UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
x | | |
| (Mark One) | | |
| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 2, 2004
or
¨ |
| | For the fiscal year ended December 31, 2004 |
|
| or |
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
For the transition period from to
Commission file number: 0-11634 (Exact name of registrant as specified in its charter) | | |
Delaware | | 95-3797439 |
Delaware
| | 95-3797439 |
| (State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer
Identification No.)
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| |
1911 Walker Avenue
Monrovia, California
| | 91016 |
(Address of principal executive offices) | | 91016
(Zip Code) |
(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to sectionSection 12(g) of the Act: Common Stock, $.01 par value 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
xþ No
o¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
xþIndicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes
xþ No
o¨The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of July
4, 2003,2, 2004, the last business day of the registrant’s most recently completed
second fiscal quarter, was approximately
$268,684,410$153,394,326 based on the closing price per share of
$14.80$7.51 of the registrant’s Common Stock on that date.
The number of shares outstanding of the registrant’s Common Stock as of March
15, 200425, 2005 was
18,409,590.20,690,638.
DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement relating to its 20042005 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the close of the registrant’s last fiscal year, are incorporated by reference into Part III of this report.
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This Annual Report on Form 10-K contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include comments regarding the intent, belief or current expectations of the Company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results.Operations — Risk Factors.”
STAAR Surgical Company develops, manufactures and distributes worldwide products used by ophthalmologists and other eye care professionals to improve or correct vision in patients with cataracts, refractive conditions, and glaucoma. Originally incorporated in California in 1982, STAAR Surgical Company reincorporated in Delaware in 1986. Unless the context indicates otherwise “we,”
“us” or“us,” “the Company,”
refersand “STAAR” refer to STAAR Surgical Company and its consolidated subsidiaries.
Cataract Surgery. Our main products are foldable silicone and Collamer®Collamer® intraocular lenses (“IOLs”) used after minimally invasive small incision cataract extraction. Over the years, we have expanded our range of products for use in cataract surgery to include toric silicone IOLs to treat astigmatic abnormalities, STAARVISC™ II, a viscoelastic material, the STAAR SonicWAVE™ Phacoemulsification System, and Cruise Control, a disposable filter which allows for a significantly faster, cleaner phacoemulsification procedure and is compatible with all phacoemulsification equipment utilizing Venturi pump technologies. include:
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| • | the Preloaded Injector, a three-piece silicone IOL preloaded into a single-use disposable injector, |
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| • | toric silicone IOLs to treat astigmatic abnormalities, |
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| • | STAARVISCtm II, a viscoelastic material which is used as a tissue protective lubricant and to maintain the shape of the eye during surgery, |
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| • | STAAR SonicWAVEtm Phacoemulsification System, which is used to remove a cataract patient’s cloudy lens and has low energy and high vacuum characteristics, and |
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| • | Cruise Control, a disposable filter which allows for a significantly faster, cleaner phacoemulsification procedure and is compatible with all phacoemulsification equipment utilizing Venturi and peristaltic pump technologies. |
Currently, the majority of our revenues are generated from these products.
Refractive Surgery. In the area of refractive surgery, we have used our biocompatible Collamer material to develop and manufacture the Visian
™tm ICL (“ICL”) and the Visian
™tm TICL (“TICL”) to treat refractive disorders such as myopia (near-sightedness), hyperopia (far-sightedness) and astigmatism. These disorders of vision affect a large proportion of the population. Unlike the intraocular lens (“IOL”), which replaces a cataract patient’s cloudy lens, these products are designed to work with the patient’s natural lens to correct refractive errors. The Company’s goal is to establish the
custom made ICL and TICL as the next paradigm shift in refractive surgery, making the products
the dominantsignificant revenue generators for the Company over the next four to five years.
The ICL
hasand TICL have not yet been approved for use in the United States.
On October 3, 2003, the U.S. Food and Drug Administration’s (“the FDA”) Ophthalmic Devices Panel recommended that, with certain conditions, the FDA approve the ICL for use in correcting myopia in the range of -3 to - -15 diopters and reducing myopia in the range of -15 to -20 diopters. If approved, we believe that the ICL will have a significant market as an alternative to LASIK and other available refractive surgical procedures and
will likelycould replace cataract surgery products as STAAR’s largest source of revenue. The ICL is approved for use in the
countries comprising the European Union and in Korea and Canada. The TICL is
in clinical trials in the United States, and is approved for use in the
countries comprisingEuropean Union. For a discussion of the
European Union.status of the FDA review of the ICL, see “— Regulatory Matters — FDA Review of the ICL.”
Glaucoma Surgery. We have also developed the AquaFlow™tm Collagen Glaucoma Drainage Device (the “Aqua Flow Device”), as an alternative to current methods of treating open-angle glaucoma. The
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AquaFlow Device is implanted in the sclera (the white of the eye), using a minimally invasive procedure, for the purpose of reducing intraocular pressure.
Within each of these segments, we also sell other instruments, devices and equipment that we manufacture or that are manufactured by others in the ophthalmic industry. In general, these products complement STAAR’s proprietary product range and allow us to compete more effectively.
Recent Developments
For a description of financial and other recent developments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.”
Our overall mission is to develop, manufacture and marketdistribute worldwide visual implants toand other ophthalmic products that improve outcomes forthe vision of patients with cataracts, refractive conditions and make surgery simpler and saferglaucoma. The key elements of the Company’s strategy are as follows:
Expanding the market for the physician. In pursuit of that mission we pioneered minimally invasive cataract surgery by introducingICL. We are seeking to expand the folding intraocular lensmarket for our ICL and the cartridge delivery system. We have recently built on that success to enter the field of refractive surgery with the Visian ICL, which is available for the treatment of refractive errors in much of the world and currently under reviewTICL by the FDA for usefollowing means:
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| • | obtaining the approval of the FDA to market the ICL and the TICL in the United States; |
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| • | obtaining the approval of the ICL and the TICL in new international markets; and |
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| • | expanding the market share of the ICL and the TICL in existing international markets. |
Revitalizing our IOL business. We are seeking to rebuild the market share of our IOLs in the United
States.States by the following means:
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| • | increasing the awareness of ophthalmologists of the advantages of our proprietary Collamer material as an alternative to either silicone or acrylic for the manufacture of IOLs; |
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| • | improving the injector systems for our lenses; and |
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| • | obtaining U.S. approval for our preloaded injector technology and expanding it to all of our lenses. |
Improving regulatory compliance. We are seeking to improve our quality systems to correct any deficiencies identified in the FDA’s December 22, 2003 Warning Letter and the 483 Observations. For a description of these regulatory issues, see “— Regulatory Matters — Warning Letters and the past three years, the strategic focus483 Observations.”
Reducing operating expenses and seeking additional financing. During late 2004 and early 2005, we took steps to reduce our operating expenses by, among other things, reducing our use of
independent consultants and reducing our
new management team, led by our CEO David Bailey, has been to strengthendirect sales force. In addition, we are seeking additional financing. See “Management’s Discussion and
revitalize the Company. This was achieved through the executionAnalysis of
key strategies that included the following:strengthening management at both the executiveFinancial Condition and Board levels;
developing corporate governance that is more responsive to stockholder interests;
improving cash flow;
reducing costs;
improving gross margins;
closing unprofitable facilities and consolidating manufacturing;
resolving several lingering lawsuits by determining the best reasonably achievable outcome and aggressively prosecuting or defending the cases, or settling, as appropriate; and
collecting on indebtedness to STAARResults of former executive officers and directors.
With a strong foundation firmly in place as a result of those initiatives, the Company has shifted its focus to strategies designed to enhance future profitability of the Company and provide maximum stockholder value. Those strategies include the following:
Building our franchise in refractive implant surgery.Operations — Risk Factors — We have experienced steady growth in worldwide sales of our innovative refractive implant, the Visian ICL. We seek to build on our leadership in this technology to create a strong franchise for the Visian ICL, which we expect to account for an increasing portion of revenue in the future. To achieve this we will pursue the following goals:
FDA approval for the Visian ICL;
completion of the Visian Toric ICL clinical trial to lay the foundation for FDA approval;
approval for the Visian ICLonly limited working capital” and the Visian Toric ICL in new international markets;
gaining market share within the European Union.
Revitalizing our core cataract implant business. We intend to rebuild U.S. market share for our cataract implants through the following steps:
increasing awareness among ophthalmologists of the advantages of our proprietary Collamer material as an alternative to either silicone or acrylic lenses;
improving the lens insertion technology for all of our cataract implants; and
expanding on our preloaded cartridge technology to make it available for all of our lenses and establishing it as the standard of care.
Improve regulatory compliance. We are launching programs to reinforce regulatory compliance throughout our organization, and to put systems in place to ensure the highest standards of quality and medical and scientific integrity in our research and development, testing, production, reporting and
commercialization of our implants.“— We have accelerated our effortsonly limited access to meet these long-term goals in response to an FDA Warning Letter received on December 29, 2003, which identified deficiencies in our compliance with FDA Quality Systems Regulations, by undertaking the following actions:
financing.” engaging private consulting firms to audit systems and procedures throughout our organization and recommend both specific and comprehensive changes;
bifurcating the regulatory and compliance functions from the research and development functions to allow for more concentrated focus in each area and recruiting a new Vice President of Research and Development; and
recruiting additional staff with primary responsibility for regulatory compliance.
Increase our emphasis on marketing. Like most medical device manufacturers, we have relied on a force of specialized sales representatives to introduce our products to ophthalmologists. We believe that we can increase the readiness of ophthalmologists to adopt our innovative products and undergo the training necessary to use them by branding and other centralized marketing initiatives. In particular, we believe that the Visian ICL, the Visian Toric ICL and Collamer have the potential to be valuable and recognized brands, and we intend to increase our efforts and expenditures to establish their brand identity.
Grow our glaucoma franchise. We believe the AquaFlow device represents a safer and more effective glaucoma filtration surgery than conventional or laser procedures in more common use. We will continue our efforts to educate professionals about the potential advantages of AquaFlow technology and to build the base of surgeons trained to implant it.
Strengthen training. We intend to strengthen our global training programs to provide a more ready pathway for introducing and gaining physician acceptance for our new products.
2003 Financial and Other Information Highlights
Among the significant events for STAAR in 2003 were the following:
We settled our employment dispute with Mr. Richard Leza, a former officer on February 27, 2003, and on April 24, 2003, a shareholder derivative suit filed against STAAR and certain named directors and officers in the state of Delaware was dismissed. These were the last of the significant litigation matters confronting us when current management began its tenure.
On June 11, 2003, we completed a private sale of 1,000,000 shares of the Company’s Common Stock at a price per share of $9.60. The sale yielded net proceeds to us of approximately $9,000,000, which was used to repay indebtedness and for working capital.
Applying some of the proceeds of the private sale of securities, we paid down approximately $2.9 million in notes payable and cancelled our line-of-credit with our domestic lender.
On October 3, 2003, the Ophthalmic Devices Panel of the Center for Devices and Radiological Health (“CDRH”) voted 8-3 to recommend that the Visian ICL be approved with conditions for use in correcting myopia in the range of -3 to -15 diopters and reducing myopia in the range of -15 to -20 diopters.
During the year, we integrated the phacoemulsification manufacturing and repair activities of our subsidiary, Circuit Tree Medical, into our Monrovia, California facility and wrote down approximately $2.1 million in associated net capitalized patent costs.
During the year, we collected $3.3 million in notes receivable from our former officers and directors and reversed $1.7 million in reserves against the notes.
On December 29, 2003, we received a Warning Letter from the FDA identifying deficiencies in our compliance with medical device regulations. Until the deficiencies are addressed to its satisfaction, the FDA will not grant final approval to the Visian ICL, and we may face FDA restrictions on our
| established domestic lines of business. We are taking immediate steps to remedy the deficiencies identified by the FDA and to improve systems and procedures throughout our organization to ensure we meet or exceed regulatory standards in the future.
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Revenues for 2003 were $50.4 million, an increase of $2.2 million, or 5%, from 2002. Net loss for 2003 amounted to $8.4 million, or $.47 per share, compared to a net loss of $16.8 million, or $0.98 per share, reported in 2002. Significant operational matters that affected net earnings for 2002 included non-recurring charges totaling $1.5 million and a $9.0 million valuation allowance recorded against the Company’s deferred tax assets (partially offset by a tax benefit recorded for a carryback claim of approximately $1.0 million). Excluding the impact of these charges, the net loss for 2002 was $7.4 million or $0.43 per share.
Financial Information about Segments and Geographic Areas
The Company has expanded its marketing focus beyond the cataract surgery market to include the refractive surgery and glaucoma markets. However, during
20032004 the cataract segment
continued to accountaccounted for
90.4% the majority of the Company’s revenues and, thus, the Company operates as one business segment for financial reporting purposes. See Note
1517 to the Consolidated Financial Statements for financial information about product lines and operations in geographic areas.
The human eye is a specialized sensory organ capable of receiving visual images that are transmitted to the visual center in the brain. The main parts of the eye are the cornea, the iris, the lens, the retina, and the
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trabecular meshwork. The cornea is the clear window in the front of the eye through which light first passes. The iris is a muscular curtain located behind the cornea which opens and closes to regulate the amount of light entering the eye through the pupil, an opening at the center of the iris. The lens is a clear structure located behind the iris that changes shape to better focus light to the retina, located in the back of the eye. The retina is a layer of nerve tissue consisting of millions of light receptors called rods and cones, which receive the light image and transmit it to the brain via the optic nerve. The anterior chamber of the eye, located in front of the iris, is filled with a watery fluid called the aqueous humour, while the portion of the eye behind the lens is filled with a jelly-like material called the vitreous humour. The trabecular meshwork, a drainage channel located between the iris and the surrounding white portion of the eye, maintains a normal pressure in the anterior chamber of the eye by draining excess aqueous humour.
The eye can be affected by common visual disorders, disease or trauma. The most prevalent ocular disorders or diseases are cataracts and glaucoma. Cataract formation is generally an age related situation that involves the hardening and loss of transparency of the natural crystalline lens, impairing visual acuity.
Glaucoma is a progressive ocular disease that manifests itself through increased intraocular pressure. This, in turn, may result in damage to the optic disc and a decrease of the visual field. Untreated, progressive glaucoma
maycan result in blindness.
Refractive disorders include myopia, hyperopia, astigmatism and presbyopia. Myopia and hyperopia are caused by either overly curved or flat corneas which result in improper focusing of light on the retina. They are also known as near-sightedness and far-sightedness, respectively. Astigmatism is characterized by an irregularly shaped cornea resulting in blurred vision. Presbyopia is an age related condition caused by the loss of elasticity of the natural crystalline lens, reducing the eye’s ability to accommodate or adjust for varying distances.
Our products are designed to:
Improve patient outcomes,
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| • | Improve patient outcomes, |
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| • | Minimize patient risk and discomfort, and |
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| • | Simplify ophthalmic procedures or post-operative care for the surgeon and the patient. |
Minimize patient risk and discomfort, and
Simplify ophthalmic procedures or post-operative care for the surgeon and the patient.
Intraocular Lenses (IOLs) and Related Cataract Treatment ProductsProducts.. We produce and market a line of foldable IOLs for use in minimally invasive cataract surgical procedures. Our IOLs can be folded, or otherwise deformed, and therefore can be implanted into the eye through an incision as small as 2.8 mm. Once inserted, the IOL unfolds naturally into the capsular bag that previously heldto replace the cataractous lens.
Our
In late 2003, we introduced, through our joint venture company, Canon Staar, the first preloaded lens injector system in international markets. We believe the Preloaded Injector offers surgeons improved convenience and reliability. The Preloaded Injector is not yet available in the U.S.
Currently, our foldable IOLs are manufactured from both our proprietary Collamer material and silicone. Both materials are offered in two differently configured styles, the single-piece plate haptic design and the three-piece design where the optic is combined with polyimide loop haptics. The selection of one style over the other is primarily based on the preference of the ophthalmologist.
SalesThe Collamer IOL is offered in a single-piece design. A redesign of
foldable IOLs accounted for approximately 61%the three-piece version of
our total revenues for the
2003 fiscal year, 64%lens has been completed along with a dedicated injection system which is in the final stages of
total revenues for the 2002 fiscal year and approximately 71% of total revenues for the 2001 fiscal year.development.
We have developed and currently market globally the Toric IOL, a toric version of our single-piece silicone IOL, which is specifically designed for patients with pre-existing astigmatism. The Toric IOL is the only IOL that has FDA approval to include in its labeling that it improves uncorrected visual acuity. The Toric IOL is the first refractive product we offered in the U.S.,
Sales of foldable IOLs accounted for approximately 56% of our total revenues for the 2004 fiscal year, 61% of total revenues for the 2003 fiscal year and is a significant addition to our line65% of cataract products. In May 2000,total revenues for the Centers for Medicare and Medicaid (“CMS”), granted our application to have the Toric IOL designated as a “new technology”. This designation allows ambulatory surgical centers to receive an additional $50 per lens above the standard Medicare reimbursement rate through May 2005.2002 fiscal year.
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As part of our approach to providing complementary products for use in minimally invasive cataract surgery, we also market STAARVISC II, a viscoelastic material
which is used as a protective lubricant and to maintain the shape of the eye during surgery, the STAAR SonicWAVE Phacoemulsification System,
which is used to remove a cataract patient’s cloudy lens and has low energy and high vacuum characteristics, and Cruise Control, a
single-use disposable filter which allows for a significantly faster, cleaner phacoemulsification procedure and is compatible with all phacoemulsification equipment utilizing Venturi
and peristaltic pump technologies. We also sell other related instruments, devices, surgical packs and equipment that we manufacture or that are manufactured by
others inothers. Sales of other cataract products accounted for approximately 32% of our total revenues for the
ophthalmic industry.2004 fiscal year, 29% of total revenues for the 2003 fiscal year and 26% of total revenues for the 2002 fiscal year.
AquaFlow Collagen Glaucoma Drainage DeviceDevice.. Our AquaFlow Device is surgically implanted in the outer tissues of the eye to maintain a space that allows increased drainage of intraocular fluid so as to reduce intraocular pressure. It is made of collagen, a porous material that is compatible with human tissue and facilitates drainage of excess eye fluid. The AquaFlow Device is specifically designed for patients with open-angled glaucoma, which is the most prevalent type of glaucoma. In contrast to conventional and laser glaucoma surgeries, implantation of the AquaFlow Device does not require penetration of the anterior chamber of the eye. Instead, a small flap of the outer eye is folded back and a portion of the sclera and trabecular meshwork is removed. The AquaFlow Device is placed above the remaining trabecular meshwork and Schlemm’s canal and the outer flap is refolded into place. The device swells, creating a space as the eye heals. It is absorbed into the surrounding tissue within six months to nine months after implantation, leaving the open space and possibly creating new fluid collector channels. The 15 to 45 minute surgical procedure to implant the AquaFlow Device is performed under local or topical anesthesia, typically on an outpatient basis.
We believe that the compatibility of the human eye with the material from which the AquaFlow Device is made and the minimally invasive nature of the surgery offer several advantages over existing surgical procedures, including:
reduced risk of surgical complications compared to trabeculectomy,
a longer-term solution than medications,
predictable outcomes, making case management easier and less time consuming,
less need for pressure-reducing medications,
enabling the patient to have minimally invasive laser surgery if further pressure reduction becomes necessary over the long term, and
cost effectiveness compared to surgical and medication alternatives.
We believe the AquaFlow Device is an attractive product for:
ophthalmic surgeons who have traditionally referred their patients to glaucoma specialists;
managed care and health maintenance organizations and group purchasing organizations that desire to control their costs and at the same time provide their customers with a higher standard of health care; and
less developed countries which lack the resources and infrastructure to provide the continuous treatments mandated by drug therapy.
While we believe thisthe glaucoma market is very conservative, there is a continuing interest in learning the surgical procedure to implant the AquaFlow Device. Adoption by ophthalmic surgeons, however, will be dependent upon the rate at which they learn to perform the surgical procedure or the development of instrumentation to simplify the procedure. In July 2001, we received pre-market approvalSales of AquaFlow Devices accounted for approximately 2% of our total revenues in each of the AquaFlow Device from the FDA.
2004, 2003, and 2002 fiscal years.Refractive Correction—Correction — Visian ICL™tm(ICLs).. ICLs are
phakic IOLs lenses implanted into the eye in order to correct refractive disorders such as myopia, hyperopia and astigmatism.
Lenses of this type are generically called “phakic IOLs” or “phakic implants” because they work along with the patient’s natural lens, orphakos, rather than replacing it. The ICL is capable of correcting a wide range of refractive disorders from low to severe conditions.
The ICL is folded and implanted into the eye behind the iris and in front of the natural
crystalline lens using minimally invasive surgical techniques similar to implanting an IOL during cataract surgery, except that the human lens is not removed. The surgical procedure to implant the ICL is typically performed with topical anesthesia on an outpatient basis. Visual recovery is within one to 24 hours.
We believe the ICL will complement current refractive technologies and allow refractive surgeons to expand their treatment range and customer base.
The ICL and TICL have not yet been approved for use in the United States. The ICL for myopia
received the CE Markis approved for use in
August 1997 allowing the Company to sell the product in each of the countries comprising the European Union
(EU). Approvalsand in Korea and Canada, and applications are pending in Australia. The TICL is approved for
Canada were receiveduse in
July 2001the European Union, and
applications are pending in Australia, Korea
in April 2002.and Canada. The Company has
submitted for approvalcompleted enrollment in
Taiwan and Australia and those files are pending. The CANON-STAAR Company, Inc., our joint venture in Japan, beganthe U.S. clinical trials for the
ICL in the second quarter of 2003. In the United States, the FoodTICL and
Drug Administration’s Ophthalmic Devices Panel recommended in October 2003 that the Company’s ICL be approvedexpects to file its submission with
conditions for the correction of myopia in the range of -3.0 to -15.0 diopters and for the reduction of myopia from -15.0 to -20.0 diopters. However, there can be no assurance that the FDA
will follow the recommendationsin late 2005. For a discussion of the
Ophthalmic Devices Panel.The Toricstatus of the FDA review of the ICL, receivedsee “— Regulatory Matters — FDA Review of the CE Mark in November 2002 and submissions are currently pending in Canada and Korea. The Company initiated clinical trials in the United States in Q3 2002 and completed enrollment in February 2004. The toric IDE cohort consists of 125 patients with myopia in the range of -3.0D to -20.0D and astigmatism in the range of +1.0D to +4.0D. A one year post-operative follow up of each patient is required.
ICL.”
The Hyperopic ICL received the CE Mark in August 1997, is approved for saleuse in the European Union and in Canada, and is currently in clinical trials in the United States.
The ICL is available internationally for myopia in five lengths, with 41 powers for each length, and for hyperopia in five lengths, with 38 powers for each length, which equates to approximately 400 inventoried parts. This requires the Company to carry a significant amount of inventory to meet the customer demand for
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rapid delivery. The Toric ICL is available for myopia in the same powers and lengths but carries additional parameters of cylinder and axis with 11 and 180 possibilities, respectively. As such, the Toric ICL is made to order.
Sales of ICLs accounted for approximately 8% of our total revenues for the 2004 fiscal year, 6% of total revenues for the 2003 fiscal year and 5% of total revenues for the 2002 fiscal year.
Sources and Availability of Raw Materials The Company uses a wide range of raw materials in the production of our products. Most of the raw materials and components are purchased from external suppliers. Some of our raw materials are single-sourced due to regulatory constraints, cost effectiveness, availability,
and quality, and vendor reliability issues. Many of our components are standard parts and are available from a variety of sources although we do not typically pursue regulatory and quality certification of multiple sources of supply. With the exception of our silicone material, we do not believe that the loss of any existing external supply source would have material adverse effect on us.
The proprietary collagen-based raw material used to manufacture our IOLs, ICLs and the AquaFlow Device is internally sole-sourced from one of our facilities in California. If the supply of these collagen-based raw materials is disrupted we know of no alternative supplier, and therefore, any such disruption could result in our inability to manufacture the products and would have a material adverse effect on the Company.
Patents, Trademarks and Licenses We strive to protect our investment in the research, development, manufacturing and marketing of our products through the use of patents, licenses, trademarks, and copyrights. We own or have rights to a number of patents, licenses, trademarks, copyrights, trade secrets and other intellectual property directly related and important to our business. As of
January 2,December 31, 2004, we owned approximately
7684 United States and foreign patents and had approximately
7366 patent applications pending.
We believe that our patents are important to our business. Of significant importance to the Company are the patents, licenses, and technology rights surrounding our Visian ICL (“ICL”) and Collamer material. In 1996, we were granted an exclusive
royaltyroyalty- bearing license to manufacture, use, and sell ICLs in the United States, Europe, Latin America, Africa, and Asia using the uniquely biocompatible Collamer material. The Collamer material is also used in certain of our IOLs. We have also acquired or applied for various patents and licenses related to our Aqua Flow Device, our phacoemulsification system, our insertion devices, and other technologies of the Company.
Patents for individual products extend for varying periods of time according to the date a patent application is filed or a patent is granted and the term of patent protection available in the jurisdiction granting the patent. The scope of protection provided by a patent can vary significantly from country to country.
Our strategy is to develop patent portfolios for our research and development projects in order to obtain market exclusivity for our products in our major markets. Although the expiration of a patent for a product normally results in the loss of market exclusivity, we may continue to derive commercial benefits from these products. We routinely monitor the activities of our competitors and other third parties with respect to their use of intellectual property, including considering whether or not to assert our patents where we believe they are being infringed.
Worldwide, all of our major products are sold under trademarks we consider to be important to our business. The scope and duration of trademark protection varies widely throughout the world. In some countries, trademark protection continues only as long as the mark is used. Other countries require registration of trademarks and the payment of registration fees. Trademark registrations are generally for fixed but renewable terms.
Confidentiality Arrangements.
We protect our proprietary technology, in part, through confidentiality and nondisclosure agreements with employees, consultants and other parties. Our confidentiality agreements with employees and consultants
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generally contain standard provisions requiring those individuals to assign to STAAR, without additional consideration, inventions conceived or reduced to practice by them while employed or retained by STAAR, subject to customary exceptions.
We experience some seasonality in demand for our products with sales in the third quarter generally being the lowest due to the impact of summer vacations on elective surgeries.
Distribution and Customers We market our products to a variety of health care providers, including surgical centers, hospitals, managed care providers, health maintenance organizations, group purchasing organizations and government facilities. The primary user of our products is the ophthalmologist. No material part of our business, taken as a whole, is dependant upon a single or a few customers.
We maintain direct distribution
to the physician or facility in the United States, Canada, Germany and Australia. Sales efforts in Germany and Australia are primarily supported through a direct sales force. Sales efforts in the United States and Canada are primarily supported through a network of independent manufacturers’ representatives. The
independent representatives are compensated through the payment of commissions based on sales and may represent manufacturers other than STAAR, although not in competing products. In all other countries where we do business, we sell
principally through independent distributors.
We support the sales efforts of our agents, employees and distributors through the activities of our internal marketing
departments.department. Sales efforts are supplemented through the use of promotional materials, educational courses, speakers programs, participation in trade shows and technical presentations.
The dollar amount of the Company’s backlog orders is not significant in relation to total annual sales. The Company generally keeps sufficient inventory on hand to ship product when ordered.
Competition in the ophthalmic medical device field is intense and characterized by extensive research and development and rapid technological change. Development by competitors of new or improved products, processes or technologies may make our products obsolete or less competitive. We will be required to devote continued efforts and significant financial resources to enhance our existing products and to develop new products for the ophthalmic industry.
We believe our primary competition in the development and sale of products used to surgically correct cataracts, namely foldable IOLs and phacoemulsification machines, includes Alcon
Laboratories, Advanced Medical Optics (“AMO”), and Bausch & Lomb.
TheseCurrently, Alcon holds 48.2% of the U.S. IOL market, followed by AMO with 30.4% and Bausch & Lomb with 10.7%. We hold approximately 6.1% of the U.S. IOL market. Our competitors have been established for longer periods of time than we have and have significantly greater resources than we have, including greater name recognition, larger sales operations,
and greater ability to finance research and development and proceedings for regulatory
approval.approval, and more developed regulatory compliance and quality control systems.
In the U.S. market, physicians prefer IOLs made out of acrylic. Acrylic IOLs currently account for a 53.8% share of the U.S. IOL market. We believe that we are positioned to compete effectively in this market segment with the Collamer IOL, and that the introduction of the three-piece Collamer IOL will strengthen our position and allow for a gain in overall IOL market share. Silicone IOLs, which currently account for 42% of the U.S. market, also provide an opportunity for us as we introduce improvements in silicone IOL technology and Collamer IOL injection systems to facilitate delivery of the IOL.
Our primary competition in the development and sale of products used to treat glaucoma is from pharmaceutical companies, primarily because drug therapy is, and for years has been, the accepted treatment for glaucoma. The portion of this market held by medical devices used to treat glaucoma is insignificant at
7
present. We believe that Merck & Company,
Inc., Pfizer, Novartis, Alcon, Allergan and Bausch & Lomb are the largest providers of drugs used to treat glaucoma. There are also
other devices under development by others to be used in conjunction with a non-penetrating deep sclerectomy for the surgical management of glaucoma.
Our ICL will face significant competition in the marketplace from products that improve or correct refractive conditions, such as corrective eyeglasses, and external contact lenses, and particularly from providers of conventional and laser refractive surgical procedures. These are products long established in the marketplace and familiar to patients in need of refractive correction. Furthermore, corrective eyeglasses and external contact lenses are more easily obtained, in that a prescription is usually written following a routine eye examination in a doctor’s office, without admitting the patient to a hospital or surgery center.
We believe that the following providers of laser surgical procedures comprise our primary competition in the marketplace for patients requiring refractive corrections: Alcon, Bausch & Lomb, VISX, Nidek and Wave Light all market Excimer lasers for corneal refractive surgery. Approval of custom ablation, along with the addition of wavefront technology, has increased awareness of corneal refractive surgery by patients and practitioners. Conductive Keratoplasty (CK) by Refractec competes for the hyperopic market for +1.0 to +3.0 diopters. In the phakic IOL market, the ICL faces the Ophtec Verisyse or Artisan IOL,
(to be distributed in the United States by
AMO), CIBA Vision’sAMO, IOLTech’s PRL,
manufactured by Medennium, as well as phakic IOLs under investigation by Ophthalmic Innovations International, Tekia,
Inc., Alcon,
Inc.,Vision Membrane and ThinOptX.
Regulatory RequirementsMatters
Our products are subject to regulatory approval in the United States and in foreign countries. We are also subject to various federal, state, local and foreign laws applicable to our operations including, among other things, working conditions, laboratory and manufacturing practices, and the use and disposal of hazardous or potentially hazardous substances.
The following discussion outlines the various kinds of reviews to which our products or production facilities may be subject.
Clinical Regulatory Requirements in the United StatesStates.. Under the federal Food, Drug & Cosmetic Act as amended by the Food and Drug Administration Modernization Act of 1997
(“the Act”(the “Act”), the FDA has the authority to adopt regulations that:
set standards for medical devices,
| | |
| • | set standards for medical devices, |
|
| • | require proof of safety and effectiveness prior to marketing devices which the FDA believes require pre-market clearance, |
|
| • | require test data approval prior to clinical evaluation of human use, |
|
| • | permit detailed inspections of device manufacturing facilities, |
|
| • | establish “good manufacturing practices” that must be followed in device manufacture, |
|
| • | require reporting of serious product defects to the FDA, and |
|
| • | prohibit device exports that do not comply with the Act unless they comply with established foreign regulations, do not conflict with foreign laws, and the FDA and the health agency of the importing country determine export is not contrary to public health. |
require proof of safety and effectiveness prior to marketing devices which the FDA believes require pre-market clearance,
require test data approval prior to clinical evaluation of human use,
permit detailed inspections of device manufacturing facilities,
establish “good manufacturing practices” that must be followed in device manufacture,
require reporting of serious product defects to the FDA, and
prohibit device exports that do not comply with the Act unless they comply with established foreign regulations, do not conflict with foreign laws, and the FDA and the health agency of the importing country determine export is not contrary to public health.
Most of our products are “medicalmedical devices intended for human use”use within the meaning of the Act and, therefore, are subject to FDA regulation.
The FDA establishes complex procedures for compliance based upon regulations that designate devices as Class I (general controls, such as compliance with labeling and record-keeping requirements), Class II (performance standards in addition to general controls) or Class III (pre-market approval application (“PMAA”PMA”) before commercial marketing). Class III devices are the most extensively regulated because the FDA has determined they are life-supporting,
8
are of substantial importance in preventing impairment of health, or present a potential unreasonable risk of illness or injury. The effect of assigning a device to Class III is to require each manufacturer to submit to the FDA a
PMAAPMA that includes information on the safety and effectiveness of the device.
A medical device that is substantially equivalent to a directly related medical device previously in commerce may be eligible for the FDA’s
abbreviated pre-market notification “510(k) review” process. FDA
510(k) clearance is a “grandfather” process. As such, FDA clearance does not imply that the safety, reliability and effectiveness of the medical device has been approved or validated by the FDA, but merely means that the medical device is substantially equivalent to a previously cleared commercially-relatedcommercial medical device. The review period and FDA determination as to substantial equivalence should begenerally is made within 90 days of submission of a 510(k) application, unless additional information or clarification or clinical studies are requested or required by the FDA. As a practical matter, the review process and FDA determination may take longer than 90 days.
Our IOLs and ICLs are Class III devices, our AquaFlow Devices, phacoemulsification equipment, ultrasonic cutting tips and surgical packs are Class II devices, and our lens injectors are Class I devices. We have received FDA pre-market approval for our IOLs (including the
Torictoric and the Collamer IOLs) and AquaFlow Device and
FDA 510(k) clearance for our phacoemulsification equipment, lens injectors, and ultrasonic cutting tips.
As a manufacturer of medical devices, our manufacturing processes and facilities are subject to continuing review by the FDA and various state agencies to ensure compliance with
good manufacturing practices.quality system regulations. These agencies inspect our facilities from time to time to determine whether we are in compliance with various regulations relating to manufacturing practices, validation, testing, quality control and product labeling.
In 2003, during a series of such inspections, the FDA issued a warning letter to us relating to the reporting of adverse events and alleged violations of FDA’s Quality System Regulations. We met with the FDA to discuss the issues and are actively working on resolving them. Until these issues are resolved, the ICL cannot be granted approval for sale in the U.S. market. Resolving these issues in a timely manner is also critical to the ongoing commercialization of existing, approved products.We are also subject to regulation by the local Air Pollution Control District and the United States Environmental Protection Agency as a result of some of the chemicals used in our manufacturing processes.
Medical device laws and regulations similar to those described above are also in effect in some of the countries to which we export our products. These range from comprehensive device approval requirements for some or all of our medical device products to requests for product data or certifications.
Clinical Regulatory Requirements Inin Foreign CountriesCountries.. There is a wide variation in the approval or clearance requirements necessary to market medical products in foreign countries. The requirements range from minimal requirements to
a levelrequirements comparable to
those established by the FDA. For example, many countries in South America have minimal regulatory requirements, while many developed countries, such as Japan, have requirements at least as stringent as those of the FDA. Foreign governments do not always accept FDA approval as a substitute for their own approval or clearance procedures.
As of June 1998, the member countries of the European Union (the “Union”) require that all medical products sold within their borders carry a Conformite’ EuropeeneEuropeane Mark (“CE Mark”). The CE Mark denotes that the applicable medical device has been found to be in compliance with guidelines concerning manufacturing and quality control, technical specifications and biological or chemical and clinical safety. The CE Mark supersedes all current medical device regulatory requirements for Union countries. We have obtained the CE Mark for all of our principal products including our ICL and TICL, IOLs (including the Toric IOL and Collamer IOL), SonicWAVE Phacoemulsification System and our AquaFlow Device.
| |
| Warning Letters and the 483 Observations |
The Company received a Warning Letter issued by the FDA, dated December 22, 2003 which outlined deficiencies related to the manufacturing and quality assurance systems of its Monrovia, California facility. To assist it in correcting the issues raised in the Warning Letter, the Company engaged the services of Quintiles Consulting (“Quintiles”), a well regarded consulting organization that specializes in FDA related compliance matters. The Company, with Quintiles’ help, assessed the state of its quality system in light of the FDA’s concerns, developed an improvement plan, and took corrective actions to improve the Company’s processes, procedures, and controls.
The Company received a second Warning Letter from the FDA dated April 26, 2004, which outlined deficiencies noted in an audit by the FDA in December 2003. The Company provided the FDA with its planned corrective actions to the issues raised, and in a letter dated July 1, 2004, the FDA responded that they found the corrective and preventative action plans described in the Company’s response “adequate.”
On June 17, 2004, the FDA completed an audit of the Company’s Nidau, Switzerland manufacturing facility. The FDA did not observe any violations of quality system requirements during this audit.
9
We are also subject
On September 23, 2004, as a follow-up to various federal, statethe December 22, 2003 Warning Letter, the FDA completed a re-audit of the Company’s Monrovia, California manufacturing facility. At the conclusion of the audit, the FDA issued a form “FDA 483 Inspectional Observations” described more fully in the Company’s Current Report on Form 8-K filed with the Securities and local laws applicableExchange Commission on September 29, 2004 (the “483 Observations”). The Company delivered its response to ourthe FDA on November 5, 2004. On January 27, 2005, the Company and its representatives met with the FDA to update them on the corrective actions taken by the Company in response to the 483 Observations. During the meeting, the FDA gave no indication of the status of their review of the response or the nature or timing of future communications to the Company. However, subsequent to the meeting the FDA confirmed with the Company’s regulatory counsel, with respect to issues relating to the Collamer material addressed in the 483 Observations, that “materials issues with regard to stability have been addressed to the FDA’s satisfaction.”
Until the FDA is satisfied with the adequacy of the Company’s corrective actions, it may take further actions which could include conducting another inspection, seizure of the Company’s products, injunction of the Monrovia facility to compel compliance (which may include suspension of production operations including, amongand/or recall of products), or other things, workingactions. Such actions could have a material adverse effect on the Company’s established lines of business, results of operations and liquidity.
The Company is not able to predict whether the FDA will conclude that the Company’s corrective actions to date or those included in its response to the 483 Observations satisfactorily resolve its concerns. Nor can the Company predict the likelihood, nature of, or timing of any additional action by the FDA or the impact of any other FDA action on the Company’s established lines of business, results of the operations or liquidity or the approval of the ICL for the United States market.
On October 3, 2003, the FDA Ophthalmic Devices Panel recommended that, with certain conditions, laboratorythe FDA approve the ICL for use in correcting myopia in the range of -3 to -15 diopters and manufacturing practices,reducing myopia in the range of - 15 to -20 diopters. However, until the FDA is satisfied with the Company’s corrective actions to the deficiencies identified in the December 22, 2003 Warning Letter and the use and disposal483 Observations, it is unlikely to grant the Company approval to market the ICL in the United States.
On December 16, 2004, the Company submitted to the FDA a supplement to the Company’s investigational device exemptions application for the ICL. The supplement requested permission for each of
hazardous or potentially hazardous substances.the active clinical centers to continue enrollment of eyes in the ICL clinical investigation while the pre-market approval is pending with the FDA so that the physicians may continue to expand on their clinical experience with implantation of the ICL. On January 14, 2005, the FDA approved the supplement allowing 18 investigational sites to enroll a combined total of 75 additional eyes each month.
We are focused on furthering technological advancements in the ophthalmic products industry through
continuous innovativethe development of
innovative ophthalmic products and materials and related surgical techniques. We
maintain an active internal research and development program which activities includes research and development, clinical activities, and regulatory affairs and is comprised of 2923 employees. In order to achieve itsour business objectives, we will continue to increase the investment in research and development. In line with this goal, we recently announced the appointment of a new Vice President of Research and Development. Further reorganization is underway to ensure that our goal of effective and timely delivery becomes a reality within the 2004 timeframe. Over the past year, we have principally focused our research and development efforts on:
| | |
| • | improving regulatory and compliance systems and procedures, |
|
| • | obtaining approval for the ICL, |
|
| • | completing enrollment in the U.S. clinical trials for the TICL, |
|
| • | redesigning the three-piece Collamer IOL, |
|
| • | designing an insertion system for the three-piece Collamer IOL, |
|
| • | improving insertion and delivery systems for our other foldable products, |
bringing the Visian ICL to FDA Panel for approval,
improving insertion and delivery systems for our foldable products,
improving manufacturing systems and procedures for all products to reduce manufacturing costs resulting in yield increases for Collamer products,
U.S. clinical evaluation of the Visian Toric ICL, and
developing products and extending foreign registrations for the refractive market.
10
| | |
| • | improving manufacturing systems and procedures for all products to reduce manufacturing costs and improve yields, and |
|
| • | developing products and extending foreign registrations. |
Research and development expenses were approximately
$6,246,000, $5,120,000,
$4,016,000, and
$3,800,000$4,016,000 for our
2004, 2003
2002 and
20012002 fiscal years, respectively.
The Company is subject to federal, state, local and foreign environmental laws and regulations. We believe that our operations comply in all material respects with applicable environmental laws and regulations in each country where we
have a business presence.do business. We do not anticipate that compliance with these laws will have any material impact on our capital expenditures, earnings or competitive position. We currently have no plans to invest in material capital expenditures for environmental control facilities for the remainder of our current fiscal year or for the next fiscal year. We are not aware of any pending
actions, litigation or significant financial obligations arising from current or past environmental practices that are likely to have a material adverse impact on our financial position. However, environmental problems relating to our properties could develop in the future, and such problems could require significant expenditures. Additionally, we are unable to predict changes in legislation or regulations that may be adopted or enacted in the future and that may adversely affect us.
The Company’s only significant subsidiary is STAAR Surgical AG, a wholly owned entity incorporated in Switzerland. This subsidiary develops, manufactures and distributes products worldwide including Collamer IOLs, ICLs, TICLs, and the AquaFlow Device. STAAR Surgical AG also controls 100% of Domilens GMBH,GmbH, a European sales subsidiary that distributes both STAAR products and products from various competitors.other ophthalmic manufacturers.
Canon Staar Joint Venture
In 1988, the Company entered into a joint venture with Canon Inc. and Canon Sales Co., Inc. for the principal purpose of designing, manufacturing, and selling in Japan intraocular lenses and other ophthalmic products. The joint venture will market its products worldwide through Canon, Canon Sales or STAAR or such other distributors as the Board of Directors of the joint venture may approve. The terms of any distribution arrangement will require the unanimous approval of the Board of Directors of the joint venture. Each joint venture party is entitled to appoint one member of the Board of Directors of the joint venture. Certain matters require the unanimous approval of the directors. Upon the occurrence of certain events, including the merger, sale of substantially all of the assets or change in the management of one of the parties, any of the other parties may have the right to acquire the first party’s interest in the joint venture at book-value. The Company also granted to the joint venture a perpetual exclusive license under the Licensed Technology (as defined in the license agreement) to make and sell any products in Japan, and a perpetual non-exclusive license to do so in the rest of the world.
In 2001, the parties entered into a settlement agreement whereby (i) they reconfirmed the joint venture agreement and the license agreement, (ii) they agreed that the Company would promptly commence the transfer of the Licensed Technology to the joint venture, (iii) the Company granted the joint venture an exclusive license to make any products in China and sell such products in Japan and China (subject to the existing rights of third parties), (iv) the Company agreed to provide the joint venture with raw materials, (v) the joint venture granted Canon Sales Co., Inc. the right to distribute its products in Japan on specified terms, and (iv) the parties settled certain patent disputes.
The foregoing description of the joint venture agreement, technical assistance and license agreement and settlement agreement is qualified in its entirety by the full text of such agreements, which have been filed as exhibits or incorporated by reference to this report. See “Management’s Discussion and Analysis of Financial
11
Employees
Condition and Results of Operations — Risk Factors — We have licensed our technology to our joint venture company and have granted certain rights to the partners that could be exercised in the event of a change in control of the Company.”
Employees
As of February
27, 2004,25, 2005, we employed approximately
258247 persons.
The Company makes available free of charge through our website,
www.staar.com,, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as soon as reasonably practicable after those reports are filed with or furnished to the Securities and Exchange Commission (“SEC”).
The public may read any of the items we file with the SEC at the SEC’s
Commission’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information about the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding the Company and other issuers that file electronically with the SEC at http://www.sec.gov.
Our operations are conducted in leased facilities throughout the world. Our executive offices, manufacturing, warehouse and distribution, and primary research facilities are located in Monrovia, California. STAAR Surgical AG maintains office, manufacturing, and warehouse and distribution facilities in Nidau, Switzerland. The Company has one additional facility in Aliso Viejo, California for raw material production and research and development activities. The Company leases additional sales and distribution facilities in Germany and Australia. We believe our manufacturing facilities in the U.S. and Switzerland are suitable and adequate for our current and future planned
requirements because manufacturing currently runs only one shift and therequirements. The Company could increase capacity by adding additional shifts at our existing facilities. However, the Company is at capacity in the U.S. and Switzerland in the
areasarea of
distribution and administration. The Company would require additional space to support growth in those areas, although this is not anticipated for
2004.2005.
ITEM 3. LEGAL PROCEEDINGSWe are currently party to various claims and legal proceedings arising out of the normal course of our business. These claims and legal proceedings relate to contractual rights and obligations, employment matters, and claims of product liability. We do not believe that any of the claims known to us is likely to have a material adverse effect on our financial condition or results of operations.
Since September 1, 2004, multiple class action lawsuits have been filed in the United States District Courts for the Central District of California and the District of New Mexico against the Company and its Chief Executive Officer on behalf of all persons who acquired the Company’s securities during various periods between April 3, 2003 and September 28, 2004. On December 15, 2004, the Court ordered consolidation of the complaints that had been filed in the United States District Court for the Central District of California and directed that the plaintiffs file a consolidated complaint as soon as practicable. The plaintiffs have proposed a stipulation pursuant to which they would file a consolidated amended complaint on or about April 29, 2005. The New Mexico action was voluntarily dismissed on January 28, 2005. The lawsuits generally allege that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by issuing false and misleading statements regarding intraocular lenses and implantable lenses, and failing timely to disclose significant problems with the lenses, as well as the existence of serious injuries and/or malfunctions attributable to the lenses, thereby artificially inflating the price of the Company’s Common Stock. The plaintiffs generally seek to recover compensatory damages, including interest. The Company intends to vigorously defend the consolidated lawsuits.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | |
| Item 4. | Submission of Matters to a Vote of Security Holders |
There were no matters submitted to a vote of security holders during the quarter ended
January 2,December 31, 2004.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS | |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
Our Common Stock is quoted on the
National Association of Securities Dealers Automatic Quotation SystemNasdaq National Market under the symbol “STAA.” The following table sets forth the reported high and low bid prices of the Common Stock as reported by
NASDAQNasdaq for the calendar periods indicated:
| | | | | | |
Period
| | High
| | Low
|
2004 | | | | | | |
First Quarter (through March 15, 2004) | | $ | 11.260 | | $ | 7.420 |
2003 | | | | | | |
Fourth Quarter | | $ | 12.000 | | $ | 8.360 |
Third Quarter | | | 15.440 | | | 9.750 |
Second Quarter | | | 15.250 | | | 5.050 |
First Quarter | | | 6.550 | | | 3.050 |
2002 | | | | | | |
Fourth Quarter | | $ | 4.580 | | $ | 2.100 |
Third Quarter | | | 4.200 | | | 1.710 |
Second Quarter | | | 6.020 | | | 3.750 |
First Quarter | | | 5.440 | | | 3.500 |
| | | | | | | | | | |
| Period | | High | | | Low | |
| | | | | | | |
| 2005 | | | | | | | | |
| | First Quarter (through March 25, 2005) | | $ | 7.300 | | | $ | 3.830 | |
| 2004 | | | | | | | | |
| | Fourth Quarter | | $ | 6.400 | | | $ | 3.500 | |
| | Third Quarter | | | 7.480 | | | | 2.880 | |
| | Second Quarter | | | 9.730 | | | | 6.250 | |
| | First Quarter | | | 11.260 | | | | 7.230 | |
| 2003 | | | | | | | | |
| | Fourth Quarter | | $ | 12.000 | | | $ | 8.360 | |
| | Third Quarter | | | 15.440 | | | | 9.750 | |
| | Second Quarter | | | 15.250 | | | | 5.050 | |
| | First Quarter | | | 6.550 | | | | 3.050 | |
On March
15, 2004,25, 2005, the closing price of the Company’s Common Stock was
$7.82.$3.95. Stockholders are urged to obtain current market quotations for the Common Stock.
As of March
15, 2004,25, 2005, there were approximately 565 record holders of our Common Stock.
We have not paid any cash dividends on our Common Stock since our inception. We currently expect to retain any earnings for use to further develop our business and not to declare cash dividends on our Common Stock in the foreseeable future. The declaration and payment of any such dividends in the future depends upon the Company’s earnings, financial condition, capital needs and other factors deemed relevant by the Board of Directors and may be restricted by future agreements with lenders.
As of March
15, 2004,25, 2005, options to purchase
2,640,8452,719,379 shares of Common Stock were exercisable.
Recent Sales of Unregistered Securites On June 11, 2003,10, 2004, the Company sold 1,000,0002,000,000 shares of Common Stock at a price per share of $9.60.$6.25. The Company sold the shares of Common Stock directly, without the services of an underwriter, in a private placement made in reliance on Rule 506 of Regulation D under the Securities Act of 1933. The purchasers were all “accredited investors” within the meaning of Regulation D. The Company received proceeds, net of placement agent fees and other expenses, of approximately $8,948,000.$11,646,000.
We also entered into a Registration Rights Agreement with the purchasers, in which we agreed to file a “shelf” registration statement under the Securities Act of 1933 providing for the public resale of their shares, and to keep the registration statement effective for up to two years. After the expiration of that two-year period, to the extent any of the investors have shares purchased in the 2004 private placement that are not eligible for public sale under Rule 144 or Regulation S, the investors may have a right under the Registration Rights Agreement to “piggyback” on other registered offerings of the Company to resell those shares.
13
ITEM 6. SELECTED FINANCIAL DATA | |
| Item 6. | Selected Financial Data |
The following table sets forth selected consolidated financial data with respect to the five most recent fiscal years ended December 31, 2004, January 2, 2004, January 3, 2003, December 28, 2001, and December 29, 2000, and December 31, 1999.2000. The selected consolidated statement of income data set forth below for each of the three most recent fiscal years, and the selected consolidated balance sheet data set forth below at January 2,December 31, 2004 and January 3, 2003,2, 2004, are derived from the consolidated financial statements which have been audited by BDO Seidman, LLP, independent certified public accountants, as indicated in their report which is included elsewhere in this Annual Report. The selected consolidated statement of income data set forth below for each of the two fiscal years in the periods ended December 29, 2000,28, 2001, and December 31, 1999,29, 2000, and the consolidated balance sheet data set forth below at January 3, 2003, December 28, 2001 and December 29, 2000 and December 31, 1999 are derived from the Company’s audited consolidated financial statements not included in this Annual Report. The selected consolidated financial data should be read in conjunction with the consolidated financial statements of the Company, and the Notes thereto, included elsewhere in this Annual Report, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | | |
| | | December 31, | | | January 2, | | | January 3, | | | December 28, | | | December 29, | |
| | | 2004 | | | 2004 | | | 2003 | | | 2001 | | | 2000 | |
| | | | | | | | | | | | | | | | |
| | | (In thousands except per share data) | |
Statement of Operations | | | | | | | | | | | | | | | | | | | | |
| Sales | | $ | 51,685 | | | $ | 50,409 | | | $ | 47,880 | | | $ | 50,237 | | | $ | 53,986 | |
| Royalty and other income | | | — | | | | 49 | | | | 368 | | | | 549 | | | | 448 | |
| | | | | | | | | | | | | | | | |
| Total revenues | | | 51,685 | | | | 50,458 | | | | 48,248 | | | | 50,786 | | | | 54,434 | |
| Cost of sales | | | 25,542 | | | | 22,621 | | | | 24,099 | | | | 28,203 | | | | 26,329 | |
| | | | | | | | | | | | | | | | |
| Gross profit | | | 26,143 | | | | 27,837 | | | | 24,149 | | | | 22,583 | | | | 28,105 | |
| | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | | | | | | | | | | | | | | | | | | |
| General and administrative | | | 9,253 | | | | 9,343 | | | | 8,959 | | | | 8,746 | | | | 8,593 | |
| Marketing and selling | | | 20,302 | | | | 19,509 | | | | 16,833 | | | | 20,043 | | | | 21,254 | |
| Research and development | | | 6,246 | | | | 5,120 | | | | 4,016 | | | | 3,800 | | | | 4,215 | |
| Other charges | | | 500 | | | | 390 | | | | 1,454 | | | | 7,780 | | | | 15,276 | |
| | | | | | | | | | | | | | | | |
| Total selling, general and administrative expenses | | | 36,301 | | | | 34,362 | | | | 31,262 | | | | 40,369 | | | | 49,338 | |
| | | | | | | | | | | | | | | | |
| Operating loss | | | (10,158 | ) | | | (6,525 | ) | | | (7,113 | ) | | | (17,786 | ) | | | (21,233 | ) |
| | | | | | | | | | | | | | | | |
| Total other expense, net | | | (88 | ) | | | (637 | ) | | | (785 | ) | | | (724 | ) | | | (4,630 | ) |
| | | | | | | | | | | | | | | | |
| Loss before income taxes and minority interest | | | (10,246 | ) | | | (7,162 | ) | | | (7,898 | ) | | | (18,510 | ) | | | (25,863 | ) |
| Income tax provision (benefit) | | | 1,057 | | | | 1,127 | | | | 8,805 | | | | (3,649 | ) | | | (6,758 | ) |
| Minority interest | | | 29 | | | | 68 | | | | 75 | | | | 139 | | | | 87 | |
| | | | | | | | | | | | | | | | |
| Net loss | | $ | (11,332 | ) | | $ | (8,357 | ) | | $ | (16,778 | ) | | $ | (15,000 | ) | | $ | (19,192 | ) |
| | | | | | | | | | | | | | | | |
| Basic net loss per share | | $ | (0.58 | ) | | $ | (0.47 | ) | | $ | (0.98 | ) | | $ | (0.88 | ) | | $ | (1.25 | ) |
| Diluted net loss per share | | $ | (0.58 | ) | | $ | (0.47 | ) | | $ | (0.98 | ) | | $ | (0.88 | ) | | $ | (1.25 | ) |
| Weighted average number of basic shares | | | 19,602 | | | | 17,704 | | | | 17,142 | | | | 17,003 | | | | 15,378 | |
| Weighted average number of diluted shares | | | 19,602 | | | | 17,704 | | | | 17,142 | | | | 17,003 | | | | 15,378 | |
Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
| Working capital | | $ | 19,103 | | | $ | 15,883 | | | $ | 7,095 | | | $ | 16,780 | | | $ | 24,153 | |
| Total assets | | | 51,973 | | | | 47,376 | | | | 45,220 | | | | 64,650 | | | | 79,745 | |
| Notes payable and current portion of long-term debt | | | 3,004 | | | | 2,950 | | | | 5,845 | | | | 8,216 | | | | 7,944 | |
| Stockholders’ equity | | | 37,840 | | | | 35,219 | | | | 30,551 | | | | 46,142 | | | | 58,060 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended (In thousands except per share data)
| |
| | | January 2,
2004
| | | January 3,
2003
| | | December 28,
2001
| | | December 29,
2000
| | | December 31,
1999
| |
Statement of Operations | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 50,409 | | | $ | 47,880 | | | $ | 50,237 | | | $ | 53,986 | | | $ | 58,955 | |
Royalty and other income | | | 49 | | | | 368 | | | | 549 | | | | 448 | | | | 253 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total revenues | | | 50,458 | | | | 48,248 | | | | 50,786 | | | | 54,434 | | | | 59,208 | |
Cost of sales | | | 22,621 | | | | 24,099 | | | | 28,203 | | | | 26,329 | | | | 22,935 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Gross profit | | | 27,837 | | | | 24,149 | | | | 22,583 | | | | 28,105 | | | | 36,273 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Selling, general and administrative expenses | | | | | | | | | | | | | | | | | | | | |
General and administrative | | | 9,343 | | | | 8,959 | | | | 8,746 | | | | 8,593 | | | | 7,939 | |
Marketing and selling | | | 19,509 | | | | 16,833 | | | | 20,043 | | | | 21,254 | | | | 19,879 | |
Research and development | | | 5,120 | | | | 4,016 | | | | 3,800 | | | | 4,215 | | | | 4,338 | |
Other charges | | | 390 | | | | 1,454 | | | | 7,780 | | | | 15,276 | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total selling, general and administrative expenses | | | 34,362 | | | | 31,262 | | | | 40,369 | | | | 49,338 | | | | 32,156 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Operating income (loss) | | | (6,525 | ) | | | (7,113 | ) | | | (17,786 | ) | | | (21,233 | ) | | | 4,117 | |
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|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total other expense, net | | | (637 | ) | | | (785 | ) | | | (724 | ) | | | (4,630 | ) | | | (463 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Income (loss) before income taxes and minority interest | | | (7,162 | ) | | | (7,898 | ) | | | (18,510 | ) | | | (25,863 | ) | | | 3,654 | |
Income tax provision (benefit) | | | 1,127 | | | | 8,805 | | | | (3,649 | ) | | | (6,758 | ) | | | 945 | |
Minority interest | | | 68 | | | | 75 | | | | 139 | | | | 87 | | | | 419 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Net income (loss) | | $ | (8,357 | ) | | $ | (16,778 | ) | | $ | (15,000 | ) | | $ | (19,192 | ) | | $ | 2,290 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Basic net income (loss) per share | | $ | (0.47 | ) | | $ | (0.98 | ) | | $ | (0.88 | ) | | $ | (1.25 | ) | | $ | 0.16 | |
Diluted net income (loss) per share | | $ | (0.47 | ) | | $ | (0.98 | ) | | $ | (0.88 | ) | | $ | (1.25 | ) | | $ | 0.16 | |
Weighted average number of basic shares | | | 17,704 | | | | 17,142 | | | | 17,003 | | | | 15,378 | | | | 14,157 | |
Weighted average number of diluted shares | | | 17,704 | | | | 17,142 | | | | 17,003 | | | | 15,378 | | | | 14,756 | |
| | | | | |
Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
Working capital | | $ | 15,883 | | | $ | 7,095 | | | $ | 16,780 | | | $ | 24,153 | | | $ | 28,037 | |
Total assets | | | 47,219 | | | | 45,220 | | | | 64,650 | | | | 79,745 | | | | 85,008 | |
Notes payable and current portion of long-term debt | | | 2,950 | | | | 5,845 | | | | 8,216 | | | | 7,944 | | | | 2,691 | |
Long-term debt | | | — | | | | — | | | | — | | | | — | | | | 13,673 | |
Stockholders’ equity | | $ | 35,219 | | | $ | 30,551 | | | $ | 46,142 | | | $ | 58,060 | | | $ | 52,100 | |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Except for the historical information contained in this Annual Report, the matters discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements, the accuracy of which is necessarily subject to risks and uncertainties. Actual results may differ significantly from the discussion of such matters in the forward-looking statements. See “Factors That May Affect Future Results“Risk Factors.”
In the discussion of Operations.”the material changes in our financial condition and results of operations between the reporting periods in the consolidated financial statements, management has sought to identify and, in some cases, quantify, the factors that contributed to such material changes. However, quantifying these factors may involve the presentation of numerical measures that exclude amounts that are included in the most directly comparable measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”). Management uses this information to assess material changes in our financial condition and results of operations and is providing it to assist investors and potential investors to understand these assessments. In each instance, such information is presented immediately following (and in connection with an explanation of) the most directly comparable financial measure calculated in accordance with GAAP, and includes other material information necessary to reconcile the information with the comparable GAAP financial measure.
STAAR Surgical Company develops, manufactures and distributes worldwide products used by ophthalmologistsvisual implants and other eye care professionalsophthalmic products to improve or correct the vision inof patients with cataracts, refractive conditions, cataracts and glaucoma. Originally incorporated in California in 1982, STAAR Surgical Company reincorporated in Delaware in 1986. Unless the context indicates otherwise “we,” “us,” the “Company,” and “STAAR” refer to STAAR Surgical Company and its consolidated subsidiaries.
| | |
| • | STAAR developed, patented, and licensed the first foldable intraocular lens, or IOL, for cataract surgery. Made of pliable material, the foldable IOL permitted surgeons for the first time to replace a cataract patient’s natural lens with minimally invasive surgery. The foldable IOL quickly became the standard of care for cataract surgery throughout the world. STAAR introduced its first versions of the lens, made of silicone, in 1991. |
|
| • | In 1996, STAAR commenced commercial sales of its VISIANtm ICL (“ICL”) in certain foreign countries, and in 1997, the ICL received CE Marking which allowed STAAR to market the product in the European Union. Using the unique biocompatible properties of the Collamer material, the ICL is implanted in front of the patient’s natural lens to treat refractive errors, such as myopia (nearsightedness) and hyperopia (farsightedness). In 2003, the ICL became the first phakic IOL to receive an “approvable” recommendation from the FDA’s Ophthalmic Devices Panel. Currently, the ICL is approved for sale in 38 countries and has been implanted in approximately 40,000 eyes worldwide. |
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| • | In 1998, STAAR introduced the Toric IOL, the only implantable lens approved for the treatment of astigmatism. The Toric IOL was STAAR’s first venture into the refractive market in the United States. |
|
| • | In 2000, STAAR introduced an IOL made of our proprietary Collamer® lens material, a unique biocompatible polymerized collagen. Collamer mimics the clarity and refractive qualities of the natural human lens better than acrylic lens materials, and is better tolerated by the eye than either silicone or acrylic. |
|
| • | In 2001, STAAR commenced commercial sales of its VISIANtm Toric ICL (“TICL”) on a limited basis in certain foreign countries, and in 2002, the TICL received CE Marking which allowed STAAR to market the product in the European Union. |
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| • | In 2004, STAAR, through its joint venture company, Canon Staar, introduced the first preloaded lens injector system in international markets. The Preloaded Injector offers surgeons improved convenience and reliability. The Preloaded Injector is not yet available in the U.S. |
15
Cataract Surgery. The production and sale of IOLs for use in cataract surgery remains our core business. Our products for cataract surgery include the following:
| | |
| • | Silicone IOLs, in both three-piece and one-piece designs; |
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| • | Silicone Toric IOLs, used in cataract surgery to treat astigmatism; |
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| • | Collamer® IOLs, in a one-piece design, with a three-piece redesigned lens scheduled for introduction in the second quarter of 2005; |
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| • | the Preloaded Injector, a three-piece silicone IOL preloaded into a single-use disposable injector; |
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| • | STAARVISCtm II, a viscoelastic material, which is used as a tissue protective lubricant and to maintain the shape of the eye during surgery; |
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| • | SonicWAVEtm Phacoemulsification System, which is used to remove a cataract patient’s cloudy lens and has low energy and high vacuum characteristics; |
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| • | Cruise Control, a disposable filter used to increase safety and control during phacoemulsification; and |
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| • | Other auxiliary products for cataract surgery, manufactured by others, which strengthen our ability to offer an expanded range of procedural products. |
Sales of cataract surgery products accounted for approximately 90% of our total revenues for the year ended December 31, 2004 and 92% for the 2003 fiscal year.
Refractive Surgery.We have manufacturingused our unique biocompatible Collamer material to develop and distributionmanufacture lenses to treat refractive disorders such as myopia (near-sightedness), hyperopia (far-sightedness) and astigmatism. These include the VISIANtm ICL, or ICL®, and the Toric VISIANtm TICL, or TICL®. Lenses of this type are generically called “phakic IOLs” or “phakic implants” because they work along with the patient’s natural lens, orphakos, rather than replacing it.
The ICL and TICL have not yet been approved for use in the United States. The ICL is approved for use in the European Union and in Korea and Canada. The TICL completed enrollment in clinical trials in the United States in early 2005, and is approved for use in the European Union.
Glaucoma Surgery. We have developed the AquaFlowtm Collagen Glaucoma Drainage Device, also referred to as the AquaFlow Device, as an alternative to current methods of treating open angle glaucoma. The AquaFlow Device is implanted in the sclera (the white of the eye), using a minimally invasive procedure, for the purpose of reducing intraocular pressure.
| |
| Significant Factors Affecting Our Business and Recent Highlights |
Changing Focus of Research and Development. STAAR’s executive management was completely replaced commencing in 2001. The new management team assumed control of a company with a long record of innovation in ophthalmology, but one that had failing financial results and was expending cash at a significant rate. STAAR was also embroiled in several legal actions which affected our cash reserves. The new management implemented significant restructuring and other cost-cutting measures in 2001 to conserve our cash resources. Despite these cutbacks, STAAR has continued to devote a significant amount of its resources to developing and introducing the ICL.
Because of its significant investment in ICL technology, STAAR had limited resources for further developing its mature and well accepted IOL products for cataract treatment. Nevertheless, in the fourth quarter of 2003, the Company introduced the first preloaded injector system which was developed by its joint venture company in Japan, Canon Staar. Management believes, however, that during the long process of developing and seeking approval for the ICL, STAAR overall failed to match some of its competitors’ improvements to IOL technology and standard delivery systems resulting in a loss of U.S. market share.
As U.S. approval of the ICL appeared more likely in late 2003, and the focus of the ICL project shifted from development to marketing, management began to devote research and development resources to making STAAR’s IOL delivery systems more competitive. In an effort to strengthen the areas of research and
16
development, we separated our research and development function from our regulatory and compliance function and hired Tom Paul, PhD as Vice President, Research and Development and James Farnworth as Vice President, Regulatory and Quality Assurance. The resources for these efforts were made available by STAAR’s 2003 private sale of Common Stock, the proceeds of which were intended to fund the launching and marketing of the ICL.
The Warning Letter received from the FDA on December 29, 2003 caused STAAR to accelerate its efforts to improve its quality and regulatory compliance systems. The delay in the approval of the ICL until compliance issues were resolved further accelerated the need to invest in improvements to its IOL delivery systems in order to maintain its core cataract business.
As a result of the above factors and the receipt of a second Warning Letter, 2004 saw significant new investments in the restructuring of STAAR’s quality assurance and regulatory compliance functions, and in improving IOL technology, particularly lens delivery systems. While some R&D expense is directly attributable to the response to the FDA’s Warning Letters and related audits of STAAR’s facilities, the bulk of the expense results from systemic changes intended to produce a permanent improvement in the areas of research and development and quality assurance and regulatory compliance.
As described below, the initiative to improve IOL delivery technology resulted in progress towards the completion of an improved one-piece Collamer IOL injector, continuous improvement efforts to cartridge injector components for all lenses and a redesigned three-piece Collamer IOL injector. The continuous effort to improve cartridges resulted in supply problems, particularly in the second quarter of 2004. The timing of this interruption in supply, which coincided with increased R&D expenditures and a decline in sales of silicone IOLs, contributed to the drop in earnings in the second quarter. The decision to upgrade our three-piece Collamer lens design to coincide with the introduction of the first dedicated injector for this lens, coupled with a revised quality system, have resulted in the combined introduction being delayed.
Contraction of Silicone IOL Market. Our market share for silicone IOLs has steadily decreased over the last several years, as many surgeons now choose lenses made of acrylic material rather than silicone for their patients. Management believes that Collamer lens material will ultimately be competitive with acrylic, but to date sales of Collamer IOLs have only partially offset declining sales of silicone IOLs.
Redesign of Injectors and Three-Piece Collamer IOL. In an effort to improve the competitiveness of our lens injection systems for Collamer IOLs, during 2004 we devoted significant resources to improving the injector for the one-piece Collamer IOL and redesigning the three-piece Collamer injector. The redesign of the three-piece Collamer injector resulted in a hiatus in three-piece Collamer lens production, which STAAR took as an opportunity to make minor improvements and enhancements to the lens design. As a result of these efforts, three-piece Collamer IOLs had limited availability during 2004.
Decline in U.S. Sales of IOLs. During the year ended December 31, 2004, decreasing sales of silicone IOLs were further intensified by the negative perception in the marketplace caused by the Warning Letters and recalls described below, resulting in a 14% decline in U.S. silicone IOL sales compared to fiscal 2003. The market’s reaction to the compliance issues, along with an interruption in the supply of cartridges, also resulted in a decline in sales of Collamer IOLs. In contrast to recent periods in which improving sales of Collamer IOLs partially offset declining sales of silicone IOLs, sales of Collamer IOLs declined 8% in 2004 compared to fiscal 2003, worsening overall results for the U.S. cataract business and resulting in an overall decline of 7.8% in U.S. sales in 2004 compared to fiscal 2003.
Growth in International Sales of VISIAN ICLs and Preloaded Silicone IOLs. The decline in the U.S. cataract business during 2004 was offset in part by a 37.6% increase in international sales of the VISIAN ICL and TICL. In addition, our preloaded silicone lens injector system, newly launched in international markets, experienced strong sales. This growth in the business resulted in an increase in international sales of 11.5% in 2004 compared to 2003.
FDA Warning Letters and the 483 Observations. In 2004, we received Warning Letters and 483 Observations issued by the FDA, which outlined deficiencies related to our manufacturing and quality assurance systems in our Monrovia, California facility. For a discussion of the Warning Letters and 483
17
Observations, see “Business — Regulatory Matters — Warning Letters and the 483 Observations.” Costs associated with the preparation for these FDA inspections, and the improvements made to the quality assurance and regulatory compliance functions, contributed to the 22% increase in our research and development expenses (which included regulatory and quality assurance expenses) for fiscal 2004, compared to fiscal 2003. Additionally, the Warning Letters and 483 Observations have affected the Company’s reputation in the ophthalmic market and have adversely affected product sales for fiscal 2004. Until the FDA is satisfied with the Company’s response, it is unlikely to grant the Company approval to market the ICL in the United States. See “Risk Factors — We have received 483 Inspectional Observations and Warning Letters from the FDA, which until resolved to the satisfaction of the FDA will continue to delay approval of the ICL and could limit our existing business in the United States.” and “— Our success depends on the ICL, which has not been approved for use in the United States.”
Foreign Currency Fluctuations. Our products are sold in more than 45 countries. For the year ended December 31, 2004, revenues from international operations were 58% of total revenues. The results of operations and the financial position of certain of our offshore operations are reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk. For the year ended December 31, 2004, currency exchange rates had a favorable impact on product sales of approximately $2.2 million, and an adverse impact on our marketing and selling expenses of approximately $777,000.
Product Recalls. During 2004, we initiated several voluntary recalls of STAAR manufactured product including 33 lots of IOL cartridges, three lots of injectors, and 529 lenses. In an action considered a recall, but with no requirement for product to be returned to us, we issued letters to healthcare professionals advising them of the potential for a change in manifest refraction over time in rare cases involving the single-piece Collamer IOL. Although the direct costs associated with recalls have not been material, we believe recalls have adversely affected our revenues from product sales, although the amount of the impact cannot be determined.
Gross Profit. Our gross profit margin decreased to 50.6% in fiscal 2004 from 55.2% in fiscal 2003. Among the factors contributing to the decline in our gross profit margin were increased expenses associated with manufacturing engineering and quality control and assurance, an increase in inventory provisions, higher unit costs due to process changes and reduced volumes, and a shift in geographical and product mix.
Research and Development. We spent 12.1% of our revenue on research and development (which includes regulatory and quality assurance expenses) for the year ended December 31, 2004, and we expect to spend approximately 10% of our revenue on an annual basis in the future. For the year ended December 31, 2004, research and development expenses increased 22% compared to 2003. This was primarily due to our increased investment in injection systems, the redesign of the Collamer three-piece IOL and injector and preparation for the FDA audit of our facilities in Nidau, Switzerland and sellMonrovia, California, described above. Increases in research and development expense were partially offset by decreased expenses at subsidiaries, as all research and development efforts were consolidated into one location.
Private Placement. Due to the issues raised the FDA’s Warning Letters and the delay in the FDA approval of the ICL, we sought additional cash to invest in research and development, regulatory and compliance, and manufacturing engineering and to support other operating activities. This was accomplished through the private placement of 2,000,000 shares of our productsCommon Stock on June 10, 2004 generating net proceeds of $11.6 million during the second quarter of 2004.
Cash Flow and the Need for Further Financing. During fiscal 2004, we used $8.8 million in 35 countries.cash for operating activities and $1.7 million for property plant and equipment, ending fiscal 2004 with $9.3 million in cash and cash equivalents and short-term investments compared to $7.3 million in cash and cash equivalents at the end of fiscal 2003. We used $2.5 million in cash in the fourth quarter of 2004 and expect to use $3.5 million in the first quarter of 2005. During the fourth quarter of 2004, we took steps to reduce operating expenses by reducing our reliance on outside consultants. This reduction in spending is expected to result in savings of approximately $1.0 million annually. In early February 2005, we implemented additional cost reduction strategies, including the reduction in size of our direct sales force, which are expected to result in
18
another $1.0 million in annualized cost savings. We will continue to pursue other cost savings opportunities with the goal of realizing a total of $3.0 million in annual cost savings. We do not expect to realize significant benefits from the cost reductions in the first quarter of 2005 and while the benefit of the cost reductions will be fully implemented in the second quarter, a continued decline in U.S. sales could offset some of the savings for future periods. As a result of the level of cash available to the Company to fund ongoing operations as well as new product initiatives, we are exploring opportunities to raise additional financing. The Company expects operating losses and negative cash flows to continue until such time as the issues presented in the FDA Warning Letter dated December 22, 2003 and the cataract segment continued483 Observations are resolved and the ICL is approved for sale in the United States.
Going Concern. Our recurring losses from operations, negative cash flows, and accumulated deficit raise substantial doubt about our ability to accountcontinue as a going concern. As a result, we have received a report from our independent registered public accounting firm regarding our financial statements for the majorityyear ended December 31, 2004 that included an explanatory paragraph stating that there is substantial doubt about our ability to continue as a going concern.
Retention of Morgan Stanley. In December 2004, we engaged Morgan Stanley to assist our Board of Directors in a review of the Company’s revenuesstrategic and thus,financial options available to us.
Litigation. During 2004, multiple class action lawsuits, which were subsequently consolidated, were filed against the Company operates as one business segment.and its Chief Executive Officer on behalf of all persons who acquired the Company’s securities during various periods between April 3, 2003 and September 28, 2004. See Note 15 to“Item 3. Legal Proceedings.”
Purchase of Minority Interest. In May 2004, we entered into an agreement for the
Condensed Consolidated Financial Statements.For 2003 Financialpurchase of the 20% minority interest of an 80% owned subsidiary, ConceptVision Australia Pty Limited, in exchange for cash of $768,000 and Other Information Highlights, see Part I, Itema long-term note in the amount of $542,000 due on November 1, - Business.
2007. The transaction resulted in the recording of goodwill of $1.1 million.
The following table sets forth the percentage of total revenues represented by certain items reflected in the Company’s income statement for the period indicated and the percentage increase or decrease in such items over the prior period.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Percentage of Total Revenues | | | Percentage Change | |
| | | | | | | |
| | | December 31, | | | January 2, | | | January 3, | | | 2004 vs. | | | 2003 vs. | |
| | | 2004 | | | 2004 | | | 2003 | | | 2003 | | | 2002 | |
| | | | | | | | | | | | | | | | |
| Total revenues | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 2.4 | % | | | (4.6 | )% |
| Cost of sales | | | 49.4 | % | | | 44.8 | % | | | 49.9 | % | | | 12.9 | % | | | (6.1 | )% |
| Gross profit | | | 50.6 | % | | | 55.2 | % | | | 50.1 | % | | | (6.1 | )% | | | 15.3 | % |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
| | General and administrative | | | 17.9 | % | | | 18.5 | % | | | 18.6 | % | | | (1.0 | )% | | | 4.3 | % |
| | Marketing and selling | | | 39.3 | % | | | 38.7 | % | | | 34.9 | % | | | 4.1 | % | | | 15.9 | % |
| | Research and development | | | 12.1 | % | | | 10.1 | % | | | 8.3 | % | | | 22.0 | % | | | 27.5 | % |
| | Other charges | | | 1.0 | % | | | 0.8 | % | | | 3.0 | % | | | 28.2 | % | | | (73.2 | )% |
| | | Total costs and expenses | | | 70.3 | % | | | 68.1 | % | | | 64.8 | % | | | 5.6 | % | | | 9.9 | % |
| Operating loss | | | (19.7 | )% | | | (12.9 | )% | | | (14.7 | )% | | | 55.7 | % | | | (8.3 | )% |
| Other expense, net | | | (0.1 | )% | | | (1.3 | )% | | | (1.7 | )% | | | (86.2 | )% | | | (18.9 | )% |
| Loss before income taxes | | | (19.8 | )% | | | (14.2 | )% | | | (16.4 | )% | | | 43.1 | % | | | (9.3 | )% |
| Income tax provision (benefit) | | | 2.0 | % | | | 2.2 | % | | | 18.2 | % | | | (6.2 | )% | | | (87.2 | )% |
| Minority interest | | | 0.1 | % | | | 0.1 | % | | | 0.2 | % | | | (57.4 | )% | | | (9.3 | )% |
| Net loss | | | (21.9 | )% | | | (16.5 | )% | | | (34.8 | )% | | | 35.6 | % | | | (50.2 | )% |
| | | | | | | | | | | | | | | |
| | | Percentage of Total Revenues
| | | Percentage Change
| |
| | | January 2,
2004
| | | January 3, 2003
| | | December 28, 2001
| | | 2003 vs.
2002
| | | 2002 vs.
2001
| |
Total revenues | | 100.0 | % | | 100.0 | % | | 100.0 | % | | (4.6 | )% | | (5.0 | )% |
Cost of sales | | 44.8 | % | | 49.9 | % | | 55.5 | % | | (6.1 | )% | | (14.6 | )% |
Gross profit | | 55.2 | % | | 50.1 | % | | 44.5 | % | | 15.3 | % | | 6.9 | % |
Costs and expenses: | | | | | | | | | | | | | | | |
General and administrative | | 18.5 | % | | 18.6 | % | | 17.2 | % | | 4.3 | % | | 2.4 | % |
Marketing and selling | | 38.7 | % | | 34.9 | % | | 39.5 | % | | 15.9 | % | | (16.0 | )% |
Research and development | | 10.1 | % | | 8.3 | % | | 7.5 | % | | 27.5 | % | | 5.7 | % |
Other charges | | 0.8 | % | | 3.0 | % | | 15.3 | % | | (73.2 | )% | | (81.3 | )% |
Total costs and expenses | | 68.1 | % | | 64.8 | % | | 79.5 | % | | 9.9 | % | | (22.6 | )% |
Operating loss | | (12.9 | )% | | (14.7 | )% | | (35.0 | )% | | (8.3 | )% | | (60.0 | )% |
Other expense, net | | (1.3 | )% | | (1.7 | )% | | (1.4 | )% | | (18.9 | )% | | 8.4 | % |
Loss before income taxes | | (14.2 | )% | | (16.4 | )% | | (36.4 | )% | | (9.3 | )% | | 57.3 | % |
Income tax provision (benefit) | | 2.2 | % | | 18.2 | % | | (7.2 | )% | | (87.2 | )% | | 341.5 | % |
Minority interest | | 0.1 | % | | 0.2 | % | | 0.3 | % | | (9.3 | )% | | (46.0 | )% |
Net loss | | (16.5 | )% | | (34.8 | )% | | (29.5 | )% | | (50.2 | )% | | 11.9 | % |
19
2004 Fiscal Year Compared to 2003 Fiscal Year
Revenues. Product sales for the years ended December 31, 2004 (“fiscal 2004”) and January 2, 2004 (“fiscal 2003”) were $51.7 million and $50.4 million, respectively. Changes in currency exchange rates had a favorable impact on product sales of approximately $2.2 million for fiscal 2004. The primary reason for the decrease in product sales, excluding the impact of exchange rates, was a decrease in U.S. IOL sales due to (i) the decline in the silicone IOL market as many surgeons now choose lenses made of acrylic material, (ii) the Company’s failure to match competitors’ improvements to IOL technology, (iii) the market response to the Company’s compliance issues with the FDA and (iv) the lack of competitive lens delivery systems. The Company also experienced decreased sales of distributed products as it concentrates on the distribution of its higher margin proprietary products. The decreases in U.S. IOL sales and sales of distributed products were partially offset by increased sales of the Company’s Visiantm ICL (“ICL”) and Visiantm TICL (“TICL”) in international markets, sales of the newly launched preloaded IOLs in international markets, and increased sales of Cruise Control.
Total revenues for 2003 included $49,000 in royalties from technology licenses that terminated in 2003.
Gross profit. Gross profit margin decreased to 50.6% of revenues for fiscal 2004, from 55.2% of revenues for fiscal 2003. The most significant impact on gross margins resulted from increased expenses associated with manufacturing engineering and quality control and assurance, an increase in inventory provisions, higher unit costs due to process changes and reduced volumes, and a shift in geographical and product mix.
Marketing and selling expenses. Marketing and selling expenses for fiscal 2004 increased $793,000, or 4%, over fiscal 2003. The increase is principally due to fluctuations in foreign exchange rates which negatively impacted marketing and selling expenses by $777,000. International sales and marketing expenses increased due to increased salaries, travel, and commissions. Headcount in the U.S. increased due to the addition of direct sales representatives for a newly established sales territory in the Pacific Northwest Region and as a result of the addition of proctors-trainers used principally to train physicians in the ICL implantation technique. These increases were offset by decreased promotional activities, primarily in response to the delay in the launch of the Visiantm ICL in the U.S. and the cost savings realized from the closure of a subsidiary.
Research and development expenses. Research and development expenses for the fiscal 2004, increased $1,127,000, or 22%, compared to fiscal 2003. This was primarily due to our increased investment in insertion systems, the redesign of the Collamer three-piece IOL and injector and preparation for the FDA audit of our facilities in Nidau, Switzerland and Monrovia, California. Increases in research and development expense were partially offset by decreased research and development expenses of subsidiaries, as all research and development efforts were consolidated into one location.
Other charges. Other charges for fiscal 2004 were $500,000 compared to $390,000 in fiscal 2003. During fiscal 2004, the Company recorded a $500,000 reserve against the notes of a former director of the Company which total $1.8 million including accrued interest. The notes are collateralized by 120,000 shares of the Company’s Common Stock and a second mortgage on a home in Florida. The current value of the collateral is approximately $1.3 million. The amount of the reserve is based on the difference between the note amount and the collateral value.
Other expense, net. Other expense for fiscal 2004 decreased $549,000 over fiscal 2003. Included in other expense for fiscal 2003 was the write-off of a note receivable in the amount of $430,000. During fiscal 2004, the Company recovered $200,000 of the note and recorded the cash received as other income. These increases in other income were partially offset by losses recorded in 2004 by the Company’s joint venture, Canon Staar.
Income taxes. For each of fiscal 2004 and fiscal 2003, the Company recorded income taxes of $1.1 million primarily based on the income of the Company’s German subsidiary.
In 1995, a subsidiary of the Company obtained retroactively to 1993, a ten-year tax holiday for the payment of federal, cantonal and municipal income taxes in Switzerland. As such, Swiss income taxes were not due on the operations of this subsidiary for the ten-year period that ended on December 31, 2002. For 2004
20
and 2003, as the tax holiday from Swiss taxes has expired, the appropriate federal, cantonal and municipal income taxes have been included in the foreign tax provision.
Negotiations to extend the Swiss tax holiday are ongoing. The Swiss tax authorities are considering granting an extension of the tax holiday with respect to “new” products including the ICL, the Toric ICL and the AquaFlow Device. If the tax holiday is extended, it will likely be applied prospectively.
2003 Fiscal Year Compared to 2002 Fiscal Year RevenuesRevenues.. Revenues for
the year ended January 2, 2004fiscal 2003 increased over the year ended January 3, 2003
(“fiscal 2002”) by 4.6% or $2,210,000 due to the favorable impact of foreign exchange on sales of other ophthalmic products distributed in international markets. Excluding the favorable impact of foreign exchange, sales decreased 2%. The decrease in sales is due primarily to a decrease in unit volume of the Company’s single and three-piece silicone IOL, primarily in the U.S. market, due to a decline in competitiveness of the Company’s lens delivery systems and believed contraction of this market segment. The decrease in sales of silicone IOLs was partially offset by increased sales in the U.S. of Collamer IOLs (28% increase in volume partially offset by a 6% decrease in average selling price “ASP”). As a result of the decreased silicone IOL sales in the U.S., overall sales in that market declined 3%. Sales of the AquaFlow
deviceDevice decreased 19% (15% decrease in volume and a 5% decrease in ASP) over 2002. This sales decrease was also realized in the U.S. and was the result of sales and marketing
resources which have been diverted from AquaFlow proctoring and training to surgical evaluations of silicone lens injection systems and preparation for possible FDA approval of the ICL.
The decreases in single and three-piece silicone IOL and
AquaflowAquaFlow sales were further offset by increased sales of ICLs, Toric IOLs, STAARVisc, and Cruise Control. Sales of ICLs in international markets increased 31% due to a 26% increase in units and a 4% increase in ASP. Sales of STAARVisc increased 17% on a 25% increase in volume partially offset by a 7% decrease in ASP. Sales of Toric IOLs increased 3% due to a 10% increase in volume partially offset by a 6% decline in ASP. Sales in international markets decreased 2% (excluding the impact of exchange) due to a decrease in equipment sales in Australia.
Gross profitprofit.. Gross profit for
the year ended January 2, 2004fiscal 2003 was 55.2% of revenues compared to
the year ended January 3, 2003fiscal 2002 when it was 50.1% of revenues. The improvement in gross profit margin is the result of successfully increasing standard margins across all of our primary product lines through reduced cost structures resulting from better yields, efficiencies and volume, and reducing other costs of sales through better management of excess and obsolete inventories. Additionally, the Company streamlined its phacoemulsification manufacturing and repair division, during the year, resulting in lower costs and improved gross profit for this product line.
Marketing and selling expensesexpenses.. Marketing and selling expenses for
the year ended January 2, 2004fiscal 2003 increased $2.7 million, or 16%
, over
fiscal 2002. Marketing and selling expense in the U.S. increased by $1.7 million as a result of marketing and promotional costs which increased, as planned, in preparation for the launch of the ICL and increased headcount and associated recruiting costs in preparation for launch of the ICL in the U.S., the addition of direct sales representatives for a newly established Pacific Northwest Region, increased travel expenses and increased salaries. Marketing and selling expense increased internationally by $1.0 million primarily due to the unfavorable impact of exchange rates partially offset by reduced expenses of subsidiaries which were closed in 2002 and 2003.
Other chargescharges.. Other charges for the year ended January 2, 2004fiscal 2003 were $390,000 compared to the year ended January 3, 2003fiscal 2002 when they were $1.5 million. The charges in 2003 related to the write-down of $2.1 million (net book value) in capitalized patent costs in connection with the Company’s routine evaluation of such costs in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”)—“Accounting “Accounting for the Impairment of Long-Lived Assets.” The write-down related to patents acquired in 1999 in the purchase of the Company’s majority interest in Circuit Tree Medical, a developer and manufacturer of phacoemulsification equipment, whose ongoing operations were moved to the Company’s Monrovia, CACalifornia facility. The $2.1 million charge was partially offset by the reversal of $1.7 million of reserves against former officer’sofficers’ notes which were paid during the year.
21
Other expense, netnet.. Other expense for
the year ended January 2, 2004fiscal 2003 decreased $148,000 over
the year ended January 3, 2003.fiscal 2002. The decreased expense is due to decreased interest expense and foreign exchange losses partially offset by decreased interest income from
officer’sofficers’ notes that were paid in full and a $430,000 reserve on a note receivable the Company recorded during the year.
Income taxestaxes.. Income taxes for
the year ended January 2, 2004fiscal 2003 decreased $7.7 million over the
year ended January 3, 2003.fiscal 2002. The high provision for income taxes in 2002 was the result of a valuation allowance of $9.0 million recorded against the Company’s deferred tax assets, partially offset by an income tax benefit of approximately $1.0 million related to a federal carryback claim filed in 2002. The tax refund from the carryback claim was received in 2003.
In 1995, a subsidiary of the Company obtained retroactively to 1993, a ten-year tax holiday for the payment of federal, cantonal and municipal income taxes in Switzerland. As such, Swiss income taxes were not due on the operations of this subsidiary for the
ten yearten-year period that ended on December 31, 2002. For 2003, as the tax holiday from Swiss taxes has expired, the appropriate federal, cantonal and municipal income taxes have been included in the foreign tax provision.
Negotiations to extend the Swiss tax holiday are ongoing. The Swiss tax authorities are considering granting an extension of the tax holiday with respect to “new” products including the
ICLs,ICL, the Toric
ICLsICL and the AquaFlow
product line.Device. If the tax holiday is
granted,extended, it
couldwill likely be
applicable retrospectively to 2003, although this is not certain.2002 Fiscal Year Compared to 2001 Fiscal Year
Revenues. Revenues for the year ended January 3, 2003 decreased over the year ended December 28, 2001 by 5.0% or $2,538,000. The decrease in revenues was due primarily to a 14% decrease in IOL sales primarily in the United States. Approximately 66% of the decrease in IOL sales was the result of a decline in unit volume and 34% of the decrease was the result of a decline in ASP. The decrease in IOL sales was partially offset by an 11% increase in sales in international markets of distributed products and a 33% increase in ICL sales. Unit volume of ICLs increased 34%, partially offset by a 1% decline in ASP. Sales of STAARVisc increased 205% on increased volume and Aquaflow sales increased 54% on increased volume and ASP.
Gross profit. Gross profit for the year ended January 3, 2003 was 50.1% of revenues compared to the year ended December 28, 2001 when it was 44.5% of revenues (including other charges of $5.6 million related to inventory write-offs primarily as the result of voluntary product recalls). Excluding the other charges, gross profit for the year ended December 28, 2001 was 57.0%. The lower gross profit for the current year compared to the previous year (excluding other charges) is due to the high unit costs of IOL inventory manufactured in 2001 during a period of low production volumes. Gross profit for 2002 was also impacted by a shift in product mix from IOLs with a higher gross profit margin to equipment and other distributed product with a lower gross profit margin. Gross profit margin has improved sequentially each quarter since the second quarter of 2002.
Marketing and selling expenses. Marketing and selling expenses for the year ended January 3, 2003 were 34.9% of revenues compared to 39.5% of revenues for the year ended December 28, 2001. In terms of dollars, marketing and selling expenses for 2002 decreased $3.2 million or 16.0% over 2001 due to cost containment measures which have reduced overall spending in the U.S. and the approximate $1.6 million in cost savings the Company has realized as a result of subsidiary closures in 2001.
Other charges. Other charges for the year ended January 3, 2003 were approximately $1.5 million compared to the year ended December 28, 2001 when other charges were $7.8 million. The $1.5 million in charges taken during 2002 related to the recognition of deferred losses resulting from the translation of foreign currency statements into U.S. dollars of subsidiaries that were closed and employee separation.
Other expense, net. Other expense, net for the year ended January 3, 2003 increased $61,000 over the year ended December 28, 2001. This increase was due to increased interest income due to prior year notes receivable reserves and write-off of previous interest, offset by decreased income from the Company’s joint venture with CANON-STAAR Company, Inc., and increased foreign exchange losses.
Income taxes. During the year ended January 3, 2003, the Company recorded a valuation allowance of $9.0 million against its deferred tax assets. This non-cash charge reduced the deferred tax assets on the balance sheet to zero. The assets were created as a result of income tax benefits that were recorded on U.S. operating losses incurred during the restructuring and reorganization accomplished in 2000 and 2001. No deferred tax benefits were recorded on operating losses in 2002. Current accounting standards place significant weight on a history of recent cumulative losses in determining whether or not a valuation allowance is necessary. Forecasts of future taxable income are not considered sufficient positive evidence to outweigh a history of losses. Accordingly, the assets were reserved in full. The Company’s federal net operating loss carryforwards are not impacted and can continue to be utilized for up to 20 years.
Legislation enacted on March 9, 2002 (HR 3090) enabled the Company to carryback a portion of the federal 2001 net operating loss to 1996, 1997 and 1998. Since this legislation was not enacted as of the end of fiscal year 2001, the benefit of $959,000 from this carryback was recorded in 2002.
applied prospectively.
Liquidity and Capital Resources The Company has funded its activities over the past several years principally from cash flow generated from operations, credit facilities provided by institutional domestic and foreign lenders, the private placement of Common Stock, the repayment of former
officer’sofficers’ notes, and the exercise of stock options.
Net cash provided by (used in) operating activities was ($
8.8) million, ($4.1) million,
$0.6 million, and
($2.5)$0.6 million for fiscal
2004, 2003,
and 2002,
respectively. For fiscal 2004, cash used in operations was the result of the net loss, adjusted for depreciation, amortization, and
2001, respectively.other non-cash charges, and increases in working capital — primarily accounts receivable, inventory, accounts payable and other current liabilities. For fiscal 2003, cash used in operations was the result of
the net loss, adjusted for depreciation, amortization, the write-off of patents, and other non-cash charges. For fiscal 2002, cash provided by operations was the result of
the net loss, adjusted for depreciation, amortization, deferred income taxes, and other non-cash charges, and decreases in working
capital—capital — primarily accounts receivable, inventory, and accounts payable.
For fiscal 2001, cash used in operations was net loss, adjusted for depreciation, amortization, deferred income taxes, and non-cash restructuring and inventory write-downs.Accounts receivable was
$5.5$6.2 million in 2004, $5.7 million in 2003,
and $6.0 million in
2002, and $7.5 million in 2001.2002. The
decreaseincrease in accounts receivable is due to
lowerincreased sales,
the write-off of a receivable, reserved in the previous year, of a distributor that discontinued its operations and
increased collection efforts. Day’sa slight increase in day’s sales outstanding (“DSO”)
. Although DSO improved from
54 days in 2001 to 45 days in 2002
andto 39 days in
2003.2003 it increased slightly, as expected, to 41 days in 2004. The Company
does not believe that the trend of lowerexpects DSO
willto continue in
2004 below the
39 days realized in 2003.40-43 day range for 2005.
Inventory at year-end
2004, 2003,
and 2002
and 2001 was
$15.1 million, $12.8 million,
$11.8 million, and
$15.2$11.8 million, respectively. Day’s inventory on hand
decreasedincreased from
195 days in 2001 to 176 days in 2002
and increased to 204 days in
2003. Decreased2003, and decreased to 186 days in 2004. Although inventory
in 2001 totaling $5.6 million,units have decreased overall from 2003 to 2004, the decrease was
primarily the result of write-offs of excess and obsolete inventory and inventory related to voluntary product recalls. The decrease in inventory in 2001 was partiallymore than offset by higher cost inventory that was produced during the year as a result of
decreasedlower than planned production
volume. This high cost inventory was sold during 2002 and replaced with lower cost inventoryvolume resulting in an
overall decreaseincrease in inventory
at the end of
2002 of $3.5$2.3 million
in 2004 over
2001.2003. Inventory, at the end of 2003, increased $1.0 million over 2002 levels due to the build-up of ICL inventory in preparation of the launch of the product in the U.S. and increased collamer IOL inventory based on increased demand for the product.
The Company expects that for 2004, the value of itsHigh cost inventory,
will increase to approximately $15.5 million.Accounts payable at year-end 2003, 2002, and 2001 was $4.7 million, $4.4 million, and $5.6 million, respectively. The increase in 2003 was the result of increased marketing expenses related to the anticipated launch of the ICL in the U.S. The decreasebuilt in 2001, was sold during 2002 and replaced with lower cost inventory resulting in an overall decrease in inventory at the resultend of companywide cost savings measures implemented during that year. The benefits2002 of those cost savings measures continued into 2002.
$3.5 million over 2001.
Net cash provided by (used in) investing activities was approximately ($7,294,000), $2,151,000, ($406,000), and ($705,000)406,000) for fiscal 2004, 2003, and 2002, respectively. During 2004, the Company invested $8.0 million of the proceeds of a private placement in taxable auction-rate securities which are classified as available for sale investments and 2001, respectively.sold $2.9 million of the investment during the year to provide cash for operations. Also during 2004, the Company purchased the 20% minority interest in an 80% owned subsidiary in exchange for cash of $768,000 and a long-term note in the amount of $542,000 due on November 1, 2007. The transaction resulted
22
in the recording of goodwill of $1.1 million. Proceeds from the payment of notes of former officers were the primary source of cash provided by investing activities in 2003. The principal investments of the Company are in property and equipment. Investments in property and equipment were
$1.7 million, $1.3 million,
$874,000, and
$1.2 million$874,000 for fiscal
2004, 2003,
2002, and
2001,2002, respectively. The investments are generally made to upgrade and improve existing production equipment and processes. The Company expects to spend approximately
$1.3$1.0 million on property and equipment in
2004.2005.
Net cash provided by (used in) financing activities were approximately $12,547,000, $7,589,000, ($592,000), and ($1.7 million)592,000) for fiscal 2004, 2003, and 2002, respectively. In 2004, cash provided by financing activities resulted from the receipt of net proceeds of $11.6 million from a private placement of 2.0 million shares of the Company’s Common Stock and 2001, respectively. The increase in$829,000 received from the exercise of stock options. In 2003, of cash provided by financing activities is primarily the result of net proceeds of $8.9 million from a private placement of the Company’s Common Stock and $1.6 million received from the exercise of stock options. The Company used approximately $2.1 million of the proceeds to pay off the note to its domestic lender and $812,000 to pay down other notes payable. In 2002, the Company used $592,000 in cash to pay down notes payable and in 2001 cash used in financing activities was primarily the result of $2.0 million in cash which was restricted pursuant to the renegotiated termspayable.
Subsidiaries of the
Company’s domestic line of credit.The Company has twohave foreign credit facilities with different banks to support operations in Switzerland and Germany.
The Swiss credit agreement,
whichas amended on August 2, 2004, provides for borrowings of up to
4.03.75 million Swiss Francs “CHF”
(approximately $3.2 (approximately $3.3 million based on the rate of exchange on January 2,December 31, 2004), and permits either fixed-term or current advances. The interest rate on current advances iswas 6.0% and 6.5% per annum at January 2,both December 31, 2004 and January 3, 2003, respectively,2, 2004, plus a commission rate of .25%0.25% payable quarterly. There were no current advances outstanding at December 31, 2004 or January 2, 2004. The base interest rate for fixed-term advances follows Euromarket conditions for loans of a corresponding term and currency, plus an individual margin (4.2%(4.5% at December 31, 2004 and 4.6%4.2% at January 2, 2004 and January 3, 2003)2004). Borrowings outstanding under the notefacility were CHF 3.73.4 million at December 31, 2004 (approximately $3.0 million based on the rate of exchange at January 2,December 31, 2004) and CHF 5.03.7 million at January 2, 2004 (approximately $3.0 million based on the rate of exchange on January 3, 2003)2, 2004). The credit facility is secured by a general assignment of claims and includes positive and negative covenants which, among other things, require the maintenance of a minimum level of equity of at least CHF 15$12.0 million (approximately $12.1 million based onand prevents the exchange rate on January 2, 2004), prevents theSwiss subsidiary from entering into other secured obligations or guaranteeing the obligations of others. The agreement also prohibits repaymentthe sale or transfer of loans made by the Company to the subsidiarypatents or licenses without the prior consent of the lender. This financial covenant was not met as of January 2, 2004lender and the bank has waived such non-compliance.
terms of intercompany receivables may not exceed 90 days.
The Swiss credit facility is divided into two
parts:parts. Part A provides for borrowings of up to CHF 3.0 million ($
2.42.7 million based on the exchange rate on
January 2,December 31, 2004) and does not have a termination
date;date. Part B
presently provides for borrowings of up to CHF
1.0 million750,000 ($
0.8 million662,000 based on the exchange rate on
January 2,December 31, 2004). The loan amount under Part B of the agreement
reducesis reduced by CHF 250,000 ($
200,000220,000 based on the exchange rate on
January 2,December 31, 2004)
semi-annually beginning June 30, 2002.semi-annually.
The German credit agreement, entered into during fiscal year 2003, provides for borrowings of up to 210,000 EUR ($263,000 at286,000 based on the exchange rate of exchange on January 2,December 31, 2004), at a rate of 8.5% per annum is scheduled to mature in November 2004.and renews automatically each November. The agreement prohibits theour German subsidiary from paying dividends and is personally guaranteed by the president of the Company’s German subsidiary. This agreement replaced a previous credit agreement with another German bank that provided for borrowings during fiscal year 2002 of up to 200,000 EUR ($207,000 at the exchange rate on January 3, 2003), and carried interest at a rate of 8.5%. There were no borrowings outstanding under either agreement at January 2,as of December 31, 2004 or January 3, 2003.2, 2004.
The Company was in compliance with the covenants of these credit facilities as of December 31, 2004.
23
The following table represents the Company’s known contractual obligations included in the Company’s balance sheet as of
January 2,December 31, 2004.
| | | | | | | | | | | | | | | |
| | | Payments Due by Period
|
Contractual Obligations
| | Total
| | Less Than 1 Year
| | 1-3 Years
| | 3-5 Years
| | More Than 5 Years
|
| | | (In thousands) |
Notes Payable | | $ | 2,950 | | $ | 2,950 | | $ | — | | $ | — | | $ | — |
Capital Lease Obligations | | | 90 | | | 61 | | | 29 | | | — | | | — |
Operating Lease Obligations | | | 2,972 | | | 1,218 | | | 1,743 | | | 11 | | | — |
Purchase Obligations | | | 1,866 | | | 1,066 | | | 800 | | | — | | | — |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
Total | | $ | 7,878 | | $ | 5,295 | | $ | 2,572 | | $ | 11 | | $ | — |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| | | |
| | | | | Less | | | | | More |
| | | | | Than | | | 1-3 | | | 3-5 | | | Than |
| Contractual Obligations | | Total | | | 1 Year | | | Years | | | Years | | | 5 Years |
| | | | | | | | | | | | | | | |
| | | (In thousands) |
| Notes payable | | $ | 3,004 | | | $ | 3,004 | | | $ | — | | | $ | — | | | $ | — | |
| Capital lease obligations | | | 105 | | | | 92 | | | | 11 | | | | 2 | | | | — | |
| Operating lease obligations | | | 2,286 | | | | 927 | | | | 1,307 | | | | 52 | | | | — | |
| Purchase obligations | | | 1,222 | | | | 1,022 | | | | 200 | | | | — | | | | — | |
| Open purchase orders | | | 1,212 | | | | 1,212 | | | | — | | | | — | | | | — | |
| Other long-term liabilities | | | 542 | | | | — | | | | 542 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | Total | | $ | 8,371 | | | $ | 6,257 | | | $ | 2,060 | | | $ | 54 | | | $ | — | |
| | | | | | | | | | | | | | | | |
The table presented above excludes the following information: (a) interest due on notes payable under the Swiss credit agreement and (b) employment agreements for the two previous minority owners of our Australian subsidiary. See Note 9 to the Consolidated Financial Statements.
Due to a continued decline in U.S. sales, lower gross profit, and increased operating expenses the Company sustained significant losses and negative cash flows from operations for the year ended December 31, 2004. Our current sources of working capital are not sufficient to satisfy our anticipated working capital requirements for fiscal 2005. The Company expects operating losses and negative cash flows to continue until such time as the issues presented in the FDA Warning Letter dated December 22, 2003 and the 483 Observations are resolved and the ICL is approved for sale in the U.S. To enhance its ability to continue as a going concern through the year ended December 30, 2005, the Company expects to take the following actions: (1) continue to aggressively address the issues presented in the FDA Warning Letter of December 22, 2003 and the 483 Observations; (2) work closely with the independent sales force and ophthalmic community to reverse the negative perceptions and sales trends of the Company’s existing lines of business; (3) further reduce discretionary spending; (4) seek other sources of funding; and (5) explore other strategic and financial options. However, there can be no assurance as to the availability or terms upon which capital might be obtained, or that the Company will be successful in executing its other strategies. Accordingly, the Company’s independent registered public accounting firm has issued an opinion that substantial doubt exists as to the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company’s liquidity requirements arise from the funding of its working capital needs, primarily inventory, work-in-process and accounts receivable. The Company’s primary sources for working capital and capital expenditures are cash flow from operations, proceeds from the private placement of Common Stock, proceeds from option exercises, debt repayments by former officers, and borrowings under the Company’s foreign bank credit facilities. Any withdrawal of support from its banks could have serious consequences on the Company’s liquidity. The Company’s liquidity is dependent, in part, on customers paying within credit terms, and any extended delays in payments or changes in credit terms given to major customers may have an impact on the Company’s cash flow. In addition, any abnormal product returns or pricing adjustments may also affect the Company’s short-term funding.
The
Company believes it has sufficient cash to fund existing operations and that it could obtain additional financing, if necessary, although this is not certain.On December 29, 2003,business of the Company received a Warning Letter issuedis subject to numerous risks and uncertainties that are beyond its control, including, but not limited to, those set forth above and in the other reports filed by the U.S. Food and Drug Administration (FDA) which outlined certain deficiencies related to the Company’s manufacturing and quality assurance systems which were identified during inspection audits of the Company’s Monrovia, CA facility. The Company is aggressively pursuing corrective actions to remedy the issues and does not expect the direct costs of these corrections to be significant. However, until the FDA is satisfied with the Company’s response, the Company cannot be granted approval on new productsSecurities and Exchange Commission. Such risks and uncertainties could face restrictions on established domestic lines of business. While there can be no assurance that an adverse determination of any of the items identified by the FDA could not have a material adverse impact in any future period, management does not believe, based upon information known to it, that the final resolution of these matters will have a material adverse effect uponon the Company’s consolidatedbusiness, financial position and annualcondition, operating results of operations and cash flows. See “Factors That May Affect Future Results of Operations—We are subject to extensive government regulation, which increases our costs and could prevent us from selling our products.“Risk Factors.”
24
Critical Accounting Policies The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, inventory reserves and income taxes, among others. Our estimates are based upon historical experiences, market trends and financial forecasts and projections, and upon various other assumptions that management believes to be reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.
The Company believes the following represent its critical accounting policies.
| | |
| | • | Revenue Recognition and Accounts Receivable.. In general, The Company recognizes revenue when realized or realizable and earned, which is when the Company supplies foldablefollowing criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the sale price is fixed and determinable; and collectibility is reasonably assured. We record revenue from product sales when title and risk of ownership has been transferred to the customer, which is typically upon delivery to the customer. The exception to this recognition policy is revenue from IOLs distributed on a consignment basis, which is recognized upon notification of implantation in a patient. |
| |
| The Company may bundle the sale of phacoemulsification equipment to customers primarily ophthalmologists, surgical centers, hospitals and other eye care providers andwith multi-year agreements to purchase minimum quantities of foldable IOLs. The Company recognizes sales when the revenue from the equipment based on monthly purchases of minimum quantities of IOLs are implanted. Salesover the life of all other products, including sales to foreign distributors, are generally recognized upon shipment. the agreement. |
|
| Revenue from license and technology agreements is recorded as income, when earned, according to the terms of the respective agreements. |
|
| The Company generally permits returns of product if such product is returned within the time allowed by the Company, and in good condition. Allowances for returns are provided for based upon an analysis of our historical patterns of returns matched against the sales from which they originated. To date, historical product returns have been within the Company’s estimates. |
|
| The Company maintains provisions for uncollectible accounts for estimated losses resulting from the inability of its customers to remit payments. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer collection issues that have been identified. |
| | |
| | • | Stock-Based Compensation. We measure stock-based compensation for option grants to employees and members of the Board of Directors using the intrinsic value method. The fair value of each option grant for determining the pro forma impact of stock-based compensation expense is estimated on the date of grant using the Black-Scholes option-pricing model with weighted average assumptions. These assumptions consist of expected dividend yield, expected volatility, expected life, and risk-free interest rate. If the assumptions used to calculate the value of each option grant do not properly reflect future activity, the weighted average fair value of our grants could be impacted. |
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| • | Income Taxes. We account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered and expected levels of taxable income. A valuation allowance to reduce deferred tax |
25
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| | assets is established when it is “more likely than not” that some or all of the deferred tax assets will not be realized. As of the years ended December 31, 2004 and January 2, 2004, the valuation allowance fully offsets the value of deferred tax assets on the Company’s balance sheet. |
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| We expect to continue to maintain a full valuation allowance on future tax benefits until an appropriate level of profitability is sustained, or we are able to develop tax strategies that would enable us to conclude that it is more likely than not that a portion of our deferred tax assets would be realizable. |
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| • | Inventories. Inventories are valued at the lower of first-in, first-out cost or market. On a regular basis, we evaluate inventory balances for excess quantities and obsolescence by analyzing estimated demand, inventory on hand, sales levels and other information. Based on these evaluations, inventory balances are reduced, if necessary. |
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| • | Impairment of Long-Lived Assets. Intangible and other long lived-assets are reviewed for impairment whenever events such as product discontinuance, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount may not be recoverable. In reviewing for impairment, the Company compares the carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets’ fair value and their carrying value. |
Goodwill, which has an indefinite life and was previously amortized on a straight-line basis over the periods benefited, is no longer amortized to earnings, but instead is subject to periodic testing for impairment. Intangible assets determined to have definite lives are amortized over their remaining useful lives. Goodwill of a reporting unit is tested for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. As provided under SFAS 142, the initial testing of goodwill for possible impairment was completed within the first six months of 2002 and an annual assessment was completed during 2003, and no impairment has been identified. As of January 2, 2004, the carrying value of goodwill was $6.4 million.
The Company also has other intangible assets consisting of patents and licenses, with a gross book value of $11.6 million and accumulated amortization of $5.6 million as of January 2, 2004. Amortization is computed on the straight-line basis over the estimated useful lives, which are based on legal and contractual provisions, and range from 10 to 20 years. The Company capitalizes the costs of acquiring patents and licenses.
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| | • | Deferred TaxesGoodwill.. Goodwill, which has an indefinite life and was previously amortized on a straight-line basis over the periods benefited, is no longer amortized to earnings, but instead is subject to periodic testing for impairment. Intangible assets determined to have definite lives are amortized over their remaining useful lives. Goodwill of a reporting unit is tested for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. As provided under SFAS No. 142, an annual assessment was completed during 2004, and no impairment was identified. As of December 31, 2004, the carrying value of goodwill was $7.5 million. |
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| • | Patents and Licenses. The Company recognizes deferred taxalso has other intangible assets consisting of patents and liabilities for temporary differences betweenlicenses, with a gross book value of $11.5 million and accumulated amortization of $6.1 million as of December 31, 2004. Amortization is computed on the financial reportingstraight-line basis andover the tax basis of the Company’s assets and liabilities along with net operating loss and credit carryforwards. A valuation allowance is recognized if,estimated useful lives, which are based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset may not be realized. The impact on deferred taxes of changes in tax rateslegal and laws, if any, are appliedcontractual provisions, and range from 10 to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period of enactment.20 years. |
In 2002, due to the Company’s recent history of losses, an increase to the valuation allowance was recorded as a non-cash charge to tax expense in the amount of $9.0 million. As a result, the valuation
Risk Factorsallowance fully offsets the value of deferred tax assets on the Company’s balance sheet as of January 2, 2004. If in the future, the Company determines it will be able to utilize all or part of the deferred tax assets which have a valuation allowance of $22.1 million at January 2, 2004, we would reverse the valuation allowance, which would result in an income tax benefit.
Factors That May Affect Future Results of Operations
Our short and long-term success is subject to many factors that are beyond our control. Stockholders and prospective stockholders in the Company should consider carefully the following risk factors, in addition to other information contained in this report. This Annual Report on Form l0-K contains forward-looking statements, which are subject to a variety of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below.
We have a history of losses.
Risks Related to Our Business
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| We have a history of losses and anticipate future losses. |
We have reported losses in each of the last three fiscal years and have an accumulated deficit of $49.1$60.5 million as of January 2,December 31, 2004. If losses from operations continue, they could adversely affect the market price for our Common Stock and our ability to obtain new financing. In June 2000, we began implementing a restructuring plan aimed at reducing costs and improving operating efficiency. In connection with this plan, we recognized pre-tax charges to earnings of $15.3 million, $7.8 million, and $1.5 million in fiscal 2000, 2001, and 2002. While the restructuring plan has generally improved our profit margins, we cannotThere can be certainno assurance that we will succeedreport net income in restoringany future period.
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| We have only limited working capital. |
Our current sources of working capital are not sufficient to satisfy our profitability.anticipated working capital requirements for fiscal 2005.
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We have limited access to credit and have been in default of the terms of our loan agreements.
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| We have limited access to credit and could default on the terms of our loan agreement. |
As of January 2, 2004, we failed to comply with a covenant under our principal foreign loan agreement which prohibits the repayment of loans made by the Company to the subsidiary without the prior consent of the lender. Accordingly, we had to obtain a waiver from our lender. As of January 2,December 31, 2004, we have outstanding balances on the loanscredit facility of oura European subsidiariessubsidiary of approximately $3.0 million, based on exchange rates on that date. We believe that sufficient cashIf our losses continue, we risk defaulting on the terms of our credit facility, particularly as it relates to fund operationsthe maintenance of minimum levels of equity and current growth plans will be provided by cash from operations and existing cash balances. However, it is likely that we will also need access to credit to finance operations and fund future growth.the payment of intercompany receivables.
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| We have only limited access to financing. |
Because of our history of losses,
we may not be able securethere is substantial doubt about our ability to obtain adequate financing
for these purposes on
satisfactory terms
that are favorableor at all. Any such financing may involve substantial dilution to
us or on any terms.existing shareholders.
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| We have received a “going concern” opinion from our registered public accounting firm, which may negatively impact our business. |
We have received a report from our independent registered public accounting firm regarding our financial statements for the year ended December 31, 2004 stating that there is substantial doubt about our ability to continue as a going concern.
The Company expects to continue to experience negative cash flows, similar to those of fiscal 2004, until such time as the issues presented in the FDA Warning Letter
fromof December 22, 2003 and the
FDA which will delay approval of483 Observations are resolved and the ICL
and limit our existing businessis approved for sale in the United States.
To enhance its ability to continue as a going concern through the year ended December 30, 2005, the Company expects to take the following actions: (1) continue to aggressively address the issues presented in the Warning Letter of December 22, 2003 and the 483 Observations; (2) work closely with the independent sales force and ophthalmic community to reverse the negative perceptions and sales trends of the Company’s existing lines of business; (3) further reduce discretionary spending; (4) seek other sources of funding; and (5) explore other strategic and financial options. However, there can be no assurance as to the availability or terms upon which capital might be obtained or that the Company will be successful in executing its other strategies. In addition, doubt about our ability to continue as a going concern could adversely affect our ability to enter into collaborative relationships with strategic partners and our ability to sell our products and could have a material adverse effect on our business, financial condition and results of operations.
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| We have received 483 Inspectional Observations and Warning Letters from the FDA, which until resolved to the satisfaction of the FDA will continue to delay approval of the ICL and could limit our existing business in the United States. |
On December 29, 2003
and April 26, 2004, we received
a Warning
LetterLetters issued by the FDA.
While we are acting to correct the deficiencies identified in the Warning Letter, until the FDA is satisfied with our response, we will not be granted approval to market the ICL in the United States and we may face FDA restrictions on our established domestic lines of business. Even if the FDA approves our corrective action, the publication of the Warning Letter or similar actions in the future could harm our reputation and reduce sales. A copy of the
first Warning Letter is attached as Exhibit 99.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 9,
2004, and a copy of the second Warning Letter is attached as Exhibit 99.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 6, 2004.
Our success depends
On September 23, 2004, the FDA completed a re-audit of our Monrovia, California manufacturing facility. At the conclusion of the audit, the FDA issued a form “FDA 483 Inspectional Observations” described more fully in our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2004.
The Warning Letters and 483 Observations have adversely affected our reputation in the ophthalmic industry and our product sales. Until the FDA is satisfied with our response, it is unlikely to grant us approval to market the ICL
which has not been approved for useand the TICL in the United
States.States and may place restrictions on our domestic lines of business. See “Business — Regulatory Matters — Warning Letters and the 483 Observations.”
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| Our success depends on the ICL, which has not been approved for use in the United States. |
We have devoted significant resources and management attention to the development and introduction of our ICL and TICL. Our managementManagement believes that the future success of STAAR depends on the approval of the
27
ICL
for sale in the United States by the
FDA and a successful launch of the ICL in North America.FDA. The ICL is already approved for use in
the countries comprising the European Union and Canada and in parts of Asia. The TICL is approved for use in
the countries comprising the European Union. In October 2003, the FDA Ophthalmic Devices Panel recommended that the FDA approve, with conditions, specified uses of the ICL. The FDA has not yet acted on this
recommendation, and it could decide to reject the Ophthalmic Devices Panel recommendations. Until the FDA is satisfied with our response to its Warning Letter dated December 22, 2003 we will not be grantedand its 483 Observations issued on September 23, 2004, it is unlikely to grant us approval to market the ICL and the TICL in the United States. If the FDA does not grant approval of the ICL, or significantly delays its approval, whether because of the issues contained in the Warning Letter, the 483 Observations or otherwise, our prospects for success will be severely diminished.
Our success depends on the successful marketing of the ICL in the United States market.
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| Our future success depends on the successful marketing of the ICL in the United States market. |
Even if it is approved by the FDA
for sale in the United States, the ICL will not reach its full sales potential unless we successfully plan and execute its launch and marketing in the United States. This will present new challenges to our sales and marketing staff and to our independent manufacturers’ representatives. In countries where the ICL has been approved to date, our sales have grown steadily, but slowly. In the United States in particular, patients who might benefit from the ICL have already been exposed to a great deal of advertising and publicity about laser refractive surgery, but have little if any awareness of the ICL. As a result, we expect to make extensive use of advertising and promotion targeted to potential patients through providers, and to carefully manage the introduction of the ICL. We do not have
unlimitedsignificant resources and we cannot predict whether the particular marketing, advertising and promotion strategies we pursue will be as successful as we intend. If we do not successfully market the ICL in the United States, we will not achieve our planned profitability and growth.
Our core domestic business has suffered declining sales, which sales of new products have only partially offset.
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| Our core domestic business has suffered declining sales, which sales of new products have only partially offset. |
STAAR pioneered the foldable IOL for use in cataract surgery, and the foldable silicone IOL
remainsis one of our largest
sourcesources of revenue. Since we introduced the product, however, competitors have introduced IOLs employing a variety of designs and materials. Over the years these products have gradually taken a larger share of the IOL market, while the market share for
STAARour IOLs has decreased. In particular, many surgeons now choose lenses made of acrylic material rather than silicone for their typical patients. In an effort to maintain our competitive position we have introduced a new biocompatible lens material, Collamer, to our line of IOLs. We have also introduced new IOL designs, such as the Toric IOL,
pioneered cartridge-injector systems for lens insertion, and have continued to improve and refine the silicone IOL. Sales of these new products, however, have only partially offset declining sales of our silicone IOLs.
We depend on independent manufacturers’ representatives.
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| We depend on independent manufacturers’ representatives. |
In an effort to manage costs and bring our products to a wider market, we have entered into long-term agreements with severalcertain independent regional manufacturers’ representatives, who introduce our products to eye surgeons and provide the training needed to begin using some of our products. Under our agreements with these representatives, each receives a commission on all of our sales within a specified region, including sales on products we sell into their territories without their assistance. Because they are independent contractors, we have a limited ability to manage these representatives or their employees. In addition, a representative may represent manufacturers other than STAAR, although not in competing products. We have been relying on the independent representatives to introduce our new products like Collamer IOLs, Toric IOLs and the AquaFlow Device, and we will rely on them, in part, to help introduce the ICL if it is approved. However, we are also introducing direct application specialists to assist in proctoring and surgeon training to ensure physician compliance and enhance patient outcomes as a means of growing this segment of the market. If the introduction of direct application specialists is not successful, or our independent manufacturers’ representatives do not devote sufficient resources to marketing our products, or if they lack the skills or resources to market our new products, our new products will fail to reach their full sales potential and sales of our established products could decline.
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Product recalls have been costly and may be so in the future.
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| Product recalls have been costly and may be so in the future. |
Medical devices must be manufactured to the highest standards and tolerances, and often incorporate newly developed technology. Despite all efforts to achieve the highest level of quality control and advance testing, from
time to time defects or technical flaws in our products may not come to light until after the products are sold or consigned. In those circumstances, we have previously made voluntary recalls of our products. Recalls significantly impacted our revenue in 2001 when, in separate instances, we voluntarily recalled our three-piece Collamer lens and certain silicone lenses, and as a result wrote down approximately $3.4 million in inventory in that year. In JanuaryDuring 2004, we voluntarily recalled selectedinitiated several voluntary recalls of STAAR manufactured product including 33 lots of IOL cartridges, three lots of injectors, and 529 lenses, and in February 2004, in an action the FDA considersconsidered a recall but where there iswith no requirement for product to be returned to us, we issued a letter to healthcare professionals advising them of the potential for a change in manifest refraction over time in rare cases involving the single-piece Collamer IOL. Similar recalls could take place again. Courts or regulators can also impose mandatory recalls on us, even if we believe our products are safe and effective. Recalls can result in lost sales of the recalled products themselves, and can result in further lost sales while replacement products are manufactured, especially if the replacements must be redesigned. If recalled products have already been implanted, we may bear some or all of the cost of corrective surgery. Recalls may also damage our professional reputation and the reputation of our products. The inconvenience caused by recalls and related interruptions in supply, and the damage to our reputation, could cause some professionals to discontinue using our products.
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| We could experience losses due to product liability claims. |
We competehave in the past been, and continue to be, subject to product liability claims. As part of our risk management policy, we have obtained third-party product liability insurance coverage. Product liability claims against us may exceed the coverage limits of our insurance policies or cause us to record a self-insured loss. A product liability claim in excess of applicable insurance could have a material adverse effect on our business, financial condition and results of operations. Even if any product liability loss is covered by an insurance policy, these policies have retentions or deductibles that provide that we will not receive insurance proceeds until the losses incurred exceed the amount of those retentions or deductibles. To the extent that any losses are below these retentions or deductibles, we will be responsible for paying these losses. The payment of retentions or deductibles for a significant amount of claims could have a material adverse effect on our business, financial condition, and results of operations.
Any product liability claim would divert managerial and financial resources and could harm our reputation with
much larger companies.customers. We cannot assure you that we will not have product liability claims in the future or that such claims would not have a material adverse effect on our business.
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| We compete with much larger companies. |
Our competitors, including Alcon,
Inc., AMO,Advanced Medical Optics, and Bausch & Lomb,
Inc., and Pfizer, Inc., have much greater financial resources than we do and some of them have large international markets for a full suite of ophthalmic products. Their greater resources for research, development and marketing, and their greater capacity to offer comprehensive products and equipment to providers, make it difficult for us to compete. We have lost significant market share to some of our competitors.
Most of our products have single-site manufacturing approvals, exposing us to risks of business interruption.
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| Most of our products have single-site manufacturing approvals, exposing us to risks of business interruption. |
We manufacture all of our products either at one of our facilities in California or at our facility in Monrovia, California or our facility in Nidau, Switzerland. Most of our products are approved for manufacturing only at one of these sites. Before we can use a second manufacturing site for an implantable device we must obtain the approval of regulatory authorities. Because this process is expensive we have generally not sought approvals needed to manufacture at an additional site. If a natural disaster, fire, or other serious business interruption struck one of our manufacturing facilities, it could take a significant amount of time to validate a second site and replace lost product. We could lose customers to competitors, thereby reducing sales, profitability and market share.
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Risks Related to the Ophthalmic Products Industry
If we fail to keep pace with advances in our industry or fail to persuade physicians to adopt the new products we introduce, customers may not buy our products and our revenue may decline.
Constant development of new technologies and techniques, frequent new product introductions and strong price competition characterize the ophthalmic industry. The first company to introduce a new product or technique to market usually gains a significant competitive advantage. Our future growth depends, in part, on our ability to develop products to treat diseases and disorders of the eye that are more effective, safer, or incorporate emerging technologies better than our competitors’ products. Sales of our existing products may decline rapidly if one of our competitors introduces a substantially superior product, or if we announce a new product of our own. Similarly, if we fail to make sufficient investments in research and development or if we focus on technologies that do not lead to better products, our current and planned products could be surpassed by more effective or advanced products.
In addition, we must manufacture these products economically and market them successfully by persuading a sufficient number of eye care professionals to use them. For example, glaucoma requires ongoing treatment over a long period of time; thus, many doctors are reluctant to switch a patient to a new treatment if the patient’s current treatment for glaucoma remains effective. This has been a challenge in selling our Aquaflow Device.
Resources devoted to research and development may not yield new products that achieve commercial success.
We spent 10.1% of our revenue on research and development during the year ended January 2, 2004, and we expect to spend comparable amounts annually in the future. Development of new implantable technology, from discovery through testing and registration to initial product launch, is expensive and typically takes from three to seven years. Because of the complexities and uncertainties of ophthalmic research and development, products we are currently developing may not complete the development process or obtain the regulatory approvals required for us to market the products successfully. It is possible that few or none of the products currently under development will become commercially successful.
Failure of users of our products to obtain adequate reimbursement from third-party payors could limit market acceptance of our products, which could affect our sales and profits.
Many of our products, in particular IOLs and products related to the treatment of glaucoma, are used in procedures that are typically covered by health insurance, HMO plans, Medicare or Medicaid. These third-party payors have recently been trying to contain costs by restricting the types of procedures they reimburse to those viewed as most cost-effective and capping or reducing reimbursement rates. These polices could adversely affect sales and prices of our products. Physicians, hospitals and other health care providers may be reluctant to purchase our products if third-party payors do not adequately reimburse them for the cost of our products and the use of our surgical equipment. For example:
Major third-party payors for hospital services, including government insurance plans, Medicare, Medicaid and private health care insurers, have substantially revised their payment methodologies during the last few years, resulting in stricter standards for reimbursement of hospital and outpatient charges for some medical procedures, including cataract procedures and IOLs;
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| The global nature of our business may result in fluctuations and declines in our sales and profits. |
Numerous legislative proposals have been considered that, if enacted, would result in major reforms in the United States’ health care system, which could have an adverse effect on our business;
Our competitors may reduce the prices of their products, which could result in third-party payors favoring our competitors;
There are proposed and existing laws and regulations governing maximum product prices and the profitability of companies in the health care industry; and
There have been recent initiatives by third-party payors to challenge the prices charged for medical products. Reductions in the prices for our products in response to these trends could reduce our profits. Moreover, our products may not be covered in the future by third-party payors, which would also reduce our sales.
We are subject to extensive government regulation, which increases our costs and could prevent us from selling our products.
Government regulations and agency oversight apply to every aspect of our business, including testing, manufacturing, safety and environmental controls, efficacy, labeling, advertising, promotion, record keeping, the sale and distribution of products and samples. We are also subject to government regulation over the prices we charge and the rebates we offer to customers. Complying with government regulation substantially increases the cost of developing, manufacturing and selling our products.
In the United States, we must obtain approval from the FDA for each product that we market. Competing in the ophthalmic products industry requires us to continuously introduce new or improved products and processes, and to submit these to the FDA for approval. Obtaining FDA approval is a long and expensive process, and approval is never certain. In addition, our operations in the United States are subject to periodic inspection by the FDA. Such inspection may result in the FDA ordering changes in our business practices, which changes could be costly and have a material adverse effect on our business and results of operations.
Products distributed outside of the United States are also subject to government regulation, which may be equally or more demanding. Our new products could take a significantly longer time than we expect to gain regulatory approval and may never gain approval. If a regulatory authority delays approval of a potentially significant product, the potential sales of the product and its value to us can be substantially reduced. Even if the FDA or another regulatory agency approves a product, the approval may limit the indicated uses of the product, or may otherwise limit our ability to promote, sell and distribute the product, or may require post-marketing studies. If we cannot obtain regulatory approval of our new products, or if the approval is too narrow, we will not be able to market these products, which would eliminate or reduce our potential sales and earnings.
The global nature of our business may result in fluctuations and declines in our sales and profits.
Our products are sold in more than 3545 countries. Revenues from international operations make up a significant portion of our total revenue. For the year ended January 2,December 31, 2004 revenues from international operations was 53%.were 58% of total revenues. The results of operations and the financial position of certain of our offshore operations are reported in the relevant local currencies and then translated into United States dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to translation risk. In addition, we are exposed to transaction risk because some of our expenses are incurred in a different currency from the currency in which our revenues are received. In 2003, ourOur most significant currency exposures wereare to the Euro, the Swiss Franc, and the Australian dollar. The exchange rates between these and other local currencies and the United States dollar may fluctuate substantially. We have not attempted to offset our exposure to these risks by investing in derivatives or engaging in other hedging transactions. Fluctuations in the value of the United States dollar against other currencies have not had a material adverse effect on our operating margins and profitability in the past.
Economic, social and political conditions, laws, practices and local customs vary widely among the countries in which we sell our products. Our operations outside of the United States are subject to a number of risks and potential costs, including lower profit margins, less stringent protection of intellectual property and economic, political and social uncertainty in some countries, especially in emerging markets. Our continued success as a global company depends, in part, on our ability to develop and implement policies and strategies that are effective in anticipating and managing these and other risks in the countries where we do business. These and other risks may have a material adverse effect on our operations in any particular country and on our business as a whole. We price some of our products in U.S. dollars, and as a result changes in exchange rates can make our products more expensive in some offshore markets and reduce our revenues. Inflation in emerging markets also makes our products more expensive there and increases the credit risks to which we are exposed.
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| We obtain some of the components of our products from a single source, and an interruption in the supply of those components could reduce our revenue. |
We obtain some of the components for our products from a single source. For example, only one supplier produces our viscoelastic product. Although we believe we could find alternate supplies for any of these components, the loss or interruption of any of these suppliers could increase costs, reducing our revenue and profitability, or harm our customer relations by delaying product deliveries.
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| Our activities involve hazardous materials and emissions and may subject us to environmental liability. |
Our manufacturing, research and development practices involve the controlled use of hazardous materials. We are subject to federal, state, local and foreign laws and regulations in the various jurisdictions in which we have operations governing the use, manufacturing, storage, handling and disposal of these materials and certain waste products. Although we believe that our safety and environmental procedures for handling and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of accidental contamination or injury from these materials. Remedial environmental actions could require us to incur substantial unexpected costs, which would materially and adversely affect our results of operations. If we were involved in a major environmental accident or found to be in substantial non-compliance with applicable environmental laws, we could be held liable for damages or penalized with fines.
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| We risk losses through litigation. |
Since September 1, 2004, multiple class action lawsuits have been filed in the United States District Courts for the Central District of California and the District of New Mexico against the Company and its Chief Executive Officer on behalf of all persons who acquired the Company’s securities during various periods between April 3, 2003 and September 28, 2004. On December 15, 2004, the Court ordered consolidation of the complaints that had been filed in the United States District Court for the Central District of California and directed that the plaintiffs file a consolidated complaint as soon as practicable. The plaintiffs have proposed a
30
stipulation pursuant to which they would file a consolidated amended complaint on or about April 29, 2005. The New Mexico action was voluntarily dismissed on January 28, 2005. The lawsuits generally allege that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by issuing false and misleading statements regarding intraocular lenses and implantable lenses, and failing timely to disclose significant problems with the lenses, as well as the existence of serious injuries and/or malfunctions attributable to the lenses, thereby artificially inflating the price of the Company’s Common Stock. The plaintiffs generally seek to recover compensatory damages, including interest. While we intend to vigorously defend the consolidated lawsuit, the lawsuit will require significant attention of management and could result in substantial costs and harm our reputation.
We are currently party to various claims and legal proceedings arising out of the normal course of our business. These claims and legal proceedings relate to contractual rights and obligations, employment matters, and claims of product liability. While we do not believe that any of the claims known to us is likely to have a material adverse effect on our financial condition or results of operations, new claims or unexpected results of existing claims could lead to significant financial harm.
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| We depend on key employees. |
We depend on proprietarythe continued service of our senior management and other key employees. The loss of a key employee could hurt our business. We could be particularly hurt if any key employee or employees went to work for competitors. Our future success depends on our ability to identify, attract, train and motivate other highly skilled personnel. Failure to do so may adversely affect future results.
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| We have licensed our technology to our joint venture company and have granted certain rights to the partners that could be exercised in the event of a change in control of the Company. |
We have granted to the Canon Staar joint venture, a perpetual exclusive license under the Licensed Technology (as defined in the license agreement) to make and sell our products in Japan, and to make our products in China and to sell such products in Japan and China. In addition, we have granted Canon Staar a perpetual non-exclusive license under the Licensed Technology to make and sell our products in the rest of the world. Subject to the approval of the Board of Directors of the joint venture, such licenses may allow the Canon Staar joint venture to sell products in the rest of the world or grant others the right to do so. The term “Licensed Technology” includes any intellectual property owned or controlled by STAAR.
Upon the occurrence of certain events, including the merger, sale of substantially all of the assets or change in the management of any party to the Canon Staar joint venture, any joint venture partner may have the right to acquire the first party’s interest in the joint venture at book value, without terminating the licenses under the Licensed Technology.
The joint venture agreement, license agreement and settlement agreement relating to Canon Staar have been filed or incorporated by reference to this Annual Report.
Risks Related to the Ophthalmic Products Industry
| |
| If we fail to keep pace with advances in our industry or fail to persuade physicians to adopt the new products we introduce, customers may not buy our products and our revenue may decline. |
Constant development of new technologies butand techniques, frequent new product introductions and strong price competition characterize the ophthalmic industry. The first company to introduce a new product or technique to market usually gains a significant competitive advantage. Our future growth depends, in part, on our ability to develop products to treat diseases and disorders of the eye that are more effective, safer, or incorporate emerging technologies better than our competitors’ products. Sales of our existing products may decline rapidly if one of our competitors introduces a substantially superior product, or if we announce a new product of our own. Similarly, if we fail to make sufficient investments in research and development or if we focus on technologies that do not lead to better products, our current and planned products could be surpassed by more effective or advanced products.
31
In addition, we must manufacture these products economically and market them successfully by persuading a sufficient number of eye care professionals to use them. For example, glaucoma requires ongoing treatment over a long period of time; thus, many doctors are reluctant to switch a patient to a new treatment if the patient’s current treatment for glaucoma remains effective. This has been a challenge in selling our AquaFlow Device.
| |
| Resources devoted to research and development may not yield new products that achieve commercial success. |
We spent 12.1% of our revenue on research and development (including regulatory and quality assurance expenses) for the year ended December 31, 2004, and we expect to spend between 10-11% of our revenue on an annual basis in the future. Development of new implantable technology, from discovery through testing and registration to initial product launch, is expensive and typically takes from three to seven years. Because of the complexities and uncertainties of ophthalmic research and development, products we are currently developing may not complete the development process or obtain the regulatory approvals required for us to market the products successfully. It is possible that few or none of the products currently under development will become commercially successful.
| |
| Failure of users of our products to obtain adequate reimbursement from third-party payors could limit market acceptance of our products, which could affect our sales and profits. |
Many of our products, in particular IOLs and products related to the treatment of glaucoma, are used in procedures that are typically covered by health insurance, HMO plans, Medicare or Medicaid. These third-party payors have recently been trying to contain costs by restricting the types of procedures they reimburse to those viewed as most cost-effective and capping or reducing reimbursement rates. These policies could adversely affect sales and prices of our products. Physicians, hospitals and other health care providers may be reluctant to purchase our products if third-party payors do not adequately reimburse them for the cost of our products and the use of our surgical equipment. For example:
| | |
| • | Major third-party payors for hospital services, including government insurance plans, Medicare, Medicaid and private health care insurers, have substantially revised their payment methodologies during the last few years, resulting in stricter standards for reimbursement of hospital and outpatient charges for some medical procedures, including cataract procedures and IOLs; |
|
| • | Numerous legislative proposals have been considered that, if enacted, would result in major reforms in the United States’ health care system, which could have an adverse effect on our business; |
|
| • | Our competitors may reduce the prices of their products, which could result in third-party payors favoring our competitors; |
|
| • | There are proposed and existing laws and regulations governing maximum product prices and the profitability of companies in the health care industry; and |
|
| • | There have been recent initiatives by third-party payors to challenge the prices charged for medical products. Reductions in the prices for our products in response to these trends could reduce our revenues. Moreover, our products may not be covered in the future by third-party payors, which would also reduce our revenues. |
| |
| We are subject to extensive government regulation, which increases our costs and could prevent us from selling our products. |
Government regulations and agency oversight apply to every aspect of our business, including testing, manufacturing, safety and environmental controls, efficacy, labeling, advertising, promotion, record keeping, the sale and distribution of products and samples. We are also subject to government regulation over the prices we charge and the rebates we offer to customers. Complying with government regulation substantially increases the cost of developing, manufacturing and selling our products.
32
In the United States, we must obtain approval from the FDA for each product that we market. Competing in the ophthalmic products industry requires us to continuously introduce new or improved products and processes, and to submit these to the FDA for approval. Obtaining FDA approval is a long and expensive process, and approval is never certain. In addition, our operations in the United States are subject to periodic inspection by the FDA. Such inspection may result in the FDA ordering changes in our business practices, which changes could be costly and have a material adverse effect on our business and results of operations. In particular, we received Warning Letters from the FDA on December 29, 2003 and April 26, 2004, and FDA 483 Inspectional Observations on September 23, 2004, requiring us to take corrective action as discussed elsewhere in this report.
Products distributed outside of the United States are also subject to government regulation, which may be equally or more demanding. Our new products could take a significantly longer time than we expect to gain regulatory approval and may never gain approval. If a regulatory authority delays approval of a potentially significant product, the potential sales of the product and its value to us can be substantially reduced. Even if the FDA or another regulatory agency approves a product, the approval may limit the indicated uses of the product, or may otherwise limit our ability to promote, sell and distribute the product, or may require post-marketing studies. If we cannot obtain regulatory approval of our new products, or if the approval is too narrow, we will not be able to
protectmarket these products, which would eliminate or reduce our
intellectual property rights adequately.potential sales and earnings.
| |
| We depend on proprietary technologies, but may not be able to protect our intellectual property rights adequately. |
We have numerous patents and pending patent applications. We rely on a combination of contractual provisions, confidentiality procedures and patent, trademark, copyright and trade secrecy laws to protect the proprietary aspects of our technology. These legal measures afford limited protection and may not prevent our competitors from gaining access to our intellectual property and proprietary information. Any of our patents may be challenged, invalidated, circumvented or rendered unenforceable. Furthermore, we cannot be certain that any pending patent application held by us will result in an issued patent or that if patents are issued to us, the patents will provide meaningful protection against competitors or competitive technologies. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. Any litigation could result in substantial expense, may reduce our profits and may not adequately protect our intellectual property rights. In addition, we may be exposed to future litigation by third parties based on claims that our products infringe their intellectual property rights. This risk is exacerbated by the fact that the validity and breadth of claims covered by patents in our industry may involve complex legal issues that are not fully resolved.
Any litigation or claims against us, whether or not successful, could result in substantial costs and harm our reputation. In addition, intellectual property litigation or claims could force us to do one or more of the following: to cease selling or using any of our products that incorporate the challenged intellectual property, which would adversely affect our revenue; to negotiate a license from the holder of the intellectual property right alleged to have been infringed, which license may not be available on reasonable terms, if at all; or to redesign our products to avoid infringing the intellectual property rights of a third party, which may be costly and time-consuming or impossible to accomplish.
We obtain some of the components of our products from a single source, and an interruption in the supply of those components could reduce our revenue.
We obtain some of the components for our products from a single source. For example, only one supplier produces our viscoelastic product. Although we believe we could find alternate supplies for any of these components, the loss or interruption of any of these suppliers could increase costs, reducing our revenue and profitability, or harm our customer relations by delaying product deliveries.
We may not successfully develop and launch replacements for our products that lose patent protection.
| |
| We may not successfully develop and launch replacements for our products that lose patent protection. |
Most of our products are covered by patents that give us a degree of market exclusivity during the term of the patent. We have also earned revenue in the past by licensing some of our patented technology to other ophthalmic companies. The legal life of a patent is 20 years from application. Patents covering our products will expire from this year through the next 20 years. Upon patent expiration, our competitors may introduce products using the same technology. As a result of this possible increase in competition, we may need to charge a lower price in order to maintain sales of our products, which could make these products less profitable. If we fail to develop and successfully launch new products prior to the expiration of patents for our existing products, our sales and profits with respect to those products could decline significantly. We may not
33
be able to develop and successfully launch more advanced replacement products before these and other patents expire.
Our activities involve hazardous materials and emissions and may subject us to environmental liability.
Our manufacturing, research and development practices involve the controlled use of hazardous materials. We are subject to federal, state and local laws and regulations in the various jurisdictions in which we have operations governing the use, manufacturing, storage, handling and disposal of these materials and certain waste products. Although we believe that our safety and environmental procedures for handling and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of accidental contamination or injury from these materials. Remedial environmental actions could require us to incur substantial unexpected costs, which would materially and adversely affect our results of operations. If we were involved in a major environmental accident or found to be in substantial non-compliance with applicable environmental laws, we could be held liable for damages or penalized with fines.
We risk losses through litigation.
We are currently party to various claims and legal proceedings arising out of the normal course of our business. These claims and legal proceedings relate to contractual rights and obligations, employment matters, and claims of product liability. While we do not believe that any of the claims known to us is likely to have a material adverse effect on our financial condition or results of operations, new claims or unexpected results of existing claims could lead to significant financial harm.
We depend on key employees.
We depend on the continued service of our senior management and other key employees. The loss of a key employee could hurt our business. We could be particularly hurt if any key employee or employees went to work
for competitors. Our future success depends on our ability to identify, attract, train and motivate other highly skilled personnel. Failure to do so may adversely affect future results.
Risks Related to Ownership of Our Common StockOur Certificate of Incorporation could delay or prevent an acquisition or sale of our company.
| |
| Our Certificate of Incorporation could delay or prevent an acquisition or sale of our company. |
Our Certificate of Incorporation empowers the Board of Directors to establish and issue a class of preferred stock, and to determine the rights, preferences and privileges of the preferred stock. We also have a Stockholders’ Rights Plan, which could discourage a third party from making an offer to acquire us. These provisions give the Board of Directors the ability to deter, discourage or make more difficult a change in control of our company, even if such a change in control would be in the interest of a significant number of our stockholders or if such a change in control would provide our stockholders with a substantial premium for their shares over the then-prevailing market price for the common stock.
Our bylaws contain other provisions that could have an anti-takeover effect, including the following:
only one of the three classes of directors is elected each year;
| |
| Our bylaws contain other provisions that could have an anti-takeover effect, including the following: |
stockholders have limited ability to remove directors;
| | |
| • | only one of the three classes of directors is elected each year; |
|
| • | stockholders have limited ability to remove directors; |
|
| • | stockholders cannot call a special meeting of stockholders; and |
|
| • | stockholders must give advance notice to nominate directors. |
stockholders cannot call a special meeting of stockholders; and
| |
| Anti-takeover provisions of Delaware law could delay or prevent an acquisition of our company. |
stockholders must give advance notice to nominate directors.
Anti-takeover provisions of Delaware law could delay or prevent an acquisition of our company.
We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stockCommon Stock or preventing changes in our management.
| |
| Future sales of our Common Stock could reduce our stock price. |
Our Board of
ourDirectors could issue shares of common
or preferred stock,
may depress ourto raise additional capital or for other corporate purposes without stockholder approval. In addition, the Board of Directors could designate and sell a class of preferred stock
price.Thewith preferential rights over the Common Stock with respect to dividends or other distributions. Sales of common or preferred stock could dilute the interest of existing stockholders and reduce the market price of our Common Stock could be subject to downward price pressure as a resultStock. Even in the absence of such sales, the perception among investors that additional sales of our recent private placement of 1,000,000 shares of Common Stock, which have been registered for resale, orequity securities may take place could reduce the perception that these sales could occur. In addition, the perception that we might conduct similar private placements followed by public offering of the privately placed shares could make it more difficult for us to raise funds through future offerings of Common Stock. As of January 2, 2004, there were 18,401,190 shares of our Common Stock outstanding, with another 2,540,849 shares of Common Stock issuable upon exercise of options granted under our stock option plans or under certain agreements with our senior officers. The stock underlying these options has been registered for resale with the SEC.
The market price of our common stock is likely to be volatile.
Common Stock.
| |
| The market price of our Common Stock is likely to be volatile. |
Our stock price has fluctuated widely, ranging from
$3.05$2.88 to
$15.44$11.26 during the year ended
January 2,December 31, 2004. Our stock price could continue to experience significant fluctuations in response to factors such as quarterly variations in operating results, operating results that vary from the expectations of securities analysts and investors, changes in financial estimates,
changes in regulatory status, changes in market valuations of competitors, announcements by us or our competitors of a material nature, additions or departures of key personnel, future sales of Common Stock and stock volume fluctuations. Also, general political and economic conditions such as recession or interest rate fluctuations may adversely affect the market price of our stock.
Management does not believe that the fluctuation in the value of the dollar in relation to the currencies of its suppliers or customers in the last three fiscal years has adversely affected the Company’s ability to purchase or sell products at agreed upon prices. No assurance can be given, however, that adverse currency exchange rate fluctuations will not occur in the future, which would affect the Company’s operating results.
34
Inflation
Inflation
Management believes inflation has not had a significant impact on the Company’s operations during the past three years.
New Accounting Pronouncements In April 2003,October 2004, the American Jobs Creation Act of 2004 (“Act”) became effective in the U.S. Two provisions of the Act may impact the Company’s provision (benefit) for income taxes in future periods, namely those related to the qualified production activities deduction (“QPA”) and foreign earnings repatriation (“FER”).
The QPA will be effective for the Company’s U.S. federal tax return year beginning after December 31, 2004. In summary, the Act provides for a percentage deduction of earnings from qualified production activities, as defined, commencing with an initial deduction of 3 percent for tax years beginning after 2009, with the result that the statutory federal tax rate currently applicable to the Company’s qualified production activities of 35 percent could be reduced initially to 33.95 percent and ultimately to 31.85 percent. However, the Act also provides for the phased elimination of the extraterritorial income exclusion provision of the Internal Revenue Code, which have previously resulted in tax benefits to the Company. Due to the interaction of the law provisions noted above as well as the particulars of the Company’s tax position, the ultimate effect of the QPA on the Company’s future provision (benefit) for income taxes has not been determined at this time. The Financial Accounting Standards Board (“FASB”) issued FASB Staff Position FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (“FSP 109-1”), in December 2004. FSP 109-1 requires that tax benefits resulting from the QPA should be recognized no earlier than the year in which they are reported in the entity’s tax return, and that there is to be no revaluation of recorded deferred tax assets and liabilities as would be the case had there been a change in an applicable statutory rate.
The FER provision of the Act provides generally for a one-time 85 percent dividends received deduction for qualifying repatriations of foreign earnings to the U.S. Qualified repatriated funds must be reinvested in the U.S. in certain qualifying activities and expenditures, as defined by the Act. In December 2004, the FASB issued SFAS No. 149, “AmendmentFASB Staff Position FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”). FSP 109-2 allows additional time for entities potentially impacted by the FER provision to determine whether any foreign earnings will be repatriated under this provision. At this time, the Company has not undertaken an evaluation of the application of the FER provision and any potential benefits of effecting such repatriations under this provision. Numerous factors, including previous actual and deemed repatriations under federal tax law provisions, are factors impacting the availability of the FER provision to the Company and its potential benefit to the Company, if any. The Company intends to examine the issue and will provide updates in subsequent periods.
In November 2004, the FASB issued Statement of
Financial Accounting Standards
133 on Derivative Instruments and Hedging Activities” (“
SFAS 149”SFAS”)
. SFAS 149 No. 151, “Inventory Costs.” This statement amends
and clarifiesthe guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for
derivative instruments, including certain derivative instruments embedded in other contracts,abnormal amounts of idle facility expense, freight, handling costs, and
for hedging activities underwasted materials (spoilage). SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities.”151 requires that those items be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to costs of conversions be based upon the normal capacity of the production facilities. The provisions of SFAS
149 is generallyNo. 151 are effective for
contracts entered into or modifiedinventory cost incurred in fiscal years beginning after June
30, 2003 and for hedging relationships designated after June 30, 2003.15, 2005. As such, the Company is required to adopt these provisions at the beginning of fiscal 2006. The adoption of
SFAS 149 didthis pronouncement is not
expected to have a material effect on the Company’s financial
position, results of operations, or cash flows.statements.
In May 2003,December 2004, the FASB issued SFAS No. 150,123R, “Share-Based Payment.” This statement is a revision of SFAS No. 123, “Accounting for Certain Instruments with CharacteristicsStock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123R addresses all forms of Both Liabilitiesshare-based payment (“SBP”) awards including shares issued under employee stock purchase plans, stock options, restricted stock and Equity” (“stock appreciation rights. Under
35
SFAS 150”), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristicsNo. 123R, SBP awards result in a cost that will be measured at fair value on the awards’ grant date, based on the estimated number of both liabilities and equity. SFAS 150 requiresawards that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances).are expected to vest. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginningpublic entities as of the first interim or annual reporting period that begins after June 15, 2005. The Company has not quantified the potential effect of adoption of SFAS No. 123R, but believes that the adoption of this statement will result in a decrease to earnings.
In December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets.” This statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
20032005. Earlier application is permitted for
public companies.nonmonetary asset exchanges occurring in fiscal periods beginning after December 16, 2004. The provisions of this statement should be applied prospectively. The adoption of
SFAS 150 did not have a material impact on the Company’s financial statements.In December 2003, the FASB issued Interpretation No. 46 (“FIN 46R”) (revised December 2003), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 (“ARB 51”), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (“FIN 46”), which was issued in January 2003. Before concluding that it is appropriate to apply the ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entitythis pronouncement is not a variable interest entity (“VIE”). As of the effective date of FIN 46R, an enterprise must evaluate its involvement with all entities or legal structures created before February 1, 2003,expected to determine whether consolidation requirements of FIN 46R apply to those entities. There is no grandfathering of existing entities. Public companies must apply either FIN 46 or FIN 46R immediately to entities created after December 15, 2003 and no later than the end of the first reporting period that ends after March 15, 2004 to entities considered to be special purpose entities. The adoption of FIN 46(R) had no effect on our consolidated financial position, results of operations, or cash flows.
In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104 (SAB No. 104), “Revenue Recognition,” which codifies, revises and rescinds certain sections of SAB No. 101, “Revenue Recognition,” in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on our consolidated results of operations, consolidatedthe Company’s financial position or consolidated cash flows.
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates. The Company manages its risks based on management’s judgment of the appropriate trade-off between risk, opportunity and costs. Management does not believe that these market risks are material to the results of operations or cash flows of the Company, and, accordingly, does not generally enter into interest rate or foreign exchange rate hedge instruments.
Interest rate riskrisk.. Our $3.0 million of debt is based on the borrowings of our international subsidiaries. The majority of our international borrowings bear an interest rate that is linked to Euro market conditions and, thus, our interest rate expense will fluctuate with changes in those conditions. If interest rates were to increase or decrease by 1% for the year, our annual interest rate expense would increase or decrease by approximately $30,000.
Foreign currency riskrisk.. Our international subsidiaries operate in and are net recipients of currencies other than the U.S. dollar and, as such,
weour revenues benefit from a weaker dollar and are adversely affected by a stronger dollar relative to major currencies worldwide (primarily, the Euro and Australian dollar). Accordingly, changes in exchange rates, and particularly the strengthening of the US dollar, may negatively affect our consolidated sales and gross profit as expressed in U.S. dollars. Additionally, as of
January 2,December 31, 2004, all of our debt is denominated in Swiss Francs and as such, we are subject to fluctuations of the Swiss Franc as compared to the U.S. dollar in converting the value of the debt
into U.S. dollars. The U.S. dollar value of the debt is increased by a weaker dollar and decreased by a stronger dollar relative to the Swiss Franc.
In the normal course of business, we also face risks that are either non-financial or non-quantifiable. Such risks include those set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |
| Item 8. | Financial Statements and Supplementary Data |
Financial Statements and the Report of Independent
CertifiedRegistered Public
AccountantsAccounting Firm are filed with this Annual Report on Form 10-K in a separate section following Part IV, as shown on the index under Item
14(a)15 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
| |
| Item 9A. | Controls and Procedures |
Attached as exhibits to this Form 10-K are certifications of STAAR’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14(a) of the
36
ITEM 9A. CONTROLS AND PROCEDURES
Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. The section following Part IV of this Form 10-K sets forth the report of BDO Seidman LLP, our independent registered public accounting firm, regarding its audit of STAAR’s consolidated financial statements included in this Form 10-K and its attestation of management’s assessment of internal control over financial reporting set forth below in this section. This section should be read in conjunction with the certifications and the BDO Seidman report for a more complete understanding of the topics presented.
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer, David Bailey, and Chief Financial Officer, John Bily, with the participation of the Company’s management, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(e)13a-15(b). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report.
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent
Changes in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.Internal Control over Financial Reporting
There was no change induring the Company’s internal control over financial reporting,fiscal quarter ended December 31, 2004, known to the Chief Executive Officer or the Chief Financial Officer, that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’sour internal control over financial reporting.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f).
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004, the end of our fiscal year. Management based its assessment on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year ended December 31, 2004.
BDO Seidman LLP, the independent registered public accounting firm that audited and reported on the consolidated financial statements of the Company contained in this report, has issued an attestation report on management’s assessment of our internal control over financial reporting, which follows Part IV of this Form 10-K.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including the CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
37
in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
| |
| Item 9B. | Other Information |
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT | |
| Item 10. | Directors and Executive Officers of the Registrant |
The information in Item 10 is incorporated herein by reference to
portionsthe section entitled “Proposal One — Election of
Directors” contained in the proxy statement
(the “Proxy Statement”) for the
2005 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended
January 2,December 31, 2004.
ITEM 11. EXECUTIVE COMPENSATION | |
| Item 11. | Executive Compensation |
The information in Item 11 is incorporated herein by reference to
portionsthe section entitled “Proposal One — Election of
Directors” contained in the
proxy statement for the annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended January 2, 2004.Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information in Item 12 is incorporated herein by reference to
portionsthe section entitled “General Information — Security Ownership of
Certain Beneficial Owners and Management” and “Proposal One — Election of Directors” contained in the
proxy statement for the annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended January 2, 2004.Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | |
| Item 13. | Certain Relationships and Related Transactions |
The information in Item 13 is incorporated herein by reference to
portionsthe section entitled “Proposal One — Election of
Directors” contained in the
proxy statement for the annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended January 2, 2004.Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES | |
| Item 14. | Principal Accountant Fees and Services |
The information in Item 14 is incorporated herein by reference to portionsthe section entitled “Proposal Two — Ratification of the proxy statement forAppointment of Independent Registered Public Accounting Firm” contained in the annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended January 2, 2004.Proxy Statement.
38
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K | |
| Item 15. | Exhibits and Financial Statement Schedules |
| | | | |
| | | | | Page
|
(a)
| | | | |
| (1) | | Financial statements required by Item 1415 of this form are filed as a separate part of this report following Part IV | | |
| | Report of Independent Registered Public Accounting Firm | | F-2 |
| | | Report of Independent CertifiedRegistered Public AccountantsAccounting Firm | | F-2 |
| | F-3 |
| | | Consolidated Balance Sheets at January 2,December 31, 2004 and January 3, 20032, 2004 | | F-3 |
| | F-4 |
| | | Consolidated Statements of Operations for the years ended December 31, 2004, January 2, 2004, and January 3, 2003 and December 28, 2001 | | F-4 |
| | F-5 |
| | | Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2004, January 2, 2004, and January 3, 2003 and December 28, 2001 | | F-5 |
| | F-6 |
| | | Consolidated Statements of Cash Flows for the years ended December 31, 2004, January 2, 2004, and January 3, 2003 and December 28, 2001 | | F-6 |
| | F-7 |
| | | Notes to Consolidated Financial Statements | | F-13F-8 |
| | |
(2) | | Schedules required by Regulation S-X are filed as an exhibit to this report: | | |
| | I. Independent Registered Public Accounting Firm Report on Schedule | | F-31 |
| | | I. Independent Certified Public Accountants’ Report on Schedule
| | |
| | |
| | II. Independent Certified Public Accountants’ Consent | | |
| | |
| | III.Schedule II — Valuation and Qualifying Accounts and Reserves
| | F-32 |
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements and the notes thereto.
(3) Exhibits
| | | | | |
| | 3 | .1 | | Certificate of Incorporation, as amended(8) |
| |
| | 3 | .2 | | By-laws, as amended(9) |
| |
| | †4 | .1 | | 1991 Stock Option Plan of STAAR Surgical Company(2) |
| |
| | †4 | .2 | | 1995 STAAR Surgical Company Consultant Stock Plan(3) |
| |
| | †4 | .3 | | 1996 STAAR Surgical Company Non-Qualified Stock Plan(4) |
| |
| | 4 | .4 | | Stockholders’ Rights Plan, dated effective April 20, 1995(9) |
| |
| | †4 | .5 | | 1998 STAAR Surgical Company Stock Plan, adopted April 17, 1998(5) |
| |
| | 4 | .6 | | Form of Certificate for Common Stock, par value $0.01 per share(14) |
| |
| | †4 | .7 | | 2003 Omnibus Equity Incentive Plan and form of Option Grant and Stock Option Agreement(13) |
| |
| | 4 | .8 | | Amendment No. 1 to Stockholders’ Rights Plan, dated April 21, 2003(15) |
| |
| | 4 | .9 | | Registration Rights Agreement, dated June 4, 2004(19) |
| |
| | 10 | .1 | | Joint Venture Agreement, dated May 23, 1988, among the Company, Canon Sales Co, Inc. and Canon, Inc., and Exhibit B, Technical Assistance and License Agreement, dated September 6, 1988, between the Company and Canon Staar Co., Inc.(7) |
| |
| | 10 | .2 | | Settlement Agreement among the Company, Canon, Inc., Canon Sales Co., Inc., and Canon Staar Company, Inc. dated September 28, 2001(10) |
| |
| | 10 | .3 | | Indenture of Lease dated September 1, 1993, between the Company and FKT Associates and First through Third Additions Thereto(9) |
| |
| | 10 | .4 | | Second Amendment to Indenture of Lease dated September 21, 1998, between the Company and FKT Associates(9) |
| |
| | 10 | .5 | | Third Amendment to Indenture of Lease dated October 13, 2003, by and between the Company and FKT Associates(17) |
| |
| | 10 | .6 | | Indenture of Lease dated October 20, 1983, between the Company and Dale E. Turner and Francis R. Turner and First through Fifth Additions Thereto(6) |
39
(3) Reports on Form 8-K
On August 25, 2003, the Company filed a Current Report on Form 8-K, furnishing under Item 4 its decision to dismiss McGladrey & Pullen, LLP and engage BDO Seidman, LLP as its principal accountant for the fiscal year ending January 2, 2004. Amendments to the Form 8-K were filed on September 4, 2003 and November 7, 2003.
| | | | | |
| |
| | 10 | .7 | | Sixth Lease Addition to Indenture of Lease dated October 13, 2003, by and between the Company and Turner Trust UTD Dale E. Turner March 28, 1984(17) |
| |
| | 10 | .8 | | Standard Industrial/ Commercial Multi-Tenant Lease-Gross dated April 5, 2000, entered into between the Company and Kilroy Realty, L.P.(9) |
| |
| | 10 | .9 | | Amendment No. 1 to Standard Industrial/ Commercial Multi-Tenant Lease dated January 3, 2003, by and between the Company and California Rosen(17) |
| |
| | 10 | .10 | | Lease Agreement dated July 12, 1994, between STAAR Surgical AG and Calderari and Schwab AG/ SA** |
| |
| | 10 | .11 | | Supplement #1 dated July 10, 1995, to the Lease Agreement of July 12, 1994, between STAAR Surgical AG and Calderari and Schwab AG/SA** |
| |
| | 10 | .12 | | Supplement #2 dated August 2, 1999, to the Lease Agreement of July 12, 1994, between STAAR Surgical AG and Calderari and Schwab AG/SA** |
| |
| | 10 | .13 | | Commercial Lease Agreement dated November 29, 2000, between Domilens GmbH and DePfa Deutsche Pfandbriefbank AG** |
| |
| | 10 | .14 | | Patent License Agreement, dated May 24, 1995, with Eye Microsurgery Intersectoral Research and Technology Complex(16) |
| |
| | 10 | .15 | | Patent License Agreement, dated January 1, 1996, with Eye Microsurgery Intersectoral Research and Technology Complex(9) |
| |
| | †10 | .16 | | Promissory Note dated June 16, 1999, from Peter J. Utrata to the Company(8) |
| |
| | †10 | .17 | | Stock Pledge Agreement dated June 16, 1999, by Peter J. Utrata in favor of the Company(8) |
| |
| | †10 | .18 | | Promissory Note dated June 2, 2000, from Peter J. Utrata to the Company(9) |
| |
| | †10 | .19 | | Stock Pledge Agreement dated June 2, 2000, between the Company and Peter J. Utrata(9) |
| |
| | †10 | .20 | | Mortgage dated July 16, 2004, between the Company and Peter J. Utrata** |
| |
| | †10 | .21 | | Forbearance Agreement dated July 22, 2004, between the Company and Peter J. Utrata** |
| |
| | †10 | .22 | | Employment Agreement dated December 19, 2000, between the Company and David Bailey(9) |
| |
| | †10 | .23 | | Stock Option Plan and Agreement for Chief Executive Officer dated November 13, 2001, between the Company and David Bailey(10) |
| |
| | †10 | .24 | | Stock Option Certificate dated August 9, 2001, between the Company and David Bailey** |
| |
| | †10 | .25 | | Stock Option Certificate dated January 2, 2002, between the Company and David Bailey** |
| |
| | †10 | .26 | | Stock Option Certificate dated February 14, 2003, between the Company and David Bailey** |
| |
| | †10 | .27 | | Amended and Restated Stock Option Certificate dated February 12, 2003, between the Company and David Bailey** |
| |
| | †10 | .28 | | Stock Option Certificate dated May 9, 2000, between the Company and Volker Anhaeusser** |
| |
| | †10 | .29 | | Stock Option Certificate dated May 31 2000, between the Company and Volker Anhaeusser** |
| |
| | †10 | .30 | | Stock Option Certificate dated May 30, 2002, between the Company and Volker Anhaeusser** |
| |
| | †10 | .31 | | Stock Option Agreement dated November 13, 2001, between the Company and David R. Morrison(10) |
| |
| | †10 | .32 | | Stock Option Certificate dated February 13, 2003, between the Company and Donald Duffy** |
| |
| | †10 | .33 | | Employment Agreement dated January 3, 2002, between the Company and John Bily(11) |
| |
| | †10 | .34 | | Stock Option Certificate dated January 18, 2002, between the Company and John C. Bily** |
| |
| | †10 | .35 | | Amended and Restated Stock Option Certificate dated February 12, 2003, between the Company and John C. Bily** |
| |
| | †10 | .36 | | Offer of Employment dated July 12, 2002, from the Company to Nick Curtis** |
| |
| | †10 | .37 | | Amendment to Offer of Employment dated February 14, 2003 from the Company to Nick Curtis** |
| |
| | †10 | .38 | | Stock Option Certificate dated February 14, 2003, between the Company and Nicholas Curtis** |
| |
| | †10 | .39 | | Amended and Restated Stock Option Certificate dated February 12, 2003, between the Company and Nicholas Curtis** |
| |
| | †10 | .40 | | Employment Agreement dated March 18, 2005, between the Company and Tom Paul** |
40
(4) Exhibits
| | | | | |
| |
| | †10 | .41 | | Employment Agreement dated March 18, 2005, between the Company and James Farnworth** |
| |
| | †10 | .42 | | Form of Indemnification Agreement between the Company and certain officers and directors** |
| |
| | †10 | .43 | | Managing Director’s Contract of Employment, dated June 22, 1993, between Domilens and Guenther Roepstorff** |
| |
| | †10 | .44 | | Supplementary Agreement #1 to the Managing Director’s Contract of Employment, dated November 25, 1997, between STAAR Surgical AG and Guenther Roepstorff** |
| |
| | †10 | .45 | | Supplementary Agreement #2 to the Managing Director’s Contract of Employment dated January 1, 1998, between Domilens and Guenther Roepstorff** |
| |
| | †10 | .46 | | Supplementary Agreement #3 to the Managing Director’s Contract of Employment dated January 1, 2003, between Domilens and Guenther Roepstorff** |
| |
| | †10 | .47 | | Employment Agreement dated May 5, 2004, between the ConceptVision Australia Pty Limited ACN 006 391 928 and Philip Butler Stoney(18) |
| |
| | †10 | .48 | | Employment Agreement dated May 5, 2004, between the ConceptVision Australia Pty Limited ACN 006 391 928 and Robert William Mitchell(18) |
| |
| | #10 | .49 | | Assignment Agreement of the Share Capital of Domilens Vertrieb fuer medizinische Produkte GmbH dated January 3, 2003, between STAAR Surgical AG and Guenther Roepstorff(12) |
| |
| | 10 | .50 | | Assignment Agreement of the Share Capital of ConceptVision Australia Pty Limited ACN 006 391 928, dated May 5, 2004, between the Company and Philip Butler Stoney and Robert William Mitchell(18) |
| |
| | 10 | .51 | | Addendum to the Assignment Agreement of the Share Capital of ConceptVision Australia Pty Limited ACN 006 391 928, dated May 5, 2004, between the Company and Philip Butler Stoney and Robert William Mitchell(18) |
| |
| | 10 | .52 | | Form of Purchase Agreement dated June 11, 2003, entered into between the Company and Crestwood Capital Partners, LP; Crestwood Capital International, Ltd; Crestwood Capital Partners II, LP; RS Emerging Growth Pacific Partners Master Fund Unit Trust; RS Emerging Growth Pacific Partners LP, Prism Partners I, LP; Prism Partners II Offshore Fund; Prism Partners Offshore Fund; Vertical Ventures Investments, LLC; Smithfield Fiduciary, LLC, individually(21) |
| |
| | 10 | .53 | | Stock Purchase Agreement dated June 4, 2004, between the Company and Andesite Management, L.P., Colonial Fund LLC, Domain Public Equity Partners, L.P., Fortis L Fund Equity Pharma World, Fortis L Fund Opportunity World, Heartland Group, Inc., ProMed Offshore Fund, Ltd., ProMed Partners, L.P., ProMed Partners II, L.P., Sagitta Asset Management Ltd., SF Capital Partners, Ltd., Special Situations Cayman Fund L.P., Special Situations Fund III, L.P., Special Situations Private Equity Fund, L.P., Ursus Capital, L.P., Ursus Offshore, Ltd., Zeke, LP(19) |
| |
| | 10 | .54 | | Master Credit Agreement dated August 2, 2004, between STAAR Surgical AG and UBS AG(20) |
| |
| | 10 | .55 | | Credit Agreement effective January 13, 2003, between Domilens Gmbh and Postbank(12) |
| |
| | †10 | .56 | | Promissory Note dated March 29, 2002, between the Company and Pollet & Richardson** |
| |
| | †#10 | .57 | | Security Agreement dated March 29, 2002, between the Company and Pollet & Richardson(12) |
| |
| | 14 | .1 | | Code of Ethics** |
| |
| | 21 | .1 | | List of Significant Subsidiaries** |
| |
| | 23 | .1 | | Consent of BDO Seidman, LLP** |
| |
| | 31 | .1 | | Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002** |
| |
| | 31 | .2 | | Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002** |
| |
| | 32 | .1 | | Certification Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** |
| | |
| |
3.1** | | Certificate of Incorporation, as amended(8)
|
| |
3.2 | | By-laws, as amended(9)
|
| |
†4.1 | | 1990 Stock Option Plan(1)
|
| |
†4.2 | | 1991 Stock Option Plan(2)
|
| |
†4.3 | | 1995 STAAR Surgical Company Consultant Stock Plan(3)
|
| |
†4.4 | | 1996 STAAR Surgical Company Non-Qualified Stock Plan(4)
|
| |
4.5 | | Stockholders’ Rights Plan, dated effective April 20, 1995(9)
|
| |
†4.6 | | 1998 STAAR Surgical Company Stock Plan, adopted April 17, 1998(5)
|
| |
4.7 | | Form of Certificate for Common Stock, Par Value $0.01 per share(14)
|
| |
4.8 | | 2003 Omnibus Equity Incentive Plan(12)
|
| |
4.9 | | Amendment No. 1 to Stockholders’ Rights Plan, dated April 21, 2003(15)
|
| |
10.1 | | Joint Venture Agreement, dated May 23, 1988, between the Company, Canon Sales Co, Inc. and Canon, Inc.(7)
Filed herewith |
| | |
| |
10.13 | | Indenture of Lease dated September 1, 1993, between the Company and FKT Associates(9)
|
| |
10.14 | | Second Amendment to Indenture of Lease dated September 21, 1998, between the Company and FKT Associates(9)
|
| |
10.15 | | Indenture of Lease dated October 20, 1983, between Dale E. Turner and Francis R. Turner(6)
|
| |
10.18 | | Patent License Agreement, dated May 24, 1995, with Eye Microsurgery Intersectoral Research and Technology Complex(9)
|
| |
10.19 | | Patent License Agreement, dated January 1, 1996, with Eye Microsurgery Intersectoral Research and Technology Complex(9)
|
| |
†10.28 | | Employment Agreement dated April 28, 1999, between the Company and John Santos(9)
|
| |
†10.29 | | Modification to Employment Agreement dated May 31, 2000, between the Company and John Santos(9)
|
| |
†10.30 | | Second Modification to Employment Agreement dated September 5, 2000, between the Company and John Santos(9)
|
| |
†10.31 | | Promissory Note dated June 16, 1999, from Peter J. Utrata, M.D. to the Company(8)
|
| |
†10.32 | | Stock Pledge Agreement dated June 16, 1999, by Peter J. Utrata, M.D. in favor of the Company(8)
|
| |
10.36 | | Standard Industrial/Commercial Multi-Tenant Lease-Gross dated April 5, 2000, entered into between the Company and Kilroy Realty, L.P.(9)
|
| |
†10.40 | | Promissory Note dated June 2, 2000, from Peter J. Utrata, M.D. to the Company(9)
|
| |
†10.41 | | Stock Pledge Agreement dated June 2, 2000, between the Company and Peter J. Utrata, M.D.(9)
|
| |
†10.62 | | Employment Agreement dated December 20, 2000, between the Company and David Bailey(9)
|
| |
†10.63 | | Stock Option Agreement dated December 20, 2000, between the Company and David Bailey(9)
|
| |
10.70 | | Settlement Agreement between the Company, Canon, Inc., Canon Sales Co., Inc., and CANON-STAAR Company, Inc. dated September 28, 2001(10)
|
| |
†10.73 | | Stock Option Agreement dated November 13, 2001, between the Company and David Bailey(10)
|
| |
†10.74 | | Stock Option Agreement dated November 13, 2001, between the Company and David R. Morrison(10)
|
| |
†10.80 | | Employment Agreement dated January 3, 2002, between the Company and John Bily(11)
|
| |
†10.81 | | Employment Agreement dated January 22, 2002, between the Company and Helene Lamielle(11)
|
| |
10.82 | | Master Credit Agreement dated December 15, 2000, between STAAR Surgical AG and UBS AG(12)
|
| |
†10.84 | | Settlement Agreement and General Release dated March 29, 2002, among the Company, Sally M. Pollet, Pollet and Richardson, and the Estate of Andrew F. Pollet(12)
|
| |
†#10.88 | | Security Agreement dated March 29, 2002, between the Company and Pollet & Richardson(12)
|
| |
#10.91 | | Assignment Agreement of the Share Capital of Domilens Vertrieb fuer medizinische Produkte GmbH dated January 3, 2003, between STAAR Surgical AG and Guenther Roepstorff(12)
|
| |
10.92 | | Credit Agreement effective January 13, 2003, between Domilens Gmbh and Postbank(12)
|
| |
10.93 | | Settlement Agreement and Mutual General Release dated February 27, 2003, by and between the Company and Richard Leza(12)
|
| |
10.97 | | Amendment No. 1 to Standard Industrial/Commercial Multi-Tenant Lease dated January 3,003 by and between the Company and California Rosen**
|
| |
10.98 | | Form of Purchase Agreement dated June 11, 2003 entered into between the Company and Crestwood Capital Partners, LP; Crestwood Capital International, Ltd; Crestwood Capital Partners II, LP; RS Emerging Growth Pacific Partners Master Fund Unit Trust; RS Emerging Growth Pacific Partners LP; Prism Partners I, LP; Prism Partners II Offshore Fund; Prism Partners Offshore Fund; Vertical Ventures Investments, LLC; Smithfield Fiduciary, LLC., individually(16)
|
| | |
| |
10.99 | | Sixth Lease Addition to Indenture of Lease dated October 13, 2003 by and between the Company and Turner Trust UTD Dale E. Turner March 28,1984**
|
| |
10.100 | | Third Amendment to Indenture of Lease dated October 13, 2003 by and between the Company and FKT Associates**
|
| |
14.1 | | Code of Ethics**
|
| |
21.1 | | List of Significant Subsidiaries**
|
| |
23.1 | | Consent of BDO Seidman, LLP**
|
| |
31.1 | | Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**
|
| |
31.2 | | Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**
|
| |
32.1 | | Certification Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
|
| † | Management contract or compensatory plan or arrangement |
41
| | |
| # | All schedules and or exhibits have been omitted. Any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request |
(1) | Incorporated by reference from the Company’s Registration Statement on Form S-8, File No. 033-37248, as filed on October 11, 1990. |
| (2) | Incorporated by reference from the Company’s Registration Statement on Form S-8, File No. 033-76404, as filed on March 11, 1994. |
|
| (3) | Incorporated by reference from the Company’s Registration Statement on Form S-8, File No. 033-60241, as filed on June 15, 1995. |
|
| (4) | Incorporated by reference from the Company’s Annual Report on Form 10-K, File No. 0-11634, for the year ended January 3, 1997, as filed on April 2, 1997. |
|
| (5) | Incorporated by reference from the Company’s Proxy Statement, File No. 0-11634, for its Annual Meeting of Stockholders held on May 29, 1998, as filed on May 4, 1999.1, 1998. |
|
| (6) | Incorporated by reference from the Company’s Annual Report on Form 10-K, File No. 0-11634, for the year ended January 1,2, 1998, as filed on April 1, 1998. |
|
| (7) | Incorporated by reference from the Company’s Annual Report on Form 10-K, File No. 0-11634, for the year ended January 1, 1999, as filed on April 1, 1999. |
|
| (8) | Incorporated by reference from the Company’s Annual Report on Form 10-K, File No. 0-11634, for the year ended December 31, 1999, as filed on March 30, 2000. |
|
| (9) | Incorporated by reference from the Company’s Annual Report on Form 10-K, File No. 0-11634, for the year ended December 29, 2000, as filed on March 29, 2001. |
| |
| (10) | Incorporated by reference to the Company’s Annual Report on Form 10-K, File No. 0-11634, for the year ended December 28, 2001, as filed on March 28, 2002. |
|
| (11) | Incorporated by reference to the Company’s Quarterly Report, File No. 0-11634, for the period ended June 28, 2002, as filed on August 12, 2002. |
|
| (12) | Incorporated by reference to the Company’s Annual Report on Form 10-K, File No. 0-11634, for the year ended January 3, 2003, as filed on April 3, 2003. |
|
| (13) | Incorporated by reference from the Company’s Proxy Statement, File No. 0-11634, for its Annual Meeting of Stockholders held on June 18, 2003, as filed on May 19, 2003. |
|
| (14) | Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Company’s Registration Statement on Form 8-A/A, as filed on April 18, 2003. |
|
| (15) | Incorporated by reference to the Company’s Quarterly Report, File No. 0-11634, for the period ended April 4, 2003, as filed on May 19, 2003. |
|
| (16) | Incorporated by reference from the Company’s Annual Report on Form 10-K/ A, for the year ended December 29, 2000, as filed on May 9, 2001. |
|
| (17) | Incorporated by reference to the Company’s Annual Report on Form 10-K, for the year ended January 2, 2004, as filed on March 17, 2004. |
|
| (18) | Incorporated by reference to the Company’s Quarterly Report, for the period ended April 2, 2004, as filed on May 12, 2004. |
|
| (19) | Incorporated by reference to the Company’s Current Report on Form 8-K, File No. 0-11634,as filed on June 9, 2004. |
|
| (20) | Incorporated by reference to the Company’s Quarterly Report, for the period ended October 1, 2004, as filed on November 10, 2004. |
|
| (21) | Incorporated by reference to the Company’s Current Report on Form 8-K, as filed on June 13, 2003. |
42
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
| By: | /s/STAAR SURGICAL COMPANYDavid Bailey |
| |
By:
| | /s/ DAVID BAILEY
|
| | |
| David Bailey |
| President and Chief Executive Officer (principal |
| (principal executive officer) |
| |
Date:
| | Date: March 17, 2004
30, 2005 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | |
Name
| | Title
| | Date
|
| | |
/s/ DAVID BAILEY
David Bailey
| | |
| Name | | Title | | Date |
| | | | |
|
/s/David Bailey
David Bailey | | President, Chief Executive Officer, Chairman and Director (principal executive officer) | | March 17, 200430, 2005 |
| | |
/s/ /s/ JOHN BILY
John Bily
John Bily | | Chief Financial Officer (principal accounting and financial officer) | | March 17, 200430, 2005 |
| | |
/s/ /s/ JOHN R. GILBERTDavid Schlotterbeck
John R. Gilbert
David Schlotterbeck | | Director | | March 17, 200430, 2005 |
| | |
/s/ /s/ DONALD DUFFY
Donald Duffy
Donald Duffy | | Director | | March 17, 200430, 2005 |
| | |
/s/ /s/ DAVID MORRISON
David Morrison
David Morrison | | Director | | March 17, 200430, 2005 |
| | |
/s/ /s/ VOLKER ANHAEUSSER
Volker Anhaeusser
Volker Anhaeusser | | Director | | March 17, 200430, 2005 |
43
STAAR SURGICAL COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004,
JANUARY 2, 2004 AND JANUARY 3, 2003
F-1
STAAR SURGICAL COMPANY AND DECEMBER 28, 2001
SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIEDREGISTERED PUBLIC ACCOUNTANTSACCOUNTING FIRM Board of Directors
and Stockholders
Monrovia, CA
We have audited the accompanying consolidated balance sheets of STAAR Surgical Company and subsidiaries as of
January 2,December 31, 2004 and January
3, 2003,2, 2004, and the related consolidated statements of operations, stockholders’ equity,
and comprehensive income (loss), and cash flows for each of the three years in the period ended
January 2,December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with
auditingthe standards
generally accepted inof the
United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of STAAR Surgical Company and subsidiaries as of
December 31, 2004 and January 2, 2004, and
January 3, 2003, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended
January 2,December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO SEIDMAN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s recurring losses from operations, negative cash flows, and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
�� We also have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States),
LLPthe effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2005 expressed an unqualified opinion thereon.
Los Angeles, California
March 16, 2005
March 3, 2004
F-2
STAAR SURGICAL COMPANY AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
STAAR Surgical Company
Monrovia, CA
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting included in Item 9A,that STAAR Surgical Company maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). STAAR Surgical Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that STAAR Surgical Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in COSO. Also in our opinion, STAAR Surgical Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of STAAR Surgical Company as of December 31, 2004 and January 2, 2004 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004, and our report dated March 16, 2005 expressed substantial doubt about the Company’s ability to continue as a going concern.
Los Angeles, California
March 16, 2005
F-3
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and January 3, 2003 | | | | | | | | |
| | | 2003
| | | 2002
| |
| | | (In thousands, except par value amounts) | |
| ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 7,286 | | | $ | 1,009 | |
Accounts receivable, less allowance for doubtful accounts and sales returns | | | 5,518 | | | | 5,992 | |
Inventories | | | 12,802 | | | | 11,761 | |
Prepaids, deposits and other current assets | | | 2,001 | | | | 2,813 | |
| | |
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|
|
Total current assets | | | 27,607 | | | | 21,575 | |
| | |
|
|
| |
|
|
|
Investment in joint venture | | | 397 | | | | 462 | |
Property, plant and equipment, net | | | 6,638 | | | | 7,438 | |
Patents and licenses, net of accumulated amortization of $5,583 and $4,967 | | | 6,059 | | | | 9,038 | |
Goodwill | | | 6,427 | | | | 6,427 | |
Other assets | | | 91 | | | | 280 | |
| | |
|
|
| |
|
|
|
Total assets | | $ | 47,219 | | | $ | 45,220 | |
| | |
|
|
| |
|
|
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | |
Current liabilities: | | | | | | | | |
Notes payable | | $ | 2,950 | | | $ | 5,845 | |
Accounts payable | | | 4,739 | | | | 4,394 | |
Other current liabilities | | | 4,035 | | | | 4,241 | |
| | |
|
|
| |
|
|
|
Total current liabilities | | | 11,724 | | | | 14,480 | |
Other long-term liabilities | | | 72 | | | | 89 | |
| | |
|
|
| |
|
|
|
Total liabilities | | | 11,796 | | | | 14,569 | |
| | |
|
|
| |
|
|
|
Minority interest | | | 204 | | | | 100 | |
| | |
|
|
| |
|
|
|
Commitments and contingencies | | | | | | | | |
| | |
Stockholders’ equity: | | | | | | | | |
Preferred stock, $.01 par value, 10,000 shares authorized, none issued | | | — | | | | — | |
Common stock, $.01 par value; 30,000 shares authorized; issued and outstanding 18,403 and 16,962 shares | | | 184 | | | | 169 | |
Additional paid-in capital | | | 85,948 | | | | 74,977 | |
Accumulated other comprehensive income (loss) | | | 572 | | | | (111 | ) |
Accumulated deficit | | | (49,146 | ) | | | (40,789 | ) |
| | |
|
|
| |
|
|
|
| | | | 37,558 | | | | 34,246 | |
Notes receivable from officers and directors | | | (2,339 | ) | | | (3,695 | ) |
| | |
|
|
| |
|
|
|
Total stockholders’ equity | | | 35,219 | | | | 30,551 | |
| | |
|
|
| |
|
|
|
Total liabilities and stockholders’ equity | | $ | 47,219 | | | $ | 45,220 | |
| | |
|
|
| |
|
|
|
2, 2004
| | | | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| | | (In thousands, except | |
| | | par value amounts) | |
| ASSETS |
| Current assets: | | | | | | | | |
| | Cash and cash equivalents | | $ | 4,187 | | | $ | 7,286 | |
| | Short-term investments | | | 5,125 | | | | — | |
| | Accounts receivable, less allowance for doubtful accounts and sales returns | | | 6,217 | | | | 5,675 | |
| | Inventories | | | 15,084 | | | | 12,802 | |
| | Prepaids, deposits and other current assets | | | 1,969 | | | | 2,001 | |
| | | | | | | |
| | | Total current assets | | | 32,582 | | | | 27,764 | |
| | | | | | | |
| Investment in joint venture | | | 125 | | | | 397 | |
| Property, plant and equipment, net | | | 6,163 | | | | 6,638 | |
| Patents and licenses, net of accumulated amortization of $6,089 and $5,583 | | | 5,400 | | | | 6,059 | |
| Goodwill | | | 7,534 | | | | 6,427 | |
| Other assets | | | 169 | | | | 91 | |
| | | | | | | |
| | | Total assets | | $ | 51,973 | | | $ | 47,376 | |
| | | | | | | |
| |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | | | | | | |
| | Notes payable | | $ | 3,004 | | | $ | 2,950 | |
| | Accounts payable | | | 5,313 | | | | 4,544 | |
| | Other current liabilities | | | 5,162 | | | | 4,387 | |
| | | | | | | |
| | | Total current liabilities | | | 13,479 | | | | 11,881 | |
| Other long-term liabilities | | | 632 | | | | 72 | |
| | | | | | | |
| | | Total liabilities | | | 14,111 | | | | 11,953 | |
| | | | | | | |
| Minority interest | | | 22 | | | | 204 | |
| | | | | | | |
| Commitments and contingencies | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| | Preferred stock, $.01 par value, 10,000 shares authorized, none issued | | | — | | | | — | |
| | Common stock, $.01 par value; 30,000 shares authorized; issued and outstanding 20,664 and 18,403 shares | | | 207 | | | | 184 | |
| | Additional paid-in capital | | | 98,691 | | | | 85,948 | |
| | Accumulated other comprehensive income | | | 1,024 | | | | 572 | |
| | Accumulated deficit | | | (60,478 | ) | | | (49,146 | ) |
| | | | | | | |
| | | | 39,444 | | | | 37,558 | |
| Notes receivable from officers and directors | | | (1,604 | ) | | | (2,339 | ) |
| | | | | | | |
| | | Total stockholders’ equity | | | 37,840 | | | | 35,219 | |
| | | | | | | |
| | | Total liabilities and stockholders’ equity | | $ | 51,973 | | | $ | 47,376 | |
| | | | | | | |
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-4
STAAR SURGICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2004, January 2, 2004 and January 3, 2003 and December 28, 2001 | | | | | | | | | | | | |
| | | 2003
| | | 2002
| | | 2001
| |
| | | (In thousands, except per share amounts) | |
Sales | | $ | 50,409 | | | $ | 47,880 | | | $ | 50,237 | |
Royalty and other income | | | 49 | | | | 368 | | | | 549 | |
| | |
|
|
| |
|
|
| |
|
|
|
Total revenues | | | 50,458 | | | | 48,248 | | | | 50,786 | |
Cost of sales | | | 22,621 | | | | 24,099 | | | | 28,203 | |
| | |
|
|
| |
|
|
| |
|
|
|
Gross profit | | | 27,837 | | | | 24,149 | | | | 22,583 | |
| | |
|
|
| |
|
|
| |
|
|
|
Selling, general and administrative expenses: | | | | | | | | | | | | |
General and administrative | | | 9,343 | | | | 8,959 | | | | 8,746 | |
Marketing and selling | | | 19,509 | | | | 16,833 | | | | 20,043 | |
Research and development | | | 5,120 | | | | 4,016 | | | | 3,800 | |
Other charges | | | 390 | | | | 1,454 | | | | 7,780 | |
| | |
|
|
| |
|
|
| |
|
|
|
Total selling, general and administrative expenses | | | 34,362 | | | | 31,262 | | | | 40,369 | |
| | |
|
|
| |
|
|
| |
|
|
|
Operating loss | | | (6,525 | ) | | | (7,113 | ) | | | (17,786 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Other income (expense): | | | | | | | | | | | | |
Equity in earnings of joint venture | | | 11 | | | | 36 | | | | 389 | |
Interest income | | | 256 | | | | 361 | | | | 1 | |
Interest expense | | | (322 | ) | | | (579 | ) | | | (640 | ) |
Other expense | | | (582 | ) | | | (603 | ) | | | (474 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Total other expense, net | | | (637 | ) | | | (785 | ) | | | (724 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Loss before income taxes and minority interest | | | (7,162 | ) | | | (7,898 | ) | | | (18,510 | ) |
Provision (benefit) for income taxes | | | 1,127 | | | | 8,805 | | | | (3,649 | ) |
Minority interest | | | 68 | | | | 75 | | | | 139 | |
| | |
|
|
| |
|
|
| |
|
|
|
Net loss | | $ | (8,357 | ) | | $ | (16,778 | ) | | $ | (15,000 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Loss per share: | | | | | | | | | | | | |
Basic and diluted | | $ | (0.47 | ) | | $ | (0.98 | ) | | $ | (0.88 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Weighted average shares outstanding | | | | | | | | | | | | |
Basic and diluted | | | 17,704 | | | | 17,142 | | | | 17,003 | |
| | |
|
|
| |
|
|
| |
|
|
|
| | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands, | |
| | | except per share amounts) | |
| Sales | | $ | 51,685 | | | $ | 50,409 | | | $ | 47,880 | |
| Royalty and other income | | | — | | | | 49 | | | | 368 | |
| | | | | | | | | | |
| | | Total revenues | | | 51,685 | | | | 50,458 | | | | 48,248 | |
| Cost of sales | | | 25,542 | | | | 22,621 | | | | 24,099 | |
| | | | | | | | | | |
| | | Gross profit | | | 26,143 | | | | 27,837 | | | | 24,149 | |
| | | | | | | | | | |
| Selling, general and administrative expenses: | | | | | | | | | | | | |
| | General and administrative | | | 9,253 | | | | 9,343 | | | | 8,959 | |
| | Marketing and selling | | | 20,302 | | | | 19,509 | | | | 16,833 | |
| | Research and development | | | 6,246 | | | | 5,120 | | | | 4,016 | |
| | Other charges | | | 500 | | | | 390 | | | | 1,454 | |
| | | | | | | | | | |
| | | Total selling, general and administrative expenses | | | 36,301 | | | | 34,362 | | | | 31,262 | |
| | | | | | | | | | |
| | | Operating loss | | | (10,158 | ) | | | (6,525 | ) | | | (7,113 | ) |
| | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | |
| | Equity in earnings of joint venture | | | (191 | ) | | | 11 | | | | 36 | |
| | Interest income | | | 219 | | | | 256 | | | | 361 | |
| | Interest expense | | | (215 | ) | | | (322 | ) | | | (579 | ) |
| | Other income (expense) | | | 99 | | | | (582 | ) | | | (603 | ) |
| | | | | | | | | | |
| | | Total other expense, net | | | (88 | ) | | | (637 | ) | | | (785 | ) |
| | | | | | | | | | |
| Loss before income taxes and minority interest | | | (10,246 | ) | | | (7,162 | ) | | | (7,898 | ) |
| Provision for income taxes | | | 1,057 | | | | 1,127 | | | | 8,805 | |
| Minority interest | | | 29 | | | | 68 | | | | 75 | |
| | | | | | | | | | |
| Net loss | | $ | (11,332 | ) | | $ | (8,357 | ) | | $ | (16,778 | ) |
| | | | | | | | | | |
| Loss per share: | | | | | | | | | | | | |
| | Basic and diluted | | $ | (0.58 | ) | | $ | (0.47 | ) | | $ | (0.98 | ) |
| | | | | | | | | | |
| Weighted average shares outstanding | | | | | | | | | | | | |
| | Basic and diluted | | | 19,602 | | | | 17,704 | | | | 17,142 | |
| | | | | | | | | | |
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-5
STAAR SURGICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2004, January 2, 2004 and January 3, 2003 and December 28, 2001 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common
Stock Shares
| | | Common
Stock Par Value
| | | Additional
Paid-In
Capital
| | | Accumulated
Other
Comprehensive
Income (Loss)
| | | Accumulated
(Deficit)
| | | Notes
Receivable
| | | Total
| |
| | | (In thousands) | |
Balance, at December 29, 2000 | | 16,949 | | | $ | 169 | | | $ | 75,047 | | | $ | (1,582 | ) | | $ | (9,011 | ) | | $ | (6,563 | ) | | $ | 58,060 | |
Common stock issued upon exercise of options | | 18 | | | | 1 | | | | 62 | | | | — | | | | — | | | | — | | | | 63 | |
Common stock issued as payment for services | | 191 | | | | 2 | | | | 411 | | | | — | | | | — | | | | — | | | | 413 | |
Stock-based consultant expense | | — | | | | — | | | | 53 | | | | — | | | | — | | | | — | | | | 53 | |
Proceeds from notes receivable | | — | | | | — | | | | — | | | | — | | | | — | | | | 321 | | | | 321 | |
Net change in accrued interest on notes receivable | | — | | | | — | | | | — | | | | — | | | | — | | | | 269 | | | | 269 | |
Notes receivable reserve | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,109 | | | | 2,109 | |
Foreign currency translation adjustment | | — | | | | — | | | | — | | | | (146 | ) | | | — | | | | — | | | | (146 | ) |
Net loss | | — | | | | — | | | | — | | | | — | | | | (15,000 | ) | | | — | | | | (15,000 | ) |
| | |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Balance, at December 28, 2001 | | 17,158 | | | | 172 | | | | 75,573 | | | | (1,728 | ) | | | (24,011 | ) | | | (3,864 | ) | | | 46,142 | |
Common stock issued upon exercise of warrants | | 5 | | | | — | | | | 6 | | | | — | | | | — | | | | — | | | | 6 | |
Common stock issued as payment for services | | 39 | | | | — | | | | 120 | | | | — | | | | — | | | | — | | | | 120 | |
Common stock issued pursuant to employment contract | | 3 | | | | — | | | | 12 | | | | — | | | | — | | | | — | | | | 12 | |
Stock-based consultant expense | | — | | | | — | | | | 236 | | | | — | | | | — | | | | — | | | | 236 | |
Treasury stock acquired in satisfaction of note receivable | | (243 | ) | | | (3 | ) | | | (970 | ) | | | — | | | | — | | | | 2,129 | | | | 1,156 | |
Proceeds from notes receivable | | — | | | | — | | | | — | | | | — | | | | — | | | | 96 | | | | 96 | |
Accrued interest on notes receivable | | — | | | | — | | | | — | | | | — | | | | — | | | | (242 | ) | | | (242 | ) |
Reversal of notes receivable reserve | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,814 | ) | | | (1,814 | ) |
Foreign currency translation adjustment | | — | | | | — | | | | — | | | | 1,617 | | | | — | | | | — | | | | 1,617 | |
Net loss | | — | | | | — | | | | — | | | | — | | | | (16,778 | ) | | | — | | | | (16,778 | ) |
| | |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Balance, at January 3, 2003 | | 16,962 | | | | 169 | | | | 74,977 | | | | (111 | ) | | | (40,789 | ) | | | (3,695 | ) | | | 30,551 | |
Common stock issued upon exercise of options | | 387 | | | | 4 | | | | 1,549 | | | | — | | | | — | | | | — | | | | 1,553 | |
Common stock issued as payment for services | | 54 | | | | 1 | | | | 278 | | | | — | | | | — | | | | — | | | | 279 | |
Stock-based consultant expense | | — | | | | — | | | | 206 | | | | — | | | | — | | | | — | | | | 206 | |
Net proceeds from private placement | | 1,000 | | | | 10 | | | | 8,938 | | | | — | | | | — | | | | — | | | | 8,948 | |
Proceeds from notes receivable | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,270 | | | | 3,270 | |
Accrued interest on notes receivable | | — | | | | — | | | | — | | | | — | | | | — | | | | (118 | ) | | | (118 | ) |
Reversal of notes receivable reserve | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,796 | ) | | | (1,796 | ) |
Foreign currency translation adjustment | | — | | | | — | | | | — | | | | 683 | | | | — | | | | — | | | | 683 | |
Net loss | | — | | | | — | | | | — | | | | — | | | | (8,357 | ) | | | — | | | | (8,357 | ) |
| | |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Balance, at January 2, 2004 | | 18,403 | | | $ | 184 | | | $ | 85,948 | | | $ | 572 | | | $ | (49,146 | ) | | $ | (2,339 | ) | | $ | 35,219 | |
| | |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Accumulated | | | | | | | |
| | | Common | | | Common | | | Additional | | | Other | | | | | | | |
| | | Stock | | | Stock Par | | | Paid-In | | | Comprehensive | | | Accumulated | | | Notes | | | |
| | | Shares | | | Value | | | Capital | | | Income (Loss) | | | (Deficit) | | | Receivable | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | (In thousands) | |
| Balance, at December 28, 2001 | | | 17,158 | | | $ | 172 | | | $ | 75,573 | | | $ | (1,728 | ) | | $ | (24,011 | ) | | $ | (3,864 | ) | | $ | 46,142 | |
| Common stock issued upon exercise of options | | | 5 | | | | — | | | | 6 | | | | — | | | | — | | | | — | | | | 6 | |
| Common stock issued as payment for services | | | 39 | | | | — | | | | 120 | | | | — | | | | — | | | | — | | | | 120 | |
| Common stock issued pursuant to employment contract | | | 3 | | | | — | | | | 12 | | | | — | | | | — | | | | — | | | | 12 | |
| Stock-based consultant expense | | | — | | | | — | | | | 236 | | | | — | | | | — | | | | — | | | | 236 | |
| Treasury stock acquired in satisfaction of note receivable | | | (243 | ) | | | (3 | ) | | | (970 | ) | | | — | | | | — | | | | 2,129 | | | | 1,156 | |
| Proceeds from notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | 96 | | | | 96 | |
| Accrued interest on notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | (242 | ) | | | (242 | ) |
| Reversal of notes receivable reserve | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,814 | ) | | | (1,814 | ) |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | 1,617 | | | | — | | | | — | | | | 1,617 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | (16,778 | ) | | | — | | | | (16,778 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance, at January 3, 2003 | | | 16,962 | | | | 169 | | | | 74,977 | | | | (111 | ) | | | (40,789 | ) | | | (3,695 | ) | | | 30,551 | |
| Common stock issued upon exercise of warrants | | | 387 | | | | 4 | | | | 1,549 | | | | — | | | | — | | | | — | | | | 1,553 | |
| Common stock issued as payment for services | | | 54 | | | | 1 | | | | 278 | | | | — | | | | — | | | | — | | | | 279 | |
| Stock-based consultant expense | | | — | | | | — | | | | 206 | | | | — | | | | — | | | | — | | | | 206 | |
| Net proceeds from private placement | | | 1,000 | | | | 10 | | | | 8,938 | | | | — | | | | — | | | | — | | | | 8,948 | |
| Proceeds from notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,270 | | | | 3,270 | |
| Accrued interest on notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | (118 | ) | | | (118 | ) |
| Reversal of notes receivable reserve | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,796 | ) | | | (1,796 | ) |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | 683 | | | | — | | | | — | | | | 683 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | (8,357 | ) | | | — | | | | (8,357 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance, at January 2, 2004 | | | 18,403 | | | | 184 | | | | 85,948 | | | | 572 | | | | (49,146 | ) | | | (2,339 | ) | | | 35,219 | |
| Common stock issued upon exercise of options | | | 250 | | | | 3 | | | | 826 | | | | — | | | | — | | | | — | | | | 829 | |
| Common stock issued as payment for services | | | 11 | | | | — | | | | 60 | | | | — | | | | — | | | | — | | | | 60 | |
| Stock-based consultant expense | | | — | | | | — | | | | 231 | | | | — | | | | — | | | | — | | | | 231 | |
| Net proceeds from private placement | | | 2,000 | | | | 20 | | | | 11,626 | | | | — | | | | — | | | | — | | | | 11,646 | |
| Proceeds from notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | 330 | | | | 330 | |
| Accrued interest on notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | (95 | ) | | | (95 | ) |
| Notes receivable reserve | | | — | | | | — | | | | — | | | | — | | | | — | | | | 500 | | | | 500 | |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | 452 | | | | — | | | | — | | | | 452 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | (11,332 | ) | | | — | | | | (11,332 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance, at December 31, 2004 | | | 20,664 | | | $ | 207 | | | $ | 98,691 | | | $ | 1,024 | | | $ | (60,478 | ) | | $ | (1,604 | ) | | $ | 37,840 | |
| | | | | | | | | | | | | | | | | | | | | | |
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-6
STAAR SURGICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2004, January 2, 2004 and January 3, 2003 and December 28, 2001 | | | | | | | | | | | | |
| | | 2003
| | | 2002
| | | 2001
| |
| | | (In thousands) | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net loss | | $ | (8,357 | ) | | $ | (16,778 | ) | | $ | (15,000 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | | | | |
Depreciation of property and equipment | | | 1,950 | | | | 2,171 | | | | 2,364 | |
Amortization of intangibles | | | 952 | | | | 933 | | | | 1,259 | |
Write-off of patents | | | 2,102 | | | | — | | | | — | |
Loss on disposal of fixed assets | | | 159 | | | | — | | | | — | |
Equity in earnings of joint venture | | | (11 | ) | | | (36 | ) | | | (746 | ) |
Deferred income taxes | | | — | | | | 9,132 | | | | (4,537 | ) |
Stock-based consultant expense | | | 206 | | | | 236 | | | | 53 | |
Common stock issued for services | | | 279 | | | | 132 | | | | 413 | |
Non-cash restructuring and inventory write-down | | | — | | | | 1,225 | | | | 13,230 | |
Net change in notes receivable reserve | | | (1,364 | ) | | | — | | | | — | |
Other | | | (124 | ) | | | (226 | ) | | | 269 | |
Minority interest | | | 104 | | | | 144 | | | | 178 | |
Changes in working capital: | | | | | | | | | | | | |
Accounts receivable | | | 474 | | | | 1,462 | | | | 1,697 | |
Inventories | | | (1,041 | ) | | | 3,108 | | | | (1,316 | ) |
Prepaids, deposits and other current assets | | | 380 | | | | (232 | ) | | | 2,619 | |
Accounts payable | | | 351 | | | | (966 | ) | | | (573 | ) |
Other current liabilities | | | (206 | ) | | | 264 | | | | (2,450 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash provided by (used in) operating activities | | | (4,146 | ) | | | 569 | | | | (2,540 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Cash flows from investing activities: | | | | | | | | | | | | |
Acquisition of property and equipment | | | (1,309 | ) | | | (874 | ) | | | (1,180 | ) |
Acquisition of patents and licenses | | | (75 | ) | | | (75 | ) | | | (245 | ) |
Proceeds from notes receivable and other | | | 3,270 | | | | 10 | | | | 321 | |
Change in other assets | | | 189 | | | | 493 | | | | 119 | |
Dividends received from joint venture | | | 76 | | | | 40 | | | | 280 | |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash provided by (used in) investing activities | | | 2,151 | | | | (406 | ) | | | (705 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Cash flows from financing activities: | | | | | | | | | | | | |
Net borrowings (payments) under notes payable and long-term debt | | | (2,912 | ) | | | (2,598 | ) | | | 276 | |
Restricted cash | | | — | | | | 2,000 | | | | (2,000 | ) |
Proceeds from the exercise of stock options and warrants | | | 1,553 | | | | 6 | | | | 63 | |
Net proceeds from private placement | | | 8,948 | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash provided by (used in) financing activities | | | 7,589 | | | | (592 | ) | | | (1,661 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Effect of exchange rate changes on cash and cash equivalents | | | 683 | | | | 585 | | | | (328 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Increase (decrease) in cash and cash equivalents | | | 6,277 | | | | 156 | | | | (5,234 | ) |
Cash and cash equivalents, at beginning of year | | | 1,009 | | | | 853 | | | | 6,087 | |
| | |
|
|
| |
|
|
| |
|
|
|
Cash and cash equivalents, at end of year | | $ | 7,286 | | | $ | 1,009 | | | $ | 853 | |
| | |
|
|
| |
|
|
| |
|
|
|
| | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands) | |
| Cash flows from operating activities: | | | | | | | | | | | | |
| | Net loss | | $ | (11,332 | ) | | $ | (8,357 | ) | | $ | (16,778 | ) |
| | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | | | | |
| | | Depreciation of property and equipment | | | 2,005 | | | | 1,950 | | | | 2,171 | |
| | | Amortization of intangibles | | | 688 | | | | 952 | | | | 933 | |
| | | Write-off of patents | | | — | | | | 2,102 | | | | — | |
| | | Loss on disposal of fixed assets | | | 175 | | | | 159 | | | | — | |
| | | Equity in earnings of joint venture | | | 191 | | | | (11 | ) | | | (36 | ) |
| | | Deferred income taxes | | | — | | | | — | | | | 9,132 | |
| | | Stock-based consultant expense | | | 231 | | | | 206 | | | | 236 | |
| | | Common stock issued for services | | | 60 | | | | 279 | | | | 132 | |
| | | Non-cash restructuring and inventory write-down | | | — | | | | — | | | | 1,225 | |
| | | Net change in notes receivable reserve | | | 500 | | | | (1,364 | ) | | | — | |
| | | Other | | | (95 | ) | | | (124 | ) | | | (226 | ) |
| | | Minority interest | | | 21 | | | | 104 | | | | 144 | |
| | Changes in working capital: | | | | | | | | | | | | |
| | | Accounts receivable | | | (542 | ) | | | 474 | | | | 1,462 | |
| | | Inventories | | | (2,282 | ) | | | (1,041 | ) | | | 3,108 | |
| | | Prepaids, deposits and other current assets | | | 32 | | | | 380 | | | | (232 | ) |
| | | Accounts payable | | | 769 | | | | 351 | | | | (966 | ) |
| | | Other current liabilities | | | 775 | | | | (206 | ) | | | 264 | |
| | | | | | | | | | |
| | | | Net cash provided by (used in) operating activities | | | (8,804 | ) | | | (4,146 | ) | | | 569 | |
| | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| | Acquisition of property and equipment | | | (1,705 | ) | | | (1,309 | ) | | | (874 | ) |
| | Acquisition of patents and licenses | | | (16 | ) | | | (75 | ) | | | (75 | ) |
| | Purchase of short-term investments | | | (8,000 | ) | | | — | | | | — | |
| | Sale of short-term investments | | | 2,875 | | | | — | | | | — | |
| | Purchase of minority interest in subsidiary | | | (768 | ) | | | — | | | | — | |
| | Proceeds from notes receivable and other | | | 330 | | | | 3,270 | | | | 10 | |
| | Change in other assets | | | (91 | ) | | | 189 | | | | 493 | |
| | Dividends received from joint venture | | | 81 | | | | 76 | | | | 40 | |
| | | | | | | | | | |
| | | | Net cash provided by (used in) investing activities | | | (7,294 | ) | | | 2,151 | | | | (406 | ) |
| | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| | Net borrowings (payments) under notes payable and long-term debt | | | 72 | | | | (2,912 | ) | | | (2,598 | ) |
| | Restricted cash | | | — | | | | — | | | | 2,000 | |
| | Proceeds from the exercise of stock options and warrants | | | 829 | | | | 1,553 | | | | 6 | |
| | Net proceeds from private placement | | | 11,646 | | | | 8,948 | | | | — | |
| | | | | | | | | | |
| | | | Net cash provided by (used in) financing activities | | | 12,547 | | | | 7,589 | | | | (592 | ) |
| | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | 452 | | | | 683 | | | | 585 | |
| | | | | | | | | | |
| Increase (decrease) in cash and cash equivalents | | | (3,099 | ) | | | 6,277 | | | | 156 | |
| Cash and cash equivalents, at beginning of year | | | 7,286 | | | | 1,009 | | | | 853 | |
| | | | | | | | | | |
| Cash and cash equivalents, at end of year | | $ | 4,187 | | | $ | 7,286 | | | $ | 1,009 | |
| | | | | | | | | | |
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-7
STAAR SURGICAL COMPANY AND SUBSIDIARIESSUMMARY OF ACCOUNTING POLICIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and January 2, 2004 January 3, 2003 and December 28, 2001 | |
| Note 1 — | Significant Accounting Policies |
Organization and Description of Business STAAR Surgical Company (the “Company”), a Delaware corporation, was incorporated in 1982 for the purpose of developing, producing, and marketing
Intraocular Lensesintraocular lenses (“IOLs”) and other products for minimally invasive ophthalmic surgery. The Company has evolved to become a developer, manufacturer and global distributor of products used by ophthalmologists and other eye care professionals to improve or correct vision in patients with cataracts, refractive conditions and glaucoma. Products
manufacturedsold by the Company for use in restoring vision adversely affected by cataracts include its line of
silicone and Collamer IOLs, the
Preloaded Injector, a three-piece silicone IOL preloaded into a single-use disposable injector, the SonicWAVE
™tm Phacoemulsification System, STAARVISC
™tm II, a viscoelastic material, and Cruise Control, a disposable filter which allows for a significantly faster, cleaner phacoemulsification procedure and is compatible with all phacoemulsification equipment utilizing Venturi
and peristaltic pump technologies. Products
manufacturedsold by the Company for use in correcting refractive conditions such as myopia (near-sightedness), hyperopia (far-sightedness) and astigmatism include the VISIAN
™tm ICL (“ICL”)
, and the VISIAN
™tm TICL (“TICL”)
and the Toric IOL.. The Company’s AquaFlow
™tm Collagen Glaucoma Drainage Device is surgically implanted in the outer tissues of the eye to maintain a space that allows increased drainage of intraocular fluid thereby reducing intraocular pressure, which otherwise may lead to deterioration of vision in patients with glaucoma. The Company also sells other instruments, devices and equipment that are manufactured either by the Company or by others in the ophthalmic products industry.
The Company’s most significantonly subsidiary is STAAR Surgical AG, a wholly owned subsidiary formed in Switzerland to develop, manufacture and distribute certain of the Company’s products worldwide, including the ICL and itsthe AquaFlow Device.device. STAAR Surgical AG also controls a major European sales subsidiary that distributes both the Company’s products and products from various other manufacturers. Investment in the subsidiary was increased from 80% to 100% during the fourth quarter of 2002, when StaarSTAAR Surgical AG purchased the remaining shares of the subsidiary (see Note 7)9).
| |
| Canon Staar Joint Venture |
In 1988, the Company entered into a joint venture with Canon Inc. and Canon Sales Co., Inc. for the principal purpose of designing, manufacturing, and selling in Japan intraocular lenses and other ophthalmic products. The joint venture will market its products worldwide through Canon, Canon Sales or STAAR or such other distributors as the Board of Directors of the joint venture may approve. The terms of any distribution arrangement will require the unanimous approval of the Board of Directors of the joint venture. Each joint venture party is entitled to appoint one member of the Board of Directors of the joint venture. Certain matters require the unanimous approval of the directors. Upon the occurrence of certain events, including the merger, sale of substantially all of the assets or change in the management of one of the parties, any of the other parties may have the right to acquire the first party’s interest in the joint venture at book-value. The Company also granted to the joint venture a perpetual exclusive license under the Licensed Technology (as defined in the license agreement) to make and sell any products in Japan, and a perpetual non-exclusive license to do so in the rest of the world.
In 2001, the parties entered into a settlement agreement whereby (i) they reconfirmed the joint venture agreement and the license agreement, (ii) they agreed that the Company would promptly commence the transfer of the Licensed Technology to the joint venture, (iii) the Company granted the joint venture an exclusive license to make any products in China and sell such products in Japan and China (subject to the existing rights of third parties), (iv) the Company agreed to provide the joint venture with raw materials, (v) the joint venture granted Canon Sales Co., Inc. the right to distribute its products in Japan on specified terms, and (iv) the parties settled certain patent disputes.
F-8
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The accompanying consolidated financial statements include the accounts of the Company, its wholly
owned and its majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Assets and liabilities of foreign subsidiaries are translated at rates of exchange in effect at the close of the year. Revenues and expenses are translated at the weighted average of exchange rates in effect during the year. The resulting translation gains and losses are deferred and are shown as a separate component of stockholders’ equity as accumulated other comprehensive income (loss). During
2004, 2003
2002 and
2001,2002, the net foreign translation gain
(loss) was
$452,000, $683,000
$585,000 and
$(328,000),$585,000, respectively, and net foreign currency transaction loss was
$190,000, $107,000
and $458,000,
and $204,000, respectively.
Investment in the Company’s joint venture,
with CANON-STAAR Company,Canon Staar Co., Inc., is accounted for using the equity method of accounting
except for the nine-months ended September 29, 2001 when the investment was written off and earnings were recognized on a cash basis (see Note
4)6).
The Company’s fiscal year ends on the Friday nearest December 31 and each of the Company’s quarterly reporting periods generally
consistconsists of 13 weeks.
Summary
Going Concern
As of
Significant Accounting PoliciesRevenue Recognition
In general,December 31, 2004, the Company supplies foldable IOLshad $4.2 million of cash and cash equivalents and $5.1 million of short-term investments. However, due to a continued decline in U.S. sales, lower gross profit, and increased operating expenses the Company sustained significant losses and negative cash flows from operations for the year ended December 31, 2004. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
The FDA Warning Letters and 483 Observations (see Note 11) were significant contributors to the negative impact on operations. Sales were impacted because of the negative perception of the FDA issues in the ophthalmic community. Quality assurance consultants retained to assist the Company in preparing for re-audit by the FDA, accelerated investments in manufacturing engineering, and lower production volumes were among the significant factors impacting gross profit. Research and development and regulatory expenses increased as the Company took action to strengthen those areas.
The Company is not able to predict whether the FDA will conclude that the Company’s corrective actions to date or those included in its response to the 483 Observations satisfactorily resolve its concerns. Nor can the Company predict the likelihood, nature of, or timing of any additional action by the FDA or the impact of the 483 Observations or any other FDA action on the Company’s established lines of business, results of the operations or liquidity or the approval of the ICL for the United States market.
The Company expects to continue to experience negative cash flows, similar to those of fiscal 2004, until such time as the issues presented in the FDA Warning Letter dated December 22, 2003 and the 483 Observations are resolved and the ICL is approved for sale in the U.S. To enhance its ability to continue as a going concern through the year ended December 30, 2005, the Company expects to take the following actions: (1) continue to aggressively address FDA issues; (2) work closely with the independent sales force and ophthalmic community to reverse the negative perceptions and sales trends of the Company’s existing lines of business; (3) further reduce discretionary spending; (4) seek other sources of funding; and (5) explore other strategic and financial options. However, there can be no assurance as to the availability or terms upon which capital might be obtained or that the Company will be successful in executing its other strategies. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
F-9
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue Recognition
The Company recognizes revenue when realized or realizable and earned, which is when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the sale price is fixed and determinable; and collectibility is reasonably assured. We record revenue from product sales when title and risk of ownership has been transferred to the customer, which is typically upon delivery to the customer. The exception to this recognition policy is revenue from intraocular lenses distributed on a consignment basis, which is recognized upon notification of implantation in a patient.
The Company may bundle the sale of phacoemulsification equipment to customers
primarily ophthalmologists, surgical centers, hospitals and other eye care providers andwith multi-year agreements to purchase minimum quantities of foldable IOLs. The Company recognizes
sales when the
revenue from the equipment based on monthly purchases of minimum quantities of IOLs
areSTAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Years Ended January 2, 2004, January 3, 2003 and December 28, 2001
implanted. Salesover the life of all other products, including sales to foreign distributors, are generally recognized upon shipment.
the agreement.
Revenue from license and technology agreements is recorded as income, when earned, according to the terms of the respective agreements.
The Company generally permits returns of product if such product is returned within the time allowed by the Company, and in good condition. Allowances for returns are provided for based upon an analysis of our historical patterns of returns matched against the sales from which they originated. To date, historical product returns have been within the Company’s estimates.
The Company maintains provisions for uncollectible accounts for estimated losses resulting from the inability of its customers to remit payments. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer collection issues that have been identified.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk principally consist of trade receivables. This risk is limited due to the large number of customers comprising the Company’s customer base, and their geographic dispersion. Ongoing credit evaluations of customers’ financial condition are performed and, generally, no collateral is required. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management’s expectations.
The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities along with net operating loss and credit carryforwards. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset may not be realized. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period of enactment.
Cash, Cash Equivalents, and Restricted Cash The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Short-Term Investments
Short-term investments are classified as available for sale and are reported at fair value. Unrealized holding gains and losses, if any, net of the related income tax effect, are excluded from income and are reported in other comprehensive income. Realized gains and losses are included in income on the specific identification method.
F-10
Inventories
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories
Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Inventory costs are comprised of material, direct labor, and overhead. The Company records inventory provisions, based on a review of forecasted demand and inventory levels.
Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation on property, plant, and equipment is computed using the straight-line method over the estimated useful lives of the assets, generally ranging from
53 to 10 years. Major improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred.
Demonstration Equipment
In the normal course of business, the Company maintains demonstration and bundled equipment, primarily phacoemulsification surgical equipment, for the purpose and intent of selling similar equipment or related products to the customer in the future. Demonstration equipment is not held for sale and is recorded as property, plant and equipment. The assets are amortized utilizing the straight-line method over their estimated economic life not to exceed three years.
Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets,” on December 29, 2001.
Goodwill, which has an indefinite life and was previously amortized on a straight-line basis over the periods benefited, is no longer amortized to earnings but instead is subject to periodic testing for impairment. Intangible assets determined to have definite lives are amortized over their remaining useful lives. Goodwill of a reporting unit is tested for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. As provided under SFAS
No. 142,
the initial testing of goodwill for possible impairment was completed within the first six months of 2002 and an annual assessment was completed during fiscal year
2003,2004 and no impairment
has beenwas identified. As of
January 2,December 31, 2004, the carrying value of goodwill was
$6.4$7.5 million.
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Years Ended January 2, 2004, January 3, 2003 and December 28, 2001
In accordance with SFAS 142, prior period amounts were not restated. The net loss for the years ended December 28, 2001, adjusted for the exclusion of amortization of goodwill, would have been $375,000 less than reported and the loss per share would have decreased by $0.02.
The Company also has other intangible assets consisting of patents and licenses, with a gross book value of $11.6$11.5 million and accumulated amortization of $5.6$6.1 million as of January 2,December 31, 2004. The Company capitalizes the costs of acquiring patents and licenses. Amortization is computed on the straight-line basis over the estimated useful lives, which are based on legal and contractual provisions, and range from 10 to 20 years. Aggregate amortization expense for amortized other intangible assets was $688,000, $952,000 $933,000 and $884,000$933,000 for the years ended December 31, 2004, January 2, 2004 and January 3, 2003, and December 28, 2001, respectively.
F-11
The weighted average amortization period for other intangible assets is approximately 9 years.
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table shows the estimated amortization expense for these assets for each of the five succeeding years (in thousands):
| | | |
Fiscal Year | | | |
2004 | | $ | 674 |
2005 | | | 479 |
2006 | | | 479 |
2007 | | | 479 |
2008 | | | 479 |
| | |
|
|
Total | | $ | 2,590 |
| | |
|
|
| | | | | | |
| Fiscal Year | | |
| | | |
| 2005 | | $ | 481 | |
| 2006 | | | 479 | |
| 2007 | | | 479 | |
| 2008 | | | 479 | |
| 2009 | | | 478 | |
| | | | |
| | Total | | $ | 2,396 | |
| | | | |
Impairment of Long-Lived Assets In accordance with SFAS No.
144—“Accounting144, “Accounting for the Impairment of Long-Lived Assets,” intangible and other long lived-assets are reviewed for impairment whenever events such as product discontinuance, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount may not be recoverable. In reviewing for impairment, the Company compares the carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets’ fair value and their carrying value.
During the year ended January 2, 2004, the Company wrote down $2.1 million (net book value) in capitalized patent costs in connection with its routine evaluation of patent costs. The write-down related to patents acquired in the purchase of its majority interest in Circuit Tree Medical, a developer and manufacturer of phacoemulsification equipment, whose ongoing operations were moved to the Company’s Monrovia, CA facility during the quarter. The Company believes the write-down was necessary based upon the subsidiary’s historical losses and management’s uncertainty about whether the Company will be able to recover the cost. There were no
other impairments of long-lived assets identified during the year ended
January 2,December 31, 2004.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results may materially differ from those estimates.
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Years Ended January 2, 2004, January 3, 2003 and December 28, 2001
Fair Value of Financial Instruments The carrying values reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and notes payable approximate their fair values because of the short maturity of these instruments.
The Company presents loss per share data in accordance with the provision of SFAS No. 128, “Earnings per Share” (“SFAS 128”),Share,” which provides for the calculation of Basicbasic and Diluteddiluted earnings per share. Loss per share of common stock is computed by using the weighted average number of common shares outstanding during the period. Common stock equivalents are not included in the determination of the weighted average number of shares outstanding, as they would be antidilutive. For the years ended December 31, 2004, January 2, 2004, and January 3, 2003, and December 28, 2001, 0, 0, and 5,000 warrants and3.1 million, 3.2 million, 3.1 million, and 2.93.1 million options to purchase shares of the Company’s common stock, respectively, were outstanding.excluded from the computation.
F-12
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company accounts for stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and has adopted the disclosure provisions of SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”). SFAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB 25. If the APB 25 intrinsic value method of accounting is used, SFAS 123 requires pro forma disclosures of net income and earnings per share as if the fair value based method of accounting for stock based compensation had been applied. The Company records expense in an amount equal to the excess of the quoted market price on the grant date over the option price. Such expense is recognized at the grant date for options fully vested. For options with a vesting period, the expense is recognized over the vesting period.
SFAS
No. 123, “Accounting for Stock-Based Compensation” requires the Company to provide pro forma information regarding net income and earnings per share as if compensation expense for the Company’s stock option plans had been determined in accordance with the fair value based method. The fair value of each stock option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
| | | | | | | | | |
| | | 2003
| | | 2002
| | | 2001
| |
Dividend yield | | 0 | % | | 0 | % | | 0 | % |
Expected volatility | | 69 | % | | 66 | % | | 64 | % |
Risk-free interest rate | | 4.37 | % | | 4.50 | % | | 4.50 | % |
Expected holding period (in years) | | 4.8 | | | 5.4 | | | 5.4 | |
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Dividend yield | | | 0 | % | | | 0 | % | | | 0 | % |
| Expected volatility | | | 72 | % | | | 69 | % | | | 66 | % |
| Risk-free interest rate | | | 4.22 | % | | | 4.37 | % | | | 4.50 | % |
| Expected holding period (in years) | | | 4.2 | | | | 4.8 | | | | 5.4 | |
The weighted average fair value of options granted during the year ended
December 31, 2004, January 2, 2004
and January 3, 2003
and December 28, 2001, werewas $2.14 to $4.55, $1.91 to $7.10
and $1.27 to $2.44,
and $0.55 to $3.72, respectively.
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Years Ended January 2, 2004, January 3, 2003 and December 28, 2001
Pro forma net loss and loss per share for fiscal
yearyears 2004, 2003
2002 and
20012002, had the Company accounted for stock options issued to employees and others in accordance with the fair value method of SFAS 123, are as follows (in thousands, except per share data):
| | | | | | | | | | | | |
| | | 2003
| | | 2002
| | | 2001
| |
Net loss | | | | | | | | | | | | |
As reported | | $ | (8,357 | ) | | $ | (16,778 | ) | | $ | (15,000 | ) |
Add: Stock-based employee compensation expense included in reported net loss | | | — | | | | — | | | | — | |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards | | | (1,563 | ) | | | (1,679 | ) | | | (1,488 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Pro forma | | $ | (9,920 | ) | | $ | (18,457 | ) | | $ | (16,488 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Basic and diluted loss per share | | | | | | | | | | | | |
As reported | | $ | (0.47 | ) | | $ | (0.98 | ) | | $ | (0.88 | ) |
Pro forma | | $ | (0.56 | ) | | $ | (1.08 | ) | | $ | (0.97 | ) |
| | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Net loss | | | | | | | | | | | | |
| | As reported | | $ | (11,332 | ) | | $ | (8,357 | ) | | $ | (16,778 | ) |
| Add: Stock-based employee compensation expense included in reported net loss | | | — | | | | — | | | | — | |
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards | | | (739 | ) | | | (1,563 | ) | | | (1,679 | ) |
| | | | | | | | | | |
| | Pro forma | | $ | (12,071 | ) | | $ | (9,920 | ) | | $ | (18,457 | ) |
| | | | | | | | | | |
| Basic and diluted loss per share | | | | | | | | | | | | |
| | As reported | | $ | (0.58 | ) | | $ | (0.47 | ) | | $ | (0.98 | ) |
| | Pro forma | | $ | (0.62 | ) | | $ | (0.56 | ) | | $ | (1.08 | ) |
The Company presents comprehensive losses in its Consolidated Statement of Changes in Stockholders’ Equity in accordance with SFAS No. 130, “Reporting Comprehensive Income” (“SFAS 130”). Total comprehensive loss includes, in addition to net loss, changes in equity that are excluded from the consolidated
F-13
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
statements of operations and are recorded directly into a separate section of stockholders’ equity on the consolidated balance sheets.
Comprehensive loss and its components consist of the following (in thousands):
| | | | | | | | | | | | |
| | | 2003
| | | 2002
| | | 2001
| |
Net loss | | $ | (8,357 | ) | | $ | (16,778 | ) | | $ | (15,000 | ) |
Foreign currency translation adjustment | | | 683 | | | | 1,617 | | | | (146 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Comprehensive loss | | $ | (7,674 | ) | | $ | (15,161 | ) | | $ | (15,146 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Net loss | | $ | (11,332 | ) | | $ | (8,357 | ) | | $ | (16,778 | ) |
| Foreign currency translation adjustment | | | 452 | | | | 683 | | | | 1,617 | |
| | | | | | | | | | |
| Comprehensive loss | | $ | (10,880 | ) | | $ | (7,674 | ) | | $ | (15,161 | ) |
| | | | | | | | | | |
Segments of an Enterprise The Company reports segment information in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). Under SFAS 131 all publicly traded companies are required to report certain information about the operating segments, products, services and geographical areas in which they operate and their major customers. While the Company has expanded its marketing focus beyond the cataract market to include the refractive and glaucoma markets, the cataract market remains its primary source of revenues and, accordingly,
the Company operates as one business segment (Note
15)17).
Research and Development Costs Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Years Ended January 2, 2004, January 3, 2003 and December 28, 2001
Certain reclassifications have been made to the prior year consolidated financial statements to conform to the
20032004 presentation.
New Accounting Pronouncements In April 2003,October 2004, the American Jobs Creation Act of 2004 (“Act”) became effective in the U.S. Two provisions of the Act may impact the Company’s provision (benefit) for income taxes in future periods, namely those related to the qualified production activities deduction (“QPA”) and foreign earnings repatriation (“FER”).
The QPA will be effective for the Company’s U.S. federal tax return year beginning after December 31, 2004. In summary, the Act provides for a percentage deduction of earnings from qualified production activities, as defined, commencing with an initial deduction of 3 percent for tax years beginning after 2009, with the result that the statutory federal tax rate currently applicable to the Company’s qualified production activities of 35 percent could be reduced initially to 33.95 percent and ultimately to 31.85 percent. However, the Act also provides for the phased elimination of the extraterritorial income exclusion provision of the Internal Revenue Code, which have previously resulted in tax benefits to the Company. Due to the interaction of the law provisions noted above as well as the particulars of the Company’s tax position, the ultimate effect of the QPA on the Company’s future provision (benefit) for income taxes has not been determined at this time. The Financial Accounting Standards Board (“FASB”) issued SFASFASB Staff Position FAS 109-1, “Application of FASB Statement No. 149, “Amendment109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (“FSP 109-1”), in December 2004. FSP 109-1 requires that tax benefits resulting from the QPA should be recognized no earlier than the year in which they are reported in the entity’s tax return, and that there is to be no revaluation of recorded deferred tax assets and liabilities as would be the case had there been a change in an applicable statutory rate.
F-14
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The FER provision of the Act provides generally for a one-time 85 percent dividends received deduction for qualifying repatriations of foreign earnings to the U.S. Qualified repatriated funds must be reinvested in the U.S. in certain qualifying activities and expenditures, as defined by the Act. In December 2004, the FASB issued FASB Staff Position FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”). FSP 109-2 allows additional time for entities potentially impacted by the FER provision to determine whether any foreign earnings will be repatriated under this provision. At this time, the Company has not undertaken an evaluation of the application of the FER provision and any potential benefits of effecting such repatriations under this provision. Numerous factors, including previous actual and deemed repatriations under federal tax law provisions, are factors impacting the availability of the FER provision to the Company and its potential benefit to the Company, if any. The Company intends to examine the issue and will provide updates in subsequent periods.
In November 2004, the FASB issued Statement of
Financial Accounting Standards
133 on Derivative Instruments and Hedging Activities” (“
SFAS 149”SFAS”)
. SFAS 149 No. 151, “Inventory Costs.” This statement amends
and clarifiesthe guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for
derivative instruments, including certain derivative instruments embedded in other contracts,abnormal amounts of idle facility expense, freight, handling costs, and
for hedging activities underwasted materials (spoilage). SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities.”151 requires that those items be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to costs of conversions be based upon the normal capacity of the production facilities. The provisions of SFAS
149 is generallyNo. 151 are effective for
contracts entered into or modifiedinventory cost incurred in fiscal years beginning after June
30, 2003 and for hedging relationships designated after June 30, 2003.15, 2005. As such, the Company is required to adopt these provisions at the beginning of fiscal 2006. The adoption of
SFAS 149 didthis pronouncement is not
expected to have a material effect on the Company’s financial
position, results of operations, or cash flows.statements.
In May 2003,December 2004, the FASB issued SFAS No. 150,123R, “Share-Based Payment.” This statement is a revision of SFAS No. 123, “Accounting for Certain Instruments with CharacteristicsStock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123R addresses all forms of Both Liabilitiesshare-based payment (“SBP”) awards including shares issued under employee stock purchase plans, stock options, restricted stock and Equity,” (“stock appreciation rights. Under SFAS 150”) which establishes standards for how an issuer classifies and measures certain financial instruments with characteristicsNo. 123R, SBP awards result in a cost that will be measured at fair value on the awards’ grant date, based on the estimated number of both liabilities and equity. SFAS 150 requiresawards that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances).are expected to vest. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginningpublic entities as of the first interim or annual reporting period that begins after June 15, 2005. The Company has not quantified the potential effect of adoption of SFAS No. 123R, but believes that the adoption of this statement will result in a decrease to earnings.
In December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets.” This statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
20032005. Earlier application is permitted for
public companies.nonmonetary asset exchanges occurring in fiscal periods beginning after December 16, 2004. The provisions of this statement should be applied prospectively. The adoption of
SFAS 150 did not have a material impact on the Company’s financial statements.In December 2003, the FASB issued Interpretation No. 46 (“FIN 46R”) (revised December 2003), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 (“ARB 51”), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (“FIN 46”), which was issued in January 2003. Before concluding that it is appropriate to apply the ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entitythis pronouncement is not a variable interest entity (“VIE”). As of the effective date of FIN 46R, an enterprise must evaluate its involvement with all entities or legal structures created before February 1, 2003,expected to determine whether consolidation requirements of FIN 46R apply to those entities. There is no grandfathering of existing entities. Public companies must apply either FIN 46 or FIN 46R immediately to entities created after December 15, 2003 and no later than the end of the first reporting period that ends after March 15, 2004 to entities considered to be special purpose entities. The adoption of FIN 46(R) had no effect on our consolidated financial position, results of operations, or cash flows.
In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104 (SAB No. 104), “Revenue Recognition,” which codifies, revises and rescinds certain sections of SAB No. 101, “Revenue Recognition,” in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on our consolidated results of operations, consolidatedthe Company’s financial position or consolidated cash flows.
statements. F-15
STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYears Ended — (Continued)
| |
| Note 2 — | Short-Term Investments |
Short-term investments consisted of the following at December 31, 2004 and January 3, 2003,2, 2004 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 |
| | | | | | |
| | | | | Market | | | | | Market |
| | | Cost | | | Value | | | Cost | | Value |
| | | | | | | | | | | |
| Auction rate securities | | $ | 5,125 | | | $ | 5,125 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | $ | 5,125 | | | $ | 5,125 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | |
The short-term investments are comprised solely of taxable auction-rate securities within a closed-end fund with no stated maturity date. Due to the fact that these investments have frequent interest rate resets, the Company did not have any gross unrealized gains or losses at December
28, 2001NOTE 1—ACCOUNTS RECEIVABLE
31, 2004 or January 2, 2004. The Company classifies the securities as available for sale investments.
| |
| Note 3 — | Accounts Receivable |
Accounts receivable consisted of the following at
December 31, 2004 and January 2, 2004
and January 3, 2003 (in thousands):
| | | | | | |
| | | 2003
| | 2002
|
Domestic | | $ | 2,834 | | $ | 3,435 |
Foreign | | | 3,575 | | | 3,362 |
| | |
|
| |
|
|
| | | | 6,409 | | | 6,797 |
Less allowance for doubtful accounts and sales returns | | | 891 | | | 805 |
| | |
|
| |
|
|
| | | $ | 5,518 | | $ | 5,992 |
| | |
|
| |
|
|
NOTE 2—INVENTORIES
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| Domestic | | $ | 2,602 | | | $ | 2,834 | |
| Foreign | | | 4,075 | | | | 3,575 | |
| | | | | | | |
| | | | 6,677 | | | | 6,409 | |
| Less allowance for doubtful accounts and sales returns | | | 460 | | | | 734 | |
| | | | | | | |
| | | $ | 6,217 | | | $ | 5,675 | |
| | | | | | | |
Inventories consisted of the following at
December 31, 2004 and January 2, 2004
and January 3, 2003 (in thousands):
| | | | | | |
| | | 2003
| | 2002
|
Raw materials and purchased parts | | $ | 830 | | $ | 710 |
Work in process | | | 1,273 | | | 798 |
Finished goods | | | 10,699 | | | 10,253 |
| | |
|
| |
|
|
| | | $ | 12,802 | | $ | 11,761 |
| | |
|
| |
|
|
NOTE 3—PROPERTY, PLANT AND EQUIPMENT
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| Raw materials and purchased parts | | $ | 985 | | | $ | 830 | |
| Work in process | | | 2,253 | | | | 1,273 | |
| Finished goods | | | 11,846 | | | | 10,699 | |
| | | | | | | |
| | | $ | 15,084 | | | $ | 12,802 | |
| | | | | | | |
| |
| Note 5 — | Property, Plant and Equipment |
Property, plant and equipment consisted of the following at December 31, 2004 and January 2, 2004 (in thousands):
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| Machinery and equipment | | $ | 12,388 | | | $ | 12,791 | |
| Furniture and fixtures | | | 4,378 | | | | 3,808 | |
| Leasehold improvements | | | 4,826 | | | | 4,608 | |
| | | | | | | |
| | | | 21,592 | | | | 21,207 | |
| Less accumulated depreciation and amortization | | | 15,429 | | | | 14,569 | |
| | | | | | | |
| | | $ | 6,163 | | | $ | 6,638 | |
| | | | | | | |
F-16
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Depreciation expense for the years ended December 31, 2004, January 2, 2004, and January 3, 2003
(in thousands): | | | | | | |
| | | 2003
| | 2002
|
Machinery and equipment | | $ | 12,791 | | $ | 14,147 |
Furniture and fixtures | | | 3,808 | | | 5,378 |
Leasehold improvements | | | 4,608 | | | 4,577 |
| | |
|
| |
|
|
| | | | 21,207 | | | 24,102 |
Less accumulated depreciation and amortization | | | 14,569 | | | 16,664 |
| | |
|
| |
|
|
| | | $ | 6,638 | | $ | 7,438 |
| | |
|
| |
|
|
Depreciation expense for the years ended January 2, 2004, January 3, 2003 and December 28, 2001 was $2.0 million, $2.0 million and $2.2 million, and $2.4 million, respectively.
NOTE 4—INVESTMENT IN JOINT VENTURE
| |
| Note 6 — | Investment in Joint Venture |
The Company owns a 50% equity interest in a joint venture, the
CANON-STAAR Company,Canon Staar Co., Inc. (“CSC”), with Canon Inc. and Canon Sales Co, Inc., together the “Canon
Companies.” The Company sold CSC an exclusive license to manufacture, market and sell the Company’s IOL products in Japan.Companies” (see Note 1). The investment in the Japanese joint venture is accounted for using the equity method of accounting except for the
nine-monthsnine months ended September 29, 2001 when income was recorded on a cash basis due to disputes between the Company and the
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Canon Companies.Companies which were resolved during the fourth quarter of 2001. Dividends received, relating to periods when the Company accounted for its investment on a cash basis, were charged to earnings on a cash basis. For all other periods, dividends are recorded under the equity method. Duringmethod as a reduction to the fourth quarter of fiscal year 2001, the Company executed an agreement with the Canon Companies resolving all claims between the parties and reaffirming the partnering arrangement to manufacture and distribute ophthalmic products based on the Company’s technology.
investment.
The financial statements of CSC include
assets of approximately $11.0 and $9.1 million, and liabilities of approximately $2.7 million and $1.7 million, as of January 2, 2004 and January 3, 2003, respectively.the following information:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
| Current assets | | $ | 6,237 | | | $ | 7,728 | |
| Non-current assets | | | 1,402 | | | | 3,297 | |
| Current liabilities | | | 1,238 | | | | 1,881 | |
| Non-current liabilities | | | 807 | | | | 829 | |
| Net sales | | | 10,908 | | | | 9,273 | |
| Gross profit | | | 4,572 | | | | 3,237 | |
| Income from operations | | | 6,163 | | | | 122 | |
| Net loss | | $ | (304 | ) | | $ | 22 | |
The Company’s equity in earnings
(loss) of the joint venture is calculated as follows (in thousands):
| | | | | | | | | | | | |
| | | 2003
| | | 2002
| | | 2001
| |
Joint venture net income (loss) | | $ | 22 | | | $ | (8 | ) | | $ | 134 | |
Equity interest | | | 50 | % | | | 50 | % | | | 50 | % |
| | |
|
|
| |
|
|
| |
|
|
|
Total joint venture net income (loss) | | | 11 | | | | (4 | ) | | | 67 | |
Cash basis dividends | | | — | | | | 40 | | | | 322 | |
| | |
|
|
| |
|
|
| |
|
|
|
Equity in earnings of joint venture | | $ | 11 | | | $ | 36 | | | $ | 389 | |
| | |
|
|
| |
|
|
| |
|
|
|
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Joint venture net income (loss) | | $ | (382 | ) | | $ | 22 | | | $ | (8 | ) |
| Equity interest | | | 50 | % | | | 50 | % | | | 50 | % |
| | | | | | | | | | |
| Total joint venture net income (loss) | | | (191 | ) | | | 11 | | | | (4 | ) |
| Cash basis dividends | | | — | | | | — | | | | 40 | |
| | | | | | | | | | |
| Equity in earnings (loss) of joint venture | | $ | (191 | ) | | $ | 11 | | | $ | 36 | |
| | | | | | | | | | |
The Company received
dividend incomedividends of
$81,000, $76,000
and $40,000
during 2004, 2003 and
$322,000 during 2003, 2002,
and 2001, respectively.
The Company recorded sales of certain IOL products to CSC of approximately $185,000, $66,000 and $142,000 in 2004, 2003 and $118,0002002, respectively.
The Company purchased preloaded injectors from CSC in
the amount of $1.7 million, $239,000, and $0 in 2004, 2003,
and 2002,
and 2001, respectively.
NOTE 5—NOTES PAYABLE
The Company had a $7 million line of credit with a domestic lender which was amended and restated from time to time during the fiscal 2003 and 2002. The Company’s obligation to the lender was secured by a first priority lien on substantially all of the Company’s assets and included certain financial covenants. The note carried an interest rate equal to the prime rate (4.25% at January 3, 2003), plus interest margin and commitment fees of 5% and 1.25% per annum, respectively. Borrowings outstanding under the note as of January 3, 2003 were approximately $2.9 million, with total borrowings of up to $3.7 million available under
F-17
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the
agreement.line of credit. During 2003, the note, which was originally due March 31, 2003, was extended one year to March 31, 2004. In June 2003, the Company paid off the note and canceled the line of credit.
The
Subsidiaries of the Company has twohave foreign credit facilities with different banks to support operations in Switzerland and Germany.
The Swiss credit agreement,
whichas amended on August 2, 2004, provides for borrowings of up to
4.03.75 million Swiss Francs “CHF” (approximately
$3.2$3.3 million based on the rate of exchange on
January 2,December 31, 2004),
and permits either fixed-term or current advances. The interest rate on current advances is 6.0%
and 6.5% per annum at
January 2,December 31, 2004 and January
3, 2003,2, 2004, respectively, plus a commission rate of
.25%0.25% payable quarterly.
There were no current advances outstanding at December 31, 2004 or January 2, 2004. The base interest rate for fixed-term advances follows Euromarket conditions for loans of a corresponding term and currency, plus an individual margin
(4.2%(4.5% at December 31, 2004 and
4.6%4.2% at January 2,
2004 and January 3, 2003)2004). Borrowings outstanding under the
notefacility were CHF
3.73.4 million
at December 31, 2004 (approximately $3.0 million based on the rate of exchange at
January 2,December 31, 2004) and CHF
4.23.7 million
at January 2, 2004 (approximately $3.0 million based on the rate of exchange on January
3, 2003)2, 2004). The credit facility is secured by a general assignment of claims and includes positive and negative covenants which,
among other things, require the maintenance of a minimum level of equity of at least
CHF 15.8$12.0 million
(approximately $12.7 million based onand prevents the
exchange rate on January 2, 2004), prevents theSwiss subsidiary from entering into other secured obligations or
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
guaranteeing the obligations of others. The agreement also prohibits repaymentthe sale or transfer of loans made by the Company to the subsidiarypatents or licenses without the prior consent of the lender. This financial covenant was not met as of January 2, 2004lender and the bank has waived such non-compliance.
terms of intercompany receivables may not exceed 90 days.
The Swiss credit facility is divided into two
parts:parts. Part A provides for borrowings of up to CHF 3.0 million ($
2.42.7 million based on the exchange rate on
January 2,December 31, 2004) and does not have a termination
date;date. Part B
presently provides for borrowings of up to CHF
1.0 million750,000 ($
0.8 million662,000 based on the exchange rate on
January 2,December 31, 2004). The loan amount under Part B of the agreement reduces by CHF 250,000 ($
200,000220,000 based on the exchange rate on
January 2,December 31, 2004)
semi-annually beginning June 30, 2002.semi-annually.
The German credit agreement, entered into during fiscal year 2003, provides for borrowings of up to 210,000 EUR ($
263,000 at286,000 based on the
exchange rate
of exchange on
January 2,December 31, 2004), at a rate of 8.5% per annum
is scheduled to mature in November 2004.and renews automatically each November. The agreement prohibits
theour German subsidiary from paying dividends and is personally guaranteed by the president of the
Company’s German subsidiary.
This agreement replaced a previous credit agreement with another German bank that provided for borrowings during fiscal year 2002 of up to 200,000 EUR ($207,000 at the exchange rate on January 3, 2003), and carried interest at a rate of 8.5%. There were no borrowings outstanding
under either agreement at January 2,as of December 31, 2004 or January
3, 2003.NOTE 6—INCOME TAXES
2, 2004.
The Company was in compliance with the covenants of credit facilities as of December 31, 2004.
The provision (benefit) for income taxes consists of the following (in thousands):
| | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Current tax provision (benefit): | | | | | | | | | | | | |
| | U.S. federal | | $ | — | | | $ | — | | | $ | (995 | ) |
| | State | | | — | | | | — | | | | (74 | ) |
| | Foreign | | | 1,057 | | | | 1,127 | | | | 742 | |
| | | | | | | | | | |
| Total current provision (benefit) | | | 1,057 | | | | 1,127 | | | | (327 | ) |
| | | | | | | | | | |
| Deferred tax provision (benefit): | | | | | | | | | | | | |
| | U.S. federal and state | | | — | | | | — | | | | 9,021 | |
| | Foreign | | | — | | | | — | | | | 111 | |
| | | | | | | | | | |
| Total deferred provision (benefit) | | | — | | | | — | | | | 9,132 | |
| | | | | | | | | | |
| Provision (benefit) for income taxes | | $ | 1,057 | | | $ | 1,127 | | | $ | 8,805 | |
| | | | | | | | | | |
| | | | | | | | | | | |
| | | 2003
| | 2002
| | | 2001
| |
Current tax provision (benefit): | | | | | | | | | | | |
U.S. federal | | $ | — | | $ | (995 | ) | | $ | 484 | |
State | | | — | | | (74 | ) | | | 146 | |
Foreign | | | 1,127 | | | 742 | | | | 258 | |
| | |
|
| |
|
|
| |
|
|
|
Total current provision (benefit) | | | 1,127 | | | (327 | ) | | | 888 | |
| | |
|
| |
|
|
| |
|
|
|
Deferred tax provision (benefit): | | | | | | | | | | | |
U.S. federal and state | | | — | | | 9,021 | | | | (4,537 | ) |
Foreign | | | — | | | 111 | | | | — | |
| | |
|
| |
|
|
| |
|
|
|
Total deferred provision (benefit) | | | — | | | 9,132 | | | | (4,537 | ) |
| | |
|
| |
|
|
| |
|
|
|
Provision (benefit) for income taxes | | $ | 1,127 | | $ | 8,805 | | | $ | (3,649 | ) |
| | |
|
| |
|
|
| |
|
|
|
F-18
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Legislation enacted on March 9, 2002 (HR 3090) enabled the Company to carryback a portion of the federal 2001 net operating loss to 1996, 1997 and 1998. Since this legislation was not enacted as of the end of fiscal year 2001, the benefit of $959,000 from this carryback was recorded in 2002. As of
January 2,December 31, 2004, the Company had
$48.9$63.6 million of federal net operating loss carryforwards available to reduce future income taxes. The net operating loss carryforwards expire in varying amounts between 2020 and
2023.2024.
The Company has net income taxes payable at
December 31, 2004 and January 2, 2004
of $420,000 and
January 3, 2003 of $416,000,
and $348,000, respectively.
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The provision (benefit) for income before taxes differs from the amount computed by applying the statutory federal income tax rate to income before taxes as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | 2003
| | | 2002
| | | 2001
| |
Computed provision for taxes based on income at statutory rate | | $ | (2,435 | ) | | 34.0 | % | | $ | (2,685 | ) | | 34.0 | % | | $ | (6,293 | ) | | 34.0 | % |
Increase (decrease) in taxes resulting from: | | | | | | | | | | | | | | | | | | | | | |
Write down of investment in Circuit Tree Medical Inc. | | | 715 | | | (10.0 | ) | | | — | | | — | | | | — | | | — | |
Permanent differences | | | 23 | | | (0.3 | ) | | | 38 | | | (0.5 | ) | | | 39 | | | (0.2 | ) |
State taxes, net of federal income tax benefit | | | — | | | (0.0 | ) | | | 1,305 | | | (16.5 | ) | | | (763 | ) | | 4.1 | |
Tax effect attributed to foreign operations | | | 107 | | | (1.5 | ) | | | (1,245 | ) | | 15.8 | | | | (345 | ) | | 1.9 | |
Valuation allowance | | | 2,717 | | | (37.9 | ) | | | 11,392 | | | (144.3 | ) | | | 3,713 | | | (20.1 | ) |
| | |
|
|
| | | | |
|
|
| | | | |
|
|
| | | |
Effective tax provision (benefit) rate | | $ | 1,127 | | | (15.7 | )% | | $ | 8,805 | | | (111.5 | )% | | $ | (3,649 | ) | | 19.7 | % |
| | |
|
|
| | | | |
|
|
| | | | |
|
|
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Computed provision for taxes based on income at statutory rate | | $ | (3,484 | ) | | | 34.0 | % | | $ | (2,435 | ) | | | 34.0 | % | | $ | (2,685 | ) | | | 34.0 | % |
| Increase (decrease) in taxes resulting from: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Write down of investment in Circuit Tree Medical Inc. | | | — | | | | — | | | | 715 | | | | (10.0 | ) | | | — | | | | — | |
| | Permanent differences | | | 36 | | | | (0.3 | ) | | | 23 | | | | (0.3 | ) | | | 38 | | | | (0.5 | ) |
| | State taxes, net of federal income tax benefit | | | — | | | | (0.0 | ) | | | — | | | | (0.0 | ) | | | 1,305 | | | | (16.5 | ) |
| | Tax effect attributed to foreign operations | | | 158 | | | | (1.5 | ) | | | 107 | | | | (1.5 | ) | | | (1,245 | ) | | | 15.8 | |
| | Other | | | 7 | | | | (0.1 | ) | | | — | | | | — | | | | — | | | | — | |
| | Valuation allowance | | | 4,340 | | | | (42.4 | ) | | | 2,717 | | | | (37.9 | ) | | | 11,392 | | | | (144.3 | ) |
| | | | | | | | | | | | | | | | | | | |
| Effective tax provision (benefit) rate | | $ | 1,057 | | | | (10.3 | )% | | $ | 1,127 | | | | (15.7 | )% | | $ | 8,805 | | | | (111.5 | )% |
| | | | | | | | | | | | | | | | | | | |
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $10.7$12.1 million at January 2,December 31, 2004. Undistributed earnings are considered to be indefinitely reinvested and, accordingly, no provision for United States federal and state income taxes has been provided thereon. Upon distribution of earnings in the form of dividends or otherwise, the Company would be subject to both United States income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred United States income tax liability is not practicable because of the complexities associated with its hypothetical calculation.
F-19
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets (liabilities) as of
January 2,December 31, 2004 and January
3, 20032, 2004 are as follows (in thousands):
| | | | | | | | |
| | | 2003
| | | 2002
| |
Current deferred tax assets (liabilities): | | | | | | | | |
Allowance for doubtful accounts and sales returns | | $ | 114 | | | $ | 131 | |
Inventory | | | 611 | | | | 576 | |
Accrued vacation | | | 156 | | | | 153 | |
State taxes | | | 3 | | | | 3 | |
Deferred revenue | | | 6 | | | | 33 | |
Valuation allowance | | | (890 | ) | | | (896 | ) |
| | |
|
|
| |
|
|
|
Total current deferred tax assets (liabilities) | | $ | — | | | $ | — | |
| | |
|
|
| |
|
|
|
Non-current deferred tax assets (liabilities): | | | | | | | | |
Net operating loss and capital loss carryforwards | | | 19,141 | | | | 14,804 | |
Business, foreign and AMT credit carryforwards | | | 876 | | | | 1,132 | |
Depreciation and amortization | | | 194 | | | | (781 | ) |
Reserve for notes receivable | | | — | | | | 744 | |
Reserve for restructuring costs | | | 429 | | | | 1,573 | |
Subpart F income | | | 267 | | | | 103 | |
Capitalized R&D | | | 246 | | | | 136 | |
Contributions | | | 32 | | | | — | |
Valuation allowance | | | (21,185 | ) | | | (17,711 | ) |
| | |
|
|
| |
|
|
|
Total non-current deferred tax assets (liabilities) | | $ | — | | | $ | — | |
| | |
|
|
| |
|
|
|
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
Current deferred tax assets (liabilities): | | | | | | | | |
| | Allowance for doubtful accounts and sales returns | | $ | 143 | | | $ | 114 | |
| | Inventory | | | 475 | | | | 611 | |
| | Accrued vacation | | | 171 | | | | 156 | |
| | State taxes | | | 3 | | | | 3 | |
| | Deferred revenue | | | 79 | | | | 6 | |
| | Accrued expenses | | | 21 | | | | — | |
| | Valuation allowance | | | (892 | ) | | | (890 | ) |
| | | | | | | |
| | | Total current deferred tax assets (liabilities) | | $ | — | | | $ | — | |
| | | | | | | |
Non-current deferred tax assets (liabilities): | | | | | | | | |
| | Net operating loss and capital loss carryforwards | | | 25,508 | | | | 19,141 | |
| | Business, foreign and AMT credit carryforwards | | | 880 | | | | 876 | |
| | Depreciation and amortization | | | (54 | ) | | | 194 | |
| | Notes receivable | | | 207 | | | | — | |
| | Reserve for restructuring costs | | | 450 | | | | 429 | |
| | Subpart F income | | | — | | | | 267 | |
| | Capitalized R&D | | | 252 | | | | 246 | |
| | Contributions | | | 37 | | | | 32 | |
| | Valuation allowance | | | (27,280 | ) | | | (21,185 | ) |
| | | | | | | |
| | | Total non-current deferred tax assets (liabilities) | | $ | — | | | $ | — | |
| | | | | | | |
SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”) requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset may not be realized. Cumulative losses weigh heavily in the assessment of the need for a valuation allowance. In 2002, due to the Company’s recent history of losses, an increase to the valuation allowance was recorded as a non-cash charge to tax expense in the amount of $9.0 million. As a result, the valuation allowance fully offsets the value of deferred tax assets on the Company’s balance sheet as of
January 2,December 31, 2004.
Under Section 382 of the Internal Revenue Code, significant changes in ownership may restrict the future utilization of these tax loss carry forwards.
In 1995, a subsidiary of the Company obtained retrospectively to 1993, a ten-year tax holiday for the payment of federal, cantonal and municipal income taxes in Switzerland. As such, Swiss income taxes were not due on the operations of this subsidiary for the ten year period that ended on December 31, 2002.
For 2003, asAs the tax holiday from Swiss taxes has expired, the appropriate federal, cantonal and municipal income taxes have been included in the foreign tax provision.
Income (loss) before income taxes are as follows (in thousands):
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Domestic | | $ | (12,887 | ) | | $ | (10,163 | ) | | $ | (14,066 | ) |
| Foreign | | | 2,641 | | | | 3,001 | | | | 6,168 | |
| | | | | | | | | | |
| | | $ | (10,246 | ) | | $ | (7,162 | ) | | $ | (7,898 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | |
| | | 2003
| | | 2002
| | | 2001
| |
Domestic | | $ | (10,163 | ) | | $ | (14,066 | ) | | $ | (20,311 | ) |
Foreign | | | 3,001 | | | | 6,168 | | | | 1,801 | |
| | |
|
|
| |
|
|
| |
|
|
|
| | | $ | (7,162 | ) | | $ | (7,898 | ) | | $ | (18,510 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
F-20
NOTE 7—BUSINESS ACQUISITIONS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| Note 9 — | Business Acquisitions |
During the year ended December 31, 2004, the Company purchased the remaining 20% interest in its Australian subsidiary for $1.3 million, in exchange for $768,000 in cash and a long-term note in the amount of $542,000 due on November 1, 2007. The transaction resulted in the recording of goodwill of $1.1 million. The Company also entered into employment agreements with the previous minority owners of the subsidiary. The employment agreements expire on November 1, 2007 and include clauses to not compete for a period of one year after termination for any cause, except in the event of a change in control.
Pro forma amounts for the acquisition are not included, as the effect on operations is not material to the Company’s consolidated financial statements.
During the year ended January 3, 2003, the Company acquired the remaining 20% interest in its German subsidiary at its book value of $426,000, from the subsidiary’s president in exchange for cancellation of amounts due from the subsidiary’s president of $955,000 less bonuses due to the subsidiary’s president of $87,000, resulting in goodwill of $442,000. The terms of the agreement also provided for the cancellation of 75,000 unexercised stock options previously issued to the subsidiary’s president and an agreement not to compete with the Company for a period of ten years.
For the years ended January 2, 2004 and January 3, 2003, the Company reflected the activity as a wholly owned subsidiary, whereas for the year ended December 28, 2001, the 20% interest that was not owned was reflected as a minority interest on the consolidated statement of operations.Pro forma amounts for the acquisition are not included, as the effect on operations is not material to the Company’s consolidated financial statements.
NOTE 8—STOCKHOLDERS’ EQUITY
| |
| Note 10 — | Stockholders’ Equity |
During fiscal year 2004, the Company issued 11,000 shares to consultants for services rendered to the Company. Also during 2004, the Company completed a private placement with institutional investors of 2 million shares of the Company’s common stock, for net proceeds of $11.6 million.
During fiscal year 2003, the Company issued 11,000 shares to consultants for services rendered to the Company and
42,00043,000 shares, in lieu of bonuses earned, to an officer and director of the Company. Also during 2003, the Company completed a private placement with institutional investors of 1 million shares of the Company’s common stock, for net proceeds of $8.9 million.
During fiscal year 2002, the Company issued 39,000 shares to consultants for services rendered to the Company and 3,000 shares to an employee relating to an employment contract. Also during 2002, the Company acquired 243,000 shares of treasury stock from a former officer in settlement of notes receivable.
During fiscal year 2001, the Company issued 191,000 shares to consultants for services rendered to the Company.
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Receivables from Officers and Directors As of
December 31, 2004 and January 2, 2004,
and January 3, 2003, notes receivable
(excluding reserves) from former officers and directors totaling
$2.3$2.1 million and
$5.5$2.3 million, respectively, were outstanding. The notes were issued in connection with purchases of the Company’s common stock and bear interest at rates ranging between
5.00%1.98% and 6.40% per annum, or at the lowest federal applicable rate allowed by the Internal Revenue Service. The notes are secured by stock pledge agreements and other assets and mature on various dates through June 1, 2006.
As
During the year ended December 31, 2004, the Company entered into a forbearance agreement with a former director of January 2,the Company whereby the due date of the $1.2 million note receivable was extended from June 15, 2004 to March 15, 2005 and January 3, 2003 reservesthe interest rate was reduced to 1.986%, which was the lowest applicable federal rate at the date of the agreement.
During the year ended December 31, 2004, the Company recorded a $500,000 reserve against the notes receivable from officers and directors were $0 andof a former director of the Company which total $1.8 million respectively.including accrued interest. The notes are
F-21
During fiscal year 2002,
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
collateralized by the
CompanyCompany’s common stock and
its former Chief Executive Officer, John R. Wolf, dismissed all legal actions between them pursuant to a
settlement agreement dated November 12, 2002.second mortgage on a home in Florida. The
agreement provided for completion of Mr. Wolf’s transfer of 243,000 shares of Company stock pursuant to the Form 4 executed May 9, 2000, in satisfaction of $2.1 million in promissory notes executed by Mr. Wolf in favorcurrent value of the
Company.Also duringcollateral is approximately $1.3 million. The amount of the reserve is based on the difference between the note amount and the collateral value.
During the year ended January 3, 2003, the Company entered into a promissory note in the amount of $560,000 pursuant to the terms of a settlement agreement with a law firm, of which a principal was a former officer, director and stockholder of the Company. Terms of the note, secured by trade accounts receivable of the law firm, include interest at the rate of 5% with monthly payment of principal and interest due beginning July 1, 2002 through June 1, 2006. During the years ended
January 2,December 31, 2004 and January
3, 2003,2, 2004, payments against the note were received in the amount of
$180,000 and $100,000,
and $80,000, respectively.
The
Also during the year ended January 3, 2003, the Company entered into a second promissory note in the amount of $2.2 million, pursuant to the terms of the same settlement agreement, with the former officer’s widow. Terms of the note, secured by a stock pledge agreement, included interest at the rate of 5% with principal and interest due on or before March 29, 2006. The note also provided for escalation in the interest rate to 9.75% if the bid price of the Company’s common stock traded at $8.00 or greater on any public stock exchange for a period of 20 consecutive trading days, or if the stock permanently ceased to trade on any public stock exchange. Additionally, the note provided an acceleration of payment in the event the closing bid price of the common stock of the Company traded at $10.00 or greater on any public stock exchange for a period of 20 consecutive trading days. The note was paid in full in July 2003.
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The table below summarizes the transactions in the Company’s stock option plans (in thousands except per share data):
| | | | | | |
| | | Number of
Shares
| | | Weighted
Average Exercise
Price
|
Balance at December 29, 2000 | | 1,892 | | | $ | 9.95 |
Options granted | | 1,114 | | | $ | 6.98 |
Options exercised | | (18 | ) | | $ | 3.57 |
Options forfeited / cancelled | | (77 | ) | | $ | 9.77 |
| | |
|
| |
|
|
Balance at December 28, 2001 | | 2,911 | | | $ | 8.85 |
Options granted | | 972 | | | $ | 3.73 |
Options exercised | | — | | | $ | — |
Options forfeited / cancelled | | (746 | ) | | $ | 10.55 |
| | |
|
| |
|
|
Balance at January 3, 2003 | | 3,137 | | | $ | 6.86 |
Options granted | | 553 | | | $ | 4.52 |
Options exercised | | (387 | ) | | $ | 4.03 |
Options forfeited / cancelled | | (84 | ) | | $ | 5.89 |
| | |
|
| |
|
|
Balance at January 2, 2004 | | 3,219 | | | $ | 6.84 |
| | |
|
| |
|
|
Options exercisable (vested) at January 2, 2004 | | 2,541 | | | $ | 7.44 |
| | |
|
| |
|
|
| | | | | | | | | |
| | | | | Weighted | |
| | | | | Average | |
| | | Number of | | | Exercise | |
| | | Shares | | | Price | |
| | | | | | | |
| Balance at December 28, 2001 | | | 2,911 | | | $ | 8.85 | |
| Options granted | | | 972 | | | $ | 3.73 | |
| Options exercised | | | — | | | $ | — | |
| Options forfeited/ cancelled | | | (746 | ) | | $ | 10.55 | |
| | | | | | | |
| Balance at January 3, 2003 | | | 3,137 | | | $ | 6.86 | |
| Options granted | | | 553 | | | $ | 4.52 | |
| Options exercised | | | (387 | ) | | $ | 4.03 | |
| Options forfeited/ cancelled | | | (84 | ) | | $ | 5.89 | |
| | | | | | | |
| Balance at January 2, 2004 | | | 3,219 | | | $ | 6.84 | |
| Options granted | | | 531 | | | $ | 7.76 | |
| Options exercised | | | (250 | ) | | $ | 3.32 | |
| Options forfeited/ cancelled | | | (348 | ) | | $ | 8.27 | |
| | | | | | | |
| Balance at December 31, 2004 | | | 3,152 | | | $ | 7.12 | |
| | | | | | | |
| Options exercisable (vested) at December 31, 2004 | | | 2,535 | | | $ | 7.27 | |
| | | | | | | |
In fiscal year 2003, the Board of Directors approved the 2003 Omnibus Equity Incentive Plan (the “2003 Plan”) authorizing the granting of options to purchase or awards of the Company’s common stock. The 2003 Plan amends, restates and replaces the 1991 Stock Option Plan, the 1995 Consultant Stock Plan, the 1996 Non-Qualified Stock Plan and the 1998 Stock Option Plan (the “Restated Plans”). Under provisions of the 2003 Plan, all of the unissued shares in the Restated Plans are reserved for issuance in the 2003 Plan. In addition, 2% of the total shares of common stock outstanding on the immediately preceding December 31 will be reserved for issuance under the 2003 Plan. Options under the plan are granted at fair market value on the
F-22
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
date of grant, become exercisable over a 3-year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. Pursuant to the plan, options for
522,000 and 83,000 shares were outstanding at
December 31, 2004 and January 2, 2004,
respectively, with exercise prices ranging between $3.00
ad $10.99and $11.24 per share.
In fiscal year
2001,2000, the Board of Directors approved the Stock Option Plan and Agreement for the Company’s Chief Executive Officer authorizing the granting of options to purchase or awards of the Company’s common stock.
Generally,The options under the plan are granted at fair market value
aton the date of grant, become exercisable over a 3-year period,
or as determined by the Board of Directors, and expire 10 years from the date of grant. Pursuant to this plan, options for 500,000 were outstanding at
December 31, 2004, January 2, 2004,
and January 3, 2003,
and December 28, 2001, respectively, with an exercise price of $11.125.
In fiscal year 1998, the Board of Directors approved the 1998 Stock Option Plan, authorizing the granting of incentive options and/or non-qualified options to purchase or awards of the Company’s common stock. Under the provisions of the plan, 1.0 million shares were reserved for issuance; however, the maximum number of shares authorized may be increased provided such action is in compliance with Article IV of the
Plan.plan. During fiscal year 2001, pursuant to Article IV of the
Plan,plan, the stockholders of the Company authorized an additional 1.5 million shares. Generally, options under the plan are granted at fair market value at the date of the grant, become exercisable over a 3-year period, or as determined by the Board of Directors, and expire over periods not
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
exceeding 10 years from the date of grant. Pursuant to the plan, options for 1.6 million, 1.9 million 1.5 million and 1.41.5 million shares were outstanding at December 31, 2004, January 2, 2004, and January 3, 2003, and December 28, 2001, respectively, with exercise prices ranging between $2.00 and $13.875 per share.
In fiscal year 1996, the Board of Directors approved the 1996 Non-Qualified Stock Plan, authorizing the granting of options to purchase or awards of the Company’s common stock. Under provisions of the Non-Qualified Stock Plan, 600,000 shares were reserved for issuance. Generally, options under the plan are granted at fair market value at the date of the grant, become exercisable over a 3-year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. Pursuant to this plan, options for 146,000,
170,000146,000, and 170,000 shares were outstanding at
December 31, 2004, January 2, 2004,
and January 3, 2003,
and December 28, 2001, respectively. The options were originally issued with an exercise price of $12.50 per share. During fiscal year 1998 the exercise price was reduced to $6.25 per share by action of the Board of Directors.
In fiscal year 1995, the Company adopted the 1995 Consultant Stock Plan, authorizing the granting of options to purchase or awards of the Company’s common stock. Generally, options under the plan are granted at fair market value at the date of the grant, become exercisable on the date of grant and expire 10 years from the date of grant. Pursuant to this plan, options for
165,000, 330,000,
and 545,000
and 472,000shares were outstanding at
December 31, 2004, January 2, 2004,
and January 3, 2003,
and December 28, 2001, respectively.respectively, with exercise prices ranging from $1.70 to $3.99 per share.
Under provisions of the Company’s 1991 Stock Option Plan, 2.0 million shares were reserved for issuance. Generally, options under this plan are granted at fair market value at the date of the grant, become exercisable over a 3-year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. At
December 31, 2004, January 2, 2004,
and January 3, 2003,
and December 28, 2001 options for
163,000, 220,000,
379,000 and
384,000379,000 shares were outstanding, with exercise prices ranging
betweenfrom $9.56 to $11.25 per share.
In fiscal year 2004, officers, employees and others exercised 250,000 options from the 1995, 1998 and 2003 stock option plans at prices ranging from $1.90 to $4.65 resulting in cash proceeds totaling $829,000.
In fiscal year 2003, officers, employees and others exercised 387,000 options from the 1991, 1996 and 1998 stock option plans at prices ranging from $2.00 to $9.56 resulting in cash proceeds totaling $1.6 million.
F-23
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In fiscal year 2002, no options were exercised from any of the Company’s stock option plans.
In fiscal year 2001, officers, employees and others exercised 18,000 options from the 1991 and 1996 stock option plans at prices ranging from $2.50 to $6.25 resulting in cash proceeds totaling $62,000.
The following table summarizes information about stock options outstanding and exercisable at
January 2,December 31, 2004 (in thousands, except per share data):
| | | | | | | | | | |
Range of Exercise Prices
| | Number
Outstanding at
1/02/04
| | Options
Outstanding
Weighted-Average Remaining
Contractual Life
| | Weighted-Average
Exercise Price
| | Number Exercisable
at 01/02/04
| | Weighted-Average
Exercise Price
|
| | | (in thousands) | | | | | | (in thousands) | | |
$ 1.70 to $ 2.15 | | 206 | | 4.5 years | | $ 1.94 | | 184 | | $ 1.92 |
$ 2.82 to $ 4.12 | | 1,216 | | 5.4 years | | $ 3.50 | | 738 | | $ 3.46 |
$ 4.62 to $ 6.25 | | 453 | | 3.7 years | | $ 5.61 | | 368 | | $ 5.81 |
$ 7.40 to $11.25 | | 1,162 | | 6.1 years | | $10.64 | | 1,069 | | $10.67 |
$12.50 to $13.88 | | 182 | | 7.0 years | | $13.56 | | 182 | | $13.56 |
| |
| |
| |
| |
| |
|
$ 1.70 to $13.88 | | 3,219 | | 5.5 years | | $ 6.84 | | 2,541 | | $ 7.44 |
| |
| |
| |
| |
| |
|
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Warrants
The table below summarizes the transactions related to warrants to purchase the Company’s common stock:
| | | | | | |
| | | Number of Shares
| | | Weighted Average Exercise Price
|
Balance at December 28, 2001 | | 5,000 | | | $ | 1.20 |
Warrants exercised | | (5,000 | ) | | $ | 1.20 |
| | |
|
| |
|
|
Balance at January 2, 2004 and January 3, 2003 | | 0 | | | $ | 0 |
| | |
|
| |
|
|
NOTE 9—COMMITMENTS AND CONTINGENCIES
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Options | | | | | | | |
| | | | | Outstanding | | | | | | | |
| | | Number | | | Weighted-Average | | | | | Number | | | |
| Range of | | | Outstanding at | | | Remaining | | | Weighted-Average | | | Exercisable at | | | Weighted-Average | |
| Exercise Prices | | | 12/31/04 | | | Contractual Life | | | Exercise Price | | | 12/31/04 | | | Exercise Price | |
| | | | | | | | | | | | | | | | | |
| | | (In thousands) | | | | | | | (In thousands) | | | |
| | $ 1.70 to $ 2.15 | | | | 160 | | | | 3.1 years | | | $ | 1.93 | | | | 160 | | | $ | 1.93 | |
| | $ 2.96 to $ 4.30 | | | | 1,037 | | | | 4.1 years | | | $ | 3.54 | | | | 821 | | | $ | 3.52 | |
| | $ 4.62 to $ 6.25 | | | | 402 | | | | 0.8 years | | | $ | 5.61 | | | | 365 | | | $ | 5.64 | |
| | $ 7.00 to $10.19 | | | | 620 | | | | 6.2 years | | | $ | 8.75 | | | | 314 | | | $ | 9.67 | |
| | $10.60 to $13.88 | | | | 933 | | | | 3.9 years | | | $ | 11.54 | | | | 875 | | | $ | 11.58 | |
| | | | | | | | | | | | | | | | | |
| | $ 1.70 to $13.88 | | | | 3,152 | | | | 4.0 years | | | $ | 7.12 | | | | 2,535 | | | $ | 7.27 | |
| | | | | | | | | | | | | | | | | |
| |
| Note 11 — | Commitments and Contingencies |
The Company leases certain property, plant and equipment under capital and operating lease agreements.
Annual These leases vary in duration and many contain renewal options and/or escalation clauses.
Estimated future minimum lease payments under
leases having initial or remaining non-cancelable
operating lease
commitmentsterms in excess of one year as of
January 2,December 31, 2004
arewere approximately as follows (in thousands):
| | | |
Fiscal Year
| | |
2004 | | $ | 1,218 |
2005 | | | 1,135 |
2006 | | | 608 |
2007 | | | 11 |
2008 | | | — |
| | |
|
|
Total | | $ | 2,972 |
| | |
|
|
| | | | | | | | | |
| | | Operating | | | Capital | |
| Fiscal Year | | Leases | | | Leases | |
| | | | | | | |
| 2005 | | $ | 927 | | | $ | 92 | |
| 2006 | | | 435 | | | | 6 | |
| 2007 | | | 435 | | | | 3 | |
| 2008 | | | 437 | | | | 2 | |
| 2009 | | | 52 | | | | 2 | |
| | | | | | | |
| Total minimum lease payments | | $ | 2,286 | | | $ | 105 | |
| Less amounts representing interest | | | — | | | | (8 | ) |
| | | | | | | |
| | | $ | 2,286 | | | $ | 97 | |
| | | | | | | |
| Current | | | | | | $ | 86 | |
| Long-term | | | | | | | 11 | |
| | | | | | | |
| Total | | | | | | $ | 97 | |
| | | | | | | |
Rent expense was approximately $1.2 million,
$1.1$1.2 million, and $1.1 million for each of the years ended
December 31, 2004, January 2, 2004
and January 3, 2003,
and December 28, 2001, respectively.
In May 1999, the Company entered into a license and supply agreement with another manufacturer to license and re-sell one of the manufacturer’s products. Under the terms of the agreement, the Company was committed to purchase the specified product for a total sum of $3.2 million over 18 months. In September 2001, the supply agreement was amended reducing the minimum contractual amount that the Company is
F-24
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
obligated to purchase from the manufacturer to $2.5 million over a
24 month24-month period commencing September 1, 2001. The agreement, which was cancelable upon
4four months written notice, was terminated during the quarter ended January 2, 2004 at no additional expense. Purchases under the agreement for fiscal
20032004 and
20022003 were approximately
$0 and $954,000,
and $1.3 million, respectively.
In December 2000, the Company entered into a minimum purchase agreement with another manufacturer for the purchase of viscoelastic solution. In addition to the minimum purchase requirement, the Company is also obligated to pay an annual regulatory maintenance fee. The agreement contains provisions to increase the minimum annual purchases in the event that the seller gains regulatory approval of the product in other markets, as requested by the Company. Purchases under the agreement for fiscal
20032004 and
20022003 were approximately
$644,000 and $568,000,
and $383,000, respectively.
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of
January 2,December 31, 2004, estimated annual purchase commitments under these contracts are as follows (in thousands):
| | | |
Fiscal Year
| | |
2004 | | $ | 1,066 |
2005 | | | 600 |
2006 | | | 200 |
| | |
|
|
Total | | $ | 1,866 |
| | |
|
|
| | | | | | |
| Fiscal Year | | |
| | | |
| 2005 | | $ | 1,022 | |
| 2006 | | | 200 | |
| | | | |
| | Total | | $ | 1,222 | |
| | | | |
FDA Warning LetterOn December 29, 2003, theLetters and 483 Observations
The Company received a Warning Letter issued by the U.S. Food and Drug Administration (FDA)FDA, dated December 22, 2003 which outlined certain deficiencies related to the Company’s manufacturing and quality assurance systems of its Monrovia, California facility. To assist it in correcting the issues raised in the Warning Letter, the Company engaged the services of Quintiles Consulting (“Quintiles”), a well regarded consulting organization that specializes in FDA related compliance matters. The Company, with Quintiles’ help, assessed the state of its quality system in light of the FDA’s concerns, developed an improvement plan, and took corrective actions to improve the Company’s processes, procedures, and controls.
The Company received a second Warning Letter from the FDA dated April 26, 2004, which were identified during inspection auditsoutlined deficiencies noted in an audit by the FDA in December 2003. The Company provided the FDA with its planned corrective actions to the issues raised, and in a letter dated July 1, 2004, the FDA responded that they found the corrective and preventative action plans described in the Company’s response “adequate.”
On June 17, 2004, the FDA completed an audit of the Company’s Monrovia, CANidau, Switzerland manufacturing facility. The CompanyFDA did not observe any violations of Quality System and Good Manufacturing Practices requirements during this audit.
Costs associated with the preparation for these FDA inspections, and the improvements made to the quality assurance and regulatory compliance functions, contributed to the 22% increase in research and development expenses (which included regulatory and quality assurance expenses) for the year ended December 31, 2004, compared to fiscal 2003. Additionally, the Warning Letters and 483 Observations have affected the Company’s reputation in the ophthalmic market and have adversely affected product sales for the year ended December 31, 2004.
Until the FDA is aggressively pursuingsatisfied with the adequacy of the Company’s corrective actions, it may take further actions which could include conducting another inspection, seizure of the Company’s products, injunction of the Monrovia facility to remedycompel compliance (which may include suspension of production operations and/or recall of products), or other actions. Such actions could have a material adverse effect on the issuesCompany’s established lines of business, results of operations and does not expect the direct cost of these corrections to be significant. However,liquidity. Furthermore, until the FDA is satisfied with the Company’s response, it is unlikely to grant the Company cannot be granted approval on new products and could face restrictions on established domestic linesto market the ICL in the United States.
F-25
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company is not able to predict whether the FDA will conclude that the Company’s corrective actions to date or those included in its response to the 483 Observations satisfactorily resolve its concerns. Nor can the Company predict the likelihood, nature of,
business. While there can be no assurance that an adverse determinationor timing of any
of the items identifiedadditional action by the FDA
could not have a material adverseor the impact
in any future period, management does not believe, based upon information known to it, that the final resolution of
these matters will have a material adverse effect uponother FDA action on the Company’s
consolidated financial position and annualestablished lines of business, results of
the operations
and cash flows.or liquidity or the approval of the ICL for the United States market.
Indemnification Agreements The Company has entered into indemnification agreements with its directors and officers that may require the Company: to indemnify them 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;except as prohibited by applicable law; to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and to make a 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.
Since September 1, 2004, multiple class action lawsuits have been filed in the United States District Courts for the Central District of California and the District of New Mexico against the Company and its Chief Executive Officer on behalf of all persons who acquired the Company’s securities during various periods between April 3, 2003 and September 28, 2004. On December 15, 2004, the Court ordered consolidation of the complaints that had been filed in the United States District Court for the Central District of California and directed that the plaintiffs file a consolidated complaint as soon as practicable. The plaintiffs have proposed a stipulation pursuant to which they would file a consolidated amended complaint on or about April 29, 2005. The New Mexico action was voluntarily dismissed on January 28, 2005. The lawsuits generally allege that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by issuing false and misleading statements regarding intraocular lenses and implantable lenses, and failing timely to disclose significant problems with the lenses, as well as the existence of serious injuries and/or malfunctions attributable to the lenses, thereby artificially inflating the price of the Company’s Common Stock. The plaintiffs generally seek to recover compensatory damages, including interest. Although the Company intends to vigorously defend the consolidated lawsuit, the lawsuit will require significant attention of management and could result in substantial costs and harm our reputation.
The Company is
currently party to various claims and legal proceedings arising out of the normal course of
itsour business. These claims and legal proceedings relate to contractual rights and obligations, employment matters,
stockholder suits and claims of product liability. While
there can be no assurance that an adverse determination of any such matters could not have a material adverse impact in any future period, management doeswe do not believe
based upon informationthat any of the claims known to
it, that the final resolution of any of these matters willus is likely to have a material adverse effect
upon the Company’s consolidatedon our financial
position and annualcondition or results of operations,
and cash flows.NOTE 10—OTHER LIABILITIES
new claims or unexpected results of existing claims could lead to significant financial harm.
| |
| Note 12 — | Other Liabilities |
Other Current Liabilities Included in other current liabilities at December 31, 2004 and January 2, 2004 and January 3, 2003 are approximately $988,000$1,868,000 and $1.3 million$1,534,000 of accrued salaries and wages and $808,000 and $959,000 of commissions due to outside sales representatives, and accrued salaries and wages of $959,000 and $805,000 and income and other taxes payable of $579,000 and $728,000 million, respectively.
F-26
STAAR SURGICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)NOTE 11—RELATED PARTY TRANSACTIONS
| |
| Note 13 — | Related Party Transactions |
The Company has had significant related party transactions as discussed in Notes
4, 76, 9 and
8.10.
The Company issues options to purchase 60,000 shares of its common stock at fair market value on the date of grant to
memberseach member of its Board of Directors upon election or reelection for services provided as Board members.
In addition to secured notes (see Note
8)10), the Company holds other various promissory notes from
current and former officers and directors of the Company. The notes, which provide for interest at the lowest applicable rate allowed by the Internal Revenue Code, are due on demand. Amounts due from
former officers and directors and included in prepaids, deposits, and other current assets at
December 31, 2004 and January 2, 2004
were $104,000 and
January 3, 2003 were $98,000,
and $158,000, respectively.
In March 2001, the Company entered into a consulting agreement with one of the members of its Board of Directors. In exchange for services, the Company issued an option to purchase 20,000 shares of the Company’s common stock at fair market value on the date of grant, in addition to a monthly retainer of $6,000, and a per-diem rate after six days worked of $1,000. Upon the mutual consent of the parties, the agreement was cancelled in July 2003.
However, the Company has continued to pay the Board member for consulting services. Amounts paid
under the agreementto during the year ended
December 31, 2004, January 2, 2004,
and January 3, 2003,
were $13,000, $50,000, and
December 28, 2001, were $50,000, $73,000,
and $93,000, respectively.
The Company had a consulting contract with a corporation owned by an employee of one of its foreign subsidiaries. The consulting contract, which began October 1, 1999 and ending October 1, 2005, provided for monthly payments of $20,000 in exchange for specified services. During fiscal year 2001, the parties agreed to terminate the contract at a discount in exchange for cash and forgiveness of a note receivable due the subsidiary from the employee. Debt forgiveness totaled $658,000 (1.4 million DM at the exchange rate in effect on the settlement date). During fiscal year 2003, 2002, and 2001, amounts paid or accrued under the contract totaled $0, 0, and $180,000, respectively. During the year ended January 3, 2003, a pension obligation in the amount of $257,000 was paid to the employee, with additional amounts due cancelled during the year ended January 3, 2003 in exchange for the purchase of the remaining 20% interest of the subsidiary (see Note 7).
During fiscal year 2001, a law firm, of which a principal was an officer, director and stockholder of the Company, received approximately $1.5 million, for fees in connection with legal services performed on behalf of the Company.
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 12—SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
| |
| Note 14 — | Supplemental Disclosure of Cash Flow Information |
Interest paid was $159,000, $255,000 $580,000 and $640,000$580,000 for the years ended December 31, 2004, January 2, 2004 and January 3, 2003, and December 28, 2001, respectively. Income taxes paid amounted to approximately $1,602,000, $1,477,000 $719,000 and $479,000$719,000 for the years ended December 31, 2004, January 2, 2004 and January 3, 2003, and December 28, 2001, respectively. Income taxes paid in 2003 were partially offset by the receipt of $962,000 in U.S. federal tax refunds related to a carryback claim filed in 2002 (see Note 6)8).
The Company’s non-cash investing and financing activities were as follows (in thousands):
| | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Non-cash financing activities: | | | | | | | | | | | | |
| | Notes receivable from officers and directors (Note 8) | | $ | — | | | $ | — | | | $ | (2,129 | ) |
| | Notes receivable reserve | | | 500 | | | | 1,713 | | | | 1,814 | |
| | Prepaids, deposits and other current assets | | | — | | | | — | | | | (658 | ) |
| | Treasury stock acquired | | | — | | | | — | | | | 973 | |
| | Other charges | | | (500 | ) | | | (1,713 | ) | | | — | |
| Acquisition of business: | | | | | | | | | | | | |
| | Minority interest acquired | | $ | 203 | | | $ | — | | | $ | 426 | |
| | Goodwill | | | 1,107 | | | | — | | | | 442 | |
| | Note payable | | | (542 | ) | | | — | | | | (868 | ) |
| | Cash paid | | | (768 | ) | | | — | | | | — | |
| Patent impairment: | | | | | | | | | | | | |
| | Patents | | $ | — | | | $ | (2,438 | ) | | $ | — | |
| | Accumulated amortization | | | — | | | | 336 | | | | — | |
| | Other charges | | | — | | | | 2,102 | | | | — | |
| | | | | | | | | | | |
| | | 2003
| | | 2002
| | | 2001
|
Non cash financing activities: | | | | | | | | | | | |
Notes receivable from officers and directors (Note 8) | | $ | — | | | $ | (2,129 | ) | | $ | — |
Notes receivable reserve | | | 1,713 | | | | 1,814 | | | | — |
Prepaids, deposits and other current assets | | | — | | | | (658 | ) | | | — |
Treasury stock acquired | | | — | | | | 973 | | | | — |
Other charges | | | (1,713 | ) | | | — | | | | — |
| | | |
Acquisition of business: | | | | | | | | | | | |
Minority interest acquired | | $ | — | | | $ | 426 | | | $ | — |
Goodwill | | | — | | | | 442 | | | | — |
Cancellation of amounts receivable | | | — | | | | (868 | ) | | | — |
| | | |
Patent impairment: | | | | | | | | | | | |
Patents | | $ | (2,438 | ) | | $ | — | | | $ | — |
Accumulated amortization | | | 336 | | | | — | | | | — |
Other charges | | | 2,102 | | | | — | | | | — |
F-27
NOTE 13—OTHER CHARGES
In June 2001 management completed an extensive operational review of
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the Company. Based upon that review, in August 2001 the Company implemented a plan that management believes will allow the Company to become profitable. As a result of implementing the plan, the Company significantly changed its manufacturing processes and location including consolidating lathing activity into the Swiss manufacturing site from the dual site operations and reducing molded lens capacity at the California site. The Company also reduced its workforce and closed certain overseas operations. In conjunction with the implementation of the plan,year ended December 31, 2004, the Company recorded pretax chargesa $500,000 reserve against the notes of a former director of the Company which total $1.8 million including accrued interest. The notes are collateralized by the Company’s common stock and a second mortgage on a home in Florida. The current value of the collateral is approximately $7.8$1.3 million. The amount of the reserve is based on the difference between the note amount and the collateral value.
During 2003, the Company recorded $390,000 in other charges. The amount includes a charge of $2.1 million relating to the write-down of capitalized patent costs acquired in the purchase of the Company’s majority interest in Circuit Tree Medical, a developer and manufacturer of phacoemulsification equipment, and was partially offset by the reversal of $1.7 million in
the third and fourth quarters of fiscal year 2001. Planned charges include approximately $3.7 million in fixed asset write-offs, $300,000 in severance and employee relocation costs, and $1.0 million for subsidiary closures. Additionally, the Company reserved $2.1 million ofreserves previously recorded against notes receivable from
former officers and directors
ofwhich the Company
and paid $700,000 in consideration for the early termination of a consulting contract with the president of the Company’s German subsidiary.The Company also wrote off $6.4 million of inventory related to voluntary product recalls and excess and obsolete inventory in 2001, which is included in cost of sales at December 28, 2001.
has settled.
In connection with its business strategy to reduce operating expenses, announced during the third quarter of 2001, the Company completed the sale of its South African subsidiary and closure of its Swedish and Canadian subsidiaries during the year ended January 3, 2003. As a result of these transactions the Company recorded $1.2 million of subsidiary closure charges. The charges were primarily related to the recognition of deferred losses resulting from the translation of foreign currency statements into U.S. dollars (previously included in equity in the balance sheet in accordance with SFAS No. 52). Since the charges had been included in equity their subsequent recognition, while impacting retained earnings, had no impact on total stockholders’ equity.
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Also included in other charges at January 3, 2003 is $230,000 in employee separation costs.
During 2003, the Company recorded $390,000 in other charges. The amount includes a charge of $2.1 million relating to the write-down of capitalized patent costs acquired in the purchase of the Company’s majority interest in Circuit Tree Medical, a developer and manufacturer of phacoemulsification equipment and was partially offset by the reversal of $1.7 million in reserves previously recorded against notes receivable from officers and directors which the Company has settled.
NOTE 14—NET LOSS PER SHARE
| |
| Note 16 — | Net Loss Per Share |
The following is a reconciliation of the weighted average number of shares used to compute basic and diluted loss per share (in thousands):
| | | | | | |
| | | 2003
| | 2002
| | 2001
|
Basic weighted average shares outstanding | | 17,704 | | 17,142 | | 17,003 |
Diluted effect of stock options and warrants | | — | | — | | — |
| | |
| |
| |
|
Diluted weighted average shares outstanding | | 17,704 | | 17,142 | | 17,003 |
| | |
| |
| |
|
NOTE 15—GEOGRAPHIC AND PRODUCT DATA
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| Basic weighted average shares outstanding | | | 19,602 | | | | 17,704 | | | | 17,142 | |
| Diluted effect of stock options and warrants | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| Diluted weighted average shares outstanding | | | 19,602 | | | | 17,704 | | | | 17,142 | |
| | | | | | | | | | |
| |
| Note 17 — | Geographic and Product Data |
The Company markets and sells its products in over 3545 countries and has manufacturing sites in the United States and Switzerland. Other than the United States and Germany, the Company does not conduct business in any country in which its sales in that country exceed 5% of consolidated sales. Sales are attributed to countries based on location of customers. The composition of the Company’s sales to unaffiliated customers between those in the United States, Germany, and other locations for each year, is set forth below (in thousands).
| | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
Sales to unaffiliated customers | | | | | | | | | | | | |
| | U.S. | | $ | 21,643 | | | $ | 23,464 | | | $ | 24,082 | |
| | Germany | | | 22,128 | | | | 19,840 | | | | 16,081 | |
| | Other | | | 7,914 | | | | 7,105 | | | | 7,717 | |
| | | | | | | | | | |
| | | Total | | $ | 51,685 | | | $ | 50,409 | | | $ | 47,880 | |
| | | | | | | | | | |
| | | | | | | | | |
| | | 2003
| | 2002
| | 2001
|
Sales to unaffiliated customers | | | | | | | | | |
U.S. | | $ | 23,464 | | $ | 24,082 | | $ | 27,009 |
Germany | | | 19,840 | | | 16,081 | | | 14,907 |
Other | | | 7,105 | | | 7,717 | | | 8,321 |
| | |
|
| |
|
| |
|
|
Total | | $ | 50,409 | | $ | 47,880 | | $ | 50,237 |
| | |
|
| |
|
| |
|
|
F-28
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company develops, manufactures and distributes medical devices used in minimally invasive ophthalmic surgery. Substantially, all of the Company’s revenues result from the sale of the Company’s medical devices. The Company distributes its medical devices in the cataract, refractive and glaucoma segments within ophthalmology. While the Company has expanded its marketing focus beyond the cataract market to include the refractive and glaucoma markets, the cataract market remains the Company’s primary source of revenues and, therefore,
the Company operates as one business segment for financial reporting purposes.
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
Cataractcataract product line includes intraocular lenses, phacoemulsification equipment, viscoelastics, and other products used in cataract surgery. During the years presented, revenues from the
Refractiverefractive and
Glaucomaglaucoma product lines were
8%9% or less of total revenue. Accordingly, the difference is not significant enough for the Company to account for these products separately and, therefore,
those products are combined as
Other Productsother products in the following table.
Net Sales by Product Line(In thousands)
| | | | | | | | | |
| | | 2003
| | 2002
| | 2001
|
Cataract | | $ | 46,409 | | $ | 44,349 | | $ | 47,646 |
Other | | | 4,000 | | | 3,531 | | | 2,591 |
| | |
|
| |
|
| |
|
|
Total | | $ | 50,409 | | $ | 47,880 | | $ | 50,237 |
| | |
|
| |
|
| |
|
|
| | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | |
| | | (In thousands) | |
| Cataract | | $ | 46,772 | | | $ | 46,409 | | | $ | 44,349 | |
| Other | | | 4,913 | | | | 4,000 | | | | 3,531 | |
| | | | | | | | | | |
| | Total | | $ | 51,685 | | | $ | 50,409 | | | $ | 47,880 | |
| | | | | | | | | | |
The composition of the Company’s long-lived assets between those in the United States, Germany, Switzerland, and other countries is set forth below (in thousands).
| | | | | | |
| | | 2003
| | 2002
|
Long-lived assets | | | | | | |
U.S. | | $ | 10,181 | | $ | 13,633 |
Germany | | | 6,511 | | | 6,499 |
Switzerland | | | 2,220 | | | 2,467 |
Other | | | 212 | | | 304 |
| | |
|
| |
|
|
Total | | $ | 19,124 | | $ | 22,903 |
| | |
|
| |
|
|
| | | | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | | | | | |
Long-lived assets | | | | | | | | |
| | U.S. | | $ | 9,035 | | | $ | 10,181 | |
| | Germany | | | 6,799 | | | | 6,511 | |
| | Switzerland | | | 2,010 | | | | 2,220 | |
| | Other | | | 1,253 | | | | 212 | |
| | | | | | | |
| | | Total | | $ | 19,097 | | | $ | 19,124 | |
| | | | | | | |
The Company sells its products internationally, which subjects the Company to several potential risks, including fluctuating exchange rates (to the extent the Company’s transactions are not in U.S. dollars), regulation of fund transfers by foreign governments, United States and foreign export and import duties and tariffs, and political instability.
NOTE 16—QUARTERLY FINANCIAL DATA (UNAUDITED)
| |
| Note 18 — | Quarterly Financial Data (Unaudited) |
Summary unaudited quarterly financial data from continuing operations for fiscal 20032004 and 20022003 is as follows (in thousands except per share data):
| | | | | | | | | | | | | | | | | |
| December 31, 2004 | | 1st Qtr. | | | 2nd Qtr. | | | 3rd Qtr. | | | 4th Qtr. | |
| | | | | | | | | | | | | |
| Revenues | | $ | 13,569 | | | $ | 12,024 | | | $ | 12,140 | | | $ | 13,952 | |
| Gross profit | | | 7,317 | | | | 6,150 | | | | 6,097 | | | | 6,579 | |
| Net loss | | | (1,299 | ) | | | (3,380 | ) | | | (2,268 | ) | | | (4,385 | ) |
| Basic and diluted loss per share | | | (.07 | ) | | | (.18 | ) | | | (.11 | ) | | | (.21 | ) |
| | | | | | | | | | | | | | | | |
January 2, 2004
| | 1st Qtr.
| | | 2nd Qtr.
| | | 3rd Qtr.
| | | 4th Qtr.
| |
Revenues | | $ | 12,826 | | | $ | 12,951 | | | $ | 11,927 | | | $ | 12,754 | |
Gross profit | | | 6,979 | | | | 7,056 | | | | 6,587 | | | | 7,215 | |
Net loss | | | (958 | ) | | | (1,169 | ) | | | (2,710 | ) | | | (3,520 | ) |
Basic and diluted loss per share | | | (.06 | ) | | | (.07 | ) | | | (.15 | ) | | | (.19 | ) |
| | | | |
January 3, 2003
| | 1st. Qtr.
| | | 2nd Qtr.
| | | 3rd Qtr.
| | | 4th Qtr.
| |
Revenues | | $ | 11,731 | | | $ | 12,088 | | | $ | 11,201 | | | $ | 13,228 | |
Gross profit | | | 5,712 | | | | 6,024 | | | | 5,620 | | | | 6,793 | |
Net loss | | | (962 | ) | | | (3,844 | ) | | | (2,073 | ) | | | (9,899 | ) |
Basic and diluted loss per share | | | (.06 | ) | | | (.22 | ) | | | (.12 | ) | | | (.58 | ) |
F-29
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| January 2, 2004 | | 1st. Qtr. | | | 2nd Qtr. | | | 3rd Qtr. | | | 4th Qtr. | |
| | | | | | | | | | | | | |
| Revenues | | $ | 12,826 | | | $ | 12,951 | | | $ | 11,927 | | | $ | 12,754 | |
| Gross profit | | | 6,979 | | | | 7,056 | | | | 6,587 | | | | 7,215 | |
| Net loss | | | (958 | ) | | | (1,169 | ) | | | (2,710 | ) | | | (3,520 | ) |
| Basic and diluted loss per share | | | (.06 | ) | | | (.07 | ) | | | (.15 | ) | | | (.19 | ) |
Quarterly and year-to-date computations of loss per share amounts are made independently. Therefore, the sum of the per share amounts for the quarters may not agree with the per share amounts for the year.
F-30
INDEPENDENT CERTIFIEDREGISTERED PUBLIC ACCOUNTANTS’ACCOUNTING FIRM To the Board of Directors
The audits referred to in our report dated March
3, 2004,16, 2005, which includes an explanatory paragraph concerning substantial doubt about the Company’s ability to continue as a going concern, relating to the consolidated financial statements of STAAR Surgical Company and Subsidiaries, which is contained in Item 8 of this Annual Report on Form 10-K included the audit of Schedule II, Valuation and Qualifying Accounts and Reserves as of
January 2,December 31, 2004, and for each of the three years in the period ended
January 2,December 31, 2004. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audit.
In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
March 16, 2005
March 3, 2004
F-31
STAAR SURGICAL COMPANY AND SUBSIDIARIES SCHEDULE II—II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| | | | | | | | | | | | | | | | | | |
| Column A | | Column B | | | Column C | | | Column D | | | Column E | |
| | | | | | | | | | | | | |
| | | Balance at | | | | | | | Balance at | |
| | | Beginning | | | | | | | End of | |
| Description | | of Year | | | Additions | | | Deductions | | | Year | |
| | | | | | | | | | | | | |
| | | (In thousands) | |
| 2004 | | | | | | | | | | | | | | | | |
| | Allowance for doubtful accounts and sales returns deducted from accounts receivable in balance sheet | | $ | 734 | | | $ | 236 | | | $ | 510 | | | $ | 460 | |
| | Deferred tax asset valuation allowance | | | 22,075 | | | | 6,097 | | | | — | | | | 28,172 | |
| | Notes receivable reserve | | | — | | | | 500 | | | | — | | | | 500 | |
| | | | | | | | | | | | | |
| | | $ | 22,809 | | | $ | 6,833 | | | $ | 510 | | | $ | 29,132 | |
| | | | | | | | | | | | | |
| 2003 | | | | | | | | | | | | | | | | |
| | Allowance for doubtful accounts and sales returns deducted from accounts receivable in balance sheet | | $ | 805 | | | $ | 108 | | | $ | 179 | | | $ | 734 | |
| | Deferred tax asset valuation allowance | | | 18,607 | | | | 3,468 | | | | — | | | | 22,075 | |
| | Notes receivable reserve | | | 1,795 | | | | — | | | | 1,795 | | | | — | |
| | | | | | | | | | | | | |
| | | $ | 21,207 | | | $ | 3,576 | | | $ | 1,974 | | | $ | 22,809 | |
| | | | | | | | | | | | | |
| 2002 | | | | | | | | | | | | | | | | |
| | Allowance for doubtful accounts and sales returns deducted from accounts receivable in balance sheet | | $ | 768 | | | $ | 1,186 | | | $ | 1,149 | | | $ | 805 | |
| | Accrued restructuring costs | | | 100 | | | | — | | | | 100 | | | | — | |
| | Deferred tax asset valuation allowance | | | 4,288 | | | | 14,319 | | | | — | | | | 18,607 | |
| | Notes receivable reserve | | | 3,609 | | | | — | | | | 1,814 | | | | 1,795 | |
| | | | | | | | | | | | | |
| | | $ | 8,765 | | | $ | 15,505 | | | $ | 3,063 | | | $ | 21,207 | |
| | | | | | | | | | | | | |
F-32
| | | | | | | | | | | | |
Column A
| | Column B
| | Column C
| | Column D
| | Column E
|
Description
| | Balance at
Beginning
of Year
| | Additions
| | Deductions
| | Balance at
End of
Year
|
| | | (In thousands) |
2003 | | | | | | | | | | | | |
Allowance for doubtful accounts and sales returns deducted from accounts receivable in balance sheet | | $ | 805 | | $ | 265 | | $ | 179 | | $ | 891 |
Accrued restructuring costs | | | — | | | — | | | — | | | — |
Deferred tax asset valuation allowance | | | 18,607 | | | 4,311 | | | — | | | 22,918 |
Notes receivable reserve | | | 1,795 | | | — | | | 1,795 | | | — |
| | |
|
| |
|
| |
|
| |
|
|
| | | $ | 21,207 | | $ | 4,576 | | $ | 1,974 | | $ | 23,809 |
| | |
|
| |
|
| |
|
| |
|
|
2002 | | | | | | | | | | | | |
Allowance for doubtful accounts and sales returns deducted from accounts receivable in balance sheet | | $ | 768 | | $ | 1,186 | | $ | 1,149 | | $ | 805 |
Accrued restructuring costs | | | 100 | | | — | | | 100 | | | — |
Deferred tax asset valuation allowance | | | 4,288 | | | 14,319 | | | — | | | 18,607 |
Notes receivable reserve | | | 3,609 | | | — | | | 1,814 | | | 1,795 |
| | |
|
| |
|
| |
|
| |
|
|
| | | $ | 8,765 | | $ | 15,505 | | $ | 3,063 | | $ | 21,207 |
| | |
|
| |
|
| |
|
| |
|
|
2001 | | | | | | | | | | | | |
Allowance for doubtful accounts and sales returns deducted from accounts receivable in balance sheet | | $ | 781 | | $ | — | | $ | 13 | | $ | 768 |
Accrued restructuring costs | | | 2,236 | | | 100 | | | 2,236 | | | 100 |
Deferred tax asset valuation allowance | | | 1,511 | | | 2,777 | | | — | | | 4,288 |
Notes receivable reserve | | | 1,500 | | | 2,109 | | | — | | | 3,609 |
| | |
|
| |
|
| |
|
| |
|
|
| | | $ | 6,028 | | $ | 4,986 | | $ | 2,249 | | $ | 8,765 |
| | |
|
| |
|
| |
|
| |
|
|
F-28