Jim,
Palomar's 20 May press release is interesting, but I believe that investors
should read the whole Boston Herald article. I have a fax of it, and have
since found it on Dow Jones News retrieval. There were three articles, all
published together on 20 May 1997:
1. "New Palomar Medical CEO pleads ignorance to firm's past"
2. "Laser firm pours $$ into spinoff."
3. "Industry peers call ex-CEO man on the move."
I will not post them here, out of respect of copyrights; however, here are
a few highlights.
The lead article "New Palomar Medical CEO pleads ignorance to firm's past"
is the one that broke the story that outside directors salaries were to be
cut. Here is what Palomar's press-release referred to:
"Another perk Valente says he is eliminating: extraordinarily high pay for
outside directors. Glosson, who joined the board Sept. 1, and former
Central Intelligence Agency Director John M. Deutch, who joined the board
Feb. 1, were being paid $60,000 a year. Valente, who also joined the board
Feb. 1, was also being paid $60,000 until he became CEO last week."
"Valente says that will drop to between $35,000 and $40,000 a year. But
that is still more than comparable companies: Digital Equipment, the
biggest high-tech company in the state, pays outside directors an annual
retainer of $25,000. Gillette, the consistently profitable consumer
products company, pays $35,000. And Netscape, the super-hot Internet
company, pays outside directors only $10,000."
So even after the cut to $35-40,000, the salaries may be generous.
The press-release reported that loans to directors were to cease, and
mentions a current loan exceeding $1 million to Chairman Steven Georgiev,
but the article reveals many $millions in loans to directors and their
companies, but that can all be found by digging into the SEC filings
available via EDGAR:
sec.gov
It amazes me that many investors appear not read SEC filings, which exist
solely to protect their interests.
The article also reports on a "proposed powerful set of anti-takeover
provisions" in the preliminary proxy statement filed recently with the SEC
(also available on EDGAR)for the "annual meeting, which had been scheduled
for June 18 in a preliminary proxy statement, ... now postponed until late
July or early August."
"Palomar proposed a powerful set of anti-takeover provisions. These include
a staggered board of directors, a rule restricting consideration of major
corporate changes to the company's annual meeting, and a rule ensuring the
new rules cannot be changed without the approval of holders of at least 75
percent of the company's shares."
"In its letter to shareholders, the company admits that such moves would
help keep current managers and directors in place - even if most
shareholders wanted to dump them."
"Tender offers to buy Palomar shares at a premium to their market price
would also be thwarted."
"Valente says this is in the best interest of shareholders, even though
Palomar's stock has lost 77 percent of its value since hitting a high of
$16.625 almost a year ago."
""Shareholders would be making, in my opinion, a real mistake to have this
company acquired at $7 a share," said Valente last week, adding it would be
tantamount to "stealing" the company."
The Herald reported these comments from business academics:
"This is an extreme form of an attitude of `shareholder be damned,' " said
Boston University School of Management professor Allen Michel, after
reviewing the proxy statement. "It's a dreadful reminder of the excesses
of the 1980s. It certainly does not respect the right of the shareholders.
It elevates the role of the director and officer at the expense of the
shareholder," Michel said.
"Adds Joe Bower, professor of business administration at Harvard Business
School, "It sounds like this is a management trying to protect itself.
It certainly raises questions.""
The NEXAR article is also interesting reading, for example:
"Palomar is paying big bonuses for Nexar's executives: $1 million last year
and another $1 million for the current year, according to the prospectus.
That arrangement appeared to baffle Valente."
""I don't know any reason why corporate would pay out (Nexar bonuses)," he
said. Asked if a spinoff normally should pay its own bonuses, Valente said,
"Yes, I would agree with that.""
"Albert Agbay, Nexar's chief executive, took home a hefty $620,000 in salary
and bonus last year."
* * *
My own reading of the SEC filings reveals other information that investors
might want to consider:
- outstanding shares grew from 20,135,406 on 31 Dec 95 to 30,596,812 on
31 Dec 96, an increase of 52 percent. As of 9 May 1997, the total had grown
to 32,634,923, suggesting an average annual growth rate of about 5.8 million
shares, or about 19 percent. And there seem to be lots more recent convertible
debenture issues to feed the flow, plus warrants and options.
- shareholder's equity has declined from $49.9 million on 30 Sep 96, to
$32.2 million on 31 March 97. During this period, equity per share has
fallen from $1.76 to $1.01.
- working capital has fallen from $38.2 million on 30 Sep 96 to $24.5 million
on 31 March 1997
- revenues from the medical segment increased by 8.6 percent from $2,406,419
in Q1'96 to $2,612,765 in Q2'97.
Based on recent press-releases, the medical segment is to be Palomar's focus
in the future, especially laser hair removal and skin-resurfacing. As I have
stated in many of my past messages, I fail to see how laser hair removal can
succeed, given that the FDA cleared it only for temporary, not "permanent" nor
"long-term" hair removal. The lead Boston Herald article provides an
interersting comparison of Palomar's claims for this technology, and what the
Massachusetts General Hospital says in a recent patient letter. I covered this
in much greater detail in reply #408.
Also, I see that Palomar persists in making claims for the Epilaser on the
Internet, that I believe go well beyond the FDA clearance, as I discussed in
message #391. In my opinion, they use a variety of euphemisms that sound like
direct claims of permanent results. Why not simply promote it as a temporary
treatment, in accordance with the FDA, and avoid misleading consumers?
As for CO2 skin resurfacing, this article indicates that aggressive treatment
may be required to obtain results that last much longer than 3 to 6 months.
plasticsurgery.org
Given the high cost, and that skin may be red for several months afterward,
how popular will this treatment be in the long-run? And will more aggressive
treatment increase the risks associated with this procedure. Is Palomar's
CO2 better than others on the market in this regard?
So there are many challenges facing Valente, and many questions for investors
to ponder as we go forward.
Ted Molczan |
