Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1 Cynosure, Inc. Form S-1 HTML 1.11M
18: COVER ¶ Comment-Response or Cover Letter to the SEC HTML 5K
2: EX-3.1 EX-3.1 Certificate of Incorporation of the 21 58K
Registrant, as Amended
3: EX-3.2 EX-3.2 Form of Restated Certificate of 19 77K
Incorporation of the Registrant
4: EX-3.3 EX-3.3 Bylaws of the Registrant 16 53K
5: EX-3.4 EX-3.4 Form of Amended and Restated Bylaws of the 21 100K
Registrant
6: EX-10.1 EX-10.1 1992 Stock Option Plan 12 43K
15: EX-10.10 EX-10.10 Lease, Dated January 31, 2005 46 244K
7: EX-10.2 EX-10.2 2004 Stock Option Plan, as Amended 11 56K
8: EX-10.3 EX-10.3 2005 Stock Incentive Plan 13 65K
9: EX-10.4 EX-10.4 Employment Agreement, Dated September 2003 11 40K
10: EX-10.5 EX-10.5 Employment Agreement, Dated January 1, 9 38K
2003
11: EX-10.6 EX-10.6 Employment Agreement, Dated September 2003 10 38K
12: EX-10.7 EX-10.7 Exclusive Distribution Agreement 14 46K
13: EX-10.8 EX-10.8 Exclusive Distribution Agreement 16 50K
14: EX-10.9 EX-10.9 Promissory Note, Dated October 1, 2004 3 20K
16: EX-21.1 EX-21.1 Subsidiaries of the Registrant 1 6K
17: EX-23.1 EX-23.1 Consent of Ernst & Young LLP 1 7K
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration
Statement is declared effective.
If any of the securities being registered on this form are
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended (the
“Securities Act”) please check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box. o
CALCULATION OF REGISTRATION FEE
Each Class of
Proposed Maximum Aggregate
Amount of
Securities to be Registered
Offering Price(1)
Registration Fee(2)
Class A Common Stock, par value $0.001 per share
$75,000,000
$8,828
(1)
Estimated solely for the purpose of computing the registration
fee in accordance with Rule 457(o) under the Securities Act
of 1933, as amended.
(2)
Calculated pursuant to Rule 457(o) based on an estimate of
the proposed maximum aggregate offering price.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant
to Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is
not soliciting offers to buy these securities in any state where
the offer or sale is not permitted.
We are
selling shares
of our class A common stock, and El.En. S.p.A., as selling
stockholder, is
selling shares
of our class A common stock. We will not receive any
proceeds from the sale of the shares by El.En. We have granted
the underwriters an option to purchase up
to additional
shares of class A common stock to cover over-allotments.
This is the initial public offering of our class A common
stock. We currently expect the initial public offering price to
be between
$ and
$ per
share. We have applied to have our class A common stock
included for quotation on The Nasdaq National Market under the
symbol “CYNO.”
Investing in our class A common stock involves risks.
See “Risk Factors” beginning on page 8.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Per Share
Total
Public Offering Price
$
$
Underwriting Discounts
$
$
Proceeds to Cynosure (before expenses)
$
$
Proceeds to El.En. (before expenses)
$
$
The underwriters expect to deliver the shares to purchasers on
or
about ,
2005.
Citigroup
UBS Investment Bank
Jefferies & Company, Inc.
Needham & Company, LLC
,
2005
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
different or additional information. We are not making an offer
of these securities in any state where an offer is not
permitted. You should not assume that the information contained
in this prospectus is accurate as of any date other than the
date on the front of this prospectus, regardless of the time of
delivery of this prospectus or any sale of our class A
common stock.
Through and
including ,
2005 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our class A common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments and
subscriptions.
This summary highlights information contained elsewhere in
this prospectus. This summary may not contain all of the
information that is important to you. Before investing in our
class A common stock, you should read this prospectus
carefully in its entirety, especially the description of risks
of investing in our class A common stock set forth under
“Risk Factors,” and our consolidated financial
statements and related notes beginning on page F-1.
Cynosure, Inc.
We develop and market aesthetic treatment systems that are used
by physicians and other practitioners to perform non-invasive
procedures to remove hair, treat vascular lesions, rejuvenate
skin through the treatment of shallow vascular lesions and
pigmented lesions and temporarily reduce the appearance of
cellulite. Our systems incorporate a broad range of laser and
other light-based energy sources, including Alexandrite, pulse
dye, Nd:Yag and diode lasers, as well as intense pulsed light.
We believe that we are one of only a few companies that
currently offer aesthetic treatment systems utilizing
Alexandrite and pulse dye lasers, which are particularly well
suited for some applications and skin types. We offer single
energy source systems as well as workstations that incorporate
two or more different types of lasers or pulsed light
technologies. We offer multiple technologies and system
alternatives at a variety of price points depending primarily on
the number and type of energy sources included in the system.
Our newer products are designed to be easily upgradeable to add
additional energy sources and handpieces as our customers expand
their practices. As the aesthetic treatment market evolves to
include new customers, such as aesthetic spas and additional
physician specialties, we believe that our broad technology base
and tailored solutions will provide us with a competitive
advantage.
We sell over 14 different aesthetic treatment systems and
have focused our development and marketing efforts on offering
leading, or flagship, products for each of the major aesthetic
procedure categories that we address. Our flagship products are:
•
the Apogee®
Elitetm
system for hair removal;
•
the
Cynergytm
system for the treatment of vascular lesions;
•
the PhotoSilk
Plustm
system for skin rejuvenation through the treatment of shallow
vascular lesions and pigmented lesions; and
•
the TriActive®
LaserDermologysm
system for the temporary reduction of the appearance of
cellulite.
We sell our products through a direct sales force in North
America, four European countries, Japan and China and through
international distributors in 31 other countries. In
January 2005, we launched a separate
CynosureSpatm
brand with product offerings, tailored marketing and sales
personnel focused exclusively on the aesthetic spa market. As of
June 30, 2005, we had sold more than 4,500 aesthetic
treatment systems worldwide.
Our company was founded in 1991. El.En. S.p.A., an Italian
company listed on the techSTAR segment of the Italian stock
market, Borsa Italiana, that itself and through subsidiaries
develops and markets laser systems for medical and industrial
applications, acquired a majority of our capital stock in 2002.
In September 2003, we recruited a new management team that has
implemented a comprehensive reorganization of our company. Our
revenues have increased from $23.0 million in 2002 to
$41.6 million in 2004, a compound annual growth rate of
35%. Our revenues for the six months ended June 30, 2005
increased 31% to $25.1 million, compared to
$19.2 million for the first six months of 2004. Our gross
profit margin improved from 43% in 2002 to 51% in 2004, and we
achieved profitability in 2004.
Aesthetic Market Opportunity
Michael Moretti/Medical Insight, Inc., an aesthetic treatment
market research firm, estimates that the number of non-invasive
aesthetic treatment procedures worldwide using laser and other
light-based
technologies will grow from nearly 20 million in 2003 to
over 53 million in 2008, representing a compound annual
growth rate of over 20%. We estimate that the worldwide market
for aesthetic treatment systems based on laser and other
light-based technologies will exceed $550 million in 2005.
We base this estimate on published market research reports,
revenue figures for public companies and our conversations with
the managements of private companies that compete in the
aesthetic treatment equipment market.
Key factors contributing to growth in the markets for aesthetic
treatment procedures and aesthetic laser equipment include:
•
the aging population of industrialized countries and the rising
discretionary income of the “baby boomer” demographic
segment;
•
the desire of many individuals to improve their appearance;
•
the development of technology that allows for safe and effective
aesthetic treatment procedures;
•
the impact of managed care and reimbursement on physician
economics, which has motivated physicians to establish or expand
their elective aesthetic practices with procedures that are paid
for directly by patients; and
•
reductions in cost per procedure, which has attracted a broader
base of clients and patients for aesthetic treatment procedures.
Aesthetic treatment procedures that use lasers and other
light-based equipment have traditionally been performed by
dermatologists and plastic surgeons, of whom there are more than
18,000 in the United States, based on published membership
information from professional medical organizations. More
recently, a broader group of physicians in the United States,
including primary care physicians, obstetricians, gynecologists,
ophthalmologists and ear, nose and throat specialists, have
incorporated aesthetic treatment procedures into their
practices. We believe that there are approximately 200,000 of
these potential customers in the United States and Canada,
representing a significant market opportunity that is only
beginning to be addressed by suppliers of lasers and other
light-based aesthetic equipment. An aesthetic spa market is also
rapidly developing, with approximately 12,000 aesthetic
spas in North America in 2004, an increase of approximately 26%
from 2002 according to the International Spa Association. In
addition to conventional massage and cosmetic treatments,
aesthetic spas are beginning to offer non-invasive light-based
procedures.
We believe that non-traditional physician customers and spa
customers currently represent at least one-half of the North
American laser and other light-based aesthetic treatment systems
market. We also believe that as aesthetic spas and
non-traditional physician customers play increasingly important
roles as purchasers of aesthetic treatment systems, the market
for these products will become even more diverse. Specifically,
we expect that owners of different types of aesthetic treatment
practices will place different emphases on various system
attributes, such as breadth of treatment applications, return on
investment, upgradeability and price. Accordingly, we believe
that there is significant market opportunity for a company that
tailors its product offerings to meet the needs of a wide range
of market segments.
Our Solution
We offer tailored customer solutions to address the market for
non-invasive light-based aesthetic treatment applications,
including hair removal, treatment of vascular lesions, skin
rejuvenation through the treatment of shallow vascular lesions
and pigmented lesions and temporary reduction of the appearance
of cellulite. We believe our laser and other light-based systems
are reliable, user friendly and easily incorporated into both
physician practices and spas. We complement our product
offerings with comprehensive and responsive service offerings,
including assistance with training, aesthetic practice
development consultation and product maintenance.
We believe that the following factors enhance our market
position:
•
Broad Technology Base. Our products are based on a broad
range of technology and incorporate different types of lasers,
such as Alexandrite, pulse dye, Nd:Yag and diode, as well as
intense pulsed light devices.
•
Expansive Portfolio of Aesthetic Treatment Systems. Our
product portfolio of over 14 aesthetic treatment systems
includes single energy source systems as well as workstations
that incorporate two or more different types of lasers or
light-based technologies. By offering multiple technologies and
system alternatives at a variety of price points, we seek to
provide customers with tailored solutions that meet the specific
needs of their practices while providing significant flexibility
in their level of investment.
•
Upgrade Paths Within Product Families. We have designed
our new products to facilitate upgrading within product
families. For example, our Cynergy system and our
redesigned Apogee Elite system are multiple energy source
workstations that can be upgraded from our single energy source
systems. We began shipping these new upgradeable systems in
mid-2005.
•
Global Presence. We have offered our products in
international markets for over 14 years, with approximately
45% of our revenue generated from international markets in 2004.
We target international markets through a direct sales force in
four European countries, Japan and China and through
international distributors in 31 other countries.
•
Strong Reputation Established Over 14-Year History. We
have been in the business of developing and marketing aesthetic
treatment systems for over 14 years. As a result of this
history, we believe the Cynosure brand name is associated with a
tradition of technological leadership.
Our Business Strategy
Our goal is to become the worldwide leader in providing
non-invasive aesthetic treatment systems. The key elements of
our business strategy to achieve this goal are to:
•
Offer a Full Range of Tailored Aesthetic Solutions. Our
product portfolio incorporates a variety of laser and light
sources at various price points across many aesthetic
applications to address the needs of the traditional physician
customer market as well as the growing non-traditional physician
customer market.
•
Launch Innovative New Products and Technologies for Emerging
Non-Invasive Aesthetic Applications. Since 2002, we have
introduced 11 new products. We introduced two of our
flagship products, the Apogee Elite and TriActive
LaserDermology systems, in 2004 and two of our flagship
products, the Cynergy and the PhotoSilk Plus
systems, in 2005. We are also working on new technologies for
emerging aesthetic applications, such as tattoo removal and acne.
•
Pursue Spa Market with Dedicated Organization. In January
2005, we launched our separate CynosureSpa brand with
tailored marketing and sales personnel focused exclusively on
penetrating the aesthetic spa market. We have also introduced
products specifically designed for the aesthetic spa market,
such as the TriActive LaserDermology system and the
PhotoLighttm
system.
•
Provide Comprehensive, Ongoing Customer Service. We
support our customers with a worldwide service organization to
provide product installation and ongoing maintenance services.
Most of our new products are modular in design to enable quick
and efficient service and support. We offer our North American
customers additional training, business development and
marketing services through a third party consulting firm.
•
Generate Additional Revenue from Existing Customer Base.
We believe that there are opportunities for us to generate
additional revenue from existing customers who are already
familiar
with our products through additional sales of standalone
systems, upgrades to our new modular products and increasing the
percentage of our customers that enter into service contracts.
Relationship with El.En. S.p.A.
Upon completion of this offering, El.En. S.p.A. will
own %
of our outstanding class B common stock,
representing %
of the aggregate number of shares of our class A and
class B common stock outstanding. El.En. has agreed with
the underwriters for this offering that, without the prior
written consent of Citigroup Global Markets Inc., the
lead-managing underwriter of this offering, it will not sell or
otherwise dispose of any shares of our common stock for a period
of 24 months after the date of this prospectus, other than:
•
up to 33% of the shares of our common stock that it beneficially
owned on the date of this prospectus during the period between
12 and 18 months after the date of this prospectus; and
•
up to an additional 33% of the shares of our common stock that
it beneficially owned on the date of this prospectus during the
period between 18 and 24 months after the date of this
prospectus.
We are party to distribution agreements with El.En. under which
we distribute products manufactured by El.En., including our
Cynergy
PLTM,
PhotoLight, PhotoSilk Plus and TriActive LaserDermology
products. These agreements provide us with exclusive
worldwide distribution rights for the Cynergy PL product
and exclusive distribution rights in the United States and
Canada for the PhotoLight, PhotoSilk Plus and
TriActive LaserDermology products. Each of the
distribution agreements has an initial term that expires in
January 2012, and each will automatically renew for additional
one-year terms unless either party provides notice of
termination within a specified period prior to the expiration of
the initial term or any subsequent renewal term.
Prior to the closing of this offering, we and El.En. intend to
enter into an agreement providing that, to the extent El.En. is
required to make any indemnity payments to the underwriters
pursuant to the underwriting agreement relating to this
offering, and such indemnity payments relate to matters as to
which El.En., after reasonable inquiry, had no knowledge, we
will reimburse El.En. for such indemnity payments. This
agreement will not affect the respective liability of us and
El.En. to the underwriters pursuant to the underwriting
agreement. See “ Underwriting.”
See “Risk Factors — Risks Related to Our
Relationship with El.En.,”“Business —
El.En. Commercial Relationship,”“Certain
Relationships and Related Party Transactions” and
“Underwriting.”
Our Dual Class Capital Structure
Prior to the completion of this offering, we will restate our
certificate of incorporation to, among other things, create a
dual class capital structure by authorizing class A and
class B common stock and reclassifying all of our
outstanding shares of previously existing common stock into
shares of class B common stock. In addition, upon our
filing of the restated certificate of incorporation, each
outstanding option to purchase shares of our common stock will
automatically convert into an option to purchase an equal number
of shares of our class B common stock, with no other
changes to the terms of the option. We and El.En. are selling
shares of class A common stock in this offering, and the
only shares of our class A common stock to be outstanding
immediately following this offering will be the shares being
sold in this offering.
The holders of class A common stock and class B common
stock have identical rights and will be entitled to one vote per
share with respect to each matter presented to our stockholders
on which the holders of common stock are entitled to vote,
except as discussed below. Until El.En. beneficially owns less
than 20% of the aggregate number of shares of our class A
common stock and class B common stock
outstanding, or less than 50% of the number of shares of our
class B common stock outstanding, the holders of shares of
our class B common stock will have the right to:
•
elect a majority of our board of directors;
•
approve amendments to our bylaws adopted by our stockholders; and
•
approve amendments to any provision of our certificate of
incorporation relating to the rights of holders of common stock,
the powers, election and classification of the board of
directors, corporate opportunities and the rights of holders of
class A common stock and class B common stock to elect
and remove directors, act by written consent and call special
meetings of stockholders.
In addition, the holders of shares of our class B common
stock will vote with our class A stockholders in the
election of the remaining directors.
Shares of class B common stock will convert automatically
into class A common stock upon any transfer of such shares,
whether or not for value. Shares of class B common stock
are also convertible into class A common stock upon the
occurrence of events specified in our restated certificate of
incorporation.
See “Description of Capital Stock — Common
Stock.”
Risks Associated with Our Business
Our business is subject to numerous risks, as more fully
described in the section entitled “Risk Factors”
immediately following this prospectus summary. We have a history
of operating losses, and we may not maintain profitability. We
rely on third party suppliers, including some sole source
suppliers, for the components and subassemblies of many of our
products. We compete against companies that have longer
operating histories, more established products and greater
resources than we do. We rely on third party distributors to
market, sell and service a significant portion of our products.
El.En. will continue to have substantial control over us after
this offering. We depend on El.En. for several of the products
that we market and sell. El.En. markets and sells products that
compete with our products.
Our Corporate Information
We were incorporated under the laws of the State of Delaware in
July 1991. Our principal executive offices are located at
5 Carlisle Road, Westford, Massachusetts01886, and our
telephone number is (978) 256-4200. Our website address is
www.cynosurelaser.com. The information on our website is
not a part of this prospectus.
Except for our financial statements included in this prospectus,
the capitalization table set forth under
“Capitalization” or where otherwise expressly
indicated, this prospectus assumes for all purposes that our
restated certificate of incorporation has been filed and become
effective and that our previously existing shares of and options
to purchase common stock have been converted into and
reclassified as shares of and options to purchase class B
common stock. In this prospectus, we refer to our to be
authorized class A common stock and class B common
stock collectively as our common stock.
Cynosure®, Apogee®,
PhotoGenica® and SmartCool® are our
registered trademarks. We also have the following trademarks and
servicemarks:
Acclaimtm,
Affinitytm,
Apogee
Elitetm,
Cynergytm,
CynosureSpatm,
LaserDermologysm,
Photolighttm,
PhotoSilktm,
PhotoSilk
Plustm
and
VStartm.
TriActive® is the registered trademark of El.En.
S.p.A. Each of the other trademarks, trade names or service
marks appearing in this prospectus belongs to its respective
holder.
Common stock to be outstanding after this offering:
Class A
shares
Class B
shares
Total
shares
Common stock to be held by El.En. immediately after this
offering:
Class B
shares,
which El.En. has agreed not to sell for 12 to 24 months
following this offering, as described under “Shares
Eligible for Future Sale — Lock-up Agreements.”
Voting Rights
One vote for each share of class A common stock and one
vote for each share of class B common stock on all matters
on which stockholders are entitled to vote, except holders of
class B common stock will have the right separately
(1) to elect and remove a majority of the members of our
board of directors, (2) to approve amendments to our bylaws
adopted by our stockholders and (3) to approve amendments
to specified provisions of our certificate of incorporation. See
“Description of Capital Stock — Common
Stock.”
Use of Proceeds
We expect to use our net proceeds from this offering to expand
our sales, marketing and distribution capabilities, to fund our
research and development activities and for general corporate
purposes, including potential acquisitions of complementary
products, technologies or businesses.
We will not receive any proceeds from the sale of shares of
class A common stock by El.En.
Risk Factors
See “Risk Factors” and other information included in
this prospectus for a discussion of factors you should consider
carefully before deciding to invest in shares of our
class A common stock.
Proposed Nasdaq National Market symbol
CYNO
The number of shares of our class A common stock and
class B common stock to be outstanding after this offering
is based on no shares of class A common stock and
6,242,877 shares of class B common stock outstanding
as of June 30, 2005. The number of shares to be outstanding
after this offering excludes:
•
1,862,642 shares of class B common stock issuable upon
the exercise of stock options outstanding as of June 30,2005 at a weighted average exercise price of $3.31 per
share; and
•
541,342 shares of class A common stock reserved for
future issuance under our equity compensation plans as of the
date of this prospectus.
Unless otherwise noted, the information in this prospectus
assumes that the underwriters do not exercise their
over-allotment option.
The following summary consolidated financial data for the years
ended December 31, 2002, 2003 and 2004 have been derived
from our audited financial statements. The summary consolidated
financial data as of June 30, 2005 and for the six month
periods ended June 30, 2004 and 2005 have been derived from
our unaudited financial statements. The unaudited summary
consolidated financial statement data includes, in our opinion,
all adjustments, consisting only of normal recurring
adjustments, that are necessary for a fair presentation of our
financial position and results of operations for these periods.
Operating results for the six months ended June 30, 2005
are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. You should
read this data together with our consolidated financial
statements and the related notes appearing at the end of this
prospectus and the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
section of this prospectus.
The as adjusted consolidated balance sheet data gives effect to
the sale by us
of shares
of class A common stock in this offering at an assumed
initial public offering price of
$ per
share, after deducting underwriting discounts and commissions
and estimated offering expenses payable by us.
Investing in our class A common stock involves a high
degree of risk. You should carefully consider the risks and
uncertainties described below together with all of the other
information included in this prospectus, including the financial
statements and related notes appearing at the end of this
prospectus, before deciding to invest in our class A common
stock. If any of the following risks actually occurs, our
business, prospects, financial condition and results of
operations may be materially harmed. In this event, the market
price of our class A common stock could decline and you
could lose part or all of your investment.
Risks Related to Our Business and Industry
We have a history of operating losses, and we may not
maintain profitability.
Although we were profitable in 2004 and for the first six months
of 2005, we incurred operating losses for three of the last five
years. Our net losses were approximately $6.0 million in
2001, $1.9 million in 2002 and $0.5 million in 2003.
We may not be able to sustain or increase profitability on a
quarterly or annual basis. If we are unable to maintain
profitability, the market value of our stock will decline, and
you could lose all or a part of your investment.
If we fail to obtain Alexandrite rods or our air cooling
system from our sole suppliers, our ability to manufacture and
sell our products and components would be impaired.
We use Alexandrite rods to manufacture the lasers for our
Apogee products. We depend exclusively on Northrop
Grumman SYNOPTICS to supply Alexandrite rods to us, and we are
aware of no alternative supplier meeting our quality standards.
We offer our SmartCool® treatment cooling systems
for use with our laser aesthetic treatment systems, and we
depend exclusively on Zimmer Elektromedizin GmbH to supply
SmartCool systems to us. Both Alexandrite lasers and our
SmartCool systems are important to our business.
We do not have long-term arrangements with Northrop Grumman
SYNOPTICS or Zimmer Elektromedizin for the supply of Alexandrite
rods or SmartCool systems, but instead purchase from them
on a purchase order basis. Northrop Grumman SYNOPTICS and Zimmer
Elektromedizin are not required, and may not be able or willing,
to meet our future requirements at current prices, or at all.
Any extended interruption in our supplies of Alexandrite rods or
our SmartCool treatment cooling systems could materially
harm our business.
We compete against companies that have longer operating
histories, more established products and greater resources than
we do, which may prevent us from achieving further market
penetration or improving operating results.
Competition in the aesthetic laser industry is intense. Our
products compete against products offered by public companies,
such as Candela Corporation, Cutera, Inc., Laserscope, Lumenis
Ltd., Palomar Medical Technologies, Inc. and Syneron Medical
Ltd., as well as several smaller specialized private companies,
such as Radiancy, Inc. and Thermage, Inc. Some of these
competitors have significantly greater financial and human
resources than we do and have established reputations, as well
as worldwide distribution channels and sales and marketing
capabilities that are larger and more established than ours.
Additional competitors may enter the market, and we are likely
to compete with new companies in the future. We also face
competition from medical products, such as BOTOX® and
collagen injections, and surgical and non-surgical aesthetic
procedures, such as face lifts, sclerotherapy, electrolysis,
microdermabrasion and chemical peels. We may also face
competition from manufacturers of pharmaceutical and other
products that have not yet been developed. As a result of
competition with these companies, products and procedures, we
could experience loss of market share and decreasing revenue as
well as reduced prices and profit margins, any of which would
harm our business and operating results.
Our ability to compete effectively depends upon our ability to
distinguish our company and our products from our competitors
and their products. Factors affecting our competitive position
include:
•
product performance and design;
•
ability to sell products tailored to meet the applications needs
of clients and patients;
•
quality of customer support;
•
product pricing;
•
product safety;
•
sales, marketing and distribution capabilities;
•
success and timing of new product development and
introductions; and
•
intellectual property protection.
Some of our competitors have more established products and
customer relationships than we do, which could inhibit our
further market penetration efforts. For example, we have
encountered, and expect to continue to encounter, situations
where, due to pre-existing relationships, potential customers
determine to purchase additional products from our competitors.
If we are unable to compete effectively, our business and
operating results will be harmed.
In addition, some of our current and potential competitors have
significantly greater financial, research and development,
manufacturing and sales and marketing resources than we have.
Our competitors could utilize their greater financial resources
to acquire other companies to gain enhanced name recognition and
market share, as well as to acquire new technologies or products
that could effectively compete with our product lines.
If we do not continue to develop and commercialize new
products and identify new markets for our products and
technology, we may not remain competitive, and our revenues and
operating results could suffer.
The aesthetic laser and light-based treatment system industry is
subject to continuous technological development and product
innovation. If we do not continue to be innovative in the
development of new products and applications, our competitive
position will likely deteriorate as other companies successfully
design and commercialize new products and applications.
Accordingly, our success depends in part on developing new and
innovative applications of laser and other light-based
technology and identifying new markets for and applications of
existing products and technology. If we are unable to develop
and commercialize new products and identify new markets for our
products and technology, our products and technology could
become obsolete and our revenues and operating results could be
adversely affected.
To remain competitive, we must:
•
develop or acquire new technologies that either add to or
significantly improve our current products;
•
convince our target customers that our new products or product
upgrades would be attractive revenue-generating additions to
their practices;
•
sell our products to non-traditional customers, including
primary care physicians, gynecologists and other specialists;
•
identify new markets and emerging technological trends in our
target markets and react effectively to technological
changes; and
•
maintain effective sales and marketing strategies.
If our new products do not gain market acceptance, our
revenues and operating results could suffer.
The commercial success of the products and technology we develop
will depend upon the acceptance of these products by providers
of aesthetic procedures and their patients and clients. It is
difficult for us to predict how successful recently introduced
products, or products we are currently developing, will be over
the long term. If the products we develop do not gain market
acceptance, our revenues and operating results could suffer.
We expect that many of the products we develop will be based
upon new technologies or new applications of existing
technologies. It may be difficult for us to achieve market
acceptance of some of our products, particularly the first
products that we introduce to the market based on new
technologies or new applications of existing technologies.
If demand for our aesthetic treatment systems by
non-traditional physician customers and spas does not develop as
we expect, our revenues will suffer and our business will be
harmed.
Our revenues from non-traditional physician customers and spa
purchasers of our products have increased significantly since
January 1, 2004. We believe, and our growth expectations
assume, that we and other companies selling lasers and other
light-based aesthetic treatment systems have only begun to
penetrate these markets and that our revenues from selling to
these markets will continue to increase. If our expectations as
to the size of these markets and our ability to sell our
products to participants in these markets are not correct, our
revenues will suffer and our business will be harmed.
We rely upon third party suppliers for the components and
subassemblies of many of our products, making us vulnerable to
supply shortages and price fluctuations, which could harm our
business.
Many of the components and subassemblies that comprise our
aesthetic treatment systems are currently manufactured for us by
a limited number of suppliers. In addition, one third party
supplier assembles and tests many of the components and
subassemblies for our Apogee, Cynergy, Acclaim and
VStar product families. We do not have long-term
contracts with any of these third parties, including the third
party supplier that assembles many of our components and
subassemblies, for the supply of parts or services. Any
interruption in the supply of components or subassemblies, or
our inability to obtain substitute components or subassemblies
from alternate sources at acceptable prices in a timely manner,
or our inability to obtain assembly and testing services, could
impair our ability to meet the demand of our customers, which
would have an adverse effect on our business and operating
results.
We sell our products in numerous international markets.
Our operating results may suffer if we are unable to manage our
international operations effectively.
We sell our products in 48 foreign countries, and we therefore
are subject to risks associated with having international
operations. International sales accounted for 58% of our revenue
for 2003, 45% of our revenue for 2004 and 43% of our revenue for
the first six months of 2005.
Our international sales are subject to a number of risks,
including:
•
foreign certification and regulatory requirements;
•
difficulties in staffing and managing our foreign operations;
•
import and export controls; and
•
political and economic instability.
Revenue from our international sales could be adversely
affected by fluctuations in currency exchange rates, which would
cause our operating results to suffer.
We face risks associated with changes in foreign currency
exchange rates. Revenues from our international operations that
were recorded in U.S. dollars represented approximately 45%
of our total 2004 international revenues. Substantially all of
the remaining 55% of our total 2004 revenues from international
operations were sales in euros, British pounds and Japanese yen.
Since we report our financial position and results of operations
in U.S. dollars, our reported results of operations may be
adversely affected by changes in the exchange rate between these
currencies and the U.S. dollar. We have not historically
engaged in hedging activities relating to our
non-U.S. dollar operations. We may incur negative foreign
currency translation charges as a result of changes in currency
exchange rates, which could cause our operating results to
suffer.
We rely on third party distributors to market, sell and
service a significant portion of our products. If these
distributors do not commit the necessary resources to
effectively market, sell and service our products or if our
relationships with these distributors are disrupted, our
business and operating results may be harmed.
In North America, the United Kingdom, Germany, Spain, France,
Japan and China, we sell our products through our internal sales
organization. Outside of these markets, we sell our products
through third party distributors. Our sales and marketing
success in these other markets depends on these distributors, in
particular their sales and service expertise and relationships
with the customers in the marketplace. Sales of our aesthetic
treatment systems by third party distributors represented 21% of
our revenue in 2003, 13% of our revenue in 2004 and 20% of our
revenue in the first six months of 2005. We do not control these
distributors, and they may not be successful in marketing our
products. Third party distributors may terminate their
relationships with us, or fail to commit the necessary resources
to market and sell our products to the level of our
expectations. Currently, we have written distributor agreements
in place with only nine of our 19 third party distributors.
The third party distributors with which we do not have written
distributor agreements may terminate their relationships with us
and stop selling and servicing our products with little or no
notice. If current or future third party distributors do not
perform adequately, or if we fail to maintain our existing
relationships with these distributors or fail to recruit and
retain distributors in particular geographic areas, our revenue
from international sales may be adversely affected and our
operating results could suffer.
Because we do not require training for users of our
products, and sell our products to non-physicians, there exists
an increased potential for misuse of our products, which could
harm our reputation and our business.
Federal regulations allow us to sell our products to or on the
order of practitioners licensed by law to use or order the use
of a prescription device. The definition of “licensed
practitioners” varies from state to state. As a result, our
products may be purchased or operated by physicians with varying
levels of training and, in many states, by non-physicians,
including nurse practitioners, chiropractors and technicians.
Outside the United States, many jurisdictions do not require
specific qualifications or training for purchasers or operators
of our products. We do not supervise the procedures performed
with our products, nor do we require that direct medical
supervision occur. We and our distributors offer product
training sessions, but neither we nor our distributors require
purchasers or operators of our products to attend training
sessions. The lack of required training and the purchase and use
of our products by non-physicians may result in product misuse
and adverse treatment outcomes, which could harm our reputation
and expose us to costly product liability litigation.
Product liability suits could be brought against us due to
a defective design, material or workmanship or due to misuse of
our products. These lawsuits could be expensive and time
consuming and result in substantial damages to us and increases
in our insurance rates.
If our products are defectively designed, manufactured or
labeled, contain defective components or are misused, we may
become subject to substantial and costly litigation by our
customers or their patients or clients. Misusing our products or
failing to adhere to operating guidelines for our products can
cause severe burns or other damage to the eyes, skin or other
tissue. We are routinely involved in claims related to the use
of our products. Product liability claims could divert
management’s attention from our core business, be expensive
to defend and result in sizable damage awards against us. Our
current insurance coverage may not be sufficient to cover these
claims. Moreover, in the future, we may not be able to obtain
insurance in amount or scope sufficient to provide us with
adequate coverage against potential liabilities. Any product
liability claims brought against us, with or without merit,
could increase our product liability insurance rates or prevent
us from securing continuing coverage, could harm our reputation
in the industry and reduce product sales. We would need to pay
any product losses in excess of our insurance coverage out of
cash reserves, harming our financial condition and adversely
affecting our operating results.
Our financial results may fluctuate from quarter to
quarter, which makes our results difficult to predict and could
cause our results to fall short of expectations.
Our financial results may fluctuate as a result of a number of
factors, many of which are outside of our control. For these
reasons, comparing our financial results on a period-to-period
basis may not be meaningful, and you should not rely on our past
results as an indication of our future performance. Our future
quarterly and annual expenses as a percentage of our revenues
may be significantly different from those we have recorded in
the past or which we expect for the future. Our financial
results in some quarters may fall below expectations. Any of
these events could cause our stock price to fall. Each of the
risk factors listed in this “Risk Factors” section,
and the following factors, may adversely affect our financial
results:
•
continued availability of attractive equipment leasing terms for
our customers, which may be negatively influenced by interest
rate increases;
•
increases in the length of our sales cycle; and
•
reductions in the efficiency of our manufacturing processes.
If there is not sufficient demand for the procedures
performed with our products, practitioner demand for our
products could decline, which would adversely affect our
operating results.
Most procedures performed using our aesthetic treatment systems
are elective procedures that are not reimbursable through
government or private health insurance. The cost of these
elective procedures must be borne by the patient. As a result,
the decision to undergo a procedure that utilizes our products
may be influenced by a number of factors, including:
•
patient awareness of procedures and treatments;
•
the cost, safety and effectiveness of the procedure and of
alternative treatments;
•
the success of our and our customers’ sales and marketing
efforts to purchasers of these procedures; and
•
consumer confidence, which may be affected by economic and other
conditions.
If there is not sufficient demand for the procedures performed
with our products, practitioner demand for our products would be
reduced, which would adversely affect our operating results.
The expense and potential unavailability of liability
insurance coverage for our customers could adversely affect our
ability to sell our products and our financial condition.
Some of our customers and prospective customers have had
difficulty in procuring or maintaining liability insurance to
cover their operation and use of our products. Medical
malpractice carriers are withdrawing coverage in some states or
substantially increasing premiums. If this trend continues or
worsens, our customers may discontinue using our products, and
potential customers may elect not to purchase laser and other
light-based products.
Our business and operations are experiencing rapid growth.
If we fail to effectively manage our growth, our business and
operating results could be harmed.
We have experienced significant growth in the scope of our
operations and the number of our employees. For example, our
revenue increased from $23.0 million in 2002 to
$41.6 million in 2004, and the number of our employees
increased from 138 at the beginning of 2003 to 178 as of
June 30, 2005. This growth has placed significant demands
on our management, as well as our financial and operational
resources. If we do not effectively manage our growth, the
efficiency of our operations and the quality of our products
could suffer, which could adversely affect our business and
operating results. To effectively manage this growth, we will
need to continue to:
•
implement appropriate operational, financial and management
controls, systems and procedures;
•
expand our manufacturing capacity and scale of production;
expand our sales, marketing and distribution infrastructure and
capabilities; and
•
provide adequate training and supervision to maintain high
quality standards.
We may be unable to attract and retain management and
other personnel we need to succeed.
Our success depends on the services of our senior management and
other key research and development, manufacturing, sales and
marketing employees. The loss of the services of one or more of
these employees could have a material adverse effect on our
business. We consider retaining Michael R. Davin, our president
and chief executive officer, to be key to our efforts to
develop, sell and market our products and remain competitive. We
have entered into an employment agreement with Mr. Davin;
however, the employment agreement is terminable by him on short
notice and may not ensure his continued service with our
company. Our future success will depend in large part upon our
ability to attract, retain and motivate highly skilled
employees. We cannot be certain that we will be able to do so.
Any acquisitions that we make could disrupt our business
and harm our financial condition.
From time to time, we evaluate potential strategic acquisitions
of complementary businesses, products or technologies, as well
as consider joint ventures and other collaborative projects. We
may not be able to identify appropriate acquisition candidates
or strategic partners, or successfully negotiate, finance or
integrate any businesses, products or technologies that we
acquire. We do not have any experience with acquiring companies
or products. Any acquisition we pursue could diminish the
proceeds from this offering available to us for other uses or be
dilutive to our stockholders, and could divert management’s
time and resources from our core operations.
Risks Related to Our Relationship with El.En.
El.En. will continue to have substantial control over us
after this offering and could delay or prevent a change of
control.
Even after this offering, El.En., our largest stockholder, will
be able to control the election of a majority of the members of
our board of directors. Immediately prior to this offering,
El.En. held 78% of our outstanding common stock. Immediately
following this offering, El.En. will
own %
of our outstanding class B common stock, which will
comprise %
of our aggregate outstanding common stock,
or %
of our aggregate outstanding common stock if the underwriters
exercise their over-allotment right in full. Until El.En.
beneficially owns less than 20% of the aggregate number of
shares of our class A common stock and class B common
stock outstanding or less than 50% of the number of shares of
our class B common stock outstanding, El.En., as holder of
a majority of the shares of our class B common stock, will
have the right:
•
to elect a majority of the members of our board of directors;
•
to approve amendments to our bylaws adopted by our
stockholders; and
•
to approve amendments to any provisions of our restated
certificate of incorporation relating to the rights of holders
of common stock, the powers, election and classification of the
board of directors, corporate opportunities and the rights of
holders of class A common stock and class B common
stock to elect and remove directors, act by written consent and
call special meetings of stockholders.
In addition, the holders of shares of our class B common
stock will vote with our class A stockholders for the
election of the remaining directors. Because El.En. will be able
to control the election of a majority of our board, and because
of its substantial holdings of our capital stock, El.En. will
likely have the ability to delay or prevent a change of control
of our company that may be favored by other directors or
stockholders and otherwise exercise substantial control over all
corporate actions requiring board or stockholder approval.
We currently depend on El.En. for our Cynergy PL,
PhotoLight, PhotoSilk Plus and TriActive LaserDermology
products. If our distribution agreements with El.En. terminate,
we will no longer be able to sell these products, and our
business will be harmed.
El.En. manufactures and owns the intellectual property rights to
the Cynergy PL, PhotoLight, PhotoSilk Plus and
TriActive LaserDermology products. We distribute these
products pursuant to distribution agreements we have with El.En.
These agreements provide us with exclusive worldwide
distribution rights for our Cynergy PL product, and
exclusive North American distribution rights for our
PhotoLight, PhotoSilk and TriActive LaserDermology
products. For the six months ended June 30, 2005, we
derived 6% of our revenues from our distribution relationship
with El.En., and for the year ended December 31, 2004, we
derived 4% of our revenues from this relationship. Although we
have distribution rights for the PhotoLight, PhotoSilk Plus,
Cynergy PL and TriActive LaserDermology products
during the terms of the agreements, El.En. may discontinue
production of these products at any time and must make
reasonable efforts to provide one year’s notice to us prior
to such discontinuation. Additionally, El.En. may not be able or
willing to provide these products to us after the expiration of
those agreements. El.En. may change the prices that we pay for
these products on 30 days’ notice to us. Additionally,
El.En. may terminate the distribution agreement for the
PhotoLight, PhotoSilk Plus and TriActive
LaserDermology systems if we do not meet annual minimum
purchase obligations specified in the agreements. If El.En.
ceases production of these products, is unable or unwilling to
sell these products to us after the expiration of the
distribution agreements, terminates the agreements or increases
the prices that we pay for the products, we may not be able to
replace them with similar products in a timely manner or on
comparable terms, and our business could be adversely affected.
El.En. and its subsidiaries market and sell products that
compete with our products, and any competition by El.En. could
have a material adverse effect on our business.
El.En. is a leading laser manufacturer in Europe and a leading
light-based medical device manufacturer worldwide. El.En. and
its subsidiaries develop and produce laser systems with
scientific, industrial, commercial and medical applications.
Although we have exclusive North American distribution rights
for our PhotoLight, PhotoSilk Plus and TriActive
LaserDermology products, El.En. may compete with us in North
America with its other products. In the event that our
distribution agreements with El.En. terminate, El.En. may
compete with us in North America with these products. El.En.
markets, sells, promotes and licenses products that compete with
our products outside of North America. El.En. has significantly
greater financial, technical and human resources than we have
and is better equipped to research, develop, manufacture and
commercialize products. In addition, El.En. has more extensive
experience in light-based technologies. Our business could be
materially and adversely affected by competition from El.En.
Conflicts of interest may arise between us and El.En., and
these conflicts might ultimately be resolved in a manner
unfavorable to us.
For financial reporting purposes, our financial results are
included in El.En.’s consolidated financial statements. Two
of our directors, Andrea Cangioli and Gabriele Clementi, and the
spouse of one of our directors, Leonardo Masotti, are also
officers or directors of El.En. These three directors own or
have an interest in substantial amounts of El.En. stock.
Ownership interests of our directors in El.En. stock, or service
as a director of our company while at the same time serving as,
or being the spouse of, a director or officer of El.En., could
give rise to conflicts of interest when a director or officer is
faced with a decision that could have different implications for
the two companies. Conflicts may arise with respect to possible
future distribution and research and development arrangements
with El.En. or another El.En. affiliated company in which the
terms and conditions of the arrangements are subject to
negotiation between us and El.En. or such other El.En.
affiliated company. These potential conflicts could also arise,
for example, over matters such as:
•
the nature, timing, marketing, distribution and price of our
products and El.En.’s products that compete with each other;
business opportunities that may be attractive to both El.En. and
us.
In order to address potential conflicts of interest between us
and El.En., upon completion of this offering, our restated
certificate of incorporation will contain provisions regulating
and defining the conduct of our affairs as they may involve
El.En. and El.En. affiliated companies and El.En.’s
officers and directors who serve as our directors. These
provisions recognize that we and El.En. and El.En. affiliated
companies engage and may continue to engage in the same or
similar business activities and lines of business and will
continue to have contractual and business relations with each
other. These provisions expressly permit El.En. and its
affiliated companies to compete against us and narrowly limit
corporate opportunities that El.En. or its directors or officers
who serve as our directors must make available to us.
Our class A share price may decline because of future
sales of our shares by El.En.
After completion of this offering, El.En. may sell all or part
of the shares of our class B common stock that it owns, at
which time those shares would automatically convert into shares
of our class A common stock. El.En. is not subject to any
contractual obligation to maintain its ownership position in our
shares, except that it has agreed with the underwriters for this
offering that, without the prior written consent of Citigroup
Global Markets Inc., the lead-managing underwriter of this
offering, it will not sell or otherwise dispose of any shares of
our common stock for a period of 24 months after the date
of this prospectus, other than:
•
up to 33% of the shares of our common stock that it beneficially
owned on the date of this prospectus during the period between
12 and 18 months after the date of this prospectus; and
•
up to an additional 33% of the shares of our common stock that
it beneficially owned on the date of this prospectus during the
period between 18 and 24 months after the date of this
prospectus.
Consequently, El.En. may not maintain its ownership of our
common stock following this offering. Sales by El.En. of
substantial amounts of our common stock in the public market
could adversely affect prevailing market prices for our
class A common stock.
Risks Related to Intellectual Property
If we infringe or are alleged to infringe intellectual
property rights of third parties, our business could be
adversely affected.
Our products may infringe or be claimed to infringe patents or
patent applications under which we do not hold licenses or other
rights. Third parties may own or control these patents and
patent applications in the United States and abroad. These third
parties could bring claims against us that would cause us to
incur substantial expenses and, if successfully asserted against
us, could cause us to pay substantial damages. Further, if a
patent infringement suit were brought against us, we could be
forced to stop or delay manufacturing or sales of the product
that is the subject of the suit.
As a result of patent infringement claims, or in order to avoid
potential claims, we may choose or be required to seek a license
from the third party and be required to pay license fees or
royalties or both. These licenses may not be available on
acceptable terms, or at all. Even if we were able to obtain a
license, the rights may be nonexclusive, which could result in
our competitors gaining access to the same intellectual
property. Ultimately, we could be forced to cease some aspect of
our business operations if, as a result of actual or threatened
patent infringement claims, we are unable to enter into licenses
on acceptable terms. This could harm our business significantly.
There has been substantial litigation and other proceedings
regarding patent and other intellectual property rights in our
industry. In addition to infringement claims against us, we may
become a party to other types of patent litigation and other
proceedings, including interference proceedings declared by the
United States Patent and Trademark Office and opposition
proceedings in the European Patent Office, regarding
intellectual property rights with respect to our products and
technology. The cost to us of any patent litigation or other
proceeding, even if resolved in our favor, could be substantial.
Some of our competitors may be able to sustain the costs of such
litigation or proceedings more effectively than we can
because of their greater financial resources. Uncertainties
resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse
effect on our ability to compete in the marketplace. Patent
litigation and other proceedings may also absorb significant
management time.
A third party has asserted that we need a license to its
patents in order for us to continue selling many of our
products.
On July 2, 2004, Palomar Medical Technologies, Inc. sent us
a letter proposing to enter into negotiations with us regarding
the grant of a nonexclusive license under specified United
States and foreign patents owned or licensed by Palomar with
respect to our Apogee Elite, Apogee 5500,
PhotoLight and Acclaim 7000 products, and
also with respect to our SmartEpil II product, which
we no longer offer. In subsequent letters from Palomar dated
September 14, 2004 and March 24, 2005, Palomar
reiterated its willingness to negotiate a license under these
patents and, in its March 24, 2005 letter, stated that it
continues to believe that we need a license under these patents
for each of the products listed in the July 2, 2004 letter,
as well as for our PhotoSilk, PhotoSilk Plus, Cynergy,
Cynergy PL and Cynergy III systems. We have not
entered into negotiations with Palomar with respect to such a
license.
In February 2002, Palomar filed a lawsuit against one of our
competitors, Cutera, Inc., alleging that by making, using,
selling or offering for sale its hair removal products, Cutera
willfully and deliberately infringed one of the patents that
Palomar has asserted against us in its letters to us. This
litigation between Palomar and Cutera is ongoing. Palomar may
also bring suit against us claiming that some or all of our
products violate patents owned or licensed by Palomar.
Litigation is unpredictable, and we may not prevail in
successfully defending or asserting our position. If Palomar
takes legal action against us, and if we do not prevail, we may
be ordered to pay substantial damages for past sales and an
ongoing royalty for future sales of products found to infringe
Palomar’s patents or we could be ordered to stop selling
any products that are found to infringe Palomar’s patents.
If we are unable to obtain or maintain intellectual
property rights relating to our technology and products, the
commercial value of our technology and products will be
adversely affected and our competitive position could be
harmed.
Our success and ability to compete depends in part upon our
ability to obtain protection in the United States and other
countries for our products by establishing and maintaining
intellectual property rights relating to or incorporated into
our technology and products. We own a variety of patents and
patent applications in the United States and corresponding
patents and patent applications in many foreign jurisdictions.
To date, however, our patent estate has not stopped other
companies from competing against us, and we do not know how
successful we would be should we choose to assert our patents
against suspected infringers. Our pending and future patent
applications may not issue as patents or, if issued, may not
issue in a form that will be advantageous to us. Even if issued,
patents may be challenged, narrowed, invalidated or
circumvented, which could limit our ability to stop competitors
from marketing similar products or limit the length of term of
patent protection we may have for our products. Changes in
either patent laws or in interpretations of patent laws in the
United States and other countries may diminish the value of our
intellectual property or narrow the scope of our patent
protection.
If we are unable to protect the confidentiality of our
proprietary information and know-how, the value of our
technology and products could be adversely affected.
In addition to patented technology, we rely upon unpatented
proprietary technology, processes and know-how, particularly
with respect to our Alexandrite and pulse dye lasers. We
generally seek to protect this information in part by
confidentiality agreements with our employees, consultants and
third parties. These agreements may be breached, and we may not
have adequate remedies for any such breach. In addition, our
trade secrets may otherwise become known or be independently
developed by competitors.
If we fail to obtain and maintain necessary U.S. Food
and Drug Administration clearances for our products and
indications or if clearances for future products and indications
are delayed or not issued, our business would be harmed.
Our products are classified as medical devices and are subject
to extensive regulation in the United States by the Food and
Drug Administration, or FDA, and other federal, state and local
authorities. These regulations relate to manufacturing,
labeling, sale, promotion, distribution, importing and exporting
and shipping of our products. In the United States, before we
can market a new medical device, or a new use of, or claim for,
an existing product, we must first receive either 510(k)
clearance or premarket approval from the FDA, unless an
exemption applies. Both of these processes can be expensive and
lengthy and entail significant user fees, unless exempt. The
FDA’s 510(k) clearance process usually takes from three to
12 months, but it can last longer. The process of obtaining
premarket approval is much more costly and uncertain than the
510(k) clearance process. It generally takes from one to three
years, or even longer, from the time the premarket approval
application is submitted to the FDA until an approval is
obtained.
In order to obtain premarket approval and, in some cases, a
510(k) clearance, a product sponsor must conduct well controlled
clinical trials designed to test the safety and effectiveness of
the product. Conducting clinical trials generally entails a
long, expensive and uncertain process that is subject to delays
and failure at any stage. The data obtained from clinical trials
may be inadequate to support approval or clearance of a
submission. In addition, the occurrence of unexpected findings
in connection with clinical trials may prevent or delay
obtaining approval or clearance. If we conduct clinical trials,
they may be delayed or halted, or be inadequate to support
approval or clearance, for numerous reasons, including:
•
FDA, other regulatory authorities or an institutional review
board may place a clinical trial on hold;
•
patients may not enroll in clinical trials, or patient follow-up
may not occur, at the rate we expect;
•
patients may not comply with trial protocols;
•
institutional review boards and third party clinical
investigators may delay or reject our trial protocol;
•
third party clinical investigators may decline to participate in
a trial or may not perform a trial on our anticipated schedule
or consistent with the clinical trial protocol, good clinical
practices, or other FDA requirements;
•
third party organizations may not perform data collection and
analysis in a timely or accurate manner;
•
regulatory inspections of our clinical trials or manufacturing
facilities may, among other things, require us to undertake
corrective action or suspend or terminate our clinical trials,
or invalidate our clinical trials;
•
changes in governmental regulations or administrative
actions; and
•
the interim or final results of the clinical trials may be
inconclusive or unfavorable as to safety or effectiveness.
Medical devices may be marketed only for the indications for
which they are approved or cleared. The FDA may not approve or
clear indications that are necessary or desirable for successful
commercialization. Indeed, the FDA may refuse our requests for
510(k) clearance or premarket approval of new products, new
intended uses or modifications to existing products. Our
clearances can be revoked if safety or effectiveness problems
develop.
After clearance or approval of our products, we are
subject to continuing regulation by the FDA, and if we fail to
comply with FDA regulations, our business could suffer.
Even after clearance or approval of a product, we are subject to
continuing regulation by the FDA, including the requirements
that our facility be registered and our devices listed with the
agency. We are subject to Medical Device Reporting regulations,
which require us to report to the FDA if our products
may have caused or contributed to a death or serious injury or
malfunction in a way that would likely cause or contribute to a
death or serious injury if the malfunction were to recur. We
must report corrections and removals to the FDA where the
correction or removal was initiated to reduce a risk to health
posed by the device or to remedy a violation of the Federal
Food, Drug, and Cosmetic Act caused by the device that may
present a risk to health, and maintain records of other
corrections or removals. The FDA closely regulates promotion and
advertising and our promotional and advertising activities could
come under scrutiny. Since 1994, we have received five untitled
letters from the FDA regarding alleged violations caused by our
promotional activities. We have responded to these letters and
the FDA has found our responses acceptable. If the FDA objects
to our promotional and advertising activities or finds that we
failed to submit reports under the Medical Device Reporting
regulations, for example, the FDA may allege our activities
resulted in violations.
The FDA and state authorities have broad enforcement powers. Our
failure to comply with applicable regulatory requirements could
result in enforcement action by the FDA or state agencies, which
may include any of the following sanctions:
repair, replacement, refunds, recall or seizure of our products;
•
operating restrictions or partial suspension or total shutdown
of production;
•
refusing or delaying our requests for 510(k) clearance or
premarket approval of new products or new intended uses;
•
withdrawing 510(k) clearance or premarket approvals that have
already been granted; and
•
criminal prosecution.
If any of these events were to occur, they could harm our
business.
Federal regulatory reforms may adversely affect our
ability to sell our products profitably.
From time to time, legislation is drafted and introduced in
Congress that could significantly change the statutory
provisions governing the clearance or approval, manufacture and
marketing of a device. In addition, FDA regulations and guidance
are often revised or reinterpreted by the agency in ways that
may significantly affect our business and our products. It is
impossible to predict whether legislative changes will be
enacted or FDA regulations, guidance or interpretations changed,
and what the impact of such changes, if any, may be.
We have modified some of our products without FDA
clearance. The FDA could retroactively determine that the
modifications were improper and require us to stop marketing and
recall the modified products.
Any modifications to one of our FDA-cleared devices that could
significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, requires a new
510(k) clearance or a premarket approval. We may be required to
submit extensive pre-clinical and clinical data depending on the
nature of the changes. We may not be able to obtain additional
510(k) clearances or premarket approvals for modifications to,
or additional indications for, our existing products in a timely
fashion, or at all. Delays in obtaining future clearances or
approvals would adversely affect our ability to introduce new or
enhanced products in a timely manner, which in turn would harm
our revenue and operating results. We have made modifications to
our devices in the past and may make additional modifications in
the future that we believe do not or will not require additional
clearances or approvals. If the FDA disagrees, and requires new
clearances or approvals for the modifications, we may be
required to recall and to stop marketing the modified devices,
which could harm our operating results and require us to
redesign our products.
If we fail to comply with the FDA’s Quality System
Regulation and laser performance standards, our manufacturing
operations could be halted, and our business would
suffer.
We are currently required to demonstrate and maintain compliance
with the FDA’s Quality System Regulation, or QSR. The QSR
is a complex regulatory scheme that covers the methods and
documentation of the design, testing, control, manufacturing,
labeling, quality assurance, packaging, storage and shipping of
our products. Because our products involve the use of lasers,
our products also are covered by a performance standard for
lasers set forth in FDA regulations. The laser performance
standard imposes specific record keeping, reporting, product
testing and product labeling requirements. These requirements
include affixing warning labels to laser products as well as
incorporating certain safety features in the design of laser
products. The FDA enforces the QSR and laser performance
standards through periodic unannounced inspections. We have
been, and anticipate in the future being, subject to such
inspections. Our failure to comply with the QSR or to take
satisfactory corrective action in response to an adverse QSR
inspection or our failure to comply with applicable laser
performance standards could result in enforcement actions,
including a public warning letter, a shutdown of or restrictions
on our manufacturing operations, delays in approving or clearing
a product, refusal to permit the import or export of our
products, a recall or seizure of our products, fines,
injunctions, civil or criminal penalties, or other sanctions,
such as those described in the preceding paragraphs, any of
which could cause our business and operating results to suffer.
If we fail to comply with state laws and regulations, or
if state laws or regulations change, our business could
suffer.
In addition to FDA regulations, most of our products are also
subject to state regulations relating to their sale and use.
These regulations are complex and vary from state to state,
which complicates monitoring compliance. In addition, these
regulations are in many instances in flux. For example, federal
regulations allow our products to be sold to or on the order of
“licensed practitioners,” that is, practitioners
licensed by law to use or order the use of a prescription
device, which is defined on a state-by-state basis. As a result,
some states permit non-physicians to legally purchase and
operate our products, while other states do not. Additionally, a
state could change its regulations at any time to prohibit sales
to particular types of customers. Our failure to comply with
state laws or regulations and changes in state laws or
regulations may adversely affect our business.
We or our distributors may be unable to obtain or maintain
international regulatory qualifications or approvals for our
current or future products and indications, which could harm our
business.
Sales of our products outside the United States are subject to
foreign regulatory requirements that vary widely from country to
country. In many countries, our third party distributors are
responsible for obtaining and maintaining regulatory approvals
for our products. We do not control our third party
distributors, and they may not be successful in obtaining or
maintaining these regulatory approvals. In addition, the FDA
regulates exports of medical devices from the United States.
Complying with international regulatory requirements can be an
expensive and time consuming process, and approval is not
certain. The time required to obtain foreign clearances or
approvals may be longer than that required for FDA clearance or
approval, and requirements for such clearances or approvals may
differ significantly from FDA requirements. Foreign regulatory
authorities may not clear or approve our products for the same
indications cleared or approved by the FDA. The foreign
regulatory approval process may include all of the risks
associated with obtaining FDA clearance or approval in addition
to other risks. Although we or our distributors have obtained
regulatory approvals in the European Union and other countries
outside the United States for many of our products, we or our
distributors may be unable to maintain regulatory
qualifications, clearances or approvals in these countries or
obtain qualifications, clearances or approvals in other
countries. For example, we are in the process of seeking
regulatory approvals from the Japanese Ministry of Health,
Labour and Welfare for the direct sale of our products into that
country. If we are not successful in doing so, our business will
be harmed. We may also incur significant costs in attempting to
obtain and in maintaining foreign regulatory clearances,
approvals or qualifications.
Foreign regulatory agencies, as well as the FDA, periodically
inspect manufacturing facilities both in the United States and
abroad. If we experience delays in receiving necessary
qualifications, clearances or approvals to market our products
outside the United States, or if we fail to receive those
qualifications, clearances or approvals, or if we fail to comply
with other foreign regulatory requirements, we and our
distributors may be unable to market our products or
enhancements in international markets effectively, or at all.
Additionally, the imposition of new requirements may
significantly affect our business and our products. We may not
be able to adjust to such new requirements.
New regulations may limit our ability to sell to
non-physicians, which could harm our business.
Currently, we sell our products primarily to physicians and,
outside the United States, to aestheticians. In addition, we
recently began marketing our products to the growing aesthetic
spa market, where non-physicians under physician supervision
perform aesthetic procedures at dedicated facilities. However,
federal, state and international regulations could change at any
time, disallowing sales of our products to aestheticians, and
limiting the ability of aestheticians and non-physicians to
operate our products. Any limitations on our ability to sell our
products to non-physicians or on the ability of aestheticians
and non-physicians to operate our products could cause our
business and operating results to suffer.
Risks Related to the Offering
After this offering, El.En. will continue to have
substantial control over us. In addition, El.En. and our
executive officers and directors will maintain the ability to
control all matters submitted to stockholders for
approval.
In addition to the factors discussed above regarding
El.En.’s ability to control the election of a majority of
the members of our board of directors, when this offering is
completed El.En. and our executive officers and directors will,
in the aggregate, beneficially own shares representing
approximately %
of our common stock. As a result, if these stockholders were to
act together, they would be able to control all matters
submitted to our stockholders for approval. For example, these
persons could control any amendment of our certificate of
incorporation and bylaws and approval of any merger,
consolidation or sale of all or substantially all of our assets.
This concentration of voting power could delay or prevent an
acquisition of our company on terms that other stockholders may
desire. Please also see the discussion under
“— Risks Related to Our Relationship with
El.En. — El.En. will continue to have substantial
control over us after this offering and could delay or prevent a
change of control.”
Provisions in our corporate charter documents and under
Delaware law may prevent or frustrate attempts by our
stockholders to change our management and hinder efforts to
acquire a controlling interest in us.
Provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger, acquisition or other
change in control that stockholders may consider favorable,
including transactions in which you might otherwise receive a
premium for your shares. These provisions may also prevent or
frustrate attempts by our stockholders to replace or remove our
management. These provisions include:
•
a dual class capital structure that allows El.En. to control the
election of a majority of the members of our board of directors;
•
the classification of the members of our directors who are
elected by holders of our class A common stock and
class B common stock, voting together as a single class;
•
limitations on the removal of directors who are elected by
holders of our class A common stock and class B common
stock, voting together as a single class;
•
advance notice requirements for stockholder proposals and
nominations;
•
the inability of class A stockholders to act by written
consent or to call special meetings; and
•
the ability of our board of directors to designate the terms of
and issue new series of preferred stock without stockholder
approval, which could be used to institute a “poison
pill” that would work to dilute the stock ownership of a
potential hostile acquirer, effectively preventing acquisitions
that have not been approved by our board of directors.
The affirmative vote of the holders of at least 75% of our
shares of capital stock entitled to vote is necessary to amend
or repeal the above provisions of our certificate of
incorporation, and the right of the holders of shares of our
class B common stock to elect a majority of the members of
our board of directors may not be modified without the approval
of the holders of at least a majority of the shares of
our class B common stock outstanding. In addition, absent
approval of our board of directors, our bylaws may only be
amended or repealed by the affirmative vote of the holders of at
least 75% of the voting power of our shares of capital stock
entitled to vote and the affirmative vote of holders of at least
a majority of the shares of class B common stock
outstanding.
In addition, Section 203 of the Delaware General
Corporation Law prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested
stockholder, generally a person which together with its
affiliates owns or within the last three years has owned 15% of
our voting stock, for a period of three years after the date of
the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner. Accordingly, Section 203 may discourage,
delay or prevent a change in control of our company.
If you purchase shares of our class A common stock in
this offering, you will suffer immediate and substantial
dilution of your investment.
We expect the initial public offering price of our class A
common stock to be substantially higher than the net tangible
book value per share of our class A common stock.
Therefore, if you purchase shares of our class A common
stock in this offering, you will pay a price per share that
substantially exceeds our net tangible book value per share
after this offering. See “Dilution.”
An active trading market for our class A common stock
may not develop.
Prior to this offering, there has been no public market for any
shares of our common stock. The initial public offering price
for our class A common stock will be determined through
negotiations with the underwriters. Although we have applied to
have our class A common stock quoted on The Nasdaq National
Market, an active trading market for our shares may never
develop or be sustained following this offering. If an active
market for our class A common stock does not develop, it
may be difficult to sell shares you purchase in this offering
without depressing the market price for the shares or at all.
Our stock price is likely to be volatile, and purchasers
of our class A common stock could incur substantial
losses.
Our class A common stock price is likely to be volatile.
The stock market in general has experienced extreme volatility
that has often been unrelated to the operating performance of
particular companies. As a result of this volatility, investors
may not be able to sell their class A common stock at or
above the initial public offering price. The market price for
our class A common stock may be influenced by many factors,
including:
•
the success of competitive products or technologies;
•
regulatory developments in the United States and foreign
countries;
•
developments or disputes concerning patents or other proprietary
rights;
•
the recruitment or departure of key personnel;
•
variations in our financial results or those of companies that
are perceived to be similar to us;
•
market conditions in the our industry and issuance of new or
changed securities analysts’ reports or
recommendations; and
•
general economic, industry and market conditions.
We have broad discretion in the use of our net proceeds
from this offering and may not use them effectively.
Our management will have broad discretion in the application of
our net proceeds from this offering and could spend the proceeds
in ways that do not improve our operating results or enhance the
value of our class A common stock. The failure by our
management to apply these funds effectively could result in
financial losses that could have a material adverse effect on
our business, cause the price of our class A common stock
to decline and delay the development of our product candidates.
Pending their use, we may invest our net proceeds from this
offering in a manner that does not produce income or that loses
value.
We have never paid cash dividends on our capital stock,
and we do not anticipate paying any cash dividends in the
foreseeable future.
We have paid no cash dividends on our capital stock to date. We
currently intend to retain our future earnings, if any, to fund
the development and growth of our business. In addition, the
terms of existing or any future debt agreements may preclude us
from paying dividends. As a result, capital appreciation, if
any, of our class A common stock will be your sole source
of gain for the foreseeable future.
A significant portion of our total outstanding shares are
restricted from immediate resale but may be sold into the market
in the near future. This could cause the market price of our
class A common stock to drop significantly, even if our
business is doing well.
Sales of a substantial number of shares of our class A
common stock, including shares of our class B common stock
that have been converted into shares of our class A common
stock, in the public market could occur at any time. These
sales, or the perception in the market that the holders of a
large number of shares intend to sell shares, could reduce the
market price of our class A common stock. We also intend to
register all shares of our class A common stock that we may
issue under our employee benefit plans. Once we register these
shares, they can be freely sold in the public market upon
issuance, subject to the lock-up agreements described in
“Underwriting.”
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. All statements, other than
statements of historical facts, included in this prospectus
regarding our strategy, future operations, future financial
position, future revenues, projected costs, prospects, plans,
objectives of management and expected market growth are
forward-looking statements. The words “anticipate,”“believe,”“estimate,”“expect,”“intend,”“may,”“plan,”“predict,”“project,”“will,”“would” and similar expressions are intended to
identify forward-looking statements, although not all
forward-looking statements contain these identifying words.
These forward-looking statements include, among other things,
statements about:
•
our ability to identify and penetrate new markets for our
products and technology;
•
our ability to innovate, develop and commercialize new products;
•
our ability to obtain and maintain regulatory clearances;
•
our sales and marketing capabilities and strategy in the United
States and internationally;
•
our intellectual property portfolio; and
•
our estimates regarding expenses, future revenues, capital
requirements and needs for additional financing.
We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements, and
you should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the
forward-looking statements we make. We have included important
factors in the cautionary statements included in this
prospectus, particularly in the “Risk Factors”
section, that could cause actual results or events to differ
materially from the forward-looking statements that we make.
You should read this prospectus and the documents that we have
filed as exhibits to the registration statement, of which this
prospectus is a part, completely and with the understanding that
our actual future results may be materially different from what
we expect. We do not assume any obligation to update any
forward-looking statements.
We estimate that we will receive approximately
$ million
in net proceeds from this offering, or approximately
$ million
if the underwriters exercise their over-allotment option in
full, based upon an assumed initial public offering price of
$ per
share, after deducting underwriting discounts and commissions
and estimated offering expenses payable by us.
We estimate that we will use:
•
approximately
$ million
of our net proceeds to expand our sales, marketing and
distribution capabilities; and
•
approximately
$ million
of our net proceeds to fund our research and development
activities.
We intend to use the remainder of our net proceeds for general
corporate purposes. We may use a portion of our net proceeds to
acquire complementary products, technologies or businesses. We
currently have no agreements or commitments to complete any such
transactions. The amounts and timing of our actual expenditures
may vary significantly depending upon numerous factors,
including our future revenues and cash generated by operations.
Accordingly, we will retain broad discretion in the allocation
of our net proceeds of this offering.
Pending use of our net proceeds from this offering, we intend to
invest the proceeds in a variety of capital preservation
investments, including short-term, investment-grade,
interest-bearing instruments.
We will not receive any proceeds from the sale of shares of
class A common stock offered by El.En.
C:
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain all of our future earnings
to finance the growth and development of our business. We do not
anticipate paying cash dividends to our stockholders in the
foreseeable future.
the reclassification and conversion of our outstanding shares of
common stock into shares of class B common stock on a one
for one basis; and
•
the sale
of shares
of class A common stock in this offering at an assumed
initial public offering price of
$ per
share, after deducting underwriting discounts and commissions
and estimated offering expenses payable by us.
You should read this table together with our financial
statements and the related notes appearing at the end of this
prospectus and the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
section of this prospectus.
Common stock, par value $0.01 per share;
15,000,000 shares authorized actual and no shares
authorized as adjusted; 6,242,877 shares outstanding actual
and no shares outstanding as adjusted
63
—
Class A common stock, par value $0.001 per share; no
shares authorized actual, 61,500,000 shares authorized as
adjusted; no shares outstanding actual
and shares
outstanding as adjusted
—
Class B common stock, par value $0.001 per share; no
shares authorized actual, 8,500,000 shares authorized as
adjusted; no shares outstanding actual
and shares
outstanding as adjusted
—
Preferred stock, par value $0.001 per share; no shares
authorized actual, 5,000,000 shares authorized as adjusted;
no shares outstanding actual and no shares outstanding as
adjusted
—
—
Additional paid-in capital
14,885
Retained earnings
2,834
2,834
Deferred stock-based compensation
(1,637
)
(1,637
)
Accumulated other comprehensive loss
(585
)
(585
)
Treasury stock, 36,136 shares, at cost
(287
)
(287
)
Total stockholders’ equity
15,273
Total capitalization
$
16,034
$
The number of shares in the table above excludes:
•
1,862,642 shares of class B common stock issuable upon
the exercise of stock options outstanding as of June 30,2005 at a weighted average exercise price of $3.31 per
share; and
•
541,342 shares of class A common stock reserved for
future issuance under our equity compensation plans as of the
date of this prospectus.
If you invest in our class A common stock, your interest
will be diluted immediately to the extent of the difference
between the initial public offering price per share of our
class A common stock and the net tangible book value per
share of our class A and class B common stock after
this offering.
Our actual net tangible book value as of June 30, 2005 was
$15.0 million, or $2.40 per share of class A and
class B common stock. Net tangible book value per share
represents the amount of our total tangible assets less total
liabilities, divided by the number of shares of class A and
class B common stock outstanding.
After giving effect to the issuance and sale by us of
the shares
of class A common stock in this offering, at an assumed
initial public offering price of
$ per
share, less the underwriting discounts and commissions and
estimated offering expenses payable by us, our net tangible book
value as of June 30, 2005 would have been
$ ,
or
$ per
share of class A and class B common stock. This
represents an immediate increase in net tangible book value per
share of
$ to
existing stockholders and immediate dilution of
$ per
share to new investors purchasing shares in this offering.
Dilution per share to new investors is determined by subtracting
the net tangible book value per share after this offering from
the initial public offering price per share paid by a new
investor. The following table illustrates the per share dilution
without giving effect to the over-allotment option granted to
the underwriters:
Assumed initial public offering price per share of class A
common stock
$
Actual net tangible book value per share as of June 30, 2005
$
2.40
Increase in net tangible book value per share attributable to
new investors
Adjusted net tangible book value per share after the offering
Dilution per share to new investors
$
If the underwriters exercise their over-allotment option in
full, our net tangible book value will increase to
$ per
share, representing an immediate increase to existing
stockholders of
$ per
share and an immediate dilution of
$ per
share to new investors. If any shares are issued in connection
with outstanding options, you will experience further dilution.
The following table summarizes as of June 30, 2005 the
number of shares of class A common stock purchased or to be
purchased from us, the total consideration paid or to be paid
and the average price per share paid by El.En., other existing
stockholders and by new investors in this offering, before
deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
Total Shares
Total Consideration
Average Price
Number
%
Amount
%
Per Share
El.En.(1)
612,959
%
$
1,793,920
%
$
2.93
Other existing stockholders(2)
5,629,918
10,516,447
1.87
New investors
Totals
100
%
100
%
(1)
Excludes an aggregate of 4,275,669 shares purchased
by El.En. from other stockholders at a weighted-average purchase
price of $3.29 per share. El.En. currently holds, including
shares purchased directly from us and shares purchased from
other stockholders, a total of 4,888,628 at a weighted-average
purchase price of $3.25 per share.
(2)
Includes 4,275,669 shares purchased from us by other
stockholders and sold to El.En. by other stockholders as
described in Note 1 above.
The table above is based on shares outstanding as of
June 30, 2005 and excludes:
•
1,862,642 shares of class B common stock issuable upon
the exercise of stock options outstanding as of June 30,2005 at a weighted average exercise price of $3.31 per
share; and
541,342 shares of class A common stock reserved for
future issuance under our equity compensation plans as of the
date of this prospectus.
If the underwriters’ over-allotment option is exercised in
full, the following will occur:
•
the percentage of shares of class A and class B common
stock held by existing stockholders will decrease to
approximately % of the total
number of shares of our class A and class B common
stock outstanding after this offering; and
•
the number of shares held by new investors will increase
to ,
or
approximately %,
of the total number of shares of our class A and
class B common stock outstanding after this offering.
You should read the following selected consolidated financial
data in conjunction with our consolidated financial statements
and the related notes appearing at the end of this prospectus
and the “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” section of
this prospectus. We have derived the consolidated statement of
operations data for the years ended December 31, 2002, 2003
and 2004 and the consolidated balance sheet data as of
December 31, 2003 and 2004 from our audited consolidated
financial statements, which are included elsewhere in this
prospectus. We have derived the consolidated statement of
operations data for the years ended December 31, 2000 and
2001 and the consolidated balance sheet data as of
December 31, 2000, 2001 and 2002 from our audited
consolidated financial statements, which are not included in
this prospectus. We have derived the unaudited consolidated
statement of operations data for the six months ended
June 30, 2004 and 2005 and the unaudited consolidated
balance sheet data as of June 30, 2005 from our unaudited
consolidated financial statements, which are included in this
prospectus. The unaudited selected consolidated financial
statement data include, in our opinion, all adjustments,
consisting only of normal recurring adjustments, that are
necessary for a fair presentation of our financial position and
results of operations for these periods. Our historical results
for any prior period are not necessarily indicative of results
to be expected for any future period.
You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and the related notes and other financial
data included elsewhere in this prospectus. Some of the
information contained in this discussion and analysis or set
forth elsewhere in this prospectus, including information with
respect to our plans and strategy for our business, includes
forward-looking statements that involve risks and uncertainties.
You should review the “Risk Factors” section of this
prospectus for a discussion of important factors that could
cause actual results to differ materially from the results
described in or implied by the forward-looking statements
contained in the following discussion and analysis.
Company Overview
We develop and market aesthetic treatment systems used by
physicians and other practitioners that incorporate laser and
light-based energy sources. As of June 30, 2005, we had
sold more than 4,500 aesthetic treatment systems worldwide.
We were incorporated in July 1991. In 2002, El.En. S.p.A., an
Italian company that itself and through subsidiaries develops
and markets laser systems for medical and industrial
applications, acquired a majority of our capital stock. In
September 2003, we recruited a new management team that has
implemented a comprehensive reorganization of our company,
including:
•
redesigning many of our existing products;
•
introducing innovative new products and technologies;
•
streamlining and rationalizing our manufacturing processes;
•
reorganizing and expanding our research and development, sales
and marketing and distribution capabilities; and
•
enhancing our customer service network.
Since the beginning of 2004, we have introduced 10 new aesthetic
treatment systems, including our four flagship products:
•
the Apogee Elite system, our flagship product for hair
removal, in March 2004;
•
the Cynergy system, our flagship product for the
treatment of vascular lesions, in February 2005;
•
the PhotoSilk Plus system, our flagship product for skin
rejuvenation through the treatment of shallow vascular lesions
and pigmented lesions, in February 2005; and
•
the TriActive LaserDermology system, our flagship product
for the temporary reduction of the appearance of cellulite, in
February 2004.
As a result of our product development efforts, we incurred
increased research and development expenses in absolute dollars,
although not as a percentage of revenues, during each of 2003
and 2004.
We have expanded our direct sales and marketing organization
from 22 employees as of September 30, 2003 to
53 employees as of June 30, 2005. In addition, we have
expanded our distribution relationships and had
19 distributors covering 31 countries as of
June 30, 2005. In January 2005, we launched a separate
CynosureSpa brand with product offerings, tailored
marketing and sales personnel focused exclusively on the
aesthetic spa market. As a result of these activities, we
incurred increased sales and marketing expenses in absolute
dollars, although not as a percentage of revenues, during each
of 2003 and 2004.
We recently redesigned or introduced a number of our products,
including our Apogee, Cynergy, Acclaim and VStar
product families, so that they are built in a modular
fashion using fewer components. We began shipping these
redesigned products in the second quarter of 2005. We believe
that this new
approach allows our platform technology to be easily
upgradeable, increases the scalability and efficiency of our
production process and facilitates improvements in field service
diagnosis and repair. We expect that the new modular design of
these products will reduce our direct labor and inventory costs
and result in lower cost of revenues as a percentage of revenues.
In November 2000, we purchased a 20% equity interest, which we
subsequently increased to 40%, in Sona MedSpa, an operator and
franchisor of spa franchises. Also in November 2000, we entered
into a supply and revenue sharing arrangement with Sona MedSpa
pursuant to which we provided our aesthetic treatment systems to
Sona MedSpa and its franchisees and received a share of their
revenues from procedures using our products. We also guaranteed
the lease obligations for two facilities operated by Sona
MedSpa. In May 2004, we sold our equity interest in Sona MedSpa
to third parties and also sold to Sona MedSpa a portion of the
aesthetic treatment systems previously provided by us under the
supply and revenue sharing arrangement. We recognized a gain of
$3.0 million from the sale of our equity interest and an
additional $1.2 million in revenue from the sale of the
systems to Sona MedSpa in connection with the transaction. Also
in May 2004, we entered into an amended supply and revenue
sharing arrangement with Sona MedSpa pursuant to which we
continue to sell systems to Sona MedSpa and its franchisees and
receive a share of their revenues from procedures using our
systems. During the period in which we held our equity interest
in Sona MedSpa, we accounted for our investment using the equity
method of accounting and recognized our share of Sona
MedSpa’s income or loss as a component of other income
(expense). We recognized other expense of $0.2 million in
2002 for our share of Sona MedSpa’s loss and recognized
other income of $0.7 million in 2003 and $0.2 million
in 2004 for our share of Sona MedSpa’s income.
We also sell our lasers on an original equipment manufacturer
basis to third parties with whom we collaborate in connection
with surgical uses of our laser products. In addition, until
2004, we had a distributor relationship with El.En. pursuant to
which we sold a veterinary laser product in the United States
supplied by El.En.
Financial Operations Overview
Revenues
We generate revenues primarily from sales of our products and
parts and accessories and, to a lesser extent, from services,
including product warranty revenues, and from our revenue
sharing arrangement with Sona MedSpa. In 2004, we derived
approximately 87% of our revenues from sales of our products, 6%
of our revenues from service and 7% of our revenues from our
revenue sharing arrangement. For the six months ended
June 30, 2005, we derived approximately 90% of our revenues
from sales of our products, 6% of our revenues from service and
4% of our revenues from our revenue sharing arrangement.
Generally, we recognize revenues from the sales of our products
upon delivery to our customers, revenues from service contracts
and extended product warranties ratably over the coverage
period, revenues from service in the period in which the service
occurs and revenues from our revenue sharing arrangement in the
period the procedures are performed.
We sell our products directly in North America, four European
countries, Japan and China and use distributors to sell our
products in other countries where we do not have a direct
presence. For the year ended December 31, 2004, we derived
45%, and for the six months ended June 30, 2005 we derived
43%, of our revenues from sales of our products outside North
America. As of June 30, 2005, we had 27 sales
employees in North America, 11 sales employees in four
European countries, Japan and China and
distributors in 31 countries. The following table provides
revenue data by geographical region for the year ended
December 31, 2004 and the six months ended June 30,2005:
See Note 3 to our consolidated financial statements
included in this prospectus for revenues and asset data by
geographic region.
Cost of Revenues
Our cost of revenues consists primarily of material, labor and
manufacturing overhead expenses and includes the cost of
components and subassemblies supplied by third party suppliers.
Cost of revenues also includes service and warranty expenses, as
well as salaries and personnel-related expenses for our
operations management team, purchasing and quality control.
Sales and Marketing Expenses
Our sales and marketing expenses consist primarily of salaries,
commissions and other personnel-related expenses for employees
engaged in sales, marketing and support of our products, trade
show, promotional and public relations expenses and management
and administration expenses in support of sales and marketing.
We expect our sales and marketing expenses to increase in
absolute dollars, though we do not expect them to increase
significantly as a percentage of revenues, as we expand our
sales, marketing and distribution capabilities.
Research and Development Expenses
Our research and development expenses consist of salaries and
other personnel-related expenses for employees primarily engaged
in research, development and engineering activities and
materials used and other overhead expenses incurred in
connection with the design and development of our products. We
expense all of our research and development costs as incurred.
We expect our research and development expenditures to increase
in absolute dollars, though we do not expect them to increase
significantly as a percentage of revenues, as we continue to
devote resources to research and develop new products and
technologies.
General and Administrative Expenses
Our general and administrative expenses consist primarily of
salaries and other personnel-related expenses for executive,
accounting and administrative personnel, professional fees and
other general corporate expenses. We expect our general and
administrative expenses to increase in absolute dollars and as a
percentage of revenues as a result of our becoming a public
company.
Stock-Based Compensation
Our stock-based compensation consists of expenses related to
stock-based awards to employees and non-employees. We currently
account for our stock-based awards to employees using the
intrinsic-value method. Under the intrinsic-value method,
compensation expense is measured on the date of grant as the
difference between the deemed fair market value of our common
stock for accounting purposes and the option exercise price
multiplied by the number of options granted. In May 2005, we
recorded $1.7 million
of deferred stock-based compensation in connection with options
granted at that time, which we are amortizing over the vesting
periods of the options. Stock-based awards to non-employees are
currently expensed under the fair value method using the
Black-Scholes option pricing model. We expect to adopt
SFAS 123(R) in the first quarter of fiscal 2006, which will
require us to expense all stock-based awards under the fair
value method.
Interest Expense, net
Interest expense consists primarily of interest due on
short-term indebtedness owed to El.En. and with respect to
capitalized leases.
Provision for Income Taxes
As of December 31, 2004, we had federal tax credits of
$0.4 million and state tax credits of $0.5 million to
offset future tax liability and state net operating losses of
approximately $3.1 million to offset future taxable income.
If not utilized, these credit carryforwards will expire at
various dates through 2019, and the net operating losses will
expire at various dates through 2024. In addition, the future
utilization of our net operating loss carryforwards may be
limited based upon changes in ownership pursuant to regulations
promulgated under the Internal Revenue Code. We also had foreign
net operating losses of approximately $2.6 million
available to reduce future foreign income taxes, which will
expire at various times beginning in 2005.
The following table contains selected unaudited statement of
operations data, which serves as the basis of the discussion of
our results of operations for the six months ended June 30,2004 and 2005:
Total revenues for the six months ended June 30, 2004
included $1.3 million of revenues from related party. For
purposes of the following discussion, we refer to revenues and
revenues from related party on a combined basis. Revenues in the
six months ended June 30, 2005 exceeded revenues in the
same period of 2004 by $5.9 million, or 31%. The increase
in revenues was attributable to a number of factors:
•
Revenues from the sale of products in North America increased
$5.8 million, or 105%, to $11.3 million in the first
six months of 2005 as compared to $5.5 million in the first
six months of 2004. The increase was attributable to an increase
in the number of product units sold and a higher average selling
price due to a favorable change in product mix. The increase in
North American revenues resulted in part from the reorganization
and expansion of our North American sales organization,
including the hiring of 12 additional direct sales employees
between June 30, 2004 and 2005. The increase also resulted
from the introduction of new products, particularly our
Apogee Elite system at the end of the first quarter of
2004. Revenues from sales of products introduced in 2004 totaled
$9.8 million, or 87%, of total North American product
revenues in the first six months of 2005.
•
Revenues from sales of products outside of North America
increased $2.0 million, or 32%, to $8.2 million in the
first six months of 2005 as compared to $6.2 million in the
same period in 2004. The increase was mainly attributable to an
increase in sales in Europe of $1.8 million, or 54%, over
the same period in 2004, resulting from a favorable change in
product mix and our increased focus on direct selling, for which
we receive higher average selling prices as compared to sales
through distributors, including the opening of our direct sales
office in Spain in the second half of 2004.
•
Revenues from original equipment manufacturer and other
relationships and our revenue sharing arrangement decreased
$2.1 million, or 50%, to $2.1 million in the first six
months of 2005 as compared to $4.2 million in the same
period in 2004. The decrease was mainly attributable to
non-recurring revenues of $1.2 million from the purchase of
aesthetic treatment systems by Sona MedSpa in May 2004 in
connection with the sale of our equity interest in Sona MedSpa,
and a $0.7 million decrease in sales of a product we
distributed that was supplied by El.En. in 2004 but that we did
not distribute in 2005.
•
Revenues from the sale of parts and accessories and services
increased $0.1 million, or 3%, to $3.4 million in the
first six months of 2005 as compared to $3.3 million in the
first six months of 2004. The increase was primarily
attributable to an increase of revenues generated from service
contracts.
Cost of Revenues
Cost of revenues increased $1.9 million, or 20%, to
$11.6 million in the first six months of 2005, as compared
to $9.7 million in the same period in 2004. The increase in
the cost of revenues was primarily attributable to an increase
in direct labor, overhead and material costs associated with
increased sales of our products. Our cost of revenues decreased
as a percentage of revenues to 46% in the first six months of
2005 from 51% in the first six months of 2004, resulting in an
increase in our gross margin of 5% between the two periods. The
improved margin resulted from higher average selling prices of
our products due to a favorable change in product mix, in part
as a result of the introduction of our Apogee Elite
system in the first quarter of 2004, as well as increased
direct sales in North America and increased direct sales in
Europe, for which we receive higher average selling prices as
compared to sales through distributors. In the first six months
of 2005, we derived 57% of our international product revenues
from direct sales by us or our subsidiaries compared to 50% of
our international product revenues in the same period in 2004.
We derived all of our North American product revenues from
direct sales.
Sales and marketing expenses increased $2.3 million, or
40%, to $8.0 million in the first six months of 2005, as
compared to $5.8 million in the same period in 2004. The
increase was primarily attributable to an increase of
$1.4 million in personnel costs and travel expenses
associated with the expansion of our North American direct sales
organization and $0.2 million in personnel costs and travel
expenses associated with our international subsidiaries.
Promotional costs increased $0.3 million, primarily due to
our increased number of clinical workshops, trade shows and
promotional efforts. As a percentage of revenues, sales and
marketing expenses increased to 32% for the first six months of
2005 from 30% in the same period in 2004.
Research and Development
Research and development expenses remained relatively flat,
increasing by $0.1 million, or 8%, to $1.5 million in
the first six months of 2005, as compared to $1.4 million
in the same period in 2004. In the first six months of 2005, our
research and development expenses were attributable to project
research costs and product engineering expenses related to the
introduction of our new Cynergy system in the first
quarter of 2005 and ongoing development of new products. In the
first six months of 2004, our research and development expenses
were attributable to project research costs and product
engineering expenses related to the introduction of our new
Apogee Elite, Apogee 5500 NL and Acclaim 7000 NL
products in the first quarter of 2004 and our ongoing
development of new products. As a percentage of revenues,
research and development expenses decreased to 6% in the first
six months of 2005 from 7% in the same period in 2004.
General and Administrative
General and administrative expenses increased $0.5 million,
or 24%, to $2.4 million in the first six months of 2005
from $1.9 million in the same period in 2004. The increase
was primarily attributable to a $0.2 million increase in
our international subsidiaries’ administrative expenses in
connection with our opening an office in Spain in the second
half of 2004, as well as a $0.1 million increase in legal
expenses associated with patent filing costs. As a percentage of
revenues, general and administrative expenses decreased to 9% in
the first six months of 2005 from 10% in the same period in 2004.
Stock-Based Compensation
Stock-based compensation related to employee stock-based awards
was $53,000 in the first six months of 2005 compared to $89,000
in the first six months of 2004. We expect amortization of
deferred stock-based compensation to be approximately
$0.2 million for the remainder of 2005. Stock-based
compensation related to non-employee option grants was
$0.2 million in the first six months of 2005.
Interest Expense, net; Gain on Sale of Investment and
Other Income (Expense), net
Interest expense decreased to $45,000 in the first six months of
2005 from $71,000 in the same period in 2004. The decrease
resulted from a reduction in short-term notes payable for the
2005 period. In the first six months of 2004, we recorded a gain
of $3.0 million on the sale of our 40% equity interest in
Sona MedSpa. We had no similar gain in the 2005 period. Other
income (expense) decreased to $0.3 million in expense in
the first six months of 2005 from $0.5 million in income in
the same period in 2004. The decrease was partially attributable
to an increase in foreign currency transaction losses of
$0.5 million and to a $0.2 million decrease in our
equity interest in Sona MedSpa for the first six months of 2005
as compared to the same period in 2004 as a result of the sale
of such interest partially offset by $0.3 million that we
realized in the first six months of 2004 in connection with a
settlement with an insurer.
(Benefit) Provision for Income Taxes
In the first six months of 2005, we recorded an income tax
provision of $0.4 million, reflecting an effective tax rate
of 41%. In the first six months of 2004, we recorded an income
tax provision of $97,000,
reflecting an effective tax rate of 3%. The increase in our
effective income tax rate was primarily due to a reduction in
our valuation allowance in 2004 on our U.S. federal net
operating loss carryforwards. In 2004, we utilized all of our
available U.S. federal net operating loss carryforwards. As
a result, we had no U.S. federal net operating loss
carryforwards available to utilize against our 2005 taxable
income, which resulted in a higher effective tax rate in 2005.
The following table contains selected statement of operations
data, which serves as the basis of the discussion of our results
of operations for the years ended December 31, 2003 and
2004 (in thousands, except for percentages):
(Loss) income before provision (benefit) for income taxes and
minority interest
(365
)
(1
)
5,084
12
5,449
1,493
Provision (benefit) for income taxes
72
—
(276
)
(1
)
(348
)
(483
)
Minority interest in net income of subsidiary
63
—
64
—
1
2
Net (loss) income
$
(500
)
(2
)%
$
5,296
13
%
$
5,796
1,159
%
Revenues
Total revenues for the year ended December 31, 2003
included $1.6 million, and for the year ended
December 31, 2004 included $1.3 million, of revenues
from related party. For purposes of the following discussion, we
refer to revenues and revenues from related party on a combined
basis. Revenues in 2004 exceeded revenues in 2003 by
$14.5 million, or 53%. The increase in revenues was
attributable to a number of factors:
•
Revenues from the sale of products in North America increased
$6.2 million, or 86%, to $13.4 million in 2004 as
compared to $7.2 million in 2003. The increase was
attributable to an increase in the number of products sold and a
higher average selling price due to a favorable change in
product mix. The increase in North American revenues resulted in
part from the reorganization and expansion of our North American
sales organization, including the hiring of new sales management
and 10 additional direct sales employees between November 2003
and the end of 2004. The increase also resulted from the
introduction of new products, particularly our Apogee
Elite system at the end of the first quarter of 2004.
Revenues from sales of products introduced in 2004 totaled
$9.8 million, or 74%, of total North American product
revenues in 2004.
•
Revenues from sales of products outside of North America
increased $2.4 million, or 20.7%, to $14.0 million in
2004 as compared to $11.6 million in 2003. The increase was
primarily attributable to an increase in sales in Europe of
$3.3 million, or 65%, over 2003, resulting from our
introduction of new products and our increased focus on direct
selling in 2004, for which we receive higher average selling
prices as compared to sales through distributors, partially
offset by a $1.0 million decrease in revenues from product
sales in the Asia/ Pacific region, which was primarily
attributable to the discontinuation of a product distributed in
the region.
•
Revenues from original equipment manufacturer and other
relationships and our revenue sharing arrangement increased
$4.8 million, or 200%, to $7.2 million in 2004 as
compared to $2.4 million in 2003. The increase was mainly
attributable to a $3.6 million increase in revenues from
our revenue sharing arrangement with Sona MedSpa, reflecting
growth in Sona MedSpa’s business, a different revenue
sharing formula in the amended supply and revenue sharing
arrangement entered into in May 2004 and non-recurring
revenues of $1.2 million from the purchase of aesthetic
treatment systems by Sona MedSpa in May 2004 in connection
with the sale of our equity interest in Sona MedSpa, and a
$0.9 million increase in sales of a product we formerly
distributed supplied by El.En. in 2003 and 2004.
•
Revenues from the sale of parts and accessories and services
increased $1.1 million, or 20%, to $6.7 million in
2004 as compared to $5.6 million in 2003. The increase was
primarily attributable to an increase in revenues generated from
service contracts, reflecting increased service contract
marketing efforts by us.
Cost of Revenues
Cost of revenues increased $6.3 million in 2004, or 44%, to
$20.5 million as compared to $14.2 million in 2003.
The increase in cost of revenues was primarily attributable to
an increase in direct labor, overhead and material costs
associated with increased sales of our products. Our cost of
revenues decreased as a percentage of revenues to 49% in 2004
from 52% in 2003, resulting in an increase in our gross margin
of 3% between the two periods. The improved margin resulted from
higher average selling prices of our products due to a favorable
change in product mix, in part as a result of the introduction
of our Apogee Elite system in the first quarter of 2004,
as well as increased direct sales in North America and Europe,
from which we receive higher average selling prices as compared
to sales through distributors. In 2004, we derived 63% of our
international product revenues from direct sales by us or our
subsidiaries compared to 52% of our international product
revenues in the same period in 2003. We derived all of our North
American product revenues from direct sales.
Sales and Marketing
Sales and marketing expenses increased $3.9 million, or
44%, to $12.6 million in 2004, as compared to
$8.7 million in 2003. The increase was attributable to an
increase of $1.9 million in personnel costs and travel
expenses associated with the expansion of our North American
direct sales organization, an increase of $0.9 million in
personnel costs and travel expenses associated with our
international subsidiaries and an increase of $0.5 million
in clinical research expenses. Promotional costs increased
$0.7 million, primarily due to our increased number of
clinical workshops, trade shows and promotional efforts,
including product launch expenses incurred in connection with
the introduction of our Apogee Elite,
Apogee 5500 NL, Acclaim 7000 NL and
TriActive LaserDermology systems in early 2004. As a
percentage of revenues, sales and marketing expenses decreased
to 30% in 2004 from 32% in 2003.
Research and
Development
Research and development expenses increased $0.7 million,
or 27%, to $3.1 million in 2004 as compared to
$2.5 million in 2003. The increase was primarily
attributable to expenses related to the
development and introduction of our Apogee Elite,
Apogee 5500 NL and
Acclaim 7000 NL systems in 2004 and the
development of our Cynergy and Cynergy III
systems that were introduced in 2005. In 2003, our research and
development expenses were attributable to project research costs
and product engineering expenses related to the introduction of
our Apogee 5500 and Acclaim 7000
products that were introduced in 2003 and the development of our
Apogee Elite, Apogee 5500 NL and Acclaim
7000 NL products which were introduced in 2004. As a
percentage of revenues, research and development expenses
decreased to 8% in 2004 from 9% in 2003.
General and
Administrative
General and administrative expenses increased $0.3 million,
or 9%, to $4.1 million in 2004 as compared to
$3.8 million in 2003. The increase was attributable to a
$0.2 million increase in audit expenses and a
$0.1 million increase in consulting expenses relating to
our reorganization by the new management team. As a percentage
of revenues, general and administrative expenses decreased to
10% in 2004 from 14% in 2003.
Stock-Based
Compensation
In connection with employee stock purchase rights granted under
our 2003 Stock Compensation Plan, we recorded stock-based
compensation of $0.1 million in 2004 and $76,000 in 2003.
The 2003 Stock Compensation Plan terminated on December 31,2004 and we do not expect any additional stock-based
compensation related to this plan.
Interest Expense, net; Gain
on Sale of Investment and Other Income (Expense), net
Interest expense increased to $0.1 million in 2004 from
$62,000 in 2003. The increase resulted from an increase in
short-term notes payable for the 2004 period. Gain on sale of
investment was $3.0 million in 2004; we did not record a
similar gain in 2003. The gain on sale of investment in 2004
resulted from the non-recurring sale of our equity interest in
Sona MedSpa. Other income, net decreased to $1.0 million in
income in 2004 from $1.8 million in income in 2003. The
decrease is attributable to the $0.6 million decrease in
our equity interest in Sona MedSpa in 2004 as compared to 2003,
reflecting the sale of such interest in May 2004, combined
with a $0.5 million decrease in foreign currency
transaction gains, partially offset by $0.3 million
realized in connection with a settlement with an insurer.
(Benefit) Provision for
Income Taxes
During 2004, we recorded an income tax benefit of
$0.3 million compared to an income tax provision of $72,000
recorded in 2003. The increase in our income tax benefit was due
to the receipt of $0.5 million of refund claims in the
second half of 2004, which was recorded as an income tax
benefit, partially offset by an increase in the proportion of
our taxable income from foreign locations for which we did not
have available loss carryforwards in 2004 as compared to 2003.
We did not apply for or receive any refund claims in 2003.
The following table contains selected statement of operations
data, which serves as the basis of the discussion of our results
of operations for the years ended December 31, 2002 and
2003 (in thousands, except for percentages):
Loss before (benefit) provision for income taxes and minority
interest
(2,098
)
(9
)
(365
)
(1
)
1,733
83
(Benefit) provision for income taxes
(301
)
(1
)
72
—
373
(124
)
Minority interest in net income of subsidiary
70
—
63
—
(7
)
(10
)
Net loss
$
(1,867
)
(8
)%
$
(500
)
(2
)%
$
1,367
73
%
Revenues
Total revenues for the year ended December 31, 2002
included $1.3 million, and for the year ended
December 31, 2003 included $1.6 million, of revenues
from related party. For purposes of the following discussion, we
refer to revenues and revenues from related party on a combined
basis. Revenues in 2003 exceeded revenues in 2002 by
$4.2 million, or 18%. The increase in revenues was
attributable to a number of factors:
•
Revenues from the sale of products in North America increased
$1.9 million, or 36%, to $7.2 million in 2003 as
compared to $5.3 million in 2002. The increase was
primarily attributable to an increase in sales of new products
introduced in 2003 of $1.3 million, including our
Photolight, Apogee 5500 and Acclaim 7000
systems. The increase also resulted from the hiring of eight
additional direct sales employees in North America in the second
half of 2003.
•
Revenues from sales of products outside of North America
increased $1.6 million, or 16%, to $11.9 million in
2003 as compared to $10.3 million in 2002. The increase was
primarily attributable to an increase in sales in Europe of
$2.0 million, or 64%, over 2002, resulting from our
increased focus on direct selling in 2003, for which we receive
higher average selling prices as compared to sales through
distributors, partially offset by a $0.8 million decrease
in revenues from product sales in the Asia/ Pacific region
resulting from the termination of a distributor relationship in
the region.
•
Revenues from original equipment manufacturer and other
relationships and our revenue sharing arrangement increased
$0.7 million, or 41%, to $2.4 million in 2003 as
compared to $1.7 million in
2002. The increase was attributable to a $0.3 million
increase in revenues attributable to our revenue sharing
arrangement with Sona MedSpa and a $0.3 million increase in
sales of a product we formerly distributed supplied by El.En. in
2002 and 2003.
•
Revenues from the sale of parts and accessories and services
increased $0.3 million, or 6%, to $5.6 million in 2003
as compared to $5.3 million in 2002. The increase was
attributable to an increase of $0.9 million in revenues
generated from parts sales, partially offset by a
$0.6 million decrease in revenues generated from service
contracts.
Cost of Revenues
Cost of revenues increased $1.0 million in 2003, or 8%, to
$14.2 million as compared to $13.2 million in 2002.
The increase in the cost of revenues was primarily attributable
to an increase in direct labor, overhead and material costs
associated with increased sales of our products. Our cost of
revenues decreased as a percentage of revenues to 52% in 2003
from 57% in 2002, resulting in an increase in our gross margin
of 5% between the two periods. The improved margin resulted from
higher average selling prices of our products due to a favorable
change in product mix, in part as a result of the introduction
of our Photolight, Apogee 5500 and
Acclaim 7000 systems in 2003, an increased gross
profit contribution resulting from an increase in parts sales in
2003 as well as increased direct sales in North America, from
which we receive a higher average selling price as compared to
sales through distributors. In 2003, we derived 52% of our
international product revenues derived from direct sales by us
or our subsidiaries compared to 43% of our international product
revenues in 2002. We derived all of our North American product
revenues from direct sales.
Sales and Marketing
Sales and marketing expenses increased $2.9 million, or
51%, to $8.7 million in 2003, as compared to
$5.8 million in 2002. Of the increase, $1.6 million
was attributable to the expansion of our international sales,
marketing and customer service organization and
$0.7 million was attributable to an increase in personnel
costs and travel expenses in North America. Promotional costs
increased $0.3 million, primarily due to our increased
number of clinical workshops and trade shows. As a percentage of
revenues, sales and marketing expenses increased to 32% in 2003
from 25% in 2002.
Research and Development
Research and development expenses remained relatively flat,
increasing by $0.1 million, or 4%, to $2.5 million in
2003 as compared to $2.4 million in 2002. In 2003, our
research and development expenses were attributable to project
research costs and product engineering expenses related to the
introduction of our Apogee 5500 and
Acclaim 7000 systems and the development of our
Apogee Elite, Apogee 5500 NL and
Acclaim 7000 NL systems that were introduced in
2004. In 2002, our research and development expenses were
attributable to project research costs and product engineering
expenses related to the development of our
Apogee 5500 and Acclaim 7000 systems
that were introduced in 2003. As a percentage of revenues,
research and development expenses decreased to 9% in 2003 from
11% in 2002.
General and Administrative
General and administrative expenses decreased $0.2 million,
or 5%, to $3.8 million in 2003 as compared to
$4.0 million in 2002. The decrease was primarily
attributable to costs incurred in 2002 related to El.En.’s
purchase of a majority of our outstanding common stock. As a
percentage of revenues, general and administrative expenses
decreased to 14% in 2003 from 17% in 2002.
Stock-Based Compensation
In 2003, we recorded stock-based compensation of $76,000 in
connection with employee stock purchase rights granted under the
2003 Stock Compensation Plan. The 2003 Stock Compensation Plan
terminated on December 31, 2004 and we do not expect any
additional stock-based compensation related to this plan. We did
not record any stock-based compensation charges in 2002.
Interest Expense, net and Other Income (Expense),
net
Interest expense increased to $62,000 in 2003 from $25,000 in
2002. The increase resulted from an increase in short-term notes
payable for the 2003 period. Other income increased by
$1.5 million, or 511%, to $1.8 million in 2003 as
compared to $0.3 million in 2002. The increase was
attributable to the $0.9 million increase in our equity
interest in Sona MedSpa in 2003 as compared to 2002, combined
with a $0.6 million increase in foreign currency
transaction gains.
(Benefit) Provision for Income Taxes
During 2003, we recorded an income tax provision of $72,000.
During 2002, we recorded an income tax benefit of
$0.3 million. The decrease in provision for income taxes is
primarily due to the receipt of $0.4 million of carryback
claims from a refund in 2002.
Liquidity and Capital Resources
We require cash to pay our operating expenses, make capital
expenditures and pay our long-term liabilities. Since our
inception, we have funded our operations through private
placements of equity securities, short-term borrowings and funds
generated from our operations. From inception through
June 30, 2005, we had received net proceeds of
$12.3 million from the issuance of shares of common stock.
At June 30, 2005, our cash and cash equivalents were
$3.2 million as compared to $4.0 million at
December 31, 2004 and $2.1 million at
December 31, 2003. Our cash and cash equivalents are highly
liquid investments with maturity of 90 days or less at date
of purchase and consist of time deposits and investments in
money market funds with commercial banks and financial
institutions and United States government obligations.
Cash Flows
Net cash used in operating activities was $57,000 for the six
months ended June 30, 2005. This resulted primarily from
net income for the period of $0.5 million, increased by
approximately $1.1 million in depreciation and stock-based
compensation expense. Net changes in working capital items
decreased cash from operating activities by approximately
$1.7 million principally related to an increase in
inventory for anticipated future sales and in preparation for
our transition to modular assembly and contract manufacturing.
Net cash used in investing activities was $1.2 million for
the six months ended June 30, 2005, which consisted
primarily of $1.2 million used for fixed asset purchases
and the payment of a $0.2 million security deposit relating
to the lease for our new corporate headquarters offset by the
receipt of $0.3 million released from escrow as part of the
sale of our investment in Sona MedSpa. Net cash used in
financing activities during the six months ended June 30,2005 was $0.1 million, principally relating to payments on
our capital lease obligations.
Net cash provided by operating activities was $1.3 million
for the year ended December 31, 2004. This resulted
primarily from net income of $5.3 million increased by
$1.3 million in depreciation and amortization, reduced by a
$3.0 million gain from the sale of our equity interest in
Sona MedSpa and a $2.3 million decrease in working capital
primarily attributable to an increase in accounts receivables
from increased sales and inventory for anticipated future sales.
Net cash provided by investing activities was $0.3 million
for the year ended December 31, 2004 resulting primarily
from $3.1 million in net proceeds from the sale of our
investment in Sona MedSpa, offset in large part by
$2.8 million in capital expenditures. Net cash provided by
financing activities was $0.1 million for the year ended
December 31, 2004 resulting primarily from proceeds of
$2.1 million from the sale of common stock and
$0.5 million of proceeds from a note payable to El.En.,
offset by payments of $2.0 million on short-terms loans and
payments of $0.2 million on capital lease obligations.
Net cash used in operating activities was $0.3 million for
the year ended December 31, 2003. This primarily resulted
from net loss of $0.5 million and a $0.4 million
decrease in working capital primarily attributable to an
increase in accounts receivables from increased sales and
inventory for anticipated future sales, partially offset by
$1.3 million in depreciation and amortization. Net cash
used in investing activities was $1.2 million for the year
ended December 31, 2003 and consisted of $0.9 million
in capital expenditures and $0.2 million relating to an
equity investment. Net cash provided in financing activities was
$0.7 million for the year ended December 31, 2003 and
resulted primarily from proceeds of $1.4 million from the
sale of common stock to El.En. and $0.7 million in proceeds
from notes payable to El.En., offset by $1.3 million for
the repurchase of common stock from several minority
stockholders and payments of $0.3 million on capital lease
obligations.
We expect to generate positive cash flows from operations in the
future. Our future capital requirements depend on a number of
factors, including the rate of market acceptance of our current
and future products, the resources we devote to developing and
supporting our products and continued progress of our research
and development of new products. We expect our capital
expenditures over the next 12 months generally to be
consistent with our capital expenditures during the prior
12 months.
We believe that our net proceeds from this offering, together
with our current cash and cash equivalents and cash generated
from operations, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures at least
through 2006. If existing cash and cash generated from
operations are insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt
securities or obtain a credit facility. The sale of additional
equity or convertible securities could result in dilution to our
stockholders. If additional funds are raised through the
issuance of debt securities, these securities could have rights
senior to those associated with our class A or class B
common stock and could contain covenants that would restrict our
operations. Any financing may not be available in amounts or on
terms acceptable to us. If we are unable to obtain required
financing, we may be required to reduce the scope of our planned
product development and marketing efforts, which could harm our
financial condition and operating results.
Contractual Obligations
Our major outstanding contractual obligations relate to our
capital leases from equipment financings and our facilities
leases. In addition, we guaranteed the lease obligations for two
facilities that are operated by Sona MedSpa and will be
obligated to pay these leases if Sona MedSpa can not or does not
make the required lease payments. We have summarized in the
table below our fixed contractual cash obligations as of
June 30, 2005.
Payments Due by Period
Less Than
One to Three
Three to
More Than
Total
One Year
Years
Five Years
Five Years
(In thousands)
Capital lease obligations, including interest
$
1,153
$
298
$
553
$
302
$
—
Operating leases
5,701
817
1,591
1,591
1,702
Short-term indebtedness, including interest
310
310
—
—
—
Lease guarantees
386
91
165
90
40
Total contractual cash obligations
$
7,550
$
1,516
$
2,309
$
1,983
$
1,742
Off Balance Sheet Arrangements
Since inception, we have not engaged in any off balance sheet
financing activities.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is currently confined to our cash
and cash equivalents that have maturities of less than
90 days. We currently do not hedge interest rate exposure.
We have not used
derivative financial instruments for speculation or trading
purposes. Because of the short-term maturities of our cash and
cash equivalents, we do not believe that an increase in market
rates would have any significant impact on the realized value of
our investments.
A significant portion of our operations is conducted through
operations in countries other than the United States. Revenues
from our international operations that were recorded in
U.S. dollars represented approximately 45% of our total
international revenues for the year ended December 31,2004. Substantially all of the remaining 55% were sales in
euros, British pounds and Japanese yen. Since we conduct our
business in U.S. dollars, our main exposure, if any,
results from changes in the exchange rate between these
currencies and the U.S. dollar. Our functional currency is
the U.S. dollar. Our policy is to reduce exposure to
exchange rate fluctuations by having most of our assets and
liabilities, as well as most of our revenues and expenditures,
in U.S. dollars, or U.S. dollar linked. Therefore, we
believe that the potential loss that would result from an
increase or decrease in the exchange rate is immaterial to our
business and net assets.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and
results of operations set forth above are based on our financial
statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. On an ongoing basis,
we evaluate our estimates and judgments, including those
described below. We base our estimates on historical experience
and on various assumptions that we believe to be reasonable
under the circumstances. These estimates and assumptions form
the basis for making judgments about the carrying values of
assets and liabilities, and the reported amounts of revenues and
expenses, that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies require
significant judgment and estimates by us in the preparation of
our financial statements.
Revenue Recognition and Deferred Revenue
In accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition in Financial
Statements, we recognize revenue from sales of aesthetic
treatment systems and accessories when each of the following
four criteria are met:
•
delivery has occurred;
•
there is persuasive evidence of an agreement;
•
the fee is fixed or determinable; and
•
collection is reasonably assured.
Revenue from the sale of service contracts is deferred and
recognized on a straight-line basis over the contract period as
services are provided. We are party to a revenue sharing
arrangement with an operator and franchisor of spa franchises
and recognize revenue from this arrangement in the period in
which the procedures are performed.
We defer until earned payments that we receive in advance of
product delivery or performance of services. When we enter into
arrangements with multiple elements, which may include sales of
products together with service contracts and warranties, we
allocate revenue among the elements based on each element’s
fair value in accordance with the principles of Emerging Issues
Task Force Issue Number 00-21, Revenue Arrangements with
Multiple Deliverables. This allocation requires us to make
estimates of fair value for each element.
Accounts Receivable and Concentration of Credit
Risk
Our accounts receivable balance, net of allowance for doubtful
accounts, was $8.4 million as of December 31, 2004,
compared with $5.6 million as of December 31, 2003.
The allowance for doubtful accounts as of December 31, 2004
and 2003 was $0.5 million. We maintain an allowance, or
reserve, for doubtful accounts based upon the aging of our
receivable balances, known collectibility issues and our
historical experience with losses. While our credit losses have
historically been within our expectations and the allowances
established, we may not continue to experience the same credit
losses that we have in the past, which could cause our
provisions for doubtful accounts to increase. We work to
mitigate bad debt exposure through our credit evaluation
policies, reasonably short payment terms and geographical
dispersion of sales. Our revenues include export sales to
foreign companies located principally in Europe, the
Asia/Pacific region and the Middle East. We obtain letters of
credit for foreign sales that we consider to be at risk.
Inventories and Allowance for Obsolescence
We state all inventories at the lower of cost or market value,
determined on a first-in, first-out method. We monitor standard
costs on a monthly basis and update them annually and as
necessary to reflect changes in raw material costs and labor and
overhead rates. Our inventory balance was $9.9 million as
of December 31, 2004, compared with $6.7 million as of
December 31, 2003. Our inventory allowances as of
December 31, 2004 and 2003 were $0.8 million. We
provide inventory allowances when conditions indicate that the
selling price could be less than cost due to physical
deterioration, usage, obsolescence, reductions in estimated
future demand and reductions in selling prices. We balance the
need to maintain strategic inventory levels with the risk of
obsolescence due to changing technology and customer demand
levels. Unfavorable changes in market conditions may result in a
need for additional inventory reserves that could adversely
impact our gross margins. Conversely, favorable changes in
demand could result in higher gross margins when we sell
products.
Product Warranty Costs and Provisions
We provide a one-year parts and labor warranty on end-user sales
of our aesthetic treatment systems. Distributor sales generally
include a warranty on parts only. We estimate and provide for
future costs for initial product warranties at the time revenue
is recognized. We base product warranty costs on related
material costs, technical support labor costs and overhead. We
provide for the estimated cost of product warranties by
considering historical material, labor and overhead expenses and
applying the experience rates to the outstanding warranty period
for products sold. As we sell new products to our customers, we
must exercise considerable judgment in estimating the expected
failure rates and warranty costs. If actual product failure
rates, material usage, service delivery costs or overhead costs
differ from our estimates, we would be required to revise our
estimated warranty liability. The following table sets forth
activity in the accrued warranty account for each of the two
years ended December 31, 2003 and 2004.
2003
2004
(In thousands)
Balance at beginning of year
$
863
$
1,252
Charged to expense
1,317
1,606
Costs incurred
(928
)
(1,248
)
Balance at end of year
$
1,252
$
1,610
Stock-Based Compensation
We have elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, or
APB 25, and related interpretations, in accounting for our
stock-based compensation plans, rather than the alternative fair
value method provided for under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation, or SFAS No. 123. In 2005, some grants of
stock options were made at exercise prices less than the deemed
fair value of our common stock for accounting purposes and, as a
result, we recorded deferred stock-based compensation. This
deferred stock-based compensation will be amortized to expense
over the vesting period of the stock options. In the notes to
our financial statements, we provide pro forma disclosures in
accordance with SFAS No. 123 that reflect the effect
on net (loss) income as if we had applied the fair value
provisions of SFAS No. 123. We account for
transactions in which services are received from non-employees
in exchange for equity instruments based on the fair value of
such services received or of the equity instruments issued,
whichever is more reliably measured, in accordance with
SFAS No. 123 and the Emerging Issues Task Force Issue
No. 96-18, Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services, or EITF Issue
No. 96-18.
Accounting for equity instruments granted or sold by us under
APB 25, SFAS No. 123 and EITF Issue
No. 96-18 requires fair value estimates of the equity
instrument granted or sold. If our estimates of the fair value
of these equity instruments for accounting purposes are too high
or too low, our expenses may be overstated or understated. We
estimated the fair value of the equity instruments for
accounting purposes based upon consideration of factors we
deemed to be relevant at the time. Because shares of our common
stock have not been publicly traded, market factors historically
considered in valuing stock and stock option grants include
comparative values of public companies discounted for the risk
of limited liquidity provided for in the shares we are issuing,
pricing of private sales of our common stock between unrelated
parties and the effect of certain events that have occurred
between the time of such private sales and such grants.
The fair value of our common stock for accounting purposes is
determined by our management and board of directors. In making
that determination, our management and the board of directors
draw on the knowledge of our officers and directors who have
experience with companies in the medical device sector. For
options granted in May 2005, our management and board of
directors used hindsight, the valuation implied in the sale of
our common stock to accredited investors during October and
November 2004 and our estimate of the value of our stock in a
liquid trading market to determine that the deemed fair value of
our common stock for accounting purposes was higher than the
exercise price. Because the accredited investors who purchased
shares in October and November 2004 had not previously purchased
shares of our common stock, we considered the pricing of these
sales to be a strong indicator of the fair value of our common
stock. In addition, during October and November 2004, we did not
consider an initial public offering or other liquidity event to
be likely to occur during the ensuing three to four months. This
retrospective valuation for accounting purposes, performed in
August 2005, caused us to record deferred stock-based
compensation of approximately $1.7 million during the six
months ended June 30, 2005. We recognized $53,000 of
amortization of deferred stock-based compensation during the six
months ended June 30, 2005. We expect to record
amortization of this deferred stock-based compensation of
$0.2 million during the remainder of 2005,
$0.4 million in each of 2006, 2007 and 2008 and
$0.2 million in 2009, subject to employee terminations.
We use the Black-Scholes option pricing model to determine the
fair value of each option grant to non-employees. The
Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, this
option pricing model requires the use of highly subjective
assumptions, including expected stock price volatility. These
assumptions reflect our best estimates, but these items involve
inherent uncertainties based on market conditions that are
generally outside of our control. If other assumptions had been
used in the current period, stock-based compensation expense
could have been materially affected. Furthermore, if we use
different assumptions in future periods, stock-based
compensation expense could be materially affected in future
years.
Income Taxes
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes.
Under this method, we determine deferred tax assets and
liabilities based upon the differences between the financial
statement carrying amounts and the tax bases of assets and
liabilities using enacted tax rates in
effect for the year in which the differences are expected to
affect taxable income. The tax consequences of most events
recognized in the current year’s financial statements are
included in determining income taxes currently payable. However,
because tax laws and financial accounting standards differ in
their recognition and measurement of assets, liabilities,
equity, revenues, expenses, gains and losses, differences arise
between the amount of taxable income and pretax financial income
for a year and between the tax bases of assets or liabilities
and their reported amounts in the financial statements. Because
we assume that the reported amounts of assets and liabilities
will be recovered and settled, respectively, a difference
between the tax basis of an asset or a liability and its
reported amount in the balance sheet will result in a taxable or
a deductible amount in some future years when the related
liabilities are settled or the reported amounts of the assets
are recovered, giving rise to a deferred tax asset. We then
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and, to the extent we
believe that recovery is not likely, we establish a valuation
allowance.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
issued SFAS Statement No. 123 (revised 2004),
Share-Based Payment, or SFAS 123(R), which is a
revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. SFAS 123(R) supersedes
APB 25 and amends FASB Statement No. 95, Statement
of Cash Flows. SFAS 123(R) requires companies to
measure compensation costs for share-based payments to
employees, including stock options, at fair value and expense
such compensation over the service period beginning with the
first interim or annual period after December 15, 2005. The
pro forma disclosures previously permitted under SFAS 123
will no longer be an alternative to financial statement
recognition. We expect to adopt SFAS 123(R) in the first
quarter of fiscal 2006. Under SFAS 123(R), companies must
determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at the
date of adoption. The transition methods include prospective and
retroactive adoption options. Management is evaluating the
requirements of SFAS 123(R) and cannot currently estimate
the future effects of adopting this new guidance.
In November 2004, the Financial Accounting Standards Board
issued SFAS Statement No. 151, Inventory Costs, an
Amendment of Accounting Principles Board Opinion No. 43,
Chapter 4, or SFAS 151. SFAS 151 requires
that items such as idle facility expense, freight, handling
costs and wasted materials be recognized as current-period
charges rather than being included in inventory regardless of
whether the costs meet the criterion of abnormal as defined in
Accounting Principles Board Opinion No. 43. SFAS 151
is applicable for inventory costs incurred during fiscal years
beginning after June 15, 2005. We will adopt this
pronouncement on January 1, 2006 and we do not expect the
adoption with have a material impact on our financial condition
or results of operation.
We develop and market aesthetic treatment systems that are used
by physicians and other practitioners to perform non-invasive
procedures to remove hair, treat vascular lesions, rejuvenate
skin through the treatment of shallow vascular lesions and
pigmented lesions and temporarily reduce the appearance of
cellulite. Our systems incorporate a broad range of laser and
other light-based energy sources, including Alexandrite, pulse
dye, Nd:Yag and diode lasers, as well as intense pulsed light.
We believe that we are one of only a few companies that
currently offer aesthetic treatment systems utilizing
Alexandrite and pulse dye lasers, which are particularly well
suited for some applications and skin types. We offer single
energy source systems as well as workstations that incorporate
two or more different types of lasers or pulsed light
technologies. We offer multiple technologies and system
alternatives at a variety of price points depending primarily on
the number and type of energy sources included in the system.
Our newer products are designed to be easily upgradeable to add
additional energy sources and handpieces, which provides our
customers with technological flexibility as they expand their
practices. As the aesthetic treatment market evolves to include
new customers, such as aesthetic spas and additional physician
specialties, we believe that our broad technology base and
tailored solutions will provide us with a competitive advantage.
We sell over 14 different aesthetic treatment systems and have
focused our development and marketing efforts on offering
leading, or flagship, products for each of the major aesthetic
procedure categories that we address. Our flagship products are:
•
the Apogee Elite system for hair removal;
•
the Cynergy system for the treatment of vascular lesions;
•
the PhotoSilk Plus system for skin rejuvenation through
the treatment of shallow vascular lesions and pigmented
lesions; and
•
the TriActive LaserDermology system for the temporary
reduction of the appearance of cellulite.
In addition to their primary applications, the Apogee Elite,
Cynergy and PhotoSilk Plus systems can each be used
by practitioners for a variety of other applications.
We sell our products through a direct sales force in North
America, four European countries, Japan and China and through
international distributors in 31 other countries. In January
2005, we launched a separate CynosureSpa brand with
product offerings, tailored marketing and sales personnel
focused exclusively on the aesthetic spa market. As of
June 30, 2005, we had sold more than 4,500 aesthetic
treatment systems worldwide.
Our company was founded in 1991. El.En. S.p.A., an Italian
company listed on the techSTAR segment of the Italian stock
market, Borsa Italiana, that itself and through subsidiaries
develops and markets laser systems for medical and industrial
applications, acquired a majority of our capital stock in 2002.
In September 2003, we recruited a new management team that has
implemented a comprehensive reorganization of our company. Our
revenues have increased from $23.0 million in 2002 to
$41.6 million in 2004, a compound annual growth rate of
35%. Our revenues for the six months ended June 30, 2005
increased 31% to $25.1 million, compared to
$19.2 million for the first six months of 2004. Our gross
profit margin improved from 43% in 2002 to 51% in 2004, and we
achieved profitability in 2004.
Industry
Aesthetic Market Opportunity
Michael Moretti/Medical Insight, Inc., an aesthetic treatment
market research firm, estimates that the number of non-invasive
aesthetic treatment procedures worldwide using laser and other
light-based technologies will grow from nearly 20 million
in 2003 to over 53 million in 2008, representing a compound
annual growth rate of over 20%. We estimate that the worldwide
market for aesthetic treatment systems based on laser and other
light-based technologies will exceed $550 million in 2005.
We base this estimate on published market research reports,
revenue figures for public companies and our conversations with
the managements of private companies that compete in the
aesthetic treatment equipment market.
Key factors contributing to growth in the markets for aesthetic
treatment procedures and aesthetic laser equipment include:
•
the aging population of industrialized countries and the rising
discretionary income of the “baby boomer” demographic
segment;
•
the desire of many individuals to improve their appearance;
•
the development of technology that allows for safe and effective
aesthetic treatment procedures;
•
the impact of managed care and reimbursement on physician
economics, which has motivated physicians to establish or expand
their elective aesthetic practices with procedures that are paid
for directly by patients; and
•
reductions in cost per procedure, which has attracted a broader
base of clients and patients for aesthetic treatment procedures.
Expansion Into Non-Traditional Physician Customer and Spa
Markets
Aesthetic treatment procedures that use lasers and other
light-based equipment have traditionally been performed by
dermatologists and plastic surgeons. Based on published
membership information from professional medical organizations,
there are more than 18,000 dermatologists and plastic surgeons
in the United States. More recently, a broader group of
physicians in the United States, including primary care
physicians, obstetricians, gynecologists, ophthalmologists and
ear, nose and throat specialists, have incorporated aesthetic
treatment procedures into their practices. These non-traditional
physician customers are largely motivated to offer aesthetic
procedures by the potential for a reliable revenue stream that
is unaffected by managed care and government payor reimbursement
economics. We believe that there are approximately 200,000 of
these potential customers in the United States and Canada,
representing a significant market opportunity that is only
beginning to be addressed by suppliers of lasers and other
light-based aesthetic equipment. Some physicians are electing to
open medical spas, often adjacent to their conventional office
space, where they perform aesthetic procedures in an environment
designed to feel less like a health care facility. The
International Spa Association, known as ISPA, estimates that
there were approximately 600 of these medical spas in North
America in 2004 and that the number of medical spas more than
doubled between 2002 and 2004.
An aesthetic spa market is also rapidly developing and growing
in the United States at dedicated day spa facilities and hotels
and resorts. In addition to conventional massage and cosmetic
treatments, aesthetic spas are also beginning to offer
non-invasive light-based procedures performed by spa technicians
and other non-medical professionals. ISPA estimates that there
were approximately 12,000 aesthetic spas in North America in
2004, an increase of approximately 26% from 2002. We believe
that non-traditional physician customers and spa customers
currently represent at least one-half of the North American
laser and other light-based aesthetic treatment systems market.
The Structure of Skin and Conditions that Affect
Appearance
The human skin consists of several layers. The epidermis is the
outer layer and contains the cells that determine pigmentation,
or skin color. The dermis is a thicker inner layer that contains
hair follicles and large and small blood vessels. Beneath the
dermis is a layer that contains subdermal fat and collagen,
which provides strength and flexibility to the skin.
The appearance of the skin may change over time due to a variety
of factors, including age, sun damage, circulatory changes,
deterioration of collagen and the human body’s diminished
ability to repair and renew itself. These changes include:
•
unwanted hair growth;
•
uneven pigmentation;
•
wrinkles;
•
blood vessels and veins that are visible at the skin’s
surface; and
•
the appearance of cellulite.
Changes to the skin caused by pigmentation are called pigmented
lesions and are the result of the accumulation of excess
melanin, the substance that gives skin its color. Pigmented
lesions are characterized by the brown color of melanin and
include freckles, solar lentigines, also known as sun spots or
age spots, and café au lait birthmarks. Changes to the skin
caused by abnormally large or numerous blood vessels located
under the surface of the skin are called vascular lesions.
Vascular lesions are characterized by blood vessels that are
visible through the skin or that result in a red appearance of
the skin. Vascular lesions may be superficial and shallow in the
skin or deep in the skin. Shallow vascular lesions include small
spider veins, port wine birthmarks, facial veins and rosacea, a
chronic skin condition that causes rosy coloration and acne-like
pimples on the face. Deep vascular lesions include large spider
veins and leg veins.
People with undesirable skin conditions or unwanted hair growth
often seek aesthetic treatments, including treatments using
non-invasive laser and light-based technologies.
Non-Invasive Laser and Light-Based Aesthetic
Treatments
A laser is a device that creates and amplifies a narrow, intense
beam of light. Lasers have been used for medical and aesthetic
applications since the 1960s. Intense pulsed light technology
was introduced in the 1990s and uses flashlamps, rather than
lasers, to generate multiple wavelengths of light with varying
pulse durations, or time intervals, over which the energy is
delivered.
By producing intense bursts of highly focused light, lasers and
other light-based technologies selectively target hair
follicles, veins or collagen in or below the dermis, as well as
cells responsible for pigmentation in the epidermis. When the
target absorbs sufficient energy, it is destroyed. The degree to
which energy is absorbed in the skin depends upon the skin
structure targeted — e.g., hair follicle or blood
vessel — and the skin type — e.g., light or
dark. Different types of lasers and other light-based
technologies are needed to effectively treat the entire spectrum
of skin types and conditions. As a result, an active aesthetic
practice may require multiple laser or other light-based systems
in order to offer treatments to its entire client base.
Different types of lasers are currently used for a wide range of
aesthetic treatments. Each type of laser operates at its own
wavelength, measured in nanometers, which corresponds to a
particular emission and color in the light spectrum. The most
common lasers used for non-invasive aesthetic treatments are:
•
Pulse dye lasers — produce a yellow light that
functions at a shallow penetration depth.
•
Alexandrite lasers — produce a near infrared
invisible light that functions with high power at a deep
penetration depth.
•
Diode lasers — produce a near infrared
invisible light that functions at a deep penetration depth.
•
Nd:Yag lasers — produce a near infrared
invisible light that functions over a wide range of penetration
depths.
In addition to selecting the appropriate wavelength for a
particular application, laser and other light-based treatments
require an appropriate balance among three other parameters to
optimize safety and effectiveness for aesthetic treatments:
•
energy level — the amount of light emitted to heat the
target;
•
pulse duration — the time interval over which the
energy is delivered; and
•
spot size — the diameter of the energy beam.
As a result of the wide spectrum of aesthetic applications,
patient skin types and users of technology, customer purchasing
objectives for aesthetic treatment systems are diverse. We
believe that as aesthetic spas and non-traditional physician
customers play increasingly important roles as purchasers of
aesthetic treatment systems, the market for these products will
become even more diverse. Specifically, we expect that owners of
different types of aesthetic treatment practices will place
different emphases on various system attributes, such as breadth
of treatment applications, return on investment, upgradeability
and price. Accordingly, we believe that there is significant
market opportunity for a company that tailors its product
offerings to meet the needs of a wide range of market segments.
Our Solution
We offer tailored customer solutions to address the market for
non-invasive light-based aesthetic treatment applications,
including hair removal, treatment of vascular lesions, skin
rejuvenation through the treatment of shallow vascular lesions
and pigmented lesions and temporary reduction of the appearance
of cellulite. We believe our laser and other light-based systems
are reliable, user friendly and easily incorporated into both
physician practices and spas. We complement our product
offerings with comprehensive and responsive service offerings,
including assistance with training, aesthetic practice
development consultation and product maintenance. As of
June 30, 2005, we had sold more than 4,500 aesthetic
treatment systems.
We believe that the following factors enhance our market
position:
•
Broad Technology Base. Our products are based on a
broad range of technology and incorporate different types of
lasers, such as Alexandrite, pulse dye, Nd:Yag and diode, as
well as intense pulsed light devices. We believe we are one of a
few companies that currently offer aesthetic treatment systems
using Alexandrite and pulse dye lasers, which are particularly
well suited for some applications and skin types. The following
table provides information regarding the principal energy
sources used in laser and other light-based aesthetic treatments
that we offer and the primary application of each of these
energy sources. The table also indicates how many of the six
largest competitors in our industry we believe also offer
products using this energy source. See
“— Competition” below. We base our belief as
to the six largest competitors in our industry and their product
offerings on public company filings and information available on
company websites.
Vascular lesions, including shallow and deep lesions
ü
1 of 6
Alexandrite Laser
Near infrared invisible light (755 nm)
Hair removal, particularly for light skin types
ü
1 of 6
Diode Laser
Near infrared invisible light (805/940/980 nm)
Hair removal, particularly for light skin types
ü
3 of 6
Vascular lesions, particularly shallow lesions
Temporary reduction in the appearance of cellulite
Nd:Yag Laser
Near infrared invisible light (1064 nm)
Hair removal, particularly for medium and dark skin types
ü
5 of 6
Vascular lesions, particularly deep lesions
Intense Pulsed Light
Visible/Near infrared
Hair removal, all skin types
ü
5 of 6
invisible light
(400-950 nm)
Vascular lesions, particularly shallow lesions
Pigmented lesions
Temporary reduction in the appearance of cellulite
Multiple Energy
Source Workstations (incorporating two
or more energy
sources)
Multiple
Multiple
ü
3 of 6
•
Expansive Portfolio of Aesthetic Treatment
Systems. We sell over 14 different aesthetic treatment
systems so that customers can select the product best suited to
their practice or business. Our product portfolio includes
single energy source systems as well as workstations that
incorporate two or more different types of lasers or light-based
technologies. By offering multiple technologies and system
alternatives at a variety of price points, we seek to provide
customers with tailored solutions that meet the specific needs
of their practices while providing significant flexibility in
their level of investment.
•
Upgrade Paths Within Product Families. We have
designed our new products to facilitate upgrading within product
families. For example, our redesigned single energy source
Acclaim 7000 NL and Apogee 5500 NL laser systems
are each upgradeable to our Apogee Elite workstation,
which includes a combination of these two laser systems.
Similarly, our two laser Cynergy system, which is a
combination of our VStar and Acclaim 7000 NL laser
systems, is upgradeable to our Cynergy III
multi-energy source workstation through the addition of an
intense pulsed light module. We began shipping these new
upgradeable systems in mid-2005.
•
Global Presence. We have offered our products in
international markets for over 14 years, with approximately
45% of our revenue generated from international markets in 2004.
We target international markets through a direct sales force in
four European countries, Japan and China and through
international distributors in 31 other countries.
•
Strong Reputation Established Over 14-Year
History. We have been in the business of developing and
marketing aesthetic treatment systems for over 14 years. As
a result of this history, we believe the Cynosure brand name is
associated with a tradition of technological leadership.
Our goal is to become the worldwide leader in providing
non-invasive aesthetic treatment systems. The key elements of
our business strategy to achieve this goal are to:
•
Offer a Full Range of Tailored Aesthetic
Solutions. We believe that we have one of the broadest
product portfolios in the industry, with multiple product
offerings incorporating a range of laser and light sources at
various price points across many aesthetic applications. Our
approach is designed to allow our customers to select products
that best suit their client base, practice size and the types of
treatments that they wish to offer. This allows us to address
the needs of the traditional physician customer market as well
as the growing non-traditional physician customer market. Many
of our newer products can be upgraded to systems with greater
functionality as our customers’ practices expand.
•
Launch Innovative New Products and Technologies for
Emerging Non-Invasive Aesthetic Applications. Our
research and development team builds on our broad range of laser
and light-based technologies to target unmet needs in
significant aesthetic treatment markets. Since 2002, we have
introduced 11 new products. We launched the Apogee Elite
system, our flagship product for hair removal, in March 2004,
and the Cynergy system, our flagship product for the
treatment of vascular lesions, in February 2005. In addition, we
began to distribute the TriActive LaserDermology system,
our flagship product for the temporary reduction of the
appearance of cellulite, in North America in February 2004, and
the PhotoSilk Plus system, our flagship product for skin
rejuvenation through the treatment of shallow vascular lesions
and pigmented lesions, in North America in February 2005. We are
also working on new technologies for other emerging aesthetic
applications, such as tattoo removal and acne.
•
Pursue Spa Market with Dedicated Organization. We
believe that the aesthetic spa market’s emergence and
growth presents a significant sales opportunity for us. In
January 2005, we launched our separate CynosureSpa brand
with tailored marketing and sales personnel focused exclusively
on penetrating the aesthetic spa market. We have also introduced
products specifically designed for the aesthetic spa market,
such as the TriActive LaserDermology system for the
temporary reduction of the appearance of cellulite and the
PhotoLight system for hair removal, skin rejuvenation
through the treatment of shallow vascular lesions and pigmented
lesions and the treatment of vascular and pigmented lesions. We
are establishing relationships with aesthetic spa distributors
and operators to augment our efforts to sell and market our
products to this growing market.
•
Provide Comprehensive, Ongoing Customer Service.
We support our customers with a worldwide service organization
that includes 18 field service engineers in North America
and 43 international field service engineers working
directly for us or our international distributors. The field
service engineers install our products and respond rapidly to
service calls to minimize disruption to our customers’
businesses. Most of our new products are modular in design to
enable quick and efficient service and support. In addition, we
have engaged a third party consulting firm to assist our North
American customers with training and the development of business
and marketing plans to establish and grow their aesthetic
treatment businesses. We plan to bolster our existing service
infrastructure by establishing new training and inventory hubs
in Europe and the Asia/Pacific region.
•
Generate Additional Revenue from Existing Customer
Base. We believe that there are opportunities for us to
generate additional revenue from existing customers who are
already familiar with our products. Many of our existing
traditional and non-traditional customers may be purchasers of
additional aesthetic treatment systems to address increasing
treatment volumes or new treatment applications. We also expect
that customers purchasing our new modular products will be
candidates for technology upgrades to enhance the capabilities
of their systems. In addition, as we continue to grow our
service organization, we are seeking to increase the
percentage of our customers that enters into service contracts,
which would provide additional recurring customer revenue.
Products
We offer a broad portfolio of aesthetic treatment systems that
address a wide variety of applications. From our entry-level,
standalone pulsed light products that cost as little as
approximately $30,000, to our multi-laser, multi-application
workstations that we sell for over $100,000, we can address a
wide range of markets and applications.
The following table provides information concerning our products
and their applications. We use the flagship designation for our
products that are our leading products for a particular
application.
Application
Temporary
Reduction of
Year
Hair
Vascular
Skin
Pigmented
Appearance of
Tattoo
Laser/Light Source
Introduced
Removal
Lesions
Rejuvenation(1)
Lesions
Cellulite
Acne
Removal
Principal Products:
Apogee Elite
Alexandrite Nd:Yag
2004
Flagship
ü
ü
ü
Apogee 5500 NL
Alexandrite
2004
ü
ü
Acclaim 7000 NL
Nd:Yag
2004
ü
ü
ü
ü
Cynergy III
Pulse Dye Nd:Yag
Pulsed Light
2005
ü
ü
ü
ü
Cynergy
Pulse Dye Nd:Yag
2005
ü
Flagship
ü
ü
VStar
Pulse Dye
2000
ü
ü
Acclaim 7000 NL
Nd:Yag
2004
ü
ü
ü
Cynergy PL(2)
Pulsed Light
2005
ü
ü
ü
ü
TriActive LaserDermology(3)
Diode Laser
2004
Flagship
PhotoSilk Plus(3)
Pulsed Light
2005
ü
ü
Flagship
ü
Other Products:
Affinity QS(4)
Q-Switch
1064/532
Nd:Yag
2005
ü
ü
Apogee 9300
Alexandrite
2000
ü
Acclaim 9300
Nd:Yag
2004
ü
ü
ü
ü
PhotoLight(3)
Pulsed Light
2003
ü
ü
ü
ü
PhotoGenica MiniV
Pulse Dye
2001
ü
(1)
We consider skin rejuvenation to be the treatment of shallow
vascular lesions and pigmented lesions to rejuvenate the
skin’s appearance.
(2)
We distribute the Cynergy PL product worldwide pursuant
to a distribution agreement with El.En.
(3)
We distribute the PhotoLight, PhotoSilk Plus and
TriActive LaserDermology systems in North America
pursuant to a distribution agreement with El.En.
(4)
We currently offer the Affinity QS system outside of the
United States only and are seeking regulatory clearance for this
product in the United States.
Each of our systems consists of a control console and one or
more handpieces. Our control consoles are each comprised of a
graphical user interface, a laser or other light source, control
system software and high voltage electronics. The graphical user
interface allows the practitioner to set the appropriate laser
or flashlamp parameters to meet the requirements of a particular
application and patient. The laser or other light source
consists of electronics, a visible aiming beam, a focusing lens
and a laser or flashlamp. Using the graphical user interface,
the practitioner can independently adjust the system’s
power level and pulse duration to optimize the desired
treatment’s safety and effectiveness. The graphical user
interface on our multiple energy workstations also allows the
practitioner to change energy sources with the press of a
button. The graphical user interfaces on our intense pulsed
light systems offer practitioners a choice between using
programmed preset treatment settings that address a variety of
skin types and treatment options or manually adjusting the
energy level and pulse duration settings. The control system
software communicates the operator’s instructions from the
graphical user interface to the system’s components and
manages system performance and calibration.
The handpieces on our laser systems deliver the laser energy
through a maneuverable optical fiber to the treatment area.
These handpieces weigh approximately eight ounces and are
ergonomically designed to allow the practitioner to use the
system with one hand and without becoming fatigued. Other
features of our laser system handpieces include:
•
interchangeable components that permit the practitioner to
easily adjust the spot size; and
•
an integrated aiming beam of harmless visible light that allows
the practitioner to verify the treatment area, thereby reducing
the risk of unintended skin damage and potentially reducing
treatment time.
The handpieces for our intense pulsed light systems consist of
the flashlamp, a wavelength filter and, on some models, an
integrated flashlamp cooling system. These handpieces weigh
approximately two pounds and also are ergonomically designed to
be operated with one hand.
Practitioners generally use our laser systems in combination
with a cooling system. We offer our customers our
SmartCool treatment cooling system, which we purchase
from a third party supplier and sell as a private label product
under the Cynosure SmartCool brand. Our SmartCool
product has six variable settings and allows the practitioner to
provide a continuous flow of chilled air before, during and
after treatment to cool and comfort the patient’s skin. The
SmartCool handpiece, which is specially designed for use
with our laser systems, interlocks with the laser handpiece. In
contrast to some competitive cooling systems, there are no
disposable supplies required to use our SmartCool system.
In North America, our SmartCool system is generally
packaged and sold with our laser aesthetic treatment systems,
and nearly all of our North American customers purchase a
SmartCool system when they purchase one of our laser
aesthetic treatment systems. Outside of North America, our
customers either purchase our SmartCool system when they
purchase one of our aesthetic treatment systems or they purchase
another cooling system from a third party supplier. Our
PhotoSilk Plus system provides contact cooling for
patient comfort. Practitioners generally do not use our other
intense pulsed light systems in combination with cooling systems
or treatments.
Applications
Practitioners use our products to perform a variety of
non-invasive procedures to remove hair, treat vascular and
pigmented lesions, rejuvenate skin through the treatment of
shallow vascular lesions and pigmented lesions and temporarily
reduce the appearance of cellulite. These applications of our
products are described below.
Hair Removal. In a typical laser or pulsed light
hair removal treatment, the target area is first cleaned and
shaved. The practitioner then selects appropriate laser or
pulsed light parameters based on the patient’s skin and
hair types and pre-cools the treatment area. The practitioner
next applies the handpiece to the target area and delivers laser
or pulsed light energy to the selected area. The laser or pulsed
light
removes hair by directing energy to the target melanin pigment
of the hair follicle, destroying the hair follicle without
harming the surrounding skin. This procedure can last from a few
minutes to one hour depending on the size of the treatment area
and laser or pulsed light spot size. Chilled air is applied to
the treatment area on a continuous basis to cool and comfort the
patient’s skin. Generally, for permanent reduction, hair
removal requires three to six treatments spaced four to six
weeks apart.
Our Apogee Elite workstation is our flagship product for
hair removal. It is a two-in-one laser system that contains both
an Alexandrite laser, which is best suited for hair removal for
patients with light skin types, and an Nd:Yag laser, which is
best suited for hair removal for patients with medium and dark
skin types or tanned skin. The practitioner can switch between
these two energy sources simply by pressing a button on the
system console. Features of the Apogee Elite system
include:
•
A wide range of separately adjustable power and pulse duration
settings. This allows the practitioner to select the best
settings for safe and efficient hair removal depending on the
patient’s skin and hair type. Some competitive systems do
not permit pulse duration adjustment, which we believe may
reduce the effectiveness of the treatment, particularly for
thicker hair.
•
A large, 15 millimeter spot size and a laser beam that
distributes energy evenly over the entire treatment area. This
allows the practitioner to treat a targeted area in an efficient
manner. Some competitive systems have smaller spot sizes or
beams that concentrate the energy in the middle of the treatment
area of each pulse of light, which requires more overlap of the
treatment areas of the individual pulses of light to achieve an
effective result.
•
A rapid pulse rate. This permits the practitioner to cover the
treatment area quickly, which is particularly important when
removing hair from large areas, such as backs and legs.
In addition to the Apogee Elite system, each of our
Apogee 5500 NL, Acclaim 7000 NL, Cynergy III,
Cynergy, Cynergy PL, PhotoSilk Plus, Apogee 9300,
Acclaim 9300 and PhotoLight systems can be used
for hair removal.
Treatment of Vascular Lesions. To treat vascular
lesions the practitioner generally first pre-cools the target
area and then applies the system handpiece to deliver laser
energy to the treatment area. Depending on the size of the
treatment area, procedures last between 20 and 30 minutes. In
some cases, a topical anesthetic is applied to the treatment
area to minimize pain. For spider veins, redness and rosacea,
patients generally receive between two and four treatments
spaced over two to three weeks. For port wine birthmarks,
patients may receive ten or more treatments.
Our Cynergy workstation is our flagship product for the
treatment of vascular lesions. The Cynergy system
combines a pulse dye laser, which is best suited for treating
shallow vascular lesions, such as port wine birthmarks, facial
veins and rosacea, and an Nd:Yag laser, which is best suited for
treating large or deep veins, such as leg veins. The
practitioner can switch between these two energy sources simply
by pressing a button on the system console. Other features of
the Cynergy system include:
•
A wide range of separately adjustable power and pulse duration
settings. This allows the practitioner to select the best
settings for safe and efficient treatment depending on the
particular type and depth of the vascular lesion to be treated.
•
One of the most powerful pulse dye lasers currently available in
the aesthetic treatment system market. The power of this laser
allows a practitioner to provide treatment with a spot size that
is larger than would be effective with a less powerful laser,
thereby enhancing treatment efficiency.
•
SixPulsetm
technology in the pulse dye laser, which distributes the power
of one long pulse of energy into six micro pulses. This allows
the practitioner to deliver more energy with less patient
discomfort.
•
A choice of five different spot sizes that are easily selected
through the use of interchangeable headpiece components. This
allows the practitioner to select the appropriate spot size for
the
particular vascular lesion to be treated. For example, a large
spot size is generally used for a large leg vein, while a small
spot size is normally used for facial veins.
We recently obtained FDA clearance for our innovative
Multiplextm
energy delivery system that we plan to make available on the
Cynergy system. Our Multiplex system mixes the
energy from the two lasers included in Cynergy system by
quickly following a pulse of energy from the pulse dye laser
with a pulse of energy from the Nd:Yag laser. We are studying
whether Multiplex delivery allows for more efficient
treatment of vascular lesions by reducing the amount of laser
power required and allowing the laser energy to penetrate deeper
into the target.
In addition to the Cynergy system, each of our Apogee
Elite, Acclaim 7000 NL, Cynergy III, VStar, Cynergy PL,
PhotoSilk Plus, Acclaim 9300, PhotoLight and PhotoGenica
MiniV systems can be used for the treatment of vascular
lesions.
Skin Rejuvenation. Skin rejuvenation involves the
treatment of shallow vascular lesions and pigmented lesions to
rejuvenate the skin’s appearance. In a skin rejuvenation
procedure, the practitioner applies the system handpiece to the
target area and delivers laser or pulsed light energy. The
energy destroys the shallow vascular lesions and pigmented
lesions and rejuvenates the skin’s appearance without
damage to the treated or surrounding area through the
improvement in skin texture and reduction or elimination of skin
irregularities. Cooling is generally not required. Patients
typically receive between four to six treatments of
approximately 30 minutes each. Treatments are spaced two to four
weeks apart.
Our PhotoSilk Plus system is our flagship product for
skin rejuvenation. The PhotoSilk Plus system is a
high-powered pulsed light system that delivers energy over a
broad spectrum of wavelengths that are best suited for treatment
of shallow vascular lesions and pigmented lesions. Features of
the PhotoSilk Plus system include:
•
A wide range of separately adjustable power and pulse duration
settings. This allows the practitioner to select the best
settings for safe and efficient skin rejuvenation depending on
the patient’s skin type and the treatment desired.
•
U-shaped design, with the flashlamp located close to the
treatment area. In contrast with some competitive products that
locate the flashlamp further away from the treatment area, we
believe that our design enhances patient safety and comfort by
reducing the heat produced in the procedure. In addition, this
design reduces the energy required for effective treatment.
•
A number of preprogrammed settings for a variety of skin types
and different types of treatments. This permits the practitioner
to quickly adjust the system for use in typical applications,
such as treatment of vascular lesions, pigmented lesions or both.
We offer the PhotoSilk Plus system with a variety of
handpieces that have different wavelength filters and spot
sizes. We offer three different wavelength filters and three
different spot sizes. The range of available wavelength filters
allows the practitioner to select the handpiece best suited for
the type of treatment to be performed. For example, treatments
with a short wavelength filter are best suited for pigmented
lesions, while treatment with long wavelength filters are best
suited for vascular lesions. A medium wavelength filter may be
used to treat both vascular lesions and pigmented lesions. The
range of available spot sizes allows the practitioner to select
the handpiece best suited for the treatment area. For example,
treatments on some areas of the face may require a small spot
size, while other treatments may be more efficient with a large
spot size. Up to two handpieces may be connected to the
PhotoSilk Plus system at one time, which reduces delays
in switching between treatments with handpieces. This feature
enables a practitioner to easily switch between handpieces to
address varying treatment needs for an individual patient, as
well as allowing for quick turnaround times between different
patients.
In addition to the PhotoSilk Plus system, each of our
Apogee Elite, Acclaim 7000 NL, Cynergy III,
Cynergy, Cynergy PL, Acclaim 9300 and
PhotoLight systems can be used for skin rejuvenation
through the treatment of shallow vascular lesions and pigmented
lesions.
Temporary Reduction of Appearance of Cellulite.
Cellulite is a deposit of fat that causes a dimple or
other uneven appearance of the skin on women, typically around
the thighs, hips and buttocks. According to published reports,
an estimated 80% of women have some degree of cellulite. In a
treatment for the temporary reduction of the appearance of
cellulite, the practitioner applies the multifunction handpiece
to deliver diode laser energy, as well as suction and
manipulation therapy, to the treatment area. The laser energy
and suction and manipulation therapy enhance micro-circulation
in the area of the cellulite. Treatment for the temporary
reduction in the appearance of cellulite requires a series of
treatments of approximately 30 to 45 minutes each, depending on
the treatment area and patient response.
Our TriActive LaserDermology system is our flagship
product for temporarily reducing the appearance of cellulite.
The TriActive system contains six low-energy diode
lasers, mechanical massage and suction features and localized
cooling. The TriActive system is one of only two
light-based systems, and the only laser-based system, cleared by
the FDA for use for the temporary reduction in the appearance of
cellulite. In addition, the FDA has cleared TriActive
system as an over-the-counter device, for sale and use
without physician supervision, because its diode lasers are
sealed and do not pose a risk of exposure to operators’
eyes. We believe that TriActive system is the only
light-based system for this application that has been so cleared
by the FDA, which significantly facilitates our marketing of
TriActive system to the growing aesthetic spa market.
Other Aesthetic Applications. We are developing
flagship products based on laser technologies in two other areas:
•
tattoo removal, which we consider a large and growing market
opportunity as a result of the increasing popularity of tattoos
and the limitations on effectiveness of current laser
treatments; and
•
acne, for which we believe laser treatment may be seen as an
attractive alternative to Accutane because of safety issues with
this drug.
Currently, our VStar product is used for the treatment of
acne and our Affinity QS system, which has not
received regulatory clearance in the United States, is used for
tattoo removal.
Original Equipment
Manufacturing and Other Relationships
We are collaborating with third parties in connection with
surgical uses of our laser products. Specifically:
•
In 2004, we began supplying our surgical pulse dye lasers on an
original equipment manufacturer basis to PENTAX Medical Company,
which sells these lasers for use with its endoscopic video
imaging system in North America and South America for use in
treating recurrent respiratory papilloma and glottal dysplasia.
Recurrent respiratory papilloma is a disease characterized by
tumor growth in the larynx, vocal cords and trachea. Glottal
dysplasia is a disease characterized by abnormal changes in the
cells that line the glottis, or middle part of the larynx,
caused by damage to the lining of the larynx. In these
treatments, the PENTAX endoscope is inserted through the nose to
access the larynx. A disposable, flexible optical fiber is then
passed through the endoscope. Our system is used to deliver
laser energy through the optical fiber to target and destroy the
tumors or abnormal cells. The FDA has cleared the use of our
laser for these indications.
•
In 2004, we began supplying our lasers on an original equipment
manufacturer basis to Solx, Inc., which is using the lasers with
its systems for the treatment of glaucoma. Glaucoma is an eye
disease associated with the degeneration of the retinal cells
responsible for transmitting images from the eye to the brain.
This treatment involves the implantation of the Solx system in
the eye and the use of laser energy to activate the system to
reduce intraocular pressure associated with some types of
glaucoma. Solx is marketing our lasers in Europe, where their
use in this procedure has been approved. Clinical trials of our
lasers for this procedure are ongoing in the United States.
We are supplying our VStar pulse dye lasers to DUSA
Pharmaceuticals, Inc., which is using these lasers in a
phase II clinical trial of photodynamic therapy for the
treatment of acne and sun damage.
Sales and Marketing
We sell our aesthetic treatment systems to the traditional
physician customer base of dermatologists and plastic surgeons
as well as to the increasing number of non-traditional physician
customers who are providing aesthetic services using laser and
light-based technology. Non-traditional physician customers
include primary care physicians, obstetricians, gynecologists,
ophthalmologists and ear, nose and throat specialists. In early
2005, we created our CynosureSpa brand, which is focused
on the emerging market of approximately 12,000 aesthetic spas in
North America.
We target potential customers through office visits, trade shows
and trade journals. We also conduct clinical workshops featuring
recognized expert panelists and opinion leaders to promote
existing and new treatment techniques using our products. We
believe that these workshops enhance customer loyalty and
provide us with new sales opportunities. We plan to increase the
number of workshops that we conduct from 40 in 2004
to 90 in 2005. We also use direct mail programs to target
specific segments of the market that we seek to access, such as
members of medical societies and attendees at meetings sponsored
by medical societies or associations. In addition, we have
recently implemented a public relations program that has
resulted in treatments based on our products being featured in
magazines such as Elle, Harper’s Bazaar
and Redbook.
Physician Sales
We sell our products to physicians in North America through a
direct sales force. Outside of North America, we sell our
products to physicians through a direct sales force in four
European countries, Japan and China and through independent
distributors in 31 other countries.
We conduct our own international sales and service operations
through wholly-owned subsidiaries in the United Kingdom, France,
Germany, Spain and Japan and through a majority-owned joint
venture in China. We seek distributors in international markets
where we do not believe that a direct sales presence is
warranted or feasible. In those markets, we select distributors
that have extensive knowledge of our industry and their local
markets. Our distributors sell, install and service our
products. We require our distributors to invest in service
training and equipment, to stock and supply maintenance and
service parts for our systems, to attend exhibitions and
industry meetings and, in some instances, to commit to minimum
sales amounts to gain or retain exclusivity. Currently, we have
written distribution agreements with nine of our 19 third party
distributors. Generally, the written agreements with our
distributors have terms of between one and two years.
Spa Sales
We have implemented a tailored marketing program, including
focused product offerings, for the aesthetic spa market. In
North America, we maintain a separate sales organization for our
CynosureSpa brand. In addition, we are working with
several aesthetic spa distributors and operators to address this
growing market. For example, in April 2005 we entered into a
distribution agreement with Universal Companies, which has over
40,000 spa customers worldwide, to include our PhotoLight
and TriActive LaserDermology systems in its product
catalog. In addition, we are a party to an agreement with Sona
MedSpa, in which we formerly held an equity interest and which
operates or franchises 36 spa locations across the United
States, to provide our laser aesthetic treatment systems to its
facilities in exchange for a share of the facilities’
revenues. In 2004, we derived 13% of our revenues from Sona
MedSpa. Our existing direct sales force and independent
distributors sell to the spa market outside of North America.
We support our customers with a range of services, including
installation and product training, business and practice
development consulting and product service and maintenance. In
North America, our field service organization has 18 field
service engineers. Outside of North America, our sales and
service subsidiaries and our trained distributors employ
43 field service engineers.
In connection with direct sales of our aesthetic treatment
systems, we arrange for the installation of the system and
initial product training. Generally, installation and initial
training take less than three hours. The installation is
conducted by our field service engineers. We have engaged a
third party consulting firm to provide advice to North American
purchasers of our systems on the development of their aesthetic
treatment businesses and marketing plans. We have found that
this service is particularly appealing to the non-traditional
physician customer and aesthetic spa segments of the market,
which have less familiarity with the business aspects of laser
and light-based aesthetic treatments than dermatologists and
cosmetic surgeons. The cost of installation, initial training
and, for North American purchasers, the basic consulting package
of this third party consultant are all included in the purchase
price of our systems. We also offer for an additional charge a
more comprehensive package of services from the third party
consultant.
We strive to respond to all service calls within 24 hours
to minimize disruption of our customers’ businesses. We
have designed our new products in a modular fashion to enable
quick and efficient service and support. Specifically, we build
these products with several separate components that can easily
be removed and replaced when the product is being serviced. We
provide initial warranties on our products to cover parts and
service, and we offer extended warranty packages that vary by
type of product and level of service desired. Our base warranty
covers parts and service for one year. We offer extended
warranty arrangements through service plans. We believe that we
have a significant opportunity to increase our recurring
customer revenues by increasing the percentage of our customers
that enter into service contracts for our systems.
Research and Development
Our research and development team consists of 19 employees
with a broad base of experience in lasers and optoelectronics.
Our research and development team works closely with opinion
leaders and customers, both individually and through our
sponsored seminars, to understand unmet needs and emerging
applications in the field of aesthetic skin treatments and to
develop new products and improvements to our existing products.
They also conduct and coordinate clinical trials of our
products. Our research and development team builds on the
significant base of patented and proprietary intellectual
property that we have developed in the fields of laser and other
light-based technologies since our inception in 1991.
Our research and development expenses were approximately
$2.4 million in 2002, $2.5 million in 2003 and
$3.1 million in 2004, none of which was customer sponsored.
We expect our research and development expenditures to increase
as we continue to devote resources to research and develop new
products and technologies.
Manufacturing and Raw Materials
We manufacture all of our products, other than the
Cynergy PL, PhotoLight, PhotoSilk Plus and
TriActive LaserDermology systems, which are manufactured
by El.En. and which we sell and market under our distribution
agreement with El.En. We manufacture our products with
components and subassemblies purchased from third party
suppliers. Accordingly, our manufacturing operations consist
principally of assembly and testing of our systems and
integration of our proprietary software.
We recently redesigned a number of our products, including our
Apogee, Cynergy, Acclaim and VStar product
families, so that they are built in a modular fashion using
fewer components. We began shipping
these redesigned products in the second quarter of 2005. This
new approach enables us to manufacture our products more
efficiently. Specifically, we have:
•
reduced our assembly part counts and our direct labor costs;
•
reduced our service parts inventories; and
•
increased our ability to test our products during the
manufacturing process.
We purchase many of our components and subassemblies from third
party manufacturers on an outsourced basis. We use one third
party to assemble and test many of the components and
subassemblies for our Apogee, Cynergy, Acclaim and
VStar product families. We also depend exclusively on
sole source suppliers for Alexandrite rods, which we use in the
manufacture of our Apogee products, and for our
SmartCool treatment cooling systems.
We do not have long-term contracts with our third party
manufacturers or sole source suppliers. We generally purchase
components and subassemblies as well as our other supplies on a
purchase order basis. If for any reason, our third party
manufacturers or sole source suppliers are not willing or able
to provide us with components, subassemblies or supplies in a
timely fashion, or at all, our ability to manufacture and sell
many of our products could be impaired. To date, we have been
able to obtain adequate outsourced manufacturing services and
supplies of Alexandrite rods and air cooling systems from our
third party manufacturers and suppliers in a timely manner. We
believe that over time alternative component and subassembly
manufacturers and suppliers can be identified if our current
third party manufacturers and suppliers fail to fulfill our
requirements.
El.En. Commercial Relationship
The Cynergy PL, PhotoLight, PhotoSilk Plus and
TriActive LaserDermology systems sold by us were
developed, and associated intellectual property rights are
owned, by El.En. El.En. manufactures, and we distribute, these
products pursuant to distribution agreements between us and
El.En. These agreements provide us with exclusive worldwide
distribution rights for the Cynergy PL system and
exclusive distribution rights in the United States and Canada
for the PhotoLight, PhotoSilk Plus and TriActive
LaserDermology systems. The transfer prices for products
that we currently distribute under the agreements are specified
in the agreement; however, they may be changed by El.En. at its
discretion upon 30 days’ notice.
El.En. is required to provide us with training, marketing and
other sales support for the products we distribute under these
agreements. We are required to use best efforts to sell and
promote these products, and we are responsible for obtaining and
maintaining regulatory approvals for them. If El.En. wishes to
discontinue producing products that we distribute, it must make
reasonable efforts to provide us with one year’s notice of
its plan to do so.
Each of the distribution agreements has an initial term that
expires in January 2012. The distribution agreement relating to
the PhotoLight, PhotoSilk Plus and TriActive
LaserDermology systems will automatically renew for
additional one-year terms unless either party provides notice of
termination at least six months prior to the expiration of the
initial term or any subsequent renewal term. The distribution
agreement relating to the Cynergy system will
automatically renew for additional one year terms unless either
party provides notice of termination at least one year prior to
the expiration of the initial term or any subsequent renewal
term. We or El.En. may terminate the distribution agreements at
any time based upon material uncured breaches by, or the
insolvency of, the other party. In addition, El.En. may
terminate the distribution agreement for the PhotoLight,
PhotoSilk Plus and TriActive LaserDermology
systems if we do not meet annual minimum purchase obligations
specified in the agreements.
Patents, Proprietary Technology and Trademarks
Our success depends in part on our ability to obtain and
maintain proprietary protection for our products, technology and
know-how, to operate without infringing the proprietary rights
of others and to
prevent others from infringing our proprietary rights. Our
policy is to seek to protect our proprietary position by, among
other methods, filing United States and foreign patent
applications related to our proprietary technology, inventions
and improvements that are important to the development of our
business. We also rely on trade secrets, know-how, continuing
technological innovation and in-licensing opportunities to
develop and maintain our proprietary position.
As of June 30, 2005, we owned a total of 38 United States
patents and six United States patent applications, as well as
foreign counterparts to 17 of these patents and four of these
patent applications. Our patent portfolio includes patents and
patent applications with claims directed to:
•
the design and method of use and operation of our pulse dye
laser systems;
•
the design and method of use and operation of our Alexandrite
laser systems for hair removal;
•
our Multiplex energy delivery system for our pulse dye
lasers; and
•
the design of endoscopic laser and light delivery systems.
The expiration dates for our issued United States patents range
from 2013 to 2022. Additionally, El.En. has applied for a patent
covering the methods of use and operation of the TriActive
LaserDermology system. We do not consider any single patent
or patent application that we hold to be material to our
business.
The patent positions of companies like ours are generally
uncertain and involve complex legal and factual questions. Our
ability to maintain and solidify our proprietary position for
our technology will depend on our success in obtaining effective
patent claims and enforcing those claims once granted. We do not
know whether any of our patent applications or those patent
applications that we license will result in the issuance of any
patents. Our issued patents and those that may issue in the
future, or those licensed to us, may be challenged, invalidated
or circumvented, which could limit our ability to stop
competitors from marketing related products or shorten the term
of patent protection that we may have for our products. In
addition, the rights granted under any issued patents may not
provide us with competitive advantages against competitors with
similar technology. Furthermore, our competitors may
independently develop similar technologies or duplicate any
technology developed by us. Because of the extensive time
required for development, testing and regulatory review of a
potential product, it is possible that, before any of our
products under development can be commercialized, any related
patent may expire or remain in force for only a short period
following commercialization, thereby reducing any advantage of
the patent.
On July 2, 2004, Palomar Medical Technologies, Inc. sent us
a letter proposing to enter into negotiations with us regarding
the grant of a nonexclusive license under specified United
States and foreign patents owned or licensed by Palomar with
respect to our Apogee Elite, Apogee 5500, PhotoLight and
Acclaim 7000 products, and also with respect to our
SmartEpil II product, which we no longer offer. In
subsequent letters from Palomar dated September 14, 2004
and March 24, 2005, Palomar reiterated its willingness to
negotiate a license under these patents and, in its
March 24, 2005 letter, stated that it continues to believe
that we need a license under these patents for each of the
products listed in the July 2, 2004 letter, as well as for
our PhotoSilk, PhotoSilk Plus, Cynergy, Cynergy PL and
Cynergy III systems. We have not entered into
negotiations with Palomar with respect to such a license.
In February 2002, Palomar filed a lawsuit against one of our
competitors, Cutera, Inc., alleging that by making, using,
selling or offering for sale its hair removal products, Cutera
willfully and deliberately infringed one of the patents that
Palomar has asserted against us in its letters to us. This
litigation between Palomar and Cutera is ongoing. Palomar may
also bring suit against us claiming that some or all of our
products violate patents owned or licensed by Palomar.
Litigation is unpredictable, and we may not prevail in
successfully defending or asserting our position. If Palomar
takes legal action against us, and if we do not prevail, we may
be ordered to pay substantial damages for past sales and an
ongoing royalty for future sales of products found to infringe
Palomar’s patents or we could be ordered to stop selling
any products that are found to infringe Palomar’s patents.
We rely, in some circumstances, on trade secrets to protect our
technology. Trade secrets, however, are difficult to protect. We
seek to protect our proprietary technology and processes, in
part, by confidentiality agreements with our employees,
consultants, scientific advisors and other contractors. These
agreements may be breached, and we may not have adequate
remedies for any breach. In addition, our trade secrets may
otherwise become known or be independently discovered by
competitors. To the extent that our employees, consultants or
contractors use intellectual property owned by others in their
work for us, disputes may arise as to the rights in related or
resulting know-how and inventions.
We use trademarks on nearly all of our products and believe that
having distinctive marks is an important factor in marketing our
products. We have registered our Cynosure®,
Apogee®, PhotoGenica® and
SmartCool® marks, among others, in the United
States. Our other trademarks include
Affinitytm,
Acclaimtm,
Apogee
Elitetm,
Cynergytm,
CynosureSpatm,
PhotoLighttm,
PhotoSilktm,
PhotoSilk
Plustmand
LaserDermologysm.
We have also registered some of our marks in a number of foreign
countries. In addition, El.En. has registered the
TriActive® mark in the United States. Although we
have a foreign trademark registration program for selected
marks, we may not be able to register or use such marks in each
foreign country in which we seek registration.
Competition
Our industry is subject to intense competition. Our products
compete against laser and other light-based products offered by
public companies, such as Candela Corporation, Cutera, Inc.,
Laserscope, Lumenis Ltd., Palomar Medical Technologies, Inc. and
Syneron Medical Ltd., as well as several smaller specialized
private companies, such as Radiancy, Inc. and Thermage, Inc.
Some of these competitors have significantly greater financial
and human resources than we do and have established reputations,
as well as worldwide distribution channels and sales and
marketing capabilities that are larger and more established than
ours. Additional competitors may enter the market, and we are
likely to compete with new companies in the future. Our products
also compete against non-light-based medical products, such as
BOTOX® and collagen injections, and surgical and
non-surgical aesthetic procedures, such as face lifts, chemical
peels, microdermabrasion, sclerotherapy and electrolysis.
Competition among providers of aesthetic laser and other
light-based products is characterized by significant research
and development efforts and rapid technological progress. There
are few barriers that would prevent new entrants or existing
competitors from developing products that would compete directly
with ours. There are many companies, both public and private,
that are developing innovative devices that use both light-based
and alternative technologies for aesthetic and medical
applications. Accordingly, our success depends in part on
developing and commercializing new and innovative applications
of laser and other light-based technology and identifying new
markets for and applications of existing products and technology.
To compete effectively, we have to demonstrate that our products
are attractive alternatives to other devices and treatments by
differentiating our products on the basis of performance,
reputation, quality of customer support and price. Breadth of
product offering is also important. We believe that we perform
favorably with respect to each of these factors. However, we
have encountered and expect to continue to encounter potential
customers who, due to pre-existing relationships with our
competitors, are committed to, or prefer the products offered by
these competitors. Potential customers also may decide not to
purchase our products, or to delay such purchases, based on a
decision to recoup the cost of expensive products that they may
have already purchased from our competitors. In addition, we
expect that competitive pressures may result in price reductions
and reduced margins over time for our products.
Government Regulation
Our products are medical devices subject to extensive and
rigorous regulation by the FDA, as well as other regulatory
bodies. FDA regulations govern the following activities that we
perform and will continue to perform to ensure that medical
devices distributed domestically are safe and effective for
their intended uses.
The FDA requires that we manufacture our products in accordance
with its Quality System Regulation, or QSR. The QSR covers the
methods and documentation of the design, testing, control,
manufacturing, labeling, quality assurance, packaging, storage
and shipping of our products. The FDA enforces the QSR through
periodic unannounced inspections. Based on our communication
with the FDA, we expect an inspection of our new facility to
occur in the near future.
Our failure to maintain compliance with the QSR requirements
could result in the shut down of, or restrictions on, our
manufacturing operations and the recall or seizure of our
products, which would have a material adverse effect on our
business. In the event that one of our suppliers fails to
maintain compliance with our quality requirements, we may have
to qualify a new supplier and could experience manufacturing
delays as a result.
We maintain quality assurance and quality management
certifications to enable us to market our products in the member
states of the European Union, the European Free Trade
Association and some countries that have entered into Mutual
Recognition Agreements with the European Union. In November
1998, our former facility was awarded the ISO 9001 and EN 46001
certifications. In October 2003, we received our ISO 9001
updated certification as well as our certification for ISO
13485, which replaced our EN 46001 certification. We are in the
process of transferring these certifications to our new facility
and are currently able to conduct our manufacturing activities
in the normal course.
FDA’s Premarket Clearance and Approval
Requirements
Unless an exemption applies, each medical device we wish to
distribute commercially in the United States requires either
prior 510(k) clearance or premarket approval from the FDA. The
FDA classifies medical devices into one of three classes.
Devices deemed to pose lower risks are placed in either
class I or II, which requires the manufacturer to
submit to the FDA a premarket notification requesting permission
to distribute the device commercially. This process is generally
known as 510(k) clearance. Class I devices are subject to
general controls such as labeling and adherence to FDA’s
QSR. Class II devices are subject to special controls such
as performance standards and FDA guidelines as well as general
controls. The FDA exempts some low risk devices from premarket
notification requirements and the requirement of compliance with
certain provisions of the QSR. The FDA places devices in
class III, requiring premarket approval, if insufficient
information exists to determine that the application of general
controls or special controls are sufficient to provide
reasonable assurance of safety and effectiveness and they are
life-sustaining, life-supporting or implantable devices, or
devices deemed not substantially equivalent to a previously
cleared 510(k) device or to a “preamendment”
class III device in commercial distribution before
May 28, 1976, for which premarket approval applications
have not been required. All of our current products are
class II devices. Both premarket notifications and
premarket approval applications when submitted to FDA must be
accompanied by a user fee, unless exempt.
510(k) Clearance Pathway
When a 510(k) clearance is required, we must submit a premarket
notification to the FDA demonstrating that our proposed device
is substantially equivalent to a previously cleared 510(k)
device or a device that was in commercial distribution before
May 28, 1976 for which the FDA has not yet called for the
submission of premarket approval applications, or premarket
approval. By regulation, the FDA must clear or deny a 510(k)
premarket notification within 90 days of submission of the
application. As a practical matter, clearance often takes
significantly longer. The FDA may require further information,
including clinical data, to make a determination regarding
substantial equivalence.
Laser devices used for aesthetic procedures, such as hair
removal, have generally qualified for clearance under 510(k)
procedures.
If the device cannot be cleared through the 510(k) process, the
sponsor must submit a premarket approval application, which is
known as a PMA. The sponsor must support the PMA with extensive
data, including but not limited to, technical, preclinical,
clinical trials, manufacturing and labeling to demonstrate to
the FDA’s satisfaction the safety and effectiveness of the
device.
No device that we have developed has required premarket
approval, nor do we currently expect that any future device or
indication will require premarket approval.
Product Modifications
After a device receives 510(k) clearance or a PMA approval, any
modification that could significantly affect its safety or
effectiveness, or that would constitute a major change in its
intended use, will require a new clearance or approval. The FDA
requires each manufacturer to make this determination initially,
but the FDA can review any such decision and can disagree with a
manufacturer’s determination. We have modified aspects of
various products since receiving regulatory clearance and
believe that new 510(k) clearances are not required for these
modifications. If the FDA disagrees with our determination not
to seek a new 510(k) clearance or PMA approval, the FDA may
retroactively require us to seek 510(k) clearance or premarket
approval. The FDA could also require us to cease marketing and
distributing the modified device, and the recall any sold
devices, until 510(k) clearance or premarket approval is
obtained. Also, in these circumstances, we may be subject to
significant regulatory fines or penalties.
Clinical Trials
We perform clinical trials to provide data to support the FDA
clearance process for our products and for use in our sales and
marketing efforts. Human clinical studies are generally required
in connection with approval of class III devices and may be
required for clearance of class I and II devices. When FDA
clearance or approval of a device requires human clinical
trials, and if the device presents a “significant
risk,” as defined by the FDA, to human health, the FDA
requires the device sponsor to file an investigational device
exemption, or IDE, application with the FDA and obtain IDE
approval prior to commencing the human clinical trials. The
sponsor must support the IDE application with appropriate data,
such as animal and laboratory testing results, showing that it
is safe to test the device in humans and that the testing
protocol is scientifically sound. The sponsor also must obtain
approval from the institutional review board overseeing the
clinical trial.
To date, we have not submitted any IDEs because we believe our
devices present only “non-significant” risks and,
therefore, do not require IDE submission to the FDA. Instead,
only institutional review board approval is required. Future
clinical trials of our products may require that we submit and
obtain approval of an IDE from the FDA prior to commencing
clinical trials. The FDA, and the Institutional Review Board at
each institution at which a clinical trial is being performed,
may suspend a clinical trial at any time for various reasons,
including a belief that the subjects are being exposed to an
unacceptable health risk.
All clinical investigations of devices to determine safety and
effectiveness must be conducted in accordance with the
FDA’s IDE regulations which govern investigational device
labeling, prohibit promotion of the investigational device, and
specify an array of recordkeeping, reporting and monitoring
responsibilities of study sponsors and study investigators.
Clinical trials must further comply with FDA’s regulations
for institutional review board approval and for informed
consent. Required records and reports are subject to inspection
by the FDA. The results of clinical testing may be unfavorable
or inconclusive or, even if the intended safety and
effectiveness success criteria are achieved, may not be
considered sufficient for the FDA to grant approval or clearance
of a product. The commencement or completion of any of our
clinical trials may be delayed or halted, or be inadequate to
support approval of a PMA application, or 510(k) clearance, for
numerous reasons, including, but not limited to, the following:
•
patients do not enroll in clinical trials or there is not
patient follow-up at the rate we expect;
institutional review boards and third party clinical
investigators may delay or reject our trial protocol;
•
third party clinical investigators decline to participate in a
trial or do not perform a trial on our anticipated schedule or
consistent with the clinical trial protocol, good clinical
practices, or other FDA requirements;
•
regulatory inspections of our clinical trials or manufacturing
facilities, which may, among other things, require us to
undertake corrective action or suspend or terminate our clinical
trials or invalidate our clinical trials; and
•
changes in governmental regulations or administrative actions.
Our clinical trials may not generate favorable data to support
any PMA or 510(k), and we may not be able to obtain such
approvals or clearances on a timely basis, or at all. Delays in
receipt of or failure to receive such approvals or clearances or
failure to comply with existing or future regulatory
requirements would have a material adverse effect on our
business, financial condition and results of operations. Even if
granted, the approvals or clearances may include significant
limitations on the intended use and indications for use for
which our products may be marketed.
Clinical studies conducted on 510(k) cleared devices, when used
or investigated in accordance with the devices’ labeled
instructions, are exempt from most of the FDA’s IDE
requirements.
Pervasive and Continuing Regulation
After a device is placed on the market, numerous regulatory
requirements apply. These include:
•
establishment registration and device listing;
•
the quality system regulation, which requires manufacturers,
including third party manufacturers, to follow stringent design,
testing, control, documentation and other quality assurance
procedures during all aspects of the manufacturing process;
•
labeling regulations and FDA prohibitions against the promotion
of products for uncleared, unapproved or “off-label”
uses, and other requirements related to promotional activities;
•
medical device reporting regulations, which require that
manufacturers report to the FDA if their device may have caused
or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or
serious injury if the malfunction were to recur;
•
corrections and removal reporting regulations, which require
that manufacturers report to the FDA field corrections and
product recalls or removals if undertaken to reduce a risk to
health posed by the device or to remedy a violation of the
Federal Food, Drug, and Cosmetic Act that may present a risk to
health; and
•
post-market surveillance regulations, which apply when necessary
to protect the public health or to provide additional safety and
effectiveness data for the device.
The FDA may require us to maintain a system for tracking our
products through the chain of distribution to the patient level.
The FDA has broad post-market and regulatory enforcement powers.
We are subject to unannounced inspections by the FDA to
determine our compliance with the QSR and other regulations.
These inspections may include the manufacturing facilities of
our subcontractors. Thus, we must continue to spend time, money
and effort to maintain compliance. In the past, our prior
facility has been inspected and observations were noted. The FDA
has accepted our responses to these observations, and we believe
that we are in substantial compliance with the QSR. The FDA has
not inspected our current manufacturing facility, although we
understand that the FDA intends to inspect this facility in the
near future. Since 1994, we have received five untitled letters
from the FDA regarding alleged violations
caused by our promotional activities. We have responded to these
letters and the FDA found our responses acceptable.
We are also regulated under the Radiation Control for Health and
Safety Act, which requires laser products to comply with
performance standards, including design and operation
requirements. The law also requires manufacturers to certify in
product labeling and in reports to the FDA that their products
comply with all such standards. The law and applicable federal
regulations also require laser manufacturers to file new product
and annual reports, maintain manufacturing, testing and sales
records, and report product defects. Various warning labels must
be affixed and certain protective devices installed, depending
on the class of the product.
Failure to comply with applicable regulatory requirements can
result in enforcement action by the FDA, which may include any
of the following sanctions:
repair, replacement, refunds, recall or seizure of our products;
•
operating restrictions, partial suspension or total shutdown of
production;
•
refusing or delaying our requests for 510(k) clearance or
premarket approval of new products or new intended uses;
•
withdrawing 510(k) clearance or premarket approvals that are
already granted; and
•
criminal prosecution.
The FDA also has the authority to require us to repair, replace
or refund the cost of any medical device that we have
manufactured or distributed. If any of these events were to
occur, they could have a material adverse effect on our business.
We are also subject to a wide range of federal, state and local
laws and regulations, including those related to the
environment, health and safety, land use and quality assurance.
We believe that compliance with these laws and regulations as
currently in effect will not have a material adverse effect on
our capital expenditures, earnings and competitive and financial
position.
International
International sales of medical devices are subject to foreign
governmental regulations, which vary substantially from country
to country. The time required to obtain clearance or approval by
a foreign country may be longer or shorter than that required
for FDA clearance or approval, and the requirements may be
different.
The primary regulatory environment in Europe is that of the
European Union, which consists of 25 countries encompassing
most of the major countries in Europe. The European Union has
adopted numerous directives, and European Standardization
Committees have promulgated voluntary standards, regulating the
design, manufacture, clinical trials, labeling and adverse event
reporting for medical devices. Devices that comply with the
requirements of a relevant directive will be entitled to bear CE
conformity marking, indicating that the device conforms to the
essential requirements of the applicable directives and,
accordingly, can be commercially distributed throughout the
member states of the European Union and the member states of the
European Free Trade Association, including Switzerland.
The method of assessing conformity varies depending on the type
and class of the product, but normally involves a combination of
self-assessment by the manufacturer and a third party assessment
by a Notified Body, an independent and neutral institution
appointed by a country to conduct the conformity assessment.
This third party assessment may consist of an audit of the
manufacturer’s quality system and specific testing of the
manufacturer’s device. An assessment by a Notified Body in
one member state of the European Union or the European Free
Trade Association is required in order for a manufacturer to
distribute the product commercially throughout these countries.
ISO 9001 and ISO 13845 certification are
voluntary harmonized standards. Compliance establishes the
presumption of conformity with the essential requirements for a
CE Marking. In November 1998, our former facility was awarded
the ISO 9001 and EN 46001 certifications. In October 2003, we
received our ISO 9001 updated certification as well as our
certification for ISO 13485, which replaced our EN 46001
certification.
Employees
As of June 30, 2005, we had 178 employees, including 53
employees in sales and marketing functions, 19 employees in
research, development and engineering functions, 82 employees in
manufacturing and service functions and 24 employees in general
and administrative functions. We believe that our future success
will depend in part on our continued ability to attract, hire
and retain qualified personnel. None of our employees is
represented by a labor union, and we believe our employee
relations are good.
Facilities
In July 2005, we moved our executive offices and our
manufacturing, research and development and warehouse operations
to a new 55,000 square foot facility that we lease in
Westford, Massachusetts. The lease on this facility expires in
March 2012. In addition, we lease an aggregate of approximately
5,300 square feet of space at six other locations in Europe
and the Asia/ Pacific region that we use for sales and service
purposes.
Litigation
We are subject to legal proceedings, claims and litigation,
including product liability claims, arising in the ordinary
course of business. While the outcome of these matters is
currently not determinable, we do not expect that the ultimate
costs to resolve these matters will have a material adverse
effect on our consolidated financial position, results of
operations or cash flows.
Michael R. Davin. Mr. Davin has been our
president and chief executive officer and a director since
September 2003 and became the chairman of our board of directors
in October 2004. Mr. Davin has over 20 years of
experience in the light-based technology field. From 1998 to
2003, Mr. Davin served as co-founder and vice president of
worldwide sales and strategic development of Cutera, Inc., a
provider of laser and other light-based aesthetic treatment
systems. Prior to co-founding Cutera, Mr. Davin spent
11 years at Coherent Medical, Inc., a manufacturer of
laser, optics and related equipment, in senior management
positions in sales, marketing and clinical development.
Timothy W. Baker. Mr. Baker has been our
executive vice president, chief financial officer and treasurer
since March 2004. From July 2003 to February 2004,
Mr. Baker served as vice president, finance of Stryker
Biotech, a division of Stryker Corporation, a medical products
and services provider. From July 2000 to June 2003,
Mr. Baker served as president and chief financial officer
of Photoelectron Corp., a provider of miniature x-ray systems
for radiation therapy. From January 1996 to July 2000,
Mr. Baker served as the chief financial officer and vice
president of operations of Radionics, Inc., a provider of
surgical devices. Mr. Baker is a certified public
accountant and holds an M.B.A. in operations management.
Douglas J. Delaney. Mr. Delaney has been our
executive vice president, sales since February 2005 and has
worked in medical laser sales for more than ten years. From May
2004 until February 2005, Mr. Delaney was our vice
president, North American sales, and from September 2003 until
May 2004, he was our director of North American sales. From
September 1999 to September 2003, Mr. Delaney served as
national sales manager of Cutera.
John T. Theroux. Mr. Theroux has been our
chief operating officer since May 2004. From 1979 to May 2004,
Mr. Theroux was a self-employed management consultant
specializing in restructuring and process re-engineering.
Mr. Theroux’s consulting experience spans across
several industries, including manufacturing, health care,
government, insurance and technology.
Andrea Cangioli. Mr. Cangioli has been a
director since 2002. Mr. Cangioli has served as a director
and the general manager of El.En. since 1992. Mr. Cangioli
also serves on the boards of other El.En. affiliated companies.
George Cho. Mr. Cho has been a director since
1991. Mr. Cho has also been our senior vice president,
medical technology and regulatory affairs since October 1991.
Mr. Cho has been awarded 22 United States patents related
to medical devices and methods.
Gabriele Clementi. Mr. Clementi has been a
director since 2002. Mr. Clementi co-founded El.En. in
1981. Mr. Clementi has served as a director of El.En. since 1981
and as its president since 1987. Mr. Clementi also serves
on the boards of other El.En. affiliated companies.
Leonardo Masotti. Prof. Masotti has been a
director since 2002. Prof. Masotti has been a full
professor in electronics at the University of Florence, Italy
since 1976, where he has also served as the director of the
doctorate course in non destructive testing since 1989.
Prof. Masotti has served as the president of the Research
Consortium Centro Eccellenza Optronica in Florence, Italy since
1992. Prof. Masotti is a member of the Regional High
Technology Director Board (Florence) as well as the editorial
board of “Fisica Medica.” Prof. Masotti has been
awarded 30 patents and is the author of 180 scientific
and technical papers. Prof. Masotti’s wife is a
director of El.En.
Marina Kamenakis. Ms. Kamenakis has been our
vice president, marketing since May 2004. From September 2003
until May 2004, Ms. Kamenakis was our director of
marketing. From January 2001 to September 2003, she served as
our director of product marketing with responsibility for the
marketing of our entire product line. From September 1997 until
January 2001, Ms. Kamenakis was a product manager
responsible for our hair removal products.
David Mackie. Mr. Mackie has been our vice
president, operations since April 2004. From January 2000 to
October 2003, Mr. Mackie served as senior director of
operations of Alcatel, an international telecommunications
company, with responsibility for Alcatel’s Chelmsford,
Massachusetts operations organization.
Kenji Shimizu. Mr. Shimizu has been our
senior vice president, international sales since April 1999.
During the 20 years prior to his joining Cynosure,
Mr. Shimizu held senior international sales positions at
several laser companies.
Rafael Sierra. Dr. Sierra has been our chief
technology officer since May 1997. Dr. Sierra has been
involved in the laser and fiberoptics industries for over
25 years. From 1991 to 1995, Dr. Sierra served as
director of laser technology at Candela Corporation, a provider
of laser and other light-based aesthetic treatment systems.
Dr. Sierra has been awarded seven patents related to
medical devices and methods.
There are no family relationships among any of our directors or
executive officers.
Board Composition and Election of Directors
Upon the completion of this offering, our board of directors
will be authorized to have seven members. We currently have five
directors, two of whom, Messrs. Cho and Clementi, are
expected to resign before the completion of the offering. We are
actively identifying and recruiting four additional candidates
to join our board prior to the completion of this offering.
Upon the completion of this offering, four of our seven
directors will be elected by holders of our class B common
stock, voting as a separate class, and the remaining three
directors will be elected by holders of our class A common
stock and class B common stock, voting together as a single
class. The three directors serving on our board who are to be
elected by holders of our class A common stock and
class B common stock, voting together as a single class,
will be divided into three classes, each of which will consist
of one member who will serve for a staggered three-year term:
•
will serve in the class of directors whose term expires at our
2006 annual meeting;
•
will serve in the class of directors whose term expires at our
2007 annual meeting; and
•
will serve in the class of directors whose term expires at our
2008 annual meeting.
Upon the expiration of the term of a class of directors, the
director in that class will be eligible to be elected for a new
three-year term at the annual meeting of stockholders in the
year in which his or her term expires. As a result, after the
offering and based on the board composition described above,
holders of our class A common stock, voting together with
holders of class B common stock as a single class, will
elect one director at each annual meeting.
The four directors to be elected by the holders of the
class B common stock will not be divided into classes and
will be elected annually to the board. These four directors may
be removed from office at any time, without cause, solely by the
affirmative vote of the holders of the class B common
stock, voting as a separate class. El.En., as the holder of a
majority of the shares of our class B common stock, will be
able to control the election and removal of these four
directors. See “Description of Capital Stock —
Anti-Takeover Effects of Delaware Law and Our Certificate of
Incorporation and Bylaws.”
The rules of The Nasdaq National Market require that a majority
of our board of directors be independent directors, as defined
by such rules. The Nasdaq National Market rules also permit a
company, such as us, listing on The Nasdaq National Market in
connection with its initial public offer to have 12 months
from the date of listing to comply with the majority independent
board requirement. Currently, none of our directors are
independent directors, as defined by the applicable rules of The
Nasdaq National Market. We are seeking four independent
directors to join our board prior to the completion of this
offering. Prior to the end of the phase-in period permitted
under The Nasdaq National Market rules, we expect to comply with
the requirement that our board of directors consist of a
majority of independent directors.
Board Committees
Our board of directors has established, effective upon
completion of this offering, an audit committee, a compensation
committee and a nominating and corporate governance committee.
The composition of each of these committees will be determined
prior to the completion of this offering.
Audit Committee
Our audit committee will assist our board of directors in its
oversight of the integrity of our financial statements, our
independent registered public accounting firm’s
qualifications and independence and the performance of our
independent registered public accounting firm.
Upon the completion of this offering, our audit committee’s
responsibilities will include:
•
appointing, approving the compensation of, and assessing the
independence of our independent registered public accounting
firm;
•
overseeing the work of our independent registered public
accounting firm, including through the receipt and consideration
of reports from our independent registered public accounting
firm;
•
reviewing and discussing with management and our independent
registered public accounting firm our annual and quarterly
financial statements and related disclosures;
•
coordinating our board of directors’ oversight of internal
control over financial reporting, disclosure controls and
procedures and our code of business conduct and ethics;
•
establishing procedures for the receipt and retention of
accounting related complaints and concerns;
meeting independently with our independent registered public
accounting firm and management; and
•
preparing the audit committee report required by the rules of
the Securities and Exchange Commission.
All audit services to be provided to us and all non-audit
services, other than de minimus non-audit services, to be
provided to us by our independent registered public accounting
firm must be approved in advance by our audit committee.
We are seeking a director who will qualify as our audit
committee financial expert.
Compensation Committee
The purpose of our compensation committee will be to assist the
board of directors in the discharge of its responsibilities
relating to the compensation of our executive officers. Upon
completion of this offering, our compensation committee’s
responsibilities will include:
•
reviewing and approving, or making recommendations to the board
of directors with respect to, our chief executive officer’s
compensation;
•
evaluating the performance of our executive officers and
reviewing and approving, or making recommendations to the board
of directors with respect to, the compensation of our other
executive officers;
•
overseeing and administering, and making recommendations to the
board of directors with respect to, our equity incentive plans;
•
reviewing and making recommendations to the board of directors
with respect to director compensation; and
•
preparing the compensation committee reports required by the
rules of the Securities and Exchange Commission.
Nominating and Corporate Governance Committee
Upon completion of this offering, our nominating and corporate
governance committee’s responsibilities will include:
•
recommending to the board of directors the persons to be
nominated for election as directors or to fill vacancies on the
board of directors, and to be appointed to each of the
board’s committees;
•
overseeing an annual review by the board of directors with
respect to management succession planning;
•
developing and recommending to the board of directors corporate
governance principles and guidelines; and
•
overseeing periodic evaluations of the board of directors.
Compensation Committee Interlocks and Insider
Participation
In 2004, Mr. Davin, our chief executive officer and
president, Messrs. Cangioli and Clementi, each of whom is a
director and officer of El.En., and Prof. Masotti, whose
wife is a director of El.En., participated in deliberations
concerning the compensation of our executive officers. None of
our executive officers serves as a member of the board of
directors or compensation committee, or other committee serving
an equivalent function, of any entity that has one or more
executive officers who serve as members of our board of
directors or our compensation committee.
In August 2005, our board of directors approved a compensation
program pursuant to which we pay each of our directors who is
not an employee of, or a spouse of an employee of, our company
or El.En., whom we refer to as our non-employee directors, a fee
for attendance at board and board committee meetings. This fee
is currently $1,500 for each day that a non-employee director
attends board or board committee meetings in person and $1,000
for each day that a non-employee director attends board or board
committee meetings by telephone or videoconference. Upon
completion of the offering, the fee will increase to $2,500 for
each day that a non-employee director attends board or board
committee meetings in person and will remain at $1,000 for each
day that a non-employee director attends board or board
committee meetings by telephone or videoconference. The chairman
of our audit committee will receive an additional annual
retainer of $5,000 and our other committee chairmen will receive
an additional annual retainer of $2,500. Each of these committee
chairmen will be non-employee directors. We reimburse each
non-employee member of our board of directors for out-of-pocket
expenses incurred in connection with attending our board and
committee meetings.
In addition, each non-employee director will receive an option
to purchase 5,000 shares of class A common stock
upon his or her appointment to our board of directors. These
options will vest annually in three equal installments subject
to the non-employee director’s continued service as a
director. Thereafter, each non-employee director will receive an
annual grant of an option to purchase 2,500 shares of
class A common stock at each year’s annual meeting
after which he or she will continue to serve as a director,
provided each such non-employee director has served on our board
of directors for a least six months. These options will vest in
full on the first anniversary of the grant date, subject to the
non-employee director’s continued service as a director.
Each non-employee director stock option will have such terms as
our board of directors may specify in the applicable option
agreement, provided that no option will be granted to a
non-employee director for a term in excess of 10 years. The
exercise price of all of these options will equal the fair
market value of our class A common stock on the date of
grant.
Compensation for our directors, including cash and equity
compensation, is determined and subject to adjustment by our
board of directors.
Executive Compensation
The following table sets forth the compensation paid or accrued
during the fiscal year ended December 31, 2004 to our chief
executive officer and to each of our three other most highly
compensated executive officers whose salary and bonus exceeded
$100,000 for the year ended December 31, 2004. We refer to
these officers collectively as our named executive officers.
Includes sales commissions of $221,982 and $43,132 as
compensation from the issuance of 14,377 shares of
class B common stock.
(5)
Represents amounts paid under a car allowance arrangement.
(6)
Mr. Theroux joined our company on May 10, 2004.
Mr. Theroux’s annual base salary is $196,750.
(7)
Represents amounts paid for moving expenses.
Stock Options
The following table contains information regarding options to
purchase shares of our class B common stock granted to our
named executive officers during 2004.
Amounts in the following table represent potential realizable
gains that could be achieved for the options if exercised at the
end of the option term. The 5% and 10% assumed annual rates of
compounded stock price appreciation are calculated based on the
requirements of the SEC and do not represent an estimate or
projection of our future stock prices. These amounts represent
certain assumed rates of appreciation in the value of our common
stock from the fair market value on the date of grant. Actual
gains, if any, on stock option exercises depend on the future
performance of the common stock and overall stock market
conditions. The amounts reflected in the following table may not
necessarily be achieved.
To date, the options that we have granted to our executive
officers and other employees typically vest as to 25% on the
first anniversary of the date of grant, and in equal quarterly
installments thereafter until the fourth anniversary of the date
of grant. See “— Stock Option and Other
Compensation Plans — 1992 Stock Option Plan” and
“— 2004 Stock Option Plan” below for
information regarding the vesting of options under the 1992
Stock Option Plan and the 2004 Stock Option Plan.
(2)
The dollar amounts under these columns are the result of
calculations at rates set by the Securities and Exchange
Commission and, therefore, are not intended to forecast possible
future appreciation, if any, in the price of the underlying
common stock. The potential realizable values are calculated
using an assumed initial public offering price of
$ per
share and assuming that the market price appreciates from this
price at the indicated rate for the entire term of each option
and that each option is exercised and sold on the last day of
its term at the assumed appreciated price.
In May 2005, we granted additional options to purchase shares of
our class B common stock to most of our employees,
including each of our named executive officers. Mr. Davin
was granted an option to purchase 80,000 shares, and
each of Messrs. Baker, Delaney and Theroux were granted an
option to purchase 40,000 shares. Each of the options
has an exercise price per share of $4.50 and expires on
May 17, 2015.
Option Exercises and Year-End Option Values
The following table provides information about the number and
value of options held by our named executive officers at
December 31, 2004. There was no public trading market for
our common stock as of December 31, 2004. Accordingly, as
permitted by the rules of the Securities and Exchange
Commission, we have calculated the value of unexercised
in-the-money options at fiscal year end on the basis of an
assumed initial public offering price of
$ per
share, less the aggregate exercise price. There were no options
exercised by our named executive officers during the year ended
December 31, 2004.
Michael R. Davin. Pursuant to an employment
agreement entered into in September 2003, we employ
Mr. Davin as our chief executive officer. Under this
agreement, Mr. Davin was entitled to an annual base salary
of $180,000 for the first year of his employment with us and to
an annual base salary of $205,000 thereafter, subject to
adjustment upon annual review by our board of directors.
Mr. Davin’s annual base salary has been adjusted by
our board of directors and is currently $230,000. The agreement
provides for bonus payments of 10% of our adjusted net profit
for each of 2004 and 2005, a bonus payment of 7.5% of our
adjusted net profit for 2006 and a bonus payment of 5% of our
adjusted net profit for each subsequent year.
For purposes of Mr. Davin’s employment agreement,
adjusted net profit is calculated based on our operating profit,
excluding specified write-offs and non-recurring charges or
gains, adjusted for an assumed fixed tax rate.
Mr. Davin’s employment agreement does not have a term;
however he or we may terminate his employment for any reason
upon 30 days’ notice. Upon the termination of his
employment other than for cause, or if he terminates his
employment for good reason, Mr. Davin has the right to
receive a severance payment equal to 24 months of his base
salary then in effect. Mr. Davin is not entitled to
severance payments if we terminate him for cause or if he
resigns without good reason. Pursuant to this agreement, except
as provided in the following sentence, Mr. Davin is
prohibited from competing with us and soliciting our customers,
prospective customers or employees for a period of two years if
we terminate him for any reason or if he terminates his
employment for good reason. This non-competition period is one
year if Mr. Davin voluntarily resigns and does not receive
severance payments.
George Cho. Pursuant to an employment agreement
entered into in January 2003, we employ Mr. Cho as our
senior vice president, medical technology and regulatory
affairs. The agreement will expire on December 31, 2005.
Under the agreement, Mr. Cho is entitled to an annual base
salary of $130,000, subject to adjustment upon annual review by
our board of directors. Mr. Cho is also eligible to earn
discretionary incentive bonuses. Upon the termination of his
employment by us other than for cause, or if he terminates his
employment for good reason, Mr. Cho has the right to
receive a severance payment equal to 12 months of his base
salary then in effect. Pursuant to this agreement, Mr. Cho
is prohibited from competing with us for a period of one year
and from soliciting our customers, prospective customers or
employees for a period of two years after termination of his
employment for any reason.
Douglas J. Delaney. Pursuant to an employment
agreement entered into in September 2003, we employ
Mr. Delaney as our executive vice president, sales. Under
this agreement, Mr. Delaney is entitled to an annual base
salary of $100,000, subject to adjustment upon annual review by
our board of directors. Mr. Delaney’s annual base
salary has been adjusted by our board of directors and is
currently $129,500. Mr. Delaney is also eligible to earn
discretionary incentive bonuses. The agreement also provides for
a monthly automobile allowance of $700. Mr. Delaney’s
employment agreement does not have a term; however he or we may
terminate his employment for any reason upon 30 days’
notice. Upon the termination of his employment by us other than
for cause, or if he terminates his employment for good reason,
Mr. Delaney has the right to receive a severance payment
equal to 12 months of his base salary then in effect.
Mr. Delaney is not entitled to severance payments if we
terminate him for cause of if he
resigns without good reason. Pursuant to this agreement,
Mr. Delaney is prohibited from competing with us and from
soliciting our customers, prospective customers or employees for
a period of one year after termination of his employment for any
reason.
Stock Option and Other Compensation Plans
1992 Stock Option Plan
Our 1992 stock option plan was adopted by our board of directors
and approved by our stockholders on February 12, 1992, and
expired on February 13, 2002. The 1992 stock option plan
provided for the grant of incentive stock options and
nonstatutory options. A maximum of 1,500,000 shares of
class B common stock were authorized for issuance under our
1992 stock option plan. Our 1992 stock option plan is
administered by our board of directors. Pursuant to the terms of
the 1992 stock option plan and to the extent permitted by law,
our board of directors may delegate authority to a committee of
the board of directors.
Under the 1992 stock option plan, if a merger or other
reorganization event, as defined in the 1992 stock option plan,
occurs, our board of directors may, in its discretion:
•
provide that the outstanding options under the 1992 stock option
plan be assumed or substituted by the successor corporation;
•
upon written notice to optionees, provide that all unexercised
options will terminate, unless exercised, immediately prior to
the consummation of such transaction;
•
in the case of a merger in which the holders of our common stock
receive a cash payment, provide for a cash payment equal to the
difference between the merger price and the exercise price for
all outstanding options, in exchange for the termination of such
options; and
•
provide that all or any outstanding options become fully
exercisable.
As of June 30, 2005, options to
purchase 53,983 shares of our class B common
stock at a weighted average exercise price of $3.39 were
outstanding under our 1992 stock option plan, options to
purchase 1,172,049 shares of class B common stock had
been exercised and options to purchase 1,102,072 shares of
class B common stock had been forfeited. Because the plan
expired in 2002, we will grant no further awards under the 1992
stock option plan.
2004 Stock Option Plan
Our 2004 stock option plan was adopted by our board of directors
and approved by our stockholders on November 16, 2004 and
amended on May 17, 2005. The 2004 stock option plan
provides for the grant of incentive stock options and
nonstatutory options. A maximum of 1,850,000 shares of
class B common stock are authorized for issuance under our
2004 stock option plan. Our employees, officers, directors,
consultants and advisors are eligible to receive awards under
our 2004 stock option plan; however, incentive stock options may
only be granted to our employees.
Our board of directors administers our 2004 stock option plan.
Pursuant to the terms of our 2004 stock option plan and to the
extent permitted by law, our board may delegate authority to a
committee composed of two or more of our directors or to an
officer who is also a member of our board of directors. Our
board of directors, or a committee to whom the board of
directors delegates authority, selects the recipients of awards
and determines:
•
the number of shares of common stock covered by options and the
dates upon which the options become exerciseable;
the terms and conditions of awards, including transfer
restrictions, conditions for repurchase and rights of first
refusal.
If our board of directors delegates authority to an officer, the
officer has the power to make awards to all of our employees,
except executive officers.
Under the 2004 stock option plan, if an acquisition of our
company occurs, our board shall:
•
provide that the outstanding options under the 2004 stock option
plan be assumed or substituted by the successor corporation;
•
upon written notice to optionees, provide that all options will
become exercisable in full, subject to the transaction, and
unless exercised, terminate immediately prior to, or within a
specified time after, the consummation of such
transaction; or
•
in the case of an acquisition in which the holders of our common
stock receive cash or other securities or property, provide for
a payment in cash, securities or property, as the case may be,
equal to the difference between the merger price and the
exercise price for all outstanding vested options, in exchange
for the termination of such options.
If a change in control event, as defined in the 2004 stock
option plan, occurs, and an option holder’s employment is
terminated for reasons other than misconduct within six months
after the change in control event, that employee’s options
that would have vested on or before the next anniversary of the
grant date shall become immediately exercisable.
No award may be granted under the 2004 stock option plan after
November 16, 2014. Our board of directors may amend or
terminate this plan at any time, except that:
•
the provision governing eligibility for grants of incentive
stock options may not be modified;
•
the provision governing the exercise price at which shares may
be offered pursuant to incentive stock options may not be
modified; and
•
the expiration date of the plan may not be extended without
stockholder approval.
As of June 30, 2005, options to
purchase 1,808,659 shares of our class B common
stock at a weighted average exercise price of $3.31 were
outstanding under our 2004 stock option plan, no options to
purchase shares of class B common stock have been exercised
and no options to purchase shares of class B common stock
have been forfeited. After the effectiveness of the 2005 stock
incentive plan described below, we will grant no further stock
options or other awards under the 2004 stock option plan.
2005 Stock Incentive Plan
Our 2005 stock incentive plan, which will become effective on
the date that the registration statement for this offering is
declared effective, was adopted by our board of directors on
August 8, 2005 and approved by our stockholders
on ,
2005. The 2005 stock incentive plan provides for the grant of
incentive stock options, nonstatutory stock options, restricted
stock awards and other stock-based awards. Upon effectiveness of
the plan, the number of shares of class A common stock that
will be reserved for issuance under the 2005 stock incentive
plan will be 500,000 shares plus the number of shares of
class A common stock equal to the number of shares of
class B common stock then available for issuance under the
2004 plan, up to a maximum of 100,000 shares.
In addition, our 2005 stock incentive plan contains an
“evergreen provision” which allows for an annual
increase in the number of shares available for issuance under
our 2005 stock incentive plan on the
first day of each fiscal year beginning in fiscal year 2007 and
ending on the second day of fiscal year 2015. The annual
increase in the number of shares shall be equal to the lowest of:
•
300,000 shares;
•
2.5% of the aggregate number of shares of class A common
stock and class B common stock outstanding on the first day
of the fiscal year; and
•
an amount determined by our board of directors.
Under this provision, no annual increase shall be made to the
extent that the number of shares of class A common stock
available for issuance under the 2005 stock incentive plan and
all other employee or director equity incentive plans would
exceed 25% of our outstanding shares on the first day of the
applicable fiscal year.
Our employees, officers, directors, consultants and advisors are
eligible to receive awards under our 2005 stock incentive plan;
however, incentive stock options may only be granted to our
employees. The maximum number of shares of class A common
stock with respect to which awards may be granted to any
participant under the plan is 250,000 per calendar year.
Our 2005 stock incentive plan is administered by our board of
directors. Pursuant to the terms of the 2005 stock incentive
plan, and to the extent permitted by law, our board of directors
may delegate authority to one or more committees or
subcommittees of the board of directors or to our executive
officers. Our board of directors or any committee to whom the
board of directors delegates authority selects the recipients of
awards and determines:
•
the number of shares of class A common stock covered by
options and the dates upon which the options become exercisable;
•
the exercise price of options;
•
the duration of the options; and
•
the number of shares of class A common stock subject to any
restricted stock or other stock-based awards and the terms and
conditions of such awards, including conditions for repurchase,
issue price and repurchase price.
If our board of directors delegates authority to an executive
officer, the executive officer has the power to make awards to
all of our employees, except to executive officers. Our board of
directors will fix the terms of the awards to be granted by such
executive officer, including the exercise price of such awards,
and the maximum number of shares subject to awards that such
executive officer may make.
If a merger or other reorganization event occurs, our board of
directors shall provide that all of our outstanding options are
to be assumed or substituted by the successor corporation. If
the merger or reorganization event also constitutes a change in
control event under our 2005 stock incentive plan, the assumed
or substituted options will become immediately exercisable in
full if on or prior to the 18-month anniversary of the
reorganization event an option holder’s employment with us
or our succeeding corporation is terminated by the option holder
for good reason or is terminated by us or the succeeding
corporation without cause, each as defined in our 2005 stock
incentive plan. In the event the succeeding corporation does not
agree to assume, or substitute for, outstanding options, then
our board of directors shall provide that all unexercised
options will become exercisable in full prior to the completion
of the event and that these options will terminate immediately
prior to the completion of the merger or other reorganization
event if not previously exercised. Our board of directors may
also provide for a cash out of the value of any outstanding
options. In addition, upon the occurrence of a change in control
event that does not also constitute a reorganization event under
our 2005 stock incentive plan, each option will continue to vest
according to its original vesting schedule, except that an
option will become immediately exercisable in full if on or
prior to the 18-month anniversary of the reorganization event an
option holder’s employment with us or our succeeding
corporation is terminated by the option holder for good reason
or is terminated by us or our succeeding corporation without
cause.
No award may be granted under the 2005 stock incentive plan
after ,
2015, but the vesting and effectiveness of awards granted before
that date may extend beyond that date. Our board of directors
may amend, suspend or terminate the 2005 stock incentive plan at
any time, except that stockholder approval will be required for
any revision that would materially increase the number of shares
reserved for issuance, expand the types of awards available
under the plan, materially modify plan eligibility requirements,
extend the term of the plan or materially modify the method of
determining the exercise price of options granted under the
plan, or otherwise as required to comply with applicable law or
stock market requirements.
401(k) Retirement Plan
We maintain a 401(k) retirement plan which is intended to be a
tax-qualified defined contribution plan under
Section 401(k) of the Internal Revenue Code. In general,
all of our employees are eligible to participate, subject to a
90-day waiting period. The 401(k) Plan includes a salary
deferral arrangement pursuant to which participants may elect to
reduce their current compensation by up to the statutorily
prescribed limit, equal to $14,000 in 2005, and have the amount
of the reduction contributed to the 401(k) Plan. We are
permitted to match employees’ 401(k) Plan contributions,
however, we do not do so.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since January 1, 2002, we have engaged in the following
transactions with our directors, executive officers and holders
of more than 5% of our voting securities, and affiliates of our
directors, executive officers and 5% stockholders:
Stock Issuances
In February 2002, we issued and sold to Mr. Cho
95,000 shares of our class B common stock upon
exercise of an incentive stock option. Mr. Cho paid the
exercise price for the shares through a combination of cash and
a promissory note payable to us secured by the underlying
shares. As of June 30, 2005, Mr. Cho had repaid the
note in full, including all interest.
In May 2002, we issued and sold an aggregate of
3,327,960 shares of our class B common stock for an
aggregate purchase price of $11.3 million to El.En. In
November 2003, we issued to El.En. an aggregate of
3,499 shares of our class B common stock for no
additional consideration as a final adjustment of the May 2002
stock purchase transaction.
From September through November 2004, we issued and sold an
aggregate of 744,577 shares of our class B common
stock to El.En. and individual investors, including three of our
executive officers. The following table sets forth the number of
shares of class B common stock issued to our directors,
executive officers and 5% stockholders from September through
November 2004. The shares issued to our executive officers were
in consideration of the performance of services and were not
issued for cash.
Issued in consideration of the performance of services. We
recorded compensation expense in the amount of $61,111 for the
shares issued to Mr. Davin, $43,132 for the shares issued
to Mr. Delaney and $61,111 for the shares issued to
Mr. Cho.
In April 2005, we issued and sold an aggregate of
495,000 shares of our class B common stock to
investors and employees, including four of our executive
officers. The following table sets forth the number of shares of
class B common stock sold to our directors, executive
officers and 5% stockholders in April 2005:
Since 2002, we have distributed products that are developed and
manufactured by El.En., which immediately prior to this offering
owned approximately 78% of our aggregate outstanding capital
stock. The following table sets forth our payments and
indebtedness to El.En. pursuant to these distribution
arrangements during the three most recent fiscal years and the
first six months of 2005:
Includes payments of trade payables and principal and interest
on indebtedness.
(2)
Our indebtedness to El.En. as of June 30, 2005 was $310,000
and is evidenced by a promissory note that is payable on demand.
Interest on the indebtedness evidenced by this promissory note
accrues at a rate of 5% per year.
For a more detailed discussion of our continuing distribution
arrangements with El.En., please see “Business —
El.En. Commercial Relationship.”
Other El.En. Arrangements
Prior to the closing of this offering, we and El.En. intend to
enter into an agreement providing that, to the extent El.En. is
required to make any indemnity payments to the underwriters
pursuant to the underwriting agreement relating to this
offering, and such indemnity payments relate to matters as to
which El.En., after reasonable inquiry, had no knowledge, we
will reimburse El.En. for such indemnity payments. This
agreement will not affect the respective liability of us and
El.En. to the underwriters pursuant to the underwriting
agreement. See “ Underwriting.”
Davin Consulting Arrangement with El.En.
Since September 2003, Mr. Davin has provided consulting
services to El.En. regarding laser industry marketing, for which
El.En. paid Mr. Davin $18,333 in 2003, $55,000 in 2004 and
$27,500 in the first six months of 2005.
Director Compensation
Please see “Management — Director
Compensation” for a discussion of options granted to our
non-employee directors.
Executive Compensation and Employment Agreements
Please see “Management — Executive
Compensation” and “— Stock Options” for
additional information on compensation of our executive
officers. Information regarding employment agreements with
several of our executive officers is set forth under
“Management — Employment Agreements.”
The following table sets forth information with respect to the
beneficial ownership of our common stock, as of June 30,2005, by:
•
each of our directors;
•
each of our named executive officers;
•
each person, or group of affiliated persons, who is known by us
to beneficially own more than 5% of our class A common
stock or our class B common stock;
•
all of our directors and executive officers as a group; and
•
El.En.
The column entitled “Shares of Common Stock Beneficially
Owned Prior to Offering” is based on no shares of our
class A common stock and 6,242,877 shares of our
class B common stock being outstanding as of June 30,2005. The column entitled “Shares of Common Stock
Beneficially Owned After Offering” is based
on shares
of our class A common stock
and shares
of our class B common stock to be outstanding after this
offering, including
the shares
of class A common stock that we are selling in this
offering and
the shares
of class A common stock that El.En. is selling in this
offering. No shares of class A common stock are
beneficially owned by any of the persons or entities in this
table, and no shares of class A common stock will be
beneficially owned by such persons immediately following the
offering.
For purposes of the table below, and in accordance with the
rules of the Securities and Exchange Commission, we deem shares
of class B common stock subject to options that are
currently exercisable or exercisable within 60 days of
June 30, 2005 to be outstanding and to be beneficially
owned by the person holding the options for the purpose of
computing the percentage ownership of that person but we do not
treat them as outstanding for the purpose of computing the
percentage ownership of any other person. Except as otherwise
noted, the persons or entities in this table have sole voting
and investing power with respect to all of the shares of common
stock beneficially owned by them, subject to community property
laws, where applicable. Except as otherwise set forth below, the
street address of the beneficial owner is c/o Cynosure,
Inc., 5 Carlisle Road, Westford, Massachusetts01886.
Percentage total voting power represents voting power with
respect to all shares of our class A and class B
common stock, as a single class. For a description of the voting
rights of our class A common stock and class B common
stock, see “Description of Capital Stock — Common
Stock” below.
(2)
Includes 40,741 shares of class B common stock
issuable upon exercise of stock options exercisable within
60 days of June 30, 2005.
(3)
Includes 10,000 shares of class B common stock
issuable upon exercise of stock options exercisable within
60 days of June 30, 2005.
(4)
Includes 28,754 shares of class B common stock
issuable upon exercise of stock options exercisable within
60 days of June 30, 2005.
(5)
Includes 10,000 shares of class B common stock
issuable upon exercise of stock options exercisable within
60 days of June 30, 2005.
(6)
The El.En. board of directors has voting and investment power
for the shares held by El.En. The El.En. board of directors
consists of nine persons, including Andrea Cangioli, Gabriele
Clementi and the spouse of Leonardo Masotti.
(7)
Includes 40,741 shares of class B common stock
issuable upon exercise of stock options exercisable within
60 days of June 30, 2005.
(8)
Includes 130,236 shares of class B common stock
issuable upon exercise of stock options exercisable within
60 days of June 30, 2005.
(9)
The address of El.En. is Via Baldanzee 17, Calezano, 50041,
Florence, Italy.
The following description of our capital stock and provisions of
our restated certificate of incorporation, which we refer to
below as our certificate of incorporation, and our amended and
restated bylaws, which we refer to below as our bylaws, are
summaries and are qualified by reference to the certificate of
incorporation and the bylaws that will be in effect upon
completion of this offering. Copies of these documents have been
filed with the Securities and Exchange Commission as exhibits to
our registration statement, of which this prospectus forms a
part. The descriptions of the common stock and preferred stock
reflect changes to our capital structure that will occur prior
to the closing of this offering.
Upon the completion of this offering, our authorized capital
stock will consist of 61,500,000 shares of class A
common stock, par value $0.001 per share,
8,500,000 shares of class B common stock, par value
$0.001 per share, and 5,000,000 shares of preferred
stock, par value $0.001 per share, all of which shares of
preferred stock will be undesignated.
As of June 30, 2005, we had issued and outstanding
6,242,877 shares of common stock, held by 29 stockholders
of record. As of June 30, 2005, we also had outstanding
options to purchase 1,862,642 shares of class B
common stock at a weighted average exercise price of
$3.31 per share.
Immediately prior to this offering, each outstanding share of
our common stock will automatically be converted into one share
of our class B common stock, and the only shares of our
class A common stock to be outstanding immediately
following this offering will be the shares being sold in this
offering. In addition, immediately prior to this offering, each
outstanding option to purchase shares of our common stock will
automatically be converted into an option to purchase an equal
number of shares of our class B common stock at the same
exercise price per share.
Common Stock
Voting Rights
The holders of class A common stock and class B common
stock have identical rights and will be entitled to one vote per
share with respect to each matter presented to our stockholders
on which the holders of common stock are entitled to vote,
except for the approval rights of the holders of the
class B common stock applicable to specified amendments to
our certificate of incorporation and amendments of our bylaws by
stockholders and except with respect to the election and removal
of directors.
Our certificate of incorporation provides that until the first
date on which El.En. beneficially owns less than 20% of the
aggregate number of shares of our class A common stock and
class B common stock outstanding or less than 50% of the
number of shares of our class B common stock outstanding,
which we refer to as the class B conversion date:
•
the number of authorized directors of our company will be
established exclusively by our board of directors;
•
the holders of class B common stock, voting separately as a
single class, will be entitled to elect the smallest number of
directors which shall constitute a majority of the authorized
number of directors; and
•
the holders of class A common stock and class B common
stock, voting together as a single class, will be entitled to
elect the remaining directors.
We refer to the directors elected by the holders of class B
common stock, voting as a separate class, as the class B
directors and to the directors elected by the holders of
class A common stock and class B common stock, voting
together as a single class, as the classified directors.
On the class B conversion date, all shares of our
class B common stock will automatically convert into
class A common stock and, beginning on such date:
•
the number of authorized directors of our company will be
established exclusively by our board of directors;
•
the term of each class B director shall end; and
•
the holders of class A common stock, which will be the only
class of our common stock outstanding, will be entitled to elect
all directors, and all directors shall be classified directors.
In general, each class B director will serve for a term
ending on the date of the first annual meeting following the
annual meeting at which the class B director was elected,
and each classified director will serve for a term ending on the
date of the third annual meeting following the annual meeting at
which the classified director was elected. The term of office of
each director can be earlier terminated upon his or her death,
resignation, removal or until his or her successor is elected
and qualified or, with respect to class B directors, the
expiration of his or her term as discussed above. Neither the
class A common stock nor the class B common stock will
have cumulative voting rights in the election of directors.
Conversion
Our class A common stock is not convertible into any other
shares of our capital stock.
Each share of class B common stock is convertible into one
share of class A common stock at any time at the option of
the holder. In addition, each share of class B common stock
shall convert automatically into one share of class A
common stock upon any transfer of such share of class B
common stock, whether or not for value. The death of any holder
of class B common stock who is a natural person will result
in the conversion of his or her shares of class B common
stock into class A common stock.
All shares of class B common stock will convert into shares
of class A common stock on a one-for-one basis upon the
earlier of the class B conversion date or the date the
holders of a majority of the shares of class B common stock
vote in favor of such conversion. Once converted into
class A common stock, the class B common stock shall
not be reissued. No class of common stock may be subdivided or
combined unless the other class of common stock concurrently is
subdivided or combined in the same proportion and in the same
manner.
Dividends
Subject to preferences that may apply to any shares of preferred
stock outstanding at the time, the holders of class A
common stock and class B common stock shall be entitled to
share equally, on a per share basis, in any dividends that our
board of directors may determine to issue from time to time. In
the event a dividend is paid in the form of shares of common
stock or rights to acquire shares of common stock, the holders
of class A common stock and the holders of class B
common stock shall receive class A common stock, or rights
to acquire class A common stock, as the case may be. In no
event will we declare or pay dividends in the form of
class B common stock except in connection with a stock
split or subdivision, in which case the class A common
stock and class B common stock will be proportionately
split or subdivided in the same manner.
Liquidation Rights
In the event of our liquidation or dissolution, the holders of
class A common stock and class B common stock shall be
entitled to share equally, on a per share basis, in all assets
remaining after the payment of all debts and other liabilities
and subject to the prior rights of any outstanding preferred
stock.
Approval Rights of Holders of Class A Common
Stock
In addition to any other vote required by law, until the
class B conversion date, the prior affirmative vote of
holders of a majority of the shares of class A common stock
that are not beneficially owned by any holder of 50% or more of
the shares of class B common stock, voting as a separate
class, is required to alter, amend, terminate or repeal any
provisions of our certificate of incorporation relating to the
powers, preferences, rights or other terms of the class A
common stock or the class B common stock in a manner that
adversely affects the class A common stock but does not
similarly so affect the class B common stock or that
affects the class A common stock differently than the
effect on the class B common stock. In addition, until the
class B conversion date, the prior affirmative vote of
holders of a majority of the shares of class A common
stock, voting separately as a class, is required to approve any
merger or consolidation in which the class A common stock
and the class B common stock are not exchanged for or
converted into the same kind of amount of securities, cash or
other property as the other.
Approval Rights of Holders of Class B Common
Stock
In addition to any other vote required by law, until the
class B conversion date, the prior affirmative vote or
written consent of holders of a majority of the class B
common stock is required:
•
to approve amendments to our bylaws adopted by our stockholders;
•
to alter, amend, terminate or repeal any provisions of our
certificate of incorporation relating to the rights of holders
of common stock, the powers, election and classification of the
board of directors, corporate opportunities and the rights of
holders of class A common stock and class B common
stock to elect and remove directors, act by written consent and
call special meetings of stockholders; and
•
to approve any merger or consolidation in which the class A
common stock and the class B common stock are not exchanged
for or converted into the same kind and amount of securities,
cash or other property as the other.
Because El.En. is the holder of a majority of the shares of our
class B common stock, and because all shares of our
class B common stock will convert to shares of our
class A common stock if El.En. beneficially owns less than
50% of the outstanding shares of our class B common stock,
El.En.’s approval will be required for any of the actions
described above.
Other Rights
Except as described above, neither our class A common stock
nor our class B common stock will have any preemptive,
subscription, redemption or conversion rights. The outstanding
shares of our class B common stock are, and the shares of
class A common stock being offered in this offering will be
when issued and paid for, validly issued, fully paid and
non-assessable. The rights, preferences and privileges of
holders of our class A common stock and class B common
stock are subject to and may be adversely affected by, the
rights of holders of shares of any series of preferred stock
that we may designate and issue in the future.
Preferred Stock
Under the terms of our certificate of incorporation, our board
of directors is authorized to issue shares of preferred stock in
one or more series without stockholder approval. Our board of
directors has the discretion to determine the rights,
preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, of each series of
preferred stock.
Authorizing our board of directors to issue preferred stock and
determine its rights and preferences has the effect of
eliminating delays associated with a stockholder vote on
specific issuances. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions,
future financings and other corporate purposes, could have the
effect of making it more difficult for a third party to acquire,
or
could discourage a third party from seeking to acquire, a
majority of our outstanding voting stock. Upon completion of
this offering, there will be no shares of preferred stock
outstanding, and we have no present plans to issue any shares of
preferred stock.
Anti-Takeover Effects of Delaware Law and Our Certificate of
Incorporation and Bylaws
Delaware law, our certificate of incorporation and our bylaws
contain provisions that could have the effect of delaying,
deferring or discouraging another party from acquiring control
of us. In particular, our dual class common stock structure will
give holders of our class B common stock the right to elect
a majority of the members of our board of directors. These
provisions, which are summarized below, are expected to
discourage coercive takeover practices and inadequate takeover
bids. These provisions are also designed to encourage persons
seeking to acquire control of us to first negotiate with our
board of directors.
Dual Class Structure; Election of Directors
As discussed above, until the class B conversion date,
holders of our class B common stock will be entitled to
elect the class B directors, who will comprise a majority
of our board of directors. In addition, holders of class B
common stock will vote with holders of class A common stock
for the election of the remaining directors. Immediately prior
to this offering, El.En. held approximately 78% of our
outstanding common stock. After this offering, El.En. will
own %
of our outstanding class B common stock, which will
comprise %
of our aggregate outstanding common stock,
or %
of our aggregate outstanding common stock if the underwriters
exercise their over-allotment right in full. Because of our dual
class structure, El.En. will continue to be able to control our
board of directors even if it owns less than 50% of the shares
our of outstanding common stock. This control could discourage
others from initiating a potential merger, takeover or other
change of control transaction that other stockholders may view
as beneficial.
Staggered Board; Removal of Directors
Our certificate of incorporation and our bylaws divide the
classified directors into three classes with staggered
three-year terms. In addition, a classified director may be
removed only for cause and only by the affirmative vote of the
holders of at least 75% of the voting power of our outstanding
class A common stock and class B common stock, voting
together as a single class. Class B directors will be
elected annually to our board of directors for one-year terms. A
class B director may be removed from office at any time,
without cause, by the affirmative vote of the holders of the
class B common stock, voting as a separate class.
Until the class B conversion date, vacancies among the
class B directors may be filled only by the vote of a
majority of the class B directors remaining in office or,
if there are none, by the holders of the class B common
stock. Vacancies among the classified directors may be filled
only by the vote of a majority of the classified directors or,
if there are none, by the holders of our capital stock, voting
together as a single class.
The classification of our board of directors and the limitations
on the removal of directors and filling of vacancies could make
it more difficult for a third party to acquire, or discourage a
third party from seeking to acquire, control of our company.
Stockholder Action by Written Consent; Special
Meetings
Our certificate of incorporation provides that, except for
actions taken by written consent of the holders of the
class B common stock with respect to matters subject to the
approval only of the holders of the class B common stock,
any action required or permitted to be taken by our stockholders
must be effected at a duly called annual or special meeting of
such holders and may not be effected by any consent in writing
by such holders. Our certificate of incorporation and our bylaws
also provide that, except as
otherwise required by law, special meetings of our stockholders
can only be called by our board of directors.
Advance Notice Requirements
Except with respect to candidates nominated for election as
class B directors, our bylaws establish an advance notice
procedure for stockholder proposals to be brought before an
annual meeting of stockholders, including proposed nominations
of persons for election to the board of directors. Stockholders
at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting
by or at the direction of the board of directors or by a
stockholder of record on the record date for the meeting, who is
entitled to vote at the meeting and who has delivered timely
written notice in proper form to our secretary of the
stockholder’s intention to bring such business before the
meeting. These provisions could have the effect of delaying
until the next stockholder meeting stockholder actions that are
favored by the holders of a majority of our outstanding voting
securities.
Delaware Business Combination Statute
We are subject to Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203
prevents a publicly held Delaware corporation from engaging in a
“business combination” with any “interested
stockholder” for three years following the date that the
person became an interested stockholder, unless the interested
stockholder attained such status with the approval of our board
of directors or unless the business combination is approved in a
prescribed manner. A “business combination” includes,
among other things, a merger or consolidation involving us and
the “interested stockholder” and the sale of more than
10% of our assets. In general, an “interested
stockholder” is any entity or person beneficially owning
15% or more of our outstanding voting stock and any entity or
person affiliated with or controlling or controlled by such
entity or person. The restrictions contained in Section 203
are not applicable to any of our existing stockholders.
Super-Majority Voting
The General Corporation Law of Delaware provides generally that
the affirmative vote of a majority of the shares entitled to
vote on any matter is required to amend a corporation’s
certificate of incorporation or bylaws, unless a
corporation’s certificate of incorporation or bylaws, as
the case may be, requires a greater percentage. Our bylaws may
be amended or repealed by a majority vote of our board of
directors, or the affirmative vote of the holders of at least
75% of the voting power of our capital stock issued and
outstanding and entitled to vote on the matter and, until the
class B conversion date, the holders of a majority of
shares of class B common stock, voting separately as a
class. In addition, the affirmative vote of the holders of at
least 75% of voting power of our capital stock issued and
outstanding and entitled to vote on the matter, voting together
as a single class, and, until the class B conversion date,
the approval of holders of a majority of the outstanding shares
of class B common stock, voting separately as a class, are
required to amend or repeal or to adopt any provisions
inconsistent with any of the provisions of our certificate of
incorporation described in this section entitled
“— Anti-Takeover Effects of Delaware Law and Our
Certificate of Incorporation and Bylaws.”
In order to address potential conflicts of interest between us
and El.En., upon completion of this offering, our certificate of
incorporation will contain provisions relating to the conduct of
our affairs as they may involve El.En. and corporations and
other entities controlled by El.En. other than us, which we
refer to collectively as El.En. affiliated companies, and
El.En.’s officers and directors who serve as our directors.
These provisions recognize that we and El.En. affiliated
companies engage and may continue to engage in the same or
similar business activities and lines of business, have an
interest in the same areas of corporate opportunities and will
continue to have contractual and business relations with each
other.
Our certificate of incorporation will provide that, subject to
any written agreement to the contrary, El.En. affiliated
companies will have no duty to refrain from engaging in the same
or similar business activities or lines of business as us. Our
certificate of incorporation also will provide that, except for
a corporate opportunity that is expressly offered to a director
or officer of an El.En. affiliated company in writing solely in,
and as a direct result of, his or her capacity as our director,
we renounce our interest in any potential transaction or matter
which may be a corporate opportunity for both us and El.En.
affiliated companies. El.En. will have no duty to communicate or
offer such corporate opportunity to us and will not be liable to
us or our stockholders for breach of any fiduciary duty as our
stockholder by reason of the fact that El.En. pursues or
acquires the corporate opportunity for itself, directs that
corporate opportunity to another person or does not communicate
that corporate opportunity to us. In our certificate of
incorporation, we will also renounce our interest in any
corporate opportunity that we are not financially able or
contractually permitted or legally able to undertake or that is,
from its nature, not in our line of business or is of no
practical advantage to us or is one in which we have no interest
or reasonably expectancy.
The provisions of our certificate of incorporation related to
corporate opportunities will terminate and expire on the
class B conversion date. In addition, the affirmative vote
of the holders of at least a majority of the voting power of our
capital stock issued and outstanding and entitled to vote on the
matter, voting together as a single class, and, until the
class B conversion date, the approval of holders of a
majority of the outstanding shares of class B common stock,
voting separately as a class, are required to amend or repeal or
to adopt any provisions inconsistent with the provisions of our
certificate of incorporation related to corporate opportunities.
By becoming a stockholder in our company, you will be deemed to
have notice of and have consented to the provisions of our
certificate of incorporation related to corporate opportunities
that are described above.
Limitation of Liability and Indemnification of Officers and
Directors
Our certificate of incorporation that will be in effect upon the
completion of this offering limits the personal liability of
directors for breach of fiduciary duty to the maximum extent
permitted by the Delaware General Corporation Law. Our
certificate of incorporation provides that no director will have
personal liability to us or to our stockholders for monetary
damages for breach of fiduciary duty or other duty as a
director. However, these provisions do not eliminate or limit
the liability of any of our directors:
•
for any breach of their duty of loyalty to us or our
stockholders;
•
for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
•
for voting or assenting to unlawful payments of dividends or
other distributions; or
•
for any transaction from which the director derived an improper
personal benefit.
Any amendment to or repeal of these provisions will not
eliminate or reduce the effect of these provisions in respect of
any act or failure to act, or any cause of action, suit or claim
that would accrue or arise prior to any amendment or repeal or
adoption of an inconsistent provision. If the Delaware General
Corporation Law is amended to provide for further limitations on
the personal liability of directors of corporations, then the
personal liability of our directors will be further limited to
the greatest extent permitted by the Delaware General
Corporation Law.
In addition, our certificate of incorporation provides that we
must indemnify our directors and officers and we must advance
expenses, including attorneys’ fees, to our directors and
officers in connection with legal proceedings, subject to
limited exceptions.
The authorized but unissued shares of class A common stock
and preferred stock are available for future issuance without
stockholder approval, subject to any limitations imposed by the
listing standards of The Nasdaq National Market. These
additional shares may be used for a variety of corporate finance
transactions, acquisitions and employee benefit plans. The
existence of authorized but unissued and unreserved common stock
and preferred stock could make more difficult or discourage an
attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
Transfer Agent and Registrar
The transfer agent and registrar for our class A common
stock and class B common stock is American Stock
Transfer & Trust Company.
Nasdaq National Market
We have applied for the quotation of our class A common
stock on The Nasdaq National Market under the symbol
“CYNO.” Our class B common stock will not be
listed on any stock market or exchange.
Prior to this offering, there has been no market for our
class A common stock, and a liquid trading market for our
class A common stock may not develop or be sustained after
this offering. Future sales of substantial amounts of
class A common stock, including shares issued upon exercise
of outstanding options or in the public market after this
offering, or the anticipation of those sales, could adversely
affect market prices prevailing from time to time and could
impair our ability to raise capital through sales of our equity
securities. We have applied for the quotation of our
class A common stock on The Nasdaq National Market under
the symbol “CYNO.” Our class B common stock will
not be listed on any stock market or exchange. Due, in part, to
the mandatory conversion features of our class B common
stock, we do not anticipate that there will ever be a trading
market for our class B common stock.
Upon the completion of this offering, we will have
outstanding shares
of class A common stock
and shares
of class B common stock. All the shares of class A
common stock sold in this offering will be freely tradable
without restriction or further registration under the Securities
Act, except for any shares purchased by our
“affiliates,” as that term is defined in Rule 144
under the Securities Act. The shares of our class B common
stock are “restricted securities” under Rule 144.
Substantially all of these restricted securities will be subject
to the lock-up agreements described below.
After the expiration of the lock-up agreements, these restricted
securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under
Rule 144 or 701 under the Securities Act. Any shares of
class B common stock, whether sold under Rule 144,
Rule 701, pursuant to a registration statement or
otherwise, will automatically convert into shares of
class A common stock upon transfer.
Rule 144
In general and subject to the lock-up agreements described
below, under Rule 144, beginning 90 days after the
date of this prospectus, a person who has beneficially owned
shares of our class A common stock or class B common
stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed:
•
for sales of class B common stock, 1% of the number of
shares of our class B common stock then outstanding, which
will equal
approximately shares
immediately after this offering; and
•
for sales of class A common stock that has been converted
from class B common stock, the greater of:
•
1% of the number of shares of our class A common stock then
outstanding, which will equal
approximately shares
immediately after this offering; and
•
the average weekly trading volume in our class A common
stock on The Nasdaq National Market during the four calendar
weeks preceding the sale.
Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and to the availability of
current public information about us. Upon expiration of the
lock-up agreements described
below, shares
of our class B common stock will be eligible for sale under
Rule 144, excluding shares eligible for resale under
Rule 144(k) described below. We anticipate that our
existing stockholders may convert their shares to class A
common stock prior to selling them as only our class A
common stock will be listed on The Nasdaq National Market. We
cannot estimate the number of shares of class A common
stock or class B commons stock that our existing
stockholders will elect to sell under Rule 144.
Rule 144(k)
Subject to the lock-up agreements described below, shares of our
class B common stock eligible for sale under
Rule 144(k) may be sold immediately upon the completion of
this offering. In general, under Rule 144(k), a person may
sell shares of class B common stock acquired from us
immediately upon the
completion of this offering, without regard to manner of sale,
the availability of public information about us or volume, if:
•
the person is not our affiliate and has not been our affiliate
at any time during the three months preceding the sale; and
•
the person has beneficially owned the shares proposed to be sold
for at least two years, including the holding period of any
prior owner other than an affiliate.
Upon the expiration of the lock-up agreements described below,
approximately shares
of class B common stock will be eligible for sale under
Rule 144(k).
Rule 701
In general, under Rule 701 of the Securities Act, any of
our employees, consultants or advisors who purchased shares from
us in connection with a qualified compensatory stock plan or
other written agreement is eligible to resell those shares
90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with the
various restrictions, including the holding period, contained in
Rule 144. Subject to the lock-up agreements described
below,
approximately shares
of our class B common stock will be eligible for sale in
accordance with Rule 701.
Lock-up Agreements
The holders of substantially all of our currently outstanding
stock other than El.En. have agreed that, without the prior
written consent of Citigroup Global Markets Inc., they will not,
during the period ending 180 days after the date of this
prospectus, subject to exceptions specified in the lock-up
agreements, offer, sell, contract to sell or otherwise dispose
of, directly or indirectly, or hedge our class A common
stock or securities convertible into or exchangeable for or
exercisable for our class A common stock (including our
class B common stock), sell any option or contract to
purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise dispose
of, directly or indirectly, any shares of class A common
stock or any securities convertible into or exercisable for
class A common stock (including our class B common
stock).
In addition, El.En. has agreed with the underwriters for this
offering that, without the prior written consent of Citigroup
Global Markets Inc., it will not offer, sell, contract to sell
or otherwise dispose of, directly or indirectly, or hedge, sell
options or contracts to purchase, purchase options or contracts
to sell, grant options, rights or warrants to purchase, lend or
otherwise dispose of, directly or indirectly any shares of
class A common stock or any securities convertible into or
exercisable for class A common stock (including our
class B common stock) for a period of 24 months after
the date of this prospectus, other than:
•
up to 33% of the shares of our class A common stock or any
securities convertible into or exercisable for class A
common stock (including our class B common stock) that it
beneficially owned on the date of this prospectus during the
period between 12 and 18 months after the date of this
prospectus; and
•
up to an additional 33% of the shares of our class A common
stock or any securities convertible into or exercisable for
class A common stock (including our class B common
stock) that it beneficially owned on the date of this prospectus
during the period between 18 and 24 months after the date
of this prospectus.
Stock Options
As of June 30, 2005, we had outstanding options to
purchase 1,862,642 shares of class B common
stock, of which options to purchase 333,807 shares of
class B common stock were vested as of June 30, 2005.
Following this offering, we intend to file registration
statements on Form S-8 under the Securities Act to register
all of the shares subject to outstanding options and options and
other awards issuable pursuant to our 1992 stock option plan,
2004 stock option plan and 2005 stock incentive plan. Please see
“Management — Stock Option and Other Compensation
Plans” for additional information regarding these plans.
The following is a general discussion of the material
U.S. federal income and estate tax consequences of the
ownership and disposition of our class A common stock by a
non-U.S. holder that acquires our class A common stock
pursuant to this offering. The discussion is based on provisions
of the Internal Revenue Code of 1986, as amended, which we refer
to as the Code, applicable U.S. Treasury regulations
promulgated thereunder and administrative and judicial
interpretations, all as in effect on the date of this
prospectus, and all of which are subject to change, possibly on
a retroactive basis. The discussion is limited to
non-U.S. holders that hold our class A common stock as
a “capital asset” within the meaning of
Section 1221 of the Code — generally, property
held for investment. As used in this discussion, the term
“non-U.S. holder” means a beneficial owner of our
class A common stock that is not, for U.S. federal
income tax purposes:
•
an individual who is a citizen or resident of the United States;
•
a corporation or partnership, including any entity treated as a
corporation or partnership for U.S. federal income tax
purposes, created or organized in or under the laws of the
United States or any state of the United States or the District
of Columbia, other than a partnership treated as foreign under
U.S. Treasury regulations;
•
an estate the income of which is includible in gross income for
U.S. federal income tax purposes regardless of its
source; or
•
a trust (1) if a U.S. court is able to exercise
primary supervision over the administration of the trust and one
or more U.S. persons have authority to control all
substantial decisions of the trust, or (2) that has a valid
election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
This discussion does not consider:
•
U.S. federal gift tax consequences, or U.S. state or
local or non-U.S. tax consequences;
•
specific facts and circumstances that may be relevant to a
particular non-U.S. holder’s tax position, including,
if the non-U.S. holder is a partnership, that the
U.S. tax consequences of holding and disposing of our
class A common stock may be affected by certain
determinations made at the partner level;
•
the tax consequences for partnerships or persons who hold their
interests through a partnership or other entity classified as a
partnership for U.S. federal income tax purposes;
•
the tax consequences for the stockholders or beneficiaries of a
non-U.S. holder;
•
all of the U.S. federal tax considerations that may be
relevant to a non-U.S. holder in light of its particular
circumstances or to non-U.S. holders that may be subject to
special treatment under U.S. federal tax laws, such as
financial institutions, insurance companies, tax-exempt
organizations, certain trusts, hybrid entities, certain former
citizens or residents of the United States, holders subject to
U.S. federal alternative minimum tax, broker-dealers,
traders in securities, pension plans and regulated investment
companies; or
•
special tax rules that may apply to a non-U.S. holder that
holds our class A common stock as part of a
“straddle,”“hedge,”“conversion
transaction,”“synthetic security,” or other
integrated investment.
Prospective investors are urged to consult their own tax
advisors regarding the U.S. federal, state, local, and
non-U.S. income and other tax considerations with respect
to owning and disposing of shares of our class A common
stock.
Dividends
As previously discussed, we do not anticipate paying dividends
on our class A common stock in the foreseeable future. See
“Dividend Policy.” If we make distributions on our
class A common stock, those payments will constitute
dividends for U.S. federal income tax purposes to the
extent paid from our current or accumulated earnings and
profits, as determined under U.S. federal income tax
principles. To the extent those distributions exceed our current
and accumulated earnings and profits, the excess will constitute
a return of capital and first reduce the
non-U.S. holder’s basis, but not below zero, and then
will be treated as gain from the sale of stock.
We will have to withhold U.S. federal income tax at a rate
of 30%, or a lower rate under an applicable income tax treaty,
from the gross amount of the dividends paid to a
non-U.S. holder, unless the dividend is effectively
connected with the conduct of a trade or business of the
non-U.S. holder within the United States or, if an income
tax treaty applies, attributable to a permanent establishment or
fixed base of the non-U.S. holder within the United States.
Under applicable U.S. Treasury regulations, a
non-U.S. holder, including, in certain cases of
non-U.S. holders that are entities, the owner or owners of
such entities, will be required to satisfy certain certification
requirements in order to claim a reduced rate of withholding
pursuant to an applicable income tax treaty.
Non-U.S. holders should consult their tax advisors
regarding their entitlement to benefits under a relevant income
tax treaty.
Dividends that are effectively connected with a
non-U.S. holder’s conduct of a trade or business in
the United States and, if an income tax treaty applies,
attributable to a permanent establishment or fixed base of the
non-U.S. holder within the United States, are taxed on a
net income basis at the regular graduated U.S. federal
income tax rates in the same manner as if the
non-U.S. holder were a resident of the United States. In
such cases, we will not have to withhold U.S. federal
income tax if the non-U.S. holder complies with applicable
certification and disclosure requirements. In addition, a
“branch profits tax” may be imposed at a 30% rate, or
a lower rate under an applicable income tax treaty, on dividends
received by a foreign corporation that are effectively connected
with the conduct of a trade or business in the United States.
In order to claim the benefit of an income tax treaty or to
claim exemption from withholding because the income is
effectively connected with the conduct of a trade or business in
the United States, the non-U.S. holder must provide a
properly executed IRS Form W-8BEN, for treaty benefits, or
W-8ECI, for effectively connected income, respectively, or such
successor forms as the IRS designates prior to the payment of
dividends. These forms must be periodically updated.
A non-U.S. holder that is eligible for a reduced rate of
U.S. federal withholding tax under an income tax treaty may
obtain a refund of any excess amounts withheld by filing an
appropriate claim for a refund together with the required
information with the IRS.
Gain on Disposition of Class A Common Stock
A non-U.S. holder generally will not be subject to
U.S. federal income tax or withholding tax with respect to
gain realized on a sale or other disposition of our class A
common stock unless one of the following applies:
•
the gain is effectively connected with the
non-U.S. holder’s conduct of a trade or business in
the United States and, if an income tax treaty applies, is
attributable to a permanent establishment or fixed base
maintained by the non-U.S. holder in the United States; in
these cases, the non-U.S. holder will generally be taxed on
its net gain derived from the disposition in the manner and at
the regular graduated U.S. federal income tax rates
applicable to United States persons, as
defined in the Code, and, if the non-U.S. holder is a
foreign corporation, the “branch profits tax”
described above may also apply;
•
the non-U.S. holder is a nonresident alien individual who
is present in the United States for 183 days or more in the
taxable year of the disposition and meets certain other
requirements; in this case, the non-U.S. holder will be
subject to a 30% tax on the gain derived from the disposition
which may be offset by U.S. source capital losses of the
non-U.S. holder, if any; or
•
our class A common stock constitutes a United States real
property interest by reason of our status as a “United
States real property holding corporation,” or a USRPHC, for
U.S. federal income tax purposes at any time during the
shorter of the 5-year period ending on the date of such
disposition or the period that the non-U.S. holder held our
class A common stock. We believe that we are not currently
and will not become a USRPHC. However, because the determination
of whether we are a USRPHC depends on the fair market value of
our United States real property interests relative to the fair
market value of our other business assets, there can be no
assurance that we will not become a USRPHC in the future. As
long as our class A common stock is “regularly traded
on an established securities market” within the meaning of
Section 897(c)(3) of the Code, however, such class A
common stock will be treated as United States real property
interests only if a non-U.S. holder owned directly or
indirectly more than 5 percent of such regularly traded
class A common stock during the shorter of the 5-year
period ending on the date of disposition or the period that the
non-U.S. holder held our class A common stock and we
were a USRPHC during such period. If we are or were to become a
USRPHC and a non-U.S. holder owned directly or indirectly
more than 5 percent of our class A common stock during
the period described above or our class A common stock is
not “regularly traded on an established securities
market,” then a non-U.S. holder would generally be
subject to U.S. federal income tax on its net gain derived
from the disposition of our class A common stock at the
regular graduated U.S. federal income tax rates applicable
to United States persons, as defined in the Code.
Federal Estate Tax
Class A common stock owned or treated as owned at the time
of death by an individual who is not a citizen or resident of
the United States, as specifically defined for U.S. federal
estate tax purposes, will be included in the individual’s
gross estate for U.S. federal estate tax purposes, unless
an applicable estate tax or other treaty provides otherwise and,
therefore, may be subject to U.S. federal estate tax.
Information Reporting and Backup Withholding Tax
We must report annually to the IRS and to each
non-U.S. holder the gross amount of the distributions paid
to that holder and the tax withheld from those distributions.
These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable income
tax treaty. Copies of the information returns reporting those
distributions and withholding may also be made available under
the provisions of an applicable income tax treaty or agreement
to the tax authorities in the country in which the
non-U.S. holder is a resident or incorporated.
Under some circumstances, U.S. Treasury regulations require
backup withholding and additional information reporting on
reportable payments on class A common stock. The gross
amount of dividends paid to a non-U.S. holder that fails to
certify its non-U.S. holder status in accordance with
applicable U.S. Treasury regulations generally will be
reduced by backup withholding at the applicable rate, currently
28%. Dividends paid to non-U.S. holders subject to the
U.S. withholding tax at a rate of 30%, described above in
“Dividends,” generally will be exempt from
U.S. backup withholding.
The payment of the proceeds of the sale or other disposition of
class A common stock by a non-U.S. holder effected by
or through the U.S. office of any broker, U.S. or
non-U.S., generally will be reported to the IRS and reduced by
backup withholding, unless the non-U.S. holder either
certifies its status as a non-U.S. holder under penalties
of perjury or otherwise establishes an exemption. The payment
of the proceeds from the disposition of class A common
stock by a non-U.S. holder effected by or through a
non-U.S. office of a non-U.S. broker generally will
not be reduced by backup withholding or reported to the IRS,
unless the non-U.S. broker has certain enumerated
connections with the United States. In general, the payment of
proceeds from the disposition of class A common stock
effected by or through a non-U.S. office of a broker that
is a U.S. person or has certain enumerated connections with
the United States will be reported to the IRS and may be reduced
by backup withholding unless the broker receives a statement
from the non-U.S. holder that certifies its status as a
non-U.S. holder under penalties of perjury or the broker
has documentary evidence in its files that the holder is a
non-U.S. holder.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from a payment to a
non-U.S. holder can be refunded or credited against the
non-U.S. holder’s U.S. federal income tax
liability, if any, provided that the required information is
furnished to the IRS in a timely manner. These backup
withholding and information reporting rules are complex and
non-U.S. holders are urged to consult their own tax
advisors regarding the application of these rules to them.
The foregoing discussion of U.S. federal income and
estate tax considerations is not tax advice and is not based on
an opinion of counsel. Accordingly, each prospective
non-U.S. holder of our class A common stock should
consult that holder’s own tax advisor with respect to the
federal, state, local and non-U.S. tax consequences of the
ownership and disposition of our class A common stock.
Citigroup Global Markets Inc. is acting as bookrunning manager
of this offering, and together with UBS Securities LLC,
Jefferies & Company, Inc., and Needham &
Company, LLC, are acting as representatives of the underwriters
named below. Subject to the terms and conditions stated in the
underwriting agreement dated the date of this prospectus, each
underwriter named below has agreed to purchase, and we and
El.En. have agreed to sell to that underwriter, the number of
shares of class A common stock set forth opposite the
underwriter’s name.
Number of
Underwriters
Class A Shares
Citigroup Global Markets Inc.
UBS Securities LLC
Jefferies & Company, Inc.
Needham & Company, LLC
Total
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering
are subject to approval of legal matters by counsel and to other
conditions. The underwriters are obligated to purchase all the
shares, other than those covered by the over-allotment option
described below, if they purchase any of the shares.
The underwriters propose to offer some of the shares directly to
the public at the public offering price set forth on the cover
page of this prospectus and some of the shares to dealers at the
public offering price less a concession not to exceed
$ per
share. The underwriters may allow, and dealers may reallow, a
concession not to exceed
$ per
share on sales to other dealers. If all of the shares are not
sold at the initial offering price, the representatives may
change the public offering price and the other selling terms.
The representatives have advised us and El.En. that the
underwriters do not intend sales to discretionary accounts to
exceed five percent of the total number of shares of our
class A common stock offered by them.
We have granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to
an aggregate
of additional
shares of class A common stock at the public offering price
less the underwriting discount. The underwriters may exercise
the option solely for the purpose of covering over-allotments,
if any, in connection with this offering. To the extent the
option is exercised, each underwriter must purchase a number of
additional shares approximately proportionate to that
underwriter’s initial purchase commitment.
We, our officers and directors and holders of substantially all
of our shares and options to purchase our shares other than
El.En., have agreed that, for a period of 180 days from the
date of this prospectus, we and they will not, without the prior
written consent of Citigroup, dispose of or hedge any shares of
our common stock or any securities convertible into or
exchangeable for our common stock, subject to customary
exceptions. In addition, El.En. has agreed that, without the
prior written consent of Citigroup and subject to specified
exceptions, it will not dispose of or hedge any shares of our
common stock or any securities convertible into or exercisable
for our common stock for a period of 24 months after the
date of this prospectus, other than:
•
up to 33% of the shares of our common stock or any securities
convertible into or exercisable for our common stock that it
beneficially owned on the date of this prospectus during the
period between 12 months and 18 months after the date of
this prospectus; and
•
up to an additional 33% of the shares of our common stock or any
securities convertible into or exercisable for our common stock
that it beneficially owned on the date of this prospectus during
the period between 18 months and 24 months after the date of
this prospectus.
Citigroup in its sole discretion may release any of the
securities subject to these lock-up agreements at any time
without notice.
Prior to this offering, there has been no public market for our
class A common stock. Consequently, the initial public
offering price for the shares was determined by negotiations
among us, El.En. and the representatives. Among the factors
considered in determining the initial public offering price were
our record of operations, our current financial condition, our
future prospects, our markets, the economic conditions in and
future prospects for the industry in which we compete, our
management, and currently prevailing general conditions in the
equity securities markets, including current market valuations
of publicly traded companies considered comparable to our
company. We cannot assure you, however, that the prices at which
the shares will sell in the public market after this offering
will not be lower than the initial public offering price or that
an active trading market in our class A common stock will
develop and continue after this offering.
We have applied to have our class A common stock included
for quotation on The Nasdaq National Market under the symbol
“CYNO.”
The following table shows the underwriting discounts and
commissions that we and El.En. are to pay to the underwriters in
connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters’
option to purchase additional shares of class A common
stock.
Paid by Cynosure
Paid by El.En.
No Exercise
Full Exercise
No Exercise
Full Exercise
Per share
$
$
$
$
Total
$
$
$
$
In connection with the offering, Citigroup on behalf of the
underwriters, may purchase and sell shares of class A
common stock in the open market. These transactions may include
short sales, syndicate covering transactions and stabilizing
transactions. Short sales involve syndicate sales of
class A common stock in excess of the number of shares to
be purchased by the underwriters in the offering, which creates
a syndicate short position. “Covered” short sales are
sales of shares made in an amount up to the number of shares
represented by the underwriters’ over-allotment option. In
determining the source of shares to close out the covered
syndicate short position, the underwriters will consider, among
other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase
shares through the over-allotment option. Transactions to close
out the covered syndicate short involve either purchases of the
class A common stock in the open market after the
distribution has been completed or the exercise of the
over-allotment option. The underwriters may also make
“naked” short sales of shares in excess of the
over-allotment option. The underwriters must close out any naked
short position by purchasing shares of class A common stock
in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be
downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase
in the offering. Stabilizing transactions consist of bids for or
purchases of shares in the open market while the offering is in
progress.
The underwriters also may impose a penalty bid. Penalty bids
permit the underwriters to reclaim a selling concession from a
syndicate member when Citigroup repurchases shares originally
sold by that syndicate member in order to cover syndicate short
positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or
retarding a decline in the market price of the class A
common stock. They may also cause the price of the class A
common stock to be higher than the price that would otherwise
exist in the open market in the absence of these transactions.
The underwriters may conduct these transactions on The Nasdaq
National Market or in the over-the-counter market, or otherwise.
If the underwriters commence any of these transactions, they may
discontinue them at any time.
We estimate that the total expenses of this offering, paid and
payable by us, not including the underwriting discounts and
commissions, will be
$ .
Other than in connection with this offering, the underwriters
have not performed investment banking and advisory services for
us.
A prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters. The
representatives may agree to allocate a number of shares to
underwriters for sale to their online brokerage account holders.
The representatives will allocate shares to underwriters that
may make Internet distributions on the same basis as other
allocations. In addition, shares may be sold by the underwriters
to securities dealers who resell shares to online brokerage
account holders.
We and El.En. have agreed to indemnify the underwriters and
their controlling persons against certain liabilities, including
liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make because of any
of those liabilities.
The validity of the class A common stock offered by this
prospectus will be passed upon by Wilmer Cutler Pickering Hale
and Dorr LLP, Boston, Massachusetts. Dewey Ballantine LLP, New
York, New York, is counsel for the underwriters in connection
with this offering.
EXPERTS
Ernst & Young LLP, independent registered public
accounting firm, has audited our consolidated financial
statements at December 31, 2003 and 2004, and for each of
the three years in the period ended December 31, 2004, as
set forth in their report. We have included our financial
statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP’s
report, given on their authority as experts in accounting and
auditing.
C:
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act
of 1933 with respect to the shares of class A common stock
we are offering to sell. This prospectus, which constitutes part
of the registration statement, does not include all of the
information contained in the registration statement and the
exhibits, schedules and amendments to the registration
statement. For further information with respect to us and our
class A common stock, we refer you to the registration
statement and to the exhibits and schedules to the registration
statement. Statements contained in this prospectus about the
contents of any contract or any other document are not
necessarily complete, and, and in each instance, we refer you to
the copy of the contract or other documents filed as an exhibit
to the registration statement. Each of theses statements is
qualified in all respects by this reference.
You may read and copy the registration statement of which this
prospectus is a part at the Securities and Exchange
Commission’s public reference room, which is located at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You can request copies of the
registration statement by writing to the Securities and Exchange
Commission and paying a fee for the copying cost. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for
more information about the operation of the Securities and
Exchange Commission’s public reference room. In addition,
the Securities and Exchange Commission maintains an Internet
website, which is located at http://www.sec.gov, that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities
and Exchange Commission. You may access the registration
statement of which this prospectus is a part at the Securities
and Exchange Commission’s Internet website. Upon completion
of this offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934,
and we will file reports, proxy statements and other information
with the Securities and Exchange Commission.
This prospectus includes statistical data that were obtained
from industry publications. These industry publications
generally indicate that the authors of these publications have
obtained information from sources believed to be reliable but do
no guarantee the accuracy and completeness of their information.
While we believe these industry publications to be reliable, we
have not independently verified their data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cynosure, Inc.
We have audited the accompanying consolidated balance sheets of
Cynosure, Inc. as of December 31, 2003 and 2004, and the
related consolidated statements of operations,
stockholders’ equity and comprehensive (loss) income and
cash flows for each of the three years in the period ended
December 31, 2004. 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 the standards of the
Public Company Accounting Oversight Board (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. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and 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 consolidated
financial position of Cynosure, Inc. at December 31, 2003
and 2004, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles
generally accepted in the United States.
Cynosure, Inc. (Cynosure or the Company) develops, manufactures
and markets aesthetic treatment systems that are used by
physicians and other practitioners to perform non-invasive
procedures to remove hair, treat vascular lesions, rejuvenate
skin through the treatment of shallow vascular lesions and
pigmented lesions and temporarily reduce the appearance of
cellulite. Cynosure markets and sells its products primarily to
the dermatology, plastic surgery and general medical markets,
both domestically and internationally. Cynosure is a Delaware
corporation, incorporated on July 10, 1991, located in
Westford, Massachusetts.
In May 2002, Cynosure sold 3,327,960 shares of common stock
(representing a 60% ownership interest) to El.En. S.p.A.
(El.En.) for approximately $9.8 million in cash. As a
consequence, the results of Cynosure are consolidated in the
financial statements of El.En. Final consideration of
$1.5 million from the sale was received in May 2003 (see
Note 8). During 2004, El.En. acquired 2,190,834 additional
shares of Cynosure’s common stock from the Company and
certain minority stockholders, increasing its ownership
percentage of Cynosure to approximately 87%.
2.
Summary of Significant Accounting Policies
Significant accounting policies followed in the preparation of
these consolidated financial statements are as follows:
Management 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 reported amounts of assets, liabilities, revenues and
expenses, and the related disclosures at the date of the
financial statements and during the reporting period. Components
particularly subject to estimation include the allowance for
doubtful accounts, inventory reserves and accrued warranties. On
an ongoing basis, management evaluates its estimates. Actual
results could differ from these estimates.
Interim Unaudited Financial Statements
Cynosure’s consolidated statements of operations and cash
flows for the six months ended June 30, 2004 and 2005 and
consolidated balance sheet at June 30, 2005 are unaudited,
have been prepared on a basis consistent with the audited
consolidated financial statements, and, in the opinion of
Cynosure’s management, include all adjustments, consisting
only of normal, recurring adjustments and accruals, necessary
for a fair presentation of Cynosure’s financial position
and results of operations for the periods presented. Results for
the interim period are not necessarily indicative of results for
the full year or any other interim period.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Cynosure, Inc. and its wholly owned subsidiaries:
Cynosure GmbH, Cynosure S.A.R.L., Cynosure UK Limited and
Cynosure KK. Cynosure has a 52% interest in Suzhou Cynosure
Medical Devices, Co., located in the People’s Republic of
China, and the related financial statements have been
consolidated. All significant intercompany balances and
transactions have been eliminated.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
Cash and Cash Equivalents
Cynosure considers all short-term, highly liquid investments
with original maturities at the time of purchase of 90 days
or less to be cash equivalents.
Accounts Receivable and Concentration of Credit
Risk
Management works to mitigate its concentration of credit risk
with respect to accounts receivable through its credit
evaluation policies, reasonably short payment terms and
geographical dispersion of sales. Revenue includes export sales
to foreign companies located principally in Europe, the
Asia/Pacific region and the Middle East. Cynosure obtains
letters of credit for foreign sales considered by management to
be at risk. Cynosure maintains reserves for potential credit
losses based upon the aging of its receivable balances, known
collectibility issues and its historical experience with losses.
In the event that it is determined that the customer may not be
able to meet its full obligation to Cynosure, Cynosure records a
specific allowance to reduce the related receivable to the
amount that Cynosure expects to recover given all information
present. Cynosure had one customer that accounted for 11% of
revenue in 2002. No customer accounted for 10% or greater of
revenue during 2003 or 10% or greater of accounts receivable as
of December 31, 2003. Another customer accounted for 13% of
revenues in 2004 and 12% of accounts receivable as of
December 31, 2004. Accounts receivable allowance activity
consisted of the following for the years ended December 31:
2002
2003
2004
(In thousands)
Balance at beginning of year
$
930
$
705
$
484
Additions
(105
)
176
160
Deductions
(120
)
(397
)
(184
)
Balance at end of year
$
705
$
484
$
460
Inventory
Cynosure states all inventories at the lower of cost or market,
determined on a first-in, first-out method. Inventory includes
material, labor and overhead and consists of the following:
Included in finished goods are lasers used for demonstration
purposes. Cynosure’s policy is to include demonstration
lasers as inventory for a period of up to one year after
production at which time the demonstration lasers are either
sold or transferred to fixed assets and depreciated over their
estimated useful life.
Cynosure’s policy is to establish inventory reserves when
conditions exist that suggest that inventory may be in excess of
anticipated demand or is obsolete based upon assumptions about
future demand for products and market conditions. Cynosure
regularly evaluates the ability to realize the value of
inventory based on a combination of factors including the
following: historical usage rates, forecasted sales or usage,
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
product end of life dates, estimated current and future market
values and new product introductions. Assumptions used in
determining management’s estimates of future product demand
may prove to be incorrect; in which case the provision required
for excess and obsolete inventory would have to be adjusted in
the future. If inventory is determined to be overvalued,
Cynosure recognizes such costs as cost of goods sold at the time
of such determination. Although Cynosure performs a detailed
review of its forecasts of future product demand, any
significant unanticipated changes in demand could have a
significant impact on the value of Cynosure’s inventory and
reported operating results. Inventory reserve activity consisted
of the following for the years ended December 31:
2002
2003
2004
(In thousands)
Balance at beginning of year
$
788
$
1,182
$
797
Additions
394
379
529
Deductions
—
(764
)
(514
)
Balance at end of year
$
1,182
$
797
$
812
Cynosure purchases a significant raw material component from one
vendor, who is the sole manufacturer of this component. A delay
in the production capabilities of this vendor could cause a
delay in Cynosure’s manufacturing, and a possible loss of
revenues, which would adversely affect operating results.
Property and Equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. Assets
under capital leases and leasehold improvements are amortized
using the straight-line method over the shorter of the estimated
useful life of the asset or the respective lease term. Included
in property and equipment are certain lasers that are used for
demonstration purposes, as well as lasers to which Cynosure
continues to hold title that are placed at customer locations
under a revenue-sharing arrangement. Maintenance and repairs are
charged to expense as incurred. Cynosure continually evaluates
whether events or circumstances have occurred that indicate that
the estimated remaining useful life of its long-lived assets may
warrant revision or that the carrying value of these assets may
be impaired. Cynosure evaluates the realizability of its
long-lived assets based on profitability and cash flow
expectations for the related asset. Any write-downs are treated
as permanent reductions in the carrying amount of the assets.
Based on this evaluation, Cynosure believes that, as of each of
the balance sheet dates presented, none of the Cynosure’s
long-lived assets was impaired.
Revenue Recognition and Deferred Revenue
Cynosure generates revenue from the sale of aesthetic treatment
systems that are used by physicians and other practitioners to
perform various non-invasive aesthetic procedures. These systems
incorporate a broad range of laser and other light-based energy
sources. Cynosure offers service and warranty contracts in
connection with these sales.
Cynosure recognizes revenue in accordance with Securities and
Exchange Commission (SEC) Staff Accounting
Bulletin No. 104, Revenue Recognition in Financial
Statements (SAB 104). Cynosure recognizes revenue from
sales of its treatment systems and accessories upon delivery,
provided there are no uncertainties regarding customer
acceptance, the fee is fixed or determinable, and collectibility
of the related receivable is reasonably assured. Revenues from
the sales of service and warranty contracts are deferred and
recognized on a straight-line basis over the contract period as
services are provided. Payments
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
received by Cynosure in advance of product delivery or
performance of services are deferred until earned.
Multiple-element arrangements are evaluated in accordance with
the principles of Emerging Issues Task Force (EITF) Issue
Number 00-21, Revenue Arrangements with Multiple Deliverables
(EITF 00-21), and Cynosure allocates revenue among the
elements based upon each element’s relative fair value.
Cynosure has also entered into a revenue sharing arrangement
with Sona MedSpa whereby Cynosure receives a percentage of the
revenues related to the cosmetic procedures performed at Sona
MedSpa locations. Cynosure recognizes this revenue in the period
the procedure is performed. During the years ended
December 31, 2002, 2003 and 2004 and the six month periods
ended June 30, 2004 and 2005, Cynosure recognized
approximately $1,284,000, $1,600,000, $2,402,000, $1,369,000 and
$900,000, respectively, under this revenue sharing arrangement.
In accordance with the provisions of EITF Issue Number 00-10,
Accounting for Shipping and Handling Costs
(EITF 00-10), Cynosure records shipping and handling
costs billed to its customers as a component of revenue, and the
underlying expense as a component of cost of revenue. Shipping
and handling costs included as a component of revenue and cost
of revenue totaled $167,000, $165,000 and $210,000 for the years
ended December 31, 2002, 2003 and 2004, respectively.
Product Warranty Costs
Cynosure provides a one-year parts and labor warranty on
end-user sales of lasers. Distributor sales generally include a
warranty on parts only. Estimated future costs for initial
product warranties are provided for at the time of revenue
recognition. The following table sets forth activity in the
accrued warranty account for the years ended December 31:
2002
2003
2004
(In thousands)
Balance at beginning of year
$
822
$
863
$
1,252
Charged to expense
951
1,317
1,606
Costs incurred
(910
)
(928
)
(1,248
)
Balance at end of year
$
863
$
1,252
$
1,610
Research and Development
Research and development costs consist of salaries and other
personnel-related expenses of employees primarily engaged in
research, development and engineering activities and materials
used and other overhead expenses incurred in connection with the
design and development of Cynosure’s products. These costs
are expensed as incurred.
Advertising Costs
Cynosure expenses advertising costs as incurred. Advertising
costs totaled $88,000, $97,000 and $252,000 for the years ended
December 31, 2002, 2003 and 2004, respectively.
Foreign Currency Translation
The financial statements of Cynosure’s foreign subsidiaries
are translated from local currency into U.S. dollars using
the current exchange rate at the balance sheet date for assets
and liabilities, and the average exchange rate prevailing during
the period for revenue and expenses. The functional currency for
Cynosure’s foreign subsidiaries is considered to be the
local currency for each entity and, accordingly, translation
adjustments for these subsidiaries are included in accumulated
other comprehensive income
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
(loss) within stockholders’ equity. Certain intercompany
and third party foreign currency-denominated transactions
generated foreign currency transaction gains of approximately
$350,000, $864,000 and $558,000 during 2002, 2003 and 2004,
respectively, which are included in other income in the
consolidated statements of operations.
Comprehensive (Loss) Income
Comprehensive (loss) income is the change in equity of a company
during a period from transactions and other events and
circumstances, excluding transactions resulting from investments
by owners and distributions to owners. A reconciliation of
Cynosure’s net (loss) income to comprehensive (loss) income
is as follows:
The carrying value of Cynosure’s financial instruments,
which include cash equivalents, accounts receivable, accounts
payable, accrued expenses, short-term loan, note payable to
related party and capital leases, approximates their fair value
at December 31, 2003 and 2004.
Stock-Based Compensation
Cynosure accounts for its stock-based awards to employees using
the intrinsic-value method prescribed in Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and related
interpretations. Under the intrinsic-value method, compensation
expense is measured on the date of grant as the difference
between the deemed fair market value of Cynosure’s common
stock for accounting purposes and the option exercise price
multiplied by the number of options granted. Generally, Cynosure
grants stock options with exercise prices equal to the fair
market value for accounting purposes of its common stock;
however, to the extent that the deemed fair market value for
accounting purposes of the common stock exceeds the exercise
price, Cynosure records deferred stock-based compensation and
amortizes the expense over the vesting schedule of the options,
generally four years. The fair value for accounting purposes of
Cynosure’s common stock is determined by the Company’s
board of directors. In the absence of a public trading market
for Cynosure’s common stock, Cynosure’s board of
directors considers objective and subjective factors in
determining the fair value of Cynosure’s common stock for
accounting purposes. During the six months ended June 30,2005, Cynosure granted stock options with exercise prices less
than the deemed fair market value of common stock for accounting
purposes and, as a result, recorded deferred stock-based
compensation of approximately $1.7 million. Cynosure also
provides the disclosure requirements of Financial Accounting
Standards Board (FASB) Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure, an
amendment of FASB Statement No. 123 (SFAS 148).
Stock-based awards to non-employees are accounted for under the
provisions of SFAS No. 123 Accounting for
Stock-Based Compensation (SFAS 123) and EITF Issue
No. 96-18, Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services (EITF 96-18).
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
If compensation cost had been determined for stock options
granted to employees based on the fair value of the awards at
the date of grant in accordance with the provisions of
SFAS 123, Cynosure’s net (loss) income would have been
the pro forma amount indicated below:
Add: Stock-based employee compensation expense included in
determination of net loss, net of tax
—
56
118
61
34
Less: Total stock-based employee compensation expense determined
under the fair value-based method, net of tax
(23
)
(215
)
(611
)
(102
)
(268
)
Pro forma net (loss) income:
$
(1,890
)
$
(659
)
$
4,803
$
3,570
$
290
Basic net (loss) income per share — as reported
$
(0.35
)
$
(0.09
)
$
0.93
$
0.65
$
0.08
Diluted net (loss) income per share — as reported
$
(0.35
)
$
(0.09
)
$
0.92
$
0.65
$
0.07
Basic net (loss) income per share — pro forma
$
(0.36
)
$
(0.12
)
$
0.84
$
0.65
$
0.05
Diluted net (loss) income per share — pro forma
$
(0.36
)
$
(0.12
)
$
0.83
$
0.65
$
0.04
For the purpose of SFAS 123 pro forma disclosures, Cynosure
uses the Black-Scholes option pricing model to determine the
fair value of each option granted to Cynosure employees. The
Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition,
option-pricing models require the input of highly subjective
assumptions, including expected stock price volatility. Because
Cynosure’s employee stock options have characteristics
significantly different from those of traded options, and
because changes in the subjective input assumptions can
materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
The key assumptions used to apply this pricing model and the
related weighted average fair values are as follows:
Cynosure provides for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes
(SFAS 109). SFAS 109 recognizes tax assets and
liabilities for the cumulative effect of all temporary
differences between the financial statement carrying amounts and
the tax basis of assets and liabilities, and are measured using
the enacted tax rates that will be in effect when these
differences are expected to reverse. Valuation allowances are
provided if, based on the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets
will not be realized.
Net (Loss) Income per Common Share
Basic net (loss) income per share is determined by dividing net
(loss) income by the weighted average common shares outstanding
during the period. Diluted net income per share is determined by
dividing net income by the diluted weighted average shares
outstanding during the period. Diluted weighted average shares
reflect the dilutive effect, if any, of common stock options
based on the treasury stock method. The reconciliation of basic
and diluted weighted average shares outstanding is as follows:
Diluted weighted average common shares outstanding
5,272
5,530
5,773
5,530
7,234
As of December 31, 2002, 2003, 2004 and June 30, 2004,
options to purchase approximately 165,000, 123,000, 8,000,
57,000, were excluded from the calculation of diluted weighted
average common shares outstanding as their effect was
antidilutive.
Reclassifications
Certain reclassifications have been made to the prior year
financial statements to conform to the current year presentation.
Recent Accounting Pronouncements
On December 16, 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment (SFAS 123(R)),
which is a revision of SFAS 123. SFAS 123(R)
supersedes APB 25, and amends SFAS No. 95,
Statement of Cash Flows (SFAS 95). Generally, the
approach in SFAS 123(R) is similar to the approach
described in SFAS 123. However, SFAS 123(R) requires
all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement
based on their fair values. Pro forma disclosure is no longer an
alternative.
SFAS 123(R) is effective for the Company beginning
January 1, 2006. Upon adoption, Cynosure will apply the
provisions of SFAS 123(R) to all unvested awards and to
future awards.
The adoption of SFAS 123(R)’s fair value method may
have a significant impact on the Cynosure’s result of
operations, although it will have no impact on Cynosure’s
overall financial position. The impact of adoption of
SFAS 123(R) cannot be predicted at this time because it
will depend on levels of share-based
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
payments granted in the future. Had Cynosure adopted
SFAS 123(R) in prior periods, the impact of that standard
would have approximated the impact of SFAS 123 as described
in the disclosure of pro forma net income in Note 2 to the
consolidated financial statements.
In November 2004, the FASB issued Statement of
SFAS No. 151, Inventory Costs (SFAS 151),
an amendment of APB Opinion No. 43, Chapter 4.
The amendments made by SFAS 151 will improve financial
reporting by requiring that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials
(spoilage) be recognized as current-period charges, and by
requiring the allocation of fixed production overheads to
inventory based on the normal capacity of production facilities.
SFAS 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during
fiscal years beginning after November 24, 2004. Cynosure is
currently evaluating the impact that adoption of SFAS 151
will have on its financial positions and results of operations.
3. Segment and Geographic
Information
In accordance with SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information
(SFAS 131), operating segments are identified as components
of an enterprise about which separate discrete financial
information is available for evaluation by the chief operating
decision maker, or decision-making group, in making decisions
how to allocate resources and assess performance.
Cynosure’s chief decision-maker, as defined under
SFAS 131, is a combination of the Chief Executive Officer
and the Chief Financial Officer. Cynosure views its operations
and manages its business as one segment, aesthetic treatment
products and services.
The following table represents total revenue by geographic
destination:
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
4.
Balance Sheet Accounts
Property and Equipment
Property and equipment consists of the following at
December 31:
Estimated
Useful
2003
2004
Life
(Years)
Cost
Cost
(In thousands)
Equipment
3-5
$
1,592
$
1,706
Furniture and fixtures
5
379
394
Computer equipment and software
3
1,014
1,608
Leasehold improvements
5
337
340
Demonstration equipment
3
2,821
3,725
Revenue sharing lasers
3
2,405
2,430
8,548
10,203
Less accumulated depreciation and amortization
(6,410
)
(6,470
)
$
2,138
$
3,733
Depreciation expense relating to property and equipment was
$1,305,000, $1,235,000 and $1,275,000 for the years ended
December 31, 2002, 2003 and 2004, respectively. As of
December 31, 2003 and 2004, the cost of assets recorded
under capitalized leases was approximately $679,000 and
$872,000, and the related accumulated amortization was
approximately $459,000 and $260,000, respectively. Amortization
expense of assets recorded under capitalized leases is included
as a component of depreciation expense.
Accrued Expenses
Accrued expenses consist of the following at December 31:
2003
2004
(In thousands)
Accrued payroll and taxes
$
832
$
1,504
Accrued employee benefits
319
380
Accrued warranty costs
1,252
1,610
Stock purchase deposit
—
413
Accrued commissions
180
339
Accrued legal fees
339
562
Accrued other
726
1,625
$
3,648
$
6,433
5.
Investment in Sona MedSpa
As of December 31, 2003, Cynosure had invested $1,500,000
in the Series A preferred stock of Sona MedSpa
International, Inc. (Sona MedSpa), a company that owns and
operates hair removal clinics in the United States.
Cynosure’s equity investment represented a 40% equity
ownership which Cynosure accounted for under the equity method
of accounting, which required classification of Sona MedSpa as a
related party.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
Selected Sona MedSpa financial information as of and for the
year ended December 31, 2003 is as follows:
2003
(In thousands)
Assets
$
3,296
Liabilities
$
2,284
Net revenue
$
5,066
Net income
$
1,313
As of December 31, 2003, Cynosure’s carrying value of
its investment in Sona MedSpa was $384,000, and is included in
long-term investments. The Company recognized $(159,000),
$737,000 and $154,000 as the Company’s share of Sona
MedSpa’s (loss) income as a component of other (expense)
income for the years ended December 31, 2002, 2003 and
2004, respectively.
In May 2004, Cynosure sold its 40% equity interest in Sona
MedSpa for $3.6 million, resulting in a $3.0 million
gain. Of the sales price, $2.6 million was received in cash
and $1.0 million was deposited in escrow to be received in
three installments over the next 18 months. As of
December 31, 2004, $500,000 remained in escrow of which
$250,000 was released during the first six months of 2005 and
the remainder will be released to Cynosure in the second six
months of 2005.
In connection with the original investment in Sona MedSpa,
Cynosure also entered into a revenue sharing arrangement with
Sona MedSpa whereby Cynosure provided lasers to Sona MedSpa and,
in return, received a percentage of the revenues related to the
aesthetic procedures performed at Sona MedSpa locations.
Simultaneous with the sale of Cynosure’s equity investment,
Cynosure sold certain lasers previously placed in Sona MedSpa
clinics to Sona MedSpa for $1.2 million, which is included
in revenues. Cynosure also entered into an amended laser
placement and revenue sharing arrangement with the new owners of
Sona MedSpa. Effective May 24, 2004, Cynosure had no
ongoing ownership interest in Sona MedSpa and Sona MedSpa was no
longer considered a related party.
During the years ended December 31, 2002, 2003 and 2004 and
the six month periods ended June 30, 2004 and 2005,
Cynosure recognized approximately $1,284,000, $1,600,000,
$2,402,000, $1,369,000 and $900,000, respectively, under the
revenue sharing arrangement of which $1,284,000, $1,600,000 and
$1,269,000 are presented as related party revenues in the
accompanying consolidated statement of operations for the years
ended December 31, 2002 and 2003 and for the period in 2004
prior to the sale of the equity interest. As of
December 31, 2003, amounts due to Cynosure from Sona MedSpa
were approximately $233,000 which were paid in 2004. During 2000
and 2001, Cynosure agreed to guarantee certain Sona MedSpa lease
commitments (see Note 12).
6.
Related Party Transactions
Purchases of inventory from El.En. during the years ended
December 31, 2002, 2003 and 2004 and the six months ended
June 30, 2004 and 2005 were approximately $1,043,000,
$1,648,000, $2,142,000, $1,201,000 and $745,000, respectively.
Cynosure has a note payable totaling $303,437, including accrued
interest, at December 31, 2004 to El.En., which is payable
on demand. Interest accrues on the note payable at a rate of
5% per annum. Amounts due from El.En. as of
December 31, 2003 and June 30, 2005 are $29,000 and
$49,000, respectively. There were no amounts due from El.En. as
of December 31, 2004.
During 2003, Cynosure made an investment in a private company
that represents an approximate 2% ownership interest in the
entity. During the years ended December 31, 2003 and 2004,
Cynosure
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
recognized revenue of $87,000 and $251,000, respectively,
related to laser sales to this entity. Cynosure’s
investment of $257,000 is carried at the lower of cost or fair
value.
7.
Short-term Loan
Cynosure’s short-term loan consists of a line of credit
with a bank which expires on May 11, 2006 and bears
interest at 5.11%. There are no amounts available for borrowing
at December 31, 2004 and the note is due in full on
May 11, 2006.
8.
Common Stock
Of the 15,000,000 authorized shares of common stock, 14,600,000
are designated voting common stock and 400,000 are designated
non-voting common stock.
Common Stock Reserved
Cynosure has reserved 2,250,000 and 1,850,000 shares of
common stock for issuance upon the exercise of stock options
granted or available for grant under the 1992 Stock Option Plan
and the 2004 Stock Option Plan, respectively (see Note 9).
There were no outstanding shares of non-voting common stock as
of December 31, 2002, 2003 and 2004 and June 30, 2005.
Issuance of Common Stock
During May 2002, Cynosure signed an agreement with El.En. to
sell 3,327,960 shares of its common stock for a total
purchase price calculated via a formula based on 2001 and 2002
revenue and operating results, as defined. An initial payment of
$9,828,000 (net of issuance costs) was received in May 2002. In
May 2003, Cynosure completed its sale to El.En. The total
purchase price for the 60% ownership share was $11,290,000 (net
of issuance costs). The final payment of $1,462,000 (net of
issuance costs) was received in May 2003 and, in turn, was
partially used to purchase the ownership interests of several
minority owners. The payment of $1,317,000 to minority
stockholders is reflected as an increase in the cost of treasury
stock in the statements of stockholders’ equity.
During October and November 2004, Cynosure entered into Stock
Subscription Agreements (the Agreements) with certain accredited
investors for the purchase of 575,000 shares of Cynosure
common stock at $3.00 per share. The purchase price was
payable in two installments, 50% upon execution of the
subscription agreement and 50% due April 1, 2005. Certain
of the subscription agreements required a single payment due
April 15, 2005. The first installment payment of $413,000
is recorded as a stock purchase deposit included as a component
of accrued expenses in the accompanying balance sheet. The
common stock sold under the Agreements was issued in April 2005.
In connection with the signing of the stock subscription
agreements, Cynosure entered into a Stock Purchase Agreement
with El.En. to purchase 575,000 shares of Cynosure
common stock at $3.00 per share to be delivered to the
accredited investors pursuant to the subscription agreements.
The payment terms of the Stock Purchase Agreement mirror those
of the subscription agreement. The first installment payment of
$413,000 is recorded as a stock purchase deposit in the other
non-current assets section of the balance sheet. The common
stock was purchased in April 2005 and recorded as a reduction of
additional paid-in capital.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
9.
Stock-Based Compensation
1992 Stock Option Plan
In February 1992, the Board of Directors adopted, and the
stockholders approved, the 1992 Stock Option Plan (the 1992
Plan). The 1992 Plan provided for the grant of incentive stock
options (ISOs), as well as nonstatutory options. The Board of
Directors administered the 1992 Plan and had sole discretion to
grant options to purchase shares of the Company’s common
stock.
The Board of Directors determined the term of each option,
option price, number of shares for which each option was
granted, whether restrictions would be imposed on the shares
subject to options and the rate at which each option was
exercisable. The exercise price for options granted was
determined by the Board of Directors, except that for ISOs, the
exercise price could not be less than the fair market value per
share of the underlying common stock on the date granted (110%
of fair market value for ISOs granted to holders of more than
10% of the voting stock of the Cynosure). The term of the
options were set forth in the applicable option agreements,
except that in the case of ISOs, the option term was not to
exceed ten years (five years for ISOs granted to holders of more
than 10% of voting stock of the Cynosure). A maximum of
2,250,000 shares of common stock were reserved for issuance
in accordance with the 1992 Plan. Options granted under the 1992
Plan vested either (i) over a 50-month period at the rate
of 24% after the first year and 2% each month thereafter until
fully vested or (ii) after eight years with acceleration of
vesting if certain performance measures were met, as defined in
the agreements. All options granted under the 1992 Plan to date
were issued at fair market value as determined by the Board of
Directors. The 1992 Plan expired on the tenth anniversary of the
date of its adoption by the Board of Directors in February 2002.
Options outstanding as of this date continue to have force and
effect in accordance with the provisions of the instruments
evidencing such options.
2003 Stock Compensation Plan
In July 2003, the Board of Directors approved the 2003 Stock
Compensation Plan (the 2003 Plan), which granted nine Cynosure
executives the right to purchase up to a maximum of
550,000 shares of Cynosure’s common stock at an
exercise price of $2.00 per share. The deemed fair value of
Cynosure’s common stock for accounting purposes on the date
of grant was $2.25. As a result, Cynosure recorded compensation
expense for the difference between the purchase price and the
deemed fair value over the period the rights vest. The number of
shares each executive can purchase was determined by a service
ratio, which is determined by the number of whole or partial
months an executive is employed by Cynosure relative to a stated
service period, determined on an individual participant basis.
Once the right to purchase the shares is vested, the executives
are obligated to purchase shares on the earlier of (1) an
acquisition of Cynosure, (2) 180 days following an
initial public offering of Cynosure’s common stock or
(3) December 31, 2004. If neither of the first two
events occurred, Cynosure or El.En. had the discretionary right
to purchase the rights at the then-fair value of the common
stock determined by a formula dependent upon operating results.
Furthermore, one executive had a put right requiring either
Cynosure or El.En. to purchase the common stock at a price
determined by the formula previously noted.
During 2003, Cynosure recorded $86,000 of compensation expense
associated with the 2003 Plan. For the year ended
December 31, 2004, Cynosure recorded approximately $122,000
of cash and $182,000 of non-cash stock-based compensation
expense, respectively, associated with the 2003 Plan. A portion
of the 2004 stock-based compensation expense resulted from
Cynosure issuing 75,855 shares of common stock to certain
executives, in lieu of acquiring stock purchase rights from the
executives, who were active employees of Cynosure as of
October 1, 2004, effectively terminating the 2003 Plan. All
vested rights for executives who were no longer employees of
Cynosure as of October 1, 2004 expired unexercised.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
2004 Stock Option Plan
In October 2004, the Board of Directors adopted and the
stockholders approved the 2004 Stock Option Plan (the 2004
Plan). The 2004 Plan provided for the grant of ISOs, as well as
nonstatutory options. The Board of Directors administers the
2004 Plan and had sole discretion to grant options to purchase
shares of Cynosure’s common stock.
The Board of Directors determines the term of each option,
option price, number of shares for which each option is granted,
whether restrictions would be imposed on the shares subject to
options and the rate at which each option is exercisable. The
exercise price for options granted is determined by the Board of
Directors, except that for ISOs, the exercise price could not be
less than the fair market value per share of the underlying
common stock on the date granted (110% of fair market value for
ISOs granted to holders of more than 10% of the voting stock of
Cynosure). The term of the options is set forth in the
applicable option agreement, except that in the case of ISOs,
the option term cannot exceed ten years. As of December 31,2004, a maximum of 1,500,000 shares of common stock are
reserved for issuance in accordance with the 2004 Plan. Options
granted under the Plan vested either (i) over a 48-month
period at the rate of 25% after the first year and 6.25% each
quarter thereafter until fully vested or (ii) over a
vesting period determined by the Board of Directors. As of
December 31, 2004, there are 77,541 shares available
for future grant under the 2004 Plan.
In May 2005, the Board of Directors authorized an additional
350,000 shares of common stock in accordance with the 2004
Plan and granted 368,200 options to employees under the 2004
Plan. At the time of grant, these options were believed to have
been issued at fair market value. Subsequently, the Board of
Directors determined these options were issued below the deemed
fair market value for accounting purposes and recorded
approximately $1.7 million of deferred stock-based
compensation expense which is being amortized over the vesting
period of the options. During the six months ended June 30,2005, Cynosure amortized approximately $53,000 related to this
deferred stock-based compensation expense. In May 2005, Cynosure
granted approximately 18,000 options to non-employees under the
2004 Plan. In connection with this grant, Cynosure recorded
$205,000 of stock-based compensation expense.
As of December 31, 2004, Cynosure had federal and state tax
credits of $420,000 and $500,000, respectively, to offset future
tax liability, and state net operating losses of approximately
$3,094,000 to offset future taxable income. If not utilized,
these credit carryforwards will expire at various dates through
2019, and the losses will expire through 2024. Cynosure also had
foreign net operating losses of approximately $2,647,000
available to reduce future foreign income taxes which will
expire at various times through 2019. Foreign net operating
losses in Germany do not expire. Cynosure has a net deferred tax
asset before consideration of valuation allowances arising
principally from domestic and foreign net operating loss and
credit carryforwards, accruals and other reserves. Based upon
the weight of the available evidence, it is more likely than not
that all of the deferred tax assets will not be realized and,
accordingly, the deferred tax assets have been fully reserved.
Significant components of Cynosure’s net deferred tax
assets as of December 31, 2003 and 2004 are as follows:
2003
2004
(In thousands)
Deferred tax assets (liabilities):
Domestic net operating loss and tax credit carryforwards
$
1,757
$
1,024
Foreign net operating loss carryforwards
1,098
1,046
Reserves and allowances
1,157
1,438
Depreciation
120
(314
)
Sona MedSpa equity loss
422
—
Other temporary differences
138
187
Valuation allowance for deferred tax assets
(4,692
)
(3,381
)
Net deferred tax assets
$
—
$
—
The net change in valuation allowance is $1,311,000 from the
prior year primarily due to the utilization of net operating
loss carryforwards.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
(Loss) income before income tax (benefit) provision and minority
interest consists of the following:
2002
2003
2004
Domestic
$
(1,808
)
$
144
$
4,124
Foreign
(290
)
(509
)
960
Total
$
(2,098
)
$
(365
)
$
5,084
In 2004, Cynosure applied for a $515,000 refund claim, of which
$476,000 was carried back to its 1997 U.S. income tax
return filings and the remainder carried back to its 1998
U.S. income tax return filings. This amount was received in
2004 and was recorded as a net income tax benefit in the
2004 statement of operations.
The (benefit) provision for income taxes consists of:
2002
2003
2004
(In thousands)
Current:
Federal
$
(401
)
$
—
$
(491
)
Foreign
99
72
215
State
1
—
—
Total current
(301
)
72
(276
)
Deferred:
Federal
—
—
—
Foreign
—
—
—
State
—
—
—
Total deferred
—
—
—
$
(301
)
$
72
$
(276
)
A reconciliation of the federal statutory rate to
Cynosure’s effective tax rate is as follows for the years
ended December 31:
2002
2003
2004
Income tax (benefit) provision at federal statutory rate:
(35.0
)%
(35.0
)%
35.0
%
Increase (decrease) in tax resulting from —
Nondeductible expenses
1.2
7.9
1.0
Change in valuation allowance, net operating loss
utilization
18.6
46.5
(40.8
)
Other
0.9
0.3
(0.6
)
Effective income tax rate
(14.3
)%
19.7
%
(5.4
)%
11.
401(k) Plan
Cynosure sponsors the Cynosure 401(k) defined contribution plan.
Participation in the plan is available to all employees of
Cynosure who meet certain eligibility requirements. The Plan is
qualified under Section 401(k) of the Internal Revenue
Code, and is subject to contribution limitations as set
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
annually by the Internal Revenue Service. Employer matching
contributions are at Cynosure’s discretion. There were no
employer matches for the years ended December 31, 2002,
2003 or 2004.
12.
Commitments and Contingencies
Lease Commitments
Cynosure leases its U.S. operating facility and certain foreign
facilities under noncancelable operating lease agreements, which
expire July 31, 2005. Rent expense for the years ended
December 31, 2002, 2003 and 2004 was approximately
$678,000, $720,000 and $789,000, respectively.
On January 31, 2005, Cynosure entered into a new seven-year
noncancelable operating lease agreement for 55,817 square
feet, which expires March 31, 2012. Cynosure relocated to
the new facility in the third quarter of 2005. The facility
houses Cynosure’s new corporate headquarters and operating
facility.
Commitments under Cynosure’s lease arrangements are as
follows, in thousands:
Operating
Capital
Leases
Leases
2005
$
789
$
180
2006
824
180
2007
791
155
2008
767
145
2009
795
38
Thereafter
2,114
—
Total minimum lease payments
$
6,080
698
Less amount representing interest
(104
)
Present value of obligations under capital leases
594
Current portion of capital lease obligations
118
Capital lease obligations, net of current portion
$
476
Lease Guarantees
During 2000 and 2001, Cynosure guaranteed the lease obligations
for two locations that are operated by Sona MedSpa, and will be
obligated to pay these leases if Sona MedSpa cannot make the
required lease payments. Minimum lease payments for the next
five years and thereafter are as follows, in thousands:
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Including Data Applicable to Unaudited Periods)
Litigation
From time to time, Cynosure is subject to various claims,
lawsuits, disputes with third parties, investigations and
pending actions involving various allegations against Cynosure
incident to the operation of its business, principally product
liability. Each of these matters is subject to various
uncertainties, and it is possible that some of these matters may
be resolved unfavorably to Cynosure. Cynosure establishes
accruals for losses that are deemed to be probable and subject
to reasonable estimate. Cynosure management believes in these
matters and other matters that the ultimate outcome of these
matters and any liabilities in excess of amounts provided will
not have a material adverse impact on Cynosure’s
consolidated financial position or on its future business
operations.
13.
Subsequent Event (unaudited)
On August 8, 2005, Cynosure’s Board of Directors
approved a restated certificate of incorporation. The restated
certificate of incorporation, which remains subject to
stockholder approval, will become effective upon the effective
time of the registration statement relating to Cynosure’s
initial public offering and will, among other things, authorize
61,500,000 shares of Cynosure’s class A common
stock, 8,500,000 shares of class B common stock and
5,000,000 shares of preferred stock, each with a par value
of $0.001 per share, and will reclassify each outstanding
share of common stock into one share of class B common
stock. In addition, upon effectiveness of the restated
certificate of incorporation, outstanding options to purchase
shares of Cynosure’s common stock will automatically be
converted into an option to purchase an equal number of shares
of class B common stock at the same exercise price per
share. The impact of the restated certificate of incorporation
has not been retroactively reflected in the financial statements.
In August 2005, Cynosure’s Board of Directors approved the
2005 Stock Incentive Plan (the 2005 Plan). The 2005 Plan, which
remains subject to stockholder approval, is expected to become
effective on the date that the registration statement relating
to the Company’s initial public offering is declared
effective. Under the 2005 Plan, 541,342 shares of common
stock will be authorized for issuance, subject to annual
increases beginning in 2006 in accordance with the terms of the
2005 Incentive Plan. Upon the effectiveness of the 2005 Plan,
the Company will grant no further stock options or other awards
under the Company’s 2004 Plan.
The following table indicates the expenses to be incurred in
connection with the offering described in this Registration
Statement, other than underwriting discounts and commissions,
all of which will be paid by the Registrant. All amounts are
estimated except the Securities and Exchange Commission
registration fee and the National Association of Securities
Dealers Inc. filing fee.
Amount
Securities and Exchange Commission registration fee
$
8,828
National Association of Securities Dealers, Inc. fee
8,000
Nasdaq Stock Market listing fee
100,000
Accountants’ fees and expenses
*
Legal fees and expenses
*
Blue Sky fees and expenses
*
Transfer Agent’s fees and expenses
*
Printing and engraving expenses
*
Miscellaneous
*
Total Expenses
$
*
*
To be filed by amendment.
Item 14.
Indemnification of Directors and Officers
Section 102 of the General Corporation Law of the State of
Delaware permits a corporation to eliminate the personal
liability of directors of a corporation to the corporation or
its stockholders for monetary damages for a breach of fiduciary
duty as a director, except where the director breached his duty
of loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment
of a dividend or approved a stock repurchase in violation of
Delaware corporate law or obtained an improper personal benefit.
The Registrant’s certificate of incorporation provides that
no director of the Registrant shall be personally liable to it
or its stockholders for monetary damages for any breach of
fiduciary duty as director, notwithstanding any provision of law
imposing such liability, except to the extent that the General
Corporation Law of the State of Delaware prohibits the
elimination or limitation of liability of directors for breaches
of fiduciary duty.
Section 145 of the General Corporation Law of the State of
Delaware provides that a corporation has the power to indemnify
a director, officer, employee, or agent of the corporation and
certain other persons serving at the request of the corporation
in related capacities against expenses (including
attorneys’ fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by the person in
connection with an action, suit or proceeding to which he is or
is threatened to be made a party by reason of such position, if
such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
corporation, and, in any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, except
that, in the case of actions brought by or in the right of the
corporation, no indemnification shall be made with respect to
any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to
the extent that the Court of Chancery or other adjudicating
court determines that, despite the adjudication of liability but
in view of all of the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem
proper.
Our restated certificate of incorporation provides that we will
indemnify each person who was or is a party or threatened to be
made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of
Cynosure) by reason of the fact that he or she is or was, or has
agreed to become, a director or officer of Cynosure, or is or
was serving, or has agreed to serve, at our request as a
director, officer, partner, employee or trustee of, or in a
similar capacity with, another corporation, partnership, joint
venture, trust or other enterprise, including any employee
benefit plan, (all such persons being referred to hereafter as
an “Indemnitee”), or by reason of any action alleged
to have been taken or omitted in such capacity or in any other
capacity while serving as a director, officer, partner, employee
or trustee, against all expenses (including attorneys’
fees), liability, loss, judgments, fines, ERISA taxes or
penalties and amounts paid in settlement actually and reasonably
incurred by or on behalf of Indemnitee in connection with such
action, suit or proceeding and any appeal therefrom, if such
Indemnitee acted in good faith and in a manner which Indemnitee
reasonably believed to be in, or not opposed to, our best
interests, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her
conduct was unlawful. Our certificate of incorporation provides
that we will indemnify any Indemnitee who was or is a party to
or threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of Cynosure to
procure a judgment in our favor by reason of the fact that the
Indemnitee is or was, or has agreed to become, a director or
officer of Cynosure, or is or was serving, or has agreed to
serve, at our request, as a director, officer, partner, employee
or trustee of or in a similar capacity with, another
corporation, partnership, joint venture, trust or other
enterprise, (including any employee benefit plan), or by reason
of any action alleged to have been taken or omitted in such
capacity, or in any other capacity while serving as a director,
officer, partner, employee or trustee, against all expenses
(including attorneys’ fees) and, to the extent permitted by
law, amounts paid in settlement actually and reasonably incurred
by or on behalf of Indemnitee in connection with such action,
suit or proceeding and any appeal therefrom, if Indemnitee acted
in good faith and in a manner which Indemnitee reasonably
believed to be in, or not opposed to, the best interests of
Cynosure, except that no indemnification shall be made with
respect to any claim, issue or matter as to which Indemnitee
shall have been adjudged to be liable to us, unless, and only to
the extent, that the Court of Chancery of Delaware or the court
in which such action or suit was brought shall determine upon
application that, despite the adjudication of such liability but
in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expense
(including attorney’s fees) which the Court of Chancery of
Delaware or such other court shall deem proper. Notwithstanding
the foregoing, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any
action, suit or proceeding, Indemnitee shall be indemnified by
us against all expenses (including attorneys’ fees)
actually and reasonably incurred in connection therewith.
Expenses must be advanced to an Indemnitee under certain
circumstances.
We maintain a general liability insurance policy which covers
certain liabilities of directors and officers of our corporation
arising out of claims based on acts or omissions in their
capacities as directors or officers.
In any underwriting agreement we enter into in connection with
the sale of common stock being registered hereby, the
underwriters will agree to indemnify, under certain conditions,
us, our directors, our officers and persons who control us with
the meaning of the Securities Act of 1933, as amended, against
certain liabilities.
Item 15.
Recent Sales of Unregistered Securities
Set forth below is information regarding shares of common stock
issued, and options granted, by us within the past three years.
Also included is the consideration, if any, received by us for
such shares and
options and information relating to the section of the
Securities Act, or rule of the Securities and Exchange
Commission, under which exemption from registration was claimed.
(a) Issuances of Capital Stock
1. In May 2002, we issued an aggregate of
3,327,960 shares of class B common stock at an
approximate price per share of $3.40 to El.En.
2. In November 2003, we issued an aggregate of
3,499 shares of class B common stock to El.En. for no
additional consideration as a final adjustment of the May 2002
stock purchase transaction.
3. From September through November 2004, we issued an
aggregate of 789,947 shares of class B common stock at
an approximate price per share of $2.67 to individual investors,
including certain of our executive officers and El.En. The
shares issued to our executive officers were issued in
consideration of the performance of services, for which we
recorded compensation expense in the amount of $3.00 per share,
and were not issued for cash.
4. In April 2005, we issued an aggregate of
495,000 shares of our class B common stock at a price
per share of $3.00 to individual investors, including certain of
our executive officers.
No underwriters were involved in the foregoing sales of
securities. The securities described in this
paragraph (a) of Item 15 were issued to a
combination of foreign and U.S. investors in reliance upon
the exemption from the registration requirements of the
Securities Act, as set forth in Section 4(2) under the
Securities Act and Rule 506 of Regulation D
promulgated thereunder relative to sales by an issuer not
involving any public offering, to the extent an exemption from
such registration was required.
(b) Stock Option Grants
From the period beginning August 10, 2002 through
August 10, 2005, we have granted stock options under our
stock option plans for an aggregate of 1,808,659 shares of
class B common stock (net of exercises, expirations and
cancellations) at exercise prices of $3.00 to $4.50 per share.
During the same period, no options to purchase stock were
exercised.
The issuances of stock options and the shares of common stock
issuable upon the exercise of the options as described in this
paragraph (b) of Item 15 were issued pursuant to
written compensatory plans or arrangements with our employees,
directors and consultants, in reliance on the exemption provided
by Section 3(b) of the Securities Act and Rule 701
promulgated thereunder. All recipients either received adequate
information about us or had access, through employment or other
relationships, to such information.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of the registration statement as
of the time it was declared effective.
(ii) For purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Westford, Commonwealth of
Massachusetts on the 11th day of August, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael R. Davin and
Timothy W. Baker, and each of them, his/her true and lawful
attorneys-in-fact and agents, with full power of substitution
and resubstitution for him/her and in his/her name, place and
stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration
Statement, and any subsequent registration statements pursuant
to Rule 462 of the Securities Act and to file the same,
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he/she might
or could do in person, hereby ratifying and confirming all that
each of said attorney-in-fact or his/her substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
Confidential treatment requested as to certain portions, which
portions have been omitted and filed separately with the
Securities and Exchange Commission.
Dates Referenced Herein and Documents Incorporated by Reference
