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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

___________________

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2002

or

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

For the transition period from ______ to ______

Commission file number 0-18053

LASERSCOPE

(Exact name of Registrant as Specified in Its Charter)
     
CALIFORNIA
(State or Other Jurisdiction
of Incorporation or Organization)
  77-0049527
(I.R.S. Employer Identification No.)

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

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

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

Yes    [X]        No    [   ]

The number of shares of Registrant’s common stock issued and outstanding as of July 31, 2002 was 16,470,449.


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements Of Operations
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements:
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations:
Results of Operations:
Liquidity and Capital Resources:
Risk Factors:
Item 3. Quantitative and Qualitative Disclosures About Market Risk:
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Items
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 99.1
EXHIBIT 99.2


Table of Contents

TABLE OF CONTENTS
                 
            Page
           
PART I.   FINANCIAL INFORMATION     3  
   Item 1.
 
Financial Statements (unaudited)
    3  
       
Condensed Consolidated Balance Sheets
    3  
       
Condensed Consolidated Statements of Operations
    4  
       
Condensed Consolidated Statements of Cash Flows
    5  
       
Notes to Condensed Consolidated Financial Statements
    6  
   Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    8  
       
Results of Operations
    9  
       
Liquidity and Capital Resources
    10  
       
Risk Factors
    12  
   Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
    16  
PART II.   OTHER INFORMATION     16  
   Item 1.
 
Legal Proceedings
    16  
   Item 2.
 
Changes in Securities
    16  
   Item 3.
 
Defaults upon Senior Securities
    17  
   Item 4.
 
Submission of Matters to a Vote of Security Holders
    17  
   Item 5.
 
Other Items
    18  
   Item 6.
 
Exhibits and Reports on Form 8-K
    18  
SIGNATURES
    19  

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Laserscope
Condensed Consolidated Balance Sheets
(Unaudited)
                       
          June 30,   December 31,
(thousands)   2002   2001

 
 
Assets
               
Current assets:
               
 
Cash and cash equivalents
  $ 3,772     $ 3,408  
 
Accounts receivable, net
    10,537       8,427  
 
Inventories
    9,234       9,228  
 
Other current assets
    1,194       1,283  
 
   
     
 
   
Total current assets
    24,737       22,346  
Property and equipment, net
    2,082       2,067  
Goodwill
    655       655  
Other assets
    346       414  
 
   
     
 
     
Total assets
  $ 27,820     $ 25,482  
 
   
     
 
Liabilities and Shareholders’ Equity
               
Current liabilities:
               
 
Short-term bank loans
  $ 1,350     $ 1,135  
 
Accounts payable
    3,051       2,821  
 
Accrued compensation
    1,973       1,588  
 
Deferred revenue
    1,287       1,031  
 
Convertible subordinated debentures, current portion
    147        
 
Other current liabilities
    2,897       2,435  
 
   
     
 
   
Total current liabilities
    10,705       9,010  
 
   
     
 
Convertible subordinated debentures, net of current portion
    2,853       3,000  
Obligations under capital leases
    91       60  
 
   
     
 
   
Total long-term liabilities
    2,944       3,060  
 
   
     
 
Contingencies (Note 5)
               
Shareholders’ equity:
               
 
Common stock
    55,104       54,712  
 
Accumulated deficit
    (39,762 )     (39,843 )
 
Accumulated other comprehensive loss
    (1,046 )     (1,332 )
 
Notes receivable from shareholders
    (125 )     (125 )
 
   
     
 
     
Total shareholders’ equity
    14,171       13,412  
 
   
     
 
     
Total liabilities and shareholders’ equity
  $ 27,820     $ 25,482  
 
   
     
 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Laserscope
Condensed Consolidated Statements Of Operations
(Unaudited)
                                   
      Three months ended   Six months ended
      June 30,   June 30,
     
 
(thousands, except per share amounts)   2002   2001   2002   2001

 
 
 
 
Net revenue
  $ 10,529     $ 9,302     $ 19,949     $ 17,530  
Cost of sales
    4,957       4,281       9,756       8,800  
 
   
     
     
     
 
Gross margin
    5,572       5,021       10,193       8,730  
 
   
     
     
     
 
Operating expenses:
                               
 
Research and development
    1,033       978       2,049       1,791  
 
Selling, general and administrative
    4,289       3,774       7,836       7,084  
 
   
     
     
     
 
 
    5,322       4,752       9,885       8,875  
 
   
     
     
     
 
Operating income (loss)
    250       269       308       (145 )
Interest income (expense) and other, net
    (104 )     (73 )     (194 )     (131 )
 
   
     
     
     
 
Income (loss) before income taxes
    146       196       114       (276 )
Provision for income taxes
    18       14       33       32  
 
   
     
     
     
 
Net income (loss)
  $ 128     $ 182     $ 81     $ (308 )
 
   
     
     
     
 
Basic net income (loss) per share
  $ 0.01     $ 0.01     $ 0.00     $ (0.02 )
 
   
     
     
     
 
Diluted net income (loss) per share
  $ 0.01     $ 0.01     $ 0.00     $ (0.02 )
 
   
     
     
     
 
Shares used in basic per share calculations
    16,335       15,902       16,262       15,893  
 
   
     
     
     
 
Shares used in diluted per share calculations
    18,688       19,029       18,511       15,893  
 
   
     
     
     
 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Laserscope
Condensed Consolidated Statements of Cash Flows
(Unaudited)
                       
          Six Months Ended
          June 30,
         
(thousands)   2002   2001

 
 
Cash flows from operating activities:
               
 
Net income (loss)
  $ 81     $ (308 )
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
   
Depreciation and amortization
    605       559  
   
Changes in assets and liabilities:
               
     
Accounts receivable, net
    (1,956 )     (101 )
     
Inventories
    97       (285 )
     
Other current assets
    122       (29 )
     
Accounts payable
    214       255  
     
Accrued compensation
    385       317  
     
Deferred revenue
    257       571  
     
Other current liabilities
    382       249  
 
   
     
 
Net cash provided by operating activities
    187       1,228  
 
   
     
 
Cash flows from investing activities:
               
 
Acquisition of property and equipment
    (372 )     (547 )
 
   
     
 
Net cash used in investing activities
    (372 )     (547 )
 
   
     
 
Cash flows from financing activities:
               
 
Payments on obligations under capital leases
    (133 )     (184 )
 
Proceeds from the sale of common stock under stock plans
    393       18  
 
Proceeds from bank loans
    5,020       6,244  
 
Repayment of bank loans
    (4,805 )     (6,052 )
 
   
     
 
Net cash provided by financing activities
    475       26  
 
   
     
 
Effect of exchange rate changes on cash
    74       (403 )
Net increase in cash and cash equivalents
    364       304  
Cash and cash equivalents, beginning of period
    3,408       2,698  
 
   
     
 
Cash and cash equivalents, end of period
  $ 3,772     $ 3,002  
 
   
     
 
Supplemental disclosure of cash flow information:
               
   
Cash paid during the period for:
               
     
Interest
  $ 78     $ 201  
     
Income taxes
  $     $ 8  
   
Non-cash increase in obligations under capital leases
  $ 172     $  

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Laserscope Notes to Condensed Consolidated Financial Statements:

1. Basis of presentation

The accompanying unaudited condensed consolidated financial statements include Laserscope (the “Company,” “management,” “we,” “us,” “our”) and its wholly and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated. While the financial information in this report is unaudited, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods indicated have been recorded. We suggest that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2001 included in the Company’s annual report on Form 10-K for the year ended December 31, 2001. The results of operations for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results expected for the full year.

2. Inventories

Inventories were comprised of the following (in thousands):

                 
    June 30,   December 31,
    2002   2001
   
 
Sub-assemblies and purchased parts
  $ 4,201     $ 4,743  
Work-in-process
    2,748       2,345  
Finished goods
    2,285       2,140  
 
   
     
 
 
  $ 9,234     $ 9,228  
 
   
     
 
 

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3. Net income (loss) per share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by giving effect to all dilutive potential common shares, including options, warrants, and convertible debentures. A reconciliation of the numerator and denominator used in the calculation of historical basic and diluted net income (loss) per share follows:

                                   
      Three months ended   Six months ended
      June 30,   June 30,
     
 
(thousands)   2002   2001   2002   2001

 
 
 
 
Numerator:
                               
 
Net income (loss) used in computing basic net income (loss) per share
  $ 128     $ 182     $ 81     $ (308 )
 
Add: After-tax equivalent of interest expense on 8% convertible debentures
  $     $ 60     $     $  
 
   
     
     
     
 
 
Net income (loss) used in computing diluted net income (loss) per share
  $ 128     $ 242     $ 81     $ (308 )
 
   
     
     
     
 
Denominator:
                               
 
Weighted average number of common shares outstanding used in computing basic net income (loss) per share
    16,335       15,902       16,262       15,893  
 
Add: dilutive potential common share used in computing dilutive net income (loss) per share
    2,353       3,127       2,249        
 
   
     
     
     
 
 
Total weighted-average number of shares used in computing diluted net income (loss) per share
    18,688       19,029       18,511       15,893  
 
   
     
     
     
 

The following outstanding options and warrants (prior to the application of the treasury stock method) and convertible debentures (on an as-converted basis) were excluded from the computation of diluted net income (loss) per common share for the periods ended June 30, 2002 and 2001 because including them would have had an antidilutive effect:

                                 
    Three months ended   Six months ended
    June 30,   June 30,
   
 
(thousands)   2002   2001   2002   2001

 
 
 
 
Options to purchase common stock
    1,156       2,535       1,329       2,779  
Warrants to purchase common stock
                      459  
Convertible debentures
    2,400             2,400       2,400  
 
   
     
     
     
 
 
    3,556       2,535       3,729       5,638  
 
   
     
     
     
 
 

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4. Comprehensive income (loss)

Total comprehensive income (loss) during the periods ended June 30, 2002 and 2001 consisted of (in thousands):

                                 
    Three months ended   Six months ended
    June 30,   June 30,
   
 
    2002   2001   2002   2001
   
 
 
 
Net income (loss)
  $ 128     $ 182     $ 81     $ (308 )
Translation adjustments
    376       (82 )     286       (403 )
 
   
     
     
     
 
Comprehensive income (loss)
  $ 504     $ 100     $ 367     $ (711 )
 
   
     
     
     
 

5. Contingencies

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

6. Recent accounting pronouncements

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”, which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. The standard also requires a change in the method of testing for the impairment of long-lived assets, including goodwill, from the method previously used by the Company as of December 31, 2001. Adoption of SFAS No. 142 has not had a significant impact on our financial statements.

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

INTRODUCTORY STATEMENT

Some of the statements in this Quarterly Report on Form 10-Q, including but not limited to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this document are forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. We refer you to the factors described under the heading “Risk Factors” in this Quarterly Report on Form 10-Q as well as to our Annual Report on Form 10-K for the year ended December 31, 2001 under the heading “Risk Factors”. Readers are cautioned not to place undue reliance on forward-looking statements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of those statements. We are under no duty to update any of the forward-looking statements after the date of this document to reflect the occurrence of unanticipated events.

 

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Results of Operations:

The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes included in Part I — Item 1 of this Quarterly Report and the audited financial statements and notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 and the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following table contains selected income statement information, which serves as the basis of the discussion of the Company’s results of operations for the quarter and six months ended June 30, 2002 (in thousands, except for percentages):
                                                                                   
      Three months ended           Six months ended        
     
         
       
      June 30, 2002   June 30, 2001       June 30, 2002   June 30, 2001    
     
 
  %  
 
  %
      Amount   %(a)   Amount   %(a)   Change   Amount   %(a)   Amount   %(a)   Change
     
 
 
 
 
 
 
 
 
 
Revenues from sales of:
                                                                               
 
Lasers
  $ 4,700       45 %   $ 4,193       45 %     12 %   $ 8,778       44 %   $ 8,246       47 %     6 %
 
Instruments & disposable supplies
    4,412       42 %     3,669       39 %     20 %     8,309       42 %     6,365       36 %     31 %
 
Service
    1,417       13 %     1,440       16 %     (2 )%     2,862       14 %     2,919       17 %     (2 )%
 
   
             
                     
             
                 
Total net revenues
  $ 10,529       100 %   $ 9,302       100 %     13 %   $ 19,949       100 %   $ 17,530       100 %     14 %
Gross margin
  $ 5,572       53 %   $ 5,021       54 %     11 %   $ 10,193       51 %   $ 8,730       50 %     17 %
Research & development
  $ 1,033       10 %   $ 978       11 %     6 %   $ 2,049       10 %   $ 1,791       10 %     14 %
Selling, general & admin
  $ 4,289       41 %   $ 3,774       41 %     14 %   $ 7,836       39 %   $ 7,084       40 %     11 %


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

Net revenues increased for the three month and six month periods ended June 30, 2002 relative to the corresponding periods of 2001.

Revenues from the sales of laser systems increased during the three-month and six-month periods ended June 30, 2002 relative to the same periods in 2001. While unit sales increased 29% and 26%, respectively, for the three and six-month periods ended June 30, 2002 relative to the same periods in 2001, average selling prices decreased. This price decrease is due to a change in the mix of laser types sold, as well as our distribution agreement with McKesson/HBOC. The distribution arrangement with McKesson Corp. was implemented during the first quarter of 2001, and unit volumes through that channel were lower in the start-up period than in the first or second quarters of 2002. The Company expects that sales of aesthetic lasers will continue to be a major source of revenue. In addition, as the year progresses, we anticipate increasing the sales of Niagara PVTM lasers. The Niagara PV is a surgical laser used for the treatment of benign prostatic hyperplasia (BPH). Our first revenue shipments of the Niagara PV laser were in the three month period ended March 31, 2002 during which we sold six units. In the three month period ended June 30, 2002, we sold nine of these units.

Revenues from the sales of instrumentation and disposable supplies increased during the three and six months ended June 30, 2002 compared to the corresponding periods in 2001. The increases are driven by the higher laser unit volumes and the associated increase in volume of accessories that are sold with lasers. The Company expects revenues from the

 

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sales of instrumentation and disposable supplies to incrementally increase as we ship more Niagara PV lasers and experience the corresponding recurring revenue from sales of the Niagara PV’s single-use fiber optic energy delivery device.

Laserscope’s service revenues decreased during the three and six-month periods ended June 30, 2002 compared to the same periods in 2001. Decreased service revenues were primarily experienced in the domestic region as a result of a reduction in the number of billable service calls performed. The Company believes that future service revenues primarily depend on increases to the installed base of lasers as well as the acceptance of its service contracts by its customers.

Gross margin as a percentage of revenues during the quarter and six months ended June 30, 2002 decreased one percentage point and increased one percentage point, respectively, relative to the corresponding periods of 2001. Laserscope expects that gross margin as a percentage of revenues for the remainder of 2002 may vary from quarter to quarter as product and distribution mix varies.

Research and development expenses are the result of activities related to the development of new laser, instrumentation and disposable products and the enhancement of Laserscope’s existing products. These expenses increased during the three month and six month periods ended June 30, 2002 compared to the same periods in 2001. The increase was driven by product development activity in the United States on the new Niagara PV laser as well as the Aura, Lyra, and Venus I-series lasers. While development of these lasers is nearly complete, the Company expects that sustaining engineering, clinical development, and development of new aesthetic and surgical products will cause amounts spent in research and development to decline only marginally in absolute terms in the remainder of the year relative to the prior quarter’s level.

Selling, general and administrative expenses increased during the quarter and six month periods ended June 30, 2002, compared to the corresponding periods in 2001. This was driven by expenses relating to the promotion of the Niagara PV laser and to a lesser extent, increased expenses in support of our aesthetic lasers. Laserscope expects amounts spent in selling, general and administrative expenses to increase during the remainder of 2002 as variable selling and marketing expenses increase.

Liquidity and Capital Resources:

The following table contains selected balance sheet information that serves as the basis of the discussion of the Company’s liquidity and capital resources at June 30, 2002 and for the six months then ended (in thousands):

                 
    June 30,   December 31,
    2002   2001
   
 
Cash and cash equivalents
  $ 3,772     $ 3,408  
Total assets
  $ 27,820     $ 25,842  
Total liabilities
  $ 13,649     $ 12,070  
Net working capital
  $ 14,032     $ 13,336  
 

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

Cash provided in operating activities totaled $0.2 million. This was the combined result of the following sources: depreciation and amortization — $0.6 million; increase in accrued compensation — $0.4 million; increase in other current liabilities — $0.4 million; increase in deferred revenue — $0.3 million; increase in accounts payable — $0.2 million; decrease in other current assets — $0.1 million; decrease in inventory — $0.1 million; and net income — $0.1. These sources were partially offset by an increase in accounts receivable — $2.0 million.

Cash used in investing activities consisted of capital expenditures of $0.4 million.

Cash provided by financing activities consisted of sale of common stock under stock plans — $0.4 million; and an increase in short-term borrowing — $0.2 million; which was partially offset by payments on obligations under capital leases — $0.1 million.

Laserscope has in place an asset-based line of credit that provides for borrowing up to $5.0 million and expires in September 2002. Credit is extended based on eligible accounts receivable and inventory. At June 30, 2002, we had approximately $4.1 million in borrowing capacity available against borrowings of $1.4 million outstanding and $1.1 million in letter of credit reserve requirements. This resulted in $1.6 million of unused borrowing capacity. As of June 30, 2002 we were in compliance with all covenants associated with the line of credit and our convertible debentures. We anticipate that future changes in cash and working capital will be dependent on a number of factors including:

     our ability to effectively manage inventory and accounts receivable;
 
     our ability to anticipate and adapt to the changes in our industry such as new and alternative medical procedures;
 
     our level of profitability;
 
     our determination to acquire or invest in products and businesses complementary to ours; and
 
     the market price for our common stock as it affects the exercise of stock options.

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

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

 

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Risk Factors:

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

Limited Working Capital; Potential Need to Raise Additional Capital.

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

History of Losses; Uncertain Future Profitability.

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

Government Regulation; Uncertainty of Obtaining Regulatory Approval.

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

Insurance Reimbursement.

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

Uncertainty of Technological Change; Uncertainty of New Product Development and Acceptance.

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

Dependence on Single-Source Suppliers and Certain Third Parties.

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

Competition.

We compete in the non-ophthalmic surgical segment of the worldwide medical laser market. In this market, lasers are used in hospital operating rooms, outpatient surgery centers and individual physician offices for a wide variety of procedures. This market is highly competitive. Our competitors are numerous and include some of the world’s largest organizations as well

 

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as smaller, highly-specialized firms. We cannot assure that we can compete successfully against these organizations.

Reliance on Patents and Licenses.

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

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

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

Reliance on Key Customers.

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

Fluctuations in Quarterly Operating Results.

A number of factors affect our quarterly financial results including the timing of shipments and orders. Our laser products are relatively expensive pieces of medical capital equipment and the precise shipment date of specific units can have a marked effect on our results of operations on a quarterly basis. Any delay in product shipments near the end of a quarter could cause our quarterly results to fall short of anticipated levels. Furthermore, to the extent we receive orders near the end of a quarter, we may not be able to fulfill the order during the balance of that same quarter. Moreover, we typically receive a disproportionate percentage of orders toward the end of each quarter. To the extent that we do not receive anticipated orders or orders are delayed beyond the end of the applicable quarter, our results may be adversely affected and may be unpredictable from quarter to quarter. In addition, because a significant portion of our revenues in each quarter result from orders received in that quarter, we base our production, inventory and operating expenditure levels on anticipated revenue levels. Thus, if sales do not occur when expected, expenditure levels could be disproportionately high and operating results for that quarter and potentially future quarters, would be adversely affected. We cannot assure that Laserscope will accomplish revenue growth or profitability on a quarterly or annual basis. Nor can we assure that revenue growth or profitability will not fluctuate significantly from quarter to quarter.

Product Liability Risk; Limited Insurance Coverage.

Our business has significant risks of product liability claims. We have experienced product liability claims from time to time, which we believe are ordinary for our business. While we

 

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cannot predict or determine the outcome of the actions brought against us, we believe that these actions will not ultimately have a material adverse impact on Lasercope’s financial position, results of operations or future cash flows.

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

Factors Affecting Financial Results and Stock Price.

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

     product mix;
 
     competitive pricing pressures;
 
     material costs;
 
     revenue and expenses related to new products and enhancements to existing products; and delays in customer purchases in anticipation of new products or product enhancements by Laserscope or its competitors.

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

     quarterly fluctuations in our financial results;
 
     changes in analysts’ estimates of future results;
 
     changes in investors’ perceptions of our products;
 
     announcement of new or enhanced products by us or our competitors;
 
     announcements relating to acquisitions and strategic transactions by us or our competitors;
 
     general conditions in the medical equipment industry; and
 
     general conditions in the financial markets.

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

As of July 31, 2002, we had 16,470,449 shares of outstanding common stock. The sale of a substantial number of shares of common stock or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock.

International Business.

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

Legal Proceedings.

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

 

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Interest Rate Risk.

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

Warranty Obligations.

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

No Dividends.

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

“Penny Stock” Rules.

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

Dilution.

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

Other.

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

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk:

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

Interest Rate Risk

Laserscope’s exposure to market rate risk for changes in interest rates relates primarily to our outstanding debt. In 2002 and 2001 we did not use derivative financial instruments. We invest our excess cash in money market funds. Our debt financings consist of convertible debentures and bank loans requiring either fixed or variable rate interest payments. Investments in and borrowings under both fixed-rate and floating-rate interest-earning instruments carry a degree of interest rate risk. On the investment side, fixed-rate securities may have their fair market value adversely affected due to a rise in interest rates, while floating-rate securities may produce less income than expected if interest rates fall. In addition, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. On the debt side, borrowings that require fixed-rate interest payments require greater than current market rate interest payments if interest rates fall, while floating rate borrowings may require greater interest payments if interest rates rise. Additionally, Laserscope’s future interest expense may be greater than expected due to changes in interest rates.

Foreign Currency Risk

International revenues were 28% and 26% of total revenues in the three and six month periods ended June 30, 2002, compared to 29% and 34% during the comparable periods in 2001. International sales are made through international distributors and wholly-owned subsidiaries with payments to the Company typically denominated in the local currencies of the United Kingdom and France, and in U.S. dollars in the rest of the world. Our international business is subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors. We do not engage in hedging transactions for speculative or trading purposes.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities

     Not applicable.

 

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Item 3. Defaults upon Senior Securities

     Not applicable.

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

        (a)    The annual meeting of shareholders was held on June 21, 2002.
 
        (b)    The first matter voted upon at the meeting was the election of directors and the results of that vote were as follows:

                                 
                            Present but
    For   Withheld   Abstained   Not Voting
   
 
 
 
James R. Baumgardt
    15,083,346       183,582       0       0  
Robert C. Pearson
    15,083,346       183,582       0       0  
Rodney Perkins, M.D.
    15,082,946       183,982       0       0  
Robert J. Pressley, Ph.D.
    15,082,946       183,982       0       0  
Eric M. Reuter
    15,083,346       183,582       0       0  

        (c)    The second matter voted upon at the meeting and the results of that vote were as follows:

                                 
                            Present but
    For   Opposed   Abstained   Not Voting
   
 
 
 
To authorize an amendment to the Company’s Articles of Incorporation to increase the number of shares of Common Stock authorized for issuance by 5,000,000 shares to an aggregate of 30,000,000 shares.     14,460,925       715,615       90,388       0  

        (d)    The third matter voted upon at the meeting and the results of that vote were as follows:

                                 
                            Present but
    For   Opposed   Abstained   Not Voting
   
 
 
 
To authorize an amendment to the Company’s 1994 Stock Option Plan to increase the number of shares for issuance thereunder by 200,000 shares to an aggregate of 3,450,000 shares.     14,194,197       985,745       86,986       0  

        (e)    The fourth matter voted upon at the meeting and the results of that vote were as follows:

                                 
                            Present but
    For   Opposed   Abstained   Not Voting
   
 
 
 
To authorize an amendment to the Company’s 1999 Employee Stock Purchase Plan to increase the number of shares for issuance thereunder by 150,000 shares to an aggregate of 650,000.     14,121,426       1,047,654       97,848       0  
 

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        (f)    The fifth matter voted upon at the meeting and the results of that vote were as follows:

                                 
                            Present but
    For   Opposed   Abstained   Not Voting
   
 
 
 
To ratify the appointment of PricewaterhouseCoopers LLP as the independent auditors for the Company for the fiscal year ending December 31, 2002.     15,169,563       32,850       64,515       0  

Item 5. Other Items

     Not applicable.

Item 6. Exhibits and Reports on Form 8-K

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

 
99.1   Certification of Principal Executive Officer pursuant to 18 U.S.C. section 1350
99.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. section 1350

 

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SIGNATURES

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

  LASERSCOPE

Registrant

  /s/   Dennis LaLumandiere
Dennis LaLumandiere
Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: August 13, 2002

 

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EXHIBIT INDEX
     
Exhibit    
Number   Description

 
99.1   Certification of Principal Executive Officer pursuant to 18 U.S.C. section 1350
99.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. section 1350