Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2001, or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____ to _____
Commission file number: 0-13012
LUMENIS LTD.
(Exact name of registrant as specified in its charter)
Israel N.A.
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 240, Yokneam, Israel 20692
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 972-4-959-9000
Securities Registered pursuant to Section 12(b) of the Act: None.
Title of each class Name of exchange on which registered
None None
Securities registered pursuant to Section 12(g)of the Act:
Ordinary Shares, NIS 0.10 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of Ordinary Shares, par value 0.10 New Israeli Shekels ("NIS")
per share, of the registrant outstanding as of March 25, 2002 was 36,758,606.
The aggregate market value of the Ordinary Shares held by non-affiliates of
the registrant, based on the closing price of the Ordinary Shares on March 25,
2002 as reported on the Nasdaq National Market, was approximately $209,899,459.
Ordinary Shares held by each current executive officer and director and by each
person who is known by the registrant to own 5% or more of the outstanding
Ordinary Shares have been excluded from this computation in that such persons
may be deemed to be affiliates of the Company. Share ownership information of
certain persons known by the Company to own greater than 5% of the outstanding
common stock for purposes of the preceding calculation is based on information
on Schedules 13D and 13G filed with the Commission. This determination of
affiliate status is not a conclusive determination for other purposes.
Documents Incorporated by Reference
None
PART I
Item 1. Business.
General
Lumenis Ltd. ("Lumenis", "Company", "We" or "Our") is a world leader in
the design, manufacture, marketing and servicing of laser and light based
systems for aesthetic, ophthalmic, surgical and dental applications. Lumenis
offers a broad range of laser and intense pulsed light ("IPL") systems which are
used in skin treatments, hair removal, non-invasive treatment of vascular
lesions and pigmented lesions, acne, psoriasis, ear, nose and throat ("ENT"),
gynecology, urinary lithotripsy, benign prostatic hyperplasia, open angle
glaucoma, secondary cataracts, age-related macular degeneration, refractive eye
correction, neurosurgery, dentistry and veterinary.
The Company was incorporated in Israel on December 21, 1991. In January
1996, the Company completed an initial public offering ("IPO") in the United
States. Since its IPO, the Company has raised both equity and debt financing in
the public capital markets.
On April 30, 2001, the Company completed the purchase of the medical
division of Coherent, Inc. ("Coherent"), Coherent Medical Group ("CMG"). This
acquisition approximately doubled the Company's sales, expanding its leading
position in sales of pulsed light and laser based systems for the aesthetic and
surgical markets, made it a significant competitor in the ophthalmic portion of
the medical laser market, expanded its proprietary technology and increased its
critical mass by country and customer type for the marketing and cross-selling
of its products. After completion of this acquisition, the Company changed its
name from ESC Medical Systems Ltd. ("ESC") to Lumenis Ltd. See "Coherent Asset
Acquisition" below.
On November 30, 2001 the Company completed the acquisition of the stock of
FISMA Corporation, Instruments for Medicine & Diagnostics, Inc. and Instruments
for Surgery (collectively "HGM") from the Estate of William H. McMahan
("McMahan"). HGM is a Salt Lake City developer and manufacturer of medical laser
devices. The purchase price for HGM was $9.9 million in cash. This transaction
expands the Company's ophthalmic product offerings, provides specialized
technologies to help reduce the cost of manufacturing certain parts and
accessories and enables the Company to transfer certain manufacturing operations
from higher cost locations. The purchase included HGM's manufacturing
facilities. In January 2002, the Company exercised its right of first refusal to
purchase from McMahan the adjacent premises for the purchase price of $900,000.
Unless the context otherwise requires, all references to the Company or
Lumenis shall mean Lumenis Ltd. and each of its subsidiaries.
This Report includes forward looking statements. See "Management's
Discussion and Analysis - Forward Looking Statements and Risk Factors."
Market Focus
The Company's systems are designed for use in a variety of medical
environments. The principal target markets for the Company's aesthetic products
are physicians with private practices or clinics, as well as leading beauty/hair
removal centers. Many of these are customers who wish to access the vanity
market and are looking to increase their revenues and reduce dependence on
insurance reimbursements. The target markets for the Company's surgical products
are hospitals and outpatient clinics that use lasers for certain procedures.
Ophthalmologists are the primary target market for the ophthalmic products; and
dentists are the primary target market for the dental products.
2
Coherent Asset Acquisition
The Company acquired substantially all of the assets and related
liabilities of CMG for $100 million in cash financed through a new term loan
(see also Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations; Financing Activities"), 5,432,099 ordinary shares of
Lumenis, and a $12.9 million eighteen-month 5% subordinated note, plus an
earn-out of up to $25 million based on the revenues generated during the four
calendar years ending December 31, 2004 from sales of the ophthalmic equipment
operations of CMG. The cash portion of the purchase price is subject to an as
yet undetermined post-closing adjustment based on the closing date net tangible
book value of the business, which will not exceed $6 million. If total
ophthalmic revenues for the four fiscal years ended December 31, 2004 exceed
$450 million, the earn-out payment will be 21.5% of the excess. In addition, if
the ophthalmic business is sold to a third party during this four-year period
for a price in excess of $110 million, Coherent will receive an earn-out payment
equal to 50% of the excess. In no event, however, will the earn-out payment be
more than $25 million. During the fiscal year ended December 31, 2000, the
ophthalmic equipment sales were approximately $76 million. During the Company's
fiscal year ended December 31, 2001, its ophthalmic equipment sales (all of
which are attributable to the acquired CMG operations) were approximately $74
million. The Company is obligated to register the 5,432,099 shares by October
30, 2004 for resale. At completion of the acquisition, Bernard Couillaud,
President and Chief Executive Officer of Coherent, was appointed to the
Company's Board of Directors. Coherent continues to supply the Company parts and
components.
Sales for Lumenis' business, together with the medical business acquired
from Coherent for the years ended December 31, 2000 and 2001, are as follows
(dollar amounts in thousands):
--------------------------------------------------------------------------------------------------------------
Business Year Ended Year Ended
December 31, 2000 December 31, 2001
(Pro Forma and Unaudited) (Pro Forma and Unaudited)
--------------------------------------------------------------------------------------------------------------
Aesthetic $160 $168
--------------------------------------------------------------------------------------------------------------
Ophthalmic 76 74
--------------------------------------------------------------------------------------------------------------
Surgical 57 64
--------------------------------------------------------------------------------------------------------------
Service 54 49
--------------------------------------------------------------------------------------------------------------
Dental 8 11
--------------------------------------------------------------------------------------------------------------
Industrial 14 11
--------------------------------------------------------------------------------------------------------------
TOTAL $369 $376
--------------------------------------------------------------------------------------------------------------
Following the completion of the CMG acquisition, the Company embarked on an
intensive integration program to merge the two companies into one cohesive
organization. As part of the integration program, the company rationalized
product lines, sales and distribution networks, combined offices, closed
facilities and laid off employees. This included the closure of the
manufacturing sites in Seattle, Washington, the manufacturing activities in Tel
Aviv, Israel and five sales offices in Norwood, Massachusetts, Munich, Germany,
Cambridge, England, Paris, France and Tokyo, Japan. See "Manufacturing" below
and Item 2 -- "Properties". As a result of such closures, the Company
consolidated its manufacturing sites and balanced the production of its products
between the United States and Israel. Furthermore, it combined sales offices in
a concerted effort to strengthen its global sales force.
Technology
Most of the Company's products are based on proprietary technologies, using
intense pulsed light ("IPL") or state-of-the-art laser applications pioneered by
the Company.
Intense Pulsed Light Technology. IPL, the Company's proprietary technology
uses thermal energy generated by a broad band intense pulsed light source to
selectively illuminate unwanted lesions without damaging the surrounding tissue.
IPL uses a combination of intense pulses of light and filters. Our IPL products
are primarily aimed at the private aesthetic markets and applications include:
non-invasive treatment of varicose veins and other benign vascular lesions;
removal of benign pigmented lesions, such as age spots and sunspots; hair
removal; and skin rejuvenation. Among our leading IPL brands are the VascuLight
system for both deep and superficial vascular lesions, pigmented lesions, and
hair removal and the IPL Quantum family of products for skin treatments,
vascular and pigmented lesions and hair removal.
Laser Technology. Surgical and medical laser units are generally
categorized by the active material employed in generating the laser's beam.
Materials used in surgical and medical lasers may be gases (such as CO2, argon
or krypton) or crystals (such as yttrium-aluminum-garnet (YAG)). The active
material determines the wavelength of the light emitted and thus the
applications for which various types of lasers are best suited. The Company
offers many laser systems, utilizing CO2, Nd:YAG, erbium, holmium and diode
technologies. The lasers come in a variety of sizes and
3
power levels designed to serve a broad range of aesthetic and medical procedures
in physician offices, outpatient clinics and hospitals. These lasers work with a
wide variety of application-driven laser accessories. Among the Company's
leading cosmetic laser brands are: LightSheer diode lasers systems for hair
removal and UltraPulse for skin resurfacing. The Company offers a comprehensive
line of lasers for ophthalmic surgery, including the Novus Omni and Selecta
laser for glaucoma and the Opal Photoactivator for treatment of age-related
macular degeneration (AMD). The Company's leading surgical products are the
Powersuite for urology and Gynelase for gynecology applications. The Company's
leading dental products are Opus 20, Opus 5 and Opus 10.
Products and Applications
Aesthetic Applications. The Company's main focus has been in the quickly
growing aesthetic market, responding to the public's demand for improved
appearance. The primary applications for our products are: the improving of
facial complexion, skin texture, and blemishes; the removal of benign vascular
lesions, including leg veins, spider veins on legs and face, and other red
spots; removal of benign pigmented lesions including brown spots, age spots,
sunspots and tattoos; and hair removal. In 2001, 45% of our revenues were
derived from aesthetic applications.
The following are the major products we currently market to meet these
primary aesthetic applications. We have designed some of our systems to have the
versatility to treat several different conditions.
Aesthetic: Vascular and Pigmented Skin Treatments and Skin Resurfacing
VascuLight. VascuLight is the top- of-the-line multi-application IPL
system, integrating the features and benefits of the IPL with an Nd:YAG laser.
It enables physicians to offer patients non-invasive solutions for a variety of
clinical applications in a single device. The IPL heads can be varied according
to applications for vascular and pigmented lesions and hair removal. The Nd:YAG
laser treats deeper leg veins.
IPL Quantum. These IPL systems are available as single application or
multi-application systems for treating a variety of applications including
photorejuventaion, vascular and pigmented lesions as well as hair removal. The
Quantum DL for deeper leg veins was introduced in 2001.
UltraPulse and UltraPulse Encore. UltraPulse is the industry's high-end
high-energy, short-pulse-duration CO2 technology that first made laser skin
resurfacing possible. It treats moderate to severe wrinkles and acne scarring
and can also be used for a wide range of surgical applications.
LightSheer. An industry leader in laser hair removal, LightSheer systems
are high-power pulsed diode array systems that provide permanent hair reduction
to patients of all skin types. LightSheer has been recognized as an effective
and relatively maintenance free system. In 2001 two new portable systems were
introduced.
Lumenis holds the exclusive worldwide distribution rights for ClearLight,
an intense blue light acne treatment system owned by CureLight Ltd. of Or Akiva,
Israel. The Company believes that this therapy achieves higher clearance rates
in less time than other medical treatments without observable material adverse
side effects. ClearLight recently received the CE mark (see "Government
Regulation" below), and CureLight recently filed for marketing clearance with
the United States Food and Drug Administration. The Company began shipping the
product outside the United States in the second quarter of 2001.
In February 2002, Lumenis introduced the BClear Targeted PhotoClearing
System, a UVB based light therapy system to treat psoriasis and vitiligo. The
focused, high dose delivery and precise dosimetry of the BClear system allows
individually customized treatments that safely and effectively treat specific
problem locations without exposure to surrounding healthy skin. BClear qualifies
for Medicare reimbursement under an existing standard.
Ophthalmology Applications. Prior to the CMG Acquisition, CMG was a leader
in the ophthalmic laser market since its introduction of the first argon
photocoagulator system in 1970 for the treatment of retinal diseases and
glaucoma. Coherent had achieved a widespread reputation for innovations and
product excellence with an installed base of over 30,000 ophthalmic lasers in
more than 75 countries. Lumenis is continuing the work begun by Coherent and is
developing products which include both laser and other innovative technology
solutions for the treatment of a variety of sight-threatening diseases. Argon,
krypton, Nd:YAG, excimer, diode-pumped, and other diode systems all continue to
give ophthalmologists essential surgical alternatives to treat various
ophthalmic conditions. In 2001, 18% of our revenues were derived from ophthalmic
applications. Our leading ophthalmic applications include:
4
Photocoagulator. The purpose of this system is to heat or coagulate tissue.
The primary application is the treatment of diabetic retinopathy, an abnormal
vascular disease of the retina. Through the use of photocoagulation serious
vision loss from diabetic retinopathy has been reduced in some patients from 50%
to less than 2%. The main products are: Novus Omni, Ultima, and the Elite.
Photodisruptor. The photodisruptor creates a small optical breakdown, or
spark, to separate tissue or drill holes in the retina. The primary application
is capsulotomy or perforation of the posterior capsule, a membrane left after
removal of the cataractous lens. A secondary application is drilling holes in
the iris, laser iridotomy, to relieve pressure in narrow angle glaucoma. The
main brands for this product are the Aura and the Epic.
Photoactivator. This system is used to activate a drug, Visudyne(R), to
cause selective destruction of abnormal retinal blood vessels. The primary
application is treatment of the predominantly classic "wet" form of age related
macular degeneration (AMD). The main product is the Opal photoactivator which
uses Visudyne, a drug provided by Novartis.
Selective Laser Trabeculoplasty (SLT). SLT is used to selectively target
individual trabecular meshwork cells to activate a biologic response that
increases outflow of fluid to reduce intraocular pressure in open angle
glaucoma. SLT is performed using the Selecta series of products.
Refractive. This system is used to correct near and far sightedness and
astigmatism. In certain markets outside of the U.S. market, Lumenis distributes
the Allegretto laser, manufactured by Wavelight Laser Technolgie AG, which has
the capability of "custom ablation" to achieve better corrective vision for
patients.
Surgical Applications. Lumenis' acquired businesses, including Laser
Industries, with its well known Sharplan brand name, and CMG, were leading
forces in the surgical marketplace for over twenty-five years. Lumenis now has a
leading position in the surgical laser market. In 2001, 17% of our revenues were
derived from surgical applications.
The Company offers a broad range of laser systems and accessories for sale
to hospitals and to medical practices to meet the growing in-office procedure
demand.
Surgical: Urology
PowerSuite. The PowerSuite family of holmium lasers is used for two main
applications in Urology: kidney and bladder stone lithotripsy and benign
prostatic hyperplasia (BPH). BPH affects over 60% of men over the age of 60.
Power Suite is sold with a wide range of fibers, which enable physicians to
penetrate hard to reach areas. The laser is used to resect, ablate and coagulate
tissue.
In 2001 the Company entered into a new U.S. distribution agreement with
Boston Scientific Corp ("BSC") under which BSC is responsible for sales of
fibers and accessories as well as for providing sales leads for holmium lasers
to Lumenis' direct distribution force. A similar agreement for distribution in
Japan was entered into under which BSC is responsible for sales of all Lumenis
urology offerings in Japan.
Surgical: ENT (Otolaryngology).
Lumenis has pioneered several ENT applications for both operating room and
office environments. Our leading ENT products include:
CO2 Lasers. The Company offers a full range of CO2 laser systems and
accessories for a variety of applications. CO2 lasers enable the physician to
create precise, hemostatic incisions and excisions and to ablate soft tissue
with minimal thermal necrosis to the surrounding area. These units can be easily
adapted for freehand surgery, laser microsurgery, and rigid endoscopy
Surgical: Gynecology.
5
Lumenis offers several systems for various gynecologic applications,
including laparoscopy, endometrial ablation, microsurgery, tubal infertility,
lesions of the lower genital tract and excessive menstrual bleeding. Our leading
gynecological products include:
UltraPulse Encore. UltraPulse Encore is used in gynecology as well as
operating room based surgery. This high powered technology provides performance
enhancement over lower powered CO2 technologies.
GyneLase. GyneLase is a compact portable state-of-the-art diode laser that
is designed for outpatient global endometrial ablation treatment of menorrhagia
(excessive menstrual bleeding). Menorraghia is estimated to affect 20% of all
menstruating women. In March 2001, we entered into a worldwide distribution
agreement with Karl Storz GmbH & Co. for the GyneLase line of products.
Surgical: Veterinary
The Company pioneered laser applications in the veterinary area with the
AccuVet, a compact, easy to use, CO2 laser. The many surgical applications
include: removal of cysts, tumors and warts; specialized internal procedures;
neutering; spaying; and declawing.
Dental Applications. We have developed several dental lasers to enable
dentists to perform hard and soft tissue applications including drilling, cavity
preparation, gum trimming and periodontic procedures, as well as teeth
whitening. In 2001, 3% of our revenues were derived from dental applications.
Our leading systems for dental applications include:
Opus5 and Opus10. Opus5 and Opus10 are compact lightweight efficient diode
laser systems for maintenance-free tooth whitening. Opus 10 can also be used for
soft tissue applications such as root canal disinfection, periodontal
procedures, small surgery procedures, and curretage. The Opus 5 is a 5 Watt
system; Opus 10 is 10 Watt. In October 2001, the Company entered into a
distribution agreement with Patterson Dental Supply Inc. for distribution of
these products in the United States.
Opus20. Opus 20 uniquely combines Erbium YAG and CO2 lasers in one device
to enable dentists to meet most of their dental practices' needs. The Er:YAG
laser is designed primarily for hard tissue procedures on teeth and bone,
including cavity and crown preparation, caries removal, enamel etching and
curretage. The CO2 laser is effective for a wide variety of soft tissue
applications, including gingevectomy, gingivoplasty, frenectomy, implant
exposure and maintenance, root canal disinfection, laser troughing, crown
lengthening, operative dentistry, and guided tissue regeneration. The Opus20
enables dentists to perform hard tissue drilling at speeds equal to high speed
mechanical drills.
NovaPulse. The NovaPulse is a 20 Watt pulsed CO2 laser for a wide variety
of soft tissue applications including gingevectomy, gingivoplasty, frenectomy,
implant exposure and maintenance, root canal disinfection, laser troughing,
crown lengthening, operative dentistry, and guided tissue regeneration. The
NovaPulse can also be used for other dentistry surgical applications.
The Company also sells a variety of handpieces and accessories for its
dental lasers.
Industrial Applications. The industrial unit, Spectron Lasers, located in
Rugby, England, develops and sells a number of different industrial laser
systems for specialized applications based upon customer requests. In 2001, 4%
of our revenues were from industrial applications.
Products Under Development
In order to maintain and enhance its competitive position, the Company
believes it is imperative to develop new products and applications and introduce
new technologies. Some of these products are developed internally, some are
developed pursuant to research agreements, and some are acquired or licensed.
Business Strategy
The Company intends to maintain its leadership position in its markets by
providing quality leading edge systems, accessories and service, and through
in-house research and development and continued acquisition of products and
technologies. The Company intends to broaden its sales channels and product
offerings to reach a wider audience
6
for its products. The Company intends to use the resources at its disposal to
ensure that it can compete effectively in each of the markets it has targeted.
Financial Information about Business Segments
Please refer to Note 16 of the Financial Statements with respect to
financial information about business segments.
Marketing, Distribution and Sales
As part of the integration of CMG, in the second half of 2001, the Company
began a reorganization of its core business operations into five functional
business units to focus upstream marketing and research and development
activities within product application areas.
Five business units have accordingly been set up to focus on Lumenis'
primary markets: aesthetic, ophthalmology, surgery, dentistry and industrial.
o The Aesthetic business unit focuses on photorejuvenation, hair
removal, vascular and pigmented lesions, acne, psoriasis and other
applications under development.
o The Ophthalmic business unit focuses on ophthalmic products for
correction of vision related problems.
o The Surgical business unit focuses on hospital and in-office medical
procedures in such fields as gynecology, urology, ENT, veterinary and
other surgical applications.
o The Dental business unit focuses on dental applications including soft
and hard tissue and tooth whitening applications.
o Spectron Lasers, the industrial business unit, manufactures and sells
OEM products principally using a direct sales force in the U.K. and
U.S.
Three regional service centers have been established to coordinate local
sales, marketing and service functions for all five business units. In addition
to the sale of products, the Company generates revenues from service calls,
maintenance agreements and sales of parts and accessories. Service revenue
represents 13% of the net revenues. Lumenis sells directly in nine countries and
has consolidated the global distributor networks of its two primary predecessor
companies. These distributors sell Lumenis products in over 75 countries around
the world.
The regional service centers are:
o Americas, headquartered in Santa Clara, California, which is
responsible for sales in the United States and distributor sales in
Canada and Latin America.
o Europe, headquartered in Amstelveen, the Netherlands, which is
responsible for direct sales in France, Germany, Italy, Sweden and the
United Kingdom and for distributor sales in the rest of Europe, the
Middle East and North Africa. The European headquarters will also host
the Company's main distribution center outside the United States.
o Asia Pacific, headquartered in Tokyo, Japan, which is responsible for
direct sales operations in Japan, the People's Republic of China and
Hong Kong as well as distributor sales in over 20 countries in Asia
and the rest of the world, not covered elsewhere.
Within each region, where appropriate, the Company has entered into
distributor and representative agreements, to enable it to better penetrate
certain markets.
The Company also has entered into distribution agreements with other
manufacturers to grant Lumenis rights to distribute third party products which
complement its product offerings, including the ClearLight Phototherapy system
for acne, Allegretto Wavefront laser for laser vision correction, Verdi
photocoagulator for retinal disorders and Aura photodisrupter for capsulotomy,
all of which are sold through the regional service centers.
7
Breakdown Of Net Sales By Region
For The Year Ended December 31,
------------------------------------
(dollar amounts in thousands)
Actual
2 0 0 1 2 0 0 0 1 9 9 9
------------------------------------
North America ........................ $143,659 $ 64,254 $ 51,223
Europe ............................... 67,397 39,910 40,774
Asia ................................. 87,422 37,430 33,662
Israel ............................... 3,683 2,088 2,054
Other ................................ 13,040 17,943 14,438
-------- -------- --------
Total $315,201 $161,625 $142,151
======== ======== ========
To assist customers in financing their purchases of the Company's products,
the Company or its distributors may introduce them to one of a number of
independent leasing companies. As is common in this industry, a substantial
portion of the Company's sales are completed in the last few weeks of each
calendar quarter.
The Company generally sells more of its products during the second and the
fourth fiscal quarters than in the first and third fiscal quarters. We believe
that this is because during the third fiscal quarter many physician customers
take summer vacation and during the first fiscal quarter many hospitals and
medical organizations have not yet assessed their needs and budgets for the
upcoming year.
Manufacturing
The Company manufactures its products in five principal locations: the
LightSheer hair removal and BClear psoriasis systems are manufactured in
Pleasanton, California; aesthetic, surgical and ophthalmic products from the CMG
product line are manufactured in Santa Clara, California; former HGM products
and certain ophthalmic accessories are manufactured in Salt Lake City, Utah; the
aesthetic, surgical and dental products from the former ESC Medical product line
are manufactured in Yokneam, Israel; and the industrial products are
manufactured in Rugby, England.
Following the completion of the CMG acquisition, the Company consolidated
its manufacturing sites and balanced the production of its product lines between
the United States and Israel. By the end of 2001, the Company closed its
manufacturing sites in Seattle, Washington and Tel Aviv, Israel. The production
of the NovaPulse products was transferred from the Seattle facility to the
Yokneam, Israel site. Additionally, in an effort to lower manufacturing costs,
the Company is in the process of transferring other products from the Santa
Clara facility to the Yokneam and Salt Lake City facilities, respectively. This
transfer is expected to be completed in the second half of 2002.
The Company manufactures products based mostly upon sales forecasts and, to
a lesser extent, upon specific orders received from our customers. The Company
delivers products based upon purchase orders received, and on average, the
Company fulfills each customer's order within two to three weeks of receipt of
the order.
Sources and Availability of Raw Materials
The Company's products are manufactured from a large number of parts, using
standard components and subassemblies supplied by subcontractors and vendors to
the Company's specifications.
The Company's policy is to maintain more than one source for each of its
major components, to the extent possible, although in some cases parts are
supplied by a sole source. Due to their sophisticated nature, certain components
must be ordered up to six months in advance, resulting in a substantial lead
time for certain production runs. In the event that such limited source
suppliers are unable to meet the Company's requirements in a timely manner, the
Company may experience an interruption in production until an alternate source
of supply can be obtained.
In Israel, the Company uses an outsourcing vendor to store and stock its
raw material inventory.
8
The Company orders raw materials, including optical and electronic parts,
which it sends in kits to subcontractors for assembly of components and
subassemblies. Assembly (in part), integration, and quality assurance of the
components and subassemblies are conducted at the Company's manufacturing
facilities. In some cases, quality is tested on-site at the subcontractor's
facility. In the third quarter of 2001, the Company began outsourcing certain of
its subcomponent assembly to turnkey manufacturers.
Research and Development
The Company's research and development strategy is to develop high quality
products and related accessories to maintain its competitive advantage. The
Company's research and development expenses, net of participation by the Israeli
Office of the Chief Scientist, were approximately $21.77 million in 2001, $11.89
million in 2000, and $14.73 million in 1999. The Company believes that the close
interaction between its research and development, marketing, and manufacturing
groups allows for timely and effective realization of the Company's new product
concepts.
The Company receives certain grants and tax benefits from, and participates
in, programs sponsored by the Government of Israel.
Israeli tax law permits, under certain conditions, a tax deduction in the
year incurred for expenditures (including capital expenditures) in scientific
research and development projects, if the expenditures are approved by the
relevant Israeli Government Ministry (determined by the field of research), and
the research and development is for the promotion of enterprise and is carried
out by or on behalf of a company seeking such deduction. Expenditures not
approved as such are deductible over a three year period for Israeli tax
purposes. However, the amounts of any government grant made available to the
Company are subtracted from the amount of the aforementioned deductible
expenses.
The terms of the Israeli government participation also require that the
manufacture of products developed with government grants be performed in Israel.
Under the regulations of the Law for the Enforcement of Industrial Research and
Development 1984 (the "Research Law"), if any of the manufacturing is performed
outside Israel by any entity other than the Company, assuming the Company
received approval from the Chief Scientist for the foreign manufacturing, the
Company may be required to pay increased royalties. The increase in royalties
depends upon the manufacturing volume that is performed outside of Israel. The
maximum royalty to be paid could be up to 300% of the original grant.
The technology developed with Chief Scientist grants may not be transferred
to third parties without the prior approval of a governmental committee under
the Research Law, and may not be transferred to non-residents of Israel. The
approval, however, is not required for the export of any products developed
using the grants. Approval of the transfer of technology to residents of Israel
may be granted in specific circumstances, only if the recipient abides by the
provisions of the Research Law and related regulations, including the
restrictions on the transfer of know-how and the obligation to pay royalties in
an amount that may be increased.
In connection with an initial program approved by the Office of the Chief
Scientist, the Company and an Israeli subsidiary received or accrued
participation grants from the State of Israel in the amount of approximately
$58,000, $60,000 and $275,000 for the years ended December 31, 2001, 2000 and
1999, respectively. In return for the Government's participation payments, the
Company and its subsidiaries are obligated to pay royalties at a rate of 3% to
5% of sales of the developed product until the Office of the Chief Scientist is
repaid in full. As of December 31, 2001, the balance of the Company's
outstanding obligation to the State of Israel in connection with all
participation payments is approximately $5,594,000, which will be repaid to the
government in the form of royalties on sales of those products that reach the
market.
Competition
Lumenis faces keen competition in its different market niches. Competition
arises from utilizing other light-based products as well as alternate
technologies. Competitors range in size from small single product companies to
large multifaceted corporations, which may have greater resources than those
available to the Company. Major competitors are: in the aesthetic market:
Candela Corporation, Cynosure, Inc., Danish Dermatological Development A/S,
Laserscope, Inc. and Altus Medical Inc.; in the surgical market: Diomed Inc.,
Dornier MedTech, and Bioletic AG; and in the ophthalmic market: Carl Zeiss Micro
Imaging Inc., Nidek Technologies Inc. and Iridex Corporation.
In addition, the Company competes in markets subject to rapid technological
change. The entry of new companies or new technologies into these markets could
have a material adverse effect on the Company.
9
Patents and Intellectual Property
The Company has obtained and now holds 155 patents in the United States and
47 patents outside of the United States and has applied for 36 and 68 patents in
the United States and outside of the United States, respectively. In general,
however, the Company relies on its research and development program, production
techniques and marketing, distribution and service programs to advance its
products. The Company also licenses certain of its technologies from third
parties pursuant to various license agreements. Patents filed both in the United
States and Europe have a life of twenty years from the filing date. However,
patents filed in the United States prior to June 1995 expire either twenty years
from filing or seventeen years from the issue date. None of the Company's
material patents are expected to expire in the near future.
Technologies related to the Company's business, such as laser and IPL
technologies, have been rapidly developing in recent years. Numerous parties
have sought patent protection on developments in these technologies.
The Company's policy is to obtain patents by application, license or
otherwise, to maintain trade secrets and to operate without infringing on the
intellectual property rights of third parties. Loss or invalidation of certain
of these patents, or a finding of unenforceability of certain of the Company's
license agreements with respect to many third party patents, could have a
material adverse effect on the Company. The patent position of many inventions
in the areas related to the Company's business is highly uncertain, involves
many complex legal, factual and technical issues and has recently been the
subject of litigation industry-wide. There is no certainty in predicting the
breadth of allowable patent claims in such cases or the degree of protection
afforded under such patents. As a result, there can be no assurance that patent
applications relating to the Company's products or technologies will result in
patents being issued, that patents issued or licensed to the Company will
provide protection against competitors or that the Company will enjoy patent
protection for any significant period of time.
It is possible that patents issued or licensed to the Company will be
successfully challenged or that patents issued to others may preclude the
Company from commercializing its products under development. Litigation to
establish the validity of patents, to defend against infringement claims or to
assert infringement claims against others, if required, can be lengthy and
expensive, and may result in determinations adverse to the Company. There can be
no assurance that the products currently marketed or under development by the
Company will not be found to infringe patents issued or licensed to others.
Likewise, there can be no assurance that other parties will not independently
develop similar technologies, duplicate the Company's technologies or, with
respect to patents which are issued to the Company or rights licensed to the
Company, design around the patented aspects of the technologies. Third parties
could also obtain patents that may require licensing of their patented
technology for the conduct of the Company's business.
Because of the rapid development of technologies which relate to the
Company's products, there may be other issued patents which relate to basic
relevant technologies and other technologies marketed by the Company. From time
to time, the Company receives inquiries from third parties contending that their
patents are being infringed by the Company. If such third parties were to
commence infringement suits against the Company, and such patents were found by
a court to be valid and infringed upon by the Company, the Company could be
required to pay damages and make royalty payments. Depending on the nature of
the patent found to be infringed upon by the Company, a court order requiring
the Company to cease such infringement could have a material adverse effect on
the Company. See Item 3. - Legal Proceedings.
Government Regulation
The products manufactured and marketed by the Company are subject to
regulatory requirements mandated by the U.S. FDA the European Union and similar
authorities in other countries. The Company believes that it's principal
products will be regulated as "devices" under United States federal law and FDA
regulations. The process of obtaining clearances or approvals from the FDA and
other regulatory authorities is costly, time consuming and subject to
unanticipated delays.
Among the conditions for FDA approval of a medical device is the
requirement that the manufacturer's quality control and manufacturing procedures
comply with Good Manufacturing Practices ("GMP"), or the Quality System
Regulations ("QSR"), which must be followed at all times. The GMP and QSR
regulations impose certain procedural and documentation requirements upon a
company with respect to design, manufacturing, service and quality assurance
activities. These GMP and QSR requirements control every phase of design and
production from the receipt of raw materials, components and subassemblies to
the labeling of the finished product. It also includes the tracing of
10
consignees after distribution as well as documentation of training, follow-up
and customer complaint reporting. Design control was implemented by the FDA in
1998 as part of the QSR.
In February 1997, the Company received a Quality System Certification Award
for being in compliance with ISO 9001. ISO 9001 is a globally recognized
standard established by the International Standard Organization in Geneva,
Switzerland and has been adopted by more than 90 countries worldwide. ISO 9001
embraces all principles of the GMP and QSR and is the most comprehensive of the
quality assurance standards. ISO certification is based upon adherence to
established quality assurance standards and manufacturing process controls.
In 1998, the European Union ("EU") determined that marketing or selling any
medical product or devices within the European community requires a CE Mark
according to the European Medical Device Directive. It is the responsibility of
member states to ensure that devices capable of compromising the health and
safety of patients (and users) do not enter the market. Obtaining a CE Mark for
medical devices is regulated according to the European Medical Device Directive.
The medical device must comply with the requirements of the European Medical
Device Directive that applies at each stage, from design to final inspection.
The Company has complied with the EU standards and has received the CE Mark for
all the Company's IPL and Laser Systems.
International sales are subject to specific foreign government regulation
and those regulations vary from country to country. The time required to obtain
approval for any device to be sold in any foreign country may be longer or
shorter than that required for FDA approval.
Employees
As of December 31, 2001, the Company and its subsidiaries had 1,451
full-time employees. In Israel there were 324 employees, in the United States
728 employees, in Europe 244 employees and in Asia 155 employees.
Financial Information About Foreign And Domestic Operations And Export
Please refer to "Breakdown of Net Sales By Region" above and to Note 16 to
the Financial Statements with respect to financial information about geographic
areas of the Company's business.
The Company's worldwide business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings outside
the U.S. The Company does not regard these risks as a deterrent to further
expansion of its operations outside the U.S. However, the Company closely
reviews its methods of operations and adopts strategies responsive to changing
economic and political conditions.
Within the EU, there has been an evolution toward a single market for which
the Economic and Monetary Union ("EMU"), including the adoption of the Euro as a
single currency, marks an important step. The Company has recognized the
strategic significance of this development and, in the beginning of year 2000,
has adopted the Euro for use in EMU markets.
For risks related to the Company's operations in Israel, see "Conditions in
Israel" And "Management's Discussion and Analysis - Forward Looking Statements
and Risk Factors."
Conditions In Israel
General
The Company is incorporated under the laws of the State of Israel, and much
of its research and development and significant executive facilities are located
in Israel. Accordingly, the Company is directly affected by political, economic
and military conditions in Israel. The Company's operations would be materially
adversely affected if major hostilities involving Israel should occur or if
trade between Israel and its present trading partners should be curtailed.
Political Conditions
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its neighbors. A state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Additionally, Israel is currently
experiencing intense violence and terrorism and from time to time in the past,
Israel has experienced civil unrest, primarily in the West Bank and in the Gaza
Strip
11
administered by Israel since 1967. However, a peace agreement between Israel and
Egypt was signed in 1979, a peace agreement between Israel and Jordan was signed
in 1994 and, since 1993, several agreements between Israel and Palestinian
representatives have been signed pursuant to which certain territories in the
West Bank and Gaza Strip were handed over to the Palestinian administration. The
implementation of these agreements with the Palestinians representatives have
been subject to difficulties and delays and a resolution of all of the
differences between the parties remains uncertain. Recently the political
conflict with the Palestinians has worsened. Since October 2000, there has been
a significant increase in violence primarily in the West Bank and Gaza Strip, as
well as in Israel itself, and negotiations between Israel and the Palestinians
representatives cease from time to time. Violence in the region intensified
during 2001 and 2002. As of the date hereof, Israel has not entered into any
peace agreement with Syria or Lebanon. The Company cannot predict whether any
other agreements will be entered into between Israel and its neighboring
countries, whether a final resolution of the area's problem will be achieved,
the nature of any resolution of this kind, or whether the current violence will
continue and to what extent this violence will have an adverse impact on
Israel's economic development, on the Company's operations in the future or what
other effects it may have upon the Company.
Certain countries, companies and organizations continue to participate in a
boycott of Israeli firms and others doing business with Israel or with Israeli
companies. Although the Company is restricted from marketing the Company's
product in these countries, the Company does not believe that the boycott has
had a material adverse effect on the Company. However, a prolonged continuation
of the increased hostilities in the region could lead to increased boycotts and
further restrictive laws, policies or practices directed towards Israel or
Israeli businesses, and these could have a material adverse impact on the
Company's business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 45 are obligated, unless exempt, to perform up to 45 days, or longer
under certain circumstances, of military reserve duty annually. Additionally,
all such residents are subject to being called to active duty at any time under
emergency circumstances. Currently, some of the Company's senior officers and
key employees are obligated to perform annual reserve duty. While the Company
has operated effectively under these requirements since it began operations, no
assessment can be made as to the full impact of such requirements on its
workforce or business if hostilities continue, and no prediction can be made as
to the effect on the Company of any expansion or reduction of such obligations,
particularly if emergency circumstances occur.
Moreover, the September 11, 2001 terror attacks on the U.S. and the
military response by the U.S. and its international allies, in Afghanistan, have
created additional uncertainty regarding the state of the U.S. and world
economy. The U.S. war against terrorist activities centered in Afghanistan could
be broadened to include the Middle East, which could more directly affect the
Company's business. If weaknesses in the global economy persist or worsen, the
Company's future sales and operating results could be negatively impacted.
Economic Conditions
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has, for these and other reasons,
intervened in various sectors of the economy, employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
controls of wages, prices and foreign currency exchange rates. Until May 1998,
Israel imposed restrictions on transactions in foreign currency. These
restrictions affected the Company's operations in various ways, and also
affected the right of non-residents of Israel to convert into foreign currency
amounts they received in Israeli currency, such as the proceeds of a judgment
enforced in Israel. Despite these restrictions, foreign investors who purchased
shares with foreign currency are able to repatriate in foreign currency both
dividends (after deduction of withholding tax) and the proceeds from any sale of
shares. In 1998, the Israeli currency control regulations were liberalized
significantly, as a result of which Israeli residents generally may freely deal
in foreign currency and non-residents of Israel generally may freely purchase
and sell Israeli currency and assets. There are currently no Israeli currency
control restrictions on remittances of dividends on Ordinary Shares or proceeds
from the sale of Ordinary Shares; however, legislation remains in effect
pursuant to which currency controls can be imposed by administrative action at
any time. In addition, Israeli residents are required to file reports pertaining
to certain types of actions or transactions.
The Israeli Government's monetary policy contributed to relative price and
exchange rate stability in recent years, despite fluctuating rates of economic
growth and a high rate of unemployment. There can be no assurance that the
Israeli Government will be successful in its attempts to keep prices and
exchange rates stable.
12
Trade Agreements
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is also a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United Nations, Australia, Canada and
Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs. Israel and the European
Economic Community, known now as the European Union, concluded a free trade
agreement in July 1975, which confers various advantages on Israeli export to
most European countries and obligates Israel to lower its tariffs on imports
from these countries over a number of years. In 1985 Israel and the United
States entered into an agreement to establish a free trade area. The free trade
area has eliminated all tariff and specified non - tariff barriers on most trade
between the two countries. On January 1, 1993, Israel and the European Free
Trade Association entered into an agreement establishing a free - trade zone
between Israel and the European Free Trade Association. In November 1995, Israel
entered into a new agreement with the European Union, which includes
redefinition of rules of origin and other improvements, including providing for
Israel to become a member of the research and technology programs of the
European Union. In recent years, Israel has established commercial and trade
relations with a number of the other nations, including Russia, China, Turkey,
India and other nations in Eastern Europe and Asia, with which Israel had not
previously had such relations.
Item 2. Properties.
The Company's principal executive offices and principal engineering,
development, manufacturing, shipping and service operations are located in an
approximately 70,000 square foot facility in Yokneam, Israel and an
approximately 125,000 square foot facility in Santa Clara, California. In March
1996, the Company entered into a ten-year lease on the initial facility (of
approximately 34,000 square feet) in Yokneam, and in March 1998, the Company
entered into an additional ten-year lease on a second facility in Yokneam (of
approximately 36,000 square feet). As part of the CMG acquisition, the lease for
the premises formerly used by CMG was subleased to the Company. The sub-lease
for the Santa Clara premises expires in April 2004.
As part of the 2001 restructuring following the completion of the CMG
acquisition, the Company closed seven facilities by the end of 2001. This
included the closure of the manufacturing sites in Seattle, Washington and Tel
Aviv, Israel and five sales offices in Norwood, Massachusetts, Munich, Germany,
Cambridge, England, Paris, France and Tokyo, Japan. The facilities in
Massachusetts and Seattle will retain skeletal staff until the Company locates
subtenants for these locations.
In addition, the Company leases a facility in Tel Aviv, Israel which is
primarily utilized for research and development operations and through its
subsidiaries maintains the following premises, all of which are leased except
for the Salt Lake City, Utah sites acquired in connection with the acquisition
of HGM.
Israel
OpusDent Ltd. -- Manufacturing, operations, administrative and research and
development facilities are located in Netanya, Israel.
United States
Lumenis Inc. -- Manufacturing, marketing and sales operations are located
in facilities in Santa Clara, (described above) Pleasanton, California and in
Salt Lake City, Utah (the former HGM premises).
Other
In addition, Lumenis maintains sales offices in China, France, Germany,
Holland, Hong Kong, Italy, Japan and the United Kingdom.
For a description of an office facility located in New York, New York, see
Part III, Item 13: "Certain Relationships and Related Transactions."
13
Item 3. Legal Proceedings.
The Company is a party to various legal proceedings incident to its
business. Except as noted below, there are no legal proceedings pending or
threatened against the Company that management believes are likely to have a
material adverse effect on the Company's consolidated financial position.
In February 2002, the Company received a request from the United States
Securities and Exchange Commission ("SEC") to voluntarily provide certain
documents and information for a period commencing January 1, 1998. The request
primarily relates to the Company's relationships with its distributors, and also
asks for amplification of the Company's explanation of certain previously
disclosed charges and write-downs. The Company intends to furnish all documents
and information requested and cooperate with the SEC and is currently in the
process of collecting and producing such documents and information. The Company
is unable to predict the duration or outcome of this process.
Following the Company's announcement of the information request from the
SEC, several plaintiffs' law firms announced the filing of purported class
action suits in the United States District Court for the Southern District of
New York, on behalf of purchasers of securities of Lumenis Ltd. between January
7, 2002 and February 28, 2002, inclusive (the "Class Period"), against the
Company and certain of its officers and directors. As of March 26, 2002, the
Company had not been served with a summons in any of the announced lawsuits.
According to the announcements, the complaints allege that the Company
violated U.S. federal securities laws by issuing materially false and misleading
statements throughout the Class Period that had the effect of artificially
inflating the market price of the Company's securities. The complaints allege
that throughout the Class Period, defendants discounted and disputed marketplace
rumors about its operations even as the Company knew it was being investigated
by the SEC and that its distributors had been contacted by the SEC, and that
even after announcing in a press release that it was subject to an SEC
investigation, the Company continued to hide the fact that it had been aware of
the SEC investigation and had been providing information to the SEC for several
weeks. The Company believes the allegations and the claims are baseless, and if
served with a summons in any of the announced lawsuits, the Company intends to
vigorously defend against them.
The Company has been named in a number of purported class action securities
lawsuits filed in the fall of 1998 that have been consolidated in the United
States District Court for the Southern District of New York. The consolidated
action is known as In Re ESC Medical Systems Ltd. Securities Litigation, 98 Civ.
7530 (NRB). The consolidated amended complaint seeks damages and attorneys fees
under the United States securities laws for alleged irregularities in the way in
which the Company reported its financial results and disclosed certain facts
throughout 1997 and 1998 and for alleged "tipping" of non-public information to
Salomon Smith Barney Inc. in September 1998. The Company has entered into a
settlement agreement with the plaintiffs, which requires the Company to pay
$4,500,000 and to issue up to 500,000 Ordinary Shares. The cash portion of the
settlement will be paid by one of the re-insurers of the Company's directors and
officers liability insurance policy, and the Company intends to pursue
reimbursement of another $5,000,000 of the settlement consideration from a
second re-insurer that is in liquidation. An accrual of $13,000,000 for this
matter has been recorded in the Company's 2001 Consolidated Financial
Statements, which amount is based on the fair market value of the maximum number
of Ordinary Shares payable by the Company at the time the settlement agreement
was entered into. On March 26, 2002, the judge signed an Order and Final
Judgment approving the settlement.
On November 5, 1998, Light Age, Inc. ("Light Age") instituted an ex-parte
application in the Tel-Aviv District Court (the "Tel-Aviv Court") against the
Company and others, seeking a temporary injunction against the development,
production and sale of the Company's Alexandrite laser for dermatological or
hair removal treatments. Light Age's principal allegations are that the
Alexandrite laser is based on technology developed by Light Age and is competing
with Light Age's Alexandrite laser, in breach of the Company's non-disclosure
and non-compete undertakings in a supply agreement with Light Age. In addition,
Light Age sought a permanent injunction against the Company from engaging in
such activities. The Tel-Aviv Court denied Light Age's request for an ex-parte
injunction and ordered that a hearing be held with both parties present. On
March 21, 1999, the Tel-Aviv Court denied Light Age's motion for a preliminary
injunction. The parties have since agreed to submit their dispute for
arbitration. Accordingly, the parties filed a motion to stay the proceedings,
which was granted by the Tel Aviv Court on October 14, 1999.
On January 25, 1999, the Company, along with three affiliated entities,
brought an action seeking declaratory and injunctive relief in the Superior
Court of New Jersey, Somerset County; Law Division, against Light Age, Inc.,
entitled Laser Industries Ltd., ESC Medical Systems Inc., Sharplan Lasers Inc.,
and ESC Medical Systems Ltd. v. Light Age, Inc. Docket No. SOM-L-14199. The
litigation relates to disputes arising out of an agreement between Light Age and
Laser Industries pursuant to which Light Age supplied certain medical laser
devices to Laser Industries. On
14
March 5, 1999, defendant Light Age answered the complaint and counterclaimed
against the plaintiffs, seeking unspecified damages under thirteen counts
alleging a variety of causes of action such as breach of contract, tortuous
interference with contract, unjust enrichment, and misappropriation. On July 1,
1999 the court granted Light Age's motion to compel the Company and the three
affiliated entities to arbitrate. On August 13, 1999, Light Age filed a demand
for arbitration on its counterclaim with the American Arbitration Association.
On November 22, 1999, the Company and the three affiliated entities filed a
response to Light Age's demand. Light Age claims that it incurred damages of up
to $41,447,000. A hearing on the merits was held in December 2001. Closing
arguments were held on January 30, 2002 and a decision is expected in early
spring.
On September 20, 1999, Dr. Richard Urso filed what purports to be a class
action lawsuit against the Company and against a leasing company in Harris
County, Texas, alleging a variety of causes of action. In December 2000,
plaintiff amended his complaint to eliminate the class action claim. On April
13, 2001 the lawsuit was dismissed and on May 3, 2001, Dr. Urso and
approximately forty-eight physicians and medical clinics re-filed what purports
to be a class action lawsuit in Harris County, Texas. Plaintiffs filed a motion
to remove the case to Federal Court. The lawsuit was removed to the U.S.
District Court for the Southern District of Texas. The current allegations on
behalf of plaintiffs are breach of contract, breach of express and implied
warranties, fraud, misrepresentation, conversion, product liability, violation
of the Texas Deceptive Trade Practices Act and Texas Securities Act as well as
lender liability and unconscionable conduct. In March 2002, the Plaintiffs filed
a motion to amend their complaint to dismiss the class action and securities
allegations and to add several new plaintiffs. The plaintiffs have also filed a
motion to remand to State Court. The Company denies the allegations and will
continue to defend this case vigorously. No assessment of likelihood of outcome
or likely damages, if any, can be made at this time.
On October 12, 2001, Lumenis Inc., a subsidiary of the Company, commenced
an action for patent infringement in the United States District Court for the
Southern District of New York against Altus Medical Inc. ("Altus") seeking,
among other things, an injunction and damages. The complaint alleges that Altus
infringed two U.S. patents owned by Lumenis Inc. Altus answered the complaint
denying that it was infringing the asserted patents and filed counterclaims
seeking a declaratory judgment that the asserted patents are invalid and were
not infringed. Lumenis filed a reply denying the material allegations of the
counterclaims. Altus filed a motion seeking to transfer the action to the United
States District Court for the Northern District of California ("NDCA") for the
convenience of the parties and witnesses. Lumenis Inc. consented to the motion
to transfer. On December 12, 2001 the action was transferred to the NDCA.
On January 18, 2002, Lumenis Inc. commenced an action for patent
infringement against Trimedyne, Inc. ("Trimedyne") in the United States District
Court for the Central District of California. The complaint alleges that
Trimedyne has willfully infringed and is willfully infringing two Lumenis Inc.
U.S. patents. Lumenis Inc. seeks (i) an injunction enjoining Trimedyne's
infringement; (ii) an award of damages sustained by Lumenis as a result of such
infringement; (iii) a trebling of such damage award; and (iii) an award of its
costs and attorneys' fees incurred in the action. On or about February 26, 2002,
Trimedyne filed an answer and counterclaims in this action denying Lumenis'
material allegations of infringement and asserting counterclaims alleging that:
(i) Trimedyne is entitled to a declaratory judgment that Trimedyne is not
infringing the patents; (ii) Lumenis Inc. has violated certain U.S. and
California antitrust and trade practices laws; (iii) Lumenis Inc. has
disseminated false and misleading statements in violation of the California
Business and Professions Code and/or California's trade libel laws; (iv) certain
Lumenis Inc. products infringe Trimedyne's patents; (v) Lumenis has tortuously
interfered with Trimedyne's prospective economic relationships; and (vi)
Trimedyne is entitled to a declaratory judgment that it is entitled to a refund
of an alleged overpayment of royalties by Trimedyne of approximately $130,000
under a 1994 patent license. Trimedyne seeks: (i) an injunction enjoining
Lumenis Inc. from the allegedly wrongful acts; (ii) unspecified damages arising
from Lumenis Inc.'s allegedly wrongful acts and a trebling of such damages;
(iii) Lumenis Inc.'s profits derived from Lumenis Inc.'s allegedly wrongful
acts; (iv) unspecified punitive damages for Lumenis' allegedly wrongful acts;
(v) a refund of the alleged royalty overpayment, plus interest thereon; and (vi)
Trimedyne's costs and attorneys fees incurred in connection with this action.
The Company believes the counterclaims are baseless, will vigorously defend
against them and will continue to vigorously prosecute its claims against
Trimedyne.
15
On May 8, 2001, Lumenos, Inc. ("Lumenos"), the owner of several
applications with the United States Patent and Trademark Office to register the
term "Lumenos" as a trademark, filed a complaint for trademark infringement
against the Company in the United States District Court for the District of
Massachusetts, seeking equitable relief and damages. In its complaint, Lumenos
sought to prevent the Company from using or promoting the name "Lumenis" as a
company name, trademark or Internet domain name. This dispute was settled, and
the case dismissed, in December 2001.
On February 11, 2002, the Company filed a petition with the Bailiff's Court
of Horsholm, Denmark, requesting that an interim injunction be granted against
two competing products, which are manufactured by Danish Dermatological
Development A/S, a Danish company ("DDD"). As of March 26, 2002, the Company was
not aware of any statement of defense filed by DDD.
In 2001, the Company entered into settlement agreements with respect to
litigation with H.K. Hashalom, for aggregate payments by the Company of
$447,000.
In addition to the foregoing, the Company is a party in certain actions in
various countries, including the U.S., in which the Company sells its products
in which it is alleged that the Company's products did not perform as promised
and/or that the Company made certain misrepresentations in connection with the
sale of products to the plaintiffs. Management believes that none of these
actions that are presently pending individually would have a material adverse
impact on the consolidated financial position of the Company, although such
actions in the aggregate could have a material effect on quarterly or annual
operating results or cash flows when resolved in a future period.
Finally, the Company also is a defendant in various product liability
lawsuits in which the Company's products are alleged to have caused personal
injury to certain individuals who underwent treatments using the Company's
products. The Company maintains insurance against these types of claims and
believes that these claims individually or in the aggregate are not likely to
have a material adverse impact on the business, financial condition or operating
results of the Company.
The Company incurred an aggregate of $22,244,000 in litigation related
expenses (including settlement payments and legal fees and expenses) in 2001.
The balance sheet as of December 31, 2001 includes an accrual of $18,000,000
(including the provision of $13,000,000 noted above) reflecting management's
estimate of the Company's potential exposure with respect to certain, but not
all, legal proceedings, claims and litigation. With respect to the pending legal
proceedings and claims for which no accrual has been recorded in the financial
statements, Company management is unable to predict the outcome of such matters,
the likelihood of an unfavorable outcome or the amount or range of potential
loss, if any.
Item 4. Submission Of Matters To A Vote Of Security Holders.
None.
PART II
Item 5. Market For The Registrant's Equity And Related Stockholder Matters.
The Ordinary Shares of the Company were listed on the Nasdaq National
Market ("Nasdaq") on January 24, 1996. The Company began trading on September
17,1999 under the ticker symbol, "ESCM" and on September 24, 2001, following the
required Israeli authority approval of the new name, Lumenis Ltd., the Company
began trading under the ticker symbol "LUME."
As of June 23, 1999, Lumenis ceased being considered a "foreign private
issuer" under the Securities Exchange Act of 1934, as amended. Instead, the
Company began reporting under the broader disclosure obligations applicable to
United States issuers.
As of March 25, 2002, there were 270 shareholders of record of the
Company.
The following table sets forth the high and low closing sale prices for the
Ordinary Shares of the Company as reported by Nasdaq for the periods indicated.
16
2000 High Low
---- ---- ---
First Quarter $17.50 $ 8.06
Second Quarter $16.38 $ 8.13
Third Quarter $19.64 $15.53
Fourth Quarter $18.44 $12.06
2001 High Low
---- ---- ---
First Quarter $24.06 $ 10.94
Second Quarter $30.24 $ 22.50
Third Quarter $30.05 $ 18.71
Fourth Quarter $21.07 $ 15.60
The Company has never paid a cash dividend on its Ordinary Shares and does
not anticipate that it will pay any cash dividend on its Ordinary Shares in the
foreseeable future.
The Company intends to retain its earnings to finance the development of
its business. Any future dividend policy will be determined by Lumenis' Board of
Directors (the "Board") based upon conditions then existing, including the
Company's earnings, financial condition, tax position and capital requirements
as well as such economic and other conditions as the Board may deem relevant.
Pursuant to Lumenis' Articles of Association, certain dividends, referred to as
final dividends (which are comparable to annual dividends which are paid by some
United States companies), may be recommended by the Board and may be approved by
shareholders at the annual meeting of shareholders, but only in an amount per
share equal to or less than the amount recommended by the Board. In addition,
depending upon the factors described above, the Board may declare interim
dividends on account of the final dividend. Lumenis may only pay dividends in
any given fiscal year out of "profits," which generally are defined for Israeli
statutory purposes to be after tax net earnings. In addition, because Lumenis
has received certain benefits under the Israeli law relating to "Approved
Enterprises," the payment of dividends by Lumenis may be subject to certain
Israeli taxes to which Lumenis would not otherwise be subject. Furthermore,
pursuant to the terms of certain financing agreements, the Company is restricted
from paying dividends to its shareholders. In the event that cash dividends are
declared by the Company, such dividends will be paid in New Israeli Shekel
("NIS").
Dividends paid out of income derived from an Approved Enterprise under
Israeli law are subject to a 15% withholding tax. Approved Enterprises may
receive exemption from Israeli tax for up to 10 years (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Effective Corporate Tax Rate"). Should dividends be paid out of income earned by
the Company from an Approved Enterprise during the tax exempt period, such
income will be subject to tax at the rate of up to 25%. The Company does not
anticipate paying dividends from income derived from the Approved Enterprise and
any such earnings distributed upon dissolution are not expected to subject the
Company to income taxes.
Item 6. Selected Financial Data.
The following selected financial data was derived from the Company's
Consolidated Financial Statements, which have been prepared in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP"). The
financial data set forth below should be read in conjunction with, and are
qualified in their entirety by, the Company's Consolidated Financial Statements,
related notes and other financial information contained in this Annual Report.
17
For The Year Ended December 31,
--------------------------------------------------------
In thousands except per share data
2001(*) 2000 1999 1998 1997
------- ---- ---- ---- ----
Revenues
Net Revenues ............................... $ 315,201 $ 161,625 $ 142,151 $ 225,206 $ 193,983
Other Revenues ............................ -- -- -- -- 2,100
315,201 161,625 142,151 225,206 196,083
Cost of Revenues .............................. 155,643 66,448 96,474 78,585 65,068
--------- --------- --------- --------- ---------
Gross Profit .............................. 159,558 95,177 45,677 146,621 131,015
--------- --------- --------- --------- ---------
Operating Expenses
Research and Development, Net ................. 21,766 11,887 14,725 18,480 17,371
In process research and Development ........... 47,853 -- -- 2,451 11,912
Selling, Marketing and administrative
expenses .................................... 180,157 62,479 104,231 91,549 71,968
Restructuring costs ........................... -- -- 20,530 -- --
Litigation expenses ........................... 22,244 -- 23,780 -- --
Impairment and write-down of intangible and
tangible assets ............................. 5,455 -- 17,616 -- --
Amortization of goodwill and other intangible
assets ...................................... 13,978 -- -- -- --
Other ......................................... -- -- 4,987 -- --
--------- --------- --------- --------- ---------
Total Operating Expenses ...................... 291,453 74,366 185,869 112,480 101,251
--------- --------- --------- --------- ---------
Other Operating Income .................... -- 1,450 -- -- --
--------- --------- --------- --------- ---------
Operating Income (loss) ................... (131,895) 22,261 (140,192) 34,141 29,764
Other income .............................. -- 599 -- -- --
Financing Income (expenses), Net .............. (11,897) (4,470) (3,865) 1,211 1,409
--------- --------- --------- --------- ---------
(143,792) 18,390 (144,057) 35,352 31,173
Nonrecurring Expenses ......................... -- -- -- 28,951 4,650
Income (loss) Before Income Taxes ............. (143,792) 18,390 (144,057) 6,401 26,523
Taxes on Income ............................... (520) 280 4,079 2,201 4,429
--------- --------- --------- --------- ---------
Net Income (loss) after income taxes .......... (143,272) 18,110 (148,136) 4,200 22,094
Company's share in losses of affiliates ....... 2,596 1,120 626 200 --
--------- --------- --------- --------- ---------
Net Income (loss) before extraordinary
items ....................................... (145,868) 16,990 (148,762) 4,000 22,094
Extraordinary gain on purchase of
Company's Subordinated .................... -- 292 7,974 -- --
Convertible Notes ............................. -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) for the year ................ $(145,868) $ 17,282 $(140,788) $ 4,000 $ 22,094
========= ========= ========= ========= =========
Earning (loss) Per Share
Basic
Income (loss) before extraordinary items .. $ (4.52) $ 0.67 $ (5.79) $ 0.15 $ 0.86
Extraordinary gain .................... -- 0.01 0.31 -- --
--------- --------- --------- --------- ---------
Net earnings (loss) per share ......... $ (4.52) $ 0.68 $ (5.48) $ 0.15 $ 0.86
========= ========= ========= ========= =========
Diluted
Income (loss) before extraordinary items .. $ (4.52) $ 0.60 $ (5.79) $ 0.15 0.86
Extraordinary gain ............................ -- -- 0.01 0.31 --
--------- --------- --------- --------- ---------
Net earnings (loss) per share ................. $ (4.52) $ 0.61 $ (5.48) $ 0.15 $ 0.86
========= ========= ========= ========= =========
Weighted Average Number Of Shares
Basic ..................................... 32,302 25,354 25,674 26,027 25,604
Diluted ................................... 32,302 28,217 25,674 27,381 27,194
Cash and cash equivalents ..................... $ 31,400 $ 43,396 $ 24,524 $ 42,950 $ 54,616
Total assets .................................. 387,274 179,529 174,907 327,666 335,646
Long-term liabilities ......................... 168,492 93,930 96,691 116,306 127,427
Retained earning (deficit) .................... (242,561) (96,693) (113,975) 26,813 22,813
Total shareholder's equity .................... $ 79,366 $ 27,863 $ 5,943 $ 155,508 $ 150,004
(*) Includes eight months of CMG post-acquisition and one month of HGM
post-acquisition.
18
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations: (In thousands, except per share data)
Critical Accounting Policies and Estimates
Lumenis' discussion and analysis of its financial condition and results of
operations are based upon Lumenis' consolidated financial statements, which have
been prepared in accordance with U.S. GAAP.
The preparation of these financial statements requires Lumenis to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent liabilities. On an
ongoing basis, Lumenis evaluates its estimates, including those related to
product returns, bad debts, inventories, investments, intangible assets, income
taxes, financing, warranty obligations, restructuring, long-term service
contracts, contingencies and litigation.
Lumenis bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Lumenis believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. For a detailed discussion of the application of these and
other accounting policies, see Note 3 to the Consolidated Financial Statements.
Inventories are presented at the lower of cost or market. Inventory
reserves are provided to cover risks arising from slow-moving items or
technological obsolescence.
We regularly review inventory quantities on hand and record a provision for
excess and obsolete inventory. Demand for our products can fluctuate
significantly. Our products are characterized mainly by rapid technological
change, frequent new product development and rapid product obsolescence that
could result in an increase in the amount of obsolete inventory quantities on
hand. Additionally, our estimates of future product demand may prove to be
inaccurate, in which case we may have understated or overstated the provision
required for excess and obsolete inventory. Although we make every effort to
ensure the accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have a
significant impact on the value of our inventory and our reported operating
results.
Revenues from product sales are recognized when delivery has occurred,
persuasive evidence of an agreement exists, the fee is fixed or determinable and
collectibility is probable. The costs of insignificant related obligations
(mainly installations and training which are not material to functionality) are
accrued when the related revenue is recognized. Estimated sales returns are
accrued upon recognition of sales based on Lumenis' experience and management's
estimates. Revenues from service contracts are recognized on a straight-line
basis over the life of the related service contracts.
Goodwill and other intangible assets are reviewed for impairment whenever
events such as product discontinuance, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. When such events occur, the Company compares the carrying amount of
the assets to undiscounted expected future cash flows. If this comparison
indicates that there is impairment, the amount of the impairment is calculated
using discounted expected future cash flows. The discount rate applied to these
cash flows is based on the Company's weighted average cost of capital, which
represents the blended after-tax costs of debt and equity. Any impairment loss
is recognized in the statement of operations. The Company applied SFAS No. 142
to goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to June 30, 2001 the Company will
adopt the SFAS effective January 1, 2002. At such date, all acquired goodwill
and other intangible assets with indefinite lives will be assigned to reporting
units for purposes of impairment testing and segment reporting and will no
longer be amortized but will be subject to periodic impairment assessment.
19
Overview
Lumenis is a world leader in the design, manufacture, marketing and
servicing of laser and light based systems for aesthetic, ophthalmic, surgical
and dental applications. Lumenis offers a broad range of laser and IPL systems
which are used in a variety of aesthetic, ophthalmic, surgical and dental
applications, including skin treatments, hair removal, non-invasive treatment of
vascular lesions and pigmented lesions, acne, psoriasis, ear, nose and throat,
gynecology, urinary lithotripsy, benign prostatic hyperplasia, open angle
glaucoma, secondary cataracts, age-related macular degeneration, refractive eye
correction, neurosurgery, dentistry and veterinary.
The Company reported net revenues of $315,201 for the year ended December
31, 2001 compared to net revenues of $161,625 for the year ended December 31,
2000. The net loss for the year ended December 31, 2001 was $145,868 or a
diluted net loss per share of $4.52 compared to net income of $17,282 for the
year ended December 31, 2000 or a diluted net earnings per share of $0.61.
On April 30, 2001, the Company completed the acquisition of the medical
group of Coherent, Inc. ("CMG"). This acquisition approximately doubled the
Company's sales, strengthened its leading position in sales of pulsed light and
laser based systems for the aesthetic and surgical markets, made it a
significant competitor in the ophthalmic segment of the medical laser market,
expanded its proprietary technology and increased its critical mass by country
and customer type for the marketing and cross-selling of its products. After
completion of this acquisition, the Company changed its name from ESC Medical
Systems Ltd. ("ESC") to Lumenis, derived from lumen, Latin for light.
In November the Company also completed the acquisition of the stock of
FISMA Corporation, Instruments for Medicine & Diagnostics, Inc. and Instruments
for Surgery Inc. (collectively "HGM"). HGM is engaged in developing,
manufacturing and selling medical laser equipment primarily to the ophthalmology
market as well as providing service support for these products worldwide.
Results in 2001 included several costs and charges that related principally
to the acquisitions of CMG and HGM. Integration costs incurred following the
respective acquisitions totaled a pretax charge of $57,365 as described further
below. In addition the Company also recorded a total charge of $47,853 for in
process research and development as a result of the acquisitions. The Company
also recorded amortization of $1,692 related to options granted in connection
with the financing for the acquisition of CMG and other related deferred
financing costs. In 2001, the Company recorded $4,627 of amortization of
goodwill and $9,351 of amortization of other intangible amounts arising mainly
from the CMG acquisition.
As a result of the completion of the CMG acquisition, the Board also made
special option grants to certain key employees and accelerated the vesting of
previously granted options resulting in a charge of $26,075.
Additionally, the Company incurred and provided for litigation expenses
totaling $22,244 principally related to a settlement of a class action suit and
a provision for other matters as described further in Note 13C to the
Consolidated Financial Statements. The Company reorganized its Dental operation
and as a result incurred charges of $1,110. The Company also recorded a bad debt
reserve of $1,754, primarily to cover exposure in Argentina as a result of the
currency crisis in that country. The Company also recorded a charge of $3,986
for write down of investments due to the Company's assessment for impairment,
mainly its investment in Galil Medical Ltd. Financing expenses included an
exchange loss of $2,141 as a result of not hedging certain foreign currency
denominated assets and liabilities. The Company typically hedges its foreign
currency transactions. Also, the Company recognized a loss of $2,596 related to
its investment and transactions with Aculight as further described below. In
2001 the Company recorded a gain of $1,600 related to a reversal of a prior year
income tax accrual and took a charge for $1,105 mainly for sales tax matters
dating back to 1995.
The net unusual charges in 2001 totaled $180,297. Excluding these items net
income for 2001 would have been $34,429 compared to the reported net loss of
$145,868 and compared to net income of $17,282 in 2000.
Following the completion of the CMG acquisition, the Company undertook an
integration program to capture the cost savings from the acquisition. As part of
the integration plan, the Company closed or suspended operations at seven
facilities by the end of 2001 including the consolidation of manufacturing sites
balancing the production of its products between the United States and Israel.
The facilities affected included 2 plants and 5 sales offices. The Company also
integrated its sales force, rationalized its distributor arrangements and
reorganized its marketing and research and development functions as are
described in more detail in the following review. In total, the Company reduced
its employment by 160 employees or approximately 10%. The Company terminated
distributor agreeements,
20
principally duplicate distributors as a result of the acquisitions of CMG and
HGM. As part of the integration measures the Company incurred certain costs and
charges. The charges were included in the categories as noted in the Company's
Consolidated Statement of Operations.
Integration Costs
Cost of Revenues
Write-down of inventory mainly related to discontinued products $19,172
Selling, Marketing and Administrative Expenses
Severance for terminated employees 6,377
Retention bonuses 9,963
Consulting, travel, name change rebranding of products
and other integration costs 5,784
Write-down of accounts receivables from
terminated distributors 10,213
Future lease costs of closed or unused facilities and relocation costs 4,387
Impairment and write-down of intangible assets
Fixed asset write-downs 1,469
-------
Total $57,365
=======
As a result of the integration measures taken by the Company, the expected
savings are estimated at $30,000 on an annual basis. As of December 31, 2001
substantially all of the integration process has been completed. During 2001,
the Company incurred approximately $12,027 of costs in its reported results
subsequently eliminated as a result of these programs. The Company expects to
incur up to an additional $10,000 in unusual charges in 2002 related to further
cost savings efforts mainly related to reorganization of its manufacturing
operations and the relocation of its Santa Clara offices resulting in further
expected annual savings of at least $10,000. See "Forward Looking Statements and
Risk Factors" below.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
The Company reported net revenues of $315,201 for the year ended December
31, 2001 compared to net revenues of $161,625 for the year ended December 31,
2000. The net loss for the year ended December 31, 2001 was $145,868 or a
diluted net loss per share of $4.52 compared to net income of $17,282 for the
year ended December 31, 2000 or a diluted net earnings per share of $0.61.
Net Revenues. The Company's net revenues increased in 2001 by 95% to
$315,201 compared to $161,625 in 2000. The increase in sales reflects mainly the
eight-month contribution from the CMG acquisition.
Gross Profit. Gross profit increased by 68% to $159,558 in 2001 compared to
$95,177 in 2000. As a percentage of revenues the gross profit was 51% in
2001compared to 59% in 2000. Excluding the write down of inventory and other
charges mainly connected to discontinued products following the acquisition of
CMG and HGM of $19,172 gross profit margin decreased by 2% to 57% in 2001. The
write-down of discontinued products is based on management's decision to keep
superior products per application, mainly discontinuing ESC's hair removal and
certain surgical products.
The increase in gross profit, excluding the write down of inventory and
other charges mainly connected to discontinued products, in 2001 was due to the
eight months of contribution from the CMG acquisition.
The decrease in gross profit, excluding the unusual charges, as a
percentage of sales in 2001 stems from the inherently lower gross margins of the
CMG product lines and was affected by changes in the product mix compared to
2000.
Research and Development, Net. Net research and development costs increased
by 83% to $21,766 in 2001 from $11,887 in 2000. As a percentage of sales,
research and development costs were 7% in 2001 or the same as in 2000.
The increase in research and development costs in 2001 is due mainly to the
eight month contribution from CMG activities.
21
In Process Research and Development. In process research and development
expenses in 2001 represent the fair value allocated to in process research and
development of the CMG acquisition of $46,650 and HGM acquisition of $1,203
based upon independent valuations (see Note 3 to the Consolidated Financial
Statements).
The fair values of the existing purchased technology and other intangible
assets, as well as the technology currently under development, were determined
using the income approach, which discounts expected future cash flows to present
value. Such projected cash flows were provided by the acquired company. The
discount rates used in the present value calculations were typically derived
from a weighted-average cost of capital and debt analysis, adjusted upward to
reflect additional risks inherent in the development life cycle.
The assumptions primarily consist of an expected completion date for the
in-process research and development projects, estimated costs to complete the
projects, and revenue and expense projections for market entrance costs.
The development of these technologies remains a significant risk due to the
remaining efforts to achieve technical feasibility, rapidly changing customer
markets and uncertainty of our intentions and abilities to continue the
development of those projects. Thus, we did not include in the projected cash
flows the effect of expense reductions or synergies as a result of integrating
the acquired in-process technology. Therefore, the valuation assumptions do not
include significant anticipated cost savings.
The following table summarizes the key assumptions underlying the
valuations for our acquisitions completed during the year ended December 31,
2001.
- ---------------------------------------------------------------------------------------------------------
Acquired company R&D Fair value of Estimated costs to Estimated time to Discount rate
IPR&D complete complete (Years)
- ---------------------------------------------------------------------------------------------------------
CMG and HGM $47,853 $13,404 0.5-4.5 16%-23.4%
- ---------------------------------------------------------------------------------------------------------
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses increased by 188% to $180,157 in 2001 compared to
$62,479 in 2000. As a percentage of revenues, selling marketing and
administrative expenses in 2001 were 57% compared to 39% in 2000. As a
percentage of revenues, excluding unusual charges (listed below) mainly in
connection with the CMG acquisition, selling, marketing and administrative
expenses in 2001 were 36%. Excluding the unusual charges, selling, marketing and
administrative expense as a percentage of sales improved in 2001 due to cost
reduction actions taken following the CMG acquisition.
Selling, marketing and administrative expense in 2001 include unusual
charges, mainly in connection with the CMG and HGM acquisitions as follows:
o $10,213 write-down of accounts receivable in connection with
terminated distributors.
o $6,377 severance for terminated employees.
o $9,963 for retention bonuses.
o $4,387 relating to accrued future lease costs of closed or unused
facilities, relocation costs.
o $5,784 costs incurred for outside consultants, travel costs during the
integration, costs of the Company's change in name and other
re-branding of products and other integration costs.
Other unusual charges were also included as follows.
o $1,110 reorganization expenses of the Company's Dental operations.
o $1,754 for bad debt provision to principally cover receivable exposure
in Argentina.
o $26,075 for non-cash compensation related to special option grants and
accelerated vesting of previously granted options (see Note 14 to
Consolidated Financial Statements).
o $1,105 in other charges mainly for sales tax matters dating back to
1995.
Litigation Expenses. Litigation expenses in the year 2001 were $22,244,
mainly with respect to certain legal proceedings, claims and litigation, which
primarily represents management's estimate of the Company's exposure relating to
certain proceedings.
22
Amortization of goodwill and other intangible assets. Amortization of
goodwill and other intangible assets of $13,978 includes $4,627 of amortization
of goodwill and $9,351 of amortization of other intangible assets both arising
mainly from the CMG acquisition.
Impairment and Write-down of intangible and tangible assets. Impairment and
write-downs of tangible and intangible assets in 2001 of $5,455 includes $1,469
write-down of fixed assets in connection with relocation of facilities and
$3,986 impairment of value of investments, principally the Company's investment
in Galil Medical Ltd.
Financing expenses, net. For the year ended December 31, 2001, financing
expenses were $11,897 compared to financing expenses of $4,470 in 2000. The
increase in 2001 in financing expense is mainly due to the $5,769 financing cost
of the long term bank loan in connection with the CMG acquisition including
amortization of $1,692 in respect of value of options given to the bank as part
of the financing agreement and amortization of other deferred financing costs,
as well as lower average available cash and lower interest rates during the
year. Financing expenses included an exchange loss of $2,141 as a result of not
hedging certain foreign currency denominated assets and liabilities. The Company
typically hedges its foreign currency transactions.
Tax on Income (benefit). Tax benefit for the year ended December 31, 2001
was $520 compared with expense of $280 in the year ended December 31, 2000. In
April 2001, the Company reached a final agreement with the Israeli income tax
authorities with regard to tax returns filed by the Company for the years up to
and including 1998. As a result, the Company recorded a gain of $1,600 from
reversal of the accrual recorded in previous years. Most of the Company's income
in Israel is exempt from income taxes; the Israeli statutory tax rate for the
purpose of reconciliation of the reported tax expense is approximately zero.
Income tax expense relates primarily to the income taxes of Israeli
subsidiaries. Additionally, the Company has over $140,000 of net operating
losses, mostly in the United States, Europe and Israel. The Company has provided
a valuation reserve for the full amount of the net operating losses. For tax
purposes, the goodwill and other intangibles of approximately $118,000
allocated to the CMG acquisition in the U.S. will be amortized over periods of
up to 15 years.
Company's share of losses of affiliates. In 2001, the Company's share of
losses of affiliates was $2,596 compared to $1,120 in 2000. The net losses in
2001 include $1,007 due to its 50% share of Aculight's losses and $1,589 net
elimination of 50% of the gain resulting from sales of Company products to
Aculight in the amount of $4,764. In 2000, the Company's share of losses of
affiliates relates to its investment in Galil Medical Ltd., which was written
down in 2001.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
The Company reported net revenues of $161,625 for the year ended December
31, 2000 compared to net revenues of $142,151 for the year ended December 31,
1999. The net income for the year ended December 31, 2000 was $17,282 or a
diluted net earnings per share of $0.61 compared to net loss of $140,788 for the
year ended December 31, 1999 or a diluted net loss per share of $5.48. In 1999
the Company recorded restructuring costs and other unusual charges totaling
$119,593.
Net Revenues. The Company's net revenues increased by 14% to $161,625 in
2000 compared to $142,151 in 1999. The increase in revenue is attributable to an
increase in unit revenues and sale of services.
Gross Profit. Gross profit increased to $95,177 in 2000 from $45,677 in
1999. Excluding the write-off of inventory and other reserves mainly relating to
restructuring, gross profit for the year 1999 was $75,727. As a percentage of
sales, the gross profit was 59% in 2000 compared to 53% in 1999, excluding the
write-off of inventory and other reserves.
The significant increase in gross profit is due to the increase in sales,
reduction in overhead costs and an improvement in the product mix.
Research and Development Costs, Net. Net research and development costs in
2000 decreased by 19% to $11,887 from $14,725 in 1999. As a percentage of sales,
research and development costs were 7% in 2000 as compared to 10% in 1999. The
decrease in research and development costs, net is due to a reduction in
overhead costs, significantly lower material consumption and cost savings
implemented during 1999, including the elimination of certain uneconomical
projects. Research and development expenses are net of the participation of the
Office of the Chief Scientist in Israel.
23
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses decreased by 40% to approximately $62,479 in 2000 from
approximately $104,231 in 1999. As a percentage of sales, selling, marketing and
administrative expenses were 39% in 2000 compared to 73% in 1999. Selling,
marketing and administrative expenses for 1999 included bad debt charges of
$13,430, restructuring charges of $4,800 and litigation expenses of $4,400,
which were not part of the legal settlements, which were recorded in settlement
of litigations described below.
Excluding write-offs relating to the restructuring, bad debts and
litigation expenses in 1999, selling, marketing and administrative expense were
$81,601. As a percentage of sales, selling, marketing and administrative
expenses in 2000 were 39% compared to 57% in 1999, excluding write-offs and
litigation expense.
The decrease in 2000 is attributable to the reduction in selling and
marketing costs, mainly in the United States, as a result of the restructuring
plan adopted during 1999 and the decrease in general and administrative expenses
mainly attributable to a decrease in bad debt reserves and a significant
reduction in legal costs.
Restructuring Costs. In 1999, the Company developed and started the
implementation of a restructuring plan. The majority of the restructuring charge
was attributable to the Company's divisions in the United States. The
restructuring program provided for a reduction of approximately 200 employees.
Litigations. During 1999, the Company had made several legal settlements
mainly related to the Reliant and LPG lawsuits. The total for the legal
settlements was $23,780, which includes both settlement fees and related legal
fees incurred by the Company.
Impairment and Write-down of Intangible and Tangible Assets. During 1999,
the Company wrote-off intangible assets in the amount of $16,049 which mainly
related to goodwill from acquisitions and acquired technology in prior years. In
addition, the Company wrote-off tangible assets in the amount of $1,567 that
related to the restructuring plan adopted during 1999.
Other Expenses. For the year ended December 31, 1999, other expenses were
$4,987 comprised mainly of fees to McKinsey & Co., for work on the restructuring
plan and $3,575 of expenses incurred during 1999 in connection with the director
election contest.
Other Operating Income. Other operating income in 2000 includes the profit
from sale of Applied Optronics Corporation, a unit in our industrial division.
Other Income. Other income of $599 in 2000 includes profits due to dilution
of the Company's interests in Galil Medical Ltd.
Financing Income (Expense), Net. For the year ended December 31, 2000,
financing expenses were approximately $4,470 compared to financing expenses of
$3,865 in 1999. Financing expense increased mainly due to lower average cash
balances.
Taxes On Income. Taxes on income were approximately $280 for the year ended
December 31, 2000 compared to approximately $4,079 for the year ended December
31, 1999. In 1999, the Company wrote off deferred tax assets of approximately $
3,300, which is reflected as tax expense in the period. Because most of the
Company's income in Israel is presently exempt from income taxes, the Israeli
statutory tax rate for the purposes of the reconciliation of the reported tax
expense is approximately zero. Additionally, the Company had over $100 million
of net operating losses, mostly in the United States, Europe and Israel. Income
tax expense in the financial statements relates primarily to the income taxes of
non-Israeli subsidiaries.
Company's Share Of Losses Of Affiliates. The Company's share of losses of
affiliates in 2000 was $1,120 compared to $626 in 1999.
Extraordinary Gain On Purchase Of The Company's Subordinated Convertible
Notes. Extraordinary gain on the purchase of the Company's convertible notes was
$292 compared to $7,974 in 1999. The decrease is due to the purchase of fewer of
the Company's subordinated convertible notes.
Variability Of Operating Results
The Company's sales and profitability may vary in any given year, and from
quarter to quarter, depending on the number and mix of products sold and the
average selling price of the
24
products. In addition, due to potential competition, uncertain market acceptance
and other factors, the Company may be required to reduce prices for its products
in the future.
The Company's future results will be affected by a number of factors
including the ability to increase the number of units sold, to develop,
introduce and deliver new products on a timely basis, to anticipate accurately
customer demand patterns and to manage future inventory levels in line with
anticipated demand. These results may also be affected by currency exchange rate
fluctuations and economic conditions in the geographical areas in which the
Company operates. There can be no assurance that the Company's historical
performance in sales, gross profit and net income will continue, or that sales,
gross profit and net income in any particular quarter will not be lower than
those of the preceding quarters, including comparable quarters.
Recent Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 establishes new standards for accounting and reporting requirements for
business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited. The Company has adopted this
statement for the acquisition of HGM made in November 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets". SFAS No. 142
establishes new standards for goodwill and other intangibles acquired in a
business combination and eliminates amortization of goodwill and intangible
assets with indefinite lives and instead sets forth methods to periodically
evaluate them for impairment. The Company applied SFAS No. 142 to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to June 30, 2001 the Company will adopt the
SFAS effective January 1, 2002. At such date, acquired goodwill will be assigned
to reporting units for purposes of impairment testing and segment reporting, and
will no longer be amortized but will be subject to periodic impairment
assessment. The adoption of SFAS No. 142 is expected to result in an exclusion
of amortization expenses in the amount of approximately $6,000 in the year 2002.
Management does not expect the adoption of SFAS No. 142 to have an adverse
effect on the Company's financial position and results of operations except for
the aforementioned impact.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. While the Company is currently
evaluating the impact the adoption of SFAS No. 143 will have on its financial
position and results of operations, it does not expect such impact to be
material.
Liquidity and Capital Resources
As of December 31, 2001, the Company had cash and cash equivalents of
$31,400 compared to $43,396 on December 31, 2000.
Operating Activities
In 2001, cash used by operating activities was $29,279 including a net
source of $14,313 from a reduction in operating assets and liabilities. The use
of cash for operating activities arose principally from the cash portion of the
integration charges totaling $12,959 in 2001, and the cash portion of legal
settlements in 2001 of $4,244. The Company estimates that the remaining balance
of the cash portion of the integration related expense of approximately $19,000
will be spent as $15,000 in 2002 and $4,000 in 2003. The cash provided from
operating assets and liabilities was mainly due to the write-down of inventory
of $19,172 and write-down of distributor receivables of $10,213 described above
which offset increases in both inventories and receivables.
Investing Activities
In 2001, cash used by investing activities was $127,516. The principal
investing activities were the payment for the CMG acquisition of $110,216 and
for the acquisition of HGM of $9,925, use of cash of approximately $6,264 for
capital expenditures and investments of approximately $2,093 in non-marketable
equity securities.
At the closing of the CMG acquisition, the Company paid Coherent $100,000
in cash (the "Cash Purchase Price") financed through a new term loan (see
"Financing Activities" below"), 5,432,099 Lumenis Ordinary Shares (the "Shares")
and an eighteen-month note bearing interest at the rate of 5% per annum and in
the principal amount of $12,904 (the "Coherent Note"). The Cash Purchase Price
is subject to an as yet undetermined adjustment based on the net tangible value,
at the closing, of CMG's assets acquired not to exceed
25
$6,000. Additionally, Coherent may be entitled to a post-closing earn-out
payment of up to $25,000, subject to certain financial conditions being met. If
total ophthalmic revenues exceed $450,000 over a period starting January 1, 2001
and ending December 31, 2004 (the "Period"), the earn-out payment will be 21.5%
of the excess. In addition, if the ophthalmic business is sold to a third party
prior to the end of the Period for a price in excess of $110,000, Coherent will
receive an earn-out payment equal to 50% of the excess. In no event, however,
will the earn-out payment be more than $25,000. As of December 31, 2001 such
stated conditions have not yet been met.
Financing Activities
In 2001, cash provided by financing activities was $144,799. The primary
financing activities of the Company included the proceeds from the term loan,
described below, used to finance the CMG acquisition of $100,000, the repayment
of the Company's short term bank debt of $4,431 and proceeds from the exercise
of options of $50,122.
To finance the CMG acquisition, ongoing working capital needs and, if
needed, the refinancing of the Company's convertible subordinated notes (see
Note 11 to the Consolidated Financial Statements) the Company and certain of its
subsidiaries entered into various financing arrangements (the "Financing") with
Bank Hapoalim B.M (the "Bank"). The financing arrangement consisted of: (a) a
$100,000 six-year term loan bearing interest at LI