| LASERSCOPE Item 1A Risk Factors In determining whether to invest in our common stock, you should carefully consider the information below in addition to all other information provided to you in this Report, including the information incorporated by reference in this Report |
| The statements under this caption are intended to serve as cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995 |
| The following information is not intended to limit in any way the characterization of other statements or information under other captions as cautionary statements for such purpose |
| Demand for our products in the United States and internationally is highly dependent on the ability of physicians, hospitals and other health care facilities to obtain satisfactory reimbursement rates for our products and services performed with our products from private and governmental third-party payers as well as direct payments from consumers |
| If satisfactory reimbursement rates are not maintained, demand for Laserscope products would decline and our business and financial results and cash flows would suffer |
| A substantial portion of our laser sales are for aesthetic procedures that generally are not covered or reimbursed by government or commercial health insurance |
| The general absence of insurance coverage for these cosmetic procedures may restrict the development of this market as growth in procedures performed with our aesthetic products largely depends on consumers’ willingness to pay out-of-pocket for these treatments |
| Market acceptance of our products internationally may depend in part upon the availability of reimbursement within prevailing healthcare payment systems |
| Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government sponsored health care and private insurance |
| We may not obtain international reimbursement approvals in a timely manner, if at all |
| Our failure to receive international reimbursement approvals may negatively impact market acceptance of our products in the international markets in which those approvals are sought |
| Increasing the use of our GreenLight laser system to perform the Photoselective Vaporization of the Prostate (“PVP”) procedure could be hindered by the ongoing efforts of major third-party payers for health care in the United States (such as Medicare, Medicaid, private healthcare insurance and managed care plans) and in our key international markets such as the European Union and the Asia-Pacific region to contain healthcare costs through stricter coverage criteria, price regulation, and lower payments for all items, including health care services, disposable medical products and medical capital equipment |
| The current Facility Fee reimbursement for PVP in the United States has been reduced and could be reduced further, eliminated or utilized by a competitor |
| Demand in the United States for our GreenLight laser system and disposable fiber optic delivery devices is highly dependent on the reimbursement for the PVP procedure when it is performed in the hospital outpatient setting |
| The rate set by Medicare is particularly influential on demand because Medicare is the largest single payer for PVP procedures and because many commercial payers use Medicare payments as a benchmark for their reimbursement rates |
| The national reimbursement rate for the PVP procedure was reduced to a new rate of approximately dlra2cmam500 for 2006 |
| This amount represents a decrease of dlra1cmam250 from the temporary reimbursement amount of dlra3cmam750 per procedure previously in effect since April 2004, but is higher than the dlra1cmam850 paid per procedure prior to April 2004 |
| Medicare pays for hospital outpatient services on a rate-per-service basis that varies according to the ambulatory payment classification (APC) group to which the service is assigned |
| Services within a particular APC are supposed to be like in clinical character and resource utilization |
| Medicare uses the median cost to establish a payment amount for the services grouped with a single APC The hospital outpatient payment rate includes the national payment amount that is made up of the Medicare payment and the beneficiary co-payment to the facility |
| Special payments are made under the hospital outpatient payment system for new technology items in one of two ways |
| The first is through a temporary add-on payment or “transitional pass-through payments |
| ” This applies to certain drugs, devices and biologics |
| The 11 _________________________________________________________________ [69]Table of Contents second is through a temporary assignment to a New Technology APC New services, not specific items, generally are handled through this method |
| Assignment to a New Technology APC is time limited |
| Medicare has the discretion to reassign a New Technology service to a standard clinical APC when it feels it has sufficient data to understand the costs incurred by hospitals to provide the service |
| The APC code applicable to the PVP procedure has varied since its launch |
| We submitted a New Technology Application to the Centers for Medicare and Medicaid Services (“CMS”) in September 2003, and was notified by Medicare several months afterwards that the application was approved |
| As a result, PVP was assigned temporary HCPCS code C9713 and was assigned to New Technology APC 1525, effective April 1, 2004 |
| The national average payment rate for APC 1525 is dlra3cmam750 |
| In July 2005, CMS published its proposed rule regarding the 2006 Outpatient Prospective Payment System (“OPPS”) for outpatient hospital facility reimbursement |
| In this rule, CMS proposed to transfer PVP to a standard clinical Ambulatory Payment Classification (“APC”) code beginning in 2006 |
| CMS recently finalized this proposal based on the agency’s belief that although it had less than a full-year of hospital claims data for PVP, it had a sufficient number of claims upon which to establish the median cost for performing the procedure billed under code C9713, and, therefore, a median cost could be established |
| As of January 1, 2006, PVP was assigned to APC 0429, which includes all prostate laser procedures described by CPT codes 52647 and 52648 |
| The 2006 national reimbursement rate for APC 0429 is approximately dlra2cmam500 |
| Physician Fee Schedule reimbursement for PVP in the United States remains uncertain |
| Demand in the US for our GreenLight laser system and disposable fiber optic delivery devices is also highly dependent on the reimbursement rates physicians are paid to perform a PVP procedure |
| In particular, Medicare payments to physicians for the PVP procedure are of critical importance as Medicare is the largest single payer for PVP procedures and its reimbursement rates are used as a benchmark by many commercial payers |
| Medicare pays for physician services under a uniform, national fee schedule based on relative value units (“RVUs”) that reflect the physician work and overhead costs associated with furnishing a particular item or service |
| Medicare assigns different RVUs for a single procedure depending on whether the service is performed in the physician’s office or a facility such as a hospital outpatient department or ambulatory surgery center |
| The non-facility payment rate is higher and is meant to reflect the fact that physicians incur greater overhead costs when they perform a procedure in their office |
| Prior to January 2006, physicians generally used CPT code 52647 to describe to payers that they performed a PVP procedure |
| A change in the CPT code descriptors for CPT codes 52647 and 52648 became effective January 2006 |
| Under the new descriptions, PVP is more appropriately described by 52648 |
| Prior to the change, 52647 was used most frequently to describe PVP Historically, CPT code 52648 was not assigned non-facility practice expense relative value units (RVUs) |
| Consequently, despite the fact that physicians have been performing PVP in a well-equipped office setting, there would no longer have been a mechanism to reimburse physicians for the overhead costs of performing PVP in the non-facility setting |
| CMS published a technical revision to the 2006 Medicare physician fee schedule to address this situation |
| Thus, the total national 2006 reimbursement rate for a PVP procedure performed in the office is approximately dlra3cmam100 |
| There is the chance that at some time in the future PVP may be assigned a payment level that does not pay physicians at a rate they feel adequately reflects the time, effort and resource costs associated with the procedure |
| Similarly, should Medicare underpay PVP relative to other procedures it will negatively influence physician adoption of the PVP procedure, which would reduce demand for our products and harm our financial performance |
| CMS reimbursement decisions regarding the physician Fee Schedule for PVP in any site of service remain uncertain and could result in maintenance of the current reimbursement structure or a decrease in reimbursement rates which could adversely affect PVP procedural volume and sales of our products |
| 12 _________________________________________________________________ [70]Table of Contents PVP physician reimbursement is typically lower, on a per-procedure basis, compared to other BPH therapies |
| The current national average rate of reimbursement paid by Medicare to physicians for performing the PVP procedure on a per-procedure basis is, in some cases, substantially lower than the reimbursement rate paid for performing certain other minimally invasive BPH therapies on a per-procedure basis |
| While we believe that this disparity results in physicians and hospitals not being reimbursed at a rate commensurate with the necessary resources and work required to do the PVP procedure in all sites of service currently being used by physicians, there can be no assurance that CMS will adjust reimbursement rates to address this disparity |
| Further, there can be no assurance that physician reimbursement for these other therapies will not be maintained at current levels or raised relative to reimbursement for PVP or that the physician reimbursement for PVP will be maintained at current levels or increased relative to other BPH therapies |
| The adoption rate of the PVP procedure in the United States is highly dependent upon hospital and physician economics |
| A substantial reduction in payments to facilities and/or a continuation of the disparity which currently exists between the physician reimbursement for certain other BPH therapies and that for PVP could cause a reduction in the adoption of PVP by hospitals and physicians, which would reduce demand for our products and harm our business |
| If we are not able to protect our intellectual property adequately, we will lose a critical competitive advantage, which will reduce our revenues, profits and cash flows |
| Our patents, copyrights, trademarks, trade secrets and other intellectual property are critical to our success |
| We hold several patents issued in the United States, generally covering surgical laser systems, delivery devices, calibration inserts and the laser resonator |
| We have also licensed certain technologies from others |
| We cannot assure that any patents or licenses that we hold or that may be issued as a result of our patent applications will provide any competitive advantages for our products |
| Nor can we assure that any of the patents that we now hold or may hold in the future will not be successfully challenged, invalidated or circumvented in the future |
| In addition, we cannot assure that competitors, many of which have substantial resources and have made substantial investments in competing technologies, will not seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, issue, use and sell our products |
| Furthermore, we cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States |
| We have not attempted to secure patent protection in foreign countries, and the laws of some foreign countries may not adequately protect our intellectual property as well as the laws of the United States |
| As we increase our international presence, we expect that it will become more difficult to monitor the development of competing technologies that may infringe on our rights as well as unauthorized use of our technologies |
| We believe that we own or have the right to use the basic patents covering our products |
| However, the laser industry is characterized by a very large number of patents, some of which appear to overlap with other issued patents |
| As a result, there is a significant amount of uncertainty in the industry regarding patent protection and infringement |
| Because patent applications are maintained in secrecy in the United States until such patents are issued and are maintained in secrecy for a period of time outside the United States, we can conduct only limited searches to determine whether our technology infringes any patents or patent applications of others |
| If we are unable to protect the integrity, safety and proper use of our disposable fiber optic delivery device used with the GreenLight laser system, it could result in negative patient outcomes and reduce our disposable delivery device recurring revenue stream |
| Ensuring the integrity, safety and proper use of the GreenLight PV disposable fiber optical delivery device, also known as the ADDStat fiber optic delivery device, and referred to elsewhere in this Report as the “delivery device”, used with the GreenLight PV laser system is crucial to achieving optimal patient outcomes from the PVP procedure |
| With this is mind, we manufacture the GreenLight PV delivery device 13 _________________________________________________________________ [71]Table of Contents using high quality materials and exacting production standards |
| We inspect each unit carefully to check that it conforms to our specifications and use diligent efforts to ensure that the delivery device is used appropriately in connection with the GreenLight PV laser system |
| However, if a third party were to produce and distribute a counterfeit version of the GreenLight PV delivery device or an inferior substitute delivery device to our customers, use of inferior materials, poor design, shoddy construction or improper handling or use of such products could result in severe adverse patient events |
| While we are constantly making diligent efforts to promote positive clinical outcomes by protecting the safety, integrity and proper use of our products, particularly the GreenLight PV delivery device, one or more third party manufacturers may produce counterfeit or inferior quality delivery devices that our customers may, knowingly or unknowingly, purchase for use with the GreenLight PV laser system |
| In addition, it is possible that our customers may seek to violate our prohibition on reuse of delivery devices (or reuse inferior substitute delivery devices) on unwitting patients, reducing the efficacy of the procedure and exposing such patients to the risk of blood-borne pathogens |
| Use of such third party delivery devices or misuse of our genuine GreenLight PV delivery devices could result in adverse clinical outcomes, potentially reducing demand for PVP and decreasing demand for our products |
| Although we use a variety of methods to protect patients from inferior delivery devices and the reuse of our GreenLight PV delivery devices, including legal and regulatory safeguards, system enabling, patient education and safety packaging among other measures, there can be no assurance that such methods will be effective at avoiding the introduction of such counterfeit or substitute delivery devices into the market |
| Moreover, use of counterfeit or substitute disposable delivery devices for use with the GreenLight PV laser system or unauthorized reuse of delivery devices, would displace sales of our GreenLight PV disposable delivery devices reducing our recurring disposable delivery device revenue stream and harming our business |
| We participate in competitive markets with companies that have significantly greater financial, technical, research and development, manufacturing and marketing resources and/or who produce standard, entrenched medical technologies |
| 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; • satisfactory reimbursement of the PVP procedure by public and private third party payers; • customer support; • the success and timing of new product development; and • continued development of successful distribution channels |
| Some of our current and prospective competitors have or may have significantly greater financial, technical, research and development, manufacturing and marketing resources than we have |
| To compete effectively, we will need to continue to expand our product offerings, periodically enhance our existing products and continue to enhance our distribution |
| Certain surgical laser manufacturers have targeted their efforts on narrow segments of the market, such as angioplasty, orthopedics, and lithotripsy |
| Their products may compete for the same capital equipment and disposable device funds as our products, and accordingly, these manufacturers may be considered our competitors |
| Generally, surgical laser manufacturers such as us compete with standard 14 _________________________________________________________________ [72]Table of Contents surgical methods and other medical technologies and treatment modalities |
| Several of these manufacturers and their distribution partners offer products for the treatment of BPH using similar technologies to ours and engage in aggressive marketing campaigns, pricing, and promotional efforts targeted at our products and customers |
| We cannot assure that we can compete effectively against such competitors |
| In addition, we cannot assure that these or other companies will not succeed in developing technologies, products or treatments that are more effective than ours or that would render our technology or products obsolete or non-competitive |
| If we are unable to effectively manage our growth, our business may be harmed |
| Our future success depends on our ability to successfully manage our growth |
| Our ability to manage our business successfully in a rapidly evolving and extremely competitive market requires an effective planning and management process |
| Our rates of growth in recent years have been high |
| Should our business continue to grow and demand for our products continue to increase at similar rates, it will increase the strain on our personnel in all aspects of our business |
| Our historical growth and international expansion, have placed, and are expected to continue to place, a significant strain on our managerial, operational and financial resources as well as our financial and management controls, reporting systems and procedures |
| Although some new controls, systems and procedures have been implemented, our future growth, if any, will depend on our ability to continue to implement and improve operational, financial and management information and control systems on a timely basis, together with maintaining effective cost controls |
| Our inability to manage any future growth effectively would be harmful to our revenues and profitability |
| Our dependence on certain single-source suppliers and certain other third parties could adversely impact our ability to manufacture lasers |
| 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 |
| Problems associated with international business operations could affect our ability to sell our products |
| As our international business has grown, we have become increasingly subject to the risks arising from the unique and potentially adverse factors in the countries in which we operate |
| Our international revenues were 31prca of total revenues in the year ended December 31, 2005 and 27prca in the year ended December 31, 2004 |
| Our international sales are made through international distributors and wholly-owned subsidiaries with payments to us typically denominated in the local currencies of the United Kingdom and France, and in United States 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 |
| We anticipate that sales to customers located outside North America will increase and will continue to represent a significant portion of our total revenues in future periods |
| These activities, require significant management attention and financial resources and further subject us to the risks of operating internationally |
| These risks include, but are not limited to: • changes in regulatory requirements; • delays resulting from difficulty in obtaining export licenses for certain technology; • customs, tariffs and other barriers and restrictions; and • the burdens of complying with a variety of foreign laws |
| 15 _________________________________________________________________ [73]Table of Contents We are also subject to general geopolitical risks in connection with our international operations, such as: • differing economic conditions; • changes in political climate; • differing tax structures; and • changes in diplomatic and trade relationships and war |
| In addition, fluctuations in currency exchange rates may negatively affect our ability to compete in terms of price against products denominated in local currencies |
| Accordingly, if these risks actually materialize, our international operations may be adversely affected and sales to international customers, as well as those domestic customers that use foreign fabrication plants, may decrease Our business has significant risks of product liability claims, which could drain our resources and exceed our limited insurance coverage |
| Our business has significant risks of product liability claims |
| We have experienced product liability claims from time to time, which we believe are ordinary for our business |
| While we cannot predict or determine the outcome of the actions brought against us, we believe that these actions will not ultimately have a material adverse impact on our financial position, results of operations, and future cash flows |
| At present, we maintain product liability insurance on a “claims made” basis with coverage commensurate with our business and product lines |
| 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 |
| Our products are subject to government regulation, and we cannot assure that all necessary regulatory approvals, including approvals for new products or product improvements, will be granted on a timely basis, if at all, and that we won’t be subject to product recalls or warnings and other regulatory actions and penalties that could materially affect our operating results |
| Government regulation in the United States and other countries is a significant factor in the development, manufacturing and marketing of many of our products |
| Our products are regulated in the United States by the Food and Drug Administration under the Federal Food, Drug and Cosmetic Act (the “FDC Act”) and the Radiation Control for Health and Safety Act |
| The FDC Act provides two basic review procedures for medical devices |
| Certain products qualify for a Section 510(k) (“510(k)”) procedure under which the manufacturer gives the FDA pre-market notification of the manufacturer’s intention to commence marketing the product |
| The manufacturer must, among other things, establish that the product to be marketed is “substantially equivalent” to a previously marketed product |
| In some cases, the manufacturer may be required to include clinical data gathered under an investigational device exemption (“IDE”) granted by the FDA allowing human clinical studies |
| There can be no assurance that the FDA will grant marketing clearance for our future products on a timely basis, or at all |
| If the product does not qualify for the 510(k) procedure, the manufacturer must file a pre-market approval application (“PMA”) based on testing intended to demonstrate that the product is both safe and effective |
| The PMA requires more extensive clinical testing than the 510(k) procedure and generally involves a significantly longer FDA review process |
| Approval of a PMA allowing commercial sale of a product requires pre-clinical laboratory and animal tests and human clinical studies conducted under an IDE establishing safety and effectiveness |
| Generally, because of the amount of information required, the 510(k) procedure takes less time than the PMA procedure |
| 16 _________________________________________________________________ [74]Table of Contents In addition, we are subject to review, periodic inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements for any product for which we obtain marketing approval |
| Following approval, our manufacturing processes, subsequent clinical data and promotional activities are subject to ongoing regulatory obligations |
| If the FDA finds that we have failed to comply with these requirements or later discovers previously unknown problems with our products, including unanticipated adverse events of unanticipated severity or frequency, manufacture or manufacturing processes or failure to comply with regulatory requirements, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, including: • fines, injunctions and civil penalties; • recall or seizure of our products; • restrictions on our products or manufacturing processes, including operating restrictions, partial suspension or total shutdown of production; • denial of requests for 510(k) clearances or PMAs of product candidates; • withdrawal of 510(k) clearances or PMAs already granted; • disgorgement of profits; and • criminal prosecution |
| Any of these enforcement actions could affect our ability to commercially distribute our products in the United States and may also harm our ability to conduct the clinical trials necessary to support the marketing, clearance or approval of these products and could materially and adversely affect our business |
| To date, all of our products (except for the 800 and 600 Series Dye Module) have been marketed through the 510(k) procedure |
| Future products, however, may require clearance through the PMA procedure |
| There can be no assurance that such marketing clearances can be obtained on a timely basis, or at all |
| Delays in receiving such clearances could have a significant adverse impact on our ability to compete in our industry |
| The FDA may also require post-market testing and surveillance programs to monitor certain products |
| Certain other countries require medical device manufacturers to obtain clearances for products prior to marketing the products in those countries |
| The requirements vary widely from country to country and are subject to change |
| Obtaining necessary regulatory approvals in key international markets and retaining such regulatory licenses is essential to international expansion of our business, which is an important strategic objective |
| We are also required to register with the FDA and state agencies, such as the Food and Drug Branch of the California Department of Health Services (“CDHS”), as a medical device manufacturer |
| We are inspected routinely by these agencies to determine our compliance with the FDA’s current “Quality Systems Regulations” |
| Those regulations impose certain procedural and documentation requirements upon medical device manufacturers concerning manufacturing, testing and quality control activities |
| If these inspections determine violations of applicable regulations, the continued marketing of any products manufactured by us may be adversely affected |
| In addition, our laser products are covered by a performance standard for laser products set forth in FDA regulations |
| The laser performance standard imposes certain specific record-keeping, reporting, product testing, and product labeling requirements on laser manufacturers |
| These requirements also include affixing warning labels to laser systems, as well as incorporating certain safety features in the design of laser products |
| Complying with applicable governmental regulations and obtaining necessary clearances or approvals can be time consuming and expensive |
| There can be no assurance that regulatory review will not involve delays or other actions adversely affecting the marketing and sale of our products in the United States and 17 _________________________________________________________________ [75]Table of Contents internationally |
| We also cannot predict the extent or impact of future legislation or regulations in the United States and abroad |
| We are also subject to regulation under federal and state laws regarding, among other things, occupational safety, the use and handling of hazardous materials and protection of the environment |
| While we believe that we are in material compliance with these requirements, noncompliance with any such requirements could have a material adverse effect on our business |
| The regulatory approval process outside the United States varies depending on foreign regulatory requirements and may limit our ability to develop, manufacture and sell our products internationally |
| To market any of our products outside of the United States, we and our collaborative partners, including certain of our distributors, are subject to numerous and varying foreign regulatory requirements, implemented by foreign health authorities, governing the design and conduct of human clinical trials and marketing approval for diagnostic products |
| As an example, we are seeking regulatory approval to market the GreenLight laser system for the treatment of BPH in Japan, which we hope will be received before the end of 2007 |
| The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval |
| The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country, nor does the approval by foreign health authorities ensure approval by the FDA If our dispute with Palomar is resolved in a manner contrary to our position, we could be required to record additional expenses which could have a material adverse impact on our financial results |
| Palomar Medical Technologies, Inc |
| (“Palomar”) has informed us that it disputes the method used by us for calculating the royalty to be paid on the Lyra laser system pursuant to the Patent License Agreement between Laserscope and Palomar (the “License Agreement”) |
| Palomar also disputes our application of the License Agreement to the Gemini laser system, including our calculation of royalties due on the Gemini laser system under the License Agreement |
| In the third quarter of 2005, Palomar exercised its right under the License Agreement to engage an independent auditor to conduct a review of our royalty calculations and payments under the License Agreement |
| The independent auditors have issued a report identifying several potential alternative interpretations of the application of the License Agreement that indicate a potential liability of up to dlra3dtta7 million |
| We disagree with each of these potential alternative interpretations and believe that we have been correctly calculating and paying the royalties owed to Palomar under the License Agreement |
| Although we intend to vigorously defend our position while we seek to negotiate a resolution of the dispute with Palomar, we may be unable to reach a mutually agreeable resolution of the dispute |
| Additionally, we have not accrued for a settlement of the dispute |
| If our dispute with Palomar is resolved in a manner contrary to our position, we could be required to litigate the dispute incurring significant expenses and risk an unfavorable judgment, to record additional expenses and/or to pay a material amount to settle the dispute, which could have a material adverse impact on our financial results |
| As we have limited working capital, we may need additional capital that may not be available to us and, if raised, may dilute our shareholders’ ownership interest in us |
| We may need to raise additional funds to develop or enhance our technologies, to fund expansion, to respond to competitive pressures or to acquire complementary products, businesses or technologies |
| As of December 31, 2005, our total assets were dlra111dtta8 million and our total liabilities were dlra27dtta0 million |
| As of the same date, our working capital was dlra75dtta0 million and our cash and cash equivalents totaled dlra30dtta7 million |
| 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 |
| 18 _________________________________________________________________ [76]Table of Contents In 2005, except for shares issued through our Employee Stock Purchase Plan and through the exercise of stock options under our Incentive Stock Option Plans, the only other capital raised was through the exercise of warrants, which resulted in the issuance of 10cmam000 shares |
| 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; and • 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 may be required for our currently envisioned long term needs |
| Additional financing may not be available on terms that are acceptable to us |
| If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders would be reduced and these securities might have rights, preferences and privileges senior to those of our current shareholders |
| If adequate funds are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, develop or enhance our products or services, or otherwise respond to competitive pressures would be significantly limited |
| We may have difficulty sustaining profitability and may experience additional losses in the future |
| Although we recorded net income of dlra22dtta6 million, dlra14dtta7 million, and dlra2dtta5 million for fiscal years 2005, 2004, and 2003 respectively, prior to 2002 we had prolonged periods of consecutive quarterly net losses |
| In order to maintain and improve our profitability, we will need to continue to generate new sales while controlling our costs |
| However, any failure to do so could harm our profitability and negatively affect the market price of our stock |
| We may be unable to respond to the rapid technological changes that often affect the markets in which we compete |
| If we fail to rapidly develop, manufacture and market technologically innovative products at acceptable costs, our operating results will suffer |
| We operate in an industry that is subject to rapid technological change |
| Our ability to remain competitive and future operating results will depend upon, among other things, our ability to anticipate and respond rapidly to such change by developing, manufacturing and marketing technologically innovative products in sufficient quantities at acceptable costs to meet such demand |
| As we introduce new products this may cause some of our existing products to become obsolete, which may result in the write-off of inventory |
| However, without new products and enhancements, our existing products will likely become obsolete due to technological advances by other companies, which could result in the write-off of inventory as well as diminished revenues |
| Therefore, we intend to continue to invest significant amounts in research and development |
| Our expenditures for research and development were dlra7dtta9 million for the year ended December 31, 2005, dlra5dtta2 million in 2004 and, dlra4dtta4 million in 2003 |
| We anticipate that our ability to compete will require significant research and development expenditures with a continuing flow of innovative, high-quality products |
| We cannot assure that we will be successful in designing, manufacturing or selling enhanced or new products in a timely manner |
| Nor can we assure that a competitor could not introduce a new or enhanced product or technology that could have an adverse effect on our competitive position |
| 19 _________________________________________________________________ [77]Table of Contents Our current research and development programs are directed toward the development of new laser systems and delivery devices |
| We cannot assure that these markets will develop as anticipated or that our product development efforts will prove successful |
| Nor can we assure that such new products, if developed and introduced, will be accepted by the market |
| We may become a party to a patent infringement and other intellectual property related actions or disputes, which could result in significant royalty or other payments or in injunctions that can prevent the sale of our products |
| Our industry has been characterized by frequent allegations of patent infringement and or other intellectual property related activity including demands for licenses and litigation |
| Our competitors or other patent holders may assert that our products and the methods we employ are covered by their patents |
| In addition, we do not know whether our competitors will apply for and obtain patents that will prevent, limit or interfere with our ability to make, use, sell or import our products |
| Although we may seek to resolve any potential future claims or actions, we may not be able to do so on reasonable terms, or at all |
| If, following a successful third-party action for infringement, we cannot obtain a license or redesign our products, we may have to stop manufacturing and marketing our products, and our business would suffer as a result |
| We may become involved in litigation not only as a result of alleged infringement of a third party’s intellectual property rights but also to protect our own intellectual property |
| We have and may hereafter become involved in litigation to protect the trademark rights associated with our company name or the names of our products |
| If we have to change the name of our products, we may experience a loss in goodwill associated with customer confusion and a loss of sales |
| Infringement and other intellectual property related claims, with or without merit, can be expensive and time-consuming to litigate, and could divert management’s attention from our core business |
| We do not know whether necessary licenses would be available to us on satisfactory terms, or whether we could redesign our products or processes to avoid infringement |
| If we lose this kind of litigation, a court could require us to pay substantial damages, and prohibit us from using technologies essential to our products, either of which would have a material adverse effect on our business, results of operations and financial condition |
| Any acquisitions or divestitures we make may not provide us the expected benefits and could disrupt our business and harm our financial condition |
| Any acquisitions we make may not provide us the expected benefits and could disrupt our business and harm our financial condition, results of operations and cash flows |
| We have acquired businesses and technologies in the past, and we may continue to acquire businesses or technologies that we believe are a strategic fit with our business |
| Any future acquisitions may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business |
| In addition, the integration of acquisition targets may prove to be more difficult than expected, and we may be unsuccessful in maintaining and developing relations with the employees, customers and business partners and other acquisition targets |
| Since we will not be able to accurately predict these difficulties and expenditures, it is possible that these costs may outweigh the value we realize from a future acquisition |
| Future acquisitions could result in issuances of equity securities that would reduce our shareholders’ ownership interest, the incurrence of debt, contingent liabilities, stock based compensation or expenses related to the valuation of goodwill or other intangible assets and the incurrence of large, immediate write-offs |
| We may be unable to attract and retain key personnel who are critical to the success of our business |
| Our future success also depends on our ability to attract and retain engineers and other highly skilled personnel and senior managers |
| In addition, in order to meet our planned growth we must increase our sales force, both domestic and international, with qualified employees and personnel |
| Hiring qualified 20 _________________________________________________________________ [78]Table of Contents technical, sales and management personnel is difficult due to a limited number of qualified professionals and competition in our industry for these types of personnel |
| We have in the past experienced delays and difficulties in recruiting and retaining qualified technical and sales personnel and believe that at times our personnel are recruited aggressively by our competitors and start-up companies |
| Our employees are “at will” and may leave our employment at any time |
| As a result, we may experience significant employee turnover |
| Failure to attract and retain personnel, particularly sales and technical personnel would make it difficult for us to develop and market our technologies |
| In addition, our business and operations are substantially dependent on the performance of our key personnel, including Eric Reuter, our President and Chief Executive Officer, Derek Bertocci, Vice President Finance and Chief Financial Officer, Bob Mathews, Group Vice President, Operations and Product Development, and Robert Mann, Group Vice President, Global Surgical Sales and Marketing |
| We do not have formal employment agreements with Messrs |
| If such individuals were to leave or become unable to perform services for our company, our business could be severely harmed |
| Our quarterly operating results may fluctuate significantly and any failure to meet financial expectations for any fiscal quarter may cause our stock price to decline |
| 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 |
| Additionally, our fiber optic disposable delivery devices are relatively complex assemblies requiring components that can have long lead times |
| Failure of suppliers to provide materials in a timely manner or other disruptions in the continuous production of these fiber optics components could have a substantially 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 we 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 |
| If we are unable to expand and maintain our relationship with our US distribution partner, Henry Schein on favorable contractual terms, our business may be harmed |
| In July 2005, we entered into a non-exclusive distribution agreement with Henry Schein (the “HSI Agreement”), pursuant to which Henry Schein, a provider of healthcare products and services to office-based practitioners in the North American and European markets, will distribute our aesthetic product line to physicians and physician practices within the United States |
| The HSI Agreement is terminable by either party upon 90 days notice |
| The Henry Schein distribution relationship is intended to replace our distribution relationship with McKesson, which terminated effective November 9, 2005 |
| McKesson had been our exclusive US distribution partner for aesthetic products for nearly four years until April 2005, when our relationship with McKesson was made non-exclusive |
| On August 9, we received a notice from McKesson that it intended to terminate the McKesson Agreement effective in November 2005 |
| Following the amendment of our distribution agreement with McKesson to make it non-exclusive and prior to termination of the distribution relationship with McKesson, we experienced a significant decline in sales of our aesthetic products through McKesson |
| Sales of our aesthetic products through the Henry Schein 21 _________________________________________________________________ [79]Table of Contents relationship failed to offset the decline in revenues through McKesson in the 2005 |
| A national distribution relationship that extends our reach is important to our success because the potential customer base for our aesthetic product line includes physicians from a variety of specialties including among others, dermatologists, plastic surgeons, primary care and OB/GYN physicians |
| During the term of our distribution relationship with McKesson, sales to McKesson accounted for a substantial portion of our revenues |
| For the year ended December 31, 2005, sales through McKesson accounted for approximately 6prca of our total revenues and at December 31, 2005 accounts receivable from McKesson accounted for approximately 1prca of our total accounts receivable |
| Although we expect revenue generated through Henry Schein to increase significantly as this new distribution relationship is fully implemented, there can there be no assurance that our distribution relationship with Henry Schein will adequately replace our relationship with McKesson and we may be unable to generate sufficient revenues on a timely basis or at all |
| If we are unable to effect a timely and effective transition to the new distribution relationship and maintain a favorable relationship with Henry Schein and/or another major US distribution partner or if Henry Schein or any such other US distribution partner encounters financial difficulties, it could have a material adverse effect on our business, financial condition, results of operations, and future cash flows |
| If we are unable to effect a swift transition and rapidly establish a strong working relationship with our US distribution partner, Henry Schein, we may be unable to achieve growth in sales of our aesthetic product line in a timely manner or at all |
| The Henry Schein distribution relationship has replaced the McKesson distribution relationship as our principal US distribution network for our aesthetic product line, but as of yet has not replaced the revenues previously generated through McKesson |
| During 2004, sales to McKesson accounted for approximately 23prca of our total revenues, and revenues generated through McKesson in 2005 declined |
| Such sales represented a material portion of our revenues in 2004 |
| In 2005, revenues generated through Henry Schein failed to offset the decline in revenues through McKesson |
| Establishing a strong US distribution partner for our aesthetic products is important to our future success in the near future and beyond |
| The initial phase of our distribution relationship with Henry Schein involves significant training and coordination activities which are necessary to achieve a successful distribution partnership |
| Although to date we have made substantial progress in effecting this transition, unless we are able to accelerate this process and expand our relationship rapidly we will be unable to generate revenues sufficient to replace those previously generated through our relationship with McKesson |
| If our products contain defects that harm our customers’ patients, it would damage our reputation, subject us to potential legal liability and cause us to lose customers and revenue |
| Laser systems and fiber optic delivery devices are inherently complex in design and manufacturing |
| Laser systems require ongoing regular maintenance |
| The manufacture of our lasers, laser products, disposable delivery devices, and systems involve highly complex and precise processes |
| As a result of the technical complexity of our products, changes in our or our suppliers’ manufacturing processes or the inadvertent use of defective materials by us or our suppliers could result in a material adverse effect on our ability to achieve acceptable manufacturing yields and product reliability |
| To the extent that we do not achieve such yields or product reliability, this could have a material affect on our business, financial position, and results of operations |
| Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions |
| In addition, some of our products are combined with products from other vendors, which may contain defects |
| As a result, should problems occur, it may be difficult to identify the source of the problem |
| If we are unable to fix defects or other problems, we could experience, among other things: • loss of customers; • increased costs of product, returns and warranty expenses; • damage to our brand reputation; 22 _________________________________________________________________ [80]Table of Contents • failure to attract new customers or achieve market acceptance; • action by regulatory authorities; • diversion of development and engineering resources; and • legal actions by our customers |
| The occurrence of any one or more of the foregoing factors could seriously harm our business, financial condition and results of operations |
| Our financial results and stock price are affected by a number of factors which are beyond our control |
| A number of factors affect our financial results and stock price including, but not limited to: • product mix; • competitive pricing pressures; • material costs; • revenue and expenses related to new products and enhancements to existing products; • delays in customer purchases in anticipation of new products or product enhancements by Laserscope or its competitors; and • the risk of loss or interruption to our operations or increased costs due to earthquakes, the availability of power and energy supplies and other events beyond our control |
| The market price of our common stock has historically been 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 our 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 December 31, 2005, we had 22cmam296cmam689 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 |
| Our financial results and stock price are highly dependent upon successful pricing and sales of our main product line, the GreenLight laser system and related fiber optic delivery device, which increases our vulnerability to a variety of factors outside of our direct control |
| Our financial results are highly dependent on successful pricing and sales of the GreenLight PV laser system and related fiber optic delivery device |
| Pricing and sales may be affected by a myriad of factors including public and private payer reimbursement domestically and internationally, products and services offered by competitors with greater financial resources than us who may engage in aggressive marketing 23 _________________________________________________________________ [81]Table of Contents and pricing strategies, new technologies that deliver superior results to PVP or comparable results at commensurate or lower costs, our ability to maintain or reduce the costs of materials and components used to produce the GreenLight products, among other factors beyond our direct control |
| Any of these or other factors could compel us to make significant reductions in our pricing or other changes in our sales strategy, which could adversely affect our financial performance and future prospects |
| We are a party to legal proceedings arising in the ordinary course of business |
| We are 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 our financial position, results of operations, or future cash flows |
| We typically assume warranty obligations in connection with the sales of our products, which could cause a significant drain on our resources if our products perform poorly |
| We have a direct field service organization that provides service for our products |
| We generally provide a twelve month warranty on our laser systems |
| Our warranties and premium service contracts provide for a “99dtta0prca Uptime Guarantee” on our laser systems |
| Under provisions of this guarantee, at the request of the customer, we extend the term of the related warranty or service contract if specified system uptime levels are not maintained |
| Although the number of warranties extended under this program are currently not material, we can not assure that the number of warranties will not become significant in the future if our products perform poorly, which could cause a significant drain on our resources |
| Natural catastrophic events, such as earthquakes, hurricanes or terrorist attacks may reduce our revenues and harm our business |
| Our corporate headquarters, including our research and development operations, our manufacturing facilities, and our principal sales, marketing and service offices, are located in the Silicon Valley area of Northern California, a region known for seismic activity |
| A significant natural disaster, such as an earthquake or a flood, could have a material adverse impact on our business, operating results, and financial condition |
| In addition, despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems |
| Any such event could have a material adverse effect on our business, operating results, and financial condition |
| In addition, as our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions, natural and man-made disasters |
| Disruptions in large areas of the United States due to natural disasters and subsequent relief efforts, as seen with the hurricanes that struck the southern United States in the summer and fall of 2005, could have a material adverse effect on our business, operating results, and financial condition |
| The effects of war or acts of terrorism could likewise have a material adverse effect on our business, operating results, and financial condition |
| The terrorist attacks in New York, Pennsylvania and Washington, DC on September 11, 2001 disrupted commerce throughout the world and intensified the uncertainty of the United States and other economies |
| The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to these economies and create further uncertainties |
| To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders, or the manufacture or shipment of our products, our business, operating results, financial condition and cash flows could be materially and adversely affected |
| 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 |
| The exercise of outstanding options and warrants granted under our stock option plans and other options and warrants may result in dilution of our shareholders equity interests |
| Shareholders may experience dilution in the net tangible book value of their investment upon the exercise of outstanding options and warrants granted under our stock option plans and other options and warrants |
| Other Risks |
| 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 us |