UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 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 incorporation (I.R.S. Employer
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 November
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 September 30, 2000
INDEX
PART I. FINANCIAL INFORMATION...............................................3
ITEM 1. FINANCIAL STATEMENTS............................................3
1) Independent Accountant's Review Report....................4
2) Interim Consolidated Balance Sheet........................5
3) Interim Consolidated Statements of Operations.............6
4) Interim Statement of Changes in Shareholders' Equity......7
5) Interim Consolidated Statement of Cash Flows..............8
6) Notes to Unaudited Condensed Interim Consolidated
Financial Statements.....................................9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK....................................................21
PART II. OTHER INFORMATION...................................................23
ITEM 1. LEGAL PROCEEDINGS..............................................23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................24
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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. ( "the Company" ) and subsidiaries as of September 30, 2000
and the related interim consolidated statements of operations for the nine and
three month periods ended September 30, 2000 , the statement of changes in
shareholders' equity and the statement of cash flows for the nine month period
ended September 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 nine and three
month periods ended September 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
November 14, 2000
<TABLE>
<CAPTION>
ESC MEDICAL SYSTEMS LTD.
INTERIM CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
September 30, December 31,
2000 1999
------------- -----------
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 30,698 $ 24,524
Short-term investments 16,266 43,841
Trade receivables (net of allowances of $19,882 and $25,432
respectively) 52,393 43,360
Prepaid expenses and other receivables 7,571 5,852
Inventories 47,676 39,516
------------ -----------
154,604 157,093
------------ -----------
LONG-TERM INVESTMENTS
Bank deposits and securities 937 879
Other 7,132 5,566
FIXED ASSETS 6,977 6,549
OTHER ASSETS 4,865 4,820
------------ -----------
Total assets $ 174,515 $ 174,907
============ ===========
CURRENT LIABILITIES
Short-term debt and current maturities of long-term loans 6,020 21
Accounts payable and accrued expenses 53,135 72,252
------------ -----------
59,155 72,273
------------ -----------
LONG TERM LIABILITIES
Bank loans 27 42
Restructuring accrual 1,133 2,472
Accrued severance pay 1,089 1,248
Convertible subordinated notes 91,787 92,929
------------ -----------
94,036 96,691
------------ -----------
Total liabilities 153,191 168,964
------------ -----------
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 136,647 137,732
Unearned compensation (21) (117)
Accumulated deficit (102,399) (113,975)
Treasury stock, at cost: 1,951,118 and 2,644,813 shares, respectively (13,481) (18,274)
------------- -----------
Total shareholders' equity 21,324 5,943
------------- -----------
Total liabilities and shareholders' equity $ 174,515 $ 174,907
============= ===========
</TABLE>
The accompanying notes are an integral part of these interim consolidated
financial statements.
<TABLE>
<CAPTION>
ESC MEDICAL SYSTEMS LTD.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
For the nine months ended For the three months ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 115,601 $ 102,032 $ 37,058 $ 30,313
COST OF SALES 48,474 78,562 14,320 26,000
----------- ------------ ------------ -----------
Gross profit 67,127 23,470 22,738 4,313
----------- ------------ ------------ -----------
OPERATING EXPENSES
Research and development, net 8,731 12,091 2,952 3,205
Marketing and selling 37,845 60,868 12,059 16,734
General and administrative 6,812 24,809 2,409 14,692
Restructuring costs - 16,867 - 10,421
Settlement of litigation - 5,500 - 1,000
Impairment of intangible and tangible assets - 17,458 - 11,208
Other - 4,524 - 1,676
----------- ------------ ------------ -----------
Total operating expenses 53,388 142,117 17,420 58,936
----------- ------------ ------------ -----------
OTHER OPERATING INCOME 1,450 - - -
----------- ------------ ------------ -----------
Operating income (loss) 15,189 (118,648) 5,318 (54,623)
----------- ------------ ------------ -----------
OTHER INCOME 599 - - -
FINANCING EXPENSES, NET (3,673) (1,533) (1,025) 1,327
----------- ------------ ------------ -----------
Income (loss) before income taxes 12,115 (120,180) 4,293 (53,296)
INCOME TAXES 98 3,693 - 2,995
----------- ------------ ------------ -----------
Income (loss) after income taxes 12,017 (123,873) 4,293 (56,291)
COMPANY'S SHARE ON LOSSES OF AFFILIATES 733 587 313 221
----------- ------------ ------------ -----------
Income (loss) after income taxes 11,284 (124,460) 3,980 (56,512)
EXTRAORDINARY GAIN ON PURCHASE OF COMPANY'S
CONVERTIBLE NOTES 292 2,863 - 380
----------- ------------ ------------ -----------
Net income (loss) for the period $ 11,576 $ (121,597) $ 3,980 $ (56,132)
=========== ============ ============ ===========
EARNINGS (LOSS) PER SHARE
Basic:
Income (loss) before extraordinary items $ 0.45 $ (4.79) $ 0.16 $ (2.18)
Extraordinary gain 0.01 0.10 - 0.02
----------- ------------ ------------ -----------
Net earnings (loss) per share $ 0.46 $ (4.69) $ 0.16 $ (2.16)
=========== ============ ============ ===========
Diluted:
Income (loss) before extraordinary items $ 0.40 $ (4.79) $ 0.14 $ (2.18)
Extraordinary gain 0.01 0.10 - 0.02
----------- ------------ ------------ -----------
Net earnings (loss) per share $ 0.41 $ (4.69) $ 0.14 $ (2.16)
=========== ============ ============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 25,233 25,940 25,460 25,926
=========== ============ ============ ===========
Diluted 28,095 25,940 29,357 25,926
=========== ============ ============ ===========
</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
---------- ----------- ------------- ----------- ---------- ---------
Balance as of
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 $ 577 $ 137,732 $ (117) $ (113,975) $ (18,274) $ 5,943
Exercise of options 1 (1,466) 4,793 3,328
Grant of options 381 381
Amortization of unearned
compensation 96 96
Net income for the period 11,576 11,576
---------- --------- --------- ----------- ----------- ---------
Balance as of
September 30, 2000 $ 578 $ 136,647 $ (21) $ (102,399) $ (13,481) $ 21,324
========== ========= ========= =========== =========== =========
The accompanying notes are an integral part of these interim consolidated
financial statements.
</TABLE>
ESC MEDICAL SYSTEMS LTD.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
For the nine months
Ended September 30
------------------------------
2000 1999
------------ -------------
CASH FLOWS - OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 11,576 $ (121,597)
Adjustments to reconcile net income (loss) to net cash
used in operating activities -
Income and expenses not affecting operating cash flows:
Deferred income taxes - 4,993
Amortization of unearned compensation 96 96
Depreciation and amortization 2,781 5,566
Gain on purchase of Company's convertible notes (292) (2,863)
Other income (599) -
Other operating income (1,450) -
Restructuring costs - 41,405
Impairment of intangible and tangible assets - 17,458
Other 574 220
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables (9,033) 29,853
Decrease (increase) in prepaid expenses and other receivables (1,969) 1,576
Decrease (increase) in inventories (8,160) 530
Decrease in accounts payable and accrued expenses (20,075) (6,626)
------------ ------------
Net cash used in operating activities (26,551) (29,389)
------------ ------------
CASH FLOWS - INVESTING ACTIVITIES
Purchase of fixed assets (2,345) (1,559)
Sale of subsidiary's operations 814 -
Proceeds from investments, net 25,817 21,453
------------ ------------
Net cash provided by investing activities 24,286 19,894
------------ ------------
CASH FLOWS - FINANCING ACTIVITIES
Purchase of convertible notes (873) (5,205)
Proceeds from exercise of options 3,328 161
Repayment of long-term loans (15) (122)
Increase (decrease) in short-term bank debt, net 5,999 (2,207)
Purchase of treasury stock - (4,006)
------------ ------------
Net cash provided by (used in) financing activities 8,439 (11,379)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,174 (20,874)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,524 42,950
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,698 $ 22,076
============ =============
CASH PAID DURING THE PERIOD IN RESPECT OF:
Income taxes $ 710 $ 546
============ =============
Interest $ 5,869 $ 6,895
============ =============
The accompanying notes are an integral part of these interim consolidated
financial statements.
</TABLE>
ESC MEDICAL SYSTEMS LTD.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2000
(In thousands)
Note 1 - BASIS OF PRESENTATION
A. The unaudited condensed interim consolidated financial statements
as of September 30, 2000 and for the nine 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.
C. 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 nine months ended September 30, 1999, the Company recorded a
$41,405 charge with respect to this plans, including: $4,800 for
writedowns of receivables reflected in marketing and selling expenses;
$19,738 for writedowns of inventory reflected in cost of goods sold;
and $16,867 for severance, lease terminations and other costs.
As of September 30, 2000 the unutilized accrual amounted to $ 2,204,
consisting of $ 452 for severance and $ 1,752 for lease terminations.
As of September 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 SEPTEMBER 30, 2000
(In thousands)
Note 3 - INVENTORIES
Inventories are composed of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Raw materials $ 19,525 $ 15,998
Work in process 8,256 8,052
Finished products 19,895 15,466
------------ ------------
$ 47,676 $ 39,516
============ ============
</TABLE>
Note 4 - SEGMENT INFORMATION
A. COMPOSITION OF REVENUES BY GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
For the nine months ended For the three months ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
North America $ 45,880 $ 36,895 $ 15,434 $ 9,047
Europe 27,391 32,008 8,364 7,520
Asia 27,308 20,242 9,055 9,601
Central and South America 3,966 3,251 1,027 1,088
Other 11,056 9,638 3,178 3,058
---------- ---------- --------- --------
$ 115,601 $ 102,032 $ 37,058 $ 30,313
========== ========== ========= ========
</TABLE>
ESC MEDICAL SYSTEMS LTD.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 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
nine-and three-month periods ended September 30, 2000:
<TABLE>
<CAPTION>
For the nine For the three
months ended months ended
September 30, September 30,
-------------- --------------
2000 2000
-------------- --------------
(Unaudited) (Unaudited)
Revenues
<S> <C> <C>
Surgical and aesthetics $ 99,866 $ 32,091
Dental 5,071 2,153
Industrial 10,664 2,814
----------- -----------
Consolidated $ 115,601 $ 37,058
=========== ===========
Operating income (loss)
Surgical and aesthetics $ 17,704 $ 6,308
Dental (2,286) (658)
Industrial (229) (332)
----------- -----------
Consolidated 15,189 5,318
Other income 599 -
Financing expenses, net (3,673) (1,025)
----------- -----------
Income before income taxes $ 12,115 $ 4,293
=========== ===========
September 30,
-------------
2000
-------------
(Unaudited)
Assets
Surgical and aesthetics $ 146,378
Dental 3,033
Industrial 7,601
Unallocated assets 17,503
------------
Consolidated $ 174,515
============
</TABLE>
ESC MEDICAL SYSTEMS LTD.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 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. On August 31, 2000, the Court entered an order
dismissing the claim against the Laser director and officer
defendants and denying the remaining dismissal motion counts. The
Company's insurance carrier has agreed to assume the defense of
the action under a reservation of rights. 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 Company entered a
general denial and has removed the case to Federal court. The
Company will challenge plaintiff's class certification motion
when it is filed and will continue to defend this case
vigorously. 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 SEPTEMBER 30, 2000
(In thousands)
Note 5 - CONTINGENT LIABILITIES - (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. At a pre-trial hearing,
the Court advised the parties to attempt resolving the case
through mediation, and the parties are currently searching for a
mutually acceptable mediator. 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 hearings on the merits have been
scheduled for Summer 2001. 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 SEPTEMBER 30, 2000
(In thousands)
Note 5 - CONTINGENT LIABILITIES - (CONT.)
(5) On May 8, 2000, UBS Warburg L.L.C. ("Warburg") filed a complaint
in the United States District Court for the Southern District 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. In October 2000, the parties entered into a
settlement agreement pursuant to which the Company paid Warburg a
one-time cash payment of $550, for which provision was previously
made in the Company's financial statements. The Company has also
entered into a letter agreement with Warburg pursuant to which
the Company may be liable for Transaction Fees of up to $1,000 on
certain future transactions, if such transactions were to take
place on or before March 31, 2001. No accrual has been recorded
in the financial statements for such fee in respect of any such
future transaction.
(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.
ESC MEDICAL SYSTEMS LTD.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2000
(In thousands except share data)
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 of 9% per
annum; 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.
(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.
# # # # # # #
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 unit 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 September 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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE
AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 (In
thousands of U.S. Dollars)
REVENUES. The Company's net revenues increased by 22% to $37,058 for the
three months ended September 30, 2000 compared to $30,313 for the three
months ended September 30, 1999. The Company's net revenues increased by
13% to $115,601 for the nine months ended September 30, 2000 compared to
$102,032 for the nine months ended September 30, 1999.
The increase in sales is attributable to an increase in unit sales and sale
of services.
GROSS PROFIT. Gross profit increased to $22,738 for the three months ended
September 30, 2000 from $4,313 for the three-month period ended September
30, 1999. Excluding the write off of inventory and other reserves mainly
relating to restructuring, 1999 gross profit for the three months ended
September 30, 1999 was $13,955. As a percentage of sales, the gross profit
was 61% in the three-month period ended September 30, 2000 compared to 46%
in the same period in 1999, excluding the write off of inventory. Gross
profit increased to $67,127 for the nine months ended September 30, 2000
from $23,470 for the nine-month period ended September 30, 1999. Excluding
the write off of inventory and other reserves mainly relating to
restructuring, 1999 gross profit for the nine months ended September 30,
1999 was $53,520. As a percentage of sales, the gross profit was 58% in the
nine-month period ended September 30, 2000 compared to 52% 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 nine month
periods ended September 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 8% to $2,952 for the three months ended September 30, 2000 from $3,205
in the same period in 1999. As a percentage of sales, research and
development costs were 8% in the three-month period ended September 30,
2000 as compared to 11% in the three-month period ended September 30, 1999.
Net research and development costs decreased by 28% to $8,731 for the nine
months ended September 30, 2000 from $12,091 in the same period in 1999. As
a percentage of sales, research and development costs were 8% in the nine-
month period ended September 30, 2000 as compared to 12% in the nine-month
period ended September 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 28% to
$12,059 for the three months ended September 30, 2000 compared to $16,734
for the same period in 1999. As a percentage of sales, marketing and
selling expenses in the three-month period ended September 30, 2000 were
33% compared to 55% in the same period in 1999. Marketing and selling
expenses decreased by 38% to $37,845 for the nine months ended September
30, 2000 compared to $60,868 for the same period in 1999. Excluding
write-offs relating to the restructuring in the period of the nine months
ended September 30, 1999, marketing and selling expenses were $56,068. As a
percentage of sales, marketing and selling expenses in the nine-month
period ended September 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 84% to $2,409 for the three months ended September 30, 2000 from $14,692
in the same period in 1999. General and administrative expenses for the
three-month period ended September 30, 1999 include bad debt charge of
$10,780 and litigation expenses of $2,800. As a percentage of sales,
general and administrative expenses in the three months ended September 30,
2000 were 7% compared to 4% in the same period in 1999 excluding
extraordinary expenses. General and administrative expenses decreased by
73% to $6,812 for the nine months ended September 30, 2000 from $24,809 in
the same period in 1999. As a percentage of sales, general and
administrative expenses in the nine-month period ended September 30, 2000
were 6% compared to 11% in the same period in 1999 excluding extraordinary
provisions.
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 first quarter of 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).
In the third quarter of 1999, the Company commenced another restructuring
program. In that connection, the Company recorded writedowns of inventories
(included in the cost of goods sold) of approximately $3,100. The
restructuring charge amount of $11,671 was comprised of writedowns of fixed
assets of $4,221 and severance charges, lease terminations of approximately
$6,200 and professional fees of $1,250.
SETTLEMENT OF LITIGATION. Settlement of litigation expenses for the nine
and three-month period ended September 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 nine-month period ended September 30, 1999 included
intangible assets write-off mainly related to goodwill from acquisitions
$14,645, patent write-off $1,246 and tangible assets write off of $1,567
related to the restructuring plan in 1999.
OTHER EXPENSES. Other expenses for the three month period ended September
30, 1999 include $1,250 of professional fees related to the restructuring
plan and $426 ($3,274 in the nine month period ended September 30, 1999) 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 $1,510. The
officers of the Company at the time incurred expenses of $1,764, which were
charged to the Company.
OTHER OPERATING INCOME. Other operating income in the nine-month period
ended September 30, 2000 includes 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 September 30, 2000,
operating profit was $5,318, representing 14% of sales compared to
operating loss of $54,623 for the same period in 1999. For the nine months
ended September 30, 2000, operating profit was $15,189, representing 13% of
sales compared to operating loss of $118,648 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 Corporation.
OTHER INCOME. Other income of $599 in the nine months ended September 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 September 30,
2000, financing expenses were $1,025 compared to financing income of $1,327
in the same period in 1999. For the nine months ended September 30, 2000,
financing expenses were $3,673 compared to financing expenses of $1,533 in
the same period in 1999.
TAXES ON INCOME. No taxes on income were incurred in the three months ended
September 30, 2000 compared to $2,995 incurred in the same period in 1999.
Taxes on income of $98 were incurred in the nine months ended September 30,
2000 compared to $3,693 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. The taxes on income in 1999 include write-off of
deferred tax assets for the net amount of $2,383.
COMPANY'S SHARE ON LOSSES OF AFFILIATES. For the three months ended
September 30, 2000, the Company's share on losses of affiliates was $313
compared to $221 in the same period in 1999. For the nine months ended
September 30, 2000, the Company's share on losses of affiliates was $733
compared to $587 in the same period in 1999.
EXTRAORDINARY GAIN ON PURCHASE OF COMPANY'S CONVERTIBLE NOTES. For the nine
months ended September 30, 2000, extraordinary gain on the purchase of the
Company's convertible notes was $292 compared to $2,863 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 $3,980 for the three months ended September 30, 2000 compared to
net loss of $56,132 in the same period in 1999. The Company's net income
was $11,576 for the nine months ended September 30, 2000 compared to net
loss of $121,597 in the period in 1999.
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 September 30, 2000, the Company had cash and cash equivalents of
$30,698 compared to $24,524 on December 31, 1999. The increase of $6,174 is
mainly attributable to:
OPERATING ACTIVITIES
For the nine months ended September 30, 2000, cash used by operating
activities was approximately $26,551. The primary cash used in the
Company's operating activities was approximately $10,775 for payment of
legal settlements, approximately $5,839 for payments in respect of
restructuring, negative change in current working capital of approximately
$22,623 mainly due to an increase of $8,160 in inventories and an increase
of $9,033 in trade receivables all offset by the profit in the nine months
ended September 30, 2000. The increase of inventories is due to preparation
for a significant increase in sales in the fourth quarter and the
manufacture of hair removal machines for the aculight program. Under the
aculight program, machines owned by the Company are placed with operators
who are charged per usage fees.
INVESTING ACTIVITIES
For the nine months ended September 30, 2000, cash provided by investing
activities was approximately $24,286. The primary changes in the Company's
investing activities were, the maturity of $27,517 in short-term
investments which was partially used in operating activities, use of cash
of approximately $2,345 to purchase fixed assets, a $1,000 investment
representing approximately 20% control of the voting power in a company,
$700 investment in Galil Medical Systems Ltd. and a $814 in proceeds from
sale of a unit in our industrial division.
FINANCING ACTIVITIES
For the nine months ended September 30, 2000, cash provided by financing
activities was $8,439. The primary financing activities of the Company
included the repurchase of the Company's convertible notes for $873,
proceeds from the exercise of options of $3,328 and a short term loan of
$5,999.
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.
CONDITIONS IN ISRAEL
The Company's principal offices and its product development and
manufacturing facilities are located in the State of Israel, and the
Company is directly affected by the political, economic and military
conditions to which that country is subject. Since the establishment of the
State of Israel in 1948, a state of hostility has existed, varying in
degree and intensity, between Israel and certain Arab countries. In
addition, Israel and companies doing business in Israel have been the
subject of economic boycott by the Arab countries since Israel's
establishment. Although Israel has entered into various agreements with
certain Arab countries and the Palestine Liberation Organization ("PLO")
and various declarations have been signed in connection with efforts to
resolve some of the aforementioned problems, no prediction can be made as
to whether a full resolution of these problems will be achieved or as to
the nature of any such resolution. Any major hostilities involving Israel
or the interruption or curtailment of trade between Israel and its present
trading partners could have a material adverse effect on the Company's
business, financial conditions and results of operations.
Some of the employees of the Company currently are obligated to perform
annual reserve duty in the Israel Defense Forces and are subject to being
called for active military duty at any time. While the Company has operated
effectively under those and similar requirements in the past, no assessment
can be made of the full impact of such requirements of the Company in the
future, particularly if emergency circumstances occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains an investment portfolio which consists 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, British Sterling and EURO. The gain and losses on these
transactions are included in the statement of operations in the period in
which the 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
reports on Form 10-Q for the quarters ended March 31 and June 30, 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.
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. On August 31, 2000, the
Court entered an order dismissing the claim against the Laser director
and officer defendants and denying the remaining dismissal motion
counts. The Company's insurance carrier has agreed to assume the defense
of the action under a reservation of rights. 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
United States District Court for the Southern District 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. In October 2000, the
parties entered into a settlement agreement pursuant to which the
Company paid Warburg a one-time cash payment of $550, for which
provision was previously made in the Company's financial statements. The
Company has also entered into a letter agreement with Warburg pursuant
to which the Company may be liable for Transaction Fees of up to $1,000
on certain future transactions, if such transactions were to take place
on or before March 31, 2001. No accrual has been recorded in the
financial statements for such fee in respect of any such future
transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits
Exhibit
Number Description
------- -----------
10.1 Letter of Change in Prof. Jacob A. Frenkel Stock Option Plan
dated September 7, 2000
27 Financial Data Schedule
(2) Reports on Form 8-K
The Company has not filed any Current Reports on Form 8-K during the three
month period ended September 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: November 14, 2000 By: Sagi A. Genger
Chief Financial Officer
EXHIBIT INDEX
10.1 Letter of change in Prof. Jacob A. Frenkel stock option plan
dated September 7, 2000
27 Financial Data Schedule
