<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 September 30,1998 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
November 2, 1998 was 12,480,735.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
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................................................. 8
Results of Operations..................................................... 9
Liquidity and Capital Resources........................................... 12
Item 3. Qualitative and Quantitative Disclosures About Market Risk................ 14
PART II. OTHER INFORMATION............................................................ 15
Item 1. Legal Proceedings......................................................... 15
Item 2. Changes in Securities..................................................... 15
Item 3. Defaults upon Senior Securities........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders....................... 15
Item 5. Other Items............................................................... 15
Item 6. Exhibits and Reports on Form 8-K......................................... 16
SIGNATURES .......................................................................... 16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
LASERSCOPE
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (1)
SEPTEMBER 30, DECEMBER 31,
(thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,332 $ 2,465
Accounts receivable, net 13,454 13,960
Inventories 18,511 18,656
Other current assets 972 1,017
-------- --------
Total current assets 34,269 36,098
Property and equipment, net 5,317 5,183
Developed technology and other intangibles, net 4,664 5,339
Other assets 620 686
-------- --------
Total assets $ 44,870 $ 47,306
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,818 $ 6,071
Accrued compensation 2,018 1,710
Short-term bank loans 3,278 3,107
Other current liabilities 3,702 4,897
-------- --------
Total current liabilities 14,816 15,785
Long-term liabilities:
Obligations under capital leases 814 274
Mortgages and other long term loans 3,181 2,970
-------- --------
Total long-term liabilities: 3,995 3,244
Commitments and contingencies
Minority interest 485 160
Shareholders' equity:
Common stock 51,128 50,939
Accumulated deficit (24,775) (21,831)
Accumulated other comprehensive income (404) (616)
Notes receivable from shareholders (375) (375)
-------- --------
Total shareholders' equity 25,574 28,117
-------- --------
Total liabilities and shareholders' equity $ 44,870 $ 47,306
======== ========
</TABLE>
(1) Derived from the December 31, 1997 audited financial statements.
See notes to condensed consolidated financial statements
3
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LASERSCOPE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(thousands except per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues .......................................... $ 12,779 $ 15,704 $ 39,503 $ 46,674
Cost of sales ......................................... 6,976 8,104 21,618 24,969
-------- -------- -------- --------
Gross margin .......................................... 5,803 7,600 17,885 21,705
Operating expenses:
Research and development .......................... 1,179 893 3,862 2,258
Selling, general and administrative ............... 4,813 5,382 15,881 16,060
-------- -------- -------- --------
....................................................... 5,992 6,275 19,743 18,318
Operating income (loss) ............................... (189) 1,325 (1,858) 3,387
Interest income (expense) and other, net .............. (138) -- (454) (24)
-------- -------- -------- --------
Income (loss) before income
taxes and minority interest ....................... (327) 1,325 (2,312) 3,363
Provision for income taxes ............................ 178 310 311 637
-------- -------- -------- --------
Income (loss) before minority interest ................ (505) 1,015 (2,623) 2,726
Minority interest ..................................... 232 114 321 188
-------- -------- -------- --------
Net income (loss) ..................................... $ (737) $ 901 $ (2,944) $ 2,538
======== ======== ======== ========
Basic net income (loss) per share ..................... $ (0.06) $ 0.07 $ (0.24) $ 0.21
======== ======== ======== ========
Diluted net income (loss) per share ................... $ (0.06) $ 0.07 $ (0.24) $ 0.20
======== ======== ======== ========
Shares used in basic per share calculations ........... 12,469 12,279 12,405 12,154
======== ======== ======== ========
Shares used in diluted per share calculations.......... 12,469 12,986 12,405 13,007
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
4
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LASERSCOPE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(2,944) $ 2,538
Adjustments to reconcile net income (loss) to cash used
by operating activities:
Depreciation and amortization 2,261 1,656
Increase (decrease) from changes in:
Accounts receivable 506 (1,975)
Inventories 145 (714)
Other current assets 45 157
Accounts payable (253) (3,355)
Accrued compensation 308 (626)
Other current liabilities (1,192) 30
Minority interest 325 188
------- -------
Cash used by operating activities (799) (2,101)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (908) (2,240)
Cash paid for NWL acquisition, net of cash received -- (960)
Other 146 (264)
------- -------
Cash used by investing activities (762) (3,464)
------- -------
CASH USED BY FINANCING ACTIVITIES:
Payments on obligations under capital leases (143) (70)
Proceeds from the sale of common stock under stock plans 189 2,057
Proceeds from bank loans 1,603 3,866
Repayment of bank loans (1,221) (1,300)
------- -------
Cash provided by financing activities 428 4,553
------- -------
Decrease in cash and cash equivalents (1,133) (1,012)
Cash and cash equivalents, beginning of period 2,465 3,917
------- -------
Cash and cash equivalents, end of period $ 1,332 $ 2,905
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 308 $ 223
Income taxes $ 14 $ 118
Non-cash financing activities:
Equipment leases $ 680 $ --
</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 and nine
month periods ended September 30, 1998 are not necessarily indicative of
the results expected for the full year.
2. Inventory was comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Sub-assemblies and purchased parts $13,601 $13,098
Finished goods 4,910 5,558
------- -------
$18,511 $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 (707,000 shares and
853,000 shares for the quarter and nine months ended September 30, 1997,
respectively). Per share amounts for the three and nine month periods
ended September 30, 1997 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 September 30, 1998 and December 31, 1997 the Company's cash
equivalents were in the form of institutional money market accounts and
totaled $0.6 million and $1.3 million, respectively.
At September 30, 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,
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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) for the quarters ended September 30,
1998 and 1997 was $(501,000) and $715,000, respectively. Total
comprehensive income (loss) for the nine month periods ended September
30, 1998 and 1997 was $(2,732,000) and $2,094,000, respectively.
.
6. As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards 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.
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 quarter and nine month periods ended September 30, 1998. The
minority interest reported in the financial statements represents
minority shareholders' proportional interest in the net assets and
operating results of the NWL subsidiary.
8. On November 9, 1998 the Company sold its AMS business unit to Heraeus
Medical, Inc. ("HMI), a newly established division of Heraeus Holding,
GmbH. The Company acquired the AMS business as part of its acquisition
in 1996 of Heraeus Surgical Inc. from Heraeus Med GmbH, a subsidiary of
Heraeus Holding.
In connection with the divestiture, the Company will receive
approximately $1.0 million in cash, subject to the release of $0.2
million from a related escrow account in connection with potential
post-closing price adjustments and the Company's indemnification
obligations to Heraeus and HMI. In addition, HMI has assumed
approximately $2.1 million in associated Laserscope liabilities. The
Company currently anticipates taking a non-operating charge in the range
of up to $1.0 million in the fourth quarter of 1998 directly related to
the divestiture. During the quarter ended September 30, 1998, AMS
accounted for revenues of approximately $1.3 million and an operating
loss of approximately $0.3 million.
7
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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 eight percent of the Company's revenues were
attributable to sales in Asia during the nine months ended September 30, 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 a little more than a year,
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
business, financial condition and operating results.
8
<PAGE> 9
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.
The following table contains selected income statement information which serves
as the basis of the discussion of the Company's results of operations for the
quarter and nine months ended September 30, 1998 (in thousands except for
percentages):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1997 % SEPT. 30,1998 SEPT 30, 1997 %
AMOUNT %(a) AMOUNT%(a) CHANGE AMOUNT %(a) AMOUNT %(a) CHANGE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from sales of:
Lasers $ 6,955 55% $ 7,983 51% (13)% $ 20,891 53% $ 21,806 47% (4)%
Ascent medical systems 1,329 10% 2,225 14% (40)% 4,382 11% 7,763 17% (44)%
Instruments & supplies 2,916 23% 3,427 22% (15)% 9,106 23% 11,120 24% (18)%
Service 1,579 12% 2,069 13% (24)% 5,124 13% 5,985 12% (14)%
-------- ----- -------- ----- ------ -------- ----- -------- ------ ------
Total net revenues $ 12,779 100% $ 15,704 100% (19)% $ 39,503 100% $ 46,674 100% (15)%
Gross margin $ 5,803 45% $7,600 48% (24)% $ 17,885 45% $ 21,705 47% (18)%
Research & development $1,179 9% $ 893 6% 32% $ 3,862 10% $ 2,258 5% 71%
Selling, general & admin. $4,813 38% $ 5,382 34% (11)% $ 15,881 40% $ 16,060 34% (1)%
</TABLE>
(a) expressed as a percentage of total net revenues.
Net revenues decreased during the three and nine months ended September 30, 1998
relative to the corresponding periods of 1997 as a combined result of lower
revenues from shipments of lasers, lower shipments of Ascent medical system
("AMS") products, lower shipments of instrumentation and supplies and lower
sales of services.
Revenues from the sales of laser systems decreased during the quarter and nine
month periods ended September 30, 1998 relative to the same periods in 1997.
During the quarter ended September 30, 1998, relative to the same period in
1997, this was due to a combination of lower unit shipments at lower average
unit prices. During the nine month period ended September 30, 1998, relative to
the same period in 1997, this was due to 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 in the United States and Asia, partially offset by shipments of laser
products acquired in the NWL acquisition. The lower average unit prices in the
quarterly comparison are primarily the result of the introduction of the
Company's Venus erbium laser which sold at average unit prices lower than the
Company's other laser products while the higher average unit prices in the year
to date comparisons are principally due to higher average unit prices for the
Company's Aura office laser systems. The Company believes that the lower demand
for its office laser products and CO2 laser systems in the United States and the
economic
9
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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
declined during the quarter and nine month periods ended September 30, 1998
relative to the same periods in 1997. 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 $0.9
million to revenues during the nine months ended September 30, 1997.
Additionally, the Company believes that lower orders of AMS products and delays
in construction projects in which the AMS products have been ordered negatively
impacted shipments of these products during the nine months ended September 30,
1998 relative to the corresponding periods in 1997. (See subsequent event
discussion later in this report.)
Revenues from the sales of instrumentation, disposable supplies and services
during the quarter and nine months ended September 30, 1998 decreased compared
to the corresponding periods in 1997. 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 acceptance of lasers in aesthetic surgery,
dermatology, urology, and ear, nose and throat surgery will continue to be
important to its business. In addition, the adoption of photodynamic therapy by
medical practitioners will be important. The Company continues to invest in
developing new instrumentation for emerging surgical applications and in
educating surgeons in the United States and internationally to encourage the
adoption of such new applications. Penetration of the international market,
although generally increasing, has been limited and the Company continues to
view expansion of international sales as important to the Company's success.
During the nine months ended September 30, 1998, international revenues
accounted for 38% of total net revenues compared to 29% of total net revenues
during the corresponding period in 1997.
Gross margin as a percentage of revenues during the quarter and nine months
ended September 30, 1998 declined relative to the corresponding periods of 1997.
This is due principally to decreased production levels without corresponding
reductions in fixed manufacturing costs. The declines in production levels are
the combined result of lower shipment levels in the 1998 periods compared to
1997 periods as well as the Company's efforts to reduce inventory levels. The
Company expects that gross margin as a percentage of revenues for the remainder
of 1998 will 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. The increases in research and
development spending during the quarter and nine month period ended September
30, 1998 relative to the corresponding periods in 1997 are due to a combination
of increased spending in product development and incremental
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research and development spending by NWL. The Company expects that amounts spent
in research and development to remain at similar levels during the remainder of
1998.
The decreases in selling, general and administrative expenses during the quarter
and nine months ended September 30, 1998 relative to the same periods in 1997
primarily result from lower direct selling and marketing expenses resulting from
lower revenues. The Company expects these amounts to remain at similar levels
during the remainder of 1997 as the Company continues to invest in international
expansion, marketing programs and educational support.
Net interest expense and other non-operating expenses increased $0.4 million
during the nine month period ended September 30, 1998 compared to the
corresponding period in 1997. This was due to the combination of increased
interest expense from NWL and domestic bank lines and the recording of the
settlement of a dispute relating to the termination of a Heraeus domestic
distributor.
During the nine months ended September 30, 1998, the Company recorded income tax
provisions of $0.3 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 19% which is below the combined federal and state
statutory rates due to the utilization of available net operating loss
carryforwards.
11
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LIQUIDITY AND CAPITAL RESOURCES:
The following table contains selected balance sheet information that serves as
the basis of the discussion of the Company's liquidity and capital resources at
September 30, 1998 and for the nine months then ended (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------------------
<S> <C> <C>
Cash and cash equivalents $ 1,332 $ 2,465
Total assets $44,870 $47,306
Net working capital $19,453 $20,313
</TABLE>
The net decrease in cash and cash equivalents was due the combined result of
cash used by operating activities of $0.8 million, cash used by investing
activities of $0.8 and cash provided by financing activities of $0.4 million.
Cash used by operating activities was the combined result of a net loss of $2.9
million and decreases in accounts payable and other current liabilities of $0.3
million and $1.2 million, respectively. Partially offsetting these uses were
depreciation and amortization of $2.3 million, reductions in accounts receivable
and inventory of $0.5 million and $0.1 million, respectively, and $0.3 million
increases to each of minority interest and accrued compensation.
Cash used by investing activities primarily consisted of capital expenditures of
$0.9 million.
Cash provided by financing activities primarily consisted of net increases in
bank loans of $.4 million.
The Company has in place a $5.0 million revolving bank line of credit that
expires in November 1998. At September 30, 1998, the collateral provisions
allowed for approximately $3.6 million in borrowings and $2.5 million in
borrowings were outstanding. In addition, NWL has in place various bank lines
totaling approximately $3.0 million that expire in 1999 and under which $2.6
million in borrowings were outstanding at September 30, 1998. The Company
expects to renew its primary line of credit with terms similar to those
currently existing before its expiration in November 1998 and to renew NWL's
revolving bank lines prior to their respective expirations.
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
September 30, 1998, the Company's inventories consisted of $18.5 million
comprised of $13.6 million of sub-assemblies and purchased parts and $4.9
million of finished goods. This represents a 1% decrease from 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.
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Under the terms of the NWL purchase agreement, the Company has an obligation to
purchase an additional 26.9% ownership interest in NWL in January 1999 for
$1,278,500. From time to time, the Company may also consider the acquisition of,
or evaluate investments in, other products and businesses complementary to the
Company's business. Any such acquisition or investment may require additional
capital resources. The Company has historically financed 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 $200,000. This estimate includes
internal costs, but excludes the costs to upgrade and replace systems in the
normal course of business. The Company continues to implement systems with
strategic value to improve operating efficiencies and believes that such
implementation efforts will also address the Company's Year 2000 compliance
issues.
Based on the Company's assessment to date, the products sold by the Company are
not affected by the Year 2000 date.
The Company is in the process of obtaining assurances from its suppliers of
products and services that their systems are Year 2000 compliant. Additionally,
the Company is in the process of evaluating the need for contingency plans with
respect to Year 2000 requirements. The necessity of any contingency plan must be
evaluated on a case-by-case basis and will vary considerably in nature depending
on the Year 2000 issue it may need to address. The Company expects that its
review of Year 2000 compliance issues and its development of contingency plans
will be completed by September 1999.
Significant uncertainty exists concerning the potential effects associated with
Year 2000 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. There
can be assurances that the modifications to its data processing systems will be
completed within the Company's timetable or within the cost estimate. In
addition, there can be no assurance that further assessment of the Company's
products will not determine the need for modifications for the products to be
Year 2000 compliant, that its suppliers will be Year 2000 compliant or that its
contingency plans will address all issues of Year 2000 compliance.
SUBSEQUENT EVENT
On November 9, 1998 the Company sold its AMS business unit to Heraeus Medical,
Inc. ("HMI), a newly established division of Heraeus Holding, GmbH. The Company
acquired the AMS business as part of its acquisition in 1996 of Heraeus Surgical
Inc. from Heraeus Med GmbH, a subsidiary of Heraeus Holding.
In connection with the divestiture, the Company will receive approximately $1.0
million in cash, subject to the release of $0.2 million from a related escrow
account in connection with potential post-closing price adjustments and the
Company's indemnification obligations to Heraeus and HMI. In addition, HMI has
assumed approximately $2.1 million in associated
13
<PAGE> 14
Laserscope liabilities. The Company currently anticipates taking a non-operating
charge in the range of up to $1.0 million in the fourth quarter of 1998 directly
related to the divestiture. During the quarter ended September 30, 1998, AMS
accounted for revenues of approximately $1.3 million and an operating loss of
approximately $0.3 million.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
14
<PAGE> 15
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 INFORMATION
Pursuant to recent amendments to the rules relating to proxy statements
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), shareholders of the Company are hereby notified that any
shareholder proposal not included in the Company's proxy materials for
its 1999 Annual Meeting of Shareholders (the "Annual Meeting") in
accordance with Rule 14a-8 under the Exchange Act will be considered
untimely for the purposes of Rules 14a-4 and 14a-5 under the Exchange
Act if notice thereof is received by the Company after April 6, 1999.
Management proxies will be authorized to exercise discretionary voting
authority with respect to any shareholder proposal not included in the
Company's proxy materials for the Annual Meeting unless (a) the Company
receives notice of such proposal by April 6, 1999, and (b) the
conditions set forth in Rule 14a-4(c)(2)(i)-(iii) under the Exchange Act
are met.
15
<PAGE> 16
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
- ------- -----------
<S> <C>
10.11C Loan Modification Agreement between the Registrant and Silicon
Valley Bank dated September 3, 1998.
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: November 12, 1998
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.11C Loan Modification Agreement between the Registrant and Silicon
Valley Bank dated September 3, 1998.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.11C
<PAGE> 2
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of September 3,
1998, by and between Laserscope ("Borrower") and Silicon Valley Bank ("Bank").
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other
documents, an Amended and Restated Loan and Security Agreement, dated November
27, 1996, as may be amended from time to time, (the "Loan Agreement"). The Loan
Agreement provided for, among other things, a Committed Line in the original
principal amount of Five Million Dollars ($5,000,000.00) (the "Revolving
Facility"). Defined terms used but not otherwise defined herein shall have the
same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by the Collateral as described in the Loan Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Waiver of Default.
1. Bank hereby waives Borrower's existing default under the
Loan Agreement by virtue of Borrower's failure to comply
with the Tangible Net Worth covenant and Profitability
covenant as of the quarter ended June 30, 1998. Bank's
waiver of Borrower's compliance of these covenants shall
apply only to the foregoing period. Accordingly, for the
quarter ending September 30, 1998, Borrower shall be in
compliance with these covenants as amended herein.
Bank's agreement to waive the above-described default
(1) in no way shall be deemed an agreement by the Bank
to waive Borrower's compliance with the above-described
covenants as of all other dates and (2) shall not limit
or impair the Bank's right to demand strict performance
of these covenants as of all other dates and (3) shall
not limit or impair the Bank's right to demand strict
performance of all other covenants as of any date.
B. Modification(s) to Loan Agreement.
1. Section 2.3(a) entitled "Interest Rate" is hereby
amended in part to provide that 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.
2. Section 6.8 entitled "Quick Ratio" is hereby amended to
read as follows:
Borrower shall maintain, as of the last day of each
fiscal quarter, a ratio of Quick Assets to Current
Liabilities of at least 0.90 to 1.00.
<PAGE> 3
3. Section 6.9 entitled "Debt-Net Worth Ratio" is hereby
amended to read as follows:
Borrower shall maintain, as of the last day of each
fiscal quarter, a ratio of Total Liabilities less
Subordinated Debt to Tangible Net Worth plus
Subordinated Debt of not more than 1.00 to 1.00.
4. Section 6.10 entitled "Tangible Net Worth" is hereby
amended to read as follows:
Borrower shall maintain, as of the last day of each
fiscal quarter, a Tangible Net Worth of not less than
$19,000,000.00.
5. Section 6.11 entitled "Profitability" is hereby amended
to read as follows:
Borrower shall have a minimum net profit of One Dollar
($1.00) (net of amortization and depreciation) for each
fiscal quarter. Profitability shall be calculated as
follows: add depreciation and amortization from 10-Q
cash flow statement to net income (loss).
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the amount of One
Thousand Five Hundred and 00/100 Dollars ($1,500.00) (the "Loan Fee") plus all
out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that, as of the date hereof, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below)
understands and agrees that in modifying the existing Indebtedness, Bank is
relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Bank's agreement to modifications
to the existing Indebtedness pursuant to this Loan Modification Agreement in no
way shall obligate Bank to make any future modifications to the Indebtedness.
Nothing in this Loan Modification Agreement shall constitute a satisfaction of
the Indebtedness. It is the intention of Bank and Borrower to retain as liable
parties all makers and endorsers of Existing Loan Documents, unless the party is
expressly released by Bank in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
8. COUNTERPARTS. This Loan Modification Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
9. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.
<PAGE> 4
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: BANK:
LASERSCOPE SILICON VALLEY BANK
By: /s/ Dennis LaLumandiere By: /s/ Lois M. Fisher
-------------------------------- ----------------------------------------
Name: Dennis LaLumandiere Name: Lois M. Fisher
Title: Vice President of Finance and Title: Senior Vice President,
Chief Financial Officer Life Sciences and Health Care Practice
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,332
<SECURITIES> 0
<RECEIVABLES> 14,254
<ALLOWANCES> 800
<INVENTORY> 18,511
<CURRENT-ASSETS> 34,269
<PP&E> 17,664
<DEPRECIATION> 12,347
<TOTAL-ASSETS> 44,870
<CURRENT-LIABILITIES> 14,816
<BONDS> 0
0
0
<COMMON> 51,128
<OTHER-SE> (25,554)
<TOTAL-LIABILITY-AND-EQUITY> 44,870
<SALES> 39,503
<TOTAL-REVENUES> 39,503
<CGS> 21,618
<TOTAL-COSTS> 21,618
<OTHER-EXPENSES> 19,743
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (454)
<INCOME-PRETAX> (2,312)
<INCOME-TAX> 311
<INCOME-CONTINUING> (2,944)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,944)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
