Laserscope Form 10-Q, for period ended 3/31/2002

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-----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, Em5m3LnuweiOLwwMtWYhhS8fKYeppA8HZJ5IxlFhWbE43HtfuOFpmHd5rJiPoJWu UgdQkVEWRBzQyH5dIraXHA== 0000891618-02-002400.txt : 20020514 0000891618-02-002400.hdr.sgml : 20020514 ACCESSION NUMBER: 0000891618-02-002400 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020514 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18053 FILM NUMBER: 02647004 BUSINESS ADDRESS: STREET 1: 3052 ORCHARD DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089430636 10-Q 1 f81476e10-q.htm FORM 10-Q Laserscope Form 10-Q, for period ended 3/31/2002

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 March 31, 2002


[ ]		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 April 30, 2002 was 16,342,719.

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
		Laserscope Notes to Condensed Consolidated Financial Statements:
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations:
		Results of Operations:
		Liquidity and Capital Resources:
		Risk Factors:
	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 10.14

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		9

		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		17

SIGNATURES				18

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Laserscope

Condensed Consolidated Balance Sheets


				March 31,			December 31,
(thousands)				2002			2001

				(Unaudited)
Assets
Current assets:
	Cash and cash equivalents			$	3,209		$	3,408
	Accounts receivable, net				9,133			8,427
	Inventories				8,733			9,228
	Other current assets				1,208			1,283

		Total current assets			22,283			22,346
Property and equipment, net					1,970			2,067
Goodwill					655			655
Other assets					380			414

			Total assets	$	25,288		$	25,482

Liabilities and Shareholders’ Equity
Current liabilities:
	Short-term bank loans			$	1,100		$	1,135
	Accounts payable				2,523			2,821
	Accrued compensation				1,531			1,588
	Deferred revenue				1,108			1,031
	Convertible subordinated debentures, current portion				60			—
	Other current liabilities				2,541			2,435

		Total current liabilities			8,863			9,010

Convertible subordinated debentures, net of current portion					2,940			3,000
Obligations under capital leases					8			60

		Total long-term liabilities			2,948			3,060

Contingencies (Note 5)
Shareholders’ equity:
	Common stock				54,914			54,712
	Accumulated deficit				(39,890	)		(39,843	)
	Accumulated other comprehensive loss				(1,422	)		(1,332	)
	Notes receivable from shareholders				(125	)		(125	)

			Total shareholders’ equity		13,477			13,412

			Total liabilities and shareholders’ equity	$	25,288		$	25,482

See Accompanying Notes to Condensed Consolidated Financial Statements

Laserscope

Condensed Consolidated Statements of Operations
(Unaudited)


			Three months ended
			March 31,

(thousands, except per share amounts)			2002			2001

Net revenue			$	9,420		$	8,228
Cost of sales				4,799			4,519

Gross margin				4,621			3,709

Operating expenses:
	Research and development			1,016			813
	Selling, general and administrative			3,547			3,310

		Total operating expenses		4,563			4,123

Operating income (loss)				58			(414	)
Interest and other expenses				(90	)		(58	)

Loss before income taxes				(32	)		(472	)
Provision for income taxes				15			18

Net loss			$	(47	)	$	(490	)

Basic and diluted net loss per share			$	0.00		$	(0.03	)

Shares used in computing basic and diluted net loss per share				16,155			15,884

See Accompanying Notes to Condensed Consolidated Financial Statements

Laserscope

Condensed Consolidated Statements of Cash Flows
(Unaudited)


				Three Months Ended
				March 31,

(thousands)				2002			2001

Cash flows from operating activities:
	Net loss			$	(47	)	$	(490	)
	Adjustments to reconcile net loss to cash provided by (used in) operating activities:
		Depreciation and amortization			318			234
		Changes in assets and liabilities:
			Accounts receivable, net		(742	)		674
			Inventories		466			242
			Other current assets		65			(39	)
			Accounts payable		(294	)		389
			Accrued compensation		(56	)		(58	)
			Deferred revenue		77			299
			Other current liabilities		121			35

Net cash provided by (used in) operating activities					(92	)		1,286

Cash flows from investing activities:
	Acquisition of property and equipment				(187	)		(396	)

Net cash used in investing activities					(187	)		(396	)

Cash flows from financing activities:
	Payments on obligations under capital leases				(52	)		(109	)
	Proceeds from the sale of common stock under stock plans				203			—
	Proceeds from bank loans				3,320			5,350
	Repayment of bank loans				(3,355	)		(5,802	)

Net cash provided by (used in) financing activities					116			(561	)

Effect of exchange rate changes on cash					(36	)		(321	)
Net increase (decrease) in cash and cash equivalents					(199	)		8
Cash and cash equivalents, beginning of period					3,408			2,698

Cash and cash equivalents, end of period				$	3,209		$	2,706

Supplemental disclosure of cash flow information:
		Cash paid during the period for:
			Interest	$	77		$	116
			Income taxes	$	3		$	—

See Accompanying Notes to Condensed Consolidated Financial Statements

Laserscope Notes to Condensed Consolidated Financial Statements:

1. Basis of presentation

The accompanying unaudited 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, 2001 included in the Company’s annual report on Form 10-K for the year ended December 31, 2001. The results of operations for the three month period ended March 31, 2002 are not necessarily indicative of the results expected for the full year.

2. Inventories

Inventories were comprised of the following (in thousands):


	March 31,		December 31,
	2002		2001

Sub-assemblies and purchased parts	$	3,970	$	4,743
Work-in-process		2,842		2,345
Finished goods		1,921		2,140

	$	8,733	$	9,228

3. Net loss per share

Basic net loss per share is calculated using the weighted average number of common shares outstanding. Diluted net 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 3,055,000 and 2,757,000 shares of common stock and warrants to purchase approximately 454,000 and 459,000 shares of common stock were outstanding at March 31, 2002 and 2001, respectively, and debentures convertible into 2,400,000 shares of common stock were outstanding at March 31, 2002 and 2001. The stock options and warrants outstanding were not included in the computation of diluted earnings per share for the periods we presented because the effect would be anti-dilutive.

4. Comprehensive loss

Total comprehensive loss consisted of (in thousands):


	Three months ended
	March 31,

	2002			2001

Net loss	$	(47	)	$	(490	)
Translation adjustments		(90	)		(322	)

Comprehensive loss	$	(137	)	$	(812	)

5. Contingencies

The Company is at times a party to legal proceedings arising in the ordinary course of its business. While it is not feasible to predict or determine the outcome of the actions brought against the Company, management believes that the ultimate resolution of these claims will not ultimately have a material adverse effect on the Company’s financial position, results of operations, or future cash flows.

6. Recent accounting pronouncements

In May 2000, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-14, “Accounting for Certain Sales Incentives.” EITF Issue No. 00-14 addresses the recognition, measurement, and income statement classification for sales incentives that a vendor voluntarily offers to customers (without charge), which the customer can use in, or exercise as a result of, a single exchange transaction. Sales incentives that fall within the scope of EITF Issue No. 00-14 include offers that a customer can use to receive a reduction in the price of a product or service at the point of sale. The EITF changed the transition date for Issue 00-14, concluding that a company should apply this consensus no later than the company’s annual or interim financial statements for the periods beginning after December 15, 2001. In June 2001, the EITF issued EITF Issue No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products,” effective for periods beginning after December 15, 2001. EITF Issue No. 00-25 addresses whether consideration from a vendor to a reseller is (a) an adjustment of the selling prices of the vendor’s products and, therefore, should be deducted from revenue when recognized in the vendor’s statement of operations or (b) a cost incurred by the vendor for assets or services received from the reseller and, therefore, should be included as a cost or expense when recognized in the vendor’s statement of operations. In September of 2001, the EITF issued EITF Issue No. 01-09, “Accounting for Consideration Given by Vendor to a Customer or a Reseller of the Vendor’s Products”, which is a codification of EITF Issues No. 00-14, No. 00-25 and No. 00-22 “Accounting for ‘Points’ and Certain Other Time-or Volume-Based Sales Incentive Offers and Offers for Free Products or Services to be Delivered in the Future.” Adoption of EITF issue No. 01-09 has not had a significant impact on our financial statements.

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations.” SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the

pooling-of-interests method. Adoption of SFAS No. 141 has not had a significant impact on our financial statements.

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”, which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. The standard also requires a change in the method of testing for the impairment of long-lived assets, including goodwill, from the method previously used by the Company as of December 31, 2001. The initial transitional impairment analysis is required to be completed prior to June 30, 2002. The Company expects that the change in the method of testing for impairment as well as the other aspects of the adoption of SFAS No. 142 will have no significant impact on its financial statements.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses significant issues relating to the implementation of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and develops a single accounting method under which long-lived assets that are to be disposed of by sale are measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and its provisions are to be applied prospectively. Adoption of SFAS No. 144 has not had a significant impact on our financial statements.

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 for the year ended December 31, 2001 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 for the year ended December 31, 2001 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 quarters ended March 31, 2002 and 2001 (in thousands, except percentages):


		Three months ended

		March 31, 2002					March 31, 2001
												%
		Amount		%(a)			Amount		%(a)			Change

Revenues from sales of:
	Lasers	$	4,078		43	%	$	4,053		49	%		1	%
	Instrumentation & disposable supplies		3,898		41	%		2,696		33	%		45	%
	Service		1,444		16	%		1,479		18	%		(2	)%

Total net revenues		$	9,420		100	%	$	8,228		100	%		14	%
Gross margin		$	4,621		49	%	$	3,709		45	%		25	%
Research & development		$	1,016		11	%	$	813		10	%		25	%
Selling, general & admin.		$	3,547		38	%	$	3,310		40	%		7	%

(a)

expressed as a percentage of total net revenues.

Net revenues for the quarter ended March 31, 2002 were $9.4 million, an increase of approximately 14% from net revenues of $8.2 million in the corresponding quarter of 2001. This increase is due to higher sales of instrumentation and disposable supplies.

Revenues from the sales of lasers increased marginally during the three months ended March 31, 2002 compared to the same period in 2001. In the quarter ended March 31, 2002 we sold 111 lasers, and in the quarter ended March 31, 2001, we sold 90. While there was a 23% increase in the number of units sold, the increase in unit sales was offset by lower average unit prices due to the mix of lasers sold as well as our distribution arrangement with McKesson Corp. for aesthetic lasers. The distribution arrangement with McKesson Corp. was implemented during the first quarter of 2001, and unit volumes through that channel were lower in the start-up period than in the first quarter of 2002. As unit volumes to McKesson Corp increased, our average unit price decreased due to the favorable pricing which we give to McKesson Corp. The Company expects that sales of aesthetic lasers will continue to be a major source of revenue. In addition, as the year progresses, we anticipate increasing the sales of Niagara PV^TM lasers. The Niagara PV is a surgical laser used for the treatment of benign prostatic hyperplasia (BPH). Our first revenue shipments of the Niagara PV laser were in the three month period ended March 31, 2002 during which we sold six units.

Revenues from the sales of instrumentation and disposable supplies increased during the three months ended March 31, 2002 compared to the corresponding period in 2001. This increase is driven by the higher laser unit volumes and the associated increase in volume of accessories that are sold with lasers. In addition, we sold more accessories per laser. The Company expects revenues from the sales of instrumentation and disposable supplies to

incrementally increase as we ship more Niagara PV lasers which require a single-use fiber optic energy delivery device.

Laserscope’s service revenues decreased marginally during the three months ended March 31, 2002 compared to the same period in 2001. 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 increased during the quarter ended March 31, 2002 relative to the corresponding period of 2001. The increase in gross margin percentage is due primarily to higher manufacturing overhead absorption due to higher production volumes.

Research and development expenses are the result of activities related to the development of new laser, instrumentation and disposable products and the modification and enhancement of Laserscope’s existing products. These expenses increased during the three months ended March 31, 2002 compared to the same period in 2001. The increase was driven by product development activity in the United States on the new Niagara PV laser as well as the Aura^TM, Lyra^TM, and Venus^TM i-series lasers. While development of these lasers is now virtually complete, the Company expects that amounts spent in research and development will decline only marginally in the remainder of the year relative to the level of the quarter ended March 31, 2002 as other development projects are pursued.

Selling, general and administrative expenses increased during the quarter ended March 31, 2002 compared to the corresponding period in 2001, but decreased as a percentage of revenue. The increase in the absolute spending level was driven by an increase in sales and marketing efforts, principally for the launch of the Niagara PV laser. Laserscope expects amounts spent in selling, general and administrative expenses to increase during the remainder of 2002 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 March 31, 2002 and for the three months then ended (in thousands):


	March 31,		December 31,
	2001		2001

Cash and cash equivalents	$	3,209	$	3,408
Total assets	$	25,288	$	25,842
Total liabilities	$	11,811	$	12,070
Net working capital	$	13,420	$	13,336

The decrease in cash and cash equivalents was due primarily to cash used by operating and investing activities, partially offset by cash provided by financing activities.

Cash used in operating activities totaled $0.1 million. This was the combined result of the following uses: increase in accounts receivable — $0.7 million; decrease in accounts payable and accrued compensation — $0.3 million. These uses were partially offset by the following sources: decrease in inventory - $0.5 million; depreciation and amortization — $0.3 million; increase in deferred revenue and other current liabilities — $0.2 million, and a decrease in other current assets — $0.1 million.

Cash used in investing activities consisted of capital expenditures of $0.2 million.

Cash provided by financing activities consisted of sale of common stock under stock plans — $0.2 million; and was partly offset by payments on obligations under capital leases of $0.1 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 March 31, 2002, we had approximately $2.5 million in borrowing capacity available against borrowings of $1.1 million outstanding and $1.1 million in letter of credit reserve requirements. This resulted in $218,000 of unused borrowing capacity. As of March 31, 2002 we were in compliance with all covenants associated with the line of credit and our convertible debentures. 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;

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.

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.

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.

Uncertainty of Technological Change; Uncertainty of 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.

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.

Reliance on Key Customers.

In December 2000, Laserscope and McKesson Corporation (“McKesson”) entered into a five year agreement whereby McKesson would obtain exclusive distribution rights for the Company’s aesthetic product lines to doctors’ offices in the United States. If we are unable to maintain a favorable relationship with McKesson or if McKesson encounters financial difficulties, it would have a material adverse effect on our business, financial condition, results of operations, and future cashflows.

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 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 Lasercope’s financial position, results of operations or future cash flows.

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 April 30, 2002, we had 16,342,719 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.

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, results of operations, or future cash flows.

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.

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 outstanding debt. In 2002 and 2001 we did not use derivative financial instruments. We invest our excess cash in money market funds. 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 23% of total revenues in the quarter ended March 31, 2002, compared to 39% during the comparable period in 2001. 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. We do not engage in hedging transactions for speculative or trading purposes.

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, results of operations, or future cash flows.

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

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

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

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, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)

Date: May 14, 2002

EXHIBIT INDEX

EX-10.14 3 f81476ex10-14.txt EXHIBIT 10.14 EXHIBIT 10.14 MANAGEMENT CONTINUITY AGREEMENT This Management Continuity Agreement (the "Agreement") is made and entered into effect as of April 15, 2002, by and between _____________ (the "Employee") and Laserscope, a California corporation (the "Company"). RECITALS A. It is expected that another company or other entity may from time to time consider the possibility of acquiring the Company or that a change in control may otherwise occur, with or without the approval of the Company's Board of Directors (the "Board"). The Board recognizes that such consideration can be a distraction to the Employee and can cause the Employee to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication and objectivity of the Employee, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. B. The Board believe that it is in the best interest of the Company and its shareholders to provide the Employee with an incentive to continue his or her employment with the Company. C. The Board believes that it is imperative to provide the Employee with certain benefits upon a Change of Control and, under certain circumstances, upon termination of the Employee's employment in connection with a Change of Control, which benefits are intended to provide the Employee with financial security and provide sufficient income and encouragement to the Employee to remain with the Company notwithstanding the possibility of a Change of Control. D. To accomplish the foregoing objectives, the Board of Directors has directed the Company, upon execution of this Agreement by the Employee, to agree to the terms provided in this Agreement. E. Certain capitalized terms used in the Agreement are defined in Section 4 below. In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Employee by the Company, the parties agree as follows: 1. At-Will Employment: The Company and the employee acknowledge that the Employee's employment is and shall continue to be at-will, as defined under applicable law. If the Employee's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and written policies at the time of termination. The terms of this Agreement shall terminate upon the earlier of (I) the date that all obligations of the parties hereunder have been satisfied, (ii) two years after the new effective date, or (iii) twenty-four (24) months after a Change of Control. A termination of the terms of this Agreement pursuant to the preceding sentence shall be effective for all purposes, except that such 19 termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to the termination of the terms of this Agreement. 2. Change of Control/Stock Options. Immediately upon the effective date of the Change of Control, each stock option granted for the Company's securities held by the Employee 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. Upon the immediate vesting of such stock options, the Employee 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 the California Corporations Code and only to the extent permitted by the terms of the applicable option plan) to deliver a promissory note with a two (2) year term, at the prime rate of interest determined as of the date of payment of the exercise price for such options. The delivered note will be non-recourse, and the Company or its successor will look solely to the pledged shares for repayment. 3. Severance Benefits (a) Termination Following A Change of Control. Subject to Section 5 below, if the Employee's employment with the Company is terminated at any time within 24 months after a Change of Control, then the Employee shall be entitled to receive severance benefits as follows: (i) Voluntary Resignation. If the Employee voluntarily resigns from the Company (other than as an Involuntary Termination (as defined below) or if the Company terminates the Employee's employment for Cause (as defined below), then the Employee shall not be entitled to receive severance payments. The Employee's benefits will be terminated under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination. (ii) Involuntary Termination. If the Employee's employment is terminated within 12 months of the Change of Control as a result of Involuntary Termination other than for Cause, the Employee shall be entitled to receive 12 months severance payments (24 months for the CEO) (the "Severance Period") from the date of the Employee's termination. If the Employee's employment is terminated after 12 months but within 24 months after the Change of Control, the Employee shall be entitled to receive 9 months severance payments (18 months for the CEO) (the "Severance Period") from the date of the Employee's termination. The Employee's severance payments shall be equal to the salary which the Employee was receiving immediately prior to the Change of Control plus a 25% bonus for Executive Committee members and 45% for the CEO shall be paid during the Severance Period in accordance with the Company's standard payroll practices or, at the Employee's election, shall be paid to the Employee in lump sum within ten (10) days of the Employee's termination date. Such election shall not affect the length of the Severance Period nor the provision of benefits within the Severance Period. In addition, 20 during the Severance Period, the Employee shall be provided with benefits substantially identical to those to which the Employee was entitled immediately prior to the Change of Control. (iii) Involuntary Termination for Cause. If the Employee's employment is terminated for Cause, then the Employee shall not be entitled to receive severance payments. The Employee's benefits will be terminated under the Company's then existing benefits plans and policies in effect on the date of termination. (b) Termination Apart from Change of Control. In the event the Employee's employment terminates for any reason prior to the Change of Control, then the Employee shall not be entitled to receive any severance payments under this Agreement. The Employee's benefits will be terminated under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination. 4. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Change of Control. "Change of Control" shall mean the occurrence of any of the following events: (i) Ownership. Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities without the approval of the Board of Directors of the Company; or (ii) Merger/Sale of Assets. A merger or consolidation of the Company whether or not approved by the Board of Directors of the Company, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve 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. (iii) Change in Board Composition. 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. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of April 1 2002, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an 21 actual or threatened proxy contest relating to the election of directors to the Company). (b) Cause. "Cause" shall mean (I) material breach of any material terms of this Agreement, (ii) conviction of a felony, (iii) fraud, (iv) repeated unexplained or unjustified absence, (v) willful breach of fiduciary duty under applicable laws, this Agreement or Company policies first in effect prior to the occurrence of a Change in Control or (vi) gross negligence or willful misconduct where such gross negligence or willful misconduct has resulted or is likely to result in substantial and material damage to the Company or its subsidiaries. (c) Involuntary Termination. "Involuntary Termination" will include the Employee's voluntary termination, upon 30 days prior written notice to the Company, following (I) a material reduction in job responsibilities inconsistent with the Employee's position with the Company and the Employee's prior responsibilities, i.e., parent company versus subsidiary level or type responsibility, or (ii) relocation to a facility or location more than 50 miles from the Company's current location, or (iii) reduction in salary. 5. Limitation on Payments. To the extent that any of the payments or benefits provided for in this Agreement or otherwise payable to the Employee constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and, but for this Section 5, would be subject to the excise tax imposed by Section 4999 of the code, the Company shall reduce the aggregate amount of such payments and benefits such that the present value thereof (as determined under the Code and the applicable regulations) is equal to 2.99 times the Employee's "base amount" as defined in Section 280G (b)(3) of the Code. 6. Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation, or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement n the same manner and to the same extent as the company would be required to perform such obligations in the absence of a succession. The terms of this Agreement and all of the Employee's rights hereunder shall insure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 7. Notice. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. Mailed notices to the Employee shall be addressed to the Employee at the home address which the Employee most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. 8. Miscellaneous Provisions. 22 (a) No Duty to Mitigate. The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor, except as otherwise provided in this Agreement, shall any such payment be reduced by any earnings that the Employee may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver, or discharge is agreed to in writing and signed bye the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. This Agreement supersedes any agreement of the same title and concerning similar subject matter dated prior to the date of this Agreement, and by execution of this Agreement both parties agree that any such predecessor agreement shall be deemed null and void. (d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without reference to conflict of law provisions. (e) Severability. If any term or provision of this Agreement or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefore to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision. (f) Arbitration. Any dispute or controversy arising under or in connection with this Agreement may be settled at the option of either party by binding arbitration in the County of Santa Clara, California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in a court having jurisdiction. Punitive damages shall not be awarded. (g) Legal Fees and Expenses. The parties shall each bear their own expenses, legal fees and other fees incurred in connection with this Agreement. (h) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment 23 or other creditor's process, and any action in violation of this subsection (h) shall be void. (i) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (j) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of the assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Employee. (k) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. LASERSCOPE By: By: --------------------------- --------------------------- (Title) (Employee) 24 -----END PRIVACY-ENHANCED MESSAGE-----

Description

Form of Laserscope’s Management Continuity agreement as amended.


	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;

	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.


	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.


	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.