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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, 1998, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ___ to ___.
Commission file number: 0-18053
LASERSCOPE
(Exact name of Registrant as Specified in its Charter)
California 77-0049527
(State 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
(Title of Class)
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 Registrant's voting and non-voting common
equity held by non-affiliates of the Registrant was approximately $17,000,000 as
of March 15, 1999, 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 12,545,977 shares of Registrant's Common Stock issued and outstanding
as of March 15, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates information by
reference from the definitive proxy statement for the Annual Meeting of
Shareholders to be held on June 11,1999.
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 U.S. Food and Drug
Administration ("FDA") 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 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.
Laserscope intends to continue expansion of its operations outside of the United
States and to enter additional international markets. Such expansion efforts
will require significant management attention and financial resources, and
further subject the Company to the risks of operating internationally. The risks
associated with international operations include, but are not limited to,
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 seven percent of the Company's revenues were
attributable to sales in Asia during the year ended December 31, 1998, the
current economic instability in certain Asian countries could adversely affect
Laserscope'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
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trade relationships. Laserscope cannot predict whether quotas, duties, taxes or
other charges or restrictions will be imposed by the United States, Japan,
countries in the European Union or other countries upon the import or export of
the Company's products in the future, or what effect any such actions would have
on its business, financial condition or results of operations. In addition,
fluctuations in currency exchange rates may compromise Laserscope's ability to
compete in terms of price against products denominated in local currencies.
Also, there can be no assurance that regulatory, geopolitical and other factors
will not adversely affect Laserscope'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 nine months,
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 any noncompliance. Any year
2000 compliance problem encountered by Laserscope, its suppliers, its service
providers or its customers could have 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.
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 registered trademarks of Laserscope 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 common law trademarks and service marks of Laserscope 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.
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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
fiber-optic devices for a wide variety of applications, including photodynamic
therapy to treat cancer and other diseases. Laserscope's portfolio consists of
more than 350 products, including KTP/532(R), CO2, Nd:YAG, Er:YAG, Ruby, Diode
and Dye medical laser systems, industrial laser systems and related energy
delivery devices.
Primary medical markets served by Laserscope include dermatology, aesthetic
surgery, urology, gynecology, ear, nose and throat surgery and photodynamic
therapy. Secondary markets include general surgery, neurosurgery, orthopedics,
gastroenterology and 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 products are used in several surgical applications. Since the early
1990's, the ear, nose and throat (ENT), urology and gynecology (OB/GYN)
specialties have continued to represent the primary markets into which
Laserscope sells its broad range of laser systems and the majority of its energy
delivery devices and surgical instruments. As a percentage of total revenues in
1998, the ENT, urology and OB/GYN markets accounted for approximately 19%, 8%
and 10% of revenues, respectively.
Laserscope entered the dermatology/aesthetic surgery market in the mid 1990's
with several, highly-versatile laser systems. Laserscope's desktop-sized
Aura(TM) Laser System is among the industry's leading systems for the treatment
of leg and facial
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veins. The Aura SL(TM) is specifically designed for the treatment of facial
veins. The Venus is 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 1998, the
dermatology/aesthetic surgery market accounted for approximately 29% of
revenues.
The Company believes photodynamic therapy (PDT), a selective cancer treatment,
has long-term potential applications for its products. In this modality, a
photosensitizer drug is injected into a cancer patient intravenously. After a
short time, the drug selectively concentrates in abnormal 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
fiber-optic device, activates the drug and creates a toxic form of oxygen that
destroys the cancerous cells with minimal damage to healthy cells.
The non-surgical, minimally-invasive approach of PDT allows the treating
physician to be much more precise in destroying cancer cells at the tumor site.
Both the photosensitizer drug injection and the laser treatment can be
performed, in many cases, on an outpatient basis. In December 1998, Laserscope
received approval from the FDA for its PDT Laser Systems and the photosensitizer
PHOTOFRIN(R), manufactured by QLT PhotoTherapeutics, Inc., as a treatment for
certain types of late-stage lung cancer. In January 1998, the FDA approved the
same laser-drug combination for the treatment of early-stage lung cancer. These
approvals followed 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.
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.
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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 includes ENT, OB/GYN, urology,
general surgery, neurosurgery, orthopedics, spine surgery, aesthetic surgery and
dermatology. Both the Aura and Orion systems are available with SmartScan, 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 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 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, OB/GYN, 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, and 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.
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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. When used in contact with body tissue, they provide
tactile feedback similar to conventional surgery.
Sales and Marketing
The Company concentrates much of its marketing efforts for its laser products on
high volume surgical procedures such as the treatment of facial vascular
lesions, the treatment of leg veins and hair removal. Laserscope believes that
increased market 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.
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 hands-on experience using the Company's products.
Distribution
In the United States, the United Kingdom 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. Elsewhere, Laserscope products are sold through
regional distributor networks. As of December 31, 1998, 36 distributors serve 61
countries throughout Europe, the Middle East, Latin America, Asia and the
Pacific Rim. Laserscope is both ISO 9001 and CE certified.
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International Business
Revenues from Europe, Asia and the Pacific Rim continue to account for an
increasing percentage of total sales. Approximately 42% of Laserscope's 1998
revenues were derived from its international operations including export sales,
up from 33% in 1997 and 26% in 1996. The Company expects that international
sales will continue to represent a significant percentage of net sales in 1999.
In March 1995, the Company entered into an agreement with NWL Laser-Technologie
("NWL") whereby the Company paid NWL's shareholders 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, Laserscope exercised its option and paid an additional
$1.0 million to increase its equity position to a 52% interest in NWL. In
January 1999, the Company paid approximately $0.8 million cash and agreed to pay
$0.5 million on April 15, 1999 to acquire an additional 27% interest in NWL
bringing its ownership interest to 79%. The approximate purchase price
allocation for the transaction is $1.1 million for intangible assets and $0.2
million for additional interest in tangible assets. Laserscope expects to pay an
additional $1.0 million in January 2001 for the remaining interest in NWL.
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 expiration of the warranty period, maintenance and
support is provided on a variety of service contract bases or on an individual
call basis at the election of the customer. 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. Laserscope's ability to remain competitive in its industry depends on,
among other things, its ability to anticipate and react to such technological
changes. Therefore, the Company intends to continue to invest significant
amounts in research and development.
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Laserscope's current research and development programs are directed toward the
development of new laser systems and delivery devices. For example, new laser
systems for the emerging PDT market and other applications are currently in
development. However, there can be no assurance that the PDT market will develop
as anticipated or that Laserscope's product development efforts 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, system chassis and certain
accessories used in its laser systems in the United States. 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 1999. NWL also manufactures certain laser products at its
facility in Germany.
In addition to its laser manufacturing capability, the Company has a production
facility in the United States for certain of its disposable products. The
Company's Endostat fibers and Angled Delivery Devices are manufactured in this
facility
Certain of the components used in the Company's products, including potassium
titanyl phosphate (KTP) 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 which is 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, 1998, the Company had 248 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.
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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
medical equipment 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 medical equipment 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 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 $10.0 million in the aggregate with a deductible of $0.1
million per occurrence and an annual maximum aggregate deductible of $0.5
million. 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,
particularly on a quarterly basis. One such factor is the 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
affect 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
Laserscope 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
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quarter, Laserscope'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 Laserscope's common stock may be subject to significant
fluctuations. These fluctuations may be due to factors specific to Laserscope,
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.
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. Laserscope
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, Laserscope entered into a worldwide, license agreement with PDT,
Inc. ("PDTI") (now named Miravant) for licenses to PDTI's dye laser technology.
Under the terms of the agreement, Laserscope acquired a fully paid up license to
manufacture products using PDTI's dye laser technology while 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 technology for use in photodynamic therapy with PDTI
photodynamic drugs.
Government Regulation
Government regulation in the United States 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.
Laserscope 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.
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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.
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,
Laserscope achieved ISO 9001 and CE (European Conformation) Mark registration in
anticipation of this change.
Laserscope 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, Laserscope's laser products are covered by a performance standard
for laser products set forth in FDA regulations. The laser performance standard
imposes
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certain specific record keeping, reporting, product testing and product
labeling requirements on the Company. These requirements also include affixing
warning labels to Laserscope's laser systems and 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 Laserscope's products.
Furthermore, the Company cannot predict the extent or effect of future
legislation or regulations on its business.
Laserscope is also subject to regulation under federal and state laws regarding,
among other things, occupational safety, the use and handling of hazardous
materials and the protection of the environment. The Company believes that it is
in material compliance with these requirements.
Acquisitions and Dispositions
On August 30, 1996, Laserscope consummated the acquisition of Heraeus Surgical,
Inc. ("HSI"), a Delaware Corporation and wholly owned subsidiary of Heraeus Med
GmbH ("Heraeus Med"), 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 to 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"). 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 balance of the shares was sold by Heraeus Med
in a private placement in May 1998.
In March 1995, the Company entered into an agreement with NWL Laser-Technologie
("NWL") whereby the Company paid NWL's shareholders 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, Laserscope exercised its option and paid an additional
$1.0 million to increase its equity position to a 52% interest in NWL. In
January 1999, the Company paid approximately $0.8 million cash and agreed to pay
$0.5 million on April 15, 1999 to acquire an additional 27% interest in NWL
bringing its ownership interest to 79%. The approximate purchase price
allocation for the transaction is $1.1 million for intangible assets and $0.2
million for additional interest in tangible assets. Laserscope expects to pay an
additional $1.0 million in January 2001 for the remaining interest in NWL.
During November 1998, Laserscope and Heraeus Medical, Inc. (HMI) (a division of
Heraeus Med) concluded the sale by the Company of certain assets and liabilities
related to Laserscope's AMS product line. The AMS product line was originally
purchased by Laserscope in the acquisition of HSI. The Company received $0.8
million from HMI, and rights to $0.1 million that remains in escrow until
November 1999, in exchange for such assets and liabilities.
13
<PAGE> 14
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, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- -----------------------------------------------
<S> <C> <C>
Robert J. Pressley, Ph.D. 66 Chairman of the Board
Robert V. McCormick 54 President, Chief Executive Officer and Director
Thomas B. Boyd 52 Senior Vice President of International
John Allison 42 Vice President of Operations and International
Kevin Candio 45 Vice President of Sales and Service
Dennis LaLumandiere 45 Vice President of Finance, Chief Financial
Officer and Assistant Secretary
Eric M. Reuter 37 Vice President of Research and Development
Susan Webster 53 Vice President of Marketing
</TABLE>
Robert J. Pressley, Ph.D. is a co-founder of the Company and has been a director
since its founding. Dr. Pressley was appointed Chairman of the Board of
Directors in June 1998. Dr. Pressley co-founded Candescent Technologies
Corporation (formerly named Silicon Video Corporation), 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. Dr. Pressley has been a
self-employed technology consultant since January 1995.
Robert V. McCormick has been President of the Company since December 1991 and
Chief Executive Officer since July 1992. From December 1991 to July 1992, Mr.
McCormick 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 served as Senior Vice President of Operations and Finance from
April 1994 to September 1996 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 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.
14
<PAGE> 15
John Allison has served as Vice President of Operations since June 1998. Prior
to joining Laserscope, from January 1998 to June 1998, Mr. Allison was a
self-employed consultant in the field of quality assurance. From March 1996 to
January 1998 Mr. Allison served as Vice President of Quality Assurance and
Regulatory Compliance of Ventritex, an implantable defibrillator company. From
1992 to March 1996, Mr. Allison served as Senior Director of Quality Assurance
and Regulatory Compliance for Nellcor Puritan Bennett, a respiratory products
company. Prior to joining Nellcor Puritan Bennett, from 1989 to 1992, Mr.
Allison was a Managing Consultant for the Manufacturing Consulting division of
Coopers & Lybrand, an accounting firm.
Kevin Candio joined Laserscope in November 1988 as Eastern Zone Sales Manager
and has served as Vice President of Sales and Service since November 1997. Prior
to joining Laserscope, he held various sales and sales management positions at
Coopervision Surgical Systems, a medical device company, from August 1983 to
November 1988.
Dennis LaLumandiere joined Laserscope in September 1989 as Corporate Controller.
Mr. LaLumandiere has served as Vice President of Finance since February 1995,
Chief Financial Officer since February 1996 and Assistant Secretary since
November 1996. Prior to joining Laserscope, from 1983 to 1989, Mr. LaLumandiere
held various financial and operations management positions at Raychem
Corporation, a multinational materials science company.
Eric M. Reuter has served as Vice President of Research and Development since
September 1996. Prior to joining the Company, from February 1994 to August 1996,
Mr. Reuter was employed at the Stanford Linear Accelerator Center at Stanford
University (SLAC) as the Project Engineer for the B-Factory High Energy Ring, an
electron storage ring used for high energy physics research. From February 1991
to January 1994, he served 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 SLAC.
Susan Webster has served as Vice President of Marketing since June 1998. Prior
to joining the Company, from May 1994 though June 1998, Ms. Webster successively
served as Senior Marketing Manager and Director of Marketing at Dade Behring, an
international medical diagnostics company. From May 1993 through April 1994, Ms.
Webster served as Marketing Manager with Kollsman Medical Corporation, a medical
device engineering and manufacturing company. From January 1987 through April
1993, Ms. Webster held various sales and marketing positions with Boehringer
Mannheim, an international medical diagnostics corporation. Ms. Webster is a
licensed Medical Technologist, and held a variety of clinical laboratory
positions prior to joining Boehringer Mannheim.
15
<PAGE> 16
ITEM 2. PROPERTIES
Laserscope 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,
Laserscope 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 through the end of 1999.
The Company also leases offices in the United Kingdom and France where the
Company's local sales and marketing staffs are based. NWL's facilities consist
of a leased office and a 35,000 square foot 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 proceedings 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 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.
16
<PAGE> 17
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, 1999, 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, 1998 and December 31, 1997 as reported by the Nasdaq
National Market System:
<TABLE>
<CAPTION>
1998
----------------------------------
High Bid Low Bid
-------- -------
<S> <C> <C>
First Quarter $ 5 3/8 $ 2 7/16
Second Quarter $ 3 3/8 $ 2 1/16
Third Quarter $ 2 3/8 $ 1 1/16
Fourth Quarter $ 2 5/32 $ 15/16
</TABLE>
<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>
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 consent.
17
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
1998(1)(2) 1997(3)(4) 1996(5) 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues $52,728 $61,349 $42,844 $30,133 $36,320
Net loss (9,796) (843) (1,692) (3,552) (931)
Basic & diluted net
loss per share(6) (0.79) (0.07) (0.18) (0.51) (0.13)
</TABLE>
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
<TABLE>
<CAPTION>
1998(1)(2) 1997(3)(4) 1996(5) 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents &
short-term investments $ 1,456 $ 2,465 $ 3,917 $ 2,278 $ 6,602
Working capital 13,722 20,313 18,444 12,564 16,825
Total assets 36,593 47,306 44,469 23,582 27,321
Capital leases (excluding
current portion) 1,012 274 202 15 27
Other long term debt 1,693 2,970 -- -- --
Shareholders' equity 18,671 28,117 27,175 17,326 20,901
</TABLE>
CONSOLIDATED QUARTERLY STATEMENT OF OPERATIONS DATA (UNAUDITED):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------
MAR. 31, JUN. 30,(3) SEP. 30,(5) DEC. 31,(1)(2)(4)
---------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
1998
- ----
Net revenues $13,591 $13,133 $12,779 $13,225
Gross Margin 6,570 5,512 5,803 3,271
Net loss (230) (1,977) (737) (6,852)
Basic and diluted net loss per share (0.02) (0.16) (0.06) (0.55)
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 & diluted net income (loss) per share(6) 0.07 0.06 0.07 (0.27)
</TABLE>
(1) The Company sold assets & liabilities related to its AMS product line on
November 9, 1998 at a loss of $1.1 million.
(2) The Company recorded $2.1 million inventory provision in the quarter ended
December 31, 1998.
(3) The Company closed the acquisition of a 52% equity ownership of NWL
Laser-Technologie GmbH on June 13, 1997.
(4) The Company recorded $3.0 million inventory provision in the quarter ended
December 31, 1997.
(5) The Company closed the acquisition of Heraeus Surgical, Inc. on August 30,
1996.
(6) The net income (loss) per share amounts prior to December 1997 have been
restated to comply with Statement of Accounting Standard Number 128, Earnings
Per Share. (See Note 1 in Notes to the Consolidated Financial Statements)
18
<PAGE> 19
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 Laserscope's consolidated
statement of operations, expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of sales 59.9 59.1 51.1
-------- -------- --------
Gross margin 40.1 40.9 48.9
Operating expenses:
Research and development 9.9 5.5 6.0
Purchased in-process research & development -- -- 5.5
Selling, general and administrative 41.1 36.3 39.1
Other non-recurring charges related to
the acquisition of Heraeus Surgical, Inc. -- -- 2.0
Impairment of intangible assets 3.6 -- --
-------- -------- --------
54.6 41.8 52.6
Operating loss (14.5) (.9) (3.7)
Interest income (expense) and other, net (1.3) .3 .1
Loss on sale of AMS (2.1) -- --
-------- -------- --------
Loss before income taxes and minority interest (17.9) (.6) (3.6)
Provision for income taxes .4 .6 .4
-------- --------
Loss before minority interest (18.3) (1.2) (4.0)
Minority interest .3 .2 --
-------- -------- --------
Net loss (18.6)% (1.4)% (4.0)%
======== ======== ========
</TABLE>
Laserscope sells its products to hospitals, outpatient surgery centers, pay per
use providers and individual physicians in the United States, Europe, the Middle
East, Latin America and the Pacific Rim. The Company's sales in the United
States are made through its own direct sales force. The Company's export sales
are generated by its wholly and majority owned subsidiaries throughout the
United Kingdom, France and Germany and by independent distributors in the rest
of the world. Through December 31, 1998, sales outside of the United States have
been denominated in the local currencies of the United Kingdom, France and
Germany, and in U.S. dollars for the rest of the world.
19
<PAGE> 20
During 1998,1997 and 1996 the results of operations reported by Laserscope were
not materially affected by fluctuations in foreign currencies. However, the
Company is exposed to risk in a number of areas. Although over 71% of its
revenues were denominated in U.S. dollars in 1998 and over 81% of its revenues
were denominated in U.S. dollars in 1997, market risk exists in foreign
countries where the Company sells in U.S. dollars, and where a major
strengthening of the U.S. dollar could have a material negative impact on its
business. In addition, the recent introduction of the Euro as a currency in
several European countries could negatively affect Laserscope's ability to sell
its products in exchange for U.S. dollars in those countries. In January 1999,
the Company's subsidiary in France began to denominate its sales and report its
financial statements in the Euro, while the other subsidiaries have not yet
adopted a such practice. Any major strengthening of the U.S. dollar against the
Euro, the British Pound Sterling or the German Mark could have a material
adverse effect on the Company's business. Finally, the Company currently sources
the majority of material for its manufacturing production in the country of
manufacture, and therefore has insignificant foreign exchange risk relative to
the settlement of liabilities.
1998 RESULTS COMPARED TO 1997.
During 1998, Laserscope's revenues decreased approximately $8.6 million, or 14%,
from 1997. Almost half of the decrease was due to a decline in revenues from
sales of AMS products. These revenues accounted for approximately $5.2 million
of all revenues in 1998, compared to approximately $9.2 million in 1997.
Laserscope discontinued the sales of these products in November 1998 and sold
the assets and liabilities related to the product line to Heraeus Medical, Inc.
at that time. In addition, the Company experienced declines in revenues from the
sales of disposables and instrumentation, and services, which were approximately
$12.1 million and $6.7 million, respectively, in 1998, compared to $14.7 million
and $8.1 million, respectively, in 1997.
During 1998, Laserscope's revenues from the sales of laser equipment decreased
2% and were $28.8 million, or 55%, of total net revenues, compared to $29.4
million, or 48%, of total net revenues in 1997. Increases in revenues from sales
of laser equipment were due to a complete year of sales from NWL, which
contributed approximately $7.8 million of such revenues in 1998, compared to
approximately $4.8 million from June through December 1997. Offsetting the
increases contributed by NWL were reduced shipment levels in the United States
and Pacific Rim, and higher shipment levels in Europe. Overall, unit sales in
1998 were at approximately the same level as in 1997, with lower average unit
prices contributing to the 2% decline in revenue. The Company believes that
continuing cost control measures by its hospital customers in the United States,
as well as strong competition in the Unites States private physician office
markets, continues to negatively affect laser sales in United States. Laserscope
also believes that the negative economic conditions in the Pacific Rim region
have also affected its ability to increase sales in this region. Consequently,
the Company expects that its revenue mix trends in the U.S. market will continue
to shift toward lower-priced office lasers, that economic conditions in the
Pacific Rim
20
<PAGE> 21
region will continue to negatively affect Laserscope's revenues and that growth
in revenues from the sales of laser equipment, if any, will be derived from
continued growth in the European region.
Laserscope's net revenues from shipments of disposable supplies and
instrumentation were 17% lower in 1998 than 1997, and were approximately $12.1
million, or 23%, of total revenues in 1998, compared to approximately $14.7
million, or 24%, in 1997. The decrease is principally attributable to reduced
shipments of disposable fiber-optic devices for hospital surgical procedures in
the United States and the Pacific Rim. The Company believes that trends in sales
of laser equipment in the United States, which have trended towards lower-priced
office lasers for aesthetic procedures and away from lasers to be used in the
hospital for non-aesthetic procedures, has resulted in lower sales of disposable
supplies and instrumentation. Office lasers used in aesthetic procedures,
although often times carrying accompanying one-time sales of instrumentation,
generally do not create a stream of sales of disposable supplies. 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 1998 were 18% lower than 1997. These
revenues were $6.6 million, or 12%, of total net revenues in 1998, compared to
$8.1 million, or 13%, of total net revenues in 1997. The decrease is principally
attributable to lower domestic revenues as a result of reduced service contract
revenues from hospitals. Laserscope believes that future revenues depend on
increases to the installed base of lasers as well as the acceptance of its
service contracts by its customers.
The Company believes that acceptance of lasers in aesthetic surgery,
dermatology, urology and ear, nose and throat surgery will continue to be
important to its business. In addition, the Company expects that the adoption of
photodynamic therapy by medical practitioners will be important. The Company
continues to invest in developing new instrumentation for emerging surgical
applications and in educating surgeons in the United States and internationally
to encourage the adoption of such new applications. Penetration of the
international market is generally increasing, and the Company continues to view
expansion of international sales as important to the Company's success. During
1998, international revenues accounted for 42% of total net revenues, compared
to 33% of total net revenues during 1997.
Laserscope's product gross margin as a percentage of net revenues in 1998 was
45%, compared to 44% in 1997. These percentages reflect $2.1 million in charges
recorded to provide for inventory related to discontinued product lines in 1998,
and $3.0 million in charges during 1997 to provide for inventory that the
Company considered to be potentially excessive. These charges reduced
Laserscope's product gross margin as a percentage of net revenues by 5
percentage points in each of 1998 and 1997. The
21
<PAGE> 22
increase in gross margin (without respect to the inventory provisions) is due a
product mix shift away from AMS products and towards laser products. Since its
acquisition of HSI, Laserscope acted as a distributor for the majority of the
AMS products. These products were manufactured by other companies. Revenues from
sales of the AMS products generally generated lower gross margins than products
manufactured by the Company. Laserscope expects that product gross margin as a
percentage of net revenues will be higher in 1999 than in 1998, because the
Company no longer distributes AMS products. However, the Company expects that
these amounts may vary from quarter to quarter during 1999 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 service revenues was 6%
in 1998, compared to 23% in 1997. The decrease reflects a further decline in
service revenues without a corresponding reduction to the fixed cost structure,
together with inefficiencies in performing service activities supporting the
Company's AMS products. Although Laserscope expects similar revenue levels in
1999, the Company implemented cost reduction measures during late 1998 and is no
longer servicing AMS products. As a result of these factors, the Company expects
that gross margin as a percentage of net revenues from service activities will
be higher in 1999 than in 1998.
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 1998, amounts spent on
research and development increased 54% from amounts spent in 1997. The growth
was due to increased laser product development activity in the United States,
and, to a lesser extent, a full year of NWL's research and development expenses
in 1998 compared to six months in 1997. The Company expects that amounts spent
in research and development during 1999 will, as a percentage of net revenues,
be approximately equal to that which was spent in 1998.
Selling, general and administrative expenses decreased 3% in 1998, but increased
as a percentage of net revenues due to decreased revenues. The decrease
primarily results from the discontinuance of the AMS product line after the sale
of related assets and liabilities in November 1998. The Company expects selling,
general and administrative expenses to remain at similar levels during 1999 as
the Company continues to invest in international expansion, marketing programs
and educational support.
During 1998, the Company recognized an impairment loss on certain intangible
assets acquired in the acquisition of Heraeus Surgical, Inc, ("HSI"). The
intangible assets relate to certain laser product lines that Laserscope
discontinued as of December 31, 1998 or intends to discontinue in early 1999.
The Company determined this action in late 1998 as part of a redirection in
emphasis towards higher volume product lines. The Company expects that the
undiscounted future cash flows for these product lines would be significantly
less than the carrying value of the intangible assets relating to these
22
<PAGE> 23
product lines. Accordingly, Laserscope recorded an impairment charge of $1.9
million in 1998 to adjust the assets to their estimated fair value.
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 a $0.9 million charge to write
off certain assets which became redundant as a result of the acquisition.
The in-process research and development charge recognized by the Company in 1996
relates principally to three projects that were in process at HSI at the
acquisition date. Two of the projects related to laser development and one to a
disposable device. During 1997, Laserscope spent approximately $0.4 million
relating to the first laser project and approximately $0.1 million in 1998.
During 1998, the Company concluded that the potential market for the product had
declined from original expectations and therefore the product was no longer
commercially viable. Laserscope does not intend to invest additional resources
to complete this product. During 1997 and 1998, the Company did not invest
further in the second laser product due to conflicting resource priorities
during this period. The Company does intend to invest further in this project in
late 1999 or early 2000 and expects that the project will require approximately
$1.0 to $1.5 million to commercialize the product in 2000. The impact on the
Company if it does not commercialize the product will depend on the market
demand for such products at the time of completion. The final project related to
a disposable device that Laserscope invested approximately $0.1 million in 1997
and $0.1 million in 1998 to commercialize. After clinical research, the Company
concluded in 1998 that the product could not compete effectively with
alternative products that competitors had commercialized, and consequently
decided not to further pursue the product.
The assets related to the $0.9 million charge were principally computer software
and inventory that Laserscope abandoned since the acquisition.
During 1998, the Company concluded the sale of certain assets and liabilities
related to the AMS product line to Heraeus Medical, Inc. (a division of Heraeus
Med GmbH). Laserscope purchased the product line in the acquisition of HSI and
revenues from sales of products in this line decreased in 1997 and 1998. Due to
these declines and a desire to redirect Laserscope's resources towards laser
products, the management of the Company sold the assets and liabilities related
to the product line in November 1998. Laserscope received $0.8 million, and
rights to $0.1 million that remains in escrow until November 1999, in exchange
for certain assets and liabilities relating to the product line. The result of
the transaction was a loss to the Company of $1.1 million.
In 1998 and 1997, Laserscope recorded $184,000 and $370,000, respectively, in
income tax provisions primarily attributable to the profits of NWL as well as
other foreign income and withholding taxes, and federal and state minimum taxes.
23
<PAGE> 24
Minority interest in 1998 and 1997 resulted from the minority ownership
participation in NWL's net income.
Laserscope has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed in the Notes to
the Financial Statements, 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 in the financial statements. The pro forma
effect on Laserscope's results of operations caused by measuring stock option
compensation at fair value would have resulted in charges to earnings of $1.4
million, $1.4 million and $1.1 million, in 1998, 1997 and 1996, respectively.
The Company anticipates that pro forma charges to earnings in 1999 will be
comparable to 1998 since it expects to continue to grant stock options at levels
comparable to prior years, and most of its option grants have an expected life
of 4 years with the pro forma effect of each grant amortized over the expected
life.
1997 RESULTS COMPARED TO 1996.
During 1997, the Company's revenues increased by 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 product and services 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. The NWL acquisition accounted for 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'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 during 1997.
24
<PAGE> 25
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 to total net revenues was principally due to the
increased capital equipment shipments in 1997.
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 acted as a distributor of certain product
lines that were manufactured by other companies. Revenues from sales of these
products generally generated lower gross margins than products manufactured by
the Company.
Gross margin from service activities as a percentage of net service revenues was
23% in 1997, compared to 34% in 1996. The decline reflected 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.
Research and development expenses resulted from 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.
Selling, general and administrative expenses increased 33% in 1997. The increase
primarily results from new personnel hired by the Company in connection with the
HSI and NWL acquisitions.
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 a $0.9 million charge to write
off certain assets which became redundant because of the acquisition.
25
<PAGE> 26
During 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.
FINANCIAL REVIEW - LIQUIDITY AND CAPITAL RESOURCES
Total assets and liabilities as of December 31, 1998 were $36.6 million and
$17.9 million, respectively, compared to assets and liabilities of $47.3 million
and $19.1 million, respectively, at December 31, 1997. Working capital decreased
$6.6 million from $20.3 million at December 31, 1998 to $13.7 million at
December 31, 1997. Cash and cash equivalents decreased $1.0 million from $2.5
million at December 31, 1997 to $1.5 million at December 31, 1998. The decrease
to working capital was primarily the result of the net loss for the year.
Cash used by operating activities was the combined result of a net loss of $9.8
million, reductions in deferred revenue and warranty of $0.5 million and $0.2
million, respectively, and an increase to other assets of $0.3 million. These
uses were offset partially by non-cash inventory charges of $2.1 million,
non-cash asset impairment charges of $1.9 million, depreciation of $1.9 million,
the loss on the sale of AMS related assets and liabilities of $1.1 million and
amortization of $1.0 million. In addition, the uses were also offset partially
by the following reductions and increases (each before non-cash charges and
without giving effect to the sale of AMS related assets and liabilities): (i)
reductions in accounts receivable, inventories and other current assets of $0.4
million, $0.5 million and $0.3 million, respectively; and (ii) increases in
accounts payable, other accrued liabilities and minority interest of $0.8
million, $0.6 million and $0.2 million, respectively.
Cash used by investing activities primarily consisted of capital expenditures of
$1.0 million offset by $0.8 million in cash proceeds received in the sale of AMS
related assets and liabilities.
Cash used by financing activities primarily consisted of $0.8 million net
reduction in bank borrowings and $0.2 million in payments on capital leases,
offset by $0.3 million from sales of stock under the Company's stock plans.
The Company has in place a $5.0 million revolving bank line of credit that
expires in November 1999. At December 31, 1998, the collateral provisions of the
line allowed for approximately $2.7 million in borrowings and $2.5 million in
borrowings were outstanding. The loss the Company reported for the quarter ended
December 31,
26
<PAGE> 27
1998, breached the profitability and minimum net worth covenants of the loan
agreement. However, in March 1999, the bank waived these violations. In
addition, NWL has in place various revolving bank lines totaling approximately
$2.1 million that expire in 1999 and under which $1.0 million in borrowings were
outstanding at December 31, 1998.
Laserscope anticipates that future changes in cash and working capital will
depend on a number of factors, including, but not limited to, management's
ability to effectively manage non-cash assets such as inventory and accounts
receivable. At December 31, 1998, the Company's inventories consisted of $14.1
million, comprised of $9.4 million of sub-assemblies and purchased parts and
$4.7 million of finished goods. Although this represents a 25% decrease from
inventories at December 31, 1997, which consisted of $18.7 million, comprised of
$13.1 million of sub-assemblies and purchased parts and $5.6 million of finished
goods, the majority of the decrease resulted from inventory write downs of $2.1
million and a $2.0 million reduction resulting from the sale of AMS related
assets and liabilities. The Company competes in a competitive industry where
technological changes and acceptance of new and alternative procedures by its
customers is rapid. Management's ability to anticipate and adapt to these
changes will significantly affect the Company's investment in inventory and the
potential for inventory valuation adjustments. Historically, a source of
liquidity for the Company has been the sale of common stock under stock plans,
principally employee stock option and stock purchase plans. To the extent that
the market price of the common stock discourages the exercise of stock options,
this source of liquidity may be unavailable. At December 31, 1998, options to
purchase approximately 2.6 million shares of Laserscope's common stock were
outstanding, of which 1.4 million were exercisable at a weighted average
exercise price of $2.68. Finally, the level of profitability of the Company will
have a significant effect on cash resources.
Under the terms of the NWL purchase agreement, Laserscope purchased an
additional 27% ownership interest in NWL in January 1999 for $1.3 million
consisting of approximately $0.8 million in cash with the remainder to be paid
in April 1999. From time to time, Laserscope may also consider the acquisition
of, or evaluate investments in, other products and businesses complementary to
the Company's business. Any such acquisition or investment may require
additional capital resources. Laserscope has historically financed acquisitions
using its existing cash resources. Although Laserscope believes its remaining
cash resources, including existing bank lines of credit, will be sufficient to
fund its operating needs for the next twelve months, additional financing 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
As described earlier, the year 2000 computer issue creates a risk for
Laserscope. If internal systems do not correctly recognize date information when
the year changes to
27
<PAGE> 28
2000, there could be a material adverse impact on the Company's operations. The
risk for the Company exists in four areas: (i) Information systems and equipment
used by Laserscope to operate its business; (ii) systems used by the Company's
suppliers; (iii) the products sold by the Company; and (iv) the potential for
reduced spending by customers for Laserscope's products and services as a result
of significant spending on year 2000 issues and related adverse effects of such
issues on the customer's business. The Company is currently evaluating its
exposure in all of these areas.
Laserscope has completed its evaluation of its internal information systems and
equipment and has projects underway to upgrade systems and equipment that are
already known to the Company to be year 2000 non-compliant. The Company expects
to have substantially completed these projects by May 1999. At this time, the
Company has not determined a most reasonably likely worst case scenario if its
year 2000 compliance efforts are unsuccessful with respect to its internal
systems. The Company has not developed contingency plans if upgrade or
replacement of non-compliant systems is not feasible. The Company will consider
the need for such contingency plans upon completion of its upgrade projects in
May 1999. For the year 2000 non-compliance issues identified to date, the cost
of upgrade or replacement has been less than $0.1 million through December 31,
1998. Laserscope expects to spend an additional $0.1 million through December
31, 1999 for system and equipment upgrades and replacements which it expects to
capitalize. The Company does not expect that the cost of year 2000-related
upgrades or replacements will materially affect the Company's operating results.
The Company intends to fund such compliance efforts through working capital
generated by operations. If implementation of replacement systems is delayed, or
if significant new non-compliance issues are identified, the Company's results
of operations or financial condition could be adversely affected. However,
Laserscope believes that it will be able to complete its year 2000 compliance
review and make any necessary system modifications prior to any adverse
consequences.
Laserscope has also contacted its critical suppliers to determine whether such
suppliers' operations and the products and services they provide to the Company
are year 2000 compliant, and is currently in the process of evaluating
responses. The Company expects to complete this process by June 1999 for all
critical suppliers. Where practical, the Company will attempt to mitigate its
risks with respect to the failure of suppliers to be year 2000 ready. In the
event that suppliers are not year 2000 compliant, the Company may need to seek
alternative sources of supplies. Any such failures by critical suppliers could
have a material adverse effect on the Company's results of operations or
financial condition.
The Company believes that the majority of the products it sells are year 2000
compliant; however, because all customer situations cannot be anticipated, the
Company may see an increase in warranty and other claims as a result of the year
2000 transition. While litigation regarding year 2000 compliance issues is
expected to escalate, the Company
28
<PAGE> 29
does not believe that the impact of customer claims would materially affect the
Company's results of operations or financial condition.
Year 2000 compliance is an issue for virtually all businesses whose systems and
applications may require significant hardware and software upgrades or
modifications. Companies owning and operating such systems may plan to devote a
substantial portion of their information systems' spending to fund such upgrades
and modifications and divert spending away from the purchase of the Company's
products and services. Such changes in customers' spending patterns could have
an adverse effect on the Company's sales, but the effect on operating results
and financial condition is not known at this time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments, outstanding debt balances and
foreign currency fluctuations. In the normal course of business, the Company
employs established policies and procedures to manage its exposure to
fluctuations in interest rates and foreign currency values.
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's investment and debt portfolios. The Company has not
used derivative financial instruments in its investment or debt portfolios. The
Company invests its excess cash in money market funds and commercial paper. The
Company's debt financing consists mainly of bank loans requiring either fixed or
variable rate interest payments. Investments in and borrowings under both
fixed-rate and floating-rate interest-earning instruments carry a degree of
interest rate risk. On the investment side, fixed-rate securities may have their
fair market value adversely affected due to a rise in interest rates, while
floating-rate securities may produce less income than expected if interest rates
fall. In addition, the Company's future investment income may fall short of
expectations due to changes in interest rates or the Company may suffer losses
in principal if forced to sell securities which have declined in market value
due to changes in interest rates. On the debt side, borrowings that require
fixed-rate interest payments require greater than current market rate interest
payments if interest rates fall, while floating rate borrowings may require
greater interest payments if interest rates rise. Additionally, the Company's
future interest expense may be greater than expected due to changes in interest
rates.
FOREIGN CURRENCY RISK
International revenues were 42% of total revenues in 1998. International sales
are made through international distributors and wholly- and majority-owned
subsidiaries with payments to the Company typically denominated in the local
currencies of the
29
<PAGE> 30
United Kingdom, France and Germany, and in U.S. dollars in the rest of the
world. The Company's international business is subject to risks typical of an
international business, including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely affected by changes
in these or other factors. The effect of foreign exchange rate fluctuations on
the Company in 1998 was not material, and the Company does not engage in hedging
transactions for speculative or trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of Laserscope at December 31, 1998 and 1997,
and for each of the three years in the period ended December 31, 1998, 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
Certain information required by Part III is omitted from this Annual Report on
Form 10-K because the Company will file a definitive proxy statement prior to
April 30, 1999 pursuant to Regulation 14A (the "Proxy Statement") for its Annual
Meeting of Shareholders to be held June 11, 1999, and the information included
in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and executive officers
required by this Item 10 is incorporated by reference from the Company's Proxy
Statement for the 1999 Annual Meeting of Shareholders under the headings
"Election of Directors" and "Management," respectively.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders under the
heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
30
<PAGE> 31
The information required by this Item 12 is incorporated by reference from the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders under the
heading "Election of Directors" and "Beneficial Ownership of Securities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference from the
Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under the
heading "Certain Transactions."
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, 1998 and 1997. F-2
Consolidated Statements of Operations
- Years ended December 31, 1998, 1997 and 1996. F-3
Consolidated Statements of Cash Flows
- Years ended December 31, 1998, 1997 and 1996. F-4
Consolidated Statements of Shareholders' Equity
- Years ended December 31, 1998, 1997 and 1996. F-5
Notes to Consolidated Financial Statements. F-6 through F-20
(2) The following financial statement schedule for the years ended December
31, 1998, 1997 and 1996 is submitted herewith:
Page
----
Schedule II - Valuation and Qualifying Accounts S-1
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):
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1 Acquisition Agreement between Laserscope and Heraeus Med GmbH.(12)
2.1A Amendment Number One to Acquisition 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)
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.6C Net Lease Agreement between Registrant and Realtec Properties dated
June 25, 1990.(3)
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)
10.11C Loan Modification Agreement between the Registrant and Silicon
Valley Bank dated September 3, 1998.(16)
10.11D Loan Modification Agreement between the Registrant and Silicon
Valley Bank dated November 25, 1998.(17)
10.11E Loan Modification Agreement between the Registrant and Silicon
Valley Bank dated March 17, 1999.(17)
10.13 1990 Directors' Stock Option Plan and form of Option Agreement.(4)
10.14 Form of Laserscope Management Continuity Agreement, as amended.(15)
10.18 1995 Directors' Stock Option Plan and form of Option agreement.(8)
22.1 Subsidiaries of Registrant, as amended.(14)
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
23.1 Consent of Ernst & Young LLP, Independent Auditors.(17)
25.1 Power of Attorney (see pages 36 through 37).(17)
27.1 Financial Data Schedule.(17)
</TABLE>
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.
34
<PAGE> 35
(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.
(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) 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, 1997.
(15) 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 March 31, 1998.
(16) 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 September 30, 1998.
(17) Filed herewith.
35
<PAGE> 36
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 30, 1999 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 as
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/ Robert J. Pressley Chairman of the Board of March 30, 1999
- --------------------------- Directors
(Robert J. Pressley, Ph.D.)
/s/ Robert V. McCormick President, Chief Executive March 30, 1999
- ----------------------- Officer and Director (Principal
(Robert V. McCormick) Executive Officer)
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dennis LaLumandiere Vice President of Finance, March 30, 1999
- --------------------------- Chief Financial Officer and
(Dennis LaLumandiere) Assistant Secretary
(Principal Financial and
Accounting Officer)
/s/ E. Walter Lange Director March 30, 1999
- ---------------------------
(E. Walter Lange)
/s/ Rodney Perkins Director March 30, 1999
- ---------------------------
(Rodney Perkins, M.D.)
</TABLE>
<PAGE> 38
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, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, 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
March 3, 1999
F-1
<PAGE> 39
LASERSCOPE
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,456 $ 2,465
Accounts receivable, net 12,433 13,960
Inventories 14,084 18,656
Other current assets 867 1,017
-------- --------
Total current assets 28,840 36,098
Property and equipment, net 5,146 5,183
Developed technology and other intangibles, net 2,089 5,339
Other assets 518 686
-------- --------
Total assets $ 36,593 $ 47,306
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,360 $ 6,071
Accrued compensation 1,659 1,710
Short-term bank loans 3,538 3,107
Warranty 835 1,321
Deferred revenue 1,060 1,580
Other accrued liabilities 2,323 1,879
Current obligations under capital leases 343 117
-------- --------
Total current liabilities 15,118 15,785
Long-term liabilities:
Obligations under capital leases 786 274
Mortgages & other long term loans 1,693 2,970
-------- --------
Total long-term liabilities 2,479 3,244
Commitments and contingencies
Minority interest 325 160
Shareholders' equity:
Common stock 12,525,818 shares outstanding (12,347,446 in 1997) 51,268 50,939
Accumulated deficit (31,627) (21,831)
Accumulated other comprehensive income (599) (616)
Notes receivable from shareholders (371) (375)
-------- --------
Total shareholders' equity 18,671 28,117
-------- --------
Total liabilities and shareholders' equity $ 36,593 $ 47,306
======== ========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE> 40
LASERSCOPE
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
(thousands, except per share amounts) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Products $ 46,148 $ 53,296 $ 36,885
Services 6,580 8,053 5,959
-------- -------- --------
52,728 61,349 42,844
Cost of products and services:
Products 25,417 30,085 17,967
Services 6,155 6,194 3,915
-------- -------- --------
31,572 36,279 21,882
-------- -------- --------
Gross margin 21,156 25,070 20,962
Operating expenses:
Research and development 5,225 3,389 2,555
Purchased in-process research and development -- -- 2,376
Selling, general and administrative 21,657 22,250 16,749
Other non-recurring charges relating to the
acquisition of Heraeus Surgical, Inc. -- -- 872
Impairment of intangible assets 1,937 -- --
-------- -------- --------
28,819 25,639 22,552
-------- -------- --------
Operating loss (7,663) (569) (1,590)
Interest and other income (expense), net (701) 210 50
Loss on sale of AMS (1,082) -- --
-------- -------- --------
Loss before income taxes and minority interest (9,446) (359) (1,540)
Provision for income taxes 184 370 152
-------- -------- --------
Loss before minority interest (9,630) (729) (1,692)
Minority interest (166) (114) --
-------- -------- --------
Net loss $ (9,796) $ (843) $ (1,692)
======== ======== ========
Basic and diluted net loss per share $ (0.79) $ (0.07) $ (0.18)
======== ======== ========
Shares used in per share calculations 12,423 12,265 9,468
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 41
LASERSCOPE
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,796) $ (843) $(1,692)
Adjustments to reconcile net loss to cash provided (used) by operating
activities:
Excess inventory charges 2,063 3,000 500
Impairment of intangible assets 1,937 -- --
Loss on sale of AMS related assets and liabilities 1,082 -- --
Depreciation 1,915 824 938
Amortization of licenses and intangibles 976 790 280
Purchased in-process research and development -- -- 2,376
Increase (decrease) from changes in:
Accounts receivable 449 65 (2,622)
Inventories 473 (841) 576
Other current assets 250 280 (34)
Other assets (295) -- --
Accounts payable 773 (4,404) 2,923
Accrued compensation (51) (1,237) 441
Warranty (206) 359 86
Deferred revenue (453) (796) (311)
Other accrued liabilities 636 372 (115)
Minority interest 165 160 --
------- ------- -------
Cash provided (used) by operating activities (82) (2,271) 3,346
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (987) (1,616) (593)
NWL acquisition -- (960) --
Heraeus Surgical acquisition, net of cash received -- -- (1,741)
Cash received from the sale of AMS 805
Other 21 (402) (9)
------- ------- -------
Cash used by investing activities (161) (2,978) (2,343)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on obligations under capital leases (249) (39) (14)
Proceeds from the sale of common stock under stock plans 329 2,141 650
Proceeds from bank loans 1,563 3,865 --
Repayment of bank loans (2,409) (2,170) --
------- ------- -------
Cash provided (used) by financing activities (766) 3,797 636
------- ------- -------
Increase (decrease) in cash and cash equivalents (1,009) (1,452) 1,639
Cash and cash equivalents, beginning of year 2,465 3,917 2,278
------- ------- -------
Cash and cash equivalents, end of year $ 1,456 $ 2,465 $ 3,917
======= ======= =======
Supplemental cash flow information:
Cash paid for income taxes $ 25 $ 177 $ 50
======= ======= =======
Cash paid for interest $ 394 $ 393 $ 15
======= ======= =======
Non cash financing activities:
Equipment leases $ 891 $ 174 $ 241
======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 42
LASERSCOPE
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Notes Total
Accumulated Comprehensive Receivable from Shareholders'
(dollars in thousands) Common Stock Deficit Income Shareholders Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Issuance of 178,372 shares
under stock plans 329 -- -- -- 329
Repayment of shareholder notes -- -- -- 4 4
Translation adjustments -- -- 17 -- 17
Net loss -- (9,796) -- -- (9,796)
------- -------- ----- ----- --------
Balance at December 31, 1998 $51,268 $(31,627) $(599) $(371) $ 18,671
======= ======== ===== ===== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 43
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 inter-company 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, 1998 and 1997 the Company's cash equivalents were in the form of
institutional money market accounts and totaled $0.4 million and $1.3 million,
respectively.
At December 31, 1998 and 1997 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 the lease. Leasehold improvements
are amortized using the straight-line method over the remaining term of the
lease.
F-6
<PAGE> 44
Inventories
Inventories are stated at the lower of cost (computed on a first-in, first-out
basis) or market.
Net loss per share
Under Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS 128) 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. Per share amounts for the year ended
December 31, 1996 have been restated to conform to SFAS 128 requirements.
Options to purchase 2,615,317, 2,428,397 and 2,361,731 shares of common stock
were outstanding at December 31, 1998, 1997 and 1996, 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 anti-dilutive.
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 applies 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). According to SFAS 121, the Company is required to
recognize impairment losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amounts.
During the year ended December 31, 1998, the Company recognized such a loss
related to the write down of certain intangible assets acquired in 1996 in the
acquisition of Heraeus Surgical, Inc. (See Note 5). There were no such losses
recognized during the years ended December 31, 1997 and 1996.
Intangible assets related to 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. During the year ended December
31, 1998, the Company recorded an impairment loss to the intangible assets
related to the acquisition of Heraeus Surgical, Inc. (See note 5).
Advertising expense
Advertising is expensed as incurred. Advertising costs were not significant in
1998, 1997 and 1996.
F-7
<PAGE> 45
Comprehensive income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) during the year ended December 31,
1998. 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. SFAS 130 requires translation adjustments which prior to adoption were
reported in shareholders equity to be included in comprehensive income.
Segment information
During 1998 Laserscope adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 changed 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. During all
periods presented, Laserscope conducted its business predominantly within one
industry segment: the medical systems business.
(See Note 6).
2. ACQUISITION OF LASER-TECHNOLOGIE GMBH
In March 1995, Laserscope 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, Laserscope exercised its option and paid an additional $1.0 million to
increase its equity position to a 52% interest in NWL. (See Note 19.)
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 Heraeus Surgical, Inc.
(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 was 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.
In November 1998, Laserscope sold certain assets and liabilities associated with
one of the product lines acquired in the Acquisition. (See Note 4). In December
1998, the Company concluded that the majority of the remaining book value of
certain intangible assets acquired in the Acquisition had been impaired and
recorded an impairment loss. (See Note 5). In addition, the Company determined
that specific inventories relating to certain product lines acquired in the
Acquisition were excessive, and the Company wrote down these inventories
accordingly. The Company determined this action in late 1998 as part of a
redirection in emphasis towards higher volume product lines. (See Note 8).
F-8
<PAGE> 46
4. SALE OF AMS ASSETS AND LIABILITIES
During November 1998, the Company and Heraeus Medical, Inc. (HMI) (a division of
Heraeus Med GmbH), concluded the sale by the Company to HMI of certain assets
and liabilities related to the AMS product line. The AMS product line was
originally purchased by Laserscope in the acquisition of HSI. The Company
received $0.8 million in cash from HMI, and rights to $0.1 million that remains
in escrow until November 1999, in exchange for such assets and liabilities. The
result of the transaction was a loss to the Company of $1.1 million as detailed
below:
<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------
<S> <C>
Assets and liabilities sold:
Accounts receivable $ 1,078
Inventories 2,036
Licenses and intangibles assets 800
Accounts payable and accruals (1,580)
Warranty (280)
Deferred revenues (67)
----------
Total 1,987
Proceeds:
Cash received 805
In escrow 100
----------
Total 905
----------
Net loss $ 1,082
==========
</TABLE>
5. ASSET IMPAIRMENT
During 1998, the Company recognized an impairment loss, in accordance with SFAS
121, on certain intangible assets acquired in the acquisition of Heraeus
Surgical, Inc. The intangible assets relate to certain laser product lines that
Laserscope discontinued as of December 31, 1998 or intends to discontinue in
early 1999. Laserscope determined this action in late 1998 as part of a
redirection in emphasis towards higher volume product lines. The Company's
projections of the undiscounted future cash flows for these product lines
indicate that the carrying value of the intangible assets relating to these
product lines are impaired. Accordingly, Laserscope recorded an asset impairment
charge of $1.9 million in the year ended December 31, 1998 to adjust the assets
to their estimated fair value.
6. SEGMENT INFORMATION
In evaluating the requirements of SFAS 131 relating to the disclosure of
reportable segments, the Company considered whether it has discrete operating
components with all of the following characteristics: The component earns
revenues and incurs expenses; the operating results of the component are
regularly reviewed by the Company's chief operating decision maker (CODM) to
assess the performance of the individual component and make decisions
F-9
<PAGE> 47
regarding resources to be allocated to the component; and, discrete financial
information regarding the component is available. The nature of Laserscope's
revenue base is that it is derived from the sales of interrelated products and
services on a world wide basis. Although discrete components that earn revenues
and incur expenses exist, significant expenses such as research and development
and corporate administration are not incurred by nor allocated to these
operating units but rather are employed by the entire enterprise. Additionally,
the CODM evaluates resource allocation not on a product or geographic basis, but
rather on an enterprise wide basis. Due to the failure to meet these tests, the
Company has concluded that it contains only one reportable segment which is the
medical systems business.
Revenues from sales to external customers by similar products and services and
by major geographic area for the years ended December 31 were:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996(5)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
By similar products and services
Laser equipment $ 28,809 $ 29,301 $ 19,459
Disposables and instrumentation 12,139 14,750 14,463
Service 6,574 8,053 5,959
AMS equipment(1) 5,206 9,245 2,963
---------- ---------- ----------
Total $ 52,728 $ 61,349 $ 42,844
========== ========== ==========
By major geographic area(2)
United States $ 30,662 $ 41,190 $ 31,749
Germany(3) 9,298 5,656 1,326
Rest of Europe(4) 8,384 8,104 6,034
Asia Pacific(4) 3,657 5,876 3,735
Rest of world(4) 727 523 --
---------- ---------- ----------
Total $ 52,728 $ 61,349 $ 42,844
========== ========== ==========
</TABLE>
(1) Laserscope sold certain assets and liabilities related to the AMS product
line in November 1998.
(2) Based on the location of the external customer.
(3) The Company acquired a 52% interest in NWL in June 1997.
(4) Individual countries within each of these geographic regions represent less
than 10% of total revenues
(5) Laserscope acquired HSI in August 1996.
Location of long lived assets by major geographic area at December 31 were:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- --------------------------------------------------
<S> <C> <C>
United States $ 6,167 $ 9,982
Germany 1,418 1,074
Rest of world 168 152
---------- ----------
Total $ 7,753 $ 11,208
========== ==========
</TABLE>
F-10
<PAGE> 48
7. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Trade accounts receivable $ 12,958 $ 14,760
Less: allowance for doubtful accounts (525) (800)
---------- ----------
$ 12,433 $ 13,960
========== ==========
</TABLE>
8. INVENTORIES
Inventories at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Sub-assemblies and purchased parts $ 9,371 $ 13,098
Finished goods 4,713 5,558
---------- ----------
$ 14,084 $ 18,656
========== ==========
</TABLE>
Inventory at December 31, 1998 reflects the sale of inventory related to the AMS
product line to Heraeus Medical, Inc. (See Note 4) and the write-down of
specific inventories related to certain product lines acquired in the
acquisition of Heraeus Surgical, Inc totaling $2.1 million.
9. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 4,008 $ 3,589
Land and building 959 907
Office equipment and furniture 9,069 7,837
Leasehold improvements 3,402 3,250
---------- ----------
17,438 15,583
Less accumulated depreciation and amortization (12,292) (10,400)
---------- ----------
$ 5,146 $ 5,183
========== ==========
</TABLE>
F-11
<PAGE> 49
10. 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) 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Heraeus Surgical, Inc.:
Developed technology $ 3,229 $ 3,229
Work force 400 400
---------- ----------
3,629 3,629
Less:
Asset impairment (1,937) --
Accumulated amortization (1,196) (696)
Sale of AMS related assets & liabilities (443) --
---------- ----------
Net Heraeus Surgical, Inc. 53 2,933
---------- ----------
NWL Laser-Technologie GmbH
Developed technology 1,297 1,297
Distribution 832 832
Work force 462 462
---------- ----------
2,591 2,591
Less: accumulated amortization (555) (185)
---------- ----------
2,036 2,406
---------- ----------
$ 2,089 $ 5,339
========== ==========
</TABLE>
11. CREDIT LINES
In November 1998, the Company renewed its credit 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 1999
is secured by the assets of the Company and bears interest at the bank's prime
rate plus one percentage point (9.0% at December 31, 1998 and 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, 1998, the
collateral provisions of the line allowed for approximately $2.7 million in
borrowings and $2.5 million in borrowings were outstanding. The loss the Company
reported for the quarter ended December 31, 1998, breached the profitability and
minimum net worth covenants of the loan agreement. However, in March 1999, the
bank waived these violations. In addition, NWL has in place various revolving
bank lines totaling approximately $2.1 million that expire in on various dates
in 1999 and under which $1.0 million in borrowings were outstanding at December
31, 1998.
F-12
<PAGE> 50
12. 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) 1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Leased equipment $ 1,414 $ 523
Accumulated amortization 403 306
</TABLE>
There were $891,000 in additions to leased equipment in 1998, $174,000 in 1997
and $241,000 in 1996.
Amortization of equipment under capital leases is included in depreciation
expense.
The Company leases certain facilities and equipment under non-cancelable
operating leases. Rent expense under these leases amounted to approximately
$1,805,000, $1,625,000 and $982,000 in each of the three years ended December
31, 1998, 1997 and 1996, respectively.
Future minimum lease payments under capital and operating leases were as follows
at December 31, 1998:
<TABLE>
<CAPTION>
Capital Operating
(in thousands) Leases Leases
- --------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 457 $1,532
2000 408 791
2001 342 288
2002 181 72
2003 -- 72
------ ------
$1,388 $2,755
====== ======
Less amount representing interest 259
Present value of future minimum lease payments $1,129
======
</TABLE>
F-13
<PAGE> 51
13. LONG-TERM DEBT
Long term debt at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Mortgages secured by the NWL building with
principal and 8.1% interest payable in monthly
installments through March 2005 $ 419 $ 406
Unsecured term loans with principal and interest
(ranging from 3.8% to 8.0%) due through 1999 -- 1,456
Unsecured Bavarian Development Agency loans
to NWL with principal and 5.2% interest due
September through December 2003 905 840
Other 369 268
---------- ----------
$ 1,693 $ 2,970
========== ==========
</TABLE>
For each of the five years and beyond, long-term obligations are:
<TABLE>
<CAPTION>
Long-term debt
(in thousands) (Principal only)
- --------------------------------------------------
<S> <C>
1999 12
2000 12
2001 12
2002 12
2003 12
2004 and beyond 1,633
------
$1,693
======
</TABLE>
14. 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
Stock Option 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 Stock Option 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, 1998, the 1984 Stock
Option Plan had options to purchase 340,826 shares of common stock outstanding,
all of which were exercisable.
The Company has reserved 2,550,000 shares of common stock of which there were
295,922
F-14
<PAGE> 52
shares available for issuance pursuant to its 1994 Stock Option Plan as of
December 31, 1998.
In 1998, the Company allowed employees to cancel outstanding options with
exercise prices greater than $2.00 per share that had been granted under the
1994 Stock Option Plan and replace them with new grants for a like number of
shares with the same exercisability restrictions at the fair market value of the
common stock at the date of cancellation and re-grant. None of these options had
previously been repriced. Employees elected to cancel and receive new grants to
purchase an aggregate of 1,108,627 shares at an exercise price of $1.28. These
options are included in the cancellations and grants in 1998 in the table that
summarizes plan activity for the year ended December 31, 1998.
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 165,000 shares available for issuance pursuant to the 1995 Directors'
Stock Option Plan at December 31, 1998.
The following table summarizes activity in the Company's stock option plans
during the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Options 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
Granted 1,872,927 $ 1.41
Exercised (53,960) $ 2.22
Canceled (1,632,047) $ 4.37
---------- --------
Balance, December 31, 1998 2,615,317 $ 2.03
==========
</TABLE>
F-15
<PAGE> 53
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, 1998:
<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>
$ 1.25 346,183 4.95 $ 1.25 33,924 $ 1.25
$ 1.28 1,335,827 3.55 $ 1.28 464,501 $ 1.28
$ 2.00 561,480 2.81 $ 2.00 506,481 $ 2.00
$2.72 - $7.50 371,827 2.73 $ 5.47 371,827 $ 5.47
- ------------- --------- ---------- ---------- ---------- ----------
$1.25 - $7.50 2,615,317 3.46 $ 2.03 1,376,733 $ 2.68
============= ========= ========== ========== ========== ==========
</TABLE>
1989 Employee Stock Purchase Plan
The Company has reserved 750,000 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, 1998, approximately 594,000 shares had been
purchased under this plan.
Stock Based Compensation
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 4.74%, 5.98% and 6.44% for 1998, 1997 and 1996,
respectively; a dividend yield of 0.0%; a weighted average expected volatility
factor of the expected market price of the Company's common stock of 1.08 for
1998 and 1.0 for 1997 and 1996; and an expected life of the option of 3.7 years
for 1998 and 4.0 years for 1997 and 1996.
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 1998, 1997 and
1996: a dividend yield of 0.0%; an expected life of 0.5 years; a weighted
average expected volatility factor of 0.7 for 1998 and 1.0
F-16
<PAGE> 54
for 1997 and 1996; and weighted average risk free interest rates of 5.16%, 5.41%
and 5.28% for 1998, 1997 and 1996, respectively. The weighted average fair
values of those purchase rights granted in 1998, 1997 and 1996 were $0.63, $1.81
and $1.70, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net 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) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net loss $(11,150) $ (2,202) $ (2,808)
Pro forma basic and diluted loss per share $ (0.90) $ (0.18) $ (0.30)
</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.
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.
15. 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 $260,000, $257,000 and $132,000 in the years ended
December 31, 1998, 1997 and 1996, respectively.
F-17
<PAGE> 55
16. INCOME TAXES
Significant components of the provision for income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Current federal taxes $ -- $ 20 $ 102
Current state taxes -- 80 50
Current foreign taxes 184 270 --
---------- ---------- ----------
Provision for income taxes $ 184 $ 370 $ 152
========== ========== ==========
</TABLE>
Pretax income from foreign operations was $527,000 in 1998 and losses of
$362,000, and $145,000, in 1997 and 1996, 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):
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected tax $ (3,306) $ (126) $ (539)
Operating loss with no carryback benefit 3,489 371 83
State taxes -- 80 50
Benefit of net operating loss carryforward (68) (86) (432)
Foreign taxes in excess of U.S. rate 64 107 --
Charge for in-process research
and development -- -- 832
Other 5 24 158
---------- ---------- ----------
Provision for income taxes $ 184 $ 370 $ 152
========== ========== ==========
</TABLE>
The components of the deferred tax asset consisted of the following at December
31, 1998 and 1997(in thousands):
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 7,100 $ 4,000
General business credit carryforwards 1,310 1,100
Inventory reserves and adjustments 2,600 2,200
Other accruals and reserves not
currently deductible for tax purposes 1,062 1,200
Acquired intangibles 400 --
Other 1,078 600
---------- ----------
Total deferred tax assets 13,550 9,100
Valuation for deferred tax assets (13,550) (7,900)
---------- ----------
Deferred tax asset -- 1,200
Deferred tax liabilities
Acquired intangibles -- (1,200)
---------- ----------
Net deferred tax assets $ -- $ --
========== ==========
</TABLE>
<PAGE> 56
F-18
<PAGE> 57
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
increased by $5,650,000 in 1998 and decreased by $700,000 in 1997. Approximately
$794,000 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 $15,800,000,
$440,000, and $350,000, respectively, which expire in the years 1999 through
2019. The Company has net operating loss and research and development credit
carryforwards of $4,410,000 and $800,000, respectively, for state tax reporting
purposes. The state net operating loss will expire in the years 1999 through
2004. In addition, the Company has foreign tax loss carryforwards of
approximately $3,800,000 which begin to expire in 1999.
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.
17. 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. The Company generally requires no collateral. Bad debt
expense has been insignificant.
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.
18. 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-19
<PAGE> 58
19. SUBSEQUENT EVENT
Pursuant to Laserscope's agreement to purchase the remaining interest in NWL
Laser-Technologie GmbH, in January 1999, the Company paid approximately $0.8
million cash with an additional $0.5 million to be paid April 15, 1999 to
acquire an additional 27% interest in NWL bringing its ownership interest to
79%. The approximate purchase price allocation for the transaction is $1.1
million for intangible assets and $0.2 million for additional interest in
tangible assets. Laserscope expects to pay an additional $1.0 million in January
2001 for the remaining interest in NWL.
F-20
<PAGE> 59
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, 1996 $ 490 $ 210 $ -- $ 700
========== ========== ========== ==========
Year ended December 31, 1997 $ 700 $ 100 $ -- $ 800
========== ========== ========== ==========
Year ended December 31, 1998 $ 800 $ 161 $ 436 $ 525
========== ========== ========== ==========
</TABLE>
S-1
<PAGE> 60
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.11D Loan Modification Agreement between the Registrant and Silicon
Valley Bank dated November 25, 1998.
10.11E Loan Modification Agreement between the Registrant and Silicon
Valley Bank dated March 17, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
<PAGE> 1
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of November 25,
1998, by and between Laserscope ("Borrower") and Silicon Valley Bank ("Bank").
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among
other documents, an Amended and Restated Loan and Security Agreement, dated
November 27, 1996, as may be amended from time to time, (the "Loan Agreement").
The Loan Agreement provided for, among other things, a Committed Line in the
original principal amount of Five Million Dollars ($5,000,000). 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 terms as defined in Section 1.1 entitled
"Definitions" are hereby amended or incorporated into the Loan
Agreement to read as follows:
"Maturity Date" means November 24, 1999.
2. Item "(a)" in the first paragraph under Section 6.3 entitled
"Financial Statements, Reports,
1
<PAGE> 2
Certificates" is hereby no longer required by Bank.
3. Section 6.10 entitled "Tangible Net Worth" is hereby amended
to read as follows:
Borrower shall maintain, as of the last day of each fiscal
quarter, a Tangible Net Worth of not less than $17,000,000.
4. Section 6.11 entitled "Profitability" is hereby amended to
read as follows:
Borrower shall have a maximum net loss of One Million Dollars
($1,000,000) (net of amortization and depreciation) for the
fiscal quarter ending December 31, 1998. Beginning with the
fiscal quarter ending March 31, 1999 and each fiscal quarter
thereafter, Borrower shall maintain a minimum net income of
One Dollar ($1.00) (net of amortization and depreciation).
Profitability shall be calculated as follows: add depreciation
and amortization from 10Q cash flow statement to net income
(loss).
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Bank a fee in the amount of
Twenty Thousand Dollars ($20,000) (the "Loan Fee") plus all out-of-pocket
expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that, as of the date hereof, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness, Bank
is relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Bank's agreement to modifications
to the existing Indebtedness pursuant to this Loan Modification Agreement in no
way shall obligate Bank to make any future modifications to the Indebtedness.
Nothing in this Loan Modification Agreement shall constitute a satisfaction of
the Indebtedness. It is the intention of Bank and Borrower to retain as liable
parties all makers and endorsers of Existing Loan Documents, unless the party is
expressly released by Bank in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
2
<PAGE> 3
8. COUNTERPARTS. This Loan Modification Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
9. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
LASERSCOPE SILICON VALLEY BANK
By: Dennis LaLumandiere By: Lois Fisher
----------------------------- -------------------------------
Name: /s/Dennis LaLumandiere Name: /s/Lois Fisher
----------------------------- -------------------------------
Title: Vice President, Finance and Title: Senior Vice President
----------------------------- -------------------------------
Chief Financial Officer Life Science Practice
----------------------------- -------------------------------
3
<PAGE> 1
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of March 17, 1999, by
and between Laserscope ("Borrower") and Silicon Valley Bank ("Bank").
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among
other documents, an Amended and Restated Loan and Security Agreement, dated
November 27, 1996, as may be amended from time to time, (the "Loan Agreement").
The Loan Agreement provided for, among other things, a Committed Line in the
original principal amount of Five Million Dollars ($5,000,000). 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 terms as defined in Section 1.1 entitled
"Definitions" are hereby amended or incorporated into the Loan
Agreement to read as follows:
"Committed Line" means Four Million Five Hundred Thousand
Dollars ($4,500,000).
"Credit Extension" means each Advance, Letter of Credit, Term
Loan or any other extension of credit by Bank for Borrower's
benefit.
1
<PAGE> 2
"Revolving Facility" means the facility under which Borrower
may request Bank to issue cash advances or Letters of Credit
as specified in Section 2.1 herein.
"Term Loan" means Five Hundred Thousand Dollars ($500,000).
"Term Loan Advance" is defined in Section 2.1.4.
"Term Loan Maturity Date" means July 31, 2000.
"Term Loan Payment" is described in Section 2.1.4.
2. Sub-section (a) of Section 2.1 entitled "Revolving Facility"
is hereby amended in its entirety to read 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 or the Borrowing Base, whichever is less,
minus (ii) the face amount of all outstanding Letters of
Credit (including drawn but unreimbursed Letters of
Credit). 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" shall mean an amount equal to
seventy-five percent (75%) of Eligible Accounts.
3. The first sentence of sub-section (a) of Section 2.1.1
entitled "Letters of Credit" is hereby amended to read as
follows:
Subject to the terms and conditions of this Agreement, Bank
agrees to issue or cause to be issued letters of credit for
the account of Borrower (each a "Letter of Credit",
collectively, the "Letters of Credit") in an aggregate face
amount not to exceed the lesser of (i) the Committed Line
minus the sum of the then outstanding principal balance of the
Advances or (ii) the
2
<PAGE> 3
Borrowing Base; provided that the face amount of outstanding
Letters of Credit (including drawn but unreimbursed Letters of
Credit) shall not exceed in any case Two Hundred Thousand
Dollars ($200,000).
4. Section 2.1.3 entitled "Foreign Exchange Contract; Foreign
Exchange Settlements" and Section 2.1.4 entitled "Credit Card
Sublimit" and any and all references thereto are hereby
deleted in their entirety.
5. A new Section 2.1.3 entitled "Term Loan" is hereby
incorporated into the Loan Agreement to read as follows:
2.1.3 Term Loan.
(a) Subject to and upon the terms and conditions of this
Agreement, Bank will make a Term Loan available to
Borrower.
(b) Interest accrues at a per annum rate equal to two
percentage points (2.00%) above the Prime Rate and shall
be payable monthly for each month from the date hereof
through the month ending July 31, 1999 ("Interest Only
End Date"). All Term Loan principal and accrued unpaid
interest outstanding on the Interest Only End Date will
be payable in twelve (12) equal monthly installments of
principal, plus all accrued interest, beginning on the
last day of each month following the Interest Only End
Date and ending on July 31, 2000 (the "Term Loan
Maturity Date"). Any Term Loan principal, once repaid,
my not be reborrowed. Notwithstanding the foregoing, in
the event Borrower can not maintain compliance with the
financial covenants set forth in Section(s) 6.8, 6.9,
6.10 and 6.11 of this Agreement, any and all outstanding
Term Loan principal and accrued unpaid interest will be
immediately amortized and payable in six (6) equal
monthly installments of principal plus all accrued
interest, beginning on the last day of the month in
which Borrower is in violation of the aforementioned
Sections.
6. Section 2.2 entitled "Overadvances" is hereby amended to read
as follows:
3
<PAGE> 4
If, at any time or for any reason, the amount of Obligations
owed by Borrower to Bank pursuant to Section 2.1, 2.1.1 and
2.1.2 of this Agreement is greater than the lesser of (i) the
Committed Revolving Line or (ii) the Borrowing Base, Borrower
shall immediately pay to Bank, in cash, the amount of such
excess.
7. Sub-section (b) of Section 2.3 entitled "Interest Rates,
Payments, and Calculations" is hereby amended to read as
follows:
(b) After an Event of Default, Obligations accrue interest at
5 percent above the rate effective immediately before the
Event of Default.
8. Section 6.9 entitled "Debt-Net Worth Ratio" is hereby amended
to read as follows:
Borrower shall maintain, as of the last day of each fiscal
quarter, a ratio of Total Liabilities less Subordinated Debt
to Tangible Net Worth plus Subordinated Debt of not more than
1.50 to 1.00.
9. Section 6.10 entitled "Tangible Net Worth" is hereby amended
to read as follows:
Borrower shall maintain, as of the last day of each fiscal
quarter, a Tangible Net Worth of not less than $13,000,000.
10. Section 6.11 entitled "Profitability" is hereby amended to
read, in its entirety, as follows:
Borrower shall maintain, on a quarterly basis, through the
fiscal year ending 1999, a minimum net income, plus
depreciation and amortization (as provided in the cash flow
statements contained in Borrower's Securities and Exchange
Commission filings) of $1.00. Beginning with the quarter
ending March 31, 2000, Borrower shall be profitable on a
quarterly basis in accordance with GAAP.
B. Waiver of Financial Covenants.
Bank hereby waives Borrower's existing default under the Loan
Agreement by virtue of Borrower's failure to comply with Section(s)
6.9, 6.10 and 6.11 as of the quarter ended December 31, 1998.
4
<PAGE> 5
Bank's waiver of Borrower's compliance of this covenant shall apply
only to the foregoing period. Accordingly, for the quarter ended
March 31, 1999, Borrower shall be in compliance with these Sections
as amended herein.
Bank's agreement to waive the above-described default (1) in no way
shall be deemed an agreement by the Bank to waive Borrower's
compliance with the above-described covenants as of all other dates
and (2) shall not limit or impair the Bank's right to demand strict
performance of these covenants as of all other dates and (3) shall
not limit or impair the Bank's right to demand strict performance of
all other covenants as of any date.
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
Five Thousand Dollars ($5,000) for the Term Loan (the "Term Loan Fee") plus a
variance fee of Two Thousand Five Hundred Dollars ($2,500) (the "Variance Fee")
less a Revolving Facility credit in the amount of Two Thousand Dollars (the
"Revolving Credit Fee") (collectively, referred to herein as the "Loan Fee")
plus all out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that, as of the date hereof, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness, Bank
is relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Bank's agreement to modifications
to the existing Indebtedness pursuant to this Loan Modification Agreement in no
way shall obligate Bank to make any future modifications to the Indebtedness.
Nothing in this Loan Modification Agreement shall constitute a satisfaction of
the Indebtedness. It is the intention of Bank and Borrower to retain as liable
parties all makers and endorsers of Existing Loan Documents, unless the party is
expressly released by Bank in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
5
<PAGE> 6
8. COUNTERPARTS. This Loan Modification Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
9. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
LASERSCOPE SILICON VALLEY BANK
By: Dennis LaLumandiere By: Lois Fisher
----------------------------- -------------------------------
Name: /s/ Dennis LaLumandiere Name: /s/Lois Fisher
----------------------------- -------------------------------
Title: Vice President, Finance and Title: Senior Vice President
----------------------------- -------------------------------
Chief Financial Officer Life Science Practice
----------------------------- -------------------------------
6
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (form
S-3 No. 333-55843) of Laserscope and the related Prospectus, as well as 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, 333-60441, 333-60443, and
333-60445) 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 March 3, 1999, 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, 1998.
/s/ Ernst & Young LLP
San Jose, California
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,456
<SECURITIES> 0
<RECEIVABLES> 12,958
<ALLOWANCES> 525
<INVENTORY> 14,084
<CURRENT-ASSETS> 28,840
<PP&E> 17,438
<DEPRECIATION> 12,292
<TOTAL-ASSETS> 36,593
<CURRENT-LIABILITIES> 15,118
<BONDS> 0
51,268
0
<COMMON> 0
<OTHER-SE> (32,597)
<TOTAL-LIABILITY-AND-EQUITY> 36,593
<SALES> 52,728
<TOTAL-REVENUES> 52,728
<CGS> 31,572
<TOTAL-COSTS> 31,572
<OTHER-EXPENSES> 28,819
<LOSS-PROVISION> 1,082
<INTEREST-EXPENSE> 701
<INCOME-PRETAX> (9,612)
<INCOME-TAX> 184
<INCOME-CONTINUING> (9,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,796)
<EPS-PRIMARY> (.79)
<EPS-DILUTED> (.79)
</TABLE>
