UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 31, 2003
|_| 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
incorporation or organization) Identification No.)
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
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |
The number of shares outstanding of the registrant's common stock as of May 13,
2003 was 36,942,439 Ordinary Shares, NIS 0.10 par value per share.
LUMENIS LTD.
FORM 10-Q
For the Quarter Ended March 31, 2002
INDEX
PART I. FINANCIAL INFORMATION............................................. 3
ITEM 1. Financial Statements........................................... 3
1) Independent Accountant's Review Report......................... 3
2) Consolidated Balance Sheets.................................... 4
3) Interim Consolidated Statements of Operations.................. 5
4) Interim Consolidated Statements of Cash Flows.................. 6
5) Notes to Unaudited Interim Consolidated Financial
Statements..................................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 18
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk...... 27
ITEM 4. Controls and Procedures ....................................... 27
PART II. OTHER INFORMATION................................................. 28
ITEM 1. Legal Proceedings.............................................. 28
ITEM 2. Changes in Securities and Use of Proceeds...................... 30
ITEM 6. Exhibits and Reports on Form 8-K............................... 32
# # # # # #
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Brightman Almagor
1 Azrieli Center
Tel Aviv 67021
P.O.B. 16593, Tel Aviv 61164
Israel
Tel: +972 (3) 6085555
Fax: +972 (3) 6094022
info@deloitte.co.il
www.deloitte.co.il [Deloitte
& Touche LOGO]
Brightman Almagor
Independent Accountant's Review Report
The Board of Directors
Lumenis Ltd.
Yokneam
We have reviewed the accompanying consolidated balance sheet of Lumenis Ltd.
(the "Company") and its subsidiaries as of March 31, 2003, and the related
consolidated statement of operations and statement of cash flows for the
three-month period then ended. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of financial information
consists principally of applying analytical procedures to financial data and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be 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
April 28, 2003
(May 12, 2003 as for Note 1C)
- ------------------
Deloitte Tel aviv Jerusalem Haifa Eilat
Touche
Tohmatsu
- ------------------
-3-
LUMENIS LTD.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
March 31, December 31,
2003 2002
--------- ---------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 13,380 $ 18,106
Trade receivables, net 101,685 100,646
Prepaid expenses and other receivables 13,341 14,265
Inventories 73,377 82,862
--------- ---------
201,783 215,879
--------- ---------
FINISHED GOODS USED IN OPERATIONS 8,159 9,808
LONG-TERM INVESTMENTS
Investments in non marketable equity securities 5,055 5,642
Long term trade receivables 1,846 2,031
FIXED ASSETS, NET 18,176 18,582
GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $4,627 88,039 88,039
OTHER PURCHASED INTANGIBLE ASSETS, NET OF ACCUMULATED
AMORTIZATION OF $16,575 and $14,921 17,692 19,346
OTHER ASSETS, NET 10,040 10,675
--------- ---------
Total assets $ 350,790 $ 370,002
========= =========
CURRENT LIABILITIES
Short-term debt $ 47,637 38,862
Current maturities of long term loans 15,000 15,000
Trade payables 22,967 39,224
Other accounts payable and accrued expenses 78,345 80,940
Subordinated note 5,531 9,679
--------- ---------
169,480 183,705
--------- ---------
LONG TERM LIABILITIES
Bank loans, net 142,292 142,042
Deferred income 877 616
Accrued severance pay, net 1,224 1,228
Other long-term liabilities 2,731 2,515
--------- ---------
147,124 146,401
--------- ---------
Total liabilities 316,604 330,106
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Ordinary shares of NIS 0.1 par value: Authorized -
100,000,000 shares; Issued and outstanding
36,942,439 and 36,941,914 shares, respectively 805 805
Additional paid-in capital 327,175 325,947
Accumulated other comprehensive loss (96) (76)
Accumulated deficit (293,595) (286,677)
Treasury stock, 14,898 shares at cost: (103) (103)
--------- ---------
Total shareholders' equity 34,186 39,896
--------- ---------
Total liabilities and shareholders' equity $ 350,790 $ 370,002
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
LUMENIS LTD.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
For the three months
ended March 31,
-----------------------
2003 2002
-------- --------
NET REVENUES $ 80,161 $ 86,122
COST OF REVENUES 42,966 41,030
-------- --------
Gross profit 37,195 45,092
-------- --------
OPERATING EXPENSES
Research and development, net 5,985 7,007
Selling, marketing and administrative expenses 31,867 33,135
Amortization of intangible assets 1,654 1,816
-------- --------
Total operating expenses 39,506 41,958
-------- --------
Operating income (loss) (2,311) 3,134
FINANCING EXPENSES, NET 3,317 3,584
-------- --------
Loss before income taxes (5,628) (450)
TAXES ON INCOME 1,281 102
-------- --------
Loss after income taxes (6,909) (552)
COMPANY'S SHARE IN LOSSES OF AN AFFILIATE 9 91
-------- --------
Net loss for the period $ (6,918) $ (643)
======== ========
LOSS PER SHARE
Basic and diluted loss per share $ (0.19) $ (0.02)
======== ========
WEIGHTED AVERAGE NUMBER
OF SHARES
Basic and diluted 37,277 36,713
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
LUMENIS LTD.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
For the three months
-------------------
ended March 31
-------------------
2003 2002
-------- --------
CASH FLOWS - OPERATING ACTIVITIES
Net loss $ (6,918) $ (643)
Adjustments to reconcile net loss to net cash
used in operating activities -
Income and expenses not affecting operating cash flows:
Depreciation and amortization 4,309 4,386
Gain on purchase of Company's convertible notes -- (92)
Company's share on losses of an affiliate 9 91
Amortization of other long term assets 1,187 858
Other 35 (430)
Changes in operating assets and liabilities:
Increase in trade receivables (522) (11,829)
Decrease in prepaid expenses and other receivables 1,892 306
Decrease in inventories (1) 10,053 4,862
Decrease in accounts payable, accrued expenses and
other long-term liabilities (18,230) (11,606)
-------- --------
Net cash used in operating activities (8,185) (14,097)
-------- --------
CASH FLOWS - INVESTING ACTIVITIES
Purchase of fixed assets, net (1,168) (3,443)
Investment in other long-term assets -- (1,250)
Investments, deposits and securities, net -- 970
Payment for business acquired from Coherent, Inc -- (637)
-------- --------
Net cash used in investing activities (1,168) (4,360)
-------- --------
CASH FLOWS - FINANCING ACTIVITIES
Purchase of convertible notes -- (14,384)
Proceeds from exercise of options -- 626
Repayment of subordinated note (4,148) --
Increase in short-term bank debt, net 8,775 24,479
-------- --------
Net cash provided by financing activities 4,627 10,721
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (4,726) (7,736)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,106 31,400
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,380 $ 23,664
======== ========
CASH PAID DURING THE PERIOD IN RESPECT OF:
Income taxes $ 21 $ 347
======== ========
Interest $ 2,872 $ 2,578
======== ========
(1) Including finished goods used in operations.
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
LUMENIS LTD.
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2003
(In thousands, except share and per share data)
Note 1 - GENERAL
A. As described in the Company's Annual Report on Form 10-K, for the
year ended December 31, 2002 (the "2002 Form 10-K") the Company is
highly leveraged, with indebtedness that is substantial in relation
to its shareholders' equity. To finance the Coherent Medical Group
("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"). The
outstanding short-term and long-term financing obtained from the
Bank, as of March 31, 2003, amounts to $208,304. 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 and
increases the amount available under the revolver to $50,000 until
July 1, 2003 and to $35,000 thereafter, until December 31, 2003. In
addition, the new arrangement replaced a debt coverage ratio
covenant with a minimum EBITDA amount, as defined, which will be
computed at the end of each fiscal quarter of 2003. The Company has
met the minimum EBITDA amount for the first quarter of 2003 and
based on management's current estimates the Company is expected to
be in compliance with this covenant for the rest of 2003. Should the
Company be unable to comply with the Bank 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 line of credit will be
renewed or 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
investigation by the United States Securities and Exchange
Commission ("SEC"), as described in Note 7 "Commitments and
Contingent Liabilities".
B. On April 21, 2003, the Company's subsidiary, Spectron Laser Systems
Limited, signed a definitive agreement to sell its principal assets
for $6.3 million in cash, subject to adjustment, and the assumption
of certain liabilities. This industrial business had net revenue of
approximately $11 million in 2002. The Company expects to report a
loss on the sale of approximately $5 million of which the portion
that relates to certain liabilities will be recorded when such
liabilities will be settled and the resulting capital loss will be
reported during the three month period ending June 30, 2003. As of
March 31, 2003 these net assets did not meet the criteria to be
classified as long-lived assets to be disposed of by sale in
accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets".
-7-
LUMENIS LTD.
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2003
(In thousands, except share and per share data)
Note 1 - GENERAL (Cont.)
C. On March 28, 2003 the Company commenced a voluntary stock option
exchange program (the "Offer"). Under the program, eligible
participants were 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, which have an
exercise price per share of $6.00 or more ("Eligible Options").
Members of the Board of Directors were not entitled to participate
in this program. Eligible Options were cancelled in exchange for new
options ("New Options") based on 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.
Pursuant to the Offer, on May 12, 2003 the Company accepted for
exchange from 481 tendering eligible participants and cancelled
3,160,141 Eligible Options to purchase Ordinary Shares, representing
approximately 76% of the options that were eligible to be tendered
in the Offer. In exchange for the cancelled options, on May 12, 2003
the Company granted the tendering Eligible Participants New Options
to purchase a total of 912,422 ordinary shares at an exercise price
of $1.77, the May 12, 2003 market price.
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of Lumenis Ltd. (the "Company") and its subsidiaries
(collectively "the Group") as of March 31, 2003 and for the three
months then ended are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim period. The
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto, contained in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002 (the "2002 Form 10-K"). The
results of operations for the three months ended March 31, 2003, are
not necessarily indicative of the results for the entire fiscal year
ending December 31, 2003.
B. STOCK-BASED COMPENSATION
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. Stock-based compensation expenses for the three months
period ended March 31, 2003 were immaterial.
-8-
LUMENIS LTD.
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2003
(In thousands, except share and per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
C. STOCK-BASED COMPENSATION (Cont.)
For all prior periods, the Group accounted 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 recorded 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. 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 effect on net loss and loss per
share if the Group had applied the fair value recognition provisions
of SFAS No. 123, to stock-based employee compensation for the
corresponding periods presented:
Three Months Three Months
Ended Ended
March 31, March 31,
2003 2002
------------ ------------
Net loss, as reported $ (6,918) $ (643)
Add: amortization of
deferred compensation
related to employee
stock options included in
consolidated statements of
operations -- --
Deduct: amortization of
deferred compensation at
fair value 5,730 5,426
------------ ------------
Pro forma net loss $ (12,648) $ (6,069)
============ ============
Loss per share
Basic and diluted- as reported $ (0.19) $ (0.02)
Basic and diluted - pro forma $ (0.34) $ (0.17)
Under 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
the three months ended March 31, 2003 and 2002: (1) expected life of
3 years; (2) dividend yield of 0%; (3) expected volatility of 100%
in 2003 and 2002; and (4) risk-free interest rate of 1.75% and 1.8%.
-9-
LUMENIS LTD.
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2003
(In thousands, except share and per share data)
D. PRODUCT WARRANTY
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 three months period ended March 31, 2003 were
as follows:
Warranty provision as of December 31, 2002 $ 9,489
Payments made under warranty (2,404)
Increase in product warranty provision for current year 1,525
-------
Warranty provision as of March 31, 2003 $ 8,610
=======
E. NEW ACCOUNTING PRONOUNCEMENT
In April 2002, the FASB issued SFAS No. 145, which rescinds and
amends several pronouncements, including SFAS No. 4, "Reporting
Gains and Losses from Extinguishments of Debt" and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements"
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. Due to the adoption of SFAS No. 145 the
Company reclassified the $92 extraordinary gain incurred during the
three month period ended March 31, 2002 from repurchasing its
convertible notes into finance expenses.
In September 2002, the EITF issued Issue No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables.", which will be
effective for interim periods beginning after June 15, 2003. 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; and (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.
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 the
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.
-10-
LUMENIS LTD.
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2003
(In thousands, except share and per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
E. NEW ACCOUNTING PRONOUNCEMENT (Cont.)
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 at
the beginning of the first interim reporting period that starts
after July 1, 2003. The Company is still evaluating the effect of
this pronouncement on its consolidated financial statements mainly
with respect to its investment in Aculight.
F. RECLASSIFICATION
Certain prior period balances have been reclassified to conform to
current period presentation.
Note 3 - TRADE RECEIVABLES
The trade receivables as of March 31, 2003 and December 31, 2002 are
presented net of allowance for doubtful accounts of $17,512 and
$17,689, respectively and provision for returns of $3,656 and
$4,550, respectively.
Note 4 - INVENTORIES
Inventories are composed of the following:
March 31, December 31,
2003 2002
---------- ----------
Raw materials $ 14,370 $ 21,057
Work in process 11,129 13,154
Finished products 47,878 48,651
---------- ----------
$ 73,377 $ 82,862
========== ==========
-11-
LUMENIS LTD.
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2003
(In thousands, except share and per share data)
Note 5 - SEGMENT INFORMATION
A. REPORTABLE SEGMENTS
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, we again reorganized our business based on three
separate business units as follows: Aesthetics, Medical, and Other.
Medical includes the surgical and ophthalmic operations; all 2002
data have been restated to reflect such change.
For the three months ended
March 31, 2003 (Unaudited)
--------------------------------------------
Aesthetics Medical Other Consolidated
---------- ------- ------- ------------
Net Revenues $ 29,425 $28,604 $22,132 $ 80,161
Gross Profit $ 18,220 $13,491 $ 5,484 $ 37,195
Un-allocated Expenses (39,506)
----------
Operating loss $ (2,311)
==========
For the three months ended
March 31, 2002 (Unaudited)
--------------------------------------------
Aesthetics Medical Other Consolidated
---------- ------- ------- ------------
Net Revenues $ 37,162 $29,057 $19,903 $ 86,122
Gross Profit $ 25,721 $13,688 $ 5,683 $ 45,092
Un-allocated Expenses (41,958)
----------
Operating income $ (3,134)
==========
B. GEOGRAPHIC INFORMATION:
The following presents net revenues based on the location of the
customer:
For the three
months ended
March 31,
----------------------------
2003 2002
--------- ---------
(Unaudited)
Net Revenues
Americas $ 36,134 $ 44,587
Europe 18,578 17,309
Asia 24,939 23,479
Israel 510 747
--------- ---------
Consolidated $ 80,161 $ 86,122
========= =========
-12-
LUMENIS LTD.
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2003
(In thousands, except share and per share data)
Note 5 - SEGMENT INFORMATION (Cont.)
B. GEOGRAPHIC INFORMATION (Cont.):
March 31, December 31,
2003 2002
---------- ----------
(Unaudited)
Long-Lived Assets
North America $ 108,062 $ 108,934
Europe 10,352 11,399
Asia 801 728
Israel 4,692 4,906
---------- ----------
Consolidated $ 123,907 $ 125,967
========== ==========
C. ALLOCATION OF GOODWILL BETWEEN REPORTABLE SEGMENTS:
March 31, December 31,
2003 2002
---------- ----------
(Unaudited)
Aesthetics $ 28,216 $ 28,216
Medical 33,043 33,043
Other 26,780 26,780
---------- ----------
Consolidated $ 88,039 $ 88,039
========== ==========
Note 6 - FINANCING ACTIVITIES
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 a $10,000 principal payment due
April 2003; and amends certain covenants in the loan agreements. In
addition the new arrangement waived the covenants requirement for
the quarter ending December 31, 2002 and replaced the debt coverage
covenant with 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. The
Company has met the minimum EBITDA amount for the first quarter of
2003 and based on management's current estimates the Company is
expected to be in compliance with this covenant for the rest of
2003. Should the Company be unable to comply with the Bank 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 connection with the above-mentioned agreement the Company
re-priced the 1,136,300 outstanding options owned by the Bank to the
then current market price and granted an additional 275,000 options
at the then current market price. Additionally the Company paid the
Bank a $200 fee.
-13-
LUMENIS LTD.
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2003
(In thousands, except share and per share data)
Note 7 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to various legal proceedings incident to its
business. Except for the legal proceedings described below, as to
which there have been developments since the prior descriptions
thereof in the 2002 Form 10-K, or described in the "Legal
Proceedings" section of the 2002 Form 10-K and note 13C to the
Consolidated Financial Statements in the 2002 Form 10-K (for which
reference is made for descriptions of additional legal proceedings
as to which there have been no material changes since the filing of
the 2002 Form 10-K), 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 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 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, which is ongoing, and intends to continue
doing so by providing additional documents and testimony as
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. However, as the SEC investigation is
ongoing, the Company is unable to predict the duration or outcome of
this process.
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 order 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
June 2, 2003.
-14-
LUMENIS LTD.
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2003
(In thousands, except share and per share data)
Note 7 - CONTINGENT LIABILITIES (Cont.)
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 was served
on Lumenis on May 7, 2003. The parties are currently in settlement
discussions.
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 (the Company's Chairman of the Board), Yacha Sutton (then
the Company's Chief Executive Officer) and Sagi Genger (the
Company's Chief Operating Officer). 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. The motion was heard on April
7, 2003, and the judge dismissed Mr. Adil's claims of
"unemployability" and his claim that the defendants improperly
refused to allow him to retain qualified counsel of his choice in
the securities class action lawsuits in which Mr. Adil is a named
defendant. In addition, the judge dismissed Adil's claim of breach
of his employment agreement as to the individual defendants only
(Prof. Jacob A. Frenkel, Yacha Sutton and Sagi Genger). Mr. Adil's
remaining claims were transferred to the United States District
Court in Boston, Massachusetts, which has exclusive jurisdiction to
hear claims under Mr. Adil's employment agreement with the Company.
-15-
LUMENIS LTD.
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2003
(In thousands, except share and per share data)
Note 7 - CONTINGENT LIABILITIES (Cont.)
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, 2003, the Company filed a motion
to dismiss the cases based on forum non conveniens. The motion was
heard on April 7, 2003, and the judge's ruling is pending. The
Company denies the allegations and will continue to defend this case
vigorously.
In addition to the actions described above or set forth in the 2002
Form 10-K, 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 or in the 2002 Form 10-K) 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.
As of March 31, 2003 the Company has an accrual of $13,000
(including the provision of $8,800 due to the settled 1998
securities class-action lawsuits, a provision of $216 for the Light
Age matter described in the 2002 Form 10-K and $3,984 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.
-16-
LUMENIS LTD.
NOTES TO UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2003
(In thousands, except share and per share data)
Note 8 - COMPREHENSIVE LOSS
The Company reports components of comprehensive loss in its annual
consolidated statements of shareholders' equity. Comprehensive loss
consists of net loss, foreign currency translation adjustments and
unrealized loss on available for sale marketable equity securities.
Total comprehensive loss for the three months ended March 31, 2003
and 2002 is as follows:
March 31, March 31,
2003 2002
-------- --------
(Unaudited)
Net loss $ (6,918) $ (643)
Unrealized loss on available for
sale marketable securities (75) --
Foreign currency translation
adjustments 55 --
-------- --------
Consolidated $ (6,938) $ (643)
======== ========
Note 9 - LOSS PER SHARE
Period ended Period ended
March 31, 2003 March 31, 2002
-------------------------- -------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------- ------- ------- ------- ------- ------
Net loss $(6,918) $ (643) -- --
======= ======= ======
Basic loss per share
Loss available to
ordinary shareholders $(6,918) 37,277 $ (0.19) (643) 36,713 $(0.02)
======= ======= ======= ======
Effect of diluting
securities
Options -- --
Warrants -- --
------- -------
Diluted loss per share
Loss available to
ordinary shareholders $(6,918) 37,277 $ (0.19) $ (643) 36,713 $(0.02)
======= ======= ======= ======
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (In thousands of U.S. Dollars, except share and per share data)
OVERVIEW
Lumenis is a world leader in the design, manufacture, marketing and servicing of
laser and light based systems for aesthetic, ophthalmic, surgical, veterinary
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.
During 2002 the Company faced several operating and cash flow issues arising
mainly from the inadequate integration of systems and processes following the
Coherent Medical Group ("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 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 ($5,000 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 compliance with the debt coverage
covenants for the quarter ended December 31, 2002 and replaced the debt coverage
covenant with a minimum EBITDA amount, as defined, for 2003 of $50,100. The
Company has met the minimum EBITDA amount for the first quarter of 2003 and
based on management's current estimates the Company is expected to be in
compliance with this covenant for the rest of 2003. See "Cautionary Statements"
below. Should the Company be unable to comply with the Bank 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 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.
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. Moreover, the level of
internally generated funds is subject to the risk factors listed in "Cautionary
Statements" below.
-18-
On April 21, 2003, the Company's subsidiary, Spectron Laser Systems Limited,
signed a definitive agreement to sell its principal assets for $6,300 in cash,
subject to adjustment, and the assumption of certain liabilities. This
industrial business had net revenue of approximately $11,000 in 2002. The
Company expects to report a loss on the sale of approximately $5,000 of which
the portion that relates to certain liabilities will be recorded when such
liabilities will be settled and the resulting capital loss will be reported
during the three month period ending June 30, 2003. As of March 31, 2003 such
net assets did not meet the criteria to be classified as long-lived assets to be
disposed of by sale in accordance with FASB No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets".
In this Report, unless the context otherwise requires, all references to the
"Company", "Lumenis", "We" or "Our" are to Lumenis Ltd. and its direct and
indirect wholly owned subsidiaries.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED MARCH 31, 2003 COMPARED WITH THREE-MONTH PERIOD ENDED
MARCH 31, 2002
The Company reported net revenues of $80,161 for the quarter ended March 31,
2003 compared to net revenues of $86,122 for the quarter ended March 31, 2002.
The net loss for the quarter ended March 31, 2003 was $6,918 or a diluted net
loss per share of $0.19 compared to net loss of $643 for the quarter ended March
31, 2002 or a diluted net loss per share of $0.02.
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, we
again reorganized our business based on three separate business units as
follows: Aesthetics, Medical, and Other. Medical includes the surgical and
ophthalmic operations. All 2002 data have been restated to reflect such change.
Revenues. The Company's net revenues decreased by 7% to $80,161 for the three
months ended March 31, 2003 compared to $86,122 for the three months ended March
31, 2002.
By business segment, revenues for the first quarter of 2003 were Aesthetic
$29,425, Medical $28,604 and Other $22,132 compared to the following revenues in
the first quarter of 2002 Aesthetic $37,162, Medical $29,057 and Other $19,903.
The decrease in sales reflects mainly the weakness in Aesthetic unit sales in
the U.S. offset by the increase in service revenues.
Gross Profit. Gross profit decreased by 18% to $37,195 for the three months
ended March 31, 2003 from $45,092 for the three months ended March 31, 2002. As
a percentage of sales the gross profit was 46% in the three months ended March
31, 2003, compared to 52% in the same period in 2002.
As a percentage of sales, gross profit by business segment for the first quarter
of 2003 was Aesthetic 62% Medical 47% and others 25% compared to gross profit
for the first quarter of 2002 of 69%, 47% and 29% respectively.
The decrease in gross profit is due to costs associated with the final closure
of the Santa Clara manufacturing facilities and the transfer of these activities
to Salt Lake City and Israel and lower sales in the Aesthetic business.
-19-
FOR THE THREE MONTHS ENDED MARCH 31, 2003
AESTHETICS MEDICAL OTHER CONSOLIDATED
Net Revenues $ 29,425 $28,604 $22,132 $ 80,161
Gross Profit $ 18,220 $13,491 $ 5,484 $ 37,195
FOR THE THREE MONTHS ENDED MARCH 31, 2002
AESTHETICS MEDICAL OTHER CONSOLIDATED
Net Revenues $ 37,162 $29,057 $19,903 $ 86,122
Gross Profit $ 25,721 $13,688 $ 5,683 $ 45,092
Research and Development, net. Net Research and Development costs decreased by
15% to $5,985 for the three months ended March 31, 2003 from $7,007 in the same
period in 2002. As a percentage of sales, Research and Development costs were 7%
in the three-month period ended March 31, 2003 compared to 8% in the same period
in 2002.
The decrease in Research and Development costs in the three months ended March
31, 2003 is due mainly to completion of a number of projects in late 2002 and a
cost reduction program implemented last year which eliminated certain staff
positions and consolidated office space.
Selling, Marketing and Administrative expenses. Selling, Marketing and
Administrative expenses decreased by 4% to $31,867 for the three months ended
March 31, 2003 compared to $33,135 for the same period in 2002. As a percentage
of sales, Selling Marketing and Administrative expenses in the three months
ended March 31, 2003 were 40% compared to 38% in the same period in 2002.
Selling, Marketing and Administrative expenses for the three month period ended
March 31, 2002 include an unusual one-time charge of $3,300 for additional
severance costs associated primarily with the relocation of manufacturing
operations from the Santa Clara facility. The charge was offset by a reduction
in previously provided accruals for items associated with the CMG acquisition.
The decrease in Selling, Marketing and Administrative expenses were due to lower
commissions, marketing expenses and tighter control on administrative expenses
such as travel costs, facilities and communication expenses.
The increase in Selling, Marketing and Administrative expenses in the first
quarter of 2003 as a percentage of sales was mainly attributable to fixed costs
over the lower sales in the first quarter of 2003.
-20-
Amortization of intangible assets. Amortization of intangible assets, which
includes amortization of intangible assets arising from the CMG and the HGM
acquisitions amounted to $ 1,654 for the three months ended March 31, 2003
compared to $1,816 in the same period last year.
The decrease in the amortization in the three months ended March 31, 2003 is due
to the impairment of intangible assets recorded in the fourth quarter of 2002.
Financing expenses, net. For the three months ended March 31, 2003, financing
expenses were $3,317 compared to financing expenses of $3,584 in the same period
in 2002.
The decrease in financing expenses in the three months ended March 31, 2003 is
mainly due to lower interest costs of $270 from the lower balance of the long
term bank loan as well as an exchange rate gain of approximately $896 compare to
an exchange loss of approximately $250 in the three months ended March 31, 2002.
The decrease was offset in part by an increase of $509 in amortization of the
value of options re-priced as part of the financing agreement in February 2003
with the Bank and amortization of the $4,000 fee paid to with the Bank as part
of the financing agreement from August 2002. Also, interest expense was higher
by $368 due to the higher rate on the $70,667 long-term loan compared to the
subordinated convertible bonds and due to higher outstanding balance and
interest rates on the revolving credit.
Income Tax expense. Income tax expense in the three months ended March 31, 2003
was $1,281 compared to $102 in the same period last year. The increase in the
tax expense was due mainly from a provision of $337 for the period ended March
31, 2003 for the effect of the New Law in Israel as described below, and due to
a refund of $613 received in the United Kingdom during the three month period
ended March 31, 2002 for overpayments in prior years.
The (Israel) Law for Amendment of the Income Tax Ordinance (the "New Law") was
enacted on July 24, 2002 to be effective as of January 1, 2003. The effect of
the New Law and its new regulations on the Company's financial results was $337
for the three months ended March 31, 2003.
Company's share in losses of an affiliate. For the three months ended March 31,
2003, the Company's share in Aculight (UK) Limited's losses amounted to $9
compared to $91 in the same period in 2002.
Net Income (loss). As a result of the foregoing factors, the Company's net loss
was $6,918 for the three months ended March 31, 2003 compared to net loss of
$643 in the same period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands of dollars)
As of March 31, 2003, the Company had cash and cash equivalents of $13,380
compared to $18,108 on December 31, 2002. The decrease of $4,726 is mainly
attributable to:
Operating activities
For the three months ended March 31, 2003, cash used for operating activities
was $8,185, attributable mainly to a $6,807 increase in operating assets and
liabilities that resulted from paying down accounts payable by $16,257 offset by
a decrease in the inventory of $10,053, which resulted from our program to
reduce purchases and utilize existing inventories.
-21-
Investing Activities
For the three months ended March 31, 2003, cash used for investing activities
was approximately $1,160 representing investments in fixed assets.
Financing Activities
For the three months ended March 31, 2003, cash provided by financing activities
was $4,627. A total of $8,775 was provided by utilizing the available credit
with the Bank offset by payments of $4,148 to repay the Company's subordinated
notes to Coherent, Inc.
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 for the quarter ended December 31, 2002 and replaced the debt coverage
covenant with a minimum EBITDA amount, as defined, for 2003 of $50,100. The
Company has met the minimum EBITDA amount for the first quarter of 2003 and
based on management's current estimates the Company is expected to be in
compliance with this covenant for the rest of 2003. See "Cautionary
Statements"below. Should the Company be unable to comply with the Bank 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 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.
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 line of credit will be renewed or that the Company would be able to obtain
such additional financing on acceptable terms, or at all. Moreover, the level of
internally generated funds is subject to the risk factors listed in "Cautionary
Statements" below.
-22-
CAUTIONARY STATEMENTS
Certain statements made in this Report or made in press releases or in oral
presentations made by the Company's employees or agents reflect the Company's
estimates and beliefs and are intended to be, and are hereby identified as,
"forward looking statements" for the purposes of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995.
The Company cautions readers that such forward looking statements involve risks
and uncertainties that could cause actual results to differ materially from
those expected by the Company or expressed in the Company's forward looking
statements. These factors include, but are not limited to, the following:
o The Company is being investigated by the U.S. Securities and
Exchange Commission (see Part II, Item 1- "Legal Proceedings",
below) and has been named as a defendant in several class action
lawsuits alleging misrepresentations made in violation of the
securities laws.
o The Company is highly leveraged, with indebtedness that is
substantial in relation to its shareholders' equity and significant
debt service requirements and its continuing liquidity could become
problematic.
o 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.
o 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.
o 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.
o The markets in which the Company sells its products are intensely
competitive and increased competition could cause reduced sales
levels, reduced gross margins or the loss of market share.
o The Company must spend heavily on research and development.
o 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.
o 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.
o Enforcement actions may restrict sales of the Company's hair removal
products in Japan.
o 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.
o The Company must control its operating expenses in order to achieve
profitability and positive cash flow.
o The Company faces challenges as it integrates new and diverse
operations.
-23-
o Any acquisitions the Company makes could harm or disrupt its
business without bringing the anticipated synergies.
o 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.
o The Company may experience a decline in selling prices of its
products as competition increases, which could adversely affect its
operating results.
o The Company may not be able to protect its proprietary technology,
which could adversely affect its competitive advantage.
o The Company is subject to litigation regarding intellectual property
rights, and any of the respective outcomes could seriously harm its
business.
o The long sales cycles for the Company's products may cause it to
incur significant expenses without offsetting revenues.
o 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.
o The Company's dependence on sole source suppliers for certain
components exposes it to possible supply interruptions that could
delay or prevent the manufacture of its systems.
o 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.
o 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.
o The Company may be required at any time in the future to implement a
product recall.
o Conditions in Israel (including terrorism) could affect the
Company's operations, and a catastrophic loss of the Company's
facilities in Israel,, or near major earthquake faults in California
would seriously harm , its operations and its ability to produce and
sell its products.
o The Company faces risks associated with decreased revenues from the
economic downturn.
o The Company could be de-listed from NASDAQ and become subject to
"Penny Stock" Rules in the event the Company's share price closes
below $1.00 for an extended period of time.
o Conditions in Israel affect the Company's operations and may limit
its ability to produce and sell its products.
o The Company's operations could be disrupted as a result of the
obligation of key personnel who hold Israeli citizenship to perform
military service.
-24-
o The Company receives tax benefits from the Israeli government that
may be reduced or eliminated in the future.
o It may be difficult to serve process on the Company's officers and
directors in Israel, or to enforce in Israel a U.S. judgment against
the Company, its officers and directors based on U.S. securities
laws claims
o The new Israeli Companies Law may cause uncertainties regarding
corporate governance.
o In the event of proceedings against former employees, the Company
may not be able to fully enforce covenants not to compete and
therefore may be unable to prevent competitors from benefiting from
the expertise of some of its former employees.
Readers are cautioned not to place undue reliance on forward-looking statements
made in this Report, or made in press releases or in oral presentations. Such
forward-looking statements reflect management's analysis only as of the date
such statements are made and the Company undertakes no obligation to revise
publicly these forward-looking statements to reflect events or circumstances
that arise subsequently. Readers should carefully review the risk factors set
forth above and described elsewhere in this document, more fully set forth in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002
("the 2002 Form10-K") and which may be set forth in other documents the Company
files from time to time with the Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) 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. Such estimates include, but are not limited to,
allocation of corporate expenses, allowances for uncollectible accounts
receivable and sales returns reserves, inventory reserves, warranty costs,
depreciation and amortization, income taxes and contingencies. Actual results
could differ from those estimates.
CONDITIONS IN ISRAEL
General
The Company is incorporated under the laws of the State of Israel, and
much of its research and development and significant facilities are located in
Israel. Accordingly, the Company is directly affected by political, economic and
military conditions in Israel. The Company's operations would be materially
adversely affected if major hostilities involving Israel should occur or if
trade between Israel and its present trading partners should be curtailed.
Political Conditions
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its neighbors. A state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Additionally, Israel is currently
experiencing intense violence and terrorism and from time to time in the past,
Israel has experienced civil unrest, primarily in the West Bank and in the Gaza
Strip 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 Palestinian
-25-
representatives have been subject to difficulties and delays and a resolution of
all of the differences between the parties remains uncertain. Recently the
political conflict with the Palestinians has worsened. Since October 2000, there
has been a significant increase in violence primarily in the West Bank and Gaza
Strip, as well as in Israel itself, and negotiations between Israel and the
Palestinian representatives cease from time to time. Violence in the region
intensified during 2001 and 2002. As of the date hereof, Israel has not entered
into any peace agreement with Syria or Lebanon. 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. In May 2003 the U.S. government introduced the "road map" as a
starting point for initiating peace talks between Israel and the Palestinians.
The Company cannot predict whether any other agreements will be entered into
between Israel and its neighboring countries, whether a final resolution of the
area's problem will be achieved, the nature of any resolution of this kind, or
whether the current violence will continue and to what extent this violence will
have an adverse impact on Israel's economic development, on the Company's
operations in the future or what other effects it may have upon the Company.
Certain countries, companies and organizations continue to participate in
a boycott of Israeli firms and others doing business with Israel or with Israeli
companies. Although the Company is restricted from marketing the Company's
product in these countries, the Company does not believe that the boycott has
had a material adverse effect on the Company's 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 45 days, or longer
under certain circumstances, of military reserve duty annually. Additionally,
all such residents are subject to being called to active duty at any time under
emergency circumstances 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 operations, no
assessment can be made as to the full impact of such requirements on its
workforce or business if hostilities continue, and no prediction can be made as
to the effect on the Company of any expansion or reduction of such obligations,
particularly if emergency circumstances occur.
Moreover, the September 11, 2001 terror attacks on the U.S. and the
military response by the U.S. and its international allies in Afghanistan and
Iraq have created additional uncertainty regarding the state of the US and the
world economy. 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.
-26-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has fixed rate debt of approximately $5,531,000. 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 $208,304,000, 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 4. 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.
-27-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings incident to its
business. Except for the legal proceedings described below, as to which there
have been developments since the prior descriptions thereof in the 2002 Form
10-K, or described in the "Legal Proceedings" section of the 2002 Form 10-K and
note 13C to the Consolidated Financial Statements in the 2002 Form 10-K (to
which reference is made for descriptions of additional legal proceedings as to
which there have been no material changes since the filing of the 2002 Form
10-K), 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 (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, which is ongoing, and intends to
continue doing so by providing additional documents and testimony as 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. However, as the SEC
investigation is ongoing, the Company is unable to predict the duration or
outcome of this process.
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 order 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
June 2, 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.
-28-
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 was served on
Lumenis on May 7, 2003. The parties are currently in settlement discussions.
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 (the Company's Chairman of the
Board), Yacha Sutton (then the Company's Chief Executive Officer) and Sagi
Genger (the Company's Chief Operating Officer). 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. The motion was heard April 7,
2003, and the judge dismissed Mr. Adil's claims of "unemployability" and his
claim that the defendants improperly refused to allow him to retain qualified
counsel of his choice in the securities class action lawsuits in which Mr. Adil
is a named defendant. In addition, the judge dismissed Adil's claim of breach of
his employment agreement as to the individual defendants only (Prof. Jacob A.
Frenkel, Yacha Sutton and Sagi Genger). Mr. Adil's remaining claims were
transferred to the United States District Court in Boston, Massachusetts, which
has exclusive jurisdiction to hear claims under Mr. Adil's employment agreement
with the Company.
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,
2003, the Company filed a motion to dismiss the cases based on forum non
conveniens. The motion was heard on April 7, 2003, and the judge's ruling is
pending. The Company denies the allegations and will continue to defend this
case vigorously.
In addition to the actions described above or set forth in the 2002 Form
10-K, 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
-29-
forth above or in the 2002 Form 10-K) 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.
As of March 31, 2003 the Company has an accrual of $13,000,000 (including
the provision of $8,800,000 due to the settled 1998 securities class-action
lawsuits and a provision of $216,000 for the Light Age matter, both described in
the 2002 Form 10-K, and a provision of $3,984,000 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) and (b) On April 4, 2003, the Board of Directors of the Company adopted a
shareholder Rights Plan and declared a distribution of one bonus right (a
"Right") for each outstanding Ordinary Share, par value NIS 0.10 per share (the
"Ordinary Shares"), of the Company, payable to shareholders of record on April
11, 2003 (the "Record Date"). Each Right entitles the registered holder to
purchase from the Company one Ordinary Share at a price of $18 per share (the
"Purchase Price"), subject to adjustment.
The summary description of the Rights set forth below does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement,
dated as of April 11, 2003 (the "Rights Agreement"), between the Company and
American Stock Transfer & Trust Company, as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) a public announcement that a person or group
of affiliated or associated persons (subject to certain exceptions) acquired, or
obtained the right to acquire, "Beneficial Ownership" of 15% or more of the
Ordinary Shares (an "Acquiring Person"; the date of such public announcement
being called the "Shares Acquisition Date") or (ii) ten business days following
the commencement of a tender offer or exchange offer the consummation of which
would result in any person becoming an Acquiring Person (the earlier of (i) and
(ii), the "Distribution Date"), the Rights will be evidenced, with respect to
any of the Ordinary Share certificates outstanding as of the Record Date, by
such Ordinary Share certificate and will be transferred with and only with the
Ordinary Shares. Until the Distribution Date (or earlier redemption, exchange or
expiration of the Rights), new Ordinary Share certificates issued after the
Record Date upon transfer or new issuance of the Ordinary Shares will contain a
notation incorporating the Rights Agreement by reference. As soon as practicable
following the Distribution Date, separate certificates evidencing the Rights
("Right Certificates") will be mailed to holders of record of the Ordinary
Shares as of the close of business on the Distribution Date and such separate
Right Certificates alone will evidence the Rights.
-30-
The Rights are not exercisable until the Distribution Date. The Rights will
expire on May 31, 2005, unless earlier redeemed or exchanged by the Company as
described below.
In the event that a Person becomes an Acquiring Person, except pursuant to an
offer for all outstanding Ordinary Shares which the Board of Directors, with the
concurrence of the Audit Committee, determines to be fair and not inadequate and
to otherwise be in the best interests of the Company and its shareholders (a
"Qualified Offer"), proper provision shall be made so that each holder of a
Right, other than Rights that were beneficially owned by the Acquiring Person
(or any Associate or Affiliate thereof) on the earlier of the Distribution Date
or the Shares Acquisition Date (which Rights will thereafter be void), shall
thereafter have the right to receive, upon the exercise thereof at the then
current Purchase Price, that number of Ordinary Shares having a market value of
two times the Purchase Price. If the Company does not have sufficient Ordinary
Shares for this purpose, the Company may, to the extent permitted by applicable
law, substitute cash, a reduction in the exercise price, other equity securities
of the Company, debt securities of the Company, other assets, or any combination
of the foregoing, having an aggregate value equal to the value which would have
been realized if the Company had sufficient Ordinary Shares. In addition, in the
event that, at any time following the Shares Acquisition Date, (i) the Company
engages in a merger or other business combination transaction in which the
Company is not the surviving corporation (other than with an entity which
acquired the shares pursuant to a Qualified Offer), (ii) the Company engages in
a merger or other business combination transaction in which the Company is the
surviving corporation and the Ordinary Shares are changed or exchanged, or (iii)
50% or more of the Company's assets or earning power is sold or transferred,
proper provision shall be made so that each holder of a Right (except Rights
which have previously been voided as set forth above) shall thereafter have the
right to receive, upon the exercise thereof at the then current Purchase Price,
that number of shares of the acquiring company which at the time of such
transaction would have a market value of two times the Purchase Price. For
example, at a Purchase Price of $18 per Right, each Right not owned by an
Acquiring Person (or by certain related parties) following an event set forth in
this paragraph would entitle its holder to purchase $36 worth of shares.
Assuming that the shares had a per share value of $10.00 at such time, the
holder of each valid Right would be entitled to purchase 3.6 shares for $18.
At any time until ten business days following the Shares Acquisition Date, the
Company may redeem the Rights in whole, but not in part, at a price of $.001 per
Right. In addition, at any time after a person becomes an Acquiring Person and
prior to the acquisition by such person or group of fifty percent (50%) or more
of the outstanding Ordinary Shares, the Board may exchange the Rights (other
than Rights owned by such person or group which have become void), in whole or
in part, at an exchange ratio of one Ordinary Share per Right (subject to
adjustment).
(c) and (d) Not applicable.
-31-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Bonus Rights Agreement, dated as of April 11, 2003, between the
Company and American Stock Transfer & Trust Company, as Rights Agent
(incorporated by Reference to Exhibit 4.1 to the Company's
Registration Statement on Form 8-A filed on April 18, 2003).
-32-
(b) Reports on Form 8-K
During the quarterly period ended March 31, 2003, (i) 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. and (ii) on March 28, 2003 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 Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.
SIGNATURES
Pursuant to the requirements 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.
/s/ Kevin Morano
--------------------------------
Date: May 15, 2003 Kevin Morano
(Chief Financial Officer,
and Duly Authorized Officer)
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CERTIFICATIONS
I, Arie Genger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lumenis Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly 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 we
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
quarterly 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 quarterly 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
quarterly 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
----------------------------------
Arie Genger
Chief Executive Officer and
Vice Chairman of the Board
of Directors
Date: May 15, 2003
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I, Kevin Morano, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lumenis Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 quarterly
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 we
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
quarterly 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 quarterly 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
quarterly 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
--------------------------------
Kevin Morano
Chief Financial Officer
Date: May 15, 2003
-35-
EXHIBIT INDEX
4.1 Bonus Rights Agreement, dated as of April 11, 2003, between the Company
and American Stock Transfer & Trust Company, as Rights Agent (incorporated
by Reference to Exhibit 4.1 to the Company's Registration Statement on
Form 8-A filed on April 18, 2003).
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