-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IJbJJOwztVK2dt+FSTLpNh2kXNllmsvVbMkgN+EozTnXoB7wnNOzf3SYRkag0/zo 2RGW4Btr3zipSVI0tEBQ8Q== 0000891618-97-001939.txt : 19970430 0000891618-97-001939.hdr.sgml : 19970430 ACCESSION NUMBER: 0000891618-97-001939 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970429 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LASERSCOPE CENTRAL INDEX KEY: 0000851737 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 770049527 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-18053 FILM NUMBER: 97589806 BUSINESS ADDRESS: STREET 1: 3052 ORCHARD DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089430636 10-K/A 1 AMENDMENT #1 TO FORM 10-K FOR YEAR ENDED 12/31/96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1996, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ___ to ___. Commission file number: 0-18053 LASERSCOPE (Exact name of Registrant as specified in its charter) California 77-0049527 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3052 Orchard Drive San Jose, California 95134-2011 (Address of principal executive offices) Registrant's telephone number, including area code: (408) 943-0636 ------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Common Share Purchase Rights ------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $60,200,000 as of March 17, 1997, based upon the closing sale price on the NASDAQ National Market System reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% of more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. There were 12,004,306 shares of Registrant's Common Stock issued and outstanding as of March 17, 1997. 2 DOCUMENTS INCORPORATED BY REFERENCE The undersigned Registrant hereby amends and restates its Annual Report on Form 10-K for the fiscal year ended December 31, 1996, as set forth below. INTRODUCTORY STATEMENT AND REFERENCES Except for the historical information presented in this Annual Report on Form 10-K, the matters discussed herein are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward- looking statements are subject to certain risks and uncertainties that could cause the actual results to differ materially from those projected. Factors that could cause actual results to differ materially include, but are not limited to, the risks associated with the Company's acquisition of Heraeus Surgical, Inc., including the integration of the assets acquired and assumption of the liabilities assumed by Laserscope, the timing of orders and shipments, the Company's ability to balance its inventory and production schedules, the timely development and market acceptance of new products and surgical/therapeutic procedures, the impact of competitive products and pricing and public policy relating to health care reform in the United States and other countries. The Company desires to continue expansion of its operations outside of the United States and to enter additional international markets, requiring significant management attention and financial resources and further subjecting the Company to the risks of operating internationally. These risks include unexpected changes in regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, customs, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. The Company is also subject to general geopolitical risks in connection with its international operations, such as political and economic instability and changes in diplomatic and trade relationships. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions will be imposed by the United States, Japan, countries in the European Union or other countries upon the import or export of the Company's products in the future, or what effect any such actions would have on its business, financial condition or results of operations. In addition, fluctuations in currency exchange rates may negatively impact the Company's ability to compete in terms of price against products denominated in local currencies. In addition, there can be no assurance that regulatory, geopolitical and other factors will not adversely impact the Company's operations in the future or require the Company to modify its current business practices. Other risks are detailed from time to time in the Company's press releases and other public disclosure filings with the U.S. Securities and Exchange Commission (SEC), copies of which are available upon request from the Company. The forward-looking statements included herein speak only of the date hereof. The Company assumes no obligation to update any forward-looking statements included herein. References made in this Report to "Laserscope," the "Company" or the "Registrant" refer to Laserscope and its subsidiaries. References made in this Report to "HSI" refer to Heraeus Surgical, Inc. The following are Laserscope registered trademarks which may be mentioned herein: Laserscope, Dermastat, KTP/532, KTP/YAG, MicroBeam, Opthostat, ClearView, Crossfire, Digilase, Infraguide, Illumina, Laserblade, Luxus, Permaline, Pinnacle, Sureshot, Ultralase, Ultraline, and Ultraspot. The following are Laserscope common law trademarks and service marks which also may be mentioned herein: AccuStat, ADD, ADDStat, Ascent Medical Systems, Aura, Dermastat, DiscKit, Dual FX, Everything You Need. Everything Unique! (SM), Endostat, FiberLife, FocalStat, KTP/YAG, Laparostat, LaparoVac, LDD, Medical Insite (Web Site SM), MicronSpot, Microstat, Orion, People Who Do More (SM), The Power Family (SM), Pulsar, SmartConnector, SmartScan, SpineScope, SpineStat, StarPulse, ArthroGuide, Enhance, Hercules, InfraTips, On Target, OrthoProbe, QuickPulse, Radiance, Resilient, SpinaLase, SuperPulse, and UroLine. Photofrin and Optiguide are registered trademarks of QLT PhotoTherapeutics, Inc. Hanaulux and Hanauport are trademarks of Heraeus Med GmbH. Maquet is a trademark of Maquet Corporation. CVAC is a trademark of CVAC, Inc. -2- 3 PART I ITEM 1. BUSINESS General Overview of Business Laserscope(R) designs, manufactures, sells and services, on a worldwide basis, surgical, dermatologic and therapeutic laser systems and related surgical instrumentation and disposable supplies and accessories. Its portfolio of more than 350 products, includes an advanced line of KTP/532(R), CO2, Nd:YAG, Er:YAG, Ruby, Diode and Dye medical laser systems and related energy delivery devices for the office, outpatient surgical center and hospital markets. Laserscope's Ascent Medical Systems(TM) (AMS) are innovative equipment for the surgical and outpatient care environments. The AMS product family includes procedure and treatment lights, ceiling-mounted equipment organizers, centralized smoke evacuation systems, video systems and operating tables. Primary medical markets served include dermatology, aesthetic surgery, urology, gynecology, ear, nose and throat (ENT) surgery and photodynamic therapy (PDT), an emerging cancer treatment. Secondary markets include general surgery, neurosurgery, orthopedics, gastroenterology as well as other surgical specialties. Mission Laserscope's corporate mission is to improve the quality and cost effectiveness of health care by providing innovative medical products and services. History Laserscope was founded in 1982 and its first product was shipped in 1984. During its initial years, the Company was funded by several venture capital firms and by E.I. du Pont de Nemours & Company. Laserscope received the first in a series of U.S. regulatory clearances in 1987 and completed its initial public offering in December 1989. Laserscope is a California corporation. Market Focus Laserscope believes that it participates in several business areas with good opportunities. Near-term opportunities lie in the dermatology/aesthetic surgery marketplace. Laserscope's new desktop-sized Aura(TM) laser is effective in treating leg veins in addition to minimizing the side effects inherent in other laser leg vein treatments. The Company's Pulsar(TM) CO2 laser is an attractive new entry in the skin resurfacing (treatment of wrinkles) market. More mid-term opportunities lie in further developing the surgical support products (renamed Ascent Medical Systems) obtained through the acquisition of Heraeus Surgical, particularly the centralized smoke evacuation and equipment management systems, discussed in more detail below. Longer-term opportunities for the Company lie in photodynamic therapy (PDT), a modality to treat cancer and pre-malignant conditions with laser energy and light-activated, photosensitive pharmaceuticals. In January 1996, Laserscope announced that marketing clearance had been received from the U.S. Food and Drug Administration (FDA) for its PDT laser systems and the drug Photofrin(R). The laser systems' marketing clearance came in conjunction with the FDA approval of Photofrin to treat advanced esophageal cancer. Photofrin, a proprietary drug of QLT PhotoTherapeutics Inc. (QLT), is the first light-activated drug for use in photodynamic therapy to be approved in the United States. In February 1997, QLT and Laserscope jointly requested FDA approval of PDT for early and late-stage lung cancer. Photofrin is distributed through QLT's distribution partners which are Sanofi Pharmaceuticals, Inc. in the U.S. and Beaufour Ipsen in Europe. Laserscope is the worldwide distributor of its own PDT laser systems and QLT's Optiguide(R) fiberoptic delivery devices. -3- 4 Laserscope has a strategic alliance with QLT for the development, manufacture and distribution of medical devices for the PDT market, as well as a sales and marketing agreement with Rare Earth Medical, a developer and manufacturer of advanced fiber optic light diffusing products for PDT applications. Laserscope also is actively engaged in discussions with other pharmaceutical partners, some of whom are pursuing non-cancer PDT applications. Products Laser Platforms: The Company's Aura(TM) Laser System is a compact, highly portable, KTP/532 single wavelength laser designed for office use. Its integrated StarPulse feature is designed for the removal of benign vascular and pigmented surface lesions, including leg telangiectasia (spider-like leg veins). It can also be used as a continuous wave laser for surgical applications that include endoscopic blepharoplasty, rhinoplasty, facelifts, tonsillectomy, wart removal and snoring cessation. The Orion(TM) Laser System is a mid-size, more powerful system for outpatient surgical centers and hospitals. It features dual KTP/532 and Nd:YAG wavelengths as well as StarPulse. The range of applications include ENT, gynecology, urology, general surgery, neurosurgery, orthopedics, spine surgery, as well as aesthetic surgery and dermatology. The Orion also can serve as a base laser system for Laserscope's PDT laser dye module, enabling photodynamic therapy applications. Both the Aura and Orion systems are available with SmartScan, a microprocessor-controlled beam scanning device. The Pulsar(TM) Laser System is a mid-size CO2 laser for the office, outpatient surgical centers and hospitals. It features an advanced pulsing technology called ClearPulse to create custom skin tissue effects. It also operates in a continuous beam mode for surgical applications. It is primarily used for skin resurfacing or wrinkle removal as well as being a surgical laser for ENT and gynecologic applications. It is available with ParaScan, a microprocessor-controlled beam scanning device. The Hercules Nd:YAG Laser System delivers both continuous and pulsed laser energy for a variety of laser procedures. It is compact and highly maneuverable, and delivers 40, 60 or l00 watts of power. The QuickPulse feature pulses the laser ten times faster than conventional Nd:YAG lasers for rapid ablation of tissue with reduced thermal damage. Applications are in urology, gynecology, ENT, gastroenterology, and thoracoscopy. The Hercules is sold principally to hospitals outside of the United States. The 800 Series KTP/YAG(TM) Surgical Laser System is designed for use in hospitals. It is a high-power, dual-wavelength system with applications in urology, gynecology, ENT, aesthetic surgery, orthopedics, general surgery, neurosurgery, pulmonary surgery and gastroenterology. The KTP/532 beam surgically cuts, vaporizes and coagulates tissue with minimal disruption to adjacent areas. Cutting and vaporization are achieved hemostatically, making the system effective for endoscopic as well as open surgical procedures. Complementing the KTP/532 beam is the Nd:YAG infrared beam which provides deep coagulation and powerful ablative capabilities. The 800 Series System, which provides up to 40 watts of KTP/532 energy and 100 watts of Nd:YAG energy, can also serve as a base laser system for Laserscope's PDT laser dye module, enabling photodynamic therapy applications. Laserscope's PDT systems include the Model 630 and 630XP PDT Dye Modules. The Model 630 Dye Module provides 3.2 watts of power while the Model 630 XP Dye Module provides 7.0 watts of power. Both systems operate at 630 nm for photoactivation of Photofrin, are portable and tunable to other wavelengths. PDT utilizes a light-activated drug that is administered intravenously to the patient. This is followed by an interval during which the drug circulates, accumulates and is retained in tumors, while largely clearing from other tissues. The drug has no apparent effect on tumors until it is activated by non-thermal light from the Model 630 or 630XP PDT Dye Module and produces an active form of oxygen that destroys the cancer. Through its distribution arrangements with NWL Laser-Technologie, GmbH, the Company has access to erbium yttrium-aluminum garnet (Er:YAG), and Ruby lasers which have applications in dermatology, in addition to other lasers with industrial applications. Laserscope has received FDA 510(k) approval to market the Er:YAG and intends to apply for 510(k) -4- 5 approval to market the Ruby laser in the U.S. At some future time, the Company may elect to introduce all of these products to the U.S. and other geographic areas. Laser Devices, Instruments and Disposables: Laserscope offers a broad line of surgical instrumentation, disposables, kits and other accessories for use with its surgical laser systems. These products include disposable optical fibers, diffusing fibers for PDT applications, side-firing devices, individual custom handpieces for specific surgical applications, scanning devices, micromanipulators for microscopic surgery, and various other devices, procedure-specific kits and accessories. This portfolio of aftermarket products includes more than 350 medical devices. The disposable optical fibers are available in different lengths and diameters for different surgical applications and preferences. The handpieces, which are used to hold and aim the optical fiber, give the surgeon the feel of a traditional surgical tool. When used in contact with body tissue, they provide tactile feedback similar to conventional surgery. Ascent Medical Systems (AMS): Ascent Medical Systems are integrated equipment and instrumentation for the operating and emergency rooms. The AMS product family includes procedure and treatment lights, ceiling-mounted equipment organizers, centralized smoke evacuation systems, video systems and operating tables. The AMS ceiling-mounted equipment management systems are designed to improve efficiency of an operating or emergency room by moving medical equipment, anesthesia machines, endoscopic equipment, cords, hoses, accessories and gas outlets from the floor into their optimal clinical positions overhead. Ergonomically positioned equipment is designed to minimize fatigue and strain and avoid distractions for the hospital's surgical staff. Also available is a centralized smoke evacuation system (CVAC) designed to remove potentially harmful, microscopic debris from the air to protect both patients and healthcare workers. The CVAC system is integrated into a ceiling-mounted equipment management system. Through distribution arrangements with Hereaus Med GmbH and Maquet, the Company markets additional operating and emergency room equipment. Supplied by Heraeus Med, the Hanaulux(TM) high-intensity surgical lights provide brilliant light, shadow-free illumination and true color for every surgical procedure. A multi-lens system with a cascade of focal points allows each light source to illuminate the entire light field independently, minimizing shadows and creating a homogeneous light field. Electrohydraulic surgical tables supplied by Maquet,(TM) offer motorized movement for anatomic positioning of the patient during all types of surgical procedures. Also supplied by Heraeus Med are ceiling-mounted, broadcast-quality Hanauvision(TM) interactive video systems which allow monitoring, teaching, teleconferencing or consultation from a remote site or with other specialties, such as radiology and pathology, during surgical procedures. Sales and Marketing The Company concentrates its marketing efforts for its laser products on high volume surgical procedures. The marketing of AMS products is directed at planners and architects, engaged primarily in retrofitting existing operating or emergency rooms. Laserscope believes that increased awareness of both the benefits of laser surgery and the drawbacks of conventional surgery is one of the most important factors in expanding the market for its laser and laser-based products. As a result, the Company has designed its marketing and sales strategy around a strong educational effort to promote awareness of the versatility, safety and cost-effectiveness of its surgical laser systems. For AMS products, the marketing strategy emphasizes the efficient and productive operation of an operating or emergency room. -5- 6 Laserscope promotes its products through trade shows and exhibits covering most of the surgical specialties, physician workshops and seminars, medical journal advertising and direct mailings. The Company supports and participates in a substantial number of workshops and seminars. For laser products, the workshops usually include a demonstration of the Company's laser systems and provide surgeons with direct experience using the Company's products. Distribution In the U.S., the U.K. and France, the Company distributes its products to hospitals, outpatient surgical centers and physician offices through its own direct sales force. In Germany, Laserscope products are distributed by NWL Laser-Technologie, GmbH a company in which Laserscope has a minority equity interest and an option to acquire the remainder. Elsewhere, Laserscope products are sold through regional distributor networks. At present, 32 distributors serve 39 countries throughout Europe, the Middle East, Latin America, Asia and the Pacific Rim. Laserscope is both ISO 9001 and CE certified. International Business Revenues from Europe, Asia and the Pacific Rim continue to account for an increased percentage of total sales. Approximately 26% of Laserscope's 1996 revenues were derived from its international operations, up from 23% in 1995 and 17% in 1994. The Company expects that international sales will continue to represent a significant percentage of net sales. In March 1995, the Company entered into an agreement with NWL Laser-Technologie ("NWL") whereby the Company paid NWL approximately $1.6 million in exchange for a cross-distribution and development agreement, a minority equity position in NWL and an option to purchase all of the ownership interests in NWL. These assets are carried at cost. If the Company does not exercise its option to purchase NWL by June 1997, there will be no reimbursement of the Company's investment and the Company's equity position will be relinquished. If the Company exercises its option, the remaining purchase price will be paid over three and one half years from the exercise date. The Company currently expects to exercise its purchase option prior to lapse of the option period. Installed Base of Lasers Laserscope has more than 5,500 laser systems installed worldwide. The installed base provides a market for service as well as the sale of devices, instruments and disposables. Installation, Service and Support A direct field service organization provides installation and service for the Company's products. The Company generally provides a twelve month warranty on its laser systems. After the warranty period, maintenance and support is provided on a variety of service contract bases or on an individual call basis. The Company also has a "99.0% Uptime Guarantee" on its laser systems. Under provisions of this guarantee, the Company extends the term of the related warranty or contract if specified system uptime levels are not maintained. To date, all systems covered by this guarantee have achieved a 99.9% uptime rate. Research and Development The Company operates in an industry that is subject to rapid technological changes and its ability to remain competitive depends on, among other things, its ability to anticipate and react to such change. As a result, the Company intends to continue to invest significant amounts in research and development. Laserscope's current research and development programs are directed toward the development of new laser systems and delivery devices as well as enhanced operating room products. In development, for example, are new diode laser systems for the emerging PDT market and other applications. However, there can be no assurance that the PDT market will develop as anticipated or that Laserscope's product development will prove successful. Nor can there be any assurance that such new products, if developed and introduced, will receive market acceptance. -6- 7 Manufacturing The Company manufactures the laser resonators used in its laser systems, the system chassis and certain accessories. The Company's laser manufacturing operations concentrate on the assembly and test of components and subassemblies manufactured to the Company's designs and specifications by outside vendors. The Company believes that it has sufficient manufacturing capacity in its present facilities to support current operations at least through the end of 1997. In addition to its laser manufacturing capability, the Company has a production facility for certain of its disposable products. The Company's Endostat fibers, KTP Disc Kit, and Angled Delivery Devices (ADD and ADDStat) are manufactured in this facility. Certain of the components used in the Company's products, including KTP (potassium titanyl phosphate) crystals, molded and cast components, power supplies, and certain optical components, are purchased from single sources. While the Company believes that most of these components are available from alternative sources, an interruption of these or other supplies would adversely affect the Company. KTP crystals are currently available at appropriate quality levels from only one supplier, a division of Litton Industries. This supplier has a second crystal growing and fabrication facility at a second location in the United States geographically isolated from its original production facility. While the Company believes that an alternative supplier of KTP crystals could be qualified, if the supply of crystals from the present supplier were interrupted there would be an adverse effect on the Company's business and results of operations. Employees At December 31, 1996, the Company had 265 full-time employees. The Company believes that it maintains competitive compensation, benefit, equity participation and work environment policies to assist in attracting and retaining qualified personnel. The Company believes that the success of its business will depend, in part, on its ability to attract and retain such personnel, who are in great demand. Competition The medical equipment market is highly competitive. The ability of the Company to compete effectively depends on such factors as market acceptance of its products, product performance and price, customer support, the success and timing of new product development, and continued development of successful channels of distribution. Some of the Company's current and prospective competitors have or may have significantly greater financial, technical, manufacturing and marketing resources than the Company. To compete, the Company will need to continue to expand its product offerings, periodically enhance its existing products and continue to expand its distribution internationally. Product Liability Exposure The business of the Company entails the risk of product liability claims. The Company has experienced product liability claims from time to time, which it believes are ordinary for its business. While it is not feasible to predict or determine the outcome of the actions brought against it, the Company believes that these actions will not ultimately have a material adverse impact on the Company's financial position or results of operations. At present, the Company maintains product liability insurance on a "claims made" basis with coverage of $10,000,000 in the aggregate and a deductible of $100,000 per occurrence and an annual maximum aggregate deductible of $500,000. There can be no assurance that such insurance will be available at a reasonable cost, if at all, in the future, nor can there be any assurance that other claims will not be brought against the Company which would exceed applicable insurance coverage. Factors Affecting Financial Results and Stock Price A number of factors affect the Company's financial results and stock price, especially on a quarterly basis. One such factor is timing of shipments. The Company's laser products are relatively expensive pieces of medical capital equipment and the precise shipment date of specific units can have a marked effect on the Company's results of operations on a quarterly basis. A delay in product shipments near the end of a quarter could cause quarterly results to fall short of anticipated levels. -7- 8 A related factor is the timing of orders. To the extent orders are received by the Company near the end of a quarter, the Company may not be able to fulfill the order during the balance of that same quarter. Additionally, the Company typically receives a disproportionate percentage of its orders toward the end of each quarter. To the extent that anticipated orders are not received or are delayed beyond the end of the applicable quarter, the Company's revenues may be adversely affected and the Company's revenues may be unpredictable from quarter to quarter. Further, there can be no assurance that revenue growth or profitability on a quarterly or annual basis will be accomplished. Factors affecting operating results include, but are not limited to, product mix, competitive pricing pressures, material costs, revenue and expenses related to new products and enhancements to existing products, as well as delays in customer purchases in anticipation of new products or product enhancements by the Company or its competitors. The market price of the Company's common stock may be subject to significant fluctuations. These fluctuations may be due to factors specific to the Company, such as quarterly fluctuations in the Company's financial results, changes in analysts' estimates of future results, changes in investors' perceptions of the Company or the announcement of new or enhanced products or strategic transactions by the Company or its competitors. In addition, such fluctuations may be due to or exacerbated by general conditions in the medical equipment industry or conditions in the financial markets generally. Patents and Licenses While the Company believes the patents that it has and for which it has applied are of value, other factors are of greater competitive importance. The Company holds several patents issued in the United States, generally covering surgical laser systems, delivery devices, calibration inserts, the laser resonator and the connector used to attach disposable and reusable instrumentation to the Company's laser systems. In April 1992, the Company entered into a worldwide, license agreement with PDT, Inc. (PDTI) for licenses under the dye laser patents issued to PDTI. The licenses, which expire in April 1999, allow the Company, on an exclusive basis, to sublicense, manufacture, have manufactured or use, and on a non-exclusive basis, lease and sell the dye laser. Under the terms of the agreement, PDTI retains ownership of the intellectual property licensed to the Company under the agreement and has the right to manufacture, have manufactured, use, lease, and sell the dye laser for use in photodynamic therapy with PDTI photodynamic drugs. To acquire the licenses, the Company paid PDTI $400,000 and provided PDTI certain laser equipment. Under the terms of the license, the Company must pay a royalty to PDTI based on the net sales price of Dye Lasers sold by the Company. Government Regulation Government regulation in the U.S. and other countries is a significant factor in the development, manufacturing and marketing of many of the Company's products and in the Company's ongoing research and development activities. The Company and its products are regulated by the FDA under statutory authorities, including the Federal Food, Drug and Cosmetic Act (the "FDC Act") and the Radiation Control for Health and Safety Act. The FDC Act provides two basic review procedures for medical devices. Certain products may qualify for a Section 510(k) ("510(k)") procedure under which the manufacturer gives the FDA premarket notification of the manufacturer's intention to commence marketing the product. The manufacturer must, among other things, establish that the product to be marketed is "substantially equivalent" to a previously marketed product. In some cases, the manufacturer may be required to include clinical data gathered under an investigational device exemption ("IDE") granted by the FDA allowing human clinical studies. If the product does not qualify for the 510(k) procedure, the manufacturer must file a premarket approval application ("PMA") based on testing intended to demonstrate that the product is both safe and effective. The PMA requires more extensive clinical testing than the 510(k) procedure and generally involves a significantly longer FDA review process. Approval of a PMA allowing commercial sale of a product requires preclinical laboratory and animal tests and human clinical studies conducted under an IDE establishing safety and effectiveness. Generally, because of the amount of information required, the 510(k) procedure takes less time than the PMA procedure. -8- 9 To date, all of the Company's products (except for the 600 Series Dye Module) have been marketed through the 510(k) procedure. Future applications, however, may require clearance through the PMA procedure. There can be no assurance that such marketing clearances can be obtained on a timely basis. Delays in receiving such clearances could have a significant adverse impact on the Company. The FDA may also require post-market testing and surveillance programs to monitor certain products. Certain other countries require the Company to obtain clearances for its products prior to marketing the products in those countries. The requirements vary widely from country to country and are subject to change. The European community is in the process of developing a new approach to the regulation of medical products which may significantly change how medical devices are marketed in those countries within the next several years. In February 1996, the Company achieved ISO 9001 and CE (European Conformation) Mark registration in anticipation of this change. The Company is also required to register with the FDA and state agencies, such as the Food and Drug Branch of the California Department of Health Services, as a medical device manufacturer. The Company is inspected on a routine basis by both the FDA and the State of California for compliance with the FDA's Current Good Manufacturing Practice regulations. Those regulations impose certain procedural and documentation requirements upon the Company with respect to manufacturing, testing, and quality control activities. If violations of applicable regulations are noted during these inspections, the continued marketing of any products manufactured by the Company may be adversely affected. In addition, the Company's laser products are covered by a performance standard for laser products set forth in FDA regulations. The laser performance standard imposes certain specific record keeping, reporting, product testing, and product labeling requirements on the Company. These requirements also include affixing warning labels to the Company's laser systems, as well as the incorporation of certain safety features in the design of the Company's products. The Company believes that it is in material compliance with all of these requirements. Complying with applicable governmental regulations and obtaining necessary clearances or approvals can be time consuming and expensive, and there can be no assurance that regulatory review will not involve delays or other actions adversely affecting the marketing and sale of the Company's products. The Company also cannot predict the extent or impact of future legislation or regulations. The Company is also subject to regulation under federal and state laws regarding, among other things, occupational safety, the use and handling of hazardous materials and protection of the environment. The Company believes that it is in material compliance with these requirements. Acquisitions On August 30, 1996, the Company consummated the acquisition of Heraeus Surgical, Inc. ("HSI"), a Delaware corporation and wholly-owned subsidiary of Heraeus Med GmbH, a company organized under the laws of the Federal Republic of Germany. As consideration for HSI and certain of the assets and liabilities of Heraeus Med's laser distribution operations, Laserscope paid Heraeus Med $2 million and issued Heraeus Med 4,609,345 shares of Laserscope common stock (the "Heraeus Shares") The Heraeus Shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. The Company has agreed to register the Heraeus Shares pursuant to a "shelf" registration statement to be filed with the Securities Exchange Commission by August 30, 1997. On August 30, 1997, certain contractual limitations on Heraeus Med's ability to transfer the shares will expire. The sale of the Heraeus Shares would substantially alter the Company's market float for its common stock and could have an adverse impact on the Company's ability to raise capital. In addition, any such sales (or the investment community's anticipation of such sales), especially in large amounts, could materially affect the market price of Laserscope common stock. -9- 10 EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information with respect to the executive officers of the Company, and their ages as of December 31, 1996:
NAME AGE POSITION ---- ---- -------- Benjamin L. Holmes 62 Chairman of the Board and Director Robert V. McCormick 52 President, Chief Executive Officer and Director Thomas B. Boyd 50 Senior Vice President of Operations and International Roy Fiebiger 42 Senior Vice President of Marketing, Sales and Service Bonnie Jones* 48 Vice President of Human Resources Dennis LaLumandiere 43 Vice President of Finance, Chief Financial Officer and Assistant Secretary Eric Reuter 35 Vice President of Research and Development
* Ms. Jones resigned as an officer of the Company effective January 1997. Benjamin L. Holmes has been a director of the Company since January 1992 and was appointed Chairman of the Board of Directors in June 1992. Mr. Holmes was General Manager of the Medical Products Group of Hewlett-Packard Company ("HP") from 1983, and a Vice President of HP, from 1985 until his retirement in October 1995. Mr. Holmes is a member of the Board of Directors of Project HOPE and the Massachusetts High Technology Council. He is also a member of the Massachusetts Governor's Council on Economic Growth and Technology, Past Commissioner of the Massachusetts Universal Health Care Commission, and a past member of the Board on Health Care Service, Institute of Medicine, National Academy of Sciences. He is also Past Chairman of the Board of Directors of the Health Industry Manufacturers Association (HIMA). Robert V. McCormick has been President of the Company since December 1991 and Chief Executive Officer since July 1992. Between December 1991 and July 1992 he also served as the Company's Chief Operating Officer. He has been a director of the Company since July 1992. Mr. McCormick also served as the Company's Senior Vice President of Marketing and Field Operations from April 1991 to December 1991. Mr. McCormick was employed by Acuson Corporation, a manufacturer of medical imaging equipment, from 1983 to April 1991 in a variety of sales and marketing executive positions culminating as Vice President of Marketing and Field Operations. Thomas B. Boyd was hired as Senior Vice President of Operations and Finance in April 1994 and was appointed to the position of Senior Vice President of Operations and International in September 1996. Prior to joining Laserscope, from January 1992 to March 1994, Mr. Boyd was Vice President of Operations for American Safety Razor (ASR) Co., a consumer and medical products company. From August 1975 to December 1991 he was employed by Baxter Healthcare Corporation, an international manufacturer and distributor of healthcare products, in various financial and operations management positions including Vice President of Manufacturing from September 1989 to December 1991. Roy Fiebiger was hired as Vice President of Marketing in September 1995. Mr. Fiebiger was promoted to Vice President of Marketing and Sales in November 1995 and then to Senior Vice President of Marketing, Sales and Service in February 1997. Prior to his employment with Laserscope, from November 1994 to August 1995, Mr. Fiebiger was President and Chief Executive Officer of EnVision Surgical Systems (since renamed "Novacept"), a private, development stage medical device company. From April 1991 to October 1994, Mr. Fiebiger was Executive Vice President and Chief Operating Officer for Norian Corporation, a development stage medical device company, and from August 1984 to March 1991 he was Vice President of Sales and Marketing for Techmedica, a medical device company. Bonnie Jones was employed with the Company since November 1988 when she was hired as Laserscope's first Personnel Manager. She was promoted to Director of Personnel in June 1991 and Vice President of Human Resources in June 1993. Prior to working for the Company, she was as an independent consultant for various companies and Director of Personnel for Humphrey Instruments, an ophthalmic instruments company. Ms. Jones worked at Humphrey from 1982 through 1987. Ms. Jones resigned as an officer of the Company effective January 1997. -10- 11 Dennis LaLumandiere has been employed with the Company since September 1989 when he was hired as Laserscope's Corporate Controller. He was promoted to Vice President of Finance in February 1995, appointed as Chief Financial Officer in February 1996 and Assistant Secretary in November 1996. Prior to working for the Company, he held various financial and operations management positions at Raychem Corporation, a multinational materials science company. Mr. LaLumandiere was employed by Raychem from 1983 to 1989. Eric Reuter was hired as Vice President of Research and Development in September 1996. Prior to working for the Company, from February 1994 to August 1996, Mr. Reuter was employed at the Stanford Linear Accelerator Center at Stanford University as the Project Engineer for the B-Factory High Energy Ring, an electron storage ring to be used for high energy physics research. From February 1991 to January 1994 he held positions as a Senior Staff Engineer and Program Manager in digital imaging at Siemens Medical Systems - Oncology Care Systems, a medical device company. From July 1984 to January 1991, Mr. Reuter held various positions in design engineering, project engineering, and engineering management at the Stanford Linear Accelerator Center. ITEM 2. PROPERTIES The Company leases three buildings and supplemental warehouse space aggregating approximately 91,000 square feet in San Jose, California under leases expiring in February 2001. The Company has options to extend the leases at the then-current market rates. These facilities house the Company's research and development and manufacturing operations as well as the Company's principal sales, marketing, service and administrative offices. During late 1996, the Company invested approximately $1 million in leasehold improvements to these facilities to accommodate the employees hired as a result of the acquisition of HSI. The Company believes that these facilities are suitable for its current operations and are adequate to support those operations at least through the end of 1997. The Company has also leased small offices in the United Kingdom and France where the Company's local sales and marketing staffs are based. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various legal proceedings arising in the normal course of its business. These actions may include product liability and employee-related issues. While it is not feasible to predict or determine the outcome of the actions brought against it, the Company believes that the ultimate resolution of these claims will not ultimately have a material adverse impact on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. -11- 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's common stock is traded on the Nasdaq National Market under the symbol LSCP. As of March 17, 1997 the Company had approximately 800 shareholders of record. The following table shows the Company's high and low selling prices for the years ended December 31, 1996 and December 31, 1995 as reported by Nasdaq:
1996 ------------------------- HIGH BID LOW BID -------- ------- First Quarter $ 3 3/4 $ 1 5/8 Second Quarter $ 8 7/16 $ 3 1/8 Third Quarter $ 6 5/8 $ 3 7/8 Fourth Quarter $ 6 7/8 $ 4 3/4
1995 ------------------------- HIGH BID LOW BID -------- -------- First Quarter $ 4 3/8 $ 3 1/2 Second Quarter $ 4 1/2 $ 3 3/8 Third Quarter $ 5 1/8 $ 3 1/4 Fourth Quarter $ 4 $ 1 1/2
The Company has not paid dividends on its common stock and has no present plans to do so. Provisions of the Company's bank line of credit prohibit the payment of dividends without the bank's permission. ITEM 6. SELECTED FINANCIAL DATA (THOUSANDS EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF OPERATIONS DATA:
1996(1) 1995 1994 1993 1992 -------- -------- -------- ------- -------- Net revenues $ 42,844 $ 30,133 $ 36,320 $37,831 $ 35,963 Net income (loss) (1,692) (3,552) (931) 589 (4,421) Net income (loss) per share (0.19) (0.51) (0.13) 0.09 (0.66)
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
1996(1) 1995 1994 1993 1992 ------- ------- ------- ------- ------- Cash, cash equivalents & short-term investments $ 3,917 $ 2,278 $ 6,602 $ 8,144 $10,143 Working capital 18,444 12,564 16,825 17,132 16,219 Total assets 44,469 23,582 27,321 29,301 30,242 Capital leases (excluding current portion) 202 15 27 26 97 Shareholders' equity 27,175 17,326 20,901 21,234 20,182
-12- 13 CONSOLIDATED QUARTERLY STATEMENT OF OPERATIONS DATA (UNAUDITED):
THREE MONTHS ENDED ------------------ MAR. 31, JUN. 30, SEP. 30,(1) DEC. 31,(1) -------- -------- ----------- ----------- 1996(1) Net revenues $7,722 $ 8,481 $10,561 $16,080 Gross Margin 3,870 4,193 5,335 7,564 Net income (loss) 137 251 (2,811) 731 Net income (loss) per share 0.02 0.03 (0.32) 0.06 1995 Net revenues $9,215 $ 6,879 $ 7,048 $ 6,991 Gross Margin 4,832 3,801 3,463 3,245 Net income (loss) 251 (835) (1,259) (1,709) Net income (loss) per share 0.04 (0.12) (0.18) (0.25)
(1) The Company closed its acquisition of Heraeus Surgical, Inc. on August 30, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL REVIEW - RESULTS OF OPERATIONS The following table sets forth certain data from the Company's consolidated statement of operations, expressed as a percentage of net revenues:
1996 1995 1994 Net revenues 100.0% 100.0% 100.0% Cost of sales 51.1 49.1 46.6 ----- ----- ----- Gross margin 48.9 50.9 53.4 Operating expenses: Research and development 6.0 12.7 9.9 Purchased in-process research & development 5.5 - - Selling, general and administrative 39.1 50.9 46.8 Other non-recurring charges related to the acquisition of Heraeus Surgical, Inc. 2.0 - - ----- ----- ----- 52.6 63.6 56.7 Operating loss (3.7) (12.7) (3.3) Interest and other income, net .1 .9 .7 ----- ----- ----- Loss before income taxes (3.6) (11.8) (2.6) Provision for income taxes .4 - - ----- ----- ----- Net loss (4.0)% (11.8)% (2.6)% ===== ===== =====
The Company sells its products to hospitals, outpatient surgery centers, pay per use providers and individual physicians in the United States, Europe, the Middle East and the Pacific Rim. The Company's sales in the U.S. are through its own direct sales force. The Company's export sales, which are generated by its wholly and majority owned subsidiaries in the United Kingdom and France and by independent distributors in the rest of the world, are denominated in the local currencies of the United Kingdom and France, and in U.S. dollars in the rest of the world. During August 1996, the Company acquired Heraeus Surgical, Inc. ("HSI") from Heraeus Med, GmbH. Heraeus Med received approximately 4.6 million shares of newly issued Laserscope common stock and $2.0 million in cash in exchange -13- 14 for all of the outstanding shares of HSI and certain assets and liabilities of Heraeus Med's German laser distribution organization. 1996 RESULTS COMPARED TO 1995 During 1996 the Company's revenues increased 42% from 1995. This increase was primarily the result of higher capital equipment revenues and revenues from sales of products and services acquired in the HSI acquisition, which accounted for approximately $5.7 million and $1.3 million, respectively. During 1996, the Company's revenues from the sales of capital equipment increased 123% and represented 52% of total net revenues compared to 33% of total net revenues in 1995. This was due to a combination of higher unit shipments of lasers with a shift in mix to those having lower average selling prices than those sold in 1995. The higher unit sales were principally of the Company's Aura office laser system which has a lower average selling price than those of the Company's hospital-based systems. In addition, approximately $4.6 million of the increase was from sales of capital equipment products acquired in the HSI acquisition. The Company believes that the continuing trend toward reduced health care costs in the United States is still a factor which continues to impact negatively laser procurement by its hospital customers in the United States. As a result, the Company expects that its revenue mix trends in the U.S. market will continue to shift toward lower priced office lasers. The Company's net revenues in 1996 were negatively impacted by lower shipments of its disposable supplies and instrumentation which were 3% lower in 1996 than in 1995. Revenues from sales of these products represented approximately 34% of total revenues in 1996 compared to approximately 50% in 1995. The Company believes that the decline in proportion of total net revenues is primarily attributable to increased shipments of its Aura laser systems and increased shipments of lasers internationally while the reduction in absolute dollar revenues was due primarily to lower shipments of its side-firing devices due to fewer laser prostate surgeries being performed during this period than in 1995, partially offset by increased shipments of scanning devices sold as accessories to the Aura office laser system. The Company expects that revenues from the sales of instrumentation and disposable supplies will depend on the Company's ability to increase its installed base of systems and to promote and develop surgical procedures which use its laser systems, instrumentation and disposable supplies. The Company's net service revenues during 1996 were 16% higher than in 1995. These revenues represented 14% of total net revenues in 1996 compared to 17% of total net revenues in 1995. The increase in absolute dollars reflects higher international service revenues in addition to incremental revenues resulting from the acquisition of HSI. The decrease in proportion of total net revenues is principally due to the increased capital equipment shipments in 1996. The Company believes that continued acceptance of lasers in aesthetic surgery, dermatology, urology and ear, nose and throat surgery, is important to its business. In addition, the adoption of photodynamic therapy by medical practitioners also will be important. The Company continues to invest in the development of new instrumentation for emerging surgical applications and to educate surgeons in the U.S. and internationally to encourage the adoption of such new applications. Through the acquisition of HSI, the Company has expanded its product offering to include non-laser operating room equipment. The acceptance of this equipment by hospitals will be critical to the success of this product line. Finally, penetration of the international market, although increasing, has been limited and the Company continues to view expansion of international sales as important to the Company's success. International revenues accounted for approximately 26%, and 23% of total revenues in 1996 and 1995, respectively. The Company's product gross margin as a percentage of net revenues in 1996 was 51%, compared to 54% in 1995. The reduction is due principally to a product mix shift from higher margin disposable supplies to lower margin capital equipment. In addition, a higher proportion of the Company's revenues in 1996 came from sales to independent, international distributors than in 1995. These revenues generally generate lower gross margins than sales through its direct sales force. Finally, the Company acts as a distributor for certain product lines. Revenues from sales of these products generally generate lower gross margins than products manufactured by the Company. The Company expects that product gross margin as a percentage of sales may vary from quarter to quarter during 1997 as it continues to balance production volumes and inventory levels with product demand, and as product and distribution mix varies. -14- 15 Gross margin from service activities as a percentage of net service revenues was 34% in 1996, compared to 37% in 1995. The decline reflects further price erosion due to restructuring of the Company's contract programs in response to competitive pressures and reduced customer acceptance of service contracts. The Company expects that gross margin from service activities as a percentage of net revenues will continue to be influenced by these factors and will remain at or below 1996 levels for at least the next several quarters. Research and development expenses are the result of activities related to the development of new laser, instrumentation and disposable products and the enhancement of the Company's existing products. In 1996, amounts spent on research and development decreased 33% from amounts spent in 1995 due principally to lower expenses incurred in the development of the Company's Aura laser system. During 1995, the Company deployed significant resources to bring its Aura laser system to market in approximately nine months. As a percentage of revenues, research and development spending was 6% in 1996 compared to 13% in 1995. The Company expects to increase amounts spent in research and development during 1997. However, as a percentage of net revenues, the Company expects these amounts to vary from quarter to quarter as net revenues change. Selling, general and administrative expenses as a percentage of net revenues were 39% in 1996 compared to 51% in 1995. In absolute dollars, these expenses increased $1.4 million during 1996. The decrease as a percentage of net revenues is due to higher net revenues in 1996 than in 1995. The increase in absolute dollars is primarily due to higher expenses resulting from personnel which joined the Company from HSI after the acquisition. As a percentage of revenues, selling, general and administrative expenses are expected to remain at similarly high levels during 1997 as the Company continues to invest in international expansion, marketing programs and educational support. During the quarter ended September 30, 1996, the Company recorded non-recurring charges directly attributable to the acquisition of HSI consisting of a $2.4 million charge to write off purchased in-process research and development which arose from the acquisition and of $0.9 million in charges to write off certain inventory and fixed assets which became redundant as a result of the acquisition of HSI. During 1996 the Company recorded a $152,000 income tax provision due to the non-deductible charge for in-process research and development offset by the benefit of net operating loss carryforwards. In 1995 the Company recorded no income tax provision due to the net loss incurred during the period. 1995 RESULTS COMPARED TO 1994 During 1995, the Company's revenues decreased 17% from 1994 which is the combined result of lower product and service revenues. During 1995, the Company's revenues from the sales of capital equipment declined 19% due to lower unit shipments of lasers and lower average selling prices than in 1994. The Company's net revenues from the sales of products during the year ended December 31, 1995 were also affected negatively by lower shipments of its disposable supplies and instrumentation which were 18% lower in 1995 than in 1994. The Company believes that this was due primarily to lower shipments of its side-firing devices due to fewer laser prostate surgeries being performed during this period than in 1994. This was caused principally by increased drug treatment for those patients with mild to moderate prostate disorders as well as adoption of alternative electrosurgical techniques to perform prostate surgeries. The Company's net service revenues during the year ended December 31, 1995 were 9% lower than in the year ended December 31, 1994. The decline reflected price erosion due to restructuring of the Company's contract programs in response to competitive pressures and reduced customer acceptance of service contracts. Revenues from sales of instrumentation and disposable supplies represented approximately 50% of total revenues in each of the years ended December 31, 1995 and 1994. Revenues from sales of service represented approximately 17% of total revenues in 1995 and 16% of total revenues in 1994. International revenues accounted for approximately 23% and 17% of total revenues in 1995 and 1994, respectively. -15- 16 The Company's product gross margin as a percentage of net revenues was 54% and 55% in 1995 and 1994, respectively. During 1995, a 19% reduction in its product revenues caused further reductions in production volumes and greater unfavorable manufacturing variances and a reduction in product gross margin as a percentage of net revenues. Gross margin from service activities as a percentage of net revenues was 37% in 1995, and 43% in 1994. The declines reflect price erosion due to restructuring of the Company's contract programs in response to competitive pressures and reduced customer acceptance of service contracts. In 1995, amounts spent on research and development increased 7% from 1994 due principally to expenses incurred in the development of the Company's Aura laser system. As a percentage of revenues, research and development spending was 13% in 1995 and 10% in 1994. Selling, general and administrative expenses as a percentage of net revenues were 51% in 1995 and 47% in 1994. In absolute dollars, these expenses decreased $1.6 million during 1995. These decreases are the result of expense control measures originally taken by the Company in 1992 which continued through 1995. During 1995 and 1994 the Company recorded no income tax provision due to its net losses during these periods. FINANCIAL REVIEW - LIQUIDITY AND CAPITAL RESOURCES Total assets and liabilities as of December 31, 1996 were $44.5 million and $17.3 million respectively, compared to assets and liabilities of $23.6 million and $6.2 million at December 31, 1995. Working capital increased $5.8 million from $12.6 million at December 31, 1995 to $18.4 million at December 31, 1996 while cash and cash equivalents increased $1.6 million from $2.3 million at December 31, 1995 to $3.9 million at December 31, 1996. The increase to working capital was primarily the result of the HSI acquisition which, net of cash paid to Heraeus Med and transaction expenses incurred, added approximately $3.8 million to working capital. The net increase in cash and cash equivalents was primarily due to cash provided by operating activities of $3.3 million. Significant components of cash provided by operating activities included a net loss of $1.7 million offset by non cash charges for depreciation and purchased in-process research and development of $1.2 million and $2.4 million, respectively. Additionally a $1.1 million reduction of the Company's inventory (without giving effect to the inventory acquired in the acquisition of HSI), and a $2.9 million increase in accounts payable partially offset by a $2.6 million increase in accounts receivable contributed materially to cash provided by operating activities. The cash provided by operating activities was partially offset by $1.7 million used in the acquisition of HSI (net of cash received). The Company anticipates that future changes in cash and working capital will be dependent on a number of factors. As a result of the acquisition of HSI, the Company's Balance Sheet liquidity ratios changed and the Company's ability to generate cash will be partially dependent on management's ability to manage effectively non-cash assets such as inventory and accounts receivable. In addition, the level of profitability of the Company, as well as expenditures relating to the HSI acquisition will have a significant impact on cash resources. At December 31, 1996, the Company had commitments for capital expenditures relating to facility improvements of approximately $0.8 million and other accrued liabilities relating to the HSI acquisition of approximately $0.4 million. The Company has in place a $5.0 million revolving bank line of credit which expires in November 1997 and under which $1.6 million in borrowings were outstanding at March 17, 1997. From time to time, the Company may also consider the acquisition of, or evaluate investments in, certain products and businesses complementary to the Company's business. Any such acquisition or investment may require additional capital resources. The Company financed the HSI acquisition using its existing cash resources and anticipates that, while its remaining cash resources will be sufficient to fund its short term operating needs, additional financing either through its bank line of credit or otherwise will be required for the Company's currently envisioned long term needs. The Company anticipates that current cash resources, internally generated funds, capital and operating lease lines and available bank borrowings will be sufficient to meet liquidity and capital needs at least through 1997. -16- 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements of Laserscope at December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, the report of independent auditors thereon and Supplementary Data are included as separate sections in this Annual Report on form 10-K in Item 6 "Selected Financial Data" and Item 14, "Exhibits, Financial Statement Schedules and reports on Form 8-K." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to executive officers of Laserscope is set forth in "Item 1 - Business - Executive Officers of the Company" in this Annual Report on Form 10-K. Executive officers of the Company do not serve for set terms, but serve at the pleasure of the Board of Directors subject to Management Continuity Agreements. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS WITH MANAGEMENT AND OTHERS." Members of the Company's Board of Directors serve until the next annual meeting of the Company's shareholders following their election to the Board or until his or her successor has been elected and qualified. The names of the Company's directors, and certain information about them as of December 31, 1996, are set forth below:
NAME AGE POSITION - ---- --- -------- Benjamin L. Holmes 62 Chairman of the Board and Director David Cohen 44 Director Klaus Goffloo 50 Director Thomas Ihlenfeldt 49 Director E. Walter Lange 64 Director Robert V. McCormick 52 President, Chief Executive Officer and Director Rodney Perkins, M.D. 60 Director Robert J. Pressley, Ph.D. 64 Director
Benjamin L. Holmes has been a Director of the Company since January 1992 and was appointed Chairman of the Board of Directors in June 1995. Mr. Holmes was General Manager of the Medical Products Group of Hewlett-Packard Company ("HP") from 1983 to 1985, and a Vice President of HP, from 1985 until his retirement in December 1994. Mr. Holmes is a member of the Board of Directors of Project HOPE and the Massachusetts High Technology Council. He is also a member of the Massachusetts Governor's Council on Economic Growth and Technology, and a member of the Board on Health Care Service, Institute of Medicine, National Academy of Sciences. He is a member of the Board of Visitors of the UCLA and Boston University Medical Schools. He was also Chairman of the Board of Directors of the Health Industry Manufacturers Association (HIMA). David Cohen has served as a Director of the Company since August 31, 1996. Mr. Cohen has been an attorney practicing law with the firm of Cohen & Ostler, A Professional Corporation, for more than five years. Mr. Cohen's firm served as counsel to Heraeus Med and HSI in connection with the Company's acquisition of HSI. Klaus Goffloo has served as a Director of the Company since August 30, 1996. He served as general manager of the Electrical Heating and Air Conditioning group of Siemens AG from 1986 until 1992 and since that time has served as Chairman of Heraeus Med and as a member of the Board of Directors of Hereaus Holding Company. -17- 18 Thomas Ihlenfeldt has served as a Director of the Company since August 30, 1996. He joined the Heraeus group of companies in 1984 and has served in various positions. Since mid-1995 Mr. Ihlenfeldt has served as Managing Director of Heraeus Med. From 1990 through 1995 Mr. Ihlenfeldt served as President and Chief Executive Officer of HSI, formerly Heraeus LaserSonics. Robert V. McCormick has been President of the Company since December 1991 and Chief Executive Officer since July 1992. Between December 1991 and July 1992 he also served as the Company's Chief Operating Officer. He has been a Director of the Company since July 1992. Mr. McCormick also served as the Company's Senior Vice President of Marketing and Field Operations from April 1991 to December 1991. Mr. McCormick was employed by Acuson Corporation, a manufacturer of medical imaging equipment, from 1983 to April 1991 in a variety of sales and marketing executive positions culminating as Vice President of Marketing and Field Operations. Mr. McCormick is also a director of NovaCept (formerly AcuVasive and prior to that, EnVision Surgical Systems), a manufacturer of microvisualization catheter products and private, development stage medical device company. E. Walter Lange has been a Director of the Company since January 1992. Mr. Lange has more than 31 years of experience in the pharmaceutical industry, having served in a variety of executive positions at Eli Lilly & Co. from 1960 to 1991. Most recently, Mr. Lange was Group Vice President of Marketing, Planning and Development and was responsible for Eli Lilly's worldwide product planning, corporate strategic planning, business development and market research. Rodney Perkins, M.D. is a co-founder of the Company and has been a Director since its founding. Dr. Perkins also served as Chairman of the Board of Directors from its founding until June 1995 and Chief Executive Officer from February to May 1987, and from October 1991 to July 1992. He also served as the President of the Company from October to December 1991. Dr. Perkins, a specialist in otologic surgery, is President of the California Ear Institute at Stanford and has been in private practice since 1968. He is a Clinical Associate Professor of Surgery at Stanford University School of Medicine, and is the founder and President of Project HEAR a non-profit medical institute for ear research and education. Dr. Perkins is a founder of Collagen Corporation, a biomaterials company, and a member of its Board of Directors. Dr. Perkins is also a founder and the Chairman of the Board of Directors of ReSound Corporation, a hearing health care company. He also serves on the board of directors of NovaCept. Robert J. Pressley, Ph.D. is a co-founder of the Company and has been a Director since its founding. Dr. Pressley founded Silicon Video 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. -18- 19 ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS SUMMARY COMPENSATION TABLE The following table shows the compensation received by the Company's Chief Executive Officer, the five other most highly compensated executive officers of the Company for 1996 who were serving as executive officers at December 31, 1996, and the compensation received by each such individual for the Company's two prior years.
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION OPTION/SARS -------------------- (SHARES) ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2)(3) (4)(5) COMPENSATION(6) --------------------------- ---- --------- ----------- ------ --------------- Robert V. McCormick 1996 $263,455 $129,486 40,000 $15,706 President and Chief Executive Officer 1995 $248,060 -- 165,000 $18,186 1994 $236,250 -- -- $15,430 Thomas B. Boyd 1996 $171,350 $ 51,749 40,000 $13,232 Senior Vice President of Operations 1995 $168,324(7) -- 45,000 $13,219 and International 1994 $183,428(8) $ 20,000 65,000 $ 9,111 Roy Fiebiger 1996 $158,292 $ 47,888 40,000 $10,199 Senior Vice President of Marketing, 1995 $ 48,557(9) $ 10,000 65,000 $ 1,869 Sales and Service 1994 -- -- -- -- Bonnie Jones 1996 $122,491 $ 36,993 40,000 $10,819 Vice President of Human Resources(10) 1995 $107,330 -- 35,000 $ 6,252 1994 $ 99,750 -- 15,000 $ 4,552 Dennis LaLumandiere 1996 $124,426 $ 37,580 40,000 $ 9,543 Vice President of Finance, Chief 1995 $119,690 -- 40,000 $ 3,279 Financial Officer and Assistant 1994 $103,500 -- 15,000 $ 1,548 Secretary Eric M. Reuter 1996 $104,114(11) $ 10,519 50,000 $ 2,462 Vice President of Research and 1995 -- -- -- -- Development(11) 1994 -- -- -- --
________________ (1) Includes amounts deferred under the Company's 401(k) plan. (2) Includes bonuses earned in the indicated fiscal year and paid in the subsequent fiscal year. Excludes bonuses paid in the indicated fiscal year but earned in the preceding fiscal year. (3) Executive officers are entitled to discretionary bonuses based on individual and corporate performance. These bonuses are determined by the Board of Directors based on the recommendation of the Human Resources Committee (4) The options listed with respect to 1995 long-term compensation awards include options granted upon the repricing of previously granted options. Options to purchase the following number of shares granted to the following persons in 1995 were canceled as a result of their repricing on November 30, 1995: Mr. McCormick -- 97,500: Mr. -19- 20 LaLumandiere -- 12,188. Such canceled options have not been included with respect to 1995 long-term compensation award. The repriced options retain the same term and vesting schedule as those options which were replaced. (5) All options granted in 1994, 1995 and 1996 to new employees and officers of the Company have 5-year terms and become exercisable cumulatively at the rate of 12.5% of the total six months after the vesting commencement date (first date of employment for new employees and date of grant for officers), and 1/48 of the shares subject to the option in equal monthly installments thereafter. Generally options granted in 1994, 1995 and 1996 to existing employees also have 5-year terms but become exerciseable cumulatively at the rate of 1/48 of the shares subject to the option in equal monthly installments following their respective grant date. All unvested options are subject to termination upon the termination of the participant's relationship with the Company. All options were granted at market value on the date of grant. In the event that certain change in control events were to occur, the options would be assumed or equivalent options substituted by a successor corporation, unless the Board of Directors determined that the options should become immediately exercisable. The exercise price may be paid, subject to certain conditions, by delivery of already owned shares or with the proceeds from the sale of the option shares. In addition, the Management Continuity Agreements entered into between the Company and each of its executive officers may affect the vesting and manner of exercise of options granted by the Company to these individuals. See "Transactions with Management and Others." (6) Consists of the Company's contributions to its 401(k) benefit plan and certain other employee benefits, including payment of disability and group term life insurance premiums and a car allowance. (7) Includes $8,331 paid to Mr. Boyd in connection with the relocation of his principal residence to the San Jose metropolitan area. (8) Includes salary paid to Mr. Boyd during the period beginning on the commencement of his employment on April 18, 1994 and ending on December 31, 1994 and $79,578 paid to Mr. Boyd in connection with the relocation of his principal residence to the San Jose metropolitan area. (9) Includes salary paid to Mr. Fiebiger during the period beginning on the commencement of his employment on August 28, 1995 and ending on December 31, 1995. (10) Ms. Jones resigned as an officer of the Company effective January 1997. (11) Includes salary paid to Mr. Reuter during the period beginning on the commencement of his employment on August 22, 1996 and ending on December 31, 1996 and $70,614 paid to Mr. Reuter in connection with the relocation of his principal residence to the San Jose metropolitan area. -20- 21 STOCK OPTION GRANTS IN 1996 The following table sets forth information for the named executive officers with respect to grants of options to purchase Common Stock of the Company made in 1996 and the value of all options held by such executive officers on December 31, 1996.
POTENTIAL INDIVIDUAL GRANTS REALIZED ----------------- VALUE AT ASSUMED % OF TOTAL ANNUAL RATES OF OPTIONS STOCK GRANTED TO PRICE APPRECIATION OPTIONS EMPLOYEES EXERCISE OR FOR GRANTED IN FISCAL BASE PRICE EXPIRATION OPTION TERM(3) NAME (SHARES)(1) YEAR(2) (PER SHARE) DATE 5% 10% - ---- ----------- ---------- ----------- ----------- -------- -------- Robert V. McCormick . . . . . 40,000(4) 6.2% $3.48 4/04/01 $38,500 $ 85,100 Thomas B. Boyd . . . . . . . 40,000(4) 6.2% $3.48 4/04/01 $38,500 $ 85,100 Roy Fiebiger . . . . . . . . 40,000(4) 6.2% $3.48 4/04/01 $38,500 $ 85,100 Bonnie Jones(6) . . . . . . . 40,000(4) 6.2% $3.48 4/04/01 $38,500 $ 85,100 Dennis LaLumandiere . . . . . 40,000(4) 6.2% $3.48 4/04/01 $38,500 $ 85,100 Eric M. Reuter . . . . . . . 50,000(5) 7.8% $4.63 8/29/01 $63,900 $141,200 - ---------------------
(1) For a description of the material terms of the options, see footnote 5 of the Summary Compensation Table. (2) The Company granted options to employees for an aggregate of 641,225 shares of Common Stock during 1996. (3) Gains are reported net of the option exercise price but before taxes associated with exercise. These amounts represent certain assumed rates of appreciation only. Actual gains, if any, on stock option exercises are dependent on future performance of the Company's Common Stock, as well as the optionee's continued employment through the vesting period. (4) Options listed were granted on April 4, 1996. (5) Options listed were granted on August 29, 1996. (6) Ms. Jones resigned as an officer of the Company effective January 1997. -21- 22 AGGREGATED OPTION EXERCISES IN 1996 AND YEAR-END OPTION VALUES The following table sets forth information for the named executive officers with respect to exercises in 1996 of options to purchase Common Stock of the Company.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT 12/31/96: IN-THE-MONEY OPTIONS SHARES -------------------- AT 12/31/96: ACQUIRED -------------------- ON VALUE (EXERCISABLE/ (EXERCISABLE/ NAME EXERCISE REALIZED UNEXERCISABLE)(1) UNEXERCISABLE) - ---- -------- -------- ----------------- ------------------- Robert V. McCormick . . . . -- -- 340,729 / 154,271 $448,500 / $528,400 Thomas B. Boyd . . . . . . -- -- 61,144 / 88,856 $ 87,200 / $241,500 Roy Fiebiger . . . . . . . -- -- 19,899 / 85,101 $ 75,800 / $311,100 Bonnie Jones(2) . . . . . . -- -- 75,639 / 71,361 $101,100 / $212,100 Dennis LaLumandiere . . . . -- -- 54,541 / 68,959 $ 93,900 / $210,800 Eric M. Reuter . . . . . . -- -- -- / 50,000 -- / $ 81,300
___________ (1) Based on the closing price of the Company's Common Stock as reported on the NASDAQ National Market System on December 31, 1996 of $6.25 per share. (2) Ms. Jones resigned as an officer of the Company effective January 1997. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE On April 9, 1997, Eric Reuter, an officer of the Company, amended his Form 3 filed on August 30, 1996 to reflect ownership of 200 shares of Company Common Stock and an option to acquire 50,000 shares of Company Common Stock. HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION There are currently no employee directors serving on the Human Resources Committee of the Board of Directors. The following non-employee directors serve on the Company's Human Resources Committee: Rodney Perkins, M.D., Robert J. Pressley, Ph.D., David Cohen. Dr. Perkins purchased an aggregate of 16,667 shares of the Company's Common Stock in September 1989 under the Company's 1984 Stock Purchase Plan at an aggregate price of $75,002. Dr. Perkins purchased such shares through promissory notes in favor of the Company bearing interest at the annual rate 9% and secured by the shares purchased. During 1995 the principal and accrued interest on these notes were refinanced and the notes now carry annual interest rates of 5.79%. At December 31, 1996, Dr. Perkins owed an aggregate of $136,067 under such notes, the largest amount of indebtedness owed by him to the Company at any time during 1996. Dr. Perkins is also Chairman of the Board of Directors and a member of the Board of Directors' Human Resources Committee of ReSound Corporation, a publicly traded hearing health care company. The Company and ReSound Corporation have not conducted any business with each other in the past and the Company does not presently anticipate doing so in the future. -22- 23 Dr. Perkins was also a founding shareholder of AcuVasive (formerly Envision Surgical Systems), a manufacturer of microvisualization catheter products ("AcuVasive"). The Company has a commercial relationship with AcuVasive, Mr. McCormick is a member of its Board of Directors and Dr. Perkins and the Company are each holders of AcuVasive's capital stock. See "Transactions with Management and Others." Dr. Pressley purchased an aggregate of 16,667 shares of the Company's Common Stock in September 1989 under the Company's 1984 Stock Purchase Plan at an aggregate price of $75,002. Dr. Pressley purchased such shares through promissory notes in favor of the Company bearing interest at the annual rate 9% and secured by the shares purchased. During 1995 the principal and accrued interest on these notes were refinanced and the notes now carry annual interest rates of 5.79%. At December 31, 1996, Dr. Pressley owed an aggregate of $136,353 under such notes, the largest amount of indebtedness owed by him to the Company at any time. Mr. Cohen's firm served as counsel to Heraeus Med and HSI in connection with the Company's acquisition of HSI (the "HSI Acquisition"). In accordance with the Company's acquisition agreement ("Heraeus Agreement") dated April 23, 1996 with Heraeus Med pursuant to which the Company acquired HSI, the Company appointed three designees of Heraeus Med (the "Heraeus Directors") to the Company's Board of Directors. The Heraeus Agreement requires the Company to use its best efforts to have three nominees of Heraeus Med elected to the Board of Directors for so long as Heraeus Med owns at least 3.3 million shares of Company Common Stock, two nominees of Heraeus Med elected to the Board for so long as Heraeus Med owns at least 1.6 million shares of Company Common Stock and one nominee of Heraeus Med elected to the Board for so long as Heraeus Med owns at least 600,000 shares of Company Common Stock. Messrs. Cohen, Goffloo and Ihlenfeldt are the initial Heraeus Directors and were appointed to the Company's Board of Directors on August 30, 1996. Under the Heraeus Agreement, the Company and Heraeus Med have certain continuing obligations to each other. These obligations include: reciprocal indemnification obligations in connection with the HSI Acquisition; Heraeus Med's obligation not to develop, manufacture, service or sell hospital or physician office-based laser surgical systems or accessories prior to August 30, 2003; and the Company's obligation not to develop, manufacture, service or sell products outside the United States based on the mounting device technology licensed to the Company prior to August 30, 2006. In addition, the Company is obligated to register the Common Stock issued to Heraeus Med (the "Heraeus Shares") as partial consideration for HSI. The Company has also agreed to pay all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses and the expense of any special audits incident to or required by any registration in connection with any such registration. The Company and Heraeus Med have agreed to customary reciprocal indemnification obligations in connection with any such registration. The Company has entered into a supply relationship with Heraeus Med pursuant to which Hereaus Med has agreed to supply the Company certain products for resale and for use in the Company's production process. During 1996, the Company purchased approximately $937,000 of such products pursuant to the Hereaus Med supply arrangement. COMPENSATION OF DIRECTORS Non-employee members of the Board of Directors (other than the Heraeus Directors) receive a retainer of $2,000 per quarter and $500 per meeting of the Board of Directors attended. In addition, non-employee members (other than the Heraeus Directors) of the Board of Directors receive options to purchase shares of the Company's Common Stock pursuant to its 1990 Directors' Stock Option Plan (the "1990 Directors' Option Plan") and 1995 Directors' Stock Option Plan (the "1995 Directors' Option Plan"). Pursuant to the Heraeus Agreement, the Company appointed three designees of Heraeus Med to the Company's Board of Directors. For so long as Heraeus Med owns at least 3.3 million shares of Company Common Stock, the Company has agreed to use its best efforts to have three nominees of Heraeus Med elected to the Company's Board of Directors; for so long as Heraeus Med owns at least 1.6 million shares of Company Common Stock, the Company has agreed to use its best efforts to have at least two nominees of Heraeus Med elected to the Company's Board of Directors; and for so long as Heraeus Med owns at least 600,000 shares of Common Stock, the Company has agreed to use its best efforts to have one nominee of Heraeus Med elected to the Board. Pursuant to the Heraeus Agreement, the Company has agreed to reimburse Heraeus Med for the reasonable expenses of the Heraeus Directors in attending board meetings and fulfilling their duties as directors, up to a maximum of $25,000 per year. The 1990 Directors' Option Plan, which has been terminated by the Board of Directors with respect to the grant of any future options, provided for the grant of nonstatutory options to nonemployee directors of the Company at an exercise price not less than the fair market value of the Company's Common Stock on the date of grant. Under the 1990 Directors' Option Plan, persons who were non-employee directors as of October 18, 1991, as well as persons who have joined the Board since that date through election by the shareholders of the Company or appointment by the Board of Directors to fill a vacancy, have been granted an option to purchase -23- 24 45,000 shares of the Company's Common Stock. Options issued pursuant to this plan vest and become exercisable over three years with respect to each optionee who remains a director and expire five years after the date of grant. The 1995 Directors' Option Plan was approved by the Board of Directors in November 1995 and also provides for the grant of nonstatutory options to non-employee directors of the Company at an exercise price not less than the fair market value of the Company's Common Stock on the date of grant. Under the 1995 Directors' Option Plan, persons who were non-employee directors as of November 30, 1995, as well as persons who have joined the Board since that date through election by the shareholders of the Company or appointment by the Board of Directors to fill a vacancy, have been granted an option to purchase 45,000 shares of the Company's Common Stock. Options issued pursuant to this plan vest and become exercisable over three years with respect to each optionee who remains a director and expire five years after the date of grant. Directors who are designated or nominated by shareholders who hold 10% or more of the outstanding Company Common Stock, including the Heraeus Directors, are not eligible to receive options under the 1995 Directors' Option Plan. Directors who are employees of the Company do not receive any additional compensation for their services as a director. -24- 25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the beneficial ownership of the Company's Common Stock as of March 31, 1997 as to (i) each person who is known by the Company to own beneficially more than five percent of the Company's Common Stock, (ii) each of the Company's directors, (iii) each of the executive officers named in the Summary Compensation Table beginning on page 19, and (iv) all directors and executive officers as a group.
SHARES BENEFICIALLY OWNED(1) ---------------------------- NUMBER(2) PERCENT OF TOTAL --------- ---------------- Heraeus Med GmbH(3) . . . . . . . . . . . . . . . . . . 4,609,345 37.9% Thomas B. Boyd . . . . . . . . . . . . . . . . . . . . 80,358 * David Cohen(5). . . . . . . . . . . . . . . . . . . . . 0 * Roy Fiebiger . . . . . . . . . . . . . . . . . . . . . 28,486 * Klaus Goffloo(5). . . . . . . . . . . . . . . . . . . . 0 * Benjamin L. Holmes . . . . . . . . . . . . . . . . . . 44,583 * Thomas Ihlenfeldt(5) . . . . . . . . . . . . . . . . . 0 * Bonnie Jones(4) . . . . . . . . . . . . . . . . . . . . 86,959 * Dennis LaLumandiere . . . . . . . . . . . . . . . . . . 61,266 * E. Walter Lange . . . . . . . . . . . . . . . . . . . . 26,250 * Robert V. McCormick . . . . . . . . . . . . . . . . . . 331,832 2.7% Rodney Perkins, M.D. . . . . . . . . . . . . . . . . . 147,717 1.2% Robert J. Pressley, Ph.D. . . . . . . . . . . . . . . 42,266 * Eric M. Reuter. . . . . . . . . . . . . . . . . . . . . 8,033 * All directors and executive officers as a group (13 persons)(3),(5) . . . . . . . . . . . . . . . . . 5,467,095 42.7%
- ------------------ * Less than 1%. 1. The persons named in this table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the other footnotes to this table. 2. Includes with respect to each named person the following shares subject to options exercisable within 60 days of March 31, 1997: Mr. Boyd -- 76,378; Mr. Fiebiger -- 27,236; Mr. Holmes -- 42,083; Ms. Jones -- 79,332; Mr. LaLumandiere -- 57,290; Mr. Lange -- 21,250; Mr. McCormick -- 226,874; Dr. Perkins -- 81,250 Dr. Pressley -- 21,250; Mr. Reuter -- 7,833. 3. Does not include up to 500,000 shares of Laserscope common stock which Laserscope may issue to Heraeus Med, GmbH in certain circumstances in connection with its indemnification obligations to Heraeus Med in connection with Laserscope's acquisition of Heraeus Surgical, Inc. 4. Ms. Jones resigned as an officer of the Company effective January 1997. 5. Messrs. Cohen, Goffloo and Ihlenfeldt are affiliated with Heraeus Med and may be deemed to exercise beneficial ownership of the shares of Laserscope Common Stock owned by Heraeus Med. Messrs. Cohen, Goffloo and Ihlenfeldt disclaim beneficial ownership of the shares of Laserscope Common Stock held by Heraeus Med. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MANAGEMENT AND OTHERS In March 1994, the Company entered into Management Continuity Agreements with each of its executive officers, which were amended in December 1994. These agreements provide (1) for continued employment or salary continuation at the Company or its -25- 26 successor for at least twelve (12) months following any Change in Control of the Company (as defined below), at the same salary and with the same benefit program as were in effect prior to such Change in Control, (2) that such executives may, with thirty (30) days written prior notice, resign but will be entitled to receive his or her current salary and level of benefits for the remainder of the twelve (12) months following the Change in Control if, in connection with such Change in Control the executive's duties or responsibilities are materially reduced or executive is asked to relocate to a facility or location more than 50 miles from the Company's current location, (3) that all stock options exercisable for the Company's securities held by such executives shall become immediately vested and shall be exercisable in full in accordance with the provisions of the option agreement and plan pursuant to which such option was granted, and (4) that upon the immediate vesting of stock options, the optionee will have the right (subject to any limitations imposed by Section 16 of the Securities Exchange Act of 1934 or other applicable securities laws and only to the extent permitted by the terms of the applicable option plan) to deliver a non-recourse promissory note (secured only by the pledged shares for repayment), at the prime rate of interest determined as of the date of the note, in payment of the exercise price for the outstanding options. For purposes of the Management Continuity Agreements, a Change in Control of the Company shall be deemed to have occurred upon the happening of any of the following events: (1) any acquisition of twenty percent (20%) or more of the Company's then outstanding voting securities without the approval of the Board of Directors, (2) any merger or consolidation in which the Company is not the surviving entity, (3) approval of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, or (4) a change in the composition of the Board of Directors of the Company, as a result of which fewer than a majority of the directors are incumbent directors. The Company has sold Common Stock to certain employees and directors and accepted promissory notes secured by that stock as payment for certain of those shares. These notes originally carried annual interest rates of 9.0% to 9.5%. During 1995 the principal and accrued interest on these notes were refinanced and the notes now carry annual interest rates of 5.79%.
INDEBTEDNESS TO THE COMPANY TOTAL SHARES AGGREGATE AS OF PURCHASED PRICE 12/31/96 (1)(2) --------- --------- --------------- PURCHASER - --------- Rodney Perkins, M.D............... 16,667 $75,001 $136,067 Robert J. Pressley, Ph.D.......... 16,666 $74,997 $136,353
- ----- (1) In all cases, the amount shown was also the largest amount of indebtedness owed to the Company at any time during 1995. (2) Payment in the form of promissory notes in the above transactions was approved in each case by a majority of the disinterested directors of the Company and such sales were made pursuant to the Company's 1984 Stock Purchase Plan, which was approved by the shareholders of the Company. During 1996 Mr. Holmes received $25,000 in compensation from the Company for consulting services to the Company beyond his duties as Chairman of the Board of Directors. Non-employee members of the Company's Board of Directors receive cash compensation and options to purchase shares of Common Stock in connection with their service on the Board. The Company has entered into indemnification agreements with each of its directors and executive officers, which may require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' liability insurance if available on reasonable terms. The Company has entered into a supplier relationship with Heraeus Med pursuant to which Hereaus Med has agreed to supply the Company certain products for resale and for use in the Company's production process. During 1996, the Company purchased approximately $937,000 of such products pursuant to the Hereaus Med supply arrangement. -26- 27 Under the Heraeus Agreement, the Company and Heraeus Med have certain continuing obligations to each other. These obligations include: reciprocal indemnification obligations in connection with the HSI Acquisition; Heraeus Med's obligation not to develop, manufacture, service or sell hospital or physician office-based laser surgical systems or accessories prior to August 30, 2003; the Company's obligation (subject to certain limitations described below) to use its best efforts to have a specified number of Heraeus Med designees elected to the Company's Board of Directors; and the Company's obligation not to develop, manufacture, service or sell products outside the United States based on the mounting device technology licensed to the Company prior to August 30, 2006. In addition, the Company is obligated to register the Heraeus Shares issued to Heraeus Med as partial consideration for the acquisition of HSI and has agreed to pay all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses and the expense of any special audits incident to or required by any registration in connection with any such registration. The Company and Heraeus Med have agreed to customary reciprocal indemnification obligations in connection with any such registration. The Heraeus Agreement requires the Company to use its best efforts to have three nominees of Heraeus Med elected to the Board of Directors for so long as Heraeus Med owns at least 3.3 million shares of Company Common Stock, two nominees of Heraeus Med elected to the Board for so long as Heraeus Med owns at least 1.6 million shares of Company Common Stock and one nominee of Heraeus Med elected to the Board for so long as Heraeus Med owns at least 600,000 shares of Company Common Stock. Messrs. Cohen, Goffloo and Ihlenfeldt are the initial Heraeus Directors and were appointed to the Company's Board of Directors on August 30, 1996. Mr. Goffloo is Chairman of Heraeus Med and is a member of the Board of Directors of Hereaus Holding Company, Heraeus Med's parent company. Mr. Ihlenfeldt is Managing Director of Heraeus Med. From 1990 through 1995 Mr. Ihlenfeldt served as President and Chief Executive Officer of Heraeus Surgical, Inc. Mr. Cohen's firm served as counsel to Heraeus Med and HSI in connection with the Company's acquisition of HSI. -27- 28 PART IV ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements:
PAGE ---- Report of Ernst & Young LLP, Independent Auditors. F-1 Consolidated Balance Sheets at December 31, 1996 and 1995. F-2 Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994. F-3 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994. F-4 Consolidated Statements of Shareholders' Equity - Years ended December 31, 1996, 1995 and 1994. F-5 Notes to Consolidated Financial Statements. F-6 through F-14
(2) The following financial statement schedule for the years ended December 31, 1996, 1995 and 1994 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): -28- 29
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Acquisition Agreement between Laserscope and Heraeus Med GmbH.(13) 3.3 Seventh Amended and Restated Articles of Incorporation of Registrant.(1) 3.4 By-laws of Registrant, as amended.(4) 4.1 Common Shares Rights Agreement dated as of October 31, 1991 between Laserscope and American Stock Transfer & Trust Company as Rights Agent.(10) 4.1A First Amendment to Common Shares Rights Agreements between the Company and American Stock Transfer & Trust Company as Rights Agent dated as of April 22, 1996.(11) 4.1B Second Amendment to Common Shares Rights Agreement between the Company and American Stock Transfer & Trust Company as Rights Agent dated as of August 6, 1996.(12) 10.1A 1984 Stock Option Plan, as amended, and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement.(4) 10.1B 1994 Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement.(8) 10.2 1984 Stock Purchase Plan and form of Common Stock Purchase Agreement.(2) 10.3 1989 Employee Stock Purchase Plan and form of Subscription Agreement.(4) 10.4 401(k) Plan.(2) 10.6 Net Lease Agreement between the Registrant and Realtec Properties dated October 7, 1987.(2) 10.6A Amendment No. 1 dated January 18, 1990 to Net Lease Agreement between the Registrant and Realtec Properties dated October 7, 1987.(2) 10.6B Net Lease Agreement between Registrant and Realtec Properties dated December 14, 1989.(2) 10.6C Net Lease Agreement between Registrant and Realtec Properties dated June 25, 1990.(3)
-29- 30
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.6D Amendment No. 2 dated November 10, 1992 to Net Lease Agreement between Registrant and Realtec Properties dated October 7, 1987.(5) 10.6E Amendment No. 3 dated April 19, 1994 to Net Lease Agreement between Registrant and Realtec Properties dated October 7, 1987.(7) 10.6F Amendment No. 1 dated April 19, 1994 to Net Lease Agreement between Registrant and Realtec Properties dated June 25, 1990.(7) 10.6G Amendment No. 1 dated April 19, 1994 to Net Lease Agreement between Registrant and Realtec Properties dated December 14, 1989.(8) 10.10 Form of Indemnification Agreement.(2) 10.11 Amended and Restated Loan and Security Agreement between the Registrant and Silicon Valley Bank Dated November 23, 1996.(14) 10.13 1990 Directors' Stock Option Plan and form of Option Agreement.(4) 10.14 Form of Laserscope Management Continuity Agreement, as amended.(8) 10.18 1995 Directors' Stock Option Plan and form of Option agreement.(9) 22.1 Subsidiaries of Registrant.(6) 23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 32).(14) 25.1 Power of Attorney (see page 33).(14) 27.1 Financial Data Schedule.
-30- 31 Reports on Form 8-K: On November 8, 1996, the Company filed a Form 8-K/A amending its current report on Form 8-K filed September 11, 1996. The Form 8-K/A reported the consummation of the Company's acquisition of HSI and contained audited Balance Sheets of HSI as of December 31, 1995 and 1994 and the related statements of operations, stockholder's equity and cash flows for each of the three years ended December 31, 1995, 1994 and 1993 as well as the unaudited balance sheet of HSI as of June 30, 1996 and the related unaudited statements of operations, stockholder's equity and cash flows for the six-month period ended June 30, 1996 and 1995. In addition, the Form 8-K/A contained the unaudited pro forma combined condensed balance sheet as of June 30, 1996, the unaudited pro forma combined condensed statements of operations for the year ended December 31 1995 and the six months ended June 30, 1996 and the notes thereto. (1) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. (2) Incorporated by reference to identically numbered exhibits filed in response to Item 16(a), "Exhibits," of the Registrant's Registration Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto (File No. 33-31689), which became effective on November 29, 1989. (3) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a)(3), "Exhibits", of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. (4) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a)(3), "Exhibits", of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. (5) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a)(3), "Exhibits", of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. (6) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a)(3), "Exhibits", of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. (7) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits", of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1994. (8) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a)(3), "Exhibits", of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. (9) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a)(3), "Exhibits", of the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1995. (10) Incorporated by reference to Exhibit 1 of the Registrant's Registration Statement on Form 8-A filed November 15, 1991. (11) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits", of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996. (12) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits", the Company's Form 8- A/A filed September 4, 1996. (13) Incorporated by reference to Exhibit A to the Definitive Proxy Statement for the Special Meeting of Shareholders held August 29, 1996. (14) Filed herewith. -31- 32 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-38831, 33-33692, 33-40506 33-53052, 33-53158, 33- 63603 33-82524, 333-07089, 333-07101, 333-07103, 333-07095, 333-11787 and 333-11795) pertaining to the 1984 Stock Option Plan, the 1989 Employee Stock Purchase Plan, the 1990 Director's Stock Option Plan, the 1994 Stock Option Plan, the 1995 Directors' Stock Option Plan and the 1995 Replacement Option Plan of Laserscope) of our report dated January 28, 1997, with respect to the consolidated financial statements and schedule of Laserscope included in the Annual Report (Form 10-K/A) for the year ended December 31, 1996. /s/ Ernst & Young LLP San Jose, California April 25, 1997 -32- 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. LASERSCOPE Date: April 28, 1997 By: /s/ Dennis LaLumandiere ------------------------------ Dennis LaLumandiere Vice President of Finance, Chief Financial Officer and Assistant Secretary 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.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Benjamin L. Holmes* Chairman of the Board of April 28, 1997 ----------------------- Directors (Benjamin L. Holmes) /s/ Robert V. McCormick* President, Chief Executive April 28, 1997 ------------------------ Officer and Director (Robert V. McCormick) /s/ Dennis LaLumandiere Vice President of Finance, April 28, 1997 ------------------------ Chief Financial Officer and (Dennis LaLumandiere) Assistant Secretary (Principal Financial and Accounting Officer) /s/ David Cohen* Director April 28, 1997 ---------------- (David Cohen) /s/ Klaus Goffloo* Director April 28, 1997 ------------------ (Klaus Goffloo) /s/ Thomas Ihlenfeldt* Director April 28, 1997 ---------------------- (Thomas Ihlenfeldt) /s/ E. Walter Lange* Director April 28, 1997 -------------------- (E. Walter Lange) /s/ Rodney Perkins* Director April 28, 1997 ------------------- (Rodney Perkins, M.D.) /s/ Robert J. Pressley* Director April 28, 1997 ----------------------- (Robert J. Pressley, Ph.D.) * By /s/ Dennis LaLumandiere ------------------- (Dennis LaLumandiere Attorney-in-Fact)
-33- 34 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Laserscope We have audited the accompanying consolidated balance sheets of Laserscope as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Laserscope at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Ernst & Young LLP San Jose, California January 28, 1997 F-1 35 LASERSCOPE CONSOLIDATED BALANCE SHEETS
DECEMBER 31, (DOLLARS IN THOUSANDS) 1996 1995 - ---------------------- ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 3,917 $ 2,278 Accounts receivable, net 13,286 5,543 Inventories 17,407 10,292 Other current assets 926 692 -------- -------- Total current assets 35,536 18,805 Property and equipment, net 3,109 2,663 Investment in NWL 1,681 1,681 Developed technology and other intangibles, net 3,473 - Other assets 670 433 -------- -------- Total assets $ 44,469 $ 23,582 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 9,246 $ 1,455 Accrued compensation 2,947 1,156 Warranty 962 476 Deferred revenue 2,376 2,008 Other accrued liabilities 1,507 1,132 Current obligations under capital leases 54 14 -------- -------- Total current liabilities 17,092 6,241 Obligations under capital leases 202 15 Commitments and contingencies Shareholders' equity: Common stock 11,868,171 shares outstanding 48,798 37,248 (7,060,634 in 1995) Accumulated deficit (20,988) (19,296) Translation adjustments (260) (251) Notes receivable from shareholders (375) (375) -------- -------- Total shareholders' equity 27,175 17,326 -------- -------- Total liabilities and shareholders' equity $ 44,469 $ 23,582 ======== ========
See notes to consolidated financial statements F-2 36 LASERSCOPE CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, (THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 - ------------------------------------- ---- ---- ---- Net Revenues: Products $36,885 $24,974 $30,671 Services 5,959 5,159 5,649 ------- ------- ------- 42,844 30,133 36,320 Cost of Sales: Products 17,967 11,526 13,715 Services 3,915 3,266 3,203 ------- ------- ------- 21,882 14,792 16,918 Gross margin 20,962 15,341 19,402 Operating expenses: Research and development 2,555 3,838 3,589 Purchased in-process research and development 2,376 - - Selling, general and administrative 16,749 15,333 16,994 Other non-recurring charges relating to the acquisition of Heraeus Surgical, Inc. 872 - - ------- ------- ------- 22,552 19,171 20,583 Operating loss (1,590) (3,830) (1,181) Interest and other income, net 50 278 250 ------- ------- ------- Loss before income taxes (1,540) (3,552) (931) Provision for income taxes 152 - - ------- ------- ------- Net loss $(1,692) $(3,552) $ (931) ======= ======== ======= Net loss per share $ (0.19) $ (0.51) $ (0.13) ======= ======= ======= Shares used in per share calculations 8,677 6,999 6,924 ======= ======= =======
See notes to consolidated financial statements F-3 37 LASERSCOPE CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1996 1995 1994 - ---------------------- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,692) $(3,552) $(931) Adjustments to reconcile net loss to cash provided (used) by operating activities: Depreciation and amortization 1,218 1,419 1,623 Purchased in-process research and development 2,376 - - Increase (decrease) from changes in: Accounts receivable (2,622) 2,523 (460) Inventories 1,076 (2,780) 853 Other current assets (34) 346 20 Other assets - 350 86 Accounts payable 2,923 163 (485) Accrued compensation 441 20 (312) Warranty 86 (201) (166) Deferred revenue (311) (317) (151) Other accrued liabilities (115) 182 (432) ------- ------- ------- Cash provided (used) by operating activities 3,346 (1,847) (355) ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of held-to-maturity investments - - (3,001) Maturity of held-to-maturity investments - 1,998 3,030 Capital expenditures (593) (762) (1,684) Funding of agreement with NWL - (1,681) - Heraeus Surgical acquisition, net of cash received (1,741) - - Other (9) (71) 11 ------- ------- ------- Cash used by investing activities (2,343) (516) (1,644) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment on obligations under capital leases (14) (11) (101) Proceeds from the sale of common stock under stock plans, net of repurchases and shareholder notes receivable 650 48 587 ------- ------- ------- Cash provided by financing activities 636 37 486 ------- ------- ------- Increase (decrease) in cash and cash equivalents 1,639 (2,326) (1,513) Cash and cash equivalents, beginning of year 2,278 4,604 6,117 ------- ------- ------- Cash and cash equivalents, end of year $ 3,917 $ 2,278 $ 4,604 ======= ======= =======
In addition to the cash paid for the Heraeus Surgical, Inc. acquisition, the Company issued 4,609,345 shares of common stock. See notes to consolidated financial statements F-4 38 LASERSCOPE CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NOTES TOTAL ACCUMULATED TRANSLATION RECEIVABLE FROM SHAREHOLDERS' (DOLLARS IN THOUSANDS) COMMON STOCK DEFICIT ADJUSTMENTS SHAREHOLDERS EQUITY - ---------------------- ------------ ------- ----------- ------------ ------ Balance at December 31, 1993 $ 36,493 $(14,813) $(191) (255) $21,234 Issuance of 140,665 shares under stock plans, net of repayment of notes 581 6 587 Translation adjustments 11 11 Net loss (931) (931) -------- -------- ----- ------ ------- Balance at December 31, 1994 37,074 (15,744) (180) (249) 20,901 Issuance of 76,790 shares under stock plans, net of repayment and refinancing of notes 174 (126) 48 Translation adjustments (71) (71) Net loss (3,552) (3,552) -------- -------- ----- ------ ------- Balance at December 31, 1995 37,248 (19,296) (251) (375) 17,326 Issuance of 198,192 shares under stock plans 650 650 Issuance of 4,609,345 shares in conjunction with the acquisition of Heraeus Surgical, Inc., including associated acquisition costs 10,900 10,900 Translation adjustments (9) (9) Net loss (1,692) (1,692) -------- -------- ----- ------ ------- Balance at December 31, 1996 $ 48,798 $(20,988) $(260) $ (375) $27,175 ======== ======== ===== ====== =======
See notes to consolidated financial statements F-5 39 LASERSCOPE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business The Company operates in one business segment, the medical systems business. The Company develops, manufactures, markets and supports surgical lasers and other surgical systems, related instrumentation and disposable supplies. The Company markets its products and services in over thirty countries worldwide to hospitals, outpatient surgery centers and physicians. Basis of presentation The accompanying consolidated financial statements include the Company and its wholly and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash equivalents and short-term investments The Company invests its excess cash in high-quality debt instruments. The Company considers cash equivalents to be short-term financial instruments that are readily convertible to cash, subject to no more than insignificant interest rate risk and that have original maturities of three months or less. At December 31, 1996 and 1995 the Company's cash equivalents were in the form of institutional money market accounts and totaled $1.8 million and $1.1 million, respectively. At December 31, 1996 and 1995 the Company had no investments in debt securities. Revenue recognition and product warranty The Company generally recognizes revenue related to the sale of systems, instrumentation and disposables at the time of shipment and provides currently for the estimated cost to repair or replace products under warranty provisions in effect at the time of the sale. Service revenue is recognized as the services are provided or pro rata over the period of the applicable contract. Property and equipment Property and equipment is stated at cost less accumulated depreciation and amortization. Equipment is depreciated using principally accelerated methods over estimated useful lives of three to seven years. Equipment under capital leases is amortized over the period of the lease. Leasehold improvements are amortized using the straight-line method over the remaining term of the lease. Inventories Inventories are stated at the lower of cost (computed on a first-in, first-out basis) or market. Net income (loss) per share Net income (loss) per share is based upon the weighted average number of shares of common stock outstanding and dilutive common equivalent shares from stock options (using the treasury stock method). F-6 40 Foreign currency translation The functional currencies of the Company's foreign subsidiaries are their local currencies. Accordingly, all assets and liabilities related to their operations are translated at the current exchange rates at the end of each period. The resulting cumulative translation adjustments are recorded directly to the translation adjustments account included in shareholders' equity. Revenues and expenses are translated at average exchange rates in effect during the period. Impairment of assets The Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (SFAS121) during the year ended December 31, 1996. Such adoption did not have a material impact on the financial statements. Intangible assets related to the acquisition of Heraeus Surgical, Inc. Intangible assets related to the acquisition of Heraeus Surgical, Inc. included developed technology and an established workforce. These assets are amortized on a straight-line basis over estimated useful lives of seven and five years, respectively. Advertising expense The cost of advertising is expensed as incurred. The Company does not incur any direct response advertising costs. Advertising costs were not significant in 1996, 1995 and 1994. 2. ACQUISITION OF HERAEUS SURGICAL, INC. During April 1996, the Company and Heraeus Med, GmbH signed a definitive agreement for the acquisition (the "Acquisition") of HSI (a wholly- owned subsidiary of Heraeus Med, GmbH). Pursuant to the Acquisition Heraeus Med received approximately 4.6 million shares of newly issued Laserscope common stock and a $2.0 million cash payment in exchange for all of the outstanding shares of HSI and certain assets and liabilities of Heraeus Med's German laser distribution organization. The Acquisition closed on August 30, 1996 and has been accounted for as a purchase. The purchase price, including related acquisition costs, was allocated based on an independent appraisal obtained by the Company to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the date of acquisition. The purchase price for the Acquisition was (in thousands): Newly issued Laserscope common stock $10,900 Cash paid 2,000 Transaction and other direct acquisition costs 1,662 ------- Total $14,562
The allocation of the purchase price was determined as follows: Net tangible assets acquired: Cash (before netting cash paid) $ 1,508 Accounts receivable, net 5,121 Inventories 8,191 Other assets 1,111 Accounts payable and other current liabilities (7,374) ------- Total net tangible assets acquired $ 8,557 Intangible assets acquired: Developed technology $ 3,229 In-process technology 2,376 Workforce 400 ------- $14,562
To determine the value of the developed technology, the expected future cash flow of each existing product was discounted, taking into account risks related to the characteristics and applications of each product, existing and future markets, and assessments of the F-7 41 life cycle stage of each product. The analysis resulted in a valuation of approximately $3.2 million for completed products, which had reached technological feasibility and therefore was capitalizable. The asset is being amortized on a straight-line basis over a seven year period. The value of the assembled workforce was derived by estimating the costs to replace the existing employees including search costs, interview costs and training costs for each category of employee. The analysis determined a valuation of approximately $400,000 for the assembled workforce. The asset is being amortized on a straight-line basis over a five year period. In determining the value of technology in the development stage, the Company considered, among other factors, the stage of development of each project, the time and resources needed to complete each project, expected income and associated risks. Associated risks include the inherent difficulties and uncertainties in completing each project and thereby achieving technological feasibility, and risks related to the viability of potential changes in future target markets. This analysis resulted in a valuation of approximately $2.4 million for technology in the development stage that had not yet reached technological feasibility and did not have alternative future uses. Therefore, in accordance with generally accepted accounting principles, the $2.4 million of technology in the development stage was expensed in the period ended September 30, 1996 as purchased in-process research and development. During the quarter ended September 30, 1996, the Company recorded an additional $0.9 million in charges to write off inventory and fixed assets which became redundant as a result of the acquisition of HSI. The operating results of HSI from August 30, 1996 through December 31, 1996 have been included in the Company's consolidated results of operations. The following unaudited pro forma combined results of operations of the Company and Heraeus Surgical, Inc. (HSI) for the twelve months ended December 31, 1996 and December 31, 1995 have been prepared assuming that the Acquisition, had occurred at the beginning of the period presented. The following pro forma information is not necessarily indicative of the results that would have occurred had the Acquisition been completed at the beginning of the period indicated, nor is it indicative of future operating results (in thousands, except per share data):
TWELVE MONTHS ENDED DECEMBER 31, 1996 1995 ---- ---- (UNAUDITED) Net revenues $ 61,928 $ 57,909 Loss from operations $ (2,209) $ (6,718) Net loss $ (2,112) $ (6,827) Net loss per share $ (0.18) $ (0.59) Shares used in per share calculations 11,750 11,608
The 4.6 million common shares issued to Heraeus Med, GmbH in this transaction were unregistered pursuant to section 4(2) of the Securities Act of 1933, as amended and cannot be sold, transferred or pledged by Heraeus Med GmbH until August 30, 1997. On that date, the Company has an obligation to register the shares. 3. ACCOUNTS RECEIVABLE Accounts receivable at December 31 consisted of:
(IN THOUSANDS) 1996 1995 -------------- ---- ---- Trade accounts receivable $13,986 $ 6,033 Less: allowance for doubtful accounts (700) (490) ------- ------- $13,286 $ 5,543 ======= =======
F-8 42 4. INVENTORIES Inventories at December 31 consisted of:
(IN THOUSANDS) 1996 1995 -------------- ---- ---- Sub-assemblies and purchased $12,015 $ 7,201 parts Finished goods 5,392 3,091 ------- -------- $17,407 $ 10,292 ======= ========
5. PROPERTY AND EQUIPMENT Property and equipment at December 31 consisted of:
(IN THOUSANDS) 1996 1995 -------------- ---- ---- Machinery and equipment $ 4,967 $ 4,562 Office equipment and furniture 7,448 6,917 Leasehold improvements 2,229 1,781 -------- -------- 14,644 13,260 Less accumulated depreciation and amortization (11,535) (10,597) -------- -------- $ 3,109 $ 2,663 ======== ========
6. DEVELOPED TECHNOLOGY AND OTHER INTANGIBLES Developed technology and other intangibles resulting from the acquisition of HSI at December 31 consisted of:
(IN THOUSANDS) 1996 1995 -------------- ---- ---- Developed technology $ 3,229 $- Assembled workforce 400 - ------- -- 3,629 - Less accumulated amortization (156) - ------- -- $ 3,473 $- ======= ==
7. LINE OF CREDIT In November 1996, the Company renewed its agreement with a bank for a $5 million line of credit that provides for short-term borrowings based on certain eligible accounts receivable. The line of credit, which expires in November 1997, is secured by the assets of the Company and bears interest at the bank's prime rate plus one percentage point. Provisions of this agreement prohibit the payment of dividends and the repurchase of stock and require the Company to maintain certain minimum working capital and net worth levels. As of March 17, 1997, the Company was in compliance with the covenants and had $1.6 million in borrowings under this agreement. 8. INVESTMENT IN NWL In March 1995, the Company entered into an agreement with NWL Laser-Technologie ("NWL") whereby the Company paid NWL approximately $1.6 million in exchange for a cross-distribution and development agreement, a minority equity position in NWL and an option to purchase all of the ownership interests in NWL. These assets are carried at cost. If the Company does not exercise its option to purchase NWL by June 1997, there will be no reimbursement of the Company's investment and the Company's equity position will be relinquished. If the Company exercises its option, the remaining purchase price will be paid over three and one half years from the exercise date. The Company currently expects to exercise its purchase option prior to lapse of the option period. 9. LEASE OBLIGATIONS The Company leases certain equipment under lease agreements that have been accounted for as capital leases. Leased equipment and accumulated amortization related to assets under capital leases at December 31 were as follows:
(IN THOUSANDS) 1996 1995 -------------- ---- ---- Leased equipment $1,784 $1,545 Accumulated amortization 1,531 1,518
There were $241,000 in additions to leased equipment in 1996, none in 1995 and 1994. F-9 43 The Company leases its facilities and certain equipment under non-cancelable operating leases. Rental expense under these leases amounted to approximately $982,000, $966,000 and $1,070,000 in each of the three years ended December 31, 1996, 1995 and 1994, respectively. Future minimum lease payments under capital and operating leases were as follows at December 31, 1996:
CAPITAL OPERATING (IN THOUSANDS) LEASES LEASES -------------- ------ ------ 1997 $ 83 $1,094 1998 61 936 1999 61 777 2000 61 777 2001 and beyond 61 130 ----- ------ $ 327 $3,714 ====== Less amount representing interest 71 ----- Present value of future minimum lease payments $ 256 =====
10. SHAREHOLDERS' EQUITY The Company has 25,000,000 shares of no par value common stock authorized. In addition, the Company has authorized 5,000,000 shares of undesignated preferred stock with rights, preferences and privileges to be determined by the Company's Board of Directors. 1994 and 1984 Stock Option Plans During 1994 and 1984, the Company adopted stock option plans under which the Board of Directors may grant incentive stock options to purchase shares of common stock to employees of the Company at a price not less than the fair value of the shares as of the date of grant. The Board of Directors may also grant Non-statutory stock options to employees and consultants, including directors who serve as employees or consultants, at not less than 85% of the fair market value of the shares as of the date of grant. Options issued pursuant to the 1984 plan vest and become exercisable over periods of up to five years and expire five to ten years after the date of grant. Options issued pursuant to the 1994 plan vest and become exercisable over periods of up to four years and expire five years after the date of grant. The 1984 Stock Option Plan expired by its terms with respect to any future option grants effective in August 1994. At December 31, 1996, the 1984 Stock Option Plan had options to purchase 713,550 shares of common stock outstanding, of which 646,607 were exercisable. The Company has reserved 1,700,000 shares of common stock of which there were 410,520 shares available for issuance pursuant to its 1994 stock option plan as of December 31, 1996. In November 1995, the Company allowed non officer employees to cancel outstanding options that had been granted under the 1984 plan but that had not yet become exercisable and replace them with new non-statutory grants outside of the 1984 plan for a like number with the same exercisability restrictions at the fair market value of the common stock at the date of grant. Employees elected to cancel and receive new grants to purchase an aggregate of 175,453 shares at an exercise price of $2.00. In November 1995, the Company also allowed employees to cancel outstanding options that had been granted under the 1994 plan but that had not yet become exercisable and replace them with new grants for a like number with the same exercisability restrictions at the fair market value of the common stock at the date of grant. Employees elected to cancel and receive new grants to purchase an aggregate of 455,384 shares at an exercise price of $2.00. 1990 and 1995 Directors' Stock Option Plans The Company has reserved 600,000 shares of its common stock for issuance pursuant to its 1990 and 1995 Directors' Stock Option Plans in aggregate. Under these plans, non-employee directors of the Company have been granted options to purchase 90,000 shares (45,000 shares pursuant to each plan) of the Company's common stock exercisable at the fair market value of such shares on the respective grant dates. Because the 1990 Directors' Stock Option Plan was terminated in 1995 with respect to any additional grants, new non employee 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 F-10 44 a director and expire five years after the date of grant. There were 120,000 shares available for issuance pursuant to the 1995 Directors' Stock Option Plan at December 31, 1996. The following table summarizes activity in the Company's stock option plans during the years ended December 31, 1995 and 1996:
SHARE WEIGHTED AVERAGE OUTSTANDING EXERCISE PRICE ----------- -------------- Balance, December 31, 1,749,635 5.88 1994 Granted 1,546,837 2.73 Exercised - - Canceled (1,023,744) $5.02 ---------- ----- Balance, December 31, 2,272,728 4.12 1995 Granted 641,225 3.86 Exercised (101,222) 4.13 Canceled (451,000) $5.24 ---------- ----- Balance, December 31, 2,361,731 $3.84 ========== ===== 1996
The following table displays a summary of relevant ranges of exercise prices for options outstanding and options exercisable for the Company's stock option plans at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------- ------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE -------- ----------- ----------- -------- ----------- -------- PRICES LIFE PRICE PRICE ------ ---- ----- ----- $2.00 - $2.88 884,100 4.58 2.00 297,489 2.00 $3.48 - $5.13 838,786 4.19 4.05 291,824 4.33 $5.38 - $8.00 638,393 2.28 $6.09 583,159 $6.12 ------------- --------- ---- ----- --------- ----- $2.00 - $8.00 2,361,279 3.82 $3.84 1,172,472 $4.63 ============= ========= ==== ===== ========= n =====
1989 Employee Stock Purchase Plan The Company has reserved 450,000 shares of common stock, for issuance pursuant to its 1989 Employee Stock Purchase Plan. Under this plan, qualified employees, excluding non-employee directors, may purchase up to a specified maximum amount of the Company's common stock through payroll deduction at 85% of its fair market value. At December 31, 1996, approximately 391,000 shares had been purchased under this plan. SFAS 123 Disclosure The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 13, 1994 under the fair value method of this Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes multiple option pricing model with the following weighted average assumptions: risk-free interest rates of 5.89% and 6.44% for 1995 and 1996, respectively; a dividend yield of 0.0%; a volatility factor of the expected market price of the Company's common stock of 1.0; and an expected life of the option of 4.0 years. F-11 45 To comply with the pro forma reporting requirements of SFAS 123 with respect to the Company's 1989 Employee Stock Purchase Plan, compensation cost is estimated for the fair value of the employees' purchase rights using the Black-Scholes model with the following assumptions for those rights granted in 1995 and 1996: a dividend yield of 0.0%; an expected life of 0.5 years; an expected volatility factor of 1.0; and weighted average risk free interest rates of 6.21% and 5.28% for 1995 and 1996, respectively. The weighted average fair value of those purchase rights granted in 1995 and 1996 were $1.38 and $1.70, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 ------------------------------------ ---- ---- Pro forma net loss $(2,808) $(3,911) Pro forma loss per share $(0.33) $(0.56)
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. 11. EMPLOYEE SAVINGS AND INVESTMENT PLAN In October 1989, the Company adopted a 401(k) savings and investment plan which covers all employees. The Company's contributions to the plan have been 50% matching of employee contributions up to 3% of each employee's base compensation and were approximately $132,000, $109,000 and $118,000 in the years ended December 31, 1996, 1995 and 1994, respectively. 12. INCOME TAXES Significant components of the provision for income taxes were as follows (in thousands):
1996 1995 1994 ---- ---- ---- Current federal taxes $ 102 $ - $ - Current state taxes 50 - ----- ----- ---- Provision for income taxes $ 152 $ - $ - ===== ===== ====
Pretax losses from foreign operations were $145,000, $1,185,000, and $1,100,000 respectively in 1996, 1995 and 1994. Income taxes differ from the amount computed by applying the statutory federal income tax rate of 34% to income (loss) before taxes. The reasons for the differences and the tax effect of each are as follows (in thousands):
1996 1995 1994 ---- ---- ---- Computed expected tax $(539) $(1,243) $(326) Operating loss with no carryback 83 1,243 400 benefit State taxes 50 - - Benefit of net operating loss carryforward (432) - (74)
F-12 46 Charge for in-process research and development 832 - - Other 158 - ------ ------ ------ Provision for income taxes $ 152 $ - $ - ====== ====== ======
The components of the deferred tax asset consisted of the following at December 31, (in thousands):
1996 1995 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 3,200 $ 4,000 General business credit carryforwards 1,100 1,000 Inventory reserves and adjustments 2,500 1,400 Other accruals and reserves not currently deductible for tax purposes 2,000 1,500 Other 1,000 - ------- ------- Total deferred tax assets 9,800 7,900 Valuation for deferred tax assets (8,600) (7,900) ------- ------- Deferred tax asset 1,200 - Deferred tax liabilities Acquired intangibles (1,200) - ------- ------- Net deferred tax assets $ - $ - ======= =======
Approximately $500,000 of the valuation allowance is attributed to stock options, the benefit of which will be credited to paid-in-capital when realized. For federal tax purposes, the Company has net operating loss, research and development credit, and minimum tax credit carryforwards of $5,900,000, $350,000, and $350,000, respectively, which expire in the years 1997 through 2011. The Company has net operating loss and research and development credit carryforwards of $400,000 and $600,000, respectively, for state tax reporting purposes. The state net operating loss will expire in the years 1997 through 2000. In addition, the Company has foreign tax loss carryforwards of approximately $3,500,000 which begin to expire in 1998. The availability of the Company's net operating loss and tax credit carryforwards may be subject to a substantial limitation if it should be determined that there has been a change in ownership of more than 50 percent of the value of the Company's stock over a three year period. 13. FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATIONS OF CREDIT RISK The Company's trade receivables are made up of amounts due from its health care industry customers, primarily in the United States, Europe and the Pacific Rim. Any concentration of credit risk is substantially alleviated by the Company's credit evaluation and collection practices and the relative lack of concentration as well as geographical dispersion of customer accounts comprising its accounts receivable. Bad debt expense has been insignificant. The Company's export sales represent sales to unaffiliated customers and are displayed in the following table in approximate percentages of net revenues:
1996 1995 1994 ---- ---- ---- Europe 17% 15% 10% Middle - 1% 1% East Pacific Rim 9% 7% 6% --- --- --- Total 26% 23% 17%
The Company also has an Investment Policy approved by its Board of Directors related to its short-term cash investment practices. That policy limits the amount of credit exposure to any one financial institution and restricts investments to certain types of financial instruments based on specified credit criteria. 14. CONTINGENCIES F-13 47 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-14 48 SCHEDULE II LASERSCOPE VALUATION AND QUALIFYING ACCOUNTS (In thousands)
BALANCE AT BALANCE AT BEGINNING END DESCRIPTIONS OF PERIOD ADDITION DEDUCTION OF PERIOD - ---------------------- --------- -------- --------- --------- Allowance for doubtful accounts receivable: Year ended December 31, 1994 $540 $ - $ - $ 540 ==== ==== ===== ===== Year ended December 31, 1995 $540 $200 $ 250 $ 490 ==== ==== ===== ===== Year ended December 31, 1996 $490 $210 $ - $ 700 ==== ==== ===== =====
S-1 49 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.11 Amended and Restated Loan and Security Agreement between the Registrant and Silicon Valley Bank dated November 30,1996. 23.1 Consent of Ernst & Young, Independent Auditors (see page 32). 25.1 Power of Attorney (see page 33). 27.1 Financial Data Schedule.
EX-10.11 2 AMENDED AND RESTATED LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.11 2 LASERSCOPE AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT 3 TABLE OF CONTENTS
Page ---- 1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1 Revolving Facility . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2 Overadvances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.3 Interest Rates, Payments, and Calculations . . . . . . . . . . . . . . 9 2.4 Crediting Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.5 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.6 Additional Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.7 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3. CONDITIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.1 Conditions Precedent to Initial Credit Extension . . . . . . . . . . . 11 3.2 Conditions Precedent to all Credit Extensions. . . . . . . . . . . . 12 4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . 12 4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . . . . . 12 4.2 Delivery of Additional Documentation Required . . . . . . . . . . . . 12 4.3 Right to Inspect . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . 12 5.1 Due Organization and Qualification . . . . . . . . . . . . . . . . . . 12 5.2 Due Authorization; No Conflict . . . . . . . . . . . . . . . . . . . . 13 5.3 No Prior Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . 13 5.4 Bona Fide Eligible Accounts . . . . . . . . . . . . . . . . . . . . . 13 5.5 Merchantable Inventory . . . . . . . . . . . . . . . . . . . . . . . . 13 5.6 Name; Location of Chief Executive Office . . . . . . . . . . . . . . . 13 5.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.8 No Material Adverse Change in Financial Statements . . . . . . . . . . 13 5.9 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.10 Regulatory Compliance . . . . . . . . . . . . . . . . . . . . . . . . 13 5.11 Environmental Condition . . . . . . . . . . . . . . . . . . . . . . . 14 5.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.13 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.14 Government Consents . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.15 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.1 Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.2 Government Compliance . . . . . . . . . . . . . . . . . . . . . . . . 14 6.3 Financial Statements, Reports, Certificates . . . . . . . . . . . . . 14 6.4 Inventory; Returns . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.5 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.7 Principal Depository . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.8 Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
I 4 6.9 Debt-Net Worth Ratio . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.10 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.11 Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.12 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7.1 Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7.2 Change in Business . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7.3 Mergers or Acquisitions . . . . . . . . . . . . . . . . . . . . . . . 16 7.4 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.5 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.6 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.8 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.9 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . 17 7.10 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.11 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.12 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 8.1 Payment Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 8.2 Covenant Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 8.3 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . 18 8.4 Attachment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 8.5 Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 8.6 Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 8.7 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8.8 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8.9 Misrepresentations . . . . . . . . . . . . . . . . . . . . . . . . . . 19 9. BANK'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . 19 9.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 19 9.2 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . 20 9.3 Accounts Collection. . . . . . . . . . . . . . . . . . . . . . . . . . 20 9.4 Bank Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 9.5 Bank's Liability for Collateral . . . . . . . . . . . . . . . . . . . 21 9.6 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . 21 9.7 Demand; Protest . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 10. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . . . . . . . . . . 21 12. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 12.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . 22 12.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 12.3 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 12.4 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . 22 12.5 Amendments in Writing, Integration . . . . . . . . . . . . . . . . . . 22 12.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 12.7 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 12.8 Effect of Amendment and Restatement . . . . . . . . . . . . . . . . . 22
II 5 This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into as of November 27, 1996, by and between SILICON VALLEY BANK ("Bank") and LASERSCOPE ("Borrower"). RECITALS A. Borrower and Bank are parties to that certain Amended and Restated Business Loan Agreement dated as of March 18, 1996 (the "Business Loan Agreement"), that certain Commercial Security Agreement dated as of March 18, 1996 (the "Security Agreement") and a Promissory Note dated March 18, 1996, by Borrower to Bank (the "Note") (the Business Loan Agreement, the Security Agreement and the Note, each as may have been amended, the "Original Loan Documents"). B. Borrower and Bank wish to amend and restate the terms of the Original Loan Documents as stated herein. This Agreement sets forth the terms on which Bank will loan money to Borrower and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: C. DEFINITIONS AND CONSTRUCTION 1. Definitions. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means an advance under the Revolving Facility. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" has the meaning set forth in Section 2.1 hereof. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. 1 6 "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached hereto. "Committed Line" means Five Million Dollars ($5,000,000). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Credit Extension" means an Advance, Letter of Credit and/or Exchange Contract. "Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Advances made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of Borrower or any Subsidiary to a date more than one year from the date of determination, but excluding Subordinated Debt. "Daily Balance" means the amount of the Obligations owed at the end of a given day. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised from time to time by Bank in Bank's reasonable judgment and upon notification thereof to Borrower in accordance with the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: (1) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (2) Accounts with respect to an account debtor, fifty percent (50%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; (3) Accounts with respect to which the account debtor is an officer, employee, or agent of Borrower; 2 7 (4) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (5) Accounts with respect to which the account debtor is an Affiliate of Borrower; (6) Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts; (7) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States; (8) Accounts with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to Borrower; (9) Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank; (10) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (11) Accounts the collection of which Bank reasonably determines to be doubtful. "Eligible Foreign Accounts" means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that are: (1) covered by credit insurance in form and amount, and by an insurer satisfactory to Bank less the amount of any deductible(s) which may be or become owing thereon; or (2) supported by one or more letters of credit in favor of Bank as beneficiary, in an amount and of a tenor, and issued by a financial institution, acceptable to Bank; or (3) that Bank approves on a case-by-case basis. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "Exchange Contract" has the meaning set forth in Section 2.1.3 herein. "Foreign Exchange Reserve" has the meaning set forth in Section 2.1.3 herein. "GAAP" means generally accepted accounting principles as in effect from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. 3 8 "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Letter of Credit" or "Letters of Credit" has the meaning set forth in Section 2.1.1 herein. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into between Borrower and Bank in connection with this Agreement, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents. "Maturity Date" means the date immediately preceding the first anniversary of the date of this Agreement. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrower's Books relating to any of the foregoing. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Original Loan Documents" has the meaning set forth in the recital paragraph above. "Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank. 4 9 "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; and (e) Indebtedness secured by Permitted Liens. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; and (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. 5 10 "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Quick Assets" means, at any date as of which the amount thereof shall be determined, the consolidated cash, cash-equivalents, accounts receivable and investments, with maturities not to exceed 90 days, of Borrower determined in accordance with GAAP. "Responsible Officer" means each of the Chief Executive Officer, the Chief Financial Officer and the Controller of Borrower. "Revolving Facility" means the facility under which Borrower may request Bank to issue cash advances or letters of credit or enter into foreign exchange contracts as specified in Section 2.1 herein. "Schedule" means the schedule of exceptions attached hereto, if any. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means any corporation or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity shall, at the time as of which any determination is being made, be owned by Borrower, either directly or through an Affiliate. "Tangible Net Worth" means at any date as of which the amount thereof shall be determined, the consolidated total assets of Borrower and its Subsidiaries minus, without duplication, (i) the sum of any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, patents, trade and service marks and names, copyrights and research and development expenses except prepaid expenses, and (c) all reserves not already deducted from assets, and (ii) Total Liabilities. "Total Liabilities" means at any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness, but specifically excluding Subordinated Debt. 2. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. D. LOAN AND TERMS OF PAYMENT 1. Revolving Facility. (1) Advances. Subject to and upon the terms and conditions of this Agreement, Bank agrees to make Advances to Borrower in an aggregate amount outstanding at any time not to exceed the lesser of (i) the Committed Line minus the sum of (A) the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit) and (B) the Foreign Exchange Reserve or (ii) the Borrowing Base minus the sum of (A) the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit) and (B) the Foreign Exchange Reserve. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1. may be repaid and reborrowed at any time before the Maturity Date. For the purposes of this Agreement, "Borrowing Base" shall mean an amount equal to seventy-five percent (75%) of Eligible Accounts, provided that if aggregate amount of outstanding Advances in a quarter exceeds fifty percent (50%) of the average Borrowing Base for the preceding quarter, the Bank reserves the right to transfer all of Borrower's 6 11 rights, obligations and benefits under this Agreement including, without limitation, its commitment to lend, to the Bank's Commercial Finance Department provided (x) that the Borrower executes Bank's standard form of the Commercial Finance Department's documents which documents shall establish additional reporting and monetary requirements and such additional terms, conditions and customary pricing as Bank determines in its sole discretion and (y) Borrower pays all Bank Expenses incurred in preparing and negotiating such agreement. (2) Procedures. Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. California time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit A hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1 to Borrower's deposit account. (3) Maturity. The Revolving Facility shall terminate on the Maturity Date, at which time all Advances under this Section 2.1 and all other amounts owing under this Agreement shall be immediately due and payable. b. Letters of Credit. (1) Subject to the terms and conditions of this Agreement, Bank agrees to issue or cause to be issued letters of credit for the account of Borrower (each a "Letter of Credit," collectively, the "Letters of Credit") in an aggregate face amount not to exceed the lesser of (i) the Committed Line minus the sum of (A) the then outstanding principal balance of the Advances and (B) the Foreign Exchange Reserve or (ii) the Borrowing Base minus the sum of (A) the then outstanding principal balance of the Advances and (B) the Foreign Exchange Reserve, provided that the face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit) shall not in any case exceed Two Million Dollars ($2,000,000). Each such Letter of Credit shall have an expiry date no later than the Maturity Date, provided that Borrower's letter of credit reimbursement obligation shall be secured by cash on terms acceptable to Bank at any time after the Maturity Date if the term of this Agreement is not extended by Bank. All such Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form of application and letter of credit agreement. All amounts actually paid by Bank in respect of a Letter of Credit shall, when paid, constitute an Advance under this Agreement. (2) The obligation of Borrower to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and such Letters of Credit, under all circumstances whatsoever. Borrower shall indemnify, defend and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys' fees, arising out of or in connection with any Letters of Credit. c. Letter of Credit Reimbursement; Reserve. (1) Borrower may request that Bank issue a Letter of Credit payable in a currency other than United States Dollars. If a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as an advance to Borrower of the equivalent of the amount thereof (plus cable charges) in United States currency at the then prevailing rate of exchange in San Francisco, California, for sales of that other currency for cable transfer to the country of which it is the currency. 7 12 (2) Upon the issuance of any Letter of Credit payable in a currency other than United States Dollars, Bank shall create a reserve under the Committed Line for letters of credit against fluctuations in currency exchange rates, in an amount equal to twenty percent (20%) of the face amount of such Letter of Credit. The amount of such reserve may be amended by Bank from time to time to account for fluctuations in the exchange rate. The availability of funds under the Committed Line shall be reduced by the amount of such reserve for so long as such Letter of Credit remains outstanding. d. Foreign Exchange Contract; Foreign Exchange Settlements. (1) Subject to the terms of this Agreement, Borrower may enter into foreign exchange contracts (the "Exchange Contracts") not to exceed an aggregate amount of the lesser of (i) the Committed Line minus the sum of (A) the then outstanding principal balance of the Advances and (B) the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit); (ii) the Borrowing Base minus the sum of (A) the then outstanding principal balance of the Advance and (B) the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit); or (iii) Two Million Dollars ($2,000,000) (the "Contract Limit"), pursuant to which Bank shall sell to or purchase from Borrower foreign currency on a spot or future basis. Borrower shall not request any Exchange Contracts at any time it is out of compliance with any of the provisions of this Agreement. All Exchange Contracts must provide for delivery of settlement on or before the Maturity Date. The amount available under the Committed Line at any time shall be reduced by the following amounts (the "Foreign Exchange Reserve") on any given day (the "Determination Date"): (i) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed more than two business days after the Determination Date, ten percent (10%) of the gross amount of the Exchange Contracts; plus (ii) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed within two business days after the Determination Date, one hundred percent (100%) of the gross amount of the Exchange Contracts. (2) Bank may, in its discretion, terminate the Exchange Contracts at any time (a) that an Event of Default occurs or (b) that there is no sufficient availability under the Committed Line and Borrower does not have available funds in its bank account to satisfy the Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, and without limitation of any applicable indemnities, Borrower agrees to reimburse Bank for any and all fees, costs and expenses relating thereto or arising in connection therewith. (3) Borrower shall not permit the total gross amount of all Exchange Contracts on which delivery is to be effected and settlement allowed in any two business day period to be more than One Million Dollars ($1,000,000) (the "Settlement Limit"), nor shall Borrower permit the total gross amount of all Exchange Contracts to which Borrower is a party, outstanding at any one time, to exceed the Contract Limit. Notwithstanding the above, however, the amount which may be settled in any two (2) business day period may be increased above the Settlement Limit up to, but in no event to exceed, the amount of the Contract Limit under either of the following circumstances: (a) if there is sufficient availability under the Committed Line in the amount of the Foreign Exchange Reserve as of each Determination Date, provided that Bank in advance shall reserve the full amount of the Foreign Exchange Reserve against the Committed Line; or (b) if there is insufficient availability under the Committed Line, as to settlements within any two (2) business day period, provided that Bank, in its sole discretion, may: (A) verify good funds overseas prior to crediting Borrower's deposit account with Bank (in the case of Borrower's sale of foreign currency); or (B) debit Borrower's deposit account with Bank prior to delivering foreign currency overseas (in the case of Borrower's purchase of foreign currency). 8 13 (4) In the case of Borrower's purchase of foreign currency, Borrower in advance shall instruct Bank upon settlement either to treat the settlement amount as an advance under the Committed Line, or to debit Borrower's account for the amount settled. (5) Borrower shall execute all standard form applications and agreements of Bank in connection with the Exchange Contracts and, without limiting any of the terms of such applications and agreements, Borrower will pay all standard fees and charges of Bank in connection with the Exchange Contracts. (6) Without limiting any of the other terms of this Agreement or any such standard form applications and agreements of Bank, Borrower agrees to indemnify Bank and hold it harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, costs and expenses (including, without limitation, attorneys' fees of counsel of Bank's choice), of every nature and description which it may sustain or incur, based upon, arising out of, or in any way relating to any of the Exchange Contracts or any transactions relating thereto or contemplated thereby. 2. Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Bank pursuant to Section 2.1 of this Agreement is greater than the lesser of (i) the Committed Line or (ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of such excess. 3. Interest Rates, Payments, and Calculations (1) Interest Rate. Except as set forth in Section 2.3(b), any Advances shall bear interest, on the average Daily Balance, at a rate equal to one (1) percentage point above the Prime Rate. Except as set forth in Section 2.3(b), any Advances shall bear interest, on the average Daily Balance, at a rate equal to three-quarters (.75) of a percentage point above the Prime Rate on the date that Borrower simultaneously (i) achieves, as of the last day of any calendar month, a ratio of Quick Assets to Current Liabilities of at least 1.15 to 1.00, and (ii) achieves, as of the last day of any fiscal quarter a net profit, for the preceding three quarters, of at least Two Million Five Hundred Thousand Dollars ($2,500,000), and (iii) has a net profit of at least One Dollar ($1.00) in each of the preceding three quarters. (2) Default Rate. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. From and after the date Borrower (i) fails to comply with Sections 6.8, 6.9, 6.10 or 6.11 herein and (ii) cures or waives any such covenant violations, provided such waiver shall be given in Bank's sole discretion, any Advances shall bear interest, on the average Daily Balance, at a rate equal to one and one quarter (1.25) percentage points above the Prime Rate. (3) Payments. Interest hereunder shall be due and payable on the twenty-sixth calendar day of each month during the term hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower's deposit accounts or against the Committed Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (4) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 9 14 4. Crediting Payments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon California time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 5. Fees. Borrower shall pay to Bank the following: (1) Facility Fee. A Facility Fee equal to Twenty Thousand Dollars ($20,000), which fee shall be due on the Closing Date and shall be fully earned and nonrefundable; (2) Letters of Credit. An issuance fee for each standby Letter of Credit of two percent (2%) of the amount of such Letter of Credit, due on the date of the issuance of such Letter of Credit; (3) Financial Examination and Appraisal Fees. Bank's customary fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for each appraisal of Collateral and financial analysis and examination of Borrower performed from time to time by Bank or its agents; (4) Bank Expenses. Upon the date hereof, all Bank Expenses incurred through the Closing Date, including reasonable attorneys' fees and expenses, and, after the date hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 6. Additional Costs. In case any change in any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law), in each case after the date of this Agreement: (1) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (2) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (3) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 10 15 7. Term. This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. E. CONDITIONS OF LOANS 1. Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (1) this Agreement; (2) a certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; (3) financing statements (Forms UCC-1); (4) insurance certificate; (5) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof; and (6) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 2. Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (1) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; (2) timely receipt by Bank of the letter of credit applications, foreign exchange documents and/or other documents specified in Section 2.1 hereof; and (3) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Credit Extension. The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2(c). F. CREATION OF SECURITY INTEREST 1. Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. 11 16 2. Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 3. Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 4. Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified. 5. Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 6. No Prior Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. 7. Bona Fide Eligible Accounts. The Eligible Accounts are bona fide existing obligations. The property giving rise to such Eligible Accounts has been delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor that is included in any Borrowing Base Certificate as an Eligible Account. 8. Merchantable Inventory. All Inventory is in all material respects of good and marketable quality, free from all material defects. 8. 9. Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. 10. Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. Borrower does not have knowledge of any such pending or threatened actions or proceedings. 11. No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower and any Subsidiary that have been delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's 12 17 consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank. 12. Solvency. Borrower is solvent and able to pay its debts (including trade debts) as they mature. 13. Regulatory Compliance. Borrower and each Subsidiary has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. 13 18 14. Environmental Condition. None of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 15. Taxes. Borrower and each Subsidiary has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 16. Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 17. Government Consents. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted. 18. Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. G. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following: 1. Good Standing. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, to the extent consistent with prudent management of Borrower's business, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 2. Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 3. Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (a) as soon as available, but in any event within thirty (30) days after the end of each month, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during such period, certified by a Responsible Officer; (b) as soon as available, but in any event within ninety (90) days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently 14 19 applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) within five (5) days upon becoming available, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Form 10-K and 10-Q filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (e) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. Within twenty (20) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable and accounts payable. Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto. Bank shall have a right from time to time hereafter to audit Borrower's Accounts at Borrower's expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing. 4. Inventory; Returns. Borrower shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Two Hundred Fifty Thousand Dollars ($250,000). 5. Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower. 6. Insurance (1) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (2) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank's 15 20 request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 7. Principal Depository. Borrower shall maintain its principal depository and operating accounts with Bank. 8. Quick Ratio. Borrower shall maintain, as of the last day of each calendar month, a ratio of Quick Assets to Current Liabilities of at least 0.80 to 1.00. 9. Debt-Net Worth Ratio. Borrower shall maintain, as of the last day of each calendar month, a ratio of Total Liabilities less Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than .90 to 1.00. 10. Tangible Net Worth. Borrower shall maintain, as of the last day of each of Borrower's fiscal quarters, a Tangible Net Worth of not less than Twenty One Million Five Hundred Thousand Dollars ($21,500,000) plus seventy-five percent (75%) of net profit (excluding losses) for the prior quarter, on a consolidated basis, plus one hundred percent (100%) of net proceeds of equity or Subordinated Debt received after the date hereof. 11. Profitability. Beginning with the fiscal quarter ending December 31, 1996, Borrower shall have a minimum net profit of One Dollars ($1.00) for each fiscal quarter. 12. Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. H. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Credit Extensions, Borrower will not do any of the following: 1. Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment. 2. Change in Business. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in Borrower's ownership. Borrower will not, without thirty (30) days prior written notification to Bank, relocate its chief executive office. 3. Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, except such transactions that do not result in a change of more than ten percent (10%) of Net Worth. 3. 4. Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 16 21 5. Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 6. Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock. 7. Repayment of Heraeus Med. GmbH. Make any payment in respect of an obligation due and owing to Heraeus Med. GmbH with respect to an account payable in the amount as of the date hereof of Two Million Five Hundred Thousand Dollars ($2,500,000) without the prior written consent of Bank, given in its sole discretion. 8. Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments and as permitted in Section 7.3. 9. Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person. 10. Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 11. Inventory. Store the Inventory with a bailee, warehouseman, or similar party unless Bank has received a pledge of the warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory only at the location set forth in Section 10 hereof and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank's security interest. 12. Compliance. Become an "investment company" controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. I. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 1. Payment Default. If Borrower fails to pay the principal of, or any interest on, any Advances when due and payable; or fails to pay any portion of any other Obligations not constituting such principal or interest, including without limitation Bank Expenses, within thirty (30) days of receipt by Borrower of an invoice for such other Obligations; 17 22 2. Covenant Default. If Borrower fails to perform any obligation under Sections 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Credit Extensions will be required to be made during such cure period); 3. Material Adverse Change. If there occurs a material adverse change in Borrower's business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations or a material impairment of the value or priority of Bank's security interests in the Collateral; 4. Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period); 5. Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within ten (10) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding); 6. Other Agreements. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that could have a Material Adverse Effect; 7. Subordinated Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 8. Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least One Hundred Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); or 9. Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any 18 23 Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 10. BANK'S RIGHTS AND REMEDIES Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (1) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (2) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (3) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit; (4) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (5) Without notice to or demand upon Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (6) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (7) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (8) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate; (9) Bank may credit bid and purchase at any public sale; and 19 24 (10) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 11. Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; and (e) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 12. Accounts Collection. At any time from the date of this Agreement, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 13. Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Facility as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 14. Bank's Liability for Collateral. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 15. Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 16. Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, 20 25 settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. J. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower: Laserscope 3052 Orchard Drive San Jose, CA 95134 Attn: Dennis LaLumandiere FAX: (408) 943-1462 If to Bank: Silicon Valley Bank 1731 Embarcadero Road, Suite 220 Palo Alto, CA 94303 Attn: Gary Reagan FAX: (415) 812-0640 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. K. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. L. GENERAL PROVISIONS 1. Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 2. Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any 21 26 way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 3. Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 4. Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 5. Amendments in Writing, Integration. This Agreement cannot be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents, except that any financing statements or other agreements or instruments filed by Bank with respect to Borrower shall remain in full force and effect. 6. Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 7. Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 8. Effect of Amendment and Restatement. This Agreement is intended to and does completely amend and restate, without novation, the Original Loan Documents. All security interests granted under the Original Loan Documents are hereby confirmed and ratified and shall continue to secure all Obligations under this Agreement. 22 27 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. LASERSCOPE By: /s/ Dennis LaLumandiere Title: Vice President of Finance and CFO By: /s/ Robert V. McCormick Title: President and CEO SILICON VALLEY BANK By: /s/ Gary Reagan Title: Vice President 23 28 EXHIBIT A The Collateral shall consist of all right, title and interest of Borrower in and to the following: M. All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; N. All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing; O. All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; P. All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing; Q. All documents, cash, deposit accounts, securities, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; R. All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and S. Any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. 24 29 EXHIBIT B LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: ______________________ FAX#: (408) 496-2426 TIME: ________________ _______________________________________________________________________________ FROM: LASERSCOPE ------------------------------------------------------------------------- CLIENT NAME (BORROWER) REQUESTED BY: _________________________________________________________________ AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE: _________________________________________________________ PHONE NUMBER: _________________________________________________________________ FROM ACCOUNT # ___________ TO ACCOUNT # _______________________________________ REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT PRINCIPAL INCREASE (ADVANCE) $______________________________________ PRINCIPAL PAYMENT (ONLY) $______________________________________ INTEREST PAYMENT (ONLY) $______________________________________ PRINCIPAL AND INTEREST (PAYMENT) $______________________________________ OTHER INSTRUCTIONS: ___________________________________________________________ _______________________________________________________________________________ All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all material respects as of the date of the telephone request for and Advance confirmed by this Borrowing Certificate; provided, however, that these representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. _______________________________________________________________________________ 25 30 - ------------------------------------------------------------------------------- BANK USE ONLY TELEPHONE REQUEST: The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me. - ------------------------------ -------------------------------- Authorized Requestor Phone # - ------------------------------ -------------------------------- Received By (Bank) Phone # ------------------------------- Authorized Signature (Bank) - ------------------------------------------------------------------------------- 26 31 EXHIBIT C BORROWING BASE CERTIFICATE Borrower: Laserscope Lender: Silicon Valley Bank Commitment Amount: $5,000,000 ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of $ -------- ------------ 2. Additions (please explain on reverse) $ ------------ 3. TOTAL ACCOUNTS RECEIVABLE $ ----------- ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due $ ---------- 5. Balance of 50% over 90 day accounts $ ----------- 6. Concentration Limits $ ----------- 7. Foreign Accounts $ ----------- 8. Governmental Accounts $ ---------- 9. Contra Accounts $ ---------- 10. Promotion or Demo Accounts $ ----------- 11. Intercompany/Employee Accounts $ ---------- 12. Other (please explain on reverse) $ ----------- 13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $ ----------- 14. Eligible Accounts (#3 minus #13) $ ----------- 15. LOAN VALUE OF ACCOUNTS (75% of #14) $ ----------- BALANCES 16. Maximum Loan Amount $ ----------- 17. Total Funds Available [Lesser of #16 or (#13 plus #15)] $ ----------- 18. Present balance owing on Line of Credit/Foreign Exchange Reserve $ ----------- 19. Outstanding under Sublimits ( ) $ ----------- 20. RESERVE POSITION (#17 minus #18 and #19) $ -----------
The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Silicon Valley Bank. COMMENTS: ---------------------------- BANK USE ONLY LASERSCOPE Rec'd By:___________________ Authorized Signer Date:_______________________ By: _____________________________ Authorized Signer Verified:___________________ Authorized Signer Date:_______________________ ---------------------------- 27 32 EXHIBIT D COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK FROM: LASERSCOPE The undersigned authorized officer of Laserscope hereby certifies that in accordance with the terms and conditions of the Amended and Restated Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending ____________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. Please indicate compliance status by circling Yes/No under "Complies" column.
Reporting Covenant Required Complies ------------------ -------- -------- Monthly financial statements Monthly within 30 days Yes No Annual (CPA Audited) FYE within 90 days Yes No A/R & A/P Agings Monthly within 20 days Yes No A/R Audit Initial and Semi-Annual Yes No Financial Covenant Required Actual Complies ------------------ -------- ------ -------- Maintain on a Monthly Basis: Minimum Quick Ratio .80:1.00 _____:1.0 Yes No Maximum Debt/Tangible Net Worth .90:1.00 _____:1.0 Yes No Maintain on a Quarterly Basis: Minimum Tangible Net Worth $21,500,000* $________ Yes No Profitability: Quarterly** $1 $________ Yes No
* Plus 75% of net profit (exclusive of losses) plus 100% of new equity or subordinated debt ** Beginning 12/31/96. Comments Regarding Exceptions: See Attached. Sincerely, ---------------------------- - -------------------------------------- BANK USE ONLY SIGNATURE Rec'd By:___________________ - -------------------------------------- Authorized Signer TITLE Date:_______________________ - -------------------------------------- DATE Verified:___________________ Authorized Signer Date:_______________________ Compliance Status Yes No ---------------------------- 28 33 DISBURSEMENT REQUEST AND AUTHORIZATION Borrower: Laserscope Bank: Silicon Valley Bank LOAN TYPE. This is a variable rate, revolving line of credit of a principal amount up to $5,000,000. PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business. SPECIFIC PURPOSE. The specific purpose of this loan is: Short Term Working Capital. DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Bank's conditions for making the loan have been satisfied. Please disburse the loan proceeds as follows: Revolving Line Amount paid to Borrower directly: $ -------- Undisbursed Funds $ -------- Principal $ -------- CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges: Prepaid Finance Charges Paid in Cash: $ -------- $ 20 ,000 Loan Fee $ Accounts Receivables Audit --------- Other Charges Paid in Cash: $ -------- $TBD UCC Search Fees $75 UCC Filing Fees $TBD Outside Counsel Fees and Expenses (Estimate) Total Charges Paid in Cash $ --------
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from Borrower's account numbered ______________ the amount of any loan payment. If the funds in the account are insufficient to cover any payment, Bank shall not be obligated to advance funds to cover the payment. FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS AUTHORIZATION IS DATED AS OF NOVEMBER 27, 1996. BORROWER: - ---------------------------------- - ---------------------------------- Authorized Officer 34 AGREEMENT TO PROVIDE INSURANCE Grantor: Laserscope Bank: Silicon Valley Bank INSURANCE REQUIREMENTS. Laserscope ("Grantor") understands that insurance coverage is required in connection with the extending of a loan or the providing of other financial accommodations to Grantor by Bank. These requirements are set forth in the Loan Documents. The following minimum insurance coverages must be provided on the following described collateral (the "Collateral"): Collateral: All Inventory, Equipment and Fixtures. Type: All risks, including fire, theft and liability. Amount: Full insurable value. Basis: Replacement value. Endorsements: Loss payable clause to Bank with stipulation that coverage will not be cancelled or diminished without a minimum of twenty (20) days' prior written notice to Bank. INSURANCE COMPANY. Grantor may obtain insurance from any insurance company Grantor may choose that is reasonably acceptable to Bank. Grantor understands that credit may not be denied solely because insurance was not purchased through Bank. FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or before closing, evidence of the required insurance as provided above, with an effective date of November 27, 1996, or earlier. Grantor acknowledges and agrees that if Grantor fails to provide any required insurance or fails to continue such insurance in force, Bank may do so at Grantor's expense as provided in the Loan and Security Agreement. The cost of such insurance, at the option of Bank, shall be payable on demand or shall be added to the indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS. AUTHORIZATION. For purposes of insurance coverage on the Collateral, Grantor authorizes Bank to provide to any person (including any insurance agent or company) all information Bank deems appropriate, whether regarding the Collateral, the loan or other financial accommodations, or both. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED NOVEMBER 27, 1996. GRANTOR: LASERSCOPE x Authorized Officer FOR BANK USE ONLY INSURANCE VERIFICATION DATE: PHONE: AGENT'S NAME: INSURANCE COMPANY: POLICY NUMBER: EFFECTIVE DATES: COMMENTS: CORPORATE RESOLUTIONS TO BORROW Borrower: LASERSCOPE 35 I, the undersigned Secretary or Assistant Secretary of LaserScope (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of California. I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and complete copies of the Articles of Incorporation and Bylaws of the Corporation, each of which is in full force and effect on the date hereof. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly called and held, at which a quorum was present and voting (or by other duly authorized corporate action in lieu of a meeting), the following resolutions were adopted. BE IT RESOLVED, that any one (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES ----- --------- ------------------ - ----------------------- -------------------- ----------------------- - ----------------------- -------------------- ----------------------- - ----------------------- -------------------- ----------------------- - ----------------------- -------------------- ----------------------- acting for an on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: Borrow Money. To borrow from time to time from Silicon Valley Bank ("Bank"), on such terms as may be agreed upon between the officers, employees, or agents and Bank, such sum or sums of money as in their judgment should be borrowed, without limitation, including such sums as are specified in that certain Loan and Security Agreement dated as of November 27, 1996 (the "Loan Agreement"). Execute Notes. To execute and deliver to Bank the promissory note or notes of the Corporation, on Lender's forms, at such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of the Corporation to Bank, and also to execute and deliver to Lender one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the notes, or any portion of the notes. Grant Security. To grant a security interest to Bank in the Collateral described in the Loan Agreement, which security interest shall secure all of the Corporation's Obligations, as described in the Loan Agreement. Negotiate Items. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. Letters of Credit; Foreign Exchange. To execute letters of credit applications, foreign exchange agreements and other related documents pertaining to Bank's issuance of letters of credit and foreign exchange contracts. 2 36 Further Acts. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on November 27, 1996 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: X - -------------------------------------------------------------------------- Attachment 1 - Articles of Incorporation Attachment 2 - Bylaws ---------------------------------- 3 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 3,917 0 13,286 700 17,407 35,536 14,644 11,535 44,469 17,092 0 0 0 48,798 (21,623) 44,469 42,844 42,844 21,882 21,882 22,552 0 (50) (1,540) 152 (1,692) 0 0 0 (1,692) (.19) (.19)
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