UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: OCTOBER 3, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-11634
STAAR SURGICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3797439
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1911 WALKER AVENUE
MONROVIA, CALIFORNIA
91016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(818) 303-7902
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_]
THE REGISTRANT HAS 13,160,920 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE,
ISSUED AND OUTSTANDING AS OF NOVEMBER 12, 1997.
TOTAL NUMBER OF SEQUENTIALLY NUMBERED PAGES IN THIS DOCUMENT: 9
STAAR SURGICAL COMPANY
INDEX
PAGE
NUMBER
------
PART I
Item 1 - Financial Information
Condensed Consolidated Balance Sheets - October 3, 1997 and
January 3, 1997..................................................... 1
Condensed Consolidated Statements of Income - Three and Nine
Months Ended October 3, 1997 and September 27, 1996................. 2
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended October 3, 1997 and September 27, 1996........................ 3
Notes to Condensed Consolidated Financial Statements................... 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 6
PART II
Item 5 - Other Information.................................................... 8
Signature Page....................................................... 9
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
--------
27 Financial Data Schedule
Reports on Form 8-K
-------------------
None
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
OCTOBER 3, JANUARY 3,
ASSETS 1997 1997
------ ----------- -----------
Current assets:
Cash and cash equivalents $ 3,669,387 $ 6,469,515
Accounts receivable, less allowance for doubtful accounts and
estimated returns 8,790,773 6,827,250
Inventories 13,770,360 12,365,867
Prepaid, deposits and other current assets 2,692,682 1,676,611
Deferred income tax 35,092 1,331,075
----------- -----------
Total current assets 28,958,294 28,670,318
----------- -----------
Investment in joint venture 2,575,500 2,464,140
Property, plant and equipment, net 9,283,098 8,920,989
Patents and licenses, net 10,815,462 8,900,236
Other assets 2,079,419 2,163,336
----------- -----------
Total assets $53,711,773 $51,119,019
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable $ 1,225,920 $ 7,489,549
Accounts payable 1,591,000 1,605,026
Current portion of long-term debt 659,194 703,260
Other current liabilities 4,269,579 3,872,750
----------- -----------
Total current liabilities 7,745,693 13,670,585
----------- -----------
Long-term debt 2,970,800 844,050
Other long-term liabilities 40,900 207
----------- -----------
Total liabilities 10,757,393 14,514,842
----------- -----------
Stockholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized;
issued and outstanding 13,184,361 at October 3, 1997 and
13,070,705 at January 3, 1997 131,844 130,707
Capital in excess of par value 42,360,361 41,518,049
Accumulated translation adjustment (420,433) (160,573)
Retained earnings (deficit) 3,208,623 (2,557,991)
----------- -----------
45,280,395 38,930,192
Notes receivable (2,326,015) (2,326,015)
----------- -----------
Total stockholders' equity 42,954,380 36,604,177
----------- -----------
$53,711,773 $51,119,019
=========== ===========
1
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- -----------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Sales $11,574,698 $10,549,025 $33,227,477 $29,905,147
Royalty income 250,000 250,000 736,000 750,000
----------- ----------- ----------- -----------
Total revenues 11,824,698 10,799,025 33,963,477 30,655,147
Cost of sales 2,759,685 2,634,930 7,914,549 7,350,838
----------- ----------- ----------- ----------
Gross profit 9,065,013 8,164,095 26,048,928 23,304,309
Selling, general and administrative expenses:
General and administrative 1,542,404 1,375,060 4,663,330 4,123,192
Marketing and selling 3,212,657 2,997,153 9,400,875 8,926,487
Research and development 963,715 982,227 3,025,069 2,918,534
----------- ----------- ----------- -----------
Total selling, general and administrative expenses: 5,718,776 5,354,440 17,089,274 15,968,213
Operating income 3,346,237 2,809,655 8,959,654 7,336,096
----------- ----------- ----------- -----------
Other income (expense):
Equity in earnings of joint venture 52,427 119,568 171,774 342,541
Interest expense - net (200,048) (172,806) (419,258) (393,904)
Other income (expense) (153,528) (36,449) (202,884) 157,321
----------- ----------- ----------- -----------
Total other income (expense) - net (301,149) (89,687) (450,368) 105,958
Income before income taxes 3,045,088 2,719,968 8,509,286 7,442,054
Income tax provision 981,108 944,929 2,742,672 2,423,934
----------- ----------- ----------- -----------
Net income $ 2,063,980 $ 1,775,039 $ 5,766,614 $ 5,018,120
=========== =========== =========== ===========
Net income per share
Primary $ 0.15 $ 0.13 $ 0.41 $ 0.36
=========== =========== =========== ===========
Fully diluted $ 0.15 $ 0.13 $ 0.41 $ 0.36
=========== =========== =========== ===========
2
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
--------------------------------
OCTOBER 3, SEPTEMBER 27,
1997 1996
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income $ 5,766,614 $ 5,018,120
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment 1,308,940 1,395,368
Amortization of intangibles 1,001,684 377,162
Provision for allowance for doubtful accounts 3,184 67,959
Equity in earnings of joint venture (171,773) (342,541)
Utilization of deferred tax asset 1,295,983 1,415,501
Common stock issued for services 325,000 325,000
Change in operating working capital (4,004,468) (1,697,203)
----------- -----------
Net cash provided by operating activities 5,525,164 6,559,366
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (1,671,050) (2,946,967)
Increase in patents and licenses (2,674,283) (5,260,686)
Increase in other assets (158,710) (31,803)
Dividends received 60,414 -------
----------- -----------
Net cash used in investing activities (4,443,629) (8,239,456)
----------- -----------
Cash flows from financing activities:
Increase in borrowings under notes payable and long-term
debt ------- 2,015,644
Payments on notes payable and long-term debt (1,975,384) (450,245)
Net borrowings (payments) under line of credit (2,164,868) 2,188,259
Proceeds from the issuance of common stock 518,449 822,945
Payments for repurchase of common stock ------- (77,000)
----------- -----------
Net cash (used in) provided by financing activities (3,621,803) 4,499,603
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents (259,860) ------
(Decrease) increase in cash and cash equivalents (2,800,128) 2,819,513
Cash and cash equivalents at beginning of period 6,469,515 3,767,011
----------- -----------
Cash and cash equivalents at end of period $ 3,669,387 $ 6,586,524
=========== ===========
3
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 3, 1997
1. BASIS OF PRESENTATION
The accompanying financial statements consolidate the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Assets and liabilities of
foreign subsidiaries are translated at rates of exchange in effect at the close
of the period. Revenues and expenses are translated at the weighted average of
exchange rates in effect during the period. The resulting gains and losses are
deferred and are shown as a separate component of stockholders' equity. During
the nine-months ended October 3, 1997 and September 27, 1996, foreign currency
transaction gains and losses were not material. Investments in affiliates and
joint ventures are accounted for using the equity method of accounting.
Each of the Company's reporting periods ends on the Friday nearest to the
quarter ending date.
2. EXPORT SALES
During the nine-months ended October 3, 1997 and September 27, 1996, the
Company had export sales primarily to Europe and South Africa, Australia and
Southeast Asia, of approximately $11,207,000 and $8,753,000. Of these sales,
approximately $6,788,000 and $5,150,000 were to Europe, which is the Company's
principal foreign market, for the nine-months ended October 3, 1997 and
September 27, 1996.
The Company sells its products internationally. International transactions
subject the Company to several potential risks, including fluctuating exchange
rates (to the extent the Company's transactions are not in U.S. dollars),
regulation of fund transfers by foreign governments, United States and foreign
export and import duties and tariffs and possible political instability.
3. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market
(net realizable value) and consisted of the following at October 3, 1997 and
January 3, 1997.
OCTOBER 3, JANUARY 3,
1997 1997
----------- -----------
Raw materials and purchased parts...... $ 2,558,482 $ 1,518,819
Work in process........................ 2,105,592 1,644,234
Finished goods......................... 9,106,286 9,202,814
----------- -----------
$13,770,360 $12,365,867
=========== ===========
4. LONG-TERM DEBT
In June 1997, the Company renegotiated its line of credit with its current
lender. Under the new agreement, the Company may borrow up to $10,000,000 on a
revolving basis, at a rate of interest not to exceed the prime interest rate
less .25%. The loan agreement requires the Company to satisfy certain financial
tests and limits the amount of other indebtedness the Company my incur. The
line of credit expires June 1999. Borrowings are uncollateralized. The
refinance of the line of credit resulted in a reclassification of $4.2 million
of debt from short-term to long-term.
4
5. INTERIM FINANCIAL STATEMENTS
The financial statements for the nine-months ended October 3, 1997 and
September 27, 1996 are unaudited and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial condition and results of operations for this
interim period. The results of operations for the nine-months ended October 3,
1997 are not necessarily indicative of the results to be expected for any other
interim period or the entire year.
6. RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 consolidated financial
statements to conform with the 1997 presentation.
7. NEW ACCOUNTING PRONOUNCEMENTS
On March 3, 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, Earnings per Share (SFAS 128). This pronouncement provides a different
method of calculating earnings per share than is currently used in accordance
with APB 15, Earnings per Share. SFAS 128 provides for the calculation of Basic
and Diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to fully diluted earnings per share.
The pronouncement is effective for fiscal years and interim periods ending after
December 15, 1997; early adoption is not permitted. The Company has not
determined the effect, if any, of adoption on its EPS computation(s).
5
PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS:
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented by
certain items reflected in the Company's income statement for the period
indicated and the percentage increase or decrease in such items over the prior
period.
RELATIONSHIP TO
TOTAL REVENUES FOR NINE PERCENTAGE CHANGE
MONTHS ENDED FOR NINE MONTHS
---------------------------- ------------------
OCTOBER 3, SEPTEMBER 27, 1997 VS
1997 1996 1996
---------- ------------- ------------------
INCREASE (DECREASE)
Total revenues.......................... 100.0% 100.0% 10.8%
Cost of sales........................... 23.3 24.0 7.7
Gross profit............................ 76.7 76.0 11.8
Costs and expenses:
General and administrative........ 13.7 13.5 13.1
Marketing and selling............. 27.7 29.1 5.3
Research and development.......... 8.9 9.5 3.7
Total costs and expenses................ 50.3 52.1 7.0
Operating income........................ 26.4 23.9 22.1
Other income (expense), net............. (1.3) .3 -----
Income before income taxes.............. 25.1 24.3 14.3
Income tax provision.................... 8.1 7.9 13.1
----- -----
Net income............... 17.0 16.4 14.9
===== =====
REVENUES:
Revenues for the nine-month period ended October 3, 1997 were $34.0 million,
which is 10.8% greater than the $30.7 million in revenues for the nine-month
period ended September 27, 1996. The increase in revenues was attributable to
(i) a 28.4% rise in international sales reflecting increased demand for the
Company's foldable IOL's and the commercialization of the STAAR Glaucoma
Wick(TM) and implantable contact lens ICL(TM), a deformable intraocular
refractive corrective lens, in selected foreign countries, and (ii) a 4.0%
increase in sales within the United States due to a 6.0% increase in unit volume
of foldable IOL's (primarily the ELASTIMIDE(TM) model), partially offset by a
2.5% general price decrease primarily due to a decrease in prices charged to
certain large volume customers.
COST OF SALES:
Cost of sales decreased to 23.3% of revenues for the nine-months ended October
3, 1997 from 24.0% of revenues for the nine-months ended September 27, 1996. The
principal reasons for this decline were increased operating efficiencies and
economies of scale from increased sales volume. These savings were offset by
price decreases and a product mix change due to an increased demand for the
ELASTIMIDE(TM) IOL, which is relatively more expensive to manufacture.
6
GENERAL & ADMINISTRATIVE:
General and administrative expense increased nominally to 13.7% of revenues
for the nine-months ended October 3, 1997 from 13.5% of revenues for the nine-
months ended September 27, 1996. The increase in general and administrative
expense was attributable to additional administrative infrastructure
expenditures required to support the increase in revenues.
MARKETING AND SELLING:
Marketing and selling expense decreased to 27.7% of revenues for the nine-months
ended October 3, 1997 compared to 29.1% of revenues for the nine-months ended
September 27, 1996. 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.
RESEARCH AND DEVELOPMENT:
Research and development expense decreased to 8.9% of revenues for the nine-
months ending October 3, 1997 compared to 9.5% of revenues for the nine-months
ending September 27, 1996. The Company plans to continue to spend
approximately 10% of revenues on research and development activities.
OTHER INCOME, (EXPENSE) NET:
Other income (expense) for the nine-months ended October 3, 1997 was ($450,000),
or (1.3%) of revenues, as compared to $196,000, or 0.3% of revenues, for the
nine-months ended September 27, 1996. The primary reasons for this decrease
were increased interest expense, losses in translating foreign currency, and a
decline in earnings related to the Company's joint venture with Canon STAAR.
INCOME TAX PROVISION
The effective income tax rate was 32.2 percent for the nine-months ended October
3, 1997 compared to 32.6 percent in the same period last year. The Company's
effective income tax rate is lower than the federal statutory rate because the
undistributed earnings of foreign subsidiaries are not subject to United States
federal or state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents for the quarter ended October 3, 1997 decreased by
approximately $2.8 million relative to the fiscal year ended January 3, 1997.
This decrease was principally due to payments made by the Company on its notes
payable and line-of-credit resulting in a corresponding decrease to those
facilities.
The Company increased its inventories, primarily internationally, to support the
rollout of new products.
In June 1997, the Company renegotiated its line of credit with its current
lender. Under the new agreement, the Company may borrow up to $10,000,000 on a
revolving basis, at a rate of interest not to exceed the prime interest rate
less .25%.
The loan agreement requires the Company to satisfy certain financial tests and
limits the amount of other indebtedness the Company may incur. The line of
credit expires June 1999. Borrowings are uncollateralized.
As of October 3, 1997, the Company had a current ratio of 3.7:1, net working
capital of $21.2 million and net equity of $43.0 million compared to January 3,
1997 when the Company's current ratio was 2.1:1, its net working capital was
$15.0 million, and its net equity was $36.6 million.
The improvement in the Company's current ratio and net working capital is due to
the renegotiation of the line of credit from a one-year to a two-year note
resulting in a reclassification of notes payable from short-term to long-term.
7
During the year, the Company eliminated its deficit position and recorded
retained earnings.
The Company expects to continue to be profitable in the future and the Company
believes that all future cash flow needs will come from cash generated by
operations or additional financing, if required.
PART II - ITEM 5
OTHER INFORMATION
During the quarter ended July 4, 1997, the Company acquired a distributor of
ophthalmic products in Europe.
During the quarter ended October 3, 1997, the Company was granted the European
"CE Mark" of approval on its Toric intraocular lens (IOL); the implantable
contact lens ICL, a deformable intraocular refractive corrective lens; the STAAR
Glaucoma Wick(TM); and StaarVisc(TM), a viscoelastic solution.
Also during the quarter ended October 3, 1997, the Company completed Phase I
clinical trials for the ICL(TM), a deformable intraocular refractive corrective
lens, and received Food and Drug Administration (FDA) release to begin Phase II
of its clinical trials.
Subsequent to the quarter ended October 3, 1997, the Company was given approval
by the FDA to begin human clinical trials in the United States on the STAAR
Glaucoma Wick(TM).
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
27 Financial Data Schedule
REPORTS ON FORM 8-K
None
8
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
STAAR SURGICAL COMPANY
Date: November 12, 1997 By: /s/ WILLIAM C. HUDDLESTON
-----------------------------
William C. Huddleston
Chief Financial Officer and
Duly Authorized Officer
(principal accounting and financial
officer for the quarter)
9