UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1995, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from ___ to ___.
Commission file number: 0-18053
LASERSCOPE
(Exact name of Registrant as specified in its charter)
California 77-0049527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3052 Orchard Drive San Jose, California 95134-2011
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 943-0636
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Common Share Purchase Rights
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $23,648,000 as of March 20, 1996, based upon the
closing sale price on the NASDAQ National Market System reported for such date.
Shares of Common Stock held by each officer and director and by each person who
owns 5% of more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
There were 7,060,634 shares of Registrant's Common Stock issued and outstanding
as of March 20, 1996.
INTRODUCTORY STATEMENT
Except for the historical information contained in this Annual Report on Form
10-K, the matters discussed herein are forward-looking statements that are
subject to certain risks and uncertainties that could cause the actual
results to differ materially from those projected. Factors that could cause
actual results to differ materially include, but are not limited to, the
timing of orders and shipments, the timely development and market acceptance
of new products and surgical procedures, the impact of competitive products
and pricing, the Company's ability to further expand into international
markets, public policy relating to health care reform in the United States
and other countries, approval of its products by government agencies such as
the United States Food and Drug Administration, and other risks detailed
below and included from time to time in the Company's other SEC reports and
press releases, copies of which are available from the Company upon request.
The Company assumes no obligation to update any forward-looking statements
contained herein.
References made in this Annual Report on Form 10-K to "Laserscope," the
"Company" or the "Registrant" refer to Laserscope and its subsidiaries. The
following Laserscope trademarks are mentioned in this Annual Report:
Laserscope, Dermastat, KTP/532 and Microbeam, registered trademarks of the
Company; and Endostat, KTP/YAG, Microstat, KTP Disc Kit, Laparostat,
SpineStat, ADD, ADDStat, LDD, Orion, Aura, SmartScan and StarPulse trademarks
of the Company. Hexascan is a trademark of Prein and Partners. Photofrin is
a registered trademark of American Cyanamid Company.
PART I
ITEM 1. BUSINESS
Laserscope-Registered Trademark- designs, manufactures and markets on a
worldwide basis surgical, dermatologic and therapeutic laser systems and related
surgical instrumentation and disposable supplies and accessories. The Company's
laser systems employ laser technology based on potassium titanyl phosphate (KTP)
crystalline material and enable the physician to cut, coagulate and vaporize
tissue in a wide variety of applications and procedures. The Company's laser
systems also enable the surgeon to operate in contact or in near-contact with
tissue, depending on the desired surgical effect. Laserscope's laser systems are
especially well suited for minimally invasive surgery, which reduces bleeding,
postoperative pain and recovery time as compared to conventional surgery.
The Company shipped its first KTP/532-Registered Trademark- Surgical Laser
System in 1984. In 1989, the Company introduced the KTP/YAG-TM- laser system
combining its KTP laser with an additional module that allows the physician to
choose between the KTP wavelength of 532 nanometers and the neodymium
yttrium-aluminum garnet (Nd:YAG) wavelength of 1,064 nanometers. The surgeon can
select the KTP beam for precise surgical effects with minimal damage to
surrounding tissue or for microscopic applications. Simply by pressing
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a button, the surgeon can switch virtually instantaneously to the Nd:YAG beam
for increased coagulation and greater tissue penetration when desired. In 1991,
the Company introduced the "XP" module that permits the laser systems to
generate higher levels of laser energy. In 1994, the Company introduced the
"Orion-TM-" models of its KTP/532 and KTP/ YAG lasers. The Orions are smaller,
lower priced, lower power versions of its KTP/532 and KTP/YAG lasers designed
primarily for physician office applications and the international marketplace.
In 1995, the Company introduce the "Aura-TM-" models of its KTP/532 lasers. The
Aura is a compact , desk top size laser designed for use in the offices of
dermatologists, aesthetic and ear nose and throat surgeons. The Company's laser
systems are modular in nature and can be upgraded to provide additional
functionality and value to the customer.
The Company's photodynamic therapy (PDT) dye laser module is currently used in
conjunction with its KTP/532 system to deliver specific wavelengths to activate
photosensitizing drugs in the treatment of advanced esophageal cancer. This
investigational modality has received limited regulatory approval in Canada,
Europe, Japan, and the United States. The process to obtain additional
approvals may take several years and there is no assurance that the approvals
will ever be granted
Laserscope markets its products in the United States to hospitals, outpatient
surgical clinics and individual physician offices exclusively through its direct
sales force. The Company has established direct marketing and support
subsidiaries in the United Kingdom and in France, and has established
distributor relationships in several other countries. From inception through
December 31, 1995, the Company has sold approximately 1,600 laser systems.
SURGICAL LASER DEVELOPMENT
In recent years, cost containment and quality of care in the health care
industry have become increasingly important issues among health care providers
and government and private payers. These issues have been especially important
in surgery, leading to development and increased use of new techniques and
technologies. The result has been more efficient surgical procedures, greater
use of outpatient surgery, reduced hospital confinement and reduced time away
from the workplace.
The Company believes that these trends have created increased opportunities for
the use of laser surgery, especially in connection with less invasive, less
traumatic surgical procedures. These procedures include endoscopy and
laparoscopy, in which a small-diameter tube and an optical instrument are
inserted into the body through natural openings or small incisions. When used in
laser surgery, an optical fiber delivers the laser energy through the endoscope
to cut, coagulate or vaporize tissue. Endoscopic surgery is replacing certain
conventional open surgical procedures, which more often entail general
anesthesia, an extended hospital stay, extended time away from work and the
greater risks attendant to blood loss.
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Certain types of lasers can also be used in microsurgery, in which a microscope
is used to view the surgical field. With a device known as a micromanipulator,
the laser beam can be focused and controlled more precisely than conventional
surgical instruments.
The Company believes that lasers are currently used only in a small percentage
of those procedures in which they may provide an advantage over conventional
methods. Although surgeons practicing in certain specialties, such as
gynecology, otolaryngology, urology, dermatology and ophthalmology, have adopted
lasers for many procedures, other specialties such as general surgery, aesthetic
surgery, orthopaedic and disk surgery may offer great potential but have not
been developed fully. Adoption increased in 1990 in general surgery principally
for laparoscopic cholecystectomy (gall bladder removal). During 1991, however,
many physicians who had initially used lasers for laparoscopic general surgery
reverted to conventional surgical tools and laser use for these applications
declined. The Company believes that the past limitations of medical laser
technology the lack of clinical training and the high cost of lasers are among
the factors that have prevented widespread acceptance of laser surgery to date.
To the extent that sufficient potential customers do not adopt lasers for use in
surgical applications or do not accept the Company's laser products for those
applications, a broad market for the Company's laser products may not develop.
In 1993 the Company began to explore the use of KTP/532 in the areas
dermatology and aesthetic surgery. These practitioners perform their services
principally in a non-hospital environment and deal with clientele who are direct
payers. This market has shown historical growth and could provide opportunities
for the Company provided its products are accepted. The Company's Orion and
Aura systems were specifically designed for this market.
In the 1960's and 1970's, argon gas lasers were adopted for ophthalmic and
dermatological procedures. In the 1980's, carbon dioxide (C0(2)) lasers were
employed in surgery and they are currently used in a wide variety of procedures.
Lasers using neodymium yttrium-aluminum garnet (Nd:YAG) crystals were introduced
to the surgical laser market in the early 1980's. While the Nd:YAG beam may be
delivered through an optical fiber and is very effective for endoscopic
coagulation, it cannot be used safely for cutting and vaporizing because it may
penetrate too deeply. In an attempt to address this critical limitation,
sapphire tips have been developed that can be attached to the end of the optical
fiber. Nd:YAG lasers can also be used with sharpened, or sculptured fibers.
These fibers are brought to a sharp point.
Laserscope has developed a surgical laser system that it believes overcomes many
limitations of previous systems. The Company's system can effectively cut,
coagulate and vaporize tissue, and was developed specifically for use in
surgery. The wavelength of the Laserscope KTP/532 laser (532 nanometers) can be
used in a dry field or a fluid environment; therefore, it is well suited for
most surgical procedures. The beam is visible, which allows for precise aiming,
and may be delivered fiberoptically through an endoscope
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with a handpiece, with a micromanipulator or with a specialized dermatology
scanner. The KTP beam can be used in contact or in near-contact with tissue.
Further, these systems can optionally be equipped with Nd:YAG capability to
enhance coagulation and tissue penetration where appropriate. The Company
believes that these factors provide a high degree of versatility and clinical
utility to customers.
PHOTODYNAMIC THERAPY (PDT)
Photodynamic therapy is a diagnostic and treatment modality which utilizes a
drug which is photoactivated by laser irradiation. Patients are injected with a
photosensitizing drug. A period of 24 to 72 hours elapses to allow time for
absorption of the drug by malignant tissues or other abnormal cells and
elimination of the drug from normal tissues and blood serum. Tumor tissue or
serum products are then exposed directly to laser light for the purpose of
detecting or destroying abnormal cells. This treatment modality has the
advantage of displaying some degree of selectivity in killing abnormal cells.
Photodynamic therapy has been under investigation for over ten years. However,
recently, a number of drug companies in North America and Europe have
intensified their efforts to obtain regulatory clearances for this treatment
modality which have been granted for limited applications in the United States,
Canada, Europe and Japan. In February 1994, the Company entered into a
cooperative distribution, development and marketing agreement with QLT
Therapeutics, Inc. (formerly QuadraLogic Technologies, Inc.) of Vancouver,
Canada, a leader in photosensitizer drug development for PDT.
LASERSCOPE PRODUCTS
Laserscope sells both KTP/532 and YAG/1064 Surgical Laser Systems and also
the dual wavelength KTP/YAG Surgical Laser System, which provides both KTP
and Nd:YAG wavelength capability in a single system. All these systems are
mobile and are designed to be modular and upgradeable in nature. The
Company's base systems are the KTP/532 fiber optic laser that delivers KTP
laser energy through a disposable fiber optic and the YAG/1064 laser that
provides similar capability with the Nd:Yag wavelength. Additional modules
are also available. First, dual wavelength capability may be added to provide
a KTP/YAG Surgical Laser System. Second, alternative nonfiber optic delivery
capability may be added to enable laser energy to be delivered through a
microscope adapter (for use primarily in ear, nose and throat applications
and neurosurgery), or through either a Dermastat-Registered Trademark- or
Hexascan-TM- delivery system (for use in dermatology). Third, higher laser
power is available through the 'XP' module introduced in 1991. The Orion
models of the Company's KTP/532 and KTP/YAG Surgical Laser Systems, which are
available in two power levels, and the Aura models of the Company's KTP/532
Surgical Laser Systems are lower priced, lower maximum power capability units
which have similar features to the higher powered systems and also include
the ability to employ the Company's SmartScan-TM- scanning device with
StarPulse-TM- for dermatological applications. The Series 600 Dye Laser
Module, which is pumped by the KTP/532 laser
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system was introduced in 1992 for applications in photodynamic therapy. This
system provides the highest powers currently available for the photoactivation
of PDT drugs.
The Company also sells a line of delivery systems, disposable supplies,
instrumentation and other accessories. As the Company's installed base of
Surgical Laser Systems has continued to increase, revenue from sales of these
items has become an increasingly important component of the Company's overall
business.
The Company's KTP/532 Surgical Laser System utilizes a KTP crystal to produce a
high-power visible green surgical beam. Delivered through an optical fiber, this
beam can cut, coagulate or vaporize by adjusting the power, spot size and
proximity to the tissue. The system can be used either in direct contact or in
near-contact with tissue with the Company's disposable Endostat-TM- fibers. The
system can also be used in contact with tissue with the Company's Disposable
Sculptured Endostat fibers. The KTP/532 laser offers a high degree of surgical
precision. Target accuracy and exact spot size allow for minimal disruption of
normal tissue. In addition, the beam is highly absorbed in blood and pigment,
but passes safely through clear fluids, allowing surgery in most areas of the
body.
The KTP/532 system may be used with either a hand-held fiberoptic delivery
system, an endoscopic delivery system for minimally invasive surgery, with a
special microscopic adapter for microscopic surgery, with a scanning device for
use in dermatology or, with procedure-specific kits such as the KTP Disc Kit-TM-
and the Angled Delivery Device (ADD-TM-). The computerized laser system includes
a video display that provides instruction during each step of setup and laser
operation. The KTP/532 laser is field upgradeable so that new software and
delivery devices can be added easily to meet users' needs. In addition, current
models of the KTP/532 system are based on a modular design approach that allows
them to be upgraded in the field to include Nd:YAG capability and/or to provide
higher power levels.
In 1989, the Company began shipping the KTP/YAG dual wavelength laser system,
consisting of the KTP/532 Surgical Laser System and an additional Nd:YAG module
that allows the physician, using the same optical fiber, to switch between the
KTP wavelength and the Nd:YAG wavelength simply by pressing a button. The
KTP/532 wavelength can be selected for procedures requiring precise surgical
effects with minimal damage to surrounding tissue or microscopic applications.
The Nd:YAG beam can be used to provide superior coagulation effects and greater
tissue penetration when appropriate. The selected wavelength is indicated
clearly on the video display.
Laserscope offers a broad line of surgical instrumentation, disposables, kits
and other accessories for use with its surgical laser systems. These include
disposable fibers, disposable sculptured fibers, disposable coaxial fibers,
handpieces, microscope adapters, eye safety filters, safety glasses and goggles,
smoke evacuators and related disposable supplies, irrigation and aspiration
devices, a procedure-specific kit for lumbar disc
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decompression and the Hexascan and Smartscan scanners for controlled laser
delivery in dermatology.
In 1992, the Company introduced a product called the Angled Delivery Device
(ADD-TM-). The ADD product is used to deliver KTP or YAG laser energy at an
angle, making it ideal for cutting, coagulation and vaporizing tissue in
difficult to reach cylindrical cavities. In 1994, the Company introduced the
next generation ADDStat-TM- which is more flexible than the ADD, allowing the
surgeon greater ease of use. These devices have applications in urology as well
as other specialties.
The Company's disposable Endostat optical fibers are available in different
lengths and diameters for different surgical applications and preferences. The
Company's wide variety of Microstat-TM- handpieces, which are used to hold and
aim the optical fiber, give the surgeon the feel of a traditional surgical tool.
When used in contact with body tissue, they provide tactile feedback similar to
conventional surgery.
APPLICATIONS
Through December 31, 1995, the Company had obtained marketing clearances from
the U.S. Food and Drug Administration (FDA) through the Premarket Notification
(510(K)) process for its KTP/532 Surgical Laser System for a broad range of
applications in dermatology, plastic surgery, ear, nose, and throat surgery,
gastroenterology, general surgery, thoracic surgery, gynecology, neurosurgery,
ophthalmology, urology, and disc surgery. In all cases, the clearance applies to
both the base KTP/532 system and the "XP" module.
Laserscope's Nd:YAG module has marketing clearances for coagulating and
vaporizing in contact or non-contact with tissue for applications in
gynecology, ear, nose and throat surgery, urology, neurosurgery,
gastroenterology, general surgery, dermatology, plastic surgery, orthopedic
surgery, thoracic surgery, oculoplastics and pulmonary surgery.
Laserscope's 600 Series Dye Module has been cleared in Canada for use with
Photofrin-Registered Trademark- for treatment of recurrent superficial
papillary bladder cancer and in the Netherlands for use with Photofrin for
treatment of esophageal and lung cancer and in the United States for the
palliation of esophageal cancer. It is under investigation for other
applications and the Company is seeking further regulatory approvals in the
United States, other European countries and Japan.
Laserscope believes that increased awareness of both the benefits of laser
surgery and the drawbacks of conventional surgery is one of the most important
factors in expanding the market for its laser and laser-based products. As a
result, the Company has designed its marketing and sales strategy around a
strong educational effort to promote awareness of the versatility, safety and
cost-effectiveness of its surgical laser systems.
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Laserscope promotes its products through trade shows and exhibits covering most
of the surgical specialties, medical journal advertising and direct mailings.
The Company supports and participates in a substantial number of workshops and
seminars. The workshops usually include a demonstration of the Company's laser
systems and provide surgeons with direct experience using the Company's
products. Another important source of product promotion comes from referrals
within the medical community.
Laserscope markets its products to large teaching hospitals, small community
hospitals, free-standing outpatient surgery centers and individual physician
offices throughout the United States. The Company concentrates its marketing
efforts for its laser products on high volume surgical procedures where
conventional surgical techniques can be readily replaced by laser surgery. As
with many types of advanced medical equipment, the sales cycle for the Company's
laser systems is relatively long, frequently lasting several months from initial
sales call to receipt of a purchase order. In the case of hospitals, the
decision to purchase the Company's laser systems is typically made by a
committee consisting of health care professionals and hospital administrators.
This decision process makes breadth of applications and versatility of products
important issues.
The Company's U.S. sales efforts are managed by the Vice President of
Marketing and Sales. The sales organization includes a laser sales force
that addresses the hospital-based market and the office based dermatology/
plastic surgery market for laser systems. In addition, the Company has an
accessory sales force that both provide educational support and sell the
Company's surgical instrumentation, disposable supplies and accessories.
Finally, the Company has an in-house Customer Response Center which provides
clinical assistance to users on the application of the Company's products.
The Company has made a significant investment in building its direct sales
organization within the United States. At December 31, 1995, the Company's
direct sales force included approximately 16 people. Each of these individuals
is experienced in the sale of medical products, and each is compensated on a
salary plus commission basis. Laserscope believes that its own employees can
develop more productive and permanent relationships with customers than can
independent representatives or distributor organizations.
INTERNATIONAL SALES
Through December 31, 1995, most of the Company's revenues have been generated
from customers located in the United States. However, during the past five years
the Company has increased its sales efforts into international markets and
during 1991 obtained necessary regulatory clearances of certain overseas markets
including Japan. Sales outside the United States generated approximately twenty
three of the Company's revenues in 1995, seventeen percent in 1994, and thirteen
percent in 1993. The Company's sales outside the U.S. are subject to certain
risks common to all export activities, such as governmental regulation, export
license requirements and the risk of imposition of tariffs or other trade
barriers.
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In Europe, the Company has direct sales and service operations in the U.K. and
in France and currently has or is seeking distributor relationships in the rest
of Europe. The Company established its U.K. subsidiary in 1989 and its French
subsidiary in 1993. Both these subsidiaries market and support the Company's
laser products directly to the local markets and support the management of
European distributor relationships. During 1992, the Company terminated its
agreement with its former principal European distributor and is seeking new
distributor relationships on a country-by-country basis. To date distribution
agreements are in place for Germany, Switzerland, Austria, Portugal, Sweden,
Norway, Denmark, and Greece. In Pacific Rim countries, distributors or agents
have been appointed to sell and service the Company's products in Australia,
China, Korea, Singapore, Taiwan, Thailand, Indonesia and Malaysia. The Company
also has distributors in Saudi Arabia and Turkey. Under terms of the Company's
standard distribution agreement, these distributors cannot sell products offered
by the Company's competitors.
In March 1990, the Company entered into a multi-year agreement with Hoya
Corporation (Hoya) of Japan for the exclusive distribution of the Company's
laser products in Japan. Since 1990, Hoya has been responsible for obtaining the
required approvals from the Japanese Authorities for new products as well as
participating in clinical studies of new applications. Approval was received
from the Japanese Ministry of Health and Welfare in December 1991 for the
importation of certain of the Company's lasers and delivery devices into Japan.
In 1993, Hoya obtained approvals for the Company's Angled Delivery Device. In
1995, Hoya also obtained approvals for the Company's ADDStat Device and Orion
laser system.
In March 1995, the Company entered into an agreement with NWL Laser-Technologie
("NWL") whereby the Company paid NWL approximately $1.6 million in exchange for
a cross-distribution and development agreement, a current minority equity
position in NWL and an option to purchase all of the ownership interests in NWL.
These assets are carried at cost. If the Company does not exercise its option
to purchase NWL by June 1997, there will be no reimbursement of the Company's
investment and the Company's equity position will be relinquished. If the
Company exercises its option, the remaining purchase price will be paid over
three and one half years from the exercise date. As of December 31,1995 the
Company believes that it will exercise its purchase option.
Sales to International markets in 1995, 1994 and 1993 accounted for
approximately 23%, 17% and 13%, respectively, of the Company's net sales. The
Company expects that international sales will continue to represent a
significant percentage of net sales. The Company desires to continue to expand
its operations outside of the United States and to enter additional
international markets, which will require significant management attention and
financial resources and subject the Company further to the risks of operating
internationally. These risks include unexpected changes in regulatory
requirements, delays resulting from difficulty in obtaining export licenses for
certain technology, tariffs and other barriers and restrictions, and the burdens
of complying with a variety of foreign
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laws. The Company is also subject to general geopolitical risks in connection
with its international operations, such as political and economic instability
and changes in diplomatic and trade relationships. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions will be imposed
by the United States, Japan, countries in the European Union or other countries
upon the import or export of the Company's products in the future, or what
effect any such actions would have on its business, financial condition or
results of operations. In addition, fluctuations in currency exchange rates may
negatively impact the Company's ability to compete in terms of price against
products denominated in local currencies. In addition, there can be no
assurance that regulatory, geopolitical and other factors will not adversely
impact the Company's operations in the future or require the Company to modify
its current business practices.
INSTALLATION, SERVICE AND SUPPORT
A direct field service organization provides installation and service for the
Company's products. The Company generally provides a 12-month warranty on its
laser systems. After the warranty period, maintenance support is provided on a
variety of service contract bases or on an individual call basis. In November
1991, the Company announced a "99% Uptime Guarantee" related to 800 series laser
systems shipped after November 1, 1991. This guarantee has also been given for
Orion laser systems. Under provisions of this guarantee, the Company extends
the term of the related warranty or contract if specified system uptime levels
are not maintained. The Company's experience to date under this program has
exceeded 99% uptime.
RESEARCH AND DEVELOPMENT
The Company operates in an industry that is subject to rapid technological
changes and its ability to remain competitive depends on, among other things,
its ability to anticipate such change. As a result, the Company has devoted and
will continue to devote substantial resources to research and development.
Laserscope's current research and development programs are directed toward the
development of new products and enhancements to existing laser, instrumentation
and disposable products. Much of the Company's laser product development efforts
have built on the earlier basic research of Du Pont related to the KTP crystal.
A major element of the Company's current product development effort is related
to instrumentation and disposable products. Expenditures for research and
development were approximately $3.8 million, $3.6 million, and $4.0 million and
in 1995, 1994 and 1993, respectively. The Company's research and development
staff numbered 23 full time employees at December 31, 1995.
No assurance can be given that the Company will be successful in designing,
manufacturing or selling its enhanced or new products in a timely manner. Nor
can any assurance be given that a competitor could not introduce a new or
enhanced product or technology that could have an adverse effect on the
Company's competitive position.
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MANUFACTURING
Laserscope manufactures its own components and subassemblies only when it can
add significant value by doing so or when the devices have strong proprietary
design content. Accordingly, the Company manufactures the laser resonators used
in its laser systems, the system chassis and certain accessories. The Company's
laser manufacturing operations concentrate on the assembly and test of
components and subassemblies manufactured to the Company's designs and
specifications by outside vendors. The Company believes that it has sufficient
manufacturing capacity in its present facilities to support current operations
at least through the end of 1996.
In addition to its laser manufacturing capability, the Company established an
expanded production facility for certain of its disposable products during 1992.
The Company's Endostat fibers, KTP Disc Kit, and Angled Delivery Devices(ADD and
ADDStat) are manufactured in this facility.
Certain of the components used in the Company's products, including KTP
crystals, molded and cast components, power supplies, and certain optical
components, are purchased from single sources. While the Company believes that
most of these components are available from alternate sources, an interruption
of these or other supplies could adversely affect the Company. KTP crystals are
currently available at appropriate quality levels from only one supplier, a
division of Litton Industries. This supplier has a second crystal growing and
fabrication facility at a second location in the United States geographically
isolated from its original production facility. While the Company believes that
an alternative supplier of KTP crystals could be qualified, if the supply of
crystals from the present supplier were interrupted there could be an adverse
effect on the Company's business and results of operations.
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COMPETITION
The Medical laser market is highly competitive. The ability of the Company to
compete effectively depends on such factors as market acceptance of its laser
systems, product performance and price, customer support, and success and timing
of new product development by the Company and its competitors. Some of the
Company's current and prospective competitors have or may have significantly
greater financial, technical, manufacturing and marketing resources than the
Company.
Laserscope competes in the nonophthalmic surgical segment of the worldwide
medical laser market, in which lasers are used in hospital operating rooms,
outpatient surgery centers and individual physician offices for a wide variety
of procedures. A large number of companies have entered the surgical laser
market over the past several years, certain of which have significantly greater
financial and other resources than the Company. Certain surgical laser
manufacturers have targeted their efforts on narrow segments of the market, such
as angioplasty and lithotripsy. To the extent that their products compete for
the same capital equipment funds, these manufacturers may be deemed to compete
with the Company. More generally, surgical laser manufacturers such as
Laserscope compete with standard surgical methods and other medical
technologies.
The Company believes that the primary competitive factors within the surgical
laser market are the breadth of surgical capabilities provided by surgical
lasers, the level of customer service and support, safety and price. Laserscope
believes that its KTP/532, YAG/1064 and KTP/YAG dual wavelength systems deliver
a broader range of surgical capabilities than competing systems and that it has
an effective customer support program. The Company also believes that its laser
products offer more versatility than systems offered by its primary competitors,
because of the dual wavelength feature of the KTP/YAG system, the modular design
of the Company's laser systems, the ability to deliver laser energy via optical
fibers, a micromanipulator or via other delivery devices such as the Dermastat,
Hexascan and Smartscan devices, and the ability to operate either in contact or
in near contact with tissue. The Company believes that these features, as well
as the broad range of power capabilities from its high power, 800 series laser
with XP to its lowest power Aura, position its laser systems to have
price/performance flexibility.
PATENTS AND LICENSES
While the Company believes the patents that it has and for which it has applied
are of value, other factors are of greater competitive importance. The Company
holds several patents issued in the United States, generally covering surgical
laser systems, delivery devices, calibration inserts, the laser resonator and
the connector used to attach disposable and reusable instrumentation to the
Company's laser systems.
In 1986, the Company acquired a license under certain United States patents from
Du Pont relating to KTP and related crystalline material used in the Company's
laser systems for $270,000. The license was exclusive for IN VIVO diagnostic and
therapeutic applications
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of KTP material. Although the license has a 15-year term expiring in 2001, the
principal patent licensed under this agreement expired in April 1993.
Accordingly, the use by competitors of a key component in the Company's surgical
laser systems has not been prohibited since the expiration date. Under the terms
of the Company's license, the Company is required to achieve certain minimum
sales of systems using KTP material to maintain the license. In addition, Du
Pont has sole discretion whether or not to enforce the license against
infringers. While the Company believes that it has developed proprietary
technology that will be difficult for competitors to replicate without
substantial time and expense, and while additional patents have issued or have
been applied for by the Company, there can be no assurance that others will not
develop substantially equivalent proprietary technology or otherwise obtain
access to the Company's know-how.
In February 1989, the Company entered into a license agreement with Patlex
Corporation (Patlex) for a license under the basic laser patents issued to Mr.
Gordon Gould, for whom Patlex is the exclusive licensing agent. The license
requires the Company to pay a royalty based on the net sales price of components
covered by the Gould patents. The Company believes that royalty payments due
under this agreement have not been and are not expected to be material to the
Company's results of operations. The Company believes that substantially all of
its competitors have also entered into license agreements with Patlex.
In April 1992, the Company entered into an exclusive, worldwide, license
agreement with PDT, Inc. (PDTI) for licenses under the dye laser patents issued
to PDTI. The licenses, which expire in April 1999, allow the Company to
sublicense, manufacture, have manufactured, use, lease and sell the dye laser.
Under the terms of the agreement, PDTI retains ownership of the intellectual
property licensed to the Company under the agreement and has the right to
manufacture, have manufactured, use, lease, and sell the dye laser for use in
photodynamic therapy with PDTI photodynamic drugs. To acquire the licenses, the
Company paid PDTI $400,000 and provided PDTI certain laser equipment. Under the
terms of the license, the Company must pay a royalty to PDTI based on the net
sales price of Dye Lasers sold by the Company. The agreement sets forth certain
minimum sales levels for PDT dye lasers which become effective when there is
final regulatory approval with respect to a photodynamic drug in a major
photodynamic therapy market. Japan and the United States qualify as major
photodynamic therapy markets and such approvals were granted during 1995.
GOVERNMENT REGULATION
Government regulation in the U.S. and other countries is a significant factor in
the development, manufacturing and marketing of many of the Company's products
and in the Company's ongoing research and development activities.
The Company and its products are regulated by the FDA under statutory
authorities, including the Federal Food, Drug and Cosmetic Act (the "FDC Act")
and the Radiation Control for Health and Safety Act.
13
The FDC Act provides two basic review procedures for medical devices. Certain
products may qualify for a Section 510(k) ("510(k)") procedure under which the
manufacturer gives the FDA premarket notification of the manufacturer's
intention to commence marketing the product. The manufacturer must, among other
things, establish that the product to be marketed is "substantially equivalent"
to a previously marketed product. In some cases, the manufacturer may be
required to include clinical data gathered under an investigational device
exemption ("IDE") granted by the FDA allowing human clinical studies.
If the product does not qualify for the 510(k) procedure, the manufacturer must
file a premarket approval application ("PMA") based on testing intended to
demonstrate that the product is both safe and effective. The PMA requires more
extensive clinical testing than the 510(k) procedure and generally involves a
significantly longer FDA review process. Approval of a PMA allowing commercial
sale of a product requires preclinical laboratory and animal tests and human
clinical studies conducted under an IDE establishing safety and effectiveness.
Generally, because of the amount of information required, the 510(k) procedure
takes less time than the PMA procedure.
To date, all of the Company's products (except for the 600 Series Dye Module)
have been marketed through the 510(k) procedure. Future applications, however,
may require clearance through the PMA procedure. There can be no assurance that
such marketing clearances can be obtained on a timely basis. Delays in receiving
such clearances could have a significant adverse impact on the Company. The FDA
may also require post-market testing and surveillance programs to monitor
certain products.
Certain other countries require the Company to obtain clearances for its
products prior to marketing the products in those countries. The requirements
vary widely from country to country and are subject to change. The European
community is in the process of developing a new approach to the regulation of
medical products which may significantly change how medical devices are
marketed in those countries within the next several years. In February 1996,
the Company achieved ISO 9001 and CE Mark registration in anticipation of
this approach.
The Company is also required to register with the FDA and state agencies, such
as the Food and Drug Branch of the California Department of Health Services, as
a medical device manufacturer. The Company is inspected on a routine basis by
both the FDA and the State of California for compliance with the FDA's Current
Good Manufacturing Practice regulations. Those regulations impose certain
procedural and documentation requirements upon the Company with respect to
manufacturing, testing, and quality control activities. If violations of
applicable regulations are noted during these inspections, the continued
marketing of any products manufactured by the Company may be adversely affected.
14
In addition, the Company's laser products are covered by a performance standard
for laser products set forth in FDA regulations. The laser performance standard
imposes certain specific record keeping, reporting, product testing, and product
labeling requirements on the Company. These requirements also include affixing
warning labels to the Company's laser systems, as well as the incorporation of
certain safety features in the design of the Company's products. The Company
believes that it is in material compliance with all of these requirements.
In 1983, regulations were adopted under the Medicare program for the
reimbursement of health care costs based on Diagnostic Related Groups (DRGs).
The DRG regulations limit the dollar amount that a hospital may be reimbursed
depending on the nature of the diagnosis. This provides an incentive for the
hospital to treat a patient in the most cost-effective manner since the
reimbursement will be fixed, regardless of how much it costs the hospital to
provide the treatment. Changes in DRG regulations, such as those relating to
reimbursement of capital equipment costs, could have an adverse effect on the
Company. These regulations also influence reimbursements by private insurance
companies. Changes in insurance coverage could impact such reimbursements and
thereby adversely affect future sales of the Company's products.
Complying with applicable governmental regulations and obtaining necessary
clearances or approvals can be time consuming and expensive, and there can be no
assurance that regulatory review will not involve delays or other actions
adversely affecting the marketing and sale of the Company's products. The
Company also cannot predict the extent or impact of future legislation or
regulations.
During the past four years, there has been substantial debate in the political
arena related to prospective changes in the U.S. healthcare system. Cost
containment is a major element of these policy reviews and to the extent that
new policies and practices curtail hospital capital equipment and supplies
procurement patterns or dictate which surgical procedures will be covered by
applicable insurance or government funded or subsidized programs, this could
have a negative impact on the Company.
The Company is also subject to regulation under federal and state laws
regarding, among other things, occupational safety, the use and handling of
hazardous materials and protection of the environment. The Company believes that
it is in material compliance with these requirements.
PRODUCT LIABILITY EXPOSURE
The business of the Company entails the risk of product liability claims. The
Company has experienced product liability claims from time to time, which it
believes are ordinary for its business. While it is not feasible to predict or
determine the outcome of the actions brought against it, the Company believes
that these actions will not ultimately have a material adverse impact on the
Company's financial position or results of operations. At present, the Company
maintains product liability insurance on a "claims made" basis with
15
coverage of $10,000,000 in the aggregate and a deductible of $100,000 per
occurrence and an annual maximum aggregate deductible of $500,000. There is no
assurance that such insurance will be available at a reasonable cost, if at all,
in the future, nor can there be any assurance that other claims will not be
brought against the Company which would exceed applicable insurance coverage.
EMPLOYEES
At December 31, 1995, the Company had 174 full-time employees. Of these
employees, 21 were engaged in research and development, 50 in manufacturing and
quality assurance, 78 in sales, marketing and customer service and 25 in
administration. The Company believes that it maintains competitive compensation,
benefit, equity participation and work environment policies to assist in
attracting and retaining qualified personnel. The Company believes that the
success of its business will depend, in part, on its ability to attract and
retain such personnel. The loss or failure to recruit key personnel could have a
materially adverse effect on the Company. The Company is not a party to any
collective bargaining agreements and considers its relations with its employees
to be good.
FACTORS AFFECTING FINANCIAL RESULTS AND STOCK PRICE
A number of factors affect the Company's financial results and stock price,
especially on a quarterly basis. One such factor is timing of shipments. The
Company's laser products are relatively expensive pieces of medical capital
equipment and the precise shipment date of specific units can have a marked
effect on the Company's results of operations on a quarterly basis. Any delay in
product shipments near the end of a quarter could cause quarterly results to
fall short of anticipated levels. Another related factor is the timing of
orders. To the extent orders are received by the Company near the end of a
quarter, the Company may not be able to fulfill the order during the balance of
that same quarter. In addition, the Company typically receives a
disproportionate percentage of its orders toward the end of each quarter. To the
extent that anticipated orders are not received or are delayed beyond the end of
the applicable quarter, the Company's revenues may be adversely affected and the
Company's revenues may be unpredictable from quarter to quarter. Further, there
can be no assurance that revenue growth or profitability on a quarterly or
annual basis will be accomplished.
The market price of the Company's common stock may be subject to significant
fluctuations. These fluctuations may be due to factors specific to the Company,
such as quarterly fluctuations in the Company's financial results, changes in
analysts' estimates of future results, changes in investors' perceptions of the
Company or the announcement of new or enhanced products by the Company or its
competitors. In addition, such fluctuations may be due to or exacerbated by
general conditions in the medical equipment industry or conditions in the
financial markets generally.
16
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to the executive
officers of the Company, and their ages as of December 31, 1995:
Name Age Position
- -------------------- --- ---------------------
Benjamin L. Holmes.. . . 61 Chairman of the Board and Director
Robert V. McCormick. . . 51 President, Chief Executive Officer and Director
Thomas B. Boyd . . . . . 49 Senior Vice President of Operations and Finance
Roy Fiebiger . . . . . . 41 Vice President of Marketing and Sales
Bonnie Jones . . . . . . 47 Vice President of Human Resources
Dennis LaLumandiere. . . 42 Vice President of Finance and Chief Financial
Officer
Benjamin L. Holmes has been a director of the Company since January 1992 and was
appointed Chairman of the Board of Directors in June 1992. Mr. Holmes was
General Manager of the Medical Products Group of Hewlett-Packard Company ("HP")
from 1983, and a Vice President of HP, from 1985 until his retirement in October
1995. Mr. Holmes is a member of the Board of Directors of Project HOPE and the
Massachusetts High Technology Council. He is also a member of the Massachusetts
Governor's Council on Economic Growth and Technology, Commissioner of the
Massachusetts Universal Health Care Commission, and a member of the Board on
Health Care Service, Institute of Medicine, National Academy of Sciences. He
is also Past Chairman of the Board of Directors of the Health Industry
Manufacturers Association (HIMA).
Robert V. McCormick has been President of the Company since December 1991 and
Chief Executive Officer since July 1992. Between December 1991 and July 1992 he
also served as the Company's Chief Operating Officer. He has been a director of
the Company since July 1992. Mr. McCormick also served as the Company's Senior
Vice President of Marketing and Field Operations from April 1991 to December
1991. Mr. McCormick was employed by Acuson Corporation, a manufacturer of
medical imaging equipment, from 1983 to April 1991 in a variety of sales and
marketing executive positions culminating as Vice President of Marketing and
Field Operations.
Thomas B. Boyd was hired as Senior Vice President of Operations and Finance
in April 1994. Prior to joining Laserscope, from January 1992 to March 1994,
Mr. Boyd was Vice President of Operations for American Safety Razor (ASR)
Co., a consumer and medical products company. From August 1975 to December
1991 he was employed by Baxter Healthcare Corporation, an international
manufacturer and distributor of healthcare products, in various financial and
operations management positions including Vice President of Manufacturing
from September 1989 to December 1991.
17
Roy Fiebiger was hired as Vice President of Marketing in September 1995 and was
promoted to Vice President of Marketing and Sales in November 1995. Prior to
his employment with Laserscope, from November 1994 to August 1995, Mr. Fiebiger
was President and Chief Executive Officer of EnVision Surgical Systems, a
private, development stage medical device company. From April 1991 to October
1994, Mr. Fiebiger was Executive Vice President and Chief Operating Officer for
Norian Corporation, a development stage medical device company, and from August
1984 to March 1991 he was Vice President of Sales and Marketing for Techmedica,
a medical device company.
Bonnie Jones has been employed with the Company since November 1988 when she was
hired as Laserscope's first Personnel Manager. She was promoted to Director of
Personnel in June 1991 and Vice President of Human Resources in June 1993.
Prior to working for the Company, she was as an independent consultant for
various companies and Director of Personnel for Humphrey Instruments, an
ophthalmic instruments company. Ms. Jones worked at Humphrey from 1982 through
1987.
Dennis LaLumandiere has been employed with the Company since September 1989 when
he was hired as Laserscope's Corporate Controller. He was promoted to Vice
President of Finance in February 1995 and appointed Chief Financial Officer in
February 1996. Prior to working for the Company, he held various financial and
operations management positions at Raychem Corporation, a multinational
materials science company. Mr. LaLumandiere was employed by Raychem from 1983
to 1989.
18
ITEM 2. PROPERTIES
The Company leases three buildings aggregating approximately 91,000 square feet
in San Jose, California under leases expiring in February 2001. The Company has
options to extend the leases at the then-current market rates. These facilities
house the Company's research and development and manufacturing operations as
well as the Company's principal sales, marketing, service and administrative
offices. During 1990, the Company leased additional space to accommodate the
manufacture of certain accessories and disposables and to increase production
capacity for its laser systems. During the past three years shipments of the
Company's laser systems declined from the levels of 1990 and, accordingly, the
Company has production capacity in excess of its current shipment level. During
1992, the production of certain disposable products, previously performed by an
outside vendor, was brought in house to utilize more fully the Company's
capacity. The Company believes that these facilities are suitable for its
current operations and are adequate to support those operations at least through
the end of 1995. The Company has also leased small offices in the United Kingdom
and France where the Company's local sales and marketing staffs are based.
ITEM 3. LEGAL PROCEEDINGS
On January 6, 1995, Xintec Corporation (Xintec) filed an action against
Laserscope in the United States District Court for the Northern District of
California, alleging intentional interference with economic advantage, negligent
interference with economic advantage, slander of title, trade liable and
antitrust violations all in connection with Xintec's right to repair the
Company's delivery systems and to distribute Xintec's multi-use connector
adapter and optical fibers, and seeking among other things, declaratory relief
(including a declaration of noninfringement) and money damages for alleged
business torts. Laserscope filed its answer and counterclaim on February 17,
1995. The Company has counterclaimed as to patent infringement, unfair
competition, contractual relations, prospective economic advantage and
conversion. Upon completion of informal discovery, the parties agreed not to
pursue the litigation and a Stipulation of Dismissal (without prejudice) was
filed on October 24, 1995.
The Company is a party to various legal proceedings arising in the normal course
of its business. These actions may include product liability and employee-
related issues. While it is not feasible to predict or determine the outcome of
the actions brought against it, the Company believes that the ultimate
resolution of these claims will not ultimately have a material adverse impact on
the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol LSCP. As of December 31, 1995 the Company had approximately 1,000
shareholders of record.
The following table shows the Company's high and low selling prices for the
years ended December 31, 1995 and December 31, 1994 as reported by Nasdaq:
1995
---------------------------------------
High bid Low Bid
-------- -------
First Quarter $ 4 3/8 $ 3 1/2
Second Quarter $ 4 1/2 $ 3 3/8
Third Quarter $ 5 1/8 $ 3 1/4
Fourth Quarter $ 4 $ 1 1/2
1994
--------------------------------------
High bid Low Bid
-------- -------
First Quarter $ 7 1/8 $ 5 1/8
Second Quarter $ 7 $ 4 3/8
Third Quarter $ 5 3/8 $ 3 1/8
Fourth Quarter $ 4 7/8 $ 3 1/2
The Company has not paid dividends on its common stock and has no present plans
to do so. Provisions of the Company's bank line of credit prohibit the payment
of dividends without the bank's permission.
20
ITEM 6. SELECTED FINANCIAL DATA
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net revenue $30,133 $36,320 $37,831 $35,963 $41,893
Net income (loss) (3,552) (931) 589 (4,421) (5,212)
Net income (loss)
per share (0.51) (0.13) 0.09 (0.66) (0.79)
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Cash, cash equivalents &
short-term investments $2,278 $ 6,602 $ 8,144 $10,143 $12,707
Working capital 12,564 16,825 17,132 16,219 20,157
Total assets 23,582 27,321 29,301 30,242 35,394
Capital leases (excluding
current portion) 15 27 26 97 465
Shareholders' equity 17,326 20,901 21,234 20,182 24,208
CONSOLIDATED QUARTERLY STATEMENT OF OPERATIONS DATA (UNAUDITED):
THREE MONTHS ENDED
------------------
MAR 31, JUN 30, SEP 30, DEC 31,
------- ------- ------- -------
1995
- ----
Net revenues $9,215 $6,879 $7,048 $6,991
Gross Margin 4,832 3,801 3,463 3,245
Net income (loss) 251 (835) (1,259) (1,709)
Net income (loss) per share 0.04 (0.12) (0.18) (0.25)
1994
- ----
Net revenues $9,124 $8,232 $8,769 $10,195
Gross Margin 5,078 4,299 4,828 5,197
Net income (loss) 180 (1,560) 178 271
Net income (loss) per share 0.03 (0.23) 0.03 0.04
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW - RESULTS OF OPERATIONS
The following table sets forth certain data from the Company's consolidated
statement of operations, expressed as a percentage of net revenues:
1995 1994 1993
- --------------------------------------------------------------------------------
Net revenues 100.0% 100.0% 100.0%
Cost of sales 49.1 46.6 42.2
----- ----- -----
Gross margin 50.9 53.4 57.8
Operating expenses:
Research and development 12.7 9.9 10.7
Selling, general and administrative 50.9 46.8 46.2
----- ----- -----
63.6 56.7 56.9
Operating income (loss) (12.7) (3.3) .9
Interest and other income, net .9 .7 .9
----- ----- -----
Income (loss) before income taxes (11.8) (2.6) 1.8
Provision for income taxes - - .2
----- ----- -----
Net income (loss) (11.8)% (2.6)% 1.6%
----- ----- -----
----- ----- -----
The Company sells its laser system products to hospitals, outpatient surgery
centers and individual physicians in the U.S., Europe, the Middle East and the
Pacific Rim for multispecialty use in a wide range of surgical and therapeutic
applications.
During 1995, the Company's revenues decreased 17% from 1994 which is the
combined result of lower product and service revenues. During 1995, the
Company's revenues from the sales of capital equipment declined 19% due to lower
unit shipments of lasers and lower average selling prices than in 1994. The
Company believes that the continuing trend towards reduced health care costs in
the United States is still a factor which continued to impact negatively capital
equipment procurement by its customers during 1995.
The Company's net revenues from the sales of products during the year ended
December 31, 1995 were also affected negatively by lower shipments of its
disposable supplies and instrumentation which were 18% lower in 1995 than in
1994. The Company believes that this was due primarily to lower shipments of
its side-firing devices due to fewer laser prostate surgeries being performed
during this period than in 1994. This was caused principally by increased drug
treatment for those patients with mild to moderate prostate
22
disorders as well as adoption of alternative electrosurgical techniques to
perform prostate surgeries.
The Company's net revenues from the sales of services during the year ended
December 31, 1995 were 9% lower than in the year ended December 31, 1994. The
declines reflect price erosion due to restructuring of the Company's contract
programs in response to competitive pressures and reduced customer acceptance of
service contracts.
In 1994, the Company's revenues decreased 4% from 1993 primarily due to weaker
demand for capital equipment in the United States which resulted in lower
shipments of its lasers partially offset by higher shipments of its
instrumentation, disposable supplies and service. The Company believes that
pressure to reduce health care costs in the United States and uncertainty
concerning health care reform were factors which negatively impacted capital
equipment procurement by its customers and resulted in lower shipments of the
Company's lasers.
Revenues from sales of instrumentation and disposable supplies represented
approximately 50% of total revenues in each of the years ended December 31, 1995
and 1994, and 43% of total revenues in 1993. Revenues from sales of service
represented approximately 17% of total revenues in 1995 and 16% of total
revenues in each of 1994 and 1993, respectively. The Company expects that
revenues from the sales of instrumentation and disposable supplies will be
dependent on its ability to increase its installed base of systems and to
promote and develop surgical procedures which use its laser systems,
instrumentation and disposable supplies.
The Company believes that the acceptance of lasers in aesthetic surgery,
dermatology, urology, and ear, nose and throat surgery, will continue to be
significant to its business. In addition, the adoption of photodynamic therapy
by medical practitioners also will be important. The Company continues to
invest in the development of new instrumentation for emerging surgical
applications and to educate surgeons in the U.S. and internationally to
encourage the adoption of such new applications. Finally, penetration of the
international market, although increasing, has been limited and the Company
continues to view this as a significant opportunity. International revenues
accounted for approximately 23%, 17% and 13% of total revenues in 1995, 1994
and 1993, respectively.
The Company's product gross margin as a percentage of net revenues was 53.8%,
55.3% and 58.9% in 1995, 1994 and 1993, respectively. In 1994, the Company
implemented programs to reduce inventory levels, which, coupled with a 4%
reduction in its product revenues, resulted in lower production volumes and
unfavorable manufacturing variances. During 1995, a 19% reduction in its
product revenues caused further reductions in production volumes and greater
unfavorable manufacturing variances and thus a further reduction in product
gross margin as a percentage of net revenues. The Company expects that product
gross margin as a percentage of sales may vary from quarter to quarter during
1996 as it continues to balance production volumes and inventory levels with
product demand, and as product and distribution mix varies.
23
Gross margin from service activities as a percentage of net revenues was 36.7%
in 1995, 43.3% in 1994, and 51.2% in 1993. The declines reflect price erosion
due to restructuring of the Company's contract programs in response to
competitive pressures and reduced customer acceptance of service contracts. The
Company expects that gross margin from service activities as a percentage of net
revenues will continue to be influenced by these factors and will remain at or
below 1995 levels at least for the next several quarters.
Research and development expenses are the result of activities related to the
development of new laser, instrumentation and disposable products and the
enhancement of the Company's existing products. In 1995, amounts spent on
research and development increased 7% due principally to expenses incurred in
the development of the Company's Aura laser system. As a result of expense
reduction efforts, amounts spent on research and development decreased 11% in
1994. As a percentage of revenues, research and development spending was 12.7%
in 1995, 9.9% in 1994 and 10.7% in 1993. The Company expects to continue to
make significant investments in research and development during 1996 and beyond.
Selling, general and administrative expenses as a percentage of net revenues
were 50.9% in 1995, 46.8% in 1994, and 46.2% in 1993. In absolute terms, these
expenses decreased $1.6 million during 1995 and $0.5 million during 1994. These
decreases are the result of expense control measures originally taken by the
Company in 1992 which continued through 1995. As a result, the Company expects
that selling, general and administrative expenses to be somewhat lower, in
absolute terms, in 1996 than in 1995 unless the revenue base increases
significantly. However, as a percentage of revenues, selling, general and
administrative expenses are expected to remain at relatively high levels during
1996 since the Company expects to continue to invest significant amounts in
international expansion, marketing programs and educational support.
During 1995 and 1994 the Company recorded no income tax provision due to its net
losses during these periods. In 1993 the Company recorded an income tax
provision with an effective tax rate of 10% which reflected the benefit of net
operating loss carryforwards.
FINANCIAL REVIEW - LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995 the Company had working capital of $12.6 million and
cash, cash equivalents and short-term investments of $2.3 million. During
1995, both working capital and cash, cash equivalents and short-term
investments decreased by $4.3 million, respectively. These changes were due
to the funding of the Company's agreement with NWL and the use of cash in
operating activities.
In March 1995, the Company entered into an agreement with NWL Laser-Technologie
("NWL") whereby the Company paid NWL approximately $1.6 million in exchange for
a cross-distribution and development agreement, a current minority equity
position in NWL
24
and an option to purchase all of the ownership interests in NWL. These
assets are carried at cost. If the Company does not exercise its option to
purchase NWL by June 1997, there will be no reimbursement of the Company's
investment and the Company's equity position will be relinquished. If the
Company exercises its option, the remaining purchase price will be paid over
three and one half years from the exercise date. As of December 31, 1995 the
Company believes that it will exercise its purchase option.
The Company's accounts receivable collection cycle is relatively long, which the
Company believes is typical of the surgical systems business. In addition, due
to the length of procurement and production lead times and the need for minimum
stock levels for certain components and accessories, the Company maintains
substantial inventories. For these reasons, the Company's operations require
substantial and varying investment of cash resources. At December 31, 1995 the
Company's net accounts receivable was 31% lower than at December 31, 1994,
primarily due to lower net revenues in the quarter ended December 31, 1995 than
in the corresponding quarter in 1994.
Inventories at December 31, 1995 were 37% higher at December 31, 1994. This was
due to lower product shipments relative to the prior year coupled with the
Company's increased inventory associated with the launch of its Aura laser
system. The Company also increased its inventory of products related to
photodynamic therapy which was approved by the Food and Drug Administration at
the end of December 1995 and for which the Company had expected earlier
approval.
In March 1996, the Company re-negotiated its agreement with a bank for a $5
million line of credit that provides for short-term borrowings based on
certain eligible accounts receivable. The line of credit, which expires in
October 1996, is secured by the assets of the Company and bears interest at
the bank's prime rate plus one percentage point Provisions of this agreement
prohibit the payment of dividends and the repurchase of stock and require the
Company to maintain certain minimum working capital and net worth levels.
The Company currently has no material commitments for capital expenditures for
1996.
The Company anticipates that current cash resources, internally generated funds,
capital lease lines and available bank borrowings will be sufficient to meet
liquidity and capital needs at least through 1996.
NEW ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS 121 requires recognition of impairment of Long-Lived assets in the event
the net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS 121 is effective for fiscal
25
years beginning after December 15, 1995. Adoption of SFAS 121 is not expected
to have a material impact on the Company's financial position or results of
operations.
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with the provisions of the Accounting Principles
Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees."
In 1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standards No. 123 (SFAS 123), " Accounting For Stock
Based Compensation." SFAS 123 provides an alternative to APB 25 and is
effective for fiscal years beginning after December 15, 1995. The Company
expects to continue to account for its employee stock plans in accordance
with the provisions of APB 25. Accordingly, SFAS 123 is not expected to have
any material impact on the Company's financial position or results of
operations.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of Laserscope at December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995, the
report of independent auditors thereon and Supplementary Data are included as a
separate section in this Annual Report on form 10-K in Item 14, "Exhibits,
Financial Statement Schedules and reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to executive officers of Laserscope is set forth in
"Item 1--Business--Executive Officers of the Company" in this Annual Report on
Form 10-K.
The names of the Company's directors, and certain information about them as of
December 31, 1995, are set forth below:
Name Age Position
- -------------------- --- -------------
Benjamin L. Holmes 61 Chairman of the Board and Director
Robert V. McCormick 51 President, Chief Executive Officer and Director
E. Walter Lange 63 Director
Rodney Perkins, M.D. 59 Director
Robert J. Pressley, Ph.D. 63 Director
Benjamin L. Holmes has been a director of the Company since January 1995 and was
appointed Chairman of the Board of Directors in June 1992. Mr. Holmes was
General Manager of the Medical Products Group of Hewlett-Packard Company ("HP")
from 1983, and a Vice President of HP, from 1985 until his retirement in October
1995. Mr. Holmes is a member of the Board of Directors of Project HOPE and the
Massachusetts High Technology Council. He is also a member of the Massachusetts
Governor's Council on Economic Growth and Technology, Commissioner of the
Massachusetts Universal Health Care Commission, and a member of the Board on
Health Care Service, Institute of Medicine, National Academy of Sciences. He
is also Past Chairman of the Board of Directors of the Health Industry
Manufacturers Association (HIMA).
Robert V. McCormick has been President of the Company since December 1991 and
Chief Executive Officer since July 1992. Between December 1991 and July 1992 he
also served as the Company's Chief Operating Officer. He has been a director of
the Company since July 1992. Mr. McCormick also served as the Company's Senior
Vice President of Marketing and Field Operations from April 1991 to December
1991. Mr. McCormick was employed by Acuson Corporation, a manufacturer of
medical imaging equipment, from 1983 to April 1991 in a variety of sales and
marketing executive positions culminating as Vice President of Marketing and
Field Operations.
E. Walter Lange has been a Director of the Company since January 1992. Mr.
Lange has more than 31 years of experience in the pharmaceutical industry,
having served in a variety of executive positions at Eli Lilly & Co. from 1960
to 1991. Most recently, Mr. Lange was Group Vice President of Marketing,
Planning and Development and was responsible for Lilly's worldwide product
planning, corporate strategic planning, business development and market
research.
28
Rodney Perkins, M.D. is a co-founder of the Company and has been a Director
since its founding. Dr. Perkins also served as Chairman of the Board of
Directors from its founding until June 1995 and Chief Executive Officer from
February to May 1987, and from October 1991 to July 1992. He also served as the
President of the Company from October to December 1991. Dr. Perkins, a
specialist in otologic surgery, is President of the California Ear Institute at
Stanford and has been in private practice since 1968. He is Clinical Associate
Professor of Surgery at Stanford University School of Medicine, and is the
founder and President of Project HEAR a non-profit medical institute for ear
research and education. Dr. Perkins is a founder of Collagen Corporation, a
biomaterials company, and a member of its Board of Directors. Dr. Perkins is
also a founder and the Chairman of the Board of Directors of ReSound
Corporation, a hearing health care company.
Robert J. Pressley, Ph.D. is a co-founder of the Company and has been a Director
since its founding. Dr. Pressley founded Silicon Video, a developer of
electronic products, and served as its President and Chief Executive Officer
from January 1991 to January 1994. Dr. Pressley also founded XMR, Inc., a
manufacturer of eximer lasers and laser systems, and served as its Chief
Executive Officer from March 1979 until March 1990.
29
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table shows the compensation received by the Company's Chief
Executive Officer, the four other most highly compensated executive officers of
the Company for 1995 who were serving as executive officers at December 31,
1995, one highly compensated executive officer who was not serving as an
executive officer at December 31, 1995 and the compensation received by each
such individual for the Company's two prior years.
LONG-TERM
COMPENSATION
AWARDS
-----------
ANNUAL COMPENSATION OPTION/SARS
------------------------------ (SHARES) ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS (4)(5) COMPENSATION
- ------------------------------- ---- --------- ----- ------------ ------------
(2)(3) (6)
------ ---
Robert V. McCormick 1995 $248,060 -- 165,000 $2,004
President and Chief Executive 1994 $236,250 -- -- $2,045
Officer 1993 $225,000 -- 40,000 $1,927
Thomas B. Boyd 1995 $168,324(7) -- 45,000 $2,400
Senior Vice President of Operations 1994 $183,428(8) $20,000 65,000 $1,471
and Finance 1993 -- -- -- --
Bonnie Jones 1995 $107,330 -- 35,000 $1,543
Vice President of Human Resources 1994 $ 99,750 -- 15,000 $1,496
1993 $ 95,000 $ 9,500 35,000 $1,425
Dennis LaLumandiere 1995 $119,950 -- 40,000 $1,794
Vice President of Finance, Chief 1994 $103,500 -- 15,000 $1,548
Financial Officer 1993 $ 96,885 $9,821 8,500 $1,438
Joseph F. Rondinone 1995 $131,250 -- -- $1,312
Vice President of Research and 1994 $125,000 -- 25,000 $1,250
Development(9) 1993 $162,766(10) -- 27,000 $1,786
Eli Wismer
Vice President of North American 1995 $150,909 $32,643 -- $1,744
Sales and Education(11) 1994 $153,399(12) $78,160 50,000 $1,927
1993 $193,953(12) $83,135 20,000 $1,786
- --------------------------
(1) Includes amounts deferred under the Company's 401(k) plan.
(2) Includes bonuses earned in the indicated fiscal year and paid in the
subsequent fiscal year. Excludes bonuses paid in the indicated fiscal year
but earned in the preceding fiscal year.
30
(3) Executive officers are entitled to discretionary bonuses based on
individual and corporate performance. These bonuses are determined by the
Board of Directors based on the recommendation of the Human Resources
Committee
(4) The options listed with respect to 1995 long-term compensation awards
include options granted upon the repricing of previously granted options.
Options to purchase the following number of shares granted to the following
persons in 1995 were canceled as a result of their repricing on November
30, 1995: Mr. McCormick--97,500: Mr. LaLumandiere--12,188. Such canceled
options have not been included with respect to 1995 long-term compensations
award. The repriced options retain the same term and vesting schedule as
those options which were replaced.
(5) All options granted in 1993, 1994 and 1995 to new employees and officers of
the Company have 5-year terms and become exercisable cumulatively at the
rate of 12.5% of the total six months after the vesting commencement date
(first date of employment for new employees and date of grant for
officers), and 1/48 of the shares subject to the option in equal monthly
installments thereafter. All option granted in 1993, 1994 and 1995 to
existing employees also have 5-year terms but become exerciseable
cumulatively at the rate of 1/48 of the shares subject to the option in
equal monthly installments following their respective grant date. All
unvested options are subject to earlier termination in the event of the
termination of the participant's relationship with the Company. All
options were granted at market value on the date of grant. In the event
that certain change in control events were to occur, the options would be
assumed or equivalent options substituted by a successor corporation,
unless the Board of Directors determined that the options should become
immediately exercisable. The exercise price may be paid, subject to
certain conditions, by delivery of already owned shares or with the
proceeds from the sale of the option shares. In addition, the Management
Continuity Agreements entered into between the Company and each of its
executive officers may affect the vesting and manner of exercise of options
granted by the Company to these individuals. See "Transactions with
Management and Others."
(6) Consists of the Company's contributions to its 401(k) plan for the benefit
of the named executive officers.
(7) Includes $8,331 paid to Mr. Boyd in connection with the relocation of his
principal residence to the San Jose metropolitan area.
(8) Includes salary paid to Mr. Boyd during the period beginning on the his
employment commencement of April 18, 1994 and ending on December 31, 1994
and $79,578 paid to Mr. Boyd in connection with the relocation of his
principal residence to the San Jose metropolitan area.
(9) Mr. Rondinone terminated his employment with the Company in January 1996.
(10) Includes $47,766 paid to Mr. Rondinone in connection with the relocation
of his principal residence to the San Jose metropolitan area.
(11) Mr. Wismer terminated his employment with the Company in October 1995.
(12) Includes the following amounts paid to Mr. Wismer in connection with the
relocation of his principal residence to the San Jose metropolitan area:
1994 -- $13,399 and 1993 --$53,953.
31
STOCK OPTION GRANTS IN 1995
The following table sets forth information for the named executive officers with
respect to grants of options to purchase Common Stock of the Company made in
1995 and the value of all options held by such executive officers on
December 31, 1995.
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-----------------
% OF TOTAL ANNUAL RATES OF
OPTIONS STOCK
GRANTED TO PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE OF FOR
GRANTED IN FISCAL BASE PRICE EXPIRATION OPTION TERM (3)
NAME (SHARES) (1) YEAR (2) (PER SHARE) DATE 5% 10%
- ---- ------------ --------- ----------- -------- ------- -------
Robert V. McCormick . . . . . 22,500(4) 3.3% $4.00 2/17/00 $24,900 $55,000
97,500(5) 14.2% $2.00 2/17/00 $44,600 $96,700
45,000(6) 6.6% $2.00 11/30/00 $24,900 $55,000
Thomas B. Boyd . . . . . . . 45,000(6) 6.6% $2.00 11/30/00 $24,900 $55,000
Bonnie Jones . . . . . . . . 35,000(6) 5.1% $2.00 11/30/00 $19,300 $42,700
Dennis LaLumandiere . . . . . 2,812(4) 0.4% $4.00 2/17/00 $ 3,100 $ 6,900
12,188(5) 1.8% $2.00 2/17/00 $ 5,600 $12,100
25,000(6) 3.6% $2.00 11/30/00 $13,800 $30,500
Joseph F. Rondinone, Ph.D(7). -- -- -- -- -- --
Eli Wismer(8) . . . . . . . . -- -- -- -- -- --
- -------------------------------------
(1) For a description of the material terms of the options, see footnote 5 of
the Summary Compensation Table.
(2) The Company granted options to employees for an aggregate of 686,000 shares
of Common Stock during 1995 excluding 175,453 issued to replace options
canceled from the 1984 Employee Stock Option Plan and 405,384 issued to
replace options canceled from the 1994 Employee Stock Option Plan.
(3) Gains are reported net of the option exercise price but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on future performance of the Company's Common Stock, as well as
the optionee's continued employment through the vesting period.
(4) Options listed were granted on February 17, 1995.
(5) Options listed were granted on November 30, 1995 to replace options which
were originally granted on February 17, 1995 then canceled on November 30,
1995 due to repricing.
(6) Options listed were granted on November 30, 1995.
(7) Dr. Rondinone terminated his employment with the Company in January 1996
(8) Mr. Wismer terminated his employment with the Company in October 1995.
32
AGGREGATED OPTION EXERCISES IN 1995
AND YEAR-END OPTION VALUES
The following table sets forth information for the named executive officers
with respect to exercises in 1995 of options to purchase Common Stock of the
Company.
NUMBER OF
UNEXERCISED
OPTIONS AT VALUE OF UNEXERCISED
---------- IN-THE-MONEY OPTIONS
SHARES 12/31/95: AT 12/31/95:
ACQUIRED --------- ------------
ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE)(1) UNEXERCISABLE)(1)(2)
- ---- --------- -------- ----------------- --------------------
Robert McCormick . . . . . . . . . . . -- -- 217,083 / 237,917 -- / --
Thomas B. Boyd . . . . . . . . . . . . -- -- 26,041 / 83,959 -- / --
Bonnie Jones . . . . . . . . . . . . . -- -- 41,712 / 65,288 -- / --
Dennis LaLumandiere. . . . . . . . . . -- -- 26,103 / 57,397 -- / --
Joseph F. Rondinone Ph.D. (3). . . . . -- -- 42,562 / 39,438 -- / --
Eli Wismer (4) . . . . . . . . . . . . -- -- 58,978 / 0 -- / --
- --------------
(1) Based on the closing price of the Company's Common Stock as reported
on the NASDAQ National Market System on December 29, 1995 of $1.938
per share.
(2) The closing price of the Company's Common Stock on the Nasdaq National
Market on December 29, 1995 was less than the exercise price of the
referenced options.
(3) Dr. Rondinone terminated his employment with the Company in January
1996.
(4) Mr. Wismer terminated his employment with the Company in October 1995.
33
HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are currently no employee directors serving on the Human Resources
Committee of the Board of Directors. The following non-employee directors serve
on the Company's Human Resources Committee: Rodney Perkins, M.D., Robert J.
Pressley, Ph.D.
Dr. Perkins purchased an aggregate of 16,667 shares of the Company's Common
Stock on September 11, 1989 under the Company's 1984 Stock Purchase Plan at an
aggregate price of $75,002. Dr. Perkins purchased such shares through
promissory notes in favor of the Company bearing interest at the annual rate 9%
and secured by the shares purchased. At December 31, 1995, Dr. Perkins owed an
aggregate of $128,603 under such notes, the largest amount of indebtedness owed
by him to the Company at any time during 1995.
Dr. Perkins is also Chairman of the Board of Directors and a member of the Board
of Directors' Human Resources Committee of ReSound Corporation, a publicly
traded hearing health care company. The Company and ReSound Corporation have
not conducted any business with each other in the past and the Company does not
presently anticipate doing so in the future.
Dr. Perkins was also a founding shareholder of AcuVasive (formerly Envision
Surgical Systems), a manufacturer of microvisualization catheter products
("AcuVasive"). The Company has a commercial relationship with AcuVasive, Mr.
McCormick is a member of its Board of Directors and Dr. Perkins and the Company
are each holders of AcuVasive's capital stock. See "Transactions with
Management and Others."
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's Common
Stock as of March 20, 1996 as to (i) each person who is known by the Company to
own beneficially more than five percent of the Company's Common Stock, (ii) each
of the Company's directors, (iii) each of the executive officers named in the
Summary Compensation Table beginning on page 30, and (iv) all directors and
executive officers as a group.
SHARES BENEFICIALLY
------------------------
OWNED (1)
---------
NUMBER(2) PERCENT OF
--------- ----------
TOTAL
-----
Thomas B. Boyd . . . . . . . . . . . . 35,286 *
Benjamin L. Holmes . . . . . . . . . . 61,041 *
Bonnie Jones . . . . . . . . . . . . . 53,407 *
Dennis LaLumandiere. . . . . . . . . . 34,946 *
E. Walter Lange. . . . . . . . . . . . 51,250 *
Robert V. McCormick. . . . . . . . . . 339,781 4.6%
Rodney Perkins, M.D. . . . . . . . . . 177,717 2.5%
Robert J. Pressley, Ph.D. . . . . . . 72,266 1.0%
Joseph F. Rondinone, Ph.D(3).. . . . . 1,121 *
Eli Wismer(4). . . . . . . . . . . . . 17,378 *
All directors and executive officers as a group
(12 persons). . . . . . . . . . . . . 850,410 11.0%
- ------------------
* Less than 1%.
(1) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and the information
contained in the other footnotes to this table.
(2) Includes with respect to each named person the following shares subject to
options exercisable within 60 days of March 15, 1996: Mr. Boyd -- 32,812;
Mr. Holmes -- 58,541; Ms. Jones -- 49,219; Mr. LaLumandiere -- 32,300;
Mr. Lange -- 51,250; Mr. McCormick -- 277,082; Dr. Perkins -- 111,250
Dr. Pressley -- 51,250; Dr. Rondinone -- 0; Mr. Wismer -- 0.
(3) Dr. Rondinone terminated his employment with the Company in January 1996.
(4) Mr. Wismer terminated his employment with the Company in October 1995.
35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Dr. Perkins was a founding shareholder of AcuVasive (formerly EnVision Surgical
Systems), a manufacturer of microvisualization catheter products ("AcuVasive"),
and is currently a member of its Board of Directors. The Company is also party
to a Product Development and Marketing Agreement with AcuVasive dated June 4,
1993 (the "Development Agreement") pursuant to which AcuVasive has agreed to
develop certain microvisualization catheter products for which Laserscope shall
have world-wide, exclusive, royalty-free marketing rights provided that
Laserscope purchases certain minimum volumes of such products from AcuVasive.
Should Laserscope fail to meet such minimums, its market rights under the
Development Agreement become non-exclusive. As of December 31, 1995, AcuVasive
had not completed and the Company did not expect that AcuVasive would complete
the development of such products. In addition, during 1995, the Company loaned
AcuVasive $100,000 pursuant to a promissory note. At December 31, 1995,
AcuVasive was in default of the payment terms of the note and the Company does
not expect to be repaid at least within the next year due to AcuVasive's current
lack of financial resources. Robert McCormick is also a director of AcuVasive,
and Dr. Perkins and the Company are each holders of AcuVasive's capital stock.
From November 1994 to August 1995, Roy Fiebiger was President and Chief
Executive Officer of AcuVasive.
In March 1994, the Company entered into Management Continuity Agreements with
each of its executive officers, which were amended in December 1994. These
agreements provide (1) for continued employment or salary continuation at the
Company or its successor for at least twelve (12) months following any Change in
Control of the Company (as defined below), at the same salary and with the same
benefit program as were in effect prior to such Change in Control, (2) that such
executives may, with thirty (30) days written prior notice, resign but will be
entitled to receive his or her current salary and level of benefits for the
remainder of the twelve (12) months following the Change in Control if, in
connection with such Change in Control the executive's duties or
responsibilities are materially reduced or executive is asked to relocate to a
facility or location more than 50 miles from the Company's current location, (3)
that all stock options exercisable for the Company's securities held by such
executives shall become immediately vested and shall be exercisable in full in
accordance with the provisions of the option agreement and plan pursuant to
which such option was granted, and (4) that upon the immediate vesting of stock
options, the optionee will have the right (subject to any limitations imposed by
Section 16 of the Securities Exchange Act of 1934 or other applicable securities
laws and only to the extent permitted by the terms of the applicable option
plan) to deliver a non-recourse promissory note (secured only by the pledged
shares for repayment), at the prime rate of interest determined as of the date
of the note, in payment of the exercise price for the outstanding options. For
purposes of the Management Continuity Agreements, a Change in Control of the
Company shall be deemed to have occurred upon the
36
happening of any of the following events: (1) any acquisition of twenty percent
(20%) or more of the Company's then outstanding voting securities without the
approval of the Board of Directors, (2) any merger or consolidation in which the
Company is not the surviving entity, (3) approval of a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets, or (4) a change in
the composition of the Board of Directors of the Company, as a result of which
fewer than a majority of the directors are incumbent directors.
The Company has sold Common Stock to certain employees and directors and
accepted promissory notes secured by that stock as payment for certain of those
shares. These notes originally carried annual interest rates of 9.0% to 9.5%.
During 1995 the principal and accrued interest on these notes were refinanced
and the notes now carry annual interest rates of 5.79%.
INDEBTEDNESS
TO THE COMPANY
TOTAL SHARES AGGREGATE AS OF
PURCHASED PRICE 12/31/95 (1)(2)
------------ --------- ---------------
PURCHASER
- ---------
Rodney Perkins, M.D..................... 16,667 $75,001 $128,603
Robert J. Pressley, Ph.D................ 16,666 $74,997 $128,788
- ------
(1) In all cases, the amount shown was also the largest amount of indebtedness
owed to the Company at any time during 1995.
(2) Payment in the form of promissory notes in the above transactions was
approved in ach case by a majority of the disinterested directors of the
Company and such sales were made pursuant to the Company's 1984 Stock
Purchase Plan, which was approved by the shareholders of the Company.
During 1995 Mr. Holmes received $25,000 in compensation from the Company for
consulting services to the Company beyond his duties as Chairman of the Board of
Directors.
Non-employee members of the Company's Board of Directors receive cash
compensation and options to purchase shares of Common Stock in connection with
their service on the Board.
The Company has entered into indemnification agreements with each of its
directors and executive officers, which may require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers, to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' liability insurance if
available on reasonable terms.
37
PART IV
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)Financial Statements:
Page
----
Report of Ernst & Young LLP, Independent Auditors. F-1
Consolidated Balance Sheets at December 31, 1995 and 1994. F-2
Consolidated Statements of Operations
- Years ended December 31, 1995, 1994 and 1993. F-3
Consolidated Statements of Cash Flows
- Years ended December 31, 1995, 1994 and 1993. F-4
Consolidated Statements of Shareholders' Equity
- Years ended December 31, 1995, 1994 and 1993. F-5
Notes to Consolidated Financial Statements. F-6 through F-14
(2)The following financial statement schedule
for the years ended December 31, 1995, 1994
and 1993 is submitted herewith:
Page
----
Schedule II - Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial
statements or notes thereto.
(3)Exhibits included herein (numbered in accordance with Item
601 of Regulation S-K):
38
Exhibit
Number Description
- ------- -----------
3.3 Seventh Amended and Restated Articles of Incorporation of
Registrant.(1)
3.4 By-laws of Registrant, as amended.(5)
10.1A 1984 Stock Option Plan, as amended, and forms of Incentive Stock Option
Agreement Nonstatutory Stock Option Agreement.(5)
10.1B 1994 Stock Option Plan and forms of Incentive Stock Option Agreement
Nonstatutory Stock Option Agreement.(10)
10.2 1984 Stock Purchase Plan and form of Common Stock Purchase
Agreement.(2)
10.3 1989 Employee Stock Purchase Plan and form of Subscription
Agreement.(5)
10.4 401(k) Plan.(2)
10.6 Net Lease Agreement between the Registrant and Realtec Properties dated
October 7, 1987. (2)
10.6A Amendment No. 1 dated January 18, 1990 to Net Lease Agreement between
the Registrant and Realtec Properties dated October 7, 1987.(2)
10.6B Net Lease Agreement between Registrant and Realtec Properties dated
December 14, 1989.(2)
10.6C Net Lease Agreement between Registrant and Realtec Properties dated
June 25, 1990.(4)
10.6D Amendment No. 2 dated November 10, 1992 to Net Lease Agreement between
Registrant and Realtec Properties dated October 7, 1987.(6)
10.6E Amendment No. 3 dated April 19, 1994 to Net Lease Agreement between
Registrant and Realtec Properties dated October 7, 1987.(8)
10.6F Amendment No. 1 dated April 19, 1994 to Net Lease Agreement between
Registrant and Realtec Properties dated June 25, 1990.(8)
39
Exhibit
Number Description
- ------- -----------
10.6G Amendment No. 1 dated April 19, 1994 to Net Lease Agreement between
Registrant and Realtec Properties dated December 14, 1989.(10)
10.8 License Agreement between the Registrant and DuPont dated June 10,
1986.(2)
10.9 License Agreement between the Registrant and Patlex Corporation dated
February 24, 1989.(2)(3)
10.10 Form of Indemnification Agreement.(2)
10.11 Business Loan Agreement between the Registrant and Silicon Valley Bank
dated June 7, 1991 and Promissory Note, as amended.(5)
10.11A Change in Terms Agreement and Commercial Security Agreement between the
Registrant and Silicon Valley Bank dated April 10, 1992 as amended
on November 6, 1992.(6)
10.11B Modification to Loan Agreement between the Registrant and Silicon
Valley Bank dated April 15, 1993.(7)
10.11C Letter Agreement between the Registrant and Silicon Valley Bank dated
May 12, 1993.(7)
10.11D Modification to Loan Agreement between the Registrant and Silicon
Valley Bank dated April 15, 1994.(8)
10.11E Letter Agreement between the Registrant and Silicon Valley Bank dated
July 29, 1994.(8)
10.11F Covenant Waiver letter form Silicon Valley Bank dated August 1,
1994.(8)
10.11G Modification to Loan Agreement between the Registrant and Silicon
Valley Bank dated July 15, 1994.(9)
10.11H Modification to Loan Agreement between the Registrant and Silicon
Valley Bank dated August 1, 1995.(11)
10.11I Modification to Loan Agreement between the Registrant and Silicon
Valley Bank dated September 22, 1995.(11)
10.11J Modification to Loan Agreement between the Registrant and Silicon
Valley Bank dated October 1, 1995.(12)
10.11K Modification to Loan Agreement between the Registrant and Silicon
Valley Bank dated March 18, 1996.(12)
40
Exhibit
Number Description
- ------- -----------
10.11L Amended Loan Agreement between the Registrant and Silicon Valley Bank
dated March 18, 1996.(12)
10.12 License Agreement between the Registrant and Hughes Aircraft Company
effective April 1, 1990.(4)
10.13 1990 Directors' Stock Option Plan and form of Option Agreement.(5)
10.14 Form of Laserscope Management Continuity Agreement, as amended.(10)
10.15 Common Stock Purchase Agreement between the Registrant and EnVision
Surgical Systems dated June 4, 1993.(7)
10.16 Preferred Stock Purchase Agreement between the Registrant and
EnVision Surgical Systems dated June 4, 1993.(7)
10.17 Product Development and Marketing Agreement between the Registrant and
EnVision Surgical Systems dated June 4, 1993.(7)
10.18 1995 Directors' Stock Option Plan and form of Option agreement.(12)
22.1 Subsidiaries of Registrant.(7)
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 43).(12)
25.1 Power of Attorney (see pages 44 through 45).(12)
(b) Reports on Form 8-K: None.
- ------------------------------------------------------------------------------
(1)Incorporated by reference to identically numbered exhibits filed in response
to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1989.
(2)Incorporated by reference to identically numbered exhibits filed in response
to Item 16(a), "Exhibits," of the Registrant's Registration Statement
on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto (File No.
33-31689), which became effective on November 29, 1989.
(3)Confidential treatment granted by order effective November 28, 1989.
41
(4)Incorporated by reference to identically numbered exhibits filed in response
to Item 14(a)(3), "Exhibits", of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1990.
(5)Incorporated by reference to identically numbered exhibits filed in response
to Item 14(a)(3), "Exhibits", of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1991.
(6)Incorporated by reference to identically numbered exhibits filed in response
to Item 14(a)(3), "Exhibits", of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1992.
(7)Incorporated by reference to identically numbered exhibits filed in response
to Item 14(a)(3), "Exhibits", of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993.
(8)Incorporated by reference to identically numbered exhibits filed in response
to Item 6(a), "Exhibits", of the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1994.
(9)Incorporated by reference to identically numbered exhibits filed in response
to Item 6(a), "Exhibits", of the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994.
(10)Incorporated by reference to identically numbered exhibits filed in response
to Item 14(a)(3), "Exhibits", of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
(11)Incorporated by reference to identically numbered exhibits filed in response
to Item 6(a), "Exhibits", of the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995.
(12)Filed herewith
42
EXHIBIT 23.1
CONSENT 0F ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-38831, 33-53052) pertaining to the 1990 Director's Stock Option
Plan and the Registration Statements (Form S-8 No. 33-33692, 33-53158)
pertaining to the 1989 Employee Stock Purchase Plan and 1984 Stock Option Plan
and the Registration Statement (Form S-8 No. 33-40506) pertaining to the 1984
Stock Option Plan and the Registration Statements (Form S-8 No. 33-82524, 33-
63603) pertaining to the 1994 Stock Option Plan of Laserscope of our report
dated January 26, 1996, with respect to the consolidated financial statements,
and schedule of Laserscope included in the Annual Report (Form 10-K) for the
year ended December 31, 1995.
Ernst & Young LLP
San Jose, California
March 25, 1996
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LASERSCOPE
Date: March 29, 1996 By: /s/ Robert V. McCormick
---------------------
Robert V. McCormick
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert V. McCormick and Dennis LaLumandiere, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
Signature Title Date
- -------------------------------------------------------------------------------
/s/ Benjamin L. Holmes Chairman of the Board of March 29, 1996
- -----------------------
(Benjamin L. Holmes) Directors
/s/ Robert V. McCormick President, Chief Executive March 29, 1996
- -----------------------
(Robert V. McCormick) Officer and Director
44
Signature Title Date
- -------------------------------------------------------------------------------
/s/ Dennis LaLumandiere Vice President of Finance March 29, 1996
- -----------------------
(Dennis LaLumandiere) (Principal Financial and
Accounting Officer)
/s/ E. Walter Lange Director March 29, 1996
- -----------------------
(E. Walter Lange)
/s/ Rodney Perkins Director March 29, 1996
- -----------------------
(Rodney Perkins, M.D.)
/s/ Robert J. Pressley Director March 29, 1996
- -----------------------
(Robert J. Pressley, Ph.D.)
45
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Laserscope
We have audited the accompanying consolidated balance sheets of Laserscope as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Laserscope at December 31, 1995 and 1994 , and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Ernst & Young LLP
San Jose, California
January 26, 1996
F-1
LASERSCOPE
CONSOLIDATED BALANCE SHEETS
December 31,
(DOLLARS IN THOUSANDS) 1995 1994
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,278 $ 4,604
Short-term investments - 1,998
Accounts receivable, net 5,543 8,066
Inventories 10,292 7,512
Other current assets 692 1,038
------ ------
Total current assets 18,805 23,218
Property and equipment, net 2,663 3,320
Other assets 2,114 783
------ ------
Total assets $23,582 $27,321
------ ------
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,455 $ 1,292
Accrued compensation 1,156 1,136
Warranty 476 677
Deferred revenue 2,008 2,325
Other accrued liabilities 1,132 950
Current obligations under capital leases 14 13
------ ------
Total current liabilities 6,241 6,393
Obligations under capital leases 15 27
Commitments and contingencies
Shareholders' equity:
Common stock 7,060,634 shares outstanding
(6,983,844 in 1994) 37,248 37,074
Accumulated deficit (19,296) (15,744)
Translation adjustments (251) (180)
Notes receivable from shareholders (375) (249)
------ ------
Total shareholders' equity 17,326 20,901
------ ------
Total liabilities and shareholders' equity $23,582 $27,321
------ ------
------ ------
See notes to consolidated financial statements
F-2
LASERSCOPE
CONSOLIDATED BALANCE SHEETS
Years Ended December 31,
(THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1993
- --------------------------------------------------------------------------------
Net Revenues:
Products $24,974 $30,671 $31,946
Services 5,159 5,649 5,885
------ ------ ------
30,133 36,320 37,831
Cost of Sales:
Products 11,526 13,715 13,115
Services 3,266 3,203 2,872
------ ------ ------
14,792 16,918 15,987
Gross margin 15,341 19,402 21,844
Operating expenses:
Research and development 3,838 3,589 4,044
Selling, general and administrative 15,333 16,994 17,477
------ ------ ------
19,171 20,583 21,521
Operating income (loss) (3,830) (1,181) 323
Interest and other income, net 278 250 331
------ ------ ------
Income (loss) before income taxes (3,552) (931) 654
Provision for income taxes - - 65
------ ------ ------
Net income (loss) $(3,552) $ (931) $ 589
------ ------ ------
------ ------ ------
Net income (loss) per share $ (0.51) $ (0.13) $ 0.09
------ ------ ------
------ ------ ------
Shares used in per share calculations 6,999 6,924 6,834
------ ------ ------
------ ------ ------
See notes to consolidated financial statements
F-3
LASERSCOPE
CONSOLIDATED BALANCE SHEETS
Years Ended December 31,
(IN THOUSANDS 1995 1994 1993
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,552) $ (931) $ 589
Adjustments to reconcile net income (loss)
to cash provided (used) by operating
activities:
Depreciation and amortization 1,419 1,623 1,714
Increase (decrease) from changes in:
Accounts receivable 2,523 (460) (1,575)
Inventories (2,780) 853 487
Other current assets 346 20 98
Other assets 350 86 (399)
Accounts payable 163 (485) (860)
Accrued compensation 20 (312) (143)
Warranty (201) (166) (75)
Deferred revenue (317) (151) 44
Other accrued liabilities 182 (432) (723)
------- ------- -------
Cash used by operating activities (1,847) (355) (843)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity investments - (3,001) (3,056)
Maturity of held-to-maturity investments 1,998 3,030 8,174
Capital expenditures (762) (1,684) (1,383)
Funding of agreement with NWL (1,681) - -
Other (71) 11 (47)
------- ------- -------
Cash provided (used) by investing activities (516) (1,644) 3,688
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on obligations under capital leases (11) (101) (236)
Proceeds from the sale of common stock under
stock plans, net of repurchases and
shareholder notes receivable 48 587 510
------- ------- -------
Cash provided by financing activities 37 486 274
------- ------- -------
Increase (decrease) in cash and cash
equivalents (2,326) (1,513) 3,119
Cash and cash equivalents, beginning of year 4,604 6,117 2,998
------- ------- -------
Cash and cash equivalents, end of year $2,278 $4,604 $6,117
------- ------- -------
------- ------- -------
See notes to consolidated financial statements
F-4
LASERSCOPE
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Notes Total
Accumulated Translation Receivable from Shareholders'
(DOLLARS IN THOUSANDS) Common Stock Deficit Adjustments Shareholders Equity
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 $36,094 $(15,402) $ (144) $ (366) $20,182
Issuance of 104,924 shares
under stock plans, net
of repayment of notes 399 111 510
Translation adjustments (47) (47)
Net Income 589 589
------ ------ ------ ------ ------
Balance at December 31, 1993 36,493 (14,813) (191) (255) 21,234
Issuance of 140,665 shares
under stock plans, net
of repayment of notes 581 6 587
Translation adjustments 11 11
Net loss (931) (931)
------ ------ ------ ------ ------
Balance at December 31, 1994 37,074 (15,744) (180) (249) 20,901
Issuance of 76,790 shares
under stock plans, net
of repayment and
refinancing of notes 174 (126) 48
Translation adjustments (71) (71)
Net loss (3,552) (3,552)
------ ------ ------ ------ ------
Balance at December 31, 1995 $37,248 $(19,296) $ (251) $ (375) $17,326
------ ------ ------ ------ ------
------ ------ ------ ------ ------
See notes to consolidated financial statements
F-5
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company operates in one business segment, the medical systems business. The
Company develops, manufactures, markets and supports surgical lasers and other
surgical systems, related instrumentation and disposable supplies. The Company
markets its products and services in over twenty countries worldwide to
hospitals, outpatient surgery centers and physicians.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the Company and its
wholly and majority-owned subsidiaries. All intercompany transactions and
balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company invests its excess cash in high-quality debt instruments. The
Company considers cash equivalents to be short-term financial instruments that
are readily convertible to cash, subject to no more than insignificant interest
rate risk and that have original maturities of three months or less. Short-term
investments consist of short-term financial instruments with less than one year
to maturity.
At December 31, 1994 and December 31, 1995 the Company's cash equivalents were
in the form of institutional money market accounts and totaled $3.0 million and
$1.1 million, respectively.
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standard No. 115 (FAS 115), "Accounting for Certain Investments in Debt and
Equity Securities". Under FAS 115, management determines the appropriate
classification of debt securities at the time of purchase as held-to-maturity,
trading, or available-for-sale, and reevaluates such designation as of each
balance sheet date. At December 31, 1994, all debt securities were designated
as held-to-maturity as management believed it had the positive intent and
ability to hold the securities until maturity. Held-to-maturity securities were
stated at amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization, as well as any interest on the
securities, were included in interest income. At December 31, 1994 the
Company's investment in held to maturity securities stated at amortized cost,
which approximates their fair value, consisted of corporate debt securities of
$2.03 million. At December 31, 1995 the Company had no investments in debt
securities.
F-6
REVENUE RECOGNITION AND PRODUCT WARRANTY
The Company generally recognizes revenue related to the sale of systems,
instrumentation and disposables at the time of shipment and provides currently
for the estimated cost to repair or replace products under warranty provisions
in effect at the time of the sale. Service revenue is recognized as the
services are provided or pro rata over the period of the applicable contract.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization.
Equipment is depreciated using principally accelerated methods over estimated
useful lives of three to seven years. Equipment under capital leases is
amortized over the period of the lease. Leasehold improvements are amortized
using the straight-line method over the remaining term of the lease.
INVENTORIES
Inventories are stated at the lower of cost (computed on a first-in, first-out
basis) or market.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based upon the weighted average number of shares
of common stock outstanding and dilutive common equivalent shares from stock
options (using the treasury stock method).
FOREIGN CURRENCY TRANSLATION
The functional currencies of the Company's foreign subsidiaries are their local
currencies. Accordingly, all assets and liabilities related to their operations
are translated at the current exchange rates at the end of each period. The
resulting cumulative translation adjustments are recorded directly to the
translation adjustments account included in shareholders' equity. Revenues and
expenses are translated at average exchange rates in effect during the period.
NEW ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS 121 requires recognition of impairment of long-lived assets in the event
the net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS 121 is effective for fiscal years beginning
after December 15, 1995. Adoption of SFAS 121 is not expected to have a
material impact on the Company's financial position or results of operations.
The Company accounts for its stock option plans and its employee stock purchase
plan in accordance with the provisions of the Accounting principles Board's
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In 1995,
the Financial Accounting Standards Board released the Statement of Financial
Accounting Standards No. 123 (SFAS 123), " Accounting For Stock Based
Compensation." SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The Company expects to continue
to account for its employee stock plans in accordance with provisions of APB 25.
F-7
Accordingly, SFAS 123 is not expected to have any material impact on the
Company's financial position or results of operations.
2. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consist of:
(in thousands) 1995 1994
- ----------------------------------------------------------------------------
Trade accounts receivable $ 6,033 $ 8,606
Less: allowance for doubtful accounts (490) (540)
------ -----
$ 5,543 $ 8,066
------ ------
------ ------
3. INVENTORIES
Inventories at December 31 consist of:
(in thousands) 1995 1994
- -----------------------------------------------------------------------------
Sub-assemblies and purchased parts $ 7,201 $ 4,996
Finished goods 3,091 2,516
----- -----
$10,292 $ 7,512
------ -----
------ -----
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consists of:
(in thousands) 1995 1994
- -----------------------------------------------------------------------------
Machinery and equipment $4,562 $4,189
Office equipment and furniture 6,917 6,535
Leasehold improvements 1,781 1,776
----- -----
13,260 12,500
Less accumulated depreciation and amortization (10,597) (9,180)
------ ------
$2,663 $3,320
------ ------
------ ------
5. OTHER ASSETS
Other assets December 31 consist of:
(in thousands) 1995 1994
- -----------------------------------------------------------------------------
NWL Laser-Technologie agreement $1,681 $ 0
Other 433 783
---- ----
$2,114 $ 783
------ -----
------ -----
In March 1995, the Company entered into an agreement with NWL Laser-Technologie
("NWL") whereby the Company paid NWL approximately $1.6 million in exchange for
a cross-distribution and development agreement, a current minority equity
position in NWL and an
F-8
option to purchase all of the ownership interests in NWL. These assets are
carried at cost. If the Company does not exercise its option to purchase NWL by
June 1997, there will be no reimbursement of the Company's investment and the
Company's equity position will be relinquished. If the Company exercises its
option, the remaining purchase price will be paid over three and one half years
from the exercise date. As of December 31, 1995 the Company believes it will
exercise its purchase option.
6. LEASE OBLIGATIONS
The Company has not entered into any significant lease agreements that have been
accounted for as capital leases during the last three years. The Company's
capital lease obligations at December 31, 1995 and 1994 were immaterial.
Leased equipment and accumulated amortization related to assets under capital
leases at December 31 were:
(in thousands) 1995 1994
- -----------------------------------------------------------------------------
Leased equipment $ 1,545 $1,545
Accumulated amortization 1,518 1,503
The Company leases its facilities and certain equipment under noncancelable
operating leases. Rental expense under these leases amounted to approximately
$966,000, $1,070,000 and $960,000 in each of the three years ended December 31,
1995, 1994 and 1993, respectively.
Future minimum lease payments under operating leases were as follows at
December 31, 1994:
(in thousands)
- --------------------------------------------------------------------------------
1996 $ 918
1997 839
1998 817
1999 777
2000 777
2001 130
---
$4,258
------
------
7. SHAREHOLDERS' EQUITY
The Company has 25,000,000 shares of no par value common stock authorized. In
addition, the Company has authorized 5,000,000 shares of undesignated preferred
stock with rights, preferences and privileges to be determined by the Company's
Board of Directors.
1994 AND 1984 STOCK OPTION PLANS
During 1994 and 1984, the Company adopted stock option plans under which the
Board of Directors may grant incentive stock options to purchase shares of
common stock to
F-9
employees of the Company at a price not less than the fair value of the shares
as of the date of grant. The Board of Directors may also grant nonstatutory
stock options to employees and consultants, including directors who serve as
employees or consultants, at not less than 85% of the fair market value of the
shares as of the date of grant. All options vest and become exercisable over
periods of up to five years and expire five to ten years after the date of
grant.
The 1984 Stock Option Plan expired by its terms with respect to any future
option grants effective in August 1994. At December 31, 1995 there were
1,032,690 options outstanding and 799,689 options exercisable under this plan
with exercise prices ranging from $3.50 to $9.25.
In 1995, the Company allowed non officer employees to cancel outstanding options
that had been granted under the 1984 plan but that had not yet become
exercisable and replace them with new nonstatutory grants outside of the 1984
plan for a like number with the same exercisability restrictions at the fair
market value of the common stock at the date of grant. Employees elected to
cancel and receive new grants to purchase an aggregate of 175,453 shares at an
exercise price of $2.00. At December 31, 1995 none of these options had been
exercised.
The Company has reserved 725,000 shares of common stock for issuance pursuant to
its 1994 stock option plan of which 150,000 shares were subject to shareholder
approval as of December 31, 1995..
In 1995, the Company allowed employees to cancel outstanding options that had
been granted under the 1994 plan but that had not yet become exercisable and
replace them with new grants for a like number with the same exercisability
restrictions at the fair market value of the common stock at the date of grant.
Employees elected to cancel and receive new grants to purchase an aggregate of
455,384 shares at an exercise price of $2.00. These options are included in the
cancellations and grants in 1995 in the following table which summarizes plan
activity for the year ended December 31, 1995.
Number of Shares
--------------------
Available Options Price Per
For Grant Outstanding Share
- ----------------------------------------------------------------------------
Balance, December 31, 1994 307,000 18,000 $4.13-$4.75
Additional shares authorized 400,000 -
Granted (1,191,384) 1,191,384 $2.00-$4.48
Exercised - -
Canceled 504,799 (504,799) $3.63-$4.75
------- -------
Balance, December 31, 1995 20,415 704,585 $2.00-$4.75
------ -------
------ -------
At December 31, 1995, options were exercisable for approximately 75,000 shares
at $2.00 to $4.75 per share.
F-10
1990 AND 1995 DIRECTORS' STOCK OPTION PLANS
The Company has reserved 600,000 shares of its common stock for issuance
pursuant to its 1990 and 1995 Directors' Stock Option Plans in aggregate,
300,000 of which were subject to shareholder approval as of December 31, 1995.
Under these plans, non-employee directors of the Company have been granted
options to purchase 90,000 shares (45,000 shares pursuant to each plan) of the
Company's common stock exercisable at the fair market value of such shares on
the respective grant dates. Because the 1990 Directors' Stock Option Plan was
terminated in 1995 with respect to any additional grants, new non employee
directors receive only a grant under the 1995 Directors' Stock Option Plan.
Options issued pursuant to these plans vest and become exercisable over three
years from the respective original date of issuance with respect to each
optionee who remains a director and expire five years after the date of grant.
The following table summarizes activity in the plans during the year ended
December 31, 1995:
Available Options Price Per
For Grant Outstanding Share
- --------------------------------------------------------------------------------
Balance, December 31, 1994 30,000 270,000 $7.13-$8.13
Additional shares authorized 300,000 -
Granted (180,000) 180,000 $2.00
Exercised - -
Canceled 90,000 (90,000) $7.13-$8.13
Expired (120,000) -
------- --------
Balance, December 31, 1995 120,000 360,000 $2.00-$8.00
------- -------
------- -------
At December 31, 1995, options were exercisable for 185,000 shares at $2.00 to
$8.00 per share.
1989 EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 450,000 shares of common stock, (200,000 of which were
subject to shareholder approval as of December 31, 1995) for issuance pursuant
to its 1989 Employee Stock Purchase Plan. Under this plan, qualified employees,
excluding non-employee directors, may purchase up to a specified maximum amount
of the Company's common stock through payroll deduction at 85% of its fair
market value. At December 31, 1995, approximately 294,000 shares had been
purchased under this plan.
1991 SHAREHOLDER RIGHTS PLAN
In November 1991, the Company adopted a shareholder rights plan and distributed
a dividend of one right to purchase one share of common stock (a "Right") for
each outstanding share of common stock of the Company. The Rights become
exercisable in certain limited circumstances involving a potential business
combination transaction of the Company and are initially exercisable at a price
of $34 per share. Following certain other events after the Rights have become
exercisable, each Right entitles its holder to purchase for $34 an amount of
F-11
common stock of the Company, or in certain circumstances, securities of the
acquirer, having a then current market value of twice the exercise price of the
Right. The Rights are redeemable at the Company's option at $0.01 per Right
before they become exercisable. Until a Right is exercised, the holder of a
Right, as such, has no rights as a shareholder of the Company. The Rights
expire on November 20, 2001.
8. EMPLOYEE SAVINGS AND INVESTMENT PLAN
In October 1989, the Company adopted a 401(k) savings and investment plan which
covers all employees. The Company's contributions to the plan have been 50%
matching of employee contributions up to 3% of each employee's base compensation
and were approximately $109,000, $118,000 and $101,000 in the years ended
December 31, 1995, 1994 and 1993, respectively.
9. INCOME TAXES
Significant components of the provision for income taxes were as follows (in
thousands):
1995 1994 1993
- ----------------------------------------------------------------------------
Current Federal taxes $ - $ - $ 15
Current state taxes - - 50
----- ----- -----
Provision for income taxes $ - $ - $ 65
----- ----- -----
----- ----- -----
Pretax losses from foreign operations were $1,185,000, $1,100,000 and $900,000
respectively in 1995, 1994 and 1993.
Income taxes differ from the amount computed by applying the statutory federal
income tax rate of 34% to income (loss) before taxes. The reasons for the
differences and the tax effect of each are as follows (in thousands):
1995 1994 1993
- -----------------------------------------------------------------------------
Computed expected tax $(1,208) $(317) $ 200
Operating loss with no carryback benefit 1,208 391 -
State taxes, net of federal benefit - - 33
Benefit of net operating loss carryforward - ( 74) (168)
---- ---- ----
Provision for income taxes $ - $ - $ 65
-------- ----- -----
-------- ----- -----
F-12
The components of the deferred tax asset consist of the following at December
31, (in thousands):
1995 1994
- -----------------------------------------------------------------------------
Net operating loss carryforwards $ 4,000 $ 2,763
General business credit carryforwards 1,000 816
Inventory reserves and adjustments 1,400 1,354
Other accruals and reserves not
currently deductible for tax purposes 1,500 1,814
----- -----
7,900 6,817
Valuation allowance (7,900) (6,817)
Net deferred tax asset $ - $ -
------ ------
------ ------
For federal tax purposes, the Company has net operating loss, research and
development credit and minimum tax credit carryforwards of $9,000,000, $350,000,
and $300,000, respectively, expiring in 1997 through 2010. The Company has net
operating loss and research and development credit carryforwards of $1,000,000
and $500,000, respectively, for state tax reporting purposes. The state net
operating loss carryforward expires in the year 2000. In addition, the Company
has foreign tax loss carryforwards of approximately $3,600,000 which begin to
expire in 1998.
10. FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATIONS OF CREDIT RISK
The Company's trade receivables are made up of amounts due from its health care
industry customers, primarily in the United States. Any concentration of credit
risk is substantially alleviated by the Company's credit evaluation and
collection practices and the relative lack of concentration as well as
geographical dispersion of customer accounts comprising its accounts receivable.
Bad debt expense has been insignificant.
The Company's export sales represent sales to unaffiliated customers in Europe,
the Middle East and the Pacific Rim and were approximately 23%, 17% and 13% of
total revenues in 1995, 1994 and 1993, respectively.
The Company also has an Investment Policy approved by its Board of Directors
related to its short-term cash investment practices. That policy limits the
amount of credit exposure to any one financial institution and restricts
investments to certain types of financial instruments based on specified credit
criteria.
11. CONTINGENCIES
The Company is a party to a number of legal proceedings arising in the ordinary
course of its business. These actions may include product liability and
employee-related issues. While it is not feasible to predict or determine the
outcome of the actions brought against it, the Company believes that the
ultimate resolution of these claims will not ultimately have a material adverse
effect on its financial position or results of operations.
F-13
12. SUBSEQUENT EVENTS (UNAUDITED)
In March 1996, the Company re-negotiated its agreement with a bank for a $5
million line of credit that provides for short-term borrowings based on certain
eligible accounts receivable. The line of credit, which expires in March 1997,
is secured by the assets of the Company and bears interest at the bank's prime
rate plus one percentage point. Provisions of this agreement prohibit the
payment of dividends and the repurchase of stock and require the Company to
maintain certain minimum working capital and net worth levels.
F-14
SCHEDULE I
LASERSCOPE
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Balance at
Beginning End
Descriptions of Period Additions Deductions of Period
------------ ---------- --------- ---------- ---------
Allowance for doubtful
accounts receivable:
Year ended December 31, 1993 $540 $ -- $ -- $540
---- ---- ---- ----
---- ---- ---- ----
Year ended December 31, 1994 $540 $ -- $ -- $540
---- ---- ---- ----
---- ---- ---- ----
Year ended December 31, 1995 $540 $200 $250 $490
---- ---- ---- ----
---- ---- ---- ----
S-1
INDEX TO EXHIBITS
EXHIBIT
NUMBER Description
- ------- -----------
10.11J Modification to Loan Agreement between the Registrant
and Silicon Valley Bank dated October 1, 1995.
10.11K Modification to Loan Agreement between the Registrant
and Silicon Valley Bank dated March 18, 1996.
10.11L Loan Agreement between the Registrant and Silicon Valley
Bank dated March 18, 1996.
10.18 1995 Directors' Stock Option Plan and form of Option
agreement.
23.1 Consent of Ernst & Young, Independent Auditors (see page 43).
25.1 Power of Attorney (see pages 44 through 45).