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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 1, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number: 0-27598
IRIDEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0210467
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
1212 TERRA BELLA AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043-1824
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(Address of principal executive offices, including zip code)
(650) 940-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No [ ]; (2) Yes [X] No [ ]
The number of shares of Common Stock, $.01 par value, issued and outstanding as
of May 8, 2000 was 6,631,948.
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IRIDEX CORPORATION
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of April 1, 2000 and
January 1, 2000 3
Condensed Consolidated Statements of Income for the three months
ended April 1, 2000 and April 3, 1999 4
Condensed Consolidated Statements of Cash Flows for the three
months ended April 1, 2000 and April 3, 1999 5
Condensed Consolidated Statements of Comprehensive Income for
the three months ended April 1, 2000 and April 3, 1999 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE 20
INDEX TO EXHIBITS 21
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
APRIL 1, JANUARY 1,
2000 2000
-------- ----------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 10,935 $ 9,645
Available-for-sale securities ............................ 2,699 3,503
Accounts receivable, net ................................. 8,211 8,162
Inventories .............................................. 7,350 7,256
Prepaids and other current assets ........................ 458 437
-------- --------
Total current assets ................................. 29,653 29,003
Property and equipment, net .............................. 2,037 2,144
Deferred income taxes .................................... 1,518 1,518
-------- --------
Total assets ......................................... $ 33,208 $ 32,665
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 1,144 $ 1,128
Accrued expenses ......................................... 3,704 4,033
-------- --------
Total liabilities .................................... 4,848 5,161
-------- --------
Stockholders' equity:
Common stock ............................................. 66 66
Additional paid-in capital ............................... 22,270 22,124
Accumulated other comprehensive loss ..................... (3) (2)
Retained earnings ........................................ 6,027 5,316
-------- --------
Total stockholders' equity ........................... 28,360 27,504
-------- --------
Total liabilities and stockholders' equity ........... $ 33,208 $ 32,665
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
APRIL 1, APRIL 3,
2000 1999
------- -------
Sales ............................................... $ 8,192 $ 5,697
Cost of sales ....................................... 3,382 2,616
------- -------
Gross Profit .................................... 4,810 3,081
------- -------
Operating expenses:
Research and development ........................ 1,224 968
Selling, general and administrative ............. 2,677 2,001
------- -------
Total operating expenses ............................ 3,901 2,969
------- -------
Income from operations .............................. 909 112
Interest and other income (expense), net ............ 136 161
------- -------
Income before provision for income taxes ........ 1,045 273
Provision for income taxes .......................... (334) (88)
------- -------
Net income .......................................... $ 711 $ 185
======= =======
Net income per common share ......................... $ 0.11 $ 0.03
======= =======
Diluted net income per common share ................. $ 0.10 $ 0.03
======= =======
Shares used in income per common share calculation .. 6,619 6,506
======= =======
Shares used in diluted net income per common
share calculation .............................. 7,374 6,767
======= =======
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
APRIL 1, APRIL 3,
2000 1999
-------- -------
Cash flows from operating activities:
Net income.......................................... $ 711 $ 185
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 261 181
Provision for doubtful accounts................. 42 --
Changes in operating assets and liabilities:
Accounts receivable........................... (91) 1,215
Inventories................................... (94) (684)
Prepaids and other current assets............. (21) 9
Accounts payable.............................. 16 (8)
Accrued expenses.............................. (329) 272
-------- -------
Net cash provided by operating activities....... 495 1,170
-------- -------
Cash flows from investing activities:
Purchases of available-for-sale securities......... (848) --
Proceeds from maturity of available-for-sale
securities...................................... 1,652 1,027
Acquisition of intangible assets................... -- (17)
Acquisition of property and equipment.............. (155) (171)
-------- -------
Net cash provided by investing activities....... 649 839
-------- -------
Cash flows from financing activities:
Issuance of common stock, net...................... 146 79
Purchase of treasury stock......................... -- (105)
-------- -------
Net cash provided by (used in)
financing activities.......................... 146 (26)
-------- -------
Net increase in cash and cash equivalents..... 1,290 1,983
Cash and cash equivalents at beginning of period........ 9,645 5,791
-------- -------
Cash and cash equivalents at end of period.............. $ 10,935 $ 7,774
======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Change in unrealized losses on available-for-sale
securities....................................... $ (1) $ (6)
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
APRIL 1, APRIL 3,
2000 1999
-------- --------
Net income .............................................. $ 711 $ 185
Other comprehensive income (loss):
Change in unrealized gain (loss) on
available-for-sale securities ..................... (1) (6)
----- -----
Comprehensive income .................................... $ 710 $ 179
===== =====
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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IRIDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
IRIDEX Corporation have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included. The condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto, together with management's discussion
and analysis of financial condition and results of operations, contained in our
Annual Report on Form 10-K, which was filed with the Securities and Exchange
Commission on March 31, 2000. The results of operations for the three month
period ended April 1, 2000 are not necessarily indicative of the results for the
year ending December 30, 2000 or any future interim period.
2. INVENTORIES COMPRISE (IN THOUSANDS) :
APRIL 1, JANUARY 1,
2000 2000
----------- ----------
(unaudited)
Raw materials and work in progress............... $ 3,630 $ 3,839
Finished goods................................... 3,720 3,417
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Total inventories................................ $ 7,350 $ 7,256
======= =======
3. COMPUTATIONS OF NET INCOME PER COMMON SHARE AND DILUTED NET INCOME PER
COMMON SHARE
Net income per common share is computed using the weighted average number
of shares of common stock outstanding during the period. Diluted net income per
common share is computed using the weighted average number of shares of common
stock and dilutive common equivalent shares from stock options outstanding.
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A reconciliation of the numerator and denominator of net income per common
share and diluted net income per common share is as follows (in thousands,
except per share amounts):
THREE MONTHS ENDED
APRIL 1, APRIL 3,
2000 1999
----------- -----------
(unaudited) (unaudited)
Numerator -- Net income per common share and
diluted net income per common share
Net income............................................. $ 711 $ 185
======= =======
Denominator -- Net income per common share
Weighted average common stock outstanding.......... 6,619 6,506
======= =======
Net income per common share............................ $ 0.11 $ 0.03
======= =======
Denominator -- Diluted net income per common share
Weighted average common stock outstanding.......... 6,619 6,506
Effect of dilutive securities
Weighted average common stock options.............. 755 261
------- -------
Total weighted average stock and options outstanding... 7,374 6,767
======= =======
Diluted net income per common share.................... $ 0.10 $ 0.03
======= =======
During the three months ended April 3, 1999, options to purchase
300,050 shares at a weighted average exercise price of $7.69 per share were
outstanding, but were not included in the computations of diluted net income per
common share because the exercise price of the related options exceeded the
average market price of the common shares. These options could dilute earnings
per share in future periods. For the three months ended April 1, 2000 all
options outstanding were included in the computation of diluted net income per
common share.
4. BUSINESS SEGMENTS
We operate in two reportable segments: the laser medical device segment and
the laser research segment. In the laser medical device segment, we develop,
manufacture and market medical devices for the ophthalmology and dermatology
markets. Our revenues arise from the sale of consoles, delivery devices,
disposables and service and support activities. In the laser research segment,
we conduct research and development under research grants from the U.S. Federal
Government and others. Under the terms of these grants we typically retain the
right to commercially market the technology developed.
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Information on reportable segments for the three months ended April 1, 2000
and April 3, 1999 is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
APRIL 1, 2000 APRIL 3, 1999
-------------------- ---------------------
Laser Laser
Medical Laser Medical Laser
Devices Research Devices Research
------- -------- ------- --------
Sales ..................... $ 7,996 $ 196 $ 5,520 $ 177
Depreciation .............. 258 3 177 4
Interest and other expense 136 -- 161 --
Income before provision
for income taxes 897 148 153 120
Income before provision for income taxes of the laser research segment does
not include indirect costs of manufacturing, research and development and
selling, general and administrative costs. Such costs are not allocated and
therefore are included in the Laser Medical Device segment.
5. INCOME TAXES
The Company uses the liability method to account for income taxes.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. The provision for income taxes
for the three month periods ended April 1, 2000 and April 3, 1999 are based on
the estimated effective income tax rate of 32% for the fiscal years ending
December 30, 2000 and January 1, 2000.
6. RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 will be effective for fiscal
quarters beginning after June 15, 2000. The Company will comply with the
requirements of SFAS 133 in fiscal year 2000. Currently the Company does not
hold derivative instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. The accounting and disclosures prescribed by SAB 101 will be
effective for the fiscal year ended December 30, 2000. The Company is currently
evaluating the impact of SAB 101 on its financial statements and related
disclosures and does not expect any material impact from its application.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those set forth in such
forward-looking statements as a result of the factors set forth under "Factors
That May Affect Future Operating Results" and other risks detailed in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission and detailed from time to time in the Company's reports filed with
the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of certain items
in our income statement for the periods indicated.
THREE MONTHS ENDED
APRIL 1, APRIL 3,
2000 1999
-------- --------
Sales .................................. 100.0% 100.0%
Cost of sales .......................... 41.3 45.9
----- -----
Gross profit ....................... 58.7 54.1
----- -----
Operating expenses:
Research and development ........... 14.9 17.0
Sales, general and administrative .. 32.7 35.1
----- -----
Total operating expenses ....... 47.6 52.1
----- -----
Income (loss) from operations .......... 11.1 2.0
Other income, net ...................... 1.7 2.8
----- -----
Income before provision for income taxes 12.8 4.8
Provision for income taxes ............. (4.1) (1.6)
----- -----
Net income ............................. 8.7% 3.2%
===== =====
Sales. Our sales increased 44% to $8.2 million for the three months ended
April 1, 2000 from $5.7 million for the three months ended April 3, 1999. The
increase in our sales was due to increased unit sales, primarily from an
increase in our customer base for the OcuLight SLx for ophthalmology and the
DioLite for dermatology. Domestic sales of $5.4 million accounted for 66% of
sales for the three months ended April 1, 2000 compared to $3.1 million or 54%
of sales in the comparable 1999 period. The increase in domestic sales was
widespread with increases in ophthalmology and dermatology. International sales
of $2.8 million accounted for 34% of sales for the three months ended April 1,
2000 compared to $2.6 million or 46% in the comparable 1999 period. The increase
in international sales was primarily due to increases in ophthalmology product
sales, partially offset by decreases in dermatology product sales. International
ophthalmology product sales increases were primarily in Europe, offset in part
by a decrease in sales to the Asian region. We expect revenues from
international sales to continue to account for a substantial portion of our
sales. We expect future growth in sales to be primarily derived from sales of
the OcuLight SLx and related delivery devices, and the Apex 800 hair removal
laser for dermatology, which we expect to begin shipping in the summer of 2000.
Sales into the research segment were $0.2 million for the three months
ended April 1, 2000 and for the three months ended April 3, 1999.
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Gross Profit. Our gross profit increased 56% to $4.8 million for the three
months ended April 1, 2000 from $3.1 million for the three months ended April 3,
1999. Gross profit as a percentage of net sales for the three months ended April
1, 2000 increased to 59%, compared to 54% for the three months ended April 3,
1999, due primarily to the increased sales volume of the OcuLight SLx and the
increased domestic sales, both of which have higher gross profit margins.
Domestic product sales have higher average sales prices, as they are transacted
directly with the user-customer by a direct sales force as compared to
international product sales which are transacted through independent
distributors. For the balance of 2000, we expect manufacturing costs to increase
in absolute dollars to support increasing unit shipment volumes. We expect to
begin shipping the Apex 800 hair removal laser system in the summer of 2000. As
a result, we expect the gross profit margin to drop slightly since initial
production costs for the Apex 800 are likely to cause a comparatively lower
gross profit margin. We also expect our gross profit margins to continue to
fluctuate due to changes in the relative proportions of domestic and
international sales, mix of sales of existing products, pricing, product costs
and a variety of other factors.
Research and Development. Our research and development expenses increased
by 26% to $1.2 million for the three months ended April 1, 2000 from $1.0
million for the three months ended April 3, 1999. Research and development
expenses decreased as a percentage of net sales to 15% for the three months
ended April 1, 2000 from 17% for the comparable prior year three-month period.
The increase in research and development expenses in absolute dollars during
this period was primarily attributable to increases in personnel, clinical study
expenses and other resources as we increased our product and applications
development efforts. We expect these expenses for research and development to
continue to increase in absolute dollars during the remainder of 2000 in
connection with activities related to new products, such as the Apex 800, and
clinical treatment development, such as the Transpupillary ThermoTherapy (TTT)
for Age-related Macular Degeneration (AMD) study that commenced in March 2000.
Research and development expenses as a percentage of net sales decreased during
this period due to the increase in the rate of growth of revenue relative to the
rate of growth of research and development expenses.
Sales, General and Administrative. Our sales, general and administrative
expenses increased by 34% to $2.7 million for the three months ended April 1,
2000 from $2.0 million for the three months ended April 3, 1999. Sales, general
and administrative expenses decreased as a percentage of net sales to 33% for
the three months ended April 1, 2000 from 35% for the comparable prior year
three-month period. The increase in absolute dollars in sales, general and
administrative expenses was primarily due to increased marketing efforts and the
hiring of additional employees to support expanding unit sales volumes for our
medical products and administrative activities. We expect sales, general and
administrative expenses to continue to increase in absolute dollars during the
balance of 2000 to support the increasing unit shipment volumes and additional
employees. Sales, general and administrative expenses as a percentage of net
sales decreased during this period due to the increase in the rate of growth of
revenue relative to the rate of growth of sales, general and administrative
expenses.
Income Taxes. Our effective tax rate for the three months ended April 1,
2000 was 32%. This rate differs from the federal statutory rate primarily due to
state income taxes, offset by the utilization of tax credits, non-taxable
available-for-sale security investments and tax benefits from our foreign sales
corporation.
LIQUIDITY AND CAPITAL RESOURCES
At April 1, 2000, our primary sources of liquidity included cash and cash
equivalents and available-for-sale securities in the aggregate amount of $13.6
million. In addition, we have available $2 million under our unsecured line of
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credit which bears interest at the bank's prime rate and expires in September
2000. As of April 1, 2000, no borrowings were outstanding under this credit
facility.
During the three months ended April 1, 2000, we generated $1.3 million in
cash and cash equivalents. During this period, operating activities provided a
net $0.5 million of cash. Sources of cash from operating activities included net
income of $0.7 million and depreciation and amortization of $0.3 million, offset
by uses of cash including a net decrease in accounts payable and accrued
expenses of an aggregate of $0.3 million, an increase in accounts receivable of
$0.1 million and an increase in inventories of $0.1 million. The increase in
inventory was primarily due to an increase in raw materials inventory.
We generated $0.6 million in investing activities during the three months
ended April 1, 2000, primarily from the net maturities of $0.8 million of
available-for-sale securities offset by the acquisition of $0.2 million of
property and equipment.
Net cash provided by financing activities during the three months ended
April 1, 2000 was $0.1 million which consisted of the issuance of common stock.
We believe that, based on current estimates, our available-for-sale
securities together with cash generated from operations will be sufficient to
meet our anticipated cash requirements for the next 12 months.
In December 1998, we instituted a stock repurchase program whereby up to
150,000 shares of our Common Stock may be repurchased in the open market. We
plan to utilize all of the reacquired shares for reissuance in connection with
employee stock programs. No shares were repurchased during the three months
ending April 1, 2000. To date, we have purchased 76,000 shares of our Common
Stock under this program.
YEAR 2000 ISSUES
The Year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer controlled
systems using two digits rather than four digits to define the applicable year.
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit fields used by many systems. Most reports to
date, however, are that the computer systems are functioning normally and the
compliance and remediation work accomplished leading up to 2000 was effective in
preventing any problems. Computer experts have warned that there may still be
residual consequences of the change in centuries. If not corrected, these
residual problems could result in miscalculations, data corruption, system
failures or disruptions in operations during or beyond the year 2000. Any such
difficulties could result in a decrease in sales of our products, an increase in
allocation of resources to address Year 2000 problems of our customers without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by our customers due to
such Year 2000 problems.
Because our products are used in connection with components and systems
designed and manufactured by others, residual Year 2000 problems affecting these
components and systems could cause our products to fail. If residual Year 2000
problems cause the failure of any of the technology, software or systems used
with our products, we could lose customers, suffer disruptions in our business,
lose revenues and incur substantial liabilities and expenses. We could also
become involved in costly litigation resulting
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from residual Year 2000 problems. Any of these occurrences could materially harm
our business, financial condition or results of operations.
To date, we have not experienced any Year 2000 issues with any of our
internal systems or our products, or with any of our key third party suppliers,
vendors, customers or service providers. The costs associated with remediating
our internal systems have not been material to date.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We Rely on Continued Market Acceptance of Our Products. We currently market
visible and infrared light semiconductor-based photocoagulator medical laser
systems to the ophthalmic market. We also market a visible light
semiconductor-based photocoagulator medical laser system to the dermatology
market. We believe those continued and increased sales, if any, of these medical
laser systems is dependent upon the following factors:
o Product performance, procedures and price;
o Opinions of medical advisors and associates;
o Recommendations by ophthalmologists, dermatologists, clinicians, and
their associated opinion leaders;
o Performance of these laser systems and treatments which are a
beneficial alternative to competing technologies and treatments;
o The willingness of ophthalmologists and dermatologists to convert to
semiconductor-based or infrared laser systems from visible argon gas
or ion-based laser systems;
o The level of reimbursement for treatments administered with our
products; and
o Our ability to introduce new products into these markets.
Any significant decline in market acceptance of our products would have a
material adverse effect on our business, results of operations and financial
condition.
Our Market is Competitive. Competition in the market for devices used for
ophthalmic and dermatological treatments is intense and is expected to increase.
This market is also characterized by rapid technological innovation and change
and our products could be rendered obsolete as a result of future innovations.
Our competitive position depends on a number of factors including product
performance, characteristics and functionality, ease of use, scalability,
durability and cost. Our principal competitors in ophthalmology are Coherent,
Inc., Nidek, Inc. ("Nidek"), Carl Zeiss, Inc. ("Zeiss"), Alcon International,
and HGM Medical Laser Systems, Inc. ("HGM") and our principal competitors in
dermatology are Laserscope and HGM. Our newest product, the Apex 800 laser hair
removal system, will compete with products from Coherent, Inc., Candela
Corporation, ESC Medical Systems, Ltd. and Cynosure, Inc. Some competitors have
substantially greater financial, engineering, product development,
manufacturing, marketing and technical resources than we do. In addition to
other companies that manufacture photocoagulators, we compete with
pharmaceutical solutions, other technologies and other surgical techniques. Some
medical companies,
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academic and research institutions or others may develop new technologies or
therapies that are more effective in treating conditions targeted by us or are
less expensive than our current or future products. Any such developments could
have a material adverse effect on our business, financial condition and results
of operations.
We Face Risks of Manufacturing. The manufacture of our infrared and visible
light photocoagulators and the related delivery devices is a highly complex and
precise process. Although our OcuLight Systems and our DioLite 532 have been
successfully introduced, we continue to face risks associated with manufacturing
these products. Various difficulties may occur despite testing. Furthermore, we
depend on third parties to manufacture substantially all of the components used
in our products and have in the past experienced delays in manufacturing when a
sole source supplier was unable to deliver components in volume and on a timely
basis. Such a problem may reoccur. See "--We Depend on Key Manufacturers and
Suppliers." As a result of these factors, we may not be able to continue to
manufacture our existing products or future products on a cost-effective and
timely basis.
We Depend on Key Manufacturers and Suppliers. We rely on third parties to
manufacture substantially all of the components used in our products, although
we assemble critical subassemblies and the final product at our facility in
Mountain View, California. There are risks associated with the use of
independent manufacturers, including unavailability of or delays in obtaining
adequate supplies of optics and laser diodes. We have qualified two or more
sources for most of the components used in our products. In the past, we
experienced delays in our manufacturing the OcuLight GL due to the inability of
a supplier to deliver components in volume and on a timely basis. We have
qualified a second source for this diode component. The process of qualifying
suppliers is ongoing and may be lengthy, particularly as new products are
introduced. We do not have long-term or volume purchase agreements with any of
our suppliers and currently purchase components on a purchase order basis. These
components may not be available in the quantities required, on reasonable terms,
or at all. Establishing our own capabilities to manufacture these components
would be expensive and could significantly decrease our profit margins. Our
business, results of operations and financial condition would be adversely
affected if we were unable to continue to obtain components as required at a
reasonable cost.
We Depend on International Sales. We derive and expect to continue to
derive a large portion of our revenue from international sales. In 1999 and
1998, our international sales were $10.3 million and $8.6 million, or 39% and
37%, respectively, of total sales. For the three months ended April 1, 2000 and
April 1, 1999, our international sales were $2.8 million and $2.6 million,
representing 34% and 46%, respectively, of total sales. Therefore, a large
portion of our revenues will continue to be subject to the risks associated with
international sales. Economic difficulties in Asia and the devaluation of the
currencies of many Asian countries in the past couple of years have
significantly increased the purchase price of our products to our distributors
in that region. Product sales were lower for the affected Asian region on a
quarterly basis during 1998 and to a lesser extent 1999 as a result of the
economic downturn and currency problem. The factors stated above could have a
material adverse effect on our business, financial condition or results of
operations.
Our Operating Results Fluctuate from Quarter to Quarter. Our sales and
operating results have varied substantially on a quarterly basis and may
continue to vary in the future. Our operating results are affected by a number
of factors, many of which are beyond our control. Factors contributing to these
fluctuations include the following:
o The timing of the introduction and market acceptance of new products,
product enhancements and new applications;
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o The cost and availability of components and subassemblies;
o Changes in our pricing and our competitors;
o Our long and highly variable sales cycle;
o Changes in customers' or potential customers' budgets; and
o Increased product development costs.
In addition to these factors, our quarterly results have been and are expected
to continue to be affected by seasonal factors.
Our expense levels are based, in part, on expected future sales. If sales
levels in a particular quarter do not meet expectations, we may be unable to
adjust operating expenses quickly enough to compensate for the shortfall of
sales, and our results of operations may be adversely affected. In addition, we
have historically made a significant portion of each quarter's product shipments
near the end of the quarter. If that pattern continues, any delays in shipment
of products could have a material adverse effect on results of operations for
such quarter. As a result of the above factors, sales for any future quarter are
not predictable with any significant degree of accuracy and operating results in
any period should not be considered indicative of the results to be expected for
any future period. There can be no assurance that we will remain profitable in
the future or that operating results will not vary significantly.
We Depend on Development of New Products and New Applications. Our future
success is dependent upon, among other factors, our ability to develop, obtain
regulatory approval of, manufacture and market, new products such as the Apex
800 hair removal laser system. In addition, we must successfully sell and
achieve market acceptance of new products and applications and enhanced versions
of existing products. The extent of, and rate at which, market acceptance and
penetration are achieved by future products is a function of many variables.
These variables include price, safety, efficacy, reliability, marketing and
sales efforts, the development of new applications for these products and
general economic conditions affecting purchasing patterns. Any failure in our
ability to successfully develop and introduce new products, such as the Apex
800, or enhanced versions of existing products, could have a material adverse
effect on our business, operating results and financial condition. We are
seeking to expand the market for our existing and new products by working with
clinicians and third parties to identify new applications and procedures for our
products. Failure to develop and achieve market acceptance of new applications
or new products would have a material adverse effect on our business, results of
operations and financial condition.
We Must Manage Growth. We have experienced, and may continue to experience
growth in production, the number of employees, the scope of our business, our
operating and financial systems and the geographic area of our operations. This
growth has resulted in new and increased responsibilities for management
personnel and our operating, inventory and financial systems. To effectively
manage future growth, if any, we have been required to continue to implement and
improve operational, financial and management information systems, procedures
and controls. We have implemented a new enterprise-wide management information
system. We must also expand, train, motivate and manage our work force. Our
personnel, systems, procedures and controls may not be adequate to support our
existing and future operations. Any failure to implement and improve our
operational, financial and management systems or to expand, train, motivate or
manage employees could have a material adverse effect on our business, results
of operations and financial condition.
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We Depend on Collaborative Relationships. We have entered into
collaborative relationships with academic medical centers and physicians in
connection with the research and development and clinical testing of our
products. We plan to collaborate with third parties to develop and commercialize
existing and new products. In May 1996, we executed an agreement with Miravant,
formerly known as PDT, Inc., a maker of photodynamic drugs to collaborate on a
device that emits a laser beam to activate a photodynamic drug developed by
Miravant for the treatment of wet AMD. The development and support of this new
photodynamic system will require significant financial and other resources. This
collaborative development effort may not continue or it may not result in the
successful development and introduction of a photodynamic system and the amount
and timing of resources to be devoted to these activities are not within our
control. Additionally, our reliance on others for clinical development,
manufacturing and distribution of our products may result in unforeseen
problems. Further, our collaborative partners may develop or pursue alternative
technologies either on their own or in collaboration with others. The failure of
any current or future collaboration efforts could have a material adverse effect
on our ability to introduce new products or applications and therefore could
have a material adverse effect on our business, results of operations and
financial condition.
We Rely on Patents and Proprietary Rights. Our success and ability to
compete is dependent in part upon our proprietary information. We rely on a
combination of patents, trade secrets, copyright and trademark laws,
nondisclosure and other contractual agreements and technical measures to protect
our intellectual property rights. We file patent applications to protect
technology, inventions and improvements that are significant to the development
of our business. We have been issued eight United States patents on the
technologies related to our products and processes. Our patent applications may
not issue as patents, any patents now or in the future may not offer any degree
of protection, or our patents or patent applications may be challenged,
invalidated or circumvented in the future. Moreover, our competitors, many of
which have substantial resources and have made substantial investments in
competing technologies, may seek to apply for and obtain patents that will
prevent, limit or interfere with our ability to make, use or sell our products
either in the United States or in international markets.
In March 2000, we entered into a patent license agreement with Palomar
Medical Technologies, Inc. (PMTI). This agreement gives us a non-exclusive 7.5%
royalty bearing sublicense to skin cooling patents for use in laser hair
removal. The license provides the Apex 800 hair removal system with additional
cooling features.
In addition to patents, we rely on trade secrets and proprietary know-how
which we seek to protect, in part, through proprietary information agreements
with employees, consultants and other parties. Our proprietary information
agreements with our employees and consultants contain industry standard
provisions requiring such individuals to assign to us without additional
consideration any inventions conceived or reduced to practice by them while
employed or retained by us, subject to customary exceptions. Proprietary
information agreements with employees, consultants and others may be breached,
and we may not have adequate remedies for any breach. Also our trade secrets may
become known to or independently developed by competitors.
The laser and medical device industry is characterized by frequent
litigation regarding patent and other intellectual property rights. Companies in
the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Numerous patents are held by others, including
academic institutions and our competitors. Because patent applications are
maintained in secrecy in the United States until patents are issued and are
maintained in secrecy for a period of time outside the United States, we have
not conducted any searches to determine whether our technology infringes any
patents or patent applications. We have from time to time been notified of, or
have otherwise been made aware of, claims that we may be
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infringing upon patents or other proprietary intellectual property owned by
others. If it appears necessary or desirable, we may seek licenses under such
patents or proprietary intellectual property. Although patent holders commonly
offer such licenses, licenses under such patents or intellectual property may
not be offered or the terms of any offered licenses may not be reasonable. This
may adversely impact our operating results.
Any claims, with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel, cause
shipment delays or require us to develop noninfringing technology or to enter
into royalty or licensing agreements. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. An adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would have a material
adverse effect on our business, results of operations and financial condition.
Conversely, litigation may be necessary to enforce patents issued to us, to
protect trade secrets or know-how owned by us or to determine the
enforceability, scope and validity of the proprietary rights of others. Both the
defense and prosecution of intellectual property suits or interference
proceedings are costly and time consuming.
We Are Subject To Government Regulation. The medical devices that we market
and manufacture are subject to extensive regulation by the FDA and by foreign
and state governments. Under the FDA Act and the related regulations, the FDA
regulates the design, development, clinical testing, manufacture, labeling,
sale, distribution and promotion of medical devices. Before a new device can be
introduced into the market, the manufacturer must obtain market clearance
through either the 510(k) premarket notification process or the lengthier
premarket approval ("PMA") application process. Obtaining these approvals can
take a long time and delay the introduction of a product. For example, the
introduction of the OcuLight GL in the United States was delayed about three
months from our expectations due to the longer than expected time period
required to obtain FDA premarket clearance. Noncompliance with applicable
requirements, including Quality System Regulations ("QSRs"), can result in,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or premarket approval for devices, withdrawal of
marketing approvals, and criminal prosecution. The FDA also has the authority to
request repair, replacement or refund of the cost of any device we manufacture
or distribute. Our failure to obtain government approvals or any delays in
receipt of such approvals would have a material adverse effect on our business,
results of operations and financial condition.
International regulatory bodies often establish varying product standards,
packaging requirements, labeling requirements, tariff regulations, duties and
tax requirements. As a result of our sales in Europe, we are required to have
all products "CE" registered, an international symbol affixed to all products
demonstrating compliance to the European Medical Device Directive and all
applicable standards. In July 1998, we received CE registration under Annex II
guidelines, the most stringent path to CE registration. With Annex II CE
registration, we have demonstrated our ability to both understand and comply
with all applicable European standards. This allows us to register any product
upon our internal verification of compliance to all applicable European
Standards. Currently all released IRIS Medical and IRIDERM products are CE
registered. Continued registration is based on successful review of the process
by our European Registrar during their annual audit. Any loss of registration
would have a material adverse effect on our business, results of operations and
financial condition.
We Face Product Liability Risks. We may be subject to product liability
claims in the future. Our products are highly complex and are used to treat
extremely delicate eye tissue and skin conditions on and near a patient's face.
Product defects or the improper use of our products could cause blindness,
eyesight
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damage or skin damage. In addition, although we recommend that our disposable
products only be used once and so prominently label these disposables, we
believe that certain customers may nevertheless reuse these disposable products.
Accordingly, the manufacture and sale of medical products entails significant
risk of product liability claims. Although we maintain product liability
insurance with coverage limits of $11.0 million per occurrence and an annual
aggregate maximum of $12.0 million, our coverage from our insurance policies may
not be adequate. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A successful claim brought against us
in excess of our insurance coverage could have a material adverse effect on our
business, results of operations and financial condition. To date, we have not
experienced any product liability claims which would result in payments in
excess of our policy limits.
Our Stock Price is Volatile. The trading price of our Common Stock has been
subject to wide fluctuations in response to a variety of factors since our
initial public offering in February 1996. Volatility in price and volume has had
a substantial effect on the market prices of many technology companies for
reasons unrelated or disproportionate to the operating performance of such
companies. These broad market fluctuations could have a significant impact on
the market price of our Common Stock.
We Face Risks of the Year 2000 Issue. Residual Year 2000 issues may disrupt
our operations, subject us to liabilities and costs and affect the timing of our
revenues. Prior to January 1, 2000, there was a great deal of concern regarding
the ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit fields used by many systems. Most reports to
date, however, are that the computer systems are functioning normally and the
compliance and remediation work accomplished leading to 2000 was effective in
preventing any problems. Computer experts have warned that there may still be
residual consequences of the change in centuries. If not corrected, these
residual problems could result in miscalculations, data corruption, system
failures or disruptions in operations during or beyond the year 2000. Any such
difficulties could result in a decrease in sales of our products, an increase in
allocation of resources to address Year 2000 problems of our customers without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by our customers due to
such Year 2000 problems.
Because our products are used in connection with components and systems
designed and manufactured by others, residual Year 2000 problems affecting these
components and sytems could cause our products to fail. If residual Year 2000
problems cause the failure of any of the technology, software or systems used
with our products, we could lose customers, suffer disruptions in our business,
lose revenues and incur substantial liabilities and expenses. We could also
become involved in costly litigation resulting from Year 2000 problems. Any of
these occurrences could materially harm our business, financial condition or
results of operations.
To date, we have not experienced any Year 2000 issues with any of our
internal systems or our products, or with any of our key third party suppliers,
vendors, customers or service providers. The costs associated with remediating
our internal systems have not been material to date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio and had no holdings of derivative financial or
commodity instruments at April 1, 2000. A review of our financial instruments in
our investment portfolio and risk exposures at that date revealed that we had
exposure to interest rate risk. At April 1, 2000, we performed sensitivity
analyses to assess the potential effect of this risk and concluded that
near-term
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changes in interest rates should not materially adversely affect our financial
position, results of operations or cash flows.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the period for which
this report is filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IRIDEX Corporation
(Registrant)
Date: May 16, 2000 By: /s/ ROBERT KAMENSKI
-------------------------------------
Robert Kamenski
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT PAGE
27.1 Financial Data Schedule
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