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, 2000
[ ] 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 August 10, 2000 was 27,629,017 Ordinary Shares, NIS 0.10 par value per
share.
ESC MEDICAL SYSTEMS LTD.
FORM 10-Q
For the Quarter Ended June 30, 2000
INDEX
PART I. FINANCIAL INFORMATION.....................................3
ITEM 1. Financial Statements......................................3
1) Independent Accountant's Review Report.................4
2) Consolidated Balance Sheets............................5
3) Consolidated Statements of Operations..................6
4) Statement of Changes in Shareholders' Equity...........7
5) Consolidated Statements of Cash Flows..................8
6) Notes to Condensed Interim Consolidated Financial
Statements.............................................9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................15
ITEM 3. Quantitative and Qualitative Disclosure about Market
Risk..................................................20
PART II. OTHER INFORMATION........................................21
ITEM 1. Legal Proceedings.....................................21
ITEM 4: Submission of Matters to a vote of security holders...22
ITEM 5. Other Information.....................................24
ITEM 6. Exhibits and Reports on Form 8-K......................24
# # # # # #
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-------------------------------------
ESC MEDICAL SYSTEMS LTD.
-------------------------------------
INDEX TO UNAUDITED CONDENSED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000
PAGE
----
INDEPENDENT ACCOUNTANTS' REVIEW REPORT 1
BALANCE SHEET 2
STATEMENT OF OPERATIONS 3
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY 4
STATEMENT OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6-12
# # # # # #
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
The Board of Directors
ESC Medical Systems Ltd.
Yokneam, Israel
We have reviewed the accompanying interim consolidated balance sheet of
ESC Medical Systems Ltd. and subsidiaries as of June 30, 2000 and the
related interim consolidated statements of operations for the six and
three month periods ended June 30, 2000 , statement of changes in
shareholders' equity and statement of cash flows for the six months
period ended June 30, 2000. These financial statements are the
responsibility of the company's board of directors and management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
We have not audited or reviewed the comparative amounts for the six and
three month periods ended June 30, 1999. Accordingly, we do not express
an opinion or any other form of assurance thereon.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with accounting principles generally accepted in the United
States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated
balance sheet of the Company as of December 31, 1999, and the related
consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended and in our report dated March 30, 2000, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated financial statements as of December 31, 1999, is
fairly stated, in all material respects, in relation to the consolidated
financial statements from which they have been derived.
Brightman Almagor & Co.
Certified Public Accountants
A member of Deloitte Touche Tohmatsu
Tel Aviv, Israel
August 15, 2000
ESC MEDICAL SYSTEMS LTD.
INTERIM CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 10,718 $ 24,524
Short-term investments 39,227 43,841
Trade receivables (net of allowances of $21,582 and
$25,432, respectively) 52,874 43,360
Prepaid expenses and other receivables 5,704 5,852
Inventories 39,440 39,516
--------- --------
147,963 157,093
--------- --------
LONG-TERM INVESTMENTS
Bank deposits and securities 885 879
Other 6,945 5,566
FIXED ASSETS 6,838 6,549
OTHER ASSETS 5,178 4,820
--------- --------
Total assets $ 167,809 $174,907
========= ========
CURRENT LIABILITIES
Short-term debt and current maturities of long-term loans $ 21 $ 21
Accounts payable and accrued expenses 57,828 72,252
--------- --------
57,849 72,273
--------- --------
LONG TERM LIABILITIES
Bank loans 35 42
Restructuring accrual 1,303 2,472
Accrued severance pay 1,064 1,248
Convertible subordinated notes 91,787 92,929
--------- --------
94,189 96,691
--------- --------
Total liabilities 152,038 168,964
SHAREHOLDERS' EQUITY
Ordinary shares of NIS 0.1 par value: Authorized -
50,000,000 shares; Issued and outstanding - 27,629,017
and 27,579,020 shares, respectively 578 577
Additional paid-in capital 138,136 137,732
Unearned compensation (53) (117)
Accumulated deficit (106,379) (113,975)
Treasury stock, at cost: 2,387,464 and 2,644,813 shares,
respectively (16,511) (18,274)
--------- --------
Total shareholders' equity 15,771 5,943
--------- --------
Total liabilities and shareholders' equity $ 167,809 $174,907
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS.
ESC MEDICAL SYSTEMS LTD.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ----------------------
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $ 78,543 $ 71,719 $ 42,515 $ 40,427
COST OF SALES 34,154 52,562 17,673 22,472
--------- --------- -------- --------
Gross profit 44,389 19,157 24,842 17,955
--------- --------- -------- --------
OPERATING EXPENSES
Research and development, net 5,779 8,886 2,973 4,231
Marketing and selling 25,786 44,134 13,505 19,721
General and administrative 4,403 10,117 2,135 6,103
Restructuring costs - 6,446 - -
Settlement of litigation - 4,500 - 1,500
Impairment of intangible and tangible assets - 6,250 - 6,250
Other - 2,848 - 2,848
--------- --------- -------- --------
Total operating expenses 35,968 83,181 18,613 40,653
--------- --------- -------- --------
OTHER OPERATING INCOME 1,450 - 1,450 -
--------- --------- -------- --------
Operating income (loss) 9,871 (64,024) 7,679 (22,698)
OTHER INCOME 599 - 599 -
FINANCING EXPENSES, NET (2,648) (2,860) (1,608) (1,448)
--------- --------- -------- --------
Income (loss) before income taxes 7,822 (66,884) 6,670 (24,146)
INCOME TAXES 98 698 - 575
--------- --------- -------- --------
Income (loss) after income taxes 7,724 (67,582) 6,670 (24,721)
COMPANY'S SHARE ON LOSSES OF AFFILIATES 420 366 318 52
--------- --------- -------- --------
Income (loss) after income taxes 7,304 (67,948) 6,352 (24,773)
--------- --------- -------- --------
EXTRAORDINARY GAIN ON PURCHASE OF
COMPANY'S CONVERTIBLE NOTES --------- --------- -------- --------
292 2,483 - -
--------- --------- -------- --------
Net income (loss) for the period $ 7,596 $(65,465) $ 6,352 $(24,773)
========= ========= ======== ========
EARNINGS (LOSS) PER SHARE
Basic:
Income (loss) before extraordinary items $ 0.29 $ (2.66) $ 0.25 $ (0.98)
Extraordinary gain 0.01 0.10 - -
--------- --------- -------- -------
Net earnings (loss) per share $ 0.30 $ (2.56) $ 0.25 $ (0.98)
========= ========= ======== ========
Diluted:
Income (loss) before extraordinary items $ 0.27 $ (2.66) $ 0.23 $ (0.98)
Extraordinary gain 0.01 0.10 - -
--------- --------- -------- -------
Net earnings (loss) per share $ 0.28 $ (2.56) $ 0.23 $ (0.98)
========= ========= ======== ========
WEIGHTED AVERAGE NUMBER
OF SHARES
Basic 25,128 25,537 25,183 25,358
========= ========= ======== ========
Diluted 27,595 25,537 27,802 25,358
========= ========= ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS.
ESC MEDICAL SYSTEMS LTD.
INTERIM STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
ADDITIONAL
SHARE PAID-IN UNEARNED ACCUMULATED TREASURY
CAPITAL CAPITAL COMPENSATION DEFICIT STOCK TOTAL
------- ---------- ------------ ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance as of
December 31, 1999 $ 577 $ 137,732 $ (117) $ (113,975) $ (18,274) $ 5,943
Exercise of options 1 23 1,763 1,787
Grant of options 381 381
Amortization of unearned
compensation 64 64
Net income for the period 7,596 7,596
------ ---------- ------------ ------------ ----------- -------
Balance as of
June 30, 2000 $ 578 $ 138,136 $ (53) $ (106,379) $ (16,511) $15,771
====== ========== ============ ============ =========== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS.
ESC MEDICAL SYSTEMS LTD.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30
-------------------------------
2000 1999
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 7,596 $(65,465)
Adjustments to reconcile net income (loss) to net cash
used in operating activities -
Income and expenses not affecting operating
cash flows:
Deferred income taxes - 1,203
Amortization of unearned compensation 64 65
Depreciation and amortization 1,818 4,372
Gain on purchase of Company's convertible notes (292) (2,483)
Other income (599) -
Other operating income (1,450) -
Rescosts - 27,854
Impairment of intangible and tangible assets - 6,250
Other 236 242
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables (9,514) 13,065
Decrease (increase) in prepaid expenses and (102) 1,385
other receivables
Decrease (increase) in inventories 76 (2,555)
Decrease in accounts payable and accrued expenses (15,912) (3,294)
------------- -----------
Net cash used in operating activities (18,079) (19,361)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (1,556) (1,441)
Sale of subsidiary's operations 814 -
Proceeds from investments, net 4,108 17,996
------------- -----------
Net cash provided by investing activities 3,366 16,555
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of convertible notes (873) (4,580)
Proceeds from exercise of options 1,787 136
Repayment of long-term loans (7) (96)
Increase (decrease) in short-term bank debt, net - (1,685)
Purchase of treasury stock - (4,006)
------------- -----------
Net cash provided by (used in) financing activities 907 (10,231)
------------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (13,806) (13,037)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,524 42,950
------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,718 $ 29,913
============= ===========
CASH PAID DURING THE PERIOD IN RESPECT OF:
Income taxes $ 490 $ 49
============= ===========
Interest $ 2,807 $ 3,491
============= ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS.
ESC MEDICAL SYSTEMS LTD.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2000
(In thousands)
NOTE 1 - BASIS OF PRESENTATION
A. The unaudited condensed interim consolidated
financial statements as of June 30, 2000 and for the
six and three months then ended ("interim financial
statements") of ESC Medical Systems Ltd. (the
"Company") and subsidiaries should be read in
conjunction with the audited financial statements of
the Company as of December 31, 1999 and for the year
then ended, including the notes thereto. The results
of operations for the interim periods are not
necessarily indicative of the results to be expected
on a full-year basis.
B. The interim financial statements have been prepared
in accordance with accounting principles generally
accepted in the United States.
The accounting principles applied in the preparation of
these interim financial statements are consistent with
those principles applied in the preparation of the most
recent annual audited financial statements.
3rd. Certain previously reported amounts have been reclassified
in order to conform with the current period presentation.
NOTE 2 - RESTRUCTURING
In 1999, the Company recorded a $45,068 charge for comprehensive
restructuring plans approved by the Board of Directors.
For the six months ended June 30, 1999, the Company recorded a
$27,854 charge with respect to this plan, including: $4,800 for
writedowns of receivables reflected in marketing and selling
expenses; $16,608 for writedowns of inventory reflected in cost
of goods sold; and $6,446 for severance, lease terminations and
other costs.
As of June 30, 2000 the unutilized accrual amounted to $2,410,
consisting of $488 for severance and $1,922 for lease
terminations.
As of June 30, 2000 most of the restructuring plan initiated in
1999 has already been implemented. Certain restructuring costs
are expected in the next twelve months. Management estimates an
additional $2,000 in restructuring charges related to these
matters.
ESC MEDICAL SYSTEMS LTD.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2000
(In thousands)
NOTE 3 - INVENTORIES
Inventories are composed of the following:
JUNE 30 DECEMBER 31
2000 1999
----------- -----------
(UNAUDITED)
----------- -----------
Raw materials $ 15,678 $ 15,998
Work in process 7,421 8,052
Finished products 16,341 15,466
----------- -----------
$ 39,440 $ 39,516
=========== ===========
NOTE 4 - SEGMENT INFORMATION
A. COMPOSITION OF REVENUES BY GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE THREE
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
2000 1999 2000 1999
--------- -------- --------- ----------
(UNAUDITED) (UNAUDITED)
-------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues
North America $ 30,446 $ 27,848 $ 16,621 $ 14,192
Europe 19,027 24,488 10,506 13,472
Asia 18,253 10,641 9,749 9,017
Central and South America 2,939 2,163 1,532 1,066
Other 7,878 6,579 4,107 2,680
--------- --------- ---------- --------
Consolidated $ 78,543 $ 71,719 $ 42,515 $ 40,427
========= ========= ========== ========
</TABLE>
ESC MEDICAL SYSTEMS LTD.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2000
(In thousands)
NOTE 4 - SEGMENT INFORMATION (CONT.)
B. REPORTABLE SEGMENTS
Starting in 2000, the Company changed its structure of internal
organization in a manner that caused the composition of its
reportable segments to change. Prior period data has not been
restated due to impracticability. In addition, previously
reported segment data has not been presented due to the lack of
relevance and comparability as a result of the structural
changes. The following table sets forth segment information for
six and three month periods ended June 30, 2000:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE THREE
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
------------- --------------
2000 2000
------------- --------------
(UNAUDITED) (UNAUDITED)
------------- --------------
<S> <C> <C>
Revenues
Surgical and aesthetics $ 67,775 $ 36,447
Dental 2,918 1,788
Industrial 7,850 4,280
------------- --------------
Consolidated $ 78,543 $ 42,515
============= ==============
Operating income (loss)
Surgical and aesthetics $ 11,396 $ 8,087
Dental (1,628) (801)
Industrial 103 393
------------- --------------
Consolidated 9,871 7,679
Other income 599 599
Financing expenses, net (2,648) (1,608)
------------- --------------
Income before income taxes $ 7,822 $ 6,670
============= ==============
</TABLE>
JUNE 30,
----------
2000
----------
(UNAUDITED)
----------
Assets
Surgical and aesthetics $ 92,866
Dental 4,238
Industrial 8,595
Unallocated assets 62,110
Consolidated $167,809
ESC MEDICAL SYSTEMS LTD.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2000
(In thousands)
NOTE 5 - CONTINGENT LIABILITIES
(A) In late 1998 the Company was named in a number of purported
class action securities lawsuits that have been consolidated
in the United States District Court for the Southern
District of New York. In July 1999, a consolidated amended
complaint was filed naming, among others, the Company and
several additional current and former directors and officers
of the Company and Laser Industries Limited, a subsidiary of
the Company ("Laser"), as defendants. The consolidated
amended complaint seeks 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. On December 23, 1999, the
Company moved to dismiss the consolidated amended complaint.
Both the plaintiffs' brief in opposition to the Company's
motion and the Company's reply brief have been filed. The
parties are awaiting the ruling on the Company's motion to
dismiss. The Company's insurance carrier has agreed to
assume the defense of the action under a reservation of
rights. Laser's insurance carrier's decision as to coverage
is currently pending. No accrual has been recorded in the
financial statements for this matter.
(B) On September 20, 1999, Dr. Richard Urso filed what purports
to be a class action lawsuit against the Company in the
State District Court in Harris County, Texas. Dr. Urso
alleges a number of causes of action including, breach of
contract, breach of warranty, product liability,
misrepresentation and violations of the Texas Deceptive
Trade Practices Act. The complaint purports to be filed on
behalf of a national class. The Plaintiff has failed to file
the motion for class certification in a timely manner. The
Company has taken steps to remove the case to Federal court
and intends to vigorously deny all allegations. No accrual
has been recorded in the financial statements for this
matter.
ESC MEDICAL SYSTEMS LTD.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2000
(In thousands)
NOTE 5 - CONTINGELIABILITIES - (CONT.)
(C) On May 10, 1999, the Company and a former director and
officer were named as defendants in an action filed in
Tel-Aviv Court by H.K. Hashalom Ltd. in connection with the
sale of the Company's EpiLight systems. H.K. Hashalom is
seeking monetary damages in the amount of $2,450 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 first hearing
has already been held. The date has not yet been set for the
hearing of the evidence. No accrual has been recorded in the
financial statements for this matter.
(D) 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. On January 25,
1999, the Company, along with three subsidiaries, brought an
action in the Superior Court of New Jersey, Somerset County
(the "US Court"), against Light Age. The litigation relates
to disputes arising out of an agreement between Light Age
and Laser pursuant to which Light Age supplied certain
medical laser devices to Laser. On July 1, 1999, the U.S.
Court granted defendant Light Age's motion to compel the
Company and the three affiliated entities to arbitrate. An
arbitration panel has been appointed and the parties are
currently conducting pre-arbitration discovery. Pending the
outcome of the U.S. arbitration, Light Age and the Company
agreed to file a motion to stay the proceedings in Tel-Aviv.
On October 14, 1999, the Tel-Aviv Court confirmed the motion
as requested and stayed the proceedings. No accrual has been
recorded in the financial statements for this matter.
ESC MEDICAL SYSTEMS LTD.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2000
(In thousands)
NOTE 5 - CONTINGENT LIABILITIES - (CONT.)
(E) On May 8, 2000, UBS Warburg L.L.C. ("Warburg") filed a
complaint in the Southern District Court of New York
alleging that the Company failed to pay approximately $2,600
in retainer and advisory fees arising out of a March 15,
1999 agreement, pursuant to which Warburg was engaged by
prior management with respect to matters relating to the
proxy contest that preceded the Company's 1999 annual
meeting of shareholders. The Company has filed its answer to
the complaint denying liability and asserting various
defenses. The parties are currently negotiating the terms of
a settlement agreement which is expected to dispose of this
complaint. No accrual has been recorded in the financial
statements for this matter.
(F) As mentioned above, the Company and its subsidiaries are
involved in several legal proceedings, claims and litigation
in which no accrual has been recorded in the financial
statements. Management of the Company is unable to predict
the outcome of such matters, the likelihood of an
unfavorable outcome or the amount or range of potential
loss, if any.
(G) 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 in further legal proceedings individually is not
likely to materially affect the Company's consolidated
financial position.
NOTE 6 - OTHER
(A) In June 2000, a subsidiary of the Company - Applied
Optronics Corp. ("AOC") sold its operations to a third
party. The consideration for this transactions was as
follows: $814 paid at the closing date, $750 to be paid
quarterly during three years from the date of the closing
bearing interest at a fixed rate per annum of 9%; and one of
the following: $1,000 which will be paid in three years from
the date of the contract or 149,080 shares of the buyer. As
a result of transaction the Company recorded other operating
income of $1,450.
ESC MEDICAL SYSTEMS LTD.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2000
(In thousands except share data)
NOTE 6 - OTHER- (CONT.)
(B) In April 2000, the audit committee approved the employment
with the Company of a related party as a special advisor to
the Board of Directors. Consideration for his services
include an annual salary of $10 and options to purchase
1,000,000 ordinary shares of the Company at a price of
$8.50, which was the market value of the shares at that
date, vesting in 4 equal annual installments. The first
installment vests upon approval of the grant.
(C) Following the issuance of shares of an affiliate the Company
recorded a gain of $599.
# # # # # # #
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ESC Medical Systems Ltd. (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 ("IPL") 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.
Starting in 2000, the Company organized itself into three business units
one consisting of three geographical sub-units serving the aesthetic and
surgical market, one unit serving the dental market and one unit serving
the industrial market.
As of June 30, 2000, most of the restructuring plan initiated in September
1999 has already been implemented. Certain remaining cost savings measures
are still planned. Management estimates an additional $2,000 in
restructuring charges related to these actions. As a result of the above
additional planned actions, management estimates another $5,000 in
annualizing cost savings.
In this Report, unless the context otherwise requires, all references to
the "Company" are to ESC Medical Systems Ltd. and its direct and indirect
wholly owned subsidiaries.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 COMPARED WITH
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 (In thousands
of U.S. Dollars)
REVENUES. The Company's net revenues increased by 5% to $42,515 for the
three months ended June 30, 2000 compared to $40,427 for the three months
ended June 30, 1999. The Company's net revenues increased by 10% to $78,543
for the six months ended June 30, 2000 compared to $71,719 for the six
months ended June 30, 1999.
The increase in sales is attributable to an increase in unit sales.
GROSS PROFIT. Gross profit increased to $24,842 for the three months ended
June 30, 2000 from $17,955 for the three month period ended June 30, 1999.
As a percentage of sales, the gross profit was 58% in the three month
period ended June 30, 2000 compared to 44% in the same period in 1999.
Gross profit increased to $44,389 for the six months ended June 30, 2000
from $19,157 for the six month period ended June 30, 1999. Excluding the
write off of inventory and other reserves mainly relating to restructuring,
1999 gross profit for the six months ended June 30, 1999 was $35,765. As a
percentage of sales, the gross profit was 57% in the six month period ended
June 30, 2000 compared to 50% in the same period in 1999, excluding the
write off of inventory and other reserves.
The significant increase in gross profit in the three and six month periods
ended June 30, 2000 is due to the increase in sales, reduction in overhead
cost and an improvement in the product mix.
RESEARCH AND DEVELOPMENT, NET. Net research and development costs decreased
by 30% to $2,973 for the three months ended June 30, 2000 from $4,231 in
the same period in 1999. As a percentage of sales, research and development
costs were 7% in the three month period ended June 30, 2000 as compared to
10% in the three month period ended June 30, 1999. Net research and
development costs decreased by 35% to $5,779 for the six month ended June
30, 2000 from $8,886 in the same period in 1999. As a percentage of sales,
research and development costs were 7% in the six month period ended June
30, 2000 as compared to 12% in the six month period ended June 30, 1999.
The decrease in research and development costs, net is due to a reduction
in overhead costs, significantly lower material consumption and cost
savings implemented during 1999, including the elimination of certain
uneconomical projects.
MARKETING AND SELLING. Marketing and selling expenses decreased by 32% to
$13,505 for the three months ended June 30, 2000 compared to $19,721 for
the same period in 1999. As a percentage of sales, marketing and selling
expenses in the three month period ended June 30, 2000 were 32% compared to
49% in the same period in 1999. Marketing and selling expenses decreased by
42% to $25,786 for the six months ended June 30, 2000 compared to $44,134
for the same period in 1999. Excluding write-offs relating to the
restructuring in the period of the six months ended June 30, 1999,
marketing and selling expenses were $39,334. As a percentage of sales,
marketing and selling expenses in the six month period ended June 30, 2000
were 33% compared to 55% in the same period in 1999 excluding write-offs.
The decrease in 2000 is attributable to the reduction in costs mainly in
the United States as a result of the restructuring plan adopted during
1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
by 65% to $2,135 for the three months ended June 30, 2000 from $6,103 in
the same period in 1999. As a percentage of sales, general and
administrative expenses in the three months ended June 30, 2000 were 5%
compared to 15% in the same period in 1999. General and administrative
expenses decreased by 56% to $4,403 for the six months ended June 30, 2000
from $10,117 in the same period in 1999. As a percentage of sales, general
and administrative expenses in the six month period ended June 30, 2000
were 6% compared to 14% in the same period in 1999.
The decrease in general and administrative expenses is mainly attributable
to a decrease in bad debts reserves and a significant reduction in legal
costs.
RESTRUCTURING COSTS. In the six month ended June 30, 1999, the Company
developed and started the implementation of a restructuring plan. In
connection with that restructuring plan, the Company recorded in the first
quarter of 1999 charges of $11,246 related to its sales and marketing
operations out of which $4,800 is included in marketing and selling
expenses and $16,608 related to inventory write-off (included in the cost
of goods sold).
SETTLEMENT OF LITIGATION. Settlement of litigation expenses for the six and
three month period ended June 30, 1999 included a provision, in connection
with litigation settled at the beginning of 2000.
IMPAIRMENT OF INTANGIBLE AND TANGIBLE ASSETS. Impairment of intangible and
tangible assets in the six and three month periods ended June 30, 1999
included intangible assets write off mainly related to goodwill from
acquisitions of $5,004 and patent write off of $1,246.
OTHER EXPENSES. The $2,848 of expenses incurred in the three month period
ended June 30, 1999 are in connection with the 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 Messr. Arie Genger and Barnard J. Gottstein
and their affiliates in connection with the directors election contest
shall be reimbursed by the Company promptly and the costs of certain
officers of the Company." Messr. Arie Genger and Barnard J. Gottstein
submitted approximately $1,500. The officers of the Company at the time
incurred expenses of $1,348, which were charged to the Company.
OTHER OPERATING INCOME. Other operating income in the three month period
ended June 30, 2000 include the profit from sale of operation of a unit in
our industrial division, Applied Optronics Corporation in the United
States.
OPERATING INCOME (LOSS). For the three months ended June 30, 2000,
operating profit was $7,679, representing 18% of sales compared to
operating loss of $22,698 for the same period in 1999. For the six months
ended June 30, 2000, operating profit was $9,871, representing 13% of sales
compared to operating loss of $64,024 for the same period in 1999.
The improvement in operating result is due to the adoption of the
restructuring plan, mainly designed to align the Company's cost structure
with its revenue, the increase in sales and improvement in gross margins
and the sale of Applied Optronics Corp.
OTHER INCOME. Other income of $599 in the three months ended June 30, 2000
includes profits due to dilution of the Company's interests in one of its
high-tech ventures, Galil Medical Ltd.
FINANCING INCOME (EXPENSES), NET. For the three months ended June 30, 2000,
financing expenses were $1,608 compared to financing expenses of $1,448 in
the same period in 1999. For the six months ended June 30, 2000, financing
expenses were $2,648 compared to financing expenses of $2,860 in the same
period in 1999.
TAXES ON INCOME. No taxes on income incurred in the three months ended June
30, 2000 compared to $575 in the same period in 1999. Taxes on income of
$98 incurred in the six months ended June 30, 2000 compared to $698 in the
same period in 1999. Most of the Company's income in Israel is exempt from
income taxes, the Israeli statutory tax rate for the purpose of
reconciliation of the reported tax expense is approximately zero. Income
tax expense in the financial statements relates primarily to the income
taxes of non-Israeli subsidiaries. Additionally, the Company has over
$100,000 of net operating losses, mostly in the United States and Israel.
COMPANY'S SHARE ON LOSSES OF AFFILIATES. For the three months ended June
30, 2000, the Company's share on losses of affiliates was $318 compared to
$52 in the same period in 1999. For the six months ended June 30, 2000, the
Company's share on losses of affiliates was $420 compared to $366 in the
same period in 1999.
EXTRAORDINARY GAIN ON PURCHASE OF COMPANY'S CONVERTIBLE NOTES. For the six
months ended June 30, 2000, extraordinary gain on the purchase of the
Company's convertible notes was $292 compared to $2,483 in the same period
in 1999. The decrease is due to the purchase of fewer of the Company's
convertible notes.
NET INCOME (LOSS). As a result of the foregoing factors, the Company's net
income was $6,352 for the three months ended June 30, 2000 compared to net
loss of $24,773 in the period in 1999. The Company's net income was $7,596
for the six months ended June 30, 2000 compared to net loss of $65,465 in
the period in 1999. Excluding 1999 restructuring costs, the net loss for
the six month period ended June 30, 1999 was $37,611.
The improvement in net income is due to the adoption of the restructuring
plan, mainly designed to align the Company's cost structure with its
revenue capabilities, the increase in sales and improvement in gross
margins and the sale of Applied Optronics Corp.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands of dollars)
As of June 30, 2000, the Company had cash and cash equivalents of $10,718
compared to $24,524 on December 31, 1999. The decrease of $13,806 is mainly
attributable to:
OPERATING ACTIVITIES
For the six months ended June 30, 2000, cash used by operating activities
was approximately $18,079. The primary cash used in the Company's operating
activities were approximately $10,775 for payment of legal settlements,
approximately $5,588 for payments in respect of restructuring all offset by
the profit in the six months ended June 30, 2000 and negative change in
current working capital of approximately $1,716. Trade receivables rose by
$9,514 mainly due to certain temporary manufacturing and collection
inefficiencies related to restructuring and due to higher sales.
INVESTING ACTIVITIES
For the six months ended June 30, 2000, cash provided by investing
activities was approximately $3,366. The primary changes in the Company's
investing activities were, the maturity of $4,608 in short-term investments
which was used in operating activities, use of cash of approximately $1,556
to purchase fixed assets, a $500 investment representing 10% in a company
and a $814 in proceeds from sale of a unit in our industrial division.
FINANCING ACTIVITIES
For the six months ended June 30, 2000, cash provided by financing
activities was $907. The primary financing activities of the Company
included the repurchase of the Company's convertible notes for $873 and
proceeds from the exercise of options of $1,787.
The Company believes that internally generated funds, together with
available cash, will suffice over at least the next 12 months to meet its
present anticipated day-to-day operating expenses, materials, commitments,
working capital and capital expenditure requirements.
CAUTIONARY STATEMENTS
Certain statements made in this Report or made in press releases or in oral
presentations made by the Company's employees or agents reflect the
Company's estimates and beliefs and are intended to be, and are hereby
identified as, "forward looking statements" for the purposes of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
The Company cautions readers that such forward looking statements involve
risks and uncertainties that could cause actual results to differ
materially from those expected by the Company or expressed in the Company's
forward looking statements. These factors include, but are not limited to,
the following: (1) uncertainty of market acceptance of the Company's
products; (2) uncertainties with respect to obtaining regulatory approvals
for new products or for the sale of existing products in new markets; (3)
uncertainties associated with the enforcement of intellectual property
rights by the Company and others; (4) limited number of customers for the
Company's products; (5) risks of downturns in economic conditions
generally, and in the health care industry specifically; (6) risks
associated with competition and competitive pricing pressures; (7) other
risks described in the Company's filings with the Securities and Exchange
Commission and (8) errors made in gathering information or making
estimates.
Readers are cautioned not to place undue reliance on forward-looking
statements made in this Report, or made in press releases or in oral
presentations. Such forward-looking statements reflect management's
analysis only as of the date such statements are made and the Company
undertakes no obligation to revise publicly these forward-looking
statements to reflect events or circumstances that arise subsequently.
Readers should carefully review the risk factors set forth above and
described elsewhere in this document and in other documents the Company
files from time to time with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains an investment portfolio which consist mainly of
income securities with an average maturity of less than one year. The
portfolio consists of low risk corporate bonds and bank deposits. The
Company's policy is generally to hold its fixed income investments until
maturity and therefore the Company would not expect its operating results
or cash flows to be affected to any significant degree by a sudden change
in market interest rates on its securities portfolio.
The Company has fixed rate long-term debt of approximately $92 million. The
Company believes that a material decrease in interest rates would not have
a material impact on the fair value of this debt.
The Company has foreign subsidiaries, which sell and manufacture its
products in various markets. As a result, the Company's earnings and cash
flows are exposed to fluctuation in foreign currency exchange rates. The
Company attempts to limit this exposure by selling and linking its products
mostly to the United States dollar.
The Company also enters into foreign currency hedging transactions to
protect the dollar value of its non dollar denominated trade receivables,
mainly in JPY and EURO. The gain and losses of on these transactions are
included in the statement of operations in the period in which the he
changes in the exchange rate occur. There can be no assurance that such
activities or others will eliminate the negative financial impact of
currency fluctuations. Indeed, such activities may have adverse impact on
earnings.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings incident to its
business. Except as noted below and as noted in the Company's annual report
on Form 10-K for the year ended December 31, 1999 and quarterly report on
Form 10-Q for the quarter ended March 31, 2000, 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.
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. On January 25, 1999, the
Company, along with three subsidiaries, brought an action in the Superior
Court of New Jersey, Somerset County (the "US Court"), against Light Age.
The litigation relates to disputes arising out of an agreement between
Light Age and Laser pursuant to which Light Age supplied certain medical
laser devices to Laser. On July 1, 1999, the U.S. Court granted defendant
Light Age's motion to compel the Company and the three affiliated entities
to arbitrate. An arbitration panel has been appointed and the parties are
currently conducting pre-arbitration discovery. Pending the outcome of the
U.S. arbitration, Light Age and the Company agreed to file a motion to stay
the proceedings in Tel-Aviv. On October 14, 1999, the Tel-Aviv Court
confirmed the motion as requested and stayed the proceedings. No accrual
has been recorded in the financial statements for this matter.
On May 8, 2000, UBS Warburg L.L.C. ("Warburg") filed a complaint in the
Southern District Court of New York alleging that the Company failed to pay
approximately 2.6 million dollars in retainer and advisory fees arising out
of a March 15, 1999 agreement, pursuant to which Warburg was engaged by
prior management with respect to matters relating to the proxy contest that
preceded the Company's 1999 annual meeting of shareholders. The Company has
filed its answer to the complaint denying liability and asserting various
defenses. The parties are currently negotiating the terms of a settlement
agreement which is expected to dispose of this complaint. No accrual has
been recorded in the financial statements for this matter.
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 (approximately $2.45 million at current
exchange rates) but has reserved the right to increase such amount as well
as a declaratory judgment that, among other things, 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 first hearing has already been held. The date has not yet been set for
the hearing of the evidence.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual General Meeting of the Company's shareholders on
May 30, 2000 (the "Annual Meeting"). The following sets forth each matter
which was presented to the Company's shareholders and voted upon at the
meeting and the number of votes cast for and against as well as the number
of abstentions for each such matter:
1. To approve the election of directors of the Company to serve
until the next Annual General Meeting. The nominees for election were:
Prof. Jacob A. Frenkel, Aharon Dovrat, Philip Friedman, Thomas G. Hardy,
Prof. Darrell S. Rigel, Sash A. Spencer, Mark H. Tabak, Prof. Zehev Tadmor.
FOR: 24,320,006 WITHHOLD: 195,907
---------------------------------------------
2. To approve the exemption, insurance and indemnification arrangements of
the Company's directors under the Israeli Companies Law 1999-5759 (the
"Companies Law") which requires such arrangements to be approved by the
Company's Audit Committee and Board of Directors as well as the Company's
shareholders. This matter was approved by the following votes:
FOR: 23,841,290 AGAINST: 293,189 ABSTAIN: 51,434
---------------------------------------------------------
3. To approve the reimbursement of costs and expenses of certain
shareholders in connection with the proxy contest held at the Company June
23, 1999 combined extraordinary and annual general meeting of shareholders.
This matter was approved by the following votes:
FOR: 8,041,416 AGAINST: 2,684,709 ABSTAIN: 14,217
---------------------------------------------------------
4. To approve the indemnification of current and former directors of the
Company with respect to certain complaints filed with the United States
District Court and in connection with the filing of Schedule 13D by certain
shareholders prior to the Company's June 23, 1999 combined extraordinary
and annual general meeting of shareholders. This matter was approved by the
following votes:
FOR: 8,001,012 AGAINST: 2,723,053 ABSTAIN: 16,277
--------------------------------------------------------------
5. To approve the adoption of the 1999 Share Option Plan and the grant of
share options thereunder, which was introduced in the Company in 1999 and
intended to provide incentive compensation to and encourage share ownership
by the directors, officers, employees and certain consultants and dealers
of the Company. This matter was approved by the following votes:
FOR: 7,900,142 AGAINST: 2,827,103 ABSTAIN: 13,097
---------------------------------------------------------------
6. To appoint the firm of Brightman, Almagor & Co., a member firm of
Deloitte, Touche, Tohmatsu, as the Company's independent accountants for
fiscal year 2000, replacing Luboshitz Kaiserer, to audit the consolidated
fianancial statements of the Company and its subsidiaries for fiscal year
1999. This matter was approved by the following votes:
FOR: 24,119,204 AGAINST: 55,234 ABSTAIN: 11,475
---------------------------------------------------------
7. To approve an amendment to the Company's Memorandum of Association in
order to change the voting required for adoption of amendments to the
Company's Memorandum of Association from the affirmative vote of the
holders of 75% of the Ordinary Shares present and voting at a general
meeting of shareholders to the affirmative vote of the holders of a
majority of the Ordinary Shares present and voting at a general meeting of
shareholders. This matter was approved by the following votes:
FOR: 10,646,885 AGAINST: 78,535 ABSTAIN: 14,922
---------------------------------------------------------
8. To amend the Company's Articles of Association by adopting the Amended
and Restated Articles of Association. On February 1, 2000 the Companies Law
became effective and superseded most of the then-existing provisions of the
Israeli Companies Ordinance (New Version), 1983-5743 to which the Company
had been subject. Consequently, companies incorporated in Israel were able
to alter and modify their Articles of Association in order to adjust them
to the new provision of the Companies Law. This matter was approved by the
following votes:
FOR: 10,646,760 AGAINST: 79,435 ABSTAIN: 14,147
---------------------------------------------------------
9. To approve the compensation of the Company's directors for (i) services
rendered to the Board of Directors during the term which commenced
following the Company's June 23, 1999 combined extraordinary and annual
general meeting of shareholders and (ii) serving on the Board of Directors
during the new term, which commenced at the Annual Meeting. This matter was
approved by the following votes:
FOR: 21,295,172 AGAINST: 2,836,702 ABSTAIN: 54,039
-----------------------------------------------------------
ITEM 5. OTHER INFORMATION
Following new regulations promulgated under the Israeli Companies Law and
in accordance thereto, on July 25, 2000 the Company designated Mssrs.
Philip Friedman and Mark H. Tabak as its outside directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
10.1 Agreement, dated as of January 1, 2000, between the Company
and Alon Maor
10.2 Agreement, dated as of June 23, 2000, between the Company
and Raffi Werner
10.3 New Employment Terms, dated May 17, 2000, between the Company and
Louis Scafuri
27 Financial Date Schedule
(b) Reports on Form 8-K
The Company has not filed any Current Reports on Form 8-K during the three
month period ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESC Medical Systems Ltd.
/s/ Sagi A. Genger
-----------------------------
Date: August 15, 2000 By: Sagi A. Genger
(Chief Financial Officer,
and Duly Authorized Officer)
EXHIBIT INDEX
10.1 Agreement, dated as of January 1, 2000, between the Company and Alon
Maor
10.2 Agreement, dated as of June 23, 2000, between the Company and Raffi
Werner
10.3 New Employment Terms, dated May 17, 2000, between the Company and
Louis Scafuri
27 Financial Data Schedule
