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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, 1997, 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 $20,000,000 as of March 13, 1998, 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 12,371,349 shares of Registrant's Common Stock issued and outstanding
as of March 13, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement ("Proxy Statement") to be filed prior
to April 30, 1998, pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, are incorporated by reference into Part III of this Form 10-K.
INTRODUCTORY STATEMENT AND REFERENCES
Except for the historical information contained 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
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. Although only 10 percent of the Company's revenues were
attributable to sales in Asia 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
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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 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.
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. References made in the Report to
"NWL" refer to NWL Laser-Technologie GmbH.
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,
Aura SL, 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, UroLine, and
Venus.
Photofrin and Optiguide are registered trademarks of QLT PhotoTherapeutics, Inc.
Hanaulux and Hanauport are trademarks of Heraeus Med GmbH.
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PART I
ITEM 1. BUSINESS
General Overview of Business
Laserscope(R) designs, manufactures, sells and services, on a worldwide basis,
an advanced line of medical laser systems and related energy devices for the
medical office, outpatient surgical center and hospital markets. The Company is
a pioneer in the development and commercialization of lasers and advanced
fiberoptic devices for a wide variety of applications, including photoselective
medicine to treat cancer and other diseases. Its portfolio of more than 350
products, includes KTP/532(R), CO2, Nd:YAG, Er:YAG, Ruby, Diode and Dye medical
laser systems, industrial laser systems, and related energy delivery devices.
Laserscope's Ascent Medical Systems(TM) (AMS) are innovative equipment for the
surgical and outpatient care environments. The AMS product family includes
procedure and treatment lights, ceiling-mounted equipment organizers,
centralized smoke evacuation systems, and video systems.
Primary medical markets served include dermatology, aesthetic surgery, urology,
gynecology, ear, nose and throat (ENT) surgery and photodynamic therapy.
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 participates in several markets. Since the early 1990's, ear nose and
throat (ENT), urology, and gynecology (OB/GYN) specialities, into which it sells
its broad range of laser systems and the majority of its energy delivery devices
and surgical instruments have been important to Laserscope. As a percentage of
total
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revenues in 1997, the ENT market accounted for 27% of revenues, the urology
market, 21% and the OB/GYN market, 14%.
Dermatology/aesthetic surgery is a market that Laserscope entered in the mid
1990's and in which the Company competes with six, highly-versatile laser
systems. The desktop-sized Aura(TM) Laser System is among the industry's leading
systems for the treatment of leg and facial veins. The Aura SL(TM) is
specifically designed for the treatment of facial veins alone. The Venus(TM)
Erbium and Pulsar(TM) CO2 Laser Systems are both engineered for skin resurfacing
(wrinkle removal) applications. The Levante(TM) Ruby Laser System is used for
hair and tattoo removal. The Q-Switched Orion(TM) Laser System is currently
marketed for tattoo removal only. As a percentage of total revenues in 1997 the
dermatology/aesthetic surgery market accounted for 23%.
An application that the Company believes has long term potential for its
products is photodynamic therapy (PDT) (also referred to as photoselective
medicine). PDT is a selective cancer treatment. In this modality, a
photosensitizer drug is injected into a cancer patient intravenously. After a
short time, the drug selectively concentrates in tumor cells while largely
clearing from normal tissue. The drug remains inactive until exposed to laser
light. When applied, the laser energy, delivered through a disposable fiberoptic
device, activates the drug and creates a toxic form of oxygen that destroys the
cancerous cells with minimal damage to healthy cells.
This non-surgical, minimally-invasive approach allows the treating physician to
be much more precise in destroying cancer cells at the tumor site. Both the drug
injection and the laser treatment can be performed, in many situations, on an
outpatient basis. In mid-January 1998 Laserscope received approval from the U.S.
Food and Drug Administration for its Laser Systems and the drug PHOTOFRIN(R),
manufactured by QLT PhotoTherapeutics, Inc., as a treatment for certain types of
early-stage lung cancer. This follows an earlier FDA approval to treat certain
late- stage esophageal cancers. The Company is also involved in clinical studies
on other PDT applications, including some non-cancer applications, and is
working in collaboration with most of the leading pharmaceutical firms that have
PDT drugs in various stages of development. As a percentage of total revenues in
1997 all other markets, including photodynamic therapy (PDT), accounted for 15%.
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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 and facial telangiectasia (spider-like 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 Aura SL(TM) is a new configuration of the Aura Laser System, modified to
treat facial spider veins only, including superficial pigmented lesions such as
age spots. Its special design provides greater patient comfort, quicker healing
and a lower price. Currently, It is the only laser dedicated to facial
applications that is available with an integrated robotic scanner.
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 used primarily 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 Venus Erbium:YAG Laser System is among the most compact and powerful,
commercially available Erbium lasers for skin resurfacing and other medical
laser applications. Venus is one-half the size and weight of most other Erbium
systems on the market, providing an easy-to-use, in-office system for such
procedures as skin resurfacing or wrinkle removal. The Erbium:YAG wavelength is
more superficially absorbed by the skin than the CO2 wavelength and it provides
a gentler form of skin resurfacing, suitable for younger patients with mild
wrinkles or moderate sun damage and can be used on both facial and non-facial
skin such as the hands.
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 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.
The Levante(TM) Dual Mode Ruby Laser, developed by NWL Laser-Technologie GmbH, a
Laserscope subsidiary, is a 694 nm wavelength laser designed exclusively for
dermatologic and aesthetic applications, specifically for the removal of hair,
tattoos and pigmented lesions. The Levante laser offers technological
improvements over other ruby lasers, such as an optional, adjustable scanner
that can treat areas ranging up to four inches by four inches.
Through its subsidiary NWL Laser-Technologie, the Company has access to
additional Erbium:YAG, Krypton, pulsed Nd:YAG, Argon and CO2 lasers, as well as
other lasers with industrial applications.
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.
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.
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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, and video systems.
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.
Supplied by Heraeus Med, 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.
Also supplied to Laserscope 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
procedures and the drawbacks of conventional procedures 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 majority equity
interest and an option to acquire the remainder. Elsewhere, Laserscope products
are sold through regional distributor networks. At present, 28 distributors
serve 54 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 33% of Laserscope's 1997
revenues were derived from its international operations including export sales,
up from 26% in 1996 and 23% in 1995. The Company expects that international
sales will continue to represent a significant percentage of net sales in 1998.
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. In June
1997, the
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Company exercised its option and paid an additional $1 million to increase its
equity position to a 52% interest in NWL. The Company expects, and under certain
conditions is obligated, to purchase the remainder of NWL for approximately $2.3
million, payable at specified dates over the next three years.
Installed Base of Lasers
Laserscope has more than 6,000 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.
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. 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 in the
U.S., 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 believes that it has sufficient manufacturing
capacity in its present facilities to support current operations at least
through the end of 1998. NWL also manufactures its laser products at its
facility in Germany.
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In addition to its laser manufacturing capability, the Company has a production
facility in the U.S. for certain of its disposable products. The Company's
Endostat fibers, and Angled Delivery Devices (ADD, ADDStat, MicroADDStat, and
UltraSTAT 10), for example, 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, an interruption in the supply of crystals would have an adverse
effect on the Company's business and results of operations.
Employees
At December 31, 1997, the Company had 293 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, however there can be no assurances that it
will be able to do so.
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. In early 1998 the
industry experienced significant consolidation when two of the Company's largest
competitors, ESC Medical Systems and Laser Industries, combined to become the
largest participant in the industry. 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
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actions brought against it, the Company believes that these actions will not
ultimately 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.
On August 30, 1997, certain contractual limitations on Heraeus Med's ability
to transfer the Heraeus Shares expired. During February and March 1998, Heraeus
Med began limited sales of the Heraeus Shares pursuant to Rule 144 of the
Securities Act and through March 13, 1998 had sold 271,000 shares. The further
sale of Heraeus Shares could 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.
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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 a co-exclusive basis
with PDTI, 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.
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 PDT 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.
14
<PAGE> 15
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
"Securities Act". The Company has agreed to register the Heraeus Shares pursuant
to a shelf registration statement to be filed with the Securities Exchange
Commission within 30 days of receipt of written request by Heraeus Med. On
August 30, 1997, certain contractual limitations on Heraeus Med's ability to
transfer the Heraeus Shares expired. During February and March of 1998, Heraeus
Med began limited sales of the Heraeus Shares pursuant to Rule 144 of the
Securities Act and through March 13, 1998 had sold 271,000 shares. The further
sale of the Heraeus Shares could 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.
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. In June
1997, the Company exercised its option and paid an additional $1 million to
increase its equity position to a 52% interest in NWL. The Company expects, and
under certain conditions is obligated, to purchase the remainder of NWL for
approximately $2.3 million, payable at specified dates over the next three
years.
15
<PAGE> 16
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, 1997:
<TABLE>
<CAPTION>
Name Age Position
- --------------------- --- --------------------------------------------
<S> <C> <C>
Benjamin L. Holmes 63 Chairman of the Board and Director
Robert V. McCormick 53 President, Chief Executive Officer and Director
Thomas B. Boyd 51 Senior Vice President of Operations and
International
Roy Fiebiger 44 Senior Vice President of Marketing and
Corporate Development
Kevin Candio 44 Vice President of Sales and Service
Dennis LaLumandiere 44 Vice President of Finance, Chief Financial
Officer and Assistant Secretary
Eric M. Reuter 36 Vice President of Research and Development
</TABLE>
- --------------------
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, Past Commissioner of the
Massachusetts Universal Health Care Commission, and a past 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
16
<PAGE> 17
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
to Senior Vice President of Marketing, Sales and Service in February 1997 and
then appointed to the position of Senior Vice President of Marketing and
Corporate Development in November 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.
Kevin Candio has been employed with the Company since November 1988 when he was
hired as Eastern Zone Sales Manager. He was promoted to Vice President of Sales
and Service in November 1997. Prior to working for the Company, he was employed
by Coopervision Surgical Systems, a medical device company, from August 1983 to
November 1988.
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 M. 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.
17
<PAGE> 18
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 1998. The Company has also leased small offices in the United Kingdom and
France where the Company's local sales and marketing staffs are based. NWL's
facilities consist of a small leased office and a 35,000 square feet facility
owned by NWL in Germany.
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.
18
<PAGE> 19
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 15, 1998 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, 1997 and December 31, 1996 as reported by Nasdaq:
<TABLE>
<CAPTION>
1997
----------------------
High Bid Low Bid
-------- -------
<S> <C> <C>
First Quarter $ 9 5/8 $ 5 7/8
Second Quarter $ 8 1/8 $ 5
Third Quarter $ 8 3/8 $ 4 1/8
Fourth Quarter $ 6 3/4 $ 4 1/8
</TABLE>
<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>
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.
19
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
1997(1)(2) 1996(3) 1995 1994 1993
---------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $ 61,349 $ 42,844 $ 30,133 $ 36,320 $ 37,831
Net income (loss) (843) (1,692) (3,552) (931) 589
Basic and diluted net
income (loss) per share(4) (0.07) (0.18) (0.51) (0.13) 0.09
</TABLE>
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
<TABLE>
<CAPTION>
1997(1)(2) 1996(3) 1995 1994 1993
---------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents &
short-term investments $ 2,465 $ 3,917 $ 2,278 $ 6,602 $ 8,144
Working capital 20,313 18,444 12,564 16,825 17,132
Total assets 47,306 44,469 23,582 27,321 29,301
Capital leases (excluding
current portion) 274 202 15 27 26
Other long term debt 2,970 -- -- -- --
Shareholders' equity 28,117 27,175 17,326 20,901 21,234
</TABLE>
CONSOLIDATED QUARTERLY STATEMENT OF OPERATIONS DATA (UNAUDITED):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MAR. 31, JUN. 30,(1) SEP. 30,(1)(3) DEC. 31,(1)(2)(3)
-------- ----------- -------------- -----------------
<S> <C> <C> <C> <C>
1997
- ----
Net revenues $ 15,763 $ 15,207 $ 15,704 $ 14,675
Gross Margin 7,076 7,029 7,600 3,365
Net income (loss) 881 756 901 (3,381)
Basic net income (loss) per share(4) 0.07 0.06 0.07 (0.27)
Diluted net income (loss) per share(4) 0.07 0.06 0.07 (0.27)
1996
- ----
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
Basic net income (loss) per share(4) 0.02 0.04 (0.32) 0.06
Diluted net income (loss) per share(4) 0.02 0.03 (0.32) 0.06
</TABLE>
(1) The Company closed the acquisition of a 52% equity ownership of NWL
Laser-Technologie GmbH on June 13, 1997.
(2) The Company recorded $3 million inventory provision in the quarter
ended December 31, 1997.
(3) The Company closed the acquisition of Heraeus Surgical, Inc. on August 30,
1996.
(4) The net income (loss) per share amounts prior to December 1997 have been
restated as required to comply with Statement of Accounting Standards
Number 128. Earnings Per Share (See Note 1 in Notes to the Consolidated
Financial Statements.)
20
<PAGE> 21
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>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of sales 59.1 51.1 49.1
----- ----- -----
Gross margin 40.9 48.9 50.9
Operating expenses:
Research and development 5.5 6.0 12.7
Purchased in-process research & development -- 5.5 --
Selling, general and administrative 36.3 39.1 50.9
Other non-recurring charges related to
the acquisition of Heraeus Surgical, Inc. -- 2.0 --
----- ----- -----
41.8 52.6 63.6
Operating loss (.9) (3.7) (12.7)
Interest and other income, net .3 .1 .9
----- ----- -----
Loss before income taxes and minority interest (.6) (3.6) (11.8)
Provision for income taxes .6 .4 --
----- ----- -----
Loss before minority interest (1.2) (4.0) (11.8)
Minority interest .2 -- --
----- ----- -----
Net loss (1.4)% (4.0)% (11.8)%
===== ===== =====
</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, are generated by its wholly and
majority owned subsidiaries in the United Kingdom, France and Germany and by
independent distributors in the rest of the world. Export sales are denominated
in the local currencies of the United Kingdom, France and Germany, and in U.S.
dollars in the rest of the world.
21
<PAGE> 22
1997 RESULTS COMPARED TO 1996.
During 1997, the Company's revenues increased approximately $18.5 million or 43%
from 1996. The majority of the increase was due to a full year of revenues
from sales of products and services acquired in the HSI acquisition that closed
August 1996. These revenues accounted for approximately $15.5 million and $3.4
million, respectively in 1997 compared to approximately $5.7 million and $1.3
million, respectively in 1996. In addition, the Company recorded approximately
$4.5 million in revenues from sales of products and $0.4 million in revenues
from sales of services acquired in the acquisition of the majority interest in
NWL in June 1997.
During 1997, the Company's revenues from the sales of capital equipment
increased 72% and were $38.6 million or 63% of total net revenues compared to
$22.4 million or 52% of total net revenues in 1996. Approximately $9.5 million
of the increase was from a complete year of sales of capital equipment products
acquired in the HSI acquisition while the NWL acquisition added approximately
$4.1 million of such revenues. The remainder of the increase is attributed to
higher unit sales, at lower unit prices, of the Company's Aura office laser. The
Company believes that the continuing trend toward reduced health care costs in
the United States continues to impact negatively laser procurement by its
hospital customers in the United States. Consequently, the Company expects that
its revenue mix trends in the U.S. market will continue to shift toward lower
priced office lasers.
The Company's net revenues from shipments of disposable supplies and
instrumentation were 2% higher in 1997 than in 1996 and were approximately $14.7
million or 24% of total revenues in 1997 compared to approximately $14.5 million
or 34% in 1996. The net increase in absolute dollars reflects incremental
revenues resulting from the acquisitions of HSI and NWL and increased shipments
of accessories used in aesthetic procedures offset by lower shipments of its
side-firing devices for laser prostate surgeries. The decline in proportion of
total net revenues is primarily attributable to increased capital equipment
shipments in 1997. 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 these products.
The Company's net service revenues during 1997 were 35% higher than in 1996.
These revenues were $8.1 million or 13% of total net revenues in 1997 compared
to $6.0 million or 14% of total net revenues in 1996. The increase in absolute
dollars reflects higher international service revenues in addition to
incremental revenues resulting from the acquisitions of HSI and NWL. The
decrease in proportion of total net revenues is principally due to the increased
capital equipment shipments in 1997.
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
22
<PAGE> 23
important. 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 33%
and 26% of total revenues in 1997 and 1996, respectively.
The Company's product gross margin as a percentage of net revenues in 1997 was
44%, compared to 51% in 1996. The reduction reflects $3.0 million in charges
recorded to provide for inventory that the Company considered to be potentially
excessive in light of planned new product introductions in 1998 and lower than
expected fourth quarter 1997 orders and shipments. Without these charges, the
Company's product gross margin as a percentage of net revenues would have been
49% in 1997. In addition, a higher proportion of the Company's revenues in 1997
came from sales to independent, international distributors than in 1996. These
revenues generally generate lower gross margins than sales through its direct
sales force. Finally, the Company acts as a distributor of certain product lines
that are manufactured by other companies. 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 1998 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
23% in 1997, compared to 34% in 1996. The decline reflects further price erosion
due to restructuring of the Company's contract programs in response to
competitive market conditions together with inefficiencies in performing service
activities supporting the Company's non-laser products. The Company expects that
these factors will continue and will result in gross margin as a percentage of
net revenues from service activities remaining at or below 1997 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 1997, amounts spent on
research and development increased 33% from amounts spent in 1996 due to a
combination of increased spending in product development and incremental
research and development spending by NWL. The Company expects to increase
amounts spent in research and development during 1998.
Selling, general and administrative expenses increased 33% in 1997. The increase
primarily results from new personnel acquired by the Company in the HSI and NWL
23
<PAGE> 24
acquisitions. The Company expects selling, general and administrative expenses
remain at similarly high levels during 1998 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. These charges consisted
of a $2.4 million charge to write off purchased in-process research and
development that arose from the acquisition and $0.9 million to write off
certain assets which became redundant because of the acquisition.
In 1997, the Company recorded a $370,000 income tax provision primarily
attributable to the post-acquisition profits of NWL as well as other foreign
income and withholding taxes and federal and state minimum taxes. 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.
Minority interest in 1997 resulted from the minority ownership participation in
NWL's post acquisition net income.
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 higher unit shipments of lasers and
lower average selling prices in 1996 than in 1995. The higher unit sales were
principally of the Company's Aura office laser system that 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's net revenues from shipments of its disposable supplies and
instrumentation 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. The
Company believes that the reduction in absolute dollar revenues was due
primarily to lower shipments of its side-firing devices due to fewer laser
prostate surgeries during this period than in 1995, partially offset by
increased shipments of scanning devices sold as accessories to the Aura office
laser system.
24
<PAGE> 25
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.
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.
Gross margin from service activities as a percentage of net service revenues was
34% in 1996, compared to 37% in 1995. The decrease reflects price erosion due to
restructuring of the Company's contract programs in response to competitive
pressures and reduced customer acceptance of service contracts.
In 1996, research and development expenses 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.
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 decrease as a percentage of net revenues
is due to higher net revenues in 1996 than in 1995. The increase in absolute
dollars is primarily due to higher expenses resulting from personnel who joined
the Company from HSI after the acquisition.
During the quarter ended September 30, 1996, the Company recorded non-recurring
charges directly attributable to the acquisition of HSI. These charges consisted
of a $2.4 million charge to write off purchased in-process research and
development that arose from the acquisition and $0.9 million to write off
certain assets which became redundant because of the acquisition.
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
25
<PAGE> 26
operating loss carryforwards. In 1995, the Company recorded no income tax
provision due to the net loss incurred during the period.
FINANCIAL REVIEW - LIQUIDITY AND CAPITAL RESOURCES
Total assets and liabilities as of December 31, 1997 were $47.3 million and
$19.2 million respectively, compared to assets and liabilities of $44.5 million
and $17.3 million at December 31, 1996. Working capital increased $1.9 million
from $18.4 million at December 31, 1996 to $20.3 million at December 31, 1997.
Cash and cash equivalents decreased $1.4 million from $3.9 million at December
31, 1996 to $2.5 million at December 31, 1997. The increase to working capital
was primarily the result of the NWL acquisition which added approximately $1.4
million to working capital as of the acquisition date.
Cash used by operating activities was the combined result of a net loss of $0.8
million, reductions in accounts payable and accrued compensation of $4.4 million
and $1.2 million, and an increase to inventory (before non-cash charges and
without giving effect to the inventory acquired in the acquisition of NWL) of
$0.8 million. These uses were partially offset by non-cash inventory charges of
$3.0 million, depreciation of $0.8 million and amortization of $0.8 million.
Cash used by investing activities primarily consisted of capital expenditures of
$1.6 million and investments in NWL of $1.0 million.
Cash provided by financing activities primarily consisted of $2.1 million from
sales of stock under the Company's stock plans and net increases in bank loans
of $1.7 million.
The Company has in place a $5.0 million revolving bank line of credit that
expires in November 1998. At December 31, 1997, the collateral provisions of the
line allowed for approximately $4.1 million in borrowings and $2.6 million in
borrowings were outstanding ($2.6 million outstanding at March 20, 1998). The
loss the Company reported for the quarter ended December 31, 1997 breached the
profitability and minimum net worth covenants of the loan agreement. However, in
March 1998, the bank waived these violations. In addition, NWL has in place
various revolving bank lines totaling approximately $3.0 million that expire in
1999 and under which $2.0 million in borrowings were outstanding at December 31,
1997 ($2.5 million at March 20, 1998). At December 31, 1997 NWL had covenant
violations for one of its bank lines for $0.5 million classified as current on
the Balance Sheet. NWL currently expects to renegotiate the terms of this line,
however there can be no assurance NWL will be able to accomplish this in a
timely manner, on acceptable terms, or at all.
The Company anticipates that future changes in cash and working capital will be
dependent on a number of factors. As a result of the acquisitions of HSI and
NWL, 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
26
<PAGE> 27
effectively non-cash assets such as inventory and accounts receivable. At
December 31, 1997, the Company's inventories consisted of $18.7 million
(reflecting the $3.0 million inventory provision described below) and were
comprised of $13.1 million of sub-assemblies and purchases parts and $5.6
million of finished goods. This represents a 7% increase from the prior year
period in which the Company's inventories consisted of $17.4 million comprised
of $12.0 million of sub-assemblies and purchased parts and $5.4 million of
finished goods. During the quarter ended December 31, 1997 the Company recorded
$3.0 million in charges to provide for inventory that the Company considered to
be potentially excessive in light of planned new product introductions in 1998
and lower than expected fourth quarter 1997 orders and shipments. 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 further 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.
27
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of Laserscope at December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997, 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 executive officers of Laserscope is set forth in
"Item 1-Business-Executive Officers of the Company" in this Annual Report on
Form 10-K. Executive officers of the Company do not serve for set terms, but
serve at the pleasure of the Board of Directors subject to Management Continuity
Agreements. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS WITH MANAGEMENT
AND OTHERS." Members of the Company's Board of Directors serve until the next
annual meeting of the Company's shareholders following their election to the
Board or until his or her successor has been elected and qualified.
The names of the Company's directors, and certain information about them as of
December 31, 1997, are set forth below:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ --- ---------------------------------------
<S> <C> <C>
Benjamin L. Holmes 63 Chairman of the Board and Directors
David Cohen 45 Director
Klaus Goffloo 51 Director
Thomas Ihlenfeldt 50 Director
E. Walter Lange 65 Director
Robert V. McCormick 52 President, Chief Executive Officer and
Director
Rodney Perkins, M.D. 61 Director
Robert J. Pressley Ph.D. 65 Director
</TABLE>
- -----------------
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
28
<PAGE> 29
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, Past Commissioner of the
Massachusetts Universal Health Care Commission, and a past 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).
David Cohen has served as a Director of the Company since August 31, 1996. Mr.
Cohen has been an attorney practicing law with the firm of Cohen & Ostler, A
Professional Corporation, for more than five years. Mr. Cohen's firm served as
counsel to Heraeus Med and HSI in connection with the Company's acquisition of
HSI.
Klaus Goffloo has served as a Director of the Company since August 30, 1996. He
served as general manager of the Electrical Heating and Air Conditioning group
of Siemens AG from 1986 until 1992 and since that time has served as Chairman of
Heraeus Med and as a member of the Board of Directors of Hereaus Holding GmbH.
Thomas Ihlenfeldt has served as a Director of the Company since August 30, 1996.
He joined the Heraeus group of companies in 1984 and has served in various
positions. Since mid-1995 Mr. Ihlenfeldt has served as Managing Director of
Heraeus Med. From 1990 through 1995 Mr. Ihlenfeldt served as President and Chief
Executive Officer of HSI, formerly Heraeus LaserSonics.
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. Mr. McCormick is also a director of NovaCept (formerly
AcuVasive and prior to that, EnVision Surgical Systems), a manufacturer of
microvisualization catheter products and private, development stage medical
device company.
E. Walter Lange has been a Director of the Company since January 1992. Mr. Lange
has more than 31 years of experience in the pharmaceutical industry, having
served in a variety of executive positions at Eli Lilly & Co. from 1960 to 1991.
Most recently, Mr. Lange was Group Vice President of Marketing, Planning and
Development and was responsible for Lilly's worldwide product planning,
corporate strategic planning, business development and market research.
29
<PAGE> 30
Rodney Perkins, M.D. is a co-founder of the Company and has been a Director
since its founding. Dr. Perkins also served as Chairman of the Board of
Directors from its founding until June 1995 and Chief Executive Officer from
February to May 1987, and from October 1991 to July 1992. He also served as the
President of the Company from October to December 1991. Dr. Perkins, a
specialist in otologic surgery, is President of the California Ear Institute at
Stanford and has been in private practice since 1968. He is a Clinical Professor
of Surgery at Stanford University School of Medicine, and is the founder and
President of Project HEAR a non-profit medical institute for ear research and
education. Dr. Perkins is a founder of Collagen Corporation, a biomaterials
company. Dr. Perkins is also a founder and the Chairman of the Board of
Directors of ReSound Corporation, a hearing health care company. He also serves
on the board of directors of NovaCept and Pulmonix.
Robert J. Pressley, Ph.D. is a co-founder of the Company and has been a Director
since its founding. Dr. Pressley founded Silicon Video, a developer of
electronic products, and served as its President and Chief Executive Officer
from January 1991 to January 1994. Dr. Pressley also founded XMR, Inc., a
manufacturer of eximer lasers and laser systems, and served as its Chief
Executive Officer from March 1979 until March 1990.
30
<PAGE> 31
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table shows the compensation received by the Company's
Chief Executive Officer, the five other most highly compensated executive
officers of the Company for 1997 who were serving as executive officers at
December 31, 1997, and the compensation received by each such individual for the
Company's two prior years.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
OPTION/SARS
ANNUAL COMPENSATION (SHARES) ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2)(3) (4)(5) COMPENSATION(6)
- --------------------------- ---- --------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Robert V. McCormick 1997 $276,614 -- 30,000 $ 21,021
President and Chief 1996 $263,455 $129,486 40,000 $ 15,706
Executive Officer 1995 $248,060 -- 165,000 $ 18,186
Thomas B. Boyd 1997 $179,928 -- 30,000 $ 17,320
Senior Vice President of 1996 $171,350 $ 51,749 40,000 $ 13,232
Operations and 1995 $168,324(7) -- 45,000 $ 13,219
International
Roy Fiebiger 1997 $174,000 -- -- $ 17,141
Senior Vice President of 1996 $158,292 $ 47,888 40,000 $ 10,199
Marketing, and Strategic 1995 $ 48,557(8) $ 10,000 65,000 $ 1,869
Development
Kevin Candio 1997 $115,759 $ 21,748 60,000 $ 7,082
Vice President of Sales 1996 $104,190 $146,186 10,000 $ 7,235
and Service 1995 $ 83,376 $ 22,758 5,000 $ 6,498
Dennis LaLumandiere 1997 $140,000 -- 30,000 $ 12,862
Vice President of 1996 $124,426 $ 37,580 40,000 $ 9,543
Finance, Chief Financial 1995 $119,690 -- 40,000 $ 3,279
Officer and Assistant
Secretary
Eric M. Reuter 1997 $147,500(10) -- 50,000 $ 13,632
Vice President of 1996 $104,114(11) $ 10,519 50,000 $ 2,462
Research and Development 1995 -- -- -- --
</TABLE>
- --------------------
(1) Includes amounts deferred under the Company's 401(k) plan.
(2) Includes bonuses earned in the indicated fiscal year and paid in the
subsequent fiscal year. Excludes bonuses paid in the indicated fiscal year
but earned in the preceding fiscal year.
(3) Executive officers are entitled to discretionary bonuses based on
individual and corporate performance. These bonuses are determined by the
Board of Directors based on the recommendation of the Human Resources
Committee. Mr. Candio's bonuses consisted of sales commissions.
31
<PAGE> 32
(4) The options listed with respect to 1995 long-term compensation awards
include options granted upon the repricing of previously granted options.
Options to purchase the following number of shares granted to the following
persons in 1995 were canceled as a result of their repricing on November
30, 1995: Mr. McCormick -- 97,500; Mr. LaLumandiere -- 12,188. Such
canceled options have not been included with respect to 1995 long-term
compensations award. The repriced options retain the same term and vesting
schedule as those options which were replaced.
(5) All options granted in 1995, 1996 and 1997 to new employees and officers of
the Company have 5-year terms and become exercisable cumulatively at the
rate of 12.5% of the total six months after the vesting commencement date
(first date of employment for new employees and date of grant for
officers), and 1/48 of the shares subject to the option in equal monthly
installments thereafter. All options granted in 1995, 1996 and 1997 to
existing employees also have 5-year terms but become exercisable
cumulatively at the rate of 1/48 of the shares subject to the option in
equal monthly installments following their respective grant date. All
unvested options are subject to earlier termination in the event of the
termination of the participant's relationship with the Company. All options
were granted at market value on the date of grant. In the event that
certain change in control events were to occur, the options would be
assumed or equivalent options substituted by a successor corporation,
unless the Board of Directors determined that the options should become
immediately exercisable. The exercise price may be paid, subject to certain
conditions, by delivery of already owned shares or with the proceeds from
the sale of the option shares. In addition, the Management Continuity
Agreements entered into between the Company and each of its executive
officers may affect the vesting and manner of exercise of options granted
by the Company to these individuals. See "Transactions with Management and
Others."
(6) Consists of the Company's contributions to its 401(k) benefit plan and
certain other employee benefits, including payment of disability and group
term life insurance premiums and a car allowance.
(7) Includes $8,331 paid to Mr. Boyd in connection with the relocation of his
principal residence to the San Jose metropolitan area.
(8) Includes salary paid to Mr. Fiebiger during the period beginning on the
commencement of his employment on August 28, 1995 and ending on December
31, 1995.
(10) Includes $12,000 mortgage allowance paid to Mr. Reuter in connection with
the relocation of his principal residence to the San Jose metropolitan
area.
(11) Includes salary paid to Mr. Reuter during the period beginning on the
commencement of his employment on August 22, 1996 and ending on December
31, 1996 and $70,614 paid to Mr. Reuter in connection with the relocation
of his principal residence to the San Jose metropolitan area.
32
<PAGE> 33
STOCK OPTION GRANTS IN 1997
The following table sets forth information for the named executive officers with
respect to grants of options to purchase Common Stock of the Company made in
1997 and the value of all options held by such executive officers on December
31, 1997.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
----------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
OPTIONS STOCK
GRANTED TO PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE OR FOR
GRANTED IN FISCAL BASE PRICE EXPIRATION OPTION TERM (3)
NAME (SHARES)(1) YEAR(2) (PER SHARE) DATE 5% 10%
- ---- ----------- ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert V. McCormick 30,000(4) 4.2% $ 4.63 12/19/02 $ 38,300 $ 84,700
Thomas B. Boyd 30,000(4) 4.2% $ 4.63 12/19/02 $ 38,300 $ 84,700
Roy Fiebiger -- -- -- -- -- --
Kevin Candio 10,000(5) 1.4% $ 7.50 2/14/02 $ 20,700 $ 45,800
50,000(4) 7.0% $ 4.63 12/19/02 $ 63,900 $141,200
Dennis LaLumandiere 30,000(4) 4.2% $ 4.63 12/19/02 $ 38,300 $ 84,700
Eric M. Reuter 50,000(4) 7.0% $ 4.63 12/19/02 $ 63,900 $141,200
</TABLE>
- ---------------------
(1) For a description of the material terms of the options, see footnote 5 of
the Summary Compensation Table.
(2) The Company granted options to employees for an aggregate of 715,600 shares
of Common Stock during 1997.
(3) Gains are reported net of the option exercise price but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on future performance of the Company's Common Stock, as well as
the optionee's continued employment through the vesting period.
(4) Options listed were granted on December 19, 1997.
(5) Options listed were granted on February 14, 1997.
33
<PAGE> 34
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
The following table sets forth information for the named executive officers
with respect to exercises in 1997 of options to purchase Common Stock of the
Company.
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS(1)
SHARES 12/31/97: AT 12/31/97:
ACQUIRED --------- -----------------------
ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE)
- ---- -------- -------- -------------- --------------
<S> <C> <C> <C> <C>
Robert V. McCormick 150,000 $341,100 265,182 /109,818 $243,200 / $164,900
Thomas B. Boyd -- -- 97,708 / 82,292 $ 73,200 / $ 80,000
Roy Fiebiger -- -- 41,145 / 63,855 $ 78,100 / $125,000
Kevin Candio 2,000 $ 5,600 37,249 / 65,751 $ 39,700 / $ 10,900
Dennis LaLumandiere -- -- 76,937 / 71,563 $ 70,400 / $ 64,600
Eric M. Reuter -- -- 16,166 / 83,334 -- / --
</TABLE>
- -----------
(1) Based on the closing price of the Company's Common Stock as reported on the
NASDAQ National Market System on December 31, 1997 of $4.50 per share.
34
<PAGE> 35
HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are currently no employee directors serving on the Human Resources
Committee of the Board of Directors. The following non-employee directors serve
on the Company's Human Resources Committee: Rodney Perkins, M.D., Robert J.
Pressley, Ph.D., David Cohen.
Dr. Perkins purchased an aggregate of 16,667 shares of the Company's Common
Stock in September 1989 under the Company's 1984 Stock Purchase plan at an
aggregate price of $75,002. Dr. Perkins purchased such shares through promissory
notes in favor of the Company bearing interest at the annual rate 9% and secured
by the shares purchased. During 1995 the principal and accrued interest on these
notes were refinanced and the notes now carry annual interest rates of 5.79%. At
December 31, 1997, Dr. Perkins owed an aggregate of $144,155 under such notes,
the largest amount of indebtedness owed by him to the Company at any time during
1997.
Dr. Perkins is also Chairman of the Board of Directors and a member of the Board
of Directors' Human Resources Committee of ReSound Corporation, a publicly
traded hearing health care company. The Company and ReSound Corporation have not
conducted any business with each other in the past and the Company does not
presently anticipate doing so in the future.
Dr. Pressley purchased an aggregate of 16,667 shares of the Company's Common
Stock in September 1989 under the Company's 1984 Stock Purchase plan at an
aggregate price of $75,002. Dr. Pressley purchased such shares through
promissory notes in favor or the Company bearing interest at an annual rate 9%
and secured by the shares purchased. During 1995 the principal and accrued
interest on these notes were refinanced and the notes now carry annual interest
rates of 5.79% At December 31, 1997, Dr. Pressley owed an aggregate of $144,361
under such notes, the largest amount of indebtedness owed by him to the Company
at any time.
Mr. Cohen's firm served as counsel to Heraeus Med and HSI in connection with the
Company's acquisition of HSI (the "HSI Acquisition"). In accordance with the
Company's acquisition agreement ("Heraeus Agreement") dated April 23, 1996 with
Heraeus Med pursuant to which the Company acquired HSI, the Company appointed
three designees of Heraeus Med (the "Heraeus Directors") to the Company's Board
of Directors. The Heraeus Agreement as amended, provides that upon the death,
resignation or removal of any member of the Board, or the declaring by the Board
of any vacancy on the Board pursuant to the Company's Bylaws, the Company is
required to promptly amend its Bylaws to set the exact number of directors at
seven. In addition, the agreement requires the Company to use its best efforts
to have three nominees of Heraeus Med elected to the Board of Directors for so
long as Heraeus Med owns at least 3.3 million shares of Company Common Stock,
two nominees of Heraeus Med elected to the Board for so long as Heraeus Med owns
at least 1.6 million shares of Company Common Stock and one nominee of Heraeus
Med elected to the Board for so long as Heraeus Med owns at least 600,000 shares
of Company Common Stock. Under the agreement, the Company may not, without the
prior consent of Heraeus Med, increase, or ask Company shareholders to increase,
the number of directors beyond eight or, once reduced to seven in accordance
with the agreement, beyond seven. Messrs. Cohen, Goffloo and Ihlenfeldt are the
initial Heraeus Directors and were appointed to the Company's Board of Directors
on August
35
<PAGE> 36
30, 1996. Under the Heraeus Agreement, the Company and Heraeus Med have certain
continuing obligations to each other. These obligations include: reciprocal
indemnification obligations in connection with the HSI Acquisition; Heraeus
Med's obligation not to develop, manufacture, service or sell hospital or
physician office-based laser surgical systems or accessories prior to August 30,
2003; and the Company's obligation not to develop, manufacture, service or sell
products outside the United States based on mounting device technology licensed
to the Company prior to August 30, 2006. In addition, the Company is obligated
to register the Common Stock issued to Heraeus Med (the "Heraeus Shares") as
partial consideration for HSI. The Company has also agreed to pay all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses
and the expense of any special audits incident to or required by any
registration in connection with any such registration. The Company and Heraeus
Med have agreed to customary reciprocal indemnification obligations in
connection with any such registration.
The Company has entered into a supply relationship with Heraeus Med pursuant to
which Heraeus Med has agreed to supply the Company certain products for resale
and for use in the Company's production process. During 1997, the Company
purchased approximately $2,161,000 of such products pursuant to the Heraeus Med
supply arrangement.
COMPENSATION OF DIRECTORS
Non-employee members of the Board of Directors (other than the Heraeus
Directors) receive a retainer of $2,000 per quarter and $500 per meeting of the
Board of Directors attended. In addition, non-employee members (other than the
Heraeus Directors) of the Board of Directors receive options to purchase shares
of the Company's Common Stock pursuant to its 1990 Directors' Stock Option Plan
(the "1990 Directors' Option Plan") and 1995 Directors Stock Option Plan (the
"1995 Directors' Option Plan"). Pursuant to the Heraeus Agreement the Company
appointed three designees of Heraeus Med to the Company's Board of Directors.
For so long as Heraeus Med owns at least 3.3 million shares of Company Common
Stock, the Company has agreed to use its best efforts to have three nominees of
Heraeus Med elected to the Board of Directors; for so long as Heraeus Med owns
at least 1.6 million shares of Company Common Stock, the Company has agreed to
use its best efforts to have at least two nominees of Heraeus Med elected to the
Board of Directors; and for so long as Heraeus Med owns at least 600,000 shares
of Common Stock, the Company has agreed to use its best efforts to have one
nominee of Heraeus Med elected to the Board. Pursuant to the Heraeus Agreement,
the Company has agreed to reimburse Heraeus Med for the reasonable expenses of
the Heraeus Directors in attending board meetings and fulfilling their duties as
directors, up to a maximum of $25,000 per year, in aggregate.
36
<PAGE> 37
The 1990 Directors' Option Plan, which has been terminated by the Board of
Directors with respect to the grant of any future options, provided for the
grant of nonstatutory options to non-employee directors of the Company at an
exercise price not less than the fair market value of the Company's Common Stock
on the date of grant. Under the 1990 Directors' Option Plan, persons who were
non-employee directors as of October 18, 1991 as well as persons who have joined
the Board since that date through election by the shareholders of the Company or
appointment by the Board of Directors to fill a vacancy, have been granted an
option to purchase 45,000 shares of the Company's Common Stock. Options issued
pursuant to this plan vest and become exercisable over three years with respect
to each optionee who remains a director and expire five years after the date of
grant.
The 1995 Directors' Option Plan was approved by the Board of Directors in
November 1995 and also provides for the grant of nonstatutory options to
non-employee directors of the Company at an exercise price not less than the
fair market value of the Company's Common Stock on the date of grant. Under the
1995 Directors' Option Plan, persons who were non-employee directors as of
November 30, 1995, as well as persons who have joined the Board since that date
through election by the shareholders of the Company or appointment by the Board
of Directors to fill a vacancy, have been granted an option to purchase 45,000
shares of the Company's Common Stock. Options issued pursuant to this plan vest
and become exercisable over three years with respect to each optionee who
remains a director and expire five years after the date of grant. Directors who
are designated or nominated by shareholders who hold 10% or more of the
outstanding Company Common Stock, including the Heraeus Directors, are not
eligible to receive options under the 1995 Directors' Option Plan.
Directors who are employees of the Company do not receive any additional
compensation for their services as a director.
37
<PAGE> 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's Common
Stock as of March 15, 1998 as to (i) each person who is known by the Company to
own beneficially more than five percent of the Company's Common Stock, (ii) each
of the Company's directors, (iii) each of the executive officers named in the
Summary Compensation Table beginning on page 31, and (iv) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
(1)
PERCENT OF
NUMBER(2) TOTAL
--------- -----
<S> <C> <C>
Heraeus Med GmbH ................................... 4,338,345 35.1%
Thomas B. Boyd...................................... 116,513 *
Kevin Candio........................................ 68,440 *
Roy Fiebiger........................................ 54,479 *
Benjamin L. Holmes.................................. 71,041 *
Dennis LaLumandiere................................. 86,808 *
E. Walter Lange..................................... 41,250 *
Robert V. McCormick................................. 376,840 3.0%
Rodney Perkins, M.D. ............................... 162,717 1.3%
Robert J. Pressley, Ph.D. .......................... 57,266 *
Eric M. Reuter...................................... 20,533 *
All directors and executive officers as a group
(11 persons)(3).................................... 5,394,232 40.9%
</TABLE>
- ------------------
* Less than 1%.
(1) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and the information
contained in the other footnotes to this table.
(2) Includes with respect to each named person the following shares subject to
options exercisable within 60 days of March 15, 1998: Mr. Boyd -- 111,562;
Mr. Candio -- 36,665; Mr. Fiebiger -- 53,229; Mr. Holmes -- 68,541; Mr.
LaLumandiere -- 82,499; Mr. Lange -- 36,250; Mr. McCormick -- 268,410; Dr.
Perkins -- 96,250; Dr. Pressley -- 36,250; Mr. Reuter -- 20,333.
(3) Messrs. Cohen, Goffloo and Ihlenfeldt are affiliated with Heraeus Med and
may be deemed to exercise beneficial ownership of the shares of Laserscope
Common Stock owned by Heraeus Med. Messrs. Cohen, Goffloo and Ihlenfeldt
disclaim beneficial ownership of the shares of Laserscope Common Stock held
by Heraeus Med.
38
<PAGE> 39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
In March 1994, the Company entered into Management Continuity Agreements with
each of its executive officers, which were amended in December 1994. These
agreements provide (1) for continued employment or salary continuation at the
Company or its successor for at least twelve (12) months following any Change in
Control of the Company (as defined below), at the same salary and with the same
benefit program as were in effect prior to such Change in Control, (2) that such
executives may, with thirty (30) days written prior notice, resign but will be
entitled to receive his or her current salary and level of benefits for the
remainder of the twelve (12) months following the Change in Control if, in
connection with such Change in Control the executive's duties or
responsibilities are materially reduced or executive is asked to relocate to a
facility or location more than 50 miles from the Company's current location, (3)
that all stock options exercisable for the Company's securities held by such
executives 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, and (4) that upon the immediate vesting of stock
options, the optionee 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 only to the extent permitted by the terms of the applicable option
plan) to deliver a non-recourse promissory note (secured only by the pledged
shares for repayment), at the prime rate of interest determined as of the date
of the note, in payment of the exercise price for the outstanding options. For
purposes of the Management Continuity Agreements, a Change in Control of the
Company shall be deemed to have occurred upon the happening of any of the
following events: (1) any acquisition of twenty percent (20%) or more of the
Company's then outstanding voting securities without the approval of the Board
of Directors, (2) any merger or consolidation in which the Company is not the
surviving entity, (3) approval of 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, or (4) a change in the composition of
the Board of Directors of the Company, as a result of which fewer than a
majority of the directors are incumbent directors.
The Company has sold Common Stock to certain employees and directors and
accepted promissory notes secured by that stock as payment for certain of those
shares. These notes originally carried annual interest rates of 9.0% to 9.5%.
During 1995 the principal and accrued interest on these notes were refinanced
and the notes now carry annual interest rates of 5.79%.
39
<PAGE> 40
<TABLE>
<CAPTION>
INDEBTEDNESS
TO THE COMPANY
TOTAL SHARES AGGREGATE AS OF
PURCHASER PURCHASED PRICE 12/31/97 (1)(2)
- --------- ------------ --------- ---------------
<S> <C> <C> <C>
Rodney Perkins, M.D. ............... 16,667 $ 75,001 $144,155
Robert J. Pressley, Ph.D. .......... 16,666 $ 74,997 $144,361
</TABLE>
(1) In all cases, the amount shown was also the largest amount of indebtedness
owed to the Company at any time during 1997.
(2) Payment in the form of promissory notes in the above transactions was
approved in each case by a majority of the disinterested directors of the
Company and such sales were made pursuant to the Company's 1984 Stock
Purchase Plan, which was approved by the shareholders of the Company.
During 1997, Mr. Holmes received $25,000 in compensation from the Company for
consulting services to the Company beyond his duties as Chairman of the Board of
Directors.
Non-employee members of the Company's Board of Directors receive cash
compensation and options to purchase shares of Common Stock in connection with
their service on the Board.
The Company has entered into indemnification agreements with each of its
directors and executive officers, which may require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers, to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' liability insurance if
available on reasonable terms.
The Company has entered into a supplier relationship with Heraeus Med pursuant
to which Heraeus Med has agreed to supply the Company certain products for
resale and for use in the Company' production process. During 1997, the Company
purchased approximately $2,161,000 of such products pursuant to the Heraeus Med
supply arrangement.
Under the Heraeus Agreement, the Company and Heraeus Med have certain continuing
obligations to each other. These obligations include: reciprocal indemnification
obligations in connection with the HSI Acquisition; Heraeus Med's obligation not
to develop, manufacture, service or sell hospital or physician office-based
laser surgical systems or accessories prior to August 30, 2003; the Company's
obligation (subject to certain limitations described below) to use its best
efforts to have a specified number of Heraeus Med designees elected to the
Company's Board of Directors; and the Company's obligation not to develop,
manufacture, service or sell products outside the United States based on
mounting device technology licensed to
40
<PAGE> 41
the Company prior to August 30, 2006. In addition, the Company is obligated to
register the Heraeus Shares issued to Heraeus Med as partial consideration for
the acquisition of HSI and has agreed to pay all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses and the expense of any special
audits incident to or required by any registration in connection with any such
registration. The Company and Heraeus Med have agreed to customary reciprocal
indemnification obligations in connection with any such registration.
The Heraeus Agreement as amended, provides that upon the death, resignation or
removal of any member of the Board, or the declaring by the Board of any vacancy
on the Board pursuant to the Company's Bylaws, the Company is required to
promptly amend its Bylaws to set the exact number of directors at seven. In
addition, the agreement requires the Company to use its best efforts to have
three nominees of Heraeus Med elected to the Board of Directors for so long as
Heraeus Med owns at least 3.3 million shares of Company Common Stock, two
nominees of Heraeus Med elected to the Board for so long as Heraeus Med owns at
least 1.6 million shares of Company Common Stock and one nominee of Heraeus Med
elected to the Board for so long as Heraeus Med owns at least 600,000 shares of
Company Common Stock. Under the agreement, the Company may not, without the
prior consent of Heraeus Med, increase, of ask Company shareholders to increase,
the number of directors beyond eight or, once reduced to seven in accordance
with the agreement, beyond seven. Messrs. Cohen, Goffloo and Ihlenfeldt are the
initial Heraeus Directors and were appointed to the Company's Board of Directors
on August 30, 1996. Mr. Goffloo is Chairman of Heraeus Med and is a member of
the Board of Directors of Heraeus Holding GmbH., Heraeus Med's parent company.
Mr. Ihlenfeldt is Managing Director of Heraeus Med. From 1990 through 1995 Mr.
Ihlenfeldt served as President and Chief Executive Officer of Heraeus Surgical,
Inc. Mr. Cohen's firm served as counsel to Heraeus Med and HSI in connection
with the Company's acquisition of HSI.
41
<PAGE> 42
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, 1997 and 1996. F-2
Consolidated Statements of Operations
- Years ended December 31, 1997, 1996 and 1995. F-3
Consolidated Statements of Cash Flows
- Years ended December 31, 1997, 1996 and 1995. F-4
Consolidated Statements of Shareholders' Equity
- Years ended December 31, 1997, 1996 and 1995. F-5
Notes to Consolidated Financial Statements. F-6 through F-18
</TABLE>
(2) The following financial statement schedule
for the years ended December 31, 1997, 1996
and 1995 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):
42
<PAGE> 43
Exhibit
Number Description
- ------ -----------
2.1 Acquisition Agreement between Laserscope and Heraeus Med GmbH.(12)
2.1A Amendment Number One to Acquistion Agreement between Laserscope
and Heraeus Med GmbH. (14)
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.(9)
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.(10)
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.(11)
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.(7)
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)
43
<PAGE> 44
Exhibit
Number Description
- ------ -----------
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.(6)
10.6F Amendment No. 1 dated April 19, 1994 to Net Lease Agreement between
Registrant and Realtec Properties dated June 25, 1990.(6)
10.6G Amendment No. 1 dated April 19, 1994 to Net Lease Agreement between
Registrant and Realtec Properties dated December 14, 1989.(7)
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.(13)
10.11A Loan Modification Agreement between the Registrant and Silicon
Valley Bank dated November 26, 1997.(14)
10.11B Loan Modification Agreement between the Registrant and Silicon
Valley Bank dated March 18, 1998.(14)
10.13 1990 Directors' Stock Option Plan and form of Option Agreement.(4)
10.14 Form of Laserscope Management Continuity Agreement, as amended.(7)
10.18 1995 Directors' Stock Option Plan and form of Option agreement.(8)
22.1 Subsidiaries of Registrant, as amended.(14)
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page
47).(14)
25.1 Power of Attorney (see pages 48 through 49).(14)
27.1 Financial Data Schedule.(15)
44
<PAGE> 45
Reports on Form 8-K:
Not applicable
(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 6(a), "Exhibits", of the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1994.
(7) 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.
(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/A for the year ended December 31, 1995.
(9) Incorporated by reference to Exhibit 1 of the Registrant's Registration
Statement on Form 8-A filed November 15, 1991.
(10) 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.
45
<PAGE> 46
(11) 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.
(12) Incorporated by reference to Exhibit A to the Definitive Proxy Statement
for the Special Meeting of Shareholders held August 29, 1996.
(13) 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, 1996.
(14) Filed herewith.
46
<PAGE> 47
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, 333-11795,
333-31213 and 333-31233 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 February 17, 1998,
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, 1997.
/s/Ernst & Young LLP
San Jose, California
March 27, 1998
47
<PAGE> 48
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 31, 1998 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 31, 1998
- ----------------------- Directors
(Benjamin L. Holmes)
/s/ Robert V. McCormick President, Chief Executive March 31, 1998
- ----------------------- Officer and Director
(Robert V. McCormick)
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------------------------------------------------
<S> <C> <C>
/s/ Dennis LaLumandiere Vice President of Finance, March 27, 1998
- ------------------------ Chief Financial Officer and
(Dennis LaLumandiere) Assistant Secretary
(Principal Financial and
Accounting Officer)
/s/ David Cohen Director March 27, 1998
- ------------------------
(David Cohen)
/s/ Klaus Goffloo Director March 27, 1998
- ------------------------
(Klaus Goffloo)
/s/ Thomas Ihlenfeldt Director March 27, 1998
- ------------------------
(Thomas Ihlenfeldt)
/s/ E. Walter Lange Director March 27, 1998
- ------------------------
(E. Walter Lange)
/s/ Rodney Perkins Director March 27, 1998
- ------------------------
(Rodney Perkins, M.D.)
/s/ Robert J. Pressley Director March 27, 1998
- ------------------------
(Robert J. Pressley, Ph.D.)
</TABLE>
50
<PAGE> 50
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, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, 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
February 17, 1998
F-1
<PAGE> 51
LASERSCOPE
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,465 $ 3,917
Accounts receivable, net 13,960 13,286
Inventories 18,656 17,407
Other current assets 1,017 926
-------- --------
Total current assets 36,098 35,536
Property and equipment, net 5,183 3,109
Investment in NWL -- 1,681
Developed technology and other intangibles, net 5,339 3,473
Other assets 686 670
-------- --------
Total assets $ 47,306 $ 44,469
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,071 $ 9,246
Accrued compensation 1,710 2,947
Short-term bank loans 3,107 --
Warranty 1,321 962
Deferred revenue 1,580 2,376
Other accrued liabilities 1,879 1,507
Current obligations under capital leases 117 54
-------- --------
Total current liabilities 15,785 17,092
Long-term liabilities:
Obligations under capital leases 274 202
Mortgages & other long term loans 2,970 --
-------- --------
Total long term liabilities 3,244 202
Commitments and contingencies
Minority interest 160 --
Shareholders' equity:
Common stock 12,347,446 shares outstanding (11,868,171 in 1996) 50,939 48,798
Accumulated deficit (21,831) (20,988)
Translation adjustments (616) (260)
Notes receivable from shareholders (375) (375)
-------- --------
Total shareholders' equity 28,117 27,175
-------- --------
Total liabilities and shareholders' equity $ 47,306 $ 44,469
======== ========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE> 52
LASERSCOPE
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
(thousands, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Products $ 53,296 $ 36,885 $ 24,974
Services 8,053 5,959 5,159
-------- -------- --------
61,349 42,844 30,133
Cost of products and services:
Products 30,085 17,967 11,526
Services 6,194 3,915 3,266
-------- -------- --------
36,279 21,882 14,792
-------- -------- --------
Gross margin 25,070 20,962 15,341
Operating expenses:
Research and development 3,389 2,555 3,838
Purchased in-process research and development -- 2,376 --
Selling, general and administrative 22,250 16,749 15,333
Other non-recurring charges relating to the
acquisition of Heraeus Surgical, Inc. -- 872 --
-------- -------- --------
25,639 22,552 19,171
Operating loss (569) (1,590) (3,830)
Interest and other income 210 50 278
-------- -------- --------
Loss before income taxes and minority interest (359) (1,540) (3,552)
Provision for income taxes 370 152 --
-------- -------- --------
Loss before minority interest (729) (1,692) (3,552)
Minority interest (114) -- --
-------- -------- --------
Net loss $ (843) $ (1,692) $ (3,552)
======== ======== ========
Basic and diluted net loss per share $ (0.07) $ (0.18) $ (0.51)
======== ======== ========
Shares used in per share calculations 12,265 9,468 7,019
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 53
LASERSCOPE
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (843) $(1,692) $(3,552)
Adjustments to reconcile net loss to cash
provided (used) by operating activities:
Inventory charges 3,000 500 --
Depreciation 824 938 1,419
Amortization of licenses and intangibles 790 280 --
Purchased in-process research and development -- 2,376 --
Increase (decrease) from changes in:
Accounts receivable 65 (2,622) 2,523
Inventories (841) 576 (2,780)
Other current assets 280 (34) 346
Other assets -- -- 350
Accounts payable (4,404) 2,923 163
Accrued compensation (1,237) 441 20
Warranty 359 86 (201)
Deferred revenue (796) (311) (317)
Other accrued liabilities 372 (115) 182
Minority interest 160 -- --
------- ------- -------
Cash provided (used) by operating activities (2,271) 3,346 (1,847)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of held-to-maturity investments -- -- 1,998
Capital expenditures (1,616) (593) (762)
NWL acquisition (960) -- (1,681)
Heraeus Surgical acquisition, net of cash received -- (1,741) --
Other (402) (9) (71)
------- ------- -------
Cash used by investing activities (2,978) (2,343) (516)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on obligations under capital leases (39) (14) (11)
Proceeds from the sale of common stock under stock plans 2,141 650 48
Proceeds from bank loans 3,865 -- --
Repayment of bank loans (2,170) -- --
------- ------- -------
Cash provided by financing activities 3,797 636 37
------- ------- -------
Increase (decrease) in cash and cash equivalents (1,452) 1,639 (2,326)
Cash and cash equivalents, beginning of year 3,917 2,278 4,604
------- ------- -------
Cash and cash equivalents, end of year $ 2,465 $ 3,917 $ 2,278
======= ======= =======
Supplemental cash flow information:
Cash paid for income taxes $ 177 $ 50 $ 41
======= ======= =======
Cash paid for interest $ 393 $ 15 $ 31
======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 54
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, 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
Issuance of 479,275 shares
under stock plans 2,141 2,141
Translation adjustments (356) (356)
Net loss (843) (843)
-------- -------- -------- -------- --------
Balance at December 31, 1997 $ 50,939 $(21,831) $ (616) $ (375) $ 28,117
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 55
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company primarily 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 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, 1997 and 1996 the Company's cash equivalents were in the form of
institutional money market accounts and totaled $1.3 million and $1.8 million,
respectively.
At December 31, 1997 and 1996 the Company had no investments in debt or equity
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.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization.
The building is depreciated using the straight line method over an estimated
useful life of 25 years. 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
F-6
<PAGE> 56
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 loss per share
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" (SFAS 128) during the year ended December 31, 1997. Under
the requirements of SFAS 128, the Company is required to restate all prior
periods and report "Basic" and "Diluted" net income (loss) per share. 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. All per share amounts for all periods presented have been
restated to conform to SFAS 128 requirements.
Options to purchase 2,428,397, 2,361,731 and 2,272,728 shares of common stock
were outstanding at December 31, 1997, 1996 and 1995, respectively, but were not
included in the computation of diluted earnings (loss) per share because the
Company reported losses for the periods that ended at these dates and,
therefore, the effect would be antidilutive.
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 Assets and for Long-Lived Assets to
Be Disposed of" (SFAS 121) during the year ended December 31, 1996. Such
adoption did not have a material impact on the financial statements.
Intangible assets related to the acquisitions
Intangible assets related to the acquisitions of Heraeus Surgical, Inc. and NWL
Laser-Technologie GmbH included developed technology, distribution and
established workforces. These assets are amortized on a straight-line basis over
estimated useful lives from five to seven years.
Advertising expense
Advertising is expensed as incurred. Advertising costs were not significant in
1997, 1996 and 1995.
F-7
<PAGE> 57
Recently issued accounting standards
Comprehensive income:
In June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company believes that adoption of SFAS 130 will not have a
material impact on its consolidated financial statements.
Segment information:
In June 1997, the Financial Accounting Standards Board released 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. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. 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.
2. ACQUISITION OF NWL LASER-TECHNOLOGIE GMBH
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. In June
1997, the Company exercised its option and paid an additional $1 million to
increase its equity position to a 52% interest in NWL. The Company expects, and
under certain conditions is obligated, to purchase the remainder of NWL for
approximately $2.3 million, payable at specified dates over the next three
years.
The acquisition of majority interest (the "Acquisition") closed in June 1997 and
has been accounted for as a purchase. The purchase price was allocated based on
management estimates of the respective fair values of the tangible and
intangible assets acquired and the liabilities assumed on the date of
acquisition.
F-8
<PAGE> 58
The purchase price for the Acquisition was $2.6 million and was allocated as
follows:
<TABLE>
<S> <C>
Net tangible assets acquired:
Accounts receivable, net $ 739
Inventories 3,408
Property and equipment 1,108
Other assets 452
Accounts payable and other current liabilities (3,089)
Mortgages and other long term liabilities (2,522)
Minority interest in net tangible assets (46)
-------
Total net tangible assets acquired 50
=======
Intangible assets acquired:
Developed technology 1,297
Distribution 832
Workforce 462
-------
$ 2,591
=======
</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 $1.3 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.
To determine the value of distribution, the expected future cash flow from sales
of the Company's non-NWL products into Germany 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 $832,000 million
for distribution. 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 $462,000 for the assembled workforce. The asset is
being amortized on a straight-line basis over a seven year period.
The operating results of NWL from June 13, 1997 through December 31, 1997 have
been included in the Company's consolidated results of operations.
F-9
<PAGE> 59
The following unaudited pro forma combined results of operations of the Company
and NWL for the twelve months ended December 31, 1997 and December 31, 1996 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:
<TABLE>
<CAPTION>
Twelve months ended
December 31,
1997 1996
(thousands, except per share data): (Unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $ 63,087 $ 48,898
Loss from operations $ (987) $ (1,598)
Net loss $ (1,313) $ (1,690)
Basic and diluted net loss per share $ (0.11) $ (0.18)
Shares used in per share calculations 12,265 9,468
</TABLE>
3. 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.
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 date of acquisition.
The Company has entered into a supplier relationship with Heraeus Med pursuant
to which Heraeus Med has agreed to supply the Company certain products for
resale and for use in the Company's production process. During 1997 and 1996 the
Company purchased approximately $2.2 million and $0.9 million respectively and
had accounts payable to Heraeus Med of approximately $2.2 million and $2.8
million at December 31, 1997 and 1996, respectively.
4. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts receivable $ 14,760 $ 13,986
Less: allowance for doubtful accounts (800) (700)
-------- --------
$ 13,960 $ 13,286
======== ========
</TABLE>
F-10
<PAGE> 60
5. INVENTORIES
Inventories at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Sub-assemblies and purchased parts $13,098 $12,015
Finished goods 5,558 5,392
------- -------
$18,656 $17,407
======= =======
</TABLE>
Inventory at December 31, 1997 reflects a $3.0 million provision to reserve for
inventory that the Company considered to be potentially excessive in light of
planned new product introductions in 1998 and lower than expected fourth quarter
1997 orders and shipments.
6. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 3,589 $ 4,967
Land and building 907 --
Office equipment and furniture 7,837 7,448
Leasehold improvements 3,250 2,229
-------- --------
15,583 14,644
Less accumulated depreciation and amortization (10,400) (11,535)
-------- --------
$ 5,183 $ 3,109
======== ========
</TABLE>
7. DEVELOPED TECHNOLOGY AND OTHER INTANGIBLES
Developed technology and other intangibles resulting from the acquisition of
Heraeus Surgical, Inc. and NWL Laser-Technologie GmbH at December 31 consisted
of:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Heraeus Surgical, Inc. $ 3,629 $ 3,629
NWL Laser-Technologie GmbH 2,591 --
------- -------
6,220 3,629
Less accumulated amortization (881) (156)
------- -------
$ 5,339 $ 3,473
======= =======
</TABLE>
8. CREDIT LINES
In November 1997, 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 1998, is
secured by the assets of the Company and bears interest at the bank's prime rate
plus three quarters of one percentage point (9.25% at December 31, 1997).
Provisions of this agreement prohibit the payment of dividends and the
repurchase of stock and require the Company to maintain certain minimum working
capital, profitability and net worth levels. At December 31, 1997, the
collateral provisions of the line allowed for approximately $4.1 million in
borrowings and $2.6 million in borrowings
F-11
<PAGE> 61
were outstanding. The loss the Company reported for the quarter ended December
31, 1997 breached the profitability and minimum net worth covenants of the loan
agreement. However, in March 1998, the bank waived these violations. In
addition, NWL has in place various revolving bank lines totaling approximately
$3.0 million that expire in 1999 and under which $2.0 million in borrowings were
outstanding at December 31, 1997. At December 31, 1997 NWL had covenant
violations for one of its bank lines for $0.5 million classified as current on
the Balance Sheet. NWL currently expects to renegotiate the terms of this line,
however there can be no assurance NWL will be able to accomplish this in a
timely manner, on acceptable terms, or at all.
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) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Leased equipment $ 523 $ 1,784
Accumulated amortization 306 1,531
</TABLE>
There were $174,000 in additions to leased equipment in 1997, $241,000 in 1996
and none in 1995.
Amortization of equipment under capital leases is included in depreciation
expense.
The Company leases certain facilities and equipment under non-cancelable
operating leases. Rental expense under these leases amounted to approximately
$1,625,000, $982,000 and $966,000 in each of the three years ended December 31,
1997, 1996 and 1995, respectively.
Future minimum lease payments under capital and operating leases were as follows
at December 31, 1997:
<TABLE>
<CAPTION>
Capital Operating
(in thousands) Leases Leases
- --------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 188 $1,788
1999 143 1,788
2000 89 844
2001 61 197
2002 and beyond -- 400
------ ------
$ 481 $5,017
======
Less amount representing interest 90
------
Present value of future minimum lease payments $ 391
======
</TABLE>
F-12
<PAGE> 62
10. LONG TERM DEBT
Long term debt at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgages secured by the NWL building with
principal and 8.1% interest payable in monthly
installments through March 2005 $ 406 --
Unsecured term loans with principal and interest
(ranging from 3.8% to 8.0%) due January
through March, 1999 $1,456 --
Unsecured Bavarian Development Agency loans to
NWL with principal and 5.2% interest due
September through December 2003 840 --
Other 268 --
------ ------
$2,970 --
====== ======
For each of the five years and beyond, long-term obligations are:
Long-term debt
(in thousands) (Principal Only)
--------------
1998 $ 9
1999 1,462
2000 11
2001 11
2002 12
2003 and beyond 1,465
------
$2,970
======
</TABLE>
11. 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, 1997, the 1984 Stock
Option Plan had options to purchase 458,232 shares of common stock outstanding,
of which 449,898 were exercisable.
The Company has reserved 2,100,000 shares of common stock of which there were
256,738 shares available for issuance pursuant to its 1994 stock option plan as
of December 31, 1997.
F-13
<PAGE> 63
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
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 five years after the date of grant.
There were 120,000 shares available for issuance pursuant to the 1995 Directors'
Stock Option Plan at December 31, 1997.
The following table summarizes activity in the Company's stock option plans
during the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Shares Weighted Average
Outstanding Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
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
Granted 715,600 $ 5.82
Exercised (374,661) $ 4.65
Canceled (274,273) $ 5.73
---------- ------
Balance, December 31, 1997 2,428,397 $ 4.08
========== ======
</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, 1997:
<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 - $2.88 773,843 3.78 $2.01 467,656 $2.00
$3.48 - $4.63 952,548 4.02 $4.18 284,218 $3.96
$4.75 - $7.50 702,006 3.40 $6.24 451,891 $5.83
------------- --------- ---- ----- --------- -----
$2.00 - $7.50 2,428,397 3.76 $4.08 1,203,765 $3.90
============= ========= ==== ===== ========= =====
</TABLE>
1989 Employee Stock Purchase Plan
The Company has reserved 600,000 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, 1997, approximately 496,000 shares had been
purchased under this plan.
F-14
<PAGE> 64
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 earnings 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 5.98%, 6.44% and 5.89% for 1997, 1996 and 1995,
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 1997, 1996 and
1995: 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
5.41%, 5.28% and 6.21% for 1997, 1996 and 1995, respectively. The weighted
average fair value of those purchase rights granted in 1997, 1996 and 1995 were
$1.81, $1.70 and $1.38, 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 loss and net
loss per share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
(in thousands, except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net loss $(2,202) $(2,808) $(3,911)
Pro forma basic and diluted loss per
share $ (0.18) $ (0.30) $ (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-15
<PAGE> 65
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.
12. 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 5% of each employee's base compensation
and were approximately $257,000, $132,000 and $109,000 in the years ended
December 31, 1997, 1996 and 1995, respectively.
13. INCOME TAXES
Significant components of the provision for income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current federal taxes $ 20 $102 $ --
Current state taxes 80 50 --
Current foreign taxes 270 -- --
---- ---- ----
Provision for income taxes $370 $152 $ --
==== ==== ====
</TABLE>
Pretax losses from foreign operations were $362,000 in 1997 and losses of
$145,000, and $1,185,000, in 1996 and 1995, respectively.
Income taxes differ from the amount computed by applying the statutory federal
income tax rate of 35% to income (loss) before taxes. The reasons for the
differences and the tax effect of each are as follows (in thousands):
F-16
<PAGE> 66
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected tax $ (126) $ (539) $(1,243)
Operating loss with no carryback benefit 371 83 1,243
State taxes 80 50 --
Benefit of net operating loss carryforward (86) (432) --
Foreign taxes 107 -- --
Charge for in-process research
and development -- 832 --
Other 24 158 --
------- ------- -------
Provision for income taxes $ 370 $ 152 $ --
======= ======= =======
</TABLE>
The components of the deferred tax asset consisted of the following at December
31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,000 $ 3,200
General business credit carryforwards 1,100 1,100
Inventory reserves and adjustments 2,200 2,500
Other accruals and reserves not
currently deductible for tax purposes 1,200 2,000
Other 600 1,000
------- -------
Total deferred tax assets 9,100 9,800
Valuation for deferred tax assets (7,900) (8,600)
------- -------
Deferred tax asset 1,200 1,200
Deferred tax liabilities
Acquired intangibles (1,200) (1,200)
------- -------
Net deferred tax assets $ -- $ --
======= =======
</TABLE>
Because of the Company's lack of earnings history, the net deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
decreased by $700,000 in 1997 and increased by $700,000 in 1996. Approximately
$550,000 of the valuation allowance is attributed to stock option deductions,
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 $7,800,000,
$350,000, and $350,000, respectively, which expire in the years 1998 through
2011. The Company has net operating loss and research and development credit
carryforwards of $900,000 and $650,000, respectively, for state tax reporting
purposes. The state net operating loss will expire in the years 1998 through
2002. In addition, the Company has foreign tax loss carryforwards of
approximately $3,700,000 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-17
<PAGE> 67
14. 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>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Europe 21% 17% 15%
Pacific Rim 10% 9% 7%
Americas 1% -- --
Middle East 1% -- 1%
-- -- --
Total 33% 26% 23%
</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.
15. 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-18
<PAGE> 68
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, 1995 $540 $200 $250 $490
==== ==== ==== ====
Year ended December 31, 1996 $490 $210 $ -- $700
==== ==== ==== ====
Year ended December 31, 1997 $700 $100 $ -- $800
==== ==== ==== ====
</TABLE>
S-1
<PAGE> 69
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1A Amendment Number One to Acquistion Agreement between Laserscope
adn Heraeus Med GmbH.
10.11A Loan Modification Agreement between the Registrant and Silicon
Valley Bank dated November 26, 1997.
10.11B Loan Modification Agreement between the Registrant and Silicon
Valley Bank dated March 18, 1998.
22.1 Subsidiaries of Registrant, as amended.
23.1 Consent of Ernst & Young, Independent Auditors. (see page 47).
27.1 Financial Data Schedule.
<PAGE> 1
EXHIBIT 2.1A
<PAGE> 2
AMENDMENT NUMBER ONE TO ACQUISITION AGREEMENT
---------------------------------------------
This Amendment Number One (this "Amendment") is made this 23rd day of May,
1997 by and between Laserscope, a California corporation ("Laserscope"), and
Heraeus Med GmbH, a German corporation ("HME"), as an amendment to that certain
agreement dated April 23, 1996 between Laserscope and HME for the acquisition
by Laserscope from HME of all the outstanding shares of Heraeus liabilities
(the "Agreement").
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Laserscope and HME hereby agree as follows
1. Section 5(i) of the Agreement is deleted and replaced with the
following:
"(i) NUMBER OF DIRECTORS: Upon the death, resignation or removal of any
member of the Board, or the declaring by the Board of any vacancy on the Board
pursuant to Section 3.4 of the Laserscope Bylaws, the Board shall promptly
amend Section 3.2 of said Bylaws to set the exact number of directors at seven
(7). For so long as HME owns at least 3,300,000 shares of Laserscope Common
Stock, Laserscope shall use its best efforts to have three nominees of HME
elected to the Board. For as long as HME owns at least 1,600,000 shares of
Laserscope Common Stock, Laserscope shall use its best efforts to have two
nominees of HME elected to the Board. For as long as HME owns at least 600,000
shares of Laserscope Common Stock, Laserscope shall use its best efforts to
have one nominee of HME elected to the Board, and Laserscope shall not, without
the prior consent of HME, increase, or ask its shareholders to increase, the
number of directors beyond eight (8) or, once reduced to seven (7) in
accordance with the first sentence of this Section 5(i), beyond seven (7)."
2. The Agreement shall remain in full force and effect in all other
respects.
3. This Amendment may be signed in one or more counterparts; signature
pages from the facsimile transmission are deemed acceptable.
SIGNATURE PAGE FOLLOWS
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment
as of the date first set forth above,
LASERSCOPE HERAEUS MED GmbH
/s/ Dennis LaLumandiere /s/ Thomas Ihlenfeldt
- ------------------------------ ------------------------------
(Authorized Signature) (Authorized Signature)
/s/ V.P. Finance, C.F.O. Managing Director
- ------------------------------ ------------------------------
(Title) (Title)
<PAGE> 1
EXHIBIT 10.11A
<PAGE> 2
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of November 26, 1997,
by and between Laserscope ("Borrower") whose address is 3052 Orchard Drive, San
Jose, CA 95134 and Silicon Valley Bank ("Bank") whose address is 3003 Tasman
Drive, Santa Clara, CA 95054.
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. Modification(s) to Loan Agreement.
1. The following Definition as set forth in Section 1.1 is hereby amended
as follows:
"Maturity Date" means November 25, 1998.
2. Subsection (a) of Section 2.1 entitled "Advances" is hereby amended to
read, in its entirety as follows:
(a) Subject to and upon the terms and conditions of this Agreement,
Bank agrees to make Advances to Borrower in an aggregate outstanding
amount not to exceed (i) the Committed Line, minus the Credit Card
Sublimit or the Borrowing Base, whichever is
1
<PAGE> 3
less, minus (ii) the face amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit) and minus (iii)
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 during the term of this Agreement.
For purposes of this Agreement, "Borrowing Base" means an amount equal
to (i) Seventy Five Percent (75%) of Eligible Accounts, as determined
by Bank with reference to the most recent Borrowing Base Certificate
delivered by Borrower.
3. Subsection (a) of Section 2.3 entitled "Interest Rates" is hereby
amended to read, in its entirety, as follows:
(a) Interest Rate. Except as set forth in Section 2.3(b), any Advances shall
bear interest, on the Average Daily Balance thereof, at a per annum
rate equal to three-quarters of one (.75) percentage point above the
Prime Rate, effective as of the date hereof.
4. Subsection (b) of Section 2.5 entitled "Letters of Credit" is hereby
amended as follows:
An issuance fee for each Letter of Credit of One and one half (1.50)
percent of the amount of each Letter of Credit shall be due upon the
issuance of such Letter of Credit.
5. Section 6.8 entitled "Quick Ratio" is hereby amended to read, in its
entirety, as follows:
Borrower shall maintain, as of the last day of each of Borrower's
fiscal quarters, a ratio of Quick Assets to Current Liabilities of at
least .80 to 1.00.
6. Section 6.9 entitled "Debt-Net Worth Ratio" is hereby amended to read,
in its entirety, as follows:
2
<PAGE> 4
Borrower shall maintain, as of the last day of each of Borrower's
fiscal quarters, a ratio of Total Liabilities less Subordinated Debt
to Tangible Net Worth plus Subordinated Debt of not more than 1.00 to
1.00.
7. Section 6.10 entitled "Tangible Net Worth" is hereby amended to read,
in its entirety, as follows:
Borrower shall maintain, as of the last day of each of Borrower's
fiscal quarters, a minimum Tangible Net Worth of $24,000,000 plus 75%
of net profits (excluding losses) for the prior quarter, on a
consolidated basis, plus 100% of new equity or Subordinated Debt
received after the date hereof.
8. Section 6.11 entitled "Profitability" is hereby amended to read, in
its entirety, as follows:
Borrower shall have a net profit of One Dollar ($1.00) in each fiscal
quarter.
9. The following Section entitled "Credit Card Sublimit" is hereby
incorporated as 2.1.4 into the Loan Agreement:
Borrower may utilize up to an aggregate amount not to exceed $100,000.00
for cash management services provided by Bank, which services will
include business credit cards for the executives of Borrower as
described in certain cash management service agreements provided to
Borrower from time to time in connection herewith (a "Credit Card
Service", or the "Credit Card Services"). All amounts actually paid by
Bank in respect of a Credit Card Service or Credit Card Services, when
paid, constitute an Advance under the Committed Line.
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 Bank a fee in the amount of Twenty
Thousand Dollars ($20,000.00) (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.
3
<PAGE> 5
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. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.
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/Gary Reagan
------------------------- ---------------------------------
Name: Dennis LaLumandiere Name: Gary Reagan
--------------------------------- -------------------------------
Title:Vice President of Finance and Title:Vice President - Life Sciences
--------------------------------- ------------------------------
Chief Financial Officer and Health Care Practice
--------------------------------- ------------------------------
4
<PAGE> 1
EXHIBIT 10.11B
1
<PAGE> 2
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of March 18, 1998, by
and between Laserscope ("Borrower") whose address is 3052 Orchard Drive, San
Jose, CA 95134 and Silicon Valley Bank ("Bank") whose address is 3003 Tasman
Drive, Santa Clara, CA 95054.
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 and the Profitability covenants as of the quarter
ended December 31, 1997. Bank's waiver of Borrower's compliance of
these covenants shall apply only to the foregoing period.
Accordingly, for the month ending March 31, 1998, Borrower shall be
in compliance with the Tangible Net Worth covenant, as amended
herein, and for the quarter ending March 31, 1998, Borrower shall be
in compliance with the Profitability covenant, as amended herein.
1
<PAGE> 3
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 6.10 entitled "Tangible Net Worth" is hereby amended to
read, in its entirety, as follows:
Borrower shall maintain, as of the last day of each quarter, a
Tangible Net Worth of not less than $21,500,000.00 plus seventy five
percent (75%) of net profits plus one hundred percent (100%) of new
equity.
2. Section 6.11 entitled "Profitability" is hereby amended to read, in
its entirety, as follows:
Borrower shall have a minimum net profit of One Dollar ($1.00) for each
fiscal quarter, provided, however, Borrower may incur a net loss for
the quarter ending March 31, 1998 not to exceed $250,000.00.
3. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
4. 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.
5. 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.
6. 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
2
<PAGE> 4
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.
7. 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.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.
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/Gary Reagan
------------------------------ ---------------------------------
Name: Dennis LaLumandiere Name: Gary Reagan
----------------------------- -------------------------------
Title: Vice President of Finance and Title:Vice President - Life Sciences
Chief Financial Officer and Health Care Practice
3
<PAGE> 1
EXHIBIT 22.1
1
<PAGE> 2
Exhibit 22.1
Subsidiaries Of The Registrant
Lasercare, a California Corporation
Laserscope (UK) Ltd.
Laserscope France S.A.
NWL Laser-Technologie GmbH
1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,465
<SECURITIES> 0
<RECEIVABLES> 14,760
<ALLOWANCES> 800
<INVENTORY> 18,656
<CURRENT-ASSETS> 36,098
<PP&E> 15,583
<DEPRECIATION> 10,400
<TOTAL-ASSETS> 47,306
<CURRENT-LIABILITIES> 15,785
<BONDS> 0
0
0
<COMMON> 50,939
<OTHER-SE> (22,822)
<TOTAL-LIABILITY-AND-EQUITY> 47,306
<SALES> 61,349
<TOTAL-REVENUES> 61,349
<CGS> 36,279
<TOTAL-COSTS> 36,279
<OTHER-EXPENSES> 25,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (210)
<INCOME-PRETAX> (359)
<INCOME-TAX> 370
<INCOME-CONTINUING> (843)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (843)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
