ITEM 1. BUSINESS
GENERAL OVERVIEW OF BUSINESS
Laserscope designs, manufactures, sells and services, on a worldwide basis, an advanced line of medical laser systems and related energy devices for the medical office, outpatient surgical center and hospital markets. The Company is a pioneer in the development and commercialization of lasers and advanced fiber-optic devices for a wide variety of applications. Our product portfolio consists of more than 350 products, including KTP/532, CO2, Nd:YAG, Er:YAG, and Dye medical laser systems and related energy delivery devices.
Our primary medical markets include dermatology, aesthetic surgery and urology. Our secondary markets include ear, nose and throat surgery, general surgery, gynecology, photodynamic therapy and other surgical specialties.
MISSION
Our corporate mission is to improve the quality and cost effectiveness of health care by providing innovative medical products and services.
HISTORY
Laserscope is a California corporation that was founded in 1982 and shipped its first product in 1984. During its initial years, the Company was funded by several venture capital firms and by E.I. du Pont de Nemours & Company. We received the first in a series of U.S. regulatory clearances in 1987 and completed our initial public offering in December 1989.
MARKET FOCUS
We entered the dermatology/aesthetic surgery market in the mid 1990's with several, highly-versatile laser systems. Our desktop-sized Aura Laser System is among the industry's leading systems for the treatment of red leg and facial veins. Our Aura SL is specifically designed for the treatment of facial veins. Our Lyra and Lyra XP are designed specifically for hair removal and for the treatment of large leg veins. Our Venus is engineered for skin resurfacing (wrinkle removal) applications. As a percentage of total revenues in 2000, the dermatology/aesthetic surgery market accounted for approximately 58% of revenues.
Our products are also used in several other applications. Since the early 1990's, the ear, nose and throat (ENT), gynecology (OB/GYN), general surgery and urology specialties have continued to represent markets into which we sell our broad range of laser systems and the majority of our energy delivery devices and surgical instruments.
As a percentage of total revenues in 2000 these markets accounted for approximately 42% of our total revenues.
PRODUCTS
Laser Platforms:
Our Lyra and Lyra XP laser systems are compact Nd:YAG, single wavelength lasers used primarily for hair removal and leg vein treatments in doctors' offices. These lasers are approved by the FDA for hair removal on all skin color types and are also the only lasers approved by the FDA for treatment of Pseudo folliculitis barbae (PFB), commonly referred to as "shaving bumps," "razor bumps" or "ingrown hairs." PFB is a condition that has an incidence estimated from 20 - 60 percent in African American men and is of particular concern in the military services.
Our Aura laser system is a compact, highly portable, KTP/532 single wavelength laser designed for office use. Its integrated StarPulse feature is designed for the removal of benign vascular and pigmented surface lesions, including leg and facial telangiectasia (spider-like veins). It can also be used as a continuous wave
laser for surgical applications that include endoscopic blepharoplasty, rhinoplasty, facelifts, tonsillectomy, wart removal and snoring cessation.
Our Aura SL treats primarily facial spider veins, including superficial pigmented lesions such as age spots. Its special design provides greater patient comfort, quicker healing and a lower price.
Our Orion Laser System is a mid-size, more powerful system for outpatient surgical centers and hospitals. It features dual KTP/532 and Nd:YAG wavelengths as well as StarPulse. The range of applications includes ENT, OB/GYN, urology, general surgery, neurosurgery, orthopedics, spine surgery, aesthetic surgery and dermatology. Both the Aura and Orion systems are available with SmartScan, a microprocessor-controlled beam-scanning device.
Our Venus Erbium:YAG Laser System is among the most compact and powerful, commercially available Erbium lasers for skin resurfacing and other medical laser applications. Venus is one-half the size and weight of most other Erbium systems on the market.
Our 800 Series KTP/YAG Surgical Laser System is designed for use in hospitals. It is a high-power, dual-wavelength system with applications in urology, general surgery, and other surgical specialties. The KTP/532 beam surgically cuts, vaporizes and coagulates tissue with minimal disruption to adjacent areas. Cutting and vaporization are achieved hemostatically, making the system effective for endoscopic as well as open surgical procedures. Complementing the KTP/532 beam is the Nd:YAG infrared beam which provides deep coagulation and powerful ablative capabilities. The 800 Series System, which provides up to 40 watts of KTP/532 energy and 100 watts of Nd:YAG energy, can also serve as a base laser system for Laserscope's PDT laser dye module, enabling photodynamic therapy applications.
Laserscope's PDT systems include the Model 630 and 630XP PDT Dye Modules. The Model 630 Dye Module provides 3.2 watts of power while the Model 630 XP Dye Module provides 7.0 watts of power. Both systems operate at 630 nm for photoactivation of Photofrin, and are portable and may be tunable to other wavelengths.
Laser Devices, Instruments and Disposables:
We offer a broad line of surgical instrumentation, disposables, kits and other accessories for use with our surgical laser systems. These products include disposable optical fibers, side-firing devices, individual custom hand pieces for specific surgical applications, scanning devices, micromanipulators for microscopic surgery and various other devices, procedure-specific kits and accessories.
Our disposable optical fibers are available in different lengths and diameters for different surgical applications and preferences. The hand pieces, which are used to hold and aim the optical fiber, give the doctor the feel of a traditional surgical tool. When used in contact with body tissue, they provide tactile feedback similar to conventional surgery.
SALES AND MARKETING
We concentrate much of our marketing efforts for our laser products on high volume surgical procedures such as the treatment of facial vascular lesions, the treatment of leg veins and hair removal. We believe that increased market awareness of both the benefits of laser procedures and the drawbacks of conventional procedures is one of the most important factors in expanding the market for our laser and laser-based products. As a result, we have designed our marketing and sales strategy around a strong educational effort to promote awareness of the versatility, safety, and cost-effectiveness of our surgical laser systems.
We promote our products through trade shows and exhibits covering most of the surgical specialties, physician workshops and seminars, medical journal advertising and direct mailings. We support and participate in a substantial number of workshops and seminars. For laser products, the workshops usually include a demonstration of our laser systems and provide surgeons with hands-on experience using our products.
DISTRIBUTION
In the United States, we distribute our products to hospitals, outpatient surgical centers and physician offices through our own direct sales force and through the McKessonHBOC Medical Group, (McKesson). In December 2000, we signed a distribution agreement that grants to McKesson the exclusive distribution rights for our core aesthetic laser products in the United States. McKesson Medical Group's Primary Care Division has a sales force of more than 500 representatives throughout the United States who will be supported by our own direct sales force.
In the United Kingdom and France, we distribute our products to hospitals, outpatient surgical centers and physician offices through our own direct sales force. Elsewhere, we sell our products through regional distributor networks throughout Europe, the Middle East, Latin America, Asia and the Pacific Rim. Laserscope is both ISO 9001 and CE certified.
INTERNATIONAL BUSINESS
Revenues from Europe, Asia and the Pacific Rim continue to account for a large percentage of total sales. Approximately 38% of Laserscope's 2000 revenues were derived from its international operations including export sales, compared to 45% in 1999 and 42% in 1998. We expect that international sales will continue to represent a significant percentage of net sales in 2001.
On February 18, 2000, Laserscope signed an agreement with Wavelight Laser Technologie AG to sell its interest in NWL. The sale had an effective date of January 1, 2000. As part of the transaction, NWL will continue to distribute our products in all countries covered by NWL's current distribution channels.
INSTALLED BASE OF LASERS
We have more than 6,000 laser systems installed worldwide. The installed base provides a market for service as well as the sale of devices, instruments and disposables.
SERVICE AND SUPPORT
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 contract if specified system uptime levels are not maintained.
RESEARCH AND DEVELOPMENT
We operate in an industry that is subject to rapid technological changes. Our ability to remain competitive in our industry depends on, among other things, our ability to anticipate and react to such technological changes. Therefore, we intend to continue to invest significant amounts in research and development.
Our current research and development programs are directed toward the development of new laser systems and delivery devices. For example, we are currently developing new laser systems for the emerging aesthetic market and the urology market.
MANUFACTURING
We manufacture the laser resonators, system chassis and certain accessories used in our laser systems in the United States. Our laser manufacturing operations concentrate on the assembly and test of components and subassemblies manufactured to our designs and specifications by outside vendors. We believe that we have sufficient manufacturing capacity in our present facilities to support current operations at least through the end of 2001.
In addition to our laser manufacturing capability, we have a production facility in the United States for certain of our disposable products and re-usable hand pieces.
EMPLOYEES
At December 31, 2000, Laserscope had 159 employees. We believe that we maintain competitive compensation, benefit, equity participation and work environment policies to assist in attracting and retaining qualified personnel. We also believe that the success of our business will depend, in part, on our ability to attract and retain such personnel, who are in great demand.
COMPETITION
We compete in the non-ophthalmic surgical segment of the worldwide medical laser market. In this market, lasers are used in hospital operating rooms, outpatient surgery centers and individual physician offices for a wide variety of procedures. This market is highly competitive. Our competitors are numerous and include some of the world's largest organizations as well as smaller, highly-specialized firms. Our ability to compete effectively depends on such factors as:
- market acceptance of our products;
- product performance;
- price;
- customer support;
- the success and timing of new product development;
- continued development of successful distribution channels.
Some of our current and prospective competitors have or may have significantly greater financial, technical, research and development, manufacturing and marketing resources than we have. In early 2001, two of our largest competitors, ESC Medical Systems ("ESC") and Coherent Medical announced that ESC intends to acquire Coherent Medical. To compete effectively, we will need to continue to expand our product offerings, periodically enhance our existing products and continue to enhance our distribution.
PATENTS AND LICENSES
While we believe the patents that we have and for which we have applied are of value, other factors are of greater competitive importance. We hold 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 our laser systems. We have also licensed certain technologies from others.
DISPOSITIONS
During November 1998, Laserscope and Heraeus Medical, Inc. (a division of Heraeus Med GmbH), signed a definitive agreement for the sale of certain assets and liabilities related to the our AMS product line. Laserscope originally purchased the product line in the acquisition of Heraeus Surgical, Inc. in 1996. We received $905,000 in exchange for certain assets and liabilities relating to the product line.
On February 18, 2000, the Company signed an agreement with Wavelight Laser Technologie AG to sell its interest in NWL. The sale had an effective date of January 1, 2000. As part of the transaction, NWL will continue to distribute Laserscope's products in all countries covered by NWL's current distribution channels.
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, 2000:
Robert J. Pressley, Ph.D. is a co-founder of the Company and has been a director since its founding. Dr. Pressley was appointed Chairman of the Board of Directors in June 1998. Dr. Pressley co-founded Candescent Technologies Corporation (formerly named Silicon Video Corporation), 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. Dr. Pressley has been a self-employed technology consultant since January 1995.
Eric M. Reuter joined Laserscope as Vice President, Research and Development in September 1996 and was appointed President and Chief Executive Officer of the Company in June 1999. Prior to joining Laserscope, from February 1994 to August 1996, Mr. Reuter was employed at the Stanford Linear Accelerator Center at Stanford University (SLAC) as the Project Engineer for the B-Factory High Energy Ring, an electron storage ring used for high energy physics research. From February 1991 to January 1994, he served as a Senior Staff Engineer and Program Manager in digital imaging at Siemens Medical Systems -- Oncology Care Systems, a medical device company.
Robert L. Mathews joined Laserscope as Executive Vice President in August 1999. Before joining Laserscope, from December 1998 to August 1999, he was Executive Vice President & General Manager of the MasterPlan Division of COHR, Inc., a management consulting and independent service organization. From April 1997 to December 1998, he was Vice President and General Manager of Diasonics Vingmed Ultrasound, Inc., a medical device manufacturer. From April 1996 to April 1997, he was Senior Director, Corporate Accounts at Spacelabs Medical, Inc., a medical device manufacturer. From May 1995 to April 1996 Mr. Mathews was a self employed business consultant and from February 1994 to May 1995 he was President and Chief Executive Officer of Resonex Holdings Ltd., a medical device manufacturer.
Kevin Candio has served as Laserscope's Senior Vice President, Global Sales since February 2000. Prior to this position, he was Vice President, Sales and Marketing from June 1999 to February 2000; Vice President, Sales and Service from November 1997 to June 1999 and was Eastern Region Sales Manager for Laserscope from November 1988 to November 1997. Before joining Laserscope, he held various sales and sales management positions at Coopervision Surgical Systems, a medical device company, from August 1983 to November 1988.
Van Frazier joined Laserscope as Director of Quality Assurance in January 1999 and was appointed Vice President, Quality and Regulatory Affairs in June 1999. Before joining Laserscope, from October 1997 to January 1999, he was Director of Quality Assurance and Regulatory Affairs of St. Jude Medical, a medical device manufacturer. From January 1996 to October 1997, Mr. Frazier held various regulatory management positions at Telectronics Pacing Systems, a medical device manufacturer and from November 1991 to January 1996, he was Regulatory Compliance Manager for Physio-Control, a medical device manufacturer.
Dennis LaLumandiere joined Laserscope in September 1989 as Corporate Controller. Mr. LaLumandiere has served as Vice President, Finance since February 1995, Chief Financial Officer since February 1996 and Assistant Secretary since November 1996. Prior to joining Laserscope, from 1983 to 1989, Mr. LaLumandiere
held various financial and operations management positions at Raychem Corporation, a multinational materials science company.
ITEM 2.
ITEM 2. PROPERTIES
Laserscope leases two buildings aggregating approximately 35,000 square feet in San Jose, California under leases expiring in September 2005. We have options to extend the leases at the then-current market rates. These facilities house our research and development and manufacturing operations as well as our principal sales, marketing, service and administrative offices. We believe that these facilities are suitable for our current operations and are adequate to support those operations through at least the end of 2001. We also lease offices in the United Kingdom and France where our local sales and marketing staffs are based.
ITEM 3.
ITEM 3. 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 ultimately have a material adverse effect on Laserscope's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol LSCP. As of March 16, 2001, Laserscope had approximately 700 shareholders of record.
The following table shows Laserscope's high and low selling prices for the years ended December 31, 2000 and December 31, 1999 as reported by the Nasdaq National Market System:
We have not paid dividends on our common stock and have no present plans to do so. Provisions of our bank line of credit prohibit the payment of dividends without the bank's consent.
To address our capital needs in 2000, we completed a private placement of our Common Stock pursuant to Regulation D of the Securities Act of 1933 to accredited investors providing gross proceeds of approximately $1.9 million to Laserscope. The transaction consisted of two closings. The first was approximately $1.1 million in gross proceeds in exchange for 1,505,000 shares of Laserscope common stock, which closed on December 30, 1999. The second closing was for approximately $0.8 million in exchange for 995,000 shares of Laserscope common stock which closed on January 14, 2000. The shares had no par value and were issued at a price of $0.80 per share. We also issued warrants to purchase 218,875 shares of common stock on the date of the second closing. The warrants are convertible into shares of Laserscope's common stock at $1.25 per share and expire in 2005.
On February 11, 2000, we completed a private placement of subordinate convertible debentures pursuant to Regulation D of the Securities Act of 1933 to affiliates of Renaissance Capital Group, Inc. with gross proceeds to Laserscope of $3.0 million. The debentures mature seven years from issuance and bear an interest rate of 8.00%. The debentures are convertible into Laserscope common stock with an initial conversion price, which is subject to adjustment, of $1.25. The private placement also included warrants convertible into 240,000 shares of Laserscope common stock at $1.50 per share and expire in 2005.
The proceeds from both of these financings were used for general corporate working capital.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
CONSOLIDATED QUARTERLY STATEMENT OF OPERATIONS DATA (UNAUDITED):
- --------------- (1) The Company sold its ownership interest in NWL Laser-Technologie GmbH effective January 1, 2000.
(2) The Company recorded a $750,000 obsolete inventory provision in the quarter ended June 30, 1999.
(3) The Company sold assets & liabilities related to its AMS product line on November 9, 1998 at a loss of $1.1 million.
(4) The Company recorded a $2.1 million obsolete inventory provision in the quarter ended December 31, 1998.
(5) The Company closed the acquisition of a 52% equity ownership of NWL Laser-Technologie GmbH on June 13, 1997.
(6) The Company recorded a $3.0 million obsolete inventory provision in the quarter ended December 31, 1997.
(7) The Company closed the acquisition of Heraeus Surgical, Inc. on August 30, 1996.
(8) The net income (loss) per share amounts prior to December 1997 have been restated to comply with Statement of Financial Accounting Standard Number 128, Earnings Per Share. (See Note 1 in Notes to the Consolidated Financial Statements).
ITEM 7.
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 Laserscope's Consolidated Statements of Operations, expressed as a percentage of net revenues:
We sell our products to hospitals, outpatient surgery centers, pay-per-use providers and individual physicians in the United States, Europe, the Middle East, Latin America and the Pacific Rim. In the United States we sell through our direct sales force. We also generate export sales through our wholly and majority owned subsidiaries in the United Kingdom and France and by independent distributors in the rest of the world.
We operate in a technologically advanced, dynamic and highly competitive environment. Our future operating results are subject to quarterly variations based on a variety of factors, many of which are beyond our control. While we attempt to identify and respond to these conditions in a timely manner, these conditions represent significant risks to our performance.
International sales accounted for 38%, 45% and 42% of our net revenues for 2000, 1999 and 1998, respectively. We believe that international sales will continue to account for a significant portion of our net revenues in the foreseeable future. A large portion of our international sales occur through our foreign subsidiaries and the remainder result from exports to foreign distributors. Our international sales and operations are subject to the risks of conducting business internationally. These risks could harm our financial condition and results of operations.
Through December 31, 2000, sales outside of the United States have been denominated in the local currencies of the United Kingdom and France and in U.S. Dollars for the rest of the world. Prior to 2000, sales in Germany were denominated in German marks. During 2000, 1999 and 1998 fluctuations in foreign currencies did not materially affect the results of operations reported by Laserscope. However, there is risk exposure to us in a number of areas. Although our revenues denominated in U.S. Dollars represented over 85% of total revenues in 2000, 69% in 1999 and 71% in 1998, market risk exists in foreign countries where we sell in U.S. Dollars, and where a major strengthening of the U.S. Dollar could have a material negative impact on our business. In addition, the introduction of the euro as a currency in several European countries may negatively affect our ability to sell our products in exchange for U.S. Dollars in those countries. In January 1999, our subsidiary in France began to denominate its sales and report its financial statements in the euro. Through 2000, we had not sustained any material adverse impact from the introduction of the euro. However, any major strengthening of the U.S. Dollar against the Euro or the British Pound Sterling could have a material adverse impact on our business.
Please refer to the "Risk Factors" section of this Annual Report for further discussion on these and other risks associated with our business.
The following table contains selected income statement information for Laserscope for the years ended December 31 2000, 1999 and 1998:
- --------------- (a) expressed as a percentage of total net revenues except for gross margins which are expressed as a percentage of either product or service revenues as designated.
(b) we sold our NWL subsidiary effective January 1, 2000.
(c) we sold our AMS division effective November 1998.
2000 RESULTS COMPARED TO 1999
During 2000, total revenues decreased approximately $5.6 million, or 14%, from 1999. The majority of the decrease resulted from the sale of our NWL subsidiary effective January 1, 2000. In 1999, sales of NWL products and services contributed $5.0 million in revenue while we had no sales of NWL products and services in 2000.
During 2000, revenues from the sales of non-NWL laser equipment decreased 6% to $18.4 million, or 52% of total net revenues, compared to $19.7 million, or 48%, of total net revenues in 1999. Decreases in revenues from sales of laser equipment resulted from higher unit shipments at lower average selling prices due to an increased number of aesthetic lasers sold. We believe that our revenue mix trends in all geographic markets will continue to shift toward lower-priced office-based aesthetic lasers.
Net revenues from shipments of non-NWL disposable supplies and instrumentation were 2% higher in 2000 than 1999, and were approximately $11.2 million, or 32%, of total revenues in 2000, compared to approximately $11.0 million, or 27% of total revenues in 1999. The increase is principally due to higher sales of scanning equipment and hand pieces for use with our aesthetic lasers. This increase was offset partially by reduced shipments of disposable fiber-optic devices for hospital surgical procedures in the United States and the Pacific Rim. During the past several years, our sales have trended towards lower-priced office lasers for aesthetic procedures and away from lasers to be used in the hospital for non-aesthetic procedures. This has resulted in lower sales of disposable supplies since office lasers used in aesthetic procedures, although carrying one-time sales of instrumentation, generally do not create a stream of sales of disposable supplies. We believe that our future sales of instrumentation and disposable supplies depend on our ability to develop and promote surgical procedures that use these products and to increase our installed base of systems.
Non-NWL service revenues during 2000 were 9% higher than 1999. These revenues were $5.7 million, or 16%, of total net revenues in 2000, compared to $5.2 million, or 13%, of total net revenues in 1999. The increase is primarily due to higher domestic service contract revenues. We believe that future revenues will depend on increases to the installed base of lasers as well as the acceptance of service contracts by our customers.
Product gross margin as a percentage of net revenues was 50% in 2000 compared to 45% in 1999. The increase reflects a combination of higher margins on aesthetic laser product sales, the elimination of lower margin NWL product sales in 2000 and charges recorded to provide for inventory related to discontinued product lines totaling $0.7 million in 1999. We expect that product gross margin, as a percentage of net revenues in 2001, will be at levels similar to 2000. However, we expect that these amounts may vary from quarter to quarter during 2001 and will depend on product demand and distribution mix.
Gross margin from service activities as a percentage of service revenues was 36% in 2000 compared to 26% in 1999. The increase reflects continued overhead reduction. We expect that gross margin, as a percentage of net revenues from service activities in 2001, will be similar to 2000 levels.
Research and development expenses result from activities related to the development of new laser, instrumentation and disposable products and the enhancement our existing products. In 2000, amounts spent on research and development (excluding NWL's research and development) decreased 20% from amounts spent in 1999. The decline was due to our continued narrowing of focus in product development activity with fewer products in development. We expect that amounts spent in research and development during 2001 will, as a percentage of net revenues, be approximately equal to that which was spent in 2000.
Selling, general and administrative expenses decreased 34% in 2000 compared to 1999. The decrease in spending primarily results from the sale of NWL and continuation of expense reduction measures implemented in July 1999. We expect selling, general and administrative expenses to remain at similar levels during 2001 as we continue to invest in marketing programs and educational support.
In 2000 we recorded no income tax provision due to the availability of net operating loss carry forwards. In 1999 we recorded $13,000 in income tax provisions primarily attributable to the profits of NWL.
Minority interest in 1999 resulted from the minority ownership participation in NWL's net results.
1999 RESULTS COMPARED TO 1998
During 1999, revenues decreased approximately $11.7 million, or 22%, from 1998. We experienced declines in revenues from the sales of lasers, disposables and instrumentation, and services. Sales of these products were approximately $23.3 million, $11.6 million and $6.1 million, respectively in 1999, compared to $28.8 million, $12.1 million and $6.6 million, respectively, in 1998. In addition, due to the sale of the assets and liabilities of Ascent Medical Systems in November 1998, we had no sales of AMS products in 1999 while sales of these products were $5.2 million in 1998. We discontinued the sales of these products in November 1998 and sold the assets and liabilities related to the product line to Heraeus Medical, Inc. at that time.
During 1999, revenues from the sales of laser equipment decreased 19% and were $23.3 million, or 57% of total net revenues, compared to $28.8 million, or 55%, of total net revenues in 1998. Decreases in revenues from sales of laser equipment resulted from lower unit sales with lower unit prices in most geographic regions. Lower unit volume contributed to approximately 68% of the decline in revenue while lower unit prices contributed to approximately 32% of the decline.
Net revenues from shipments of disposable supplies and instrumentation were 5% lower in 1999 than 1998, and were approximately $11.6 million, or 28%, of total revenues in 1999, compared to approximately $12.1 million, or 23%, in 1998. The decrease is principally attributable to reduced shipments of disposable fiber-optic devices for hospital surgical procedures in the United States and the Pacific Rim.
Net service revenues during 1999 were 6% lower than 1998. These revenues were $6.1 million, or 15%, of total net revenues in 1999, compared to $6.6 million, or 12%, of total net revenues in 1998. The decrease was
principally attributable to lower domestic revenues resulting from reduced service contract revenues from hospitals
Product gross margin as a percentage of net revenues was 45% in each of 1999 and 1998. These percentages reflect charges recorded to provide for inventory related to discontinued product lines totaling approximately $0.7 million in 1999 and $2.1 million in 1998. These charges reduced our product gross margin as a percentage of net revenues by 2 percentage points in 1999 and 5 percentage points in 1998. The decrease in gross margin (without respect to the inventory provisions) is due to manufacturing inefficiencies resulting from lower production volumes, particularly during the first half of 1999.
Gross margin from service activities as a percentage of service revenues was 26% in 1999 compared to 6% in 1998. The increase reflects a reduction to the fixed cost structure in response to lower revenues.
In 1999, amounts spent on research and development decreased 14% from amounts spent in 1998. The decline was due to a narrowing of focus in product development activity with fewer products in development.
Selling, general and administrative expenses decreased 10% in 1999, but increased as a percentage of net revenues due to decreased revenues. The decrease in spending primarily results from expense reduction measures implemented in July 1999.
During 1998, we recognized an impairment loss on certain intangible assets acquired in the acquisition of Heraeus Surgical, Inc, ("HSI"). The intangible assets related to certain laser product lines that we discontinued as of December 31, 1998 or early in 1999. We determined this action in late 1998 as part of a redirection in emphasis towards higher volume product lines. We expected that the undiscounted future cash flows for these product lines would be significantly less than the carrying value of the intangible assets relating to these product lines. Accordingly, we recorded an impairment charge of $1.9 million in 1998 to adjust the assets to their estimated fair value.
During 1998, we concluded the sale of certain assets and liabilities related to the AMS product line to Heraeus Medical, Inc. (a division of Heraeus Med GmbH). We purchased the product line in the acquisition of HSI and revenues from sales of products in this line decreased in 1997 and 1998. Due to these declines and a desire to redirect our resources towards laser products, we sold the assets and liabilities related to the product line in November 1998. We received $0.9 million, in exchange for certain assets and liabilities relating to the product line. The result of the transaction was a loss of $1.1 million.
In 1999 and 1998, we recorded $13,000 and $184,000, respectively, in income tax provisions primarily attributable to the profits of NWL.
Minority interest in 1999 and 1998 resulted from the minority ownership participation in NWL's net results.
FINANCIAL REVIEW -- LIQUIDITY AND CAPITAL RESOURCES
The following table contains selected balance sheet information at December 31, 2000 and 1999 (in thousands):
The net increase in cash and cash equivalents from 1999 was due primarily to the receipt of the net proceeds from the sale of NWL and the issuance of long-term debt and equity securities, offset by the reduction in short-term bank loans.
Cash used by operating activities totaled $1.6 million. This was the combined result of the following uses: Increases in accounts receivable -- $2.1 million; inventory -- $0.7 million; other current assets -- $0.1 million; and other assets -- $0.1 million. Decreases in accounts payable -- $0.5 million; other accrued liabili-
ties -- $0.3 million; and accrued compensation -- $0.2 million. These uses were offset partially by the following: depreciation -- $1.6 million; amortization -- $0.1 million; reductions in deferred revenue -- $0.3 million; reductions in warranty -- $0.2 million and net income -- $0.2 million.
Cash provided by investing activities totaled $2.4 million and consisted of net proceeds from the sale of NWL of $3.1 million, partially offset by capital expenditures of $0.4 million.
Cash provided by financing activities totaled $0.4 million and consisted of net proceeds from the sale of convertible debentures of $2.6 million; proceeds from the sale of common stock under stock plans of $1.0 million; and net proceeds from the private placement of common stock of $0.7 million. These sources were offset by reductions in short-term bank borrowings of $3.6 million; and payments on obligations under capital leases of $0.3 million.
Laserscope has in place an asset based line of credit which provides up to $6.0 million and expires in September 2001. Credit is extended based on eligible accounts receivable and inventory. At December 31, 2000, we had approximately $2.1 million in borrowing base available against the $0.7 million outstanding and the $1.1 million in letter of credit reserve requirements. Laserscope's assets secure the credit line which bears an interest rate equivalent to the bank's prime rate plus 2.25% per annum (11.75% in December 2000). Any borrowings against the line of credit are paid down as we collect on accounts receivable. Provisions of the bank loan agreement prohibit the payment of dividends on non-preferred stock, or the redemption, retirement, repurchase or other acquisition of Laserscope stock. The agreement further requires us to maintain a minimum tangible net worth. As of December 31, 2000, we complied with all covenants.
Capital expenditures totaled $0.4 million and $0.6 million in 2000 and 1999, respectively. These expenditures were primarily for computer systems and leasehold improvements. We expect capital expenditures in 2001 to be at levels similar to 2000.
To address our capital needs, on January 14, 2000 we completed a private placement of our common stock providing net proceeds of approximately $1.8 million to accredited investors, of which $1.0 million was received in 1999. We issued 2.5 million shares of our no par value Common Stock at a price of $0.80 per share. We also issued warrants to purchase 218,875 shares of our common stock.
On February 11, 2000, we completed a private placement of subordinate convertible debentures to affiliates of Renaissance Capital Group, Inc., with net proceeds to us of approximately $2.9 million. The debentures mature seven years from issuance and bear an annual interest rate of 8.00%. The debentures are convertible into Laserscope Common Stock with an initial conversion price, which is subject to adjustment, of $1.25. The private placement also included warrants convertible into 240,000 shares of our common stock.
We anticipate that future changes in cash and working capital will be dependent on a number of factors including:
Our ability to manage effectively non-cash assets such as 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.
We have historically financed acquisitions using our existing cash resources. While we believe our existing cash resources, including our bank line of credit will be sufficient to fund our operating needs for the next twelve months, additional financing will be required for our currently envisioned long term needs.
There can be no assurance that any additional financing will be available on terms acceptable to us, or at all. In addition, future equity financings could result in dilution to our shareholders, and future debt financings could result in certain financial and operational restrictions.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" or SAB 101. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. In recent actions, the SEC further delayed the required implementation date; which for Laserscope, was the fourth quarter of 2000, retroactive to the beginning of the fiscal year. The implementation of SAB 101 did not have a material effect on our financial position, results of operations or cash flows for the year ending December 31, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes methods for accounting for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. We will be required to implement SFAS 133, as amended, for the quarter beginning January 1, 2001. Because we do not currently hold any derivative instruments and do not engage in hedging activities, the adoption of SFAS 133 will not have a material impact on our financial position, results of operations or cash flows.
In March 2000, FASB Interpretation, No. 44, "Accounting for Certain Transactions Involving Stock Compensation -- An Interpretation of APB Opinion No. 25," (FIN 44) was issued. FIN 44 clarifies the application of APB No. 25 for certain stock-based compensation issues. FIN 44 clarifies the definition of employee for purposes of applying ABP No. 25, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequences of various modifications to the terms of a previously fixed option or award, and the accounting for an exchange of share compensation awards in a business combination, among other matters. FIN 44 was effective July 1, 2000, but certain conclusions in this interpretation cover specific events that occurred after either December 15, 1998 or January 12, 2000. The implementation of FIN 44 did not have a significant impact on our financial position or results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including changes in interest rates affecting the return on investments, outstanding debt balances and foreign currency fluctuations. In the normal course of business, we employ established policies and procedures to manage 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 relate primarily to our investment and debt portfolios. We have not used derivative financial instruments in our investment or debt portfolios. We invest excess cash in money market funds and commercial paper. Our debt financing consists 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 securities analyst expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. On the debt side, borrowings that require fixed-rate interest payments require greater than current market rate interest payments if interest rates fall, while floating rate borrowings may require greater interest payments if interest rates rise. Additionally, our future interest expense may be greater than expected due to changes in interest rates.
The following table presents principal amounts and related weighted average interest rates by year of maturity for our debt obligations as of December 31, 2000 and 1999.
FOREIGN CURRENCY RISK
International revenues were 38% of total revenues in the year ended December 31, 2000, compared to 45% of total revenues during the comparable period in 1999. Our international sales are made through international distributors and wholly- and majority-owned subsidiaries with payments to us typically denominated in the local currencies of the United Kingdom and France, and in U.S. dollars in the rest of the world. We intend to continue our operations outside of the United States and potentially to enter additional international markets. These activities, require significant management attention and financial resources and further subject us to the risks of operating internationally. These risks include, but are not limited to:
- changes in regulatory requirements;
- delays resulting from difficulty in obtaining export licenses for certain technology;
- customs, tariffs and other barriers and restrictions;
- the burdens of complying with a variety of foreign laws.
We are also subject to general geopolitical risks in connection with our international operations, such as:
- differing economic conditions;
- changes in political climate;
- differing tax structures;
- changes in diplomatic and trade relationships.
In addition, fluctuations in currency exchange rates may negatively affect our ability to compete in terms of price against products denominated in local currencies.
Accordingly, our future results could be materially adversely affected by changes in these regulatory, geopolitical and other factors. The effect of foreign exchange fluctuations on Laserscope's financial results in the years ended 2000 and 1999 were not material and we do not engage in hedging transactions for speculative or trading purposes.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of Laserscope at December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, the report of independent auditors thereon and Supplementary Data are included as separate sections in this Annual Report on Form 10-K in Item 6 "Selected Financial Data" and Item 14, "Exhibits, Financial Statement Schedules and reports on Form 8-K."
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because the Company will file a definitive proxy statement prior to April 30, 2001 pursuant to Regulation 14A (the "Proxy Statement") for its Annual Meeting of Shareholders to be held June 22, 2001, and the information included in the Proxy Statement is incorporated herein by reference.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and executive officers required by this Item 10 is incorporated by reference from the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders under the headings "Election of Directors" and "Management," respectively.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders under the heading "Executive Compensation."
ITEM 12.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference from the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders under the heading "Election of Directors" and "Beneficial Ownership of Securities."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference from the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders under the heading "Certain Transactions."
PART IV
ITEM 14.
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
(2) The following financial statement schedule for the years ended December 31, 2000, 1999 and 1998 is submitted herewith:
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):
REPORTS ON FORM 8-K:
On February 10, 2000 the Company filed a Form 8-K referring to a press release it had issued on January 18, 2000 announcing that it had completed a private placement of common stock providing net proceeds to the Company of approximately $1.8 million. Taglich Brothers Inc. managed the placement of common stock to accredited investors.
On March 1, 2000 the Company filed a Form 8-K referring to a press release it had issued on February 22, 2000 announcing that it had completed a private placement of subordinate convertible debentures providing net proceeds to the Company of approximately $2.9 million. Taglich Brothers Inc. managed the placement to affiliates of Renaissance Capital Group Inc. - ---------------
(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) 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.
(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, 1994.
(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/A for the year ended December 31, 1995.
(6) Incorporated by reference to Exhibit 1 of the Registrant's Registration Statement on Form 8-A filed November 15, 1991.
(7) 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, 1996.
(8) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits", the Company's Form 8-A/A filed September 4, 1996.
(9) Incorporated by reference to Exhibit A to the Definitive Proxy Statement for the Special Meeting of Shareholders held August 29, 1996.
(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/A for the year ended December 31, 1996.
(11) 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/A for the year ended December 31, 1997.
(12) 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, 1998.
(13) 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/A for the year ended December 31, 1998.
(14) 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 March 31, 1999.
(15) 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, 1999.
(16) 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 March 31, 2000.
(17) 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, 2000.
(18) Filed herewith.
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 28, 2001 By: /s/ ERIC M. REUTER ------------------------------------ Eric M. Reuter President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Eric M. Reuter and Dennis LaLumandiere as 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.
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, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. 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.
/s/ Ernst & Young LLP
San Jose, California February 16, 2001
LASERSCOPE
CONSOLIDATED BALANCE SHEETS
ASSETS
See notes to consolidated financial statements
LASERSCOPE
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements
LASERSCOPE
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements
LASERSCOPE
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
See notes to consolidated financial statements
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company primarily 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 thirty-five 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 considers cash equivalents to be short-term financial instruments that are readily convertible to cash, subject to no more than insignificant interest rate risk and that have original maturities of three months or less.
At December 31, 2000 and 1999 the Company had no investments in debt or equity securities. At December 31, 1999, the Company had no cash equivalents.
Revenue recognition and product warranty
The company recognizes revenue when persuasive evidence of an arrangement is in place, the price is fixed or determinable, delivery is completed, and collectibility is reasonably assured. Revenue related to the sale of systems, instrumentation and disposables is recognized upon delivery. The company provides currently for the estimated cost to repair or replace products under warranty provisions in effect at the time of sale. Service revenue is recognized as the services are provided or for service contracts pro rata over the period of the applicable service 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 or useful life if shorter.
Inventories
Inventories are stated at the lower of cost (computed on a first-in, first-out basis) or market.
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Income (loss) per share
Basic net income/(loss) per share is calculated using the weighted average of common stock outstanding. Diluted net income/(loss) per share is calculated using the weighted average of common stock outstanding plus dilutive common equivalent shares from stock options.
The following table sets forth the computation of basic and diluted net income (loss) per common share.
Options to purchase 2,819,606, 3,443,978, and 2,615,317 shares of common stock were outstanding at December 31, 2000, 1999, and 1998, respectively. In addition, warrants to purchase 402,000 shares of common stock were outstanding at December 31, 2000. During 1999 and 1998, the options were not included in the computation of diluted net loss per share because the Company reported losses for the periods that ended at these dates and, therefore, the effect would be antidilutive.
At December 31, 2000 the Company had outstanding debentures convertible into 2.4 million shares of common stock. The interest on these debentures and the shares has been excluded from the calculation of diluted net income per share in 2000 because the effect of including them would be antidilutive.
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, a component of the comprehensive income (loss), and are included in shareholders' equity. Revenues and expenses are translated at average exchange rates in effect during the period.
Impairment of assets
The Company will recognize impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. During the year ended December 31, 1998, the Company recognized such a loss related to the write down of certain intangible assets acquired in the acquisition of Heraeus Surgical, Inc. (See Note 3). There were no such losses recognized during the years ended December 31, 2000 and 1999.
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible assets related to acquisitions
Intangible assets related to the acquisitions of Heraeus Surgical, Inc. and NWL Laser-Technologie GmbH included developed technology, distribution channels and established workforces. These assets are amortized on a straight-line basis over their estimated useful lives from five to seven years. During the year ended December 31, 1998, the Company recorded an impairment loss to the intangible assets related to the acquisition of Heraeus Surgical, Inc. In 2000, NWL Laser-Technologie GmbH was sold and intangible assets associated with Heraeus Surgical, Inc. had been fully amortized. (See Note 3) As of December 31, 2000 the Company had no intangible assets.
Advertising expense
Advertising is expensed as incurred. Advertising costs were not significant in 2000, 1999, and 1998.
Comprehensive income
The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) during the year ended December 31, 1998. SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements and is effective for fiscal years beginning after December 15, 1997. For the Company, comprehensive income is comprised of net income (loss) and foreign currency translation adjustments.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" or SAB 101. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. In recent actions, the SEC further delayed the required implementation date which, for Laserscope, was the fourth quarter of 2000, retroactive to the beginning of the fiscal year. The implementation of SAB 101 did not have a material impact on Laserscope's financial position, results of operations or cash flows for the year ending December 31, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes methods for accounting for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. The Company will be required to implement SFAS 133, as amended, for the quarter beginning January 1, 2001. Because the Company does do not currently hold any derivative instruments and does not engage in hedging activities, the adoption of SFAS 133 will not have a material impact on Laserscope's financial position, results of operations or cash flows.
In March 2000, FASB Interpretation, No. 44, "Accounting for Certain Transactions Involving Stock Compensation -- An Interpretation of APB Opinion No. 25," (FIN 44) was issued. FIN 44 clarifies the application of APB No. 25 for certain stock-based compensation issues. FIN 44 clarifies the definition of employee for purposes of applying ABP No. 25, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequences of various modifications to the terms of a previously fixed option or award, and the accounting for an exchange of share compensation awards in a business combination, among other matters. FIN 44 was effective July 1, 2000, but certain conclusions in this interpretation cover specific events that occurred after either December 15, 1998 or January 12, 2000. The implementation of FIN 44 did not have a significant impact on Laserscope's financial position or results of operations.
2. SALE AND IMPAIRMENT OF ASSETS AND LIABILITIES ACQUIRED IN THE ACQUISITION OF HERAEUS SURGICAL, INC.
During November 1998, the Company and Heraeus Medical, Inc. (a division of Heraeus Med GmbH), signed a definitive agreement for the sale of certain assets and liabilities related to the AMS product line. The
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
product line was originally purchased by Laserscope in the acquisition of Heraeus Surgical, Inc. The Company received $905,000 in exchange for certain assets and liabilities relating to the product line.
In December 1998, the Company concluded that the majority of the remaining book value of the intangible assets acquired in the acquisition of Heraeus Surgical, Inc. had been impaired and recorded an impairment loss. In addition, the Company determined that specific inventories relating to certain product lines acquired in the acquisition were excessive, and the Company adjusted the value of these inventories accordingly. Laserscope determined this action in late 1998, as part of a redirection in emphasis towards higher volume product lines.
3. SALE OF NWL LASER-TECHNOLOGIE
On February 18, 2000, the Company signed an agreement with Wavelight Laser Technologie AG ("Wavelight") to sell its interest in NWL Laser-Technologie GmbH ("NWL"). The sale, which was approved by Wavelight's shareholders on March 31, 2000, had an effective date of January 1, 2000. As part of the transaction, NWL will continue to distribute Laserscope's products in all countries covered by NWL's then current distribution channels. The details of the transaction are as follows (in thousands):
We will defer recognition of the gain until the funds held in escrow are paid us.
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SEGMENT INFORMATION
Laserscope's revenue base is derived from the sales of interrelated products and services on a world-wide basis. Although discrete components that earn revenues and incur expenses exist, significant expenses such as research and development and corporate administration are not incurred by nor allocated to these operating units but rather are employed by the entire enterprise. Additionally, the chief operating decision maker evaluates resource allocation not on a product or geographic basis, but rather on an enterprise wide basis. Therefore, the Company has concluded that it contains only one reportable segment, which is the medical systems business.
Revenues from sales to external customers by similar products and services and by major geographic area for the years ended December 31 were:
- --------------- (1) Laserscope sold certain assets and liabilities related to the AMS product line in November 1998.
(2) Based on the location of the external customer.
(3) The Company acquired a 52% interest in NWL in June 1997 and further increased its interest to 80% in January 1999. Effective January 2000, the Company divested itself from NWL.
(4) Individual countries within each of these geographic regions represent less than 10% of total revenues.
Location of long lived assets by major geographic area at December 31 were:
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consisted of:
6. INVENTORIES
Inventories at December 31 consisted of:
Inventory at December 31, 1999 includes $2.5 million of inventory related to NWL which was sold to Wavelight in January 2000.
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of:
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEVELOPED TECHNOLOGY AND OTHER INTANGIBLES
Developed technology and other intangibles resulting from the acquisition of Heraeus Surgical, Inc. and NWL Laser-Technologie GmbH at December 31, 1999 consisted of (in thousands):
There were no intangibles remaining after the sale of NWL as of January 1, 2000, and the Company had no intangible assets as of December 31, 2000.
9. CREDIT LINES
The Company has in place an asset based line of credit which provides up to $6.0 million and expires September 2001. Credit is extended based on the Company's eligible accounts receivable and inventory. At December 31, 2000, the Company had approximately $2.1 million in borrowing base available against the $0.7 million outstanding and the $1.1 million in letter of credit reserve requirements. The assets of the company secure the credit line, and the line bears an interest rate equivalent to the bank's prime rate plus 2.25% per annum (11.75% in December 2000). Borrowings against the line of credit are paid down as the Company collects on accounts receivable. Provisions of the bank loan agreement prohibit the payment of dividends on non-preferred stock, or the redemption, retirement, repurchase or other acquisition of Company stock. The agreement further requires the Company to maintain a minimum tangible net worth. As of December 31, 2000, the Company was in compliance with all covenants.
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LEASE OBLIGATIONS
The Company leases certain equipment under lease agreements that have been accounted for as capital leases. Leased equipment and accumulated amortization related to assets under capital leases at December 31 were as follows:
There were $20,000 in additions to leased equipment in 2000, $77,000 in 1999 and $891,000 in 1998.
Amortization of equipment under capital leases is included in depreciation expense.
The Company leases certain facilities and equipment under non-cancelable operating leases. Rent expense under these leases amounted to approximately $1,130,000, $1,558,000 and $1,805,000 in each of the three years ended December 31, 2000, 1999 and 1998 respectively.
Future minimum lease payments under capital and operating leases were as follows at December 31, 2000:
11. LONG-TERM DEBT
In February of 2000, the Company sold $3 million of 8.00% convertible debentures in a private placement. The debentures mature in February 2007 and pay interest monthly. Starting in February 2002, 1% per month of the outstanding principal will be repaid. The debentures are convertible at the option of the holder at any time prior to the close of business on the maturity date, unless previously repurchased, into 2.4 million shares of common stock at a conversion price of $1.25, subject to adjustment in certain circumstances. In addition, the Company issued warrants to purchase 240,000 shares of the Company's common stock at $1.50 per share. The warrants expire in 2005. The value of the warrants is being amortized as interest expense in our statement of operations. The debenture agreement contains covenants with regard various financial ratios, and as of December 31, 2000 the Company is in compliance with all covenants.
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long term debt at December 31 consisted of:
For each of the five years and beyond, long-term obligations are:
12. 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.
Private Placement of Common Stock
On January 14, 2000, the Company completed the final closing of a private placement of common stock. In the transaction the Company received approximately $1.8 million, net of expenses, of which approximately $1.0 million was received in 1999 in exchange for 2.5 million shares of common stock, including placement agent commission shares. In addition, the Company issued warrants to purchase 218,875 shares of the Company's common stock at $1.25 per share. The warrants expire in January 2005.
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 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 non-statutory 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. Options issued pursuant to the 1984 plan vest and become exercisable over periods of up to five years and expire five to ten years after the date of grant. Options issued pursuant to the 1994 plan vest and become exercisable over periods of up to four years and expire five years after the date of grant.
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 1984 Stock Option Plan expired by its terms with respect to any future option grants effective in August 1994. At December 31, 2000, the 1984 Stock Option Plan had options to purchase 142,832 shares of common stock outstanding, all of which were exercisable.
The Company has reserved 3,050,000 shares of common stock of which there were 504,535 shares available for issuance pursuant to its 1994 stock option plan as of December 31, 2000.
In 1998, the Company allowed employees to cancel outstanding options with exercise prices greater than $2.00 per share that had been granted under the 1994 plan 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. None of these options had previously been repriced. Employees elected to cancel and receive new grants to purchase an aggregate of 1,266,400 shares at an exercise price of $1.28. These options are included in the cancellations and grants in 1998 in the table that summarizes plan activity for the years ended December 31, 2000, 1999 and 1998.
1999 Retention Stock Option Plan
During 1999, the Company adopted a stock option plan under which the Board of Directors may grant non-statutory options to purchase shares of common stock to non-officer employees of the Company at a price not less than the fair value of the shares as of the date of grant. Options issued pursuant to the 1999 plan vest and become exercisable over periods of up to four years and expire five years after the date of grant.
The Company has reserved 698,000 shares of common stock of which there were 196,000 shares available for issuance pursuant to its 1999 Retention Stock Option Plan as of December 31, 2000.
Directors' Stock Option Plans
The Company has reserved 720,000 shares of its common stock for issuance pursuant to its 1999 and 1995 Directors' Stock Option Plans in aggregate. Under these plans, non-employee directors of the Company have been granted options to purchase up to 105,000 shares (45,000 shares pursuant to the 1995 plan and 60,000 shares pursuant to the 1999 plan) of the Company's common stock exercisable at the fair market value of such shares on the respective grant dates. 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 to ten years after the date of grant. Upon the adoption of the 1999 Directors' Stock Option Plan, the 1995 Directors' Stock Option Plan expired with respect to future grants. There were 180,000 shares available in aggregate for issuance pursuant to the 1999 Directors' Stock Option Plans at December 31, 2000.
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes activity in the Company's stock option plans during the years ended December 31, 2000, 1999 and 1998:
The following table displays a summary of relevant ranges of exercise prices for options outstanding and options exercisable for the Company's stock option plans at December 31, 2000:
1989 and 1999 Employee Stock Purchase Plans
During 1989 and 1999, the Company adopted Employee Stock Purchase Plans under which qualified employees can purchase up to a specified maximum amount of the Company's common stock through payroll deduction at 85% of its fair market value. In July 1999, the Company's 1989 Employee Stock Purchase Plan expired by its term and at its expiration date, approximately 650,000 shares had been purchased under this plan. Laserscope has reserved 350,000 shares of common stock, for issuance pursuant to its 1999 Employee Stock Purchase Plan. Under this plan, as of December 31, 2000, approximately 204,000 shares had been purchased under this plan.
SFAS 123 Disclosure
The Company uses the intrinsic value method in accounting for its employee stock options because, as discussed below, the alternative fair value method requires use of option valuation models that were not developed for use in valuing employee stock options. Under he intrinsic value method and because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma information regarding net income and net income per share as if the Company accounted for its employee stock options granted subsequent to December 15, 1994 under the fair value method was estimated at the date of grant using a Black-Scholes multiple option pricing model with the following weighted average assumptions:
Pro forma reporting compensation cost with respect to the Company's 1989 and 1999 Employee Stock Purchase Plan is estimated using the fair value of the employees' purchase rights under the Black-Scholes model with the following assumptions:
The weighted average fair values of those purchase rights granted in 2000, 1999 and 1998 were $0.68, $0.62 and $0.63, respectively.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below:
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 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.
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. 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 5% of each employee's base compensation and were approximately $173,000, $213,000, and $260,000 in the years ended December 31, 2000, 1999, and 1998, respectively.
14. INCOME TAXES
Significant components of the provision for income taxes were as follows (in thousands):
Pretax loss from foreign operations was $665,000 in 2000, $501,000 in 1999 and income of $395,000 in 1998.
Income taxes differ from the amount computed by applying the statutory federal income tax rate of 35% to income (loss) before taxes. The reasons for the differences and the tax effect of each are as follows (in thousands):
The components of the deferred tax asset consisted of the following at December 31, 2000 and 1999(in thousands):
LASERSCOPE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Because of the Company's lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $1,435,000 in 2000 and by $2,173,000 in 1999. Approximately $1,384,000 of the valuation allowance is attributed to stock option deductions, the benefit of which will be credited to paid-in-capital when realized.
For federal tax purposes, the Company has net operating loss and tax credit carryforwards of approximately $24,500,000 and $900,000, respectively, which expire in the years 2001 through 2020. The Company has net operating loss and research and development credit carryforwards of approximately $3,700,000 and $1,100,000, respectively, for state tax reporting purposes. The state net operating loss carryforwards will expire in the years 2001 through 2006.
Utilization of the Company's net operating loss and tax credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss carryforwards and tax credits before utilization.
15. 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, Europe and the Pacific Rim. 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 substantially alleviate any concentration of credit risk. Bad debt expense has been insignificant.
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.
16. CONTINGENCIES
The Company is at times a party to legal proceedings arising in the ordinary course of its business. Currently, there are no actions which relate to product liability or employee issues. While it is not feasible to predict or determine the outcome of the actions which have been 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.
SCHEDULE II
LASERSCOPE
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
S-1
EXHIBIT INDEX
- --------------- (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) 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.
(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, 1994.
(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/A for the year ended December 31, 1995.
(6) Incorporated by reference to Exhibit 1 of the Registrant's Registration Statement on Form 8-A filed November 15, 1991.
(7) 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, 1996.
(8) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits", the Company's Form 8-A/A filed September 4, 1996.
(9) Incorporated by reference to Exhibit A to the Definitive Proxy Statement for the Special Meeting of Shareholders held August 29, 1996.
(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/A for the year ended December 31, 1996.
(11) 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/A for the year ended December 31, 1997.
(12) 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, 1998.
(13) 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/A for the year ended December 31, 1998.
(14) 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 March 31, 1999.
(15) 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, 1999.
(16) 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 March 31, 2000.
(17) 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, 2000.
(18) Filed herewith.