FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 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 July 31, 2000, 10,209,656 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
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 11
RISK FACTORS 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 19
PART II - OTHER INFORMATION 20
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE 21
OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 24
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
---------------------------------------------
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<S> <C> <C>
December 31, June 30,
1999 2000
------------ -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $2,712,466 $13,528,404
Available-for-sale investments, at market value 22,505,996 6,979,100
Accounts receivable, net 1,879,612 1,197,737
Inventories 1,899,591 997,182
Receivable from sale of subsidiary 3,330,976 -
Other current assets 729,301 362,004
------------ -----------
Total current assets 33,057,942 23,064,427
------------ -----------
Property and Equipment, Net 991,432 933,022
------------ -----------
Cost in excess of net assets acquired, net 631,026 -
Other non-current assets 162,468 122,025
------------ -----------
Total other assets 793,494 122,025
------------ -----------
$34,842,868 $24,119,474
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $1,122,008 $ 2,244,016
Accounts payable 659,280 392,666
Accrued liabilities 6,371,553 5,719,707
Accrued income taxes 2,500,000 395,675
Deferred revenue 918,642 448,861
Deferred gain from sale of subsidiary 3,139,556 -
------------ -----------
Total current liabilities 14,711,039 9,200,925
------------ -----------
Long-Term Debt, Net of Current Portion 1,622,008 500,000
------------ -----------
Accrued Dividends and Interest on Preferred Stock 1,417,184 1,598,317
------------ -----------
Stockholders' Equity:
Preferred stock, $.01 par value-
Authorized - 1,500,000 shares
Issued and outstanding -
6,000 shares
at December 31, 1999 and June 30, 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 June 30, 2000, respectively 110,345 110,744
Additional paid-in capital 162,275,613 161,964,523
Accumulated deficit (141,550,040) (146,033,695)
Unrealized loss on available-for-sale investments (67,943) (18,830)
Less: Treasury stock - 1,002,615 and 873,779 shares at cost
at December 31, 1999 and June 30, 2000, respectively (3,675,398) (3,202,570)
------------ -----------
Total stockholders' equity 17,092,637 12,820,232
------------ ------------
$34,842,868 $24,119,474
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
1
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
Product revenues $ 4,879,177 $ 1,481,603 $ 18,357,786 $ 3,095,123
Royalty revenues 650,000 1,113,147 650,000 2,352,677
------------ ------------ ------------ ------------
Total Revenues 5,529,177 2,594,750 19,007,786 5,447,800
Cost of product revenues 3,977,045 2,117,864 8,947,021 4,172,077
Cost of royalty revenues 260,000 445,259 260,000 941,071
------------ ------------ ------------ ------------
Total Cost of Revenues 4,237,045 2,563,123 9,207,021 5,113,148
------------ ------------ ------------ ------------
Gross Margin 1,292,132 31,627 9,800,765 334,652
------------ ------------ ------------ ------------
Operating Expenses (Income)
Research and development 2,504,746 1,890,553 4,630,729 3,968,524
Sales and marketing 1,618,800 671,142 5,717,222 1,152,897
General and administrative 1,485,378 834,860 3,157,632 2,092,814
Goodwill and asset write-off (Note 11) - 745,804 - 745,804
Costs incurred for proxy contest 624,627 - 624,627 -
Settlement costs 750,000 - 750,000 -
Gain from sale of subsidiary (47,090,876) (3,139,556) (47,090,876) (3,139,556)
------------ ------------ ------------ ------------
Total operating expenses (income) (40,107,325) 1,002,803 (32,210,666) 4,820,483
------------ ------------ ------------ ------------
Income (loss) from operations 41,399,457 (971,176) 42,011,431 (4,485,831)
Swiss Franc Redemption (6,167,369) - (6,167,369) -
Interest Income 401,937 275,976 407,634 689,612
Interest Expense (192,969) (36,792) (363,916) (87,260)
Other Income, net 257,291 48,728 279,637 293,418
------------ ------------ ------------ ------------
Income (Loss) from Continuing Operations
Before Provision for Income Taxes 35,698,347 (683,264) 36,167,417 (3,590,061)
Provision for Income Taxes 2,500,000 - 2,500,000 -
------------ ------------ ------------ ------------
Income (Loss) from Continuing Operations Before
Cumulative Effect of Change in Accounting Method 33,198,347 (683,264) 33,667,417 (3,590,061)
Cumulative Effect of Change in Accounting Method (Note 12) - - - (712,359)
Loss from Discontinued Operations (435,000) - (435,000) -
------------ ------------ ------------ ------------
Net Income (Loss) $ 32,763,347 $ (683,264) $ 33,232,417 $ (4,302,420)
============ ============ ============ ============
Basic Net Income (Loss) per Share:
Continuing operations $ 3.22 $ (0.08) $ 3.27 $ (0.37)
Cumulative effect of change in accounting method - - - (0.07)
Discontinued operations (0.04) - (0.04) -
------------ ------------ ------------ ------------
Total Basic Net Income (Loss) Per Share $ 3.18 $ (0.08) $ 3.23 $ (0.44)
============ ============ ============ ============
Basic Weighted Average Number of Shares Outstanding 10,284,035 10,189,401 10,239,338 10,118,294
============ ============ ============ ============
Diluted Net Income (Loss) Per Share:
Continuing operations $ 3.02 $ (0.08) $ 3.03 $ (0.37)
Cumulative effect of change in accounting method - - - (0.07)
Discontinued operations (0.04) - (0.04) -
------------ ------------ ------------ ------------
Total Diluted Net Income (Loss) Per Share $ 2.98 $ (0.08) $ 2.99 $ (0.44)
============ ============ ============ ============
Diluted Weighted Average Number of Shares Outstanding 11,033,819 10,189,401 11,183,627 10,118,294
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<S> <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 stock for Employee Stock Purchase Plan - - - - 9,993 36,674
Issuance of stock for 401K plan - - - - 99,843 366,424
Exercise of stock options - - 39,900 399 19,000 69,730
Unrealized gain on available-for-sale investments - - - - - -
Preferred stock dividends - - - - - -
Net loss - - - - - -
-----------------------------------------------------------------------
Balance, June 30, 2000 6,000 $ 60 11,074,393 $ 110,744 (873,779) $(3,202,570)
=======================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Additional Unrealized Loss Total
Paid-in Accumulated on Available-for- Stockholders'
Capital Deficit Sale Investments Equity
-------------------------------------------------------------------------
Balance, December 31, 1999 $ 162,275,613 $ (141,550,040) $ (67,943) $ 17,092,637
Costs incurred related to the issuance of common stock (156,425) - - (156,425)
Issuance of stock for Employee Stock Purchase Plan (25,420) - - 11,254
Issuance of stock for 401K plan (247,860) - - 118,564
Exercise of stock options 118,615 - - 188,744
Unrealized gain on available-for-sale investments - - 49,113 49,113
Preferred stock dividends - (181,235) - (181,235)
Net loss - (4,302,420) - (4,302,420)
-------------------------------------------------------------------------
Balance, June 30, 2000 $ 161,964,523 $ (146,033,695) $ (18,830) $ 12,820,232
=========================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<S> <C> <C>
Six Months Ended June 30,
1999 2000
Cash Flows from Operating Activities: ------------ ------------
Net Income (Loss) $ 33,232,417 $ (4,302,420)
Add: Net Loss from discontinued operations 435,000 -
------------ ------------
Net Income (Loss) from continuing operations 33,667,417 (4,302,420)
------------ ------------
Adjustments to reconcile net income (loss) from continuing operations
to net cash used in operating activities-
Depreciation and amortization 873,603 335,845
Gain from sale of subsidiary (47,090,876) -
Goodwill and asset write-off - 745,804
Inventory write-off - 597,000
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
Accounts receivable 2,367,166 681,875
Inventories (1,067,763) 305,409
Receivable from sale of subsidiary - 191,420
Other current assets (2,456,403) 367,297
Accounts payable (4,119,523) (266,614)
Accrued expenses (910,798) (563,840)
Accrued income taxes 2,500,000 (2,073,869)
Other current liabilities 3,239,556 -
Deferred revenue (799,714) (469,781)
------------ ------------
Net cash used in operating activities (7,629,966) (4,451,874)
------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (249,691) (392,213)
Proceeds of available-for-sale investments (17,850,248) 15,576,009
Proceeds from the sale of subsidiary, net of cash on hand $288,000 49,448,023 -
Decrease in other assets 10,925 40,443
------------ ------------
Net cash provided by investing activities 31,359,009 15,224,239
------------ ------------
Cash Flows from Financing Activities:
Net proceeds from the issuance of notes payable and advances from distributor 750,000 -
Proceeds from exercise of warrants, stock options
and Employee Stock Purchase Plan 18,087 199,998
Costs incurred related to issuance of common stock (198,500) (156,425)
Payments on line of credit (1,000,000) -
Payment on Swiss Franc convertible debentures (1,365,931) -
Purchase of treasury stock (1,102,084) -
Payment on note payable (2,290,041) -
Redemption of preferred stock (781,387) -
------------ ------------
Net cash provided by (used in) financing activities (5,969,856) 43,573
------------ ------------
Net increase in cash and cash equivalents 17,759,187 10,815,938
Net cash used in discontinued operations (2,115,171) -
Cash and cash equivalents, beginning of the period 1,874,718 2,712,466
------------ ------------
Cash and cash equivalents, end of the period $17,518,734 $13,528,404
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 264,934 $ 122,404
============ ============
Supplemental Disclosure of Noncash Financing and Investing Activities:
Conversion of convertible debentures and related accrued
interest, net of financing fees $ 1,806,074 $ -
============ ============
Conversion of preferred stock $ 63,411 $ -
============ ============
Issuance of common stock for 1999 and 2000 employer 401(k)
matching contribution $ 206,659 $ 118,564
============ ============
Unrealized gain (loss) on available-for-sale investments $ (53,964) $ 49,113
============ ============
Accrued dividends and interest on preferred stock $ 177,452 $ 181,235
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim information. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States 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 accounting principles generally
accepted in the United States. 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, June 30,
1999 2000
----------------- ----------------
Market Value $22,505,996 $6,979,100
================= ================
Cost Basis $22,573,939 $6,997,930
================= ================
Gross Unrealized Loss $(67,943) $(18,830)
================= ================
Available-for-sale investments in the accompanying balance sheet at
June 30, 2000 include debt securities of $6,979,100. 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 $49,113 on such
debt securities were recorded in stockholders' equity during the six months
ended June 30, 2000.
5
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
4. INVENTORIES
-----------
Inventories are stated at lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<S> <C> <C> <C>
December 31, June 30,
1999 2000
------------------ -----------------
Raw materials $1,403,001 $735,802
Work-in-process 496,590 195,867
Finished goods - 65,513
----------------- ----------------
$1,899,591 $997,182
================= =================
</TABLE>
During the quarter ended June 30, 2000, the Company determined that
certain inventory related to past generation products being phased out was
obsolete. Accordingly, the Company wrote-off $597,000 of such inventory which
was included in cost of sales.
5. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consist of the following:
<TABLE>
<S> <C> <C> <C>
December 31, June 30,
1999 2000
------------------ ---------------
Machinery and equipment $1,062,774 $1,209,724
Furniture and fixtures 1,006,125 1,202,295
Leasehold improvements 139,046 188,139
------------------ ----------------
2,207,945 2,600,158
Less: Accumulated depreciation
and amortization 1,216,513 1,667,136
------------------ ----------------
$991,432 $933,022
================= ================
</TABLE>
During the quarter ended June 30, 2000, the Company determined that
carrying value of certain equipment related to past generation products being
phased out had been impaired and, accordingly, wrote-off $223,715 of such
equipment.
6. NOTES PAYABLE
-------------
Notes payable consist of the following:
<TABLE>
<S> <C> <C>
December 31, June 30,
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) (2,244,016)
----------------- ------------------
$1,622,008 $500,000
================= ==================
</TABLE>
6
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
7. SEGMENT AND GEOGRAPHIC INFORMATION
----------------------------------
Product revenue from international sources were $1.0 million and $0.3
million for the three months ended June 30, 1999 and 2000, respectively, and
$7.4 million and $1.1 million for the six months ended June 30, 1999 and 2000,
respectively. 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 and six months ended June 30,
1999 and 2000:
<TABLE>
<S> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------- --------------------------------------
1999 2000 1999 2000
-------------------------------------- --------------------------------------
United States 79.9% 78.1% 60.0% 65.3%
Japan 6.9% 0.6% 13.2% 21.7%
Asia/Pacific 6.1% 9.7% 3.7% 7.1%
Canada/Australia 3.3% 11.0% 1.6% 5.5%
Europe/Middle East 3.8% 0.5% 19.9% 0.3%
Latin America 0.0% 0.1% 1.6% 0.1%
-------------------------------------- --------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
====================================== ======================================
</TABLE>
8. STOCKHOLDERS' EQUITY
--------------------
(a) Options to Purchase Common Stock
During the six months ended June 30, 2000, the Company granted options
to purchase 948,500 shares of the Company's common stock at exercise prices
ranging from $1.38 to $5.06 per share. During the six months ended June 30,
2000, 58,900 options were exercised at $3.19. During the six months ended June
30, 2000, options to purchase 176,541 shares of the Company's common stock at
exercise prices ranging from $1.97 to $10.50 per share expired.
(b) Warrants to Purchase Common Stock
During the six months ended June 30, 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 six months
ended June 30, 2000.
7
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
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 Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
1999 2000 1999 2000
------------- ------------- -------------- --------------
Basic weighted average common
Shares outstanding 10,284,035 10,189,401 10,239,338 10,118,294
Potential common shares pursuant to:
Stock options and warrants 110,086 - 83,514 -
Convertible preferred stock 415,529 - 468,288 -
Convertible debentures 224,169 - 392,487 -
------------- ------------- -------------- --------------
Diluted weighted average common
Shares outstanding 11,033,819 10,189,401 11,183,627 10,118,294
============= ============= ============== ==============
</TABLE>
The Company's net income (loss) per share for the three and six months
ended June 30, 1999 and 2000 is as follows:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
1999 2000 1999 2000
------------------ ----------------- ------------------ -----------------
Net income (loss) from continuing operations $33,198,347 $(683,264) $33,667,417 $(4,302,420)
Preferred stock dividends (80,226) (91,317) (177,452) (181,235)
------------------ ----------------- ------------------ ------------------
Income (loss) attributable to common stockholders $33,118,121 $(774,581) $33,489,965 $(4,483,655)
================== ================= ================== =================
Basic net income (loss) per common share from
continuing operations $3.22 $(0.08) $3.27 $(0.44)
================== ================= ================== =================
Basic weighted average number of shares
Outstanding 10,284,035 10,189,401 10,239,338 10,118,294
================== ================= ================== =================
Diluted net income (loss) per common share from
continuing operations $3.02 $(0.08) $3.03 $(0.44)
================== ================= ================== ================
Diluted weighted average number of shares
outstanding 11,033,819 10,189,401 11,183,627 10,118,294
================== ================= ================== ================
</TABLE>
For the three months ended June 30, 1999 and 2000, 3,204,859
and 5,079,403 shares, respectively, and for the six months ended June 30, 1999
and 2000, 3,010,354 and 5,079,403 shares, respectively, of outstanding
stock options, stock warrants and convertible debt and preferred stock
were not included in the diluted weighted average shares outstanding as
they were antidilutive.
8
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
10. COMPREHENSIVE INCOME (LOSS)
---------------------------
A reconciliation of comprehensive income (loss) is as follows:
<TABLE>
<S> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- ------------------------------------
1999 2000 1999 2000
----------------- ------------------- ----------------- ------------------
Net income (loss) $33,198,347 $(683,264) $33,667,417 $(4,302,420)
Unrealized gain (loss) on
available-for-sale investments (53,964) 27,396 (53,964) 49,113
----------------- ------------------- ----------------- ------------------
Comprehensive income (loss) $33,144,383 $(655,868) $33,613,453 $(4,253,307)
================= =================== ================= ==================
</TABLE>
11. INTANGIBLE ASSETS
-----------------
The Company assesses the realizability of intangible assets in
accordance with SFAS No. 121, Accounting for the Impairment Of Long-Lived Assets
And For Long-Lived Assets To Be Disposed Of. Under SFAS No. 121, the Company is
required to assess the valuation of its long-lived assets, including intangible
assets, based on the estimated undiscounted cash flows to be generated by such
assets. During the quarter ended June 30, 2000, the Company made a determination
that goodwill related to certain past generation products being phased out had
been impaired and, accordingly, wrote-off $522,089 of such goodwill.
12. CHANGE IN ACCOUNTING METHOD - REVENUE RECOGNITION
-------------------------------------------------
During the quarter ended June 30, 2000, the Company adopted Securities
and Exchange Commission (SEC) Staff Accounting Bulletin ("SAB") No. 101, Revenue
Recognition. As a result of adopting SAB 101, the Company now records royalty
income when received rather than when earned. In accordance with SAB No. 101,
the Company recorded the impact of adopting SAB No. 101 as a cumulative catch-up
adjustment to income in the current year's statement of operations, effective
January 1, 2000. The impact of adopting SAB 101 for the three and six months
ended June 30, 2000 was to increase net income by approximately $95,000 ($0.01
per share) and $140,000 ($0.01 per share), respectively. Restated results of
operations for the quarter ended March 31, 2000 as a result of adopting SAB No.
101 are as follows:
Three Months Ended
March 31, 2000
-----------------------
Revenues $2,853,050
Gross Margin $288,201
Operating Loss $(3,514,655)
Net Loss $(3,619,156)
Net Loss Per Share $(0.37)
9
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
If SAB 101 had been adopted effective January 1, 1999, the Company
would have reported the following pro forma results:
<TABLE>
<S> <C> <C>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
--------------------------------------------
(Pro forma - Unaudited)
--------------------------------------------
Revenues $4,879,177 $18,357,786
Income from continuing operations
before extraordinary items $32,808,347 $33,277,417
Net income $32,763,347 $32,842,417
Net income per share - basic $3.14 $3.19
Net income per share - diluted $2.94 $2.96
</TABLE>
13. GAIN ON SALE OF SUBSIDIARY
--------------------------
In connection with the sale of the Company's subsidiary on April 27,
1999, the Company had deferred gain recognition of $3.1 million. This amount
represented funds held in escrow until April 27, 2000 as security for claims
made. On April 27, 2000, the Company received all funds held in escrow for which
no claims had been made and recorded the deferred gain in operating income in
the accompanying Consolidated Statements of Operations.
10
<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 April 27, 1999, the Company sold all of the issued and outstanding common
stock of Palomar's Star Medical Technologies, Inc. ("Star") subsidiary to
Coherent for $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, for the years ended
December 31, 1998 and 1999, gross revenues associated with Star's LightSheer
diode laser system comprised 80% and 60%, respectively, of the Company's total
revenues. Consequently, the Company's revenues have declined significantly over
the last four-quarters. 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 Palomar SLP1000(TM) diode hair
removal laser system is critical to the Company's success. During the quarter
ended June 30, 2000, the Company began shipment of the Palomar SLP1000. 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 June 30, 2000,
Compared to Three Months Ended June 30, 1999
For the three months ended June 30, 2000, the Company's revenues
decreased to $2.6 million, as compared to $5.5 million for the three months
ended June 30, 1999. The decrease in the Company's revenues of $2.9 million, or
53% from the three months ended June 30, 1999, was mainly due to the reduction
in sales volume of $3.4 million associated with the LightSheer diode laser
system manufactured by Star. This decrease was offset by an increase of $463,000
in royalties received by the Company.
Gross profit for the three months ended June 30, 2000 was
$32,000, 1% of revenues, compared to $1.3 million, 23% of revenues, for the
three months ended June 30, 1999. The decrease in gross profit and gross profit
percentage was mainly due to the reduction in sales volume associated with the
LightSheer diode laser system manufactured by Star. Additionally, gross margin
was negatively affected in the quarter ended June 30, 2000 as the Company wrote
off $597,000 of the remaining inventory associated with past generation product
lines being phased out.
(ii) OPERATING AND OTHER EXPENSES: Three Months Ended June 30,
2000, Compared to Three Months Ended June 30, 1999
Research and development costs decreased to $1.9 million for the three
months ended June 30, 2000, as compared to $2.5 million for the three months
ended June 30, 1999. Research and development expenses as a percentage of
revenue totaled 73% for the three months ended June 30, 2000 and 45% for the
three months ended June 30, 1999. The increase as a percentage of sales is
directly attributable to the reduction in sales volume associated with the
LightSheer diode laser system 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
11
<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 were $671,000, or 26% of revenues for
the three months ended June 30, 2000, compared to $1.6 million, or 29% of
revenues for the three months ended June 30, 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 diode laser system
manufactured by Star
General and administrative expenses decreased to $835,000, or 32% of
revenues for the three months ended June 30, 2000, as compared to $1.5 million,
or 27% of revenues for the three months ended June 30, 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.
During the quarter ended June 30, 2000, the Company made a
determination that goodwill and equipment related to certain past generation
products being phased out had been impaired and, accordingly, wrote-off $522,000
of goodwill and $224,000 of equipment.
Costs related to solicitation of proxies in connection with the
Company's 1999 Annual Meeting of Stockholders were $625,000 for the three months
ended June 30, 1999 as a result of proxy contest launched by a dissident
stockholder group.
Settlement costs were $750,000 for the three months ended June 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 three
months ended June 30, 1999 due to the Company completing the sale of Star on
April 27, 1999. Gain from sale of subsidiary was $3.1 million in the quarter
ended June 30, 2000, as the one-year escrow was settled in connection with the
sale of Star.
Redemption expense was $6.2 million for the three months ended June 30,
1999. This amount reflects a redemption expense 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 $7.7
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 $6.7
million to the European banks, of which $4.5 million has been paid. The balance
of $2.2 million is due through 2001. Accordingly, the Company has recorded a
charge to operations of $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 income decreased to $276,000 for the three months ended June
30, 2000, compared to $402,000 for the three months ended June 30, 1999. This
decrease in interest income was the result of a decrease in cash, cash
equivalents and available-for-sale investments for the three months ended June
30, 2000 as compared to the three months ended June 30, 1999.
Interest expense decreased to $37,000 for the three months ended June
30, 2000, compared to $193,000 for the three months ended June 30, 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 resulting in a decrease of
interest expense.
Other income, net decreased to approximately $49,000 for the three
months ended June 30, 2000. This amount compares to $257,000 for the three
months ended June 30, 1999.
12
<PAGE>
The Company had a provision for income taxes of $2.5 million for the
three months ended June 30, 1999 as a result of the sale of Star. The Company
was not able to fully offset the gain with its net operating loss carryforwards.
During the three months ended June 30, 2000, the Company adopted
Securities and Exchange Commission (SEC) Staff Accounting Bulletin ("SAB") No.
101, Revenue Recognition. As a result of adopting SAB 101, the Company now
records royalty income when received rather than when earned. In accordance with
SAB No. 101, the Company recorded the impact of adopting SAB No. 101 as a
cumulative catch-up adjustment to income in the current year's statement of
operations, effective January 1, 2000.
The loss from discontinued operations for the three months ended June
30, 1999 was $435,000 and due to a settlement related to the operations of a
former subsidiary.
(iii) REVENUES AND GROSS PROFIT: Six Months Ended June 30, 2000, Compared to
the Six Months Ended June 30, 1999
For the six months ended June 30, 2000, the Company's revenues were
$5.4 million, as compared to $19.0 million for the six months ended June 30,
1999. The decrease in the Company's revenues of $13.6 million, or 71% from the
six months ended June 30, 1999, was mainly due to the reduction in sales volume
of $14.5 million associated with the LightSheer diode laser system manufactured
by Star. This decrease is offset by an increase of $1.7 million in royalties
received by the Company and decrease of $0.8 million in other product revenues.
Gross profit for the six months ended June 30, 2000 was $335,000, 6% of
revenues, as compared to $9.8 million, or 52% of revenues for the six months
ended June 30, 1999. The decrease in the Company's gross profit of $9.5 million,
or 97% from the six months ended June 30, 1999, was mainly due to the reduction
in sales volume associated with the LightSheer diode laser system manufactured
by Star. Additionally, gross margin was negatively affected in the six months
ended June 30, 2000 as the Company wrote off $597,000 of the remaining inventory
associated with past generation product lines being phased out.
(iv) OPERATING AND OTHER EXPENSES: Six Months Ended June 30, 1999,
Compared to Six Months Ended June 30, 1998
Research and development costs decreased to $4.0 million for the six
months ended June 30, 2000, from $4.6 million for the six months ended June 30,
1999. Research and development expenses as a percentage of revenue totaled 73%
for the six months ended June 30, 2000 and 24% for the six months ended June 30,
1999. 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 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 $1.2 million (21% of
revenues) for the six months ended June 30, 2000, from $5.7 million (30% of
revenues) for the six months ended June 30, 1999. The decrease in selling and
marketing expenses as a percentage of revenues is a result of the Company's sale
of Star.
General and administrative expenses decreased to $2.1 million (38% of
revenues) for the six months ended June 30, 2000, as compared to $3.2 million
(17% of revenues) for the six months ended June 30, 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.
13
<PAGE>
During the quarter ended June 30, 2000, the Company made a
determination that goodwill and equipment related to certain past generation
products being phased out had been impaired and, accordingly, wrote-off $522,000
of goodwill and $224,000 of equipment.
Costs related to solicitation of proxies in connection with the
Company's 1999 Annual Meeting of Stockholders were $625,000 for the six months
ended June 30, 1999 as a result of proxy contest launched by a dissident
stockholder group.
Settlement costs were $750,000 for the six months ended June 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 six months
ended June 30, 1999 due to the Company completing the sale of Star on April 27,
1999
Redemption expense was $6.2 million for the six months ended June 30,
1999. This amount reflects a redemption expense 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 $7.7
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 $6.7
million to the European banks, of which $4.5 million has been paid. The balance
of $2.2 million is due through 2001. Accordingly, the Company has recorded a
charge to operations of $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 income increased to approximately $690,000 for the six months
ended June 30, 2000 as compared to $408,000 for the six months ended June 30,
1999. This amount represents interest earned on the balance of the funds
received from the April 27, 1999 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.
Interest expense decreased to $87,000 for the six months ended June 30,
2000, from $364,000 for the six months ended June 30, 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 resulting in a decrease of interest
expense.
Other income, net of $293,000 for the six months ended June 30, 2000,
remained relatively constant as compared to $280,000 for the six months ended
June 30, 1999.
The Company had a provision for income taxes of $2.5 million for the
six months ended June 30, 1999 as a result of the sale of Star. The Company was
not able to fully offset the gain with its net operating loss carryforwards.
During the six months ended June 30, 2000, the Company adopted
Securities and Exchange Commission (SEC) Staff Accounting Bulletin ("SAB") No.
101, Revenue Recognition. As a result of adopting SAB 101, the Company now
records royalty income when received rather than when earned. In accordance with
SAB No. 101, the Company recorded the impact of adopting SAB No. 101 as a
cumulative catch-up adjustment to income in the current year's statement of
operations, effective January 1, 2000.
The loss from discontinued operations for the six months ended June 30,
1999 was $435,000 and due to a settlement related to the operations of a former
subsidiary.
(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 June 30, 2000, the Company had $20.5 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
14
<PAGE>
its ongoingcash 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 June 30, 2000, the Company's accounts receivable totaled $1.2
million, as compared to $1.9 million as of December 31, 1999. The Company's
allowance for doubtful accounts totaled $173,000 as of June 30, 2000, compared
to $207,000 as of December 31, 1999.
As of June 30, 2000, the Company's accounts payable has decreased
to $393,000, as compared to $659,000 as of December 31, 1999.
The Company anticipates that capital expenditures for the remainder of
2000 will total approximately $200,000, 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.
(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.
15
<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.
16
<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 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.
17
<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 Amended
and Restated "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.
18
<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.
19
<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 operating officer as
defendants. On March 17, 1999, the Second Amended Class Action Complaint in
Varljen was served upon the Company and its current chief operating 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.
20
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
The following table sets forth a brief description of each matter voted
upon and the number of votes cast for or against, as well as the number of
abstentions and broker non-votes, as to each such matter, at the Company's
Annual Meeting of Stockholders held on June 7, 2000.
<TABLE>
<S> <C> <C> <C> <C>
Votes Votes
Matter For Against Abstentions
------------------------------------------------------------------------------------------------------------
Ratification of Selection of Arthur Andersen LLP as the 7,842,625 28,138 32,682
Company's Auditors
Election of Directors:
Management Nominees:
Louis P. Valente 7,797,865 105,580
James G. Martin 7,797,921 105,524
A. Neil Pappalardo 7,797,921 105,538
Nicholas P. Economou 7,797,921 105,524
</TABLE>
Item 5. Other Information.
------------------
Not applicable.
21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
<TABLE>
<S> <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
10 Amendment No. 1 to Key Employment Agreement between the Company and Joseph P. Caruso dated June 8,
2000
22
<PAGE>
27 Financial Data Schedule for the Period Ended June 30, 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.
(b) Reports on Form 8-K
None
</TABLE>
23
<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 August 9, 2000.
PALOMAR MEDICAL TECHNOLOGIES, INC.
----------------------------------
(Registrant)
/S/ Louis P. Valente
DATE: August 9, 2000 By: -----------------------------
Louis P. Valente
Chief Executive Officer
(Principal Executive Officer)
/S/ Joseph P. Caruso
DATE: August 9, 2000 By: -----------------------------
Joseph P. Caruso
President and Chief Operating Officer
(Principal Financial Officer and Principal
Accounting Officer)
24
<PAGE>
