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 June 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: 972-4-959-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _
The number of shares outstanding of the registrant's common stock
as of June 30, 1999 was 27,554,584 Ordinary Shares, NIS 0.10 par value per
share.
ESC MEDICAL SYSTEMS LTD.
FORM 10-Q
For the Quarter Ended June 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 4. Submission of Matters to a Vote of Security Holders
ITEM 6. Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ESC MEDICAL SYSTEMS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, December 31,
1999 1998
(unaudited) (audited)
---------------- ---------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $29,913 $42,950
Short-term investments 32,320 46,867
Trade receivables (net of allowances of $ 13,574 in 1999
and $ 10,480 in 1998) 60,727 78,392
Prepaid expenses and other receivables 8,736 12,824
Inventories 47,147 61,200
-------- -------
178,843 242,233
LONG-TERM INVESTMENTS
Bank deposits and securities 37,901 41,350
Investments in companies 6,333 5,469
FIXED ASSETS 11,959 13,877
OTHER ASSETS 17,721 24,737
-------- -------
TOTAL ASSETS $252,757 $327,666
======== =======
CURRENT LIABILITIES
Short-term debt and current maturities of long-term loans $1,763 $3,533
Accounts payable and accrued expenses 53,885 52,319
-------- -------
55,648 55,852
LONG TERM LIABILITIES
Loans from banks 50 61
Accrued severance pay 1,192 1,245
Convertible subordinated notes 108,104 115,000
-------- -------
109,346 116,306
-------- -------
TOTAL LIABILITIES 164,994 172,158
-------- -------
SHAREHOLDERS' EQUITY
Ordinary shares of NIS 0.10 par value: Authorized -
50,000,000 shares; Issued and outstanding - 27,554,584
shares as of June 30, 1999 and 27,314,605 shares as of
December 31, 1998 562 553
Paid-in capital 135,948 135,756
Capital reserve 1,525 -
Retained earnings (accumulated deficit) (38,652) 26,813
Treasury shares, at cost (1999 - 1,644,443 shares;
1998 -1,054,813 shares) (11,620) (7,614)
-------- -------
TOTAL SHAREHOLDERS' EQUITY 87,763 155,508
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $252,757 $327,666
======== =======
The accompanying notes are integral part of these financial statements.
</TABLE>
ESC MEDICAL SYSTEMS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the three For the six
months ended months ended
June 30 June 30
------------ ------------
1999 1998 1999 1998
-------- -------- -------- --------
NET SALES $40,427 $63,614 $71,719 $123,153
COST OF SALES 22,472 21,729 52,562 42,356
-------- -------- -------- --------
Gross profit 17,955 41,885 19,157 80,797
RESEARCH AND
DEVELOPMENT COSTS, NET 4,283 4,692 9,252 8,935
MARKETING AND SELLING
EXPENSES 19,721 18,783 39,334 35,946
ADMINISTRATIVE AND
GENERAL EXPENSES 6,103 4,228 10,117 7,919
RESTRUCTURING COSTS - - 11,246 -
PROXY EXPENSES 2,848 - 2,848 -
OTHER EXPENSES 7,750 - 10,750 -
-------- -------- -------- --------
Total operating expenses 40,705 27,703 83,547 52,800
-------- -------- -------- --------
Operating income (loss) (22,750) 14,182 (64,390) 27,977
FINANCING INCOME
(EXPENSES), NET (1,448) 159 (377) 159
-------- -------- -------- --------
(24,198) 14,341 (64,767) 28,156
NONRECURRING EXPENSES - - - 28,951
Income (loss) before income
taxes (24,198) 14,341 (64,767) (795)
-------- -------- -------- --------
INCOME TAXES 575 1,078 698 2,178
-------- -------- -------- --------
Net income (loss) $(24,773) $13,263 $(65,465) $(2,973)
NET INCOME (LOSS) PER SHARE
Basic $(0.98) $0.50 $(2.56) $(0.11)
Diluted $(0.98) $0.48 $(2.56) $(0.11)
WEIGHTED AVERAGE NUMBER
OF SHARES
Basic 25,358 26,490 25,537 26,280
Diluted 25,358 27,765 25,537 26,280
The accompanying notes are integral part of these financial statements.
<TABLE>
<CAPTION>
ESC MEDICAL SYSTEMS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the six
months ended
June 30,
--------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(65,465) $(2,973)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Expenses not affecting operating cash flows:
Restructuring costs and inventory writedowns 27,854 -
Depreciation and amortization 4,372 14,298
Gain on purchase of convertible notes (2,483) -
Deferred income taxes 1,203 (62)
Amortization of deferred compensation 65 160
Writeoff of intangibles 6,250 -
Other 242 412
Changes in operating assets and liabilities:
Decrease in short-term investments 14,547 27,903
Decrease (increase) in trade receivables 13,065 (27,031)
Decrease (increase) in other receivables 1,385 (1,180)
Increase in inventories (2,555) (10,952)
Increase (decrease) in accounts payable and
accrued expenses (3,294) 1,784
-------- --------
Net cash provided by (used in) operating activities (4,814) 2,359
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (1,441) (3,886)
Sale of investment - 368
Investments in patents and know-how - (3,914)
Maturity of (additions to) long-term investments 3,449 (7,960)
-------- --------
Net cash provided by (used in) investing activities (2,008) (15,392)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options 136 4,466
Decrease in short-term bank debt, net (1,685) (2,054)
Purchase of convertible notes (4,580) -
Purchase of treasury shares (4,006) -
Repayment of long-term loans (96) (10,830)
Net cash used in financing activities (10,231) (8,418)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (13,037) (21,451)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 42,950 54,616
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $29,913 $33,165
======== ========
The accompanying notes are integral part of these financial statements.
</TABLE>
ESC MEDICAL SYSTEMS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
(In thousands)
(Unaudited)
For the six
months ended
June 30,
--------------------
1999 1998
-------- --------
NONCASH ACTIVITIES
Tax benefit of options exercised by employees $ - $ 452
-------- --------
CASH PAID DURING THE PERIOD IN
RESPECT OF:
Income taxes $ 49 $ 243
Interest $ 3,491 $ 3,838
-------- --------
The accompanying notes are integral part of these financial statements.
ESC MEDICAL SYSTEMS LTD.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED
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 six month period ended June 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:
June 30, December 31,
1999 1998
(Unaudited) (Audited)
----------- -----------
(In thousands)
Raw materials $ 16,411 $ 20,309
Work in process 9,002 10,106
Finished products 21,734 30,785
--------- ---------
$ 47,147 $ 61,200
========= =========
Note 3 - RESTRUCTURING COSTS AND OTHER CHARGES
In the first quarter of 1999, the Company commenced a program of
restructuring of its business operations. In that connection, the Company
recorded writedowns of inventories (included in cost of goods sold) of
approximately $16.6 million, pertaining mostly to the Company's decision to
eliminate a number of products.
ESC MEDICAL SYSTEMS LTD.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (CONT.)
(Unaudited)
The restructuring charge in the first quarter amounted to $11.2 million and
was comprised of writedowns of receivables and fixed assets of $4.6 million
and $1.6 million, respectively, and severance charges and lease and other
contract termination costs of $5 million. The majority of the restructuring
charge related to the Company's divisions in the U.S. The restructuring
program provides for a reduction of approximately 52 employees.
As of June 30, 1999, the unutilized accrual amounted to $2.5 million.
It is expected that this restructuring program will be completed by the end
of 1999 (see also Note 9).
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 six month periods ended
June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
For the three For the six
months ended months ended
June 30, June 30,
------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues
<S> <C> <C> <C> <C>
U.S.A. $ 14,189 $ 36,605 $ 28,323 $ 68,700
ROW $ 26,238 $ 27,009 $ 43,396 $ 54,453
---------- ---------- ---------- ----------
Consolidated 40,427 63,614 71,719 123,153
Operating income (loss)
U.S.A. $ (13,840) $ (3,057) $ (43,975) $ (7,939)
ROW 188 17,239 (8,317) 35,936
---------- ---------- ---------- ----------
Consolidated (1) (22,750) 14,182 (64,390) 27,997
Financing income
(loss), net (1,448) 159 (378) 159
Nonrecurring expenses - - - 28,951
Income (loss) before
---------- ---------- ---------- ----------
income taxes $ (24,198) $ 14,341 $ (64,767) $ (795)
June 30,
----------------------
1999 1998
Identifiable Assets ---------- ----------
U.S.A. $ 95,049 $ 101,953
ROW 145,505 211,188
---------- ----------
Consolidated (2) $ 252,757 $ 327,063
</TABLE>
ESC MEDICAL SYSTEMS LTD.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (CONT.)
(Unaudited)
(1) Includes unallocated corporate expenses of $9,098 and
$12,098 for three month and six month periods ended June 30, 1999.
These include $2,848 of Proxy expenses and $6,250 of other
expenses for the three month period and $2,848 of proxy expenses
and $9,250 of other expenses for the six month period.
(2) Includes investments in companies and other assets not
allocable to a particular segment of $12,203 as of June 30, 1999
and $13,922 as of June 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 antitrust laws, federal unfair
competition law (Lanham Act) and California state laws, requesting
a judgment for damages of not less than $20,000,000.
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.
(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 September 1999 to answer,
move or otherwise respond to the consolidated amended complaint.
(3) 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 $4,500,000 has been recorded in
other expenses to cover estimated losses arising from the
abovementioned legal proceedings.
NOTE 6 - CAPITAL RESERVE
Following the issuance of shares of a development stage
investee company and the decrease in the Company's holdings in the
investee company, the gain in the amount of $1,525,000 was
credited to a capital reserve.
NOTE 7 - OTHER EXPENSES
In connection with the evaluation of certain intangibles,
the Company recorded a writeoff of goodwill and other intangibles
in the amount of $6,250,000 in the second quarter of 1999.
NOTE 8 - PROXY EXPENSES
In connection with the director election contest held during
the quarter, the Company has incurred expenses of $1,348,000. In
addition, in accordance with the resolution of the Board of
Directors of the Company in a meeting held on June 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 $1,500,000 which have been included in proxy expenses.
NOTE 9 - SUBSEQUENT EVENTS
Following the changes in the Company's Board of Directors,
the Company is developing a new restructuring plan which shall
include product and facilities rationalization, as well as
evaluation of the market potential of different applications, with
an emphasis on future revenue growth. The Company anticipates that
the overall costs associated with the implementation of the plan,
while yet undetermined, will be charged to earnings in the third
quarter of this year.
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 light of the recent changes in the composition of the Board of
Directors, the management of the Company, at the direction of the Board of
Directors, is undertaking a review of the businesses of the Company and its
financial affairs. This review includes possible steps to be taken to
enhance the Company's revenues, reduce costs and improve operating margins.
The Company has retained McKinsey & Company, Inc. to assist in the
development of a restructuring plan, including product and facilities
rationalization, as well as an evaluation of the market potential of
different applications.
The Company will work with McKinsey & Company, Inc. to develop a
comprehensive restructuring plan, which the Company intends to develop
within the next 60 to 90 days. The Company anticipates that the overall
costs associated with the plan's implementation, while as yet undetermined,
will be charged to earnings in the third quarter of this year.
As part of this study, the management of the Company is also reviewing the
adequacy of reserves. While management believes that significant progress
has been made in this review and is reflected in the results reported for
the second quarter, the Company intends to continue its review during the
third quarter and may determine to take additional charges.
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.
RESULTS OF OPERATIONS
Three and Six Month Periods Ended June 30, 1999 Compared With Three
and Six Month Periods Ended June 30, 1998 (In thousands of U.S. Dollars)
NET SALES. The Company's net sales decreased by 36% to $40,427 for the
three months ended June 30, 1999 compared to $63,614 for the three months
ended June 30,1998. For the six months ended June 30, 1999, net sales
decreased by 42% to $71,719 compared to $123,153 for the comparable period
in 1998. The decrease in sales was due to a general decrease in sales of
the Company's products.
Most of the decrease in sales is attributable to strong price pressure on
hair removal products, decreased unit sales and a general slowdown in the
U.S. aesthetic markets. Net sales in the U.S. decreased by 61% for the
three months ended June 30, 1999, compared with an insignificant decrease
of 3% for the same period in the rest of the world.
GROSS PROFIT. Gross profit decreased by 57% to $17,955 in the three months
ended June 30, 1999 compared to $41,885 for the three months ended June 30,
1998. For the three months ended June 30, 1999 gross margin was 44%
compared to 66% for the comparable period in 1998. For the six months ended
June 30, 1999, gross profit decreased by 56% from $80,797 to $35,765
(excluding the write off of inventory of $16,608 pertaining to the
Company's decision to cease production of a number of products in
connection with its restructuring program adopted in the first quarter of
1999). For the six months ended June 30, 1999, gross margin was 50%
compared to 66% for the comparable period in 1998.
The reduction in gross margin in 1999 was due, in large part, to the
decrease in unit sales and sales price together with the relatively high
level of fixed expenses and a change in the products' sales mix. Gross
margin in the second quarter also decreased due to inventory write-offs and
reserves for approximately $3,800, which caused a decrease of 9% in gross
margin for the quarter.
RESEARCH AND DEVELOPMENT COSTS, NET. Net research and development costs
decreased by 8% to $4,283 for the three months ended June 30, 1999 from
$4,692 in the three month ended June 30, 1998. For the six months ended
June 30, 1999, net research and development costs increased by 4% to $9,252
from $8,935 for the comparable period in 1998.
MARKETING AND SELLING EXPENSES. Marketing and selling expenses increased by
5% to $19,721 for the three months ended June 30, 1999 compared to $18,783
for the same period in 1998. For the six months ended June 30, 1999,
marketing and selling expenses increased 9% to $39,334 from $35,946 for the
comparable period in 1998.
The increase in the marketing and selling expenses in 1999 is primarily
attributable to the cost of reorganization of the Company's selling efforts
in the United States. No cost savings from the reorganization plan were
realized in the second quarter of 1999.
ADMINISTRATIVE AND GENERAL EXPENSES. Administrative and general expenses
increased by 44% to $6,103 for the three months ended June 30, 1999 from
$4,228 for the three months ended June 30, 1998. For the six months ended
June 30, 1999, administrative and general expenses increased 28% to $10,117
from $7,919 for the comparable period in 1998.
Increased administrative and general expenses in 1999 were primarily
attributable to bad debt reserves of approximately $3,000 and litigation
expenses of $400. These increases were offset by an expense reduction in
certain Israeli operations resulting in approximately $1,600 in savings for
the second quarter.
RESTRUCTURING COSTS. In the quarter ended March 31, 1999, the Company
developed and has 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 $16,609 related to inventory write-off (included in the cost of goods
sold).
PROXY EXPENSES. The $2,848 of expenses incurred 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 June 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 $1,500. The officers and directors of the Company at
the time incurred expenses of $1,348, which were charged to the Company.
OTHER EXPENSES. For the three months ended June 30 ,1999, other expenses
were $7,750 comprised of the following: (i) a provision of $1,500 for a
judgement against the Company in connection with an alleged breach of a
supply agreement, and (ii) intangible assets write off mainly related to
goodwill from acquisitions of $5,004 and a patent write off of $1,246.
In addition, during the first quarter ended March 31, 1999, the Company
recorded a provision for $3,000 for a court decision against the Company.
The Company is presently appealing the decision.
OPERATING INCOME (LOSS). For the three months ended June 30, 1999,
operating loss was $22,750 compared to operating income of $14,182 for the
same period in 1998. For the six months ended June 30, 1999, operating loss
was $64,390 compared to operating income of $27,977 for the same period in
1998. Operating income for the three and six month ended June 30, 1999,
excluding restructuring costs, proxy expenses, other expenses, bad debt
reserve and inventory write-off's was $5,352 and $16,137 respectively,
compared to operating income of $14,182 and $27,977 for the same periods in
1998.
FINANCING INCOME (EXPENSES), NET. For the three months ended June 30, 1999,
financing expenses were $1,448 compared to financing income of $159 for the
three months ended June 30, 1998. For the six months ended June 30, 1999,
financing expenses increased to approximately $2,858 (net of $3,930
interest and amortization of deferred expenses stemming from the Company's
Convertible Notes) compared to financing income of approximately $159 for
the comparable period in 1998. The primary reason for the increase in net
financing expenses is a decrease in interest income (due to a lower cash
balance and lower interest rates) and foreign currency losses.
INCOME TAXES. Income taxes was $575 for the three months ended June 30,
1999 compared to $1,078 for the three months ended June 30,1998. For the
six months ended June 30, 1999, income taxes was $698 compared to $2,178
for the same period in 1998.
NET INCOME. As a result of the foregoing factors, the Company's net loss
was $24,773 in the three months ended June 30, 1999 compared to net income
$13,263 in the three months ended June 30,1998. For the six months ended
June 30,1999, net loss was $65,465 compared to net loss of $2,973 for the
same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands of dollars)
As of June 30, 1999, the Company had cash and cash equivalent of
approximately $29,913 compared to approximately $42,950 on December 31,
1998. The decrease of $13,037 is mainly attributable to (i) the repurchase
of the Company's 6% Convertible Notes for $4,580; (ii) the repurchase of
shares of the Company's common stock for $4,006; (iii) the decrease of
short-term bank debt by $1,685; (iv) the use of cash for operational
activities in the amount of $4,814; and (vii) capital expenditures totaling
$1,441, all offset partially by the maturing of long term instruments in an
amount of $3,449 which was used for operations.
Despite the expected negative cash-flow, the management of the Company
believes that available cash will be sufficient 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, over at least the next 12
months.
INVESTING ACTIVITIES
(in thousands of dollars)
For the six months ended June 30, 1999 cash provided by investing
activities was approximately $2,008. The primary changes in the Company's
investing activities were the maturity of $3,449 in long-term investments
which matured and used in operations activities and use of cash of
approximately $1,441 to purchase fixed assets.
FINANCING ACTIVITIES
(in thousands of dollars)
For the six months ended June 30,1999 cash used in financing activities was
$10,231. The 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 $4,580 and (iii) the
payment of short-term bank loans totaling $1,685.
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 is approximately 60%
complete with the remediation phase of these systems as of June 30, 1999.
The inventory and assessment phase for non-IT systems (including production
facilities worldwide) is substantially complete and remediation is
underway. 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 expected to be
completed by the end of the third quarter 1999. 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 under development,
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, are being
developed to address the risks of noncompliance. Additionally, the Company
is assessing the need to maintain increased inventory levels to satisfy
potential increased customer demand at year-end.
As of June 30, 1999 the Company has spent $50,000 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; and (6) 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 U.S. Dollars (the "Dollar") or other foreign 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 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.
A significant portion of the Company's sales are in U.S. dollars, and to
avoid large foreign exchange exposure, a significant portion of the
Company's expenditures, including in Israel, are in U.S. dollar or U.S.
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 Company's policy also limits
the amount of credit exposure to any one issue, issuer and type of
instrument.
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 ------- ------- -------
Equivalents ($) 30,486 -- 30,486
AVERAGE INTEREST RATE 4.85% --
INVESTMENTS ($) 23,962 42,384 66,346
AVERAGE INTEREST RATE 5.97% 6.40%
------- ------- -------
Total portfolio ($) 54,448 42,384 96,832
======= ======= =======
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. As of June 31, 1999 the market value of the
Convertible Notes were approximately 65% of their face value.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since this is the Company's first filing of a Quarterly Report on Form
10-Q, the Company has elected to set forth below the following updated
description of outstanding material 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.
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 captioned In Re ESC Medical Systems Ltd. Securities
Litigation, 98 Civ. 7530 (MBM). On July 9, 1999, a consolidated amended
complaint was filed naming the Company, Salomon Smith Barney Inc., and
several additional current and former directors and officers of the
Company's subsidiary, Laser Industries, as defendants. The consolidated
amended complaint seeks damages and attorneys fees under the United States
securities laws for alleged irregularities in the way in which the Company
reported its financial results and disclosed certain facts throughout 1997
and 1998 and for alleged "tipping" of non-public information to Salomon
Smith Barney Inc. in September 1998. The Company has until September 24,
1999 to answer, move, or otherwise respond to the consolidated amended
complaint.
The Company's Laser Industries Ltd ("Laser Industries") and Sharplan Laser,
Inc. ("Sharplan") 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 (the "California Court"). Laser Industries commenced
this action in 1995, alleging infringement of Laser Industries Patent No.
5,411,502 (the "502 Patent"). In the same action, and in a separate action
filed by Reliant Technologies, Inc. ("Reliant"), Reliant asserted a number
of claims against Laser Industries based, among other things, on its
assertions that Laser Industries had concealed certain prior art from the
U.S. Patent Office, that the 502 Patent was invalid and that Laser
Industries lawsuit was brought in bad faith.
On September 3, 1998, the California Court issued an order dismissing all
of Reliant's claims, but granting Reliant leave to amend its complaint to
raise new claims against Laser Industries, consistent with the California
Court's decision. However, the California Court found the 502 Patent
invalid and, therefore, granted summary judgment in Reliant's favor on
Laser Industries patent infringement claim.
On October 30, 1998, Reliant filed a third amended complaint alleging
violations of the United States anti-trust laws and the Lanham Act. These
claims are based, in part, on Reliant's assertion that Laser Industries
patent lawsuit was brought for anti-competitive purposes and without a good
faith belief that the 502 Patent was valid and infringed. Reliant's third
amended complaint seeks judgment of not less than $20 million, as well as
treble and punitive damages and other relief, including attorney's fees.
On November 13, 1998, Laser Industries filed a motion to dismiss Reliant's
third amended complaint, and Reliant filed a cross-motion seeking to have
Laser Industries patent suit declared baseless and/or a sham and further
seeking to strike an expert affidavit filed by Laser in support of its
motion.
On November 18, 1998, the California Court denied Reliant's motion for
leave to file a motion for reconsideration of portions of its September 3,
1998 ruling. On December 17, 1998, the California Court also denied Laser
Industries motion for leave to file a motion for reconsideration of certain
aspects of the September 3, 1998 order.
On February 25, 1999, the California Court granted, in part, and denied, in
part, Laser's motion to dismiss the third amended complaint. Specifically,
the California Court dismissed Reliant's anti-trust claims to the extent
that they were based on alleged fraud for failure to disclose material
prior art to the Patent Office, and further dismissed Reliant's state law
unfair competition claims. However, the California Court denied Laser
Industries motion to dismiss Reliant's anti-trust claims insofar as they
were based on Laser Industries alleged lack of good faith belief that its
502 Patent was valid and infringed, and also denied Laser Industries motion
to dismiss Reliant's Lanham Act claim.
With respect to Reliant's cross-motion, the California Court denied
Reliant's motion to strike Laser Industries expert affidavit but granted
Reliant summary judgment with respect to the "objectively baseless" prong
of its motion, holding that Laser Industries lacked an objective basis for
believing its 502 Patent to be valid. The California Court noted, however,
that Laser Industries Noerr- Pennington litigation immunity would not be
removed unless and until Reliant proved at trial that Laser Industries
initiated the patent suit with a subjective anti- competitive purpose.
Subsequently, Reliant asked the California Court to declare Laser
Industries patent suit against Reliant "exceptional" under 35 U.S.C. 285,
and to award over $2 million in attorney's fees and costs to Reliant. On
April 26, 1999, the California Court denied Reliant's motion as premature,
but without prejudice to its right to re-file the motion in accordance with
the requirements set forth in the California Court's order of that date.
On March 4, 1999, Laser filed a notice of appeal of the District Court's
final judgment of invalidity of the 502 Patent to the U.S. Court of Appeals
for the Federal Circuit. The appeal is likely to be heard in the fall of
1999. The California Court has scheduled a trial on the parties' remaining
claims in the litigation to commence on April 24, 2000. If Laser Industries
appeal to the Federal Circuits is successful, Laser Industries intends to
ask the California Court to vacate its determination that Laser Industries
patent suit was objectively baseless, and to renew its motion to dismiss
the anti-trust and Lanham Act allegations remaining in Reliant's
counter-suit against Laser Industries.
On November 5, 1998, Light Age, Inc. ("Light Age") instituted an ex-parte
application in the Tel-Aviv District Court (the "Tel-Aviv Court") against
the Company and others, seeking a temporary injunction against the
development, production and sale of the Company's Alexandrite laser for
dermatological or hair removal treatments. Light Age's principal
contentions are that the Alexandrite laser is based on technology developed
by Light Age and is competing with Light Age's Alexandrite laser, in breach
of the Company's non- disclosure and non-compete undertaking in a supply
agreement with Light Age. In addition, Light Age is seeking a permanent
injunction against the Company engaging in such activities. The Tel-Aviv
Court denied Light Age's request for an ex-parte injunction and ordered
that a hearing be held with both parties present. On March 21, 1999, the
Tel-Aviv Court denied Light Age's motion for a preliminary injunction. The
defendants, including the Company, have filed a Statement of Defense and a
court hearing is scheduled to commence on December 28, 1999.
On January 25, 1999, the Company, along with three affiliated entities,
brought an action in 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. In the action, the Company seeks declaratory and
injunctive relief. On March 5, 1999, Light Age answered the complaint and
filed a counterclaim against the Company seeking unspecified damages
pursuant to a variety of causes of action including breach of contract,
tortious interference with contract, unjust enrichment, and
misappropriation of trade secrets. On July 1, 1999 the court granted Light
Age's motion to compel the Company and the three affiliated plaintiff
entities to arbitrate. However, Light Age has not yet served a demand for
arbitration.
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.). 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 on February 8, 1999, 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 counterclaims. The
parties are now actively engaged in discovery.
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. The complaint was amended in August 1998. The
action was then removed to the United States District Court for the
Southern District of California. On May 3, 1999 the plaintiffs filed a
Second Amended Complaint against the Company and the Company filed
counterclaims against the plaintiffs. In their complaint, the plaintiffs
allege that they did not receive as much equity in the Company as they were
promised in exchange for their services. In addition, plaintiffs claim that
they are entitled to reimbursement for travel expenses and honoraria for
their attendance at various seminars and conferences on behalf of the
Company. The Company's counterclaims allege breach of contract and
undertakings of confidentiality. A court ordered settlement conference was
recently held but failed to resolve the dispute. A final pretrial
conference is set for December 20, 1999 at which time a firm trial date is
expected to be set.
In addition to the foregoing proceedings, the Company is a party in certain
actions in various countries in which the Company sells its products in
which plaintiffs have 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. The largest single
such case presently pending against the Company is a case filed by H.K.
Hashalom Medical Centers Ltd. in Tel-Aviv District Court against the
Company and Dr. Shimon Eckhouse in connection with the sale of the
Company's EpiLight systems. H.K. Hashalom is seeking monetary damages in
the amount of NIS10,000,000 but has reserved the right to increase such
amount as well as a declaratory judgment that, inter alia, the Company
indemnify it for certain costs and expenses arising out of the transaction
between the parties. On July 15, 1999, the defendants filed a Statement of
Defense. The case has not yet been set for a hearing.
Apart from H.K. Hashalom's action, management believes that none of the
other of these types of cases that are presently pending individually would
have a material adverse impact on the consolidated financial position of
the Company, although such other proceedings could have a material effect
on quarterly or annual operating results or cash flows when resolved in a
future period.
Finally, the Company also is a defendant in various product liability
lawsuits in which the Company's products are alleged to have caused
personal injury to certain individuals who have received treatments using
the Company's products. The Company maintains insurance against these types
of claims and believes that these claims individually or in the aggregate
are not likely to have a material adverse impact on the business, financial
condition or operating results of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Combined Annual and Extraordinary Meeting of Shareholders held on June
23, 1999 (the "Meeting"), the following persons were elected to the Board
of Directors of the Company by the margin indicated:
NAME FOR AGAINST WITHHELD
Aharon Dovrat 11,860,681 26,291 12,450
Philip Friedman 11,860,681 26,291 12,450
Thomas Hardy 11,860,681 26,291 12,450
Darrell S. Rigel, M.D. 11,860,681 26,291 12,450
S.A. Spencer 11,860,681 26,291 12,450
Mark H. Tabak 11,860,681 26,291 12,450
Professor Zehev Tadmor 11,860,681 26,291 12,450
The votes cast for the other nominees, which was not sufficient to effect
re-election to the Board, were as follows:
NAME FOR AGAINST WITHHELD
Shimon Eckhouse 8,566,545 340,959 83,615
Hillel Bachrach 8,565,420 340,959 84,740
Halley Faust 8,566,545 340,959 83,615
Marshall Buttler 8,565,420 340,959 84,740
Kenneth Rind 8,566,545 340,959 83,615
Dan Suesskind 8,566,545 340,959 83,615
Karen Sarid 8,561,545 340,959 88,615
All of the new directors were proposed to the Board by Messrs. Arie Genger
and Bernard J. Gottstein, two major shareholders of the Company, including
Mr. Hardy, the only member of the incumbent ESC Board. In accordance with
an agreement between the Company and Messrs. Genger and Gottstein, dated
June 23, 1999, at the first meeting of the newly elected Board, held on
June 27, 1999, the Board invited Messrs. Shimon Eckhouse, Halley Faust,
Marshall Buttler, Kenneth Rind and Dan Suesskind, all members of the
previous ESC Board, to join the newly elected Board. As of August 12, 1999
and following the resignation of Messrs. Suesskind and Buttler, the Board
of Directors of the Company is composed of the following persons: Aharon
Dovrat, Philip Friedman, Thomas Hardy, Darrell S. Rigel, S.A. Spencer, Mark
H. Tabak, Zehev Tadmor, Shimon Eckhouse, Halley Faust, and Kenneth Rind.
In addition the following matters were voted upon in the Meeting:
<TABLE>
<CAPTION>
Proposal For Against Abstain
<S> <C> <C> <C>
To reappoint Luboshitz, Kasierer & Co. as the 9,153,982 304,910 11,431,049
Company's Independent public accountants for the
current fiscal year and authorize the Board of
Directors to fix their compensation.
To indemnify directors with respect to certain 7,949,287 12,441,573 499,081
litigation.
To adjourn the Meeting for seven days. 8,990,519 11,836,421 -0-
</TABLE>
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
Number Description
<S> <C> <C>
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 Employment Agreement, dated May 1, Filed with this document
1999, between the Company, E.S.C.
(D) Inc. and Louis Scafuri
10.2 Stock Option Agreement, dated June Filed with this document
18, 1999, between the Company and
Louis Scafuri
10.3 Letter of Agreement, dated June 23, Filed with this document
1999, from Messrs. Genger and
Gottstein to the Company
27 Financial data schedule Filed with this document
(2) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended June 30,
1999.
</TABLE>
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/ Yacha Sutton
--------------------------------
Date: August 13, 1999 By: Yacha Sutton
(Chief Executive Officer,
Acting Chief Financial Officer
and Duly Authorized Officer)
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C> <C>
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 Employment Agreement, dated May 1, Filed with this document
1999, between the Company, E.S.C.
(D) Inc. and Louis Scafuri
10.2 Stock Option Agreement, dated June Filed with this document
18, 1999, between the Company and
Louis Scafuri
10.3 Letter of Agreement, dated June 23, Filed with this document
1999, from Messrs. Genger and
Gottstein to the Company
27 Financial data schedule Filed with this document
</TABLE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
WITH
LOUIS SCAFURI
AGREEMENT entered into as of May 1, 1999 between Louis Scafuri residing at
133 Nichols Road, Cohasset MA 02025, USA ("Employee"), E.S.C. (D) Inc., a
Delaware company with offices located at 100 Crescent Road, Needham, MA
02194, USA ("ESC" or the "Subsidiary") and ESC Medical Systems Ltd., an
Israeli company with offices located at Yokneam, Israel (unless the context
otherwise requires , references to ESC Ltd. shall be included in references
to "ESC" or the "Company").
W I T N E S S E T H:
WHEREAS, ESC is in the business of marketing medical instruments developed
and manufactured by ESC Ltd. (the "Business);
WHEREAS, ESC and ESC Ltd. desires to employ Employee as CEO North
American Operations.
NOW THEREFORE, in consideration of the premises and mutual agreements
hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT.
With effect from the Effective Date (as defined in Section 3), ESC
employs Employee and Employee accepts employment with ESC upon the
terms and conditions set forth herein.
2. DUTIES.
2.1 ESC and ESC Ltd. hereby engages Employee to serve as CEO North
American Operations during the term hereof;
2.2 Employee shall devote his full business time and attention to the
Business of the Company and shall perform his duties diligently and
promptly for the benefit of ESC. During his employment hereunder,
Employee shall not undertake or accept any other paid or unpaid
employment or occupation or engage in or be associated with,
directly or indirectly, any other business, duties or pursuits
except with the prior written consent of the Board of Directors.
Employee shall report regularly to the President of ESC Ltd.
3. TERM.
3.1 Employee's employment under this Agreement shall commence on April
1, 1999 (the "Effective Date") and shall end on the earliest of:
(i) the death or disability (as defined herein) of Employee; (ii)
the termination of Employee's employment by ESC for cause (as
defined herein) after providing thirty (30) days advance notice (as
defined herein); or (iii) three (3) years from the Effective Date.
The term will extend for additional one year periods at March 31 of
each year commencing on March 31, 2000 unless either party delivers
a notice of intention not to renew no later than January 1 of any
year.
3.2 Either party may terminate this agreement without cause, as
hereinafter defined, by six months prior written notice, during
which period Employee shall continue his services unless otherwise
instructed by the Board. In the event of a Change in Control of the
Company, as defined in the Attachment, the Company may not exercise
this termination provision. In such event, Employee will be
employed by the Company for a minimum period of one year following
a termination notice to Employee by Company. All the terms and
conditions will apply during this two year period.
3.3 For the purpose of this paragraph 3, "disability" shall mean any
physical or mental illness or injury as a result of which Employee
remains absent from work for a period of two (2) successive months.
Disability shall occur upon the end of such two-month period.
3.4 For the purpose of this paragraph 3, "cause" shall exist if
Employee (i) breaches any of the material terms or conditions
hereof including, without limitation, the terms of paragraphs 8 or
9; (ii) substantially fails to perform the Employee's areas of
responsibility set forth herein; (iii) engages in willful
misconduct or acts in bad faith with respect to ESC, in connection
with and related to the employment hereunder; (iv) is convicted of
a felony or is held liable by a court of competent jurisdiction for
common law fraud against ESC; or (v) fails to comply with the
instructions of the Company's Board of Directors in a manner
materially detrimental to the Company, provided that, with respect
to clauses (i), (ii) and (v), if Employee has cured any such
condition (that is reasonably susceptible to cure) within 30 days
of the advance notice (as defined herein) then "cause" shall be
deemed not to exist. For purposes of this paragraph 3, "advance
notice" shall constitute a written notice delivered to Employee
that sets forth with particularity the facts and circumstances
relied upon by ESC as the basis for cause.
3.5 During the period following notice of termination by any party for
any reason, the Employee shall cooperate with ESC and use his best
efforts to assist the integration into the ESC organization of the
person or persons who will assume the Employee's responsibilities.
4. COMPENSATION.
During the term hereof, and subject to the performance of the
services required to be performed hereunder by Employee, ESC shall
pay to Employee for all services rendered by Employee under this
Agreement a salary, payable not less often than monthly and in
accordance with ESC's normal and reasonable payroll practices, in a
monthly gross amount of $20,833 exclusive of any benefits to or on
behalf of Employee provided by or through the Company (the "Gross
Salary"). Employee shall, in addition to the above, receive a sign
or bonus $125,000 of which $63,000 has been paid upon execution of
the engagement letter and $62,000 will be paid during January 2000.
5. VACATION.
Employee shall be entitled to three (3) weeks of paid vacation
during each year that this Agreement is in effect, to be taken at
times subject to the reasonable approval of ESC. Vacation time
shall not be accumulated but Employee shall be paid for any unused
vacation remaining at the end of the year in which vacation time is
accrued.
6. 401(K) AND INSURANCE
The Company shall allow Employee to participate in its 401(K) Plan,
once implemented.
7. BONUS
In addition to the compensation set forth above, Employee shall be
awarded an annual bonus of up to 80% of the annual Gross Salary
payment if the Company meets bottom line and top line performance
annual goals st by the Ltd.'s President.
8. OPTIONS
Employee shall be granted options to purchase Ordinary Shares of
the Company in the amount of 450,000 shares ("Options") as follows:
8.1 Options to acquire 200,000 of the Option shares shall be
exercisable in equal amounts over a three-year period commencing on
the anniversary of the date of grant; i.e., 33% at the end of one
year, 66% at the end of the second year, 100% at the end of the
third year.
8.2 Options to acquire 150,000 of the Option shares shall be execrable
in equal parts over a five-year period commencing on the
anniversary of the date of grant; i.e., 20% at the end of one year,
40% at the end of the second year, 60% at the end of the third
year, 80% at the end of the fourth year and 100% at the end of the
fifth year. Irrespective of the terms of exercise set forth in this
subsection 8.2, the options to acquire 150,000 shares described
herein shall be exercisable immediately in its entirety in the
event the shares of the Company listed on NASDAQ trade at a closing
bid price of $20 or more for 20 successive trading days.
8.3 Options to acquire 100,000 of the Option shares shall be
exercisable in equal parts over a five-year period commencing on
the anniversary of the date of grant; i.e., 20% at the end of one
year, 40% at the end of the second year, 60% at the end of the
third year, 80% at the end of the fourth year and 100% at the end
of the fifth year. Irrespective of the terms of exercise set forth
in this subsection 8.3, the options to acquire 40,000 shares
described herein shall be exercisable immediately in its entirety
in the event the shares of the Company listed on NASDAQ trade at a
closing bid price of $25 or more for 20 successive trading days.
8.4 All Options granted hereunder shall be exercisable immediately upon
a Change of Control as defined in the Appendix attached hereto.
The Options will be subject to the Company's option plan and the terms
of the option agreement to be entered between the Employee and ESC
Ltd.
9. SECRECY AND NONDISCLOSURE.
The Employee shall treat as secret and confidential all of the
processes, methods, formulas, procedures, techniques, software,
designs, data, drawings and other information which are not of
public knowledge or record pertaining to the Business of the
Company and ESC Ltd. (existing, potential and future), including
without limitation, all business information relating to customers
and suppliers and products of which the Employee becomes aware
during and as a result of his employment or association with the
Company and ESC Ltd., and Employee shall not disclose, use,
publish, or in any other manner reveal, directly or indirectly, at
any time during or after the term of this Agreement, any such
processes, methods, formulas, procedures, techniques, software,
designs, data, drawings and other information pertaining to ESC's
existing or future Business or products. The Employee may disclose
or use such information, if at all, only with the prior express
written consent of the Company and ESC Ltd., as the case may be.
10. NON-COMPETITION.
10.1 Employee agrees that during the term of this Agreement and for a
period of two (2) years after he ceases to be employed by the
Company he shall not, directly or indirectly, for his or its own
account or as an employee, officer, director, partner, joint
ventures, shareholder, investor, consultant or otherwise (except as
an investor in a corporation whose stock is publicly traded and in
which Employee holds less than 5% of the outstanding shares) sell,
distribute or in any way market any product, service or technology
of the Company or ESC Ltd. or interest himself or itself in or
engage in any business or enterprise, anywhere in the world, that
directly or indirectly competes with the Business of the Company or
ESC Ltd., that exists now or in the future during the term of this
Agreement or its proposed in writing by the Company or ESC Ltd.
prior to the time of termination or is based on similar technology
to that of the Company or ESC Ltd.; provided that any such proposal
is provided to Employee in writing within 30 days of the date of
termination.
10.1.1 The restrictions in paragraph 10.1 shall not apply to any
activities that are consented to in writing by the Board of
Directors of the Company and ESC Ltd. after disclosure by Employee
of his proposed activities.
10.2 Employee agrees that during a period of one year from termination
of this Agreement he shall not employ directly or indirectly any
individual then employed by the Company or ESC Ltd.
10.3 Employee acknowledges that the restricted period of time and
geographical area specified under paragraph 10.1 hereof are
reasonable, in view of the nature of the business in which the
Company and ESC Ltd. are engaged and Employee's knowledge of the
Business and products of the Company and ESC Ltd.
10.4 Notwithstanding anything contained in paragraph 10.3 to the
contrary, if the period of time or the geographical area specified
under paragraph 10.1 hereof should be determined to be unreasonable
in any judicial proceeding, then the period of time and area of the
restriction shall be reduced so that this Agreement may be enforced
in such area and during such period of time as shall be determined
to be reasonable by such judicial proceeding.
10.5.1 No contract, agreement or arrangement for sales, research,
development, promotion, maintenance or service of any medical
equipment shall be entered into by Employee individually or some
other person or entity unless the Board of Directors of ESC Ltd.
has given its prior written consent;
10.5.2 Unless otherwise expressly agreed to by ESC Ltd., all sales or
other disposition of the products or services of ESC Ltd. shall be
made only by or through the Company and not by or through any other
person or entity with which Employee is directly or indirectly
associated.
11. DEVELOPMENT RIGHTS.
The Employee agrees and declares that all proprietary information
including but not limited to trade secrets and know-how, patents
and other rights in connection therewith developed by or with the
contribution of Employee's efforts during his employment or
association with the Company and/or ESC Ltd. shall be the sole
property of the Company and ESC Ltd. and the Employee shall execute
all documents necessary to assign any patents to ESC and otherwise
transfer such proprietary rights to ESC.
12. EMPLOYEE REPRESENTATIONS.
The Employee represents and warrants to ESC that the execution and
delivery of this Agreement and the fulfillment of the terms hereof
(i) will not constitute a default under or breach of any agreement
or other instrument to which he is a party or by which he is bound,
including without limitation, any confidentiality or
non-competition agreement, (ii) do not require the consent of any
person or entity, and (iii) shall not utilize during the term of
his employment any proprietary information of any third party,
including prior employers of the Employee.
13. BENEFIT.
Except as otherwise herein expressly provided, this Agreement shall
inure to the benefit of and be binding upon ESC, its successors and
assigns, including, without limitation, any subsidiary or
affiliated entity and shall inure to the benefit of, and be binding
upon, Employee, his heirs, executors, administrators and legal
representatives.
14. ENTIRE AGREEMENT.
This Agreement constitutes the entire understanding and agreement
between the parties hereto, supersedes any and all prior
discussions, agreements and correspondence with regard to the
subject matter hereof, and may not be amended, modified or
supplemented in any respect, except by a subsequent
writing executed by both parties hereto.
15. NOTICES.
All notices, requests and other communications to any party
hereunder shall be given or made in writing and telecopied, mailed
(by registered or certified mail) or delivered by hand to the
respective party at the address set forth in the caption of this
Agreement or to such other address (or telecopier number) as such
party may hereafter specify for the purpose of notice to the other
party hereto. Each such notice, request or other communication
shall be effective (i) if given by telecopier, when such telecopy
is transmitted to the telecopier number specified herein and the
appropriate answer back is received or (ii) if given by any other
means, when delivered at the address specified herein.
16. APPLICABLE LAW.
This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of Israel without giving effect to
principles of conflicts of law and the courts of Israel, District
of Tel Aviv, shall have exclusive jurisdiction over the parties
hereto and subject matter hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first appearing above.
E.S.C. (D) INC.
By: /s/ Shimon Eckhouse /s/ Louis Scafuri
------------------------------- ---------------------------
LOUIS SCAFURI
ESC MEDICAL SYSTEMS LTD.
By: /s/ Shimon Eckhouse
-------------------------------
EXHIBIT 10.2
ESC MEDICAL SYSTEMS LTD
STOCK OPTION AGREEMENT
Made as of the 18th day of June, 1999
BETWEEN
ESC MEDICAL SYSTEMS LTD., an Israeli company with offices at Yokneam
Industrial Park, P.O. Box 240, Yokneam 20692, Israel (the "Company").
AND
LOUIS SCAFURI, an individual resident of Israel whose address is
133 Nichols Road, Cohasset, MA 02025, U.S.A. (the "Optionee");
WITNESSETH
WHEREAS, the Company desires, by affording the Optionee an opportunity to
purchase shares of its Ordinary Shares, per value NIS 0.10 per share (the
"Shares"), as hereinafter provided.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
and agreements hereinafter contained, the parties hereto mutually covenant
and agree as follows;
1. Grant of Option. The Company has granted to the Optionee as of the
18th of June, 1999 (the "Date of the Grant" and "Commencement Date") a
restricted stock option (the "Option") to purchase all or any part of an
aggregate of 450,000 Shares (such number reflects the share dividends
distributed by the Company until the date of this Agreement, and is being
subject to adjustment as provided in Paragraph 7) on the terms and
conditions hereinafter set forth.
2. Purchase Price. The purchase price of the Shares issuable upon
exercise of the Option ("the Option Price") shall be $5.9375 per Share.
Payment shall be made in cash or by certified check in the manner
prescribed in paragraph 7 hereof.
3. Term of Option. The term of Option shall be for a period of ten
(10) years from the date hereof, subject to earlier termination as provided
in Paragraph 5. (This term may be modified by the Stock Option Committee,
in its sole discretion, if circumstances so dictate).
3.1.1 Options to acquire 200,000 of the Option shares shall be
exercisable in equal amounts over a three-year period commencing on the
anniversary of the date of grant; i.e., 33% at the end of one year, 66% at
the end of the second year, 100% at the end of the third year.
3.1.2 Options to acquire 150,000 of the Option shares shall be
exercisable in equal parts over a five-year period commencing on the
anniversary of the date of grant, i.e., 20% at the end of one year, 40% at
the end of the second year, 60% at the end of the third year, 80% at the
end of the fourth year and 100% at the end of the fifth year. Irrespective
of the terms of exercise set forth in this subsection 3.1.2, the options to
acquire 150,000 shares described herein shall be exercisable immediately in
its entirety in the event the shares of the Company listed on NASDAQ trade
at a closing bid price of $20 or more for 20 successive trading days.
3.1.3 Options to acquire 100,000 of the Option shares shall be
exercisable in equal parts over a five-year period commencing on the
anniversary of the date of grant; i.e., 20% at the end of one year, 40% at
the end for the second year, 60% at the end of the third year, 80% at the
end of the fourth year and 100% at the end of the fifth year. Irrespective
of the terms of exercise set forth in this subsection 3.1.3, the options to
acquire 100,000 shares described herein shall described herein shall be
exercisable immediately in its entirely in the event the shares of the
Company listed on NASDAQ trade at a closing bid price of $25 or more for 20
successive trading days.
3.1.4 All Options granted hereunder shall be exercisable immediately upon
a Change of Control as defined in the Appendix attached hereto.
Except as provided in paragraph 7, the Option may not be exercised unless,
at the time the Option is exercised and at all times from the Commencement
Date, the Optionee shall then be and shall have been, an employee of the
Company.
4. Limitations and Restrictions on Options and Ordinary Shares. The
Option shall not be transferable otherwise than by will or the laws of
descent and the Option may be exercised, during the lifetime of the
Optionee, only by him. More particularly (but without limiting the
generality of the foregoing), the Option may not be assigned, transferred
(except as provided as provided above), pledged or hypothecated in any way,
shall not be assignable by operation of law, and shall not subject to
execution, attachment or similar process. Any attempted assignment,
transfer, pledge, hypothecation or other disposition of the Option contrary
to the provisions hereof, and the levy of any execution, attachment, or
similar process upon the Option, shall be null and void and without effect)
provided, however, that if the Optionee shall die, his estate, personal
representative, or beneficiary shall have the right to exercise the Option.
5. Termination of Option.
(a) if the Optionee ceased to be employed by the Company as a result of
his disability or his retirement with the consent of the Company, then any
Options that are exercisable by him at the time he ceases to be employed by
the Company, and only to the extent such Options are exercisable as of such
time, may be exercised by him within two (2) years after the date of
disability or one (1) year after the date of retirement with the consent of
the Company (as determined by the Board of Directors), respectively;
(b) if the Optionee ceases to be employed by the Company as a result of
his dismissal without cause, then any Options that are exercisable by him
at the time he ceases to be employed by the Company, and only to the extent
such Options are exercisable as of such time, may be exercised by him
within sixty (60) days after the date he ceases to be employed by the
Company;
(c) if the Optionee ceases to be employed by the Company as a result of
his dismissal for cause (as determined by the Board of Directors of the
Company in its sole discretion), the Option shall terminate immediately,
whether or not all or any portion is then exercisable;
(d) if the Optionee shall die while in the employment of the Company,
his estate, personal representative or beneficiary shall have the right to
exercise the entire Option granted to the option holder pursuant to the
Plan at any time within two (2) years from the data of his death, in
respect of the total number of share as to which he would have been
entitled to exercise an Option at the date of his death.
6. Changes in Capital Stock. In the event of any increase, reduction
or change or exchange of shares for a different number or kind of share or
other securities by reason of a reclassification, recapitalization, merger,
consolidation, reorganization, issuance of warrants or rights, dividend or
other distribution (whether in the form of cash, stock or other property),
stock split or reverse stock split, spin-off, combination or exchange of
shares, repurchase of shares, change in corporate structure of otherwise,
appropriate adjustments shall be made so that the capital stock issuable
upon exercise of the Option after such readjustment or recapitalization
shall be the substantial equivalent of the Ordinary Shares issuable upon
exercise of the Option. In the case of a merger, sale of assets or similar
transaction which results in a replacement of the Ordinary Shares with
stock of another corporation, the Company will make a reasonable effort,
but shall not be required, to replace any outstanding Options granted
pursuant to this Agreement with comparable options to purchase the Options
granted pursuant to this Agreement with comparable options to purchase the
stock of such other corporation, or will provide for immediate maturity of
all outstanding Options, with all Options not being exercised within the
time period specified by the Board of Directors being terminated.
7. Method of Exercising Option. Subject to the terms and conditions
of this Agreement, the Option may be exercised by written notice to the
Company at its offices at Yokeam Industrial Park, P.O.B. 240, Yokneam
20692, Israel. Such notice shall state that the Option is being exercised
thereby and the number of shares of Ordinary Shares in respect of which it
is being exercised. It shall be signed by the person or persons so
exercising the Option and shall be accompanied by payment in full of the
Option Price for such shares of Ordinary Sharer in cash or by certified
check.
Within thirty (30) days of receipt of the above-mentioned notice, the
Company shall issue shares in the name of the Trustee for the benefit of
the person or persons exercising the Option or, in the case of free shares,
in the name of the person or persons exercising the Option, and deliver a
certificate or certificates to the Trustee or persons, as the case may be
representing such shares as soon as practicable after notice and payment
shall be received.
In the event the Option shall be exercised by any person or persons other
than the Options, such notice shall be accompanied by appropriate proof of
the right of such person or persons to exercise the Option.
The Optionee shall have no rights of a stockholder with respect to Ordinary
Shares to be acquired by the exercise of the Option until a certificate or
certificates representing such shares are issued to him or the Trustee for
his benefit, as the case may be. Upon issuance of a certificate or
certificates, Optionee shall have the rights of a shareholder except:
the Optionee shall have voting rights as a shareholder starting at the
date of exercise of the option.
8. General. The Company shall at all times during the term of the
Option reserve and keep available such number of Ordinary Shares as will be
sufficient to satisfy the requirements of this Agreement, shall pay all
original issue taxes, if any, with respect to the issuance of Ordinary
Shares pursuant hereto and all other fees and expenses necessarily incurred
by the Company in connection therewith, and shall, from time to time, use
its best efforts to comply with all laws and regulations which, in the
opinion of counsel for the Company, shall be applicable thereto.
9. Restrictive Legend. All certificates representing any shares of
Ordinary Shares subject to the provisions of this Agreement shall have
endorsed thereon the following legend:
"Any disposition of any interest in the securities represented by this
certificate is subject to certain restrictions, and the securities
represented by this certificate are subject to the terms of a Stock Option
Agreement by the record holder hereof and the Company, a copy of which will
be mailed to any holder of this certificate without charge with five (5)
days of receipt by the Company of a written request therefore."
10. Notices. Each notice relating to this Agreement shall be in
writing and delivered in person or by first class mail; postage prepaid, to
the address as hereinafter provided. Each notices shall be deemed to have
been given on the date it is received. Each notice to the Company shall be
addressed to it at its offices at Yokneam Industrial Park, P.O.B. 240,
Yokneam 20692, Israel. Each notice to the Optionee or other person or
persons then entitled to exercise the Option shall be addressed to the
Optionee or such other person or persons at the Optionee's last known
address.
11. Restrictions on Issuing Shares. The exercise of the Option shall
be subject to the condition that if at any time the Company shall determine
in its discretion that the satisfaction of withholding tax or other
withholding liabilities, or that the listing, registration, or
qualification of any shares otherwise deliverable upon such exercise upon
any securities exchange or under any national, state or federal law, or
that the consent or approval of any regulatory body, is necessary or
desirable as a condition of, or in connection with, such exercise in the
delivery or purchase of shares pursuant thereto, then in any such event,
such exercise shall not be effective unless such withholding, listing,
registration, qualification, consent or approval shall have been effected
or obtained free of any conditions not acceptable to the Company.
The Company will require an additional payment equal to all applicable
withholding taxes which may be imposed on the difference between the
purchase price of shares issuable upon exercise of an option and the fair
market value of such shares as of the exercise date (which sum shall be
paid in due course by the Company to the applicable agencies as income
taxes withheld on income resulting from the exercise of the Option).
12. Interpretation. The interpretation and construction of any terms
or conditions of this Agreement or other matters related thereto by the
Board of Directors shall be final and conclusive.
13. Enforceability. This Agreement shall be binding upon the Optionee,
his estate, his personal representatives and beneficiaries.
14. Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Israel.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Optionee has hereunto set his hand all as of the day and
year first above written.
ESC MEDICAL SYSTEMS LTD. OPTIONEE
By: /s/ Shimon Eckhouse Address: 133 Nichols Road
------------------- Cohasset, MA 02025
Authorized Officer
APPENDIX
"Change in Control" means the first to occur of any of the following dates:
(i) An acquisition (other than directly from the Company) of any voting
securities of the Company by any "Person" (as the term person is used for
purposes of Section 13(d) or 14(d) of the Exchange Act) immediately after
which such Person has "Beneficial Ownership" (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the
combined voting power of the Company's then outstanding Voting Securities;
provided, however, in determining whether a Change in Control has occurred,
Voting Securities which are acquired in a "Non-Control Acquisition" (as
hereinafter defined) shall not constitute an acquisition which would cause
a Change in Control. A "Non-Control Acquisition" shall mean an acquisition
by (A) an employee benefit plan (or a trust forming a part thereof or a
trustee thereof acting solely in its capacity as trustee) maintained by (X)
the Company or (Y) any corporation or other Person of which a majority of
its voting power or its voting equity securities or equity interest is
owned, directly or indirectly, by the Company (for purposes of this
definition, a "Subsidiary"), (B) the Company or its Subsidiaries, or (C)
any Person who files in connection with such acquisition a Schedule 13D
which expressly disclaims any intention to seek control of the Company and
does not expressly reserve the right to seek such control; provided,
however, that any amendment to such statement of intent which either
indicates an intention or reserves the right to seek control shall be
deemed an "acquisition" of the securities of the Company reported in such
filing as beneficially owned by such Person for purposes of this paragraph
(l);
(ii) The individuals who, as of the beginning of any two year period, are
members of the Board (the "Incumbent Board"), ceasing for any reason,
during such two year period, to constitute at least a majority of the
members of the Board; provided, however, that if the election, or
nomination for election by the Company's common stockholders, of any new
director was approved by a vote of at least two-thirds of the Incumbent
Board, such new director shall, for purposes of the Agreement, be
considered a member of the Incumbent Board; provided further, however, that
no individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11 promulgated
under the Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board (a
"Proxy Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
(iii) Approval by stockholders of the Company of:
(A) A merger, consolidation or reorganization involving the Company,
unless such merger, consolidation or reorganization is a "Non-Control
Transaction" i.e., meets each of the requirements described in
(i),(ii), and (iii) below:
(i) the stockholders of the Company, immediately before such
merger, consolidation or reorganization, own, directly or
indirectly immediately following such merger, consolidation or
reorganization, at least eighty percent (80%) of the combined
voting power of the outstanding voting securities of the
corporation resulting from such merger or consolidation or
reorganization (the "Surviving Corporation") in substantially the
same proportion as their ownership of the Voting Securities
immediately before such merger, consolidation or reorganization;
(ii) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization constitute at least
two-thirds of the members of the board of directors of the
surviving corporation immediately following the consummation of
such merger, consolidation or reorganization; and
(iii) no Person other than the Company, any Subsidiary, any
employee benefit plan (or any trust forming a part thereof or a
trustee thereof acting solely in its capacity as trustee)
maintained by the Company, the surviving corporation, or any
Subsidiary, or any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of 20%
or more of the then outstanding Voting Securities has Beneficial
Ownership of 20% or more of the combined voting power of the
surviving corporation's then outstanding voting securities
immediately following the consummation of such merger,
consolidation or reorganization.
(B) A complete liquidation or dissolution of the Company; or
(C) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person (other
than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the outstanding
Voting Securities as a result of the acquisition of Voting Securities by
the Company which, by reducing the number of Voting Securities outstanding,
increases the proportional number of shares Beneficially Owned by the
Subject Persons, provided that if a Change in Control would occur (but for
the operation of this sentence) as a result of the acquisition of Voting
Securities by the Company, and after such, a Beneficial Owner acquires
additional Voting Securities which increase the percentage of the then
outstanding Voting Securities beneficially owned by the Subject Person,
then a Change in Control shall occur.
June 23, 1999
To the Board of Directors
of ESC Medical Systems Ltd.
Gentlemen:
Effective upon your adoption of the resolutions attached hereto as
Annex A, we hereby agree on behalf of ourselves and our affiliates that
immediately following the certification of the vote by CT Corporation of
the combined extraordinary and annual general meeting, we will support and
take all necessary actions within our power to effect the prompt election
to the Board of the directors on the reconstituted Board (the
"Reconstituted Board"), as contemplated by the attached resolutions, who
were not elected at such meeting, it being understood that there will be no
obligation to thereafter continue to support such nominations by Messrs.
Genger, Gottstein or the current Board.
We and our affiliates agree to waive any claims we or our affiliates
may have against any existing directors with respect to the proxy contests.
As of today we are not aware of any
other claims we have against the current Board of Directors.
We further agree to jointly issue the press release attached hereto
as Annex B.
Our agreements are expressly conditioned on the resignation of Shimon
Eckhouse as President and Chief Executive Officer of the Company and Karen
Sarid and Hillel Bachrach as directors pursuant to executed resignation
letters attached hereto as Annex C and the receipt of the certification as
to the adoption of the resolutions from Gene Kleinhendler, counsel to the
Company.
We and our affiliates will vote all shares controlled by us and our
affiliates in favor of a shareholder resolution for indemnification of
current directors for certain litigation, as specified in Annex D hereto.
We agree not to challenge the proxies of ESC and authorize CT
Corporation to certify the vote on all three matters and the adjournment
resolution presented at the June 23, 1999 meeting.
This agreement will expire if the resolutions as attached as Annex A
are not adopted by the Board by 11:59 p.m., New York City time, on June 23,
1999.
Sincerely,
/s/ Arie Genger /s/ Barnard J. Gottstein
On behalf of himself On behalf of himself
and his affiliates, all as and his affiliates, all as
identified in his Schedule 13Ds identified in his Schedule 13Ds
filed with the Securities and filed with the Securities and
Exchange Commission Exchange Commission
<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 10Q for the quarter ended June 30,
1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 29,913 42,950
<SECURITIES> 32,320 46,867
<RECEIVABLES> 74,301 88,872
<ALLOWANCES> (13,574) (10,480)
<INVENTORY> 47,147 61,200
<CURRENT-ASSETS> 178,843 242,233
<PP&E> 38,177 37,418
<DEPRECIATION> (26,218) (23,541)
<TOTAL-ASSETS> 252,757 327,666
<CURRENT-LIABILITIES> 55,648 55,852
<BONDS> 108,104 115,000
<COMMON> 562 553
0 0
0 0
<OTHER-SE> 87,201 154,955
<TOTAL-LIABILITY-AND-EQUITY> 252,757 327,666
<SALES> 40,427 71,719
<TOTAL-REVENUES> 40,427 71,719
<CGS> 22,472 52,562
<TOTAL-COSTS> 22,472 52,562
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 3,019 3,019
<INTEREST-EXPENSE> 3,929 1,855
<INCOME-PRETAX> (24,198) (64,767)
<INCOME-TAX> 575 698
<INCOME-CONTINUING> (24,773) (65,465)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (24,773) (65,465)
<EPS-BASIC> (0.98) (2.56)
<EPS-DILUTED> (0.98) (2.56)
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