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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, 2002, or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________ to
______________
Commission file number: 0-13012
LUMENIS LTD.
(Exact name of registrant as specified in its charter)
ISRAEL N.A.
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. BOX 240, YOKNEAM, ISRAEL 20692
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 972-4-959-9000
Securities Registered pursuant to Section 12(b) of the Act: None.
Title of each class Name of exchange on which registered
None None
Securities registered pursuant to Section 12(g)of the Act:
ORDINARY SHARES, NIS 0.10 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
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
24, 2003 as reported on the Nasdaq National Market, was approximately
$28,049,991. 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 more than 5% of the
outstanding Ordinary Shares for purposes of the preceding calculation is based
on information on Schedules 13D and 13G filed with the Commission. This
determination of affiliate status is not a conclusive determination for other
purposes.
The number of Ordinary Shares, par value 0.10 New Israeli Shekels ("NIS") per
share, of the registrant outstanding as of March 24, 2003 was 36,942,439.
DOCUMENTS INCORPORATED BY REFERENCE
Documents from which portions Part of the Form 10-K
are incorporated by reference into which incorporated
- -------------------------------------------- ---------------------------------
Proxy Statement for the 2003 Part III
Annual General Meeting of Shareholders
PART I
ITEM 1. BUSINESS.
GENERAL
Lumenis Ltd. ("Lumenis", "Company", "We" or "Our") is a world leader in the
design, manufacture, marketing and servicing of laser and light based systems
for aesthetic, ophthalmic, surgical and dental applications. Lumenis offers a
broad range of laser and intense pulsed light, or IPL(TM) ("IPL") systems, which
are used in skin treatments, hair removal, non-invasive treatment of vascular
lesions and pigmented lesions, acne, psoriasis, ear, nose and throat ("ENT"),
gynecology, urinary lithotripsy, benign prostatic hyperplasia, open angle
glaucoma, diabetic retinopathy, secondary cataracts, age-related macular
degeneration, vision correction, neurosurgery, dentistry and veterinary.
The Company was incorporated in Israel on December 21, 1991. In January
1996, the Company completed an initial public offering ("IPO") in the United
States.
On April 30, 2001, the Company completed the purchase of Coherent Medical
Group ("CMG") the medical division of Coherent, Inc. ("Coherent"). This
acquisition approximately doubled the Company's sales, expanding its leading
position in sales of pulsed light and laser based systems for the aesthetic and
surgical markets, made it a significant competitor in the ophthalmic segment of
the medical laser market, expanded its proprietary technology and increased its
critical mass by country and customer type for the marketing and cross-selling
of its products. After completion of this acquisition, the Company changed its
name from ESC Medical Systems Ltd. ("ESC") to Lumenis Ltd. See "Coherent Asset
Acquisition" below.
Unless the context otherwise requires, all references to "Lumenis", the
"Company", "We" or "Our" shall mean Lumenis Ltd. and each of its subsidiaries.
This Report includes forward looking statements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Forward Looking Statements and Risk Factors."
MARKET FOCUS
The Company's systems are designed for use in a variety of medical
environments. The principal target markets for the Company's aesthetic products
are physicians with private practices or clinics, as well as leading beauty/hair
removal centers. Many of these are customers who wish to access the vanity
market and are looking to increase their revenues and reduce dependence on
insurance reimbursements. The target markets for the Company's surgical products
are hospitals and outpatient clinics that use lasers for certain procedures.
Ophthalmologists are the primary target market for the Company's ophthalmic
products, with a focus on office based procedures. Dentists are the primary
target market for the Company's dental products.
1
COHERENT ASSET ACQUISITION
The Company acquired substantially all of the assets and related
liabilities of CMG for $100 million in cash financed through a new bank term
loan note, 5,432,099 ordinary shares of Lumenis, and a $12.9 million
eighteen-month 5% subordinated note (see Item 7--"Management's Discussion and
Analysis of Financial Condition and Results of Operations; Financing
Activities"), plus an earn-out of up to $25 million based on the revenues
generated during the four calendar years ending December 31, 2004 from sales of
the ophthalmic equipment operations of CMG. The cash portion of the purchase
price was subject to a post-closing adjustment based on the closing date net
tangible book value of the business, which increased the purchase price by
approximately $5.4 million. If total ophthalmic revenues for the four fiscal
years ended December 31, 2004 exceed $450 million, the earn-out payment will be
21.5% of the excess. In addition, if the ophthalmic business is sold to a third
party during this four-year period for a price in excess of $110 million,
Coherent will receive an earn-out payment equal to 50% of the excess. In no
event, however, will the earn-out payment be more than $25 million. During the
fiscal years ended December 31, 2002 and 2001, the ophthalmic equipment sales
were approximately $80 million and $55 million, respectively (all of which are
attributable to the acquired CMG operations). The Company is obligated to
register the 5,432,099 shares by October 30, 2003, for resale. At completion of
the acquisition, Bernard Couillaud, President and Chief Executive Officer of
Coherent, was appointed to the Company's Board of Directors and served as a
director until his resignation in January 2003. Coherent retains the right to
nominate one Company director. Coherent continues to supply the Company parts
and components.
Sales for Lumenis' business, assuming the acquisition of CMG occurred on
January 1, 2001, for the years ended December 31, 2001 and 2002, are as follows
(dollar amounts in thousands):
BUSINESS YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
(ACTUAL RESULTS) PRO FORMA AND UNAUDITED)
AESTHETIC $145 $168
- --------------------------------------------------------------------------------
Ophthalmic 80 74
- --------------------------------------------------------------------------------
Surgical 60 64
- --------------------------------------------------------------------------------
Other 63 70
- --------------------------------------------------------------------------------
TOTAL $348 $376
- --------------------------------------------------------------------------------
Following the completion of the CMG acquisition, the Company embarked on an
intensive integration program to merge the two companies into one organization.
As part of the integration program, the Company rationalized product lines,
sales and distribution networks, combined offices, closed facilities and reduced
employment. This included the closure of the manufacturing sites in Seattle,
Washington, the manufacturing activities in Tel Aviv, Israel and five sales
offices in Norwood, Massachusetts, Munich, Germany, Cambridge, England, Paris,
France and Tokyo, Japan. See "Manufacturing" below and Item 2 - "Properties". As
a result of such closures, the Company consolidated its manufacturing sites and
balanced the production of its products between the United States and Israel.
Furthermore, it combined sales activities in an effort to strengthen its global
sales force. The Company experienced difficulties in the consolidation and
integration of its administrative, financial and IT systems during 2002 which
impacted its ability to produce essential management information for controlling
and monitoring its working capital. As a result the Company experienced a
significant cash usage for working capital. See Item 7 - "Management's
Discussion and Analysis of Financial Condition and Result of Operations".
TECHNOLOGY
Most of the Company's products are based on proprietary technologies, using
intense pulsed light ("IPL") or laser applications pioneered by the Company.
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INTENSE PULSED LIGHT TECHNOLOGY. IPL, the Company's proprietary technology,
uses thermal energy generated by a broad band intense pulsed light source to
selectively illuminate unwanted lesions without damaging the surrounding tissue.
IPL uses a combination of intense pulses of light and different cut-off filters.
Our IPL products are primarily aimed at the private aesthetic markets and
applications include: skin rejuvenation, non-invasive treatment of varicose
veins and other benign vascular lesions; removal of benign pigmented lesions,
such as age spots and sunspots; and hair removal. Among our leading IPL brands
are the VascuLight Elite system for skin rejuvenation, both deep and superficial
vascular lesions, pigmented lesions, and hair removal; and the IPL Quantum
family of products for skin treatments, vascular and pigmented lesions and hair
removal.
LASER TECHNOLOGY. Surgical and ophthalmic laser systems are generally
categorized by the active material employed in generating the laser's beam.
Materials used in surgical and ophthalmic lasers may be gases (such as CO2,
argon or krypton) or crystals (such as yttrium-aluminum-garnet (YAG)). The
active material determines the wavelength of the light emitted and thus the
applications for which various types of lasers are best suited. The Company
offers many laser systems, utilizing CO2, Nd:YAG, Erbium, Holmium and Diode
technologies. The lasers come in a variety of sizes and power levels designed to
serve a broad range of aesthetic and medical procedures in physician offices,
outpatient clinics and hospitals. These lasers work with a wide variety of
application-driven laser accessories. Among the Company's leading cosmetic laser
brands are: LightSheer diode lasers systems for hair removal and UltraPulse for
skin resurfacing. The Company offers a comprehensive line of lasers for
ophthalmic surgery, including the Selecta II laser for glaucoma, the Novus Varia
and Novus Spectra for treatment of the retina and the Opal Photoactivator for
treatment of age-related macular degeneration (AMD). The Company's leading
surgical products are the PowerSuite for urology and UltraPulse Encore for
gynecology applications. The Company's leading dental products are OpusDuo, Opus
20, Opus 5 and Opus 10.
PRODUCTS AND APPLICATIONS
AESTHETIC APPLICATIONS. The Company's main focus has been in the aesthetic
market, responding to the public's demand for improved appearance. The primary
applications for our products are: the improving of facial complexion, skin
texture, and blemishes; the removal of benign vascular lesions, including leg
veins, spider veins on legs and face, and other red spots; removal of benign
pigmented lesions including brown spots, age spots, sunspots, scars, stretch
marks and tattoos; and hair removal. In 2002, approximately 41.7% of our
revenues were derived from aesthetic applications.
The following are the major products we currently market to meet these
primary aesthetic applications. We have designed some of our systems to have the
versatility to treat several different conditions.
Aesthetic: Vascular and Pigmented Skin Treatments and Skin Resurfacing
VASCULIGHT ELITE. VascuLight Elite is the multi-application IPL system,
integrating the features and benefits of the IPL with an Nd:YAG laser. It
enables physicians to offer patients non-invasive solutions for a variety of
clinical applications in a single device. The IPL heads can be varied according
to applications for photorejuvenation, vascular and pigmented lesions, and hair
removal. The Nd:YAG laser treats deep vascular lesions and leg veins.
IPL QUANTUM. These IPL systems are available as single application and are
also upgradeable to multi-application systems for treating a variety of
applications including photorejuvenation, vascular and pigmented lesions as well
as hair removal. The Quantum DL for deeper leg veins was introduced in 2001.
ULTRAPULSE AND ULTRAPULSE ENCORE. UltraPulse is the industry's high-end
high-energy, short-pulse-duration CO2 technology that first made laser skin
resurfacing possible. It treats moderate to severe wrinkles and acne scarring
and can also be used for a wide range of surgical applications.
3
LIGHTSHEER. The Company's leading product for laser hair removal,
LightSheer systems are high-power pulsed diode array systems that provide safe
and efficacious permanent hair reduction to patients of all skin types,
including tanned skin. LightSheer has been recognized as a simple to operate and
very low maintenance system.
CLEARLIGHT. Lumenis holds the exclusive distribution rights for ClearLight
in the US and non-exclusive distribution rights worldwide excluding the US, an
intense blue light acne treatment system owned by CureLight Ltd. of Or Akiva,
Israel. The Company believes that this therapy achieves higher clearance rates
in less time than other medical treatments without observable material adverse
side effects. ClearLight received the CE mark in 2001, and in August 2002
CureLight received marketing clearance from the United States Food and Drug
Administration (the FDA) (see "Government Regulation" below). The Company began
shipping the product outside the United States in the second quarter of 2001.
BCLEAR. In February 2002, Lumenis introduced the BClear Targeted
PhotoClearing System, a Ultraviolet B (UVB) based light therapy system to treat
psoriasis and vitiligo. The focused, high dose delivery and precise dosimetry of
the BClear system allows individually customized treatments that safely and
effectively treat specific problem locations without exposure to surrounding
healthy skin. BClear qualifies for Medicare reimbursement under an existing
reimbursement code.
RELUME. Lumenis was the first company to introduce light-based therapy for
the cosmetic treatment of leucoderma. The ReLume system was launched in November
2002 for hypopigmentation conditions associated with scars, stretch marks, post
chemical peeling and skin resurfacing. The targeted light, transmitted via fiber
optics, precisely stimulates the production of melanin and repigments the
affected area with no side effects or pain.
OPHTHALMOLOGY APPLICATIONS. CMG was a leader in the ophthalmic laser market
since its introduction of the first argon photocoagulator system in 1970 for the
treatment of retinal diseases and glaucoma. CMG had achieved a widespread
reputation for innovations and product excellence with an installed base of over
30,000 ophthalmic lasers in more than 75 countries. Since the acquisition of CMG
Lumenis has been developing products which include both laser and other
innovative technology solutions for the treatment of a variety of
sight-threatening diseases. Argon, krypton, Nd:YAG, excimer, diode-pumped, and
other diode systems all continue to give ophthalmologists essential surgical
alternatives to treat various ophthalmic conditions. During the fourth quarter
of 2002 the ophthalmic business launched four new products; the Novus Varia TM,
the Selecta Duet TM, the Novus Spectra and the Novus TTX.
The Novus Varia is the world's first three-color diode-pumped ophthalmic laser.
The Selecta Duet is the first laser to treat both glaucoma and secondary
cataracts. The Novus Spectra a 532 nanometer green diode pumped solid-state
photocoagulation laser, is the first product of the integration of Lumenis and
HGM Medical systems. The Novus TTX, a diode-pumped 810 nanometer infrared
photocoagulator laser, has not yet received FDA clearance for sale in the United
States.
In 2002 approximately 23.1% of our revenues were derived from ophthalmic
applications.
Our leading ophthalmic applications include:
PHOTOCOAGULATOR. The purpose of this system is to heat or coagulate tissue.
The primary application is the treatment of diabetic retinopathy, an abnormal
vascular disease of the retina. Through the use of photocoagulation serious
vision loss from diabetic retinopathy has been reduced in some patients from 50%
to less than 2%. The main products are: Novus Varia, Novus Spectra, Ultima, and
the Elite family of products.
PHOTODISRUPTOR. The photodisruptor creates a small optical breakdown, or
spark, to separate tissue or drill holes in the retina. The primary application
is capsulotomy or perforation of the posterior capsule, a membrane left after
removal of the cataractous lens. A secondary application is drilling holes in
the iris,
4
laser iridotomy, to relieve pressure in narrow angle glaucoma. The main brands
for this product are the Aura and the Selecta Duet.
PHOTOACTIVATOR. This system is used to activate a drug, Visudyne(R), to
cause selective destruction of abnormal retinal blood vessels. The primary
application is treatment of the predominantly classic "wet" form of age related
macular degeneration (AMD). The main product is the Opal photoactivator which
uses Visudyne, a drug provided by Novartis.
SELECTIVE LASER TRABECULOPLASTY (SLT). SLT is used to selectively target
individual trabecular meshwork cells to activate a biologic response that
increases outflow of fluid to reduce intraocular pressure in open angle
glaucoma. SLT is performed using the Selecta II and Selecta Duet.
REFRACTIVE. This system is used to correct near and far sightedness and
astigmatism. In certain markets outside of the U.S. market, Lumenis distributes
the Allegretto Wave laser, manufactured by Wavelight Laser Technolgie AG, which
has the capability of "custom ablation" to achieve better corrective vision for
patients.
SURGICAL APPLICATIONS. Lumenis' acquired businesses, including Laser
Industries, with its Sharplan brand name, and CMG, were leaders in the surgical
marketplace for over twenty-five years. Lumenis now has a leading position in
the surgical laser market. In the fourth quarter of 2002 the UltraPulse
SurgiTouch (UPST) was approved by the FDA as the first application guided pulsed
CO2 laser to offer an intuitive, versatile interface featuring pre-set
parameters by specialty, application and suggested delivery device. The UPST is
the first product to result from the integration of CMG and ESC. In 2002, 17% of
our revenues were derived from surgical applications.
The Company offers a broad range of laser systems and accessories for sale
to hospitals and to medical practices to meet the growing in-office procedure
demand.
Surgical: Urology
POWERSUITE. The VersaPulse PowerSuite family of holmium lasers is used for
two main applications in Urology: ureteral, bladder and kidney stone lithotripsy
and benign prostatic hyperplasia (BPH). BPH affects over 60% of men over the age
of 60. Power Suite is sold with a wide range of fibers, which enable physicians
to penetrate hard to reach areas. The laser is used to resect, ablate and
coagulate tissue.
In 2001 the Company entered into a U.S. distribution agreement with Boston
Scientific Corp ("BSC") under which BSC is responsible for sales of fibers and
accessories as well as for providing sales leads for holmium lasers to Lumenis'
direct distribution force. An agreement for distribution in Japan was entered
into under which BSC is responsible for sales of all Lumenis urology offerings
in Japan.
Surgical: ENT (Otolaryngology).
Lumenis has pioneered several ENT applications for both operating room and
office environments. Our leading ENT products include:
CO2 LASERS. The Company offers a full range of CO2 laser systems and
accessories for a variety of applications. CO2 lasers enable the physician to
create precise, hemostatic incisions and excisions and to ablate soft tissue
with minimal thermal necrosis to the surrounding area. These units can be easily
adapted for freehand surgery, laser microsurgery, and rigid endoscopy
Surgical: Gynecology.
Lumenis offers several systems for various gynecologic applications,
including laparoscopy, endometrial ablation, and lesions of the lower genital
tract. Our leading gynecological products include:
5
ULTRAPULSE ENCORE. UltraPulse Encore is used in gynecology as well as
operating room based surgery. This high powered technology provides performance
enhancement over lower powered CO2 technologies.
VETERINARY APPLICATIONS. The Company pioneered laser applications in the
veterinary area with the AccuVet, a compact, easy to use, CO2 laser. The many
surgical applications include: removal of cysts, tumors and warts; specialized
internal procedures; neutering; spaying; and declawing.
DENTAL APPLICATIONS. We have developed several dental lasers to enable
dentists to perform hard and soft tissue applications including drilling, cavity
preparation, gum trimming and periodontal procedures, as well as teeth
whitening. In 2002, 2.3% of our revenues were derived from dental applications.
Our leading systems for dental applications include:
OPUS5 AND OPUS10. Opus5 watt and Opus10 watt are compact lightweight
efficient 830mm diode laser systems. The Opuslasers can also be used for soft
tissue applications such as cosmetic and periodontal procedures, minor surgical
procedures (troughing), and curettage. The Opus systems can be used to whiten
teeth in conjunction with a specified gel.
OPUSDUO AND OPUS20. The OpusDuo is a new system that uniquely combines
Erbium YAG and CO2 lasers in one cabinet with two distinct delivery systems.
Both lasers incorporate the Opus patented hollow wave guide delivery system that
emits high energy pulses. The Er:YAG laser is designed primarily for hard tissue
procedures on enamel, dentin and bone, including cavity and crown lengthening,
caries removal and etching. The CO2 laser is effective for a wide variety of
soft tissue applications, including gingevectomy, gingivoplasty, frenectomy,
implant exposure, laser troughing, crown lengthening, and guided tissue
regeneration. The OpusDuo enables dentists to remove hard tissue at speeds equal
to high speed mechanical handpieces.
NOVAPULSE. The NovaPulse is a 20 Watt pulsed CO2 laser for a wide variety
of soft tissue applications including gingevectomy, gingivoplasty, frenectomy,
implant exposure laser troughing, crown lengthening, biopsies and guided tissue
regeneration. The NovaPulse can also be used for multiple perio/oral surgical
applications. The NovaPulse offers the patented hollow wave guide technology for
more flexibility and energy to tissue.
The Company also sells a variety of handpieces and accessories for its
dental lasers.
INDUSTRIAL APPLICATIONS. Our industrial unit, Spectron Lasers Ltd., located
in Rugby, England, develops and sells a number of different industrial laser
systems for specialized applications based upon customer requests. In 2002, 3.1%
of our revenues were from industrial applications.
PRODUCTS UNDER DEVELOPMENT
In order to maintain and enhance its competitive position, the Company
believes it is imperative to develop new products and applications and introduce
new technologies. Some of these products are developed internally, some are
developed pursuant to research agreements, and some are acquired or licensed.
BUSINESS STRATEGY
The Company intends to maintain its leadership position in its markets by
providing quality leading edge systems, accessories and service, and through
in-house research and development and continued acquisition of products and
technologies. The Company intends to broaden its sales channels and product
offerings to reach a wider audience for its products. The Company intends to use
its resources to ensure that it can compete effectively in each of the markets
it has targeted.
6
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
Please refer to Note 16 of the Consolidated Financial Statements with
respect to financial information about business segments.
MARKETING, DISTRIBUTION AND SALES
As part of the integration of CMG, in the second half of 2001 the Company
began a reorganization of its core business operations into four functional
business units to focus upstream marketing and research and development
activities within product application areas.
The four business units were established to focus on Lumenis' primary
markets: aesthetic,; ophthalmic, surgical and other. Beginning in 2003, the
ophthalmic and surgical businesses were combined as one group called Medical.
o The Aesthetic business unit focuses on photorejuvenation, hair removal,
vascular and pigmented lesions, acne, psoriasis and other cosmetic
applications under development.
o The Ophthalmic segment focuses on ophthalmic products for the
correction of vision related problems, and the Surgical segment focuses
on hospital and in-office medical procedures in such fields as
gynecology, urology, ENT, and other surgical applications.
Three regional service centers have been established to coordinate local
sales, marketing, service and administrative functions for all business units.
In addition to the sale of products, the Company generates revenues from service
calls, maintenance agreements and sales of parts and accessories. Lumenis sells
directly in fourteen countries and has consolidated the global distributor
networks of its two primary predecessor companies. These distributors sell
Lumenis products in over 75 countries around the world.
The regional service and administrative centers are:
o Americas, headquartered in Santa Clara, California, which is
responsible for sales in the United States and distributor sales in
Canada and Latin America.
o Europe, headquartered in Amsterdam, the Netherlands, which is
responsible for direct sales in France, Germany, Italy, Sweden and the
United Kingdom and for distributor sales in the rest of Europe, the
Middle East the former Soviet-bloc countries and Africa. The European
headquarters also manages the Company's main distribution center
outside the United States.
o Asia Pacific, headquartered in Tokyo, Japan, which is responsible for
direct sales operations in Japan, the People's Republic of China and
Hong Kong as well as distributor sales in the other countries in Asia
and the rest of the world, not covered elsewhere. Beginning in 2003,
the head manager for the Asia Pacific region, excluding Japan, will be
based in Beijing, China.
Within each region, where appropriate, the Company has entered into
distributor and representative agreements, to enable it to better penetrate and
serve certain markets.
The Company also has entered into distribution agreements with other
manufacturers to grant Lumenis rights to distribute third party products which
complement its product offerings, including the ClearLight Phototherapy system
for acne, Allegretto Wave laser for laser vision correction, Selecta Duet for
glaucoma and cataracts and Aura photodisruptor for capsulotomy, all of which are
sold through the regional service centers.
7
BREAKDOWN OF NET SALES BY REGION BASED ON LOCATION OF THE CUSTOMERS
For The Year Ended December 31,
--------------------------------------------------
(dollar amounts in thousands)
Actual
2002 2001 2000
------------ ------------ ------------
Americas ............................. $170,146 $151,614 $69,728
Europe ............................... 73,247 71,638 50,181
Asia ................................. 103,020 88,266 39,628
Israel ............................... 2,083 3,683 2,088
-------- -------- --------
Total ................................ $348,496 $315,201 $161,625
-------- -------- --------
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 and in some cases may earn a fee for referral. As
is common in this industry, a substantial portion of the Company's sales are
completed in the last few weeks of each calendar quarter.
The Company generally sells more of its products during the second and the
fourth fiscal quarters than in the first and third fiscal quarters. We believe
that this is because during the third fiscal quarter many physician customers
take summer vacation and during the first fiscal quarter many hospitals and
medical organizations have not yet assessed their needs and budgets for the
upcoming year.
MANUFACTURING
The Company manufactures its products in six principal locations: Yokneam,
Israel, where Aesthetic and Surgical products are manufactured; Pleasanton,
California, where Aesthetic products are manufactured; Salt Lake City, Utah,
where Ophthalmic products were manufactured; Santa Clara, California, where
Aesthetic, Surgical and Ophthalmic products are manufactured; Netanya, Israel,
where mainly Dental products are manufactured; and Rugby, England, where
industrial products are manufactured.
Following the completion of the CMG acquisition, the Company consolidated
its manufacturing sites and balanced the production of its product lines between
the United States and Israel. By the end of 2001, the Company closed its
manufacturing sites in Seattle, Washington and Tel Aviv, Israel. The production
of the NovaPulse products was transferred from the Seattle facility to the
Yokneam, Israel site. Additionally, in an effort to lower manufacturing costs,
during 2002 the Company transferred manufacturing activities from Santa Clara to
Yokneam and Salt Lake City. This transfer is expected to be completed in the
second quarter of 2003.
The Company manufactures products based mostly upon sales forecasts and, to
a lesser extent, upon specific orders received from our customers. The Company
delivers products based upon purchase orders received, and on average, the
Company fulfills each customer's order within two to eight weeks of receipt of
the order.
8
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's products are manufactured from a large number of parts, using
standard components and subassemblies supplied by subcontractors and vendors to
the Company's specifications.
The Company's policy is to maintain more than one source for each of its
major components, to the extent possible, although in some cases parts are
supplied by a sole source. Due to their sophisticated nature, certain components
must be ordered up to six months in advance, resulting in a substantial lead
time for certain production runs. In the event that such limited source
suppliers are unable to meet the Company's requirements in a timely manner, the
Company may experience an interruption in production until an alternate source
of supply can be obtained.
In Israel and the Netherlands, the Company uses a vendor to store and stock
its raw materials inventory and finished goods inventory, respectively.
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 $29.0 million in 2002, $21.8
million in 2001, and $11.9 million in 2000. The Company believes that the close
interaction between its research and development, marketing, and manufacturing
groups allows for timely and effective realization of the Company's new product
concepts.
The Company receives certain grants and tax benefits from, and participates
in, programs sponsored by the Government of Israel.
Israeli tax law permits, under certain conditions, a tax deduction in the
year incurred for expenditures (including capital expenditures) in scientific
research and development projects, if the expenditures are approved by the
relevant Israeli Government Ministry (determined by the field of research), and
the research and development is for the promotion of enterprise and is carried
out by or on behalf of a company seeking such deduction. Expenditures not
approved as such are deductible over a three year period for Israeli tax
purposes. However, the amounts of any government grants made available to the
Company are subtracted from the amount of the aforementioned deductible
expenses.
The terms of the Israeli government participation also require that the
manufacture of products developed with government grants be performed in Israel.
Under the regulations of the Law for the Enforcement of Industrial Research and
Development 1984 (the "Research Law"), if any of the manufacturing is performed
outside Israel by any entity other than the Company, assuming the Company
received approval from the Chief Scientist for the foreign manufacturing, the
Company may be required to pay increased royalties. The increase in royalties
depends upon the manufacturing volume that is performed outside of Israel. The
maximum royalty to be paid could be up to 300% of the original grant plus
interest and the Israeli Consumer Price Index ("CPI") linkage differences.
The technology developed with Chief Scientist grants may not be transferred
to third parties without the prior approval of a governmental committee under
the Research Law, and may not be transferred to non-residents of Israel. The
approval, however, is not required for the export of any products developed
using the grants. Approval of the transfer of technology to residents of Israel
may be granted in specific circumstances, only if the recipient abides by the
provisions of the Research Law and related regulations, including the
restrictions on the transfer of know-how and the obligation to pay royalties in
an amount that may be increased.
9
In connection with an initial program approved by the Office of the Chief
Scientist, the Company and an Israeli subsidiary received or accrued
participation grants from the State of Israel in the amount of approximately
$135,000, $58,000 and $60,000 for the years ended December 31, 2002, 2001 and
2000, respectively. In return for the Government's participation payments, the
Company and its subsidiaries are obligated to pay royalties at a rate of 3% to
5% of sales of the developed product until the Office of the Chief Scientist is
repaid in full. In the years ended December 31, 2002, 2001 and 2000, the Company
and its subsidiaries paid or accrued royalties to the Office of the Chief
Scientist in aggregate amounts of$348,000, $292,000, and $408,000, respectively.
As of December 31, 2002, the balance of the Company's outstanding obligation to
the State of Israel in connection with all participation payments is
approximately $5,246,000 which will be repaid to the government in the form of
royalties on sales of those products that reach the market.
BACKLOG
On December 31, 2002 our backlog was approximately $10 million as compared to
none at December 31, 2001. Backlog represents firm orders generally shippable
within the next two quarters. We believe that most of our backlog at the end of
December 31, 2002 will be delivered within the next two quarters. The increase
in the backlog reflects the strong demand for our products, in particular for
our new ophthalmic products, and delays in shipment.
COMPETITION
Lumenis faces keen competition in its different markets. Competition arises
from other light-based products as well as alternate technologies. Competitors
range in size from small single product companies to large multifaceted
corporations, which may have greater resources than those available to the
Company. Major competitors are: in the aesthetic market, Candela Corporation,
Cynosure, Inc., Danish Dermatological Development A/S, Laserscope, Inc., Palomar
Medical Technologies, Inc., Syneron Medical Ltd. and Altus Medical Inc.; in the
surgical market, Diomed Inc., Dornier MedTech, and Bioletic AG; in the
ophthalmic market, Carl Zeiss Meditech AG, Nidek Technologies Inc. and Iridex
Corporation; and in the dental market, Biolase Technology, Inc.
In addition, the Company competes in markets subject to rapid technological
change. The entry of new companies or new technologies into these markets could
have a material adverse effect on the Company.
PATENTS AND INTELLECTUAL PROPERTY
The Company has obtained and now holds 146 patents in the United States and
37 patents outside of the United States and has applied for 20 and 45 patents in
the United States and outside of the United States, respectively. In general,
however, the Company relies on its research and development program, production
techniques and marketing, distribution and service programs to advance its
products. The Company also licenses certain of its technologies from third
parties pursuant to various license agreements. Patents filed both in the United
States and Europe have a life of twenty years from the filing date. However,
patents filed in the United States prior to June 1995 expire the later of twenty
years from filing or seventeen years from the issue date. None of the Company's
material patents are expected to expire in the near future.
Technologies related to the Company's business, such as laser and IPL
technologies, have been rapidly developing in recent years. Numerous parties
have sought patent protection on developments in these technologies.
The Company's policy is to obtain patents by application, license or
otherwise, to maintain trade secrets and to operate without infringing on the
intellectual property rights of third parties. Loss or
10
invalidation of certain of these patents, or a finding of unenforceability or
limited scope of certain of the Company's intellectual property, 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 be
useful 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 or challenge the validity of patents, to defend against infringement,
enforceability or invalidity claims or to assert infringement, invalidity or
enforceability claims against others, if required, can be lengthy and expensive,
and may result in determinations materially adverse to the Company. There can be
no assurance that the products currently marketed or under development by the
Company will not be found to infringe patents issued or licensed to others.
Likewise, there can be no assurance that other parties will not independently
develop similar technologies, duplicate the Company's technologies or, with
respect to patents which are issued to the Company or rights licensed to the
Company, design around the patented aspects of the technologies. Third parties
could also obtain patents that may require licensing of their patented
technology for the conduct of the Company's business.
Because of the rapid development of technologies which relate to the
Company's products, there may be other issued patents which relate to basic
relevant technologies and other technologies marketed by the Company. From time
to time, the Company receives inquiries from third parties contending that their
patents are being infringed by the Company. If such third parties were to
commence infringement suits against the Company, and such patents were found by
a court to be valid, enforceable and infringed upon by the Company, the Company
could be required to pay damages and/or make royalty payments. Depending on the
nature of the patent found to be infringed upon by the Company, a court order
requiring the Company to cease such infringement could have a material adverse
effect on the Company. See Item 3 - "Legal Proceedings".
GOVERNMENT REGULATION
The products manufactured and marketed by the Company are subject to
regulatory requirements mandated by the U.S. FDA, the European Union and similar
authorities in other countries. The Company believes that 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 the Quality System Regulations ("QSR"), which must be followed at
all times. The QSR regulations impose certain procedural and documentation
requirements upon a company with respect to design, manufacturing, complaint
handling and quality assurance activities. These 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.
In February 1997, the Company received a Quality System Certification Award
for being in compliance with ISO 9001. ISO 9001 is a globally recognized
standard established by the International Standards Organization in Geneva,
Switzerland and has been adopted by more than 90 countries worldwide. ISO 9001
embraces principles of the QSR and is a comprehensive quality assurance
standard. ISO certification is based upon adherence to established quality
assurance standards and manufacturing process controls.
11
In 1998, the European Union ("EU") determined that marketing or selling any
medical products or devices within the European community requires a CE Mark
according to the European Medical Device Directive. It is the responsibility of
member states to ensure that devices capable of compromising the health and
safety of patients (and users) do not enter the market. Obtaining a CE Mark for
medical devices is regulated according to the European Medical Device Directive.
The medical device must comply with the requirements of the European Medical
Device Directive that applies at each stage, from design to final inspection.
The Company has complied with the EU standards and has received the CE Mark for
all of the Company's systems distributed in EU.
International sales are subject to specific foreign government regulation
and those regulations vary from country to country. The time required to obtain
approval for any device to be sold in any foreign country may be longer or
shorter than that required for FDA clearance and there can be no assurance that
approval in any jurisdiction will be obtained or, if granted, will not be
withdrawn.
EMPLOYEES
As of December 31, 2002, the Company and its subsidiaries had 1,420
full-time employees. In Israel there were 322 employees, in the United States
699 employees, in Europe 221 employees and in Asia 178 employees. In the first
quarter of 2003, the Company reduced its employment by 95 employees as a result
of planned cost reductions and the closure of the Santa Clara manufacturing
operations.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
Please refer to "Breakdown of Net Sales By Region" above and to Note 16 to
the Financial Statements with respect to financial information about geographic
areas of the Company's business.
The Company's worldwide business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings outside
the U.S. The Company does not regard these risks as a deterrent to further
expansion of its operations outside the U.S. However, the Company closely
reviews its methods of operations and adopts strategies responsive to changing
economic and political conditions.
Within the EU, there has been an evolution toward a single market for which
the Economic and Monetary Union ("EMU"), including the adoption of the Euro as a
single currency, marks an important step. The Company has recognized the
strategic significance of this development and has adopted the Euro in 2000 for
use in EMU markets.
For risks related to the Company's operations in Israel, see "Conditions in
Israel" below and Item 7--"Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward Looking Statements and Risk
Factors."
CONDITIONS IN ISRAEL
GENERAL
The Company is incorporated under the laws of the State of Israel, and much
of its research and development, manufacturing and significant executive
facilities are located in Israel. Accordingly, the Company is directly affected
by political, economic and military conditions in Israel. The Company's
operations could be materially adversely affected if major hostilities involving
Israel should occur or if trade between Israel and its present trading partners
should be curtailed.
POLITICAL CONDITIONS
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its neighbors. A state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Additionally, Israel is currently
experiencing intense
12
violence and terrorism and from time to time in the past, Israel has experienced
civil unrest, primarily in the West Bank and in the Gaza Strip administered by
Israel since 1967. However, a peace agreement between Israel and Egypt was
signed in 1979, a peace agreement between Israel and Jordan was signed in 1994
and, since 1993, several agreements between Israel and Palestinian
representatives have been signed, pursuant to which certain territories in the
West Bank and Gaza Strip were handed over to the Palestinian administration. The
implementation of these agreements with the Palestinians representatives has
been subject to difficulties and delays and a resolution of all of the
differences between the parties remains uncertain. Recently the political
conflict with the Palestinians has worsened. Since October 2000, there has been
a significant increase in violence primarily in the West Bank and Gaza Strip, as
well as in Israel itself, which intensified during 2001 and 2002. Negotiations
between the parties have almost entirely ceased. As of the date hereof, Israel
has not entered into any peace agreement with Syria or Lebanon. In November 2002
the National Unity Government was dissolved which was followed by national
elections. In January 2003 the "Likud" party won Israel's general elections and
the party's leader, Ariel Sharon, has formed the new Israeli government. The
Company cannot predict the political and economic policy to be implemented by
the new government, whether any other agreements will be entered into between
Israel and its neighboring countries, whether a final resolution of the area's
problems will be achieved, the nature of any resolution of this kind, or whether
the current violence will continue and the extent to which this violence will
have an adverse impact on Israel's economic development, on the Company's
operations in the future or what other effects it may have upon the Company.
Certain countries, companies and organizations continue to participate in a
boycott of Israeli firms and others doing business with Israel or with Israeli
companies. Although the Company is restricted from marketing its products in
these countries, the Company does not believe that the boycott has had a
material adverse effect on its business. However, a prolonged continuation of
the increased hostilities in the region could lead to increased boycotts and
further restrictive laws, policies or practices directed towards Israel or
Israeli businesses, and these could have a material adverse impact on the
Company's business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 45 are obligated, unless exempt, to perform up to 43 days, or more
under certain circumstances, of military reserve duty annually. Additionally,
all Israeli residents are subject to being called to active duty at any time
under emergency circumstances and large numbers of them have been so called over
the past few months. Currently, some of the Company's senior officers and key
employees are obligated to perform annual reserve duty. While the Company has
operated effectively under these requirements since it began its operations, no
assessment can be made as to the full impact of such requirements on its
workforce or business if hostilities continue, and no prediction can be made as
to the effect on the Company of any expansion or reduction of such obligations,
particularly if emergency circumstances occur.
The September 11, 2001, terror attacks on the U.S. and the military
response by the U.S. and its international allies in Afghanistan, have created
uncertainty regarding the state of the U.S. and world economy. In addition, the
U.S. military operation against Iraq increased interest in fighting terrorist
activities in the Middle East and around the world, and the effects of the
military operation against Iraq on the State of Israel could directly affect the
Company's business.
ECONOMIC CONDITIONS
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has, for these and other reasons,
intervened in various sectors of the economy, employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
controls of wages, prices and foreign currency exchange rates. Until May 1998,
Israel imposed restrictions on transactions in foreign currency. These
restrictions affected the Company's operations in various ways, and also
affected the right of non-residents of Israel to convert into foreign currency
amounts they received in Israeli currency, such as the proceeds of a judgment
enforced in Israel. Despite these restrictions, foreign investors who purchased
shares with foreign currency
13
are able to repatriate in foreign currency both dividends (after deduction of
withholding tax) and the proceeds from any sale of shares. In 1998, the Israeli
currency control regulations were liberalized significantly, as a result of
which Israeli residents generally may freely deal in foreign currency and
non-residents of Israel generally may freely purchase and sell Israeli currency
and assets. There are currently no Israeli currency control restrictions on
remittances of dividends on Ordinary Shares or proceeds from the sale of
Ordinary Shares; however, legislation remains in effect, pursuant to which
currency controls can be imposed by administrative action at any time. In
addition, Israeli residents are required to file reports pertaining to certain
types of actions or transactions. While Israeli monetary policy contributed to
relative price stability in recent years, during the last nineteen months
exchange rates have been comparatively volatile, which volatility is
attributable, among other things, to the conflict with the Palestinians and
fluctuating rates of economic growth. No prediction can be made as to whether
not the Israeli government will be successful in its attempts to keep prices
stable, or whether or not the exchange rate volatility will be moderated.
TRADE AGREEMENTS
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is also a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United Nations, Australia, Canada and
Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs. Israel and the European
Economic Community, known now as the European Union, concluded a free trade
agreement in July 1975, which confers various advantages on Israeli export to
most European countries and obligates Israel to lower its tariffs on imports
from these countries over a number of years. In 1985 Israel and the United
States entered into an agreement to establish a free trade area. The free trade
area has eliminated all tariff and specified non-tariff barriers on most trade
between the two countries. On January 1, 1993, Israel and the European Free
Trade Association entered into an agreement establishing a free-trade zone
between Israel and the European Free Trade Association. In November 1995, Israel
entered into a new agreement with the European Union, which includes
redefinition of rules of origin and other improvements, including providing for
Israel to become a member of the research and technology programs of the
European Union. In recent years, Israel has established commercial and trade
relations with a number of the other nations, including Russia, China, Turkey,
India and other nations in Eastern Europe and Asia, with which Israel had not
previously had such relations.
WEB SITE ACCESS TO SEC REPORTS
The Company's Internet web site can be found at http://www.lumenis.com/.
Information contained on the Company's Internet web site is not part of this
report.
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and any amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act
of 1934 are available on the Company's web site, free of charge, as soon as
reasonably practicable after such reports are filed with or furnished to the
SEC.
Alternatively, you may access these reports at the SEC's Internet web site:
http//www.SEC.gov/.
ITEM 2. PROPERTIES.
The Company's principal executive offices and principal engineering,
development, manufacturing, shipping and service operations are located in an
approximately 70,000 square foot facility in Yokneam, Israel, an approximately
158,000 square foot facility in Santa Clara, California, an approximately
106,000 square foot facility in Salt Lake City, Utah, an approximately 38,000
square foot facility in Pleasanton, California and an approximately 11,000
square foot office in New York City. In April 2003, the Company
14
will reduce the size of the leased facility in Santa Clara to 80,000 square
feet. The lease of the Pleasanton facility expires in 2004. In March 1996, the
Company entered into a ten-year lease on the initial facility (of approximately
34,000 square feet) in Yokneam, and in March 1998, the Company entered into an
additional ten-year lease on a second facility in Yokneam (of approximately
36,000 square feet). As part of the CMG acquisition, the lease for the Santa
Clara premises formerly used by CMG was subleased to the Company. The sub-lease
for the Santa Clara premises expires in February 2007. The lease on the New York
office expires in September 2004 and is subject to the Company's board of
directors' approval.
As part of the 2001 restructuring following the completion of the CMG
acquisition, the Company closed seven facilities by the end of 2001. This
included the closure of the manufacturing sites in Seattle, Washington and Tel
Aviv, Israel and five sales offices in Norwood, Massachusetts, Munich, Germany,
Cambridge, England, Paris, France and Tokyo, Japan.
As part of the cost savings initiatives implemented at the start of 2003,
the Company decided to close the administrative and research and development
site in Tel Aviv, Israel, which is leased by its subsidiary Laser Industries
Ltd., and is currently seeking a subtenant for such facility. In connection with
the closure by the Company of the Norwood, Massachusetts sales offices in 2001,
the Company is also seeking a subtenant for that facility.
The Company, either directly or through its subsidiaries, maintains the
following additional premises, all of which are leased:
ISRAEL
Lumenis Ltd. - Sales, marketing, manufacturing, and research and development
operations of the Company and its subsidiary, OpusDent Ltd., are located in a
facility in Netanya, Israel.
EUROPE
The Company's new European headquarters were established in Amsterdam in
2002. In addition to coordinating all sales, marketing and service activities
for Europe, the headquarters manage Lumenis' main distribution center outside
the United States. Lumenis has also opened a branch in Schaffhausen, Switzerland
to own and manage its portfolio of intellectual property and other intangible
assets outside the United States.
OTHER
In addition, Lumenis maintains sales offices in China, France, Germany,
Hong Kong, Italy, Japan, Sweden and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal proceedings incident to its
business. Except as noted below, there are no legal proceedings pending or
threatened against the Company that management believes are likely to have a
material adverse effect on the Company's consolidated financial position.
In February 2002, the Company received a request from the United States
Securities and Exchange Commission ("SEC") to voluntarily provide certain
documents and information for a period commencing January 1, 1998. The request
primarily relates to the Company's relationships with distributors, and also
asks for amplification of the Company's explanation of certain previously
disclosed charges and write-downs which were taken in 1999 (inventory and other
charges of approximately $30,050,000; bad debt charges of approximately
$13,430,000; and litigation expenses of approximately $4,400,000) and
2001(write-down of accounts receivable of $14,043,000 and write-downs of
inventory and other charges
15
(amounts not given)). On May 15, 2002, the Company learned that the SEC had
issued a formal order of investigation on these matters, including as to
whether, in connection therewith, the Company, in prior periods, may have
overstated revenues and related income and failed to maintain proper books and
records and a proper system of internal controls. This was followed by the
issuance of a subpoena on August 19, 2002 relating to the above-mentioned
requested information, as well as documents of the Company's present auditors,
Brightman Almagor & Co., and its previous auditors, Luboshitz Kasierer. The
Company believes, as of the date of this report, that it has substantially
completed the production of documents to the SEC in response to the requests
previously received with respect to the transactions involving U.S. distributors
and certain charges taken in 1999 and 2001. The Company has continued to
cooperate with the SEC in its investigation, and intends to continue doing so by
providing additional documents or testimony which may be requested. Having
reviewed, among other things, the information gathered for the SEC
investigation, the Company does not presently believe that a restatement of the
Company's reported financial statements is warranted. The SEC investigation,
however, is ongoing and, accordingly, the Company is unable to predict the
duration or outcome of this process.
On or around February 28, 2003, a lawsuit was filed on behalf of Aqua Fund,
L.P. and certain additional purchasers of Lumenis securities in the United
States District Court for the Northern District of Illinois. The named
defendants are the Company, Yacha Sutton, the Company's former Chief Executive
Officer, and Sagi Genger, the Company's Chief Operating Officer. The complaint
generally alleges that the defendants violated U.S. Federal securities laws by
making material misrepresentations and/or omissions, and also includes claims
for common law fraud and negligence. The complaint alleges that, at various
times during the period from September 17, 2001 through February 27, 2002,
plaintiffs purchased the Company's securities in reliance on such statements,
and suffered economic loss as a result. The defendants have not been served with
a summons in this action. The Company believes that all of the allegations and
claims are baseless, and the Company intends to vigorously defend against them.
During March, April and May 2002, eight purported class action lawsuits
were filed in the United States District Court for the Southern District of New
York on behalf of purchasers of Lumenis securities between January 7 and
February 28, 2002 (the "Class Period"). The named defendants include, in
addition to the Company, certain present and former officers and directors of
the Company, including Prof. Jacob A. Frenkel, Yacha Sutton, Sagi Genger and
Asif Adil. The complaints generally allege that the defendants violated U.S.
Federal securities laws by issuing materially false and misleading statements
throughout the Class Period that had the effect of artificially inflating the
market price of the Company's securities. The complaints allege that throughout
the Class Period, defendants discounted and disputed marketplace rumors about
the Company's operations even as the Company knew it was being investigated by
the SEC and that its distributors had been contacted by the SEC.
The Company has been served with a summons and complaint in some but not
all of these actions. There is currently pending before the Court a motion by
plaintiffs to appoint a lead plaintiff and for approval of selection of lead
counsel. Upon the disposition of this motion, it is anticipated that a
consolidated complaint will be filed. The Company's time to respond to the
complaints has been extended. It is anticipated that, following the appointment
of a lead plaintiff and approval of lead class counsel, and subject to review
and evaluation of any consolidated complaint that is filed, the Company will
file a motion to dismiss for failure to state a claim and failure to plead fraud
with particularity as required by the Private Securities Litigation Reform Act
of 1995 and Rule 9(b) of the Federal Rules of Civil Procedure.
In May 2002, another purported class action complaint was filed in the
United States District Court for the Southern District of New York on behalf of
purchasers of the Company's securities between August 2, 2001 and May 7, 2002
(the "Extended Class Period"). In addition to the Company, the named defendants
include certain present and former officers and directors of the Company,
including Prof. Jacob A. Frenkel, Yacha Sutton, Sagi Genger and Asif Adil. The
complaint alleges that the defendants violated U.S. Federal securities laws by
making a series of material misrepresentations to the market during the Extended
Class Period regarding the Company's financial performance, successful execution
of its business plan and strong
16
demand for the Company's products, thereby artificially inflating the price of
Lumenis securities. The Company has not been served with a summons and complaint
in this action.
The Company believes that all the allegations and claims in all of the
above purported class action lawsuits are baseless, and the Company intends to
vigorously defend against them.
On February 11, 2002, the Company filed a petition with the Bailiff's Court
of Horsholm, Denmark, requesting that an interim injunction be granted against
two competing products, which are manufactured by Danish Dermatological
Development A/S, a Danish company ("DDD"). DDD filed its statement of defense in
July 2002, to which the Company answered in September 2002. Additionally, DDD
has filed oppositions in the European and Danish Patent Offices against the
Company's European IPL Patent and Danish Utility Model Patents, which are the
basis for the Company's request for an interim injunction. After a hearing on
the European patent opposition on March 25, 2003, the European Patent Office
revoked the Company's European IPL Patent. The Company is evaluating this
ruling. The Company's petition for an interim injunction against DDD in Denmark
is scheduled to be heard in August 2003.
On September 12, 2002, the Company filed a claim in the Tel Aviv - Jaffa
District Court against Syneron Medical Ltd. and Messrs. Shimon Eckhouse, Michael
Kreindel, Mark Aronovitz, Avner Lior and Hans Edel (the "Syneron Defendants").
The Company alleges that the Syneron Defendants, all former employees of the
Company, used confidential business information and technology gained during
their work at the Company, for the production and distribution of products
essentially similar to the Company's products for hair removal and skin
treatment (the "Copied Products"). The Company also alleges that Syneron Medical
Ltd. and the Syneron Defendants (collectively the "Defendants") used information
with regard to the Company's distributors and customers for the purpose of
marketing the Copied Products. The Company is seeking the following remedies
against the Defendants: a permanent injunction restraining the Defendants from
using any business information or technology or trade secrets of the Company, a
mandatory injunction ordering the Defendants to demolish all of the Copied
Products that were produced by the Defendants, an order for the delivery of
accounts, the appointment of a receiver and a monetary judgment in the amount of
approximately $6,250,000. On October 20, 2002, the Defendants filed their
Statement of Defense in which they denied the Company's claims, pleading, inter
alia, that the Company's Intense Pulsed Light technology (the "IPL Technology")
is within the public domain; that the Company has no intellectual property
rights in it; and that, consequently, the Defendants' technology (the "ELOS
Technology") does not breach the Company's rights in its IPL Technology. In
addition, the Defendants pleaded, that there is no similarity between the ELOS
Technology and the IPL Technology. On November 4, 2002, the Company filed its
response to the Defendants' Statement of Defense. In its response, the Company
claimed, inter alia, that the Defendants are prohibited from pleading that the
Company does not have any intellectual property rights in the IPL technology,
due to the fact that the Defendants themselves assisted the Company in
registering patents which constitute the Company's intellectual property in the
IPL technology. The parties have served on each other numerous discovery
requests, and the parties have agreed to complete discovery by March 23, 2003.
The Defendants have filed a motion to dismiss the Company's claims, and the
Company has filed a motion to strike certain parts of the Defendants' statement
of defense. The parties' motions are pending before the court, and a pre-trial
hearing is scheduled for May 14, 2003.
On September 20, 2002, Lumenis Inc. filed a lawsuit against Syneron Inc.
(Canada), Syneron Inc. (Delaware), and certain former Lumenis employees, Brian
D. Lodwig, J. Scott Callihan, Mark Lazinski, and Stephen Harsnett, in the
Superior Court of California for the County of Santa Clara for breach of
contract, intentional interference with prospective economic advantage,
misappropriation of trade secrets, breach of duty of loyalty, conspiracy, unjust
enrichment, and unfair competition, seeking unspecified damages and injunctive
relief. Lumenis Inc.'s request for expedited discovery was granted by the court,
and Lumenis served initial discovery demands. On or about October 22, 2002,
Syneron Inc. (Canada) filed a motion to quash service upon it for lack of
personal jurisdiction. This motion was granted by the court in January 2003, and
Syneron Inc. (Canada) was dismissed as a defendant. On or about October 25,
2002,
17
Lumenis Inc. filed an amended complaint adding former Lumenis Inc. employee
David J. Maslowski as a defendant in the action. On or about December 4, 2002,
the defendants filed answers to the amended complaint. In addition, Syneron Inc.
(Delaware) filed a cross-complaint alleging various claims related to unfair
trade practices and competition, and two of the individual defendants filed
cross-complaints alleging various claims related to unpaid commissions. Lumenis
believes the cross-claims are wholly without merit and will vigorously defend
against them. Discovery has commenced but a trial date has not been set.
On October 28, 2002, Lumenis Ltd. and Lumenis Inc. (collectively,
"Lumenis") filed a complaint in the United States District Court for the Central
District of California alleging that Syneron Medical Ltd., Syneron Inc. and
Syneron Canada Corp. (collectively "Syneron") are infringing six U.S. patents
held by Lumenis by, inter alia, selling Syneron's Aurora DS and Aurora SR
devices. Lumenis is seeking a temporary restraining order and a preliminary and
permanent injunction against further infringement as well as an award of as yet
undetermined damages and lost profits resulting from Syneron's infringement and
Lumenis' attorneys' fees and costs. Oral argument on the request for a temporary
restraining and preliminary injunction was held on November 1, 2002. Citing the
complexity of the patent issues involved, the court declined to grant the
Company's request for a temporary restraining order. The court granted the
Company's request for expedited discovery, and ordered the appointment of an
independent expert to advise the court on the patent infringement issues raised
by the lawsuit. A technical expert has been appointed to assist the court, and
the Company's request for a preliminary injunction is scheduled to be heard on
May 19, 2003.
On October 24, 2002, Lumenis Inc. filed a complaint in the United States
District Court for the Northern District of California (the "Federal Action")
against Palomar Medical Technologies, Inc. ("Palomar") and the General Hospital
Corp. ("General"). The complaint seeks a declaratory judgment that two U.S.
patents, which are owned by General and sublicensed by Palomar to Lumenis Inc.
pursuant to a 1998 license agreement (the "License Agreement"), are invalid
and/or unenforceable and/or are not infringed by Lumenis. The Company served its
complaint on Palomar and General on February 24, 2003.
In connection with the Federal Action, Lumenis has ceased payment of
royalties under the License Agreement. In response, Palomar filed a complaint on
October 29, 2002 against Lumenis Ltd., Lumenis Inc., ESC Medical Systems Ltd.,
ESC Medical Systems Inc. and "ESC/Sharplan Laser Industries Ltd." (collectively,
"Lumenis") in the Superior Court of the Commonwealth of Massachusetts. The
complaint alleges that Lumenis has breached the License Agreement by failing to
make certain royalty payments, that Lumenis' actions have breached the implied
covenant of good faith and fair dealing arising with respect to the License
Agreement and that Lumenis' actions constitute unfair and deceptive trade
practices in violation of M.G.L., Chap. 93A, Sections 2 and 11. Palomar seeks an
award of unspecified compensatory damages, a trebling of such damages, its costs
and attorneys' fees and pre-judgment interest. The complaint has not been served
on Lumenis.
On September 30, 2002, an action was filed by Mr. Asif Adil, the Company's
former Executive Vice President - Business Operations and acting Chief Financial
Officer, in the Superior Court of New Jersey, Somerset County; Law Division
against the Company and Prof. Jacob A. Frenkel, Yacha Sutton and Sagi Genger.
The complaint alleges, among other things, that the Company removed Mr. Adil
from these positions and terminated his employment in retaliation for his report
to the Company of alleged accounting and disclosure irregularities. The action
seeks, among other things, compensatory damages and reinstatement of his
employment. The Company believes that the claims are without merit, and the
Company intends to defend itself vigorously. On October 29, 2002, the defendants
removed the action to the United States District Court for the District of New
Jersey (the "District Court"). On November 13, 2002, Mr. Adil filed a first
amended complaint in the District Court, adding Lumenis Inc. as a defendant in
the action. During January 2003, the defendants moved to dismiss the first
amended complaint, and Mr. Adil filed an opposition to the defendants' motion. A
hearing on the motion has not been scheduled.
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
18
against the development, production and sale of the Company's Alexandrite laser
for dermatological or hair removal treatments. 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 21, 1999, the Tel-Aviv Court denied Light Age's motion for
a preliminary injunction. The parties then agreed to submit their dispute for
arbitration. Accordingly, the parties filed a motion to stay the proceedings,
which was granted by the Tel Aviv Court on October 14, 1999. Since that date,
there have been no further proceedings in this matter in the Tel Aviv Court.
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 (together
the "1999 Light Age Matter"). On March 5, 1999, defendant Light Age answered the
complaint and counterclaimed against the plaintiffs, seeking unspecified damages
under thirteen counts alleging a variety of causes of action such as breach of
contract, tortious interference with contract, unjust enrichment, and
misappropriation. A hearing on the merits was held in December 2001 and the
arbitrators eventually issued a final award in the amount of approximately
$9,100,000, which includes pre-judgment interest and an award of certain
out-of-pocket expenses incurred by Light Age. The Company recorded a charge of
$5,200,000 for the fiscal year ended December 31, 2002, in addition to its
previous reserve of $4,600,000. The request by Light Age for approximately
$2,780,000 in attorneys' fees and disbursements was denied in its entirety.
Pursuant to a settlement agreement entered into on August 27, 2002, as
subsequently amended, Lumenis agreed to the entry of a final judgment on
consent, including post-judgment interest, and the Company made its final
payment of principal and interest on February 19, 2003. The law firms
representing Light Age have filed suit for nonpayment of approximately
$3,200,000 in legal fees, and Light Age has made certain claims against its
counsel alleging malpractice. In connection therewith, the law firms have
asserted an attorneys lien against all settlement amounts paid to Light Age. As
a result of this dispute, the Company filed an interpleader action with the
court on or about January 10, 2003. The parties consented to an interpleader of
approximately $1,370,000 of the settlement amount, and the funds were deposited
with the court. In addition, approximately $1,840,000 of the settlement amount
paid to Light Age has been segregated in an account pursuant to court orders
issued on or about September 26, 2002, and February 14, 2003. As of March 10,
2003, the Company has paid or submitted as interpleader a total of approximately
$9,320,000 in settlement of this action.
On September 20, 1999, Dr. Richard Urso filed what purports to be a class
action lawsuit against the Company and against a leasing company in Harris
County, Texas, alleging a variety of causes of action. In December 2000,
plaintiff amended his complaint to eliminate the class action claim. On April
13, 2001 the lawsuit was dismissed and on May 3, 2001, Dr. Urso and
approximately forty-eight physicians and medical clinics re-filed what purports
to be a class action lawsuit in Harris County, Texas. Plaintiffs filed a motion
to remove the case to Federal Court. The lawsuit was removed to the U.S.
District Court for the Southern District of Texas. The current allegations on
behalf of plaintiffs are breach of contract, breach of express and implied
warranties, fraud, misrepresentation, conversion, product liability, and
violation of the Texas Deceptive Trade Practices Act and Texas Securities Act.
In March 2002, the plaintiffs filed a motion to amend their complaint to dismiss
the class action and securities allegations and to add several new plaintiffs
and in June 2002, the motion was granted. The plaintiffs subsequently filed a
motion to remand the cases to State Court, which was granted. On February 11,
2002, the Company filed a motion to dismiss the cases based on forum non
conveniens. The motion is scheduled to be heard on April 7, 2003. The Company
denies the allegations and will continue to defend this case vigorously.
The Company was named in a number of purported class action lawsuits filed
in 1998, seeking damages and attorneys fees under the United States securities
laws for alleged irregularities in the way in which the Company reported its
financial results and disclosed certain facts throughout 1997 and 1998 and for
alleged "tipping" of non-public information to Salomon Smith Barney Inc. in
September 1998. In December 2001, the Company entered into a settlement
agreement with the plaintiffs, which requires the Company to pay $4,500,000 and
to issue up to 500,000 Ordinary Shares. In May 2002, approximately
19
$4,400,000 million of the cash portion of the settlement was paid by one of the
re-insurers of the Company's directors and officers liability insurance policy,
and in August 2002 the Company paid the remaining approximately $101,000 of the
cash portion of the settlement. During the second quarter of 2002, the Company
issued 150,000 of the 500,000 Ordinary Shares issuable to the plaintiffs and
their attorneys. The Company intends to pursue reimbursement of another
$5,000,000 of the settlement consideration from a second re-insurer that is in
liquidation. An accrual of $13,000,000 for this matter has been recorded in the
Company's 2001 Consolidated Financial Statements, which amount is based on the
fair market value of the maximum number of Ordinary Shares payable by the
Company at the time the settlement agreement was entered into. On March 26,
2002, the judge signed an Order and Final Judgment approving the settlement. As
of December 31, 2002 the balance of the accrual is $8,800,000. The Company
expects to issue the balance of the Ordinary Shares issuable pursuant to the
settlement during 2003.
On January 18, 2002, Lumenis Inc. commenced an action for patent
infringement against Trimedyne, Inc. ("Trimedyne") in the United States District
Court for the Central District of California. The complaint alleges that
Trimedyne has willfully infringed and is willfully infringing two Lumenis Inc.
U.S. patents. Lumenis Inc. seeks, inter alia, an injunction enjoining
Trimedyne's infringement, damages, costs and attorneys' fees. On or about
February 26, 2002, Trimedyne filed an answer and counterclaims in this action
denying Lumenis' material allegations of infringement and asserting
counterclaims, inter alia, seeking a declaratory judgment that Trimedyne is not
infringing the Lumenis patents and a declaratory judgment that it is entitled to
a refund of an alleged overpayment of royalties by Trimedyne of approximately
$130,000 under a 1994 patent license. Trimedyne also alleges generally that
Lumenis violated certain antitrust, trade libel and trade practices laws; and
that certain Lumenis products infringe Trimedyne's patents. Trimedyne seeks,
inter alia, an injunction enjoining Lumenis Inc. from the allegedly wrongful
acts, unspecified damages and a trebling of such damages, disgorgement of
profits, unspecified punitive damages, a refund of the alleged royalty
overpayment, and costs and attorneys fees. On April 29, 2002, the Company moved
to: (i) dismiss the federal and state antitrust counterclaims, the counterclaims
for trade libel and the counterclaim for tortious interference with prospective
economic relationships on the grounds that Trimedyne has failed to state a claim
upon which relief can be granted; (ii) dismiss or stay the claims related to the
1994 patent license, as those claims are subject to a compulsory arbitration
clause; and (iii) strike certain of the affirmative defenses asserted by
Trimedyne. On June 3, 2002, Trimedyne served an amended answer and counterclaims
re-asserting all of the claims from its original complaint other than the claims
relating to the 1994 patent license. On March 3, 2003, the Court dismissed
Trimedyne's counterclaim for tortious interference with prospective economic
relationships, but denied the Company's motion to dismiss Trimedyne's other
counterclaims. The parties have submitted this dispute to mediation, and
settlement discussions are continuing. The court has ordered discovery to be
completed by July 30, 2003, and a trial is scheduled for December 2, 2003.
On August 19, 2002, Cool Laser Optics, Inc. ("Cool Laser") commenced an
arbitration proceeding before the American Arbitration Association by filing a
demand for arbitration claiming that Lumenis Inc. violated an August 1996 patent
license agreement (that was entered into by Cool Laser and Coherent Inc. and
assigned to Lumenis Inc.) by not paying royalties thereunder respecting sales of
Lumenis Inc.'s LightSheer systems and that as a result the license agreement has
been or is terminated and Lumenis Inc.'s sales of the LightSheer systems
constitute infringement of certain of Cool Laser's U.S. patents. The demand for
arbitration seeks an unspecified amount in damages and an injunction against
further sales of the LightSheer system. On October 3, 2002, Lumenis Inc. filed
and served an answering statement denying the material allegations of the demand
for arbitration, denying that the LightSheer system infringes the referenced
patents, denying that Lumenis Inc. owes any royalties under the license
agreement and denying that Cool Laser has any right to terminate the license
agreement. Lumenis Inc.'s answering statement also asserts that the Cool Laser
patents are invalid and unenforceable and that Cool Laser is estopped from
asserting them and further asserts that the arbitrators do not have jurisdiction
to hear a claim for patent infringement. Lumenis Inc.'s answering statement
seeks, inter alia, the dismissal of all of Cool Laser's claims with prejudice.
The members of the arbitration panel have not been appointed. The Company
20
believes that Cool Laser's claims are without merit, and the Company intends to
vigorously defend against them.
In addition to the foregoing, the Company is a party in certain actions in
various countries, including the U.S., in which the Company sells its products
in which it is alleged that the Company's products did not perform as promised
and/or that the Company made certain misrepresentations in connection with the
sale of products to the plaintiffs. Management believes that none of these
actions (other than those set forth above) that are presently pending
individually would have a material adverse impact on the consolidated financial
position of the Company, although such actions in the aggregate could have a
material adverse effect on quarterly or annual operating results or cash flows
when resolved in a future period.
Finally, the Company also is a defendant in various product liability
lawsuits in which the Company's products are alleged to have caused personal
injury to certain individuals who underwent treatments using the Company's
products. The Company is defending itself vigorously, maintains insurance
against these types of claims and believes that these claims individually or in
the aggregate are not likely to have a material adverse impact on the business,
financial condition or operating results of the Company.
The Company incurred litigation settlements and related expenses of
$8,909,000 in 2002. As of December 31, 2002 the Company has an accrual of
$14,600,000 (including the provision of $8,800,000 due to the settled 1998
class-action lawsuits, a provision of $1,300,000 for the Light Age matter and
$4,500,000 due to other litigation matters) reflecting management's estimate of
the Company's potential exposure with respect to certain, but not all, legal
proceedings, claims and litigation. With respect to the pending legal
proceedings and claims for which no accrual has been recorded in the financial
statements, Company management is unable to predict the outcome of such matters,
the likelihood of an unfavorable outcome or the amount or range of potential
loss, if any.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals are the executive officers and key management of
the Company:
NAME POSITION AND BUSINESS EXPERIENCE
Arie Genger Mr. Arie Genger, age 57, has been a director of the
Company and its Vice Chairman of the Board since July
2001and was appointed as Chief Executive Officer of the
Company in January 2003. In 1985, Mr. Genger founded
Trans-Resources, Inc. ("TRI"), of which he has been
Chairman of the Board and Chief Executive Officer since
1986. TRI is a privately owned specialty chemical
company. Mr. Genger is the father of Sagi Genger, the
Company's Chief Operating Officer.
21
Sagi Genger Mr. Sagi Genger, age 31, was appointed Chief Operating
Officer in July 2001 after having served as Chief
Financial Officer of the Company since November 1999.
Prior to joining the Company, Mr. Genger was employed in
the mergers and acquisitions department of Donaldson,
Lufkin, and Jenrette, a leading Wall Street investment
bank, during the period from 1997 through 1999. Prior to
that, Mr. Genger worked from 1996 through 1997 at
Holding Capital Group, a boutique investment house. Mr.
Genger has an MBA and BS in Finance, International
Management and Legal Studies from the Wharton School of
Business. Mr. Genger is the son of Mr. Arie Genger, Vice
Chairman of the Board of Directors and Chief Executive
Officer of the Company.
Kevin R. Morano Mr. Morano, age 49, was appointed Executive Vice
President and Chief Financial Officer in March 2002.
Prior to joining the Company, Mr. Morano served as
Executive Vice President and Chief Financial Officer at
Exide Technologies from May 2000 through October 2001.
Prior to that, Mr. Morano was employed for 21 years at
ASARCO Incorporated, a global copper mining, specialty
chemicals and aggregates producer. At ASARCO, Mr. Morano
held several leadership positions including serving as
President and Chief Operating Officer in 1999 and as
Chief Financial Officer from 1993 to 1999. Since
February 2000, Mr. Morano serves as an outside director
on the board of directors of APEX Silver Mines Ltd.,
Datawatch Corporation and Bear Creek Mining Co. Mr.
Morano received a BS in Finance from Drexel University
in 1977 and received an MBA from Rider University in
1983.
Shlomo Alkalay Mr. Alkalay, age 46, was appointed Executive Vice
President and Chief Information Officer (CIO) in May
2002. Prior to joining the Company, Mr. Alkalay served
from January 2000 as Executive Vice President of
Information Technology (IT) and Business Development in
Layam Ltd. (a subsidiary of Zim Israel Navigation Co.
Ltd.). From 1976 to 1999 Mr. Alkalay served as a Naval
Commander in the Israeli Navy and filled many tasks in
the IT and logistics fields. Mr. Alkalay holds a B.Sc.
degree with honors in Industrial Engineering from the
Technion, Haifa and received his Masters in Business
Administration from Haifa University.
Yossi Gal Mr. Gal, age 47, Executive Vice President of Human
Resources, joined the Company in July 2000. Prior to
joining the Company, Mr. Gal served as Vice President of
Human Resources and MIS in GE Medical Systems Israel
from 1997 to 2000. Previously, Mr. Gal worked with
Elscint Ltd. for 16 years in a number of managerial
positions, which included Human Resources, Planning and
Control Director of Elscint's Manufacturing Division and
Corporate Manager of Staffing and Overseas Personnel.
Mr. Gal has a B.A. in Sociology and Political Science
from Haifa University and an MSc. in Management &
Behavioral Science from the Technion.
22
Wade Hampton Mr. Hampton, age 47, was appointed Executive Vice
President of the Medical Business Unit, effective March
2003. Prior to joining the Company, Mr. Hampton served
as Vice President, International at Natus Medical. From
September 1999 to October 2001, Mr. Hampton served as
Vice President, International CMG. From July 1997 to
August 1999, Mr. Hampton served in various senior
management positions with Andros, Inc., a medical
products original equipment manufacturer, most recently
as president of the medical products division. From
October 1994 to July 1997, Mr. Hampton held various
positions with SpaceLabs Medical, a supplier of patient
monitoring equipment and clinical information systems,
most recently as an area director of sales in Latin
America. Mr. Hampton holds a Bachelor of Science degree
in Business Administration from the University of
Florida.
Moshe Grencel Mr. Grencel, age 49, Executive Vice President of
Operations, joined the Company in January 2001. Prior to
joining Lumenis, Mr. Grencel served as General Manager
of Elscint Industrial Solutions, a spin-off from Elscint
Ltd. from 1998 to 2001. From 1994 to 1998, Mr. Grencel
served as Vice President of Operations in Elscint and
Manager of the Operations Division. Mr. Grencel also
served in other capacities in Engineering, Operations,
Sales and Service support. Mr. Grencel has a B.Sc.
degree in Industrial Engineering from the Technion.
Zhai Qiying Mr. Qiying, age 38, Executive Vice President responsible
for operations in China and for Asia/Pacific
distributors, joined Lumenis as part of the CMG
acquisition in April 2001. In 1992, Mr. Qiying started
the Coherent operation in China and has managed it
through the Company's acquisition of CMG. He continues
to oversee Lumenis' China operations and has directed
the growth in the Company's Chinese business, which has
increased by 40 percent in the past year, bringing 2002
sales to approximately $23 million.
Stephen B. Kaplitt Mr. Kaplitt, age 35, was appointed Executive Vice
President and General Counsel in November 2001. Prior to
joining Lumenis he was a senior associate at Becker,
Glynn, Melamed & Muffly LLP, a boutique international
law firm in New York. While at Becker, Glynn he was
seconded to the International Finance Corporation in
Washington, DC, for two years. Before that he was an
associate at Cadwalader, Wickersham & Taft in New York.
In his law firm career he worked on a wide variety of
transactions involving mergers and acquisitions,
multilateral finance, asset securitization and
reorganizations. He received his B.A. with honors from
Dartmouth College and his JD cum laude from the
Georgetown University Law Center.
Franz Krammer Mr. Krammer, age 47, Executive Vice President - European
Operations, joined the company in May 2002. Mr. Krammer
has served in numerous top management positions for
General Electric, including General Manager and Regional
Executive, Central Europe, GE Capital Services
23
and General Manager, GE Medical Systems, Central Europe.
For Picker International Europe (later Marconi Medical
Systems Europe), Mr. Krammer served as VP Marketing,
European Operations and VP, European Operations.
Sharon Levita Ms. Levita, age 35, was appointed Executive Vice
President, Finance in October 2001. Ms. Levita has
served as senior manager at Lumenis since November 1999.
Prior to joining the company, she served for five years
as head of the Israeli Desk at KPMG, Hungary and before
that for four years at Luboshitz Kasierer, a member firm
of Arthur Andersen, in Israel. Ms. Levita holds a M.BA.
in Finance Management from Bar-Ilan University, a B.A.
in Accounting & Economics from Haifa University, and a
license as a CPA in Israel.
Alon Maor Mr. Maor, age 41, was appointed Executive Vice
President, Aesthetic Business Unit in July 2001. Prior
thereto, Mr. Maor served as Chief Executive Officer of
Asia Pacific Operations from January 2000. Mr. Maor
joined the Company in January 1999 as the President and
Representative Director of Lumenis Japan, in which
position he served until January 2000. Prior to joining
the Company, Mr. Maor was the President and
Representative Director of Direx Japan, a subsidiary of
Direx Medical Systems. During his eleven years with
Direx Medical Systems, he formed Direx Japan and was
responsible for capturing major market share in Japan
and Asia.
Nina Peled Ms. Peled, age 55, was appointed Executive Vice
President of Regulatory Affairs and Quality Assurance in
May 2002. Prior to joining Lumenis, Ms. Peled served as
vice president of scientific affairs at Amira Medical
from 1998 to 2002 and vice president of regulatory
affairs at Cygnus, Inc. from 1997 to 1998. Previously
she held various leading positions in the areas of
Regulatory Affairs, Quality Assurance, Clinical
Research, Research and Development and Business
Development at i-STAT Corporation and for sixteen years
at Boehringer Mannheim Corporation. Earlier in her
career she served as assistant professor of chemistry at
Rice University in Houston. Nina holds a B.Sc., M.Sc.
and Ph.D. from the Hebrew University in Jerusalem and an
Executive MBA from the University of Houston.
During March 2002, Cedar Chemical Corporation and Vicksburg Chemical Company,
related privately held corporations, which were indirectly majority owned by Mr.
Arie Genger, filed voluntary petitions for reorganization in the U.S. Bankruptcy
Court for the Southern District of New York (Case Nos. 0211039 and 02-11040
(SMB)).
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.
The Ordinary Shares of the Company were listed on the Nasdaq National
Market ("Nasdaq") on January 24, 1996. The Company began trading on September
17, 1999 under the ticker symbol "ESCM" and on September 24, 2001, following the
required Israeli authority approval of the new name, Lumenis Ltd., the Company
began trading under the ticker symbol "LUME."
As of June 23, 1999, Lumenis ceased being considered a "foreign private
issuer" under the Securities Exchange Act of 1934, as amended. Instead, the
Company began reporting under the broader disclosure obligations applicable to
United States issuers.
As of March 10, 2003 there were 265 shareholders of record of the Company.
The following table sets forth the high and low closing sale prices for the
Ordinary Shares of the Company as reported by Nasdaq for the periods indicated.
2001 HIGH LOW
---- ------- ------
First Quarter $ 24.06 $ 10.94
Second Quarter $ 30.24 $ 23.50
Third Quarter $ 30.05 $ 18.71
Fourth Quarter $ 21.07 $ 15.60
2002 HIGH LOW
---- ------ ------
First Quarter $ 23.35 $ 7.30
Second Quarter $ 10.64 $ 3.30
Third Quarter $ 6.55 $ 2.88
Fourth Quarter $ 4.67 $ 1.80
On March 21 2003, the closing price of our Ordinary Shares was $1.53.
The Company has never paid a cash dividend on its Ordinary Shares and does
not anticipate that it will pay any cash dividend on its Ordinary Shares in the
foreseeable future.
The Company intends to retain its earnings to finance the development of
its business. Any future dividend policy will be determined by Lumenis' Board of
Directors (the "Board") based upon conditions then existing, including the
Company's earnings, financial condition, tax position and capital requirements
as well as such economic and other conditions as the Board may deem relevant.
Pursuant to Lumenis' Articles of Association, certain dividends, referred to as
final dividends (which are comparable to annual dividends which are paid by some
United States companies), may be declared by the Board. In addition, depending
upon the factors described above, the Board may declare interim dividends.
Lumenis may only pay dividends in any given fiscal year out of "profits," which
generally are defined for Israeli statutory purposes to be after tax net
earnings. In addition, because Lumenis has received certain benefits under the
Israeli law relating to "Approved Enterprises," the payment of dividends by
Lumenis may be subject to certain Israeli taxes to which Lumenis would not
otherwise be subject. Furthermore, pursuant to the terms of certain financing
agreements, the Company is restricted from paying dividends to its shareholders.
In the event that cash dividends are declared by the Company, such dividends
will be paid in New Israeli Shekel ("NIS").
Dividends paid out of income derived from an Approved Enterprise under
Israeli law are subject to a 15% withholding tax. Approved Enterprises may
receive exemption from Israeli tax for up to 10 years (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Effective Corporate Tax Rate". Should dividends be paid out of income earned by
the Company from an Approved Enterprise during the tax exempt period, such
income will be subject to tax at the rate of up to 25%. The
25
Company does not anticipate paying dividends from income derived from the
Approved Enterprise and any such earnings distributed upon dissolution are not
expected to subject the Company to income taxes.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data was derived from the Company's
Consolidated Financial Statements, which have been prepared in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP"). The
financial data set forth below should be read in conjunction with, and are
qualified in their entirety by, the Company's Consolidated Financial Statements,
related notes and other financial information contained in this Annual Report.
26
For The Year Ended December 31,
------------------------------------------------------------
In thousands except per share data
2002 2001(*) 2000 1999 1998
---------- ------------ ---------- ---------- ---------
Revenues
Net Revenues $ 348,496 $ 315,201 $ 161,625 $ 142,151 $225,206
Other Revenues -- -- -- -- --
348,496 315,201 161,625 142,151 225,206
Cost of Revenues 179,085 155,643 66,448 96,474 78,585
--------- --------- --------- --------- --------
Gross Profit 169,411 159,558 95,177 45,677 146,621
--------- --------- --------- --------- --------
Operating Expenses
Research and Development, Net 29,026 21,766 11,887 14,725 18,480
In process Research and Development -- 47,853 -- -- 2,451
Selling, Marketing and Administrative
expenses 149,536 180,157 62,479 104,231 91,549
Restructuring costs -- -- -- 20,530 --
Litigation expenses 8,909 22,244 -- 23,780 --
Impairment and write-down of
intangible and tangible assets -- 5,455 -- 17,616 --
Amortization of goodwill and other
intangible assets 9,531 13,978 -- -- --
Other -- -- -- 4,987 --
--------- --------- --------- --------- --------
Total Operating Expenses 197,002 291,453 74,366 185,869 112,480
--------- --------- --------- --------- --------
Other Operating Income -- -- 1,450 -- --
--------- --------- --------- --------- --------
Operating Income (loss) (27,591) (131,895) 22,261 (140,192) 34,141
Other income 1,720 -- 599 -- --
Financing Income (expenses), Net 14,384 (11,897) (4,470) (3,865) 1,211
--------- --------- --------- --------- --------
(40,255) (143,792) 18,390 (144,057) 35,352
Nonrecurring Expenses -- -- -- -- 28,951
--------- --------- --------- --------- --------
Income (loss) Before Income Taxes (40,255) (143,792) 18,390 (144,057) 6,401
Taxes on Income 2,250 (520) 280 4,079 2,201
--------- --------- --------- --------- --------
Net Income (loss) after income taxes (42,505) (143,272) 18,110 (148,136) 4,200
Company's share in losses of affiliates 1,703 2,596 1,120 626 200
--------- --------- --------- --------- --------
Net Income (loss) before extraordinary
items (44,208) (145,868) 16,990 (148,762) 4,000
Extraordinary gain on purchase of
Company's Subordinated -- -- 292 7,974 --
Convertible Notes 92 -- -- -- --
--------- --------- --------- --------- --------
Net income (loss) for the year $ (44,116) $(145,868) $ 17,282 $(140,788) $ 4,000
========== ========== ========== ========== ========
Earning (loss) Per Share
Basic
Income (loss) before
extraordinary items $ (1.19) $ (4.52) $ 0.67 $ (5.79) $ 0.15
Extraordinary gain -- -- 0.01 0.31 --
--------- --------- --------- --------- --------
Net earnings (loss) per share $ (1.19) $ (4.52) $ 0.68 $ (5.48) $ 0.15
========== ========== ========== ========== ========
Diluted
Income (loss) before
extraordinary items $ (1.19) $ (4.52) $ 0.60 $ (5.79) $ 0.15
Extraordinary gain -- -- -- -- 0.01
--------- --------- --------- --------- --------
Net earnings (loss) per share $ (1.19) $ (4.52) $0.61 ) $ (5.48) $ 0.15
========== ========== ========== ========== ========
Weighted Average Number Of Shares
Basic 37,184 32,302 25,354 25,674 26,027
Diluted 37,184 32,302 28,217 25,674 27,381
Cash and cash equivalents $ 18,106 $ 31,400 $ 43,396 $ 24,524 $ 42,950
Total assets 370,002 392,535 179,529 174,907 327,666
Long-term liabilities 146,401 168,492 93,930 96,691 116,306
Retained earning (deficit) (286,677) (242,561) (96,693) (113,975) 26,813
Total shareholder's equity $ 39,896 $ 79,366 $ 27,863 $ 5,943 $155,508
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (IN THOUSANDS, EXCEPT PER SHARE DATA)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of the Company's financial condition
and results of operations is based upon Lumenis' consolidated financial
statements, which have been prepared in accordance with generally accepted
accounting principles in the U.S.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent liabilities. On an
ongoing basis, the Company evaluates its estimates, including those related to
product returns, bad debts, inventories, investments, tangible and intangible
assets, income taxes, financing, warranty obligations, restructuring, long-term
service contracts, contingencies and litigation.
The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
Lumenis believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. For a detailed discussion of the application of these and
other accounting policies, see Note 3 to the Consolidated Financial Statements.
Inventories are presented at the lower of cost or market. Inventory
reserves are provided to cover risks arising from excess or slow-moving items or
technological obsolescence.
We regularly review inventory quantities on hand and record a provision for
excess and obsolete inventory. Demand for our products can fluctuate
significantly. Our products are characterized mainly by rapid technological
change, frequent new product development and rapid product obsolescence that
could result in an increase in the amount of obsolete inventory quantities on
hand. Additionally, our estimates of future product demand may prove to be
inaccurate, in which case we may have understated or overstated the provision
required for excess and obsolete inventory. Although we make every effort to
ensure the accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have a
significant impact on the value of our inventory and our reported operating
results.
Revenues from product sales are recognized when delivery has occurred,
persuasive evidence of an agreement exists, the fee is fixed or determinable and
collectibility is probable. The costs of insignificant related obligations
(mainly installations and training which are not material to functionality) are
accrued when the related revenue is recognized. Estimated sales returns are
accrued upon recognition of sales based on Lumenis' experience and management's
estimates. Revenues from service contracts are recognized on a straight-line
basis over the life of the related service contracts.
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
based on the aging of the past due amount. The allowance for doubtful accounts
as of December 31, 2002 and 2001 amounted to $17,689 and $19,744, respectively.
Intangible assets (patents, know-how, Coherent name, product trade names,
developed technology, covenant not to compete) are amortized by the
straight-line method over periods of principally between two and fifteen years.
Other intangible assets are reviewed for impairment in accordance with SFAS No.
144, whenever events such as product discontinuance, plant closures, product
dispositions or other changes in circumstances indicate that the carrying amount
may not be recoverable. When such events occur, the
28
Company compares the carrying amount of the assets to undiscounted expected
future cash flows. If this comparison indicates that there is impairment, the
amount of the impairment is calculated using discounted expected future cash
flows. The discount rate applied to these cash flows is based on the Company's
weighted average cost of capital, which represents the blended after-tax costs
of debt and equity. Any impairment loss is recognized in the statement of
operations. During the year ended December 31, 2002, the Company recorded an
impairment charge of $2,761 due to certain intangible assets.
Effective January 1, 2002, the Company adopted SFAS No. 142 , "Goodwill and
Other Intangible Assets" under which pre-existing goodwill is no longer to be
amortized. Intangible assets continue to be amortized over their useful lives.
The criteria for recognizing intangible assets have also been revised. SFAS 142
requires that goodwill be tested for impairment initially within one year of
adoption and at least annually thereafter. If an impairment loss exists it could
result in a one-time charge to earnings. The goodwill impairment test is a
two-step process that requires goodwill to be allocated to reporting units. In
the first step, the fair value of the reporting unit is compared to the carrying
value of the reporting unit. If the fair value of the reporting unit is less
than the carrying value of the reporting unit, goodwill impairment may exist,
and the second step of the test is performed. In the second step, the implied
fair value of the goodwill is compared to the carrying value of the goodwill and
an impairment loss will be recognized to the extent that the carrying value of
the goodwill exceeds the implied fair value of the goodwill. As of December 31,
2002 the Company completed its initial review for impairment of goodwill and its
annual impairment evaluation and found no indication of impairment of its
approximately $88,000 of goodwill net. For the year ended December 31, 2001
goodwill amortization expenses amounted to $4,627.
OVERVIEW
Lumenis is a world leader in the design, manufacture, marketing and
servicing of laser and light based systems for aesthetic, ophthalmic, surgical
and dental applications. Lumenis offers a broad range of laser and light based
systems which are used in skin treatments, hair removal, non-invasive treatment
of vascular lesions and pigmented lesions, acne, psoriasis, ear, nose and
throat, gynecology, urinary lithotripsy, benign prostatic hyperplasia, open
angle glaucoma, diabetic retinopathy, secondary cataracts, age-related macular
degeneration, vision correction, neurosurgery, dentistry and veterinary.
The Company reported net revenues of $348,496 for the year ended December
31, 2002 compared to net revenues of $315,201 for the year ended December 31,
2001. The net loss for the year ended December 31, 2002 was $44,116 or a diluted
net loss per share of $1.19 compared to net loss of $145,868 for the year ended
December 31, 2001 or a diluted net loss per share of $4.52.
During 2002 the Company faced several operating and cash flow issues
arising mainly from the inadequate integration of systems and processes
following the CMG acquisition and lower revenue principally in the U.S. markets
for the Company's Aesthetic business due to the loss of a number of sales people
and increased competitive pressure due to new entrants to the market. As a
result of these issues, the Company built up high levels of inventory in 2002
that reduced its availability of credit for working capital purposes. In order
to address these issues, the Company undertook an inventory reduction program,
reduced employment levels to match more closely with the lower expected revenue
levels, and arranged additional financing from Bank Hapoalim, B.M. (the "Bank").
On February 6, 2003 the Company and the Bank signed a new financing
arrangement effective as of December 31, 2002 which extends the Company's
existing revolving credit agreement from April 30, 2003 to December 31, 2003;
increased the amount available on the revolver to $50,000 until July 1, 2003 and
to $35,000 thereafter, until December 31, 2003; provides for an interest rate on
the $15,000 million increase of LIBOR plus 3%; deferred the semi-annual loan
amortization of $10,000 principal payment due April 2003 under a $100,000 term
loan which financed, in part, the CMG acquisition ($5 million is to be paid in
December 2003 and $5,000 in April 2004); and amended certain covenants in the
loan agreements. In
29
addition the new arrangement waived compliance with the debt coverage covenants
requirement for the quarter ended December 31, 2002 and replaced the covenant
with a minimum EBITDA amount, as defined, for 2003 of $50,100. Based on
management's current estimates the Company will be in compliance with this
covenant. See "Forward Looking Statements and Risk Factors". In connection with
the new arrangement the Company agreed to re-price the outstanding 1,136,300
options held by the Bank from $20.25 to the then current market price, $1.17,
changed the expiration date to April 2008, and granted the Bank an additional
275,000 five-year options exercisable at $1.17. The Company also paid the Bank a
$200 fee (see also note 12 to the Consolidated Financial Statements).
In order to restore the Company to profitability and positive cash flow
from operating activities, the Company will need to reduce its inventories,
complete its cost reduction program, control operating expenses in order to
maintain margins and return to historical levels of revenue in the U.S.
Aesthetic market by maintaining its sales force and competing successfully with
its current and anticipated new products. The Company's operating plans for
2003, including the above specific objectives, are expected to result in
adequate liquidity for the Company to be able to execute its plans. The Company
believes that internally generated funds, together with available cash and funds
available under the revolving credit agreement will be sufficient to meet the
Company's presently anticipated day-to-day operating expenses, commitments,
working capital, capital expenditure and debt payment requirements. However,
according to the Company's plans, the Company is expected to need a renewal of
the revolving line of credit or other alternative financing by December 31,
2003. The Company believes it will be able to renew the revolving line of credit
or secure other financing, however, there is no assurance that the Company would
be able to obtain such additional financing on acceptable terms, or at all. The
level of internally generated funds, however, is subject to the risk factors
described in "Forward Looking Statements and Risk Factors." On April 30, 2001,
the Company completed the acquisition of the medical group of Coherent, Inc.
("CMG"). This acquisition approximately doubled the Company's sales,
strengthened its leading position in sales of pulsed light and laser based
systems for the aesthetic and surgical markets, made it a significant competitor
in the ophthalmic segment of the medical laser market, expanded its proprietary
technology and increased its critical mass by country and customer type for the
marketing and cross-selling of its products. After completion of this
acquisition, the Company changed its name from ESC Medical Systems Ltd. ("ESC")
to Lumenis, derived from lumen, Latin for light.
Following the completion of the CMG acquisition, the Company undertook an
integration program to capture the cost savings from the acquisition. As part of
the integration plan, by the end of 2001, the Company closed or suspended
operations at two manufacturing plants and five sales offices, balancing the
production of its products between the United States and Israel. The Company
also integrated its sales force, rationalized its distributor arrangements and
reorganized its marketing and research and development functions. The Company
reduced its workforce by 160 employees, or approximately 10%, as part of the
integration program. The Company terminated distributor agreements, principally
duplicate distributors as a result of the acquisitions of CMG and HGM (described
below). As part of the integration measures the Company incurred certain costs
and charges. The charges were included in the categories as noted in the
Company's Consolidated Statement of Operations.
In November 2001, the Company also completed the acquisition of the stock
of FISMA Corporation, Instruments for Medicine & Diagnostics, Inc. and
Instruments for Surgery Inc. (collectively "HGM"). HGM is engaged in developing,
manufacturing and selling medical laser equipment primarily to the ophthalmology
market as well as providing service support for these products worldwide.
During 2002 the Company continued the reorganization of its manufacturing
operations through the relocation of its Santa Clara manufacturing operations to
Israel and Salt Lake City. The completion of the move is expected by April 2003,
resulting in expected annual savings of approximately $10,000. See "Forward
Looking Statements and Risk Factors" below.
30
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
The Company reported net revenues of $348,496 for the year ended December
31, 2002, compared to net revenues of $315,201 for the year ended December 31,
2001. The net loss for the year ended December 31, 2002, was $44,116 or a
diluted net loss per share of $1.19 compared to net loss of $145,868 for the
year ended December 31, 2001, or a diluted net loss per share of $4.52. Results
in 2002 included unusual charges of $24,931 mainly in connection with legal
settlements, inventory writedowns, severance and office closure costs. In 2001
results included unusual charges in the amount of $180,297, mainly related to
integration costs following the CMG acquisition.
Commencing January 1, 2002, we began to evaluate our business based on four
separate business units, as follows: Aesthetic, Ophthalmic, Surgical, and Other.
These business units are identified as operating segments in accordance with
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information". The information evaluated by the Company's senior management in
deciding how to allocate resources to these segments is net revenues and gross
profit.
Due to several organizational changes, commencing January 1, 2003, the
Company again reorganized its business based on 3 separate business units as
follows: Aesthetics, Medical, and Other. Medical includes the surgical and
ophthalmic operations.
Net Revenues. The Company's net revenues increased in 2002 by 11% to
$348,496 compared to $315,201 in 2001. The increase in sales reflects mainly the
contribution from the CMG acquisition offset by declines in Aesthetic sales. Net
revenue declined principally in the U.S. markets for the Company's Aesthetic
business due to the loss of a number of sales people and to increased
competitive pressure due to new entrants to the market.
For the year ended For the year ended For the year ended
December 31, 2002 December 31, 2001, pro forma December 31, 2001
for CMG as reported
---------------------- ----------------------------- -------------------------
Aesthetic $145,407 $168,105 $143,652
Ophthalmic 80,313 74,389 55,210
Surgical 59,524 63,542 54,697
Other 63,252 70,108 61,642
-------- -------- --------
Total $348,496 $376,144 $315,201
======== ======== ========
By business unit, revenues for the year ended 2002 compared to actual
reported revenues for the year ended 2001 and compared to pro-forma revenues for
the same period adjusted as if the acquisition of CMG had occurred as of January
1, 2001 are shown below:
The decrease in total revenues for the year ended December 31, 2002
compared to the year ended December 31, 2001, on a pro-forma basis for the CMG
acquisition, is mainly due to lower Aesthetic sales caused by the loss of sales
people and competitive pressure, higher than usual sales of CMG hair removal
products prior to the acquisition, offset in part by the increase in sales
mainly due to the introduction of the new Selecta and refractive products in the
Ophthalmic business. The sales people in Aesthetic have since been replaced. The
Company also ended 2002 with approximately $10,000 in backlog compared to
approximately none in the prior year. The Company believes the creation of
backlog will assist it in making revenue more linear during a quarter compared
to its current experience of most sales occurring at the end of the quarter.
Gross Profit. Gross profit increased by 6% to $169,411 in 2002 compared to
$159,558 in 2001. As a percentage of revenues the gross profit was 49% in 2002
compared to 50.6% in 2001. Excluding the write downs of inventory in the fourth
quarters of 2002 and 2001, gross profit margin decreased by 5% to 52% in
31
2002 compare to 57% in 2001. The inventory write-down in the fourth quarter of
2002 was for slow-moving and obsolete parts and demonstration equipment totaling
$10,661. The total inventory write-downs in 2001 were $17,569, mainly in
connection with discontinued products following the CMG acquisition and $1,603
following the HGM acquisition.
As a percentage of sales, the decrease in gross profit, excluding inventory
write-downs was principally due to the lower Aesthetic revenue, which is
generally higher margin, sales of lower margin products, principally refractive
products sold pursuant to the Company's distribution arrangement with Wavelight
Laser Technologie AG and lower sales price of certain products.
Net revenues and gross profit by business unit in 2002 was as follows (no
comparative data is available):
FOR THE YEAR ENDED DECEMBER 31, 2002
---------------------------------------------------------------------------
AESTHETICS OPHTHALMIC SURGICAL OTHER CONSOLIDATED
---------- ---------- -------- ----- ------------
Net Revenues $ 145,407 $ 80,313 $ 59,524 $ 63,252 $ 348,496
Gross Profit $ 93,603 $ 35,597 $ 29,307 $ 10,904 $ 169,411
Research and Development, Net. Net research and development costs increased
by 33% to $29,026 in 2002 from $21,766 in 2001. As a percentage of sales,
research and development costs were 8% in 2002 compare to 7% in 2001.
The increase in research and development costs in 2002 is due mainly to new
products introduced primarily in the Ophthalmic business, the inclusion of 8
months cost in 2001 resulting from the acquisition of CMG and higher regulatory
expense associated with introduction of new products.
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses decreased by 17% to $149,536 in 2002 compared to
$180,157 in 2001. Excluding unusual charges (listed below) selling, marketing
and administrative expenses in 2002 were $146,936 compared to $113,389 in 2001
excluding unusual charges (listed below). As a percentage of revenues, selling
marketing and administrative expenses in 2002 were 43% compared to 57% in 2001.
As a percentage of revenues, excluding unusual charges, selling, marketing and
administrative expenses in 2002 were 42% compared to 36% in 2001. Selling,
marketing and administrative expenses were higher in 2002, excluding the unusual
charges, mainly due to the contribution of additional expense from the CMG
acquisition, higher legal expenses associated with the SEC investigation and
litigation and higher integration costs.
Selling, marketing and administrative expenses in 2002 included unusual
charges totaling $2,600, as follows:
o $1,300 write-down of non-trade accounts receivable.
o $4,100 severance
o $500 office closure cost
o ($3,300) reversal of previously provided bonus accruals associated
with the CMG acquisition
Selling, marketing and administrative expenses in 2001 included unusual
charges totaling $66,768, mainly in connection with the CMG and HGM acquisitions
as follows:
o $10,213 write-down of accounts receivable in connection with terminated
distributors.
32
o $6,377 severance for terminated employees.
o $9,963 for retention bonuses.
o $4,387 relating to accrued future lease costs of closed or unused
facilities and relocation costs.
o $5,784 costs incurred for outside consultants, travel costs during
the integration, costs of the Company's change in name and other
re-branding of products and other integration costs.
o $1,110 reorganization expenses of the Company's Dental operations.
o $1,754 for bad debt provision principally to cover receivables exposure
in Argentina.
o $26,075 for non-cash compensation related to special option
grants and accelerated vesting of previously granted options
(see Note 14 to Consolidated Financial Statements).
o $1,105 in other charges mainly for sales tax matters dating back to 1995.
LITIGATION EXPENSES. Litigation expenses in 2002 totaled $8,909 compared to
$22,244 in 2001. Litigation expenses in 2002 included $5,201 in respect of an
arbitration award in the Light Age matter (see Part I Item 3- "Legal
Proceedings", above) and $3,708 which represents management's estimates of the
exposure relating to various other litigation matters.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
identified intangible assets of $9,531 includes $2,761 for impairment of
identified intangibles due to discontinued products.
FINANCING EXPENSES, NET. For the year ended December 31, 2002, financing
expenses were $14,384 compared to financing expenses of $11,897 in 2001. The
increase in 2002 is mainly due to a $1,283 increase in amortization of the value
of options given as part of the financing agreement with Bank Hapoalim B.M.
amortized in 2001 only for an eight-month period; amortization of other deferred
financing costs of approximately $2,000; and an increase in interest expenses
due to higher average borrowings under the Company's revolving credit agreement.
TAX ON INCOME (BENEFIT). Tax expense for the year ended December 31, 2002
was $2,250 compared with a benefit of $520 in the year ended December 31, 2001.
Most of the increase in the tax expense resulted from the operations in Europe
that were established during the year ended December 31, 2001. In Europe, the
Company pays taxes on income principally under an arrangement where taxes are
based primarily on net revenue. Furthermore, in April 2001, the Company reached
a final agreement with the Israeli tax authorities with regard to tax returns
filed by the Company for the years up to and including 1998. As a result, the
Company recorded in the year ended December 31, 2001 a gain of $1,600 from
reversal of the accrual recorded in previous years. Additionally, the Company
has approximately $108,000 of net operating losses in the U.S., $7,000 in Israel
and $19,000 in total in various countries in Europe. The Company has provided a
valuation reserve for the full amount of the net operating losses. For tax
purposes, the goodwill and other intangibles of approximately $117,000 allocated
to the CMG and HGM acquisitions in the U.S. will be amortized over periods of up
to 15 years from the date of acquisitions.
The (Israel) Law for Amendment of the Income Tax Ordinance (the "New Law")
was enacted on July 24, 2002. The New Law may have a significant impact on
international investments of Israeli companies. The New Law may also affect the
local taxation of individuals and companies such as Lumenis. The Company
together with its tax advisors is assessing the potential impact of the New Law
on the Company. Such impact would affect the Company's results of operations in
periods beginning after December 31, 2002. Additional regulations under the
effect of the New Law were enacted and the Company will reflect the effect of
the New Law and new regulations on its financial results in the relevant
periods.
33
COMPANY'S SHARE IN LOSSES OF AFFILIATES. In 2002, the Company's share in
losses of affiliates was $1,703 compared to $2,596 in 2001. The net losses in
2002 included $1,695 due to its share of Aculight's losses offset by $565
recognition of gains resulting from systems sold by the Company to Aculight
which was deferred in 2001. In 2002, the Company recorded an equity loss
representing 100% of Aculight's losses in excess of its paid in capital due to
the fact that the Company, through the long-term payment arrangement granted to
Aculight, is the only shareholder of Aculight which provides financing for
Aculight's activities. In addition during the fourth quarter of 2002, Lumenis
and Aculight agreed to change the terms of the receivable from Aculight;
Aculight will pay the remaining balance of $6,371 (relating to the
aforementioned products and an additional service contract sold by the Company)
in 56 equal monthly installments of $114. The net loss in 2001 included $1,007
due to the Company's share of Aculight's losses and $1,589 net elimination of
the gain resulting from sales of Company products to Aculight in the amount of
$4,764.
EXTRAORDINARY GAIN ON PURCHASE OF THE COMPANY'S SUBORDINATED CONVERTIBLE
NOTES. Extraordinary gain on the purchase of the Company's subordinated
convertible notes was $92 in 2002 compared to none in 2001. The Company
repurchased $16,539 of subordinated convertible notes in 2002.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
The Company reported net revenues of $315,201 for the year ended December
31, 2001 compared to net revenues of $161,625 for the year ended December 31,
2000. The net loss for the year ended December 31, 2001 was $145,868 or a
diluted net loss per share of $4.52 compared to net income of $17,282 for the
year ended December 31, 2000 or a diluted net earnings per share of $0.61.
NET REVENUES. The Company's net revenues increased in 2001 by 95% to
$315,201 compared to $161,625 in 2000. The increase in sales reflects mainly the
eight-month contribution from the CMG acquisition.
GROSS PROFIT. Gross profit increased by 68% to $159,558 in 2001 compared to
$95,177 in 2000. As a percentage of revenues the gross profit was 51% in 2001
compared to 59% in 2000. Excluding the write down of inventory and other charges
mainly connected to discontinued products following the acquisition of CMG and
HGM of $19,172, gross profit margin decreased by 2% to 57% in 2001. The
write-down of discontinued products is based on management's decision to keep
superior products per application, mainly discontinuing ESC's hair removal and
certain surgical products.
The increase in gross profit, excluding the write down of inventory and
other charges mainly connected to discontinued products, in 2001 was due to the
eight months of contribution from the CMG acquisition.
The decrease in gross profit, excluding the unusual charges, as a
percentage of sales in 2001 stems from the inherently lower gross margins of the
CMG product lines and was affected by changes in the product mix compared to
2000.
RESEARCH AND DEVELOPMENT, NET. Net research and development costs increased
by 83% to $21,766 in 2001 from $11,887 in 2000. As a percentage of sales,
research and development costs were 7% in 2001, the same as in 2000.
The increase in research and development costs in 2001 is due mainly to the
eight-month contribution from CMG activities.
34
IN PROCESS RESEARCH AND DEVELOPMENT. In process research and development
expenses in 2001 represent the fair value allocated to in process research and
development of the CMG acquisition of $46,650 and HGM acquisition of $1,203
based upon independent valuations (see Note 2 to the Consolidated Financial
Statements).
The fair values of the existing purchased technology and other intangible
assets, as well as the technology currently under development, were determined
using the income approach, which discounts expected future cash flows to present
value. Such projected cash flows were provided by the acquired company. The
discount rates used in the present value calculations were typically derived
from a weighted-average cost of capital and debt analysis, adjusted upward to
reflect additional risks inherent in the development life cycle.
The assumptions primarily consist of an expected completion date for the
in-process research and development projects, estimated costs to complete the
projects, and revenue and expense projections for market entrance costs.
The development of these technologies remains a significant risk due to the
remaining efforts to achieve technical feasibility, rapidly changing customer
markets and uncertainty of our intentions and abilities to continue the
development of those projects. Thus, we did not include in the projected cash
flows the effect of expense reductions or synergies as a result of integrating
the acquired in-process technology. Therefore, the valuation assumptions did not
include significant anticipated cost savings.
The following table summarizes the key assumptions underlying the
valuations for our acquisitions completed during the year ended December 31,
2001.
ACQUIRED COMPANY R&D FAIR VALUE OF ESTIMATED COSTS ESTIMATED TIME TO DISCOUNT RATE
IPR&D TO COMPLETE COMPLETE (YEARS)
- -------------------------------------------------------------------------------------------------------------------
CMG and HGM $47,853 $13,404 0.5-4.5 16%-23.4%
- -------------------------------------------------------------------------------------------------------------------
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Selling, marketing and
administrative expenses increased by 188% to $180,157 in 2001 compared to
$62,479 in 2000. As a percentage of revenues, selling marketing and
administrative expenses in 2001 were 57% compared to 39% in 2000. As a
percentage of revenues, excluding unusual charges (listed below) mainly in
connection with the CMG acquisition, selling, marketing and administrative
expenses in 2001 were 36%. Excluding the unusual charges, selling, marketing and
administrative expense as a percentage of sales improved in 2001 due to cost
reduction actions taken following the CMG acquisition.
Selling, marketing and administrative expense in 2001 include unusual
charges, mainly in connection with the CMG and HGM acquisitions as follows:
o $10,213 write-down of accounts receivable in connection with terminated
distributors.
o $6,377 severance for terminated employees.
o $9,963 for retention bonuses.
o $4,387 relating to accrued future lease costs of closed or unused
facilities and relocation costs.
o $5,784 costs incurred for outside consultants, travel costs
during the integration, costs of the Company's change in name
and other re-branding of products and other integration costs.
35
Other unusual charges were also included as follows:
o $1,110 reorganization expenses of the Company's Dental operations.
o $1,754 for bad debt provision principally to cover receivable exposure
in Argentina.
o $26,075 for non-cash compensation related to special option grants and
accelerated vesting of previously granted options (see Note 14 to
Consolidated Financial Statements).
o $1,105 in other charges mainly for sales tax matters dating back to 1995.
LITIGATION EXPENSES. Litigation expenses in the year 2001 were $22,244,
mainly with respect to certain legal proceedings, claims and litigation, which
primarily represents management's estimate of the Company's exposure relating to
certain proceedings. The principal matter was a provision of $13,000 for
settlement of a class action (See note 13C to the Consolidated Financial
Statements).
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill and other intangible assets of $13,978 includes $4,627 of amortization
of goodwill and $9,351 of amortization of other intangible assets both arising
mainly from the CMG acquisition.
IMPAIRMENT AND WRITE-DOWN OF INTANGIBLE AND TANGIBLE ASSETS. Impairment and
write-downs of tangible and intangible assets in 2001 of $5,455 includes $1,469
write-down of fixed assets in connection with relocation of facilities and
$3,986 impairment of value of investments, principally the Company's investment
in Galil Medical Ltd.
FINANCING EXPENSES, NET. For the year ended December 31, 2001, financing
expenses were $11,897 compared to financing expenses of $4,470 in 2000. The
increase in 2001 in financing expense is mainly due to the $5,769 financing cost
of the long term bank loan in connection with the CMG acquisition including
amortization of $1,692 in respect of value of options given to the bank as part
of the financing agreement and amortization of other deferred financing costs,
as well as lower average available cash and lower interest rates during the
year. Financing expenses included an exchange loss of $2,141 as a result of not
hedging certain foreign currency denominated assets and liabilities. The Company
typically hedges its foreign currency transactions.
TAX ON INCOME (BENEFIT). Tax benefit for the year ended December 31, 2001
was $520 compared with expense of $280 in the year ended December 31, 2000. In
April 2001, the Company reached a final agreement with the Israeli income tax
authorities with regard to tax returns filed by the Company for the years up to
and including 1998. As a result, the Company recorded a gain of $1,600 from
reversal of the accrual recorded in previous years. Most of the Company's income
in Israel is exempt from income taxes; the Israeli statutory tax rate for the
purpose of reconciliation of the reported tax expense is approximately zero.
Income tax expense relates primarily to the income taxes of non Israeli
subsidiaries. Additionally, the Company had, at the end of 2001, over $140,000
of net operating losses, mostly in the United States, Europe and Israel. The
Company has provided a valuation reserve for the full amount of the net
operating losses. For tax purposes, the goodwill and other intangibles of
approximately $118,000 allocated to the CMG acquisition in the U.S. will be
amortized over periods of up to 15 years from acquisition.
COMPANY'S SHARE IN LOSSES OF AFFILIATES. In 2001, the Company's share in
losses of affiliates was $2,596 compared to $1,120 in 2000. The net losses in
2001 include $1,007 due to its 50% share of Aculight's losses and $1,589 net
elimination of 50% of the gain resulting from sales of Company products to
Aculight in the amount of $4,764. In 2000, the Company's share of losses of
affiliates relates to its investment in Galil Medical Ltd., which was written
down in 2001.
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
36
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; develop, introduce
and deliver new products on a timely basis; anticipate accurately customer
demand patterns; and manage future inventory levels in line with anticipated
demand. These results may also be affected by competitive factors, the extent to
which the Company's cost reduction program succeeds, the availability of working
capital, results of litigation, the enforcement of intellectual property rights,
currency exchange rate fluctuations and economic conditions in the geographical
areas in which the Company operates. There can be no assurance that the
Company's historical performance in sales, gross profit and net income will
improve or even continue, or that sales, gross profit and net income in any
particular quarter will not be lower than those of the preceding quarters,
including comparable quarters.
RECENT PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishments of Debt", SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers" and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and amends
SFAS No. 13, "Accounting for Leases". This statement updates, clarifies and
simplifies existing accounting pronouncements. As a result of rescinding SFAS
No. 4 and SFAS No. 64, the criteria in APB No. 30 will be used to classify gains
and losses from extinguishments of debt. SFAS No. 13 was amended to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions
and makes technical corrections to existing pronouncements. The Company does not
expect the adoption of this pronouncement to have a material impact on its
results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force ("EITF") Issue No. 94-3. The
Company will adopt the provisions of SFAS No. 146 for restructuring activities
initiated after December 31, 2002. SFAS 146 requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost was
recognized at the date of the Company's commitment to an exit plan. SFAS No. 146
also establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amounts recognized. The Company does
not expect the adoption of this pronouncement to have a material impact on its
results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123",
which provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. The
Company has elected to adopt SFAS No. 123 effective January 1, 2003, for all
prospective option grants. Based on current compensation programs the Company
estimates that the adoption of SFAS No. 123 will result in a non-cash charge to
earnings of up to approximately $1,000 for the year ending December 31, 2003.
In September 2002, the EITF issued EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." The scope of EITF 00-21 deals with how
a company should recognize revenue when it sells multiple products or services
to a customer as part of an overall solution. In general, EITF 00-21 provides
the following broad criteria for recognizing revenue in multiple element
arrangements: (i) revenue should be recognized separately for separate units of
accounting; (ii) revenue for a separate unit of accounting should be recognized
only when the arrangement consideration is reliably measurable and the earnings
process is complete; (iii) consideration should be allocated among separate
units of measure of
37
accounting in an arrangement based on their relative fair values. The Company is
still evaluating the effect of EITF 00-21 on its financial position and results
of operations.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN 45 requires the guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing such guarantee and to provide certain disclosures. The
recognition provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company does not
expect the adoption of FIN 45 to have a material effect on its consolidated
financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities". FIN No. 46 classifies entities into two groups: (1) those
for which voting interests are used to determine consolidation; and (2) those
for which other interests (variable interests) are used to determine
consolidation. FIN 46 deals with the identification of Variable Interest
Entities ("VIE") and the business enterprise which should include the assets,
liabilities, non-controlling interests, and results of activities of a VIE in
its consolidated financial statements. FIN 46 would become effective during
2003. At this stage, the Company is evaluating the effect of this pronouncement
on its consolidated financial statements mainly with respect to its investment
in Aculight (see note 15D to the Consolidated Financial Statement).
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, the Company had cash and cash equivalents of
$18,106 compared to $31,400 on December 31, 2001.
OPERATING ACTIVITIES
For the year ended December 31, 2002, cash used in operating activities was
$22,706, attributable mainly to the net loss and a $2,246 increase in operating
assets and liabilities that resulted from an increase in inventory of $5,700, a
decrease in trade receivables of $2,785 and an increase in prepaid expenses and
other receivables of $3,297 offset by an increase in accounts payable, accrued
expenses and other long-term liabilities of $3,966. The increase in inventory is
after the write-downs taken in the fourth quarter of $10,661 and resulted almost
entirely from an increase in spare parts and inventory used in the Company's
service network. The Company paid approximately $7,950 during 2002 for the Light
Age settlement and $500 in respect of previously accrued litigation.
The increase in accounts payable and accrued expenses was after
approximately $13,318 in payments of previously accrued one-time charges in
respect of the CMG acquisition, of which $8,020 was paid for severance,
integration and retention bonuses, and $5,298 was paid mainly for termination of
agreements with distributors and lease agreements of abandoned facilities for
which no sub-lease has been arranged. The remaining balance of the accrued
one-time integration expenses as a result of the CMG acquisition and head count
reduction associated with the operation move to be completed in 2003 in the
amount of approximately $4,400 is expected to be paid before the end of the
first quarter of 2003. The balance of the increase in accounts payable and
accrued expenses relate to higher trade payables in part related to the increase
in inventories.
INVESTING ACTIVITIES
In 2002, cash used in investing activities was $7,753. The principal
investing activities were additional payments for the acquisition of CMG and HGM
of $1,255 and $31, respectively. Cash used for capital expenditures amounted to
approximately $7,550, which includes an investment of approximately $900 for the
purchase of a building in Salt Lake City. Proceeds from the sale of impaired
investments (Galil Medical Ltd.) amounted to $1,720 and investments in other
long-term assets amounted to approximately $1,600.
38
FINANCING ACTIVITIES
In 2002, cash provided by financing activities was $17,165. During August 2002,
the Company drew down its $70,667 four-year loan from Bank Hapoalim, B.M. in
accordance with a prior agreement between the parties entered into on March 26,
2002. The proceeds of the loan were used to repay the Company's existing
convertible subordinated notes due September 1, 2002, in the amount of $54,128
and to repay borrowings of $16,539 under its revolving credit agreement. The
$70,667 loan matures four years from date of draw down and bears interest at
LIBOR plus 6.55% increasing to 7.80% over the life of the loan. In accordance
with the March 26, 2002 agreement, the Company also increased its revolving
credit facility to $35,000 from $20,000. In connection with the loan, the
Company paid Bank Hapoalim a $4,000 fee, which will be amortized over the life
of the loan and is offset against the loan on the balance sheet.
The terms of the financing restrict certain cash dividends and have limitations
on asset dispositions or acquisitions without prior approval of the Bank. In its
three financing arrangements with the Bank, the Company is required to maintain
a ratio of its debt, as defined, to EBITDA, as defined, of less than three
times. At September 30, 2002, the Company was not in compliance with this
covenant. On November 19, 2002, the Company received a waiver of this
requirement as of September 30, 2002 and an amendment of the ratio to a maximum
of 3.7 times for the quarter ending December 31, 2002. Additionally, among other
things, the interest rate on borrowings under the revolving credit facility was
increased by 1.25% to LIBOR plus 2.25% effective November 19, 2002.
On February 6, 2003 the Company and the Bank signed a new financing arrangement
effective as of December 31, 2002 which extends the Company's existing revolving
credit agreement to December 31, 2003; increased the amount available on the
revolver to $50,000 until July 1, 2003 and to $35,000 thereafter, until December
31, 2003; provides for an interest rate on the $15,000 increase of LIBOR plus
3%; deferred the loan amortization of $10,000 principal payment due April 2003
under a $100,000 term loan which financed, in part, the CMG acquisition ($5,000
is to be paid in December 2003 and $5,000 in April 2004); and amended certain
covenants in the loan agreements. In addition the new arrangement waived
covenants requirement for the quarter ended December 31, 2002 and replaced the
covenant with a minimum EBITDA amount, as defined, for 2003 of $50,100. Based on
management's current estimates the Company will be in compliance with this
covenant. See "Forward Looking Statements and Risk Factors". In connection with
the new arrangement the Company agreed to re-price the outstanding 1,136,300
options owned by the Bank from $20.25 to the then current market price, $1.17,
changed the expiration date to April 2008, and granted the Bank an additional
275,000 five-year options exercisable at $1.17. The Company also paid the Bank a
$200 fee (see also note 12 to the Consolidated Financial Statements).
As of December 31, 2002 the Company had drawn down $38,862 of its credit
facility compared to no outstanding at December 31, 2001. The borrowings were
principally used to repay the first semi annual installment in the amount of
$10,000 of its $100,000 term loan, make the Light Age settlement payment of
$7,950 and to finance its ongoing working capital needs.
In 2002, the Company paid $5,357 to Coherent as a post closing adjustment of the
CMG acquisition purchase price.
During October 2002, the Company and Coherent, Inc. agreed to modify the terms
of the subordinated note, dated as of April 30, 2001, in the principal amount of
$12,904 which was due on October 30, 2002. The Company and Coherent agreed that
(i) the principal amount would be due as follows: (A) three equal monthly
installments of $1,075 on October 31, 2002, November 30, 2002 and December 31,
2002, respectively, and thereafter (B) seven equal monthly installments, each in
the amount of $1,383, with the first such payment due on January 31, 2003; and
(ii) interest on the unpaid principal amount would be at a rate of nine percent
(9%) per annum payable monthly, commencing on October 31, 2002. The amended
39
repayment terms are subject to certain acceleration provisions in the event the
Company secures additional financing. Total payments in respect of the note in
2002 were $3,225.
The Company believes that internally generated funds, together with available
cash and funds available under the revolving credit agreement will be sufficient
to meet the Company's presently anticipated day-to-day operating expenses,
commitments, working capital, capital expenditure and debt payment requirements.
However, according to the Company's plans, the Company is expected to need a
renewal of the revolving line of credit or other alternative financing by
December 31, 2003. The Company believes it will be able to renew the revolving
line of credit or secure other financing, however, there is no assurance that
the Company would be able to obtain such additional financing on acceptable
terms, or at all.
The level of internally generated funds, however, is subject to the risk
factors described below. See "Forward Looking Statements and Risk Factors."
GENERAL CORPORATE TAX STRUCTURE
The general corporate tax rate in Israel is currently 36%. However, the
effective tax rate payable by the Company, which derives a portion of its income
from facilities granted "Approved Enterprise" status (see below), may be
significantly less. As most of the Company's income in Israel is exempt from
income taxes, the Israeli statutory tax rate for the purposes of the
reconciliation of the reported tax expense is approximately zero. Income tax
expense in the financial statements relates primarily to the income taxes of
subsidiaries.
Income derived by the Company or its Israeli subsidiaries from sources
other than the "approved enterprises" is taxable at a regular Israeli corporate
tax rate of 36%. Income earned by non-Israeli subsidiaries is subject to
different corporate tax rates of up to 45%.
As part of the process of preparing our consolidated financial statements
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves our estimating actual current tax
exposure for the Company together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. Actual income
taxes could vary from these estimates due to future changes in income tax law or
results from final tax examinations and reviews.
INFLATIONARY ADJUSTMENTS
The Company and its Israeli subsidiaries are assessed under the provisions
of the Income Tax Law (Inflationary Adjustments), 1985, pursuant to which the
results for tax purposes are measured in Israeli currency in real terms in
accordance with changes in the Israeli Consumer Price Index ("CPI"). The
financial statements are measured in U.S. dollars; see Note 3 to the
Consolidated Financial Statements. The differences between the annual change in
the CPI and in the NIS/US dollar exchange rate causes further differences
between taxable income and the income before taxes shown in the financial
statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has
not provided for income taxes on the differences between results using the
functional currency and the tax basis of assets and liabilities. In accordance
with a recent amendment to the Inflationary Adjustments Law (the "ILA"), the
Minister of Finance may, with the approval of the Knesset Finance Committee,
determine by order, during a certain fiscal year (or until February 28th of the
following year) in which the rate of increase of the price index would not
exceed or shall not have exceeded, as applicable, 3%, that all or some of the
provisions of the ILA shall not apply to such fiscal year, or, that the rate of
increase of the price index relating to such fiscal year shall be deemed to be
0%, and to make the adjustments required to be made as a result of such
determination.
APPROVED ENTERPRISE.
The Company and one of its Israeli subsidiaries have received approval for
their investment programs in accordance with the Israeli Law for the
Encouragement of Capital Investments, 1959 (the "Law"). The
40
Company and its subsidiary, have chosen to receive their benefits through the
alternative benefits program, and, as such, they are entitled to receive certain
tax benefits including accelerated depreciation of fixed assets used in the
investment programs, as well as a full tax exemption on undistributed income
that is derived from the portion of the Company's and its subsidiary's
facilities granted approved enterprise status, for a period of ten years or a
full tax exemption for a period of six years and reduced tax rates of 10%-25%
(according to the portion of non-Israeli investors in the Company's equity, as
defined by the Law, measured on an annual basis) for an additional period of up
to four years. The benefits commence with the date on which taxable income is
first earned. The benefit period for each program is limited to the earlier to
occur of 12 years from commencement of production and 14 years from date of
approval. The Company's entitlement to the above benefits is subject to
fulfillment of certain conditions, according to the Law and related regulations.
The tax exemption period for the Company and its subsidiaries commenced in 1995.
Dividends paid out of income derived from the portion of the Company's
facilities granted approved enterprise status is subject to a 15% withholding
tax. Should dividends be paid out of income earned during the period of the tax
holiday, such income will be subject to tax at the rate of up to 25%. The
Company does not anticipate paying dividends from income derived from the
portion of the Company's facilities granted approved enterprise status and any
such earnings distributed upon dissolution are not expected to subject the
Company to income taxes. Therefore, no deferred income taxes have been provided
on such exempted income derived from the portion of the Company's facilities
granted approved enterprise status.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
Certain statements made in this Report, in other filings with the
Securities and Exchange Commission, or in press releases, web site postings or
in oral presentations made by the Company reflect the Company's estimates and
beliefs and are intended to be, and are hereby identified as, "forward looking
statements" for the purposes of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. In some cases, these forward-looking
statements can be identified by terminology such as "may," "will," "could,"
"would," "should," "expect," "plan," anticipate," "intend," "believe,"
"estimate," "predict," "potential" or "continue" or the negative of these terms
or other comparable terminology.
The Company cautions readers that such forward looking statements involve
risks and uncertainties that could cause actual results to differ materially
from those expected by the Company or expressed in the Company's forward looking
statements. Some of these factors are listed below or described elsewhere in
this Annual Report.
Readers are cautioned not to place undue reliance on forward-looking
statements made in this Annual Report, or made in other filings, web postings,
press releases or in oral presentations. Such forward-looking statements reflect
management's analysis only as of the date such statements are made and the
Company undertakes no obligation to revise publicly these forward-looking
statements to reflect events or circumstances that arise subsequently. Readers
should carefully review the risk factors set forth below and described elsewhere
in this document and in other documents the Company files from time to time with
the Securities and Exchange Commission.
The Company is being investigated by the U.S. Securities and Exchange Commission
and has been named in several class action securities lawsuits.
In February 2002, the Company received a request from the United States
Securities and Exchange Commission ("SEC") to voluntarily provide certain
documents and information for a period commencing January 1, 1998. The request
primarily relates to the Company's relationships with distributors, and also
asks for amplification of the Company's explanation of certain previously
disclosed charges and write-downs which were taken in 1999 (inventory and other
charges of approximately $30,050; bad debt charges
41
of $13,430; and litigation expenses of $4,400) and 2001(write-down of accounts
receivable of $14,043 and write-downs of inventory and other charges (amounts
not given)). On May 15, 2002, the Company learned that the SEC had issued a
formal order of investigation on these matters, including as to whether, in
connection therewith, the Company, in prior periods, may have overstated
revenues and related income and failed to maintain proper books and records and
a proper system of internal controls. This was followed by the issuance of a
subpoena on August 19, 2002, relating to the above-mentioned requested
information, as well as documents of the Company's present auditors, Brightman
Almagor & Co., and its previous auditors, Luboshitz Kasierer. The Company
believes, as of the date of this report, that it has substantially completed the
production of documents to the SEC in response to the requests previously
received with respect to the transactions involving U.S. distributors and
certain charges taken in 1999 and 2001. The Company has continued to cooperate
with the SEC in its investigation, and intends to continue doing so by providing
additional documents or testimony which may be requested. Having reviewed, among
other things, the information gathered for the SEC investigation, the Company
does not believe that a restatement of the Company's reported financial
statements is warranted. The SEC investigation, however, is ongoing and,
accordingly, the Company is unable to predict the duration or outcome of this
process.
As described in Part I, Item 3-"Legal Proceedings" above, the Company and
several of its current and former executive officers and directors are the
subject of lawsuits in the Federal District Courts for the Southern District of
New York and the Northern District of Illinois by or (as class actions) on
behalf of purchasers of Lumenis securities during periods ranging from August 2,
2001, to May 7, 2002, generally alleging among other things that the defendants
violated U.S. Federal securities laws by issuing materially false and misleading
statements during the relevant period, thereby inflating the price of Lumenis
securities.
The Company believes that all of the allegations and claims in these
lawsuits and purported class actions are baseless, and the Company intends to
vigorously defend against them. However, the Company is unable to predict the
outcome of such lawsuits or their effect (if any) on the Company's business. .
In addition, the Company has incurred and anticipates that it will continue to
incur substantial legal expenses and some diversion of senior executives' time,
in connection with the SEC investigation and the securities lawsuits.
RISKS RELATED TO THE COMPANY'S BUSINESS
The Company is highly leveraged, with indebtedness that is substantial in
relation to its shareholders' equity and significant debt service and its
continuing liquidity could become problematic.
The Company has a substantial amount of debt relative to its recent
financial performance. The Company has had to repeatedly seek extensions of
principal payment dates and Bank waivers due to its inability to meet debt
coverage covenants. While based on management's current estimates, the Company
believes it will be in compliance with Bank covenants, the Company's ability to
do so is subject to the risk factors described below, and any failure to comply
with the covenants could have a material adverse effect on the Company's
liquidity and operations. The Company's Bank borrowings bear interest at rates
as high as LIBOR plus 6.55% increasing to 7.80%. Its substantial debt requires
the Company to dedicate a substantial portion of its cash flow to debt service,
could impair its ability to obtain additional financing for capital expenditures
or other purposes, hinder its ability to adjust rapidly to changing market
conditions and competitive pressures, and could make the Company more vulnerable
in the event of a continued downturn in its business or further deterioration of
general economic conditions. Since much of the Company's debt is at floating
rates, an increase in interest rates could adversely affect the Company.
Although the Company currently believes that internally generated
funds, together with available cash and funds available under the revolving
credit agreement will be sufficient to meet the Company's presently anticipated
day-to-day operating expenses, commitments, working capital, capital expenditure
and debt payment requirements, there can be no assurance in this regard. In
particular, the level of internally generated funds is subject to the risk
factors described below, and must be viewed in light of the
42
Company's recent history of substantial operating losses and negative cash flow
from operations. If the Company is unsuccessful in achieving its plans or in
renewing its revolving credit agreements beyond December 31, 2003, it would need
to seek additional sources of financing in order to continue its operations.
There can be no assurance that such financing will be available on terms
acceptable to the Company, or at all. If additional financing were to be in the
form of equity, it could result in substantial dilution to the Company's
shareholders.
The Company's future success depends on its ability to develop and successfully
introduce new and enhanced products that meet the needs of its customers.
The Company's future success depends on its ability to anticipate its
customers' needs and develop products that address those needs. This will
require the Company to design, develop, manufacture, assemble, test market and
support new products and enhancements on a timely and cost-effective basis. The
Company cannot assure that it will successfully identify new product
opportunities and develop and bring new products to market in a timely and cost
effective manner. The Company's failure to do so could lead to a reduction in
net sales and its business may be harmed.
The Company's market is unpredictable and characterized by rapid technological
changes and evolving standards, and, if the Company fails to keep up with such
changes, its business and operating results will be harmed.
The Company's industry is characterized by extensive research and
development, rapid technological change, frequent innovations and new product
introductions, changes in customer requirements and evolving industry standards.
Demand for the Company's products could be significantly diminished by new
technologies or products that replace them or render them obsolete, which would
have a material adverse effect on the Company.
The market for laser and light based systems for aesthetic and medical
applications is relatively new and the Company's business will suffer if we fail
to educate customers or if the market does not develop as we expect.
In many cases the Company's products seek to replace traditional aesthetic
and medical procedures, such as electrolysis for hair removal and drilling for
dental treatments. The Company cannot be certain that a broad-based market for
its products will emerge among service providers and their patients or end-use
customers. Both these groups may opt to continue with traditional procedures
with which they are familiar rather than investing in high technology
alternatives that do not have decades long safety and performance track records.
The Company needs to educate potential end-use customers about the benefits of
IPL and laser systems, but the Company cannot assure that it will succeed in
this. If the Company's anticipated markets do not develop or develop more slowly
than expected, the Company's business, results of operations and financial
condition will be adversely affected.
The markets in which the Company sells its products are intensely competitive
and increased competition could continue to cause reduced sales levels, reduced
gross margins or the loss of market share.
Competition in the various laser and light products markets in which the
Company provides products is intense and is based upon price, product
performance, quality, reliability and customer service. The Company's aesthetic
products compete against products offered by Candela Corporation, Cynosure,
Inc., Laserscope, Inc., Altus Medical Inc and Syneron Medical Ltd. among others;
the Company's medical products compete against products offered by Diomed Inc.,
Dornier MedTech, and Bioletic AG among others, and the Company's ophthalmic
products compete against products offered by Carl Zeiss Micro Imaging Inc.,
Nidek Technologies Inc., and Iridex Corporation. The Company's competitors range
in size from small single product companies to large multifaceted corporations
with significant financial, technical, marketing and other resources. Some of
these competitors may be able to devote greater resources than the Company can
to the development, promotion, sale and support of their products. During
43
2002 the Company's U.S. Aesthetic sales declined dramatically due, in part, to
increased competitive pressures from new entrants to the market. There can be no
assurance that these adverse trends will not recur.
Any business combinations or mergers among the Company's competitors,
forming larger competitors with greater resources, or the acquisition of a
competitor by a major medical or technology corporation seeking to enter this
business, could result in increased competition.
The Company must spend heavily on research and development.
The Company has incurred substantial research and development expenditures
in the past, and plans to continue to do so in the future. Over the last three
fiscal years, the Company's research and development expenses have been in the
range of 6.9% to 8.3% of net revenues. The Company cannot assure that its
expenditures for research and development will result in the introduction of new
products or, if such products are introduced, that those products will achieve
sufficient market acceptance. The Company's failure to address rapid
technological changes in its markets could adversely affect its business and
results of operations.
The Company's products are subject to U.S., E.U. and international medical
regulations and controls, which impose substantial financial costs on it and
which can prevent or delay the introduction of new products.
The Company's ability to sell its products is subject to various federal,
state and international rules and regulations. In the United States, the Company
is subject to inspection and market surveillance by the FDA, to determine
compliance with regulatory requirements. The regulatory process is costly,
lengthy and uncertain. Unless an exemption applies, each device that the Company
wishes to market in the United States must receive prior review by the FDA
before it can be marketed. Certain products qualify for a Section 510(k)
("510(k)") procedure under which the manufacturer gives the FDA pre-market
notification of the manufacturer's intention to commence marketing the product.
The manufacturer must, among other things, establish that the product to be
marketed is "substantially equivalent" to a previously marketed product. In some
cases, the manufacturer may be required to include clinical data gathered under
an investigational device exemption, or IDE, granted by the FDA allowing human
clinical studies. The FDA's 510(k) clearance process usually takes from four to
twelve months, but it can take longer. If the product does not qualify for the
510(k) procedure, the manufacturer must file a pre-market approval application,
or PMA, based on testing intended to demonstrate that the product is both safe
and effective. The PMA requires more extensive clinical testing than the 510(k)
procedure and generally involves a significantly longer FDA review process.
Approval of a PMA allowing commercial sale of a product requires
pre-clinical laboratory and animal tests and human clinical studies conducted
under an IDE establishing safety and effectiveness. For products subject to
pre-market approval, the regulatory process generally takes from one to three
years or more and involves substantially greater risks and commitment of
resources than the 510(k) clearance process. The Company may not be able to
obtain necessary regulatory approvals or clearances on a timely basis, if at
all, for any of its products under development and delays in receipt of or
failure to receive such approvals or clearances could have a material adverse
effect on its business.
Following clearance or approval, marketed products are subject to
continuing regulation. The Company is required to adhere to the FDA's Quality
System Regulation, or QSR, and similar regulations in other countries, which
include design, testing, quality control and documentation requirements. Ongoing
compliance with QSR, labeling and other applicable regulatory requirements is
monitored through periodic inspections and market surveillance by the FDA and by
comparable agencies in other countries.
44
The Company's failure to comply with applicable requirements could lead to
an enforcement action, which could have an adverse effect on its business. The
FDA can institute a wide variety of enforcement actions, ranging from a public
warning letter to more severe sanctions such as:
o Fines, injunctions and civil penalties;
o Recall or seizure of the Company's products;
o Requiring the Company to repair, replace or refund the cost of its
products;
o The issuance of public notices or warnings;
o Operating restrictions, partial suspension or total shutdown of
production;
o Refusal of the Company's requests for 510 (k) clearance pre-market
approval of new products;
o Withdrawal of 510(k) clearance or pre-market approvals already granted;
and
o Criminal prosecution.
Similarly, the European Union, or E.U., determined in 1998 that the
marketing or selling of any medical product or device within the European Union
necessitates a CE Mark. The Company is now required to comply with the European
Medical Device Directive's criteria and obtain the CE Mark prior to the sale of
its medical products in any E.U. Member State. The European Medical Device
Directive sets out specific requirements for each stage in the development of a
medical product, from design to final inspection. The Company's products are
subject to additional similar regulations in most of the international markets
in which the Company sells its products.
Changes to existing U.S., E.U. and international rules and regulations
could adversely affect the Company's ability to sell its current line of
products in the United States, the European Union and internationally, and could
increase its costs and could materially adversely affect its results of
operations.
The Company depends on its facilities in Israel and on its international sales.
Many of its customers' operations are also located outside the U.S.
The Company's principal executive offices and two of its five principal
manufacturing facilities are located in Israel. Moreover, many of its customers'
operations are located outside the U.S. The Company's net sales are derived
primarily from international sales through its international sales subsidiaries
and exports to foreign distributors and resellers. The Company anticipates that
international sales will continue to account for the majority of its revenues in
the foreseeable future.
The Company's international operations and sales are subject to a number of
risks, including:
o Longer accounts receivable collection periods;
o The impact of recessions on economies worldwide;
o Reduced protection for intellectual property worldwide;
o Political and economic instability;
o Regulatory limitations imposed by foreign governments;
o Political risks;
45
o Disruption or delays in shipments caused by customs brokers or
government agencies;
o Unexpected changes in regulatory requirements, tariffs, customs,
duties, tax laws and other trade barriers;
o Difficulties in staffing and managing foreign operations;
o Preference for locally produced products; and
o Potentially adverse tax consequences resulting from changes in tax
laws.
The Company is also subject to the risks of fluctuating foreign exchange
rates, which could materially adversely affect the sales price of its products
in foreign markets as well as the costs and expenses of its international sales
subsidiaries. While the Company uses forward exchange contracts, currency swap
contracts, currency options and other risk management techniques to hedge its
foreign currency exposure, it remains exposed to the economic risks of foreign
currency fluctuations.
In addition to the general risks listed above, the Company's operations in
Israel are subject to certain country-specific risks described below under
"Risks Relating to the Company's Location in Israel".
Legal actions may restrict sales of the Company's hair removal products in Japan
Recent court decisions and enforcement actions in Japan may have the result
of restricting or prohibiting altogether the sale of the Company's hair removal
products to spas and salons in that country.
Closure of facilities in Santa Clara
The closure of manufacturing facilities in Santa Clara and their transition
to Salt Lake City and Israel might impact the Company's ability to supply
products in a timely manner, which could result in the Company losing sales and
customers.
The Company must control its operating expenses in order to achieve
profitability and positive cash flow.
The Company's ability to sustain and improve profit margins and generate
positive cash flow is largely dependent on its ability to maintain an efficient
and cost-effective operation. During 2002 the Company faced several operating
and cash flow issues arising mainly from the inadequate integration of systems
and processes following the CMG acquisition. As a result of these issues the
Company built up high levels of inventory in 2002 that reduced its availability
of credit for working capital purposes. Although the Company is attempting to
address these issues through an inventory reduction program and a cost reduction
program to reduce employment levels to match more closely with the lower
expected revenue levels, there can be no assurance of the success of these
programs.
The Company faces challenges as it integrates new and diverse operations.
The acquisition of the CMG has strained the Company's managerial and
financial systems and processes, and manufacturing and other resources. In order
to integrate its acquired businesses the Company must continue to improve
operating and financial systems and controls. If the Company fails to
successfully implement such systems and controls in a timely and cost-effective
manner its business and financial performance could be materially adversely
affected.
Any acquisitions the Company makes could harm or disrupt its business without
bringing the anticipated synergies.
46
The Company has in the past made acquisitions of other businesses, and it
continues to evaluate potential strategic acquisitions. In the event of any
future acquisitions, the Company could: issue ordinary shares that would dilute
its current shareholders' percentage ownership; pay cash; incur debt; assume
liabilities; or incur expenses related to in-process research and development,
amortization of goodwill and other intangible assets.
These purchases also involve numerous risks, including:
o Problems combining the acquired operations, technologies or products;
o Unanticipated costs or liabilities;
o Adverse effects on existing business relationships with distributors,
suppliers and customers;
o Diversion of management's attention from our core businesses; and
o Potential loss of key employees, particularly those of the purchased
organizations.
The Company depends on skilled personnel to operate its business effectively in
a rapidly changing market, and if the Company is unable to retain existing or
hire additional personnel, its ability to develop and sell its products could be
harmed.
The Company's success depends to a significant extent upon the continued
service of its key senior management, sales and technical personnel, any of whom
could be difficult to replace. Competition for qualified employees is intense,
and, as happened in 2002 as a result of the loss of Aesthetic sales personnel,
the Company's business could be adversely affected by the loss of the services
of any of its existing key personnel. The Company cannot assure that it will
continue to be successful in hiring and retaining properly trained personnel.
The Company's inability to attract, retain, motivate and train qualified new
personnel could have a material adverse effect on its business.
The Company may experience a decline in selling prices of its products as
competition increases, which could adversely affect its operating results.
The Company has in the past experienced decreases in the average selling
prices of some of its products. As competing products become more widely
available, the average selling price of its products may decrease. Trends toward
managed care, health care cost containment and other changes in government and
private sector initiatives in the United States and other countries in which the
Company does business are placing increased emphasis on the delivery of more
cost-effective medical therapies which could also adversely affect prices of the
Company's products. If the Company is unable to offset the anticipated decrease
in its average selling prices by increasing its sales volumes, its net sales
will decline. In addition, to maintain the Company's gross margins, it must
continue to reduce the cost of its products. Further, as average selling prices
of the Company's current products decline, it must develop and introduce new
products and product enhancements with higher margins. If the Company cannot
maintain its net sales and gross margins, its operating results could be
seriously harmed, particularly if the average selling prices of its products
decrease significantly.
The Company may not be able to protect its proprietary technology, which could
adversely affect its competitive advantage.
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure and confidentiality agreements and other
restrictions on disclosure to protect its intellectual property rights. The
Company has obtained and now holds approximately 183 patents worldwide and has
applied for approximately 65 patents worldwide. The Company cannot assure that
its patent applications will be approved, that any patents that may be issued
will protect its intellectual property, that any issued
47
patents will not be challenged by third parties or that any patents held by the
Company will not be found by a judicial authority to be invalid or
unenforceable. Other parties may independently develop similar or competing
technology or design around any patents that may be issued to or held by the
Company. The Company cannot be certain that the steps it has taken will prevent
the misappropriation of its intellectual property, particularly in foreign
countries where the laws may not protect its proprietary rights as fully as in
the United States. Moreover, if the Company loses any key personnel, it may not
be able to prevent the unauthorized disclosure or use of its technical knowledge
or other trade secrets by those former employees.
The Company is subject to litigation regarding intellectual property rights,
which could seriously harm its business.
The laser and light based systems industry is characterized by a very large
number of patents, some of which may bee of questionable scope, validity or
enforceability, and some of which appear to overlap with other issued patents.
As a result, there is a significant amount of uncertainty in the industry
regarding patent protection and infringement. In recent years, there has been
significant litigation in the United States involving patents and other
intellectual property rights. The Company currently is, and in the future it may
continue to be, a party to claims and litigation as a result of infringement by
third parties of the Company's intellectual property, and alleged infringement
by the Company of third party intellectual property. These claims and any
resulting lawsuits, if resolved adversely to the Company, could subject the
Company to significant liability for damages or invalidate or render
unenforceable the Company's intellectual property. These lawsuits, regardless of
their success, would likely be time-consuming and expensive to resolve and would
divert management time and attention. In addition, because patent applications
can take many years to issue, there may be applications now pending of which the
Company is unaware, which may later result in issued patents which its products
may infringe. If any of the Company's products infringes a valid and enforceable
patent, or if the Company wishes to avoid potential intellectual property
litigation on its alleged infringement, the Company could be prevented from
selling that product unless it can obtain a license, which may be unavailable.
Alternatively, the Company could be forced to pay substantial royalties, or
redesign a product to avoid infringement. The Company also may not be successful
in any attempt to redesign its product to avoid any alleged infringement.
The Company vigorously seeks to protect its intellectual property rights.
The Company has in the past initiated and may also in the future initiate,
claims or litigation against third parties for infringement of its intellectual
property to protect the Company's rights or to determine the scope and validity
of its intellectual property or the intellectual property of competitors. These
claims could result in costly litigation and the diversion of its technical and
management personnel and the final outcome may not be favorable to the Company.
If the Company is forced to take any of these actions, its business may be
seriously harmed.
The long sales cycles for the Company's products may cause it to incur
significant expenses without offsetting revenues.
Customers typically expend significant effort in evaluating, testing and
qualifying the Company's products before making a decision to purchase them,
resulting in a lengthy initial sales cycle. While the Company's customers are
evaluating its products it may incur substantial sales and marketing and
research and development expenses to customize its products to the customer's
needs. The Company may also expend significant management efforts, increase
manufacturing capacity and order long-lead-time components or materials. Even
after this evaluation process, a potential customer may not purchase its
products. As a result, these long sales cycles may cause the Company to incur
significant expenses without ever receiving revenue to offset those expenses.
If the Company fails to accurately forecast component and material requirements
for its products, it could incur additional costs and significant delays in
shipments, which could result in loss of customers.
48
The Company must accurately predict both the demand for its products and
the lead times required to obtain the necessary components and materials. Lead
times for components and materials that the Company orders vary significantly
and depend on factors including the specific supplier requirements, the size of
the order, contract terms and current market demand for components. Due to the
sophisticated nature of the components, some of the Company's suppliers may need
six months or more lead time. If the Company overestimates its component and
material requirements, it may have excess inventory, which would increase its
costs, impair its available liquidity and could have a material adverse effect
on the Company's business, operating results and financial condition. If the
Company underestimates its component and material requirements, it may have
inadequate inventory, which could interrupt and delay delivery of its products
to its customers. Any of these occurrences would negatively impact the Company's
net sales, business and operating results and could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company's dependence on sole source suppliers exposes it to possible supply
interruptions that could delay or prevent the manufacture of its systems.
Certain of the components used in the Company's products are purchased from
single sources. While the Company believes that most of these components are
available from alternate sources, an interruption of these or other supplies
could have a material adverse effect on its ability to manufacture some of its
systems.
Some of the Company's medical customers' willingness to purchase its products
depends on their ability to obtain reimbursement for medical procedures using
its products and its revenues could suffer from changes in third-party coverage
and reimbursement policies.
The Company's medical segment customers include doctors, clinics, hospitals
and other health care providers whose willingness and ability to purchase its
products depends in part upon their ability to obtain reimbursement for medical
procedures using its products from third-party payers, including private
insurance companies, and in the U.S. from health maintenance organizations, and
federal, state and local government programs, including Medicare and Medicaid.
Third-party payers are increasingly scrutinizing health care costs submitted for
reimbursement and may deny coverage and reimbursement for the medical procedures
made possible by the Company's products. Failure by the Company's customers to
obtain adequate reimbursement from third-party payers for medical procedures
that use its products or changes in third-party coverage and reimbursement
policies could have a material adverse effect on the Company's sales, results of
operations and financial condition.
Some of the Company's laser and intense pulsed light (IPL) systems are complex
in design and may contain defects that are not detected until deployed by its
customers and could lead to product liability claims.
Laser and pulsed light systems are inherently complex in design and require
ongoing regular maintenance. The technical complexity of the Company's products,
changes in its or its suppliers' manufacturing processes, the inadvertent use of
defective or contaminated materials by the Company or its suppliers and other
factors could restrict its ability to achieve acceptable product reliability.
If the Company is unable to prevent or fix defects or other problems, it
could experience, among other things:
o Legal actions by customers, patients and other third parties, which
could result in substantial judgments or settlement costs to the Company;
o Loss of customers;
o Failure to attract new customers or achieve market acceptance;
49
o Increased costs of product returns and warranty expenses;
o Damage to its brand reputation; and
o Diversion of development, engineering and management resources.
In addition, some of the Company's products are combined with products from
other vendors, which may contain defects. As a result, should problems occur, it
may be difficult to identify the source of the problem. There are also the risks
of physical injury to the patient when treated with one of the Company's
products, even if the product is not defective.
Although the Company has obtained product liability insurance, the coverage
limits of these policies may not be adequate to cover future claims. A
successful claim brought against the Company in excess of, or outside of, its
insurance coverage could have a material adverse effect on its business,
operating results and financial condition.
The Company may be required to implement a costly product recall
In the event that any of the Company's products proves to be defective, it
may voluntarily recall, or the FDA could require it to redesign or implement a
recall of, any of its products. Though it is not possible to quantify the
economic impact of a recall, it could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company uses laboratory and manufacturing materials that could be considered
hazardous; and it could be liable for any damage or liability resulting from
accidental environmental contamination or injury.
Although most of the Company's products do not incorporate any hazardous or
toxic materials or chemicals, some of the gases used in the Company's excimer
lasers are highly toxic. In addition, the Company's operations involve the use
of laboratory and manufacturing materials that could be considered hazardous.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with all Israeli, local and U.S. federal and
state regulations and standards, the risk of accidental environmental
contamination or injury from such materials cannot be entirely eliminated. In
the event of such an accident involving such materials, the Company could be
liable for any damage and such liability could exceed the amount of its
liability insurance coverage and the resources of its business, and have a
material adverse effect on the Company.
If the Company's facilities were to experience catastrophic loss, its operations
would be seriously harmed.
The Company's facilities could be subject to a catastrophic loss such as
fire, flood or earthquake, or, particularly in the case of Israel, terrorism. A
substantial portion of the Company's research and development activities and
manufacturing, and other critical business operations are located near major
earthquake faults in California, an area with a history of seismic events. Any
such loss at any of the Company's facilities could disrupt its operations, delay
production, shipments and revenue and result in large expenses to repair or
replace facilities. Any such loss could have a material adverse effect on the
Company.
The Company faces risks associated with decreased revenues from the economic
downturn.
There can be no certainty as to the severity or duration of the current
economic downturn and its impact on the vanity market for aesthetic procedures,
and therefore on the Company's future revenues.
50
The Company could be delisted from NASDAQ and become subject to "Penny Stock"
Rules.
The Company's Ordinary Shares are traded on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") National Market System, which
requires that a company have a minimum bid price of $1.00 per share in order to
qualify for continued listing. The Company's bid price in 2003 has frequently
been below $1.00. If the Company's bid price remains below $1.00 per share for
30 consecutive business days, it would receive a notice from NASDAQ, and then
have a cure period to achieve compliance by maintaining the $1.00 minimum bid
price for 10 consecutive business days during the cure period. Under a temporary
pilot program, NASDAQ has extended the cure period from 90 days to 180 days. The
Company would also have the option of "phasing-down" to the NASDAQ Small Cap
Market, where the cure period under NASDAQ's temporary pilot program would, in
the Company's case, likely be 360 days. NASDAQ has proposed additional
extensions of the cure period. If its bid price is below $3.00 per share, the
Company must generally also maintain stockholders' equity in excess of
prescribed amounts. If the Company's recent history of net losses continues,
compliance with this requirement could also become problematic. There can be no
assurance that the Company will remain in compliance with NASDAQ's criteria for
continued listing or remain listed on NASDAQ. If the Company fails to maintain
its listing on NASDAQ, and no other exclusion from the definition of "penny
stock" under the Securities Exchange Act of 1934 is available, any brokers
engaging in the Company's securities would be required to provide their
customers with a risk disclosure document, the compensation of the broker/dealer
in the transaction and other information. If brokers become subject to the
"penny stock" rules when engaging in transactions in the Company's securities,
they would become less willing to engage in such transactions, thereby making it
more difficult for shareholders to dispose of their shares of Lumenis stock.
RISKS RELATING TO THE COMPANY'S LOCATION IN ISRAEL
Conditions in Israel affect the Company's operations and may limit its ability
to produce and sell its products.
The Company is incorporated in Israel and a substantial portion of its
manufacturing facilities and research and development facilities are located in
Israel. Political, economic and military conditions in Israel could directly
affect the Company's operations. Since the establishment of the State of Israel
in 1948, a number of armed conflicts have taken place between Israel and its
Arab neighbors and a state of hostility, varying in degree and intensity, has
led to security and economic problems for Israel. Despite past progress towards
peace between Israel and its Arab neighbors, the future of these peace efforts
is uncertain. Since October 2000 there has been a significant increase in
violence primarily in the West Bank and Gaza Strip as well as in Israel itself,
and negotiations between Israel and Palestinian representatives have almost
entirely ceased. Violence in the region intensified during 2001 and 2002. The
escalation of Palestinian violence in the recent months, as well as any future
armed conflict, political instability or continued violence in the region, could
have a negative effect on the Company's business condition, harm its results of
operations and adversely affect the share price of publicly traded Israeli
companies such as the Company. Moreover, the U.S. military operation against
Iraq, and increased interest in fighting terrorist activities in the Middle East
and around the world, and the effects of the military operation against Iraq on
the State of Israel, could directly affect the Company's business. Furthermore,
several countries still restrict trade with Israeli companies, and this may
limit the Company's ability to make sales in those countries. These restrictions
may have a material adverse effect on the Company's business, operating results
and financial condition.
The Company's operations could be disrupted as a result of the obligation of key
personnel in Israel to perform military service.
Generally, all male adult citizens and permanent residents of Israel under
the age of 45 are, unless exempt, obligated to perform up to 43 days, or more
under certain circumstances, of military reserve duty annually. Additionally,
all Israeli residents of this age are subject to being called to active duty at
any time
51
under emergency circumstances, and large numbers of them have been so called
over the past few months. Currently, many of the Company's officers and
employees are obligated to perform annual reserve duty. The Company's operations
could be disrupted by the absence for a significant period of one or more of its
officers or employees due to military service. Any disruption to the Company's
operations could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company receives tax benefits from the Israeli government that may be
reduced or eliminated in the future.
The Company's facilities in Israel have been granted approved enterprise
status and they are therefore eligible for certain tax benefits under Israeli
law. In the past, the government of Israel has considered reducing or
eliminating the tax benefits available to approved enterprises such as the
Company. The Company cannot assure that these tax benefits will be continued in
the future at their current levels or at all. If these tax benefits were reduced
or eliminated, the amount of taxes that the Company pays would likely increase.
In addition, the Company's approved enterprise status imposes certain
requirements on it, such as the location of its manufacturing facilities, the
location of certain subcontractors and the extent to which it may outsource
portions of its production process. If the Company does not meet these
requirements, the law permits the authorities to cancel the tax benefits
retroactively. The government grants the Company has received for research and
development expenditures restrict its ability to manufacture products and
transfer technologies outside of Israel and require the Company to satisfy
specified conditions. If the Company fails to satisfy these conditions, it may
be required to refund grants previously received together with interest and
penalties, and may be subject to criminal charges.
The Company has received grants from the Government of Israel through the
Office of the Chief Scientist of the Ministry of Industry and Trade for the
financing of a portion of its research and development expenditures in Israel.
In 2002, 2001 and 2000, the Company received or accrued grant amounts totaling
$135, $58 and $60, respectively, from the Office of the Chief Scientist. The
terms of the Chief Scientist grants prohibit the Company from manufacturing
products or transferring technologies developed using these grants outside of
Israel without special approvals. Even if the Company receives approval to
manufacture its products outside of Israel, it may be required to pay an
increased total amount of royalties, which may be up to 300% of the grant amount
plus interest, depending on the manufacturing volume that is performed outside
of Israel. This restriction may impair the Company's ability to outsource
manufacturing or engage in similar arrangements for those products or
technologies. In addition, if the Company fails to comply with any of the
conditions imposed by the Office of the Chief Scientist, it may be required to
refund any grants previously received, together with interest and penalties and
may be subject to criminal charges. In recent years, the Government of Israel
has accelerated the rate of repayment of Chief Scientist grants and may further
accelerate them in the future. (See -- Item 1 -- Business -- Research and
Development).
It may be difficult to enforce a U.S. judgment against the Company, its officers
and directors in Israel based on U.S. securities laws claims or to serve process
on the Company's officers and directors.
The Company is incorporated in Israel. Many of the Company's executive
officers and directors are not residents of the United States, and a substantial
portion of its assets and the assets of these persons are located outside the
United States. Therefore, it may be difficult for a shareholder, or any other
person or entity, to enforce a U.S. court judgment based upon the civil
liability provisions of the U.S. securities laws in an Israeli court against the
Company or any of these persons or to effect service of process upon these
persons in the United States. In addition, it may be difficult to assert U.S.
securities law claims in original actions instituted in Israel. Israeli courts
may refuse to hear a claim based on a violation of U.S. securities laws because
Israel is not the most appropriate forum to which such a claim should be
brought. In addition, even if an Israeli court agrees to hear a claim, it may
determine that Israeli law and not U.S. law is applicable to the claim. If U.S.
law is found to be applicable, the content of applicable U.S. law must be proved
as a fact, which can be a time-consuming and costly process. Certain matters of
procedure will also
52
be governed by Israeli law. There is little binding case law in Israel
addressing the matters described above.
The new Israeli Companies Law may cause uncertainties regarding corporate
governance.
The new 1999 Israeli Companies Law (the "Companies Law"), which became
effective on February 1, 2000, resulted in significant changes to Israeli
corporate law. Under this new law, uncertainties may arise regarding corporate
governance in some areas. For example, the law obligates a controlling
shareholder, a shareholder who knows that its vote can determine the outcome of
a shareholders vote and any shareholder who, under the Company's articles of
association, can appoint or prevent the appointment of an office holder, to act
with fairness towards the Company. The Companies Law does not specify the
substance of this duty and there is no binding case law that addresses this
subject directly. These uncertainties and others could exist until this new law
has been adequately interpreted, and these uncertainties could inhibit takeover
attempts or other transactions and inhibit other corporate decisions.
Under current Israeli law, the Company may not be able to enforce covenants not
to compete and therefore may be unable to prevent competitors from benefiting
from the expertise of some of its former employees.
Recently, Israeli courts have required employers seeking to enforce
non-compete undertakings of a former employee to demonstrate that the
competitive activities of the former employee will harm one of a limited number
of material interests of the employer, which have been recognized by the courts,
such as the secrecy of a company's confidential commercial information or its
intellectual property. If the Company cannot demonstrate that harm would be
caused to its material interests, it may be unable to prevent its competitors
from benefiting from the expertise of its former employees
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has fixed rate debt of approximately $9,679 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 floating rate
debt of approximately $199,529 million, which exposes the Company to potential
losses related to changes in interest rates.
The Company has foreign subsidiaries, which sell and manufacture its
products in various markets. As a result, the Company's earnings and cash flows
are exposed to fluctuations in foreign currency exchange rates. The Company
attempts to limit this exposure by selling and linking its products mostly to
the United States dollar.
The Company also enters into foreign currency hedging transactions mainly
to protect the dollar value of its non-dollar denominated trade receivables and
to protect revenues and expenses, mainly in Yen and EURO. The gains and losses
on these transactions are included in the statement of operations or as part of
the other comprehensive loss, as appropriate, in the period in which the changes
in the exchange rate occur. There can be no assurance that such activities or
others will eliminate the negative financial impact of currency fluctuations.
Indeed, such activities may have an adverse impact on earnings.
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.
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference to "Executive
Officers of the Registrant" in Part I of this Annual Report and to the Company's
definitive proxy statement to be filed within 120 days after December 31, 2002.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after December
31, 2002.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after December
31, 2002.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after December
31, 2002.
ITEM 14.
CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, under the supervision
and with the participation of management, including the Chief Executive Officer
and Chief Financial Officer, the Company has evaluated the effectiveness of the
design and operation of its disclosure controls and procedures (as defined in
Rule 13a-14 under the Securities Exchange Act of 1934, as amended). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective in
timely identifying material information required to be included in the Company's
periodic SEC filings. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The Following Documents Are Filed As Part Of This Report:
PAGE
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(1) Financial Statements
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-50
(3) Exhibits
54
Exhibit
Number Description
2.1 Asset Purchase Agreement, dated as of February 25, 2001, by and
among Lumenis Ltd. ("Lumenis"), Lumenis Holdings Inc. ("LHI") and
Coherent, Inc. *A (Schedules omitted; Lumenis agrees to furnish
supplementally a copy of any omitted Schedule to the Commission upon
request.)
2.2 First Amendment to the Asset Purchase Agreement, dated as of April
30, 2001, by and among Lumenis, LHI and Coherent, Inc. *B
2.3 Stock Purchase Agreement, dated as of November 8, 2001, by and among
Lumenis, Lumenis Inc. and Linda H. McMahan, in her capacity as the
personal representative of the Estate of William H. McMahan. *H
(Schedules omitted; Lumenis agrees to furnish supplementally a copy
of any omitted Schedule to the Commission upon request.)
2.4 Contract of Sale, dated as of November 8, 2001, by and between
McMahan Enterprises, Inc. and Lumenis Holdings Inc. *H (Schedules
omitted; Lumenis agrees to furnish supplementally a copy of any
omitted Schedule to the Commission upon request)
3.1 Memorandum of Association, as amended (English translation)*H
3.2 Articles of Association, as amended *H
4.1 Bonus Rights Agreement, dated as of April 11, 2002, between the
Registrant and American Stock Transfer & Trust Company as Rights
Agent *I
10.1 1999 Share Option Plan *H *M
10.2 2000 Share Option Plan *H *M
10.3 Israel 2003 Share Option Plan *M *O
10.4 Loan Agreement, dated as of April 30, 2001, between Lumenis Holdings
Inc. and Bank Hapoalim B.M., an Israeli banking corporation acting
through its New York branch. *B
10.5 Letter of Intent, dated as of April 30, 2001, from Bank Hapoalim
B.M. *B
10.6 Letters, dated April 24, 2001, regarding short term line of credit
and related Agreement, dated as of April 30, 2001, between Bank
Hapoalim B.M. and Lumenis *B
10.7 Form of Indemnification Agreement *H
10.8 Employment Agreement, dated as of March 31, 2000, between Lumenis
and Yacha Sutton *E, *M
10.9 Lease Agreement between Scan Group Yokneam Ltd. and Lumenis (English
Translation) *D
10.10 Lease Agreement between Marion Laznik Industrial Buildings Ltd. and
Lumenis *D
10.11 Employment Agreement, dated as of July 11, 2001, between Lumenis and
Alon Maor *G, *M
55
10.12 Letter of Change in Prof. Jacob A. Frenkel Stock Option Plan, dated
September 7, 2000 *F, *M
10.13 Sublease Agreement, dated as of June 30, 2001, between Lumenis and
Trans-Resources, Inc. *H
10.14 Office Services Agreement, dated as of July 1, 2001 between Lumenis
and Trans-Resources, Inc. *H
10.15 Letter Agreement, date as of November 1, 2002, between Lumenis Ltd.
and Trans-Resources, Inc., extending the term of the Sublease
Agreement and the Office Services Agreement. *O
10.16 Form of Executive Variable Compensation Plan letter *H, *M
10.17 Option grant letter, dated February 22, 2001, from Lumenis to Arie
Genger. *H, *M
10.18 Loan Agreement, dated as of March 26, 2002, between Bank Hapoalim
B.M. and Lumenis *H
10.19 Letter Agreement, dated March 26, 2002, between Bank Hapoalim B.M.
and Lumenis as to Short Term Credit Line *H
10.20 Employment Agreement, dated as of January 21, 2003, between the
Company and Kevin Morano *M *O
10.21 Distribution Agreement, effective as of December 31, 2001, between
Lumenis Inc. and Eclipse Medical, Ltd. *J
10.22 Consulting Agreement, dated April 12, 2002, between the Company and
Thomas G. Hardy *K *M
10.23 Employment Agreement dated as of January 21, 2003, between the
Company and Sagi Genger *M *O
10.24 Pledge Agreement dated as of June 1, 2002, between the Company and
Sagi Genger *L *M
10.25 Letter Agreement dated October 22, 2002, between the Company and
Coherent, Inc., relating to the Promissory Note, dated as of April
30, 2001. *L
10.26 Second Amendment to Sublease, dated as of October 21, 2002, between
the Company and Coherent, Inc. *L
10.27 Termination of Consulting Agreement, dated November 8, 2002, from
Thomas G. Hardy to the Company *L
10.28 Letter Agreement, dated November 19, 2002, between the Company and
Bank Hapoalim B.M. *L
10.29 Amendment Letter Agreement, dated February 6, 2003, between Bank
Hapoalim B.M., Lumenis Ltd. and Lumenis Holdings Inc. *N
10.30 Amended and Restated Option Agreement, dated as of February 6, 2003,
between Lumenis Ltd. and Bank Hapoalim B.M. *N
56
10.31 Option Agreement, dated as of February 6, 2003, between Lumenis Ltd.
and Bank Hapoalim B.M. *N
21 List of Subsidiaries *O
23.1 Consent of Brightman Almagor & Co. *O
Note: Parenthetical references following the Exhibit Number of a document
relate to the exhibit number under which such exhibit was initially filed.
*A Incorporated by reference to said document filed as an exhibit to Current
Report on Form 8-K, File #0-13012, filed on March 20, 2001
*B Incorporated by reference to said document filed as an exhibit to Current
Report on Form 8-K, File #0-13012, filed on May 15, 2001.
*C Incorporated by reference to Registration Statement on Form F-3, File
#333-8056, filed on December 19, 1997.
*D Incorporated by reference to said document filed as an exhibit to Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, File
#0-13012, filed on March 30, 2000.
*E Incorporated by reference to said document filed as an exhibit to Quarterly
Report on Form 10-Q for the quarterly period ended March 30, 2000, File
#0-13012, filed on May 15, 2000.
*F Incorporated by reference to said document filed as an exhibit to Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2000, File
#0-13012, filed on November 15, 2000.
*G Incorporated by reference to said document filed as an exhibit to Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2001, File
# 0-13012, filed on November 14, 2001.
*H Incorporated by reference to said document filed as an Exhibit to Annual
Report on Form 10-K for the fiscal year ended December 31, 2001, File
#0-13012, filed on April 1, 2002.
*I. Incorporated by reference to said document filed as an Exhibit to the
Company's Registration Statement on Form 8-A filed on April 17, 2002.
*J. Incorporated by reference to said document filed as an Exhibit to Quarterly
Report on Form 10-Q for the Quarterly Period ended March 31, 2002, File
#0-13012, filed on May 15, 2002.
*K. Incorporated by reference to said document filed as an Exhibit to Quarterly
Report on Form 10-Q for the Quarterly Period ended June 30, 2002, File
#0-13012, filed on August 15, 2002.
*L. Incorporated by reference to said document filed as an Exhibit to Quarterly
Report on Form 10-Q for the Quarterly Period ended September 30, 2002, File
#0-13012, filed on November 19, 2002.
*M Management contract or compensatory plan or arrangement.
*N. Incorporated by reference to said document filed as an Exhibit to Current
Report on Form 8-K, File #0-13012, filed on February 12, 2003.
*O Filed herewith.
57
(b) Reports on Form 8-K
During the quarter ended December 31, 2002, (i) on November 19, 2002 (Date of
earliest event reported: November 29, 2002), the Company furnished a Current
Report on Form 8-K disclosing (under Item 9) the certification made by the
Company's chief executive officer and chief financial officer under Section 906
of the Sarbanes-Oxley Act with respect to the Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2002; and (ii) on December 23, 2002
(Date of earliest event reported: December 19, 2002), the Company filed a
Current Report on Form 8-K disclosing (under Item 5) the retirement of Yacha
Sutton as Chief Executive Officer, the assumption by Arie Genger of the duties
of Chief Executive Officer and the search for a permanent Chief Executive
Officer.
After the end of that quarter on February 12, 2003 (Date of earliest event
reported: February 6, 2003), the Company filed a Current Report on Form 8-K
disclosing (under Item 5) the new financing arrangement with Bank Hapoalim B.M.
58
LUMENIS LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
AND FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
PAGE
INDEPENDENT AUDITORS' REPORTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of December 31, 2002 and 2001 F-3
Consolidated Statements of Operations
for the years ended December 31, 2002, 2001 and 2000 F-4
Statements of Changes in Shareholders' Equity and Other
Comprehensive Loss for the years ended December 31, 2002,
2001 and 2000 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 2002, 2001 and 2000 F-6 - F-7
Notes to the Consolidated Financial Statements F-8 - F-50
[LETTERHEAD OF DELOITTE & TOUCHE BRIGHTMAN ALMAGOR]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Lumenis Ltd.
We have audited the accompanying consolidated balance sheets of Lumenis Ltd.
(the "Company") and its subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, statements of changes in
shareholders' equity and other comprehensive loss and statements of cash flows
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, 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
February 18, 2003
(March 26, 2003 as for the approval of a voluntary stock option exchange program
mentioned in Note 14B)
F-2
LUMENIS LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31
----------------------
2002 2001
--------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 18,106 $ 31,400
Trade receivables, net 100,646 106,084
Prepaid expenses and other receivables 14,265 10,968
Inventories 82,862 83,614
--------- ---------
215,879 232,066
--------- ---------
FINISHED GOODS USED IN OPERATIONS 9,808 9,180
LONG-TERM INVESTMENTS
Bank deposits -- 970
Investments in equity securities 5,642 3,337
Long term trade receivables 2,031 3,134
FIXED ASSETS, NET 18,582 16,198
GOODWILL, NET 88,039 85,752
OTHER PURCHASED INTANGIBLE ASSETS, NET 19,346 28,877
OTHER ASSETS, NET 10,675 13,021
--------- ---------
Total assets $ 370,002 $ 392,535
========= =========
CURRENT LIABILITIES
Short-term bank debt $ 38,862 $ --
Current maturities of long-term loan 15,000 10,000
Trade payables 39,224 25,763
Other accounts payable and accrued expenses 80,940 96,010
Subordinated note 9,679 12,904
--------- ---------
183,705 144,677
--------- ---------
LONG-TERM LIABILITIES
Bank loans 142,042 90,000
Deferred income 616 1,172
Accrued severance pay, net 1,228 1,169
Convertible subordinated notes -- 70,667
Other long-term liabilities 2,515 5,484
--------- ---------
146,401 168,492
--------- ---------
Total liabilities 330,106 313,169
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Ordinary shares of NIS 0.1 par value:
Authorized - 100,000,000 shares
Issued and outstanding -36,941,914 shares and 36,667,070 shares,
respectively 805 800
Additional paid-in capital 325,947 321,230
Accumulated other comprehensive loss (76) --
Accumulated deficit (286,677) (242,561)
Treasury stock, at cost 14,898 shares (103) (103)
--------- ---------
Total shareholders' equity 39,896 79,366
--------- ---------
Total liabilities and shareholders' equity $ 370,002 $ 392,535
========= =========
The accompanying notes form an integral part of these consolidated financial
statements.
F-3
LUMENIS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended December 31
------------------------------------
2002 2001 2000
---------- ---------- ----------
NET REVENUES $ 348,496 $ 315,201 $ 161,625
COST OF REVENUES 179,085 155,643 66,448
---------- ---------- ----------
Gross profit 169,411 159,558 95,177
OPERATING EXPENSES
Research and development, net 29,026 21,766 11,887
In process research and development -- 47,853 --
Selling, marketing and administrative expenses 149,536 180,157 62,479
Litigation expenses 8,909 22,244 --
Write-down of investments and
tangible assets -- 5,455 --
Amortization and impairment of goodwill and other
intangible assets 9,531 13,978 --
---------- ---------- ----------
Total operating expenses 197,002 291,453 74,366
---------- ---------- ----------
OTHER OPERATING INCOME -- -- 1,450
---------- ---------- ----------
Operating income (loss) (27,591) (131,895) 22,261
---------- ---------- ----------
OTHER INCOME 1,720 -- 599
FINANCING EXPENSES, NET 14,384 11,897 4,470
---------- ---------- ----------
Income (loss) before income taxes (40,255) (143,792) 18,390
TAXES ON INCOME (BENEFIT) 2,250 (520) 280
---------- ---------- ----------
Income (loss) after income taxes (42,505) (143,272) 18,110
COMPANY'S SHARE IN LOSSES OF AFFILIATES 1,703 2,596 1,120
---------- ---------- ----------
Net income (loss) before extraordinary item (44,208) (145,868) 16,990
EXTRAORDINARY GAIN ON PURCHASE OF
COMPANY'S CONVERTIBLE NOTES 92 -- 292
---------- ---------- ----------
Net income (loss) for the year $ (44,116) $ (145,868) $ 17,282
========== ========== ==========
EARNINGS (LOSS) PER SHARE
Basic:
Income (loss) before extraordinary item $ (1.19) $ (4.52) $ 0.67
Extraordinary gain -- -- 0.01
---------- ---------- ----------
Net earnings (loss) per share $ (1.19) $ (4.52) $ 0.68
========== ========== ==========
Diluted:
Income (loss) before extraordinary item $ (1.19) $ (4.52) $ 0.60
Extraordinary gain -- -- 0.01
========== ========== ==========
Net earnings (loss) per share $ (1.19) $ (4.52) $ 0.61
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 37,184 32,302 25,354
========== ========== ==========
Diluted 37,184 32,302 28,217
========== ========== ==========
The accompanying notes form an integral part of these consolidated financial
statements.
F-4
LUMENIS LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND OTHER COMPREHENSIVE LOSS
(IN THOUSANDS)
Accumulated
Additional other
Share paid in Unearned Comprehensive Accumulated
Capital Capital Compensation Loss Deficit
-------- ------------ ------------ ------------ ------------
Balance as of January 1, 2000 $ 577 $ 137,732 $ (117) $ -- $ (113,975)
Exercise of options 1 (1,200)
Unearned compensation 120 (120)
Grant of options 381
Amortization of unearned compensation 117
Net income for the year 17,282
-------- ------------ ------------ ------------ ------------
Balance as of December 31, 2000 578 137,033 (120) -- (96,693)
Share issuance for acquisition 132 89,498
Options granted in connection with financing 9,704
Compensation expenses of stock options 9,268
Exercise of options 71 37,219
Conversion of notes 19 21,396
Amortization of unearned compensation 120
Acceleration of stock-options 17,112
Net loss for the year (145,868)
-------- ------------ ------------ ------------ ------------
Balance as of December 31, 2001 800 321,230 -- -- (242,561)
Exercise of options 2 791
Issuance of shares in settlement of
litigation 3 3,926
Unrealized gain on available for sale
marketable equity securities 92
Currency translation adjustments (168)
Net loss for the year (44,116)
-------- ------------ ------------ ------------ ------------
Balance as of December 31, 2002 $ 805 $ 325,947 $ -- $ (76) $ (286,677)
======== ============ ==========-- ============ ============
Treasury Comprehensive
Stock Total income (loss)
------------ ------------ ------------
Balance as of January 1, 2000 $ (18,274) $ 5,943 $ --
Exercise of options 5,339 4,140
Unearned compensation --
Grant of options 381
Amortization of unearned compensation 117
Net income for the year 17,282 17,282
------------ ------------ ------------
Balance as of December 31, 2000 (12,935) 27,863
Share issuance for acquisition 89,630
Options granted in connection with financing 9,704
Compensation expenses of stock options 9,268
Exercise of options 12,832 50,122
Conversion of notes 21,415
Amortization of unearned compensation 120
Acceleration of stock-options 17,112
Net loss for the year (145,868) (145,868)
------------ ------------ ------------
Balance as of December 31, 2001 (103) 79,366
Exercise of options 793
Issuance of shares in settlement of
litigation 3,929
Unrealized gain on available for sale
marketable equity securities 92
Currency translation adjustments (168)
Net loss for the year (44,116) (44,116)
------------ ------------ ------------
Balance as of December 31, 2002 $ (103) $ 39,896 $ (44,192)
============ ============ ============
The accompanying notes form an integral part of these consolidated financial
statements.
F-5
LUMENIS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
-------------------------------
2002 2001 2000
-------- --------- --------
CASH FLOWS - OPERATING ACTIVITIES
Net income (loss) $(44,116) $(145,868) $ 17,282
Adjustments required to reconcile net income (loss) to net cash used in
operating activities:
Expenses (income) not affecting operating cash flows:
Amortization of unearned compensation -- 120 117
Increase (decrease) in deferred income (733) 1,172 --
Compensation expenses of stock options -- 9,268 --
Acceleration of stock-options -- 17,112 --
Depreciation and amortization 20,498 17,630 4,153
In process research and development -- 47,853 --
Gain on purchase of Company's convertible notes (92) -- (292)
Other income -- -- (599)
Gain from sale of an impaired investment (1,720)
Other operating income -- -- (1,450)
Impairment of tangible assets -- 1,469 --
Company's share in losses of affiliates 1,703 1,007 1,120
Write-down of investments -- 3,986 --
Amortization of other long-term assets 3,008 2,816 --
Other 992 (157) (413)
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables 2,785 (18,481) (10,137)
Increase in prepaid expenses and other receivables (3,297) (1,942) (1,347)
Decrease (increase) in inventories (1) (5,700) 6,812 (15,708)
Increase (decrease) in accounts payable, accrued
expenses and other long-term liabilities 3,966 27,924 (20,064)
-------- --------- --------
NET CASH USED IN OPERATING ACTIVITIES (22,706) (29,279) (27,338)
-------- --------- --------
CASH FLOWS - INVESTING ACTIVITIES
Purchase of fixed assets (7,550) (6,264) (3,952)
Investment in other long-term assets (1,600) -- --
Long term bank deposit, net 970 (29) --
Short term investments, net -- 123 --
Proceeds from sale of an impaired investment 1,720 -- --
Proceeds from sale of subsidiary's operations 144 288 814
Proceeds from investments, net -- 1,100 41,706
Payment for business acquired from Coherent, Inc. (Appendix A) (1,255) (110,216) --
Payment for HGM Medical Laser Systems Inc. acquisition
(Appendix B) (31) (9,925) --
Investments in equity securities (151) (2,093) --
Purchase of distribution rights -- (500) --
-------- --------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (7,753) (127,516) 38,568
-------- --------- --------
CASH FLOWS - FINANCING ACTIVITIES
Purchase of convertible notes (16,447) -- (873)
Repayment of convertible notes (54,128) -- --
Proceeds from exercise of options 793 50,122 4,140
Increase (decrease) in long-term loans 66,667 99,982 (24)
Repayment of long-term loan (10,000) -- --
Repayment of subordinated note (3,225) -- --
Repayment of liability to Coherent (5,357) -- --
Increase (decrease) in short-term bank debt, net 38,862 (4,431) 4,399
Other (874) --
-------- --------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,165 144,799 7,642
-------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,294) (11,996) 18,872
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 31,400 43,396 24,524
-------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,106 $ 31,400 $ 43,396
======== ========= ========
CASH PAID DURING THE PERIOD IN RESPECT OF:
Income taxes $ 595 $ 1,491 $ 1,387
======== ========= ========
Interest $ 10,668 $ 8,218 $ 5,920
======== ========= ========
(1) Including finished goods used in operations
The accompanying notes form an integral part of these consolidated financial
statements.
F-6
LUMENIS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
APPENDIX A - PAYMENTS FOR BUSINESS ACQUIRED FROM COHERENT INC.
YEAR ENDED DECEMBER 31
----------------------
2002 2001
--------- ---------
Current assets $ -- $ (79,704)
Fixed assets -- (5,224)
Current liabilities -- 39,486
In process research and development -- (46,650)
Goodwill and other intangibles (1,808) (125,462)
Liability with respect to the acquisition 553 4,804
--------- ---------
(1,255) (212,750)
--------- ---------
Less- amount acquired by issuance of shares -- 89,630
Less- amount acquired by issuance of subordinated note -- 12,904
--------- ---------
$ (1,255) $(110,216)
========= =========
APPENDIX B - PAYMENTS FOR ACQUISITION OF HGM MEDICAL LASER SYSTEMS INC.
YEAR ENDED DECEMBER 31
----------------------
2002 2001
-------- --------
Current Assets $ 259 $ (4,055)
Fixed assets -- (2,592)
Current Liabilities 189 1,070
In process research and development -- (1,203)
Goodwill and other intangibles (479) (3,145)
-------- --------
$ (31) $ (9,925)
======== ========
APPENDIX C -- NON-CASH ACTIVITIES
YEAR ENDED DECEMBER 31
----------------------------
2002 2001 2000
-------- -------- --------
Conversion of notes including accrued interest $ -- $ 21,415 $ --
======== ======== ========
Options granted in connection with financing $ -- $ 9,704 $ --
======== ======== ========
Issuance of shares in settlement of litigation $ 3,929 $ -- $ --
======== ======== ========
The accompanying notes form an integral part of these consolidated financial
statements.
F-7
NOTE 1 - GENERAL
Lumenis Ltd. (the "Company") is an Israeli company engaged, together with
its subsidiaries (the "Group"), in research and development, manufacture,
marketing and servicing of laser and light based systems for aesthetic,
ophthalmic, surgical and dental applications. The Group offers a broad
range of laser and intense pulsed light ("IPL") systems which are used in a
variety of applications, including photorejuvenation, hair removal,
non-invasive treatment of vascular lesions and pigmented lesions, acne,
ear, nose and throat ("ENT"), gynecology, urinary lithotripsy, benign
prostatic hyperplasia, open angle glaucoma, secondary cataracts,
age-related macular degeneration, refractive eye correction, neurosurgery,
dental and veterinary procedures. The Group's products use proprietary
technology and accordingly the Group holds numerous patents and licenses.
The Company is highly leveraged, with indebtedness that is substantial in
relation to its shareholders' equity. To finance the CMG acquisition,
ongoing working capital needs and the refinancing of the Company's
convertible subordinated notes the Company and certain of its subsidiaries
entered into various financing arrangements with Bank Hapoalim, B.M. (the
"Bank") (see Notes 11 and 12). The outstanding short-term and long-term
financing obtain from the Bank, as of December 31, 2002, amounts to
$199,529. In its three financing arrangements with the Bank, the Company
was required to maintain a ratio of its debt to EBITDA. At September 30,
2002 and December 31, 2002, the Company was not in compliance with these
covenants and received waivers from the Bank.
On February 6, 2003 the Company and the Bank signed a new financing
arrangement, effective as of December 31, 2002, which extends the Company's
existing revolving credit agreement to December 31, 2003, increases the
amount available on the revolver to $50,000 until July 1, 2003, and to
$35,000 thereafter, until December 31, 2003. In addition, such new
arrangement has replaced the covenant with a minimum EBITDA amounts, as
defined, which will be computed at the end of each fiscal quarter of 2003.
Based on the Company's current internal estimates the Company expects to be
in compliance with those covenants (see Notes 11 and 12). Should the
Company be unable to meet the covenants it will have to seek waivers from
the Bank, which it has received in the past, or the Bank could accelerate
the repayment of the loans.
In order to restore the Company to profitability and positive cash flow
from operating activities, the Company will need to reduce its inventories,
complete its cost reduction program, control operating expenses in order to
maintain margins and return to historical levels of revenue in the U.S.
Aesthetic market by maintaining its sales force and competing successfully
with its current and anticipated new products. The Company's operating
plans for 2003, including the above specific objectives, are expected to
result in adequate liquidity for the Company to be able to execute its
plans. The Company believes that internally generated funds, together with
available cash and funds available under the revolving credit agreement
will be sufficient to meet the Company's presently anticipated day-to-day
operating expenses, commitments, working capital, capital expenditure and
debt payment requirements. However, according to the Company's plans, the
Company is expected to need a renewal of the revolving line of credit or
other alternative financing by December 31, 2003. The Company believes it
will be able to renew the revolving line of credit or secure other
financing, however, there is no assurance that the Company would be able to
obtain such additional financing on acceptable terms, or at all.
The Company is party to various legal proceedings, including an SEC
investigation, as described in Note 13 C "Contingent Liabilities".
NOTE 2 - MERGERS AND ACQUISITIONS
A. On April 30, 2001 (the "Closing"), the Group acquired from
Coherent Inc. ("Coherent") all of the assets and assumed
certain liabilities of the CMG, Coherent's medical group
division. The assets acquired included among other things,
plant, equipment, certain technology, goodwill and other
physical property. CMG focuses on solid-state
The accompanying notes form an integral part of these consolidated financial
statements.
F-8
lasers and diode lasers that are developed for aesthetic,
surgical and ophthalmic applications. The core CMG
technologies are in the area of lasers, optics, embedded
software, electronic controllers, power supplies, and
mechanical design.
At the Closing, the Group paid Coherent $100,000 in cash
financed through a new term loan (see also Note 12 for
additional information on the related financing agreements),
5,432,099 ordinary shares of the Company, and an
eighteen-month note bearing interest at the rate of 5% per
annum and in the principal amount of $12,904. In 2002 an
additional cash payment of $5,357 was made as a post-closing
adjustment based on the net tangible value, at the Closing, of
CMG's assets acquired. The agreement also provides for a
post-Closing earn-out payment to Coherent of up to $25,000,
subject to certain financial conditions being met subsequent
to the Closing date. If total ophthalmic revenues exceed
$450,000 over a period starting January 1, 2001 and ending
December 31, 2004 (the "Period"), the earn-out payment will be
21.5% of the excess. In addition, if the ophthalmic business
is sold to a third party until the end of the Period for a
price in excess of $110,000, Coherent will receive an earn-out
payment equal to 50% of the excess. In no event, however, will
the earn-out payment be more than $25,000. During the fiscal
years ended December 31, 2002 and 2001 the ophthalmic
equipment sales amounted to approximately $80,000 and $55,000,
respectively (all of which are attributable to the acquired
CMG operations). Accordingly, as of December 31, 2002 such
stated conditions have not yet been met. During October 2002,
the Company and Coherent, reached a mutual agreement to modify
the terms of the subordinated note, as follows: (i) the
principal amount shall be due as follows: (A) three equal
monthly installments, each in the amount of $1,075 on October
31, 2002, November 30, 2002 and December 31, 2002,
respectively, and (B) thereafter, seven equal monthly
installments, each in the amount of approximately $1,383, with
the first such payment due on January 31, 2003; and (ii)
interest on the unpaid principal amount shall accrue at the
rate of nine percent (9%) per annum and shall be payable
monthly, commencing on October 31, 2002. The repayment
agreement is subject to certain acceleration provisions in the
event the Company secures additional financing.
The acquisition was accounted for as a purchase. The aggregate
consideration including costs directly attributable to the
completion of the acquisition (together, the "Purchase
Price"), have been allocated to the assets acquired and
liabilities assumed. The allocation of the Purchase Price
among the identifiable intangible assets was based upon
independent estimates of the fair value of those assets. As a
result, $46,650 was allocated to purchased in-process research
and development, which at the acquisition date did not reach
technological feasibility and did not have alternative future
uses. This amount has been charged to the Company's statement
of operations in accordance with Financial Accounting
Standards Board ("FASB") Interpretation No. 4. The fair value
of the purchased in-process research and development was
estimated by using the income approach which discounts
expected future cash flows to present value. The discount rate
took into account the weighted-average cost of capital and
debt adjusted upward to reflect additional risks inherent in
the development life cycle.
The consolidated balance sheet as of December 31, 2001 and the
consolidated statement of operations for the year then ended,
include, on a consolidated basis, the financial data of CMG as
of such date and for the period from the Closing to December
31, 2001, respectively.
The accompanying notes form an integral part of these consolidated financial
statements.
NOTE 2 - MERGERS AND ACQUISITIONS
A. (Cont.)
F-9
The following is a summary of intangible assets acquired as
estimated at the date of acquisition:
Coherent name $ 2,990
Product trade names 1,420
Developed technology 29,910
Covenant not to compete 878
Goodwill 98,271
---------
$ 133,469
=========
Purchased technology and other intangibles are amortized
over their estimated useful lives, generally two to fifteen
years (goodwill-15 years in the year 2001 only, developed
technology an average of 8 years), (see also note 3J).
In accordance with Statement of Financial Accounting
("SFAS") No. 141, "Business Combinations", the Group
reduced by $6,199 the initial goodwill resulting from the
CMG acquisition based on changes to pre-acquisition
contingencies and assumed liabilities during the year
following the Closing, as follows:
FOR THE FOUR FOR THE EIGHT
MONTHS ENDED MONTHS ENDED
APRIL 30, DECEMBER 31,
2002 2001
-------------- --------------
Initial goodwill, at the beginning of the period $ 90,264 $ 98,271
Inventory adjustments -- (8,993)
Distributor termination fees adjustments -- (1,229)
Other 1,808 2,215
-------------- --------------
$ 92,072 $ 90,264
============== ==============
Increase (decrease) in goodwill during the
period $ 1,808 $ (8,007)
============== ==============
Pro Forma Financial Results: The following selected
unaudited pro forma results of operations for the years
ended December 31, 2001 and 2000 of the Group and CMG, have
been prepared assuming the CMG acquisition occurred at the
beginning of each of the periods presented.
The accompanying notes form an integral part of these consolidated financial
statements.
F-10
NOTE 2 - MERGERS AND ACQUISITIONS
A. (Cont.)
YEAR ENDED DECEMBER 31
-----------------------
2001 2000
(UNAUDITED) (PROFORMA)
------------ ----------
Net revenues $ 376,144 $368,915
Net Income (loss) $(102,447) $ 15,529
Basic net earnings (loss) per share $ (2.97) $ 0.51
Diluted net earnings (loss) per share $ (2.97) $ 0.46
Weighted average number of shares used in
calculation of basic net earnings (loss) per share 34,487 30,665
Weighted average number of shares used in
calculation of diluted net earnings (loss) per share 34,487 33,528
The pro forma results of operations give effect to certain
adjustments, including amortization of purchased intangibles,
goodwill and options granted in connection with financing and write
down of inventories and receivables. Such unaudited information does
not purport to be indicative of the combined results of operations
of future periods or indicative of the results that actually would
have been realized had the entities been a single entity during the
presented periods.
The $46,650 charge for purchased in-process research and development
has been excluded from the pro forma results, as it is a material
non-recurring charge.
NOTE 2 - MERGERS AND ACQUISITIONS
B. On November 30, 2001 the Group acquired HGM Medical Laser Systems
Inc. including its manufacturing facilities ("HGM") for a total
purchase price of $9,925.
HGM is the combination of three wholly-owned subchapter
S-corporations which are engaged in developing, manufacturing and
selling medical laser equipment primarily to the ophthalmology
market as well as providing service support for these products
world-wide.
The acquisition was accounted for as a purchase, accordingly, the
purchase price has been allocated to the assets acquired. The
allocation of the purchase price among the identifiable intangible
assets was based upon independent estimates of fair value of those
assets. As a result, $1,203 was allocated to purchased in-process
research and development, which at the acquisition date did not
reach technological feasibility and did not have alternative future
uses. This amount has been charged to the Group's statement of
operations in accordance with FASB Interpretation No. 4 and was
based on the same valuation methods as was used in the CMG
acquisition (see Note 2A). In addition the Group has recorded $3,030
in respect of acquired technology which is being amortized on a
straight-line basis over 6 years and $115 of goodwill (see also Note
3J). The operations of HGM are included in the consolidated
statements from the date of acquisition.
In accordance with SFAS No. 141, the Group increased during the
eleven months ended November 30, 2002, by $479 the initial goodwill
resulting from the HGM acquisition
The accompanying notes form an integral part of these consolidated financial
statements.
F-11
based on an increase of an estimate of a pre-acquisition contingency
in the amount of $189, additional required inventory adjustments in
the amount of $259 and others in the amount of $31.
Pro forma information has not been provided, since the revenues and
net income (loss) of HGM for the year ended December 31, 2001 and
2000 were immaterial in relation to total consolidated revenues and
net income (loss). HGM's revenues for the years ended December 31,
2001 and 2000 were approximately $8,000 (unaudited) and $8,000
respectively, and net income (loss) for the years ended December 31,
2001 and 2000 amounted to approximately $374 (unaudited) and $(607),
respectively.
C. In June 2000, the Group sold the operations of one of its
subsidiaries -- Applied Optronics Corp. ("AOC"). The consideration
for this transaction was as follows: $814 paid at the closing date,
$750 to be paid quarterly, over a three-year period bearing interest
at a fixed rate of 9% per annum and one of the following: $1,000
which will be paid in three years or 149,080 shares of the buyer. As
of December 31, 2002 the total remaining amount to be received by
the Group in the amount of $776, was charged to operations due to
the buyer's failure to repay the remaining balance. The Company
intends to pursue collection of the remaining balance.
The accompanying notes form an integral part of these consolidated financial
statements.
F-12
NOTE 3 - ACCOUNTING POLICIES
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America. The
significant accounting policies followed in the preparation of the
financial statements, on a consistent basis, are:
A. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
B. FINANCIAL STATEMENTS IN U.S. DOLLARS
The accompanying financial statements have been prepared in U.S.
dollars, as the currency of the primary economic environment in
which the operations of the Group are conducted is the U.S. dollar.
The majority of the Group's sales and expenses, including materials
and components purchases, are denominated in U.S. dollars. Thus, the
functional and reporting currency of the Group is the U.S. dollar.
Transactions and balances originally denominated in U.S. dollars are
presented at their original amounts. Transactions and balances in
other currencies are re-measured into U.S. dollars in accordance
with SFAS No. 52, "Foreign Currency Translation". Foreign currency
translation adjustments are recorded in the statement of operations
as incurred.
The financial statements of an entity included in the financial
statements under the equity method of accounting, whose functional
currency is not the U.S. dollar, have been translated into dollars,
in accordance with SFAS No. 52. Accordingly all balance sheet
accounts have been translated using the exchange rate in effect at
the balance sheet date. Statements of income amounts have been
translated using the average exchange rate for the year. The
resulting aggregate translation adjustments are reported as a
component of accumulated other comprehensive loss in the
shareholders` equity.
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Material inter-company balances and
transactions have been eliminated.
D. CASH AND CASH EQUIVALENTS
All highly liquid investments are considered as cash equivalents if
the investments mature within three months from the date of
investment.
The accompanying notes form an integral part of these consolidated financial
statements.
F-13
NOTE 3 - ACCOUNTING POLICIES (CONT.)
E. 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 based on the aging of the past due
amounts. The allowance for doubtful accounts as of December 31, 2002
and 2001 amounted to $17,689 and $19,744, respectively.
F. INVENTORIES
Inventories are presented at the lower of cost or market. Inventory
reserves are provided to cover risks arising from slow-moving items
or technological obsolescence. Cost is determined as follows:
Raw materials - "First-in, first-out" method
Finished products and work in process - Materials as above, labor and overhead
costs on an average basis.
Finished products located at customer sites in respect of support
for warranty obligations or finished products used for promotional
purposes are separately classified as finished goods used in
operations and are depreciated over a period of three years.
G. INVESTMENTS IN EQUITY SECURITIES
Investments in non-marketable equity securities are stated at cost,
unless the Group has significant influence over the investee as
defined in Accounting Principles Board Opinion ("APB") No. 18. The
investments in companies over which the Group can exercise
significant influence are presented using the equity method of
accounting. The Group generally discontinues applying the equity
method when its investment (including advances and loans) is reduced
to zero and it has not guaranteed obligations of the affiliate or
otherwise committed to provide further financial support to the
affiliate.
Investment in marketable equity securities covered by SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities",
were designated as available-for-sale. Accordingly, these securities
are stated at fair value, with unrealized gains reported in
accumulated other comprehensive loss. Realized gain and losses are
calculated based on specific identification method. Other-than-
temporary declines in value from the original cost are charged to
operations in the period in which the loss occurs. In determining
whether other-than- temporary decline in the market value has
occurred, the Company considers the duration that and the extent to
which market value is below original cost.
H. LONG-TERM TRADE RECEIVABLES
Long-term trade receivables are recorded at estimated present values
determined based on current rates of interest and reported at the
net amounts in the accompanying financial statements. Imputed
interest is recognized, using the effective interest method as a
component of interest income.
The accompanying notes form an integral part of these consolidated financial
statements.
F-14
NOTE 3 - ACCOUNTING POLICIES (CONT.)
I. FIXED ASSETS
Fixed assets are presented at cost, net of accumulated depreciation.
Annual depreciation is calculated based on the straight-line method
over the shorter of the estimated useful lives of the related assets
or terms of the related leases as follows:
YEARS
-----
Computers and equipment 3-10
Office furniture and equipment 5-15
Buildings 40
Leasehold improvements Over the period of the lease
Vehicles 7
Effective January 1, 2002, the Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
This statement addresses financial accounting and reporting for the
impairment of long-lived assets. The statement also broadens the
definition of what constitutes a discontinued operation and how the
results of a discontinued operation are to be measured and
presented. The adoption of this statement did not have a material
impact on the Company's results of operations or financial position.
J. INTANGIBLE ASSETS
Intangible assets (patents, know-how, Coherent name, product trade
names, developed technology, covenant not to compete) are amortized
by the straight-line method over periods of principally between two
and fifteen years. Intangible assets are reviewed for impairment in
accordance with SFAS No. 144, whenever events such as product
discontinuance, plant closures, product dispositions or other
changes in circumstances indicate that the carrying amount may not
be recoverable. When such events occur, the Group compares the
carrying amount of the assets to undiscounted expected future cash
flows. If this comparison indicates that there is an impairment, the
amount of the impairment is calculated using discounted expected
future cash flows. The discount rate applied to these cash flows is
based on the Group's weighted average cost of capital, which
represents the blended after-tax costs of debt and equity. Any
impairment loss is recognized in the statement of operations. During
the year ended December 31, 2002, the Group recorded an impairment
charge of $2,761 for certain intangible assets.
The accompanying notes form an integral part of these consolidated financial
statements.
F-15
NOTE 3 - ACCOUNTING POLICIES (CONT.)
J. INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" under which pre-existing
goodwill is no longer amortized. Intangible assets continue to be
amortized over their useful lives. The criteria for recognizing
intangible assets have also been revised. SFAS No. 142 requires that
goodwill be tested for impairment initially within one year of
adoption and at least annually thereafter. If an impairment loss
exists it could result in a one-time charge to earnings. The
goodwill impairment test is a two-step process that requires
goodwill to be allocated to reporting units. In the first step, the
fair value of the reporting unit is compared to the carrying value
of the reporting unit. If the fair value of the reporting unit is
less than the carrying value of the reporting unit, goodwill
impairment may exist, and the second step of the test is performed.
In the second step, the implied fair value of the goodwill is
compared to the carrying value of the goodwill and an impairment
loss will be recognized to the extent that the carrying value of the
goodwill exceeds the implied fair value of the goodwill. As of
December 31, 2002 the Company completed its initial review for
impairment of goodwill and its annual impairment evaluation and
found no indication of impairment of its approximately $88,000 of
goodwill, net. For the year ended December 31, 2001 goodwill
amortization expenses amounted to $4,627.
Debt issuance costs are amortized over the term of the related debt
by the effective interest rate method.
K. RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as
incurred. Amounts received or receivable from the Government of
Israel, through the Office of the Chief Scientist ("OCS") for
participation in certain research and development are offset against
the Group's research and development costs. Amounts recorded as an
offset against research and development expenses amounted to $135,
$58 and $60 for the years ended December 31, 2002, 2001 and 2000,
respectively.
L. REVENUE RECOGNITION
Revenues from product sales are recognized when delivery has
occurred, persuasive evidence of an agreement exists, the fee is
fixed or determinable and collectibility is probable. The costs of
insignificant related obligations (mainly installations and training
which are not material to functionality) are accrued when the
related revenue is recognized. The Group accrues estimated sales
returns upon recognition of sales based on the Group's experience
and management's estimates. The provision for returns as of December
31, 2002 and 2001 amounted to $4,550 and $2,849, respectively.
Revenues from service contracts are recognized on a straight-line
basis over the life of the related service contracts.
NOTE 3 - ACCOUNTING POLICIES (CONT.)
M. PRODUCT WARRANTIES
The accompanying notes form an integral part of these consolidated financial
statements.
F-16
Accrued warranty costs are recorded at the time of sale based on
the Group's experience and management's estimates. Changes in
warranty provision during the year ended December 31, 2002 were
as follows:
Warranty provision as of December 31, 2001 $ 9,891
Payments made under warranty (11,109)
Increase in product warranty provision for current year 10,707
----------
Warranty provision as of December 31, 2002 $ 9,489
N. STOCK-BASED COMPENSATION
The Group accounts for employee stock-based compensation in
accordance with APB No. 25, "Accounting for Stock Issued to
Employees" and the related FASB interpretations. 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 also note 3R). The Group accounts for
stock-based compensation to consultants in accordance with SFAS No.
123 "Accounting for Stock Based Compensation" and EITF 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
The following table illustrates the pro forma effect on net income
(loss) and earning (loss) per ordinary share as if the fair value
method were applied to all outstanding and unvested stock options
for the years ended December 31, 2002, 2001 and 2000.
Had compensation cost been determined under the alternative fair
value accounting method provided for under SFAS No. 123, the
Company's net income (loss) and earnings (loss) per share for the
years 2002, 2001 and 2000 would have been reduced to the following
pro forma amounts:
2002 2001 2000
------------ ------------ ------------
Net income (loss), as reported $ (44,116) $ (145,868) $ 17,282
Add: amortization of deferred compensation
related to employee stock options included in
consolidated statements of operations
-- 26,075 498
Deduct: amortization of deferred compensation
at fair value 22,755 36,820 9,280
Proforma net income (loss) $ (66,871) $ (156,613)(*) $ 8,500
Earning (loss) per share
Basic- as reported $ (1.19) $ (4.52) $ 0.68
Basic- proforma $ (1.80) $ (4.85)(*) $ 0.34
Diluted- as reported $ (1.19) $ (4.52) $ 0.61
Diluted- proforma $ (1.80) $ (4.85)(*) $ 0.30
(*) Pro forma net loss revised from $(171,920) and Pro forma basic and diluted
loss per share revised from $(5.32)
Under Statement SFAS No. 123 the fair value of each option grant is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions
used for grants in 2002, 2001 and 2000: (1) expected life of 3
years;
The accompanying notes form an integral part of these consolidated financial
statements.
F-17
(2) dividend yield of 0%; (3) expected volatility of 100% in 2002,
66% in 2001 and 71% in 2000; and (4) risk-free interest rate of 1.8%
in 2002, 3.9% in 2001 and 6.5% in 2000.
O. DEFERRED TAXES
The Group accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This statement prescribes the use of
the liability method whereby account balances of deferred tax assets
and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Group provides a
valuation allowance if necessary, to reduce deferred tax assets to
their estimated realizable value.
P. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are computed based on the weighted
average number of ordinary shares outstanding. Diluted earnings
(loss) per share reflect potential dilution from exercise of options
or conversion of convertible securities into ordinary shares in
accordance with SFAS No. 128, "Earnings Per Share".
Q. DERIVATIVE INSTRUMENTS
On January 1, 2001, the Group adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", which requires, principally, the presentation
of all derivatives as either assets or liabilities on the balance
sheet and the measurement of those instruments at fair value. Gains
and losses resulting from changes in the fair values of derivative
instruments are accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The adoption of such
statement did not have a material impact on the Group's financial
condition or results of operations.
The accompanying notes form an integral part of these consolidated financial
statements.
F-18
NOTE 3 - ACCOUNTING POLICIES (CONT.)
R. NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS
No. 4, "Reporting Gains and Losses from Extinguishments of Debt",
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers"
and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements" and amends SFAS No. 13, "Accounting
for Leases". This statement updates, clarifies and simplifies
existing accounting pronouncements. As a result of rescinding
SFAS No. 4 and SFAS No. 64, the criteria in APB No. 30 will be
used to classify gains and losses from extinguishments of debt.
SFAS No. 13 was amended to require that certain lease
modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner
as sale-leaseback transactions and makes technical corrections to
existing pronouncements. The Company does not expect the adoption
of this pronouncement to have a material impact on its results of
operations or financial position. In June 2002, the FASB issued
SFAS No. 146 , "Accounting for Costs Associated with Exit or
Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force
("EITF") Issue No. 94-3. The Company will adopt the provisions of
SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when
the liability is incurred. Under EITF 94-3, a liability for an
exit cost was recognized at the date of the Company's commitment
to an exit plan. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value.
Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amounts recognized. The
Company does not expect the adoption of this pronouncement to
have a material impact on its results of operations or financial
position. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123", which
provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based
employee compensation. Accordingly, the Group has elected to
adopt SFAS No. 123 effective January 1, 2003, for all prospective
option grants, modification or settlements. Based on current
compensation programs the Group estimates that the adoption of
SFAS No. 123 will result in a non-cash charge to earnings of up
to approximately $1,000 for the year ending December 31, 2003.
In September 2002, the EITF issued Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." The scope
of EITF 00-21 deals with how a company should recognize revenue
when it sells multiple products or services to a customer as part
of an overall solution. In general, EITF 00-21 provides the
following broad criteria for recognizing revenue in multiple
element arrangements: (i) revenue should be recognized separately
for separate units of accounting; (ii) revenue for a separate
unit of accounting should be recognized only when the arrangement
consideration is reliably measurable and the earnings process is
complete; (iii) consideration should be allocated among separate
units of measure of accounting in an arrangement based on their
relative fair values. The Company is still evaluating the effect
of EITF 00-21 on its financial position and results of
operations.
The accompanying notes form an integral part of these consolidated financial
statements.
F-19
In November 2002, the FASB issued FIN No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires
the guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in
issuing such guarantee and to provide certain disclosures. The
recognition provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002.
The Company does not expect the adoption of FIN 45 to have a
material effect on its consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities". FIN 46 classifies entities into two
groups: (1) those for which voting interests are used to
determine consolidation; and (2) those for which other interests
(variable interests) are used to determine consolidation. FIN 46
deals with the identification of Variable Interest Entities
("VIE") and the business enterprise which should include the
assets, liabilities, non-controlling interests, and results of
activities of a VIE in its consolidated financial statements. FIN
46 will become effective during 2003. The Company is still
evaluating the effect of this pronouncement on its consolidated
financial statements mainly with respect to its investment in
Aculight (see note 15D).
S. RECLASSIFICATION
Certain amounts from prior years have been reclassified to
conform with current year presentation.
The accompanying notes form an integral part of these consolidated financial
statements.
F-20
NOTE 4 - RESTRUCTURING COSTS AND OTHER CHARGES
In 1999, the Group initiated a restructuring program of its business
operations. In the framework of this program, the U.S.-based marketing
activity was consolidated, the Israel-based manufacturing activity was
consolidated, and certain products were eliminated.
In 1999, the Group recorded a $45,068 charge for such restructuring
plans. The plans included, among other things, closing locations and
reducing staff. The charge included $9,797 for lease terminations and
related fixed asset disposals, $19,738 for write-downs of inventories,
$4,800 for write-downs of receivables, $8,758 for severance in respect
of the termination of approximately 200 employees, and $1,975 for
other costs.
The write-downs of inventories, pertaining to the Group's decision to
eliminate the sale of a number of products, amounting to $19,738, were
included in cost of sales. The write-downs of receivables amounting to
$4,800 related to termination of agreements with distributors were
included in selling, marketing and administrative expenses. The
majority of the restructuring charges relate to the Group's operations
in the U.S. As of December 31, 2001, the unutilized accrual amounted
to $1,041 relating to lease terminations, which was paid by the
Company during 2002.
NOTE 5 - PREPAID EXPENSES AND OTHER RECEIVABLES
DECEMBER 31
------------------------
2002 2001
-------- --------
Government agencies(*) $ 7,058 $ 4,301
Prepaid expenses 3,337 2,918
Other 3,860 3,749
-------- --------
$ 14,255 $ 10,968
======== ========
(*) Mainly value added taxes
NOTE 6 - INVENTORIES
DECEMBER 31
-------------------------
2002 2001
-------- --------
Raw materials $ 21,057 $ 35,362
Work in process 13,154 15,536
Finished products 48,651 32,716
-------- --------
$ 82,862 $ 83,614
======== ========
The cost of revenues for the years ended December 31, 2002 and
2001, include the write-down of inventories in the total amounts
of approximately $10,661 and $19,172, respectively.
The accompanying notes form an integral part of these consolidated financial
statements.
F-21
NOTE 7 - FIXED ASSETS
DECEMBER 31
-----------------------
2002 2001
-------- --------
Equipment $ 15,477 $ 10,772
Office furniture and equipment 5,308 4,818
Building 2,840 1,950
Land 550 550
Leasehold improvements 5,130 4,192
Vehicles 726 960
-------- --------
30,030 23,242
Less - accumulated depreciation 11,448 7,044
-------- --------
$ 18,582 $ 16,198
======== ========
Depreciation expense amounted to $5,166, $3,652 and $ 2,934 for
the years 2002, 2001 and 2000, respectively. During 2001, in
connection with the integration following the CMG acquisition,
fixed assets with a net book value of $1,469 that had no
alternative future use were written-off.
NOTE 8 - INTANGIBLE ASSETS AND OTHER LONG-TERM ASSETS
DECEMBER 31
-----------------
2002 2001
------- -------
Goodwill $92,666 $90,379
Less - accumulated amortization 4,627 4,627
------- -------
$88,039 $85,752
======= =======
Trade names $ 3,888 $ 4,410
Developed technology 29,501 32,940
Covenant not to compete 878 878
------- -------
34,267 38,228
Less - accumulated amortization 14,921 9,351
------- -------
Other purchased intangible assets, net $19,346 $28,877
======= =======
Debt issuance costs, net (1) $ -- $ 334
Deferred cost, net 1,031 682
Options granted in connection with financing, net (2) 5,724 8,204
Other 4,271 4,063
------- -------
11,026 13,283
Less - accumulated amortization 351 262
------- -------
$10,675 $13,021
======= =======
(1) In respect of convertible subordinated notes -- see Note 11.
(2) In respect of options granted to bank in connection with
financing -- see Note 12.
The accompanying notes form an integral part of these consolidated financial
statements.
F-22
NOTE 8 - INTANGIBLE ASSETS AND OTHER LONG-TERM ASSETS (cont'd)
The following table summarizes the Company's reported results adjusted
to eliminate the effect of amortization of goodwill, as of January 1,
2000 (see also Note 3J):
2002 2001 2000
----------- ----------- -----------
Net income (loss), as reported $ (44,116) $ (145,868) $ 17,282
Add, amortization goodwill charged
through 2001 -- 4,627 --
----------- ----------- -----------
As adjusted $ (44,116) $ (141,241) $ 17,282
=========== =========== ===========
Earnings (loss) per share-basic as
reported $ (1.19) $ (4.52) $ 0.68
Add---amortization of goodwill, charged
through 2001 -- 0.14 --
----------- ----------- -----------
As adjusted $ (1.19) $ (4.38) $ 0.68
=========== =========== ===========
Earnings (loss) per share--diluted,
As reported $ (1.19) $ (4.52) $ 0.61
Add, amortization of goodwill charged
through 2001 -- 0.14 --
----------- ----------- -----------
As adjusted $ (1.19) $ (4.38) $ 0.61
=========== =========== ===========
NOTE 9 - OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31
----------------
2002 2001
------- -------
Deferred revenues $12,610 $ 8,893
Government agencies 871 --
Accruals:
Payroll and related expenses 13,738 14,336
Commissions 1,784 2,906
Income taxes 2,057 --
Settlement of litigations (Note 13 C) 14,626 18,000
Restructuring (Note 4) -- 1,041
Interest 1,406 2,208
Warranty (See note 3M) 9,489 9,891
Royalties 3,883 2,801
Termination of lease agreements 1,652 2,808
Retention bonuses and severance pay 2,220 8,777
Other 16,604 24,349
------- -------
$80,940 $96,010
======= =======
NOTE 10 - ACCRUED SEVERANCE PAY
The obligation of the Company and its Israeli subsidiaries to make
severance payments to its employees pursuant to the Israeli
severance pay law and labor agreements is based on the
The accompanying notes form an integral part of these consolidated financial
statements.
F-23
employee's most recent salary and the period of employment. This
obligation is partially covered by deposits with severance pay
funds, which are not under the management or control of the Company,
and accordingly, neither those amounts nor the corresponding accrual
for severance pay are reflected in the balance sheet. The Company's
obligation in respect of severance pay for those employees not
covered by severance pay funds policies is presented as a short-term
or a long-term accrued liability, as appropriate. The gross
obligation of the Company and its Israeli subsidiaries with respect
to severance pay, as of December 31, 2002 and December 31, 2001
amounted to $4,126 and $4,077, respectively.
The subsidiaries in the United States ("U.S. subsidiaries") have
401(k) savings plans covering substantially all of the employees in
the United States who have completed at least three months of
service. Each employee may contribute up to 15% of his or her
compensation per year, subject to maximum limits imposed by U.S. tax
law. The U.S. subsidiaries may make discretionary matching
contributions based on a formula as defined in the plans. The
aforementioned subsidiaries contributed approximately $1,256, $1,081
and $276 to the 401(k) plans during the years ended December 31,
2002, 2001 and 2000, respectively. The Company suspended matching
contributions effective January 1, 2003
Severance pay expenses amounted to approximately $3,274, $3,660 and
$329 for the years ended December 31, 2002, 2001 and 2000,
respectively. The aforementioned expense in the years ended December
31, 2002 and 2001 include severance pay expenses in the amount of
approximately $3,100 and $3,600, respectively which relates to
terminations of employees made in conjunction with the relocation of
the production facility to Salt Lake City and Israel and the
integration process following the CMG acquisition, respectively.
The accompanying notes form an integral part of these consolidated financial
statements.
F-24
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. In 2002 and
2000 the Company purchased $16,539, and $ 1,142, respectively, in
principal amount, of the 6% convertible subordinated notes at a cost
of $16,447 and $873, respectively. As a result of the purchase the
Company recorded an extraordinary gain of $92 and $292 in the years
ended December 31, 2002 and 2000 respectively. In 2001, in response
to an offer from one of the convertible subordinated note holders,
notes in a principal amount of $21,120 and the related interest
payable in the amount of $295 were converted into 754,797 ordinary
shares, which represented the fair value of the notes at the
conversion date.
During August 2002 the Company repaid the remaining balance of
$54,128 of its outstanding convertible subordinated notes using the
proceeds from its $70,667 loan from Bank Hapoalim, B.M. (the
"Bank")- see Note 12.
NOTE 12 - BANK LOANS AND OTHER FINANCING AGREEMENTS
To finance the CMG acquisition, ongoing working capital needs and,
if needed, the refinancing of the Company's convertible subordinated
notes (see Note 11) the Company and certain of its subsidiaries
entered into various financing arrangements (the "Financing") with
the Bank. The financing arrangement consisted of: (a) a $100,000
six-year term loan bearing interest at LIBOR plus 1.75% per annum,
(b) up to $50,000 revolving line of credit until April, 2002 and up
to $20,000 revolving line of credit from April, 2002 to April, 2003
bearing interest at LIBOR plus 1% per annum and (c) a letter of
undertaking pursuant to which the Bank agreed, subject to the terms
and conditions set forth therein, to provide up to approximately
$92,000 of a four-year convertible loan to refinance the Company's
outstanding convertible subordinated notes (see Note 11). In
connection with the $100,000 loan (the "Loan"), the Company granted
the Bank 2,500,000 options to acquire 2,500,000 shares of the
Company (see also Note 14 B). On March 26, 2002, the Company entered
into new agreements with the Bank for a new four year $70,667 loan,
the proceeds of which were used mainly to repay its existing
convertible subordinated notes due September 1, 2002. The $70,667
loan matures on September 1, 2006 and bears interest at LIBOR plus
6.55% increasing to 7.80% over the life of the loan. In connection
with the loan, the Company paid the Bank a $4,000 fee, which will be
amortized over the life of the loan and is offset against the
outstanding amount of the loan.
The terms of the financing restrict certain cash dividends and have
limitations on asset dispositions or acquisitions without prior
approval of the bank. In its three financing arrangements with the
Bank, the Company was required to maintain a ratio of its debt, as
defined, to EBITDA, as defined, of less than three times. At
September 30, 2002 and December 31, 2002, the Company was not in
compliance with these covenants (as amended). On November 19, 2002,
the Company received a waiver of this requirement for September 30,
2002 and on February 6, 2003, the Company received a waiver of this
covenant for the three months ended December 31, 2002. At December
31, 2002 the Company had outstanding $199,529 under the three
agreements. Additionally, the interest rate on borrowings under the
revolving credit facility was increased by 1.25% to LIBOR plus 2.25%
effective November 19, 2002.
The accompanying notes form an integral part of these consolidated financial
statements.
F-25
NOTE 12 - BANK LOANS AND OTHER FINANCING AGREEMENTS (CONT.)
On February 6, 2003 the Company and the Bank signed a new financing
arrangement, effective as of December 31, 2002, which extends the
Company's existing revolving credit agreement to December 31, 2003,
increases the amount available on the revolver to $50,000 until July
1, 2003 and to $35,000 thereafter, until December 31, 2003, provides
for an interest rate on the $15,000 increase of LIBOR plus 3%,
defers the loan amortization of $10,000principal payment due April
2003 and amends certain covenants in its loan agreements. In
addition the new arrangement waived the covenants requirement for
the quarter ending December 31, 2002 and replaced the covenant with
a minimum EBITDA amounts, as defined, which will be computed at the
end of each fiscal quarter of 2003 cumulatively, as follows: Q1-
$5,000, Q2- $18,400, Q3- $30,400 and Q4- $50,100. Based on the
Company's current internal estimates the Company will be in
compliance with those covenants. In connection with the
aforementioned agreement the Company agreed to re-price the
outstanding 1,136,300 options owned by the Bank to the then current
market price and granted an additional 275,000 options at the then
current market price (see also note 14B). Additionally the Company
paid the Bank a $200 fee.
The $100,000 loan and $70,667 loan repayment schedules is as
follows (after giving effect to the February 6, 2003 arrangement):
2003 $ 15,000
2004 25,000
2005 20,000
2006 90,667
2007 10,000
---------
$ 160,667
=========
As of December 31, 2002 the total amount of unused credit line
amounted to approximately $9,000 based on borrowing under the credit
line of $38,862 and an outstanding guarantee of $2,000 (see note
13).
The accompanying notes form an integral part of these consolidated financial
statements.
F-26
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
A. LEASE COMMITMENTS
The Group leases facilities under non-cancellable operating leases
with various expirations through 2006. Rental expense for the years
2002, 2001 and 2000, amounted to $5,325, $9,307 and $2,359,
respectively. Future minimum annual lease payments under
non-cancellable operating lease agreements are as follows:
2003 $ 4,190
2004 3,209
2005 2,671
2006 2,474
2007 560
--------
$ 13,104
========
In connection with the efforts to reduce expenses and in connection
with the integration following the CMG acquisition, several
facilities were abandoned. Such terminations resulted in a losses
representing future lease payments amounting to approximately $813
and $3,953, which were included in the 2002 and 2001 rental
expenses, respectively. The related accruals (see Note 9) are not
included in the above table.
B. ROYALTIES
The Group is party to various licensing agreements, which require it
to pay royalties on certain product sales at various rates of up to
7.5% of the net selling price of these products. For the years ended
December 31, 2002, 2001 and 2000, the Group paid or accrued
royalties in the amount of $3,779, $3,388 and $133 respectively.
The Company and part of its Israeli subsidiaries are also obligated
to pay to the OCS and the BIRD Foundation royalties of 3-5% on the
sales of products for which participations were received up to 100%
of the amount of the participations. The Group paid or accrued
royalties of $348, $292 and $408 in 2002, 2001 and 2000,
respectively. As of December 31, 2002, the balance of the
royalty-bearing participations not yet paid or accrued amounted to
approximately $5,246.
C. CONTINGENT LIABILITIES
The Company is a party to various legal proceedings incident to its
business. Except as noted below, there are no legal proceedings
pending or threatened against the Company that management believes
are likely to have a material adverse effect on the Company's
consolidated financial position.
In February 2002, the Company received a request from the United
States Securities and Exchange Commission ("SEC") to voluntarily
provide certain documents and information for a period commencing
January 1, 1998. The request primarily relates to the Company's
relationships with distributors, and also asks for amplification of
the Company's explanation of certain previously disclosed charges
and write-downs which were taken in 1999 (inventory and other
charges of approximately $30,050; bad debt charges of approximately
$13,430; and litigation expenses of approximately $4,400) and 2001
(write-down of accounts receivable of $14,043 and write-downs of
inventory and other charges (amounts not given)). On May 15, 2002,
the Company learned that the SEC had issued a formal order of
investigation on these matters, including as to whether, in
connection therewith, the Company, in prior periods, may have
overstated revenues and related income and failed to maintain proper
books and records and a proper system of internal controls. This was
followed by the issuance of a subpoena on August 19, 2002
The accompanying notes form an integral part of these consolidated financial
statements.
F-27
relating to the above-mentioned requested information, as well as
documents of the Company's present auditors, Brightman Almagor &
Co., and its previous auditors, Luboshitz Kasierer. The Company
believes, as of the date of this report, that it has substantially
completed the production of documents to the SEC in response to the
requests previously received with respect to the transactions
involving U.S. distributors and certain charges taken in 1999 and
2001. The Company has continued to cooperate with the SEC in its
investigation, and intends to continue doing so by providing
additional documents or testimony, which may be requested. Having
reviewed, among other things, the information gathered for the SEC
investigation, the Company does not presently believe that a
restatement of the Company's reported financial statements is
warranted. The SEC investigation, however, is ongoing and,
accordingly, the Company is unable to predict the duration or
outcome of this process.
On or around February 28, 2003, a lawsuit was filed on behalf of
Aqua Fund, L.P. and certain additional purchasers of Lumenis
securities in the United States District Court for the Northern
District of Illinois. The named defendants are the Company, Yacha
Sutton, the Company's former Chief Executive Officer, and Sagi
Genger, the Company's Chief Operating Officer. The complaint
generally alleges that the defendants violated U.S. Federal
securities laws by making material misrepresentations and/or
omissions, and also includes claims for common law fraud and
negligence. The complaint alleges that, at various times during the
period from September 17, 2001 through February 27, 2002, plaintiffs
purchased the Company's securities in reliance on such statements,
and suffered economic loss as a result. The defendants have not been
served with a summons in this action. The Company believes that all
of the allegations and claims are baseless, and the Company intends
to vigorously defend against them.
During March, April and May 2002, eight purported class action
lawsuits were filed in the United States District Court for the
Southern District of New York on behalf of purchasers of Lumenis
securities between January 7 and February 28, 2002 (the "Class
Period"). The named defendants include, in addition to the Company,
certain present and former officers and directors of the Company,
including Prof. Jacob A. Frenkel, Yacha Sutton, Sagi Genger and Asif
Adil. The complaints generally allege that the defendants violated
U.S. Federal securities laws by issuing materially false and
misleading statements throughout the Class Period that had the
effect of artificially inflating the market price of the Company's
securities. The complaints allege that throughout the Class Period,
defendants discounted and disputed marketplace rumors about the
Company's operations even as the Company knew it was being
investigated by the SEC and that its distributors had been contacted
by the SEC.
The Company has been served with a summons and complaint in some but
not all of these actions. There is currently pending before the
Court a motion by plaintiffs to appoint a lead plaintiff and for
approval of selection of lead counsel. Upon the disposition of this
motion, it is anticipated that a consolidated complaint will be
filed. The Company's time to respond to the complaints has been
extended. It is anticipated that, following the appointment of a
lead plaintiff and approval of lead class counsel, and subject to
review and evaluation of any consolidated complaint that is filed,
the Company will file a motion to dismiss for failure to state a
claim and failure to plead fraud with particularity as required by
the Private Securities Litigation Reform Act of 1995 and Rule 9(b)
of the Federal Rules of Civil Procedure.
The accompanying notes form an integral part of these consolidated financial
statements.
F-28
In May 2002, another purported class action complaint was filed in
the United States District Court for the Southern District of New
York on behalf of purchasers of the Company's securities between
August 2, 2001 and May 7, 2002 (the "Extended Class Period"). In
addition to the Company, the named defendants include certain
present and former officers and directors of the Company, including
Prof. Jacob A. Frenkel, Yacha Sutton, Sagi Genger and Asif Adil. The
complaint alleges that the defendants violated U.S. Federal
securities laws by making a series of material misrepresentations to
the market during the Extended Class Period regarding the Company's
financial performance, successful execution of its business plan and
strong demand for the Company's products, thereby artificially
inflating the price of Lumenis securities. The Company has not been
served with a summons and complaint in this action.
The Company believes that all the allegations and claims in all of
the above purported class action lawsuits are baseless, and the
Company intends to vigorously defend against them.
On February 11, 2002, the Company filed a petition with the
Bailiff's Court of Horsholm, Denmark, requesting that an interim
injunction be granted against two competing products, which are
manufactured by Danish Dermatological Development A/S, a Danish
company ("DDD"). DDD filed its statement of defense in July 2002, to
which the Company answered in September 2002. Additionally, DDD has
filed oppositions in the European and Danish Patent Offices against
the Company's European IPL Patent and Danish Utility Model Patents,
which are the basis for the Company's request for an interim
injunction. After a hearing on the European patent opposition on
March 25, 2003, the European Patent Office revoked the Company's
European IPL Patent. The Company is evaluating this ruling. The
Company's petition for an interim injunction against DDD in Denmark
is scheduled to be heard in August 2003.
On September 12, 2002, the Company filed a claim in the Tel Aviv -
Jaffa District Court against Syneron Medical Ltd. and Messrs. Shimon
Eckhouse, Michael Kreindel, Mark Aronovitz, Avner Lior and Hans Edel
(the "Syneron Defendants"). The Company alleges that the Syneron
Defendants, all former employees of the Company, used confidential
business information and technology gained during their work at the
Company, for the production and distribution of products essentially
similar to the Company's products for hair removal and skin
treatment (the "Copied Products"). The Company also alleges that
Syneron Medical Ltd. and the Syneron Defendants (collectively the
"Defendants") used information with regard to the Company's
distributors and customers for the purpose of marketing the Copied
Products. The Company is seeking the following remedies against the
Defendants: a permanent injunction restraining the Defendants from
using any business information or technology or trade secrets of the
Company, a mandatory injunction ordering the Defendants to demolish
all of the Copied Products that were produced by the Defendants, an
order for the delivery of accounts, the appointment of a receiver
and a monetary judgment in the amount of approximately $6,250.
On October 20, 2002, the Defendants filed their Statement of Defense
in which they denied the Company's claims, pleading, inter alia,
that the Company's Intense Pulsed Light technology (the "IPL
Technology") is within the public domain; that the Company has no
intellectual property rights in it; and that, consequently, the
Defendants' technology (the "ELOS Technology") does not breach the
Company's rights in its IPL Technology. In addition, the Defendants
pleaded, that there is no similarity between the ELOS Technology and
the IPL Technology. On November 4, 2002, the Company filed its
response to the Defendants' Statement of Defense. In its response,
the Company claimed, inter alia, that the Defendants are prohibited
from pleading that the Company does not have any intellectual
property rights in the IPL technology, due to the fact that the
Defendants themselves assisted the Company in registering patents
which constitute the Company's intellectual property in the IPL
technology. The parties have served on each other numerous discovery
requests, and the parties have agreed to complete discovery by March
23, 2003. The Defendants have filed a motion to dismiss the
Company's claims, and the Company has filed a motion to strike
certain parts of the Defendants' statement of defense. The parties'
motions are pending before the court, and a pre-trial hearing is
scheduled for May 14, 2003.
The accompanying notes form an integral part of these consolidated financial
statements.
F-29
On September 20, 2002, Lumenis Inc. filed a lawsuit against Syneron
Inc. (Canada), Syneron Inc. (Delaware), and certain former Lumenis
employees, Brian D. Lodwig, J. Scott Callihan, Mark Lazinski, and
Stephen Harsnett, in the Superior Court of California for the County
of Santa Clara for breach of contract, intentional interference with
prospective economic advantage, misappropriation of trade secrets,
breach of duty of loyalty, conspiracy, unjust enrichment, and unfair
competition, seeking unspecified damages and injunctive relief.
Lumenis Inc.'s request for expedited discovery was granted by the
court, and Lumenis served initial discovery demands. On or about
October 22, 2002, Syneron Inc. (Canada) filed a motion to quash
service upon it for lack of personal jurisdiction. This motion was
granted by the court in January 2003, and Syneron Inc. (Canada) was
dismissed as a defendant. On or about October 25, 2002, Lumenis Inc.
filed an amended complaint adding former Lumenis Inc. employee David
J. Maslowski as a defendant in the action. On or about December 4,
2002, the defendants filed answers to the amended complaint. In
addition, Syneron Inc. (Delaware) filed a cross-complaint alleging
various claims related to unfair trade practices and competition,
and two of the individual defendants filed cross-complaints alleging
various claims related to unpaid commissions. Lumenis believes the
cross-claims are wholly without merit and will vigorously defend
against them. Discovery has commenced but a trial date has not been
set.
On October 28, 2002, Lumenis Ltd. and Lumenis Inc. (collectively,
"Lumenis") filed a complaint in the United States District Court for
the Central District of California alleging that Syneron Medical
Ltd., Syneron Inc. and Syneron Canada Corp. (collectively "Syneron")
are infringing six U.S. patents held by Lumenis by, inter alia,
selling Syneron's Aurora DS and Aurora SR devices. Lumenis is
seeking a temporary restraining order and a preliminary and
permanent injunction against further infringement as well as an
award of as yet undetermined damages and lost profits resulting from
Syneron's infringement and Lumenis' attorneys' fees and costs. Oral
argument on the request for a temporary restraining and preliminary
injunction was held on November 1, 2002. Citing the complexity of
the patent issues involved, the court declined to grant the
Company's request for a temporary restraining order. The court
granted the Company's request for expedited discovery, and ordered
the appointment of an independent expert to advise the court on the
patent infringement issues raised by the lawsuit. A technical expert
has been appointed to assist the court, and the Company's request
for a preliminary injunction is scheduled to be heard on May 19,
2003.
On October 24, 2002, Lumenis Inc. filed a complaint in the United
States District Court for the Northern District of California (the
"Federal Action") against Palomar Medical Technologies, Inc.
("Palomar") and the General Hospital Corp. ("General"). The
complaint seeks a declaratory judgment that two U.S. patents, which
are owned by General and sublicensed by Palomar to Lumenis Inc.
pursuant to a 1998 license agreement (the "License Agreement"), are
invalid and/or unenforceable and/or are not infringed by Lumenis.
The Company served its complaint on Palomar and General on February
24, 2003.
In connection with the Federal Action, Lumenis has ceased payment of
royalties under the License Agreement. In response, Palomar filed a
complaint on October 29, 2002 against Lumenis Ltd., Lumenis Inc.,
ESC Medical Systems Ltd., ESC Medical Systems Inc. and "ESC/Sharplan
Laser Industries Ltd." (collectively, "Lumenis") in the Superior
Court of the Commonwealth of Massachusetts. The complaint alleges
that Lumenis has breached the License Agreement by failing to make
certain royalty payments, that Lumenis' actions have breached the
implied covenant of good faith and fair dealing arising with respect
to the License Agreement and that Lumenis' actions constitute unfair
and deceptive trade practices in violation of M.G.L., Chap. 93A,
Sections 2 and 11 Palomar seeks an award of unspecified compensatory
damages, a trebling of such damages, its costs and attorneys' fees
and pre-judgment interest. The complaint has not been served on
Lumenis.
On September 30, 2002, an action was filed by Mr. Asif Adil, the
Company's former Executive Vice President - Business Operations and
acting Chief Financial Officer, in the Superior Court of New Jersey,
Somerset County; Law Division against the Company and Prof. Jacob A.
Frenkel, Yacha Sutton and Sagi Genger. The complaint alleges, among
other things, that the Company removed Mr. Adil from these positions
and terminated his employment in retaliation for his report to the
Company of alleged accounting and
The accompanying notes form an integral part of these consolidated financial
statements.
F-30
disclosure irregularities. The action seeks, among other things,
compensatory damages and reinstatement of his employment. The
Company believes that the claims are without merit, and the Company
intends to defend itself vigorously. On October 29, 2002, the
defendants removed the action to the United States District Court
for the District of New Jersey (the "District Court"). On November
13, 2002, Mr. Adil filed a first amended complaint in the District
Court, adding Lumenis Inc. as a defendant in the action. During
January 2003, the defendants moved to dismiss the first amended
complaint, and Mr. Adil filed an opposition to the defendants'
motion. A hearing on the motion has not been scheduled.
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. 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 21, 1999, the Tel-Aviv Court denied Light Age's
motion for a preliminary injunction. The parties then agreed to
submit their dispute for arbitration. Accordingly, the parties filed
a motion to stay the proceedings, which was granted by the Tel Aviv
Court on October 14, 1999. Since that date, there have been no
further proceedings in this matter in the Tel Aviv Court.
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 (together the
"1999 Light Age Matter"). On March 5, 1999, defendant Light Age
answered the complaint and counterclaimed against the plaintiffs,
seeking unspecified damages under thirteen counts alleging a variety
of causes of action such as breach of contract, tortious
interference with contract, unjust enrichment, and misappropriation.
A hearing on the merits was held in December 2001 and the
arbitrators eventually issued a final award in the amount of
approximately $9,100 which includes pre-judgment interest and, an
award of certain out-of-pocket expenses incurred by Light Age. The
Company recorded a charge of $5,200 for the fiscal year ended
December 31, 2002 in addition to its previous reserve of $4,600. The
request by Light Age for approximately $2,780 in attorneys' fees and
disbursements was denied in its entirety. Pursuant to a settlement
agreement entered into on August 27, 2002, as subsequently amended,
Lumenis agreed to the entry of a final judgment on consent, and the
Company made its final payment of principal and interest on February
19, 2003. The law firms representing Light Age have filed suit for
nonpayment of approximately $3,200 in legal fees, and Light Age has
made certain claims against its counsel alleging malpractice. In
connection therewith, the law firms have asserted an attorneys lien
against all settlement amounts paid to Light Age. As a result of
this dispute, the Company filed an interpleader action with the
court on or about January 10, 2003. The parties consented to an
interpleader of approximately $1,370 of the settlement amount, and
the funds were deposited with the court. In addition, approximately
$1,840 of the settlement amount including past judgement interest
paid to Light Age has been segregated in an account pursuant to
court orders issued on or about September 26, 2002 and February 14,
2003. As of March 10, 2003, the Company has paid or submitted as
interpleader a total of approximately $9,320 in settlement of this
action.
On September 20, 1999, Dr. Richard Urso filed what purports to be a
class action lawsuit against the Company and against a leasing
company in Harris County, Texas, alleging a variety of causes of
action. In December 2000, plaintiff amended his complaint to
eliminate the class action claim. On April 13, 2001 the lawsuit was
dismissed and on May 3, 2001, Dr. Urso and approximately forty-eight
physicians and medical clinics re-filed what purports to be a class
action lawsuit in Harris County, Texas. Plaintiffs filed a motion to
remove the case to Federal Court. The lawsuit was removed to the
U.S. District Court for the Southern District of Texas. The current
allegations on behalf of plaintiffs are breach of contract, breach
of express and implied warranties, fraud, misrepresentation,
conversion, product liability, and violation of the Texas Deceptive
Trade Practices Act and Texas Securities Act. In March 2002, the
plaintiffs filed a motion to amend their complaint to dismiss the
class action and securities allegations and to add several new
plaintiffs and in June 2002, the motion was granted. The plaintiffs
subsequently filed a motion to remand the cases to State Court,
which was granted. On February 11, 2002, the Company filed a motion
to dismiss the cases based on forum non conveniens. The motion is
scheduled to be heard on April 7, 2003. The Company denies the
allegations and will continue to defend this case vigorously.
The accompanying notes form an integral part of these consolidated financial
statements.
F-31
The Company was named in a number of purported class action lawsuits
filed in 1998, seeking damages and attorneys fees under the United
States securities laws for alleged irregularities in the way in
which the Company reported its financial results and disclosed
certain facts throughout 1997 and 1998 and for alleged "tipping" of
non-public information to Salomon Smith Barney Inc. in September
1998. In December 2001, the Company entered into a settlement
agreement with the plaintiffs, which requires the Company to pay
$4,500 and to issue up to 500,000 Ordinary Shares. In May 2002,
approximately $4,400 million of the cash portion of the settlement
was paid by one of the re-insurers of the Company's directors and
officers liability insurance policy, and in August 2002 the Company
paid the remaining approximately $101 of the cash portion of the
settlement. During the second quarter of 2002, the Company issued
150,000 of the 500,000 Ordinary Shares issuable to the plaintiffs
and their attorneys. The Company intends to pursue reimbursement of
another $5,000 of the settlement consideration from a second
re-insurer that is in liquidation. An accrual of $13,000 for this
matter has been recorded in the Company's 2001 Consolidated
Financial Statements, which amount is based on the fair market value
of the maximum number of Ordinary Shares payable by the Company at
the time the settlement agreement was entered into. On March 26,
2002, the judge signed an Order and Final Judgment approving the
settlement. As of December 31, 2002 the balance of the accrual is
$8,800. The Company expects to issue the balance of the Ordinary
Shares issuable pursuant to the settlement during 2003.
On January 18, 2002, Lumenis Inc. commenced an action for patent
infringement against Trimedyne, Inc. ("Trimedyne") in the United
States District Court for the Central District of California. The
complaint alleges that Trimedyne has willfully infringed and is
willfully infringing two Lumenis Inc. U.S. patents. Lumenis Inc.
seeks, inter alia, an injunction enjoining Trimedyne's infringement,
damages, costs and attorneys' fees. On or about February 26, 2002,
Trimedyne filed an answer and counterclaims in this action denying
Lumenis' material allegations of infringement and asserting
counterclaims, inter alia, seeking a declaratory judgment that
Trimedyne is not infringing the Lumenis patents and a declaratory
judgment that it is entitled to a refund of an alleged overpayment
of royalties by Trimedyne of approximately $130 under a 1994 patent
license. Trimedyne also alleges generally that: Lumenis violated
certainantitrust, trade libel and trade practices laws; and that
certain Lumenis products infringe Trimedyne's patents. Trimedyne
seeks, inter alia,an injunction enjoining Lumenis Inc. from the
allegedly wrongful acts, unspecified damagesand a trebling of such
damages, disgorgement of profits,unspecified punitive damages,a
refund of the alleged royalty overpayment, andcosts and attorneys
fees. On April 29, 2002, the Company moved to: (i) dismiss the
federal and state antitrust counterclaims, the counterclaims for
trade libel and the counterclaim for tortious interference with
prospective economic relationships on the grounds that Trimedyne has
failed to state a claim upon which relief can be granted; (ii)
dismiss or stay the claims related to the 1994 patent license as
those claims are subject to a compulsory arbitration clause; and
(iii) strike certain of the affirmative defenses asserted by
Trimedyne. On June 3, 2002, Trimedyne served an amended answer and
counterclaims re-asserting all of the claims from its original
complaint other than the claims relating to the 1994 patent license.
On March 3, 2003, the Court dismissed Trimedyne's counterclaim for
tortious interference with prospective economic relationships, but
denied the Company's motion to dismiss Trimedyne's other
counterclaims. The court has ordered discovery to be completed by
July 30, 2003, and a trial is scheduled for December 2, 2003. The
parties have submitted this dispute to mediation and settlement
discussions are continuing. The Company believes that Trimedyne's
counterclaims are baseless. If a settlement is not achieved, the
Company will continue to vigorously defend against them, and will
continue to vigorously prosecute its claims against Trimedyne.
The accompanying notes form an integral part of these consolidated financial
statements.
F-32
On August 19, 2002, Cool Laser Optics, Inc. ("Cool Laser") commenced
an arbitration proceeding before the American Arbitration
Association by filing a demand for arbitration claiming that Lumenis
Inc. violated an August 1996 patent license agreement (that was
entered into by Cool Laser and Coherent Inc. and assigned to Lumenis
Inc.) by not paying royalties thereunder respecting sales of Lumenis
Inc.'s LightSheer systems and that as a result the license agreement
has been or is terminated and Lumenis Inc.'s sales of the LightSheer
systems constitute infringement of certain of Cool Laser's U.S.
patents. The demand for arbitration seeks an unspecified amount in
damages and an injunction against further sales of the LightSheer
system. On October 3, 2002, Lumenis Inc. filed and served an
answering statement denying the material allegations of the demand
for arbitration, denying that the LightSheer system infringes the
referenced patents, denying that Lumenis Inc. owes any royalties
under the license agreement and denying that Cool Laser has any
right to terminate the license agreement. Lumenis Inc.'s answering
statement also asserts that the Cool Laser patents are invalid and
unenforceable and that Cool Laser is estopped from asserting them
and further asserts that the arbitrators do not have jurisdiction to
hear a claim for patent infringement. Lumenis Inc.'s answering
statement seeks, inter alia, the dismissal of all of Cool Laser's
claims with prejudice. The members of the arbitration panel have not
been appointed. The Company believes that Cool Laser's claims are
without merit, and the Company intends to vigorously defend against
them.
In addition to the foregoing, the Company is a party in certain
actions in various countries, including the U.S., in which the
Company sells its products in which it is alleged that the Company's
products did not perform as promised and/or that the Company made
certain misrepresentations in connection with the sale of products
to the plaintiffs. Management believes that none of these actions
(other than those set forth above) that are presently pending
individually would have a material adverse impact on the
consolidated financial position of the Company, although such
actions in the aggregate could have a material adverse effect on
quarterly or annual operating results or cash flows when resolved in
a future period.
Finally, the Company also is a defendant in various product
liability lawsuits in which the Company's products are alleged to
have caused personal injury to certain individuals who underwent
treatments using the Company's products. The Company is defending
itself vigorously, maintains insurance against these types of claims
and believes that these claims individually or in the aggregate are
not likely to have a material adverse impact on the business,
financial condition or operating results of the Company.
The Company incurred litigation settlements and related expenses of
$8,909 in 2002. As of December 31, 2002 the Company has an accrual
of $14,600 (including the provision of $8,800 due to the settled
1998 class-action lawsuits, a provision of $1,300 for the Light Age
matter and $4,500 due to other litigation matters) reflecting
management's estimate of the Company's potential exposure with
respect to certain, but not all, legal proceedings, claims and
litigation. With respect to the pending legal proceedings and claims
for which no accrual has been recorded in the financial statements,
Company management is unable to predict the outcome of such matters,
the likelihood of an unfavorable outcome or the amount or range of
potential loss, if any.
The accompanying notes form an integral part of these consolidated financial
statements.
F-33
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
D. COLLATERAL, LIENS AND GUARANTEES
1. As part of the Financing (see Note 12) the Group has granted a
security interest to the Bank in substantially all of the assets
of the Company, Lumenis Holdings Inc. and certain of their
material subsidiaries.
2. During 2001, the Board of Directors and the Audit Committee
approved the grant to Mr. Sagi Genger, the Company's Chief
Operating Officer, of a guarantee in the amount of $2,000 in
connection with his relocation. The guarantee is secured by
149,500 of the Company's shares held by the officer, which were
valued at $4,364 as of June 1, 2001. The guarantee shall
terminate on the earlier to occur of (i) June 1, 2003 or (ii)
the termination of the officer's employment with the Company. In
the event of termination by the Company of Mr. Sagi Genger's
employment or in the event of a change in control of the
Company, the Company may recover any payments made under the
guarantee only to the extent of the shares pledged. The Company
bears all the expenses related to obtaining and maintaining the
guarantee in the amount of $30 and $2, for the years ending
December 31, 2002 and 2001, respectively. As of December 31,
2002 the outstanding guarantee balance amounted to $2,000, and
the fair value of the secured shares was $299. The fair value of
the secured shares as of March 21, 2003 was $229. The Company
and Mr. Sagi Genger had intended to extend the guarantee,
however, the Sarbanes-Oxley Act of 2002 prohibits any extension
or modification of a loan to an executive officer, accordingly
the guarantee cannot be extended beyond June 1, 2003. Mr. Sagi
Genger has informed the Company that he intends to refinance the
underlying loan by June 1, 2003. The Company cannot predict
whether Mr. Sagi Genger will be able to refinance the loan. In
the event Mr. Sagi Genger is unable to refinance the obligation,
the Company will be subject to an exercise of the guarantee and
the Company would exercise its rights against Mr. Sagi Genger.
As a result the Company could incur a loss up to the full amount
of the guarantee less the then fair value of the securities and
any other recovery from Mr. Sagi Genger.
NOTE 14 - SHARE CAPITAL
A. SHARES SUBJECT TO OPTIONS
Until 1997, the Company issued ordinary shares to an independent
trustee, which restricted the use of these shares to the
granting of options to founding shareholders, employees and
consultants to acquire such shares. No shares can be returned to
the Company and such shares have voting and dividend rights.
Shares issued to the trustee are deemed outstanding, using the
treasury stock method, for purposes of earnings per share
computations. As of December 31, 2002, the trustee held 293,610
shares.
B. STOCK OPTIONS
In the year ended December 31, 2001, the Board of Directors
approved the acceleration of vesting of stock options granted to
certain employees and members of the Board of Directors. As a
result, and in accordance with FASB Interpretation No.44,
compensation expense with regard to such acceleration, in the
total amount of $17,112, is included in the statement of
operations.
The accompanying notes form an integral part of these consolidated financial
statements.
F-34
NOTE 14 - SHARE CAPITAL (CONT.)
B. STOCK OPTIONS (Cont.)
During 2001, the Board of Directors approved the grant of fully
vested stock options, to purchase 1,200,000 shares, to several
of the Company's senior employees, members of the Board and a
related party, at an exercise price of $10.90 per share (equal
to the exercise price of options granted to many of the
Company's other employees prior to the acquisition of CMG). As a
result, and in accordance with APB 25, compensation expense in
the total amount of $8,963 is included in the statement of
operations.
In May 2001 the Company granted 968,000 Time Accelerated
Restricted Stock Award options ("TARSAP's") to employees and a
related party with an exercise price of $24.90. The TARSAP's
include an acceleration feature, based on the Company's
performance in the years 2003 and 2004. No compensation expense
was recorded, since the market price was equal to the exercise
price at the date of grant.
Transactions during the three year period ended December 31, 2002, are
summarized as follows:
WEIGHTED AVERAGE
EXERCISE PRICE
NO. OF SHARES U.S.$
------------- ----------------
Outstanding January 1, 2000 5,099,144
Granted 2,468,500 9.10
Exercised (813,346) 5.09
Forfeitures (219,848) 12.95
-----------
Outstanding December 31, 2000 6,534,450
Granted 8,171,232 17.10
Exercised (3,268,645) 7.34
Forfeitures (842,956) 11.16
-----------
Outstanding December 31, 2001 10,594,081
Granted 2,570,235 6.34
Exercised (122,739) 6.48
Forfeitures (1,752,132) 15.50
-----------
Outstanding December 31, 2002 11,289,445
===========
The weighted average fair value of options granted in 2002, 2001 and 2000
were $4.54, $7.45 and $4.76 respectively.
The weighted average exercise price of options outstanding as of December
31, 2002, 2001 and 2000 were $12.56, $14.45 and $6.37 respectively.
The number of options exercisable as of December 31, 2002, 2001 and 2000 was
4,986,568, 3,404,184 and 3,306,280, with a weighted average exercise price
of $11.42, $8.71 and $6.66, respectively.
F-35
The following table summarizes information about options outstanding at
December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
WEIGHTED
NUMBER AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT WEIGHTED
EXERCISE PRICES DECEMBER 31, CONTRACTUAL LIFE AVERAGE EXERCISE DECEMBER 31, AVERAGE EXERCISE
(DOLLARS) 2002 (YEARS) PRICE (DOLLARS) 2002 PRICE (DOLLARS)
--------------- -------------- ---------------- ---------------- -------------- ----------------
0.02-2.90 1,197 3.91 0.27 1,197 0.27
3.31-4.03 1,540,950 5.45 3.93 -- --
4.05-5.99 1,257,216 6.75 5.08 1,074,316 5.08
6.0-7.37 29,075 8.23 6.95 -- --
7.86-9.1 1,757,669 7.46 8.46 1,212,214 8.50
9.5-10.93 3,016,481 8.13 10.86 1,546,032 10.88
12.38-14.81 90,775 7.03 12.82 60,975 12.68
15.00-17.00 726,533 8.46 16.05 334,731 16.13
17.11-18.22 38,675 8.99 17.83 5,074 17.75
18.3-27.8 2,808,357 8.43 23.95 729,512 23.83
30.500 22,517 8.69 30.50 22,517 30.50
---------- ---------
11,289,445 4,986,568
========== =========
The accompanying notes form an integral part of these consolidated financial
statements.
F-36
NOTE 14 - SHARE CAPITAL (CONT.)
B. STOCK OPTIONS (Cont.)
The Board of Directors determines the option's exercise price and,
if granted below fair market value, compensation expense is recorded
over the vesting period of the option in accordance with APB 25.
Under APB 25, the compensation cost charged to operations for the
years ended December 31, 2002, 2001 and 2000 amounted to $0, $120
and $117, respectively, excluding above-mentioned expenses with
respect to the acceleration of options and the grant of fully vested
options.
During the year ended December 31, 2001 the Company recorded
compensation expenses in the amount of $305 due to options granted
to consultants, such expenses were measured in accordance with SFAS
No. 123 and are included in the selling, marketing and
administrative expenses.
Pursuant to the agreement for the acquisition of AOC entered into in
December 1997, options to purchase 84,435 ordinary shares at a price
of $47.25 per share were issued. These options expired in December
2002.
In connection with the Loan, on April 30, 2001 (See Note 12), the
Company and the Bank also entered into a five-year option agreement
granting the Bank or any of its subsidiaries the right to purchase
from the Company up to 2,500,000 ordinary shares of the Company at a
purchase price of $20.25 per share, subject to certain adjustments,
of which 1,363,700 options have been exercised until December 31,
2002. The fair value of the options granted was $9,704, which is
amortized based on the interest rate method over the term of the
Loan. Amortization expenses amounted to $2,480 and $1,500 during the
years ended December 31, 2002 and 2001, respectively, and are
included in financial expenses.
The accompanying notes form an integral part of these consolidated financial
statements.
F-37
NOTE 14 - SHARE CAPITAL (CONT.)
B. STOCK OPTIONS
As part of the new financing arrangement, with the Bank dated
February 6, 2003 (see Note 12) the Company agreed to re-price the
outstanding 1,136,300 options owned by the Bank to the then current
market price and to grant an additional 275,000 options at the then
current market price. As a result the Company will incur during 2003
a charge to earnings of approximately $1,000 as the cost of the
options.
On March 26, 2003 the Company's Board of Directors approved a
voluntary stock option exchange program. Under the program, eligible
participants will be all current employees of the Group as well as
members of the Company's Medical Advisory Board holding outstanding
options to purchase ordinary Shares of the Company granted under
various share option plans, which have an exercise price per share
of $6.00 or more ("Eligible Options"). Members of the Board of
Directors are not entitled to participate in this program. Eligible
Options will be cancelled in exchange for new options ("New
Options") that will be granted at an exercise price equal to the
closing price of the Company's ordinary shares as reported on the
NASDAQ National Market ("NASDAQ") on the date of grant of the New
Options. New Options will be granted at a ratio of one New Option
for each three Eligible Options with an exercise price of $6.00
-$14.99, and one New Option for each four Eligible Options with an
exercise price of $15 or more. The New Options will vest in four
equal installments every six months over a 24-month period from the
date of grant. If all 4,140,527 Eligible Options are exchanged, then
options outstanding will be reduced by 2,940,644 shares (see also
Notes 3N and 3R).
C. TREASURY STOCK
During 1998 and 1999, the Company's Board of Directors authorized
the purchase of up to 3,000,000 ordinary shares, to facilitate the
exercise of employee stock options under the various plans.
Accordingly, during 1999 the Company repurchased 1,590,000 shares at
an average purchase price of $6.70 per share, for an aggregate
consideration of approximately $10,660. During 2001 and 2000, the
Company issued 1,856,786 and 772,759 shares, respectively, to
employees who have exercised their options. Purchases of ordinary
shares are accounted for as treasury stock, and result in a
reduction of shareholders' equity. When treasury shares are
reissued, the Company charges the excess of the repurchase cost over
issuance price using the weighted average method to retained
earnings. If the repurchase cost is lower than the issuance price,
the Company charges the difference to additional paid in capital. As
of December 31, 2002, 14,898 shares were held as treasury shares in
trust.
The accompanying notes form an integral part of these consolidated financial
statements.
F-38
NOTE 14 - SHARE CAPITAL (CONT.)
D. OPTIONS TO RELATED PARTY
In April 2000, the audit committee of the Board of Directors
approved the employment with the Company of a related party, Mr.
Arie Genger. Consideration for his services includes an annual
salary of $10 and options to purchase 1,000,000 ordinary shares of
the Company at a price of $8.50, which was the market value of the
shares at that date, vesting in four equal annual installments. The
first installment vested upon approval of the grant. The vesting of
such options was accelerated in 2001 (see Note 14A). The employment
agreement was terminated upon Mr. Genger's election to the Board of
Directors in July 2001.
E. DIVIDENDS
In the event that cash dividends are declared in the future, such
dividends will be paid in NIS. The Company does not intend to pay
cash dividends in the foreseeable future (see Notes 12 and 19).
NOTE 15 - RELATED PARTY TRANSACTIONS
A. The Group and Coherent were involved in the following transactions
during the year ended December 31, 2002 and the eight month period
ended December 31, 2001, as follows: Purchases of raw material in
the amount of approximately $26,690 and $10,807 (included in cost of
revenues), respectively, purchases of fixed assets in the amount of
$102 in 2001, rent expenses at one of the Company's facilities in
the amount of $ 3,251 and $2,145, respectively and other operating
expenses and interest expenses in the amount of $ 673 and $3,656,
respectively.
B. The Group has retained the services of one of the Company's
directors as an outside consultant. The service agreement started on
October 1, 2000 and was terminated in October 2002. The Group has
recorded $183, $283 and $320 for the years ended December 31, 2002,
2001 and 2000, respectively in respect of those services.
C. Beginning in 2001, the U.S. subsidiary sub-leases one of its offices
and receives related office services from a company controlled by
Mr. Arie Genger, the Vice Chairman of the Board of Directors and the
current Chief Executive Officer of the Company. For the years ended
December 31, 2002 and 2001 the Group recorded expenses of
approximately $661 and $320, respectively, for this facility. The
Sublease agreement and the office services agreement were extended
on November 1, 2002 until September 29, 2004, subject to Board of
Directors approval.
D. During 2001 the Group signed an investment agreement with Aculight
(UK) Ltd. ("Aculight"). The Group has significant influence over the
operations of Aculight and, accordingly, such investment is
accounted for under the equity method. Following the investment
agreement, Aculight acquired from the Group products, formerly
leased by it, in the amount of $4,764, to be paid over a three-year
period. The Group's unrealized gain as of December 31, 2001 with
respect to such sale, in the amount of $1,589 was recorded as
deferred income. The deferred income balance as of December 31, 2002
amounted to $1,203. In 2002 the Company recorded an equity loss
representing 100% of Aculight's losses in excess of its paid-in
capital due to the fact that the Company, by the long-term payment
arrangement granted to Aculight, is the only shareholder of Aculight
which provides financing for Aculight's activities. In addition,
during the fourth quarter of 2002, the Group and Aculight agreed to
change the terms of Aculight's remaining receivable; accordingly
Aculight will pay the remaining balance of $6,371 (relating to the
aforementioned products and additional service contracts sold by the
Company) in 56 equal monthly installments of $114.
The accompanying notes form an integral part of these consolidated financial
statements.
Note 14 - SHARE CAPITAL (Cont.)
D. OPTIONS TO RELATED PARTY
In April 2000, the audit committee of the Board of Directors
approved the employment with the Company of a related party, Mr.
Arie Genger. Consideration for his services includes an annual
salary of $10 and options to purchase 1,000,000 ordinary shares of
the Company at a price of $8.50, which was the market value of the
shares at that date, vesting in four equal annual installments. The
first installment vested upon approval of the grant. The vesting of
such options was accelerated in 2001 (see Note 14A). The employment
agreement was terminated upon Mr. Genger's election to the Board of
Directors in July 2001.
E. DIVIDENDS
In the event that cash dividends are declared in the future, such
dividends will be paid in NIS. The Company does not intend to pay
cash dividends in the foreseeable future (see Notes 12 and 19).
Note 15 - RELATED PARTY TRANSACTIONS
A. The Group and Coherent were involved in the following transactions
during the year ended December 31, 2002 and the eight month period
ended December 31, 2001, as follows: Purchases of raw material in
the amount of approximately $26,690 and $10,807 (included in cost of
revenues), respectively, purchases of fixed assets in the amount of
$102 in 2001, rent expenses at one of the Company's facilities in
the amount of $ 3,251 and $2,145, respectively and other operating
expenses and interest expenses in the amount of $ 673 and $3,656,
respectively.
B. The Group has retained the services of one of the Company's
directors as an outside consultant. The service agreement started on
October 1, 2000 and was terminated in October 2002. The Group has
recorded $183, $283 and $320 for the years ended December 31, 2002,
2001 and 2000, respectively in respect of those services.
C. Beginning in 2001, the U.S. subsidiary sub-leases one of its offices
and receives related office services from a company controlled by
Mr. Arie Genger, the Vice Chairman of the Board of Directors and the
current Chief Executive Officer of the Company. For the years ended
December 31, 2002 and 2001 the Group recorded expenses of
approximately $661 and $320, respectively, for this facility. The
Sublease agreement and the office services agreement were extended
on November 1, 2002 until September 29, 2004, subject to Board of
Directors approval.
D. During 2001 the Group signed an investment agreement with Aculight
(UK) Ltd. ("Aculight"). The Group has significant influence over the
operations of Aculight and, accordingly, such investment is
accounted for under the equity method. Following the investment
agreement, Aculight acquired from the Group products, formerly
leased by it, in the amount of $4,764, to be paid over a three-year
period. The Group's unrealized gain as of December 31, 2001 with
respect to such sale, in the amount of $1,589 was recorded as
deferred income. The deferred income balance as of December 31, 2002
amounted to $1,203. In 2002 the Company recorded an equity loss
representing 100% of Aculight's losses in excess of its paid-in
capital due to the fact that the Company, by the long-term
The accompanying notes form an integral part of these consolidated financial
statements.
F-39
payment arrangement granted to Aculight, is the only shareholder of
Aculight which provides financing for Aculight's activities. In
addition, during the fourth quarter of 2002, the Group and Aculight
agreed to change the terms of Aculight's remaining receivable;
accordingly Aculight will pay the remaining balance of $6,371
(relating to the aforementioned products and additional service
contracts sold by the Company) in 56 equal monthly installments of
$114.
F-40
Note 15 - RELATED PARTY TRANSACTIONS (Cont.)
E. During 2001 the Company entered into several consulting agreements
with an IT consulting company owned by one of the Company's
directors. As a result the Company recorded during 2002 and 2001
expenses in the amount of approximately $81 and $150, respectively.
The agreement was terminated as of June 2002.
F. See note 14 A, B and D for options granted to related parties.
G. See Note 13C as for certain guarantees that have been provided to a
related party.
Note 16 - SEGMENT INFORMATION
A. COMPOSITION OF REVENUES BY GEOGRAPHIC AREAS BASED ON THE LOCATION OF
THE CUSTOMERS
Year ended December 31
------------------------------
2002 2001 2000
-------- -------- --------
Net revenues:
Americas ................ $170,146 $151,614 $ 69,728
Europe .................. 73,247 71,638 50,181
Asia .................... 103,020 88,266 39,628
Israel .................. 2,083 3,683 2,088
-------- -------- --------
$348,496 $315,201 $161,625
======== ======== ========
December 31
-------------------
2002 2001
-------- --------
Assets
North America $224,591 $232,446
Europe 73,726 80,771
Asia 23,129 23,662
Israel 48,556 55,716
-------- --------
Consolidated $370,002 $392,535
======== ========
The accompanying notes form an integral part of these consolidated financial
statements.
F-41
C. REPORTABLE SEGMENTS
Commencing January 1, 2002, the Company began to evaluate its
business on the basis of four separate business units, as follows:
Aesthetics, Ophthalmic, Surgical, and Other. Those business units
were identified as operating segments in accordance with SFAS No.
131, "Disclosure about Segments of an Enterprise and Related
Information". The information evaluated by the Company's decision
makers in deciding how to allocate resources to these segments is
net revenues and gross profit. Data for 2001 and 2000 has not been
restated due to impracticability.
For the year ended December 31, 2002
------------------------------------------------------------------------
Aesthetics Ophthalmic Surgical Other Consolidated
------------ ------------ ------------ ------------ ------------
Net Revenues $ 145,407 $ 80,313 $ 59,524 $ 63,252 $ 348,496
Gross Profit $ 93,603 $ 35,597 $ 29,307 $ 10,904 $ 169,411
Un-allocated
Expenses (209,666)
Income before ------------
income taxes $ (40,255)
============
Total Assets $ 112,456 $ 108,492 $ 70,455 $ 78,599 $ 370,002
============ ============ ============ ============ ============
The following table sets forth segment information for each of the
two years in the period ended December 31, 2001:
For the year ended
December 31
----------------------
2001 2000
--------- ---------
Net revenues
Surgical, aesthetics and ophthalmic $ 294,099 $ 139,305
Dental ............................. 9,708 8,490
Industrial ......................... 11,394 13,830
--------- ---------
Consolidated ................. $ 315,201 $ 161,625
========= =========
Operating income (loss)
Surgical, aesthetics and ophthalmic $(126,891) $ 25,071
Dental ............................. (5,711) (2,553)
Industrial ......................... 707 (257)
--------- ---------
Consolidated .................... (131,895) 22,261
Other income ....................... -- 599
Financing expenses, net ............ (11,897) (4,470)
--------- ---------
Income (loss) before income taxes $(143,792) $ 18,390
========= =========
December 31
2001
-----------
Assets
Surgical, aesthetics and ophthalmic $372,912
Dental 8,777
Industrial 10,846
--------
Consolidated $392,535
========
The accompanying notes form an integral part of these consolidated financial
statements.
F-42
D. ALLOCATION OF GOODWILL BETWEEN REPORTABLE SEGMENTS:
December 31
---------------------
2002 2001
--------- ---------
Aesthetics $ 28,216 $ 26,408
Ophthalmic 23,579 23,100
Surgical 9,464 9,464
Other 26,780 26,780
--------- ---------
Consolidated $ 88,039 $ 85,752
========= =========
The accompanying notes form an integral part of these consolidated financial
statements.
F-43
Note 18 - FINANCING EXPENSES, NET
Year ended December 31
------------------------------
2002 2001 2000
-------- -------- --------
Interest income $ 555 $ 1,040 $ 4,013
-------- -------- --------
Less - Financing expenses
Interest and amortization in respect of
convertible notes 2,472 6,036 6,261
Other interest 9,520 4,769 520
Amortization of options granted in
connection with financing 2,480 1,500 --
Foreign currency translation adjustments,
Net 467 632 1,702
-------- -------- --------
Interest expense and other 14,939 12,937 8,483
-------- -------- --------
Total Financing Expenses, net $ 14,384 $ 11,897 $ 4,470
======== ======== ========
Note 19 - INCOME TAXES
Measurement of taxable income under the Income Tax Law (Inflationary
Adjustments), 1985:
The Company and its Israeli subsidiaries are assessed under the
provisions of the Income Tax Law (Inflationary Adjustments), 1985,
pursuant to which the results for tax purposes are measured in
Israeli currency in real terms in accordance with changes in the
Israeli Consumer Price Index ("CPI"). As explained in Note 3, the
financial statements are measured in U.S. dollars. The differences
between the annual change in the CPI and in the NIS/US dollar
exchange rate causes further differences between taxable income and
the income before taxes shown in the financial statements. In
accordance with paragraph 9(f) of SFAS No. 109, the Company has not
provided income taxes on the differences between results using the
functional currency and the tax basis of assets and liabilities. In
accordance with an amendment to the Inflationary Adjustments Law,
the Minister of Finance may, with the approval of the Knesset
Finance Committee, determine by order, during a certain fiscal year
(or until February 28 of the following year) in which the rate of
increase of the price index would not exceed or shall not have
exceeded, as applicable, 3%, that all or some of the provisions of
this Law shall not apply to such fiscal year, or, that the rate of
increase of the price index relating to such fiscal year shall be
deemed to be 0%, and to make the adjustments required to be made as
a result of such determination.
The accompanying notes form an integral part of these consolidated financial
statements.
F-44
Note 19 - INCOME TAXES (Cont.)
"Israeli Tax Law amendment"
The (Israel) Law for Amendment of the Income Tax Ordinance (the "New
Law") was enacted on July 24, 2002. The New Law may have a
significant impact on international investments of Israeli
companies. The New Law may also affect the local taxation of
individuals and companies such as the Company. The Company is
assessing the potential impact of the New Law on the Company
together with its tax advisors which would affect the Company's
results of operations in periods beginning after December 31, 2002.
Additional regulations under the New Law were enacted and the
Company will reflect the New Law and new regulations effect on its
books in the relevant periods.
"Approved enterprise"
The Company and one of its Israeli subsidiaries have received
approval for their investment programs in accordance with the
Israeli Law for the Encouragement of Capital Investments, 1959 (the
"Law"). The Company and its subsidiary, have chosen to receive their
benefits through the alternative benefits program, and, as such,
they are entitled to receive certain tax benefits including
accelerated depreciation of fixed assets used in the investment
programs, as well as a full tax exemption on undistributed income
that is derived from the portion of the Company and its subsidiary's
facilities granted approved enterprise status, for a period of ten
years or a full tax exemption for a period of six years and reduced
tax rates of 10%-25% (according to the portion of non-Israeli
investors in the Company's equity, as defined by the Law, measured
on an annual basis) for an additional period of up to four years or
a full exemption for a period of 10 years. The benefits commence
with the date on which taxable income is first earned. The benefit
period for each program, is limited to the earlier to occur of 12
years from commencement of production and 14 years from date of
approval. The Company's entitlement to the above benefits is subject
to fulfillment of certain conditions, according to the Law and
related Regulations. The tax exemption period for the Company and
its subsidiaries commenced in 1995.
Dividends paid out of income derived from the portion of the
Company's facilities granted approved enterprise status is subject
to 15% withholding tax. Should dividends be paid out of income
earned during the period of the tax holiday, such income will be
subject to tax at the rate of up to 25%. The Company does not
anticipate paying dividends from income derived from the portion of
the Company's facilities granted approved enterprise status and any
such earnings distributed upon dissolution are not expected to
subject the Company to income taxes. Therefore, no deferred income
taxes have been provided on such exempted income derived from the
portion of the Company's facilities granted approved enterprise
status.
As of December 31, 2002, the aggregate amount of undistributed
tax-exempt earnings for which deferred taxes had not been provided
was approximately $245,000. Distributing such tax-exempt earnings
will subject the Company to tax rates ranging between 10% and 25%
(according to the portion of non-Israeli investors in the Company's
equity, as defined by the Law, measured on an annual basis).
Income derived by the Company or its Israeli subsidiaries from
sources other than the "approved enterprises" is taxable at a
regular Israeli corporate tax rate of 36%. Income earned by
non-Israeli subsidiaries, is subject to different corporate tax
rates of up to 45%.
The accompanying notes form an integral part of these consolidated financial
statements.
F-45
Note 19 - INCOME TAXES (Cont.)
Composition of income tax expenses (benefit):
Year ended December 31
----------------------------------
2002 2001 2000
--------- --------- --------
Income (loss) before income taxes:
Israel $ 26,335 $ (9,887) $ 42,021
Non-Israeli (66,590) (133,905) (23,631)
--------- --------- --------
$ (40,255) $(143,792) $ 18,390
========= ========= ========
Taxes on income (benefit):
Current:
Israel $ 778 $ (499) $ --
Non-Israeli 1,472 (21) 280
--------- --------- --------
$ 2,250 $ (520) $ 280
========= ========= ========
Deferred:
Israel $ -- $ -- $ --
Non-Israeli -- -- --
--------- --------- --------
$ -- $ -- $ --
========= ========= ========
Total $ 2,250 $ (520) $ 280
========= ========= ========
As most of the income in Israel is exempt from income taxes, the Israeli
statutory tax rate for the purposes of the reconciliation of the reported
tax expense is approximately zero.
Net operating loss carryforward
The current tax provisions are recorded net of the benefit of utilizing
net operating loss carryforwards and tax credit carryforwards of
subsidiaries. As of December 31, 2002 the net operating loss carryforward
balances of approximately $108,000 of losses relates to the U.S. and
approximately $7,000 in Israel and approximately $19,000 in various
companies in Europe. For tax purposes, the goodwill and other intangibles
of approximately $117,000 allocated to the CMG and HGM acquisitions in the
U.S. will be amortized over periods of up to 15 years from the
acquisitions date, respectively.
Tax loss carryforwards in Israel have no expiration date while the
subsidiaries' portion of the tax loss carryforward, expires in periods
between five years and indefinite periods.
The accompanying notes form an integral part of these consolidated financial
statements.
F-46
Note 19 - INCOME TAXES (Cont.)
Deferred taxes
Under Statement No. 109 of the FASB, deferred tax assets are to be
recognized for the anticipated tax benefits associated with net operating
loss carryforwards and deductible temporary differences, unless it is more
likely than not that some or the entire deferred tax asset will not be
realized. The adjustment is made by a valuation allowance.
Since management currently believes the realization of the net operating
loss carryforwards and deductible temporary differences is less likely
than not, a valuation allowance has been established for the amounts of
the related tax benefits.
Tax assessments
In April 2001, the Company reached a final agreement with the Israeli
income tax authorities with regard to tax returns filed by the Company for
the years up to and including 1998. As a result, the Company recorded, in
the year ended December 31, 2001 a gain from the reversal of the accrual
recorded in previous years in a total amount of $ 1,600.
The accompanying notes form an integral part of these consolidated financial
statements.
F-47
Note 20 - EARNINGS PER SHARE
Year ended December 31, 2002 Year ended December 31, 2001 Year ended December 31, 2000
------------------------------- ------------------------------- ------------------------------
Per Per Per
Share Share Share
Loss Shares Amount Loss Shares Amount Income Shares Amount
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) (44,116) (145,868) -- -- 17,282 -- --
======= ======== ======
Basic earnings per share
Income (loss) before
extraordinary items (44,208) 37,184 (1.19) (145,868) 32,302 (4.52) 16,990 25,354 0.67
Extraordinary gain 92 37,184 -- 32,302 -- 292 25,354 0.01
-------- -------- -------- -------- -------- --------
Income (loss) available to
ordinary shareholders (44,116) 37,184 (1.19) (145,868) 32,302 (4.52) 17,282 25,354 0.68
======== ======== ======== ======== ======== ========
Effect of diluting
securities
Options -- -- 2,863
Warrants -- -- --
-------- -------- --------
Diluted earnings per
share
Income (loss) before
extraordinary items (44,208) 37,184 (1.19) (145,868) 32,302 (4.52) 16,990 28,217 0.60
Extraordinary gain 92 37,184 -- 32,302 -- 292 28,217 0.01
======== ======== ======== ======== ======== ========
Income (loss) available
to ordinary
shareholders (44,116) 37,184 (1.19) (145,868) 32,302 (4.52) 17,282 28,217 0.61
======== ======== ======== ======== ======== ========
The diluted EPS calculation does not take into account subordinated notes
convertible into weighted average shares of, 893,630, 1,744,941, and 1,971,794
ordinary shares, in 2002, 2001 and 2000 respectively, because their effect is
anti-dilutive. The weighted average number of shares related to options excluded
from the calculation of diluted net earnings per share, since they would have an
anti-dilutive effect was 447,926 and 4,227,626 for the years ended December 31,
2002 and 2001, respectively.
Note 21 - FINANCIAL INSTRUMENTS
A. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Group to a
concentration of credit risk, consist principally of cash and cash
equivalents, short-term and long-term investments, trade receivables
and long-term trade receivables. Short-term cash investments are
placed with high credit-quality financial institutions. Other
investments are in securities of various banks, in U.S. Government
securities and in commercial paper of industrial companies with high
credit ratings. The Group performs ongoing credit evaluations of its
customers and generally retains a security interest in the products
sold. The Group maintains allowances for estimated credit losses.
The Company from time to time enters into transactions in which the
Company discounts trade receivables on a recourse basis with banks,
the proceeds from such transactions are presented as current
liabilities.
The accompanying notes form an integral part of these consolidated financial
statements.
F-48
Note 21 - FINANCIAL INSTRUMENTS (Cont.)
B. CURRENCY RATE HEDGING
The Company is exposed to market risks related to changes in
currency exchange rates. To manage the volatility relating to this
exposure, the Company nets the exposures on a consolidated basis to
take advantage of natural offsets. For the residual portion, the
Company enters into various derivative transactions pursuant to the
Company's policy for hedging. Designation is performed on a specific
exposure basis in accordance with hedge accounting. The changes in
the fair value of these hedging instruments are offset in part or in
whole by corresponding changes in the fair value or cash flows of
the underlying exposures being hedged. The Company does not hold or
issue derivative financial instruments for trading purposes.
The Company sells its products in a number of countries and
manufactures its products principally in Israel and the U.S. and as
a result is exposed to movements in foreign currency exchange rates.
The Company's major foreign currency exposures involve the markets
in Europe and Asia. The primary purpose of the Company's foreign
currency hedging activities is to manage the volatility associated
with foreign currency denominated revenues and expenses and other
assets and liabilities created in the normal course of business. The
Company primarily utilizes forward exchange contracts and purchased
options with maturities of less than 18 months. The derivatives
hedging these exposures are also designated as cash flow hedging
instruments for anticipated cash flows not to exceed 12 months.
Purchased foreign currency options or forward exchange contracts are
intended mainly to offset the effect of exchange rate fluctuations
on projected sales, and receivables. The fair value of the
outstanding instruments at December 31, 2002 and 2001 of $369 and
$874, respectively was recorded as current liabilities. These
amounts are recognized as earnings as the underlying transactions
are recognized.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, investments,
trade receivables, subordinated notes, accounts payable and accrued
expenses approximate their fair value due to their short-term
nature. The market value of the convertible notes as of December 31,
2001 was approximately 101% of the book value. The book value of the
Bank loan approximates its fair value, as it bears interest, which
doesn't differ significantly from interest rates for similar loans.
D. DERIVATIVES AND OFF-BALANCE SHEET INSTRUMENTS
Commitments to extend credit and financial guarantees are reviewed
and approved by senior management. Management regularly reviews all
outstanding commitments, letters of credit and financial guarantees,
and the results of these reviews are considered in assessing the
adequacy of the Company's reserve for possible credit and guarantee
losses.
The accompanying notes form an integral part of these consolidated financial
statements.
F-49
Note 22 - UNAUDITED QUARTERLY FINANCIAL DATA
Quarter ended
----------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
2002
----------------------------------------------------------------
Net revenues $ 86,122 $ 92,965 $ 90,004 $ 79,405
Gross profit 45,092 50,744 46,828 26,747
Loss before extraordinary items $ (735) $ (2,829) $ (928) $ (39,716)
Net Loss $ (643) $ (2,829) $ (928) $ (39,716)
============= ============= ============= =============
Basic and diluted net loss per share
before extraordinary items $ (0.02) $ (0.08) $ (0.02) $ (1.07)
============= ============= ============= =============
Basic and diluted net loss per share $ (0.02) $ (0.08) $ (0.02) $ (1.07)
============= ============= ============= =============
Quarter ended
----------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
2001
----------------------------------------------------------------
Net revenues $ 43,868 $ 80,372 $ 90,173 $ 100,788
Gross profit 28,306 26,263 50,366 54,623
Net income (loss) $ 4,228 $ (146,377) $ 133 $ (3,852)
============= ============= ============= =============
Basic net earnings (loss) per share $ 0.16 $ (4.70) $ -- $ (0.11)
============= ============= ============= =============
Diluted net earnings (loss) per share $ 0.14 $ (4.70) $ -- $ (0.11)
============= ============= ============= =============
The accompanying notes form an integral part of these consolidated financial
statements.
F-50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LUMENIS LTD.
By: /s/ Arie Genger
--------------------------
Arie Genger
Vice Chairman of the Board of Directors and
Chief Executive Officer
Dated: March 28, 2003
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Arie Genger, Sagi Genger and Kevin R. Morano, and each
of them, his true and lawful attorney- in-fact and agent, each with full power
of substitution and resubstitution, for him and in his name, place and stead,
and in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- -------- -------- --------
/s/ Jacob A. Frenkel Chairman of the Board of Directors March 28, 2003
- ---------------------
Prof. Jacob A. Frenkel
/s/ Arie Genger Vice Chairman of the Board of Directors March 28, 2003
- ---------------------- and Chief Executive Officer
Arie Genger (Principal Executive Officer)
Director March __, 2003
- ---------------------
Aharon Dovrat
/s/ Philip Friedman Director March 28, 2003
- ---------------------
Philip Friedman
/s/ Thomas G. Hardy Director March 28, 2003
- ---------------------
Mr. Thomas G. Hardy
/s/ Darrell S. Rigel Director March 28, 2003
- ---------------------
Dr. Darrell S. Rigel
/s/ S.A. Spencer Director March 28, 2003
- ---------------------
Mr. S.A. Spencer
/s/ Mark H. Tabak Director March 28, 2003
- ---------------------
Mr. Mark H. Tabak
/s/ Zehev Tadmor Director March 28, 2003
- ---------------------
Prof. Zehev Tadmor
/s/ Kevin R. Morano Chief Financial Officer March 28, 2003
- ---------------------
Mr. Kevin R. Morano (Principal Financial and Accounting Officer)
CERTIFICATIONS
I, Arie Genger, certify that:
1. I have reviewed this annual report on Form 10-K of Lumenis Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Arie Genger
----------------------------------
By: Arie Genger
Chief Executive Officer
Date: March 28, 2003
I, Kevin Morano, certify that:
1. I have reviewed this annual report on Form 10-K of Lumenis Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Kevin Morano
---------------------------------
By: Kevin Morano
Chief Financial Officer
Date: March 28, 2003
INDEX TO EXHIBITS
NUMBER DESCRIPTION
2.1 Asset Purchase Agreement, dated as of February 25, 2001, by and
among Lumenis Ltd. ("Lumenis"), Lumenis Holdings Inc. ("LHI") and
Coherent, Inc. *A (Schedules omitted; Lumenis agrees to furnish
supplementally a copy of any omitted Schedule to the Commission upon
request.)
2.2 First Amendment to the Asset Purchase Agreement, dated as of April
30, 2001, by and among Lumenis, LHI and Coherent, Inc. *B
2.3 Stock Purchase Agreement, dated as of November 8, 2001, by and among
Lumenis, Lumenis Inc. and Linda H. McMahan, in her capacity as the
personal representative of the Estate of William H. McMahan.*H
(Schedules omitted; Lumenis agrees to furnish supplementally a copy
of any omitted Schedule to the Commission upon request.)
2.4 Contract of Sale, dated as of November 8, 2001, by and between
McMahan Enterprises, Inc. and Lumenis Holdings Inc. *H (Schedules
omitted; Lumenis agrees to furnish supplementally a copy of any
omitted Schedule to the Commission upon request)
3.1 Memorandum of Association, as amended (English translation)*H
3.2 Articles of Association, as amended *H
4.1 Bonus Rights Agreement, dated as of April 11, 2002, between the
Registrant and American Stock Transfer & Trust Company , as Rights
Agent *I
10.1 1999 Share Option Plan *H *M
10.2 2000 Share Option Plan *H *M
10.3 Israel 2003 Share Option Plan *M *O
10.4 Loan Agreement, dated as of April 30, 2001, between Lumenis Holdings
Inc. and Bank Hapoalim B.M., an Israeli banking corporation acting
through its New York branch. *B
10.5 Letter of Intent, dated as of April 30, 2001, from Bank Hapoalim
B.M. *B
10.6 Letters, dated April 24, 2001, regarding short term line of credit
and related Agreement, dated as of April 30, 2001, between Bank
Hapoalim B.M. and Lumenis *B
10.7 Form of Indemnification Agreement *H
10.8 Employment Agreement, dated as of March 31, 2000, between Lumenis
and Yacha Sutton *E, *M 10.9 Lease Agreement between Scan Group
Yokneam Ltd. and Lumenis (English Translation) *D
10.10 Lease Agreement between Marion Laznik Industrial Buildings Ltd. and
Lumenis *D
10.11 Employment Agreement, dated as of July 11, 2001, between Lumenis and
Alon Maor *G, *M
10.12 Letter of Change in Prof. Jacob A. Frenkel Stock Option Plan, dated
September 7, 2000 *F, *M
10.13 Sublease Agreement, dated as of June 30, 2001, between Lumenis and
Trans-Resources, Inc. *H
10.14 Office Services Agreement, dated as of July 1, 2001 between Lumenis
and Trans-Resources, Inc. *H
10.15 Letter Agreement, date as of November 1, 2002, between Lumenis Ltd.
and Trans-Resources, Inc., extending the term of the Sublease
Agreement and the Office Services Agreement. *O
10.16 Form of Executive Variable Compensation Plan letter *H, *M
10.17 Option grant letter, dated February 22, 2001, from Lumenis to Arie
Genger. *H, *M
10.18 Loan Agreement, dated as of March 26, 2002, between Bank Hapoalim
B.M. and Lumenis *H
10.19 Letter Agreement, dated March 26, 2002, between Bank Hapoalim B.M.
and Lumenis as to Short Term Credit Line *H
10.20 Employment Agreement, dated as of January 21, 2003, between the
Company and Kevin Morano *M *O
10.21 Distribution Agreement, effective as of December 31, 2001, between
Lumenis Inc. and Eclipse Medical, Ltd. *J
10.22 Consulting Agreement, dated April 12, 2002, between the Company and
Thomas G. Hardy *K *M
10.23 Employment Agreement dated as of January 21, 2003 between the
Company and Sagi Genger *M *O
10.24 Pledge Agreement dated as of June 1, 2002 between the Company and
Sagi Genger *L *M
10.25 Letter Agreement dated October 22, 2002 between the Company and
Coherent, Inc., relating to the Promissory Note, dated as of April
30, 2001. *L
10.26 Second Amendment to Sublease, dated as of October 21, 2002, between
the Company and Coherent, Inc. *L
10.27 Termination of Consulting Agreement, dated November 8, 2002, from
Thomas G. Hardy to the Company *L
10.28 Letter Agreement, dated November 19, 2002 between the Company and
Bank Hapoalim B.M. *L
10.29 Amendment Letter Agreement, dated February 6, 2003, between Bank
Hapoalim B.M., Lumenis Ltd. and Lumenis Holdings Inc. *N
10.30 Amended and Restated Option Agreement, dated as of February 6, 2003,
between Lumenis Ltd. and Bank Hapoalim B.M. *N
10.31 Option Agreement, dated as of February 6, 2003, between Lumenis Ltd.
and Bank Hapoalim B.M. *N
2
21 List of Subsidiaries *O
23.1 Consent of Brightman Almagor & Co. *0
Note: Parenthetical references following the Exhibit Number of a document
relate to the exhibit number under which such exhibit was initially filed.
*A Incorporated by reference to said document filed as an exhibit to Current
Report on Form 8-K, File #0-13012, filed on March 20, 2001
*B Incorporated by reference to said document filed as an exhibit to Current
Report on Form 8-K, File #0-13012, filed on May 15, 2001.
*C Incorporated by reference to Registration Statement on Form F-3, File
#333-8056, filed on December 19, 1997.
*D Incorporated by reference to said document filed as an exhibit to Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, File
#0-13012, filed on March 30, 2000
*E Incorporated by reference to said document filed as an exhibit to Quarterly
Report on Form 10-Q for the quarterly period ended March 30, 2000, File
#0-13012, filed on May 15, 2000
*F Incorporated by reference to said document filed as an exhibit to Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2000, File
#0-13012, filed on November 15, 2000
*G Incorporated by reference to said document filed as an exhibit to Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2001, File
# 0-13012, filed on November 14, 2001.
*H Incorporated by reference to said document filed as an Exhibit to Annual
Report on Form 10-K for the fiscal year ended December 31, 2001, File
#0-13012, filed on April 1, 2002.
*I. Incorporated by reference to said document filed as an Exhibit to the
Company's Registration Statement on Form 8-A filed on April 17, 2002.
*J. Incorporated by reference to said document filed as an Exhibit to Quarterly
Report on Form 10-Q for the Quarterly Period ended March 31, 2002, File
#0-13012, filed on May 15, 2002.
*K. Incorporated by reference to said document filed as an Exhibit to Quarterly
Report on Form 10-Q for the Quarterly Period ended June 30, 2002, File
#0-13012, filed on August 15, 2002.
*L. Incorporated by reference to said document filed as an Exhibit to Quarterly
Report on Form 10-Q for the Quarterly Period ended September 30, 2002, File
#0-13012, filed on November 19, 2002.
*M Management contract or compensatory plan or arrangement
*N. Incorporated by reference to said document filed as an Exhibit to Current
Report on Form 8-K, File #0-13012, filed on February 12, 2003.
*O Filed herewith.
3