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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2002, or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________ to
______________
Commission file number: 0-13012
LUMENIS LTD.
(Exact name of registrant as specified in its charter)
ISRAEL N.A.
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. BOX 240, YOKNEAM, ISRAEL 20692
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 972-4-959-9000
Securities Registered pursuant to Section 12(b) of the Act: None.
Title of each class Name of exchange on which registered
None None
Securities registered pursuant to Section 12(g)of the Act:
ORDINARY SHARES, NIS 0.10 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the Ordinary Shares held by non-affiliates
of the registrant, based on the closing price of the Ordinary Shares on March
24, 2003 as reported on the Nasdaq National Market, was approximately
$28,049,991. Ordinary Shares held by each current executive officer and director
and by each person who is known by the registrant to own 5% or more of the
outstanding Ordinary Shares have been excluded from this computation in that
such persons may be deemed to be affiliates of the Company. Share ownership
information of certain persons known by the Company to own more than 5% of the
outstanding Ordinary Shares for purposes of the preceding calculation is based
on information on Schedules 13D and 13G filed with the Commission. This
determination of affiliate status is not a conclusive determination for other
purposes.
The number of Ordinary Shares, par value 0.10 New Israeli Shekels ("NIS") per
share, of the registrant outstanding as of March 24, 2003 was 36,942,439.
DOCUMENTS INCORPORATED BY REFERENCE
Documents from which portions Part of the Form 10-K
are incorporated by reference into which incorporated
- -------------------------------------------- ---------------------------------
Proxy Statement for the 2003 Part III
Annual General Meeting of Shareholders
PART I
ITEM 1. BUSINESS.
GENERAL
Lumenis Ltd. ("Lumenis", "Company", "We" or "Our") is a world leader in the
design, manufacture, marketing and servicing of laser and light based systems
for aesthetic, ophthalmic, surgical and dental applications. Lumenis offers a
broad range of laser and intense pulsed light, or IPL(TM) ("IPL") systems, which
are used in skin treatments, hair removal, non-invasive treatment of vascular
lesions and pigmented lesions, acne, psoriasis, ear, nose and throat ("ENT"),
gynecology, urinary lithotripsy, benign prostatic hyperplasia, open angle
glaucoma, diabetic retinopathy, secondary cataracts, age-related macular
degeneration, vision correction, neurosurgery, dentistry and veterinary.
The Company was incorporated in Israel on December 21, 1991. In January
1996, the Company completed an initial public offering ("IPO") in the United
States.
On April 30, 2001, the Company completed the purchase of Coherent Medical
Group ("CMG") the medical division of Coherent, Inc. ("Coherent"). This
acquisition approximately doubled the Company's sales, expanding its leading
position in sales of pulsed light and laser based systems for the aesthetic and
surgical markets, made it a significant competitor in the ophthalmic segment of
the medical laser market, expanded its proprietary technology and increased its
critical mass by country and customer type for the marketing and cross-selling
of its products. After completion of this acquisition, the Company changed its
name from ESC Medical Systems Ltd. ("ESC") to Lumenis Ltd. See "Coherent Asset
Acquisition" below.
Unless the context otherwise requires, all references to "Lumenis", the
"Company", "We" or "Our" shall mean Lumenis Ltd. and each of its subsidiaries.
This Report includes forward looking statements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Forward Looking Statements and Risk Factors."
MARKET FOCUS
The Company's systems are designed for use in a variety of medical
environments. The principal target markets for the Company's aesthetic products
are physicians with private practices or clinics, as well as leading beauty/hair
removal centers. Many of these are customers who wish to access the vanity
market and are looking to increase their revenues and reduce dependence on
insurance reimbursements. The target markets for the Company's surgical products
are hospitals and outpatient clinics that use lasers for certain procedures.
Ophthalmologists are the primary target market for the Company's ophthalmic
products, with a focus on office based procedures. Dentists are the primary
target market for the Company's dental products.
1
COHERENT ASSET ACQUISITION
The Company acquired substantially all of the assets and related
liabilities of CMG for $100 million in cash financed through a new bank term
loan note, 5,432,099 ordinary shares of Lumenis, and a $12.9 million
eighteen-month 5% subordinated note (see Item 7--"Management's Discussion and
Analysis of Financial Condition and Results of Operations; Financing
Activities"), plus an earn-out of up to $25 million based on the revenues
generated during the four calendar years ending December 31, 2004 from sales of
the ophthalmic equipment operations of CMG. The cash portion of the purchase
price was subject to a post-closing adjustment based on the closing date net
tangible book value of the business, which increased the purchase price by
approximately $5.4 million. If total ophthalmic revenues for the four fiscal
years ended December 31, 2004 exceed $450 million, the earn-out payment will be
21.5% of the excess. In addition, if the ophthalmic business is sold to a third
party during this four-year period for a price in excess of $110 million,
Coherent will receive an earn-out payment equal to 50% of the excess. In no
event, however, will the earn-out payment be more than $25 million. During the
fiscal years ended December 31, 2002 and 2001, the ophthalmic equipment sales
were approximately $80 million and $55 million, respectively (all of which are
attributable to the acquired CMG operations). The Company is obligated to
register the 5,432,099 shares by October 30, 2003, for resale. At completion of
the acquisition, Bernard Couillaud, President and Chief Executive Officer of
Coherent, was appointed to the Company's Board of Directors and served as a
director until his resignation in January 2003. Coherent retains the right to
nominate one Company director. Coherent continues to supply the Company parts
and components.
Sales for Lumenis' business, assuming the acquisition of CMG occurred on
January 1, 2001, for the years ended December 31, 2001 and 2002, are as follows
(dollar amounts in thousands):
BUSINESS YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
(ACTUAL RESULTS) PRO FORMA AND UNAUDITED)
AESTHETIC $145 $168
- --------------------------------------------------------------------------------
Ophthalmic 80 74
- --------------------------------------------------------------------------------
Surgical 60 64
- --------------------------------------------------------------------------------
Other 63 70
- --------------------------------------------------------------------------------
TOTAL $348 $376
- --------------------------------------------------------------------------------
Following the completion of the CMG acquisition, the Company embarked on an
intensive integration program to merge the two companies into one organization.
As part of the integration program, the Company rationalized product lines,
sales and distribution networks, combined offices, closed facilities and reduced
employment. This included the closure of the manufacturing sites in Seattle,
Washington, the manufacturing activities in Tel Aviv, Israel and five sales
offices in Norwood, Massachusetts, Munich, Germany, Cambridge, England, Paris,
France and Tokyo, Japan. See "Manufacturing" below and Item 2 - "Properties". As
a result of such closures, the Company consolidated its manufacturing sites and
balanced the production of its products between the United States and Israel.
Furthermore, it combined sales activities in an effort to strengthen its global
sales force. The Company experienced difficulties in the consolidation and
integration of its administrative, financial and IT systems during 2002 which
impacted its ability to produce essential management information for controlling
and monitoring its working capital. As a result the Company experienced a
significant cash usage for working capital. See Item 7 - "Management's
Discussion and Analysis of Financial Condition and Result of Operations".
TECHNOLOGY
Most of the Company's products are based on proprietary technologies, using
intense pulsed light ("IPL") or laser applications pioneered by the Company.
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INTENSE PULSED LIGHT TECHNOLOGY. IPL, the Company's proprietary technology,
uses thermal energy generated by a broad band intense pulsed light source to
selectively illuminate unwanted lesions without damaging the surrounding tissue.
IPL uses a combination of intense pulses of light and different cut-off filters.
Our IPL products are primarily aimed at the private aesthetic markets and
applications include: skin rejuvenation, non-invasive treatment of varicose
veins and other benign vascular lesions; removal of benign pigmented lesions,
such as age spots and sunspots; and hair removal. Among our leading IPL brands
are the VascuLight Elite system for skin rejuvenation, both deep and superficial
vascular lesions, pigmented lesions, and hair removal; and the IPL Quantum
family of products for skin treatments, vascular and pigmented lesions and hair
removal.
LASER TECHNOLOGY. Surgical and ophthalmic laser systems are generally
categorized by the active material employed in generating the laser's beam.
Materials used in surgical and ophthalmic lasers may be gases (such as CO2,
argon or krypton) or crystals (such as yttrium-aluminum-garnet (YAG)). The
active material determines the wavelength of the light emitted and thus the
applications for which various types of lasers are best suited. The Company
offers many laser systems, utilizing CO2, Nd:YAG, Erbium, Holmium and Diode
technologies. The lasers come in a variety of sizes and power levels designed to
serve a broad range of aesthetic and medical procedures in physician offices,
outpatient clinics and hospitals. These lasers work with a wide variety of
application-driven laser accessories. Among the Company's leading cosmetic laser
brands are: LightSheer diode lasers systems for hair removal and UltraPulse for
skin resurfacing. The Company offers a comprehensive line of lasers for
ophthalmic surgery, including the Selecta II laser for glaucoma, the Novus Varia
and Novus Spectra for treatment of the retina and the Opal Photoactivator for
treatment of age-related macular degeneration (AMD). The Company's leading
surgical products are the PowerSuite for urology and UltraPulse Encore for
gynecology applications. The Company's leading dental products are OpusDuo, Opus
20, Opus 5 and Opus 10.
PRODUCTS AND APPLICATIONS
AESTHETIC APPLICATIONS. The Company's main focus has been in the aesthetic
market, responding to the public's demand for improved appearance. The primary
applications for our products are: the improving of facial complexion, skin
texture, and blemishes; the removal of benign vascular lesions, including leg
veins, spider veins on legs and face, and other red spots; removal of benign
pigmented lesions including brown spots, age spots, sunspots, scars, stretch
marks and tattoos; and hair removal. In 2002, approximately 41.7% of our
revenues were derived from aesthetic applications.
The following are the major products we currently market to meet these
primary aesthetic applications. We have designed some of our systems to have the
versatility to treat several different conditions.
Aesthetic: Vascular and Pigmented Skin Treatments and Skin Resurfacing
VASCULIGHT ELITE. VascuLight Elite is the multi-application IPL system,
integrating the features and benefits of the IPL with an Nd:YAG laser. It
enables physicians to offer patients non-invasive solutions for a variety of
clinical applications in a single device. The IPL heads can be varied according
to applications for photorejuvenation, vascular and pigmented lesions, and hair
removal. The Nd:YAG laser treats deep vascular lesions and leg veins.
IPL QUANTUM. These IPL systems are available as single application and are
also upgradeable to multi-application systems for treating a variety of
applications including photorejuvenation, vascular and pigmented lesions as well
as hair removal. The Quantum DL for deeper leg veins was introduced in 2001.
ULTRAPULSE AND ULTRAPULSE ENCORE. UltraPulse is the industry's high-end
high-energy, short-pulse-duration CO2 technology that first made laser skin
resurfacing possible. It treats moderate to severe wrinkles and acne scarring
and can also be used for a wide range of surgical applications.
3
LIGHTSHEER. The Company's leading product for laser hair removal,
LightSheer systems are high-power pulsed diode array systems that provide safe
and efficacious permanent hair reduction to patients of all skin types,
including tanned skin. LightSheer has been recognized as a simple to operate and
very low maintenance system.
CLEARLIGHT. Lumenis holds the exclusive distribution rights for ClearLight
in the US and non-exclusive distribution rights worldwide excluding the US, an
intense blue light acne treatment system owned by CureLight Ltd. of Or Akiva,
Israel. The Company believes that this therapy achieves higher clearance rates
in less time than other medical treatments without observable material adverse
side effects. ClearLight received the CE mark in 2001, and in August 2002
CureLight received marketing clearance from the United States Food and Drug
Administration (the FDA) (see "Government Regulation" below). The Company began
shipping the product outside the United States in the second quarter of 2001.
BCLEAR. In February 2002, Lumenis introduced the BClear Targeted
PhotoClearing System, a Ultraviolet B (UVB) based light therapy system to treat
psoriasis and vitiligo. The focused, high dose delivery and precise dosimetry of
the BClear system allows individually customized treatments that safely and
effectively treat specific problem locations without exposure to surrounding
healthy skin. BClear qualifies for Medicare reimbursement under an existing
reimbursement code.
RELUME. Lumenis was the first company to introduce light-based therapy for
the cosmetic treatment of leucoderma. The ReLume system was launched in November
2002 for hypopigmentation conditions associated with scars, stretch marks, post
chemical peeling and skin resurfacing. The targeted light, transmitted via fiber
optics, precisely stimulates the production of melanin and repigments the
affected area with no side effects or pain.
OPHTHALMOLOGY APPLICATIONS. CMG was a leader in the ophthalmic laser market
since its introduction of the first argon photocoagulator system in 1970 for the
treatment of retinal diseases and glaucoma. CMG had achieved a widespread
reputation for innovations and product excellence with an installed base of over
30,000 ophthalmic lasers in more than 75 countries. Since the acquisition of CMG
Lumenis has been developing products which include both laser and other
innovative technology solutions for the treatment of a variety of
sight-threatening diseases. Argon, krypton, Nd:YAG, excimer, diode-pumped, and
other diode systems all continue to give ophthalmologists essential surgical
alternatives to treat various ophthalmic conditions. During the fourth quarter
of 2002 the ophthalmic business launched four new products; the Novus Varia TM,
the Selecta Duet TM, the Novus Spectra and the Novus TTX.
The Novus Varia is the world's first three-color diode-pumped ophthalmic laser.
The Selecta Duet is the first laser to treat both glaucoma and secondary
cataracts. The Novus Spectra a 532 nanometer green diode pumped solid-state
photocoagulation laser, is the first product of the integration of Lumenis and
HGM Medical systems. The Novus TTX, a diode-pumped 810 nanometer infrared
photocoagulator laser, has not yet received FDA clearance for sale in the United
States.
In 2002 approximately 23.1% of our revenues were derived from ophthalmic
applications.
Our leading ophthalmic applications include:
PHOTOCOAGULATOR. The purpose of this system is to heat or coagulate tissue.
The primary application is the treatment of diabetic retinopathy, an abnormal
vascular disease of the retina. Through the use of photocoagulation serious
vision loss from diabetic retinopathy has been reduced in some patients from 50%
to less than 2%. The main products are: Novus Varia, Novus Spectra, Ultima, and
the Elite family of products.
PHOTODISRUPTOR. The photodisruptor creates a small optical breakdown, or
spark, to separate tissue or drill holes in the retina. The primary application
is capsulotomy or perforation of the posterior capsule, a membrane left after
removal of the cataractous lens. A secondary application is drilling holes in
the iris,
4
laser iridotomy, to relieve pressure in narrow angle glaucoma. The main brands
for this product are the Aura and the Selecta Duet.
PHOTOACTIVATOR. This system is used to activate a drug, Visudyne(R), to
cause selective destruction of abnormal retinal blood vessels. The primary
application is treatment of the predominantly classic "wet" form of age related
macular degeneration (AMD). The main product is the Opal photoactivator which
uses Visudyne, a drug provided by Novartis.
SELECTIVE LASER TRABECULOPLASTY (SLT). SLT is used to selectively target
individual trabecular meshwork cells to activate a biologic response that
increases outflow of fluid to reduce intraocular pressure in open angle
glaucoma. SLT is performed using the Selecta II and Selecta Duet.
REFRACTIVE. This system is used to correct near and far sightedness and
astigmatism. In certain markets outside of the U.S. market, Lumenis distributes
the Allegretto Wave laser, manufactured by Wavelight Laser Technolgie AG, which
has the capability of "custom ablation" to achieve better corrective vision for
patients.
SURGICAL APPLICATIONS. Lumenis' acquired businesses, including Laser
Industries, with its Sharplan brand name, and CMG, were leaders in the surgical
marketplace for over twenty-five years. Lumenis now has a leading position in
the surgical laser market. In the fourth quarter of 2002 the UltraPulse
SurgiTouch (UPST) was approved by the FDA as the first application guided pulsed
CO2 laser to offer an intuitive, versatile interface featuring pre-set
parameters by specialty, application and suggested delivery device. The UPST is
the first product to result from the integration of CMG and ESC. In 2002, 17% of
our revenues were derived from surgical applications.
The Company offers a broad range of laser systems and accessories for sale
to hospitals and to medical practices to meet the growing in-office procedure
demand.
Surgical: Urology
POWERSUITE. The VersaPulse PowerSuite family of holmium lasers is used for
two main applications in Urology: ureteral, bladder and kidney stone lithotripsy
and benign prostatic hyperplasia (BPH). BPH affects over 60% of men over the age
of 60. Power Suite is sold with a wide range of fibers, which enable physicians
to penetrate hard to reach areas. The laser is used to resect, ablate and
coagulate tissue.
In 2001 the Company entered into a U.S. distribution agreement with Boston
Scientific Corp ("BSC") under which BSC is responsible for sales of fibers and
accessories as well as for providing sales leads for holmium lasers to Lumenis'
direct distribution force. An agreement for distribution in Japan was entered
into under which BSC is responsible for sales of all Lumenis urology offerings
in Japan.
Surgical: ENT (Otolaryngology).
Lumenis has pioneered several ENT applications for both operating room and
office environments. Our leading ENT products include:
CO2 LASERS. The Company offers a full range of CO2 laser systems and
accessories for a variety of applications. CO2 lasers enable the physician to
create precise, hemostatic incisions and excisions and to ablate soft tissue
with minimal thermal necrosis to the surrounding area. These units can be easily
adapted for freehand surgery, laser microsurgery, and rigid endoscopy
Surgical: Gynecology.
Lumenis offers several systems for various gynecologic applications,
including laparoscopy, endometrial ablation, and lesions of the lower genital
tract. Our leading gynecological products include:
5
ULTRAPULSE ENCORE. UltraPulse Encore is used in gynecology as well as
operating room based surgery. This high powered technology provides performance
enhancement over lower powered CO2 technologies.
VETERINARY APPLICATIONS. The Company pioneered laser applications in the
veterinary area with the AccuVet, a compact, easy to use, CO2 laser. The many
surgical applications include: removal of cysts, tumors and warts; specialized
internal procedures; neutering; spaying; and declawing.
DENTAL APPLICATIONS. We have developed several dental lasers to enable
dentists to perform hard and soft tissue applications including drilling, cavity
preparation, gum trimming and periodontal procedures, as well as teeth
whitening. In 2002, 2.3% of our revenues were derived from dental applications.
Our leading systems for dental applications include:
OPUS5 AND OPUS10. Opus5 watt and Opus10 watt are compact lightweight
efficient 830mm diode laser systems. The Opuslasers can also be used for soft
tissue applications such as cosmetic and periodontal procedures, minor surgical
procedures (troughing), and curettage. The Opus systems can be used to whiten
teeth in conjunction with a specified gel.
OPUSDUO AND OPUS20. The OpusDuo is a new system that uniquely combines
Erbium YAG and CO2 lasers in one cabinet with two distinct delivery systems.
Both lasers incorporate the Opus patented hollow wave guide delivery system that
emits high energy pulses. The Er:YAG laser is designed primarily for hard tissue
procedures on enamel, dentin and bone, including cavity and crown lengthening,
caries removal and etching. The CO2 laser is effective for a wide variety of
soft tissue applications, including gingevectomy, gingivoplasty, frenectomy,
implant exposure, laser troughing, crown lengthening, and guided tissue
regeneration. The OpusDuo enables dentists to remove hard tissue at speeds equal
to high speed mechanical handpieces.
NOVAPULSE. The NovaPulse is a 20 Watt pulsed CO2 laser for a wide variety
of soft tissue applications including gingevectomy, gingivoplasty, frenectomy,
implant exposure laser troughing, crown lengthening, biopsies and guided tissue
regeneration. The NovaPulse can also be used for multiple perio/oral surgical
applications. The NovaPulse offers the patented hollow wave guide technology for
more flexibility and energy to tissue.
The Company also sells a variety of handpieces and accessories for its
dental lasers.
INDUSTRIAL APPLICATIONS. Our industrial unit, Spectron Lasers Ltd., located
in Rugby, England, develops and sells a number of different industrial laser
systems for specialized applications based upon customer requests. In 2002, 3.1%
of our revenues were from industrial applications.
PRODUCTS UNDER DEVELOPMENT
In order to maintain and enhance its competitive position, the Company
believes it is imperative to develop new products and applications and introduce
new technologies. Some of these products are developed internally, some are
developed pursuant to research agreements, and some are acquired or licensed.
BUSINESS STRATEGY
The Company intends to maintain its leadership position in its markets by
providing quality leading edge systems, accessories and service, and through
in-house research and development and continued acquisition of products and
technologies. The Company intends to broaden its sales channels and product
offerings to reach a wider audience for its products. The Company intends to use
its resources to ensure that it can compete effectively in each of the markets
it has targeted.
6
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
Please refer to Note 16 of the Consolidated Financial Statements with
respect to financial information about business segments.
MARKETING, DISTRIBUTION AND SALES
As part of the integration of CMG, in the second half of 2001 the Company
began a reorganization of its core business operations into four functional
business units to focus upstream marketing and research and development
activities within product application areas.
The four business units were established to focus on Lumenis' primary
markets: aesthetic,; ophthalmic, surgical and other. Beginning in 2003, the
ophthalmic and surgical businesses were combined as one group called Medical.
o The Aesthetic business unit focuses on photorejuvenation, hair removal,
vascular and pigmented lesions, acne, psoriasis and other cosmetic
applications under development.
o The Ophthalmic segment focuses on ophthalmic products for the
correction of vision related problems, and the Surgical segment focuses
on hospital and in-office medical procedures in such fields as
gynecology, urology, ENT, and other surgical applications.
Three regional service centers have been established to coordinate local
sales, marketing, service and administrative functions for all business units.
In addition to the sale of products, the Company generates revenues from service
calls, maintenance agreements and sales of parts and accessories. Lumenis sells
directly in fourteen countries and has consolidated the global distributor
networks of its two primary predecessor companies. These distributors sell
Lumenis products in over 75 countries around the world.
The regional service and administrative centers are:
o Americas, headquartered in Santa Clara, California, which is
responsible for sales in the United States and distributor sales in
Canada and Latin America.
o Europe, headquartered in Amsterdam, the Netherlands, which is
responsible for direct sales in France, Germany, Italy, Sweden and the
United Kingdom and for distributor sales in the rest of Europe, the
Middle East the former Soviet-bloc countries and Africa. The European
headquarters also manages the Company's main distribution center
outside the United States.
o Asia Pacific, headquartered in Tokyo, Japan, which is responsible for
direct sales operations in Japan, the People's Republic of China and
Hong Kong as well as distributor sales in the other countries in Asia
and the rest of the world, not covered elsewhere. Beginning in 2003,
the head manager for the Asia Pacific region, excluding Japan, will be
based in Beijing, China.
Within each region, where appropriate, the Company has entered into
distributor and representative agreements, to enable it to better penetrate and
serve certain markets.
The Company also has entered into distribution agreements with other
manufacturers to grant Lumenis rights to distribute third party products which
complement its product offerings, including the ClearLight Phototherapy system
for acne, Allegretto Wave laser for laser vision correction, Selecta Duet for
glaucoma and cataracts and Aura photodisruptor for capsulotomy, all of which are
sold through the regional service centers.
7
BREAKDOWN OF NET SALES BY REGION BASED ON LOCATION OF THE CUSTOMERS
For The Year Ended December 31,
--------------------------------------------------
(dollar amounts in thousands)
Actual
2002 2001 2000
------------ ------------ ------------
Americas ............................. $170,146 $151,614 $69,728
Europe ............................... 73,247 71,638 50,181
Asia ................................. 103,020 88,266 39,628
Israel ............................... 2,083 3,683 2,088
-------- -------- --------
Total ................................ $348,496 $315,201 $161,625
-------- -------- --------
To assist customers in financing their purchases of the Company's products,
the Company or its distributors may introduce them to one of a number of
independent leasing companies and in some cases may earn a fee for referral. As
is common in this industry, a substantial portion of the Company's sales are
completed in the last few weeks of each calendar quarter.
The Company generally sells more of its products during the second and the
fourth fiscal quarters than in the first and third fiscal quarters. We believe
that this is because during the third fiscal quarter many physician customers
take summer vacation and during the first fiscal quarter many hospitals and
medical organizations have not yet assessed their needs and budgets for the
upcoming year.
MANUFACTURING
The Company manufactures its products in six principal locations: Yokneam,
Israel, where Aesthetic and Surgical products are manufactured; Pleasanton,
California, where Aesthetic products are manufactured; Salt Lake City, Utah,
where Ophthalmic products were manufactured; Santa Clara, California, where
Aesthetic, Surgical and Ophthalmic products are manufactured; Netanya, Israel,
where mainly Dental products are manufactured; and Rugby, England, where
industrial products are manufactured.
Following the completion of the CMG acquisition, the Company consolidated
its manufacturing sites and balanced the production of its product lines between
the United States and Israel. By the end of 2001, the Company closed its
manufacturing sites in Seattle, Washington and Tel Aviv, Israel. The production
of the NovaPulse products was transferred from the Seattle facility to the
Yokneam, Israel site. Additionally, in an effort to lower manufacturing costs,
during 2002 the Company transferred manufacturing activities from Santa Clara to
Yokneam and Salt Lake City. This transfer is expected to be completed in the
second quarter of 2003.
The Company manufactures products based mostly upon sales forecasts and, to
a lesser extent, upon specific orders received from our customers. The Company
delivers products based upon purchase orders received, and on average, the
Company fulfills each customer's order within two to eight weeks of receipt of
the order.
8
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's products are manufactured from a large number of parts, using
standard components and subassemblies supplied by subcontractors and vendors to
the Company's specifications.
The Company's policy is to maintain more than one source for each of its
major components, to the extent possible, although in some cases parts are
supplied by a sole source. Due to their sophisticated nature, certain components
must be ordered up to six months in advance, resulting in a substantial lead
time for certain production runs. In the event that such limited source
suppliers are unable to meet the Company's requirements in a timely manner, the
Company may experience an interruption in production until an alternate source
of supply can be obtained.
In Israel and the Netherlands, the Company uses a vendor to store and stock
its raw materials inventory and finished goods inventory, respectively.
The Company orders raw materials, including optical and electronic parts,
which it sends in kits to subcontractors for assembly of components and
subassemblies. Assembly (in part), integration, and quality assurance of the
components and subassemblies are conducted at the Company's manufacturing
facilities. In some cases, quality is tested on-site at the subcontractor's
facility.
RESEARCH AND DEVELOPMENT
The Company's research and development strategy is to develop high quality
products and related accessories to maintain its competitive advantage. The
Company's research and development expenses, net of participation by the Israeli
Office of the Chief Scientist, were approximately $29.0 million in 2002, $21.8
million in 2001, and $11.9 million in 2000. The Company believes that the close
interaction between its research and development, marketing, and manufacturing
groups allows for timely and effective realization of the Company's new product
concepts.
The Company receives certain grants and tax benefits from, and participates
in, programs sponsored by the Government of Israel.
Israeli tax law permits, under certain conditions, a tax deduction in the
year incurred for expenditures (including capital expenditures) in scientific
research and development projects, if the expenditures are approved by the
relevant Israeli Government Ministry (determined by the field of research), and
the research and development is for the promotion of enterprise and is carried
out by or on behalf of a company seeking such deduction. Expenditures not
approved as such are deductible over a three year period for Israeli tax
purposes. However, the amounts of any government grants made available to the
Company are subtracted from the amount of the aforementioned deductible
expenses.
The terms of the Israeli government participation also require that the
manufacture of products developed with government grants be performed in Israel.
Under the regulations of the Law for the Enforcement of Industrial Research and
Development 1984 (the "Research Law"), if any of the manufacturing is performed
outside Israel by any entity other than the Company, assuming the Company
received approval from the Chief Scientist for the foreign manufacturing, the
Company may be required to pay increased royalties. The increase in royalties
depends upon the manufacturing volume that is performed outside of Israel. The
maximum royalty to be paid could be up to 300% of the original grant plus
interest and the Israeli Consumer Price Index ("CPI") linkage differences.
The technology developed with Chief Scientist grants may not be transferred
to third parties without the prior approval of a governmental committee under
the Research Law, and may not be transferred to non-residents of Israel. The
approval, however, is not required for the export of any products developed
using the grants. Approval of the transfer of technology to residents of Israel
may be granted in specific circumstances, only if the recipient abides by the
provisions of the Research Law and related regulations, including the
restrictions on the transfer of know-how and the obligation to pay royalties in
an amount that may be increased.
9
In connection with an initial program approved by the Office of the Chief
Scientist, the Company and an Israeli subsidiary received or accrued
participation grants from the State of Israel in the amount of approximately
$135,000, $58,000 and $60,000 for the years ended December 31, 2002, 2001 and
2000, respectively. In return for the Government's participation payments, the
Company and its subsidiaries are obligated to pay royalties at a rate of 3% to
5% of sales of the developed product until the Office of the Chief Scientist is
repaid in full. In the years ended December 31, 2002, 2001 and 2000, the Company
and its subsidiaries paid or accrued royalties to the Office of the Chief
Scientist in aggregate amounts of$348,000, $292,000, and $408,000, respectively.
As of December 31, 2002, the balance of the Company's outstanding obligation to
the State of Israel in connection with all participation payments is
approximately $5,246,000 which will be repaid to the government in the form of
royalties on sales of those products that reach the market.
BACKLOG
On December 31, 2002 our backlog was approximately $10 million as compared to
none at December 31, 2001. Backlog represents firm orders generally shippable
within the next two quarters. We believe that most of our backlog at the end of
December 31, 2002 will be delivered within the next two quarters. The increase
in the backlog reflects the strong demand for our products, in particular for
our new ophthalmic products, and delays in shipment.
COMPETITION
Lumenis faces keen competition in its different markets. Competition arises
from other light-based products as well as alternate technologies. Competitors
range in size from small single product companies to large multifaceted
corporations, which may have greater resources than those available to the
Company. Major competitors are: in the aesthetic market, Candela Corporation,
Cynosure, Inc., Danish Dermatological Development A/S, Laserscope, Inc., Palomar
Medical Technologies, Inc., Syneron Medical Ltd. and Altus Medical Inc.; in the
surgical market, Diomed Inc., Dornier MedTech, and Bioletic AG; in the
ophthalmic market, Carl Zeiss Meditech AG, Nidek Technologies Inc. and Iridex
Corporation; and in the dental market, Biolase Technology, Inc.
In addition, the Company competes in markets subject to rapid technological
change. The entry of new companies or new technologies into these markets could
have a material adverse effect on the Company.
PATENTS AND INTELLECTUAL PROPERTY
The Company has obtained and now holds 146 patents in the United States and
37 patents outside of the United States and has applied for 20 and 45 patents in
the United States and outside of the United States, respectively. In general,
however, the Company relies on its research and development program, production
techniques and marketing, distribution and service programs to advance its
products. The Company also licenses certain of its technologies from third
parties pursuant to various license agreements. Patents filed both in the United
States and Europe have a life of twenty years from the filing date. However,
patents filed in the United States prior to June 1995 expire the later of twenty
years from filing or seventeen years from the issue date. None of the Company's
material patents are expected to expire in the near future.
Technologies related to the Company's business, such as laser and IPL
technologies, have been rapidly developing in recent years. Numerous parties
have sought patent protection on developments in these technologies.
The Company's policy is to obtain patents by application, license or
otherwise, to maintain trade secrets and to operate without infringing on the
intellectual property rights of third parties. Loss or
10
invalidation of certain of these patents, or a finding of unenforceability or
limited scope of certain of the Company's intellectual property, could have a
material adverse effect on the Company. The patent position of many inventions
in the areas related to the Company's business is highly uncertain, involves
many complex legal, factual and technical issues and has recently been the
subject of litigation industry-wide. There is no certainty in predicting the
breadth of allowable patent claims in such cases or the degree of protection
afforded under such patents. As a result, there can be no assurance that patent
applications relating to the Company's products or technologies will result in
patents being issued, that patents issued or licensed to the Company will be
useful against competitors or that the Company will enjoy patent protection for
any significant period of time.
It is possible that patents issued or licensed to the Company will be
successfully challenged or that patents issued to others may preclude the
Company from commercializing its products under development. Litigation to
establish or challenge the validity of patents, to defend against infringement,
enforceability or invalidity claims or to assert infringement, invalidity or
enforceability claims against others, if required, can be lengthy and expensive,
and may result in determinations materially adverse to the Company. There can be
no assurance that the products currently marketed or under development by the
Company will not be found to infringe patents issued or licensed to others.
Likewise, there can be no assurance that other parties will not independently
develop similar technologies, duplicate the Company's technologies or, with
respect to patents which are issued to the Company or rights licensed to the
Company, design around the patented aspects of the technologies. Third parties
could also obtain patents that may require licensing of their patented
technology for the conduct of the Company's business.
Because of the rapid development of technologies which relate to the
Company's products, there may be other issued patents which relate to basic
relevant technologies and other technologies marketed by the Company. From time
to time, the Company receives inquiries from third parties contending that their
patents are being infringed by the Company. If such third parties were to
commence infringement suits against the Company, and such patents were found by
a court to be valid, enforceable and infringed upon by the Company, the Company
could be required to pay damages and/or make royalty payments. Depending on the
nature of the patent found to be infringed upon by the Company, a court order
requiring the Company to cease such infringement could have a material adverse
effect on the Company. See Item 3 - "Legal Proceedings".
GOVERNMENT REGULATION
The products manufactured and marketed by the Company are subject to
regulatory requirements mandated by the U.S. FDA, the European Union and similar
authorities in other countries. The Company believes that its principal products
will be regulated as "devices" under United States federal law and FDA
regulations. The process of obtaining clearances or approvals from the FDA and
other regulatory authorities is costly, time consuming and subject to
unanticipated delays.
Among the conditions for FDA approval of a medical device is the
requirement that the manufacturer's quality control and manufacturing procedures
comply with the Quality System Regulations ("QSR"), which must be followed at
all times. The QSR regulations impose certain procedural and documentation
requirements upon a company with respect to design, manufacturing, complaint
handling and quality assurance activities. These QSR requirements control every
phase of design and production from the receipt of raw materials, components and
subassemblies to the labeling of the finished product.
In February 1997, the Company received a Quality System Certification Award
for being in compliance with ISO 9001. ISO 9001 is a globally recognized
standard established by the International Standards Organization in Geneva,
Switzerland and has been adopted by more than 90 countries worldwide. ISO 9001
embraces principles of the QSR and is a comprehensive quality assurance
standard. ISO certification is based upon adherence to established quality
assurance standards and manufacturing process controls.
11
In 1998, the European Union ("EU") determined that marketing or selling any
medical products or devices within the European community requires a CE Mark
according to the European Medical Device Directive. It is the responsibility of
member states to ensure that devices capable of compromising the health and
safety of patients (and users) do not enter the market. Obtaining a CE Mark for
medical devices is regulated according to the European Medical Device Directive.
The medical device must comply with the requirements of the European Medical
Device Directive that applies at each stage, from design to final inspection.
The Company has complied with the EU standards and has received the CE Mark for
all of the Company's systems distributed in EU.
International sales are subject to specific foreign government regulation
and those regulations vary from country to country. The time required to obtain
approval for any device to be sold in any foreign country may be longer or
shorter than that required for FDA clearance and there can be no assurance that
approval in any jurisdiction will be obtained or, if granted, will not be
withdrawn.
EMPLOYEES
As of December 31, 2002, the Company and its subsidiaries had 1,420
full-time employees. In Israel there were 322 employees, in the United States
699 employees, in Europe 221 employees and in Asia 178 employees. In the first
quarter of 2003, the Company reduced its employment by 95 employees as a result
of planned cost reductions and the closure of the Santa Clara manufacturing
operations.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
Please refer to "Breakdown of Net Sales By Region" above and to Note 16 to
the Financial Statements with respect to financial information about geographic
areas of the Company's business.
The Company's worldwide business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings outside
the U.S. The Company does not regard these risks as a deterrent to further
expansion of its operations outside the U.S. However, the Company closely
reviews its methods of operations and adopts strategies responsive to changing
economic and political conditions.
Within the EU, there has been an evolution toward a single market for which
the Economic and Monetary Union ("EMU"), including the adoption of the Euro as a
single currency, marks an important step. The Company has recognized the
strategic significance of this development and has adopted the Euro in 2000 for
use in EMU markets.
For risks related to the Company's operations in Israel, see "Conditions in
Israel" below and Item 7--"Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward Looking Statements and Risk
Factors."
CONDITIONS IN ISRAEL
GENERAL
The Company is incorporated under the laws of the State of Israel, and much
of its research and development, manufacturing and significant executive
facilities are located in Israel. Accordingly, the Company is directly affected
by political, economic and military conditions in Israel. The Company's
operations could be materially adversely affected if major hostilities involving
Israel should occur or if trade between Israel and its present trading partners
should be curtailed.
POLITICAL CONDITIONS
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its neighbors. A state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Additionally, Israel is currently
experiencing intense
12
violence and terrorism and from time to time in the past, Israel has experienced
civil unrest, primarily in the West Bank and in the Gaza Strip administered by
Israel since 1967. However, a peace agreement between Israel and Egypt was
signed in 1979, a peace agreement between Israel and Jordan was signed in 1994
and, since 1993, several agreements between Israel and Palestinian
representatives have been signed, pursuant to which certain territories in the
West Bank and Gaza Strip were handed over to the Palestinian administration. The
implementation of these agreements with the Palestinians representatives has
been subject to difficulties and delays and a resolution of all of the
differences between the parties remains uncertain. Recently the political
conflict with the Palestinians has worsened. Since October 2000, there has been
a significant increase in violence primarily in the West Bank and Gaza Strip, as
well as in Israel itself, which intensified during 2001 and 2002. Negotiations
between the parties have almost entirely ceased. As of the date hereof, Israel
has not entered into any peace agreement with Syria or Lebanon. In November 2002
the National Unity Government was dissolved which was followed by national
elections. In January 2003 the "Likud" party won Israel's general elections and
the party's leader, Ariel Sharon, has formed the new Israeli government. The
Company cannot predict the political and economic policy to be implemented by
the new government, whether any other agreements will be entered into between
Israel and its neighboring countries, whether a final resolution of the area's
problems will be achieved, the nature of any resolution of this kind, or whether
the current violence will continue and the extent to which this violence will
have an adverse impact on Israel's economic development, on the Company's
operations in the future or what other effects it may have upon the Company.
Certain countries, companies and organizations continue to participate in a
boycott of Israeli firms and others doing business with Israel or with Israeli
companies. Although the Company is restricted from marketing its products in
these countries, the Company does not believe that the boycott has had a
material adverse effect on its business. However, a prolonged continuation of
the increased hostilities in the region could lead to increased boycotts and
further restrictive laws, policies or practices directed towards Israel or
Israeli businesses, and these could have a material adverse impact on the
Company's business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 45 are obligated, unless exempt, to perform up to 43 days, or more
under certain circumstances, of military reserve duty annually. Additionally,
all Israeli residents are subject to being called to active duty at any time
under emergency circumstances and large numbers of them have been so called over
the past few months. Currently, some of the Company's senior officers and key
employees are obligated to perform annual reserve duty. While the Company has
operated effectively under these requirements since it began its operations, no
assessment can be made as to the full impact of such requirements on its
workforce or business if hostilities continue, and no prediction can be made as
to the effect on the Company of any expansion or reduction of such obligations,
particularly if emergency circumstances occur.
The September 11, 2001, terror attacks on the U.S. and the military
response by the U.S. and its international allies in Afghanistan, have created
uncertainty regarding the state of the U.S. and world economy. In addition, the
U.S. military operation against Iraq increased interest in fighting terrorist
activities in the Middle East and around the world, and the effects of the
military operation against Iraq on the State of Israel could directly affect the
Company's business.
ECONOMIC CONDITIONS
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has, for these and other reasons,
intervened in various sectors of the economy, employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
controls of wages, prices and foreign currency exchange rates. Until May 1998,
Israel imposed restrictions on transactions in foreign currency. These
restrictions affected the Company's operations in various ways, and also
affected the right of non-residents of Israel to convert into foreign currency
amounts they received in Israeli currency, such as the proceeds of a judgment
enforced in Israel. Despite these restrictions, foreign investors who purchased
shares with foreign currency
13
are able to repatriate in foreign currency both dividends (after deduction of
withholding tax) and the proceeds from any sale of shares. In 1998, the Israeli
currency control regulations were liberalized significantly, as a result of
which Israeli residents generally may freely deal in foreign currency and
non-residents of Israel generally may freely purchase and sell Israeli currency
and assets. There are currently no Israeli currency control restrictions on
remittances of dividends on Ordinary Shares or proceeds from the sale of
Ordinary Shares; however, legislation remains in effect, pursuant to which
currency controls can be imposed by administrative action at any time. In
addition, Israeli residents are required to file reports pertaining to certain
types of actions or transactions. While Israeli monetary policy contributed to
relative price stability in recent years, during the last nineteen months
exchange rates have been comparatively volatile, which volatility is
attributable, among other things, to the conflict with the Palestinians and
fluctuating rates of economic growth. No prediction can be made as to whether
not the Israeli government will be successful in its attempts to keep prices
stable, or whether or not the exchange rate volatility will be moderated.
TRADE AGREEMENTS
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is also a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United Nations, Australia, Canada and
Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs. Israel and the European
Economic Community, known now as the European Union, concluded a free trade
agreement in July 1975, which confers various advantages on Israeli export to
most European countries and obligates Israel to lower its tariffs on imports
from these countries over a number of years. In 1985 Israel and the United
States entered into an agreement to establish a free trade area. The free trade
area has eliminated all tariff and specified non-tariff barriers on most trade
between the two countries. On January 1, 1993, Israel and the European Free
Trade Association entered into an agreement establishing a free-trade zone
between Israel and the European Free Trade Association. In November 1995, Israel
entered into a new agreement with the European Union, which includes
redefinition of rules of origin and other improvements, including providing for
Israel to become a member of the research and technology programs of the
European Union. In recent years, Israel has established commercial and trade
relations with a number of the other nations, including Russia, China, Turkey,
India and other nations in Eastern Europe and Asia, with which Israel had not
previously had such relations.
WEB SITE ACCESS TO SEC REPORTS
The Company's Internet web site can be found at http://www.lumenis.com/.
Information contained on the Company's Internet web site is not part of this
report.
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and any amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act
of 1934 are available on the Company's web site, free of charge, as soon as
reasonably practicable after such reports are filed with or furnished to the
SEC.
Alternatively, you may access these reports at the SEC's Internet web site:
http//www.SEC.gov/.
ITEM 2. PROPERTIES.
The Company's principal executive offices and principal engineering,
development, manufacturing, shipping and service operations are located in an
approximately 70,000 square foot facility in Yokneam, Israel, an approximately
158,000 square foot facility in Santa Clara, California, an approximately
106,000 square foot facility in Salt Lake City, Utah, an approximately 38,000
square foot facility in Pleasanton, California and an approximately 11,000
square foot office in New York City. In April 2003, the Company
14
will reduce the size of the leased facility in Santa Clara to 80,000 square
feet. The lease of the Pleasanton facility expires in 2004. In March 1996, the
Company entered into a ten-year lease on the initial facility (of approximately
34,000 square feet) in Yokneam, and in March 1998, the Company entered into an
additional ten-year lease on a second facility in Yokneam (of approximately
36,000 square feet). As part of the CMG acquisition, the lease for the Santa
Clara premises formerly used by CMG was subleased to the Company. The sub-lease
for the Santa Clara premises expires in February 2007. The lease on the New York
office expires in September 2004 and is subject to the Company's board of
directors' approval.
As part of the 2001 restructuring following the completion of the CMG
acquisition, the Company closed seven facilities by the end of 2001. This
included the closure of the manufacturing sites in Seattle, Washington and Tel
Aviv, Israel and five sales offices in Norwood, Massachusetts, Munich, Germany,
Cambridge, England, Paris, France and Tokyo, Japan.
As part of the cost savings initiatives implemented at the start of 2003,
the Company decided to close the administrative and research and development
site in Tel Aviv, Israel, which is leased by its subsidiary Laser Industries
Ltd., and is currently seeking a subtenant for such facility. In connection with
the closure by the Company of the Norwood, Massachusetts sales offices in 2001,
the Company is also seeking a subtenant for that facility.
The Company, either directly or through its subsidiaries, maintains the
following additional premises, all of which are leased:
ISRAEL
Lumenis Ltd. - Sales, marketing, manufacturing, and research and development
operations of the Company and its subsidiary, OpusDent Ltd., are located in a
facility in Netanya, Israel.
EUROPE
The Company's new European headquarters were established in Amsterdam in
2002. In addition to coordinating all sales, marketing and service activities
for Europe, the headquarters manage Lumenis' main distribution center outside
the United States. Lumenis has also opened a branch in Schaffhausen, Switzerland
to own and manage its portfolio of intellectual property and other intangible
assets outside the United States.
OTHER
In addition, Lumenis maintains sales offices in China, France, Germany,
Hong Kong, Italy, Japan, Sweden and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal proceedings incident to its
business. Except as noted below, there are no legal proceedings pending or
threatened against the Company that management believes are likely to have a
material adverse effect on the Company's consolidated financial position.
In February 2002, the Company received a request from the United States
Securities and Exchange Commission ("SEC") to voluntarily provide certain
documents and information for a period commencing January 1, 1998. The request
primarily relates to the Company's relationships with distributors, and also
asks for amplification of the Company's explanation of certain previously
disclosed charges and write-downs which were taken in 1999 (inventory and other
charges of approximately $30,050,000; bad debt charges of approximately
$13,430,000; and litigation expenses of approximately $4,400,000) and
2001(write-down of accounts receivable of $14,043,000 and write-downs of
inventory and other charges
15
(amounts not given)). On May 15, 2002, the Company learned that the SEC had
issued a formal order of investigation on these matters, including as to
whether, in connection therewith, the Company, in prior periods, may have
overstated revenues and related income and failed to maintain proper books and
records and a proper system of internal controls. This was followed by the
issuance of a subpoena on August 19, 2002 relating to the above-mentioned
requested information, as well as documents of the Company's present auditors,
Brightman Almagor & Co., and its previous auditors, Luboshitz Kasierer. The
Company believes, as of the date of this report, that it has substantially
completed the production of documents to the SEC in response to the requests
previously received with respect to the transactions involving U.S. distributors
and certain charges taken in 1999 and 2001. The Company has continued to
cooperate with the SEC in its investigation, and intends to continue doing so by
providing additional documents or testimony which may be requested. Having
reviewed, among other things, the information gathered for the SEC
investigation, the Company does not presently believe that a restatement of the
Company's reported financial statements is warranted. The SEC investigation,
however, is ongoing and, accordingly, the Company is unable to predict the
duration or outcome of this process.
On or around February 28, 2003, a lawsuit was filed on behalf of Aqua Fund,
L.P. and certain additional purchasers of Lumenis securities in the United
States District Court for the Northern District of Illinois. The named
defendants are the Company, Yacha Sutton, the Company's former Chief Executive
Officer, and Sagi Genger, the Company's Chief Operating Officer. The complaint
generally alleges that the defendants violated U.S. Federal securities laws by
making material misrepresentations and/or omissions, and also includes claims
for common law fraud and negligence. The complaint alleges that, at various
times during the period from September 17, 2001 through February 27, 2002,
plaintiffs purchased the Company's securities in reliance on such statements,
and suffered economic loss as a result. The defendants have not been served with
a summons in this action. The Company believes that all of the allegations and
claims are baseless, and the Company intends to vigorously defend against them.
During March, April and May 2002, eight purported class action lawsuits
were filed in the United States District Court for the Southern District of New
York on behalf of purchasers of Lumenis securities between January 7 and
February 28, 2002 (the "Class Period"). The named defendants include, in
addition to the Company, certain present and former officers and directors of
the Company, including Prof. Jacob A. Frenkel, Yacha Sutton, Sagi Genger and
Asif Adil. The complaints generally allege that the defendants violated U.S.
Federal securities laws by issuing materially false and misleading statements
throughout the Class Period that had the effect of artificially inflating the
market price of the Company's securities. The complaints allege that throughout
the Class Period, defendants discounted and disputed marketplace rumors about
the Company's operations even as the Company knew it was being investigated by
the SEC and that its distributors had been contacted by the SEC.
The Company has been served with a summons and complaint in some but not
all of these actions. There is currently pending before the Court a motion by
plaintiffs to appoint a lead plaintiff and for approval of selection of lead
counsel. Upon the disposition of this motion, it is anticipated that a
consolidated complaint will be filed. The Company's time to respond to the
complaints has been extended. It is anticipated that, following the appointment
of a lead plaintiff and approval of lead class counsel, and subject to review
and evaluation of any consolidated complaint that is filed, the Company will
file a motion to dismiss for failure to state a claim and failure to plead fraud
with particularity as required by the Private Securities Litigation Reform Act
of 1995 and Rule 9(b) of the Federal Rules of Civil Procedure.
In May 2002, another purported class action complaint was filed in the
United States District Court for the Southern District of New York on behalf of
purchasers of the Company's securities between August 2, 2001 and May 7, 2002
(the "Extended Class Period"). In addition to the Company, the named defendants
include certain present and former officers and directors of the Company,
including Prof. Jacob A. Frenkel, Yacha Sutton, Sagi Genger and Asif Adil. The
complaint alleges that the defendants violated U.S. Federal securities laws by
making a series of material misrepresentations to the market during the Extended
Class Period regarding the Company's financial performance, successful execution
of its business plan and strong
16
demand for the Company's products, thereby artificially inflating the price of
Lumenis securities. The Company has not been served with a summons and complaint
in this action.
The Company believes that all the allegations and claims in all of the
above purported class action lawsuits are baseless, and the Company intends to
vigorously defend against them.
On February 11, 2002, the Company filed a petition with the Bailiff's Court
of Horsholm, Denmark, requesting that an interim injunction be granted against
two competing products, which are manufactured by Danish Dermatological
Development A/S, a Danish company ("DDD"). DDD filed its statement of defense in
July 2002, to which the Company answered in September 2002. Additionally, DDD
has filed oppositions in the European and Danish Patent Offices against the
Company's European IPL Patent and Danish Utility Model Patents, which are the
basis for the Company's request for an interim injunction. After a hearing on
the European patent opposition on March 25, 2003, the European Patent Office
revoked the Company's European IPL Patent. The Company is evaluating this
ruling. The Company's petition for an interim injunction against DDD in Denmark
is scheduled to be heard in August 2003.
On September 12, 2002, the Company filed a claim in the Tel Aviv - Jaffa
District Court against Syneron Medical Ltd. and Messrs. Shimon Eckhouse, Michael
Kreindel, Mark Aronovitz, Avner Lior and Hans Edel (the "Syneron Defendants").
The Company alleges that the Syneron Defendants, all former employees of the
Company, used confidential business information and technology gained during
their work at the Company, for the production and distribution of products
essentially similar to the Company's products for hair removal and skin
treatment (the "Copied Products"). The Company also alleges that Syneron Medical
Ltd. and the Syneron Defendants (collectively the "Defendants") used information
with regard to the Company's distributors and customers for the purpose of
marketing the Copied Products. The Company is seeking the following remedies
against the Defendants: a permanent injunction restraining the Defendants from
using any business information or technology or trade secrets of the Company, a
mandatory injunction ordering the Defendants to demolish all of the Copied
Products that were produced by the Defendants, an order for the delivery of
accounts, the appointment of a receiver and a monetary judgment in the amount of
approximately $6,250,000. On October 20, 2002, the Defendants filed their
Statement of Defense in which they denied the Company's claims, pleading, inter
alia, that the Company's Intense Pulsed Light technology (the "IPL Technology")
is within the public domain; that the Company has no intellectual property
rights in it; and that, consequently, the Defendants' technology (the "ELOS
Technology") does not breach the Company's rights in its IPL Technology. In
addition, the Defendants pleaded, that there is no similarity between the ELOS
Technology and the IPL Technology. On November 4, 2002, the Company filed its
response to the Defendants' Statement of Defense. In its response, the Company
claimed, inter alia, that the Defendants are prohibited from pleading that the
Company does not have any intellectual property rights in the IPL technology,
due to the fact that the Defendants themselves assisted the Company in
registering patents which constitute the Company's intellectual property in the
IPL technology. The parties have served on each other numerous discovery
requests, and the parties have agreed to complete discovery by March 23, 2003.
The Defendants have filed a motion to dismiss the Company's claims, and the
Company has filed a motion to strike certain parts of the Defendants' statement
of defense. The parties' motions are pending before the court, and a pre-trial
hearing is scheduled for May 14, 2003.
On September 20, 2002, Lumenis Inc. filed a lawsuit against Syneron Inc.
(Canada), Syneron Inc. (Delaware), and certain former Lumenis employees, Brian
D. Lodwig, J. Scott Callihan, Mark Lazinski, and Stephen Harsnett, in the
Superior Court of California for the County of Santa Clara for breach of
contract, intentional interference with prospective economic advantage,
misappropriation of trade secrets, breach of duty of loyalty, conspiracy, unjust
enrichment, and unfair competition, seeking unspecified damages and injunctive
relief. Lumenis Inc.'s request for expedited discovery was granted by the court,
and Lumenis served initial discovery demands. On or about October 22, 2002,
Syneron Inc. (Canada) filed a motion to quash service upon it for lack of
personal jurisdiction. This motion was granted by the court in January 2003, and
Syneron Inc. (Canada) was dismissed as a defendant. On or about October 25,
2002,
17
Lumenis Inc. filed an amended complaint adding former Lumenis Inc. employee
David J. Maslowski as a defendant in the action. On or about December 4, 2002,
the defendants filed answers to the amended complaint. In addition, Syneron Inc.
(Delaware) filed a cross-complaint alleging various claims related to unfair
trade practices and competition, and two of the individual defendants filed
cross-complaints alleging various claims related to unpaid commissions. Lumenis
believes the cross-claims are wholly without merit and will vigorously defend
against them. Discovery has commenced but a trial date has not been set.
On October 28, 2002, Lumenis Ltd. and Lumenis Inc. (collectively,
"Lumenis") filed a complaint in the United States District Court for the Central
District of California alleging that Syneron Medical Ltd., Syneron Inc. and
Syneron Canada Corp. (collectively "Syneron") are infringing six U.S. patents
held by Lumenis by, inter alia, selling Syneron's Aurora DS and Aurora SR
devices. Lumenis is seeking a temporary restraining order and a preliminary and
permanent injunction against further infringement as well as an award of as yet
undetermined damages and lost profits resulting from Syneron's infringement and
Lumenis' attorneys' fees and costs. Oral argument on the request for a temporary
restraining and preliminary injunction was held on November 1, 2002. Citing the
complexity of the patent issues involved, the court declined to grant the
Company's request for a temporary restraining order. The court granted the
Company's request for expedited discovery, and ordered the appointment of an
independent expert to advise the court on the patent infringement issues raised
by the lawsuit. A technical expert has been appointed to assist the court, and
the Company's request for a preliminary injunction is scheduled to be heard on
May 19, 2003.
On October 24, 2002, Lumenis Inc. filed a complaint in the United States
District Court for the Northern District of California (the "Federal Action")
against Palomar Medical Technologies, Inc. ("Palomar") and the General Hospital
Corp. ("General"). The complaint seeks a declaratory judgment that two U.S.
patents, which are owned by General and sublicensed by Palomar to Lumenis Inc.
pursuant to a 1998 license agreement (the "License Agreement"), are invalid
and/or unenforceable and/or are not infringed by Lumenis. The Company served its
complaint on Palomar and General on February 24, 2003.
In connection with the Federal Action, Lumenis has ceased payment of
royalties under the License Agreement. In response, Palomar filed a complaint on
October 29, 2002 against Lumenis Ltd., Lumenis Inc., ESC Medical Systems Ltd.,
ESC Medical Systems Inc. and "ESC/Sharplan Laser Industries Ltd." (collectively,
"Lumenis") in the Superior Court of the Commonwealth of Massachusetts. The
complaint alleges that Lumenis has breached the License Agreement by failing to
make certain royalty payments, that Lumenis' actions have breached the implied
covenant of good faith and fair dealing arising with respect to the License
Agreement and that Lumenis' actions constitute unfair and deceptive trade
practices in violation of M.G.L., Chap. 93A, Sections 2 and 11. Palomar seeks an
award of unspecified compensatory damages, a trebling of such damages, its costs
and attorneys' fees and pre-judgment interest. The complaint has not been served
on Lumenis.
On September 30, 2002, an action was filed by Mr. Asif Adil, the Company's
former Executive Vice President - Business Operations and acting Chief Financial
Officer, in the Superior Court of New Jersey, Somerset County; Law Division
against the Company and Prof. Jacob A. Frenkel, Yacha Sutton and Sagi Genger.
The complaint alleges, among other things, that the Company removed Mr. Adil
from these positions and terminated his employment in retaliation for his report
to the Company of alleged accounting and disclosure irregularities. The action
seeks, among other things, compensatory damages and reinstatement of his
employment. The Company believes that the claims are without merit, and the
Company intends to defend itself vigorously. On October 29, 2002, the defendants
removed the action to the United States District Court for the District of New
Jersey (the "District Court"). On November 13, 2002, Mr. Adil filed a first
amended complaint in the District Court, adding Lumenis Inc. as a defendant in
the action. During January 2003, the defendants moved to dismiss the first
amended complaint, and Mr. Adil filed an opposition to the defendants' motion. A
hearing on the motion has not been scheduled.
On November 5, 1998, Light Age, Inc. ("Light Age") instituted an ex-parte
application in the Tel-Aviv District Court (the "Tel Aviv Court") against the
Company and others, seeking a temporary injunction
18
against the development, production and sale of the Company's Alexandrite laser
for dermatological or hair removal treatments. The litigation relates to
disputes arising out of an agreement between Light Age and Laser Industries
pursuant to which Light Age supplied certain medical laser devices to Laser
Industries. On March 21, 1999, the Tel-Aviv Court denied Light Age's motion for
a preliminary injunction. The parties then agreed to submit their dispute for
arbitration. Accordingly, the parties filed a motion to stay the proceedings,
which was granted by the Tel Aviv Court on October 14, 1999. Since that date,
there have been no further proceedings in this matter in the Tel Aviv Court.
On January 25, 1999, the Company, along with three affiliated entities,
brought an action seeking declaratory and injunctive relief in the Superior
Court of New Jersey, Somerset County; Law Division, against Light Age, Inc.,
entitled Laser Industries Ltd., ESC Medical Systems Inc., Sharplan Lasers Inc.,
and ESC Medical Systems Ltd. v. Light Age, Inc. Docket No. SOM-L-14199 (together
the "1999 Light Age Matter"). On March 5, 1999, defendant Light Age answered the
complaint and counterclaimed against the plaintiffs, seeking unspecified damages
under thirteen counts alleging a variety of causes of action such as breach of
contract, tortious interference with contract, unjust enrichment, and
misappropriation. A hearing on the merits was held in December 2001 and the
arbitrators eventually issued a final award in the amount of approximately
$9,100,000, which includes pre-judgment interest and an award of certain
out-of-pocket expenses incurred by Light Age. The Company recorded a charge of
$5,200,000 for the fiscal year ended December 31, 2002, in addition to its
previous reserve of $4,600,000. The request by Light Age for approximately
$2,780,000 in attorneys' fees and disbursements was denied in its entirety.
Pursuant to a settlement agreement entered into on August 27, 2002, as
subsequently amended, Lumenis agreed to the entry of a final judgment on
consent, including post-judgment interest, and the Company made its final
payment of principal and interest on February 19, 2003. The law firms
representing Light Age have filed suit for nonpayment of approximately
$3,200,000 in legal fees, and Light Age has made certain claims against its
counsel alleging malpractice. In connection therewith, the law firms have
asserted an attorneys lien against all settlement amounts paid to Light Age. As
a result of this dispute, the Company filed an interpleader action with the
court on or about January 10, 2003. The parties consented to an interpleader of
approximately $1,370,000 of the settlement amount, and the funds were deposited
with the court. In addition, approximately $1,840,000 of the settlement amount
paid to Light Age has been segregated in an account pursuant to court orders
issued on or about September 26, 2002, and February 14, 2003. As of March 10,
2003, the Company has paid or submitted as interpleader a total of approximately
$9,320,000 in settlement of this action.
On September 20, 1999, Dr. Richard Urso filed what purports to be a class
action lawsuit against the Company and against a leasing company in Harris
County, Texas, alleging a variety of causes of action. In December 2000,
plaintiff amended his complaint to eliminate the class action claim. On April
13, 2001 the lawsuit was dismissed and on May 3, 2001, Dr. Urso and
approximately forty-eight physicians and medical clinics re-filed what purports
to be a class action lawsuit in Harris County, Texas. Plaintiffs filed a motion
to remove the case to Federal Court. The lawsuit was removed to the U.S.
District Court for the Southern District of Texas. The current allegations on
behalf of plaintiffs are breach of contract, breach of express and implied
warranties, fraud, misrepresentation, conversion, product liability, and
violation of the Texas Deceptive Trade Practices Act and Texas Securities Act.
In March 2002, the plaintiffs filed a motion to amend their complaint to dismiss
the class action and securities allegations and to add several new plaintiffs
and in June 2002, the motion was granted. The plaintiffs subsequently filed a
motion to remand the cases to State Court, which was granted. On February 11,
2002, the Company filed a motion to dismiss the cases based on forum non
conveniens. The motion is scheduled to be heard on April 7, 2003. The Company
denies the allegations and will continue to defend this case vigorously.
The Company was named in a number of purported class action lawsuits filed
in 1998, seeking damages and attorneys fees under the United States securities
laws for alleged irregularities in the way in which the Company reported its
financial results and disclosed certain facts throughout 1997 and 1998 and for
alleged "tipping" of non-public information to Salomon Smith Barney Inc. in
September 1998. In December 2001, the Company entered into a settlement
agreement with the plaintiffs, which requires the Company to pay $4,500,000 and
to issue up to 500,000 Ordinary Shares. In May 2002, approximately
19
$4,400,000 million of the cash portion of the settlement was paid by one of the
re-insurers of the Company's directors and officers liability insurance policy,
and in August 2002 the Company paid the remaining approximately $101,000 of the
cash portion of the settlement. During the second quarter of 2002, the Company
issued 150,000 of the 500,000 Ordinary Shares issuable to the plaintiffs and
their attorneys. The Company intends to pursue reimbursement of another
$5,000,000 of the settlement consideration from a second re-insurer that is in
liquidation. An accrual of $13,000,000 for this matter has been recorded in the
Company's 2001 Consolidated Financial Statements, which amount is based on the
fair market value of the maximum number of Ordinary Shares payable by the
Company at the time the settlement agreement was entered into. On March 26,
2002, the judge signed an Order and Final Judgment approving the settlement. As
of December 31, 2002 the balance of the accrual is $8,800,000. The Company
expects to issue the balance of the Ordinary Shares issuable pursuant to the
settlement during 2003.
On January 18, 2002, Lumenis Inc. commenced an action for patent
infringement against Trimedyne, Inc. ("Trimedyne") in the United States District
Court for the Central District of California. The complaint alleges that
Trimedyne has willfully infringed and is willfully infringing two Lumenis Inc.
U.S. patents. Lumenis Inc. seeks, inter alia, an injunction enjoining
Trimedyne's infringement, damages, costs and attorneys' fees. On or about
February 26, 2002, Trimedyne filed an answer and counterclaims in this action
denying Lumenis' material allegations of infringement and asserting
counterclaims, inter alia, seeking a declaratory judgment that Trimedyne is not
infringing the Lumenis patents and a declaratory judgment that it is entitled to
a refund of an alleged overpayment of royalties by Trimedyne of approximately
$130,000 under a 1994 patent license. Trimedyne also alleges generally that
Lumenis violated certain antitrust, trade libel and trade practices laws; and
that certain Lumenis products infringe Trimedyne's patents. Trimedyne seeks,
inter alia, an injunction enjoining Lumenis Inc. from the allegedly wrongful
acts, unspecified damages and a trebling of such damages, disgorgement of
profits, unspecified punitive damages, a refund of the alleged royalty
overpayment, and costs and attorneys fees. On April 29, 2002, the Company moved
to: (i) dismiss the federal and state antitrust counterclaims, the counterclaims
for trade libel and the counterclaim for tortious interference with prospective
economic relationships on the grounds that Trimedyne has failed to state a claim
upon which relief can be granted; (ii) dismiss or stay the claims related to the
1994 patent license, as those claims are subject to a compulsory arbitration
clause; and (iii) strike certain of the affirmative defenses asserted by
Trimedyne. On June 3, 2002, Trimedyne served an amended answer and counterclaims
re-asserting all of the claims from its original complaint other than the claims
relating to the 1994 patent license. On March 3, 2003, the Court dismissed
Trimedyne's counterclaim for tortious interference with prospective economic
relationships, but denied the Company's motion to dismiss Trimedyne's other
counterclaims. The parties have submitted this dispute to mediation, and
settlement discussions are continuing. The court has ordered discovery to be
completed by July 30, 2003, and a trial is scheduled for December 2, 2003.
On August 19, 2002, Cool Laser Optics, Inc. ("Cool Laser") commenced an
arbitration proceeding before the American Arbitration Association by filing a
demand for arbitration claiming that Lumenis Inc. violated an August 1996 patent
license agreement (that was entered into by Cool Laser and Coherent Inc. and
assigned to Lumenis Inc.) by not paying royalties thereunder respecting sales of
Lumenis Inc.'s LightSheer systems and that as a result the license agreement has
been or is terminated and Lumenis Inc.'s sales of the LightSheer systems
constitute infringement of certain of Cool Laser's U.S. patents. The demand for
arbitration seeks an unspecified amount in damages and an injunction against
further sales of the LightSheer system. On October 3, 2002, Lumenis Inc. filed
and served an answering statement denying the material allegations of the demand
for arbitration, denying that the LightSheer system infringes the referenced
patents, denying that Lumenis Inc. owes any royalties under the license
agreement and denying that Cool Laser has any right to terminate the license
agreement. Lumenis Inc.'s answering statement also asserts that the Cool Laser
patents are invalid and unenforceable and that Cool Laser is estopped from
asserting them and further asserts that the arbitrators do not have jurisdiction
to hear a claim for patent infringement. Lumenis Inc.'s answering statement
seeks, inter alia, the dismissal of all of Cool Laser's claims with prejudice.
The members of the arbitration panel have not been appointed. The Company
20
believes that Cool Laser's claims are without merit, and the Company intends to
vigorously defend against them.
In addition to the foregoing, the Company is a party in certain actions in
various countries, including the U.S., in which the Company sells its products
in which it is alleged that the Company's products did not perform as promised
and/or that the Company made certain misrepresentations in connection with the
sale of products to the plaintiffs. Management believes that none of these
actions (other than those set forth above) that are presently pending
individually would have a material adverse impact on the consolidated financial
position of the Company, although such actions in the aggregate could have a
material adverse effect on quarterly or annual operating results or cash flows
when resolved in a future period.
Finally, the Company also is a defendant in various product liability
lawsuits in which the Company's products are alleged to have caused personal
injury to certain individuals who underwent treatments using the Company's
products. The Company is defending itself vigorously, maintains insurance
against these types of claims and believes that these claims individually or in
the aggregate are not likely to have a material adverse impact on the business,
financial condition or operating results of the Company.
The Company incurred litigation settlements and related expenses of
$8,909,000 in 2002. As of December 31, 2002 the Company has an accrual of
$14,600,000 (including the provision of $8,800,000 due to the settled 1998
class-action lawsuits, a provision of $1,300,000 for the Light Age matter and
$4,500,000 due to other litigation matters) reflecting management's estimate of
the Company's potential exposure with respect to certain, but not all, legal
proceedings, claims and litigation. With respect to the pending legal
proceedings and claims for which no accrual has been recorded in the financial
statements, Company management is unable to predict the outcome of such matters,
the likelihood of an unfavorable outcome or the amount or range of potential
loss, if any.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals are the executive officers and key management of
the Company:
NAME POSITION AND BUSINESS EXPERIENCE
Arie Genger Mr. Arie Genger, age 57, has been a director of the
Company and its Vice Chairman of the Board since July
2001and was appointed as Chief Executive Officer of the
Company in January 2003. In 1985, Mr. Genger founded
Trans-Resources, Inc. ("TRI"), of which he has been
Chairman of the Board and Chief Executive Officer since
1986. TRI is a privately owned specialty chemical
company. Mr. Genger is the father of Sagi Genger, the
Company's Chief Operating Officer.
21
Sagi Genger Mr. Sagi Genger, age 31, was appointed Chief Operating
Officer in July 2001 after having served as Chief
Financial Officer of the Company since November 1999.
Prior to joining the Company, Mr. Genger was employed in
the mergers and acquisitions department of Donaldson,
Lufkin, and Jenrette, a leading Wall Street investment
bank, during the period from 1997 through 1999. Prior to
that, Mr. Genger worked from 1996 through 1997 at
Holding Capital Group, a boutique investment house. Mr.
Genger has an MBA and BS in Finance, International
Management and Legal Studies from the Wharton School of
Business. Mr. Genger is the son of Mr. Arie Genger, Vice
Chairman of the Board of Directors and Chief Executive
Officer of the Company.
Kevin R. Morano Mr. Morano, age 49, was appointed Executive Vice
President and Chief Financial Officer in March 2002.
Prior to joining the Company, Mr. Morano served as
Executive Vice President and Chief Financial Officer at
Exide Technologies from May 2000 through October 2001.
Prior to that, Mr. Morano was employed for 21 years at
ASARCO Incorporated, a global copper mining, specialty
chemicals and aggregates producer. At ASARCO, Mr. Morano
held several leadership positions including serving as
President and Chief Operating Officer in 1999 and as
Chief Financial Officer from 1993 to 1999. Since
February 2000, Mr. Morano serves as an outside director
on the board of directors of APEX Silver Mines Ltd.,
Datawatch Corporation and Bear Creek Mining Co. Mr.
Morano received a BS in Finance from Drexel University
in 1977 and received an MBA from Rider University in
1983.
Shlomo Alkalay Mr. Alkalay, age 46, was appointed Executive Vice
President and Chief Information Officer (CIO) in May
2002. Prior to joining the Company, Mr. Alkalay served
from January 2000 as Executive Vice President of
Information Technology (IT) and Business Development in
Layam Ltd. (a subsidiary of Zim Israel Navigation Co.
Ltd.). From 1976 to 1999 Mr. Alkalay served as a Naval
Commander in the Israeli Navy and filled many tasks in
the IT and logistics fields. Mr. Alkalay holds a B.Sc.
degree with honors in Industrial Engineering from the
Technion, Haifa and received his Masters in Business
Administration from Haifa University.
Yossi Gal Mr. Gal, age 47, Executive Vice President of Human
Resources, joined the Company in July 2000. Prior to
joining the Company, Mr. Gal served as Vice President of
Human Resources and MIS in GE Medical Systems Israel
from 1997 to 2000. Previously, Mr. Gal worked with
Elscint Ltd. for 16 years in a number of managerial
positions, which included Human Resources, Planning and
Control Director of Elscint's Manufacturing Division and
Corporate Manager of Staffing and Overseas Personnel.
Mr. Gal has a B.A. in Sociology and Political Science
from Haifa University and an MSc. in Management &
Behavioral Science from the Technion.
22
Wade Hampton Mr. Hampton, age 47, was appointed Executive Vice
President of the Medical Business Unit, effective March
2003. Prior to joining the Company, Mr. Hampton served
as Vice President, International at Natus Medical. From
September 1999 to October 2001, Mr. Hampton served as
Vice President, International CMG. From July 1997 to
August 1999, Mr. Hampton served in various senior
management positions with Andros, Inc., a medical
products original equipment manufacturer, most recently
as president of the medical products division. From
October 1994 to July 1997, Mr. Hampton held various
positions with SpaceLabs Medical, a supplier of patient
monitoring equipment and clinical information systems,
most recently as an area director of sales in Latin
America. Mr. Hampton holds a Bachelor of Science degree
in Business Administration from the University of
Florida.
Moshe Grencel Mr. Grencel, age 49, Executive Vice President of
Operations, joined the Company in January 2001. Prior to
joining Lumenis, Mr. Grencel served as General Manager
of Elscint Industrial Solutions, a spin-off from Elscint
Ltd. from 1998 to 2001. From 1994 to 1998, Mr. Grencel
served as Vice President of Operations in Elscint and
Manager of the Operations Division. Mr. Grencel also
served in other capacities in Engineering, Operations,
Sales and Service support. Mr. Grencel has a B.Sc.
degree in Industrial Engineering from the Technion.
Zhai Qiying Mr. Qiying, age 38, Executive Vice President responsible
for operations in China and for Asia/Pacific
distributors, joined Lumenis as part of the CMG
acquisition in April 2001. In 1992, Mr. Qiying started
the Coherent operation in China and has managed it
through the Company's acquisition of CMG. He continues
to oversee Lumenis' China operations and has directed
the growth in the Company's Chinese business, which has
increased by 40 percent in the past year, bringing 2002
sales to approximately $23 million.
Stephen B. Kaplitt Mr. Kaplitt, age 35, was appointed Executive Vice
President and General Counsel in November 2001. Prior to
joining Lumenis he was a senior associate at Becker,
Glynn, Melamed & Muffly LLP, a boutique international
law firm in New York. While at Becker, Glynn he was
seconded to the International Finance Corporation in
Washington, DC, for two years. Before that he was an
associate at Cadwalader, Wickersham & Taft in New York.
In his law firm career he worked on a wide variety of
transactions involving mergers and acquisitions,
multilateral finance, asset securitization and
reorganizations. He received his B.A. with honors from
Dartmouth College and his JD cum laude from the
Georgetown University Law Center.
Franz Krammer Mr. Krammer, age 47, Executive Vice President - European
Operations, joined the company in May 2002. Mr. Krammer
has served in numerous top management positions for
General Electric, including General Manager and Regional
Executive, Central Europe, GE Capital Services
23
and General Manager, GE Medical Systems, Central Europe.
For Picker International Europe (later Marconi Medical
Systems Europe), Mr. Krammer served as VP Marketing,
European Operations and VP, European Operations.
Sharon Levita Ms. Levita, age 35, was appointed Executive Vice
President, Finance in October 2001. Ms. Levita has
served as senior manager at Lumenis since November 1999.
Prior to joining the company, she served for five years
as head of the Israeli Desk at KPMG, Hungary and before
that for four years at Luboshitz Kasierer, a member firm
of Arthur Andersen, in Israel. Ms. Levita holds a M.BA.
in Finance Management from Bar-Ilan University, a B.A.
in Accounting & Economics from Haifa University, and a
license as a CPA in Israel.
Alon Maor Mr. Maor, age 41, was appointed Executive Vice
President, Aesthetic Business Unit in July 2001. Prior
thereto, Mr. Maor served as Chief Executive Officer of
Asia Pacific Operations from January 2000. Mr. Maor
joined the Company in January 1999 as the President and
Representative Director of Lumenis Japan, in which
position he served until January 2000. Prior to joining
the Company, Mr. Maor was the President and
Representative Director of Direx Japan, a subsidiary of
Direx Medical Systems. During his eleven years with
Direx Medical Systems, he formed Direx Japan and was
responsible for capturing major market share in Japan
and Asia.
Nina Peled Ms. Peled, age 55, was appointed Executive Vice
President of Regulatory Affairs and Quality Assurance in
May 2002. Prior to joining Lumenis, Ms. Peled served as
vice president of scientific affairs at Amira Medical
from 1998 to 2002 and vice president of regulatory
affairs at Cygnus, Inc. from 1997 to 1998. Previously
she held various leading positions in the areas of
Regulatory Affairs, Quality Assurance, Clinical
Research, Research and Development and Business
Development at i-STAT Corporation and for sixteen years
at Boehringer Mannheim Corporation. Earlier in her
career she served as assistant professor of chemistry at
Rice University in Houston. Nina holds a B.Sc., M.Sc.
and Ph.D. from the Hebrew University in Jerusalem and an
Executive MBA from the University of Houston.
During March 2002, Cedar Chemical Corporation and Vicksburg Chemical Company,
related privately held corporations, which were indirectly majority owned by Mr.
Arie Genger, filed voluntary petitions for reorganization in the U.S. Bankruptcy
Court for the Southern District of New York (Case Nos. 0211039 and 02-11040
(SMB)).
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.
The Ordinary Shares of the Company were listed on the Nasdaq National
Market ("Nasdaq") on January 24, 1996. The Company began trading on September
17, 1999 under the ticker symbol "ESCM" and on September 24, 2001, following the
required Israeli authority approval of the new name, Lumenis Ltd., the Company
began trading under the ticker symbol "LUME."
As of June 23, 1999, Lumenis ceased being considered a "foreign private
issuer" under the Securities Exchange Act of 1934, as amended. Instead, the
Company began reporting under the broader disclosure obligations applicable to
United States issuers.
As of March 10, 2003 there were 265 shareholders of record of the Company.
The following table sets forth the high and low closing sale prices for the
Ordinary Shares of the Company as reported by Nasdaq for the periods indicated.
2001 HIGH LOW
---- ------- ------
First Quarter $ 24.06 $ 10.94
Second Quarter $ 30.24 $ 23.50
Third Quarter $ 30.05 $ 18.71
Fourth Quarter $ 21.07 $ 15.60
2002 HIGH LOW
---- ------ ------
First Quarter $ 23.35 $ 7.30
Second Quarter $ 10.64 $ 3.30
Third Quarter $ 6.55 $ 2.88
Fourth Quarter $ 4.67 $ 1.80
On March 21 2003, the closing price of our Ordinary Shares was $1.53.
The Company has never paid a cash dividend on its Ordinary Shares and does
not anticipate that it will pay any cash dividend on its Ordinary Shares in the
foreseeable future.
The Company intends to retain its earnings to finance the development of
its business. Any future dividend policy will be determined by Lumenis' Board of
Directors (the "Board") based upon conditions then existing, including the
Company's earnings, financial condition, tax position and capital requirements
as well as such economic and other conditions as the Board may deem relevant.
Pursuant to Lumenis' Articles of Association, certain dividends, referred to as
final dividends (which are comparable to annual dividends which are paid by some
United States companies), may be declared by the Board. In addition, depending
upon the factors described above, the Board may declare interim dividends.
Lumenis may only pay dividends in any given fiscal year out of "profits," which
generally are defined for Israeli statutory purposes to be after tax net
earnings. In addition, because Lumenis has received certain benefits under the
Israeli law relating to "Approved Enterprises," the payment of dividends by
Lumenis may be subject to certain Israeli taxes to which Lumenis would not
otherwise be subject. Furthermore, pursuant to the terms of certain financing
agreements, the Company is restricted from paying dividends to its shareholders.
In the event that cash dividends are declared by the Company, such dividends
will be paid in New Israeli Shekel ("NIS").
Dividends paid out of income derived from an Approved Enterprise under
Israeli law are subject to a 15% withholding tax. Approved Enterprises may
receive exemption from Israeli tax for up to 10 years (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Effective Corporate Tax Rate". Should dividends be paid out of income earned by
the Company from an Approved Enterprise during the tax exempt period, such
income will be subject to tax at the rate of up to 25%. The
25
Company does not anticipate paying dividends from income derived from the
Approved Enterprise and any such earnings distributed upon dissolution are not
expected to subject the Company to income taxes.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data was derived from the Company's
Consolidated Financial Statements, which have been prepared in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP"). The
financial data set forth below should be read in conjunction with, and are
qualified in their entirety by, the Company's Consolidated Financial Statements,
related notes and other financial information contained in this Annual Report.
26
For The Year Ended December 31,
------------------------------------------------------------
In thousands except per share data
2002 2001(*) 2000 1999 1998
---------- ------------ ---------- ---------- ---------
Revenues
Net Revenues $ 348,496 $ 315,201 $ 161,625 $ 142,151 $225,206
Other Revenues -- -- -- -- --
348,496 315,201 161,625 142,151 225,206
Cost of Revenues 179,085 155,643 66,448 96,474 78,585
--------- --------- --------- --------- --------
Gross Profit 169,411 159,558 95,177 45,677 146,621
--------- --------- --------- --------- --------
Operating Expenses
Research and Development, Net 29,026 21,766 11,887 14,725 18,480
In process Research and Development -- 47,853 -- -- 2,451
Selling, Marketing and Administrative
expenses 149,536 180,157 62,479 104,231 91,549
Restructuring costs -- -- -- 20,530 --
Litigation expenses 8,909 22,244 -- 23,780 --
Impairment and write-down of
intangible and tangible assets -- 5,455 -- 17,616 --
Amortization of goodwill and other
intangible assets 9,531 13,978 -- -- --
Other -- -- -- 4,987 --
--------- --------- --------- --------- --------
Total Operating Expenses 197,002 291,453 74,366 185,869 112,480
--------- --------- --------- --------- --------
Other Operating Income -- -- 1,450 -- --
--------- --------- --------- --------- --------
Operating Income (loss) (27,591) (131,895) 22,261 (140,192) 34,141
Other income 1,720 -- 599 -- --
Financing Income (expenses), Net 14,384 (11,897) (4,470) (3,865) 1,211
--------- --------- --------- --------- --------
(40,255) (143,792) 18,390 (144,057) 35,352
Nonrecurring Expenses -- -- -- -- 28,951
--------- --------- --------- --------- --------
Income (loss) Before Income Taxes (40,255) (143,792) 18,390 (144,057) 6,401
Taxes on Income 2,250 (520) 280 4,079 2,201
--------- --------- --------- --------- --------
Net Income (loss) after income taxes (42,505) (143,272) 18,110 (148,136) 4,200
Company's share in losses of affiliates 1,703 2,596 1,120 626 200
--------- --------- --------- --------- --------
Net Income (loss) before extraordinary
items (44,208) (145,868) 16,990 (148,762) 4,000
Extraordinary gain on purchase of
Company's Subordinated -- -- 292 7,974 --
Convertible Notes 92 -- -- -- --
--------- --------- --------- --------- --------
Net income (loss) for the year $ (44,116) $(145,868) $ 17,282 $(140,788) $ 4,000
========== ========== ========== ========== ========
Earning (loss) Per Share
Basic
Income (loss) before
extraordinary items $ (1.19) $ (4.52) $ 0.67 $ (5.79) $ 0.15
Extraordinary gain -- -- 0.01 0.31 --
--------- --------- --------- --------- --------
Net earnings (loss) per share $ (1.19) $ (4.52) $ 0.68 $ (5.48) $ 0.15
========== ========== ========== ========== ========
Diluted
Income (loss) before
extraordinary items $ (1.19) $ (4.52) $ 0.60 $ (5.79) $ 0.15
Extraordinary gain -- -- -- -- 0.01
--------- --------- --------- --------- --------
Net earnings (loss) per share $ (1.19) $ (4.52) $0.61 ) $ (5.48) $ 0.15
========== ========== ========== ========== ========
Weighted Average Number Of Shares
Basic 37,184 32,302 25,354 25,674 26,027
Diluted 37,184 32,302 28,217 25,674 27,381
Cash and cash equivalents $ 18,106 $ 31,400 $ 43,396 $ 24,524 $ 42,950
Total assets 370,002 392,535 179,529 174,907 327,666
Long-term liabilities 146,401 168,492 93,930 96,691 116,306
Retained earning (deficit) (286,677) (242,561) (96,693) (113,975) 26,813
Total shareholder's equity $ 39,896 $ 79,366 $ 27,863 $ 5,943 $155,508
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (IN THOUSANDS, EXCEPT PER SHARE DATA)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of the Company's financial condition
and results of operations is based upon Lumenis' consolidated financial
statements, which have been prepared in accordance with generally accepted
accounting principles in the U.S.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent liabilities. On an
ongoing basis, the Company evaluates its estimates, including those related to
product returns, bad debts, inventories, investments, tangible and intangible
assets, income taxes, financing, warranty obligations, restructuring, long-term
service contracts, contingencies and litigation.
The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
Lumenis believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. For a detailed discussion of the application of these and
other accounting policies, see Note 3 to the Consolidated Financial Statements.
Inventories are presented at the lower of cost or market. Inventory
reserves are provided to cover risks arising from excess or slow-moving items or
technological obsolescence.
We regularly review inventory quantities on hand and record a provision for
excess and obsolete inventory. Demand for our products can fluctuate
significantly. Our products are characterized mainly by rapid technological
change, frequent new product development and rapid product obsolescence that
could result in an increase in the amount of obsolete inventory quantities on
hand. Additionally, our estimates of future product demand may prove to be
inaccurate, in which case we may have understated or overstated the provision
required for excess and obsolete inventory. Although we make every effort to
ensure the accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have a
significant impact on the value of our inventory and our reported operating
results.
Revenues from product sales are recognized when delivery has occurred,
persuasive evidence of an agreement exists, the fee is fixed or determinable and
collectibility is probable. The costs of insignificant related obligations
(mainly installations and training which are not material to functionality) are
accrued when the related revenue is recognized. Estimated sales returns are
accrued upon recognition of sales based on Lumenis' experience and management's
estimates. Revenues from service contracts are recognized on a straight-line
basis over the life of the related service contracts.
The allowance for doubtful accounts is recorded, based on management's
estimates, partially on the basis of specific accounts receivable whose
collectibility is uncertain and partially as a percentage of accounts receivable
based on the aging of the past due amount. The allowance for doubtful accounts
as of December 31, 2002 and 2001 amounted to $17,689 and $19,744, respectively.
Intangible assets (patents, know-how, Coherent name, product trade names,
developed technology, covenant not to compete) are amortized by the
straight-line method over periods of principally between two and fifteen years.
Other intangible assets are reviewed for impairment in accordance with SFAS No.
144, whenever events such as product discontinuance, plant closures, product
dispositions or other changes in circumstances indicate that the carrying amount
may not be recoverable. When such events occur, the
28
Company compares the carrying amount of the assets to undiscounted expected
future cash flows. If this comparison indicates that there is impairment, the
amount of the impairment is calculated using discounted expected future cash
flows. The discount rate applied to these cash flows is based on the Company's
weighted average cost of capital, which represents the blended after-tax costs
of debt and equity. Any impairment loss is recognized in the statement of
operations. During the year ended December 31, 2002, the Company rec