13% 5.44%
Expected dividend yield - - -
Expected lives 5.9 years 4.44 years 2.58 years
Expected volatility 79% 79% 93%
Grant date fair value of warrants granted during
the period $5.39 $2.17 $0.76
</TABLE>
-29-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The weighted average fair value and weighted average exercise price of
warrants granted by the Company for the years ended December 31, 1996, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
----------------- -------------- -----------------
<S> <C> <C> <C>
Weighted average exercise price for warrants:
Whose exercise price exceeded fair market value at date
of grant $11.76 $4.30 $2.78
Whose exercise price was less than fair market value at
date of grant $7.07 $7.50 $0.01
Whose exercise price was equal to fair market value at
date of grant $6.67 $3.25 $-
Weighted average fair value for warrants:
Whose exercise price exceeded fair market value at date
of grant $9.34 $1.10 $0.76
Whose exercise price was less than fair market value at
date of grant $8.82 $0.62 $1.24
Whose exercise price was equal to fair market value at
date of grant $6.67 $2.18 $-
</TABLE>
(III) PRO FORMA DISCLOSURE
The pro forma effect on the Company of applying SFAS No. 123 for all
options and warrants to purchase common stock of the Company and Star would be
as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
------------------- ---------------------- -----------------
<S> <C> <C> <C>
Pro forma net loss from continuing operations $(48,292,780) $(62,020,782) $(23,169,514)
Pro forma basic and dilutive net loss per share from
continuing operations $(1.89) $(1.89) $(0.39)
</TABLE>
(D) RESERVED SHARES
At December 31, 1998, the Company has reserved shares of its common
stock for the following:
<TABLE>
<CAPTION>
<S> <C>
Warrants 19,579,578
Stock option plans 6,707,655
Convertible debentures 3,216,694
Preferred stock 3,328,894
Employee stock purchase plan 419,412
Employee 401(k) plan 554,787
---------------
Total 33,807,020
===============
</TABLE>
(E) EMPLOYEE STOCK PURCHASE PLAN
In June 1996, the Board of Directors established the Palomar Medical
Technologies, Inc. 1996 Employee Stock Purchase Plan (the "Purchase Plan").
Under the Purchase Plan, all employees, are eligible to purchase the Company's
common stock at an exercise price equal to 85% of the fair market value of the
common stock with a
-30-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
lookback provision of three months. The Purchase Plan provides for issuance of
up to 500,000 shares under the Purchase Plan. During the year ended December 31,
1997 and 1998, employees purchased 15,377 and 65,211 shares of the Company's
common stock for approximately $40,000 and $50,000, respectively, pursuant to
the Purchase Plan.
(8) RESEARCH AND PRODUCT DEVELOPMENT AGREEMENTS
During 1995, the Company entered into a multi-year agreement with
Massachusetts General Hospital ("MGH"), whereby MGH agreed to conduct clinical
trials on a laser treatment for hair removal. MGH will provide the Company with
data previously generated by Dr. Anderson and further clinical research on the
ruby laser device at MGH and other sites and remit ownership of all case report
forms and data resulting from the study.
The Company agreed to provide MGH with a grant of $203,757 to perform
research and evaluation in the field of hair removal. The Company immediately
paid $50,090 upon execution of this agreement, and the Company paid a license
fee of $10,000 within thirty days of this amendment. As consideration for this
amended license, the Company is obligated to pay to MGH royalties of up to 5% on
net revenues as defined (See Note 12 (b)). In March 1997, the U.S. Patent Office
issued a patent covering the laser-based hair removal technology developed by at
MGH, for which Palomar is the exclusive worldwide licensee.
(9) ACCRUED LIABILITIES
At December 31, 1997 and 1998, accrued liabilities consist of the
following:
<TABLE>
<CAPTION>
December 31,
1997 1998
---------------- ---------------
<S> <C> <C>
Payroll and consulting costs $1,535,013 $1,148,898
Royalties 853,808 1,106,352
Settlement costs 1,457,020 --
Warranty 2,583,677 2,798,836
Restructuring 1,981,907 279,000
Interest and preferred stock dividends 1,659,709 1,550,662
Other 3,688,720 3,417,876
---------------- ---------------
Total $13,759,854 $10,301,624
================ ===============
</TABLE>
(10) RELATED PARTY TRANSACTION
At December 31, 1997, approximately $478,000 of loans receivable with
interest at the rate of 7% per annum were outstanding from the Company's former
President. In the first quarter of 1998, the Company's former President paid
back his outstanding loan.
(11) 401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan (the "Profit Sharing
Plan") which covers substantially all employees who have attained the age of 18
and are employed at year-end. Employees may contribute up to 15% of their
salary, as defined, subject to restrictions defined by the Internal Revenue
Service. The Company is obligated to make a matching contribution, in the form
of the Company's common stock, of 50% of all employee contributions effective
January 1, 1995. The Company contributions vest over a three-year period. The
Company has reserved 554,787 shares of its common stock for issuance in
connection with the Profit Sharing Plan.
-31-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During 1997 and 1998, the Company issued 87,441 and 311,887 shares of
its common stock to the Profit Sharing Plan in satisfaction of its $318,154 and
$254,281 employer match for the 1996 and 1997 employee contributions,
respectively. For the year ended December 31, 1998, the Company has accrued
$206,000 for the 1998 match. The Company contributed 227,930 shares of its
common stock for this match in February of 1999.
(12) COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
The Company has entered into various operating leases for its corporate
office, research facilities and manufacturing operations. These leases have
monthly rents ranging from approximately $2,000 to $34,000, adjusted annually
for certain other costs such as inflation, taxes and utilities, and expire
through July 2003. The Company guarantees Star's facility operating lease
Future minimum payments under the Company's operating leases at
December 31, 1998 are approximately as follows:
<TABLE>
<CAPTION>
December 31,
<S> <C>
1999 $548,000
2000 264,000
2001 96,000
2002 101,000
2003 60,000
-------------
$1,069,000
=============
</TABLE>
(B) ROYALTIES
The Company is required to pay a royalty of up to 5% of "net laser
sales," as defined, under a royalty agreement with MGH (see Note 8). For the
years ended December 31, 1996, 1997 and 1998, approximately $175,000, $854,000
and $1,332,000 of royalty expense, respectively, was incurred under this
agreement. These amounts are included in cost of sales in the accompanying
consolidated statements of operations.
A former employee and previous owner of one of the Company's
subsidiaries is paid a 1% commission on the net sales of certain ruby lasers and
diode lasers, as defined. These commissions will be paid through March 31, 2000
and are to be no less than $450,000. In accordance with the settlement agreement
with this individual, the Company paid advances on commissions totaling
$450,000: $200,000 in 1997 and $250,000 in January 1998.
(C) LITIGATION
The Company was a defendant in a lawsuit filed on March 14, 1996 in the
United States District Court for the Southern District of New York by
Commonwealth Associates ("Commonwealth"). In its suit, Commonwealth alleged that
the Company had breached a contract with Commonwealth in which Commonwealth was
to provide certain investment banking services in return for certain
compensation. In January 1997, Commonwealth's motion for summary judgment on its
breach of contract claim was granted, and in April 1997 the District Court
awarded Commonwealth $3,174,070 in damages. That judgment was appealed by
Palomar and on August 18, 1997 the case was settled for $1.875 million. During
the year ended December 31, 1997, the Company incurred $1.875 million in
settlement costs related to the above matter and another $1.324 million related
to several other claims and associated litigation costs.
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
-32-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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)- ruby laser hair removal system
infringed a patent licensed to Selvac (the "Selvac Patent") and that the Company
unfairly competed by promoting the EpiLaser(R)- ruby 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 September 25, 1998, the court
denied Selvac's motion for reconsideration of its prior order dismissing so much
of Selvac's unfair competition claim as relied on interpreting the Food, Drug
and Cosmetics Act or FDA regulations, and dismissed without prejudice the state
law remainder of Selvac's unfair competition claim. On October 26, 1998, Selvac
filed its notice of appeal to the Court of Appeals for the Federal Circuit.
Selvac subsequently filed its opening brief on appeal; the Company's opposition
was filed in March, 1999. The Company is unable to express an opinion as to the
likely outcome of Selvac's appeal, or as to the range of loss if Selvac
ultimately prevailed at trial.
On October 16, 1997, the Company brought a declaratory judgment action
in U.S. District Court for the District of Massachusetts against the holders and
the indenture trustee of the Company's 4.5% Subordinated Convertible Debentures
due 2003, denominated in Swiss francs (the "Swiss Franc Debentures"). Just prior
to this suit, certain of the debenture holders (the "Asserting Holders") had
alleged that the Company was in breach of certain protective covenants under the
indenture, and on October 22, 1997 they sued the Company and all of its
principal subsidiaries in the same court; the October 16 and October 22 cases
have been assigned to the same judge, and the dispute between the Asserting
Holders and the Company is proceeding under the October 22 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
approximately US$5,600,000 at December 31, 1998 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. The Company believes that it has not
breached any of the protective covenants under this indenture and that the debt
cannot properly be accelerated, and intends to contest the claims of the
Asserting Holders vigorously. Nonetheless, an adverse result could have a
material adverse effect on the Company in the range of $5,600,000 to $7,000,000.
By mutual agreement, the Asserting Holders and the Company requested that the
case be removed from the Court's trial calendar. The parties have discussed ways
to resolve their dispute, including the restructuring of the debentures, but
there can be no absolute assurance that all of the debentureholders, including
the Asserting Holders, and the Company will complete a proposed settlement.
On March 17, 1999, the company and a former and current officer were
added as defendants in the class action of VARLJEN V. H.J. MEYERS, INC. ET AL.
pending in the United States District Court of the Southern District of New
York. The Company is unable to estimate any possible outcome or range of loss in
this matter at this time. An adverse result in the VARLJEN action, however,
could have a materially adverse effect upon the financial statements and
operations of the Company.
The Company is also aware of a claim alleging that the Company had
previously committed to make an additional capital contribution to Nexar. The
Company believes that this claim is without merit.
The Company is involved in other legal and administrative proceedings
and claims of various types. While any litigation contains an element of
uncertainty, management, in consultation with the Company's general counsel,
presently believes that the outcome of each such other proceeding or claim which
is pending or known to be threatened, or all of them combined, will not have a
material adverse effect on the Company.
-33-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(D) DISTRIBUTION AGREEMENT
On November 17, 1997, the Company entered into an exclusive
distribution, sales and service agreement with Coherent, an established,
worldwide laser company. Under this agreement, Coherent has the exclusive right
to sell the EpiLaser(R) and LightSheer(TM) laser systems and future generation
products worldwide. The Company pays Coherent a per unit commission, adjusted
for certain events as defined. During 1997 and 1998, the Company incurred
approximately $800,000 and $14,108,000, respectively, of commission expense
related to this agreement which is included in sales and marketing expense in
the accompanying consolidated statement of operations. Upon execution of this
agreement, Coherent made a lump sum payment of $3,500,000 and received a warrant
to purchase one million shares of the Company's common stock at a share price of
$5.25. The valuation of the warrant using the Black-Scholes option pricing model
was approximately $380,000. The value was credited to additional paid-in capital
during the year ended December 31, 1997. The remaining amount of $3,120,000,
included in deferred revenue, is being amortized to revenue over the three year
life of the agreement. If the Company completes its anticipated sale of Star to
Coherent as discussed in Note 1, the current distribution agreement with
Coherent will be terminated and replaced with a one year non-exclusive
distribution agreement that will enable Coherent to sell the Company's
ruby-based laser products. The Company will amortize the deferred revenue
related to Coherent over this one year non-exclusive period.
In exchange for the payment at closing of $2,740 per day from January
20, 1999 until Palomar shareholder approval of the Agreement, Coherent has
agreed to waive its exclusive rights under the distribution agreement to market
and sell our ruby laser products, so that we may begin to sell the Palomar
E2000(TM) immediately through other channels without the obligation of paying a
commission to Coherent or waiting for the distribution agreement to terminate
upon the closing of the sale of Star to Coherent.
(E) EMPLOYMENT AGREEMENTS
The Company and its subsidiaries have employment agreements with
certain executive officers that provide for annual bonuses to the officers and
expire on various dates through 2001. Each of these agreements provides for 12
months severance upon termination of employment.
(13) SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED Information in the fiscal year ended December 31, 1998.
SFAS 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker, or decision
making group, in making decisions how to allocate resources and assess
performance. The Company's chief decision-maker, as defined under SFAS 131, is a
combination of the Chief Executive Officer and the Chief Financial Officer. To
date, the Company has viewed its operations and manages its business as
principally one segment, cosmetic laser sales. Associated services are not
significant. As a result, the financial information disclosed herein represents
all of the material financial information related to the Company's principal
operating segment.
Product revenues from international sources were approximately $3.87
million, $5.03 million and $17.36 million in 1996, 1997 and 1998, respectively.
The Company's revenues from international sources were primarily generated from
customers located in Europe, Canada, Latin America and Asia/Pacific. All of the
Company's product sales for the years ended December 31, 1996, 1997 and 1998
were shipped from its facilities located in the United States.
-34-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table represents percentage of product revenue by
geographic region from customers for 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
United States 78% 76% 61%
Europe 3 6 17
Asia/Pacific 10 6 13
Canada 9 4 3
Latin America -- 8 6
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
-35-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant certifies that it has caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Lexington in the
Commonwealth of Massachusetts on May 3, 1999.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /S/ Louis P. Valente
------------------------------
Louis P. Valente
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Name Capacity Date
---- -------- ----
/s/ Louis P. Valente President, Chief Executive May 3, 1999
- -------------------------------------- Officer and Director
Louis P. Valente
/s/ Joseph P. Caruso Chief Financial Officer and Treasurer May 3, 1999
- -------------------------------------- (Principal Financial Officer and
Joseph P. Caruso Principal Accounting Officer)
/s/ Nicholas P. Economou Director May 3, 1999
- --------------------------------------
Nicholas P. Economou
/s/ A. Neil Pappalardo Director May 3, 1999
- --------------------------------------
A. Neil Pappalardo
/s/ James G. Martin Director May 3, 1999
- --------------------------------------
James G. Martin
</TABLE>
73
