UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549




FORM 20-F




o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934




OR




x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the fiscal year ended December 31, 2009




OR




o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the transition period from ____ to _____




OR




o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




Date of event requiring this shell company report: Not applicable




Commission File No. 000-50867




SYNERON MEDICAL LTD.


(Exact name of Registrant as specified in its charter)




N/A


(Translation of Registrant’s name into English)




ISRAEL


(Jurisdiction of incorporation or organization)




Industrial Zone, Yokneam Illit, 20692, Tavor Building P.O.B. 550, Israel


(Address of principal executive offices)




Fabian Tenenbaum, CFO


Telephone: 972-732-442200


Email: CFO@syneron.com


Facsimile: 972-732-442202


Industrial Zone, Yokneam Illit, 20692, Tavor Building P.O.B. 550, Israel


(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)




Securities registered or to be registered pursuant to Section 12(b) of the Act.




Title of Each Class
Name of Each Exchange on which RegisteredOrdinary Shares, par value NIS 0.01 per share
Nasdaq Global Select Market




Securities registered or to be registered pursuant to Section 12(g) of the Act.




None




Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.




None










Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.




As of December 31, 2009, the Registrant had 27,601,264 Ordinary Shares outstanding (excluding treasury shares).




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.




o  Yesx   No




If this report is an annual report or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.




o   Yesx   No




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.




x   Yeso   No




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).




o   Yeso   No




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.




Large accelerated filer  oAccelerated filer   xNon-accelerated filer  o




Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:




U.S. GAAP x    International Financing Reporting Standards as issued by the International Accounting Standards Board  o Other   o




If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.




Item 17 oItem 18 o




If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).




o   Yesx   No







In this Annual Report on Form 20-F, unless the context suggests otherwise, the terms “Syneron,” “the Company,” “we,” “us,” “our” or “ours” refer to Syneron Medical Ltd. and its consolidated subsidiaries as of December 31, 2009, and does not include Candela Corporation, unless specified otherwise. All references in this Annual Report on Form 20-F  to “U.S. dollars,” “dollars” or “$” are to the legal currency of the United States of America, and all references in this Annual Report on Form 20-F to “NIS” or “New Israeli Shekel” are to the legal currency of Israel.




On January 5, 2010, we completed the merger with Candela Corporation ("Candela"). Pursuant to that certain Agreement and Plan of Merger, dated September 8, 2009, by and among us, Syneron Acquisition Sub, Inc., a Delaware corporation and our indirect, wholly-owned subsidiary (Acquisition Sub), and Candela , we acquired Candela through Acquisition Sub which merged with and into Candela. Candela survived the merger as our indirect wholly-owned subsidiary.




Any statements contained in this Annual Report on Form 20-F regarding future expectations, beliefs, goals, plans or prospects constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Further, any statements that are not statements of historical fact (including statements containing the words "believes," "anticipates," "plans," "expects," "may," "will," "would," "intends," "estimates" and similar expressions) should also be considered to be forward-looking statements. The forward-looking statements included herein are based on current expectations and beliefs that involve a number of known and unknown risks and uncertainties. These forward-looking statements are based on certain assumptions, including, but not limited to, the following: the assumption that we will not lose a significant customer or customers or experience increased fluctuations of demand or rescheduling of purchase orders; that our products will be approved by appropriate regulatory authorities; that our markets will continue to grow; that our products will remain accepted within their respective markets and will not be replaced by new technologies; that competitive conditions within our markets will not change materially or adversely; that we will retain key technical and management personnel; that our businesses and the business of our new indirect wholly owned subsidiary, Candela Corporation, will be integrated successfully; that our forecasts will accurately anticipate market demand and that, in light of the current economic crises, there will be no material adverse change in our operations or business. Assumptions relating to the foregoing involve judgment with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. If one or more of these assumptions will prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. This forward-looking statement does not reflect the potential impact of any future dispositions or strategic transactions that may be undertaken. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. Factors that could cause actual results to differ from our expectations or projections include the risks and uncertainties relating to our business described in this Annual Report on Form 20-F at Item 3.D, “Key Information – Risk Factors.”




In addition, the statements in this document reflect our expectations and beliefs as of the date of this Annual Report. However, while we may elect to update these forward-looking statements publicly in the future, we specifically disclaim any obligation to do so. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report on Form 20-F might not occur.









TABLE OF CONTENTS




PagePART I


1ITEM 1.
IDENTITY OFDIRECTORS, SENIOR MANAGEMENT AND ADVISERS

1ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE

1ITEM 3.
KEY INFORMATION

1ITEM 4.
INFORMATION ON THE COMPANY

15ITEM 4A.
UNRESOLVEDSTAFF COMMENTS

32ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS

32ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

41ITEM7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

50ITEM8.
FINANCIALINFORMATION

52ITEM 9.
THE OFFER AND LISTING

54ITEM 10.
ADDITIONAL INFORMATION

55ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

72ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

72PARTII


73ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

73ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

73ITEM 15.
CONTROLS AND PROCEDURES

73ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT

74ITEM 16B.
CODE OF ETHICS

74ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

74ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

74ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

74ITEM16F.
CHANGE IN THE REGISTRANT'S CERTIFYING ACCOUNTANT

75ITEM 16G.
CORPORATE GOVERNANCE

75PARTIII


75ITEM 17.
FINANCIAL STATEMENTS

75ITEM 18.
FINANCIAL STATEMENTS

75ITEM 19.
EXHIBITS

76SIGNATURES


78














PART I




ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS




Not applicable.




ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE




Not applicable.




ITEM 3.
KEY INFORMATION




A.
SELECTED FINANCIAL DATA




The following selected consolidated financial data is qualified by reference to and should be read in conjunction with our audited consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 20-F.




The selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007 and the selected consolidated statement of operations data for the fiscal years ended December 31, 2005 and 2006 have been derived from our audited financial statements not included in this Annual Report on Form 20-F. The selected consolidated balance sheet data as of December 31, 2008 and 2009 and the selected consolidated statement of operations data for each of the years ended December 2007, 2008 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and audited by Kost, Forer, Gabbay & Kasierer, an independent registered public accounting firm and a member firm of Ernst & Young Global.




Year ended December 31,2005


2006


2007


2008


2009(U.S. Dollars, in thousands, except per share and

weighted average shares data)Consolidated Statement of Operations Data:Revenues

$
87,406


$
116,976


$
140,996


$
114,979


$
54,726Cost of revenues (1)


11,428



17,921



26,995



29,670



18,903Gross profit


75,978



99,055



114,001



85,309



35,823Operating expenses:Research and development (1)


5,030



8,515



12,511



13,783



13,220Selling and marketing (1)


25,188



46,434



58,605



54,064



34,156General and administrative (1)


3,534



9,455



11,860



17,706



16,478Other expenses (income) (2)


3,494



-



-



-



(3,975
)Total operating expenses (1)(2)


37,246



64,404



82,976



85,553



59,879Operating (loss) income (1)(2)


38,732



34,651



31,025



(244
)


(24,056
)Financial income, net


3,081



6,492



3,254



3,862



2,097Other income


-



-



-



-



(562
)Income (loss) before taxes on income


41,813



41,143



34,279



3,618



(21,397
)Taxes on income


750



1,489



3,035



(2,009
)


3,240Net income (loss) before non controlling interest


41,063



39,654



31,244



5,627


$
(24,637
)Net loss attributable to non controlling interest


-



-



-



-



1,050Net income (loss) attributable to shareholders

$
41,063


$
39,654


$
31,244


$
5,627


$
(23,587
)Net (loss) earnings per share:Basic

$
1.65


$
1.46


$
1.13


$
0.21


$
(0.86
)Diluted

$
1.48


$
1.44


$
1.12


$
0.20


$
(0.86
)Weighted-average number of shares used in actual per share calculations:Basic


24,888



27,202



27,690



27,410



27,526Diluted


27,664



27,601



27,880



27,521



27,526




1





Year ended December 31,2005


2006


2007


2008


2009Cost of revenues

$
-


$
267


$
278


$
51


$
28Research and development


16



644



883



295



528Selling and marketing


112



5,054



4,514



3,860



1,421General and administrative


20



2,291



2,134



3,386



2,287Total stock-based compensation charge

$
148


$
8,256


$
7,809


$
7,592


$
4,264




(2) Consists of settlement and litigation costs in 2005 associated with litigation with competitors, and our secondary offering expenses.




As of December 31,2005


2006


2007


2008


2009(U.S. Dollars, in thousands)Consolidated Balance Sheet DataCash and cash equivalents, deposits and securities

$
134,059


$
171,676


$
203,687


$
216,922


$
206,130Working capital


144,490



127,259



189,784



204,992



178,565Total assets


170,281



225,241



269,276



211,286



270,267Total liabilities


25,117



30,844



38,441



38,690



43,009Retained earnings


77,675



117,329



148,573



154,338



130,751Shareholders’ equity


145,164



194,397



230,835



242,596



227,258




B.
CAPITALIZATION AND INDEBTEDNESS




Not applicable.




C.
REASONS FOR OFFER AND USE OF PROCEEDS




Not applicable.




D.           RISK FACTORS




This Annual Report on Form 20-F contains certain statements that are intended to be, and are hereby identified as, “forward-looking statements.” We have based these “forward-looking statements” on our current expectations and projections about future events, which are subject to risks and uncertainties. The Company’s actual future results may differ significantly from those stated or implied in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below.




Risks Related to Our Business and Industry




Recent difficult conditions in the global capital markets and the global economy materially affected our business and results of operations and may continue to harm our customers and our own ability to raise capital or debt.




As widely reported, the global credit markets and financial services industry have been experiencing a period of upheaval characterized by the bankruptcy, failure, collapse or sale of various financial institutions, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. Our results of operations are materially affected by the current economic turmoil, both in the U.S. and elsewhere around the world. The global economic instability and uncertainty has had an adverse effect on our revenues and there can be no assurance that there will not be further deterioration in the global economy, credit and financial markets and confidence in economic conditions. While the ultimate outcome of these events cannot be predicted, it may have a material adverse effect on us and our ability to borrow money or raise additional capital. Similarly, our customers and suppliers may experience financial difficulties or be unable to borrow money to fund their operations, which may adversely impact their ability or decision to purchase our product or to pay for our products that they do purchase on a timely basis, if at all.




2





Our success depends upon market acceptance of our products, our ability to develop and commercialize new products and our ability to identify new markets for our technology.




We have created products that allow physicians and personal care practitioners to treat a wide variety of cosmetic and medical conditions including hair removal on all skin types, skin rejuvenation, skin tightening and wrinkle reduction, vascular lesions such as rosacea, facial spider veins, leg veins, port wine stains, angiomas and hemangiomas, all-color tattoo removal, skin resurfacing scars, stretch marks and warts, removal of benign pigmented lesions such as sun spots, age spots, freckles, and Nevus of Ota/Ito, acne and acne scars, sebaceous hyperplasia, pseudofolliculitis barbae (beard bumps or PFB), psoriasis, treatment for the temporary reduction in the appearance of cellulite, reduction in thigh circumference and fat removal. Our failure to significantly penetrate current or new markets with our products and manage the manufacturing and distribution of multiple products could negatively impact our business, financial condition and results of operations. The success of our products depends on continued acceptance of our proprietary Electro-Optical Synergy, or ELOS TM technology and the adoption and acceptance of other technologies that we develop or acquire. The rate of adoption and acceptance may be affected adversely by actual or perceived issues relating to quality and safety, customers’ reluctance to invest in new technologies, and widespread acceptance of other technologies. Our business strategy is based, in part, on our expectation that we will continue to make novel product introductions and upgrades or acquire new products that we can sell to new and existing users of our products and that we will be able to identify new markets for our products.




To increase our revenues, we must:




·
develop or acquire new products that either add to or significantly improve our current products;




·
convince our target customers that our products or product upgrades would be an attractive revenue-generating addition to their practices;




·
sell our products to customers which have traditionally not engaged in aesthetics procedures, including primary care physicians, obstetricians, ear, nose and throat specialists, other specialists and non-medical professionals;




·
identify new markets and emerging technological trends in our target markets and react effectively to technological changes; and




·
maintain effective sales and marketing strategies.




We may be unable, however, to continue to develop new upgrades, products and technologies at the rate we expect, or at all, which could adversely affect our expected growth rate. In addition, the market for aesthetic devices is highly competitive and dynamic, and marked by rapid and substantial technological development and product innovations. To be successful, we must be responsive to new technological developments and new applications of existing technology. Demand for our products could be diminished by equivalent or superior products and technologies offered by competitors.




Our financial results may fluctuate from quarter to quarter.




Demand for our products varies from quarter to quarter, and these variations may cause revenue to fluctuate significantly from quarter to quarter. As a result, it is difficult for us to accurately predict sales for subsequent periods. In addition, we base our production, inventory and operating expenditure levels on anticipated orders. If orders are not received when expected in any given quarter, expenditure levels could be disproportionately high in relation to revenue for that quarter. A number of additional factors, over which we have limited control, may contribute to fluctuations in our financial results, including:




·
the willingness of individuals to pay directly for aesthetic medical procedures, in light of the lack of reimbursement by third-party payors;




·
availability of attractive equipment leasing terms for our customers, which may be negatively influenced by interest rate increases and the current economic climate;




·
changes in our ability to obtain and maintain regulatory approvals;




·
increases in the length of our sales cycle;




·
performance of our independent distributors; and




·
delays in, or failure of, product and component deliveries by our subcontractors and suppliers.




If we are unable to protect our intellectual property rights, our competitive position could be harmed.




Our success and ability to compete depends in large part upon our ability to protect our proprietary technology. As of February 25, 2010, our patent portfolio consisted of 11 issued U.S. patents, one of which we purchased in December 2004 (with the corresponding U.S. and international family members), and 72 patent applications pending in the U.S. (with an additional 101 applications pending internationally and 10 international patents), related to 74 patent families relating to our technology and products. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Any issued patents may be challenged, invalidated or legally circumvented by third parties. We cannot be certain that our patents will be upheld as valid and enforceable or prevent the development of competitive products. Consequently, competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and diminish our ability to compete. In addition, competitors could purchase one of our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, design around our protected technology, or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property does not adequately protect us from our competitors’ products and methods, our competitive position could be adversely affected, as could our business.




3





We rely on a combination of patent and other intellectual property laws and confidentiality, non-disclosure and assignment of inventions agreements, as appropriate, with our employees, consultants and customers, to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to protect our technology from unauthorized disclosure, third-party infringement or misappropriation. We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties. However, these parties may breach these agreements, and we may not have adequate remedies for any breach. Also, others may learn of our trade secrets through a variety of methods. In addition, the laws of certain countries in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as the laws of the U.S. or Israel.




Existing and future third-party claims of infringement or other claims against us could require us to redesign our products, seek licenses, or engage in future costly intellectual property litigation, which could impact our future business and financial performance.




Third parties have claimed, and may from time to time claim, that our current or future products infringe their patent or other intellectual property rights, and seek to prevent, limit or interfere with our ability to make, use, sell or import our products. Patent applications are latent for the first eighteen months following their filing and cannot be discovered until such patents applications are published. Accordingly, we can conduct only limited searches to determine whether our technology infringes any patents or patent applications of others. Infringement claims in the past, have, among other things, led to license agreements pursuant to which we were required to pay license fees to third party claimants.




Our subsidiary, Syneron Inc., and our new indirect wholly owned subsidiary, Candela Corporation (Candela), are each currently defending separate patent infringement lawsuits brought by Palomar Medical Technologies, Inc. (Palomar) alleging infringement of U.S. Patent Nos. 5,595,568 (the ’568 Patent) and 5,735,844 (the ’844 Patent) by Syneron Inc.’s and Candela’s hair removal products, respectively. The ’568 and ’844 Patents were subject to reexaminations by the U.S. Patent and Trademark Office (PTO), and both the Candela action and the Syneron Inc. action were stayed pending completion of the reexaminations. The PTO issued Reexamination Certificates with respect to the ’568 and ’844 Patents, and the stay was lifted in the Syneron Inc. case on November 13, 2009, and in the Candela case on January 5, 2010. Palomar has dropped the ’568 Patent from the Candela lawsuit, and has elected to proceed solely on the ’844 Patent.




While Syneron Inc. and Candela each intend to vigorously contest Palomar’s allegations, each lawsuit is inherently uncertain and unpredictable as to its ultimate outcome. An adverse outcome in Palomar’s suit against Syneron Inc. and/or Candela would materially hurt the business, financial condition, results of operations and cash flows of Syneron Inc. and/or Candela, as applicable.




In addition, on February 19, 2008, Cardiofocus, Inc., or Cardiofocus, filed a suit against Candela and eight other companies in the U.S. District Court for the District of Massachusetts, asserting willful infringement by Candela of U.S. Patents 6,457, 780, 6,159,203 and 5,843,073. Cardiofocus seeks compensatory and treble damages, as well as attorneys’ fees and injunctive relief. On April 21, 2008, Candela answered Cardiofocus’ complaint and asserted a variety of counterclaims against Cardiofocus. Candela intends to vigorously defend against the lawsuit. Based upon Candela’s request, on July 23, 2008, the PTO agreed to re-examine the validity of the Cardiofocus patents. On October 14, 2008, the Court agreed to stay this matter for a minimum of one year, up to a maximum of two years, but no later than the PTO’s decision with respect to the re-examination proceedings.




We may also become involved in intellectual property litigation in the future. Although we may try to resolve any potential future claims or actions as we have, from time to time, in the past, we may not be able to do so on reasonable terms, if at all. Following a successful third-party action for infringement, we may be required to pay substantial damages and if we cannot obtain a license or redesign our products, we may have to stop manufacturing, selling and marketing our products, and our business could suffer as a result. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate, and could divert management’s attention from our core business. If we lose this kind of litigation, a court could require us to pay substantial damages, and prohibit us from using and selling technologies essential to our products. Any of these events would have a material adverse effect on our business, results of operations and financial condition. Furthermore, we do not know whether necessary licenses would be available to us on satisfactory terms, or whether we could redesign our products or processes to avoid infringement.




4





We may become involved in litigation to protect the trademark rights associated with our company name or the names of our products. In addition, names we choose for our products may be claimed to infringe names held by others. If we have to change the name of our products, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales.




We may also become involved in litigation not only as a result of alleged infringement of a third-party’s intellectual property rights, but also to protect our own intellectual property rights, which would divert our management’s attention from our core business and may be expensive and time consuming to litigate.




Please see Item 8, “Financial Information – Consolidated Statements and Other Financial Information” for further details regarding legal proceeding and the risk arising under those proceedings.




If we will not be successful in coordinating our business with that of our new indirect subsidiary, Candela Corporation, and its subsidiaries and in establishing efficient arrangements and agreements with Candela and its subsidiaries, then the benefits of the merger with Candela will not be fully realized and the market price of our ordinary shares may be negatively affected.




The merger with Candela involved the coordination and the establishment of contractual arrangements and agreements between us and Candela, each of which previously operated independently with principal offices in several distinct locations. We entered into the merger agreement with the expectation that the merger will result in benefits arising out of the coordination and arrangements between the companies. The difficulties of coordinating the operations of the businesses include, among others:




·
coordinating geographically separate organizations;




·
addressing inconsistencies between the two companies in standards, controls, procedures and policies, any of which could adversely affect either company’s ability to maintain relationships with licensors, collaborators, partners, suppliers, customers and employees;




·
consolidating Candela’s business into our financial reporting system;




·
implementing internal controls over financial reporting in accordance with section 404 of the Sarbanes-Oxley Act of 2002; and




·
coordinating sales, distribution and marketing functions.




As a result of these and other factors, we may not successfully coordinate our business with that of Candela and its subsidiaries or establish efficient arrangements and agreements with Candela and its subsidiaries in a timely manner, or at all, and we may not realize the benefits and synergies of the merger to the extent, or in the timeframe, anticipated. It is also possible that such coordination and arrangements could lead to the loss of key employees, diversion of the attention of our or Candela's management, or the disruption or interruption of, or the loss of momentum in our or Candela's ongoing business. Any of these possible outcomes can affect our or Candela's ability to maintain its licensing, research and development, supply, distribution, marketing, customer and other relationships and affect our or Candela's business and financial results following the merger. The occurrence of such negative results could adversely affect the market price of our ordinary shares.




In addition, we incurred and we expect to continue to incur significant costs and commit significant management time in coordinating Candela’s business operations, technology, development programs, products and personnel with our business. If we will not successfully coordinate our business with that of Candela and its subsidiaries, the expenditure of these costs will reduce our cash position.




We compete against companies that havemore established products and greater resources, which may prevent us frommaintaining and increasingmarketshareor maintaining or improving operating results.




Our products compete against products offered by public companies, including Cutera, Inc., Cynosure, Inc., Solta Medical, Inc., Lumenis Ltd., UltraShape Ltd. and Palomar Medical Technologies, Inc., as well as by private companies such as Sciton, Inc., Alma Lasers Ltd., and several other smaller specialized companies. Competition with these companies could result in reduced prices and profit margins and loss of market share, any of which could harm our business, financial condition and results of operations. We also face competition from medical products, including Botox and collagen injections, and aesthetic procedures, such as sclerotherapy, electrolysis chemical peels and microdermabrasion, that are unrelated to radio frequency and light or laser-based technologies. We also may face competition from manufacturers of pharmaceutical and other products that have not yet been developed. Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products, and includes the following factors:




·
product performance;




·
product pricing;




5




·
intellectual property protection;




·
quality of customer support;




·
success and timing of new product development and introductions; and




·
development of successful distribution channels.




Some of our competitors have more established products and customer relationships than we do, which could inhibit our market penetration efforts. Potential customers also may need to recoup the cost of expensive products that they already have purchased from our competitors and may decide not to purchase our products, or to delay such purchases. If we are unable to achieve continued market penetration, we will be unable to compete effectively and our business will be harmed.




In addition, some of our current and potential competitors have significantly greater financial, research and development, manufacturing, and sales and marketing resources than we have. Our competitors could use their greater financial resources to acquire other companies, to gain enhanced name recognition and market share, as well as to develop new technologies or products that could effectively compete with our existing product lines.




We outsource the manufacturing of our products to a small number of manufacturing subcontractors. If our subcontractors’ operations are interrupted or if our orders exceed our subcontractors’ manufacturing capacity, we may not be able to deliver our products to customers on time.




We outsource the manufacturing of our products to three subcontractors located in Israel. These subcontractors have limited manufacturing capacity that may be inadequate if our customers place orders for unexpectedly large quantities of our products. In addition, because our subcontractors are located in Israel, they on occasion may feel the impact of potential economic or political instability in the region. If the operations of one or more of these subcontractors were halted or limited, even temporarily, or if they were unable or unwilling to fulfill large orders, we could experience business interruption, increased costs, damage to our reputation and loss of our customers. In addition, qualifying new subcontractors could take several months.




We depend upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations, which could harm our business.




Many of the components that comprise our products are currently manufactured by a limited number of suppliers. Although most of our components are obtained from at least three separate suppliers, we do not have the ability to manufacture these components ourselves. A supply interruption or an increase in demand beyond current suppliers’ capabilities could harm our ability to manufacture our products until we identify and qualify a new source of supply, which could take several months.




Any interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate sources at acceptable prices and in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.




In addition, our new indirect subsidiary, Candela, uses Alexandrite rods to manufacture the GentleMaxTM, GentleLASE® and the AlexTriVantageTM systems, which accounts for a significant portion of Candela’s total revenues. Candela depends exclusively on its contract manufacturer to supply these rods, for which no alternative supplier meeting its quality standards exists. We cannot be certain that Candela's contract manufacturer will be able to meet Candela's future requirements at current prices or at all. To date, Candela has been able to obtain adequate supplies of Alexandrite rods in a timely manner, but any extended interruption in its supplies could hurt its results.




We sell our products in a number of countries and therefore our results of operations could suffer if we are unable to manage our international operations effectively.




We are headquartered in Israel and have offices in three locations in the United States, Canada, four locations in Japan, Hong-Kong, Australia, Spain, Portugal, Germany, Italy, France and the United Kingdom. We depend on third-party distributors in Europe, Asia, Australia, South Africa and South America. We also depend on relatively new direct sales operations to sell our products in North America. Therefore, we are subject to risks associated with having worldwide operations. Substantially all of our revenues in 2007, 2008 and 2009, were generated outside of Israel, primarily in North America, Western Europe and Asia. Part of our strategy is to expand our sales in existing markets and to enter new foreign markets. Expansion of our international business will require significant management attention and financial resources. In addition, Candela sells more than half of its products and services outside the U.S. International sales accounted for approximately 67% of Candela’s revenue for fiscal year 2009, and Candela expects that it will continue to be significant. Accordingly, a major part of Candela’s revenues and operating results could be adversely affected by risks associated with international commerce. Significant fluctuations in the exchange rates between the U.S. dollar and foreign currencies could cause Candela to lower its prices and thus reduce its profitability, or could cause prospective customers to push out orders to later dates because of the increased relative cost of Candela’s products in the aftermath of a currency devaluation or currency fluctuation.




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Our international sales and operations subject us to many risks inherent in international business activities, including:




·
foreign certification and regulatory requirements;




·
lengthy payment cycles and difficulty in collecting accounts receivable;




·
customs clearance and shipping delays;




·
import and export controls;




·
multiple and possibly overlapping tax structures;




·
changes in tax and other laws;




·
regulatory practices and tariffs;





·
difficulties staffing and managing our international operations;




·
political instability; and




·
economic instability.




If our international sales do not continue at the expected pace or suffer from higher challenges than expected, we will not experience our projected growth or have decreased revenue and our financial results will suffer.




Exchange rate fluctuations could have a material adverse impact on our results of operations.




A majority of our revenues and a substantial portion of our expenses are denominated in U.S. dollars. However, a portion of our revenues and a portion of our costs, including personnel and some marketing and facilities expenses, are incurred in New Israeli Shekels and Euros. Inflation in Israel or Europe or a weakening of the U.S. dollar against other currencies may have the effect of increasing the U.S. dollar cost of our operations in that jurisdiction, which may have a material adverse impact on our results of operations. During 2009, the U.S. dollar depreciated against the New Israeli Shekel by approximately 0.7%, and the U.S. dollar depreciated against the Euro by approximately 2%. If the New Israeli Shekel continues to strengthen in value in relation to the U.S. dollar, it will become more expensive for us to fund our operations in Israel. If the Euro depreciates against the U.S. dollar it will decrease our revenues from operations.




Although we use hedging techniques to reduce the risk associated with fluctuations in currency exchange rates, we may not be able to eliminate the effects of currency fluctuations. Thus exchange rate fluctuations could have a material adverse impact on our results of operations.




As a result of the merger with Candela Corporation, we and our subsidiaries, including Candela, became a larger and more geographically diverse organization, and if our respective management teams will not be able to continue to manage their businesses efficiently, our and our subsidiaries', including Candela's, operating results will suffer.




Following the merger with Candela Corporation, we and our subsidiaries, including Candela, collectively, have approximately 557 employees in a total of 17 facilities around the world. As a result, our management teams are facing challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs. The inability to manage successfully the geographically more diverse and substantially larger organization could have a material adverse effect on our operating results and those of our subsidiaries, and as a result, on the market price of our ordinary shares.




Any acquisition that we make could harm our business and hurt our financial condition.




From time to time, we evaluate potential strategic acquisitions of technologies and products. We also consider entering into joint venture agreements and other collaborations. We may not be able to identify appropriate targets or strategic partners, or successfully negotiate, finance or integrate any such products or technologies. Any acquisition that we pursue could diminish our cash position and divert management’s time and attention from our core operations.




If we fail to obtain and maintain necessary U.S. Food and Drug Administration clearances for our products and indications, if clearances for future products and indications are delayed or not issued, or if there are U.S. federal or state level regulatory changes, our commercial operations could be harmed.




Most of our products are medical devices subject to extensive regulation in the U.S. by the Food and Drug Administration, or FDA, for manufacturing, labeling, sale, promotion, distribution and shipping. Before a new medical device, or a new use of, or claim for, an existing product can be marketed in the U.S., it must first receive either 510(k) clearance or pre-market approval, or PMA, from the FDA, unless an exemption applies. Either process can be expensive and lengthy. The FDA’s 510(k) clearance process usually takes from three to twelve months, but it can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and it generally takes from one to three years, or even longer, from the time the application is filed with the FDA. To date, none of our devices passed via PMA and we believe that very few (if at all) of our currently planned products are subject to PMA by the FDA. All products that we currently market in the U.S. have received 510(k) clearance for the uses for which they are marketed or are products with minor modifications from our cleared products and are therefore covered by Letter to File.




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Medical devices may be marketed only for the indications for which they are approved or cleared. We have obtained 510(k) clearance for the current treatments for which we offer our products. However, our clearances can be revoked if safety or effectiveness problems develop. Any modifications to an FDA-cleared device that would significantly affect its safety or effectiveness or that would constitute a major change in its intended use would require a new 510(k) clearance or possibly PMA. We may not be able to obtain additional 510(k) clearances or PMAs for new products or for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearances would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and future profitability.




We have made modifications to our devices in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices. We also are subject to Medical Device Reporting regulations, which require us to report to the FDA if our products cause or contribute to a death or serious injury, or malfunction in a way that would likely cause or contribute to a death or serious injury. Our products and/or their use are also subject to state regulations, which are, in many instances, in flux. Changes in state regulations may impede sales. We cannot predict the impact or effect of future legislation or regulations at the federal or state levels.




The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:




·
warning letters, fines, injunctions, consent decrees and civil penalties;




·
repair, replacement, refunds, recall or seizure of our products;




·
issuing an import alert to block entry of products the FDA has reason to believe violate applicable regulatory requirements;




·
operating restrictions or partial suspension or total shutdown of production;




·
refusing our requests for 510(k) clearance or PMA of new products, new intended uses, or modifications to existing products;




·
withdrawing 510(k) clearance or PMAs approvals that have already been granted; and




·
criminal prosecution.




If any of these events were to occur, it could harm our business.




If we or our subcontractors fail to comply with the FDA’s Quality System Regulation and performance standards, manufacturing operations could be halted, and our business would suffer.




We and our subcontractors are required to demonstrate and maintain compliance with the FDA’s Quality System Regulation, or QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Because our products use optical energy, including lasers, our products also are covered by a performance standard for lasers set forth in FDA regulations. The laser performance standard imposes specific record-keeping, reporting, product testing and product labeling requirements. These requirements include affixing warning labels to laser products, as well as incorporating certain safety features in the design of laser products. The FDA enforces the QSR and laser performance standards through periodic unannounced inspections. We and our subcontractors are subject to such inspections. Although we place our own quality control employee at each of our subcontractors’ facilities, we do not have complete control over our subcontractors’ compliance with these standards. Any failure by us or our subcontractors to take satisfactory corrective action in response to an adverse QSR inspection or to comply with applicable laser performance standards could result in enforcement actions against us or our subcontractors, including a public warning letter, a shutdown of manufacturing operations, a recall of our products, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraph, which could cause our sales and business to suffer. In addition, we are subject to standards imposed on our activities outside of the U.S., such as obtaining ISO 13485:2003 certification for the quality of our systems and products and CE certification from the European authorized notify body (KEMA) and electrical and safety certification from the Standards Institution of Israel/ CSA/ UL etc., and failure to comply with such standards could adversely impact our business.




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We may be unable to obtain or maintain international regulatory qualifications or approvals for our current or future products, which could harm our business.




Sales of our products outside the U.S. are subject to foreign regulatory requirements that vary widely from country to country. Complying with international regulatory requirements can be an expensive and time-consuming process and approval is not certain. The time required for obtaining clearance or approvals, if required by other countries, may be longer than that required for FDA clearance or approvals, and requirements for such clearances or approvals may significantly differ from FDA requirements. Although we have obtained regulatory approvals in the European Union and other countries outside the U.S., we may be unable to maintain regulatory qualifications, clearances or approvals in these countries or to obtain approvals in other countries. We also may incur significant costs in attempting to obtain and in maintaining foreign regulatory approvals or qualifications. If we experience delays in receiving necessary qualifications, clearances or approvals to market our products outside the U.S., or if we fail to receive those qualifications, clearances or approvals, we may be unable to market some of our products or enhancements in certain international markets effectively, or at all.




New regulations may limit our ability to sell to non-physicians.




We sell our products to physicians and, outside the U.S., also to aestheticians. International regulations could change at any time, disallowing sales of our products to aestheticians, and limiting the ability of aestheticians and non-physicians to operate our products. We cannot predict the impact or effect of changes in U.S., state or international laws or regulations.




Becausemany of theusers of our productsare not trained, andbecausewe also sell our products to non-physicians,our productsmay be misused, which could harm our reputation and our business.




In the U.S., federal regulations allow us to sell our products to or on the order of “licensed practitioners.” The definition of “licensed practitioners” varies from state to state. As a result, depending on state law, our products may be purchased or operated by physicians or other licensed practitioners, including nurse practitioners, chiropractors and technicians. Outside the U.S., many jurisdictions do not require specific qualifications or training for purchasers or operators of our products. We do not supervise the procedures performed with our products, and we have no way to confirm that adequate supervision occurs. The lack of required training and the purchase and use of our products by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to product liability claims and costly product liability litigation.




Product liability suits could be brought against us due to defective material or design, or due to misuse of our products, and could result in expensive and time-consuming litigation, payment of substantial damages and an increase in our insurance rates.




If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to substantial and costly litigation by our customers or their patients. Misusing our products or failing to adhere to operating guidelines could cause significant eye and skin damage, and underlying tissue or organ damage. In addition, if our operating guidelines are found to be inadequate, we may be subject to liability. We have been involved, and may in the future be involved, in claims related to the use of our products. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us. Since inception we have been involved in a number of disputes or legal claims between our customers and their patients that involved potential product liability claims. We may not be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and reduce product sales. Product liability claims in excess of our insurance coverage would be paid out of cash reserves harming our financial condition and reducing our operating results.




Components used in our products are complex in design, and defects may not be discovered prior to shipment to customers, which could result in warranty obligations, reducing our revenue and increasing our costs.




In manufacturing our products, we and our subcontractors depend upon third-party suppliers for various components. Many of these components require a significant degree of technical expertise to produce. If our suppliers fail to produce components to specification, or if the suppliers, our subcontractors, or we, use defective materials or workmanship in the manufacturing process, the reliability and performance of our products will be compromised.




If our products contain defects that cannot be repaired easily and inexpensively, we may experience:




·
loss of customer orders and delay in order fulfillment;




·
damage to our brand reputation;




·
increased cost of our warranty program due to product repair or replacement;




·
inability to attract new customers;




·
diversion of resources from our manufacturing and research and development departments into our service department;




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·
product recalls; and




·
legal action.





The occurrence of any one or more of the foregoing could materially harm our business.




We forecast sales to determine requirements for our products and if our forecasts are incorrect, we may experience either shipment delays or increased costs and inventory.




Our subcontractors keep limited materials and components on hand. To help them manage their manufacturing operations and minimize inventory costs, we forecast anticipated product sales to predict our inventory needs up to nine months in advance and enter into purchase orders on the basis of these requirements, subject to limitations on components lead time and long lead items. We also accept one month safety stock of raw material above lead time. Our historical experience may not provide us with sufficient data to accurately predict future demand. If our business expands, our demand would increase and our suppliers may be unable to meet our demand. If we overestimate our requirements, our subcontractors will have excess inventory, and may transfer to us any increase in costs. If we underestimate our requirements, our subcontractors may have inadequate components and materials inventory, which could interrupt, delay or prevent delivery of our products to our customers. Any of these occurrences would negatively affect our financial performance and the level of satisfaction our customers have with our business.




In order to effectively manage our collaboration with Procter & Gamble Company, we may divert the attention of key technical personnel and management from the core business. If Procter & Gamble Company terminates the agreement, our share price could fall, and we may be unable to bring a home-use device to the market.




Effective February 25, 2007, we entered into a Joint Development and Supply Framework Agreement with the Procter & Gamble Company, or Procter & Gamble, for the commercialization of patented and patent pending, ELOS-based, home-use devices and compositions for the enhancement of skin appearance through the treatment of fine lines, wrinkles, age and sun spots and cellulite. Under the agreement, significant resources and the attention of key technical personnel and management were directed to the development of such devices even though such devices may not be commercialized for several years, if ever. In addition, we cannot be sure that the agreement will result in marketable products or that we will receive payments for any products developed pursuant to the agreement. Procter & Gamble has the option under certain circumstances to terminate the agreement, including following the failure by us to successfully complete two milestones, and may exercise that option. If Procter & Gamble terminates the agreement, the price of our ordinary shares could fall significantly, and we will not receive certain royalty and other payments provided for in the agreement. If Procter & Gamble terminates the agreement, we may decide to proceed to develop and commercialize the device on our own or with a third party. However, there can be no assurance that we will be able to successfully implement such a decision and successfully bring this home-use device to the market.




The expense and potential unavailability of insurance coverage for our customers could adversely affect our ability to sell our products and negatively impact our financial condition.




Some of our customers and prospective customers have had difficulty in procuring or maintaining liability insurance to cover their operation and use of our products. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using our products and, industry-wide, potential customers may opt against purchasing laser and other light-based products due to the cost of or inability to procure insurance coverage.




We have invested a portion of our cash in auction-rate securities, which subjects us to liquidity and investment risk. Due to recent uncertainties in the capital markets regarding auction-rate securities, we recorded an impairment chargeduring 2007, 2008 and 2009,and, if the fair value of these investments were to decline further, we could be required to record further impairment charges related to these investments.




The performance of the capital markets affects the value of our funds that are held in marketable securities. These assets are subject to market fluctuations and will yield uncertain returns, which may fall below our projected return rates. Due to market developments in recent years, including a series of rating agency downgrades, the fair value of these investments may decline. We expect that market conditions will continue to fluctuate and that the fair value of our investments may be impacted accordingly.




As of February 25, 2010, we held approximately $8.9 million in auction-rate securities, which consist of interests in collateralized debt obligations supported by pools of residential and commercial mortgages or credit cards, insurance securitizations and other structured credits, including corporate bonds. Auction-rate securities are floating rate debt securities with long-term nominal maturities for which the interest rates are reset from time to time through a competitive bidding process often referred to as a “Dutch auction.” These periodic auctions have historically provided a liquid market for auction-rate securities, as this mechanism generally allows existing investors to rollover their holdings and continue to own their respective securities at then-existing market rates or to liquidate their holdings by selling their securities at par value. As part of the ongoing credit market crisis, a number of auction-rate securities from various issuers have failed to receive sufficient order interest from potential investors to clear successfully, resulting in auction failures. Historically, when investor demand was insufficient, the banks running the auctions would step in and purchase the remaining securities to prevent an auction failure. During the recent credit crisis, however, banks have allowed these auctions to fail.




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While the auction-rate securities held by us had AAA/Aaa credit ratings at the time of our purchase of these securities, the auction-rate securities held by us have experienced multiple failed auctions, as the amount of these auction-rate securities submitted for sale exceeded the amount of purchase orders for these auction-rate securities. As a result, we recorded a pre-tax impairment charge of $1.6 during 2008 and an additional $0.2 million in 2009. We cannot predict when the liquidity of these auction-rate securities will improve. We continue to monitor the market for auction-rate securities although there is no current secondary market for such securities. If the fair value of these investments were to further decline, management would be required to evaluate whether such decline is “other than temporary.” The amount of any impairment loss which is determined to be other than temporary would be immediately recorded in the consolidated statement of operations. Such an impairment charge could materially and adversely affect our consolidated financial condition and results of operations. See Notes 3 and 4 of the notes to our consolidated financial statements for further information. A portion of our liquidity will be adversely affected to the extent that auctions for our auction-rate securities experience further failures.




Following the merger with Candela Corporation, we may continue to incur significant additional expenses in connection with the acquisition of Candela.




Following the merger we expect to continue to incur significant additional expenses, including those relating to coordinating personnel, information technology systems, accounting systems, vendors and strategic partners of Candela, as well as expenses relating to the implementation of consistent standards, policies, and procedures. As a result of the merger we suffered and we may continue to suffer material write downs in assets and charges to earnings, which include severance pay and other costs.




We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.




The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section 404, which started in connection with our Annual Report on Form 20-F for the fiscal year ended December 31, 2006, have resulted in increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require the continued commitment of resources. Section 404 of the Sarbanes-Oxley Act of 2002 requires (i) management’s annual review and evaluation of our internal control over financial reporting and (ii) a statement by management that its independent registered public accounting firm has issued an attestation report on our internal control over financial reporting, in connection with the filing of our Annual Report on Form 20-F for each fiscal year. We have documented and tested our internal control systems and procedures in order for us to comply with the requirements of Section 404. While our assessment of our internal control over financial reporting resulted in our conclusion that as of December 31, 2009, our internal control over financial reporting was effective, we cannot predict the outcome of our testing in future periods. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.




We are a foreign private issuer under the rules and regulations of the SEC and thus, we are exempt from a number of rules under the Exchange Act and we are permitted to file less information with the SEC than a full reporting company.




As a foreign private issuer under the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies with securities registered under the Exchange Act; and we are not required to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our ordinary shares. If we will lose our status as a foreign private issuer, we will no longer be exempt from such rules and, among other things, will be required to file periodic reports and financial statements as if we were a company incorporated in the U.S. The costs incurred in fulfilling these additional regulatory requirements could be substantial.




The failure to attract and retain key personnel could adversely affect our business.




Our success also depends in large part on our ability to continue to attract, retain and motivate highly skilled technical and professional personnel. Competition for certain employees, particularly sales representatives and development engineers, is intense. We may be unable to continue to attract and retain sufficient numbers of highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or more of our current key employees could adversely affect our business, financial condition and results of operations.




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In various jurisdictions in which we operate, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.




We have entered into non-competition agreements with all of our professional employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period. In various jurisdictions in which we operate, we may be unable to enforce these agreements, in whole or in part, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us. For example, in the past, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of such employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or intellectual property. In addition, pursuant to Israeli courts in order to enforce the non-compete undertakings, the employer need to prove that the employee received a special consideration in return for his commitment not to compete with his employer. If we are unable to demonstrate that harm would be caused to us or otherwise enforce these non-competition agreements, in whole or in part, we may be unable to prevent our competitors from benefiting from the expertise of our former employees, which could harm our business.




Risks Related to Our Operations in Israel




Political, economic and military instability in Israel may impede our ability to operate and harm our financial results.




We are incorporated under the laws of the State of Israel and our principal executive offices and research and development facilities are located in Israel. In addition, all of our subcontractors are located in Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. The Israeli economy has suffered in the past and may suffer in the future from instability, which may adversely affect our financial condition and results of operations.




The global economic recession, instability and uncertainty of the last two years has affected the economic conditions in Israel. If the economic deterioration in Israel continues, it may adversely affect our financial conditions and results of operations.




In addition, since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could affect adversely our operations. Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations and product development and cause our sales to decrease. Furthermore, several countries, principally those in the Middle East, still restrict business with Israel and Israeli companies. These restrictive laws and policies may seriously limit our ability to sell our products in these countries.




You may have difficulties enforcing a U.S. judgment against us and/or our executive officers and directors or asserting U.S. securities laws claims in Israel.




A significant portion of our assets and the assets of our directors and executive officers are located outside the U.S. Therefore, a judgment obtained against us or any of them in the U.S., including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the U.S. and may not be enforced by an Israeli court. Further, if a foreign judgment is enforced by an Israeli court, it will be payable in Israeli currency. It also may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel.




Our operations may be disrupted by the obligation of our personnel to perform military service.




Many of our employees in Israel are obligated to perform annual military reserve duty in the Israeli Defense Forces and may be called to active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of our other employees due to reserve duty. Any disruption in our operations may harm our business.




The tax benefits available to us require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs and taxes.




We have generated income and are able to take advantage of tax exemptions and reductions resulting from the “Approved Enterprise” and “Privileged Enterprise” status of our facilities in Israel. To remain eligible for these tax benefits, we must continue to meet certain conditions, including making specified investments in property and equipment. If we fail to meet these conditions in the future, the tax benefits would be canceled and we could be required to refund any tax benefits we might already have received. In addition, these tax benefits may not be continued in the future at their current levels or at any level. The termination or reduction of these tax benefits may increase our expenses in the future, which would reduce our expected profits or increase our losses. Additionally, if we increase our activities outside of Israel, for example, by future acquisitions, our increased activities generally will not be eligible for inclusion in Israeli tax benefit programs. Under our first tax benefit plan, we have invested approximately $720,000 in fixed assets of which $223,000 were from paid-in capital as required by the financing condition of the approved plan. Under our next two tax benefit plans, which were approved under the amendment to the law of the Engorgement of Capital Investment 1959, we invested approximately $529,000 during 2004 and 2005 under the second plan and approximately $1,138,000 during 2006 and 2007 under the third plan. See Item 10.E, “Taxation – Israeli Taxation – Law for the Encouragement of Capital Investments, 1959” for more information about these programs.




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The government grants we received from 2000 to 2003 for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants previously received together with interest and penalties, and may be subject to criminal charges.




From 2000 to 2003, we received grants totaling $397,000 from the government of Israel through the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor for the financing of a portion of our research and development expenditures for our Polaris and Galaxy product platforms. The terms of the Chief Scientist grants prohibit us from manufacturing products or transferring technologies developed using these grants outside of Israel without special approvals. We have no current plan to manufacture products or transfer technologies developed using these grants outside of Israel. Even if we receive approval to manufacture our products outside of Israel, we may be required to pay an increased total amount of royalties, which may be up to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed outside of Israel. This restriction may impair our ability to outsource manufacturing or engage in similar arrangements for those products or technologies. In addition, the restrictions may impair our ability to consummate a merger or similar transaction in which the surviving entity is not an Israeli company. In addition, if we fail to comply with any of the conditions imposed by the Office of the Chief Scientist, we may be required to refund any grants previously received together with interest and penalties, and may be subject to criminal charges. In addition, in recent years, the government of Israel has accelerated the rate of repayment of Chief Scientist grants and may further accelerate them in the future. We have not applied for any new grants since 2004 and currently have no plans to apply for such grants.




Provisions of our articles of association, our shareholders' rights plan, and Israeli law may delay, prevent or make difficult to acquire us, which could prevent a change of control and negatively affect the price of our ordinary shares.




Israeli corporate law regulates mergers, tender offers for acquisitions of shares above specified thresholds, special approvals for transactions involving directors, officers or significant shareholders, and other matters that may be relevant to these types of transactions. Our articles of association also contain provisions that may make it more difficult to acquire our company, such as classified board provisions. As noted above, the transfer of our technology (including by acquisition) is subject to certain restrictions and approvals of the Office of the Chief Scientist, which provided grants for the development of our technology.




In addition, our board of directors adopted a shareholders' rights plan under which our board of directors declared a dividend of one right for each ordinary share held by shareholders of record as of the close of business on November 9, 2008.  Initially, these rights are not exercisable and are traded with our ordinary shares. Under the plan, these rights will generally be exercisable only if a person or group acquires beneficial ownership of 15% or more of our ordinary shares or commences a tender or exchange offer for 15% or more of our ordinary shares, except if such person or group has become an “Acquiring Person” pursuant to an offer approved by the majority of the board of directors. If a person or group acquires beneficial ownership of 15% or more of our ordinary shares (except if such person or group has become an “Acquiring Person” pursuant to an offer approved by the majority of the board of directors), each right will generally entitle the holder, other than the acquiring person or group, to acquire, for the exercise price of $0.01 per share (subject to adjustment as provided in the plan), one and a quarter (1.25) ordinary shares. In addition, if, after a person acquires such ownership, we engage in a merger in which we are not the survivor or our ordinary shares are changed or exchanged, or we sell or transfer more than 50% of our assets or earning power, each right will generally entitle the holder, other than the acquiring person or group, to acquire, for the exercise price of $0.01 per share (subject to adjustment as provided in the plan), one and a quarter (1.25) times the shares of the acquiring company to which each of our shareholders is entitled to for each ordinary share. Our board of directors may redeem the rights at a price of $0.0001 per right at any time up to ten days after a person or group acquires beneficial ownership of 15% or more of our ordinary shares. The rights plan will continue in effect until November 30, 2010, unless earlier redeemed or amended by our board of directors.




Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See Item 10.B, “Additional Information – Memorandum and Articles of Association.” for additional discussion about some anti-takeover effects of Israeli law.




These provisions of Israeli law, our articles of association, and our shareholders’ rights plan, may delay or prevent our acquisition or make it difficult, which could prevent a change of control and therefore depress the price of our shares.




The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.




We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our articles of association and by the Israeli Companies Law, 5759-1999, or the Companies Law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, pursuant to the Companies Law each shareholder of an Israeli company has to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders and class meetings, on amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers, and transactions requiring shareholders’ approval under the Companies Law. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company, or has other powers toward the company has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revision in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.




13





Risks Related to Our Ordinary Shares




The price of our ordinary shares has fluctuated substantially and we expect will continue to do so.




The market price for our ordinary shares has been, and may continue to be, volatile. The market price for our ordinary shares has been, and we expect will continue to be, affected by a number of factors, including:




·
the gain or loss of significant orders or customers;




·
recruitment or departure of key personnel;




·
the announcement of new products or service enhancements by us or our competitors;




·
possible delays in market acceptance of our new products;




·
potential increases in the level and intensity of price competition between our competitors and us;




·
announcements regarding clearance or non-clearance of regulatory approval;




·
quarterly variations in our or our competitors’ results of operations;




·
announcements related to litigation;




·
changes in earnings estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ earning estimates;




·
developments in our industry;




·
absence of significant product backlogs;




·
our effectiveness in our manufacturing process;




·
unsatisfactory performance of our distribution channels, service providers, or customer support organizations;




·
timing of any acquisitions and related costs; and




·
general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors.




The stock prices of many companies in the medical device industry have experienced wide fluctuations that often have been unrelated to the operating performance of those companies. These factors and price fluctuations may materially and adversely affect the market price of our ordinary shares.




In addition, the market price of our ordinary shares may decline as a result of the merger with Candela Corporation for a number of reasons including if:




·
we will not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts;




·
the effect of the merger on our business and prospects is not consistent with the expectations of financial or industry analysts; or




·
investors react negatively to the effect on our business and prospects from the merger.




14




Further, we issued ordinary shares to Candela's shareholders as consideration for their common stock in Candela and, in some cases, we assumed Candela's options and stock appreciation rights. As a result, following the merger the number of our shares available for sale increased, and this may adversely impact the market price of our ordinary shares.




We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our ordinary shares.




We have never paid cash dividends on our ordinary shares and do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. The payment of dividends on our ordinary shares will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. Furthermore, the payment of dividends may be considered as income which is non tax-exempt under the “Approved Enterprise” status of our facilities in Israel. We may only pay dividends in any fiscal year out of “profits,” as defined by the Companies Law, and, provided that the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only occur if our share price appreciates. We have decided to reinvest the amount of tax exempt income derived from our “Approved Enterprise” status and not to distribute that income as dividends.




U.S. investors in our company could suffer adverse tax consequences if we are characterized as a passive foreign investment company.




If, for any taxable year, our passive income or our assets that produce passive income exceed levels provided by law, we may be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax consequences to our shareholders. If we were classified as a passive foreign investment company, a U.S. shareholder could be subject to increased tax liability upon the sale or other disposition of ordinary shares or upon the receipt of amounts treated as “excess distributions.” Under these rules, any gain or excess distribution would be allocated ratably over the U.S. shareholder’s holding period for the ordinary shares, and the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a passive foreign investment company would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest applicable ordinary income rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares as well as the specific application of the “excess distribution” and other rules discussed in this paragraph. For a discussion of how we might be characterized as a PFIC and related tax consequences, please see Item 10.E, “Additional Information – Taxation – United States Federal Income Tax Considerations – Passive Foreign Investment Company Considerations.”




ITEM 4.
INFORMATION ON THE COMPANY




A.           HISTORY AND DEVELOPMENT OF THE COMPANY




Our History




Syneron Medical Ltd. was incorporated in the State of Israel in July 2000. Our headquarters are located at Industrial Zone, Yokneam Illit, 20692, Tavor Building P.O.B. 550, Israel. Our phone number is (972-73) 24-42200. The agent for service of process in the United States is Syneron Inc., which is incorporated in the State of Delaware and located at 1104 Heinz Drive, Unit B, East Dundee, Illinois 60118. Our website address is www.syneron.com. The reference to our website is an inactive textual reference only, and the information contained on our website or available through our website is not incorporated by reference into this Annual Report on Form 20-F and should not be considered a part of this Annual Report on Form 20-F.




We completed our initial public offering of our ordinary shares in August 2004. Upon the closing of our initial public offering, all of our then outstanding preferred shares automatically converted into ordinary shares and we effected a 3.4-for-one split of our ordinary shares.




We design, develop and market innovative aesthetic medical products based on our various technologies including our proprietary Electro-Optical Synergy, or ELOS, technology, which uses the synergy between electrical energy, including radiofrequency or RF energy, and optical energy to provide effective, safe and affordable aesthetic medical treatments. Our products, which we sell primarily to physicians and other practitioners, target a wide array of non-invasive aesthetic medical procedures, including hair removal, wrinkle reduction, rejuvenation of the skin’s appearance through the treatment of superficial benign vascular and pigmented lesions, acne treatment, treatment of leg veins, treatment for the temporary reduction in the appearance of cellulite and thigh circumference, ablation and resurfacing of the skin and one minimally invasive product for laser-assisted lipolysis. We believe ELOS provides performance advantages over existing technologies that rely solely on optical energy. We believe using optical energy alone limits the safety and efficacy of many aesthetic medical procedures due to limited skin penetration and unwanted epidermal absorption. Our proprietary ELOS technology, which combines optical and electrical energy, enhances the user’s ability to accurately target the tissue to be treated and enables real-time measurement of skin temperature, resulting in increased patient safety and comfort and improved treatment results.




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During 2004, we significantly expanded our direct sales and marketing organization in North America to approximately 50 employees, established a distribution network in eleven countries in the Asia-Pacific region and increased our sales and marketing efforts in Europe. We increased our sales and marketing effort in 2004 in connection with new product introductions and other marketing activities planned for 2004. In 2004, we introduced three new product platforms: the Galaxy, which combines the applications of the Aurora and the Polaris product platforms, the Vela, for the temporary reduction in the appearance of cellulite and the Comet, for hair removal. Our Galaxy and Comet platforms are covered by our present FDA clearances. In addition, in June 2005, the FDA granted 510(k) clearance to our Vela platform for the temporary reduction in the appearance of cellulite and for the relief of minor muscle aches, pain and spasms, as well as the temporary improvement of local blood circulation. As a result of this 510(k) clearance we are now permitted to sell the Vela in the United States to physicians.




On March 8, 2005, certain selling shareholders completed a secondary offering, in which such selling shareholders sold an aggregate of 7,937,809 of our ordinary shares, including an aggregate of 1,264,174 shares that were exercised by option holders.




In July 2005, we entered into an agreement to invest $1.5 million in Light Instruments Ltd. (Light Instruments), an Israeli start-up specializing in the development of advanced dental laser devices, in consideration for approximately 51% of Light Instruments’ outstanding share capital. As part of the investment agreement, we received the exclusive North American marketing and sales rights for 10 years following FDA clearance of Light Instruments’ product used for the treatment of oral soft and hard tissue. In July 2007, we entered into a share purchase agreement to purchase an additional 44% of Light Instruments’ outstanding share capital in consideration for an aggregate amount of up to $4.5 million. In October 2008, we purchased an additional 5% of Light Instruments’ outstanding share capital, and we currently own 100% of Light Instrument.




Effective February 25, 2007, we entered into an exclusive Joint Development and Supply Framework Agreement with Procter & Gamble Company, or Procter & Gamble, for the commercialization of patented and patent pending, ELOS-based, home-use devices and compositions for the enhancement of skin appearance through the treatment of fine lines, wrinkles, age and sun spots and cellulite. Under the terms of the agreement we will lead the research, development and manufacturing of the devices, while Procter & Gamble will focus on the development of the compositions that may be used in conjunction with our devices, marketing, and distribution of the devices. The agreement provides that Procter & Gamble will purchase the devices exclusively from us. The devices will be marketed under the Procter & Gamble family of skin care products and will be co-branded with our ELOS technology. The agreement contemplates further collaboration between Procter & Gamble that could lead to commercializing additional products in the future. Procter & Gamble may terminate the agreement in certain circumstances, including following the failure to comply with the terms of the agreement.




On April 10, 2007, we entered into an agreement with Fluorinex Active Ltd. (Fluorinex), an Israeli-based start-up that develops advanced fluoridation and tooth whitening devices for dentists and consumers, under which we purchased 38.47% of Fluorinex’s then fully diluted share capital in consideration of $1.5 million and received a warrant to purchase an additional 3.85% of Fluorinex’s then fully diluted share capital to increase our holdings to 42.32% of Fluorinex's fully diluted share capital. In September 2008, Fluorinex received FDA approval for its product. In December 2008, we exercised the warrant granted to us by Fluorinex. On May 13, 2009, we entered into an agreement with Fluorinex for the purchase of additional 20% of Fluorinex’s then fully diluted share capital in consideration of $1.0 million and we currently hold 53.01% of Fluorinex's fully diluted share capital. Following the additional investment on May 13, 2009, we are consolidating Fluorinex results in our financial statements. Fluorinex has developed a unique device that delivers fluoride ions directly to the tooth enamel via a sophisticated electro-chemical technique. The Fluorinex technology delivers the maximum amount of fluoride ions to the tooth, for the longest endurance of time known today. Unlike other electro-chemical based fluoride systems, no electric current passes through the patient’s tissue, thus enhancing the safety of the device.




On November 8, 2007, we announced our first share repurchase program. Under this share repurchase program, we have repurchased, and may continue to repurchase our outstanding ordinary shares in consideration of up to an aggregate amount of $50.0 million. Our repurchases under this share repurchase program may be made from time to time in the open market and may be initiated and discontinued by us at any time. Under this share repurchase program, from November 1, 2007 to March 31, 2008 we repurchased 588,700 of our ordinary shares at an aggregate purchase price of $9.1 million.




In February 2008, we entered into an agreement with Rakuto Bio Technologies Ltd. (RBT), an Israeli-based start-up that develops a whole skin complexion whitening treatment. Under the agreement, we agreed to purchase an aggregate of 31.57% of RBT’s fully diluted share capital (excluding the warrant as described below) in consideration for up to $3 million, and received a warrant to purchase an additional 5.94% of RBT fully diluted share capital. As part of the agreement, we have exclusive worldwide distribution rights to RBT’s currently developed product to the professional market. In November 2009, we entered into an agreement with certain shareholders of RBT for the purchase of additional 9.25% of RBT’s share capital in consideration for approximately $0.2 million plus a potential earn-out in the event RBT merges or is acquired. In accordance with accounting pronouncements and as we are the primary beneficiary in RBT since November, 2009, we are consolidating RBT's results in our financial statements. As of February 25, 2010, we hold 44.9% of RBT’s fully diluted share capital (see also Note 1 to our consolidated financial statements). In November 2009, RBT announced the commercial launch of the elureTM topical whitening cream in several Asian markets. The elure advanced dermal whitening product is the first scientifically proven enzymatic skin whitening product treatment that targets and decomposes melanin to reveal a visibly lighter and exceptionally luminous skin tone. This product line is based on the unique scientific discovery of a naturally occurring bio-active substance, MelanozymeTM, which acts to decompose the melanin. It is combined with a bio-activator to diminish the dark colored pigment in the skin. Unlike several other whitening products in the market, the elure product does not include Hydequinine which may cause side effects such as skin redness and burning sensation.




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In November 2008, we entered into an agreement with Inlight Corp., a San Diego-based research and development company whereby we purchased 100% of Inlight Corp.’s outstanding capital stock. Inlight is currently developing a CO2 laser for fractional skin rejuvenation and we expect to introduce the product in the second half of 2010.




In November 2008, we entered into a joint venture agreement for the formation of Syneron China. Our partner in Syneron China is EverCare Medical Group, a major aesthetic hospital chain in China. Evercare operates cosmetic surgery hospitals throughout China and has been our distributor in China for the past three and a half years. Through this new Chinese subsidiary, we are able to sell directly to medical and aesthetic professionals in China, including doctors, hospitals, medi-spas and cosmetic chains. Syneron China also provides training and after sales service and support. Syneron China commenced its operations during 2010 and it currently has four offices in Beijing, Shanghai, Shengdu and Guangzhou and several product demonstration centers in different areas in China.





On September 8, 2009, we entered into an agreement and plan of merger with Syneron Acquisition Sub, Inc., a Delaware corporation and our indirect, wholly-owned subsidiary (Acquisition Sub), and Candela Corporation, a publicly traded company incorporated under the laws of the state of Delaware. Pursuant to the merger agreement we acquired Candela through Acquisition Sub which merged with and into Candela. The transaction was completed on January 5, 2010, and Candela survived the merger as our indirect wholly-owned subsidiary. Candela shareholders received 0.2911 shares of our ordinary share for each share of Candela common stock they owned. We issued approximately 6.7 million shares to acquire Candela. Candela manufactures, and distributes innovative clinical solutions that enable physicians, surgeons, and personal care practitioners to treat selected cosmetic and medical conditions using lasers, aesthetic laser systems, and other advanced technologies. Candela’s current product line offers comprehensive and technologically sophisticated cosmetic and aesthetic lasers and light-based systems used by physicians and personal care practitioners to treat a wide variety of cosmetic and medical conditions.





In October 2009, we entered into a definitive agreement to acquire Primaeva Medical, Inc., an aesthetic technology firm based in Pleasanton, California (Primaeva), in consideration for $7 million in cash, with potential additional consideration of up to $23 million in cash contingent on the achievement of commercial milestones (see also Note 1 to our consolidated financial statements). The transaction was completed on October 26, 2009. Primaeva developed a minimally invasive RF aesthetic device for the treatment of skin wrinkles and laxity. The Primaeva product, which has already received 510(k) clearance for wrinkle treatment, employs an innovative micro-needle electrode array housed in an advanced single-patient use applicator tip to deliver bipolar fractional radiofrequency (RF) energy directly within the reticular dermis. Its fractional treatment patterns and unique energy delivery mechanism have demonstrated noticeable skin tightening, with minimal downtime. We expect to introduce the Primaeva product in the next 12 months.




Principal Capital Expenditures




We had capital expenditures of approximately $9 million in 2009, approximately $4.1 million in 2008 and approximately $8.4 million in 2007. We expect that our capital expenditures will be approximately $1.5 million in 2010. We have financed our capital expenditures with cash generated from operations.




Our capital expenditures in 2009 consisted of an acquisition of shares in subsidiaries ($7.7 million), investments in affiliated companies ($0.8 million), and purchase of computers and general equipment ($0.5 million). We expect our capital expenditures in 2010 to consist of additional investments in our affiliated companies and purchase of computers and general equipment. Our capital expenditures in 2008 consisted of an acquisition of minority shares in subsidiaries ($1.3 million), investments in affiliated companies ($1.6 million), and purchase of computers and general equipment ($1.2 million). Our capital expenditure in 2007 consisted of an acquisition of a minority share in a subsidiary ($ 3.6 million), investments in affiliated companies ($2.6 million), leasehold improvements ($ 1.3 million), and purchase of computers and general equipment ($0.9 million).




B.           BUSINESS OVERVIEW




Overview




We design, develop and market innovative aesthetic medical products based on our proprietary Electro-Optical Synergy, or ELOS, technology, which uses the synergy between electrical energy and optical energy to provide effective, safe and affordable aesthetic medical treatments. Our products, which we sell primarily to physicians and other practitioners, target a wide array of non-invasive aesthetic medical procedures, including hair removal, wrinkle reduction, rejuvenation of the skin’s appearance through the treatment of superficial benign vascular and pigmented lesions, acne treatment, treatment of leg veins, treatment for the temporary reduction in the appearance of cellulite and thigh circumference, skin tightening, and one minimally invasive product for laser-assisted lipolysis. We believe ELOS provides performance advantages over existing technologies that rely solely on optical energy. We believe using optical energy alone limits the safety and efficacy of many aesthetic medical procedures due to limited skin penetration and unwanted epidermal absorption. The addition of radiofrequency energy, an electrical energy, lessens absorption in the outer layer of skin, or epidermis, and allows for greater skin penetration. Using radiofrequency and optical energy together enhances the ability of the user to target, or select, accurately the tissue to be treated and enables real-time measurement of skin temperature, enhancing patient safety and comfort. Following the launch of our first product, the Aurora, based on our ELOS technology in December 2001, our revenues were $11.5 million in 2002, $35.0 million in 2003, $57.9 million in 2004, $87.4 million in 2005, $117.0 million in 2006, $141.0 million in 2007, $115 million in 2008 and $54.7 million in 2009.




17





Our family of aesthetic products is mostly based on our ELOS technology. Each product platform consists of one or more hand pieces and a console that incorporates the multiple energy sources, sophisticated software and a simple, user-friendly interface. Our consoles have a small footprint and are lightweight compared to competitive systems which are typically larger and heavier. Our products can be easily upgraded by the user to perform additional applications by adding hand pieces and installing a software module in the console. We seek to deliver to our users the ability to generate increased practice revenue through additional service offerings. We also seek to provide predictable costs of ownership by minimizing maintenance expenses and providing a parts and services warranty.




During 2000 and 2001, our primary activity was the development and approval of our first product platform, the Aurora, which utilizes our ELOS technology. We received our CE Mark approval in Europe in November 2001, and launched sales of the Aurora product platform in December 2001. We received 510(k) clearance from the FDA for hair removal for the Aurora product platform in July 2002. In October 2002, we received 510(k) clearance from the FDA to market the Aurora product platform for the treatment of superficial benign vascular and pigmented lesions. In August 2002, we introduced the Aurora product platform commercially in the United States.




We launched the Polaris product platform in May 2003, after receiving our CE Mark approval in Europe for the product in December 2002. In April 2003, we received 510(k) clearance from the FDA to market the Polaris product platform for leg vein treatment as well as other types of vascular lesions. In December 2003, we introduced the Polaris product platform commercially in the United States.




We received our CE Mark approval in Europe for the Pitanga product platform in May 2003. During the fourth quarter of 2003, we launched the Pitanga product platform for the treatment of acne and hair removal in Europe and Canada.




We launched the Galaxy product platform in May 2004. We received our CE Mark approval in Europe for the Galaxy product platform in May 2004. The 510(k) clearances from the FDA also provide the regulatory basis for the marketing of the Galaxy product for all applications. We introduced the Galaxy product platform commercially in the United States in May 2004.




In 2005, we introduced the VelaSmooth product platform in the United States and a few upgrades for the Aurora, Galaxy and Comet product platforms. Our products address traditional applications, including the rejuvenation of the skin’s appearance through the treatment of superficial benign vascular and pigmented lesions, hair removal and the treatment of leg veins, as well as newer applications, including wrinkle reduction, the permanent reduction of hair, the temporary reduction in the appearance of cellulite and the reduction of body circumference. Also, in the first quarter of 2006, we launched three new platforms to address medical aesthetic applications based on our ELOS technology. The eLightTM platform combines broad spectrum light with bi-polar radio frequency. The system provides a full facial solution for skin rejuvenation, including the treatment of superficial vascular and pigmented lesions, and acne applications. It also supports hair removal applications. The system also includes a skin tightening modality, the ST. The eLaserTM platform combines diode laser technology with bi-polar radio frequency and offers ultra fast hair removal, as well as upgradeability to our leg vein and wrinkle reduction treatments. Finally, the eMaxTM platform combines bi-polar radio frequency with multiple forms of broad spectrum light energy and diode laser energy to deliver the complete range of our ELOS modalities in one multi-platform system. All the applications on the eLight, eLaser and eMax have received 510(k) clearance from the FDA.




In the first quarter of 2007, we launched the LiteTouch platform, which is a dental laser system that can be used for treatment of oral soft and hard tissue. The LiteTouch platform is a compact, lightweight and portable laser system which makes the use of the device very similar to mechanical drills. The LiteTouch system has a small footprint, which saves important floor space and allows it to easily integrate into any clinic. The LiteTouch offers both high energy and high frequency, thus providing a wide envelope of treatment parameters. The LiteTouch platform received 510(k) clearance from the FDA in October 2006.




In the second quarter of 2007, we completed the development of a new Matrix IR applicator for use with our eMax and eLaser platforms. The Matrix IR combines fractional optical energy with radio frequency for deep dermal heating for effective treatment of wrinkles. The collagen remodeling caused by the Matrix IR treatment is designed for maximum effective penetration for consistent and effective treatment for wrinkles.




In August 2007, our VelaTM platform received FDA 510(k) pre-market clearance in the United States and CE Mark certification in the European Union for the reduction of thigh circumference (FDA) and body contouring (CE). This announcement marks the first FDA clearance and CE mark certification for a product designed to reduce the circumference of the body.




18





In the first quarter of 2008, we introduced our new Matrix RFTM applicator. The Matrix RF applicator utilizes our fractional radio frequency technology to provide fractional tissue heating at three ablation relative ratios, resulting in effective ablation and resurfacing of the skin. The tunable applicator equipped with our SelecPulseTM, allows the user to adjust the relative ratio of ablation, as well as direct heating, and to vary the treatment depth based upon desired clinical endpoints. The Matrix RF applicator is the first bi-polar non-laser and non-light-based aesthetic device capable of creating tunable ablation impact, simulating the effects of different types of ablative / coagulative lasers used for a range of aesthetic applications. These applications include tightening and resurfacing, with minimal or no patient downtime. Matrix RF is being sold as an applicator add-on to all existing eLight, eLaser and eMax platforms. The ergonomically designed headpiece will greatly increase ease-of-use for physicians performing the treatments. The Matrix RF features a single-use disposable treatment tip. Each applicator comes with 10 treatments tips at purchase. Treatment will most often be performed around the eyes, mouth, and cheek, but can also be performed on the entire face as well as other anatomical areas. The Matrix RF was the second product in our series of ELOS fractional treatments, which currently includes the Matrix IR applicator. In September 2008, our Matrix RF applicator received CE Mark certification in the European Union and FDA clearance in the United States for use in dermatologic procedures for wrinkle reduction by means of skin ablation and coagulation (CE) and use in dermatological procedures requiring ablation and resurfacing of the skin (FDA). In the third quarter of 2008, we commenced selling our Matrix RF applicator.




In the first quarter of 2008, we also introduced our new LipoLite platform. Our LipoLite is a minimally invasive alternative and a complement to traditional liposuction fat-removing procedures. The procedure requires only local anesthetic and is designed to provide patients lasting results with little downtime and a high level of safety. For our customers, the LipoLite product is comfortable to use, upgradable to support future applications and fits easily on tabletops to save floor space in small operating rooms. In May 2008, our LipoLite platform received FDA 510(k) clearance in the United States for laser-assisted lipolysis and additional dermatological procedures. As a result of this clearance, we are currently permitted to sell our LipoLite platform in the United States. In the third quarter of 2008, we commenced selling our LipoLite platform in the United States.





In December 2008, we launched our new eMatrixTM treatment system, a portable touch-screen device that allows physicians to program dermatological procedures requiring skin resurfacing. The eMatrix utilizes our Matrix RF technology for fractional tissue heating to provide ablation and effective resurfacing. With the SelectPulse feature, our customers can “tune” eMatrix to any of three resurfacing programs, customizing the depth of ablation and degree of skin resurfacing to each patient’s needs.


In June 2009, we introduce a new and unique treatment modality called Sublative RejuvenationTM. Sublative Rejuvenation utilizes a fractionated bi-polar radio frequency technology in which heat energy is effectively placed into the dermis, producing dermal remodeling with the least amount of epidermal disruption. While traditional fractional technologies are most aggressive at the epidermal level, Sublative Rejuvenation delivers energy with minimal epidermis ablation.





In June 2009, we further launched VelaShape IITM. The latest device on the market for cellulite and circumferential reduction leading to body contouring, VelaShape II offers current and new practitioners added features and benefits, including increased power for shorter treatment sessions, reduced number of sessions, and an advanced CleverTM terminal, a diagnostic digital user interface to improve both consistency in treatment results and patient comfort.





In conjunction with the Sublative Rejuvenation treatment and the VelaShape II, we launched Syneron AdvantageTM a new physician partnership program to support customers' needs in today's economic climate. The program enables physicians to gain access to our facial applications and body shaping technologies at a more affordable price point that are easier to finance in the current economic environment. The Syneron Advantage program delivers services and programs to further support the success of physicians long after purchase. The program is now available with purchases of new VelaShape IITM, LipoLiteTM and eMatrixTM devices.





In November 2009, RBT announced the commercial launch of the elureTM topical whitening products in several Asian markets.The elure advanced dermal whitening product is the first scientifically proven enzymatic skin whitening treatment that targets and decomposes melanin to reveal a visibly lighter and exceptionally luminous skin tone. This product line is based on the unique scientific discovery of a naturally occurring bio-active substance, MelanozymeTM, which acts to decompose the melanin. It is combined with a bio-activator to diminish the dark colored pigment in the skin. Unlike several other whitening products in the market, the elure product line does not contain Hydroquinine which may cause side effects such as skin redness and burning sensation.




We have received 510(k) clearances from the FDA for all of the professional applications mentioned above. We sell our products in more than 50 countries through a direct sales force of approximately 35 employees in North America and more than 50 distributors in Europe, the Middle East, Asia-Pacific, South Africa and Central and South America. As of December 31, 2009, we had an installed base of over 12,750 products.




Candela Corporation




Our new indirect subsidiary, Candela, researches, develops, manufactures, markets, sells, distributes, and services laser systems used to perform procedures addressing patients' aesthetic medical and cosmetic concerns. Candela offers a comprehensive range of products based on proprietary technologies focusing on the major aesthetic and cosmetic laser applications. Candela's products include:




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Dynamic Cooling Device (DCD) is a device which cools the top layer of the skin, while leaving the targeted underlying hair follicle, vein or other structure at normal temperature. As a result, higher levels of laser energy can be delivered during treatment, while minimizing thermal injury, pain, and the inconvenience associated with anesthetics. The design of the hand-held DCD enables the practitioner to clearly see the area being treated, and the combined efficiency of the lasers and DCD reduces the risks of over treatment. The DCD delivers the appropriate amount of cooling quickly and consistently. Currently, DCD is available as an option on several Candela laser systems.




GentleMaxTM is an integrated aesthetic treatment workstation with multiple wavelength capability. It includes the Nd:YAG 1064 laser and 755 nm laser in one. It includes touch-screen technology for user-friendly interface. It offers broad treatment versatility with as many as 36 different applications, including permanent hair reduction, skin tightening and skin rejuvenation and treating leg and facial veins. In addition, this workstation offers a choice of skin cooling options—from chilled air technology to Candela's integrated and patented DCD that utilizes bursts of cryogen before and after the laser pulse to offer patient comfort.




AlexTriVantageTM is a total all-color tattoo and pigmented lesion solution using multi-wavelength technology in conjunction with Candela's "laser-pumped-laser" hand piece technology. It also includes a new long pulse mode which offers advanced rejuvenation treatments for a wider variety of pigmented lesions. It is Candela's fastest, gentlest, most powerful q-switched alexandrite laser with a touch-screen technology for user friendly interface.




QuadraLASETM offers a complete solution to fractional and traditional CO2 skin resurfacing. It features a unique QuadraSCANTM scanning system for enhanced patient comfort and includes dual fractionated (300 and 180m) hand pieces and surgical hand pieces which provide variable depth therapy and full range of treatment options. This product offers savings on cost of ownership since it uses no disposables.




GentleLASETM family of alexandrite lasers offers a powerful, fast, efficient, and ease-of-use system for treatment of permanent hair reduction, vascular lesions, wrinkle reduction and the treatment of pigmented lesions. It includes a large spot size of 18mm, resulting in faster treatment times. It treats most skin types and includes a long delivery system that allows treatment of a patient from head-to-toe without repositioning laser. The GentleLASE features a lightweight, compact design with multiple spot sizes and applications. In addition, it includes DCD epidermal cooling which makes redundant the use of messy gels.




GentleYAGTM family of Nd: YAG lasers provide fast, effective permanent hair reduction for every skin type including tanned or dark skin, treatment of beard bumps, leg and facial veins, and skin tightening. It is one of the fastest, most powerful Nd:YAG laser on the market today. One of the largest spot (18mm) on any Nd:YAG laser, it includes multiple spot sizes for multiple applications and multiple configurations. In addition, it includes DCD epidermal cooling which makes redundant the use of messy gels.




VbeamTM is the pulsed-dye technology which eliminates vascular lesions including port wine stain birthmarks, rosacea, leg and facial veins, post-operative bruising and provides skin rejuvenation by the reduction of diffuse redness and pigmentation, scars, warts, psoriasis and hemangiomas.  The Vbeam uses micro-pulse technology for purpura-free results and includes smart user interface which provides pre-set treatment parameters with a touch of the screen. In addition, it includes DCD epidermal cooling which makes redundant the use of messy gels.




SmoothbeamTM is a diode laser, for treatment of acne and acne scars, sebaceous hyperplasia and wrinkle reduction. It features 1450 nm wavelength which stimulates new collagen growth to treat fine lines and wrinkles. The Smoothbeam offers a quick, effective, non-invasive treatment for patients. In addition, it includes DCD epidermal cooling which makes redundant the use of messy gels.




The Syneron Solution




Our ELOS technology combines electrical and optical energy, each of which has unique characteristics when used alone and, which, when used together, produce beneficial synergistic effects. We believe that our ELOS technology represents a paradigm shift in non-invasive aesthetic medicine because it is the first approach that combines conducted radiofrequency energy, an electrical energy, a light or laser-based energy, and optical energy. Most previously available technologies have relied solely on optical energy sources or solely on radiofrequency energy.




Optical energy is absorbed in chromophores that may be blood or melanin in, for example, hair follicles and skin pigments. Water is a chromophore as well, depending on the optical energy wavelength used. Light has a typical depth of penetration of approximately 0.5 to 2.0 millimeters. Epidermal pigmentation may limit the amount of optical energy that can be used without burning or damaging the skin. Radiofrequency, or RF, energy differs from optical energy because it is not absorbed by the chromophore. Our products use two electrodes to deliver RF energy, or bipolar RF energy. The distance between the two electrodes controls the depth of penetration of the bipolar RF energy. In our products, we have selected the distance between the two electrodes to enable a depth of penetration of the bipolar RF energy of up to approximately 5.0 millimeters in facial applications and hair removal and up to approximately 25 millimeters in body contouring and cellulite applications, which permits the treatment of a broad range of dermal and subdermal aesthetic problems. Our products also contain a mechanism which simultaneously cools the skin’s surface and decreases the skin’s conductivity, pushing the RF energy even deeper into the skin. The use of RF energy enables real-time measurement of skin impedance, which allows our products to provide real-time feedback for every pulse, improving control of skin temperature and enhancing safety.




20





When used together, RF and optical energy produce a unique synergistic effect. Optical energy is used first to heat the target and decrease its resistance to RF energy. The RF energy is attracted to the areas that have been preheated by the optical energy, which results in more selective heating of the target. Heating a target structure will require less total energy with RF and optical energy combined than with optical energy alone. Using less total energy translates into enhanced safety, decreases the risk of burning the skin and allows the treatment of darker skin.




Our ELOS technology is embedded in most of our aesthetic product platforms, which consist of multiple hand pieces and a console that incorporates the RF and optical energy sources, sophisticated software and a simple, user-friendly interface. The key benefits of our technology to our customers include: enhanced control of treatment depth and selectivity for enhanced safety and increased patient comfort, and continuous temperature measurement and automated parameter adjustment to reduce the risk of burns.




Candela's Solution




Our new indirect subsidiary, Candela Corporation, has a product line which offers comprehensive and technologically sophisticated cosmetic and aesthetic lasers and light-based systems used by physicians and personal care practitioners to treat a wide variety of cosmetic and medical conditions. Since Candela's foundation, it has continuously developed and enhanced applications for laser technology. In the mid-1980's Candela began developing laser technology for medical applications, and since that time has shipped approximately 14,500 systems to over 85 countries. Since the early 1990's Candela has focused its organizational resources on developing laser and light-based technology for use solely in cosmetic, dermatological, and aesthetic applications.




Our Products




Our products address a wide range of treatment alternatives, as summarized in the table below.




Product

Platform

Applications(1)

Intended Users

Energy Sources

Market IntroductionAurora

Hair Removal,

Improving the skin’s appearance(2), Acne treatment

Physicians

Light + RF

U.S.: Third Quarter 2002

Rest of World: Fourth Quarter 2001Pitanga

Hair Removal,

Acne treatment

Aestheticians Medical Spas

Light + RF

Rest of World: Fourth Quarter 2003Polaris

Wrinkles reduction,

Leg Veins treatment,

Other Vascular Lesions treatment

Physicians

Laser + RF

U.S.: Fourth Quarter 2003 Rest of World: Second Quarter 2003
 Galaxy

Hair Removal, Improving the skin’s appearance(2), Acne treatment,

Wrinkles reduction,

Leg Veins treatment,

Other Vascular Lesions treatment

Physicians

Light + RF / Laser + RF

U.S.: Second Quarter 2004 Rest of World: Second Quarter 2004Comet

Hair Removal

Physicians Aestheticians

Laser + RF

U.S.: Fourth Quarter 2004 Rest of World: Fourth Quarter 2004VelaSmooth

Appearance of Cellulite, Thigh circumference reduction (in 2007), Body contouring

Physicians Aestheticians Medical Spas

Light + RF+ Vacuum + Massage

U.S.: Second Quarter 2005 Rest of World: First Quarter 2005
  21
  eStyle

Hair Removal, Improving the skin appearance,

Acne treatment ,Wrinkles reduction (ST)

Aestheticians Spas

Light + RF

Rest of World: First quarter 2006eLight

Hair Removal, Improving the skin’s appearance(2), Acne treatment, Wrinkles reduction(ST)

Physicians

Light + RF

U.S.: First quarter 2006

Rest of World: First quarter 2006eLaser

Wrinkles treatment, Leg Veins treatment, Other Vascular Lesions treatment; Hair removal

Physicians

Laser + RF

U.S.: First quarter 2006

Rest of World: First quarter 2006eMax

Hair Removal, Improving the skin’s appearance(2), Acne treatment, Wrinkles reduction, Leg Veins treatment, Other Vascular Lesions treatment, and wrinkles with the ST applicator

Physicians

Light + RF / Laser + RF

U.S.: First quarter 2006

Rest of World: First quarter 2006VelaShape

Appearance of Cellulite, Reduction of thigh circumference

Physicians Aestheticians Medical Spas

Light + RF+ Vacuum + Massage

U.S.: Third Quarter 2007

Rest of World: Third quarter 2007VelaShapeII

Appearance of Cellulite, Reduction of thigh circumference

Physicians Aestheticians Medical Spas

Light + RF+ Vacuum + Massage

U.S.: Third Quarter 2009

Rest of World: Third Quarter 2009LipoLite

Laser-assisted lipolysis

Physicians

Laser

U.S.: Third Quarter 2008eMatrix

Ablation and resurfacing of the skin

Physicians

RF

U.S.: Fourth Quarter 2008

Rest of World: Forth quarter 2008LiteTouch

Dental Laser

Dentists

Laser

U.S.: First quarter 2007

Rest of World: First quarter 2007elure

Skin Whitening

Physicians

Melanozyme

Sales have not yet commenced




(1)
Regulatory clearance has been received in the United States and Europe for each indicated application for all products. In each market in which our products are sold, other than the United States and most European countries, our distributors are responsible for obtaining regulatory approvals.




(2)
Improving the skin’s appearance through the treatment of superficial benign vascular and pigmented lesions.




22




Candela's Products




Candela's product line includes the following products:




Dynamic Cooling Device

Skin Cooling

Physicians

Cryogenic Cooling

U.S.: First Quarter 1998

Rest of World: First Quarter 1998GentleMax

Hair Removal, Skin Tightening, Skin Rejuvenation and Leg and Facial Veinstreatment

Physicians

Laser

U.S.: First Quarter 2007

Rest of World: First Quarter 2007AlexTriVantage

Tattoo and Pigmented Lesion Solution

Physicians

Laser

U.S.: First Quarter 2007

Rest of World: First Quarter 2007QuadraLASE

Fractional and Traditional Co2 Skin Resurfacing

Physicians

Laser

U.S.: Second Quarter 2009

Rest of World: Second Quarter 2009GentleYAG

Hair Removal, Beard Bumps Treatment, Skin Tightening and Leg Vein Removal

Physicians

Laser

U.S.: First Quarter 2004

Rest of World: First Quarter 2004Vbeam

Vascular Lesions Elimination including Port Wine Stain Birthmarks, Rosacea, Leg and Facial Veins, Post-Operative Bruising and Skin RejuvenationTreatment

Physicians

Laser

U.S.: First Quarter 1998

Rest of World: First Quarter 1998Smoothbeam

Acne Treatment, and Acne Scars, Sebaceous Hyperplasia and Wrinkle Reduction

Physicians

Laser

U.S.: First Quarter 2002

Rest of World: First Quarter 2002GentleLASE

Hair Removal, Vascular Lesions, Wrinkle Reduction and Treatment of Pigmented Lesions

Physicians

Laser

U.S.: First Quarter 1998

Rest of World: First Quarter 1998


Sales and Marketing




We market our products to dermatologists, plastic surgeons and other cosmetic physicians in North America and to medical and non-medical practitioners outside North America. In North America, we continue to target the larger market of primary care physicians, obstetricians/gynecologists, ear, nose and throat specialists, and other practitioners who have started incorporating aesthetic procedures into their practices, along with the developing medical spa market. We also focus on additional aestheticians throughout the world. We believe our products represent a significant opportunity for practitioners to deliver improved patient treatment results and significantly increase their ability to generate additional revenue.




We sell our products in 50 countries around the world primarily through a combination of more than 50 distributors as well as salespeople employed by our distributors throughout the world. In the United States and Canada, we sell, market and distribute our products through a direct sales force of approximately 35 individuals. Our U.S. and Canadian sales efforts are headquartered in Irvine, California, and we manage several separate territories in the United Stated and Canada. In addition, we have agreements with distributors to market and sell our products throughout Europe, the Middle East, South Africa, the Asia-Pacific region and South and Central America.




Our customer support strategy in North America is to offer our customers predictable cost of ownership, including minimal ongoing maintenance. In North America, we offer a three-year, parts and services warranty that covers disposable applicator parts and regular system maintenance. The small size and weight of our system enables us to complement our warranty programs with a product maintenance program that offers next-day delivery of replacement products in North America in the case of any problems with the machine. This unique overnight delivery program eliminates unnecessary downtime at the user’s office and results in minimal loss of revenue for our customers. We now also offer in connection with the purchases of new VelaShape IITM, LipoLiteTM and eMatrixTM devices, the Syneron Advantage program which enables physicians to gain access to our facial applications and body shaping technologies at a more affordable price point that are easier to finance in the current economic environment. The Syneron Advantage program also delivers services and programs to further support the success of physicians long after purchase.




23





Candela's Sales and Marketing




Our new indirect subsidiary, Candela, markets and sells its products worldwide. Executives in North America, Latin America, Japan, Asia-Pacific, and Europe manage Candela's marketing, selling, and service activities through a combination of direct personnel and a network of independent distributors. Candela's sale efforts are headquartered in Wayland, Massachusetts. The mix of direct sales and distributor sales varies by region. Generally, Candela's distributors enter into 2-3 year exclusive agreements during which they typically agree not to sell Candela's competitors' products.




Candela sells products in the United States primarily through its direct sales force to traditional customer base of dermatologists and plastic and cosmetic surgeons.Candela's products are distributed to our non-traditional markets through an exclusive arrangement with McKesson's Medical Surgical Division. McKesson has approximately 450 dedicated sales representatives that showcase a wide range of products to family and general practice, and obstetrics and gynecology, physicians.




Outside the United States, Candela sells its products in Europe, Japan, Latin America, the Middle East, and Asia-Pacific through direct sales offices and distribution relationships. Candela has a total of 130 employees in its direct sales offices in Madrid, Lisbon, Rome, Frankfurt, Paris, Tokyo, Nagoya, Fukuoka, Osaka, Cwmbran, and Sydney. Candela has also established distribution relationships in China, Europe, Japan, Africa, Latin America, and the Middle East. Outside the United States, Candela is utilizing approximately 60 distributors.




Revenues by Geographic Market




Region

Year ended December 31,2007

2008

2009USD in

thousands



USD in

thousands


USD in

thousandsPercentage

Percentage

PercentageNorth America

$
80,489

57.1
%
$
60,202
52.4
%
$
27,978
51.1
%Europe


32,666

23.2


33,005
28.7


10,919
20.0Asia-Pacific


22,013

15.6


16,967
14.7


11,362
20.8Israel


916

0.6


581
0.5


1,127
2.1Others


4,912

3.5


4,224
3.7


3,340
6.0Total


140,996

100.0


114,979
100


54,726
100




Manufacturing




We use outsourced manufacturing to produce our devices while maintaining full control over every step of the production process. We believe that outsourcing allows us to carry low inventory levels and maintain fixed unit costs without incurring significant capital expenditures. We use three separate manufacturers to produce our products. We believe their manufacturing processes are in compliance with all pertinent U.S. and international quality and safety standards, such as ISO 9001:2000, ISO 13485:2003 and EN46001 as well as the FDA’s quality system regulations. We conduct in-house prototype development and present detailed manufacturing documents to our subcontractors, who then purchase most of the necessary components and manufacture the product. These manufacturing subcontractors provide us fully assembled, or “turn-key,” services. We control and monitor the quality of our products by testing each product at our warehouse and through extensive involvement in the production process at the facilities of our subcontractors.




The contracts we have with these manufacturers do not have minimum purchase requirements and allow us to purchase end products from the manufacturers on a purchase order basis. The contracts have one-year terms that automatically renew for successive one-year terms. Either we or the manufacturer may terminate the contract by giving the other party four months’ written notice prior to the expiration of the term. The time required to qualify new subcontract manufacturers for our products could cause delays in our ability to provide products to our customers.




We procure the diode laser component of our products on behalf of our third-party manufacturers from a limited number of suppliers. We have flexibility to adjust the number of diode lasers we procure as well as the delivery schedules. The forecasts we use are based on historical demands and future plans. Lead times may vary significantly depending on the size of the order, time required to fabricate and test the components, specific supplier requirements and current market demand for the components. We reduce the potential for delays of supply by maintaining relationships with multiple suppliers of diode lasers. The time required to qualify new suppliers for the diode laser components, or to redesign them, could cause delays in our manufacturing. To date, we have not experienced significant delays in obtaining our diode laser components.




24





Candela's Manufacturing




Our new indirect subsidiary, Candela, designs, assembles, and tests its branded products at its Wayland, Massachusetts facility.




Candela's facility has ISO 13485 certification and has established and is maintaining a quality system that meets the requirements of ISO 13485:2003 from both the EC Directive 93/42/EEC and Canadian Medical Devices Regulation. The ISO 13485 certification provides evidence that Candela conforms to quality system requirements for the design, development, production, servicing and distribution of medical lasers and accessories.




Candela's products are manufactured with standard components and subassemblies supplied by third party manufacturers to its specifications. Candela purchases certain components and subassemblies from a limited number of suppliers. If Candela's suppliers are unable to meet its requirements on a timely basis, Candela's production could be interrupted until it will obtain an alternative source of supply.




Candela uses Alexandrite rods to manufacture the GentleMaxTM, GentleLASETMand the AlexTriVantageTM systems, which account for a significant portion of Candela’s total revenues. Candela depends exclusively on its contract manufacturer to supply these rods, for which no alternative supplier meeting its quality standards exists. To date, Candela has not experienced significant delays in obtaining dyes, optical and electro-optical components, electronic components, Alexandrite rods and other raw materials for its products. Candela believes that over time alternative component and subassembly manufacturers and suppliers can be identified if its current third party manufacturers and suppliers fail to fulfill its requirements.




Research and Development




Our research and development activities are conducted internally by a research and development staff consisting of 46 employees. Our research and development efforts are focused on the development of new products, as well as the extension of our existing products to new applications in the aesthetic medical market. We intend to develop products and product line extensions that leverage our ELOS technology as well as other product platforms. We have a number of new projects and products under development, mainly focusing on additional non-invasive aesthetic treatments. We expect to develop several major product initiatives in 2010: a new product for circumferential reduction, a new product line for aestheticians and the cosmetic market, and products for home use using our proprietary ELOS technology.




Until 2007, our research and development efforts have been focused on the development of products that leverage our ELOS technology. Since 2007, our research and development efforts also focus on the development of technologies, which are not based on our ELOS technology. Our gross research and development expenditures were $8.5 million in 2006, $12.5 million in 2007, $13.8 million in 2008 and $13.2 million in 2009. We estimate our gross research and development expenditures for 2010 will be $15 million.




Candela's Research and Development




Our new indirect subsidiary, Candela, is currently conducting research on a number of applications by its in-house research and development staff consisting of 27 employees. Candela's core competencies include: applied laser physics and technology; tissue optics; photochemistry; light-tissue interaction; clinical research; aesthetic laser applications; engineering and design of medical laser devices; and collaborative research with leading academic and medical institutions.




When Candela discovers new technologies or applications with commercial potential, it assembles a team to develop the new product or application in cooperation with leading physicians and medical and research institutions.




Candela's research and development team works with its operations group to design its products for ease of manufacturing and assembly and with its marketing group to create and respond to market opportunities. This interaction between functional groups facilitates the introduction of new products with the right balance of features, clinical benefits, performance, quality, and cost.




Historically, Candela's research and development effort has relied primarily on internal development building on its core technologies. Today, in addition to its internal team, Candela's regularly engages the services of independent engineering and development firms to assist in the acceleration of new product development.




Candela also conducts joint research with physicians affiliated with various medical and research institutions. One example of technology developed through joint research is Candela's Dynamic Cooling Device which was developed in conjunction with the Beckman Laser Institute at the University of California, Irvine. Candela anticipates continuing joint research and licensing arrangements with reputable medical research institutions in future periods.




25





Intellectual Property




We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality and invention assignment agreements to protect our intellectual property rights. As of February 25, 2010, our patent portfolio consisted of 11 issued U.S. patents, one of which we purchased in December 2004 (with the certain U.S. and international family members), and 72 patents applications pending in the U.S. (with an additional 101 applications pending internationally and 10 international patents), related to 74 patent families relating to our technology and products. We have filed and expect to file future patent applications in the United States. We have also filed, or intend to file, foreign counterpart applications in Europe, certain countries in South America, Canada, Israel, Australia, China, Korea, Japan, and certain other countries in Asia for at least certain applications. We intend to file for additional patents to strengthen our intellectual property rights. Our trademarks include Syneron, the Syneron logo, ELOS, Active Dermal Monitoring, Aurora, Polaris, Pitanga, VelaSmooth, Syner-Cool, Galaxy, Comet, eLight, eLaser, eMax, elure, Refirme, VelaShape, LipoLite, Sublative Rejuvenation, VelaShapeII, Syneron Advantage and elure . All other trademarks, trade names and service marks appearing in this Annual Report on Form 20-F are the property of their respective owners. We have a policy of seeking to register our trademarks in the United States, Canada and certain other countries.




Candela's Intellectual Property




Our new indirect subsidiary, Candela, has numerous patents and has a number of patent applications pending to protect its rights in certain technical aspects of hair removal, wrinkle removal, acne treatment, benign vascular lesion, pigmented lesion, and other laser systems.As of February 25, 2010, Candela's patent portfolio consisted of 22 issued U.S. patents, 37 patents applications pending in the U.S. and additional 10 applications pending internationally and 33 international patents.In addition to Candela's portfolio of issued patents and patent applications, Candela licenses patented technology from third parties. Candela uses its patentedDynamic Cooling Device (DCD) under a license agreement from August 2000, to patent rights owned by the Regents of the University of California (Regents). The exclusive license rights to the DCD are subject to limited license rights of Cool Touch, Inc. (Cool Touch), in the following fields of use: procedures that involve skin resurfacing and rejuvenation, vascular skin lesions, and laser hair removal. Cool Touch obtained a license to the DCD on a co-exclusive basis with Candela, in certain narrower fields of use. Cool Touch is restricted in its ability to assign its license rights to certain existing competitors of Candela. Candela is entitled to one-half of all royalty income payable to the Regents from Cool Touch. Under the agreement, Candela no longer is required by the Regents to negotiate sublicenses to third parties. However, Candela is entitled to one-half of all royalties due from any other entity that licenses the DCD technology from the Regents in other fields of use.




Intellectual PropertyLitigation




On October 9, 2007, we reached an agreement with Shaldot and Qray which settled a patent related claim. Pursuant to this settlement, we entered into a license agreement with Shaldot and Qray under which we received a license to use and utilize the patent in suit in any of our products. In return, we agreed to pay Qray a one-time license fee of $0.1 million. We also entered into a share purchase agreement with Shaldot and Qray under which we invested $1.05 million in Qray in consideration for shares equivalent to 9% of Qray’s outstanding share capital. If Qray meets certain milestones within three and a half years from the closing of the transaction, we are obligated to invest an additional $0.45 million in Qray. The costs in connection with our settlement amounted to approximately $0.2 million.




Our subsidiary, Syneron Inc. is currently defending a patent infringement lawsuit brought by Palomar Medical Technologies, Inc. (Palomar) alleging infringement of U.S. Patent Nos. 5,595,568 (the ’568 Patent) and 5,735,844 (the ’844 Patent) by Syneron Inc.’s hair removal products. The ’568 and ’844 Patents were subject to reexaminations by the U.S. Patent and Trademark Office (PTO), and the action was stayed pending completion of the reexaminations. The PTO issued Reexamination Certificates with respect to the ’568 and ’844 Patents, and the stay was lifted in the Syneron Inc. case on November 13, 2009. The Syneron Inc. action is still in its early stages. The complaint against Syneron Inc. was filed on November 14, 2008, and alleges willful infringement of the ’568 and ’844 Patents. The complaint seeks compensatory damages, requests that these damages be trebled, and requests attorneys’ fees and injunctive relief. After the lifting of the stay, Syneron Inc. answered the complaint on November 30, 2009, denying Palomar’s claims and seeking a declaratory judgment of noninfringement, invalidity, and unenforceability of the ’568 and ’844 Patents. On December 10, 2009, Palomar filed a First Amended Complaint that added Massachusetts General Hospital (MGH) as a plaintiff, and on December 14, 2009, Palomar replied to Syneron Inc.’s counterclaims. Syneron Inc. answered the First Amended Complaint on December 23, 2009, and filed Amended Counterclaims that add MGH as a counterdefendant. The Court held a scheduling conference in the case on January 6, 2010. At the conference, the Court set the claim construction hearing for November 17, 2010, and set other pre-trial dates. No trial date was set.




While Syneron Inc. intends to vigorously contest Palomar’s allegations, the lawsuit is inherently uncertain and unpredictable as to its ultimate outcome. An adverse outcome in Palomar’s suit against Syneron Inc. would materially hurt the business, financial condition, results of operations and cash flows of Syneron Inc.





26





Candela's Intellectual PropertyLitigation




Our new indirect wholly owned subsidiary, Candela Corporation (Candela), is also currently defending a patent infringement lawsuit brought by Palomar alleging infringement of the ’568 and the ’844 Patents by Candela’s hair removal products. The ’568 and ’844 Patents were subject to reexaminations by the U.S. Patent and Trademark Office (PTO), and the action was stayed pending completion of the reexaminations. The PTO issued Reexamination Certificates with respect to the ’568 and ’844 Patents, and the stay was lifted in the Candela case on January 5, 2010. Palomar's amended complaint, which added MGH as a plaintiff, alleges that Candela willfully infringed the ’568 and ’844 Patents. In addition to seeking compensatory damages, the amended complaint requests that the Court treble these damages, award attorneys’ fees, and provide injunctive relief. Candela’s amended answer and counterclaims denies Palomar’s claims, seeks a declaratory judgment of noninfringement, invalidity, and unenforceability of the ’568 and ’844 Patents, and alleges unfair and deceptive business practices by Palomar in violation of Massachusetts General Laws Ch. 93A. Candela seeks compensatory damages, and requests the trebling of these damages, attorneys’ fees, and injunctive relief. Prior to the entry of the stay, a claim construction hearing was held, the Court issued an order on November 8, 2007, construing the claims, fact discovery was closed and expert reports were exchanged prior to entry of the stay. Palomar has dropped the ’568 Patent from this lawsuit, and has elected to proceed solely on the ’844 Patent. On February 10, 2010, after the stay was lifted, the Court held a scheduling conference and set June 30, 2010 as the cutoff for expert discovery, July 30, 2010, as the last date for filing summary judgment motions, and September 14, 2010, as the hearing date for summary judgment motions. The parties later agreed to serve supplemental expert reports on April 9, 2010, and supplemental rebuttal expert reports on May 7, 2010. No trial date has been set.




While Candela intends to vigorously contest Palomar’s allegations, the lawsuit is inherently uncertain and unpredictable as to its ultimate outcome. An adverse outcome in Palomar’s suit against Candela would materially hurt the business, financial condition, results of operations and cash flows of Candela.




On February 19, 2008, Cardiofocus, Inc., or Cardiofocus, filed suit against Candela and eight other companies in the U.S. District Court for the District of Massachusetts, asserting willful infringement by Candela of U.S. Patents 6,457,780, 6,159,203 and 5,843,073. Cardiofocus seeks compensatory and treble damages, as well as attorneys’ fees and injunctive relief. On April 21, 2008, Candela answered Cardiofocus’ complaint and asserted a variety of counterclaims against Cardiofocus. Candela intends to vigorously defend against the lawsuit. Based upon Candela’s request, on July 23, 2008, the PTO agreed to re-examine the validity of the Cardiofocus patents. On October 14, 2008, the Court agreed to stay this matter for a minimum of one year, up to a maximum of two years, but no later than the PTO’s decision with respect to the re-examination proceedings.




All our professional employees and technical consultants are required to execute confidentiality agreements in connection with their employment and consulting relationships with us. In most cases, we also require them to agree to disclose and assign to us all inventions conceived in connection with their services to us. However, there can be no assurance that these confidentiality and assignment agreements will be enforceable or that they will provide us with adequate protection.




Competition




Our industry is subject to intense competitionand technological developments are expected to continue at a rapid pace.We compete against products offered by public companies, including Cutera, Inc., Cynosure, Inc., Solta Medical, Inc., Palomar Medical Technologies, Inc., UltraShape Ltd., and Lumenis Ltd., as well as by private companies such as Sciton, Inc., Alma Lasers Ltd. and several other smaller specialized companies. Our products compete against conventional non-light-based treatments, including Botox and collagen injections, sclerotherapy, electrolysis, liposuction, chemical peels and microdermabrasion. Our products also compete against laser and other light-based products.




Competition among providers of laser and other light-based products for the aesthetic medical market is characterized by extensive research efforts and rapid technological progress. While we attempt to protect our products through patents and other intellectual property rights, there are few barriers of entry that would prevent new entrants or existing competitors from developing products that would compete directly with ours. There are many companies, both public and private, that are developing innovative devices that use laser, light-based and alternative technologies. Many of these competitors have significantly greater financial and human resources than we do and have established reputations, as well as worldwide distribution channels that are more effective than ours. Additional competitors may enter the market and we are likely to compete with new companies in the future. To compete effectively, we have to demonstrate that our products are attractive alternatives to other devices and treatments by differentiating our products on the basis of performance, brand name, reputation and price. We have encountered and expect to continue to encounter potential customers who, due to existing relationships with our competitors, are committed to, or prefer the products offered by, these competitors. We expect that competitive pressures may over time result in price reductions and reduced margins for our products.




We believe that many factors will affect our competitive position in the future, including our ability to:




·
develop and manufacture new products that meet the needs of our markets;




·
respond to competitive developments and technological changes;




·
manufacture our products at lower cost;




27




·
retain a highly qualified research and engineering staff;




·
provide sales and service to a worldwide customer base; and




·
maintain and improve product reliability.




Government Regulation




Our products are medical devices subject to extensive and rigorous regulation by the U.S. Food and Drug Administration, as well as other regulatory bodies, to help ensure that medical products are safe and effective for their intended uses. FDA regulations govern the following activities that we perform and will continue to perform:




·
product design and development;




·
product testing;




·
software validation;




·
product manufacturing;




·
product safety;




·
product labeling;




·
product storage;




·
record keeping;




·
pre-market clearance or approval;




·
advertising and promotion;




·
production; and




·
product sales and distribution.




Each of our products currently marketed in the United States has received 510(k) clearance or has Letter to File documentation for the uses for which it is being marketed.




FDA’s Pre-market Clearance and Approval Requirements. Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either prior 510(k) clearance or pre-market approval (PMA) from the FDA.The FDA's 510(k) clearance process usually takes from three to twelve months, but it can last longer. The process of obtaining PMA approval is much more costly, lengthy, and uncertain and generally takes from one to three years or even longer. We cannot be sure that 510(k) clearance or PMA approval will ever be obtained for any product we propose to market. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placed in either class I or II, which requires the manufacturer to submit to the FDA a registration or a pre-market notification requesting permission to commercially distribute the device. This process is generally known as 510(k) clearance. Some low risk devices are exempt from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in class III, requiring PMA. All of our current products that are being marketed in the United States are class II devices.




A clinical trial may be required in support of a 510(k) submission or PMA application. Such trials generally require an Investigational Device Exemption (IDE) application approved in advance by the FDA for a limited number of patients, unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements. The IDE application must be supported by appropriate data, such as animal and laboratory testing results. Clinical trials may begin once the IDE application is approved by the FDA and the appropriate institutional review boards are at the clinical trial sites.




510(k) Clearance Pathway. When a 510(k) clearance is required, we must submit a pre-market notification demonstrating that our proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for the submission of PMA applications. By regulation, the FDA is required to clear, negotiate or deny a 510(k) pre-market notification within 90 days of submission of the application. As a practical matter, clearance often takes significantly longer. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence.




28





After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with a manufacturer's decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to submit a pre-market notification requiring 510(k) clearance. The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance is obtained. We have modified some of our 510(k) cleared devices but have determined that, in our view, new 510(k) clearances are not required. We cannot be certain that the FDA would agree with any of our decisions not to seek 510(k) clearance. If the FDA requires us to seek 510(k) clearance for any modification, we also may be required to cease marketing and/or recall the modified device until we obtain a new 510(k) clearance.




Laser devices used for aesthetic procedures, such as hair removal, have generally qualified for clearance under 510(k) procedures. We received FDA clearances to market our Aurora platform of products for hair removal in July 2002 and for superficial vascular and pigmented lesions in October 2002. We received FDA clearance for the treatment of acne with the Aurora and the Pitanga products in February 2004. We received FDA clearances to market our Polaris product platform for leg vein treatment as well as other types of vascular lesions in April 2003. We received FDA clearance for wrinkle treatment with the Polaris products in December 2003. In June 2005, the FDA granted 510(k) clearance to our Vela platform for the temporary reduction in the appearance of cellulite and for the relief of minor muscle aches, pain and spasms, as well as the temporary improvement of local blood circulation. In March 2006, the FDA granted 510(k) clearance to our ST applicator for non-invasive wrinkle treatment a technique related to our ReFirmeTM procedure. In July 2007, the FDA granted 510(k) clearance to our VelaSmooth product for temporary reduction of thigh circumferences, and in August 2007, the FDA granted 510(k) clearance to our VelaShape for all uses of our VelaSmooth product. In May 2008, the FDA granted 510(k) to our new LipoLite product for laser-assisted lipolysis and additional dermatological procedures. In September 2008, the FDA granted 510(k) clearance to our Matrix RF applicator for use in dermatological procedures requiring ablation and resurfacing of the skin. In October 2006, the FDA granted 510(k) clearance to our LiteTouch product for dental laser treatment. Our recently acquired subsidiary, Primaeva, already received 510(k) clearance for wrinkle treatment indication.




Pre-market Approval Pathway. PMA application must be submitted to the FDA if the device cannot be cleared through the 510(k) process or through registration. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device.




Pervasive and Continuing Regulation. After a device is placed on the market, numerous regulatory requirements apply. These include:




·
quality system regulations, or QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process (including an annual laser report);




·
labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses;




·
medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; and




·
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.




The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA to determine our compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of our manufacturing subcontractors.




We also are regulated under the Radiation Control for Health and Safety Act, which requires laser products to comply with performance standards, including design and operation requirements, and manufacturers to certify in product labeling and in reports to the FDA that their products comply with all such standards. The law also requires laser manufacturers to file new product and annual reports, maintain manufacturing, testing and sales records, and report product defects. Various warning labels must be affixed and certain protective devices installed, depending on the class of the product.




Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:




·
fines, injunctions, consent decrees and civil penalties;




·
recall or seizure of our products;




29




·
issuing an import alert to block entry of products the FDA has reason to believe violate applicable regulatory requirements;




·
operating restrictions, partial suspension or total shutdown of production;




·
refusing our requests for 510(k) clearance or pre-market approval of new products or new intended uses;




·
withdrawing 510(k) clearance or pre-market approvals that are already granted; and




·
criminal prosecution.




The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we have manufactured or distributed. If any of these events were to occur, they could have a material adverse effect on our business.




We also are subject to a wide range of federal, state and local laws and regulations, including those related to the environment, health and safety, land use and quality assurance. We believe that we are in compliance with these laws and regulations as currently in effect, and our compliance with such laws will not have a material adverse effect on our capital expenditures, earnings and competitive and financial position.




International Regulations. International sales of medical devices are subject to foreign governmental regulations, which vary substantially from country to country. The time required to obtain clearance or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may be different.




The primary regulatory environment in Europe is that of the European Union, encompassing most of the major countries in Europe. Several member states of the European Free Trade Association have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. Other countries, such as Switzerland, have entered into Mutual Recognition Agreements and allow the marketing of medical devices that meet European Union requirements. The European Union has adopted numerous directives and European Standardization Committees have promulgated voluntary standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear CE conformity marking (CE Mark), indicating that the device conforms with the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout the member states of the European Union, the member states of the European Free Trade Association and countries which have entered into a Mutual Recognition Agreement. The method of assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body, an independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s device. An assessment by a Notified Body in one member state of the European Union, the European Free Trade Association or one country which has entered into a Mutual Recognition Agreement is required in order for a manufacturer to commercially distribute the product throughout these countries. In the second quarter of 2003, we received certification for ISO 13485:2003. An ISO 13845:2003 certificate reflects the voluntary adoption of harmonized standards; however, compliance with such standards establishes a presumption of conformity with the essential requirements for a CE Mark. In the third quarter of 2001, our facility was granted a CE Mark approval certification. The ISO 13485:2003 and the CE Mark approval are valid until 2010.




Federal Communications Commission and other governmental agencies governing the use of radio frequency energy. Our products generate and use radio frequency energy, and therefore may be subject to technical, equipment authorization and other regulatory requirements in the countries and regions where they are marketed or distributed. In the United States, our products are subject to the Federal Communications Commission’s equipment verification procedures, under which the manufacturer is required to determine, or verify, that the equipment complies with the applicable technical standards and to keep a record of test measurements demonstrating compliance before the equipment can be marketed or sold in the United States. Any modifications to our products may require re-verification before we are permitted to market and distribute the modified devices.




We seek to obtain regulatory approvals in countries requiring advance clearance of our products before they are marketed or distributed in those countries. Our failure to comply with the technical, equipment authorization, or other regulatory requirements of a specific country or region could impair our ability to commercially market and distribute our products in that country or region.




C.           ORGANIZATIONAL STRUCTURE




We have 19 active subsidiaries as follows:




·
Syneron GmbH, which is a wholly-owned subsidiary of ours and was established in Germany in August 2001 to market and sell our products in Europe.




·
Syneron Inc. and Syneron Canada Corp., which are wholly-owned subsidiaries and were established in 2002 in Delaware and Toronto, Canada, respectively, to market and sell our products in North America.




30




·
Syneron Medical (HK) Ltd., which is a wholly-owned subsidiary and was established in Hong Kong in June 2004 and became active promoting, marketing and serving as an agent of the Company in Asia and Australia since January 2007.




·
Light Instruments Ltd., an Israeli corporation which is a wholly-owned subsidiary of ours as of October 2008.




·
Inlight Corp., a California corporation, which is a wholly owned subsidiary of ours as of November 4, 2008.




·
Rakuto Bio Technologies Ltd. an Israeli company, which we own 44.9% of its fully diluted share capital as of November 9, 2009.




·
Fluorinex Active Ltd., an Israeli company, which we own 53.01% of its fully diluted share capital as of May 13, 2009.




·
Primaeva Medical, Inc., a company based in Pleasanton, California which is an indirect wholly owned subsidiary of ours as of October 26, 2009.




·
Candela Corporation, a Delaware corporation, which is an indirect wholly owned subsidiary of ours as of January 5, 2010. Candela Corporation has 9 active subsidiaries as follows:




·
Candela KK – a Japanese corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.




·
Candela Iberica, S.A. – a Spanish corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.




·
Candela Deutschland GmbH - a German corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.




·
Candela France SARL – a French corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.




·
Candela Italia – an Italian corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.




·
Candela (U.K.) Limited – a U.K. corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.




·
Candela Corporation Australia PTY, Ltd. – an Australian corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.




·
Candela International Holdco, B.V. – a Netherland corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.




·
Candela Portugal, Unipessoal Lda. – a Portugal corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.




D.           PROPERTY, PLANTS AND EQUIPMENT




We lease our main office and research and development facilities, located in the Industrial Zone in Yokneam Illit, Israel, pursuant to a lease that expires in December 2010. We have an option to extend our lease for an additional two year period. We and our subsidiaries, Light Instruments Ltd. and Fluorinex Active Ltd. occupy approximately 36,600 square foot in this leased facility in Yokneam Illit. Our U.S. subsidiary leases a 2,212 square foot facility in Schaumburg, Illinois pursuant to a lease that expires in May 2010. Our U.S. subsidiary also leases a 15,204 square foot facility in Irvine, California pursuant to a lease that expires in October 2011. Our Canadian subsidiary leases a 14,257 square foot facility in Richmond Hill, Ontario, Canada pursuant to leases that expire in July 2012. Our Hong-Kong subsidiary leases a 2,814 square foot facility in Hong-Kong pursuant to a lease that expires in June 2010. Inlight Corp. leases a 840 square foot facility in Irvine, California, pursuant to a lease which is renewable on a monthly basis. Primaeva Medical, Inc. leases approximately 14,137 square foot for its operations in Pleasanton, California pursuant to a lease that expires in June 2013.




Candela Corporation leases approximately 38,000 square foot for its operations in Wayland, Massachusettspursuant to a lease that expires inDecember 2011. Candela Corporation also leases a 12,000 square foot facility in South Plainfield, New Jersey for its diode operationpursuant to a lease that expires inOctober 2011.




31





Candela’s subsidiaries currently lease the following facilities:




·
Candela KK – leases four offices in Japan in Tokyo, Osaka, Nagoya, and Fukuoka. These leases expire between November 14, 2009 and September 16, 2012.




·
Candela Iberica, S.A. – leases two locations in Lisbon, Portugal and Madrid, Spain. These leases expire on December 12, 2010 and December 31, 2011, respectively.




·
Candela Deutschland GmbH – leases a facility in Neu-Isenberg, Germany expiring on October 14, 2011.




·
Candela France SARL – leases a facility in Villebou Sur Yvette, France expiring on June 30, 2016.




·
Candela Italia – leases a facility in Formello, Italy expiring on November 3, 2011.




·
Candela (U.K.) Limited – leases a facility in Cwmbran, U.K. expiring on September 18, 2012.




·
Candela Corporation Australia PTY, Ltd. – leases a facility in Heidelberg West, Australia expiring on March 4, 2013.




·
Inolase (2002), Ltd. – leases a facility in Natanya, Israel expiring on April 30, 2010. The lease agreement will not be renewed as Candela closed the operation of Inolase.




We believe that our properties are adequate to meet our current needs.







ITEM4A.
UNRESOLVED STAFF COMMENTS




None




ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS




The following discussion of our financial condition and results of operations should be read in conjunction with Item 3.A, “Key Information – Selected Financial Data” and our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 20-F. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in theses forward-looking statements as a result of many factors, including those discussed under Item 3.D, “Key Information – Risk Factors” and elsewhere in this Annual Report on Form 20-F.




A.           OPERATING RESULTS




Overview




We design, develop and market innovative aesthetic medical products mostly based on our proprietary ELOS technology, which uses the synergy between electrical energy and optical energy to provide effective, safe and affordable aesthetic medical treatments. Our products, which we sell primarily to physicians and other practitioners, target a wide array of non-invasive aesthetic medical procedures, including hair removal, wrinkle reduction, rejuvenation of the skin’s appearance through the treatment of superficial benign vascular and pigmented lesions, and treatment for the temporary reduction in the appearance of cellulite thigh circumference and skin tightening, and one minimally invasive product for laser-assisted lipolysis. We believe our ELOS technology provides performance advantages over existing technologies that rely solely on optical energy. We believe using optical energy alone limits the safety and efficacy of many aesthetic medical procedures due to limited skin penetration and unwanted epidermal absorption, and that our proprietary ELOS technology, which combines optical and electrical energy, enhances the user’s ability to accurately target the tissue to be treated and enables real-time measurement of skin temperature, resulting in increased patient safety and comfort and improved treatment results




We generate our revenues primarily from the sales of our ELOS-based medical aesthetic equipment as well as other products, which we developed. We also generate a small portion of our revenue from the recognition of service revenue. We expect product service revenue to increase over time as our installed base continues to grow.




We have recently introduced new product platforms such as the eMatrix, VelaShape II and LipoLite under a new recurring revenue business model. We believe that our new systems offer our customers an attractive total cost of ownership, a lower entry system cost and a better clinical outcome due to the replaceable, single-use treatment modules. Our goal is that the recurring business model, once fully implemented, will deliver attractive operating margins both from the sale of the system as well as the sale of the consumable modules. To the extent possible, we intend to offer this new recurring-revenue business model on most of our future product introductions and intend for our recurring-revenue stream to increase proportionally as the installed base for our newer units increases.




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Information provided in this Item 5, does not include any information about our new, indirect subsidiary, Candela Corporation, which we acquired after December 31, 2009.For historical financial information of Candela, please see Candela's previously filed reports with the SEC.




Revenues




Generally, we recognize revenue when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable, collectability is probable and we do not have any obligation to customers after the date on which products are delivered.




We generate our revenues primarily from the sales of our ELOS-based medical aesthetic equipment as well as other products, which we developed. For the year ended December 31, 2009, our revenues totaled $54.7 million. From inception through December 31, 2009, we sold over 12,750 products worldwide. For the year ended December 31, 2009, we derived approximately 5.5% of our revenues from the recognition of service revenue. We expect product service revenue to increase over time as our installed base continues to grow.




We directly sell our products primarily in the United States, Canada, and to a lesser extent, in China, Hong Kong and Germany, and we use distributors to sell our products in countries where we do not have a direct presence or to complement our direct sales force. For the year ended December 31, 2009, we derived 48.9% of our revenues from sales of our products outside North America through a combination of direct and distributor sales. As of December 31, 2009, we had approximately 35 salespeople in North America and distributors in more than 50 countries. We intend to overcome the decrease in our revenues by introducing new products and new applications to the market. In addition, following the merger with Candela, we added direct sales operationsin many countries outside the U.S. and we now have a strong presence in the international market of our product line and Candela's product line. We also expanded our international sales management team to support the sales efforts in these markets. International sales are subject to a number of risks, including changes in foreign government regulations, import and export license requirements, tariffs, taxes and other trade barriers, fluctuations in foreign currency exchange rates, difficulty in collecting accounts receivable, difficulty in staffing and managing foreign operations, managing distributor relations and political and economic instability. Also, additional international markets may not develop and we may not receive future orders to supply our products in international markets at rates equal to or greater than those experienced in recent periods.




The following table provides information regarding the breakdown of our sales by geographical region for the years ended December 31, 2008 and 2009:




Percent of SalesRegion

Year ended

December

31, 2008


Year ended

December

31, 2009North America


52.4
%


51.1
%Europe


28.7



20Asia-Pacific


14.7



20.8Israel


0.5



2.1Others


3.7



6Total


100.0
%


100.0
%




Cost of Revenues




Our cost of revenues consists of the cost of manufacture and assembly of our products by third party manufacturers. These costs primarily include materials, components and labor used by our third-party manufacturers. We have been able to negotiate competitive terms with the subcontractors that manufacture our products. Also, because our product technology, design and engineering does not require highly sophisticated, time intensive labor for assembly and testing and our products use the off-the-shelf discrete components, we are able to experience low manufacturing costs and relatively high gross margins.




Cost of revenues also includes royalties to third parties, service and warranty expenses, as well as salaries and personnel-related expenses for our operations management team which includes subcontractor management, purchasing and quality control. The cost of revenue as a percentage of revenues increased from 2008 to 2009 due to the decrease in our revenues, our overhead expenses which remained fixed while our sales volume was significantly reduced and to the increase in write-off costs of inventory due to a decrease in revenues. We expect our cost of revenues to increase as a percentage of revenues, as a result of the merger with Candela Corporation.




33





Research and Development Expenses




Our research and development expenses consist of salaries and other personnel-related expenses of employees primarily engaged in research and development activities, external engineering fees and materials used and other overhead expenses incurred in connection with the design and development of our products.




Selling and Marketing Expenses




Our selling and marketing expenses consist primarily of salaries, commissions and other personnel-related expenses for those engaged in the sales, marketing and support of our products and trade show, promotional and public relations expenses, as well as management and administration expenses in support of sales and marketing in our subsidiaries. We expect our selling and marketing expenses to decrease as a percentage of revenues, as a result of a projected increase in our sales following the merger with Candela Corporation.




General and Administrative Expenses




Our general and administrative expenses consist primarily of salaries and other personnel-related expenses for executive, accounting and administrative personnel, professional fees and other general corporate expenses. We are experiencing an increase of our general and administrative expenses in absolute dollars and as a percentage of revenues primarily due to our merger with Candela Corporation, and the expansion of our management functions and support of our overall growth.




Financial Income, net




Interest income and other income consists primarily of interest earned on cash, cash equivalents, deposits and marketable securities, as well as exchange differences resulting from remeasurement of our foreign currency transactions and balances into U.S. dollars.




Taxes on Income




Our facilities in Israel were granted the status of “Approved Enterprise” and the status of “Privileged Enterprise” (the new program under the Law for the Encouragement of Capital Investments, 1959), both entitling us to a ten-year exemption from Israeli corporate tax. The “Approved Enterprise” and the “Privileged Enterprise” status only allows corporate tax exemptions on profits generated from such operations but requires regular Israeli corporate tax on income generated from other sources, such as gains from sales of marketable securities and interest earned on cash, cash equivalent and marketable securities. We will seek to maintain the “Approved Enterprise” and the “Privileged Enterprise” status by meeting the necessary conditions with respect to our future capital investment programs thus extending our “Approved Enterprise”and "Privileged Enterprise" benefits beyond the first ten years. Our effective tax rate is directly affected by the relative proportions of domestic and international revenue and proportions between revenue from Approved and Privileged Enterprises and revenue from other sources as discussed above. We are also subject to changing tax laws in multiple jurisdictions in which we operate. For additional description of Israeli Tax please see Item 10.E, “Additional Information – Taxation – Israeli Taxation.”




Critical Accounting Policies and Estimates




Our discussion and analysis of our financial condition and results of our operations is based upon our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, sales and expenses and related disclosure of contingent assets and liabilities. On a periodic basis, we evaluate our estimates, including those related to revenue recognition, allowances for doubtful accounts, slow moving inventory, warranty reserves, income taxes, litigation and stock-based compensation. We base our estimates on historical experience, authoritative pronouncements and various other assumptions which we believe to be reasonable under the circumstances. Actual results could differ from those estimates. The following is a discussion of our critical accounting policies and the significant judgments and estimates affecting the application of those policies in our consolidated financial statements. See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 20-F for a summary of all of our significant accounting policies




Marketable securities. Marketable securities consist of debt securities classified as available-for-sale and are recorded at fair value. The fair value of quoted securities is based on current market value. When securities do not have an active market, fair value is determined using a valuation model. This model is based on reference to other instruments with similar characteristics, or a discounted cash flow analysis, or other pricing models making use of market inputs and relying as little as possible on entity-specific inputs. Changes in fair value, net of taxes, are reflected in other comprehensive income (loss) or in earnings if the decline is determined to be other than temporary in accordance with accounting guidance.




In April 2009, the FASB amended the existing guidance on determining whether an impairment for investments in debt securities is other-than-temporary. Effective as of the second quarter of 2009, if an other-than-temporary impairment exists for debt securities, we separate the other-than-temporary impairment into the portion of the loss related to credit factors, or the credit loss portion, and the portion of the loss that is not related to credit factors, or the noncredit loss portion. The credit loss portion is the difference between the amortized cost of the security and our best estimate of the present value of the cash flows expected to be collected from the debt security. The non-credit loss portion is the residual amount of the other-than-temporary impairment. The credit loss portion is recorded as a charge to earnings, and the noncredit loss portion is recorded as a separate component of other comprehensive income (loss).




34





Marketable securities are classified within Level 1 or Level 2. This is because marketable securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Investments in auction rate securities are classified within Level 3 because they are valued using valuation techniques. Some of the inputs to these models are unobservable in the market and are significant. Due to the current economic environment in which there is a lack of market activity for auction rate securities, we have been unable to obtain quoted prices or market prices for identical assets as of the measurement date resulting in significant unobservable inputs used in determining the fair value. We estimated together with our third party advisor the fair value of these auction rate securities using the income approach based on the following: (i) the underlying structure and contractual provisions of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; and (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period. These estimated fair values could change significantly based on future market conditions, which could result in recognizing other-than-temporary impairment losses. The actual value at which such securities could actually be sold or settled with a willing buyer or seller may differ from such estimated fair values depending on a number of factors including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller. Our management determines the appropriate classification of its investments in marketable debt securities at the time of purchase and re-evaluates such designations as of each balance sheet date.




Revenue Recognition. We recognize revenues in accordance with SAB 104, when each of the following four criteria are met:




·
There is persuasive evidence of an arrangement;




·
delivery of product has occurred;




·
the fee is fixed or determinable; and




·
collection is probable.




Revenue from some product sales to end users in North America usually includes multiple elements within a single contract. Our accounting policy complies with the requirements set forth in ASC 605-25 (originally issued as EITF 00-21), relating to the separation of multiple deliverables into individual accounting units with determinable fair values.




The items included in the arrangements (deliverables) are evaluated pursuant to ASC 605-25 to determine whether they represent separate units of accounting. We perform this evaluation at the inception of an arrangement and as of the delivery of the items. Generally, we account for a deliverable separately if: (i) the delivered item has standalone value to the customer;(ii) there is objective evidence and reliable evidence of the fair value of the undelivered item; and (iii) if we have given the customer a general right of return relative to the delivered item, delivery of performance of the undelivered item is probable and substantially within our control. We are establishing fair value of the undelivered item based on the price charged by third parties and data available from which to estimate the volume of services provided during the term of the arrangement.




In evaluating whether collection is reasonably assured, we review credit and operation histories and customers’ facilities and in the case of independent distributors, we will evaluate creditworthiness and other relevant factors.




If changes in conditions cause management to determine that these criteria are not met for future transactions, revenue recognized for any reporting period could be adversely affected. Although we meet the requirements of ASC 605 upon shipment of product, and the recording of revenue, we continually evaluate our accounts receivable for any bad debts and make estimates for any bad debt allowances.




We compute an allowance based upon a specific customer account review of our customers. Our assessment of the ability of our customers to pay generally includes direct contact with the customer, investigation into their financial status, as well as consideration of their payment history with us. If the financial condition of a customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowance may be required. If we determine, based on our assessment, that it is probable that a customer will be unable to pay, we will write off the account receivable.





Inventory write-down. As a designer and manufacturer of high technology equipment, we may be exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements and competitive pressures in products and prices. Our policy is to establish inventory reserves when conditions exist that suggest that our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products and market conditions. We regularly evaluate our ability to realize the value of our inventory based on combination of factors including the following: historical usage rates, forecasted sales or usage, estimated current and future values and new product instructions. Assumptions used in determining our estimates of future product demand may proved to be incorrect, in which case the provision required for excess and absolute inventory would have to be adjusted in the future. If inventory is determined to be overvalued, we would be required to recognize such as cost of goods sold at the time of such determination. When recorded, our reserves are intended to reduce the carting value of our inventory to its net realizable.




35





Taxes on Income. The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws.





Accounting for uncertainty in income taxes requires that tax benefits recognized in the financial statements must be at least


more likely than not of being sustained based on technical merits. The amount of benefits recorded for these positions is measured as the largest benefit more likely than not to be sustained. Significant judgment is required in making these determinations.





Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. Our valuation allowance is based on our judgment on future taxable income that would allow or prevent us from benefiting from our loss carry forwards. Currently, our relatively short history of loss operations does not allow us to record any tax benefit resulting from our subsidiaries’ losses.




Deferred taxes are determined utilizing the asset and liability method. Tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.




Stock-Based Compensation. ASC 718 (Originally issued as SFAS 123(R)) requires stock-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant.




We used the Binominal model to estimate the fair value of stock option grants. Key assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term, the post-vesting forfeiture rate, the suboptimal exercise factor and our expected annual dividend yield. Expected volatilities are based on historical volatilities of similar companies. As equity-based compensation expense recognized in the consolidated statement of income is based on awards ultimately expected to vest, it should be reduced for estimated forfeitures. The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The post-vesting forfeiture rate and estimated forfeitures are based on our historical experience and the suboptimal exercise factor is based on our historical experience as well as on academic papers and the common practice which support our assumptions. Assumed dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends.




If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods the stock-based compensation expense we recognize in future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and earnings per share. It may also result in a lack of comparability with other companies that use different models, methods and assumptions. Existing valuation models, including the Binominal model, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, may expire with little or no intrinsic value compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, the value realized from these instruments may be significantly higher than the fair values originally estimated on the grant date and reported in our financial statements.




Litigation.Management sets aside liabilities related to litigation brought against us when the amount of the potential loss is probable and can be estimated. Because of the uncertainties related to an unfavorable outcome of litigation, and the amount and range of loss on pending litigation, management is often unable to make an accurate estimate of the liability that could result from an unfavorable outcome. As litigation progresses, we continue to assess our potential liability and revise our estimates accordingly. Such revisions in our estimates could materially impact our results of operations and financial position. Estimates of litigation liability affect our accrued liability line item in our consolidated balance sheet and our general and administrative expense line item in our statement of income.




36





Warranty Reserve. We generally provide a one to three years standard warranty with our products, depending on the type of product and the country in which we do business. After the warranty period, maintenance and support is provided on a service contract basis or on an individual call basis. We provide for the estimated cost of product warranties at the time product revenue is recognized. Factors that affect our warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our estimated warranty obligation is affected by ongoing product failure rates, specific product class failures outside of our baseline experience, material usage and service delivery costs incurred in correcting a product failure. If actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. Assumptions and historical warranty experience are evaluated to determine the appropriateness of such assumptions. We assess the adequacy of the warranty provision once a year and we may adjust this provision if necessary.




Fair Value Measurements. The performance of fair value measurements is an integral part of the preparation of financial statements in accordance with generally accepted accounting principles. Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants to sell or transfer such an asset or liability. Selection of the appropriate valuation techniques, as well as determination of assumptions, risks and estimates used by market participants in pricing the asset or liability requires significant judgment. Although we believe that the inputs used in our evaluations techniques are reasonable, a change in one or more of the inputs could result in an increase or decrease in the fair value of certain assets and certain liabilities and could have an impact on both our consolidated balance sheets and consolidated statements of operations.




Business Combination. In accordance with ASC 805 "Business Combination" (Formerly SFAS No. 141R), we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development based on their estimated fair values. In allocating the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, we developed the required assumptions underlying the valuation work. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements and acquired developed technologies; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. We were assisted by a third party appraiser in applying the required economic models (such as income approach and cost approach), in order to estimate the fair value of assets acquired and liabilities assumed in the business combination.


Principles of Accounting for Holdings in Group Companies




The various holdings that we have in our group companies are accounted for under several methods, based among others, on our level of ownership and the type and form of our holdings in our group companies, as described below.




The consolidated financial statements include our accounts and our subsidiaries' accounts, in which we have a controlling voting interest or entities which are considered variable interest entities for which the we are considered the primary beneficiary of their operations as such terms are determined in ASC 810 (originally issued as FASB Interpretation No. 46(R)), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. Inter-company balances and transactions have been eliminated upon consolidation. The noncontrolling interest amount adjusts the consolidated net loss to reflect only our share in the earnings or losses of any consolidated company.




We apply the provisions of ASC 810 which provides a framework for identifying variable interest entities (“VIE”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements.




Upon consolidation, the primary beneficiary initially records all of the VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on a majority voting interest.




Recently Issued Accounting Pronouncements





In June 2009, the FASB updated accounting guidance relating to variable interest entities. As applicable to us, this will become effective as of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. As applicable to us, the adoption of the new guidance will not have a material impact on the consolidated financial statements.





In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition for multiple-element arrangements. These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple element arrangements and require companies to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. Additionally, the amendments eliminate the residual method for allocating arrangement considerations. We are currently evaluating the impact that the adoption would have on our consolidated financial statements. In January 2010, the FASB updated the “Fair Value Measurements Disclosures”. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value, and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. As applicable to us, this will become effective as of the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward information, which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years. As applicable to us, the adoption of the new guidance will not have a material impact on our consolidated financial statements.




37





Results of Operations




Years Ended December 31, 2008 and December 31, 2009




Revenues.Revenues in 2009 decreased by $60.3 million, or 52.4%, from $115 million in 2008 to $54.7 million. The decrease was primarily attributable to the global financial crisis, a weakness in U.S. economy as well as in the rest of the world, combined with a tightening of credit terms available to our customers.




Cost of Revenues.The cost of revenues decreased by $10.8million in 2009, or 36.3%, from $29.7 million (25.8% of revenues) in 2008 to $18.9 million (35.5% of revenues). The decrease in cost of revenues was primarily attributable to the reduction in our revenues.




Research and development. Research and development expenses decreased by $0.6 million, from $13.8 million in 2008 to $13.2 million in 2009. As a percentage of revenues, research and development expenses increased from 12% in 2008 to 24.2% in 2009. The decrease was primarily attributable to the strengthening of the U.S. dollar against the NIS. Research and development expenses for the year ended December 31, 2009, included $0.5 million of stock-based compensation expenses in comparison to $0.3 million of stock-based compensation expenses for the year ended December 31, 2008.




Selling and Marketing Expenses.Selling and marketing expenses decreased by $19.9 million, from $54.1 million in 2008 to $34.2 million in 2009. As a percentage of revenues, selling and marketing expenses increased from 47% in 2008 to 62.4% in 2009. The decrease in selling and marketing expenses was primarily attributable to our corporate restructuring program implemented starting from 2009 and to the reduction in our revenues in 2009 resulting in lower commission to employees. Selling and marketing expenses for the year ended December 31, 2009, included $1.4 million of stock-based compensation expenses in comparison to $3.9 million of stock-based compensation expenses for the year ended December 31, 2008.




General and Administrative Expenses.General and administrative expenses decreased by $1.2 million, from $17.7 million in 2008 to $16.5 million in 2009. As a percentage of revenues, general and administrative expenses increased from 15.4% in 2008 to 30.1% in 2009. The decrease in general and administrative expenses was primarily attributed to the results of our corporate restructuring program. General and administrative expenses for the year ended December 31, 2009, included $2.3 million of stock-based compensation expenses in comparison to $3.4 of stock-based compensation expenses for the year ended December 31, 2008, and $2 million expense related to the merger with Candela Corporation, completed on January 5, 2010.




Financial Income.Financial income decreased by $1.8 million, from $3.9 million in 2008 to $2.1 million in 2009. The decrease in financial income was primarily attributable to interest earned on our increasing cash balance offset partially by a low interest rate and by an impairment charge of $1.6 million and $0.2 million on our investment portfolio due to uncertainties in the capital markets regarding auction-rate securities in the year ended December 31, 2008, and 2009, respectively. As a percentage of revenues, financial income increased from 3.4% in 2008 to 3.8% in 2009.




Taxes on Income.Income taxes increased by $5.2 million, from income tax benefit in the amount of $2.0 million in 2008 to income tax expense in the amount of $3.2 million in 2009. As a percentage of revenue, taxes on income changed from 1.7% in 2008 to 5.6% in 2009. In 2008 we recorded an income from taxes resulting from final tax assessment reached with the Israeli tax authorities. As an “Approved Enterprise” and a “Privileged Enterprise” in Israel, we are exempt from tax on any income derived from our “Approved Enterprise” and “Privileged Enterprise,” and we pay taxes only on income from other sources which are not integral to our “Approved Enterprise” and “Privileged Enterprise,” such as interest on marketable securities. Taxes on income in 2009 reflect the taxes resulting from our subsidiaries net income and the accrual recorded from our continuing exposures in according with ASC 740. We provided a valuation allowance with respect to our U.S. subsidiaries operating losses carry forward and our capital loss to reduce deferred tax assets to amounts which are more likely than not to be realized during 2010 (see also Note 14d to the consolidated financial statements).




Years Ended December 31, 2007 and December 31, 2008




Revenues.Revenues in 2008 decreased by $26 million, or 18.4%, from $141 million in 2007 to $115 million. The decrease was primarily attributable to the global financial crisis, a weakness in U.S. economy as well as in the rest of the world, combined with a tightening of credit terms available to our customers.




Cost of Revenues. The cost of revenues increased by $2.7 million in 2008, from $27.0 million in 2007 to $29.7 million. The increase in cost of revenues was primarily attributable to a reduction of the average sales price of our products, a one-time inventory write-off and our overhead expenses which remained fixed while our sales volume was reduced.




Research and development. Research and development expenses increased by $1.3 million, from $12.5 million in 2007 to $13.8 million in 2008. As a percentage of revenues, research and development expenses increased from 8.9% in 2007 to 12% in 2008. The increase was primarily attributable to a 14% strengthening of the NIS against the U.S. dollar. Research and development expenses for the year ended December 31, 2008, included $0.3 million of stock-based compensation expenses in comparison to $0.9 million of stock-based compensation expenses for the year ended December 31, 2007.




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Selling and Marketing Expenses. Selling and marketing expenses decreased by $4.5 million, from $58.6 million in 2007 to $54.1 million in 2008. As a percentage of revenues, selling and marketing expenses increased from 41.6% in 2007 to 47% in 2008. The decrease in selling and marketing expenses was primarily attributable to a reduction of revenue in 2008. Selling and marketing expenses for the year ended December 31, 2008, included $3.9 million of stock-based compensation expenses in comparison to $4.5 million of stock-based compensation expenses for the year ended December 31, 2007.




General and Administrative Expenses. General and administrative expenses increased by $5.8 million, from $11.9 million in 2007 to $17.7 million in 2008. As a percentage of revenues, general and administrative expenses increased from 8.4% in 2007 to 15.4% in 2008. The increase in general and administrative expenses was primarily attributable to a provision for doubtful debts and legal fees. General and administrative expenses for the year ended December 31, 2008, included $3.4 million of stock-based compensation expenses in comparison to $2.1 of stock-based compensation expenses for the year ended December 31, 2007.




Financial Income. Financial income increased by $0.6 million, from $3.3 million in 2007, to $3.9 million in 2008. The increase in financial income was primarily attributable to interest earned on our increasing cash balance offset partially by a low interest rate and by an impairment charge of $5.8 million and $1.6 million on our investment portfolio due to uncertainties in the capital markets regarding auction-rate securities in the year ended December 31, 2007, and 2008, respectively. As a percentage of revenues, financial income increased from 2.3% in 2007 to 3.4% in 2008.




Taxes on Income. Income taxes decreased by $5 million, from income tax expense in the amount of $3.0 million in 2007 to income tax benefit in the amount of $2.0 million in 2008. As a percentage of revenue, taxes on income changed from 2.15% in 2007 to 1.7% in 2008. The decrease in taxes on income was primarily attributed to a reverse of the prior year’s provision resulting from final tax assessment reached with the Israeli tax authorities. As an “Approved Enterprise” and a “Privileged Enterprise” in Israel, we are exempt from tax on any income derived from our “Approved Enterprise” and “Privileged Enterprise,” and we pay taxes only on income from other sources which are not integral to our “Approved Enterprise” and “Privileged Enterprise,” such as interest on marketable securities. Our subsidiaries had loss carry forwards of approximately $34.04 million as of December 31, 2008, as compared to approximately $38.0 million as of December 31, 2007. We have recorded a valuation allowance for the deferred taxes on these losses since it is more likely than not that we will not be able to offset such losses against future income. In addition we have capital loss for tax purposes on marketable securities resulting from the U.S. dollar/NIS fluctuation rate. We had loss carry forwards of approximately $38.0 million. The Company provided a valuation allowance with respect to the above mentioned capital loss to reduce deferred tax assets to amounts which are more likely than not to be realized during 2009 (see also Note 15d to the consolidated financial statements).




B.
LIQUIDITY AND CAPITAL RESOURCES




From December 31, 2002, through August 10, 2004, we funded our operations principally from private placements of our preferred shares that resulted in aggregate net proceeds of approximately $3.3 million. On August 11, 2004, we completed our initial public offering, which resulted in net proceeds of approximately $54.0 million. Since August 10, 2004, we have been using the proceeds from our initial public offering and our working capital to fund our operations. On March 8, 2005, certain selling shareholders completed a secondary offering, in connection with which we received net proceeds of approximately $1.6 million from the exercise of options. On August 11, 2005, the one-year lock-up period for certain of our shareholders ended, and following that period, we raised $11.7 million from the exercise of options. As of February 25, 2010, we did not have any outstanding or available debt financing arrangements.




As of December 31, 2009, we had working capital of $178.6 million, and our primary source of liquidity was $206 million in cash, cash equivalents and marketable securities and cash flow from operations. Approximately $8.9 million of the marketable securities that we held as of December 31, 2009, were auction-rate securities consisting of interests in collateralized debt obligations supported by pools of residential and commercial mortgages or credit cards, insurance securitizations and other structured credits, including corporate bonds. While the auction-rate securities held by us had AAA/Aaa credit ratings at the time of our purchase of these securities, as part of the recent ongoing credit market crisis, the auction-rate securities held by us have experienced multiple failed auctions. As a result, we recorded a pre-tax impairment charge of $1.6 million during 2008 and an additional charge of $0.2 million during 2009. We cannot predict when the liquidity of these auction-rate securities will improve. Please see Item 3.D. “Key Information – Risk Factors” for further details regarding our auction-rated securities.




We believe that our cash balances and cash generated from operations will be sufficient to meet our anticipated cash requirements for the next twelve months. If existing cash and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. If we raise additional funds through the issuance of debt securities, these securities could have rights senior to those associated with our ordinary shares and could contain covenants that would restrict our operations. We cannot be sure that we will not require additional capital beyond the amounts currently forecasted by us, nor that any such required additional capital will be available on reasonable terms, if at all.




39





Net Cash Provided By (Used In) Operating Activities.Net cash provided by (used in) operating activities was $47.8 million in 2007, $20.4 million in 2008, and $(0.9) million in 2009. The change in net cash provided by operating activities reflects a decrease in sales activities. During 2009, trade receivables and trade payables decreased as a result of a decrease in sales activities. In 2008, we incurred an impairment charge of $1.6 million on our investment portfolio due to uncertainties in the capital markets regarding auction-rate securities. In 2009, we increased the impairment charge by an additional $0.2 million.




Net Cash (Used In) Investing Activities.Net cash provided by (used in) investing activities was $(17.4) million in 2007, and provided by $10.7 million in 2008 and $(47.6) million in 2009. Cash used in 2009 in investing activities is primarily attributable to acquisition of marketable securities and net cash paid in connection with acquisition of subsidiaries. For the year ended December 31, 2007, we invested $8.4 million in capital expenditures, which consisted primarily of an acquisition of a minority share in a subsidiary ($3.6 million), investment in affiliated companies $(2.6) million, leasehold improvements $(1.3) million, and computers and general equipment $(0.9) million. For the year ended December 31, 2008, we invested $4.1 million in capital expenditures, which consisted primarily of a purchase of minority shares in our subsidiaries $(1.3) million, investment in affiliated companies $(1.6) million and a purchase of computers and general equipment $(1.2) million. For the year ended December 31, 2009, we invested $9 million in capital expenditures, which consisted primarily of a purchase of shares in our subsidiaries $(7.7) million, investment in affiliated companies $(0.8) million and a purchase of computers and general equipment $(0.5) million. We expect our capital expenditures in 2010 will be approximately $1.0 million (excluding Candela) and will consist of computers and general equipment.




Net Cash Provided By (Used In) Financing Activities.Net cash provided by (used in) financing activities was $(3.7) million in 2007, $(1.3) million in 2008 and $0.5 million in 2009. Net cash used in 2007 financing activities was attributed to the proceeds of exercise of options and the sale of restricted shares units in the amount of $3.5 million. This was offset by the Company’s repurchase program under which we have repurchased our outstanding ordinary shares in the aggregate amount of in the amount of $7.2 million. Net cash provided by financing activities in 2008 was primarily attributable to our repurchase program under which we have repurchased our outstanding ordinary shares in the aggregate amount of $1.9 million, offset by reimbursement of share issuance expenses $(0.6) million. Net cash provided by financing activities in 2009 was attributable to net proceeds from exercise of options.




C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.




Our research and development activities are conducted internally by a research and development staff consisting of 73 employees (including Candela's employees). Our research and development efforts focus on the development of new products, as well as the extension of our existing products to new applications in the non-invasive aesthetic medical market. We have a number of new projects and products under development, mainly focusing on additional non-invasive aesthetic treatments. We expect to continue and develop several major product initiatives in 2010 including a new product for circumferential reduction, a new product line for aestheticians and the cosmetic market and products for home use using our proprietary ELOS technology.




Prior to 2007, our research and development effort has been focused on the development of products that leverage our ELOS technology. Since 2007, our research and development efforts also focused on the development of technologies that are not only based on our ELOS technology. Our gross research and development expenditures were $12.5 million in 2007, $13.8 million in 2008 and $13.2 million in 2009. We expect to continue to increase our expenditures on research and development.




D.
TREND INFORMATION




In May 2008, the FDA granted 510(k) to our new LipoLite product for laser-assisted lipolysis and additional dermatological procedures. In September 2008, the FDA granted 510(k) clearance to our Matrix RF applicator for use in dermatological procedures requiring ablation and resurfacing of the skin.




On January 5, 2010, we completed the merger with Candela Corporation (Candela). Pursuant to that certain agreement and plan of merger dated September 8, 2009, by and among us, Syneron Acquisition Sub, Inc., a Delaware corporation and our indirect, wholly-owned subsidiary (Acquisition Sub), and Candela, we acquired Candela through Acquisition Sub which merged with and into Candela. Candela survived the merger as our indirect wholly-owned subsidiary. The merger with Candela involved the coordination and the establishment of contractual arrangements and agreements between us and Candela that have previously operated independently with principal offices in several distinct locations. Following the merger with Candela Corporation, we and our subsidiaries, including Candela, collectively, have approximately 557 employees in a total of 17 facilities around the world. As a result, our management teams are facing challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs. In addition, we incurred and we expect to continue to incur significant costs and commit significant management time in coordinating Candela’s business operations, technology, development programs, products and personnel with our business.




40




Our subsidiaries, Syneron Inc. and Candela, are each currently defending separate patent infringement lawsuits brought by Palomar Medical Technologies, Inc. (Palomar) alleging infringement of U.S. Patent Nos. 5,595,568 (the ’568 Patent) and 5,735,844 (the ’844 Patent) by Syneron Inc.’s and Candela’s hair removal products, respectively. The ’568 and ’844 Patents were subject to reexaminations by the U.S. Patent and Trademark Office, and both the Candela action and the Syneron Inc. action were stayed pending completion of the reexaminations. The PTO issued Reexamination Certificates with respect to the ’568 and ’844 Patents, and the stay was lifted in the Syneron Inc. case on November 13, 2009, and in the Candela case on January 5, 2010. Palomar has dropped the ’568 Patent from the Candela lawsuit, and has elected to proceed solely on the ’844 Patent.




While Syneron Inc. and Candela each intend to vigorously contest Palomar’s allegations, each lawsuit is inherently uncertain and unpredictable as to its ultimate outcome. An adverse outcome in Palomar’s suit against Syneron Inc. and/or Candela would materially hurt the business, financial condition, results of operations and cash flows of Syneron Inc. and/or Candela, as applicable.




We intend to overcome the decrease in our revenues by introducing new products and new applications to the market. In addition, following the merger with Candela, we added direct sales operations in many countries outside the U.S. and we now have a strong presence in the international market of our product line and Candela's product line. We also expanded our international sales management team to support the sales efforts in these markets.




We intend to continue the development of new products and procedures in the medical aesthetic market in order to maintain the growth in revenue and net income.




E.
OFF-BALANCE SHEET ARRANGEMENTS




We do not have off-balance sheet arrangements (as such term is defined in Item E(2) of Form 20-F) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.




F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS




The following table summarizes our contractual commitments as of December 31, 2009, excluding royalty payments commitments, and the effect those commitments are expected to have on our liquidity and cash flow in future periods:


Payments Due by PeriodTotal


Less than 1

year


1-3 years


3-5 years


More than

5 yearsContractual Commitments







(in thousands)Uncertain tax positions (1)

$
6,342Operating leases (2)

$
2,896


$
1,661


$
1,235


$
-


$
-




(1)
Uncertain income tax position under ASC 740 guidelines for accounting for uncertain tax positions are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 14 in our Consolidated Financial Statements for further information regarding the Company’s liability under FIN 48.




(2)
Consists of operating leases for our facilities and motor vehicles.




ITEM6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES




A.
DIRECTORS AND SENIOR MANAGEMENT




The following table sets forth information regarding our executive officers and directors as of February 25, 2010:




Name
Age
Position(s)Dr. Shimon Eckhouse
65
Chairman of the Board of DirectorsLouis Scafuri
58
Chief Executive OfficerFabian Tenenbaum
36
Chief Financial OfficerDr. Michael Anghel
71
External DirectorMarshall Butler
83
DirectorYaffa Krindel
55
DirectorDavid Schlachet
65
DirectorDan Suesskind
66
External DirectorGerard E. Puorro 1
62
Director





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Dr. Shimon Eckhouse has served as the Chairman of our board of directors since May 2004. Dr. Eckhouse is the chairman of OrSense Ltd., CardioDex Ltd., NanoCyte Ltd., Tulip Ltd., and Navotek Ltd., Rapid Medical Ltd. and RealView Ltd. Dr. Eckhouse was a co-founder of ColorChip Inc. and served as its chairman from 2003 to January 2004 and again since 2007, and as its chief executive officer from 2001 to 2003. Dr. Eckhouse was the chairman and chief executive officer of ESC Medical Systems from its inception in 1992 until 1999. Prior to founding ESC Medical Systems, Dr. Eckhouse was head of product development and technical director at Maxwell Technologies in San Diego, California. Before that, Dr. Eckhouse was a scientist, team leader and head of a department in Rafael, Armament Development Authority of Israel and was active in various areas of research and development, including lasers and electro-optics. Dr. Eckhouse holds a B.Sc. in physics from the Technion Israeli Institute of Technology and a Ph.D. in physics from the University of California at Irvine. He has more than 20 registered patents and published more than 50 papers in leading reference journals and conferences. He is also a member of the board of directors of the Technion Israeli Institute of Technology.





Louis Scafuriwas appointed as our Chief Executive Officer on February 2, 2009. From 1983 until 1999, Mr. Scafuri held various executive and management positions with Marquette Electronics which was acquired by General Electric Medical Systems to become GE Marquette Medical Systems. In his last position with GE Marquette Medical Systems, Mr. Scafuri served as its COO and President. From 1999 to 2001, Mr. Scafuri served as the COO of ESC Medical Systems, where he was responsible for Commercial Activities, R&D and the Global Operations of the company. From 2002, Mr. Scafuri served in various consulting, advisory and investor roles in medical device and medical aesthetic companies. Mr. Scafuri holds a B.Sc. degree in biology from Cornell University in Ithaca, NY and is a graduate of the Tuck Executive Program at Dartmouth College School of Business.





Fabian Tenenbaum was appointed as our CFO in May 2007, a year after joining us as Vice President for Business Development. In his VP role, Mr. Tenenbaum was responsible for developing the growth strategy for our home-use product, which culminated in the exclusive worldwide joint development and supply agreement with Procter and Gamble Company. From 2002 to 2006, Mr. Tenenbaum served as Vice President at Radiancy Inc., where he managed the U.S. subsidiary of a late-stage med-tech start-up with the third largest global installed base for light-based devices in the field of dermatology and aesthetic medicine. Mr. Tenenbaum currently serves as a director of our subsidiaries, Fluorinex Active Ltd., and Rakuto Bio Technologies Ltd. Mr. Tenenbaum holds a Bachelor's degree in Medicine from Ben Gurion University and an MBA from Columbia Business School.




Dr. Michael Anghel has served as a director since November 2004. Until 2005, Dr. Anghel served as the President and CEO of Israel Discount Capital Markets & Investments Corp., a subsidiary of the Israel Discount Bank. From 2000 to 2004, Dr. Anghel served as the Chief Executive Officer of CAP Ventures, an operating venture capital company he founded that has invested and established a number of information technology and communications enterprises. Since 1977, Dr. Anghel has been directly involved as a senior executive of a major Israeli holdings company, in the founding, managing and directing a variety of industrial, technology and financial enterprises. Dr. Anghel served as a director of major publicly listed corporations and a number of financial institutions. Dr. Anghel is currently a director of Evogene Ltd. (TASE/Nasdaq:EVGN), Dan Hotels Ltd. (TASE: DANH), Partner Communications Company Ltd. (TASE/Nasdaq: PTNR), Strauss Group Ltd. (TASE: STRS), Orbotech Ltd. (Nasdaq: ORBK), and Chairman of the Board of Gravity Ltd. and several other private companies. Dr. Anghel is the Chairman of the Board of CET – the Israeli Center for Education Technology. From 1969 to 1977, Dr. Anghel was a full-time member of the faculty of the Graduate School of Business at the Tel-Aviv University. Dr. Anghel is currently the Chairman of the university’s executive program. Dr. Anghel served on various Israeli governmental policy committees in the areas of communications and public finance. Dr. Anghel received his B.A. in Economics from the Hebrew University in 1960, an M.B.A. in Economics and Finance from Columbia University in 1964, and a Ph.D. in International Finance from Columbia University in 1969.




Marshall Butler has served as a director since October 2003. Mr. Butler is a co-founder and has served as chairman of both First Israel Mezzanine Investors Fund and Israeli Infinity Venture Capital Fund from 1996 to 2006. Mr. Butler is a director of the Anti Defamation League and A.R.T. New York. Mr. Butler served as chairman of Nitzanim, AVX/Kyocera Corporation from 1994 to 2001. Mr. Butler served as Chief Executive Officer and chairman of AVX Corporation from 1974 to 1993 and as director of Kyocera Corporation from 1990 to 1994. Mr. Butler is on the board of governors of the Technion Institute in Haifa, Israel. In 1998, Mr. Butler received the Israeli Prime Minister’s award for his contribution to Israeli industry. In 2001, he received an Honoree Doctorate from the Technion Institute.




Yaffa Krindel has served as a director since November 2005. She is currently serving as a General Partner in Tamarix Ventures, a private clean-tech venture capital partnership headquartered in Ramat Hasharon, Israel. From 1997 until 2007 Ms. Krindel served as Partner and Managing Partner of Star Ventures, a private venture capital fund headquartered in Munich, Germany. Before joining Star Ventures, between 1992 and 1996, Ms. Krindel served as CFO and VP Finance of Lannet Data Communications Ltd., then a publicly traded company in Nasdaq (now part of Avaya Inc.), a LAN switching company. From 1993 to 1997 she served as a director and CFO of BreezeCOM Ltd. (now part of Alvarion Ltd. (TASE/Nasdaq: ALVR)), a leader in WiMax technology headquartered in Tel Aviv. Ms. Krindel currently serves on the boards of : Fundtech Ltd. (Nasdaq: FNDT), Voltaire Ltd. (Nasdaq: VOLT), OrSense Ltd. and Siano Mobile Silicon Inc. Ms. Krindel has earned M.B.A. from Tel Aviv University and a B.A. in Economics and Japanese Studies from the Hebrew University in Jerusalem.





42





David Schlachet served as our Chief Executive Officer from November 2005 until May 14, 2007, when he resigned as our Chief Executive Officer and was appointed to our board of directors. From July 2004 to November 2005, Mr. Schlachet served as our Chief Financial Officer. From 2000 to June 2004, Mr. Schlachet served as Managing Partner of Biocom, a venture capital fund specializing in the life sciences area. From 1995 to 2000, Mr. Schlachet served as a senior Vice President and Chief Financial Officer of Strauss Elite Holdings, a packaged food group. From June 1997 to June 2000 David Schlachet also served as an active chairman of Elite Industries, a chocolate and confectionary company which is a subsidiary of Strauss Group Ltd., in addition to his position in Straus Group Ltd. (TASE: STRS) From 1990 to 1995, Mr. Schlachet served as Vice President of Finance and Administration of the Weizmann Institute of Science. Mr. Schlachet serves as a director for Nasdaq listed Ezchip (formerly LanOptics Ltd.) (Nasdaq: EZCH). In addition, Mr. Schlachet serves as a director for Tel-Aviv Stock Exchange listed companies Taya Investments Ltd., Mazor Surgical Technologies Ltd., BioCancell Threrapautics Inc. and Adgar Investments and Developments Ltd. As of November 2008, Mr. Schlachet was nominated to serve as a director in the Tel Aviv Stock Exchange (TASE) and as a director and audit committee member of the TASE Clearing House. Mr. Schlachet also serves as a director of several privately owned Israeli companies. Mr. Schlachet holds a B.Sc. degree in chemical engineering and an M.B.A. from Tel-Aviv University.




Dan Suesskind has served as a director since November 2004. Until 2008, Mr. Suesskind has held numerous positions with Teva Pharmaceutical Industries Ltd. (TASE/Nasdaq: TEVA) since 1976. Mr. Suesskind served as Teva’s Chief Financial Officer from 1977 until 2008, as a director from 1981 until 2001 and as of January 2010. From 1970 until 1976, Mr. Suesskind was a consultant and securities analyst with I.C. International Consultants Ltd. Mr. Suesskind is a member of the Jerusalem Foundation, Investment Advisory Committee, Board of Trustees of Hebrew University, board member of Ness Technologies Inc., and a board member of Migdal Insurance Company Ltd. Mr. Suesskind received his B.A. in Economics and Political Science from the Hebrew University in 1965, a certificate in Business Administration from the Hebrew University in 1967, and an M.B.A. from the University of Massachusetts in 1969.





Gerard E. Puorro was appointed to our board of directors in January 2010. Mr. Puorro served as the President and Chief Executive Officer of Candela Corporation from April 1993 to 2010. From 1991 to 1993, Mr. Puorro served as Candela’s Chief Operating Officer and from 1989 to 1991, he was Candela’s Chief Financial Officer. Mr. Puorro is a visiting lecturer at the University of Pennsylvania, Wharton School of Business in the “Business and Biotechnology” lecture series. He is also a visiting lecturer at the Massachusetts Institute of Technology, Sloan School of Management in the “Managing in Adversity” lecture series. Mr. Puorro has been an active member in his community. He has served as a Special Olympics Coach, as President of the Board of Trustees for the Deaf Community Center in his hometown of Framingham, Massachusetts, as a member of the President’s Commission on Americans with Disabilities, and the Massachusetts Governor’s Commission for Employment of Individuals with Disabilities. Mr. Puorro is a Member Emeritus and consultant to the board of directors of the Sturge-Weber Foundation, a non-profit organization whose mission is to improve the quality of life for individuals with Sturge-Weber Syndrome. Mr. Puorro is a graduate of Bentley University with dual majors in Accounting and Taxation.





Our Chief Executive Officer serves at the discretion of our board of directors and hold office until his or her successor is elected or his or her earlier resignation or removal. Each other executive officer, in his or her capacity as such, serves at the discretion of our Chief Executive Officer and holds office until his or her successor is elected or his or her earlier resignation or removal.





Termination of Office




Doron Gerstel served as our Chief Executive Officer and a director until February 2, 2009.




B.
COMPENSATION




The aggregate direct compensation we paid to our directors who are not executive officers for their services as directors as a group for the year ended December 31, 2009, was approximately $0.382 million. This amount includes payment to our Chairman of the board. Directors are reimbursed for expenses incurred in order to attend board or committee meetings.




The aggregate direct compensation we and our subsidiaries paid to the executive officers as a group for the year ended December 31, 2009, was approximately $1.45 million (including our former CEO). This amount does not include expenses we incurred for other payments, including dues for professional and business associations, business travel and other expenses, and other benefits commonly reimbursed or paid by companies in Israel. We did not pay our officers who also serve as directors any separate compensation for their directorship during 2009, other than reimbursements for travel expenses.




As of February 25, 2010, our directors and officers (10 persons, including Doron Gerstel, a former director and chief executive officer of the Company) had outstanding options to purchase 1,939,631ordinary shares with exercise prices ranging from $0.01 to $27.73. 13,375 of these options will expire in the year 2011, 4,000 of these option will expire in the year 2012, 402,000 of these options will expire in the year 2013, 2,500 of these options will expire in the year 2014, 967,756 of these options will expire in the year 2015, and 550,000 will expire in 2016.




43





For a description of the plans pursuant to which such options were granted please see Item 6.E, “Share Ownership” below.




C.
BOARD PRACTICES




Board of Directors




The Sarbanes-Oxley Act of 2002, as well as related new rules subsequently implemented by the Securities and Exchange Commission and the Nasdaq Global Select Market, requires issuers to comply with various corporate governance practices. Our board of directors currently consists of seven directors, four of whom are independent, and our audit committee consists of three directors, all of whom are independent. In addition, Israeli law requires that we have at least two external directors, as described in greater detail below.




In general, the number of members of our board of directors will be determined from time to time by a vote of at least 75% of the ordinary shares present and entitled to vote, provided that there shall be no more than 7 and no fewer than three directors. Our board of directors consists of seven directors. Two of the directors, Dr. Anghel and Mr. Suesskind, are external directors under Israeli law and are independent for Nasdaq purposes. Other than external directors, who are subject to special election requirements under Israeli law, our directors are elected in three staggered classes by the vote of a majority of the ordinary shares present, in person or by proxy, at a shareholders’ meeting. The directors of only one class are elected at each annual meeting, so that the regular term of only one class of directors expires annually. At our annual general meeting held in 2008, the term of the first class expired and Mr. Schlachet and Mr. Gerstel were elected for a three-year term. Mr. Gerstel has ceased to serve on our board in February 2009,andcreated a vacancy on our board of directors. Pursuant to our articles of association in such event, the remaining directors may appoint a director in place of the retiring director and such appointment shall be in effect until the end of the third annual general meeting of the shareholders following the meeting at which the retiring director was elected. Therefore, our board of directors has resolved to appoint Mr. Puorro as a Class I director, immediately upon the completion of the merger with Candela Corporation, to serve through our annual general meeting in 2011, and until his successor is duly elected and qualified. At our annual general meeting held on March 2, 2010, the term of the second class, consisting of Mr. Butler and Ms. Krindel expired and Mr. Butler and Ms. Krindel were elected for a three-year term. At our next annual general meeting, the term of the third class, consisting of Dr. Eckhouse, will expire and the director elected at that meeting will be elected for a three-year term. After these initial terms, directors (other than the external directors) shall serve in office until the end of the third annual shareholders’ meeting following the one in which they were elected.




The external directors will not be assigned a class. The general meeting of our shareholders may dismiss a director during his or her term of office only by a vote of at least 75% of the ordinary shares present and entitled to vote (except for external directors, who may be dismissed only in the manner prescribed in the Israeli Companies Law, 5759-1999). We have employment and consultancy agreements with our principal executive officers. These agreements contain salary, benefit, non-competition and other provisions that we believe to be customary in our industry. In addition, these agreements provide for up to nine months of liquidation fees in certain events of termination of employment. Agreements with our directors (serving in that capacity) do not provide for benefits upon termination of service.




Each of our executive officers serves at the discretion of our board of directors and holds office until his or her successor is elected or his or her resignation or removal.




External Directors




We are subject to the Israeli Companies Law, 5759-1999, or the Companies Law. Under the Companies Law, an Israeli company whose shares have been offered to the public or whose shares are listed for trading on a stock exchange in or outside of Israel, is required to appoint at least two external directors to serve on its board of directors. Our external directors are Dr. Anghel and Mr. Suesskind. At least one of the external directors is required to have “financial and accounting expertise,” unless another member of the audit committee, who is an independent director under the Nasdaq rules, has “financial and accounting expertise,” and the other external director or directors are required to have “professional expertise.” The above qualifications do not apply to external directors appointed prior to January 19, 2006. An external director may not be appointed to an additional term unless: (i) such director has “accounting and financial expertise;” or (ii) he or she has “professional expertise,” and on the date of appointment for another term there is another external director who has “accounting and financial expertise” and the number of “accounting and financial experts” on the board of directors is at least equal to the minimum number determined appropriate by the board of directors.




A director has “professional expertise” if he or she satisfies one of the following:




·
the director holds an academic degree in one of these areas: economics, business administration, accounting, law or public administration;




·
the director holds an academic degree or has other higher education, all in the main business sector of the company or in a relevant area for the board position; or




44




·
the director has at least five years’ experience in one or more of the following (or a combined five years’ experience in at least two or more of these: (a) senior management position in a corporation of significant business scope; (b) senior public office or senior position in the public sector; or (c) senior position in the main business sector of the company.




A director with “financial and accounting expertise” is a person that due to his or her education, experience and skills has high skills and understanding of business-accounting issues and financial reports which allow him to deeply understand the financial reports of the company and hold a discussion relating to the presentation of financial information. The company’s board of directors will take into consideration in determining whether a director has “accounting and financial expertise”, among other things, his or her education, experience and knowledge in any of the following:




·
accounting issues and accounting control issues characteristic to the segment in which the company operates and to companies of the size and complexity of the company;




·
the functions of the external auditor and the obligations imposed on such auditor;




·
preparation of financial reports and their approval in accordance with the Companies Law and the securities law.




A person may not serve as an external director if at the date of the person’s appointment or within the prior two years the person, or his or her relatives, partners, employers or entities under the person’s control, have or had any affiliation with us or any entity controlling, controlled by or under common control with us. Under the Companies Law, “affiliation” includes:




·
an employment relationship;




·
a business or professional relationship maintained on a regular basis;




·
control; and




·
service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an external director following the initial public offering.




An “office holder” is defined as any director, managing director, general manager, chief executive officer, executive vice president, vice president, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of these positions regardless of that person’s title. Each person listed in the table under “Item 6A. – Directors and Senior Management” is an office holder.




A person may not serve as an external director if that person’s position or other business activities create, or may create, a conflict of interest with the person’s service as a director or may otherwise interfere with the person’s ability to serve as a director. If at the time any external director is appointed, all members of the board are the same gender, then the external director to be appointed must be of the other gender. A director of a company shall not be appointed as an external director of another company if at such time, a director of the other company is acting as an external director of the first company. Until the lapse of two years from the termination of office, a company may not engage an external director to serve as an office holder and cannot employ or receive services from that person, either director or indirectly, including through a corporation controlled by that person.




External directors are elected by a majority vote at a shareholders’ meeting, as long as either:




·
the majority of shares voted for the election includes at least one-third of the shares of non-controlling shareholders voted at the meeting; or




·
the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed one percent of the aggregate voting rights of our company.




The Companies Law provides for an initial three-year term for an external director, which may be extended for one additional three-year term. External directors may be removed only by the same special majority required for their election or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to our company. In the event of a vacancy created by an external director, our board of directors is required under the Companies Law to call a shareholders meeting to appoint a new external director. Dr. Michael Anghel and Dan Suesskind serve as our external directors.




External directors may be compensated only in accordance with regulations adopted under the Companies Law. The regulations provide three alternatives for cash compensation to external directors: a fixed amount determined by the regulations, an amount within a range set in the regulations, or an amount that is equal to the average compensation to other directors who are not controlling shareholders of the company or employees or service providers of the company or its affiliates. A company also may issue shares or options to an external director at the average amount granted to directors who are not controlling shareholders of the company or employees or service providers of the company or its affiliates. Cash compensation at the fixed amount determined by the regulations does not require shareholder approval. Compensation determined in any other manner requires the approval of the company’s audit committee, board of directors and shareholders. Compensation of an external director must be determined prior to the person’s consent to serve as an external director.




45





Committees of the Board of Directors




Our board of directors has established three standing committees, the audit committee, the compensation committee and the nominating and governance committee.




Audit Committee.Under the Companies Law, the board of directors of any public company must establish an audit committee. The audit committee must consist of at least three directors and must include all of the external directors. The audit committee may not include the chairman of the board, any director employed by the company or providing services to the company on an ongoing basis, a controlling shareholder or any of the controlling shareholder’s relatives. In addition, under the listing requirements of the Nasdaq Global Select Market, we are also required to maintain an audit committee of at least three members, all of whom are independent directors under the Nasdaq Global Select Market listing requirements. The rules of the Nasdaq Global Select Market also require that at least one member of the audit committee be a financial expert.




Our audit committee, acting pursuant to a written charter, is comprised of Dr. Anghel, who has been designated as the audit committee financial expert, Mr. Suesskind, and Ms. Krindel. All of the audit committee members have been determined to be independent as defined by the applicable Nasdaq and SEC rules.




The audit committee provides assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal accounting controls. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management. Under the Companies Law, the audit committee also is required to monitor deficiencies in the administration of the company, including by consulting with the internal auditor, and to review and approve related party transactions.




Compensation Committee. Our compensation committee, acting pursuant to a written charter, is comprised of Dr. Anghel, Ms. Krindel and Mr. Butler. The composition and functions of the compensation committee meet the requirements of the applicable Nasdaq rules, with which we comply voluntarily. All of the compensation committee members have been determined to be independent as defined by the applicable Nasdaq rules. The compensation committee makes recommendations to the board of directors regarding the issuance of employee share incentives under our share option and benefit plans and determines salaries and bonuses for our Chief Executive Officer and incentive compensation for our other employees.




Nominating and Governance Committee. Our nominating and governance committee, acting pursuant to a written charter, is comprised of Dr. Anghel, Ms. Krindel and Mr. Butler. The committee is responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate governance matters. The composition and function of our nominating and governance committee meets the requirements of the applicable Nasdaq rules, with which we comply voluntarily. All of the nominating committee members have been determined to be independent as defined by the applicable Nasdaq rules.




Internal Auditor




Under the Companies Law, the board of directors must also appoint an internal auditor nominated by the audit committee. Our internal auditor is Ezra Yehuda, C.P.A. (Isr). The role of the internal auditor is to examine whether a company’s actions comply with the law and proper business procedure. The internal auditor may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative. The Companies Law defines an interested party as a holder of 5% or more of the shares or voting rights of a company, any person or entity that has the right to nominate or appoint at least one director or the general manager of the company or any person who serves as a director or as the general manager of a company. Our internal auditor is not our employee, but the managing partner of an accounting firm which specializes in internal auditing.




46




D.
EMPLOYEES




The breakdown of our employees by department and geographic location is as follows:




As of December 312007

2008

2009Management, administration and operations
44


58

47Research and development
43


63

46Selling and marketing
193


179

120Total
280


300

213Israel
113


141

110North America
151


140

93Asia-Pacific
5


10

10Europe
10


9

0South America
1


0

0




Some provisions of the collective bargaining agreement between the Histadrut, which is the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialist’s Association of Israel, apply to our Israeli employees by virtue of extension orders of the Israeli Ministry of Industry, Commerce & Employment.




These provisions concern the length of the workday and the work-week, recuperation pay and commuting expenses. Furthermore, these provisions provide that the wages of most of our employees are adjusted automatically based on changes in Israel’s Consumer Price Index. The amount and frequency of these adjustments are modified from time to time. In addition, Israeli law determines minimum wages for workers, minimum vacation pay, sick leave, determination of severance pay and other conditions of employment. We have never experienced a work stoppage, and we believe our relations with our employees are good.




Israeli law generally requires the payment of severance pay by employers upon the retirement or death of an employee or termination of employment without cause. As of December 31, 2009, our accrued severance pay funds totaled $0.3 million. We fund our ongoing severance obligations by making monthly payments to insurance policies. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the U.S. Social Security Administration. These amounts also include payments for national health insurance. The payments to the National Insurance Institute are approximately 18% of wages, up to a specified amount of which the employee contributes approximately 12% and the employer contributes approximately 6%.




In Israel, we are subject to the instructions of the Extension Order in the Industrial Field for Extensive Pension Insurance, 2006, according to the Israeli Collective Bargaining Agreements Law, 1957, or the Extension Order. The Extension Order ensures the pension insurance of certain employees which fall under its criteria.




In accordance with our policy and the provisions of the Extension Order, we make contributions to a pension fund and/or insurance policy. Therefore, all our obligations to pay severance pay are covered by the aforementioned contributions, in accordance with Section 14 of the Israeli Severance Pay Law, 1963, and the Extension Order or any other applicable law.




Candela Corporation




As of February 25, 2010,our new subsidiary, Candela Corporation, employed 344 employees. The breakdown of Candela's employees by department and geographic location is as follows:




As of December 312007

2008

2009Management, administration and operations


238

243


210Research and development


39

26


27Selling and marketing


128

101


96Total


405

370


333Israel


12

15


0North America


267

228


203Asia-Pacific


47

48


50Europe


79

79


80




47







E.
SHARE OWNERSHIP




The following table sets forth information regarding the beneficial ownership of our ordinary shares as of February 25, 2010, by our executive officers and directors:




Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary shares that are subject to warrants or stock options that are presently exercisable or exercisable within 60 days of the date of February 25, 2010, are deemed to be outstanding and beneficially owned by the person holding the stock options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.




Except as indicated in the footnotes to this table, each shareholder in the table has sole voting and investment power for the shares shown as beneficially owned by them. Percentage ownership is based on 35,587,440 ordinary shares outstanding on February 25, 2010.




Executive Officers and Directors:


Number


PercentDr. Shimon Eckhouse(1)


2,729,147


7.67
%Yaffa Krindel


*


*
%Marshall Butler


*


*
%Dan Suesskind


*


*
%Dr. Michael Anghel


*


*
%David Schlachet(2)


*


*
%Louis Scafuri


*


*
%Doron Gerstel(3)


*


*
%Fabian Tenenbaum


*


*
%Gerard E. Puorro(4)


*


*
%All directors and executive officers as a group (10 persons)


3,482,696


8.91
%





* equals less than 1%




(1)
Includes 2,287,331 shares held by Starlight Capital Ltd. and 341,816 shares held by European High-Tech Capital S.A., which are corporations wholly owned by foundations that were created for the benefit of members of Dr. Eckhouse’s family. Dr. Eckhouse disclaims beneficial ownership of these shares.




(2)           Mr. Schlachet ceased to serve as our Chief Executive Officer on May 14, 2007.




(3)           Mr. Gerstel ceased to serve as our Chief Executive Officer and director in February 2009.




(4)           Mr. Puorro was appointed as a director effective as of January 5, 2010.




Employee Benefit Plans




As of December 31, 2009, we had 15,931 options outstanding, all of which were issued under the 2003 Plan or conformed to the terms of the 2003 Plan. On May 12, 2004, our board of directors cancelled the unallocated options under the 2003 Plan.




On July 12, 2004, our board of directors and shareholders adopted separate 2004 plans for Israel and for the United States, Canada and the rest of the world. On November 11, 2004, our shareholders approved the 2004 United States, Canada and Rest of World Plan. Under the 2004 Plans, as of December 31, 2009, we had 3,256,274 options and Restricted Stock Units outstanding.




Prior to the adoption of the 2004 Plans, we maintained one equity incentive plan adopted in 2003, which served as an umbrella plan for all of our employees, directors, officers and other eligible persons worldwide. Prior to the 2003 Plan, we granted options according to individual agreements with the grantees, without adopting a specific plan. We adopted both the 2003 Plan and the 2004 Israel Plan under Section 102 of the Israeli Income Tax Ordinance.




Options granted to employees under the 2003 Plan generally vest over three to four years from the grant date. Any option not exercised within seven years of the grant date will expire unless extended by the board of directors. If we terminate the engagement with a grantee for cause, all of his or her vested and unvested options expire immediately. If we terminate the engagement with a grantee for any other reason or the grantee resigns, the grantee may exercise his or her vested options within six months of the date of termination. A grantee who terminates his or her engagement with us due to death or disability may exercise his or her options (or in case of death, by the estate or the legal successor of the grantee) within 12 months of the date of death or disability. In case of retirement, the post-retirement period of exercise is set at the discretion of the board of directors or the compensation committee. Any expired or terminated options return to the plan and are automatically cancelled.




Under the 2003 Plan, we have granted to our directors, officers, employees and consultants and those of any of our subsidiaries, options to purchase our ordinary shares. Since May 12, 2004, all option grants to our Israeli employees have been issued under the 2004 Israel Plan and, unless we adopt a new plan, all such grants in the future will be issued under the 2004 Israel Plan. The 2004 Israel Plan also allows for beneficial tax treatment for options issued through a trustee. Based on Israeli law currently in effect and elections made by us, and provided that options granted or, upon their exercise, the underlying shares, issued under the plan are held by the trustee for at least two years following the end of the calendar year in which the options are granted, Israeli employees are (i) entitled to defer any taxable event with respect to the options until the underlying shares are sold, and (ii) subject to capital gains tax of 25% on the sale of the shares. We may not recognize expenses pertaining to the options for Israeli tax purposes.




48





Israeli tax law allows us to choose from among three alternative sets of tax treatment for our 2004 Israel Plan or future plans. In approving the 2004 Israel Plan, the board of directors selected the capital gains tax treatment described above.




Under the 2004 United States, Canada and Rest of World Plan, we may grant to our non-Israeli directors, officers, employees and consultants, options and other incentive awards to purchase our ordinary shares. These plans were adopted to allow favorable tax treatment for our United States and Canadian directors, officers, employees and consultants. Since May 12, 2004, all options to our non-Israeli employees have been granted under the 2004 United States, Canada and Rest of World Plan and, unless we adopt a new plan, all such options in the future will be granted under the 2004 United States, Canada and Rest of World Plan.




Options granted under the 2004 Plans generally vest over a period of one to three years of employment. Any options that are cancelled or forfeited before expiration become available for future grants. The Company can also issue a variety of other equity incentives under the 2004 Plans, but no such other equity incentives were outstanding as of December 31, 2009. In addition to granting stock options during 2006, the Company started to routinely grant Restricted Stock Units (RSUs) under the 2004 United States, Canada and Rest of World Plan. RSUs usually vest over a period of employment of up to three years. Upon vesting, the RSU beneficiary is entitled to receive a share per one RSU for $0.01 per share. RSUs that are cancelled or forfeited become available for future grants.




Each of the 2004 Plans expires in 2014 and has an evergreen provision. The evergreen provision calls for the annual increase of shares reserved for issuance under the 2004 Plan by the lesser of 2,000,000 options or 3% of the share capital, provided however that the board of directors may, at its sole discretion, decrease, at any given year, the yearly incremental increase of options to whatever number it deems appropriate.




In January 2010, upon the consummation of the merger agreement with Candela Corporation, we assumed Candela's Third Amended and Restated 1998 Candela Corporation Stock Option Plan (1998 Plan), Candela's 2008 Candela Corporation Stock Plan (2008 Plan)and each of the following options to purchase Candela's common stock, stock appreciation rights or similar rights granted on Candela's common stock that were outstanding at such time, whether vested or unvested (Candela Awards):




·
Candela Awards with an exercise or strike price less than or equal to $3.16, which is the product of (x) the price per our ordinary share on Nasdaq immediately prior to the effective time of the merger, which was $10.86, and (y) the exchange ratio ofour ordinary share for each share of Candela common stock, which was 0.2911; and




·
all Candela Awards subject to, and in accordance with the existing terms of, Candela’s executive retention agreements.




All such options and stock appreciation rights became fully vested and continued in effect in all material respects on the same terms and conditions as in effect immediately prior to the effective time of the merger. As of January 15, 2010, there were 952,549 outstanding options and stock appreciation rights (SARs), granted under the 1998 Plan and the 2008 Plan, or Candela Plans.




Options and SARs granted under the 1998 Plan become exercisable on the date of grant or vest over a period of time, as specified by the committee established by Candela's board of directors, and expire ten years from the date of the grant. Upon exercise of a SAR, only the net number of ordinary shares issued in connection with such exercise shall be deemed "issued" for this purpose. The SARs granted to employees under the 1998 Plan vest over one to four years, while the SARs granted to directors vest over two years.




Under the 1998 Plan, there were 587,070 outstanding options/SARs at January 15, 2010, with a weighted-average exercise price of $24.97 per share. The 1998 Plan expired pursuant to its terms on September 18, 2008. As such, there were no options/SARs available for grant under this plan at January 15, 2010.




On October 27, 2008, the board of directors of Candela adopted the 2008 Plan. The 2008 Plan was approved by Candela's stockholders on December 12, 2008. Under the 2008 Plan, Candela was permitted to grant incentive stock options, non-qualified stock options, SARs, restricted stock awards and RSUs (collectively, Stock Rights). The SARs granted to employees under the 2008 Plan vest over one to two years. Under the 2008 Plan incentive stock options were granted to employees of Candela and non-qualified options, SARs, restricted stock and RSUs were granted to employees, officers, directors and consultants of Candela. Following the merger with Candela, our board of directors administers the 2008 Plan.




Under the 2008 Plan, there were 365,479 outstanding options/SARs at January 15, 2010,with a weighted-average exercise price of $2.34 per share.




49





Each option or SAR granted under this plan, expires on the date specified by the compensation committee of Candela, but not more than (i) ten years from the date of grant in the case of options and SARs generally, and (ii) five years from the date of grant in the case of incentive stock options granted to an employee possessing more than ten percent of the total combined voting power of all classes of stock of Candela. Options and SARs are subject to early termination in certain circumstances.




Pursuant to the 2008 Plan, our board of directors may take any action as may be necessary to ensure that Stock Rights granted under the 2008 Plan qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code. Any Stock Right granted under the 2008 Plan which is intended to qualify as "performance-based compensation" may be conditioned on the attainment of one or more of the following performance goals: earnings, earnings before interest and taxes, earnings before interest, taxes, depreciation and amortization, earnings per share, economic value created, market share, net income (before or after taxes), operating income, adjusted net income after capital charge, return on assets, return on capital (based on earnings or cash flow), return on equity, return on investment, revenue, cash flow, operating margin, share price, total stockholder return, total market value, and strategic business criteria, consisting of one or more objectives based on meeting specified market penetration goals, productivity measures, geographic business expansion goals, cost targets, customer satisfaction or employee satisfaction goals, goals relating to merger synergies, management of employment practices and employee benefits, or supervision of litigation or information technology, and goals relating to acquisitions or divestitures of subsidiaries, affiliates or joint ventures.




Unless otherwise specified in the instrument relating to the grant of an incentive stock options, if an incentive stock option optionee ceases to be employed other than reason of death or disability, all unvested incentive stock options shall terminate and the vested incentive stock options shall terminate on the earlier of three months after the date of termination of employment or the specified expiration date. If an incentive stock option optionee ceases to be employed by reason of death or disability, all unvested incentive stock options shall terminate and the vested incentive stock options shall terminate on the earlier of one hundred and eighty days after the date of termination of employment or the specified expiration date. The compensation committee of Candela specified in the instrument relating to the grant of nonqualified options, SARs, restricted stock and RSUs the treatment of such Stock Rights upon a grantee's termination of employment.




The 2008 Plan shall automatically expire on October 27, 2018, except as to options and SARs outstanding on that date.




ITEM7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS




A.
Major Shareholders




The following table sets forth information regarding the beneficial ownership of our ordinary shares as of February 25, 2010, by each person or entity that we know beneficially owns 5% or more of our outstanding ordinary shares.




Beneficial ownership of shares is determined in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary shares that are subject to warrants or stock options that are presently exercisable or exercisable within 60 days of the date of February 25, 2010 are deemed to be outstanding and beneficially owned by the person holding the stock options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.




Except as indicated in the footnotes to this table, each shareholder in the table has sole voting and sole investment power for the shares shown as beneficially owned by them. Percentage ownership is based on 35,587,440 ordinary shares outstanding as of February 25, 2010.




Number of

Shares

Beneficially

Owned


Percentage

of

outstanding

Ordinary

SharesThe Baupost Group, LLC (1)


1,500,000


4.22
%Starlight Capital Ltd.(2)


2,287,331


6.43
%FMR LLC (3)


2,822,226


7.93
%Visium Balanced Master Fund, Ltd.(4)


1,766,349


4.96
%Royce & Associates, LLC(5)


1,463,059


4.11
%Paradigm Capital Management, Inc.(6)


1,390,700


3.91
%Steinberg Asset Management, LLC(7)


1,738,591


4.89
%




(1)
The information is solely based upon Amendment No. 4 to Schedule 13G filed with the SEC on December 9, 2009, by the Baupost Group, LLC (“Baupost”), SAK Corporation and Seth A. Klarman. SAK Corporation is the Manager of Baupost. Seth A. Klarman, as the sole Director of SAK Corporation and a controlling person of Baupost, may be deemed to have beneficial ownership of the securities beneficially owned by Baupost. Securities reported on the Schedule 13G as being beneficially owned by Baupost includes securities purchased on behalf of various investment limited partnerships.




50




(2)
A corporation wholly owned by foundations that were created for the benefit of members of Dr. Eckhouse’s family. Dr. Eckhouse disclaims beneficial ownership of these shares. Excludes 341,816 shares held by European High-Tech Capital S.A., which is also a corporation wholly owned by foundations that were created for the benefit of members of Dr. Eckhouse’s family.




(3)
The information is solely based upon Amendment No. 1 to Schedule 13G filed with the SEC on February 16, 2010, by FMR LLC (“FMR”), Edward C. Johnson 3rd (chairman of FMR), Fidelity Management & Research Company ("Fidelity") and Fidelity Low Priced Stock Fund (“FLPS”). Fidelity a wholly owned subsidiary of FMR and an investment adviser is the beneficial owner of 2,822,226 ordinary shares. FLPS, an investment company, is the owner of 2,200,000 of these ordinary shares. Edward C. Johnson 3rd and FMR, through its control of Fidelity, and the funds each has the sole power to dispose these shares. Members of the Johnson family through their ownership of voting common shares and the execution of the shareholders' voting agreement, may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR LLC.Neither FMR nor Mr. Johnson has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds' Boards of Trustees.




(4)
The information is solely based upon Amendment No. 1 to Schedule 13G filed with the SEC on February 12, 2010, by Visium Asset Management, LP (“VAM”), Visium Balanced Master Fund, Ltd. (“VBMF”), JG Asset, LLC (“JG Asset”) and Jacob Gottlieb (“Gottlieb”). VAM as the investment manager of VBMF may be deemed to beneficially own shares beneficially owned by VBMF. JG Asset as the General Partner to VAM may be deemed to beneficially own shares beneficially owned by VAM. Gottlieb as the Managing Member of JG Asset may be deemed to beneficially own the shares beneficially owned by JG Asset. VAM, JG Asset and Gottlieb disclaim beneficial ownership as to these shares, except to the extent of his or its pecuniary interests therein.




(5)
The information is solely based upon Schedule 13G filed with the SEC on February 9, 2010, by Royce & Associates, LLC.




(6)
The information is solely based upon Schedule 13G filed with the SEC on February 12, 2010, by Paradigm Capital Management, Inc. All of these ordinary shares are owned by advisory clients Paradigm.




(7)
The information is solely based upon Schedule 13G filed with the SEC on February 16, 2010, by Steinberg Asset Management, LLC.




To our knowledge, the only significant changes in the percentage ownership held by our major shareholders during the past three years have been: (i) the sale by Cititrust Bahamas Ltd., which is a trust that was created for the benefit of our retired Chief Technology Officer and director, Dr. Michael Kreindel, of part of its holdings pursuant to 10b5-1 plans, (ii) the increase in the percentage ownership held by the Baupost Group, LLC from 5.52% (based on a Schedule 13G filed on February 13, 2007) to 11.23% (based on a Amendment No. 3 to Schedule 13G filed on February 12, 2009) and then the decrease to 5.45% (based on a Amendment No. 4 to Schedule 13G filed on December 9, 2009), (iii) the purchase by Brandywine Global Investment Management, LLC of 6.11% of our ordinary shares (based on a Amendment No.1 to Schedule 13G filed on February 17, 2009) and the sale of such ordinary shares (based on Amendment No.2 to Schedule 13G filed on February 16, 2010), (iv) the purchase by Fidelity Management & Research Company of 11.214% of our ordinary shares (based on Schedule 13G filed on November 10, 2009) and the sale of 258,500 of these ordinary shares (based on Amendment No.1 to Schedule 13G filed on February 16, 2010), (v) the purchase by Royce & Associates, LLC of 5.32% of our ordinary shares (based on a Schedule 13G filed on February 9, 2010), (vi) the purchase by Paradigm Capital Management, Inc. of 5.05% of our ordinary shares (based on a Schedule 13G filed on February 12, 2010), and (vii) the purchase by Steinberg Asset Management, LLC of 6.33% of our ordinary shares (based on a Schedule 13G filed on February 16, 2010).




Our major shareholders have the same voting rights with respect to their respective ordinary shares as other shareholders have with respect to their respective ordinary shares.




To our knowledge, as of March 23, 2010, we had 107 shareholders of record who were registered with addresses in the United States. These holders in the United States were as of such date, the holders of record of approximately 90.76%* of our outstanding ordinary shares.


* Includes the Depository Trust Company




51




B.
Related Party Transactions




Agreements with Directors and Officers




Our articles of association permit us to exculpate, indemnify and insure our directors and officers to the fullest extent permitted by the Companies Law. We have entered into agreements with each of our office holders, including our directors, undertaking to exculpate, indemnify and insure them to the fullest extent permitted by law, to the extent that these liabilities are not covered by insurance. See “Item 10.B Memorandum And Articles Association – Exculpation, Indemnification and Insurance of Directors and Officers.”




Registration Rights




Prior to our initial public offering, we issued preferred shares to Starlight Capital Ltd., European High-Tech Capital S.A. and Marshall Butler. Starlight Capital Ltd. and European High-Tech Capital S.A. are controlled by foundations which have been established for the benefit of family members of Dr. Shimon Eckhouse, the chairman of our board of directors. Dr. Eckhouse disclaims beneficial ownership of the shares held by these companies. Marshall Butler is a member of our board of directors. All of these preferred shares were subject to registration rights, and all of these preferred shares were automatically converted into ordinary shares at the closing of our initial public offering. As of February 25, 2010, we believe that these shareholders continue to hold a certain amount of ordinary shares issued upon conversion of our preferred shares subject to such registration rights. Pursuant to these registration rights, in the event we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders, these and other holders who may hold shares subject to registration rights are entitled to notice of such registration and are entitled to include their remaining ordinary shares subject to the registration rights in such registration, subject to certain marketing cutbacks and other limitations. The holders of at least 50% of the ordinary shares with registration rights will have the right to require us, on not more than one occasion, to file a registration statement on the appropriate form under the Securities Act in order to register the resale of their ordinary shares. We may, in certain circumstances, defer such registration and the underwriters have the right, subject to certain limitations, to limit the number of shares included in such registrations. Further, these holders may require us to register the resale of all or a portion of their shares on a Registration Statement on Form F-3, subject to certain conditions and limitations.




Shareholders’ Rights Plan




Our board of directors adopted a shareholders' rights plan, under which our board of directors declared a dividend of one right for each ordinary share held by shareholders of record as of the close of business on November 9, 2008. Initially, these rights are not exercisable and are traded with our ordinary shares. Under the plan, these rights will generally be exercisable only if a person or group acquires beneficial ownership of 15 percent or more of our ordinary shares or commences a tender or exchange offer for 15 percent or more of our ordinary shares, except if such person or group has become an “Acquiring Person” pursuant to an offer approved by the majority of the board of directors. If a person or group acquires beneficial ownership of 15 percent or more of our ordinary shares (except if such person or group has become an “Acquiring Person” pursuant to an offer approved by the majority of the board of directors), each right will generally entitle the holder, other than the acquiring person or group, to acquire, for the exercise price of $0.01 per share (subject to adjustment as provided in the plan), one and a quarter (1.25) ordinary shares. In addition, if, after a person acquires such ownership, we engages in a merger in which it is not the survivor or its ordinary shares are changed or exchanged, or sells or transfers more than 50 percent of our assets or earning power, each right will generally entitle the holder, other than the acquiring person or group, to acquire, for the exercise price of $0.01 per share (subject to adjustment as provided in the plan), one and a quarter (1.25) times the shares of the acquiring company to which each of our shareholders is entitled to for each ordinary share. Our board of directors may redeem the rights at a price of $.0001 per right at any time up to ten days after a person or group acquires beneficial ownership of 15 percent or more of our ordinary shares. The rights plan will continue in effect until November 30, 2010, unless earlier redeemed or amended by our board of directors.




C.
INTERESTS OF EXPERTS AND COUNSEL




Not applicable.




ITEM8.
FINANCIAL INFORMATION




A.
Consolidated Statements and Other Financial Information




Our audited consolidated financial statements for the year ended December 31, 2009, are included in this Annual Report on Form 20-F under Item 18, “Financial Statements.”




Legal Proceedings.




On December 21, 2007, Torkaman and Torabi Dental Corporation filed a complaint against us, Syneron Inc. and Scott Cote. Plaintiff alleges that we represented that dentists who purchased our products did not need to have a medical doctor or other medically trained personnel operate the device and that it could be legally operated by an aesthetician. Plaintiff alleges that it purchased the equipment in reliance upon these representations. Plaintiff further alleges that based on our misrepresentation, he set up a dental spa operation and has suffered economic damage as a consequence of not being able to operate the dental spa in the manner represented by us. Pursuant to a settlement agreement reached between the parties, the plaintiff was paid $1,044,000 of which we paid $372,000 and the remaining amount was paid by the insurance company.




52





On October 9, 2007, we reached an agreement with Shaldot and Qray which settled a patent related claim. Pursuant to this settlement, we entered into a license agreement with Shaldot and Qray under which we received a license to use and utilize the patent in suit in any of our products. In return, we agreed to pay Qray a one-time license fee of $0.1 million. We also entered into a share purchase agreement with Shaldot and Qray under which we invested $1.05 million in Qray in consideration for shares equivalent to 9% of Qray’s outstanding share capital. If Qray meets certain milestones within three and a half years from the closing of the transaction, we are obligated to invest an additional $0.45 million in Qray. The costs in connection with our settlement amounted to approximately $0.2 million.




Our subsidiary, Syneron Inc. is currently defending a patent infringement lawsuit brought by Palomar Medical Technologies, Inc. (Palomar) in the U.S. District Court for the District of Massachusetts, on November 13, 2009, alleging willful infringement of U.S. Patent Nos. 5,595,568 (the ’568 Patent) and 5,735,844 (the ’844 Patent) by Syneron Inc.’s hair removal products. The ’568 and ’844 Patents were subject to reexaminations by the U.S. Patent and Trademark Office, and the action was stayed pending completion of the reexaminations. The PTO issued Reexamination Certificates with respect to the ’568 and ’844 Patents, confirming the patentability of all of the claims of the ’568 Patent at issue in the reexamination proceedings and most of the claims of the ’844 Patent at issue in the reexam proceedings. The stay was lifted on November 13, 2009.  The action is still in its early stages. The complaint seeks compensatory damages, requests that these damages be trebled, and requests attorneys’ fees and injunctive relief. After the lifting of the stay, Syneron Inc. answered the complaint on November 30, 2009, denying Palomar’s claims and seeking a declaratory judgment of noninfringement, invalidity, and unenforceability of the ’568 and ’844 Patents. On December 10, 2009, Palomar filed a First Amended Complaint that added Massachusetts General Hospital (MGH) as a plaintiff, and on December 14, 2009, Palomar replied to Syneron Inc.’s counterclaims. Syneron Inc. answered the First Amended Complaint on December 23, 2009, and filed Amended Counterclaims that add MGH as a counterdefendant. The Court held a scheduling conference in the case on January 6, 2010. At the conference, the Court set the claim construction hearing for November 17, 2010, and set other pre-trial dates. No trial date was set.




While Syneron Inc. intends to vigorously contest Palomar’s allegations, the lawsuit is inherently uncertain and unpredictable as to its ultimate outcome. An adverse outcome in Palomar’s suit against Syneron Inc. would materially hurt the business, financial condition, results of operations and cash flows of Syneron Inc.




We recorded a one time income of $3.975 million for the year ended December 31, 2009, in connection with a legal settlement that we reached in March 2009.




On or about December 23, 2008, we received a letter from Tensor Technologies LLC claiming that we were in breach of our royalty payment obligations to Tensor pursuant to a License Agreement dated June 24, 2004, between us and Tensor (as amended). On February 19, 2009, we sent Tensor a letter denying Tensor's claims and denying any royalty payment obligations to Tensor whatsoever. We submitted the matter for arbitration, have agreed upon an arbitrator and have started the arbitration process. On August 30, 2009, a statement of claim was served by Tensor against us in the amount of $2,617,706. On November 1, 2009, we submitted a statement of defense and a countersuit in the amount of $4,367,089 for the restitution of the royalties already paid by us to Tensor. Tensor has submitted its statement of defense to the countersuit we submitted. We have begun discovery proceedings. On March 16, 2010, Tensor has submitted its primary testimony affidavit.




Candela's Legal Proceedings




Our new indirect wholly owned subsidiary, Candela Corporation, is also currently defending a patent infringement lawsuit brought by Palomar in the U.S. District Court for the District of Massachusetts, alleging infringement of the ’568 and ’844 Patents by Candela’s hair removal products. The ’568 and ’844 Patents were subject to reexaminations by the U.S. Patent and Trademark Office, and the action was stayed pending completion of the reexaminations. The PTO issued Reexamination Certificates with respect to the ’568 and ’844 Patents, confirming the patentability of all of the claims of the ’568 Patent at issue in the reexamination proceedings and most of the claims of the ’844 Patent at issue in the reexam proceedings. The stay was lifted on January 5, 2010.  Palomar's amended complaint, which added MGH as a plaintiff, alleges that Candela willfully infringed the ’568 and ’844 Patents. In addition to seeking compensatory damages, the amended complaint requests that the Court treble these damages, award attorneys’ fees, and provide injunctive relief. Candela’s amended answer and counterclaims denies Palomar’s claims, seeks a declaratory judgment of noninfringement, invalidity, and unenforceability of the ’568 and ’844 Patents, and alleges unfair and deceptive business practices by Palomar in violation of Massachusetts General Laws Ch. 93A. Candela seeks compensatory damages, and requests the trebling of these damages, attorneys’ fees, and injunctive relief. Prior to the entry of the stay, a claim construction hearing was held, the Court issued an order on November 8, 2007 construing the claims, fact discovery was closed, and expert reports were exchanged. Palomar has dropped the ’568 Patent from this lawsuit, and has elected to proceed solely on the ’844 Patent. On February 10, 2010, after the stay was lifted, the Court held a scheduling conference and set June 30, 2010 as the cutoff for expert discovery, July 30, 2010, as the last date for filing summary judgment motions, and September 14, 2010, as the hearing date for summary judgment motions. The parties later agreed to serve supplemental expert reports on April 9, 2010, and supplemental rebuttal expert reports on May 7, 2010. No trial date has been set.




53





While Candela intends to vigorously contest Palomar’s allegations, the lawsuit is inherently uncertain and unpredictable as to its ultimate outcome. An adverse outcome in Palomar’s suit against Candela would materially hurt the business, financial condition, results of operations and cash flows of Candela.




On February 19, 2008, Cardiofocus, Inc., or Cardiofocus, filed suit against Candela and eight other companies in the U.S. District Court for the District of Massachusetts, asserting willful infringement by Candela of U.S. Patents 6,457, 780, 6,159,203 and 5,843,073. Cardiofocus seeks compensatory and treble damages, as well as attorneys’ fees and injunctive relief. On April 21, 2008, Candela answered Cardiofocus’ complaint and asserted a variety of counterclaims against Cardiofocus. Candela intends to vigorously defend against the lawsuit. Based upon Candela’s request, on July 23, 2008, the PTO agreed to re-examine the validity of the Cardiofocus patents. On October 14, 2008, the Court agreed to stay this matter for a minimum of one year, up to a maximum of two years, but no later than the PTO’s decision with respect to the re-examination proceedings.




On September 24, 2009, and October 30, 2009, after the announcement of our proposed merger with Candela, two putative class action lawsuits were filed in the Suffolk CountySuperior Court of Massachusetts against Candela, the members of Candela’s board of directors, among others (one of the lawsuits included us as a defendant). The two actions were thereafter consolidated. Plaintiffs alleged that members of Candela’s board of directors breached fiduciary duties owed to Candela stockholders by, among other things, using an unfair or flawed process in connection with the proposed merger between Candela and us, agreeing to an all-stock transaction at an unfair price, and omitting material information and/or providing materially misleading information concerning the merger. The consolidated action further alleged that Candela and us aided and abetted the purported breaches of fiduciary duties. The complaint seeks, among other relief: an injunction against the merger; rescission of the transaction (or damages) if consummated; and an award of all costs of the actions, including reasonable attorneys’ fees and expenses. While Candela and the other defendants believe the allegations in the complaints are entirely without merit and that they have valid defenses to all claims, in an effort to minimize the cost and expense of litigation, the defendants entered into a proposed settlement with the plaintiffs, which is subject to the Court approval. The proposed settlement provides for plaintiff's release of any and all claims and causes of action alleged in the complaints, or arising out of or relating in any manner thereto, in exchange for adding in the proxy statement/prospectus relating to the proposed merger certain additional limited disclosures and reducing the termination fee payable by Candela to us under the circumstances outlined in the merger agreement from $2.6 million to $2.1 million. The defendants have also agreed not to oppose any fee application by plaintiffs’ counsel that does not exceed $260,000.




For other legal proceedings see also Note 12 to our consolidated financial statements. Please also see Item 3.D, “Risk Factors – Existing and future third-party claims of infringement or other claims against us could require us to redesign our products, seek licenses, or engage in future costly intellectual property litigation, which could impact our future business and financial performance.”




Policy on Dividend Distribution




We have never declared or paid cash dividends to our shareholders, and we do not intend to pay cash dividends in the foreseeable future. We intend to reinvest any future earnings in developing and expanding our business. We have decided to reinvest the amount of tax-exempt income derived from out “Approved Enterprise” status and not to distribute that income as dividends.




B.
SIGNIFICANT CHANGES





On January 5, 2010, the merger with Candela Corporation (Candela) was completed. Pursuant to that certain agreement and plan of merger dated September 8, 2009, by and among us, Syneron Acquisition Sub, Inc., a Delaware corporation and our indirect, wholly-owned subsidiary (Acquisition Sub), and Candela , we acquired Candela through Acquisition Sub which merged with and into Candela. Candela survived the merger as our indirect wholly-owned subsidiary. Candela shareholders received 0.2911 shares of our ordinary shares for each share of Candela common stock they owned. We issued approximately 6.7 million shares to acquire Candela. Candela manufactures, and distributes innovative clinical solutions that enable physicians, surgeons, and personal care practitioners to treat selected cosmetic and medical conditions using lasers, aesthetic laser systems, and other advanced technologies. Candela’s current product line offers comprehensive and technologically sophisticated cosmetic and aesthetic lasers and light-based systems used by physicians and personal care practitioners to treat a wide variety of cosmetic and medical conditions.




ITEM9.
THE OFFER AND LISTING




A.
OFFER AND LISTING DETAILS




Our ordinary shares are quoted on the Nasdaq Global Select Market under the symbol “ELOS.”




The following table sets forth, for the periods indicated since August 5, 2004, which was the date on which our ordinary shares began trading on the Nasdaq Global Select Market (formerly known as the Nasdaq National Market), the high and low sales prices of our ordinary shares as reported by the Nasdaq Global Market.




54




Nasdaq Global Market
 Price per share (US$)High


LowYearly highs and lows2005

$
46.91


$
23.052006


32.72



17.812007


28.12



13.372008


18.04



5.882009


12.44



4.55Quarterly highs and lows2008First quarter


17.77



13.35Second quarter


18.04



14.51Third quarter


17.25



12.70Fourth quarter


14.13



5.882009First quarter


8.74



4.55Second quarter


8.52



5.28Third quarter


12.04



6.50Fourth quarter


12.44



9.33
 2010First quarter (through March 22, 2010)


11.44



9.00Monthly highs and lowsSeptember 2009


12.04



8.69October 2009


12.09



10.74November 2009


12.44



9.86December 2009


10.52



9.33January 2010


11.44



9.79February 2010


10.13



8.91




On March 22, 2010, the closing price of our ordinary share as quoted on Nasdaq Global Select Market was $11.08.




B.
PLAN OF DISTRIBUTION




Not applicable.




C.
MARKETS




Our ordinary shares are quoted on the Nasdaq Global Select Market under the symbol “ELOS.”




D.
SELLING SHAREHOLDERS




Not applicable.




E.
DILUTION




Not applicable.




F.
EXPENSES OF THE ISSUE




Not applicable.




ITEM10.
ADDITIONAL INFORMATION




A.
SHARE CAPITAL




Not applicable.




B.
MEMORANDUM AND ARTICLES OF ASSOCIATION




Set forth below is a summary of certain provisions of our amended and restated articles of association, as adopted by our shareholders on November 7, 2007, and Israeli law affecting our shareholders. This summary does not purport to be complete and is qualified in its entirety by reference to our amended and restated articles of association and such law. On November 7, 2007, our shareholders adopted the amended and restated articles of association of the Company (for the purposes of this Item, the “Amended Articles”)




55





Register Number and Purposes of the Company




Our registration number with the Israeli Companies Registrar is 51-298651-4. Pursuant to Section 4 of our Amended Articles we may engage in any type of lawful business as may be determined by our board of directors from time to time.




Dividend and Liquidation Rights




Holders of our ordinary shares are entitled to their proportionate share of any cash dividend, share dividend or dividend in kind declared with respect to our ordinary shares. We may declare dividends out of profits legally available for distribution. Under the Israeli Companies Law, 1999-5759, or the Companies Law, a company may distribute a dividend only if the distribution does not create a reasonably foreseeable risk that the company will be unable to meet its existing and anticipated obligations as they become due. A company may only distribute a dividend out of the company’s profits, as defined under the Companies Law. If a company does not meet the profit requirement, a court may allow it to distribute a dividend, as long as the court is convinced that there is no reasonable risk that a distribution might prevent the company from being able to meet its existing and anticipated obligations as they become due.




Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of a company unless the company’s articles of association provide otherwise. Our Amended Articles provide that the board of directors may declare and distribute dividends without the approval of the shareholders. In the event of our liquidation, holders of our ordinary shares have the right to share ratably in any assets remaining after payment of liabilities, in proportion to the paid-up par value of their respective holdings.




These rights may be affected by the grant of preferential liquidation or dividend rights to the holders of a class of shares that may be authorized in the future.




Voting, Shareholder Meetings and Resolutions




Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. This right may be changed if shares with special voting rights are authorized in the future.




Under the Companies Law, an annual general meeting of our shareholders should be held once every calendar year, but no later than 15 months from the date of the previous annual general meeting. The quorum required for a general meeting of shareholders consists of at least two shareholders present in person or by proxy holding at least 40.0% of the voting power. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the directors designate in a notice to the shareholders. At the reconvened meeting, the required quorum consists of any number of shareholders present in person or by proxy.




Our board of directors may, in its discretion, convene additional meetings as “special general meetings.” In addition, the board must convene a special general meeting upon the demand of two of the directors, one fourth of the nominated directors, one or more shareholders having at least 5% of outstanding share capital and at least 1% of the voting power in the company, or one or more shareholders having at least 5% of the voting power in the company. The chairman of the board of directors presides at each of our general meetings. The chairman of the board of directors is not entitled to a vote at a general meeting in his capacity as chairman.




Most shareholders’ resolutions, including resolutions to:




·
amend our articles of association (except for amendments relating to the election of directors and the powers, composition and size of the board of directors);




·
make changes in our capital structure such as a reduction of capital, increase of capital or share split, merger or consolidation;




·
authorize a new class of shares, elect directors, other than external directors;




·
appoint auditors; or




·
approve transactions with certain office holders.




Will be deemed adopted if approved by the holders of a majority of the voting power represented at a shareholders’ meeting, in person or by proxy, and voting on that resolution. In most cases these actions will not require the approval of a special majority.




56





Ownership of Shares; Transfer of Shares; Notices




Our Amended Articles and the laws of the State of Israel do not restrict the ownership or voting of ordinary shares by non-residents of Israel, except with respect to individuals and entities that are residents of countries in a state of war with Israel, and except with respect to entities which are controlled by residents of countries in a state of war with Israel.




Our fully paid ordinary shares are issued in registered form and are freely transferable under our Amended Articles.




The Companies Law and regulations determine that shareholders’ meetings require prior notice of at least 21 days. In the event that the issue to be resolved is an issue subject to the Israeli proxy rules, a notice of no less than 35 days should be given to the company’s shareholders. In some cases a prior notice of not less than 14 days may be given to the company’s shareholders.




Under the Companies Law, we are required to maintain a major shareholder register listing shareholders holding 5% or more of our outstanding ordinary shares.




Modification of Class Rights




The Companies Law provides that the rights of a particular class of shares may not be modified without the vote of a majority of the affected class.




Election of Directors




Our ordinary shares do not have cumulative voting rights in the election of directors. Therefore, the holders of ordinary shares representing more than 50% of the voting power at the general meeting of the shareholders, in person or by proxy, have the power to elect all of the directors whose positions are being filled at that meeting, to the exclusion of the remaining shareholders. External directors are elected by a majority vote at a shareholders’ meeting, provided that either:




·
at least one third (33.33%) of the shares held by shareholders who are not controlling shareholders attending in person or represented by proxy have voted in favor of the proposal (shares held by abstaining shareholders shall not be considered); or




·
the aggregate number of shares voting against the proposal held by such shareholders has not exceeded 1% of the company’s voting shareholders.




Our directors are elected in three staggered classes. The directors of only one class are elected at each annual meeting, so that the regular term of only one class of directors expires annually. Each of our directors holds office until the third annual general meeting of the shareholders following the meeting at which he was appointed. In accordance with the Companies Law, our external directors serve for three years, which may be renewed for additional three year terms, if both the audit committee and the board of directors confirm that in light of the expertise and contribution of the external director, the extension of such external director's term would be in the interest of our company (such requirement is not applicable to the first three-year renewal). The Companies Law requires that the offices of the Chief Executive Officer and the Chairman of the Board of Directors be held by different persons. However, the Companies Law further provides that those positions may be held by the same person for a period not exceeding three years if approved by a majority of the company’s shareholder, including at least two thirds of the voting shareholders present (shares held by abstaining shareholders are not considered) which are not controlling shareholders or the aggregate number of shares of non controlling shareholders voting against the proposal shall not exceed 1% of company voting shareholders.




The Companies Law provides that Israeli public companies must have at least two external directors. External directors may be elected at our annual general meeting or a special meeting of our shareholders in a number and manner stipulated by law, namely, for a term of three years which may be renewed for additional three year terms and requires the affirmative vote as described above. External directors may be removed from office only under the following circumstances: (i) an external director ceases to meet the legal requirements for appointment as an external director or breaches his or her fiduciary duty to the company and a resolution to remove such external director is made by the shareholders at a meeting at which such external director is granted a reasonable opportunity to express his position (such a resolution requires the same majority of votes that elected the external director); (ii) an external director ceases to meet the legal requirements for appointment as an external director or breaches his or her fiduciary duty to the Company and a court orders that such director be removed; or (iii) an external director is unable to perform his or her duties or is convicted of certain felonies and a court orders that such director be removed.




An external director is qualified for nomination as an external director, only if he/she has either professional qualifications or accounting and financial expertise. At least one of the external directors must have accounting and financial expertise. However, a company whose shares are traded in certain exchanges outside of Israel, including the Nasdaq Global Select Market, such as our company, is not required to nominate at least one external director who has accounting and financial expertise as long as another independent director for audit committee purposes who has such expertise serves on the board of directors pursuant to the applicable foreign securities laws. In such case all external directors will have professional qualification.




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Regulations adopted under the Companies Law provide that a director with accounting and financial expertise is a director that due to his education, experience and skills has high expertise and understanding in business-accounting matters and financial statements in a way that enables him to deeply understand the financial statements of the company and to facilitate discussion with respect to the way the financial data should be presented. The assessment of the accounting and financial expertise of a director shall be made by the board of directors, who shall take into consideration, inter alia, the education, experience and knowledge of the director in the following subjects:




(1)
Accounting matters and audit accounting matters, which are typical to the sector in which the company works and of companies with the same size and complexity as of the company;




(2)
The duties and obligations of the auditing accountant; and




(3)
Preparing of financial statements and their approval according to applicable law, including securities law.




The regulations also provide that a director with professional qualifications is a director who meets one of the following conditions:




(1)
A holder of an academic degree in one of the following: economics, business administration, accounting, law, or public administration;




(2)
A holder of another academic degree or is otherwise a graduate of higher education in a major field of business of the company or in other field which is relevant to the role;




(3)
He has experience of at least five years in one of the following, or that he has cumulative experience of at least five years in two or more of the following:




(a)
A senior position in the business management of a corporation which has a significant scope of business;




(b)
A senior public position or in a senior role in the public service; or




(c)
A senior position in the company's major fields of business.




According to the Companies Law, the board of directors of a public company must establish the minimum number of board members that are to have accounting and financial expertise while considering, inter alia, the nature of the company, its size, the scope and complexity of its operations and the number of directors stated in the Amended Articles.




Our board of directors resolved that the minimum number of board members that need to have accounting and financial expertise, including the external director with accounting and financial expertise is one.




Our board of directors determined that Dr. Michael Anghel has accounting and financial expertise as described in the regulations promulgated pursuant to Companies Law, and that, therefore, the requirements of the minimum number of board members that need to have accounting and financial expertise, as set by the board of directors, has been met.




On September 29, 2008, Amendment No. 8 to the Companies Law came into effect. The amendment states that a publicly traded company will be able to determine the number of independent directors that will serve on the company's board of directors. The amendment also sets a recommendation as to the number of independent directors a public company should appoint to their board: (i) companies with a controlling shareholder – one third; and (ii) other companies – a majority of the board. A Majority of our board members are independent as required by Nasdaq rules, which are different than the independence standard of the Companies Law.




Under regulations promulgated under the Companies Law regarding payment of compensation to external directors, compensation of external directors shall be comprised of annual compensation and a per meeting payment ranging as stated in the regulations. These amounts are adjusted twice a year in accordance with the Israeli consumer price index. With regard to a company, which shares are traded in an exchange outside of Israel, and is subject to laws which impose upon the external directors duties which exceed the duties imposed upon them under Israeli law, the maximum amount payable to the external directors is NIS 100,000 per annum (approximately $26,500) and NIS 3,000 (approximately $800) per meeting. The approval of the shareholders of the company is required for such compensation, unless it is between the maximum and fixed amounts set forth in these regulations. Alternatively, the compensation of external directors may be linked to the compensation of other directors subject to certain restrictions. Additionally, external directors may be entitled to compensation in stock (including by way of granting options to purchase the company’s stock), provided that such compensation is granted within the framework of a stock incentive plan applicable to all other directors and further provided the amount of stock granted or purchasable shall not fall below the lowest amount granted to any other director and shall not exceed the average amount of stock granted to all other directors. In 2008, these regulations were amended to allow an increased compensation to external directors who are considered “expert external directors” under these regulations.




See Item 6.C, “Directors, Senior Management and Employees – Board Practices” regarding our staggered board.




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Anti-Takeover Provisions; Mergers and Acquisitions




Merger. The Companies Law permits merger transactions with the approval of each party’s board of directors and shareholders. In accordance with the Companies Law, a merger may be approved at a shareholders meeting by a majority of the voting power represented at the meeting, in person or by proxy, and voting on that resolution. In determining whether the required majority has approved the merger, shares held by the other party to the merger, any person holding at least 25% of the outstanding voting shares or means of appointing the board of directors of the other party to the merger, or the relatives or companies controlled by these persons, are excluded from the vote.




Under the Companies Law, a merging company must inform its creditors of the proposed merger. Any creditor of a party to the merger may seek a court order blocking the merger, if there is a reasonable concern that the surviving company will not be able to satisfy all of the obligations of the parties to the merger. Moreover, a merger may not be completed until at least 30 days have passed from the time that the shareholders of each company approved the merger proposal and 50 days have passed from the time that a merger proposal was filed with the Israeli Registrar of Companies.




In addition, the Companies Law preserves provisions of its predecessor, the Companies Ordinance, dealing with arrangements between a company and its shareholders. These arrangements may be used to effect squeeze out transactions in which the target company becomes a wholly owned subsidiary of the acquirer. These provisions generally require that the merger be approved by at least 75% of the shares of participating shareholders and a majority of the shareholders voting at a shareholders meeting. In addition to shareholder approval, court approval of the transaction is required, which entails further delay.




A merger, the acquisition of a controlling stake or any transaction in which all or substantially all the assets of a company are de facto transferred to another company, may require the approval of the Israeli Commissioner of Restrictive Trade Practices, in the event that the aggregate annual sales volume in Israel of all the companies which are parties to such transaction in the year preceding the merger, exceeds NIS 150,000,000 (approximately $40,214,000, an amount which is adjusted on an annual basis)andthe annual sales volume in Israel of at least two of the companies which are parties to such transaction exceeds NIS 10,000,000 each (approximately $2,681,000, an amount which is adjusted on an annual basis),and also if after the consummation of such transactions, the joint market, in Israel, or at any identified geographic part of Israel will be in excess of 50% with respect to such products and services.




Tender Offer. The Companies Law requires a purchaser to conduct a tender offer in order to purchase shares in publicly held companies, if as a result of the purchase the purchaser would hold more than 25% of the voting rights of a company in which no other shareholder holds more than 25% of the voting rights, or the purchaser would hold more than 45% of the voting rights of a company in which no other shareholder holds more than 45% of the voting rights. Under the Companies Law, a person may not purchase shares of a public company if, following the purchase of shares, the purchaser would hold more than 90% of the company’s shares or of any class of shares unless the purchaser makes a tender offer to purchase all of the target company’s shares or all the shares of the particular class, as applicable. If, as a result of the tender offer, the purchaser would hold more than 95% of the company’s shares or a particular class of shares, the ownership of the remaining shares will be transferred to the purchaser. However, if the purchaser is unable to purchase 95% or more of the company’s shares or class of shares, the purchaser may not own more than 90% of the shares or class of shares of the target company.




Tax Law. Israeli tax law treats some acquisitions, such as a stock-for-stock swap between an Israeli company and a foreign company, less favorably than U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in a foreign corporation to immediate taxation. Please see Item 10.E, “Additional Information – Taxation – Israeli Taxation.”




Transfer Agent and Registrar




American Stock Transfer & Trust Company is the transfer agent and registrar for our ordinary shares.




Listing




Our ordinary shares are quoted on the Nasdaq Global Select Market under the symbol “ELOS”.




Approval of Related Party Transactions under Israeli Law




Office Holders




The Companies Law codifies the fiduciary duties that office holders owe to a company. An office holder is defined as any director, managing director, general manager, chief executive officer, executive vice president, vice president, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of these positions regardless of that person’s title. Each person listed in the table under Item 6.A, “Directors, Senior Management and Employees – Directors and Senior Management” is an office holder under the Companies Law.




Fiduciary duties. An office holder’s fiduciary duties consist of a duty of loyalty and a duty of care. The duty of loyalty requires the office holder to avoid any conflict of interest between the office holder’s position in the company and personal affairs, and proscribes any competition with the company or the exploitation of any business opportunity of the company in order to receive personal advantage for himself or others. This duty also requires him or her to reveal to the company any information or documents relating to the company’s affairs that the office holder has received due to his or her position as an office holder. The duty of care requires an office holder to act with a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to use reasonable means to obtain information regarding the advisability of a given action submitted for his or her approval or performed by virtue of his or her position and all other relevant information pertaining to these actions.




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Compensation. Under the Companies Law, all compensation arrangements for office holders who are not directors require approval of the board of directors, unless the articles of association provide otherwise. Our compensation committee is required to approve the compensation of all office holders. Arrangements regarding the compensation of directors require audit committee, board and shareholder approval.




Disclosure of personal interest. The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. “Personal interest”, as defined by the Companies Law, includes a personal interest of any person in an act or transaction of the company, including a personal interest of his relative or of a corporate body in which that person or a relative of that person is a 5% or greater shareholder, a holder of 5% or more of the voting rights, a director or general manager, or in which he or she has the right to appoint at least one director or the general manager. “Personal interest” does not apply to a personal interest stemming merely from the fact of that the office holder is also a shareholder in the company.




The office holder must make the disclosure of his personal interest no later than the first meeting of the company’s board of directors that discusses the particular transaction. This duty does not apply to the personal interest of a relative of the office holder in a transaction unless it is an “extraordinary transaction”. The Companies Law defines an extraordinary transaction as a transaction not in the ordinary course of business, not on market terms or that is likely to have a material impact on the company’s profitability, assets or liabilities, and defines a relative as a spouse, sibling, parent, grandparent, descendent, spouse’s descendant and the spouse of any of the foregoing.




Approvals. The Companies Law provides that a transaction with an office holder or a transaction in which an office holder has a personal interest may not be approved if it is adverse to the company’s interest. In addition, such a transaction generally requires board approval, unless the transaction is an extraordinary transaction or the articles of association provide otherwise. If the transaction is an extraordinary transaction, or if it concerns exculpation, indemnification or insurance of an office holder, then in addition to any approval stipulated by the articles of association, approval of the company’s audit committee and the board of directors is required. Exculpation, indemnification, insurance or compensation of a director also would require shareholder approval. A director who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee may not attend that meeting or vote on that matter, unless a majority of the board of directors or the audit committee also has a personal interest in the matter. If a majority of the board of directors or the audit committee has a personal interest in the transaction, shareholder approval also would be required.




Shareholders




The Companies Law imposes the same disclosure requirements, as described above, on a controlling shareholder of a public company that it imposes on an office holder. For these purposes, a controlling shareholder is any shareholder that has the ability to direct the company’s actions, including any shareholder holding 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Two or more shareholders with a personal interest in the approval of the same transaction are deemed to be one shareholder.




Approval of the audit committee, the board of directors and our shareholders is required for:




·
extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest; and




·
employment of a controlling shareholder.




The shareholder approval must include the majority of shares voted at the meeting. In addition, either:




·
the majority must include at least one-third of the shares of the voting shareholders who have no personal interest in the transaction; or




·
the total shareholdings of those who have no personal interest in the transaction and who vote against the transaction must not represent more than 1% of the aggregate voting rights in the company.




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Under the Companies Law, a shareholder has a duty to act in good faith towards the company and other shareholders and to refrain from abusing his or her power in the company including, among other things, when voting in a general meeting of shareholders or in a class meeting on the following matters:




·
any amendment to the articles of association;




·
an increase in the company’s authorized share capital;




·
a merger; or




·
approval of related party transactions that require shareholder approval.




A shareholder has a general duty to refrain from depriving any other shareholder of their rights as a shareholder. In addition, any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or prevent the appointment of an office holder in the company is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty of fairness.




Exculpation, Indemnification and Insurance of Directors and Officers




Our Amended Articles allow us to indemnify, exculpate and insure our office holders to the fullest extent permitted by the Companies Law, provided that procuring this insurance or providing this indemnification or exculpation is approved by the audit committee and the board of directors, as well as by the shareholders where the office holder is a director. Our Amended Articles also allow us to insure or indemnify any person who is not an office holder, including any employee, agent, consultant or contractor who is not an office holder.




Under the Companies Law, a company may indemnify an office holder in respect of some liabilities, either in advance of an event or following an event. If a company undertakes to indemnify an office holder in advance of an event, the indemnification must be limited to foreseeable types of events and reasonable amounts, as determined by the board of directors.




Under the Companies Law, a company may indemnify an office holder against any monetary liability incurred in his or her capacity as an office holder whether imposed on him or her in favor of another person pursuant to a judgment, a settlement or an arbitrator’s award approved by a court. A company also can indemnify an office holder against reasonable litigation expenses including attorneys’ fees, incurred by him or her in his or her capacity as an office holder, in proceedings instituted against him or her by the company, on its behalf or by a third-party, in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for a crime that does not require proof of criminal intent. The additional case in which a reimbursement of expenses is allowed according to the Companies Law is reasonable legal fees, including attorneys fees, incurred by an Office Holder in an investigatory proceeding or other proceeding filed by a governmental authority, which has terminated without the filing of criminal charges and without imposing a fine, or with imposing a fine in lieu of a criminal charge which does not require proof of criminal intent.




Under the Companies Law, a company may obtain insurance for an office holder against liabilities incurred in his or her capacity as an office holder. These liabilities include a breach of duty of care to the company or a third-party, a breach of duty of loyalty and any monetary liability imposed on the office holder in favor of a third-party.




A company may exculpate an office holder for a breach of duty of care, but only in advance of that breach. A company may not exculpate an office holder from a breach of duty of loyalty towards the company nor from a breach of duty of care with respect to a distribution.




Under the Companies Law, however, an Israeli company may only indemnify or insure an office holder against a breach of duty of loyalty to the extent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, an Israeli company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly unless it was carried our negligently, or committed with the intent to derive an unlawful personal gain, or for a fine or forfeit levied against the office holder in connection with a criminal offense.




Our audit committee, board of directors and shareholders have resolved to indemnify our directors and officers to the extent permitted by law and by our Amended Articles for liabilities not covered by insurance and that are of certain enumerated types of events, subject to an aggregate sum equal to 50.0% of the shareholders equity outstanding at the time a claim for indemnification is made.




C.
MATERIAL CONTRACTS




For a short description of the material terms of our agreements with our manufacturers, please see Item 4.B, “Information on the Company – Business Overview – Manufacturing.”




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In February 2008, we entered into an agreement with Rakuto Bio Technologies Ltd. (RBT), an Israeli-based start-up that develops and advances a whole skin complexion whitening treatment. Under the agreement, we agreed to purchase an aggregate of 31.57% of RBT’s fully diluted share capital (excluding the warrant as described below) in consideration for up to $3 million, and received a warrant to purchase an additional 5.94% of RBT fully diluted share capital. As part of the agreement, we have exclusive worldwide distribution rights to RBT’s currently developed product. In November 2009, we entered into an agreement with a few shareholders of RBT, pursuant to which we purchased additional 9.25% of RBT’s fully diluted share capital in consideration for approximately $0.2 million. As of February 25, 2010, we hold 44.90% of RBT’s fully diluted share capital.




In November 2008, we entered into an agreement with Inlight Corp., a San Diego-based development and research company, under which we purchased 100% of Inlight’s outstanding share capital. Inlight is currently developing a CO2 laser for fractional skin rejuvenation and we expect to introduce the product in the second half of 2010.




In November 2008, we entered into a joint venture agreement for the formation of Syneron China. Our partner in Syneron China is EverCare Medical Group, the largest aesthetic hospital chain in China. Evercare operates cosmetic surgery hospitals throughout the country and has been our distributor in China for the past three and a half years. Through this new Chinese subsidiary, we are able to sell directly to medical and aesthetic professionals in China, including doctors, hospitals, medi-spas and cosmetic chains. Syneron China also provides training and after sales service and support. Syneron China currently has four offices in Beijing, Shanghai, Shengdu and Guangzhou. In addition, Syneron China established product demonstration centers in several areas in China.





On September 8, 2009, we entered into an agreement and plan of merger with Syneron Acquisition Sub, Inc., a Delaware corporation and our indirect, wholly-owned subsidiary (Acquisition Sub), and Candela Corporation, a publicly traded company incorporated under the laws of the state of Delaware. Pursuant to the merger agreement we acquired Candela through Acquisition Sub which merged with and into Candela. The transaction was completed on January 5, 2010, and Candela survived the merger as our indirect wholly-owned subsidiary. Candela shareholders received 0.2911 shares of our ordinary shares for each share of Candela common stock they owned. We issued approximately 6.7 million shares to acquire Candela.




In October 2009, we entered into a definitive agreement to acquire Primaeva Medical, Inc., an aesthetic technology firm based in Pleasanton, CA, in consideration for $7 million in cash, with potential additional consideration of up to $23 million in cash contingent on the achievement of commercial milestones. The transaction was completed on October 26, 2009. Primaeva developed a minimally invasive RF aesthetic device for the treatment of skin wrinkles and laxity. The Primaeva product, which has already received FDA clearance for wrinkle treatment, employs an innovative micro-needle electrode array housed in an advanced single-patient use applicator tip to deliver bipolar fractional radiofrequency (RF) energy directly within the reticular dermis. Its fractional treatment patterns and unique energy delivery mechanism have demonstrated noticeable skin tightening, with minimal downtime. We expect to introduce the Primaeva product in the next 12 months.




Candela's Material contracts




In August 2000, Candelaentered into an agreement to amend its license agreement with The Regents of the University of California (Regents) whereby in exchange for an exclusivity fee of approximately $1.7 million,Candela obtained exclusive license rights to the Dynamic Cooling Device (DCD) subject to certain limited license rights of Cool Touch, Inc. (Cool Touch) in the following fields of use: procedures that involve skin resurfacing and rejuvenation, vascular skin lesions, and laser hair removal. Cool Touch, a subsidiary of New Star Technology, Inc. obtained a license to the DCD on a co-exclusive basis with Candela in certain narrower fields of use. Cool Touch is restricted in its ability to assign its license rights to certain existing competitors of Candela. Pursuant to the agreement, Candela is entitled to one-half of all royalty income payable to the Regents from Cool Touch. Under the amended agreement, Candela is no longer required by the Regents to negotiate sublicenses to third parties. However, Candela is entitled to one-half of all royalties due from any other entity that licenses the DCD technology from the Regents in other fields of use. Effective as of July 3, 2005, Candela amended certain portions of its agreement with the Regents whereby for the annual license fee of $0.3 million, Candela's royalty obligation was reduced to 3% from its prior level of 6%. The annual fee of $0.3 million was paid by a lump sum of $3.0 million and is being amortized over the remaining life of the patent agreement, which as of February 25, 2010 was approximately five years.




In August of 2005, Candela entered into a distribution agreement with McKesson Medical-Surgical Inc.( McKesson), amended in September of the same year, whereby McKesson is nominated as the exclusive distributor of Candela's products listed under the agreement in the U.S., except for the following specialties and markets for which McKesson is a non-exclusive distributor – hospitals, dermatology, plastic surgery, spa, medispa (any spa employing a medical director), electrology, government organizations, rental companies, third-party resellers and/or customers of Candela that do not primarily engage in the practice of medicine, such as Ideal Image. The exclusive appointment is provided to be in effect for a period of 3 years following August 5, 2005, and to continue automatically for successive terms of 1 year each until terminated in accordance with terms of the agreement or by either party giving 90 days notice prior to the end of the applicable term. The engagement under the agreement is subject to the achievement of certain sale goals by McKesson. In the event that during a 1 year term McKesson fails to achieve 100% of the sales goal for such year but achieves 80% of such goal, the parties agree that they will establish new sale goals for the subsequent years. In the even that McKesson fails to achieve 80% of the sales goal for a certain year, Candela may terminate the agreement upon 60 days notice. The sales goal for the first year was provided at 700 product units.


In November 2007, Candela entered into Senior Officer Executive Retention Agreements with certain of its officers (Retention Agreements). The existing terms of each Retention Agreement provide, among other things, that the officer will be entitled to certain benefits in the event that (i) a change in control occurs and (ii) the executive officer's employment with Candela terminates under the conditions described below within 24 months following the date of the change in control. The consummation of the merger with Candela constituted a change in control under the terms of the Retention Agreements. Pursuant to the terms of the Retention Agreements and the merger agreement, the Retention Agreements were assumed by us upon the completion of the merger. Pursuant to the terms of the Retention Agreements, if, within 24 months following the merger, Candela (or us) terminates the officer's employment without "cause" (as defined in the Retention Agreements) or the officer terminates his employment in connection with an "involuntary termination" (which includes (i) a material diminution in the officer's authority, duties or responsibilities, (ii) a material diminution in the officer's base compensation, (iii) a material diminution in the authority, duties or responsibilities of the supervisor to whom the officer is required to report, (iv) a change by more than 50 miles in the geographic location at which the officer must perform his duties, or (v) a material breach of the terms of the officer's Retention Agreement), then:




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(i) the officer will be entitled to equal monthly payments for a period of 12 or 24 months of the officer's annual base salary multiplied by two or three;




(ii) the officer will be entitled to equal monthly payments for a period of 12 or 24 months of the officer's target annual bonus (irrespective of the level of attainment to that date of any target bonus benchmarks) multiplied by two or three;




(iii) the officer will be entitled to receive any accrued obligations owing to him by Candela, including any unpaid base salary and prorated bonus (irrespective of the level of attainment to that date of any target bonus benchmarks);




(iv) any then-unvested equity awards will immediately become exercisable and vested in full;




(v) the officer will be provided with benefits for 18 months following the officer's termination or such longer period as may be provided by the terms of the appropriate plan, program, practice, or policy;




(vi) Candela will be obligated to make a one-time payment of $5,000 to the officer to cover some or all of the lease payments remaining due on the automobile leased by Candela for use by the officer or, for one officer, Candela will continue to cover all lease payments until the end of the lease term; and




(vii) Candela will provide outplacement services with a value of up to $10,000 or $25,000 to the officer, subject to certain limitations.




The severance payments and benefits described above supersede the severance payable to each e officer under his existing Employment Agreement. Accordingly, should a termination of employment (without cause or an involuntary termination) occur within 24 months of the merger, severance payments will be made under the Retention Agreements, and not the Employment Agreements.




After the announcement of our proposed merger with Candela, on September 24, 2009 and October 30, 2009, two putative class action lawsuits were filed against Candela, the members of Candela’s board of directors and us. The Court has consolidated the two actions. The plaintiffs alleged that members of Candela’s board of directors breached fiduciary duties owed to Candela stockholders by, among other things, using an unfair or flawed process in connection with the proposed merger between Candela and us, agreeing to an all-stock transaction at an unfair price, and omitting material information and/or providing materially misleading information concerning the merger. The consolidated action further alleged that Candela and us aided and abetted the purported breaches of fiduciary duties. The complaint seeks, among other relief: an injunction against the merger; rescission of the transaction (or damages) if consummated; and an award of all costs of the actions, including reasonable attorneys’ fees and expenses. While Candela and the other defendants believe the allegations in the complaints are entirely without merit and that they have valid defenses to all claims, in an effort to minimize the cost and expense of litigation, the defendants entered into a proposed settlement with the plaintiffs, which is subject to the Court approval. The proposed settlement provides for plaintiff's release of any and all claims and causes of action alleged in the complaints, or arising out of or relating in any manner thereto, in exchange for adding in the proxy statement/prospectus relating to the proposed merger certain additional limited disclosures and reducing the termination fee payable by Candela to us under the circumstances outlined in the merger agreement from $2.6 million to $2.1 million. The defendants have also agreed not to oppose any fee application by plaintiffs’ counsel that does not exceed $260,000.




D.
EXCHANGE CONTROLS




Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, freely repatriable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of exchange controls has not been eliminated, and may be restored at any time by administrative action.




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E.
TAXATION




The following is a general summary only and should not be considered as income tax advice or relied upon for tax planning purposes.




ISRAELI TAXATION




The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some Israeli tax consequences to persons owning our ordinary shares. This summary does not discuss all the acts of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include residents of Israel, traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax considerations.




Potential investors are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, including, in particular, the effect of any foreign, state or local taxes.




General Corporate Tax Structure in Israel




Israeli companies are generally subject to corporate tax on their taxable income at the rate of 26% for the 2009 tax year. This rate was reduced to 25% in 2010 and is scheduled to be gradually reduced to 18% by 2016. Israeli companies are generally subject to capital gains tax at a corporate tax rate of 25% (in 2010). However, the effective corporate tax rate payable by a company that derives income from an Approved Enterprise/Privileged Enterprise (as further discussed below) may be considerably less.




Tax Benefits under the Law for the Encouragement of Capital Investments, 1959




Tax benefits prior to the 2005 Amendment




The Law for the Encouragement of Capital Investments, 1959, (Investments Law), provides that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry, Trade and Labor of the State of Israel, be granted the status of an Approved Enterprise. The Investment Center bases its decision as to whether or not to approve an application, among other things, on the criteria set forth in the Investments Law and related regulations, the then prevailing policy of the Investment Center, and the specific objectives and financial criteria of the applicant. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, e.g., the equipment to be purchased and utilized pursuant to the program.




The Investments Law provides that a company investing in an Approved Enterprise is eligible for tax benefits (Tax Benefits) on taxable income derived from the operations under the Approved Enterprise programs. The Tax Benefits under the Investments Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed pursuant to the Approved Enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided that such income is generated within the ordinary course of business of the company investing in the Approved Enterprise. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted average of the applicable rates. The Tax Benefits under the Investments Law are not, generally, available with respect to income derived from products manufactured outside of Israel. In addition, the Tax Benefits available to a company investing in an Approved Enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and related regulations and the criteria set forth in the specific certificate of approval, as described above. In the event that a company does not meet these conditions, it would be required to refund the amount of tax benefits, plus a consumer price index linked adjustment and interest.




The Investments Law also provides that a company investing in an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an Approved Enterprise program in the first five tax years of using the equipment.




The tax benefits call for taxable income of a company that has been granted the status of Approved Enterprise on a specific investment program to be subject to corporate tax at the maximum rate of 25%, for the benefit period. This period is ordinarily seven years, commencing with the year in which the Approved Enterprise first generates taxable income, and is limited to 12 years from commencement of production or 14 years from the date of approval, whichever is earlier (Time Limit).




Additionally, a company that has been granted the status of an Approved Enterprise on all or part of its operations may elect to receive a grant of money from the government or an alternative track of tax benefits under the Investments Law (the Alternative Track). Under the Alternative Track, a company’s undistributed income derived from the Approved Enterprise will be exempt from corporate tax for a period of between two and ten years, starting from the first year the company derives taxable income under the Approved Enterprise program. The length of time of this exemption will depend on the geographic location of the Approved Enterprise within Israel. After the exemption period lapses, the company will be eligible for the reduced tax rate discussed in the previous paragraph for the remainder of the benefit period. The Time Limit imposed on the Tax Benefit does not limit this exemption under the Alternative Track.




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The Company has elected to be taxed under the Alternative Track. A company that has elected the Alternative Track and subsequently pays a dividend out of income derived from the Approved Enterprise during the tax exemption period will be subject to corporate tax on the amount which is determined by the distributed amount grossed up with the effective corporate tax rate which would have been applied had the company not elected the Alternative Track, which is generally 10%-25%, depending on the percentage of the company’s rights (e.g., earnings and voting rights) held by foreign shareholders. Dividends paid out of income derived from an Approved Enterprise (or out of dividends received from a company whose income is derived from an Approved Enterprise) are generally subject to withholding tax at the reduced rate of 15%, if the dividend is distributed during the tax exemption period or within twelve years thereafter. In the event, however, that the company qualifies as a Foreign Investors’ Company as defined below, there is no such time limitation. The company must withhold this tax at source.




A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors’ Company. A Foreign Investors’ Company is a company where more than 25% of its share capital and combined share and loan capital are owned by non-Israeli residents. A company that qualifies as a Foreign Investors’ Company and has an Approved Enterprise program is eligible for tax benefits for a ten-year benefit period. As specified above, depending on the geographic location of the Approved Enterprise within Israel, income derived from the Approved Enterprise program, if undistributed, may be exempt from tax for a period of between two to ten years, and will be subject to a reduced tax rate for the remainder of the benefit period. The tax rate for the remainder of the benefit period will be 25%, unless the level of foreign investment exceeds 49%, in which case the tax rate will be 20% if the foreign investment is more than 49% and less than 74%; 15% if more than 74% and less than 90%; and 10% if 90% or more.




Under the Alternative Track, dividends paid by a company are considered to be attributable to income received from the entire company and the company’s effective tax rate is the result of a weighted average of the various applicable tax rates, excluding any tax-exempt income. Under the Investments Law, a company that has elected the Alternative Track is not obliged to distribute retained profits, and may generally decide from which year’s profits to declare dividends. We currently intend to reinvest any income derived fromourApproved Enterpriseprogram and not to distribute such income as a dividend.




Tax benefits under the 2005 Amendment




An amendment to the Investments Law, which effective as of April 1, 2005, has changed certain provisions of the Investments Law. The amendment includes revisions to the criteria for investments qualified to receive tax benefits as an Approved Enterprise. This amendment applies to new investment programs and investment programs commencing after 2004, and does not apply to investment programs approved prior to December 31, 2004. However, a company that was granted benefits according to section 51 of the Investments Law prior to the amendment would not be allowed to apply for benefits under the new amendment for a period of 3 years from the date of commencement of the beginning of the year the privileged enterprise was operated (reduced to a period of 2 years under certain conditions). According to the amendment, only Approved Enterprises receiving cash grants require the prior approval of the Investment Center.




The Amendment does not apply to benefits included in any certificate of approval that was granted before the amendment came into effect, which will remain subject to the provisions of the Investments Law as they were on the date of such approval.




The basic condition for receiving the benefits under this track is that the enterprise contributes to the country’s economic independence and is a competitive factor for the Gross Domestic Product (Competitive Enterprise). In order to comply with this condition, the Investment Law prescribes various requirements regarding industrial enterprises. In each tax year during the benefit period, one of the following conditions must be met:




1.
The enterprise’s main activity is in the area of biotechnology or nanotechnology as approved by the Head of the Administration of Industrial Research and Development, prior to the approval of the aforementioned plan.




2.
The enterprise’s revenues during the tax year from the plant’s sales in a certain market do not exceed 75% of total revenues from the plant’s total sales during that tax year. A “market” is defined as a distinct country or customs territory.




3.
25% or more of the enterprise’s total revenues from the plant’s sales during the tax year are from sales to a certain market that numbers at least 12 million residents.




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An industrial enterprise that sells a specific product that constitutes a component in another product manufactured by another industrial enterprise (which is, or was, a Privileged Enterprise or an Approved Enterprise), the enterprise must meet the conditions stipulated in the relevant regulations regarding the encouragement of capital investments.




In order to receive the tax benefits, the amendment states that a company must make an investment in the Privileged Enterprise exceeding a certain percentage or a minimum amount specified in the Investments Law. Such investment may be made over a period of no more than three years, ending at the end of the year in which the company requested to have the tax benefits apply to the Privileged Enterprise (Year of Election). Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Privileged Enterprise and the company’s effective tax rate will be the result of a weighted combination of the applicable rates. In this case, the minimum investment required in order to qualify as a Privileged Enterprise is required to exceed a certain percentage or a minimum amount of the company’s productive assets before the expansion.




The duration of these tax benefits is limited to the shorter of 7 or 10 years (depending on the geographic location of the Approved Enterprise within Israel) from the Commencement Year (as described below) or 12 years from the first day of the Year of Election. Commencement Year is defined as the later of the first tax year in which a company had derived liable income for tax purposes from the Privileged Enterprise, or the year of election which is the year in which a company requested to have the tax benefits apply to the Privileged Enterprise. The tax benefits granted to a Privileged Enterprise are determined, depending on the geographic location of the Privileged Enterprise within Israel, according to one of the following, which may be applicable to us:




·
Similar to the currently available Alternative Track, exemption from corporate tax may be available on undistributed income for a period of two to ten years, depending on the geographic location of the Privileged Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefit period, depending on the level of foreign investment in each year. Benefits may be granted for a term of seven to ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the Privileged Enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%) with respect to the gross amount of the dividend that we may distribute. The company is required to withhold tax on such distribution at a rate of 15%; or




·
A special track which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at a flat rate of 11.5% on income the Privileged Enterprise (Irish Track). The benefit period is for ten years. Upon payment of dividends, the company is required to withhold tax on such dividend at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents.




Generally, a company that is Abundant in Foreign Investment (owned by at least 74% foreign shareholders and has undertaken to invest a minimum sum of $20 million in the Privileged Enterprise) is entitled to an extension of the benefit period by an additional five years, depending on the rate of its income that is derived in foreign currency.




The amendment changes the definition of “foreign investment” in the Investments Law so that the definition now requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder, provided that the company’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the aforementioned definition will take effect retroactively from 2003.




As a result of the amendment, tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income.




Currently we have three approved programs under the Investments Law, which entitle us to some tax benefits. The first program under the Investments Law prior to the amendment (Approved Enterprise) and the second and third amendment (Privileged Enterprise). The above mentioned approved programs are subject to the Alternative Track provisions, which allows a ten year period of exemption of taxes for undistributed income.




A substantial portion of our taxable operating income is derived from our Approved Enterprise program and we expect that a substantial portion of any taxable operating income that we may realize in the future will be also derived from such program.




The tax benefits attributable to our current Approved Enterprise and Privileged Enterprise are scheduled to expire in phases by 2016.




If a company has elected the alternative package of benefits for an Approved Enterprise under the Investment Law prior to the 2005 amendment, it was precluded from filing a Year of Election notice for a Privileged Enterprise for three years following the year in which the Approved Enterprise was activated (Cooling Period). In November 2008, the law was amended to shorten the Cooling Period to two years.




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Law for the Encouragement of Industry (Taxes), 1969




We believe that we qualify as an “Industrial Company” within the meaning of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law. The Industry Encouragement Law defines “Industrial Company” as an Israeli resident company, of which 90% or more of its income in any tax year, other than of income from defense loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production activity.




The following corporate tax benefits, among others, are available to Industrial Companies:




·
deduction of the cost of purchasing know-how and patents and/or right to use a patent over an eight-year period;




·
accelerated depreciation rates on equipment and buildings;




·
under specified conditions, an election to file consolidated tax returns with additional related Israeli Industrial Companies and an Industrial Holding Company;




·
Expenses related to a public offering on recognized stock markets, are deductible in equal amounts over three years.




Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We cannot assure that we will continue to qualify as an “Industrial Company” or that the benefits described above will be available in the future.




Taxation of the Company Shareholders




Capital Gains




Capital gain tax is imposed on the disposal of capital assets by an Israeli resident, and on the disposal of such assets by a non- Israel resident if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights to assets located in Israel. The Israeli Income Tax Ordinance distinguishes between “Real Gain” and the “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increase in the Israeli CPI between the date of purchase and the date of disposal.




The capital gain accrued by individuals on the sale of our ordinary shares will be taxed at the rate of 20%. However, if the individual shareholder is a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with other, 10% or more of one of the Israeli resident company's means of control) at the time of sale or at any time during the preceding 12 months period such gain will be taxed at the rate of 25%. In addition, capital gain derived by an individual claiming deduction of financing expenses in respect of such gain will be taxed at the rate of 25%. The real capital gain derived by corporation will be generally subject to a corporate tax rate.




Individual and corporate shareholder dealing in securities in Israel are taxed at the tax rates applicable to business income 25% tax rate in 2010 for a corporation and a marginal tax rate of up to 45% in 2010 for individual. Notwithstanding the foregoing, capital gain derived from the sale of our ordinary shares by a non-Israeli shareholder may be exempt under the Israeli Income Tax Ordinance from Israeli taxation provided the following cumulative conditions are met: (i) the shares were purchased upon or after the registration of the securities on the stock exchange (this condition shall not apply to shares purchased on or after January 1, 2009), (i) the seller doesn't have a permanent establishment in Israel to which the derived capital gain is attributed, and (ii) if the seller is a corporation, less than 25% of its means of control are held, directly and indirectly, by Israeli resident shareholders. In addition, the sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. Thus, the U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital gain tax in connection with such sale, provided (i) the U.S. resident owned, directly or indirectly, less than 10% of an Israeli resident company's voting power at any time within the 12 month period preceding such sale; (ii) the seller, being an individual, is present in Israel for a period or periods of less than 183 days at the taxable year; and (iii) the capital gain from the sale was not derived through a permanent establishment of the U.S. resident in Israel.




Either the seller, the Israeli stockbrokers or financial institution through which the shares are held are obliged, subject to the above mentioned exemptions, to withhold tax upon the sale of securities from the real capital gain at the rate of 25% in respect of a corporation and 20% in respect of an individual.




At the sale of shares a detailed return, including a computation of the tax due, should be filed and an advanced payment should be paid on January 31 and June 31 of every tax year in respect of sales of securities made within the previous six months. However, if all tax due was withheld at source according to applicable provisions of the Israeli Income Tax Ordinance and regulations promulgated thereunder the aforementioned return should not be filed and no advance payment should be paid. Capital gain is also reportable on the annual income tax return.




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Dividends




We have never paid cash dividends and we do not intend to pay cash dividends in the foreseeable future. A distribution of dividend by our company from income attributed to an Approved Enterprise/Privileged Enterprise (either to individual or corporation) will be subject to tax in Israel at the rate of 15%, subject to a reduced rate under the provisions of any applicable double tax treaty. A distribution of dividend from income, which is not attributed to an Approved Enterprise/Privileged Enterprise to an Israeli resident individual, will generally be subject to income tax at a rate of 20%. However, a 25% tax rate will apply if the dividend recipient is a “Controlling Shareholder” at the time of distribution or at any time during the preceding 12 months period. If the recipient of the dividend is an Israeli resident corporation, such dividend will be exempt from income tax provided the income from which such dividend is distributed was derived or accrued within Israel.




Under the Israeli Income Tax Ordinance, a non-Israeli resident (either individual or corporation) is generally subject to an Israeli income tax on the receipt of dividends at the rate of 20% (25% if the dividends recipient is a “Controlling Shareholder” (as defined above), at the time of distribution or at any time during the preceding 12 months period); those rates are subject to a reduced tax rate under the provisions of an applicable double tax treaty. Thus, under the U.S.-Israel Double Tax Treaty the following rates will apply in respect of dividends distributed by an Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of the taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of the outstanding shares of the voting stock of the Israeli resident paying corporation and not more then 25% of the gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain type of interest or dividends – the tax rate is 12.5%, (ii) if both the conditions mentioned in section (i) above are met and the dividend is paid from an Israeli resident company's income which was entitled to a reduced tax rate applicable to an Approved Enterprise/Privileged Enterprise – the tax rate is 15%, and (iii) in all other cases, the tax rate is 25%. The aforementioned rates under the Israel U.S. Double Tax Treaty will not apply if the dividend income was derived through a permanent establishment of the U.S. resident in Israel.




Our company is obligated to withhold tax, upon the distribution of a dividend attributed to an Approved Enterprise's/Privileged Enterprise's income, from the amount distributed, at the following rates: (i) Israeli resident corporation – 15%, (ii) Israeli resident individual – 15%, and (iii) non-Israeli resident – 15% (4% under the Ireland Track), subject to a reduced tax rate under the provisions of an applicable double tax treaty. If the dividend is distributed from an income not attributed to the Approved Enterprise/Privileged Enterprise, the following withholding tax rates will apply: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual – 20% (iii) non-Israeli resident - 20%, subject to a reduced tax rate under the provisions of an applicable double tax treaty.




Foreign Exchange Regulations




Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, freely repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of exchange controls has not been eliminated, and may be restored at any time by administrative action.




UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS




The following is a summary of the material U.S. federal income tax consequences of the ownership and disposition of ordinary shares. The following discussion is not exhaustive of all possible tax considerations. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations), rulings, current administrative interpretations and official pronouncements of the Internal Revenue Service (the “IRS”), and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, possibly with retroactive effect. Such change could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.




This discussion does not address state, local, or foreign tax consequences of the ownership and disposition of ordinary shares. See “Israeli Taxation” above.




This summary is for general information only and does not address all aspects of the U.S. federal income taxation that may be important to a particular holder in light of its investment or tax circumstances or to holders subject to special tax rules, such as: banks; financial institutions; insurance companies; dealers in stocks, securities, or currencies; traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; tax-exempt organizations; real estate investment trusts; regulated investment companies; qualified retirement plans, individual retirement accounts, and other tax-deferred accounts; expatriates of the United States; persons subject to the alternative minimum tax; persons holding ordinary shares as part of a straddle, hedge, conversion transaction, or other integrated transaction; persons who acquired ordinary shares pursuant to the exercise of any employee stock option or otherwise as compensation for services; persons actually or constructively holding 10% or more of our voting stock; and U.S. Holders (as defined below) whose functional currency is other than the U.S. dollar.




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This discussion is not a comprehensive description of all of the U.S. federal tax consequences that may be relevant with respect to the ownership and disposition of our ordinary shares. We urge you to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of owning and disposing of ordinary shares, as well as any tax consequences arising under the laws of any state, local, or foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.




This summary is directed solely to holders that hold their ordinary shares as capital assets within the meaning of Section 1221 of the Code, which generally means as property held for investment. For purposes of this discussion, the term “U.S. Holder” means a beneficial owner of ordinary shares that is any of the following:




§
a citizen or resident of the United States or someone treated as a U.S. citizen or resident for U.S. federal income tax purposes;




§
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;




§
an estate, the income of which is subject to U.S. federal income taxation regardless of its source;




§
a trust if a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust; or




§
a trust in existence on August 20, 1996, that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.




The term “Non-U.S. Holder” means a beneficial owner of an ordinary share who is not a U.S. Holder. The tax consequences to a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder. Certain aspects of U.S. federal income tax relevant to a Non-U.S. Holder also are discussed below.




If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of ordinary shares, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A holder of ordinary shares that is a partnership and partners in such partnership should consult their own tax advisors about the U.S. federal income tax consequences of holding and disposing of ordinary shares.




Distributions Paid on the Ordinary Shares




We have never paid cash dividends and we do not intend to pay cash dividends in the foreseeable future. Subject to the discussion below under “Passive Foreign Investment Company Considerations,” a U.S. Holder generally will be required to include in gross income as ordinary dividend income the amount of any distributions paid on the ordinary shares, including the amount of any Israeli taxes withheld, to the extent that those distributions are paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Subject to the discussion below under “Passive Foreign Investment Company Considerations,” distributions in excess of our earnings and profits will be applied against and will reduce (but not below zero) the U.S. Holder’s tax basis in its ordinary shares and, to the extent they exceed that tax basis, will be treated as gain from a sale or exchange of those ordinary shares. Our dividends will not qualify for the dividends-received deduction applicable in some cases to U.S. corporations. Dividends paid in NIS, including the amount of any Israeli taxes withheld, will be includible in the income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day they are received by the U.S. Holder. Any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend is includible in the income of the U.S. Holder to the date that payment is converted into U.S. dollars generally will be treated as ordinary income or loss.




For tax years beginning before January 1, 2011, a non-corporate U.S. Holder’s “qualified dividend income” is subject to tax at reduced rates not exceeding 15%. “Qualified dividend income” generally includes dividends paid by a foreign corporation if either:




·
The stock of that corporation with respect to which the dividends are paid is readily tradable on an established securities market in the U.S., or




·
That corporation is eligible for benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The Internal Revenue Service has determined that the U.S.-Israel Tax Treaty is satisfactory for this purpose.




In addition, under current law a U.S. Holder must generally hold his ordinary shares for more than 60 days during the 121 day period beginning 60 days prior to the ex-dividend date.




Dividends paid by a foreign corporation will not qualify for the reduced rates, however, if such corporation is treated, for the tax year in which the dividend is paid or the preceding tax year, as a “passive foreign investment company” for U.S. federal income tax purposes. We do not believe that we will be classified as a “passive foreign investment company” for U.S. federal income tax purposes for our current taxable year. However, see the discussion under “Passive Foreign Investment Company Considerations” below.




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Subject to the discussion below under “Information Reporting and Back-up Withholding,” a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on dividends received on ordinary shares unless that income is effectively connected with the conduct by that Non-U.S. Holder of a trade or business in the United States.




Foreign Tax Credit




Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from taxable income or credited against a U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed with respect to the ordinary shares will generally constitute “passive category income” or, in the case of certain U.S. Holders, “general category income”. Any dividend income resulting from distributions we pay to a U.S. Holder with respect to the ordinary shares generally will be treated as foreign source income for U.S. foreign tax credit purposes; however, special rules will apply if we are a “United States-owned foreign corporation.” In that case, distributions of current or accumulated earnings and profits will be treated as U.S. source and foreign source income in proportion to our earnings and profits in the year of the distribution allocable to U.S. and foreign sources. We will be treated as a U.S.-owned foreign corporation as long as stock representing 50% or more of the voting power or value of our ordinary shares is owned, directly or indirectly, by U.S. persons. Foreign taxes allocable to the portion of our distributions treated as from U.S. sources under these rules may not be creditable against a U.S. Holder’s U.S. federal income tax liability on such portion. The rules relating to the determination of foreign source income and the foreign tax credit are complex, and availability of a foreign tax credit depends on numerous factors. Each U.S. Holder should consult with its own tax advisor to determine whether its income with respect to the ordinary shares would be foreign source income and whether and to what extent that U.S. Holder would be entitled to the credit.




Disposition of Ordinary Shares




Upon the sale or other disposition of ordinary shares, subject to the discussion below under “Passive Foreign Investment Company Considerations,” a U.S. Holder generally will recognize capital gain or loss equal to the difference between the amount realized on the disposition and the holder’s adjusted tax basis in the ordinary shares. U.S. Holders should consult their own advisors with respect to the tax consequences of the receipt of a currency other than U.S. dollars upon such sale or other disposition.




In the event there is an Israeli income tax on gain from the disposition of ordinary shares, such tax should generally be the type of tax that is creditable for U.S. tax purposes; however, because it is likely that the source of any such gain would be a U.S. source, a U.S. foreign tax credit may not be available. U.S. Holders should consult their own tax advisors regarding the ability to claim such credit.




Gain or loss upon the disposition of the ordinary shares will be treated as long-term if, at the time of the sale or disposition, the ordinary shares were held for more than one year. For tax years beginning before January 1, 2011, long-term capital gains realized by non-corporate U.S. Holders are generally subject to a lower marginal U.S. federal income tax rate than ordinary income, other than qualified dividend income, as defined above. The deductibility of capital losses by a U.S. Holder is subject to limitations. In general, any gain or loss recognized by a U.S. Holder on the sale or other disposition of ordinary shares will be U.S. source income or loss for U.S. foreign tax credit purposes. U.S. Holders should consult their own tax advisors concerning the source of income for U.S. foreign tax credit purposes and the effect of the U.S.-Israel Tax Treaty on the source of income.




Subject to the discussion below under “Information Reporting and Back-up Withholding”, a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or exchange of ordinary shares unless:




·
that gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States, or




·
in the case of any gain realized by an individual Non-U.S. Holder, that holder is present in the United States for 183 days or more in the taxable year of the sale or exchange, and other conditions are met.




Passive Foreign Investment Company Considerations




Special U.S. federal income tax rules apply to U.S. Holders owning shares of a passive foreign investment company. A non-U.S. corporation will be considered a passive foreign investment company for any taxable year in which, after applying look-through rules, 75% or more of its gross income consists of specified types of passive income, or 50% or more of the average value of its assets consists of passive assets, which generally means assets that generate, or are held for the production of, passive income. Passive income may include amounts derived by reason of the temporary investment of funds. If we were classified as a passive foreign investment company, a U.S. Holder could be subject to increased tax liability upon the sale or other disposition of ordinary shares or upon the receipt of amounts treated as “excess distributions.” Under these rules, the excess distribution and any gain would be allocated ratably over the U.S. Holder’s holding period for the ordinary shares, and the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a passive foreign investment company would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. The tax liability with respect to the amount allocated to years prior to the year of the disposition, or “excess distribution,” cannot be offset by any net operating losses. In addition, holders of stock in a passive foreign investment company may not receive a “step-up” in basis on shares acquired from a decedent. U.S. Holders who hold ordinary shares during a period when we are a passive foreign investment company will be subject to the foregoing rules even if we cease to be a passive foreign investment company.




70





We believe that we are not a passive foreign investment company for U.S. federal income tax purposes, but we cannot be certain whether we will be treated as a passive foreign investment company for the current year or any future taxable year. Our belief that we will not be a passive foreign investment company for the current year is based on our estimate of the fair market value of our intangible assets, including goodwill, not reflected in our financial statements under U.S. GAAP, and our projection of our income for the current year. If the IRS successfully challenged our valuation of our intangible assets, it could result in our classification as a passive foreign investment company. Moreover, because passive foreign investment company status is based on our income and assets for the entire taxable year, it is not possible to determine whether we will be a passive foreign investment company for the current taxable year until after the close of the year. In the future, in calculating the value of our intangible assets, we will value our total assets, in part, based on our total market value determined using the average of the selling price of our ordinary shares on the last trading day of each calendar quarter. We believe this valuation approach is reasonable. While we intend to manage our business so as to avoid passive foreign investment company status, to the extent consistent with our other business goals, we cannot predict whether our business plans will allow us to avoid passive foreign investment company status or whether our business plans will change in a manner that affects our passive foreign investment company status determination. In addition, because the market price of our ordinary shares is likely to fluctuate and the market price of the shares of technology companies has been especially volatile, and because that market price may affect the determination of whether we will be considered a passive foreign investment company, we cannot assure that we will not be considered a passive foreign investment company for any taxable year.




The passive foreign investment company rules described above will not apply to a U.S. Holder if the U.S. Holder makes an election to treat us as a qualified electing fund. However, a U.S Holder may make a qualified electing fund election only if we furnish the U.S. Holder with certain tax information. We currently do not provide this information, and we do not intend to take actions necessary to permit you to make a qualified electing fund election in the event we are determined to be a passive foreign investment company. As an alternative to making this election, a U.S. Holder of passive foreign investment company stock which is publicly traded may in certain circumstances avoid certain of the tax consequences generally applicable to holders of a passive foreign investment company by electing to mark the stock to market annually and recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the passive foreign investment company stock and the U.S. Holder’s adjusted tax basis in the passive foreign investment company stock. Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. Holder under the election for prior taxable years. This election is available for so long as our ordinary shares constitute “marketable stock,” which includes stock of a passive foreign investment company that is “regularly traded” on a “qualified exchange or other market.” Generally, a “qualified exchange or other market” includes a national market system established pursuant to Section 11A of the Securities Exchange Act of 1934. A class of stock that is traded on one or more qualified exchanges or other markets is “regularly traded” on an exchange or market for any calendar year during which that class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. We believe that the Nasdaq Global Select Market will constitute a qualified exchange or other market for this purpose. However, no assurances can be provided that our ordinary shares will continue to trade on the Nasdaq Global Select Market or that the shares will be regularly traded for this purpose.




The rules applicable to owning shares of a passive foreign investment company are complex, and each prospective purchaser who would be a U.S. Holder should consult with its own tax advisor regarding the consequences of investing in a passive foreign investment company.




Information Reporting and Back-up Withholding




Generally, information reporting requirements will apply to distributions on ordinary shares or proceeds on the disposition of ordinary shares paid within the United States (and, in certain cases, outside the United States) to U.S. Holders other than certain exempt recipients, such as corporations. Furthermore, backup withholding (currently at 28%) may apply to such amounts if the U.S. Holder fails to (i) provide a correct taxpayer identification number, (ii) report interest and dividends required to be shown on its U.S. federal income tax return, or (iii) make other appropriate certifications in the required manner. U.S. Holders who are required to establish their exempt status generally must provide such certification on IRS Form W-9.




Payments to Non-U.S. Holders of distributions on, or proceeds from the disposition of, ordinary shares are generally exempt from information reporting and backup withholding. However, a Non-U.S. Holder may be required to establish that exemption by providing certification of non-U.S. status on an appropriate IRS Form W-8.




71





Backup withholding is not an additional tax. Amounts withheld as backup withholding from a payment to you may be credited against your U.S. federal income tax liability and you may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.




F.
DIVIDENDS AND PAYING AGENTS




Not applicable.




G.           STATEMENT BY EXPERTS




Not applicable.




H.           DOCUMENTS ON DISPLAY




A copy of each report submitted in accordance with applicable United States law is available for public review at our principal executive offices. In addition, our filings with the Securities and Exchange Commission may be inspected without charge at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public from the SEC’s website at www.sec.gov.




A copy of each document (or a translation thereof to the extent not in English) concerning Syneron Medical Ltd. that is referred to in this Annual Report on Form 20-F, is available for public view (subject to confidential treatment of certain agreements pursuant to applicable law) at our principal executive offices.




I.
SUBSIDIARY INFORMATION




Not applicable.




ITEM11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Exchange Rate Risk. A significant portion of our operations is conducted through operations in countries other than the United States and Israel. Revenues from our international operations which were recorded in U.S. dollars represented 80% of our total revenues for the year ended December 31, 2009. Substantially all of the remaining 20% were sales in Euros. Since we conduct our business in U.S. dollars, our main exposure, if any, results from changes in the exchange rate between the Euro and the U.S. dollar and NIS and U.S. dollar. Our functional currency is the U.S. dollar. Our policy is to reduce exposure to exchange rate fluctuations by having most of our assets and liabilities, as well as most of our revenues and expenditures, in U.S. dollars, or U.S. dollar linked. Therefore, we believe that the potential loss that would result from an increase or decrease in the exchange rate may have a material impact on us.




Interest Rate Risk. We do not have any outstanding loans and therefore, our exposure to market risk for changes in interest rate relates primarily to our investments in cash, marketable securities and bank deposits. The primary objective of our investment activities is to preserve principal while maximizing the interest income we receive from our investments, without increasing risk. We invest approximately 12% of our cash balances in bank deposits and the remainder primarily in securities issued by the United States, by non-U.S. governments and by high quality U.S and non U.S corporations featuring high credit rating of A and up. We do not use derivative financial instruments to limit exposure to interest rate risk. Our interest gains may decline in the future as a result of changes in the financial markets; however we believe any such potential loss would be immaterial to us.




Our investment portfolio of cash equivalents, corporate securities, and governmental debt securities is subject to interest rate fluctuations. At December 31, 2009, we held $8.9 million in auction-rate securities (ARS). The ARS we invest in are mainly high quality securities. At December 31, 2007, because of the short-term nature of our investment in these securities, they were classified as available-for-sale and included in short-term investments on our consolidated balance sheets. Subsequent to December 31, 2007, our securities failed at auction due to a decline in liquidity in the ARS and other capital markets. We will not be able to access our investments in ARS until future auctions are successful, ARS are called for redemption by the issuers, or until sold in a secondary market. As our investments in ARS currently lack short-term liquidity, we have reclassified these investments as non-current as of December 31, 2009. During fiscal year 2009, we sold approximately $0.8 million of the ARS held at December 31, 2008. The recovery of the remaining $8.9 million ARS held is based upon market factors which are not within our control.






ITEM12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES




Not applicable.




72





PARTII




ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES




Not applicable.




ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS




At the closing of our initial public offering of our ordinary shares on August 11, 2004, all of our outstanding preferred shares were converted into ordinary shares. Amendments to articles of incorporation (relating only to ordinary shares and allowing, for example, free transferability of shares) became effective upon the closing of our initial public offering. Since our initial public offering, no instruments defining the rights of our ordinary shares’ holders have been modified.




Pursuant to our initial public offering, we sold an aggregate of 5,000,000 ordinary shares at a per share offering price of $12.00. Our net aggregate proceeds (after underwriting discount and expenses) amounted to approximately $54 million. The amount of the underwriting discount paid by us in the initial public offering was approximately $4.2 million and the expenses of the offering, not including the underwriting discount, were approximately $2.0 million, consisting of, among other things, SEC registration fees, NASD filings fees, Nasdaq Global Select Market listing fees, Israel stamp duty and legal and accounting fees. The payments of these expenses did not constitute direct or indirect payments to our directors, officers, major shareholders or affiliates.




To date, the net proceeds of the offering were invested in term deposits in U.S. banks, government bonds and corporate bonds in accordance with our investment guidelines as adopted by our audit committee. We still intend to use the proceeds in the manner set forth in our prospectus of August 5, 2004.




ITEM 15.
CONTROLS AND PROCEDURES




(a)        Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009, pursuant to Rule 13a-15 under the Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer (the principal executive and principal financial officer, respectively) have concluded that our disclosure controls and procedure are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.




(b)        Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal control over financial reporting is defined as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes policies and procedures that:




·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;




·
provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles;




·
provide reasonable assurance that receipts and expenditures are made only in accordance with authorizations of our management and board of directors (as appropriate); and




·
provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.




Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2009, based on the framework for Internal Control-Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that the Company’s internal controls over financial reporting were effective as of December 31, 2009.




Our independent registered public accounting firm, Kost, Forer, Gabbay & Kasierer an independent registered public accounting firm and a member firm of Ernst & Young Global has issued an attestation report on our internal controls over financial reporting, and is incorporated herein by reference. There were no changes in our internal control over financial reporting identified with the evaluation thereof that occurred during the period covered by this Annual Report on Form 20-F that have materially affected, or are reasonable likely to materially affect our internal control over financial reporting.




73




ITEM16A.
AUDIT COMMITTEE FINANCIAL EXPERT




Our board of directors has determined that Dr. Michael Anghel, who is an independent director (as defined under Rule 5605(a)(2) of The Nasdaq Marketplace Rules) and serves on our audit committee, qualifies as an “audit committee financial expert” as defined in Item 16A of Form 20-F.




ITEM 16B.
CODE OF ETHICS




In 2004, we adopted a Code of Business Conduct and Ethics, which applies to our directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer, principal accounting officer or controller, and persons performing similar functions. In February 2008, the Code of Business Conduct and Ethics was reapproved by our board of directors. The Code of Business Conduct and Ethics is posted on our website, www.syneron.com.




ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES




During the years 2008 and 2009, we were billed the following aggregate fees for the professional services rendered by Ernst & Young, independent registered public accounting firm:




2008

(in thousands)

2009

(in thousands)Audit Fees(1)
595


614Tax Fees(2)
170


82Audit Related Fees(3)
162


295Total
927


991




(1)
Audit fees are fees for audit services for each of the years shown in this table, including fees associated with the annual audit (including audit of our internal control over financial reporting), consultations on various accounting issues and audit services provided in connection with other statutory or regulatory filings.




(2)
Tax services rendered by our auditors were for tax compliance and for tax consulting associated with international transfer pricing.




(3)
Audit related services rendered by Ernst & Young during 2009 were mostly in connection with due diligence review conducted with respect to potential acquisitions and F-4 filling.





Our audit committee has adopted a policy for pre-approval of audit and non-audit services provided by our independent auditor. Under the policy, such services must require the specific pre-approval of our audit committee followed by ratification of our full board of directors. Any proposed services exceeding the pre-approval amounts for all services to be provided by our independent auditor require an additional specific pre-approval by our audit committee.




ITEM16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES




Not applicable.




ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS




Through February 25, 2010, we spent an aggregate of $9.1 million to repurchase 588,700 ordinary shares under our share repurchase program. The following table provides information regarding our repurchases of our ordinary shares for each month included in the period covered by this Annual Report on Form 20-F:




Period
(a) Total Number

of Ordinary

Shares Purchased

(b) Average

Price Paid per

Ordinary Share
(c) Total Number of

Ordinary Shares

Purchased as Part

of

Publicly Announced

Plans or Programs

(d) Approximate

Dollar

Value of Shares

that

May Yet Be

Purchased

Under the Plans or

Programs (in

thousands)November 1 - November 30, 2007
209,000

$
15.622

209,000

$
46,735December 1 - December 31, 2007
257,000


15.272

466,000


42,810March 1 - March 31, 2008
122,700


15.701

588,700


40,884




74





ITEM16F.
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT





None.




ITEM 16G.
CORPORATE GOVERNANCE





There are no significant ways in which our corporate governance practices differ from those followed by domestic companies listed on The NASDAQ Global Market.




PART III


ITEM 17.
FINANCIAL STATEMENTS





Not applicable.




ITEM 18.
FINANCIAL STATEMENTS





Our and our subsidiary’s Consolidated Financial Statements beginning on pages F-1 through F-52, as set forth in the following index, are hereby incorporated herein by reference. These Consolidated Financial Statements are filed as part of this Annual Report on Form 20-F.




Report of Independent Registered Public Accounting Firm
F-2Report of Independent Registered Public Accounting Firm On Internal Control Over Financial Reporting
F-3Consolidated Balance Sheets
F-4 F-5Consolidated Statements of Income
F-6Consolidated Statements of Changes in Shareholders’ Equity
F-7-F-9Consolidated Statements of Cash Flows
F-10-F-11Notes to Consolidated Financial Statements
F-12-F-52




75







ITEM19.       EXHIBITS




1.1
Articles of Association of Registrant, as amended (incorporated by reference to Exhibit 1.1 to our Annual Report on Form 20-F for the year ended December 31, 2007, filed May 7, 2008).




2.1
Form of Share Certificate (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form F-1 filed July 14, 2004).




4.1
Turn-Key Manufacturing Agreement by and between Syneron Medical Ltd. and U.S.R. Electronics Systems (1987) Ltd. (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form F-1/A filed August 3, 2004)**.




4.2
Turn-Key Manufacturing Agreement by and between Syneron Medical Ltd. and Fibernet Ltd. (incorporated by reference to Exhibit 10.3 to our Registration Statement on Form F-1/A filed August 3, 2004)**.




4.3*
Amended and Restated License Agreement between Candela Corporation and The Regents of the University of California for Dynamic Skin Cooling Method and Apparatus effective as of August 11, 2000**.




4.4*
Settlement Agreement dated August 11, 2000 by and among Candela Corporation, the Regents of the University of California, and Cool Touch, Inc*.




4.5
Patent License and Settlement Agreement dated March 4, 2004 by and between (a) Lumenis Inc. and Lumenis Ltd. and (b) Syneron Inc. and Syneron Medical Ltd. (incorporated by reference to Exhibit 10.4 to our Registration Statement on Form F-1/A filed August 3, 2004)**.




4. 6*
Candela Corporation's1998 Third Amended and Restated Stock Plan.




4.7
2003 Stock Option Plan (incorporated by reference to Exhibit 10.5 to our Registration Statement on Form F-1 filed July 14, 2004).




4.8
2004 Israel Stock Option Plan (incorporated by reference to Exhibit 10.6 to our Registration Statement on Form F-1 filed July 14, 2004).




4.9
2004 United States and Canada Stock Option Plan (incorporated by reference to Exhibit 10.7 to our Registration Statement on Form F-1 filed July 14, 2004).




4.10*
Candela Corporation's 2008 Stock Plan.




4.11*
Form of Candela Corporation 2008 Stock Plan Notice of Stock Appreciation Right Grant.




4.12*
Lease for premises at 530 and 534 Boston Post Road, Wayland, Massachusetts.




4.13
Patent License and Settlement Agreement dated as of June 3, 2005 by and between Thermage, Inc. and Syneron Medical Ltd. (incorporated by reference to Exhibit 4.8 to our Annual Report on Form 20-F for the year ended December 31, 2004 filed July 30, 2005).




4.14*
First Amendment to the Amended and Restated License Agreement dated as of July 3, 2005, by and between the Regents of the University of California and Candela Corporation.




4.15 *
Distribution Agreement dated as of August 5, 2005, by and between McKesson Medical-Surgical Inc. and Candela Corporation.




4.16*
Candela Corporation's Senior Officer Executive Retention Agreement.




4.17
Joint Development and Supply Framework Agreement dated as of February 25, 2007, by and between The Procter & Gamble Company and Syneron Medical Ltd. (incorporated by reference to Exhibit 4.9 to our Annual Report on Form 20-F for the year ended December 31, 2006 filed June 15, 2007)**.




4.18
Shareholders' Rights Agreement dated as of November 11, 2008, by and between Syneron Medical Ltd. and American Stock Transfer & Trust Company, LLC (incorporated by reference to Exhibit 99.1 to our Report of Foreign Private Issuer on Form 6-K, filed November 12, 2008) .




4.19
Agreement and Plan of Merger, dated as of September 8, 2009, among Syneron Medical Ltd., Syneron Acquisition Sub, Inc. and Candela Corporation (incorporated by reference to Annex A to the proxy statement/prospectus included in our Registration Statement on Form F-4 filed November 23, 2009).




76




4.20
Amendment No. 1 to Agreement and Plan of Merger, dated as of November 23, 2009, by and among Syneron Medical Ltd., Syneron Acquisition Sub, Inc. and Candela Corporation (incorporated by reference to Annex A-1 to the proxy statement/prospectus included in our Registration Statement on Form F-4 filed November 23, 2009).




8.1*
List of Subsidiaries of the Registrant.




12.(a).1*
Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.




12.(a).2*
Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.




13.(a).1*
Certifications of the Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




15.(a).1*
Consent of Independent Registered Public Accounting Firm.







*
Filed herewith.




**
Portions of this exhibit have been omitted and filed separately with the secretary of the Securities and Exchange Commission pursuant to a confidential treatment request.




77





SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 Consolidated
 Financial Statements
 
 As of December 31, 2009
 
 U.S. Dollars in thousands
 
 
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
  Consolidated
 Financial Statements
 As of December 31, 2009
 
 U.S. Dollars in thousands
  C O N T E N T S
  P a g eReport of Independent Registered Public Accounting Firm

F-2Report of Independent Registered Public Accounting Firm On Internal Control Over Financial Reporting

F-3Consolidated Balance Sheets

F-4 – F-5Consolidated Statements of Operation

F-6Statements of Changes in Shareholders' Equity and Comprehensive income (loss)

F-7 –F-9Consolidated Statements of Cash Flows

F-10-F-11Notes to the Consolidated Financial Statements

F-12-F-57
 
 F - 1
  
 Kost Forer Gabbay & Kasierer

2 Pal-Yam Ave.

Haifa 33095, Israel

Tel:  972 (4)8654000

Fax:  972(3)5633443

www.ey.com.il
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Board of Directors and Shareholders of
 
 SYNERON MEDICAL LTD.
 
 We have audited the accompanying consolidated balance sheets of Syneron Medical Ltd. (the "Company") and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
 
 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 25, 2010 expressed an unqualified opinion thereon.
 
 As discussed in Note 2 to the consolidated financial statements, the Company adopted new guidance on accounting for business combinations and non controlling interests during the year ended December 31, 2009.
  Haifa, Israel
KOST FORER GABBAY & KASIERERMarch 25, 2010
A Member of Ernst & Young Global
 
 F - 2
 
 Kost Forer Gabbay & Kasierer

2 Pal-Yam Ave.

Haifa 33095, Israel

Tel:  972 (4)8654000

Fax:  972(3)5633443

www.ey.com.il
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Board of Directors and Shareholders of
 
 SYNERON MEDICAL LTD.
  We have audited Syneron Medical Ltd.'s (the "Company") internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO criteria"). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Form 20-F. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
 
 We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
 A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
 
 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 In our opinion, the Company maintained in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
 
 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Syneron Medical Ltd. and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2009 and our report dated March 25, 2010 expressed an unqualified opinion thereon.
  Haifa, Israel
KOST FORER GABBAY & KASIERERMarch 25, 2010
A Member of Ernst & Young Global
  F - 3
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESCONSOLIDATED BALANCE SHEETSU.S. dollars in thousands
 
 December 31,Note


2009


2008ASSETSCURRENT ASSETS:Cash and cash equivalents




$
24,372


$
72,366Short-term bank deposit





1,000



-Available-for-sale marketable securities


3



169,309



117,342Trade receivables (net of allowance for doubtful accounts of $7,561

and $5,876 as of December 31, 2009 and 2008, respectively)






13,758



32,637Other accounts receivable, prepaid expenses and other


5



2,753



4,249Inventories


6



8,592



12,660Total Current Assets






219,784



239,254LONG-TERM ASSETS:Severance pay fund






246



107Long-term deposits and others






221



180Long-term available-for-sale marketable securities


3



11,449



27,214Investments in affiliated companies


7



1,050



4,225Property and equipment, net


8



2,885



3,656Intangible assets, net


9



19,522



3,828Goodwill


10



15,110



2,822Total Long-Term Assets






50,483



42,032Total Assets





$
270,267


$
281,286
  The accompanying notes are an integral part of the consolidated financial statements.
 F - 4
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESCONSOLIDATED BALANCE SHEETSU.S. dollars in thousands, except share and per share data
 
 December 31,Note


2009


2008LIABILITIES AND EQUITYCURRENT LIABILITIES:Trade payables




$
3,735


$
8,675Other accounts payable and accrued expenses


11



30,153



25,587Total Current Liabilities






33,888



34,262LONG-TERM LIABILITIES:Deferred revenues






902



3,140Warranty accruals






558



1,117Contingent consideration


1G



7,331



--Accrued severance pay






330



171Total Long-Term Liabilities






9,121



4,428Total Liabilities






43,009



38,690EQUITY:


13Syneron Medical shareholders’ equityOrdinary shares of NIS 0.01 par value:Authorized – 100,000,000 Ordinary shares; Issued and

outstanding-  27,601,264 and  27,472,775 shares as of December

31, 2009 and 2008, respectively






65



64Additional paid-in capital






102,937



98,125Treasury shares 1,251,574 Ordinary shares as of December 31,

2009 and 2008.






(9,587
)


(9,587
)Accumulated other comprehensive loss






(9
)


(344
)Retained earnings






130,751



154,338Total Syneron  Shareholders’ Equity






224,157



242,596Noncontrolling Interest


1F,1H



3,101



-Total Equity






227,258



242,596Total Liabilities and Equity





$
270,267


$
281,286
  The accompanying notes are an integral part of the consolidated financial statements.
 F - 5
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSU.S. dollars in thousands, except share and per share data
  Year Ended December 31,Note


2009


2008


2007Revenues


16


$
54,726


$
114,979


$
140,996Cost of revenues






18,903



29,670



26,995Gross profit






35,823



85,309



114,001Operating expenses, net:Research and development






13,220



13,783



12,511Selling and marketing






34,156



54,064



58,605General and administrative






16,478



17,706



11,860Legal settlement, net of legal cost


12



(3,975
)


-



-Total operating expenses, net






59,879



85,553



82,976Operating (loss) income






(24,056
)


(244
)


31,025Financial income, net


15



2,097



3,862



3,254Other income


1F, 1H



562



-



-Income (loss) before taxes on income (benefits)






(21,397
)


3,618



34,279Taxes on income (benefits)


14



3,240



(2,009
)


3,035Consolidated net income (loss)






(24,637
)


5,627



31,244Plus: Net loss attributable to noncontroling interest


1F,1H



1,050



-



-Net income (loss) attributable to Syneron's shareholders





$
(23,587
)

$
5,627


$
31,244Net (loss) earnings per share:Basic net (loss) earnings per share attributable to Syneron shareholders





$
(0.86
)

$
0.21


$
1.13Diluted net (loss) earnings per share attributable to Syneron shareholders





$
(0.86
)

$
0.20


$
1.12Weighted average number of shares used in per share

calculations (in thousands):Basic






27,526



27,410



27,690Diluted






27,526



27,521



27,880
  The accompanying notes are an integral part of the consolidated financial statements.
 F - 6
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESSTATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)U.S. dollars in thousands
  Syneron Medical Ltd. ShareholdersAccumulatedother














TotalOrdinary

shares


Additional

paid-in capital


comprehensive income (**)


Treasury

Shares


Retained

earnings


Noncontrolling

Interest


Total

equity


comprehensive

income (loss)Balance as of  January 1, 2009

$
64


$
98,125


$
(344
)

$
(9,587
)

$
154,338



-


$
242,596Exercise of stock options

$
1



547



-



-



-



-



548Issuance of shares as a result of

exercise of restrictedstock units (RSU)


*
)


1



-



-



-



-



1Equity based compensation expenses


*
)


4,264



-



-



-



-



4,264Noncontrolling interest recorded as a result of

businesscombination (see also Notes 1F, 1H)


-



-



-



-



-



4,151



4,151Other comprehensive income:Unrealized gain on available-for-sale securities


-



-



342



-



-



-



342


$
342Reclassification to income statement for

gain realized


-



-



(7
)


-



-



-



(7
)Net loss


-



-



-



-



(23,587
)


(1,050
)


(24,637
)


(24,637
)Total comprehensive income





























$
(24,295
)Balance as of  December 31, 2009

$
65


$
102,937


$
(9
)

$
(9,587
)

$
130,751


$
3,101


$
227,258
 
 *)       Represents an amount lower than $1.
 **)
Accumulated other comprehensive loss on account of unrealized losses on available-for-sale marketable securities.
 
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 7
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESSTATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)U.S. dollars in thousands
  Syneron Medical Ltd. ShareholdersAccumulatedAdditional


other














TotalOrdinary


paid-in


comprehensive


Treasury


Retained


Noncontrolling


Total


comprehensiveshares


capital


loss **)


shares


earnings


interest


equity


incomeBalance as of  January 1, 2008

$
64


$
89,941


$
(83
)

$
(7,660
)

$
148,573


$
-


$
230,835Exercise of stock options


*
)


2



-



-



-



-



2Issuance of shares as a result of exercise

of restrictedstock units (RSU)


*
)


2



-



-



-



-



2Equity based compensation expenses


-



7,592



-



-



-



-



7,592Repurchase of Ordinary shares at cost


-



-



-



(1,927
)


-



-



(1,927
)Accretion to redemption of value of put option

(see also Note 1C)


-



-



-



-



138



-



138Reimbursement of share issuance expenses

(see also Note 13A(4))


-



588



-



-



-



-



588Other comprehensive income:Unrealized loss on available-for-sale securities


-



-



(558
)


-



-



-



(558
)

$
(558
)Reclassification to income statement for

loss realized


-



-



297



-



-



-



297Net income


-



-



-



-



5,627



-



5,627



5,627Total comprehensive income





























$
5,069Balance as of  December 31, 2008

$
64


$
98,125


$
(344
)

$
(9,587
)

$
154,338


$
-


$
242,596
  *)
Represents an amount lower than $1.
 **)
Accumulated other comprehensive loss on account of unrealized losses on available-for-sale marketable securities.
   F - 8
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESSTATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)U.S. dollars in thousands
  Syneron Medical Ltd. ShareholdersOrdinary

shares


Additional

paid-in capital


Accumulated

other

comprehensive income (**)


Treasury

Shares


Retained

earnings


Noncontrolling

Interest


Total

equity


Total

comprehensive

income (loss)Balance as of  January 1, 2007Exercise of stock options

$
63


$
78,663


$
(1,197
)

$
(461
)

$
117,329


$
-


$
194,397Issuance of shares as a result of exercise of

restricted stock units (RSU)


1



3,468



-



-



-



-



3,469Equity based compensation expenses


*
)


1



-



-



-



-



1Repurchase of Ordinary shares at cost


-



7,809



-



-



-



-



7,809Other comprehensive income:


-



-



-



(7,199
)


-



-



(7,199
)Unrealized gain on available-for-sale

securitiesReclassification to income statement for

gain realized


-



-



981



-



-



-



981


$
981Net income


-



-



133



-



-



-



133-



-



-



-



31,244



-



31,244



31,244Total comprehensive income$
32,225Balance as of  December 31, 2007$
64


$
89,941


$
(83
)

$
(7,660
)

$
148,573


$
-


$
230,835
    *)
Represents an amount lower than $1.
 **)
Accumulated other comprehensive loss on account of unrealized losses on available-for-sale marketable securities.
   F - 9
 
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars in thousands
 Year Ended December 31,2009


2008


2007CASH FLOWS FROM OPERATING ACTIVITIESNet (loss) income before noncontrolling interest

$
(24,637
)

$
5,627


$
31,244Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:Depreciation and amortization


1,927



2,137



1,263Deferred taxes


1,549



(1,812
)


-Increase (decrease) in accrued severance pay, net


(9
)


41



(14
)Decrease (increase) in trade receivables, net


18,879



8,104



(2,263
)Decrease  in other accounts receivable and prepaid expenses


64



2,048



405Increase (decrease) in inventories


4,320



(3,691
)


(2,381
)Decrease (increase) in trade payables


(5,039
)


941



1,282Increase (decrease) in other account payable and accrued     expenses


167



(552
)


3,915Impairment of available-for-sale marketable securities


173



1,553



5,776Decrease (increase) in accrued interest from marketable securities and amortization of

premium and accretion to discount


1,578



(489
)


(1,192
)Gain on  investments in affiliated companies as a result of a business combination


(562
)


-



-Equity based compensation


4,264



7,592



7,809Increase (decrease) in deferred revenues


(3,608
)


(2,020
)


1,175Increase (decrease) in warranty accruals


(4
)


641



596Others


(7
)


297



141Net cash (used in) provided by operating activities


(945
)


20,417



47,756CASH FLOWS FROM INVESTING ACTIVITIESMaturity of (investment in) short-term deposits, net


(1,000
)


-



5,000Purchase of available-for-sale marketable securities


(294,345
)


(183,103
)


(152,568
)Proceeds from sale and redemption of available-for-sale marketable securities


256,735



196,988



138,542Payments for investments in affiliated companies


(750
)


(1,653
)


(2,572
)Withdraw of (investment in) long-term deposits and others


(22
)


950



(25
)Purchase of property and equipment


(487
)


(1,247
)


(2,272
)Proceeds from sale of property and equipment


-



-



10Acquisition of shares held by noncontrolling shareholders of a subsidiary


-



(500
)


-Net cash paid in acquisition of  subsidiaries (Schedule A)


(7,729
)


(775
)


(3,554
)Net cash provided by (used in) investing activities


(47,598
)


10,660



(17,439
)CASH FLOWS FROM FINANCING ACTIVITIESExercise of stock options


548



2



3,469Issuance of shares as a result of exercise of RSU’s


1



2



1Repurchase of Ordinary shares from shareholders at cost


-



(1,927
)


(7,199
)Reimbursement of share issuance expenses


-



588



-Net cash provided by (used in) financing activities


549



(1,335
)


(3,729
)Increase (decrease) in cash and cash equivalents


(47,994
)


29,742



26,588Cash and cash equivalents at the beginning of the year


72,366



42,624



16,036Cash and cash equivalents at the end of the year

$
24,372


$
72,366


$
42,624Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes

$
625


$
905


$
-
   F - 10
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars in thousands
  Year Ended December 31,2009


2008


2007Supplemental disclosure of non-cash financing and investing activities:Purchase of property and equipment on credit

$
-


$
347


$
-Change in designation of inventory to property and equipment

(reclassification of  property and equipment to inventory)

$
(252
)

$
496


$
-Acquisition of shares held by noncontrolling shareholders of a subsidiary

$
-


$
-


$
786
 SCHEDULE A:Net cash paid in conjunction with acquisition of subsidiaries

(see Note 1(C-H))CONSIDERATIONCash

$
8,658


$
775


$
3,554Fair value of Syneron’s equity interest held before thebusiness combination


4,487



-



-Total consideration

$
13,145


$
775


$
3,554Identifiable assets acquired and liabilities assumedCash acquired

$
929


$
-


$
-In process research and development


983



-



99Developed technology


15,405



1,826



1,394Distribution agreements and brand name


-



-



581Financials liabilities assumed


(142
)


(712
)


-Deferred tax liability


(5,236
)


-



-Amount payable


400



-



(786
)Contingent consideration


(7,331
)


(614
)


-Noncontrolling interest in the subsidiary


(4,151
)


-



-Goodwill


12,288



275



2,266$
13,145


$
775


$
3,554Net cash paid for acquisition

$
7,729


$
775


$
3,554
   F - 11
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 1 -
GENERAL
 
 A.
Syneron Medical Ltd. ("the Company” or “Syneron”) commenced its operations in July 2000. The Company and its subsidiaries (together “the Group”) are principally engaged in research, development, marketing and sales, directly to end-users and also to distributors of advanced equipment for the esthetic medical industry and systems for dermatologists, plastic surgeons and other qualified practitioners worldwide.
 
 B.
The Company established various wholly owned subsidiaries throughout the world which are engaged in the marketing and selling of the Company’s products in different geographic areas.
 
 C.
Light Instruments Ltd.
 
 In 2005, the Company invested in Light Instruments Ltd. ("LI"), an Israeli development stage company engaged in the development of advanced dental laser devices. The Company invested $1,500, in two portions, in consideration of approximately 51% of  its outstanding share capital and exercised its right to increase the number of directors to three out of five members of LI's board of directors. As such, the Company is consolidating LI since the third quarter of 2005. The Company is expecting to utilize LI's technology to develop and release additional products.
 
 On July 2, 2007, the Company signed a new Share Purchase Agreement with LI and its two founders. The Company has recorded an investment at the total amount of $4,340 in consideration of approximately 44% of LI's outstanding share capital. Following the closing, the Company held approximately 95% of LI. As of December 31, 2007, the Company had paid in cash $3,554 and recorded a liability to pay an additional $786 to the two founders (even if they will leave the Company) with LI. During 2009 and 2008, the Company paid $400 and $219, respectively on account of the above mentioned liability.
 
 Each of the two founders is also entitled to 0.5% of all of LI net sales for a period of up to seven years starting from the closing date, up to an aggregate amount of $500 with no regard to their continued employment with the Company (i.e., the founders are entitled to such amounts as sellers and not in their role as employees). This amount will be recorded as part of the purchase price and will be allocated to Goodwill. Through December 31, 2009, the Company paid to the two founders approximately $109.
 
 The Founders and the Company had a put and call option for the respective sale and acquisition of the remaining 5% holdings for the sum of $500, with various effective dates, last of which was July 2, 2017. In 2008, the founders exercised their put option. As a result of the founders having the right to return to the Company their shares for cash, the Company accreted to the redemption value of the put option and recorded such accretion to its retained earnings in the amount of $138. The Company recorded the amount paid for the remaining 5% as an increase to its goodwill resulting from the LI acquisition.
 
 F - 12
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 1 -
GENERAL (CONT.)
 
 C.
Light Instruments Ltd (Cont.):
 
 Further, if the two founders comply with certain terms with respect to the termination of their employment, they shall be entitled to receive an aggregate amount of $350 over a period of 3 years. Since the founder’s entitlement to such compensation is contingent upon their continuous service to the acquired company, such amounts are recognized as compensation expense in the appropriate periods in which the founders are providing services to the acquired company as employees.
 
 The excess of the amounts paid through December 31, 2009 for the above mentioned LI shares acquired over their book value was calculated as follows:
 
 Excess cost

Expected useful lives

of excess costDeveloped technology

$
1,394

6.5 yearsIn Process Research and Development


99

Immediate write-offDistribution agreements


286

8.5 yearsBrand name


295

11.5 yearsGoodwill(*) (**)


2,875

IndefiniteTotal consideration to-date

$
4,949
 
 (*)
Including $53 and $56 paid during 2009 and 2008 respectively to the two founders in connection with LI net sales amounts (see above).
 (**)
Including $500 paid in connection with put option exercised, see above.
 
 D.
Inlight Corp.
 
 1
In November 2008, the Company entered into a share purchase agreement ("SPA") with Inlight Corp. shareholders' ("Inlight"), a company incorporated under the laws of the State of California pursuant to which Syneron acquired all of Inlight's share capital. The Company is expecting to utilize Inlight's technology to develop and release additional products.
 
 2.
In consideration of 100% of Inlight's share capital, the Company undertook to pay a total consideration of up to $4,000. The consideration is conditioned upon Inlight's compliance with certain milestones detailed in the SPA. At the closing, the Company paid Inlight's shareholders a total consideration of $500 and deposited an additional amount of $500 in escrow. Amounts deposited in escrow were recorded as part of other receivables.
 
 
 F - 13
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
 
 Note 1 -
GENERAL (CONT.)
 
 D.
Inlight Corp. (Cont.)
 
 3.
The excess amounts paid for above mentioned Inlight shares over their book value was calculated as follows:
 
 Assets

Fair value


Expected useful lives

of excess costTangible assetContingent payment liability

$
(614
)


-Intangible assetsDeveloped technology


1,826


6 yearsDeferred tax liability


(712
)


-Total purchase price

$
500
 
 E.
Syneron China
 
 During November 2008, the Company signed a joint venture (“JV”) agreement for establishing Syneron China. According to the agreement, the Company will hold 51% of the JV for the total investment of $510. Through this new Chinese subsidiary, Syneron will sell directly to medical and aesthetic professionals in China. The JV became active in promoting and marketing as an agent of the Company in January 2010.
 
 F.
Fluorinex Active Ltd.
 
 1.
On May 13, 2009 (the acquisition date), the Company invested an additional $1,000 in Fluorinex Active Ltd. (Fluorinex) in consideration of 603,687 Preferred B1 shares. Following the additional investment, the Company has obtained control over Fluorinex and holds 56% of Fluorinex's outstanding voting shares. Prior to the acquisition date, the Company's investment in Fluorinex was accounted for based on the cost method as further described in (4) below.
 
 The results of Fluorinex's operations have been included in the consolidated financial statements since the date Company obtained control over Fluorinex. Fluorinex is an Israeli company near the commercialization phase which is engaged in the development of a new tooth decay and dental care prevention method and device.
 
 The Company has accounted for the acquisition and the control gained in accordance with ASC 805 (formerly SFAS 141(R)), “Business Combinations”.
 The acquisition date fair value of the consideration transferred totaled $ 2,787 which consisted of the following:
 
  Cash

$
1,000Fair value of previous equity investment


1,787Total

$
2,787
  F - 14
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 1 -
GENERAL (CONT.)
 
 F.
Fluorinex Active Ltd (cont.):
  2.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (reflects 100% of Fluorinex).
  
 
 Assets

Fair value


Expected useful livesCash

$
959



-Developed technology(1)


1,141


6.5 yearsIn process technology (2)


983



-Total identifiable assets acquired


3,083Current liabilities


(144
)Deferred tax liability


(376
)


-Total liabilities assumed


(520
)


-Net identifiable assets acquired


2,563Goodwill (3)


1,389Net assets acquired

$
3,952
  (1)
Developed technology is amortized using the straight-line method over its useful life, which is estimated to 6.5 years.
 
  (2)
The Company recorded an in-process research and development asset which currently considered indefinite lived until the completion or abandonment of the associated project. The in-process research and development asset recorded will be amortized when revenues are generated from such technology and will be subject to impairment testing.
  (3)
Goodwill represents the excess acquisition price over assets acquired and liabilities assumed. Goodwill is not amortized and will be tested for impairment at least annually.
  3.
The fair value of the 47% noncontrolling interest in Fluorinex is $1,277 and was estimated using the income approach.
 
 4.
Prior to the acquisition date, the Company accounted for its 43% interest in Fluorinex as a cost method investment. The investment was stated at cost, since the investment was in series B Preferred shares which was determined to be not in-substance Ordinary shares in accordance with ASC 323-10 (originally issued as EITF 02-14). The acquisition-date fair value of the previous equity interest was $1,787, and is included in the measurement of the consideration transferred. The Company recognized a total gain of $112 as a result of remeasuring its prior equity interest in Fluorinex held before the business combination and recorded such gain as other income in its statement of income.
  F - 15
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
 
 Note 1 -
GENERAL (CONT.)
 
 G.
Primaeva Medical Inc.
 
 1.
On October 26, 2009 (the acquisition date), the Company has acquired Primaeva Medical, Inc. ("Primaeva"), an aesthetic technology firm based in the United States in consideration of $14,331. Following the acquisition, the Company has obtained control over Primaeva and holds 100% of Primaeva's outstanding voting shares.
 
 The Company has accounted for the acquisition and the control gained in   accordance with ASC 805 “Business Combinations” (originally issued as SFAS 141R).
 
 2.
The acquisition date fair value of the consideration transferred totaled $ 14,331 which consisted of the following:
 
 Fair value of consideration transferred:
  Cash

$
7,000Contingent Consideration


7,331Total

$
14,331
  The contingent consideration arrangement requires the Company to pay $23,000 of additional consideration to Primaeva's former shareholders subject to reaching certain net revenue milestones over a three years period ending December 31, 2012.
 
 The fair value of the contingent consideration arrangement at the acquisition date was $7,331. The Company estimated the fair value of the contingent consideration using a probability weighted discounted cash flow model with a discount rate of 18%. As of December 31, 2009 there were no significant changes to the fair value assigned to the contingent consideration.
 
 3.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
 
 Assets

Fair value


Expected useful livesCash

$
-



-Current assets


140Developed technology(1)


10,038


7 yearsTotal identifiable assets acquired


10,178Current liabilities


(38
)Deferred tax liability


(4,015
)


-Total liabilities assumed


(4,053
)


-Net identifiable assets acquired


6,125Goodwill (2)


8,206Net assets acquired

$
14,331
 
 F - 16
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 1 -
GENERAL (CONT.)
 
 G.
Primaeva Inc. (Cont.):
 
 (1)
The developed technology will be amortized using the straight-line method over its useful life which is estimated as 7 years.
 
 (2)
Goodwill represents the excess acquisition price over assets acquired and liabilities assumed. Goodwill is not amortized and will be tested for impairment at least annually.
  H.
Acquisition of Rakuto Bio Technologies Ltd. (RBT):
  1.
On November 9, 2009 (the acquisition date), the Company entered into a share purchase agreement ("SPA") with RBT's shareholders. Pursuant to the SPA, the Company acquired 17.8% of RBT's Common shares for total consideration of $ 205, from three existing shareholders. Following the investment, the Company holds 41% (in the combination of 10% Common shares and 31% in Preferred shares) of RBT's shares on an as if converted basis (the Company holds 100% of the Preferred voting shares) and the total cash amount invested on cumulative basis is approximately $2,454 (see also 5 below).
 
 The acquisition date fair value of the consideration transferred totaled $ 2,905 which consisted of the following:
  Cash

$
205Fair value of previous equity investment


2,700Total

$
2,905
  
 2.
The results of RBT's operations have been included from the acquisition date as it was deemed to be a variable interest entity and the Company became the primary beneficiary in accordance with ASC 810 (originally issued as FASB Interpretation 46 (Revised), or FASB Interpretation ("FIN") 46R, "Consolidation of Variable Interest Entities - An Interpretation of ARB 51"). Prior to the acquisition date, the Company's investment in RBT was accounted for based on the cost method as further described in (5) below.
 
 F - 17
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 1 -
GENERAL (CONT.)
  H.
Acquisition of Rakuto Bio Technologies Ltd. (RBT) (Cont.):
 
  
 3.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (reflects 100% of RBT).
 
  Assets

Fair value


Expected useful livesCash

$
(30
)


-Current assets


59Longterm assets


12Fixed assets


108Developed technology (1)


4,226


7 yearsTotal identifiable assets acquired


4,375Current liabilities


(275
)Deferred tax liability


(845
)


-Total liabilities assumed


(1,120
)


-Net identifiable assets acquired


3,255Goodwill (2)


2,945Net assets acquired

$
6,200
  (1)
Developed technology is amortized using the straight-line method over its useful life, which is estimated as 7 years.
  (2)
Goodwill represents the excess acquisition price over assets acquired and liabilities assumed. Goodwill is not amortized and will be tested for impairment at least annually.
 
 4.
The fair value of the noncontrolling interest in RBT is $2,874 and was estimated using the income approach.
  5.
Prior to the acquisition date, the Company accounted for its 31% interest in RBT as a cost method investment. In February 2008, the Company entered into an agreement with RBT, whereby the Company will invest up to $3,000 if and when RBT will meet certain milestones in consideration of 32% of RBT fully dilluted share capital in Preferred shares. As of the acquisition date, in 2009 the Company had already invested $2,250. The investment was stated at cost, since the investment was in series A Preferred shares which was determined to be not in-substance Common shares as this term is defined in ASC 323-10 (originally issued as EITF 02-14). The acquisition-date fair value of the previous equity interest was $2,700, and is included in the measurement of the consideration transferred. The Company recognized a total gain of $450 as a result of remeasuring its prior equity interest in RBT held before the business combination and recorded such gain as other income in its statement of income.
 
 F - 18
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 1 -
GENERAL (CONT.)
 
 I.
Candela Corporation:
 
 On September 8, 2009, Syneron, Syneron Acquisition Sub, Inc. (Acquisition Sub), an indirect wholly-owned subsidiary of Syneron, and Candela Corporation, (Candela), a U.S. public company listed on the Nasdaq under the symbol CLZR, entered into an Agreement and Plan of Merger (the Merger Agreement). Under the Merger Agreement, Acquisition Sub merged with and into Candela (the Merger), with Candela continuing after the Merger as the surviving company and Candela will became an indirect wholly owned subsidiary of Syneron. Upon the terms and subject to the conditions set forth in the Merger Agreement, on January 5, 2010, the effective date of the Merger, each issued and outstanding share of Common stock of Candela was converted into the right to receive Company's ordinary shares.
 
 At the effective time of the Merger, approximately 6,670,477 of Syneron Ordinary shares were issued based on conversion ratio of 0.2911 Syneron Ordinary share for each Candela share of Common stock. In addition, Syneron assumed certain outstanding stock options and stock appreciation rights of Candela, and the number of Syneron Ordinary shares issuable upon exercise of each assumed Candela stock option or stock appreciation right was determined by multiplying the exchange ratio in the transaction, 0.2911, by the number of shares of Candela Common stock underlying the assumed option or stock appreciation right, as the case may be.  Immediately following the effective time of the Merger and issuance of Syneron's shares to Candela's shareholders, Candela's shareholders own approximately 19.4%, and Syneron's shareholders own approximately 80.6%, of Syneron's Ordinary shares.
 
 The Merger had no effect on the number of Ordinary shares of Syneron owned by existing Syneron shareholders.
 
 The transaction will be accounted for under ASC 805 (previously issued as SFAS 141(R)), "Business Combinations". The purchase consideration is measured based on the fair value of equity instruments exchanged on the closing date. The excess of fair value of the net assets acquired over the amount of consideration transferred will be recorded as a deferred gain until the end of the measurement period (see also Note 18).
  F - 19
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
 Note 2 -
SIGNIFICANT ACCOUNTING POLICIES
 
 A.
USE OF ESTIMATES
 
 The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
 B.
FINANCIAL STATEMENTS IN U.S. DOLLARS
 
 The Company’s consolidated revenues are generated mainly in U.S. dollars (“dollars”). In addition, a substantial portion of the Group's costs are incurred in dollars. The Company’s management believes that the dollar is the primary currency of the economic environment in which the Company and its subsidiaries operate. Thus, the dollar is the functional and reporting currency of the Company and its subsidiaries. Transaction and balances in currencies other than the U.S. dollars have been re-measured into dollars in accordance with the principles set forth in ASC 830, "Foreign Currency Matters" (originally issued as SFAS 52, “Foreign Currency Translation”). All exchange gains and losses from re-measurement are reflected in the consolidated income statements in financial income or expenses.
 
 C.
PRINCIPLES OF CONSOLIDATION
 
 The consolidated financial statements include the accounts of the Company and its subsidiaries, in which the Company has a controlling voting interest or entities which are considered variable interest entities for which the Company is considered the primary beneficiary as such terms are determined in ASC 810 (originally issued as FASB Interpretation 46(R)), “Consolidation of Variable Interest Entities, an Interpretation of ARB 51”. Inter-company balances and transactions have been eliminated upon consolidation. The noncontrolloing interest amount adjusts the consolidated net loss to reflect only the Company’s share in the earnings or losses of any consolidated company.
 
 The Company applies the provisions of ASC 810 which provides a framework for identifying variable interest entities (“VIE”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. See also Note 1H.
 
 Upon consolidation, the primary beneficiary initially records all of the VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on a majority voting interest.
  F - 20
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 D.
CASH AND CASH EQUIVALENTS
 
 Cash equivalents are short-term highly liquid investments that are readily convertible into cash with original maturities of three months or less at the date acquired.
 
 E.
BANK DEPOSITS
 
 Bank deposits with original maturities of more than three months but less than one year are presented as part of short-term investments. Deposits are presented at their cost including accrued interest. Interest on deposits is recorded as financial income.
  F.
MARKETABLE SECURITIES
 
 The Company classifies all of its marketable securities as available-for-sale securities in accordance with ASC 320  (originally issued as SFAS 115), "Investment in Debt and Equity Securities". Such marketable securities consist primarily of U.S. government treasury bonds, U.S. agencies and government guaranteed debts which are stated at market value. Unrealized gains and losses are comprised of the difference between market value and amortized costs of such securities and are reflected as “accumulated other comprehensive loss” in equity. Accumulated other comprehensive income (loss) at December 31, 2009 and December 31, 2008 represents accumulated unrecognized gains and losses on investments in marketable securities. Realized gains and losses on marketable securities are included in earnings.
 
 The Company adopted FASB ASC 320-10 (originally issued as FSP SFAS 115-2) effective April 1, 2009, which requires the Other-Than-Temporary Impairment (“OTTI”) for debt securities to be separated into (a) the amount representing the credit loss and (b) the amount related to all other factors. The Company holds its marketable securities as available-for-sale and accounts for them at fair value. The Company typically invests in highly-rated securities, and its policy generally limits the amount of credit exposure to any one issuer. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not that it will be required to sell, the investment before recovery of the investment’s amortized cost basis.  The Company used a discounted cash flow analysis to determine the portion of the impairment that relates to the credit loss. To the extent that the net present value of the estimate of the present value of cash flows expected to be collected from the debt security discounted at the at the effective interest rate implicit in the security at the date of acquisition is less than the amortized cost basis of the security, the difference is considered credit loss and is recorded through earnings. Based on the above factors, the Company concluded that unrealized losses on its available-for-sale securities except for certain investments in Auction Rate Securities were not other-than-temporary and no credit loss was present for any of its other investments. As such, the Company did not recognize any impairment charges on outstanding securities other than on certain investments in Auction Rate securities during the three years period ended December 31, 2009(See also Notes 3 and 4).
 
 F - 21
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 G.
DERIVATIVES
 
 The Company’s Derivatives are not designated as hedging accounting instruments under ASC 815, Derivatives and Hedging (originally issued as SFAS 133 and SFAS161). Those derivatives consist primarily of forward and options contracts the Company uses to hedge the Company’s exposures to currencies other than the U.S. dollar. The Company recognized derivative instruments as either assets of liabilities and measures those instruments at fair value. Since the derivative instruments that the Company holds do not meet the definition of  hedging instruments under ASC 815, the Company recognizes changes in the fair values in its statement of income in financial income, net, in the same period as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities.
 
 H.
INVENTORIES
 
 Inventories are stated at the lower of cost or market value. Inventory write-offs are provided for slow-moving items.
 
 Cost is determined as follows:
 
 Raw materials: first in, first out (“FIFO”) method.
 
 Finished products: raw materials as explained above, with the addition of the specific manufacturing costs.
 
 Inventory provisions are provided to cover risks arising from slow-moving items and discontinued products. Inventory provisions for slow moving inventory for the years ended December 31, 2009, 2008 and 2007 were $504, $1,478 and $1,318, respectively.
 
 I.
PROPERTY AND EQUIPMENT, NET
 
 Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets at the following annual rates:
 
 %Computers, software, manufacturing andlaboratory equipment
10-33 (mainly 33)Office furniture, equipment
7-15 (mainly 15)Leasehold improvements
The shorter of term of the lease or the useful life of the asset
 
 J.
IMPAIRMENT OF LONG-LIVED ASSETS
 
 The Company's long-lived assets and identifiable intangibles subject to amortization are reviewed for impairment in accordance with ASC 360, "Property, Plant and Equipment" (originally issued as SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”), whenever
 
 F - 22
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 J.
IMPAIRMENT OF LONG-LIVED ASSETS (CONT.)
 
 events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of the asset to the future undiscounted cash flows expected to be generated by the asset.  If such asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. During 2009, 2008 and 2007, no impairments losses have been identified.
 
 K.
INVESTMENTS IN AFFILATED COMPANIES
 
 All investments in Affiliates are stated at cost. The Company followed ASC 323Investments – Equity and Joint Ventures, to determine whether it should apply the equity method of accounting to investments in other than common stock ( the guidance was originally issued as EITF 02-14), with regard to certain investments  in preferred shares, and determined that they are not in substance common stock.
 
 The Company’s investment in the affiliated companies is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable, in accordance with ASC 323-10 (originally issued as APB 18). As of December 31, 2009, no impairment losses have been identified.
 
 L.
GOODWILL AND INTANGIBLE ASSETS
 
 Goodwill and intangible assets have been recorded as a result of acquisitions. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired.
 
 The Company applies ASC 350, "Intangibles – Goodwill and Other" (originally issued as SFAS 142, "Goodwill and Other Intangible Assets"). Under ASC 350, goodwill is not amortized but instead it is tested for impairment at least annually (or more frequently if impairment indicators arise). The Company determined June 30 as the date of the annual impairment test.
 
 ASC 350 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment while the second phase (if necessary) measures impairment.
 
 In the first phase of impairment testing, goodwill attributable to the reporting units is tested for impairment by comparing the fair value of the reporting unit with its carrying value. The Company performs an annual impairment test or more frequently if impairment indicators are present. The Company operates in one operating and reportable segment, with four reporting units which comprise its one segment. Goodwill is allocated to the reporting units. Fair value is determined using discounted cash flows. Significant estimates used in the fair value methodologies include estimates of future cash flows, future growth rates and the weighted average cost of capital of the reporting units. As of December 31, 2009, 2008 and 2007, no instances of impairment were found.
  F - 23
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 L.
GOODWILL AND INTANGIBLE ASSETS (CONT.)
 
 Intangible assets are stated at cost, net of accumulated amortization. Intangible Assets are amortized over their useful lives using a straight-line method of amortization  that
 reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, in accordance with ASC 360. During 2009, 2008 and2007, no impairment loss was recorded.
 
 M.
REVENUE RECOGNITION
  Revenues are recognized in accordance with ASC 605, "Revenue Recognition" and SAB 104 when delivery has occurred, persuasive evidence of an agreement exists, the fee is fixed and determinable, collectability is probable and no further obligations exist. The Company does not grant a right of return for its products.
 
 Other than pricing terms which may differ due to the different volume of purchases between distributors and end-users, there are no material differences in the terms and arrangements involving direct and indirect customers.
 
 All of the Company's products sold through agreements with distributors are non-exchangeable, non-refundable, non-returnable and without any rights of price protection or stock rotation. Accordingly, the Company considers all the distributors as end-users.
 
 Deferred revenue includes unearned amounts received in respect of service contracts and amounts received from customers but not yet recognized as revenues.
 
 Revenue from some product sales to end users in North America includes multiple elements within a single contract. The Company’s accounting policy complies with the requirements set forth in ASC 605-25 (originally issued as EITF 00-21), relating to the separation of multiple deliverables into individual accounting units with determinable fair values.
 
 The items included in the arrangements (deliverables) are evaluated pursuant to ASC 605-25 to determine whether they represent separate units of accounting. The Company performs this evaluation at the inception of an arrangement and as of the delivery of the items. Generally, the Company accounts for a deliverable separately if: a) the delivered item has standalone value to the customer, and b) there is objective evidence and reliable evidence of the fair value of the undelivered  item, and c) if the Company has given the customer a general right of return relative to the delivered item, delivery of performance of the undelivered item is probable and substantially within the Company’s control. The company establishes fair value of the undelivered item based on price charged by third parties and data available from which to estimate the volume of services provided during the term of the arrangement.
 
 N.
RESEARCH AND DEVELOPMENT COSTS
 
 Research and development costs are charged to the income statement as incurred.
  F - 24
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 O.
STOCK-BASED COMPENSATION
 
 The Company measures and recognizes the compensation expense for all equity-based payments to employees and directors based on their estimated fair values in accordance with ASC 718, "Compensation-Stock Compensation" (Originally issued as  SFAS 123R). The Company estimates the fair value of employee stock options at the date of grant using a Binominal valuation model and values restricted stock based on the market value of the underlying shares at the date of grant.
 
 The Company recognizes compensation expenses for the value of its awards based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
 
 P.
BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE
 
 Basic net earnings (loss) per share are computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earning per share are computed based on the weighted average number of ordinary shares outstanding during each year, plus the dilutive effect of options considered to be outstanding during each year, in accordance with ASC 260, “Earnings Per Share” (originally issued as SFAS 128).
 
 Q.
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 The carrying amounts of financial instruments, including cash and cash equivalents, short-term bank deposits, marketable securities, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their generally short maturities.
 
 The Company applies ASC 820, “Fair value and disclosure” (originally issued SFAS 157). Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
 
 R.
INCOME TAXES
 
 The Company accounts for income taxes in accordance with ASC 740, "Income Taxes" (originally issued as SFAS 109 and FIN 48). ASC 740 prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts more likely than not to be realized.
 
 Deferred tax liabilities and assets are classified as current or non-current based on the classification of the related asset or liability for financial reporting, or according to the expected reversal dates of the specific temporary differences if not related to an asset or liability for financial reporting.
 
 F - 25
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 R.
INCOME TAXES (CONT.)
 
 The Company accounts for uncertain tax positions in accordance with ASC 740 (Originally issued as FIN 48).  ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative probability) likely to be realized upon ultimate settlement. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income tax.
 
 S.
SEVERANCE PAY
 
 The Company’s liability for severance pay to its Israeli employees is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date.  Employees are entitled to one month’s salary for each year of employment or a portion thereof. The Company’s liability for all of its Israeli employees is covered by monthly deposits for insurance policies and by an accrual.  The value of these policies is recorded as an asset in the Company’s balance sheet.
 
 The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits accumulated up to balance sheet dates.
 
 The majority of the Company’s agreements with its employees in Israel are in accordance with section 14 of the Severance Pay Law -1963. Upon contribution of the full amount of the employee’s monthly salary, and release of the policy to the employee, no additional legal obligation exists between the parties and no additional payments shall be made by the Company to the employee; therefore related assets and liabilities  are not presented on the balance sheet.
 
 Severance expenses for the years ended December 31, 2009, 2008 and 2007 amounted to approximately $652, $761 and $505, respectively.
 
 T.
ADVERTISING EXPENSES
 
 Advertising expenses are charged to the statements of income, as incurred. Advertising expenses for the years ended December 31, 2009, 2008 and 2007 were $2,421, $2,672 and $2,644, respectively.
 
 U.
CONCENTRATION OF CREDIT RISK
 
 Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents, derivative instruments, marketable securities, and trade receivables.
 
 F - 26
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 U.
CONCENTRATION OF CREDIT RISK (CONT.)
 
 The majority of the Group’s cash and cash equivalents are invested in dollar instruments of major banks in Israel and in the United States.  Management believes that the financial institutions that hold the Company’s investments are institutions with high credit standing and, accordingly, low credit risk exists with respect to these investments.
 
 The Company’s marketable securities include investments in highly rated debentures of Israeli and U.S, Corporations and Governmental Bonds. Based on the above and the fact that the portfolio is well diversified, management believes that low credit risk exists with respect to these marketable securities. As a result of the recent turmoil in capital markets, the Company has implemented additional measures with respect to its investment policy. Such measures included among others: reducing credit exposure to corporate sector securities and increasing the overall credit quality of the portfolio.
 
 The Company and its subsidiaries have no material off-balance sheet concentration of financial instruments subject to credit risk such as foreign exchange contracts, option contracts or other hedging arrangements.
 
 The Company’s trade receivables are derived from sales to large independent distributors located mainly in Western Europe, Asia Pacific region and to end-users in North America.  The Company performs ongoing credit evaluations of its customers.  An allowance for doubtful accounts is determined with respect to those specific amounts that the Company has determined to be doubtful of collection.
 
 The following table provides the detail of the change in the Company provision for doubtful debts for the years ended December 31, 2009, 2008 and 2007:
 
 December 31,2009


2008


2007Balance at the beginning of the year

$
5,876


$
1,777


$
1,582Charged to expenses


3,336



4,099



195Write off


(1,651
)


-



-Balance at end of the year

$
7,561


$
5,876


$
1,777
 
 V.
CONCENTRATION OF OPERATIONAL RISK
 
 The Company outsources the manufacturing of its products to three subcontractors located in Israel. These subcontractors have limited manufacturing capacity that may be inadequate if customers place orders for unexpectedly large quantities of products. In addition, because the Company's subcontractors are located in Israel, they on occasion may feel the impact of potential economic or political instability in the region. If the operations of one or more of these subcontractors were halted or limited, even temporarily, or if they were unable or unwilling to fulfill large orders, the Company could experience business interruption, increased costs, damage to the Company's reputation and loss of customers. In addition, qualifying new subcontractors could take several months. Management believes that the above mentioned risk is mitigated by diversification of production where each product is
  F - 27
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 V.
CONCENTRATION OF OPERATIONAL RISK (CONT.)
 
 manufactured by more than one subcontractor. In addition, most of the subcontractors are affiliated with international firms and if needed a temporary solution could be found by shifting manufacturing out of Israel.
 
 Many of the components that comprise the Company's products are currently manufactured by a limited number of suppliers. Although most of the components are obtained from at least three separate suppliers, the Company does not have the ability to manufacture these components. A supply interruption or an increase in demand beyond current suppliers’ capabilities could harm the Company’s ability to manufacture its products until it identifies and qualifies a new source of supply, which could take several months.
 
 Any interruption in the supply of components or materials, or the Company’s inability to obtain substitute components or materials from alternate sources at acceptable prices in a timely manner, could impair the ability to meet the demand of the Company's customers, which would have an adverse effect on the Company’s business.
  W.
WARRANTY
 
 The Company generally provides a one year to three year standard warranty for its products, depending on the type of product and the country in which the Company does business. The Company records a provision for the estimated cost to repair or replace products under warranty at the time of sale. Factors that affect the Company’s warranty reserve include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair.
 
 The following table provides the detail of the change in the Company’s product warranty accrual, which is a component of other accrued liabilities on the consolidated balance sheets for the years ended December 31, 2009 and 2008.
 
 December 31,2009


2008Warranty provision, beginning of year

$
2,683


$
2,042Charged to costs and expenses relating to new sales


1,073



1,777Costs of product warranty claims


(1,077
)


(1,136
)Warranty provision, end of year

$
2,679


$
2,683
 
 At December 31, 2009, the short-term and long-term accrued warranty provision amounted to $2,121 and $558, respectively. At December 31, 2008, the short-term and long-term warranty provision amounted to $1,566 and $1,117, respectively.
 
  X.
COMPREHENSIVE INCOME (LOSS)
  The Company reports comprehensive income (loss) in accordance with ASC 220, "Comprehensive Income" (originally issued as SFAS 130). This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in equity during the period except those resulting from investments by, or distributions to, stockholders. The Company
  F - 28
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 X.
COMPREHENSIVE INCOME (LOSS) (CONT.)
 
 determined that items of other comprehensive income relate to unrealized gains and losses on available-for-sale securities.
 
 Y.
TREASURY SHARES
 
 The Company repurchases its Ordinary shares from time to time on the open market and holds such shares as treasury stock. The Company presents the cost to repurchase treasury stock as a reduction in shareholders' equity.
 
 Z.
IMPACT OF RECENTLY ISSUED ACCOUTING STANDARDS
 
 1.
Adoptionof New Accounting Standards during the period
 
 On July 1, 2009, the FASB issued the FASB Accounting Standards Codification (the “Codification”). The Codification became the single source of authoritative nongovernmental U.S. GAAP, superseding existing pronouncements issued by the FASB, the American Institute of Certified Public Accountants, the Emerging Issues Task Force and related literature. The Codification is effective for interim and annual periods ending after September 15, 2009. The Company has adopted the guidance and therefore all references by the Company to authoritative accounting principles recognized by the FASB reflect the Codification.
 
 In May 2009, the FASB issued authoritative guidance, codified in ASC 855 effective June 15, 2009, on subsequent events, which sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may have occurred for potential recognition or disclosure in the financial statements. The guidance also sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.
 
 In April 2009, the FASB issued authoritative guidance codified in ASC 820 effective for interim and annual reporting periods ending after June 15, 2009, on how to determine the fair value of an asset and a liability when the volume and level of activity for such asset or liability has significantly decreased in relation to normal market activity for such asset or liability. It also provides guidance on identifying circumstances that indicate a transaction is not orderly and when the use of multiple (or different) valuation techniques may be warranted and considered. In addition, this guidance requires disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques. The adoption of this guidance on April 1, 2009, did not have a material impact on the Company’s financial statements.
 
 Effective January 1, 2009, the Company adopted the guidance codified in ASC 350-30 with respect to the determination of the useful life of intangible assets” (originally issued as FSP 142-3) that amends the factors considered in developing renewal or extension assumptions
  F - 29
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 Z.
IMPACT OF RECENTLY ISSUED ACCOUTING STANDARDS (CONT.)
 
 1.
used to determine the useful life of a recognized intangible asset under ASC 350. ASC 350-30 requires a consistent approach between the useful life of a recognized intangible asset under ASC 350 and the period of expected cash flows used to measure the fair value of an asset under ASC 805 (originally issued as SFAS 141(R)). The ASC also requires enhanced disclosures when an intangible asset’s expected future cash flows are affected by an entity’s intent and/or ability to renew or extend the arrangement. The adoption of this ASC did not have a material effect on the Company’s consolidated financial statements.
 
 Effective January 1, 2009, the Company adopted ASC 805, "Business Combinations" (originally issued as SFAS 141R) and ASC 810, "Consolidation" (originally issued as SFAS 160). ASC 805 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. It also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. ASC 810 changed the accounting and reporting for minority interests, reporting them as equity separate from the parent entity’s equity, as well as requiring expanded disclosures. This new guidance is effective for January 1, 2009 and therefore. The Company applied this guidance to the acquisitions of Fluorinex, Primaeva and RBT. (for further details, refer also to note 1).
 
 In April 2009, the FASB issued guidance on accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies, as codified in ASC 805-20 (originally issued as FSP 141R-1). ASC 805-20 amends the provisions for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. ASC 805-20 eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and provisions in SFAS 141 for acquired contingencies ASC 805-20 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of ASC 805-20 effected the accounting treatment for the acquisition of Primeava. See also Note 1G to the Company’s consolidated financial statements.
 
 Effective January 1, 2009, the Company adopted ASC 815, “Derivatives and Hedging” (originally issued as SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS 161”Disclosures about Derivative Instruments and Hedging Activities”), which requires additional disclosures about the objectives of using derivative instruments; the method by which the derivative instruments and related hedged items are accounted for under ASC 815,  and its related interpretations; and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows. ASC 815 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. The adoption did not have a material effect on the Company’s consolidated financial statements.
  F - 30
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 Z.
IMPACT OF RECENTLY ISSUED ACCOUTING STANDARDS (CONT.)
 
 2.
Recently issued accounting Standards
 
 In June 2009, the FASB updated accounting guidance relating to variable interest entities codified in ASC 805. As applicable to the Company, this will become effective as of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. As applicable to the Company, the adoption of the new guidance will not have a material impact on the consolidated financial statements.
 
 In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition of multiple deliverable revenue arrangements codified in ASC 605-25. These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple element arrangements and require companies to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. Additionally, the amendments eliminate the residual method for allocating arrangement considerations. The Company is currently evaluating the impact that the adoption would have on its consolidated financial statements.
 
 In January 2010, the FASB updated the “Fair Value Measurements Disclosures” codified in ASU 2010-06. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value, and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. As applicable to the Company, this will become effective as of the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward information, which is required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years. As applicable to the Company, the adoption of the new guidance will not have a material impact on its consolidated financial statements.
 
 F - 31
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 3 -
AVAILABLE-FOR-SALE - MARKETABLE SECURITIES
 
 December 31, 2009Amortized Cost


Gross

Unrealized

Gains


Gross

Unrealized

Losses


Market

ValueMoney market funds

$
3,737


$
-


$
-


$
3,737Available-for-sale - matures within one year:Governmental debentures – fixed interest rate


144,077



314



(217
)


144,174Corporate debentures – fixed interest rate


430



-



(6
)


424144,507



314



(223
)


144,598Available-for-sale - matures after one year

through three years:Government debentures – fixed interest rate


15,932



177



(2
)


16,107Corporate debentures – fixed interest rate


2,388



1



(37
)


2,35218,320



178



(39
)


18,459Available-for-sale - matures after three years through five years:Governmental debentures – fixed interest rate


4,111



285



(65
)


4,331Corporate debentures – fixed interest rate


686



42



-



7284,797



327



(65
)


5,059Available-for-sale - matures after five years:Auction rate securities


9,406



82



(583
)


8,9059,406



82



(583
)


8,905$
180,767


$
901


$
(910
)

$
180,758Reclassification of certain securities to Long Term














11,449$
169,309
  F - 32
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 3 -
AVAILABLE-FOR-SALE - MARKETABLE SECURITIES (CONT.)
 
 December 31, 2008Amortized Cost


Gross

Unrealized

Gains


Gross

Unrealized

Losses


Market

ValueMoney market funds

$
300


$
-


$
-


$
300Available-for-sale - matures within one year:FHLB debentures – fixed interest rate


26,752



133



(50
)


26,83526,752



133



(50
)


26,835Available-for-sale - matures after one year through three years:FHLB debentures – fixed interest rate


87,748



861



(101
)


88,508Corporate debentures – fixed interest rate


5,159



13



(174
)


4,99892,907



874



(275
)


93,506Available-for-sale - matures after three years through five years:FHLB debentures – fixed interest rate


6,171



17



(8
)


6,180Corporate debentures – fixed interest rate


2,423



-



(121
)


2,3028,594



17



(129
)


8,482Available-for-sale - matures after five years:FHLB debentures – fixed interest rate


3,513



178



-



3,691Corporate debentures – fixed interest rate


1,706



1



(198
)


1,509Corporate debentures – floating interest rate


700



28



-



728Auction rate securities


10,428



-



(923
)


9,50516,347



207



(1,121
)


15,433$
144,900


$
1,231


$
(1,575
)

$
144,556Reclassification of certain securities to Long Term














27,214$
117,342
  F - 33
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 3 -
AVAILABLE-FOR-SALE - MARKETABLE SECURITIES (CONT.)
 
 The table below shows the fair value of investments in available for sale securities that have been in an unrealized loss position for less than 12 months or for 12 months or longer as of December 31, 2009:
 
 Less than 12 months


12 months or longer


TotalFair value


Unrealized losses


Fair value


Unrealized losses


Fair value


Unrealized lossesGovernment and agency Debentures

$
100,730


$
77


$
2,712


$
207


$
103,442


$
284Corporate debentures


-



-



2,187



43



2,187



43Auction rate securities


-



-



7,002



583



7,002



583$
100,730


$
77


$
11,901


$
833


$
112,631


$
910
 
 Note 4 -
FAIR VALUE MEASUREMENT
 
 In accordance with ASC 820 (originally issued as SFAS 157), the Company measures marketable securities, auction rate securities and foreign currency derivative contracts at fair value. Available for sale marketable securities are classified within Level 1 or Level 2. This is because marketable securities and foreign currency derivative contracts are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Investments in auction rate securities are classified within Level 3 because they are valued using valuation techniques. Some of the inputs to these models are unobservable in the market and are significant.
 
 Due to the current economic environment in which there is a lack of market activity for auction rate securities, the Company has been unable to obtain quoted prices or market prices for identical assets as of the measurement date resulting in significant unobservable inputs used in determining the fair value.  The Company, with its third party advisor, estimated the fair value of these auction rate securities using the income approach based on the following: (i) the underlying structure and contractual provisions of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; and (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period.  These estimated fair values could change significantly based on future market conditions, which could result in recognizing other-than-temporary impairment losses.
 
 The Company's financial assets measured at fair value on a recurring basis, consisted of the following types of instruments as of December 31, 2009:
 
 December 31, 2009Level 1


Level 2


Level 3


TotalCorporate debentures

$
-


$
3,504


$
-


$
3,504Auction rate securities


-



-



8,905



8,905Government, U.S. agencies andmunicipal debentures


47,246



117,366



-



164,612Money markets funds


3,737



-



-



3,737Foreign currency derivatives


-



20



-



20Total

$
50,983


$
120,890


$
8,905


$
180,778
 
 F - 34
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 4 -
FAIR VALUE MEASUREMENT (CONT.)
  December 31, 2008Level 1


Level 2


Level 3


TotalCorporate debentures

$
-


$
4,852


$
-


$
4,852Auction rate securities


-



-



9,505



9,505Government, U.S. agencies andmunicipal debentures


-



129,899



-



129,899Money markets funds


300



-



-



300Foreign currency derivatives


-



118



-



118Total

$
300


$
134,869


$
9,505


$
144,674
  The following table presents the changes in Level 3 instruments measured on a recurring basis for the twelve months period December 31, 2009. The Company's Level 3 instruments consist of Auction Rate Securities (ARS) classified as available-for-sale with the unrealized losses, reported in accumulated other comprehensive income (loss) equity and in earnings. Fair value measurements using significant unobservable inputs (Level 3).
 
 Consistent with the Company’s investment policy guidelines, the ARS investments held by the Company all had AAA/Aaa credit ratings at the time of purchase. With the liquidity issues experienced in global credit and capital markets, the ARS held by the Company at December 31, 2009 and at December 31, 2008 have experienced multiple failed auctions as the amount of securities submitted for sale has exceeded the amount of purchase orders.
 
 The estimated fair value of the Company’s ARS holdings in collateralized debt obligations and a certain ARS as of December 31, 2009 and 2008 was $620 and $728 respectively, which reflects accumulative impairment of $7,502 and $7,329 respectively, to the carrying value of $8,050. Based on respective valuation models and an analysis of other-than-temporary cumulative impairment factors, the Company has recorded a pre-tax impairment charge of $173 in the year ended December 31, 2009, $ 1,553 in the year ended December 31, 2008, and $5,776 for the year ended December 31, 2007 reflecting the portion of ARS holdings that the Company has concluded have other-than-temporary decline in value (for legal claims regarding investments in ARS, see also Note 12).
  Auction Rate SecuritiesYear ended December 31,2009


2008Beginning balance

$
9,505


$
874Transferinto Level 3


-



11,107Redemption at par value


(800
)


-Changes in unrealized losses included in earnings

(including an increase in the amount of  $16 from

accrued interest on such securities)


(157
)


(1,553
)Changes in unrealized losses included in Other

Comprehensive Income


357



(923
)Ending balance

$
8,905


$
9,505
 
 F - 35
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 5 -
OTHER ACCOUNTS RECEIVABLE, PREPAID EXPENSES AND OTHER
 
 December 31,2009


2008Government authorities

$
549


$
832Prepaid expenses


1,202



768Deferred taxes


263



1,812Deposits with escrow agent


500



500Other receivables


239



337$
2,753


$
4,249
  Note 6 -
INVENTORIES
 
 December 31,2009


2008Raw materials

$
2,673


$
3,079Finished products


5,919



9,581$
8,592


$
12,660
 
 Note 7 -      INVESTMENTS IN AFFILIATED COMPANIES
 
 December 31,2009


2008Investment in Fluorinex Active Ltd. (1)

$
-


$
1,675Investment in Q’Ray Ltd. (2)


1,050



1,050Investment in Rakuto Bio Technologies (3)


-



1,500$
1,050


$
4,225
 
 (1)
See Note 1F.
  (2)
The Company entered into a Share Purchase Agreement with Shaldot and QRay whereby the Company invested $1,050 in QRay in consideration of 9% of QRay’s share capital. If QRay will meet certain milestones within three and a half years as of the closing of the transaction, the Company is obligated to invest an additional $ 450 in QRay. The investment is stated at cost.
  
 (3)
See also Note 1H.
  F - 36
  
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 8 -
PROPERTY AND EQUIPMENT
  December 31,2009


2008CostComputers, software, manufacturing and laboratory equipment

$
5,341


$
4,722Leasehold improvements


1,529



1,519Office furniture and equipment


563



534Total cost


7,433



6,775Accumulated depreciationComputers, software, manufacturing and laboratory equipment


3,273



2,140Leasehold improvements


(*) 994



(*)737Office furniture and equipment


281



242Total accumulated depreciation


4,548



3,119Depreciated cost

$
2,885


$
3,656
  Depreciation expenses for the years ended December 31, 2009, 2008 and 2007 were $1,233, $1,545, $656, respectively.
 
 (*)
Including depreciation expenses recorded during fiscal year 2008 in the amount of $350 as a result of leasehold improvements that are not in use in Syneron Canada Corp.
 
 Note 9 -
INTANGIBLE ASSETS
  December 31,2009


2008Original costPatent

$
1,716


$
1,716Distribution agreements


286



286Brand name


295



295In process R&D


99



99In process R&D in accordance with ASC 350(2)


983



-Developed technologies (1)


18,625



3,220Total cost


22,004



5,616Accumulated amortizationPatent


1,620



1,276Distribution agreements


84



51Brand name


65



39In process R&D


99



99Developed technology


614



323Total accumulated amortization


2,482



1,788Amortized cost

$
19,522


$
3,828
 
 (1)
See note 1 for details of the amounts resulting from business consolidation.
 (2)
In accordance with ASC 350 as of January 1, 2009 acquired In process R&D will not be amortized but rather tested for impairment.
 
 F - 37
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 9 -
INTANGIBLE ASSETS, NET (CONT.)
 
 The annual amortization expense relating to intangible assets existing as of December 31, 2009 is estimated to be as follows:
 
 2010

$
3,0962011


3,1682012


3,1212013


3,120Thereafter


7,017Total

$
19,522
 
 Note 10 -
GOODWILL
 
 Changes in goodwill for the years ended December 31, 2009 and 2008 according to Company's reporting units are as follows:
 
 Syneron


Light Instrument


Fluorinex


RBT


TotalAs of January 1, 2008

$
-


$
2,266


$
-


$
-


$
2,266Acquisitions


-



556



-



-



556As of December 31, 2008


-



2,822



-



-



2,822Acquisitions


8,206



53



1,501


$
2,528



12,288As of December 31, 2009

$
8,206


$
2,875


$
1,501


$
2,528


$
15,110
  Note 11 -
OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 December 31,2009


2008Deferred revenues

$
4,206


$
5,576Warranty accruals


2,121



1,566Accrued expenses


6,300



6,961Deferred tax liability


5,919



712Accrued commission


1,427



1,672Employees and related expenses


3,569



3,801Tax authorities


6,342



5,052Other payables


269



247$
30,153


$
25,587
 
 F - 38
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 12 -
COMMITMENTS AND CONTINGENCIES
  A.
ROYALTIES
 
 In June 2004, the Company has entered into an agreement effective from December 1, 2003 and until 2021, for using know-how of a Tensor Technologies LLC, in which the Company is obligated to pay royalties, at a rate of 4.5%, on sales of certain products to its distributors and subsidiaries.
 
 Expenses in respect of royalties amounted to $461, $1,287 and $1,547 for the years ended December 31, 2009, 2008 and 2007, respectively, and were recorded as part of cost of revenues. See C below for legal proceedings with the third party.
 
 B.
LEASES
 
 The Company operates from facilities in Canada, the United States, Germany, Hong-Kong and Israel that are leased for periods expiring in years 2010 through 2012.
 
 The Company leases motor vehicles under standard commercial operating leases.
 
 The future minimum lease commitments of the Group under various non-cancelable operating lease agreements in respect of premises and motor vehicles, that are in effect as of December 31, 2009, are as follows:
 
 Year ended December 31,2010

$
1,6612011


8852012


350$
2,896
 
 Rent expenses amounted to $989, $1,248 and $889 for the years ended December 31, 2009, 2008 and 2007, respectively.
 
 C.
LEGAL CLAIMS
 
 1.
On November 10, 2005, a class action was filed against one of the Company’s subsidiaries, Syneron Inc. The plaintiff seeks injunctive relief, statutory damages and attorneys fees and costs as a result of the alleged violations of the Telephone Consumer Protection Act (“TCPA”). Syneron Inc.’s insurance carrier has accepted tender of defense of this litigation subject to a reservation of rights. Although there appears to be a likelihood that Syneron Inc. will have insurance coverage for this lawsuit and it is currently being provided a defense through its insurance carrier, there is the possibility that these TCPA claims against Syneron Inc. will not be covered by the insurance policy. Syneron Inc. has answered the Complaint and the parties have engaged in discovery relating to the appropriateness of proceeding with the action on behalf of a class action, as well as discovery on the merits of the claim. On February 7, 2007, Syneron Inc. filed a motion to dismiss the action and the court granted Syneron Inc.’s motion. The plaintiff filed a motion for Reconsideration, which was denied. The plaintiff filed a notice of appeal, however, due to the pending appeals in two similar cases, the parties agreed that the appeal shall be withdrawn from active consideration without prejudice and will leave to be reactivated pending the resolution of the two cases. On October 31, 2008, the Second Circuit affirmed the dismissal of the case based upon lack of subject matter jurisdiction. The case was closed without any liability to the Company in 2009.
 
  F - 39
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 12 -
COMMITMENTS AND CONTINGENCIES (CONT.)
  
 C.
LEGAL CLAIMS (cont.)
 
 2.
On December 31, 2007, a plaintiff filed a complaint against Syneron Medical Ltd., Syneron Inc. and Syneron Inc.’s employee. Plaintiff alleges that Syneron represented that dentists who purchased Syneron’s products did not need to have a medical doctor or other medically trained personnel to operate the device and that it could be legally operated by an esthetician. Plaintiff alleges that he purchased the equipment in reliance upon these representations. Plaintiff further alleges that based on Syneron’s misrepresentation, he set up a dental spa operation and has suffered economic damage as a consequence of not being able to operate the dental spa in the manner represented by Syneron. Following mediation, the parties have reach a settlement during 2009 pursuant to which an amount of $1,044 was paid to plaintiff, of which $372 was paid by Syneron Inc. and the balance paid by the Company’s insurance carrier.
 
 3.
In May 2007, a complaint was filed against one of the Company’s subsidiaries, Syneron Inc. by a plaintiff. Plaintiff alleges that during a hair removal treatment, her hair was set on fire as a result of which she suffered various injuries. Plaintiff alleges that Syneron is the company responsible for the sale of the System, which was not manufactured by Syneron. Syneron intends to vigorously defend its position in this case.
 
 4.
On November 14, 2008, Palomar Medical Technologies, Inc. filed a complaint against the Company's subsidiary, Syneron Inc. The complaint alleges infringement of U.S. Patent Nos. 5,735,844 and 5,595,568 by hair removal products sold in the United States. These patents are the subject of reexaminations by the U.S. Patent Office, which has issued Notices of Intent to Issue Reexamination Certificates with respect to both patents. The case brought by Palomar against Syneron Inc. has been stayed pending the completion of the reexaminations. Palomar has moved to lift the stay and the stay had been lifted. The court held a scheduling conference in the case on January 6, 2010.  At the conference, the court set the construction hearing for November 17, 2010, and set other pre-trial dates. No trial date was set. The Company is denying all allegations and is planning to vigorously defend this case.
 
 5.
On or about December 23, 2008, the Company received a letter from Tensor Technologies LLC (herein "Tensor") claiming that the Company was in breach of its royalty payment obligations to Tensor pursuant to a License Agreement dated June 24, 2004 between the Company and Tensor (as amended).  On February 19, 2009, the Company sent Tensor a letter denying Tensor's claims and denying any royalty payment obligations to Tensor whatsoever. The Company submitted the matter for arbitration, agreed upon an arbitrator and started the arbitration process. On August 30, 2009, a statement of claim was served by Tensor against the Company in the amount of $2,618. On November 1, 2009, the Company submitted a statement of defense and a countersuit in the amount of $4,367 for the restitution of the royalties already paid by it to Tensor. Tensor has submitted its statement of defense to the countersuit the Company submitted. The Company has begun discovery proceedings and intends to vigorously defend this case.
  F - 40
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands, expect share and per share data
  Note 12 -
COMMITMENTS AND CONTINGENCIES (CONT.)
  C.
LEGAL CLAIMS (cont.)
 
 6.
On March 10, 2009, a complaint was filed against Syneron, Inc. The complaint arises out of a fatal accident involving a contractor. The plaintiff, who tripped and fell back through a skylight on the roof of the building leased by Syneron Inc. The complaint names the building owners, skylight manufacturer and various other parties and alleges a cause of action of negligence treatment of the building and failing to protect others from the dangerous condition of the roof and skylight. The Complaint does not specify the amount of damages claimed by the plaintiffs.  Syneron intends to vigorously defend this case.
  7.
On May 15, 2009, a former distributor of the Company filed a claim against Syneron for unlawful termination of its exclusive distribution agreement with Syneron in the amount of approximately $2,225 (the claim amount is NIS 8,400,000). On August 9, 2009, the Company filed a statement of defense and a counterclaim against the plaintiff in an amount of $667 (claim amount is NIS 2,517,627). The Company claims that the plaintiff has a debt concerning equipment and services it has received from the Company, and to reimburse the Company for damages caused to the Company’s reputation and market share losses by plaintiff. The Company is denying all allegations and is planning to vigorously defend this case.
 
 The Company has accrued an amount which it deems sufficient to cover probable losses from these and other claims in the ordinary course of business. Management does not believe the final disposition of these matters will have a material adverse effect on the financial position, results of operations or cash flows of the Company.
 
 On March 27, 2009, the Company reached a settlement agreement with a financial institution resolving a dispute filed with FINRA in 2008 with regard to certain ARS securities managed by this institution. The parties reached an agreement to amicably settle the dispute for a total amount of $3,975 in return for a Dismissal with Prejudice and a signed release. The Company continues to hold the ARS securities related to this claim.
  Note 13 -
SHAREHOLDERS' EQUITY
  A.
SHARE CAPITAL
 
 1.
Ordinary shares confer upon their holders voting rights, the right to receive dividends and the right to share in equity upon liquidation of the Company.
 
 2.
In November, 2007, the Company announced that its Board of Directors authorized additional repurchases of up to $50,000 of its Ordinary shares. The repurchase program has no time limit and maybe suspended from time to time or discontinued. Under the above program, the Company repurchased during 2007 and 2008, 466,000 and 122,700 shares, respectively. The average purchase price per share was $15.50. Such purchases of Ordinary shares are accounted for as treasury stock and resulted in a reduction in shareholders’ equity.
  F - 41
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands, expect share and per share data
  Note 13 -
SHAREHOLDERS' EQUITY (CONT.)
 
 A.
SHARE CAPITAL  (CONT.)
 
 3.
Certain of the Company’s officers, directors and major shareholders that hold Ordinary shares have the right to require the Company, on not more than one occasion, to file a registration statement on the appropriate form under the Securities Act in order to register the resale of their Ordinary shares.
 
 4.
During 2004 and pursuant to Israeli regulations, the Company paid stamp duty and recorded it as part of the initial public offering issuance expenses. During 2008, following a Supreme Court verdict, it was determined by the Court that such stamp duty should be paid by domestic companies which are traded in a foreign stock exchange and thus each entity may appeal to the tax authorities for reimbursement. The Company with its legal counsel approached the tax authorities and received during November 2008 the amounts originally paid. During 2008, the Company recorded an amount of $588 in additional paid-in capital as a result of the reimbursement of stamp duty in Israel.
 
 5.
On November 11, 2008, the Company's board of directors adopted a shareholder rights plan. The shareholder rights plan is designed to protect against any potential future use of coercive or abusive takeover techniques designed to gain control of the Company and its capital without full and fair value being paid to all of the Company's shareholders. The shareholder rights plan was adopted following evaluation and consultation with outside advisors in consideration of the Company's current low valuation and strong cash position.
  In connection with the adoption of the shareholder rights plan, the Company's board of directors declared a dividend of one right for each Ordinary share of the Company held by shareholders of record as of the close of business on November 9, 2008. Initially, these rights will not be exercisable and will trade with the Ordinary shares of the Company. Under the plan, these rights will generally be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's Ordinary shares or commences a tender or exchange offer for 15% or more of the Company's ordinary shares, except if such person or group has become an "Acquiring Person" pursuant to an offer approved by the majority of the board of directors. If a person or group acquires beneficial ownership of 15% or more of the Company's Ordinary shares (except if such person or group has become an "Acquiring Person" pursuant to an offer approved by the majority of the board of directors), each right will generally entitle the holder, other than the acquiring person or group, to acquire, for the exercise price of $0.01 per share (subject to adjustment as provided in the plan), one and a quarter Ordinary shares of the Company. In addition, if, after a person acquires such ownership, the Company engages in a merger in which it is not the survivor or its Ordinary shares are changed or exchanged, or sells or transfers more than 50 percent of its assets or earning power, each right will generally entitle the holder, other than the acquiring person or group, to acquire, for the exercise price of $0.01 per share (subject to adjustment as provided in the plan), one and a quarter times the shares of the acquiring company to which each of the shareholders of the Company is entitled to for each Ordinary share.
 
 
 F - 42
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands, expect share and per share data
  Note 13 -
SHAREHOLDERS' EQUITY (CONT.)
 
 A.
SHARE CAPITAL  (CONT.)
 
 The Company's board of directors may redeem the rights at a price of $0.0001 per right at any time up to ten days after a person or group acquires beneficial ownership of 15% or more of the Company's Ordinary shares. The rights plan originally was in effect until November 9, 2009 and was amended and extended during 2009 to be in effect until November 30, 2010 unless earlier redeemed or amended by the Company's board of directors.
 
 Shareholders are not required to take any actions to receive the rights distribution. Until the rights become exercisable, outstanding share certificates will represent both Ordinary shares of the Company and the rights.
 
 B.
STOCK OPTION PLAN
 
 In 2004, the Company adopted the 2004 Israel Stock Option Plan (for Israeli residents) and the 2004 Incentive Stock Option Plan (for United States, Canada and the rest of the world) (collectively "the 2004 Plans"). The number of options approved under the 2004 Plans was 2,000,000 options, increasing annually according to the evergreen provision included in each of the 2004 Plans. The evergreen provision calls for the annual increase by the lesser of 2,000,000 options or 3% of the share capital, provided however that the Board of Directors may at its sole discretion decrease, at any given year, the increase of the number of options to whatever number it see fit.
 
 As of December 31, 2009, there were 2,808,644 options available for future grant.
 
 Under the 2004 Plans, options are granted to employees, officers, directors and consultants at an exercise price equal to at least the fair market value at the date of grant and are granted for periods not to exceed seven years. Options granted under the 2004 Plans generally vest over a period of one to three years of employment. Any options that are cancelled or forfeited before expiration become available for future grants. In addition to granting stock options during 2006, the Company started to routinely grant Restricted Stock Units (RSUs) under the 2004 Plans. RSUs usually vest over a period of employment of up to three years. Upon vesting, the RSU beneficiary is entitled to receive a share per one RSU for no consideration ($0.01 per share). RSUs that are cancelled or forfeited become available for future grants.
 
 The following is a summary of activities relating to the Company's stock options and RSUs granted to employee and directors among the Company's various plans:
 
 F - 43
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands, expect share and per share data
  Note 13 -
SHAREHOLDERS' EQUITY (CONT.)
 
 B.
STOCK OPTION PLAN (CONT.)
 
 Transactions related to the grant of options to employees and directors under the above plans during the years ended December 31, 2009, 2008 and 2007, were as follows:
  Year ended December 31,2009


2008


2007Weighted





Weighted





Weightedaverage





average





averageNumber

of options


exercise

price


Number

of options


exercise

price


Number

of options


exercise

priceOutstanding at beginning of year


3,843,001


$
14.2



1,276,380


$
23.87



1,631,224


$
23.58Granted


700,000


$
7.28



3,156,466


$
11.5



59,000


$
26.6Exercised


(68,625
)

$
7.96



(61,650
)

$
0.0737



(183,116
)

$
18.93Forfeited


(1,249,250
)

$
15.77



(528,195
)

$
23.12



(230,728
)

$
25.93Outstanding at end of year


3,225,126


$
12.22



3,843,001


$
14.2



1,276,380


$
23.87Exercisable options at end of year


994,578


$
17.16



802,499


$
24.14



848,754


$
21.17Vested and expected to vest


2,035,754


$
12.23



1,825,367


$
15.38



1,218,883


$
23.77
 
 The intrinsic value of exercisable options (the difference between the Company's closing share price on the last trading day in fiscal 2009 and the exercise price, multiplied by the  number of in-the-money options) included below represents the amount that would have been received by the option holders had all option holders exercised their options on December 31, 2009. This amount changes based on the fair market value of the Company's Ordinary Shares. Total intrinsic value of outstanding options, exercisable options and vested and expected to vest options as of December 31, 2009 was $5,234, $1,244  and $4,298 respectively.
 
 The following table summarizes information relating to awards of RSUs:
 
 Year ended December 31,2009


2008


2007Number

of options


Fair

value

of grant date


Number

of options


Fair

value

of grant date


Number

of options


Weighted

average

exercise

priceOutstanding at beginning of year


110,310


$
20.28



271,301


$
24.17



130,927


$
24.70Granted


-


$
-



29,155


$
12.13



264,123


$
24.36Exercised


(55,066
)

$
23.16



(124,220
)

$
24.05



(58,173
)

$
24.64Forfeited


(8,165
)

$
22.29



(65,926
)

$
25.57



(65,576
)

$
26.42Outstanding at end of year


47,079


$
16.57



110,310


$
20.28



271,301


$
24.17
 
 Aggregate intrinsic value, at the date of exercise, of options and RSUs that were exercised during the years ended on December 31, 2009, 2008 and 2007 was $667, $3,320 and 4,308 respectively.
  F - 44
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands, expect share and per share data
 Note 13 -
SHAREHOLDERS' EQUITY (CONT.)
 
 B.
STOCK OPTION PLAN (CONT.)
 
 The options outstanding as of December 31, 2009, grouped by exercise prices, were as follows:
 
 Options

outstanding

as of


Weighted average remaining


Options exercisable

as of


Intrinsic

value of options exercisable as ofDecember 31,


contractual


December 31,


December 31,Exercise price


2009


life years


2009


2009$
0.0737



15,931



0.99



15,931


$
165$
7.25-7.96



1,844,099



5.99



427,139



1,079$
14.1-18.69



853,630



4.97



40,292



-$
20.44-25.86



189,254



3.39



189,254



-$
26.49-30.96



322,212



3.55



321,962



-3,225,126



5.3



994,578


$
1,244
 
 The weighted average fair values of options granted (including those granted to non-employees but excluding RSUs) during the years ended December 31, 2009, 2008 and 2007 were:
  Year Ended December 31,2009


2008


2007Weighted average exercise prices

$
7.28


$
11.50


$
26.6Weighted average fair value on grant date

$
3.82


$
5.65


$
13.55
  The weighted-average estimated fair value of employee stock options granted during the 12 months ended December 31, 2009, 2008 and 2007 was calculated using the binomial model with the following weighted-average assumptions:
 
 Year ended December 31,2009


2008


2007Volatility


65
%


56
%


65
%Risk-free interest rate


2.43
%


3.06
%


4.8
%Dividend yield


0
%


0
%


0
%Post-vest cancellation rate *)


5
%


5
%


5
%Suboptimal exercise factor **)


2



2



2Expected life (in years)


5.10



4.45



3.04
 
 *)
The post-vest cancellation rate was calculated on a monthly basis and is presented here on an annual basis.
 **)
The ratio of the stock price to strike price at the time of exercise of the option.
  F - 45
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 13 -
SHAREHOLDERS' EQUITY (CONT.)
 
 B.
STOCK OPTION PLAN (CONT.)
 
 The Company used volatility data of comparable companies' with similar characteristics to the Company for calculating volatility in accordance with ASC 718. The computation of historical volatility was derived from the comparable companies' historical volatility for similar contractual terms. As a result of the above-mentioned calculations, the weighted-average volatility used for the 12 months ended December 31, 2009 and 2008 was 65% and 56%, respectively.
 
 The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the Company's employee stock options. Weighted average interest rate used for the 12 months ended December 31, 2009 and 2008 was 2.43% and 3.06% respectively.
 
 The Company is required to assume a dividend yield as an input in the binomial model. The dividend yield assumption is based on the Company's historical and expectation of future dividend payouts and may be subject to substantial change in the future. The dividend yield used for the twelve months ended December 31, 2009 and 2008 was 0%.
 
 The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the binomial model. The expected life of employee stock options is impacted by all of the underlying assumptions used in the Company’s model.
 
 The binomial model assumes that employees’ exercise behavior is a function of the option’s remaining contractual life and the extent to which the option is in-the-money (i.e., the average stock price during the period is above the strike price of the stock option). The binomial model estimates the probability of exercise as a function of these two variables based on the history of exercises and factors in also the post vesting termination rate of employees, as termination triggers the truncation of employee awards shortly thereafter. The expected life derived from the binomial model was a weighted average of 5.1 and 4.45 years for options granted during the 12 months ended December 31, 2009 and 2008, respectively.
 
 As equity-based compensation expense recognized in the consolidated statement of income is based on awards ultimately expected to vest, it should be reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
  F - 46
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 13 -
SHAREHOLDERS' EQUITY (CONT.)
 
 B.
STOCK OPTION PLAN (CONT.)
 
 The Company's aggregate compensation cost for the years ended December 31, 2009, 2008 and 2007 totaled $4,264, $7,592 and $7,809, respectively.
 The total equity-based compensation expense related to all of the Company's equity-based awards, recognized for years ended December 31, 2009, 2008 and 2007, was comprised as follows:
 
 Year ended December 31,2009


2008


2007Cost of goods sold

$
28


$
51


$
278Research and development


528



295



883Sales and marketing


1,421



3,860



4,514General and administrative


2,287



3,386



2,134Total equity-based compensationexpense before taxes

$
4,264


$
7,592


$
7,809
 
 As of December 31, 2009, there was $3,876 of total unrecognized stock-based compensation cost related to non-vested stock-based compensation granted under the Company’s stock option plans. That cost is expected to be recognized over a weighted average period of 2 years.
 
 C.
DIVIDENDS
 
 The Company has never paid cash dividends to shareholders.  The Company intends to retain future earnings for use in its business and does not anticipate paying cash dividends on its shares in the foreseeable future.  Any future dividend policy will be determined by the Board of Directors and will be based upon conditions then existing, including results of operations, financial condition, current and anticipated cash needs, contractual restrictions and other conditions as the Board of Directors may deem relevant.  In the event that cash dividends are declared in the future, such dividends will be paid in U.S. dollars subject to any statutory limitations.
  F - 47
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 14 -
INCOME TAXES
 
 A.
The Company recognizes interest and penalties related to income taxes in tax expenses line in its consolidated statements. The Company has approximately $728 accrued for the payments of interest and penalties as of December 31, 2009.
 
 A reconciliation of the beginning and ending balances of the total amounts of gross tax liabilities is as follows:
  Gross tax liabilities at January 1, 2008

$
6,113Decreases in tax positions for prior years


(669
)Increases in tax positions for current year


1,611Decreases in tax position resulting from settlement


(2,003
)Gross tax liabilities at December 31, 2008


5,052Increases in tax positions for prior years


155Increases in tax positions for current year


1,135Gross tax liabilities at December 31, 2009

$
6,342
 
 The Company operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited or subject to review by both domestic and foreign authorities. As a result of ongoing examinations, tax proceedings in certain countries, additions to unrecognized tax benefits for positions taken and interest and penalties, if any, arising in 2009, it is not possible to estimate the potential net increase or decrease to the Company’s unrecognized tax benefits during the next twelve months. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2009:
 
 Israel
2006 - presentUnited States
2002 - presentGermany
2005 - presentCanada
2004 - present
 
 B.
ISRAELI TAXATION
 
 1.
Corporate tax rate
 
 For tax year 2009, Israeli companies are subject to “Corporate Tax” on their taxable income at the rate of 26%. Following an amendment to the Israeli Income Tax Ordinance, 1961 (the “Israeli Tax Ordinance”), which came into effect on January 1, 2006, the corporate tax rate was scheduled to decrease to 25% for the 2010 tax year and thereafter.
 
 During July 2009, an additional reduction to the corporate tax rate was approved in the Israeli parliament (“the Knesset”), according to which the corporate tax rate is scheduled to decrease as follows:
  24% for the 2011 tax year, 23% for the 2012 tax year, 22% for the 2013 tax year, 21% for the 2014 tax year, 20% for the 2015 tax year and 18% for the 2016 tax year and thereafter.
 
 F - 48
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 14 -
INCOME TAXES (CONT.)
 
 B.
ISRAELI TAXATION (CONT.)
 
 2.
Measurement of taxable income:
 
 On February 26, 2008, the Israeli Parliament (the Knesset) enacted the Income Tax Law (Inflationary Adjustments) (Amendment 20) (Restriction of Effective Period), 2008, which the Company refers to as the Inflationary Adjustments Amendment.  In accordance with the Inflationary Adjustments Amendment, the effective period of the Inflationary Adjustments Law will cease at the end of the 2007 tax year and as of the 2008 tax year the provisions of the law shall no longer apply, other than the transitional provisions intended at preventing distortions in the tax calculations.  In accordance with the Inflationary Adjustments Amendment, commencing with the 2008 tax year, income for tax purposes will no longer be adjusted to a real (net of inflation) measurement basis.  Furthermore, the depreciation of inflation immune assets and carried forward tax losses will no longer be linked to the Israeli Consumer Price Index.
 
 In accordance with ASC 740 (originally issued as SFAS 109), the Company has not provided deferred income taxes on the above difference between the reporting currency and the tax basis of assets and liabilities.
 
 3.
Tax benefits under Israel’s Law for the Encouragement of Industry (Taxes), 1969:
 
 The Company is “Industrial Company”, as defined by the Law for the Encouragement of an Industry (Taxes), 1969, and as such, the Company is entitled to certain tax benefits, mainly amortization of costs relating to know-how and patents over eight years, accelerated depreciation and the right to deduct public issuance expenses for tax purposes.
 
 4.
Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959 (the "Law"):
 
 The Investment Law empowers the Israeli Investment Center to grant Approved Enterprise status to capital investments in production facilities that meet certain relevant criteria ("Approved Enterprise") specified by the Law and the regulations specified thereafter. The tax benefits derived from any Approved Enterprise relate only to taxable income attributable to the specific program of investment to which the status was granted.
 
 On April 1, 2005, an amendment to the Investment Law came into effect ("the Amendment") and has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Beneficiary Enterprise, such as provisions generally requiring that at least 25% of the Privileged Enterprise's income will be derived from export.
 
 F - 49
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 14 -
INCOME TAXES (CONT.)
 
 B.
ISRAELI TAXATION (CONT.)
 
 4.
Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959 (the "Law") (cont.):
 
 Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.
 
 In addition, the Investment Law provides that terms and benefits included in any letter of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Company's existing Approved Enterprise will generally not be subject to the provisions of the Amendment. Following the amendment to the law, it was clarified that tax-exempt income generated under the provisions of the new law, as part of a new Privileged enterprise, will subject the Company to taxes upon distribution or liquidation.
 
 The Company has been granted the status of "Approved Enterprises", under the Law, for an investments program for the period ending in 2004, and the status of "Privileged Enterprise" according to the Amendment to the Law, for investments in 2005 through 2007 ("Programs").
 
 In accordance with the Law and the Amendment, Syneron Medical Ltd. has chosen to enjoy an "alternative benefits track" status. Accordingly, Syneron Medical Ltd.'s income attributed to the Programs is exempt from taxes on income derived therefrom for a period of ten years starting in the year in which the Company first generates taxable income.
 
 Out of the Company's retained earnings as of December 31, 2009, approximately $145,000 is tax-exempt earnings attributable to its Approved Enterprise programs and $61,000 is tax-exempt earnings attributable to its Privileged Enterprise program. The tax-exempt income attributable to the Approved and Privileged Enterprise cannot be distributed to shareholders without subjecting the Company to taxes. If dividends are distributed out of tax-exempt profits, the Company will then become liable for tax at the rate applicable to its profits from the approved enterprise in the year in which the income was earned, as if it was not under the "Alternative benefits track" (tax at the rate of 10%-25%). Under the law, tax-exempt income generated under the Approved or Privileged Enterprise status will be taxed upon dividend distribution or complete liquidation, whereas in accordance with the law, tax exempt income generated under the Approved Enterprise status will be taxed upon dividend distribution.
 
 As of December 31, 2009, if the income attributed to the Approved Enterprise were distributed as dividend, the Company would incur a tax liability of approximately up to $22,000 (depending on the tax rate as described above). If income attributed to the Privileged Enterprise is distributed as a dividend, including upon liquidation, the Company would incur a tax liability in the amount of approximately up to $9,000 (depending on the tax rate as described above).These amounts will be recorded as an income tax expense in the period in which the Company declares the dividend.
 
 F - 50
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 14 -
INCOME TAXES (CONT.)
 
 B.
ISRAELI TAXATION (CONT.)
 
 4.
Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959 (the "Law") (cont.):
 
 The Company's board of directors has determined that it will not distribute any amounts of its undistributed tax exempt income as a dividend. The Company intends to reinvest the amount of its tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the Company's Approved and Privileged Enterprise programs as the undistributed tax exempt income is essentially permanent in duration.
 The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the Law, regulations published there under and the certificates of approval for the specific investments in approved enterprises.
 
 Should Syneron Ltd. fail to meet such requirements in the future, income attributable to its programs could be subject to the statutory Israeli corporate tax rate and the Company could be required to refund a portion of the tax benefits already received, with respect to such program. The Company's management believes that the Company is meeting the aforementioned conditions.
 
 Income from sources other than the "Approved Enterprise" is subject to tax at regular Israeli corporate tax rate of 26%.
 
 C.
NON-ISRAELI SUBSIDIARIES
 
 Non-Israeli subsidiaries are taxed based on tax laws in their countries of residence.
 
 D.
DEFERRED INCOME TAXES
 
 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
 
 F - 51
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 14 -
INCOME TAXES (CONT.)
 
 D.
DEFERRED INCOME TAXES (CONT.)
 
 December 31,2009


2008Net operating loss carryforward of subsidiaries

$
16,279


$
15,048Share-based compensation costs


4,826



4,099Deferred tax asset from unrealized losses on available-for-sale marketable securities


2



86Impairment of available-for-sale marketable securities


1,884



1,832Company’s capital losses carryforward  (*)


8,114



9,483Temporary differences


1,859



2,123Total deferred tax asset before valuation allowance


32,964



32,671Valuation allowance


(32,701
)


(30,859
)Total deferred tax asset


263



1,812Deferred tax liability from the acquisition of a subsidiary


(5,919
)


(712
)Total deferred tax liability


(5,919
)


(712
)Net deferred tax asset (liability)

$
(5,656
)

$
1,100
 
 (*)
The Company has a capital loss carryforward resulting from the difference between the reporting currency and the tax basis of the investments in Marketable securities.
 
 The Israeli subsidiaries have available carryfoward operating tax loss of $9,224 to offset against future tax profits for an indefinite period.
 
 The Company’s subsidiary in the United States has estimated total available carryforward tax losses of $34,582 to offset against future tax income for periods of 15-20 years expiring between 2017-2028.
 
 In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and net operating losses and capital losses are utilized. Based on a consideration of these factors, the Company has established a valuation allowance of $32,701 and $30,859 at December 31, 2009 and 2008, respectively.
 
 Utilization of U.S. loss carryforwards may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of losses before utilization.
 
 F - 52
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands
  Note 14 -
INCOME TAXES (CONT.)
 
 E.
INCOME (LOSS) BEFORE TAXES ON INCOME
  Year Ended December 31,2009


2008


2007Domestic

$
(23,955
)

$
1,136


$
30,240Foreign


2,558



2,482



4,039$
(21,397
)

$
3,618


$
34,279
 
 F.
TAXES ON INCOME
  Year Ended December 31,2009


2008


2007Domestic

$
3,038


$
(*) (2,412
)

$
2,493Foreign


202



403



542$
3,240


$
(2,009
)

$
3,035
 
 (*)
Includes the effect of a final tax assessment with the Israeli tax authorities for the years 2003-2005 in the amount of ($2,003).
 
 G.
A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company and the actual tax expense as reported in the income statements is as follows:
 
 Year Ended December 31,2009


2008


2007Income (loss) before taxes, as reported  in  the consolidated statements

of  income

$
(21,397
)

$
3,618


$
34,279Statutory tax rate


26
%


27
%


29
%Theoretical tax expenses (benefits) on  the  above amount at the

Israeli Statutory tax rate

$
(5,563
)

$
977


$
9,941Increase (decrease) in taxes resulting  from

“Approved  Enterprise” benefits (1)


4,602



161



(14,172
)Difference in basis of measurement for tax purpose


408



(7,155
)


-Change in valuation allowance, net


1,842



4,309



4,285Non-deductible stock based compensation


1,109



1,056



2,263Non-deductible expenses


646



185



451Decrease in taxes resulting from tax   settlement with tax authorities


--



(1,506
)


--Others


196



(36
)


267Actual tax (income) expense

$
3,240


$
(2,009
)

$
3,035
  F - 53
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands, expect share and per share data
  Note 14 -
INCOME TAXES (CONT.)
 
 G.
Cont.
 
 Year Ended December 31,2009


2008


2007(1
)
Per share amounts (basic) of the tax  benefit resulting from the exemption

$
0.17


$
0.01


$
(0.51
)Per share amounts (diluted) of  the tax benefit Resulting from the exemption

$
0.17


$
0.01


$
(0.50
)
  Note 15 -
FINANCIAL INCOME, NET
 
 Year Ended December 31,2009


2008


2007Income:Interest on cash equivalents

$
25


$
373


$
505Gain and interest on available-for-salemarketable securities


3,274



7,561



8,423Interest on short-term deposits andstructured note


-



510



310Foreign currency transaction adjustments


-



-



465Expenses:Interest on short-term credit and bankCommissions


(280
)


(337
)


(245
)Loss on available-for-sale marketableSecurities


(458
)


(540
)


(428
)Impairment of investments in marketablesecurities


(173
)


(1,553
)


(5,776
)Foreign currency transaction adjustments


(291
)


(2,152
)


-$
2,097


$
3,862


$
3,254
 
 F - 54
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands, expect share and per share data
  Note 16 -
MAJOR GEOGRAPHIC INFORMATION
 
 The Company applies ASC 280 (Originally issued as SFAS 131) Segments reporting (“ASC 280”).  The Company operates in one reportable segment. The total revenues are attributed to geographic areas based on the location of the end customer.
 
 The following presents total revenues and long-lived assets as of December 31, 2009, 2008 and 2007 and for the years then ended:
 
 2009


2008


2007Total revenue


Long lived assets


Total revenue


Long lived assets


Total revenue


Long lived assetsNorth America

$
27,978


$
18,583


$
60,202


$
642


$
80,489


$
608Europe


10,919



-



33,005



-



32,666



44Asia Pacific


11,362



-



16,967



-



22,013



-Israel


1,127



18,934



581



9,664



916



7,319Others


3,340



-



4,224



-



4,912



-$
54,726


$
37,517


$
114,979


$
10,306


$
140,996


$
7,971
  Note 17 -
EARNINGS PER SHARE
 
 The following table sets forth the computation of basic and diluted net earnings per share:
 
 Year Ended December 31,2009


2008


2007Numerator:Net (loss) income

$
(23,587
)

$
5,627


$
31,244Denominator:Weighted-average number of sharesoutstanding used

in computing basic net earnings per share


27,526,401



27,410,187



27,690,449Dilutive effect: stock options and RSUs


-



110,576



190,041Total weighted-average number of shares used in

computing diluted net earnings (loss) per share


27,526,401



27,520,763



27,880,490Basic net (loss) earnings per share

$
(0.86
)

$
0.21


$
1.13Diluted net (loss) earnings per share

$
(0.86
)

$
0.20


$
1.12
  F - 55
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands, expect share and per share data
  Note 17 -
EARNINGS PER SHARE (CONT.)
  Anti-dilutive securities
  The following outstanding options (prior to the application of the treasury shares method) and RSU’s were excluded from the computation of diluted net earnings loss per Ordinary share for the periods presented because including them would have had an anti-dilutive effect.
 
 Year Ended December 31,2009


2008


2007Options and RSU’s to purchase Ordinary shares


3,272,205



2,202,853



1,107,837
  Note 18 -
SUBSEQUENT EVENTS (UNAUDITED)
 
 On January 5, 2010 the Company officially completed the merger with Candela Incorporation. See also Note 1I.
 
 The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The Company is in the process of obtaining third party valuations of assets acquired and the liabilities assumed, thus the provisional measurements below are subject to change and are based on unaudited figures:
 
 Assets

Fair valueCurrent assets


75,673Other assets (includes mainly deferred tax assets)


38,143Net fixed assets


3,110Intangible assets (*)


24,010Total identifiable assets acquired


140,936Current liabilities


43,366Deferred  taxes


9,832Long term liabilities


4,889Total identifiable liabilities assumed


58,087Net identifiable assets acquired


82,849Deferred gain


(9,825
)Net assets acquired


73,024
 
 (*)
Of the $24,010 intangible assets acquired, $10,070 was assigned to developed technology (10 years useful life), $510 was assigned to in-process research and development asset which is not subject to amortization, $8,930 was assigned to  customer relationship (6 years useful life), $3,300 was assigned to tradename (11 years useful life) and the remaining $1,200 was assigned to covenant not to compete (3 years useful life).
 
 F - 56
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands, expect share and per share data
 
 Note 18 -
SUBSEQUENT EVENTS (UNAUDITED) (CONT.):
 
 Pro forma condensed results of operations:
 
 The following represents the unaudited pro forma condensed results of operations for the year ended December 31, 2009 assuming that the acquisition of Candela occurred on January 1, 2009. The pro forma information is not necessarily indicative of the results of operations, which actually would have occurred had not the acquisitions been consummated on those dates, nor does it purport to represent the results of operations for future periods.
  Year ended December 31,2009Revenues

$
174,032Net loss attributable to Syneron's shareholders


(28,023
)Basic and diluted net loss per share attributable to Syneron's shareholders

$
(0.82
)
  F - 57




SIGNATURES




The registrant hereby certifies that it meets all of the requirements for filing Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.




Dated: March 25, 2010




Syneron Medical LtdBy:
/s/   Louis ScafuriLouis ScafuriChief Executive Officer





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