UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From ____ to _____
Commission File Number 0-13012
ESC MEDICAL SYSTEMS LTD.
(Exact name of registrant as specified in its charter)
Israel N.A.
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 240, Yokneam, Israel 20692
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 972-4-9599000
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 _
The number of shares outstanding of the registrant's common stock as
of September 30, 1999 was 27,562,492 Ordinary Shares, NIS 0.10 par value
per share.
ESC MEDICAL SYSTEMS LTD.
FORM 10-Q
For the Quarter Ended September 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
1) Consolidated Balance Sheets
2) Consolidated Statements of Operations
3) Consolidated Statements of Cash Flows
4) Notes to Condensed Interim Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings
ITEM 6 Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
# # # # # #
ESC MEDICAL SYSTEMS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
(UNAUDITED) (RESTATED)
U.S.$ U.S.$
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 22,076 $ 42,950
Short-term investments 49,964 46,867
Trade receivables (net of allowances of $ 26,805 in 1999
and $ 10,480 in 1998) 43,779 78,392
Prepaid expenses and other receivables 6,516 12,824
Inventories 40,932 61,200
163,267 242,233
LONG-TERM INVESTMENTS
Bank deposits and securities 16,800 41,350
Investments in companies 6,168 5,469
FIXED ASSETS 5,978 13,877
OTHER ASSETS 5,730 24,737
Total assets $ 197,943 $ 327,666
CURRENT LIABILITIES
Short-term debt and current maturities of long-term loans $ 1,220 $ 3,533
Accounts payable and accrued expenses 56,716 52,319
57,936 55,852
LONG TERM LIABILITIES
Loans from banks 45 61
Accrued severance pay 1,170 1,245
Convertible subordinated notes 107,104 115,000
108,319 116,306
Total liabilities 166,255 172,158
SHAREHOLDERS' EQUITY
Ordinary shares of NIS 0.10 par value: Authorized - 50,000,000
Shares; Issued and outstanding - 27,562,492 shares as of
September 30, 1999 and 27,314,605 shares as of December
31, 1998 563 553
Paid-in capital 137,530 135,756
Retained earnings (accumulated deficit) (94,785) 26,813
Treasury shares, at cost (1999 - 1,644,443 shares;
1998 -1,054,813 shares)
(11,620) (7,614)
Total shareholders' equity 31,688 155,508
Total liabilities and shareholders' equity $ 197,943 $ 327,666
The accompanying notes are an integral part of these financial statements.
</TABLE>
ESC MEDICAL SYSTEMS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED)
U.S.$ U.S.$ U.S.$ U.S.$
NET SALES $ 30,313 $ 53,847 $102,032 $177,000
COST OF SALES 26,000 18,264 78,562 60,620
Gross profit 4,313 35,583 23,470 116,380
RESEARCH AND
DEVELOPMENT COSTS, NET 3,426 4,576 12,678 13,511
MARKETING AND SELLING EXPENSES 16,734 19,521 56,068 55,467
ADMINISTRATIVE AND
GENERAL EXPENSES 14,692 3,399 24,809 11,318
RESTRUCTURING COSTS 11,988 - 23,234 -
PROXY EXPENSES 426 - 3,274 -
OTHER EXPENSES 11,891 - 22,641 -
Total operating expenses 59,157 27,496 142,704 80,296
Operating income (loss) (54,844) 8,087 (119,234) 36,084
FINANCING INCOME, NET 1,707 803 1,330 962
(53,137) 8,890 (117,904) 37,046
NONRECURRING EXPENSES - - - 28,951
Income (loss) before income
taxes (53,137) 8,890 (117,904) 8,095
INCOME TAXES 2,995 850 3,693 3,028
Net income (loss) $(56,132) $ 8,040 $(121,597) $ 5,067
NET INCOME (LOSS) PER SHARE
Basic $ (2.16) $ 0.30 $ (4.69) $ 0.19
Diluted $ (2.16) $ 0.29 $ (4.69) $ 0.18
WEIGHTED AVERAGE NUMBER
OF SHARES
Basic 25,926 26,798 25,940 26,405
Diluted 25,926 27,719 25,940 27,647
The accompanying notes are an integral part of these financial statements.
ESC MEDICAL SYSTEMS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(121,597) $ 5,067
Adjustments to reconcile net income to net cash
provided by operating activities -
Expenses not affecting operating cash flows:
Restructuring costs and inventory writedowns 42,972 -
Deferred income taxes 4,993 (1,945)
Amortization of deferred compensation 96 240
Gain on purchase of convertible notes (2,863) -
Depreciation and amortization 5,566 16,539
Writeoff of intangibles 15,891 -
Other 220 356
Changes in operating assets and liabilities:
Decrease (increase) in short-term investments (3,097) 29,300
Decrease (increase) in trade receivables 29,853 (30,590)
Decrease in other receivables 1,576 1,634
Decrease (increase) in inventories 530 (15,415)
Decrease in accounts payable and accrued
expenses (6,626) (2,822)
Net cash provided by (used in) operating
activities (32,486) 2,364
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for purchase of subsidiaries, net of
cash acquired - (2,450)
Purchase of fixed assets (1,559) (4,570)
Sale of investment - 368
Investments in patents and know-how - (5,207)
Maturity of (additions to) long-term
investments 24,550 (6,254)
Net cash provided by (used in) investing
activities 22,991 (18,113)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options 161 7,700
Purchase of convertible notes (5,205) -
Repayment of long-term loans (122) (11,089)
Decrease in short-term bank debt, net (2,207) (237)
Purchase of treasury shares (4,006) -
Net cash used in financing activities (11,379) (3,626)
DECREASE IN CASH AND CASH EQUIVALENTS (20,874) (19,375)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,950 54,616
CASH AND CASH EQUIVALENTS AT END OF PERIOD 22,076 35,241
The accompanying notes are an integral part of these financial statements.
ESC MEDICAL SYSTEMS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
(In thousands) (Unaudited)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30
1999 1998
NONCASH ACTIVITIES
Tax benefit of options exercised by employees $ $ 610
CASH PAID DURING THE PERIOD IN RESPECT OF:
Income taxes 546 427
Interest 6,895 7,631
PURCHASES OF SUBSIDIARIES
Assets and liabilities at date of purchase:
Working capital (excluding cash) 556
Fixed assets (19)
Intangibles (3,987)
(3,450)
Short-term liabilities incurred in connection
with purchase 1,000
Cash paid, net (2,450)
The accompanying notes are an integral part of these financial statements.
ESC MEDICAL SYSTEMS LTD.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States relating to
the provision of interim financial information. Accordingly, they
do not include all of the information and notes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30,
1999, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further
information, refer to the financial statements and notes for the
year ended December 31, 1998.
NOTE 2 - INVENTORIES
Inventories are composed of the following:
SEPTEMBER 30 DECEMBER 31
1999 1998
(UNAUDITED) (AUDITED)
(IN THOUSANDS)
Raw materials $ 17,898 $ 20,309
Work in process 8,120 10,106
Finished products 14,914 30,785
40,932 61,200
NOTE 3 - RESTRUCTURING COSTS AND OTHER CHARGES
In the first and third quarters of 1999, the Company implemented
two restructuring programs of its business operations. In that
connection, the Company recorded writedowns of inventories
(included in cost of goods sold) of approximately $16.6 million
and $8.9 million in the first quarter and third quarter,
respectively, pertaining mostly to the Company's decision to
eliminate a number of products.
The restructuring charges in the first and third quarters
amounted to $11.2 million and $12 million, respectively. These
charges were comprised of writedowns of receivables in the first
quarter of $4.6 million, writedowns of fixed assets of $1.6
million and $5.7 million in the first quarter and third quarter,
respectively, and severance charges and lease and other contract
termination costs of $5 million and $6.2 million in the first
quarter and third quarter, respectively. The majority of the
restructuring charges related to the Company's divisions in the
U.S.
As of September 30, 1999, the unutilized accrual amounted to $8.5
million. It is expected that the restructuring programs will be
substantially completed by the end of March 2000.
NOTE 4 - GEOGRAPHICAL SEGMENTS
The company's activities fall within two reporting geographical
segments: the U.S.A. and the rest of the world (ROW). The
following table sets forth segment information for three month
and nine month periods ended September 30, 1999 and 1998 (in
thousands):
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
Revenues
U.S.A. $ 9,046 $ 30,676 $ 37,369 $ 99,376
ROW $ 21,267 $ 23,171 $ 64,663 $ 77,624
Consolidated 30,313 53,847 102,032 177,000
Operating income (loss)
U.S.A. $(33,332) $ (3,940) $(91,943) $(11,879)
ROW (9,195) 12,027 (1,376) 47,963
Consolidated (1) (54,844) 8,087 (119,234) 36,084
Financing income, net 1,707 803 1,330 962
Nonrecurring expenses - - - 28,951
Income (loss) before
income taxes $ (53,137) $ 8,890 $ (117,904) $ 8,095
SEPTEMBER 30
1999 1998
Identifiable Assets
U.S.A. $ 58,763 $ 112,555
ROW 128,928 210,770
Consolidated (2) $ 197,943 $ 337,347
(1) Includes unallocated corporate expenses of $12,317 and
$25,915 for three month and nine month periods ended
September 30, 1999. These include $426 of proxy expenses and
$11,891 of other expenses for the three month period and
$3,274 of Proxy expenses and $22,641 of other expenses for
the nine month period.
(2) Includes investments in companies and other assets not
allocable to a particular segment of $10,252 as of September
30, 1999 and $14,022 as of September 30, 1998.
NOTE 5 - CONTINGENT LIABILITIES
(1) In September 1995, Laser and SLI (Laser's subsidiary in the
U.S.A.) instituted a patent infringement suit against a
California company, which counterclaimed for declaratory
judgment of patent invalidity, unenforceability and
non-infringement. Subsequently, such company also filed a
complaint against Laser and SLI for claims under the Federal
anti-trust laws, federal unfair competition law (Lanham Act)
and California state laws, requesting a judgment for damages
of not less than $20 million.
The District Court entered summary judgement in favor of the
California company on Laser's claim of infringement and
further held that Laser's lawsuit was objectively baseless.
The Court has scheduled a trial on the parties' remaining
claims in the litigation for April 24, 2000. Laser has
appealed the summary judgement award and if Laser's appeal
is successful, Laser intends to ask the court to vacate its
determination that Laser's patent suit was objectively
baseless, and will renew its motion to dismiss the antitrust
and Lanham Act allegations remaining in the California
company counter-suit against Laser.
Company management is unable to predict the final outcome of
these claims. However, management intends to defend this
action vigorously, including its appeal from the Court's
award of Summary Judgement. Oral arguments for Laser
Industries' appeal of the District Court's ruling of patent
invalidity, has been set for December 8, 1999 before the
United States Court of Appeals for the Federal Circuit.
(2) In late 1998 the Company and one of its officers were named
in a series of securities class action lawsuits. These
lawsuits have now been consolidated before the United States
District Court for the Southern District of New York. In
addition to the Company and certain of the Company's
officers and directors who have been named as defendants,
the consolidated complaint names certain former officers and
directors of the Company's Laser Industries Ltd. subsidiary
as defendants. The actions seek damages and attorneys fees
under the United States securities laws for alleged
"tipping" of non-public information to an investment banker
in September 1998 and for alleged irregularities in the way
in which the Company reported its financial results and
disclosed certain facts throughout 1997 and 1998. Management
of the Company believes that the Company's directors and
officers' liability insurance applies to the claims made in
this consolidated action and has informed the Company's
insurance carrier of the claims. (The insurance carrier has
agreed to assume the defense of action while reserving all
of its rights under the applicable insurance policy).The
Company has until the end of November 1999 to answer, move
or otherwise respond to the consolidated amended complaint.
(3) On November 9, 1998, Light Age, Inc. ("Light Age")
instituted a statement of claim and an application for
preliminary injunction in the Tel-Aviv District Court (the
"Tel-Aviv Court") against the Company and others, seeking
injunctions against the development, production and sale of
the Company's Alexandrite laser for dermatological or hair
removal treatments. On January 25, 1999, the Company, along
with three affiliated entities, brought an action in the
Superior Court of New Jersey, Somerset County, against Light
Age, Inc. entitled Laser Industries Ltd., ESC Medical
Systems Inc., Sharplan Lasers Inc., and ESC Medical Systems
Ltd. v. Light Age, Inc., Docket No. SOM-L-14199. The
litigation relates to disputes arising out of an agreement
between Light Age and Laser Industries pursuant to which
Light Age supplied certain medical laser devices to Laser
Industries. On July 1, 1999, the U.S. Court granted
defendant Light Age's motion to compel the Company and the
three affiliated entities to arbitrate. On August 13, 1999,
Light Age filed a demand for arbitration on its counterclaim
with the American Arbitration Association. To date, the
arbitration has not progressed beyond the demand stage.
Pending the outcome of the U.S. arbitration, Light Age and
the Company agreed to file a motion to stay the proceedings
in Tel-Aviv. On October 14, 1999, the Tel-Aviv Court
confirmed the motion as requested and stayed the
proceedings.
(4) On December 31, 1998, the Company and Luxar were named as
defendants in an action filed in the United States District
Court for the Southern District of Florida (the "Florida
Court"), entitled LPG USA, Inc. v. ESC Medical Systems, Ltd.
and Luxar Corporation, Civ, No. 98-7509 (S.D. Fla.).
Discovery closes on December 1, 1999, and a trial is
currently scheduled to begin the week of January 14, 2000.
The action alleges violations of the Lanham Act (including
false advertising and trade dress infringement) and related
state laws (including trade secret and unfair competition
laws). The plaintiffs in the action are seeking an
injunction and monetary damages of an unspecified amount.
The Company and Luxar filed an answer which also asserted
counterclaims for intentional interference with business
relationships and prospective business relationships, trade
libel and product disparagement, Lanham Act violations,
unfair competition and related counterclams.
(5) The Company and its subsidiaries are involved in further
legal proceedings, claims and litigation arising in the
ordinary course of business. In the opinion of management,
the outcome of such current legal proceedings, claims and
litigation could have a material effect on quarterly or
annual operating results or cash flows when resolved in a
future period. However, in the opinion of management, each
of these matters individually is not likely to materially
affect the Company's consolidated financial position.
An accrual in the amount of $4.5 million has been recorded in
other expenses to cover estimated probable losses arising from
the abovementioned legal proceedings. The Company is not
presently able to estimate any additional loss that may be
reasonably possible, in addition to the amount accrued. The
Company reassesses these matters as new facts are brought to its
attention.
NOTE 6 - WRITEOFF OF OTHER ASSETS
In connection with the evaluation of certain intangibles, the
Company recorded a writeoff of goodwill and other intangibles in
the amount of $6.3 million in the second quarter of 1999 and $9.6
million in the third quarter of 1999. These writeoffs are
included in other expenses in the statement of operations.
NOTE 7 - PROXY EXPENSES
In connection with the director election contest held during the
second quarter, the Company has incurred expenses of $1.8
million. In addition, in accordance with the resolution of the
Board of Directors of the Company in a meeting held on September
23, 1999, all cost and expenses of Messrs. Genger and Gottstein
and their affiliates in connection with the director election
contest shall be reimbursed by the Company promptly on submission
of invoices therefor. The reimbursement is subject to refund
should such reimbursement not be approved by the shareholders.
Messrs. Genger and Gottstein have submitted to the Company
invoices in the amount of $1.5 million which have been included
in proxy expenses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ESC Medical Systems Ltd. ("ESC" or the "Company") is a world leader in the
design, manufacture, marketing and servicing of a broad range of medical
devices that incorporate proprietary intense pulsed light technology,
state-of-the-art lasers and accessories as well as other technologies. The
Company's systems incorporate these technologies for applications in
aesthetic dermatology, plastic and re-constructive surgery, ear, nose and
throat procedures and oral and dental surgery, among others. The Company's
systems are designed for use in a variety of medical environments, ranging
from physicians' offices to acute care hospitals.
In this Report, unless the context otherwise requires, all references to
the "Company" are to ESC Medical Systems Limited, an Israeli corporation
and its direct and indirect wholly owned subsidiaries.
On September 14, 1999 the Board of Directors approved a comprehensive
restructuring program designed to align the Company's cost structure with
its revenue capabilities, while capitalizing on the market potential of its
innovative light technology products, including products in various
development and regulatory stages.
The restructuring plan was developed by the Company's senior management
team, together with the consulting firm of McKinsey & Company. The vast
majority of the plan should be implemented by the close of the quarter
ended March 31, 2000. Under the plan, ESC Medical Systems will:
. Continue to reduce or eliminate certain fixed and variable costs
from the organizational structure. If those cost savings would
have been implemented prior to January 1, 1999, management
estimates that expenses would have been over $40 million lower as
compared to annualized revenue and expense levels in the first
half of the year. The cost reductions include over $25 million in
selling, general and administrative expenses not considered
essential to the continued growth of sales.
. Reduce headcount in certain departments, adjust certain employee
compensation plans and reduce non-core R&D expenditures.
. Bring the selling and marketing team closer to the customers and
markets being served.
. Reorganize the internal reporting structure of the Company in a
manner intended to provide all management levels with greater
visibility.
A number of personnel changes took place during the quarter, some of which
were related to the restructuring. Changes included the replacement of the
Company's CFO and the formation of three geographic business units for
aesthetic and surgical sales. Other vice president level positions were
eliminated. The Company expects to be fully organized by geographic
business unit by January 2000.
The headcount of the Company as of October 31,1999 was 754 down from 854 on
June 30, 1999. As of November 10, 1999, 84 employees were on notice that
they will be laid off.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE
AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 (In thousands of U.S.
Dollars)
NET SALES. The Company's net sales decreased by 44% to $30,313 for the
three months ended September 30, 1999 compared to $53,847 for the three
months ended September 30, 1998. For the nine months ended September 30,
1999, net sales decreased by 42% to $102,032 compared to $177,000 for the
comparable period in 1998.
Most of the decrease in sales is attributable to decreased unit sales and
lower selling prices in the U.S. aesthetic markets. Net sales in the U.S.
decreased by 70% for the three months ended September 30, 1999 from the
comparable period in 1998, compared with a decrease of 8% for the same
period in the rest of the world. The Company increased its reserves for
sales returns by $2,450.
GROSS PROFIT. Gross profit decreased by 88% to $4,313 for the three months
ended September 30, 1999 from $35,583 for the three months period ended
September 30, 1998. Gross profit for the nine months ended September 30,
1999 decreased by 80% to $ 23,470 from $116,380 for the nine months ended
September 30, 1998. Excluding write off of inventory and other reserves
gross profit for the three and nine months ended September 30, 1999 was
$13,955 and $53,520 respectively.
RESEARCH AND DEVELOPMENT COSTS, NET. Net research and development costs
decreased by 25% to $3,426 for the three months ended September 30, 1999
from $4,576 in the three month ended September 30, 1998. For the nine
months ended September 30, 1999, net research and development costs
decreased by 6% to $12,678 from $13,511 for the comparable period in 1998.
The decrease in research and development costs, net is due to reduction in
staff and lower material consumption.
MARKETING AND SELLING EXPENSES. Marketing and selling expenses decreased by
14% to $16,734 for the three months ended September 30, 1999 compared to
$19,521 for the same period in 1998. For the nine months ended September
30, 1999, marketing and selling expenses increased 1% to $56,068 from
$55,467 for the comparable period in 1998. The decrease in the third
quarter expense was due to a lower sales level and reduction in staff.
ADMINISTRATIVE AND GENERAL EXPENSES. Administrative and general expenses
increased by 332% to $14,692 for the three months ended September 30, 1999
from $3,399 for the three months ended September 30, 1998. For the nine
months ended September 30, 1999, administrative and general expenses
increased 119% to $24,809 from $11,318 for the comparable period in 1998.
Administrative and general expenses for the three month period ending
September 30, 1999 include bad debt charges of $10,780 and litigation
expenses of $2,800.
RESTRUCTURING COSTS. In the quarter ended March 31, 1999, the Company
developed and started the implementation of a restructuring plan. In
connection with that restructuring plan, the Company recorded in the first
quarter charges of $11,246 related to its sales and marketing operations
and $16,608 related to inventory write-off (included in the cost of goods
sold).
In the third quarter of 1999, the Company commenced another restructuring
program. In that connection, the Company recorded writedowns of inventories
(included in cost of goods sold) of approximately $3,100. The restructuring
charge amounted to $12 million is comprised of writedowns of fixed assets
of $5.7 million and severance charges and lease contract termination of
$6.2 million. The majority of the restructuring charge related to the
company's divisions in the USA. The restructuring program provides for a
reduction of approximately 58 employees. In addition the Company recorded
$8,337 of expenses associated with the same plan which was charged to
operating and income tax expense. The Company expects about another $5,000
charges related to the restructuring plan through the year 2000.
PROXY EXPENSES. The $3,274 of expenses incurred during 1999 in connection
with the director election include an expected reimbursement of certain
shareholder expenses, in accordance with the resolution of the Board of
Directors of the Company in a meeting held on September 23, 1999 which
resolved that "all cost and expenses of Messrs. Arie Genger and Barnard J.
Gottstein and their affiliates in connection with the directors election
contest shall be reimbursed by the Company promptly on submission of
invoices therefore subject to refund when such reimbursement is submitted
to shareholders and not approved by such shareholders at a meeting noticed
for such purpose". Messrs. Genger and Gottstein have submitted to the
Company invoices for a sum of approximately $1,510. The officers and
directors of the Company at the time incurred expenses of $1,764, those
expenses were charged to the Company.
OTHER EXPENSES. For the three months ended September 30, 1999, other
expenses were $11,891 comprised mainly of the following: (i) $9,642
intangible assets write off related to goodwill from acquisitions and (ii)
a provision of $1,250 related to the fee of McKinsey & Co.
OPERATING INCOME (LOSS). For the three months ended September 30, 1999,
operating loss was $54,844 compared to operating income of $8,087 for the
same period in 1998. For the nine months ended September 30, 1999,
operating loss was $119,234 compared to operating income of $36,084 for the
same period in 1998.
FINANCING INCOME (EXPENSES), NET. For the three months ended September 30,
1999, financing income was $1,707 compared to financing income of $803 for
the three months ended September 30, 1998. For the nine months ended
September 30, 1999, financing income was $1,330 compared to financing
income of approximately $962 for the comparable period in 1998. The primary
reasons for the change in net financing income were a decrease in interest
income, foreign currency exchange gain and gain on repurchases of 7,896 of
the companys 6% subordinated convertible notes.
INCOME TAXES. Income taxes was $2,995 for the three months ended September
30, 1999 compared to $850 for the three months ended September 30,1998. For
the nine months ended September 30, 1999, income taxes was $3,693 compared
to $3,028 for the same period in 1998. For 1999 income taxes included write
offs of deferred tax assets for the net amount of $2,383.
NET INCOME(LOSS). As a result of the foregoing factors, the Company's net
loss was $56,132 for the three months ended September 30, 1999 compared to
net income $8,040 for the three months ended September 30,1998. For the nine
months ended September 30,1999, net loss was $121,597 compared to net
income of $5,067 for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands of dollars)
As of September 30, 1999, the Company had cash and cash equivalents of
approximately $22,076 compared to approximately $42,950 on December 31,
1998. The decrease of $20,874 is mainly attributable to (i) the repurchase
of the Company's 6% Convertible Notes for $5,205; (ii) the repurchase of
shares of the Company's common stock for $4,006; (iii) the decrease of
short-term bank debt by $2,207; (iv) the use of cash for operational
activities in the amount of $32,486; and (vii) capital expenditures
totaling $1,559, all offset partially by the maturing of long term
investments in an amount of $24,550.
Despite the expected negative cash-flow over the next nine months, the
management of the Company believes that available cash and borrowing power
will be sufficient over at least the next 12 months to meet its presently
anticipated day-to-day operating expenses, material commitments, working
capital and capital expenditures including those in connection with the
restructuring plan currently being developed, announced share repurchase
program and possible continued purchase of the 6% subordinated convertible
notes.
INVESTING ACTIVITIES
(in thousands of dollars)
For the nine months ended September 30, 1999 cash provided by investing
activities was approximately $22,991. The primary changes in the Company's
investing activities were the maturity of $24,550 in long-term investments
which was used in operations activities and use of cash of approximately
$1,559 to purchase fixed assets.
FINANCING ACTIVITIES
(in thousands of dollars)
For the nine months ended September 30,1999 cash used in financing
activities was $11,379. The primary financing activities of the Company
included (i) the repurchase of shares of the Company's Common Stock for
$4,006, (ii) the repurchase the Company's 6% Convertible Notes for $5,205
and (iii) the payment of short-term and long term bank loans totaling
$2,329.
YEAR 2000
The Company is committed to assuring "Year 2000 compliance" for its
facilities and products. Year 2000 compliance means that when the new
century begins on January 1, 2000 systems and products using date
information in various ways (display, calculations, etc.) will continue to
perform normally.
The Company initiated a program in 1998 to assess the risks of Year 2000
noncompliance, remediate all noncompliant systems and assess the readiness
of key third parties. In January 1999, a Year 2000 Task Force was created
headed by a vice president, with direct reporting to the executive
management of the company. The Task Force includes 8 internal personnel
including managers from each of the Company's principal operational areas
including finance, IT, manufacturing and distribution. The Task Force is
also assisted by third party consultants.
The inventory and assessment phases are complete for critical internal
information technology (IT) systems and the Company has completed over 90%
of the remediation phase of these systems as of September 30, 1999.The
Company anticipate to complete 100% of the remeditaion phase for IT systems
by the end of December, 1999. The inventory and assessment and remediation
phases for non-IT systems (including production facilities worldwide) is
substantially complete.
The remediation process includes both the upgrading of existing systems and
the replacement of various critical systems. All critical aspects of the
Company's Year 2000 compliance program are believed to be in place. The
Company has also included a complete list of its products, and the status
of their Year 2000 readiness, on the Company's official web site
(www.escmed.com).
While some of the risks relating to third party readiness are outside of
the Company's control, the Company has instituted programs, including
internal records review and external questionnaires and supplier audits, to
identify key third parties and assess their level of Year 2000 readiness.
Suppliers and vendors of the Company as well as providers of goods and
services to the Company have been contacted to evaluate the state of their
Year 2000 readiness. At this point the Company has no reason to believe
that any of its significant suppliers, vendors and providers of goods and
services will be unable to meet their business obligations to the Company
beyond the end of the year 1999 and into the year 2000. However, the
Company's business might be adversely affected if its significant vendors
and suppliers cannot meet their business obligations as a result of
difficulties with the Year 2000 compliance.
Contingency plans (including the substitution of systems, use of manual
methods and other means to prevent the failure of critical systems from
having a material effect on the Company) are in place, particularly for
high-risk areas such as those involving supplier and product management.
Third party-based contingency plans, including securing alternate suppliers
and alternate lines of communication with customers and suppliers, as well
as advance ordering and staging of materials, have been developed to
address the risks of noncompliance.
As of September 30, 1999 the Company has spent $70,000 on its Year 2000
compliance program. The total costs of the Year 2000 compliance program are
not expected to exceed $100,000. All expenditures are funded by working
capital expensed as incurred and they are not expected to have a
significant impact on the Company's ongoing results of operations.
The Company believes that its Year 2000 program will identify and correct
all material non-compliant systems and operations before the end of 1999.
The Company also expects to have contingency plans that will avoid failures
having a material effect on the Company's business operations or financial
condition in place before the end of 1999. However, there can be no
assurance that the Company's Year 2000 program will identify and correct
all non-compliant systems of the Company and its third party service
providers or that any such failure will not have a material effect on the
Company's business operations or financial condition.
CAUTIONARY STATEMENTS
Certain statements made in this Form 10-Q reflect the Company's estimates
and beliefs and are intended to be, and are hereby identified as, `forward
looking statements' for the purposes of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.
These forward-looking statements can be identified by the use of words such
as "expects," "plans," "will," "estimates," "forecasts," "projects" and
other words of similar meaning. One can also identify them by the fact that
they do not relate strictly to historical or current facts. These
statements are likely to address the Company's growth strategy, financial
results, product approvals and development programs.
The Company cautions readers that such forward looking statements involve
risks and uncertainties that could cause actual results to differ
materially from those expected by the Company or expressed in the Company's
forward looking statements. These factors include, but are not limited to,
the following: (1) risks associated with the Company's dependence on a
limited number of products; (2) uncertainty of market acceptance of the
Company's products; (3) limited number of customers for the Company's
products; (4) risks of downturns in economic conditions generally, and in
the health care industry specifically; (5) risks associated with
competition and competitive pricing pressures; (6) risks associated with
uncertainty of the Companies ability to timely consume the restructuring
plans, including the reduction in head-count, and (7) other risks described
in the Company's filings with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on forward-looking
statements made in this Form 10-Q. Such forward-looking statements reflect
management's analysis only as of the date such statements are made and the
Company undertakes no obligation to revise publicly these forward-looking
statements to reflect events or circumstances that arise subsequently.
Readers should carefully review the risk factors described in documents the
Company files from time to time with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The cost of the Company's operations in Israel is influenced by the extent
to which any increase in the rate of inflation in Israel compared to the
currencies of its markets (the "Revenue Currencies", mainly the U.S. Dollar
and Euro) is not offset (or is offset on a lagging basis) by the
devaluation of the New Israeli Shekel (NIS) in relation to those
currencies. Inflation in Israel will likely have a negative impact on the
profitability of the Company of contracts under which the Company is to
receive payment in revenue currencies, unless such inflation is offset by a
devaluation of the NIS. Inflation in Israel and currency fluctuations will
also have a negative effect on the profitability to the Company of fixed
price contracts under which the Company is to receive payments in NIS.
A devaluation of the NIS in relation to the U.S. Dollar (the "Dollar") will
have the effect of decreasing the dollar value of any assets of the Company
which consist of NIS (unless such assets are linked to another currency).
Such a devaluation would also have the effect of reducing the Dollar amount
of any liabilities of the Company which are payable in NIS (unless such
payables are linked to another currency). Any increase in the value of the
NIS in relation to the Dollar will have the effect of increasing the Dollar
value of any unlinked NIS assets of the Company and the Dollar amount of
any unlinked NIS liabilities of the Company.
To reduce foreign exchange exposure, a significant portion of the Company's
expenditures, including in Israel, are in Dollars or are Dollar linked.
The Company also enters into foreign currency hedging transactions to
protect the dollar value of its NIS deposits and certain non-dollar
denominated trade receivables. The gains and losses on these transactions
are included in the statement of operations in the period in which the
changes in the exchange rates occur. There can be no assurance that such
activities or others will eliminate the negative financial impact of
currency fluctuations. Indeed, such activities may have an adverse impact
on earnings.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company deposits a portion of its funds in interest-bearing NIS
accounts. In order to minimize exposure to currency fluctuation, the
Company enters into hedging positions that will secure its Dollar principal
from losses due to devaluation of the NIS.
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash, short-term and
long-term financial investments and trade receivables. Short-term cash
investments are placed with high credit-quality financial institutions as
specified in the Company's investment policy guidelines. Other investments
are in securities of various banks, in U.S. Government securities and in
commercial paper of industrial companies.
The table below provides information about the Company's investment
portfolio. For investment Securities, the table presents principal cash
flows and related weighted average interest rates by expected maturity
dates.
- ------------------------------------------------------
FY 1999 FY 2000 Total
- ------------------------------------------------------
Cash and Cash 22,076 -- 22,076
Equivalents ($)
- ------------------------------------------------------
Average Interest Rate 4.85% --
- ------------------------------------------------------
Investments ($) 22,140 44,624 66,764
- ------------------------------------------------------
Average Interest Rate 6.10% 6.20%
- ------------------------------------------------------
TOTAL PORTFOLIO ($) 42,216 44,624 88,840
- ------------------------------------------------------
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains allowances for
estimated credit losses.
The carrying amounts of cash, investments, receivables and accounts payable
approximate fair value.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings incident to its
business. Except as noted below and as noted in the Company's quarterly
report for the period ended June 30, 1999, there are no legal proceedings
pending or threatened against the Company that management believes are
likely to have a material adverse effect on the Company's consolidated
financial position.
The Company has been named in a number of purported class action securities
lawsuits filed in the fall of 1998 that have now been consolidated in the
United States District Court for the Southern District of New York. The
consolidated action is known as In Re ESC Medical Systems Ltd. Securities
Litigation, Case No. 98 Civ. 7530 (MBM). The Company is required to answer,
move or otherwise respond to the Consolidated Amended Complaint by November
23, 1999. No discovery has been conducted.
The Company's Laser Industries Ltd ("Laser Industries") and Sharplan Laser,
Inc. subsidiaries are parties to an action entitled Laser Industries Ltd. and
Sharplan Lasers, Inc. v. Reliant Technologies, Inc. currently pending before
the United States District Court for Northern District of California. Oral
arguments for Laser Industries' appeal of the District Court's ruling of
patent invalidity, has been set for December 8, 1999 before the United
States Court of Appeals for the Federal Circuit.
On November 9, 1998, Light Age, Inc. ("Light Age") instituted a statement
of claim and an application for preliminary injunction in the Tel-Aviv
District Court (the "Tel-Aviv Court") against the Company and others,
seeking injunctions against the development, production and sale of the
Company's Alexandrite laser for dermatological or hair removal treatments.
On January 25, 1999, the Company, along with three affiliated entities,
brought an action in the Superior Court of New Jersey, Somerset County,
against Light Age, Inc., entitled Laser Industries Ltd., ESC Medical
Systems Inc., Sharplan Lasers Inc., and ESC Medical Systems Ltd. v. Light
Age, Inc., Docket No. SOM-L-14199. The litigation relates to disputes
arising out of an agreement between Light Age and Laser Industries pursuant
to which Light Age supplied certain medical laser devices to Laser
Industries. On July 1, 1999, the U.S. Court granted defendant Light Age's
motion to compel the Company and the three affiliated entities to
arbitrate. On August 13, 1999, Light Age filed a demand for arbitration on
its counterclaim with the American Arbitration Association. To date, the
arbitration has not progressed beyond the demand stage. Pending the outcome
of the U.S. arbitration, Light Age and the Company agreed to file a motion
to stay the proceedings in Tel Aviv. On October 14, 1999, the Tel Aviv
Court confirmed the motion as requested and stayed the proceedings.
On December 31, 1998, the Company and Luxar were named as defendants in an
action filed in the United States District Court for the Southern District of
Florida (the "Florida Court"), entitled LPG USA, Inc. v. ESC Medical Systems,
Ltd. and Luxar Corporation, Civ. No. 98-7509 (S.D. Fla.). Discovery closes
on December 1, 1999, and a trial is currently scheduled to begin the week of
January 14, 2000.
On July 1, 1998 an action was filed by Richard Fitzpatrick, M.D. and
Mitchell Goldman, M.D. against the Company in the Superior Court in San
Diego County, California. On September 2, 1999, the parties reached a
complete settlement of this action in a settlement conference held before
Magistrate Judge James Stiven. That settlement has now been concluded with
a formal settlement agreement executed by all parties. The settlement
agreement requires that the terms of the settlement be kept confidential by
the parties and, therefore, the terms are not set forth herein. The
settlement did not have a material effect on the Company's results for the
third quarter of 1999. A dismissal of Plaintiffs' claims and ESC's
counterclaims was filed on October 20, 1999. Thus, this matter is
concluded.
On September 20, 1999, Dr. Richard Urso filed what purports to be a class
action lawsuit against the Company in the State District Court in Harris
County, Texas. Dr. Urso alleges a number of causes of action including,
breach of contract, breach of warranty, product liability,
misrepresentation and violations of the Texas Deceptive Trade Practices
Act. The complaint purports to be filed on behalf of a national class. The
Company has taken steps to remove the case to Federal court and intends to
vigorously deny all allegations and challenge Plaintiff's class
certification motion when it is filed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits
NUMBER DESCRIPTION
3.1 Memorandum of Association of the Incorporated by reference to
Registrant (English translation) Amendment No. 1 to the
Registrant's Registration
Statement on Form F-1, File No.
33-80199, filed on December 20,
1996.
3.2 Articles of Association of the Incorporated by reference to
Registrant Amendment No. 1 to the
Registrant's Registration
Statement on Form F-1, File No.
33-80199, filed on December 20,
1996.
10.1 Agreement, dated as of June 29, Filed with this document
1999, between the Company and
Yacha Sutton
27 Financial data schedules Filed with this document
(2) Reports on Form 8-K
During the three-month period ended September 30, 1999, the Company filed
one Current Report on Form 8-K under Item 7 - Financial Statements, Pro
Forma Financial Information and Exhibits. The report was filed on August 4,
1999 and incorporated a letter to shareholders dated August 4, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESC Medical Systems Ltd.
/s/ Sagi A. Genger
-----------------------------
Date: November 14, 1999 By: Sagi A. Genger
(Chief Financial Officer,
and Duly Authorized Officer)
EXHIBIT INDEX
3.1 Memorandum of Association of the Incorporated by reference to
Registrant (English translation) Amendment No. 1 to the
Registrant's Registration
Statement on Form F-1, File No.
33-80199, filed on December 20,
1996.
3.2 Articles of Association of the Incorporated by reference to
Registrant Amendment No. 1 to the
Registrant's Registration
Statement on Form F-1, File No.
33-80199, filed on December 20,
1996.
10.1 Agreement, dated as of June 29, Filed with this document
1999, between the Company and
Yacha Sutton
27 Financial data schedules Filed with this document
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and
entered into as of June 29, 1999 by and among ESC MEDICAL SYSTEMS LTD., a
public company incorporated under the laws of the State of Israel, with its
principal offices at the New Industrial Park, Yokneam, Israel (the
"Company"), and MR. YACHA SUTTON, residing at 6 Oppenheimer Street,
Tel-Aviv, Israel (the "Executive").
WHEREAS, the Company desires to employ and secure for itself
the services of the Executive upon the terms and subject to the conditions
specified herein, and
WHEREAS, the Executive desires to accept employment with the
Company upon the terms and subject to the conditions specified herein, and
WHEREAS, for the avoidance of any doubt, it is agreed and
understood between the parties that by accepting employment with the
Company pursuant to this Agreement the Executive shall not be deemed in
breach of either the Termination Agreement between Laser Industries Ltd.
and the Executive or the Non-Competition Agreement between the Company and
the Executive, both agreements dated February 22, 1998.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants, terms and conditions hereinafter set forth, and for other
good and valuable consideration, the receipt of which is hereby
specifically acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive in the
capacity of Chief Executive Officer of the Company upon the terms and
subject to the conditions set forth below. The Executive hereby accepts
employment with the Company upon the terms and subject to the conditions
set forth below. This agreement is personal and shall not invoke the
provisions of any collective bargaining agreement or arrangement or
extension orders, whether presently existing or shall exist in the future,
except and only to the extent so mandated by law.
2. DUTIES. (a) The Executive agrees to devote his full business
time, attention, best efforts and ability to the affairs of the Company. He
shall report to the Board of Directors of the Company (the "Board") or to
the Executive Committee of the Board (the "Committee") or to such members
of the Board or the Committee as either of them shall designate from time
to time to direct the Executive in the execution of his duties and
responsibilities hereunder. The Executive shall have primary responsibility
for operating and managing the business of the Company in the ordinary
course of its business, with the powers and duties accorded to the position
of CEO as set forth in the Articles of Association of the Company and such
other duties consistent therewith as may be assigned to the Executive from
time to time by the Board or the Committee or such members of the Board or
the Committee as either of them shall designate from time to time to direct
the Executive in the execution of his duties and responsibilities
hereunder.
(b) The Executive acknowledges that his capacity as CEO is a
fiduciary position and requires a special degree of trust, his duties and
responsibilities may entail irregular work hours and extensive traveling,
for which he is adequately rewarded by the compensations provided for in
this Agreement, and that accordingly the provisions of the Work Hours and
Rest Law, 1951 will not apply to his employment with the Company.
(c) When the Executive performs services for the Company, the
Executive shall be, at all times, an employee of the Company. While
performing services for the Company, the Executive shall not engage in any
activities that may interfere or conflict with the proper discharge of his
duties.
3. TERM AND TERMINATION. The term of this Agreement shall be
effective as of June 30, 1999 and shall continue in full force and effect
until terminated pursuant to the terms hereof.
3.1 The Agreement and the Executive's employment may be
terminated (a) at any time at the option of either party upon ninety (90)
days prior written notice ("Prior Notice"); (b) upon the death of the
Executive; (c) in the event of the inability of the Executive to perform
his duties hereunder, whether by reason of injury (mental or physical),
illness or otherwise, incapacitating the Executive for a continuous period
exceeding 45 days or non-consecutive 45 days in any six month period; or
(d) for cause. For purposes of this Agreement, an event or occurrence
constituting "cause" includes:
(i) The Executive's omission or refusal to perform
specific directives of the Board or the Committee
or such members of the Board or the Committee as
either of them shall designate from time to time
to direct the Executive in the execution of his
duties and responsibilities hereunder;
(ii) Dishonesty of the Executive affecting the Company;
(iii)The Executive's conviction of a felony or of any
crime involving moral turpitude, fraud or
misrepresentation;
(iv) Any gross negligence or bad-faith conduct of the
Executive resulting in material loss to the
Company or any of its subsidiaries or material
damage to the reputation of the Company or any of
its subsidiaries; and
(v) Any material breach of this Agreement.
3.2 In the event of a termination of this Agreement and the
Executive's employment by the Company pursuant to a Prior Notice, the
Company shall only be obligated to pay (i) Executive's base salary and
benefits through the Prior Notice period specified above, provided that the
Executive continues his employment obligations through such period (if so
required by the Company), and (ii) the lump sum severance payment to which
the Executive shall be entitled pursuant to the Severance Payment Law, 1963
("Severance Payment") less any amounts received by the Executive from his
Managers' Insurance on account of severance payment (all such payments
shall be less deductions for all applicable taxes and withholdings under
any relevant laws). The Company shall have no further obligation to make
any salary payments or provide any benefits to the Executive after the
expiration of such Prior Notice period, except as required by applicable
law. Notwithstanding the foregoing, the Company may, in its sole
discretion, elect not to require the services of the Executive during the
Prior Notice period, but shall nevertheless continue to pay the Executive's
base salary and benefits through such period.
In addition to the payments specified in this
subparagraph 3.2, if either (a) this Agreement and the Executive's
employment is terminated by the Company at any timeother than for "cause",
or (b) following the automatic termination of this Agreement pursuant to
paragraph 3.4 below the Executive shall choose not to remain in the employ
of the Company (whether by not nominating himself for the position of
permanent CEO or by declining any other position with the Company), then
the unpaid balance of the amounts payable by the Company to the Executive
pursuant to the Non-Competition Agreement, dated February 22, 1998, between
the Company and the Executive entered in connection with the merger of the
Company with Laser Industries Ltd., will be paid to the executive in a lump
sum, in lieu of in monthly installments as provided by the said agreement.
3.3 In the event of any termination of this Agreement and the
Executive's employment which is not referred to in paragraph 3.2 above, the
Company shall no longer be obligated to make any base salary payments or
provide any benefits of any kind whatsoever (except as required by
applicable law) to the Executive or the Executive's estate. However, any
base salary payments earned but not yet paid and any benefits (other than
base salary) to which the Executive has already become entitled under the
terms of any Company plan or policy or this Agreement but has not yet been
provided shall be made and provided by the Company to the Executive or the
Executive's estate in accordance with their respective terms.
3.4 Notwithstanding anything to the contrary contained in
this Agreement, if not terminated earlier pursuant to any other provision
of this paragraph 3, this Agreement and the Executive's employment
thereunder shall terminate automatically on December 31, 1999, unless
otherwise agreed between the Executive and the Company. In the event of
such termination, as of such date the Company shall no longer be obligated
to make any base salary payments or provide any benefits of any kind
whatsoever to the Executive.
4. BASE SALARY. As compensation for services rendered hereunder,
the Company shall pay the Executive a gross monthly base salary of U.S.
$15,000 (fifteen thousand U.S. Dollars), less deductions for all applicable
taxes and withholdings, payable in conformance with the regular payroll
dates and practices for executives of the Company during the term of the
Agreement. The Executive's salary level shall be reviewed by the Board or
the Committee annually or at such other times as shall be determined by the
Board or the Committee. The base salary is denominated in U.S. Dollar and
accordingly shall not be adjusted to any changes in the consumer price
index or changes in the cost of living.
5. BENEFITS. In addition to the compensation set forth in
paragraph 4 above, the Executive shall receive the following benefits, and
only such benefits, from the Company (less deductions for all applicable
taxes and withholdings under any applicable law), it being understood that
any wage-based benefits shall be calculated exclusively on the basis of the
base salary (without consideration to any other benefit):
(a) VACATION. The Executive shall be entitled to twenty-four
(24) business days of vacation per year in accordance with Company's
policy. The specific dates of such vacations shall be coordinated in
advance with the Board or the Committee. The Executive shall not be
entitled to accumulate or to redeem any unused vacation days in excess of
an aggregate of twelve days.
(b) OPTIONS. The Executive shall be granted options to
purchase up to 100,000 of the Company's Ordinary Shares, par value NIS 0.10
per share, under the terms and conditions of one of the employees equity
incentive plans maintained by the Company, as the Board or the Committee
shall designated. The exercise price per share for the shares covered by
the said options shall be US$ 6.00. Notwithstanding the provisions of such
plan, the options shall fully vest with the Executive upon the completion
of his initial six months of employment with the Company, unless terminated
earlier by the Executive for whatever reason or by the Company for "cause",
shall be exercisable at any time thereafter until July 1, 2005 (regardless
of whether the Executive is still employed by or affiliated with the
Company at the time of their exercise), and shall otherwise be subject to
the provisions of the option plan under which they shall be issued.
(c) MANAGERS INSURANCE ETC. In accordance with the Company's
general policy, the Company shall procure for the benefit of the Executive
a "Managers' Insurance Policy" (for life insurance and pension), under
customary terms, and contribute to such policy an amount equal 5% of the
Executive's base salary and 8.33% on account of the Company's severance
payment obligations, and the Company shall withhold 5% from the Executive's
base salary and contribute such amount to the said policy as the
Executive's participation. Upon any termination of the Executive employment
with the Company (other than termination by the Company under circumstances
in which severance payment is not payable) the rights in the Executive's
"Managers' Insurance Policy" shall be assigned to the Executive. The
Executive may designate for the above purpose a policy already existing in
his favor in lieu of the new policy. In addition, the Company shall pay an
amount of up to 2.5% of the Executive's base salary as premium of a
disability insurance policy in favor of the Executive, and an additional
7.5% of the base salary to an "Advanced Study Fund" ("Keren Hishtalmut")
(in which the Executive shall participate in an amount of 2.5% of his base
salary by way of withholding from his pay).
(d) OTHER BENEFITS. The Board or the Committee shall consider
such additional benefits to the Executive as generally provided by the
Company to its senior executives under its current remuneration policy. The
Executive shall be entitled to use a Company vehicle in accordance to the
Company's existing policies, with respect to the type of vehicle, coverage
of costs and expenses and grossing of applicable taxes.
(e) INDEMNIFICATION. Subject to the approvals required by the
Companies Ordinance [New Version], 1983, the Company shall enter with the
Executive into the Indemnity Agreement in the form attached hereto as
Exhibit A.
6. CONFIDENTIAL INFORMATION. The Executive agrees not to divulge
or use, except in furtherance of the Company's business at any time during
his employment or after the termination of his employment with the Company,
any confidential and other proprietary information ("Confidential
Information") obtained at any time, disclosed to the Executive or developed
by the Executive in the course of the Executive's employment with the
Company or regarding the business of either the Company, its subsidiaries,
affiliates, or any of its customers, except that the Executive may disclose
certain necessary information to co-workers employed at the Company and to
third parties when required to do so in connection with the performance of
his duties hereunder. "Confidential Information" shall mean information
which is not known to the public and shall include, but not be limited to,
trade secrets, know-how, data, technical or non-technical, whether written,
graphic or oral, the names and addresses of prospective or existing
investors, customers, supply sources, ideas, financial information,
operations policies, marketing strategies, business development plans,
corporate assets, financial forecasts, and historical financial results.
7. COVENANT NOT TO SOLICIT BUSINESS. (a) Upon termination of this
Agreement the Executive agrees that for a period of two (2) years he will
not directly or indirectly solicit any business from individuals or
entities that are customers or distributors of the Company, its
subsidiaries or any of their respective affiliates, at the time of the
termination of this Agreement, without the prior written consent of the
Board.
(b) For a period of two (2) years from the date of
termination of this Agreement, without the prior written consent of the
Board or the Committee, the Executive shall not employ, offer to employ, or
in any way directly or indirectly solicit or seek to obtain or achieve the
employment of any person employed by either the Company, its subsidiaries,
affiliates, or any successors or assigns thereof now or during a two (2)
year period from the date of the Executive's termination of employment,
except for those executives who have left the Company, its subsidiaries,
affiliates, or any successors or assigns thereof more than one (1) year
prior to the date of the Executive's termination of employment with the
Company.
(c) For a period of two (2) years from the date of
termination of this Agreement, without the prior written consent of the
Board or the Committee, the Executive shall not participate, directly or
indirectly (whether as advisor, principal, agent, partner, officer,
director, employee, stockholder, associate or consultant of), in any
Business Entity (except for an interest of less than 5% in any entity whose
securities are traded in any exchange). For purposes of this paragraph
7(c), the term "Business Entity" shall mean any person, partnership,
corporation or other business entity that at the time of the Executive's
involvement with the Company is involved in any competition with any
business carried on by the Company or its affiliates or subsidiaries prior
to the date of this Agreement or hereafter conducted by the Company or its
affiliates or subsidiaries during the term of this Agreement anywhere in
the world.
(d) The parties hereto agree that the duration and area for
which the covenant not to compete set forth in paragraph 7(c) above is to
be effective and reasonable, in terms of their geographical and temporal
scope. In the event that any court determines that the time period and/or
area are unreasonable and that such covenant is to that extent
unenforceable, the parties hereto agree that such covenant shall remain in
full force and effect for the greatest period of time and in the greatest
geographical area that would not render it unenforceable. In addition, the
Executive acknowledges and agrees that a breach of paragraph 6 or sections
(a), (b) or (c) of this paragraph 7 shall cause irreparable harm to the
Company, its subsidiaries, and/or its affiliates and that the Company shall
be entitled to specific performance of this Agreement or an injunction
without proof of special damages, together with the costs and reasonable
attorney's fees and disbursements incurred by the Company in enforcing
their rights under paragraph 6 and this paragraph 7.
8. INTELLECTUAL PROPERTY ASSIGNMENT. Any invention or know-how
which shall be conceived, developed or reduced to practice by the Executive
during the period of his employment relating to the business of the Company
or the use of any of its technologies, notwithstanding that it is perfected
or reduced to specific form at any time thereafter provided that its
conception arose during such period, including all rights therein and in
any patent or other form of intellectual property or legal protection with
respect thereto, shall become the sole property of the Company, without
need for any specific action or notice or any consideration to the
Executive other than as provided for by this Agreement. The Executive shall
cooperate with the Company and assist it in obtaining any patent or other
form of legal protection for such inventions or know-how for no additional
compensation (other than the coverage of the Executive's reasonable out if
pocket expenses).
9. REIMBURSEMENT OF EXPENSES. (a) The Company shall reimburse the
Executive in the amount of US$1,500 per month for the cost of his apartment
located in New York City, which shall be used for the Company's business.
(b) The Company shall reimburse the Executive for all costs
relating to the maintenance and use of one telephone line at his home,
which shall be used for Company's matters only, and the maintenance and use
of a cellular phone.
10. DEDUCTIONS AND WITHHOLDINGS. The Company shall be entitled to
deduct and withhold from any amount payable to the Executive, whether
pursuant to this Agreement or otherwise, any and all taxes, withholdings or
other payments as required under any applicable law.
11. NO ASSIGNMENT BY EXECUTIVE. The Executive shall have no right
to assign any of the rights nor to delegate any of the duties created by
this Agreement and any assignment or attempted assignment of the
Executive's rights, and any delegation or attempted delegation of the
Executive's duties, shall be null and void (except for such delegations of
authority to other officers of the Company as necessary and customary for
the fulfillment of the Executive's duties). The Company retains the right
at any time to assign any of its rights or delegate any of its duties under
this Agreement.
12. CONDITIONS. The Executive represents that he has full
authority to enter into this Agreement and that the performance of his
duties under this Agreement will not interfere with or violate the terms of
any other agreement, arrangement or understanding.
13. BENEFIT. Except as otherwise expressly provided herein, this
Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, beneficiaries, personal representatives,
successors and assigns.
14. NOTICES. All notices hereunder shall be in writing and
delivered by hand or telefaxed or mailed to the address stated below of the
party to which such notice is given, or to such changed address as such
party shall have given to the other party by written notice provided,
however, that any notice of change of address shall be effective only upon
receipt by the other party.
To the Company: P.O. Box 240
Yoqneam, Israel
Attention: Chairman of the Executive Committee
To Executive: 6 Oppenheimer Street
Ramat-Aviv, Tel-Aviv
Israel
15. SEVERABILITY OF PROVISIONS. If any of the provisions of this
Agreement is held invalid, such provisions shall be severed and the
remainder of the Agreement shall remain in force and shall not be affected
thereby.
16. NO ORAL CHANGES. This instrument constitutes and contains the
entire Agreement between the parties except as otherwise expressly stated
herein. This Agreement may be changed only in writing, and must be signed
by the party against whom enforcement of any waiver, modification,
discharge or other change is sought.
17. WAIVER. Either party's failure to insist upon strict
compliance with any of the terms, covenants or conditions hereof shall not
be deemed a waiver of such term, covenant or condition, nor shall any
waiver or relinquishment of any right or power hereunder at any one or more
times be deemed a waiver or relinquishment of such right or power at any
other time or times.
18. ENTIRE AGREEMENT. The Agreement contained in this instrument
supersedes and cancels any and all prior agreements between the parties
hereto, express or implied, written or oral, relating to the subject matter
hereof (excluding, for the avoidance of doubt, any of the agreements
mentioned in the preamble of this Agreement). This Agreement sets forth the
entire agreement between the parties hereto with respect to the subject
matter hereof.
19. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement
shall be governed by and construed in accordance with the laws of the State
of Israel. Any litigation concerning any claims under or breach of this
Agreement shall be brought exclusively in the competent courts of the
Tel-Aviv-Jaffa District.
20. DESCRIPTIVE HEADINGS. The paragraph headings contained herein
are for reference purposes only and shall not in any way affect the meaning
or interpretation of this Agreement.
21. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, and all such counterparts shall
constitute one and the same instrument.
22. SURVIVAL. The provisions of paragraphs 6, 7 and 8 shall survive
any termination of this Agreement.
* * * *
IN WITNESS WHEREOF, the Company and the Executive have
executed this Employment Agreement, as of the day and year first above
written.
ESC MEDICAL SYSTEMS LTD.
By: /s/ Tom Hardy
------------------------
Tom Hardy
Director
YACHA SUTTON
/s/ Yacha Sutton
------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the financial statements contained in
the Company's Report on Form 10-Q for the quarter ended
September 30, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<PERIOD-END> SEP-30-1999 SEP-30-1998
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<CASH> $22,076 $ 35,241
<SECURITIES> 49,964 29,324
<RECEIVABLES> 70,584 87,421
<ALLOWANCES> (26,805) (3,960)
<INVENTORY> 40,932 55,313
<CURRENT-ASSETS> 163,267 214,737
<PP&E> 32,773 38,976
<DEPRECIATION> (26,795) (24,635)
<TOTAL-ASSETS> 197,943 337,345
<CURRENT-LIABILITIES> 57,936 57,655
<BONDS> 108,319 116,107
<COMMON> 563 547
0 0
0 0
<OTHER-SE> 31,125 163,036
<TOTAL-LIABILITY-AND-EQUITY> 197,943 337,345
<SALES> 30,313 102,032
<TOTAL-REVENUES> 30,313 102,032
<CGS> 26,000 78,562
<TOTAL-COSTS> 26,000 78,562
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 10,780 13,799
<INTEREST-EXPENSE> 1,817 5,746
<INCOME-PRETAX> (53,137) (117,904)
<INCOME-TAX> 2,995 3,693
<INCOME-CONTINUING> (56,132) (121,597)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (56,132) (121,597)
<EPS-BASIC> (2.16) (4.69)
<EPS-DILUTED> (2.16) (4.69)
</TABLE>
