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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
February 14, 2002
DIOMED HOLDINGS, INC.
NEVADA 000-32045 84-140636
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification No.)
incorporation)
1 DUNDEE PARK
ANDOVER, MA 01810
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (978-475-7771)
Natexco Corporation
(Former name or address, if changed since last report)
ITEM 5. CHANGES IN CONTROL OF REGISTRANT.
On February 14, 2002, Diomed Acquisition Corp., a Delaware corporation
and a wholly-owned subsidiary of Diomed Holdings, Inc., a Nevada corporation
formerly known as Natexco Corporation (the "Company"), merged with and into
Diomed, Inc., a Delaware corporation ("Diomed"), pursuant to an Agreement and
Plan of Merger dated as of January 29, 2002 (the "Merger Agreement"). Diomed
provides innovative clinical modalities and specializes in the development and
distribution of equipment and disposable items used in minimal and
micro-invasive medical procedures. In developing and marketing our innovative
solutions, we use proprietary technology and we aim to secure strong commercial
advantages over our competitors by gaining governmental approvals in advance of
others and through exclusive commercial arrangements. To participate in the
rapidly growing minimal and micro-invasive medical procedure industry, we seek
to integrate disposable items into our product lines. We hold proprietary
technology in certain methods of synchronizing diode light sources and in
certain optical fibers. To optimize our revenues, we focus on photodynamic
therapy for use in cancer treatments, on endovenous laser treatment for use in
varicose vein treatments and on dental and general surgical applications.
Following the merger, the business to be conducted by the Company will
be principally the business conducted by Diomed prior to the merger. The merger
will be accounted for as a recapitalization.
Pursuant to the terms of the Merger Agreement, the Company issued (i)
2,328,922.50 shares of its Class A convertible preferred stock ("Class A Stock")
to the former holders of Diomed common stock in exchange for 9,315,690 shares of
common stock of Diomed issued and outstanding as of the effective time of the
Merger, which 2,328,922.50 shares convert into 9,315,690 shares of our common
stock, and (ii) 1,362,500 of its Class A Stock to the former holders of
2,725,000 shares of Diomed Series A preferred stock issued and outstanding as of
the effective time of the Merger, which 1,362,500 shares convert into 5,450,000
shares of our common stock.
The shares issued to the former Diomed stockholders in the Merger
represent approximately of 51% of the issued and outstanding voting securities
(by vote) of the Company following the Merger. The directors of the Company
appointed Mr. Peter Norris, a director of Diomed, as a director to fill a
vacancy on its board of directors, to serve in such capacity until the next
annual meeting of shareholders of the Company or until his earlier resignation
or removal. The directors also appointed Mr. Peter Klein, the chief executive
officer of Diomed, as chief executive officer and president. We anticipate that
shortly after the Merger the directors other than Mr. Norris will resign and Mr.
Norris will appoint the remaining Diomed directors as the board of directors of
the Company, subject to the applicable rules of the Securities and Exchange
Commission.
In connection with the Merger, the Company conducted a private
placement offering of its securities. In the private placement, investors
subscribed to purchase from the Company an aggregate of 5,000,000 shares of its
common stock pursuant to Section 4(2) of the Securities Act of 1933, as amended,
at a price per share of $2.00 for aggregate gross proceeds of $10,000,000. The
Company intends to make the proceeds of the private placement available to
Diomed for the following uses: (a) to pay expenses incurred in connection with
the Merger, the Company's private placement and repayment of a portion of
Diomed's existing debt; (b) to fund Diomed's laser development project and other
research and development initiatives; (c) to fund business acquisitions that
Diomed may undertake in the future; and (d) to fund Diomed's working capital
needs. Pursuant to the terms of the subscription agreements, each subscriber may
rescind his or her subscription for a period of two days following the receipt
of a draft of the Company's Current Report on Form 8-K and this memorandum
attached thereto as Exhibit 99.1. The two-day period elapsed prior to the
closing of the Merger. The 5,000,000 shares of the Company's common stock issued
in the private placement completed on February 14, 2002 cannot be sold for a
period of six months following the later of (i) the closing of the Merger and
(ii) the effective date of the Merger, subject to exception for gifts and
transfers in trust.
1
In connection with the Merger, the Company assumed the obligations of
Diomed with respect to Diomed's outstanding 1,380,335 stock options and each of
the two plans under which Diomed had granted these options since 1998. Prior to
its adoption of formal stock option plans, Diomed had also granted 489,679
options to officers, other employees and consultants. With respect to these
non-plan options, the Merger Agreement obligates the Company, upon request of
the option holders, to perform Diomed's obligations to issue shares upon the
exercise of outstanding options. If all existing optionees fully exercise their
rights, the Company will issue to them an aggregate of 467,503.50 shares of its
Class A Stock which shares convert into 1,870,014 shares of its common stock.
The Merger Agreement also obligates the Company to perform Diomed's
obligations to issue shares upon exercise of outstanding warrants to purchase
121,924 shares. If the warrantholders fully exercise their rights, the Company
will issue to them an aggregate of 30,481 shares of its Class A Stock which
shares convert into 121,924 shares of the Company's common stock.
Exhibit 99.1 to this Report is a descriptive memorandum of Diomed
Holdings, Inc. and its business.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
(a) Financial Statements of Diomed, Inc.
Unaudited financial statements for the nine months ended September
30, 2000 and 2001
Audited financial statements for the years ended December 31, 1998,
1999 and 2000
(b) Pro forma financial statements of Diomed Holdings, Inc.
Pro Forma Balance Sheet as of September 30, 2001
Pro Forma Statement of Operations for the year ended December 31, 2000
Pro Forma Statement of Operations for the nine months ended September
30, 2001
(c) Exhibits
Exhibit No. Description of Exhibit
---------- ----------------------
2.1 Agreement and Plan of Merger
3.2 Amendment to the Articles of Incorporation
3.3 Restated By-laws
4.2 Certificate of Designation for Class A Convertible Preferred Stock
4.3 1998 Incentive Stock Plan
4.4 Diomed, Inc. 2001 Employee Stock Option Plan
10.1 Form of Subscription Agreement and Investment Representation
10.2 Escrow Agreement
10.3 Consulting Agreement between the Company and Verus Support
Services Inc.
10.4 Agreement between James Arkoosh and Diomed
10.5 Employment Agreement with Peter Klein, dated July 24, 1999
10.6 Lock-up Agreement Applicable to Private Placement Investors
10.7 Assignment and Assumption Agreement
23.1 Consent of Arthur Andersen LLP
99.1 Descriptive Memorandum of Diomed Holdings, Inc.
99.2 Report of Atlas Capital Services dated February 4, 2002
2
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED HEREUNTO DULY AUTHORIZED.
DIOMED HOLDINGS, INC.
(Registrant)
Date: February 14, 2002 By: /s/ Peter Klein
-------------------------------------
Name: Peter Klein
Title: President and Chief Executive Officer
3
DIOMED, INC.
Consolidated Financial Statements
as of December 31, 2000 and 1999
Together with Auditors' Report
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants F-I-2
Consolidated Balance Sheets as of December 31, 1999 and 2000
and September 30, 2001 (unaudited) F-I-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1999, and 2000 and the Nine Months Ended
September 30, 2000 and 2001 (unaudited) F-I-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1998, 1999, and 2000 and
the Nine Months Ended September 30, 2001 (unaudited) F-I-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999, and 2000 and the Nine Months Ended
September 30, 2000 and 2001 (unaudited) F-I-6
Notes to Consolidated Financial Statements F-I-7
F-I-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Diomed, Inc.:
We have audited the accompanying consolidated balance sheets of Diomed, Inc. (a
Delaware corporation) and subsidiary as of December 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the years in the three-year period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diomed, Inc. and subsidiary as
of December 31, 1999 and 2000, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
September 26, 2001
(except with respect to the
matter discussed in Note 16,
as to which the date is
February 14, 2002)
F-I-2
DIOMED, INC.
Consolidated Balance Sheets
DECEMBER 31, SEPTEMBER 30,
1999 2000 2001
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 63,042 $ 118,872 $ 293,100
Accounts receivable, net of allowance for doubtful accounts of
$7,000, $300,000 and $238,000 in 1999, 2000 and 2001,
respectively 1,737,199 3,574,510 1,352,200
Inventories 1,759,480 2,348,594 2,504,035
Prepaid expenses and other current assets 513,445 219,808 301,704
--------------- --------------- ---------------
Total current assets 4,073,166 6,261,784 4,451,039
--------------- --------------- ---------------
Property and Equipment:
Office equipment and furniture and fixtures 843,681 1,024,529 1,193,665
Manufacturing equipment 620,081 746,060 736,000
Leasehold improvements 635,404 605,790 634,000
--------------- --------------- ---------------
2,099,166 2,376,379 2,563,665
Less--Accumulated depreciation and amortization 624,960 1,077,933 1,383,500
--------------- --------------- ---------------
1,474,206 1,298,446 1,180,165
--------------- --------------- ---------------
Intangible Assets, net of accumulated amortization of $0, $41,000
and $139,000 in 1999, 2000 and 2001, respectively -- 940,487 801,400
--------------- --------------- ---------------
Other Assets 489,092 451,597 669,396
--------------- --------------- ---------------
$ 6,036,464 $ 8,952,314 $ 7,102,000
=============== =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank loan $ 1,985,550 $ 1,722,674 $ 529,900
Convertible loan notes -- 2,700,000 --
Current maturities of convertible debt -- 339,336 339,336
Current maturities of capital lease obligations 52,656 52,528 48,657
Accounts payable 1,896,117 1,983,206 2,308,821
Accrued expenses 2,626,073 1,584,962 832,500
Customer advance -- -- 488,500
--------------- --------------- ---------------
Total current liabilities 6,560,396 8,382,706 4,547,714
--------------- --------------- ---------------
Promissory Note Payable -- 936,000 936,000
--------------- --------------- ---------------
Convertible Notes Payable to Stockholders -- - 457,000
--------------- --------------- ---------------
Convertible Debt, less current maturities -- 826,339 826,339
--------------- --------------- ---------------
Capital Lease Obligations, less current maturities 119,270 88,303 51,243
--------------- --------------- ---------------
Commitments (Note 14)
Stockholders' Equity (Deficit):
Series A convertible preferred stock, $0.01 par value-
Authorized--3,500,000 shares
Issued and outstanding--2,725,000 in 2001 -- -- 27,250
Common stock, $0.001 par value-
Authorized--40,000,000 shares
Issued and outstanding--3,954,238 in 1999, 4,770,103 shares
in 2000 and 9,179,955 shares in 2001 3,954 4,770 9,180
Additional paid-in capital 19,289,991 22,073,666 30,270,656
Cumulative translation adjustment (38,341) 15,332 (4,200)
Accumulated deficit (19,898,806) (23,374,802) (30,019,182)
--------------- --------------- ---------------
Total stockholders' equity (deficit) (643,202) (1,281,034) 283,704
--------------- --------------- ---------------
$ 6,036,464 $ 8,952,314 $ 7,102,000
=============== =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-I-3
DIOMED, INC.
Consolidated Statements of Operations
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------- -----------
1998 1999 2000 2000 2001
(UNAUDITED)
Revenues $ 9,312,347 $ 6,751,302 $ 9,424,514 $ 5,461,800 $ 6,427,800
Cost of Revenues 5,179,234 6,706,013 7,414,564 4,766,700 4,952,000
------------- ------------- ------------- ------------- -------------
Gross profit 4,133,113 45,289 2,009,950 695,100 1,475,800
------------- ------------- ------------- ------------- -------------
Operating Expenses:
Research and development 1,374,179 1,572,825 1,270,816 846,400 1,009,000
Selling and marketing 1,929,350 2,136,498 1,647,510 1,136,400 1,873,000
General and administrative 2,577,860 2,115,787 2,228,777 1,395,000 1,936,000
Impairment of goodwill (Note 5) -- 1,586,370 -- -- --
------------- ------------- ------------- ------------- -------------
Total operating expenses 5,881,389 7,411,480 5,147,103 3,377,800 4,818,000
------------- ------------- ------------- ------------- -------------
Loss from operations (1,748,276) (7,366,191) (3,137,153) (2,682,700) (3,342,200)
Interest Expense, net (60,984) (124,535) (338,843) (231,600) (2,879,000)
------------- ------------- ------------- ------------- -------------
Net loss (1,809,260) (7,490,726) (3,475,996) (2,914,300) (6,221,200)
Value Ascribed to Call Option and
Beneficial Conversion Feature Related to
Preferred Stock -- -- -- -- (423,180)
------------- ------------- ------------- ------------- -------------
Net loss applicable to common
stockholders $ (1,809,260) $ (7,490,726) $ (3,475,996) $ (2,914,300) $ (6,644,380)
============= ============= ============= ============= =============
Net loss per share (Note 3):
Basic and diluted net loss per share
applicable to common stockholders $ (0.70) $ (2.34) $ (0.82) $ (0.71) $ (0.83)
============= ============= ============ ============ ============
Basic and diluted weighted average
common shares outstanding 2,596,574 3,196,558 4,246,004 4,081,222 8,003,994
============= ============= ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-I-4
DIOMED, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
NUMBER OF $0.01 PAR NUMBER OF $0.001 PAR PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
Balance, December 31, 1997 -- $ -- 2,346,811 $ 2,347 $ 13,602,136
Issuance of stock for services rendered -- -- 3,354 3 21,997
Issuance of stock in connection with acquisition -- -- 414,143 414 2,716,364
Exercise of options to purchase common stock -- -- 25,350 25 126,102
Change in cumulative translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Comprehensive loss
Balance, December 31, 1998 -- -- 2,789,658 2,789 16,466,599
Issuance of stock, net of issuance costs of
$148,448 -- -- 1,139,580 1,140 2,700,207
Change in cumulative translation adjustment -- -- -- -- -
Exercise of options to purchase common stock -- 25,000 25 123,185
Net loss -- -- -- -- -
------------ ------------ ------------ ------------ ------------
Comprehensive loss
Balance, December 31, 1999 -- -- 3,954,238 3,954 19,289,991
Issuance of stock and warrants, net of offering
costs of $71,036 -- -- 815,865 816 2,783,675
Change in cumulative translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Comprehensive loss
Balance, December 31, 2000 -- -- 4,770,103 4,770 22,073,666
Issuance of Series A convertible preferred stock,
net of issuance costs of $192,530 (unaudited) 2,725,000 27,250 -- -- 2,505,220
Value ascribed to call option and beneficial
conversion feature related to preferred stock
(unaudited) -- -- -- -- 423,180
Conversion of debt into common stock, including
$2,700,000 related to beneficial conversion
feature (unaudited) -- -- 2,475,000 2,475 5,172,525
Value ascribed to warrants issued in connection
with issuance of debt to stockholders
(unaudited) -- -- -- -- 43,000
Compensation expense related to issuance of stock
options to consultants for services (unaudited) -- -- -- -- 55,000
Recapitalization of common stock held by certain
investors (unaudited) -- -- 1,934,852 1,935 (1,935)
Change in cumulative translation adjustment
(unaudited) -- -- -- -- -
Net loss (unaudited) -- -- -- -- -
------------ ------------ ------------ ------------ ------------
Comprehensive loss (unaudited)
Balance, September 30, 2001 (unaudited) 2,725,000 $ 27,250 9,179,955 $ 9,180 $ 30,270,656
============ ============ ============ ============ ============
TOTAL
CUMULATIVE STOCKHOLDERS'
TRANSLATION ACCUMULATED EQUITY COMPREHENSIVE
ADJUSTMENT DEFICIT (DEFICIT) LOSS
$ - $(10,598,820) $ 3,005,663
- -- 22,000
- -- 2,716,778
- -- 126,127
27,014 -- 27,014 $ 27,014
- (1,809,260) (1,809,260) (1,809,260)
------------ ------------ ------------ -------------
$ (1,782,246)
=============
27,014 (12,408,080) 4,088,322
- -- 2,701,347
(65,355) -- (65,355) $ (65,355)
- -- 123,210
- (7,490,726) (7,490,726) (7,490,726)
------------ ------------ ------------ -------------
$ (7,556,081)
=============
(38,341) (19,898,806) (643,202)
- -- 2,784,491
53,673 -- 53,673 $ 53,673
- (3,475,996) (3,475,996) (3,475,996)
------------ ------------ ------------ -------------
$ (3,422,323)
=============
15,332 (23,374,802) (1,281,034)
-- -- 2,532,470
-- (423,180) --
-- -- 5,175,000
-- - 43,000
-- - 55,000
-- -- --
(19,532) -- (19,532) $ (19,532)
-- (6,221,200) (6,221,200) (6,221,200)
------------ ------------ ------------ -------------
$ (6,240,732)
=============
$ (4,200) $(30,019,182) $ 283,704
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-I-5
DIOMED, INC.
Consolidated Statements of Cash Flows
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------- -------
1998 1999 2000 2000 2001
(UNAUDITED)
Cash Flows from Operating Activities:
Net loss $ (1,809,260) $ (7,490,726) $ (3,475,996) $ (2,914,300) $ (6,221,200)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 431,817 688,708 467,566 304,086 524,049
Noncash interest expense on convertible loan
notes -- -- -- -- 2,700,000
Issuance of stock options to consultants -- -- -- -- 55,000
Impairment of goodwill -- 1,586,370 -- -- --
Changes in operating assets and liabilities,
net of acquisition-
Accounts receivable (19,771) 545,556 (1,965,681) 41,625 2,461,837
Inventories (254,245) (30,084) (421,071) (458,651) (155,339)
Prepaid expenses and other current assets (155,648) (269,088) 256,583 58,437 (88,997)
Accounts payable 607,244 82,218 226,307 137,012 353,166
Accrued expenses 209,478 2,055,614 (852,658) (915,222) (727,604)
Customer advance -- -- -- - 488,500
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (990,385) (2,831,432) (5,764,950) (3,747,013) (610,588)
------------ ------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (36,151) (970,323) (272,414) (322,877) (374,398)
Increase in other assets -- (489,092) -- -- (225,196)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (36,151) (1,459,415) (272,414) (322,877) (599,594)
------------ ------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Net proceeds (payments) from bank borrowings 308,395 1,500,073 (115,389) (350,277) (1,162,364)
Proceeds from convertible loan notes -- -- 2,700,000 2,700,000 --
Proceeds from convertible debt -- -- -- -- 500,000
Promissory note payable -- -- 936,000 -- --
Payments on convertible debt -- -- (34,325) -- (225,000)
Payments on capital lease obligations (17,419) (40,859) (50,388) (48,180) (38,445)
Proceeds from issue of stock 126,127 2,701,347 2,784,491 1,950,248 --
Proceeds from issue of preferred stock -- -- -- -- 2,532,470
Proceeds from exercise of stock options -- 123,210 -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 417,103 4,283,771 6,220,389 4,251,791 1,606,661
------------ ------------ ------------ ------------ ------------
Effect of Exchange Rate Changes (145) (37,143) (127,195) (174,443) (222,251)
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents (609,578) (44,219) 55,830 7,458 174,228
Cash and Cash Equivalents, beginning of period 716,839 107,261 63,042 63,042 118,872
------------ ------------ ------------ ------------ ------------
Cash and Cash Equivalents, end of period $ 107,261 $ 63,042 $ 118,872 $ 70,500 $ 293,100
=========== =========== =========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 61,518 $ 124,535 $ 332,285 $ 205,248 $ 186,432
=========== =========== =========== =========== ===========
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Acquisition of property and equipment under
capital lease obligations $ -- $ 172,159 $ 32,065 $ 32,065 $ --
=========== =========== =========== =========== ===========
Issuance of stock in connection with
acquisition of LaserLite LLC $ 2,738,778 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
Exchange of convertible debt for QLT
intangible assets and inventory $ -- $ -- $ 1,200,000 $ -- $ --
=========== =========== =========== =========== ===========
Conversion of convertible loan notes into
common stock $ -- $ -- $ -- $ -- $ 2,475,000
=========== =========== =========== =========== ===========
Value ascribed to warrants issued in
connection with issuance of debt to
stockholders $ -- $ - $ -- $ -- $ 43,000
=========== =========== =========== =========== ===========
Value ascribed to call option and beneficial
conversion feature related to preferred stock $ -- $ - $ -- $ -- $ 423,180
=========== =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-I-6
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS
Diomed, Inc. and subsidiaries (the Company) provides innovative clinical
modalities and specializes in developing and distributing equipment and
disposables used in minimal and micro-invasive medical procedures.
Some of the Company's medical laser products are in various stages of
development, and as such, the success of future operations is subject to a
number of risks similar to those of other companies in similar stages of
development. Principal among these risks are the continued successful
development and marketing of the Company's products, proper regulatory
approval, the need to achieve profitable operations, competition from
substitute products and larger companies, the need to obtain adequate
financing to fund future operations and dependence on key individuals. The
Company has incurred significant losses since inception and is devoting
substantially all its efforts towards research and development, regulatory
approvals, manufacturing and marketing its products.
As discussed in Notes 8, 11(B), and 15, subsequent to year-end, certain
debt outstanding at December 31, 2000 has converted to equity and the
Company has raised additional funding through separate issuances of equity
and debt instruments. Management believes that this additional capital,
along with its cash flows from operations, will be sufficient to fund its
operations into 2002. As discussed in Note 16, the Company merged with
another company subsequent to year end.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described below and elsewhere in these
notes to consolidated financial statements.
F-I-7
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(A) PRINCIPLES OF CONSOLIDATION
These financial statements include the amounts of the Company and its
wholly owned subsidiaries. All significant intercompany transactions have
been eliminated.
(B) UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of the Company's management, the September 30, 2000 and
2001 unaudited interim financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of results of the respective interim period. The results of
operations for the nine months ended September 30, 2001 are not
necessarily indicative of the results to be expected for the full year or
for any future period.
(C) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
(D) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of short-term, highly liquid
investments with original maturity dates of 90 days or less. Cash
equivalents are carried at cost, which approximates fair value.
(E) FOREIGN CURRENCY TRANSLATION
Assets, excluding property and equipment and liabilities of the foreign
subsidiaries are translated at the rate of exchange in effect at
year-end, while stockholders' equity, excluding the current year's loss,
is translated at historical rates. Results of operations are translated
using the weighted average exchange rate in effect during the year.
Resulting translation adjustments are recorded as a separate component of
stockholders' equity in the accompanying consolidated balance sheets.
Transaction gains and losses are included in operating expenses for all
periods presented.
(F) REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment to the
customer as long as there is persuasive evidence of an arrangement, the
sales price is fixed and determinable and collection of the related
receivable is probable. The Company provides for estimated product
returns and warranty costs at the time of product shipment. In December
1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, which establishes guidance in applying generally accepted
accounting principles to revenue recognition in financial statements and
is effective beginning with the Company's fourth quarter of the year
ended December 31, 2000. The
F-I-8
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Company has determined that its existing revenue recognition
practices comply with the requirements of SAB No. 101 for all periods
presented.
(G) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Work-in-progress and finished goods consist of materials, labor
and manufacturing overhead. Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
1999 2000 2001
Raw materials $ 1,316,720 $ 2,022,590 $ 2,111,486
Work-in-progress - 243,612 270,467
Finished goods 442,760 82,392 122,082
--------------- --------------- ---------------
$ 1,759,480 $ 2,348,594 $ 2,504,035
=============== =============== ===============
(H) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization using both
straight-line and accelerated methods by charges to operations in amounts
that allocate the cost of the assets over their estimated useful lives as
follows:
ESTIMATED
DESCRIPTION USEFUL LIFE
Office equipment and furniture and
fixtures 2-5 years
Manufacturing equipment 2-5 years
Leasehold improvements Lesser of estimated useful
life or life of lease
(I) LONG-LIVED ASSETS
The Company assesses the realizability of long-lived assets in accordance
with Statement of Financial Accounting Standards (SFAS) No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. Under SFAS No. 121, if qualitative factors
suggest that an impairment may have occurred, the Company is required to
assess the valuation of its long-lived assets. Based on the Company's
development of a next-generation laser and its decision to discontinue
the sale of the LaserLite LLC product line, the Company recorded an asset
impairment charge of approximately $1.6 million against the remaining
carrying value of goodwill related to the acquisition of LaserLite LLC
during the year ended December 31, 1999. As of December 31, 2000 and
September 30, 2001, the Company has determined that no material
adjustment to the carrying value of its long-lived assets was required.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, cash equivalents, accounts
receivable, accounts payable and various debt instruments approximate
fair value due to the short-term nature of these instruments. The
carrying amounts of debt issued pursuant to agreements with banks
approximate fair value as the interest rates on these instruments
fluctuate with market interest rates.
F-I-9
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(K) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that subject the Company to credit risk consist
primarily of cash, cash equivalents and trade accounts receivable. The
Company places its cash and cash equivalents in established financial
institutions. The Company has no significant off-balance-sheet
concentration of credit risk such as foreign exchange contracts, options
contracts or other foreign hedging arrangements. The Company's accounts
receivable credit risk is not concentrated within any one geographic
area. The Company has not experienced any losses related to receivables
from any individual customers or groups of customers in any specific
industry or by geographic area. Due to these factors, no additional
credit risk beyond amounts provided for collection losses is believed by
management to be inherent in the Company's accounts receivable.
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenues and total gross accounts
receivable for the periods presented:
REVENUES
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
1998 1999 2000 2000 2001
Customer A * * 20% * 28%
Customer B 27% 23% 18% 40% 15%
Customer C * 12% * * *
Customer D * 11% * * *
Customer E * * * * *
*Less than 10%
GROSS ACCOUNTS RECEIVABLE
DECEMBER 31, SEPTEMBER 30,
1999 2000 2001
Customer A * 29% 18%
Customer B * * *
Customer C 24% 18% 16%
Customer D 17% * *
Customer E 29% * *
*Less than 10%
(L) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and has included the pro forma disclosures required
by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, for all periods
presented in the notes to the consolidated financial statements.
F-I-10
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(M) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as
incurred.
(N) COMPREHENSIVE INCOME
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of all
components of comprehensive income. Comprehensive income is defined as
the change in stockholders' equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. For all periods presented, comprehensive income consists of only
the Company's net loss and changes in cumulative translation adjustment
account (see Note 2(E)). The Company has disclosed comprehensive income
(loss) for all periods presented in the accompanying consolidated
statements of stockholders' equity (deficit).
(O) INCOME TAXES
The Company follows the provisions of SFAS No. 109, ACCOUNTING FOR INCOME
TAXES. Deferred income taxes are provided on temporary differences that
arise in the recording of transactions for financial and tax reporting
purposes and result in deferred tax assets and liabilities. Deferred tax
assets are reduced by an appropriate valuation allowance if it is
management's judgment that part of the deferred tax asset will not be
realized. Tax credits are accounted for as reductions of the current
provision for income taxes in the year in which the related expenditures
are incurred.
(P) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING
STOCK COMPENSATION--AN INTERPRETATION OF APB OPINION NO. 25. This
interpretation clarifies the application of APB Opinion No. 25 in certain
situations, as defined. The interpretation is effective July 1, 2000, but
covers certain events occurring during the period after December 15, 1998
but before the effective date. The adoption of this new accounting
interpretation did not have a material impact on the Company's financial
statements.
In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS.
SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. This statement
is effective for all business combinations initiated after June 30,
2001.
In July 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. This statement applies to goodwill and intangible assets acquired
after June 30, 2001, as well as goodwill and intangible assets previously
acquired. Under this statement, goodwill as well as certain other
intangible assets determined to have an infinite life will no longer be
amortized; instead, these assets will be reviewed for impairment on a
periodic basis. This statement is effective for the Company for the first
quarter in the fiscal year ended December 2002. The Company has not yet
completed its assessment
F-I-11
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
of whether the adoption of this new accounting standard will have a
material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supercedes SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 144 further refines the
requirements of SFAS No. 121 that companies (i) recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable
based on its undiscounted future cash flows and (ii) measure an
impairment loss as the difference between the carrying amount and the
fair value of the asset. In addition, SFAS No. 144 provides guidance on
accounting and disclosure issues surrounding long-lived assets to be
disposed of by sale. The Company does not expect adoption of this
statement to have a material impact on its financial position or results
of operations.
(3) NET LOSS PER SHARE
Net loss per share is computed based on the guidance of SFAS No. 128,
EARNINGS PER SHARE. SFAS No. 128 requires companies to report both basic
loss per share, which is based on the weighted average number of common
shares outstanding, and diluted loss per share, which is based on the
weighted average number of common shares outstanding and the weighted
average dilutive potential common shares outstanding using the treasury
stock method. As a result of the losses incurred by the Company for the
years ended December 31, 1998, 1999 and 2000 and the nine months ended
September 30, 2000 and 2001, all potential common shares were antidilutive
and were excluded from the diluted net loss per share calculations.
The following table summarizes securities outstanding as of each period-end
which were not included in the calculation of diluted net loss per share
since their inclusion would be antidilutive.
DECEMBER 31, SEPTEMBER 30,
----------------------------------- ----------------------
1998 1999 2000 2000 2001
Common stock options
and warrants 565,979 714,995 2,248,944 841,850 1,921,308
========== ========== ========== ========== ==========
Convertible preferred
stock -- -- -- -- 5,450,000
========== ========== ========== ========== ==========
Convertible debt -- -- 1,104,479 771,429 832,838
========== ========== ========== ========== ==========
F-I-12
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) ACCRUED EXPENSES
Accrued liabilities consist of the following:
DECEMBER 31, SEPTEMBER 30,
--------------------------------- -----------------
1999 2000 2001
Payroll and related costs $ 286,452 $ 499,254 $ 221,393
Warranty 1,268,413 830,419 156,228
Deferred rent 276,724 151,184 172,131
Others 794,484 104,105 282,748
--------------- --------------- ---------------
$ 2,626,073 $ 1,584,962 $ 832,500
=============== =============== ===============
(5) ACQUISITON OF LASERLITE LLC
On May 31, 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of LaserLite LLC (LaserLite), the distributor
of Diomed, Ltd.'s cosmetic laser systems, with certain patents and other
intangible assets. As consideration, the Company issued 414,143 shares of
common stock to LaserLite and options to purchase 86,412 shares of common
stock.
The Company allocated approximately $2.6 million of the purchase price to
goodwill and was amortizing such goodwill on the straight-line basis over a
four-year period. Included in general and administrative expenses are
$656,429 of amortization expense for the year ended December 31, 1999.
In December 1999, the Company recorded a noncash accounting charge of
$1,586,370 related to the impairment of the value of the goodwill that had
arisen from this acquisition. An impairment was recognized when the
Company's development of a next-generation laser led to a decision to
discontinue the sale of the LaserLite product line.
F-I-13
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) ACQUISITION OF MANUFACTURING RIGHTS
Effective October 16, 2000, the Company acquired certain manufacturing
rights and inventory of QLT, Inc. (QLT) necessary or useful to
commercialize certain series of its OPTIGUIDE(R) fibers for $1.2 million in
the form of two promissory notes, payable within two years. The first
promissory note is payable in cash or in shares of common stock. The second
promissory is payable, at the election of the Company, in cash or in shares
of common stock (see Note 9). In the event that the Company closes an
initial public offering (IPO) of its securities within two years of the
closing date, the due date of the balance payment would be accelerated to
the time of completion of the IPO and QLT would receive payment in full in
the form of common stock, at a 40% discount on the offering price per share
to the public. This contingent beneficial conversion feature, valued at
$556,667 and computed in accordance with Emerging Issues Task Force (EITF)
00-27, APPLICATION OF EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE
INSTRUMENTS, would be recorded upon the occurrence of an IPO as a discount
to the debt and amortized ratably to interest expense over the remaining
term of the debt, unless converted earlier. The aggregate purchase price of
$1,200,000 was allocated based on the fair value of the tangible and
intangible assets acquired as follows:
Inventory $ 218,623
Manufacturing rights 981,377
---------------
$ 1,200,000
===============
Amounts allocated to manufacturing rights are being amortized on the
straight-line basis over a five-year period. Included in general and
administrative expenses is amortization expense of approximately $41,000
and $139,000 for the year ended December 31, 2000 and the nine months ended
September 30, 2001, respectively.
(7) LINE-OF-CREDIT ARRANGEMENT
Diomed, Ltd. had a (pounds sterling)400,000 ($646,000 at December 31,
1999) line of credit with Barclays Bank. This line bore interest at 2.5%
above Barclays Bank's base rate (6.25% at December 31, 1999). Borrowings
were guaranteed by a shareholder of the Company and were due on March 31,
2000. Subsequently, the due date was extended to May 11, 2000, when the
outstanding balance was repaid.
Diomed, Ltd. also has a line of credit with Barclays Bank, which is limited
to the lesser of (pounds sterling)1,200,000 ($1,762,920 at September 30,
2001) or 80% of eligible accounts receivable. This line bears interest at
3% above Barclays Bank's base rate (4.75% at September 30, 2001) and
borrowings are due upon collection of receivables from customers. As of
September 30, 2001, there were borrowings of (pounds sterling)360,700
($529,900) outstanding under this line and no available future borrowings.
(8) CONVERTIBLE LOAN NOTES
Between March and June 2000, the Company issued $2.7 million of 9%
convertible subordinated notes (the Notes), which were due on March 31,
2001. The original conversion rate for the Notes was $3.50 per share of
common stock. The conversion rate was subject to
F-I-14
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
adjustment in the event of certain circumstances occurring, including
certain issues of common stock at a price below $3.50 per share.
Pursuant to the Stock Purchase and Recapitalization Agreement (the
Agreement), dated March 5, 2001, which provided certain existing
shareholders with additional shares of common stock which had the effect of
reducing their purchase price to $1.00 per share (see Note 11(C)), the
Company agreed to adjust the conversion price from $3.50 per share to $1.00
per share. Concurrent with the Agreement, the noteholders agreed to convert
principle of $2,475,000 into 2,475,000 shares of common stock. The balance
due of $225,000 was repaid in cash.
In accordance with EITF 00-27, the Company has recorded noncash interest
expense totaling approximately $2.7 million in March 2001 due to the
adjustment of the original conversion price.
(9) DEBT
As of December 31, 2000 and September 30, 2001, the two promissory notes
due to QLT for the acquisition of the manufacturing rights to the
OPTIGUIDE(R) fibers (see Note 6) are shown on the consolidated balance
sheet as convertible debt.
With respect to the First QLT Promissory Note, by letter dated June 7,
2001, QLT formally requested payment of the $339,336 balance due under that
note. QLT also indicated that it would exercise its option under the
Optiguide Asset Purchase Agreement to require Diomed to issue to QLT shares
of Diomed Common Stock having a value equal to $339,336. On October 1, 2001
Diomed advised QLT that it was prepared to issue 135,735 shares based on a
per share price of $2.50. Diomed asked QLT to respond if the calculation
was acceptable to it and also asked that, if the calculation was not
acceptable, that the matter be referred to arbitration pursuant to the
applicable provisions of the Optiguide Asset Purchase Agreement. On January
28, 2002 Diomed issued QLT 135,735 shares of Diomed Common Stock. On
February 11, 2002, QLT wrote Diomed and stated that it was accepting the
135,735 shares issued to it under protest as it disagreed with the per
share price Diomed had used in calculating the number of shares issued to
it. It also pointed out that Diomed had failed, in connection with the
issuance of those shares, to confirm certain registration rights and
deliver a legal opinion. Based on the letter, it is unclear what QLT's
position is. Diomed believes that QLT's position may be that it should
be issued up to an additional 542,940 shares. Diomed disputes this position
based on the express terms of its agreement with QLT and the relevant
facts. The terms of the agreement between Diomed and QLT requires senior
management of both companies to meet within a period of 60 days to attempt
to resolve disputes arising thereunder.
In October 2000, a customer advanced the Company $936,000 to secure certain
key materials. In September 2001, the Company issued a promissory note to
this customer in the amount of the advance. The note matures on January 1,
2004 and bears interest at a rate of 8.5% per year. The note does not
provide for conversion rights.
A summary of the debt at December 31, 2000 and September 30, 2001 is as
follows:
CURRENT LONG-TERM
Convertible debt--QLT $ 339,336 $ 826,339
Promissory note payable - 936,000
--------------- ---------------
$ 339,336 $ 1,762,339
=============== ===============
(10) INCOME TAXES
No provision for foreign, federal or state income taxes has been recorded,
as the Company incurred net operating losses for all periods presented. The
Company has U.S. federal and state net operating loss carryforwards of
approximately $3.8 million at December 31, 2000 to
F-I-15
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
reduce future federal income taxes, if any. These carryforwards expire
through 2020 and are subject to review and possible adjustment by the
Internal Revenue Service (IRS). The Company also has approximately $13.5
million of foreign net operating loss carryforwards at December 31, 2000 to
reduce future foreign income taxes, if any. These carryforwards do not have
an expiration date.
The Tax Reform Act of 1986 contains provisions that may limit the amount of
U.S. federal and state net operating loss and credit carryforwards that the
Company may utilize in any one year in the event of certain cumulative
changes in ownership over a three-year period in excess of 50%, as defined.
The Company has not assessed whether its equity transactions have caused
such a change in ownership.
The approximate tax effects of temporary differences that give rise to
significant portions of the Company's deferred tax assets primarily relate
to net operating loss carryforwards and amount to approximately $3.9
million and $5.8 million as of December 31, 1999 and 2000, respectively. It
is the Company's objective to become a profitable enterprise and to realize
the benefits of its deferred tax assets. However, in evaluating the
realizability of these deferred tax assets, management has considered the
Company's short operating history, the volatility of the market in which it
competes and the operating losses incurred to date, and believes that,
given the significance of this evidence, a full valuation reserve against
its deferred tax assets is required as of December 31, 1999 and 2000. The
components of the Company's deferred tax assets are as follows:
DECEMBER 31
1999 2000
Net operating loss carryforwards $ 3,653,030 $ 5,581,915
Other temporary differences 259,605 261,805
Valuation allowance (3,912,635) (5,843,720)
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
(11) STOCKHOLDERS' EQUITY
(A) AMENDED CERTIFICATE OF INCORPORATION
Effective March 15, 2001, the authorized capital stock of the Company was
increased to 43,500,000 shares, consisting of 40,000,000 shares of common
stock, $0.001 par value per share and 3,500,000 shares of preferred
stock, $0.01 par value per share, all of which are designated Series A
convertible preferred stock (Series A Preferred Stock).
(B) SALE OF SERIES A PREFERRED STOCK
In March and April 2001, the Company sold an aggregate of 2,725,000
shares of Series A Preferred Stock for $1.00 per share, which resulted in
gross proceeds of $2,725,000.
F-I-16
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The Series A Preferred Stock has the following rights, preferences and
privileges:
VOTING
Each share of Series A Preferred Stock shall entitle the holder
thereof to such number of votes equal to the number of shares of
common stock into which each share is then convertible. The holders,
collectively, by a two-thirds vote, have the right to elect three
members to the Company's Board of Directors and can assign such
rights to the lead investor. Also, the holders are required, by a
two-thirds vote, to approve matters pertaining to corporate
governance and structure, dividends, sale or redemption of
securities or instruments convertible to securities, a merger or
consolidation, and sale, lease or disposal of all or substantially
all of the Company's assets. In addition, until the effective date
of a qualifying initial public offering or private equity offering
of common stock at a price per share of at least $5.00, resulting in
gross proceeds of at least $15 million, the Company shall not incur
any debt, make any acquisitions or strategic investments or enter
into any contracts or payment obligations that commit the Company to
$250,000 or more in aggregate without the approval of the Board of
Directors, including the three members elected by the holders.
DIVIDENDS
The holders of Series A Preferred Stock are entitled to receive
non-cumulative 10% dividends annually, when and if declared by the
Company's Board of Directors.
LIQUIDATION PREFERENCE
Upon any liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, the holders of each share of
Series A Preferred Stock is entitled to receive an amount equal to
the greater of (i) $1.00 per share, subject to adjustment, plus any
declared but unpaid dividends or (ii) such amount per share of
Series A Preferred Stock as would have been payable had each share
been converted to common stock.
VOLUNTARY CONVERSION
Each share of Series A Preferred Stock is convertible, at the option
of the holder thereof, into two shares of common stock, subject to
adjustment, as defined.
AUTOMATIC CONVERSION
Each share of Series A Preferred Stock shall automatically be
converted into shares of common stock at the then effective
conversion price, upon written election of at least two-thirds of
the then outstanding Series A Preferred Stock, merger or
consolidation, as defined, or upon the closing of a qualifying
initial public offering at a price per share of at least $5.00,
resulting in gross proceeds of at least $15,000,000.
F-I-17
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
CALL OPTION
On or prior to October 31, 2001 or the earlier merger or
consolidation of the Company, as defined, two holders of Series A
Preferred Stock can require the Company to sell up to 1,000,000
shares of Series A Preferred Stock at a price per share equal to
$1.00, subject to adjustment, as defined. The Company recorded the
fair value of the call option and related beneficial conversion
feature, totaling an aggregate of $423,180, in the accompanying
statement of stockholders' equity (deficit). Effective October 31,
2001, the call option terminated.
(C) COMMON STOCK
As of September 30, 2001, the Company had authorized 40,000,000 shares of
common stock, $0.001 par value, of which 9,179,955 are outstanding.
Between August and November 2000, the Company issued 815,865 shares of
its common stock at a price of $3.50 per share, together with warrants to
purchase 1,387,294 shares of common stock at a price of $3.50 per share,
in private placements resulting in net proceeds of approximately $2.8
million. In connection with the sale of Series A Preferred Stock for
$1.00 per share, substantially all of the purchasers of common stock from
August and November 2000 elected to accept the Company's offer to
exchange the shares and warrants they originally acquired (773,941 and
1,345,370, respectively) for 2,708,793 shares of common stock. This
recapitalization yields an effective purchase price of $1.00 per share.
(D) STOCK OPTIONS
In November 1998 and May 2001, the Company's Board of Directors approved
the 1998 Incentive Plan (the 1998 Plan) and the 2001 Stock Option Plan
(the 2001 Plan) (collectively, the Plans), respectively, permitting the
granting of stock options to employees, directors, consultants and
advisors, which may be either incentive stock options or nonqualified
options and stock awards. The Board has reserved 750,000 and 1,750,000
shares of common stock for issuance under the 1998 Plan and the 2001
Plan, respectively.
The exercise price and vesting are determined by the Board of Directors
at the date of grant. Options generally vest over two and four years and
expire 10 years after the date of grant. Incentive stock options under
the Plans are granted at not less than fair market value per share of
common stock on the date of grant or 110% of fair market value for any
stockholder who holds more than 10% of the total combined voting power of
all classes of stock of the Company.
F-I-18
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
A summary of stock option activity is as follows:
WEIGHTED
RANGE OF NUMBER OF AVERAGE
EXERCISE PRICE SHARES EXERCISE PRICE
Outstanding, December 31, 1997 $ 2.24-8.23 354,150 $ 5.11
Granted 5.98-6.56 257,662 6.62
Exercised 2.24-4.49 (25,350) 4.96
Forfeited 2.24-5.98 (31,600) 4.84
------------- ------------- -------------
Outstanding, December 31, 1998 2.24-8.23 554,862 5.54
Granted 2.50-5.98 198,316 3.63
Exercised 4.49 (25,000) 4.84
Forfeited 2.24-8.23 (24,100) 6.57
------------- ------------- -------------
Outstanding, December 31, 1999 2.24-8.23 704,078 4.89
Granted 3.50 172,738 3.50
Forfeited 2.24-8.23 (36,176) 6.46
------------- ------------- -------------
Outstanding, December 31, 2000 2.24-8.23 840,640 4.37
Granted 1.25-2.25 1,031,653 1.31
Forfeited 3.50-6.36 (42,909) 3.67
------------- ------------- -------------
Outstanding, September 30, 2001 $ 1.25-$8.23 1,829,384 $ 2.62
============= ============= =============
Exercisable, December 31, 1998 $ 2.50-$8.23 416,327 $ 5.54
============= ============= =============
Exercisable, December 31, 1999 $ 2.24-$8.23 573,343 $ 4.07
============= ============= =============
Exercisable, December 31, 2000 $ 2.24-$8.23 680,621 $ 4.59
============= ============= =============
Exercisable, September 30, 2001 $ 1.25-$8.23 837,404 $ 4.05
============= ============= =============
At September 30, 2001, 1,160,295 options were available for future grants
under the Plans.
The following table summarizes information relating to currently
outstanding and exercisable options as of September 30, 2001.
OUTSTANDING
WEIGHTED
AVERAGE EXERCISABLE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER OF LIFE (IN EXERCISE NUMBER OF EXERCISE
PRICE SHARES YEARS) PRICE SHARES PRICE
$ 1.25 971,653 9.7 $ 1.25 60,000 $ 1.25
2.24-3.50 449,081 5.6 2.86 370,421 2.77
4.00-6.56 390,250 4.6 5.52 388,583 5.52
7.48-8.23 18,400 4.5 7.76 18,400 7.76
----------- ----------- ----------- -----------
1,829,384 $ 2.62 837,404 $ 4.05
=========== =========== =========== ===========
F-I-19
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Had compensation cost for the Company's option plans been determined
based on the fair value at the grant dates, as prescribed in SFAS No. 123
for the years ended December 31, 1998, 1999 and 2000 and for the nine
months ended September 30, 2000 and 2001, the Company's pro forma net
loss would have been as follows:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------------------
1998 1999 2000 2000 2001
Net loss applicable to common stockholders,
as reported $(1,809,260) $ (7,490,726) $ (3,475,996) $ (2,914,300) $ (6,644,381)
Net loss applicable to common stockholders,
pro forma $(1,828,228) $ (7,524,032) $ (3,541,425) $ (2,961,340) $ (6,692,853)
Basic and diluted net loss per share
applicable to common stockholders, as
reported $ (0.70) $ (2.34) $ (0.82) $ (0.71) $ (0.83)
Basic and diluted net loss per share
applicable to common stockholders, pro
forma $ (0.70) $ (2.35) $ (0.83) $ (0.73) $ (0.84)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions used for grants during the applicable period:
DECEMBER 31, SEPTEMBER 30,
1998 1999 2000 2000 2001
Risk-free interest rate 4.62-5.57% 4.84-6.55% 5.78-6.68% 5.93-6.68% 4.62-6.29%
Expected dividend yield -% -% -% -% -%
Expected lives 5 years 5 years 5 years 5 years 5 years
Expected volatility -% -% -% -% -%
Weighted average grant date
fair value per share $ 0.90 $ 0.92 $ 0.95 $ 0.96 $ 0.30
Weighted average remaining
contractual life of options
outstanding 5.5 years 6.0 years 6.4 years 7.0 years 7.5 years
In connection with the private offerings of the Company's common stock,
options to purchase 48,966 and 8,438 shares of common stock were issued
to nonemployees in 1999 and 2000, respectively. The Company has recorded
stock-based offering costs of $30,000 and $33,752 based upon the fair
value of such options.
(E) ISSUANCE OF STOCK OPTIONS TO CONSULTANTS
In August 2001, the Company granted fully exercisable options to purchase
60,000 shares of common stock at an exercise price per share equal to
$2.25 to consultants in exchange for marketing services. The Company
recorded the fair value of such options, based on the Black-Scholes
option pricing model, as stock-based compensation expense totaling
$55,000 in the accompanying statement of operations for the nine months
ended September 30, 2001.
F-I-20
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(12) VALUATION AND QUALIFYING ACCOUNTS
A summary of the allowance for doubtful accounts is as follows:
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------- -------
1998 1999 2000 2001
Allowance for doubtful accounts:
Balance, beginning of period $ - $ - $ 7,000 $ 300,000
Provision for doubtful
accounts - 7,000 293,000 200,000
Write-offs - - - (262,000)
----------- ----------- ----------- -----------
Balance, end of period $ - $ 7,000 $ 300,000 $ 238,000
=========== =========== =========== ===========
(13) SEGMENT REPORTING
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and geographic
areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions on how
to allocate resources and assess performance. The Company's chief decision
making group, as defined under SFAS No. 131, is the Executive Management
Committee.
The Company's reportable segments are determined by product type: laser systems
and fibers and other accessories. The accounting policies of the segments are
the same as those described in Note 2. The Executive Management Committee
evaluates segment performance based on revenue. Accordingly, all expenses are
considered corporate level activities and are not allocated to segments. Also,
the Executive Management Committee does not assign assets to its segments.
This table presents revenues by reportable segment:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------- -------
1998 1999 2000 2000 2001
Laser systems $ 8,266,808 $ 5,818,270 $ 8,901,906 $ 4,802,800 $ 5,157,800
Fibers and other
accessories 1,045,539 933,032 522,608 659,000 1,270,000
----------- ----------- ----------- ----------- -----------
Total $ 9,312,347 $ 6,751,302 $ 9,424,514 $ 5,461,800 $ 6,427,800
=========== =========== =========== =========== ===========
F-I-21
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The following table represents percentage of revenues by geographic destination:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------- -------
1998 1999 2000 2000 2001
North America 15% 30% 33% 15% 48%
Asia/Pacific 34 28 30 40 27
Europe 44 34 33 43 25
Other 7 8 4 2 -
--------- --------- --------- --------- ---------
Total 100% 100% 100% 100% 100%
========= ========= ========= ========= =========
The following table represents long-lived assets by geographic destination:
DECEMBER 31, SEPTEMBER 30,
1999 2000 2001
North America $ 357,250 $ 1,200,955 $ 1,246,896
Europe 1,606,048 1,489,575 1,325,000
--------------- --------------- ---------------
Total $ 1,963,298 $ 2,690,530 $ 2,571,896
=============== =============== ===============
F-I-22
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(14) COMMITMENTS
(A) LEASES
The Company leases certain equipment and office facilities under
noncancelable operating and capital leases that expire at various dates
through 2014. The Company's building lease at its subsidiary in the UK is
a 25-year lease through 2024. However, the Company has an option, at its
election, to terminate the lease agreement after 10 years in 2014. If the
Company chooses not to exercise this option, the lease agreement
continues for the remaining 10 years through 2024. Total rent expense
under these operating lease agreements for the years ended December 31,
1998, 1999, 2000 and the nine months ended September 30, 2000 and 2001
was $69,776, $381,446, $454,529, $340,897 and $361,235, respectively.
Capital lease obligations bear interest at a rate of 20% per annum.
Future minimum lease payments required under these leases at September
30, 2001 are as follows:
CAPITAL LEASES OPERATING LEASES
2001, three months $ 18,612 $ 120,346
2002 63,809 481,383
2003 28,769 481,383
2004 8,845 462,801
2005 298 444,219
Thereafter - 3,701,826
--------------- ---------------
Total future minimum lease
payments 120,333 $ 5,691,958
===============
Less--Amount representing interest 20,433
---------------
Present value of future minimum
lease payments 99,900
Less--Current portion of capital lease
obligations 48,657
---------------
Capital lease obligations, net
of current portion $ 51,243
===============
(B) LITIGATION
From time to time, the Company is involved in legal and administrative
proceedings and claims of various types. While any litigation contains an
element of uncertainty, management, in consultation with the Company's
general counsel, presently believes that the outcome of each such other
proceedings or claims which are pending or known to be threatened, or all
of them combined, will not have a material adverse effect on the Company.
On October 22, 2001, a plaintiff filed an action against the Company,
alleging that the Company disclosed certain trade secret information. The
plaintiff
F-I-23
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
seeks compensatory and punitive damages in an unspecified amount and an
injunction against further disclosures. The Company has moved to dismiss
the action and compel arbitration. Management believes that this claim
will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
(15) BRIDGE LOANS FROM STOCKHOLDERS
In September 2001, the Company received an aggregate of $500,000 from two
stockholders of the Company in exchange for a bridge loan in the form of
two secured promissory notes ("notes"), dated October 5, 2001. The notes
mature on January 1, 2003 and bear an annual interest rate of 7.5%.
The notes are convertible, at the election of the noteholders, into
common stock prior to the maturity date under the following scenarios :
1) in the event the Company does not complete a reverse merger by October
31, 2001, the noteholders may exercise their call option issued in the
March 2001 Series A Preferred Stock financing (see Note 11B) and deliver
their notes as payment, 2) in the event the Company completes a reverse
merger, the notes are convertible into common stock at the lesser of
$2.25 per share and the price per share in the reverse merger, 3) in the
event of another type of financing transaction, as defined, the notes are
convertible into common stock at the lesser of $2.25 per share and the
price per share in the transaction, and 4) in the event of a merger or
consolidation, excluding a reverse merger, the notes are convertible into
common stock at the lesser of $2.25 per share and the price per share of
any warrants issued in the transaction. However, if the Company
successfully completes a reverse merger with a public company, where such
public company has raised $10 million in gross proceeds in a private
placement financing prior to the reverse merger, the notes become due and
payable in cash within 10 days of the effective closing date. The call
option expired on October 31, 2001.
In addition, the Company granted fully exercisable warrants to purchase
an aggregate of 50,000 shares of common stock at a price per share equal
to a maximum of $2.25, adjustable for certain events, as defined. The
value of such warrants, calculated using the Black-Scholes option pricing
model, was recorded as a debt discount totaling $43,000 and will be
amortized to interest expense over the life of the note. In addition, the
beneficial conversion feature attributable to the warrants, totaling
$43,000, will be recorded as interest expense upon the occurrence of an
event which will trigger the note's right to convert. Due to the
Company's delay in completing the reverse merger by December 31, 2001,
the Company will have to issue up to an additional aggregate of 50,000
warrants, at the rate of 10,000 warrants for each month the reverse
merger is delayed, with terms identical to the initial grant. The
warrants expire two years from the date of issuance.
In December 2001, the Company received an additional aggregate of
$200,000 from the same two noteholders through issuance of additional
promissory notes, with terms identical to those specified above, except
as noted below. The maximum conversion price of the notes and the
exercise price of the warrants is $2.00 per share, adjustable for certain
events as defined. In addition, the Company granted fully exercisable
warrants to purchase an aggregate of 20,000 shares of common stock at a
price per share equal to a maximum of $2.00, adjustable for certain
events, as defined. If the Company does not complete a reverse merger by
March 31,
F-I-24
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
2002, the Company may have to issue up to an additional aggregate of
20,000 warrants, at the rate of 10,000 per month for each month the
reverse merger is delayed, with terms identical to the initial grant.
Under the December 2001 notes, the conversion price of the notes and the
exercise price of the warrants included under the October 2001 notes were
reduced to a maximum of $2.00 to be consistent with the terms of the
December 2001 notes. Such revision creates an additional beneficial
conversion feature attributed to the reduction of the conversion price,
totaling $62,500, to be recorded upon the occurrence of an event which
will trigger the notes' right to convert. Additionally, such revision
creates an additional debt discount, attributed to the establishment of a
new measurement date for the amended warrant, totaling $39,000. In
January 2002, the Company issued an additional aggregate of 10,000
warrants due to the reverse merger not being consummated by December 31,
2001.
(16) MERGER AND PRIVATE OFFERING OF COMMON STOCK
On February 14, 2002, Diomed Acquisition Corp. ("Acquisition"), a
Delaware corporation and a wholly-owned subsidiary of Diomed Holdings,
Inc., a Nevada corporation formerly known as Natexco Corporation (the
"Parent") merged with and into the Company pursuant to an Agreement and
Plan of Merger, dated as of January 29, 2002. In the merger (the
"Merger") that occurred under the Agreement and Plan of Merger, the
stockholders of the Company received shares of Parent. As a condition to
the Merger, Parent raised gross proceeds of $10,000,000 in a private
offering of shares of its common stock. The shares issued in the private
offering are not subject to refund, redemption or rescission and,
accordingly, will be included as a component of stockholders' equity, net
of the applicable costs. The merger agreement provides that the proceeds
of that offering will be available to the Company for payment of its
existing obligations and, subject to the approval of its board of
directors, certain future expenses, including the financing of product
developments and acquisitions. Parent is obligated to use its best
efforts to file a registration statement with the Securities Exchange
Commission to register for resale its common shares that it issued in the
private offering and those of its common shares that it issued to the
Company's former stockholders and to cause the registration statement to
be declared effective. In the event that the Parent fails to file or
cause the registration statement to be declared effective, or remain
effective through the first anniversary of the Merger, the Parent will be
required to issue additional shares of its common stock, up to a maximum
of 12% of the shares held by each party subject to the agreement.
After the Merger, the Company's former stockholders own approximately 51%
of the issued and outstanding shares of Parent (in terms of common share
equivalents). The shares of Parent into which the shares of the Company's
existing common stock and the Company's Series A preferred stock will be
converted in the Merger will thereafter automatically convert into
Parent's common stock in installments beginning after Parent's
registration statement has become effective and continuing, unless
interrupted under certain circumstances, until the second anniversary of
the Merger, at which time all such shares will automatically convert into
shares of Parent's common stock.
The Merger will be accounted for as a recapitalization. The historical
records of the Company will become the historical records of Parent.
Following the Merger, the business conducted by Parent will be the
business conducted by the Company prior to the Merger.
Costs of approximately $1.5 million related to the issuance of Parent's
shares in the offering and its preparation and negotiation of the
documentation for the Merger were paid at the closing of the Merger.
F-I-25
TABLE OF CONTENTS
Page
-----
Notes to unaudited pro forma combined condensed financial statements F-II-2
Pro forma combined condensed balance sheet as of September 30, 2001 F-II-3
Notes to pro forma combined condensed balance sheet as of September 30, 2001 F-II-4
Pro forma combined condensed statement of operations for the year ended
December 31, 2000 F-II-5
Notes to pro forma combined condensed statement of operations for the nine
months ended December 31, 2001 F-II-6
Pro forma combined condensed statement of operations for the year ended
December 31, 2000 F-II-7
Notes to pro forma combined condensed statement of operations for the nine
months ended September 30, 2001 F-II-8
F-II-1
DIOMED HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined condensed financial statements combine
(i) the historical consolidated balance sheets of Diomed, Inc. and Diomed
Holdings, Inc. as of September 30, 2001 as if the reverse merger was consummated
on September 30, 2001 and (ii) the historical statements of operations for the
nine months ended September 30, 2001 and the year ended December 31, 2000 as if
the reverse merger was consummated on January 1, 2000. The pro forma information
is not necessarily indicative of either the results which would have actually
been reported if the reverse merger had been consummated on January 1, 2000 or
results which may be reported in the future.
F-II-2
DIOMED HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
AMOUNTS IN THOUSANDS
(UNAUDITED)
HISTORICAL PRO FORMA
-------------------------------- --------------------------------------
DIOMED COMBINED
DIOMED HOLDINGS ADJUSTMENTS COMPANY
-------------- ------------- -------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 293 $ - $8,500 (1) $ 8,293
(500) (3)
Accounts receivable, net 1,352 - - 1,352
Inventories 2,583 - - 2,583
Prepaid expenses and other current assets 302 - - 302
-------------- ------------- -------------- ---------------
Total current assets 4,530 - 8,000 12,530
PROPERTY AND EQUIPMENT, NET 1,101 1 (1) (2) 1,101
INTANGIBLE ASSETS, NET 802 - - 802
OTHER ASSETS 669 9 (176) (1) 493
(9) (2)
-------------- ------------- -------------- ---------------
$7,102 $10 $7,814 $14,926
============== ============= ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank loan $ 530 $ - $ - $ 530
Convertible loan notes - 35 - 35
Current maturities of convertible debt 339 - - 339
Current maturities of capital lease obligations 49 - - 49
Accounts payable 2,309 - (176) (1) 2,133
Accrued expenses 833 3 - 836
Customer advance 488 - - 488
-------------- ------------- -------------- ---------------
Total current liabilities 4,548 38 (176) 4,410
-------------- ------------- -------------- ---------------
PROMISSORY NOTE PAYABLE 936 - - 936
CONVERTIBLE NOTES PAYABLE TO STOCKHOLDERS
457 - (457) (3) -
CONVERTIBLE DEBT, less current maturities 826 - 826
CAPITAL LEASE OBLIGATIONS, less current maturities
51 - - 51
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock 27 - (13) (4) 14
Common stock 9 10 5 (1) 24
Additional paid-in capital 30,271 44 8,495 (1) 38,837
13 (4)
106 (3)
(82) (5)
(10) (2)
Cumulative translation adjustment (4) - - (4)
Accumulated deficit (30,019) (82) (149) (3) (30,168)
82 (5)
-------------- ------------- -------------- ---------------
Total stockholders' equity (deficit) 284 (28) 8,447 8,703
-------------- ------------- -------------- ---------------
$7,102 $ 10 $7,814 $14,926
============== ============= ============== ===============
F-II-3
DIOMED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(UNAUDITED)
The accompanying unaudited pro forma condensed balance sheet has been prepared
by combining the historical results of Diomed and Diomed Holdings as of
September 30, 2001 and reflects the following pro forma adjustments:
(1) Represents a private placement of 5,000,000 shares of Diomed Holdings at
$2.00 per share net of $1.5 million in costs related to the private
placement and the merger.
(2) Represents write-down of Diomed Holdings' long-lived assets to realizable
value.
(3) Represents the payment of the September 2001 bridge loans, including the
recognition of non cash interest expense related to debt discount and
beneficial conversion feature.
(4) Represents the issuance of 1,362,500 shares of Diomed Holdings Class A
convertible preferred stock to the former holders of 2,725,000 shares of
Diomed Series A preferred stock which shares convert into 5,450,000 shares
of Diomed common stock.
(5) Represents elimination of Diomed Holdings' accumulated deficit.
F-II-4
DIOMED HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
FOR THE YEAR ENDED DECEMBER 31, 2000
(UNAUDITED)
HISTORICAL PRO FORMA
---------------------------------- ------------------------------------
DIOMED COMBINED
DIOMED HOLDINGS ADJUSTMENTS COMPANY
-------------- ------------- --------------- ---------------
Revenues $9,425 $ 1 $ - $9,426
Cost of revenues 7,415 - - 7,415
-------------- ------------- --------------- ---------------
Gross profit 2,010 1 - 2,011
-------------- ------------- --------------- ---------------
Operating expenses:
Research and development 1,270 - - 1,270
Selling and marketing 1,648 - - 1,648
General and administrative 2,229 41 - 2,270
-------------- ------------- --------------- ---------------
Total operating expenses 5,147 41 - 5,188
-------------- ------------- --------------- ---------------
Loss from operations (3,137) (40) - (3,177)
Interest expense, net (339) (2) (1) (341)
-------------- ------------- --------------- ---------------
Net loss $(3,476) $(42) - $(3,518)
============== ============= =============== ===============
Basic and diluted net loss per share $ (0.82) $ - - $ (0.15)
============== ============= =============== ===============
Basic and diluted weighted average common shares 4,246 (4) 9,200 5,000 (2) 23,896
outstanding 5,450 (3)
============== ============= =============== ===============
F-II-5
DIOMED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(UNAUDITED)
The accompanying unaudited pro forma condensed statement of operations has been
prepared by combining the historical results of Diomed and Diomed Holdings for
the year ended December 31, 2000 and reflects the following pro forma
adjustments:
(1) Excludes approximately $149,000 of nonrecurring non cash interest expense
related to debt discount and beneficial conversion feature on $500,000 of
September 2001 bridge loans.
(2) Represents the increase in Diomed Holdings shares of common stock to
reflect the number of shares issued in connection with private placement
by Diomed Holdings.
(3) Represents the issuance of 1,362,500 shares of Diomed Holdings Class A
convertible preferred stock to the former holders of 2,725,000 shares of
Diomed Series A preferred stock, which shares convert into 5,450,000
shares of Diomed common stock.
(4) In the merger, stockholders of Diomed common stock received shares of
Diomed Holdings Class A convertible preferred stock, which shares convert
into Diomed Holdings common stock. In January 2002, Diomed Holdings
reduced its 9.6 million shares outstanding to 9.2 million by a redemption
of 400,000 shares.
F-II-6
DIOMED HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
HISTORICAL PRO FORMA
---------------------------------- ------------------------------------
COMBINED
DIOMED DIOMED ADJUSTMENTS COMPANY
HOLDINGS
-------------- ------------- --------------- ---------------
Revenues $6,428 $ 6 $- $6,434
Cost of revenues 4,952 - - 4,952
-------------- ------------- --------------- ---------------
Gross profit 1,476 6 - 1,482
-------------- ------------- --------------- ---------------
Operating expenses:
Research and development 1,009 - - 1,009
Selling and marketing 1,873 - - 1,873
General and administrative 1,936 40 - 1,976
-------------- ------------- --------------- ---------------
-
Total operating expenses 4,818 40 - 4,858
-------------- ------------- --------------- ---------------
Loss from operations (3,342) (34) - (3,376)
Interest expense, net (2,879) (2) - (2,881)
-------------- ------------- --------------- ---------------
Net loss (6,221) (36) (6,257)
Value ascribed to call option and beneficial
conversion feature related to preferred stock (423) - - (423)
-------------- ------------- --------------- ---------------
Net loss applicable to common stockholders $(6,644) $(36) $(6,680)
============== ============= =============== ===============
Basic and diluted net loss per share applicable
to common stockholders $ (0.83) $ - - $ (0.24)
============== ============= =============== ===============
Basic and diluted weighted average common shares 8,004 (3) 9,200 (3) 5,000 (1) 27,654
outstanding 5,450 (2)
============== ============= =============== ===============
F-II-7
DIOMED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
The accompanying unaudited pro forma condensed statement of operations has been
prepared by combining the historical results of Diomed and Diomed Holdings for
the nine months ended September 30, 2001 and reflects the following pro forma
adjustments:
(1) Represents the increase in Diomed Holdings common stock to reflect the
number of shares issued in connection with private placement by Diomed
Holdings.
(2) Represents the issuance of 1,362,500 shares of Diomed Holdings Class A
convertible preferred stock to the former holders of 2,725,000 shares of
Diomed Series A preferred stock, which shares convert into 5,450,000 shares
of Diomed common stock.
(3) In the merger, stockholders of Diomed common stock received shares of
Diomed Holdings Class A convertible preferred stock, which shares convert
into Diomed Holdings common stock. In January 2002, Diomed Holdings reduced
its 9.6 million shares outstanding to 9.2 million by a redemption of
400,000 shares.
F-II-8