UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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: JUNE 28, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-11634
STAAR SURGICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3797439
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1911 WALKER AVENUE
MONROVIA, CALIFORNIA 91016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818) 303-7902
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
----------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_]
THE REGISTRANT HAS 12,878,901 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER
SHARE, ISSUED AND OUTSTANDING AS OF AUGUST 7, 1996.
TOTAL NUMBER OF SEQUENTIALLY NUMBERED PAGES IN THIS DOCUMENT: 8
STAAR SURGICAL COMPANY
INDEX
PAGE
NUMBER
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PART I
Item 1--Financial Information
Condensed Consolidated Balance Sheets--June 28, 1996 and December 29,
1995................................................................. 1
Condensed Consolidated Statements of Income--Three and Six Months
Ended June 28, 1996 and June 30, 1995................................ 2
Condensed Consolidated Statements of Cash Flows--Six Months Ended June
28, 1996 and June 30, 1995........................................... 3
Notes to Condensed Consolidated Financial Statements.................. 4
Item 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 6
PART II
Other Information..................................................... 7
Signature Page........................................................ 8
i
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 28, DECEMBER 29,
ASSETS 1996 1995
------ ----------- ------------
Current assets:
Cash and cash equivalents.......................... $ 3,872,336 $ 3,767,011
Accounts receivable, less allowance for doubtful
accounts and estimated returns.................... 7,741,470 7,492,439
Inventories........................................ 11,939,659 9,591,898
Prepaids, deposits and other current assets........ 1,550,257 917,895
Deferred income tax................................ 2,674,223 3,323,724
----------- -----------
Total current assets............................. 27,777,945 25,092,967
Investment in joint venture.......................... 2,250,715 2,121,492
Property, plant and equipment, net................... 7,485,990 6,362,696
Patents and licenses, net............................ 5,165,496 3,538,769
Other assets......................................... 1,710,454 1,687,066
----------- -----------
Total assets..................................... $44,390,600 $38,802,990
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable...................................... $ 4,493,391 $ 3,548,686
Accounts payable................................... 2,318,681 1,448,135
Current portion of long-term debt.................. 654,562 480,151
Other current liabilities.......................... 3,415,718 3,281,321
----------- -----------
Total current liabilities........................ 10,882,352 8,758,293
----------- -----------
Long-term debt....................................... 1,136,917 1,212,178
Deferred gain on sale of license..................... 50,000 143,750
Other long-term liabilities.......................... 5,367 10,743
----------- -----------
Total liabilities................................ 12,074,636 10,124,964
----------- -----------
Stockholders' equity:
Common stock $0.01 par value, 40,000,000 shares
authorized; issued and outstanding 12,876,048 at
June 28, 1996 and 12,784,148 at December 29, 1995. 128,760 127,841
Capital in excess of par value..................... 40,719,224 40,325,287
Accumulated deficit................................ (6,206,005) (9,449,087)
----------- -----------
34,641,979 31,004,041
Notes and other receivables.......................... (2,326,015) (2,326,015)
----------- -----------
Total stockholders' equity......................... 32,315,964 28,678,026
----------- -----------
Total liabilities and stockholders' equity........... $44,390,600 $38,802,990
=========== ===========
1
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ------------------------
JUNE 28, JUNE 30, JUNE 28, JUNE 30,
1996 1995 1996 1995
----------- ---------- ----------- -----------
REVENUES
Sales....................... $10,077,044 $8,447,741 $19,356,122 $15,755,340
Royalty income.............. 250,000 -- 500,000 --
----------- ---------- ----------- -----------
Total revenues............ 10,327,044 8,447,741 19,856,122 15,755,340
Cost of sales............... 2,442,038 2,027,465 4,715,908 3,781,375
----------- ---------- ----------- -----------
Gross profit.............. 7,885,006 6,420,276 15,140,214 11,973,965
Selling, general and
administrative expenses:
General and
administrative........... 1,324,434 1,180,985 2,748,132 2,210,784
Marketing and selling..... 3,150,883 2,875,313 5,929,334 5,072,018
Research and development.. 1,065,709 759,632 1,936,307 1,498,805
----------- ---------- ----------- -----------
Total selling general and
administrative expense..... 5,541,026 4,815,930 10,613,773 8,781,607
Operating income.......... 2,343,980 1,604,346 4,526,441 3,192,358
----------- ---------- ----------- -----------
Other income (expense)
Equity in earnings of
joint venture............ 46,875 149,820 222,973 379,420
Interest expense--net..... (150,709) (102,569) (221,098) (122,733)
Other income.............. 178,121 176,000 193,770 83,452
----------- ---------- ----------- -----------
Total other income--net... 74,287 223,251 195,645 340,139
Income before income taxes.. 2,418,267 1,827,597 4,722,086 3,532,497
Income tax provision........ 673,065 56,061 1,479,005 114,992
----------- ---------- ----------- -----------
Net income................ $ 1,745,202 $1,771,536 $ 3,243,081 $ 3,417,505
=========== ========== =========== ===========
Income per share............ $ 0.13 $ 0.13 $ 0.23 $ 0.26
=========== ========== =========== ===========
2
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
------------------------
JUNE 28, JUNE 30,
1996 1995
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income.............................................. $ 3,243,082 $ 3,417,505
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization of property and
equipment............................................ 966,352 594,485
Amortization of patents and licenses.................. 248,243 92,566
Provision for allowance for doubtful accounts......... 4,284 (219,007)
Equity in earnings of joint venture................... (222,973) (379,409)
Recognition of deferred tax asset..................... 649,501 --
Common stock issued for services...................... 325,000 325,000
Prepaid services and other............................ -- (6,695)
Change in operating working capital................... (2,228,495) (1,477,827)
----------- -----------
Net cash provided by (used in) operating activities. 2,984,994 2,346,618
----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment.......... (2,089,646) (835,943)
Increase in patent and licenses....................... (1,874,970) (1,469,716)
Increase in other assets.............................. (23,388) --
----------- -----------
Net cash used in investing activities............... (3,988,004) (2,305,659)
Cash flows from financing activities:
Increase in borrowings under notes payable and long-
term debt............................................ 519,978 1,097,155
Payments on other notes payable and long-term debt.... (426,204) --
Increase in borrowings under line-of-credit........... 4,063,011 850,587
Payments on line-of-credit............................ (3,118,306) --
Proceeds from the issuance of common stock............ 146,856 239,846
Payments for repurchase of common stock............... (77,000) (1,516,662)
----------- -----------
Net cash provided by financing activities........... 1,108,335 670,926
----------- -----------
Increase (decrease) in cash and cash equivalents........ 105,325 711,885
Cash and cash equivalents at beginning of period........ 3,767,011 3,203,887
----------- -----------
Cash and cash equivalents at end of period.............. $ 3,872,336 $ 3,915,772
=========== ===========
3
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 1996
1. BASIS OF PRESENTATION
The accompanying financial statements consolidate the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Assets and
liabilities of foreign subsidiaries are translated at rates of exchange in
effect at the close of the period. Revenues and expenses are translated at the
weighted average of exchange rates in effect during the period. During the
three and six-months ended June 28, 1996 and June 30, 1995, foreign currency
translation and transaction gains and losses were not material. Investments in
affiliates and joint ventures are accounted for using the equity method of
accounting.
Each of the Company's reporting periods ends on the Friday nearest to the
quarter ending date.
2. REVENUE RECOGNITION
The Company records revenues from product sales to hospitals and physicians
principally upon implant of IOL's from cataract surgery; and in many cases,
engages independent sales representatives to transact these sales. Revenues
from product sales to distributors (primarily export sales) are recorded upon
shipment. The Company experiences a minimum amount of returns. Revenue from
license and technology agreements is recorded as income when the Company has
satisfied the terms of such agreements and has knowledge of the amounts.
3. EXPORT SALES
During the six months ended June 28, 1996 and June 30, 1995, the Company had
export sales primarily to Europe and South Africa, Australia and Southeast
Asia, of approximately $5,706,000 and $3,480,000 of these sales, approximately
$3,547,000 and $2,396,000 were to Europe, which is the Company's principal
foreign market, for the quarters ended June 28, 1996 and June 30, 1995.
The Company sells its products internationally. International transactions
subject 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 possible political instability.
4. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market
(net realizable value) and consisted of the following at June 28, 1996 and
December 29, 1995.
JUNE 28, DECEMBER 29,
1996 1995
----------- ------------
Raw materials and purchased parts................... $ 1,625,944 $1,104,203
Work in process..................................... 863,254 1,143,119
Finished goods...................................... 9,450,461 7,344,576
----------- ----------
$11,939,659 $9,591,898
=========== ==========
4
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost.
Depreciation is provided on the straight-line method over the estimated
useful lives, which are generally not greater than five years. Leasehold
improvements are amortized over the life of the lease or estimated useful
life, if shorter.
6. PATENTS AND LICENSES
The Company capitalizes the costs of acquiring patents and licenses as well
as the legal costs of successfully defending its rights to these patents.
Amortization is computed on the straight-line basis over the estimated useful
lives, which range from 8 to 17 years. Capitalized patent costs are reviewed
each year based on management's estimates of sales of the related products.
Patent and license costs are expensed when determined worthless.
The Company has been and continues to be involved in litigation to protect
the position of the Company concerning its patents and its proprietary
technology, and intends in the future to continue to vigorously prosecute
and/or defend the position of the Company and its licensees as to its or their
patents and other proprietary technology.
7. INCOME PER SHARE
Income per share has been computed by dividing net income by the weighted
average number of common shares and common stock equivalents (outstanding
warrants and options) outstanding during the period. For each period
presented, the weighted average number of shares is computed using the
treasury stock method, under which the number of common stock equivalent
shares outstanding reflects an assumed use of the proceeds from the issuance
of such shares and from the assumed exercise of such common stock options and
warrants to repurchase shares of the Company's common stock at the current
fair values.
8. CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity
of three months or less to be cash equivalents.
9. INTERIM FINANCIAL STATEMENTS
The financial statements for the three and six-months ended June 28, 1996
are unaudited and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial condition and results of operations for this
interim period. The results of operations for the three and six-months ended
June 28, 1996 are not necessarily indicative of the results to be expected for
any other interim period or the entire year.
10. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
contingent liabilities, revenues, and expenses at the date and for the periods
that the financial statements are prepared. Actual results could differ from
those estimates.
11. RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated financial
statements to conform with the 1996 presentation.
5
PART 1--ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented
by certain items reflected in the Company's income statement for the period
indicated and the percentage increase or decrease in such items over the prior
period.
RELATIONSHIP TO
TOTAL REVENUES FOR SIX PERCENTAGE CHANGE
MONTHS ENDED FOR SIX MONTHS
--------------------------- -------------------
JUNE 28, 1996 JUNE 30, 1995 1996 VS 1995
------------- ------------- -------------------
INCREASE (DECREASE)
Total revenues.................. 100.0% 100.0% 26.0%
Cost of sales................... 23.8 24.0 24.7
----- -----
Gross profit.................... 76.2 76.0 26.4
Costs and expenses:
General and administrative.... 13.8 14.0 24.3
Marketing and selling......... 29.9 32.2 16.9
Research and development...... 9.8 9.5 29.2
----- -----
Total costs and expenses........ 53.5 55.7 20.9
Operating income................ 22.8 20.3 41.8
Other income, net............... 1.0 2.2 (42.5)
----- -----
Income before income taxes...... 23.8 22.4 33.7
Income tax provision............ 7.4 .7 1,186.2
----- -----
Net income.................. 16.3 21.7 (5.1)
===== =====
REVENUES
Revenues for the six-month period ended June 28, 1996 were $19.9 million,
which is 26.0% greater than the $15.8 million in revenues for the six-month
period ended June 30, 1995. The increase in revenues was attributable to (i) a
64.0% rise in international sales reflecting increased demand for the
Company's foldable IOLs and, to a lesser extent, the recent commercialization
of the Company's new Glaucoma Wick in selected foreign countries, (ii) a 11.2%
increase in total sales within the United States due to a 24.6% increase in
unit volume of foldable IOLs (primarily the ELASTIMIDE model) following the
April 1995 introduction within the United States of ultraviolet (UV) versions
of this product, partially offset by a 9.7% average price decrease primarily
due to a decrease in prices charged to certain managed care customers, and
(iii) a $500,000 increase in royalties.
COST OF SALES
Cost of sales as a percentage of revenues was essentially unchanged for the
six-month period ended June 28, 1996, at 23.8% ($4.7 million), as compared to
24.0% ($3.8 million) for the six-month period ended June 30, 1995. Lower unit
costs due to increased operating efficiencies and greater absorption of fixed
costs were partially offset by lower prices.
GENERAL & ADMINISTRATIVE (G&A)
General and administrative expense decreased to 13.8% of revenues ($2.7
million) for the six-month period ended June 28, 1996 from 14.0% ($2.2
million) of revenues for the six-month period ended June 30, 1995. The
6
decrease as a percent of revenues is a result of sales growing at a faster
rate than G&A. The overall increase in G&A is due to the addition of
administrative staff in Human Resources, Finance, and Systems to support the
Company's anticipated growth as well as increased rent and professional fees.
MARKETING AND SELLING (M&S)
Marketing and selling expense decreased to 29.9% of revenues ($5.9 million)
for the six-month period ended June 28, 1996 from 32.2% of revenues ($5.1
million) for the six-month period ended June 30, 1995. This decrease was
attributable to a lower effective overall commission rate on foldable IOL
sales in the United States resulting from declines in foldable IOL sales
prices and to higher sales by the Company's international subsidiaries without
a commensurate increase in expenses.
RESEARCH AND DEVELOPMENT (R&D)
Research and development expense increased to 9.8% of revenues ($1,936,000)
for the six-month period ended June 28, 1996 from 9.5% of revenues
($1,499,000) for the six-month period ended June 30, 1995, as a result of
continued investment in developing new products, manufacturing systems and
distribution systems, and cost reduction projects for manufacturing.
OTHER INCOME, NET
Other income, net decreased to 1.0% of revenues ($196,000) for the six-month
period ended June 28, 1996 from 2.2% of revenues ($340,000) for the six-month
period ended June 30, 1995. The primary reason for this decrease was reduced
earnings reported by the Company's joint venture with Canon STAAR.
INCOME TAX PROVISION
Income taxes increased to 7.4% of revenues for the six-month period ended
June 28, 1996 from 0.7% of revenues for the six-month period ended June 30,
1995. This increase was due to the Company's recording of its remaining book
net operating loss carryforwards as a deferred tax asset of $3.3 million as of
December 29, 1995 and utilizing a portion of the deferred tax asset during the
six-month period ended June 28, 1996. The Company's tax provision for the six-
month period ended June 30, 1995 recognized only the current utilization of
the operating loss carryover. The Company's tax provision for the six month
period ended June 28, 1996 is lower than the U.S. statutory rate due to the
significant income generated from international operations which is not
subject to income taxes. The Company has remaining net operating loss
carryforwards for tax purposes and will not be paying Federal income taxes
until such carryforwards are fully utilized.
LIQUIDITY AND CAPITAL RESOURCES
In March 1996 the Company refinanced and increased its domestic line of
credit with a different lender. As a result, the Company significantly lowered
its interest rate under the refinancing and increased its line of credit.
During the second quarter of 1996, the Company granted options to various
employees to purchase 503,000 shares of the Company's common stock at $12.50
per share, its fair market value at that time.
As of June 28, 1996, the Company had a current ratio of 2.6:1, net working
capital of $16.9 million and net equity of $32.3 million compared to December
29, 1995 when the Company's current ratio was 2.9:1, its net working capital
was $16.3 million, and its net equity was $28.7 million.
The Company expects to continue to be profitable in the future and the
Company believes that all future cash flow needs will come from cash generated
by operations or additional financing, if required.
PART II--ITEM 1
OTHER INFORMATION
During the quarter ended June 28, 1996, the Company settled all litigation
with Alcon.
7
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934 THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
STAAR SURGICAL COMPANY
Date: August 12, 1996 By: /s/ William C. Huddleston
----------------------------------
William C. Huddleston
Chief Financial Officer and
Duly Authorized Officer
(principal accounting and financial
officer for the quarter)
8