10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2001

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
(State or Other Jurisdiction of Incorporation or Organization) 77-0049527
(I.R.S. Employer Identification No.)

3070 ORCHARD DRIVE, SAN JOSE, CALIFORNIA 95134-2011
(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: (408) 943-0636

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  [X]  No [   ]

The number of shares of Registrant’s common stock issued and outstanding as of October 31, 2001 was 16,014,877.

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements:
		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Operations
		Condensed Consolidated Statements of Cash Flows
		Notes to Condensed Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities
	Item 3. Defaults upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Items
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.11I

TABLE OF CONTENTS

			Page
PART I.  FINANCIAL INFORMATION				3
	Item 1.  Financial Statements			3
		Condensed Consolidated Balance Sheets		3
		Condensed Consolidated Statements of Operations		4
		Condensed Consolidated Statements of Cash Flows		5
		Notes to Condensed Consolidated Financial Statements		6
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations			8
		Results of Operations		8
		Liquidity and Capital Resources		10
		Risk Factors		11
	Item 3.  Quantitative and Qualitative Disclosures About Market Risk			15
PART II.  OTHER INFORMATION				16
	Item 1.  Legal Proceedings			16
	Item 2.  Changes in Securities			16
	Item 3.  Defaults upon Senior Securities			16
	Item 4.  Submission of Matters to a Vote of Security Holders			16
	Item 5.  Other Items			16
	Item 6.  Exhibits and Reports on Form 8-K			16
SIGNATURES				17

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements:

Laserscope

Condensed Consolidated Balance Sheets

					September 30,			December 31,
					2001			2000
					(Unaudited)
					(thousands)
Assets
	Current assets:
		Cash and cash equivalents			$	3,147		$	2,698
		Accounts receivable, net				8,122			9,549
		Inventories				9,415			8,279
		Other current assets				1,237			963
			Total current assets			21,921			21,489
	Property and equipment, net					1,906			1,944
	Other assets					1,107			654
				Total assets	$	24,934		$	24,087
Liabilities and Shareholders’ Equity
	Current liabilities:
		Short-term bank loans			$	1,000		$	702
		Accounts payable				1,960			1,444
		Accrued compensation				1,321			1,290
		Deferred revenue				1,732			1,022
		Other current liabilities				2,513			2,238
			Total current liabilities			8,526			6,696
	Convertible subordinated debentures					3,000			3,000
	Obligations under capital leases					123			277
			Total long-term liabilities			3,123			3,277
	Shareholders’ equity:
		Common stock				54,614			54,480
		Accumulated deficit				(39,963	)		(39,014	)
		Accumulated other comprehensive loss				(1,241	)		(1,218	)
		Notes receivable from shareholders				(125	)		(134	)
				Total shareholders’ equity		13,285			14,114
				Total liabilities and shareholders’ equity	$	24,934		$	24,087

See Notes to Condensed Consolidated Financial Statements

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Laserscope

Condensed Consolidated Statements of Operations

(Unaudited)

			Three months ended						Nine months ended
			September 30,						September 30,
			2001			2000			2001			2000
			(thousands, except per share amounts)
Net revenue			$	7,953		$	9,254		$	25,483		$	27,176
Cost of sales				4,154			4,614			12,954			14,275
Gross margin				3,799			4,640			12,529			12,901
Operating expenses:
	Research and development			930			772			2,721			2,463
	Selling, general and administrative			3,375			3,226			10,459			9,655
		Total operating expenses		4,305			3,998			13,180			12,118
Operating income (loss)				(506	)		642			(651	)		783
Interest income (expense) and other, net				(135	)		(137	)		(266	)		(327	)
Income (loss) before income taxes				(641	)		505			(917	)		456
Provision for income taxes				—			—			32			—
Net income (loss)			$	(641	)	$	505		$	(949	)	$	456
Basic net income (loss) per share			$	(0.04	)	$	0.03		$	(0.06	)	$	0.03
Diluted net income (loss) per share			$	(0.04	)	$	0.03		$	(0.06	)	$	0.03
Shares used in basic per share calculations				16,003			15,610			15,929			15,474
Shares used in diluted per share calculations				16,003			19,277			15,929			19,049

See Notes to Condensed Consolidated Financial Statements

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Laserscope

Condensed Consolidated Statements of Cash Flows

(Unaudited)

				Nine Months Ended
				September 30,
				2001			2000
				(thousands)
Cash flows from operating activities:
	Net Income (loss)			$	(949	)	$	456
	Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
		Depreciation and amortization			859			1,338
		Changes in assets and liabilities:
			Accounts receivable, net		872			(2,541	)
			Inventories		(1,136	)		(15	)
			Other current assets		(274	)		266
			Accounts payable		516			(735	)
			Accrued compensation		31			(294	)
			Deferred revenue		710			173
			Other current liabilities		373			(51	)
Cash provided by (used in) operating activities					1,002			(1,403	)
Cash flows from investing activities:
	Capital additions to property and equipment				(719	)		(302	)
	Other				(23	)		(441	)
Cash used in investing activities					(742	)		(743	)
Cash flows from financing activities:
	Payments on obligations under capital leases				(252	)		(233	)
	Cash transferred to Wavelight in NWL sale				—			(296	)
	Proceeds from the NWL sale				—			3,429
	Proceeds from the sale of common stock under stock plans				134			780
	Proceeds from the sale of common stock in private placement				—			731
	Proceeds from the issuance of convertible subordinated debentures				—			2,632
	Proceeds from bank loans				9,550			16,534
	Repayment of shareholder notes				9			14
	Repayment of bank loans				(9,252	)		(19,489	)
Cash provided by financing activities					189			4,102
Increase in cash and cash equivalents					449			1,956
Cash and cash equivalents, beginning of period					2,698			1,449
Cash and cash equivalents, end of period				$	3,147		$	3,405
Supplemental disclosure of cash flow information:
		Cash paid during the period for:
			Interest	$	287		$	444
			Income taxes	$	10		$	15
		Non-cash reduction is assets relating to NWL sale		$	—		$	8,949
		Non-cash reduction in liabilities relating to NWL sale		$	—		$	5,415
		Acquisition of minority interest in affiliate in exchange for accounts receivable		$	555		$	—

See Notes to Condensed Consolidated Financial Statements

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Laserscope Notes to Condensed Consolidated Financial Statements:

1.	Basis of presentation
	The accompanying condensed consolidated financial statements include Laserscope (the “Company,” “management,” “we,” “us,” “our”) and its wholly and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated. While the financial information in this report is unaudited, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods indicated have been recorded. We suggest that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2000 included in the Company’s annual report on Form 10-K/A for the year ended December 31, 2000. The results of operations for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results expected for the full year.
2.	Inventories
	Inventory was comprised of the following (in thousands):

	September 30,		December 31,
	2001		2000
Sub-assemblies and purchased parts	$	7,049	$	6,295
Finished goods		2,366		1,984
	$	9,415	$	8,279

3.	Net income (loss) per share
	Basic net income (loss) per share is calculated using the weighted average number of common shares outstanding. Diluted net income (loss) per share is calculated using the weighted average number of common shares outstanding plus dilutive common equivalent shares from stock options and warrants. Options to purchase approximately 3,149,000 and 2,937,000 shares of common stock were outstanding at September 30, 2001 and 2000, respectively, and warrants to purchase approximately 459,000 shares of common stock and debentures convertible into 2,400,000 shares of common stock were outstanding at September 30, 2001. The stock options and warrants outstanding were not included in the computation of diluted earnings per share for the periods we reported net losses because the effect would be anti-dilutive.
4.	Comprehensive income (loss)
	Total comprehensive income (loss) consisted of (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2001			2000			2001			2000
Net income (loss)	$	(641	)	$	505		$	(949	)	$	456
Translation adjustments		379			(193	)		(23	)		(441	)
Comprehensive income (loss)	$	(262	)	$	312		$	(973	)	$	15

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5.	Recent accounting pronouncements
	In July 2001, the FASB issued SFAS No. 141 “Business Combinations” (“SFAS No. 141”) which establishes financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, “Business Combinations,” and FASB Statement No. 38, “Accounting for Preacquisition Contingencies of Purchased Enterprises”. SFAS No. 141 requires that all business combinations be accounted for using one method, the purchase method. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The Company will adopt SFAS No. 141 during the first quarter of fiscal 2002, and the adoption of SFAS No. 141 is expected to have no material impact on financial reporting and related disclosures of the Company.
	In July 2001, the FASB issued SFAS No. 142 “Goodwill and Other Intangible Assets,” (“SFAS No. 142”) which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, “Intangible Assets”. SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition, and after they have been initially recognized in the financial statements. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS No. 142 during the first quarter of fiscal 2002, and the adoption of SFAS No. 142 is expected to have no material impact on financial reporting and related disclosures of the Company.
	In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) which is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal periods. This Statement supersedes FASB Statement No. 121 and APB 30, however, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in a distribution to owners) or is classified as held for sale. This Statement addresses financial accounting and reporting for the impairment of certain long-lived assets and for long-lived assets to be disposed of. Management does not expect the adoption of SFAS No. 144 to have a material impact on the Company’s financial position and results of operations.
6.	Sale of NWL Laser-Technologie
	On February 18, 2000, we signed an agreement with Wavelight Laser Technologie AG (“Wavelight”) to sell our interest in NWL Laser Technologie GmbH (“NWL”). The sale then had an effective date of January 1, 2000.
	During April 2001, Laserscope and Wavelight reached an agreement whereby Laserscope waived its rights to $400,000 held by Wavelight in escrow and Wavelight waived the right to make any future claims against Laserscope with respect to its purchase of NWL.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations:

INTRODUCTORY STATEMENT

Some of the statements in this Quarterly Report on Form 10-Q, including but not limited to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this document are forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. We refer you to the factors described under the heading “Risk Factors” in this Quarterly Report on Form 10-Q as well as to our Annual Report on Form 10-K/A for the year ended December 31, 2000 under the heading “Risk Factors” in Part I. Item 1. Business. Readers are cautioned not to place undue reliance on forward-looking statements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of those statements. We are under no duty to update any of the forward-looking statements after the date of this document to reflect the occurrence of unanticipated events.

Results of Operations:

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes included in Part I — Item 1 of this Quarterly Report and the audited consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2000 and the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following table contains selected income statement information, which serves as the basis of the discussion of the Company’s results of operations for the quarter and nine months ended September 30, 2001 (in thousands, except percentages):

		Three months ended													Nine months ended
		Sept. 30, 2001					Sept. 30, 2000								Sept. 30, 2001					Sept. 30, 2000
		Amount		%(a)			Amount		%(a)			% Change			Amount		%(a)			Amount		%(a)			% Change
Revenues from sales of:
	Lasers	$	3,489		44	%	$	4,900		53	%		(29	)%	$	11,735		46	%	$	14,328		53	%		(18	)%
	Instruments & supplies		3,129		39	%		2,751		30	%		14	%		9,494		37	%		8,435		31	%		13	%
	Service		1,335		17	%		1,603		17	%		(17	)%		4,254		17	%		4,413		16	%		(4	)%
Total net revenues		$	7,953		100	%	$	9,254		100	%		(14	)%	$	25,483		100	%	$	27,176		100	%		(6	)%
Gross margin		$	3,799		48	%	$	4,640		50	%		(18	)%	$	12,529		49	%	$	12,901		47	%		(3	)%
Research & development		$	930		12	%	$	772		8	%		20	%	$	2,721		11	%	$	2,463		9	%		10	%
Selling, general & administrative		$	3,375		42	%	$	3,226		35	%		5	%	$	10,459		41	%	$	9,655		36	%		8	%

(a) expressed as a percentage of total net revenues.

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Net revenues decreased $1.3 million for the three months ended September 30, 2001 relative to the corresponding period of 2000, and revenues declined $1.7 million for the nine months ended September 30, 2001 relative to the corresponding period of 2000.

Revenues from the sales of laser systems decreased during the three and nine month periods ended September 30, 2001 relative to the same periods in 2000. While unit sales actually increased 2% for both the three and nine month periods ended September 30, 2001 relative to the same periods in 2000, average selling prices decreased. This decrease in dollar terms is due to a change in the mix of laser types sold. In 2001, we sold more lower-priced aesthetic lasers than in 2000. This is partly due to our distribution arrangement with McKesson/HBOC which we implemented during the first quarter of 2001. In addition, we sold fewer higher-priced surgical lasers in 2001 than in 2000. The Company expects that its revenue mix trend in all geographic markets will continue to shift toward lower-priced office-based aesthetic lasers through at least the end of 2001.

Revenues from the sales of instrumentation and disposable supplies increased during the three and nine months ended September 30, 2001 compared to the corresponding periods in 2000. The increases during the quarter and year-to-date are due to increased shipments of scanning devices sold as accessories to Laserscope’s office laser systems, partially offset by lower shipments of disposable supplies. During the last two years, our laser equipment sales have trended towards lower-priced office lasers for aesthetic procedures and away from lasers to be used in the hospital for non-aesthetic procedures. This trend has resulted in lower sales of disposable supplies. Office lasers used in aesthetic procedures, although carrying one-time sales of instrumentation such as scanning devices, generally do not create a stream of sales of disposable supplies. The Company expects revenues from the sales of instrumentation and disposable supplies to depend on the Laserscope’s ability to develop and promote surgical procedures that use these products and to increase its installed base of systems.

Laserscope’s service revenues decreased during the three and nine months ended September 30, 2001 compared to the same periods in 2000 as a result of a decrease in direct-billing service. Decreased service revenues experienced in the United States were partly offset by increased service revenues in Europe. The Company believes that future revenues depend on increases to the installed base of lasers as well as the acceptance of its service contracts by its customers.

Gross margin as a percentage of revenues decreased during the quarter and increased during the nine month period ended September 30, 2001 relative to the corresponding periods of 2000. The decrease in gross margin percentage for the quarter is due primarily to lower service margins. The increase in gross margin percentage for the nine month period is due primarily to a shift towards Laserscope’s higher margin Lyra product as well a shift towards the United States and away from lower margin international distributors. Laserscope expects that gross margin as a percentage of revenues for the remainder of 2001 may vary as product and distribution mix varies.

Research and development expenses are the result of activities related to the development of new laser, instrumentation and disposable products and the enhancement of Laserscope’s existing products. These expenses increased during the three and nine months ended September 30, 2001 compared to the same periods in 2000. The increase was driven by product development activity in the United States on a new laser for treatment of benign prostatic hyperplasia. Since development of this laser is nearly complete, the Company expects that amounts spent in research and development will decline in the remainder of the year relative to the prior quarter’s level.

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Selling, general and administrative expenses increased during the quarter and nine months ended September 30, 2001 compared to the corresponding periods in 2000. In the third quarter of 2001, this was due to an increase in sales commissions as well as sales department travel expenses. In the second quarter of 2001 this was driven by start-up expenses such as workshops and marketing material to support the McKesson distribution agreement. Laserscope expects amounts spent in selling, general and administrative expenses to increase during the remainder of 2001 as variable selling and marketing expenses increase.

Liquidity and Capital Resources:

The following table contains selected balance sheet information that serves as the basis of the discussion of the Company’s liquidity and capital resources at September 30, 2001 and for the nine months then ended (in thousands):

	September 30,		December 31,
	2001		2000
Cash and cash equivalents	$	3,147	$	2,698
Total assets	$	24,934	$	24,087
Total liabilities	$	11,649	$	9,973
Net working capital	$	13,395	$	14,793

The increase in cash and cash equivalents was due principally to cash generated by operating and financing activities, partially offset by cash used in investing activities.

Cash provided by operating activities totaled $1.0 million. This was the combined result of the following sources: decrease in accounts receivable - $0.9 million; depreciation and amortization — $0.9 million; increase in deferred service contract revenue — $0.7 million; increase in accounts payable and accrued compensation — $0.5 million; and an increase in warranty liability and royalties payable — $0.4 million. These sources were partially offset by the following uses: increase in inventory — $1.1 million; net loss — $0.9 million; and an increase in prepaid expenses and deposits — $0.3 million.

Cash used by investing activities consisted of capital expenditures of $0.7 million.

Cash provided by financing activities consisted of increased short-term bank borrowings — $0.3 million; sale of common stock under stock plans — $0.1 million; and was offset by payments on obligations under capital leases of $0.3 million.

Laserscope has in place an asset-based line of credit that provides for borrowing up to $5.0 million and expires in September 2002. Credit is extended based on eligible accounts receivable and inventory. At September 30, 2001, we had approximately $2.5 million in borrowing base available against borrowings of $1.0 million outstanding and $1.1 million in letter of credit reserve requirements. As of September 30, 2001 we were in compliance with all covenants.

We anticipate that future changes in cash and working capital will be dependent on a number of factors including:

our ability to effectively manage inventory and accounts receivable;

our ability to anticipate and adapt to the changes in our industry such as new and alternative medical procedures;

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our level of profitability;

our determination to acquire or invest in products and businesses complementary to ours; and

the market price for our common stock as it affects the exercise of stock options.

We have historically financed acquisitions using our existing cash resources. While we believe our existing cash resources, including our bank line of credit, will be sufficient to fund our operating needs for the next twelve months, additional financing will be required for our currently envisioned long-term needs.

There can be no assurance that any additional financing will be available on terms acceptable to us, or at all. In addition, future equity financings could result in dilution to our shareholders, and future debt financings could result in certain financial and operational restrictions.

Risk Factors:

Our business, financial condition and results of operations have been, and in the future may be, affected by a variety of factors, including those set forth below and elsewhere in this report.

Limited Working Capital; Potential Need to Raise Additional Capital.

Current and anticipated demand for our products as well as procurement and production affect our need for capital. Changes in these or other factors could have a material impact on capital requirements and may require us to raise additional capital.

History of Losses; Uncertain Future Profitability.

There can be no assurance that we can achieve or maintain profitability on a quarterly basis or at all.

Technological Change; Uncertain New Product Development and Acceptance.

We operate in an industry that is subject to rapid technological change. Our ability to remain competitive and future operating results will depend upon, among other things, our ability to anticipate and respond rapidly to such change by developing, manufacturing and marketing technologically innovative products in sufficient quantities at acceptable costs to meet such demand. Without new products and enhancements, our existing products will likely become technologically obsolete, which could result in the write-off of inventory as well as diminished revenues. Therefore, we intend to continue to invest significant amounts in research and development.

Government Regulation; Uncertainty of Obtaining Regulatory Approval.

Government regulation in the United States and other countries is a significant factor in the development, manufacturing and marketing of many of our products. There can be no assurance that the appropriate regulatory agencies will grant us the clearance to market our future products on a timely basis, or at all.

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Insurance Reimbursement.

Demand for certain of our products depends on government and private insurance reimbursement of hospitals and physicians for health care costs, including, but not limited to, reimbursement of capital equipment costs. Reductions or delays in such insurance coverage or reimbursement may negatively impact hospitals’ and physicians’ decision to purchase our products, adversely affecting our future sales.

Dependence on Single-Source Suppliers and Certain Third Parties.

Certain of the components used in our laser products, including certain optical components, are purchased from single sources. While we believe that most of these components are available from alternate sources, an interruption of these or other supplies could adversely affect our ability to manufacture lasers.

Competition.

We compete in the non-ophthalmic surgical segment of the worldwide medical laser market. In this market, lasers are used in hospital operating rooms, outpatient surgery centers and individual physician offices for a wide variety of procedures. This market is highly competitive. Our competitors are numerous and include some of the world’s largest organizations as well as smaller, highly-specialized firms. We cannot assure that we can compete successfully against these organizations.

Reliance on Patents and Licenses.

We cannot assure that any patents or licenses that we hold or that may be issued as a result of our patent applications will provide any competitive advantages for our products. Nor can we assure that any of the patents that we now hold or may hold in the future will not be successfully challenged, invalidated or circumvented in the future. In addition, we cannot assure that competitors, many of which have substantial resources and have made substantial investments in competing technologies, will not seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, issue, use and sell our products.

Failure to Attract or Retain Key Personnel Can Adversely Affect Results.

We depend upon the efforts and abilities of a number of current key personnel. If we are unable to attract and retain key employees it would have a material adverse effect on our business, financial condition and results of operations.

Fluctuations in Quarterly Operating Results.

A number of factors affect our quarterly financial results including the timing of shipments and orders. Our laser products are relatively expensive pieces of medical capital equipment and the precise shipment date of specific units can have a marked effect on our results of operations on a quarterly basis. Any delay in product shipments near the end of a quarter could cause our quarterly results to fall short of anticipated levels. Furthermore, to the extent we receive orders near the end of a quarter, we may not be able to fulfill the order during the balance of that same quarter. Moreover, we typically receive a disproportionate percentage of orders toward the end of each quarter. To the extent that we do not receive anticipated orders or orders are delayed beyond the end of the applicable quarter, our results may be adversely affected and may be unpredictable from quarter to quarter. In addition, because a significant portion of our revenues in each quarter result from orders received in that quarter, we base our production, inventory and operating expenditure levels on anticipated revenue levels. Thus, if sales do not occur when expected, expenditure levels could be disproportionately high and

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operating results for that quarter and potentially future quarters, would be adversely affected. We cannot assure that Laserscope will accomplish revenue growth or profitability on a quarterly or annual basis. Nor can we assure that revenue growth or profitability will not fluctuate significantly from quarter to quarter.

Product Liability Risk; Limited Insurance Coverage.

Our business has significant risks of product liability claims. We have experienced product liability claims from time to time, which we believe are ordinary for our business. While we cannot predict or determine the outcome of the actions brought against us, we believe that these actions will not ultimately have a material adverse impact on Laserscope’s financial position or results of operations.

At present, we maintain product liability insurance on a “claims made” basis with coverage of $10.0 million in the aggregate with a deductible of $0.1 million per occurrence and an annual maximum aggregate deductible of $0.5 million. We cannot assure that such insurance coverage will be available to us in the future at a reasonable cost, if at all. Nor can we assure that other claims will not be brought against us in excess of our insurance coverage.

Factors Affecting Financial Results and Stock Price.

A number of factors affect our financial results and stock price including, but not limited to:

product mix;

competitive pricing pressures;

material costs;

revenue and expenses related to new products and enhancements to existing products; and

delays in customer purchases in anticipation of new products or product enhancements by Laserscope or its competitors.

The market price of our common stock may be subject to significant fluctuations. These fluctuations may be due to factors specific to Laserscope, such as:

quarterly fluctuations in our financial results;

changes in analysts’ estimates of future results;

changes in investors’ perceptions of our products;

announcement of new or enhanced products by us or our competitors;

announcements relating to acquisitions and strategic transactions by us or our competitors;

general conditions in the medical equipment industry; and

general conditions in the financial markets.

The stock market has from time to time experienced extreme price and volume fluctuations, particularly among stocks of high technology companies, which, on occasion, have been unrelated to the operating performance of particular companies. Factors not directly related to Laserscope’s performance, such as negative industry reports or disappointing earnings announcements by publicly traded competitors, may have an adverse impact on the market price of our common stock.

As of October 31, 2001, we had 16,014,877 shares of outstanding common stock. The sale of a substantial number of shares of common stock or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock.

-13-

International Business.

We intend to continue our operations outside of the United States and potentially to enter additional international markets. These activities require significant management attention and financial resources and further subject us to the risks of operating internationally.

Legal Proceedings.

Laserscope is a party to a number of legal proceedings arising in the ordinary course of business. While it is not feasible to predict or determine the outcome of the actions brought against us, we believe that the ultimate resolution of these claims will not have a material adverse effect on Laserscope’s financial position or results of operations.

Interest Rate Risk.

(See Item 3.-Quantitative and Qualitative Disclosures About Market Risk in this Quarterly Report on Form 10-Q.)

Warranty Obligations.

We have a direct field service organization that provides service for our products. We generally provide a twelve month warranty on our laser systems. After the warranty period, maintenance and support is provided on a variety of service contract bases or on an individual call basis. We also have a “99.0% Uptime Guarantee” on our laser systems. Under provisions of this guarantee, we extend the term of the related warranty or service contract if specified system uptime levels are not maintained. Although most systems covered by this guarantee have achieved a 99.0% uptime rate to date, we cannot assure that we can maintain such uptime rates in the future.

No Dividends.

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on the common stock in the foreseeable future. The payment of dividends on the common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as the Board of Directors may consider relevant.

“Penny Stock” Rules.

Our common stock is traded on the National Association of Securities Dealers Automated Quotation (“NASDAQ”) National Market System, which requires that a company have, among other things, a minimum bid price of $1.00 in order to qualify for continued listing. If we fail to maintain our listing for our common stock on the NASDAQ National Market System, and no other exclusion from the definition of “penny stock” under the Exchange Act is available, any brokers engaging in transactions in our securities would be required to provide their customers with a risk disclosure document, the compensation of the broker/dealer in the transaction and monthly account statements showing the market values of our securities held in the customers’ accounts. The bid and offer quotations and compensation information must be provided prior to effecting the transaction and must be contained on the customer’s confirmation. If brokers become subject to the “penny stock” rules when engaging in transactions in our securities, they would become less willing to engage in such transactions, thereby making it more difficult for shareholders to dispose of their shares of Laserscope common stock.

-14-

Dilution.

Shareholders may experience dilution in the net tangible book value of their investment upon the exercise of outstanding options and warrants granted under Laserscope’s stock option plans and other options, warrants and outstanding convertible securities.

Other.

Other risks are detailed from time to time in our press releases and other public disclosure filings with the United States Securities and Exchange Commission (“SEC”), copies of which are available upon request from the Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk:

Laserscope is exposed to a variety of risks, including changes in interest rates affecting the return on its investments, outstanding debt balances and foreign currency fluctuations. In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in interest rates and foreign currency values.

Interest Rate Risk

Laserscope’s exposure to market rate risk for changes in interest rates relates primarily to our investment and debt portfolios. We have not used derivative financial instruments in our investment or debt portfolios. We invest our excess cash in money market funds and commercial paper. Our debt financings consist of convertible debentures and bank loans requiring either fixed or variable rate interest payments. Investments in and borrowings under both fixed-rate and floating-rate interest-earning instruments carry a degree of interest rate risk. On the investment side, fixed-rate securities may have their fair market value adversely affected due to a rise in interest rates, while floating-rate securities may produce less income than expected if interest rates fall. In addition, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. On the debt side, borrowings that require fixed-rate interest payments require greater than current market rate interest payments if interest rates fall, while floating rate borrowings may require greater interest payments if interest rates rise. Additionally, Laserscope’s future interest expense may be greater than expected due to changes in interest rates.

Foreign Currency Risk

International revenues were 27% and 32% of total revenues in the quarter and nine months ended September 30, 2001, respectively, compared to 41% and 37% during the comparable periods in 2000. International sales are made through international distributors and wholly and majority-owned subsidiaries with payments to the Company typically denominated in the local currencies of the United Kingdom and France, and in U.S. dollars in the rest of the world. Our international business is subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors. The effect of foreign exchange rate fluctuations on the Company in the three and nine months ended September 30, 2001 and 2000 was not material, and we do not engage in hedging transactions for speculative or trading purposes.

-15-

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a party to a number of legal proceedings arising in the ordinary course of business. While it is not feasible to predict or determine the outcome of the actions brought against it, we believe that the ultimate resolution of these claims will not have a material adverse effect on our financial position or results of operations.

Item 2. Changes in Securities

     Not applicable.

Item 3. Defaults upon Senior Securities

     Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

     Not applicable

Item 5. Other Items

On September 26, 2001 we renewed our line of credit with Silicon Valley Bank. The renewed line of credit will expire in September 2002. Exhibit 10.11I filed herewith shows the document in which the renewal was consummated.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits filed herewith or incorporated herein (numbered in accordance with Item 601 of Regulation S-K):

Exhibit
Number	Description
10.11I	Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 26, 2001

(b) Reports on Form 8-K: Report on Form 8-K (the “Form 8-K”) dated September 4, 2001 and filed on September 6, 2001. The Form 8-K announced Laserscope’s change in accounting firms from Ernst & Young LLP to PricewaterhouseCoopers LLP.

-16-

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LASERSCOPE
Registrant
 
/s/ Dennis LaLumandiere
Dennis LaLumandiere
Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: November 13, 2001

-17-

EXHIBIT INDEX

Exhibit
Number
10.11I	Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 26, 2001

-18- EX-10.11 3 f77042ex10-11.txt EXHIBIT 10.11I EXHIBIT 10.11I SILICON VALLEY BANK AMENDMENT TO LOAN DOCUMENTS BORROWER: LASERSCOPE ADDRESS: 3052 ORCHARD DRIVE SAN JOSE, CALIFORNIA 95134 DATE: SEPTEMBER 26, 2001 THIS AMENDMENT TO LOAN DOCUMENTS is entered into between Silicon Valley Bank ("Silicon") and the borrower named above ("Borrower"). The Parties agree to amend the Loan and Security Agreement between them, dated October 1, 1999 (as otherwise amended, the "Loan Agreement"), as follows, effective as of the date hereof. (Capitalized terms used but not defined in this Amendment, shall have the meanings set forth in the Loan Agreement.) 1. CREDIT LIMIT. Section 1 of the Schedule is hereby amended by modifying the words which presently read "An amount not to exceed the lesser of a total of $6,000,000 at any one time outstanding (the `Maximum Credit Limit'), or the sum or (a) and (b) below . . ." to read as follows: "An amount not to exceed the lesser of a total of $5,000,000 at any one time outstanding (the "Maximum Credit Limit"), or the sum or (a) and (b) below: . . ." 2. INTEREST RATE. Section 2 of the Schedule is hereby amended by modifying the words which presently read "A rate equal to the `Prime Rate' in effect from time to time, plus 2.25% per annum." to read as follows: "A rate equal to the `Prime Rate' in effect from time to time, plus 1.75% per annum." 3. MATURITY DATE. Section 4 of the Schedule is hereby amended in its entirety to read as follows: "4. Maturity Date (Section 6.1): September 30, 2002." 4. AUDIT FEES. Section 5.4 of the Loan Agreement is hereby amended by modifying the sentence which presently reads "The foregoing inspections and audits shall be at Borrower's expense and the charge therefor shall be $600 per person per day (or such higher amount as shall represent Silicon's then current standard charge for the same), plus reasonable out of pocket expenses." to read as follows: "The foregoing inspections and audits shall be at Borrower's expense and the charge therefor shall be $700 per person per day (or such higher amount as shall represent Silicon's then current standard charge for the same), plus reasonable out of pocket expenses." 5. TRANSACTION REPORTS. Section 4.3 of the Loan Agreement is hereby amended by adding the following at the end of Section 4.3: "Transaction reports pursuant to this Section 4.3 shall be provided to Silicon at the time a request for a Loan is submitted by Borrower to Silicon and also every two weeks, provided that if, at any time, the total Loans outstanding exceed $1,000,000 or the total of the Loans which are available to Borrower under Section 1 of the Schedule but which have not been borrowed is below $750,000, then, in either such case, and so long as such condition exists, the transaction reports pursuant to this Section 4.3 shall be provided to Silicon at the time a request for a Loan is submitted by Borrower to Silicon and also every week." 6. TERMINATION FEE. The asterisk portion of Section 6.2 of the Loan Agreement, which presently reads "*one percent (1%) of the Maximum Credit Limit if the effective date of termination occurs within six months after the date hereof, or two percent (2.0%) of the Maximum Credit Limit if the effective date of termination occurs thereafter," is hereby amended to read as follows: "*two percent (2%) of the Maximum Credit Limit if the effective date of termination occurs within six months after September 30, 2001, or one percent (1%) of the Maximum Credit Limit if the effective date of termination occurs thereafter," 7. FEE. In consideration for Silicon entering into this Amendment, Borrower shall concurrently pay Silicon a fee in the amount of $25,000, which shall be non-refundable and in addition to all interest and other fees payable to Silicon under the Loan Documents. Silicon is authorized to charge said fee to Borrower's loan account. 8. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon that all representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct. 9. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior written amendments to the Loan Agreement signed by Silicon and Borrower, and the other written documents and agreements between Silicon and Borrower set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between the parties with respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions of the Loan Agreement, and all other documents and agreements between Silicon and Borrower shall continue in full force and effect and the same are hereby ratified and confirmed. BORROWER: SILICON: LASERSCOPE SILICON VALLEY BANK BY /s/ DENNIS LALUMANDIERE BY /s/ MILAD I. HANNA -------------------------------- ----------------------------- PRESIDENT OR VICE PRESIDENT TITLE SR. VICE PRESIDENT ------------------------------ BY -------------------------------- SECRETARY OR ASS'T SECRETARY CONSENT The undersigned acknowledges that its consent to the foregoing Agreement is not required, but the undersigned nevertheless does hereby consent to the foregoing Agreement and to the documents and agreements referred to therein and to all future modifications and amendments thereto, and any termination thereof, and to any and all other present and future documents and agreements between or among the foregoing parties. Nothing herein shall in any way limit any of the terms or provisions of the Guarantee of the undersigned, all of which are hereby ratified and affirmed. LASERSCOPE (UK) LIMITED BY /s/ DENNIS LALUMANDIERE ---------------------------------- TITLE VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.11

                                                                  EXHIBIT 10.11I

SILICON VALLEY BANK

                          AMENDMENT TO LOAN DOCUMENTS

BORROWER:   LASERSCOPE
ADDRESS:    3052 ORCHARD DRIVE
            SAN JOSE, CALIFORNIA  95134

DATE:       SEPTEMBER 26, 2001

        THIS AMENDMENT TO LOAN DOCUMENTS is entered into between Silicon Valley
Bank ("Silicon") and the borrower named above ("Borrower").

        The Parties agree to amend the Loan and Security Agreement between them,
dated October 1, 1999 (as otherwise amended, the "Loan Agreement"), as follows,
effective as of the date hereof. (Capitalized terms used but not defined in this
Amendment, shall have the meanings set forth in the Loan Agreement.)

        1. CREDIT LIMIT. Section 1 of the Schedule is hereby amended by
modifying the words which presently read "An amount not to exceed the lesser of
a total of $6,000,000 at any one time outstanding (the `Maximum Credit Limit'),
or the sum or (a) and (b) below . . ." to read as follows:

                "An amount not to exceed the lesser of a total of $5,000,000 at
                any one time outstanding (the "Maximum Credit Limit"), or the
                sum or (a) and (b) below: . . ."

        2. INTEREST RATE. Section 2 of the Schedule is hereby amended by
modifying the words which presently read "A rate equal to the `Prime Rate' in
effect from time to time, plus 2.25% per annum." to read as follows: "A rate
equal to the `Prime Rate' in effect from time to time, plus 1.75% per annum."

        3. MATURITY DATE. Section 4 of the Schedule is hereby amended in its
entirety to read as follows: "4. Maturity Date (Section 6.1): September 30,
2002."

        4. AUDIT FEES. Section 5.4 of the Loan Agreement is hereby amended by
modifying the sentence which presently reads "The foregoing inspections and
audits shall be at Borrower's expense and the charge therefor shall be $600 per
person per day (or such higher amount as shall represent Silicon's then current
standard charge for the same), plus reasonable out of pocket expenses." to read
as follows:

               "The foregoing inspections and audits shall be at Borrower's
               expense and the charge therefor shall be $700 per person per day
               (or such higher amount as shall represent Silicon's then current
               standard charge for the same), plus reasonable out of pocket
               expenses."

        5. TRANSACTION REPORTS. Section 4.3 of the Loan Agreement is hereby
amended by adding the following at the end of Section 4.3:

               "Transaction reports pursuant to this Section 4.3 shall be
               provided to Silicon at the time a request for a Loan is submitted
               by Borrower to Silicon and also every two weeks, provided that
               if, at any time, the total Loans outstanding exceed $1,000,000 or
               the total of the Loans which are available to Borrower under


               Section 1 of the Schedule but which have not been borrowed is
               below $750,000, then, in either such case, and so long as such
               condition exists, the transaction reports pursuant to this
               Section 4.3 shall be provided to Silicon at the time a request
               for a Loan is submitted by Borrower to Silicon and also every
               week."

        6. TERMINATION FEE. The asterisk portion of Section 6.2 of the Loan
Agreement, which presently reads "*one percent (1%) of the Maximum Credit Limit
if the effective date of termination occurs within six months after the date
hereof, or two percent (2.0%) of the Maximum Credit Limit if the effective date
of termination occurs thereafter," is hereby amended to read as follows:

               "*two percent (2%) of the Maximum Credit Limit if the effective
               date of termination occurs within six months after September 30,
               2001, or one percent (1%) of the Maximum Credit Limit if the
               effective date of termination occurs thereafter,"

        7. FEE. In consideration for Silicon entering into this Amendment,
Borrower shall concurrently pay Silicon a fee in the amount of $25,000, which
shall be non-refundable and in addition to all interest and other fees payable
to Silicon under the Loan Documents. Silicon is authorized to charge said fee to
Borrower's loan account.

        8. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.

        9. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and Borrower, and the
other written documents and agreements between Silicon and Borrower set forth in
full all of the representations and agreements of the parties with respect to
the subject matter hereof and supersede all prior discussions, representations,
agreements and understandings between the parties with respect to the subject
hereof. Except as herein expressly amended, all of the terms and provisions of
the Loan Agreement, and all other documents and agreements between Silicon and
Borrower shall continue in full force and effect and the same are hereby
ratified and confirmed.

BORROWER:                                       SILICON:

LASERSCOPE                                      SILICON VALLEY BANK

BY /s/ DENNIS LALUMANDIERE                 BY     /s/ MILAD I. HANNA
   --------------------------------               -----------------------------
   PRESIDENT OR VICE PRESIDENT             TITLE  SR. VICE PRESIDENT
                                                  ------------------------------

BY
   --------------------------------
   SECRETARY OR ASS'T SECRETARY


                                     CONSENT

        The undersigned acknowledges that its consent to the foregoing Agreement
is not required, but the undersigned nevertheless does hereby consent to the
foregoing Agreement and to the documents and agreements referred to therein and
to all future modifications and amendments thereto, and any termination thereof,
and to any and all other present and future documents and agreements between or
among the foregoing parties. Nothing herein shall in any way limit any of the
terms or provisions of the Guarantee of the undersigned, all of which are hereby
ratified and affirmed.

                                       LASERSCOPE (UK) LIMITED

                                       BY     /s/ DENNIS LALUMANDIERE
                                              ----------------------------------
                                       TITLE  VICE PRESIDENT, FINANCE
                                              AND CHIEF FINANCIAL OFFICER