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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: SEPTEMBER 27, 1996
OR
[_] TRANSACTION 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 13,044,228 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER
SHARE, ISSUED AND OUTSTANDING AS OF NOVEMBER 6, 1996.
TOTAL NUMBER OF SEQUENTIALLY NUMBERED PAGES IN THIS DOCUMENT: 9
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STAAR SURGICAL COMPANY
INDEX
PAGE
NUMBER
------
PART I
Item 1--Financial Information
Condensed Consolidated Balance Sheets--September 27, 1996 and December
29, 1995............................................................. 1
Condensed Consolidated Statements of Income--Three and Nine Months
Ended September 27, 1996 and September 29, 1995...................... 2
Condensed Consolidated Statements of Cash Flows--Nine Months Ended
September 27, 1996 and September 29, 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...................................................... 8
Signature Page......................................................... 9
i
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER DECEMBER
27, 1996 29, 1995
----------- -----------
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $ 6,586,524 $ 3,767,011
Accounts receivable, less allowance for doubtful
accounts and estimated returns.................... 6,928,215 7,492,439
Inventories........................................ 12,517,972 9,591,898
Prepaids, deposits and other current assets........ 1,860,473 917,895
Deferred income tax................................ 1,908,223 3,323,724
----------- -----------
Total current assets............................. 29,801,407 25,092,967
----------- -----------
Investment in joint venture.......................... 2,323,408 2,121,492
Property, plant and equipment, net................... 7,914,295 6,362,696
Patents and licenses, net............................ 8,422,293 3,538,769
Other assets......................................... 1,718,869 1,687,066
----------- -----------
Total assets..................................... $50,180,272 $38,802,990
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable...................................... $ 7,399,198 $ 3,548,686
Accounts payable................................... 2,145,815 1,448,135
Current portion of long-term debt.................. 636,198 480,151
Other current liabilities.......................... 4,258,825 3,281,321
----------- -----------
Total current liabilities........................ 14,440,036 8,758,293
----------- -----------
Long-term debt....................................... 967,296 1,212,178
Deferred gain on sale of license..................... 3,125 143,750
Other long-term liabilities.......................... 2,724 10,743
----------- -----------
Total liabilities................................ 15,413,181 10,124,964
----------- -----------
Stockholders' equity
Common stock $0.01 par value, 40,000,000 shares
authorized; issued and outstanding 13,045,456 at
September 27, 1996 and 12,784,148 at December 29,
1995.............................................. 130,455 127,841
Capital in excess of par value..................... 41,393,618 40,325,287
Accumulated deficit................................ (4,430,967) (9,449,087)
----------- -----------
37,093,106 31,004,041
----------- -----------
Notes and other receivables ......................... (2,326,015) (2,326,015)
----------- -----------
Total stockholders' equity....................... 34,767,091 28,678,026
----------- -----------
Total liabilities and stockholders' equity........... $50,180,272 $38,802,990
=========== ===========
1
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 27, SEPTEMBER 29, SEPTEMBER 27, SEPTEMBER 29,
1996 1995 1996 1995
------------- ------------- ------------- -------------
REVENUES
Sales................... $10,549,025 $8,958,550 $29,905,147 $24,713,890
Royalty income.......... 250,000 -- 750,000 --
----------- ---------- ----------- -----------
Total revenues.......... 10,799,025 8,958,550 30,655,147 24,713,890
Cost of sales........... 2,634,930 2,183,496 7,350,838 5,964,871
----------- ---------- ----------- -----------
Gross profit............ 8,164,095 6,775,054 23,304,309 18,749,019
Selling, general and
administrative
expenses:
General and
administrative....... 1,375,060 1,336,591 4,123,192 3,547,375
Marketing and selling. 2,997,153 2,508,820 8,926,487 7,580,838
Research and
development.......... 982,227 773,906 2,918,534 2,272,711
----------- ---------- ----------- -----------
Total selling, general
and administrative
expense: 5,354,440 4,619,317 15,968,213 13,400,924
Operating income...... 2,809,655 2,155,737 7,336,096 5,348,095
----------- ---------- ----------- -----------
Other income (expense)
Equity in earnings of
joint venture........ 119,568 165,882 342,541 545,302
Interest expense--net. (172,806) (32,716) (393,904) (155,449)
Other income
(expense)............ (36,449) (126,653) 157,321 (43,201)
----------- ---------- ----------- -----------
Total other income
(expense)--net....... (89,687) 6,513 105,958 346,652
Income before income
taxes.................. 2,719,968 2,162,250 7,442,054 5,694,747
Income tax provision.... 944,929 54,926 2,423,934 169,918
----------- ---------- ----------- -----------
Net income............ $ 1,775,039 $2,107,324 $ 5,018,120 $ 5,524,829
=========== ========== =========== ===========
Income per share........ $ 0.13 $ 0.16 $ 0.36 $ 0.41
=========== ========== =========== ===========
Average number of shares
of common stock........ 13,857,180 13,335,359 13,857,180 13,335,359
=========== ========== =========== ===========
2
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
---------------------------
SEPTEMBER 27, SEPTEMBER 29,
1996 1995
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income........................................ $ 5,018,120 $ 5,524,829
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization of property and
equipment...................................... 1,395,368 938,676
Amortization of patents and licenses............ 377,162 114,000
Provision for allowance for doubtful accounts... 67,959 (209,476)
Equity in earnings of joint venture............. (342,541) (545,284)
Recognition of deferred tax asset............... 1,415,501 --
Common stock issued for services................ 325,000 325,000
Prepaid services and other...................... -- (30,117)
Change in operating working capital............. (1,697,203) (2,201,662)
----------- -----------
Net cash provided by operating activities..... 6,559,366 3,915,966
----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment.... (2,946,967) (1,354,302)
Increase in patents and licenses................ (5,260,686) (2,076,745)
Increase in other assets........................ (31,803) --
----------- -----------
Net cash used in investing activities......... (8,239,456) (3,431,047)
----------- -----------
Cash flows from financing activities:
Increase in borrowings under notes payable and
long-term debt................................. 2,015,644 1,012,146
Payments on other notes payable and long-term
debt........................................... (450,245) --
Increase in borrowings under line-of-credit..... 4,700,000 704,620
Payments on line-of-credit...................... (2,511,741) --
Proceeds from the issuance of common stock...... 822,945 211,156
Payments for repurchase of common stock......... (77,000) (1,516,662)
----------- -----------
Net cash provided by financing activities..... 4,499,603 411,260
----------- -----------
Increase in cash and cash equivalents............. 2,819,513 896,179
Cash and cash equivalents at beginning of period.. 3,767,011 3,203,887
----------- -----------
Cash and cash equivalents at end of period........ $ 6,586,524 $ 4,100,066
=========== ===========
3
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 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 nine-months ended September 27, 1996 and September 29, 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 intraocular lenses ("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 nine months ended September 27, 1996 and September 29, 1995, the
Company had export sales primarily to Europe and South Africa, Australia and
Southeast Asia, of approximately $8,753,000 and $5,670,000. Of these sales,
approximately $5,150,000 and $3,718,000 were to Europe, which is the Company's
principal foreign market, for the quarters ended September 27, 1996 and
September 29, 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 September 27, 1996
and December 29, 1995.
SEPTEMBER 27, DECEMBER 29,
1996 1995
------------- ------------
Raw materials and purchased parts................. $ 1,723,067 $1,104,203
Work in process................................... 1,120,086 1,143,119
Finished goods.................................... 9,674,819 7,344,576
----------- ----------
$12,517,972 $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 nine-months ended September 27,
1996 and September 29, 1995 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 nine-months ended September 27, 1996 and September 29, 1995 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 PERCENTAGE CHANGE
NINE MONTHS ENDED FOR NINE MONTHS
--------------------------- -------------------
SEPTEMBER 27, SEPTEMBER 29,
1996 1995 1996 VS 1995
------------- ------------- -------------------
INCREASE (DECREASE)
Total revenues.............. 100.0% 100.0% 24.0%
Cost of sales............... 24.0 24.1 23.2
----- -----
Gross profit................ 76.0 75.9 24.3
Costs and expenses:
General and
administrative........... 13.5 14.4 16.2
Marketing and selling..... 29.1 30.7 17.8
Research and development.. 9.5 9.2 28.4
----- -----
Total costs and expenses.... 52.1 54.3 19.2
Operating income............ 23.9 21.6 37.2
Other income, net........... .3 1.4 (69.4)
----- -----
Income before income taxes.. 24.3 23.0 30.7
Income tax provision........ 7.9 .7 1,326.5
----- -----
Net income.............. 16.4% 22.3% (9.2)%
===== =====
Revenues:
Revenues for the nine-month period ended September 27, 1996 were $30.7
million, which is 24.0% greater than the $24.7 million in revenues for the
nine-month period ended September 29, 1995. The increase in revenues was
attributable to (i) a 54.4% 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 and implantable contact
lens ("ICL") in selected foreign countries, (ii) a 11.1% increase in sales
within the United States due to a 23.7% increase in unit volume of foldable
IOL's (primarily the ELASTIMIDE(TM) model) following the April 1995
introduction within the United States of ultraviolet (UV) versions of this
product, partially offset by a 8.3% average price decrease primarily due to a
decrease in prices charged to certain managed care customers, and (iii) a
$750,000 increase in royalties.
Cost of Sales:
Cost of sales as a percentage of revenues was essentially unchanged for the
nine-month period ended September 27, 1996, at 24.0% ($7.4 million), as
compared to 24.1% ($6.0 million) for the nine-month period ended September 29,
1995. Lower unit costs due to increased operating efficiencies and greater
absorption of fixed costs were offset by lower prices.
General & Administrative (G&A):
General and administrative expense decreased to 13.5% of revenues ($4.1
million) for the nine-month period ended September 27, 1996 from 14.4% ($3.5
million) of revenues for the nine-month period ended September 29, 1995.
6
The 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 29.1% of revenues ($8.9 million)
for the nine-month period ended September 27, 1996 from 30.7% of revenues
($7.6 million) for the nine-month period ended September 29, 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. The Company expects
Marketing and Selling expenses to increase in dollars with the rollout of four
new product lines internationally in 1997.
Research and Development (R&D):
Research and development expense increased to 9.5% of revenues ($2.9
million) for the nine-month period ended September 27, 1996 from 9.2% of
revenues ($2.3 million) for the nine-month period ended September 29, 1995, as
a result of continued investment in developing new products, manufacturing
systems and distribution systems, and cost reduction projects for
manufacturing.
OTHER INCOME (EXPENSE), NET
Other income, net decreased to .3% of revenues ($106,000) for the nine-month
period ended September 27, 1996 from 1.4% of revenues ($347,000) for the nine-
month period ended September 29, 1995. The primary reason for this decrease
was reduced earnings reported by the Company's joint venture with Canon STAAR
and increased interest expense, due to borrowings needed for working capital
purposes.
INCOME TAX PROVISION
Income taxes increased to 7.9% of revenues for the nine-month period ended
September 27, 1996 from 0.7% of revenues for the nine-month period ended
September 29, 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 nine-month period ended September 27, 1996. The Company's
tax provision for the nine-month period ended September 29, 1995 recognized
only the current utilization of the operating loss carryover. The Company's
tax provision for the nine-month period ended September 27, 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
The Company increased its finished goods inventories during the first nine-
months of 1996 in anticipation of increased fourth quarter and 1997 sales.
The increase in prepaids, deposits and other current assets during the nine-
months ended September 27, 1996 are the result of receivables due from the
Swiss government for incentive rebates and refunds of Value Added Tax and due
to increases in prepaid advertising and trade show expenses.
The Company's capital expenditures for the nine-month period ended September
27, 1996 were approximately $2.9 million. All expenditures were used to
upgrade existing production equipment, to set up new production facilities for
new products, and to maintain the company's existing facilities in the
ordinary course of
7
business. The company's planned capital expenditures over the next twelve
months are expected to decrease over 1996 levels and will be used to increase
capacity for new products and to reduce manufacturing costs.
The Company capitalizes the costs of acquiring patents and licenses as well
as the legal costs of defending its rights to these patents. Capitalized
additions to patents and licenses for the nine-months ended September 27, 1996
were $5.3 million. Of this amount, 67% was spent on the acquisition of
existing patents, 20% on the development of new patents, and 15% on patent
defense. The Company expects spending to be less in 1997 for patents and
licenses.
In March 1996, the Company refinanced and increased its domestic line of
credit at a lower interest rate with a different lender.
During the nine-months ended September 27, 1996, 211,302 options were
exercised at prices ranging from $1.20 to $5.87 resulting in cash proceeds of
$822,945.
As of September 27, 1996, the Company had a current ratio of 2.1:1, net
working capital of $15.4 million and net equity of $34.8 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.
During the third quarter of 1996, the Company settled all litigation with
Allergan.
8
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
/s/ William C. Huddleston
Date: November 8, 1996 By: _________________________________
William C. Huddleston
Chief Financial Officer and
Duly Authorized Officer
(principal accounting and financial
officer for the quarter)
9