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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 domestic and foreign lenders, the sale of Common Stock, the repayment of former directors’ notes, and the exercise of stock options.
As of December 28, 2007 and December 29, 2006, the Company had $11.0 million and $7.9 million, respectively, of cash, cash equivalents and restricted short-term investments.
Net cash used in operating activities was $11.2 million, $8.1 million, and $7.5 million for fiscal 2007, 2006, and 2005, respectively. For fiscal 2007, cash used in operations was the result of increased net losses, adjusted for depreciation, amortization, SFAS No. 123R stock compensation expense, and other miscellaneous non-cash items, and net decreases in working capital. The increase in cash used for operating activities was primarily due to payments associated with the Domilens investigation and decreased cash receipts in the U.S. due to the decline in sales. For fiscal 2006, cash used in operations was the result of increased net losses, adjusted for depreciation, amortization, expense related to the implementation of SFAS No. 123R, and other miscellaneous non-cash items, and further offset by increases in working capital. For fiscal 2005, cash used in operations was the result of the net loss, adjusted for depreciation, amortization, notes receivable reserves and other non-cash charges, and net increases in working capital.
Accounts receivable was $6.9 million in 2007 and $6.5 million in 2006. The increase in accounts receivable is due to increased sales in the international markets during fiscal 2007. Days’ Sales Outstanding (“DSO”) were 40 days in 2007 and 39 days in 2006. The Company expects to maintain DSO within a range of 40 to 45 days during the course of fiscal 2008.
Inventories at the end of fiscal 2007 and 2006 were $12.7 million and $12.9 million, respectively. Days’ inventory on hand were 162 days in 2007 and 162 days in 2006.
Net cash used in investing activities was approximately $4.7 million in fiscal 2007. In fiscal 2006 and 2005 the net cash provided by investing activities was approximately $140,000 and $4.1 million, respectively. Included in investing activities for fiscal 2007, was the $4.0 million advance payment toward the purchase price for the 50% acquisition of Canon Staar and the acquisition of $691,000 in property and equipment. Included in investing activities for fiscal 2006, was the receipt of $1.2 million in proceeds from former officer’s notes partially offset by the acquisition of $786,000 in property and equipment. Included in investing activities for fiscal 2005, were the purchase and sales of short-term investments and the acquisition of $1.2 million in property and equipment.
Net cash provided by financing activities was approximately $18.7 million, $2.8 million, and $12.2 million for fiscal 2007, 2006, and 2005, respectively. In 2007, cash provided by financing activities resulted from the receipt of net proceeds of $16.6 million from a public offering of 3.6 million shares of the Company’s common stock and $584,000 received from the exercise of the stock options. Additionally in 2007 the Company borrowed $9.0 million from Broadwood, of which $4 million was repaid in the second quarter and $5.0 million was intended to be used to fund the acquisition of the remaining 50% interest in the Canon joint venture and related transaction costs. In addition, the Company repaid $1.8 million outstanding on its line of credit and repaid $972,000 related to the 2004 acquisition of the minority interest of our Australian subsidiary and $692,000 in payments under capital lease lines of credit. In 2006, cash provided by financing activities resulted from the receipt of $2.9 million of proceeds from stock option exercises. In 2005, cash provided by financing activities resulted from the receipt of net proceeds of $13.4 million from a private placement of 4.1 million shares of the Company’s Common Stock and $130,000 received from the exercise of the stock options. During 2005, the Company used $1.3 million in cash generated from international operations to pay down the Company’s Swiss credit facility which was later terminated in 2007.
Credit Facilities, Contractual Obligations and Commitments
Credit Facilities
The Company has credit facilities with different lenders to support operations in the U.S. and Germany.
On December 14, 2007, the Company borrowed $5 million from Broadwood Partners, L.P. (“Broadwood”) pursuant to a Senior Promissory Note (the “Note”) between the Company and Broadwood. The
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borrowed funds were used to finance the cash consideration and related transaction costs in the Company’s purchase of the remaining interests in its Canon Staar Co., Inc. joint venture. The Note has a term of three years and bears interest at a rate of 7% per annum. The Note is not secured by any collateral, may be pre-paid by the Company at any time without penalty, and is not subject to covenants based on financial performance or financial condition (except for insolvency). The Note provides that, with certain exceptions, the Company will not incur indebtedness senior to or at parity with its indebtedness under the Note without the consent of Broadwood. As additional consideration for the loan the Company also entered into a Warrant Agreement (the “Warrant Agreement”) with Broadwood granting the right to purchase up to 700,000 shares of Common Stock at an exercise price of $4.00 per share, exercisable for a period of six years. The Note also provides that if the Company has any indebtedness outstanding on the Note on June 29, 2009, it will issue additional warrants on the same terms as set forth in the Warrant Agreement in a number equal to 700,000 times the percentage of the original $5 million principal that remains outstanding. The Note also gives Broadwood the right to participate on a pro rata basis in certain offerings of equity securities until the later of December 14, 2008 and the date the Note is no longer outstanding.
Based on representations made by Broadwood in the Promissory Note, on the date of the transaction Broadwood. beneficially owned 4,396,231 shares of the Company’s common stock, comprising 15% of the Company’s common stock as of December 14, 2007. Based on publicly available information filed by Broadwood, Neal Bradsher, President of Broadwood Partners, L.P., may have been deemed to beneficially own all of the 4,396,231 shares. Broadwood also holds a warrant to purchase 70,000 shares of Common Stock at an exercise price of $6.00 per share, which warrant was issued in connection with a loan of $4 million by Broadwood under a Promissory Note dated March 21, 2007. The March 21, 2007 Promissory Note was repaid in full on June 20, 2007.
The Company’s lease agreement with Farnam Street Financial, Inc., as amended on October 9, 2006, provides for purchases of up to $1,500,000 of property, plant and equipment. In accordance with the requirements of SFAS 13 “Accounting for Leases,” purchases under this facility are accounted for as capital leases and have a three-year term. Under the agreement, the Company has the option to purchase any item of the leased property, at the end of the respective items lease terms, at a mutually agreed fair value. On April 1, 2007, the Company signed an additional leasing schedule with Farnam, which provides for additional purchases of $800,000 during the next fiscal year. The terms of this new schedule conform to the amended agreement dated October 9, 2006. Approximately $364,000 in borrowings were available under this facility as of December 28, 2007.
The Company’s lease agreement with Mazuma Capital Corporation, as amended on August 16, 2006, provides for purchases of up to $301,000 of property, plant and equipment. In accordance with the requirements of SFAS 13 “Accounting for Leases,” purchases under this facility are accounted for as capital leases and have a two-year term. The Company was required to open a certificate of deposit as collateral in STAAR Surgical Company’s name at the underwriting bank for 50% of the assets funded by Mazuma. As of December 28, 2007, the Company had a certificate of deposit for approximately $150,000 recorded as “short-term investment — restricted” with a 12-month term at a fixed interest rate of 4.5%. The agreement also provides that the Company may elect to purchase any item of the leased property at the end of its lease term for $1. No borrowings were available under this facility as of December 28, 2007.
The Company’s German subsidiary, Domilens, entered into a credit agreement on August 30, 2005. The renewed credit agreement provides for borrowings of up to 100,000 EUR ($145,000 at the rate of exchange on December 28, 2007), at a rate of 8.5% per annum and does not have a termination date. The credit agreement may be terminated by the lender in accordance with its general terms and conditions. The credit facility is not secured. There were no borrowings outstanding as of December 28, 2007 and December 29, 2006 and the full amount of the line was available for borrowing as of December 28, 2007.
The Company was in compliance with the covenants of these credit facilities as of December 28, 2007.
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The following table represents the Company’s known contractual obligations as of December 28, 2007 (in thousands):
 | | | | | | | | | | |
| | Payments Due by Period |
| Contractual Obligations | | Total | | Less Than
1 Year | | 1 – 3
Years | | 3 – 5
Years | | More Than
5 Years |
| Note payable | | $ | 5,000 | | | $ | — | | | $ | 5,000 | | | $ | — | | | $ | — | |
| Capital lease obligations | | | 2,440 | | | | 1,058 | | | | 1,382 | | | | — | | | | — | |
Operating lease
obligations | | | 3,293 | | | | 1,373 | | | | 1,644 | | | | 276 | | | | — | |
| Purchase obligations | | | 600 | | | | 600 | | | | — | | | | — | | | | — | |
| Pension obligations | | | 684 | | | | 39 | | | | 96 | | | | 121 | | | | 428 | |
| Open purchase orders | | | 1,659 | | | | 1,659 | | | | — | | | | — | | | | — | |
| Total | | $ | 13,676 | | | $ | 4,729 | | | $ | 8,122 | | | $ | 397 | | | $ | 428 | |
While the Company’s international business generates positive cash flow and represents approximately 67% of consolidated net sales, the Company has reported losses on a consolidated basis for several years due to a number of factors, including eroding sales of cataract products in the U.S. and FDA compliance issues that consumed additional resources while delaying the introduction of new products in the U.S. market. During these years the Company has secured additional capital to sustain operations through private and public sales of equity securities.
The Company believes that its best prospect for returning its U.S. and consolidated operations to profitability is through the growth in sales of the ICL and cost reduction efforts in the U.S. combined with continued growth in international markets. In the longer term the Company seeks to develop and introduce products in the U.S. cataract market to stop further erosion of its market share and resume growth in that sector. Nevertheless, success of these strategies is not assured and, even if successful, the company is not likely to achieve positive cash flow on a consolidated basis during fiscal 2008.
The Company believes that based on current cash balances, combined with expected cash from international operations, it currently has sufficient cash to meet its funding requirements at least through the first quarter of 2009. However, given its history of losses and negative cash flows, it is possible that the Company will find it necessary to supplement these sources of capital with additional financing to sustain operations until the Company returns to profitability.
The credit facilities are subject to various covenants, and we risk defaulting on the terms of our credit facilities. Our limited borrowing capacity could cause a shortfall in working capital or prevent us from making expenditures to expand or enhance our business. A default on any of our credit facilities could cause our long term obligations to be accelerated, make further borrowing difficult and jeopardize our ability to continue operations.
If the Company is unable to rely solely on existing debt financing and is unable to obtain additional debt financing, the Company may find it necessary to raise additional capital in the future through the sale of equity or debt securities.
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, which will largely depend on the success of the ICL, proceeds from option exercises, borrowings under the Company’s credit facility and proceeds from the sale of common stock. Any withdrawal of support from its lenders could have serious consequences on the Company’s liquidity. The Company’s liquidity also depends, 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. Changes in the market price of our common stock affect the value of our outstanding options, and lower market prices could reduce our expected revenue from option exercises.
The business of the Company is 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 Company with the
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Securities and Exchange Commission. Such risks and uncertainties could have a material adverse effect on the Company’s business, financial condition, operating results and cash flows.
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 sales 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 on historical experiences, market trends and financial forecasts and projections, and on various other assumptions that management believes are reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these if actual conditions differ from our assumptions.
The Company believes the following represent its critical accounting policies.
| • | Revenue Recognition and Accounts Receivable. 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 collectability is reasonably assured in accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition” (“SAB 104”). The Company records revenue from product sales when title and risk of ownership has been transferred, which is typically at shipping point. The Company’s products are marketed to ophthalmic surgeons, hospitals, ambulatory surgery centers or vision centers, and distributors. IOLs may be offered to surgeons and hospitals on a consignment basis. In accordance with SAB No. 104, the Company recognizes revenue for consignment inventory when the IOL is implanted during surgery and not upon shipment to the surgeon. The Company believes its revenue recognition policies are appropriate in all circumstances. |
ICLs are sold only to certified surgeons who have completed requisite training. STAAR ships ICLs only for use by surgeons who have already been certified, or for use in scheduled training surgeries. As a result, STAAR does not face the risk that the revenue it recognizes on shipment of ICLs could be reversed because of a surgeon’s failure to qualify for its use.
The Company generally permits returns of product if the product is returned within the time allowed by the Company, and in good condition. The Company provides allowances for returns based on an analysis of our historical patterns of returns matched against the sales from which they originated. While such allowances have historically been within the Company’s expectations, the Company cannot guarantee that it will continue to experience the same return rates that it has in the past. Measurement of such returns requires consideration of historical return experience, including the need to adjust for current conditions and product lines, and judgments about the probable effects of relevant observable data. The Company considers all available information in its quarterly assessments of the adequacy of the allowance for returns.
The Company maintains provisions for uncollectible accounts based on estimated losses resulting from the inability of its customers to remit payments. If the financial condition of customers were to deteriorate, thereby resulting in an inability to make payments, additional allowances could be required. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon customer payment history and current creditworthiness, as determined by the Company’s review of its customers’ current credit information. 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. Amounts determined to be uncollectible are written off against the allowance for doubtful accounts. While such credit losses have historically been within the Company’s expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the
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probable effects of relevant observable data, including present economic conditions such as delinquency rates and financial health of specific customers. The Company considers all available information in its assessments of the adequacy of the reserves for uncollectible accounts.
| • | Stock-Based Compensation. The Company accounts for the issuance of stock options to employees and directors in accordance with SFAS No. 123R and the issuance of stock options and warrants for services from non-employees in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” and the Financial Accounting Standards Board (FASB) Emerging Issues Task Force Issue (EITF) No. 96-18, “Accounting For Equity Instruments That Are Issued To Other Than Employees For Acquiring Or In Conjunction With Selling Goods Or Services,” by estimating the fair value of options and warrants issued using the Black-Scholes pricing model. This model’s calculations include the exercise price, the market price of shares on grant date, risk-free interest rates, expected life of the option or warrant, expected volatility of our stock and expected dividend yield. The amounts recorded in the financial statements for share-based expense could vary significantly if we were to use different assumptions. |
| • | Accounting for Warrants. The Company accounts for the issuance of Company derivative equity instruments in accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). The Company has agreed to use its best efforts to register and maintain registration of the common shares underlying certain warrants (the “Warrant Shares”) that were issued by the Company with debt instruments, so that the warrant holder may freely sell the Warrant Shares if the warrant is exercised, and the Company agreed that in any event it would secure effective registration within four months of issuance. In addition, while the relevant warrant agreement does not require cash settlement if the Company fails to register the Warrant Shares, it does not specifically preclude cash settlement. As a result EITF 00-19 requires the Company to assume that in the absence of effective registration it may be required to settle the these warrants for cash when they are exercised. Accordingly, the Company’s agreement to register and maintain registration of the Warrant Shares without express terms for settlement in the absence of effective registration is presumed to create a liability to settle these warrants in cash, requiring liability classification. The Company has issued other warrants under an agreement that expressly provides that if the Company fails satisfy registration requirements the Company will be obligated only to issue additional common stock as the holder’s sole remedy, with no possibility of settlement in cash. The Company accounts for those warrants as equity because additional shares are the only form of settlement available to the holder. The Company uses the Black-Scholes option pricing model as the valuation model to estimate the fair value of those warrants. The Company evaluates the balance sheet classification of the warrants during each reporting period. Expected volatilities are based on historical volatility of the Company’s stock. The expected life of the warrant is determined by the amount of time remaining on the original six year term of the relevant warrant agreement. The risk-free rate of return for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at each reporting period. Any gains or losses resulting from the changes in fair value of the warrants classified as a liability from period to period are included as an increase or decrease of other income (expense). The warrants that are accounted for as equity are only valued on the issuance date and not subsequently revalued. Once registration becomes effective for the resale of warrant shares, the Company will be obligated to use its best efforts to maintain registration, and at that point the Company believes it will be appropriate to reclassify the liability warrants to equity subject to reassessment of the classification at that time. |
| • | 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 |
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| | deferred tax assets based on 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 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 December 28, 2007, the valuation allowance fully offsets the value of deferred tax assets on the Company’s balance sheet. Net increases to the valuation allowance were $4,983,000, $6,774,000 and $5,490,000 in 2007, 2006 and 2005, respectively. |
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.
In the normal course of business, the Company is regularly audited by federal, state and foreign tax authorities, and is periodically challenged regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. Management believes the Company’s tax positions comply with applicable tax law and intends to defend its positions. The Company’s effective tax rate in a given financial statement period could be impacted if the Company prevailed in matters for which reserves have been established, or was required to pay amounts in excess of established reserves.
| • | Inventories. The Company provides estimated inventory allowances for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. These reserves are based on current assessments about future demands, market conditions and related management initiatives. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required. The Company values its inventory at the lower of cost or net realizable market values. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on the expiration of products with a shelf life of less than four months, estimated forecasts of product demand and production requirements for the next twelve months. Several factors may influence the realizability of its inventories, including decisions to exit a product line, technological change and new product development. These factors could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, estimates of future product demand may prove to be inaccurate, in which case the provision required for excess and obsolete inventory may be understated or overstated. If in the future, the Company determined that its inventory was overvalued, it would be required to recognize such costs in cost of sales at the time of such determination. Likewise, if the Company determined that its inventory was undervalued, cost of sales in previous periods could have been overstated and the Company would be required to recognize such additional operating income at the time of sale. While such inventory losses have historically been within the Company’s expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same loss rates that it has in the past. Therefore, although the Company makes every effort to ensure the accuracy of forecasts of future product demand, including the impact of planned future product launches, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of its inventory and its reported operating results. |
| • | 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. Certain factors which may occur and indicate that an impairment exists include, but are not limited to the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of the Company’s use of the underlying assets; and significant adverse industry or market economic trends. 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. In the event that the carrying value of assets is determined to be unrecoverable, the Company would estimate the fair value of the assets and record an impairment charge for the excess of the carrying value over the fair value. The estimate of fair value requires management to make a number of assumptions and projections, which could include, |
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| | but would not be limited to, future revenues, earnings and the probability of certain outcomes and scenarios. The Company’s policy is consistent with current accounting guidance as prescribed by SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets.An assessment was completed under the guidance of SFAS No. 144 for the year ended December 28, 2007, and no impairment was identified. |
| • | Goodwill. Goodwill, which has an indefinite life, is not amortized, but instead is subject to periodic testing for impairment. Intangible assets determined to have definite lives are amortized over their remaining useful lives. Goodwill 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. Certain factors which may occur and indicate that an impairment exists include, but are not limited to the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of the Company’s use of the underlying assets; and significant adverse industry or market economic trends. In the event that the carrying value of assets is determined to be unrecoverable, the Company would estimate the fair value of the reporting unit and record an impairment charge for the excess of the carrying value over the fair value. The estimate of fair value requires management to make a number of assumptions and projections, which could include, but would not be limited to, future revenues, earnings and the probability of certain outcomes and scenarios. The Company’s policy is consistent with current accounting guidance as prescribed by SFAS No. 142, Goodwill and Intangible Assets. During the fourth quarter of fiscal 2007, the Company performed its annual impairment test using the methodology prescribed by SFAS No. 142 and determined that its goodwill was not impaired. As of December 28, 2007, the carrying value of goodwill was $7.5 million. |
| • | Patents and Licenses. The Company also has other intangible assets consisting of patents and licenses, with a gross book value of $11.5 million and accumulated amortization of $7.5 million as of December 28, 2007. The company capitalizes the cost of acquiring patents and licenses. Amortization is computed on the straight-line basis over the estimated useful lives since the pattern in which the economic benefits realized cannot be reasonably determined, which are based on legal and contractual provisions, and range from 10 to 20 years. The Company reviews patents and licenses for impairment in the same assessment discussed above in the discussion above regardingImpairment of Long-Lived Assets. No impairment was identified during the review completed in the fourth quarter of 2007. |
| • | Employee Defined Benefit Plan. The Company has historically maintained a passive pension plan (“Swiss Plan”) covering employees of its Switzerland subsidiary which was classified and accounted for as a defined contribution plan. Based on new guidance obtained in the fourth quarter of fiscal year 2007 from the Swiss Auditing Chamber’s Auditing Practice Committee and its Accounting Practice Committee with respect to a change in Swiss pension law, the Company concluded that the features of the Swiss Plan now conform to a defined benefit plan. As a result, the Company adopted the recognition and disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, an amendment of SFAS Nos. 87, 88, 106 and 132R (“SFAS 158”) effective October 1, 2007. This model allocates pension costs over the service period of employees in the plan. The underlying principle is that employees render service ratably over this period, and therefore, the income statement effects of pensions should follow a similar pattern. |
SFAS No. 158 requires recognition of the funded status, or difference between the fair value of plan assets and the projected benefit obligations of the pension plan on the statement of financial position as of December 28, 2007, with a corresponding adjustment to accumulated other comprehensive income. If the projected benefit obligation exceeds the fair value of plan assets, then that difference or unfunded status represents the pension liability. The Company conformed the pension assets and liabilities to SFAS No. 158 and recorded a corresponding reduction of $371,000, net of tax, to the December 28, 2007 balance of accumulated other comprehensive income.
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Due to adoption of SFAS No. 158 and the new accounting guidance relating to Swiss plan, the Company records a net periodic pension cost in the consolidated statement of operations. The liabilities and annual income or expense of the Swiss Plan is determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, and the long-term rate of asset return (based on the market-related value of assets). The fair values of plan assets are determined based on prevailing market prices.
Foreign Exchange
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 had 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. The Company does not engage in hedging transactions to offset changes in currency.
Inflation
Management believes inflation has not had a significant impact on the Company’s operations during the past three years.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157Fair Value Measurements (“SFAS 157”). SFAS No. 157 provides a new single authoritative definition of fair value and provides enhanced guidance for measuring the fair value of assets and liabilities and requires additional disclosures related to the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 is effective for the Company as of December 29, 2007. The Company is currently assessing the impact, if any, of SFAS No. 157 on its consolidated financial statements.
In February 2008, the FASB issued Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157, which defers the implementation for the non-recurring nonfinancial assets and liabilities from fiscal years beginning after November 15 , 2007 to fiscal years beginning after November 15, 2008. The provisions of SFAS No. 157 will be applied prospectively. The statement provisions effective as of December 29, 2007, do not have a material effect on the Company’s consolidated financial position and results of operations. Management does not believe that the remaining provisions will have a material effect on the Company’s consolidated financial position and results of operations when they become effective on January 3, 2009.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS No. 159 permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. SFAS No. 159 is intended to improve financial reporting by allowing companies to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently and to do so without having to apply complex hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value and does not affect disclosure requirements in other accounting standards. SFAS No. 159 will be effective for the Company’s next fiscal year starting on December 29, 2007, and it is currently evaluating whether it will adopt the fair value measurement option allowed by the standard.
In December 2007, the FASB issued SFAS No. 141(R)Business Combinations(“SFAS 141R”), which replaces SFAS No. 141,Business Combinations. SFAS No. 141R requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their acquisition-date fair values, (ii) changes the recognition of assets acquired and liabilities assumed arising from contingencies, (iii) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, requires changes in fair value to be recognized in earnings until settled, (iv) requires companies to revise any previously issued post-acquisition financial information to reflect any adjustments as if they had
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been recorded on the acquisition date, (v) requires the reversals of valuation allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties to be recognized in earnings, and (vi) requires the expensing of acquisition-related costs as incurred. SFAS No. 141R also requires additional disclosure of information surrounding a business combination to enhance financial statement users’ understanding of the nature and financial impact of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with the exception of accounting for changes in a valuation allowance for acquired deferred tax assets and the resolution of uncertain tax positions accounted for under FIN 48, which is effective on January 1, 2009 for all acquisitions. The Company is currently assessing the impact, if any, of SFAS No. 141R on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51 (“SFAS 160”). SFAS No. 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary. SFAS No. 160 also requires that a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. Upon adoption of SFAS No. 160, the Company will be required to report its noncontrolling interests as a separate component of stockholders’ equity. The Company will also be required to present net income allocable to the noncontrolling interests and net income attributable to the stockholders of the Company separately in its consolidated statements of operations. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS No. 160 shall be applied prospectively. SFAS No. 160 will be effective for the Company’s 2009 fiscal year. The Company does not expect the adoption of SFAS No. 160 will have a material impact on its consolidated financial statements.
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 risk. As of December 28, 2007, STAAR had $0 of foreign debt. STAAR’s $5 million principal amount of U.S. indebtedness under the Broadwood note bears a fixed interest rate of 7% and may be prepaid without penalty. Accordingly as of December 28, 2007, STAAR was not exposed to significant interest rate risk related to borrowings.
Foreign currency risk. Our international subsidiaries operate in and are net recipients of currencies other than the U.S. dollar and, as such, our 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. 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 1A. — Risk Factors.”
Item 8. Financial Statements and Supplementary Data
Financial Statements and the Report of Independent Registered Public Accounting 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 15 of this Annual Report.
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 Annual Report on 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 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures”
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section includes information concerning the controls and controls evaluation referred to in the certifications. Page F-3 of this Annual Report on Form 10-K sets forth the report of BDO Seidman, LLP, our independent registered public accounting firm, regarding its audit of STAAR’s internal control over financial reporting. This section should be read in conjunction with the certifications and the BDO Seidman, LLP report for a more complete understanding of the topics presented.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report on 10-K, our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.
Management Report on Internal Control over Financial Reporting
The Company’s management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for STAAR Surgical Company and its subsidiaries (the “Company”). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changing conditions, effectiveness of internal control over financial reporting may vary over time. The Company’s processes contain self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 28, 2007, based on the criteria for effective internal control described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 28, 2007.
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 on Form 10-K, was engaged to attest to and report on the effectiveness of the Company’s internal control over financial reporting. Its report is included herein.
Remediation of Material Weakness Regarding Control Over and In German Subsidiary
We reported a material weakness in internal control over financial reporting due to our failure to design and maintain controls over our German subsidiary sufficient to detect and prevent management override and fraud inItem 9A — Controls and Procedures of our Annual Report on Form 10-K/A for the fiscal year ended December 29, 2006 and inItem 4 — Controls and Procedures of the Quarterly Report on Form 10-Q for the period ended March 30, 2007. InItem 4 — Controls and Procedures of the two subsequent Quarterly Reports on Form 10-Q we reported that notwithstanding remedial measures we could not yet conclude that the weakness had been rectified. In response to the material weakness, we instituted additional control procedures over our German subsidiary including enhanced monitoring and oversight by our Swiss and U.S. operations, hired a new management team, enhanced our whistleblower program, made site visits to monitor and reinforce policies, and reinforced the certification process around accountability for maintaining an ethical environment. Based on the foregoing, our management has concluded that the material weakness has been remediated.
Changes in Internal Control over Financial Reporting
Except for the controls and procedures implemented to remediate the material weakness that existed as of December 29, 2006, there was no change during the fiscal quarter ended December 28, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The information in Item 10 is incorporated herein by reference to the section entitled “Proposal One — Election of Directors” contained in the proxy statement (the “Proxy Statement”) for the 2007 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended December 28, 2007.
Item 11. Executive Compensation
The information in Item 11 is incorporated herein by reference to the section entitled “Proposal One — Election of Directors” contained in the Proxy Statement.
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 the section entitled “General Information — Security Ownership of Certain Beneficial Owners and Management” and “Proposal One — Election of Directors” contained in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information in Item 13 is incorporated herein by reference to the section entitled “Proposal One — Election of Directors” contained in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information in Item 14 is incorporated herein by reference to the section entitled “Proposal Two — Ratification of the Appointment of Independent Registered Public Accounting Firm” contained in the Proxy Statement.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
| | |
| | Page |
(1) Financial statements required by Item 15 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 Registered Public Accounting Firm | | | F-3 | |
| Consolidated Balance Sheets at December 28, 2007 and at December 29, 2006 | | | F-4 | |
Consolidated Statements of Operations for the years ended December 28, 2007,
December 29, 2006, and December 30, 2005 | | | F-5 | |
| Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Loss for the years ended December 28, 2007, December 29, 2006, and December 30, 2005 | | | F-6 | |
Consolidated Statements of Cash Flows for the years ended December 28, 2007,
December 29, 2006, and December 30, 2005 | | | F-7 | |
| Notes to Consolidated Financial Statements | | | F-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-39 | |
| II. Schedule II — Valuation and Qualifying Accounts and Reserves | | | F-40 | |
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.
| | |
Exhibit
No. | | Description |
| 1.1 | | Underwriting Agreement dated April 25, 2007 by and between the Company and Pacific Growth Equities LLC.(1) |
| 3.1 | | Certificate of Incorporation, as amended to date* |
| 3.2 | | By-laws, as amended to date(2) |
| 4.1 | | Certificate of Designation of Series A Convertible Preferred Stock.* |
| †4.2 | | 1991 Stock Option Plan of STAAR Surgical Company(3) |
| †4.3 | | 1998 STAAR Surgical Company Stock Plan, adopted April 17, 1998(4) |
| 4.4 | | Form of Certificate for Common Stock, par value $0.01 per share(5) |
| †4.5 | | 2003 Omnibus Equity Incentive Plan and form of Option Grant and Stock Option Agreement(6) |
| 10.3 | | Indenture of Lease dated September 1, 1993, by and between the Company and FKT Associates and First through Third Additions Thereto(7) |
| 10.4 | | Second Amendment to Indenture of Lease dated September 21, 1998, by and between the Company and FKT Associates(7) |
| 10.5 | | Third Amendment to Indenture of Lease dated October 13, 2003, by and between the Company and FKT Associates(8) |
| 10.6 | | Fourth Amendment to Indenture of Lease dated September 30, 2006, by and between the Company and FKT Associates.* |
| 10.7 | | Indenture of Lease dated October 20, 1983, between the Company and Dale E. Turner and Francis R. Turner and First through Fifth Additions Thereto(9) |
| 10.8 | | 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(8) |
| 10.9 | | Seventh Lease Addition to Indenture of Lease dated September 30, 2006, by and between the Company and Turner Trust UTD Dale E. Turner March 28, 1984* |
| 10.10 | | Amendment No. 1 to Standard Industrial/Commercial Multi-Tenant Lease dated January 3, 2003, by and between the Company and California Rosen LLC(8) |
| 10.11 | | Lease Agreement dated July 12, 1994, between STAAR Surgical AG and Calderari and Schwab AG/SA(10) |
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| | |
Exhibit
No. | | Description |
| 10.12 | | 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) |
| 10.13 | | 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) |
| 10.14 | | Commercial Lease Agreement dated November 29, 2000, between Domilens GmbH and DePfa Deutsche Pfandbriefbank AG(10) |
| 10.15 | | Patent License Agreement, dated May 24, 1995, with Eye Microsurgery Intersectoral Research and Technology Complex(11) |
| 10.16 | | Patent License Agreement, dated January 1, 1996, with Eye Microsurgery Intersectoral Research and Technology Complex(12) |
| †10.23 | | Stock Option Plan and Agreement for Chief Executive Officer dated November 13, 2001, between the Company and David Bailey(13) |
| †10.24 | | Stock Option Certificate dated August 9, 2001, between the Company and David Bailey(10) |
| †10.25 | | Stock Option Certificate dated January 2, 2002, between the Company and David Bailey(10) |
| †10.27 | | Amended and Restated Stock Option Certificate dated February 13, 2003, between the Company and David Bailey(10) |
| †10.36 | | Offer of Employment dated July 12, 2002, from the Company to Nick Curtis(10) |
| †10.37 | | Amendment to Offer of Employment dated February 14, 2003 from the Company to Nick Curtis(10) |
| †10.42 | | Form of Indemnification Agreement between the Company and certain officers and directors(10) |
| †10.47 | | Employment Agreement dated May 5, 2004, between the ConceptVision Australia Pty Limited CAN 006 391 928 and Philip Butler Stoney(14) |
| †10.48 | | Employment Agreement dated May 5, 2004, between the ConceptVision Australia Pty Limited CAN 006 391 928 and Robert William Mitchell(14) |
| 10.58 | | Loan Agreement between Deutsche Postbank AG and Domilens GmbH dated August 30, 2005(15) |
| 10.59 | | Standard Industrial/Commercial Multi Tenant Lease — Gross dated October 6, 2005, entered into between the Company and Z & M LLC(15) |
| 10.61 | | Addendum No. 1 to Commercial Leases between Domilens GmbH and DePfa Deutsche
Pfandbriefbank AG related to Domilens headquarters facilities, dated as of December 13, 2005.(16) |
| 10.63 | | Promissory Note between STAAR Surgical Company and Broadwood Partners, L.P., dated March 21, 2007.(17) |
| 10.64 | | Warrant Agreement between STAAR Surgical Company and Broadwood Partners, L.P., dated March 21, 2007.(17) |
| 10.65 | | Share Purchase Agreement dated October 25, 2007 by and between Canon Marketing Japan Inc. and Canon Inc. as Sellers and STAAR Surgical Company as Buyer.(18) |
| 10.66 | | Executive Employment Agreement by and between the Company and Barry G. Caldwell, dated as of November 27, 2007.(19) |
| 10.67 | | Executive Employment Agreement by and between the Company and David Bailey, dated as of November 27, 2007.(19) |
| 10.68 | | Senior Promissory Note between STAAR Surgical Company and Broadwood Partners, L.P., dated December 14, 2007.(20) |
| 10.69 | | Warrant Agreement between STAAR Surgical Company and Broadwood Partners, L.P., dated December 14, 2007.(20) |
| 14.1 | | Code of Ethics(10) |
| 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* |
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| | |
Exhibit
No. | | Description |
| 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 |
| # | 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 to the Company’s Current Report on Form 8-K, filed under Item 1.01 on April 26, 2007. |
| (2) | Incorporated by reference from the Company’s Current Report on Form 8-K, as filed on May 23, 2006. |
| (3) | Incorporated by reference from the Company’s Registration Statement on Form S-8, File No. 033-76404, as filed on March 11, 1994. |
| (4) | Incorporated by reference to the Company’s Proxy Statement for its Annual Meeting of Stockholders held on May 29, 1998, filed on May 1, 1998. |
| (5) | 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. |
| (6) | Incorporated by reference to the Company’s Proxy Statement for its Annual Meeting of Stockholders held on June 18, 2003, as filed on May 19, 2003. |
| (8) | 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. |
| (9) | Incorporated by reference from the Company’s Annual Report on Form 10-K, for the year ended
January 2, 1998, as filed on April 1, 1998. |
| (10) | Incorporated by reference to the Company’s Annual Report on Form 10-K, for the year ended
December 31, 2004, as filed on March 30, 2005. |
| (11) | Incorporated by reference from the Company’s Amendment No. 1 to Annual Report on Form 10-K/A, for the year ended December 29, 2000, as filed on May 9, 2001. |
| (12) | Incorporated by reference from the Company’s Annual Report on Form 10-K, for the year ended
December 29, 2000, as filed on March 29, 2001. |
| (13) | Incorporated by reference to the Company’s Annual Report on Form 10-K, for the year ended
December 28, 2001, as filed on March 28, 2002. |
| (14) | Incorporated by reference to the Company’s Quarterly Report for the period ended April 2, 2004, as filed on May 12, 2004. |
| (15) | Incorporated by reference to the Company’s Quarterly Report for the period ended September 30, 2005, as filed on November 9, 2005. |
| (16) | Incorporated by reference to the Company’s Quarterly Report for the period ended March 31, 2006, as filed on May 10, 2006. |
| (17) | Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 21, 2007. |
| (18) | Incorporated by reference to the Company’s Current Report on Form 8-K filed on October 31, 2007. |
| (19) | Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 4, 2007. |
| (20) | Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 19, 2007. |
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SIGNATURES
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.
STAAR SURGICAL COMPANY
| Date: March 12, 2008 | By: /s/ Barry G. Caldwell
Barry G. Caldwell
President and Chief Executive Officer
(principal executive officer) |
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/ Barry G. Caldwell
Barry G. Caldwell | | President, Chief Executive Officer and Director
(principal executive officer) | | March 12, 2008 |
/s/ Deborah Andrews
Deborah Andrews | | Chief Financial Officer
(principal accounting and financial officer) | | March 12, 2008 |
/s/ Don Bailey
Don Bailey | | Chairman of the Board, Director | | March 12, 2008 |
/s/ David Bailey
David Bailey | | Director, President, International Operations | | March 12, 2008 |
/s/ Donald Duffy
Donald Duffy | | Director | | March 12, 2008 |
/s/ John C. Moore
John C. Moore | | Director | | March 12, 2008 |
/s/ David Morrison
David Morrison | | Director | | March 12, 2008 |
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STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007,
December 29, 2006 and December 30, 2005
TABLE OF CONTENTS
| | |
| | Page |
| Report of Independent Registered Public Accounting Firm | | | F-2 | |
| Report of Independent Registered Public Accounting Firm | | | F-3 | |
| Consolidated Balance Sheets at December 28, 2007 and at December 29, 2006 | | | F-4 | |
| Consolidated Statements of Operations for the Years Ended December 28, 2007, December 29, 2006, and December 30, 2005 | | | F-5 | |
| Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Loss for the Years Ended December 28, 2007, December 29, 2006, and December 30, 2005 | | | F-6 | |
| Consolidated Statements of Cash Flows for the Years Ended December 28, 2007, December 29, 2006, and December 30, 2005 | | | F-7 | |
| Notes to Consolidated Financial Statements | | | F-8 | |
| Report on Schedule II — Valuation and Qualifying Accounts and Reserves | | | F-40 | |
F-1
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
STAAR Surgical Company
Monrovia, CA
We have audited the accompanying consolidated balance sheets of STAAR Surgical Company and Subsidiaries (“the Company”) as of December 28, 2007 and December 29, 2006, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive loss, and cash flows for each of the fiscal years in the three year period ended December 28, 2007. 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 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 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, 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 28, 2007 and December 29, 2006, and the consolidated results of their operations and their cash flows for each of the fiscal years in the three year period ended December 28, 2007, in conformity with accounting principles generally accepted in the United States of America.
As more fully disclosed in Note 9 to the consolidated financial statements, effective December 30, 2006, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”. As more fully disclosed in Note 10 to the consolidated financial statements, effective December 30, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106, and 132(R). As more fully disclosed in Note 11 to the consolidated financial statements, effective December 30, 2005, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), STAAR Surgical Company and Subsidiaries’ internal control over financial reporting as of December 28, 2007, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 12, 2008 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Los Angeles, California
March 12, 2008
F-2
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STAAR SURGICAL COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
STAAR Surgical Company
Monrovia, CA
We have audited STAAR Surgical Company and Subsidiaries’ internal control over financial reporting as of December 28, 2007, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). 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, included in the accompanying Item 9AManagement’s Report on Internal control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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, STAAR Surgical Company and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 28, 2007, based on the COSO criteria.
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 28, 2007 and December 29, 2006 and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive loss, and cash flows for each of the fiscal years in the three year period ended December 28, 2007, and our report dated March 12, 2008 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Los Angeles, California
March 12, 2008
F-3
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STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, 2007 and December 29, 2006
| | | | |
| | 2007 | | 2006 |
| | | (In Thousands, Except
Par Value Amounts) |
ASSETS
| | | | | | | | |
Current assets:
| | | | | | | | |
| Cash and cash equivalents | | $ | 10,895 | | | $ | 7,758 | |
| Short-term investments — restricted | | | 150 | | | | 150 | |
| Accounts receivable trade, net | | | 6,898 | | | | 6,524 | |
| Inventories | | | 12,741 | | | | 12,939 | |
| Prepaids, deposits and other current assets | | | 1,610 | | | | 1,923 | |
| Total current assets | | | 32,294 | | | | 29,294 | |
| Investment in joint venture | | | — | | | | 397 | |
| Property, plant and equipment, net | | | 5,772 | | | | 5,846 | |
| Patents and licenses, net | | | 3,959 | | | | 4,439 | |
| Goodwill | | | 7,534 | | | | 7,534 | |
| Advance payment for acquisition of Canon Staar (Note 18) | | | 4,000 | | | | — | |
| Other assets | | | 620 | | | | 260 | |
| Total assets | | $ | 54,179 | | | $ | 47,770 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY
| | | | | | | | |
Current liabilities:
| | | | | | | | |
| Notes payable | | $ | — | | | $ | 1,802 | |
| Accounts payable | | | 4,823 | | | | 5,055 | |
| Deferred income taxes — current | | | 102 | | | | 179 | |
| Obligations under capital leases — current | | | 822 | | | | 500 | |
| Other current liabilities | | | 5,541 | | | | 7,395 | |
| Total current liabilities | | | 11,288 | | | | 14,931 | |
| Notes payable — long-term, net of discount | | | 4,166 | | | | — | |
| Obligations under capital leases — long-term | | | 1,311 | | | | 957 | |
| Deferred income taxes — long-term | | | 570 | | | | — | |
| Other long-term liabilities | | | 619 | | | | 122 | |
| Total liabilities | | | 17,954 | | | | 16,010 | |
| Commitments, contingencies and subsequent events (Notes 10, 12 and 18) | | | | | | | | |
| Series A convertible preferred stock $.01 par value, 10,000 shares authorized, none issued or outstanding | | | — | | | | — | |
Stockholders’ equity:
| | | | | | | | |
| Common stock, $.01 par value; 60,000 and 60,000 shares authorized; issued and outstanding 29,488 and 25,618 shares | | | 295 | | | | 256 | |
| Additional paid-in capital | | | 137,075 | | | | 117,312 | |
| Accumulated other comprehensive income | | | 1,551 | | | | 889 | |
| Accumulated deficit | | | (102,696 | ) | | | (86,697 | ) |
| Total stockholders’ equity | | | 36,225 | | | | 31,760 | |
| Total liabilities and stockholders’ equity | | $ | 54,179 | | | $ | 47,770 | |
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-4
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STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 28, 2007, December 29, 2006 and December 30, 2005
| | | | | | |
| | 2007 | | 2006 | | 2005 |
| | | (In Thousands, Except
Per Share Amounts) |
| Net sales | | $ | 59,363 | | | $ | 56,951 | | | $ | 51,303 | |
| Cost of sales | | | 30,097 | | | | 30,801 | | | | 27,517 | |
| Gross profit | | | 29,266 | | | | 26,150 | | | | 23,786 | |
Selling, general and administrative expenses:
| | | | | | | | | | | | |
| General and administrative | | | 12,951 | | | | 10,891 | | | | 9,727 | |
| Marketing and selling | | | 23,723 | | | | 22,112 | | | | 18,552 | |
| Research and development | | | 6,711 | | | | 7,080 | | | | 5,573 | |
| Note reserves (reversals) | | | — | | | | (331 | ) | | | 746 | |
| Total selling, general and administrative expenses | | | 43,385 | | | | 39,752 | | | | 34,598 | |
| Operating loss | | | (14,119 | ) | | | (13,602 | ) | | | (10,812 | ) |
Other (expense) income:
| | | | | | | | | | | | |
| Equity in operations of joint venture | | | (280 | ) | | | 114 | | | | 158 | |
| Interest income | | | 336 | | | | 293 | | | | 453 | |
| Interest expense | | | (486 | ) | | | (261 | ) | | | (170 | ) |
| Other (expense) income, net | | | (607 | ) | | | (51 | ) | | | 413 | |
| Total other (expense) income, net | | | (1,037 | ) | | | 95 | | | | 854 | |
| Loss before income taxes and minority interest | | | (15,156 | ) | | | (13,507 | ) | | | (9,958 | ) |
| Provision for income taxes | | | 843 | | | | 1,537 | | | | 1,239 | |
| Minority interest | | | — | | | | — | | | | (22 | ) |
| Net loss | | $ | (15,999 | ) | | $ | (15,044 | ) | | $ | (11,175 | ) |
Loss per share:
| | | | | | | | | | | | |
| Basic and diluted | | $ | (0.57 | ) | | $ | (0.60 | ) | | $ | (0.47 | ) |
Weighted average shares outstanding
| | | | | | | | | | | | |
| Basic and diluted | | | 28,121 | | | | 25,227 | | | | 23,704 | |
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-5
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE LOSS
Years Ended December 28, 2007, December 29, 2006, and December 30, 2005
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 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 31, 2004 | | | 20,664 | | | $ | 207 | | | $ | 98,691 | | | $ | 1,024 | | | $ | (60,478 | ) | | $ | (1,604 | ) | | $ | 37,840 | |
Comprehensive loss:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | (11,175 | ) | | | — | | | | (11,175 | ) |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | (878 | ) | | | — | | | | — | | | | (878 | ) |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (12,053 | ) |
| Common stock issued upon exercise of options | | | 36 | | | | — | | | | 130 | | | | — | | | | — | | | | — | | | | 130 | |
| Common stock issued as payment for services | | | 13 | | | | — | | | | 77 | | | | — | | | | — | | | | — | | | | 77 | |
| Stock-based consultant expense | | | — | | | | — | | | | 203 | | | | — | | | | — | | | | — | | | | 203 | |
| Net proceeds from private placement | | | 4,100 | | | | 41 | | | | 13,333 | | | | — | | | | — | | | | — | | | | 13,374 | |
| Restricted stock grants | | | 6 | | | | — | | | | 37 | | | | — | | | | — | | | | — | | | | 37 | |
| Deferred compensation | | | — | | | | — | | | | (37 | ) | | | — | | | | — | | | | — | | | | (37 | ) |
| Proceeds from notes receivable, net | | | — | | | | — | | | | — | | | | — | | | | — | | | | 130 | | | | 130 | |
| Accrued interest on notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | (81 | ) | | | (81 | ) |
| Notes receivable reserve | | | — | | | | — | | | | — | | | | — | | | | — | | | | 746 | | | | 746 | |
| Balance, at December 30, 2005 | | | 24,819 | | | | 248 | | | | 112,434 | | | | 146 | | | | (71,653 | ) | | | (809 | ) | | | 40,366 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | (15,044 | ) | | | — | | | | (15,044 | ) |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | 743 | | | | — | | | | — | | | | 743 | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (14,301 | ) |
| Common stock issued upon exercise of options | | | 753 | | | | 8 | | | | 2,882 | | | | — | | | | — | | | | — | | | | 2,890 | |
| Stock-based compensation | | | — | | | | — | | | | 1,996 | | | | — | | | | — | | | | — | | | | 1,996 | |
| Restricted stock grants | | | 46 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Proceeds from notes receivable, net | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,181 | | | | 1,181 | |
| Accrued interest on notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | (41 | ) | | | (41 | ) |
| Notes receivable reserve reversal | | | — | | | | — | | | | — | | | | — | | | | — | | | | (331 | ) | | | (331 | ) |
| Balance, at December 29, 2006 | | | 25,618 | | | | 256 | | | | 117,312 | | | | 889 | | | | (86,697 | ) | | | — | | | | 31,760 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | (15,999 | ) | | | — | | | | (15,999 | ) |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | 1,033 | | | | — | | | | — | | | | 1,033 | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (14,966 | ) |
| Adoption of SFAS No. 158 (Note 10) | | | — | | | | — | | | | — | | | | (371 | ) | | | — | | | | — | | | | (371 | ) |
| Common stock issued upon exercise of options | | | 163 | | | | 2 | | | | 582 | | | | — | | | | — | | | | — | | | | 584 | |
| Restricted stock cancelled | | | (9 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Issuance of warrant — Broadwood | | | — | | | | — | | | | 842 | | | | — | | | | — | | | | — | | | | 842 | |
| Common stock issued as payment for services | | | 47 | | | | — | | | | 125 | | | | — | | | | — | | | | — | | | | 125 | |
| Net proceeds from public offering | | | 3,600 | | | | 36 | | | | 16,577 | | | | — | | | | — | | | | — | | | | 16,613 | |
| Stock-based compensation | | | — | | | | — | | | | 1,637 | | | | — | | | | — | | | | — | | | | 1,637 | |
| Restricted stock grants | | | 69 | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | 1 | |
| Balance, at December 28, 2007 | | | 29,488 | | | $ | 295 | | | $ | 137,075 | | | $ | 1,551 | | | $ | (102,696 | ) | | $ | — | | | $ | 36,225 | |
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-6
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 28, 2007, December 29, 2006 and December 30, 2005
| | | | | | |
| | 2007 | | 2006 | | 2005 |
| | | (In Thousands) |
Cash flows from operating activities:
| | | | | | | | | | | | |
| Net loss | | $ | (15,999 | ) | | $ | (15,044 | ) | | $ | (11,175 | ) |
Adjustments to reconcile net loss to net cash used in operating activities:
| | | | | | | | | | | | |
| Depreciation of property and equipment | | | 2,001 | | | | 1,889 | | | | 2,010 | |
| Amortization of intangibles | | | 481 | | | | 481 | | | | 480 | |
| Amortization of discount | | | 26 | | | | — | | | | — | |
| Deferred income taxes | | | 493 | | | | 179 | | | | — | |
| Minority interest | | | — | | | | — | | | | (22 | ) |
| Loss on extinguishment of debt | | | 215 | | | | — | | | | — | |
| Fair value adjustment of warrant | | | (182 | ) | | | — | | | | — | |
| Change in pension accounting | | | 179 | | | | — | | | | — | |
| Loss on disposal of property and equipment | | | 307 | | | | 190 | | | | 90 | |
| Equity in operations of joint venture | | | 280 | | | | (114 | ) | | | (158 | ) |
| Stock-based compensation expense | | | 1,456 | | | | 1,856 | | | | 203 | |
| Common stock issued for services | | | 125 | | | | — | | | | 77 | |
| Notes receivable reserve (reversal) | | | — | | | | (331 | ) | | | 746 | |
| Other | | | 32 | | | | (44 | ) | | | (81 | ) |
Changes in working capital:
| | | | | | | | | | | | |
| Accounts receivable | | | (210 | ) | | | (1,233 | ) | | | 807 | |
| Inventories | | | 861 | | | | 2,502 | | | | (450 | ) |
| Prepaids, deposits and other current assets | | | 330 | | | | (7 | ) | | | 170 | |
| Accounts payable | | | (637 | ) | | | 926 | | | | (1,155 | ) |
| Other current liabilities | | | (942 | ) | | | 681 | | | | 910 | |
| Net cash used in operating activities | | | (11,184 | ) | | | (8,069 | ) | | | (7,548 | ) |
Cash flows from investing activities:
| | | | | | | | | | | | |
| Acquisition of property and equipment | | | (691 | ) | | | (786 | ) | | | (1,203 | ) |
| Advance payment on acquisition of Canon Staar Joint Venture | | | (4,000 | ) | | | — | | | | — | |
| Deferred acquisition costs of Canon Staar | | | (197 | ) | | | — | | | | — | |
| Sale of property and equipment | | | 72 | | | | — | | | | — | |
| Dividends received from joint venture | | | 117 | | | | — | | | | — | |
| Net change in other assets | | | 24 | | | | (105 | ) | | | 15 | |
| Purchase of short-term investments | | | — | | | | (193 | ) | | | (15,300 | ) |
| Sale of short-term investments | | | — | | | | 43 | | | | 20,425 | |
| Proceeds from notes receivable | | | — | | | | 1,181 | | | | 130 | |
| Net cash provided by (used in) investing activities | | | (4,675 | ) | | | 140 | | | | 4,067 | |
Cash flows from financing activities:
| | | | | | | | | | | | |
| Borrowings under notes payable | | | 9,000 | | | | — | | | | — | |
| Repayment of notes payable | | | (4,000 | ) | | | — | | | | — | |
| Repayment of note issued in connection with purchase minority interest in subsidiary | | | (972 | ) | | | — | | | | — | |
| Borrowings (payments) under line of credit | | | (1,798 | ) | | | (95 | ) | | | (1,265 | ) |
| Repayment of capital lease lines of credit | | | (692 | ) | | | — | | | | — | |
| Proceeds from the exercise of stock options and warrants | | | 584 | | | | 2,890 | | | | 130 | |
| Net proceeds from public and private sale of equity securities | | | 16,613 | | | | — | | | | 13,374 | |
| Net cash provided by financing activities | | | 18,735 | | | | 2,795 | | | | 12,239 | |
| Effect of exchange rate changes on cash and cash equivalents | | | 261 | | | | 184 | | | | (237 | ) |
| Increase (decrease) in cash and cash equivalents | | | 3,137 | | | | (4,950 | ) | | | 8,521 | |
| Cash and cash equivalents, at beginning of year | | | 7,758 | | | | 12,708 | | | | 4,187 | |
| Cash and cash equivalents, at end of year | | $ | 10,895 | | | $ | 7,758 | | | $ | 12,708 | |
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-7
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 1 — Significant Accounting Policies
Organization and Description of Business
STAAR Surgical Company and Subsidiaries (the “Company”), a Delaware corporation, was incorporated in 1982 for the purpose of developing, producing, and marketing intraocular 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 sold 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), STAARVISC® II, a viscoelastic material, and Cruise Control, a disposable filter which allows for a faster, cleaner phacoemulsification procedure and is compatible with all phacoemulsification equipment utilizing Venturi and peristaltic pump technologies. Products sold by the Company for use in correcting refractive conditions such as myopia (near-sightedness), hyperopia (far-sightedness) and astigmatism include the VisianTM ICL (“ICL”) and the VisianTM TICL (“TICL”). The Company’s AquaFlowTM 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.
As of December 28, 2007, the Company’s significant subsidiaries consisted of STAAR Surgical AG, a wholly owned subsidiary formed in Switzerland to develop, manufacture and distribute certain of the Company’s products worldwide, including Collamer IOLs, the ICL and the AquaFlow device, and Domilens GmbH, an indirect wholly owned subsidiary, which distributes both STAAR products and products from other ophthalmic manufacturers in Germany.
Canon Staar Joint Venture
In 1988, the Company entered into a Joint Venture Agreement with Canon Inc. and Canon Marketing Japan Inc., creating a company for the principal purpose of designing, manufacturing, and selling in Japan intraocular lenses and other ophthalmic products. The joint venture company, Canon Staar Co., Inc., markets its products worldwide through Canon, Canon Marketing, their subsidiaries and/or STAAR or such other distributors as the Board of Directors of the joint venture may approve. The terms of any such distribution arrangements require the unanimous approval of the Board of Directors of the joint venture. Of the five members of the Board of Directors of the joint venture, STAAR and Canon Marketing are each entitled to appoint two directors and Canon may appoint one. The president of the joint venture is to be appointed by STAAR. Several matters in addition to the approval of distribution arrangements require the unanimous approval of the directors, including appointment of officers, acquiring or disposing of assets exceeding 20% of the joint venture’s total book value, and borrowing money or granting a lien exceeding 20% of the joint venture’s total book value. 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.
In 1988, the Company also entered into a Technical Assistance and License Agreement with the joint venture to further its purposes, granting to the joint venture a perpetual, exclusive license to use STAAR technology to make and sell products in Japan, and a perpetual, non-exclusive license to use STAAR technology to sell products in the rest of the world, subject to the requirements of the Joint Venture Agreement that all sales take place through a distribution agreement unanimously approved by the directors of the joint venture. STAAR also granted to the joint venture a right of first refusal on the distribution of STAAR’s products in Japan.
In 2001, the parties entered into a settlement agreement whereby (i) they reconfirmed the Joint Venture Agreement and the Technical Assistance and License Agreement, (ii) they agreed that the Company would
F-8
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 1 — Significant Accounting Policies – (continued)
promptly commence the transfer of STAAR’s 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 STAAR’s existing licenses and the existing rights of third parties), (iv) the Company agreed to provide the joint venture with raw materials under a supply agreement to be entered into with the joint venture, (v) Canon Marketing is to enter into a distribution agreement with the joint venture providing a minimum 50 – 70% share of sales revenue to the joint venture and having such other terms as unanimously approved by the directors of the joint venture, and (iv) the parties settled certain patent disputes.
The joint venture has a single class of capital stock, of which STAAR owns 50%. Accordingly, STAAR is entitled to 50% of any dividends or distributions by the joint venture and 50% of the proceeds of any liquidation. As further discussed in Note 18, on December 29, 2007 (fiscal year 2008), the Company acquired the remaining 50% of the joint venture.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Investment in the Company’s joint venture, Canon Staar Co., Inc., is accounted for using the equity method of accounting (see Note 7).
The Company’s fiscal year ends on the Friday nearest December 31 and each of the Company’s quarterly reporting periods generally consists of 13 weeks.
Foreign Currency
The functional currency of the Company and its subsidiaries is the local currency, except for the Company’s Swiss subsidiary which is the U.S. dollar. In accordance with SFAS No. 52,Foreign Currency Translation, assets and liabilities of foreign subsidiaries are translated at rates of exchange in effect at the close of the period. Sales and expenses are translated at the weighted average of exchange rates in effect during the period. The resulting translation gains and losses are deferred and are shown as a separate component of stockholders’ equity as accumulated other comprehensive income. During 2007, 2006 and 2005, the net foreign translation gain (loss) was $1,033,000, $743,000 and ($878,000), respectively, and net foreign currency transaction gain (loss), included in the statement of operations in other (expense) income, net, was ($295,000), ($65,000) and $334,000, respectively.
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 collectability is reasonably assured in accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition” (“SAB 104”). The Company records revenue from product sales when title and risk of ownership has been transferred, which is typically at shipping point.
The Company’s products are marketed to ophthalmic surgeons, hospitals, ambulatory surgery centers or vision centers, and distributors. IOLs may be offered to surgeons and hospitals on a consignment basis. In accordance with SAB No. 104, the Company recognizes revenue for consignment inventory when the IOL is implanted during surgery and not upon shipment to the surgeon.
ICLs are sold only to certified surgeons who have completed requisite training. STAAR ships ICLs only for use by surgeons who have already been certified, or for use in scheduled training surgeries. As a result, STAAR does not face the risk that the revenue it recognizes on shipment of ICLs could be reversed because of a surgeon’s failure to qualify for its use.
F-9
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 1 — Significant Accounting Policies – (continued)
The Company has ongoing programs that, under specified conditions, allow customers to return products and, in accordance with SFAS No. 48,Revenue RecognitionWhen Right of Return Exists, records liabilities for estimated returns and allowances at the time revenue is recognized. The Company’s liability for estimated returns considers historical trends, the impact of new product launches, the entry of a competitor, product rationalization and the various terms and arrangements offered, including sales with extended credit terms.
The Company maintains provisions for uncollectible accounts for estimated losses resulting from the inability of its customers to remit payments. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment history and credit worthiness, as determined by the Company’s review of its customers’ current credit information. The Company continuously monitors collections and payments from customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer collection issues that have been identified. Amounts determined to be uncollectible are written off against the allowance for doubtful accounts.
Use of Estimates
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and, as such, include amounts based on informed estimates and judgments of management with consideration given to materiality. For example, estimates are used in determining valuation allowances for uncollectible trade receivables, obsolete inventory, deferred income taxes and tax reserves. Estimates are also used in the evaluation of asset impairment, in determining the useful life of depreciable assets, and in calculating stock-based compensation. Actual results could differ materially from those estimates.
Segment Reporting
The Company reports segment information in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). Under SFAS No. 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. Although the Company has expanded its marketing focus beyond the cataract market to include the refractive and glaucoma markets, the ophthalmic surgery market remains its primary source of revenues and, accordingly, the Company operates as one business segment (see Note 17).
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company maintains cash deposits with major banks which from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal.
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.
Fair Value of Financial Instruments
The carrying values reflected in the consolidated balance sheets for cash and cash equivalents, short-term investments, trade accounts receivable, accounts payable, capital leases, and notes payable approximate their fair values because of the short maturity of these instruments.
F-10
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 1 — Significant Accounting Policies – (continued)
Inventories
Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or market. Inventories include the costs of raw material, labor, and manufacturing overhead. The Company provides estimated inventory allowances for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value to properly reflect inventory at the lower of cost or market.
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 as noted below. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related lease term. Major improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred.
Depreciation is generally computed using the straight-line method over the estimated useful lives of the assets:
| | |
| Machinery and equipment | | | 10 years | |
| Furniture and equipment | | | 7 years | |
| Computer and peripherals | | | 3 – 5 years | |
| Leasehold improvements | | | (a) | |
| (a) | Leasehold improvements are depreciated over the shorter of the useful life of the asset or the term of the associated leases. |
Demonstration Equipment
In the normal course of business, the Company maintains demonstration 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 accounts for goodwill in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets.”
Goodwill, which has an indefinite life, is not amortized but instead is subject to periodic testing for impairment. Intangible assets determined to have definite lives are amortized over their remaining useful lives. Goodwill is tested for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at the reporting unit level. Reporting units are one level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics. Under the criteria set forth by SFAS No. 142, the Company has determined that its reporting units have similar economic characteristics and therefore, can be combined into one reporting unit for the purposes of goodwill impairment testing.
Certain factors which may occur and indicate that an impairment exists include, but are not limited to the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of the Company’s use of the underlying assets; and significant adverse
F-11
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 1 — Significant Accounting Policies – (continued)
industry or market economic trends. In the event that the carrying value of assets is determined to be unrecoverable, the Company would estimate the fair value of the reporting unit and record an impairment charge for the excess of the carrying value over the fair value. The estimate of fair value requires management to make a number of assumptions and projections, which could include, but would not be limited to, future revenues, earnings and the probability of certain outcomes and scenarios.
During the fourth quarter of fiscal 2007, the Company performed its annual impairment test using the methodology prescribed by SFAS No. 142 and determined that its goodwill was not impaired. As of December 28, 2007, the carrying value of goodwill was $7.5 million.
The Company also has other intangible assets consisting of patents and licenses, with a gross book value of $11.5 million and accumulated amortization of $7.5 million and $7.0 million as of December 28, 2007 and December 29, 2006, respectively. The Company capitalizes the costs of acquiring patents and licenses. Amortization is computed on the straight-line basis over the estimated useful lives, since the pattern in which the economic benefits realized cannot be reasonably determined, which are based on legal and contractual provisions, and range from 10 to 20 years. Aggregate amortization expense for amortized other intangible assets was $481,000, $481,000 and $480,000 for the years ended December 28, 2007, December 29, 2006 and December 30, 2005, respectively.
The following table shows the estimated amortization expense for these assets for each of the five succeeding years (in thousands):
| | |
| Fiscal Year | | |
| 2008 | | $ | 481 | |
| 2009 | | | 481 | |
| 2010 | | | 380 | |
| 2011 | | | 380 | |
| 2012 | | | 380 | |
| Total | | $ | 2,102 | |
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, “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.
There were no impairments of long-lived assets identified during the years ended December 28, 2007 and December 29, 2006.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
Income Taxes
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 in accordance with SFAS No. 109 “Accounting for Income Taxes.” A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion
F-12
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 1 — Significant Accounting Policies – (continued)
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.
Basic and Diluted Loss Per Share
The consolidated financial statements include “basic” and “diluted” per share information. Basic per share information is calculated by dividing net loss by the weighted average number of shares outstanding. Diluted per share information is calculated by also considering the impact of potential common stock on both net income and the weighted number of shares outstanding. As the Company was in a loss position, potential common shares of 3.6 million, 2.6 million, and 3.9 million for the fiscal years ended December 28, 2007, December 29, 2006, and December 30, 2005, respectively, were excluded from the computation as the shares would have had an anti-dilutive effect.
Employee Defined Benefit Plan
The Company has historically maintained a passive pension plan (“Swiss Plan”) covering employees of its Switzerland subsidiary which was classified and accounted for as a defined contribution plan. Based on new guidance obtained in the fourth quarter of fiscal year 2007 from the Swiss Auditing Chamber’s Auditing Practice Committee and its Accounting Practice Committee with respect to a change in Swiss pension law, the Company concluded that the features of the Swiss Plan now conform to a defined benefit plan. As a result, the Company adopted the recognition and disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, an amendment of SFAS Nos. 87, 88, 106 and 132R (“SFAS 158”) effective October 1, 2007. This model allocates pension costs over the service period of employees in the plan. The underlying principle is that employees render service ratably over this period, and therefore, the income statement effects of pensions should follow a similar pattern.
SFAS No. 158 requires recognition of the funded status, or difference between the fair value of plan assets and the projected benefit obligations of the pension plan on the statement of financial position as of December 28, 2007, with a corresponding adjustment to accumulated other comprehensive income. If the projected benefit obligation exceeds the fair value of plan assets, then that difference or unfunded status represents the pension liability. The Company conformed the pension assets and liabilities to SFAS No. 158 and recorded a corresponding reduction of $371,000, net of tax, to the December 28, 2007 balance of accumulated other comprehensive income. (see Note 10)
Due to adoption of SFAS No. 158 and the new accounting guidance relating Swiss pension law changes, the Company records a net periodic pension cost in the consolidated statement of operations. The liabilities and annual income or expense of the Swiss Plan is determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, and the long-term rate of asset return (based on the market-related value of assets). The fair values of plan assets are determined based on prevailing market prices.
Stock Based Compensation
Effective December 31, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, stock-based compensation expense for fiscal 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of December 30, 2005, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Stock-based compensation expense for all stock-based compensation awards granted after December 30, 2005 is based on the grant-date fair value estimated in accordance with the provisions of
F-13
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 1 — Significant Accounting Policies – (continued)
SFAS No. 123R. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of three to four years. Prior to the adoption of SFAS No. 123R, the Company recognized stock-based compensation expense in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In March 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS No. 123R and the valuation of share-based payments for public companies. The Company has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123R. (See Note 11)
The Company accounts for options granted to persons other than employees and directors under SFAS No. 123 and EITF No. 98-16,Accounting for EquityInvestments That Are Issued to Other Than Employees for Acquiring or in Conjunctionwith Selling Goods and Services.As such, the fair value of such options is periodically remeasured using the Black-Scholes option-pricing model and income or expense is recognized over the vesting period.
Accounting for Warrants
The Company accounts for the issuance of Company derivative equity instruments in accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). The Company has agreed to use its best efforts to register and maintain registration of the common shares underlying certain warrants (the “Warrant Shares”) that were issued by the Company with debt instruments, so that the warrant holder may freely sell the Warrant Shares if the warrant is exercised, and the Company agreed that in any event it would secure effective registration within four months of issuance. In addition, while the relevant warrant agreement does not require cash settlement if the Company fails to register the Warrant Shares, it does not specifically preclude cash settlement. As a result EITF 00-19 requires the Company to assume that in the absence of effective registration it may be required to settle the these warrants for cash when they are exercised. Accordingly, the Company’s agreement to register and maintain registration of the Warrant Shares without express terms for settlement in the absence of effective registration is presumed to create a liability to settle these warrants in cash, requiring liability classification. The Company has issued other warrants under an agreement that expressly provides that if the Company fails satisfy registration requirements the Company will be obligated only to issue additional common stock as the holder’s sole remedy, with no possibility of settlement in cash. The Company accounts for those warrants as equity because additional shares are the only form of settlement available to the holder. The Company uses the Black-Scholes option pricing model as the valuation model to estimate the fair value of those warrants. The Company evaluates the balance sheet classification of the warrants during each reporting period. Expected volatilities are based on historical volatility of the Company’s stock. The expected life of the warrant is determined by the amount of time remaining on the original six year term of the relevant warrant agreement. The risk-free rate of return for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at each reporting period. Any gains or losses resulting from the changes in fair value of the warrants classified as a liability from period to period are included as an increase or decrease of other income (expense). The warrants that are accounted for as equity are only valued on the issuance date and not subsequently revalued. Once registration becomes effective for the resale of warrant shares, the Company will be obligated to use its best efforts to maintain registration, and at that point the Company believes it will be appropriate to reclassify the liability warrants to equity subject to reassessment of the classification at that time.
Comprehensive Loss
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-14
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 1 — Significant Accounting Policies – (continued)
statements of operations and are recorded directly into a separate section of stockholders’ equity on the consolidated balance sheets.
F-15
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 1 — Significant Accounting Policies – (continued)
Comprehensive loss and its components consist of the following (in thousands):
| | | | | | |
| | 2007 | | 2006 | | 2005 |
| Net loss | | $ | (15,999 | ) | | $ | (15,044 | ) | | $ | (11,175 | ) |
| Foreign currency translation adjustment | | | 1,033 | | | | 743 | | | | (878 | ) |
| Comprehensive loss | | $ | (14,966 | ) | | $ | (14,301 | ) | | $ | (12,053 | ) |
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157Fair Value Measurements (“SFAS 157”). SFAS No. 157 provides a new single authoritative definition of fair value and provides enhanced guidance for measuring the fair value of assets and liabilities and requires additional disclosures related to the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 is effective for the Company as of December 29, 2007. The Company is currently assessing the impact, if any, of SFAS No. 157 on its consolidated financial statements.
In February 2008, the FASB issued Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157, which defers the implementation for the non-recurring nonfinancial assets and liabilities from fiscal years beginning after November 15 , 2007 to fiscal years beginning after November 15, 2008. The provisions of SFAS No. 157 will be applied prospectively. The statement provisions effective as of December 29, 2007, do not have a material effect on the Company’s consolidated financial position and results of operations. Management does not believe that the remaining provisions will have a material effect on the Company’s consolidated financial position and results of operations when they become effective on January 3, 2009.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS No. 159 permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. SFAS No. 159 is intended to improve financial reporting by allowing companies to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently and to do so without having to apply complex hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value and does not affect disclosure requirements in other accounting standards. SFAS No. 159 will be effective for the Company’s its next fiscal year starting on December 29, 2007, and it is currently evaluating whether it will adopt the fair value measurement option allowed by the standard.
In December 2007, the FASB issued SFAS No. 141(R)Business Combinations(“SFAS 141R”), which replaces SFAS No. 141,Business Combinations. SFAS No. 141R requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their acquisition-date fair values, (ii) changes the recognition of assets acquired and liabilities assumed arising from contingencies, (iii) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, requires changes in fair value to be recognized in earnings until settled, (iv) requires companies to revise any previously issued post-acquisition financial information to reflect any adjustments as if they had been recorded on the acquisition date, (v) requires the reversals of valuation allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties to be recognized in earnings, and (vi) requires the expensing of acquisition-related costs as incurred. SFAS No. 141R also requires additional disclosure of information surrounding a business combination to enhance financial statement users’ understanding of the nature and financial impact of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with the exception of accounting for changes in a valuation
F-16
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 1 — Significant Accounting Policies – (continued)
allowance for acquired deferred tax assets and the resolution of uncertain tax positions accounted for under FIN 48, which is effective on January 1, 2009 for all acquisitions. The Company is currently assessing the impact, if any, of SFAS No. 141R on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51 (“SFAS 160”). SFAS No. 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary. SFAS No. 160 also requires that a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. Upon adoption of SFAS No. 160, the Company will be required to report its noncontrolling interests as a separate component of stockholders’ equity. The Company will also be required to present net income allocable to the noncontrolling interests and net income attributable to the stockholders of the Company separately in its consolidated statements of operations. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS No. 160 shall be applied prospectively. SFAS No. 160 will be effective for the Company’s 2009 fiscal year. The Company does not expect the adoption of SFAS No. 160 will have a material impact on its consolidated financial statements.
Prior Year Reclassifications
Certain reclassifications have been made to the prior financial statement information to conform with current period presentation.
Note 2 — Short-Term Investments — Restricted
Short-term investments consist of a 12-month Certificate of Deposit with a 4.5% interest rate to collateralize capital leases funded under a lease line of credit with Mazuma Capital Corporation (see Note 8). The short-term investments are classified as held to maturity, carried at amortized cost, and approximate fair value.
Note 3 — Accounts Receivable — Trade, net
Accounts receivable consisted of the following at December 28, 2007 and December 29, 2006 (in thousands):
| | | | |
| | 2007 | | 2006 |
| Domestic | | $ | 2,116 | | | $ | 2,880 | |
| Foreign | | | 5,466 | | | | 4,334 | |
| | | | 7,582 | | | | 7,214 | |
| Less allowance for doubtful accounts and sales returns | | | 684 | | | | 690 | |
| | | $ | 6,898 | | | $ | 6,524 | |
Note 4 — Inventories
Inventories consisted of the following at December 28, 2007 and December 29, 2006 (in thousands):
| | | | |
| | 2007 | | 2006 |
| Raw materials and purchased parts | | $ | 914 | | | $ | 690 | |
| Work in process | | | 2,035 | | | | 1,669 | |
| Finished goods | | | 9,792 | | | | 10,580 | |
| | | $ | 12,741 | | | $ | 12,939 | |
F-17
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 5 — Prepaids, Deposits, and Other Current Assets
Prepaids, deposits, and other current assets consisted of the following at December 28, 2007 and December 29, 2006 (in thousands):
| | | | |
| | 2007 | | 2006 |
| Prepaids and deposits | | $ | 1,330 | | | $ | 1,455 | |
| Other current assets | | | 280 | | | | 468 | |
| | | $ | 1,610 | | | $ | 1,923 | |
Note 6 — Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 28, 2007 and December 29, 2006 (in thousands):
| | | | |
| | 2007 | | 2006 |
| Machinery and equipment | | $ | 14,250 | | | $ | 13,053 | |
| Furniture and fixtures | | | 6,491 | | | | 5,985 | |
| Leasehold improvements | | | 4,998 | | | | 4,952 | |
| | | | 25,739 | | | | 23,990 | |
| Less accumulated depreciation | | | 19,967 | | | | 18,144 | |
| | | $ | 5,772 | | | $ | 5,846 | |
Depreciation expense for each of the years ended December 28, 2007, December 29, 2006, and December 30, 2005 was approximately $2.0 million.
Note 7 — Investment in Joint Venture
The Company owns a 50% equity interest in a joint venture, the Canon Staar Co., Inc. (“CSC”), with Canon Inc. and Canon Marketing Japan Inc., together the “Canon Companies” (see Note 1). The investment in the Japanese joint venture is accounted for using the equity method of accounting. The Company records its share of investment income or loss based on its 50% ownership in the joint venture; however, no losses are recognized to the extent they exceed the carrying value of the investment as the Company has no obligation to fund operating losses and no other commitments or guarantees to CSC. Therefore, no losses exceeding the investment balance are recorded. Dividends received are recorded under the equity method as a reduction to the investment. The principal difference between 50% of the equity balance recorded on CSC’s financial statements and the Company’s recorded investment in the joint venture relates to the fiscal year 2000 write down of the investment of approximately $3.6 million due to disputes between the Company and the Canon Companies. The disputes were subsequently resolved in late 2001.
The financial statements of CSC include the following information (in thousands):
| | | | |
| | 2007 | | 2006 |
| Current assets | | $ | 6,768 | | | $ | 6,507 | |
| Non-current assets | | | 707 | | | | 2,986 | |
| Current liabilities | | | 3,465 | | | | 1,143 | |
| Non-current liabilities | | | 840 | | | | 778 | |
| Net sales | | | 8,086 | | | | 10,368 | |
| Gross profit | | | 3,399 | | | | 5,461 | |
| (Loss) Income from operations | | | (1,832 | ) | | | 483 | |
| Net (Loss) Income | | $ | (1,916 | ) | | $ | 228 | |
F-18
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 7 — Investment in Joint Venture – (continued)
For 2007, the Company’s share of the loss on its investment in CSC was $958,000, of which only $280,000 was recorded to reduce the Company’s investment in CSC to zero.
The Company’s equity in earnings of the joint venture for years with net income was calculated as follows (in thousands):
| | | | | | |
| | 2007 | | 2006 | | 2005 |
| Joint venture net (loss) income | | $ | (1,916 | ) | | $ | 228 | | | $ | 316 | |
| Equity interest | | | 50 | % | | | 50 | % | | | 50 | % |
| Equity in operations of joint venture | | $ | (958)* | | | $ | 114 | | | $ | 158 | |
| * | Limited to Staar’s carrying value in the joint venture investment, which was written off in fiscal year 2007 to zero by recognizing an investment loss in the amount of $280,000, net of dividends received of $117,000. |
The Company received dividends of $117,000, $0 and $0 in 2007, 2006 and 2005, respectively.
The Company recorded sales of certain IOL products to CSC of approximately $96,000, $67,000 and $180,000 in fiscal years 2007, 2006 and 2005, respectively.
The Company purchased preloaded injectors from CSC in the amount of $2.7 million, $2.2 million, and $2.0 million in fiscal years 2007, 2006, and 2005, respectively.
The Company owed CSC $0 and $702,000 as of December 28, 2007 and December 29, 2006, respectively, for purchases of preloaded injectors.
As further discussed in Note 18, on December 29, 2007 (fiscal year 2008), the Company acquired the remaining 50% of the joint venture.
Note 8 — Notes Payable
Credit Facilities
The Company has credit facilities with different lenders to support operations in the U.S. and Germany.
Broadwood Loan Notes
On March 21, 2007, STAAR entered into a loan arrangement with Broadwood Partners, L.P. (“Broadwood”). Pursuant to a Promissory Note (the “March 2007 Note”) between STAAR and Broadwood, Broadwood loaned $4 million to STAAR. The March 2007 Note had a term of three years and bore interest at a rate of 10% per annum, payable quarterly. The March 2007 Note was not secured by any collateral, may be pre-paid by STAAR at any time without penalty, and was not subject to covenants based on financial performance or financial condition (except for insolvency). The March 2007 Note was repaid by STAAR on June 27, 2007.
As additional consideration for the loan, STAAR also entered into a Warrant Agreement (the “March 2007 Warrant Agreement”) with Broadwood granting the right to purchase up to 70,000 shares of STAAR’s Common Stock at an exercise price of $6.00 per share, exercisable for a period of six years, with additional warrants issuable to Broadwood if the March 2007 Note remained outstanding beginning June 30, 2007. Due to the repayment of the March 2007 Note on June 27, 2007, no additional warrants are issuable to Broadwood by STAAR. The warrant agreement also provides that STAAR will register the shares underlying the warrant agreement for resale with the SEC by a specified date and maintain registration. Accordingly, in accordance with the provisions of Emerging Issues Task Force 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”), the warrant is accounted for as a liability because the Company is required to assume that a warrant exercised when registration requirements have not been satisfied may be settled in cash. The warrant liability must be revalued at
F-19
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 8 — Notes Payable – (continued)
each reporting period with changes in fair value being reflected in the consolidated statements of operations. STAAR used the Black-Scholes valuation model to estimate the warrant’s fair value as of and subsequent to the issuance date. As of March 21, 2007 the fair value of the warrant liability approximated $250,000 with the residual amount of the total $4 million in proceeds, or $3.75 million being allocated to the March 2007 Note. The $250,000 was treated as an additional discount on the loan and the unamortized balance of $215,000 was written off and included in other expenses, net, when the loan was paid off in June 2007. The fair value of the warrant as of December 28, 2007 approximated $68,000, with the change in value of $182,000 recorded in other income.
The fair value of the warrant was estimated on March 21, 2007 (issuance date) and December 28, 2007 using a Black-Scholes option valuation model applying the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The expected life of the warrant is determined by the amount of time remaining on the original six year term of the agreement. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at each reporting period.
| | | | |
| | As of
March 21,
2007 | | As of
December 28,
2007 |
| Expected dividends | | | 0 | % | | | 0 | % |
| Expected volatility | | | 73.3 | % | | | 62.5 | % |
| Risk-free rate | | | 4.45 | % | | | 3.77 | % |
| Remaining life (in years) | | | 6.0 | | | | 5.25 | |
On December 14, 2007, the Company borrowed $5 million from Broadwood Partners, L.P. (“Broadwood”) pursuant to a Senior Promissory Note (the “Note”) between the Company and Broadwood. The borrowed funds were used to finance the cash consideration and related transaction costs in the Company’s purchase of the remaining interests of the Canon companies in its Canon Staar Co., Inc. joint venture. The Note has a term of three years and bears interest at a rate of 7% per annum. The Note is not secured by any collateral, may be pre-paid by the Company at any time without penalty, and is not subject to covenants based on financial performance or financial condition (except for insolvency). The Note provides that, with certain exceptions, the Company will not incur indebtedness senior to or at parity with its indebtedness under the Note without the consent of Broadwood.
Based on representations made by Broadwood in the Promissory Note, on the date of the transaction Broadwood beneficially owned 4,396,231 shares of the Company’s common stock, comprising 15% of the Company’s common stock as of December 14, 2007. Based on publicly available information filed by Broadwood, Neal Bradsher, President of Broadwood Partners, L.P., may have been deemed to beneficially own all of the 4,396,231 shares.
As additional consideration for the loan, the Company also entered into a Warrant Agreement (the “December 2007 Warrant Agreement”) with Broadwood granting the right to purchase up to 700,000 shares of Common Stock at an exercise price of $4.00 per share, exercisable for a period of six years. The December 2007 Note also provides that if the Company has an indebtedness outstanding on June 29, 2009, it will issue additional warrants on the same terms as set forth in the December 2007 Warrant Agreement in a number equal to 700,000 times the percentage of the original $5 million principal that remains outstanding. The December 2007 Warrant Agreement also provides that the Company will register the underlying shares of the warrants covering the resale of the warrant shares with the SEC within 150 days of issuance of the warrants and maintain effective registration and if not registered by the specified date, the Company is only obligated to issue additional 30,000 warrants per month for each month that the Company remains non compliant with the registration requirement through the term of the warrants (2,013,000 maximum shares that may be issued).
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TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 8 — Notes Payable – (continued)
The December 2007 warrant has been accounted for as an equity instrument in accordance with the provisions of EITF 00-19. Additionally, in accordance with Accounting Principles Board (“APB”) Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” the total $5 million proceeds were allocated to the December 2007 Warrant and Note based on their relative fair values, approximating $842,000 and $4.2 million on the issuance date, respectively. The $842,000 was treated as an additional discount on the loan and will be amortized using the effective interest method over the life of the loan. The Company believes that it is not probable that it will issue any additional warrants related to the aforementioned stock registration requirements and therefore no contingent liability is accrued as of December 28, 2007.
The fair value of the warrant was estimated on December 14, 2007, issuance date, using a Black-Scholes option valuation model applying the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The expected life of the warrant is determined by the amount of time remaining on the original six year term of the agreement. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at each reporting period.
| | |
| | As of
December 14,
2007 |
| Expected dividends | | | 0 | % |
| Expected volatility | | | 67.3 | % |
| Risk-free rate | | | 3.88 | % |
| Remaining life (in years) | | | 6.0 | |
The Company’s lease agreement with Farnam Street Financial, Inc., as amended on October 9, 2006, provides for purchases of up to $1,500,000 of property, plant and equipment. In accordance with the requirements of SFAS 13 “Accounting for Leases,” purchases under this facility are accounted for as capital leases and have a three-year term. Under the agreement, the Company has the option to purchase any item of the leased property, at the end of the respective items lease terms, at a mutually agreed fair value. On April 1, 2007, the Company signed an additional leasing schedule with Farnam, which provides for additional purchases of $800,000 during the next fiscal year. The terms of this new schedule conform to the amended agreement dated October 9, 2006. Approximately $364,000 in borrowings were available under this facility as of December 28, 2007.
The Company’s lease agreement with Mazuma Capital Corporation, as amended on August 16, 2006, provides for purchases of up to $301,000 of property, plant and equipment. In accordance with the requirements of SFAS 13 “Accounting for Leases,” purchases under this facility are accounted for as capital leases and have a two-year term. The Company was required to open a certificate of deposit as collateral in STAAR Surgical Company’s name at the underwriting bank for 50% of the assets funded by Mazuma. As of December 28, 2007, the Company had a certificate of deposit for approximately $150,000 recorded as “short-term investment — restricted” with a 12-month term at a fixed interest rate of 4.5%. The agreement also provides that the Company may elect to purchase any item of the leased property at the end of its lease term for $1. No borrowings were available under this facility as of December 28, 2007.
The Company’s German subsidiary, Domilens, entered into a credit agreement on August 30, 2005. The renewed credit agreement provides for borrowings of up to 100,000 EUR ($145,000 at the rate of exchange on December 28, 2007), at a rate of 8.5% per annum and does not have a termination date. The credit agreement may be terminated by the lender in accordance with its general terms and conditions. The credit facility is not secured. There were no borrowings outstanding as of December 28, 2007 and December 29, 2006 and the full amount of the line was available for borrowing as of December 28, 2007.
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TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 8 — Notes Payable – (continued)
The Company was in compliance with the covenants of these credit facilities as of December 28, 2007.
Note 9 — Income Taxes
The provision for income taxes consists of the following (in thousands):
| | | | | | |
| | 2007 | | 2006 | | 2005 |
Current tax provision:
| | | | | | | | | | | | |
| U.S. federal | | $ | — | | | $ | — | | | $ | — | |
| State | | | 6 | | | | 17 | | | | 18 | |
| Foreign | | | 344 | | | | 1,341 | | | | 1,221 | |
| Total current provision | | | 350 | | | | 1,358 | | | | 1,239 | |
Deferred tax provision:
| | | | | | | | | | | | |
| U.S. federal and state | | | — | | | | — | | | | — | |
| Foreign | | | 493 | | | | 179 | | | | — | |
| Total deferred provision | | | 493 | | | | 179 | | | | — | |
| Provision for income taxes | | $ | 843 | | | $ | 1,537 | | | $ | 1,239 | |
As of December 28, 2007, the Company had $107.7 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 2026.
The Company had a net income taxes payable at December 28, 2007 of $363,000 and net income tax payable at December 29, 2006 of $830,000. Included in the Company’s 2006 foreign tax provision is approximately $700,000 in additional taxes that assessed by the German Ministry of Finance pursuant to the Domilens Investigation of which $465,000 was reversed in 2007 following a final assessment.
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):
| | | | | | | | | | | | |
| | 2007 | | 2006 | | 2005 |
| Computed provision for taxes based on income at statutory rate | | | 34.0 | % | | $ | (5,153 | ) | | | 34.0 | % | | $ | (4,592 | ) | | | 34.0 | % | | $ | (3,386 | ) |
Increase (decrease) in taxes resulting from:
| | | | | | | | | | | | | | �� | | | | | | | | | | |
| Permanent differences | | | (0.3 | ) | | | 46 | | | | (1.6 | ) | | | 210 | | | | (0.2 | ) | | | 19 | |
| State taxes, net of federal income tax benefit | | | — | | | | 4 | | | | (0.1 | ) | | | 11 | | | | (0.1 | ) | | | 12 | |
Tax effect attributed to foreign
operations | | | 3.3 | | | | (502 | ) | | | (5.4 | ) | | | 733 | | | | (3.0 | ) | | | 300 | |
Foreign earnings previously
considered permanently reinvested | | | (12.4 | ) | | | 1,883 | | | | — | | | | — | | | | — | | | | — | |
| Foreign dividend withholding | | | (3.8 | ) | | | 570 | | | | — | | | | — | | | | — | | | | — | |
| Other | | | (0.5 | ) | | | 67 | | | | — | | | | — | | | | (0.3 | ) | | | 29 | |
| Valuation allowance | | | (25.9 | ) | | | 3,928 | | | | (38.3 | ) | | | 5,175 | | | | (42.8 | ) | | | 4,265 | |
| Effective tax provision (benefit) rate | | | (5.6 | )% | | $ | 843 | | | | (11.4 | )% | | $ | 1,537 | | | | (12.4 | )% | | $ | 1,239 | |
Included in the state tax provision is an increase to the state deferred tax asset and corresponding increase to the valuation allowance of $372,000, $1,256,000 and $945,000 for 2007, 2006 and 2005, respectively. This results in a total state tax provision of $6,000 for 2007, $17,000 for 2006 and $18,000 for 2005.
F-22
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 9 — Income Taxes – (continued)
During the year ended December 28, 2007, the Company decided to adopt a plan to repatriate earnings from certain foreign subsidiaries commencing during the 2008 fiscal year. Such repatriations, previously considered indefinitely reinvested, are not expected to exceed $11.4 million. Withholding and U.S. taxes have been provided on such amount.
Undistributed earnings are considered to be indefinitely reinvested amount to $9.7 million. Accordingly, no provision of United States federal and state income taxes has been provided thereon. Such earnings would become taxable upon the sale or liquidation of these non-U.S. foreign subsidiaries or upon remittance of dividends. Determination of the amount of unrecognized deferred United States income tax liability is not practicable because of the complexities associated with its hypothetical calculation.
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 December 28, 2007 and December 29, 2006 are as follows (in thousands):
| | | | |
| | 2007 | | 2006 |
Current deferred tax assets (liabilities):
| | | | | | | | |
| Allowance for doubtful accounts and sales returns | | $ | 77 | | | $ | 120 | |
| Inventory | | | 881 | | | | 675 | |
| Accrued vacation | | | 260 | | | | 238 | |
| Pension plan | | | 121 | | | | — | |
| Other | | | 25 | | | | — | |
| State taxes | | | 3 | | | | 3 | |
| Accrued expenses | | | — | | | | 99 | |
| Valuation allowance | | | (1,469 | ) | | | (1,314 | ) |
| Total current deferred tax liabilities | | $ | (102 | ) | | $ | (179 | ) |
Non-current deferred tax assets (liabilities):
| | | | | | | | |
| Net operating loss and capital loss carryforwards | | | 43,795 | | | | 36,515 | |
| Stock-based payments | | | 1,098 | | | | 691 | |
| Business, foreign and AMT credit carryforwards | | | 801 | | | | 879 | |
| Capitalized R&D | | | 527 | | | | 409 | |
| Reserve for restructuring costs | | | 347 | | | | 464 | |
| Contributions | | | 164 | | | | 89 | |
| Depreciation and amortization | | | (51 | ) | | | 75 | |
| Foreign tax withholding | | | (377 | ) | | | — | |
| Foreign earnings not permanently reinvested | | | (2,924 | ) | | | — | |
| Valuation allowance | | | (43,950 | ) | | | (39,122 | ) |
| Total non-current deferred tax liabilities | | $ | (570 | ) | | $ | — | |
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. Due to the Company’s recent history of losses, the valuation allowance fully offsets the value of U.S. deferred tax assets on the Company’s balance sheet as of December 28, 2007. Further, under Federal Tax Law Internal Revenue Code Section 382, significant changes in ownership may restrict the future utilization of these tax loss carry forwards.
F-23
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 9 — Income Taxes – (continued)
Effective December 30, 2006, the Company adopted Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”, an interpretation of Statement of Financial Accounting Standards No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The adoption of FIN 48 did not have an impact on the Company’s Consolidated Financial Statements.
The following tax years remain subject to examination:
| | |
| Significant Jurisdictions | | Open Years |
| U.S. Federal | | | 2004 – 2006 | |
| California | | | 2003 – 2006 | |
| Germany | | | 2006 | |
| Switzerland | | | 2002 – 2006 | |
Loss before income taxes are as follows (in thousands):
| | | | | | |
| | 2007 | | 2006 | | 2005 |
| Domestic | | $ | (17,418 | ) | | $ | (15,824 | ) | | $ | (12,665 | ) |
| Foreign | | | 2,262 | | | | 2,317 | | | | 2,707 | |
| | | $ | (15,156 | ) | | $ | (13,507 | ) | | $ | (9,958 | ) |
Note 10 — Employee Benefit Plans
Defined Benefit Plan
The Company has historically maintained a passive pension plan covering employees of its Switzerland subsidiary (“Swiss Plan”) which was classified and accounted for as a defined contribution plan. Based on changes in Swiss pension law, during the fourth quarter of fiscal year 2007, the Company concluded that the features of the Swiss Plan now conform to a defined benefit plan. As a result, the Company adopted the recognition and disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, an amendment of SFAS Nos. 87, 88, 106 and 132R (“SFAS 158”) effective October 1, 2007.
In accordance with SFAS No. 158, the Company recorded a corresponding reduction of $371,000, net of tax, to the December 28, 2007 balance of accumulated other comprehensive income.
F-24
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 10 — Employee Benefit Plans – (continued)
The incremental effect of applying SFAS No. 158 is as follows:
| | | | | | |
| | Before
Adoption of
FAS 158 | | Adjustments | | After
Adoption of
FAS 158 |
| | | (In Thousands) |
| Deferred income taxes - long term | | $ | (691 | ) | | $ | 121 | | | $ | (570 | ) |
| Other long-term liabilities | | | (69 | ) | | | (550 | ) | | | (619 | ) |
| Total liabilities | | | (17,525 | ) | | | (429 | ) | | | (17,954 | ) |
| Accumulated other comprehensive income | | | (1,922 | ) | | | 371 | | | | (1,551 | ) |
| Accumulated deficit | | | 102,638 | | | | 58 | | | | 102,696 | |
| Total stockholders’ equity | | | (36,654 | ) | | | 429 | | | | (36,225 | ) |
| Total liabilities and stockholders’ equity | | | (54,179 | ) | | | — | | | | (54,179 | ) |
Net periodic pension cost and projected and accumulated pension obligation for the Company’s Swiss Plan were calculated on December 28, 2007 using the following assumptions:
| | |
| | 2007 |
| Discount rate | | | 3.75 | % |
| Salary increases | | | 2.00 | % |
| Expected return on plan assets | | | 4.50 | % |
| Expected average remaining working lives in years | | | 9.90 | |
The discount rate of 3.75% is based on an assumed pension benefit maturity of 10 to 15 years. The rate was estimated using the rate of return for high quality Swiss corporate bonds that mature in eight years. This maturity was used as there are significant numbers of high quality Swiss bonds, but very few bonds issued with maturities with longer lives. As of December 28, 2007, the rate for high quality Swiss corporate bonds was 3.45%. In order to determine an appropriate discount rate, the eight year rate of return was then extrapolated along the yield curve of Swiss government bonds.
The salary increase rate of 2% was based on the Company’s best assessment for on-going increases over time.
The expected long-term rate of return on plan assets is based on the expected asset allocation and assumptions concerning long-term interest rates, inflation rates, and risk premiums for equities above the risk-free rates of return. These assumptions take into consideration historical long-term rates of return for relevant asset categories.
F-25
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 10 — Employee Benefit Plans – (continued)
At December 28, 2007, the projected benefit obligation was $2,960,000, accumulated benefit obligation was $2,688,000 and the fair value of the plan assets was $2,410,000. A summary of the changes in benefit obligation and plan assets is as follows (in thousands):
| | |
| | 2007 |
Change in Projected Benefit Obligation for the Period from
September 29, 2007 – December 28, 2007:
| | | | |
| Projected benefit obligation, beginning of period | | $ | — | |
| Service cost | | | 60 | |
| Interest cost | | | 26 | |
| Participant contributions | | | 46 | |
| Benefits (paid) deposited | | | 19 | |
| Vested benefit deposit (initial assessment) | | | 2,715 | |
| Impact of currency exchange rate changes | | | 94 | |
| Projected benefit obligation, end of period | | $ | 2,960 | |
Changes in Plan Assets for the Period from
September 29, 2007 – December 28, 2007:
| | | | |
| Plan assets at fair value, beginning of period | | $ | — | |
| Actual return on plan assets | | | (492 | ) |
| Employer contributions | | | 46 | |
| Participant contributions | | | 46 | |
| Benefits (paid) deposited | | | 19 | |
| Vested benefit deposit (initial assessment) | | | 2,715 | |
| Impact of current exchange rate changes | | | 76 | |
| Plan assets at fair value, end of period | | $ | 2,410 | |
Net Amount Recognized in Consolidated Balance Sheets
| | | | |
| Funded status (underfunded), end of year | | $ | (550 | ) |
| Other long term liabilities | | $ | (550 | ) |
Amount Recognized in Accumulated Other Comprehensive Income, net of tax
| | $ | (371 | ) |
A summary of the components of the Company’s net periodic pension cost is as follows (in thousands):
| | |
| | 2007 |
| Service cost | | $ | 60 | |
| Interest cost | | | 26 | |
| Expected return on plan assets | | | (31 | ) |
| Net periodic pension cost | | $ | 55 | |
The amount in accumulated other comprehensive income as of December 28, 2007 that is expected to be recognized as a component of the net periodic pension costs in the subsequent year is $25,000.
F-26
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 10 — Employee Benefit Plans – (continued)
The estimated future benefit payments for the Swiss Plan are as follows (in thousands):
| | |
| Fiscal Year | | |
| 2008 | | $ | 39 | |
| 2009 | | | 45 | |
| 2010 | | | 51 | |
| 2011 | | | 57 | |
| 2012 | | | 64 | |
| 2013 – 2017 | | | 428 | |
In fiscal 2008, the Company expects to make cash contributions totaling approximately $188,000 to the Swiss Plan.
Swiss Plan assets are comprised of the following:
| | |
| | 2007 |
| Bonds | | | 79 | % |
| Real Estate (including real estate funds) | | | 14 | % |
| Equity securities | | | 6 | % |
| Liquid assets | | | 1 | % |
| | | | 100 | % |
The Company has contracted with the Allianz Suisse Life Insurance Company’s BVG Collective Foundation to manage the Swiss Plan. The investment strategy is determined by the Swiss insurance company and applies to all members of the collective foundation.
Defined Contribution Plan
The Company maintains a 401(k) profit sharing plan (“401(k) Plan”) for the benefit of qualified employees in North America. During the fiscal year ended December 28, 2007, employees who participate may elect to make salary deferral contributions to the 401(k) Plan up to the $15,500 of the employees’ eligible payroll subject to annual Internal Revenue Code maximum limitations. The Company makes a contribution of 50% of the employee’s contribution up to the first 2% of the employee’s compensation, and 25% of the next 4% of compensation. In addition, STAAR may make a discretionary contribution to qualified employees, in accordance with the 401(k) Plan.
Note 11 — Stockholders’ Equity
Common Stock
During 2007, the Company completed a public offering with institutional investors of 3,600,000 shares of the Company’s common stock, for net proceeds of $16.6 million. Also during fiscal 2007, the Company issued 69,151 shares of restricted stock to certain employees and a director and 47,000 shares of common stock to an employee in consideration for services rendered to the Company. Stock compensation expense of $125,000 was recorded during fiscal 2007 as a result of the issuance of common stock. As of December 28, 2007, 5,346 of the restricted shares were vested.
During fiscal year 2006, the Company issued 46,000 shares of restricted stock to certain employees and a consultant in consideration for future services to the Company. During fiscal 2007, 10,064 of the shares vested and 9,060 shares were forfeited.
During fiscal year 2005, the Company issued 13,000 shares to consultants for services rendered to the Company. Also during 2005, the Company completed a private placement with institutional investors of
F-27
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 11 — Stockholders’ Equity – (continued)
4,100,000 shares of the Company’s common stock, for net proceeds of $13.4 million. Also during 2005, the Company issued 6,117 shares of restricted stock to certain employees and a consultant in consideration for future services to the Company. During fiscal 2007, 3,617 of the shares vested and 691 shares were forfeited.
Restricted shares are issued at fair market value on the date of grant, vest over a period of three or four years, and are subject to forfeiture until vested or the service period is terminated. Prior to 2006, the cost of the restricted stock was recorded as deferred equity compensation in Additional Paid-in Capital and amortized over the vesting period. Beginning in 2006, the amortization is included in stock-based compensation.
Share-Based Payments
The Company has adopted Statement of Financial Accounting Standards No. 123 (revised)Share Based Payment, (“SFAS 123R”) effective December 31, 2005. The Company previously applied APB Opinion No. 25Accounting for Stock Issued to Employees (“Opinion”) in accounting for stock option plans and in accordance with the Opinion, no compensation cost has been recognized for employee option grants for these plans in the prior period financial statements because there was no difference between the exercise price and the market price on the date of grant. The Company has elected to apply the Modified Prospective Application (“MPA”) in its implementation of SFAS No. 123R and its subsequent amendments and clarifications. Under this method, the Company has recognized stock based compensation expense only for awards newly made or modified on or after the effective date and for the portion of the outstanding awards for which requisite service will be performed on or after the effective date. Expenses for awards previously granted and earned have not been restated.
As of December 28, 2007, the Company has multiple share-based compensation plans, which are described below. The Company issues new shares upon option exercise once the optionee remits payment for the exercise price. The compensation cost that has been charged against income for the 2003 Omnibus Plan and the 1998 Stock Option Plan is set forth below (in thousands):
| | | | |
| | Fiscal Year Ended |
| | | December 28, 2007 | | December 29, 2006 |
| SFAS 123R expense | | $ | 1,350 | | | $ | 1,634 | |
| Restricted stock expense | | | 92 | | | | 91 | |
| Consultant compensation | | | 14 | | | | 116 | |
| Total | | $ | 1,456 | | | $ | 1,841 | |
There was no net income tax benefit recognized in the income statement for share-based compensation arrangements as the Company fully offsets net deferred tax assets with a valuation allowance. In addition, the Company capitalized $181,000 and $155,000 of SFAS No. 123R compensation to inventory for the fiscal years ended December 28, 2007 and December 29, 2006, respectively, and recognizes those amounts as expense under in Cost of Sales as the inventory is sold.
F-28
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 11 — Stockholders’ Equity – (continued)
Prior to January 1, 2006, no compensation expense was recognized in the consolidated statements of income. Had stock compensation expense in 2005 for employee options granted been determined based on their fair value at the measurement date, consistent with the fair value method of accounting prescribed by SFAS 123R, the Company’s net loss and net loss per share would have been adjusted as follows (in thousands, except per share data):
| | |
| | Fiscal Year
Ended
December 30,
2005 |
| Net loss as reported | | $ | (11,175 | ) |
| Add: Stock-based compensation expense determined under the fair value method of all awards | | | (1,038 | ) |
| Pro forma net loss | | $ | (12,213 | ) |
| Net loss per share, basic and diluted, as reported | | $ | (0.47 | ) |
| Pro forma net loss, basic and diluted, as reported | | $ | (0.52 | ) |
Stock Option Plans
In fiscal year 2003, the Board of Directors approved the 2003 Omnibus Equity Incentive Plan (the “2003 Plan”) authorizing awards of equity compensation, including options to purchase common stock and restricted shares of 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. Each year the number of shares reserved for issuance under the 2003 Plan is increased if necessary to provide that 2% of the total shares of common stock outstanding on the immediately preceding December 31 will be reserved for issuance. The 2003 Plan provides for various forms of stock-based incentives. To date, of the available forms of awards under the 2003 Plan, the Company has granted only stock options and restricted stock. Options under the plan are granted at fair market value on the date of grant, become exercisable over a three- or four-year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the 2003 Plan). Restricted stock grants under the 2003 Plan generally vest over a period of one, three or four years. Pursuant to the plan, options for 2,286,000 shares were outstanding at December 28, 2007 with exercise prices ranging between $3.00 and $11.24 per share. There were 112,000 shares of restricted stock outstanding at December 28, 2007.
In fiscal year 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 common stock or awards of common stock. The options under the plan were granted at fair market value on the date of grant, become exercisable over a three-year period, and expire 10 years from the date of grant. Pursuant to this plan, options for 500,000 were outstanding at December 28, 2007, 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 options to purchase common stock or awards of 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. During fiscal year 2001, pursuant to Article IV of the 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 three-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 771,000 were outstanding at December 28, 2007 with exercise prices ranging between $3.35 and $13.625 per share. No further awards may be made under this plan.
F-29
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 11 — Stockholders’ Equity – (continued)
In fiscal year 1995, the Company adopted the 1995 Consultant Stock Plan, authorizing the granting of options to purchase common stock or awards of common stock. Generally, options under the plan were 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 45,000 shares were outstanding at December 28, 2007 with an exercise price of $1.70 per share. No further awards may be made under this plan.
Under provisions of the Company’s 1991 Stock Option Plan, 2.0 million shares were reserved for issuance. Generally, options under this plan were granted at fair market value at the date of the grant, become exercisable over a three-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 60,000 shares were outstanding at December 28, 2007 with exercise prices ranging from $9.56 to $10.18 per share. No further awards may be made under this plan.
During fiscal years 1999 and 2000, the Company issued non-qualified options to purchase shares of its Common Stock to employees and consultants. Pursuant to these agreements, options for 55,000 shares were outstanding at December 28, 2007 with exercise prices ranging between $9.375 and $10.63.
During the fiscal year ended December 28, 2007, officers, employees and others exercised 163,000 options from the 1995, 1996, 1998, non-qualified and 2003 stock option plans at prices ranging from $2.96 to $4.88 resulting in net cash proceeds to the Company totaling $584,000.
During the fiscal year ended December 29, 2006, officers, employees and others exercised 753,000 options from the 1995, 1996, 1998, non-qualified and 2003 stock option plans at prices ranging from $1.91 to $7.00 resulting in net cash proceeds to the Company totaling $2,890,000.
In fiscal year 2005, officers, employees and others exercised 36,000 options from the 1998 and 2003 stock option plans at prices ranging from $2.00 to $4.62 resulting in cash proceeds totaling $130,000.
Assumptions
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model applying the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination behavior. The expected term of options granted is derived from the historical exercise activity over the past 15 years, and represents the period of time that options granted are expected to be outstanding. The Company used the shortcut method to calculate the expected term of 80,000 options granted in 2007 with a one year vesting life and 152,500 options granted in 2006 with a four year vesting life, as it has no historical experience for the expected term of options with these vesting lives. All other options granted with a three year vesting life during the fiscal year ended December 28, 2007 had an expected term of 5.41 years derived from historical exercise and termination activity. The Company has calculated a 9.59% estimated forfeiture rate used in the model for fiscal year 2007 option grants based on historical forfeiture experience. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
| | | | |
| | Fiscal Year Ended |
| | | December 28, 2007 | | December 29, 2006 |
| Expected dividend yield | | | 0 | % | | | 0 | % |
| Expected volatility | | | 69 | % | | | 73 | % |
| Risk-free interest rate | | | 4.52 | % | | | 4.17 | % |
| Expected term (in years) | | | 5.41 & 5.5 | | | | 5.2 & 7 | |
F-30
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 11 — Stockholders’ Equity – (continued)
A summary of option activity under the Plans as of December 28, 2007 is presented below:
| | | | | | | | |
| Options | | Shares
(000’s) | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic Value
(000’s) |
| Outstanding at December 29, 2006 | | | 3,472 | | | $ | 5.62 | | | | | | | | | |
| Granted | | | 620 | | | | 4.67 | | | | | | | | | |
| Exercised | | | (163 | ) | | | 3.57 | | | | | | | | | |
| Forfeited or expired | | | (212 | ) | | | 5.55 | | | | | | | | | |
| Outstanding at December 28, 2007 | | | 3,717 | | | $ | 6.70 | | | | 5.61 | | | $ | 41 | |
| Exercisable at December 28, 2007 | | | 2,662 | | | $ | 7.30 | | | | 4.36 | | | $ | 41 | |
The weighted-average grant-date fair value of options granted during the fiscal year ended December 28, 2007 was $2.94. The total fair value of options vested during fiscal years ended December 28, 2007 and December 29, 2006 was $1,606,000 and $1,725,000, respectively. The total intrinsic value of options exercised during the fiscal years ended December 28, 2007 and December 29, 2006 was $296,000 and $2,988,000, respectively.
A summary of the status of the Company’s non-vested shares as of December 28, 2007 and changes during the period is presented below:
| | | | |
| Nonvested Shares | | Shares
(000’s) | | Weighted-
Average Grant
Date Fair
Value |
| Nonvested at December 29, 2006 | | | 1,032 | | | $ | 3.30 | |
| Granted | | | 620 | | | | 2.94 | |
| Vested | | | (537 | ) | | | 2.99 | |
| Forfeited | | | (60 | ) | | | 3.69 | |
| Nonvested at December 28, 2007 | | | 1,055 | | | $ | 5.18 | |
As of December 28, 2007, there was $2.3 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 1.38 years.
The following table summarizes information about stock options outstanding and exercisable at December 28, 2007 (in thousands, except per share data):
| | | | | | | | | | |
| Range of Exercise Prices | | Number
Outstanding
at 12/28/07 | | Options
Outstanding
Weighted-
Average
Remaining
Contractual
Life | | Weighted-
Average
Exercise
Price | | Number
Exercisable
at 12/28/07 | | Weighted-
Average
Exercise
Price |
| $ 1.70 to $ 2.15 | | | 45 | | | | 3.7 years | | | $ | 1.70 | | | | 45 | | | $ | 1.70 | |
| $ 2.96 to $ 4.30 | | | 1,322 | | | | 5.7 years | | | $ | 3.76 | | | | 951 | | | $ | 3.79 | |
| $ 4.64 to $ 6.92 | | | 781 | | | | 7.9 years | | | $ | 5.59 | | | | 313 | | | $ | 5.94 | |
| $ 7.00 to $10.19 | | | 721 | | | | 6.3 years | | | $ | 8.03 | | | | 505 | | | $ | 8.30 | |
| $10.60 to $13.63 | | | 848 | | | | 2.8 years | | | $ | 11.44 | | | | 848 | | | $ | 11.44 | |
| $ 1.70 to $13.63 | | | 3,717 | | | | 5.6 years | | | $ | 6.70 | | | | 2,662 | | | $ | 7.30 | |
F-31
TABLE OF CONTENTS
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 12 — Commitments and Contingencies
Lease Obligations
The Company leases certain property, plant and equipment under capital and operating lease agreements. These leases vary in duration and many contain renewal options and/or escalation clauses. Current and long-term obligations under capital leases are classified in other current liabilities and other long-term debt in the Company’s Consolidated Balance Sheets.
Estimated future minimum lease payments under leases having initial or remaining non-cancelable lease terms in excess of one year as of December 28, 2007 were approximately as follows (in thousands):
| | | | |
| Fiscal Year | | Operating
Leases | | Capital
Leases |
| 2008 | | $ | 1,373 | | | $ | 1,058 | |
| 2009 | | | 886 | | | | 873 | |
| 2010 | | | 759 | | | | 509 | |
| 2011 | | | 275 | | | | — | |
| 2012 | | | 1 | | | | — | |
| Total minimum lease payments | | $ | 3,294 | | | $ | 2,440 | |
| Less amounts representing interest | | | — | | | | (307 | ) |
| | | $ | 3,294 | | | $ | 2,133 | |
Rent expense was approximately $1.4 million, $1.2 million and $1.2 million for the years ended December 28, 2007, December 29, 2006 and December 30, 2005, respectively.
The Company had the following assets under capital lease at December 28, 2007 and December 29, 2006 (in thousands):
| | | | |
| | 2007 | | 2006 |
| Machinery and equipment | | $ | 2,484 | | | $ | 1,290 | |
| Furniture and fixtures | | | 212 | | | | 145 | |
| Leasehold improvements | | | 148 | | | | 111 | |
| | | | 2,844 | | | | 1,546 | |
| Less accumulated depreciation | | | 607 | | | | 109 | |
| | | $ | 2,237 | | | $ | 1,437 | |
Depreciation expense for assets under capital lease for each of the years ended December 28, 2007, December 29, 2006, and December 30, 2005 was approximately $569,000, $146,000 and $4,000, respectively.
Supply Agreement
In December 2000, the Company entered into a minimum purchase agreement with another manufacturer for the purchase of viscoelastic solution. In January 2006, the Company extended this agreement through December 31, 2008 under the same purchasing terms as the original contract. 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, excluding the U.S and Canada, as requested by the Company. Purchases under the agreement for fiscal 2007, 2006, and 2005 were approximately $849,000, $502,000, and $728,000, respectively.
As of December 28, 2007, estimated future annual purchase commitments under this contract for fiscal year 2008 is $600,000.
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STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 12 — Commitments and Contingencies – (continued)
Indemnification Agreements
The Company has entered into indemnification agreements with its directors and officers that may require the Company: a) to indemnify them against liabilities that may arise by reason of their status or service as directors or officers, except as prohibited by applicable law; b) to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and c) 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’ liability insurance through a third party carrier.
Tax Filings
The Company’s tax filings are subject to audit by taxing authorities in jurisdictions where it conducts business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or potentially through the courts. Management believes the Company has adequately provided for any ultimate amounts that are likely to result from these audits; however, final assessments, if any, could be different than the amounts recorded in the consolidated financial statements.
Employment Agreements
The Company’s Chief Executive Officer and certain other officers have as provisions of their employment agreements certain rights, including continuance of cash compensation and benefits, upon a “change in control,” which may include an acquisition of substantially all of its assets.
Litigation and Claims
Moody v. STAAR Surgical Company; Parallax Medical Systems, Inc. v. STAAR Surgical Company. On September 21, 2007, Scott C. Moody, Inc. and Parallax Medical Systems, Inc. filed substantially identical complaints against STAAR in the Superior Court of California, County of Orange. Moody and Parallax are former independent regional manufacturer’s representatives (“RMRs”) of STAAR whose contracts with STAAR expired on July 31, 2007. They claim, among other things, that STAAR interfered with the plaintiffs’ contracts when it caused some of their current or former subcontractors to enter into new agreements to represent STAAR products, and that STAAR interfered with the plaintiffs’ prospective economic advantage when it informed a regional IOL distributor that each of the RMR’s contracts had a covenant restricting the sale of competing products. Moody claims general and compensatory damages of $32 million and Parallax claims general and compensatory damages of $48 million, and both plaintiffs request punitive damages.
On December 7, 2007 STAAR filed a general denial of the Parallax and Moody claims along with cross-complaints against Parallax and Moody for breach of contract. Among the facts STAAR relies on in opposing the Parallax and Moody complaints are documents and sworn testimony provided by the plaintiffs in early discovery pursuant to the California Code of Civil Procedure. This evidence included admissions that directly contradict certain of their claims and confirmed STAAR’s assessment that the plaintiffs could provide no evidence to support their claims for damages. As a result, STAAR has been advised that not only are the plaintiffs’ claims without merit, but that the plaintiffs could not reasonably and in good faith pursue certain of their claims and the asserted amounts of damages. Accordingly STAAR has demanded that the plaintiffs withdraw these claims and assertions pursuant to Section 128.7 of the California Civil Code, which is modeled on Rule 11 of the Federal Code of Civil Procedure. In early discovery Parallax and Moody also provided evidence and sworn testimony indicating serious breaches of contract during the terms of their RMR agreements, which STAAR believes harmed its business. This is among the evidence on which STAAR will rely in prosecuting its cross-complaints.
STAAR believes that the Parallax and Moody claims are without merit. It also believes that its cross complaints are well founded and that it may be able to recover a portion of its legal fees and expenses on certain legal bases, including the plaintiffs’ failure to promptly withdraw claims that are found to have been
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STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 12 — Commitments and Contingencies – (continued)
asserted in bad faith. Nevertheless, the outcome of litigation is never certain and the possibility that the plaintiffs will recover under their claims cannot be eliminated at this time. STAAR has not reserved funds against a negative outcome in the lawsuits. However, an unexpected negative outcome in these cases or litigation costs that are much greater than anticipated could result in material harm to STAAR’s business.
From time to time the Company is subject 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. STAAR maintains insurance coverage for product liability claims. While the Company does not believe that any of the claims known is likely to have a material adverse effect on its financial condition or results of operations, new claims or unexpected results of existing claims could lead to significant financial harm.
Note 13 — Other Liabilities
Other Current Liabilities
Other current liabilities consisted of the following at December 28, 2007 and December 29, 2006 (in thousands):
| | | | |
| | 2007 | | 2006 |
| Accrued salaries & wages | | $ | 1,910 | | | $ | 1,974 | |
| Commissions due to outside sales representatives | | | 544 | | | | 800 | |
| Accrued audit expenses | | | 542 | | | | 517 | |
| Accounts receivable credit balances | | | 516 | | | | 392 | |
| Accrued income taxes | | | 363 | | | | 830 | |
| Accrued insurance | | | 334 | | | | 484 | |
Payable related to acquisition of minority interest in Australia
subsidiary | | | — | | | | 770 | |
| Other | | | 1,332 | | | | 1,628 | |
| | | $ | 5,541 | | | $ | 7,395 | |
No item in “other” above exceeds 5% of total other current liabilities.
Note 14 — Related Party Transactions
The Company has had significant related party transactions as discussed in Notes 7, 8, 11, 12 and 18.
In addition to secured notes (see Note 8), the Company holds other various promissory notes from employees 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 employees and included in prepaids, deposits, and other current assets at December 28, 2007 and December 29, 2006 were $81,000 and $116,000, respectively.
Note 15 — Supplemental Disclosure of Cash Flow Information
Interest paid was $249,000, $175,000 and $181,000 for the years ended December 28, 2007, December 29, 2006, and December 30, 2005, respectively. Income taxes paid amounted to approximately $795,000, $731,000 and $1,047,000 for the years ended December 28, 2007, December 29, 2006, and December 30, 2005, respectively.
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STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 15 — Supplemental Disclosure of Cash Flow Information – (continued)
The Company’s non-cash investing and financing activities were as follows (in thousands):
| | | | | | |
| | 2007 | | 2006 | | 2005 |
Non-cash investing activities:
| | | | | | | | | | | | |
| Purchase of property and equipment on terms | | $ | 1,210 | | | $ | 1,228 | | | $ | 200 | |
| Deferred acquisition costs included in accounts payable | | | 187 | | | | — | | | | — | |
Non-cash financing activities:
| | | | | | | | | | | | |
| Notes receivable reserve | | | — | | | | (331 | ) | | | 746 | |
| Other charges | | | — | | | | 331 | | | | (746 | ) |
| Warrants issued with Broadwood notes | | | 842 | | | | — | | | | — | |
The Company had classified the proceeds from loans to officers and directors in fiscal years 2006 and 2005 as an investing activity in the Company’s Consolidated Statements of Cash Flows in accordance with paragraph 16 of Statement of Financial Accounting Standard No. 95, Statement of Cash Flows (“SFAS 95”). Alternatively, the Company could have classified the proceeds from loans to officers and directors as a financing activity in accordance with paragraph 18 of SFAS No. 95. The Company chose the foregoing classification because it believes that the presentation is more consistent with the position that the notes are investments to be collected, and not vehicles used to fund issuances of the Company’s common stock.
The effect on investing and financing activities had the Company chosen the alternative classification would have been as follows (in thousands):
| | | | | | | | |
| | As presented | | Alternative Presentation |
| | | 2006 | | 2005 | | 2006 | | 2005 |
| Net cash provided by (used in) investing activities | | $ | 140 | | | $ | 4,067 | | | $ | (1,041 | ) | | $ | 3,937 | |
| Net cash provided by financing activities | | | 2,795 | | | | 12,239 | | | | 3,976 | | | | 12,369 | |
During 2006, the Company settled the last of its notes receivables from a former director. At December 28, 2007, notes receivables from a former director was $0.
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):
| | | | | | |
| | 2007 | | 2006 | | 2005 |
| Basic weighted average shares outstanding | | | 28,121 | | | | 25,227 | | | | 23,704 | |
| Diluted effect of stock options and warrants | | | — | | | | — | | | | — | |
| Diluted weighted average shares outstanding | | | 28,121 | | | | 25,227 | | | | 23,704 | |
Potential common shares of 3.6 million, 2.6 million, and 3.9 million for the fiscal years ended December 28, 2007, December 29, 2006, and December 30, 2005, respectively, were excluded from the computation as the shares would have had an anti-dilutive effect.
Note 17 — Geographic and Product Data
The Company markets and sells its products in approximately 50 countries and has manufacturing sites in the United States and Switzerland. Other than the United States, Germany and Australia, the Company does not conduct business in any country in which its sales in that country exceed 5% of consolidated sales. Sales
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STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 17 — Geographic and Product Data – (continued)
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, Australia, and other locations for each year, is set forth below (in thousands):
| | | | | | |
| | 2007 | | 2006 | | 2005 |
Net sales to unaffiliated customers
| | | | | | | | | | | | |
| U.S | | $ | 19,721 | | | $ | 22,778 | | | $ | 18,715 | |
| Germany | | | 23,731 | | | | 21,135 | | | | 22,433 | |
| Australia | | | 2,521 | | | | 2,178 | | | | 2,722 | |
| Other | | | 13,390 | | | | 10,860 | | | | 7,433 | |
| Total | | $ | 59,363 | | | $ | 56,951 | | | $ | 51,303 | |
100% of the Company’s sales are generated from the ophthalmic surgical product segment and, therefore, the Company operates as one operating segment for financial reporting purposes. The Company’s principal products are IOLs and ancillary products used in cataract and refractive surgery. The composition of the Company’s net sales by surgical line is as follows (in thousands):
Net Sales by Surgical Line
| | | | | | |
| | 2007 | | 2006 | | 2005 |
| Cataract | | $ | 42,960 | | | $ | 43,576 | | | $ | 45,361 | |
| Refractive | | | 15,797 | | | | 12,698 | | | | 5,288 | |
| Glaucoma | | | 606 | | | | 677 | | | | 654 | |
| Total | | $ | 59,363 | | | $ | 56,951 | | | $ | 51,303 | |
The composition of the Company’s long-lived assets, consisting of property and equipment, patents and licenses, and goodwill, between those in the United States, Germany, Switzerland, and other countries is set forth below (in thousands):
| | | | |
| | 2007 | | 2006 |
Long-lived assets
| | | | | | | | |
| U.S | | $ | 7,697 | | | $ | 8,153 | |
| Germany | | | 7,460 | | | | 7,208 | |
| Switzerland | | | 836 | | | | 1,140 | |
| Australia | | | 1,272 | | | | 1,318 | |
| Total | | $ | 17,265 | | | $ | 17,819 | |
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 18 — Subsequent Event
On December 29, 2007 (fiscal year 2008), STAAR acquired the remaining 50% interests in Canon Staar that had been owned by Canon Inc. and Canon Marketing Japan Inc. (“Canon Marketing” and collectively “the Canon companies”) and as a result STAAR obtained 100% ownership of Canon Staar, which was renamed STAAR Japan, Inc. (“STAAR Japan”). The purchase will be accounted for as a “step-acquisition” and the provisions of SFAS No. 141, “Business Combinations”, will be applied and the Company will consolidate the results of STAAR Japan commencing on the acquisition date.
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STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 18 — Subsequent Event – (continued)
Total consideration STAAR paid to the Canon companies for the purchase consisted of $4 million in cash and issuance of 1.7 million shares of Series A Convertible Preferred Stock (“Preferred Stock”). Additionally, the principal agreements among the joint venture parties, including the Technical Assistance and License Agreement between the Company and Canon Staar, terminated at closing. The Company incurred $384,000 of direct acquisition costs as of December 28, 2007 included in other assets.
The Preferred Stock is a) redeemable at the option of the holder at any time after the third anniversary from the issuance date at a price of $4.00 per share plus accrued or declared but unpaid dividends, if any, at redemption (“Redemption Price”), b) redeemable at the option of the Company at any time on or after the first anniversary from the issuance date at the Redemption Price, c) convertible into common stock of the Company at the option of the holder at any time after the issuance date at a conversion ratio of 1-to-1, subject to adjustment for stock splits, reverse splits, combinations, subdivisions, dividends or capitalizations (“the Conversion Ratio”), d) automatically convertible into the Company’s common stock on the fifth anniversary of the issuance date at the Conversion Ratio and e) on or prior to the effective date of a change in control or liquidation of the Company, as defined, immediately redeemable at the Redemption Price at the option of the holder; however, the holder will continue to have the right to convert into common stock until the close of business on the second business day prior to the effective date of such an event. STAAR also agreed to file a registration statement with the SEC to register the public resale of the common stock issuable on conversion of the Preferred Stock and to cause it to become effective within 180 days of the issuance date of the Preferred Stock. If it fails to secure effective registration or to keep it effective for a two-year period the Company will be obligated only to issue an additional 30,000 shares of common stock (“Penalty Shares”) for each calendar month that the Company does not meet this effectiveness requirement. The Company expects to secure effective registration in a timely manner and does not consider the issuance of Penalty Shares probable. The Preferred Share do not have voting rights and have the right to participatepari passu in any dividend or distribution paid to the common stockholders based on the number of shares of common stock into which each share of Preferred Stock is convertible into.
The Canon companies agree that for a period of three years after the closing they will not directly manage, operate or engage in research, development, manufacture, marketing, sale or distribution of implantable silicone and collagen copolymer intraocular lenses whether phakic or aphakic, whether spheric or aspheric, and insertion devices for such implants and collagen glaucoma wicks (collectively the “Business”) or acquire a controlling ownership interest in any entity that manages, operates or engages in the Business (other than conducting research and development activities) in Japan and has aggregate annual sales of products connected with the Business in excess of $1 million.
At closing STAAR Japan and Canon Marketing entered into an Inventory Sales Agreement in the form attached to the Share Purchase Agreement (the “Inventory Sales Agreement”), which provides for the repurchase by STAAR Japan of all Canon Staar product inventory owned by Canon Marketing (the “Repurchased Inventory”) for an aggregate value of all such products (the “Inventory Purchase Price”). The Inventory Sales Agreement provides that at the end of each month during the first year after the closing, Canon Staar will pay Canon Marketing for the Repurchased Inventory STAAR Japan has sold in the preceding month. The price paid to Canon Marketing will be the same price Canon Marketing originally paid Canon Staar for the Repurchased Inventory (the “Original Purchase Price”), except for sales in China of the KS-XI model acrylic Preloaded Injector, for which the price will be 50% of STAAR Japan’s sales price to the customer. On the first anniversary of the closing date STAAR Japan will pay Canon Marketing the balance of the Inventory Purchase Price not already paid on a monthly basis, less (i) the amount of any negative discrepancy in the Repurchased Inventory and (ii) a 20% restocking fee for any Repurchased Inventory requiring rework before resale. STAAR Japan will continue to pay Canon Marketing for KS-XI inventory only after its sale by Canon Staar. At and following closing all accounts receivable and accounts payable between Canon Marketing and STAAR Japan will be reconciled and any net amount owed by either party will be paid.
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STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 28, 2007 and December 29, 2006
Note 19 — Quarterly Financial Data (Unaudited)
Summary unaudited quarterly financial data from continuing operations for fiscal 2007 and 2006 is as follows (in thousands except per share data):
| | | | | | | | |
| December 28, 2007 | | 1st Qtr | | 2nd Qtr | | 3rd Qtr | | 4th Qtr. |
| Revenues | | $ | 14,917 | | | $ | 14,932 | | | $ | 13,629 | | | $ | 15,885 | |
| Gross profit | | | 7,295 | | | | 7,237 | | | | 6,770 | | | | 7,964 | |
| Net loss | | | (3,521 | ) | | | (4,357 | ) | | | (3,830 | ) | | | (4,291 | ) |
| Basic and diluted loss per share | | | (.14 | ) | | | (.16 | ) | | | (.13 | ) | | | (.15 | ) |
| | | | | | | | |
| December 29, 2006 | | 1st Qtr | | 2nd Qtr | | 3rd Qtr | | 4th Qtr. |
| Revenues | | $ | 13,465 | | | $ | 14,733 | | | $ | 13,313 | | | $ | 15,440 | |
| Gross profit | | | 6,275 | | | | 7,044 | | | | 6,333 | | | | 6,498 | |
| Net loss | | | (3,362 | ) | | | (3,218 | ) | | | (2,789 | ) | | | (5,675 | ) |
| Basic and diluted loss per share | | | (.14 | ) | | | (.13 | ) | | | (.11 | ) | | | (.22 | ) |
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.
Significant Fourth Quarter Adjustments
Except for the adoption of SFAS No. 158, there were no significant adjustments recorded.
During the fourth quarter of 2006, the Company recorded two significant adjustments. The Company took an obsolescence charge of $807,000 against certain IOL inventory in anticipation of new product that launched 2007. In addition to the inventory reserve, the Company has reserved $700,000 for additional taxes in connection with the findings at the Company’s German subsidiary.
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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT ON SCHEDULE
To the Board of Directors
STAAR Surgical Company
Monrovia, CA
The audits referred to in our report dated March 12, 2008 relating to the consolidated financial statements of STAAR Surgical Company and Subsidiaries, which is contained in Item 8 of this Form 10-K also included the audit of the financial statement schedules listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
| By: | /s/ BDO Seidman, LLP
|
Los Angeles, California
March 12, 2008
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STAAR SURGICAL COMPANY AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| | | | | | | | |
| 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) |
2007
| | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts and sales returns deducted from accounts receivable in balance sheet | | $ | 690 | | | $ | 132 | | | $ | 138 | | | $ | 684 | |
| Deferred tax asset valuation allowance | | | 40,436 | | | | 4,983 | | | | — | | | | 45,419 | |
| | | $ | 41,126 | | | $ | 5,115 | | | $ | 138 | | | $ | 46,103 | |
2006
| | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts and sales returns deducted from accounts receivable in balance sheet | | $ | 480 | | | $ | 348 | | | $ | 138 | | | $ | 690 | |
| Deferred tax asset valuation allowance | | | 33,662 | | | | 6,774 | | | | — | | | | 40,436 | |
| Notes receivable reserve | | | 1,246 | | | | — | | | | 1,246 | | | | — | |
| | | $ | 35,388 | | | $ | 7,122 | | | $ | 1,384 | | | $ | 41,126 | |
2005
| | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts and sales returns deducted from accounts receivable in balance sheet | | $ | 460 | | | $ | 191 | | | $ | 171 | | | $ | 480 | |
| Deferred tax asset valuation allowance | | | 28,172 | | | | 5,490 | | | | — | | | | 33,662 | |
| Notes receivable reserve | | | 500 | | | | 746 | | | | — | | | | 1,246 | |
| | | $ | 29,132 | | | $ | 6,427 | | | $ | 171 | | | $ | 35,388 | |
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