-----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, PGWJp0fGvP0M+MHLLNm/zp3thskdXa6n5PT7+pQdR5dnZDu9nmYzIDywHIwGNfqO /+JL5EvHObmxIV/puUrcpg== 0000891618-99-005067.txt : 19991115 0000891618-99-005067.hdr.sgml : 19991115 ACCESSION NUMBER: 0000891618-99-005067 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: SEC FILE NUMBER: 000-18053 FILM NUMBER: 99747288 BUSINESS ADDRESS: STREET 1: 3052 ORCHARD DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089430636 10-Q 1 FORM 10-Q FOR PERIOD ENDING 09/30/99 1 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, 1999 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______ Commission file number 0-18053 LASERSCOPE (Exact name of Registrant as specified in its charter) CALIFORNIA 77-0049527 (State of Incorporation) (I.R.S. Employer Identification No.) 3052 ORCHARD DRIVE, SAN JOSE, CALIFORNIA 95134-2011 (Address of principal executive offices) Registrant's telephone number: (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, 1999 was 12,611,637. 2 TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION..................................................... 3 Item 1. 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....................................... 12 Item 3. Qualitative and Quantitative Disclosures About Market Risk............ 14 PART II. OTHER INFORMATION........................................................ 15 Item 1. Legal Proceedings..................................................... 15 Item 2. Changes in Securities................................................. 15 Item 3. Defaults upon Senior Securities....................................... 15 Item 4. Submission of Matters to a Vote of Security Holders................... 15 Item 5. Other Items........................................................... 15 Item 6. Exhibits and Reports on Form 8-K...................................... 15 SIGNATURES ...................................................................... 15
2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: LASERSCOPE CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, (thousands) 1999 1998 - ---------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 887 $ 1,456 Accounts receivable, net 9,616 12,433 Inventories 11,893 14,084 Other current assets 1,635 867 -------- -------- Total current assets 24,031 28,840 Property and equipment, net 4,236 5,146 Developed technology and other intangibles, net 2,736 2,089 Other assets -- 518 -------- -------- Total assets $ 31,003 $ 36,593 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,679 $ 5,360 Accrued compensation 1,518 1,659 Short-term bank loans 6,016 3,538 Other current liabilities 3,477 4,561 -------- -------- Total current liabilities 15,690 15,118 Long-term liabilities: Obligations under capital leases 612 786 Mortgages and other long term loans 1,693 1,693 -------- -------- Total long-term liabilities: 2,305 2,479 Commitments and contingencies Minority interest 194 325 Shareholders' equity: Common stock 51,268 51,268 Accumulated deficit (37,526) (31,627) Accumulated other comprehensive income (726) (599) Notes receivable from shareholders (202) (371) -------- -------- Total shareholders' equity 12,814 18,671 -------- -------- Total liabilities and shareholders' equity $ 31,003 $ 36,593 ======== ========
See notes to condensed consolidated financial statements 3 4 LASERSCOPE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (thousands except per share amounts) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------ Net revenues .................................. $ 9,892 $ 12,779 $ 31,323 $ 39,503 Cost of sales ................................. 5,410 6,976 18,322 21,618 -------- -------- -------- -------- Gross margin .................................. 4,482 5,803 13,001 17,885 Operating expenses: Research and development .................. 989 1,179 3,553 3,862 Selling, general and administrative ....... 4,441 4,813 14,127 15,881 -------- -------- -------- -------- 5,430 5,992 17,680 19,743 Operating loss ................................ (948) (189) (4,679) (1,858) Interest income (expense) and other, net ...... (345) (138) (1,027) (454) -------- -------- -------- -------- Loss before income taxes and minority interest ..................... (1,293) (327) (5,706) (2,312) Provision for income taxes .................... 13 178 141 311 -------- -------- -------- -------- Loss before minority interest ................. (1,306) (505) (5,847) (2,623) Minority interest ............................. 2 232 52 321 -------- -------- -------- -------- Net loss ...................................... $ (1,308) $ (737) $ (5,899) $ (2,944) ======== ======== ======== ======== Basic and diluted net loss per share .......... $ (0.10) $ (0.06) $ (0.47) $ (0.24) ======== ======== ======== ======== Shares used in basic and diluted per share calculations ............. 12,550 12,469 12,564 12,405 ======== ======== ======== ========
See notes to condensed consolidated financial statements 4 5 LASERSCOPE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, (thousands) 1999 1998 - --------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(5,899) $(2,944) Adjustments to reconcile net loss to cash used by operating activities: Depreciation and amortization 2,362 2,261 Excess Inventory charge 750 -- Compensation relating to repayment of shareholder note 169 -- Increase (decrease) from changes in: Accounts receivable 2,817 506 Inventories 1,441 145 Other current assets (768) 45 Accounts payable (681) (253) Accrued compensation (141) 308 Other current liabilities (999) (1,192) Minority interest 52 325 ------- ------- Cash used by operating activities (897) (799) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (474) (908) NWL acquisition (1,278) -- Other (127) 146 ------- ------- Cash used by investing activities (1,879) (762) ------- ------- CASH USED BY FINANCING ACTIVITIES: Payments on obligations under capital leases (271) (143) Proceeds from the sale of common stock under stock plans -- 189 Proceeds from bank loans 3,621 1,603 Repayment of bank loans (1,143) (1,221) ------- ------- Cash provided by financing activities 2,207 428 ------- ------- Decrease in cash and cash equivalents (569) (1,133) Cash and cash equivalents, beginning of period 1,456 2,465 ------- ------- Cash and cash equivalents, end of period $ 887 $ 1,332 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 378 $ 308 Income taxes $ 15 $ 14 Non-cash financing activities: Equipment leases $ 12 $ 680
See notes to condensed consolidated financial statements 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: 1. The accompanying condensed consolidated financial statements include Laserscope (the "Company") 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. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 1998 included in the Company's annual report on Form 10-K for the year ended December 31, 1998. The results of operations for the three and nine month periods ended September 30, 1999 are not necessarily indicative of the results expected for the full year. 2. Inventory was comprised of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ Sub-assemblies and purchased parts $ 8,588 $ 9,371 Finished goods 3,305 4,713 ------- ------- $11,893 $14,084 ======= =======
3. Basic net income (loss) per share is calculated using the weighted average of common stock outstanding. Diluted net income per share is calculated using the weighted average of common stock outstanding plus dilutive common equivalent shares from stock options. Options to purchase approximately 3,609,000 and 2,588,000 shares of common stock were outstanding at September 30, 1999 and 1998, respectively. Options were not included in the computation of diluted earnings (loss) per share because the Company reported losses for the periods that ended at these dates and, therefore, the effect would be anti-dilutive. 4. The Company considers cash equivalents to be short-term financial instruments that are readily convertible to cash, subject to no more than insignificant interest rate risk and that have original maturities of three months or less. At September 30, 1999 and December 31, 1998, the Company's cash equivalents were in the form of institutional money market accounts and totaled $0.4 million and $0.4 million, respectively. At September 30, 1999 and December 31, 1998, the Company had no investments in debt or equity securities. 5. During the year ended December 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires translation adjustments, which prior to adoption were reported in shareholders' equity, to be included in comprehensive income (loss). The total comprehensive loss during the quarters and nine month periods ended September 30, 1999 and 1998 consisted of (in thousands): 6 7
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- --------------------- 1999 1998 1999 1998 -------------------------------------------------------------------------------------- Net loss $(1,308) $ (737) $(5,899) $(2,944) Translation adjustments (195) 236 (127) 212 ------- ------- ------- ------- Comprehensive loss $(1,503) $ (501) $(6,026) $(2,732) ======= ======= ======= =======
6. During the year ended December 31, 1998, Laserscope adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 changed the way companies report selected segment information in annual financial statements and requires those companies to report selected segment information in interim financial reports to shareholders. During all periods presented, the Company conducted its business predominantly within one industry segment: the medical systems business. 7. In January 1999, pursuant to an agreement between Laserscope and the minority interest owners of NWL Laser-Technologie GmbH ("NWL"), the Company paid approximately $0.8 million in cash, and an additional $0.5 million in April 1999, to acquire an additional 27% interest in NWL. These purchases bring Laserscope's ownership interest in NWL to 79%. The approximate purchase price allocation for the transaction is $1.1 million for intangible assets (including developed technology, distribution and workforce) and $0.2 million for additional interest in tangible assets. The Company expects to pay an additional $1.0 million in January 2001 for the remaining interest in NWL. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: Except for the historical information contained in this Quarterly Report on Form 10-Q, the matters discussed herein are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements are subject to certain risks and uncertainties that could cause the actual results to differ materially from those projected. Factors that could cause actual results to differ materially include, but are not limited to, the risks associated with the acquisition of NWL Laser-Technologie, GmbH ("NWL"), including the integration of the operations and assets acquired and the assumption of the liabilities assumed by Laserscope, the timing of orders and shipments, the Company's ability to balance its inventory and production schedules, the timely development, clearance by the F.D.A. and other regulatory agencies and market acceptance of new products and surgical/therapeutic procedures, the impact of competitive products and pricing, Laserscope's ability to raise capital on terms acceptable to the Company, or at all, the Company's ability to expand further into international markets, and public policy relating to health care reform in the United States and other countries. Laserscope intends to continue expansion of its operations outside of the United States and to enter additional international markets, requiring significant management attention and financial resources and further subjecting the Company to the risks of operating internationally. These risks include unexpected changes in regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, customs, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. The Company is also subject to general geopolitical risks in connection with its international operations, such as political and economic instability and changes in diplomatic and trade relationships. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions will be imposed by the United States, Japan, countries in the European Union or other countries upon the import or export of Laserscope's products in the future, or what effect any such actions would have on its business, financial condition or results of operations. In addition, fluctuations in currency exchange rates may negatively affect the Company's ability to compete in terms of price against products denominated in local currencies. There can be no assurance that regulatory, geopolitical and other factors will not adversely affect the Laserscope's operations in the future or require Laserscope to modify its current business practices. Many currently installed computer systems and software products are coded to accept only two digit entries in the date field. Beginning in the year 2000, these date fields need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in approximately two months, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists concerning the potential effects associated with any noncompliance. Any Year 2000 compliance problem encountered by Laserscope, its suppliers, its service providers or its customers could have a material adverse effect on the Company's financial condition and operating results. Other risks are detailed from time to time in Laserscope's press releases and other public disclosure filings with the U.S. Securities and Exchange Commission (SEC), copies of which are available upon request from the Company. The forward-looking statements included 8 9 herein speak only as of the date hereof. Laserscope assumes no obligation to update any forward-looking statements included herein. RESULTS OF OPERATIONS: The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in Part I -- Item 1 of this Quarterly Report and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 1998 contained in the Company's Annual Report on Form 10-K. 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, 1999 (in thousands except for percentages):
THREE MONTHS ENDED NINE MONTHS ENDED SEPT. 30, 1999 SEPT. 30, 1998 % SEPT. 30,1999 SEPT. 30, 1998 % AMOUNT %(a) AMOUNT %(a) CHANGE AMOUNT %(a) AMOUNT %(a) CHANGE -------------- ---------------- ------- -------------- ------------------- ------ Revenues from sales of: Lasers $5,381 54% $ 6,955 55% (23)% $17,756 57% $ 20,891 53% (15)% Ascent medical systems - - 1,329 10% (100)% - - 4,382 11% (100)% Instruments & supplies 2,881 29% 2,916 23% (1)% 8,808 28% 9,106 23% (3)% Service 1,630 17% 1,579 12% 3 % 4,759 15% 5,124 13% (7)% ------ --- ------- ---- ---- ------- ---- -------- --- ---- Total net revenues $9,892 100% $12,779 100% (23)% $31,323 100% $ 39,503 100% (21)% Gross margin $4,482 45% $ 5,803 45% (23)% $13,001 42% $ 17,885 45% (27)% Research & development $ 989 10% $ 1,179 9% (16)% $ 3,553 11% $ 3,862 10% (8)% Selling, general & admin $4,441 45% $ 4,813 38% (8)% $14,127 45% $ 15,881 40% (11)%
(a) expressed as a percentage of total net revenues. Net revenues decreased during the three and nine months ended September 30, 1999 relative to the corresponding periods of 1998 as a combined result of lower shipments of lasers, instrumentation and supplies. Sales of services were higher during the three months ended September 30, 1999 and lower during the nine months ended September 30, 1999 compared to the corresponding periods in 1998. In addition, due to the sale of the Ascent Medical System ("AMS") assets and liabilities in November 1998, Laserscope had no sales of AMS products in 1999 while sales of these products were $1.3 million and $4.4 million in the three and nine months ended September 30, 1998, respectively. Revenues from the sales of laser systems decreased during the quarter and nine-month periods ended September 30, 1999 relative to the same periods in 1998. This was due to a combination of lower unit shipments and lower average unit prices during the quarter and lower unit shipments and higher average unit prices during the nine months period. The lower unit shipments are the result of decreased shipments of the Company's Surgical Laser Systems, principally in the United States and the Pacific Rim. The lower average unit prices during the three months ended September 30, 1999 are due primarily to a higher mix of office lasers world-wide. The higher average unit prices during the nine months ended September 30, 1999 reflect the higher mix of PDT units sold in the United States and lower shipments to customers in Asia during the first six months of 1999. In spite of higher laser system unit prices in the United States during the nine months of 1999 compared to the first nine months of 1998, the Company expects its future revenue mix trends in the U.S. market to shift toward 9 10 lower-priced lasers. In addition, Laserscope believes that economic conditions in the Pacific Rim region will continue to affect its revenues negatively. Revenues from the sales of instrumentation and disposable supplies during the quarter and nine months ended September 30, 1999 decreased compared to the corresponding periods in 1998. The decrease is due to the combination of lower shipments of disposable supplies and decreased shipments of scanning devices sold as accessories to the Aura office laser system. The Company believes that trends in sales of laser equipment in the United States towards office lasers for aesthetic procedures and away from lasers to be used in the hospital for non-aesthetic procedures have resulted in decreased sales of disposable supplies. Office lasers used in aesthetic procedures, although often times carrying accompanying one-time sales of instrumentation, generally do not create a stream of sales of disposable supplies. The Company expects revenues from the sales of instrumentation and disposable supplies will depend on Laserscope's ability to increase its installed base of systems, and to promote and develop surgical procedures that use these products. Laserscope's service revenues increased during the three-month period and decreased during the nine-month period ended September 30, 1999 compared to the same periods in 1998. The increase during the three-month period is primarily due to increased non-domestic revenues. The decrease during the nine-month period is principally attributable to lower domestic revenues resulting from reduced service contract revenues from hospitals, partially offset by increased non-domestic service revenues. 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. The Company believes that acceptance of lasers in aesthetic surgery, dermatology, urology and ear, nose and throat surgery will continue to be important to its business. In addition, the Company expects that the adoption of photodynamic therapy by medical practitioners will be important to its business. The Company continues to invest in developing new instrumentation for emerging surgical applications and in educating surgeons in the United States and internationally to encourage the adoption of such new applications. Penetration of the international market is generally increasing, and the Company continues to view expansion of international sales as important to its success. During the first nine months of 1999, international revenues accounted for 46% of total net revenues, compared to 39% of total net revenues during the first nine months of 1998. The increase as a percentage of total net revenues is due principally to the discontinuance of sales of AMS products which were sold by the Company only in the United States, and, to a lesser extent, higher international revenues. Gross margin as a percentage of revenues remained constant during the quarter ended and decreased during the and nine months ended September 30, 1999 relative to the corresponding periods of 1998. The decline is due principally to lower production levels without corresponding reductions in fixed manufacturing costs. The decline in production levels is the combined result of lower shipment levels in the 1999 periods compared to 1998 periods as well as the Company's efforts to reduce inventory levels. In addition, Laserscope recorded a $0.8 million charge during the period ended June 30, 1999, to provide for inventory the Company considered potentially obsolete. The Company expects that gross margin as a percentage of revenues for the remainder of 1999 will vary from quarter to quarter as it continues to balance production volumes and inventory levels with product demand and as product and distribution mix varies. 10 11 Research and development expenses are the result of activities related to the development of new laser, instrumentation and disposable products and the enhancement of the Company's existing products. The decreases in research and development spending during the nine month period ended September 30, 1999 relative to the corresponding period in 1998 is due to decreased laser product development activity in the United States. The Company expects amounts spent in research and development to remain at similar levels during the remainder of 1999. Selling, general and administrative expenses decreased during the quarter and nine-month periods ended September 30, 1999. This is due to a number of factors. As a result of the sale of AMS assets and liabilities in November 1998, Laserscope reduced expenses relating to the sales and marketing of AMS products. In addition, the Company has generally reduced selling, general and administrative expenses under expense control measures instituted during the latter part of 1998. Partially offsetting these reductions is approximately $1.0 million in charges recorded by Laserscope relating to severance arrangements with employees that were terminated in reductions in force during 1999. Laserscope expects amounts spent in selling, general and administrative expenses during the final quarter of 1999 to be lower than amounts spent during the first three quarters of 1999. The expected reductions are due to continued expense reduction programs instituted by the Company late in the quarter ended June 30, 1999. 11 12 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, 1999 and for the nine months then ended (in thousands):
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ Cash and cash equivalents $ 887 $ 1,456 Total assets $31,003 $ 36,593 Net working capital $ 8,341 $ 13,722
The net decrease in cash and cash equivalents during the nine month period was due primarily to the combination of net proceeds from bank borrowings of $2.5 million, $1.3 million paid to increase Laserscope's interest in NWL, cash used by operating activities of $0.9 million and capital expenditures of $0.5 million. Cash provided by operating activities was the combined result of a net loss of $5.9 million, a decrease in other current liabilities of $1.0 million, an increase to other current assets of $0.8 million, a decrease in accounts payable of $0.7 million and a decrease to accrued compensation of $0.1 million. Offsetting these uses were a reduction in accounts receivable of $2.8 million, depreciation and amortization of $2.4 million, a reduction in inventory of $1.4 million, an excess inventory charge of $0.8 million and a decrease in shareholder notes receivable of $0.2 million. Cash used by investing activities primarily consisted of capital expenditures of $0.5 million and increased investment in NWL of $1.3 million. Cash provided by financing activities primarily consisted of net increases in bank loans of $2.5 million. At September 30, 1999, Laserscope had approximately $4.4 million outstanding under its bank credit line. The losses reported by the Company during the quarters ended June 30, 1999 and September 30, 1999 violated the profitability and minimum net worth covenants of the loan agreement. On October 1, 1999, Laserscope moved to a $6.0 million asset-based borrowing arrangement with the same bank with collateral values based principally on domestic accounts receivable. The arrangement, which expires in September 2000, allows for an over-advance relative to the collateral of $1.9 million until December 31, 1999, then $1.0 million until March 31, 2000 at which time further over-advances will no longer be allowed. At October 1, 1999, the Company had approximately $4.4 million in collateral available against the $4.4 million outstanding. In addition, NWL has in place various bank lines totaling approximately $2.0 million that expire in 1999 and 2000 under which $1.0 million in borrowings were outstanding at September 30, 1999. The Company anticipates that future changes in cash and working capital will be dependent on a number of factors including management's ability to manage effectively non-cash assets such as inventory and accounts receivable. The Company competes in a competitive industry where technological changes and acceptance of new and alternative procedures by its customers is rapid. Management's ability to anticipate and adapt to these changes will significantly affect the Company's investment in inventory and the potential for inventory 12 13 valuation adjustments. In addition, the level of profitability of the Company will have a significant impact on cash resources. From time to time, the Company may also consider the acquisition of, or evaluate investments in, certain products and businesses complementary to the Company's business. Any such acquisition or investment may require additional capital resources. The Company has historically financed acquisitions using its existing cash resources. While the Company believes its remaining cash resources will be sufficient to fund its operating needs for the next twelve months, additional financing either through its bank lines of credit or otherwise will be required for the Company's currently envisioned long term needs. There can be no assurance that such additional financing will be available on terms acceptable to the Company, or at all. YEAR 2000 As described earlier, the year 2000 computer issue creates a risk for Laserscope. If computer systems do not correctly recognize date information when the year changes to 2000, there could be a material adverse effect on the Company's operations. The risk for the Company exists in four areas: (i) Information systems and equipment used by the Company to operate its business; (ii) systems used by the Company's suppliers; (iii) the products sold by the Company; and (iv) the potential for reduced spending by customers for Laserscope's products and services as a result of significant spending on year 2000 issues and related adverse effects of such issues on the customer's business. Laserscope has completed its upgrade of the business critical internal information systems and equipment that the Company had identified to be year 2000 non-compliant. At this time, Laserscope has developed contingency plans, consistent with its other disaster recovery plans, to address the potential of unidentified year 2000 non-compliance. For the year 2000 non-compliance issues identified to date, the cost of upgrade or replacement has been less than $200,000 through September 30, 1999. Laserscope does not expect any remaining costs of year 2000-related upgrades or replacements to affect materially its operating results. The Company intends to fund any such compliance efforts through working capital generated by operations. If significant new non-compliance issues are identified, the Company's results of operations or financial condition could be adversely affected. However, the Company believes that it has completed its year 2000 compliance review and necessary system modifications and does not anticipate adverse consequences. Laserscope has also contacted its critical suppliers to determine whether such suppliers' operations and the products and services they provide to the Company are year 2000 compliant, and has evaluated the responses. At present, Laserscope is satisfied with the responses from these critical suppliers. Where practical, the Company will attempt to mitigate its risks with respect to the failure of its suppliers to be year 2000 ready. In the event that suppliers are not year 2000 compliant, the Company may need to seek alternative sources. Any such failures by critical suppliers could have a material adverse effect on the Company's results of operations or financial condition. Laserscope believes that the majority of the products it sells are year 2000 compliant in all material respects; however, because all customer situations cannot be anticipated, the Company may see an increase in warranty and other claims as a result of the year 2000 transition. While litigation regarding year 2000 compliance issues is expected to escalate, the Company does not believe that the effect of customer claims is reasonably likely to materially affect the Company's results of operations or financial condition. 13 14 Year 2000 compliance is an issue for virtually all businesses whose systems and applications may require significant hardware and software upgrades or modifications. Companies owning and operating such systems may plan to devote a substantial portion of their information systems' spending to fund such upgrades and modifications and divert spending away from the purchase of the Company's products and services. Such changes in customers' spending patterns could have an adverse effect on the Company's sales, but the effect on operating results and financial condition is not known at this time. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to a variety of risks, including changes in interest rates affecting the return on its investments, outstanding debt balances and foreign currency fluctuations. In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in interest rates and foreign currency values. INTEREST RATE RISK The Company's exposure to market rate risk for changes in interest rates relate primarily to the Company's investment and debt portfolios. Laserscope has not used derivative financial instruments in its investment or debt portfolios. The Company invests its excess cash in money market funds and commercial paper. The Company's debt financing consists mainly of bank loans requiring either fixed or variable rate interest payments. Investments in and borrowings under both fixed-rate and floating-rate interest-earning instruments carry a degree of interest rate risk. On the investment side, fixed-rate securities may have their fair market value adversely affected due to a rise in interest rates, while floating-rate securities may produce less income than expected if interest rates fall. In addition, Laserscope's future investment income may fall short of securities analyst expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. On the debt side, borrowings that require fixed-rate interest payments require greater than current market rate interest payments if interest rates fall, while floating rate borrowings may require greater interest payments if interest rates rise. Additionally, the Company's future interest expense may be greater than expected due to changes in interest rates. FOREIGN CURRENCY RISK International revenues were 46% of total revenues in the nine months ended September 30, 1999, compared to 39% of total revenues during the comparable period in 1998. International sales are made through international distributors and wholly- and majority-owned subsidiaries with payments to Laserscope typically denominated in the local currencies of the United Kingdom, France and Germany, and in U.S. dollars in the rest of the world. The Company's international business is subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the Company's future results could be materially adversely affected by changes in these or other factors. The effect of foreign exchange rate fluctuations on the Company in the quarters and nine month periods ended September 30, 1999 and 1998 were not material, and the Company does not engage in hedging transactions for speculative or trading purposes. 14 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, the Company believes that the ultimate resolution of these claims will not ultimately have a material adverse effect on its financial position or results of operations. 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 INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K: None 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 12, 1999 15 16 EXHIBIT INDEX Exhibit# Description 27.1 Financial Data Schedule EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 SEP-30-1999 887 0 10,271 655 11,893 24,031 17,919 13,683 31,003 15,690 0 0 0 51,268 (38,454) 31,003 31,323 31,323 18,322 18,322 17,680 0 1,027 (5,758) 141 (5,899) 0 0 0 (5,899) (.47) (.47)
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