e10vq

-----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, U1oSTcq8n0GplHCT2GLrqjGuyMGIJ/L5QLuLFh2yhgzySFoF/Fkw/bG85MkqR2nR s1CPD7SLQn5eIQ+3bJ+1kw== 0000950134-04-006953.txt : 20040507 0000950134-04-006953.hdr.sgml : 20040507 20040507153803 ACCESSION NUMBER: 0000950134-04-006953 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040507 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: 04789086 BUSINESS ADDRESS: STREET 1: 3052 ORCHARD DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089430636 10-Q 1 f98715e10vq.htm FORM 10-Q e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________

FORM 10-Q

(Mark One)


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2004


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to ______

Commission file number 0-18053

LASERSCOPE

(Exact name of Registrant as Specified in Its Charter)


CALIFORNIA		77-0049527

(State or Other Jurisdiction of Incorporation or Organization)		(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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES þ NO o

The number of shares of Registrant’s common stock issued and outstanding as of April 30, 2004 was 20,878,396.

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION			3
Item 1.	Financial Statements (unaudited)		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		11
	Results of Operations		12
	Liquidity and Capital Resources		14
	Risk Factors		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26
Item 4.	Controls and Procedures		27
PART II. OTHER INFORMATION			27
Item 6.	Exhibits and Reports on Form 8-K		27
SIGNATURES			28
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION.

Item 1. Financial Statements.

Laserscope
Condensed Consolidated Balance Sheets
(unaudited)


	March 31,			December 31,
(thousands)	2004			2003
Assets
Current assets:
Cash and cash equivalents	$	8,700		$	7,158
Accounts receivable, net		12,754			12,711
Inventories, net		14,681			13,368
Other current assets		1,465			1,315

Total current assets		37,600			34,552
Property and equipment, net		1,596			1,645
Goodwill		655			655
Other assets		197			176

Total assets	$	40,048		$	37,028

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	2,893		$	4,094
Accrued compensation		3,118			2,360
Deferred revenue		2,313			2,022
Other current liabilities		5,506			5,354

Total current liabilities		13,830			13,830

Contingencies (Note 7)
Shareholders’ equity:
Common stock		61,124			60,427
Accumulated deficit		(34,788	)		(37,002	)
Accumulated other comprehensive loss		(118	)		(227	)

Total shareholders’ equity		26,218			23,198

Total liabilities and shareholders’ equity	$	40,048		$	37,028

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)	2004			2003
Net revenue	$	18,750		$	12,456
Cost of sales		8,164			6,191

Gross margin		10,586			6,265

Operating expenses:
Research and development		1,239			1,008
Selling, general and administrative		6,733			5,064

Total operating expenses		7,972			6,072

Operating income		2,614			193
Interest and other expenses		(69	)		(36	)

Income before income taxes		2,545			157
Provision for income taxes		331			22

Net income	$	2,214		$	135

Basic net income per share	$	0.11		$	0.01

Diluted net income per share	$	0.10		$	0.01

Shares used in basic per share calculations		20,342			16,899

Shares used in diluted per share calculations		22,682			18,858

See Accompanying Notes to Condensed Consolidated Financial Statements

Laserscope
Condensed Consolidated Statements of Cash Flows
(Unaudited)


	Three Months Ended
	March 31,
(thousands)	2004			2003
Cash flows from operating activities:
Net income	$	2,214		$	135
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		209			285
Amortization of debt issuance costs		—			34
Provision for doubtful accounts		138			34
Provision for excess and obsolete inventory		297			309
Changes in assets and liabilities:
Accounts receivable, net		(92	)		(732	)
Inventories		(1,600	)		(124	)
Prepayments and other current assets		(169	)		222
Accounts payable		(1,439	)		(413	)
Accrued compensation		760			(116	)
Warranty		10			158
Deferred revenue		291			229
Other current liabilities		170			48
Tax payable		230			14

Net cash provided by operating activities		1,019			83

Cash flows from investing activities:
Acquisition of property and equipment		(186	)		(107	)

Net cash used in investing activities		(186	)		(107	)

Cash flows from financing activities:
Payments on obligations under capital leases		(15	)		(72	)
Proceeds from the sale of common stock under stock plans		697			182
Proceeds from bank loans		—			200
Repayment of bank loans		—			(200	)

Net cash provided by financing activities		682			110

Effect of exchange rate changes on cash		27			7
Net increase in cash and cash equivalents		1,542			93
Cash and cash equivalents, beginning of period		7,158			4,661

Cash and cash equivalents, end of period	$	8,700		$	4,754

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	20		$	67
Income taxes	$	96		$	8

See Accompanying Notes to Condensed Consolidated Financial Statements

Laserscope Notes to Unaudited 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 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, 2003 included in the Company’s annual report on Form 10-K for the year ended December 31, 2003. The December 31, 2003 balance sheet data has been derived from the audited financial statements at that date. The results of operations for the three month period ended March 31, 2004 are not necessarily indicative of the results expected for the full year or any other interim period.

2. Stock-Based Compensation

The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and its interpretations, and complies with the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” Under APB Opinion No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company’s stock and the exercise price. SFAS No. 123 defines a “fair value” based method of accounting for an employee stock option or similar equity instrument. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services” (“EITF Issue No. 96-18”). Under SFAS No. 123 and EITF Issue No. 96-18, the fair value of options granted to non-employees is estimated using the Black-Scholes option pricing model and is periodically remeasured as the options vest.

Had compensation cost for stock-based employee compensation arrangements been determined based on the fair value at the date of the awards consistent with the provisions of SFAS No. 123, the impact on the Company’s net income would be as follows (in thousands, except per share data):


	Three months ended
	March 31,
	2004			2003
Net income as reported	$	2,214		$	135
Add: Stock-based compensation expense included in reported net loss, net of related tax effects		—			—
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(366	)		(240	)

Pro forma net income (loss)	$	1,848		$	(105	)

Net income (loss) per share:
Basic-as reported	$	0.11		$	0.01

Basic-pro forma	$	0.09		$	(0.01	)

Diluted-as reported	$	0.10		$	0.01

Diluted-pro forma	$	0.08		$	(0.01	)

3. Inventories

Inventories were comprised of the following (in thousands):


	March 31,		December 31,
	2004		2003
Sub-assemblies and purchased parts	$	7,453	$	6,356
Work-in-process		3,979		3,213
Finished goods		3,249		3,799

	$	14,681	$	13,368

4. Warranty and Service Contracts

Warranty
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 service contract basis or on an individual call basis. Our warranties and premium service contracts provide for 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. The number of warranties extended under this program are not material.

The Company currently provides for the estimated cost to repair or replace products under warranty at the time of sale. The cost estimate is based on warranty costs experienced in the prior 12 months, and the outstanding warranty liability is revalued on a quarterly basis.


		Three months ended
		March 31,
Warranty Reserve (in thousands)		2004			2003
Balance at beginning of period		$	1,947		$	1,127
Add:	Accruals for warranties issued		546			571
	Accruals related to pre-existing warranties		12			14
Less:	Settlements made during the period		(548	)		(427	)

Balance at end of period		$	1,957		$	1,285

Service Contracts
Deferred service contract revenue is recognized on a pro rata basis over the period of the applicable service contract. Costs are recognized as incurred.


		Three months ended
		March 31,
Deferred Service Contract Revenue (in thousands)		2004			2003
Balance at beginning of period		$	1,433		$	1,086
Add:	Payments received		1,234			925
	Costs incurred under extended service contracts		594			442
Less:	Revenue recognized		(900	)		(671	)
	Settlements made under extended service
	contracts during the period		(594	)		(442	)

Balance at end of period		$	1,767		$	1,340

5. Net income per share

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by giving effect to all dilutive potential common shares, including options, warrants, and convertible

debentures. A reconciliation of the numerator and denominator used in the calculation of historical basic and diluted net income per share follows:


	Three months ended
	March 31,
(thousands)	2004		2003
Numerator:
Net income used in computing basic and diluted net income per share	$	2,214	$	135

Denominator:
Weighted average number of common shares outstanding used in computing basic net income per share		20,342		16,899
Add: Dilutive potential common shares used in computing dilutive net income per share		2,340		1,959

Total weighted average number of shares used in computing diluted net income per share		22,682		18,858

The following outstanding options and warrants (prior to the application of the treasury stock method) and convertible debentures (on an as-converted basis) were excluded from the computation of diluted net income per common share for the periods ended March 31, 2004 and 2003 because including them would have had an antidilutive effect:


	Three months ended
	March 31,
(thousands)	2004		2003
Options to purchase common stock		58		279
Warrants to purchase common stock		—		444
Convertible debentures		—		2,400

		58		3,123

6. Comprehensive income

Total comprehensive income during the periods ended March 31, 2004 and 2003 consisted of (in thousands):


	Three months ended
	March 31,
	2004		2003
Net income	$	2,214	$	135
Translation adjustments		109		(14	)

Comprehensive income	$	2,323	$	121

7. Contingencies

The Company is at times a party to legal proceedings and claims 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.

8. Indemnifications

In the ordinary course of business, the Company enters into contractual arrangements under which the Company may agree to indemnify the third party to such arrangement from any losses incurred relating to the services they perform on behalf of the Company or for losses arising from certain events as defined within the particular contract, which may include, for example, patents, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.

The Company has entered into indemnification agreements with its directors and officers that may require the Company: to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and to make good faith determination whether or not it is practicable for the Company to obtain directors’ and officers’ insurance. The Company currently has directors’ and officers’ insurance.

9. Recent accounting pronouncements

In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify those financial instruments as liabilities (or assets in some circumstances). Under previous guidance, issuers could account for those financial instruments as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, certain elements of SFAS No. 150 were deferred to fiscal periods beginning after December 15, 2004. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of

SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of the effective elements of SFAS No. 150 had no material effect on the Company’s financial position or results of operations. The Company does not expect the adoption of the deferred elements of SFAS No. 150 to have a material effect on its financial position or results of operations.

In December 2003, the FASB issued a revised FASB Interpretation No. 46 (“FIN No. 46R”), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” The FASB published the revision to clarify and amend some of the original provisions of FIN No. 46, which was issued in January 2003, and to exempt certain entities from its requirements. A variable interest entity (“VIE”) refers to an entity subject to consolidation according to the provisions of this Interpretation. FIN No. 46R applies to entities whose equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support provided by any parties, including equity holders, or where the equity investors (if any) do not have a controlling financial interest. FIN No. 46R provides that if an entity is the primary beneficiary of a VIE, the assets, liabilities, and results of operations of the VIE should be consolidated in the entity’s financial statements. In addition, FIN No. 46R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE provide additional disclosures. The provisions of FIN No. 46R are effective to the first reporting period ending after March 15, 2004. The adoption of FIN No. 46R had no material effect on the Company’s financial position or results of operations.

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, 2003 under the heading “Risk Factors.” 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 publicly release any revision to the forward-looking statements after the date of this document.

Overview.

Laserscope is a leading provider of medical laser systems for surgical and aesthetic applications. Founded in 1984, we are a pioneer developer of innovative technologies with over 7000 lasers installed worldwide in doctors’ offices, out-patient surgical centers and hospitals. Our product

portfolio consists of more than 150 products, including KTP/532, Nd:YAG, Er:YAG, and Dye medical laser systems and related energy delivery devices.

Laserscope primarily serves the needs of two medical specialties: urology and aesthetic surgery. Our newest product, the GreenLight™ laser, offers a breakthrough treatment for a urological disorder called benign prostatic hyperplasia (“BPH”), an enlargement of the prostate gland experienced by most men after the age of fifty.

For aesthetic applications, we offer a full line of products used to perform a wide variety of treatments including the removal of leg and facial veins, unwanted hair, pseudo-folliculitis and wrinkles.

In the United States, we distribute our products to hospitals, outpatient surgical centers and physician offices through our own direct sales force and through the McKesson Corporation Medical Group, (“McKesson”). In December 2000, we signed a five year distribution agreement that grants to McKesson the exclusive distribution rights for our core aesthetic laser products in the United States. McKesson’s Primary Care Division has a sales force of more than 500 representatives throughout the United States who are supported by our own direct sales force.

In the United Kingdom and France, we distribute our products to hospitals, outpatient surgical centers and physician offices through our own direct sales force. Elsewhere, we sell our products through regional distributor networks throughout Europe, the Middle East, Latin America, Asia and the Pacific Rim. Laserscope is both ISO 9001 and CE certified.

During the three months ended March 31, 2004, the center for Medicare and Medicaid Services announced the assignment of the Company’s Photoselective Vaporization of the Prostate procedure for the treatment of Benign Prostate Hyperplasia, or enlarged prostate, to a New Technology Ambulatory Payment Classification code. The new classification carries with it a payment rate of $3,750.00, approximately twice that of the old rate.

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, 2003 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, 2004 and 2003 (in thousands, except percentages):


			Three months ended
	March 31, 2004						March 31, 2003					%
	Amount			%(a)			Amount		%(a)			Change
Revenues from sales of:
Lasers & Instrumentation	$	11,663			62	%		8,876		71	%		31	%
Disposable supplies		5,319			28	%		2,108		17	%		152	%
Service		1,768			10	%		1,472		12	%		20	%

Total net revenues		18,750			100	%		12,456		100	%		51	%
Gross margin		10,586			56	%		6,265		50	%		69	%
Operating expenses:
Research & development		1,239			7	%		1,008		8	%		23	%
Selling, general & administrative		6,733			37	%		5,064		41	%		33	%
Net income	$	2,214			12	%	$	135		1	%		1,540	%

(a)

expressed as a percentage of total net revenues.

Revenues from the sales of lasers and instrumentation increased 31% during the three months ended March 31, 2004 compared to the same period in 2003. The increase primarily was driven by a higher volume of GreenLight™ surgical lasers sold. First quarter 2004 revenue shipments of GreenLight lasers were 49 units, which is an approximate eight-fold increase over first quarter 2003 shipments of 6 units. GreenLight backlog remained at 19 units at March 31, 2004, the same as at the end of the fourth quarter of 2003. First quarter 2004 worldwide aesthetic laser and instrumentation revenues increased 4% compared to the same period in 2003. The increase is due to higher average selling prices, partially offset by decreased international aesthetic laser sales. We believe that we will see moderate increases in our sales of lower-priced office-based aesthetic lasers in the worldwide market due to a strong distribution channel with McKesson and the introduction of the Gemini™ laser. The Gemini, introduced at the American Academy of Dermatology Annual Meeting, held February 7-10, 2004, is FDA-approved for the treatment of acne, permanent hair reduction and wrinkle reduction, is now approved for a total of 21 different procedures, and can perform over 90% of all aesthetic laser procedures available in a physician’s office. We also believe we will see a continued trend of increasing GreenLight laser shipments.

Revenues from the sales of disposable supplies increased 152% during the three months ended March 31, 2004 compared to the corresponding period in 2003. This increase is driven by a 5,000 unit increase in shipments of GreenLight disposable fiber-optic devices. Increased GreenLight fiber sales is a direct result of an increase in our GreenLight installed base. The Company expects revenues from the sales of disposable supplies to incrementally increase as a result of a recent increase in the Medicare reimbursement rate for the BPH procedure that uses Laserscope’s GreenLight laser and fiber optic delivery device. Also, revenues are expected to increase as the Company ships more GreenLight lasers, which require a single-use fiber optic energy delivery device.

Laserscope’s service revenues increased 20% during the three months ended March 31, 2004 compared to the same period in 2003 due to higher service contracts sold worldwide. Service revenue increased $189,000 in the Domestic region, or 16%, and $107,000 in the International region, or 35%. The Company believes that increases in 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, 2004 relative to the corresponding period of 2003. The increase in gross margin percentage is due primarily to a change in the product mix and better average selling prices for the GreenLight laser.

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 decreased marginally as a percentage of sales during the three months ended March 31, 2004 compared to the same period in 2003, but increased in absolute terms. This was primarily due to our efforts in finishing the development of the new Gemini laser as well as our efforts on enhancements for the GreenLight and aesthetic

lasers. The Company expects that amounts spent in research and development during 2004 will be higher in absolute terms than that spent in 2003 but lower as a percentage of net revenues

Selling, general and administrative expenses increased during the quarter ended March 31, 2004 compared to the corresponding period in 2003. The increase is due primarily to higher sales and marketing expenses related to the Company’s GreenLight and Gemini products, as well as higher direct selling expenses for domestic aesthetic products. We expect amounts spent in selling, general and administrative expenses to increase during the remainder of 2004 relative to the first quarter of 2004 as we continue to expand marketing programs related to the GreenLight and aesthetic products.

Provision for income taxes increased $309,000, from $22,000 to $331,000 during the three months ended March 31, 2004 compared to the corresponding period in 2003. The effective tax rate in the three month period ended march 31, 2004 was 13% compared to 14% in the corresponding period in 2003. Due to experiencing only a short history of profitability, management believes that there is sufficient uncertainty regarding the realization of deferred tax assets and a full valuation allowance was appropriate at March 31, 2004 and 2003. Management reviews its assumptions regarding the realization of deferred tax assets on an ongoing basis. Continued profitability and future changes in management’s assumptions may result in a partial or full release of the deferred tax valuation allowance. A release of the valuation allowance would have a favorable impact on the tax provision within the statement of operations.

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, 2004 and for the three months then ended (in thousands):


	March 31,		December 31,
	2004		2003
Cash and cash equivalents	$	8,700	$	7,158
Total assets	$	40,048	$	37,028
Total liabilities	$	13,830	$	13,830
Net working capital	$	23,770	$	20,722

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

During the three months ended March 31, 2004, cash provided in operating activities totaled $1.0 million. This was the combined result of the following sources: net income- $2.2 million; an increase in accrued compensation- $0.8 million due to an increase in accrued salaries and wages and company bonuses; an increase in provision for excess and obsolete inventory- $0.3 million; an increase in deferred revenue- $0.3 million; an increase in tax payable- $0.2 million due to a higher tax provision as a result of an increase in income; an increase in other accrued liabilities- $0.2 million; depreciation- $0.2 million; and an increase in provision of doubtful accounts receivable- $0.1 million. These sources were offset by: an increase in inventory- $1.6 million due to an increase in material purchases; a decrease in accounts payable- $1.4 million as Laserscope increased payments to suppliers during the quarter; an increase in other current assets- $0.2 million due to early payments for future expenses; and an increase in accounts receivable- $0.1 million.

During the three months ended March 31, 2004, cash provided by financing activities consisted of the sale of common stock under stock plans - $0.7 million

In the first quarter of 2004, cash used in investing activities consisted of capital expenditures of $0.2 million.

We have in place an asset based line of credit which provides up to $5.0 million in borrowings off-set against $1.0 million in letter of credit reserve requirements. The line of credit expires September 2004. Credit is extended based on the Company’s eligible accounts receivable and inventory. At March 31, 2004, the Company had approximately $4.0 million in borrowing capacity under the line of credit facility. The Company’s assets collateralize the line of credit which bears

an interest rate equivalent to the bank’s prime rate plus 2.0%. Borrowings against the line of credit are paid down as the Company collects its accounts receivable. Provisions of the bank loan agreement prohibit the payment of dividends on non-preferred stock, or the redemption, retirement, repurchase or other acquisition of Company stock. The agreement further requires the Company to maintain a minimum tangible net worth. As of March 31, 2004, the Company was in compliance with all covenants and had no outstanding borrowings under the line of credit facility.

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 and sale of common stock under stock plans.

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 may 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.

Off-Balance Sheet Arrangements.

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of March 31, 2004, we are not involved in any unconsolidated SPE transactions.

Contractual Obligations.

We did not enter into any additional material contractual obligations during the quarter ended March 31, 2004.

Recent Accounting Pronouncements.

instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify those financial instruments as liabilities (or assets in some circumstances). Under previous guidance, issuers could account for those financial instruments as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, certain elements of SFAS No. 150 were deferred to fiscal periods beginning after December 15, 2004. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of the effective elements of SFAS No. 150 had no material effect on the Company’s financial position or results of operations. The Company does not expect the adoption of the deferred elements of SFAS No. 150 to have a material effect on its financial position or results of operations.

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; Uncertainty of 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.

Laserscope and its products are regulated in the United States by the Food and Drug Administration (the “FDA”) under the Federal Food, Drug and Cosmetic Act (the “FDC Act”) and the Radiation Control for Health and Safety Act. The FDC Act provides two basic review procedures for medical devices. Certain products qualify for a Section 510(k) (“510(k)”) procedure under which the manufacturer gives the FDA pre-market notification of the manufacturer’s intention to commence marketing the product. The manufacturer must, among other things, establish that the product to be marketed is “substantially equivalent” to a previously marketed product. In some cases, the manufacturer may be required to include clinical data gathered under an investigational device exemption (“IDE”) granted by the FDA allowing human clinical studies.

There can be no assurance that the FDA will grant marketing clearance for our future products on a timely basis, or at all. Delays in receiving such clearances could have a significant adverse impact on our ability to compete in our industry. The FDA may also require post-market testing and surveillance programs to monitor certain products.

If the product does not qualify for the 510(k) procedure, the manufacturer must file a pre-market approval application (“PMA”) based on testing intended to demonstrate that the product is both safe and effective. The PMA requires more extensive clinical testing than the 510(k) procedure and generally involves a significantly longer FDA review process. Approval of a PMA allowing commercial sale of a product requires pre-clinical laboratory and animal tests and human clinical studies conducted under an IDE establishing safety and effectiveness. Generally, because of the amount of information required, the 510(k) procedure takes less time than the PMA procedure.

To date, all of our products (except for the 600 Series Dye Module) have been marketed through the 510(k) procedure. Future products, however, may require clearance through the PMA procedure. There can be no assurance that such marketing clearances can be obtained on a timely basis, or at all. Delays in receiving such clearances could have a significant adverse impact on our ability to compete in our industry. The FDA may also require post-market testing and surveillance programs to monitor certain products.

Certain other countries require medical device manufacturers to obtain clearances for products prior to marketing the products in those countries. The requirements vary widely from country to country and are subject to change.

We are also required to register with the FDA and state agencies, such as the Food and Drug Branch of the California Department of Health Services (CDHS), as a medical device manufacturer. We are inspected routinely by these agencies to determine our compliance with the FDA’s current “Good Manufacturing Practice” regulations. Those regulations impose certain procedural and documentation requirements upon medical device manufacturers concerning manufacturing, testing and quality control activities. If these inspections determine violations of applicable regulations, the continued marketing of any products manufactured by us may be adversely affected.

In addition, our laser products are covered by a performance standard for laser products set forth in FDA regulations. The laser performance standard imposes certain specific record-keeping, reporting, product testing, and product labeling requirements on laser manufacturers. These requirements also include affixing warning labels to laser systems, as well as incorporating certain safety features in the design of laser products.

Complying with applicable governmental regulations and obtaining necessary clearances or approvals can be time consuming and expensive. There can be no assurance that regulatory review will not involve delays or other actions adversely affecting the marketing and sale of our products. We also cannot predict the extent or impact of future legislation or regulations.

We are also subject to regulation under federal and state laws regarding, among other things, occupational safety, the use and handling of hazardous materials and protection of the environment. We believe that we are in material compliance with these requirements.

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’ decisions to purchase our products, adversely affecting our future sales.

A substantial portion of our laser sales are for aesthetic procedures that are generally not subject to reimbursement by government or private health insurance. The general absence of insurance coverage for these cosmetic procedures may restrict the development of this market.

In November 2003, CMS notified Laserscope that its application for assignment of photoselective vaporization of the prostate (“PVP”) to treat BPH to a new technology APC had been accepted. In March 2004, CMS determined that PVP meets the new technology APC qualification criteria and assigned a new APC code effective April 1, 2004. The new classification carries with it a payment rate of $3,750.00, approximately twice that of the old rate. Over the next few months, we will continue to work closely with CMS and the American Urological Association to ensure that the hospital outpatient reimbursement rates for furnishing PVP continue to reflect the appropriate costs of performing the procedure.

If CMS were to reduce reimbursement rates, it will likely have a short-term adverse effect on the adoption and sales growth of the PVP procedure in the United States as some customers who would normally consider adopting the PVP procedure delay their purchases or adoption in hopes of a favorable change in the reimbursement climate.

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. As we introduce new products this may cause some of our existing products to become obsolete, which may result in the write-off of inventory. However, without new products and enhancements, our existing products will likely become obsolete due to technological advances by other companies, 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.

We anticipate that our ability to compete will require significant research and development expenditures with a continuing flow of innovative, high-quality products. We cannot assure that we will be successful in designing, manufacturing or selling enhanced or new products in a timely manner. Nor can we assure that a competitor could not introduce a new or enhanced product or technology that could have an adverse effect on our competitive position.

Our current research and development programs are directed toward the development of new laser systems and delivery devices. We cannot assure that these markets will develop as anticipated or that our product development efforts will prove successful. Nor can we assure that such new products, if developed and introduced, will be accepted by the market.

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.

Manufacturing.
We manufacture in the United States the laser resonators, system chassis and certain accessories including disposable products and re-usable hand pieces used in our laser systems. Our laser manufacturing operations concentrate on the assembly and test of components and subassemblies manufactured to our designs and specifications by outside vendors. We believe that we have sufficient manufacturing capacity in our present facilities to support current operations at least through the end of 2004.

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. Our ability to compete effectively depends on such factors as:

• market acceptance of our products;

• product performance;

• price;

• customer support;

• the success and timing of new product development; and

• continued development of successful distribution channels.

Some of our current and prospective competitors have or may have significantly greater financial, technical, research and development, manufacturing and marketing resources than we have. To compete effectively, we will need to continue to expand our product offerings, periodically enhance our existing products and continue to enhance our distribution.

Certain surgical laser manufacturers have targeted their efforts on narrow segments of the market, such as angioplasty and lithotripsy. Their products may compete for the same capital equipment funds as our products, and accordingly, these manufacturers may be considered our competitors. Generally, surgical laser manufacturers such as Laserscope compete with standard surgical methods and other medical technologies and treatment modalities. We cannot assure that we can compete effectively against such competitors. In addition, we cannot assure that these or other companies will not succeed in developing technologies, products or treatments that are more effective than ours or that would render our technology or products obsolete or non-competitive.

Reliance on Patents and Licenses.
We hold several patents issued in the United States, generally covering surgical laser systems, delivery devices, calibration inserts and the laser resonator. We have also licensed certain technologies from others.

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.

Furthermore, we cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.

We believe that we own or have the right to use the basic patents covering our products. However, the laser industry is characterized by a very large number of patents, many of which are of questionable validity and some of which appear to overlap with other issued patents. As a result, there is a significant amount of uncertainty in the industry regarding patent protection and infringement. Because patent applications are maintained in secrecy in the United States until such patents are issued and are maintained in secrecy for a period of time outside the United States, we can conduct only limited searches to determine whether our technology infringes any patents or patent applications of others.

Potential Intellectual Property Litigation.
Our industry has been characterized by frequent demands for licenses and litigation. Our competitors or other patent holders may assert that our products and the methods we employ are covered by their patents. In addition, we do not know whether our competitors will apply for and obtain patents that will prevent, limit or interfere with our ability to make, use, sell or import our products. Although we may seek to resolve any potential future claims or actions, we may not be able to do so on reasonable terms, or at all. If following a successful third-party action for infringement, we cannot obtain a license or redesign our products, we may have to stop manufacturing and marketing our products, and our business would suffer as a result.

We may become involved in litigation not only as a result of alleged infringement of a third party’s intellectual property rights but also to protect our own intellectual property. We have and may hereafter become involved in litigation to protect the trademark rights associated with our company name or the names of our products. If we have to change the name of our products, we may experience a loss in goodwill associated with customer confusion and a loss of sales.

Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate, and could divert management’s attention from our core business. We do not know whether necessary licenses would be available to us on satisfactory terms, or whether we could redesign our products or processes to avoid infringement. If we lose this kind of litigation, a court could require us to pay substantial damages, and prohibit us from using technologies essential to our products, any of which would have a material adverse effect on our business, results of operations and financial condition.

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, results of operations, and future cash flows.

Reliance on Key Customers.
In December 2000, Laserscope and 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. At March 31, 2004, accounts receivable from McKesson accounted for approximately 15% of our total accounts receivable. 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.

Potential of Product Defects.
Laser systems are inherently complex in design and require ongoing regular maintenance. The manufacture of our lasers, laser products and systems involves a highly complex and precise process. As a result of the technical complexity of our products, changes in our or our suppliers’ manufacturing processes or the inadvertent use of defective materials by us or our suppliers could result in a material adverse effect on our ability to achieve acceptable manufacturing yields and product reliability. To the extent that we do not achieve such yields or product reliability, our business, operating results, financial condition and customer relationships would be adversely affected.

Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition some of our products are combined with products from other vendors, which may contain defects. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to fix defects or other problems, we could experience, among other things:

• loss of customers;

• increased costs of product, returns and warranty expenses;

• damage to our brand reputation;

• failure to attract new customers or achieve market acceptance;

• diversion of development and engineering resources; and

• legal actions by our customers.

The occurrence of any one or more of the foregoing factors could seriously harm our business, financial condition and results of operations.

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 our financial position, results of operations and/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.

Natural Catastrophic Events; Terrorism and Other Manmade Problems.
Our corporate headquarters, including our research and development operations, our manufacturing facilities, and our principal sales, marketing and service offices, are located in the Silicon Valley area of Northern California, a region known for seismic activity. A significant natural disaster, such as an earthquake or a flood, could have a material adverse impact on our business, operating results, and financial condition. In addition, despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems. Any such event could have a material adverse effect on our business, operating results, and financial condition. In addition, the effects of war or acts of terrorism could have a material adverse effect on our business, operating results, and financial condition. The terrorist attacks in New York and Washington, D.C. on September 11, 2001 disrupted commerce throughout the world and intensified the uncertainty of the United States and other economies. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to these economies and create further uncertainties. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders, or the manufacture or shipment of our products, our business, operating results and financial condition could be materially and adversely affected.

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;

• delays in customer purchases in anticipation of new products or product enhancements by Laserscope or its competitors; and

• the risk of loss or interruption to our operations or increased costs due to earthquakes, the availability of power and energy supplies and other events beyond our control.

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, 2004, we had 20,878,396 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.
Our international sales are made through international distributors and wholly-owned subsidiaries with payments to us typically denominated in the local currencies of the United Kingdom and France, and in U.S. Dollars in the rest of the world. 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. These risks include, but are not limited to:

• 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.

We are also subject to general geopolitical risks in connection with our international operations, such as:

• differing economic conditions;

• changes in political climate;

• differing tax structures; and

• changes in diplomatic and trade relationships and war.

In addition, fluctuations in currency exchange rates may negatively affect our ability to compete in terms of price against products denominated in local currencies.

Accordingly, our future results could be materially adversely affected by changes in these regulatory, geopolitical and other factors.

We do not engage in hedging transactions for speculative or trading purposes.

Legal Proceedings.

Laserscope is a party to a number of legal proceedings and claims 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 service contract basis or on an individual call basis. Our warranties and premium service contracts provide for 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 and warrants.

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.

Our exposure to market rate risk for changes in interest rates relates primarily to our outstanding debt. However, at March 31, 2004, we had no bank loans or debentures. Also, in the three months ended March 31, 2004 and 2003, we did not use derivative financial instruments. We invest our excess cash in money market funds. Historically, our debt financings generally consisted 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. While we had no borrowing in the current quarter, if we borrow in the future, our interest expense may be greater than expected due to changes in interest rates.

Foreign Currency Risk.

Our International revenues were 27% and 23% of total revenues in the quarters ended March 31, 2004 and 2003. Our international sales are made through international distributors and wholly owned subsidiaries with payments to the Company typically denominated in the local currencies of the United Kingdom and France, and in United States 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.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) or 15d-15(e) as of the end of the period covered by this report (the “Evaluation Date”), have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate based on the evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 13d-15.

(b) Changes in internal controls.
No change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the Company’s first fiscal quarter has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.

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


Exhibit
Number		Description
10.1		Form of Management Continuity Agreement.
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

(b) Reports on form 8-K:

On February 12, 2004, the Company filed a current report on Form 8-K reporting the issuance of a Press Release dated February 12, 2004 announcing the Company’s financial results for the fiscal quarter and year ended December 31, 2003.

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
Date: May 7, 2004 Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)

Exhibit Index


Exhibit
Number		Description
10.1		Form of Management Continuity Agreement.
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350.
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

EX-10.1 2 f98715exv10w1.htm EXHIBIT 10.1 exv10w1

Exhibit 10.1

MANAGEMENT CONTINUITY AGREEMENT

This Management Continuity Agreement (the “Agreement”) is made and entered into effect as of March 31, 2004 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 believes 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 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.

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 18 months {2.99 years for the CEO} severance payments (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 {12 months for the CEO} severance payments (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, 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 2004, 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 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.

(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 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)

EX-31.1 3 f98715exv31w1.htm EXHIBIT 31.1 exv31w1

Exhibit 31.1

CERTIFICATIONS

I, Eric M. Reuter, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Laserscope;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2004 /s/ Eric M. Reuter
Eric M. Reuter
Chief Executive Officer
(Principal Executive Officer)

EX-31.2 4 f98715exv31w2.htm EXHIBIT 31.2 exv31w2

Exhibit 31.2

I, Dennis LaLumandiere, certify that:

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2004 /s/ Dennis LaLumandiere
Dennis LaLumandiere
Chief Financial Officer
(Principal Financial Officer)

EX-32.1 5 f98715exv32w1.htm EXHIBIT 32.1 exv32w1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the accompanying Quarterly Report of Laserscope on Form 10-Q for the three months ended March 31, 2004, I, Eric M. Reuter, President and Chief Executive Officer of Laserscope, hereby certify pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) such Quarterly Report on Form 10-Q for the three months ended March 31, 2004 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in such Quarterly Report on Form 10-Q for the three months ended March 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of Laserscope.

Date: May 7, 2004 By: /s/ Eric M. Reuter
Eric M. Reuter
President and Chief Executive Officer

A signed original of this written statement required by section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by section 906, has been provided to Laserscope and will be retained by Laserscope and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 6 f98715exv32w2.htm EXHIBIT 32.2 exv32w2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the accompanying Quarterly Report of Laserscope on Form 10-Q for the three months ended March 31, 2004, I, Dennis LaLumandiere, Vice President, Finance and Chief Financial Officer of Laserscope, hereby certify pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) such Quarterly Report on Form 10-Q for the three months ended March 31, 2004 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in such Quarterly Report on Form 10-Q for the three months ended March 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of Laserscope.

Date: May 7, 2004 By: /s/ Dennis LaLumandiere
Dennis LaLumandiere
Vice President, Finance and Chief Financial Officer

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

	(b)		Reports on form 8-K:

			On February 12, 2004, the Company filed a current report on Form 8-K reporting the issuance of a Press Release dated February 12, 2004 announcing the Company’s financial results for the fiscal quarter and year ended December 31, 2003.


	LASERSCOPE Registrant
	/s/ Dennis LaLumandiere
	Dennis LaLumandiere
Date: May 7, 2004	Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

	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 believes 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:

	(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 18 months {2.99 years for the CEO} severance payments (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 {12 months for the CEO} severance payments (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, 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.

	(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 2004, 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 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.



	(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 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.

1.		I have reviewed this quarterly report on Form 10-Q of Laserscope;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: May 7, 2004	/s/ Eric M. Reuter
	Eric M. Reuter
	Chief Executive Officer (Principal Executive Officer)

	(1)		such Quarterly Report on Form 10-Q for the three months ended March 31, 2004 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		the information contained in such Quarterly Report on Form 10-Q for the three months ended March 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of Laserscope.