UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: APRIL 3, 1998
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)
(626) 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 13,278,342 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE,
ISSUED AND OUTSTANDING AS OF MAY 11, 1998.
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 - April 3, 1998 and
January 2, 1998....................................................... 1
Condensed Consolidated Statements of Income - Three Months Ended
April 3, 1998 and April 4, 1997....................................... 2
Condensed Consolidated Statements of Cash Flows - Three Months Ended
April 3, 1998 and April 4, 1997....................................... 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)
APRIL 3, JANUARY 2,
1998 1998
---- ----
ASSETS
------
Current assets:
Cash and cash equivalents $ 3,593,960 $ 6,279,136
Accounts receivable, less allowance for doubtful accounts 9,736,983 7,983,399
Other receivable - 3,250,000
Inventories 18,877,261 14,712,398
Prepaid, deposits and other current assets 2,798,276 2,006,075
Deferred income tax 1,178,112 1,182,136
------------ ------------
Total current assets 36,184,592 35,413,144
------------ ------------
Investment in joint venture 2,890,217 2,740,163
Property, plant and equipment, net 10,618,889 10,024,181
Patents and licenses, net 11,375,854 11,121,436
Goodwill, net 5,032,441 967,789
Other assets 3,006,818 2,124,168
------------ ------------
Total assets $ 69,108,811 $ 62,390,881
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable $ 667,809 $ 983,276
Accounts payable 5,100,152 1,528,436
Current portion of long-term debt 455,654 624,698
Deferred income tax 3,174,000 3,174,000
Other current liabilities 5,351,338 4,166,963
------------ ------------
Total current liabilities 14,748,953 10,477,373
------------ ------------
Long-term debt 6,472,640 5,750,478
Minority interest 406,910 -
Other long-term liabilities 1,308,024 1,380,246
------------ ------------
Total liabilities 22,936,527 17,608,097
------------ ------------
Stockholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized;
issued and outstanding 13,266,740 at April 3, 1998 and
13,246,161 at January 2, 1998 132,667 132,462
Capital in excess of par value 42,915,994 42,810,700
Accumulated translation adjustment (1,086,389) (695,502)
Retained earnings 6,536,027 4,861,139
------------ ------------
48,498,299 47,108,799
Notes receivable (2,326,015) (2,326,015)
------------ ------------
Total stockholders' equity 46,172,284 44,782,784
------------ ------------
$ 69,108,811 $ 62,390,881
============ ============
1
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
------------------------------
APRIL 3, 1998 APRIL 4, 1997
------------- -------------
Sales $ 14,042,833 $ 10,304,743
Royalty income 58,036 250,000
------------ ------------
Total revenues 14,100,869 10,554,743
Cost of sales 4,283,689 2,459,366
------------ ------------
Gross profit 9,817,180 8,095,377
------------ ------------
Selling, general and administrative expenses:
General and administrative 1,681,963 1,516,114
Marketing and selling 4,384,999 2,869,379
Research and development 1,016,719 991,343
------------ ------------
Total selling, general and administrative expenses 7,083,681 5,376,836
------------ ------------
Operating income 2,733,499 2,718,541
------------ ------------
Other income (expense):
Equity in earnings of joint venture 150,054 68,947
Interest expense - net (183,873) (115,418)
Other expense - net (64,942) (85,820)
------------ ------------
Total other income (expense) - net (98,761) (132,291)
------------ ------------
Income before income taxes 2,634,738 2,586,250
Income tax provision 843,781 836,843
Minority interest 116,069 -
------------ ------------
Net income $ 1,674,888 $ 1,749,407
=========== ===========
Net income per share
Basic $ .13 $ .13
=========== ===========
Diluted $ .12 $ .13
=========== ===========
2
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
---------------------------------
APRIL 3, APRIL 4,
1998 1997
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income $ 1,674,888 $ 1,749,407
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property and equipment 477,845 421,053
Amortization of intangibles 842,144 416,073
Change in deferred revenue (58,036) (250,000)
Equity in earnings of joint venture (150,054) (68,947)
Deferred income taxes 4,024 550,000
Change in operating working capital, excluding effects of
acquisitions 1,480,361 (1,461,355)
----------- -----------
Net cash provided by operating activities 4,271,172 1,356,231
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (563,437) (471,996)
Increase in patents and licenses (496,695) (948,183)
Acquisition of a foreign distributor,
net of cash acquired (4,290,255) -
(Increase) decrease in other assets (1,130,351) 194,714
----------- -----------
Net cash used in investing activities (6,480,738) (1,225,465)
----------- -----------
Cash flows from financing activities:
Increase in borrowings under notes payable and long-term debt 4,375,162 ---
Payments on other notes payable and long-term debt (858,444) (1,358,683)
Net payments under line of credit (3,706,940) (1,269,578)
Proceeds from the exercise of stock options 105,499 22,510
----------- -----------
Net cash used in financing activities (84,723) (2,605,751)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (390,887) 4,366
----------- -----------
Decrease in cash and cash equivalents (2,685,176) (2,470,619)
Cash and cash equivalents at beginning of period 6,279,136 6,469,515
----------- -----------
Cash and cash equivalents at end of period $ 3,593,960 $ 3,998,896
=========== ===========
3
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 1998
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 three-months ended April 3, 1998 and April 4, 1997, the net foreign
translation (loss)/gain was ($390,887) and $4,366 and net foreign currency
transaction gain/(loss) was $29,286 and ($100,000). 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 three-months ended April 3, 1998 and April 4, 1997, the Company
had export sales primarily to Europe, South Africa, Australia and Southeast Asia
of approximately $7,642,000 and $3,023,000. Of these sales, approximately
$6,160,000 and $2,045,000 were to Europe, which is the Company's principal
foreign market, for the quarters ended April 3, 1998 and April 4, 1997.
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 April 3, 1998 and
January 2, 1998:
APRIL 3, JANUARY 2,
1998 1998
----------- -----------
Raw materials and purchased parts...... $ 2,449,364 $ 1,976,467
Work in process........................ 1,934,878 1,736,339
Finished goods......................... 14,493,019 10,999,592
----------- -----------
$18,877,261 $14,712,398
=========== ===========
4. INTERIM FINANCIAL STATEMENTS
The financial statements for the three-months ended April 3, 1998 and April 4,
1997 are unaudited and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial condition and results of operations for this
interim period. The results of operations for the three-months ended April 3,
1998 are not necessarily indicative of the results to be expected for any other
interim period or the entire year.
4
5. RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform with the 1998 presentation.
6. BUSINESS ACQUISITIONS
On January 5, 1998, the Company acquired a 60% interest in a foreign
distributor of ophthalmic products. Total consideration for the acquisition of
the majority interest was approximately $4.6 million and resulted in the
recording of goodwill of approximately $4.1 million. The distributor had 1997
sales of approximately $15 million. The results of operations of the
distributor are not material as compared to the Company's results of
operations.
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.
PERCENTAGE OF
TOTAL REVENUES FOR
THREE PERCENTAGE CHANGE
MONTHS ENDED FOR THREE MONTHS
-------------------- -----------------
APRIL 3, APRIL 4,
1998 1997 1998 VS 1997
-------- ------- ------------------
INCREASE (DECREASE)
Total revenues.......................... 100.0% 100.0% 33.6%
Cost of sales........................... 30.4 23.3 74.2
----- -----
Gross profit............................ 69.6 76.7 21.3
Costs and expenses:
General and administrative.......... 11.9 14.4 10.9
Marketing and selling.............. 31.1 27.2 52.8
Research and development........... 7.2 9.4 2.6
----- -----
Total costs and expenses...... 50.2 50.9 31.7
Other expense, net...................... (.7) (1.3) (25.3)
----- -----
Income before income taxes.............. 18.7 24.5 1.9
Income tax provision.................... 6.0 7.9 .8
Net income............... 11.9% 16.6% (4.3)%
----- -----
REVENUES
- --------
Revenues for the three-month period ended April 3, 1998 were $14.1
million, which is 33.6% greater than the $10.6 million in revenues for the
three-month period ended April 4, 1997. The increase in revenues was
attributable to an increase in international sales of $4.2 million from foreign
distributors acquired or formed during the past year and continued increasing
international sales of the Company's new products, primarily the Implantable
Contact Lens, a deformable intraocular refractive corrective lens, and the
Glaucoma Wick. These increases were partially offset by lower sales of the
Company's intraocular lenses (IOL's) and lower average selling prices for IOL's
due to competitive pressures. Additionally, during the first quarter of 1998,
the Company recorded $192,000 less royalty revenue as compared to the same
period of 1997.
COST OF SALES
- -------------
Cost of sales increased to 30.4% of revenues for the three-months ended
April 3, 1998 from 23.3% of revenues for the three-months ended April 4, 1997.
The increase as a percentage of revenue was due to revenue from the new foreign
distributors, having cost of sales as of percentage of sales that are typical
for a distribution company. As the distributors product mix changes to include
more product manufactured by the Company, the Company expects cost of sales as a
percentage of sales to decline. Without the effect of the new distributors,
cost of sales as percentage of revenue for the first quarter of 1998 was in line
with the first quarter of 1997 due to continuing manufacturing efficiencies,
despite lower average selling prices of the Company's IOL's.
6
GENERAL & ADMINISTRATIVE
- ------------------------
General and administrative expense decreased to 11.9% of revenues for
the three-months ended April 3, 1998 from 14.4% of revenues for the three-months
ended April 4, 1997. The decline in general and administrative expense as a
percentage of revenues was attributable to the significant increase in revenues
permitting greater absorption of general and administrative costs. The increase
in general 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 increased to 31.1% of revenues for the
three-months ended April 3, 1998 compared to 27.2% of revenues for the three-
months ended April 4, 1997. The increase in marketing and selling expense as a
percentage of revenues was attributable to marketing and selling expenses of the
new foreign distributors.
RESEARCH AND DEVELOPMENT
- ------------------------
Research and development expense decreased to 7.2% of revenues for the
first quarter ending April 3, 1998, compared to 9.4% of revenues for the first
quarter ending April 4, 1997. While actual spending was consistent with the
same period in prior year, the decline as a percent of revenues was due to the
significant increase in revenues.
OTHER INCOME (EXPENSE), NET
- ---------------------------
Other income (expense) for the quarter ended April 3, 1998 was ($99,000),
or (.7)% of revenues, as compared to ($132,000), or (1.3%) of revenues, for the
quarter ended April 4, 1997. The primary reasons for this change were increased
interest expenses, offset by decreased losses in foreign currency transactions,
and an increase in earnings related to the Company's joint venture with Canon
STAAR.
INCOME TAX PROVISION (INCOME TAXES)
- -----------------------------------
The Company's effective income tax rate at April 3, 1998 and April 4, 1997
was 32%.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents for the quarter ended April 3, 1998 decreased by
approximately $2.7 million relative to the fiscal year ended January 2, 1998.
This decrease was principally due to payments made by the Company on its line-
of-credit resulting in a corresponding decrease to that facility.
The Company increased its inventories, primarily internationally, to
support the rollout of new products and to stock the new distributors.
Goodwill and accounts payable increased significantly with the addition of
a foreign distributor during the quarter.
As of April 3, 1998, the Company had a current ratio of 2.5:1, net working
capital of $21.4 million and net equity of $46.2 million compared to January 2,
1998 when the Company's current ratio was 3.4:1, its net working capital was
$24.9 million, and its net equity was $44.8 million.
The Company expects to continue to be profitable in the future and the
Company believes that all future cash flow needs will come from cash generated
by operations or additional financing, if required.
7
PART II - ITEM 5
OTHER INFORMATION
- -----------------
None
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: May 15, 1998 By: /s/ WILLIAM C. HUDDLESTON
--------------------------------
William C. Huddleston
Chief Financial Officer and
Duly Authorized Officer
(principal accounting and
financial
officer for the quarter)
9