FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2000
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)
Delaware 04-3128178
- ------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 April 30, 2000, 10,200,614 shares of common stock, $.01 par value
per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
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-i-
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C> <C> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Condensed Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Stockholders' 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 10
RISK FACTORS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 16
PART II - OTHER INFORMATION 17
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE 17
OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 20
</TABLE>
<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
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<S> <C> <C> <C>
December 31, March 31,
1999 2000
-------------------- --------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $2,712,466 $ 3,063,351
Available-for-sale investments, at market value 22,505,996 17,029,254
Accounts receivable, net 1,879,612 1,985,998
Inventories 1,899,591 1,367,027
Receivable from sale of subsidiary 3,330,976 3,385,299
Other current assets 729,301 666,501
-------------------- --------------------
Total current assets 33,057,942 27,497,430
-------------------- --------------------
Property and Equipment, Net 991,432 1,034,765
-------------------- --------------------
Other Assets:
Cost in excess of net assets acquired, net 631,026 567,921
Other non-current assets 162,468 151,108
-------------------- --------------------
Total other assets 793,494 719,029
-------------------- --------------------
$34,842,868 $29,251,224
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $1,122,008 $1,683,012
Accounts payable 659,280 652,828
Accrued liabilities 6,371,553 6,113,073
Accrued income taxes 2,500,000 426,131
Current portion of deferred revenue 918,642 494,810
Deferred gain from sale of subsidiary 3,139,556 3,139,556
-------------------- --------------------
Total current liabilities 14,711,039 12,509,410
-------------------- --------------------
Long-Term Debt, Net of Current Portion 1,622,008 1,061,004
-------------------- --------------------
Accrued Dividends and Interest on Preferred Stock 1,417,184 1,507,000
-------------------- --------------------
Stockholders' Equity:
Preferred stock, $.01 par value-
Authorized - 1,500,000 shares
Issued and outstanding -
6,000 shares at December 31, 1999 and March 31, 2000 60 60
Common stock, $.01 par value-
Authorized - 45,000,000 shares
Issued - 11,034,493 shares and 11,074,393 shares
at December 31, 1999 and March 31, 2000, respectively 110,345 110,744
Additional paid-in capital 162,275,613 162,296,320
Accumulated deficit (141,550,040) (144,591,226)
Unrealized loss on available-for-sale investments (67,943) (46,226)
Less: Treasury stock - 1,002,615 and 980,943 shares at cost
at December 31, 1999 and March 31, 2000, respectively (3,675,398) (3,595,862)
-------------------- --------------------
Total stockholders' equity 17,092,637 14,173,810
-------------------- --------------------
$34,842,868 $29,251,224
==================== ====================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE> 1
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C> <C>
Three Months Ended
March 31,
1999 2000
---------------------- --------------------
Product Revenues $13,478,609 $1,603,103
Royalty Revenues - 1,175,829
---------------------- --------------------
Total Revenues 13,478,609 2,778,932
Cost of Product Revenues 4,969,976 2,050,046
Cost of Royalty Revenues - 470,332
---------------------- --------------------
Total Cost of Revenues 4,969,976 2,520,378
---------------------- --------------------
Gross Margin 8,508,633 258,554
---------------------- --------------------
Operating Expenses
Research and development 2,125,983 2,077,971
Sales and marketing 4,098,422 481,755
General and administrative 1,672,254 1,257,954
---------------------- --------------------
Total operating expenses 7,896,659 3,817,680
---------------------- --------------------
Income (loss) from operations 611,974 (3,559,126)
Interest Income 5,697 413,636
Interest Expense (170,947) (50,468)
Other Income 22,346 244,690
---------------------- --------------------
Net Income (Loss) $ 469,070 $ (2,951,268)
====================== ====================
Basic Net Income (Loss) Per Share $ 0.04 $ (0.30)
====================== ====================
Basic Weighted Average Number of Shares Outstanding 10,194,145 10,047,183
====================== ====================
Diluted Net Income (Loss) Per Share $ 0.04 $ (0.30)
====================== ====================
Diluted Weighted Average Number of Shares Outstanding 10,633,551 10,047,183
====================== ====================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' 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 Shares Par Value of Shares Par Value of Shares Cost
-----------------------------------------------------------------------------------------
Balance, December 31, 1999 6,000 $ 60 $11,034,493 110,345 (1,002,615) $(3,675,398)
Costs incurred related to the
issuance of common stock - - - - - -
Issuance of treasury stock for
Employee Stock Purchase Plan - - - - 2,672 9,806
Exercise of Stock Options - - 39,900 399 19,000 69,730
Unrealized loss on
available-for-sale Investments - - - - - -
Preferred stock dividends - - - - - -
Net loss - - - - - -
-----------------------------------------------------------------------------------------
Balance, March 31, 2000 6,000 $ 60 11,074,393 $110,744 (980,943) $(3,595,862)
=========================================================================================
Additional Unrealized Loss Total
Paid-in Accumulated on Available-for Stockholders'
Capital Deficit Sale Investments Equity (Deficit)
-----------------------------------------------------------------------------------------
Balance, December 31, 1999 $162,275,613 $(141,550,040) $(67,943) $ 17,092,637
Costs incurred related to the
issuance of common stock (90,800) - - (90,800)
Issuance of treasury stock for
Employee Stock Purchase Plan (7,108) - - 2,698
Exercise of Stock Options 118,615 - - 188,744
Unrealized loss on
available-for-sale Investments - - 21,717 21,717
Preferred stock dividends - (89,918) - (89,918)
Net loss - (2,951,268) - (2,951,268)
-----------------------------------------------------------------------------------------
Balance, March 31, 2000 $162,296,320 $(144,591,226) $(46,226) $14,173,810
=========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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<S> <C> <C> <C>
Three Months Ended March 31,
1999 2000
----------------- -----------------
Cash Flows from Operating Activities:
Net Income (Loss) $469,070 $(2,951,268)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation and amortization 444,772 176,559
Changes in assets and liabilities
Accounts receivable (712,472) (106,386)
Inventories (764,631) 532,564
Receivable from sale of subsidiary - (54,323)
Other current assets 386,749 62,800
Accounts payable (483,152) (6,452)
Accrued expenses 982,914 (258,582)
Accrued income taxes - (2,073,869)
Deferred revenue (442,295) (423,832)
----------------- -----------------
Net cash used in operating activities (119,045) (5,102,789)
----------------- -----------------
Cash Flows from Investing Activities
Purchases of property and equipment (191,651) (156,787)
Proceeds of available-for-sale investments - 5,498,459
Decrease in other assets 24,230 11,360
----------------- -----------------
Net cash provided by (used in) investing activities (167,421) 5,353,032
----------------- -----------------
Cash Flows from Financing Activities:
Net proceeds from the issuance of notes payable and advances from distributor 480,584 -
Proceeds from exercise of warrants, stock options
and Employee Stock Purchase Plan 12,213 191,442
Costs incurred related to issuance of common stock (106,000) (90,800)
----------------- -----------------
Net cash provided by financing activities 386,797 100,642
----------------- -----------------
Net increase in cash and cash equivalents 100,331 350,885
Cash and cash equivalents, beginning of the period 1,874,718 2,712,466
----------------- -----------------
Cash and cash equivalents, end of the period $ 1,975,049 $3,063,351
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 148,149 $ 10,847
================= =================
Supplemental Disclosure of Noncash Financing and Investing Activities:
Conversion of convertible debentures and related accrued
interest, net of financing fees $ 1,018,728 $ -
================= =================
Conversion of preferred stock $ 63,411 $ -
================= =================
Issuance of common stock for 1998 and 1999 employer 401(k)
matching contribution $ 206,659 $ -
================= =================
Unrealized gain (loss) on available-for-sale investments $ - $ 21,717
================= =================
Accrued dividends and interest on preferred stock $ 97,226 $ 89,918
================= =================
Redemption of preferred stock $ 557,417 $ -
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<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 for the year ended
December 31, 1999.
2. CASH AND CASH EQUIVALENTS
-------------------------
Cash equivalents consist 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. INVESTMENTS
-----------
The Company accounts for marketable securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities. 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' equity.
The aggregate market value, cost basis, and gross unrealized losses of
available-for-sale investments are as follows:
December 31, March 31,
1999 2000
------------------ ----------------
Market Value $22,505,996 $17,029,254
================== ================
Cost Basis $22,573,939 $17,075,480
================== ================
Gross Unrealized Loss $ (67,943) $ (46,226)
================== ================
Available-for-sale investments in the accompanying balance sheet at
March 31, 2000 include debt securities of $17,029,254. 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 gains totaling $21,717 on such
debt securities were recorded in stockholders' equity during three months ended
March 31, 2000.
5
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4. INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market
and consist of the following:
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<S> <C> <C> <C>
December 31, March 31,
1999 2000
------------------ -----------------
Raw materials $1,403,001 $984,267
Work-in-process 496,590 323,242
Finished goods - 59,518
------------------ -----------------
$1,899,591 $1,367,027
================== =================
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<S> <C> <C> <C>
December 31, March 31,
1999 2000
------------------ -----------------
Machinery and equipment $1,062,774 $1,081,039
Furniture and fixtures 1,006,125 1,113,573
Leasehold improvements 139,046 170,120
------------------ -----------------
2,207,945 2,364,732
Less: Accumulated depreciation
and amortization 1,216,513 1,329,967
------------------ -----------------
$991,432 $1,034,765
================== =================
</TABLE>
6. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<S> <C> <C>
December 31, March 31,
1999 2000
----------------- ------------------
Dollar denominated convertible debentures $500,000 $500,000
Swiss franc denominated convertible debentures 2,244,016 2,244,016
----------------- ------------------
2,744,016 2,744,016
Less - current maturities (1,122,008) (1,683,012)
----------------- -----------------
$1,622,008 $1,061,004
================= ==================
</TABLE>
6
<PAGE>
7. SEGMENT AND GEOGRAPHIC INFORMATION
----------------------------------
Product revenue from international sources were $6.3 million and $0.7
million for the three months ended March 31, 1999 and 2000. The Company's
revenue from international sources was primarily generated from customers
located in Japan, Asia/Pacific and Europe/Middle East.
The following table represents the percentage of product revenue by
geographic region from customers for the three month periods ended March 31,
1999 and 2000:
Three Months Ended
March 31,
1999 2000
--------------------------------------
United States 52.8% 53.3%
Japan 15.6% 41.5%
Asia/Pacific 2.8% 4.7%
Canada/Australia 0.9% 0.3%
Europe/Middle East 25.8% 0.1%
Latin America 2.1% 0.1%
--------------------------------------
Total 100.0% 100.0%
======================================
8. STOCKHOLDERS' EQUITY
--------------------
(a) Options to Purchase Common Stock
During the three months ended March 31, 2000, the Company granted
options to purchase 927,500 shares of the Company's common stock at exercise
prices ranging from $1.38 to $5.06 per share. During the three months ended
March 31, 2000, 58,900 options were exercised at $3.19. During the three months
ended March 31, 2000, options to purchase 88,330 shares of the Company's common
stock at exercise prices ranging from $3.19 to $10.50 per share expired.
(b) Warrants to Purchase Common Stock
During the three months ended March 31, 2000, the Company granted
warrants to purchase 60,000 shares of the Company's common stock at an exercise
price of $1.97 per share. No warrants were exercised or expired during the three
months ended March 31, 2000.
7
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9. 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 (loss)
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>
<S> <C> <C>
Three Months Ended
March 31,
--------------------------
1999 2000
------------- ------------
Basic weighted average common
Shares outstanding 10,194,145 10,047,183
Potential common shares pursuant to:
Convertible preferred stock 373,662 -
Convertible debentures 65,744 -
------------- ------------
Diluted weighted average common
shares outstanding 10,633,551 10,047,183
============= ============
</TABLE>
The Company's net income (loss) per share for the three months ended
March 31, 1999 and 2000 is as follows:
<TABLE>
<S> <C> <C>
Three Months Ended
March 31,
---------------------------------------
1999 2000
------------------ ------------------
Net income (loss) from continuing operations $469,070 $(2,951,268)
Preferred stock dividends (97,226) (89,918)
------------------ ------------------
Income (loss) attributable to common stockholders $371,844 $(3,041,186)
================== ==================
Basic net income (loss) per common share $0.04 $(0.30)
================== ==================
Basic weighted average number of shares
outstanding 10,194,145 10,047,183
================== ==================
Diluted net income (loss) per common share $0.04 $(0.30)
================== ==================
Diluted weighted average number of shares
outstanding 10,633,551 10,047,183
================== ==================
</TABLE>
For the three months ended March 31, 1999 and 2000, 3,868,613 and
4,214,814, respectively, of potential common shares related to outstanding
stock options, stock warrants and convertible securities were not included
in the diluted weighted average shares outstanding as they were antidilutive.
8
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10. COMPREHENSIVE INCOME (LOSS)
---------------------------
The Company adopted SFAS 130, Reporting Comprehensive Income, effective
January 1, 1998. SFAS 130 established standards for reporting and display of
comprehensive income (loss) and its components in the financial statements. The
Company's only item of other comprehensive income (loss) relates to unrealized
losses on its available-for-sale investments and is presented separately on the
balance sheet as required. A reconciliation of comprehensive income (loss) is as
follows:
<TABLE>
<S> <C> <C>
Three Months Ended
March 31,
--------------------------------------
1999 2000
----------------- -----------------
Net income (loss) $469,070 $(2,951,268)
Unrealized gain on available-for-sale
investments --- 21,717
----------------- -----------------
Comprehensive income (loss) $469,070 $(2,929,551)
================= =================
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations
-----------------------
(a) Overview
We are a researcher and developer of proprietary laser systems for hair removal
and other cosmetic laser systems and are the first company to obtain clearance
using laser systems from the FDA for "permanent hair reduction." Hundreds of
Palomar laser hair removal systems have been installed in physician practices
worldwide. Through Palomar's research partnership with Massachusetts General
Hospital's Wellman Laboratories, new indications are being tested to further
advance the laser hair removal market and other cosmetic laser applications
including fat reduction and acne treatment.
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 Palomar's Star Medical Technologies, Inc. ("Star") subsidiary. For the
years ended December 31, 1998 and 1999, gross revenues associated with Star's
LightSheer(TM) system comprised 80% and 60%, respectively, of the Company's
total revenues. The Company completed the sale of Star 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 stockholders
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. As a result of the above transaction, the Company believes it will
be able to fund its operations for the short-term. However, revenues have
declined significantly over the last three-quarters, and will continue to remain
low in the near term. The Company believes the successful introduction and
marketing of new products will become critical to the Company's long-term
success. Broad market acceptance of laser hair removal and specific acceptance
of the Company's new hair removal laser, the SLP1000, is critical to the
Company's success. The Company has traditionally spent a significant amount of
its resources in developing new technology and products. The Company expects
this trend will continue for the foreseeable future.
(b) Results of Operations
(i) REVENUES AND GROSS PROFIT: Three Months Ended March 31, 2000,
Compared to Three Months Ended March 31, 1999
For the three months ended March 31, 2000, the Company's revenues
decreased to $2.8 million, as compared to $13.5 million for the three months
ended March 31, 1999. The decrease in the Company's revenues of $10.7 million,
or 79% from the three months ended March 31, 1999, was mainly due to the
reduction in sales volume of $11.1 million associated with the LightSheer(TM)
diode laser manufactured by Star. The Company sold Star to Coherent on April 27,
1999. This decrease was offset by an increase of $1.2 million in royalties
received by the Company and a decrease of $0.8 million in other product
revenues.
Gross profit for the three months ended March 31, 2000 was $259,000 (9%
of revenues) compared to $8.5 million (63% of revenues) for the three months
ended March 31, 1999. 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 royalties
earned.
(ii) OPERATING AND OTHER EXPENSES: Three Months Ended March 31, 2000,
Compared to Three Months Ended March 31, 1999
Research and development costs remained constant at $2.1 million for
the three months ended March 31, 2000, as compared to $2.1 million for the three
months ended March 31, 1999. Research and development expenses as a percentage
of revenue totaled 75% for the three months ended March 31, 2000 and 16% for the
three months ended March 31, 1999. 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
spend 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
laser platforms. The research and development goals in the field of laser hair
removal are to design systems that (1) permit more rapid
10
<PAGE>
treatment of large areas, (2) have high gross margins, and (3) are manufactured
at a lower cost, thus addressing broader markets. Further, the Company is aiming
to address dermatology and cosmetic procedure markets other than hair, including
the fields of fat reduction and acne treatment covered in its expanded research
agreement with Massachusetts General Hospital.
Selling and marketing expenses decreased to $482,000, or 17% of
revenues for the three months ended March 31, 2000, from $4.1 million, or 30% of
revenues for the three months ended March 31, 1999. 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 $1.3 million, or 45%
of revenues for the three months ended March 31, 2000, as compared to $1.7
million, or 12% of revenues for the three months ended March 31, 1999. This
decrease in general and administrative expenses is attributable to the sale of
the Company's Star subsidiary and due to the Company's restructuring and
consolidation of administrative functions at the end of 1999.
Interest expense decreased to $50,000 for the three months ended March
31, 2000, compared to $171,000 for the three months ended March 31, 1999. As a
result of the sale of Star, which generated $49.7 million in cash, the Company
paid substantially all of its outstanding debt which has resulted in a decrease
of interest expense.
Interest income increased to $414,000 for the three months ended March
31, 2000, compared to $6,000 for the three months ended March 31, 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 increased to approximately $245,000 for the three
months ended March 31, 2000. This amount compares to $22,000 for the three
months ended March 31, 1999.
(c) Liquidity and Capital Resources
The Company's 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 March 31, 2000, the Company had $20.1 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 of its subsidiaries in
the near term. The successful introduction and marketing of new products
currently under development will be critical to future liquidity.
As of March 31, 2000, the Company's accounts receivable has remained
constant totaling $2.0 million, as compared to $1.9 million as of December 31,
1999. The Company's allowance for doubtful accounts totaled $228,000 as of March
31, 2000, compared to $207,000 as of December 31, 1999.
As of March 31, 2000, the Company's accounts payable has remained
constant totaling $653,000, as compared to $659,000 as of December 31, 1999.
The Company anticipates that capital expenditures for the remainder of
2000 will total approximately $300,000, consisting primarily of machinery,
equipment, computers and peripherals. The Company expects to finance these
expenditures with cash on hand and equipment leasing lines, if available.
<PAGE> 11
(d) Material Uncertainties
Year 2000 Impact
We have not yet experienced any problems with our computer systems
relating to distinguishing twenty-first century dates from twentieth century
dates, which generally are referred to as Year 2000 problems. We are also
not aware of any material Year 2000 problems with our clients or vendors.
Accordingly, we do not anticipate incurring material expenses or experiencing
any material operational disruptions as a result of any Year 2000 problems.
12
<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 products
under development, the timing of new product introductions, financing of future
operations, and the Company's research partnership with MGH) 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 successfully developing and marketing 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,
to enhance existing products, and to achieve market acceptance for such
products. We have in the past experienced delays in developing and marketing 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 almost entirely dependent on sales of newly
introduced products. Sales to date for the Company's current products have been
minimal and the Company's future products 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,
some 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 significant 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 have decreased as a result of the Star sale, and
that may hurt the price of our common stock.
Almost all of our revenues in 1999 were attributable to sales of the
LightSheer(TM) diode laser system 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.
13
<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 1999, 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.
We depend on a number of vendors for critical components in our current and
future products.
We develop laser systems that incorporate third-party components as
part of the overall systems. Some of these items are custom made or otherwise
not readily available on the market. We purchase some of these components from
small specialized vendors that are not well capitalized. A disruption in the
delivery of these key components could have an adverse effect on our business.
In 2000, we anticipate that we will be substantially dependent on an overseas
third-party manufacturer over whom we do not have absolute control to provide us
with critical components for a new Super Long Pulse hair removal laser.
Our lasers are subject to numerous medical device regulations. Compliance is
expensive and time-consuming. Our new products may not be able to obtain the
necessary clearances in order to 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. Our new hair removal laser system, the SLP1000,
has yet to receive FDA clearance.
Our products are subject to similar regulations in our major
international markets. Complying with these regulations is necessary for our
strategy of expanding the markets for and sales of our products into these
countries. These approvals may necessitate clinical testing, limitations on the
number of sales and controls of end user purchase price, among other things. In
certain instances, these constraints can delay planned shipment schedules as
design and engineering modifications are made in response to regulatory concerns
an requests.
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
rights 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.
14
<PAGE>
Our proprietary technology has only limited protections.
Our business could be materially and adversely affected if we are not
able to adequately protect 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-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 director nominations and business to be brought by such stockholder
before any annual or special meeting of stockholders, as well as certain
information regarding such nomination and/or business, the stockholder and
others known to support such proposal and any material interest they may have in
the proposed business. They also provide that a special meeting of stockholders
may be called only by the affirmative vote of a majority of the Board of
Directors. 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 that, 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.
15
<PAGE>
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 to successfully collect licensing royalties.
At present, a material portion of our revenues 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.
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.
Although we have reached a settlement agreement with the plaintiffs in the
Varljen litigation, the settlement must be approved by the court, and there can
be no assurance that it will be approved. An adverse result in that suit could
have a material adverse effect on our business, financial condition and results
of operations.
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 million per
occurrence and $2 million in the aggregate and maintain umbrella coverage in the
aggregate amount of $25 million; 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 in significant adverse
publicity against us.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
Not applicable.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
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 in
Varljen was served upon the Company and its current chief financial officer,
alleging 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. Palomar and the Varljen plaintiffs have reached an agreement in principle
pursuant to which Palomar and its insurance carrier would pay plaintiffs $5
million in settlement of all their claims. Of this amount, Palomar would
contribute up to $1 million in stock and $1.375 million in cash, and its
insurance carrier the remaining $2.625 million in cash. This settlement
agreement must be approved by the court. There can be no assurance of such court
approval; however, management believes that the court approval is probable and
has accrued for its estimated loss.
The Company is involved in other legal and administrative proceedings and
claims of various types. While any litigation contains an element of
uncertainty, management, 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.
Item 3. Defaults upon Senior Securities.
--------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Not applicable.
Item 5. Other Information.
------------------
Not applicable.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
<TABLE>
<S><C> <C> <C>
(a) Exhibits
^^^3(i).1 Certificate of Designation, as filed with the Delaware Secretary of State on April 21, 1999.
^3(i).2 Second Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on January 8, 1999.
^^^^3(ii) Bylaws, as amended.
^4.1 Common Stock Certificate.
^^4.2. Rights Agreement Between Palomar Medical Technologies, Inc. and American Stock Transfer & Trust
Company, dated as of April 20, 1999
##4.3 Form of 4.5% Convertible Debenture (denominated in Swiss Francs) due July 3, 2003.
####4.4 First Allonge and Amendment to 4.5% Subordinated Convertible Debenture
##4.5 Form of 6% Convertible Debenture due March 13, 2002.
<4.6 Second Amended 1991 Stock Option Plan.
<4.7 Second Amended 1993 Stock Option Plan.
<4.8 Second Amended 1995 Stock Option Plan.
<4.9 Second Amended 1996 Stock Option Plan.
<4.10 Third Amended 1996 Employee Stock Purchase Plan.
*4.11 Form of Stock Option Grant under the 1991, 1993 and 1995 Amended Stock Option Plans.
##4.12 Form of Stock Option Agreement under the 1996 Amended Stock Option Plan.
#4.13 Form of Company Warrant to Purchase Common Stock.
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
27 Financial Data Schedule for the Period Ended March 31, 2000.
^ Previously filed as an exhibit to Form 8-K, filed on April 21, 1999 and incorporated herein by reference.
^^ Previously filed as an exhibit to Form 10-K for the period ended December 31, 1998, filed on March 30, 1999 and
incorporated herein by reference.
^^^ Previously filed as an exhibit to Form 10-Q for the period ended March 31, 1999, filed on May 17, 1999 and
incorporated herein by reference.
^^^^ Previously filed as an exhibit to Form 8-K, filed on December 16, 1999 and incorporated herein by reference.
* Previously filed as an exhibit to Amendment No. 4 to Form S-1 Registration Statement No. 33-47479 filed on October
5, 1992, and incorporated herein by reference.
** Previously filed as an exhibit to the Company's Definitive Proxy Statement for the period ended December 31, 1998
filed on March 12, 1999, and incorporated herein by reference.
# Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995, and incorporated herein by reference.
## Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996,
and incorporated herein by reference.
### Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, and incorporated
herein by reference.
#### Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, and incorporated
herein by reference.
- Previously filed as an exhibit to Form S-8 Registration Statement No. 33-97710 filed on October 4, 1995, and
incorporated herein by reference.
< Previously filed as an exhibit Form 10-Q for the period ended June 30, 1999, and incorporated herein by reference.
</TABLE>
(b) Reports on Form 8-K
None
19
<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 May 8, 2000.
PALOMAR MEDICAL TECHNOLOGIES, INC.
----------------------------------
(Registrant)
DATE: May 8, 2000 By:/s/Louis P. Valente
-----------------------
Louis P. Valente
Chief Executive Officer
(Principal Executive Officer)
DATE: May 8, 2000 By:/s/Joseph P. Caruso
-----------------------
Joseph P. Caruso
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
20
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
<ARTICLE> 5
<LEGEND>
This schedule contain information derived from financial tables attached
to the Company's report on Form 10Q from the period ended March 31,2000.
</LEGEND>
<CIK> 0000881695
<NAME> Palomar Medical Technologies, Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,063,351
<SECURITIES> 17,029,254
<RECEIVABLES> 2,214,483
<ALLOWANCES> 228,485
<INVENTORY> 1,367,027
<CURRENT-ASSETS> 27,497,430
<PP&E> 2,364,732
<DEPRECIATION> 1,329,967
<TOTAL-ASSETS> 29,251,224
<CURRENT-LIABILITIES> 12,509,410
<BONDS> 1,061,004
0
60
<COMMON> 110,744
<OTHER-SE> 14,173,810
<TOTAL-LIABILITY-AND-EQUITY> 29,251,224
<SALES> 2,778,932
<TOTAL-REVENUES> 2,778,932
<CGS> 2,520,378
<TOTAL-COSTS> 2,520,378
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,468
<INCOME-PRETAX> (2,951,268)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,951,268)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,951,268)
<EPS-BASIC> $(0.30)
<EPS-DILUTED> $(0.30)
</TABLE>
