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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One) þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  or o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 Commission file number 0-18053 LASERSCOPE (Exact name of Registrant as Specified in Its Charter) CALIFORNIA
    
    77-0049527(State or Other Jurisdiction
    
    (I.R.S. Employer Identification No.)of Incorporation or Organization)
 3070 ORCHARD DRIVE, SAN JOSE, CALIFORNIA 95134-2011
(Address of Principal Executive Offices) Registrants Telephone Number, Including Area Code: (408) 943-0636 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). YES þ NO o The number of shares of Registrants common stock issued and outstanding as of April 30, 2005 was
22,067,159.




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TABLE OF CONTENTS PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Income
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Income
    
    
    12Results
of Operations
    
    
    13Liquidity and Capital Resources
    
    
    15Risk Factors
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    33PART II. OTHER INFORMATION
    
    
    34Item 6.
    
    Exhibits
    
    
    34SIGNATURES
    
    
    
    
    35EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION. 
 Item 1. Financial Statements. Laserscope 
 Condensed Consolidated Balance Sheets
(unaudited)
 March 31,
    
    
    December 31,(thousands)
    
    2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    21,970
    
    
    $
    15,954Accounts receivable, net
    
    
    22,245
    
    
    
    20,342Inventories, net
    
    
    22,849
    
    
    
    19,446Other current assets
    
    
    1,488
    
    
    
    1,471Total current assets
    
    
    68,552
    
    
    
    57,213Property and equipment, net
    
    
    3,789
    
    
    
    3,457Goodwill
    
    
    655
    
    
    
    655Other assets
    
    
    270
    
    
    
    264Total assets
    
    $
    73,266
    
    
    $
    61,589Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    6,116
    
    
    $
    2,389Accrued compensation
    
    
    3,952
    
    
    
    4,365Warranty
    
    
    2,605
    
    
    
    2,536Other accrued liabilities
    
    
    5,554
    
    
    
    5,761Deferred revenue
    
    
    5,734
    
    
    
    3,575Other current liabilities
    
    
    21
    
    
    
    21Total current liabilities
    
    
    23,982
    
    
    
    18,647Long-term liabilities:Obligations under capital leases
    
    
    25
    
    
    
    31Total long-term liabilities
    
    
    25
    
    
    
    31Contingencies (see note 7)Shareholders equity:Common stock
    
    
    66,512
    
    
    
    65,009Accumulated deficit
    
    
    (17,300
    )
    
    
    (22,263
    )Accumulated other comprehensive income
    
    
    47
    
    
    
    165Total shareholders equity
    
    
    49,259
    
    
    
    42,911Total liabilities and shareholders equity
    
    $
    73,266
    
    
    $
    61,589
 See Accompanying Notes to Condensed Consolidated Financial Statements 3




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Laserscope 
 Condensed Consolidated Statements of Income 
(Unaudited)
 Three months endedMarch 31,(thousands, except per share amounts)
    
    2005
    
    
    2004Net revenue
    
    $
    28,177
    
    
    $
    18,750Cost of sales
    
    
    10,577
    
    
    
    8,082Gross margin
    
    
    17,600
    
    
    
    10,668Operating expenses:Research and development
    
    
    1,518
    
    
    
    1,239Selling, general and administrative
    
    
    9,945
    
    
    
    6,815Total operating expenses
    
    
    11,463
    
    
    
    8,054Operating income
    
    
    6,137
    
    
    
    2,614Interest income/(expense) and other, net
    
    
    79
    
    
    
    (69
    )Income before income taxes
    
    
    6,216
    
    
    
    2,545Provision for income taxes
    
    
    1,253
    
    
    
    331Net income
    
    $
    4,963
    
    
    $
    2,214Basic net income per share
    
    $
    0.23
    
    
    $
    0.11Diluted net income per share
    
    $
    0.22
    
    
    $
    0.10Shares used in basic per share calculations
    
    
    22,009
    
    
    
    20,342Shares used in diluted per share calculations
    
    
    22,986
    
    
    
    22,682
 See Accompanying Notes to Condensed Consolidated Financial Statements 4




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Laserscope 
 Condensed Consolidated Statements of Cash Flows 
(Unaudited)
 Three Months EndedMarch 31,(thousands)
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    4,963
    
    
    $
    2,214Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation and amortization
    
    
    364
    
    
    
    241Provision for doubtful accounts
    
    
    89
    
    
    
    138Provision for excess and obsolete inventory
    
    
    15
    
    
    
    297Changes in assets and liabilities:Accounts receivable, net
    
    
    (2,079
    )
    
    
    (92
    )Inventories
    
    
    (3,479
    )
    
    
    (1,600
    )Prepayments and other current assets
    
    
    (85
    )
    
    
    (169
    )Accounts payable
    
    
    3,169
    
    
    
    (1,439
    )Accrued compensation
    
    
    (402
    )
    
    
    760Warranty
    
    
    68
    
    
    
    10Deferred revenue
    
    
    2,170
    
    
    
    291Other current liabilities
    
    
    199
    
    
    
    170Tax payable
    
    
    266
    
    
    
    230Net cash provided by operating activities
    
    
    5,258
    
    
    
    1,051Cash flows from investing activities:Acquisition of property and equipment
    
    
    (694
    )
    
    
    (186
    )Acquisition of intangibles and licenses
    
    
    (15
    )
    
    
    (32
    )Net cash used in investing activities
    
    
    (709
    )
    
    
    (218
    )Cash flows from financing activities:Payments on obligations under capital leases
    
    
    (5
    )
    
    
    (15
    )Proceeds from the sale of common stock under stock plans
    
    
    1,488
    
    
    
    697Proceeds from warrants exercised
    
    
    15
    
    
    
    Net cash provided by financing activities
    
    
    1,498
    
    
    
    682Effect of exchange rate changes on cash
    
    
    (31
    )
    
    
    27Net increase in cash and cash equivalents
    
    
    6,016
    
    
    
    1,542Cash and cash equivalents, beginning of period
    
    
    15,954
    
    
    
    7,158Cash and cash equivalents, end of period
    
    $
    21,970
    
    
    $
    8,700Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    5
    
    
    $
    20Income taxes
    
    $
    20
    
    
    $
    96
 See Accompanying Notes to Condensed Consolidated Financial Statements 5




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Laserscope Notes to Unaudited Condensed Consolidated Financial Statements: 1. Basis of presentation The accompanying unaudited condensed consolidated financial statements include Laserscope (the
Company, management, we, us, our) and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated. While the financial information in this report is
unaudited, in the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results of operations as of and
for the periods indicated have been recorded. We suggest that these consolidated financial
statements be read in conjunction with the consolidated financial statements and notes for the year
ended December 31, 2004 included in the Companys annual report on Form 10-K for the year ended
December 31, 2004. The December 31, 2004 balance sheet data has been derived from the audited
financial statements at that date. The results of operations for the three month period ended
March 31, 2005 are not necessarily indicative of the results expected for the full year or any
other interim period. 2. Stock-Based Compensation The Company accounts for stock-based compensation arrangements in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and
its interpretations, and complies with the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under APB
Opinion No. 25, compensation expense is based on the difference, if any, on the date of grant,
between the fair value of the Companys stock and the exercise price. SFAS No. 123 defines a fair
value based method of accounting for an employee stock option or similar equity instrument. The
Company accounts for equity instruments issued to non-employees in accordance with the provisions
of SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services (EITF
Issue No. 96-18). Under SFAS No. 123 and EITF Issue No. 96-18, the fair value of options granted
to non-employees is estimated using the Black-Scholes option pricing model and is periodically
remeasured as the options vest. Had compensation cost for stock-based employee compensation arrangements been determined based
on the fair value at the date of the awards consistent with the provisions of SFAS No. 123, the
impact on the Companys net income would be as follows (in thousands, except per share data): 6




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Three months endedMarch 31,2005
    
    
    2004Net income as reported
    
    $
    4,963
    
    
    $
    2,214Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects
    
    
    (632
    )
    
    
    (366
    )Pro forma net income
    
    $
    4,331
    
    
    $
    1,848Net income per share:Basic-as reported
    
    $
    0.23
    
    
    $
    0.11Basic-pro forma
    
    $
    0.20
    
    
    $
    0.09Diluted-as reported
    
    $
    0.22
    
    
    $
    0.10Diluted-pro forma
    
    $
    0.19
    
    
    $
    0.08
 3. Inventories Inventories were comprised of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Sub-assemblies and purchased parts
    
    $
    11,282
    
    
    $
    9,120Work-in-process
    
    
    6,424
    
    
    
    6,330Finished goods
    
    
    5,143
    
    
    
    3,996$
    22,849
    
    
    $
    19,446
 4. Warranty and Service Contracts Warranty We have a direct field service organization that provides service for our products. We generally
provide a twelve month warranty on our laser systems. After the warranty period, maintenance and
support is provided on a service contract basis or on an individual call basis. Our warranties and
premium service contracts provide for a 99.0% Uptime Guarantee on our laser systems. Under
provisions of this guarantee, 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. The number of
warranties extended under this program are not material. The Company currently provides for the estimated cost to repair or replace products under warranty
at the time of sale. The cost estimate is based on warranty costs experienced in the prior 12
months, and the outstanding warranty liability is revalued on a quarterly basis. Three months endedMarch 31,Warranty Reserve (in thousands)
    
    2005
    
    
    2004Balance at beginning of period
    
    $
    2,536
    
    
    $
    1,947Add:   Accruals for warranties issued
    
    
    753
    
    
    
    546Accruals related to pre-existing warranties
    
    
    31
    
    
    
    12Less:   Settlements made during the period
    
    
    (715
    )
    
    
    (548
    )Balance at end of period
    
    $
    2,605
    
    
    $
    1,957
 7




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Service Contracts Deferred service contract revenue is recognized on a pro rata basis over the period
of the applicable service contract. Costs are recognized as incurred. Three months endedMarch 31,Deferred Service Contract Revenue (in thousands)
    
    2005
    
    
    2004Balance at beginning of period
    
    $
    2,936
    
    
    $
    1,834Add:   Payments received
    
    
    1,479
    
    
    
    1,447Costs incurred under extended service contracts
    
    
    944
    
    
    
    762Less:   Revenue recognized
    
    
    (1,350
    )
    
    
    (1,141
    )Settlements made under extended service
contracts during the period
    
    
    (944
    )
    
    
    (762
    )Balance at end of period
    
    $
    3,065
    
    
    $
    2,140
 8




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5. Net income per share Basic net income per share is computed by dividing net income by the weighted average number
of common shares outstanding during the period. Diluted net income per share is computed by giving
effect to all dilutive potential common shares, including options, warrants, and convertible
debentures. A reconciliation of the numerator and denominator used in the calculation of
historical basic and diluted net income per share follows: Three months endedMarch 31,(thousands)
    
    2005
    
    
    2004Numerator:Net income used in computing basic and
diluted net income per share
    
    $
    4,963
    
    
    $
    2,214Denominator:Weighted average number of common
shares outstanding used in computing
basic net income per share
    
    
    22,009
    
    
    
    20,342Add: Dilutive potential common shares used
in computing dilutive net income per share
    
    
    977
    
    
    
    2,340Total weighted average number of shares
used in computing diluted net income
per share
    
    
    22,986
    
    
    
    22,682
 The following outstanding options (prior to the application of the treasury stock method) were
excluded from the computation of diluted net income per common share for the periods ended March
31, 2005 and 2004 because including them would have had an anti-dilutive effect: Three months endedMarch 31,(thousands)
    
    2005
    
    
    2004Options to purchase common stock
    
    
    87
    
    
    
    5887
    
    
    
    58
 9




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6. Comprehensive income Total comprehensive income during the periods ended March 31, 2005 and 2004 consisted of (in
thousands): Three months endedMarch 31,2005
    
    
    2004Net income
    
    $
    4,963
    
    
    $
    2,214Translation adjustments
    
    
    (118
    )
    
    
    109Comprehensive income
    
    $
    4,845
    
    
    $
    2,323
 7. Contingencies The Company is at times a party to legal proceedings and claims arising in the ordinary course of
its business. While it is not feasible to predict or determine the outcome of the actions brought
against the Company, management believes that the ultimate resolution of these claims will not
ultimately have a material adverse effect on the Companys financial position, results of
operations, or future cash flows. 8. Indemnifications In the ordinary course of business, the Company enters into contractual arrangements under which
the Company may agree to indemnify the third party to such arrangement from any losses incurred
relating to the services they perform on behalf of the Company or for losses arising from certain
events as defined within the particular contract, which may include, for example, patents,
litigation or claims relating to past performance. Such indemnification obligations may not be
subject to maximum loss clauses. Historically, payments made related to these indemnifications have
been immaterial. The Company has entered into indemnification agreements with its directors and officers that may
require the Company: to indemnify its directors and officers against liabilities that may arise by
reason of their status or service as directors or officers, other than liabilities arising from
willful misconduct of a culpable nature; to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified; and to make good faith determination
whether or not it is practicable for the Company to obtain directors and officers insurance. The
Company currently has directors and officers insurance. 9. Income Taxes Provision for income taxes
increased $922.000, from $331,000 to $1,253,000 for the three months
ended March 31, 2005 compared to the corresponding period in 2004.
The effective tax rate in the three month period ending March 31,
2005 was approximately 20% compared to the 13% in the corresponding
period in 2003. The difference in the rates is due to a lower
relative benefit of net operating loss carry forwards in the first
quarter of 2005. Management has evaluated the
need for a valuation allowance for the deferred tax assets in
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Due to experiencing only a
short history of profitability, management does not believe the
weight of evidence exceeds the threshold of more likely than
not not as required by SFAS No. 109 and a full valuation
allowance was appropriate at March 31, 2005 and 2004. Continued
profitability and future  changes in managements assumptions
may result in a partial or full release of the deferred tax valuation
allowance. A release of the valuation allowance would have a
favorable impact on the tax provision within the statement of
operations. 10




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10. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No 123 (revised 2004) (SFAS No 123(R)), Share Based
Payment. SFAS No 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on their fair values and
is effective for public companies for reporting periods beginning with the next fiscal year after
June 15, 2005. Laserscope has not yet completely evaluated the impact of the adoption of SFAS No
123(R). In November 2004, the
FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB
No. 43, Chapter 4. SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs
and wasted material. SFAS No. 151 is effective for the inventory
costs incurred during fiscal years beginning in the second quarter of
fiscal 2006. The Company does not believe the adoption of SFAS No.
151 will have a material effect on its consolidated financial
position, results of operations or cash flows. 11




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Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations. INTRODUCTORY STATEMENT Some of the statements in this Quarterly Report on Form 10-Q, including but not limited to
Managements Discussion and Analysis of Financial Condition and Results of Operations, and
elsewhere in this document are forward-looking statements within the meaning of the Private
Securities Litigation Act of 1995. These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements to be materially different from those expressed or
implied by any forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as may, will, could, would, should, expect, plan,
anticipate, intend, believe, estimate, predict, potential or continue or the negative
of these terms or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. We refer you to the factors described under the heading
Risk Factors in this Quarterly Report on Form 10-Q as well as to our Annual Report on Form 10-K
for the year ended December 31, 2004 under the heading Risk Factors. Readers are cautioned not
to place undue reliance on forward-looking statements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of those statements. We are under no duty
to publicly release any revision to the forward-looking statements after the date of this document. Overview. Laserscope is a leading provider of medical laser systems for surgical and aesthetic applications.
Founded in 1982, we are a pioneer developer of innovative technologies with over 8000 lasers
installed worldwide in doctors offices, out-patient surgical centers and hospitals. Our product
portfolio consists of lasers including KTP/532, Nd: YAG, and ER: Yag and other light-based systems
and related energy delivery devices for medical applications. Laserscope primarily serves the needs of two medical specialties: urology and aesthetic surgery.
Our GreenLight laser system, offers a treatment for a urological disorder called benign prostatic
hyperplasia (BPH), an enlargement of the prostate gland experienced by most men after the age of
fifty. For aesthetic applications, we offer a full line of products used to perform a wide variety of
treatments including the removal of leg and facial veins, unwanted hair, pseudo-folliculitis and
wrinkles. In the United States, we distribute our products to hospitals, outpatient surgical centers and
physician offices through our own direct sales force and through the McKesson Corporation Medical
Group (McKesson). In December 2000, we signed a five year distribution agreement that grants to
McKesson the exclusive distribution rights for our core aesthetic laser products in the United
States. McKessons Primary Care Division has a sales force of more than 500 representatives
throughout the United States who are supported by our own direct sales force. In the United Kingdom and France, we distribute our products to hospitals, outpatient surgical
centers and physician offices through our own direct sales force. Elsewhere, we sell our products through regional distributor networks throughout Europe, the Middle East, Latin America,
Asia and the Pacific Rim. Laserscope is both ISO 9001 and CE certified. During the first quarter of 2005, our revenues and net income grew substantially compared to
the corresponding period in 2004 as a result of continued growth in sales of our main urology
products, the GreenLight laser system and disposable fiber optic delivery devices, which offset a
decline in sales of our aesthetic products. Our reported revenue for the quarter ended March 31,
2005 was $28.2 million, a 50% increase as compared to total revenues of $18.8 million in the first
quarter of 2004, and net income in the first quarter of 2005 was $5 million, or $0.22 per diluted
share, a 124% increase when compared to net income of $2.2 million, or $0.10 per diluted share, in
the first quarter of 2004. We expect revenues in our urological products, fueled by sales of the
GreenLight laser system and disposable fibers, will continue to grow at a faster rate than our
aesthetic products in 2005. However, as a result of the purchasing cycles of our international customers, revenues from the
sales of disposable fibers outside of the United States have historically fluctuated sequentially.
We expect to continue to see this fluctuation in future quarters. Sales of our aesthetic products were adversely impacted by disruptions resulting from
implementation of several structural changes to our aesthetic sales organization during the first
quarter of 2005. In addition, intense competition in the market for light-based cosmetic
treatment devices, which is characterized by low barriers to entry and marginal technological
differentiation among product offerings, continued to create price pressure on our aesthetic
products. We intend to address this challenge by focusing on the key features of, and the mix
within, our product offerings affecting the value proposition to the customer, in particular the
speed and comfort of light-based aesthetic treatments. There can be no assurance that our existing
products and newly offered products will be competitive in an increasingly difficult market for
light-based cosmetic treatment devices. Adoption of the PVP procedure continued to grow in the first quarter of 2005 both domestically and
internationally and we expect this trend to continue in 2005. Our priority in the urology segment
of our business is to establish the PVP procedure using the GreenLight laser system as the
worldwide standard for treating BPH. Demonstrating and maintaining the clinical effectiveness and
safety of the PVP procedure using our product is essential to achieving this goal. As a result, we
continued to make significant investments in sales, marketing and professional education and
training in the first quarter of 2005, and intend to continue to do so in 2005. Our efforts to
increase adoption of PVP using our product in the United States, Europe and the Asia-Pacific region
will be especially important to our continued success. The international market for PVP, which we
believe to be substantially greater than the U.S. market offers great promise but also a greater
variety of challenges and uncertainties than our domestic efforts, which are discussed in greater
detail in the Risk Factors section below. Obtaining satisfactory heath care reimbursement rates for the PVP procedure using the GreenLight
laser system from government and private insurers continues to be a critical factor for our success
in the domestic BPH market. Obtaining government approvals of the PVP procedure as well as securing
satisfactory reimbursement rates from public and private payers in the various foreign countries
where we have introduced the GreenLight laser system will be important for our future success in
those markets as well. As a result, we will continue to work diligently to obtain satisfactory
health care reimbursement in our key domestic and international markets. Our sensitivity to public
and private payer reimbursement rates makes us subject to a variety of risks and uncertainties, which are discussed
in greater detail in the Risk Factors section below. 12




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Results of Operations. The following discussion should be read in conjunction with the unaudited condensed consolidated
financial statements and notes included in Part I  Item 1 of this Quarterly Report and the
audited consolidated financial statements and notes contained in the Companys Annual Report on
Form 10-K for the year ended December 31, 2004 and the accompanying Managements Discussion and
Analysis of Financial Condition and Results of Operations. The following table contains selected income statement information, which serves as the basis of
the discussion of the Companys results of operations for the quarters ended March 31, 2005 and
2004 (in thousands, except percentages): Three months endedMarch 31, 2005
    
    
    March 31, 2004
    
    
    %Amount
    
    
    %(a)
    
    
    Amount
    
    
    %(a)
    
    
    ChangeRevenues from sales of:Lasers & Instrumentation
    
    $
    13,802
    
    
    
    49
    %
    
    
    11,663
    
    
    
    62
    %
    
    
    18
    %Disposable supplies
    
    
    12,438
    
    
    
    44
    %
    
    
    5,319
    
    
    
    28
    %
    
    
    134
    %Service
    
    
    1,937
    
    
    
    7
    %
    
    
    1,768
    
    
    
    10
    %
    
    
    10
    %Total net revenues
    
    
    28,177
    
    
    
    100
    %
    
    
    18,750
    
    
    
    100
    %
    
    
    50
    %Gross margin
    
    
    17,600
    
    
    
    62
    %
    
    
    10,668
    
    
    
    57
    %
    
    
    65
    %Operating expenses:Research & development
    
    
    1,518
    
    
    
    5
    %
    
    
    1,239
    
    
    
    7
    %
    
    
    23
    %Selling, general & administrative
    
    
    9,945
    
    
    
    35
    %
    
    
    6,815
    
    
    
    36
    %
    
    
    46
    %Net income
    
    $
    4,963
    
    
    
    18
    %
    
    $
    2,214
    
    
    
    12
    %
    
    
    124
    %
   (a)
    
    expressed as a percentage of total net revenues. Revenues from the sales of lasers and instrumentation increased 18% during the three months
ended March 31, 2005 compared to the same period in 2004. The increase primarily was driven by a
higher volume of GreenLight surgical lasers sold. First quarter 2005 revenue shipments of
GreenLight lasers were 90 units, which is an approximate 84% increase over first quarter 2004
shipments of 49 units. GreenLight backlog decreased 3 unit from December 31, 2004 to 10 units at
March 31, 2005 First quarter 2005 worldwide aesthetic laser and instrumentation revenues decreased
15% compared to the same period in 2004. The decrease is due to lower average selling prices and
decreased domestic aesthetic volume, partially offset by increased international aesthetic laser
volume. Domestic aesthetic laser sales were adversely impacted by several structural changes
implemented in the Companys aesthetic sales organization in the
early pact of the first quarter in 2005. We believe that we will see moderate
increases in our sales of lower-priced office-based aesthetic lasers in the worldwide market due to
a strong distribution channel with McKesson, the Q1 2005 structural changes, and the introduction
of the Solis IPL device. The Solis, introduced at the American Academy of Dermatology Annual Meeting,
in February, 2005, is FDA-cleared for permanent hair reduction and skin rejuvenation. We
also believe we will see a continued trend of increasing GreenLight laser shipments. Revenues from the sales of disposable supplies increased 134% during the three months ended March
31, 2005 compared to the corresponding period in 2004. This increase
was driven by an increase in
shipments of disposable fiber-optic devices of approximately 9,900 units. 13




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Increased GreenLight fiber
sales are a direct result of an increase in our installed
base of GreenLight laser systems. The Company expects revenues from the sales of disposable supplies to incrementally increase
as a result of the growing installed base of GreenLight laser systems worldwide. Laserscopes service revenues increased 10% during the three months ended March 31, 2005 compared
to the same period in 2004 due to higher service contracts sold worldwide. Service revenue
increased $99,000 in the domestic region, or 7%, and $69,000 in the international region, or 27%.
The Company believes that increases in future revenues depend on increases to the installed base of
lasers as well as the acceptance of its service contracts by its customers. Gross margin as a percentage of revenues increased during the quarter ended March 31, 2005 relative
to the corresponding period of 2004. The increase in gross margin percentage is due primarily to a
change in the laser product mix to higher priced laser systems, and increased GreenLight fiber
sales. Research and development expenses are the result of activities related to the development of new
laser, instrumentation and disposable products and the modification and enhancement of Laserscopes
existing products. These expenses decreased marginally as a percentage of sales during the three
months ended March 31, 2005 compared to the same period in 2004, but increased in absolute terms.
The Company expects that amounts spent in research and development during 2005 will be higher in
absolute terms than that spent in 2004 but lower as a percentage of net revenues. Selling, general and administrative expenses increased during the quarter ended March 31, 2005
compared to the corresponding period in 2004. The increase is due primarily to higher commissions
paid commensurate with the increase in revenues, higher marketing and clinical education expenses
related to expanding the presence of the Companys products in both the domestic and international
markets, as well as increased costs related to Sarbanes-Oxley Section 404 compliance. We expect
amounts spent in selling, general and administrative expenses to increase during the remainder of
2005 relative to the first quarter of 2004 as we expect higher commissions as a result of increased
sales and to continue to expand marketing programs related to the
GreenLight laser system and aesthetic
products. Provision for income taxes increased $922,000, from $331,000 to $1,253,000 for the three months
ended March 31, 2005 compared to the corresponding period in 2004. The effective tax rate in the
three month period ended March 31, 2005 was 20% compared to 13% in the corresponding period in
2004. The difference in the rates is due to a lower relative benefit of net operating loss carry
forwards in the first quarter of 2005. Management has evaluated the need for a valuation allowance
for the deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Due to experiencing only a short history of profitability,
management does not believe the weight of evidence exceeds the threshold of more likely than not
as required by SFAS No. 109 and a full valuation allowance was appropriate at March 31, 2005 and
2004. Continued profitability and future changes in management s assumptions may result in a
partial or full release of the deferred tax valuation allowance. A release of the valuation
allowance would have a favorable impact on the tax provision within the statement of operations. 14




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Liquidity and Capital Resources. The following table contains selected balance sheet information that serves as the basis of the
discussion of the Companys liquidity and capital resources at March 31, 2005 and for the three
months then ended (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Cash and cash equivalents
    
    $
    21,970
    
    
    $
    15,954Total assets
    
    $
    73,266
    
    
    $
    61,589Total liabilities
    
    $
    24,007
    
    
    $
    18,678Net working capital
    
    $
    44,570
    
    
    $
    38,566
 During the three months ended March 31, 2005, cash provided in operating activities totaled $5.3
million. This was the combined result of the following sources: net income-$5.0 million; an
increase in accounts payable- $3.2 million; an increase in deferred revenue- $2.2 million;
depreciation- $0.3 million; an increase in tax payable- $0.3 million; an increase in other accrued
liabilities- $0.2 million; an increase in warranty- $0.1 million; and an increase in provision of
doubtful accounts receivable- $0.1 million. These sources were offset by: an increase in
inventory- $3.5 million; an increase in accounts receivable- $2.1 million resulting from
timing differences in product shipment and customer payments; a decrease in accrued compensation-
$0.4 million a result of the payment of year-end bonus accruals; and an increase in other current
assets- $0.1 million In the first quarter of 2005, cash used in investing activities consisted of capital expenditures
of $0.7 million. A significant portion of total capital spending is attributable to in-progress
Enterprise Resource Planning (ERP) costs. Additional spending was in office equipment, test and
production equipment, licenses and intangibles and capitalized laser systems used by Service and
Research and Development departments. Cash provided by financing activities during the three months ended March 31, 2005 totaled $1.5
million. This is the result of the sales of common stock under stock option plans, and the
exercise of warrants. We have in place an asset based line of credit which provides up to $5.0 million in borrowings.
The line of credit expires September 2006. Credit is extended based on the Companys eligible
accounts receivable and inventory. At March 31, 2005, the Company had approximately $5.0 million
in borrowing capacity and no borrowings outstanding. The Companys assets collateralize the line of
credit which bears an interest rate equivalent to the banks prime rate plus 2.0%. Borrowings
against the line of credit are paid down as the Company collects its accounts receivable.
Provisions of the bank loan agreement prohibit the payment of dividends on non-preferred stock, or
the redemption, retirement, repurchase or other acquisition of Company stock. The agreement
further requires the Company to maintain a minimum tangible net worth. As of March 31, 2005, the
Company was in compliance with all covenants and had no outstanding borrowings under the line of
credit facility. 15




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We anticipate that future changes in cash and working capital will be dependent on a number of
factors including:  
    our ability to effectively manage inventory and accounts receivable;
    our ability to anticipate and adapt to the changes in our industry such as new and alternative medical procedures;
    our level of profitability;
    our determination to acquire or invest in products and businesses complementary to ours; and
    the market price for our common stock as it affects the exercise of stock options and sale of common stock under stock
plans. We have historically financed acquisitions using our existing cash resources. While we believe our
existing cash resources, including our bank line of credit, will be sufficient to fund our
operating needs for the next twelve months, additional financing may be required for our currently
envisioned long-term needs. There can be no assurance that any additional financing will be available on terms acceptable
to us, or at all. In addition, future equity financings could result in dilution to our
shareholders, and future debt financings could result in certain financial and operational
restrictions . Off-Balance Sheet Arrangements. As part of our ongoing business, we do not participate in transactions that generate relationships
with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities (SPEs), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. As of March 31, 2005, we are not involved in any unconsolidated SPE transactions. 16




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##### Table of Contents



Contractual Obligations. We did not enter into any additional material contractual obligations during the quarter ended
March 31, 2005. Payments Due by Period (in thousands)Contractual
    
    
    
    
    
    Less Than
    
    
    
    
    
    
    
    
    
    
    More Than 5Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    YearsOperating Leases
    
    $
    6,363
    
    
    $
    962
    
    
    $
    1,773
    
    
    $
    1,584
    
    
    $
    2,044Capital Leases
    
    $
    47
    
    
    $
    21
    
    
    $
    26
    
    
    
    
    
    
    
    Total
    
    $
    6,410
    
    
    $
    983
    
    
    $
    1,799
    
    
    $
    1,584
    
    
    $
    2,044
 Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No 123 (revised 2004) (SFAS No 123(R)), Share Based
Payment. SFAS No 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on their fair values and
is effective for public companies for reporting periods beginning with the next fiscal year after
June 15, 2005. Laserscope has not yet completely evaluated the impact of the adoption of SFAS No
123(R). In November 2004, the
FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB
No. 43, Chapter 4. SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs
and wasted material. SFAS No. 151 is effective for the inventory
costs incurred during fiscal years beginning in the second quarter of
fiscal 2006. The Company does not believe the adoption of SFAS No.
151 will have a material effect on its consolidated financial
position, results of operations or cash flows. 17




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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
satisfactory reimbursement rates from private and governmental third-party payers for procedures
using our products. If we are unable to obtain and maintain satisfactory reimbursement rates,
demand for our products would decline and our business, financial results and cash flows would
suffer. The ability of our customers to obtain satisfactory reimbursement for our products and services
using our products from government and third-party payers is essential to our success. Demand for
certain of our products depends on government and private insurance reimbursement of hospitals and
physicians for health care costs, including, but not limited to, reimbursement of capital equipment
costs. Reductions or delays in such insurance coverage or reimbursement may negatively impact
hospitals, physicians and other health care providers decisions to purchase our products,
adversely affecting our future sales. A substantial portion of our laser sales are for aesthetic procedures that are generally not
subject to reimbursement by government or private health insurance. The general absence of
insurance coverage for these cosmetic procedures may restrict the development of this market.
Major third-party payers for health care services such as the PVP procedure using the GreenLight
laser system 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 continue to work to contain healthcare costs. Public and private initiatives
to limit the growth of healthcare costs, including price regulation, are underway in the U.S. and
our key international markets. Implementation of healthcare reforms in these significant markets
may limit the price of, or the level at which reimbursement is provided for our products. The current Facility Fee reimbursement for PVP in the United States could be reduced,
eliminated or utilized by a competitor. Demand in the United States for our GreenLight laser system and disposable fibers is highly
dependent on the reimbursement rate established for the PVP procedure when it is performed in the
hospital site of service, which is established by the Centers for Medicare and Medicaid Services
(CMS) under an Ambulatory Payment Classification (APC) reimbursement code. The APC code
applicable to the PVP procedure has varied in recent years. In November 2002, CMS announced its
final rule with respect to APC reimbursement codes to be implemented in January 2003. One of the
APC codes, known as the Facility Fee, that was 18




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affected was used by hospitals to bill Medicare
for the PVP procedure. In February 2003, CMS issued a technical correction to this APC code which
represented the reimbursement
under this code for 2003. The reimbursement rate for this code reduced the amount paid to the
hospital for the PVP procedure by approximately 19% for the hospital site of service for Medicare
patients compared to the reimbursement during 2002. In November 2003, CMS notified Laserscope that
its application for assignment of PVP to a new technology APC had been accepted. CMS determined
that PVP met the new technology APC qualification criteria and assigned a new APC code effective
April 1, 2004 for PVP and other similar procedures. The national average Facility Fee reimbursement
rate under the new technology APC is $3,750. The rate is scheduled to be maintained until March
31, 2006, at which time CMS may assign a new reimbursement value to the procedure based on data
accumulated during the two-year assessment period or may re-assign PVP to an existing APC code.
There can be no assurance that the current rate will be maintained, raised or lowered.
Additionally, the new technology APC is not solely specific to Laserscopes products and can be
used by other technologies that meet the requirements of the APC coding guidelines. If a
competitor were able to obtain reimbursement under the current APC code for the PVP procedure using
its product, demand for our product could be reduced and our financial results could suffer. Physician Fee Schedule reimbursement for PVP in the United States remains uncertain. Demand in the U.S. for our GreenLight laser system and disposable fibers is also highly dependent
on the physician reimbursement rates applicable to the PVP procedure under the national physicians
Fee Schedule determined by CMS. We believe that physicians may obtain reimbursement for PVP
procedures pursuant to the Fee Schedule under two reimbursement codes, including one applicable to
the office site of service and the other applicable to the hospital or ambulatory surgery site of
service. Each of these reimbursement codes may not provide physicians a reimbursement level and
reimbursement structure reflecting the actual time, effort and resource costs associated with the
procedure, which would discourage physicians from performing the PVP procedure. Should CMS reduce
the current codes under the Fee Schedule relative to other procedures it will likely negatively
affect PVP adoption. Failure to adequately and fairly reimburse physicians, hospitals and
ambulatory surgery centers for the PVP procedure in all sites of service will impair adoption of
the PVP procedure, 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, an upward adjustment, affecting PVP procedural volume and sales of our
products. PVP physician reimbursement is typically lower, on a per-procedure basis, compared to
other BPH therapies. The current national average rate of reimbursement paid 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 BPH therapies on a per-procedure basis. While we believe
that this disparity results in physicians and hospitals not being reimbursed 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 19




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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 either the Facility Fee 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 IP 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, many of which are of
questionable validity and some of which appear to overlap with other issued patents. As a result,
there is a significant amount of uncertainty in the industry regarding patent protection and
infringement. Because patent applications are maintained in secrecy in the United States until
such patents are issued and are maintained in secrecy for a period of time outside the United
States, we can conduct only limited searches to determine whether our technology infringes any
patents or patent applications of others. If we are unable to protect the integrity, safety and proper use of our ADDStat disposable fiber
optic delivery device with the GreenLight laser system, it could result in negative patient
outcomes and reduce our disposable fiber recurring revenue stream. Ensuring the integrity, safety and proper use of the ADDStat disposable fiber optical delivery
device, referred to elsewhere in this Report as the disposable fiber, used with the GreenLight
laser system is crucial to achieving optimal patient outcomes from the PVP procedure. With this is
mind, we manufacture the ADDStat fiber using high quality materials and exacting 20




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production
standards. We inspect each unit carefully to check that it conforms to our specifications and use
diligent efforts to ensure that the disposable fiber is used appropriately
in connection with the GreenLight laser system. However, if a third party were to produce and
distribute a counterfeit version of the ADDStat fiber or an inferior substitute fiber 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 ADDStat fiber, one or more third party manufacturers
may produce counterfeit or inferior quality fibers that our customers may, knowingly or
unknowingly, purchase for use with the GreenLight laser system. In addition, it is possible that
our customers may seek to violate our prohibition on reuse of fibers (or reuse inferior substitute
fibers) on unwitting patients, reducing the efficacy of the procedure and exposing such patients to
the risk of blood-borne pathogens such as HIV or Hepatitis C. Use of such third party fibers or
misuse of our genuine ADDStat fibers could result in adverse clinical outcomes, reducing demand for
PVP and decreasing demand for our products. We use a variety of methods to protect patients from
inferior fibers and the reuse of our ADDStat disposable fibers, including legal and regulatory

safeguards, system enabling, patient education and safety packaging among other measures.
Moreover, use of counterfeit or substitute disposable fibers for use with the GreenLight laser
system or unauthorized reuse of fibers, would displace sales of our ADDStat disposable fibers
reducing our recurring disposable fiber revenue stream and harming our business. We participate in
competitive markets with companies that have significantly greater
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;
    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 funds as our products, and accordingly, these manufacturers may be considered our
competitors. Generally, surgical laser manufacturers such as Laserscope compete with standard
surgical methods and other medical technologies and treatment modalities. We cannot assure that we
can compete effectively against such competitors. In addition, we cannot assure that these or other
companies will not succeed in developing technologies, products or treatments that are more
effective than ours or that would render our technology or products obsolete or non-competitive. 21




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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, international expansion, and our strategy of being the provider of the
leading solutions for the treatment of BPH and aesthetic laser surgery, have placed, and are
expected to continue to place, a significant strain on our managerial 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 28% of total revenues in the quarter ended March 31, 2005 and 27%
in the quarter end March 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. 22




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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 We do not engage in hedging transactions for speculative or trading purposes. Our business has significant risks of product liability claims, which could drain our resources and
exceed our insurance coverage which is limited. 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 Laserscopes financial position, results of
operations, and future cash flows. At present, we maintain product liability insurance on a claims made basis with coverage of $10.0
million in the aggregate with a deductible of $0.1 million per occurrence and an annual maximum
aggregate deductible of $0.5 million. We cannot assure that such insurance coverage will be
available to us in the future at a reasonable cost, if at all. Nor can we assure that other claims
will not be brought against us in excess of our insurance coverage. Our products are subject to government regulation, and so 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. Laserscope and its 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. 23




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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. To date, all of our products (except for the 600 Series Dye Module) have been marketed through the
510(k) procedure. Future products, however, may require clearance through the PMA procedure. There
can be no assurance that such marketing clearances can be obtained on a timely basis, or at all.
Delays in receiving such clearances could have a significant adverse impact on our ability to
compete in our industry. The FDA may also require post-market testing and surveillance programs to
monitor certain products. Certain other countries require medical device manufacturers to obtain clearances for products
prior to marketing the products in those countries. The requirements vary widely from country to
country and are subject to change. 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 Good
Manufacturing Practice regulations. Those regulations impose certain procedural and documentation
requirements upon medical device manufacturers concerning manufacturing, testing and quality
control activities. If these inspections determine violations of applicable regulations, the
continued marketing of any products manufactured by us may be adversely affected. In addition, our laser products are covered by a performance standard for laser products set forth
in FDA regulations. The laser performance standard imposes certain specific record-keeping,
reporting, product testing, and product labeling requirements on laser manufacturers. These
requirements also include affixing warning labels to laser systems, as well as incorporating
certain safety features in the design of laser products. Complying with applicable governmental regulations and obtaining necessary clearances or approvals
can be time consuming and expensive. There can be no assurance that regulatory review will not
involve delays or other actions adversely affecting the marketing and sale of our products in the
United States and internationally. We also cannot predict the extent or impact of future
legislation or regulations in the United States and abroad. 24




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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. As we have limited working capital, we may need additional capital that may not be available to us
and, if raised, may dilute our stockholders 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 March 31, 2005, our total assets were $73.3 million and our total liabilities were $24.0
million. As of the same date, our working capital was $44.6 million and our cash and cash
equivalents totaled $22.0 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. In 2004, except for shares issued through the Companys Employee Stock Purchase Plan and the
Incentive Stock Option Plans, the only other capital raised was through the exercise of warrants,
which resulted in the issuance of 363,212 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; 25




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
    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 stockholders would be reduced and these securities might have rights, preferences
and privileges senior to those of our current stockholders. 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 $14.7 million, $2.5 million, and $0.3 million for fiscal years
2004, 2003, and 2002 respectively, prior to 2002, we had prolonged periods of consecutive quarterly
net losses. At March 31, 2005, we had an accumulated deficit of
$17.3 million. In order to
maintain and improve our profitability, we will need to continue to generate new sales while
controlling our costs. As we plan on continuing the growth of our business while implementing cost
control measures, we may not be able to successfully generate enough revenues to remain profitable
with this growth. Any failure to increase our revenues and control costs as we pursue our planned
growth would harm our profitability and would likely 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. 26




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Our expenditures for research and development were $5.2 million in 2004, $4.4 million and $3.8
million in each year of 2003 and 2002, respectively. We anticipate that our ability to compete
will require significant research and development expenditures with a continuing flow of
innovative, high-quality products. We cannot assure that we will be successful in designing,
manufacturing or selling enhanced or new products in a timely manner. Nor can we assure that a
competitor could not introduce a new or enhanced product or technology that could have an adverse
effect on our competitive position. Our current research and development programs are directed toward the development of new laser
systems and delivery devices. We cannot assure that these markets will develop as anticipated or
that our product development efforts will prove successful. Nor can we assure that such new
products, if developed and introduced, will be accepted by the market. 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 patent infringement and/or other
intellectual property related action 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, any of which would have a material adverse effect on our business,
results of operations and financial condition. Any acquisitions 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 27




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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 stockholders ownership interest, the
incurrence of debt, contingent liabilities, deferred 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. Hiring
qualified technical, sales and management personnel is difficult due to a limited number of
qualified professionals and competition in our industry for these types of employees. We have in
the past experienced delays and difficulties in recruiting and retaining qualified technical and
sales personnel and believe that at times our employees 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, Bob Mathews, Group
Vice President, Operations and Product Development, and Robert Mann, Group Vice President,
Worldwide Sales and Marketing. We do not have formal employment agreements with Messrs. Reuter,
Mathews and Mann and do not maintain key person life insurance policies on their lives. 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 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
Laserscope will accomplish revenue growth or profitability on a quarterly or annual basis. Nor can
we assure that revenue growth or profitability will not fluctuate significantly from quarter to
quarter. 28




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If we are unable to continue our relationship with McKesson on favorable contractual terms, our
business may be harmed. In December 2000, Laserscope and McKesson entered into a five-year agreement whereby McKesson would
obtain exclusive distribution rights for the Companys aesthetic product lines to doctors offices
in the United States. During 2004, Sales to McKesson accounted for approximately 23% of our total
revenues and at December 31, 2004, accounts receivable from McKesson accounted for approximately
25% of our total accounts receivable. If we are unable to maintain a favorable relationship with
McKesson or if McKesson encounters financial difficulties, it would have a material adverse effect
on our business, financial condition, results of operations, and future cashflows. 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, our
business, operating results, financial condition and customer relationships would be adversely
affected. Our customers may discover defects in our products after the products have been fully deployed and
operated under peak stress conditions. In addition some of our products are combined with products
from other vendors, which may contain defects. As a result, should problems occur, it may be
difficult to identify the source of the problem. If we are unable to fix defects or other
problems, we could experience, among other things:  
    loss of customers;
    increased costs of product, returns and warranty expenses;
    damage to our brand reputation;
    failure to attract new customers or achieve market acceptance;
    diversion of development and engineering resources; and
    legal actions by our customers. The occurrence of any one or more of the foregoing factors could seriously harm our business,
financial condition and results of operations. 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; 29




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
    material costs;
    revenue and expenses related to new products and enhancements to existing
products;
    delays in customer purchases in anticipation of new products
or product enhancements by Laserscope or its competitors; and
    the risk of loss or interruption to our operations or
increased costs due to earthquakes, the availability of power and energy supplies and other events
beyond our control. The market price of our common stock may be subject to significant fluctuations. These
fluctuations may be due to factors specific to Laserscope, such as:  
    quarterly fluctuations in our financial results;
    changes in analysts estimates of future results;
    changes in investors perceptions of our products;
    announcement of new or enhanced products by us or our competitors;
    announcements relating to acquisitions and strategic transactions by us
    or our competitors;
    general conditions in the medical equipment industry; and
    general conditions in the financial markets. The stock market has from time to time experienced extreme price and volume fluctuations,
particularly among stocks of high technology companies, which, on occasion, have been unrelated to
the operating performance of particular companies. Factors not directly related to Laserscopes
performance, such as negative industry reports or disappointing earnings announcements by publicly
traded competitors, may have an adverse impact on the market price of our common stock. As of April 30, 2005, we had 22,067,159 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. We are a party to legal proceedings arising in the ordinary course of business. 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, 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. After the warranty period, maintenance and
support is provided on a service contract basis or on an individual call basis. Our warranties and
premium service contracts provide for a 99.0% Uptime Guarantee on our laser systems. Under
provisions of this guarantee, 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. 30




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Natural catastrophic events, such as earthquakes, 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. The effects of war or acts of
terrorism could have a material adverse effect on our business, operating results, and financial
condition. The terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11,
2001 disrupted commerce throughout the world and intensified the uncertainty of the United States
and other economies. The continued threat of terrorism and heightened security and military action
in response to this threat, or any future acts of terrorism, may cause further disruptions to these
economies and create further uncertainties. To the extent that such disruptions or uncertainties
result in delays or cancellations of customer orders, or the manufacture or shipment of our
products, our business, operating results, financial condition and cash flows could be materially
and adversely affected. No Dividends. We have never paid cash dividends on our common stock and do not anticipate paying cash dividends
on the common stock in the foreseeable future. The payment of dividends on the common stock will
depend on our earnings, financial condition and other business and economic factors affecting us at
such time as the Board of Directors may consider relevant. The exercise of outstanding options and warrants granted under Laserscopes 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 Laserscopes 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 the Company. 31




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Item 3. Quantitative and Qualitative Disclosures About Market Risk. Laserscope is exposed to a variety of risks, including changes in interest rates affecting the
return on its investments, outstanding debt balances and foreign currency fluctuations. In the
normal course of business, the Company employs established policies and procedures to manage its
exposure to fluctuations in interest rates and foreign currency values. Interest Rate Risk. At March 31, 2005, we had no bank loans or debentures. In the three months
ended March 31, 2005 and 2004, we did not use derivative financial instruments. We invest our
excess cash in money market funds. Historically, our debt financings generally consisted of
convertible debentures and bank loans requiring either fixed or variable rate interest payments.
Investments in and borrowings under both fixed-rate and floating-rate interest-earning instruments
carry a degree of interest rate risk. On the investment side, fixed-rate securities may have their
fair market value adversely affected due to a rise in interest rates, while floating-rate
securities may produce less income than expected if interest rates fall. In addition, our future
investment income may fall short of expectations due to changes in interest rates or we may suffer
losses in principal if forced to sell securities that have declined in market value due to changes
in interest rates. On the debt side, borrowings that require fixed-rate interest payments require
greater than current market rate interest payments if interest rates fall, while floating rate
borrowings may require greater interest payments if interest rates rise. While we had no borrowing
in the current quarter, if we borrow in the future, our interest expense may be greater than
expected due to changes in interest rates. 32




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Foreign Currency Risk. Our International revenues were 28% and 27% of total revenues in the quarters ended March 31, 2005
and 2004. Our international sales are made through international distributors and wholly owned
subsidiaries with payments to the Company typically denominated in the local currencies of the
United Kingdom and France, and in United States dollars in the rest of the world. Our
international business is subject to risks typical of an international business, including, but not
limited to, differing economic conditions, changes in political climate, differing tax structures,
other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely affected by changes in these or other factors. We do not
engage in hedging transactions for speculative or trading purposes. 
 Item 4. Controls and Procedures. (a) Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer, after evaluating the effectiveness of
the Companys disclosure controls and procedures as defined in the Securities Exchange Act of
1934, as amended (the Exchange Act), Rules 13a-15(e) or 15d-15(e) as of the end of the period
covered by this report (the Evaluation Date), have concluded that, as of the Evaluation Date, our
disclosure controls and procedures were adequate based on the evaluation of these controls and
procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 13d-15. (b) Changes in internal controls.
No change in the Companys internal control over financial reporting identified in connection with
the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred
during the Companys first fiscal quarter has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. 33




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PART II. OTHER INFORMATION 
 Item 6. Exhibits  (a)
    Exhibits filed herewith (numbered in accordance with Item 601 of Regulation S-K): ExhibitNumber
    
    Description10.1
    
    2005 Executive Staff Compensation and Bonus Plan.10.2
    
    2005 Director Compensation Plan.31.1
    
    Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C
Section 1350.32.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350.
 34




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

Registrant/s/  Dennis LaLumandiereDennis LaLumandiereVice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer) Date: May 10, 2005 35




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Exhibit Index ExhibitNumber
    
    Description10.1
    
    2005 Executive Staff Compensation
and Bonus Plan.10.2
    
    2005 Director Compensation Plan.31.1
    
    Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C
Section 1350.32.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350.