UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2001, 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: 0-13012
LUMENIS LTD.
(Exact name of registrant as specified in its charter)
Israel N.A.
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 240, Yokneam, Israel 20692
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 972-4-959-9000
Securities Registered pursuant to Section 12(b) of the Act: None.
Title of each class Name of exchange on which registered
None None
Securities registered pursuant to Section 12(g)of the Act:
Ordinary Shares, NIS 0.10 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) 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 (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of Ordinary Shares, par value 0.10 New Israeli Shekels ("NIS")
per share, of the registrant outstanding as of March 25, 2002 was 36,758,606.
The aggregate market value of the Ordinary Shares held by non-affiliates of
the registrant, based on the closing price of the Ordinary Shares on March 25,
2002 as reported on the Nasdaq National Market, was approximately $209,899,459.
Ordinary Shares held by each current executive officer and director and by each
person who is known by the registrant to own 5% or more of the outstanding
Ordinary Shares have been excluded from this computation in that such persons
may be deemed to be affiliates of the Company. Share ownership information of
certain persons known by the Company to own greater than 5% of the outstanding
common stock for purposes of the preceding calculation is based on information
on Schedules 13D and 13G filed with the Commission. This determination of
affiliate status is not a conclusive determination for other purposes.
Documents Incorporated by Reference
None
PART I
Item 1. Business.
General
Lumenis Ltd. ("Lumenis", "Company", "We" or "Our") is a world leader in
the design, manufacture, marketing and servicing of laser and light based
systems for aesthetic, ophthalmic, surgical and dental applications. Lumenis
offers a broad range of laser and intense pulsed light ("IPL") systems which are
used in skin treatments, hair removal, non-invasive treatment of vascular
lesions and pigmented lesions, acne, psoriasis, ear, nose and throat ("ENT"),
gynecology, urinary lithotripsy, benign prostatic hyperplasia, open angle
glaucoma, secondary cataracts, age-related macular degeneration, refractive eye
correction, neurosurgery, dentistry and veterinary.
The Company was incorporated in Israel on December 21, 1991. In January
1996, the Company completed an initial public offering ("IPO") in the United
States. Since its IPO, the Company has raised both equity and debt financing in
the public capital markets.
On April 30, 2001, the Company completed the purchase of the medical
division of Coherent, Inc. ("Coherent"), Coherent Medical Group ("CMG"). This
acquisition approximately doubled the Company's sales, expanding its leading
position in sales of pulsed light and laser based systems for the aesthetic and
surgical markets, made it a significant competitor in the ophthalmic portion of
the medical laser market, expanded its proprietary technology and increased its
critical mass by country and customer type for the marketing and cross-selling
of its products. After completion of this acquisition, the Company changed its
name from ESC Medical Systems Ltd. ("ESC") to Lumenis Ltd. See "Coherent Asset
Acquisition" below.
On November 30, 2001 the Company completed the acquisition of the stock of
FISMA Corporation, Instruments for Medicine & Diagnostics, Inc. and Instruments
for Surgery (collectively "HGM") from the Estate of William H. McMahan
("McMahan"). HGM is a Salt Lake City developer and manufacturer of medical laser
devices. The purchase price for HGM was $9.9 million in cash. This transaction
expands the Company's ophthalmic product offerings, provides specialized
technologies to help reduce the cost of manufacturing certain parts and
accessories and enables the Company to transfer certain manufacturing operations
from higher cost locations. The purchase included HGM's manufacturing
facilities. In January 2002, the Company exercised its right of first refusal to
purchase from McMahan the adjacent premises for the purchase price of $900,000.
Unless the context otherwise requires, all references to the Company or
Lumenis shall mean Lumenis Ltd. and each of its subsidiaries.
This Report includes forward looking statements. See "Management's
Discussion and Analysis - Forward Looking Statements and Risk Factors."
Market Focus
The Company's systems are designed for use in a variety of medical
environments. The principal target markets for the Company's aesthetic products
are physicians with private practices or clinics, as well as leading beauty/hair
removal centers. Many of these are customers who wish to access the vanity
market and are looking to increase their revenues and reduce dependence on
insurance reimbursements. The target markets for the Company's surgical products
are hospitals and outpatient clinics that use lasers for certain procedures.
Ophthalmologists are the primary target market for the ophthalmic products; and
dentists are the primary target market for the dental products.
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Coherent Asset Acquisition
The Company acquired substantially all of the assets and related
liabilities of CMG for $100 million in cash financed through a new term loan
(see also Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations; Financing Activities"), 5,432,099 ordinary shares of
Lumenis, and a $12.9 million eighteen-month 5% subordinated note, plus an
earn-out of up to $25 million based on the revenues generated during the four
calendar years ending December 31, 2004 from sales of the ophthalmic equipment
operations of CMG. The cash portion of the purchase price is subject to an as
yet undetermined post-closing adjustment based on the closing date net tangible
book value of the business, which will not exceed $6 million. If total
ophthalmic revenues for the four fiscal years ended December 31, 2004 exceed
$450 million, the earn-out payment will be 21.5% of the excess. In addition, if
the ophthalmic business is sold to a third party during this four-year period
for a price in excess of $110 million, Coherent will receive an earn-out payment
equal to 50% of the excess. In no event, however, will the earn-out payment be
more than $25 million. During the fiscal year ended December 31, 2000, the
ophthalmic equipment sales were approximately $76 million. During the Company's
fiscal year ended December 31, 2001, its ophthalmic equipment sales (all of
which are attributable to the acquired CMG operations) were approximately $74
million. The Company is obligated to register the 5,432,099 shares by October
30, 2004 for resale. At completion of the acquisition, Bernard Couillaud,
President and Chief Executive Officer of Coherent, was appointed to the
Company's Board of Directors. Coherent continues to supply the Company parts and
components.
Sales for Lumenis' business, together with the medical business acquired
from Coherent for the years ended December 31, 2000 and 2001, are as follows
(dollar amounts in thousands):
--------------------------------------------------------------------------------------------------------------
Business Year Ended Year Ended
December 31, 2000 December 31, 2001
(Pro Forma and Unaudited) (Pro Forma and Unaudited)
--------------------------------------------------------------------------------------------------------------
Aesthetic $160 $168
--------------------------------------------------------------------------------------------------------------
Ophthalmic 76 74
--------------------------------------------------------------------------------------------------------------
Surgical 57 64
--------------------------------------------------------------------------------------------------------------
Service 54 49
--------------------------------------------------------------------------------------------------------------
Dental 8 11
--------------------------------------------------------------------------------------------------------------
Industrial 14 11
--------------------------------------------------------------------------------------------------------------
TOTAL $369 $376
--------------------------------------------------------------------------------------------------------------
Following the completion of the CMG acquisition, the Company embarked on an
intensive integration program to merge the two companies into one cohesive
organization. As part of the integration program, the company rationalized
product lines, sales and distribution networks, combined offices, closed
facilities and laid off employees. This included the closure of the
manufacturing sites in Seattle, Washington, the manufacturing activities in Tel
Aviv, Israel and five sales offices in Norwood, Massachusetts, Munich, Germany,
Cambridge, England, Paris, France and Tokyo, Japan. See "Manufacturing" below
and Item 2 -- "Properties". As a result of such closures, the Company
consolidated its manufacturing sites and balanced the production of its products
between the United States and Israel. Furthermore, it combined sales offices in
a concerted effort to strengthen its global sales force.
Technology
Most of the Company's products are based on proprietary technologies, using
intense pulsed light ("IPL") or state-of-the-art laser applications pioneered by
the Company.
Intense Pulsed Light Technology. IPL, the Company's proprietary technology
uses thermal energy generated by a broad band intense pulsed light source to
selectively illuminate unwanted lesions without damaging the surrounding tissue.
IPL uses a combination of intense pulses of light and filters. Our IPL products
are primarily aimed at the private aesthetic markets and applications include:
non-invasive treatment of varicose veins and other benign vascular lesions;
removal of benign pigmented lesions, such as age spots and sunspots; hair
removal; and skin rejuvenation. Among our leading IPL brands are the VascuLight
system for both deep and superficial vascular lesions, pigmented lesions, and
hair removal and the IPL Quantum family of products for skin treatments,
vascular and pigmented lesions and hair removal.
Laser Technology. Surgical and medical laser units are generally
categorized by the active material employed in generating the laser's beam.
Materials used in surgical and medical lasers may be gases (such as CO2, argon
or krypton) or crystals (such as yttrium-aluminum-garnet (YAG)). The active
material determines the wavelength of the light emitted and thus the
applications for which various types of lasers are best suited. The Company
offers many laser systems, utilizing CO2, Nd:YAG, erbium, holmium and diode
technologies. The lasers come in a variety of sizes and
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power levels designed to serve a broad range of aesthetic and medical procedures
in physician offices, outpatient clinics and hospitals. These lasers work with a
wide variety of application-driven laser accessories. Among the Company's
leading cosmetic laser brands are: LightSheer diode lasers systems for hair
removal and UltraPulse for skin resurfacing. The Company offers a comprehensive
line of lasers for ophthalmic surgery, including the Novus Omni and Selecta
laser for glaucoma and the Opal Photoactivator for treatment of age-related
macular degeneration (AMD). The Company's leading surgical products are the
Powersuite for urology and Gynelase for gynecology applications. The Company's
leading dental products are Opus 20, Opus 5 and Opus 10.
Products and Applications
Aesthetic Applications. The Company's main focus has been in the quickly
growing aesthetic market, responding to the public's demand for improved
appearance. The primary applications for our products are: the improving of
facial complexion, skin texture, and blemishes; the removal of benign vascular
lesions, including leg veins, spider veins on legs and face, and other red
spots; removal of benign pigmented lesions including brown spots, age spots,
sunspots and tattoos; and hair removal. In 2001, 45% of our revenues were
derived from aesthetic applications.
The following are the major products we currently market to meet these
primary aesthetic applications. We have designed some of our systems to have the
versatility to treat several different conditions.
Aesthetic: Vascular and Pigmented Skin Treatments and Skin Resurfacing
VascuLight. VascuLight is the top- of-the-line multi-application IPL
system, integrating the features and benefits of the IPL with an Nd:YAG laser.
It enables physicians to offer patients non-invasive solutions for a variety of
clinical applications in a single device. The IPL heads can be varied according
to applications for vascular and pigmented lesions and hair removal. The Nd:YAG
laser treats deeper leg veins.
IPL Quantum. These IPL systems are available as single application or
multi-application systems for treating a variety of applications including
photorejuventaion, vascular and pigmented lesions as well as hair removal. The
Quantum DL for deeper leg veins was introduced in 2001.
UltraPulse and UltraPulse Encore. UltraPulse is the industry's high-end
high-energy, short-pulse-duration CO2 technology that first made laser skin
resurfacing possible. It treats moderate to severe wrinkles and acne scarring
and can also be used for a wide range of surgical applications.
LightSheer. An industry leader in laser hair removal, LightSheer systems
are high-power pulsed diode array systems that provide permanent hair reduction
to patients of all skin types. LightSheer has been recognized as an effective
and relatively maintenance free system. In 2001 two new portable systems were
introduced.
Lumenis holds the exclusive worldwide distribution rights for ClearLight,
an intense blue light acne treatment system owned by CureLight Ltd. of Or Akiva,
Israel. The Company believes that this therapy achieves higher clearance rates
in less time than other medical treatments without observable material adverse
side effects. ClearLight recently received the CE mark (see "Government
Regulation" below), and CureLight recently filed for marketing clearance with
the United States Food and Drug Administration. The Company began shipping the
product outside the United States in the second quarter of 2001.
In February 2002, Lumenis introduced the BClear Targeted PhotoClearing
System, a UVB based light therapy system to treat psoriasis and vitiligo. The
focused, high dose delivery and precise dosimetry of the BClear system allows
individually customized treatments that safely and effectively treat specific
problem locations without exposure to surrounding healthy skin. BClear qualifies
for Medicare reimbursement under an existing standard.
Ophthalmology Applications. Prior to the CMG Acquisition, CMG was a leader
in the ophthalmic laser market since its introduction of the first argon
photocoagulator system in 1970 for the treatment of retinal diseases and
glaucoma. Coherent had achieved a widespread reputation for innovations and
product excellence with an installed base of over 30,000 ophthalmic lasers in
more than 75 countries. Lumenis is continuing the work begun by Coherent and is
developing products which include both laser and other innovative technology
solutions for the treatment of a variety of sight-threatening diseases. Argon,
krypton, Nd:YAG, excimer, diode-pumped, and other diode systems all continue to
give ophthalmologists essential surgical alternatives to treat various
ophthalmic conditions. In 2001, 18% of our revenues were derived from ophthalmic
applications. Our leading ophthalmic applications include:
4
Photocoagulator. The purpose of this system is to heat or coagulate tissue.
The primary application is the treatment of diabetic retinopathy, an abnormal
vascular disease of the retina. Through the use of photocoagulation serious
vision loss from diabetic retinopathy has been reduced in some patients from 50%
to less than 2%. The main products are: Novus Omni, Ultima, and the Elite.
Photodisruptor. The photodisruptor creates a small optical breakdown, or
spark, to separate tissue or drill holes in the retina. The primary application
is capsulotomy or perforation of the posterior capsule, a membrane left after
removal of the cataractous lens. A secondary application is drilling holes in
the iris, laser iridotomy, to relieve pressure in narrow angle glaucoma. The
main brands for this product are the Aura and the Epic.
Photoactivator. This system is used to activate a drug, Visudyne(R), to
cause selective destruction of abnormal retinal blood vessels. The primary
application is treatment of the predominantly classic "wet" form of age related
macular degeneration (AMD). The main product is the Opal photoactivator which
uses Visudyne, a drug provided by Novartis.
Selective Laser Trabeculoplasty (SLT). SLT is used to selectively target
individual trabecular meshwork cells to activate a biologic response that
increases outflow of fluid to reduce intraocular pressure in open angle
glaucoma. SLT is performed using the Selecta series of products.
Refractive. This system is used to correct near and far sightedness and
astigmatism. In certain markets outside of the U.S. market, Lumenis distributes
the Allegretto laser, manufactured by Wavelight Laser Technolgie AG, which has
the capability of "custom ablation" to achieve better corrective vision for
patients.
Surgical Applications. Lumenis' acquired businesses, including Laser
Industries, with its well known Sharplan brand name, and CMG, were leading
forces in the surgical marketplace for over twenty-five years. Lumenis now has a
leading position in the surgical laser market. In 2001, 17% of our revenues were
derived from surgical applications.
The Company offers a broad range of laser systems and accessories for sale
to hospitals and to medical practices to meet the growing in-office procedure
demand.
Surgical: Urology
PowerSuite. The PowerSuite family of holmium lasers is used for two main
applications in Urology: kidney and bladder stone lithotripsy and benign
prostatic hyperplasia (BPH). BPH affects over 60% of men over the age of 60.
Power Suite is sold with a wide range of fibers, which enable physicians to
penetrate hard to reach areas. The laser is used to resect, ablate and coagulate
tissue.
In 2001 the Company entered into a new U.S. distribution agreement with
Boston Scientific Corp ("BSC") under which BSC is responsible for sales of
fibers and accessories as well as for providing sales leads for holmium lasers
to Lumenis' direct distribution force. A similar agreement for distribution in
Japan was entered into under which BSC is responsible for sales of all Lumenis
urology offerings in Japan.
Surgical: ENT (Otolaryngology).
Lumenis has pioneered several ENT applications for both operating room and
office environments. Our leading ENT products include:
CO2 Lasers. The Company offers a full range of CO2 laser systems and
accessories for a variety of applications. CO2 lasers enable the physician to
create precise, hemostatic incisions and excisions and to ablate soft tissue
with minimal thermal necrosis to the surrounding area. These units can be easily
adapted for freehand surgery, laser microsurgery, and rigid endoscopy
Surgical: Gynecology.
5
Lumenis offers several systems for various gynecologic applications,
including laparoscopy, endometrial ablation, microsurgery, tubal infertility,
lesions of the lower genital tract and excessive menstrual bleeding. Our leading
gynecological products include:
UltraPulse Encore. UltraPulse Encore is used in gynecology as well as
operating room based surgery. This high powered technology provides performance
enhancement over lower powered CO2 technologies.
GyneLase. GyneLase is a compact portable state-of-the-art diode laser that
is designed for outpatient global endometrial ablation treatment of menorrhagia
(excessive menstrual bleeding). Menorraghia is estimated to affect 20% of all
menstruating women. In March 2001, we entered into a worldwide distribution
agreement with Karl Storz GmbH & Co. for the GyneLase line of products.
Surgical: Veterinary
The Company pioneered laser applications in the veterinary area with the
AccuVet, a compact, easy to use, CO2 laser. The many surgical applications
include: removal of cysts, tumors and warts; specialized internal procedures;
neutering; spaying; and declawing.
Dental Applications. We have developed several dental lasers to enable
dentists to perform hard and soft tissue applications including drilling, cavity
preparation, gum trimming and periodontic procedures, as well as teeth
whitening. In 2001, 3% of our revenues were derived from dental applications.
Our leading systems for dental applications include:
Opus5 and Opus10. Opus5 and Opus10 are compact lightweight efficient diode
laser systems for maintenance-free tooth whitening. Opus 10 can also be used for
soft tissue applications such as root canal disinfection, periodontal
procedures, small surgery procedures, and curretage. The Opus 5 is a 5 Watt
system; Opus 10 is 10 Watt. In October 2001, the Company entered into a
distribution agreement with Patterson Dental Supply Inc. for distribution of
these products in the United States.
Opus20. Opus 20 uniquely combines Erbium YAG and CO2 lasers in one device
to enable dentists to meet most of their dental practices' needs. The Er:YAG
laser is designed primarily for hard tissue procedures on teeth and bone,
including cavity and crown preparation, caries removal, enamel etching and
curretage. The CO2 laser is effective for a wide variety of soft tissue
applications, including gingevectomy, gingivoplasty, frenectomy, implant
exposure and maintenance, root canal disinfection, laser troughing, crown
lengthening, operative dentistry, and guided tissue regeneration. The Opus20
enables dentists to perform hard tissue drilling at speeds equal to high speed
mechanical drills.
NovaPulse. The NovaPulse is a 20 Watt pulsed CO2 laser for a wide variety
of soft tissue applications including gingevectomy, gingivoplasty, frenectomy,
implant exposure and maintenance, root canal disinfection, laser troughing,
crown lengthening, operative dentistry, and guided tissue regeneration. The
NovaPulse can also be used for other dentistry surgical applications.
The Company also sells a variety of handpieces and accessories for its
dental lasers.
Industrial Applications. The industrial unit, Spectron Lasers, located in
Rugby, England, develops and sells a number of different industrial laser
systems for specialized applications based upon customer requests. In 2001, 4%
of our revenues were from industrial applications.
Products Under Development
In order to maintain and enhance its competitive position, the Company
believes it is imperative to develop new products and applications and introduce
new technologies. Some of these products are developed internally, some are
developed pursuant to research agreements, and some are acquired or licensed.
Business Strategy
The Company intends to maintain its leadership position in its markets by
providing quality leading edge systems, accessories and service, and through
in-house research and development and continued acquisition of products and
technologies. The Company intends to broaden its sales channels and product
offerings to reach a wider audience
6
for its products. The Company intends to use the resources at its disposal to
ensure that it can compete effectively in each of the markets it has targeted.
Financial Information about Business Segments
Please refer to Note 16 of the Financial Statements with respect to
financial information about business segments.
Marketing, Distribution and Sales
As part of the integration of CMG, in the second half of 2001, the Company
began a reorganization of its core business operations into five functional
business units to focus upstream marketing and research and development
activities within product application areas.
Five business units have accordingly been set up to focus on Lumenis'
primary markets: aesthetic, ophthalmology, surgery, dentistry and industrial.
o The Aesthetic business unit focuses on photorejuvenation, hair
removal, vascular and pigmented lesions, acne, psoriasis and other
applications under development.
o The Ophthalmic business unit focuses on ophthalmic products for
correction of vision related problems.
o The Surgical business unit focuses on hospital and in-office medical
procedures in such fields as gynecology, urology, ENT, veterinary and
other surgical applications.
o The Dental business unit focuses on dental applications including soft
and hard tissue and tooth whitening applications.
o Spectron Lasers, the industrial business unit, manufactures and sells
OEM products principally using a direct sales force in the U.K. and
U.S.
Three regional service centers have been established to coordinate local
sales, marketing and service functions for all five business units. In addition
to the sale of products, the Company generates revenues from service calls,
maintenance agreements and sales of parts and accessories. Service revenue
represents 13% of the net revenues. Lumenis sells directly in nine countries and
has consolidated the global distributor networks of its two primary predecessor
companies. These distributors sell Lumenis products in over 75 countries around
the world.
The regional service centers are:
o Americas, headquartered in Santa Clara, California, which is
responsible for sales in the United States and distributor sales in
Canada and Latin America.
o Europe, headquartered in Amstelveen, the Netherlands, which is
responsible for direct sales in France, Germany, Italy, Sweden and the
United Kingdom and for distributor sales in the rest of Europe, the
Middle East and North Africa. The European headquarters will also host
the Company's main distribution center outside the United States.
o Asia Pacific, headquartered in Tokyo, Japan, which is responsible for
direct sales operations in Japan, the People's Republic of China and
Hong Kong as well as distributor sales in over 20 countries in Asia
and the rest of the world, not covered elsewhere.
Within each region, where appropriate, the Company has entered into
distributor and representative agreements, to enable it to better penetrate
certain markets.
The Company also has entered into distribution agreements with other
manufacturers to grant Lumenis rights to distribute third party products which
complement its product offerings, including the ClearLight Phototherapy system
for acne, Allegretto Wavefront laser for laser vision correction, Verdi
photocoagulator for retinal disorders and Aura photodisrupter for capsulotomy,
all of which are sold through the regional service centers.
7
Breakdown Of Net Sales By Region
For The Year Ended December 31,
------------------------------------
(dollar amounts in thousands)
Actual
2 0 0 1 2 0 0 0 1 9 9 9
------------------------------------
North America ........................ $143,659 $ 64,254 $ 51,223
Europe ............................... 67,397 39,910 40,774
Asia ................................. 87,422 37,430 33,662
Israel ............................... 3,683 2,088 2,054
Other ................................ 13,040 17,943 14,438
-------- -------- --------
Total $315,201 $161,625 $142,151
======== ======== ========
To assist customers in financing their purchases of the Company's products,
the Company or its distributors may introduce them to one of a number of
independent leasing companies. As is common in this industry, a substantial
portion of the Company's sales are completed in the last few weeks of each
calendar quarter.
The Company generally sells more of its products during the second and the
fourth fiscal quarters than in the first and third fiscal quarters. We believe
that this is because during the third fiscal quarter many physician customers
take summer vacation and during the first fiscal quarter many hospitals and
medical organizations have not yet assessed their needs and budgets for the
upcoming year.
Manufacturing
The Company manufactures its products in five principal locations: the
LightSheer hair removal and BClear psoriasis systems are manufactured in
Pleasanton, California; aesthetic, surgical and ophthalmic products from the CMG
product line are manufactured in Santa Clara, California; former HGM products
and certain ophthalmic accessories are manufactured in Salt Lake City, Utah; the
aesthetic, surgical and dental products from the former ESC Medical product line
are manufactured in Yokneam, Israel; and the industrial products are
manufactured in Rugby, England.
Following the completion of the CMG acquisition, the Company consolidated
its manufacturing sites and balanced the production of its product lines between
the United States and Israel. By the end of 2001, the Company closed its
manufacturing sites in Seattle, Washington and Tel Aviv, Israel. The production
of the NovaPulse products was transferred from the Seattle facility to the
Yokneam, Israel site. Additionally, in an effort to lower manufacturing costs,
the Company is in the process of transferring other products from the Santa
Clara facility to the Yokneam and Salt Lake City facilities, respectively. This
transfer is expected to be completed in the second half of 2002.
The Company manufactures products based mostly upon sales forecasts and, to
a lesser extent, upon specific orders received from our customers. The Company
delivers products based upon purchase orders received, and on average, the
Company fulfills each customer's order within two to three weeks of receipt of
the order.
Sources and Availability of Raw Materials
The Company's products are manufactured from a large number of parts, using
standard components and subassemblies supplied by subcontractors and vendors to
the Company's specifications.
The Company's policy is to maintain more than one source for each of its
major components, to the extent possible, although in some cases parts are
supplied by a sole source. Due to their sophisticated nature, certain components
must be ordered up to six months in advance, resulting in a substantial lead
time for certain production runs. In the event that such limited source
suppliers are unable to meet the Company's requirements in a timely manner, the
Company may experience an interruption in production until an alternate source
of supply can be obtained.
In Israel, the Company uses an outsourcing vendor to store and stock its
raw material inventory.
8
The Company orders raw materials, including optical and electronic parts,
which it sends in kits to subcontractors for assembly of components and
subassemblies. Assembly (in part), integration, and quality assurance of the
components and subassemblies are conducted at the Company's manufacturing
facilities. In some cases, quality is tested on-site at the subcontractor's
facility. In the third quarter of 2001, the Company began outsourcing certain of
its subcomponent assembly to turnkey manufacturers.
Research and Development
The Company's research and development strategy is to develop high quality
products and related accessories to maintain its competitive advantage. The
Company's research and development expenses, net of participation by the Israeli
Office of the Chief Scientist, were approximately $21.77 million in 2001, $11.89
million in 2000, and $14.73 million in 1999. The Company believes that the close
interaction between its research and development, marketing, and manufacturing
groups allows for timely and effective realization of the Company's new product
concepts.
The Company receives certain grants and tax benefits from, and participates
in, programs sponsored by the Government of Israel.
Israeli tax law permits, under certain conditions, a tax deduction in the
year incurred for expenditures (including capital expenditures) in scientific
research and development projects, if the expenditures are approved by the
relevant Israeli Government Ministry (determined by the field of research), and
the research and development is for the promotion of enterprise and is carried
out by or on behalf of a company seeking such deduction. Expenditures not
approved as such are deductible over a three year period for Israeli tax
purposes. However, the amounts of any government grant made available to the
Company are subtracted from the amount of the aforementioned deductible
expenses.
The terms of the Israeli government participation also require that the
manufacture of products developed with government grants be performed in Israel.
Under the regulations of the Law for the Enforcement of Industrial Research and
Development 1984 (the "Research Law"), if any of the manufacturing is performed
outside Israel by any entity other than the Company, assuming the Company
received approval from the Chief Scientist for the foreign manufacturing, the
Company may be required to pay increased royalties. The increase in royalties
depends upon the manufacturing volume that is performed outside of Israel. The
maximum royalty to be paid could be up to 300% of the original grant.
The technology developed with Chief Scientist grants may not be transferred
to third parties without the prior approval of a governmental committee under
the Research Law, and may not be transferred to non-residents of Israel. The
approval, however, is not required for the export of any products developed
using the grants. Approval of the transfer of technology to residents of Israel
may be granted in specific circumstances, only if the recipient abides by the
provisions of the Research Law and related regulations, including the
restrictions on the transfer of know-how and the obligation to pay royalties in
an amount that may be increased.
In connection with an initial program approved by the Office of the Chief
Scientist, the Company and an Israeli subsidiary received or accrued
participation grants from the State of Israel in the amount of approximately
$58,000, $60,000 and $275,000 for the years ended December 31, 2001, 2000 and
1999, respectively. In return for the Government's participation payments, the
Company and its subsidiaries are obligated to pay royalties at a rate of 3% to
5% of sales of the developed product until the Office of the Chief Scientist is
repaid in full. As of December 31, 2001, the balance of the Company's
outstanding obligation to the State of Israel in connection with all
participation payments is approximately $5,594,000, which will be repaid to the
government in the form of royalties on sales of those products that reach the
market.
Competition
Lumenis faces keen competition in its different market niches. Competition
arises from utilizing other light-based products as well as alternate
technologies. Competitors range in size from small single product companies to
large multifaceted corporations, which may have greater resources than those
available to the Company. Major competitors are: in the aesthetic market:
Candela Corporation, Cynosure, Inc., Danish Dermatological Development A/S,
Laserscope, Inc. and Altus Medical Inc.; in the surgical market: Diomed Inc.,
Dornier MedTech, and Bioletic AG; and in the ophthalmic market: Carl Zeiss Micro
Imaging Inc., Nidek Technologies Inc. and Iridex Corporation.
In addition, the Company competes in markets subject to rapid technological
change. The entry of new companies or new technologies into these markets could
have a material adverse effect on the Company.
9
Patents and Intellectual Property
The Company has obtained and now holds 155 patents in the United States and
47 patents outside of the United States and has applied for 36 and 68 patents in
the United States and outside of the United States, respectively. In general,
however, the Company relies on its research and development program, production
techniques and marketing, distribution and service programs to advance its
products. The Company also licenses certain of its technologies from third
parties pursuant to various license agreements. Patents filed both in the United
States and Europe have a life of twenty years from the filing date. However,
patents filed in the United States prior to June 1995 expire either twenty years
from filing or seventeen years from the issue date. None of the Company's
material patents are expected to expire in the near future.
Technologies related to the Company's business, such as laser and IPL
technologies, have been rapidly developing in recent years. Numerous parties
have sought patent protection on developments in these technologies.
The Company's policy is to obtain patents by application, license or
otherwise, to maintain trade secrets and to operate without infringing on the
intellectual property rights of third parties. Loss or invalidation of certain
of these patents, or a finding of unenforceability of certain of the Company's
license agreements with respect to many third party patents, could have a
material adverse effect on the Company. The patent position of many inventions
in the areas related to the Company's business is highly uncertain, involves
many complex legal, factual and technical issues and has recently been the
subject of litigation industry-wide. There is no certainty in predicting the
breadth of allowable patent claims in such cases or the degree of protection
afforded under such patents. As a result, there can be no assurance that patent
applications relating to the Company's products or technologies will result in
patents being issued, that patents issued or licensed to the Company will
provide protection against competitors or that the Company will enjoy patent
protection for any significant period of time.
It is possible that patents issued or licensed to the Company will be
successfully challenged or that patents issued to others may preclude the
Company from commercializing its products under development. Litigation to
establish the validity of patents, to defend against infringement claims or to
assert infringement claims against others, if required, can be lengthy and
expensive, and may result in determinations adverse to the Company. There can be
no assurance that the products currently marketed or under development by the
Company will not be found to infringe patents issued or licensed to others.
Likewise, there can be no assurance that other parties will not independently
develop similar technologies, duplicate the Company's technologies or, with
respect to patents which are issued to the Company or rights licensed to the
Company, design around the patented aspects of the technologies. Third parties
could also obtain patents that may require licensing of their patented
technology for the conduct of the Company's business.
Because of the rapid development of technologies which relate to the
Company's products, there may be other issued patents which relate to basic
relevant technologies and other technologies marketed by the Company. From time
to time, the Company receives inquiries from third parties contending that their
patents are being infringed by the Company. If such third parties were to
commence infringement suits against the Company, and such patents were found by
a court to be valid and infringed upon by the Company, the Company could be
required to pay damages and make royalty payments. Depending on the nature of
the patent found to be infringed upon by the Company, a court order requiring
the Company to cease such infringement could have a material adverse effect on
the Company. See Item 3. - Legal Proceedings.
Government Regulation
The products manufactured and marketed by the Company are subject to
regulatory requirements mandated by the U.S. FDA the European Union and similar
authorities in other countries. The Company believes that it's principal
products will be regulated as "devices" under United States federal law and FDA
regulations. The process of obtaining clearances or approvals from the FDA and
other regulatory authorities is costly, time consuming and subject to
unanticipated delays.
Among the conditions for FDA approval of a medical device is the
requirement that the manufacturer's quality control and manufacturing procedures
comply with Good Manufacturing Practices ("GMP"), or the Quality System
Regulations ("QSR"), which must be followed at all times. The GMP and QSR
regulations impose certain procedural and documentation requirements upon a
company with respect to design, manufacturing, service and quality assurance
activities. These GMP and QSR requirements control every phase of design and
production from the receipt of raw materials, components and subassemblies to
the labeling of the finished product. It also includes the tracing of
10
consignees after distribution as well as documentation of training, follow-up
and customer complaint reporting. Design control was implemented by the FDA in
1998 as part of the QSR.
In February 1997, the Company received a Quality System Certification Award
for being in compliance with ISO 9001. ISO 9001 is a globally recognized
standard established by the International Standard Organization in Geneva,
Switzerland and has been adopted by more than 90 countries worldwide. ISO 9001
embraces all principles of the GMP and QSR and is the most comprehensive of the
quality assurance standards. ISO certification is based upon adherence to
established quality assurance standards and manufacturing process controls.
In 1998, the European Union ("EU") determined that marketing or selling any
medical product or devices within the European community requires a CE Mark
according to the European Medical Device Directive. It is the responsibility of
member states to ensure that devices capable of compromising the health and
safety of patients (and users) do not enter the market. Obtaining a CE Mark for
medical devices is regulated according to the European Medical Device Directive.
The medical device must comply with the requirements of the European Medical
Device Directive that applies at each stage, from design to final inspection.
The Company has complied with the EU standards and has received the CE Mark for
all the Company's IPL and Laser Systems.
International sales are subject to specific foreign government regulation
and those regulations vary from country to country. The time required to obtain
approval for any device to be sold in any foreign country may be longer or
shorter than that required for FDA approval.
Employees
As of December 31, 2001, the Company and its subsidiaries had 1,451
full-time employees. In Israel there were 324 employees, in the United States
728 employees, in Europe 244 employees and in Asia 155 employees.
Financial Information About Foreign And Domestic Operations And Export
Please refer to "Breakdown of Net Sales By Region" above and to Note 16 to
the Financial Statements with respect to financial information about geographic
areas of the Company's business.
The Company's worldwide business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings outside
the U.S. The Company does not regard these risks as a deterrent to further
expansion of its operations outside the U.S. However, the Company closely
reviews its methods of operations and adopts strategies responsive to changing
economic and political conditions.
Within the EU, there has been an evolution toward a single market for which
the Economic and Monetary Union ("EMU"), including the adoption of the Euro as a
single currency, marks an important step. The Company has recognized the
strategic significance of this development and, in the beginning of year 2000,
has adopted the Euro for use in EMU markets.
For risks related to the Company's operations in Israel, see "Conditions in
Israel" And "Management's Discussion and Analysis - Forward Looking Statements
and Risk Factors."
Conditions In Israel
General
The Company is incorporated under the laws of the State of Israel, and much
of its research and development and significant executive facilities are located
in Israel. Accordingly, the Company is directly affected by political, economic
and military conditions in Israel. The Company's operations would be materially
adversely affected if major hostilities involving Israel should occur or if
trade between Israel and its present trading partners should be curtailed.
Political Conditions
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its neighbors. A state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Additionally, Israel is currently
experiencing intense violence and terrorism and from time to time in the past,
Israel has experienced civil unrest, primarily in the West Bank and in the Gaza
Strip
11
administered by Israel since 1967. However, a peace agreement between Israel and
Egypt was signed in 1979, a peace agreement between Israel and Jordan was signed
in 1994 and, since 1993, several agreements between Israel and Palestinian
representatives have been signed pursuant to which certain territories in the
West Bank and Gaza Strip were handed over to the Palestinian administration. The
implementation of these agreements with the Palestinians representatives have
been subject to difficulties and delays and a resolution of all of the
differences between the parties remains uncertain. Recently the political
conflict with the Palestinians has worsened. Since October 2000, there has been
a significant increase in violence primarily in the West Bank and Gaza Strip, as
well as in Israel itself, and negotiations between Israel and the Palestinians
representatives cease from time to time. Violence in the region intensified
during 2001 and 2002. As of the date hereof, Israel has not entered into any
peace agreement with Syria or Lebanon. The Company cannot predict whether any
other agreements will be entered into between Israel and its neighboring
countries, whether a final resolution of the area's problem will be achieved,
the nature of any resolution of this kind, or whether the current violence will
continue and to what extent this violence will have an adverse impact on
Israel's economic development, on the Company's operations in the future or what
other effects it may have upon the Company.
Certain countries, companies and organizations continue to participate in a
boycott of Israeli firms and others doing business with Israel or with Israeli
companies. Although the Company is restricted from marketing the Company's
product in these countries, the Company does not believe that the boycott has
had a material adverse effect on the Company. However, a prolonged continuation
of the increased hostilities in the region could lead to increased boycotts and
further restrictive laws, policies or practices directed towards Israel or
Israeli businesses, and these could have a material adverse impact on the
Company's business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 45 are obligated, unless exempt, to perform up to 45 days, or longer
under certain circumstances, of military reserve duty annually. Additionally,
all such residents are subject to being called to active duty at any time under
emergency circumstances. Currently, some of the Company's senior officers and
key employees are obligated to perform annual reserve duty. While the Company
has operated effectively under these requirements since it began operations, no
assessment can be made as to the full impact of such requirements on its
workforce or business if hostilities continue, and no prediction can be made as
to the effect on the Company of any expansion or reduction of such obligations,
particularly if emergency circumstances occur.
Moreover, the September 11, 2001 terror attacks on the U.S. and the
military response by the U.S. and its international allies, in Afghanistan, have
created additional uncertainty regarding the state of the U.S. and world
economy. The U.S. war against terrorist activities centered in Afghanistan could
be broadened to include the Middle East, which could more directly affect the
Company's business. If weaknesses in the global economy persist or worsen, the
Company's future sales and operating results could be negatively impacted.
Economic Conditions
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has, for these and other reasons,
intervened in various sectors of the economy, employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
controls of wages, prices and foreign currency exchange rates. Until May 1998,
Israel imposed restrictions on transactions in foreign currency. These
restrictions affected the Company's operations in various ways, and also
affected the right of non-residents of Israel to convert into foreign currency
amounts they received in Israeli currency, such as the proceeds of a judgment
enforced in Israel. Despite these restrictions, foreign investors who purchased
shares with foreign currency are able to repatriate in foreign currency both
dividends (after deduction of withholding tax) and the proceeds from any sale of
shares. In 1998, the Israeli currency control regulations were liberalized
significantly, as a result of which Israeli residents generally may freely deal
in foreign currency and non-residents of Israel generally may freely purchase
and sell Israeli currency and assets. There are currently no Israeli currency
control restrictions on remittances of dividends on Ordinary Shares or proceeds
from the sale of Ordinary Shares; however, legislation remains in effect
pursuant to which currency controls can be imposed by administrative action at
any time. In addition, Israeli residents are required to file reports pertaining
to certain types of actions or transactions.
The Israeli Government's monetary policy contributed to relative price and
exchange rate stability in recent years, despite fluctuating rates of economic
growth and a high rate of unemployment. There can be no assurance that the
Israeli Government will be successful in its attempts to keep prices and
exchange rates stable.
12
Trade Agreements
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is also a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United Nations, Australia, Canada and
Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs. Israel and the European
Economic Community, known now as the European Union, concluded a free trade
agreement in July 1975, which confers various advantages on Israeli export to
most European countries and obligates Israel to lower its tariffs on imports
from these countries over a number of years. In 1985 Israel and the United
States entered into an agreement to establish a free trade area. The free trade
area has eliminated all tariff and specified non - tariff barriers on most trade
between the two countries. On January 1, 1993, Israel and the European Free
Trade Association entered into an agreement establishing a free - trade zone
between Israel and the European Free Trade Association. In November 1995, Israel
entered into a new agreement with the European Union, which includes
redefinition of rules of origin and other improvements, including providing for
Israel to become a member of the research and technology programs of the
European Union. In recent years, Israel has established commercial and trade
relations with a number of the other nations, including Russia, China, Turkey,
India and other nations in Eastern Europe and Asia, with which Israel had not
previously had such relations.
Item 2. Properties.
The Company's principal executive offices and principal engineering,
development, manufacturing, shipping and service operations are located in an
approximately 70,000 square foot facility in Yokneam, Israel and an
approximately 125,000 square foot facility in Santa Clara, California. In March
1996, the Company entered into a ten-year lease on the initial facility (of
approximately 34,000 square feet) in Yokneam, and in March 1998, the Company
entered into an additional ten-year lease on a second facility in Yokneam (of
approximately 36,000 square feet). As part of the CMG acquisition, the lease for
the premises formerly used by CMG was subleased to the Company. The sub-lease
for the Santa Clara premises expires in April 2004.
As part of the 2001 restructuring following the completion of the CMG
acquisition, the Company closed seven facilities by the end of 2001. This
included the closure of the manufacturing sites in Seattle, Washington and Tel
Aviv, Israel and five sales offices in Norwood, Massachusetts, Munich, Germany,
Cambridge, England, Paris, France and Tokyo, Japan. The facilities in
Massachusetts and Seattle will retain skeletal staff until the Company locates
subtenants for these locations.
In addition, the Company leases a facility in Tel Aviv, Israel which is
primarily utilized for research and development operations and through its
subsidiaries maintains the following premises, all of which are leased except
for the Salt Lake City, Utah sites acquired in connection with the acquisition
of HGM.
Israel
OpusDent Ltd. -- Manufacturing, operations, administrative and research and
development facilities are located in Netanya, Israel.
United States
Lumenis Inc. -- Manufacturing, marketing and sales operations are located
in facilities in Santa Clara, (described above) Pleasanton, California and in
Salt Lake City, Utah (the former HGM premises).
Other
In addition, Lumenis maintains sales offices in China, France, Germany,
Holland, Hong Kong, Italy, Japan and the United Kingdom.
For a description of an office facility located in New York, New York, see
Part III, Item 13: "Certain Relationships and Related Transactions."
13
Item 3. Legal Proceedings.
The Company is a party to various legal proceedings incident to its
business. Except as noted below, there are no legal proceedings pending or
threatened against the Company that management believes are likely to have a
material adverse effect on the Company's consolidated financial position.
In February 2002, the Company received a request from the United States
Securities and Exchange Commission ("SEC") to voluntarily provide certain
documents and information for a period commencing January 1, 1998. The request
primarily relates to the Company's relationships with its distributors, and also
asks for amplification of the Company's explanation of certain previously
disclosed charges and write-downs. The Company intends to furnish all documents
and information requested and cooperate with the SEC and is currently in the
process of collecting and producing such documents and information. The Company
is unable to predict the duration or outcome of this process.
Following the Company's announcement of the information request from the
SEC, several plaintiffs' law firms announced the filing of purported class
action suits in the United States District Court for the Southern District of
New York, on behalf of purchasers of securities of Lumenis Ltd. between January
7, 2002 and February 28, 2002, inclusive (the "Class Period"), against the
Company and certain of its officers and directors. As of March 26, 2002, the
Company had not been served with a summons in any of the announced lawsuits.
According to the announcements, the complaints allege that the Company
violated U.S. federal securities laws by issuing materially false and misleading
statements throughout the Class Period that had the effect of artificially
inflating the market price of the Company's securities. The complaints allege
that throughout the Class Period, defendants discounted and disputed marketplace
rumors about its operations even as the Company knew it was being investigated
by the SEC and that its distributors had been contacted by the SEC, and that
even after announcing in a press release that it was subject to an SEC
investigation, the Company continued to hide the fact that it had been aware of
the SEC investigation and had been providing information to the SEC for several
weeks. The Company believes the allegations and the claims are baseless, and if
served with a summons in any of the announced lawsuits, the Company intends to
vigorously defend against them.
The Company has been named in a number of purported class action securities
lawsuits filed in the fall of 1998 that have been consolidated in the United
States District Court for the Southern District of New York. The consolidated
action is known as In Re ESC Medical Systems Ltd. Securities Litigation, 98 Civ.
7530 (NRB). The consolidated amended complaint seeks damages and attorneys fees
under the United States securities laws for alleged irregularities in the way in
which the Company reported its financial results and disclosed certain facts
throughout 1997 and 1998 and for alleged "tipping" of non-public information to
Salomon Smith Barney Inc. in September 1998. The Company has entered into a
settlement agreement with the plaintiffs, which requires the Company to pay
$4,500,000 and to issue up to 500,000 Ordinary Shares. The cash portion of the
settlement will be paid by one of the re-insurers of the Company's directors and
officers liability insurance policy, and the Company intends to pursue
reimbursement of another $5,000,000 of the settlement consideration from a
second re-insurer that is in liquidation. An accrual of $13,000,000 for this
matter has been recorded in the Company's 2001 Consolidated Financial
Statements, which amount is based on the fair market value of the maximum number
of Ordinary Shares payable by the Company at the time the settlement agreement
was entered into. On March 26, 2002, the judge signed an Order and Final
Judgment approving the settlement.
On November 5, 1998, Light Age, Inc. ("Light Age") instituted an ex-parte
application in the Tel-Aviv District Court (the "Tel-Aviv Court") against the
Company and others, seeking a temporary injunction against the development,
production and sale of the Company's Alexandrite laser for dermatological or
hair removal treatments. Light Age's principal allegations are that the
Alexandrite laser is based on technology developed by Light Age and is competing
with Light Age's Alexandrite laser, in breach of the Company's non-disclosure
and non-compete undertakings in a supply agreement with Light Age. In addition,
Light Age sought a permanent injunction against the Company from engaging in
such activities. The Tel-Aviv Court denied Light Age's request for an ex-parte
injunction and ordered that a hearing be held with both parties present. On
March 21, 1999, the Tel-Aviv Court denied Light Age's motion for a preliminary
injunction. The parties have since agreed to submit their dispute for
arbitration. Accordingly, the parties filed a motion to stay the proceedings,
which was granted by the Tel Aviv Court on October 14, 1999.
On January 25, 1999, the Company, along with three affiliated entities,
brought an action seeking declaratory and injunctive relief in the Superior
Court of New Jersey, Somerset County; Law Division, against Light Age, Inc.,
entitled Laser Industries Ltd., ESC Medical Systems Inc., Sharplan Lasers Inc.,
and ESC Medical Systems Ltd. v. Light Age, Inc. Docket No. SOM-L-14199. The
litigation relates to disputes arising out of an agreement between Light Age and
Laser Industries pursuant to which Light Age supplied certain medical laser
devices to Laser Industries. On
14
March 5, 1999, defendant Light Age answered the complaint and counterclaimed
against the plaintiffs, seeking unspecified damages under thirteen counts
alleging a variety of causes of action such as breach of contract, tortuous
interference with contract, unjust enrichment, and misappropriation. On July 1,
1999 the court granted Light Age's motion to compel the Company and the three
affiliated entities to arbitrate. On August 13, 1999, Light Age filed a demand
for arbitration on its counterclaim with the American Arbitration Association.
On November 22, 1999, the Company and the three affiliated entities filed a
response to Light Age's demand. Light Age claims that it incurred damages of up
to $41,447,000. A hearing on the merits was held in December 2001. Closing
arguments were held on January 30, 2002 and a decision is expected in early
spring.
On September 20, 1999, Dr. Richard Urso filed what purports to be a class
action lawsuit against the Company and against a leasing company in Harris
County, Texas, alleging a variety of causes of action. In December 2000,
plaintiff amended his complaint to eliminate the class action claim. On April
13, 2001 the lawsuit was dismissed and on May 3, 2001, Dr. Urso and
approximately forty-eight physicians and medical clinics re-filed what purports
to be a class action lawsuit in Harris County, Texas. Plaintiffs filed a motion
to remove the case to Federal Court. The lawsuit was removed to the U.S.
District Court for the Southern District of Texas. The current allegations on
behalf of plaintiffs are breach of contract, breach of express and implied
warranties, fraud, misrepresentation, conversion, product liability, violation
of the Texas Deceptive Trade Practices Act and Texas Securities Act as well as
lender liability and unconscionable conduct. In March 2002, the Plaintiffs filed
a motion to amend their complaint to dismiss the class action and securities
allegations and to add several new plaintiffs. The plaintiffs have also filed a
motion to remand to State Court. The Company denies the allegations and will
continue to defend this case vigorously. No assessment of likelihood of outcome
or likely damages, if any, can be made at this time.
On October 12, 2001, Lumenis Inc., a subsidiary of the Company, commenced
an action for patent infringement in the United States District Court for the
Southern District of New York against Altus Medical Inc. ("Altus") seeking,
among other things, an injunction and damages. The complaint alleges that Altus
infringed two U.S. patents owned by Lumenis Inc. Altus answered the complaint
denying that it was infringing the asserted patents and filed counterclaims
seeking a declaratory judgment that the asserted patents are invalid and were
not infringed. Lumenis filed a reply denying the material allegations of the
counterclaims. Altus filed a motion seeking to transfer the action to the United
States District Court for the Northern District of California ("NDCA") for the
convenience of the parties and witnesses. Lumenis Inc. consented to the motion
to transfer. On December 12, 2001 the action was transferred to the NDCA.
On January 18, 2002, Lumenis Inc. commenced an action for patent
infringement against Trimedyne, Inc. ("Trimedyne") in the United States District
Court for the Central District of California. The complaint alleges that
Trimedyne has willfully infringed and is willfully infringing two Lumenis Inc.
U.S. patents. Lumenis Inc. seeks (i) an injunction enjoining Trimedyne's
infringement; (ii) an award of damages sustained by Lumenis as a result of such
infringement; (iii) a trebling of such damage award; and (iii) an award of its
costs and attorneys' fees incurred in the action. On or about February 26, 2002,
Trimedyne filed an answer and counterclaims in this action denying Lumenis'
material allegations of infringement and asserting counterclaims alleging that:
(i) Trimedyne is entitled to a declaratory judgment that Trimedyne is not
infringing the patents; (ii) Lumenis Inc. has violated certain U.S. and
California antitrust and trade practices laws; (iii) Lumenis Inc. has
disseminated false and misleading statements in violation of the California
Business and Professions Code and/or California's trade libel laws; (iv) certain
Lumenis Inc. products infringe Trimedyne's patents; (v) Lumenis has tortuously
interfered with Trimedyne's prospective economic relationships; and (vi)
Trimedyne is entitled to a declaratory judgment that it is entitled to a refund
of an alleged overpayment of royalties by Trimedyne of approximately $130,000
under a 1994 patent license. Trimedyne seeks: (i) an injunction enjoining
Lumenis Inc. from the allegedly wrongful acts; (ii) unspecified damages arising
from Lumenis Inc.'s allegedly wrongful acts and a trebling of such damages;
(iii) Lumenis Inc.'s profits derived from Lumenis Inc.'s allegedly wrongful
acts; (iv) unspecified punitive damages for Lumenis' allegedly wrongful acts;
(v) a refund of the alleged royalty overpayment, plus interest thereon; and (vi)
Trimedyne's costs and attorneys fees incurred in connection with this action.
The Company believes the counterclaims are baseless, will vigorously defend
against them and will continue to vigorously prosecute its claims against
Trimedyne.
15
On May 8, 2001, Lumenos, Inc. ("Lumenos"), the owner of several
applications with the United States Patent and Trademark Office to register the
term "Lumenos" as a trademark, filed a complaint for trademark infringement
against the Company in the United States District Court for the District of
Massachusetts, seeking equitable relief and damages. In its complaint, Lumenos
sought to prevent the Company from using or promoting the name "Lumenis" as a
company name, trademark or Internet domain name. This dispute was settled, and
the case dismissed, in December 2001.
On February 11, 2002, the Company filed a petition with the Bailiff's Court
of Horsholm, Denmark, requesting that an interim injunction be granted against
two competing products, which are manufactured by Danish Dermatological
Development A/S, a Danish company ("DDD"). As of March 26, 2002, the Company was
not aware of any statement of defense filed by DDD.
In 2001, the Company entered into settlement agreements with respect to
litigation with H.K. Hashalom, for aggregate payments by the Company of
$447,000.
In addition to the foregoing, the Company is a party in certain actions in
various countries, including the U.S., in which the Company sells its products
in which it is alleged that the Company's products did not perform as promised
and/or that the Company made certain misrepresentations in connection with the
sale of products to the plaintiffs. Management believes that none of these
actions that are presently pending individually would have a material adverse
impact on the consolidated financial position of the Company, although such
actions in the aggregate could have a material effect on quarterly or annual
operating results or cash flows when resolved in a future period.
Finally, the Company also is a defendant in various product liability
lawsuits in which the Company's products are alleged to have caused personal
injury to certain individuals who underwent treatments using the Company's
products. The Company maintains insurance against these types of claims and
believes that these claims individually or in the aggregate are not likely to
have a material adverse impact on the business, financial condition or operating
results of the Company.
The Company incurred an aggregate of $22,244,000 in litigation related
expenses (including settlement payments and legal fees and expenses) in 2001.
The balance sheet as of December 31, 2001 includes an accrual of $18,000,000
(including the provision of $13,000,000 noted above) reflecting management's
estimate of the Company's potential exposure with respect to certain, but not
all, legal proceedings, claims and litigation. With respect to the pending legal
proceedings and claims for which no accrual has been recorded in the financial
statements, Company management is unable to predict the outcome of such matters,
the likelihood of an unfavorable outcome or the amount or range of potential
loss, if any.
Item 4. Submission Of Matters To A Vote Of Security Holders.
None.
PART II
Item 5. Market For The Registrant's Equity And Related Stockholder Matters.
The Ordinary Shares of the Company were listed on the Nasdaq National
Market ("Nasdaq") on January 24, 1996. The Company began trading on September
17,1999 under the ticker symbol, "ESCM" and on September 24, 2001, following the
required Israeli authority approval of the new name, Lumenis Ltd., the Company
began trading under the ticker symbol "LUME."
As of June 23, 1999, Lumenis ceased being considered a "foreign private
issuer" under the Securities Exchange Act of 1934, as amended. Instead, the
Company began reporting under the broader disclosure obligations applicable to
United States issuers.
As of March 25, 2002, there were 270 shareholders of record of the
Company.
The following table sets forth the high and low closing sale prices for the
Ordinary Shares of the Company as reported by Nasdaq for the periods indicated.
16
2000 High Low
---- ---- ---
First Quarter $17.50 $ 8.06
Second Quarter $16.38 $ 8.13
Third Quarter $19.64 $15.53
Fourth Quarter $18.44 $12.06
2001 High Low
---- ---- ---
First Quarter $24.06 $ 10.94
Second Quarter $30.24 $ 22.50
Third Quarter $30.05 $ 18.71
Fourth Quarter $21.07 $ 15.60
The Company has never paid a cash dividend on its Ordinary Shares and does
not anticipate that it will pay any cash dividend on its Ordinary Shares in the
foreseeable future.
The Company intends to retain its earnings to finance the development of
its business. Any future dividend policy will be determined by Lumenis' Board of
Directors (the "Board") based upon conditions then existing, including the
Company's earnings, financial condition, tax position and capital requirements
as well as such economic and other conditions as the Board may deem relevant.
Pursuant to Lumenis' Articles of Association, certain dividends, referred to as
final dividends (which are comparable to annual dividends which are paid by some
United States companies), may be recommended by the Board and may be approved by
shareholders at the annual meeting of shareholders, but only in an amount per
share equal to or less than the amount recommended by the Board. In addition,
depending upon the factors described above, the Board may declare interim
dividends on account of the final dividend. Lumenis may only pay dividends in
any given fiscal year out of "profits," which generally are defined for Israeli
statutory purposes to be after tax net earnings. In addition, because Lumenis
has received certain benefits under the Israeli law relating to "Approved
Enterprises," the payment of dividends by Lumenis may be subject to certain
Israeli taxes to which Lumenis would not otherwise be subject. Furthermore,
pursuant to the terms of certain financing agreements, the Company is restricted
from paying dividends to its shareholders. In the event that cash dividends are
declared by the Company, such dividends will be paid in New Israeli Shekel
("NIS").
Dividends paid out of income derived from an Approved Enterprise under
Israeli law are subject to a 15% withholding tax. Approved Enterprises may
receive exemption from Israeli tax for up to 10 years (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Effective Corporate Tax Rate"). Should dividends be paid out of income earned by
the Company from an Approved Enterprise during the tax exempt period, such
income will be subject to tax at the rate of up to 25%. The Company does not
anticipate paying dividends from income derived from the Approved Enterprise and
any such earnings distributed upon dissolution are not expected to subject the
Company to income taxes.
Item 6. Selected Financial Data.
The following selected financial data was derived from the Company's
Consolidated Financial Statements, which have been prepared in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP"). The
financial data set forth below should be read in conjunction with, and are
qualified in their entirety by, the Company's Consolidated Financial Statements,
related notes and other financial information contained in this Annual Report.
17
For The Year Ended December 31,
--------------------------------------------------------
In thousands except per share data
2001(*) 2000 1999 1998 1997
------- ---- ---- ---- ----
Revenues
Net Revenues ............................... $ 315,201 $ 161,625 $ 142,151 $ 225,206 $ 193,983
Other Revenues ............................ -- -- -- -- 2,100
315,201 161,625 142,151 225,206 196,083
Cost of Revenues .............................. 155,643 66,448 96,474 78,585 65,068
--------- --------- --------- --------- ---------
Gross Profit .............................. 159,558 95,177 45,677 146,621 131,015
--------- --------- --------- --------- ---------
Operating Expenses
Research and Development, Net ................. 21,766 11,887 14,725 18,480 17,371
In process research and Development ........... 47,853 -- -- 2,451 11,912
Selling, Marketing and administrative
expenses .................................... 180,157 62,479 104,231 91,549 71,968
Restructuring costs ........................... -- -- 20,530 -- --
Litigation expenses ........................... 22,244 -- 23,780 -- --
Impairment and write-down of intangible and
tangible assets ............................. 5,455 -- 17,616 -- --
Amortization of goodwill and other intangible
assets ...................................... 13,978 -- -- -- --
Other ......................................... -- -- 4,987 -- --
--------- --------- --------- --------- ---------
Total Operating Expenses ...................... 291,453 74,366 185,869 112,480 101,251
--------- --------- --------- --------- ---------
Other Operating Income .................... -- 1,450 -- -- --
--------- --------- --------- --------- ---------
Operating Income (loss) ................... (131,895) 22,261 (140,192) 34,141 29,764
Other income .............................. -- 599 -- -- --
Financing Income (expenses), Net .............. (11,897) (4,470) (3,865) 1,211 1,409
--------- --------- --------- --------- ---------
(143,792) 18,390 (144,057) 35,352 31,173
Nonrecurring Expenses ......................... -- -- -- 28,951 4,650
Income (loss) Before Income Taxes ............. (143,792) 18,390 (144,057) 6,401 26,523
Taxes on Income ............................... (520) 280 4,079 2,201 4,429
--------- --------- --------- --------- ---------
Net Income (loss) after income taxes .......... (143,272) 18,110 (148,136) 4,200 22,094
Company's share in losses of affiliates ....... 2,596 1,120 626 200 --
--------- --------- --------- --------- ---------
Net Income (loss) before extraordinary
items ....................................... (145,868) 16,990 (148,762) 4,000 22,094
Extraordinary gain on purchase of
Company's Subordinated .................... -- 292 7,974 -- --
Convertible Notes ............................. -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) for the year ................ $(145,868) $ 17,282 $(140,788) $ 4,000 $ 22,094
========= ========= ========= ========= =========
Earning (loss) Per Share
Basic
Income (loss) before extraordinary items .. $ (4.52) $ 0.67 $ (5.79) $ 0.15 $ 0.86
Extraordinary gain .................... -- 0.01 0.31 -- --
--------- --------- --------- --------- ---------
Net earnings (loss) per share ......... $ (4.52) $ 0.68 $ (5.48) $ 0.15 $ 0.86
========= ========= ========= ========= =========
Diluted
Income (loss) before extraordinary items .. $ (4.52) $ 0.60 $ (5.79) $ 0.15 0.86
Extraordinary gain ............................ -- -- 0.01 0.31 --
--------- --------- --------- --------- ---------
Net earnings (loss) per share ................. $ (4.52) $ 0.61 $ (5.48) $ 0.15 $ 0.86
========= ========= ========= ========= =========
Weighted Average Number Of Shares
Basic ..................................... 32,302 25,354 25,674 26,027 25,604
Diluted ................................... 32,302 28,217 25,674 27,381 27,194
Cash and cash equivalents ..................... $ 31,400 $ 43,396 $ 24,524 $ 42,950 $ 54,616
Total assets .................................. 387,274 179,529 174,907 327,666 335,646
Long-term liabilities ......................... 168,492 93,930 96,691 116,306 127,427
Retained earning (deficit) .................... (242,561) (96,693) (113,975) 26,813 22,813
Total shareholder's equity .................... $ 79,366 $ 27,863 $ 5,943 $ 155,508 $ 150,004
(*) Includes eight months of CMG post-acquisition and one month of HGM
post-acquisition.
18
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations: (In thousands, except per share data)
Critical Accounting Policies and Estimates
Lumenis' discussion and analysis of its financial condition and results of
operations are based upon Lumenis' consolidated financial statements, which have
been prepared in accordance with U.S. GAAP.
The preparation of these financial statements requires Lumenis to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent liabilities. On an
ongoing basis, Lumenis evaluates its estimates, including those related to
product returns, bad debts, inventories, investments, intangible assets, income
taxes, financing, warranty obligations, restructuring, long-term service
contracts, contingencies and litigation.
Lumenis bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Lumenis believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. For a detailed discussion of the application of these and
other accounting policies, see Note 3 to the Consolidated Financial Statements.
Inventories are presented at the lower of cost or market. Inventory
reserves are provided to cover risks arising from slow-moving items or
technological obsolescence.
We regularly review inventory quantities on hand and record a provision for
excess and obsolete inventory. Demand for our products can fluctuate
significantly. Our products are characterized mainly by rapid technological
change, frequent new product development and rapid product obsolescence that
could result in an increase in the amount of obsolete inventory quantities on
hand. Additionally, our estimates of future product demand may prove to be
inaccurate, in which case we may have understated or overstated the provision
required for excess and obsolete inventory. Although we make every effort to
ensure the accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have a
significant impact on the value of our inventory and our reported operating
results.
Revenues from product sales are recognized when delivery has occurred,
persuasive evidence of an agreement exists, the fee is fixed or determinable and
collectibility is probable. The costs of insignificant related obligations
(mainly installations and training which are not material to functionality) are
accrued when the related revenue is recognized. Estimated sales returns are
accrued upon recognition of sales based on Lumenis' experience and management's
estimates. Revenues from service contracts are recognized on a straight-line
basis over the life of the related service contracts.
Goodwill and other intangible assets are reviewed for impairment whenever
events such as product discontinuance, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. When such events occur, the Company compares the carrying amount of
the assets to undiscounted expected future cash flows. If this comparison
indicates that there is impairment, the amount of the impairment is calculated
using discounted expected future cash flows. The discount rate applied to these
cash flows is based on the Company's weighted average cost of capital, which
represents the blended after-tax costs of debt and equity. Any impairment loss
is recognized in the statement of operations. The Company applied SFAS No. 142
to goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to June 30, 2001 the Company will
adopt the SFAS effective January 1, 2002. At such date, all acquired goodwill
and other intangible assets with indefinite lives will be assigned to reporting
units for purposes of impairment testing and segment reporting and will no
longer be amortized but will be subject to periodic impairment assessment.
19
Overview
Lumenis is a world leader in the design, manufacture, marketing and
servicing of laser and light based systems for aesthetic, ophthalmic, surgical
and dental applications. Lumenis offers a broad range of laser and IPL systems
which are used in a variety of aesthetic, ophthalmic, surgical and dental
applications, including skin treatments, hair removal, non-invasive treatment of
vascular lesions and pigmented lesions, acne, psoriasis, ear, nose and throat,
gynecology, urinary lithotripsy, benign prostatic hyperplasia, open angle
glaucoma, secondary cataracts, age-related macular degeneration, refractive eye
correction, neurosurgery, dentistry and veterinary.
The Company reported net revenues of $315,201 for the year ended December
31, 2001 compared to net revenues of $161,625 for the year ended December 31,
2000. The net loss for the year ended December 31, 2001 was $145,868 or a
diluted net loss per share of $4.52 compared to net income of $17,282 for the
year ended December 31, 2000 or a diluted net earnings per share of $0.61.
On April 30, 2001, the Company completed the acquisition of the medical
group of Coherent, Inc. ("CMG"). This acquisition approximately doubled the
Company's sales, strengthened its leading position in sales of pulsed light and
laser based systems for the aesthetic and surgical markets, made it a
significant competitor in the ophthalmic segment of the medical laser market,
expanded its proprietary technology and increased its critical mass by country
and customer type for the marketing and cross-selling of its products. After
completion of this acquisition, the Company changed its name from ESC Medical
Systems Ltd. ("ESC") to Lumenis, derived from lumen, Latin for light.
In November the Company also completed the acquisition of the stock of
FISMA Corporation, Instruments for Medicine & Diagnostics, Inc. and Instruments
for Surgery Inc. (collectively "HGM"). HGM is engaged in developing,
manufacturing and selling medical laser equipment primarily to the ophthalmology
market as well as providing service support for these products worldwide.
Results in 2001 included several costs and charges that related principally
to the acquisitions of CMG and HGM. Integration costs incurred following the
respective acquisitions totaled a pretax charge of $57,365 as described further
below. In addition the Company also recorded a total charge of $47,853 for in
process research and development as a result of the acquisitions. The Company
also recorded amortization of $1,692 related to options granted in connection
with the financing for the acquisition of CMG and other related deferred
financing costs. In 2001, the Company recorded $4,627 of amortization of
goodwill and $9,351 of amortization of other intangible amounts arising mainly
from the CMG acquisition.
As a result of the completion of the CMG acquisition, the Board also made
special option grants to certain key employees and accelerated the vesting of
previously granted options resulting in a charge of $26,075.
Additionally, the Company incurred and provided for litigation expenses
totaling $22,244 principally related to a settlement of a class action suit and
a provision for other matters as described further in Note 13C to the
Consolidated Financial Statements. The Company reorganized its Dental operation
and as a result incurred charges of $1,110. The Company also recorded a bad debt
reserve of $1,754, primarily to cover exposure in Argentina as a result of the
currency crisis in that country. The Company also recorded a charge of $3,986
for write down of investments due to the Company's assessment for impairment,
mainly its investment in Galil Medical Ltd. Financing expenses included an
exchange loss of $2,141 as a result of not hedging certain foreign currency
denominated assets and liabilities. The Company typically hedges its foreign
currency transactions. Also, the Company recognized a loss of $2,596 related to
its investment and transactions with Aculight as further described below. In
2001 the Company recorded a gain of $1,600 related to a reversal of a prior year
income tax accrual and took a charge for $1,105 mainly for sales tax matters
dating back to 1995.
The net unusual charges in 2001 totaled $180,297. Excluding these items net
income for 2001 would have been $34,429 compared to the reported net loss of
$145,868 and compared to net income of $17,282 in 2000.
Following the completion of the CMG acquisition, the Company undertook an
integration program to capture the cost savings from the acquisition. As part of
the integration plan, the Company closed or suspended operations at seven
facilities by the end of 2001 including the consolidation of manufacturing sites
balancing the production of its products between the United States and Israel.
The facilities affected included 2 plants and 5 sales offices. The Company also
integrated its sales force, rationalized its distributor arrangements and
reorganized its marketing and research and development functions as are
described in more detail in the following review. In total, the Company reduced
its employment by 160 employees or approximately 10%. The Company terminated
distributor agreeements,
20
principally duplicate distributors as a result of the acquisitions of CMG and
HGM. As part of the integration measures the Company incurred certain costs and
charges. The charges were included in the categories as noted in the Company's
Consolidated Statement of Operations.
Integration Costs
Cost of Revenues
Write-down of inventory mainly related to discontinued products $19,172
Selling, Marketing and Administrative Expenses
Severance for terminated employees 6,377
Retention bonuses 9,963
Consulting, travel, name change rebranding of products
and other integration costs 5,784
Write-down of accounts receivables from
terminated distributors 10,213
Future lease costs of closed or unused facilities and relocation costs 4,387
Impairment and write-down of intangible assets
Fixed asset write-downs 1,469
-------
Total $57,365
=======
As a result of the integration measures taken by the Company, the expected
savings are estimated at $30,000 on an annual basis. As of December 31, 2001
substantially all of the integration process has been completed. During 2001,
the Company incurred approximately $12,027 of costs in its reported results
subsequently eliminated as a result of these programs. The Company expects to
incur up to an additional $10,000 in unusual charges in 2002 related to further
cost savings efforts mainly related to reorganization of its manufacturing
operations and the relocation of its Santa Clara offices resulting in further
expected annual savings of at least $10,000. See "Forward Looking Statements and
Risk Factors" below.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
The Company reported net revenues of $315,201 for the year ended December
31, 2001 compared to net revenues of $161,625 for the year ended December 31,
2000. The net loss for the year ended December 31, 2001 was $145,868 or a
diluted net loss per share of $4.52 compared to net income of $17,282 for the
year ended December 31, 2000 or a diluted net earnings per share of $0.61.
Net Revenues. The Company's net revenues increased in 2001 by 95% to
$315,201 compared to $161,625 in 2000. The increase in sales reflects mainly the
eight-month contribution from the CMG acquisition.
Gross Profit. Gross profit increased by 68% to $159,558 in 2001 compared to
$95,177 in 2000. As a percentage of revenues the gross profit was 51% in
2001compared to 59% in 2000. Excluding the write down of inventory and other
charges mainly connected to discontinued products following the acquisition of
CMG and HGM of $19,172 gross profit margin decreased by 2% to 57% in 2001. The
write-down of discontinued products is based on management's decision to keep
superior products per application, mainly discontinuing ESC's hair removal and
certain surgical products.
The increase in gross profit, excluding the write down of inventory and
other charges mainly connected to discontinued products, in 2001 was due to the
eight months of contribution from the CMG acquisition.
The decrease in gross profit, excluding the unusual charges, as a
percentage of sales in 2001 stems from the inherently lower gross margins of the
CMG product lines and was affected by changes in the product mix compared to
2000.
Research and Development, Net. Net research and development costs increased
by 83% to $21,766 in 2001 from $11,887 in 2000. As a percentage of sales,
research and development costs were 7% in 2001 or the same as in 2000.
The increase in research and development costs in 2001 is due mainly to the
eight month contribution from CMG activities.
21
In Process Research and Development. In process research and development
expenses in 2001 represent the fair value allocated to in process research and
development of the CMG acquisition of $46,650 and HGM acquisition of $1,203
based upon independent valuations (see Note 3 to the Consolidated Financial
Statements).
The fair values of the existing purchased technology and other intangible
assets, as well as the technology currently under development, were determined
using the income approach, which discounts expected future cash flows to present
value. Such projected cash flows were provided by the acquired company. The
discount rates used in the present value calculations were typically derived
from a weighted-average cost of capital and debt analysis, adjusted upward to
reflect additional risks inherent in the development life cycle.
The assumptions primarily consist of an expected completion date for the
in-process research and development projects, estimated costs to complete the
projects, and revenue and expense projections for market entrance costs.
The development of these technologies remains a significant risk due to the
remaining efforts to achieve technical feasibility, rapidly changing customer
markets and uncertainty of our intentions and abilities to continue the
development of those projects. Thus, we did not include in the projected cash
flows the effect of expense reductions or synergies as a result of integrating
the acquired in-process technology. Therefore, the valuation assumptions do not
include significant anticipated cost savings.
The following table summarizes the key assumptions underlying the
valuations for our acquisitions completed during the year ended December 31,
2001.
- ---------------------------------------------------------------------------------------------------------
Acquired company R&D Fair value of Estimated costs to Estimated time to Discount rate
IPR&D complete complete (Years)
- ---------------------------------------------------------------------------------------------------------
CMG and HGM $47,853 $13,404 0.5-4.5 16%-23.4%
- ---------------------------------------------------------------------------------------------------------
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses increased by 188% to $180,157 in 2001 compared to
$62,479 in 2000. As a percentage of revenues, selling marketing and
administrative expenses in 2001 were 57% compared to 39% in 2000. As a
percentage of revenues, excluding unusual charges (listed below) mainly in
connection with the CMG acquisition, selling, marketing and administrative
expenses in 2001 were 36%. Excluding the unusual charges, selling, marketing and
administrative expense as a percentage of sales improved in 2001 due to cost
reduction actions taken following the CMG acquisition.
Selling, marketing and administrative expense in 2001 include unusual
charges, mainly in connection with the CMG and HGM acquisitions as follows:
o $10,213 write-down of accounts receivable in connection with
terminated distributors.
o $6,377 severance for terminated employees.
o $9,963 for retention bonuses.
o $4,387 relating to accrued future lease costs of closed or unused
facilities, relocation costs.
o $5,784 costs incurred for outside consultants, travel costs during the
integration, costs of the Company's change in name and other
re-branding of products and other integration costs.
Other unusual charges were also included as follows.
o $1,110 reorganization expenses of the Company's Dental operations.
o $1,754 for bad debt provision to principally cover receivable exposure
in Argentina.
o $26,075 for non-cash compensation related to special option grants and
accelerated vesting of previously granted options (see Note 14 to
Consolidated Financial Statements).
o $1,105 in other charges mainly for sales tax matters dating back to
1995.
Litigation Expenses. Litigation expenses in the year 2001 were $22,244,
mainly with respect to certain legal proceedings, claims and litigation, which
primarily represents management's estimate of the Company's exposure relating to
certain proceedings.
22
Amortization of goodwill and other intangible assets. Amortization of
goodwill and other intangible assets of $13,978 includes $4,627 of amortization
of goodwill and $9,351 of amortization of other intangible assets both arising
mainly from the CMG acquisition.
Impairment and Write-down of intangible and tangible assets. Impairment and
write-downs of tangible and intangible assets in 2001 of $5,455 includes $1,469
write-down of fixed assets in connection with relocation of facilities and
$3,986 impairment of value of investments, principally the Company's investment
in Galil Medical Ltd.
Financing expenses, net. For the year ended December 31, 2001, financing
expenses were $11,897 compared to financing expenses of $4,470 in 2000. The
increase in 2001 in financing expense is mainly due to the $5,769 financing cost
of the long term bank loan in connection with the CMG acquisition including
amortization of $1,692 in respect of value of options given to the bank as part
of the financing agreement and amortization of other deferred financing costs,
as well as lower average available cash and lower interest rates during the
year. Financing expenses included an exchange loss of $2,141 as a result of not
hedging certain foreign currency denominated assets and liabilities. The Company
typically hedges its foreign currency transactions.
Tax on Income (benefit). Tax benefit for the year ended December 31, 2001
was $520 compared with expense of $280 in the year ended December 31, 2000. In
April 2001, the Company reached a final agreement with the Israeli income tax
authorities with regard to tax returns filed by the Company for the years up to
and including 1998. As a result, the Company recorded a gain of $1,600 from
reversal of the accrual recorded in previous years. Most of the Company's income
in Israel is exempt from income taxes; the Israeli statutory tax rate for the
purpose of reconciliation of the reported tax expense is approximately zero.
Income tax expense relates primarily to the income taxes of Israeli
subsidiaries. Additionally, the Company has over $140,000 of net operating
losses, mostly in the United States, Europe and Israel. The Company has provided
a valuation reserve for the full amount of the net operating losses. For tax
purposes, the goodwill and other intangibles of approximately $118,000
allocated to the CMG acquisition in the U.S. will be amortized over periods of
up to 15 years.
Company's share of losses of affiliates. In 2001, the Company's share of
losses of affiliates was $2,596 compared to $1,120 in 2000. The net losses in
2001 include $1,007 due to its 50% share of Aculight's losses and $1,589 net
elimination of 50% of the gain resulting from sales of Company products to
Aculight in the amount of $4,764. In 2000, the Company's share of losses of
affiliates relates to its investment in Galil Medical Ltd., which was written
down in 2001.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
The Company reported net revenues of $161,625 for the year ended December
31, 2000 compared to net revenues of $142,151 for the year ended December 31,
1999. The net income for the year ended December 31, 2000 was $17,282 or a
diluted net earnings per share of $0.61 compared to net loss of $140,788 for the
year ended December 31, 1999 or a diluted net loss per share of $5.48. In 1999
the Company recorded restructuring costs and other unusual charges totaling
$119,593.
Net Revenues. The Company's net revenues increased by 14% to $161,625 in
2000 compared to $142,151 in 1999. The increase in revenue is attributable to an
increase in unit revenues and sale of services.
Gross Profit. Gross profit increased to $95,177 in 2000 from $45,677 in
1999. Excluding the write-off of inventory and other reserves mainly relating to
restructuring, gross profit for the year 1999 was $75,727. As a percentage of
sales, the gross profit was 59% in 2000 compared to 53% in 1999, excluding the
write-off of inventory and other reserves.
The significant increase in gross profit is due to the increase in sales,
reduction in overhead costs and an improvement in the product mix.
Research and Development Costs, Net. Net research and development costs in
2000 decreased by 19% to $11,887 from $14,725 in 1999. As a percentage of sales,
research and development costs were 7% in 2000 as compared to 10% in 1999. The
decrease in research and development costs, net is due to a reduction in
overhead costs, significantly lower material consumption and cost savings
implemented during 1999, including the elimination of certain uneconomical
projects. Research and development expenses are net of the participation of the
Office of the Chief Scientist in Israel.
23
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses decreased by 40% to approximately $62,479 in 2000 from
approximately $104,231 in 1999. As a percentage of sales, selling, marketing and
administrative expenses were 39% in 2000 compared to 73% in 1999. Selling,
marketing and administrative expenses for 1999 included bad debt charges of
$13,430, restructuring charges of $4,800 and litigation expenses of $4,400,
which were not part of the legal settlements, which were recorded in settlement
of litigations described below.
Excluding write-offs relating to the restructuring, bad debts and
litigation expenses in 1999, selling, marketing and administrative expense were
$81,601. As a percentage of sales, selling, marketing and administrative
expenses in 2000 were 39% compared to 57% in 1999, excluding write-offs and
litigation expense.
The decrease in 2000 is attributable to the reduction in selling and
marketing costs, mainly in the United States, as a result of the restructuring
plan adopted during 1999 and the decrease in general and administrative expenses
mainly attributable to a decrease in bad debt reserves and a significant
reduction in legal costs.
Restructuring Costs. In 1999, the Company developed and started the
implementation of a restructuring plan. The majority of the restructuring charge
was attributable to the Company's divisions in the United States. The
restructuring program provided for a reduction of approximately 200 employees.
Litigations. During 1999, the Company had made several legal settlements
mainly related to the Reliant and LPG lawsuits. The total for the legal
settlements was $23,780, which includes both settlement fees and related legal
fees incurred by the Company.
Impairment and Write-down of Intangible and Tangible Assets. During 1999,
the Company wrote-off intangible assets in the amount of $16,049 which mainly
related to goodwill from acquisitions and acquired technology in prior years. In
addition, the Company wrote-off tangible assets in the amount of $1,567 that
related to the restructuring plan adopted during 1999.
Other Expenses. For the year ended December 31, 1999, other expenses were
$4,987 comprised mainly of fees to McKinsey & Co., for work on the restructuring
plan and $3,575 of expenses incurred during 1999 in connection with the director
election contest.
Other Operating Income. Other operating income in 2000 includes the profit
from sale of Applied Optronics Corporation, a unit in our industrial division.
Other Income. Other income of $599 in 2000 includes profits due to dilution
of the Company's interests in Galil Medical Ltd.
Financing Income (Expense), Net. For the year ended December 31, 2000,
financing expenses were approximately $4,470 compared to financing expenses of
$3,865 in 1999. Financing expense increased mainly due to lower average cash
balances.
Taxes On Income. Taxes on income were approximately $280 for the year ended
December 31, 2000 compared to approximately $4,079 for the year ended December
31, 1999. In 1999, the Company wrote off deferred tax assets of approximately $
3,300, which is reflected as tax expense in the period. Because most of the
Company's income in Israel is presently exempt from income taxes, the Israeli
statutory tax rate for the purposes of the reconciliation of the reported tax
expense is approximately zero. Additionally, the Company had over $100 million
of net operating losses, mostly in the United States, Europe and Israel. Income
tax expense in the financial statements relates primarily to the income taxes of
non-Israeli subsidiaries.
Company's Share Of Losses Of Affiliates. The Company's share of losses of
affiliates in 2000 was $1,120 compared to $626 in 1999.
Extraordinary Gain On Purchase Of The Company's Subordinated Convertible
Notes. Extraordinary gain on the purchase of the Company's convertible notes was
$292 compared to $7,974 in 1999. The decrease is due to the purchase of fewer of
the Company's subordinated convertible notes.
Variability Of Operating Results
The Company's sales and profitability may vary in any given year, and from
quarter to quarter, depending on the number and mix of products sold and the
average selling price of the
24
products. In addition, due to potential competition, uncertain market acceptance
and other factors, the Company may be required to reduce prices for its products
in the future.
The Company's future results will be affected by a number of factors
including the ability to increase the number of units sold, to develop,
introduce and deliver new products on a timely basis, to anticipate accurately
customer demand patterns and to manage future inventory levels in line with
anticipated demand. These results may also be affected by currency exchange rate
fluctuations and economic conditions in the geographical areas in which the
Company operates. There can be no assurance that the Company's historical
performance in sales, gross profit and net income will continue, or that sales,
gross profit and net income in any particular quarter will not be lower than
those of the preceding quarters, including comparable quarters.
Recent Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 establishes new standards for accounting and reporting requirements for
business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited. The Company has adopted this
statement for the acquisition of HGM made in November 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets". SFAS No. 142
establishes new standards for goodwill and other intangibles acquired in a
business combination and eliminates amortization of goodwill and intangible
assets with indefinite lives and instead sets forth methods to periodically
evaluate them for impairment. The Company applied SFAS No. 142 to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to June 30, 2001 the Company will adopt the
SFAS effective January 1, 2002. At such date, acquired goodwill will be assigned
to reporting units for purposes of impairment testing and segment reporting, and
will no longer be amortized but will be subject to periodic impairment
assessment. The adoption of SFAS No. 142 is expected to result in an exclusion
of amortization expenses in the amount of approximately $6,000 in the year 2002.
Management does not expect the adoption of SFAS No. 142 to have an adverse
effect on the Company's financial position and results of operations except for
the aforementioned impact.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. While the Company is currently
evaluating the impact the adoption of SFAS No. 143 will have on its financial
position and results of operations, it does not expect such impact to be
material.
Liquidity and Capital Resources
As of December 31, 2001, the Company had cash and cash equivalents of
$31,400 compared to $43,396 on December 31, 2000.
Operating Activities
In 2001, cash used by operating activities was $29,279 including a net
source of $14,313 from a reduction in operating assets and liabilities. The use
of cash for operating activities arose principally from the cash portion of the
integration charges totaling $12,959 in 2001, and the cash portion of legal
settlements in 2001 of $4,244. The Company estimates that the remaining balance
of the cash portion of the integration related expense of approximately $19,000
will be spent as $15,000 in 2002 and $4,000 in 2003. The cash provided from
operating assets and liabilities was mainly due to the write-down of inventory
of $19,172 and write-down of distributor receivables of $10,213 described above
which offset increases in both inventories and receivables.
Investing Activities
In 2001, cash used by investing activities was $127,516. The principal
investing activities were the payment for the CMG acquisition of $110,216 and
for the acquisition of HGM of $9,925, use of cash of approximately $6,264 for
capital expenditures and investments of approximately $2,093 in non-marketable
equity securities.
At the closing of the CMG acquisition, the Company paid Coherent $100,000
in cash (the "Cash Purchase Price") financed through a new term loan (see
"Financing Activities" below"), 5,432,099 Lumenis Ordinary Shares (the "Shares")
and an eighteen-month note bearing interest at the rate of 5% per annum and in
the principal amount of $12,904 (the "Coherent Note"). The Cash Purchase Price
is subject to an as yet undetermined adjustment based on the net tangible value,
at the closing, of CMG's assets acquired not to exceed
25
$6,000. Additionally, Coherent may be entitled to a post-closing earn-out
payment of up to $25,000, subject to certain financial conditions being met. If
total ophthalmic revenues exceed $450,000 over a period starting January 1, 2001
and ending December 31, 2004 (the "Period"), the earn-out payment will be 21.5%
of the excess. In addition, if the ophthalmic business is sold to a third party
prior to the end of the Period for a price in excess of $110,000, Coherent will
receive an earn-out payment equal to 50% of the excess. In no event, however,
will the earn-out payment be more than $25,000. As of December 31, 2001 such
stated conditions have not yet been met.
Financing Activities
In 2001, cash provided by financing activities was $144,799. The primary
financing activities of the Company included the proceeds from the term loan,
described below, used to finance the CMG acquisition of $100,000, the repayment
of the Company's short term bank debt of $4,431 and proceeds from the exercise
of options of $50,122.
To finance the CMG acquisition, ongoing working capital needs and, if
needed, the refinancing of the Company's convertible subordinated notes (see
Note 11 to the Consolidated Financial Statements) the Company and certain of its
subsidiaries entered into various financing arrangements (the "Financing") with
Bank Hapoalim B.M (the "Bank"). The financing arrangement consisted of: (a) a
$100,000 six-year term loan bearing interest at LIBOR plus 1.75% per annum, (b)
up to $50,000 revolving line of credit until April, 2002 and up to $20,000
revolving line of credit from April, 2002 to April, 2003 bearing interest at
LIBOR plus 1% per annum and (c) a letter of undertaking pursuant to which the
Bank agreed, subject to the terms and conditions set forth therein, to provide
up to approximately $92,000 of a four-year loan convertible into the Company's
shares at a price of $20.25 per share. Proceeds from the new convertible loan
are to be used solely to refinance the Company's outstanding convertible
subordinated notes, which will mature on September 1, 2002. The new loan would
bear interest ranging between LIBOR plus 2.25% and LIBOR plus 3.5%. This amount
of the commitment was adjusted to $71,000 following the conversion of $21,120
convertible subordinated notes into shares. In connection with the $100,000
loan, on April 30, 2001, Lumenis and the Bank also entered into a five year
option agreement granting the Bank or any of its subsidiaries the right to
purchase from Lumenis up to 2,500,000 ordinary shares at a purchase
price of $20.25 per share, subject to certain adjustments. The Bank has
exercised options for 1,363,700 shares as of December 31, 2001.
The terms of the financing restrict certain cash dividends and have
limitations on asset dispositions or acquisitions without prior approval of the
Bank. In addition, in order to utilize the letter of undertaking, the Company
has to maintain a ratio of its debt, as defined, to EBITDA, as defined, of less
than three times. As of December 31, 2001 the Company was in compliance with
such terms and conditions.
On March 26, 2002, the Company entered into new agreements with the Bank
for a new four year $70,667 loan, the proceeds of which will be used to repay
its existing convertible subordinated notes due September 1, 2002. The $70,667
loan matures on September 1, 2006 and bears interest at LIBOR plus 6.55%
increasing to 7.80% over the life of the loan. The Company also increased its
revolving credit agreement to $35,000 from $20,000.
The Company believes that internally generated funds, together with
available cash and funds available under the revolving credit agreement will be
sufficient to meet the Company's presently anticipated day-to-day operating
expenses, commitments, working capital, capital expenditure and debt payment
requirements. The level of internally generated funds, however, is subject to
the risk factors described below. See "Forward Looking Statements and Risk
Factors."
General Corporate Tax Structure
The general corporate tax rate in Israel is currently 36%. However, the
effective tax rate payable by the Company, which derives a portion of its income
from facilities granted "Approved Enterprise" status (see below), may be
significantly less. As most of the Company's income in Israel is exempt from
income taxes, the Israeli statutory tax rate for the purposes of the
reconciliation of the reported tax expense is approximately zero. Income tax
expense in the financial statements relates primarily to the income taxes of
subsidiaries.
Income derived by the Company or its Israeli subsidiaries from sources
other than the "approved enterprises" is taxable at a regular Israeli corporate
tax rate of 36%. Income earned by non-Israeli subsidiaries is subject to
different corporate tax rates of up to 45%.
As part of the process of preparing our consolidated financial statements
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves our estimating actual current tax
exposure for the Company together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. Actual income
taxes could vary from these estimates due to future changes in income tax law or
results from final tax examinations and reviews.
Inflationary Adjustments
The Company and its Israeli subsidiaries are assessed under the provisions
of the Income Tax Law (Inflationary Adjustments), 1985, pursuant to which the
results for tax purposes are measured in Israeli currency in real terms in
accordance with changes in the Israeli Consumer Price Index ("CPI"). The
financial statements are measured in U.S. dollars; see Note 3 to the
Consolidated Financial Statements. The differences between the annual change in
the CPI and in
26
the NIS/US dollar exchange rate causes further differences between taxable
income and the income before taxes shown in the financial statements. In
accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided
income taxes on the differences between results using the functional currency
and the tax basis of assets and liabilities. In accordance with a recent
amendment to the Inflationary Adjustments Law (the "ILA"), the Minister of
Finance may, with the approval of the Knesset Finance Committee, determine by
order, during a certain fiscal year (or until February 28th of the following
year) in which the rate of increase of the price index would not exceed or shall
not have exceeded, as applicable, 3%, that all or some of the provisions of the
ILA shall not apply to such fiscal year, or, that the rate of increase of the
price index relating to such fiscal year shall be deemed to be 0%, and to make
the adjustments required to be made as a result of such determination.
Approved Enterprise.
The Company and one of its Israeli subsidiaries have received approval for
their investment programs in accordance with the Israeli Law for the
Encouragement of Capital Investments, 1959 (the "Law"). The Company and its
subsidiary, have chosen to receive their benefits through the alternative
benefits program, and, as such, they are entitled to receive certain tax
benefits including accelerated depreciation of fixed assets used in the
investment programs, as well as a full tax exemption on undistributed income
that is derived from the portion of the Company and its subsidiary's facilities
granted approved enterprise status, for a period of ten years or a full tax
exemption for a period of six years and reduced tax rates of 10%-25% (according
to the portion of non-Israeli investors in the Company's equity, as defined by
the Law, measured on an annual basis) for an additional period of up to four
years. The benefits commence with the date on which taxable income is first
earned. The benefit period for each program is limited to the earlier to occur
of 12 years from commencement of production and 14 years from date of approval.
The Company's entitlement to the above benefits is subject to fulfillment of
certain conditions, according to the Law and related regulations. The tax
exemption period for the Company and its subsidiaries commenced in 1995.
Dividends paid out of income derived from the portion of the Company's
facilities granted approved enterprise status is subject to a 15% withholding
tax. Should dividends be paid out of income earned during the period of the tax
holiday, such income will be subject to tax at the rate of up to 25%. The
Company does not anticipate paying dividends from income derived from the
portion of the Company's facilities granted approved enterprise status and any
such earnings distributed upon dissolution are not expected to subject the
Company to income taxes. Therefore, no deferred income taxes have been provided
on such exempted income derived from the portion of the Company's facilities
granted approved enterprise status.
Forward Looking Statements and Risk Factors
Certain statements made in this Report, in other filings with the
Securities and Exchange Commission, or in press releases, web site postings or
in oral presentations made by the Company reflect the Company's estimates and
beliefs and are intended to be, and are hereby identified as, "forward looking
statements" for the purposes of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. In some cases, these forward-looking
statements can be identified by terminology such as "may," "will," "could,"
"would," "should," "expect," "plan," anticipate," "intend," "believe,"
"estimate," "predict," "potential" or "continue" or the negative of these terms
or other comparable terminology.
The Company cautions readers that such forward looking statements involve
risks and uncertainties that could cause actual results to differ materially
from those expected by the Company or expressed in the Company's forward looking
statements. Some of these factors are listed below or described elsewhere in
this Annual Report.
Readers are cautioned not to place undue reliance on forward-looking
statements made in this Annual Report, or made in other filings, web postings,
press releases or in oral presentations. Such forward-looking statements reflect
management's analysis only as of the date such statements are made and the
Company undertakes no obligation to revise publicly these forward-looking
statements to reflect events or circumstances that arise subsequently. Readers
should carefully review the risk factors set forth below and described elsewhere
in this document and in other documents the Company files from time to time with
the Securities and Exchange Commission.
The Company has received a request to voluntarily provide certain information
from the U.S. Securities and Exchange Commission.
In February 2002, the Company received a request from the United States
Securities and Exchange Commission ("SEC") to voluntarily provide certain
documents and information for a period commencing
27
January 1, 1998. The request primarily relates to the Company's relationships
with its distributors, and also asks for amplification of the Company's
explanation of certain previously disclosed charges and write-downs. The Company
intends to furnish all documents and information requested and cooperate with
the SEC and is currently in the process of collecting and producing such
documents and information. The Company is unable to predict the duration or
outcome of this process.
Following the Company's announcement of the information request from the
SEC, several plaintiffs' law firms announced the filing of purported class
action suits in the United States District Court for the Southern District of
New York, on behalf of purchasers of securities of Lumenis Ltd. between January
7, 2002 and February 28, 2002, inclusive (the "Class Period"), against the
Company and certain of its officers and directors. As of March 26, 2002, the
Company had not been served with a summons in any of the announced lawsuits. The
Company cannot predict the outcome of these proceedings.
Risks Related to the Company's Business
The Company's future success depends on its ability to develop and successfully
introduce new and enhanced products that meet the needs of its customers.
The Company's future success depends on its ability to anticipate its
customers' needs and develop products that address those needs. This will
require the Company to design, develop, manufacture, assemble, test market and
support new products and enhancements on a timely and cost-effective basis. The
Company cannot assure that it will successfully identify new product
opportunities and develop and bring new products to market in a timely and cost
effective manner. The Company's failure to do so could lead to a reduction in
net sales and its business may be harmed.
The Company's market is unpredictable and characterized by rapid technological
changes and evolving standards, and, if the Company fails to keep up with such
changes, its business and operating results will be harmed.
The Company's industry is characterized by extensive research and
development, rapid technological change, frequent innovations and new product
introductions, changes in customer requirements and evolving industry standards.
Demand for the Company's products could be significantly diminished by new
technologies or products that replace them or render them obsolete, which would
have a material adverse effect on the Company.
The market for laser and light based systems for aesthetic and medical
applications is relatively new and the Company's business will suffer if we fail
to educate customers or if the market does not develop as we expect.
In many cases the Company's products seek to replace traditional aesthetic
and medical procedures, such as electrolysis for hair removal and drilling for
dental treatments. The Company cannot be certain that a broad-based market for
its products will emerge among service providers and their patients or end-use
customers. Both these groups may opt to continue with procedures with which they
are familiar rather than investing in high technology alternatives that do not
have decades long safety and performance track records. The Company needs to
educate potential end-use customers about the benefits of IPL and laser systems,
but the Company cannot assure that it will succeed in this. If the Company's
anticipated markets do not develop or develop more slowly than expected, the
Company's business, results of operations and financial condition will be
adversely affected.
The Company must spend heavily on research and development.
The Company has incurred substantial research and development expenditures
in the past, and plans to continue to do so in the future. Over the last three
fiscal years, the Company's research and development expenses have been in the
range of 7% to 10% of net revenues. The Company cannot assure that its
expenditures for research and development will result in the introduction of new
products or, if such products are introduced, that those products will achieve
sufficient market acceptance. The Company's failure to address rapid
technological changes in its markets could adversely affect its business and
results of operations.
The Company's products are subject to U.S., E.U. and international medical
regulations and controls, which impose substantial financial costs on it and
which can prevent or delay the introduction of new products.
The Company's ability to sell its products is subject to various federal,
state and international rules and regulations. In the United States, the Company
is subject to inspection and market surveillance by the FDA, to determine
compliance with regulatory requirements. The regulatory process is costly,
lengthy and uncertain. Unless an exemption applies, each device that the Company
wishes to market in the United States must receive prior review by the FDA
before it can be marketed. Certain products qualify for a Section 510(k)
("510(k)") procedure under which the
28
manufacturer gives the FDA pre-market notification of the manufacturer's
intention to commence marketing the product. The manufacturer must, among other
things, establish that the product to be marketed is "substantially equivalent"
to a previously marketed product. In some cases, the manufacturer may be
required to include clinical data gathered under an investigational device
exemption, or IDE, granted by the FDA allowing human clinical studies. The FDA's
510(k) clearance process usually takes from four to twelve months, but it can
take longer. If the product does not qualify for the 510(k) procedure, the
manufacturer must file a pre-market approval application, or PMA, based on
testing intended to demonstrate that the product is both safe and effective. The
PMA requires more extensive clinical testing than the 510(k) procedure and
generally involves a significantly longer FDA review process.
Approval of a PMA allowing commercial sale of a product requires
pre-clinical laboratory and animal tests and human clinical studies conducted
under an IDE establishing safety and effectiveness. For products subject to
pre-market approval, the regulatory process generally takes from one to three
years or more and involves substantially greater risks and commitment of
resources than the 510(k) clearance process. The Company may not be able to
obtain necessary regulatory approvals or clearances on a timely basis, if at
all, for any of its products under development and delays in receipt of or
failure to receive such approvals or clearances could have an adverse effect on
its business.
Following clearance or approval, marketed products are subject to
continuing regulation. The Company is required to adhere to the FDA's Quality
System Regulation, or QSR, and similar regulations in other countries, which
include design, testing, quality control and documentation requirements. Ongoing
compliance with QSR, labeling and other applicable regulatory requirements is
monitored through periodic inspections and market surveillance by the FDA and by
comparable agencies in other countries.
The Company's failure to comply with applicable requirements could lead to
an enforcement action, which could have an adverse effect on its business. The
FDA can institute a wide variety of enforcement actions, ranging from a public
warning letter to more severe sanctions such as:
o Fines, injunctions and civil penalties;
o Recall or seizure of the Company's products;
o Requiring the Company to repair, replace or refund the cost of its
products;
o The issuance of public notices or warnings;
o Operating restrictions, partial suspension or total shutdown of
production;
o Refusal of the Company's requests for 510 (k) clearance pre-market
approval of new products;
o Withdrawal of 510(k) clearance or pre-market approvals already
granted; and
o Criminal prosecution.
Similarly, the European Union, or E.U., determined in 1998 that the
marketing or selling of any medical product or device within the European Union
necessitates a CE Mark. The Company is now required to comply with the European
Medical Device Directive's criteria and obtain the CE Mark prior to the sale of
its medical products in any E.U. Member State. The European Medical Device
Directive sets out specific requirements for each stage a medical product goes
through, from design to final inspection. The Company's products are subject to
additional similar regulations in most of the international markets in which the
Company sells its products.
Changes to existing U.S., E.U. and international rules and regulations
could adversely affect the Company's ability to sell its current line of
products in the United States, the European Union and internationally, and could
increase its costs and could materially adversely impact on its results of
operations.
The Company depends on its facilities in Israel and on its international
sales. Many of its customers' operations are also located outside the U.S.
The Company's principal executive offices and one of its five manufacturing
facilities are located in Israel. Moreover, many of its customers' operations
are located outside the U.S. The Company's net sales are derived primarily from
international sales through its international sales subsidiaries and exports to
foreign distributors and resellers. The Company anticipates that international
sales will continue to account for the majority of its revenues in the
foreseeable future.
29
The Company's international operations and sales are subject to a number of
risks, including:
o Longer accounts receivable collection periods;
o The impact of recessions on economies worldwide;
o Reduced protection for intellectual property worldwide;
o Political and economic instability;
o Regulatory limitations imposed by foreign governments;
o Political risks;
o Disruption or delays in shipments caused by customs brokers or
government agencies;
o Unexpected changes in regulatory requirements, tariffs, customs,
duties, tax laws and other trade barriers;
o Difficulties in staffing and managing foreign operations;
o Preference for locally produced products; and
o Potentially adverse tax consequences resulting from changes in tax
laws.
The Company is also subject to the risks of fluctuating foreign exchange
rates, which could materially adversely affect the sales price of its products
in foreign markets as well as the costs and expenses of its international sales
subsidiaries. While the Company uses forward exchange contracts, currency swap
contracts, currency options and other risk management techniques to hedge its
foreign currency exposure, it remains exposed to the economic risks of foreign
currency fluctuations.
In addition to the general risks listed above, the Company's operations in
Israel are subject to certain country-specific risks described below under
"Risks Relating to the Company's Location in Israel".
The Company faces challenges as it integrates new and diverse operations.
The Company has experienced, and may continue to experience, growth in the
scope and complexity of its operations and an increase in the number of its
employees. This growth, including its acquisition of the Coherent medical
products division, has strained the Company's managerial, financial,
manufacturing and other resources. In order to manage the Company's growth, it
must continue to implement additional operating and financial systems and
controls. If the Company fails to successfully implement such systems and
controls in a timely and cost-effective manner as it grows, its business and
financial performance could be materially adversely affected.
Any acquisitions the Company makes could harm or disrupt its business without
bringing the anticipated synergies.
The Company has in the past made acquisitions of other businesses, and it
continues to evaluate potential strategic acquisitions. In the event of any
future acquisitions, the Company could: issue ordinary shares that would dilute
its current shareholders' percentage ownership; pay cash; incur debt; assume
liabilities; or incur expenses related to in-process research and development,
amortization of goodwill and other intangible assets.
These purchases also involve numerous risks, including:
o Problems combining the acquired operations, technologies or products;
o Unanticipated costs or liabilities;
o Adverse effects on existing business relationships with distributors,
suppliers and customers;
o Diversion of management's attention from our core businesses; and
30
o Potential loss of key employees, particularly those of the purchased
organizations.
The Company depends on skilled personnel to operate its business effectively in
a rapidly changing market, and if the Company is unable to retain existing or
hire additional personnel, its ability to develop and sell its products could be
harmed.
The Company's success depends to a significant extent upon the continued
service of its key senior management and technical personnel, any of who would
be difficult to replace. As the Company grows, it will be required to increase
the number of qualified engineers and other employees at its existing
facilities, as well as at facilities it may acquire. Competition for qualified
employees is intense, and the Company's business could be adversely affected by
the loss of the services of any of its existing key personnel. The Company
cannot assure that it will continue to be successful in hiring and properly
training sufficient numbers of qualified personnel and in effectively managing
its growth. The Company's inability to attract, retain, motivate and train
qualified new personnel could have a material adverse effect on its business.
The Company anticipates a decline in selling prices of its products as
competition increases, which could adversely affect its operating results.
The Company has in the past experienced decreases in the average selling
prices of some of its products. The Company anticipates that as competing
products become more widely available, the average selling price of its products
may decrease. Trends toward managed care, health care cost containment and other
changes in government and private sector initiatives in the United States and
other countries in which the Company does business are placing increased
emphasis on the delivery of more cost-effective medical therapies which could
also adversely affect the prices or its products. If the Company is unable to
offset the anticipated decrease in its average selling prices by increasing its
sales volumes, its net sales will decline. In addition, to maintain the
Company's gross margins, it must continue to reduce the cost of its products.
Further, as average selling prices of the Company's current products decline, it
must develop and introduce new products and product enhancements with higher
margins. If the Company cannot maintain it net sales and gross margins, its
operating results could be seriously harmed, particularly if the average selling
prices of its products decrease significantly.
The Company may not be able to protect its proprietary technology, which could
adversely affect its competitive advantage.
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure and confidentiality agreements and other
restrictions on disclosure to protect its intellectual property rights. The
Company has obtained and now holds approximately 202 patents worldwide and has
applied for approximately 104 patents worldwide. The Company cannot assure that
its patent applications will be approved, that any patents that may be issued
will protect its intellectual property or that any issued patents will not be
challenged by third parties. Other parties may independently develop similar or
competing technology or design around any patents that may be issued to the
Company. The Company cannot be certain that the steps it has taken will prevent
the misappropriation of its intellectual property, particularly in foreign
countries where the laws may not protect its proprietary rights as fully as in
the United States. Moreover, if the Company loses any key personnel, it may not
be able to prevent the unauthorized disclosure or use of its technical knowledge
or other trade secrets by those former employees. The laws of foreign countries
may not protect the Company's intellectual property rights to the same extent as
the laws of the United States.
The Company could become subject to litigation regarding intellectual property
rights, which could seriously harm its business.
The laser and light based systems industry is characterized by a very large
number of patents, many of which are of questionable validity and some of which
appear to overlap with other issued patents. As a result, there is a significant
amount of uncertainty in the industry regarding patent protection and
infringement. In recent years, there has been significant litigation in the
United States involving patents and other intellectual property rights. The
Company currently is, and in the future it may continue to be, a party to
litigation as a result of alleged infringement of others' intellectual property.
These claims and any resulting lawsuits, if resolved adversely to the Company,
could subject the Company to significant liability for damages or invalidation
of its proprietary rights. These lawsuits, regardless of their success, would
likely be time-consuming and expensive to resolve and would divert management
time and attention. In addition, because patent applications can take many years
to issue, there may be applications now pending of which the Company is unaware,
which may later result in issued patents which its products may infringe. If any
of the Company's products infringes a valid patent, or if the Company wishes to
avoid potential intellectual property litigation on its alleged infringement,
the Company could be prevented from selling that product unless it can
31
obtain a license, which may be unavailable, pay substantial royalties, or
redesign the product to avoid infringement. The Company also may not be
successful in any attempt to redesign its product to avoid any infringement.
The Company has in the past and may also in the future initiate claims or
litigation against third parties for infringement of its proprietary rights to
protect these rights or to determine the scope and validity of its proprietary
rights or the proprietary rights of competitors. These claims could result in
costly litigation and the diversion of its technical and management personnel
and the final outcome may not be favorable to the Company. If the Company is
forced to take any of these actions, its business may be seriously harmed.
The long sales cycles for the Company's products may cause it to incur
significant expenses without offsetting revenues.
Customers typically expend significant effort in evaluating, testing and
qualifying the Company's products before making a decision to purchase them,
resulting in a lengthy initial sales cycle. While the Company's customers are
evaluating its products it may incur substantial sales and marketing and
research and development expenses to customize its products to the customer's
needs. The Company may also expend significant management efforts, increase
manufacturing capacity and order long-lead-time components or materials. Even
after this evaluation process, a potential customer may not purchase its
products. As a result, these long sales cycles may cause the Company to incur
significant expenses without ever receiving revenue to offset those expenses.
The markets in which the Company sells its products are intensely competitive
and increased competition could cause reduced sales levels, reduced gross
margins or the loss of market share.
Competition in the various laser and light products markets in which the
Company provides products is intense and is based upon price, product
performance, quality, reliability and customer service. The Company's aesthetic
products compete against products offered by Candela Corporation, Cynosure,
Inc., Laserscope, Inc. and Altus Medical Inc. among others; the Company's
medical products compete against products offered by Diomed Inc., Dornier
MedTech, and Bioletic AG among others, and the Company's ophthalmic products
compete against products offered by Carl Zeiss Micro Imaging Inc., Nidek
Technologies Inc., and Iridex Corporation. The Company's competitors range in
size from small single product companies to large multifaceted corporations with
significant financial, technical, marketing and other resources. Some of these
competitors may be able to devote greater resources than the Company can to the
development, promotion, sale and support of their products.
Any business combinations or mergers among the Company's competitors,
forming larger competitors with greater resources, or the acquisition of a
competitor by a major medical or technology corporation seeking to enter this
business, could result in increased competition.
If the Company fails to accurately forecast component and material requirements
for its products, it could incur additional costs and significant delays in
shipments, which could result in loss of customers.
The Company must accurately predict both the demand for its products and
the lead times required to obtain the necessary components and materials. Lead
times for components and materials that the Company orders vary significantly
and depend on factors including the specific supplier requirements, the size of
the order, contract terms and current market demand for components. Due to the
sophisticated nature of the components, some of the Company's suppliers may need
at least six months lead time. If the Company overestimates its component and
material requirements, it may have excess inventory, which would increase its
costs. If the Company underestimates its component and material requirements, it
may have inadequate inventory, which could interrupt and delay delivery of its
products to its customers. Any of these occurrences would negatively impact the
Company's net sales, business and operating results.
The Company's dependence on sole source suppliers exposes it to possible supply
interruptions that could delay or prevent the manufacture of its systems.
Certain of the components used in the Company's products are purchased from
single sources. While the Company believes that most of these components are
available from alternate sources, an interruption of these or other supplies
could adversely affect its ability to manufacture some of its systems.
Some of the Company's medical customers' willingness to purchase its products
depends on their ability to obtain reimbursement for medical procedures using
its products and its revenues could suffer from changes in third-party coverage
and reimbursement policies.
32
The Company's medical segment customers include doctors, clinics, hospitals
and other health care providers whose willingness and ability to purchase its
products depends in part upon their ability to obtain reimbursement for medical
procedures using its products from third-party payers, including private
insurance companies, and in the U.S. from health maintenance organizations, and
federal, state and local government programs, including Medicare and Medicaid.
Third-party payers are increasingly scrutinizing health care costs submitted for
reimbursement and may deny coverage and reimbursement for the medical procedures
made possible by the Company's products. Failure by The Company's customers to
obtain adequate reimbursement from third-party payers for medical procedures
that use its products or changes in third-party coverage and reimbursement
policies could have a material adverse effect on its sales, results of
operations and financial condition.
Some of the Company's laser and intense pulsed light (IPL) systems are complex
in design and may contain defects that are not detected until deployed by its
customers and could lead to product liability claims.
Laser and pulsed light systems are inherently complex in design and require
ongoing regular maintenance. The technical complexity of the Company's products,
changes in its or its suppliers' manufacturing processes, the inadvertent use of
defective or contaminated materials by the Company or its suppliers and other
factors could restrict its ability to achieve acceptable product reliability.
If the Company is unable to prevent or fix defects or other problems, it
could experience, among other things:
o Legal actions by its customers and their patients;
o Loss of customers;
o Failure to attract new customers or achieve market acceptance;
o Increased costs of product returns and warranty expenses;
o Damage to its brand reputation; and
o Diversion of development, engineering and management resources.
In addition, some of the Company's products are combined with products from
other vendors, which may contain defects. As a result, should problems occur, it
may be difficult to identify the source of the problem. There are also the risks
of physical injury to the patient when treated with one of the Company's
products, even if the product is not defective.
Although the Company has obtained product liability insurance, the coverage
limits of these policies may not be adequate to cover future claims. A
successful claim brought against the Company in excess of, or outside of, its
insurance coverage could adversely affect its business, operating results and
financial condition.
The Company may be required to implement a costly product recall
In the event that any of the Company's products proves to be defective, it
may voluntarily recall, or the FDA could require it to redesign or implement a
recall of, any of its products. Though it is not possible to quantify the
economic impact of a recall, it could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company uses laboratory and manufacturing materials that could be considered
hazardous; and it could be liable for any damage or liability resulting from
accidental environmental contamination or injury.
Although most of the Company's products do not incorporate any hazardous or
toxic materials or chemicals, some of the gases used in the Company's excimer
lasers are highly toxic. In addition, the Company's operations involve the use
of laboratory and manufacturing materials that could be considered hazardous.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with all Israeli, local and U.S. federal and
state regulations and standards, the risk of accidental environmental
contamination or injury from such materials cannot be entirely eliminated. In
the event of such an accident involving
33
such materials, the Company could be liable for any damage and such liability
could exceed the amount of its liability insurance coverage and the resources of
its business.
If the Company's facilities were to experience catastrophic loss, its operations
would be seriously harmed.
The Company's facilities could be subject to a catastrophic loss such as
fire, flood or earthquake. A substantial portion of the Company's research and
development activities and manufacturing, and other critical business operations
are located near major earthquake faults in Santa Clara, California, an area
with a history of seismic events. Any such loss at any of the Company's
facilities could disrupt its operations, delay production, shipments and revenue
and result in large expenses to repair and replace the facility. While the
Company has obtained insurance to cover most potential losses at its facilities,
it cannot assure that its existing insurance coverage will be adequate against
all possible losses.
Risks Relating to the Company's Location in Israel
Conditions in Israel affect the Company's operations and may limit its ability
to produce and sell its products.
The Company is incorporated in Israel and a substantial portion of its
manufacturing facilities and research and development facilities are located in
Israel. Political, economic and military conditions in Israel could directly
affect the Company's operations. Since the establishment of the State of Israel
in 1948, a number of armed conflicts have taken place between Israel and its
Arab neighbors and a state of hostility, varying in degree and intensity, has
led to security and economic problems for Israel. Despite past progress towards
peace between Israel and its Arab neighbors, the future of these peace efforts
is uncertain. Since October 2000, there has been a significant increase in
violence both in the West Bank and Gaza Strip as well as in Israel itself, and
negotiations between Israel and Palestinian representatives have ceased.
Violence in the region intensified during 2001 and 2002. The escalation of the
Palestinian violence in the recent months, as well as any future armed conflict,
political instability or continued violence in the region, could have a negative
effect on the Company's business condition, harm its results of operations and
adversely affect the share price of publicly traded Israeli companies such as
the Company. Moreover, if the U.S. war against terrorist activities centered in
Afghanistan is broadened to include the Middle East, it could directly affect
the Company's business. Furthermore, several countries still restrict trade with
Israeli companies, and this may limit the Company's ability to make sales in
those countries. These restrictions may have an adverse impact on the Company's
operating results, financial condition or the expansion of its business.
The Company's operations could be disrupted as a result of the obligation of key
personnel in Israel to perform military service.
Generally, all male adult citizens and permanent residents of Israel under
the age of 45 are, unless exempt, obligated to perform up to 45 days, or longer
under certain circumstances, of military reserve duty annually. Additionally,
all Israeli residents of this age are subject to being called to active duty at
any time under emergency circumstances. Many of the Company's officers and
employees are currently obligated to perform annual reserve duty. The Company's
operations could be disrupted by the absence for a significant period of one or
more of its officers or employees due to military service. Any disruption to the
Company's operations could materially adversely affect the development of its
business and its financial condition.
The Company receives tax benefits from the Israeli government that may be
reduced or eliminated in the future.
The Company's facilities in Israel have been granted approved enterprise
status and they are therefore eligible for tax benefits under the Israeli law.
In the past, the government of Israel has considered reducing or eliminating the
tax benefits available to approved enterprises such as the Company. The Company
cannot assure that these tax benefits will be continued in the future at their
current levels or at all. If these tax benefits were reduced or eliminated, the
amount of taxes that the Company pays would likely increase. In addition, the
Company's approved enterprise status imposes certain requirements on it, such as
the location of its manufacturing, the location of certain subcontractors and
the extent to which it may outsource portions of its production process. If the
Company does not meet these requirements, the law permits the authorities to
cancel the tax benefits retroactively.
34
The government grants the Company has received for research and development
expenditures restrict its ability to manufacture products and transfer
technologies outside of Israel and require the Company to satisfy specified
conditions. If the Company fails to satisfy these conditions, it may be required
to refund grants previously received together with interest and penalties, and
may be subject to criminal charges.
The Company has received grants from the Government of Israel through the
Office of the Chief Scientist of the Ministry of Industry and Trade for the
financing of a portion of its research and development expenditures in Israel.
In 1999, 2000 and 2001, the Company recorded amounts totaling $275, $60 and $58,
respectively, from the office of the Chief Scientist. The terms of the Chief
Scientist grants prohibit the Company from manufacturing products or
transferring technologies developed using these grants outside of Israel without
special approvals. Even if the Company receives approval to manufacture its
products outside of Israel, it may be required to pay an increased total amount
of royalties, which may be up to 300% of the grant amount plus interest,
depending on the manufacturing volume that is performed outside of Israel. This
restriction may impair the Company's ability to outsource manufacturing or
engage in similar arrangements for those products or technologies. In addition,
if the Company fails to comply with any of the conditions imposed by the Office
of the Chief Scientist, it may be required to refund any grants previously
received, together with interest and penalties and may be subject to criminal
charges. In recent years, the Government of Israel has accelerated the rate of
repayment of Chief Scientist grants and may further accelerate them in the
future. (See - Item 1 - Business - Research and Development).
It may be difficult to enforce a U.S. judgment against the Company, its officers
and directors based on U.S. securities laws claims in Israel or serve process on
the Company's officers and directors.
The Company is incorporated in Israel. Many of the Company's executive
officers and directors are not residents of the United States, and a substantial
portion of its assets and the assets of these persons are located outside the
United States. Therefore, it may be difficult for a shareholder, or any other
person or entity, to enforce a U.S. court judgment based upon the civil
liability provisions of the U.S. securities laws in an Israeli court against the
Company or any of these persons or to effect service of process upon these
persons in the United States. In addition, it may be difficult to assert U.S.
securities law claims in original actions instituted in Israel. Israeli courts
may refuse to hear a claim based on a violation of U.S. securities laws because
Israel is not the most appropriate forum to bring such a claim. In addition,
even if an Israeli court agrees to hear a claim, it may determine that Israeli
law and not U.S. law is applicable to the claim. If U.S. law is found to be
applicable, the content of applicable U.S. law must be proved as a fact, which
can be a time-consuming and costly process. Certain matters of procedure will
also be governed by Israeli law. There is little binding case law in Israel
addressing the matters described above.
The new Israeli Companies Law may cause uncertainties regarding corporate
governance.
The new 1999 Israeli Companies Law ("the Companies Law"), which became
effective on February 1, 2000, resulted in significant changes to Israeli
corporate law. Under this new law, uncertainties may arise regarding corporate
governance in some areas. For example, the law obligates a controlling
shareholder, a shareholder who knows that its vote can determine the outcome of
a shareholders vote and any shareholder who, under the Company's articles of
association, can appoint or prevent the appointment of an office holder, to act
with fairness towards the Company. The Companies Law does not specify the
substance of this duty and there is no binding case law that addresses this
subject directly. These uncertainties and others could exist until this new law
has been adequately interpreted, and these uncertainties could inhibit takeover
attempts or other transactions and inhibit other corporate decisions.
Under current Israeli law, the Company may not be able to enforce covenants not
to compete and therefore may be unable to prevent competitors from benefiting
from the expertise of some of its former employees.
Recently, Israeli courts have required employers seeking to enforce
non-compete undertakings of a former employee to demonstrate that the
competitive activities of the former employee will harm one of a limited number
of material interests of the employer, which have been recognized by the courts,
such as the secrecy of a company's confidential commercial information or its
intellectual property. If the Company cannot demonstrate that harm would be
caused to it, it may be unable to prevent its competitors from benefiting from
the expertise of its former employees.
35
Item 7a. Quantitative And Qualitative Disclosures About Market Risk.
The Company maintains an investment portfolio, which consists mainly of
income securities with an average maturity of less than one year. The portfolio
consists of low risk corporate bonds and bank deposits. The Company's policy is
generally to hold its fixed income investments until maturity and therefore the
Company would not expect its operating results or cash flows to be affected to
any significant degree by a sudden change in market interest rates on its
securities portfolio.
The Company has fixed rate long-term debt of approximately $83,571 million.
The Company believes that a material decrease in interest rates would not have a
material impact on the fair value of this debt.
The Company has foreign subsidiaries, which sell and manufacture its
products in various markets. As a result, the Company's earnings and cash flows
are exposed to fluctuations in foreign currency exchange rates. The Company
attempts to limit this exposure by selling and linking its products mostly to
the United States dollar.
The Company also enters into foreign currency hedging transactions to
protect the dollar value of its non-dollar denominated trade receivables, mainly
in JPY, British Pounds Sterling and EURO. The gains and losses on these
transactions are included in the statement of operations in the period in which
the changes in the exchange rate occur. There can be no assurance that such
activities or others will eliminate the negative financial impact of currency
fluctuations. Indeed, such activities may have an adverse impact on earnings.
The Company does not hedge transactions nor does it use derivative
financial instruments for trading purposes.
Item 8. Financial Statements and Supplementary Data.
See Item 14(a) for an index to the Consolidated Financial Statements and
supplementary information, which are set forth on the pages indicated therein.
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure.
Not applicable.
PART III.
Item 10. Directors and Executive Officers Of The Registrant.
The Board of Directors
The management of the business of the Company is vested in the Board of
Directors, which may exercise all such powers and do all such acts and things as
the Company is authorized to exercise and do, and are not required by law or
otherwise to be exercised by the shareholders. The Board of Directors may,
subject to the provisions of the Israeli Companies Law 1999 ("Companies Law"),
delegate any or all of its powers to committees, each consisting of one or more
directors, and it may, from time to time, revoke such delegation or alter the
composition of any such committees. Unless otherwise expressly provided by the
Board, such committees shall not be empowered to further delegate such powers.
The following table lists certain information with respect to the Company's
directors, including the name, age, principal occupation and business experience
during the past five years and the commencement of each term as a director.
Name Business Experience
Professor Jacob A. Frenkel Prof. Frenkel, age 59, joined the Board of
Directors of the Company on January 25, 2000,
and was elected Chairman of the Board.
Professor Frenkel is the Chairman of Merrill
Lynch International Inc. and Chairman of
Merrill Lynch's Sovereign Advisory Group and
Global Financial Institutions Group. He is also
the Chairman and CEO of the Group of Thirty
(G-30). Previously, he served as Governor of
the Bank of Israel from 1991 through 2000.
During his tenure as Governor, he led the
36
liberalization of the Israeli financial system,
removed foreign exchange controls, and reduced
Israel's inflation rate to a level prevailing
in the major industrial countries. Prior to
becoming the Governor of the Bank of Israel, he
served from 1987 through 1991 as the Economic
Counselor and Director of Research at the
International Monetary Fund, and also held the
David Rockefeller Chair of International
Economics at the University of Chicago where he
served on the faculty from 1973 to 1987. In
1994 he was named the Weisfeld Professor of
Economics of Peace and International Relations
at Tel Aviv University.
Arie Genger Mr. Arie Genger, age 56, joined the Board of
Directors of the Company on July 16, 2001, and
was elected Vice Chairman of the Board. In
1985, Mr. Genger founded Trans-Resources, Inc.
("TRI"), of which he has been Chairman of the
Board and Chief Executive Officer since 1986.
TRI is a privately owned specialty chemical
company with several manufacturing plants
throughout the world. TRI markets its products
in over eighty countries. Mr. Genger is the
father of Sagi Genger, the Company's Chief
Operating Officer.
Dr. Bernard Couillaud Dr. Couillaud, age 57, joined the Board of
Directors of the Company on April 30, 2001.
Since July 1996, he has served as President and
Chief Executive Officer of Coherent Inc. and as
a member of the Coherent Board of Directors.
Dr. Couillaud served as Vice President and
General Manager of the Coherent Laser Group
from March 1992 to July 1996. From July 1990 to
March 1992, Dr. Couillaud served as Manager of
the Coherent Advanced Systems Business Unit,
and from September 1987 to July 1990 he served
as Director of Research and Development for the
Coherent Laser Group. From November 1983, when
he joined Coherent Laser Group, to September
1987, Dr. Couillaud held various managerial
positions with Coherent. Dr. Couillaud received
his PhD in Chemistry from Bordeaux University,
Bordeaux, France.
Aharon Dovrat Mr. Dovrat, age 70, joined the Board of
Directors of the Company on June 23, 1999. Mr.
Dovrat is the founder and chairman of Dovrat &
Company, Ltd., a privately held investment
company, and chairman of Isal, Ltd., a publicly
traded investment company. Between 1991 and
1998, Mr. Dovrat served as chairman of Dovrat,
Shrem & Company, Ltd., a company publicly
traded on the Tel Aviv Stock Exchange that
divides its operations into the areas of
investment banking and direct investment, fund
management, underwriting, securities and
brokerage services, real estate and industry.
Between 1965 and 1991, Mr. Dovrat served as
President and Chief Executive Officer of Clal
(Israel) Ltd., a holding company, which by 1991
had become Israel's largest independent
conglomerate, with capital of over $400 million
and aggregate annual sales in excess of $2.5
billion. Mr. Dovrat also serves as the chairman
of the board of directors of: Dovrat & Company,
Isal Ltd., Alvarion Ltd., a wireless
telecommunications equipment technology
company, and Cognifit Ltd. In addition, Mr.
Dovrat serves as a member of the board of
directors of DS Polaris Ltd., Technomatix
Technologies Ltd., a software company and Delta
Galil Ltd., a textile company.
Philip Friedman Mr. Friedman, age 53, joined the Board of
Directors June 23, 1999. Mr. Friedman is the
President and Chief Executive Officer of
Computer Generated Solutions, Inc. ("CGSI"), a
privately held technology company founded by
Mr. Friedman in 1984, that specializes in
providing comprehensive computer technology and
business solutions to companies across the
globe in a wide variety of industries. Mr.
Friedman was recognized as an Entrepreneur of
the Year of the City of New York in 1996 and is
a member of the Board of ITAA.
Thomas G. Hardy Mr. Hardy, age 56, joined the Board of
Directors of the Company in February 1998. Mr.
Hardy was Vice Chairman of the Board of
Directors of TRI from January 2000 to 2001. He
was President and Chief Operating Officer of
TRI from December 1993 to December 2000, and
was Executive Vice President of TRI from June
1987 to
37
December 1993. In addition, Mr. Hardy was a
director and member of the Financial Advisory
Committee of TRI from October 1992 to 2001. Mr.
Hardy was a director of Laser Industries Ltd.
from January 1990 until February 1998, when it
merged with the Company.
Dr. Darrell S. Rigel Dr. Rigel, age 51, joined the Board of
Directors of the Company on June 23, 1999. He
has been a faculty member at New York
University Medical School ("NYU") since 1979,
is currently a physician and Clinical Professor
of Dermatology at NYU, and is also an Adjunct
Professor of Dermatology at Mt. Sinai School of
Medicine in New York City. Dr. Rigel is a
former president of the American Academy of
Dermatology. In 1996, Dr. Rigel founded and
assumed the Presidency of Interactive Horizons,
Inc., a privately held company in the industry
of interactive computer systems. Dr. Rigel
graduated from Massachusetts Institute of
Technology with a BS and an MS in Management
Information Sciences.
Sash A. Spencer Mr. Spencer, age 70, joined the Board of
Directors of the Company on June 23, 1999. He
is the founder, Chief Executive Officer and
principal investor of Holding Capital Group,
LLC, a private LBO, MBO, venture capital and
investment firm founded by Mr. Spencer in 1976.
Mr. Spencer also serves as a member of the
board of directors of TRI.
Mark H. Tabak Mr. Tabak, age 50, joined the Board of
Directors of the Company on June 23, 1999. Mr.
Tabak is the Vice Chairman of Multiplan, Inc.
and founder, President and Chief Executive
Officer of International Managed Care Advisors,
LLC, a company that invests in and develops
managed care type delivery systems mainly
addressing primary care needs in Latin America,
Western and Central Europe and Asia. Mr. Tabak
is also managing partner of Healthcare Capital
Partners, affiliated with Capital Z Partners, a
$3 billion investment fund focusing on
investing in healthcare, insurance and
financial services. Between 1993 and 1996, Mr.
Tabak served as President of AIG Managed Care,
a subsidiary of American International Group.
Between 1990 and 1993, Mr. Tabak served as
President and Chief Executive Officer of Group
Health Plan, a managed care company and from
1986 to 1990, he served as President and Chief
Executive Officer of Clinical Pharmaceuticals,
Inc., a pharmacy benefit management company he
founded in 1986. From 1982 to 1986, he served
as President and Chief Executive Officer of
Health America Development Corporation.
Professor Zehev Tadmor Prof. Tadmor, age 65, joined the Board of
Directors of the Company on June 23, 1999. He
currently serves as a Distinguished Institute
Professor at the Department of Chemical
Engineering at the Technion Israel Institute of
Technology, Israel's major technological
scientific research university (the
"Technion"), which he joined in 1968. He served
as the chairman of the board of the S. Neaman
Institute for Advanced Studies in Science &
Technology at the Technion since October 1998.
Between October 1990 and September 1998,
Professor Tadmor served as president of the
Technion. Professor Tadmor serves as a member
of the board of directors of Haifa Chemicals
Ltd., a chemical and fertilizer company and a
wholly owned subsidiary of TRI. Professor
Tadmor also serves on the board of governors of
Technion, the USA-Israel Science & Technology
Commission, and is an elected member of the
Israeli Academy of Science and Humanities and
the USA National Academy of Engineering.
All directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified or until their
earlier death, resignation or removal.
38
The following individuals are the executive officers and key management of the
Company:
Name Position and Business Experience
Yacha Sutton Mr. Sutton, age 58, has served as Chief
Executive Officer of the Company since June
1999. Between July 1998 and April 1999, Mr.
Sutton served as the Chief Executive Officer of
Scanvec Amiable Ltd. Between March 1995 and
February 1998, Mr. Sutton served as the
President and Chief Operating Officer of Laser
Industries Ltd. Prior to such time, Mr. Sutton
served as an Executive Vice President and Chief
Financial Officer of Laser Industries Ltd.
Sagi Genger Mr. Genger, age 30, was appointed Chief
Operating Officer in July 2001 after having
served as Chief Financial Officer of the
Company since November 1999. Prior to joining
the Company, Mr. Genger was employed in the
mergers and acquisitions department of
Donaldson, Lufkin, and Jenrette, a leading Wall
Street investment bank, during the period from
1997 through 1999. Prior to that, Mr. Genger
worked from 1996 through 1997 at Holding
Capital Group, a boutique investment house. Mr.
Genger has an MBA and BS in Finance,
International Management and Legal Studies from
the Wharton School of Business. Mr. Genger is
the son of Mr. Arie Genger, Vice Chairman of
the Board of Directors of the Company.
Kevin R. Morano Mr. Morano, age 48, was appointed Executive
Vice President and Chief Financial Officer in
March 2002. Prior to joining the Company, Mr.
Morano served as Executive Vice President and
Chief Financial Officer at Exide Technologies
from May 2000 through October 2001. Prior to
that, Mr. Morano was employed for 21 years at
ASARCO Incorporated, a global copper mining,
specialty chemicals and aggregates producer. At
ASARCO, Mr. Morano held several leadership
positions including serving as President and
Chief Operating Officer in 1999 and as Chief
Financial Officer from 1993 to 1999. Since
February 2000, Mr. Morano serves as an outside
director on the board of directors of APEX
Silver Mines Ltd. Mr. Morano received a BS in
Finance from Drexel University in 1977 and
received an MBA from Rider University in 1983.
Peter D'Errico Mr. D'Errico, age 44, was appointed Executive
Vice President of the Americas in January 2002
after having served as the Vice President of
Corporate Marketing since January 2000.
Previously, Mr. D'Errico was Vice President,
Worldwide Marketing for Chiron Diagnostics.
During his sixteen years with Chiron
Diagnostics and CIBA Corning Diagnostics, he
held a number of management and leadership
position including Vice President,
International Group, Managing Director, CIBA
Corning Diagnostics Ltd., Halstead England and
Executive Director, New Business Development.
Mr. D'Errico received a Masters in Business
Administration from Harvard University in 1983.
Yossi Gal Mr. Gal, age 46, Executive Vice President of
Human Resources, joined the Company in July
2000. Prior to joining the Company, Mr. Gal
served as Vice President of Human Resources and
MIS in GE Medical Systems Israel from 1997 to
2000. Previously, Mr. Gal worked with Elscint
Ltd. for 16 years in a number of managerial
positions, which included Human Resources,
Planning and Control Director of Elscint's
Manufacturing Division and Corporate Manager of
Staffing and Overseas Personnel. Mr. Gal has a
B.A. in Sociology and Political Science from
Haifa University and an MSc. In Management &
Behavioral Science from the Technion.
Robert Grant Mr. Grant, age 32, Executive Vice President,
Surgical and Ophthalmic Business Unit, joined
the Company in May 2001, following the
completion of the Company's acquisition of the
Coherent Medical Group. Prior to the
acquisition, from August 2000 though April
2001, Mr. Grant served as Coherent's Vice
President of Business
39
Development, and from February 1999 through
April 2001 as Coherent's Managing Director of
European Operations. From March 1997 until
January 1999, Mr. Grant served as Director of
Business Development at HGM, Inc. and from 1995
to 1997 he served as a General Manager of the
Australasia Operation of Sulzermedica AG. He
has also held various positions, including
Director of Marketing, Asia Pacific; Country
Manager, Japan; and Asia Pacific Sales Manager
for Telectronics Pty Ltd. and HGM, Inc. Mr.
Grant holds a B.A. from Brigham Young
University and received his Masters in Business
with honors from the American Graduate School
of International Management.
Moshe Grencel Mr. Grencel, age 48, Executive Vice President
of Operations, joined the Company in January
2001. Prior to joining Lumenis, Mr. Grencel
served as General Manager of Elscint Industrial
Solutions, a spin-off from Elscint Ltd. from
1998 to 2001. From 1994 to 1998, Mr. Grencel
served as Vice President of Operations in
Elscint and Manager of the Operations Division.
Mr. Grencel also served in other capacities in
Engineering, Operations, Sales and Service
support. Mr. Grencel has a B.Sc. degree in
Industrial Engineering from the Technion.
James Holtz Dr. Holtz, age 57, Executive Vice President of
Aesthetic Technologies in the Aesthetic
Business Unit, joined the Company in May 2001
as Interim Vice President, Aesthetics Business
Unit, following the completion of the Company's
acquisition of the Coherent Medical Group.
Prior to the acquisition, Dr. Holtz served as
Executive Vice President of Coherent Star, a
business unit of Coherent Medical Group
responsible for hair removal and other
aesthetic applications. In 1993, Dr. Holtz
founded Star Medical Technologies, which
developed and manufactured the LightSheer diode
laser. Dr. Holtz served as Chairman of the
Board of Star Medical Technologies until its
acquisition by Coherent in 1998. Dr. Holtz has
a B.A. in Physics from Stanford University and
a Ph.D. in Physics from the University of
California, Berkeley.
Stephen B. Kaplitt Mr. Kaplitt, age 34, was appointed Executive
Vice President and General Counsel in November
2001. Prior to joining Lumenis he was a senior
associate at Becker, Glynn, Melamed & Muffly
LLP, a boutique international law firm in New
York. While at Becker, Glynn he was seconded to
the International Finance Corporation in
Washington, DC, for two years. Before that he
was an associate at Cadwalader, Wickersham &
Taft in New York. In his law firm career he
worked on a wide variety of transactions
involving mergers and acquisitions,
multilateral finance, asset securitization and
reorganizations. He received his AB with honors
from Dartmouth College and his JD cum laude
from the Georgetown University Law Center.
Sharon Levita Ms. Levita, age 34, was appointed Executive
Vice President, Finance in October 2001. Ms.
Levita has served as senior manager at Lumenis
since November 1999. Prior to joining the
company, she served for five years as head of
the Israeli Desk at KPMG, Hungary and before
that for four years at Luboshitz Kasierer, a
member firm of Arthur Andersen, in Israel. Ms.
Levita holds a M.BA. in Finance Management from
Bar-Ilan University, a B.A. in Accounting &
Economics from Haifa University, and a license
as a CPA in Israel.
Alon Maor Mr. Maor, age 40, was appointed Executive Vice
President, Aesthetic Business Unit in July
2001. Prior thereto, Mr. Maor served as Chief
Executive Officer of Asia Pacific Operations
from January 2000. Mr. Maor joined the Company
in January 1999 as the President and
Representative Director of Lumenis Japan, in
which position he served until January 2000.
Prior to joining the Company, Mr. Maor was the
President and Representative Director of Direx
Japan, a subsidiary of Direx Medical Systems.
During his eleven years with Direx Medical
Systems, he formed Direx Japan and was
responsible for capturing major market share in
Japan and Asia.
40
Jonathan T. Pearson Mr. Pearson, age 36, Executive Vice President
of Asia Pacific Operations, joined the Company
in May 2001, following the closing of the
Company's acquisition of the Coherent Medical
Group. Prior to joining the Company, Mr.
Pearson worked for Coherent since 1994, serving
in a variety of management roles covering
business development, marketing and regulatory
issues, including Director of Asia Pacific
Operations. During his seven-year career at
Coherent, Mr. Pearson focused exclusively on
Asia, establishing and expanding direct sales
operations in Japan, the People's Republic of
China and Hong Kong. Mr. Pearson holds a B.A.
from the University of Washington and a Master
of International Management from the American
Graduate School of International Management
(Thunderbird).
Hadar Solomon Mr. Solomon, age 45, was appointed Managing
Director of Lumenis Luxembourg Sarl,
Schaffhausen Branch, a newly created Swiss
branch in November 2001 as well as continuing
to serve as Executive Vice President and
Corporate Secretary since March 1998.
Previously, Mr. Solomon served as Executive
Vice President, General Counsel and Corporate
Secretary of the Company and as Vice President,
Corporate Affairs, General Counsel and
Secretary of Laser Industries Ltd. since May
1988. From July 1984 to May 1988, he served as
Assistant General Counsel of Laser Industries
Ltd. Mr. Solomon is a Graduate of the Faculty
of Law of the Hebrew University of Jerusalem
and is a member of the Israeli Bar.
Mike Terry Mr. Terry, age 47, Executive Vice President -
European Operations, joined the company in
February 2001 as integration leader for Europe.
With eighteen years of experience in the
medical device field, Mr. Terry previously
served in numerous senior leadership positions
in sales management, business unit management,
operations and ebusiness with GE Medical
Systems and Marquette Medical Systems. Prior to
those positions, Mr. Terry was Vice President
of Sales for Aspect Medical Systems, a
successful patient monitoring start-up. He also
spent ten years with Del Mar Medical Systems, a
leading supplier of cardiac monitoring devices,
and served for five years as National Sales
Manager. Mr. Terry holds a B.S. in Economics
and Business from the University of Wisconsin -
Madison and an A.D. in International Business
from California State University at Fullerton.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
that the Company's directors and executive officers, and holders of more than
10% of the Company's outstanding Ordinary Shares, file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of Ordinary Shares and furnish the Company with copies of all forms
they file pursuant to Section 16(a). The Company believes that during the fiscal
year ended December 31, 2001, its directors, executive officers, and holders of
more than 10% of its Ordinary Shares complied with the filing requirements of
Section 16(a), except for the late filings described below. In making this
statement, the Company has relied solely on a review of copies of reports filed
under Section 16(a) furnished to the Company and on the written representations
of its directors and executive officers. Robert Grant was two weeks late in
filing his Form 5 in 2002. Sagi Genger was four months late in reporting a
purchase in September. The Form 5s for all Officers fail to set forth the
options granted to them under the EVCP Plan (see Item 11-Executive Compensation-
Executive Variable Compensation Plan). It is anticipated that such amendments
will be filed shortly.
41
Item 11. Executive Compensation.
The following table sets forth information concerning total compensation
earned by or paid to the Chief Executive Officer, the four next highest paid
executive officers of the Company as of December 31, 2001 and two officers who
would have been among the highest paid but were no longer serving as executive
officers as of December 31, 2001 listed below (the "Named Officers") during the
fiscal years indicated for services rendered to the Company and its
subsidiaries.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation (a)
Annual Compensation Securities
Name and Principal Position Year Salary ($) Variable Other Annual Underlying All Other
Compensation Compensation Options/SARs Compensation
Bonus ($) ($) (1) Granted (#) ($)
Yacha Sutton 2001 280,000 750,000 39,000(2) 550,000 318,750(3)
Chief Executive 2000 240,000 -- 36,000 400,000 318,750
Officer 1999 87,298 -- 28,977 223,005 318,750
Sagi Genger 2001 211,796 500,000 -- 440,000 --
Executive Vice President, 2000 120,000 -- -- 100,000 --
Chief Operating Officer 1999 60,000 -- -- 150,000 --
Asif Adil 2001 256,530 487,500(4) -- -- --
Executive Vice President, 2000 83,333 166,667 -- 275,000 --
Chief Financial Officer*
Alon Maor 2001 210,459 90,000 293,622(5) 155,000 --
Executive Vice President, 2000 322,122 -- 415,384 -- --
Aesthetic Business Unit 1999 282,153 -- 442,453 100,000 --
Mike Terry 2001 128,256 70,000 51,946(6) 95,000
Executive Vice President,
European Operations
Louis Scafuri 2001 180,348 -- 78,688(7) 450,000 --
Executive Vice President, 2000 277,884 262,000 -- -- --
Chief Operating Officer** 1999 163,461 275,519 -- 450,000 --
Raphael Werner 2001 181,386 120,773 94,511(8) -- --
Executive Vice President, 2000 173,539 60,000 -- -- --
American Operations*** 1999 84,000 66,000 -- 66,000 --
(a) For a description of certain target Payout Amounts awarded in 2001, but to
be paid, if at all, in 2003, based on 2002 performance, see "Executive Variable
Compensation Plan" below. Also, Mr. Yacha Sutton's and Mr. Sagi Genger's options
granted in prior years were accelerated as of January 2, 2001. In connection
with such acceleration they each agreed to a lock-up arrangement mirroring the
original vesting period prohibiting them from selling shares acquired from
exercise of such options, except with respect to the sale of shares necessary to
enable a cashless exercise of other options.
* Mr. Asif Adil's position changed after year end, and he is no longer an
officer.
** Mr. Louis Scafuri resigned his position with the Company during 2001.
*** Mr. Raphael Werner ceased to be an officer of the Company during 2001.
42
(1) Does not include perquisites or other personal benefits, securities or
property, the aggregate value of which does not exceed the lesser of
$50,000 or 10% of the Named Officer's salary and bonus.
(2) Payment includes $18,000 for housing rent and $21,000 for a payment
made in respect of an Advance Study Fund.
(3) Payments made pursuant to a non-compete agreement between Yacha Sutton
and the Company in connection with the Company's acquisition of Laser
Industries Ltd., of which Mr. Sutton had been President and Chief
Operating Officer.
(4) Represents a $75,000 sign on bonus, $137,500 special bonus connected
to share performance in 2001 and a $275,000 bonus for performance in
2001.
(5) Payment includes $54,323 for reimbursements relating to housing rent
and $170,090 in sales commissions.
(6) The payment includes forgiveness of a loan made to Mr. Terry in the
amount of $24,000 and $27,964 for housing rent, car allowance and
other.
(7) Represents relocation expenses for the year 2001.
(8) Payment includes $90,000 severance and $4,511 for car allowance.
Option/SAR Grants in Last Fiscal Year
The following table provides information on options granted to the Named
Officers during the last fiscal year pursuant to the Company's option plans.
The table also shows, among other data, hypothetical potential gains from
options granted in fiscal year 2001. These hypothetical gains are based entirely
on assumed annual growth rates of 5% and 10% in the value of the price of
Ordinary Shares over the life of the options granted in fiscal year 2001. The
assumed rates of growth were selected by the Securities and Exchange Commission
for illustrative purposes only, and are not intended to predict future stock
prices, which will depend upon market conditions and the Company's future
performance and prospects. No SAR's were granted during the last fiscal year and
no SAR's are currently outstanding.
43
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value At
Assumed Annual Rates of
Stock Price Appreciation for
Individual Options Grants Option Term
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Expiration
Name Granted (#) (1) Fiscal Year Price ($/sh) Date 5% ($) 10% ($)
- --------------------------------------------------------------------------------------------------------------------------------
Yacha Sutton 380,000(2) 4.87% 10.90 01 / 2011 2,604,882 6,601,281
120,000(3) 1.54% 16.56 02 / 2011 1,249,739 3,167,085
50,000(4) 0.64% 24.90 05 / 2011 782,974 1,984,209
----------------- ---------------- -----------------
550,000 4,637,595 11,752,576
================= ================ =================
Sagi Genger 304,000(5) 3.90% 10.90 01 / 2011 2,083,905 5,281,025
96,000(3) 1.23% 16.56 02 / 2011 999,792 2,533,668
40,000(4) 0.51% 24.90 05 / 2011 626,379 1,587,367
----------------- ---------------- -----------------
440,000 3,710,076 9,402,061
================= ================ =================
Asif Adil -- -- --
================= ================ =================
Alon Maor 100,000(6) 1.28% 10.90 01 / 2011 685,495 1,737,179
20,000(7) 0.26% 24.90 05 / 2011 313,190 793,684
35,000(4) 0.45% 24.90 05 / 2011 548,082 1,388,947
----------------- ---------------- -----------------
155,000 1,546,766 3,919,810
================= ================ =================
Mike Terry 60,000(8) 0.77% 15.00 02 / 2011 566,005 1,434,368
35,000(4) 0.46% 24.90 05 / 2011 548,082 1,388,947
----------------- ---------------- -----------------
95,000 1,114,087 2,823,315
================= ================ =================
Louis Scafuri 342,000 4.38% 10.90 01 / 2011 2,344,393 5,941,153
108,000(9) 1.38% 16.56 02 / 2011 1,124,765 2,850,377
----------------- ---------------- -----------------
450,000 3,469,158 8,791,530
================= ================ =================
Raphael Werner -- -- --
================= ================ =================
(1) All options have a term of ten years from respective grant dates.
(2) 100,000 of these options vested in May 2001. The balance vests as
follows: 26,000 on January 2, 2002 and 127,000 on each of January 2,
2003 and 2004.
(3) These options vest in three equal installments on February 22, 2002,
2003 and 2004.
(4) These options vest on December 31, 2007, subject to possible
acceleration to 2003 and 2004 based on the level of 2002 EBITDA. See
"Executive Variable Compensation Plan."
(5) 100,000 of these options vested in May 2001. The balance vests as
follows: 1,000 on January 2, 2002 and 101,500 on each of January 2,
2003 and 2004.
(6) These options vest in three equal installments on January 2, 2002,
2003 and 2004.
(7) These options vest in three equal installments on May 30, 2002, 2003
and 2004.
(8) These options vest in three equal installments on March 1, 2002, 2003
and 2004.
(9) These options were scheduled to vest in three equal installments,
beginning in 2002.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table summarizes for each of the Named Officers option
exercises during the 2001 fiscal year, including the aggregate value of gains on
the date of exercise, the total number of unexercised options for Ordinary
Shares, if any, held at December 31, 2001 and the aggregate number and dollar
value of unexercised in-the-money options for Ordinary Shares, if any, held at
December 31, 2001. The value of unexercised in-the-money options at fiscal
year-end is the difference between the exercise or base price of such options
and the fair market value of the underlying
44
Ordinary Shares on December 31, 2001, which was $19.70 per share. Actual gains,
if any, upon exercise will depend on the value of Ordinary Shares on the date of
any exercise of options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION/SAR VALUES
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Money Options at Fiscal
Options at Fiscal Year End (#) Year End ($) (1)
------------------------------ ----------------
Shares Value
Acquired on Realized
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
Yacha Sutton 425,000 5,256,770 298,005 400,000 3,327,116 2,976,640
Sagi Genger 350,000 3,995,625 0 300,000 0 942,000
Asif Adil -- -- 91,667 183,333 705,833 1,411,667
Alon Maor 100,000 2,435,750 -- 120,000 -- 1,052,400
Mike Terry -- -- -- 60,000 -- --
Louis Scafuri 445,000 7,077,201 -- -- -- --
Raphael Werner 38,500 733,000 12,000 -- 174,212 --
(1) The closing price of the ordinary shares on December 31, 2001 was
$19.70 per share.
Executive Variable Compensation Plan
All of the Named Officers in the Summary Compensation Table above other
than Messrs. Scafuri, Werner and Adil are currently included in the Company's
Executive Variable Compensation Plan ("EVCP"), whose purpose is to provide
incentive for the achievement of the Company's target of $100,000,000 of
"EBITDA" (operating income plus depreciation and amortization plus or minus
adjustments provided for in the EVCP) for 2002 as it implements its integration
program. Accordingly 100% of the Payout Amounts awarded the respective Named
Officers in 2001 will be paid in 2003 after announcement of the Company's 2002
results if the 2002 $100,000,000 EBITDA target is met; if EBITDA exceeds
$120,000,000, 160% of the Payout Amount awarded will be paid; and if 2002 EBITDA
is more than $80,000,000 but less than $100,000,000, 70% of the Payout Amount
awarded will be paid. None of the Payout Amount will be paid if 2002 EBITDA is
less than $80,000,000. Payment (if any) of the Payout Amount will be in cash or
stock, at the Company's option. A Named Officer whose employment with the
Company terminates during 2002 will not be eligible for payment of the Payout
Amounts.
The Payout Amounts awarded to the Named Officers are: for Mr. Sutton,
$550,000; for Mr. Genger, $450,000; for Mr. Maor, $300,000 and for Mr. Terry,
$300,000.
In addition to the Payout Amounts, the EVCP provided for stock option
grants to EVCP participants, pursuant to the Company's 2000 Share Option Plan,
at an exercise price of $24.90. The options fully vest on December 31, 2007
irrespective of the Company's performance, if the grantee is still then employed
by the Company, but vesting of some or all of the options will be accelerated to
2003 and 2004 based on the level of 2002 EBITDA, provided that 2002 EBITDA is at
least $80,000,000. The EVCP stock option grants to the Named Officers (except
Mr. Asif Adil, Louis Scafuri and Raphael Werner) are as follows: for Mr. Sutton,
50,000 options; for Mr. Genger, 40,000 options; for Mr. Maor, 35,000 options;
and for Mr. Terry, 35,000 options. These 2001 stock option grants are included
in both the "Summary Compensation Table" and the "Option/SAR Grants in Last
Fiscal Year" tables above.
Employment Agreements, Termination Provisions and Change in Control Arrangements
Employment Agreement with Yacha Sutton
Effective January 1, 2000, the Company entered into an employment agreement
with Yacha Sutton (the "Sutton Agreement"), pursuant to which Mr. Sutton is
employed by the Company in the position of Chief Executive Officer. The Sutton
Agreement will terminate automatically on December 31, 2002, unless otherwise
agreed between Mr. Sutton and the Company in writing and with the approval of
the Board or unless earlier terminated under specified circumstances. In April
2001, the Board approved an increase in Mr. Sutton's annual base salary to
$300,000.
45
Under the Sutton Agreement, Mr. Sutton is entitled to use a Company vehicle
in accordance with the Company's existing policies and the Company provides Mr.
Sutton with such additional benefits as are generally provided by the Company to
its senior executives, including managers' insurance and Education Fund. The
Sutton Agreement provides for non-competition and non-solicitation covenants for
a period of two years following the date of termination of the Sutton Agreement.
Mr. Sutton was granted options to purchase up to 500,000 of the Company's
Ordinary Shares under the terms and conditions of the Company's 2000 Option Plan
(the "Plan"), out of which 100,000 were immediately vested at an exercise price
of $10.90. The remaining 400,000 shall be vested as follow: 26,000 on January 2,
2002 and 127,000 on each of January 2, 2003 and 2004, all at an exercise price
of $10.90. 120,000 options shall be vested in three equal installments on
February 22, 2002, 2003 and 2004 all at an exercise price of $16.56. Unless the
Sutton Agreement and Mr. Sutton's employment with the Company are terminated by
Mr. Sutton for any reason or by the Company for cause, all vested options will
be exercisable at any time thereafter until December 31, 2009, and will
otherwise be subject to the provisions of the Plan.
In the event of any termination of the Sutton Agreement and Mr. Sutton's
employment, the Company will only be obligated to pay (i) base salary and
benefits until the effective date of termination, provided that Mr. Sutton
continues his employment obligations through such period (if so required by the
Company), (ii) any severance payment to which Mr. Sutton will be entitled
pursuant to applicable Israeli law less any amounts received by Mr. Sutton from
his Managers' Insurance on account of a severance payment and (iii) earned but
unpaid benefits under Company plans.
Employment Agreement with Sagi Genger
Mr. Genger and the Company have agreed upon terms of employment, which are
effective as of May 1, 2001 (the "Genger Agreement"). The Genger Agreement may
be terminated at the option of either party upon 90 days prior notice. Pursuant
to the Genger Agreement, Mr. Genger serves as the Chief Operating Officer of the
Company. The Genger Agreement provides for an annual base salary of $250,000. In
addition, Mr. Genger is entitled to a bonus equal to 100% of his annual base
salary if 100% of targets, including revenue and profit, are met, and an
extraordinary performance bonus of up to 200% of annual salary if certain
performance targets are achieved. In February 2002, the Board approved a grant
of 50,000 options to Mr. Genger at an exercise price of $9.09 and which vests as
follows: 16,667 on each of February 27, 2003 and 2004 and 16,666 on February 27,
2005.
In addition, the Genger Agreement provides for all benefits, such as
pension, life insurance, medical and dental insurance disability insurance,
certain saving programs and participation in the Company's 401K plan, as are
generally granted to the Company's senior executives.
In the event of any termination of the Genger Agreement and Mr. Genger's
employment, the Company will only be obligated to pay (i) base salary and
benefits through the notice period, provided that Mr. Genger continues his
employment obligations through such period (if so required by the Company), (ii)
the lump sum severance payment to which Mr. Genger is entitled by law, but in no
event less than the last month's salary for each 12-month period of Mr. Genger's
employment with the Company and a pro-rata portion for any shorter period since
the last anniversary and through the notice period.
The Genger Agreement also includes confidentiality and non-competition
terms and conditions.
In addition to the above, the Board of Directors and the Audit Committee
approved the grant to Mr. Genger of a guarantee by the Company of $2 million in
debt in connection with certain relocation expenses. The guarantee is to be
secured by the Company shares held by Mr. Genger. The guarantee shall terminate
on the earlier to occur of (i) two years from issuance or (ii) the termination
of Mr. Genger's employment with the Company.
Employment Agreement with Alon Maor
Effective August 3, 2001, the Company entered into an employment agreement
with Alon Maor (the "Maor Agreement") pursuant to which Mr. Maor serves as
Executive Vice President, the Aesthetic Business Unit. The Maor Agreement may be
terminated by either party upon the provision of six-months prior notice or
three years after the effective date. The term will extend for additional one
year periods following the completion of the initial three-year term unless
either party delivers a notice of intention not to renew no later than six
months preceding the expiration of the then-current term.
Pursuant to the Maor Agreement, Mr. Maor will receive an annual base salary
in the amount of $200,000, an annual housing allowance equal to his actual rent
or acquisition costs, but subject to an annual maximum of $96,000, an
46
annual allowance for the education of his children from pre-school through high
school (subject to a tax gross up) (estimated to be approximately $18,000 for
the 2001-2002 school year), the sum of $20,000 for certain relocation expenses
(part of which may be reimbursed if Mr. Maor is terminated for cause prior to
the second anniversary of the Maor Agreement); and all benefits, such as
pension, life insurance, medical and dental insurance disability insurance,
certain saving programs and participation in the Company's 401K plan, as are
granted to the Company's Senior Executives.
In addition, Mr. Maor shall be awarded an annual bonus of 90% of his annual
base salary payment if the Aesthetic Business Unit meets certain annual targets
mutually agreed upon by the Chief Executive Officer and Mr. Maor. If achievement
of the goals exceeds or is less than 100%, the percentage of base salary to be
paid as bonus shall correspondingly be increased in excess of or decreased below
the set 90%.
Mr. Maor was granted options to purchase up to 120,000 of the Company's
Ordinary Shares under the terms and conditions of the Plan, out of which 100,000
vest in three equal installments on each of January 2, 2002, 2003 and 2004 at an
exercise price of $10.90. The remaining 20,000 vest in three equal installments
on each of May 30, 2002, 2003 and 2004 at an exercise price of $24.90.
The Maor Agreement also includes confidentiality and non-competition terms
and conditions.
Employment Agreement with Mike Terry
The Company is a party to an employment agreement with Mike Terry (the
"Terry Agreement") pursuant to which Mr. Terry serve as Executive Vice
President, European Operations. The Terry Agreement is effective as of July 3,
2001 and continues through February 28, 2003. The Terry Agreement provides for
an annual base salary of $150,000. In addition, Mr. Terry is entitled to a bonus
equal to 50% of his annual base salary if 100% of certain targets are met.
Mr. Terry was granted options to purchase 60,000 of the Company's ordinary
shares under the terms and conditions of the Plan. The options shall have an
exercise price of $15 per share and shall vest equally over a three year period
beginning on the first anniversary of the Terry Agreement.
Pursuant to the terms of the Terry Agreement, the Company forgave a loan it
made to Mr. Terry in the amount of $24,000. In addition, the Company provides
Mr. Terry with a monthly housing allowance in an amount not to exceed $5,700 and
a monthly car allowance in an amount not to exceed NGL 2300. Pursuant to the
Terry Agreement, the Company is obligated to reimburse Mr. Terry's expenses
incurred associated with relocation of Mr. Terry and his family to the
Netherlands, including certain tax liabilities in an amount not to exceed
$10,000 per year beginning in 2002. If the Terry Agreement is terminated by the
Company other than for cause, the Company is obligated to pay Mr. Terry's
relocation costs back to the U.S.
Employment Agreement with Louis Scafuri
The Company was a party to an employment agreement with Louis Scafuri (the
"Scafuri Agreement") pursuant to which Mr. Scafuri served as Chief Operating
Officer for the Company's North American Operations. The Scafuri Agreement was
effective as of May 2001. Mr. Scafuri resigned from his position on July 17,
2001.
The Scafuri Agreement provided for an annual base salary in the amount of
$270,000, a target cash bonus equal to 100% of the annual base salary, and an
extraordinary performance bonus of up to 200% of annual salary if certain
performance targets are achieved.
Employment Agreement with Raphael Werner
The Company was a party to an employment agreement with Mr. Raphael Werner
(the "Werner Agreement") pursuant to which Mr. Werner was appointed Chief
Executive Officer of the Company's American operations. The term of the Werner
Agreement commenced on July 1, 2000. The Werner Agreement provided for an annual
base salary of $180,000 and an annual bonus of $90,000 for meeting certain
targets as fully detailed in the Werner Agreement.
The Werner Agreement provided for benefits similar to those provided by the
Company to other similarly situated employees. Under the terms of the Werner
Agreement, Mr. Werner was obligated to enter into a confidentiality and
non-competition agreement in accordance with standard Company policy.
47
Mr. Werner's employment with the Company was terminated on December 31,
2001. Mr. Werner and the Company have entered into a Consulting Agreement
effective January 1, 2002.
Employment Agreement with Asif Adil
In July 2000, the Company entered into an employment agreement with Mr.
Asif Adil (the "Adil Agreement"), pursuant to which Mr Adil served initially as
the Company's Executive Vice President, Business Operations and subsequently was
also appointed as the Chief Financial Officer from July 2001 through December
2001. Pursuant to the Adil Agreement, Mr. Adil also received a sign on bonus in
the amount of $150,000 and a one-time stock price target bonus of $137,500. Mr.
Adil is entitled to receive a performance bonus for the period September 1,
2000 to December 31, 2001 in the aggregate amount of $366,667. Furthermore, the
Adil Agreement provided for the reimbursement of certain relocation expenses in
the amount of $1,250 per month for 18 months. In September 2001, Mr. Adil's
annual base salary was increased to $275,000.
The Adil Agreement also provides for a grant of options under the Company's
1999 Option Plan to purchase an aggregate of 275,000 ordinary shares at an
exercise price of $12.00 per share. The options vest as follows: 91,667 on July
1, 2001; 91,667 shares on July 1, 2002 and 91,666 shares on July 1, 2003.
The Adil Agreement provides for benefits similar to those provided by the
Company to other similarly situated executive employees, including health,
dental, disability and participation in the Company's 401K plan. The Adil
Agreement also includes confidentiality and non-competition terms and
conditions.
The Company is currently negotiating a new agreement with Mr. Adil.
Directors' Compensation
Each of the directors of the Company who serves on any one or more of the
sub-committees of the Board (other than the Chairman and the Vice Chairman), are
entitled to a cash retainer fee for participation in meetings of the Board of
Directors or any sub-committee at $2,500 per calendar quarter. Directors (other
than the Chairman and the Vice Chairman) are not entitled to receive any
additional per-meeting fee but they will be reimbursed for their reasonable
travel and accommodation expenses. The Chairman of the Board of Directors, Prof.
Frenkel, and the Vice Chairman of the Board of Directors, Mr. Arie Genger, are
each entitled to an advisory fee of up to $120,000 per year. For a description
of Thomas G. Hardy's consulting agreement with the Company, see Item 13: Certain
Relationships And Related Transactions.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
No member of the Compensation Committee is currently, or was at any time
during the fiscal year ended December 31, 2001, an officer or employee of the
Company. However, as described below, Mr. Thomas G. Hardy served as a consultant
to the Company during 2001 and continues as such in 2002. No executive officer
of the Company served on the board of directors or compensation committee of any
entity, which has one or more executive officers serving as members of the
Company's Board of Directors or Compensation Committee.
The Company retained Mr. Thomas G. Hardy, a director, as an outside
consultant and agreed with Mr. Hardy on the terms relating to such engagement
(the "Hardy Agreement"), which commenced as of October 1, 2000. The initial term
of the Hardy Agreement was through September 30, 2001. The parties have agreed
to extend the Hardy Agreement for an additional year. Pursuant to the initial
term, in consideration of the consulting services, the Company paid Mr. Hardy a
consulting fee in the amount of $5,000 for each day of services that are
rendered. During the extended term the Company will pay Mr. Hardy an annual
consulting fee of $180,000. As required under the Companies Law the extension of
the Hardy Agreement will be brought for approval to the next shareholders
meeting. Either party may terminate the Hardy Agreement at any time, by giving
30 days advance written notice to the other party. Under the terms of the Hardy
Agreement, Mr. Hardy assists the Company in strategic planning. During 2001 and
through the end of February 2002, Mr. Hardy received approximately $284,000 from
the Company for services rendered.
Item 12: Security Ownership Of Certain Beneficial Owners And Management.
The following table sets forth information regarding beneficial ownership
of the Company's Ordinary Shares as of March 25, 2002 (except in the case of Mr.
Scafuri, Mr. Adil and Mr. Werner, who are no longer officers and for whom the
Company's information may not be current) by (i) each person who is the
beneficial owner of more than 5% of the outstanding Ordinary Shares, (ii) all
directors of the Company, (iii) the Named Officers, and (iv) all directors and
executive officers as a group. The Company had approximately 36,758,606 ordinary
shares outstanding as of March 25, 2002.
48
Beneficial ownership of shares is determined under rules of the Securities
and Exchange Commission and generally includes any shares over which a person
exercises sole or shared voting or investment power. The table below includes
the number of shares underlying options that are exercisable within 60 days of
the date of this offering. Ordinary Shares subject to these options are deemed
to be outstanding for the purpose of computing the ownership percentage of the
person holding these options, but are not deemed to be outstanding for the
purpose of computing the ownership percentage of any other person.
Options
Exercisable Total
Shares within 60 Beneficial Percentage
Beneficial Owner Owned Days Ownership Ownership
- ----------------------------------------------------------------------------------------------------------------
Coherent, Inc. (1) ....................... 5,432,099 0 5,432,099 14.78%
Capital Research & Management Company (7). 3,664,500 0 3,664,500 9.97%
Arie Genger (2) .......................... 978,605 1,300,000 2,278,605 6.20%
SMALLCAP World Fund, Inc (7) ............. 2,270,000 0 2,270,000 6.18%
Bernard Gottstein (3) .................... 2,078,634 0 2,078,634 5.65%
Taunus, Inc.(4) .......................... 2,018,226 0 2,018,226 5.49%
Bernard Couillaud (5) .................... 0 0 0 *
Aharon Dovrat ............................ 15,000 25,000 40,000 *
Jacob A Frenkel .......................... 22,500 758,500 781,000 2.12%
Phillip Friedman ......................... 70,000 100,000 170,000 *
Thomas Hardy ............................. 126,515 0 126,515 *
Darrell S. Rigel ......................... 8,000 100,000 108,000 *
Sash A. Spencer .......................... 20,000 89,000 109,000 *
Mark H. Tabak ............................ 0 100,000 100,000 *
Zehev Tadmor ............................. 1,000 70,000 71,000 *
Yacha Sutton ............................. 137,600 364,005 501,605 1.35%
Louis Scafuri (6) ........................ 0 0 0 *
Alon Maor ................................ 10,000 33,000 43,333 *
Asif Adil (6) ............................ 0 91,667 91,667 *
Mike Terry ............................... 2,000 20,000 22,000 *
Sagi Genger .............................. 268,000 33,000 301,000 *
Raphael Werner (6) ....................... 0 0 0 *
All directors and executive
Officers as a group (24 persons) ......... 1,700,620 3,080,619 4,781,239 12.00%
* Less than 1%.
(1) The address of Coherent is 5100 Patrick Henry Drive, Santa Clara,
California 95054.
(2) The address of Mr. Arie Genger is 375 Park Avenue, New York, New York
10152. The 978,605 shares include (a) 155,958 shares held directly by
Mr. Genger, (b) 822,647 shares held by corporations directly or
indirectly controlled by Mr. Genger, which controlled corporations
might be deemed to share voting and investment power with Mr. Genger
as to these shares, (c) 1,500 shares owned by a trust for the benefit
of a minor child of a third party of which Mr. Genger is sole trustee,
as to which Mr. Genger disclaims beneficial ownership and (d) 5,224
shares beneficially owned by Mr. Genger's spouse, as to which Mr.
Genger disclaims beneficial ownership.
(3) The address of Mr. Gottstein is 550 West 7th Avenue, Suite 1540,
Anchorage, Alaska 99501.
(4) The address of Taunus Corporation is 31 West 52nd Street, New York,
New York 10019. The 2,018,226 shares include 2,017,957 shares held by
Deutsche Banc Alex. Brown Inc.
(5) Excluding those shares beneficially owned by Coherent, Inc. of which
Dr. Couillaud is President and Chief Executive Officer.
49
(6) As of March 25, 2002 the Company has no current information regarding
shares owned by Mr. Louis Scafuri and Mr. Raphael Werner, whose
employments terminated during 2001. Share ownership information has
not been updated as to Mr. Adil since Mr. Adil is no longer serving as
an officer of the Company. As of June 30, 2001, Mr. Scafuri owned 0
shares, as of December 31, 2001 Mr. Adil owned 0 shares and as of May
31, 2001, Mr. Werner beneficially owned 0 shares, in each case other
than stock options, if any, which may have been or become exercisable.
(7) The address of each of Capital Research and Management Company
("Capital") and SMALLCAP World Fund, Inc. ("World") is 333 South Hope
Street, Los Angeles, California 90071. The joint Schedule 13G
submitted by these entities indicates that Capital is a registered
investment adviser which is deemed to beneficially own its shares as a
result of acting as an investment adviser to various registered
investment companies, including World.
50
Item 13: Certain Relationships And Related Transactions.
The Company retained Mr. Thomas G. Hardy, a director, as an outside
consultant and agreed with Mr. Hardy on the terms relating to such engagement
(the "Hardy Agreement") which commenced as of October 1, 2000. The initial term
of the Hardy Agreement was through September 30, 2001. The parties have agreed
to extend the Hardy Agreement for an additional year. Pursuant to the initial
term, in consideration of the consulting services, the Company paid Mr. Hardy a
consulting fee in the amount of $5,000 for each day of services that are
rendered. During the extended term, the Company will pay Mr. Hardy an annual
consulting fee of $180,000. As required under the Companies Law, the extension
of the Hardy Agreement will be brought for approval to the next shareholders
meeting. Either party may terminate the Hardy Agreement at any time, by giving
30 days advance written notice to the other party. Under the terms of the Hardy
Agreement, Mr. Hardy assists the Company in strategic planning. During 2001 and
through the end of February 2002, Mr. Hardy received approximately $284,000 from
the Company for services rendered.
The Company and CGSI, whose president and chief executive officer is Philip
Friedman, a director, entered into a Master Services Agreement dated June 27,
2001 (the "CGSI Agreement"). Pursuant to the CGSI Agreement, CGSI is to provide
Lumenis with computer-related services to be agreed upon from time to time and
documented in Services Schedules executed by both parties. Through the end of
February 2002, the parties have entered into two Service Schedules. Service
Schedule No. 1, which was entered into on June 27, 2001, was, in consideration
of the amount of $45,000, for the provision of services by CGSI relating to the
review and evaluation of an IT integration plan which has since been implemented
by the Company. Service Schedule No. 2 was entered into on September 4, 2001 and
is for the provision by CGSI of management consulting services and network
design and support services. For these services, CGSI is to receive a management
consulting fee of $275 per hour. Services Schedule No. 2 is for a term of 18
months. During 2001 and through the end of February 2002, CGSI received
approximately $ 85,000 from the Company for services rendered, and there are
issued and unpaid invoices in the amount of $80,000.
The Company and TRI, whose chairman and chief executive officer is Arie
Genger, the Vice-Chairman of the Board of Directors of Lumenis, entered into a
Sub-sublease Agreement made as of June 30, 2001 (the "Sublease Agreement")
pursuant to which TRI subleases to the Company office space in New York. In
consideration for the use of this space, the Company pays rent to TRI as a
percentage of TRI's fixed rent, escalation rent and electricity charges pursuant
to TRI's lease with its landlord. In addition, the Company has entered into an
Office Service Agreement pursuant to which TRI provides Lumenis with certain
office support services including: receptionist telephone support, certain
secretarial support, office supply purchasing assistance, catering services,
computer and communication support and other similar office support functions as
needed. In consideration for the services provided under the Office Service
Agreement, the Company pays TRI a monthly fee equal to $15,000. For 2001, the
Company paid TRI approximately $216,000 under the Sublease Agreement and an
additional $105,000 under the Office Service Agreement. The Sublease Agreement
and the Office Service Agreement expire on March 31, 2002. The parties are
currently negotiating an extension for each agreement.
For a description of a loan guarantee granted to the Chief Operating
Officer of the Company, see Item 11 - "Employment Agreement with Sagi Genger."
During the eight month period ended December 31, 2001, the Company was
involved in the following transactions with Coherent, Inc.: purchases of raw
material in the amount of $10,807,000, purchases of fixed assets in the amount
of $102,000, rent expenses at one of the Company's facilities in the amount of
$2,145,000 and other operating expenses in the amount of $3,656,000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K.
(a) The Following Documents Are Filed As Part Of This Report:
Page
----
1. Financial Statements
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-37
51
3. Exhibits
Exhibit
Number Description
2.1 Asset Purchase Agreement, dated as of February 25, 2001, by and
among Lumenis Ltd. ("Lumenis"), Lumenis Holdings Inc. ("LHI") and
Coherent, Inc. *A (Schedules omitted; Lumenis agrees to furnish
supplementally a copy of any omitted Schedule to the Commission
upon request.)
2.2 First Amendment to the Asset Purchase Agreement, dated as of April
30, 2001, by and among Lumenis, LHI and Coherent, Inc. *B
2.3 Stock Purchase Agreement, dated as of November 8, 2001, by and
among Lumenis, Lumenis Inc. and Linda H. McMahan, in her capacity
as the personal representative of the Estate of William H.
McMahan.*H (Schedules omitted; Lumenis agrees to furnish
supplementally a copy of any omitted Schedule to the Commission
upon request.)
2.4 Contract of Sale, dated as of November 8, 2001, by and between
McMahan Enterprises, Inc. and Lumenis Holdings Inc. *H (Schedules
omitted; Lumenis agrees to furnish supplementally a copy of any
omitted Schedule to the Commission upon request)
3.1 Memorandum of Association, as amended (English translation)*H
3.2 Articles of Association, as amended *H
4.1 (4.1) Indenture, dated September 10, 1997, between Lumenis and United
States Trust Company of New York *C
4.2 (4.3) Specimen of Notes *C (included in Exhibit 4.1 from same filing)
10.1 1999 Share Option Plan *H *M
10.2 2000 Share Option Plan *H *M
10.3 Loan Agreement, dated as of April 30, 2001, between Lumenis
Holdings Inc. and Bank Hapoalim B.M., an Israeli banking
corporation acting through its New York branch. *B
10.4 Option Agreement, dated as of April 30, 2001, between Lumenis and
Bank Hapoalim B.M. and related letters dated April 30, 2001. *B
10.5 Letter of Intent, dated as of April 30, 2001, from Bank Hapoalim
B.M. *B
10.6 Letters, dated April 24, 2001, regarding short term line of credit
and related Agreement, dated as of April 30, 2001, between Bank
Hapoalim B.M. and Lumenis *B
10.7 Form of Indemnification Agreement *H
10.8 Employment Agreement, dated as of March 31, 2000, between Lumenis
and Yacha Sutton *E, *M
10.9 Lease Agreement between Scan Group Yokneam Ltd. and Lumenis
(English Translation) *D
10.10 Lease Agreement between Marion Laznik Industrial Buildings Ltd.
and Lumenis *D
10.11 Employment Agreement, dated as of July 11, 2001, between Lumenis
and Alon Maor *G, *M
10.12 Agreement, dated as of July 15, 1999, between Lumenis and Sagi
Genger *E, *M
10.13 Letter of Change in Prof. Jacob A. Frenkel Stock Option Plan,
dated September 7, 2000 *F, *M
10.14 Agreement, dated as of July 3, 2001, between Lumenis and Mike
Terry *H *M
10.15 Sublease Agreement, dated as of June 30, 2001, between Lumenis and
Trans-Resources, Inc. *H
10.16 Office Services Agreement, dated as of July 1, 2001 between
Lumenis and Trans-Resources, Inc. *H
10.17 Form of Executive Variable Compensation Plan letter *H, *M
10.18 Option grant letter, dated February 22, 2001, from Lumenis to Arie
Genger. *H, *M
10.19 Loan Agreement, dated as of March 26, 2002, between Bank Hapoalim
B.M. and Lumenis *H
10.20 Letter Agreement, dated March 26, 2002, between Bank Hapoalim B.M.
and Lumenis as to Short Term Credit Line *H
21 List of Subsidiaries *H
23.1 Consent of Brightman Almagor & Co. *H
Note: Parenthetical references following the Exhibit Number of a
document relate to the exhibit number under which such exhibit was
initially filed.
*A Incorporated by reference to said document filed as an exhibit to
Current Report on Form 8-K, File #0-13012, filed on March 20, 2001
*B Incorporated by reference to said document filed as an exhibit to
Current Report on Form 8-K, File #0-13012, filed on May 15, 2001.
*C Incorporated by reference to Registration Statement on Form F-3,
File #333-8056, filed on December 19, 1997.
52
*D Incorporated by reference to said document filed as an exhibit to
Annual Report on Form 10-K for the fiscal year ended December 31,
1999, File #0-13012, filed on March 30, 2000
*E Incorporated by reference to said document filed as an exhibit to
Quarterly Report on Form 10-Q for the quarterly period ended March
30, 2000, File #0-13012, filed on May 15, 2000
*F Incorporated by reference to said document filed as an exhibit to
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000, File #0-13012, filed on November 15, 2000
*G Incorporated by reference to said document filed as an exhibit to
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2001, File # 0-13012, filed on November 14, 2001.
*H Filed herewith
*M Management contract or compensatory plan or arrangement
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
53
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Page
------
INDEPENDENT AUDITORS' REPORTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of December 31, 2001 and 2000 F-3
Consolidated Statements of Operations
for the years ended December 31, 2001, 2000 and 1999 F-4
Statements of Changes in Shareholders' Equity
for the years ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 2001, 2000 and 1999 F-6 - F-7
Notes to the Consolidated Financial Statements F-8 - F-36
F-1
Brightman Almagor
1 Azrieli Center
Tel Aviv 67021
P.O.B. 16593, Tel Aviv 61164
Israel
Tel: +972 (3) 6085555
Fax: +972 (3) 6094022 Deloitte
info@deloitte.co.il & Touche
www.deloitte.co.il Brightman Almagor
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Lumenis Ltd. (Formerly ESC Medical Systems Ltd.):
We have audited the accompanying consolidated balance sheets of Lumenis Ltd.
(Formerly ESC Medical Systems Ltd.) (the "Company") and its subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2001 and 2000, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
Brightman Almagor & Co.
Certified Public Accountants
A member of Deloitte Touche Tohmatsu
Tel Aviv, Israel
March 26, 2002
-------------------------
Deloitte Tel Aviv Jerusalem Haifa Eilat
Touche
Tohmatsu
-------------------------
F-2
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share and per share data)
LUMENIS LTD. December 31
- ------------ ----------------------
2001 2000
--------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 31,400 $ 43,396
Short-term investments -- 123
Trade receivables, net 100,823 53,156
Prepaid expenses and other receivables 10,968 6,949
Inventories 83,614 50,288
--------- ---------
226,805 153,912
--------- ---------
FINISHED GOODS USED IN OPERATIONS 9,180 2,758
LONG-TERM INVESTMENTS
Bank deposits and securities 970 941
Investments in non marketable equity securities 3,337 6,993
Long term trade receivables 3,134 341
FIXED ASSETS, NET 16,198 9,695
OTHER ASSETS, NET 127,650 4,889
--------- ---------
Total assets $ 387,274 $ 179,529
========= =========
CURRENT LIABILITIES
Short-term debt and current maturities of long-term loan $ 10,000 $ 4,420
Trade payables 25,763 16,801
Other accounts payable and accrued expenses 90,749 36,515
Subordinated note 12,904 --
--------- ---------
139,416 57,736
--------- ---------
LONG-TERM LIABILITIES
Bank loan 90,000 18
Restructuring accrual -- 963
Deferred income 1,172 --
Accrued severance pay, net 1,169 1,162
Convertible subordinated notes 70,667 91,787
Other long-term liabilities 5,484 --
--------- ---------
168,492 93,930
--------- ---------
Total liabilities 307,908 151,666
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Ordinary shares of NIS 0.1 par value:
Authorized - 100,000,000 shares and 50,000,000 shares, respectively; 800 578
Issued and outstanding -36,667,070 shares and 27,629,017 shares, respectively
Additional paid-in capital 321,230 137,033
Unearned compensation -- (120)
Accumulated deficit (242,561) (96,693)
Treasury stock, at cost 14,898 shares and 1,871,684 respectively (103) (12,935)
--------- ---------
Total shareholders' equity 79,366 27,863
--------- ---------
Total liabilities and shareholders' equity $ 387,274 $ 179,529
========= =========
The accompanying notes form an integral part of these consolidated financial
statements.
F-3
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands, except per share data)
Year ended December 31
-----------------------------------
2 0 0 1 2 0 0 0 1 9 9 9
--------- --------- ---------
NET REVENUES $ 315,201 $ 161,625 $ 142,151
COST OF REVENUES 155,643 66,448 96,474
--------- --------- ---------
Gross profit 159,558 95,177 45,677
--------- --------- ---------
OPERATING EXPENSES
Research and development, net 21,766 11,887 14,725
In process research and development 47,853 -- --
Selling, marketing and administrative expenses 180,157 62,479 104,231
Restructuring costs -- -- 20,530
Litigation expenses 22,244 -- 23,780
Impairment and write-down of intangible and tangible assets 5,455 -- 17,616
Amortization of goodwill and other intangible assets 13,978 -- --
Other -- -- 4,987
--------- --------- ---------
Total operating expenses 291,453 74,366 185,869
--------- --------- ---------
OTHER OPERATING INCOME -- 1,450 --
--------- --------- ---------
Operating income (loss) (131,895) 22,261 (140,192)
--------- --------- ---------
OTHER INCOME -- 599 --
FINANCING EXPENSES, NET (11,897) (4,470) (3,865)
--------- --------- ---------
Income (loss) before income taxes (143,792) 18,390 (144,057)
TAXES ON INCOME (BENEFIT) (520) 280 4,079
--------- --------- ---------
Income (loss) after income taxes (143,272) 18,110 (148,136)
COMPANY'S SHARE IN LOSSES OF AFFILIATES 2,596 1,120 626
--------- --------- ---------
Net income (loss) before extraordinary item (145,868) 16,990 (148,762)
EXTRAORDINARY GAIN ON PURCHASE OF
COMPANY'S CONVERTIBLE NOTES -- 292 7,974
--------- --------- ---------
Net income (loss) for the year $(145,868) $ 17,282 $(140,788)
========= ========= =========
EARNINGS (LOSS) PER SHARE
Basic:
Income (loss) before extraordinary item $ (4.52) $ 0.67 $ (5.79)
Extraordinary gain -- 0.01 0.31
--------- --------- ---------
Net earnings (loss) per share $ (4.52) $ 0.68 $ (5.48)
========= ========= =========
Diluted:
Income (loss) before extraordinary item $ (4.52) $ 0.60 $ (5.79)
Extraordinary gain -- 0.01 0.31
--------- --------- ---------
Net earnings (loss) per share $ (4.52) $ 0.61 $ (5.48)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 32,302 25,354 25,674
========= ========= =========
Diluted 32,302 28,217 25,674
========= ========= =========
The accompanying notes form an integral part of these consolidated financial
statements.
F-4
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
---------------------------------------------
(In thousands)
Retained
Additional earnings
Share paid in Unearned (accumulated Treasury
capital capital compensation deficit) stock Total
--------- --------- ------------ ------------ ---------- ---------
Balance as of January 1, 1999 $ 553 $ 136,001 $ (245) $ 26,813 $ (7,614) $ 155,508
Purchase of treasury stock (10,660) (10,660)
Exercise of options 24 489 513
Grant of options 217 217
Amortization of unearned
compensation 128 128
Gain from decrease in holding in
an affiliate 1,025 1,025
Net loss for the year (140,788) (140,788)
--------- --------- --------- --------- --------- ---------
Balance as of December 31, 1999 577 137,732 (117) (113,975) (18,274) 5,943
Exercise of options 1 (1,200) 5,339 4,140
Unearned compensation 120 (120) --
Grant of options 381 381
Amortization of unearned
compensation 117 117
Net income for the year 17,282 17,282
--------- --------- --------- --------- --------- ---------
Balance as of December 31, 2000 578 137,033 (120) (96,693) (12,935) 27,863
Share issuance for acquisition 132 89,498 89,630
Options granted in connection
with financing 9,704 9,704
Grant of options 9,268 9,268
Exercise of options 71 37,219 12,832 50,122
Conversion of notes 19 21,396 21,415
Amortization of unearned
compensation 120 120
Acceleration of stock-options 17,112 17,112
Net loss for the year (145,868) (145,868)
--------- --------- --------- --------- --------- ---------
Balance as of December 31, 2001 $ 800 $ 321,230 $ -- $(242,561) $ (103) $ 79,366
========= ========= ========= ========= ========= =========
The accompanying notes form an integral part of these consolidated financial
statements.
F-5
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
Year ended December 31,
-----------------------------------
2 0 0 1 2 0 0 0 1 9 9 9
-----------------------------------
CASH FLOWS - OPERATING ACTIVITIES
Net income (loss) $(145,868) $ 17,282 $(140,788)
Adjustments required to reconcile net income (loss) to net cash used
in operating activities:
Expenses (income) not affecting operating cash flows:
Deferred income taxes -- -- 4,093
Amortization of unearned compensation 120 117 128
Increase in deferred income 1,172 -- --
Grant of options 9,268 -- --
Acceleration of stock-options 17,112 -- --
Depreciation and amortization 17,630 4,153 8,457
In process research and development 47,853 -- --
Gain on purchase of Company's convertible notes -- (292) (7,974)
Other income -- (599) --
Other operating income -- (1,450) --
Restructuring costs -- -- 45,068
Impairment of intangible and tangible assets 1,469 -- 17,616
Company's share in losses of affiliates 1,007 1,120 626
Write-down of investments 3,986 -- --
Amortization of other long-term assets 2,816 -- --
Other (157) (413) (330)
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables (13,220) (10,137) 30,232
Decrease (increase) in prepaid expenses and other receivables (1,942) (1,347) 2,879
Decrease (increase) in inventories (1) 6,812 (15,708) 1,946
Increase (decrease) in accounts payable, accrued expenses and
other long-term liabilities 22,663 (20,064) 8,139
--------- --------- ---------
Net cash used in operating activities (29,279) (27,338) (29,908)
--------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
Purchase of fixed assets, net (6,264) (3,952) (4,015)
Long term bank deposit and securities, net (29) -- --
Short term investments, net 123 -- --
Proceeds from sale of subsidiary's operations 288 814 --
Proceeds from investments, net 1,100 41,706 43,439
Payment for business acquired from Coherent, Inc. (Appendix A) (110,216) -- --
Payment for HGM Medical Laser Systems Inc. acquisition (Appendix B) (9,925) -- --
Investments in non-marketable equity securities (2,093) -- --
Purchase of distribution rights (500) -- --
--------- --------- ---------
Net cash provided by (used in) investing activities (127,516) 38,568 39,424
--------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
Purchase of convertible notes -- (873) (14,264)
Proceeds from exercise of options 50,122 4,140 513
Increase (decrease) in long-term loans 99,982 (24) (19)
Increase (decrease) in short-term bank debt, net (4,431) 4,399 (3,512)
Purchase of treasury stock -- -- (10,660)
Other (874) -- --
--------- --------- ---------
Net cash provided by (used in) financing activities 144,799 7,642 (27,942)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,996) 18,872 (18,426)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43,396 24,524 42,950
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 31,400 $ 43,396 $ 24,524
========= ========= =========
CASH PAID DURING THE PERIOD IN RESPECT OF:
Income taxes $ 1,491 $ 1,387 $ 649
--------- --------- ---------
Interest $ 8,218 $ 5,920 $ 6,654
--------- --------- ---------
(1) Including finished goods used in operations
The accompanying notes form an integral part of these consolidated financial
statements.
F-6
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
Appendix A - Payments for business acquired from Coherent Inc.
Year ended
December 31, 2001
-----------------
Current assets $ (79,704)
Fixed assets (5,224)
Current liabilities 39,486
In process research and development (46,650)
Goodwill and other intangibles (125,462)
Liability with respect to the acquisition 4,804
---------
(212,750)
---------
Less- amount acquired by issuance of shares 89,630
Less- amount acquired by issuance of
subordinated note 12,904
---------
$(110,216)
=========
Appendix B - Payments for acquisition of HGM Medical Laser Systems Inc.
Year ended
December 31, 2001
-----------------
Current Assets $ (4,055)
Fixed assets (2,592)
Current Liabilities 1,070
In process research and development (1,203)
Goodwill and other intangibles (3,145)
---------
$ (9,925)
=========
Appendix C - Non-Cash Activities
Year ended
December 31, 2001
-----------------
Conversion of notes including accrued interest $21,415
Options granted in connection with financing $ 9,704
The accompanying notes form an integral part of these consolidated financial
statements.
F-7
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 1 - GENERAL
Lumenis Ltd. (Formerly ESC Medical Systems Ltd.) (the "Company") is an
Israeli company engaged, together with its subsidiaries (the "Group"),
in research and development, manufacture, marketing and servicing of
laser and light based systems for aesthetic ophthalmic, surgical and
dental applications. The Group offers a broad range of laser and
intense pulsed light ("IPL") systems which are used in a variety of
aesthetic, surgical and ophthalmic applications, including
photorejuvenation, hair removal, non-invasive treatment of vascular
lesions and pigmented lesions, acne, ear, nose and throat ("ENT"),
gynecology, urinary lithotripsy, benign prostatic hyperplasia, open
angle glaucoma, secondary cataracts, age-related macular degeneration,
refractive eye correction, dental, neurosurgery and veterinary. The
Group's products use proprietary technology and accordingly the Group
holds numerous patents and licenses.
Note 2 - MERGERS AND ACQUISITIONS
A. On April 30, 2001 (the "Closing"), the Group acquired from
Coherent Inc. ("Coherent") all of the assets and assumed certain
liabilities of the Coherent Medical Group ("CMG"), Coherent's
medical group division. The assets acquired included among other
things, plant, equipment, certain technology, goodwill and other
physical property. CMG focuses on solid-state lasers and diode
lasers that are developed for aesthetic, surgical and ophthalmic
applications. The core CMG technologies are in the area of
lasers, optics, embedded software, electronic controllers, power
supplies, and mechanical design.
At the Closing, the Group paid Coherent $100,000 in cash financed
through a new term loan (see also Note 12 for additional
information on the related financing agreements), 5,432,099
ordinary shares of the Company, and an eighteen-month note
bearing interest at the rate of 5% per annum and in the principal
amount of $12,904. The cash portion of the purchase price is
still subject to an as yet undetermined post-closing adjustment
based on the net tangible value, at the Closing, of CMG's assets
acquired, which will not exceed $6,000. The agreement also
provides for a post-Closing earn-out payment to Coherent of up to
$25,000, subject to certain financial conditions being met
subsequent to the Closing date. If total ophthalmic revenues
exceed $450,000 over a period starting January 1, 2001 and ending
December 31, 2004 (the "Period"), the earn-out payment will be
21.5% of the excess. In addition, if the ophthalmic business is
sold to a third party until the end of the Period for a price in
excess of $110,000, Coherent will receive an earn-out payment
equal to 50% of the excess. In no event, however, will the
earn-out payment be more than $25,000. As of December 31, 2001
such stated conditions have not yet been met.
The acquisition was accounted for as a purchase. The aggregate
consideration including costs directly attributable to the
completion of the acquisition (together, the "Purchase Price"),
have been allocated to the assets acquired and liabilities
assumed. The allocation of the Purchase Price among the
identifiable intangible assets was based upon independent
estimates of fair value of those assets and is subject to final
adjustments. As a result, $46,650 was allocated to purchased
in-process research and development, which has not yet reached
technological feasibility and does not have alternative future
uses. This amount has been charged to the Company's statement of
operations in accordance with Financial Accounting Standards
Board ("FASB") Interpretation No. 4. The fair value of the
purchased in-process research and development was estimated by
using the income approach which discounts expected future cash
flows to present value. The discount rates takes into account the
weighted-average of capital and debt adjusted upward to reflect
additional risks inherent in the development life cycle.
F-8
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 2 - MERGERS AND ACQUISITIONS (Cont.)
A. (Cont.)
The consolidated balance sheet as of December 31, 2001 and the
consolidated statement of operations for the year then ended,
include, on a consolidated basis, the financial data of CMG as of
such date and for the period from the Closing to December 31,
2001, respectively.
The following is a summary of intangible assets acquired:
Coherent name $ 2,990
Product trade names 1,420
Developed technology 29,910
Covenant not to compete 878
Goodwill 90,264
--------
$125,462
========
Purchased technology, other intangibles and goodwill are
amortized over their estimated useful lives, generally two to
fifteen years (goodwill-15 years, developed technology an average
of 8 years), (see also note 3J and 3R).
In accordance with Statement of Financial Accounting ("SFAS") No.
38, "Accounting for Pre-acquisition Contingencies", of the FASB
the Group reduced by $8,007 the initial goodwill resulting from
the CMG acquisition based on changes to pre-acquisition
contingencies and assumed liabilities:
Initial goodwill $ 98,271
Inventory adjustments (8,993)
Distributor termination fees adjustments (1,229)
Other 2,215
--------
$ 90,264
========
Pro Forma Financial Results:
The following selected unaudited pro forma results of operations
for the year ended December 31, 2001 and 2000 of the Group and
CMG, have been prepared assuming the CMG acquisition occurred at
the beginning of each of the periods presented.
Year ended December 31
2001 2000
-------------------------
(Unaudited)
Net revenues $ 376,144 $ 368,915
Net Income (loss) $(102,447) $ 15,529
Basic net earnings (loss) per share $ (2.97) $ 0.51
Diluted net earnings (loss) per share $ (2.97) $ 0.46
Weighted average number of shares used in
calculation of basic net earnings (loss) per share 34,487 30,665
Weighted average number of shares used in
calculation of basic net earnings (loss) per share 34,487 33,528
F-9
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 2 - MERGERS AND ACQUISITIONS (Cont.)
The pro forma results of operations give effect to certain
adjustments, including amortization of purchased intangibles, goodwill
and options granted in connection with financing and write down of
inventories and receivables. Such unaudited information does not
purport to be indicative of the combined results of operations of
future periods or indicative of the results that actually would have
been realized had the entities been a single entity during the present
periods.
The $46,650 charge for purchased in-process research and development
has been excluded from the pro forma results, as it is a material
non-recurring charge.
B. On November 30, 2001 the Group acquired HGM Medical Laser Systems Inc.
including its manufacturing facilities ("HGM") for a total purchase
price of $9,925.
HGM is the combination of three wholly-owned subchapter S-corporations
which are engaged in developing, manufacturing and selling medical
laser equipment primarily to the ophthalmology market as well as
providing service support for these products world-wide.
The acquisition was accounted for as a purchase, accordingly, the
purchase price has been allocated to the assets acquired. The
allocation of the purchase price among the identifiable intangible
assets was based upon independent estimates of fair value of those
assets and is still subject to final adjustments. As a result, $1,203
was allocated to purchased in-process research and development, which
has not yet reached technological feasibility and does not have
alternative future uses. This amount has been charged to the Group's
statement of operations in accordance with FASB Interpretation No. 4
and was based on the same valuation methods as was used in the CMG
acquisition (see Note 2A). In addition the Group has recorded $3,030
in respect of acquired technology which is being amortized on a
straight-line basis over 6 years and $115 of goodwill (see also Note
3R). The operations of HGM are included in the consolidated statements
from the date of acquisition.
Pro forma information has not been provided, since the revenues and
net income (loss) of HGM for the year ended December 31, 2001 and 2000
were immaterial in relation to total consolidated revenues and net
income (loss). HGM's revenues for the year ended December 31, 2001 and
2000 were approximately $8,000 (unaudited) and $8,000 respectively,
and net income (loss) for the year ended December 31, 2001 and 2000
amounted to approximately $374 (unaudited) and $(607), respectively.
C. In June 2000, the Group sold the operations of one of its subsidiaries
- Applied Optronics Corp. ("AOC"). The consideration for this
transaction was as follows: $814 paid at the closing date, $750 to be
paid quarterly, over a three-year period bearing interest at a fixed
rate of 9% per annum and one of the following: $1,000 which will be
paid in three years or 149,080 shares of the buyer. As of December 31,
2001 the total amount to be received by the Group amounted to
approximately $920.
F-10
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 3 - ACCOUNTING POLICIES
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America. The significant accounting policies followed in the
preparation of the financial statements, on a consistent basis, are:
A. USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
B. FINANCIAL STATEMENTS IN U.S. DOLLARS
The accompanying financial statements have been prepared in U.S.
dollars, as the currency of the primary economic environment in
which the operations of the Group are conducted is the U.S.
dollar. The majority of the Group's sales and expenses, including
materials and components purchases, are denominated in U.S.
dollars. Thus, the functional and reporting currency of the Group
is the U.S. dollar.
Transactions and balances originally denominated in U.S. dollars
are presented at their original amounts. Transactions and
balances in other currencies are re-measured into U.S. dollars in
accordance with SFAS No. 52, "Foreign Currency Translation".
Foreign currency translation adjustments are recorded in the
statement of operations as incurred.
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Material inter-company balances and
transactions have been eliminated.
D. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments are considered as cash equivalents
if the investments mature within three months from the date of
investment. Investments in bank deposits and in commercial paper
with original maturities longer than three months but less than a
year are reflected as short-term investments.
E. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is recorded, based on
management's estimations, partially on the basis of specific
accounts receivable whose collectibility is uncertain and
partially as a percentage of accounts receivable. The allowance
for doubtful accounts as of December 31, 2001 and 2000 amounted
to $19,744 and $11,581, respectively.
F-11
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 3 - ACCOUNTING POLICIES (Cont.)
F. INVENTORIES
Inventories are presented at the lower of cost or market.
Inventory reserves are provided to cover risks arising from
slow-moving items or technological obsolescence. Cost is
determined as follows:
Raw materials - "First-in, first-out" method
Finished products and work in - Materials as above, labor
process and overhead costs on an
average basis.
Finished products located at customer sites in respect of support
for warranty obligations or finished products used for
promotional purposes are separately classified as finished goods
used in operations and are depreciated over a period of three
years.
G. LONG-TERM INVESTMENTS
Investments in non-marketable equity securities are stated at
cost, unless the Group has significant influence over the
investee as defined in Accounting Principles Board Opinion
("APB") No. 18. The investments in companies over which the Group
can exercise significant influence are presented using the equity
method of accounting. The Group generally discontinues applying
the equity method when its investment (including advances and
loans) is reduced to zero and it has not guaranteed obligations
of the affiliate or otherwise committed to provide further
financial support to the affiliate.
H. LONG-TERM TRADE RECEIVABLES
Long-term trade receivables are recorded at estimated present
values determined based on current rates of interest and reported
at the net amounts in the accompanying financial statements.
Imputed interest is recognized, using the effective interest
method as a component of interest income.
I. FIXED ASSETS
Fixed assets are presented at cost, net of accumulated
depreciation. Annual depreciation is calculated based on the
straight-line method over the shorter of the estimated useful
lives of the related assets or terms of the related leases as
follows:
Years
-----
Computers and equipment 3-10
Office furniture and equipment 5-15
Buildings 40
Leasehold improvements Over the period of the lease
Vehicles 7
The Group elected to early adopt SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets", which supercedes
SFAS No. 121. In accordance with SFAS No. 144, management reviews
long-lived assets for impairment periodically and whenever events
or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable based on estimated discounted
future cash flows. The adoption of such statement did not have a
material impact on the Group's financial condition or results of
operations.
F-12
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 3 - ACCOUNTING POLICIES (Cont.)
J. OTHER ASSETS
Intangible assets (patents, know-how, Coherent name, product
trade names, developed technology, covenant not to compete and
goodwill) are amortized by the straight-line method over periods
of principally between two and fifteen years (see also R below).
Goodwill and other intangible assets are reviewed for impairment
whenever events such as product discontinuance, plant closures,
product dispositions or other changes in circumstances indicate
that the carrying amount may not be recoverable. When such events
occur, the Group compares the carrying amount of the assets to
undiscounted expected future cash flows. If this comparison
indicates that there is impairment, the amount of the impairment
is calculated using discounted expected future cash flows. The
discount rate applied to these cash flows is based on the Group's
weighted average cost of capital, which represents the blended
after-tax costs of debt and equity. Any impairment loss is
recognized in the statement of operations.
Debt issuance costs are amortized over the term of the related
debt by the effective interest rate method.
K. RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as
incurred. Amounts received or receivable from the Government of
Israel, through the Office of the Chief Scientist ("OCS") for
participation in certain research and development are offset
against the Group's research and development costs. Amounts
recorded as an offset against research and development expenses
amounted to $58, $60 and $275 for the years ended December 31,
2001, 2000 and 1999, respectively.
L. REVENUE RECOGNITION
Revenues from product sales are recognized when delivery has
occurred, persuasive evidence of an agreement exists, the fee is
fixed or determinable and collectibility is probable. The costs
of insignificant related obligations (mainly installations and
training which are not material to functionality) are accrued
when the related revenue is recognized. The Group accrues
estimated sales returns upon recognition of sales based on the
Group's experience and management's estimates. The provision for
returns as of December 31, 2001 and 2000 amounted to $2,849 and
$2,574, respectively. Revenues from service contracts are
recognized on a straight-line basis over the life of the related
service contracts.
M. PRODUCT WARRANTIES
Accrued warranty costs are recorded at the time of sale based on
the Group's experience and management's estimates.
F-13
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 3 - ACCOUNTING POLICIES (Cont.)
N. STOCK-BASED COMPENSATION
The Group accounts for employee stock-based compensation in
accordance with APB No. 25, "Accounting for Stock Issued to
Employees" and the FASB interpretations thereon. Pursuant to
those accounting pronouncements, the Group records compensation
for share options granted to employees at the date of grant based
on the difference between the exercise price of the options and
the market value of the underlying shares at that date. Deferred
compensation is amortized to compensation expense over the
vesting period of the underlying options. See Note 14 for pro
forma disclosures required in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation". The Group accounts for
stock-based compensation to consultants in accordance with SFAS
No. 123 and EITF 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
O. DEFERRED TAXES
The Group accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes". This statement prescribes the
use of the liability method whereby account balances of deferred
tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to
reverse. The Group provides a valuation allowance if necessary,
to reduce deferred tax assets to their estimated realizable
value.
P. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are computed based on the
weighted average number of ordinary shares outstanding. Diluted
earnings (loss) per share reflect potential dilution from
exercise of options or conversion of convertible securities into
ordinary shares in accordance with SFAS No. 128, "Earnings Per
Share".
Q. DERIVATIVE INSTRUMENTS
On January 1, 2001, the Group has adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as
amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which requires,
principally, the presentation of all derivatives as either assets
or liabilities on the balance sheet and the measurement of those
instruments at fair value. Gains and losses resulting from
changes in the fair values of derivative instruments would be
accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. The adoption of such statement
did not have a material impact on the Group's financial condition
or results of operations.
F-14
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 3 - ACCOUNTING POLICIES (Cont.)
R. NEW ACCOUNTING PRONOUNCEMENT
In June 2001, the FASB issued SFAS No. 141, "Business
Combinations". SFAS No. 141 establishes new standards for
accounting and reporting requirements for business combinations
and requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of
the pooling-of-interests method is prohibited. The Group has
adopted this statement for the acquisition of HGM made in
November 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which supersedes APB Opinion No. 17,
"Intangible Assets". SFAS No. 142 establishes new standards for
goodwill and other intangibles acquired in a business combination
and eliminates amortization of goodwill and intangible assets
with indefinite lives and instead sets forth methods to
periodically evaluate them for impairment. The Group applied SFAS
No. 142 to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired
prior to June 30, 2001 the Group will adopt the SFAS effective
January 1, 2002. At such date, acquired goodwill will be assigned
to reporting units for purposes of impairment testing and segment
reporting, and will no longer be amortized but will be subject to
periodic impairment assessment. The adoption of SFAS No. 142 is
expected to result in an exclusion of amortization expenses in
the amount of approximately $6,000 in the year 2002. Management
does not expect the adoption of SFAS No. 142 to have an adverse
effect on its financial position and results of operations except
for the aforementioned impact.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. While the Group is currently
evaluating the impact the adoption of SFAS No. 143 will have on
its financial position and results of operations, it does not
expect such impact to be material.
S. RECLASSIFICATION
Certain amounts from prior years have been reclassified to
conform with current year presentation.
Note 4 - RESTRUCTURING COSTS AND OTHER CHARGES
In 1999, the Group initiated a restructuring program of its business
operations. In the framework of this program, the U.S.-based marketing
activity was consolidated, the Israel-based manufacturing activity was
consolidated, and certain products were eliminated.
In 1999 the Group recorded a $45,068 charge for such restructuring
plans. The plans included, among other things, closing locations and
reducing staff. The charge included $9,797 for lease terminations and
related fixed asset disposals, $19,738 for write-downs of inventories,
$4,800 for write-downs of receivables, $8,758 for severance in respect
of the termination of approximately 200 employees, and $1,975 for
other costs.
F-15
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 4 - RESTRUCTURING COSTS AND OTHER CHARGES (Cont.)
The write-downs of inventories, pertaining to the Group's decision to
eliminate the marketing of a number of products, amounting to $19,738,
were included in cost of sales. The write-downs of receivables
amounting to $4,800 related to termination of agreements with
distributors were included in selling, marketing and administrative
expenses. The majority of the restructuring charges relate to the
Group's operations in the U.S. As of December 31, 2001, the unutilized
accrual amounted to $1,041 relating to lease terminations.
Note 5 - PREPAID EXPENSES AND OTHER RECEIVABLES
December 31
--------------------
2 0 0 1 2 0 0 0
--------- ---------
Deferred income taxes $ -- $ 653
Government agencies 4,301 3,575
Prepaid expenses 2,918 2,241
Other 3,749 480
------- -------
$10,968 $ 6,949
======= =======
Note 6 - INVENTORIES
December 31
--------------------
2 0 0 1 2 0 0 0
--------- ---------
Raw materials $35,362 $30,468
Work in process 15,536 8,354
Finished products 32,716 11,466
------- -------
$83,614 $50,288
======= =======
The cost of revenues for the years ended December 31, 2001 and 1999,
include the write-down of inventories in the total amounts of
approximately $19,172 and $19,738, respectively.
Note 7 - FIXED ASSETS
December 31
--------------------
2 0 0 1 2 0 0 0
Computers and equipment $10,772 $11,877
Office furniture and equipment 4,818 2,235
Building 1,950 --
Land 550 --
Leasehold improvements 4,192 2,952
Vehicles 960 1,545
------- -------
23,242 18,609
Less - accumulated depreciation 7,044 8,914
------- -------
$16,198 $ 9,695
======= =======
Depreciation expense amounted to $3,652, $2,934 and $ 4,044 for the
years 2001, 2000 and 1999, respectively. In connection with the
restructuring plans (see Note 4) and in connection with the periodic
review of long-lived assets (see Note 3 I), fixed assets with a net
book value of $5,733 and $1,567, respectively, were written off in
1999. During 2001 in connection with the integration following the CMG
acquisition, fixed assets with a net book value of $1,469 that had no
alternative future use were written-off.
F-16
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 8 - OTHER ASSETS
December 31
----------------------
2 0 0 1 2 0 0 0
--------- ---------
Goodwill $ 90,379 $ --
Trade names 4,410 --
Developed technology 32,940 --
Covenant not to compete 878 --
Debt issuance costs (1) 2,765 3,591
Deferred cost 874 468
Options granted in connection
with financing (2) 9,704 --
Other (3) 4,063 3,514
-------- --------
146,013 7,573
Less - accumulated amortization 18,363 2,684
-------- --------
$127,650 $ 4,889
======== ========
(1) In respect of convertible subordinated notes - see Note 11.
(2) In respect of options granted to bank in connection with
financing - see Note 14 B.
(3) In connection with the periodic review of impairment (see Note
3J), intangible assets with a net book value of $16,049 were
written off in 1999.
Note 9 - OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31
--------------------
2 0 0 1 2 0 0 0
--------- ---------
Deferred revenues $ 8,893 $ 2,430
Government agencies -- 309
Accruals:
Payroll and related expenses 14,336 6,091
Commissions 2,906 2,679
Income taxes -- 3,513
Settlement of litigations (Note 13 C) 18,000 3,442
Restructuring (Note 4) 1,041 746
Interest 2,208 1,845
Warranty 9,891 4,127
Termination of lease agreements 2,808 --
Retention bonuses and severance pay 8,777 --
Other expenses 21,889 11,333
------- -------
$90,749 $36,515
======= =======
F-17
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 10 - ACCRUED SEVERANCE PAY
The obligation of the Company and its Israeli subsidiaries to make
severance payments to its employees pursuant to the Israeli severance
pay law and labor agreements is based on the employee's most recent
salary and the period of employment. This obligation is partially
covered by deposits with severance pay funds, which are not under the
management or control of the Company, and accordingly, neither those
amounts nor the corresponding accrual for severance pay are reflected
in the balance sheet. The Company's obligation in respect of severance
pay for those employees not covered by severance pay funds policies is
presented as a long-term accrued liability. The gross obligation of
the Company and its Israeli subsidiaries with respect to severance
pay, as of December 31, 2001 and December 31, 2000 amounted to $4,077
and $4,062, respectively.
The subsidiaries in the United States ("U.S. subsidiaries") have
401(k) savings plans covering substantially all of the employees in
the United States who have completed at least three months of service.
Each employee may contribute up to 15% of his or her compensation per
year, subject to maximum limits imposed by U.S. tax law. The U.S.
subsidiaries may make discretionary matching contributions based on a
formula as defined in the plans. The aforementioned subsidiaries
contributed approximately $1,081, $276 and $196 to the 401(k) plans
during the years ended December 31, 2001, 2000 and 1999, respectively.
Severance pay expenses amounted to approximately $3,660, $329 and $734
for the years 2001, 2000 and 1999, respectively. The aforementioned
expense in the year ended December 31, 2001 include severance pay
expenses in the amount of approximately $3,600, which relates to
terminations of employees made in conjunction with the integration
process following the CMG acquisition.
Note 11 - CONVERTIBLE SUBORDINATED NOTES
In September 1997, the Company issued $115,000 in principal amount of
6% convertible subordinated notes due September 1, 2002, with interest
payable semiannually commencing March 1, 1998. The principal amount of
notes of $70,667, as of December 31, 2001, are convertible into
approximately 1,518,088 ordinary shares of the Company at a conversion
price of $46.55 per share, subject to adjustments in certain events.
The notes are redeemable at the option of the Company, in whole or in
part. As of December 31, 2001, the redemption price approximated 101%
plus accrued interest to the date of redemption, declining annually to
100% on September 1, 2002. In 2000 and 1999 the Company purchased
$1,142, and $ 22,071, respectively, in principal amount, of the 6%
convertible subordinated notes at a cost of $873 and $14,264
respectively. As a result of the purchase the Company recorded an
extraordinary gain of $292 and $ 7,974 in the years ended December
31, 2000 and 1999, respectively.
In 2001, in response to an offer from one of the convertible
subordinated note holders, notes in a principal amount of $21,120 and
the related interest payable in the amount of $295 were converted into
754,797 ordinary shares, which represented the fair value of the notes
at the conversion date.
As it is the Company's intent and ability to refinance the convertible
subordinated notes (see also Note 12) such notes were classified as a
long-term liability.
F-18
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 12 - BANK LOANS AND OTHER FINANCING AGREEMENTS
To finance the CMG acquisition, ongoing working capital needs and, if
needed, the refinancing of the Company's convertible subordinated
notes (see Note 11) the Company and certain of its subsidiaries
entered into various financing arrangements (the "Financing") with
Bank Hapoalim B.M (the "Bank"). The financing arrangement consisted
of: (a) a $100,000 six-year term loan bearing interest at LIBOR plus
1.75% per annum, (b) up to $50,000 revolving line of credit until
April, 2002 and up to $20,000 revolving line of credit from April,
2002 to April, 2003 bearing interest at LIBOR plus 1% per annum and
(c) a letter of undertaking pursuant to which the Bank agreed, subject
to the terms and conditions set forth therein, to provide up to
approximately $92,000 of a four-year loan convertible into the
Company's shares at a price of $20.25 per share. Proceeds from the new
convertible loan are to be used solely to refinance the Company's
outstanding convertible subordinated notes, which will mature on
September 1, 2002. The new loan would bear interest ranging between
LIBOR plus 2.25% and LIBOR plus 3.5%. This amount of the commitment
was adjusted to $71,000 following the conversion of $21,120
convertible subordinated notes into shares (see also Note 11). In
connection with the $100,000 loan (the "Loan"), the Company granted
the Bank 2,500,000 options to acquire 2,500,000 shares of the Company
(see also Note 14 B).
The loan's repayment schedule is as follows:
2002 (current maturity) $ 10,000
2003 20,000
2004 20,000
2005 20,000
2006 and thereafter 30,000
--------
$100,000
========
The terms of the financing restrict certain cash dividends and have
limitations on asset dispositions or acquisitions without prior
approval of the bank. In addition, in order to execute the letter of
undertaking, the Company has to maintain a ratio of its debt, as
defined, to EBITDA, as defined, to less than three times. As of
December 31, 2001 the Company was in compliance with such terms and
conditions.
As of December 31, 2001 the total amount of unused credit line
amounted to $50,000.
On March 26, 2002, the Company entered into new agreements with the
Bank for a new 4 year $70,667 loan, the proceeds of which will be used
to repay its existing convertible subordinated notes due September 1,
2002. The $70,667 loan matures on September 1, 2006 and bears interest
at LIBOR plus 6.55% increasing to 7.80% over the life of the loan The
Company also increased its revolving credit agreement to $35,000 from
$20,000.
F-19
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 13 - COMMITMENTS AND CONTINGENT LIABILITIES
A. LEASE COMMITMENTS
The Group leases facilities worldwide under non-cancelable
operating leases that expire from 2001 through 2006. Rental
expense for the years 2001, 2000 and 1999, amounted to $9,307,
$2,359 and $3,729, respectively. Future minimum annual lease
payments under non-cancelable operating lease agreements are as
follows:
2002 $2,642
2003 2,302
2004 2,586
2005 880
2006 654
------
$9,064
======
In connection with the integration following the CMG acquisition,
several facilities were abandoned. Such terminations resulted in
a loss representing future lease payments amounting to
approximately $3,953 which was included in the 2001 rental
expenses. The related accruals (see Note 9) are not included in
the aforementioned table.
B. ROYALTIES
The Group is party to various licensing agreements, which require
it to pay royalties on certain product sales at various rates of
up to 7.5% of the net selling price of these products. For the
years ended December 31, 2001, 2000 and 1999, the Group paid or
accrued royalties in the amount of $3,388, $133 and $107
respectively.
The Company and part of its Israeli subsidiaries are also
obligated to pay to the OCS and the BIRD Foundation royalties of
3-5% on the sales of products for which participations were
received up to 100% of the amount of the participations. The
Group paid on accrued royalties of $292, $408 and $534 in 2001,
2000 and 1999, respectively. As of December 31, 2001, the balance
of the royalty-bearing participations not yet paid or accrued
amounted to approximately $5,594.
C. CONTINGENT LIABILITIES
In February 2002, the Company received a request from the United
States Securities and Exchange Commission ("SEC") to voluntarily
provide certain documents and information for a period commencing
January 1, 1998. The request primarily relates to the Company's
relationships with its distributors, and also asks for
amplification of the Company's explanation of certain previously
disclosed charges and write-downs. The Company intends to furnish
all documents and information requested and cooperate with the
SEC and is currently in the process of collecting and producing
such documents and information. The Company is unable to predict
the duration or outcome of this process.
Following the Company's announcement of the information request
from the SEC, several plaintiffs' law firms announced the filing
of purported class action suits in the United States
F-20
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 13 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
C. (Cont.)
District Court for the Southern District of New York, on behalf
of purchasers of securities of Lumenis Ltd. between January 7,
2002 and February 28, 2002, inclusive (the "Class Period"),
against the Company and certain of its officers and directors. As
of March 26, 2002, the Company had not been served with a summons
in any of the announced lawsuits.
According to the announcements, the complaints allege that the
Company violated U.S. federal securities laws by issuing
materially false and misleading statements throughout the Class
Period that had the effect of artificially inflating the market
price of the Company's securities. The complaints allege that
throughout the Class Period, defendants discounted and disputed
marketplace rumors about its operations even as the Company knew
it was being investigated by the SEC and that its distributors
had been contacted by the SEC, and that even after announcing in
a press release that it was subject to an SEC investigation, the
Company continued to hide the fact that it had been aware of the
SEC investigation and had been providing information to the SEC
for several weeks. The Company believes the allegations and the
claims are baseless, and if served with a summons in any of the
announced lawsuits, the Company intends to vigorously defend
against them.
The Company has been named in a number of purported class action
securities lawsuits filed in the fall of 1998 that have been
consolidated in the United States District Court for the Southern
District of New York. The consolidated action is known as In Re
ESC Medical Systems Ltd. Securities Litigation, 98 Civ. 7530
(NRB). The consolidated amended complaint seeks damages and
attorneys fees under the United States securities laws for
alleged irregularities in the way in which the Company reported
its financial results and disclosed certain facts throughout 1997
and 1998 and for alleged "tipping" of non-public information to
Salomon Smith Barney Inc. in September 1998. The Company has
entered into a settlement agreement with the plaintiffs, which
requires the Company to pay $4,500 and to issue up to 500,000
Ordinary Shares. The cash portion of the settlement will be paid
by one of the re-insurers of the Company's directors and officers
liability insurance policy, and the Company intends to pursue
reimbursement of another $5,000 of the settlement consideration
from a second re-insurer that is in liquidation. An accrual of
$13,000 for this matter has been recorded in the Company's 2001
Consolidated Financial Statements, which amount is based on the
fair market value of the maximum number of Ordinary Shares
payable by the Company at the time the settlement agreement was
entered into. On March 26, 2002, the judge signed an Order and
Final Judgment approving the settlement.
On November 5, 1998, Light Age, Inc. ("Light Age") instituted an
ex-parte application in the Tel-Aviv District Court (the
"Tel-Aviv Court") against the Company and others, seeking a
temporary injunction against the development, production and sale
of the Company's Alexandrite laser for dermatological or hair
removal treatments. Light Age's principal allegations are that
the Alexandrite laser is based on technology developed by Light
Age and is competing with Light Age's Alexandrite laser, in
breach of the Company's non-disclosure and non-compete
undertakings in a supply agreement with Light Age. In addition,
Light Age sought a permanent injunction against the Company from
engaging in such activities. The Tel-Aviv Court denied Light
Age's request for an ex-parte injunction and ordered that a
hearing be held with both parties present. On March 21, 1999, the
Tel-Aviv Court denied Light Age's motion for a preliminary
injunction. The parties have since agreed to submit their dispute
for arbitration. Accordingly, the parties filed a motion to stay
the proceedings, which was granted by the Tel Aviv Court on
October 14, 1999.
On January 25, 1999, the Company, along with three affiliated
entities, brought an action seeking declaratory and injunctive
relief in the Superior Court of New Jersey, Somerset County; Law
Division, against Light Age, Inc., entitled Laser Industries
Ltd., ESC Medical Systems Inc., Sharplan Lasers Inc., and ESC
Medical Systems Ltd. v. Light Age, Inc. Docket No. SOM-L-14199.
The litigation relates to disputes arising out of an agreement
between Light Age and
F-21
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 13 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
C. (Cont.)
Laser Industries pursuant to which Light Age supplied certain
medical laser devices to Laser Industries. On March 5, 1999,
defendant Light Age answered the complaint and counterclaimed
against the plaintiffs, seeking unspecified damages under
thirteen counts alleging a variety of causes of action such as
breach of contract, tortuous interference with contract, unjust
enrichment, and misappropriation. On July 1, 1999 the court
granted Light Age's motion to compel the Company and the three
affiliated entities to arbitrate. On August 13, 1999, Light Age
filed a demand for arbitration on its counterclaim with the
American Arbitration Association. On November 22, 1999, the
Company and the three affiliated entities filed a response to
Light Age's demand. Light Age claims that it incurred damages of
up to $41,447. A hearing on the merits was held in December 2001.
Closing arguments were held on January 30, 2002 and a decision is
expected in early spring.
On September 20, 1999, Dr. Richard Urso filed what purports to be
a class action lawsuit against the Company and against a leasing
company in Harris County, Texas, alleging a variety of causes of
action. In December 2000, plaintiff amended his complaint to
eliminate the class action claim. On April 13, 2001 the lawsuit
was dismissed and on May 3, 2001, Dr. Urso and approximately
forty-eight physicians and medical clinics re-filed what purports
to be a class action lawsuit in Harris County, Texas. Plaintiffs
filed a motion to remove the case to State Court. The lawsuit was
removed to the U.S. District Court for the Southern District of
Texas. The current allegations on behalf of plaintiffs are breach
of contract, breach of express and implied warranties, fraud,
misrepresentation, conversion, product liability, violation of
the Texas Deceptive Trade Practices Act and Texas Securities Act
as well as lender liability and unconscionable conduct. The
Company denies the allegations and will continue to defend this
case vigorously. No assessment of likelihood of outcome or likely
damages, if any, can be made at this time.
On October 12, 2001, Lumenis Inc., a subsidiary of the Company,
commenced an action for patent infringement in the United States
District Court for the Southern District of New York against
Altus Medical Inc. ("Altus") seeking, among other things, an
injunction and damages. The complaint alleges that Altus
infringed two U.S. patents owned by Lumenis Inc. Altus answered
the complaint denying that it was infringing the asserted patents
and filed counterclaims seeking a declaratory judgment that the
asserted patents are invalid and were not infringed. Lumenis
filed a reply denying the material allegations of the
counterclaims. Altus filed a motion seeking to transfer the
action to the United States District Court for the Northern
District of California ("NDCA") for the convenience of the
parties and witnesses. Lumenis Inc. consented to the motion to
transfer. On December 12, 2001 the action was transferred to the
NDCA.
On January 18, 2002, Lumenis Inc. commenced an action for patent
infringement against Trimedyne, Inc. ("Trimedyne") in the United
States District Court for the Central District of California. The
complaint alleges that Trimedyne has willfully infringed and is
willfully infringing two Lumenis Inc. U.S. patents. Lumenis Inc.
seeks (i) an injunction enjoining Trimedyne's infringement; (ii)
an award of damages sustained by Lumenis as a result of such
infringement; (iii) a trebling of such damage award; and (iii) an
award of its costs and attorneys' fees incurred in the action. On
or about February 26, 2002, Trimedyne filed an answer and
counterclaims in this action denying Lumenis' material
allegations of infringement and asserting counterclaims alleging
that: (i) Trimedyne is entitled to a declaratory judgment that
Trimedyne is not infringing the patents; (ii) Lumenis Inc. has
violated certain U.S. and California antitrust and trade
practices laws; (iii) Lumenis Inc. has disseminated false and
misleading statements in violation of the California Business and
Professions Code and/or California's trade libel laws; (iv)
certain Lumenis Inc. products infringe Trimedyne's patents; (v)
Lumenis has tortuously interfered with Trimedyne's prospective
economic relationships; and (vi) Trimedyne is entitled to a
declaratory judgment that it is entitled to a refund of an
alleged overpayment of royalties by Trimedyne of approximately
$130 under a 1994 patent license. Trimedyne seeks: (i) an
F-22
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
injunction enjoining Lumenis Inc. from the allegedly wrongful
acts; (ii) unspecified damages arising from Lumenis Inc.'s
allegedly wrongful acts and a trebling of such damages; (iii)
Lumenis Inc.'s profits derived from Lumenis Inc.'s allegedly
wrongful acts; (iv) unspecified punitive damages for Lumenis'
allegedly wrongful acts; (v) a refund of the alleged royalty
overpayment, plus interest thereon; and (vi) Trimedyne's costs
and attorneys fees incurred in connection with this action. The
Company believes the counterclaims are baseless, will vigorously
defend against them and will continue to vigorously prosecute its
claims against Trimedyne.
F-23
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
In 2001, the Company entered into settlement agreements with
respect to litigation with H.K. Hashalom, for aggregate payments
by the Company of $447.
The Company and its subsidiaries are involved in further legal
proceedings, claims and litigation arising in the ordinary course
of business. In the opinion of management, the outcome of such
current legal proceedings, claims and litigation could have a
material effect on quarterly or annual operating results or cash
flows when resolved in a future period. However, in the opinion
of management, each of these matters individually is not likely
to materially affect the Company's consolidated financial
position.
The Company incurred litigation settlements and related expenses
of $22,244. The balance sheet as of December 31, 2001 includes an
accrual of $18,000 (including the provision of $13,000 noted
above) reflecting managements estimate of the Company's potential
exposure with respect to certain, not all, legal proceedings,
claims and litigation. With respect to the legal proceedings,
claims and litigation for which no accrual has been recorded in
the financial statements, management of the Company is unable to
predict the outcome of such matters, the likelihood of an
unfavorable outcome or the amount or range of potential loss, if
any.
D. COLLATERAL, LIENS AND GUARANTEES
As part of the Financing (see Note 12) the Group has
collateralized substantially all of the assets of the Company,
Lumenis Holdings Inc. and certain of their material subsidiaries.
During 2001, the Board of Directors and the Audit Committee
approved the grant to Mr. Sagi Genger, the Companys' Chief
Operating Officer, of a company guarantee in the amount of $2,000
in connection with his relocation. The guarantee is to be secured
by the Company's shares held by the officer. The guarantee shall
terminate on the earlier to occur of (i) two years from issuance
or (ii) the termination of the officers' employment with the
Company.
Note 14- SHARE CAPITAL
A. SHARES SUBJECT TO OPTIONS
Until 1997, the Company issued ordinary shares to an independent
trustee which restricted the use of these shares to the granting
of options to founding shareholders, employees and consultants to
acquire such shares. No shares can be returned to the Company and
such shares have voting and dividend rights. Shares issued to the
trustee are deemed outstanding, using the treasury stock method,
for purposes of earnings per share computations. As of December
31, 2001, the trustee held 293,610 shares.
In the year ended December 31, 2001, the Board of Directors
approved the acceleration of vesting of stock options granted to
certain employees and members of the Board of Directors. As a
result, and in accordance with FASB Interpretation No.44,
compensation expense with regard to such acceleration, in the
total amount of $17,112, is included in the statement of
operations.
In May 2001, the Board of Directors approved the grant of fully
vested stock options, to purchase 1,200,000 shares, to several of
the Company's senior employees, members of the Board and a
related party, at an exercise price of $10.90 per share (equal to
the exercise price of options granted to many of the Company's
other employees prior to the acquisition of CMG). As a result,
and in accordance with APB 25, compensation expense in the total
amount of $8,963 is included in the statement of operations.
F-24
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
In May, 2001 the Company granted 968,000 Time Accelerated
Restricted Stock Award options ("TARSAP's") to employees and a
related party with an exercise price of $24.90. The TARSAP's
include an acceleration feature, based on the Company's
performance in the years 2003 and 2004. No compensation expense
was recorded, since the market price was equal to the exercise
price at the date of grant.
Transactions during the three year period ended December 31,
2001, are summarized as follows:
Weighted Average
exercise price
No. of shares U.S.$
---------------- ----------------
Outstanding January 1, 1999 1,908,842
Granted 4,639,000 5.25
Exercised (364,522) 1.41
Forfeitures (1,084,176) 7.48
----------
Outstanding December 31, 1999 5,099,144
Granted 2,468,500 9.10
Exercised (813,346) 5.09
Forfeitures (219,848) 12.95
Outstanding December 31, 2000 6,534,450
Granted 8,171,232 17.10
Exercised (3,268,645) 7.34
Forfeitures (842,956) 11.16
----------
Outstanding December 31, 2001 10,594,081
==========
The weighted average fair value of options granted in 2001, 2000
and 1999 were $7.45, $4.76 and $3.11 respectively.
The weighted average exercise price of options outstanding as of
December 31, 2001, 2000 and 1999 were $14.45, $6.37 and $6.23
respectively.
The number of options exercisable as of December 31, 2001, 2000
and 1999 was 3,404,184, 3,306,280 and 495,227, with a weighted
average exercise price of $8.71, $6.66 and $10.35, respectively.
F-25
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 14- SHARE CAPITAL (cont)
The following table summarizes information about options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------------------------- ----------------------------------
Weighted Weighted
average Weighted Number average
remaining average Exercisable at exercise
Range of Exercise Number Outstanding contractual exercise price December 31, price
Prices (Dollars) at December 31, 2001 life (Years) (Dollars) 2001 (Dollars)
---------------- -------------------- ------------ -------------- -------------- ---------
0.02-2.90 7,938 1.29 2.35 7,800 2.37
5.00-5.94 1,428,507 7.17 5.08 1,029,041 5.08
7.94-9.00 1,303,978 7.85 8.47 1,168,396 8.52
9.50-10.93 3,368,119 8.86 10.85 917,784 10.86
12.00-14.81 374,192 7.58 12.24 147,316 12.49
15.00-17.00 722,980 9.13 16.09 99,830 16.73
17.15-18.22 25,100 9.82 17.53 -- --
18.44-27.80 3,340,750 9.35 24.20 11,500 24.47
30.50 22,517 9.69 30.50 22,517 30.50
----------- ----------
10,594,081 3,404,184
=========== ==========
The Board of Directors determines the option's exercise price
and, if granted below fair market value, compensation expense is
recorded over the vesting period of the option in accordance with
APB 25. Under APB 25, the compensation cost charged to operations
for the years ended December 31, 2001, 2000 and 1999 amounted to
$120, $117 and $128, respectively excluding above-mentioned
expenses.
Had compensation cost been determined under the alternative fair
value accounting method provided for under SFAS No. 123, the
Company's net income (loss) and earnings (loss) per share for the
years 2001, 2000 and 1999 would have been reduced to the
following pro forma amounts:
2001 2000 1999
----------- ----------- -----------
Net income (loss) As reported $(145,868) $17,282 $(140,788)
Pro forma $(171,920) $ 8,500 $(147,250)
Basic earnings (loss)
per share As reported $ (4.52) $ 0.68 $ (5.48)
Pro forma $ (5.32) $ 0.34 $ (5.74)
Diluted earnings (loss)
per share As reported $ (4.52) $ 0.61 $ (5.48)
Pro forma $ (5.32) $ 0.30 $ (5.74)
Under Statement SFAS No. 123 the fair value of each option grant
is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999: (1) expected
life of 3 years; (2) dividend yield of 0%; (3) expected
volatility of 66% in 2001, 71% in 2000 and 87% in 1999; and (4)
risk-free interest rate of 3.9% in 2001, 6.5% in 2000 and 6% in
1999.
During the year ended December 31, 2001 the Company recorded
compensation expenses in the amount of $305 due to options
granted to consultants, such expenses were measured in accordance
with SFAS No. 123 and are included in the selling, marketing and
administrative expenses.
F-26
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 14- SHARE CAPITAL (Cont.)
B. OPTIONS TO BANK AND IN CONNECTION WITH MERGERS AND ACQUISITIONS
(Cont.)
Pursuant to the agreement for the acquisition of AOC entered into
in December 1997, options to purchase 84,435 ordinary shares at a
price of $47.25 per share were issued. These options are
exercisable until December 2002.
In connection with the Loan, on April 30, 2001 (See Note 12), the
Company and the Bank also entered into a five-year option
agreement granting the Bank or any of its subsidiaries the right
to purchase from the Company up to 2,500,000 ordinary shares of
the Company at a purchase price of $20.25 per share, subject to
certain adjustments, of which 1,363,700 options have been
exercised at December 31, 2001. The fair value of the options
granted was $9,704, which is amortized ratably over the term of
the Loan. Amortization expense amounted to $1,500 during the year
ended December 31, 2001 and is included in financial expenses.
C. TREASURY STOCK
During 1998 and 1999, the Company's Board of Directors authorized
the purchase of up to 3,000,000 ordinary shares, to facilitate
the exercise of employee stock options under the various plans.
Accordingly, during 1999 the Company repurchased 1,590,000 shares
at an average purchase price of $6.70 per share, for an aggregate
consideration of approximately $10,660. During 2001 and 2000, the
Company issued 1,856,786 and 772,759 shares, respectively, to
employees who have exercised their options. Purchases of ordinary
shares are accounted for as treasury stock, and result in a
reduction of shareholders' equity. When treasury shares are
reissued, the Company charges the excess of the repurchase cost
over issuance price using the weighted average method to retained
earnings. If the repurchase cost is lower than the issuance
price, the Company charges the difference to additional paid in
capital. As of December 31, 2001, 14,898 shares were held as
treasury shares in trust.
D. OPTIONS TO RELATED PARTY
In April 2000, the audit committee of the Board of Directors
approved the employment with the Company of a related party, Mr.
Arie Genger. Consideration for his services includes an annual
salary of $10 and options to purchase 1,000,000 ordinary shares
of the Company at a price of $8.50, which was the market value of
the shares at that date, vesting in four equal annual
installments. The first installment vested upon approval of the
grant. The vesting of such options was accelerated in 2001 (see
Note 14A)
E. DIVIDENDS
In the event that cash dividends are declared in the future, such
dividends will be paid in NIS. The Company does not intend to pay
cash dividends in the foreseeable future (see Notes 12 and 19).
Note 15 - RELATED PARTY TRANSACTIONS
1. During the eight month period ended December 31, 2001, the
Company was involved in the following transactions with Coherent
Inc.: Purchases of raw material in the amount of $10,807
F-27
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 15 - RELATED PARTY TRANSACTIONS (Cont.)
(included in cost of revenues), purchases of fixed assets in the
amount of $102, rent expenses at one of the Company's facilities
in the amount of $2,145 and other operating expenses in the
amount of $3,656.
2. The Group has retained the services of one of the Company's
directors as an outside consultant. The service agreement started
on October 1, 2000 and will terminate on September 30, 2002 or on
30 days advance notice by either of the parties. The Group has
recorded $283 and $320 for the year ended December 31, 2001 and
2000, respectively in respect of those services.
3. Beginning in 2001, the U.S. subsidiary sub-leases one of its
offices and receives related office services from a company
controlled by one of the Company's directors. For the year ended
December 31, 2001 the Group recorded rent expenses of
approximately $320 in that respect.
4. During 2001 the Group signed an investment agreement with
Aculight (UK) Ltd. ("Aculight"). The Group has significant
influence over the operations of Aculight and, accordingly, such
investment is accounted for under the equity method. Following
the investment agreement, Aculight acquired from the Group
products, formerly leased by it, in the amount of $4,764, to be
paid over a three-year period. The Group's unrealized gain with
respect to such sale, in the amount of $1,589 was recorded as
deferred income.
5. During 2001 the Company entered into several consulting
agreements with an IT consulting company owned by one of the
Company's directors. As a result the Company recorded during 2001
expenses in the amount of approximately $150.
6. See note 14 A and D for options granted to related parties and
Note 17 for reimbursement of expenses incurred by a related
party.
7. See Note 13D as for certain guarantees that have been provided to
a related party.
Note 16 - SEGMENT INFORMATION
A. COMPOSITION OF REVENUES BY GEOGRAPHIC AREAS BASED ON THE LOCATION
OF THE END CUSTOMERS
Year ended December 31,
------------------------------
2 0 0 1 2 0 0 0 1 9 9 9
-------- -------- --------
Net revenues:
North America $143,659 $ 64,254 $ 51,223
Europe 67,397 39,910 40,774
Asia 87,422 37,430 33,662
Israel 3,683 2,088 2,054
Other 13,040 17,943 14,438
-------- -------- --------
$315,201 $161,625 $142,151
======== ======== ========
F-28
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 16 - SEGMENT INFORMATION (Cont.)
B. REPORTABLE SEGMENTS
Starting in 2000, the Group changed its internal organization
structure in a manner that caused the composition of its
reportable segments to change. Data for 1999, except for
revenues, has not been restated due to impracticability. The
following table sets forth segment information for each of the
two years in the period ended December 31, 2001:
For the year ended December 31,
----------------------------------
2001 2000 1999
--------- --------- ---------
Net revenues
Surgical, aesthetics and opthalmic $ 294,099 $ 139,305 $ 123,505
Dental 9,708 8,490 6,381
Industrial 11,394 13,830 12,265
--------- --------- ---------
Consolidated $ 315,201 $ 161,625 $ 142,151
========= ========= =========
Operating income (loss)
Surgical, aesthetics and opthalmic $(126,891) $ 25,071
Dental (5,711) (2,553)
Industrial 707 (257)
--------- ---------
Consolidated (131,895) 22,261
Other income -- 599
Financing expenses, net (11,897) (4,470)
--------- ---------
Income (loss) before income taxes $(143,792) $ 18,390
========= =========
B. REPORTABLE SEGMENTS (Cont)
December 31 December 31
2001 2000
----------- -----------
Assets
Surgical, aesthetics and ophthalmic $367,651 $164,501
Dental 8,777 6,721
Industrial 10,846 8,307
-------- --------
Consolidated $387,274 $179,529
======== ========
Note 17 - OTHER EXPENSES
Other expenses were as follows:
Year ended
December 31,
------------
1999
----
Proxy expenses $3,575
Other 1,412
------
Total $4,987
======
In connection with a director election contest in 1999, the Group
incurred expenses of $2,065. In addition, in accordance with the
resolution of the Board of Directors of the Company, all costs
and expenses of two major shareholders and their affiliates in
connection with the director election contest were reimbursed by
the Company.
F-29
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 18 - FINANCING INCOME (EXPENSES), NET
Year ended December 31,
--------------------------------
2 0 0 1 2 0 0 0 1 9 9 9
------- ------- -------
Interest income $ 1,040 $ 4,013 $ 5,483
-------- -------- --------
Less - Financing expenses
Interest and amortization in
respect of convertible notes 6,036 6,261 7,626
Other interest 4,769 520 136
Amortization of options
granted in connection with
financing 1,500 -- --
Foreign currency translation adjustments,
net 632 1,702 1,586
-------- -------- --------
Interest expenses and other 12,937 8,483 9,348
-------- -------- --------
Total $(11,897) $ (4,470) $ (3,865)
======== ======== ========
F-30
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 19 - INCOME TAXES
Measurement of taxable income under the Income Tax Law (Inflationary
Adjustments), 1985:
The Company and its Israeli subsidiaries are assessed under the
provisions of the Income Tax Law (Inflationary Adjustments), 1985,
pursuant to which the results for tax purposes are measured in Israeli
currency in real terms in accordance with changes in the Israeli
Consumer Price Index ("CPI"). As explained in Note 3, the financial
statements are measured in U.S. dollars. The differences between the
annual change in the CPI and in the NIS/US dollar exchange rate causes
further differences between taxable income and the income before taxes
shown in the financial statements. In accordance with paragraph 9(f)
of SFAS No. 109, the Company has not provided income taxes on the
differences between results using the functional currency and the tax
basis of assets and liabilities. In accordance with a recent amendment
to the Inflationary Adjustments Law, the Minister of Finance may, with
the approval of the Knesset Finance Committee, determine by order,
during a certain fiscal year (or until February 28 th of the following
year) in which the rate of increase of the price index would not
exceed or shall not have exceeded, as applicable, 3%, that all or some
of the provisions of this Law shall not apply to such fiscal year, or,
that the rate of increase of the price index relating to such fiscal
year shall be deemed to be 0%, and to make the adjustments required to
be made as a result of such determination.
"Approved enterprise"
The Company and one of its Israeli subsidiaries have received approval
for their investment programs in accordance with the Israeli Law for
the Encouragement of Capital Investments, 1959 (the "Law"). The
Company and its subsidiary, have chosen to receive their benefits
through the alternative benefits program, and, as such, they are
entitled to receive certain tax benefits including accelerated
depreciation of fixed assets used in the investment programs, as well
as a full tax exemption on undistributed income that is derived from
the portion of the Company and its subsidiary's facilities granted
approved enterprise status, for a period of ten years or a full tax
exemption for a period of six years and reduced tax rates of 10%-25%
(according to the portion of non-Israeli investors in the Company's
equity, as defined by the Law, measured on an annual basis) for an
additional period of up to four years or a full exemption for a period
of 10 years. The benefits commence with the date on which taxable
income is first earned. The benefit period for each program, is
limited to the earlier to occur of 12 years from commencement of
production and 14 years from date of approval. The Company's
entitlement to the above benefits is subject to fulfillment of certain
conditions, according to the Law and related Regulations. The tax
exemption period for the Company and its subsidiaries commenced in
1995.
Dividends paid out of income derived from the portion of the Company's
facilities granted approved enterprise status is subject to 15%
withholding tax. Should dividends be paid out of income earned during
the period of the tax holiday, such income will be subject to tax at
the rate of up to 25%. The Company does not anticipate paying
dividends from income derived from the portion of the Company's
facilities granted approved enterprise status and any such earnings
distributed upon dissolution are not expected to subject the Company
to income taxes. Therefore, no deferred income taxes have been
provided on such exempted income derived from the portion of the
Company's facilities granted approved enterprise status.
As of December 31, 2001, the aggregate amount of undistributed
tax-exempt earnings for which deferred taxes had not been provided was
$220,000. Distributing such tax-exempt earnings will subject the
Company to tax rates ranging between 10% and 25% (according to the
portion of non-Israeli investors in the Company's equity, as defined
by the Law, measured on an annual basis).
F-31
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Income derived by the Company or its Israeli subsidiaries from sources
other than the "approved enterprises" is taxable at a regular Israeli
corporate tax rate of 36%. Income earned by non-Israeli subsidiaries,
is subject to different corporate tax rates of up to 45%.
F-32
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 19 - INCOME TAXES (Cont)
Composition of income tax expenses (benefit):
Year ended December 31
------------------------------------
2 0 0 1 2 0 0 0 1 9 9 9
---------- --------- ----------
Income (loss) before income taxes:
Israel $ (9,887) $ 42,021 $ (20,540)
Non-Israeli (133,905) (23,631) (123,517)
---------- ---------- ----------
$(143,792) $ 18,390 $(144,057)
========== ========== ==========
Year ended December 31
-------------------------------
2 0 0 1 2 0 0 0 1 9 9 9
-------- ------- -------
Taxes on income (benefit):
Current:
Israel $ (499) $ -- $ --
Non-Israeli (21) 280 --
------- ------ ------
$ (520) $ 280 $ --
======= ====== ======
Deferred:
Israel $ -- $ -- $1,133
Non-Israeli -- -- 2,946
------- ------ ------
$ -- $ -- $4,079
======= ====== ======
Total $ (520) $ 280 $4,079
======= ====== ======
As most of the income in Israel is exempt from income taxes, the
Israeli statutory tax rate for the purposes of the reconciliation of
the reported tax expense is approximately zero.
Net operating loss carryforward
The current tax provisions are recorded net of the benefit of
utilizing net operating loss carryforwards and tax credit
carryforwards of subsidiaries. As of December 31, 2001 the net
operating loss carryforward balance is over $140,000. For tax
purposes, the goodwill and other intangibles of approximately $118,000
allocated to the CMG acquisition in the U.S. will be amortized over
periods of up to 15 years.
Tax loss carryforwards in Israel have no expiration date while the
subsidiaries' portion of the tax loss carryforward, expires in periods
between five years and indefinite periods.
Deferred taxes
Under Statement No. 109 of the FASB, deferred tax assets are to be
recognized for the anticipated tax benefits associated with net
operating loss carryforwards and deductible temporary differences,
unless it is more likely than not that some or the entire deferred tax
asset will not be realized. The adjustment is made by a valuation
allowance.
Since management currently believes the realization of the net
operating loss carryforwards and deductible temporary differences is
less likely than not, a valuation allowance has been established for
the amounts of the related tax benefits.
F-33
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 19 - INCOME TAXES (Cont)
Tax assessments
In April 2001, the Company reached a final agreement with the Israeli
income tax authorities with regard to tax returns filed by the Company
for the years up to and including 1998. As a result, the Company
recorded, in the year ended December 31, 2001 a gain from the reversal
of the accrual recorded in previous years in a total amount of $
1,600.
Note 20 - EARNINGS PER SHARE
Year ended Year ended
December 31, 2 0 0 1 December 31, 2 0 0 0
-------------------------------------- --------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
--------- ------ ------ ------ ------ ------
Net income (loss) (145,868) -- -- 17,282 -- --
======== ====== ======= ====== ====== =====
Basic earnings per share
- ------------------------
Income (loss) before
extraordinary items (145,868) 32,302 (4.52) 16,990 25,354 0.67
Extraordinary gain -- 32,302 -- 292 25,354 0.01
-------- ------ ------ ----
Income available to
ordinary shareholders (145,868) 32,302 (4.52) 17,282 25,354 0.68
======== ====== ====== ====
Effect of diluting securities
- -----------------------------
Options -- 2,863
Warrants -- --
------- ------
Diluted earnings per share
- --------------------------
Income (loss) before
extraordinary items (145,868) 32,302 (4.52) 16,990 28,217 0.60
-------- ------ ------ ----
Extraordinary gain -- 32,302 -- 292 28,217 0.01
Income (loss) available
to ordinary shareholders (145,868) 32,302 (4.52) 17,282 28,217 0.61
======== ====== ====== ====
Year ended
December 31, 1 9 9 9
------------------------------------
Per
Share
Income Shares Amount
------ ------ ------
Net income (loss) (140,788) -- --
======== ====== ======
Basic earnings per share
- ------------------------
Income (loss) before
extraordinary items (148,762) 25,674 (5.79)
Extraordinary gain 7,974 25,674 0.31
-------- ------
Income available to
ordinary shareholders (140,788) 25,674 (5.48)
======== ======
Effect of diluting securities
- -----------------------------
Options --
Warrants --
-------
Diluted earnings per share
- --------------------------
Income (loss) before
extraordinary items (148,762) 25,674 (5.79)
Extraordinary gain 7,974 25,674 0.31
-------- ------
Income (loss) available
to ordinary shareholders (140,788) 25,674 (5.48)
======== ======
The diluted EPS calculation does not take into account subordinated
notes convertible into weighted average of, 1,744,941, 1,971,794, and
2,289,590 ordinary shares, in 2001, 2000 and 1999 respectively,
because their effect is anti-dilutive. The weighted average number of
shares related to options excluded from the calculation of diluted net
earnings per share, since they would have an anti-dilutive effect was
4,227,626 and 602,699 for the year ended December 31, 2001 and 1999,
respectively.
Note 21 - FINANCIAL INSTRUMENTS
A. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Group to a
concentration of credit risk, consist principally of cash and cash
equivalents, short-term and long-term investments, trade receivables
and long-term trade receivables. Short-term cash investments are
placed with high credit-quality financial institutions. Other
investments are in securities of various banks, in U.S. Government
securities and in commercial paper of industrial companies with high
credit ratings. The Group performs ongoing credit evaluations of its
customers and generally does not require collateral. The Group
maintains allowances for estimated credit losses.
F-34
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
B. CURRENCY RATE HEDGING
The Company is exposed to market risks that the main of which is
currency exchange rates. To manage the volatility relating to this
exposure, the Company nets the exposures on a consolidated basis to
take advantage of natural offsets. For the residual portion, the
Company enters into various derivative transactions pursuant to the
Company's policy such as hedging practices. Designation is preformed
on a specific exposure basis to support hedge accounting. The changes
in the fair value of these hedging instruments are offset in part or
in whole by corresponding changes in the fair value or cash flows of
the underlying exposures being hedged. The Company does not hold or
issue derivative financial instruments for trading purposes.
The Company manufactures and sells its products in a number of
countries throughout the world and as a result is exposed to movements
in foreign currency exchange rates.
The Company's major foreign currency exposures involve the markets in
Europe and Asia. The primary purpose of the Company's foreign currency
hedging activities is to manage the volatility associated with foreign
currency purchases of materials and other assets and liabilities
created in the normal course of business. The Company primarily
utilizes forward exchange contracts and purchased options with
maturities of less than 18 months. The derivatives hedging these
exposures are also designated as cash flow hedging instruments for
anticipated cash flows not to exceed 12 months. In addition, the
Company utilizes purchased foreign currency options and forward
exchange contracts. These are intended to offset the effect of
exchange rate fluctuations on forecasted sales, inventory purchases
and receivables. The fair value of the outstanding instruments at
December 31, 2001 of $874, was recorded as current liabilities. This
amount will be recognized as earnings as the underlying transactions
are recognized.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, investments, trade
receivables, subordinated notes, accounts payable and accrued expenses
approximate their fair value due to their short-term nature. The
market value of the convertible notes as of December 31, 2001 is
approximately 101% of the book value. The book value of the Bank loan
approximates its fair value, as it bears interest, which doesn't
differ significantly from interest rates for similar loans.
D. NON- DERIVATIVE AND OFF-BALANCE SHEET INSTRUMENTS
Requests for providing commitments to extend credit and financial
guarantees are reviewed and approved by senior management. Management
regularly reviews all outstanding commitments, letters of credit and
financial guarantees, and the results of these reviews are considered
in assessing the adequacy of the Company's reserve for possible credit
and guarantee losses.
F-35
LUMENIS LTD.
(FORMERLY ESC MEDICAL SYSTEMS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In thousands, except share and per share data)
Note 22 - UNAUDITED QUARTERLY FINANCIAL DATA
Quarter ended
-----------------------------------------------------
March 31 June 30 September 30 December 31
--------- ---------- --------- ----------
2 0 0 0
-----------------------------------------------------
Net revenues $ 36,028 $ 42,515 $ 37,058 $ 46,024
Gross profit 19,546 24,842 22,738 2,805
Income before extradordinary
items $ 954 $ 6,352 $ 3,980 $ 5,704
Net income (loss) $ 1,246 $ 6,352 $ 3,980 $ 5,704
========= ========== ========= ==========
Basic earnings per shore
before extraordinary items $ 0.04 $ 0.25 $ 0.16 $ 0.22
========= ========== ========= ==========
Basic net earnings per share $ 0.05 $ 0.25 $ 0.16 $ 0.22
========= ========== ========= ==========
Diluted earnings per share
before extraordinary items $ 0.04 $ 0.23 $ 0.14 $ 0.20
========= ========== ========= ==========
Diluted net earnings per share $ 0.05 $ 0.23 $ 0.14 $ 0.20
========= ========== ========= ==========
-----------------------------------------------------
Quarter ended
-----------------------------------------------------
March 31 June 30 September 30 December 31
-----------------------------------------------------
2 0 0 1
-----------------------------------------------------
Net Revenues $ 43,868 $ 80,372 $ 90,173 $ 100,788
Gross profit 28,306 26,263 50,366 54,623
Net income (loss) $ 4,228 $(146,377) $ 133 $ (3,852)
========= ========= ========= ==========
Basic net earning (loss) per share $ 0.16 $ (4.70) $ -- $ (0.11)
========= ========= ========= ==========
Diluted net earning (loss) per share $ 0.14 $ (4.70) $ -- $ (0.11)
========= ========= ========= ==========
F-36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LUMENIS LTD.
By: /s/ Yacha Sutton
-----------------------------------
Yacha Sutton
Chief Executive Officer
Dated: March 31, 2002
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Yacha Sutton, Sagi Genger and Kevin R. Morano, and each
of them, his true and lawful attorneys- in-fact and agents, each with full power
of substitution and resubstitution, for him and in his name, place and stead,
and in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Jacob A. Frenkel Chairman of the March 31, 2002
- -------------------------- Board of Directors
Prof. Jacob A. Frenkel
/s/ Arie Genger Vice Chairman of the March 31, 2002
- -------------------------- Board of Directors
Arie Genger
/s/ Bernard Couillaud Director March 31, 2002
- --------------------------
Dr. Bernard Couillaud
/s/ Aharon Dovrat Director March 31, 2002
- --------------------------
Aharon Dovrat
/s/ Philip Friedman Director March 31, 2002
- --------------------------
Philip Friedman
/s/ Thomas G. Hardy Director March 31, 2002
- --------------------------
Mr. Thomas G. Hardy
/s/ Darrell S. Rigel Director March 31, 2002
- --------------------------
Dr. Darrell S. Rigel
/s/ S.A. Spencer Director March 31, 2002
- --------------------------
Mr. S.A. Spencer
/s/ Mark H. Tabak Director March 31, 2002
- --------------------------
Mr. Mark H. Tabak
/s/ Zehev Tadmor Director March 31, 2002
- --------------------------
Prof. Zehev Tadmor
/s/ Yacha Sutton Chief Executive Officer March 31, 2002
- -------------------------- (Principal Executive Officer)
Mr. Yacha Sutton
/s/ Kevin R. Morano Chief Financial Officer March 31, 2002
- -------------------------- (Principal Financial and Accounting
Mr. Kevin R. Morano Officer)
INDEX TO EXHIBITS
Exhibit Description
Number
2.1 Asset Purchase Agreement, dated as of February 25, 2001, by and among
Lumenis Ltd. ("Lumenis"), Lumenis Holdings Inc. ("LHI") and Coherent,
Inc. *A (Schedules omitted; Lumenis agrees to furnish supplementally a
copy of any omitted Schedule to the Commission upon request.)
2.2 First Amendment to the Asset Purchase Agreement, dated as of April 30,
2001, by and among Lumenis, LHI and Coherent, Inc. *B
2.3 Stock Purchase Agreement, dated as of November 8, 2001, by and among
Lumenis, Lumenis Inc. and Linda H. McMahan, in her capacity as the
personal representative of the Estate of William H. McMahan.*H
(Schedules omitted; Lumenis agrees to furnish supplementally a copy of
any omitted Schedule to the Commission upon request.)
2.4 Contract of Sale, dated as of November 8, 2001, by and between McMahan
Enterprises, Inc. and Lumenis Holdings Inc. *H (Schedules omitted;
Lumenis agrees to furnish supplementally a copy of any omitted
Schedule to the Commission upon request)
3.1 Memorandum of Association, as amended (English translation)*H
3.2 Articles of Association, as amended *H
4.1 (4.1) Indenture, dated September 10, 1997, between Lumenis and United States
Trust Company of New York *C
4.2 (4.3) Specimen of Notes *C (included in Exhibit 4.1 from same filing)
10.1 1999 Share Option Plan *H *M
10.2 2000 Share Option Plan *H *M
10.3 Loan Agreement, dated as of April 30, 2001, between Lumenis Holdings
Inc. and Bank Hapoalim B.M., an Israeli banking corporation acting
through its New York branch. *B
10.4 Option Agreement, dated as of April 30, 2001, between Lumenis and Bank
Hapoalim B.M. and related letters dated April 30, 2001. *B
10.5 Letter of Intent, dated as of April 30, 2001, from Bank Hapoalim B.M.
*B
10.6 Letters, dated April 24, 2001, regarding short term line of credit and
related Agreement, dated as of April 30, 2001, between Bank Hapoalim
B.M. and Lumenis *B
10.7 Form of Indemnification Agreement *H
10.8 Employment Agreement, dated as of March 31, 2000, between Lumenis and
Yacha Sutton *E, *M
10.9 Lease Agreement between Scan Group Yokneam Ltd. and Lumenis (English
Translation) *D
10.10 Lease Agreement between Marion Laznik Industrial Buildings Ltd. and
Lumenis *D
10.11 Employment Agreement, dated as of July 11, 2001, between Lumenis and
Alon Maor *G, *M
10.12 Agreement, dated as of July 15, 1999, between Lumenis and Sagi Genger
*E, *M
10.13 Letter of Change in Prof. Jacob A. Frenkel Stock Option Plan, dated
September 7, 2000 *F, *M
10.14 Agreement, dated as of July 3, 2001, between Lumenis and Mike Terry *H
*M
10.15 Sublease Agreement, dated as of June 30, 2001, between Lumenis and
Trans-Resources, Inc. *H
10.16 Office Services Agreement, dated as of July 1, 2001 between Lumenis
and Trans-Resources, Inc. *H
10.17 Form of Executive Variable Compensation Plan letter *H, *M
10.18 Option grant letter, dated February 22, 2001, from Lumenis to Arie
Genger. *H, *M
10.19 Loan Agreement, dated as of March 26, 2002, between Bank Hapoalim B.M.
and Lumenis *H
10.20 Letter Agreement, dated March 26, 2002, between Bank Hapoalim B.M. and
Lumenis as to Short Term Credit Line *H
21 List of Subsidiaries *H
23.1 Consent of Brightman Almagor & Co. *H
Note: Parenthetical references following the Exhibit Number of a document
relate to the exhibit number under which such exhibit was initially
filed.
*A Incorporated by reference to said document filed as an exhibit to
Current Report on Form 8-K, File #0-13012, filed on March 20, 2001
*B Incorporated by reference to said document filed as an exhibit to
Current Report on Form 8-K, File #0-13012, filed on May 15, 2001.
*C Incorporated by reference to Registration Statement on Form F-3, File
#333-8056, filed on December 19, 1997.
*D Incorporated by reference to said document filed as an exhibit to
Annual Report on Form 10-K for the fiscal year ended December 31,
1999, File #0-13012, filed on March 30, 2000
*E Incorporated by reference to said document filed as an exhibit to
Quarterly Report on Form 10-Q for the quarterly period ended March 30,
2000, File #0-13012, filed on May 15, 2000
*F Incorporated by reference to said document filed as an exhibit to
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000, File #0-13012, filed on November 15, 2000
*G Incorporated by reference to said document filed as an exhibit to
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2001, File # 0-13012, filed on November 14, 2001.
*H Filed herewith
*M Management contract or compensatory plan or arrangement