SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended January 3, 1997
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[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
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Commission file number 0-11634
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STAAR SURGICAL COMPANY
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(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 91016
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (818) 303-7902
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 26, 1997 was approximately $118,100,000 based upon the
closing price per share of the Common Stock of $10.875 on that date.
The number of shares outstanding of the issuer's classes of Common Stock as of
March 26, 1997:
Common Stock, $.01 Par Value 13,075,646 shares
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DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III (Items 10, 11, 12 and 13) is incorporated by
reference to the Company's definitive proxy statement for its 1997 Annual
Meeting of Stockholders.
ADVISEMENT
CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K, PARTICULARLY UNDER ITEMS
1 THROUGH 8, CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE REFORM ACT). SUCH FORWARD-
LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER
FACTORS INCLUDING, WITHOUT LIMITATION, THOSE UNCERTAINTIES AND RISK FACTORS
DESCRIBED IN ITEM 7 -- MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- UNCERTAINTIES AND RISK FACTORS,
WHICH UNCERTAINTIES, RISKS AND OTHER FACTORS MAY CAUSE THE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENT EXPRESSED OR IMPLIED BY SUCH FORWARD-
LOOKING STATEMENTS.
PART I
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ITEM 1. BUSINESS
(a) GENERAL
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OVERVIEW
STAAR Surgical Company (STAAR or the Company) is a publicly traded (NASDAQ
symbol STAA) developer, manufacturer and global distributor of medical devices
used in minimally invasive ophthalmic surgery. The Company's products are
designed to improve the quality of patient outcomes, minimize patient risk and
discomfort, and simplify ophthalmic surgical procedures for surgeons and
patients. The Company's primary products are its foldable intraocular lenses
("IOLs"), its "wick" style glaucoma implant (the "Glaucoma Wick"), its
implantable contact lens ("ICL"), and its STAARVISC(TM) viscoelastic solution.
The Company's foldable IOLs are used as replacements for the natural lens after
its removal in cataract surgery. The ophthalmic surgeon can implant the foldable
IOL through an incision significantly smaller than that used to insert "hard"
IOLs. This provides numerous patient benefits including reduced risk of
infection, decreased post-operative pain and discomfort, and shorter
hospitalization and recovery time. The Glaucoma Wick is an innovative ocular
device developed to provide a more effective and longer-term solution for
glaucoma, a leading cause of blindness worldwide. The ICL is an ocular implant
designed to correct refractive disorders, such as myopia (near-sightedness) and
hyperopia (far-sightedness). STAARVISC(TM) is a viscoelastic solution used
during IOL and ICL surgery.
The Company markets its IOLs, which accounted for 94% of its revenues in 1996,
both domestically and in numerous foreign countries. The Company markets the
Glaucoma Wick, which the Company introduced in late 1995, and its ICLs and
STAARVISC(TM) viscoelastic solution, which the Company introduced in late 1996,
on a
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limited basis in selected foreign countries.
DEVELOPMENT OF BUSINESS OVER PAST FIVE YEARS AND RELEVANT PRIOR EVENTS
The Company was incorporated in California in 1982 as a successor to a
partnership for the purpose of developing, producing, and marketing IOLs and
other products for minimally invasive ophthalmic surgery. The Company was
reincorporated in Delaware in April 1986.
In 1982 and 1983 the Company's operations consisted mainly of research and
development and preliminary marketing and capital raising activities. In 1982
the Company commenced the development of foldable IOLs in association with Dr.
Thomas R. Mazzocco, M.D., who patented the concept of folding or otherwise
deforming an IOL or ICL for use in minimally invasive surgery. The Company
acquired Dr. Mazzoccos patent, and began production and sale of foldable IOLs in
1986 for implantation in connection with clinical studies for such products. In
September 1991, the Company received United States Food and Drug Administration
("FDA") pre-market approval for its foldable IOLs, which has been the Companys
principal product line to date. See "Intellectual Property Rights" and
"Products" in Item 1.
In May 1995, Intersectoral Research and Technology Complex Eye Microsurgery
("IRTC") granted an exclusive royalty bearing license to STAAR Surgical AG, a
wholly owned subsidiary of the Company, to manufacture, use and sell the
glaucoma devices in the United States, Europe, Latin America, Africa, Asia and
Japan, and non-exclusive rights with respect to the countries in the
Commonwealth of Independent States (or former Union of Soviet Socialists
Republics) and China. In January 1996, IRTC granted an exclusive royalty bearing
license to STAAR Surgical AG to manufacture, use and sell ICLs using its
biocompatible materials in the United States, Europe, Latin America, Africa,
Asia and Japan, and non-exclusive rights with respect to the Commonwealth of
Independent States. The Company has since adopted IRTC's biocompatible material
and glaucoma device design for the Company's Glaucoma Wick, and has incorporated
IRTC's biocompatible materials for use with the Company's proprietary ICL
design. See "Licenses and Distribution Rights" and "Products" in Item 1.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
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Through 1996 the Company operated primarily within the cataract medical device
segment of the overall ophthalmic market. Information relating to the Company's
financial condition for the fiscal years ended January 3, 1997, December 29,
1995 and December 30, 1994 is set forth below in "Item 8 - Financial Statements
and Supplementary Data". In late 1995 the Company introduced the Glaucoma Wick,
and in late 1996 the Company introduced the ICL and STAARVISC(TM) viscoelastic
solution, for sale in selected foreign countries.
(c) NARRATIVE DESCRIPTION OF BUSINESS
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BACKGROUND
The human eye is a specialized sensory organ capable of light reception and able
to receive visual images that are transmitted to the visual center in the brain.
The main parts of the eye are the cornea, the iris, the lens, the retina, and
the trabecular meshwork. The cornea is typically a spherically shaped window in
the front of the eye through which light passes. The iris is a muscular curtain
located behind the cornea which opens and closes to regulate the amount of light
entering the eye through the pupil, an opening at the center of the iris. The
lens is a clear structure located behind the iris which changes shape to better
focus the light to the retina, located in the back of
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the eye. The retina is a layer of nerve tissue consisting of millions of light
receptors called rods and cones, which receive the light image and transmit it
to the brain via the optic nerve. The anterior chamber of the eye, located in
front of the iris, is filled with a watery fluid called the aqueous humour,
while the portion of the eye behind the iris is filled with a jelly-like
material called the vitreous humour. The trabecular meshwork, a drainage channel
located between the cornea and the surrounding white portion of the eye,
maintains a low pressure in the anterior chamber of the eye by draining excess
aqueous humour.
There are a number of ocular diseases including cataracts and glaucoma and
common visual refractive disorders such as myopia, hyperopia and astigmatism.
Cataracts are an irreversible and progressive ophthalmic condition wherein the
eye's natural lens loses its usual transparency and becomes opaque. Glaucoma
results from the build-up of excessive intraocular pressure, primarily due to
poor drainage of the aqueous humor. The increase in pressure slowly and
progressively damages the optic disc, resulting in a gradual loss of vision.
Myopia and hyperopia are caused by an anatomical imbalance between the shape of
the eye and the resulting distance between the cornea and the retina.
Astigmatism is caused by irregularities in the smoothness and curvature of the
cornea, causing improper focusing of the incoming light on the retina and
consequential blurring of vision.
MARKETS
The market for ophthalmic products is a large and dynamic segment of the
healthcare industry. The major factors influencing this market are the aging
worldwide population, significant technological medical advancements which have
created cost effective treatments and therapies, the evolution toward managed
care and the growing importance of international markets. The Company's products
serve the following segments of the ophthalmic market:
CATARACT LENSES. Cataracts occur in varying degrees in approximately one-half
of Americans between the ages of 65 and 75, and approximately 70% of those over
the age of 75. Approximately 20% to 25% of cataract patients have pre-existing
astigmatism. Industry sources estimate that approximately 1.7 million iols were
implanted in the United States in 1996, generating approximately $224 million in
sales. The Company believes approximately 2.5 million IOLs were implanted
outside the United States during 1996 (not including China and Russia, for which
no reliable data exists), generating an additional $400 million of sales. The
Company believes that approximately 50% of the domestic market for IOLs in 1996
was held by foldable IOLs, compared to approximately 15% in 1992, and that
approximately 15% to 25% of the international market share is presently held by
foldable IOLs. The Company believes the share of the worldwide market held by
foldable IOLs will continue to increase by virtue of the benefits of foldable
IOLs over hard IOLs.
GLAUCOMA TREATMENTS. This market encompasses drug therapies as well as
traditional and laser surgical procedures for use in mitigating the effects of
glaucoma. There is no known cure for glaucoma; the most commonly prescribed
glaucoma drugs either inhibit the build-up of intraocular fluid or promote
increased drainage, in either case reducing intraocular pressure and eye damage.
Traditional surgical procedures for glaucoma (i.e., trabeculectomies) and laser
surgical procedures for glaucoma (i.e., trabeculoplasties) remove a portion of
the trabecular meshwork to create a channel for fluid to drain from the eye.
The selection of drug treatment over a trabeculectomy or trabeculoplasty is, in
part, dependent upon the stage of the disease and the prevailing glaucoma
treatment used in the country in which the treatment is given.
The Company believes that glaucoma currently afflicts approximately three
million persons in the United States, and that the number of international cases
exceeds that of the United States. The worldwide market for glaucoma drugs is
approximately $850 million, including approximately $450 million from the sale
of a single glaucoma drug. It is estimated that 100,000 trabeculectomies and
300,000 laser trabeculoplasties were performed in the United States alone in
1994, representing total expenditures of approximately $400 million. The
Company
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believes glaucoma surgery is more prevalent than glaucoma drug therapy
in certain foreign countries due to cost and other considerations.
REFRACTIVE VISION CORRECTION. The refractive vision correction market includes
corrective eyewear such as eyeglasses and external contact lenses and
traditional and laser surgical procedures. Approximately 50% of the world's
population is afflicted with common refractive vision disorders such as myopia,
hyperopia and astigmatism, and approximately 150 million people within the
United States currently use some form of eyewear to correct for these disorders.
in 1996, the vision correction market in the United States was approximately $15
billion. This market includes corrective eyeglasses, external contact lenses
and various surgical procedures such as radial keratotomy (RK), a conventional
surgical technique, and photorefractive keratectomy (PRK), a surgical technique
performed with the use of a laser. it is estimated that over one million RK
procedures have been performed in the united states, most of which have occurred
since 1989. in 1995, 350,000 rk procedures were performed, at an average cost
of $1,000-$3,000 per procedure. Surgeons have used PRK, a more recently
developed refractive surgery technique, in an estimated 600,000 procedures to
date worldwide, with a limited number occurring in the United States, where the
procedure was approved in 1996. PRK is expected to gain market share from RK.
Industry sources estimate that the number of PRK procedures in the United States
could reach 500,000 in 1997, representing a potential market of $750 million.
approximately seven million people in the united states are afflicted with
severe cases of myopia and hyperopia of greater than seven diopters which are
not currently addressed by existing conventional or laser surgical procedures
and frequently can be only partially corrected with eyeglasses and external
contact lenses.
VISCOELASTIC SOLUTION PRODUCTS. The Viscoelastic solution market relates to
gel-like substances used during IOL surgeries to maintain the space and shape of
the eye, to act as a buffer against cell damage and to otherwise act as a
lubricant for minimally invasive eye surgery. Industry studies indicate that
approximately 2.4 million units of viscoelastic solution were sold within the
United states in 1996, generating approximately $129 million in sales.
Management believes the international market for viscoelastic solution is at
least the size of the domestic market for this product.
STRATEGY
The Company's strategy is to increase its share of the worldwide market for
ophthalmic products through the development and marketing of innovative next
generation products and technologies which utilize minimally invasive surgical
procedures. The key elements of this strategy are to: (i) develop products that
deliver distinct clinical and economic benefits to patients and surgeons; (ii)
maintain a leading technological role in the industry; and (iii) expand markets
worldwide.
PRODUCTS
The Company develops, manufactures and globally distributes medical devices used
in minimally invasive ophthalmic surgery. The Company's products are designed
to (i) improve patient outcomes, (ii) minimize patient risk and discomfort, and
(iii) simplify ophthalmic procedures for the surgeon and patient. The Company's
principal customers are ophthalmologists, surgical centers, hospitals, managed
care providers, health maintenance organizations and group purchasing
organizations.
INTRAOCULAR LENSES (IOLS) AND RELATED CATARACT PRODUCTS. The Company's
principal products are its foldable iols for use in minimally invasive cataract
surgical procedures. The Company's IOLs can be folded or otherwise deformed,
and therefore can be implanted into the eye through an incision (less than 3 mm)
significantly smaller than the incision needed to insert hard iols
(approximately 5 mm to 10 mm). Once inserted, the Company's IOL
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unfolds naturally into the capsular bag which previously held the cataractous
lens. The primary advantages of using minimally invasive surgical procedures
are:
. Fewer Surgical Complications. A smaller incision minimizes eye
trauma and the potential for infection. In addition, the Company's
foldable IOL can typically be implanted under topical anesthesia,
thereby avoiding complications associated with the administration
of local anesthesia.
. Reduced Level of Surgically Induced Astigmatism. The ability to
eliminate sutures as a result of the smaller incision leads to a
reduction in the incidence of surgically induced astigmatism caused
by uneven healing of the surgical wound.
. Faster Recovery of Vision. Patients can typically recover their
best vision the same day the procedure is performed, as opposed to
thirty to forty-five days following surgery in the case of hard
IOLs.
. Enhanced Benefits to Surgeons. The use of foldable IOLs enables
ophthalmologists to more quickly perform surgical procedures at
lower cost, and with greater ease and consistently higher quality
outcomes.
The Company's foldable IOLs come in two differently configured styles, the
advanced single-piece ELASTIC(TM) model, and the ELASTIMIDE(TM) model based upon
the tradit ional three-piece design. The selection of one model over the other
is primarily based upon the preference of the ophthalmologist, although the
Company believes more experienced ophthalmologists prefer the single-piece
ELASTIC(TM) model. Sales of foldable IOLs accounted for approximately 97% of the
Company's total revenues for each of its 1993 through 1995 fiscal years and 94%
of total revenues for its 1996 fiscal year.
The Company believes the unique features of its foldable IOLs afford a number of
competitive advantages compared to other foldable IOLs such as ease of
implantation, better patient outcomes, and minimization of cell growth and
resulting capsular haze.
The Company has developed, and currently markets in certain foreign countries, a
toric version of its ELASTIC(TM) IOL, which is specifically designed for
patients with pre-existing astigmatism. The Company is the only foldable IOL
manufacturer to offer a product for astigmatism. The Company has implanted a
limited number of its toric IOLs in patients within the United States for
clinical study purposes pursuant to an Investigational Device Exemption ("IDE")
granted by the FDA in November 1992. The Company has completed Phase III
clinical studies for the toric IOL, and anticipates it will apply for FDA pre-
market approval to market this product in the United States in mid-1997. No
assurance can be given that this time schedule can be met, or that FDA pre-
market approval for this product will be obtained.
As part of its approach to providing a complete line of complementary products
for use in minimally invasive cataract surgery, the Company also markets several
styles of lens injectors and sterile cartridges used to insert IOLs, a
phacoemulsification machine used to remove the cataractous lens, and several
styles of disposable and reusable surgical packs and ultrasonic cutting tips
used with the Company's phacoemulsification machine.
GLAUCOMA WICK AND GLAUCOMA SHUNT. The Glaucoma Wick is a medical device
surgically implanted into the eye to reduce intraocular pressure ("IOP"). It is
made of biocompatible material which, through its porosity and hydrophilic
properties, promotes drainage of excess eye fluid. The Glaucoma Wick is
specifically designed for patients suffering from open-angled glaucoma, which is
the most prevalent type of glaucoma. In contrast to trabeculectomies and
trabeculoplasties, implantation of the Glaucoma Wick does not require
penetration of the anterior chamber of the eye. Instead, a small flap of the
outer eye tissue is folded back, the Glaucoma Wick is placed above the
trabecular meshwork and the outer flap is refolded into place. The Glaucoma
Wick swells to
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approximately five to ten times its original size and is absorbed
within one to six months after implantation, creating a new drainage pathway.
The twenty- to forty-minute surgical procedure to implant the Glaucoma Wick is
performed under local or topical anesthesia, typically on an outpatient basis.
Management believes the hydrophilic properties of the Glaucoma Wick and the
minimally invasive nature of the surgery offer several advantages over existing
surgical procedures including (i) greater efficacy, (ii) a longer-term solution,
(iii) reduced risk of surgical complications, and (iv) cost effectiveness.
The Company believes the Glaucoma Wick is an attractive product for (i) managed
care and health maintenance organizations and group purchasing organizations who
desire to control their costs and at the same time provide their customers with
a higher standard of health care, (ii) less developed countries which lack the
resources and infrastructure to provide continuous treatments, and (iii)
ophthalmic surgeons who have traditionally referred their patients to glaucoma
specialists. Adoption by ophthalmic surgeons, however, will be dependent upon
the rate at which they learn the advanced surgical skills necessary to perform
the implant or at which instrumentation is developed to simplify the procedure.
The Company will promote this product by educating surgeons through its highly
trained technical sales force. See "Uncertainties and Risk Factors - Risks
Relating to Commercialization of New Products." in Item 7."
The Company introduced the Glaucoma Wick in late 1995 for commercial sale on a
limited basis in South Africa and selected countries in Europe and South
America. The Company intends to apply to the FDA in mid-1997 for an IDE leading
to a 510(k) clearance to commercially market this product within the United
States. No assurance can be given as to when or if FDA 510(k) clearance for
this product will be obtained. See "Uncertainties and Risk Factors - Government
Regulation and Uncertainty of Product Approval" in Item 7.
Since 1987 the Company has marketed its MOLTENO(TM) style Glaucoma Shunt, a
medical device implanted at the latest stages of glaucoma, after conventional
treatments have been performed and failed and vision is effectively lost. The
Glaucoma Shunt is designed to relieve pain and prevent the removal of the eye.
The Company will continue to supply this product for patients in the last stages
of glaucoma.
IMPLANTABLE CONTACT LENSES (ICLS). ICLs are medical devices implanted in the eye
to permanently correct common refractive vision disorders including myopia,
hyperopia and potentially astigmatism. The ICL is initially targeted to persons
afflicted with severe hyperopia and myopia (defined as more than seven diopters)
which are not currently being addressed through current traditional or laser
surgical procedures and frequently can be only partially corrected with
eyeglasses or external contact lenses. These individuals, who suffer significant
vision impairment, are the most likely to seek surgical alternatives. The
Company also believes the ICL will be an attractive alternative for individuals
afflicted with moderate cases of myopia and hyperopia.
The Company's ICL is folded and implanted into the eye behind the iris and in
front of the normal lens using minimally invasive surgical techniques similar to
implanting an IOL during cataract surgery, except that the human lens is not
removed. The five- to twenty-minute surgical procedure to implant the ICL is
typically performed with topical anesthesia on an outpatient basis.
Management believes the use of an ICL affords a number of advantages over
existing refractive surgical procedures, such as RK and PRK, including the
following: (i) potentially corrects all levels of myopia and hyperopia, (ii) may
provide superior predictability of results, (iii) in most cases allows for
reversibility, which is precluded by existing surgical procedures, (iv) enables
faster recovery of vision and rehabilitation, and (v) produces potentially
superior refractive results.
The Company commenced commercial sales of ICLs in late 1996 on a limited basis
in South Africa, China, and selected countries in Europe and South America. In
February, 1997, the FDA granted the Company an IDE to
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commence clinical studies consisting of three distinct phases within the United
States. The first phase of the IDE permits the Company to implant ten ICLs for
myopia and ten ICLs for hyperopia. No assurance can be given as to when or if
the FDA will grant approval to expand the study to the second or third phase or
as to when or if the FDA will grant pre-market approval for the ICL. See
"Uncertainties and Risk Factors - Government Regulation and Uncertainty of
Product Approval" in Item 7.
VISCOELASTIC SOLUTION PRODUCTS. Viscoelastic solution is a gel-like substance
which can be used during IOL and ICL surgery to assist the ophthalmic surgeon in
establishing and maintaining the space and shape of the anterior and posterior
chambers of the eye. It also acts as a resilient buffer to protect against
inadvertent damage to the vital endothelial cells in the eye. Viscoelastic
solution is also effective as a lubricant for injection of foldable IOLs and
ICLs using minimally invasive surgical procedures. The Company believes it can
effectively market its STAARVISC(TM) hyaluronic acid-based viscoelastic solution
in conjunction with its foldable IOL and ICL products.
The Company introduced its STAARVISC(TM) viscoelastic solution in late 1996 for
commercial sale on a limited basis in Canada and selected countries in Europe
and South America. The only significant pending action necessary to obtain FDA
pre-market approval to commercially market STAARVISC(TM) within the United
States is satisfaction of FDA regulations pertaining to Good Manufacturing
Practices. The Company intends to arrange an FDA inspection of its STAARVISC(TM)
manufacturing facilities in mid-1997 in order to satisfy this final requirement.
See "Uncertainties and Risk Factors - Government Regulation and Uncertainty of
Product Approval" in Item 7.
RESEARCH AND DEVELOPMENT
The Company is focused on furthering technological advancements in the
ophthalmic products industry through continuous development and innovation of
ophthalmic products and materials, and related surgical techniques to promote
these products. See "Business - Strategy" above. The Company maintains an
active internal research and development program comprised of over 25 employees.
Over the past year, research and development efforts have been primarily focused
on: (i) developing the Company's ICLs, Glaucoma Wick and toric IOL, (ii)
improving insertion and delivery systems for the Company's foldable IOLs, and
(iii) generally improving the manufacturing systems and procedures for all
products to reduce manufacturing costs. Research and development expenses
amounted to approximately $4,085,000, $3,254,000 and $2,718,000 for the
Company's 1996, 1995 and 1994 fiscal years, respectively.
MARKETING, SELLING AND DISTRIBUTION
The Company maintains a highly trained sales force that works closely with its
customers (primarily surgeons and other health care providers) to educate them
on the benefits of its IOLs as well as the skills and techniques needed to
perform minimally invasive surgical procedures. The Company supplements its
direct sales efforts through advertising in medical and trade journals and by
sponsoring surgical procedure courses, seminars and technical presentations
chaired by leading ophthalmologists.
The Company's products are sold domestically through a network of independent
regional manufacturers representatives and their territorial representatives.
International sales are primarily conducted through the Company's subsidiaries
that sell through independent sales representatives engaged on a basis similar
to that of sales representatives within the United States. In countries where
the Company's subsidiaries do not have a direct presence, sales are conducted
through country or area medical distributors.
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COMPETITION
Competition in the medical device field is intense and characterized by
extensive research and development and rapid technological change. Development
by competitors of new or improved products, processes or technologies may make
the Company's products obsolete or less competitive. The Company will be
required to devote continued efforts and significant financial resources to
enhance its existing products and/or develop new products for the ophthalmic
industry. See "Uncertainties and Risk Factors - Highly Competitive Industry;
Rapid Technological Change" in Item 7.
The Company believes its primary competition for foldable IOLs includes Allergan
Medical Optics ("AMO"), a subsidiary of Allergan, Inc. ("Allergan"), Chiron
Vision Corporation ("Chiron"), a subsidiary of Chiron Corporation, and Alcon
Surgical, Inc. ("Alcon"), a subsidiary of Alcon Laboratories, Inc., all of whom
are licensees of the Company's foldable technology. Significant competitors in
the hard IOL market are believed to include Chiron, AMO, Pharmacia & Upjohn,
Inc. ("Pharmacia & Upjohn"), Alcon, Storz Ophthalmics, Inc. ("Storz"), a
subsidiary of American Home Products, and Mentor Corporation.
The Company's primary competition for glaucoma products is from pharmaceutical
companies. The Company believes Merck & Company, Inc., Alcon, Allergan, and
Storz are the largest providers of glaucoma drugs within the United States, and
CIBA Vision Corporation, a subsidiary of CIBA-GEIGY Corporation, Pharmacia &
Upjohn and Lederle Laboratories, a subsidiary of American Home Products, are the
largest internationally. The portion of this market held by glaucoma devices is
insignificant at present.
The Company will face significant competition for its ICLs generally from
manufacturers and distributors of corrective eyeglasses and external contact
lenses, and particularly from providers of conventional and laser surgical
procedures. The Company believes its primary competitors for laser surgical
procedures are Summit Technology, Inc. ("Summit"), VISX, Incorporated ("VISX"),
Escalon Medical, Inc., Sunrise Medical, Chiron and Nidek Co., Ltd. Summit's and
VISX's excimer lasers for PRK are the only products which have received pre-
market approval from the FDA for sale within the United States. KeraVision,
Inc. is developing the corneal ring.
Pharmacia & Upjohn, which distributes and manufactures a hyaluronic-based
viscoelastic solution known as Healon(TM), is the primary competitor for this
product. Other companies such as AMO, Chiron, Alcon and Storz also sell
viscoelastic type products.
MANUFACTURING AND SUPPLIERS
The Company principally manufactures its IOLs at its facilities located in
California, and its Glaucoma Wick, ICLs and STAARVISC(TM) viscoelastic solution
at its facilities located in Switzerland. Many components of the Company's
products are purchased to its specifications from suppliers or subcontractors.
Most of these components are standard parts available from multiple sources at
competitive prices. The Company presently has one supplier of silicone, the
principal raw material for its lenses, although it can purchase this raw
material from several distributors. Similarly, certain items used by the
Company in its disposable surgical packs are provided by a single supplier. The
Company's PHACO XL(TM) phacoemulsification machine is being manufactured for the
Company by unaffiliated third parties. If any of these supply sources becomes
unavailable, the Company believes that it would be able to secure alternate
supply sources within a short period of time and with minimal or no disruption.
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LICENSES AND DISTRIBUTION RIGHTS
The Company has granted licenses to certain of its patents, products, trade
secrets and technology, including its foldable technology, to other companies in
the IOL industry. The licenses under the patents extend for the life of the
patents. The licensees include Optical Radiation Corporation ("ORC"), Chiron,
AMO, Alcon and Canon STAAR, a joint venture owned equally by the Company and
Canon, Inc. and Canon Sales Co., Inc. Included in some of the licenses granted
are licenses to certain of the Company's foldable patents which were granted on
an exclusive basis to Canon STAAR (for Japan only), on a non-exclusive basis to
Alcon, ORC, Chiron and Canon STAAR (with respect to the world other than Japan),
and on a co-exclusive basis to AMO. At the time these licenses were granted,
the Company received substantial pre-payments of royalties on all but one of the
licenses. The pre-payment period on many of these licenses have since lapsed or
will lapse in the near future. The Company's business strategy is not dependent
upon realizing royalties from these licenses in the future.
In view of the number of licenses granted to its competitors, the Company is
often subject to disputes regarding the requirements of the licenses. The
Company and its licensee, Allergan, are currently in litigation with Pharmacia &
Upjohn for infringement of the Mazzocco Patent. The Company is also in
litigation with Chiron on the basis of a dispute regarding an indemnification
clause set forth in an agreement between the Company and Chiron and the payment
of royalties. The impact of an adverse decision in either case is unknown at
this time. See "Pending Legal Proceedings" in Item 3 below.
In May 1995, IRTC granted an exclusive royalty bearing license to STAAR Surgical
AG to manufacture, use and sell the glaucoma devices in the United States,
Europe, Latin America, Africa, Asia and Japan, and non-exclusive rights with
respect to the countries in the Commonwealth of Independent States (or former
Union of Soviet Socialists Republics) and China. In January 1996, IRTC granted
an exclusive royalty bearing license to STAAR Surgical AG to manufacture, use
and sell ICLs using its biocompatible materials in the United States, Europe,
Latin America, Africa, Asia and Japan, and non-exclusive rights with respect to
the Commonwealth of Independent States. The terms of these licenses extend for
the life of the patents. In connection with these licenses, IRTC also assigned
its patent for its biocompatible material for IOLs and ICLs to the Company. The
Company has since adopted IRTC's biocompatible material and glaucoma device
design for the Company's Glaucoma Wick, and has incorporated IRTC's
biocompatible materials for use with the Company's proprietary ICL design.
SUBSIDIARIES
The Company's principal operating subsidiary is STAAR Surgical AG, a wholly
owned subsidiary formed in Switzerland to develop, manufacture and distribute
worldwide certain of the Company's products, including its Glaucoma Wick and
ICLs. The Company and STAAR Surgical AG have also formed six other direct or
indirect wholly owned operating subsidiaries for the purpose of distributing and
marketing the Company's products internationally, including STAAR Surgical -
Canada, Ltd. and STAAR Surgical Australasia Pty., Ltd., formed by the Company in
1994, and STAAR Surgical France - SARL, STAAR Surgical - South Africa Pty.,
Ltd., STAAR Surgical Austria, GmbH; and STAAR Surgical Germany, GmbH, formed by
STAAR Surgical AG in 1993 through 1995.
The Company also owns a 50% interest in Canon STAAR, a joint venture between the
Company and Canon, Inc. and Canon Sales Co., Inc. for the manufacture, marketing
and distribution of IOLs in Japan.
The Company also owns an interest in a number of subsidiaries which are not
presently conducting business, including STAAR International, Inc., Lynell
Medical Technologies, Inc., STAAR of Connecticut, Inc., and
10
STAAR Surgical - Singapore Pty. Ltd. The Company also owns a 50% interest in
each of Newlensco and Softlensco, inactive corporations formed in connection
with certain licensing transactions for the sole purpose of holding title to
certain filings with the FDA and pre-market approvals of the licensed products
and technologies.
FACILITIES
The Company's executive offices and its principal manufacturing and warehouse
facilities, consisting of approximately 76,000 square feet, are located in
Monrovia, California. The Company also maintains complete laboratory facilities
at this location. STAAR Surgical AG has approximately 11,000 square feet of
manufacturing, distribution and research and development facilities located in
Switzerland. STAAR Surgical France - SARL, STAAR Australasia, Pty., Ltd., STAAR
Surgical South Africa, Pty., Ltd., and STAAR Surgical Austria, GmbH, each also
have distribution facilities. Canon STAAR Co., Inc. has an approved
manufacturing facility in Japan.
The Company believes that its existing facilities have been adequate for its
needs, and will continue to be adequate for existing levels of operations. The
Company expects no difficulties in renewing leases, or replacing or making
additions to its existing facilities or in establishing new facilities.
EMPLOYEES AND LABOR RELATIONS
The Company and its subsidiaries had a total of 255 employees as of January 3,
1997, including 49 in administration, 40 in marketing and sales, 25 in research
and development and technical services and 141 in manufacturing, quality control
and shipping. The Company and its subsidiaries are non-unionized. The Company
believes that its relations with its employees are good.
INTELLECTUAL PROPERTY RIGHTS
The Company and/or its licensors have pending patent applications and issued
patents in various countries relating specifically to the Company's products or
various aspects thereof, including the Company's core patent (the "Mazzocco
Patent") relating to methods of folding or deforming a foldable IOL or ICL for
use in minimally invasive surgery. The Mazzocco Patent was granted by the
United States Patent Office in March 1986 to Dr. Thomas Mazzocco, M.D., a
practicing ophthalmologist and a co-founder of the Company. The Company has
since obtained patent protection for the Mazzocco Patent or made application for
such protection in certain foreign countries. The Company has also received an
assignment from IRTC of its patents for glaucoma devices and biocompatible
material for IOLs.
The Company has obtained a registered trademark on the mark STAAR and associated
logo. The Company also has common law trademark rights to a number of other
marks and has also applied for registration for a number of these marks.
An adverse decision from a Court of competent jurisdiction affecting the
validity or enforceability of the Company's patents (principally the Company's
core Mazzocco Patent) or proprietary rights owned by or licensed to the Company
could have, depending generally on the economic importance of the country or
countries to which such patents or proprietary rights relate, an adverse effect
on the Company and on its business prospects. Legal costs relating to
prosecuting or defending patent infringement litigation may be substantial.
Costs of litigation related to successful prosecution of patent litigation are
capitalized and amortized over the estimated useful life of the relevant patent.
There can be no assurance that the Company will be able to successfully defend
11
its patents and proprietary rights in the future. See "Uncertainties and Risk
Factors - Patents and Proprietary Right." in Item 7.
REGULATORY REQUIREMENTS
The Company's products are subject to regulatory approval or clearance in both
the United States and in foreign countries. The following discussion outlines
the various kinds of reviews to which the Company's products or facilities may
be subject.
CLINICAL REGULATORY REQUIREMENTS WITHIN THE UNITED STATES. Most of the
Company's products are subject to regulation as medical devices by the FDA,
requiring FDA approval or clearance before they can be sold within the United
States, and mandating continuous compliance of the Company's manufacturing
facilities and distribution procedures with FDA regulations, including "Good
Manufacturing Practices."
Initial approval or clearance of medical devices for sale is subject to
differing levels or types of FDA review and evaluation depending on the
classification of the device under the Food, Drug and Cosmetic Act ("FD&C Act")
and whether the use of the medical device can be demonstrated to be
substantially equivalent to a directly related medical device in commerce prior
to May 1976 (the month and year of enactment of the FD&C Act).
Pursuant to the FD&C Act, medical devices are classified as either Class I,
Class II or Class III devices. If classified as a Class I device, the medical
device will be subject only to general controls which are applicable to all
devices. Such controls include regulations regarding FDA inspections of
facilities, "Good Manufacturing Practices," labeling, maintenance of records and
filings with the FDA. If classified as a Class II device, the medical device
must also meet general PERFORMANCE standards established by the FDA. If
classified as a Class III device, the applicant must present sufficient data
derived through clinical studies demonstrating the product's safety, reliability
and effectiveness.
FDA approval for a Class III device such as an IOL or ICL implant begins with
the submission of an application for an Investigational Device Exemption or IDE
which, if granted, will permit the implantation of a limited number of IOLs or
ICLs (typically less than 100) on a clinical study basis. Based upon the
results from the initial core population, the FDA will then allow an additional
core study to be performed, typically 500 to 700 implants. The complete
clinical results will then be reviewed by an FDA advisory panel of outside
experts. If the advisory panel approves the product based upon the results, the
FDA will then generally grant pre-market approval assuming satisfaction of its
other requirements. The grant of an IDE, the performance of clinical studies,
the submission of an application for pre-market approval, and advisory panel
approval, may take three to ten years depending, in part, upon the complexity of
the medical device.
A medical device that is substantially equivalent to a directly related medical
device previously in commerce may be eligible for abbreviated FDA pre-market
notification "510(k) review" process. The review period and FDA determination
as to substantial equivalence should be made within 90 days of submission of a
510(k) application, unless additional material, information or clarification is
requested or required by the FDA. As a practical matter, the review process and
FDA determination often take significantly longer than 90 days depending, in
part, upon the complexity of the medical device. FDA 510(k) clearance is a
"grandfather" process. As such, FDA clearance does not imply that the safety,
reliability and effectiveness of the medical device has been approved or
validated by the FDA, but merely means that the medical device is substantially
equivalent to a previously cleared commercially-related medical device.
The Company's IOLs, ICLs, lens injectors, Glaucoma Wick, Glaucoma Shunt, and
STAARVISC(TM) viscoelastic solution are Class III devices, and its
phacoemulsification equipment, ultrasonic cutting tips and surgical packs are
12
Class II devices. The Company has received FDA pre-market approval for its IOLs
(other than its toric version), and FDA 510(k) clearance for its Glaucoma Shunt,
phacoemulsification equipment, lens injectors, ultrasonic cutting tips and
surgical packs. The Company is presently conducting clinical studies under an
IDE for its Toric IOL. The Company has received an IDE to commence limited
clinical studies for its ICLs. The only significant pending requirement for the
Company to obtain pre-market approval of its STAARVISC(TM) viscoelastic solution
is the inspection and approval by the FDA of the Company's manufacturing
facilities for Good Manufacturing Practices. The Company intends to apply to
the FDA in mid-1997 for 510(k) clearance for its Glaucoma Wick.
The Company is also subject to mandatory Medical Device Reporting ("MDR")
regulations which obligate the Company to provide information to the FDA on
injuries alleged to have been associated with the use of a product or in
connection with certain product failures which could cause injury
CLINICAL REGULATORY REQUIREMENTS IN FOREIGN COUNTRIES. There is a wide
variation in the approval or clearance requirements necessary to market products
in foreign countries. The requirements range from virtually no requirements to
a level comparable to or even greater than those of the FDA. For example, many
countries in South America have minimal regulatory requirements, while many
developed countries, such as Japan and Germany, have conditions at least as
stringent as those of the FDA. FDA acceptance is not always a substitute for
foreign government approval or clearance.
The member countries of the European Economic Union (the "Union") currently
permit, and by 1998 will require, all medical products sold within their borders
to carry a "CE" marking. The CE marking denotes that the applicable medical
device has been found to be in compliance with guidelines concerning
manufacturing and quality control, technical specifications and
biological/chemical and clinical safety. The CE marking supersedes all current
medical device regulatory requirements for Union countries. The Company has an
ongoing program in place to ensure compliance with the applicable requirements.
The Company has obtained the CE mark for its IOLs (other than its toric IOL) and
lens injectors, and anticipates obtaining the CE marking for its Glaucoma Wick,
ICLs and STAARVISC(TM) viscoelastic solution by 1998.
OTHER REGULATORY REQUIREMENTS. Sales of the Company's products may be affected
by health care reimbursement practices. For example, in January 1994, the
Health Care Financing Administration ("HCFA") adopted rules that limit medicare
reimbursement for IOLs implanted in ambulatory surgical centers to a flat fee of
$150. HCFA's medicare reimbursement rate for IOLs implanted in hospitals was
set at $150 plus 50% of cost.
The Company is also subject to various federal, state and local laws applicable
to its operations including, among other things, working conditions, laboratory
and manufacturing practices, and the use and disposal of hazardous or
potentially hazardous substances used in connection with research work. The
extent of government regulation which might result from future legislation or
administrative action and their potential adverse impact on the Company cannot
be accurately predicted.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
----------------------------------------------------------------------
SALES
-----
Approximately $29,592,000, $26,561,000 and $23,091,000 in the Company's overall
revenues were generated in the United States for its 1996, 1995 and 1994 fiscal
years, respectively, constituting approximately 70%, 77% and 84% of its overall
revenues for such fiscal years, respectively. Sales to Europe, which is the
Company's principal foreign market, generated approximately $7,576,000,
$4,841,000 and $3,361,000 in revenues for the Company's 1996, 1995 and 1994
fiscal years, respectively, constituting approximately 20%, 14% and 12% of the
Company's overall revenues for such respective fiscal years. The balance of the
Company's foreign sales were distributed amongst the Asian/Pacific, Middle
Eastern, South African and South American geographic areas. Substantially
13
all products sold in 1996 were manufactured in the United States.
ITEM 2. PROPERTIES
The Company's executive offices and its principal manufacturing and warehouse
facilities are in Monrovia, California, in leased industrial buildings of
approximately 76,000 square feet. The leases expire between 1998 and 2002, and
currently require aggregate payments of $31,008 per month. The Company also
maintains complete laboratory facilities in these buildings. Certain of the
Company's subsidiaries lease facilities dedicated to manufacturing, distribution
and research and development activities. Canon STAAR Co., Inc. has an approved
manufacturing facility in Japan. See "Narrative Description of Business -
Facilities," in Item 1 above.
ITEM 3. PENDING LEGAL PROCEEDINGS
CHIRON VISION CORPORATION VS. STAAR SURGICAL COMPANY, AND RELATED CROSS-
COMPLAINT; LOS ANGELES SUPERIOR COURT CASE NO. BC 149557
On May 7, 1996, Chiron Vision Corporation ("Chiron") filed a complaint for
damages against the Company for specific performance, contractual indemnity,
declaratory relief, accounting, and breach of contract arising from a business
agreement dated March 8, 1990 between the parties. This agreement (the "Master
Terms Agreement") governs a number of associated business agreements relating to
research, development, licensing, manufacture and sale of patented and
proprietary IOLs and related products, processes, surgical instruments and
developments related thereto. The Company filed its answer to Chiron's
complaint on September 5, 1996. and filed a Cross-Complaint for specific
performance, contractual indemnity, declaratory relief, accounting and breach of
contract. On February 19, 1997, Chiron filed its Amended Complaint for specific
performance, contractual indemnity, declaratory relief, accounting, breach of
contract, intentional misrepresentation and negligent misrepresentation. A
response to the Amended Complaint is due on or before March 19, 1997. The
principal claims and cross-claims generally relate to whether the Company is
obligated to indemnify Chiron under the Master Terms Agreement and related
license agreements with respect to certain third-party litigation, and whether
Chiron has, among other things, breached its obligation to pay certain royalties
under these agreements as well as certain obligations pertaining to the sale or
transfer of licensed technology and patents. The lawsuit is currently in the
initial stage of discovery. The Company believes that it will prevail in this
suit. Nevertheless, the outcome of the litigation is uncertain, and the effect
of an unfavorable outcome is unknown at this time.
ALLERGAN SALES, INC. AND STAAR SURGICAL COMPANY VS. PHARMACIA & UPJOHN, INC.,
AND RELATED COUNTERCLAIMS; CIVIL ACTION NO. 96-1430 H (JFS); UNITED STATES
DISTRICT COURT, SOUTHERN DISTRICT OF CALIFORNIA
In August 1996, Allergan Sales, Inc. ("Allergan Sales"), a licensee of the
Company's Mazzocco Patent, filed suit against Pharmacia & Upjohn, Inc.
("Pharmacia & Upjohn") for infringement of the Mazzocco Patent. In a First
Amended Complaint filed on September 6, 1996, the Company joined as a co-
plaintiff with respect to the infringement action. On November 11, 1996,
Pharmacia & Upjohn filed an Answer to the First Amended Complaint, and filed a
Cross-Complaint for declaratory judgment of non-infringement, invalidity,
unenforceability and anti-trust violation. Allergan Sales and the Company filed
a Second Amended Complaint for patent infringement on January 16, 1997, which
was answered by Pharmacia & Upjohn pursuant to Stipulation the same date. In
related proceedings the District Court granted a temporary injunction on
September
14
17, 1996, and a preliminary injunction on October 22, 1996, against Pharmacia &
Upjohn. On November 7, 1996, Pharmacia & Upjohn filed a Notice of Appeal of the
order granting the preliminary injunction and, in connection therewith, an
Emergency Motion for Stay. The Court of Appeals issued the Emergency Stay
pending further determination by the District Court. The lawsuit is currently in
the initial stage of discovery. The Company believes that it will prevail in
this suit. Nevertheless, the outcome of the litigation is uncertain, and the
effect of an unfavorable outcome is unknown at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended January 3, 1997.
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock is quoted on the National Association of Securities
Dealers Automatic Quotation ("NASDAQ") National Market under the symbol "STAA."
The following table sets forth the reported high and low sale prices and volume
of trading of the Common Stock as reported by NASDAQ for the calendar periods
indicated:
PERIOD HIGH LOW
------ ---- ---
1996: Fourth Quarter..................... $14.375 $10.375
Third Quarter...................... 16.500 11.875
Second Quarter..................... 17.875 12.375
First Quarter...................... 14.750 9.875
1995: Fourth Quarter..................... $12.675 $ 9.875
Third Quarter...................... 12.750 8.250
Second Quarter..................... 11.375 7.500
First Quarter...................... 13.125 7.875
1994: Fourth Quarter..................... $ 7.250 $ 4.500
Third Quarter...................... 6.125 4.125
Second Quarter..................... 7.000 3.625
First Quarter...................... 5.250 3.325
The last reported sale price for the Company's Common Stock on the NASDAQ
National Market on March 26, 1997 was $10.875 per share. As of March 26, 1997,
there were approximately 1,347 record holders of the Common Stock.
The Company has not paid any cash dividends on its Common Stock since its
inception. The Company currently anticipates that all income will be retained to
develop further the Company's business and that no cash dividends on the Common
Stock will be declared in the foreseeable future.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company with respect to the Company's five most recent fiscal years ended
January 3, 1997, December 29, 1995, December 30, 1994, December 31, 1993 and
January 1, 1993. The selected consolidated statement of operations data set
forth below for each of the three fiscal years in the period ended January 3,
1997, and the selected consolidated balance sheet data set forth below at
January 3, 1997 and December 29, 1995, are derived from the Consolidated
Financial Statements of the Company which have been audited by BDO Seidman, LLP,
independent certified public accountants, as indicated in their Report which is
included elsewhere in this Report. The selected consolidated statement of
operations data set forth below for each of the two fiscal years in the period
ended December 31, 1993, and the consolidated balance sheet data set forth below
at December 30, 1994, December 31, 1993 and January 1, 1993, are derived from
the Company's audited consolidated financial statements not included elsewhere
in this Report. The selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company, the Notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7, included elsewhere in this Report.
FISCAL YEAR ENDED
-------------------------------------------------------------
JANUARY DECEMBER DECEMBER DECEMBER JANUARY
3, 29, 30, 31, 1,
1997 1995 1994 1993 1993
------- ------- ------- ------- -------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Sales......................................................... $41,213 $34,180 $26,333 $19,603 $10,198
Royalty income................................................ 1,000 514 1,020 473 ---
------- ------- ------- ------- -------
Total revenues............................................. 42,213 34,694 27,353 20,076 10,198
Cost of sales................................................. 10,196 8,441 6,059 3,980 3,257
------- ------- ------- ------- -------
Gross profit............................................... 32,017 26,253 21,294 16,096 6,941
Costs and expenses:
General and administrative................................. 5,628 5,000 4,365 4,907 5,166
Marketing and selling...................................... 12,227 10,911 8,694 6,998 4,949
Research and development................................... 4,085 3,254 2,718 2,260 1,532
------- ------- ------- ------- -------
Total costs and expenses................................ 21,940 19,165 15,777 14,165 11,647
Operating income (loss)....................................... 10,077 7,088 5,517 1,931 (4,706)
Other income (expense)........................................ 153 303 625 685 (351)
------- ------- ------- ------- -------
Income (loss) before income taxes............................. 10,230 7,391 6,142 2,616 (5,057)
Income tax provision (benefit)(1)............................. 3,339 (91) (2,184) 81 (19)
------- ------- ------- ------- -------
Net income (loss)............................................. $ 6,891 $ 7,482 $ 8,326 $ 2,535 $(5,076)
======= ======= ======= ======= =======
Fully diluted net income (loss)
before income taxes per share................................ $0.74 $0.54 $0.45 $0.20 $(0.50)
======= ======= ======= ======= =======
Fully diluted net income (loss) per share..................... $0.50 $0.55 $0.62 $0.20 $(0.50)
======= ======= ======= ======= =======
Weighted average number of fully diluted shares............... 13,867 13,715 13,500 12,859 10,191
======= ======= ======= ======= =======
BALANCE SHEET DATA:
Working capital............................................... $15,485 $16,335 $14,166 $ 7,354 $ 4,239
Total assets.................................................. 51,119 38,803 28,888 18,776 12,826
Notes payable and current portion of long-term debt........... 8,193 4,029 1,792 1,634 638
Long-term debt................................................ 844 1,212 572 0 0
Stockholders' equity.......................................... $36,604 $28,678 $22,029 $11,986 $7,317
(1) Includes recognition of deferred tax asset of $2.4 million for 1994 and
$900,000 for 1995. See Note 7 to the Company's Consolidated Financial
Statements.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW
The Company develops, manufactures and globally distributes medical devices used
in minimally invasive ophthalmic surgery. The Company's primary products are its
foldable IOLs, its Glaucoma Wick, its ICLs and its STAARVISC(TM) viscoelastic
solution. The Company markets its IOLs, which accounted for 94% of its revenues
in 1996, both domestically and in numerous foreign countries. The Company
markets the Glaucoma Wick, which the Company introduced in late 1995, and its
ICLs and STAARVISC(TM) viscoelastic solution, which the Company introduced in
late 1996, on a limited basis in selected foreign countries.
The Company has marketed its foldable IOLs internationally since 1986 and, in
September 1991, following a lengthy period of clinical studies, received FDA
pre-market approval to fully market the Company's ELASTIC(TM) and ELASTIMIDE(TM)
foldable IOL models within the United States. Since that time, the Company's
total revenues increased from $10.2 million in its 1992 fiscal year to $42.2
million in its 1996 fiscal year, representing a compound annual growth rate of
43%. The Company also receives royalty income with respect to certain of its
licensed technologies, although it does not consider the royalty income to be
material to its current or prospective financial condition.
International revenues represented 30% of total revenues for the 1996 fiscal
year, up from 10.7% for the 1992 fiscal year. The mix of the Company's revenues
and profits, on both a product and geographic basis, will be affected by the
continued introduction and acceptance of the Company's Glaucoma Wick, ICLs and
STAARVISC(TM) viscoelastic solution in various markets worldwide, including the
United States. Sales of the Company's Glaucoma Wick and ICLs will be limited to
the international market until such products receive United States FDA approval.
The Company's long-term objective is to increase international revenues to
account for one-half of total revenue.
The Company's principal customers are ophthalmologists, surgical centers,
hospitals, managed care providers, health maintenance organizations and group
purchasing organizations. The Company generally supplies a quantity of foldable
IOLs with different specifications to domestic customers on a consignment basis
and recognizes sales when an ophthalmic surgeon implants the consigned foldable
IOL. However, sales to foreign distributors are recognized upon shipment. The
Company typically does not have any backlog of orders, and has minimal product
returns. Ophthalmic surgeons and other providers of foldable IOLs are generally
eligible to receive reimbursements from government or private third-party
payors, such as Medicare, subject to certain limitations and pricing pressures.
The Company does not expect that ICLs will be eligible for, and there can be no
assurance that the Glaucoma Wick will be eligible for, reimbursement by
government or private third-party payors.
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.
17
PERCENTAGE OF TOTAL REVENUES PERCENTAGE CHANGE
-------------------------------------------- -------------------
FISCAL
FISCAL YEAR ENDED YEAR
-------------------------------------------- ----------
1996 1995
JANUARY 3, DECEMBER 29, DECEMBER 30, VS VS
1997 1995 1994 1995 1994
----------- -------------- ------------- ---- ----
Total revenues................................... 100.0% 100.0% 100.0% 21.7% 26.8%
Cost of sales.................................... 24.2 24.3 22.1 20.8 39.3
----- ----- -----
Gross profit..................................... 75.8 75.7 77.9 22.0 23.3
Costs and expenses:
General and administrative.................... 13.3 14.4 16.0 12.6 14.6
Marketing and selling......................... 29.0 31.5 31.8 12.1 25.5
Research and development...................... 9.7 9.4 9.9 25.5 19.7
----- ----- -----
Total costs and expenses................... 52.0 55.3 57.7 14.5 21.5
Operating income................................. 23.9 20.4 20.2 42.2 28.5
Other income, net................................ 0.4 0.9 2.3 (49.5) (51.5)
----- ----- -----
Income before income taxes....................... 24.2 21.3 22.5 38.4 26.8
Income tax provision (benefit)................... 7.9 (0.3) (8.0) --- (95.8)
----- ----- -----
Net income....................................... 16.3% 21.6% 30.5% (7.9)% (10.1)%
===== ===== =====
FISCAL YEAR ENDED JANUARY 3, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 29,
1995
REVENUES. Revenues for the year ended January 3, 1997 were $42.2 million,
representing a 21.7% increase over $34.7 million in revenues for the prior year
ended December 29, 1995. The increase in revenues was principally attributable
to the continued growth in unit sales of the Company's primary products, its
foldable IOLs, in both the domestic and international markets, partially offset
by certain domestic price decreases due to competitive pressures. Increases in
unit volume are attributable, in significant part, to the continuing conversion
of the cataract market to foldable IOLs (according to industry statistics,
approximately 50% of all cataract surgeries performed in the United States in
1996 used foldable IOLs as compared to 37% in 1995). Revenues from international
sales increased to 30% of total revenues for the year ended January 3, 1997, as
compared to 24% for the prior fiscal year, reflecting the Company's increased
efforts to develop international markets, as well as the conversion of these
markets to foldable IOLs. Also included in revenues for the year ended January
3, 1997 are international sales of $625,000 resulting from the commercial
introduction in selected foreign markets of the Company's Glaucoma Wick at the
end of 1995 and its ICLs and STAARVISC(TM) viscoelastic solution at the end of
1996. Revenues from royalties also increased from $500,000 for 1995 to $1
million for 1996.
COST OF SALES. Cost of sales as a percentage of revenues for the year ended
January 3, 1997 declined slightly to 24.2% of revenues as compared 24.3% for the
prior year. The principal reasons for this slight decline were increased
operating efficiencies and economies of scale from increased sales volume. These
savings were offset by price decreases resulting from competitive pressures and
a product mix change due to an increased demand for the ELASTIMIDE(TM)IOL, which
is relatively more expensive to manufacture.
GENERAL AND ADMINISTRATIVE. General and administrative expense for the year
ended January 3, 1997 was $5.6 million, or 13.3% of revenues, as compared to $5
million, or 14.4% of revenues, for the prior year. The decline in general and
administrative expense as a percentage of revenues was attributable to the
significant growth in overall revenues permitting greater absorption of general
and administrative costs. The increase in general
18
and administrative expense in dollar terms was attributable to additional
administrative infrastructure expenditures required to support the increase in
revenues.
MARKETING AND SELLING. Marketing and selling expense for the year ended January
3, 1997 was $12.2 million, or 29.0% of revenues, as compared to $10.9 million,
or 31.5% of revenues, for the prior year. The decline in marketing and selling
expense as a percentage of revenues was attributable to the significant growth
in overall revenues permitting greater absorption of fixed marketing and selling
(i.e., non-commission) costs. The increase in marketing and selling expense in
dollar terms was principally attributable to greater commissions paid arising
from increased sales revenues.
RESEARCH AND DEVELOPMENT. Research and development expense for the year ended
January 3, 1997 was $4.1 million, or 9.7% of revenues, as compared to $3.3
million, or 9.4% of revenues, for the prior year. This increase was attributable
to the Company's continued investment in developing new products, manufacturing
systems and distribution systems, cost reduction projects for manufacturing, and
increased costs incurred conducting clinical studies in the United States.
OTHER INCOME, NET. Other income for the year ended January 3, 1997 was
$153,000, or 0.4% of revenues, as compared to $303,000, or 0.9% of revenues, for
the prior year. The primary reasons for this decrease were increased interest
expenses, losses in translating foreign currency, and a decline in deferred
revenue arising from the sale of a license to the Canon STAAR joint venture.
The deferred revenue reported in 1996 is the last portion of total deferred
revenue realized with respect to the Canon STAAR license.
INCOME TAX PROVISION (BENEFIT). Income taxes increased to a provision of $3.3
million for the year ended January 3, 1997 from a benefit of $100,000 for the
year ended December 29, 1995. 1996 is the first year the Company has reported an
income tax provision without having offsets related to net operating loss
carryforwards. However, the Company will not pay any significant Federal income
taxes until it fully utilizes the remaining $2.5 million of net operating loss
carryforwards for tax purposes. The Company fully utilized its net operating
loss carryforwards for state taxes in 1995. The Company has recorded a deferred
tax asset of $1.3 million as of January 3, 1997. Management believes expected
future income levels should result in full recognition of the deferred tax
asset. See Note 7 to the Consolidated Financial Statements.
FISCAL YEAR ENDED DECEMBER 29, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
1994
REVENUES. Revenues for the year ended December 29, 1995 were $34.7 million,
which was 26.8% greater than the $27.4 million in revenues for the prior year
ended December 30, 1994. The increase in sales revenues was attributable to a
combination of interrelated factors, including: (i) increased domestic demand
for the Company's ELASTIMIDE(TM), and, to a lesser degree, ELASTIC(TM) foldable
IOLs due to the introduction of ultraviolet versions of these products in April
1995; (ii) increased international demand for the Company's IOLs as a result of
the Company's continued investment in its foreign distribution channels
(international revenue increased to 24% of total Company revenue for 1995, as
compared to 16% in 1994); and (iii) the continuing conversion of both the
domestic and international markets from hard IOLs to foldable IOLs (according to
industry statistics, 37% of the overall domestic IOL market at the end of 1995
was held by foldable IOLs, and, according to management estimates, 15% of the
overall international IOL market at the end of 1995 was held by foldable IOLs).
Gains in volume were partially offset by certain domestic price decreases
resulting from pressures from managed care providers. Revenues from royalties
were $500,000 in 1995 compared to $1.0 million in 1994.
COST OF SALES. Cost of sales increased to 24.3% of revenues for the year ended
December 29, 1995 compared to 22.1% of revenues for the year ended December 30,
1994. The principal reasons for this increase were: (i) lower
19
pricing from certain managed care contract sales; (ii) inefficiencies associated
with the resumption of manufacturing of ultraviolet versions of the Company's
ELASTIC(TM) and ELASTIMIDE(TM)IOLs following FDA pre-market approval in the
second quarter of 1995; (iii) increased sales of the ELASTIMIDE(TM) IOL, which
is more costly to manufacture because of its design; and (iv) increased costs
associated with the start-up of manufacturing of new products in Switzerland.
GENERAL AND ADMINISTRATIVE. General and administrative expense decreased to
14.4% of revenues ($5.0 million) for the year ended December 29, 1995 from 16.0%
of revenues ($4.4 million) for the year ended December 30, 1994. This percentage
decrease resulted from management's continued efforts to control general and
administrative expenses, combined with the increase in revenues. The increase in
actual general and administrative expense was attributable to the start-up of
the Company's operations in Switzerland.
MARKETING AND SELLING. Marketing and selling expense decreased to 31.5% of
revenues ($10.9 million) for the year ended December 29, 1995 from 31.8% of
revenues ($8.7 million) for the year ended December 30, 1994. The increase in
actual marketing and selling expense was attributable to: (i) higher marketing
and selling expenses associated with the build-up of direct distribution
channels in Australia, South Africa, France and Switzerland (which translated
into a significant portion of increased international revenues for 1995); and
(ii) increased costs associated with the market introduction of the new Glaucoma
Wick and preparation for the market introduction of the ICL in selected foreign
countries. This increase in expenses was partially offset by reduced domestic
commission expenses attributable to lower pricing.
RESEARCH AND DEVELOPMENT. Research and development expense decreased to 9.4%
of revenues ($3.3 million) for the year ended December 29, 1995 from 9.9% of
revenues ($2.7 million) for the year ended December 30, 1994. The primary
reason for the increase in actual expense was the continued investment in
developing new products, manufacturing systems and distribution systems, and
cost reduction projects for manufacturing.
OTHER INCOME, NET. Other income decreased to 0.9% of revenues ($300,000) for
the year ended December 29, 1995 from 2.3% of revenues ($600,000) for the year
ended December 30, 1994. The primary reason for this decrease was reduced
earnings reported by the Company's joint venture with Canon STAAR and increased
interest expense attributable to money borrowed through STAAR Surgical AG to
set-up the Company's Swiss manufacturing facility and increased borrowings by
the Company under its line of credit. Subsequent to the 1995 year-end the
Company refinanced and increased its domestic line of credit facility with a
different lender. The Company obtained a lower interest rate under the
refinancing, which should result in lower interest expense for comparable future
borrowings.
INCOME TAX PROVISION (BENEFIT). As a result of increased operating profits,
the Company increased its deferred tax asset to $3.3 million as of December 29,
1995, up from $2.4 million as of December 30, 1994. This resulted in an income
tax benefit of $100,000 ($800,000 income tax provision, exclusive of net
operating loss benefit, offset by $900,000 recognition of deferred tax asset) in
1995, compared to $2.2 million ($200,000 income tax provision, exclusive of net
operating loss benefit, offset by $2.4 million recognition of deferred tax
asset) in 1994. As a result of the Company's positive operating results for each
of the three years ended December 29, 1995, the Company determined that deferred
tax assets of approximately $3.3 million and $2.4 million should be recognized
as of December 29, 1995 and December 30, 1994, respectively. These amounts were
based on a consideration of current and future anticipated earnings. Income
levels in 1996 and 1997 similar to those of 1995 should result in full
recognition of the deferred tax assets. The amount recorded as of December 29,
1995 includes the capitalization of the remaining balance of the Company's net
operating loss carryforwards. Management believes it is more likely than not
that the deferred tax assets will be realized in full. The Company will begin
reporting an income tax provision in 1996 that will utilize the deferred tax
assets and will result in decreased after-tax earnings and earnings per share.
However, the Company will not pay any significant Federal income taxes until it
fully utilizes the remaining $7.6 million of net operating loss carryforwards.
The Company
20
fully utilized its net operating loss carryforwards for state taxes in 1995.
See Note 7 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its activities over the past several years principally
from cash flow generated from operations, exercises of stock options and
warrants, credit facilities provided by institutional domestic and foreign
lenders and private placements of equity.
The Company's domestic credit facility is a line of credit, entered into in
February 1996, which allows the Company to borrow up to $5.0 million on a
revolving basis, at a rate of interest not to exceed the prime interest rate.
The loan agreement requires the Company to satisfy certain financial tests,
limits the amount of indebtedness the Company may incur to others and restricts
the payment of dividends. This line of credit expires in June 1997. Borrowings
are collateralized by substantially all of the domestic assets of the Company.
Borrowings outstanding as of January 3, 1997 were approximately $4.7 million.
The Company's foreign credit facility consists of a separate revolving line of
credit and a term loan extended in May 1994 by a Swiss bank to the Company's
subsidiary, STAAR Surgical AG. The revolving line of credit facility provides
for borrowings up to $828,000 (1.1 million Swiss Francs) at a 5.5% rate of
interest as of January 3, 1997. A commission rate of 0.25% is payable each
quarter. The line of credit does not have a termination date and is secured by
a general assignment of claims. Borrowings outstanding as of January 3, 1997
under the line of credit were approximately $790,000. Under the term loan,
STAAR Surgical AG obtained a $828,000 (1.1 million Swiss Francs) loan guaranteed
partially by the Swiss government and partially by the Company. Interest on
this loan is 6.25%, which the Company shares on an equal basis with the bank and
the Swiss government. The principal amount of this loan is required to be
repaid in four equal installments, beginning in December 1996. Borrowings by
STAAR Surgical AG under this loan outstanding as of January 3, 1997 were
approximately $619,000.
As of January 3, 1997, the Company had net working capital of approximately
$15.5 million compared to $16.3 million and $14.2 million as of December 29,
1995 and December 30, 1994, respectively. The decrease in net working capital
for the fiscal year ended January 3, 1997 was primarily attributable to a $4.2
million increase in notes payable, $5.9 million investment in patents and
licenses, and $4.3 million expended to acquire additional property and
equipment, which used cash resources, offset by a $2.8 million increase in
inventories and a $2.7 million increase in cash. The improvement in the
Company's net working capital for the fiscal year ended December 29, 1995 was
primarily attributable to increases in accounts receivable (approximately $2.2
million) and inventory (approximately $1.0 million) resulting from increased
operating activities and a $900,000 increase in the recognition of deferred tax
assets.
As of January 3, 1997, the Company had cash and cash equivalents of
approximately $6.5 million compared to $3.8 million and $3.2 million as of
December 29, 1995 and December 30, 1994, respectively. The improvement in the
Company's cash position for the year ended January 3, 1997 was primarily
attributable to net cash provided by operating activities (approximately $8.5
million) and cash provided by financing activities (approximately $5.0 million),
partially offset by cash used for the acquisition of property, plant and
equipment to establish production facilities for new products and to improve
operations for current products and reduce current manufacturing costs
(approximately $4.3 million) and to acquire patents and licenses and to fund
patent litigation (approximately $5.9 million). The improvement in the
Company's cash position for the fiscal year ended December 29, 1995 was
primarily attributable to net cash provided by operating activities ($5.0
million), cash received from the exercise of stock options and warrants
($434,000) and borrowings under the Company's credit facilities ($2.9 million).
Cash proceeds for the fiscal year ended December 29, 1995 were principally used
for working capital, for the
21
acquisition of property, plant and equipment ($3.5 million), primarily for STAAR
Surgical AG's facility in Switzerland, and to acquire patents and licenses and
fund patent litigation ($2.0 million).
Cash flows from operating activities for the year ended January 3, 1997 were
approximately $8.5 million, an improvement of approximately $3.5 million from
the prior fiscal year. The increase in cash flow from operating activities was
principally attributable to the utilization of deferred tax asset of $2.0
million and an increase in depreciation and amortization of $836,000, offset by
a $271,000 decrease in operating working capital items. Cash flows from
operating activities for the fiscal year ended December 29, 1995 were $5.0
million, representing an improvement of approximately $1.0 million relative to
the fiscal year ended December 30, 1994, due to significantly improved results
from operations.
Cash used in investing activities for the year ended January 3, 1997 was $10.7
million, representing an increase of approximately $4.6 million relative to the
year ended December 29, 1995. This increase was due primarily to an increase of
$792,000 in expenditures for property and equipment and $4.0 million for patents
and licenses. Cash used in investing activities for the fiscal year ended
December 29, 1995 was $6.0 million, representing an increase of approximately
$2.0 million relative to the fiscal year ended December 30, 1994. This increase
was due to larger expenditures for property and equipment of $3.5 million,
patents and licenses of $2.0 million, and other assets of $600,000.
Cash flows from financing activities for the year ended January 3, 1997 were
$5.0 million, representing an increase of approximately $3.4 million relative to
the year ended December 29, 1995. This increase was principally attributable to
increased net borrowings of approximately $1.4 million, increased exercises of
stock options of $584,000, and decreased expenditures to repurchase Common Stock
(approximately $315,000, as compared to $1.6 million for the prior fiscal year).
Cash flows from financing activities for the fiscal year ended December 29, 1995
decreased by approximately $290,000 relative to the fiscal year ended December
30, 1994. This decrease was principally due to payments made by the Company in
connection with the repurchase of its Common Stock of $1.6 million, and reduced
issuance of Common Stock resulting in relatively lower proceeds in 1995 of
$600,000, offset by an increase in borrowings of $2.1 million under the
Company's credit facilities.
As of January 3, 1997, the Company had $828,000 due with respect to an open-
ended capital lease agreement wherein the Company leased $1.2 million in
surgical equipment. The Company's obligations under this lease agreement are
secured by a $600,000 letter of credit.
The Company's capital expenditures for the fiscal years ended January 3, 1997
and December 29, 1995 were approximately $4.3 million and $3.5 million,
respectively. All expenditures were used to upgrade existing production
equipment, to set up new production facilities for new products, and to reduce
current manufacturing costs. The Company's planned capital expenditures for
1997 are approximately $5.0 million, primarily to improve and expand the
Company's foldable IOL, ICL and Glaucoma Wick manufacturing capacity and to
reduce manufacturing costs.
Capitalized additions for patents and licenses for the fiscal years ended
January 3, 1997 and December 29, 1995 were approximately $5.9 million and $2.0
million, respectively. The Company capitalizes the costs of acquiring patents
and licenses as well as the legal costs of defending its rights to these
patents. The Company expects to spend approximately $2.0 million in 1997 for
patents and licenses.
Management believes that cash flow from operations and available credit
facilities, together with its current cash balances, will provide adequate
financial resources to finance an increase in the level of the Company's
operations, including capital expenditures, acquisitions and research and
development activities, for the foreseeable future. Should additional funding be
needed, such as for significantly increased levels of operations,
22
the Company believes, so long as the financial position of the Company remains
constant, that these funds could be obtained.
FOREIGN EXCHANGE
Management does not believe that the fluctuation in the value of the dollar in
relation to the currencies of its suppliers or customers in the last three
fiscal years has adversely affected the Company's ability to purchase or sell
products at agreed upon prices. No assurance can be given, however, that
adverse currency exchange rate fluctuations will not occur in the future, which
would affect the Company's operating results. See "Uncertainties and Risk
Factors - Risks Associated with International Transactions" below.
INFLATION
Management believes inflation has not had a significant impact on the Company's
operations during the past three years.
UNCERTAINTIES AND RISK FACTORS
The Company may be subject to a number of significant uncertainties and risks
including, without limitation and without purporting to be a complete or
exhaustive list, those described below and those described elsewhere in this
Report, which may ultimately affect the Company in a manner and to a degree
which cannot be foreseen at this time.
RISKS RELATING TO COMMERCIALIZATION OF NEW PRODUCTS
The extent and pace of market acceptance of the Company's new products,
including its Glaucoma Wick, ICL and STAARVISC(TM) viscoelastic solution, will
be a function of many variables, as follows: the product's efficacy, performance
and attributes; the ability of the Company to obtain necessary regulatory
approvals; the effectiveness of marketing and sales efforts, including educating
ophthalmologists and other potential customers as to the distinctive
characteristics and benefits of these products; the rate at which
ophthalmologists attain the necessary surgical skills to implant the new
products; the ability of the Company to meet manufacturing and delivery
schedules; and product pricing. The extent and pace of market acceptance will
also depend upon general economic conditions affecting customers' purchasing
patterns. As the Glaucoma Wick and ICL are new medical devices, there is a
material risk that the marketplace may not accept or be receptive to the
potential benefits of these products. Unless and until the Company's new product
lines are accepted by the market and generating meaningful revenues and profits,
the Company's financial condition and prospects will continue to be solely
dependent upon its line of cataract products. See "Uncertainties and Risk
Factors - Government Regulation and Uncertainty of Product Approval" and
"Business - Products."
HIGHLY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE
Competition in the ophthalmic industry is intense and characterized by extensive
research and development and rapid technological change. The Company has
licensed certain of its patents and technologies relating to its cataract
products to competitors. Many of the Company's current and prospective
competitors have greater financial, technical and marketing resources and trade
name recognition than the Company, which may enable them to successfully develop
and/or market products based on technologies or approaches similar to those of
the Company, or develop products based on other technologies or approaches,
which are, or may be, competitive
23
with the Company's products. Development by competitors of new or improved
products, processes or technologies may make the Company's products less
competitive or obsolete. The Company will be required to devote significant
financial and other resources to enhance its existing products and develop new
products for the ophthalmic industry. Competitive pressures could lead to a
decline in sales volumes of existing products, the inability to attain
sufficient market penetration for new products, or price reductions, any or all
of which could adversely affect the Company's operating and financial results.
There can be no assurance that the Company will be able to compete successfully
in the industry, particularly in view of rapid technological change. See
"Business - Competition" in Item 1.
GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVAL
The manufacture and sale of the Company's products are subject to extensive
international and domestic regulation. In order to sell these products within
the United States, clearance or approval from the FDA is required. The FDA
clearance or approval process is expensive and time consuming, and no assurance
can be given that any of the Company's products which have not received FDA
clearance or approval to date will obtain such FDA clearance or approval on a
timely basis or at all, or without delays adversely affecting the marketing and
sale of the Company's products. Foreign regulatory requirements differ from
jurisdiction to jurisdiction and may, in some cases, be more stringent or
difficult to obtain than FDA clearance or approval. In order to sell products
in the countries comprising the European Economic Union (the "Union"), the
Company must satisfy, by no later than 1998, certain Union-wide regulatory
requirements, notwithstanding the Company's previous receipt of approvals from
member countries. No assurance can be given that the Company will obtain such
regulatory approvals on a timely basis or at all, or without delays adversely
affecting the marketing and sale of the Company's products. In addition,
clearances or approvals that have been or may be granted are subject to
continual review, which could result in product labeling restrictions,
withdrawal of products from the market or other adverse consequences.
To date, the Company has conducted clinical studies in certain foreign countries
on the feasibility of using the Glaucoma Wick for the treatment of glaucoma.
There can be no assurance that the initial clinical trial results from these
studies are necessarily indicative of future clinical trial results with respect
to the Glaucoma Wick. There can be no assurance that long-term safety and
efficacy data, when collected, will be consistent with the clinical results and
will demonstrate that the Glaucoma Wick can be used safely and successfully to
treat glaucoma in a broad segment of the patient population or on a long-term
basis. Furthermore, no assurance can be given that there will be no serious
complications or side effects, or that any such complications or side will not
impair or delay the Company's obtaining regulatory approval for the Glaucoma
Wick in the United States and other key markets.
To date, the Company has only conducted preliminary studies in certain foreign
countries on the feasibility of using the ICL for the treatment of myopia and
hyperopia. The Company has not yet developed any long-term safety or efficacy
data on the ICL. There can be no assurance that the preliminary feasibility
results are necessarily indicative of any results of any future clinical trials.
There can be no assurance that any long-term safety and efficacy data, when
collected, will demonstrate that the ICL can be used safely and successfully to
treat myopia or hyperopia on a long-term basis. Further, no assurance can be
given that complications of ICL surgeries will not be serious or will not impair
or delay the Company in obtaining regulatory approval for the ICL in the United
States and other key markets.
In addition to the review and approval process for its products, the Company is
also subject to government regulation of its manufacturing facilities and
procedures including "good manufacturing practice" regulations promulgated by
the FDA. The Company believes it is in compliance with all applicable
regulations. However, the FDA and comparable regulatory agencies in other
countries have substantial discretion in the interpretation and enforcement of
applicable regulations. There can be no assurance that future interpretations
made by any
24
regulatory bodies, including the FDA, with possible retroactive effect, will not
adversely affect the Company. Moreover, the Company could suffer a material
adverse effect from a change in these regulations. The Company cannot predict
the extent or impact of future federal, state, local or foreign legislation or
regulation. See "Business - Regulatory Requirements" in Item 1.
If as a result of FDA inspections, MDR reports or other information, the FDA
believes that the Company is not in compliance with the law, the FDA can
institute proceedings to detain or seize products, enjoin future violations,
and/or assess civil or criminal penalties against the Company and its officers
or employees. Although the Company and its products have not been the subject
of any such FDA enforcement action, any such action by the FDA could result in a
disruption of the Company's operations for an undetermined time.
PATENTS AND PROPRIETARY RIGHTS
The Company's ability to compete effectively is materially dependent upon the
proprietary nature of the designs, processes, technologies and materials owned,
used by or licensed to the Company. Although the Company attempts to protect
its proprietary property, technologies and processes through a combination of
patent law, trade secrets and non-disclosure agreements, there is no assurance
that any or all of these measures will prove to be effective. For example, in
the case of patents, there can be no assurance that existing patents granted to
the Company or its licensors will not be invalidated, that patents currently or
prospectively applied for by the Company or its licensors will be granted, or
that patents will provide significant commercial benefits. Moreover, it is
possible that competing companies may circumvent patents the Company or its
licensors have received or applied for by developing products which closely
emulate but do not infringe the Company's or its licensor's patents, and thereby
market products that compete with the Company's products without obtaining a
license from the Company. In addition to patented or potentially patentable
designs, technologies, processes and materials, the Company also relies on
proprietary designs, technologies, processes and know-how not eligible for
patent protection, and there is no assurance that competitors may not
independently develop the same or superior designs, technologies, processes and
know-how.
The Company believes that the international market for its products is as
important as the domestic market, and therefore seeks patent protection for its
products or those of its licensors in selected foreign countries. Because of
the differences in foreign patent and other laws concerning proprietary rights,
the Company's products may not receive the same degree of protection in certain
foreign countries as they would in the United States.
There can be no assurance that the Company will be able to successfully defend
its patents and proprietary rights. The invalidation or circumvention of key
patents (principally the Company's core patents for insertion of foldable or
deformable IOLs through minimally invasive surgical techniques) or proprietary
rights owned by or licensed to the Company could have an adverse effect on the
Company and on its business prospects. There can be no assurance that the
Company will not be required to defend against litigation involving the patents
or proprietary rights of others, or that licenses under such rights will be
available. Legal and accounting costs relating to prosecuting or defending
patent infringement litigation may be substantial. See "Business - Intellectual
Property Rights" in Item 1.
THIRD-PARTY REIMBURSEMENT
The Company's ability to sell its products is, in part, dependent upon policies
of government or private third-party payors regarding reimbursement to
ophthalmic surgeons with respect to their use of the Company's products. There
can be no assurance that such third-party payors will continue to authorize or
otherwise budget reimbursement for use of the Company's existing products
(principally its IOLs) at current levels. For example, reimbursement rates for
IOLs, such as that of Medicare, have declined in recent years. Changes in
policies
25
regarding reimbursement for ophthalmic products or services could adversely
affect the prospects for future sales of the Company's products. The Company
does not expect that ICLs will be eligible for reimbursement, and there can be
no assurance that any of the Company's other new products will be eligible for
reimbursement by government or private third-party payors.
RISKS ASSOCIATED WITH INTERNATIONAL TRANSACTIONS
The Company sells its products internationally which subjects it to several
potential risks, including fluctuating exchange rates and regulation of fund
transfers by foreign governments, United States and foreign export and import
duties and tariffs and political instability. There can be no assurance that
any of the foregoing will not have a material adverse effect upon the business
of the Company. The Company has not previously engaged in activities to
mitigate the effects of foreign currency fluctuations, as the Company is
generally paid in U.S. dollars with respect to its international operations. If
earnings from international operations increase, the Company's exposure to
fluctuations in foreign currencies may increase, and the Company may utilize
forward exchange rate contracts or engage in other efforts to mitigate foreign
currency risks. If entered into, there can be no assurance as to the
effectiveness of such efforts in limiting any adverse effects of foreign
currency fluctuations on the Company's international operations and on the
Company's overall results of operations. See "Business" in Item 1 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Foreign Exchange" above.
PRODUCT LIABILITY CLAIMS; INSUFFICIENCY OF PRODUCT LIABILITY INSURANCE COVERAGE;
PRODUCT RECALL RISKS
As a supplier of products used in medical treatments, the Company faces an
inherent business risk of exposure to product liability claims in the event the
end use of its products results in unanticipated adverse effects on patients,
including serious personal injury or death. Certain of the Company's new
products, such as its Glaucoma Wick and its ICL, are based upon unique designs
and materials. Product liability risk is higher with respect to these products,
as they have a limited history of testing, use and performance, and unknown
defects associated with such products may only be identified through the passage
of time. Potential negative publicity concerning the defective product could
also affect the Company's other products. No assurance can be given that the
Company will not experience product liability claims in the future with respect
to its established or new products. Any product liability claim could have a
material adverse effect on the Company.
Any product liability claims will be subject to the uncertainties attendant to
litigation. The Company currently maintains product liability insurance
coverage. No assurance can be given that such insurance coverage is in an
amount sufficient to cover all possible liabilities, or one or more large
claims, or that the insurer will be solvent at the time of any covered loss.
Also, no assurance can be given that adequate product liability insurance will
continue to be available in the future or maintained at a reasonable cost to the
Company. In the event of a successful product liability suit against the
Company, lack or insufficiency of insurance coverage could have a material
adverse effect on the Company.
The Company may, in the event there are material deficiencies or defects in the
design or manufacture of any of its products, be required to recall such
defective products. In the event of a product recall, the cost to, and the
potential liability of, the Company could be significant and could have a
material adverse effect on the Company's business and operations, especially if
such liability relates to the recall of a product generating significant
revenues and earnings for the Company, such as its foldable IOLs. Potential
negative publicity from a recall could also adversely affect sales and/or
regulatory approvals of the Company's other products.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and the Report of Independent Certified Public Accountants
are filed with this Annual Report on Form 10-K in a separate section following
Part IV, as shown on the index under Item 14(a) of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
--------
ITEMS 10., 11., 12. AND 13.
Information required by Part III (Items 10, 11, 12 and 13) is incorporated by
reference to the Company's definitive proxy statement for its 1997 Annual
Meeting of Stockholders.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
Page
(a)(1) Financial statements required by Item B of this form
are filed as a separate part of this report following
Part IV
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets at January 3, 1997 and December 29, 1995 F-3
Consolidated Statements of Income for the years ended January 3, 1997,
December 29, 1995 and December 30, 1994 F-4
Consolidated Statements of Stockholders' Equity for the years ended January 3, 1997,
December 29, 1995 and December 30, 1994 F-5
Consolidated Statements of Cash Flows for the years ended January 3, 1997,
December 29, 1995 and December 30, 1994 F-6
Notes to Consolidated Financial Statements F-7 - F-23
27
(2) Schedules required by Regulation S-X are filed as an exhibit to this report:
Independent Certified Public Accountants' Report on Schedules and Consent F-24
II. Valuation and Qualifying Accounts and Reserves F-25
Schedules not listed above have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements notes thereto
(3) Exhibits
--------
3.1 Certificate of Incorporation, as amended/(1)/
3.4 By-laws, as amended/(9)/
4.1 1983 Incentive Stock Option Plan/(5)/
4.2 1990 Stock Option Plan/((2)/
4.3 1991 Stock Option Plan/((3)/
4.4 1995 STAAR Surgical Company Consultant Stock Plan/(4)/
4.5 1996 STAAR Surgical Company Non-Qualified Stock Plan/(10)/
4.6 Stockholders' Rights Plan, dated effective April 20, 1995/(8)/
10.1 Non-Exclusive License Agreement, dated March 13, 1986, between the
Company and CooperVision, Inc/(7)/
10.2 Technology License Agreement And Option To Purchase Equity Interest,
dated March 13, 1986, between the Company and CooperVision, Inc/(7)/
10.3 License Agreement, dated December 16, 1986, between the Company and
Optical Radiation Corporation/(5)/
10.4 Joint Venture Agreement, dated May 23, 1988, between the Company,
Canon Sales Co, Inc. and Canon, Inc/(6)/
10.5 License Agreement, dated March 9, 1990, between Chiron Ophthalmics,
Inc. and the Company/(7)/
10.6 License Agreement, dated March 9, 1990, between Chiron Ophthalmics,
Inc. and the Company/(7)/
10.7 Form of Formula Stock Option Agreements granted to certain executive
officers and directors of Company commencing in August 1990 in
connection with 1990 Stock Option Plan/(5)/
28
10.8 Promissory Note, dated February 28, 1991, from John R. Wolf to
the Company/(11)/
10.9 Stock Pledge/Security Agreement, dated February 28, 1991, between John
R. Wolf, the Company and Pollet & Associates/((11)/
10.10 Promissory Note, dated February 28, 1991, from William C. Huddleston to
the Company/((11)/
10.11 Stock Pledge/Security Agreement, dated February 28, 1991, between
William C. Huddleston, the Company and Pollet & Associates/(11)/
10.12 Amended and Restated Soft IOL License Agreement, restated as of January
31, 1992, between the Company, Softlensco, Inc., and Iolab
Corporation/(11)/
10.13 Promissory Note, dated May 26, 1992, from Andrew F. Pollet./(5)/
10.14 Deed of Trust, dated September 21, 1992, by the Andrew F. Pollet and
Sally M. Pollet Revocable Trust dated March 6, 1990/(5)/
10.15 Promissory Note, dated July 3, 1992, from William C. Huddleston to the
Company/(5)/
10.16 Stock Pledge/Security Agreement, dated July 3, 1992, between William C.
Huddleston the Company and Pollet & Associates/(5)/
10.17 Lease, dated November 9, 1992, by and between Linda Lee Brown and
Phyllis Ann Bailey and the Company regarding real property located at
1911 Walker Avenue, Monrovia, California/(5)/
10.18 Lease Addition, dated November 9, 1992, by and between Turner Trust,
Dale E. Turner & Francis R. Turner, as Trustees and the Company to that
certain lease dated October 20, 1983 regarding real property located at
1911 Walker Avenue, Monrovia, California/(5)/
10.19 Patent License Agreement, dated May 24, 1995, with Eye Microsurgery
Intersectoral Research and Technology Complex/(9)/
10.20 Patent License Agreement, dated January 1, 1996, with Eye Microsurgery
Intersectoral Research and Technology Complex/(10)/
10.21 Promissory Note, dated March 18, 1993, from William C. Huddleston to the
Company/(7)/
10.22 Indenture of Lease, dated September 1, 1993, with FKT Associates regarding
real property located at 1900 South Myrtle Avenue, Monrovia, California/(7)/
29
10.23 Business Loan Agreement, dated February 15, 1996, between STAAR
Surgical Company and First Interstate Bank of California/(10)/
10.24 Commercial Security Agreement, dated February 15, 1996, between
STAAR Surgical Company/(10)/
10.25 Revolving Line of Credit Note dated December 2, 1996,
between STAAR Surgical Company and First Interstate Bank of
California/(10)/
10.26 Modification To Employment Agreement, dated December 20, 1994,
between the Company and John R. Wolf/(7)/
10.27 First Amendment To Sales Representative Agreement, dated December 20,
1994, between the Company and John R. Wolf/(7)/
10.28 Employment Agreement, dated March 1, 1994, between the Company and
Vladimir Feingold/(7)/
10.29 Modification To Employment Agreement, dated May 6, 1996, between the
Company and Vladimir Feingold/(10)/
10.30 Employment Agreement, dated March 1, 1994, between the Company and
William C. Huddleston/(7)/
10.31 Modification To Employment Agreement, dated May 6, 1996, between the
Company and William C. Huddleston/(10)/
10.32 Employment Agreement, dated March 1, 1994, between the Company and
Carl M. Manisco/(7)/
10.33 Modification To Employment Agreement, dated May 6, 1996, between the
Company and Carl M. Manisco/(10)/
10.34 Employment Agreement, dated March 1, 1994, between the Company and
Michael J. Lloyd/(7)/
10.35 Modification To Employment Agreement, dated May 6, 1996, between the
Company and Michael J. Lloyd/(10)/
10.36 Employment Agreement, dated March 1, 1994, between the Company and
Stephen L. Ziemba/(7)/
10.37 Modification To Employment Agreement, dated May 6, 1996, between the
Company and Stephen L. Ziemba/(10)/
10.38 Employment Contract, dated May 26, 1996, between the Company and
30
Donald Ferguson/(10)/
10.39 Amended IOL Supply Agreement, dated June 10, 1994, between the
Company and Chiron Vision Corporation/(7)/
10.40 Manufacturing Site Agreement, dated June 10, 1994, between the
Company and Chiron Vision Corporation/(7)/
10.41 Form of Non-Qualified Stock Option Agreements granted to Directors of
Company in June and August 1994/(7)/
10.42 Agreement For Purchase And Sale Of Assets, dated October 1, 1994,
between STAAR Surgical Australasia Pty. Ltd. and Bionica Pty. Ltd./(7)/
10.43 Agreement, dated October 10, 1995, with China Eye Joint Venture/(9)/
10.44 Agreement, dated November 1994, between the Company and Norbrook
Laboratories Limited/(7)/
21 List of Significant Subsidiaries/(10)/
24 Powers of Attorney
27 Financial Data Schedules
- ------------
(Footnotes to Exhibits):
(1) Incorporated by reference from the Company's Registration Statement on Form S-18, File No.
2-83434, as filed on April 29, 1983
(2) Incorporated by reference from the Company's Registration Statement on Form S-8, File No.
33-37248, as filed on October 11, 1990
(3) Incorporated by reference from the Company's Registration Statement on Form S-8, File No.
33-76404, as filed on March 11, 1994
(4) Incorporated by reference from the Company's Registration Statement on Form S-8, File No.
33-60241, as filed on June 15, 1995
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for the year end
January 1, 1993, as filed on April 1, 1993
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for the year end
December 31, 1993, as filed on March 31, 1994
(7) Incorporated by reference from the Company's Annual Report on Form 10-K for the year end
December 30, 1994, as filed on March 30, 1995
(8) Incorporated by reference from the Company's Proxy Statement for its Annual Meeting of
31
Stockholders held on June 6, 1995, as filed on May 12, 1995
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for the year end
December 29, 1995, as filed on March 28, 1996
(10) Filed herewith
(11) Refiled herewith pursuant to Reg. (S)201.24
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on April 2, 1997.
STAAR SURGICAL COMPANY
By: /s/ John R. Wolf
-----------------------------
John R. Wolf, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant on
April 2, 1997 and in the capacities indicated.
/s/ John R. Wolf President, Chief Executive Officer and Chairman
- ----------------------------
John R. Wolf
/s/ William C. Huddleston Vice President and Chief Financial Officer
- ---------------------------- (principal accounting and financial officer)
William C. Huddleston
/s/ Peter J. Utrata, M.D.* Director
- ----------------------------
Peter J. Utrata, M.D.
/s/ Donald R. Sanders, M.D.* Director
- ----------------------------
Donald R. Sanders
/s/ Andrew F. Pollet* Director
- ----------------------------
Andrew F. Pollet
/s/ Michael R. Deitz, M.D.* Director
- -----------------------------
Michael R. Deitz, M.D.
* /s/ William C. Huddleston
- -----------------------------
William C. Huddleston
(Attorney in Fact)
33
STAAR SURGICAL COMPANY AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
YEARS ENDED JANUARY 3, 1997,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
---------------------------------------
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
STAAR Surgical Company
We have audited the accompanying consolidated balance sheets of STAAR Surgical
Company and subsidiaries as of January 3, 1997 and December 29, 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended January 3, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of STAAR
Surgical Company and subsidiaries as of January 3, 1997 and December 29, 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended January 3, 1997, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
March 11, 1997
F-2
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1997 AND DECEMBER 29, 1995
=====================================
ASSETS (Note 5) 1996 1995
------ ------------ ------------
Current assets:
Cash and cash equivalents $ 6,469,515 $ 3,767,011
Accounts receivable, less allowance for doubtful accounts
of $111,525 and $119,490 (Note 1) 6,827,250 7,492,439
Inventories (Note 2) 12,365,867 9,591,898
Prepaid, deposits and other current assets 1,676,611 917,895
Deferred income tax (Note 7) 1,331,075 3,323,724
----------- -----------
Total current assets 28,670,318 25,092,967
----------- -----------
Investment in joint venture (Note 4) 2,464,140 2,121,492
Property, plant and equipment, net (Note 3) 8,920,989 6,362,696
Patents and licenses, net of accumulated amortization of
$1,401,392 and $826,715 (Notes 8 and 9) 8,900,236 3,538,769
Other assets 2,163,336 1,687,066
----------- -----------
$51,119,019 $38,802,990
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable (Note 5) $ 7,489,549 $ 3,548,686
Accounts payable 1,732,064 1,448,135
Current portion of long-term debt (Note 6) 703,260 480,151
Other current liabilities (Notes 11 and 12) 3,259,714 3,281,321
----------- -----------
Total current liabilities 13,184,587 8,758,293
----------- -----------
Long-term debt (Note 6) 844,050 1,212,178
Deferred gain on sale of license (Note 4) - 143,750
Other long-term liabilities 486,205 10,743
----------- -----------
Total liabilities 14,514,842 10,124,964
----------- -----------
Commitments and contingencies (Notes 10, 11 and 13)
Stockholders' equity (Notes 10, 11 and 13):
Common stock, $.01 par value, 30,000,000 shares authorized;
issued and outstanding 13,070,705 and 12,784,148 130,707 127,841
Capital in excess of par value 41,518,049 40,325,287
Accumulated translation adjustment (160,573) -
Accumulated deficit (2,557,991) (9,449,087)
----------- -----------
38,930,192 31,004,041
Notes receivable (Note 10) (2,326,015) (2,326,015)
----------- -----------
Total stockholders' equity 36,604,177 28,678,026
----------- -----------
$51,119,019 $38,802,990
=========== ===========
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-3
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
================================================================================
1996 1995 1994
------------ ------------ ------------
Sales $41,212,511 $34,180,420 $26,333,328
Royalty income (Note 9) 1,000,000 514,000 1,020,046
----------- ----------- -----------
Total revenues 42,212,511 34,694,420 27,353,374
Cost of sales 10,195,396 8,441,099 6,058,717
----------- ----------- -----------
Gross profit 32,017,115 26,253,321 21,294,657
----------- ----------- -----------
Selling, general and administrative expenses:
General and administrative (Note 13) 5,627,576 5,000,484 4,364,722
Marketing and selling 12,227,593 10,911,240 8,694,134
Research and development 4,084,991 3,253,536 2,718,451
----------- ----------- -----------
Total selling, general and
administrative expenses 21,940,160 19,165,260 15,777,307
----------- ----------- -----------
Operating income 10,076,955 7,088,061 5,517,350
----------- ----------- -----------
Other income (expense):
Equity in earnings of joint venture (Note 4) 486,398 517,507 867,389
Interest expense - net (450,276) (265,645) (168,413)
Other income (expense) 116,563 51,145 (74,012)
----------- ----------- -----------
Total other income 152,685 303,007 624,964
----------- ----------- -----------
Income before income taxes 10,229,640 7,391,068 6,142,314
Income tax provision (benefit) (Note 7) 3,338,544 (90,652) (2,184,000)
----------- ----------- -----------
Net income $ 6,891,096 $ 7,481,720 $ 8,326,314
=========== =========== ===========
Net income per share (Note 10):
Primary $ 0.50 $ 0.55 $ 0.63
=========== =========== ===========
Fully diluted $ 0.50 $ 0.55 $ 0.62
=========== =========== ===========
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-4
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
====================================================================================================================================
Capital in Accumulated Notes
Common Excess of Accumulated Translation and Other
Stock Par Value Deficit Adjustment Receivables Total
--------- ------------ ------------- ------------ ------------ ------------
Balance, at December 31, 1993 $125,632 $41,294,627 $(25,257,121) $ - $(4,177,365) $11,985,773
Common stock issued in private placement
(Note 10) 31 9,963 - - - 9,994
Common stock issued upon exercise of
options (Note 10) 1,865 692,574 - - (192,000) 502,439
Common stock issued upon exercise of
warrants (Note 10) 1,657 329,219 - - - 330,876
Common stock issued as payment for services
(Note 10) 759 369,741 - - - 370,500
Common stock returned in exchange for notes
receivable (Notes 10 and 13) (3,599) (1,936,688) - - 1,940,287 -
Common stock issued to purchase assets
(Notes 10 and 13) 700 349,300 - - - 350,000
Stock options issued as payment for
services (Notes 10 and 11) - 50,000 - - - 50,000
Payments on notes receivable (Note 10) - - - - 103,063 103,063
Net income - - 8,326,314 - - 8,326,314
-------- ----------- ------------ ----------- ----------- -----------
Balance, at December 30, 1994 127,045 41,158,736 (16,930,807) - (2,326,015) 22,028,959
Common stock issued upon exercise of
options (Note 10) 872 399,902 - - - 400,774
Common stock issued upon exercise of
warrants (Note 10) 277 32,987 - - - 33,264
Common stock issued as payment for services
(Note 10) 511 432,302 - - - 432,813
Common stock repurchased and cancelled (1,750) (1,626,980) - - - (1,628,730)
Cash paid on common stock issued for
cashless exercise of 138,026 options
and warrants 886 (71,660) - - - (70,774)
Net income - - 7,481,720 - - 7,481,720
-------- ----------- ------------ ----------- ----------- -----------
Balance, at December 29, 1995 127,841 40,325,287 (9,449,087) - (2,326,015) 28,678,026
Common stock issued upon exercise of
options (Note 10) 2,266 983,926 - - - 986,192
Common stock issued upon exercise of
warrants (Note 10) 375 64,625 - - - 65,000
Common stock issued as payment for services
(Note 10) 444 458,492 - - - 458,936
Common stock repurchased and cancelled (219) (314,281) - - - (314,500)
Foreign currency translation adjustment - - - (160,573) - (160,573)
Net income - - 6,891,096 - - 6,891,096
-------- ----------- ------------ ----------- ----------- -----------
Balance, at January 3, 1997 $130,707 $41,518,049 $ (2,557,991) $(160,573) $(2,326,015) $36,604,177
======== =========== ============ =========== =========== ===========
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-5
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
================================================================================
INCREASE IN CASH AND CASH EQUIVALENTS
1996 1995 1994
------------- ------------ ------------
Cash flows from operating activities:
Net income $ 6,891,096 $ 7,481,720 $ 8,326,314
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property and equipment 1,720,379 1,159,610 996,068
Amortization of patents and licenses 574,677 299,171 257,075
Provision for allowance for doubtful accounts 111,525 111,512 121,435
Equity in earnings of joint venture (486,398) (517,507) (867,389)
Utilization (recognition) of deferred tax asset 1,992,649 (923,724) (2,400,000)
Common stock issued for services 458,936 432,813 370,500
Options issued for services - - 50,000
Change in operating working capital (Note 14) (2,716,699) (3,030,452) (2,888,728)
------------ ----------- -----------
Net cash provided by operating activities 8,546,165 5,013,143 3,965,275
------------ ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (4,278,671) (3,486,744) (2,152,646)
Issuance of notes receivable - - (192,000)
Increase in patents and licenses (5,936,144) (1,980,211) (872,983)
Increase in other assets (476,270) (583,505) (835,169)
------------ ----------- -----------
Net cash used in investing activities (10,691,085) (6,050,460) (4,052,798)
------------ ----------- -----------
Cash flows from financing activities:
Increase in borrowings under notes payable
and long-term debt 2,619,075 794,199 920,001
Payments on other notes payable and long-term debt (536,028) (11,128) -
Net borrowings (payments) under line-of-credit 2,188,259 2,082,836 (168,373)
Proceeds from the issuance of common stock 1,051,191 434,107 1,035,309
Cash paid in lieu of exercise of stock
options and warrants - (70,774) -
Proceeds from collections on notes receivable - - 103,063
Payments for repurchase of common stock (314,500) (1,628,799) -
------------ ----------- -----------
Net cash provided by financing activities 5,007,997 1,600,441 1,890,000
------------ ----------- -----------
Effect of exchange rate changes on cash and cash equivalents (160,573) - -
Increase in cash and cash equivalents 2,702,504 563,124 1,802,477
Cash and cash equivalents at beginning of year 3,767,011 3,203,887 1,401,410
------------ ----------- -----------
Cash and cash equivalents at end of year $ 6,469,515 $ 3,767,011 $ 3,203,887
============ =========== ===========
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-6
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
YEARS ENDED JANUARY 3, 1997,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
=======================================
ORGANIZATION AND DESCRIPTION OF BUSINESS
STAAR Surgical Company (the "Company") is a developer, manufacturer and global
distributor of medical devices used in minimally invasive ophthalmic surgery.
The Company was incorporated in California in 1982 as a successor to a
partnership for the purpose of developing, producing, and marketing intraocular
lenses ("IOLs") and other products for minimally invasive ophthalmic surgery.
The Company was reincorporated in Delaware in April 1986.
In 1982 and 1983, the Company's operations consisted mainly of research and
development and preliminary marketing and capital raising activities. In 1982,
the Company commenced the development of foldable IOLs, which are used as
replacements for the natural lens after its removal in cataract surgery, and
began production and sale of foldable IOLs in 1986 for implantation in
connection with clinical studies for such products. In September 1991, the
Company received United States Food and Drug Administration ("FDA") pre-market
approval for the Company's ELASTIC/TM/ and ELASTIMIDE/TM/ foldable IOL models,
which the Company now markets worldwide. The Company's other primary products,
developed more recently, are its "wick" style glaucoma implant (the "Glaucoma
Wick"), an ocular device developed to provide a more effective and longer-term
solution for glaucoma; its implantable refractive contact lens ("ICL"), an
ocular implant designed to correct refractive disorders such as myopia (near-
sightedness) and hyperopia (far-sightedness); and its STAARVISC/TM/ viscoelastic
solution, used during IOL and ICL surgery. The Company markets the Glaucoma
Wick, which the Company introduced in late 1995, and its ICLs and STAARVISC/TM/
viscoelastic solution, which the Company introduced in late 1996, on a limited
basis in selected foreign countries.
The Company's principal operating subsidiary is STAAR Surgical AG, a wholly
owned subsidiary formed in Switzerland to develop, manufacture and distribute
worldwide certain of the Company's products, including its Glaucoma Wick and
ICLs. The Company and STAAR Surgical AG have also formed six other wholly owned
operating subsidiaries for the purpose of distributing and marketing the
Company's products internationally, including STAAR Surgical - Canada, Ltd. and
STAAR Surgical Australasia Pty., Ltd., formed by the Company in 1994, and STAAR
Surgical France - SARL, STAAR Surgical - South Africa Pty., Ltd., STAAR Surgical
Austria, GmbH; and STAAR Surgical Germany, GmbH, which were formed by STAAR
Surgical AG in 1993 through 1995.
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 year. The resulting gains and losses are
deferred and are shown as a separate component of stockholders' equity. During
1995 and 1994, foreign currency translation and transaction gains and losses
were not material. During 1996, the net foreign translation loss was $160,573
and net foreign currency transaction loss was $261,181. Investments in
affiliates and joint ventures are accounted for using the equity method of
accounting.
The Company's fiscal year ends on the Friday nearest December 31.
F-7
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
=======================================
REVENUE RECOGNITION
The Company generally supplies a quantity of foldable IOLs with different
specifications to domestic customers, generally ophthalmologists, surgical
centers, hospitals and other health providers, on a consignment basis, and
recognizes sales when an ophthalmic surgeon implants the consigned foldable IOL.
However, sales to foreign distributors are recognized upon shipment. Revenue
from license and technology agreements is recorded as income when the Company
has satisfied the terms of such agreements and is notified of the amounts.
EXPORT SALES
During the fiscal years ended January 3, 1997, December 29, 1995 and December
30, 1994, the Company had export sales, primarily to Europe, South Africa,
Australia, and Southeast Asia, of approximately $11,620,000, $8,133,000 and
$4,284,000, respectively. Of these sales, approximately $7,576,000, $4,841,000
and $3,361,000 were to Europe, which has been the Company's principal foreign
market for the last three fiscal years.
The Company sells its products internationally, which 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 political instability.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market (net
realizable value).
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 ten years. Leasehold improvements
are amortized over the life of the lease or estimated useful life, if shorter.
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 not realizable.
F-8
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
=======================================
PATENTS AND LICENSES (Continued)
The Company's ability to compete effectively is materially dependent upon the
proprietary nature of the designs, processes, technologies and materials owned,
used by or licensed to the Company. The Company has been and will continue to be
involved in litigation to protect its copyrights, patents and proprietary
properties and technology.
START-UP COSTS
Included in other assets at January 3, 1997 and December 29, 1995 are start-up
costs of $1,010,903 and $835,469 respectively. These expenditures are directly
related to and incurred during the start-up phase of the production of two new
products: the ICL and hyaluronic acid. The costs primarily consist of direct
labor and overhead associated with the start-up. The start-up costs are being
amortized on a straight-line basis over a period not to exceed three years.
Recoverability of these costs are assessed on an on-going basis.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, cash equivalents, accounts receivable, accounts
payable, and current notes payable approximate their fair values because of the
short maturity of these instruments. With respect to long-term debt, based on
the borrowing rates currently available to the Company for similar bank and
equipment loans and capitalized leases, the amounts reported approximate the
fair value of the respective financial instruments.
NET INCOME PER SHARE
Primary net income per share has been computed by dividing net income by the
weighted average number of common shares and common stock equivalents (warrants
and options) outstanding during each year. For each year noted below, 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 market values.
F-9
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
(CONCLUDED)
=======================================
NET INCOME PER SHARE (Continued)
Common stock equivalents arising from the assumed exercise of warrants and
options were converted using the year-end market price of the Company's common
stock. The number of common and common equivalent shares used for computing
primary and fully diluted net income per share were as follows:
1996 1995 1994
---------- ---------- ----------
Primary 13,867,108 13,678,882 13,170,027
Fully diluted 13,867,108 13,715,097 13,500,363
STOCK-BASED COMPENSATION
As of January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which
establishes a fair value method of accounting for stock-based compensation
plans. In accordance with SFAS 123, the Company has chosen to continue to
account for stock-based compensation utilizing the intrinsic value method
prescribed in APB 25. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Also, in accordance with SFAS 123, the Company has provided footnote disclosure
with respect to stock-based employee compensation. The cost of stock-based
employee compensation is measured at the grant date based on the value of the
award and recognizes this cost over the service period. The value of the stock-
based award is determined using a pricing model whereby compensation cost is the
excess of the fair value of the stock as determined by the model at grant date
or other measurement date over the amount an employee must pay to acquire the
stock.
F-10
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 3, 1997,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
=======================================
NOTE 1 - ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
1996 1995
----------- -----------
Domestic $ 4,718,142 $ 4,486,125
Export 2,220,633 2,611,804
Royalties - 514,000
----------- -----------
6,938,775 7,611,929
Less allowance for doubtful accounts 111,525 119,490
----------- -----------
$ 6,827,250 $ 7,492,439
=========== ===========
NOTE 2 - INVENTORIES
Inventories are summarized as follows:
1996 1995
----------- -----------
Raw materials and purchased parts $ 1,518,819 $ 1,104,203
Work in process 1,644,234 1,143,119
Finished goods 9,202,814 7,344,576
----------- -----------
$12,365,867 $ 9,591,898
=========== ===========
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
1996 1995
----------- -----------
Machinery and equipment $10,186,227 $ 7,693,617
Furniture and fixtures 4,460,082 3,073,911
Leasehold improvements 2,550,049 2,150,158
----------- -----------
17,196,358 12,917,686
Less accumulated depreciation and
amortization 8,275,369 6,554,990
----------- -----------
$ 8,920,989 $ 6,362,696
=========== ===========
F-11
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 4 - INVESTMENT IN JOINT VENTURE
The Company owns a 50% equity interest in a joint venture, the CANON-STAAR
Company, Inc. ("CSC"), with Canon Inc. ("Canon") and Canon Sales Co, Inc.
("Canon Sales"). The joint venture was formed to manufacture and sell the
Company's IOL products to Canon Sales or other distributors in Japan. The
Company sold CSC an exclusive license to manufacture and market its products in
Japan. The Company recorded $1,500,000 of deferred revenue on the sale of the
license, which was recognized over eight years through October 1996 on a
straight-line basis. The Company uses the equity method of accounting for this
investment. The financial statements of CSC include assets of approximately
$6,640,000 and $5,454,000, and liabilities of approximately $1,381,000 and
$654,000, as of January 3, 1997 and December 29, 1995, respectively.
The Company's equity in earnings of the joint venture is calculated as follows:
1996 1995 1994
--------- --------- -----------
Joint venture net income $685,296 $660,014 $1,359,778
Equity interest 50% 50% 50%
-------- -------- ----------
Equity in net income 342,648 330,007 679,889
Recognition of deferred gain
on sale of license 143,750 187,500 187,500
-------- -------- ----------
Equity in earnings of joint venture $486,398 $517,507 $ 867,389
======== ======== ==========
The Company recorded sales of certain IOL products to CSC of approximately
$845,000, $171,000 and $262,000 in 1996, 1995 and 1994, respectively.
NOTE 5 - NOTES PAYABLE
In December 1993, the Company entered into a three year revolving credit
facility which provided for borrowings up to $3,000,000, limited to 75% of
eligible accounts receivable, at the prime interest rate (8.5% at December 29,
1995 and December 30, 1994) plus 2.75% at December 29, 1995 and 3.5% at December
30, 1994. The weighted average interest rate was 11.63% and 10.32% for fiscal
1995 and 1994. The loan was secured by substantially all of the assets of the
Company and contained certain restrictive covenants including the maintenance of
various financial ratios and a limitation of indebtedness to others and payment
of dividends. The maximum borrowings outstanding under this facility during 1995
was approximately $2,800,000. Borrowings outstanding at December 29, 1995 was
$2,512,000. During 1996, this credit facility was refinanced with another
lender.
In February 1996, the Company refinanced and increased its domestic line of
credit, which now allows the Company to borrow up to $5 million on a revolving
basis, at a rate of interest not to exceed the prime interest rate. The loan
agreement requires the Company to satisfy certain financial tests and limits the
amount of indebtedness the Company may have to others and the payment of
dividends. The line of credit expires in June 1997. Borrowings are
collateralized by substantially all of the assets of the Company. Borrowings
outstanding as of January 3, 1997 were approximately $4,700,000. The Company was
in compliance with the restrictive covenants as of January 3, 1997.
F-12
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 5 - NOTES PAYABLE (Continued)
In May 1994, the Company entered into a separate revolving credit facility with
a Swiss bank which provides for borrowings up to $827,815 (1,125,000 Swiss
Francs at the exchange rate at January 3, 1997) at the interest rate of 5.5%. A
commission rate of 0.25% is payable each quarter. The loan does not have a
termination date and is secured by a general assignment of claims. Borrowings
outstanding under this facility as of January 3, 1997 and December 29, 1995 were
$789,549 (1,072,997 Swiss Francs) and $1,036,945 (1,203,893 Swiss Francs),
respectively.
In 1996, the Company issued a note in the amount of $2,000,000 as partial
consideration for the acquisition of a license. The note is due in equal
quarterly installments through 1997.
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following:
1996 1995
---------- ----------
Note payable to bank, interest at 6.25%,
payable in four equal annual installments plus
interest beginning in December 1996, guaranteed
by the Swiss federal government and the Canton of Bern $ 618,584 $ 991,703
Note payable to equipment vendor, interest
at 13%, payable in monthly installments
plus interest through December 1999,
secured by equipment 101,118 124,379
Obligations under capitalized leases
(see Note 11) 827,608 576,247
---------- ----------
1,547,310 1,692,329
Less current portion 703,260 480,151
---------- ----------
Long-term debt due after one year $ 844,050 $1,212,178
========== ==========
NOTE 7 - INCOME TAXES
Effective January 2, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" (the "Statement") which
requires, among other things, a change from the deferred method to the asset and
liability method of accounting for income taxes. As a result of the adoption of
the Statement, the tax benefits of net operating loss carryforwards utilized in
1995 and 1994 are presented in the Consolidated Statement of Income as
reductions of the provisions for income tax.
F-13
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 7 - INCOME TAXES (Continued)
The provision (benefit) for income taxes consist of the following:
1996 1995 1994
---------- ---------- ------------
Domestic - current:
Federal (net of $2,006,000, $2,513,000 and
$1,608,000 tax benefit from operating
loss carryforwards) $ 492,000 $ 149,000 $ 138,000
State (net of $-0-, $-0- and $441,000
tax benefit from operating loss
carryforwards) 725,000 684,000 78,000
---------- --------- -----------
1,217,000 833,000 216,000
Foreign taxes 129,000 - -
Change in deferred tax assets, net 1,993,000 (924,000) (2,400,000)
---------- --------- -----------
$3,339,000 $ (91,000) $(2,184,000)
========== ========= ===========
At January 3, 1997, the Company had net operating loss carryforwards of
approximately $2.5 million for federal income tax purposes expiring at various
dates between 1999 and 2006. The Company utilized all of its remaining tax loss
carryforwards for state income tax purposes during 1995.
Alternative minimum tax and research and experimentation tax credit
carryforwards at January 3, 1997 were approximately $424,000 and $481,000,
respectively, for tax purposes. The tax credits expire at various dates through
2004.
The provision (benefit) based on income before taxes differs from the amount
obtained by applying the statutory federal income tax rate to income before
taxes as follows:
Liability Method
-------------------------
1996 1995 1994
------ ------ -------
Computed provision for taxes based on income
at statutory rate 34.0% 34.0% 34.0%
Permanent differences 1.5 0.2 (2.2)
State taxes, net of federal income tax benefit 6.1 7.7 5.7
Tax benefit of net operating loss carryforward - (28.2) (37.5)
Tax effect attributed to foreign operations (10.1) - -
Reduction of valuation allowance - (18.5) (39.1)
Other 1.1 3.8 3.5
----- ----- ------
Effective tax provision (benefit) rate 32.6% (1.0)% (35.6)%
===== ===== ======
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $3.2 million at January 3, 1997. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for United States
federal and state income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to both United States income taxes (subject to an adjustment for foreign
tax credits) and withholding taxes payable to the various foreign countries.
Determination of the amount of unrecognized deferred United States income tax
liability is not practicable because of the complexities associated with its
hypothetical calculation.
F-14
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 7 - INCOME TAXES (Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of January 3, 1997 and
December 29, 1995 are as follows:
1996 1995
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 57,000 $ 44,000
Inventory reserves and uniform capitalization 307,000 262,000
Accrued vacation 114,000 117,600
Amortization of deferred gain - 57,600
Depreciation and amortization (937,000) (670,000)
State taxes 153,000 153,000
Net operating loss carryforwards 732,075 2,578,524
Tax credits 905,000 781,000
---------- ----------
Total deferred tax assets $1,331,075 $3,323,724
========== ==========
As a result of the Company's positive operating results for each of the three
years ended January 3, 1997, the Company determined that deferred tax assets of
$1,331,075 and $3,323,724 should be recognized as of January 3, 1997 and
December 29, 1995. This amount was based on a consideration of current and
future anticipated earnings. Future income levels should result in full
recognition of the deferred tax asset. The amount recorded as of January 3, 1997
includes the capitalization of the remaining balance of the Company's net
operating loss carryforwards. Management believes it is more likely than not
that the deferred tax assets will be realized in full.
NOTE 8 - PATENTS
During 1995, the Company acquired from the Intersectoral Research and Technology
Complex Eye Microsurgery ("IRTC"), a Russian Federation located in Moscow,
Russia, exclusive patent rights to use and sell glaucoma devices in the United
States and certain foreign countries. During 1996, the Company acquired from
IRTC exclusive rights to several domestic and foreign patents associated with
the Company's implantable contact lenses (ICLs). The transactions involve a
specified amount for the patent rights and payments of royalties over the life
of the patents.
In 1996, the Company acquired a license, as part of the settlement of litigation
with Allergan Medical Optics, under U.S. Patent No. 4,681,102, relating to an
apparatus for insertion of an intraocular lens. The acquisition cost has been
included in patents in the accompanying balance sheet.
NOTE 9 - LICENSING AGREEMENTS
The Company has issued Allergan Medical Optics ("AMO"), Alcon Surgical, Inc.
(Alcon), Chiron Vision Corporation (Chiron), IOLAB Corporation (now owned by
Chiron) and Optical Radiation Corporation with licenses to utilize certain of
its patents involving foldable technology in the United States and selected
foreign countries. Each license has a certain amount of prepaid royalties (which
were received by the Company when the license was issued) which will be utilized
by that licensee as sales of the licensed products are made. The Company
recorded $1,000,000, $514,000 and $1,020,046 of royalty income in 1996, 1995 and
1994, respectively, from these licenses.
F-15
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 9 - LICENSING AGREEMENTS (Continued)
The Company was involved with certain litigation with Alcon concerning the
ownership and validity of the underlying patent and license agreement. During
1996, the Company reached a settlement with Alcon.
The Company is involved with certain litigation with Chiron concerning the
ownership and validity of the underlying patent and license agreement. The
Company believes it will prevail in the litigation, however, the outcome is
uncertain and the effects of an adverse outcome, if any, is unknown.
NOTE 10 - STOCKHOLDERS' EQUITY
COMMON STOCK
In 1994, the Company issued 75,914 shares to consultants for services rendered
to the Company. In September 1994, the Company issued 70,000 unregistered shares
of its common stock to its subsidiary, STAAR Surgical Australasia Pty. Ltd., to
purchase the assets of Bionica Inc., the Company's distributor in Australia.
Also, in April 1994, 359,906 shares of the Company's common stock were returned
to the Company by a former officer in exchange for his promissory notes to the
Company totaling $1,940,287, which notes the officer in prior years had issued
to the Company as consideration for the purchase of common stock. The shares
were canceled by the Company.
In 1995, the Company issued 51,111 shares to consultants for services rendered
to the Company. Also during 1995, the Company repurchased and cancelled 175,000
shares and paid cash in lieu of exercise for 49,363 options and warrants which
were then cancelled. Total consideration paid for the repurchased shares,
options and warrants was $1,699,573.
In 1996, the Company issued 44,384 shares to consultants for services rendered
to the Company. Also during 1996, the Company repurchased and cancelled 21,879
shares. Total consideration paid for the repurchased shares was $314,500.
NOTES RECEIVABLE
As of January 3, 1997 and December 29, 1995, notes receivable from four officers
and a director totalling $2,326,015 were outstanding. The notes were issued in
connection with purchases of the Company's common stock. The notes bear interest
at rates ranging between 6% and 8%, or at the lowest federal applicable rate
allowed by the Internal Revenue Service. The notes are secured by stock pledge
agreements and mature on various dates through May 1998.
F-16
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
OPTIONS
The table below summarizes the transactions in the Company's several stock
option plans:
Weighted
Average
Number Exercise
of Shares Price
---------- --------
Balance at December 31, 1993 970,637 $ 4.74
Options granted 636,500 $ 4.73
Options exercised (186,550) $ 3.74
Options forfeited (101,833) $ 5.23
--------- ------
Balance at December 30, 1994 1,318,754 $ 4.84
Options granted 35,000 $ 4.67
Options exercised (116,192) $ 4.08
Options forfeited (9,808) $ 9.22
--------- ------
Balance at December 29, 1995 1,227,754 $ 4.87
Options granted 574,000 $12.50
Options exercised (226,552) $ 4.26
--------- ------
Balance at January 3, 1997 1,575,202 $ 7.72
========= ======
Options exercisable (vested) at
January 3, 1997 851,868 $ 5.05
========= ======
Included in the table above are outstanding options to purchase 717,701 shares
of common stock at January 3, 1997, with exercise prices ranging from $2.50 to
$9.25 per share, which options were granted pursuant to the Company's 1990 and
1991 Stock Option Plans. Generally, options under this plan are granted at fair
market value at the date of the grant, become exercisable over a 3-year period,
or as determined by the Board of Directors, and expire over periods not
exceeding 10 years from date of grant.
In 1996, the Board of Directors of the Company approved the 1996 Non-Qualified
Stock Plan, authorizing the granting of options to purchase or awards of the
Company's common stock. Under provisions of the Non-Qualified Stock Plan
600,000 shares were reserved for issuance. Generally, options under the plan
are granted at fair market value at the date of the grant, become exercisable
over a 3 year period, or as determined by the Board of Directors, and expire
over periods not exceeding 10 years from date of grant. Pursuant to this plan
options for 570,000 shares were outstanding at January 3, 1997 with an
exercise price of $12.50 per share.
F-17
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
In 1994, the Company granted options to officers, directors and consultants to
purchase 636,500 shares of the Company's common stock, at prices ranging from
$4.00 to $5.00. Out of the above, 238,000 options were issued under the 1991
stock option plan and 398,500 options were issued as non-qualified stock
options.
In 1994, officers, employees and others exercised options to purchase 131,000
shares of common stock granted under the 1990, 1991, and non-qualified stock
option plans, at prices from $2.50 to $5.875, resulting in cash proceeds of
$505,064 and a promissory note of $192,000. The promissory note from an officer
is included as a reduction to stockholders' equity as of January 3, 1997. The
note bears interest at 8%, is payable in monthly installments, and is secured by
a Stock Pledge Security Agreement. Principal and any unpaid interest are due on
April 1, 1997.
In 1995, officers, employees and others exercised options to purchase 91,192
shares of common stock granted under the 1990 and 1991 stock option plans, at
prices from $2.50 to $6.00, in exchange for cash of $354,776. Also in 1995, the
Company's former President exercised options to purchase 25,000 shares of common
stock, at a price of $4.75, resulting in cash proceeds of $118,750.
In 1996, the Company granted options to officers, directors and consultants to
purchase 574,000 shares of the Company's common stock at a price of $12.50, the
quoted market value at date of grant. Out of the above, 4,000 options were
issued under the 1991 stock option plan and 570,000 options were issued as non-
qualified stock options.
In 1996, officers, employees, and others exercised 226,552 options from the
1990, 1991 and non-qualified stock option plans at prices from $2.50 to $5.875
resulting in cash and stock proceeds totaling $966,191.
FASB Statement 123, Accounting for Stock-Based Compensation, requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996: dividend yield of 0
percent; expected volatility of 11 percent; risk-free interest rate of 6.73
percent; and expected lives of 7 years. Compensation cost computed pursuant to
FASB Statement 123 for options granted in 1995 was not material.
Under the accounting provisions of FASB Statement 123, the Company's net income
and earnings per share for 1996 would have been reduced to the pro forma amounts
indicated below:
1996
----------
Net income
As reported $6,891,000
Pro forma $6,705,000
Primary and fully diluted earnings per share
As reported $ .50
Pro forma $ .48
F-18
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Due to the fact that the Company's stock option programs vest over many years
and additional awards may be made each year, the above proforma numbers are not
indicative of the financial impact had the disclosure provisions of FASB 123
been applicable to all years of previous option grants. The above numbers do
not include the effect of options granted prior to 1995 that vested in 1995 and
1996.
The following table summarizes information about stock options outstanding at
January 3, 1997.
Options
Outstanding Options Exercisable
Weighted- -------------------
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 1/3/97 Life Price at 1/3/97 Price
- --------------------------------------------------------------------------------------------------
$2.50 to 4.50 191,819 4.9 years $ 2.92 191,819 $2.92
$4.75 to 7.00 753,383 6.7 years $ 5.20 600,049 $5.31
$9.25 to 12.50 630,000 9.3 years $12.19 60,000 $9.25
- -------------- --------- --------- ------ ------- -----
$2.50 to 12.50 1,575,202 7.5 years $ 7.72 851,868 $5.05
- -------------- --------- --------- ------ ------- -----
WARRANTS
The table below summarizes the transactions related to the Company's warrants to
purchase common stock:
Weighted-
Average
Number Exercise
of Shares Price
--------- --------
Balance at December 31, 1993 1,215,525 $4.86
Warrants exercised (165,667) $2.00
Warrants expired (578,884) $7.97
--------- -----
Balance at December 30, 1994 470,974 $2.05
Warrants exercised (136,747) $2.17
Warrants expired (49,833) $2.63
--------- -----
Balance at December 29, 1995 284,394 $1.89
Warrants exercised (37,500) $1.73
--------- -----
Balance at January 3, 1997 246,894 $1.91
========= =====
All warrants are exercisable as of January 3, 1997.
F-19
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
WARRANTS (Continued)
In 1994, warrants to purchases 165,667 shares of common stock were exercised at
prices ranging from $1.20 to $4.62 per share, resulting in proceeds of $330,876.
Also in 1994, warrants to purchase 578,884 shares of common stock expired
unexercised. The majority of these warrants were issued in conjunction with
past private placements.
In 1995, warrants to purchase 136,747 shares of common stock were exercised at
prices ranging from $0.60 to $4.24 per share resulting in cash and/or stock (at
market price effective on the date of exercise) proceeds in the amount of
$296,852. The stock paid to exercise the options was cancelled and shown as a
reduction in common stock and additional paid in capital on the balance sheet.
In 1996, warrants to purchase 37,500 shares of common stock were exercised at
prices ranging from $1.20 to $2.00 per share, resulting in proceeds of $65,000.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases certain property, plant and equipment under capital and
operating lease agreements. In the later part of 1995, the Company entered into
a capital lease agreement to finance surgical equipment that will be sent to
China in consideration of a five year exclusive supply agreement with a hospital
in Hangzhou, China. The Company committed a $600,000 letter of credit as
further collateral for the lease.
Annual future minimum lease payments under noncancellable capital and operating
lease commitments as of January 3, 1997 are as follows:
Capital Operating
Fiscal Year Leases Leases
----------- ------- ---------
1997 $509,840 $ 637,470
1998 387,884 500,702
1999 - 469,789
2000 - 469,789
2001 - 341,256
Thereafter - 284,381
------- ----------
Total minimum lease payments 897,724 2,703,387
==========
Imputed interest 70,116
--------
Present value of net minimum lease payments $827,608
========
Rent expense was approximately $700,000, $606,000 and $406,000 for the years
ended January 3, 1997, December 29, 1995 and December 30, 1994, respectively.
F-20
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION AND CLAIMS
In addition to litigation discussed in Note 9, the Company is involved in the
following proceedings:
In February 1990, a plaintiff filed a $10,000,000 product liability claim
against a doctor and the Company arising from injuries purportedly suffered by
the plaintiff as a result of the implant of a purportedly defective lens
manufactured by Lynell, a subsidiary of the Company. The Company believes that
any liability was discharged as part of Lynell's reorganization under the
Federal Bankruptcy Code prior to the Company's acquisition of Lynell. In
addition, Lynell is being defended by its liability carrier. These proceedings
are presently administratively off the calendar as of August 1994. If the
lawsuit is reactivated, the Company believes that any liability that may result
will not be material to the consolidated financial position or results of
operations.
The Company is involved in other legal actions and claims arising in the
ordinary course of business. It is the opinion of management (based on advice
of legal counsel) that such litigation will be resolved without material effect
on the Company's financial position.
OTHER COMMITMENTS
During 1993, the Company entered into consulting agreements with certain
individuals to assist the Company in the development of new products and the
promotion of its current products. Such agreements provide for payments of cash
and the issuance of shares of the Company's common stock and options to purchase
the Company's common stock, at $7 to $11 per share over a six year period. All
common stock issued and options issued during 1996 were at fair market value.
The aggregate commitment under these agreements at January 3, 1997 is
approximately $666,000 in cash, $650,000 worth of common stock, 13,500 shares of
common stock, and options to purchase 55,000 shares of common stock. Included in
other current liabilities at January 3, 1997 and December 29, 1995 is
approximately $411,000 and $505,000, respectively, due to these consultants
payable in cash and shares of the Company's common stock.
NOTE 12 - OTHER LIABILITIES
Included in other current liabilities are approximately $1,573,000 and
$1,567,000 of commissions due to outside sales representatives at January 3,
1997 and December 29, 1995, respectively.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company has had significant related party transactions as discussed in Notes
4, 10, and 11.
Included in other current assets at December 29, 1995 is a $120,000 note
receivable from one of the Company's officers. The note bears annual interest at
8%, and is payable in monthly installments, with the principal and any unpaid
interest due on April 1, 1997. On February 29, 1996, the Company forgave the
$120,000 note receivable in exchange for the officer's efforts in obtaining
certain patents.
F-21
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 13 - RELATED PARTY TRANSACTIONS (Continued)
During 1996, 1995 and 1994, a law firm, of which a partner is director and
stockholder of the Company, received approximately $322,000, $256,000 and
$525,000 for fees in connection with legal services performed on behalf of the
Company.
The Company pays an override sales commission, based upon a percentage of the
Company's sales, to an officer of the Company. This agreement relates back to
1983, when the officer initially became associated with the Company in a sales
and marketing capacity. Commissions paid or accrued under this arrangement
totaled approximately $412,000, $322,000 and $263,000 during 1996, 1995 and
1994, respectively.
In October 1994, the Company's subsidiary, STAAR Surgical Australasia Pty., Ltd.
purchased the assets of the Company's Australian distributor for approximately
$500,000. An officer of the Company was a director of the distributor and owned
over 50% of its common stock.
In 1994, the Company entered into a four year non-compete agreement with a
former officer and director of the Company. The Company paid the officer
$358,092, and agreed to accept 359,906 shares of the Company's common stock in
payment for $1,940,287 in promissory notes the individual owed the Company. The
shares were returned and the promissory notes were canceled. Included in other
assets at January 3, 1997 and December 29, 1995 were $128,718 and $239,048,
respectively, related to the non-compete agreement. The cost of this agreement
is being amortized on a straight line basis over its four year life. A total of
$110,330, $110,330 and $91,941 was amortized during 1996, 1995 and 1994,
respectively.
NOTE 14 - STATEMENTS OF CASH FLOWS
Net cash provided by operating activities includes interest paid of
approximately $557,000, $419,000 and $206,000 for the years ended January 3,
1997, December 29, 1995 and December 30, 1994, respectively. Income taxes paid
amounted to approximately $1,160,000, $947,000 and $14,800 for the years ended
January 3, 1997, December 29, 1995 and December 30, 1994, respectively.
During 1994, the Company received 359,906 shares of its common stock in exchange
for settlement of notes receivable totaling $1,940,287 from a former officer of
the Company. During 1994, the Company issued common stock with a value of
$500,000 to purchase assets.
Changes in operating working capital as shown in the consolidated statements of
cash flows for the years ended January 3, 1997, December 29, 1995 and December
30, 1994 are comprised of:
1996 1995 1994
------------ ------------ ------------
Decrease (increase) in:
Accounts receivable $ 553,664 $(2,296,243) $(1,600,712)
Inventories (2,773,969) (1,013,252) (596,314)
Prepaids, deposits and other current assets (758,716) (308,272) (196,531)
Increase (decrease) in:
Accounts payable 283,929 338,771 (329,304)
Other current liabilities (21,607) 248,544 (165,867)
----------- ----------- -----------
Change in operating working capital $(2,716,699) $(3,030,452) $(2,888,728)
=========== =========== ===========
F-22
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 15 - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1995, the Company recorded an adjustment in the
amount of approximately $924,000 relating to the recognition of deferred tax
assets. This adjustment increased net income by $924,000 or $.07 per share for
that quarter.
During the fourth quarter of 1994, the Company recorded aggregate adjustments in
the amount of approximately $2,230,000 relating to the recognition of deferred
tax assets of $2,400,000 and to the Company's equity in earnings of joint
venture related to income taxes incurred by Canon-STAAR of $170,000. The
adjustments increased net income by $2,230,000, or $.17 per share for that
quarter.
F-23
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT ON SCHEDULE AND CONSENT
To the Board of Directors and Stockholders
STAAR Surgical Company and Subsidiaries
The audits referred to in our report dated March 11, 1997, included the related
financial statement schedule as of January 3, 1997, and for each of the three
years in the period ended January 3, 1997, included in the annual report on Form
10-K of STAAR Surgical Company and subsidiaries. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audit. In our opinion, such financial statement schedule presents fairly, in
all material respects, the information set forth therein.
We consent to incorporation by reference in the Registration Statement (No. 33-
37248) on Form S-8 of STAAR Surgical Company of our report dated March 11, 1997,
relating to the consolidated balance sheets of STAAR Surgical Company and
subsidiaries as of January 3, 1997 and December 29, 1995 and the related
consolidated statements of income, stockholders' equity, and cash flows and
related schedule for each of the three years in the period ended January 3,
1997, which report appears in the January 3, 1997 annual report on Form 10-K of
STAAR Surgical Company and subsidiaries.
BDO SEIDMAN, LLP
Los Angeles, California
March 11, 1997
F-24
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
============================================
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Balance at Balance at
beginning end of
Description of year Additions Deductions year
- ----------- ---------- --------- ---------- ----------
1996
Allowance for doubtful
accounts deducted from
accounts receivable in
balance sheet $119,000 $ - $ 7,000 $112,000
Reserve for obsolescence
deducted from inven-
tories in balance sheet 31,000 - 31,000 -
-------- -------- -------- --------
$150,000 $ - $ 38,000 $112,000
======== ======== ======== ========
1995
Allowance for doubtful
accounts deducted from
accounts receivable in
balance sheet $307,000 $112,000 $ 300,000 $119,000
Reserve for obsolescence
deducted from inven-
tories in balance sheet 105,000 - 74,000 31,000
-------- -------- -------- --------
$412,000 $112,000 $ 374,000 $150,000
======== ======== ======== ========
1994
Allowance for doubtful
accounts deducted from
accounts receivable in
balance sheet $250,000 $121,000 $64,000/(2)/ $307,000
Reserve for obsolescence
deducted from inven-
tories in balance sheet 114,000 - 9,000/(3)/ 105,000
-------- -------- -------- --------
$364,000 $121,000 $ 73,000 $412,000
======== ======== ======== ========
- ------------
/(1)/ Represents allowance for uncollectible receivables.
/(2)/ Writeoffs.
/(3)/ Obsolete inventory written down to zero value.
F-25