<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the quarterly period ended March 31, 1998 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 of Incorporation) (I.R.S. Employer Identification No.)
3052 ORCHARD DRIVE, SAN JOSE, CALIFORNIA 95134-2011
(Address of principal executive offices)
Registrant's telephone number: (408) 943-0636
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of Registrant's common stock issued and outstanding as of
April 30, 1998 was 12,373,071.
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TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION 3
Item 1. Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Results of Operations 8
Liquidity and Capital Resources 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Items 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
LASERSCOPE
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(thousands) 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,384 $ 2,465
Accounts receivable, net 14,578 13,960
Inventories 19,420 18,656
Other current assets 994 1,017
-------- --------
Total current assets 36,376 36,098
Property and equipment, net 4,970 5,183
Developed technology and other intangibles, net 5,111 5,339
Other assets 662 686
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Total assets $ 47,119 $ 47,306
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,545 $ 6,071
Accrued compensation 1,927 1,710
Short-term bank loans 3,920 3,107
Other current liabilities 4,398 4,897
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Total current liabilities 15,790 15,785
Obligations under capital leases 230 274
Mortgages and other long-term loans 2,903 2,970
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Total long-term liabilities 3,133 3,244
Commitments and contingencies
Minority interest 215 160
Shareholders' equity:
Common stock 51,008 50,939
Accumulated deficit (22,061) (21,831)
Accumulated other comprehensive income (591) (616)
Notes receivable from shareholders (375) (375)
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Total shareholders' equity 27,981 28,117
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Total liabilities and shareholders' equity $ 47,119 $ 47,306
======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
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LASERSCOPE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(thousands except per share amounts) 1998 1997
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<S> <C> <C>
Net revenues $ 13,591 $ 15,763
Cost of sales 7,021 8,687
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Gross margin 6,570 7,076
Operating expenses:
Research and development 1,331 670
Selling, general and administrative 5,345 5,401
-------- --------
6,676 6,071
Operating income (loss) (106) 1,005
Interest income (expense) and other, net 40 (26)
-------- --------
Income (loss) before income taxes and minority interest (66) 979
Provision for income taxes 109 98
-------- --------
Income (loss) before minority interest (175) 881
Minority interest 55 --
-------- --------
Net income (loss) $ (230) $ 881
======== ========
Basic and diluted net income (loss) per share $ (0.02) $ 0.07
======== ========
Shares used in basic per share calculations 12,356 12,010
======== ========
Shares used in diluted per share calculations 12,356 13,041
======== ========
</TABLE>
See notes to condensed consolidated financial statements
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LASERSCOPE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(thousands) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (230) $ 881
Adjustments to reconcile net income to
cash used by operating activities:
Depreciation and amortization 745 500
Increase (decrease) from changes in:
Accounts receivable (618) (1,958)
Inventories (764) (603)
Other current assets 23 (41)
Other assets -- 100
Accounts payable (526) (770)
Accrued compensation 217 (641)
Other current liabilities (499) 246
Minority interest 55 --
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Cash used by operating activities (1,597) (2,286)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (280) (1,635)
Other 25 (228)
------- -------
Cash used by investing activities (255) (1,863)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on obligations under capital leases (44) (14)
Proceeds from the sale of common stock under stock plans 69 1,320
Proceeds from bank loans 813 2,300
Repayment of bank loans (67) (1,300)
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Cash provided by financing activities 771 2,306
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Decrease in cash and cash equivalents (1,081) (1,843)
Cash and cash equivalents, beginning of period 2,465 3,917
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Cash and cash equivalents, end of period $ 1,384 $ 2,074
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 88 $ 43
Income taxes $ 3 $ 42
</TABLE>
See notes to condensed consolidated financial statements
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
1. The accompanying condensed consolidated financial statements include
Laserscope (the "Company") and its wholly and majority-owned
subsidiaries. All intercompany transactions and balances have been
eliminated. While the financial information in this report is unaudited,
in the opinion of management, all adjustments (which included only
normal recurring adjustments) necessary to present fairly the financial
position and results of operations as of and for the periods indicated
have been recorded. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial
statements and the notes thereto for the year ended December 31, 1997
included in the Company's annual report on Form 10-K for the year ended
December 31, 1997. The results of operations for the three month period
ended March 31, 1998 are not necessarily indicative of the results
expected for the full year.
2. Inventory was comprised of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
Sub-assemblies and purchased parts $14,177 $13,098
Finished goods 5,243 5,558
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$19,420 $18,656
======= =======
</TABLE>
3. Basic net income (loss) per share is calculated using the weighted
average of common stock outstanding. Diluted net income per share is
calculated using the weighted average of common stock outstanding plus
dilutive common equivalent shares from stock options (1,031,000 shares
at March 31, 1997). All per share amounts for all periods presented have
been restated to conform to SFAS 128 requirements.
4. 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 March 31, 1998 and December 31, 1997 the Company's cash equivalents
were in the form of institutional money market accounts and totaled $0.4
million and $1.3 million, respectively.
At March 31, 1998 and December 31, 1997 the Company had no investments
in debt or equity securities.
5. As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of the
Statement had no impact the Company's net income or shareholders'
equity. SFAS 130 requires foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the
requirements of SFAS 130.
Total comprehensive income (loss) during the quarters ended March 31,
1998 and 1997 was $(205,000) and $653,000, respectively.
6. As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standard's No. 131 "Disclosures about Segments of an
Enterprise and Related Information " (SFAS 131). SFAS 131 will change
the way companies report selected segment information in annual
financial statements and requires those companies to report selected
segment information in interim financial reports to shareholders. The
Company has not reached a conclusion as to the appropriate segments, if
any, it will be required to report to comply with SFAS 131.
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7. In June 1997 the Company completed the acquisition of a majority
interest in NWL Laser-Technologie GmbH. ("NWL"). The Company accounted
for the acquisition as a purchase. Accordingly, the operating results of
NWL are included in the Company's consolidated results of operations for
the period ended March 31, 1998, however, are not included in the
Company's consolidated results of operations for the period ended March
31, 1997. The minority interest reported in the financial statements
represents minority shareholders' proportional interest in the net
assets and operating results of the NWL subsidiary.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Except for the historical information contained in this Quarterly Report on Form
10-Q, 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
acquisitions of Heraeus Surgical, Inc. ("HSI") and NWL Laser-Technologie, GmbH
("NWL"), including the integration of the operations and assets acquired and the
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, clearance by the F.D.A. and other regulatory
agencies and market acceptance of new products and surgical/therapeutic
procedures, the impact of competitive products and pricing, the Company's
ability to raise capital on terms acceptable to the Company, or at all, the
Company's ability to expand further into international markets, 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. While only seven percent of the Company's revenues were
attributable to sales in Asia during the quarter ended March 31, 1998 compared
to ten percent during the year ended December 31, 1997, the recent economic
instability in certain Asian countries could adversely affect the Company's
business, financial condition and operating results. 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.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date field. Beginning in the year 2000,
these date fields need to accept four digit entries to distinguish 21st century
dates from 20th century dates. As a result, in
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approximately two years, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
such compliance. Any Year 2000 compliance problem to either the Company, its
suppliers, its service providers or its customers could result in a material
adverse effect on the Company's financial condition and operating results.
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 as of the date hereof. The
Company assumes no obligation to update any forward-looking statements included
herein.
RESULTS OF OPERATIONS:
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part I -- Item 1
of this Quarterly Report and the audited financial statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1997 contained in the Company's
Annual Report on Form 10-K.
Net revenues for the quarter ended March 31, 1998 were $13.6 million, a decrease
of approximately 14% from net revenues of $15.8 million in the corresponding
quarter of 1997. Net revenues decreased during the first quarter of 1998
compared to the first quarter of 1997 due to lower shipments of the Company's
laser systems, disposable supplies, instrumentation and AMS products and lower
sales of services. These decreases were offset partially by increased revenues
from shipments of products and sales of services acquired in the acquisition of
a majority interest in NWL completed in June 1997.
Revenues from the sales of laser systems were approximately 49% of total net
revenues during the quarter ended March 31, 1998 compared to approximately 44%
of total net revenues during the same period in 1997. In dollars, these revenues
decreased approximately 4% which reflects a combination of lower unit shipments
and higher average unit prices. The lower unit shipments are the net result of
decreased shipments of the Company's KTP Surgical Laser Systems and CO2 laser
systems partially offset by shipments of laser products acquired in the
acquisition of a majority interest in NWL. The higher average unit prices are
the combined result of higher shipments of PDT laser systems to hospitals and
lower shipments of Aura office laser units in the United States as well as
decreased shipments to independent international distributors in Asia. The
Company believes that the lower demand for it office laser products and CO2
laser systems in the United States and the economic downturn in Asia may
continue to impact negatively its revenues in these regions for the next several
quarters.
Revenues from the sales of the Company's Ascent Medical System ("AMS") products
were approximately 15% of total net revenues during the quarter ended March 31,
1998 compared to approximately 18% of total net revenues in the corresponding
period in 1997. In dollars, these revenues decreased approximately 31%. The
Company believes that the decrease is partially attributable to its withdrawal
from the operating room table business in late 1997. Shipments of operating room
tables contributed approximately $0.3 million to revenues during the quarter
ended March 31, 1997. In addition, the Company believes that lower orders of AMS
products and delays in construction projects in which the AMS products have been
8
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ordered negatively impacted shipments of these products during the quarter ended
March 31, 1998 relative to the corresponding period in 1997. The Company
believes that sales of AMS products during 1998 will be lower than in 1997 due
to the Company's withdrawal from the operating room table market. Additionally,
the Company believes that construction schedules will continue to affect orders
and shipments of AMS products during 1998, and as a result, revenues will vary
from quarter to quarter.
Revenues from the sales of disposable supplies, instrumentation and services
comprised approximately 37% of total net revenues during the quarter ended March
31, 1998, compared to approximately 38% of total net revenues in the
corresponding period in 1997. In dollars, these revenues decreased approximately
17%. The decreases are due to the combination of decreased shipments of scanning
devices sold as accessories to the Aura office laser system, lower shipments of
disposable supplies and lower sales of services. The Company expects that
revenues from sales of disposable supplies, instrumentation and service will
depend principally upon 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 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 Company believes the adoption of photodynamic therapy
by medical practitioners also will be important to its business. The Company
continues to invest in the development of new products for emerging surgical
applications while educating surgeons in the U.S. and internationally to
encourage the adoption of such new applications. Through the acquisition of HSI,
the Company 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 37% of total net revenues in
each of the quarters ended March 31, 1998 and March 31, 1997.
Gross margin as a percentage of net revenues for the quarter ended March 31,
1998 was 48%, compared to 45% for the corresponding quarter in 1997. The
increase is due in part to lower revenues generated from sales of AMS products.
These products generally generate lower gross margins than the Company's other
product lines. In addition, a lower proportion of revenues from sales to
independent international distributors were generated during the first quarter
of 1998 than in the corresponding quarter of 1997. These revenues generally
generate lower gross margins than those generated by revenues from sales through
the Company's direct sales force. The Company expects that gross margin as a
percentage of revenues for the remainder of 1998 may vary from quarter to
quarter as it continues to balance production volumes and inventory levels with
product demand and as product and distribution mix varies.
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 the first quarter of 1998
amounts spent in research and development increased approximately 99% compared
to the corresponding quarter of 1997. As a percentage of net revenues these
expenses were approximately 10% and 4% in the quarters ended March 31, 1998 and
March 31, 1997, respectively. The increase in spending is due to a combination
of increased spending in product development and incremental research and
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development spending by NWL. The Company expects that amounts spent in research
and development to remain at similarly high levels during the remainder of 1998.
Selling, general and administrative expenses decreased approximately 1% in the
quarter ended March 31, 1998 compared to the corresponding quarter of 1997. As a
percentage of revenue these expenses increased from approximately 34% in the
first quarter of 1997 to approximately 39% in the first quarter of 1998. The
decrease in spending is the net result of NWL administrative expenses that arose
from the majority interest acquisition offset by lower spending in sales
commissions and administrative expenses in the United States. The increase as a
percentage of net revenues is due to the decrease in net revenues without a
corresponding decrease in spending. The Company expects these amounts to remain
at similarly high levels during the remainder of 1998 as the Company continues
to invest in international expansion, marketing programs and educational
support.
During the quarter ended March 31, 1998 the Company recorded an income tax
provision of $0.1 million due to profits reported by NWL in Germany. During the
same period in 1997 the Company recorded an income tax provision representing an
effective tax rate of 10% which is below the combined federal and state
statutory rates due to the utilization of available net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES:
Total assets and liabilities as of March 31, 1998 were $47.1 million and $18.9
million respectively, compared to assets and liabilities of $47.3 million and
$19.0 million at December 31, 1997. Working capital increased $0.3 million from
$20.3 million at December 31, 1997 to $20.6 million at March 31, 1998, while
cash and cash equivalents decreased $1.1 million during the period. The net
decrease in cash and cash equivalents was due principally to cash used by
operating activities of $1.6 million partially offset by increased short-term
bank borrowings of $0.8 million.
Cash used by operating activities was the combined result of a net loss of $0.2
million, increases in inventory and accounts receivable totaling $0.8 million
and $0.6 million, respectively and reductions in accounts payable and other
current liabilities of $0.5 million and $0.5 million, respectively. These uses
were partially offset by depreciation and amortization of $0.7 million, a
reduction in accrued compensation of $0.2 million, and an increase to minority
interest of $0.1 million.
Cash used by investing activities primarily consisted of capital expenditures of
$0.3 million.
Cash provided by financing activities primarily consisted of net increases in
bank loans of $0.8 million.
The Company has in place a $5.0 million revolving bank line of credit that
expires in November 1998 under which the collateral provisions allowed for
approximately $4.7 million in borrowings and under which $3.0 million in
borrowings were outstanding at March 31, 1998. In addition, NWL has in place
various bank lines totaling approximately $3.0 million that expire in 1999 and
under which $2.5 million in borrowings were outstanding at March 31, 1998.
The Company anticipates that future changes in cash and working capital will be
dependent on a number of factors including management's ability to manage
effectively non-cash assets such as inventory and accounts receivable. At March
31, 1998, the Company's inventories consisted of $19.4 million and were
comprised of $14.2 million of sub-assemblies and purchased parts and $5.2
million of finished goods. This represents a 4% increase from
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inventories at December 31, 1997 which consisted of $18.7 million, comprised of
$13.1 million of sub-assemblies and purchased parts and $5.6 million of finished
goods. The Company competes in a competitive industry where technological
changes and acceptance of new and alternative procedures by its customers is
rapid. Management's ability to anticipate and adapt to these changes will
significantly affect the Company's investment in inventory and the potential for
inventory valuation adjustments. In addition, the level of profitability of the
Company will have a significant impact on cash resources.
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 and NWL acquisitions using its existing
cash resources. While the Company believes its remaining cash resources will be
sufficient to fund its operating needs for the next twelve months, additional
financing either through its bank lines of credit or otherwise will be required
for the Company's currently envisioned long term needs. There can be no
assurance that such additional financing will be available on terms acceptable
to the Company, or at all.
YEAR 2000
The Company has developed a plan to modify its information technology to
recognize the year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by early 1999 and to cost approximately $250,000. This estimate includes
internal costs, but excludes the costs to upgrade and replace systems in the
normal course of business. The Company currently does not expect this project to
have a significant effect on operations and continues to implement systems with
strategic value though some projects may be delayed due to resource constraints.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to a number of legal proceedings arising in the ordinary
course of business. 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.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER ITEMS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed herewith (numbered in accordance with Item 601 of
Regulation S-K):
<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C>
10.14 Form of Laserscope Management Continuity Agreement, as amended.
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LASERSCOPE
Registrant
/s/ Dennis LaLumandiere
----------------------------------------------
Dennis LaLumandiere
Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 14, 1998
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C>
10.14 Form of Laserscope Management Continuity Agreement, as amended.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.14
MANAGEMENT CONTINUITY AGREEMENT
This Management Continuity Agreement (the "Agreement") is made and
entered into effect as of April 6, 1998, by and between _____________ (the
"Employee") and Laserscope, a California corporation (the "Company").
RECITALS
A. It is expected that another company or other entity may from time
to time consider the possibility of acquiring the Company or that
a change in control may otherwise occur, with or without the
approval of the Company's Board of Directors (the "Board"). The
Board recognizes that such consideration can be a distraction to
the Employee and can cause the Employee to consider alternative
employment opportunities. The Board has determined that it is in
the best interests of the Company and its shareholders to assure
that the Company will have the continued dedication and
objectivity of the Employee, notwithstanding the possibility,
threat or occurrence of a Change of Control (as defined below) of
the Company.
B. The Board believe that it is in the best interest of the Company
and its shareholders to provide the Employee with an incentive to
continue his or her employment with the Company.
C. The Board believes that it is imperative to provide the Employee
with certain benefits upon a Change of Control and, under certain
circumstances, upon termination of the Employee's employment in
connection with a Change of Control, which benefits are intended
to provide the Employee with financial security and provide
sufficient income and encouragement to the Employee to remain
with the Company notwithstanding the possibility of a Change of
Control.
D. To accomplish the foregoing objectives, the Board of Directors
has directed the Company, upon execution of this Agreement by the
Employee, to agree to the terms provided in this Agreement.
E. Certain capitalized terms used in the Agreement are defined in
Section 4 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the
Company, the parties agree as follows:
1. At-Will Employment: The Company and the employee acknowledge
that the Employee's employment is and shall continue to be
at-will, as defined under applicable law. If the Employee's
employment terminates for any reason, including (without
limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments, benefits,
damages, awards or compensation other than as provided by this
Agreement, or as may otherwise be available in accordance with
the Company's established employee plans and written policies
at the time of termination. The terms of this Agreement shall
terminate upon the earlier of (I) the date that all
obligations of the parties hereunder have been satisfied, (ii)
two years after the new effective date, or (iii) twenty-four
(24) months after a Change of
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Control. A termination of the terms of this Agreement pursuant
to the preceding sentence shall be effective for all purposes,
except that such termination shall not affect the payment or
provision of compensation or benefits on account of a
termination of employment occurring prior to the termination
of the terms of this Agreement.
2. Change of Control/Stock Options. Immediately upon the
effective date of the Change of Control, each stock option
granted for the Company's securities held by the Employee
shall become immediately vested and shall be exercisable in
full in accordance with the provisions of the option agreement
and plan pursuant to which such option was granted. Upon the
immediate vesting of such stock options, the Employee will
have the right (subject to any limitations imposed by Section
16 of the Securities Exchange Act of 1934 or other applicable
securities laws and the California Corporations Code and only
to the extent permitted by the terms of the applicable option
plan) to deliver a promissory note with a two (2) year term,
at the prime rate of interest determined as of the date of
payment of the exercise price for such options. The delivered
note will be non-recourse, and the Company or its successor
will look solely to the pledged shares for repayment.
3. Severance Benefits
(a) Termination Following A Change of Control. Subject to
Section 5 below, if the Employee's employment with the
Company is terminated at any time within 24 months after a
Change of Control, then the Employee shall be entitled to
receive severance benefits as follows:
(i) Voluntary Resignation. If the Employee voluntarily
resigns from the Company (other than as an
Involuntary Termination (as defined below) or if
the Company terminates the Employee's employment
for Cause (as defined below), then the Employee
shall not be entitled to receive severance
payments. The Employee's benefits will be
terminated under the Company's then existing
benefit plans and policies in accordance with such
plans and policies in effect on the date of
termination.
(ii) Involuntary Termination. If the Employee's
employment is terminated within 12 months of the
Change of Control as a result of Involuntary
Termination other than for Cause, the Employee
shall be entitled to receive 12 months severance
payments (the "Severance Period") from the date of
the Employee's termination. If the Employee's
employment is terminated after 12 months but within
24 months after the Change of Control, the Employee
shall be entitled to receive 9 months severance
payments (the "Severance Period") from the date of
the Employee's termination. The Employee's
severance payments shall be equal to the salary
which the Employee was receiving immediately prior
to the Change of Control plus a 25% bonus for
Executive Committee members and 45% for the CEO
shall be paid during the Severance Period in
accordance with the Company's standard payroll
practices or, at
2
<PAGE> 3
the Employee's election, shall be paid to the
Employee in lump sum within ten (10) days of the
Employee's termination date. Such election shall
not affect the length of the Severance Period nor
the provision of benefits within the Severance
Period. In addition, during the Severance Period,
the Employee shall be provided with benefits
substantially identical to those to which the
Employee was entitled immediately prior to the
Change of Control.
(iii) Involuntary Termination for Cause. If the
Employee's employment is terminated for Cause, then
the Employee shall not be entitled to receive
severance payments. The Employee's benefits will be
terminated under the Company's then existing
benefits plans and policies in effect on the date
of termination.
(b) Termination Apart from Change of Control. In the event the
Employee's employment terminates for any reason prior to
the Change of Control, then the Employee shall not be
entitled to receive any severance payments under this
Agreement. The Employee's benefits will be terminated
under the Company's then existing benefit plans and
policies in accordance with such plans and policies in
effect on the date of termination.
4. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the
occurrence of any of the following events:
(i) Ownership. Any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934, as amended) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under
said Act), directly or indirectly, of securities of
the Company representing twenty percent (20%) or
more of the total voting power represented by the
Company's then outstanding voting securities
without the approval of the Board of Directors of
the Company; or
(ii) Merger/Sale of Assets. A merger or consolidation of
the Company whether or not approved by the Board of
Directors of the Company, other than a merger or
consolidation which would result in the voting
securities of the Company outstanding immediately
prior thereto continuing to represent (either by
remaining outstanding or by being converted into
voting securities of the surviving entity) at least
fifty percent (50%) of the total voting power
represented by the voting securities of the Company
or such surviving entity outstanding immediately
after such merger or consolidation, or the
shareholders of the Company approve a plan of
complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all
or substantially all of the Company's assets.
(iii) Change in Board Composition. A change in the
composition of the Board of Directors of the
Company, as a result of which fewer than
3
<PAGE> 4
a majority of the directors are Incumbent
Directors. "Incumbent Directors" shall mean
directors who either (A) are directors of the
Company as of April 4, 1996, or (B) are elected, or
nominated for election, to the Board of Directors
of the Company with the affirmative votes of at
least a majority of the Incumbent Directors at the
time of such election or nomination (but shall not
include an individual whose election or nomination
is in connection with an actual or threatened proxy
contest relating to the election of directors to
the Company).
(b) Cause. "Cause" shall mean (i) material breach of any
material terms of this Agreement, (ii) conviction of a
felony, (iii) fraud, (iv) repeated unexplained or
unjustified absence, (v) willful breach of fiduciary duty
under applicable laws, this Agreement or Company policies
first in effect prior to the occurrence of a Change in
Control or (vi) gross negligence or willful misconduct
where such gross negligence or willful misconduct has
resulted or is likely to result in substantial and
material damage to the Company or its subsidiaries.
(c) Involuntary Termination. "Involuntary Termination" will
include the Employee's voluntary termination, upon 30 days
prior written notice to the Company, following (i) a
material reduction in job responsibilities inconsistent
with the Employee's position with the Company and the
Employee's prior responsibilities, i.e., parent company
versus subsidiary level or type responsibility, or (ii)
relocation to a facility or location more than 50 miles
from the Company's current location, or (iii) reduction in
salary.
5. Limitation on Payments.To the extent that any of the payments
or benefits provided for in this Agreement or otherwise
payable to the Employee constitute "parachute payments" within
the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code") and, but for this Section 5,
would be subject to the excise tax imposed by Section 4999 of
the code, the Company shall reduce the aggregate amount of
such payments and benefits such that the present value thereof
(as determined under the Code and the applicable regulations)
is equal to 2.99 times the Employee's "base amount" as defined
in Section 280G (b)(3) of the Code.
6. Successors. Any successor to the Company (whether direct or
indirect and whether by purchase, lease, merger,
consolidation, liquidation, or otherwise) to all or
substantially all of the Company's business and/or assets
shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement n
the same manner and to the same extent as the company would be
required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of the
Employee's rights hereunder shall insure to the benefit of,
and be enforceable by, the Employee's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
4
<PAGE> 5
7. Notice. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by
U.S. registered or certified mail, return receipt requested
and postage prepaid. Mailed notices to the Employee shall be
addressed to the Employee at the home address which the
Employee most recently communicated to the Company in writing.
In the case of the Company, mailed notices shall be addressed
to its corporate headquarters, and all notices shall be
directed to the attention of its Secretary.
8. Miscellaneous Provisions.
(a) No Duty to Mitigate.The Employee shall not be required to
mitigate the amount of any payment contemplated by this
Agreement (whether by seeking new employment or in any
other manner), nor, except as otherwise provided in this
Agreement, shall any such payment be reduced by any
earnings that the Employee may receive from any other
source.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver, or
discharge is agreed to in writing and signed bye the
Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of
any breach of, or of compliance with, any condition or
provision of this Agreement by the other party shall be
considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether
express or implied) which are not expressly set forth in
this Agreement have been made or entered into by either
party with respect to the subject matter hereof. This
Agreement supersedes any agreement of the same title and
concerning similar subject matter dated prior to the date
of this Agreement, and by execution of this Agreement both
parties agree that any such predecessor agreement shall be
deemed null and void.
(d) Choice of Law. The validity, interpretation, construction
and performance of this Agreement shall be governed by the
laws of the State of California without reference to
conflict of law provisions.
(e) Severability. If any term or provision of this Agreement
or the application thereof to any circumstance shall, in
any jurisdiction and to any extent, be invalid or
unenforceable, such term or provision shall be ineffective
as to such jurisdiction to the extent of such invalidity
or unenforceability without invalidating or rendering
unenforceable the remaining terms and provisions to
circumstances other than those as to which it is held
invalid or unenforceable, and a suitable and equitable
term or provision shall be substituted therefore to carry
out, insofar as may be valid and enforceable, the intent
and purpose of the invalid or unenforceable term or
provision.
5
<PAGE> 6
(f) Arbitration. Any dispute or controversy arising under or
in connection with this Agreement may be settled at the
option of either party by binding arbitration in the
County of Santa Clara, California, in accordance with the
rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award
in a court having jurisdiction. Punitive damages shall not
be awarded.
(g) Legal Fees and Expenses. The parties shall each bear their
own expenses, legal fees and other fees incurred in
connection with this Agreement.
(h) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be
made subject to option or assignment, either by voluntary
or involuntary assignment or by operation of law,
including (without limitation) bankruptcy, garnishment,
attachment or other creditor's process, and any action in
violation of this subsection (h) shall be void.
(i) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable
income and employment taxes.
(j) Assignment by Company. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may
assign its rights under this Agreement to another
affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth
of the assignee is less than the net worth of the Company
at the time of the assignment. In the case of any such
assignment, the term "Company" when used in a section of
this Agreement shall mean the corporation that actually
employs the Employee.
(k) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original,
but all of which together will constitute one and the same
instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
LASERSCOPE
By: _________________________ By:__________________________
(Title) (Employee)
6
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