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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, 2000, 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
ESC MEDICAL SYSTEMS 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.
Name of exchange
Title of each class 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. [X]
The number of Ordinary Shares, NIS 0.10 par value per share, of the
registrant outstanding as of March 23, 2001 was 27,630,898.
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
23, 2001 as reported on the Nasdaq National Market, was approximately
$576,383.483. 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 solely on information on Schedule
13-G filed with the Commission and is as of December 31, 2000. This
determination of affiliate status is not a conclusive determination for
other purposes.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for the 2001 Annual Meeting of
Shareholders and the Form 8-K, dated March 20, 2001, are incorporated
herein by reference in response to Items 10 through 13 in Part III of this
report.
PART I
ITEM 1. BUSINESS.
GENERAL
ESC Medical Systems Ltd. ("ESC" or the "Company") is a world leader in the
design, manufacture, and marketing of a broad range of pulsed light and
laser based systems for the aesthetic and medical communities. The Company
is a pioneer in bringing new technologies and applications to these market
segments. The primary markets served include dermatology, plastic surgery,
cosmetic surgery, general surgery, ear, nose and throat ("ENT"),
gynecology, oncology, urology, orthopedics, veterinary medicine, oral
surgery and dentistry.
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
finance in the public capital market.
The Company has historically expanded its product line through internal
development, joint ventures and strategic business acquisitions. In
particular, the Company seeks products that enhance its ability to adapt to
changing market needs.
On February 25, 2001, the Company signed a definitive purchase agreement
with Coherent, Inc. ("Coherent") to acquire, as more fully set forth in
such agreement, the operations of Coherent's medical products division,
Coherent Medical Group ("CMG"). See "Coherent Asset Acquisition" below.
During 2000, the Company consolidated its dental operations into a separate
subsidiary, OpusDent Ltd. ("OpusDent"), an Israeli company, with its own
management, infrastructure and distribution network so as to allow the
dental operations to develop in a focused manner. See "OpusDent Ltd."
below.
Unless the context otherwise requires, all references to the Company or ESC
shall mean ESC and each of its subsidiaries.
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. These are customers who wish to tap
into the vanity market and are looking to increase their revenues and
reduce dependence on reimbursements. The target market for the Company's
surgical products are hospitals and outpatient clinics that use lasers for
surgical procedures.
A new initiative of the Company to expand its reach to other aesthetic
procedure providers was introduced this year, targeting spas, salons and
cosmeticians catering to the hair removal market.
COHERENT ASSET ACQUISITION
On February 25, 2001, the Company signed a definitive purchase agreement
with Coherent to acquire, as more fully set forth in such agreement, the
operations of CMG. The total consideration, excluding a possible earn-out,
was valued at approximately $217 million as of March 12, 2001.
Following closing of the transaction and subject to shareholder approval,
ESC will change its name to Lumenis, derived from lumen which is Latin for
light. Post transaction, ESC will be a global leader in the design,
manufacture and marketing of light-based medical solutions. Combined sales
for the two businesses for the year ended December 31, 2000 were
approximately $367 million with a focus on aesthetics (approximately $163
million), ophthalmic (approximately $74 million), surgical (approximately
$62 million), service (approximately $62 million), dental (approximately $8
million) and industrial (approximately $14 million).
Consideration for the transaction is as follows: $100 million in cash,
5,432,099 ordinary shares of ESC, and $12.9 million in eighteen-month 5%
subordinated notes, plus an earn-out of up to $25 million. ESC will be
obligated to register these shares thirty months after closing. At closing,
Bernard Couillaud, CEO of Coherent, will be appointed to ESC's Board of
Directors. In addition, following the closing, Coherent will continue to
supply parts and components and provide, on a transitional basis, on-going
technical and operational support. Consummation of the transaction is
subject to customary conditions. The transaction is expected to close in
the second quarter of 2001.
OPUSDENT LTD.
During 2000, the Company formed OpusDent and transferred to it all of its
assets in the dental field. Part of the asset transfer is subject to the
approval of the Investment Center in Israel. On December 13, 2000, ESC
signed an agreement with a German investment bank to underwrite the IPO on
the Neuer Markt in Frankfurt, Germany, of approximately 25% of the capital
stock of OpusDent, subject to market and other conditions.
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. The Company offers several products that
incorporate patented proprietary IPL technologies and applications.
Applications of the Company's IPL products are primarily aimed at the
private aesthetic markets and include: non-invasive treatment of varicose
veins and other benign vascular lesions; removal of benign pigmented
lesions, such as age spots and tattoos; and hair removal. The products
include: VascuLight for both deep and superficial vascular lesions,
pigmented lesions, and hair removal; AestiLight, a compact hair removal
system sold outside the United States and the newest system, the IPL
Quantum, for hair removal and skin rejuvenation. The Company has recently
introduced several upgrades and added features to its existing product
line.
LASER TECHNOLOGY. The Company offers many laser systems, utilizing CO2
ruby, alexandrite, Nd:YAG, erbium, holmium and diode technologies. The
lasers come in a variety of sizes and power levels designed to serve a
broad range of medical procedures in physician offices, out-patient clinics
and hospitals. In addition, the Company offers over 500 application-driven
laser accessories designed for integration with its laser systems. Many of
these accessories are disposables, which generate recurring revenue.
PRODUCTS AND APPLICATIONS
AESTHETIC APPLICATIONS. The Company's main focus in the past years has been
in the quickly growing aesthetic market, responding to the public's demand
to look better. The primary applications for ESC products are:
photorejuvenation, addressing facial skin complexion and smoothing
improvement; removal of benign vascular lesions, including leg veins,
spider veins on legs and face, rosaceae and other red spots; removal of
benign pigmented lesions including brown spots, age spots, sunspots and
tattoos; hair removal, skin rejuvenation and wrinkle removal. In 2000,
aesthetic applications accounted for 51% of the Company's revenues.
In September 2000, ESC signed an exclusive worldwide distribution agreement
with, and purchased approximately 20% equity interest in, CureLight Ltd.,
an Israeli based company. CureLight holds the worldwide patent rights to a
new acne therapy, ClearLight, based on intense blue light. The Company
believes that this therapy achieves higher clearance rates in less time
than any other medical treatment without observable material adverse side
effects. Clearlight recently received the CE mark (as defined hereafter);
and clinical trials are underway in the United States. ESC will start
shipping the product outside the United States in the second quarter of
2001.
SURGICAL APPLICATIONS. Laser Industries Ltd. ("Laser Industries"), which
was acquired by the Company in 1998, has been a leading force in the
surgical applications marketplace for close to thirty years, with a wide
range of product offerings. In 2000, surgical applications accounted for
19% of the Company's revenues. The major specialties include:
EAR, NOSE AND THROAT. The Company has pioneered several applications
for ambulatory and operating room procedures, including procedures
for snoring and nasal airways. This year ESC introduced the AcuBlade
system, which provides robotic capabilities for microsurgery, in
particular vocal cord surgery.
GYNECOLOGY. The Company offers several systems for various
gynecologic applications, including laparoscopy, endometrial
ablation, microsurgery and tubal infertility and lesions of the lower
genital tract. The Company's newest product, GyneLase, treats
menorraghia, excessive menstrual bleeding, using an in-office
procedure for endometrial ablation. Menorraghia affects 20% of all
menstruating women. In August 2000, the United States Food and Drug
Administration ("FDA") approved Phase III human clinical trials. More
than 150 patients have enrolled and 26 have been treated. The Company
expects to file a PMA to the FDA in 2002 after a one year patient
follow-up period. On March 11, 2001, the Company signed worldwide
distribution agreements with Karl Storz GmbH & Co. KG.
NEUROSURGERY. The Company offers lasers and accessories for brain
tumor and disk microsurgery and neuroendoscopy.
ORTHOPEDICS. The Company offers a Holmium laser system for orthopedic
surgical procedures, including knee and shoulder arthroscopic
procedures.
UROLOGY. The Company offers a variety of Nd:YAG lasers in varying
power ranges and a broad range of fiber delivery devices for the
laser treatment of the bladder, urethra, prostate and external
genitalia. In addition, the Company offers urologists its Holmium
laser for lithotripsy (a laser procedure which results in the
breakage of kidney, urethra and bladder stones) and for various soft
tissue procedures.
VETERINARY. The Company has developed a compact, easy to use, CO2
laser for the veterinary market. The many surgical applications
include: removal of cysts, tumors and warts; specialized internal
procedures; neutering; spaying; and declawing. The Company has
entered into a distribution agreement with Biolitech, formerly
CeramOptic, to sell their diode laser aimed at the large animal
market. There are over 19,000 veterinary practices in the United
States alone.
DENTAL APPLICATIONS. The Company has 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 December 2000, ESC announced that the Opus 20,
a combined Erbium and CO2 laser received FDA clearance, paving the way for
penetration of the United States marketplace. This device enables the
dentist to perform hard tissue drilling at speeds equal to high speed
mechanical drills. The Company is also developing a variety of handpieces
and accessories for its dental lasers.
INDUSTRIAL APPLICATIONS. The industrial unit develops and sells a number of
different laser systems for specialized applications based upon customer
requests. As part of the restructuring program, as described in Item 7
below, Surgilase of Providence, Rhode Island, an industrial division of
Sharplan Laser Inc. in the United States, was integrated into Spectron UK
so that it could function as the United States sales and marketing arm of
Spectron UK.
PRODUCTS UNDER DEVELOPMENT
In order to maintain its competitive position, the Company believes it is
imperative to develop new products and introduce new technologies.
INTENSE PULSED LIGHT PRODUCTS ("IPL"). The Company is continuously
expanding the applicability of its IPL products. The Company has developed
an upgrade policy enabling its existing IPL customers to enhance the
capability of their MultiLight, VascuLight, EpiLight, and IPL Quantum
units. The Company is developing additional applications for these devices
and enhancing their safety and effectiveness for a variety of aesthetic
applications.
SURGICAL PRODUCTS. One novel surgical application was introduced recently.
A microlaryngeal surgery for vocal chords. A product in development
involves the treatment of very deep veins with a novel disposable catheter.
DENTAL PRODUCTS. The Company is developing a range of dental lasers to
enable dentists to treat hard tissue and soft tissue applications.
BUSINESS STRATEGY
The Company intends to maintain its leadership position in the aesthetic
and surgical markets by providing leading edge high quality systems,
accessories and service. While its primary markets are cosmetic medical
practitioners and surgeons, the Company intends to broaden its sales
channels and product offerings to reach a wider audience 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.
In 2000, the Company launched the aculight Photocosmetic program, aimed at
spas, salons, and cosmeticians where hair removal services are often
provided.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Please refer to Note 14 of the Financial Statements with respect to
financial information about industry segments.
MARKETING, DISTRIBUTION AND SALES
As part of the restructuring (referred to in Item 7 below) which took place
during 1999, the Company set up three business units that enable it to
address its markets more effectively. One business unit handles the
aesthetic and surgical markets and is organized geographically. The other
two units are the Dental Unit and the Industrial Unit. In 2000, the assets
of the Dental Unit were transferred to OpusDent, the Company's newly formed
dental subsidiary. See, "Business, OpusDent Ltd." Each business unit
employs a variety of distribution channels such as direct sales by Company
personnel, independent representatives and regional distributors, depending
upon the nature of the marketplace.
ESC America handles aesthetic and surgical sales for the Company in the
United States, Canada and Latin America. There is a direct sales force in
the United States in addition to distributors in the United States, Canada
and Latin America.
ESC Europe coordinates aesthetic and surgical sales for the Company's
European subsidiaries, in the United Kingdom, France, Italy and Germany, as
well as sales via distributors in other European countries, the Middle East
and Africa.
ESC Asia coordinates aesthetic and surgical sales for the Company's
subsidiary in Japan, with a direct sales force as well as distributors in
Southeast and Northeast Asia.
The Dental Unit, OpusDent, coordinates a sales network made up primarily of
distributors and independent sales agents. A direct sales force has been
established in Germany, the United Kingdom and in France.
The Industrial Unit designs, manufactures and sells its products using
mainly a direct sales force located in the United Kingdom and United
States.
The Company's marketing and distribution practice is based upon the
manufacture and delivery of products to customers based upon specific
orders received from its customers. On average, the Company delivers a
customer order within two to three weeks of receipt of the order and
therefore, does not have, and does not rely upon, any material backlog.
Generally, the Company sells more of its products during the second and the
fourth fiscal quarters as compared with the first and third fiscal
quarters. The Company believes that this is because during the third fiscal
quarters many of the Company's physician customers take summer vacation and
during the first fiscal quarter many hospitals and medical organizations
have yet to assess their needs and budget for the upcoming year.
BREAKDOWN OF NET SALES BY REGION
FOR THE YEAR ENDED
DECEMBER 31,
------------
(dollar amounts in thousands)
-----------------------------------------------
2 0 0 0 1 9 9 9 1 9 9 8
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North America............... $ 64,254 $ 51,223 $ 117,377
Europe...................... 39,910 40,774 69,968
Asia........................ 37,430 33,662 9,375
Central and South America... 5,176 4,079 13,655
Other....................... 14,855 12,413 14,831
----------- ----------- ---------
Total $ 161,625 $ 142,151 $ 225,206
=========== =========== =========
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.
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 each production run. 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.
The Company uses an outsourcing vendor to store and stock its raw material
inventory.
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.
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 $11.89 million in
2000, $15.35 million in 1999 and $18.68 million in 1998. 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.
ESC 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. However, grants made available to the Company by the
Government of Israel are considered taxable income.
Under the Law for the Encouragement of Industrial Research and Development
1984 (the "Research Law"), research and development programs that are
approved by a research committee and meet certain criteria are eligible for
grants against payment of royalties from the sale of the products developed
in accordance with the program. Regulations promulgated under the Research
Law generally provide for the payment of royalties to the Office of the
Chief Scientist of Israel ranging from 3% to 5% on sales of products
developed as a result of a research project and so funded until 100% of the
dollar-linked amount of the grant (carrying an interest rate at LIBOR) is
repaid. The Research Law requires that the manufacture of any product
developed as a result of research and development funded by the Israeli
Government take place in Israel. It also provides that any know how from
the research and development, that is used to produce the product, may not
be transferred to third parties without the approval of a research
committee. Such approval is not required for the export of any products
resulting from such research and development.
In connection with an initial program approved by the Office of the Chief
Scientist, the Company and an Israeli subsidiary received participation
payments from the State of Israel in the amount of approximately $60,000
for the year ended December 31, 2000. In return for the Government's
participation payments, the Company and its subsidiary are obliged 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, 2000,
the balance of the Company's outstanding obligation to the State of Israel
in connection with the participation payments is approximately $5,886,000,
which will be repaid to the government in the form of royalties on sales of
those products that reach the market.
COMPETITION
ESC faces keen competition in its different market niches. Competition
arises from utilizing other light 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 in the aesthetic market
place are: Coherent, Inc. (See "Coherent Asset Acquisition" above), Candela
Corporation, Cynosure, Inc. and Laserscope, Inc.
In addition, the Company competes in a market subject to rapid
technological change. The entry of new companies or new technologies could
have a material adverse effect on the Company.
PATENTS AND INTELLECTUAL PROPERTY
The Company has obtained and now holds approximately 85 patents in the
United States and approximately 22 additional patents outside of the United
States and has applied for approximately 17 and 71 additional 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 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 cycle 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 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 a determination which is 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 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.
GOVERNMENT REGULATION
The products manufactured and marketed by the Company are subject to
regulatory requirements mandated by the FDA, the European Union and similar
authorities in other countries. The Company believes that its 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 Practice ("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 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 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
Quality Systems Requirements.
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 control.
In 1998, the European Union ("EU") determined that marketing or selling any
medical product or devices with the European community required a CE Mark.
The Company has complied with the EU standards and has received the CE Mark
for all our Intense Light and Laser Systems.
A company is now required to obtain the CE Mark prior to sale of certain
medical devices within the EU. 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.
International sales are subject to specific foreign government regulation
and those regulations vary from country to country. The time required to
obtain approval by a foreign country may be longer or shorter than that
required for FDA approval, and the requirements may differ.
EMPLOYEES
As of December 31, 2000, the Company and its subsidiaries had 765 full-time
employees. In Israel there were 320 employees, in the United States 228
employees, in Europe 179 employees and in Asia 38 employees.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
Please refer to Note 14 of 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
abroad. The Company does not regard these risks as a deterrent to further
expansion of its operations abroad. 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 has adopted the Euro in
the beginning of year 2000 for use in EMU markets. The Company is
continually seeking to take advantage of these opportunities to improve the
efficiency and productivity of its EU operations.
For risks related to the Company's operations in Israel, see "Conditions in
Israel."
CONDITIONS IN ISRAEL
GENERAL
The Company is incorporated under the laws of the State of Israel, and
substantially all 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. Our
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. 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. In
addition, Israel and several Arab States have announced their intention to
establish trade and other relations and are discussing certain projects.
Israel has not entered into any peace agreement with Syria or Lebanon, and
there have been difficulties in the negotiations with the Palestinians. We
cannot be certain as to how the peace process will develop or what effect
it may have upon the Company.
Despite the progress towards peace between Israel, its Arab neighbors and
the Palestinians, certain countries, companies and organizations continue
to participate in a boycott of Israeli firms and others doing business with
Israel or with Israeli companies. The Company does not believe that the
boycott has had a material adverse effect on the Company. However, a
prolonged continuation of the recent resultant increase in hostilities in
the region could lead to increased boycotts, further, restrictive laws,
policies or practices directed towards Israel or Israeli businesses and
such could have a material adverse impact on the expansion of the Company's
business. Generally, all male adult citizens and permanent residents of
Israel under the age of 48 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 anytime under emergency circumstances. Currently, some of
our senior officers and key employees are obligated to perform annual
reserve duty. While we have operated effectively under these requirements
since we began operations, no assessment can be made as to the full impact
of such requirements on our workforce or business if conditions should
change, and no prediction can be made as to the effect on us of any
expansion or reduction of such obligations, particularly if emergency
circumstances occur.
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 our 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 were able to
repatriate in foreign currency both dividends (after deduction of
withholding tax) and the proceeds from the sale of the 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 the ordinary shares or
the proceeds from the sale of the 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 assurances
that the Israeli Government will be successful in its attempts to keep
prices and exchange rates stable.
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
Australia, Canada and Japan. These preferences allow Israel to export the
products covered by such programs either duty-free or at reduced tariffs.
Israel has entered into preferential trade agreements with the European
Union, the United States and the European Free Trade Association. In recent
years, Israel has established commercial and trade relations with a number
of the other nations, including Russia, China and India, 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
a facility occupying an aggregate of approximately 68,000 square feet in
Yokneam, Israel. In March 1996, the Company signed a ten-year lease on the
facility in Yokneam from a non-affiliated lessor with annual lease payments
of approximately $150,000 payable in NIS linked to the Israeli CPI. In
March 1998, the Company signed an additional ten-year lease on a new
facility in Yokneam occupying an aggregate of approximately 38,000 square
feet.
The Company also leases approximately 26,000 square feet at the Atidim
Science-Based Industrial Park, Neve Sharett, Tel Aviv, Israel which is
primarily utilized for research and development operations. The term of the
lease is for a period of four years ending November 30, 2004, with an
option to extend the lease for an additional five years thereafter.
As part of the 1999 restructuring, the Company had consolidated most of the
manufacturing activities which were conducted at the Tel-Aviv facilities to
the Company's Yokneam headquarters. In addition, the Company's research and
development activities were reorganized so that most of the research and
development activity for aesthetic/cosmetic lasers and IPL products is
conducted in Yokneam and most of the research and development activity for
medical/surgical and disposable products activity is conducted in Tel-Aviv.
In addition, the Company, through its subsidiaries, maintains the following
premises:
ISRAEL
OpusDent Ltd. Manufacturing, operations, administrative and research and
development facilities are located in Netanya, Israel.
UNITED STATES
ESC Medical Systems, Inc. Marketing and sales operations are
located in a facility in Norwood, Massachusetts.
Luxar Corporation. Manufacturing, operations, administrative
and research and development facilities are located in Bothell,
Washington.
EUROPE
Sharplan Lasers UK Limited. Operations are conducted from an
office in London, England.
ESC Medizintechnik Vertriebs GmbH. Operations are conducted from
an office in Munich, Germany.
OpusDent GmbH. Operations are conducted from an office in Munich,
Germany.
OpusDent Limited. Operations are conducted from an office in
London, England and Paris, France..
Spectron Laser Systems Limited. Operations are conducted from a
facility in Rugby, England.
ESC Medical Systems (Italy) Srl. Operations are conducted from an
office in Rome, Italy.
ESC Medical Systems (France) SARL. Operations are conducted from
an office in Paris, France.
JAPAN
ESC Sharplan Co. Ltd. Operations are conducted from an office in
Tokyo, Japan.
LEASE COMMITMENTS
The Company also operates sales offices and research and development and
manufacturing facilities in the United States, the United Kingdom, Italy,
Germany, Japan and France. Aggregate rental expense for the years 1997,
1998, 1999 and 2000 amounted to $2,626,000, $3,423,000, $3,729,000 and
$2,359,000, respectively.
Future minimum annual lease payments for operating leases are as follows:
Year Lease Payment
---- -------------
2001 $3,533,000
2002 $3,335,000
2003 $2,226,000
2004 $1,946,000
2005 $1,291,000
In connection with the Company's restructuring and the consolidation of its
facilities in 1999, $3,484,000 of the above amounts have been accrued and
included in restructuring costs for the year ended December 31, 1999. As of
December 31, 2000, the accrued liabilities balance is $1,303,000.
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.
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
Untied States District Court for the Southern District of New York. The
consolidated action is captioned In Re ESC Medical Systems Ltd. Securities
Litigation, 98 Civ. 7530 (NRB). On July 9, 1999, a consolidated amended
complaint was filed naming the company, Salomon Smith Barney Inc., and
several additional current and former directors and officers as defendants.
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 or alleged "tipping" of non-public
information to Salomon Smith Barney Inc. in September 1998. On December 23,
1999, the Company moved to dismiss the consolidated amended complaint. On
August 31, 2000 the Court entered an order dismissing the claim against the
Laser Industries director and officer defendants and denying the remaining
dismissal counts. The parties have entered into a scheduling order and have
commenced discovery. The Company's insurance carrier has agreed to assume
the defense of the action under a reservation of rights. In January 2001,
the Court ordered all parties, together with their insurance carriers, to
participate in non-binding mediation and has stayed the discovery process
pending the outcome of such mediation.
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
contentions 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 is seeking a permanent
injunction against the Company 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 field 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 March 5, 1999,
defendant Light Age answered the complaint and counterclaimed against
plaintiffs, seeking unspecified damages under thirteen counts alleging a
variety of causes of action such as beach of contract, tortious
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, 199, 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 field a response to Light age's demand. An arbitration
panel has been appointed, discovery is ongoing, and hearings on the merits
have been scheduled for Summer 2001.
In addition to the foregoing proceedings, the Company is a party in certain
actions in various countries in which the Company sells its products in
which plaintiffs have 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. The largest single
such case presently pending against the Company is a cased filed by H.K.
Hashalom Medical Centers Ltd. in Tel-Aviv District Court against the
Company and Dr. Shimon Eckhouse in connection with the sale of the
Company's EpiLight systems. H.K. Hashalom is seeking monetary damages in
the amount of NIS10,000,000 (approximately $2.5 million at current exchange
rates), but has reserved the right to increase such amount as well as to
request a declaratory judgment that, among other things, the Company
indemnify it for certain costs and expenses arising out of the transaction
between the parties. On July 15, 1999, the defendants filed a Statement of
Defense. At a pre-trial hearing, the Court advised the parties to resolve
the dispute through mediation which has since commenced. The parties' third
mediation hearing is to be held on April 12, 2001.
Apart from H.K. Hashalom's action, management believes that none of the
other of these types of cases that are presently pending individually would
have a material adverse impact on the consolidated financial position of
the Company, although such other proceedings 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 have 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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
At the Company's next Annual General Meeting of Shareholders, the Company
intends to ask its shareholders to approve the change of the name of the
Company from ESC Medical Systems, Ltd. to Lumenis, Ltd. Management believes
that this name change will symbolize the joining of forces between ESC and
Coherent. Lumenis is derived from lumen, the Latin word for light. It is
management's intent that this new image for a new identity will give
shareholders, employees and customers alike an equal sense of belonging,
enabling all to feel part of a new company, which possesses the finest
attributes of both companies.
In addition, in connection with the financing of the acquisition of CMG,
the Company intends to ask its shareholders to approve the granting to
certain lending banks warrants to purchase ordinary shares of the Company
in accordance with the terms of their commitment letters.
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") under the symbol ESCMF with the commencement of the
Company's IPO on January 24, 1996. The Company began trading on September
17,1999 under the new ticker symbol, "ESCM".
The ticker symbol was changed as a result of ESC's new reporting status
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
As of June 23, 1999, ESC is no longer considered a "foreign private issuer"
under the Exchange Act. Rather, the Company started to report under
disclosure obligations applicable to United States issuers, which are
broader than the obligations applicable to foreign private issuers which
ESC was subject to prior to June 23, 1999.
Following the approval of the new name, Lumenis, the company intends to
change its ticker symbol.
As of March 17, 2000, there were 340 shareholders of record of the Company.
The prices set forth below are high and low closing sale prices for the
Ordinary Shares of the Company as reported by the Nasdaq for the period
indicated. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
- ----------------------------------------------------------------------------
1999 High Low
First Quarter $11.56 $4.84
Second Quarter $ 6.81 $5.50
Third Quarter $ 6.47 $3.78
Fourth Quarter $ 9.56 $4.13
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------
In May 1996, the shareholders approved a two for three share dividend for
all outstanding Ordinary Shares. All shares, per share amounts and share
prices have been adjusted to give effect to this dividend.
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 ESC's 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 ESC's Articles of Association, certain
dividends, referred to as final dividends (which are comparable to annual
dividends) are customarily paid by some United States companies and are not
related to distributions on dissolution or liquidation or similar final
distributions. These dividends are recommended by the Board and may be
approved by shareholders at the annual meeting of shareholders, but only in
the 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 to pay interim dividends on account of the final dividend. ESC
may only pay dividends in any given fiscal year out of "profits," which
generally are defined for Israeli statutory purposes to be net after tax
earnings. In addition, because ESC has received certain benefits under the
Israeli law relating to "Approved Enterprises," the payment of dividends by
ESC may be subject to certain Israeli taxes to which it 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 NIS.
Dividends paid out of income derived from the Approved Enterprise is
subject to a 15% withholding tax. Approved Enterprises may receive
exemption from Israeli tax for up to ten years (see "Effective Corporate
Tax Rate" herein). Should dividends be paid out of income earned by the
Company from an Approved Enterprise 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 Approved
Enterprise and any such earnings distributed upon dissolution will not
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.
FOR THE YEAR ENDED DECEMBER 31,
2000 1999 1998 1997 (*) 1996(*)
(RESTATED) (RESTATED)
-------------- --------------- -------------- -------------- ---------------
In thousands of US$ except for share data
Revenues
Net Sales $161,625 $ 142,151 $ 225,206 $ 193,983 $ 119,578
Other Revenues - 2,100 -
161,625 142,151 225,206 196,083 119,578
Cost of Sales 66,448 96,474 78,585 65,068 37,264
Gross Profit 95,177 45,677 146,621 131,015 82,314
Operating Expenses
Research and Development, 11,887 14,725 18,480 17,371 9,835
Net
Selling, Marketing and administrative 62,479 104,231 91,549 71,968 46,935
expenses
Restructuring costs - 20,530 - - -
Settlement of litigations - 23,780 - - -
Impairment of intangible and tangible - 17,616 - - -
assets
Acquired research and development - - 2,451 11,912 3,500
Other - 4,987 - - -
Total Operating Expenses 74,366 185,869 112,480 101,251 60,270
Other Operating income 1,450
Operating Income (loss) 22,261 (140,192) 34,141 29,764 22,044
Other income 599
Financing Income (expenses), Net (4,470) (3,865) 1,211 1,409 1,608
18,390 (144,057) 35,352 31,173 23,652
Nonrecurring Expenses - - 28,951 4,650 -
Income (loss) Before Income Taxes 18,390 (144,057) 6,401 26,523 23,652
Taxes on Income 280 4,079 2,201 4,429 308
Net Income (loss) after income taxes $ 18,110 $(148,136) $ 4,200 $ 22,094 $ 23,344
Company's share on losses of 1,120 626 200
affiliates
Net Income (loss) before 16,990 (148,762) 4,000 22,094 23,344
extraordinary items
Extraordinary gain on purchase of
Company's Subordinated 292 7,974 - - -
Convertible Notes
Net income (loss) for the year 17,282 $(140,788) $ 4,000 $ 22,094 $ 23,344
Earning (loss) Per Share
Basic
Income (loss) before $ 0.67 $ (5.79) $ 0.15 $ 0.86 $ 1.00
extraordinary items
Extraordinary gain 0.01 0.31 - - -
Net earnings (loss) per share 0.68 $ (5.48) $ 0.15 $ 0.86 $ 1.00
Diluted
Income (loss) before 0.60 $ (5.79) $ 0.15 $ 0.86 $ 1.00
extraordinary items
Extraordinary gain 0.01 0.31 - - -
Net earnings (loss) per share 0.61 $ (5.48) $ 0.15 $ 0.86 $ 1.00
Weighted Average Number Of
Shares
Basic 25,354 25,674 26,027 25,604 23,445
Diluted 28,217 25,674 27,381 27,194 25,568
- --------------------------------------------------------------------------------------------------------------------
(*) Relates to the restatement as a result of the mergers with Laser Industries Ltd. and Luxar Corporation.
- --------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
For the year ended December 31,
2000 1999 1998 1997 (*) 1996(*)
(RESTATED) (RESTATED)
-------------- --------------- -------------- -------------- ---------------
(In thousands of US$)
Cash and cash equivalents 43,396 $24,524 $42,950 $54,616 $49,280
Total assets 180,529 $174,907 $327,666 $335,646 $142,218
Long-term debt 93,930 $96,691 $116,306 $127,427 $4,272
Retained earning (deficit) (96,693) $(113,975) $26,813 $22,813 $(144)
Shareholders' equity 27,863 $5,943 $155,508 $150,004 $110,834
- --------------------------------------------------------------------------------------------------------------------
(*) Relates to the restatement as a result of the mergers with Laser Industries Ltd. and Luxar Corporation.
- --------------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
ESC is a world leader in the design, manufacture, marketing and servicing
of a broad range of medical devices that incorporate proprietary IPL
technology, state of the art lasers and accessories as well as other
technologies. The Company's systems incorporate these technologies for
applications in aesthetic dermatology, plastic and reconstructive surgery,
ear, nose and throat procedures and oral and dental surgery, among others.
The Company's systems are designed for use in a variety of medical
environments, ranging from physicians' offices to acute care hospitals.
Starting in 2000, the Company organized itself into three business units -
one unit consisting of three geographical sub-units serving the aesthetic
and surgical market, one unit serving the dental market and one unit
serving the industrial market.
As of December 31, 2000, most of the restructuring plan initiated in
September 1999 was implemented. Certain remaining cost savings measures are
still planned.
In this Report, unless the context otherwise requires, all references to
the "Company" are to ESC and its direct and indirect wholly-owned
subsidiaries.
Year Ended December 31, 2000 Compared With Year Ended December 31, 1999
- -----------------------------------------------------------------------
(In thousands of dollars)
NET SALES. The Company's net sales increased by 14% to approximately
$161,625 in 2000 compared to approximately $142,151 in 1999. The increase
in sales is attributable to an increase in unit sales and sale of services.
GROSS PROFIT. Gross profit increased to approximately $95,177 in 2000 from
approximately $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 cost and an improvement in the product mix.
RESEARCH AND DEVELOPMENT COSTS, NET. Net research and development costs in
2000 decreased by 19% to approximately $11,887 from approximately $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.
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 debts
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 provides for a reduction of approximately 200
employees.
SETTLEMENT OF LITIGATIONS. During 1999, the Company had made several legal
settlements mainly related to the Reliant and LPG lawsuits. The total
amounts for the legal settlements was $23,780, which includes both
settlement fees and related legal fees incurred by the Company (see Item 3-
"Legal Proceedings" above).
WRITE-OFF OF INTANGIBLE AND TANGIBLE ASSETS. During 1999, the Company
wrote-off intangible assets for 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 the McKinsey & Co., work on the
restructuring plan and $3,575 of expenses incurred during 1999 in
connection with the election contest relating to the Company's June 23,
1999 combined annual and extraordinary general meeting of shareholders.
OTHER OPERATING INCOME. Other operating income in 2000 includes the profit
from sale of operation of a unit in our industrial division, Applied
Optronics Corporation in the United States.
OPERATING INCOME (LOSS). For the year 2000, operating profit was $22,261,
representing 14% of sales compared to operating loss of $140,192 for 1999.
The improvement in operating result is due to the adoption of the
restructuring plan, mainly designed to align the Company's cost structure
with its revenue, the increase in sales and improvement in gross margins
and the sale of Applied Optronics Corporation.
OTHER INCOME. Other income of $599 in 2000 includes profits due to dilution
of the Company's interests in one of its high-tech ventures, 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 cash
available.
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 has over $100 million of net operating losses,
mostly in the United States and Israel. Income tax expense in the financial
statements relates primarily to the income taxes of non-Israeli
subsidiaries.
COMPANY'S SHARE ON LOSSES OF AFFILIATES. Company's Share on 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 convertible notes.
NET INCOME. As a result of the foregoing factors, the Company's net income
in 2000 was $17,282 compared to net loss of $140,788 in 1999.
The improvement in net income is due to the adoption of the restructuring
plan, mainly designed to align the Company's cost structure with its
revenue capabilities, the increase in sales and improvement in gross
margins and the sale of Applied Optronics Corp.
Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
- -----------------------------------------------------------------------
(In thousands of dollars)
NET SALES. The Company's net sales decreased by 37% to approximately
$142,151 in 1999 compared to approximately $225,206 in 1998. In 1999, net
sales decreased due to a decrease in unit sales and lower selling prices in
the United States aesthetic market.
The competitive price pressure mainly on hair removal products resulted in
lower price and lower unit sales of the Company's high margin products. In
addition, sales are reflected net of reserves for sales returns.
GROSS PROFIT. Gross profit decreased by 69% to approximately $45,677 in
1999 from approximately $146,621 in 1998. Gross profits decreased mainly
due to the reduction in sales. In addition, in 1999, the Company recorded
inventory write-off and other charges of approximately $30,050.
Gross profit for the year ended December 31,1999 was 32% compared to 65% in
1998. Excluding a write-off of inventory and other reserves, gross profits
for the year ended December 31,1999 was $75,727 or 53% compared to $146,621
or 65% in 1998.
RESEARCH AND DEVELOPMENT COSTS, NET. Net research and development costs in
1999 decreased by 18% to approximately $14,725 from approximately $18,480
in 1998. As a percentage of sales, research and development costs were 10%
in 1999 as compared to 8% in 1998. The decrease in research and development
costs net is due to a reduction in staff and lower material consumption.
Research and development expenses are net of the participation of the
Office of the Chief Scientist in Israel.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Selling, marketing and
administrative expenses increased by 14% to approximately $104,231 in 1999
from approximately $91,549 in 1998. As a percentage of sales, selling,
marketing and administrative expenses were 73% in 1999 compared to 41% in
1998.
The increase in selling, marketing and administrative expenses as a
percentage of sales was mainly due to the lower level of sales in 1999.
Increased selling, marketing and administrative expenses in 1999 were
primarily attributed to the expansion and reorganization of the Company's
selling efforts in the United States. Selling, marketing and administrative
expenses include: $4,800 which related to the restructuring plan adopted in
1999, bad debt charges of $13,430 and litigation expenses of $4,400 which
were not part of the legal settlements which were recorded in settlement of
litigations described below.
RESTRUCTURING COSTS. In the quarter ended March 31, 1999, the Company
developed and started the implementation of a restructuring plan. In
connection with that restructuring plan, the Company recorded charges in
1999 of $5,398 related to its sales and marketing operations and $16,608
related to inventory write-off (included in the cost of goods sold).
In the third quarter of 1999, the Company commenced another restructuring
program. In connection with that restructuring program, the Company
recorded write downs of inventories (included in cost of goods sold) of
approximately $3,130. The restructuring charge which amounted to $15,132 is
comprised of writedowns of fixed assets of $4,592 and severance charges and
a lease contract termination cost of $10,540. The majority of the
restructuring charge was attributable to the Company's divisions in the
United States. The restructuring program provides for a reduction of
approximately 200 employees. In addition, the Company recorded $4,983 of
expenses associated with the same plan which was charged to operating and
income tax expense.
SETTLEMENT OF LITIGATIONS. During 1999 the Company had made several legal
settlements mainly related to the Reliant and LPG lawsuits. The total
amounts for the legal settlements was $23,780, which includes both
settlement fees and related legal fees incurred by the Company (see Item 3-
"Legal Proceedings" above).
WRITE-OFF OF INTANGIBLE AND TANGIBLE ASSETS. During 1999, the Company
wrote-off intangible assets for 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.
ACQUIRED RESEARCH AND DEVELOPMENT. In 1998, there was $2,451 of acquired
research and development expenses in connection with the acquisition of
technology from Ballard Purchase Corporation.
OTHER EXPENSES. For the year ended December 31, 1999, other expenses were
$4,987 comprised mainly of the following:
1. Fees in the amount of $1,412 related to the McKinsey & Co.
work on the restructuring plan.
2. $3,575 of expenses incurred during 1999 in connection with
the election contest relating to the Company's June 23, 1999
combined annual and extraordinary general meeting of
shareholders. The election contest resulted in the
reimbursement of expenses incurred by certain shareholders in
connection with the election contest, in accordance with the
resolution adopted by the Board of Directors and the audit
committee of the Company, during a meeting held on June 23,
1999, which resolved that "all costs and expenses of Messrs.
Arie Genger and Barnard J. Gottstein and their affiliates in
connection with the election contest shall be reimbursed by
the Company promptly on submission of invoices therefor,
subject to refund when such reimbursement is submitted to
shareholders and not approved by such shareholders at a
meeting noticed for such purpose." The Company intends to
present the foregoing expense reimbursement arrangement to
shareholders for approval at the next Annual General Meeting
of Shareholders. Messrs. Genger and Gottstein have submitted
to the Company invoices for a sum of approximately $1,510.
Separate from these shareholder incurred expenses, the
officers and directors of the Company incurred expenses of
$2,065 in connection with the election contest that were
charged to the Company.
OPERATING INCOME (LOSS)
FINANCING INCOME (EXPENSE), NET. For the year ended December 31, 1999,
financing expenses were approximately $3,865 from financing income of
$1,211 in 1998.
Financing income in 1999 consisted of interest income of $5,483 from the
Company's short term and long term investment securities which was offset
by interest and amortization of deferred expenses, in the amount of $7,626
attributable to the Company's 6% subordinated convertible notes and by
other interest and exchange rate differences of $1,722.
At December 31, 1999, approximately $43,841 was invested in short term bank
deposits.
NON-RECURRING EXPENSES. For the year ended December 31, 1998, the Company
incurred expenses in the amount of $28,951 related to the costs associated
with the Laser Industries acquisition.
TAXES ON INCOME. Taxes on income were approximately $4,079 for the year
ended December 31, 1999 compared to approximately $2,201 for the year ended
December 31, 1998. 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. Income
tax expense in the financial statements relates primarily to the income
taxes of non-Israeli subsidiaries.
EXTRAORDINARY GAIN ON PURCHASE OF THE COMPANY'S SUBORDINATED CONVERTIBLE
NOTES. During 1999 the Company had purchased $22,071 principal amount of
its 6% subordinated convertible notes. As a result of the repurchase the
Company had an extraordinary income of approximately $7,974.
NET INCOME. As a result of the foregoing factors, the Company's net loss
was $140,788 in 1999 from a net income of approximately $4,000 in 1998.
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 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 growth 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.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands of dollars)
As of December 31, 2000, the Company had cash and cash equivalents of
$43,396 compared to $24,524 on December 31, 1999. The increase of $18,872
is mainly attributable to:
OPERATING ACTIVITIES
In 2000, cash used by operating activities was approximately $27,338. The
primary cash used in the Company's operating activities was approximately
$10,775 for payment of legal settlements, approximately $5,969 for payments
in respect of restructuring, negative change in current working capital of
approximately $30,507 mainly due to an increase of $15,708 in inventories,
decrease of 2,320 in accounts payable and accrued expenses and an increase
of $11,137 in trade receivables all offset by the profit in 2000. The
increase of inventories is due to preparation for a continuous increase in
sales and the manufacture of hair removal machines for the aculight
program. Under the aculight program, machines owned by the Company are
placed with operators who are charged per usage fees. Nevertheless
aggressive program has been initiated to reduce inventory levels.
INVESTING ACTIVITIES
In 2000, cash provided by investing activities was approximately $38,568.
The primary changes in the Company's investing activities were the maturity
of $43,718 in short-term investments which was partially used in operating
activities, use of cash of approximately $4,652 to purchase fixed assets,
proceeds of approximately $700 from sales of fixed assets, a $1,250
investment representing approximately 20% control of the voting power in a
company, $700 investment in Galil Medical Systems Ltd. and a $814 in
proceeds from sale of a unit in our industrial division.
FINANCING ACTIVITIES
In 2000, cash provided by financing activities was $7,642. The primary
financing activities of the Company included the repurchase of the
Company's subordinated convertible notes for $873, proceeds from the
exercise of options of $4,140 and a short term loan of $4,399.
ESC has executed commitment letters with two leading Israeli banks to
finance the transaction to acquire the operations of CMG. In accordance
with the commitment letters, ESC will be provided with up to $242 million
in financing to consist of a $100 million six-year term loan to fund the
cash portion of the transaction, a $50 million revolver to fund ongoing
working capital needs, and draw down rights of up to $92 million to
refinance the outstanding subordinated convertible notes upon maturity. The
draw down rights are subject to certain operational and indebtedness
milestones.
The Company believes that internally generated funds, together with
available cash, together with the expected loans mainly for the financing
the assets purchased from Coherent and draw down rights will suffice over
at least the next 12 months to meet its present anticipated day-to-day
operating expenses, materials, commitments, working capital and capital
expenditure requirements.
EFFECTIVE CORPORATE TAX RATE
INFLATIONARY ADJUSTMENTS. The Company and Laser Industries are subject to
the Income Tax Law (Inflationary Adjustments), 1985, which provides for an
adjustment to taxable income for the effects of inflation (based on the
Israeli Consumer Price Index) on that portion of shareholders' equity not
invested in inflation resistant assets.
APPROVED ENTERPRISE. The Company and Laser Industries have each received
approval for their investment programs in accordance with the Law for the
Encouragement of Capital Investments, 1959. The Company has chosen to
receive its benefits through the alternative benefits program, and, as
such, is eligible for various benefits. These benefits include 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
Approved Enterprise for a period of six years and reduced tax rates for an
additional period of up to four years. Laser Industries is entitled to a
full tax exemption for a period of two years and reduced tax rates for an
additional period of up to five years (the rate is dependent on the
percentage of non-Israeli shareholder ownership). The benefits commence
with the date on which taxable income is first earned. Income not derived
from the Approved Enterprise is subject to tax at a rate of 36%. The tax
exemption period for the Company commenced in 1995 and the tax exemption
period for Laser Industries has not yet commenced.
Dividends paid out of income derived from the Approved Enterprise 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 25%. The Company does not anticipate paying dividends
from income derived from the Approved Enterprise and any such earnings
distributed upon dissolution will not subject the Company to income taxes.
FORWARD LOOKING STATEMENTS
Certain statements made in this Report or made in press releases or in oral
presentations made by the Company's employees or agents 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.
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. These factors include, but are not limited to,
the following: (1) uncertainty of market acceptance of the Company's
products; (2) uncertainties with respect to obtaining regulatory approvals
for new products or for the sale of existing products in new markets; (3)
uncertainties associated with the enforcement of intellectual property
rights by the Company and others; (4) limited number of customers for the
Company's products; (5) risks of downturns in economic conditions
generally, and in the health care industry specifically; (6) risks
associated with competition and competitive pricing pressures; (7) the
occurrence of unanticipated events and circumstances; (8) the inability of
the Company to integrate successfully its operations with those of CMG (or
any other business which the Company may agree to acquire) and thereby
achieve anticipated cost savings and other synergies and be in a position
to take advantage of potential opportunities for growth; and (9) other
risks described in the Company's filings with the Securities and Exchange
Commission.
Readers are cautioned not to place undue reliance on forward-looking
statements made in this Annual Report, or made in 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 above and
described elsewhere in this document and in other documents the Company
files from time to time with the Securities and Exchange Commission.
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 $92 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 fluctuation 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 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 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 required information for this item is incorporated by reference to the
Company's Proxy Statement for the 2001 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
The required information for this item is incorporated by reference to the
Company's Proxy Statement for the 2001 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The required information for this item is incorporated by reference to the
Company's Proxy Statement for the 2001 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.
The required information for this item is incorporated by reference to the
Company's Proxy Statement for the 2001 Annual Meeting of Shareholders.
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:
1. Financial Statements
Page
Independent Auditors' Reports................................ F-2 to F-3
Consolidated Financial Statements:
Consolidated Balance Sheets............................... F-4
Consolidated Statements of Operations..................... F-5
Consolidated Statements of Changes in Shareholders'
Equity.................................................. F-6
Consolidated Statements of Cash Flows..................... F-7 to F-8
Notes to Consolidated Financial Statements................... F-9 to F-31
2. Financial Statements Schedule
Schedule II - Valuation and Qualifying Accounts.............. F-32
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
2.1 Asset Purchase Agreement, dated as of February 25, 2001,
between ESC Medical Systems Ltd. ("ESC"), Energy Systems
Holdings Inc. and Coherent, Inc. *S
3.1 Memorandum of Association (English translation)*A
3.2 Articles of Association *A
3.3 (4.2) Articles of Association as amended September 5, 1996 *E
4.1 Specimen Certificate for Ordinary Shares *B
4.2 Luxar Corporation 1988 Stock Bonus and Option Plan *G, *M
4.3 Luxar Corporation 1994 Stock Option Plan *G, *M
4.4 Luxar Corporation 1995 Stock Option Plan *G,*M
4.5 (4.1) Indenture, dated September 10, 1997, between ESC and
United States Trust Company of New York *H
4.6 (4.3) Specimen of Notes *H (included in Exhibit 4.1 from same
filing)
4.7 (4.2) Laser Industries Limited 1988 Share Option Plan *I, *M
4.8 (4.3) Laser Industries Limited 1990 Share Option Plan *I, *M
4.9 (4.4) Laser Industries Limited 1991 Share Option Plan *I, *M
4.10 (4.5) Laser Industries Limited 1994 Share Option Plan *I, *M
4.11 (4.6) Laser Industries Limited 1995 Share Option Plan *I, *M
4.12 (4.7) Laser Industries Limited 1996 Share Option Plan *I, *M
4.13 (4.8) Laser Industries Limited 1997 Share Option Plan *I, *M
10.1 Preferred Shares Purchase Agreement, dated April 16, 1992,
among ESC, the Founders and the Investors *B
10.2 Share Purchase and Warrant Agreement, dated May 24, 1993,
among ESC, the Founders and the Investors *B
10.3 Share Purchase and Warrant Agreement, dated February 20,
1994, among ESC, the Founders, the Investors and Nitzanim
*B
10.4 Personal Employment Agreement between ESC and Eli Talmor,
dated August 2, 1995 *B, *M
10.5 1993 Stock Option Plan, as amended *B, *M
10.6 1995 Section 102 Stock Option/Stock Purchase Plan *B, *M
10.7 Form of Stock Option Plan Restricted Stock Option
Agreement *B, *M
10.8 Form of Stock Option Plan Incentive Stock Option Agreement
*B, *M
10.9 Form of Section 102 Stock Option/Stock Purchase Plan
Restricted Stock Option Agreement *B, *M
10.10 Share Purchase Agreement, dated August 2, 1995 between ESC
and Technion Entrepreneurial Incubator Company Ltd.
("TEIC") *B
10.11 Form of Stock Sale Agreement dated August 7, 1995 between
ESC and individual shareholders of Medic Lightech Ltd.
(English translation)*B
10.12 Agreement dated August 2, 1995 between ESC, Eli Talmor and
Medic Lightech Ltd. *B
10.13 Agreement dated August 2, 1995 between ESC, Eli Talmor,
TEIC and Medic Lightech Ltd. *B
10.14 Letter dated February 27, 1994 from the Technion Research
Development Foundation Ltd. ("Technion") to Medic Lightech
Ltd. (English translation) *B
10.15 Assignment of U.S. Patent Application No. 974,619 (Patent
No. 5,344,434) by Technion to Dimotech Ltd. dated March
13, 1994 *B
10.16 Assignment of U.S. Patent Application No. 974,619 (Patent
No. 5,344,434) by Technion to Dimotech Ltd. and Eli Talmor
dated May 9, 1994 *B
10.17 Letter dated August 2, 1995 from Technion (English
translation) *B
10.18 Letter dated November 2, 1995 from Dimotech Ltd. and Eli
Talmor to Dr. Shimon Eckhouse (English translation) *B
10.19 Letter dated December 6, 1995 from Dimotech Ltd. to Dr.
Shimon Eckhouse (English translation) *B
10.20 Letter dated December 6, 1995 from Technion to ESC *B
10.21 Letter dated December 7, 1995 from Eli Talmor to Dr.
Shimon Eckhouse (English translation) *B
10.22 Assignment of PhotoDerm Patent (U.S. Patent No. 5,405,368)
to ESC by Dr. Shimon Eckhouse dated October 16, 1992 *B
10.23 Form of Standard Confidential Disclosure Agreement *B
Confidentiality Agreement dated November 12, 1992 between
ESC and Andrie Katz *B
10.25 Letter of Intent between ESC and L.B.T. Ltd. dated May 22,
1996 *C
10.26 (10.1) Employment Agreement, dated May 1, 1999, between ESC, ESC
Medical Systems Inc. and Louis Scafuri *J, *M
10.27 (10.2) Stock Option Agreement, dated June 18, 1999, between ESC
and Louis Scafuri *J, *M
10.28 (10.3) Letter of Agreement, dated June 23, 1999, from Messrs.
Genger and Gottstein to ESC *J
10.29 (10.1) Employment Agreement, dated as of June 29, 1999, between
ESC and Yacha Sutton *K, *M
10.30 Purchase Agreement concerning the Purchase by ESC of
Certain Assets of Ballard Purchase Corporation, effective
September 10, 1998 *N
10.31 Lease Agreement between Scan Group Yokneam Ltd. and ESC
(English Translation) *N
10.32 Lease Agreement between Marion Laznik Industrial Buildings
Ltd. and ESC *N
10.33 Employment Agreement, dated as of October 1, 1996, between
ESC and Shimon Eckhouse *M, *N
10.34 Employment Agreement, dated as of January 15, 1999, between
ESC Japan Company, Ltd. and Alon Maor *M, *N
10.35 Amendment to Employment Agreement, dated November 12, 1999,
between ESC Medizintechnik Vetriehs GmbH and
Hans Edel *M, *N
10.36 Agreement, dated as of July 15, 1999, between ESC and Sagi
Genger *M, *O
10.37 Agreement, dated as of March 31, 2000, between ESC and
Yacha Sutton *M, *O
10.38 Letter of Change in Prof. Jacob A. Frenkel Stock Option
Plan, dated September 7, 2000 *M, *Q
10.39 Agreement, dated as of January 1, 2000, between ESC and
Alon Maor *M, *P
10.40 New Employment Terms, dated May 17, 2000, between ESC and
Louis Scafuri *M, *P
10.41 Engagement Letter between Baader Wertpapierhandelsbank AG,
ESC and OpusDent Ltd., dated December 13, 2000 *S
16 (16) Letter, dated February 28, 2000, from Luboshitz Kasierer
to the Securities Exchange Commission *L
21 List of Subsidiaries *N
23.1 Consent of Brightman Almagor & Co. *S
23.2 Consent of Luboshitz Kasierer *S
25.1 Form T-1 Statement of Eligibility and Qualification under
the Trust Indenture Act of 1939, as amended, of United
States Trust Company of New York, as Trustee under the
Indenture *H
Note: Parenthetical references following the Exhibit Number of
each document relate to the exhibit number under which such
exhibit was initially filed.
*A Incorporated by reference to Registration Statement on Form F-1,
File #33-80199; filed on December 8, 1995.
*B Incorporated by reference to Amendment No. 2 to Registration
Statement on Form F-1, File #33-80199, filed on January 19, 1996.
*C Incorporated by reference to Registration Statement on Form F-1,
File #333-4886, filed on May 28, 1996
*D Incorporated by reference to Registration Statement on Form F-1,
File #333-4886, filed on June 25, 1996
*E Incorporated by reference to Registration Statement on Form S-8,
File #333-5898, filed on October 31, 1996
*F Incorporated by reference to Registration Statement on Form F-3,
File #333-6610, filed on March 12, 1997
*G Incorporated by reference to Registration Statement on Form S-8,
File #333-6774, filed on April 11, 1997
*H Incorporated by reference to Registration Statement on Form F-3,
File #333-8056, filed on December 9, 1997
*I Incorporated by reference to Registration Statement on Form S-8,
File #333-8352, filed on February 13, 1998
*J Incorporated by reference to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999, File #0-13012, filed on
August 13, 1999
*K Incorporated by reference to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999, File #0-13012, filed on
November 15, 1999
*L Incorporated by reference to Current Report on Form 8-K/A, filed
on February 29, 2000
*M Management contract or compensatory plan or arrangement
*N Incorporated by reference to Annual Statement on Form 10-K for the
fiscal year ended December 31, 1999, File #0-13012, filed on
March 30, 2000
*O Incorporated by reference to Quarterly Report on Form 10-Q for the
quarterly period ended March 30, 2000, File #0-13012, filed on May
15, 2000
*P Incorporated by reference to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000, File #0-13012, filed on
August 14, 2000
*Q Incorporated by reference to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000, File #0-13012, filed on
November 15, 2000
*R Incorporated by reference to Current Report on Form 8-K, filed on
March 20, 2001
*S Filed herewith
ESC MEDICAL SYSTEMS LTD.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
ESC MEDICAL SYSTEMS LTD.
----------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITORS' REPORTS F-2 - F-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of December 31, 2000 and 1999 F-4
Consolidated Statements of Operations
for the years ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 2000, 1999 and 1998 F-7 - F-8
Notes to the Consolidated Financial Statements F-9 - F-30
# # # # # #
Brightman Almagor
1 Azrieli Center
Tel Aviv 67021
P.O.B. 16593, Tel Aviv 61164
Israel
Tel: +972 (3) 6085555 Deloitte
Fax: +972 (3) 6094022 & Touche
info@deloitte.co.il Brightman Almagor
www.deloitte.co.il
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
ESC Medical Systems Ltd.
We have audited the accompanying consolidated balance sheets of ESC Medical
Systems Ltd. (the "Company") and its subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the years then ended. 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, the aforementioned consolidated financial statements
present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries as of December 31, 2000 and
1999, and the consolidated results of their operations, changes in
shareholders' equity and cash flows for the years then ended, 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 30, 2001
- ---------
Deloitte Tel Aviv Jerusalem Haifa Eilat
Touche
Tohmatsu
- ---------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
ESC Medical Systems Ltd.
We have audited the consolidated statements of operations, changes in
shareholders' equity and cash flows of ESC Medical Systems Ltd. (an Israeli
Corporation) for the year ended December 31, 1998. 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 generally accepted auditing
standards in Israel and in the United States, including those prescribed
under the Auditors' Regulations (Auditor's Mode of Performance), 1973.
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 and
the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the results of
its operations, changes in shareholders equity and its cash flows for the
year ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States.
LUBOSHITZ KASIERER
Member Firm of Arthur Andersen
Haifa, Israel
February 10, 1999
(ESC-Opinion)
ESC MEDICAL SYSTEMS LTD.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
DECEMBER 31
-----------------------------
NOTE 2000 1999
---------- ---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 43,396 $ 24,524
123 43,841
Short-term investments 4 54,156 43,360
Trade receivables, net 5 6,949 5,852
Prepaid expenses and other receivables 6 55,224 39,516
---------- ----------
Inventories 159,848 157,093
---------- ----------
LONG-TERM INVESTMENTS
Bank deposits and securities 941 879
Trade receivables 341 -
Other 6,993 5,566
FIXED ASSETS 7 7,517 6,549
OTHER ASSETS 8 4,889 4,820
---------- ----------
Total assets $ 180,529 $ 174,907
========== ==========
CURRENT LIABILITIES
Short-term debt and current maturities of long-term loans $ 4,420 $ 21
Accounts payable and accrued expenses 9 54,316 72,252
---------- ----------
58,736 72,273
---------- ----------
LONG-TERM LIABILITIES
Bank loans 18 42
Restructuring accrual 3 963 2,472
Accrued severance pay 10 1,162 1,248
Convertible subordinated notes 11 91,787 92,929
---------- ----------
93,930 96,691
---------- ----------
Total liabilities 152,666 168,964
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES 12
SHAREHOLDERS' EQUITY 13
Ordinary shares of NIS 0.1 par value:
Authorized - 50,000,000 shares;
Issued and outstanding - 27,629,017 shares and 27,579,020 shares
as of December 31, 2000 and 1999, respectively 578 577
Additional paid-in capital 137,033 137,732
Unearned compensation (120) (117)
Accumulated deficit (96,693) (113,975)
Treasury stock, at cost 1,871,684 shares and 2,644,443 shares
as of December 31, 2000 and 1999, respectively (12,935) (18,274)
---------- ----------
Total shareholders' equity 27,863 5,943
---------- ----------
Total liabilities and shareholders' equity $ 180,529 $ 174,907
========== ==========
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
ESC MEDICAL SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
YEAR ENDED DECEMBER 31
-----------------------
NOTE 2000 1999 1998
---------- ---------- ---------- ----------
REVENUES
Net sales 14 $ 161,625 $ 142,151 $ 225,206
COST OF SALES 3 66,448 96,474 78,585
---------- ---------- ----------
Gross profit 95,177 45,677 146,621
---------- ---------- ----------
OPERATING EXPENSES
Research and development, net 15 11,887 14,725 18,480
Selling, marketing and administrative expenses 62,479 104,231 91,549
Restructuring costs 3 - 20,530 -
Settlement of litigations 12 - 23,780 -
Impairment of intangible and tangible assets 7,8 - 17,616 -
Acquired research and development 16 - - 2,451
Other 17 - 4,987 -
---------- ---------- ----------
Total operating expenses 74,366 185,869 112,480
OTHER OPERATING INCOME 1,450 - -
---------- ---------- ----------
Operating income (loss) 22,261 (140,192) 34,141
OTHER INCOME 599 - -
FINANCING INCOME (EXPENSES), NET 18 (4,470) (3,865) 1,211
---------- ---------- ----------
18,390 (144,057) 35,352
NONRECURRING EXPENSES 3 - - 28,951
---------- ---------- ----------
Income (loss) before income taxes 18,390 (144,057) 6,401
INCOME TAXES 19 280 4,079 2,201
---------- ---------- ----------
Income (loss) after income taxes 18,110 (148,136) 4,200
COMPANY'S SHARE IN LOSSES OF AFFILIATES 1,120 626 200
---------- ---------- ----------
Net income (loss) before extraordinary items 16,990 (148,762) 4,000
EXTRAORDINARY GAIN ON PURCHASE OF 11
COMPANY'S CONVERTIBLE NOTES 292 7,974 -
---------- ---------- ----------
Net income (loss) for the year $ 17,282 $ (140,788) $ 4,000
========== ========== ==========
EARNINGS (LOSS) PER SHARE 20
Basic
Income (loss) before extraordinary item $ 0.67 $ (5.79) $ 0.15
Extraordinary gain 0.01 0.31 -
---------- ---------- ----------
Net earnings (loss) per share $ 0.68 $ (5.48) $ 0.15
========== ========== ==========
Diluted
Income (loss) before extraordinary item $ 0.60 $ (5.79) $ 0.15
Extraordinary gain 0.01 0.31 -
---------- ---------- ----------
Net earnings (loss) per share $ 0.61 $ (5.48) $ 0.15
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 25,354 25,674 26,027
========== ========== ==========
Diluted 28,217 25,674 27,381
========== ========== ==========
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
ESC MEDICAL SYSTEMS LTD.
CONSOLIDATED 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, 1998 (restated) $ 525 $ 127,555 $ (565) $ 22,813 $ (324) $ 150,004
Purchase of treasury stock (7,290) (7,290)
Exercise of options 28 7,836 7,864
Tax benefit of options
exercised by employees 610 610
Amortization of unearned
compensation 320 320
Net income for the year 4,000 4,000
Balance as of ----------- ----------- --------------- -------------- ----------- -----------
December 31, 1998 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
=========== =========== =============== ============== =========== ============
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
ESC MEDICAL SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
--------------------------
2 0 0 0 1 9 9 9 1 9 9 8
----------- ---------- ------------
CASH FLOWS - OPERATING ACTIVITIES
Net income (loss) $ 17,282 $ (140,788) $ 4,000
Adjustments to reconcile net income (loss) to net cash used in
operating activities -
Expenses (income) not affecting operating cash flows:
Deferred income taxes - 4,093 (1,174)
Amortization of unearned compensation 117 128 320
Nonrecurring expenses in connection with purchases - - 8,938
Depreciation and amortization 4,153 8,457 8,922
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 - 17,616 -
Company's share on losses of affiliates 1,120 626 200
Other (413) (330) 343
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables (11,137) 30,232 (25,521)
Decrease (increase) in prepaid expenses and other receivables (1,347) 2,879 852
Decrease (increase) in inventories (15,708) 1,946 (21,302)
Increase (decrease) in accounts payable and accrued expenses (19,064) 8,139 (3,012)
----------- ---------- -----------
Net cash used in operating activities (27,338) (29,908) (27,434)
----------- ---------- -----------
CASH FLOWS - INVESTING ACTIVITIES
Payment for purchase of businesses, net of cash acquired - - (2,450)
Sale of investment - - 368
Purchase of fixed assets (4,652) (4,015) (4,611)
Sale of subsidiary's operations 814 - -
Investments in patents and know-how - - (5,523)
Proceeds from investments, net 41,706 43,439 39,921
Proceeds from disposal of fixed assets 700 - 141
----------- ---------- -----------
Net cash provided by investing activities 38,568 39,424 27,846
----------- ---------- -----------
CASH FLOWS - FINANCING ACTIVITIES
Purchase of convertible notes (873) (14,264) -
Proceeds from exercise of options 4,140 513 7,864
Repayment of long-term loans (24) (19) (15,025)
Increase (decrease) in short-term bank debt, net 4,399 (3,512) 2,373
Purchase of treasury stock - (10,660) (7,290)
----------- ---------- -----------
Net cash provided by (used in) financing activities 7,642 (27,942) (12,078)
----------- ---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,872 (18,426) (11,666)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,524 42,950 54,616
----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 43,396 $ 24,524 $ 42,950
=========== ========== ===========
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
ESC MEDICAL SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
--------------------------------------
2 0 0 0 1 9 9 9 1 9 9 8
--------- --------- ---------
NON CASH ACTIVITIES
Tax benefit of options exercised by employees $ - $ - $ 610
--------- --------- ---------
CASH PAID DURING THE PERIOD IN RESPECT OF:
Income taxes $ 1,387 $ 649 $ 670
--------- --------- ---------
Interest $ 5,920 $ 6,654 $ 7,510
--------- --------- ---------
PURCHASE OF BUSINESSES
Assets and liabilities at date of purchase:
Working capital (excluding cash) $ 556
Fixed assets (19)
Intangibles and other assets (3,987)
---------
(3,450)
Short-term liabilities incurred in connection with purchase 1,000
---------
Cash paid, net $ (2,450)
=========
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
ESC MEDICAL SYSTEMS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
NOTE 1 - GENERAL
- ------ -------
A. ESC Medical Systems Ltd. (the "Company" or "ESC") is an
Israeli company engaged directly and through its
subsidiaries (together "the Group") in research,
development, production and sale of medical devices
based on proprietary intense pulsed light source and
laser technology. The markets for the Group's devices
are principally cosmetic medical professionals
worldwide. The Group's products use proprietary
technology and accordingly the Group holds numerous
patents and licenses. In addition, the industry in which
the Group operates is characterized by rapid
technological change and competition. Loss or
invalidation of a patent or a license or inability to
remain competitive in a rapidly changing economic
environment could have an adverse effect on the Group.
B. In February 1998, ESC acquired Laser Industries Ltd.
("Laser"), an Israeli corporation, through the issuance
of 6,181,013 ordinary shares of ESC, and warrants and
options exercisable for the purchase of 865,089
additional shares. The exchange with Laser was accounted
for as a pooling of interests, and accordingly, all
prior period financial statements were restated to
include the accounts of Laser and reflect the issuance
of the shares, warrants and options by ESC.
The statement of operations for the year ended December
31, 1998, reflects nonrecurring expenses of $28,951
related to costs associated with the acquisition. Such
amount includes principally $7,226 for underwriters,
legal and accounting expenses, $7,149 for non-compete
payments, bonuses and severance, and $6,638 for
inventory write-downs.
C. In 1999, the Group initiated a restructuring program of
its business operations (see Note 3). 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.
D. During 2000, ESC initiated a plan to effect the
rearrangement of ESC's corporate structure (the
"Rearrangement Plan"). As part of the Rearrangement
Plan, ESC transferred to Opusdent Ltd., a wholly owned
Israeli subsidiary ("Opusdent") substantially all of the
assets (including the shares of the corporations that,
as a consequence of the transfer, became subsidiaries of
Opusdent) and operations relating to the business
previously conducted by the Dental Group of ESC (the
"Transferred Operations"), in exchange for ordinary
shares of Opusdent. The transfer of the Transferred
Operations occurred as of December 2000. Opusdent is
planning , subject to market and other conditions , an
initial public offering on the Neuar Market in
Frankfurt, Germany.
E. In June 2000, a subsidiary of the Company - Applied
Optronics Corp. ("AOC") sold its operations to a third
party. The consideration for this transactions 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.
F. On February 26, 2001 ESC Medical Systems Ltd. signed a
definitive purchase agreement with Coherent, Inc. to
acquire certain assets associated with the operations of
its medical products division, Coherent Medical Group,
for cash, notes and stock, plus an earn-out of up to $25
million. The total consideration, excluding the
earn-out, is valued at approximately $217 million as of
March 12, 2001.
Consideration for the transaction is as follows: $100
million in cash, 5.4 million ESC shares, and $12.9
million in eighteen-month 5% subordinated notes. ESC
will be obliged to seek to register shares thirty months
after closing. In addition, following the closing,
Coherent, Inc. will continue to supply parts and
components and provide, on a transitional basis,
on-going technical and operational support.
ESC has also executed commitment letters with two
leading Israeli banks to finance the transaction. ESC
will be provided with up to $242 million in financing to
consist of a $100 million six-year term loan to fund the
cash portion of the transaction, a $50 million revolver
to fund ongoing working capital needs, and draw down
rights of up to $92 million to refinance the outstanding
subordinated convertible notes upon maturity. The draw
down rights are subject to certain operational and
indebtedness milestones. Following closing of the
transaction and subject to shareholder approval, ESC
will change its name to Lumenis.
G. 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.
NOTE 2 - ACCOUNTING POLICIES
- ------ -------------------
The financial statements have been prepared in conformity
with accounting principles generally accepted in the United
States. The significant accounting policies followed in the
preparation of the financial statements, on a consistent
basis, are:
A. 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 are denominated in U.S. dollars, as are
the majority of purchases of materials and components.
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 remeasured into U.S. dollars in
accordance with Statement of the Statement of Financial
Accounting Standards (SFAS) No. 52 of the United States
Financial Accounting Standards Board (FASB).
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the
accounts of the Company and its subsidiaries. Material
intercompany balances and transactions have been
eliminated.
C. 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.
D. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is recorded, based
on management's estimates, partially on the basis of
specific accounts receivable whose collectibility is
uncertain and partially as a percentage of accounts
receivable.
E. INVENTORIES
Inventories are presented at the lower of cost or
market. Cost is determined as follows:
Raw materials - "First-in, first-out"
method
Finished products and - Materials as above, labor
work in process and overhead costs on an
average basis.
F. LONG-TERM INVESTMENTS
Investments in debt securities in respect of which the
Company has the positive intent and ability to hold to
maturity are stated at amortized cost. Investments in
nonmarketable equity securities are stated at cost,
unless the Company has significant influence as
defined in Accounting Principles Board Opinion ("APB")
No. 18 in which case the investment is presented on
the equity method.
G. FIXED ASSETS
Fixed assets are presented at cost (see also I below),
net of accumulated depreciation.
Annual depreciation is calculated based on the
straight-line method over the estimated useful lives
of the related assets or terms of the related leases.
Annual depreciation rates are as follows:
%
-------
Computers and equipment 10-33
Office furniture and equipment 7-20
Leasehold improvements Over the period of the lease
Vehicles 15
H. OTHER ASSETS
Intangible assets (patents, know-how and goodwill) are
amortized by the straight-line method over periods of
principally between five and ten years (see also I
below). Debt issuance costs are amortized over the
term of the related debt by the straight-line method.
I. IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," of the FASB, 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 future cash flows.
J. RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to
operations as incurred. Amounts received or receivable
form the Government of Israel, through the Office of
the Chief Scientist ("OCS") as its participation in
certain research and development are offset against
the Group's research and development costs.
K. REVENUE RECOGNITION
Revenue is recognized upon shipment of products
provided that there are no significant uncertainties
regarding the customer's acceptance and the
collectibility is probable. The costs of insignificant
related obligations (initial installations) are
accrued when the related revenue is recognized.
Deferred revenues from service contracts are
recognized on a straight-line basis over the life of
the related service contracts. An allowance has been
recorded for estimated returns based on the Group's
experience and management's estimates.
L. PRODUCT WARRANTIES
Accrued warranty costs are recorded at the time of
sale based on the Group's experience and management
estimates.
M. 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
13 for pro forma disclosures required in accordance
with SFAS No. 123, "Accounting for Stock-Based
Compensation," of the FASB. The Group accounts for
stock-based compensation to consultants in accordance
with SFAS 123.
N. DEFERRED TAXES
Deferred tax assets and liabilities are determined
based on differences between financial reporting and
tax bases of assets and liabilities measured using
enacted tax rates and laws expected to be in effect
when the differences are expected to reverse. A
valuation allowance is recorded to the extent that
realization is not considered more likely than not.
O. EARNINGS PER SHARE
Basic earnings per share is computed based on the
weighted average number of ordinary shares
outstanding. Diluted earnings per share reflects
potential dilution from exercise of options and
warrants or conversion of convertible securities into
ordinary shares.
P. RECENT ACCOUNTING PRONOUNCEMENT
Derivative Instruments - SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as
amended in June 2000 by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging
Activities", effective for fiscal years beginning
after June 2000, 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 SFAS
133 and SFAS 138 is not expected to have a material
impact on the Group's consolidated financial
statements.
NOTE 3 - RESTRUCTURING COSTS AND OTHER CHARGES
- ------ -------------------------------------
In 1999 the Group recorded a $45,068 charge for comprehensive
restructuring plans. The plans include, among other things,
closing locations and reducing staff. The charge includes
$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, and $1,975
for other costs.
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 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, 2000, the
unutilized accrual amounted to $1,303 relating to lease
terminations.
NOTE 4 - TRADE RECEIVABLES
- ------ -----------------
The trade receivables as of December 31, 2000 and 1999 are
presented net of allowances of $14,154 and $25,432,
respectively.
NOTE 5 - PREPAID EXPENSES AND OTHER RECEIVABLES
- ------ --------------------------------------
DECEMBER 31
2000 1999
------------ ------------
Deferred income taxes $ 653 $ 653
Government agencies 3,575 2,278
Prepaid expenses 2,241 1,966
Other 480 955
$ 6,949 $ 5,852
============ ============
NOTE 6 - INVENTORIES
- ------ -----------
DECEMBER 31
2000 1999
------------ ------------
Raw materials $ 30,468 $ 15,998
Work in process 8,354 8,052
Finished products 16,402 15,466
$ 55,224 $ 39,516
============ ============
NOTE 7 - FIXED ASSETS
- ------ ------------
DECEMBER 31
2000 1999
------------ ------------
Computers and equipment $ 9,699 $ 5,298
Office furniture and equipment 2,235 1,851
Leasehold improvements 2,952 2,154
Vehicles 1,545 2,884
16,431 12,187
Less - accumulated depreciation 8,914 5,638
$ 7,517 $ 6,549
============ ============
Depreciation expense amounted to $4,013, $4,044 and $2,934
for the years 1998, 1999 and 2000, respectively.
In connection with the restructuring plans (see Note 3) and
in connection with the periodic review of long-lived assets
(see Note 2 I), fixed assets with a net book value of $5,733
and $1,567, respectively, were written off in 1999.
NOTE 8 - OTHER ASSETS
- ------ ------------
DECEMBER 31
2000 1999
------------ ------------
Intangible assets (1) $ 1,928 $ 1,928
Debt issuance costs (2) 3,591 3,636
Deferred cost 468 -
Other 1,586 793
7,573 6,357
Less - accumulated amortization 2,684 1,537
$ 4,889 $ 4,820
============ ============
(1) In connection with the periodic review of long-lived
assets (see Note 2 I), intangible assets with a net
book value of $16,049 were written off in 1999.
(2) In respect of convertible subordinated notes - see Note 11.
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ------ -------------------------------------
DECEMBER 31
2000 1999
------------ ------------
Trade payables $ 16,801 $ 8,722
Deferred income 3,430 3,324
Government agencies 309 744
Accruals:
Payroll and related expenses 6,091 6,462
Commissions 2,679 5,591
Income taxes 3,513 4,543
Settlement of litigations (Note 12 D) 3,442 20,213
Restructuring (Note 3) 746 5,526
Interest 1,845 1,874
Warranty 4,127 3,913
Other expenses 11,433 11,340
$ 54,316 $ 72,252
============ ============
NOTE 10 - ACCRUED SEVERANCE PAY
- ------- ---------------------
The obligation of the Company and its Israeli subsidiaries to
make severance payments to its employees according to law and
labor agreements is partially covered by the payment of
insurance premiums in respect thereof. The amounts funded
with insurance companies 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
managers' insurance policies is presented as an accrued
liability.
Severance pay expenses amounted to $1,019, $734 and $315 for
the years 1998, 1999 and 2000, respectively. The calculation
is based on the employee's most recent salary and the period
of employment.
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.
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 notes are convertible into approximately 2,470,461
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, at 102.4% of their principal amount
beginning September 2000, and thereafter at prices declining
annually to 100% on September 1, 2002, plus accrued interest
to the date of redemption. As of December 31, 2000 the
redemption price is 102.4%.
In 1999 and 2000 the Company purchased $22,071 and $1,142,
respectively, in principal amount, of the 6% convertible
subordinated notes at a price of $14,264 and $873
respectively. As a result of the purchase the Company
recorded an extraordinary gain of $7,974 and $292,
respectively.
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
- ------- --------------------------------------
A. LEASE COMMITMENTS
-----------------
The Group leases its principal facilities in Yokneam
and Tel-Aviv in Israel, and also operates sales
offices and manufacturing facilities in the U.S.,
U.K., Italy, Germany, Japan and France. Rental expense
for the years 1998, 1999 and 2000, amounted to $3,423,
$3,729 and $2,359 respectively. Future minimum annual
lease payments for operating leases are as follows:
2001 $3,533
2002 $3,335
2003 $2,226
2004 $1,946
2005 $1,291
In connection with the Group's restructuring and the
consolidation of its facilities, $3,484 of the above
amounts has been accrued and included in restructuring
costs for the year ended December 31, 1999. As of
December 31, 2000 the accrual for the restructuring is
$1,303.
B. ROYALTIES
---------
The Group is a party to various licensing agreements,
which require it to pay royalties on certain product
sales at various rates of up to 5% of the net selling
price of these products.
The Group is also obligated to pay to the State of
Israel 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. As of December 31, 2000, the balance
of the royalty-bearing participations amounted to
approximately $5,886. The Group paid royalties of
$824, $534 and $408 in 1998, 1999 and 2000,
respectively.
C. CONTINGENT LIABILITIES
----------------------
(1) In late 1998 the Company was named in a number
of purported class action securities lawsuits
that have been consolidated in the United
States District Court for the Southern District
of New York. In July 1999, a consolidated
amended complaint was filed naming among
others, the Company and several additional
current and former directors and officers of
the Company and Laser as defendants. The
consolidated amended complaint seeks damages
and attorneys' fees under the United States
securities laws for alleged "tipping" of
non-public information to an investment banker
in September 1998 and for alleged
irregularities in the way in which the Company
reported its financial results and disclosed
certain facts throughout 1997 and 1998. On
December 23, 1999, the Company moved to dismiss
the consolidated amended complaint. On August
31, 2000 the Court entered an order dismissing
the claim against the Laser Industries director
and officer defendants and denying the
remaining dismissal counts. The parties have
entered into a scheduling order and have
commenced discovery. The Company's insurance
carrier has agreed to assume the defense of the
action under a reservation of rights. In
January 2001, the Court ordered all parties,
together with their insurance carriers, to
participate in non-binding mediation and has
stayed the discovery process pending the
outcome of such mediation. No accrual has been
recorded in the financial statements for this
matter.
(2) On May 10, 1999, the Company and a former
director and officer were named as defendants
in an action filed in Tel-Aviv Court by H.K.
Hashalom Ltd. in connection with the sale of
the Company's EpiLight systems. H.K. Hashalom
is seeking monetary damages in the amount of
$2,500 but has reserved the right to increase
such amount as well as a declaratory judgment
that, inter alia, the Company indemnify it for
certain costs and expenses arising out of the
transaction between the parties. On July 15,
1999, the defendants filed a Statement of
Defense. At a pre-trial hearing, the Court
advised the parties to resolve the dispute
through mediation, which has since commenced.
The parties' third mediation hearing is to be
held on April 12, 2001. No accrual has been
recorded in the financial statements for this
matter.
(3) 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
contentions 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 is seeking a permanent injunction
against the Company 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 field 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 March 5, 1999,
defendant Light Age answered the complaint and
counterclaimed against plaintiffs, seeking
unspecified damages under thirteen counts
alleging a variety of causes of action such as
beach contract, tortious 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 field a response to Light
age's demand. An arbitration panel has been
appointed, discovery is ongoing, and hearings
on the merits have been scheduled for Summer
2001. No accrual has been recorded in the
financial statements for this matter.
(4) 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.
(5) 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 Group's consolidated
financial position.
D. SETTLEMENT OF LITIGATIONS
-------------------------
In 2000, the Group reached settlement agreements with
respect to litigation with Reliant Technologies, Inc.
and LPG USA, Inc., for a total amount of $19,000.
NOTE 13 - SHARE CAPITAL
- ------- -------------
A. SHARES SUBJECT TO OPTIONS
-------------------------
Until 1997, the Company issued ordinary shares to an
independent trustee. The use of these shares is
restricted to the granting of options to founding
shareholders, employees and consultants to acquire
such shares. No shares can be returned to the Company
and such shares have voting and dividend rights.
Shares issued to the trustee are deemed outstanding,
using the treasury stock method, for purposes of
earnings per share computations. As of December 31,
2000, 293,610 shares were held by the trustee.
Transactions during the three years ended December 31,
2000, are summarized as follows:
WEIGHTED
AVERAGE
EXERCISE PRICE
NO. OF SHARES U.S.$
-------------- ----------------
Outstanding January 1, 1998 2,420,434
Granted 233,000 23.35
Exercised (663,753) 15.40
Forfeitures (80,839) 25
--------------
Outstanding December 31, 1998 1,908,842 3.57
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
==============
The weighted average fair values of options granted in
1998, 1999 and 2000 were $19.00, $3.11 and $4.76
respectively.
The following table summarizes information about
options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
NUMBER
NUMBER WEIGHTED AVERAGE EXERCISABLE
OUTSTANDING AT REMAINING WEIGHTED AT WEIGHTED
RANGE OF EXERCISE DECEMBER 31 CONTRACTUAL AVERAGE DECEMBER 31 AVERAGE
PRICES 2000 LIFE EXERCISE PRICE 2000 EXERCISE PRICE
- ----------------- -------------- ---------------- -------------- ------------ --------------
$0.60-2.90 15,729 2.38 $ 1.72 15,729 $ 1.72
5.00-6.00 3,789,789 7.84 5.23 2,565,989 5.25
7.94-8.91 1,845,337 6.52 8.47 436,133 8.47
9.50-10.38 290,000 7.52 9.69 100,000 9.75
12.15-14.19 420,400 8.91 12.15 52,233 12.79
16.63-17 76,255 2.89 16.92 49,256 17.00
18.87-27 96,940 5.81 26.11 86,940 26.94
------------- -----------
6,534,450 3,306,280
============= ===========
The Company has received approval from the Israeli
Income Tax Authority for a share option plan under
Section 102 of the Income Tax Ordinance. This plan
provides certain tax benefits to employee participants
and restricts the disposal of the shares under option
for a period of not less than two years.
The option exercise price is determined by the Board
of Directors 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, 1998, 1999 and 2000
amounted to $320, $128 and $117 respectively.
Had compensation cost been determined under the
alternative fair value accounting method provided for
under FASB Statement No. 123, "Accounting for
Stock-Based Compensation", the Company's net income
(loss) and earnings (loss) per share for the years
1998, 1999 and 2000 would have been reduced to the
following pro forma amounts:
2000 1999 1998
------------- ----------- -----------
Net income As reported $ 17,282 $ (140,788) $ 4,000
Pro forma $ 8,500 $ (147,250) $ (446)
Basic
earnings (loss)
per share As reported $ 0.68 $ (5.48) $ 0.15
Pro forma $ 0.34 $ (5.74) $ (0.02)
Diluted
earnings (loss)
per share As reported $ 0.61 $ (5.48) $ 0.15
Pro forma $ 0.30 $ (5.74) $ (0.02)
Under Statement 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 1998,
1999 and 2000: (1) expected life of 3 years; (2)
dividend yield of 0%; (3) expected volatility of 150%
in 1998, 87% in 1999 and 71% in 2000; and (4)
risk-free interest rate of 5% in 1998, 6% in 1999, and
6.5% in 2000.
B. WARRANTS AND OPTIONS IN CONNECTION WITH MERGERS
AND ACQUISITIONS
-----------------------------------------------
Pursuant to the agreement for the acquisition of AOC
entered into in December 1997, warrants to purchase
84,435 ordinary shares at a price of $47.25 per share
were issued. These warrants are exercisable until
December 2002.
C. TREASURY STOCK
--------------
During 1998 and 1999, the Board of Directors of the
Company authorized the purchase of up to 3,000,000
ordinary shares, to facilitate the exercise of
employee share options under the various plans. As of
December 31, 2000, 1,871,684 shares had been
repurchased and held as treasury shares in trust.
D. OPTIONS TO RELATED PARTY
------------------------
In April 2000, the audit committee approved the
employment with the Company of a related party as a
special advisor to the Board of Directors.
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.
NOTE 14 - SEGMENT INFORMATION
- ------- -------------------
A. COMPOSITION OF REVENUES BY GEOGRAPHIC AREAS
-------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
----------- ----------- ---------
North America $ 64,254 $ 51,223 $ 117,377
Europe 39,910 40,774 69,968
Asia 37,430 33,662 9,375
Central and South America 5,176 4,079 13,655
Other 14,855 12,413 14,831
----------- ----------- ---------
$ 161,625 $ 142,151 $ 225,206
=========== =========== ==========
B. REPORTABLE SEGMENTS
-------------------
Starting in 2000, the Company changed its structure of
internal organization in a manner that caused the
composition of its reportable segments to change.
Prior period data except for revenues has not been
reflected due to impracticability. The following table
sets forth segment information for year ended December
31, 2000:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
----------- ----------- ---------
Revenues
Surgical and aesthetics $ 139,305 $ 123,505 $ 206,643
Dental 8,490 6,381 6,976
Industrial 13,830 12,265 11,587
----------- ----------- ---------
Consolidated $ 161,625 $ 142,151 $ 225,206
=========== =========== =========
Operating income (loss)
Surgical and aesthetics $ 25,071
Dental (2,553)
Industrial (257)
-----------
Consolidated 22,261
Other income 599
Financing expenses, net (4,470)
-----------
Income before income taxes $ 18,390
===========
DECEMBER 31
2000
-------------
Assets
Surgical and aesthetics $ 165,501
Dental 6,721
Industrial 8,307
Consolidated $ 180,529
=============
NOTE 15 - RESEARCH AND DEVELOPMENT, NET
- ------- -----------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
----------- ----------- ---------
Total costs $ 11,947 $ 15,000 $ 19,083
Less - participation primarily by
the Government of Israel 60 275 603
----------- ----------- ---------
$ 11,887 $ 14,725 $ 18,480
=========== =========== =========
NOTE 16 - ACQUIRED RESEARCH AND DEVELOPMENT
- ------- ---------------------------------
In 1998 the Company incurred nonrecurring expenses in
connection with mergers and acquisitions of businesses in the
aggregate amount of $2,451.
NOTE 17 - OTHER EXPENSES
- ------- --------------
A. Other expenses were as follows:
YEAR ENDED
DECEMBER 31,
------------
1999
------------
Proxy expenses (see B below) $ 3,575
Other 1,412
$ 4,987
B. In connection with the director election contest, the
Company incurred expenses of $2,065. In addition, in
accordance with the resolution of the Board of
Directors of the Company in a meeting held on June 23,
1999, all costs and expenses of two major shareholders
and their affiliates in connection with the director
election contest were reimbursed by the Company. All
of those expenses were recorded in the year ended
December 31, 1999.
NOTE 18 - FINANCING INCOME (EXPENSES), NET
- ------- --------------------------------
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
-------- -------- --------
Interest income $ 4,013 $ 5,483 $ 8,921
Less - Financing expenses
Interest and amortization in
6,261 7,626 7,832
respect of convertible notes
Other interest 520 136 871
Exchange rates, net 1,702 1,586 (993)
-------- -------- --------
8,483 9,348 7,710
-------- -------- --------
$ (4,470) $ (3,865) $ 1,211
======== ======== ========
NOTE 19 - INCOME TAXES
- ------- ------------
Inflationary adjustments - The Company, Laser and Opusdent
are subject to the Income Tax Law (Inflationary Adjustments),
1985, which provides for an adjustment to taxable income for
the effects of inflation (based on the Israeli Consumer Price
Index) on that portion of shareholders' equity not invested
in inflation resistant assets.
"Approved enterprise" - The Company has received approval for
its investment programs in accordance with the Law for the
Encouragement of Capital Investments, 1959. The Company has
chosen to receive its benefits through the alternative
benefits program, and, as such, 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 approved enterprise for a period of six
years and reduced tax rates for an additional period of up to
four years. Laser is entitled to a full tax exemption for a
period of two years and reduced tax rates for an additional
period of up to five years (the rate and the length of the
benefit period are dependent on the percentage of non-Israeli
shareholder ownership). The benefits commence with the date
on which taxable income is first earned. Income not derived
from the approved enterprise is subject to tax at a rate of
36%. The tax exemption period for the Company commenced in
1995 and the tax exemption period for Laser has not yet
commenced.
Dividends paid out of income derived from the approved
enterprise is subject to 15% withholding. 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 and Laser do not anticipate paying
dividends from income derived from the approved enterprise
and any such earnings distributed upon dissolution will not
subject the Company and Laser to income taxes.
As part of the Transfer of Operations agreement, signed with
Opusdent (see Note 1), the Company and Opusdent had filed an
application to the Investment Center for the transfer to
Opusdent part of the letters of approval received by the
Company which connected to the Transferred Operations.
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
2000 1999 1998
-------- --------- --------
Current taxes $ 280 $ - $ 3,375
Deferred taxes - 4,079 (1,174)
-------- --------- --------
$ 280 $ 4,079 $ 2,201
======== ========= =========
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. Income tax expense in the financial statements relates
primarily to the income taxes of subsidiaries.
The current tax provisions are recorded net of the benefit of
utilizing net operating loss carryforwards and tax credit
carryforwards of subsidiaries. The deferred tax assets of
$653 (see Note 5) are comprised of net operating loss
carryforward.
NOTE 20 - EARNINGS PER SHARE
- ------- ------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------- ----------------------------- -----------------------------
PER SHARE PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------------- --------- ----------------- --------- ----------------- ---------
Net income (loss) 17,282 (140,788) 4,000
======== ======== ======
Basic earnings per share
Income (loss) before
extraordinary items 16,990 25,354 0.67 (148,762) 25,674 (5.79) 4,000 26,027 0.15
Extraordinary gain 292 25,354 0.01 7,974 25,674 0.31 - 26,027 -
-------- --------- -------- -------- -------- ---------
Income available to
ordinary shareholders 17,282 25,354 0.68 (140,788) 25,674 (5.48) 4,000 26,027 0.15
========= ======== =========
Effect of dilutive securities
Options 2,863 - 741
Warrants - - 613
------ ------ -------
Diluted earnings per
Share
Income (loss) before
extraordinary items 16,990 28,217 0.60 (148,762) 25,674 (5.79) 4,000 27,381 0.15
Extraordinary gain 292 28,217 0.01 7,974 25,674 0.31 - 27,381 -
-------- --------- -------- -------- -------- ---------
Income (loss) available to
ordinary shareholders 17,282 28,217 0.61 (140,788) 25,674 (5.48) 4,000 27,381 0.15
========= ======== =========
The diluted EPS calculation did not take into account
subordinated notes convertible into weighted average of
1,971,794, 2,289,590, and 2,470,469 ordinary shares, in 2000,
1999 and 1998 respectively, because their effect is
antidilutive.
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, short-term and long-term
investments and 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.
B. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying amounts of cash, investments,
receivables and accounts payable approximate fair
value. The market value of its convertible notes as
of December 31, 2000 is approximately 85% of the book
value.
C. OFF-BALANCE SHEET CONTRACTS
---------------------------
The Company also enters into foreign currency
transactions to protect the dollar value of its
non-dollar denominated trade receivables, mainly in
Japanese yen, British Pound Sterling and Euro. The
outstanding contracts that the Company has as of
December 31, 2000 are an obligation to sell British
Pound Sterling 3,823 for a total of $5,600, an
obligation to sell Euro 9,100 for a total of $6,370
and an Option to exchange $4,000 for Japanese yen
432,000.
The above transactions are not qualified as hedge
transactions under SFAS No. 52 and therefore the
change in the value of those transactions in each
reporting period is reflected in the statements of
operations.
ESC MEDICAL SYSTEMS LTD.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGE CHARGE BALANCE AT END
BEGINNING TO COSTS AND TO OTHER OF
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
---------- ------------ -------- ---------- --------------
Year ended December 31, 2000:
Allowance for Doubtful accounts $25,432 ----- 11,278 $14,154
Reserve for Warranty $3,913 $391 ----- ----- $4,304
Year ended December 31, 1999:
Allowance for Doubtful accounts $10,480 $14,952 ----- ----- $25,432
Reserve for Warranty $3,029 $884 ----- ----- $3,913
Year ended December 31, 1998:
Allowance for Doubtful accounts $2,235 $8,245 ----- ----- $10,480
Reserve for Warranty $1,172 $1,857 ----- ----- $3,029
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.
ESC MEDICAL SYSTEMS LTD.
By: /s/ Yacha Sutton
-----------------------------------
Yacha Sutton,
Chief Executive Officer
Dated: March 30, 2001
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 30, 2001
- ----------------------------- Board of Directors
Prof. Jacob A. Frenkel
/s/ Aharon Dovrat Director March 30, 2001
- -----------------------------
Mr. Aharon Dovrat
/s/ Philip Friedman Director March 30, 2001
- -----------------------------
Mr. Philip Friedman
/s/ Thomas G. Hardy Director March 30, 2001
- --------------------------
Mr. Thomas G. Hardy
/s/ Darrell S. Rigel Director March 30, 2001
- ------------------------------
Prof. Darrell S. Rigel
/s/ S.A. Spencer Director March 30, 2001
- -------------------------------
Mr. S.A. Spencer
/s/ Mark H. Tabak Director March 30, 2001
- ----------------------------
Mr. Mark H. Tabak
/s/ Zehev Tadmor Director March 30, 2001
- ----------------------------
Prof. Zehev Tadmor
/s/ Yacha Sutton Chief Executive Officer March 30, 2001
- ----------------- (Principal Executive Officer)
Mr. Yacha Sutton
/s/ Sagi Genger Chief Financial Officer March 30, 2001
- -------------------------------- (Principal Executive Officer)
Mr. Sagi Genger
/s/ Sharon Levita Corporate Controller March 30, 2001
- ----------------------------
Ms. Sharon Levita
Exhibit 10.41 Engagement Letter between Baader Wertpapierhandelsbank
AG, ESC and OpusDent Ltd. dated December 13, 2000
ENGAGEMENT LETTER
BETWEEN
Baader Wertpapierhandelsbank AG
Ohmstrasse 4
85716 Unterschleissheim
(THE "UNDERWRITING BANK")
AND
OpusDent Ltd.
Atidim Science Based Industrial Park
Tel Aviv 61131
Israel
(THE "COMPANY")
AND
ESC Medical Systems Ltd.
Yokneam Industrial Park
P.O.B. 240
Yokneam 20692
Israel
(THE "EXISTING SHAREHOLDER")
CONCERNING THE INITIAL PUBLIC OFFERING OF OPUSDENT LTD., TOGETHER WITH A
CAPITAL INCREASE AND THE PLACEMENT OF SHARES.
Preamble
OpusDent Ltd., domiciled in Tel Aviv, is registered in the commercial
register of Jerusalem with a share capital of 39,100 New Israeli Shekels
(NIS) under the number 512906173. The share capital is currently composed
of 3,910,000 ordinary shares of 0.01 NIS.
Prior to the IPO ESC Medical Systems Ltd. will be sole shareholder of the
company.
In the context of the planned IPO on the Neuer Markt of the Frankfurt Stock
Exchange, the Company will implement an initial capital increase in the
run-up to the IPO in an amount still to be stipulated, in order to satisfy
the capitalization requirements of the Neuer Markt of the Frankfurt Stock
Exchange (Capital Increase I). The rules and regulations of the Neuer Markt
stipulate a net equity (capital stock less accumulated losses) of at least
EUR 1.5 million (approximately US$ 1.24 million).
A further capital increase against cash contributions in conjunction with
the IPO will be subscribed and underwritten by a syndicate led by Baader
Wertpapierhandelsbank AG, Munich (Capital Increase II) as far as this is
possible under Israeli law. Baader Wertpapierhandelsbank AG undertakes,
together with the other members of the syndicate, to make a public offering
of the shares from the cash capital increase, plus, if market conditions
prevailing at the time of the issue permit, a quantity of shares from the
holding of the Existing Shareholder still to be determined, with the aim of
expanding the group of shareholders. The objective will be to reach a free
float of at least 25% in line with market requirements. Application will be
made to admit the entire capital stock of OpusDent Ltd. to stock market
trading.
The possibility of a greenshoe will also be considered.
The Company and the Existing Shareholder acknowledge the rules and
regulations of the Neuer Markt of the Frankfurt Stock Exchange attached to
this Engagement Letter.
THE CONTENT OF THIS ENGAGEMENT LETTER GOVERNS RELATIONS BETWEEN THE
CONTRACTING PARTIES RELATING TO THE PLANNED SHARE PLACEMENT AND THE IPO.
IN ACCORDANCE WITH OUR LETTER DATED OCTOBER 20, 2000 ATTACHED HEREBY THE
PRECONDITIONS CONTAINED IN THE OPUSDENT LTD. IPO STRATEGY ARE A COMPONENT
OF THIS ENGAGEMENT LETTER, IN PARTICULAR THOSE RELATING TO THE TRANSFER OF
PATENTS, PROPRIETARY RIGHTS AND LICENSES TO THE COMPANY AND THOSE RELATING
TO THE EXPANSION OF INTERNAL PRODUCTION CAPACITY.
MARCH 2001 IS SCHEDULED FOR THE INITIAL LISTING FOR THE SHARES OF OPUSDENT
LTD. HOWEVER, THE DEFINITIVE TIMING WILL DEPEND LARGELY ON THE DATE ON
WHICH THE AUDITED 2000 ANNUAL FINANCIAL STATEMENTS OF OPUSDENT LTD. ARE
AVAILABLE. A STABLE POLITICAL ENVIRONMENT IN THE STATE OF ISRAEL IS EQUALLY
A PRECONDITION FOR ADHERENCE TO THE SCHEDULED DATE FOR THE INITIAL LISTING.
Based on the documents and business plan Baader Wertpapierhandelsbank has
reached until October 31 Baader Wertpapierhandelsbank has calculated a
preliminary pre-money value of approximately US$ 50 Mio. This valuation is
subject to the results of the due diligence and the pre-marketing and the
market conditions at the time of the placement. Subject to positive
conditions Baader Wertpapierhandelsbank believes that a size of EUR 20 Mio.
for the IPO might be possible.
THIS ENGAGEMENT LETTER ALSO DEFINES THE KEY POINTS OF A NUMBER OF
PROVISIONS, REGARDED BY THE CONTRACTING PARTIES AS MATERIAL, OF THE
UNDERWRITING AND PLACEMENT AGREEMENT TO BE CONCLUDED SUBSEQUENTLY.
1 Engagement
THE COMPANY ENGAGES BAADER WERTPAPIERHANDELSBANK AG AS ITS EXCLUSIVE LEAD
MANAGER, FOR THE DURATION OF THIS LETTER AS SET FORTH IN SECTION 9 HEREOF,
FOR THE IPO AND NECESSARY CAPITALIZATION MEASURES DESCRIBED IN THE
PREAMBLE.
2 Duties of Baader Wertpapierhandelsbank AG
a) Baader Wertpapierhandelsbank AG will perform the
following services where required:
1. ADVICE TO THE COMPANY ON THE CAPITAL INCREASE, THE SHARE PLACEMENT
AND THE IPO;
2. ADVICE CONCERNING THE SELECTION AND ENGAGEMENT OF OTHER ADVISERS
AND SERVICE PROVIDERS, FOR EXAMPLE ACCOUNTANTS AND AUDITORS, LEGAL
ADVISERS, ETC.;
3. ADVICE AND SUPPORT IN THE SELECTION OF A PUBLIC RELATIONS/INVESTOR
RELATIONS CONSULTANU;
4. SUPPORT FOR THE COMPANY'S NEUER MARKT TARGET GROUP REVIEW
PRESENTATION TO DEUTSCHE BORSE AG;
5. ADVICE ON AND SUPPORT FOR THE PREPARATION OF A DETAILED OFFERING
PROSPECTUS/COMPANY REPORT IN ENGLISH AND - IF NECESSARY - ITS
SUBSEQUENT TRANSLATION INTO GERMAN SERVING TO ADMIT THE ENTIRE
CAPITAL STOCK OF THE COMPANY TO TRADING ON THE FRANKFURT STOCK
EXCHANGE. THE OFFERING PROSPECTUS/COMPANY REPORT WILL BE PREPARED
IN CONCERT WITH THE COMPANY AND ON THE BASIS OF THE INFORMATION
SUPPLIED BY THE COMPANY;
6. SUPPORT FOR THE COMPANY IN THE STOCK EXCHANGE ADMISSION PROCEDURE;
7. SUPPORT FOR THE COMPANY FOR THE PRINTING AND DISTRIBUTION OF THE
OFFERING PROSPECTUS/COMPANY REPORT;
8. PREPARATION OF AN IPO RESEARCH REPORT;
9. SUPPORT FOR THE COMPANY FOR THE PREPARATION OF PRESS RELEASES,
PRESENTATION DOCUMENTS AND OTHER MARKETING COLLATERAL NECESSARY
FOR THE PLACEMENT OF THE SHARES;
10. ORGANIZATION OF CORPORATE PRESENTATIONS AND ONE-ON-ONE TALKS WITH
INVESTORS;
11. PLACEMENT OF THE PUBLICLY OFFERED ORDINARY SHARES;
12. ADVICE ON AND SELECTION OF A PAYING AND DEPOSITARY AGENT AND OF A
SECOND DESIGNATED SPONSOR;
13. ADVICE ON THE SELECTION OF OTHER SYNDICATE BANKS;
14. ADVICE ON CAPITAL MARKET ASPECTS ESOP AND THEIR REGISTRATION;
15. COORDINATION AND MANAGEMENT OF THE UNDERWRITING CONSORTIUM.
b) THE TERMS UNDER WHICH THE SHARES WILL BE UNDERWRITTEN AND
PLACED BY BAADER WERTPAPIERHANDELSBANK AG, INCLUDING THE FEES
PAYABLE UNDER THE TERMS OF 4. BELOW AND THE CUSTOMARY
WARRANTIES, WILL BE GOVERNED BY AN UNDERWRITING AND PLACEMENT
AGREEMENT BETWEEN THE COMPANY, THE EXISTING SHAREHOLDER, BAADER
WERTPAPIERHANDELSBANK AG AND THE OTHER SYNDICATE MEMBERS.
THE AGREEMENTS ENTERED INTO IN THIS ENGAGEMENT LETTER
1. DO NOT REPRESENT ANY OBLIGATION ON THE PART OF BAADER
WERTPAPIERHANDELSBANK AG TO UNDERWRITE OR SUBSCRIBE FOR SHARES
PRIOR TO SIGNATURE OF THE UNDERWRITING AGREEMENT;
2. DO NOT ESTABLISH ANY RESPONSIBILITY OR LIABILITY ON THE PART OF
BAADER WERTPAPIERHANDELSBANK AG FOR ANY ACTION OR OMISSION BY AN
ADVISER OF THE COMPANY AND
3. DO NOT RESTRICT THE PROVISIONS OF THE UNDERWRITING AND PLACEMENT
AGREEMENT.
c) Baader Wertpapierhandelsbank AG will perform its duties
together with other advisers where this is appropriate.
Although Baader Wertpapierhandelsbank AG is not responsible for
advice on aspects of commercial law, tax law or other aspects
of law, it will support the Company in the engagement and
coordination of other advisers and in the discussion of the
impact of the recommendations of the advisers.
3 Due Diligence
a) IN ACCORDANCE WITH CUSTOMARY STANDARDS IN THE EQUITY ISSUE BUSINESS AND
IN ORDER TO REDUCE THE PROSPECTUS LIABILITY RISK, LEGAL, TECHNICAL,
FINANCIAL AND BUSINESS DUE DILIGENCE WILL BE CONDUCTED PRIOR TO THE
ISSUE. AMONG OTHER THINGS, THIS WILL COVER THE PRO FORMA ANNUAL
FINANCIAL STATEMENTS OF THE COMPANY FOR 1998 AND 1999, AND THE AUDITED
ANNUAL FINANCIAL STATEMENTS FOR 2000, THE REASONABLENESS OF THE
COMPANY'S FINANCIAL PROJECTIONS FOR THE PERIOD 2001 - 2004, THE
INSPECTION AND REVIEW OF SIGNIFICANT CONTRACTS, THE OWNERSHIP POSITION
RELATING TO PROPRIETARY RIGHTS (PATENTS AND INDUSTRIAL PROPERTY RIGHTS)
AND LICENSES. THE DUE DILIGENCE WILL ALSO EXAMINE ANY LEGAL OR TAX
PROCEEDINGS IF APPLICABLE. THIS DUE DILIGENCE WILL BE CONDUCTED BY AN
INDEPENDENT AUDIT FIRM, A LAWYER AND A TECHNICAL EXPERT ENGAGED WITH THE
CONSENT OF THE COMPANY, NONE OF WHOM MAY BE THE COMPANY'S AUDITOR, LEGAL
ADVISER OR TECHNICAL ADVISER.
b) IN THE EVENT THAT IN THE COURSE OF THE DUE DILIGENCE, MATERIAL CHANGES
BECOME NECESSARY IN THE PLANS AND PROJECTIONS SUBMITTED BY THE COMPANY
OR THAT FACTS AND CIRCUMSTANCES EMERGE THAT, MEASURED AGAINST MARKET
STANDARDS, MAKE THE PLACEMENT OF THE SHARES APPEAR TO BE IMPRACTICABLE
OR UNREASONABLE, BAADER WERTPAPIERHANDELSBANK AG IS ENTITLED TO WITHDRAW
FROM THIS ENGAGEMENT. THE COMPANY REMAINS OBLIGATED TO REIMBURSE THE
COSTS OF THE DUE DILIGENCE IN ACCORDANCE WITH 5. OF THIS ENGAGEMENT
LETTER.
4 Fee
IN CONJUNCTION WITH THE UNDERWRITING AND PLACEMENT OF THE ORDINARY SHARES
FROM THE CASH CAPITAL INCREASE AND THE HOLDINGS OF THE EXISTING
SHAREHOLDERS, AND THE IPO OF THE CAPITAL STOCK OF THE COMPANY, THE COMPANY
AND THE SELLING SHAREHOLDER WILL PAY THE FOLLOWING FEE TO BAADER
WERTPAPIERHANDELSBANK AG AND THE UNDERWRITING SYNDICATE:
UNDERWRITING AND PLACEMENT FEE:7.00% OF THE SUBSCRIPTION OR SELLING PRICE
IPO FEE: 1.00% OF THE PAR VALUE OF THE ENTIRE CAPITAL STOCK ADMITTED
THE DETAILS OF THE FEE STRUCTURE WILL BE GOVERNED SEPARATELY IN THE
UNDERWRITING AND PLACEMENT AGREEMENT. THE ABOVE FEES DO NOT CONTAIN ANY
VALUE ADDED TAX AND ARE PAYABLE IN FULL WITHOUT DEDUCTION OR RETENTION OF
TAXES OR LEVIES OF ANY KIND UNLESS REQUIRED BY APPLICABLE LAW. IF SO, THERE
WILL BE A TAX GROSS UP FOR VAT, TRANSFER DEDUCTION, ETC.
5 Costs, Compensation
i) The Company will pay all costs associated with the IPO unless provided
for otherwise below.
1. The costs of own legal and tax advice prior to the IPO (reorganization
and transformation into a public company, structuring of
capitalization measures, preparation and audit of financial
statements, etc.).
2. The cost of Investor Relations measures (media campaign through
advertising, press work, press conference, roadshows, DVFA analyst
presentation, preparation and printing of the Company's presentation
documents).
3. The cost of preparing, printing, translating and distributing the
offering prospectus/company report, statutory
disclosures/announcements and of the stock exchange admission
procedure.
4. External costs and expenses incurred by Baader Wertpapierhandelsbank
AG and evidenced by vouchers, e.g. the cost of legal, fiscal,
technical and financial due diligence, legal contract documentation
and out-of-pocket expenses (travel expenses, etc.). The cost for the
due diligences and the preparation of the offering prospectus might
amount between 350.000 - 500.000 EUR.
LAWYERS, ACCOUNTANTS AND AUDITORS, AND OTHER EXTERNAL ADVISERS, WHERE
REQUIRED, WILL BE ENGAGED BY BAADER WERTPAPIERHANDELSBANK AG ONLY AFTER
CONSULTATION WITH THE COMPANY.
ii) Baader Wertpapierhandelsbank will bear the costs of its own equity
research and its own marketing to institutional investors.
iii) The underwriting banks will pay their own costs incurred.
iv) In the event that the capital increase and the placement of the shares
through the IPO are not implemented, or are not implemented under the
lead management of Baader Wertpapierhandelsbank AG, within the term
set out in 9. of this Engagement Letter for reasons for which Baader
Wertpapierhandelsbank AG is not responsible, Baader
Wertpapierhandelsbank AG will receive a lump sum compensation for its
own costs and expenses amounting to EUR 200,000.00 in addition to the
reimbursement of costs. Payment of this amount will settle all claims
by Baader Wertpapierhandelsbank AG.
v) In the event that the IPO is implemented during the engagement period
by an IPO syndicate of which Baader Wertpapierhandelsbank AG is not
lead manager, or if the Existing Shareholder sells a significant
proportion of his shares by way of a non-public transaction, during
said period, the Company and the selling shareholder will be jointly
and severally liable to pay 2.00% of the proceeds from such a sale, in
addition to the reimbursement of costs as set out in 5.
6 Information, Announcements, Publications
a) THE COMPANY WILL MAKE AVAILABLE TO BAADER WERTPAPIERHANDELSBANK AG AND,
IF APPLICABLE, THE ADVISERS WHO ARE PREPARING THE OFFERING
PROSPECTUS/COMPANY REPORT, ALL INFORMATION REQUIRED TO PREPARE THE
OFFERING PROSPECTUS/COMPANY REPORT. THE OFFERING PROSPECTUS/COMPANY
REPORT MUST GIVE A COMPREHENSIVE AND TRUE PICTURE OF THE COMPANY AND ITS
FINANCIAL AND ECONOMIC POSITION. THE COMPANY AND THE EXISTING
SHAREHOLDER WARRANT THAT ALL INFORMATION PROVIDED TO BAADER
WERTPAPIERHANDELSBANK AG IS CORRECT AND COMPLETE AND IS NOT MISLEADING,
WHETHER DUE TO THE OMISSION OF INFORMATION OR IN ANY OTHER WAY. IN
ADDITION, THE COMPANY UNDERTAKES TO ENSURE THAT ITS EXECUTIVE BOARD
(UNDER ISRAELI LAW - BOARD OF DIRECTORS) MEMBERS, SENIOR EXECUTIVES,
AUDITORS AND ADVISERS ARE AVAILABLE TO PROVIDE INFORMATION TO BAADER
WERTPAPIERHANDELSBANK AG TO THE EXTENT NECESSARY TO PREPARE THE OFFERING
PROSPECTUS/COMPANY REPORT.
b) WITH IMMEDIATE EFFECT, ALL PUBLICATIONS AND PRESS RELEASES RELATING TO
THE PLACEMENT AND THE COMPANY'S IPO MUST BE AGREED WITH BAADER
WERTPAPIERHANDELSBANK AG.
c) ALL PLACEMENT DOCUMENTS, ANALYST REPORTS AND STATEMENTS MAY ONLY BE
PREPARED, ISSUED AND PUBLISHED IN CLOSE CONSULTATION WITH BAADER
WERTPAPIERHANDELSBANK AG.
d) THE SHARE PLACEMENT WILL BE SUPPORTED BY SUITABLE IR/PR MEASURES
ASSISTED BY A SUITABLE IR/PR AGENCY. THE COMPANY WILL AGREE ALL IR/PR
MEASURES PLANNED IN THE RUN-UP TO AND IN CONJUNCTION WITH THE SHARE
PLACEMENT WITH BAADER WERTPAPIERHANDELSBANK AG IN ORDER TO ENSURE A
CONSISTENT MARKETING CONCEPT FOR THE COMPANY'S SHARES. IN ADDITION, THE
COMPANY STATES ITS WILLINGNESS TO MAKE ITSELF AVAILABLE FOR MARKETING
MEASURES TO SUPPORT THE SHARE PLACEMENT (ROADSHOWS, PRESS CONFERENCES,
ANALYST MEETINGS, ETC.), TO UNDERTAKE ACTIVE INVESTOR RELATIONS AFTER
THE PLACEMENT OF THE SHARES AND TO NOMINATE AT LEAST ONE CENTRAL CONTACT
PERSON IN THE COMPANY'S MANAGEMENT FOR THESE TASKS.
e) THE COMPANY'S EXECUTIVE BOARD (UNDER ISRAELI LAW - BOARD OF DIRECTORS)
WILL ENSURE THAT ALL OUTSTANDING QUESTIONS, DOUBTS, UNCERTAINTIES OR
UNCLEAR MATTERS WILL BE DISCUSSED IN GOOD TIME WITH BAADER
WERTPAPIERHANDELSBANK AG AND WITH THE COMPANY'S ADVISERS BEFORE THE
RELEVANT DECISIONS ARE TAKEN OR THE RELEVANT EVENTS OCCUR.
f) BAADER WERTPAPIERHANDELSBANK AG WILL TREAT AS CONFIDENTIAL AND WILL NOT
MAKE AVAILABLE TO THIRD PARTIES OR ANY UNRELATED EMPLOYEES OF BAADER
WERTPAPIERHANDELSBANK AG CONFIDENTIAL INFORMATION ABOUT THE COMPANY AND
ITS EXISTING SHAREHOLDER OBTAINED BY BAADER WERTPAPIERHANDELSBANK AG AS
PART OF ITS ACTIVITIES UNDER THE TERMS OF THIS ENGAGEMENT LETTER, WITH
THE EXCEPTION OF ANNOUNCEMENTS REQUIRED AS PART OF ITS STATUTORY
OBLIGATIONS OR DUE TO LEGITIMATE OFFICIAL INSTRUCTIONS, OR FOR THE
PURPOSE OF REPRODUCTION IN THE OFFERING PROSPECTUS/COMPANY REPORT, OR
OTHER PUBLICATIONS RELATING TO THE PLACEMENT, AND FOR THE PURPOSE OF
SYNDICATION TO OTHER SYNDICATE BANKS; IN THE LATTER CASES, HOWEVER, THIS
IS ALLOWED ONLY TO THE EXTENT THAT THE SYNDICATE BANK CONCERNED ITSELF
MAKES AN UNDERTAKING IN WRITING TO MAINTAIN SECRECY UNDER THE TERMS OF
THIS PROVISION AND ONLY AFTER CLOSE CONSULTATION WITH THE COMPANY.
7 Lock-up
FOR A PERIOD OF 12 MONTHS COMMENCING ON THE DATE OF ADMISSION OF THE SHARES
TO TRADING ON THE NEUER MARKT OF THE FRANKFURT STOCK EXCHANGE, THE COMPANY
WILL NOT IMPLEMENT OR ANNOUNCE ANY CAPITAL INCREASES OR COMPARABLE MEASURES
EXCEPT WITH THE CONSENT OF BAADER WERTPAPIERHANDELSBANK AG. BAADER
WERTPAPIERHANDELSBANK AG WILL NOT REFUSE ITS CONSENT WITHOUT GOOD CAUSE.
For a period of 24 months commencing on the date of admission of the shares
to the Neuer Markt, the Existing Shareholders of the Company undertake not
to sell any shares of the Company without the consent of Baader
Wertpapierhandelsbank AG, nor to announce such a sale or to take any other
measures that are the economic equivalent of a sale. Baader
Wertpapierhandelsbank AG will not refuse its consent without good cause.
8 Liability and Indemnity
BAADER WERTPAPIERHANDELSBANK AG WARRANTS THAT IT WILL ACT WITH THE
DILIGENCE OF A PRUDENT BUSINESSMAN. IT DOES NOT WARRANT THAT INFORMATION
AND DOCUMENTS MADE AVAILABLE BY THIRD PARTIES ARE COMPLETE AND CORRECT.
THROUGH THEIR SIGNATURES, THE COMPANY AND THE EXISTING SHAREHOLDER ASSUME
RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THE OFFERING
PROSPECTUS/COMPANY REPORT TO BE PREPARED, FOR THE FACTUAL INFORMATION AND
OPINIONS CONTAINED THEREIN AND FOR THE RESULTING OVERALL VIEW OF THE
FINANCIAL POSITION, RESULTS OF OPERATIONS AND LIQUIDITY POSITION OF THE
COMPANY; NEITHER SHALL THE FACT THAT BAADER WERTPAPIERHANDELSBANK AG OR THE
ADVISERS IT HAS ENGAGED PREPARE AND SIGN THE PROSPECTUS DISCHARGE THE
COMPANY AND THE EXISTING SHAREHOLDER FROM THIS RESPONSIBILITY.
THE COMPANY AND THE EXISTING SHAREHOLDER SHALL INDEMNIFY BAADER
WERTPAPIERHANDELSBANK AG FROM ALL CLAIMS, OBLIGATIONS, LOSSES, DAMAGES AND
COSTS IT INCURS IN CONJUNCTION WITH THE ENGAGEMENT, INCLUDING DEFENSE AND
LEGAL ADVICE COSTS FOR A PENDING OR THREATENED LAW SUIT. HOWEVER, THIS
INDEMNITY OBLIGATION SHALL NOT APPLY IF THESE CLAIMS, OBLIGATIONS, LOSSES,
DAMAGES OR COSTS ARE DUE TO THE GROSS NEGLIGENCE OR INTENTIONAL ACTS OF
BAADER WERTPAPIERHANDELSBANK AG. INDEMNIFICATION OBLIGATION ARISES ONLY IF
IPO IS EFFECTIVE.
INTERNALLY, THE COMPANY AND THE EXISTING SHAREHOLDER RELEASE THE
UNDERWRITING BANKS FROM ANY LIABILITY UNDER SECTION 45 OF THE BORSG (GERMAN
STOCK EXCHANGE ACT) IN SO FAR AS SUCH UNDERWRITING BANKS HAVE ACTED ON THE
BASIS OF INFORMATION PROVIDED TO IT BY THE COMPANY OR THE EXISTING
SHAREHOLDER.
9 Duration
THIS ENGAGEMENT LETTER IS IN FORCE UNTIL DECEMBER 31, 2001 UNLESS BAADER
WERTPAPIERHANDELSBANK AG FORSAKES THE IPO PROCESS EARLIER, IN WHICH EVENT
LETTER SHALL BE AUTOMATICALLY TERMINATED.
This duration may be prolonged by mutual agreement. In the event of
termination of this engagement due to expiration of the duration, the
agreed costs, including the lump sum compensation for costs and expenses,
will be reimbursed immediately, unless the parties agree to prolong the
engagement. If the shares are publicly offered at a later date by Baader
Wertpapierhandelsbank AG as lead manager and admitted to stock exchange
trading, the lump sum compensation will be offset against the fee.
If the IPO is not executed in Germany until May 31, 2001, either due to bad
market conditions or a valuation of company that is below US$ 50 Mio., the
Existing Shareholders and the Company shall be entitled, after prior
consultation with the Underwriting Bank, to proceed with the issue at
markets outside Germany. In this case section 5 (clauses i - iv) remain
unaffected.
10 Duties Subsequent to Admission
The Company undertakes to perform all measures necessary to maintain stock
exchange admission and trading on the Neuer Markt. In addition, it
undertakes to make available to Baader Wertpapierhandelsbank AG without
delay all information required by Baader Wertpapierhandelsbank AG to
perform its relevant obligations subsequent to admission.
11 Force Majeure
Baader Wertpapierhandelsbank AG is entitled to withdraw from this
Engagement in the event of a material deterioration in the economic
position of the Company, or if a fundamental change in the situation on the
capital market is evident due to unusual, unavoidable events of an economic
and/or political nature or as a consequence of government measures, or if
there is a significant reduction in equity market receptiveness due to a
negative mood, and all of these jeopardizes an IPO and an IPO is no longer
reasonable for Baader Wertpapierhandelsbank AG, measured by customary
market standards.
12 Miscellaneous
In the event that any provision of this Engagement Letter is or becomes
ineffective or unenforceable in part or in full, this shall not affect the
remaining provisions. Any gap arising due to the ineffectiveness or
unenforceability of a provision of this Engagement Letter will be filled
analogously by way of supplementary interpretation of the Engagement
Letter, taking account of the interests of the parties concerned.
ANY AMENDMENTS OR SUPPLEMENTS TO THIS ENGAGEMENT LETTER MUST BE MADE IN
WRITING; THIS ALSO APPLIES TO AMENDMENTS TO THIS REQUIREMENT OF WRITTEN
FORM.
THIS ENGAGEMENT LETTER IS GOVERNED BY THE LAWS OF GERMANY. THE PLACE OF
JURISDICTION IS MUNICH.
UNTERSCHLEI(BETA)HEIM, DECEMBER , 2000
BAADER WERTPAPIERHANDELSBANK AG
- ------------------------------- --------------------------------
UTO BAADER STEFAN HOCK
TEL AVIV, DECEMBER ,2000
OPUSDENT LTD.
- -------------------------------
YOKNEAM, DECEMBER ,2000
ESC MEDICAL SYSTEMS LTD.
Exhibit 23.1 Consent of Brightman Almagor & Co.
[GRAPHIC OMITTED]
Deloitte & Touche
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in the Registration Statements of ESC Medical Systems Ltd. on
Form F-3 (File Nos. 333-6610, 333-8056 and 333-9256) and on Form S-8 (File
No. 333-6774) of our report dated March 30, 2001 relating to the
consolidated financial statements, which appears in this Form 10-K.
Brightman Almagor & Co.
Certified Public Accountants
A member of Deloitte Touche Tohmatsu
Tel Aviv, Israel
March 30, 2001
Exhibit 23.2 Consent of Luboshitz Kasierer.
[GRAPHIC OMITTED]
Arthur Anderson
Luboshitz Kasierer
To:
THE BOARD OF DIRECTORS
ESC MEDICAL SYSTEMS LTD.
- ------------------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation
by reference in the Registration Statements of ESC Medical Systems Ltd. on
Form F-3 (File No. 333-6610, 333-8056 and 333-9256) and on Form S-8 (File
No. 333-6774) of our report dated February 10, 1999 relating to the
consolidated financial statements, which appears in this Form 10-K.
Luboshitz Kasierer
Member Firm of Arthur Andersen
Haifa, Israel
March 30, 2001