FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-22340
PALOMAR MEDICAL TECHNOLOGIES, INC.
(Exact name of issuer as specified in its charter)
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<S> <C> <C> <C>
Delaware 04-3128178
- ------------------------------------------------------------------ ---------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
82 Cambridge Street, Burlington, Massachusetts 01803
----------------------------------------------------
(Address of principal executive offices)
(781) 993-2300
------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
-- --
As of October 31, 1999, 10,081,978 shares of common stock, $.01 par
value per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
-- --
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Condensed Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Stockholders' (Deficit) Equity 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
RISK FACTORS 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 22
PART II - OTHER INFORMATION 23
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGES IN SECURITIES 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE 24
OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 26
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-i-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited).
---------------------------------------------
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(Unaudited)
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<S> <C> <C> <C>
December 31, September 30,
1998 1999
----------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $1,874,718 $8,557,690
Available-for-sale investments, at market value - 20,517,171
Accounts receivable, net 9,938,121 2,231,757
Inventories 5,416,342 4,131,854
Other current assets 1,056,388 4,268,168
----------------- -----------------
Total current assets 18,285,569 39,706,640
----------------- -----------------
Property and Equipment, at Cost, Net 3,314,087 1,311,569
----------------- -----------------
Other Assets:
Cost in excess of net assets acquired, net 1,699,983 694,131
Deferred financing costs 58,923 -
Other non-current assets 167,352 198,155
----------------- -----------------
Total other assets 1,926,258 892,286
----------------- -----------------
$23,525,914 $41,910,495
================= =================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Current portion of long-term debt $6,290,041 $ -
Accounts payable 6,553,745 1,442,742
Accrued liabilities 10,301,624 10,401,160
Current portion of deferred revenue 1,143,796 1,249,668
Deferred gain - 3,139,556
----------------- -----------------
Total current liabilities 24,289,206 16,233,126
----------------- -----------------
Net Liabilities of Discontinued Operations 1,680,171 -
----------------- -----------------
Long-Term Debt, Net of Current Portion 3,150,000 2,744,016
----------------- -----------------
Deferred Revenue, Net of Current Portion 870,000 -
----------------- -----------------
Stockholders' (Deficit) Equity:
Preferred stock, $.01 par value-
Authorized - 1,500,000 shares
Issued and outstanding -
6,993 shares and 6,000 shares
at December 31, 1998 and September 30, 1999, respectively 69 60
Common stock, $.01 par value-
Authorized - 45,000,000 shares
Issued - 10,074,864 shares and 11,034,493 shares
at December 31, 1998 and September 30, 1999, respectively 100,747 110,345
Additional paid-in capital 161,337,926 162,374,263
Accumulated deficit (166,263,346) (135,893,496)
Unrealized loss on available-for-sale investments - (56,768)
Less: Treasury stock - 49,285 and 956,596 shares at cost
at December 31, 1998 and September 30, 1999, respectively (1,638,859) (3,601,051)
----------------- -----------------
Total stockholders' (deficit) equity (6,463,463) 22,933,353
----------------- -----------------
$23,525,914 $41,910,495
================= =================
</TABLE>
1
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
--------------- ---------------- ---------------- ---------------
Product revenues $ 13,810,307 $ 1,716,517 $ 29,968,108 $ 20,074,303
Royalty revenues - 1,206,823 - 1,856,823
--------------- ---------------- ---------------- ---------------
TOTAL REVENUES 13,810,307 2,923,340 29,968,108 21,931,126
Cost of product revenues 5,721,860 2,044,485 16,870,561 10,991,486
Cost of royalty revenues - 482,729 - 742,749
--------------- ---------------- ---------------- ---------------
TOTAL COST OF REVENUES 5,721,860 2,527,214 16,870,561 11,734,235
--------------- ---------------- ---------------- ---------------
Gross margin 8,088,447 396,126 13,097,547 10,196,891
--------------- ---------------- ---------------- ---------------
OPERATING EXPENSES (INCOME)
Research and development 1,544,543 1,642,140 5,653,066 6,272,869
Sales and marketing 4,438,962 590,188 10,468,847 6,307,410
General and administrative 1,777,036 1,041,677 6,980,037 4,199,309
Costs incurred for proxy contest - - - 624,627
Settlement costs - - - 750,000
Gain from sale of subsidiary (Note 1) - - - (47,090,876)
--------------- ---------------- ---------------- ---------------
Total operating expenses (income) 7,760,541 3,274,005 23,101,950 (28,936,661)
--------------- ---------------- ---------------- ---------------
(Loss) Income from operations 327,906 (2,877,879) (10,004,403) 39,133,552
Swiss Franc Redemption (Note 8) - - - (6,167,369)
Interest Income - 469,984 29,544 877,618
Interest Expense (184,295) (182,257) (1,013,630) (546,173)
Other Income (Expense), net 396,272 (8,148) 721,237 271,489
--------------- ---------------- ---------------- ---------------
(Loss) Income from Continuing
Operations Before Provision for
Income Taxes 539,883 (2,598,300) (10,267,252) 33,569,117
Provision for Income Taxes - - - 2,500,000
--------------- ---------------- ---------------- ---------------
(Loss) Income from Continuing Operations 539,883 (2,598,300) (10,267,252) 31,069,117
Loss from Discontinued Operations (Note 10)
Loss from operations - - (1,090,885) (435,000)
Loss on disposal - - (1,533,295) -
--------------- ---------------- ---------------- ---------------
Net Loss from Discontinued Operations - - (2,624,180) (435,000)
--------------- ---------------- ---------------- ---------------
Net (Loss) Income $539,883 $(2,598,300) $(12,891,432) $30,634,117
=============== ================ ================ ===============
Basic Net (Loss) Income Per Share:
Continuing operations $ 0.07 $ (0.27) $ (1.33) $ 3.02
Discontinued operations - - (0.28) (0.04)
--------------- ---------------- ---------------- ---------------
Total Basic Net (Loss) Income Per Share $ 0.07 $ (0.27) $ (1.61) $ 2.98
=============== ================ ================ ===============
Basic Weighted Average Number of Shares 9,606,956 10,087,905 8,697,187 10,188,306
=============== ================ ================ ===============
Diluted Net (Loss) Income Per Share:
Continuing operations $ 0.07 $ (0.27) $ (1.33) $ 2.85
Discontinued operations - - (0.28) (0.04)
--------------- ---------------- ---------------- ---------------
Total Diluted Net (Loss) Income Per
Share $ 0.07 $ (0.27) $ (1.61) $ 2.81
=============== ================ ================ ===============
Diluted Weighted Average Number of Shares 9,606,956 10,087,905 8,697,187 10,957,857
=============== ================ ================ ===============
</TABLE>
2
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Unaudited)
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<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
---------------------------------------------------------------------------
Number $0.01 Number $0.01 Number
of Par Value of Shares Par Value of
Shares Shares Cost
---------------------------------------------------------------------------
Balance, December 31, 1998
6,993 $69 10,074,864 $100,747 (49,285) ($1,638,859)
Issuance of common stock for 1998 employer 401(k)
matching contribution - - 32,561 326 - -
Conversion of preferred stock (340) (3) 74,905 749 - -
Conversion of convertible debentures - - 377,760 3,778 - -
Redemption of preferred stock (653) (6) - - - -
Redemption of common stock related to Swiss Franc
denominated convertible debentures - - - - (130,576) (575,348)
Purchase of treasury stock - - - - (312,450) (1,382,202)
Issuance of common stock for Employee Stock
Purchase Plan - - 10,118 103 - -
Issuance of escrow shares to treasury - - 464,285 4,642 (464,285) (4,642)
Costs incurred related to the issuance of common
stock - - - - - -
Unrealized loss on available-for-sale investments - - - - - -
Preferred stock dividends - - - - - -
Net income - - - - - -
===========================================================================
Balance, September 30, 1999 6,000 $60 11,034,493 $110,345 (956,596) ($3,601,051)
===========================================================================
Additional Unrealized Loss Total
Paid-in Accumulated on Stockholders'
Capital Deficit Available-for-Sale (Deficit) Equity
Investments
---------------------------------------------------------------------------
Balance, December 31, 1998 $161,337,926 $ ($166,263,346) $ - $ (6,463,463)
Issuance of common stock for 1998 employer 401(k)
matching contribution 206,333 - - 206,659
Conversion of preferred stock 62,665 - - 63,411
Conversion of convertible debentures 1,802,296 - - 1,806,074
Redemption of preferred stock (781,381) - - (781,387)
Redemption of common stock related to Swiss Franc
denominated convertible debentures - - - (575,348)
Purchase of treasury stock - - - (1,382,202)
Issuance of common stock for Employee Stock
Purchase Plan 37,424 - - 37,527
Issuance of escrow shares to treasury - - - -
Costs incurred related to the issuance of common
stock (291,000) - - (291,000)
Unrealized loss on available-for-sale investments - - (56,768) (56,768)
Preferred stock dividends - (264,267) - (264,267)
Net income - 30,634,117 - 30,634,117
---------------------------------------------------------------------------
Balance, September 30, 1999 $162,374,263 $ ($135,893,496) ($56,768) $22,933,353
===========================================================================
</TABLE>
3
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended September 30,
1998 1999
---------------------- ---------------------
Cash Flows from Operating Activities
Net (loss) income $(12,891,432) $ 30,634,117
Less: net loss from discontinued operations (2,624,180) (435,000)
---------------------- ---------------------
Net (loss) from continuing operations (10,267,252) 31,069,117
---------------------- ---------------------
Adjustments to reconcile net (loss) income from continuing operations to
net cash used in operating activities -
Depreciation and amortization 2,189,013 979,546
Noncash interest expense related to debt 171,000 -
Unrealized gain on marketable securities (703,211) -
Unrealized foreign currency exchange loss on foreign debt - 8,988
Gain from sale of subsidiary - (47,090,876)
Redemption of common stock held by Swiss Franc debenture holders - 6,167,369
Changes in assets and liabilities, net of effects from sale of subsidiary
Net sale of marketable trading securities 2,484,572 -
Accounts receivable (3,608,624) 2,491,364
Inventories 434,925 (1,221,512)
Other current assets 654,227 (3,033,952)
Accounts payable (840,022) (3,258,003)
Accrued expenses 124,140 1,224,728
Other current liabilities - 3,139,556
- (764,128)
---------------------- ---------------------
Net cash used in operating activities (9,361,232) (10,287,803)
---------------------- ---------------------
Cash Flows from Investing Activities
Purchases of property and equipment (308,896) (144,341)
Purchases of available-for-sale investments - (20,786,767)
Proceeds from the sale of subsidiary, net of cash on hand - 49,448,023
Increase in other assets (470,252) (32,803)
Increase in notes receivable (86,818) -
---------------------- ---------------------
Net cash (used in) provided by investing activities (865,966) 28,484,112
---------------------- ---------------------
Cash Flows from Financing Activities
Redemption of convertible debentures (2,196,667) -
Net proceeds from the issuance of notes payable and advances from distributor 3,138,439 750,000
Proceeds from issuance of common stock 9,840,000 -
Proceeds from exercise of warrants, stock options
and Employee Stock Purchase Plan 34,482 37,527
Costs incurred related to issuance of common stock (190,000) (291,000)
Payments on line of credit - (1,000,000)
Payment on Swiss Franc denominated convertible debentures - (4,441,064)
Purchase of treasury stock - (1,382,202)
Payment on note payable - (2,290,041)
Redemption of preferred stock (4,120,673) (781,387)
---------------------- ---------------------
Net cash (used in) provided by financing activities 6,505,581 (9,398,167)
---------------------- ---------------------
Net increase (decrease) in cash and cash equivalents (3,721,617) 8,798,142
Net cash (used in) provided by discontinued operations 3,384,003 (2,115,171)
Cash and cash equivalents, beginning of the period 3,003,300 1,874,718
---------------------- ---------------------
Cash and cash equivalents, end of the period $2,665,686 $8,557,689
====================== =====================
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 1,094,759 $ 357,829
====================== =====================
Supplemental Disclosure of Noncash Financing and Investing Activities:
Conversion of convertible debentures and related accrued
interest, net of financing fees $ 6,076,994 $ 1,806,074
====================== =====================
Conversion of preferred stock $ 598,111 $ 63,411
====================== =====================
Issuance of common stock for 1998 and 1999 employer 401(k)
matching contribution $ 254,281 $ 206,659
====================== =====================
Unrealized loss on available-for-sale investments $ - $ 56,768
====================== =====================
</TABLE>
4
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the interim periods shown in
this report are not necessarily indicative of expected results for any future
interim period or for the entire fiscal year. Palomar Medical Technologies, Inc.
and its subsidiaries (the "Company" or "Palomar") believes that the quarterly
information presented includes all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation in accordance with generally
accepted accounting principles. The accompanying financial statements and notes
should be read in conjunction with the Company's Form 10-K as amended, as of and
for the year ended December 31, 1998.
On December 7, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Coherent, Inc. ("Coherent") to sell all of
the issued and outstanding common stock of Palomar's former Star Medical
Technologies, Inc. subsidiary ("Star"). The Company completed the sale of Star
to Coherent on April 27, 1999. The total purchase price for all of the issued
and outstanding capital stock of Star was $65 million, paid in cash. The
purchase price was paid to the shareholders of Star in proportion to their
holdings of Star capital stock. On the date of sale, Palomar owned 82.46% of
Star. Palomar received net proceeds of $49,736,023, of which $3,254,908 is being
held in escrow until April 27, 2000 as security for any claims which Coherent
may have under the Agreement, resulting in a gain of $47,090,876 or $4.29
diluted earnings per share for the nine months ended September 30, 1999. The
Company has deferred gain recognition of approximately $3.1 million of the
proceeds from this sale pending the resolution in 2000 of certain commitments
and contingencies related to the sale.
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
incorporate certain patented technology or use certain patented methods
currently licensed by the Company on an exclusive basis from Massachusetts
General Hospital. A portion of these royalty proceeds are remitted to
Massachusetts General Hospital.
On April 21, 1999, a majority of the Company's stockholders' approved
an amendment to the Company's Certificate of Incorporation to effect a plan of
recapitalization that resulted in a one-for-seven reverse split of the Company's
common stock and that reduced the Company's authorized capital stock to
45,000,000 shares of common stock and 1,500,000 shares of preferred stock. All
share and per share amounts of common stock for all periods presented have been
retroactively adjusted to reflect the reverse stock split.
2. CASH AND CASH EQUIVALENTS
-------------------------
Cash equivalents consists principally of corporate notes, U.S.
government-agency securities, commercial paper, money market funds, and other
marketable securities purchased with an original maturity of three months or
less. These investments are carried at cost, which approximates market value.
3. MARKETABLE SECURITIES
---------------------
The Company's marketable equity securities with maturities greater than
90 days are considered available-for-sale investments in the accompanying
balance sheet and are carried at market value, with the difference between cost
and market value, net of related tax effects, recorded as a separate component
of stockholders' (deficit) equity. The aggregate market value, cost basis, and
gross unrealized losses of available-for-sale investments are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Market Cost Gross
Value Basis Unrealized Loss
------- ----- ---------------
Corporate and municipal debt securities $20,517,171 $20,573,939 $56,768
=========== =========== =======
</TABLE>
5
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available-for-sale investments in the accompanying balance sheet at
September 30, 1999 include debt securities of $20,517,171 with contractual
maturities of one year or less. Actual maturities may differ from contractual
maturities as a result of the Company's intent to sell these securities prior to
maturity and as a result of call features of the securities that enable either
the Company, the issuer, or both to redeem these securities at an earlier date.
Unrealized holding losses totaling $56,768 on such debt securities were deducted
from stockholders' (deficit) equity during nine months ended September 30, 1999.
4. INVENTORIES
-----------
Inventories are stated at lower of cost (first-in, first-out) or
market. Work in process and finished goods inventories include material, labor
and manufacturing overhead and consist of the following:
December 31, September 30,
1998 1999
------------------ ----------------
Raw materials $2,478,289 $2,227,123
Work-in-process 1,330,822 1,200,999
Finished goods 1,607,231 703,732
------------------ ----------------
$5,416,342 $4,131,854
================== ================
5. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consist of the following:
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December 31, September 30,
1998 1999
------------------ ----------------
Machinery and equipment $6,022,320 $4,430,480
Furniture and fixtures 1,120,450 999,984
Leasehold improvements 567,216 134,056
------------------ ----------------
7,709,986 5,564,520
Less: Accumulated depreciation
and amortization 4,395,899 4,252,951
------------------ ----------------
$3,314,087 $1,311,569
================= ================
</TABLE>
6
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NET INCOME LOSS PER COMMON SHARE
--------------------------------
Basic net income (loss) per share was determined by dividing net income
(loss) by the weighted average common shares outstanding during the period.
Diluted net income (loss) per share was determined by dividing net income by
diluted weighted average shares outstanding. Diluted weighted average shares
reflect the dilutive effect, if any, of common stock options based on the
treasury stock method and the assumed conversion of all debt obligations and
convertible preferred stock and the elimination of related interest expense and
preferred stock dividends. The calculations of basic and diluted weighted
average shares outstanding are as follows:
<TABLE>
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Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------- -------------- --------------
Basic weighted average common
shares outstanding 9,606,956 10,087,905 8,697,187 10,188,306
Potential common shares pursuant to:
Stock options and warrants - - - 167,135
Convertible preferred stock - - - 423,979
Convertible debentures - - - 178,437
------------ ------------- -------------- --------------
Diluted weighted average common
shares outstanding 9,606,956 10,087,905 8,697,187 10,957,857
============ ============= ============== ==============
</TABLE>
The Company's net income (loss) per share from continuing operations
for the three and nine months ended September 30, 1998 and 1999 is as follows:
<TABLE>
<S><C> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------- ---------------------------------------
1998 1999 1998 1999
------------------ ------------------ ------------------ -------------------
Net (loss) income from $539,883 $(2,598,300) $(10,267,252) $31,069,118
continuing operations
Preferred stock dividends (195,000) (86,815) (1,341,435) (264,267)
------------------ ------------------ ------------------ -------------------
Adjusted net (loss) income $344,883 $(2,685,115) $(11,608,687) $30,804,851
================== ================== ================== ===================
Basic net (loss) income per common share
from continuing operations $0.07 $(0.27) $(1.33) $3.02
================== ================== ================== ===================
Basic weighted average number of shares
outstanding 9,606,956 10,087,905 8,697,187 10,188,306
================== ================== ================== ===================
</TABLE>
For the three months ended September 30, 1998 and 1999, potential
common shares related to, respectively, 4,199,274 and 4,420,021 of outstanding
stock options, stock warrants and convertible securities were not included in
the diluted weighted average shares outstanding as they were antidilutive. For
the nine months ended September 30, 1998 and 1999, potential common shares
related to, respectively, 4,199,274 and 3,650,470 of outstanding stock options,
stock warrants and convertible securities were not included in the diluted
weighted average shares outstanding as they were antidilutive.
7
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TOCONSOLIDATED FINANCIAL STATEMENTS
7. COMPREHENSIVE (LOSS) INCOME
---------------------------
The Company adopted SFAS 130, Reporting Comprehensive Income, effective
January 1, 1998. SFAS 130 established standards for reporting and display of
comprehensive (loss) income and its components in the financial statements. The
Company's only item of other comprehensive income relates to unrealized losses
on its available-for-sale investments and is presented separately on the balance
sheet as required. A reconciliation of comprehensive (loss) income is as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- --------------------------------------
1998 1999 1998 1999
----------------- ----------------- ----------------- -------------------
Net (loss) income from continuing $539,883 $(2,598,300) $(10,267,252) $31,069,117
operations
Unrealized loss on available-for-sale
investments - (2,804) - (56,768)
----------------- ----------------- ----------------- -------------------
Comprehensive (loss) income from
continuing operations $539,883 $(2,601,104) $(10,267,252) $31,012,349
================= ================= ================= ===================
</TABLE>
8. NOTES PAYABLE
-------------
Notes payable consist of the following:
<TABLE>
<S> <C> <C>
December 31, September 30,
1998 1999
----------------- ------------------
Dollar denominated convertible debentures $2,150,000 $500,000
Swiss Franc denominated convertible debentures - 2,244,016
Note payable issued in connection with guaranty on behalf of
discontinued subsidiary 2,290,041 -
Revolving line of credit with a bank 1,000,000 -
Short-term notes payable to Coherent 4,000,000 -
----------------- ------------------
9,440,041 2,744,016
Less - current maturities 6,290,041 -
----------------- ------------------
$3,150,000 $2,744,016
================= ==================
</TABLE>
(a) Dollar Denominated Convertible Debentures
During the nine months ended September 30, 1999, the Company converted
$1,650,000 of its 6%, 7% and 8% convertible debentures due March 31, 2002,
including $176,483 of accrued interest, into 377,760 shares of the Company's
common stock.
8
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Swiss Franc Denominated Convertible Debentures
During the three months ended June 30, 1999, the Company recorded a
redemption expense of $6,167,369 as a result of a compromise agreement between
Palomar and certain European banks that had held 4.5% Swiss Franc denominated
subordinated convertible debentures originally totaling approximately $8.2
million due in 2003. Under the terms of this April 21, 1999 agreement, which
resolved a lawsuit, Palomar agreed to rescind its conversion notices issued in
November 1997. Through these conversion notices, Palomar converted the
subordinated debentures into 130,576 shares of the Company's common stock. Since
the conversion date, the Company had treated these shares as issued and
outstanding. Under the terms of the agreement the Company agreed to pay a total
of approximately $6,742,717 to the European banks, of which $4,441,064 has been
paid as of September 30, 1999. The remaining amounts due under this obligation
are due in 2001. Accordingly, the Company has recorded a charge to operations of
$6,167,369. This amount represents the total amount due to the European banks
less the fair market value of the redemption of the common shares ($575,348)
previously considered outstanding by the Company.
(c) Note Payable Issued In Connection With Guaranty On Behalf Of
Discontinued Subsidiary
In connection with the divestiture of one of its discontinued
operations, the Company entered into a Loan and Subscription Agreement with a
bank for $3,233,000. This promissory note represents the settlement of amounts
owed to the bank by Palomar's former Comtel, Inc. subsidiary and by Palomar in
connection with a guarantee from Palomar in favor of the bank. Principal and
interest payments were being made over 24 months, beginning December 31, 1997,
with interest accruing at the bank's prime rate plus 2.25%. This promissory note
was collateralized by 464,285 shares of the Company's common stock, which was
held in escrow. On May 3, 1999, the Company paid off the balance of this note
(totaling $2,020,625), and the shares of the Company's common stock were
released from escrow and returned to the Company. The Company has accounted for
the return of the shares as an increase to its treasury stock.
(d) Revolving Line of Credit
The Company had a $10,000,000 revolving line of credit with a bank.
This line of credit was to mature on March 31, 2000 and bore interest at the
bank's prime rate. Borrowings under this line of credit were secured by
substantially all assets of the Company and were limited to 80% of qualified
accounts receivable. A director of Palomar personally guaranteed all borrowings
under this line of credit. The Company repaid all amounts outstanding under, and
cancelled, this line of credit.
(e) Short-Term Notes Payable
Through March 31, 1999, the Company's Star subsidiary borrowed a total
of $4,750,000 from Coherent in the form of notes payable. These notes accrued
interest at 8.5% per annum and were collateralized by Star's inventory. Coherent
assumed this debt in connection with its purchase of all of the issued and
outstanding common stock of Star on April 27, 1999. See Note 1.
9
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. ND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS' (DEFICIT) EQUITY
------------------------------
(a) Convertible Preferred Stock
During the first quarter of 1999, the Company converted 340 shares of
Series G Preferred Stock and accrued dividends and interest of $63,411 into
74,905 shares of the Company's common stock.
During the second quarter of 1999, the Company redeemed 403 shares of
Series G Preferred Stock and 250 shares of Series H Preferred Stock for $902,396
including related accrued dividends and interest of $121,009.
(b) Options to Purchase Common Stock
During the nine months ended September 30, 1999, the Company granted
options to purchase 954,327 shares of the Company's common stock at exercise
prices ranging from $3.1875 to $10.50 per share. No options were exercised
during the nine months ended September 30, 1999. During the nine months ended
September 30, 1999, options to purchase 84,087 shares of the Company's common
stock at exercise prices ranging from $3.1875 to $10.50 per share expired.
(c) Warrants to Purchase Common Stock
During the nine months ended September 30, 1999, the Company granted
warrants to purchase 113,000 shares of the Company's common stock at an exercise
price of $3.1875 per share to various directors of the Company. No warrants were
exercised during the nine months ended September 30, 1999. During the nine
months ended September 30, 1999, warrants to purchase 117,470 shares of the
Company's common stock at exercise prices ranging from $14.00 to $72.625 per
share expired.
(d) Reserved Shares
As of September 30, 1999, the Company had reserved shares of its common
stock for the following:
September 30, 1999
-----------------------
Convertible debentures 188,635
Stock option plans 4,686,828
Warrants 2,792,548
Employee 401(k) plan 46,697
Employee Stock Purchase Plan 121,230
Convertible preferred stock 85,714
=======================
Total 7,921,652
=======================
Substantially all of the reserved shares reflected above are
exercisable at prices in excess of the current market price of the Company's
common stock.
10
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. DISCONTINUED OPERATIONS
-----------------------
On December 31, 1997 the Company entered into an Exchange Agreement and
sold 500,000 shares of the common stock of Nexar Technologies, Inc. ("Nexar") to
GFL Advantage Fund Limited ("GFL") for $2,000,000. Under the terms of the
Exchange Agreement, Palomar guaranteed GFL a minimum selling price of $5.00 a
share with respect to 400,000 shares of the Nexar common stock over a two year
time period. The Company therefore would have been obligated to pay GFL on
January 1, 2000 the difference between $5.00 and the price at which GFL sold the
shares of Nexar common stock. As of March 31, 1999, the deferred liability
related to this transaction totaled $1,680,171 and represented the total amount
due to GFL after GFL sold all of its 400,000 shares of Nexar common stock. The
Company paid this obligation on May 3, 1999.
During the second quarter of 1998, the Company sold all of the issued
and outstanding common stock of its subsidiary, Dynaco Corp. ("Dynaco"). The
Company recognized a loss from discontinued operations of approximately
$1,091,000 related to the operations of Dynaco up through its date of
disposition that was previously not accrued. During the second quarter of 1998,
the Company recorded a charge to discontinued operations of $1,525,000 due to
management's decision to write down the carrying value of its investment in
Nexar.
During the second quarter of 1999, the Company paid and settled a
lawsuit related to the operations of Dynaco for $435,000.
Summarized financial information for the discontinued operations is as
follows:
<TABLE>
<S><C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
------------------------------- -----------------------------
Revenues $-- $-- $5,745,750 $--
Net loss from discontinued operations $-- $(435,000) $(2,624,180) $(435,000)
</TABLE>
11. COMMITMENTS
-----------
On June 17, 1999, the Company entered into a 10 year lease agreement
for its operating facilities. Under the terms of this lease the annual
commitment is approximately $890,000 for the first five years of the agreement
and $980,000 for the second five years of the agreement.
In July 1999, the Company entered into an amendment to extend its
exclusive research agreement with Massachusetts General Hospital for another
five years. In addition to laser hair removal, the agreement has been expanded
to include research and development in the fields of fat removal and acne
treatment. Under the terms of this agreement, the Company is obligated to pay
MGH $475,000 on an annual basis for clinical research during the term of this
extension.
11
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENT AND GEOGRAPHIC INFORMATION
----------------------------------
Product revenue from international sources was approximately $6.3
million and $0.6 million for the three months ended September 30, 1998 and 1999,
respectively, and approximately $10.3 million and $7.9 million for the nine
months ended September 30, 1998 and 1999. The Company's revenue from
international sources was primarily generated from customers located in
Europe/Middle East, Asia/Pacific, Latin America, Canada and Australia/Africa.
The following table represents the percentage of product revenue by
geographic region from customers for the three month and nine month periods
ended September 30, 1998 and 1999:
<TABLE>
<S> <C> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
-------------------------------------- --------------------------------------
United States 54.5% 59.1% 65.5% 57.9%
Europe/Middle East 17.6% 0.0% 11.5% 19.4%
Asia/Pacific 12.9% 34.1% 14.7% 19.2%
Latin America 5.9% 0.0% 3.1% 1.5%
Canada 5.8% 6.7% 3.1% 1.3%
Australia/Africa 3.3% 0.1% 2.1% 0.7%
-------------------------------------- --------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
====================================== ======================================
</TABLE>
13. LITIGATION
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 plaintiffs may be seeking monetary damages in excess of the Company's
ability to pay. Management is vigorously defending this class action suit and
believes that it has meritorious defenses; however, the ultimate results of this
matter cannot be determined at this time. Management believes that an adverse
result in the VARLJEN action could have a materially adverse effect upon the
financial condition and operations of the Company.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
-------------------------------------------------------------------
(a) Overview
On December 7, 1998, the Company entered into an Agreement and Plan of
Reorganization with Coherent to sell all of the issued and outstanding common
stock of Star. The total purchase price for all of the issued and outstanding
capital stock of Star was $65 million, paid in cash. The purchase price was paid
to the shareholders of Star in proportion to their holdings of Star capital
stock. This sale was approved by a majority of the stockholders of Palomar on
April 21, 1999, and on April 27, 1999, Palomar completed the sale of Star to
Coherent. On the date of the sale, Palomar owned 82.46% of Star. Palomar
received net proceeds of $49,736,023, of which $3,254,908 is being held in
escrow until April 27, 2000 as security for any claims which Coherent may have
under the Agreement. In addition, under the terms of the Agreement, the Company
receives an ongoing royalty of 7.5% from Coherent on the sale of any products by
Coherent that incorporate certain patented technology or use certain patented
methods currently licensed by the Company on an exclusive basis from
Massachusetts General Hospital. A portion of these royalty proceeds are remitted
to Massachusetts General Hospital.
As a result of the consummation of the transaction discussed above, the
Company's revenues will decline significantly in the near term because Palomar
no longer sells the LightSheer(TM) diode laser manufactured by Star. For the
nine months ended September 30, 1999 and 1998, gross revenues associated with
Star's LightSheer(TM) diode laser comprised 77.0% and 66.2% of the Company's
total revenues, respectively. Accordingly, the Company expects to incur net
losses from operations over the next few quarters. The successful introduction
and marketing of new products will be critical to the Company's long-term
success, since a significant portion of the Company's revenue base previously
generated from Star's LightSheer(TM) laser will need to be replaced with
revenues from other laser products, including the Palomar E2000TM hair removal
laser introduced in March of 1999 and other products currently in development.
There can be no assurance that the Palomar E2000TM or the Company's future
products will achieve market acceptance or generate sufficient margins. Broad
market acceptance of laser hair removal is also critical to the Company's
success. The Company recognizes the need and intends to broaden its product line
by developing cosmetic laser products other than hair removal lasers.
(b) Results of Operations.
(i) REVENUES AND GROSS PROFIT: Three Months Ended September 30,
1999, Compared to Three Months Ended September 30, 1998
For the three months ended September 30, 1999, the Company's revenues
decreased to $2.9 million, as compared to $13.8 million for the three months
ended September 30, 1998. The decrease in the Company's revenues of $10.9
million, or 79% from the three months ended September 30, 1998, was mainly due
to the reduction in sales volume of $13.0 million associated with the
LightSheer(TM) diode laser manufactured by Star. The Company sold Star to
Coherent on April 27, 1999, as discussed above. This decrease was offset by an
increase of $2.1 million in other cosmetic revenues and royalties received by
the Company from Coherent. The Company anticipates that sales volumes from its
E2000 TM laser system introduced during the first quarter of 1999 will not
increase substantially until the Company manufactures this unit in high volume,
overcomes product introduction issues and achieves further manufacturing
efficiencies.
Gross profit for the three months ended September 30, 1999 was
approximately $396,000 (14% of revenues) compared to $8.1 million (59% of
revenues) for the three months ended September 30, 1998. The decrease in gross
profit and gross profit percentage was mainly due to the reduction in sales
volume associated with the LightSheer(TM) diode laser manufactured by Star and
sold to Coherent on April 27, 1999. The decrease in gross profit dollars was
partially offset by the gross margin related to the sales of the Palomar E2000TM
hair removal laser system and royalties earned from Coherent. The Company
anticipates that its gross profit percentage from sales of the Palomar E2000TM
will be significantly less than the gross profit from its former LightSheer(TM)
product, unless and until the Company achieves volume production and
manufacturing efficiencies and overcomes product introduction issues related to
the Palomar E2000(TM).
13
<PAGE>
(ii) OPERATING AND OTHER EXPENSES: Three Months Ended September 30,
1999, Compared to Three Months Ended September 30, 1998
Research and development costs increased to $1.6 million for the three
months ended September 30, 1999, from $1.5 million for the three months ended
September 30, 1998. Research and development expenses as a percentage of revenue
totaled 56% for the three months ended September 30, 1999 and 11% for the three
months ended September 30, 1998. The increase as a percentage of sales is
directly attributable to the reduction in sales volume associated with the
LightSheer(TM) diode laser manufactured by Star while the Company continued to
increase the overall spending on research and development. The continued
spending on research and development reflects the Company's commitment to
research and development for devices and delivery systems for cosmetic and
medical applications using a variety of lasers, while continuing dermatology
research utilizing the Company's ruby and diode lasers. Among the Company's
research and development goals in hair removal is to design systems permitting
more rapid treatment of large areas, and to produce systems with high gross
margins. Management believes that research and development expenditures will
remain constant over the next year as the Company continues product development
and clinical trials for additional applications for its lasers and delivery
systems in the cosmetic and dermatological markets. The Company has recently
entered into an amendment to its existing Clinical Trial Agreement with
Massachusetts General Hospital, pursuant to which it will fund a minimum of
$475,000 per year over the next five years for research in the fields of photo
thermal removal/reduction of hair, non-invasive electromagnetic targeting of
subcutaneous fat, and treatment of sebaceous glands and related skin disorders
(e.g., acne) using infrared light (except when externally applied chromophores
are used), and obtain exclusive license rights in these fields.
Selling and marketing expenses decreased to approximately $590,000 (20%
of revenues) for the three months ended September 30, 1999, from approximately
$4.4 million (32% of revenues) for the three months ended September 30, 1998.
The decrease in selling and marketing expenses is directly attributable to the
reduction in sales volumes due to the sale of Star to Coherent and related
commissions paid to Coherent as the former exclusive distributor for the
LightSheer(TM) diode laser manufactured by Star.
General and administrative expenses decreased to $1.0 million (36% of
revenues) for the three months ended September 30, 1999, as compared to $1.8
million (13% of revenues) for the three months ended September 30, 1998. This
decrease for the three months ended September 30, 1999 is attributable to the
Company's restructuring and consolidation of administrative functions related to
the Company's Esthetica Partners, Inc. (formerly Cosmetic Technology
International, Inc.) and Palomar Medical Products, Inc. subsidiaries and general
corporate costs that resulted in respective reductions of approximately $250,000
and $100,000 compared to the three months ended September 30, 1998, along with
an additional $450,000 reduction for general and administrative expenses as a
result of the Company's sale of the Star subsidiary.
Interest expense remained constant at $182,000 for the three months
ended September 30, 1999, compared to $184,000 for the three months ended
September 30, 1998. As a result of the sale of Star, which generated $49.7
million in cash, the Company anticipates that interest expense will decline
significantly because it utilized a portion of these proceeds to pay down
substantially all of its outstanding debt.
Interest income increased to approximately $470,000 for the three
months ended September 30, 1999. This amount represents interest earned on the
balance of the funds received from the sale of Star which are invested in
high-grade corporate and government notes and bonds and will be used to fund
future ongoing operations and research and development efforts.
Other income (expense) decreased to approximately ($8,000) for the
three months ended September 30, 1999. This amount compares to approximately
$396,000 for the three months ended September 30, 1998.
(iii) REVENUES AND GROSS PROFIT: Nine Months Ended September 30,
1999, Compared to Nine Months Ended September 30, 1998
For the nine months ended September 30, 1999, the Company's revenues
decreased to $21.9 million, as compared to $30.0 million for the nine months
ended September 30, 1998. The decrease in the Company's revenues
14
<PAGE>
of $8.1 million, or 27% from the nine months ended September 30, 1998, was
mainly due to the reduction in sales volume of $7.5 million associated with the
LightSheer(TM) diode laser manufactured by Star. The Company sold Star to
Coherent on April 27, 1999, as discussed above. There was an additional decrease
of $2.4 million due to declining sales of other cosmetic lasers, offset by an
increase of $1.8 million increase in royalties received by the Company from
Coherent. The Company anticipates that sales volumes from its E2000 TM laser
system introduced during the first quarter of 1999 will not increase
substantially until the Company manufactures this unit in high volume, overcomes
product introduction issues and achieves further manufacturing efficiencies. The
decrease in sales volume associated with other cosmetic laser product revenue
was principally due to declining sales of the Company's EpiLaser(R) ruby laser.
Palomar introduced its second generation long pulse ruby laser for hair removal,
the Palomar E2000TM, during the first quarter of 1999. In March of 1999, the
Company obtained FDA clearance to market and sell its Palomar E2000TM laser
system in the United States for "permanent hair reduction." The Company
generated revenues of approximately $2.2 million on the Palomar E2000TM during
the first nine months of 1999.
Gross profit for the nine months ended September 30, 1999 was
approximately $10.2 million (46% of revenues) compared to $13.1 million (44% of
revenues) for the nine months ended June 30, 1998. The increase in gross profit
and gross profit percentage was due to sales of the LightSheer(TM) diode laser
system. This laser system provided a significantly higher gross profit than the
Company's EpiLaser(R) hair removal system and other cosmetic products. The
Company anticipates that its gross profit percentage from sales of the Palomar
E2000TM will be significantly less than the gross profit from its former
LightSheer(TM) product, unless and until the Palomar E2000TM achieves volume
production and further manufacturing efficiencies and overcomes product
introduction issues.
(iv) OPERATING AND OTHER EXPENSES: Nine Months Ended September 30,
1999, Compared to Nine Months Ended September 30, 1998
Research and development costs increased to $6.3 million for the nine
months ended September 30, 1999, from $5.7 million for the nine months ended
September 30, 1998. Research and development expenses as a percentage of revenue
totaled 29% for the nine months ended September 30, 1999 and 19% for the nine
months ended June 30, 1998. The continued spending on research and development
reflects the Company's commitment to research and development for devices and
delivery systems for cosmetic and medical applications using a variety of
lasers, while continuing dermatology research utilizing the Company's ruby and
diode lasers. Among the Company's research and development goals in hair removal
is to design systems permitting more rapid treatment of large areas, and to
produce systems with high gross margins. Management believes that research and
development expenditures will remain constant over the next year as the Company
continues product development and clinical trials for additional applications
for its lasers and delivery systems in the cosmetic and dermatological markets.
The Company has recently entered into an amendment to its existing Clinical
Trial Agreement with Massachusetts General Hospital, pursuant to which it will
fund a minimum of $475,000 per year over the next five years for research in the
fields of photo thermal removal or reduction of hair, non-invasive
electromagnetic targeting of subcutaneous fat, and treatment of sebaceous glands
and related skin disorders (e.g., acne) using infrared light (except when
externally applied chromophores are used), and obtain exclusive license rights
in these fields. However, research and development as a percentage of revenues
will increase until the Company achieves higher sales volume from its recently
introduced Palomar E2000TM laser system and introduces other products currently
in development.
Selling and marketing expenses decreased to $6.3 million (29% of
revenues) for the nine months ended September 30, 1999, from $10.5 million (35%
of revenues) for the nine months ended September 30, 1998. The decrease in
selling and marketing expenses as a percentage of revenues is a result of the
Company's introduction of its Palomar E2000(TM) laser system during the first
quarter of 1999, which is being sold through new distribution channels. These
new distribution channels include direct sales by the Company and other
distribution channels, and the associated selling and marketing expenses have to
date been less than the commission earned by Coherent, the Company's previous
distributor. The Company also will consider establishing its own direct sales
force to complement these sales channels. The Company anticipates that, in
comparison to the commission previously paid to Coherent as a percentage of net
revenues, its future selling and marketing costs as a percentage of net revenues
will decrease. The Company will also consider selling entire product lines
and/or technology to others, as in the case of the sale of Star to Coherent.
15
<PAGE>
General and administrative expenses decreased to $4.2 million (19% of
revenues) for the nine months ended September 30, 1999, as compared to $7.0
million (23% of revenues) for the nine months ended September 30, 1998. This
decrease for the nine months ended September 30, 1999 is attributable to the
Company's restructuring and consolidation of administrative functions related to
the Company's Esthetica Partners, Inc. (formerly Cosmetic Technology
International, Inc.) and Palomar Medical Products, Inc. subsidiaries and general
corporate costs that resulted in respective reductions of approximately
$1,000,000, $400,000 and $2,400,000 compared to the nine months ended September
30, 1998. An additional $1,000,000 was incurred for general and administrative
expenses at the Company's Star subsidiary during the nine months ended September
30, 1998 as compared to the nine months ended September 30, 1999. The Company
anticipates general and administrative expense will decrease slightly in the
future as a result of the Star sale, although it expects such expenses to
increase as a percentage of revenues as sales decline in the near term as the
result of the Star sale.
Costs related to solicitation of proxies in connection with the
Company's 1999 Annual Meeting of Stockholders were $625,000 for the nine months
ended September 30, 1999 as a result of a proxy contest launched by a dissident
shareholder group.
Settlement costs were $750,000 for the nine months ended September 30,
1999 and are attributable to various lawsuits and other claims against the
Company.
Gain from the sale of a subsidiary was $47.1 million for the nine
months ended September 30, 1999 due to the Company completing the sale of Star
on April 27, 1999. The Company has deferred gain recognition of approximately
$3.1 million of the proceeds from this sale pending the resolution in 2000 of
certain commitments and contingencies related to the sale.
Redemption expense was $6.2 million for the nine months ended September
30, 1999. This amount reflects a redemption expense of $6.2 million as a result
of a settlement agreement between Palomar and certain European banks that had
held 4.5% Swiss Franc denominated subordinated convertible debentures originally
totaling $8.2 million and due in 2003. Under the terms of this agreement, which
resolved a lawsuit, Palomar agreed to rescind its conversion notices issued in
November 1997. Through these conversion notices, Palomar converted the
subordinated debentures into 130,576 shares of the Company's common stock. Since
the conversion date, the Company had treated these shares as issued and
outstanding. Under the terms of this compromise, the Company agreed to pay a
total of approximately $6.7 million to the European banks, of which $4.4 million
has been paid as of September 30, 1999. The balance of $2.3 million is due 2001.
Accordingly, the Company has recorded a charge to operations of approximately
$6.2 million. This amount represents the total amount due to the European banks
less the fair market value of the redemption of the common shares previously
considered outstanding by the Company.
Interest expense decreased to $546,000 for the nine months ended
September 30, 1999, from $1.0 million for the nine months ended September 30,
1998. This 46% decrease is primarily the result of a decrease in convertible
debenture financings and the Company's increased use of conventional financing.
Also, operations did not require as much financing in 1999 as compared to 1998.
As a result of the sale of Star, which generated $49.7 million in cash, the
Company anticipates that interest expense will decline significantly because it
utilized a portion of these proceeds to pay down substantially all of its
outstanding debt during the second quarter of 1999.
Interest income increased to approximately $878,000 for the nine months
ended September 30, 1999. This amount represents interest earned on the balance
of the funds received from the sale of Star which are invested in high-grade
corporate and government notes and bonds and will be used to fund future
operations and research and development efforts.
Other income decreased to $271,000 for the nine months ended September
30, 1999. This amount compares to $721,000 for the nine months ended September
30, 1998.
The loss from discontinued operations for the six months ended
September 30, 1999 was $435,000, compared to a loss of $2.6 million for the nine
months ended September 30, 1998. The $435,000 loss from discontinued operations
incurred during 1999 was related to a settlement related to the operations of
Dynaco.
16
<PAGE>
(c) Liquidity and Capital Resources
On April 27, 1999, Palomar completed the sale of Star to Coherent for
$65 million. On the date of the sale, Palomar owned 82.46% of Star. Palomar
received net proceeds of $49,736,023, of which $3,254,908 is being held in
escrow until April 27, 2000 as security for any claims which Coherent may have
under the Agreement. In addition, under the terms of the Agreement, the Company
receives an ongoing royalty of 7.5% from Coherent on the sale of any products by
Coherent that incorporate certain patented technology or use certain patented
methods currently licensed by the Company on an exclusive basis from
Massachusetts General Hospital. A portion of these royalty proceeds are remitted
to Massachusetts General Hospital. From April 27, 1999 through September 30,
1999, the Company received approximately $1.9 million in royalty revenues from
Coherent.
The Company utilized a portion of the proceeds of the Star sale to pay
down substantially all of its debt during the second quarter of 1999. The
balance of the funds have been invested in high-grade corporate and governmental
notes and bonds to fund future operations and research and development efforts.
Accordingly, the Company will generate additional interest income for the
foreseeable future.
The Company is a holding company with no significant operations.
Operations are carried out at the subsidiary level, and consist primarily of
research and development. To date, the Company's operating subsidiaries have
required cash advances from the Company to fund their operations. As of
September 30, 1999, the Company had $29.1 million in cash, cash equivalents and
available-for-sale investments. With the proceeds from the Star sale, the
Company believes that its financial position will meet its ongoing cash flow
requirements and fund expected operating losses at its subsidiaries in the near
term. The successful introduction and marketing of new products currently under
development will be critical to future liquidity.
During the nine months ended September 30, 1999, under a settlement
agreement, the Company agreed to pay a total of approximately $6.7 million to
the European banks that had held 4.5% convertible debentures totaling $8.2
million due in 2003. The Company has paid $4.4 million to these banks through
September 30, 1999. The balance of $2.3 million is due 2001.
During 1999, the Company entered into a 10-year lease agreement for its
operating facilities. The annual commitment under this agreement is
approximately $890,000 for the first five years of the agreement and $980,000
thereafter.
In July 1999, the Company entered into an amendment to extend its
exclusive research agreement with Massachusetts General Hospital for another
five years. In addition to laser hair removal, the agreement has been expanded
to include research and development in the fields of fat removal and acne
treatment. Under the terms of this agreement, the Company is obligated to pay
Massachusetts General Hospital $475,000 on an annual basis for clinical research
during the term of this extension.
As of September 30, 1999, the Company's accounts receivable totaled
$2.2 million, as compared to $9.9 million as of December 31, 1998. This
reduction was due principally to the sale of Star to Coherent on April 27, 1999.
The Company's allowance for doubtful accounts totaled approximately $650,000 as
of September 30, 1999, compared to $364,000 as of December 31, 1998.
As of September 30, 1999, accounts payable totaled approximately $1.4
million as compared to $6.6 million as of December 31, 1998. This decrease is
principally due to paying down debt with money received from the sale of Star
and timing of additional purchases of inventory for the manufacture of the
Palomar E2000(TM) laser systems.
The Company anticipates that capital expenditures for the remainder of
1999 will total approximately $200,000, consisting primarily of machinery,
equipment and computers and peripherals. The Company expects to finance these
expenditures with cash on hand and equipment leasing lines, if available.
17
<PAGE>
The Company had a $10,000,000 revolving line of credit from a bank. A
director of the Company personally guaranteed borrowings under the line of
credit. The Company borrowed an additional $500,000 during April of 1999. On
April 27, 1999, the Company repaid all amounts outstanding ($1,500,000) under,
and subsequently cancelled, this line of credit.
The Company entered into a Loan Agreement with Coherent pursuant to
which Coherent agreed to loan the Company money to help finance the Company's
working capital requirements. These loans were collateralized by Star's
inventory. Coherent assumed the $4.8 million of debt in connection with its
purchase of all of the issued and outstanding common stock of Star on April 27,
1999. See Note 8(e).
(d) Material Uncertainties.
(i) Year 2000 Issues
During 1998 and 1999 the Company has been actively engaged in addressing
Year 2000 (Y2K) issues, which result from the use of two-digit, rather than
four-digit, year dates in software, a practice which could cause date-sensitive
systems to malfunction or fail because they may not recognize or process date
information correctly.
State of Readiness:
To manage its Y2K program, the Company has divided its efforts into
four program areas:
o Information Technology (computer hardware and software)
o Physical Plant (manufacturing equipment and facilities)
o Products (including product development)
o Extended Enterprise (suppliers and customers)
For each of these program areas, the Company is using a four-step
approach:
o Ownership (creating awareness, assigning tasks)
o Inventory (listing items to be assessed for Y2K readiness)
o Assessment (prioritizing the inventoried items, assessing
their Y2K readiness, planning corrective actions, developing
initial contingency plans)
o Corrective Action Deployment (implementing corrective actions,
verifying implementation, finalizing and executing contingency
plans)
At September 30, 1999, the ownership, inventory and assessment steps
were essentially complete for all program areas.
Costs to Address Y2K Issues:
The Company's estimated aggregate costs for its Y2K activities from
1998 through 2000 are expected to be less than $100,000. Through September 30,
1999, the Company has spent approximately $70,000.
Risks of Y2K Issues and Contingency Plans:
The Company continues to assess the Year 2000 issues relating to its
physical plant, products and suppliers. The Company intends to develop a
contingency planning process to mitigate worst-case business disruptions, such
as delays in product delivery, which could result from events such as supply
chain disruptions.
18
<PAGE>
RISK FACTORS
In addition to the other information in this Quarterly Report on Form
10-Q, the following cautionary statements should be considered carefully in
evaluating the Company and its business. Statements contained in this Form 10-Q
that are not historical facts (including, without limitation, statements
concerning financial projections, the financing of future operations, product
gross margins, product developments and improvements, research and development
plans and expenditures and Y2K issues) and other information provided by the
Company and its employees from time to time may contain certain forward-looking
information, as defined by (i) the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and (ii) releases by the SEC. The risk factors
identified below, among other factors, could cause actual results to differ
materially from those suggested in such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
release publicly the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. The cautionary
statements below are being made pursuant to the provisions of the Reform Act and
with the intention of obtaining the benefits of safe harbor provisions of the
Reform Act.
OUR FUTURE REVENUE DEPENDS ON OUR DEVELOPING NEW PRODUCTS.
We face rapidly changing technology and continuing improvements in
cosmetic laser technology. In order to be successful, we must continue to make
significant investments in research and development in order to develop in a
timely and cost-effective manner new products that meet changing market demands,
enhance existing products, and achieve market acceptance for such products. We
have in the past experienced delays in developing new products and enhancing
existing products. Furthermore, some of our new products under development are
based on unproven technology and/or technology with which the Company has no
previous experience. As a result of the sale of Star to Coherent, our future
revenue will be entirely dependent on sales of newly introduced products.
Although we have recently introduced a new hair removal laser, sales to date
have been minimal and this new product may not achieve market acceptance or
generate sufficient margins. In addition, the market for this type of hair
removal laser may already be saturated. At present, broad market acceptance of
laser hair removal is critical to our success. We intend to diversify our
product line by developing cosmetic laser products other than hair removal
lasers.
WE FACE INTENSE COMPETITION FROM COMPANIES WITH SUPERIOR FINANCIAL, MARKETING
AND OTHER RESOURCES.
The laser hair removal industry is highly competitive, and companies
frequently introduce new products. We compete in the development, manufacture,
marketing and servicing of hair removal lasers with numerous other companies,
many of which have substantially greater financial, marketing and other
resources than we do. As a result, some of our competitors are able to sell hair
removal lasers at prices significantly below the prices at which we sell our
hair removal lasers. In addition, as a result of the Star sale, Coherent, our
former exclusive distributor and one of the largest and best financed laser
companies, is now our competitor and we have to find new ways to distribute our
products. We currently have no sales force in place for our new products under
development. Our laser products also face competition from alternative medical
products and procedures, such as electrolysis and waxing, among others. We may
not be able to differentiate our products from the products of our competitors,
and customers may not consider our products to be superior to competing products
or medical procedures, especially if competitive products and procedures are
offered at lower prices. Our competitors may develop products or new
technologies that make our products obsolete or less competitive.
OUR QUARTERLY OPERATING RESULTS WILL DECREASE AS A RESULT OF THE STAR SALE, AND
THAT MAY HURT THE PRICE OF OUR COMMON STOCK.
Almost all of our revenues in our most recent two quarters were
attributable to sales of the LightSheer(TM) diode laser manufactured by Star.
Therefore, as a result of the Star sale, our revenues have declined
significantly. If our operating results fall below the expectations of investors
or public market analysts, the price of our common stock could fall
dramatically.
19
<PAGE>
WE COULD BE DELISTED FROM NASDAQ.
For continued listing on The Nasdaq SmallCap Market, a company must
maintain a minimum bid price of $1.00 per share. In March of this year, Nasdaq
held a hearing regarding our continued listing on The Nasdaq SmallCap Market in
light of the fact that our common stock had traded below the $1.00 minimum bid
price requirement for longer than 30 trading days. As a result of our reverse
stock split, we regained compliance with the minimum bid price requirement
before that date, and are now in compliance with all of Nasdaq's requirements
for continued listing on The Nasdaq SmallCap Market. However, there can be no
assurance that we will remain in compliance with Nasdaq's criteria for continued
listing or that we will remain listed on Nasdaq. The delisting of our common
stock would likely reduce the liquidity of our common stock and our ability to
raise capital. If our common stock is delisted from The Nasdaq SmallCap Market,
it will likely be quoted on the "pink sheets" maintained by the National
Quotation Bureau, Inc. or Nasdaq's OTC Bulletin Board. These listings can make
trading more difficult for stockholders.
OUR LASERS ARE SUBJECT TO NUMEROUS FDA REGULATIONS. COMPLIANCE IS EXPENSIVE AND
TIME-CONSUMING. OUR NEW PRODUCTS MAY NOT BE ABLE TO OBTAIN THE NECESSARY FDA
CLEARANCES BEFORE WE CAN SELL THEM.
All of our current products are laser medical devices. Laser medical
devices are subject to FDA regulations regulating clinical testing,
manufacturing, labeling, sale, distribution and promotion of medical devices.
Before a new laser medical device can be introduced into the market, we must
obtain clearance from the FDA. Compliance with the FDA clearance process is
expensive and time-consuming, and we may not be able to obtain such clearances
in a timely fashion or at all.
WE ARE DEPENDENT ON THIRD PARTY RESEARCHERS.
We are substantially dependent upon third party researchers, over whom
we do not have absolute control, to satisfactorily conduct and complete research
on our behalf and to grant us favorable licensing terms for products which they
may develop. At present, our principal research partner is the Wellman
Laboratories of Photomedicine at Massachusetts General Hospital. We provide
research funding, laser technology and optics know-how in return for licensing
agreements with respect to specific medical applications and patents. Our
success will be highly dependent upon the results of this research. We cannot be
sure that such research agreements will provide us with marketable products in
the future or that any of the products developed under these agreements will be
profitable for us.
OUR COMMON STOCK COULD BE FURTHER DILUTED AS THE RESULT OF OUTSTANDING
CONVERTIBLE SECURITIES, WARRANTS AND OPTIONS.
In the past, we have issued convertible securities, such as debentures,
preferred stock and warrants, in order to raise money. We have also issued
options and warrants as compensation for services and incentive compensation for
our employees and directors. We have a substantial number of shares of common
stock reserved for issuance upon the conversion and exercise of these
securities. These outstanding convertible securities, options and warrants could
affect the rights of our stockholders, and could adversely affect the market
price of our common stock.
OUR PROPRIETARY TECHNOLOGY HAS ONLY LIMITED PROTECTIONS.
Our business could be materially and adversely affected if we are not
able to protect adequately our proprietary intellectual property rights. We rely
on a combination of patent, trademark and trade secret laws, license and
confidentiality agreements to protect our proprietary rights. We generally enter
into non-disclosure agreements with our employees and customers and restrict
access to, and distribution of, our proprietary information. Nevertheless, we
may be unable to deter misappropriation of our proprietary information, detect
unauthorized use and take appropriate steps to enforce our intellectual property
rights. Our competitors also may independently develop technologies that are
substantially equivalent or superior to our technology. Although we believe that
our services and products do not infringe the intellectual property rights of
others, we cannot prevent someone else from asserting a claim against us in the
future for violating their intellectual property rights. In addition, costly and
time
20
<PAGE>
consuming lawsuits may be necessary to enforce patents issued or licensed
exclusively to us, to protect our trade secrets and/or know-how or to determine
the enforceability, scope and validity of others' intellectual property rights.
The medical laser industry is characterized by frequent litigation
regarding patent and other intellectual property rights. Because patent
applications are maintained in secrecy in the United States until such patents
are issued and are maintained in secrecy for a period of time outside the United
States, we can conduct only limited searches to determine whether our technology
infringes any patents or patent applications. Any claims for patent infringement
could be time-consuming, result in costly litigation and diversion of technical
and management personnel, cause shipment delays, require us to develop
non-infringing technology or to enter into royalty or licensing agreements.
Although patent and intellectual property disputes in the laser industry have
often been settled through licensing or similar arrangements, costs associated
with such arrangements may be substantial and often require the payment of
ongoing royalties, which could have a negative impact on gross margins. There
can be no assurance that necessary licenses would be available to us on
satisfactory terms, or that we could redesign our products or processes to avoid
infringement, if necessary. Accordingly, an adverse determination in a judicial
or administrative proceeding or failure to obtain necessary licenses could
prevent us from manufacturing and selling some of our products. This could have
a material adverse effect on our business, results of operations and financial
condition.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DISCOURAGE POTENTIAL TAKEOVER
ATTEMPTS.
Our Second Restated Certificate of Incorporation and our By-laws
contain provisions that could discourage takeover attempts or make more
difficult the acquisition of a substantial block of our common stock. Our
By-laws require a stockholder to provide to the Secretary of the Company advance
notice of business to be brought by such stockholder before any annual or
special meeting of stockholders as well as certain information regarding such
business, the stockholder and others known to support such proposal and any
material interest they may have in the proposed business. These provisions could
delay any stockholder actions that are favored by the holders of a majority of
the outstanding stock of the Company until the next stockholders' meeting. In
addition, the Board of Directors is authorized to issue shares of common stock
and preferred stock which, if issued, could dilute and adversely affect various
rights of the holders of common stock and, in addition, could be used to
discourage an unsolicited attempt to acquire control of the Company.
The Company is also subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law, which prohibits the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless the business combination is approved
in a prescribed manner. The application of Section 203 may limit the ability of
stockholders to approve a transaction that they may deem to be in their best
interests. These provisions of our Second Restated Certificate of Incorporation,
By-laws and the Delaware General Corporation Law could deter certain takeovers
or tender offers or could delay or prevent certain changes in control or
management of the Company, including transactions in which stockholders might
otherwise receive a premium for their shares over the then current market
prices.
AS WITH ANY NEW PRODUCTS, THERE IS SUBSTANTIAL RISK THAT THE MARKETPLACE MAY NOT
ACCEPT OR BE RECEPTIVE TO THE POTENTIAL BENEFITS OF OUR PRODUCTS.
Market acceptance of our current and proposed products will depend, in
large part, upon our or any marketing partner's ability to demonstrate to the
marketplace the advantages of our products over other types of products. There
can be no assurance that the marketplace will accept applications or uses for
our current and proposed products or that any of our current or proposed
products will be able to compete effectively.
WE MAY NOT BE ABLE SUCCESSFULLY TO COLLECT LICENSING ROYALTIES.
We hope that a material portion of our future revenues will consist of
royalties from licensing both our own patents and patents licensed to us on an
exclusive basis by Massachusetts General Hospital. However, there can be no
assurance that we will be able to obtain valuable patent rights. Moreover, there
can be no assurance that, even if we do obtain such patent rights and are able
to license them to third parties, we will derive a significant revenue stream
from such licenses.
21
<PAGE>
WE FACE RISKS ASSOCIATED WITH PENDING LITIGATION.
We are involved in disputes with third parties. Such disputes have
resulted in litigation with such parties. We have incurred, and likely will
continue to incur, legal expenses in connection with such matters. There can be
no assurance that such litigation will result in favorable outcomes for us. An
adverse result in the Varljen litigation (described in detail in Part II, Item
1) could have a material adverse effect on our business, financial condition and
results of operations. We are unable to determine the total expense or possible
loss, if any, that may ultimately be incurred in the resolution of this
proceeding. However, an adverse result at trial could be in an amount
substantially greater than any existing insurance, even assuming coverage. This
matter may also result in diversion of management time and effort from the
operations of the business.
WE MAY NOT BE ABLE TO RETAIN OUR KEY EXECUTIVES AND RESEARCH AND DEVELOPMENT
PERSONNEL.
As a small company with less than 100 employees, our success depends on
the services of key employees in executive and research and development
positions. The loss of the services of one or more of these employees could have
a material adverse effect on our business.
WE FACE A RISK OF FINANCIAL EXPOSURE TO PRODUCT LIABILITY CLAIMS IN THE EVENT
THAT THE USE OF OUR PRODUCTS RESULTS IN PERSONAL INJURY.
Our products are and will continue to be designed with numerous safety
features, but it is possible that patients could be adversely affected by use of
one of our products. Further, in the event that any of our products prove to be
defective, we may be required to recall and redesign such products. Although we
have not experienced any material losses due to product liability claims to
date, there can be no assurance that we will not experience such losses in the
future. We maintain general liability insurance in the amount of $1,000,000 per
occurrence and $2,000,000 in the aggregate and maintain umbrella coverage in the
aggregate amount of $25,000,000; however, there can be no assurance that such
coverage will continue to be available on terms acceptable to us or that such
coverage will be adequate for liabilities actually incurred. In the event we are
found liable for damages in excess of the limits of our insurance coverage, or
if any claim or product recall results in significant adverse publicity against
us, our business, financial condition and results of operations could be
materially and adversely affected. In addition, although our products have been
and will continue to be designed to operate in a safe manner, and although we
attempt to educate medical personnel with respect to the proper use of our
products, misuse of our products by medical personnel over whom we cannot exert
control may result in the filing of product liability claims or significant
adverse publicity against us.
COMPUTER SYSTEMS ON WHICH WE RELY MAY NOT PROPERLY RECOGNIZE DATE SENSITIVE
INFORMATION WHEN THE YEAR CHANGES TO 2000.
Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. We are at this time utilizing internal
resources to identify, correct or reprogram and test our systems for year 2000
compliance. However, there can be no assurance that the systems of other
companies on which our systems rely will also be converted in a timely manner or
that any such failure to convert by another company would not have an adverse
effect on our systems.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
Not applicable.
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
On March 7, 1997, Selvac Acquisition Corp. ("Selvac"), a subsidiary of
Mehl Biophile International, Inc. ("Mehl"), filed a complaint for injunctive
relief and damages for patent infringement and for unfair competition in the
United States District Court for the District of New Jersey against the Company,
two of its subsidiaries and a New Jersey dermatologist. Selvac's complaint
alleged that the Company's EpiLaser(R) 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 clearance 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 later 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 with the Court of Appeals for the Federal Circuit. The Federal Circuit
heard oral argument on August 5, 1999, and on September 30 affirmed the district
court's summary judgment of invalidity of the Selvac Patent. On October 14,
1999, Selvac filed a petition for rehearing, which the Federal Circuit denied on
October 27, 1999.
On March 11, 1999, the United States District Court for the Southern
District of New York granted plaintiffs leave to amend their complaint in the
action styled Varljen v. H.J. Meyers, Inc., et. al. to join the Company, its
former chief executive officer and current chief financial officer as
defendants. On March 17, 1999, the Second Amended Class Action Complaint
("Complaint") in Varljen was served upon the Company and its current chief
financial officer. The Complaint alleges that the Company and the former and
current officer violated the federal securities laws in various public
disclosures that the Company made directly and indirectly during the period from
February 1, 1996 to March 26, 1997. The Company and the former and current
officer filed a motion to dismiss the complaint, asserting all claims are barred
by the statute of limitations, that the complaint does not meet federal pleading
requirements, and that it fails to state a securities claim. The Company and the
former and current officer have also filed a motion to transfer the case to the
District of Massachusetts. On August 6, 1999, the District Court denied the
Company's motion to dismiss, and scheduled a case conference for April 28, 2000.
On July 20, 1999, The Monterey Stockholders Group LLC ("Monterey")
filed a complaint for declaratory judgment and for damages in the United States
District Court for the District of Delaware against the Company. The complaint
alleged that the Company and its directors violated the federal securities laws
in various public disclosures that the Company made in the spring of 1999. The
complaint alleged Palomar failed to disclose that it intended to include 3.25
million escrowed shares in the vote at its annual meeting when such shares were
allegedly non-voting and not outstanding. Monterey sought, among other forms of
relief, a declaration that no quorum was present in person or by proxy at the
Company's annual meeting. On September 3, 1999, the Company and its directors
filed an answer and counterclaim against Monterey, Mark Smith, Thomas O'Brien,
The Rockside Foundation, Logg Investment Research, and the R. Templeton Smith
Foundation, alleging, among other things, that Monterey filed fraudulent proxy
statements, and requesting a declaration that a quorum was present at the
Company's annual meeting and that the Palomar nominees were properly elected. On
October 19, 1999, all parties filed a stipulation of dismissal with prejudice of
the lawsuit, including all claims and counterclaims.
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, at
present 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.
Item 2. Changes in Securities.
---------------------
Not applicable.
23
<PAGE>
Item 3. Defaults upon Senior Securities.
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Not applicable.
Item 5. Other Information.
-----------------
Not applicable.
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
2.1* By-laws, as amended.
2.2** Second Restated Certificate of Incorporation of the Company
4.1*** Second Amended 1991 Stock Option Plan.
4.2*** Second Amended 1993 Stock Option Plan.
4.3*** Second Amended 1995 Stock Option Plan.
4.4*** Second Amended 1996 Stock Option Plan.
4.5*** Third Amended 1996 Employee Stock Purchase Plan.
4.6**** Rights Agreement dated as of April 20, 1999, between Palomar
Medical Technologies, Inc. and American Stock Transfer and
Trust Company, as Rights Agent.
4.7**** Form of Certificate of Designation of Series A Participating
Cumulative Preferred Stock of Palomar Medical Technologies,
Inc. (which is attached as Exhibit A to the Rights Agreement,
Exhibit 4.6 hereto).
4.8**** Form of Rights Certificate (which is attached as Exhibit B to
the Rights Agreement, Exhibit 4.6 hereto).
27.1 Financial Data Statement for the period ended June 30, 1999.
* Previously filed as an exhibit to Form 10-K for the period
ended December 31, 1996, and incorporated herein by reference.
** Previously filed as an exhibit to Registration Statement on
Form S-3, No. 333-70391, and incorporated herein by reference.
*** Previously filed as an exhibit to Form 10-Q for the period
ended June 30, 1999, and incorporated herein by reference.
**** Previously filed as an exhibit to Form 8-K, filed on April 21,
1999 and incorporated herein by reference.
(b) Reports on Form 8-K.
Form 8-K filed on July 1, 1999 (announcing Palomar victory in
proxy contest).
25
<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 Burlington in the
Commonwealth of Massachusetts on November 12, 1999.
PALOMAR MEDICAL TECHNOLOGIES, INC.
(Registrant)
DATE: November 12, 1999 By: /S/ LOUIS P. VALENTE
------------------------------
Louis P. Valente
Chief Executive Officer
(Principal Executive Officer)
DATE: November 12, 1999 By: /S/ JOSEPH P. CARUSO
------------------------------
Joseph P. Caruso
Chief Financial Officer and
Treasurer
(Principal Financial Officer
and
Principal Accounting Officer)
26
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains information derived from the financial tables
attached to the Company's Report on Form 10Q for the period ended
September 30, 1999.
</LEGEND>
<CIK> 0000881695
<NAME> Palomar Medical Technologies, Inc.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,557,690
<SECURITIES> 20,517,171
<RECEIVABLES> 2,881,757
<ALLOWANCES> 650,000
<INVENTORY> 4,131,854
<CURRENT-ASSETS> 39,706,640
<PP&E> 5,564,520
<DEPRECIATION> 4,252,951
<TOTAL-ASSETS> 41,910,495
<CURRENT-LIABILITIES> 16,233,126
<BONDS> 2,744,016
0
60
<COMMON> 110,345
<OTHER-SE> 22,822,948
<TOTAL-LIABILITY-AND-EQUITY> 41,910,495
<SALES> 20,074,303
<TOTAL-REVENUES> 21,931,126
<CGS> 10,991,486
<TOTAL-COSTS> 11,734,235
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 546,173
<INCOME-PRETAX> 33,569,117
<INCOME-TAX> 2,500,000
<INCOME-CONTINUING> 31,069,117
<DISCONTINUED> (435,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,643,117
<EPS-BASIC> 2.98
<EPS-DILUTED> 2.81
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) July 1, 1999
Palomar Medical Technologies, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C> <C>
Delaware 001-11177 04-3128178
- -----------------------------------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
</TABLE>
45 Hartwell Avenue, Lexington, Massachusetts 02421-3102
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
781-676-7300
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 5. OTHER EVENTS.
On July 1, 1999 Palomar Medical Technologies, Inc. issued a press
release regarding the final report of the Independent Inspector of Election in
connection with the annual meeting of stockholders held on June 23, 1999. A copy
of the press release is attached hereto and incorporated by reference.
ITEM 7. EXHIBITS.
99.1 Press Release dated July 1, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PALOMAR MEDICAL TECHNOLOGIES, INC.
Date: July 1, 1999
By: /s/ Louis P. Valente
-------------------------------
Name: Louis P. Valente
Title: President and
Chief Executive Officer
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
99.1 Press Release of Palomar Medical Technologies, Inc., dated
July 1, 1999
<PAGE>
[LOGO]
NEWS RELEASE
FOR IMMEDIATE RELEASE
CONTACTS:
John Ingoldsby or Joseph Caruso
Director of Investor Relations Chief Financial Officer
Palomar Medical Technologies, Inc. Palomar Medical Technologies, Inc.
781-402-2411 781-676-7300
PALOMAR VICTORIOUS IN PROXY CONTEST
LEXINGTON, Mass., July 1, 1999 - Palomar Medical Technologies, Inc. (NASDAQ:
PMTI), the technology leader in laser hair removal, today announced that it had
decisively defeated The Monterey Stockholders Group LLC in the proxy contest for
the election of directors. The company's announcement was based on the final,
certified report of the independent Inspector of Election from the Company's
annual meeting of stockholders held on June 23, 1999. The Monterey Group
unsuccessfully sought to replace Palomar's Board of Directors with their own
nominees.
The Inspector's final report noted that approximately 73% of the shares voted at
the meeting supported Palomar's nominees. Palomar said again that it achieved
the victory despite the actions of Monterey's members, including Mark T. Smith,
leader of Monterey, who intentionally failed to vote its own shares at the
annual meeting in an unsuccessful attempt to prevent a quorum at the meeting.
Despite Mr. Smith's machinations, he was unable to avoid conclusive and
resounding defeat at the polls.
Louis P. Valente, chairman and chief executive officer of Palomar, said, "The
final report of the Inspector of Election is clear and convincing evidence of
our stockholders' broad support for Palomar's Board of Directors, and we
appreciate their support. We look forward to now devoting all of our energies to
running our business and creating additional value for our stockholders."
Palomar Medical Technologies, Inc. is a leading supplier of proprietary laser
systems for hair removal and other cosmetic laser treatments. Hundreds of
Palomar laser hair removal systems have been installed in physician practices
worldwide, and hundreds of thousands of treatments have been performed.
(more)
<PAGE>
PALOMAR / 2
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
With the exception of the historical information contained in this release, the
matters described herein may contain forward-looking statements that involve
risk and uncertainties that may individually or mutually impact the matters
herein, and cause actual results, events and performance to differ materially.
These risk factors include, but are not limited to, technological difficulties,
lack of product demand and market acceptance, the effect of economic conditions,
the impact of competitive products and pricing, governmental regulations with
respect to medical devices, and/or other factors outside the control of the
company, which are detailed from time to time in the company's SEC reports,
including the report on Form 10-K for the year ended December 31, 1998. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The company undertakes no obligation to
release publicly the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
####
Palomar news releases are available through PR Newswire
Company News on-Call by fax at 800-758-5804,
Extension 107555, or http://www.prnewswire.com/(PMTI)
For more information about Palomar,
visit our home page at HTTP://WWW.PALMED.COM
