-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FQBG35ndEFOWi/PP/aoFu0KQPszp7o9OTIxia3A+q/N+OfuQkGgWvrLCr17xlNUW asNihh3v71WqntYA80HPqQ== 0001177497-03-000003.txt : 20030814 0001177497-03-000003.hdr.sgml : 20030814 20030814141024 ACCESSION NUMBER: 0001177497-03-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHOTOMEDEX INC CENTRAL INDEX KEY: 0000711665 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 592858100 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11635 FILM NUMBER: 03846028 BUSINESS ADDRESS: STREET 1: FIVE RADNOR CORPORATE CENTER STREET 2: SUITE 470 CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 4072814103 MAIL ADDRESS: STREET 1: FIVE RADNOR CORPORATE CENTER STREET 2: SUITE 470 CITY: RADNOR STATE: PA ZIP: 19087 FORMER COMPANY: FORMER CONFORMED NAME: LASER PHOTONICS INC DATE OF NAME CHANGE: 19920703 10-Q 1 form_10q-0603.txt FORM 10Q JUN 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ___________ Commission File Number 0-11365 PHOTOMEDEX, INC. (Exact name of registrant as specified in its charter) DELAWARE 59-2058100 -------- -------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 147 Keystone Drive, Montgomeryville, Pennsylvania 18936 ------------------------------------------------------- (Address of principal executive offices, including zip code) (215) 619-3600 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes___ No X The number of shares outstanding of the issuer's Common Stock as of August 14, 2003, was 37,655,440 shares. PHOTOMEDEX, INC. AND SUBSIDIARIES INDEX Part I. Financial Information: PAGE - ------------------------------ ---- ITEM 1. Financial Statements: a. Consolidated Balance Sheets, June 30, 2003 (unaudited) and December 31, 2002 (audited) 3 b. Consolidated Statements of Operations for the three months ended June 30, 2003 and 2002 (unaudited) 4 c. Consolidated Statements of Operations for the six months ended June 30, 2003 and 2002 (unaudited) 5 d. Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited) 6 e. Notes to Consolidated Financial Statements (unaudited) 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 25 ITEM 4. Controls and Procedures 25 Part II. Other Information: - --------------------------- ITEM 1. Legal Proceedings 25 ITEM 2. Changes in Securities and Use of Proceeds 25 ITEM 3. Defaults Upon Senior Securities 26 ITEM 4. Submission of Matters to a Vote of Security Holders 26 ITEM 5. Other Information 26 ITEM 6. Exhibits and Reports on Form 8-K 26 Signatures 27 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PHOTOMEDEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2003 2002 ------------ ------------ ASSETS (Unaudited) (Audited) Current assets: Cash and cash equivalents ........................................................ $ 9,594,224 $ 4,008,051 Restricted cash, cash equivalents and short-term investments ..................... -- 2,000,000 Accounts receivable, net of allowance for doubtful accounts of $745,435 and $1,169,486, respectively ............................................ 2,863,558 2,536,334 Inventories ...................................................................... 4,684,398 5,055,783 Prepaid expenses and other current assets ........................................ 687,283 283,001 ------------ ------------ Total current assets .......................................................... 17,829,463 13,883,169 Property and equipment, net ............................................................ 4,025,022 3,672,438 Goodwill, net .......................................................................... 2,944,423 2,944,423 Patents and licensed technologies, net ................................................. 849,092 933,802 Other assets ........................................................................... 69,169 79,372 ------------ ------------ Total assets ..................................................................... $ 25,717,169 $ 21,513,204 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of notes payable ................................................. $ 399,106 $ 75,263 Current portion of long-term debt ................................................ 1,171,837 2,143,425 Accounts payable ................................................................. 2,024,373 2,833,361 Accrued compensation and related expenses ........................................ 889,178 822,999 Other accrued liabilities ........................................................ 845,729 1,246,433 Deferred revenues ................................................................ 585,208 183,475 ------------ ------------ Total current liabilities ..................................................... 5,915,431 7,304,956 ------------ ------------ Long-term debt ......................................................................... 310,461 899,626 ------------ ------------ Commitments and Contingencies Stockholders' equity: Common stock, $.01 par value, 50,000,000 shares authorized;. 37,422,868and 31,439,058 shares issued and outstanding, respectively ...................................................................... 374,229 314,391 Additional paid-in capital ......................................................... 86,308,485 76,828,582 Accumulated deficit ................................................................ (67,179,826) (63,819,517) Deferred compensation .............................................................. (11,611) (14,834) ------------ ------------ Total stockholders' equity .................................................... 19,491,277 13,308,622 ------------ ------------ Total liabilities and stockholders' equity ....................................... $ 25,717,169 $ 21,513,204 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 PHOTOMEDEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended June 30, 2003 2002 ------------ ------------ Revenues: Product sales ................................................................. $ 2,089,132 $ 597,500 Services ...................................................................... 1,753,567 245,199 ------------ ------------ 3,842,699 842,699 Cost of revenues: Product cost of revenues ...................................................... 1,355,993 245,427 Services cost of revenues ..................................................... 1,405,197 734,902 ------------ ------------ 2,761,190 980,329 ------------ ------------ Gross profit (loss) ................................................................ 1,081,509 (137,630) ------------ ------------ Operating expenses: Selling, general and administrative .......................................... 2,292,062 1,591,467 Engineering and product development .......................................... 465,134 579,196 ------------ ------------ 2,757,196 2,170,663 ------------ ------------ Loss from operations before interest and other expense (income) .................... (1,675,687) (2,308,293) Interest expense (income), net ..................................................... 10,415 (4,436) Other (income), net ................................................................ -- (590) ------------ ------------ Net loss ........................................................................... $ (1,686,102) $ (2,303,267) ============ ============ Basic and diluted net loss per share ............................................... $ (0.05) $ (0.09) ============ ============ Shares used in computing basic and diluted net loss per share ...................... 33,644,326 25,010,953 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 PHOTOMEDEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended June 30, 2003 2002 ------------ ------------ Revenues: Product sales ................................................................ $ 3,958,424 $ 1,309,500 Services ..................................................................... 3,357,752 485,572 ------------ ------------ 7,316,176 1,795,072 Cost of revenues: Product cost of revenues ..................................................... 2,505,465 568,066 Services cost of revenues .................................................... 2,805,983 1,464,373 ------------ ------------ 5,311,448 2,032,439 ------------ ------------ Gross profit (loss) ............................................................... 2,004,728 (237,367) ------------ ------------ Operating expenses: Selling, general and administrative ......................................... 4,446,654 3,391,949 Engineering and product development ......................................... 877,066 801,422 ------------ ------------ 5,323,720 4,193,371 ------------ ------------ Loss from operations before interest and other expense (income) ................... (3,318,992) (4,430,738) Interest expense (income), net .................................................... 41,438 (3,368) Other expense, net ................................................................ -- 4,371 ------------ ------------ Net loss .......................................................................... $ (3,360,430) $ (4,431,741) ============ ============ Basic and diluted net loss per share .............................................. $ (0.10) $ (0.18) ============ ============ Shares used in computing basic and diluted net loss per share ..................... 32,547,784 24,597,749 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 PHOTOMEDEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2003 2002 ----------- ----------- Operating activities: Net loss ...................................................................... $(3,360,430) $(4,431,741) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ......................................... 1,026,733 850,904 Stock options issued to consultants for services ...................... 38,164 34,295 Amortization of deferred compensation ................................. 3,223 4,512 Provision for bad debts ............................................... 246,029 -- Loss on disposal of assets ............................................ 7,574 -- Changes in operating assets and liabilities: Accounts receivable ........................................................ (573,253) 73,843 Inventories ................................................................ 445,043 283,662 Prepaid expenses and other assets .......................................... 72,916 (58,743) Accounts payable ........................................................... (637,988) (474,784) Accrued compensation and related expenses .................................. 66,179 93,600 Other accrued liabilities .................................................. (400,583) 321,150 Deferred revenues .......................................................... 401,733 (17,100) ----------- ----------- Net cash used in operating activities ............................. (2,664,660) (3,320,402) ----------- ----------- Investing activities: Purchases of property and equipment ........................................... (17,999) (45,761) Lasers (placed into) or retired from service .................................. (1,035,419) 40,582 ----------- ----------- Net cash used in investing activities ............................. (1,053,418) (5,179) ----------- ----------- Financing activities: Proceeds from issuance of common stock, net ................................... 9,500,046 5,706,047 Proceeds from exercise of options ............................................. 1,531 18,000 Proceeds from exercise of warrants ............................................ -- 29,000 Proceeds from issuance of notes payable ....................................... -- 4,000 Payments on long-term debt .................................................... (90,584) -- Payments on notes payable ..................................................... (314,151) (55,972) Net repayments on line of credit .............................................. (1,792,591) -- Decrease in restricted cash, cash equivalents and short-term investments .................................................................. 2,000,000 -- ----------- ----------- Net cash provided by financing activities ......................... 9,304,251 5,701,075 ----------- ----------- Net increase in cash and cash equivalents .......................................... 5,586,173 2,375,494 Cash and cash equivalents, beginning of period ...................................... 4,008,051 4,066,820 ----------- ----------- Cash and cash equivalents, end of period ............................................ $ 9,594,224 $ 6,442,314 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 6 PHOTOMEDEX, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: THE COMPANY: BACKGROUND PhotoMedex, Inc. and subsidiaries (the "Company") is a medical device company focused on facilitating the cost-effective use of technologies for doctors, hospitals and surgery centers. The Company develops, manufactures and markets excimer-laser-based instrumentation designed to treat phototherapeutically psoriasis, vitiligo, atopic dermatitis and leukoderma. In January 2000, the Company received the first Food and Drug Administration ("FDA") clearance to market an excimer laser system, the XTRAC(R) system, for the treatment of psoriasis. In March 2001, the Company received FDA clearance to treat vitiligo; in August 2001, the Company received FDA clearance to treat atopic dermatitis; and in May 2002, the FDA granted 510(k) clearance to market the XTRAC system for the treatment of leukoderma. The Company launched the XTRAC phototherapy treatment system commercially in the United States in August 2000. Through the acquisition of Surgical Laser Technologies, Inc. ("SLT") on December 27, 2002 (see Note 2), the Company also develops, manufactures and markets proprietary lasers and delivery systems for both contact and non-contact surgery and provides surgical services utilizing these and other manufacturers' products. LIQUIDITY AND GOING CONCERN The Company has incurred significant losses and has had negative cash flows from operations since emerging from bankruptcy in May 1995. To date, the Company has dedicated most of its financial resources to engineering and product development and general and administrative expenses. During the first quarter of 2003, the Company re-launched the marketing of its XTRAC system in the United States following the issuance of common procedural terminology (CPT) codes and associated reimbursement rates by Center for Medicare and Medicaid Services (CMS). The Company has historically financed its activities from borrowings and the private placement of debt and equity securities. As of June 30, 2003, the Company had an accumulated deficit of $67,179,826. The Company expects to incur operating losses throughout 2003 as it plans to invest substantial amounts on the marketing of its psoriasis, vitiligo, atopic dermatitis and leukoderma treatment products and on the expansion of its manufacturing operations. Management cannot assure that the Company will market any products successfully, operate profitably in the future, or that it will not require significant additional financing in order to accomplish its business plan. The Company's future revenues and success depend upon its excimer-laser-based systems for the treatment of a variety of skin disorders. The Company's excimer-laser-based system for the treatment of psoriasis, vitiligo, atopic dermatitis and leukoderma is currently generating revenues in both the United States and abroad. The Company's ability to introduce successful, new products based on its new business focus and the expected benefits to be obtained from these products may be adversely affected by a number of factors, such as unforeseen costs and expenses, technological change, economic downturns, competitive factors or other events beyond the Company's control. Consequently, the Company's historical operating results cannot be relied upon as indicators of future performance, and management cannot predict whether the Company will obtain or sustain positive operating cash flow or generate net income in the future. Cash and cash equivalents were $9,594,224 as of June 30, 2003. Management believes that the existing cash balance together with its existing financial resources, including the credit line facility (see Note 8), access to lease financing for capital expenditures, and any revenues from sales, distribution, licensing and manufacturing relationships, will be sufficient to meet the Company's operating and capital requirements through the second quarter of 2004. The 2003 operating plan reflects anticipated revenue growth from the use of the XTRAC system based on the recent approval of reimbursement codes and anticipated growth in private insurance coverage in the United States. In addition, the operating plan reflects costs savings from the integration of the combined companies. However, depending upon the Company's rate of growth and other operating factors, the Company may require additional equity or debt financing to meet its working capital requirements or capital expenditure needs. There can be no assurance that additional financing, if needed, will be available when required or, if available, could be obtained on terms satisfactory to the Company. 7 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: QUARTERLY FINANCIAL INFORMATION AND RESULTS OF OPERATIONS The financial statements as of June 30, 2003 and for the three and six months ended June 30, 2003 and 2002, are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of June 30, 2003, and the results of operations and cash flows for the three and six months ended June 30, 2003 and 2002. The results for the three and six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the entire year. While management of the Company believes that the disclosures presented are adequate to make the information not misleading, these consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. The Company acquired SLT on December 27, 2002 and the operating results of SLT are not included in the consolidated statement of operations for the three and six months ended June 30, 2002. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and be based on events different from those assumptions. CASH AND CASH EQUIVALENTS The Company invests its excess cash in highly liquid, short-term investments. The Company considers short-term investments that are purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consisted of cash and money market accounts at June 30, 2003 and December 31, 2002. RESTRICTED CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS A line of credit agreement, amended February 27, 2003 and March 26, 2003, was extended to SLT by a bank and requires that SLT maintain cash and cash equivalents (including short-term investments), for any amount borrowed on the line in excess of $1 million, as collateral for the line of credit (see Note 8). Previous to the amendment, SLT was required to maintain $2 million of cash and cash equivalents (including short-term investments) as collateral for the line of credit. The restricted assets at December 31, 2002 consisted of the following: Cash and cash equivalents ......................................... $1,200,121 Short-term investments ............................................ 799,879 ---------- Total restricted cash, cash equivalents and short-term investments ..................................................... $2,000,000 ========== SLT applied cash collateral in the second quarter of 2003 and thereby reduced the amount due on the line of credit to $1 million. SLT then entered a new note payable with the bank, in the face amount of $1 million, on May 13, 2003. Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company has classified its entire portfolio of short-term investments as available for sale as they are available to take advantage of other investment opportunities. Securities available for sale are stated at fair value with unrealized gains and losses, if any, included in stockholders' equity as accumulated other comprehensive income. Dividend and interest income are recognized when earned and are recorded in interest income. The amortized cost of debt securities is adjusted for accretion of discounts to maturity. Such accretion is also included in interest income. The Company currently invests only in high-quality securities in accordance with its investment policy. Unrealized gain and loss from such securities was immaterial at June 30, 2003 and December 31, 2002. 8 INVENTORIES Inventories are stated at the lower of cost (first-in, first-out basis) or market. Cost is determined at the latest cost for raw materials and at production cost (materials, labor and indirect manufacturing cost) for work-in-process and finished goods. Throughout the laser manufacturing process, the related production costs are recorded within inventory. The Company's skin disorder treatment equipment will either (i) be sold to distributors or physicians directly or (ii) be placed in a physician's office and remain the property of the Company. For lasers that are placed in a physician's office, the cost is transferred from inventory to "lasers in service" within property and equipment. The Company earns revenue each time the laser is used for a patient treatment. Lasers that are not placed in a physician's office are maintained in inventory until the unit is sold. PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment are recorded at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, primarily three to seven years for lasers in service, computer hardware and software, furniture and fixtures, automobiles, and machinery and equipment. Leasehold improvements are amortized over the lesser of the useful lives or lease terms. Expenditures for major renewals and betterments to property and equipment are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. Upon retirement or disposition, the applicable property amounts are relieved from the accounts and any gain or loss is recorded in the consolidated statements of operations. Laser units and laser accessories located at medical facilities for sales evaluation and demonstration purposes or those units/accessories used for development and medical training are included in property and equipment under the caption "machinery and equipment." These units and accessories are being depreciated over a period of up to five years. Laser units utilized in the provision of surgical services are included in property and equipment under the caption "lasers in service." Management evaluates the realizability of property and equipment based on estimates of undiscounted future cash flows over the remaining useful life of the asset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the asset, the asset is written down to fair value. As of June 30, 2003, no such write-down was required (see Impairment of Long-Lived Assets below). PATENT COST AND LICENSED TECHNOLOGIES Costs incurred to obtain or defend patents are capitalized and amortized over the shorter of the estimated useful lives or eight to 12 years. Developed technology was recorded in connection with the purchase of the minority interest of Acculase, a former subsidiary of the Company, and is being amortized on a straight-line basis over seven years. Management evaluates the realizability of intangible assets based on estimates of undiscounted future cash flows over the remaining useful life of the asset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the asset, the asset is written down to fair value. As of June 30, 2003, no such write-down was required (see Impairment of Long-Lived Assets below). ACCRUED WARRANTY COSTS The Company offers a warranty on product sales generally for a one to two-year period. The Company provides for the estimated future warranty claims on the date the product is sold. The activity in the warranty accrual during the six months ended June 30, 2003 is summarized as follows: Accrual at January 1, 2003 $415,463 Additions charged to warranty expense 143,313 Claims paid and charged against the accrual (270,544) -------- Accrual at June 30, 2003 $288,232 ======== 9 REVENUE RECOGNITION The Company has two distribution channels for its phototherapy treatment equipment. The Company will either (i) sell the laser through a distributor or directly to a physician or (ii) place the laser in a physician's office (at no charge to the physician) and charge the physician a fee for an agreed upon number of treatments or treatment cards. When the Company sells a laser to a distributor or directly to a physician, revenue is recognized upon shipment of the product. Under the terms of the distributor agreements, the distributors do not have the right to return any unit. However, the Company does allow products to be returned by its distributors in redress of product defects or other claims. When the Company places the laser in a physician's office, it recognizes service revenue based on an estimate of patient treatments. Treatment cards sold to physicians but not yet used are deferred and recognized as a liability until the treatment occurs. In the first quarter of 2003, the Company implemented a limited program to support certain physicians in addressing treatments with the XTRAC system that may be denied reimbursement by private insurance carriers. The Company recognizes service revenue from the sale of treatment cards, or equivalent treatment codes, to physicians participating in this program only if and to the extent the physician has been reimbursed for the treatments. This program, originally scheduled to terminate on June 30, 2003, has been extended to September 30, 2003. During the six months of 2003, the Company deferred revenues of $461,454, under this program, net of $22,118 in revenues recognized during the second quarter due to physician reimbursements for the treatments. Through its surgical businesses, the Company generates revenues primarily from three channels. The first is through sales of recurring laser delivery systems and accessories; the second is through the per-procedure surgical services; and the third is through the sale of laser systems and related maintenance service agreements. The Company recognizes revenues from product sales, including sales to distributors, upon shipment of the products. For per-procedure surgical services, the Company recognizes revenue upon the completion of the procedure. Revenue from maintenance service agreements is deferred and recognized on a straight-line basis over the term of the agreements. Revenue from billable services, including repair activity, is recognized when the service is provided. PRODUCT DEVELOPMENT COSTS Costs of research, new product development and product redesign are charged to expense as incurred. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, the liability method is used for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse or are otherwise realized in the Company's tax returns. NET LOSS PER SHARE The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share." In accordance with SFAS No. 128, basic net loss per share is calculated by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share reflects the potential dilution from the conversion or exercise of securities into common stock, such as stock options and warrants. In these consolidated financial statements, diluted net loss per share is the same as basic net loss per share. No additional shares for the potential dilution from the conversion or exercise of securities into common stock are included, since the result would be anti-dilutive. RECLASSIFICATIONS The 2002 consolidated statement of operations has been revised to present product sales and services revenues and their related costs separately. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values for financial instruments under SFAS No. 107, "Disclosures about Fair Value of Financial Instruments, " are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The fair value of 10 cash is based on its demand value, which is equal to its carrying value. The fair values of notes payable are based on borrowing rates that are available to the Company for loans with similar terms, collateral and maturity. The estimated fair values of notes payable approximate the carrying values. Additionally, the carrying value of all other monetary assets and liabilities is equal to its fair value due to the short-term nature of these instruments. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets, " long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. STOCK OPTIONS The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, as amended in SFAS No. 148, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123 and SFAS No. 148. Had stock compensation cost for the Company's common stock options been determined based upon the fair value of the options at the date of grant, as prescribed under SFAS No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation," the Company's net loss and net loss per share would have been increased to the following pro-forma amounts:
Three Months Ended June 30, Six Months Ended June 30, ------------------------------- ------------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net loss: As reported ....................................... ($1,686,102) ($2,303,267) ($3,360,430) ($4,431,741) Less: stock-based employee compensation expense included in reported net loss ............................ 1,621 2,244 3,233 4,512 Impact of total stock-based compensation expense determined under fair-value-based method for all grants and awards (437,317) (465,160) (847,500) (1,009,036) ----------- ----------- ----------- ----------- Pro-forma ......................................... ($2,121,798) ($2,766,183) ($4,204,697) ($5,436,265) =========== =========== =========== =========== Net loss per share: As reported ...................................... ($0.05) ($0.09) ($0.10) ($0.18) =========== =========== =========== =========== Pro-forma ........................................ ($0.06) ($0.11) ($0.13) ($0.22) =========== =========== =========== ===========
The above pro-forma amounts may not be indicative of future pro-forma amounts because future options are expected to be granted. 11 The fair value of the options granted is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions applicable to options granted in the three-month and six-month periods:
Three Months Ended June 30, Six Months Ended June 30, -------------------------- -------------------------- 2003 2002 2003 2002 ------- ------- ------- ------- Risk-free interest rate .................. 2.943% 4.533% 2.977% 4.512% Volatility ............................... 100% 100% 100% 100% Expected dividend yield .................. 0% 0% 0% 0% Expected option life ..................... 5 years 5 years 5 years 5 years
SUPPLEMENTAL CASH FLOW INFORMATION During the six months ended June 30, 2003, the Company financed vehicle and equipment purchases of $329,351 under capital leases, financed insurance policies through notes payable for $466,995 and financed certain acquisition costs which were included in accounts payable at December 31, 2002, through a note payable for $171,000. RECENT ACCOUNTING PRONOUNCEMENTS In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair-value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation, and disclosures related to such consolidation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public enterprises with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation is applied to the enterprise no later than the beginning of the first annual reporting period beginning after June 15, 2003. The Interpretation requires certain disclosures in an entity's financial statements issued after January 31, 2003 if it is reasonably possible that the entity will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The application of this Interpretation is not expected to have a material effect on the Company's financial statements. In December 2002, the FASB finalized EITF Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This issue addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The final consensus of this issue is applicable to agreements entered into in fiscal periods beginning after June 15, 2003. Additionally, companies will be permitted to apply the guidance in this issue to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, "Accounting Changes." The Company does not believe that adoption of this issue will have a material impact on its consolidated financial position, consolidated results of operations, or liquidity. Note 2 ACQUISITION: On December 27, 2002, the Company acquired all of the outstanding common shares of SLT. The results of SLT's operations since that date have been included in the consolidated financial statements. The Company acquired SLT in order to gain market share in surgical products and services markets through a business model that is compatible with the Company's own approach to the dermatology market. The Company also acquired SLT with an expectation that it could reduce costs through economies of scale. SLT has focused on lasers used in surgery in such venues as hospitals, surgi-centers and doctors' offices. SLT has employed a similar business model to the Company's domestic services by charging a per-procedure fee. With the addition of SLT, the Company now offers laser services over a wide range of specialties, including urology, gynecology, orthopedics, and general and ENT surgery. Surgical services are offered using such lasers as the holmium, diode, Nd:YAG and CO2 lasers. In addition, SLT develops, manufactures and markets healthcare lasers and their disposables. 12 The aggregate purchase price was $6,760,445 and was paid through the issuance of 2,716,354 shares of common stock valued at $1.32 per share, the assumption of $2,937,858 of debt and the incurrence of $237,000 of capitalizable transaction costs. Non-capitalizable costs of $115,000 were incurred in registering the common stock issued in connection with the acquisition. Based on the initial purchase price allocation, the following table summarizes the recorded fair value of the assets acquired and liabilities assumed at the date of acquisition.
Cash and cash equivalents $ 120,500 Restricted cash, cash equivalents and short-term investments 2,000,000 Accounts receivable 1,508,460 Inventories 2,731,811 Prepaid expenses and other current assets 148,506 Property and equipment 1,910,674 Patents and licensed technologies 317,346 Other assets 43,020 ----------- Total assets acquired 8,780,317 Current portion of notes payable (53,470) Current portion of long-term debt (2,143,425) Accounts payable (1,084,055) Accrued compensation and related expenses (250,356) Other accrued liabilities (575,410) Deferred revenues (56,350) Long-term debt (794,433) ----------- Total liabilities assumed (4,957,499) ----------- Net assets acquired $ 3,822,818 ===========
The fair value of the net assets acquired, excluding the debt assumed, exceeded the purchase price by $1,825,819, resulting in negative goodwill. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the negative goodwill was recorded as a reduction of intangibles and property and equipment of $773,604 and $1,052,215, respectively. The accompanying consolidated financial statements do not include any revenues or expenses related to the acquisition prior to December 27, 2002, the closing date. Following are the Company's unaudited pro-forma results for the three and six months ended June 30, 2002, assuming the acquisition had occurred on January 1, 2002.
Three Months Ended Six Months Ended June 30, 2002 June 30, 2002 ------------------ ---------------- Net revenues .................................................................. $ 3,668,944 $ 7,380,217 Net loss ...................................................................... (1,997,413) (4,178,982) Basic and diluted loss per share .............................................. ($0.07) ($0.15) Shares used in calculating basic and diluted loss per share ................................................................... 27,618,273 27,205,069
These unaudited pro-forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the acquisition occurred on January 1, 2002, or of future results of operations. 13 Note 3 INVENTORIES: Set forth below is a detailed listing of inventories. June 30, December 31, 2003 2002 ---------- ------------ Raw materials $2,846,012 $3,297,942 Work-in-process 250,712 328,081 Finished goods 1,587,674 1,429,760 ---------- ------------ Total inventories $4,684,398 $5,055,783 ========== ============ Note 4 PROPERTY AND EQUIPMENT: Set forth below is a detailed listing of property and equipment.
June 30, 2003 December 31, 2002 ------------- ----------------- Lasers in service .......................... $ 6,396,663 $ 5,147,134 Computer hardware and software ............. 251,495 251,495 Furniture and fixtures ..................... 189,162 173,507 Machinery and equipment .................... 125,780 271,497 Autos and trucks ........................... 196,870 137,039 Leasehold improvements ..................... 103,863 100,106 ------------- ----------------- 7,263,833 6,080,778 Accumulated depreciation and amortization ........................... (3,238,811) (2,408,340) ------------- ----------------- Property and equipment, net ................ $ 4,025,022 $ 3,672,438 ============= =================
Depreciation expense was $942,023 and $782,722 for the six months ended June 30, 2003 and 2002, respectively. At June 30, 2003 and December 31, 2002, net property and equipment included $582,056 and $336,910, respectively, of assets recorded under capitalized lease arrangements, of which $504,621 and $272,783 was included in long-term debt at June 30, 2003 and December 31, 2002, respectively (see Note 8). Note 5 PATENTS AND LICENSED TECHNOLOGIES: Set forth below is a detailed listing of patents and licensed technologies.
June 30, 2003 December 31, 2002 ------------------ ------------------ Patents, net of accumulated amortization of $86,434 and $65,730 $315,710 $336,414 Licensed technologies, net of accumulated amortization of $303,618 and $239,612 533,382 597,388 ---------------- ------------------- Total patents and licensed technologies, net $849,092 $933,802 ================ ===================
Amortization expense was $84,710 and $68,182 for the six months ended June 30, 2003 and 2002, respectively. 14 Note 6 OTHER ACCRUED LIABILITIES: Set forth below is a detailed listing of other accrued liabilities.
June 30, 2003 December 31, 2002 ----------------------- --------------------- Accrued professional and consulting fees $85,273 $190,182 Accrued warranty 288,232 415,463 Accrued liability from matured notes 248,479 249,130 Royalty liability 86,792 169,368 Other accrued expenses 136,953 222,290 ----------------------- --------------------- Total other accrued liabilities $845,729 $1,246,433 ======================= =====================
In May 2002, SLT acquired a CO2 laser product line from Reliant Technologies, Inc., which included a commitment to prepay royalties of $268,023 over 18 months. The remaining portion of $86,792 and $169,368 is included in accrued liabilities at June 30, 2003 and December 31, 2002, respectively. During 2002, SLT resumed direct control of $223,000 of funds previously set aside for the payment of SLT's subordinated notes, which matured and ceased to bear interest on July 30, 1999, and $31,000 of funds set aside to pay related accrued interest. As of June 30, 2003 and December 31, 2002, the matured principal and related interest was $248,479 and $249,130, respectively. Note 7 NOTES PAYABLE: Set forth below is a detailed listing of notes payable.
June 30, 2003 December 31, 2002 ------------------- --------------------- Note payable - unsecured creditor, interest at 6.6%, payable in monthly principal and interest installments of $5,524 through April 2003. $ - $ 21,793 Note payable - secured creditor, interest at 10%, payable in monthly principal and interest installments of $9,173 through June 2003. - 53,470 Note payable - unsecured creditor, interest at 6.29%, payable in monthly principal and interest installments of $20,130 through September 2003. 59,762 - Note payable - unsecured creditor, interest at 7.47%, payable in monthly principal and interest installments of $7,827 through June 2004. 81,814 - Note payable - unsecured creditor, interest at 7.37%, payable in monthly principal and interest installments of $37,640 through January 2004. 257,530 - ------------------- --------------------- 399,106 75,263 Less: current maturities (399,106) (75,263) ------------------- --------------------- Notes payable, net of current maturities $ - $ - =================== =====================
15 Note 8 LONG-TERM DEBT: Set forth below is a detailed listing of the Company's long-term debt.
June 30, 2003 December 31, 2002 ------------------- --------------------- Borrowings on credit facility $977,677 $2,770,268 Capital lease obligations (see Note 4) 504,621 272,783 Less: current portion (1,171,837) (2,143,425) ------------------- --------------------- Total long-term debt $310,461 $899,626 =================== =====================
Concurrent with the SLT acquisition, the Company assumed a $3,000,000 credit facility from a bank, subsequently amended on February 27, 2003 and March 26, 2003 to $1,400,000 and on May 13, 2003 to $1,000,000. The credit facility has a commitment term of four years, expiring May 31, 2004, permits deferment of principal payments until the end of the commitment term, and is secured by SLT's business assets, including collateralization (until May 13, 2003) of $2,000,000 of SLT's cash and cash equivalents and short-term investments. On February 27, 2003 and March 26, 2003, the bank agreed to allow the Company to apply the cash collateral to a paydown of the facility in 2003 and, as such, the $2,000,000 is included in the current portion of long-term debt in the accompanying 2002 consolidated balance sheet. During 2003, the Company paid the credit facility down to $1,000,000. The credit facility has an interest rate of the 30 day LIBOR plus 2.25%. The rate at June 30, 2003 was 3.57%. The credit facility is subject to certain restrictive covenants and borrowing base limitations. At December 31, 2002, SLT did not meet the covenants set by the bank. The bank waived the non-compliance with the covenants at that date. The restrictive covenants and borrowing base limitations will continue in 2003 to apply to SLT. In addition, the Company has agreed to meet certain restrictive covenants at the consolidated group level. In the first two quarters of fiscal 2003, the group must maintain unrestricted cash, cash equivalents and/or short-term investments in an amount equal to or greater than the amount by which the line under the credit facility has been drawn down. In the last two quarters of fiscal 2003 and beyond, the group must meet two cash flow covenants. For all of 2003 and beyond, the group must maintain a minimum ratio of debt to the bank as compared to tangible net worth. The Company fulfilled all covenants applicable to the first and second quarter 2003; management expects to be able to meet all covenants, both those applying to SLT and those applying to the consolidated group, in the remaining two quarters of fiscal 2003. The Company has agreed to be guarantor to SLT's obligations under the credit facility. At June 30, 2003, the Company had $977,677 in outstanding obligations and had $22,323 of availability under the credit facility. The outstanding obligations under the credit facility are classified as current as they will be due in the next twelve months. The assets of SLT, including the subsidiaries of SLT, may not be transferred to PhotoMedex without meeting certain restrictions imposed on SLT by the terms of the credit facility with its bank. Under a restriction on dividends provision in the agreement, the assets of SLT may not be dividended, distributed or otherwise transferred by way of purchase, redemption or retirement of SLT's capital stock if such a dividend, distribution or transfer would cause SLT to be in default of the financial covenants it has made to the bank. Given this restriction, no dividend, distribution or other transfer could have been made as of June 30, 2003 or December 31, 2002. On the other hand, under a restriction under the credit facility on other, non-dividend transfers, SLT is permitted to engage in other transactions with affiliated entities, including PhotoMedex, provided such transactions are in the ordinary course of, and pursuant to the reasonable requirements of, SLT's business and are based upon fair and reasonable terms no less favorable to SLT than would be obtained in comparable arm's length transactions with non-affiliated entities. SLT did not transfer cash to PhotoMedex in the six months ended June 30, 2003. The obligations under capital leases are at fixed interest rates and are collateralized by the related property and equipment (see Note 4). Note 9 BUSINESS SEGMENT AND GEOGRAPHIC DATA: The Company is engaged in one business segment: the design, development and manufacture of laser products and the marketing of those laser products as well as other instruments for medical applications. The Company markets its offering through traditional products sales as well as through the provision of fee-based medical procedures services. The Company's customers are primarily doctors, 16 hospitals and surgery centers. For the three and six months ended June 30, 2003 and 2002, the Company did not have material net revenues from any individual customer. The Company reported net revenues in the following categories:
For the Three Months Ended For the Six Months Ended June 30, June 30, 2003 2002 2003 2002 --------------- -------------- ------------- -------------- Laser system sales $ 1,069,030 $ 597,500 $ 1,835,970 $ 1,309,500 Disposables and accessories 800,262 - 1,902,614 - --------------- -------------- ------------- -------------- Total product sales $ 1,869,292 $ 597,500 $ 3,958,424 $ 1,309,500 =============== ============== ============= ============== Excimer treatment procedures $ 202,749 $ 245,199 $ 355,913 $ 485,572 Surgical procedures 1,550,818 - 3,001,839 - --------------- -------------- ------------- -------------- Total services $ 1,753,567 $ 245,199 $ 3,357,752 $ 485,572 =============== ============== ============= ==============
For the three and six months ended June 30, 2003 and 2002, there were no material net revenues attributed to an individual foreign country. Net revenues by geographic area were as follows:
For the Three Months Ended For the Six Months Ended June 30, June 30, 2003 2002 2003 2002 --------------- -------------- ------------- -------------- Domestic $ 2,695,689 $245,199 $ 5,630,769 $ 485,572 Foreign 1,147,010 597,500 1,685,407 1,309,500 --------------- -------------- ------------- -------------- $ 3,842,699 $ 842,699 $ 7,316,176 $ 1,795,072 =============== ============== ============= ==============
Note 10 PRIVATE PLACEMENT: On May 28, 2003, the Company closed on a private placement for 5,982,353 shares of common stock at a price of $1.70 per share resulting in gross proceeds of $10,170,000. The closing price of the Company's common stock on May 28, 2003 was $2.07 per share. In connection with this private placement, the Company paid commissions and other expenses of $669,954, resulting in net proceeds of $9,500,046. In addition, the investors received warrants to purchase 1,495,588 shares of common stock at an exercise price of $2.00 per share. The warrants have a five-year term and are not exercisable until November 29, 2003. The Company intends to use the proceeds of this financing to pay for working capital and other general corporate purposes. The shares sold in the private placement, including the shares underlying the warrants, have been registered with the Securities and Exchange Commission. Note 11 SIGNIFICANT ALLIANCES/AGREEMENTS: As of April 1, 2003, the Company entered into a sales and marketing agreement with GlobalMed Technologies Co., or GlobalMed. Under this agreement, the Company designated GlobalMed as the exclusive master distributor of the XTRAC system for dermatological applications in certain countries in Europe and the Pacific Rim of Asia. The agreement has a two-year term, subject to early termination by the Company in the event that GlobalMed does not meet certain performance standards set forth in the agreement with respect to the purchase of specified quantities of XTRAC systems. GlobalMed will be responsible for promoting and marketing the XTRAC system in the designated countries by itself and through its network of sub-distributors and other subcontractors in the designated countries. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q, OR THE REPORT, ARE "FORWARD-LOOKING STATEMENTS." THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS ABOUT THE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS OF PHOTOMEDEX, INC., A DELAWARE CORPORATION (REFERRED TO IN THIS REPORT AS "WE," "US," "OUR" OR "REGISTRANT") AND OTHER STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT HISTORICAL FACTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER INCLUDED IN OTHER PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, OR THE COMMISSION, REPORTS TO OUR STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY US INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES BASED UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS. WHEN USED IN THIS REPORT, THE WORDS "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "BELIEVE," "SEEK," "ESTIMATE" AND SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS, INCLUDING OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER FACTORS DISCUSSED UNDER THE SECTION ENTITLED "RISK FACTORS," IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002. THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT. OVERVIEW OF BUSINESS OPERATIONS We are engaged in the development, manufacturing and marketing of our proprietary XTRAC(R), or XTRAC, excimer laser and fiber optic equipment and techniques directed toward the treatment of psoriasis, vitiligo, atopic dermatitis and leukoderma. We acquired Surgical Laser Technologies, Inc., ("SLT"), on December 27, 2002, and the business and revenues in surgical products and services from SLT have been included in our results of operations in the first and second quarters of 2003, but not the comparable periods for 2002. We believe that our technologies for the excimer laser and other surgical lasers provide the basis for reliable, cost-effective systems that will increasingly be used in connection with a variety of applications. In connection with our current business plan, the initial medical applications for our excimer laser technology are intended for the treatment of psoriasis, vitiligo, atopic dermatitis and leukoderma. In January 2000, we received approval of our 510(k) submission from the Food and Drug Administration, or FDA, relating to the use of our XTRAC system for the treatment of psoriasis. The 510(k) establishes that our XTRAC system has been determined to be substantially equivalent to currently marketed devices for purposes of treating psoriasis. In February 2002, the Current Procedural Terminology Editorial Board of the AMA approved the request by the American Academy of Dermatology to issue reimbursement codes for the laser therapies in the treatment of psoriasis and other inflammatory diseases, which would include laser therapy using the XTRAC system to treat such conditions. The AMA published three CPT code numbers covering the treatment of psoriasis and other inflammatory skin diseases with the XTRAC system. These new codes became effective in the first quarter of 2003. We believe that the publication of these codes will facilitate our ability to obtain broader approvals for reimbursement for treatment of psoriasis and other inflammatory skin diseases using the XTRAC system. As part of our commercialization strategy in the United States, we are providing the XTRAC system to targeted dermatologists at no initial capital cost to them. We believe that this strategy will create incentives for these dermatologists to adopt the XTRAC system and will further market penetration. But this strategy will require us to identify and target appropriate dermatologists and to balance the planned roll-out of our XTRAC lasers in 2003 against uncertainties in acceptance by physicians, patients and health plans and constraints on the number of XTRAC systems we are able to provide. Our marketing force has limited experience in dealing with such challenges. We expect that as we seek to increase the number of accepting health plans in the last half of 2003, we will encounter greater difficulties and uncertainties in overcoming such challenges. Outside of the United States, our strategy includes selling XTRAC systems directly to dermatologists through distributors and, potentially, placing XTRAC systems with dermatologists to provide us with a usage-based revenue stream. 18 In similar fashion, we have growing, but still limited marketing experience in expanding our surgical services business. The preponderance of this business is in the southeastern part of the United States. New procedures and new geographies with new customers and different business habits and networks will likely pose different challenges than the ones we have encountered in the past. There can be no necessary assurance that our experience will be sufficient to overcome such challenges. RESULTS OF OPERATIONS REVENUES We generated revenues of $3,842,699 during the three months ended June 30, 2003, of which $2,869,230 were from the operations of SLT. Of the remaining amounts, $770,720 related to the sale of our excimer lasers and spare parts to distributors outside of the United States and $202,749 related to treatments performed with our excimer laser in the United States. We generated revenues of $842,699 during the three months ended June 30, 2002. Of these amounts, $597,500 related to the sale of our excimer lasers to distributors outside of the United States and $245,199 related to treatments performed with our excimer laser in the United States. We generated revenues of $7,316,176 during the six months ended June 30, 2003, of which $6,026,243 were from the operations of SLT. Of the remaining amounts, $934,020 related to the sale of our excimer lasers and spare parts to distributors outside of the United States and $355,913 related to treatments performed with our excimer laser in the United States. We generated revenues of $1,795,072 during the six months ended June 30, 2002. Of these amounts, $1,309,500 related to the sale of our excimer lasers to distributors outside of the United States and $485,572 related to treatments performed with our excimer laser in the United States. In the first quarter of 2003, we implemented a limited program to support certain physicians in addressing treatments with the XTRAC system that may be denied reimbursement by private insurance carriers. We recognize service revenue from the sale of treatment cards, or equivalent treatment codes, to physicians participating in this program only if and to the extent the physician has been reimbursed for the treatments. This program, originally scheduled to terminate on June 30, 2003, has been extended to September 30, 2003. During the first six months of 2003, we deferred revenues of $461,454, under this program, net of $22,118 in revenues recognized during the second quarter due to physician reimbursements for the treatments. COST OF REVENUES Product cost of revenues for the three months ended June 30, 2003 were $1,355,993, compared to $245,427 for the three months ended June 30, 2002. Included in these costs were $712,938 related to SLT product revenues, for the three months ended June 30, 2003. The remaining product cost of revenues during these periods related primarily to the production costs of the XTRAC laser equipment sold outside of the United States. Product cost of revenues for the six months ended June 30, 2003 were $2,505,465, compared to $568,066 for the six months ended June 30, 2002. Included in these costs were $1,539,801 related to SLT product revenues, for the six months ended June 30, 2003. The remaining product cost of revenues during these periods related primarily to the production costs of the XTRAC laser equipment sold outside of the United States. Services cost of revenues was $1,405,197 and $734,905 in the three months ended June 30, 2003 and 2002, respectively. Included in these costs were $925,569 related to SLT service revenues, for the three months ended June 30, 2003. The remaining services cost of revenues, during the periods ended June 30, 2003 and 2002, represented depreciation and field service on the lasers in service. Services cost of revenues was $2,805,983 and $1,464,373 in the six months ended June 30, 2003 and 2002, respectively. Included in these costs were $1,801,870 related to SLT service revenues, for the six months ended June 30, 2003. The remaining services cost of revenues, during the periods ended June 30, 2003 and 2002, represented depreciation and field service on the lasers in service. The decreases in the services cost of sales, excluding SLT costs, related to the improvements made to the lasers, with the result that field service costs were less in the three and six months ended June 30, 2003 compared to the same periods ended June 30, 2002. 19 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the three months ended June 30, 2003 were $2,292,062, compared to $1,591,467 for the three months ended June 30, 2002, an increase of 44%. Selling, general and administrative expenses for the six months ended June 30, 2003 were $4,446,654, compared to $3,391,949 for the six months ended June 30, 2002, an increase of 31%. These increases were principally due to the addition of sales, marketing and administrative personnel in connection with the acquisition of SLT. ENGINEERING AND PRODUCT DEVELOPMENT Engineering and product development expenses for the three months ended June 30, 2003 decreased to $465,134 from $579,196 for the three months ended June 30, 2002. This decrease related primarily to clinical trial expenses of $173,000 and product development expenses of $170,000, related to the improvements to the excimer laser, for the three months ended June 30, 2002. These decreases were offset, in part, by the recording of a severance of $87,500 and SLT's engineering expenses of $124,000 for the three months ended June 30, 2003. Engineering and product development expenses for the six months ended June 30, 2003 increased to $877,066 from $801,422 for the six months ended June 30, 2002. This increase related primarily to the recording of a severance of $87,500 and SLT's engineering expenses of $247,000 for the six months ended June 30, 2003. These expenses were offset, in part, by clinical trial expenses of $173,000 and product development expenses of $170,000, related to the improvements to the excimer laser, for the six months ended June 30, 2002. INTEREST EXPENSE, NET Net interest expense for the three months ended June 30, 2003 was $10,415, as compared to net interest income of $4,436 for the three months ended June 30, 2002. Net interest expense for the six months ended June 30, 2003 was $41,438, as compared to net interest income of $3,368 for the six months ended June 30, 2002. The increases in net interest expense in the comparable periods related to the interest on the line of credit and on long term-debt that was assumed with the acquisition of SLT. NET LOSS The aforementioned factors resulted in a net loss of $1,686,102 and $3,360,430 during the three and six months ended June 30, 2003, as compared to a net loss of $2,303,267 and $4,431,741 during the three and six months ended June 30, 2002, a decrease of 27% and 24%, respectively. These decreases in net losses were primarily the result of the acquisition of SLT along with a reduction of operating and production costs. LIQUIDITY AND CAPITAL RESOURCES We have historically financed our operations through the use of working capital provided from loans and equity and debt financing. From September 1997 through May 2003, we issued certain securities, including shares of our common stock and other securities convertible or exercisable into shares of common stock, in order to finance our business operations. On May 28, 2003, we closed on a private placement for 5,982,353 shares of common stock at a price of $1.70 per share resulting in gross proceeds of $10,170,000. The closing price of our common stock on May 28, 2003 was $2.07 per share. In connection with this private placement, we paid commissions and other expenses of $669,954, resulting in net proceeds of $9,500,046. In addition, the investors received warrants to purchase 1,495,588 shares of common stock at an exercise price of $2.00 per share. The warrants have a five-year term and are not exercisable until November 29, 2003. We intend to use the proceeds of this financing to pay for working capital and other general corporate purposes. The shares sold in the private placement, including the shares underlying the warrants, have been registered with the Securities and Exchange Commission. On June 13, 2002, we completed a private placement of 4,115,000 shares of common stock at a price of $1.50 per share resulting in gross proceeds of $6,172,500. The closing price of our common stock on June 13, 2002 was $1.68 per share. In connection with this private placement, we paid commissions and other 20 expenses of $466,453, resulting in net proceeds of $5,706,047. In addition, the investors received warrants to purchase 1,028,750 shares of common stock at an exercise price of $1.90 per share. The warrants have a five-year term and were not exercisable until December 14, 2002. We have used the proceeds of this financing to pay for working capital and other general corporate purposes. On December 27, 2002, we acquired SLT. While the impact of the acquisition was marginal on our results of operations for 2002, we expect that the surgical products and services provided by SLT will increase revenues for 2003. Revenues from surgical products and services amounted to $2,869,230 and $6,026,243 for the three and six months ended June 30, 2003. We also expect to save costs from the consolidation of the administrative and marketing infrastructure of the combined company. With the consolidated infrastructure in place, we expect that growth of our revenues, both in phototherapy and surgical products and services, may occur, without commensurate growth in our fixed costs. We believe that results of operations for the six months ended June 30, 2003 have reflected each of these expectations. We believe that the results of operations during the six months ended June 30, 2003 have reflected that the established revenues from surgical products and services will serve to help absorb the costs of the infrastructure of the combined company and thereby improve cash flows. At June 30, 2003, the ratio of current assets to current liabilities was 3.01 to 1.00 compared to 1.90 to 1.00 at December 31, 2002. The improvement in this ratio was due to the private placement in May 2003, detailed above, and was also due in part that as of the end of fiscal 2002, we had classified $2,000,000 of the obligation to SLT's bank as currently due, but as of June 30, 2003, we had applied the cash collateral to pay down the credit facility with that bank to $977,677. As of June 30, 2003, we had $11,914,032 of working capital. Cash and cash equivalents were $9,594,224 as of June 30, 2003, as compared to $4,008,051 as of December 31, 2002. We believe that our existing cash balance together with our other existing financial resources, including the line of credit facility and access to lease financing for capital expenditures, and any revenues from sales, distribution, licensing and manufacturing relationships, will be sufficient to meet our operating and capital requirements through the second quarter of 2004. The 2003 operating plan reflects anticipated revenue growth from an increase in expected treatment fees for use of the XTRAC system based on the recent approval of applicable reimbursement codes and wider insurance coverage in the United States and significant costs savings from the integration of the combined companies. However, negative deviations from the business plan may require us to obtain additional equity or debt financing to meet our working capital requirements or capital expenditure needs. Similarly, if our growth outstrips the business plan, we may require additional equity or debt financing. There can be no assurance that additional financing, if needed, will be available when required or, if available, will be on terms satisfactory to us. In such an event, we would further rationalize our plans and operations to seek to balance cash inflows and outflows. Concurrent with the SLT acquisition, we assumed a $3,000,000 credit facility from a bank subsequently amended on February 27, 2003 and March 26, 2003 to $1,400,000 and on May 13, 2003 to $1,000,000. The credit facility has a commitment term expiring May 31, 2004, permits deferment of principal payments until the end of the commitment term, and is secured by SLT's business assets, including collateralization (until May 13, 2003) of SLT's cash and cash equivalents and short-term investments. In the first quarter of 2003, we paid the credit facility down to $1,362,817. As various certificates of deposit matured in the second quarter of 2003, the proceeds were applied to pay down the balance outstanding under the facility, bringing the credit limit down to $1,000,000. The credit facility has an interest rate of the 30 day LIBOR plus 2.25%. The rate at June 30, 2003 was 3.57%. The credit facility is subject to certain restrictive covenants and borrowing base limitations. At June 30, 2003, SLT was in compliance with all covenants set by the bank. The restrictive covenants and borrowing base limitations set under the credit facility will continue in 2003 to apply to SLT. In addition, we have agreed to meet certain restrictive covenants at the consolidated group level. In the first two quarters of fiscal 2003, we, as a group, must maintain unrestricted cash, cash equivalents and/or short-term investments in an amount equal to or greater than the amount by which the line under the credit facility has been drawn down. At December 31, 2003, the group must meet two cash flow covenants. For all of 2003 and beyond, we, as a group, must maintain a minimum ratio of debt to the bank as compared to tangible net worth. We have also agreed to be guarantor to SLT's obligations under the credit facility. 21 Management expects to be able to meet all covenants, both those applying to SLT and those applying to the consolidated group, in fiscal 2003. At June 30, 2003, we had $977,677 in outstanding obligations and had $22,323 of availability under the credit facility. The outstanding obligations under the credit facility are classified as current, as they will be due within the next twelve months. The assets of SLT, including the subsidiaries of SLT, may not be transferred to PhotoMedex without meeting certain restrictions imposed on SLT by the terms of the credit facility with its bank. Under a provision in the agreement restricting dividends, the assets of SLT may not be dividended, distributed or otherwise transferred by way of purchase, redemption or retirement of SLT's capital stock, if such a dividend, distribution or transfer would cause SLT to be in default of the financial covenants it has made to the bank. Given this restriction, no dividend, distribution or other transfer could have been made as of December 31, 2002. On the other hand, under a restriction under the credit facility on other, non-dividend transfers, SLT is permitted to engage in other transactions with affiliated entities, including PhotoMedex, provided such transactions are in the ordinary course of, and pursuant to the reasonable requirements of, SLT's business and are based upon fair and reasonable terms no less favorable to SLT than would be obtained in comparable arm's length transactions with non-affiliated entities. SLT did not transfer cash to PhotoMedex in the six months ended June 30, 2003. For the six months ended June 30, 2003, net cash used in operating activities was $2,664,660. The net loss of $3,360,430 for the six months ended June 30, 2003 included $1,026,733 of non-cash depreciation and amortization expense, $38,164 of payment in our securities (including common stock options and warrants) of fees for services to consultants and $246,029 of non-cash provisions for doubtful accounts. The usage also included a net increase in account receivables of $573,253 and a net decrease in current liabilities of $570,659, the effects of which were offset, in part, by a decrease in inventories of $445,043. For the six months ended June 30, 2002, net cash used in operating activities was $3,320,402. The net loss of $4,431,741 for the six months ended June 30, 2002 included $850,904 of non-cash depreciation and amortization expense and $34,295 of payment in our securities (including common stock options) of fees for services to consultants. The usage was offset by a net decrease in accounts receivable and inventory of $73,843 and $283,662, respectively, and a net increase in current liabilities of $77,134. Net cash used in investing activities was $1,053,419 and $5,179 for the six months ended June 30, 2003 and 2002, respectively. During the six months ended June 30, 2003, we utilized $1,035,419, for production of our lasers in service. During the six months ended June 30, 2003 and 2002, we used $17,999 and $45,761, respectively, for purchases of computer and manufacturing equipment as well as leasehold improvements to support our excimer laser business operations. Net cash provided by financing activities was $9,304,251 for the six months ended June 30, 2003 compared to net cash provided of $5,701,047 for the six months ended June 30, 2002. In the six months ended June 30, 2003, we received net proceeds of $9,500,046 from the private placement in May 2003. We also received $2,000,000 from the release of restricted cash, cash equivalents and short-term investments, which was offset by a net payment of $1,792,591 on the line of credit, and $404,735 for the payment of certain debts. In the six months ended June 30, 2002, we received net proceeds of $5,706,047 from the private placement in June 2002 and $18,000 and $29,000 from the exercise of options and warrants, respectively. These receipts were offset, in part, by $55,972 for the payment of certain debts. Our ability to expand our business operations is currently dependent in significant part on financing from external sources. There can be no assurance that changes in our manufacturing and marketing, engineering and product development plans or other changes affecting our operating expenses and business strategy will not require financing from external sources before we will be able to develop profitable operations. There can be no assurance that additional capital will be available on terms favorable to us, if at all. To the extent that additional capital is raised through the sale of additional equity or convertible debt securities, the issuance of such securities could result in additional dilution to our stockholders. Moreover, our cash requirements may vary materially from those now planned because of results of marketing, product testing, changes in the focus and direction of our marketing programs, competitive and technological advances, the level of working capital required to sustain our planned growth, litigation, operating results, including the extent and duration of operating losses, and other factors. In the event that we 22 experience the need for additional capital, and are not able to generate capital from financing sources or from future operations, management may be required to modify, suspend or discontinue our business plan. We expect to incur operating losses in 2003 because we plan to spend substantial amounts on the marketing of products for the treatment of psoriasis, vitiligo, atopic dermatitis and leukoderma as well as for the expansion of operations. We expect, based on our current business plan, and our present outlook, that we will have the resources to market our current products and services through the second quarter of 2004. Nevertheless, we cannot assure you that we will market any products successfully, operate profitably in the future, or that we may not require significant additional financing in order to accomplish our business plan. During the three and six months ended June 30, 2003, there were no items that significantly impacted our commitments and contingencies as discussed in the notes to the 2002 annual financial statements as filed on Form 10-K. In addition, we have no significant off-balance sheet arrangements. IMPACT OF INFLATION We have not operated in a highly inflationary period, and we do not believe that inflation has had a material effect on sales or expenses. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are accordingly included in the notes to the consolidated financial statements found elsewhere in this Report. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public enterprises, such as us, with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation is applied to the enterprise no later than the beginning of the first annual reporting period beginning after June 15, 2003. The application of this Interpretation is not expected to have a material effect on our consolidated financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that we will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. In December 2002, the FASB finalized EITF Issue No. 00-21, "Accounting for Revenue Arrangemetns with Multiple Deliverables." This issue addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The final consensus of this issue is applicable to agreements entered into in fiscal periods beginning after June 15, 2003. Additionally, companies will be permitted to apply the guidance in this issue to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, "Accounting Changes." We do not believe that adoption of this issue will have a material impact on its consolidated financial position, consolidated results of operations, or liquidity. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations in this Report are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expense and disclosures at the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition, accounts receivable, inventories, impairment of property and equipment and of intangibles and accruals for warranty claims. We use authoritative pronouncements, 23 historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates and be based on events different from those assumptions. Management believes that the following critical accounting policies affect our more significant judgments and estimates in the preparation of its consolidated financial statements. These critical accounting policies and the significant estimates made in accordance with them have been discussed with our Audit Committee. REVENUE RECOGNITION. We have two distribution channels for our phototherapy treatment equipment. We will either (i) sell the laser through a distributor or directly to a physician or (ii) place the laser in a physician's office (at no charge to the physician) and charge the physician a fee for an agreed upon number of treatments or treatment cards. When we sell a laser to a distributor or directly to a physician, revenue is recognized upon shipment of the product. Under the terms of the distributor agreements, the distributors do not have the right to return any unit. However, we do allow products to be returned by our distributors in redress of product defects or other claims. When we place a laser in a physician's office, service revenues are recognized based on an estimate of patient treatments. To use the laser, the physician purchases a treatment card or an access code that allows performance of a specified number of treatments. This amount is included in deferred revenues on the accompanying consolidated balance sheets until the treatment occurs. In the first quarter of 2003, we implemented a limited program to induce some physicians to perform treatments with the XTRAC system and at the same time to support these physicians in coping with claims for such treatments that may be denied reimbursement by private insurance carriers. Under this limited program, currently set to expire on September 30, 2003, we record deferred revenue when we sell treatment cards or access codes to the participating physicians and relieve the deferred service revenue account only when the physician has received reimbursement for the treatment. Through our surgical businesses, we generate revenues primarily from three channels. The first is through sales of recurring laser delivery systems and accessories; the second is through the per-procedure surgical services; and the third is through the sale of laser systems and related maintenance service agreements. We recognize revenues from product sales, including sales to distributors, upon shipment of the products. For per-procedure surgical services, we recognize revenue upon the completion of the procedure. Revenue from maintenance service agreements is deferred and recognized on a straight-line basis over the term of the agreements. Revenue from billable services, including repair activity, is recognized when the service is provided. INVENTORY. We account for inventory at the lower of cost (first-in, first-out) or market. Cost is determined at latest cost for raw materials and at production cost (materials, labor and indirect manufacturing cost) for work-in-process and finished goods. Reserves for slow moving and obsolete inventories are provided based on historical experience and product demand. Management evaluates the adequacy of these reserves periodically based on forecasted sales and market trend. ALLOWANCE FOR DOUBTFUL ACCOUNTS. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The majority of receivables related to phototherapy sales are due from various distributors located outside of the United States. The majority of receivables related to surgical product sales are due from various customers and distributors located inside the United States. From time to time, our clients dispute the amounts due to us, and, in other cases, our clients experience financial difficulties and cannot pay on a timely basis. In certain instances, these factors ultimately result in uncollectible accounts. The determination of the appropriate reserve needed for uncollectible accounts involves significant judgment. A change in the factors used to evaluate collectibility could result in a significant change in the reserve needed. Such factors include changes in the financial condition of our customers as a result of industry, economic or customer specific factors. PROPERTY AND EQUIPMENT. As of June 30, 2003 and December 31, 2002, we had net property and equipment of $4,025,022 and $3,672,438, respectively. The most significant component of these amounts related to the lasers placed by us in physicians' offices. We own the equipment and charge the physician on a per-treatment basis for use of the equipment. The realizability of the net carrying value of the lasers is predicated on increasing revenues from the physicians' use of the lasers. We believe that such usage will increase in the future based on the recently approved CPT codes and wider insurance reimbursement. INTANGIBLES. Our balance sheet includes goodwill and other intangible assets which affect the amount of future period amortization expense and possible impairment expense that we will incur. Management's judgments regarding the existence of impairment indicators are based on various factors, including 24 market conditions and operational performance of its business. As of June 30, 2003 and December 31, 2002, we had $3,793,515 and $3,878,225, respectively, of goodwill and other intangibles, accounting for 15% and 18% of our total assets at the respective dates. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. WARRANTY ACCRUALS. We establish a liability for warranty repairs based on estimated future claims for XTRAC systems and based on historical analysis of the cost of the repairs for surgical laser systems. However, future returns on defective laser systems and related warranty liability could differ significantly from estimates and historical patterns, which would adversely affect our operating results. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are not currently exposed to market risks due to changes in interest rates and foreign currency rates and, therefore, we do not use derivative financial instruments to address treasury risk management issues in connection with changes in interest rates and foreign currency rates. ITEM 4. CONTROLS AND PROCEDURES The Company's management, with the participation of the company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the company's disclosure controls and procedures as of June 30, 2003. Based on this evaluation, the company's Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules and forms. Such evaluation did not identify any change in the quarter ended June 30, 2003 that has materially affected, or is reasonable likely to materially affect, the company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to Item 3, Legal Proceedings, in our Annual Report on Form 10-K for the year ended December 31, 2002 for descriptions of our legal proceedings. Regarding the suit brought by City National Bank in Orlando, Florida for unpaid rent with respect to our former facility, Lastec, Yorke and Thompson (the buyer, and buyer principals of our Orlando-based business) had agreed as part of their settlement with us, to be responsible for the defenses of the suit, but they have reneged on this. Accordingly, we have asked the appropriate court to abrogate our settlement agreement with Lastec, Yorke and Thompson. The court has granted this request. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Recent Issuances of Unregistered Securities During the three months ended June 30, 2003, we granted options to purchase up to an aggregate of 539,000 shares of common stock to various of our employees under our 2000 Stock Option Plan at a weighted average exercise price of $1.65 per share. We also granted options to purchase an aggregate of 33,000 shares of common stock to members of our Scientific Advisory board and similar consultants. Those grants were at an exercise price of $1.53, but were not made under the 2000 Stock Option Plan. On May 28, 2003, we closed on a private placement for 5,982,353 shares of common stock at a price of $1.70 per share resulting in gross proceeds of $10,170,000. The closing price of our common stock on May 28, 2003 was $2.07 per share. In connection with this private placement, we paid commissions and other expenses of $669,954, resulting in net proceeds of $9,500,046. In addition, the investors received warrants to purchase 1,495,588 shares of common stock at an exercise price of $2.00 per share. The warrants have a five-year term and are not exercisable until November 29, 2003. We intend to use the proceeds of this financing to pay for working capital and other general corporate purposes. The shares sold in the private placement, including the shares underlying the warrants, have been registered with the Securities and Exchange Commission. 25 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Reports on Form 8-K ------------------- On July 29, 2003, we filed a Report on Form 8-K with respect to our press release, dated July 24, 2003, with respect to our second quarter 2003 earnings. B. Other Exhibits -------------- 3.2 Amended and Restated Bylaws (corrected in Sec. 3.07) 10.43 Note for Business and Commercial Loans, dated May 13, 2003, made by Surgical Laser Technologies, Inc. in favor of AmSouth Bank 10.44 Addendum to Note for Business and Commercial Loans, LIBOR rate, dated May 13, 2003, made by Surgical Laser Technologies, Inc. in favor of AmSouth Bank 31.1 Rule 13a-14(a) Certificate of Chief Executive Officer 31.2 Rule 13a-14(a) Certification of Chief Financial Officer 32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 26 DOCUMENTS INCORPORATED BY REFERENCE We are currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information may be inspected and copied at the public reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549; at its New York Regional Office, 233 Broadway, New York, New York 10297; and its Chicago Regional Office, 175 West Jackson Boulevard, Suite 900, Chicago, Illinois 60604, and copies of such materials can be obtained from the Public Reference Section of the Commission at its principal office in Washington, D.C., at prescribed rates. In addition, such materials may be accessed electronically at the Commission's site on the World Wide Web, located at http://www.sec.gov. We intend to furnish our stockholders with annual reports containing audited financial statements and such other periodic reports as we determine to be appropriate or as may be required by law. SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. PHOTOMEDEX, INC. Date: August 14, 2003 By: /s/ Jeffrey F. O'Donnell -------------------------------------------- Jeffrey F. O'Donnell President and Chief Executive Officer Date: August 14, 2003 By: /s/ Dennis M. McGrath -------------------------------------------- Dennis M. McGrath Chief Financial Officer 27 EX-3.(II) 3 exhibit3pt2_0603.txt CHANGE IN BY-LAWS JUN 2003 Exhibit 3.2 AMENDED AND RESTATED BYLAWS OF PHOTOMEDEX, INC. (A DELAWARE CORPORATION) The foregoing are the Amended and Restated Bylaws of PHOTOMEDEX, INC., a Delaware corporation (the "Corporation"), effective as of March 17, 2003: ARTICLE 1 Offices 1.1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office of the Corporation shall be located at 147 Keystone Drive, Montgomeryville, Pennsylvania 18936. The Board of Directors of the Corporation (the "Board of Directors") may change the location of said principal executive office. 1.2. OTHER OFFICES. The Corporation may also have an office or offices at such other place or places, either within or without the State of Delaware, as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE 2 Meetings of Stockholders 2.1. ANNUAL MEETINGS. The annual meeting of stockholders of the Corporation shall be held at a date and at such time as the Board of Directors shall determine. At each annual meeting of stockholders, directors shall be elected in accordance with the provisions of Section 3.03 hereof and any other proper business may be transacted. 2.2. SPECIAL MEETINGS. Special meetings of stockholders for any purpose or purposes may be called at any time by a majority of the Board of Directors, by the Chairman of the Board, by the President or by holders of not less than sixty-six and two thirds percent (66 2/3%) of the voting power of all outstanding shares of voting stock regardless of class and voting together as a single voting class. The term "voting stock" as used in these Bylaws shall have the meaning set forth in Section 203(c) of the Delaware General Corporation Law. Special meetings may not be called by any other person or persons. Each special meeting shall be held at such date and time as is requested by the person or persons calling the meeting, within the limits fixed by law. 2.3. PLACE OF MEETINGS. Each annual or special meeting of stockholders shall be held at such location as may be determined by the Board of Directors or, if no such determination is made, at such place as may be determined by the Chairman of the Board. If no location is so determined, any annual or special meeting shall be held at the principal executive office of the Corporation. 2.4. Section 2.04. NOTICE OF MEETINGS. Written notice of each annual or special meeting of stockholders stating the date and time when, and the place where, it is to be held shall be delivered either personally or by mail to stockholders entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. The purpose or purposes for which the meeting is called may, in the case of an annual meeting, and shall, in the case of a special meeting, also be stated. If mailed, such notice shall be directed to a stockholder at his address as it shall appear on the stock books of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notices intended for him be mailed to some other address, in which case such notice shall be mailed to the address designated in such request. 2.5. CONDUCT OF MEETINGS. All annual and special meetings of stockholders shall be conducted in accordance with such rules and procedures as the Board of Directors may determine subject to the requirements of applicable law and, as to matters not governed by such rules and procedures, as the chairman of such meeting shall determine. The chairman of any annual or special meeting of stockholders shall be the Chairman of the Board. The Secretary, or in the absence of the Secretary, a person designated by the Chairman of the Board, shall act as secretary of the meeting. 2.6. QUORUM. At any meeting of stockholders of the Corporation, the presence, in person or by proxy, of the holders of record of a majority of the shares then issued and outstanding and entitled to vote at the meeting shall constitute a quorum for the transaction of business; provided, however, that this Section 2.06 shall not affect any different requirement which may exist under statute, pursuant to the rights of any authorized class or series of stock, or under the Certificate of Incorporation of the Corporation, as amended or restated from time to time (the "Certificate"), for the vote necessary for the adoption of any measure governed thereby. In the absence of a quorum, the stockholders present in person or by proxy, by majority vote and without further notice, may adjourn the meeting from time to time until a quorum is attained. At any reconvened meeting following such adjournment at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. 2.7. VOTES REQUIRED. The affirmative vote of a majority of the shares present in person or represented by proxy at a duly called meeting of stockholders of the Corporation, at which a quorum is present and entitled to vote on the subject matter, shall be sufficient to take or authorize action upon any matter which may properly come before the meeting, except that the election of directors shall be by plurality vote, unless the vote of a greater or different number thereof is required by statute, by the rights of any authorized class of stock or by the Certificate. Unless the Certificate or a resolution of the Board of Directors adopted in connection with the issuance of shares of any class or series of stock provides for a greater or lesser number of votes per share, or limits or denies voting rights, each outstanding share of stock, regardless of class or series, shall be entitled to one (l) vote on each matter submitted to a vote at a meeting of stockholders. 2.8. PROXIES. A stockholder may vote the shares owned of record by him either in person or by proxy executed in writing (which shall include writings sent by telex, telegraph, cable or facsimile transmission) by the stockholder himself or by his duly authorized attorney-in-fact. No proxy shall be valid after three (3) years from its date, unless the proxy provides for a longer period. Each proxy shall be in writing, subscribed by the stockholder or his duly authorized attorney-in-fact, and dated, but it need not be sealed, witnessed or acknowledged. 2.9. STOCKHOLDER ACTION. Any action required or permitted to be taken by the stockholders of the Corporation must be effect at a duly called Annual Meeting or at a special meeting of stockholders of the Corporation. 2.10. LIST OF STOCKHOLDERS. The Secretary of the Corporation shall prepare and make (or cause to be prepared and made), at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of, and the number of shares registered in the name of, each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the duration thereof, and may be inspected by any stockholder who is present. 2.11. INSPECTORS OF ELECTION. In advance of any meeting of stockholders, the Board of Directors may appoint Inspectors of Election to act at such meeting or at any adjournment or adjournments thereof. If such Inspectors are not so appointed or fail or refuse to act, the chairman of any such meeting may (and, upon the demand of any stockholder or stockholder's proxy, shall) make such an appointment. The number of Inspectors of Election shall be one (1) or three (3). If there are three (3) Inspectors of Election, the decision, act or certificate of a majority shall be effective and shall represent the decision, act or certificate of all. No such Inspector need be a stockholder of the Corporation. Subject to any provisions of the Certificate of Incorporation, the Inspectors of Election shall determine the number of shares outstanding, the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies; they shall receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes or consents, determine when the polls shall close and determine the result; and finally, they shall do such acts as may be proper to conduct the election or vote with fairness to all stockholders. On request, the Inspectors shall make a report in writing to the secretary of the meeting concerning any challenge, question or other matter as may have been determined by them and shall execute and deliver to such secretary a certificate of any fact found by them. ARTICLE 3 Directors 3.1. POWERS. The business and affairs of the Corporation shall be managed by and be under the direction of the Board of Directors. The Board of Directors shall exercise all the powers of the Corporation, except those that are conferred upon or reserved to the stockholders by statute, the Certificate or these Bylaws. 3.2. NUMBER. The number of directors shall be fixed from time to time by resolution of the Board of Directors but shall not be less than three (3) nor more than eight (8). 3.3. ELECTION AND TERM OF OFFICE. Each director shall serve until his successor is elected and qualified or until his death, resignation or removal, no decrease in the authorized number of directors shall shorten the term of any incumbent director, and additional directors elected in connection with rights to elect such additional directors under specified circumstances which may be granted to the holders of any series of Preferred Stock shall not be included in any class, but shall serve for such term or terms and pursuant to such other provisions as are specified in the resolution of the Board of Directors establishing such series. 3.4. ELECTION OF CHAIRMAN OF THE BOARD. At the organizational meeting immediately following the annual meeting of stockholders, the directors shall elect a Chairman of the Board from among the directors who shall hold office until the corresponding meeting of the Board of Directors in the next year and until his successor shall have been elected or until his earlier resignation or removal. Any vacancy in such office may be filled for the unexpired portion of the term in the same manner by the Board of Directors at any regular or special meeting. 3.5. REMOVAL. Any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Failure to elect a new director to replace a removed director shall be deemed to create a vacancy on the board. 3.6. VACANCIES AND ADDITIONAL DIRECTORSHIPS. Newly created directorships resulting from death, resignation, disqualification, removal or other cause shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3.7. REGULAR AND SPECIAL MEETINGS. Regular meetings of the Board of Directors shall be held immediately following the annual meeting of the stockholders; without call at such time as shall from time to time be fixed by the Board of Directors; and as called by the Chairman of the Board in accordance with applicable law. Special meetings of the Board of Directors shall be held upon call by or at the direction of the Chairman of the Board, or by the President in the event that an emergency requires a special meeting and the Chairman is unavailable, or by any two (2) directors, except that when the Board of Directors consists of one (1) director, then the one director may call a special meeting. Except as otherwise required by law, notice of each special meeting shall be mailed to each director, addressed to him at his residence or usual place of business, at least three days before the day on which the meeting is to be held, or shall be sent to him at such place by telex, telegram, cable, facsimile transmission or telephoned or delivered to him personally, not later than the day before the day on which the meeting is to be held. Such notice shall state the time and place of such meeting, but need not state the purpose or purposes thereof, unless otherwise required by law, the Certificate of Incorporation or these Bylaws ("Bylaws"). Notice of any meeting need not be given to any director who shall attend such meeting in person (except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened) or who shall waive notice thereof, before or after such meeting, in a signed writing. 3.8. QUORUM. At all meetings of the Board of Directors, a majority of the fixed number of directors shall constitute a quorum for the transaction of business, except that when the Board of Directors consists of one (1) director, then the one director shall constitute a quorum. In the absence of a quorum, the directors present, by majority vote and without notice other than by announcement, may adjourn the meeting from time to time until a quorum shall be present. At any reconvened meeting following such an adjournment at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. 3.9. VOTES REQUIRED. Except as otherwise provided by applicable law or by the Certificate of Incorporation, the vote of a majority of the directors present at a meeting duly held at which a quorum is present shall be sufficient to pass any measure. 3.10. PLACE AND CONDUCT OF MEETINGS. Each regular meeting and special meeting of the Board of Directors shall be held at a location determined as follows: The Board of Directors may designate any place, within or without the State of Delaware, for the holding of any meeting. If no such designation is made: (a) any meeting called by a majority of the directors shall be held at such location, within the county of the Corporation's principal executive office, as the directors calling the meeting shall designate; and (b) any other meeting shall be held at such location, within the county of the Corporation's principal executive office, as the Chairman of the Board may designate or, in the absence of such designation, at the Corporation's principal executive office. Subject to the requirements of applicable law, all regular and special meetings of the Board of Directors shall be conducted in accordance with such rules and procedures as the Board of Directors may approve and, as to matters not governed by such rules and procedures, as the chairman of such meeting shall determine. The chairman of any regular or special meeting shall be the Chairman of the Board, or, in his absence, a person designated by the Board of Directors. The Secretary, or, in the absence of the Secretary, a person designated by the chairman of the meeting, shall act as secretary of the meeting. 3.11. FEES AND COMPENSATION. Directors shall be paid such compensation as may be fixed from time to time by resolution of the Board of Directors: (a) for their usual and contemplated services as directors; (b) for their services as members of committees appointed by the Board of Directors, including attendance at committee meetings as well as services which may be required when committee members must consult with management staff; and (c) for extraordinary services as directors or as members of committees appointed by the Board of Directors, over and above those services for which compensation is fixed pursuant to items (a) and (b) in this Section 3.11. Compensation may be in the form of an annual retainer fee or a fee for attendance at meetings, or both, or in such other form or on such basis as the resolutions of the Board of Directors shall fix. Directors shall be reimbursed for all reasonable expenses incurred by them in attending meetings of the Board of Directors and committees appointed by the Board of Directors and in performing compensable extraordinary services. Nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity, such as an officer, agent, employee, consultant or otherwise, and receiving compensation therefor. 3.12. COMMITTEES OF THE BOARD OF DIRECTORS. To the full extent permitted by applicable law, the Board of Directors may from time to time establish committees, including, but not limited to, standing or special committees and an executive committee with authority and responsibility for bookkeeping, with authority to act as signatories on Corporation bank or similar accounts and with authority to choose attorneys for the Corporation and direct litigation strategy, which shall have such duties and powers as are authorized by these Bylaws or by the Board of Directors. Committee members, and the chairman of each committee, shall be appointed by the Board of Directors. The Chairman of the Board, in conjunction with the several committee chairmen, shall make recommendations to the Board of Directors for its final action concerning members to be appointed to the several committees of the Board of Directors. Any member of any committee may be removed at any time with or without cause by the Board of Directors. Vacancies which occur on any committee shall be filled by a resolution of the Board of Directors. If any vacancy shall occur in any committee by reason of death, resignation, disqualification, removal or otherwise, the remaining members of such committee, so long as a quorum is present, may continue to act until such vacancy is filled by the Board of Directors. The Board of Directors may, by resolution, at any time deemed desirable, discontinue any standing or special committee. Members of standing committees, and their chairmen, shall be elected yearly at the regular meeting of the Board of Directors which is held immediately following the annual meeting of stockholders. The provisions of Sections 3.07, 3.08, 3.09 and 3.10 of these Bylaws shall apply, mutatis mutandis, to any such Committee of the Board of Directors. ARTICLE 4 Officers 4.1. DESIGNATION, ELECTION AND TERM OF OFFICE. The Corporation shall have a Chairman of the Board, a President, Treasurer, such senior vice presidents and vice presidents as the Board of Directors deems appropriate, a Secretary and such other officers as the Board of Directors may deem appropriate. These officers shall be elected annually by the Board of Directors at the organizational meeting immediately following the annual meeting of stockholders, and each such officer shall hold office until the corresponding meeting of the Board of Directors in the next year and until his successor shall have been elected and qualified or until his earlier resignation, death or removal. Any vacancy in any of the above offices may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting. 4.2. CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors shall preside at all meetings of the directors and shall have such other powers and duties as may from time to time be assigned to him by the Board of Directors. 4.3. PRESIDENT. The President shall be the chief executive officer of the Corporation and shall, subject to the power of the Board of Directors, have general supervision, direction and control of the business and affairs of the Corporation. He shall preside at all meetings of the stockholders and, in the absence of the Chairman of the Board, at all meetings of the directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other duties as may be assigned to him from time to time by the Board of Directors. 4.4. TREASURER. The Treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by the directors. The Treasurer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositaries as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all of his transactions as the Treasurer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. 4.5. SECRETARY. The Secretary shall keep the minutes of the meetings of the stockholders, the Board of Directors and all committees. He shall be the custodian of the corporate seal and shall affix it to all documents which he is authorized by law or the Board of Directors to sign and seal. He also shall perform such other duties as may be assigned to him from time to time by the Board of Directors or the Chairman of the Board or President. 4.6. ASSISTANT OFFICERS. The President may appoint one or more assistant secretaries and such other assistant officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as may be specified from time to time by the President. 4.7. WHEN DUTIES OF AN OFFICER MAY BE DELEGATED. In the case of absence or disability of an officer of the Corporation or for any other reason that may seem sufficient to the Board of Directors, the Board of Directors or any officer designated by it, or the President, may, for the time of the absence or disability, delegate such officer's duties and powers to any other officer of the Corporation. 4.8. OFFICERS HOLDING TWO OR MORE OFFICES. The same person may hold any two (2) or more of the above-mentioned offices. 4.9. COMPENSATION. The Board of Directors shall have the power to fix the compensation of all officers and employees of the Corporation. 4.10. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors, to the President, or to the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein unless otherwise determined by the Board of Directors. The acceptance of a resignation by the Corporation shall not be necessary to make it effective. 4.11. REMOVAL. Any officer of the Corporation may be removed, with or without cause, by the affirmative vote of a majority of the entire Board of Directors. Any assistant officer of the Corporation may be removed, with or without cause, by the President or by the Board of Directors. ARTICLE 5 Indemnification of Directors, Officers Employees end other Corporate Agents 5.1. ACTION, ETC. OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is 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 the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise (all such persons being referred to hereinafter as an "Agent"), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he 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 with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. 5.2. ACTION, ETC., BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was an Agent against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation by a court of competent jurisdiction, after exhaustion of all appeals therefrom, unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. 5.3. DETERMINATION OF RIGHT OF INDEMNIFICATION. Any indemnification under Sections 5.01 or 5.02 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Agent is proper in the circumstances because the Agent has met the applicable standard of conduct set forth in Sections 5.01 and 5.02 hereof, which determination is made (a) by the Board of Directors, by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. 5.4. INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL PARTY. Notwithstanding the other provisions of this Article V, to the extent that an Agent has been successful on the merits or otherwise, including the dismissal of an action without prejudice or the settlement of an action without admission of liability, in defense of any action, suit or proceeding referred to in Sections 5.01 or 5.02 hereof, or in defense of any claim, issue or matter therein, such Agent shall be indemnified against expenses, including attorneys' fees actually and reasonably incurred by such Agent in connection therewith. 5.5. ADVANCES OF EXPENSES. Except as limited by Section 5.06 of this Article V, expenses incurred by an Agent in defending any civil or criminal action, suit, or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding, if the Agent shall undertake to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified as authorized in this Article V. Notwithstanding the foregoing, no advance shall be made by the Corporation if a determination is reasonably and promptly made by the Board of Directors by a majority vote of a quorum of disinterested directors, or (if such a quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs) by independent legal counsel in a written opinion, that, based upon the facts known to the Board of Directors or counsel at the time such determination is made, such person acted in bad faith and in a manner that such person did not believe to be in or not opposed to the best interest of the Corporation, or, with respect to any criminal proceeding, that such person believed or had reasonable cause to believe his conduct was unlawful. 5.6. RIGHT OF AGENT TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification or advance under this Article V shall be made promptly, and in any event within ninety days, upon the written request of the Agent, unless a determination shall be made in the manner set forth in the second sentence of Subsection 5.05 hereof that such Agent acted in a manner set forth therein so as to justify the Corporation's not indemnifying or making an advance to the Agent. The right to indemnification or advances as granted by this Article V shall be enforceable by the Agent in any court of competent jurisdiction, if the Board of Directors or independent legal counsel denies the claim, in whole or in part, or if no disposition of such claim is made within ninety (90) days. The Agent's expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. 5.7. OTHER RIGHTS AND REMEDIES. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article V shall not be deemed exclusive of any other rights to which an Agent seeking indemnification or advancement of expenses may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors and administrators of such a person. All rights to indemnification under this Article V shall be deemed to be provided by a contract between the Corporation and the Agent who serves in such capacity at any time while these Bylaws and other relevant provisions of the Delaware General Corporation Law and other applicable law, if any, are in effect. Any repeal or modification thereof shall not affect any rights or obligations then existing. 5.8. INSURANCE. Upon resolution passed by the Board of Directors, the Corporation may purchase and maintain insurance on behalf of any person who is or was an Agent against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article V. 5.9. CONSTITUENT CORPORATIONS. For the purposes of this Article V, references to "the Corporation" shall include, in addition to the resulting corporation, all constituent corporations (including all constituents of constituents) absorbed in a consolidation or merger as well as the resulting or surviving corporation, which, if the separate existence of such constituent corporation had continued, would have had power and authority to indemnify its Agents, so that any Agent of such constituent corporation shall stand in the same position under the provisions of the Article V with respect to the resulting or surviving corporation as that Agent would have with respect to such constituent corporation if its separate existence had continued. 5.10. OTHER ENTERPRISES, FINES, AND SERVING AT CORPORATION'S REQUEST. For purposes of this Article V, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to any employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article V. 5.11. SAVINGS CLAUSE. If this Article V or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Agent as to expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article V that shall not have been invalidated, or by any other applicable law. ARTICLE 6 Stock 6.1. CERTIFICATES. Except as otherwise provided by law, each stockholder shall be entitled to a certificate or certificates which shall represent and certify the number and class (and series, if appropriate) of shares of stock owned by him in the Corporation. Each certificate shall be signed in the name of the Corporation by the Chairman of the Board or a Vice-Chairman of the Board or the President or a Vice President, together with the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary. Any or all of the signatures on any certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. 6.2. TRANSFER OF SHARES. Shares of stock shall be transferable on the books of the Corporation only by the holder thereof, in person or by his duly authorized attorney, upon the surrender of the certificate representing the shares to be transferred, properly endorsed, to the Corporation's transfer agent, if the Corporation has a transfer agent, or to the Corporation's registrar, if the Corporation has a registrar, or to the Secretary, if the Corporation has neither a transfer agent nor a registrar. The Board of Directors shall have power and authority to make such other rules and regulations concerning the issue, transfer and registration of certificates of the Corporation's stock as it may deem expedient. 6.3. TRANSFER AGENTS AND REGISTRARS. The Corporation may have one or more transfer agents and one or more registrars of its stock whose respective duties the Board of Directors or the Secretary may, from time to time, define. No certificate of stock shall be valid until countersigned by a transfer agent, if the Corporation has a transfer agent, or until registered by a registrar, if the Corporation has a registrar. The duties of transfer agent and registrar may be combined. 6.4. STOCK LEDGERS. Original or duplicate stock ledgers, containing the names and addresses of the stockholders of the Corporation and the number of shares of each class of stock held by them, shall be kept at the principal executive office of the Corporation or at the office of its transfer agent or registrar. 6.5. RECORD DATES. The Board of Directors may fix, in advance, a date as the record date for the purpose of determining stockholders entitled to notice of, or to vote at, any meeting of stockholders or any adjournment thereof, or stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or in order to make a determination of stockholders for any other proper purpose. Such date in any case shall be not more than sixty (60) days, and in case of a meeting of stockholders, not less than ten (10) days, prior to the date on which the particular action requiring such determination of stockholders is to be taken. Only those stockholders of record on the date so fixed shall be entitled to any of the foregoing rights, notwithstanding the transfer of any such stock on the books of the Corporation after any such record date fixed by the Board of Directors. ARTICLE 7 Amendments 7.1. AMENDMENTS. These Bylaws may be altered, amended or repealed or new bylaws adopted by the board of directors, subject to repeal or change by action of the stockholders. All amendments shall be placed in the Corporation's minute book immediately following these Bylaws. EX-10 4 exhibit10-43_0603.txt EX 10-43 Exhibit 10.43 AMSOUTH NOTE FOR BUSINESS AND COMMERCIAL LOANS REVOLVING AmSouth Bank $ 1,000,000.00 2330 University Blvd ------------ Tuscaloosa, AL 35401 DATE: May 13, 2003 ------------- FOR VALUE RECEIVED, the undersigned (hereinafter called, whether one or more, the "Borrower"), Jointly and severally and solidarily (if more than one), promises to pay to the order of AmSouth Bank (the "Bank"), its successors and assigns (hereinafter sometimes, together with any other holder of this note, called "Holder"), the sum of One Million and 00/100 Dollars or so much thereof as the Holder has advanced to the Borrower hereunder (the "Loan"), plus interest on the remaining unpaid principal balance of the Loan from the date hereof until maturity at the rate of: A per annum rate equal to the rate per annum offered by prime banks in the London interbank eurodollar market for deposits in United States dollars having a one month maturity, as determined by Holder with reference to the financial information reporting service used by Holder at the time of such determination (the "LIBOR Rate") plus 2.25%. This rate is subject to change on 05/31/2003, will be subject to change on the same day of every month thereafter (the "Change Date"). The interest rate change is based on changes in the LIBOR Rate. The Holder will determine the LIBOR Rate that will be in effect as of the Change Date; however, if the Change Date is not a Business Day, then the Holder will determine the LIBOR Rate that will be in effect as of the Business Day immediately following the Change Date. Changes in the interest rate on the Loan will be effective as of the Change Date. As used herein, "Business Day" means a day of the year on which banks are not required or authorized to close in Birmingham, Alabama, and a day on which dealings are carried on in the London interbank eurodollar market. See the Addendum to Note for Business and Commercial Loans for provisions related to the LIBOR Rate. Interest will be computed on the basis of the actual number of days elapsed over an assumed 360-day year. The Borrower hereby agrees to repay principal and interest as follows: The Borrower will pay the interest on the Loan in monthly installments and the principal and any unpaid interest on the Loan shall be due and payable in full on 5/31/2004. The first installment will be due and payable on May 31, 2003 and the remaining installments will be due and payable on the same day of every month thereafter until both the principal of and interest on the loan have been paid in full. All agreements herein made are expressly limited so that in no event whatsoever, whether by reason of advancement of proceeds hereof, acceleration of maturity of the unpaid balance hereof or otherwise, shall the interest and loan charges agreed to be paid to Holder for the use of the money advanced or to be advanced hereunder exceed the maximum amounts collectible under applicable laws in effect from time to time. If for any reason whatsoever the interest or loan charges paid or contracted to be paid in respect of the indebtedness evidenced hereby shall exceed the maximum amounts collectible under applicable laws in effect from time to time, then, ipso facto, the obligation to pay such interest and/or loan charges shall be reduced to the maximum amounts collectible under applicable laws in effect from time to time, and any amounts collected by Holder that exceed such maximum amounts shall be applied to the reduction of the principal balance remaining unpaid hereunder and/or refunded to Borrower so that at no time shall the interest or loan charges paid or payable in respect of the indebtedness evidenced hereby exceed the maximum amounts permitted from time to time by applicable law. This provision shall control every other provision in any and all other agreements and instruments now existing or hereafter arising between Borrower and Holder with respect to the indebtedness evidenced hereby. For purposes of sending periodic billing statements in advance of each interest payment date, at Holder's option, the Prime Rate in effect 15 days prior to each interest payment date shall be deemed to be the Prime Rate that continues in effect until the date prior to such interest payment date for purposes of computing the amount of interest payable on such interest payment date. If the Prime Rate changes during such 15-day period, the difference between the amount of interest that in fact accrues during such period and the amount of interest actually paid will be added to or subtracted from as the case may be, the interest otherwise payable in preparing the periodic billing statement for the next succeeding interest payment date. In determining the amount of interest payable at the final maturity or upon full prepayment of this note, all changes in the Prime Rate occurring on or prior to the date before the final maturity date or the date of such full prepayment shall be taken into account. The Borrower agrees to pay to Holder, on demand, late charge equal to 5% of any installment that is not paid within 12 days after it is due and 5% of the interest portion on the payment due upon the final maturity date of this note if that payment is not paid within 12 days after it is due. This late charge will never be less than $10.00 nor more than $250.00. This provision shall not be deemed to excuse a late payment or be deemed a waiver of any other right Holder may have, including, without limitation, the right to declare the entire unpaid principal and interest immediately due and payable. All payments coming due on this note shall be made in cash or immediately available funds at Holder's office in Birmingham, Alabama. At its option, Holder may elect to give the Borrower credit for any payment made by check or other instrument in accordance with Holder's availability schedule in effect from time to time for such items and instruments, which Holder will make available to the Borrower on request unless otherwise required by applicable law, payments will be applied as follows: (1) Each payment on the Loan will first reduce charges owed by the Borrower that are neither principal nor interest, (2) The remainder of each such payment will be applied first to accrued but unpaid interest and then to unpaid principal; and (3) Any partial prepayments of principal will be applied to installments due in the inverse order of their maturity and no such partial prepayment of principal will have the effect of postponing, satisfying, reducing, or otherwise affecting any scheduled installment before the Loan is paid in full. This note is a master note, and it is contemplated that the proceeds the loan evidenced hereby will be advanced from time to time to the Borrower by Holder in installments, as requested by the Borrower and agreed to by Holder. It is further contemplated that any amounts advanced under this note may be prepaid from time to time by the Borrower and subsequently re-advanced by Holder, so long as the principal amount outstanding does not exceed the face amount of this note. By reason of repayments hereon there may be times when no indebtedness is owing hereunder, and notwithstanding any such occurrence, this note shall remain valid and shall be in full force and effect as to each subsequent principal advance made hereunder. The Holder shall maintain a record (by computer or otherwise) of all principal advances and repayments under this master note and that record shall be presumed to be correct on the absence of clear and convincing evidence to the contrary. Unless the Holder has otherwise agreed in writing, the Holder is not obligated to make any advances or re-advances hereunder, and all advances and re-advances shall be made at the option of the Holder. This note shall be valid and enforceable as to the aggregate amount advanced at any time hereunder, whether or not the full face amount hereof is advanced. If the Loan is payable on demand, this paragraph is inoperative and not applicable; otherwise, this paragraph is operative and shall apply to the Loan in accordance with its terms. In the event of default in the payment of any one or more installments of principal or interest that may become due hereunder, when and as the same fall due, or default in the payment of all principal and interest due hereunder at maturity, or the failure of any maker, endorser, surety or guarantor hereof (hereinafter called the Obligors) to pay when due or perform any of the Obligations (meaning thereby this note and any and all renewals and extensions thereof and all other liabilities and indebtedness of the Borrower to Holder, now existing or hereafter incurred or arising, direct or indirect, and however incurred) or any part thereof or the failure of any Obligor to pay when due any other liability to Holder, in the event a default occurs under the terms of any loan agreement or other instrument (other than this note) or other document evidencing, securing, guaranteeing, or executed in connection with all or any part of the Obligations (herein, together with this note, called the "Loan Documents"), or in the event Holder shall in good faith deem itself insecure for any reason, or on the happening of any one or more of said events, Holder shall have the right at its election and without notice to any Obligor to declare the Obligations immediately due and payable with interest to date. No delay in making such election shall be construed to waive the right to make such election. Holder may note the fact of acceleration hereon without stating the ground therefor, and whether or not noted hereon such election to accelerate shall be effective. In the event of death of, insolvency of, general assignment by, judgment against, filing of a petition in bankruptcy by or against, filing a petition for the reorganization of, filing of application in any court for receiver for, or issuance of a writ of garnishment or attachment in a suit or action against any Obligor or against any of the assets of any Obligor, or on the happening of any one or more of said events, the Obligations shall immediately become due and payable with interest to date unless Holder shall on notice of such event elect to waive such acceleration by written notation hereon. Commencing upon and continuing after the maturity of this note, whether such maturity is by acceleration or otherwise, and, if by acceleration, whether such acceleration is automatic or at the election of Holder, and commencing upon and continuing after any judgment obtained on or under this note, any and all amounts due under this note or under any judgment obtained on or under this note, whether such amounts are denominated as principal, interest or otherwise, shall, if permitted by applicable law, bear interest at a rate of interest equal to 2% in excess of the rate of interest set forth above. Each of the Obligors hereby severally (a) waives as to the Loan or any renewal or extension thereof all rights of exemption under the Constitution or laws of any state as to personal property; (b) waives demand, presentment, protest, notice of protest, notice of dishonor, suit against any party and all other requirements necessary to hold any Obligor liable; (c) agrees that time of payment may be extended or renewal notes taken or other indulgence granted without notice of or consent to such action and, without release of liability as to any Obligor; (d) as to all or any part of the Obligations, consents to Holder's releasing, agreeing not to sue, suspending the right to enforce this instrument against or otherwise discharging or compromising any Obligation of any Obligor or other person against whom any Obligor has or may have a right of recourse, all without notice to or further reservations of rights against any Obligor, and all without in any way affecting or releasing the liability of any Obligor; (e) consents to Holder's releasing, exchanging or otherwise dealing in any manner with all or any portion of any collateral, lien, or right of set-off that may now or hereafter secure this note, all without notice to or further reservations of rights against any Obligor, and all without in any way affecting or releasing the liability of any Obligor, even though such release, exchange or other dealing may in any manner and to any extent impair any such collateral, lien or right of set-off (f) warrants that this Loan is for business, commercial or agricultural purposes, and not for personal, family or household purposes; (g) agrees to pay all costs of collecting or securing or attempting to collect or secure this note or defending any unsuccessful claim asserted against Holder in connection with this note, including reasonable attorneys' fees. In addition to all liens upon, and rights of setoff against, any moneys, securities, or other property of any of the Obligors given to Holder by law, Holder shall have a lien upon and a right of setoff against and (to the extent allowed by law), a lien and continuing security interest upon, all moneys, securities and other property of any of the Obligors now or hereafter in the possession of, or on deposit with, Holder, whether held in a general or special account or deposit, for safekeeping, or otherwise; and every such lien, security interest, and right of setoff may be exercised without demand upon or notice to any Obligor, and Holder shall have no liability with respect to any of Obligor's checks or other items that may be returned or other funds transfers that may not be made due to insufficient funds thereafter. The borrower understands that Holder may from time to time enter into a participation agreement or agreements with one or more participants pursuant to which such participant or participants shall be given participations in the Loan and that such participants may from time to time similarly grant to other participants sub-participations in the Loan. The Borrower agrees that any participant and any subparticipant may exercise any and all rights of banker's lien or set-off, whether arising by operation of law or given to Holder by the provisions of this note, with respect to the Borrower as fully as if such participant or subparticipant had made the Loan directly to the Borrower. For the purposes of this paragraph only, the Borrower shall be deemed to be directly obligated to each participant or subparticipant in the amount of its participating interest in the principal of, and interest on, the Loan. No failure or delay on the part of Holder in exercising any right, power or privilege under this note shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise or the exercise of any other right, power or privilege. No modification, amendment or waiver of any provisions of this note shall be effective unless in writing and signed by a duly authorized officer of Holder, and then the same shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any Obligor in any case shall entitle any Obligor to any other or further notice or demand in the same, similar or other circumstances. Any controversy, claim, dispute or issue related to or arising from (A) the interpretation, negotiation, execution, assignment, administration, repayment, modification, or extension of this note or the Loan; (B) any charge or cost incurred under this note or the Loan; (C) the collection of any amounts due under this note or any assignment thereof; (D) any alleged tort related to or arising out of this note or the Loan; or (E) any breach of any provision of this note, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA Rules"). Any disagreement as to whether a particular dispute or claim is subject to arbitration under this paragraph shall be decided by arbitration in accordance with the provisions of this paragraph. Commencement of litigation by any person entitled to demand arbitration under this paragraph shall not waive any right that person has to demand arbitration with respect to any counterclaim or other claim that may be made against that person, whether in, relating to, or arising out of such litigation, or otherwise. The Expedited Procedures of the AAA Rules shall apply in any dispute where the aggregate of all claims and the aggregate of all counterclaims each is in an amount less than $500,000. Judgment upon any award rendered by the arbitrator(s) in any such arbitration may be entered in any Court having jurisdiction thereof. Any demand for arbitration under this note shall be made no later than the date when any judicial action upon the same matter would be barred under any applicable statute of limitations. Any dispute as to whether the statute of limitations bars the arbitration of such matter shall be decided by arbitration in accordance with the provisions of this paragraph. The locale of any arbitration proceedings under this note shall be in Birmingham, Alabama or such other location as is mutually acceptable to all parties. The arbitrator(s) in any such arbitration shall establish such reasonable procedures as may be necessary for the reasonable exchange of information between the parties prior to such arbitration. Any arbitration under this paragraph shall be on an individual basis between the parties to this note only and shall not be commenced as a member or representative of or on behalf of a class of persons, it being the intention of the parties that there shall be no class action arbitrations under this note. All parties to this note specifically acknowledge and agree that this note evidences a "transaction involving commerce" under the Federal Arbitration Act, and each party to this note hereby waives and relinquishes any right to claim otherwise. WITH RESPECT TO DISPUTES SUBMITTED TO ARBITRATION, EACH PARTY WAIVES ALL RIGHT TO TRIAL BY JURY. NOTWITHSTANDING THE PRECEDING PARAGRAPH OR THE EXERCISE OF ARBITRATION RIGHTS UNDER THIS NOTE, each party may (1) foreclose against any real or personal property collateral under any mortgage, deed of trust, security agreement, pledge agreement or any other document or instrument creating a security interest in such property or under applicable law: (2) excercise any legal remedies such as set off, foreclosure or repossession: or (3) obtain any provisional or ancillary remedies such as replevin, injunctive relief, attachment, sequestration, or appointment of a receiver from a court having jurisdiction, before, during or after the pendency of any arbitration proceedings. This arbitration provision shall not be interpreted to require that any such remedies be stayed, abated or otherwise suspended pending any arbitration or request for arbitration. The exercise of a remedy shall not waive the right of either party to resort to arbitration. Any provision of this note that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. The provisions of this note shall inure to the benefit of Holder, its successors and assigns, and shall be binding upon the heirs, successors and assigns of each Obligor, except that no Obligor may assign or transfer his, her or its obligation hereunder without the written consent of Holder. All rights, powers and remedies of Holder under this note and now or hereafter existing at law, in equity or otherwise shall be cumulative and may be exercised successively or concurrently. The Loan Documents contain the entire understanding and agreement between the Borrower and Holder with respect to the Loan and supersede any and all prior agreements, understandings, promises, and statements with respect to the Loan. This note may not be modified, amended, or supplemented in any manner except by a written agreement executed by both the Borrower and Holder. This note shall be construed in accordance with and governed by the laws of the State of Alabama and Title 9 of the United States Code. Time is of the essence of this note. The proceeds of the Loan represented by this note are for a business or commercial purpose. Obligor Number: 0000687193 Due: 05/31/2004 ---------- ---------- ATTEST: SURGICAL LASER TECHNOLOGIES. INC. By: /s/ Davis Woodward (SEAL) By: /s/ Jeffrey F. O'Donnell (SEAL) ------------------ ------------------------------- Davis Woodward Jeffrey F. O'Donnell Its: Corporate Counsel Its: President and CEO By: /s/ Davis Woodward (SEAL) By: /s/ Dennis McGrath (SEAL) ------------------ ------------------------------- Davis Woodward Dennis McGrath Its: Corporate Counsel Its: VP of Finance and CFO This note is made and executed for the purpose of continuing, modifying and amending the terms of that certain promissory note in the principal amount of $1,400,000.00, dated 03/26/2003, executed by the Borrower and payable to the Bank or its predecessor or assignor. This note shall constitute a true modification or amendment of the terms of the original note, which shall continue in full force and effect except as specifically modified herein. This note shall not constitute a novation, payment in full or satisfaction of the original note, nor shall this note in any other way supercede the original note or any of the Loan Documents. This note shall continue to be secured by any and all collateral securing the original note. EX-10 5 exhibit10-44_0603.txt EXHIBIT 10-44 Exhibit 10.44 ADDENDUM TO NOTE FOR BUSINESS AND COMMERCIAL LOANS LIBOR RATE Addendum to Note for Business and Commercial Loans dated May 13, 2003, in the principal amount of $1,000,000.00. As used herein, "LIBOR Reserve Requirements" means the maximum reserves (whether basic. supplemental. marginal, emergency, or otherwise) prescribed by the Board of Governors of the Federal Reserve System (or any successor) with respect to liabilities or assets consisting of or including "Eurocurrency liabilities" (as defined in Regulation D of the Board of Governors of the Federal Reserve System). If there is any change in LIBOR Reserve Requirements, then Borrower shall, from time to time upon demand by Holder, pay to Holder such additional amounts as Holder may deem necessary to compensate Holder for any increased costs resulting from such change. Borrower agrees that Holder's determination of such additional amounts and increased costs will be made in Holder's sole discretion and shall be conclusive, if, because of the introduction of or any change in, or because of any judicial, administrative, or other governmental interpretation of any applicable law or regulation, there shall be any increase in the cost to Holder of making, funding, maintaining, or allocating capital to any amount outstanding under the Loan bearing interest at a rate based on the LIBOR Rate, then Borrower shall, from time to time upon demand by Holder, pay to Holder additional amounts sufficient to compensate Holder for such increased costs. If, because of the introduction of or any change in, or because of any judicial, administrative, or other governmental interpretation of, any applicable law or regulation, it becomes unlawful for Holder to make, fund, or maintain any advance or balance at a rate based on the LIBOR Rate, then Holder's obligation to make, fund, or maintain any such advance or balance shall terminate and any such affected outstanding advance or balance shall bear interest at a rate equal to the prime rate of the Bank in effect from time to time as designated by the Bank (the `Prime Rate") plus 0%, with changes in such interest rate to take effect as the Prime Rate changes. The Prime Rate is merely a reference rate and is not necessarily the best or lowest rate offered by the Bank. Signed for identification: ATTEST: SURGICAL LASER TECHNOLOGIES. INC. By: /s/ Davis Woodward (SEAL) By: /s/ Jeffrey F. O'Donnell (SEAL) ------------------ ---------------------- Davis Woodward Jeffrey F. O'Donnell Its: Corporate Counsel Its: President and CEO By: /s/ Davis Woodward (SEAL) By: /s/ Dennis McGrath (SEAL) ------------------ ------------------ Davis Woodward Dennis McGrath Its: Corporate Counsel Its: VP of Finance and CFO EX-31 6 exhibit31-1_0603.txt CERT OF CHIEF EXECUTIVE OFFICER JUN 2003 Exhibit 31.1 RULE 13A-14(A) CERTIFICATION PHOTOMEDEX, INC. a Delaware corporation CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Jeffrey F. O'Donnell, Chief Executive Officer of PhotoMedex, Inc., a Delaware corporation (the "Company"), do hereby certify, in accordance with Rules 13a-14 and 15d-14, as created pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, with respect to the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2003, as filed with the Securities and Exchange Commission herewith under Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that: (1) I have reviewed this Quarterly Report on Form 10-Q of the Company for the three and six months ended June 30, 2003 (the "Quarterly Report"); (2) Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; (3) Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Quarterly Report; (4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Company and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed un our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this Quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly report based on such evaluation; and (d) disclosed in this Quarterly report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the Company's internal control over financial reporting; and (5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Dated: August 14, 2003 By: /s/ Jeffrey F. O'Donnell ------------------------------- Jeffrey F. O'Donnell Chief Executive Officer EX-31 7 exhibit31-2_0603.txt CERT OF CFO JUN 2003 Exhibit 31.2 RULE 13A-14(A) CERTIFICATION PHOTOMEDEX, INC. a Delaware corporation CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Dennis M. McGrath, Chief Financial Officer of PhotoMedex, Inc., a Delaware corporation (the "Company"), do hereby certify, in accordance with Rules 13a-14 and 15d-14, as created pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, with respect to the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2003, as filed with the Securities and Exchange Commission herewith under Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that: (1) I have reviewed this Quarterly Report on Form 10-Q of the Company for the three and six months ended June 30, 2003 (the "Quarterly Report"); (2) Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; (3) Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Quarterly Report; (4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Company and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed un our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this Quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly report based on such evaluation; and (d) disclosed in this Quarterly report any change in the Company's internal control over financial reporting that occurred during the Company's quarter ending June 30, 2003 that has materially affected, or is reasonable likely to materially affect, the Company's internal control over financial reporting; and (5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Dated: August 14, 2003 By: /s/ Dennis M. McGrath ----------------------- Dennis M. McGrath Chief Financial Officer EX-32 8 exhibit32-1_0603.txt CERT CHIEF EXECUTIVE OFFICER JUN 2003 Exhibit 32.1 SECTION 906 CERTIFICATION I, Jeffrey F. O'Donnell, Chief Executive Officer of PhotoMedex, Inc., a Delaware corporation (the "Company"), do hereby certify, in accordance with 18 U.S.C. Section 1350, as created pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the accompanying Quarterly Report on Form 10-Q of the Company for the three and six months ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. PHOTOMEDEX INC. Dated: August 14, 2003 By: /s/ Jeffrey F. O'Donnell ------------------------ Jeffrey F. O'Donnell Chief Executive Officer A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 ("Section 906"), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to PhotoMedex, Inc. and will be retained by PhotoMedex, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 9 exhibit32-2_0603.txt CERT OF CFO JUN 2003 Exhibit 32.2 SECTION 906 CERTIFICATION I, Dennis M. McGrath, Chief Financial Officer of PhotoMedex, Inc., a Delaware corporation (the "Company"), do hereby certify, in accordance with 18 U.S.C. Section 1350, as created pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the accompanying Quarterly Report on Form 10-Q of the Company for the three and six months ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. PHOTOMEDEX INC. Dated: August 14, 2003 By: /s/ Dennis M. McGrath ----------------------- Dennis M. McGrath Chief Financial Officer A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 ("Section 906"), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to PhotoMedex, Inc. and will be retained by PhotoMedex, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----