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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1996, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ___ to ___.
Commission file number: 0-18053
LASERSCOPE
(Exact name of Registrant as specified in its charter)
California 77-0049527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3052 Orchard Drive San Jose, California 95134-2011
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 943-0636
______________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Common Share Purchase Rights
______________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $60,200,000 as of March 17, 1997, based upon the
closing sale price on the NASDAQ National Market System reported for such date.
Shares of Common Stock held by each officer and director and by each person who
owns 5% of more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
There were 12,004,306 shares of Registrant's Common Stock issued and
outstanding as of March 17, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement ("Proxy Statement") to be filed
prior to April 30, 1997, pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended, are incorporated by reference into Part lll of this
Form 10-K.
INTRODUCTORY STATEMENT AND REFERENCES
Except for the historical information presented in this Annual Report on Form
10-K, the matters discussed herein are forward-looking statements made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Investors are cautioned that all forward- looking statements are
subject to certain risks and uncertainties that could cause the actual results
to differ materially from those projected. Factors that could cause actual
results to differ materially include, but are not limited to, the risks
associated with the Company's acquisition of Heraeus Surgical, Inc., including
the integration of the assets acquired and assumption of the liabilities
assumed by Laserscope, the timing of orders and shipments, the Company's
ability to balance its inventory and production schedules, the timely
development and market acceptance of new products and surgical/therapeutic
procedures, the impact of competitive products and pricing and public policy
relating to health care reform in the United States and other countries.
The Company desires to continue expansion of its operations outside of the
United States and to enter additional international markets, requiring
significant management attention and financial resources and further subjecting
the Company to the risks of operating internationally. These risks include
unexpected changes in regulatory requirements, delays resulting from difficulty
in obtaining export licenses for certain technology, customs, tariffs and other
barriers and restrictions, and the burdens of complying with a variety of
foreign laws. The Company is also subject to general geopolitical risks in
connection with its international operations, such as political and economic
instability and changes in diplomatic and trade relationships. The Company
cannot predict whether quotas, duties, taxes or other charges or restrictions
will be imposed by the United States, Japan, countries in the European Union or
other countries upon the import or export of the Company's products in the
future, or what effect any such actions would have on its business, financial
condition or results of operations. In addition, fluctuations in currency
exchange rates may negatively impact the Company's ability to compete in terms
of price against products denominated in local currencies. In addition, there
can be no assurance that regulatory, geopolitical and other factors will not
adversely impact the Company's operations in the future or require the Company
to modify its current business practices.
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Other risks are detailed from time to time in the Company's press releases and
other public disclosure filings with the U.S. Securities and Exchange
Commission (SEC), copies of which are available upon request from the Company.
The forward-looking statements included herein speak only of the date hereof.
The Company assumes no obligation to update any forward-looking statements
included herein.
References made in this Report to "Laserscope," the "Company" or the
"Registrant" refer to Laserscope and its subsidiaries. References made in this
Report to "HSI" refer to Heraeus Surgical, Inc.
The following are Laserscope registered trademarks which may be mentioned
herein: Laserscope, Dermastat, KTP/532, KTP/YAG, MicroBeam, Opthostat,
ClearView, Crossfire, Digilase, Infraguide, Illumina, Laserblade, Luxus,
Permaline, Pinnacle, Sureshot, Ultralase, Ultraline, and Ultraspot.
The following are Laserscope common law trademarks and service marks which also
may be mentioned herein: AccuStat, ADD, ADDStat, Ascent Medical Systems, Aura,
Dermastat, DiscKit, Dual FX, Everything You Need. Everything Unique! (SM),
Endostat, FiberLife, FocalStat, KTP/YAG, Laparostat, LaparoVac, LDD, Medical
Insite (Web Site SM), MicronSpot, Microstat, Orion, People Who Do More (SM),
The Power Family (SM), Pulsar, SmartConnector, SmartScan, SpineScope,
SpineStat, StarPulse, ArthroGuide, Enhance, Hercules, InfraTips, On Target,
OrthoProbe, QuickPulse, Radiance, Resilient, SpinaLase, SuperPulse, and
UroLine.
Photofrin and Optiguide are registered trademarks of QLT PhotoTherapeutics,
Inc. Hanaulux and Hanauport are trademarks of Heraeus Med GmbH. Maquet is a
trademark of Maquet Corporation. CVAC is a trademark of CVAC, Inc.
PART I
ITEM 1. BUSINESS
General Overview of Business
Laserscope(R) designs, manufactures, sells and services, on a worldwide basis,
surgical, dermatologic and therapeutic laser systems and related surgical
instrumentation and disposable supplies and accessories. Its portfolio of more
than 350 products, includes an advanced line of KTP/532(R), CO2, Nd:YAG,
Er:YAG, Ruby, Diode and Dye medical laser systems and related energy delivery
devices for the office, outpatient surgical center and hospital markets.
Laserscope's Ascent Medical Systems(TM) (AMS) are innovative equipment for the
surgical and outpatient care environments. The AMS product family includes
procedure
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and treatment lights, ceiling-mounted equipment organizers, centralized smoke
evacuation systems, video systems and operating tables.
Primary medical markets served include dermatology, aesthetic surgery, urology,
gynecology, ear, nose and throat (ENT) surgery and photodynamic therapy (PDT),
an emerging cancer treatment. Secondary markets include general surgery,
neurosurgery, orthopedics, gastroenterology as well as other surgical
specialties.
Mission
Laserscope's corporate mission is to improve the quality and cost effectiveness
of health care by providing innovative medical products and services.
History
Laserscope was founded in 1982 and its first product was shipped in 1984.
During its initial years, the Company was funded by several venture capital
firms and by E.I. du Pont de Nemours & Company. Laserscope received the first
in a series of U.S. regulatory clearances in 1987 and completed its initial
public offering in December 1989. Laserscope is a California corporation.
Market Focus
Laserscope believes that it participates in several business areas with good
opportunities. Near-term opportunities lie in the dermatology/aesthetic
surgery marketplace. Laserscope's new desktop-sized Aura(TM) laser is
effective in treating leg veins in addition to minimizing the side effects
inherent in other laser leg vein treatments. The Company's Pulsar(TM) CO2
laser is an attractive new entry in the skin resurfacing (treatment of
wrinkles) market.
More mid-term opportunities lie in further developing the surgical support
products (renamed Ascent Medical Systems) obtained through the acquisition of
Heraeus Surgical, particularly the centralized smoke evacuation and equipment
management systems, discussed in more detail below.
Longer-term opportunities for the Company lie in photodynamic therapy (PDT), a
modality to treat cancer and pre-malignant conditions with laser energy and
light-activated, photosensitive pharmaceuticals. In January 1996, Laserscope
announced that marketing clearance had been received from the U.S. Food and
Drug Administration (FDA) for its PDT laser systems and the drug Photofrin(R).
The laser systems' marketing clearance came in conjunction with the FDA
approval of Photofrin to treat advanced esophageal cancer. Photofrin, a
proprietary drug of QLT PhotoTherapeutics Inc. (QLT), is the first
light-activated drug for use in photodynamic therapy to be approved in the
United States.
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In February 1997, QLT and Laserscope jointly requested FDA approval of PDT for
early and late-stage lung cancer.
Photofrin is distributed through QLT's distribution partners which are Sanofi
Pharmaceuticals, Inc. in the U.S. and Beaufour Ipsen in Europe. Laserscope is
the worldwide distributor of its own PDT laser systems and QLT's Optiguide(R)
fiberoptic delivery devices.
Laserscope has a strategic alliance with QLT for the development, manufacture
and distribution of medical devices for the PDT market, as well as a sales and
marketing agreement with Rare Earth Medical, a developer and manufacturer of
advanced fiber optic light diffusing products for PDT applications. Laserscope
also is actively engaged in discussions with other pharmaceutical partners,
some of whom are pursuing non-cancer PDT applications.
Products
Laser Platforms:
The Company's Aura(TM) Laser System is a compact, highly portable, KTP/532
single wavelength laser designed for office use. Its integrated StarPulse
feature is designed for the removal of benign vascular and pigmented surface
lesions, including leg telangiectasia (spider-like leg veins). It can also be
used as a continuous wave laser for surgical applications that include
endoscopic blepharoplasty, rhinoplasty, facelifts, tonsillectomy, wart removal
and snoring cessation.
The Orion(TM) Laser System is a mid-size, more powerful system for outpatient
surgical centers and hospitals. It features dual KTP/532 and Nd:YAG
wavelengths as well as StarPulse. The range of applications include ENT,
gynecology, urology, general surgery, neurosurgery, orthopedics, spine surgery,
as well as aesthetic surgery and dermatology. The Orion also can serve as a
base laser system for Laserscope's PDT laser dye module, enabling photodynamic
therapy applications. Both the Aura and Orion systems are available with
SmartScan, a microprocessor- controlled beam scanning device.
The Pulsar(TM) Laser System is a mid-size CO2 laser for the office, outpatient
surgical centers and hospitals. It features an advanced pulsing technology
called ClearPulse to create custom skin tissue effects. It also operates in a
continuous beam mode for surgical applications. It is primarily used for skin
resurfacing or wrinkle removal as well as being a surgical laser for ENT and
gynecologic applications. It is available with ParaScan, a
microprocessor-controlled beam scanning device.
The Hercules Nd:YAG Laser System delivers both continuous and pulsed laser
energy for a variety of laser procedures. It is compact and highly
maneuverable, and delivers 40, 60 or l00 watts of power. The QuickPulse
feature pulses the laser ten times faster
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than conventional Nd:YAG lasers for rapid ablation of tissue with reduced
thermal damage. Applications are in urology, gynecology, ENT, gastroenterology,
and thoracoscopy. The Hercules is sold principally to hospitals outside of the
United States.
The 800 Series KTP/YAG(TM) Surgical Laser System is designed for use in
hospitals. It is a high-power, dual-wavelength system with applications in
urology, gynecology, ENT, aesthetic surgery, orthopedics, general surgery,
neurosurgery, pulmonary surgery and gastroenterology. The KTP/532 beam
surgically cuts, vaporizes and coagulates tissue with minimal disruption to
adjacent areas. Cutting and vaporization are achieved hemostatically, making
the system effective for endoscopic as well as open surgical procedures.
Complementing the KTP/532 beam is the Nd:YAG infrared beam which provides deep
coagulation and powerful ablative capabilities. The 800 Series System, which
provides up to 40 watts of KTP/532 energy and 100 watts of Nd:YAG energy, can
also serve as a base laser system for Laserscope's PDT laser dye module,
enabling photodynamic therapy applications.
Laserscope's PDT systems include the Model 630 and 630XP PDT Dye Modules. The
Model 630 Dye Module provides 3.2 watts of power while the Model 630 XP Dye
Module provides 7.0 watts of power. Both systems operate at 630 nm for
photoactivation of Photofrin, are portable and tunable to other wavelengths.
PDT utilizes a light-activated drug that is administered intravenously to the
patient. This is followed by an interval during which the drug circulates,
accumulates and is retained in tumors, while largely clearing from other
tissues. The drug has no apparent effect on tumors until it is activated by
non-thermal light from the Model 630 or 630XP PDT Dye Module and produces an
active form of oxygen that destroys the cancer.
Through its distribution arrangements with NWL Laser-Technologie, GmbH, the
Company has access to erbium yttrium-aluminum garnet (Er:YAG), and Ruby lasers
which have applications in dermatology, in addition to other lasers with
industrial applications. Laserscope has received FDA 510(k) approval to market
the Er:YAG and intends to apply for 510(k) approval to market the Ruby laser in
the U.S. At some future time, the Company may elect to introduce all of these
products to the U.S. and other geographic areas.
Laser Devices, Instruments and Disposables:
Laserscope offers a broad line of surgical instrumentation, disposables, kits
and other accessories for use with its surgical laser systems. These products
include disposable optical fibers, diffusing fibers for PDT applications,
side-firing devices, individual custom handpieces for specific surgical
applications, scanning devices, micromanipulators for microscopic surgery, and
various other devices, procedure-specific kits and accessories. This portfolio
of aftermarket products includes more than 350 medical devices.
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The disposable optical fibers are available in different lengths and diameters
for different surgical applications and preferences. The handpieces, which are
used to hold and aim the optical fiber, give the surgeon the feel of a
traditional surgical tool. When used in contact with body tissue, they provide
tactile feedback similar to conventional surgery.
Ascent Medical Systems (AMS):
Ascent Medical Systems are integrated equipment and instrumentation for the
operating and emergency rooms. The AMS product family includes procedure and
treatment lights, ceiling-mounted equipment organizers, centralized smoke
evacuation systems, video systems and operating tables.
The AMS ceiling-mounted equipment management systems are designed to improve
efficiency of an operating or emergency room by moving medical equipment,
anesthesia machines, endoscopic equipment, cords, hoses, accessories and gas
outlets from the floor into their optimal clinical positions overhead.
Ergonomically positioned equipment is designed to minimize fatigue and strain
and avoid distractions for the hospital's surgical staff.
Also available is a centralized smoke evacuation system (CVAC) designed to
remove potentially harmful, microscopic debris from the air to protect both
patients and healthcare workers. The CVAC system is integrated into a
ceiling-mounted equipment management system.
Through distribution arrangements with Hereaus Med GmbH and Maquet, the Company
markets additional operating and emergency room equipment.
Supplied by Heraeus Med, the Hanaulux(TM) high-intensity surgical lights
provide brilliant light, shadow-free illumination and true color for every
surgical procedure. A multi-lens system with a cascade of focal points allows
each light source to illuminate the entire light field independently,
minimizing shadows and creating a homogeneous light field.
Electrohydraulic surgical tables supplied by Maquet,(TM) offer motorized
movement for anatomic positioning of the patient during all types of surgical
procedures.
Also supplied by Heraeus Med are ceiling-mounted, broadcast-quality
Hanauvision(TM) interactive video systems which allow monitoring, teaching,
teleconferencing or consultation from a remote site or with other specialties,
such as radiology and pathology, during surgical procedures.
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Sales and Marketing
The Company concentrates its marketing efforts for its laser products on high
volume surgical procedures. The marketing of AMS products is directed at
planners and architects, engaged primarily in retrofitting existing operating
or emergency rooms.
Laserscope believes that increased awareness of both the benefits of laser
surgery and the drawbacks of conventional surgery is one of the most important
factors in expanding the market for its laser and laser-based products. As a
result, the Company has designed its marketing and sales strategy around a
strong educational effort to promote awareness of the versatility, safety and
cost-effectiveness of its surgical laser systems. For AMS products, the
marketing strategy emphasizes the efficient and productive operation of an
operating or emergency room.
Laserscope promotes its products through trade shows and exhibits covering most
of the surgical specialties, physician workshops and seminars, medical journal
advertising and direct mailings. The Company supports and participates in a
substantial number of workshops and seminars. For laser products, the
workshops usually include a demonstration of the Company's laser systems and
provide surgeons with direct experience using the Company's products.
Distribution
In the U.S., the U.K. and France, the Company distributes its products to
hospitals, outpatient surgical centers and physician offices through its own
direct sales force. In Germany, Laserscope products are distributed by NWL
Laser-Technologie, GmbH a company in which Laserscope has a minority equity
interest and an option to acquire the remainder. Elsewhere, Laserscope
products are sold through regional distributor networks. At present, 32
distributors serve 39 countries throughout Europe, the Middle East, Latin
America, Asia and the Pacific Rim. Laserscope is both ISO 9001 and CE
certified.
International Business
Revenues from Europe, Asia and the Pacific Rim continue to account for an
increased percentage of total sales. Approximately 26% of Laserscope's 1996
revenues were derived from its international operations, up from 23% in 1995
and 17% in 1994. The Company expects that international sales will continue to
represent a significant percentage of net sales.
In March 1995, the Company entered into an agreement with NWL Laser-Technologie
("NWL") whereby the Company paid NWL approximately $1.6 million in exchange for
a cross-distribution and development agreement, a minority equity position in
NWL and an option to purchase all of the ownership interests in NWL. These
assets are carried at cost. If the Company does not exercise its option to
purchase NWL by June 1997,
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there will be no reimbursement of the Company's investment and the Company's
equity position will be relinquished. If the Company exercises its option, the
remaining purchase price will be paid over three and one half years from the
exercise date. The Company currently expects to exercise its purchase option
prior to lapse of the option period.
Installed Base of Lasers
Laserscope has more than 5,500 laser systems installed worldwide. The
installed base provides a market for service as well as the sale of devices,
instruments and disposables.
Installation, Service and Support
A direct field service organization provides installation and service for the
Company's products. The Company generally provides a twelve month warranty on
its laser systems. After the warranty period, maintenance and support is
provided on a variety of service contract bases or on an individual call basis.
The Company also has a "99.0% Uptime Guarantee" on its laser systems. Under
provisions of this guarantee, the Company extends the term of the related
warranty or contract if specified system uptime levels are not maintained. To
date, all systems covered by this guarantee have achieved a 99.9% uptime rate.
Research and Development
The Company operates in an industry that is subject to rapid technological
changes and its ability to remain competitive depends on, among other things,
its ability to anticipate and react to such change. As a result, the Company
intends to continue to invest significant amounts in research and development.
Laserscope's current research and development programs are directed toward the
development of new laser systems and delivery devices as well as enhanced
operating room products. In development, for example, are new diode laser
systems for the emerging PDT market and other applications. However, there can
be no assurance that the PDT market will develop as anticipated or that
Laserscope's product development will prove successful. Nor can there be any
assurance that such new products, if developed and introduced, will receive
market acceptance.
Manufacturing
The Company manufactures the laser resonators used in its laser systems, the
system chassis and certain accessories. The Company's laser manufacturing
operations concentrate on the assembly and test of components and subassemblies
manufactured to the Company's designs and specifications by outside vendors.
The Company
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believes that it has sufficient manufacturing capacity in its present
facilities to support current operations at least through the end of 1997.
In addition to its laser manufacturing capability, the Company has a production
facility for certain of its disposable products. The Company's Endostat
fibers, KTP Disc Kit, and Angled Delivery Devices (ADD and ADDStat) are
manufactured in this facility.
Certain of the components used in the Company's products, including KTP
(potassium titanyl phosphate) crystals, molded and cast components, power
supplies, and certain optical components, are purchased from single sources.
While the Company believes that most of these components are available from
alternative sources, an interruption of these or other supplies would adversely
affect the Company. KTP crystals are currently available at appropriate quality
levels from only one supplier, a division of Litton Industries. This supplier
has a second crystal growing and fabrication facility at a second location in
the United States geographically isolated from its original production
facility. While the Company believes that an alternative supplier of KTP
crystals could be qualified, if the supply of crystals from the present
supplier were interrupted there would be an adverse effect on the Company's
business and results of operations.
Employees
At December 31, 1996, the Company had 265 full-time employees. The Company
believes that it maintains competitive compensation, benefit, equity
participation and work environment policies to assist in attracting and
retaining qualified personnel. The Company believes that the success of its
business will depend, in part, on its ability to attract and retain such
personnel, who are in great demand.
Competition
The medical equipment market is highly competitive. The ability of the Company
to compete effectively depends on such factors as market acceptance of its
products, product performance and price, customer support, the success and
timing of new product development, and continued development of successful
channels of distribution. Some of the Company's current and prospective
competitors have or may have significantly greater financial, technical,
manufacturing and marketing resources than the Company. To compete, the
Company will need to continue to expand its product offerings, periodically
enhance its existing products and continue to expand its distribution
internationally.
Product Liability Exposure
The business of the Company entails the risk of product liability claims. The
Company has experienced product liability claims from time to time, which it
believes are ordinary for its business. While it is not feasible to predict or
determine the outcome of the actions brought against it, the Company believes
that these actions will not ultimately
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have a material adverse impact on the Company's financial position or results
of operations.
At present, the Company maintains product liability insurance on a "claims
made" basis with coverage of $10,000,000 in the aggregate and a deductible of
$100,000 per occurrence and an annual maximum aggregate deductible of $500,000.
There can be no assurance that such insurance will be available at a reasonable
cost, if at all, in the future, nor can there be any assurance that other
claims will not be brought against the Company which would exceed applicable
insurance coverage.
Factors Affecting Financial Results and Stock Price
A number of factors affect the Company's financial results and stock price,
especially on a quarterly basis. One such factor is timing of shipments. The
Company's laser products are relatively expensive pieces of medical capital
equipment and the precise shipment date of specific units can have a marked
effect on the Company's results of operations on a quarterly basis. A delay in
product shipments near the end of a quarter could cause quarterly results to
fall short of anticipated levels.
A related factor is the timing of orders. To the extent orders are received by
the Company near the end of a quarter, the Company may not be able to fulfill
the order during the balance of that same quarter. Additionally, the Company
typically receives a disproportionate percentage of its orders toward the end
of each quarter. To the extent that anticipated orders are not received or are
delayed beyond the end of the applicable quarter, the Company's revenues may be
adversely affected and the Company's revenues may be unpredictable from quarter
to quarter. Further, there can be no assurance that revenue growth or
profitability on a quarterly or annual basis will be accomplished. Factors
affecting operating results include, but are not limited to, product mix,
competitive pricing pressures, material costs, revenue and expenses related to
new products and enhancements to existing products, as well as delays in
customer purchases in anticipation of new products or product enhancements by
the Company or its competitors.
The market price of the Company's common stock may be subject to significant
fluctuations. These fluctuations may be due to factors specific to the
Company, such as quarterly fluctuations in the Company's financial results,
changes in analysts' estimates of future results, changes in investors'
perceptions of the Company or the announcement of new or enhanced products or
strategic transactions by the Company or its competitors. In addition, such
fluctuations may be due to or exacerbated by general conditions in the medical
equipment industry or conditions in the financial markets generally.
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Patents and Licenses
While the Company believes the patents that it has and for which it has applied
are of value, other factors are of greater competitive importance. The Company
holds several patents issued in the United States, generally covering surgical
laser systems, delivery devices, calibration inserts, the laser resonator and
the connector used to attach disposable and reusable instrumentation to the
Company's laser systems.
In April 1992, the Company entered into a worldwide, license agreement with
PDT, Inc. (PDTI) for licenses under the dye laser patents issued to PDTI. The
licenses, which expire in April 1999, allow the Company, on an exclusive basis,
to sublicense, manufacture, have manufactured or use, and on a non-exclusive
basis, lease and sell the dye laser. Under the terms of the agreement, PDTI
retains ownership of the intellectual property licensed to the Company under
the agreement and has the right to manufacture, have manufactured, use, lease,
and sell the dye laser for use in photodynamic therapy with PDTI photodynamic
drugs. To acquire the licenses, the Company paid PDTI $400,000 and provided
PDTI certain laser equipment. Under the terms of the license, the Company must
pay a royalty to PDTI based on the net sales price of Dye Lasers sold by the
Company.
Government Regulation
Government regulation in the U.S. and other countries is a significant factor
in the development, manufacturing and marketing of many of the Company's
products and in the Company's ongoing research and development activities.
The Company and its products are regulated by the FDA under statutory
authorities, including the Federal Food, Drug and Cosmetic Act (the "FDC Act")
and the Radiation Control for Health and Safety Act.
The FDC Act provides two basic review procedures for medical devices. Certain
products may qualify for a Section 510(k) ("510(k)") procedure under which the
manufacturer gives the FDA premarket notification of the manufacturer's
intention to commence marketing the product. The manufacturer must, among
other things, establish that the product to be marketed is "substantially
equivalent" to a previously marketed product. In some cases, the manufacturer
may be required to include clinical data gathered under an investigational
device exemption ("IDE") granted by the FDA allowing human clinical studies.
If the product does not qualify for the 510(k) procedure, the manufacturer must
file a premarket approval application ("PMA") based on testing intended to
demonstrate that the product is both safe and effective. The PMA requires more
extensive clinical testing than the 510(k) procedure and generally involves a
significantly longer FDA review process. Approval of a PMA allowing commercial
sale of a product requires preclinical laboratory and animal tests and human
clinical studies conducted under an IDE establishing safety and effectiveness.
Generally, because of the amount of information required, the 510(k) procedure
takes less time than the PMA procedure.
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To date, all of the Company's products (except for the 600 Series Dye Module)
have been marketed through the 510(k) procedure. Future applications, however,
may require clearance through the PMA procedure. There can be no assurance
that such marketing clearances can be obtained on a timely basis. Delays in
receiving such clearances could have a significant adverse impact on the
Company. The FDA may also require post-market testing and surveillance
programs to monitor certain products.
Certain other countries require the Company to obtain clearances for its
products prior to marketing the products in those countries. The requirements
vary widely from country to country and are subject to change. The European
community is in the process of developing a new approach to the regulation of
medical products which may significantly change how medical devices are
marketed in those countries within the next several years. In February 1996,
the Company achieved ISO 9001 and CE (European Conformation) Mark registration
in anticipation of this change.
The Company is also required to register with the FDA and state agencies, such
as the Food and Drug Branch of the California Department of Health Services, as
a medical device manufacturer. The Company is inspected on a routine basis by
both the FDA and the State of California for compliance with the FDA's Current
Good Manufacturing Practice regulations. Those regulations impose certain
procedural and documentation requirements upon the Company with respect to
manufacturing, testing, and quality control activities. If violations of
applicable regulations are noted during these inspections, the continued
marketing of any products manufactured by the Company may be adversely
affected.
In addition, the Company's laser products are covered by a performance standard
for laser products set forth in FDA regulations. The laser performance standard
imposes certain specific record keeping, reporting, product testing, and
product labeling requirements on the Company. These requirements also include
affixing warning labels to the Company's laser systems, as well as the
incorporation of certain safety features in the design of the Company's
products. The Company believes that it is in material compliance with all of
these requirements.
Complying with applicable governmental regulations and obtaining necessary
clearances or approvals can be time consuming and expensive, and there can be
no assurance that regulatory review will not involve delays or other actions
adversely affecting the marketing and sale of the Company's products. The
Company also cannot predict the extent or impact of future legislation or
regulations.
The Company is also subject to regulation under federal and state laws
regarding, among other things, occupational safety, the use and handling of
hazardous materials and protection of the environment. The Company believes
that it is in material compliance with these requirements.
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Acquisitions
On August 30, 1996, the Company consummated the acquisition of Heraeus
Surgical, Inc. ("HSI"), a Delaware Corporation and wholly-owned subsidiary of
Heraeus Med GmbH, a company organized under the laws of the Federal Republic of
Germany. As consideration for HSI and certain of the assets and liabilities of
Heraeus Med's laser distribution operations, Laserscope paid Heraeus Med $2
million and issued Heraeus Med 4,609,345 shares of Laserscope common stock (the
"Heraeus Shares") The Heraeus Shares were issued pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended. The Company has agreed to register the Heraeus Shares pursuant to a
"shelf" registration statement to be filed with the Securities Exchange
Commission by August 30, 1997. On August 30, 1997, certain contractual
limitations on Heraeus Med's ability to transfer the shares will expire. The
sale of the Heraeus Shares would substantially alter the Company's market float
for its common stock and could have an adverse impact on the Company's ability
to raise capital. In addition, any such sales (or the investment community's
anticipation of such sales), especially in large amounts, could materially
affect the market price of Laserscope common stock.
14
<PAGE> 15
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to the executive
officers of the Company, and their ages as of December 31, 1996:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- --- -----------------------------------------------
<S> <C> <C>
Benjamin L. Holmes 62 Chairman of the Board and Director
Robert V. McCormick 52 President, Chief Executive Officer and Director
Thomas B. Boyd 50 Senior Vice President of Operations and
International
Roy Fiebiger 42 Senior Vice President of Marketing, Sales and
Service
Bonnie Jones 48 Vice President of Human Resources
Dennis LaLumandiere 43 Vice President of Finance, Chief Financial
Officer and Assistant Secretary
Eric Reuter 35 Vice President of Research and Development
</TABLE>
Ms. Jones resigned as an officer of the Company effective January 1997.
Benjamin L. Holmes has been a director of the Company since January 1992 and
was appointed Chairman of the Board of Directors in June 1992. Mr. Holmes was
General Manager of the Medical Products Group of Hewlett-Packard Company ("HP")
from 1983, and a Vice President of HP, from 1985 until his retirement in
October 1995. Mr. Holmes is a member of the Board of Directors of Project HOPE
and the Massachusetts High Technology Council. He is also a member of the
Massachusetts Governor's Council on Economic Growth and Technology,
Commissioner of the Massachusetts Universal Health Care Commission, and a
member of the Board on Health Care Service, Institute of Medicine, National
Academy of Sciences. He is also Past Chairman of the Board of Directors of
the Health Industry Manufacturers Association (HIMA).
Robert V. McCormick has been President of the Company since December 1991 and
Chief Executive Officer since July 1992. Between December 1991 and July 1992
he also served as the Company's Chief Operating Officer. He has been a
director of the Company since July 1992. Mr. McCormick also served as the
Company's Senior Vice President of Marketing and Field Operations from April
1991 to December 1991. Mr. McCormick was employed by Acuson Corporation, a
manufacturer of medical imaging equipment, from 1983 to April 1991 in a variety
of sales and marketing executive positions culminating as Vice President of
Marketing and Field Operations.
Thomas B. Boyd was hired as Senior Vice President of Operations and Finance in
April 1994 and was appointed to the position of Senior Vice President of
Operations and International in September 1996. Prior to joining Laserscope,
from January 1992 to March 1994, Mr. Boyd was Vice President of Operations for
American Safety Razor (ASR) Co., a consumer and medical products company. From
August 1975 to
15
<PAGE> 16
December 1991 he was employed by Baxter Healthcare Corporation, an
international manufacturer and distributor of healthcare products, in various
financial and operations management positions including Vice President of
Manufacturing from September 1989 to December 1991.
Roy Fiebiger was hired as Vice President of Marketing in September 1995. Mr.
Fiebiger was promoted to Vice President of Marketing and Sales in November 1995
and then to Senior Vice President of Marketing, Sales and Service in February
1997. Prior to his employment with Laserscope, from November 1994 to August
1995, Mr. Fiebiger was President and Chief Executive Officer of EnVision
Surgical Systems (since renamed "Novacept"), a private, development stage
medical device company. From April 1991 to October 1994, Mr. Fiebiger was
Executive Vice President and Chief Operating Officer for Norian Corporation, a
development stage medical device company, and from August 1984 to March 1991 he
was Vice President of Sales and Marketing for Techmedica, a medical device
company.
Bonnie Jones was employed with the Company since November 1988 when she was
hired as Laserscope's first Personnel Manager. She was promoted to Director of
Personnel in June 1991 and Vice President of Human Resources in June 1993.
Prior to working for the Company, she was as an independent consultant for
various companies and Director of Personnel for Humphrey Instruments, an
ophthalmic instruments company. Ms. Jones worked at Humphrey from 1982 through
1987. Ms. Jones resigned as an officer of the Company effective January 1997.
Dennis LaLumandiere has been employed with the Company since September 1989
when he was hired as Laserscope's Corporate Controller. He was promoted to
Vice President of Finance in February 1995, appointed as Chief Financial
Officer in February 1996 and Assistant Secretary in November 1996. Prior to
working for the Company, he held various financial and operations management
positions at Raychem Corporation, a multinational materials science company.
Mr. LaLumandiere was employed by Raychem from 1983 to 1989.
Eric Reuter was hired as Vice President of Research and Development in
September 1996. Prior to working for the Company, from February 1994 to August
1996, Mr. Reuter was employed at the Stanford Linear Accelerator Center at
Stanford University as the Project Engineer for the B-Factory High Energy Ring,
an electron storage ring to be used for high energy physics research. From
February 1991 to January 1994 he held positions as a Senior Staff Engineer and
Program Manager in digital imaging at Siemens Medical Systems - Oncology Care
Systems, a medical device company. From July 1984 to January 1991, Mr. Reuter
held various positions in design engineering, project engineering, and
engineering management at the Stanford Linear Accelerator Center.
16
<PAGE> 17
ITEM 2. PROPERTIES
The Company leases three buildings and supplemental warehouse space aggregating
approximately 91,000 square feet in San Jose, California under leases expiring
in February 2001. The Company has options to extend the leases at the
then-current market rates. These facilities house the Company's research and
development and manufacturing operations as well as the Company's principal
sales, marketing, service and administrative offices. During late 1996, the
Company invested approximately $1 million in leasehold improvements to these
facilities to accommodate the employees hired as a result of the acquisition of
HSI. The Company believes that these facilities are suitable for its current
operations and are adequate to support those operations at least through the
end of 1997. The Company has also leased small offices in the United Kingdom
and France where the Company's local sales and marketing staffs are based.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the normal
course of its business. These actions may include product liability and
employee-related issues. While it is not feasible to predict or determine the
outcome of the actions brought against it, the Company believes that the
ultimate resolution of these claims will not ultimately have a material adverse
impact on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol LSCP. As of March 17, 1997 the Company had approximately 800
shareholders of record.
The following table shows the Company's high and low selling prices for the
years ended December 31, 1996 and December 31, 1995 as reported by Nasdaq:
<TABLE>
<CAPTION>
1996
----------------------------
High Bid Low Bid
-------- -------
<S> <C> <C>
First Quarter $ 3 3/4 $ 1 5/8
Second Quarter $ 8 7/16 $ 3 1/8
Third Quarter $ 6 5/8 $ 3 7/8
Fourth Quarter $ 6 7/8 $ 4 3/4
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------
High Bid Low Bid
-------- -------
<S> <C> <C>
First Quarter $ 4 3/8 $ 3 1/2
Second Quarter $ 4 1/2 $ 3 3/8
Third Quarter $ 5 1/8 $ 3 1/4
Fourth Quarter $ 4 $ 1 1/2
</TABLE>
The Company has not paid dividends on its common stock and has no present plans
to do so. Provisions of the Company's bank line of credit prohibit the payment
of dividends without the bank's permission.
18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
1996(1) 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $42,844 $30,133 $36,320 $37,831 $35,963
Net income (loss) (1,692) (3,552) (931) 589 (4,421)
Net income (loss)
per share (0.19) (0.51) (0.13) 0.09 (0.66)
</TABLE>
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
<TABLE>
<CAPTION>
1996(1) 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents &
short-term investments $ 3,917 $2,278 $ 6,602 $ 8,144 $10,143
Working capital 18,444 12,564 16,825 17,132 16,219
Total assets 44,469 23,582 27,321 29,301 30,242
Capital leases (excluding
current portion) 202 15 27 26 97
Shareholders' equity 27,175 17,326 20,901 21,234 20,182
</TABLE>
CONSOLIDATED QUARTERLY STATEMENT OF OPERATIONS DATA (UNAUDITED):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MAR. 31, JUN. 30, SEP. 30,(1) DEC. 31,(1)
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
1996(1)
- ----
Net revenues $7,722 $8,481 $10,561 $16,080
Gross Margin 3,870 4,193 5,335 7,564
Net income (loss) 137 251 (2,811) 731
Net income (loss) per share 0.02 0.03 (0.32) 0.06
1995
- ----
Net revenues $9,215 $6,879 $7,048 $6,991
Gross Margin 4,832 3,801 3,463 3,245
Net income (loss) 251 (835) (1,259) (1,709)
Net income (loss) per share 0.04 (0.12) (0.18) (0.25)
</TABLE>
(1)The Company closed the acquisition of Heraeus Surgical, Inc. on August 30,
1996.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW - RESULTS OF OPERATIONS
The following table sets forth certain data from the Company's consolidated
statement of operations, expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of sales 51.1 49.1 46.6
----- ----- -----
Gross margin 48.9 50.9 53.4
Operating expenses:
Research and development 6.0 12.7 9.9
Purchased in-process research & development 5.5 - -
Selling, general and administrative 39.1 50.9 46.8
Other non-recurring charges related to
the acquisition of Heraeus Surgical, Inc. 2.0 - -
----- ----- -----
52.6 63.6 56.7
Operating loss (3.7) (12.7) (3.3)
Interest and other income, net .1 .9 .7
----- ----- -----
Loss before income taxes (3.6) (11.8) (2.6)
Provision for income taxes .4 - -
------ ----- -----
Net loss (4.0)% (11.8)% (2.6)%
===== ===== =====
</TABLE>
The Company sells its products to hospitals, outpatient surgery centers, pay
per use providers and individual physicians in the United States, Europe, the
Middle East and the Pacific Rim. The Company's sales in the U.S. are through
its own direct sales force. The Company's export sales, which are generated by
its wholly and majority owned subsidiaries in the United Kingdom and France and
by independent distributors in the rest of the world, are denominated in the
local currencies of the United Kingdom and France, and in U.S. dollars in the
rest of the world.
During August 1996, the Company acquired Heraeus Surgical, Inc. ("HSI") from
Heraeus Med, GmbH. Heraeus Med received approximately 4.6 million shares of
newly issued Laserscope common stock and $2.0 million in cash in exchange for
all of the outstanding shares of HSI and certain assets and liabilities of
Heraeus Med's German laser distribution organization.
20
<PAGE> 21
1996 RESULTS COMPARED TO 1995
During 1996 the Company's revenues increased 42% from 1995. This increase was
primarily the result of higher capital equipment revenues and revenues from
sales of products and services acquired in the HSI acquisition, which accounted
for approximately $5.7 million and $1.3 million, respectively.
During 1996, the Company's revenues from the sales of capital equipment
increased 123% and represented 52% of total net revenues compared to 33% of
total net revenues in 1995. This was due to a combination of higher unit
shipments of lasers with a shift in mix to those having lower average selling
prices than those sold in 1995. The higher unit sales were principally of the
Company's Aura office laser system which has a lower average selling price than
those of the Company's hospital-based systems. In addition, approximately $4.6
million of the increase was from sales of capital equipment products acquired
in the HSI acquisition. The Company believes that the continuing trend toward
reduced health care costs in the United States is still a factor which
continues to impact negatively laser procurement by its hospital customers in
the United States. As a result, the Company expects that its revenue mix
trends in the U.S. market will continue to shift toward its lower priced office
lasers.
The Company's net revenues in 1996 were negatively impacted by lower shipments
of its disposable supplies and instrumentation which were 3% lower in 1996 than
in 1995. Revenues from sales of these products represented approximately 34% of
total revenues in 1996 compared to approximately 50% in 1995. The Company
believes that the decline in proportion of total net revenues is primarily
attributable to increased shipments of its Aura laser systems and increased
shipments of lasers internationally while the reduction in absolute dollar
revenues was due primarily to lower shipments of its side-firing devices due to
fewer laser prostate surgeries being performed during this period than in 1995,
partially offset by increased shipments of scanning devices sold as accessories
to the Aura office laser system. The Company expects that revenues from the
sales of instrumentation and disposable supplies will depend on the Company's
ability to increase its installed base of systems and to promote and develop
surgical procedures which use its laser systems, instrumentation and disposable
supplies.
The Company's net service revenues during 1996 were 16% higher than in 1995.
These revenues represented 14% of total net revenues in 1996 compared to 17% of
total net revenues in 1995. The increase in absolute dollars reflects higher
international service revenues in addition to incremental revenues resulting
from the acquisition of HSI. The decrease in proportion of total net revenues
is principally due to the increased capital equipment shipments in 1996.
The Company believes that continued acceptance of lasers in aesthetic surgery,
dermatology, urology and ear, nose and throat surgery, is important to its
business. In addition, the adoption of photodynamic therapy by medical
practitioners also will be
21
<PAGE> 22
important. The Company continues to invest in the development of new
instrumentation for emerging surgical applications and to educate surgeons in
the U.S. and internationally to encourage the adoption of such new
applications. Through the acquisition of HSI, the Company has expanded its
product offering to include non-laser operating room equipment. The acceptance
of this equipment by hospitals will be critical to the success of this product
line. Finally, penetration of the international market, although increasing,
has been limited and the Company continues to view expansion of international
sales as important to the Company's success. International revenues accounted
for approximately 26%, and 23% of total revenues in 1996 and 1995,
respectively.
The Company's product gross margin as a percentage of net revenues in 1996 was
51%, compared to 54% in 1995. The reduction is due principally to a product mix
shift from higher margin disposable supplies to lower margin capital equipment.
In addition, a higher proportion of the Company's revenues in 1996 came from
sales to independent, international distributors than in 1995. These revenues
generally generate lower gross margins than sales through its direct sales
force. Finally, the Company acts as a distributor for certain product lines.
Revenues from sales of these products generally generate lower gross margins
than products manufactured by the Company. The Company expects that product
gross margin as a percentage of sales may vary from quarter to quarter during
1997 as it continues to balance production volumes and inventory levels with
product demand, and as product and distribution mix varies.
Gross margin from service activities as a percentage of net service revenues
was 34% in 1996, compared to 37% in 1995. The declines reflect further price
erosion due to restructuring of the Company's contract programs in response to
competitive pressures and reduced customer acceptance of service contracts.
The Company expects that gross margin from service activities as a percentage
of net revenues will continue to be influenced by these factors and will remain
at or below 1996 levels for at least the next several quarters.
Research and development expenses are the result of activities related to the
development of new laser, instrumentation and disposable products and the
enhancement of the Company's existing products. In 1996, amounts spent on
research and development decreased 33% from amounts spent in 1995 due
principally to lower expenses incurred in the development of the Company's Aura
laser system. During 1995, the Company deployed significant resources to bring
its Aura laser system to market in approximately nine months. As a percentage
of revenues, research and development spending was 6% in 1996 compared to 13%
in 1995. The Company expects to increase amounts spent in research and
development during 1997. However, as a percentage of net revenues, the Company
expects these amounts to vary from quarter to quarter as net revenues change.
22
<PAGE> 23
Selling, general and administrative expenses as a percentage of net revenues
were 39% in 1996 compared to 51% in 1995. In absolute dollars, these expenses
increased $1.4 million during 1996. The decreases as a percentage of net
revenues are due to higher net revenues in 1996 than in 1995. The increases in
absolute dollars are primarily due to higher expenses resulting from personnel
which joined the Company from HSI after the acquisition. As a percentage of
revenues, selling, general and administrative expenses are expected to remain
at similarly high levels during 1997 as the Company continues to invest in
international expansion, marketing programs and educational support.
During the quarter ended September 30, 1996, the Company recorded non-recurring
charges directly attributable to the acquisition of HSI consisting of a $2.4
million charge to write off purchased in-process research and development which
arose from the acquisition and of $0.9 million in charges to write off certain
inventory and fixed assets which became redundant as a result of the
acquisition of HSI.
During 1996 the Company recorded a $152,000 income tax provision due to the
non- deductible charge for in-process research and development offset by the
benefit of net operating loss carryforwards. In 1995 the Company recorded no
income tax provision due to the net loss incurred during the period.
1995 RESULTS COMPARED TO 1994
During 1995, the Company's revenues decreased 17% from 1994 which is the
combined result of lower product and service revenues. During 1995, the
Company's revenues from the sales of capital equipment declined 19% due to
lower unit shipments of lasers and lower average selling prices than in 1994.
The Company's net revenues from the sales of products during the year ended
December 31, 1995 were also affected negatively by lower shipments of its
disposable supplies and instrumentation which were 18% lower in 1995 than in
1994. The Company believes that this was due primarily to lower shipments of
its side-firing devices due to fewer laser prostate surgeries being performed
during this period than in 1994. This was caused principally by increased drug
treatment for those patients with mild to moderate prostate disorders as well
as adoption of alternative electrosurgical techniques to perform prostate
surgeries.
The Company's net service revenues during the year ended December 31, 1995 were
9% lower than in the year ended December 31, 1994. The decline reflected price
erosion due to restructuring of the Company's contract programs in response to
competitive pressures and reduced customer acceptance of service contracts.
Revenues from sales of instrumentation and disposable supplies represented
approximately 50% of total revenues in each of the years ended December 31,
1995
23
<PAGE> 24
and 1994. Revenues from sales of service represented approximately 17% of total
revenues in 1995 and 16% of total revenues in 1994.
International revenues accounted for approximately 23% ,and 17% of total
revenues in 1995 and 1994, respectively.
The Company's product gross margin as a percentage of net revenues was 54% and
55% in 1995 and 1994, respectively. During 1995, a 19% reduction in its
product revenues caused further reductions in production volumes and greater
unfavorable manufacturing variances and a reduction in product gross margin as
a percentage of net revenues.
Gross margin from service activities as a percentage of net revenues was 37% in
1995, and 43% in 1994. The declines reflect price erosion due to restructuring
of the Company's contract programs in response to competitive pressures and
reduced customer acceptance of service contracts.
In 1995, amounts spent on research and development increased 7% from 1994 due
principally to expenses incurred in the development of the Company's Aura laser
system. As a percentage of revenues, research and development spending was 13%
in 1995 and 10% in 1994.
Selling, general and administrative expenses as a percentage of net revenues
were 51% in 1995 and 47% in 1994. In absolute dollars, these expenses
decreased $1.6 million during 1995. These decreases are the result of expense
control measures originally taken by the Company in 1992 which continued
through 1995.
During 1995 and 1994 the Company recorded no income tax provision due to its
net losses during these periods.
FINANCIAL REVIEW - LIQUIDITY AND CAPITAL RESOURCES
Total assets and liabilities as of December 31, 1996 were $44.5 million and
$17.3 million respectively, compared to assets and liabilities of $23.6 million
and $6.2 million at December 31, 1995. Working capital increased $5.8 million
from $12.6 million at December 31, 1995 to $18.4 million at December 31, 1996
while cash and cash equivalents increased $1.6 million from $2.3 million at
December 31, 1995 to $3.9 million at December 31, 1996. The increase to
working capital was primarily the result of the HSI acquisition which, net of
cash paid to Heraeus Med and transaction expenses incurred, added approximately
$3.8 million to working capital. The net increase in cash and cash equivalents
was primarily due to cash provided by operating activities of $3.3 million.
Significant components of cash provided by operating activities included a net
loss of $1.7 million offset by non cash charges for depreciation and purchased
in-process research and development of $1.2 million and $2.4 million,
respectively. Additionally a $1.1 million reduction of the Company's inventory
(without
24
<PAGE> 25
giving effect to the inventory acquired in the acquisition of HSI), and a $2.9
million increase in accounts payable partially offset by a $2.6 million
increase in accounts receivable contributed materially to cash provided by
operating activities. The cash provided by operating activities was partially
offset by $1.7 million used in the acquisition of HSI (net of cash received).
The Company anticipates that future changes in cash and working capital will be
dependent on a number of factors. As a result of the acquisition of HSI, the
Company's Balance Sheet liquidity ratios changed and the Company's ability to
generate cash will be partially dependent on management's ability to manage
effectively non-cash assets such as inventory and accounts receivable. In
addition, the level of profitability of the Company, as well as expenditures
relating to the HSI acquisition will have a significant impact on cash
resources. At December 31, 1996, the Company had commitments for capital
expenditures relating to facility improvements of approximately $0.8 million
and other accrued liabilities relating to the HSI acquisition of approximately
$0.4 million.
The Company has in place a $5.0 million revolving bank line of credit which
expires in November 1997 and under which $1.6 million in borrowings were
outstanding at March 17, 1997.
From time to time, the Company may also consider the acquisition of, or
evaluate investments in, certain products and businesses complementary to the
Company's business. Any such acquisition or investment may require additional
capital resources. The Company financed the HSI acquisition using its existing
cash resources and anticipates that, while its remaining cash resources will be
sufficient to fund its short term operating needs, additional financing either
through its bank line of credit or otherwise will be required for the Company's
currently envisioned long term needs.
The Company anticipates that current cash resources, internally generated
funds, capital and operating lease lines and available bank borrowings will be
sufficient to meet liquidity and capital needs at least through 1997.
25
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of Laserscope at December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996, the
report of independent auditors thereon and Supplementary Data are included as
separate sections in this Annual Report on form 10-K in Item 6 "Selected
Financial Data" and Item 14, "Exhibits, Financial Statement Schedules and
reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of Laserscope is incorporated by
reference from the information under the caption "Election of Directors-
Nominees" in the Registrant's Proxy Statement.
Information with respect to executive officers of Laserscope is set forth in
"Item 1-Business-Executive Officers of the Company" in this Annual Report on
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the caption "Report of the
Human Resources Committee" in the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference form the information under the caption "Common Stock
Ownership of Certain Beneficial Owners and Management" in the Registrant's
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the caption "Human
Resources Committee Interlocks and Insider Participation" in the Registrant's
Proxy Statement.
26
<PAGE> 27
PART IV
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors. F-1
Consolidated Balance Sheets at December 31, 1996 and 1995. F-2
Consolidated Statements of Operations
- Years ended December 31, 1996, 1995 and 1994. F-3
Consolidated Statements of Cash Flows
- Years ended December 31, 1996, 1995 and 1994. F-4
Consolidated Statements of Shareholders' Equity
- Years ended December 31, 1996, 1995 and 1994. F-5
Notes to Consolidated Financial Statements. F-6 through F-17
</TABLE>
(2) The following financial statement schedule for the years ended
December 31, 1996, 1995 and 1994 is submitted herewith:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II - Valuation and Qualifying Accounts S-1
</TABLE>
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated
financial statements or notes thereto.
(3) Exhibits included herein (numbered in accordance with Item 601 of
Regulation S-K):
27
<PAGE> 28
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1 Acquisition Agreement between Laserscope and Heraeus Med GmbH.(13)
3.3 Seventh Amended and Restated Articles of Incorporation of Registrant.(1)
3.4 By-laws of Registrant, as amended.(4)
4.1 Common Shares Rights Agreement dated as of October 31, 1991 between Laserscope and American Stock Transfer &
Trust Company as Rights Agent.(10)
4.1A First Amendment to Common Shares Rights Agreements between the Company and American Stock Transfer & Trust
Company as Rights Agent dated as of April 22, 1996.(11)
4.1B Second Amendment to Common Shares Rights Agreement between the Company and American Stock Transfer & Trust
Company as Rights Agent dated as of August 6, 1996.(12)
10.1A 1984 Stock Option Plan, as amended, and forms of Incentive Stock Option Agreement and Nonstatutory Stock
Option Agreement.(4)
10.1B 1994 Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option
Agreement.(8)
10.2 1984 Stock Purchase Plan and form of Common Stock Purchase Agreement.(2)
10.3 1989 Employee Stock Purchase Plan and form of Subscription Agreement.(4)
10.4 401(k) Plan.(2)
10.6 Net Lease Agreement between the Registrant and Realtec Properties dated October 7, 1987. (2)
10.6A Amendment No. 1 dated January 18, 1990 to Net Lease Agreement between the Registrant and Realtec Properties
dated October 7, 1987.(2)
10.6B Net Lease Agreement between Registrant and Realtec Properties dated December 14, 1989.(2)
10.6C Net Lease Agreement between Registrant and Realtec Properties dated June 25, 1990.(3)
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.6D Amendment No. 2 dated November 10, 1992 to Net Lease Agreement between Registrant and Realtec Properties
dated October 7, 1987.(5)
10.6E Amendment No. 3 dated April 19, 1994 to Net Lease Agreement between Registrant and Realtec Properties dated
October 7, 1987.(7)
10.6F Amendment No. 1 dated April 19, 1994 to Net Lease Agreement between Registrant and Realtec Properties dated
June 25, 1990.(7)
10.6G Amendment No. 1 dated April 19, 1994 to Net Lease Agreement between Registrant and Realtec Properties dated
December 14, 1989.(8)
10.10 Form of Indemnification Agreement.(2)
10.11 Amended and Restated Loan and Security Agreement between the Registrant and Silicon Valley Bank Dated
November 23, 1996.(14)
10.13 1990 Directors' Stock Option Plan and form of Option Agreement.(4)
10.14 Form of Laserscope Management Continuity Agreement, as amended.(8)
10.18 1995 Directors' Stock Option Plan and form of Option agreement.(9)
22.1 Subsidiaries of Registrant.(6)
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 32).(14)
25.1 Power of Attorney (see pages 33 through 34).(14)
27.1 Financial Data Schedule.
</TABLE>
29
<PAGE> 30
Reports on Form 8-K:
On November 8, 1996, the Company filed a Form 8-K/A amending its current report
on Form 8-K filed September 11,1996. The Form 8-K/A reported the consummation
of the Company's acquisition of HSI and contained audited Balance Sheets of HSI
as of December 31, 1995 and 1994 and the related statements of operations,
stockholder's equity and cash flows for each of the three years ended December
31, 1995, 1994 and 1993 as well as the unaudited balance sheet of HSI as of
June 30, 1996 and the related unaudited statements of operations, stockholder's
equity and cash flows for the six-month period ended June 30, 1996 and 1995.
In addition, the Form 8-K/A contained the unaudited pro forma combined
condensed balance sheet as of June 30, 1996, the unaudited pro forma combined
condensed statements of operations for the year ended December 31 1995 and the
six months ended June 30, 1996 and the notes thereto.
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1989.
(2) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits," of the Registrant's Registration
Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto
(File No. 33-31689), which became effective on November 29, 1989.
(3) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits", of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990.
(4) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits", of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991.
(5) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits", of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992.
(6) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits", of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993.
(7) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits", of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1994.
30
<PAGE> 31
(8) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits", of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
(9) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits", of the Registrant's Annual
Report on Form 10-K/A for the year ended December 31, 1995.
(10) Incorporated by reference to Exhibit 1 of the Registrant's
Registration Statement on Form 8-A filed November 15, 1991.
(11) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits", of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1996.
(12) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits", the Company's Form 8- A/A filed
September 4, 1996.
(13) Incorporated by reference to Exhibit A to the Definitive Proxy
Statement for the Special Meeting of Shareholders held August 29,
1996.
(14) Filed herewith.
31
<PAGE> 32
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-38831, 33-33692, 33-40506 33-53052, 33-53158, 33- 63603
33-82524, 333-07089, 333-07101, 333-07103, 333-07095, 333-11787 and 333-11795)
pertaining to the 1984 Stock Option Plan, the 1989 Employee Stock Purchase
Plan, the 1990 Director's Stock Option Plan, the 1994 Stock Option Plan, the
1995 Directors' Stock Option Plan and the 1995 Replacement Option Plan of
Laserscope) of our report dated January 28, 1997, with respect to the
consolidated financial statements and schedule of Laserscope included in the
Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/Ernst & Young LLP
San Jose, California
March 25, 1997
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LASERSCOPE
Date: March 25, 1997 By: /s/ Robert V. McCormick
------------------------------
Robert V. McCormick
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert V. McCormick and Dennis LaLumandiere, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith with
the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his substitute or substitutes may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------------------------------------------------------------
<S> <C> <C>
/s/ Benjamin L. Holmes Chairman of the Board of March 25, 1997
- ------------------------ Directors
(Benjamin L. Holmes)
/s/ Robert V. McCormick President, Chief Executive March 25, 1997
- ----------------------- Officer and Director
(Robert V. McCormick)
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Dennis LaLumandiere Vice President of Finance, March 25, 1997
- ------------------------------- Chief Financial Officer and
(Dennis LaLumandiere) Assistant Secretary
(Principal Financial and
Accounting Officer)
/s/ David Cohen Director March 25, 1997
- -------------------------------
(David Cohen)
/s/ Klaus Gooffloo Director March 25, 1997
- -------------------------------
(Klaus Gooffloo)
/s/ Thomas Ihlenfeldt Director March 25, 1997
- -------------------------------
(Thomas Ihlenfeldt)
/s/ E. Walter Lange Director March 25, 1997
- -------------------------------
(E. Walter Lange)
/s/ Rodney Perkins Director March 25 , 1997
- -------------------------------
(Rodney Perkins, M.D.)
/s/ Robert J. Pressley Director March 25, 1997
- -------------------------------
(Robert J. Pressley, Ph.D.)
</TABLE>
34
<PAGE> 35
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Laserscope
We have audited the accompanying consolidated balance sheets of Laserscope as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 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, as well as 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
Laserscope at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/Ernst & Young LLP
San Jose, California
January 28, 1997
F-1
<PAGE> 36
LASERSCOPE
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,917 $ 2,278
Accounts receivable, net 13,286 5,543
Inventories 17,407 10,292
Other current assets 926 692
-------- --------
Total current assets 35,536 18,805
Property and equipment, net 3,109 2,663
Investment in NWL 1,681 1,681
Developed technology and other intangibles, net 3,473 -
Other assets 670 433
-------- --------
Total assets $ 44,469 $ 23,582
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,246 $ 1,455
Accrued compensation 2,947 1,156
Warranty 962 476
Deferred revenue 2,376 2,008
Other accrued liabilities 1,507 1,132
Current obligations under capital leases 54 14
-------- --------
Total current liabilities 17,092 6,241
Obligations under capital leases 202 15
Commitments and contingencies
Shareholders' equity:
Common stock 11,868,171 shares outstanding (7,060,634 in 1995) 48,798 37,248
Accumulated deficit (20,988) (19,296)
Translation adjustments (260) (251)
Notes receivable from shareholders (375) (375)
-------- --------
Total shareholders' equity 27,175 17,326
-------- --------
Total liabilities and shareholders' equity $ 44,469 $ 23,582
======== ========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE> 37
LASERSCOPE
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
(thousands, except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenues:
Products $36,885 $24,974 $30,671
Services 5,959 5,159 5,649
------- ------- -------
42,844 30,133 36,320
Cost of Sales:
Products 17,967 11,526 13,715
Services 3,915 3,266 3,203
------- ------- -------
21,882 14,792 16,918
Gross margin 20,962 15,341 19,402
Operating expenses:
Research and development 2,555 3,838 3,589
Purchased in-process research and development 2,376 - -
Selling, general and administrative 16,749 15,333 16,994
Other non-recurring charges relating to the
acquisition of Heraeus Surgical, Inc. 872 - -
------- ------- -------
22,552 19,171 20,583
Operating loss (1,590) (3,830) (1,181)
Interest and other income, net 50 278 250
------- ------- -------
Loss before income taxes (1,540) (3,552) (931)
Provision for income taxes 152 - -
------- ------- -------
Net loss $(1,692) $(3,552) $ (931)
======= ======= =======
Net loss per share $ (0.19) $ (0.51) $ (0.13)
======= ======= =======
Shares used in per share calculations 8,677 6,999 6,924
======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 38
LASERSCOPE
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,692) $(3,552) $ (931)
Adjustments to reconcile net loss to cash
provided (used) by operating activities:
Depreciation and amortization 1,218 1,419 1,623
Purchased in-process research and development 2,376 - -
Increase (decrease) from changes in:
Accounts receivable (2,622) 2,523 (460)
Inventories 1,076 (2,780) 853
Other current assets (34) 346 20
Other assets - 350 86
Accounts payable 2,923 163 (485)
Accrued compensation 441 20 (312)
Warranty 86 (201) (166)
Deferred revenue (311) (317) (151)
Other accrued liabilities (115) 182 (432)
------- ------- -------
Cash provided (used) by operating activities 3,346 (1,847) (355)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity investments - - (3,001)
Maturity of held-to-maturity investments - 1,998 3,030
Capital expenditures (593) (762) (1,684)
Funding of agreement with NWL - (1,681) -
Heraeus Surgical acquisition, net of cash received (1,741) - -
Other (9) (71) 11
------- ------- -------
Cash used by investing activities (2,343) (516) (1,644)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on obligations under capital leases (14) (11) (101)
Proceeds from the sale of common stock under stock
plans, net of repurchases and shareholder notes receivable 650 48 587
------- ------- -------
Cash provided by financing activities 636 37 486
------- ------- -------
Increase (decrease) in cash and cash equivalents 1,639 (2,326) (1,513)
Cash and cash equivalents, beginning of year 2,278 4,604 6,117
------- ------- -------
Cash and cash equivalents, end of year $ 3,917 $ 2,278 $ 4,604
======= ======= =======
</TABLE>
In addition to the cash paid for the Heraeus Surgical, Inc. acquisition, the
Company issued 4,609,345 shares of common stock.
See notes to consolidated financial statements
F-4
<PAGE> 39
LASERSCOPE
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Notes Total
Accumulated Translation Receivable from Shareholders'
(dollars in thousands) Common Stock Deficit Adjustments Shareholders Equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $36,493 $(14,813) $(191) (255) $21,234
Issuance of 140,665 shares
under stock plans, net
of repayment of notes 581 6 587
Translation adjustments 11 11
Net loss (931) (931)
------- -------- ----- ----- -------
Balance at December 31, 1994 37,074 (15,744) (180) (249) 20,901
Issuance of 76,790 shares
under stock plans, net
of repayment and
refinancing of notes 174 (126) 48
Translation adjustments (71) (71)
Net loss (3,552) (3,552)
------- -------- ----- ----- -------
Balance at December 31, 1995 37,248 (19,296) (251) (375) 17,326
Issuance of 198,192 shares
under stock plans 650 650
Issuance of 4,609,345 shares
in conjunction with the acquisition
of Heraeus Surgical, Inc., including
associated acquisition costs 10,900 10,900
Translation adjustments (9) (9)
Net loss (1,692) (1,692)
------- -------- ----- ----- -------
Balance at December 31, 1996 $48,798 $(20,988) $(260) $(375) $27,175
======= ======== ===== ===== =======
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 40
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company operates in one business segment, the medical systems business.
The Company develops, manufactures, markets and supports surgical lasers and
other surgical systems, related instrumentation and disposable supplies. The
Company markets its products and services in over thirty countries worldwide to
hospitals, outpatient surgery centers and physicians.
Basis of presentation
The accompanying consolidated financial statements include the Company and its
wholly and majority-owned subsidiaries. All intercompany transactions and
balances have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Cash equivalents and short-term investments
The Company invests its excess cash in high-quality debt instruments. The
Company considers cash equivalents to be short-term financial instruments that
are readily convertible to cash, subject to no more than insignificant interest
rate risk and that have original maturities of three months or less.
At December 31, 1996 and 1995 the Company's cash equivalents were in the form
of institutional money market accounts and totaled $1.8 million and $1.1
million, respectively.
At December 31, 1996 and 1995 the Company had no investments in debt
securities.
Revenue recognition and product warranty
The Company generally recognizes revenue related to the sale of systems,
instrumentation and disposables at the time of shipment and provides currently
for the estimated cost to repair or replace products under warranty provisions
in effect at the time of the sale. Service revenue is recognized as the
services are provided or pro rata over the period of the applicable contract.
F-6
<PAGE> 41
Property and equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization.
Equipment is depreciated using principally accelerated methods over estimated
useful lives of three to seven years. Equipment under capital leases is
amortized over the period of the lease. Leasehold improvements are amortized
using the straight-line method over the remaining term of the lease.
Inventories
Inventories are stated at the lower of cost (computed on a first-in, first-out
basis) or market.
Net income (loss) per share
Net income (loss) per share is based upon the weighted average number of shares
of common stock outstanding and dilutive common equivalent shares from stock
options (using the treasury stock method).
Foreign currency translation
The functional currencies of the Company's foreign subsidiaries are their local
currencies. Accordingly, all assets and liabilities related to their
operations are translated at the current exchange rates at the end of each
period. The resulting cumulative translation adjustments are recorded directly
to the translation adjustments account included in shareholders' equity.
Revenues and expenses are translated at average exchange rates in effect during
the period.
Impairment of assets
The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Asses and for Long-Lived Assets to
Be Disposed of" (SFAS121) during the year ended December 31, 1996. Such
adoption did not have a material impact on the financial statements.
Intangible assets related to the acquisition of Heraeus Surgical, Inc.
Intangible assets related to the acquisition of Heraeus Surgical, Inc. included
developed technology and an established workforce. These assets are amortized
on a straight-line basis over estimated useful lives of seven and five years,
respectively.
Advertising expense
The cost of advertising is expensed as incurred. The Company does not incur
any direct response advertising costs. Advertising costs were not significant
in 1996, 1995 and 1994.
2. ACQUISITION OF HERAEUS SURGICAL, INC.
During April 1996, the Company and Heraeus Med, GmbH signed a definitive
agreement for the acquisition (the "Acquisition") of HSI (a wholly- owned
subsidiary of Heraeus Med, GmbH). Pursuant to the Acquisition Heraeus Med
received approximately 4.6 million shares of newly issued Laserscope common
stock and a $2.0 million cash payment in exchange for all of the outstanding
shares of HSI and certain assets and liabilities of Heraeus Med's German laser
distribution organization.
F-7
<PAGE> 42
The Acquisition closed on August 30, 1996 and has been accounted for as a
purchase. The purchase price, including related acquisition costs, was
allocated based on an independent appraisal obtained by the Company to the
tangible and intangible assets acquired and the liabilities assumed based on
their respective fair values on the data of acquisition.
The purchase price for the Acquisition was (in thousands):
<TABLE>
<S> <C>
Newly issued Laserscope common stock $10,900
Cash paid 2,000
Transaction and other direct acquisition costs 1,662
-------
Total $14,562
</TABLE>
The allocation of the purchase price was determined as follows:
<TABLE>
<S> <C>
Net tangible assets acquired:
Cash (before netting cash paid) $ 1,508
Accounts receivable, net 5,121
Inventories 8,191
Other assets 1,111
Accounts payable and other current liabilities (7,374)
-------
Total net tangible assets acquired $ 8,557
Intangible assets acquired:
Developed technology $ 3,229
In-process technology 2,376
Workforce 400
-------
$14,562
</TABLE>
To determine the value of the developed technology, the expected future cash
flow of each existing product was discounted, taking into account risks related
to the characteristics and applications of each product, existing and future
markets, and assessments of the life cycle stage of each product. The analysis
resulted in a valuation of approximately $3.2 million for completed products,
which had reached technological feasibility and therefore was capitalizable.
The asset is being amortized on a straight-line basis over a seven year period.
The value of the assembled workforce was derived by estimating the costs to
replace the existing employees including search costs, interview costs and
training costs for each category of employee. The analysis determined a
valuation of approximately $400,000 for the assembled workforce. The asset is
being amortized on a straight-line basis over a five year period.
In determining the value of technology in the development stage, the Company
considered, among other factors, the stage of development of each project, the
time and resources needed to complete each project, expected income and
associated risks. Associated risks include the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility, and risks related to the viability of potential changes in future
target markets. This analysis resulted in a valuation of approximately $2.4
million for technology in the development stage that had not yet reached
technological feasibility and did
F-8
<PAGE> 43
not have alternative future uses. Therefore, in accordance with generally
accepted accounting principles, the $2.4 million of technology in the
development stage was expensed in the period ended September 30, 1996 as
purchased in-process research and development.
During the quarter ended September 30, 1996, the Company recorded an additional
$0.9 million in charges to write off inventory and fixed assets which became
redundant as a result of the acquisition of HSI.
The operating results of HSI from August 30, 1996 through December 31, 1996
have been included in the Company's consolidated results of operations.
The following unaudited pro forma combined results of operations of the Company
and Heraeus Surgical, Inc. (HSI) for the twelve months ended December 31, 1996
and December 31, 1995 have been prepared assuming that the Acquisition, had
occurred at the beginning of the period presented. The following pro forma
information is not necessarily indicative of the results that would have
occurred had the Acquisition been completed at the beginning of the period
indicated, nor is it indicative of future operating results (in thousands,
except per share data):
<TABLE>
<CAPTION>
Twelve months ended
December 31,
1996 1995
(Unaudited)
- ---------------------------------------------------------------------------
<S> <C> <C>
Net revenues $61,928 $57,909
Loss from operations $(2,209) $(6,718)
Net loss $(2,112) $(6,827)
Net loss per share $ (0.18) $ (0.59)
Shares used in per share calculations 11,750 11,608
</TABLE>
The 4.6 million common shares issued to Heraeus Med, GmbH in this transaction
were unregistered pursuant to section 4(2) of the Securities Act of 1933, as
amended and cannot be sold, transferred or pledged by Heraeus Med GmbH until
August 30, 1997. On that date, the Company has an obligation to register the
shares.
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Trade accounts receivable $13,986 $ 6,033
Less: allowance for doubtful accounts (700) (490)
------- -------
$13,286 $ 5,543
======= =======
</TABLE>
F-9
<PAGE> 44
4. INVENTORIES
Inventories at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Sub-assemblies and purchased parts $12,015 $ 7,201
Finished goods 5,392 3,091
------- -------
$17,407 $10,292
======= =======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 4,967 $ 4,562
Office equipment and furniture 7,448 6,917
Leasehold improvements 2,229 1,781
-------- --------
14,644 13,260
Less accumulated depreciation and amortization (11,535) (10,597)
-------- --------
$ 3,109 $ 2,663
======== ========
</TABLE>
6. DEVELOPED TECHNOLOGY AND OTHER INTANGIBLES
Developed technology and other intangibles resulting from the acquisition of
HSI at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Developed technology $ 3,229 $ -
Assembled workforce 400 -
-------- --------
3,629 -
Less accumulated amortization (156) -
-------- --------
$ 3,473 $ -
======== ========
</TABLE>
7. LINE OF CREDIT
In November 1996, the Company renewed its agreement with a bank for a $5
million line of credit that provides for short-term borrowings based on certain
eligible accounts receivable. The line of credit, which expires in November
1997, is secured by the assets of the Company and bears interest at the bank's
prime rate plus one percentage point. Provisions of this agreement prohibit
the payment of dividends and the repurchase of stock and require the Company to
maintain certain minimum working capital and net worth levels. As of March 17,
1997, the Company was in compliance with the covenants and had $1.6 million in
borrowings under this agreement.
F-10
<PAGE> 45
8. INVESTMENT IN NWL
In March 1995, the Company entered into an agreement with NWL Laser-Technologie
("NWL") whereby the Company paid NWL approximately $1.6 million in exchange for
a cross-distribution and development agreement, a minority equity position in
NWL and an option to purchase all of the ownership interests in NWL. These
assets are carried at cost. If the Company does not exercise its option to
purchase NWL by June 1997, there will be no reimbursement of the Company's
investment and the Company's equity position will be relinquished. If the
Company exercises its option, the remaining purchase price will be paid over
three and one half years from the exercise date. The Company currently expects
to exercise its purchase option prior to lapse of the option period.
9. LEASE OBLIGATIONS
The Company leases certain equipment under lease agreements that have been
accounted for as capital leases. Leased equipment and accumulated amortization
related to assets under capital leases at December 31 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Leased equipment $ 1,784 $1,545
Accumulated amortization 1,531 1,518
</TABLE>
There were $241,000 in additions to leased equipment in 1996, none in 1995 and
1994.
The Company leases its facilities and certain equipment under non-cancelable
operating leases. Rental expense under these leases amounted to approximately
$982,000, $966,000 and $1,070,000 in each of the three years ended December 31,
1996, 1995 and 1994, respectively.
Future minimum lease payments under capital and operating leases were as
follows at December 31, 1996:
<TABLE>
<CAPTION>
Capital Operating
(in thousands) Leases Leases
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 83 $1,094
1998 61 936
1999 61 777
2000 61 777
2001 and beyond 61 130
------ ------
$ 327 $3,714
======
Less amount representing interest 71
------
Present value of future minimum lease payments $ 256
=====
</TABLE>
F-11
<PAGE> 46
10. SHAREHOLDERS' EQUITY
The Company has 25,000,000 shares of no par value common stock authorized. In
addition, the Company has authorized 5,000,000 shares of undesignated preferred
stock with rights, preferences and privileges to be determined by the Company's
Board of Directors.
1994 and 1984 Stock Option Plans
During 1994 and 1984, the Company adopted stock option plans under which the
Board of Directors may grant incentive stock options to purchase shares of
common stock to employees of the Company at a price not less than the fair
value of the shares as of the date of grant. The Board of Directors may also
grant Non-statutory stock options to employees and consultants, including
directors who serve as employees or consultants, at not less than 85% of the
fair market value of the shares as of the date of grant. Options issued
pursuant to the 1984 plan vest and become exercisable over periods of up to
five years and expire five to ten years after the date of grant. Options
issued pursuant to the 1994 plan vest and become exercisable over periods of up
to four years and expire five years after the date of grant.
The 1984 Stock Option Plan expired by its terms with respect to any future
option grants effective in August 1994. At December 31, 1996, the 1984 Stock
Option Plan had options to purchase 713,550 shares of common stock outstanding,
of which 646,607 were exercisable.
The Company has reserved 1,700,000 shares of common stock of which there were
410,520 shares available for issuance pursuant to its 1994 stock option plan as
of December 31, 1996.
In November 1995, the Company allowed non officer employees to cancel
outstanding options that had been granted under the 1984 plan but that had not
yet become exercisable and replace them with new non-statutory grants outside
of the 1984 plan for a like number with the same exercisability restrictions at
the fair market value of the common stock at the date of grant. Employees
elected to cancel and receive new grants to purchase an aggregate of 175,453
shares at an exercise price of $2.00.
In November 1995, the Company also allowed employees to cancel outstanding
options that had been granted under the 1994 plan but that had not yet become
exercisable and replace them with new grants for a like number with the same
exercisability restrictions at the fair market value of the common stock at the
date of grant. Employees elected to cancel and receive new grants to purchase
an aggregate of 455,384 shares at an exercise price of $2.00.
1990 and 1995 Directors' Stock Option Plans
The Company has reserved 600,000 shares of its common stock for issuance
pursuant to its 1990 and 1995 Directors' Stock Option Plans in aggregate.
Under these plans, non-employee directors of the Company have been granted
options to purchase 90,000 shares (45,000 shares pursuant to each plan) of the
Company's common stock exercisable at the fair market value of such shares on
the respective grant dates. Because the 1990 Directors' Stock Option Plan was
terminated in 1995 with respect to any additional grants, new non employee
F-12
<PAGE> 47
directors receive only a grant under the 1995 Directors' Stock Option Plan.
Options issued pursuant to these plans vest and become exercisable over three
years from the respective original date of issuance with respect to each
optionee who remains a director and expire fiveyears after the date of grant.
There were 120,000 shares available for issuance pursuant to the 1995
Directors' Stock Option Plan at December 31, 1996.
The following table summarizes activity in the Company's stock option plans
during the years ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
Share Weighted Average
Outstanding Exercise Price
- ----------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1994 1,749,635 $5.88
Granted 1,546,837 $2.73
Exercised - -
Canceled (1,023,744) $5.02
---------- -----
Balance, December 31, 1995 2,272,728 $4.12
Granted 641,225 $3.86
Exercised (101,222) $4.13
Canceled (451,000) $5.24
---------- -----
Balance, December 31, 1996 2,361,731 $3.84
========== =====
</TABLE>
The following table displays a summary of relevant ranges of exercise prices
for options outstanding and options exercisable for the Company's stock option
plans at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 - $2.88 884,100 4.58 $2.00 297,489 $2.00
$3.48 - $5.13 838,786 4.19 $4.05 291,824 $4.33
$5.38 - $8.00 638,393 2.28 $6.09 583,159 $6.12
------------- --------- ---- ----- --------- -----
$2.00 - $8.00 2,361,279 3.82 $3.84 1,172,472 $4.63
============= ========= ==== ===== ========= =====
</TABLE>
1989 Employee Stock Purchase Plan
The Company has reserved 450,000 shares of common stock, for issuance pursuant
to its 1989 Employee Stock Purchase Plan. Under this plan, qualified
employees, excluding non-employee directors, may purchase up to a specified
maximum amount of the Company's common stock through payroll deduction at 85%
of its fair market value. At December 31, 1996, approximately 391,000 shares
had been purchased under this plan.
F-13
<PAGE> 48
SFAS 123 Disclosure
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earning per share is required by
SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 13, 1994 under the fair value method of this Statement. The fair
value for these options was estimated at the date of grant using a
Black-Scholes multiple option pricing model with the following weighted average
assumptions: risk-free interest rates of 5.89% and 6.44% for 1995 and 1996,
respectively; a dividend yield of 0.0%; a volatility factor of the expected
market price of the Company's common stock of 1.0; and an expected life of the
option of 4.0 years.
To comply with the pro forma reporting requirements of SFAS 123 with respect to
the Company's 1989 Employee Stock Purchase Plan, compensation cost is estimated
for the fair value of the employees' purchase rights using the Black-Scholes
model with the following assumptions for those rights granted in 1995 and 1996:
a dividend yield of 0.0%; an expected life of 0.5 years; an expected volatility
factor of 1.0; and weighted average risk free interest rates of 6.21% and 5.28%
for 1995 and 1996, respectively. The weighted average fair value of those
purchase rights granted in 1995 and 1996 were $1.38 and $1.70, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
(in thousands, except per share data) 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Pro forma net loss $(2,808) $(3,911)
Pro forma loss per share $ (0.33) $ (0.56)
</TABLE>
Because the SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
F-14
<PAGE> 49
1991 Shareholder Rights Plan
In November 1991, the Company adopted a shareholder rights plan and distributed
a dividend of one right to purchase one share of common stock (a "Right") for
each outstanding share of common stock of the Company. The Rights become
exercisable in certain limited circumstances involving a potential business
combination transaction of the Company and are initially exercisable at a price
of $34 per share. Following certain other events after the Rights have become
exercisable, each Right entitles its holder to purchase for $34 an amount of
common stock of the Company, or in certain circumstances, securities of the
acquirer, having a then current market value of twice the exercise price of the
Right. The Rights are redeemable at the Company's option at $0.01 per Right
before they become exercisable. Until a Right is exercised, the holder of a
Right, as such, has no rights as a shareholder of the Company. The Rights
expire on November 20, 2001.
11. EMPLOYEE SAVINGS AND INVESTMENT PLAN
In October 1989, the Company adopted a 401(k) savings and investment plan which
covers all employees. The Company's contributions to the plan have been 50%
matching of employee contributions up to 3% of each employee's base
compensation and were approximately $132,000, $109,000 and $118,000 in the
years ended December 31, 1996, 1995 and 1994, respectively.
12. INCOME TAXES
Significant components of the provision for income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------
Current federal taxes $ 102 $ - $ -
Current state taxes 50 - -
----- ----- -----
Provision for income taxes $ 152 $ - $ -
===== ===== =====
</TABLE>
Pretax losses from foreign operations were $145,000, $1,185,000, and $1,100,000
respectively in 1996, 1995 and 1994.
Income taxes differ from the amount computed by applying the statutory federal
income tax rate of 34% to income (loss) before taxes. The reasons for the
differences and the tax effect of each are as follows (in thousands):
F-15
<PAGE> 50
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected tax $(539) $ (1,243) $ (326)
Operating loss with no carryback benefit 83 1,243 400
State taxes 50 - -
Benefit of net operating loss carryforward (432) - (74)
Charge for in-process research
and development 832 - -
Other 158 -
----- -------- -------
Provision for income taxes $ 152 $ - $ -
===== ======== =======
</TABLE>
The components of the deferred tax asset consisted of the following at December
31, (in thousands):
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,200 $ 4,000
General business credit carryforwards 1,100 1,000
Inventory reserves and adjustments 2,500 1,400
Other accruals and reserves not
currently deductible for tax purposes 2,000 1,500
Other 1,000 -
------- -------
Total deferred tax assets 9,800 7,900
Valuation for deferred tax assets (8,600) (7,900)
------- -------
Deferred tax asset 1,200 -
Deferred tax liabilities
Acquired intangibles (1,200) -
------- -------
Net deferred tax assets $ - $ -
======= =======
</TABLE>
Approximately $500,000 of the valuation allowance is attributed to stock
options, the benefit of which will be credited to paid-in-capital when
realized.
For federal tax purposes, the Company has net operating loss, research and
development credit, and minimum tax credit carryforwards of $5,900,000,
$350,000, and $350,000, respectively, which expire in the years 1997 through
2011. The Company has net operating loss and research and development credit
carryforwards of $400,000 and $600,000, respectively, for state tax reporting
purposes. The state net operating loss will expire in the years 1997 through
2000. In addition, the Company has foreign tax loss carryforwards of
approximately $3,500,000 which begin to expire in 1998.
The availability of the Company's net operating loss and tax credit
carryforwards may be subject to a substantial limitation if it should be
determined that there has been a change in ownership of more than 50 percent of
the value of the Company's stock over a three year period.
F-16
<PAGE> 51
13. FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATIONS OF CREDIT RISK
The Company's trade receivables are made up of amounts due from its health care
industry customers, primarily in the United States, Europe and the Pacific Rim.
Any concentration of credit risk is substantially alleviated by the Company's
credit evaluation and collection practices and the relative lack of
concentration as well as geographical dispersion of customer accounts
comprising its accounts receivable. Bad debt expense has been insignificant.
The Company's export sales represent sales to unaffiliated customers and are
displayed in the following table in approximate percentages of net revenues:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Europe 17% 15% 10%
Middle East - 1% 1%
Pacific Rim 9% 7% 6%
--- --- ---
Total 26% 23% 17%
</TABLE>
The Company also has an Investment Policy approved by its Board of Directors
related to its short-term cash investment practices. That policy limits the
amount of credit exposure to any one financial institution and restricts
investments to certain types of financial instruments based on specified credit
criteria.
14. CONTINGENCIES
The Company is a party to a number of legal proceedings arising in the ordinary
course of its business. These actions may include product liability and
employee-related issues. While it is not feasible to predict or determine the
outcome of the actions brought against it, the Company believes that the
ultimate resolution of these claims will not ultimately have a material adverse
effect on its financial position or results of operations.
F-17
<PAGE> 52
SCHEDULE II
LASERSCOPE
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning End
Descriptions of Period Additions Deductions of Period
- ------------------------------ --------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts receivable:
Year ended December 31, 1994 $540 $ -- $ -- $540
==== ==== ==== ====
Year ended December 31, 1995 $540 $200 $250 $490
==== ==== ==== ====
Year ended December 31, 1996 $490 $210 $ -- $700
==== ==== ==== ====
</TABLE>
S-1
<PAGE> 53
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.11 Amended and Restated Loan and Security Agreement between the
Registrant and Silicon Valley Bank dated November 30,1996.
23.1 Consent of Ernst & Young, Independent Auditors (see page 32).
25.1 Power of Attorney (see pages 33 through 34).
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.11
<PAGE> 2
LASERSCOPE
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Revolving Facility . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Overadvances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.3 Interest Rates, Payments, and Calculations . . . . . . . . . . . . . . 9
2.4 Crediting Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.5 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.6 Additional Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.7 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3. CONDITIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.1 Conditions Precedent to Initial Credit Extension . . . . . . . . . . . 11
3.2 Conditions Precedent to all Credit Extensions. . . . . . . . . . . . 12
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . 12
4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . . . . . 12
4.2 Delivery of Additional Documentation Required . . . . . . . . . . . . 12
4.3 Right to Inspect . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . 12
5.1 Due Organization and Qualification . . . . . . . . . . . . . . . . . . 12
5.2 Due Authorization; No Conflict . . . . . . . . . . . . . . . . . . . . 13
5.3 No Prior Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . 13
5.4 Bona Fide Eligible Accounts . . . . . . . . . . . . . . . . . . . . . 13
5.5 Merchantable Inventory . . . . . . . . . . . . . . . . . . . . . . . . 13
5.6 Name; Location of Chief Executive Office . . . . . . . . . . . . . . . 13
5.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.8 No Material Adverse Change in Financial Statements . . . . . . . . . . 13
5.9 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.10 Regulatory Compliance . . . . . . . . . . . . . . . . . . . . . . . . 13
5.11 Environmental Condition . . . . . . . . . . . . . . . . . . . . . . . 14
5.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.13 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.14 Government Consents . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.15 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.1 Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.2 Government Compliance . . . . . . . . . . . . . . . . . . . . . . . . 14
6.3 Financial Statements, Reports, Certificates . . . . . . . . . . . . . 14
6.4 Inventory; Returns . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.5 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.7 Principal Depository . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.8 Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
I
<PAGE> 4
<TABLE>
<S> <C> <C>
6.9 Debt-Net Worth Ratio . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.10 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.11 Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.12 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.1 Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.2 Change in Business . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.3 Mergers or Acquisitions . . . . . . . . . . . . . . . . . . . . . . . 16
7.4 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.5 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.6 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.8 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.9 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . 17
7.10 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.11 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.12 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.1 Payment Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.2 Covenant Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.3 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . 18
8.4 Attachment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.5 Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.6 Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.7 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.8 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.9 Misrepresentations . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9. BANK'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.2 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.3 Accounts Collection. . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.4 Bank Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.5 Bank's Liability for Collateral . . . . . . . . . . . . . . . . . . . 21
9.6 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.7 Demand; Protest . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . . . . . . . . . . 21
12. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . 22
12.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.3 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.4 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . 22
12.5 Amendments in Writing, Integration . . . . . . . . . . . . . . . . . . 22
12.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.7 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.8 Effect of Amendment and Restatement . . . . . . . . . . . . . . . . . 22
</TABLE>
II
<PAGE> 5
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into
as of November 27, 1996, by and between SILICON VALLEY BANK ("Bank") and
LASERSCOPE ("Borrower").
RECITALS
A. Borrower and Bank are parties to that certain Amended and
Restated Business Loan Agreement dated as of March 18, 1996 (the "Business Loan
Agreement"), that certain Commercial Security Agreement dated as of March 18,
1996 (the "Security Agreement") and a Promissory Note dated March 18, 1996, by
Borrower to Bank (the "Note") (the Business Loan Agreement, the Security
Agreement and the Note, each as may have been amended, the "Original Loan
Documents").
B. Borrower and Bank wish to amend and restate the terms of the
Original Loan Documents as stated herein. This Agreement sets forth the terms
on which Bank will loan money to Borrower and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
C. DEFINITIONS AND CONSTRUCTION
1. Definitions. As used in this Agreement, the
following terms shall have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
"Advance" or "Advances" means an advance under the
Revolving Facility.
"Affiliate" means, with respect to any Person, any
Person that owns or controls directly or indirectly such Person, any Person
that controls or is controlled by or is under common control with such Person,
and each of such Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or
expenses (including reasonable attorneys' fees and expenses) incurred in
connection with the preparation, negotiation, administration, and enforcement
of the Loan Documents; and Bank's reasonable attorneys' fees and expenses
incurred in amending, enforcing or defending the Loan Documents (including fees
and expenses of appeal), whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and
records including: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and
all computer programs, or tape files, and the equipment, containing such
information.
"Borrowing Base" has the meaning set forth in Section
2.1 hereof.
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California are authorized
or required to close.
1
<PAGE> 6
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit
A attached hereto.
"Committed Line" means Five Million Dollars
($5,000,000).
"Contingent Obligation" means, as applied to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to (i) any indebtedness, lease, dividend, letter of credit
or other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or discounted
or sold with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect to
undrawn letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business. The
amount of any Contingent Obligation shall be deemed to be an amount equal to
the stated or determined amount of the primary obligation in respect of which
such Contingent Obligation is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof as determined by
such Person in good faith; provided, however, that such amount shall not in any
event exceed the maximum amount of the obligations under the guarantee or other
support arrangement.
"Credit Extension" means an Advance, Letter of Credit
and/or Exchange Contract.
"Current Liabilities" means, as of any applicable
date, all amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its Subsidiaries,
as at such date, plus, to the extent not already included therein, all
outstanding Advances made under this Agreement, including all Indebtedness that
is payable upon demand or within one year from the date of determination
thereof unless such Indebtedness is renewable or extendable at the option of
Borrower or any Subsidiary to a date more than one year from the date of
determination, but excluding Subordinated Debt.
"Daily Balance" means the amount of the Obligations
owed at the end of a given day.
"Eligible Accounts" means those Accounts that arise
in the ordinary course of Borrower's business that comply with all of
Borrower's representations and warranties to Bank set forth in Section 5.4;
provided, that standards of eligibility may be fixed and revised from time to
time by Bank in Bank's reasonable judgment and upon notification thereof to
Borrower in accordance with the provisions hereof. Unless otherwise agreed to
by Bank, Eligible Accounts shall not include the following:
(1) Accounts that the account debtor has failed
to pay within ninety (90) days of invoice date;
(2) Accounts with respect to an account debtor,
fifty percent (50%) of whose Accounts the account debtor has failed to pay
within ninety (90) days of invoice date;
(3) Accounts with respect to which the account
debtor is an officer, employee, or agent of Borrower;
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(4) Accounts with respect to which goods are
placed on consignment, guaranteed sale, sale or return, sale on approval, bill
and hold, or other terms by reason of which the payment by the account debtor
may be conditional;
(5) Accounts with respect to which the account
debtor is an Affiliate of Borrower;
(6) Accounts with respect to which the account
debtor does not have its principal place of business in the United States,
except for Eligible Foreign Accounts;
(7) Accounts with respect to which the account
debtor is the United States or any department, agency, or instrumentality of
the United States;
(8) Accounts with respect to which Borrower is
liable to the account debtor for goods sold or services rendered by the account
debtor to Borrower, but only to the extent of any amounts owing to the account
debtor against amounts owed to Borrower;
(9) Accounts with respect to an account debtor,
including Subsidiaries and Affiliates, whose total obligations to Borrower
exceed twenty-five percent (25%) of all Accounts, to the extent such
obligations exceed the aforementioned percentage, except as approved in writing
by Bank;
(10) Accounts with respect to which the account
debtor disputes liability or makes any claim with respect thereto as to which
Bank believes, in its sole discretion, that there may be a basis for dispute
(but only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(11) Accounts the collection of which Bank
reasonably determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with
respect to which the account debtor does not have its principal place of
business in the United States and that are: (1) covered by credit insurance in
form and amount, and by an insurer satisfactory to Bank less the amount of any
deductible(s) which may be or become owing thereon; or (2) supported by one or
more letters of credit in favor of Bank as beneficiary, in an amount and of a
tenor, and issued by a financial institution, acceptable to Bank; or (3) that
Bank approves on a case-by-case basis.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"ERISA" means the Employment Retirement Income
Security Act of 1974, as amended, and the regulations thereunder.
"Exchange Contract" has the meaning set forth in
Section 2.1.3 herein.
"Foreign Exchange Reserve" has the meaning set forth
in Section 2.1.3 herein.
"GAAP" means generally accepted accounting principles
as in effect from time to time.
"Indebtedness" means (a) all indebtedness for
borrowed money or the deferred purchase price of property or services,
including without limitation reimbursement and other obligations with respect
to surety bonds and letters of credit, (b) all obligations evidenced by notes,
bonds, debentures or similar instruments, (c) all capital lease obligations and
(d) all Contingent Obligations.
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"Insolvency Proceeding" means any proceeding
commenced by or against any person or entity under any provision of the United
States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in
which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and
any documents of title representing any of the above, and Borrower's Books
relating to any of the foregoing.
"Investment" means any beneficial ownership of
(including stock, partnership interest or other securities) any Person, or any
loan, advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"Letter of Credit" or "Letters of Credit" has the
meaning set forth in Section 2.1.1 herein.
"Lien" means any mortgage, lien, deed of trust,
charge, pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement,
any note or notes executed by Borrower, and any other agreement entered into
between Borrower and Bank in connection with this Agreement, all as amended or
extended from time to time.
"Material Adverse Effect" means a material adverse
effect on (i) the business operations or condition (financial or otherwise) of
Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower
to repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maturity Date" means the date immediately preceding
the first anniversary of the date of this Agreement.
"Negotiable Collateral" means all of Borrower's
present and future letters of credit of which it is a beneficiary, notes,
drafts, instruments, securities, documents of title, and chattel paper, and
Borrower's Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest,
Bank Expenses and other amounts owed to Bank by Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from Borrower to others that Bank may have
obtained by assignment or otherwise.
"Original Loan Documents" has the meaning set forth
in the recital paragraph above.
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay
to Bank pursuant to the terms and provisions of any instrument, or agreement
now or hereafter in existence between Borrower and Bank.
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"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank
arising under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and
disclosed in the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in
the ordinary course of business; and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investment" means:
(a) Investments existing on the Closing Date
disclosed in the Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition
thereof, (ii) commercial paper maturing no more than one (1) year from the date
of creation thereof and currently having the highest rating obtainable from
either Standard & Poor's Corporation or Moody's Investors Service, Inc., and
(iii) certificates of deposit maturing no more than one (1) year from the date
of investment therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in
good faith by appropriate proceedings, provided the same have no priority over
any of Bank's security interests;
(c) Liens (i) upon or in any equipment acquired
or held by Borrower or any of its Subsidiaries to secure the purchase price of
such equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time
of its acquisition, provided that the Lien is confined solely to the property
so acquired and improvements thereon, and the proceeds of such equipment; and
(d) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (a) through (c) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness being extended,
renewed or refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental agency.
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"Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not
such announced rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the
amount thereof shall be determined, the consolidated cash, cash-equivalents,
accounts receivable and investments, with maturities not to exceed 90 days, of
Borrower determined in accordance with GAAP.
"Responsible Officer" means each of the Chief
Executive Officer, the Chief Financial Officer and the Controller of Borrower.
"Revolving Facility" means the facility under which
Borrower may request Bank to issue cash advances or letters of credit or enter
into foreign exchange contracts as specified in Section 2.1 herein.
"Schedule" means the schedule of exceptions attached
hereto, if any.
"Subordinated Debt" means any debt incurred by
Borrower that is subordinated to the debt owing by Borrower to Bank on terms
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in
which (i) any general partnership interest or (ii) more than 50% of the stock
of which by the terms thereof ordinary voting power to elect the Board of
Directors, managers or trustees of the entity shall, at the time as of which
any determination is being made, be owned by Borrower, either directly or
through an Affiliate.
"Tangible Net Worth" means at any date as of which
the amount thereof shall be determined, the consolidated total assets of
Borrower and its Subsidiaries minus, without duplication, (i) the sum of any
amounts attributable to (a) goodwill, (b) intangible items such as unamortized
debt discount and expense, patents, trade and service marks and names,
copyrights and research and development expenses except prepaid expenses, and
(c) all reserves not already deducted from assets, and (ii) Total Liabilities.
"Total Liabilities" means at any date as of which the
amount thereof shall be determined, all obligations that should, in accordance
with GAAP be classified as liabilities on the consolidated balance sheet of
Borrower, including in any event all Indebtedness, but specifically excluding
Subordinated Debt.
2. Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and all
calculations made hereunder shall be made in accordance with GAAP. When used
herein, the terms "financial statements" shall include the notes and schedules
thereto.
D. LOAN AND TERMS OF PAYMENT
1. Revolving Facility.
(1) Advances. Subject to and upon the terms and
conditions of this Agreement, Bank agrees to make Advances to Borrower in an
aggregate amount outstanding at any time not to exceed the lesser of (i) the
Committed Line minus the sum of (A) the face amount of all outstanding Letters
of Credit (including drawn but unreimbursed Letters of Credit) and (B) the
Foreign Exchange Reserve or (ii) the Borrowing Base minus the sum of (A) the
face amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit) and (B) the Foreign Exchange Reserve. Subject
to the terms and conditions of this Agreement, amounts borrowed pursuant to
this Section 2.1. may be repaid and reborrowed at any time before the Maturity
Date. For the purposes of this Agreement, "Borrowing Base" shall mean an
amount equal to seventy-five percent (75%) of Eligible Accounts, provided that
if aggregate amount of outstanding Advances in a quarter exceeds fifty percent
(50%) of the average Borrowing Base for the preceding quarter, the Bank
reserves the right to transfer all of Borrower's
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<PAGE> 11
rights, obligations and benefits under this Agreement including, without
limitation, its commitment to lend, to the Bank's Commercial Finance Department
provided (x) that the Borrower executes Bank's standard form of the Commercial
Finance Department's documents which documents shall establish additional
reporting and monetary requirements and such additional terms, conditions and
customary pricing as Bank determines in its sole discretion and (y) Borrower
pays all Bank Expenses incurred in preparing and negotiating such agreement.
(2) Procedures. Whenever Borrower desires an
Advance, Borrower will notify Bank by facsimile transmission or telephone no
later than 3:00 p.m. California time, on the Business Day that the Advance is
to be made. Each such notification shall be promptly confirmed by a
Payment/Advance Form in substantially the form of Exhibit A hereto. Bank is
authorized to make Advances under this Agreement, based upon instructions
received from a Responsible Officer, or without instructions if in Bank's
discretion such Advances are necessary to meet Obligations which have become
due and remain unpaid. Bank shall be entitled to rely on any telephonic notice
given by a person who Bank reasonably believes to be a Responsible Officer, and
Borrower shall indemnify and hold Bank harmless for any damages or loss
suffered by Bank as a result of such reliance. Bank will credit the amount of
Advances made under this Section 2.1 to Borrower's deposit account.
(3) Maturity. The Revolving Facility shall
terminate on the Maturity Date, at which time all Advances under this Section
2.1 and all other amounts owing under this Agreement shall be immediately due
and payable.
b. Letters of Credit.
(1) Subject to the terms and conditions
of this Agreement, Bank agrees to issue or cause to be issued letters of credit
for the account of Borrower (each a "Letter of Credit," collectively, the
"Letters of Credit") in an aggregate face amount not to exceed the lesser of
(i) the Committed Line minus the sum of (A) the then outstanding principal
balance of the Advances and (B) the Foreign Exchange Reserve or (ii) the
Borrowing Base minus the sum of (A) the then outstanding principal balance of
the Advances and (B) the Foreign Exchange Reserve, provided that the face
amount of outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit) shall not in any case exceed Two Million Dollars
($2,000,000). Each such Letter of Credit shall have an expiry date no later
than the Maturity Date, provided that Borrower's letter of credit reimbursement
obligation shall be secured by cash on terms acceptable to Bank at any time
after the Maturity Date if the term of this Agreement is not extended by Bank.
All such Letters of Credit shall be, in form and substance, acceptable to Bank
in its sole discretion and shall be subject to the terms and conditions of
Bank's form of application and letter of credit agreement. All amounts
actually paid by Bank in respect of a Letter of Credit shall, when paid,
constitute an Advance under this Agreement.
(2) The obligation of Borrower to
immediately reimburse Bank for drawings made under Letters of Credit shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement and such Letters of Credit, under
all circumstances whatsoever. Borrower shall indemnify, defend and hold Bank
harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection with
any Letters of Credit.
c. Letter of Credit Reimbursement; Reserve.
(1) Borrower may request that Bank issue
a Letter of Credit payable in a currency other than United States Dollars. If
a demand for payment is made under any such Letter of Credit, Bank shall treat
such demand as an advance to Borrower of the equivalent of the amount thereof
(plus cable charges) in United States currency at the then prevailing rate of
exchange in San Francisco, California, for sales of that other currency for
cable transfer to the country of which it is the currency.
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(2) Upon the issuance of any Letter of
Credit payable in a currency other than United States Dollars, Bank shall
create a reserve under the Committed Line for letters of credit against
fluctuations in currency exchange rates, in an amount equal to twenty percent
(20%) of the face amount of such Letter of Credit. The amount of such reserve
may be amended by Bank from time to time to account for fluctuations in the
exchange rate. The availability of funds under the Committed Line shall be
reduced by the amount of such reserve for so long as such Letter of Credit
remains outstanding.
d. Foreign Exchange Contract; Foreign Exchange
Settlements.
(1) Subject to the terms of this
Agreement, Borrower may enter into foreign exchange contracts (the "Exchange
Contracts") not to exceed an aggregate amount of the lesser of (i) the
Committed Line minus the sum of (A) the then outstanding principal balance of
the Advances and (B) the face amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit); (ii) the Borrowing Base
minus the sum of (A) the then outstanding principal balance of the Advance and
(B) the face amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit); or (iii) Two Million Dollars ($2,000,000) (the
"Contract Limit"), pursuant to which Bank shall sell to or purchase from
Borrower foreign currency on a spot or future basis. Borrower shall not
request any Exchange Contracts at any time it is out of compliance with any of
the provisions of this Agreement. All Exchange Contracts must provide for
delivery of settlement on or before the Maturity Date. The amount available
under the Committed Line at any time shall be reduced by the following amounts
(the "Foreign Exchange Reserve") on any given day (the "Determination Date"):
(i) on all outstanding Exchange Contracts on which delivery is to be effected
or settlement allowed more than two business days after the Determination Date,
ten percent (10%) of the gross amount of the Exchange Contracts; plus (ii) on
all outstanding Exchange Contracts on which delivery is to be effected or
settlement allowed within two business days after the Determination Date, one
hundred percent (100%) of the gross amount of the Exchange Contracts.
(2) Bank may, in its discretion,
terminate the Exchange Contracts at any time (a) that an Event of Default
occurs or (b) that there is no sufficient availability under the Committed Line
and Borrower does not have available funds in its bank account to satisfy the
Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, and
without limitation of any applicable indemnities, Borrower agrees to reimburse
Bank for any and all fees, costs and expenses relating thereto or arising in
connection therewith.
(3) Borrower shall not permit the total
gross amount of all Exchange Contracts on which delivery is to be effected and
settlement allowed in any two business day period to be more than One Million
Dollars ($1,000,000) (the "Settlement Limit"), nor shall Borrower permit the
total gross amount of all Exchange Contracts to which Borrower is a party,
outstanding at any one time, to exceed the Contract Limit. Notwithstanding the
above, however, the amount which may be settled in any two (2) business day
period may be increased above the Settlement Limit up to, but in no event to
exceed, the amount of the Contract Limit under either of the following
circumstances:
(a) if there is sufficient
availability under the Committed Line in the amount of the Foreign Exchange
Reserve as of each Determination Date, provided that Bank in advance shall
reserve the full amount of the Foreign Exchange Reserve against the Committed
Line; or
(b) if there is insufficient
availability under the Committed Line, as to settlements within any two (2)
business day period, provided that Bank, in its sole discretion, may: (A)
verify good funds overseas prior to crediting Borrower's deposit account with
Bank (in the case of Borrower's sale of foreign currency); or (B) debit
Borrower's deposit account with Bank prior to delivering foreign currency
overseas (in the case of Borrower's purchase of foreign currency).
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(4) In the case of Borrower's purchase
of foreign currency, Borrower in advance shall instruct Bank upon settlement
either to treat the settlement amount as an advance under the Committed Line,
or to debit Borrower's account for the amount settled.
(5) Borrower shall execute all standard
form applications and agreements of Bank in connection with the Exchange
Contracts and, without limiting any of the terms of such applications and
agreements, Borrower will pay all standard fees and charges of Bank in
connection with the Exchange Contracts.
(6) Without limiting any of the other
terms of this Agreement or any such standard form applications and agreements
of Bank, Borrower agrees to indemnify Bank and hold it harmless from and
against any and all claims, debts, liabilities, demands, obligations, actions,
costs and expenses (including, without limitation, attorneys' fees of counsel
of Bank's choice), of every nature and description which it may sustain or
incur, based upon, arising out of, or in any way relating to any of the
Exchange Contracts or any transactions relating thereto or contemplated
thereby.
2. Overadvances. If, at any time or for any reason, the
amount of Obligations owed by Borrower to Bank pursuant to Section 2.1 of this
Agreement is greater than the lesser of (i) the Committed Line or (ii) the
Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of
such excess.
3. Interest Rates, Payments, and Calculations
(1) Interest Rate. Except as set forth in
Section 2.3(b), any Advances shall bear interest, on the average Daily Balance,
at a rate equal to one (1) percentage point above the Prime Rate. Except as
set forth in Section 2.3(b), any Advances shall bear interest, on the average
Daily Balance, at a rate equal to three-quarters (.75) of a percentage point
above the Prime Rate on the date that Borrower simultaneously (i) achieves, as
of the last day of any calendar month, a ratio of Quick Assets to Current
Liabilities of at least 1.15 to 1.00, and (ii) achieves, as of the last day of
any fiscal quarter a net profit, for the preceding three quarters, of at least
Two Million Five Hundred Thousand Dollars ($2,500,000), and (iii) has a net
profit of at least One Dollar ($1.00) in each of the preceding three quarters.
(2) Default Rate. All Obligations shall bear
interest, from and after the occurrence of an Event of Default, at a rate equal
to five (5) percentage points above the interest rate applicable immediately
prior to the occurrence of the Event of Default. From and after the date
Borrower (i) fails to comply with Sections 6.8, 6.9, 6.10 or 6.11 herein and
(ii) cures or waives any such covenant violations, provided such waiver shall
be given in Bank's sole discretion, any Advances shall bear interest, on the
average Daily Balance, at a rate equal to one and one quarter (1.25) percentage
points above the Prime Rate.
(3) Payments. Interest hereunder shall be due
and payable on the twenty-sixth calendar day of each month during the term
hereof. Bank shall, at its option, charge such interest, all Bank Expenses,
and all Periodic Payments against any of Borrower's deposit accounts or against
the Committed Line, in which case those amounts shall thereafter accrue
interest at the rate then applicable hereunder. Any interest not paid when due
shall be compounded by becoming a part of the Obligations, and such interest
shall thereafter accrue interest at the rate then applicable hereunder.
(4) Computation. In the event the Prime Rate is
changed from time to time hereafter, the applicable rate of interest hereunder
shall be increased or decreased effective as of 12:01 a.m. on the day the Prime
Rate is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis of
a three hundred sixty (360) day year for the actual number of days elapsed.
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<PAGE> 14
4. Crediting Payments. Prior to the occurrence of an
Event of Default, Bank shall credit a wire transfer of funds, check or other
item of payment to such deposit account or Obligation as Borrower specifies.
After the occurrence of an Event of Default, the receipt by Bank of any wire
transfer of funds, check, or other item of payment shall be immediately applied
to conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the
Loan Documents would otherwise be due (except by reason of acceleration) on a
date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
5. Fees. Borrower shall pay to Bank the following:
(1) Facility Fee. A Facility Fee equal to Twenty
Thousand Dollars ($20,000), which fee shall be due on the Closing Date and
shall be fully earned and nonrefundable;
(2) Letters of Credit. An issuance fee for each
standby Letter of Credit of two percent (2%) of the amount of such Letter of
Credit, due on the date of the issuance of such Letter of Credit;
(3) Financial Examination and Appraisal Fees.
Bank's customary fees and out-of-pocket expenses for Bank's audits of
Borrower's Accounts, and for each appraisal of Collateral and financial
analysis and examination of Borrower performed from time to time by Bank or its
agents;
(4) Bank Expenses. Upon the date hereof, all
Bank Expenses incurred through the Closing Date, including reasonable
attorneys' fees and expenses, and, after the date hereof, all Bank Expenses,
including reasonable attorneys' fees and expenses, as and when they become due.
6. Additional Costs. In case any change in any law,
regulation, treaty or official directive or the interpretation or application
thereof by any court or any governmental authority charged with the
administration thereof or the compliance with any guideline or request of any
central bank or other governmental authority (whether or not having the force
of law), in each case after the date of this Agreement:
(1) subjects Bank to any tax with respect to
payments of principal or interest or any other amounts payable hereunder by
Borrower or otherwise with respect to the transactions contemplated hereby
(except for taxes on the overall net income of Bank imposed by the United
States of America or any political subdivision thereof);
(2) imposes, modifies or deems applicable any
deposit insurance, reserve, special deposit or similar requirement against
assets held by, or deposits in or for the account of, or loans by, Bank; or
(3) imposes upon Bank any other condition with
respect to its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
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7. Term. This Agreement shall become effective on the
Closing Date and, subject to Section 12.7, shall continue in full force and
effect for a term ending on the Maturity Date. Notwithstanding the foregoing,
Bank shall have the right to terminate its obligation to make Credit Extensions
under this Agreement immediately and without notice upon the occurrence and
during the continuance of an Event of Default. Notwithstanding termination,
Bank's Lien on the Collateral shall remain in effect for so long as any
Obligations are outstanding.
E. CONDITIONS OF LOANS
1. Conditions Precedent to Initial Credit Extension.
The obligation of Bank to make the initial Credit Extension is subject to the
condition precedent that Bank shall have received, in form and substance
satisfactory to Bank, the following:
(1) this Agreement;
(2) a certificate of the Secretary of Borrower
with respect to incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(3) financing statements (Forms UCC-1);
(4) insurance certificate;
(5) payment of the fees and Bank Expenses then
due specified in Section 2.5 hereof; and
(6) such other documents, and completion of such
other matters, as Bank may reasonably deem necessary or appropriate.
2. Conditions Precedent to all Credit Extensions. The
obligation of Bank to make each Credit Extension, including the initial Credit
Extension, is further subject to the following conditions:
(1) timely receipt by Bank of the Payment/Advance
Form as provided in Section 2.1;
(2) timely receipt by Bank of the letter of
credit applications, foreign exchange documents and/or other documents
specified in Section 2.1 hereof; and
(3) the representations and warranties contained
in Section 5 shall be true and correct in all material respects on and as of
the date of such Payment/Advance Form and on the effective date of each Credit
Extension as though made at and as of each such date, and no Event of Default
shall have occurred and be continuing, or would result from such Credit
Extension. The making of each Credit Extension shall be deemed to be a
representation and warranty by Borrower on the date of such Credit Extension as
to the accuracy of the facts referred to in this Section 3.2(c).
F. CREATION OF SECURITY INTEREST
1. Grant of Security Interest. Borrower grants and
pledges to Bank a continuing security interest in all presently existing and
hereafter acquired or arising Collateral in order to secure prompt repayment of
any and all Obligations and in order to secure prompt performance by Borrower
of each of its covenants and duties under the Loan Documents. Except as set
forth in the Schedule, such security interest constitutes a valid, first
priority security interest in the presently existing Collateral, and will
constitute a valid, first priority security interest in Collateral acquired
after the date hereof.
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2. Delivery of Additional Documentation Required.
Borrower shall from time to time execute and deliver to Bank, at the request of
Bank, all Negotiable Collateral, all financing statements and other documents
that Bank may reasonably request, in form satisfactory to Bank, to perfect and
continue perfected Bank's security interests in the Collateral and in order to
fully consummate all of the transactions contemplated under the Loan Documents.
3. Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, to inspect Borrower's
Books and to make copies thereof and to check, test, and appraise the
Collateral in order to verify Borrower's financial condition or the amount,
condition of, or any other matter relating to, the Collateral.
REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as
follows:
4. Due Organization and Qualification. Borrower and
each Subsidiary is a corporation duly existing and in good standing under the
laws of its state of incorporation and qualified and licensed to do business
in, and is in good standing in, any state in which the conduct of its business
or its ownership of property requires that it be so qualified.
5. Due Authorization; No Conflict. The execution,
delivery, and performance of the Loan Documents are within Borrower's powers,
have been duly authorized, and are not in conflict with nor constitute a breach
of any provision contained in Borrower's Articles of Incorporation or Bylaws,
nor will they constitute an event of default under any material agreement to
which Borrower is a party or by which Borrower is bound. Borrower is not in
default under any agreement to which it is a party or by which it is bound,
which default could have a Material Adverse Effect.
6. No Prior Encumbrances. Borrower has good and
indefeasible title to the Collateral, free and clear of Liens, except for
Permitted Liens.
7. Bona Fide Eligible Accounts. The Eligible Accounts
are bona fide existing obligations. The property giving rise to such Eligible
Accounts has been delivered to the account debtor or to the account debtor's
agent for immediate shipment to and unconditional acceptance by the account
debtor. Borrower has not received notice of actual or imminent Insolvency
Proceeding of any account debtor that is included in any Borrowing Base
Certificate as an Eligible Account.
8. Merchantable Inventory. All Inventory is in all
material respects of good and marketable quality, free from all material
defects.
8.
9. Name; Location of Chief Executive Office. Except as
disclosed in the Schedule, Borrower has not done business under any name other
than that specified on the signature page hereof. The chief executive office
of Borrower is located at the address indicated in Section 10 hereof.
10. Litigation. Except as set forth in the Schedule,
there are no actions or proceedings pending by or against Borrower or any
Subsidiary before any court or administrative agency in which an adverse
decision could have a Material Adverse Effect or a material adverse effect on
Borrower's interest or Bank's security interest in the Collateral. Borrower
does not have knowledge of any such pending or threatened actions or
proceedings.
11. No Material Adverse Change in Financial Statements.
All consolidated financial statements related to Borrower and any Subsidiary
that have been delivered by Borrower to Bank fairly present in all material
respects Borrower's consolidated financial condition as of the date thereof and
Borrower's
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consolidated results of operations for the period then ended. There has not
been a material adverse change in the consolidated financial condition of
Borrower since the date of the most recent of such financial statements
submitted to Bank.
12. Solvency. Borrower is solvent and able to pay its
debts (including trade debts) as they mature.
13. Regulatory Compliance. Borrower and each Subsidiary
has met the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from
Borrower's failure to comply with ERISA that is reasonably likely to result in
Borrower's incurring any liability that could have a Material Adverse Effect.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940.
Borrower is not engaged principally, or as one of the important activities, in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulations G, T and U of the Board of
Governors of the Federal Reserve System). Borrower has complied with all the
provisions of the Federal Fair Labor Standards Act. Borrower has not violated
any statutes, laws, ordinances or rules applicable to it, violation of which
could have a Material Adverse Effect.
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14. Environmental Condition. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous
waste or hazardous substances into the environment.
15. Taxes. Borrower and each Subsidiary has filed or
caused to be filed all tax returns required to be filed, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein.
16. Subsidiaries. Borrower does not own any stock,
partnership interest or other equity securities of any Person, except for
Permitted Investments.
17. Government Consents. Borrower and each Subsidiary
has obtained all consents, approvals and authorizations of, made all
declarations or filings with, and given all notices to, all governmental
authorities that are necessary for the continued operation of Borrower's
business as currently conducted.
18. Full Disclosure. No representation, warranty or
other statement made by Borrower in any certificate or written statement
furnished to Bank contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained in
such certificates or statements not misleading.
G. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of
all outstanding Obligations, and for so long as Bank may have any commitment to
make a Credit Extension hereunder, Borrower shall do all of the following:
1. Good Standing. Borrower shall maintain its and each
of its Subsidiaries' corporate existence and good standing in its jurisdiction
of incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
2. Government Compliance. Borrower shall meet, and
shall cause each Subsidiary to meet, the minimum funding requirements of ERISA
with respect to any employee benefit plans subject to ERISA. Borrower shall
comply, and shall cause each Subsidiary to comply, with all statutes, laws,
ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral.
3. Financial Statements, Reports, Certificates.
Borrower shall deliver to Bank: (a) as soon as available, but in any event
within thirty (30) days after the end of each month, a company prepared
consolidated balance sheet and income statement covering Borrower's
consolidated operations during such period, certified by a Responsible Officer;
(b) as soon as available, but in any event within ninety (90) days after the
end of Borrower's fiscal year, audited consolidated financial statements of
Borrower prepared in accordance with GAAP, consistently
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applied, together with an unqualified opinion on such financial statements of
an independent certified public accounting firm reasonably acceptable to Bank;
(c) within five (5) days upon becoming available, copies of all statements,
reports and notices sent or made available generally by Borrower to its
security holders or to any holders of Subordinated Debt and all reports on Form
10-K and 10-Q filed with the Securities and Exchange Commission; (d) promptly
upon receipt of notice thereof, a report of any legal actions pending or
threatened against Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000)
or more; and (e) such budgets, sales projections, operating plans or other
financial information as Bank may reasonably request from time to time.
Within twenty (20) days after the last day of each month, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a Responsible
Officer in substantially the form of Exhibit C hereto, together with aged
listings of accounts receivable and accounts payable.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the
form of Exhibit D hereto.
Bank shall have a right from time to time hereafter to audit
Borrower's Accounts at Borrower's expense, provided that such audits will be
conducted no more often than every six (6) months unless an Event of Default
has occurred and is continuing.
4. Inventory; Returns. Borrower shall keep all
Inventory in good and marketable condition, free from all material defects.
Returns and allowances, if any, as between Borrower and its account debtors
shall be on the same basis and in accordance with the usual customary practices
of Borrower, as they exist at the time of the execution and delivery of this
Agreement. Borrower shall promptly notify Bank of all returns and recoveries
and of all disputes and claims, where the return, recovery, dispute or claim
involves more than Two Hundred Fifty Thousand Dollars ($250,000).
5. Taxes. Borrower shall make, and shall cause each
Subsidiary to make, due and timely payment or deposit of all material federal,
state, and local taxes, assessments, or contributions required of it by law,
and will execute and deliver to Bank, on demand, appropriate certificates
attesting to the payment or deposit thereof; and Borrower will make, and will
cause each Subsidiary to make, timely payment or deposit of all material tax
payments and withholding taxes required of it by applicable laws, including,
but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability,
and local, state, and federal income taxes, and will, upon request, furnish
Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary
has made such payments or deposits; provided that Borrower or a Subsidiary need
not make any payment if the amount or validity of such payment is contested in
good faith by appropriate proceedings and is reserved against (to the extent
required by GAAP) by Borrower.
6. Insurance
(1) Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion,
sprinklers, and all other hazards and risks, and in such amounts, as ordinarily
insured against by other owners in similar businesses conducted in the
locations where Borrower's business is conducted on the date hereof. Borrower
shall also maintain insurance relating to Borrower's ownership and use of the
Collateral in amounts and of a type that are customary to businesses similar to
Borrower's.
(2) All such policies of insurance shall be in
such form, with such companies, and in such amounts as reasonably satisfactory
to Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must give
at least twenty (20) days notice to Bank before canceling its policy for any
reason. Upon Bank's
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request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
7. Principal Depository. Borrower shall maintain its
principal depository and operating accounts with Bank.
8. Quick Ratio. Borrower shall maintain, as of the last
day of each calendar month, a ratio of Quick Assets to Current Liabilities of
at least 0.80 to 1.00.
9. Debt-Net Worth Ratio. Borrower shall maintain, as of
the last day of each calendar month, a ratio of Total Liabilities less
Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than
.90 to 1.00.
10. Tangible Net Worth. Borrower shall maintain, as of
the last day of each of Borrower's fiscal quarters, a Tangible Net Worth of not
less than Twenty One Million Five Hundred Thousand Dollars ($21,500,000) plus
seventy-five percent (75%) of net profit (excluding losses) for the prior
quarter, on a consolidated basis, plus one hundred percent (100%) of net
proceeds of equity or Subordinated Debt received after the date hereof.
11. Profitability. Beginning with the fiscal quarter
ending December 31, 1996, Borrower shall have a minimum net profit of One
Dollars ($1.00) for each fiscal quarter.
12. Further Assurances. At any time and from time to
time Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
H. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Credit
Extensions, Borrower will not do any of the following:
1. Dispositions. Convey, sell, lease, transfer or
otherwise dispose of (collectively, a "Transfer"), or permit any of its
Subsidiaries to Transfer, all or any part of its business or property, other
than: (i) Transfers of Inventory in the ordinary course of business; (ii)
Transfers of non-exclusive licenses and similar arrangements for the use of the
property of Borrower or its Subsidiaries; or (iii) Transfers of worn-out or
obsolete Equipment.
2. Change in Business. Engage in any business, or
permit any of its Subsidiaries to engage in any business, other than the
businesses currently engaged in by Borrower and any business substantially
similar or related thereto (or incidental thereto), or suffer a material change
in Borrower's ownership. Borrower will not, without thirty (30) days prior
written notification to Bank, relocate its chief executive office.
3. Mergers or Acquisitions. Merge or consolidate, or
permit any of its Subsidiaries to merge or consolidate, with or into any other
business organization, or acquire, or permit any of its Subsidiaries to
acquire, all or substantially all of the capital stock or property of another
Person, except such transactions that do not result in a change of more than
ten percent (10%) of Net Worth. 3.
4. Indebtedness. Create, incur, assume or be or remain
liable with respect to any Indebtedness, or permit any Subsidiary so to do,
other than Permitted Indebtedness.
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5. Encumbrances. Create, incur, assume or suffer to
exist any Lien with respect to any of its property, or assign or otherwise
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries so to do, except for Permitted Liens.
6. Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock.
7. Repayment of Heraeus Med. GmbH. Make any payment in
respect of an obligation due and owing to Heraeus Med. GmbH with respect to an
account payable in the amount as of the date hereof of Two Million Five Hundred
Thousand Dollars ($2,500,000) without the prior written consent of Bank, given
in its sole discretion.
8. Investments. Directly or indirectly acquire or own,
or make any Investment in or to any Person, or permit any of its Subsidiaries
so to do, other than Permitted Investments and as permitted in Section 7.3.
9. Transactions with Affiliates. Directly or indirectly
enter into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of Borrower's
business, upon fair and reasonable terms that are no less favorable to Borrower
than would be obtained in an arm's length transaction with a nonaffiliated
Person.
10. Subordinated Debt. Make any payment in respect of
any Subordinated Debt, or permit any of its Subsidiaries to make any such
payment, except in compliance with the terms of such Subordinated Debt, or
amend any provision contained in any documentation relating to the Subordinated
Debt without Bank's prior written consent.
11. Inventory. Store the Inventory with a bailee,
warehouseman, or similar party unless Bank has received a pledge of the
warehouse receipt covering such Inventory. Except for Inventory sold in the
ordinary course of business and except for such other locations as Bank may
approve in writing, Borrower shall keep the Inventory only at the location set
forth in Section 10 hereof and such other locations of which Borrower gives
Bank prior written notice and as to which Borrower signs and files a financing
statement where needed to perfect Bank's security interest.
12. Compliance. Become an "investment company"
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for
such purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
I. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
1. Payment Default. If Borrower fails to pay the
principal of, or any interest on, any Advances when due and payable; or fails
to pay any portion of any other Obligations not constituting such principal or
interest, including without limitation Bank Expenses, within thirty (30) days
of receipt by Borrower of an invoice for such other Obligations;
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2. Covenant Default. If Borrower fails to perform any
obligation under Sections 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the
covenants contained in Article 7 of this Agreement, or fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and
Bank and as to any default under such other term, provision, condition,
covenant or agreement that can be cured, has failed to cure such default within
ten (10) days after Borrower receives notice thereof or any officer of Borrower
becomes aware thereof; provided, however, that if the default cannot by its
nature be cured within the ten (10) day period or cannot after diligent
attempts by Borrower be cured within such ten (10) day period, and such default
is likely to be cured within a reasonable time, then Borrower shall have an
additional reasonable period (which shall not in any case exceed thirty (30)
days) to attempt to cure such default, and within such reasonable time period
the failure to have cured such default shall not be deemed an Event of Default
(provided that no Credit Extensions will be required to be made during such
cure period);
3. Material Adverse Change. If there occurs a material
adverse change in Borrower's business or financial condition, or if there is a
material impairment of the prospect of repayment of any portion of the
Obligations or a material impairment of the value or priority of Bank's
security interests in the Collateral;
4. Attachment. If any material portion of Borrower's
assets is attached, seized, subjected to a writ or distress warrant, or is
levied upon, or comes into the possession of any trustee, receiver or person
acting in a similar capacity and such attachment, seizure, writ or distress
warrant or levy has not been removed, discharged or rescinded within ten (10)
days, or if Borrower is enjoined, restrained, or in any way prevented by court
order from continuing to conduct all or any material part of its business
affairs, or if a judgment or other claim becomes a lien or encumbrance upon any
material portion of Borrower's assets, or if a notice of lien, levy, or
assessment is filed of record with respect to any of Borrower's assets by the
United States Government, or any department, agency, or instrumentality
thereof, or by any state, county, municipal, or governmental agency, and the
same is not paid within ten (10) days after Borrower receives notice thereof,
provided that none of the foregoing shall constitute an Event of Default where
such action or event is stayed or an adequate bond has been posted pending a
good faith contest by Borrower (provided that no Credit Extensions will be
required to be made during such cure period);
5. Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within ten (10)
days (provided that no Credit Extensions will be made prior to the dismissal of
such Insolvency Proceeding);
6. Other Agreements. If there is a default in any
agreement to which Borrower is a party with a third party or parties resulting
in a right by such third party or parties, whether or not exercised, to
accelerate the maturity of any Indebtedness in an amount in excess of One
Hundred Thousand Dollars ($100,000) or that could have a Material Adverse
Effect;
7. Subordinated Debt. If Borrower makes any payment on
account of Subordinated Debt, except to the extent such payment is allowed
under any subordination agreement entered into with Bank;
8. Judgments. If a judgment or judgments for the
payment of money in an amount, individually or in the aggregate, of at least
One Hundred Thousand Dollars ($100,000) shall be rendered against Borrower and
shall remain unsatisfied and unstayed for a period of ten (10) days (provided
that no Credit Extensions will be made prior to the satisfaction or stay of
such judgment); or
9. Misrepresentations. If any material
misrepresentation or material misstatement exists now or hereafter in any
warranty or representation set forth herein or in any certificate delivered to
Bank by any
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<PAGE> 23
Responsible Officer pursuant to this Agreement or to induce Bank to enter into
this Agreement or any other Loan Document.
10. BANK'S RIGHTS AND REMEDIES Rights and
Remedies. Upon the occurrence and during the continuance of an Event of
Default, Bank may, at its election, without notice of its election and without
demand, do any one or more of the following, all of which are authorized by
Borrower:
(1) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(2) Cease advancing money or extending credit to
or for the benefit of Borrower under this Agreement or under any other
agreement between Borrower and Bank;
(3) Demand that Borrower (i) deposit cash with
Bank in an amount equal to the amount of any Letters of Credit remaining
undrawn, as collateral security for the repayment of any future drawings under
such Letters of Credit, and Borrower shall forthwith deposit and pay such
amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be
paid or payable over the remaining term of the Letters of Credit;
(4) Settle or adjust disputes and claims directly
with account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(5) Without notice to or demand upon Borrower,
make such payments and do such acts as Bank considers necessary or reasonable
to protect its security interest in the Collateral. Borrower agrees to
assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate. Borrower authorizes Bank to enter the
premises where the Collateral is located, to take and maintain possession of
the Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in Bank's determination appears to be
prior or superior to its security interest and to pay all expenses incurred in
connection therewith. With respect to any of Borrower's owned premises,
Borrower hereby grants Bank a license to enter into possession of such premises
and to occupy the same, without charge, in order to exercise any of Bank's
rights or remedies provided herein, at law, in equity, or otherwise;
(6) Without notice to Borrower set off and apply
to the Obligations any and all (i) balances and deposits of Borrower held by
Bank, or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by Bank;
(7) Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral. Bank is hereby granted a license or other
right, solely pursuant to the provisions of this Section 9.1, to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale, and selling any Collateral and,
in connection with Bank's exercise of its rights under this Section 9.1,
Borrower's rights under all licenses and all franchise agreements shall inure
to Bank's benefit;
(8) Sell the Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for
cash or on terms, in such manner and at such places (including Borrower's
premises) as Bank determines is commercially reasonable, and apply any proceeds
to the Obligations in whatever manner or order Bank deems appropriate;
(9) Bank may credit bid and purchase at any
public sale; and
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(10) Any deficiency that exists after disposition
of the Collateral as provided above will be paid immediately by Borrower.
11. Power of Attorney. Effective only upon the
occurrence and during the continuance of an Event of Default, Borrower hereby
irrevocably appoints Bank (and any of Bank's designated officers, or employees)
as Borrower's true and lawful attorney to: (a) send requests for verification
of Accounts or notify account debtors of Bank's security interest in the
Accounts; (b) endorse Borrower's name on any checks or other forms of payment
or security that may come into Bank's possession; (c) sign Borrower's name on
any invoice or bill of lading relating to any Account, drafts against account
debtors, schedules and assignments of Accounts, verifications of Accounts, and
notices to account debtors; (d) make, settle, and adjust all claims under and
decisions with respect to Borrower's policies of insurance; and (e) settle and
adjust disputes and claims respecting the accounts directly with account
debtors, for amounts and upon terms which Bank determines to be reasonable;
provided Bank may exercise such power of attorney to sign the name of Borrower
on any of the documents described in Section 4.2 regardless of whether an Event
of Default has occurred. The appointment of Bank as Borrower's attorney in
fact, and each and every one of Bank's rights and powers, being coupled with an
interest, is irrevocable until all of the Obligations have been fully repaid
and performed and Bank's obligation to provide advances hereunder is
terminated.
12. Accounts Collection. At any time from the date of
this Agreement, Bank may notify any Person owing funds to Borrower of Bank's
security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and immediately deliver such payments to Bank
in their original form as received from the account debtor, with proper
endorsements for deposit.
13. Bank Expenses. If Borrower fails to pay any amounts
or furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up such
reserves under the Revolving Facility as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. Any amounts so
paid or deposited by Bank shall constitute Bank Expenses, shall be immediately
due and payable, and shall bear interest at the then applicable rate
hereinabove provided, and shall be secured by the Collateral. Any payments
made by Bank shall not constitute an agreement by Bank to make similar payments
in the future or a waiver by Bank of any Event of Default under this Agreement.
14. Bank's Liability for Collateral. So long as Bank
complies with reasonable banking practices, Bank shall not in any way or manner
be liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or fashion from any
cause; (c) any diminution in the value thereof; or (d) any act or default of
any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever. All risk of loss, damage or destruction of the Collateral shall be
borne by Borrower.
15. Remedies Cumulative. Bank's rights and remedies
under this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Bank shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by Bank
of one right or remedy shall be deemed an election, and no waiver by Bank of
any Event of Default on Borrower's part shall be deemed a continuing waiver.
No delay by Bank shall constitute a waiver, election, or acquiescence by it.
No waiver by Bank shall be effective unless made in a written document signed
on behalf of Bank and then shall be effective only in the specific instance and
for the specific purpose for which it was given.
16. Demand; Protest. Borrower waives demand, protest,
notice of protest, notice of default or dishonor, notice of payment and
nonpayment, notice of any default, nonpayment at maturity, release, compromise,
20
<PAGE> 25
settlement, extension, or renewal of accounts, documents, instruments, chattel
paper, and guarantees at any time held by Bank on which Borrower may in any way
be liable.
J. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower: Laserscope
3052 Orchard Drive
San Jose, CA 95134
Attn: Dennis LaLumandiere
FAX: (408) 943-1462
If to Bank: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Gary Reagan
FAX: (415) 812-0640
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
K. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of California, without regard
to principles of conflicts of law. Each of Borrower and Bank hereby submits to
the exclusive jurisdiction of the state and Federal courts located in the
County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH
PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
L. GENERAL PROVISIONS
1. Successors and Assigns. This Agreement shall bind
and inure to the benefit of the respective successors and permitted assigns of
each of the parties; provided, however, that neither this Agreement nor any
rights hereunder may be assigned by Borrower without Bank's prior written
consent, which consent may be granted or withheld in Bank's sole discretion.
Bank shall have the right without the consent of or notice to Borrower to sell,
transfer, negotiate, or grant participation in all or any part of, or any
interest in, Bank's obligations, rights and benefits hereunder.
2. Indemnification. Borrower shall defend, indemnify
and hold harmless Bank and its officers, employees, and agents against: (a)
all obligations, demands, claims, and liabilities claimed or asserted by any
other party in connection with the transactions contemplated by this Agreement;
and (b) all losses or Bank Expenses in any
21
<PAGE> 26
way suffered, incurred, or paid by Bank as a result of or in any way arising
out of, following, or consequential to transactions between Bank and Borrower
whether under this Agreement, or otherwise (including without limitation
reasonable attorneys fees and expenses), except for losses caused by Bank's
gross negligence or willful misconduct.
3. Time of Essence. Time is of the essence for the
performance of all obligations set forth in this Agreement.
4. Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
5. Amendments in Writing, Integration. This Agreement
cannot be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents, except that any financing statements or other
agreements or instruments filed by Bank with respect to Borrower shall remain
in full force and effect.
6. Counterparts. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
7. Survival. All covenants, representations and
warranties made in this Agreement shall continue in full force and effect so
long as any Obligations remain outstanding. The obligations of Borrower to
indemnify Bank with respect to the expenses, damages, losses, costs and
liabilities described in Section 12.2 shall survive until all applicable
statute of limitations periods with respect to actions that may be brought
against Bank have run.
8. Effect of Amendment and Restatement. This Agreement
is intended to and does completely amend and restate, without novation, the
Original Loan Documents. All security interests granted under the Original
Loan Documents are hereby confirmed and ratified and shall continue to secure
all Obligations under this Agreement.
22
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
LASERSCOPE
By: /s/ Dennis LaLumandiere
Title: Vice President of Finance and CFO
By: /s/ Robert V. McCormick
Title: President and CEO
SILICON VALLEY BANK
By: /s/ Gary Reagan
Title: Vice President
23
<PAGE> 28
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
M. All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
N. All inventory, now owned or hereafter acquired, including,
without limitation, all merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
O. All contract rights and general intangibles now owned or
hereafter acquired, including, without limitation, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications, leases,
license agreements, franchise agreements, blueprints, drawings, purchase
orders, customer lists, route lists, infringements, claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, design rights,
income tax refunds, payments of insurance and rights to payment of any kind;
P. All now existing and hereafter arising accounts, contract
rights, royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of technology
or the rendering of services by Borrower, whether or not earned by performance,
and any and all credit insurance, guaranties, and other security therefor, as
well as all merchandise returned to or reclaimed by Borrower and Borrower's
Books relating to any of the foregoing;
Q. All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing;
R. All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter
acquired; all trade secret rights, including all rights to unpatented
inventions, know-how, operating manuals, license rights and agreements and
confidential information, now owned or hereafter acquired; all mask work or
similar rights available for the protection of semiconductor chips, now owned
or hereafter acquired; all claims for damages by way of any past, present and
future infringement of any of the foregoing; and
S. Any and all claims, rights and interests in any of the above
and all substitutions for, additions and accessions to and proceeds thereof.
24
<PAGE> 29
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: ______________________
FAX#: (408) 496-2426 TIME: ________________
_______________________________________________________________________________
FROM: LASERSCOPE
-------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY: _________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: _________________________________________________________
PHONE NUMBER: _________________________________________________________________
FROM ACCOUNT # ___________ TO ACCOUNT # _______________________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $______________________________________
PRINCIPAL PAYMENT (ONLY) $______________________________________
INTEREST PAYMENT (ONLY) $______________________________________
PRINCIPAL AND INTEREST (PAYMENT) $______________________________________
OTHER INSTRUCTIONS: ___________________________________________________________
_______________________________________________________________________________
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the
date of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that these representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
_______________________________________________________________________________
25
<PAGE> 30
- -------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- ------------------------------ --------------------------------
Authorized Requestor Phone #
- ------------------------------ --------------------------------
Received By (Bank) Phone #
-------------------------------
Authorized Signature (Bank)
- -------------------------------------------------------------------------------
26
<PAGE> 31
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: Laserscope
Lender: Silicon Valley Bank
Commitment Amount: $5,000,000
ACCOUNTS RECEIVABLE
<TABLE>
<S> <C> <C>
1. Accounts Receivable Book Value as of $
-------- ------------
2. Additions (please explain on reverse) $
------------
3. TOTAL ACCOUNTS RECEIVABLE $
-----------
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $
----------
5. Balance of 50% over 90 day accounts $
-----------
6. Concentration Limits $
-----------
7. Foreign Accounts $
-----------
8. Governmental Accounts $
----------
9. Contra Accounts $
----------
10. Promotion or Demo Accounts $
-----------
11. Intercompany/Employee Accounts $
----------
12. Other (please explain on reverse) $
-----------
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
-----------
14. Eligible Accounts (#3 minus #13) $
-----------
15. LOAN VALUE OF ACCOUNTS (75% of #14) $
-----------
BALANCES
16. Maximum Loan Amount $
-----------
17. Total Funds Available [Lesser of #16 or (#13 plus #15)] $
-----------
18. Present balance owing on Line of Credit/Foreign Exchange Reserve $
-----------
19. Outstanding under Sublimits ( ) $
-----------
20. RESERVE POSITION (#17 minus #18 and #19) $
-----------
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete
and correct, and that the information reflected in this Borrowing Base
Certificate complies with the representations and warranties set forth in the
Loan and Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
----------------------------
BANK USE ONLY
LASERSCOPE
Rec'd By:___________________
Authorized Signer
Date:_______________________
By: _____________________________
Authorized Signer Verified:___________________
Authorized Signer
Date:_______________________
----------------------------
27
<PAGE> 32
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: LASERSCOPE
The undersigned authorized officer of Laserscope hereby certifies that
in accordance with the terms and conditions of the Amended and Restated Loan
and Security Agreement between Borrower and Bank (the "Agreement"), (i)
Borrower is in complete compliance for the period ending ____________ with
all required covenants except as noted below and (ii) all representations and
warranties of Borrower stated in the Agreement are true and correct in all
material respects as of the date hereof. Attached herewith are the required
documents supporting the above certification. The Officer further certifies
that these are prepared in accordance with Generally Accepted Accounting
Principles (GAAP) and are consistently applied from one period to the next
except as explained in an accompanying letter or footnotes.
Please indicate compliance status by circling Yes/No under "Complies" column.
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements Monthly within 30 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings Monthly within 20 days Yes No
A/R Audit Initial and Semi-Annual Yes No
Financial Covenant Required Actual Complies
------------------ -------- ------ --------
Maintain on a Monthly Basis:
Minimum Quick Ratio .80:1.00 _____:1.0 Yes No
Maximum Debt/Tangible Net Worth .90:1.00 _____:1.0 Yes No
Maintain on a Quarterly Basis:
Minimum Tangible Net Worth $21,500,000* $________ Yes No
Profitability: Quarterly** $1 $________ Yes No
</TABLE>
* Plus 75% of net profit (exclusive of losses) plus 100% of new equity
or subordinated debt
** Beginning 12/31/96.
Comments Regarding Exceptions: See Attached.
Sincerely,
----------------------------
- -------------------------------------- BANK USE ONLY
SIGNATURE
Rec'd By:___________________
- -------------------------------------- Authorized Signer
TITLE
Date:_______________________
- --------------------------------------
DATE Verified:___________________
Authorized Signer
Date:_______________________
Compliance Status Yes No
----------------------------
28
<PAGE> 33
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: Laserscope Bank: Silicon Valley Bank
LOAN TYPE. This is a variable rate, revolving line of credit of a principal
amount up to $5,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Short Term Working
Capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Revolving Line
<TABLE>
<S> <C>
Amount paid to Borrower directly: $
--------
Undisbursed Funds $
--------
Principal $
--------
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges:
Prepaid Finance Charges Paid in Cash: $
--------
$ 20 ,000 Loan Fee
$ Accounts Receivables Audit
---------
Other Charges Paid in Cash: $
--------
$TBD UCC Search Fees
$75 UCC Filing Fees
$TBD Outside Counsel Fees and Expenses (Estimate)
Total Charges Paid in Cash $
--------
</TABLE>
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct
from Borrower's account numbered ______________ the amount of any loan payment.
If the funds in the account are insufficient to cover any payment, Bank shall
not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF NOVEMBER 27, 1996.
BORROWER:
- ----------------------------------
- ----------------------------------
Authorized Officer
<PAGE> 34
AGREEMENT TO PROVIDE INSURANCE
Grantor: Laserscope Bank: Silicon Valley Bank
INSURANCE REQUIREMENTS. Laserscope ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or
the providing of other financial accommodations to Grantor by Bank. These
requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and
liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation
that coverage will not be cancelled or
diminished without a minimum of twenty (20)
days' prior written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Bank. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on
or before closing, evidence of the required insurance as provided above, with
an effective date of November 27, 1996, or earlier. Grantor acknowledges and
agrees that if Grantor fails to provide any required insurance or fails to
continue such insurance in force, Bank may do so at Grantor's expense as
provided in the Loan and Security Agreement. The cost of such insurance, at
the option of Bank, shall be payable on demand or shall be added to the
indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES THAT
IF BANK SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED
PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE
LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN
ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED NOVEMBER
27, 1996.
GRANTOR:
LASERSCOPE
x
Authorized Officer
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
CORPORATE RESOLUTIONS TO BORROW
Borrower: LASERSCOPE
<PAGE> 35
I, the undersigned Secretary or Assistant Secretary of LaserScope (the
"Corporation"), HEREBY CERTIFY that the Corporation is organized and existing
under and by virtue of the laws of the State of California.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Articles of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the
Corporation, duly called and held, at which a quorum was present and voting (or
by other duly authorized corporate action in lieu of a meeting), the following
resolutions were adopted.
BE IT RESOLVED, that any one (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- ------------------
- ----------------------- -------------------- -----------------------
- ----------------------- -------------------- -----------------------
- ----------------------- -------------------- -----------------------
- ----------------------- -------------------- -----------------------
acting for an on behalf of this Corporation and as its act and deed be, and
they hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan and Security Agreement dated as of November 27, 1996 (the "Loan
Agreement").
Execute Notes. To execute and deliver to Bank the promissory note or
notes of the Corporation, on Lender's forms, at such rates of interest and on
such terms as may be agreed upon, evidencing the sums of money so borrowed or
any indebtedness of the Corporation to Bank, and also to execute and deliver to
Lender one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the notes, or any portion
of the notes.
Grant Security. To grant a security interest to Bank in the
Collateral described in the Loan Agreement, which security interest shall
secure all of the Corporation's Obligations, as described in the Loan
Agreement.
Negotiate Items. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
Letters of Credit; Foreign Exchange. To execute letters of credit
applications, foreign exchange agreements and other related documents
pertaining to Bank's issuance of letters of credit and foreign exchange
contracts.
2
<PAGE> 36
Further Acts. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any and
all fees and costs, and to execute and deliver such other documents and
agreements as they may in their discretion deem reasonably necessary or proper
in order to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect
at the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names;
that the foregoing Resolutions now stand of record on the books of the
Corporation; and that the Resolutions are in full force and effect and have not
been modified or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on November 27, 1996
and attest that the signatures set opposite the names listed above are their
genuine signatures.
CERTIFIED TO AND ATTESTED BY:
X
- --------------------------------------------------------------------------
Attachment 1 - Articles of Incorporation
Attachment 2 - Bylaws
----------------------------------
3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,917
<SECURITIES> 0
<RECEIVABLES> 13,286
<ALLOWANCES> 700
<INVENTORY> 17,407
<CURRENT-ASSETS> 35,536
<PP&E> 14,644
<DEPRECIATION> 11,535
<TOTAL-ASSETS> 44,469
<CURRENT-LIABILITIES> 17,092
<BONDS> 0
0
0
<COMMON> 48,798
<OTHER-SE> (21,623)
<TOTAL-LIABILITY-AND-EQUITY> 44,469
<SALES> 42,844
<TOTAL-REVENUES> 42,844
<CGS> 21,882
<TOTAL-COSTS> 21,882
<OTHER-EXPENSES> 22,552
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (50)
<INCOME-PRETAX> (1,540)
<INCOME-TAX> 152
<INCOME-CONTINUING> (1,692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,692)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
