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: JULY 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 13,431,287 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE,
ISSUED AND OUTSTANDING AS OF AUGUST 3, 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 - July 3, 1998 and
January 2, 1998......................................... 1
Condensed Consolidated Statements of Income - Three and
Six Months Ended July 3, 1998 and July 4, 1997.......... 2
Condensed Consolidated Statements of Cash Flows - Six
Months Ended July 3, 1998 and July 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)
JULY 3, JANUARY 2,
ASSETS 1998 1998
------ ----------- -----------
Current assets:
Cash and cash equivalents $ 3,734,705 $ 6,279,136
Accounts receivable, less allowance for doubtful accounts 9,998,892 7,983,399
Other receivable - 3,250,000
Inventories 20,152,471 14,712,398
Prepaid, deposits and other current assets 3,044,565 2,006,075
Deferred income tax 1,131,065 1,182,136
----------- -----------
Total current assets 38,061,698 35,413,144
----------- -----------
Investment in joint venture 3,116,217 2,740,163
Property, plant and equipment, net 10,703,399 10,024,181
Patents and licenses, net 11,722,033 11,121,436
Goodwill, net 4,945,117 967,789
Other assets 2,679,567 2,124,168
----------- -----------
Total assets $71,228,031 $62,390,881
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable $ 747,125 $ 983,276
Accounts payable 4,719,262 1,528,436
Current portion of long-term debt 328,292 624,698
Deferred income tax 3,174,000 3,174,000
Other current liabilities 4,869,464 4,166,963
----------- -----------
Total current liabilities 13,838,143 10,477,373
----------- -----------
Long-term debt 8,144,790 5,750,478
Other long-term liabilities 1,253,317 1,380,246
----------- -----------
Total liabilities 23,236,250 17,608,097
Minority interest 637,831 -
Stockholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized;
issued and outstanding 13,278,350 at July 3, 1998 and
13,246,161 at January 2, 1998 132,784 132,462
Capital in excess of par value 42,903,903 42,810,700
Accumulated translation adjustment (1,416,039) (695,502)
Retained earnings 8,059,317 4,861,139
----------- -----------
49,679,965 47,108,799
Notes receivable (2,326,015) (2,326,015)
----------- -----------
Total stockholders' equity 47,353,950 44,782,784
----------- -----------
$71,228,031 $62,390,881
=========== ===========
1
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- -------------------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Sales $13,924,807 $11,348,036 $27,967,640 $21,652,779
Royalty income 58,035 236,000 116,071 486,000
----------- ----------- ----------- -----------
Total revenues 13,982,842 11,584,036 28,083,711 22,138,779
Cost of sales 3,827,952 2,695,498 8,111,641 5,154,864
----------- ----------- ----------- -----------
Gross profit 10,154,890 8,888,538 19,972,070 16,983,915
----------- ----------- ----------- -----------
Selling, general and administrative expenses:
General and administrative 1,680,681 1,604,812 3,362,644 3,120,926
Marketing and selling 4,795,034 3,318,839 9,180,033 6,188,218
Research and development 937,983 1,070,012 1,954,702 2,061,354
----------- ----------- ----------- -----------
Total selling, general and administrative expenses: 7,413,698 5,993,663 14,497,379 11,370,498
----------- ----------- ----------- -----------
Operating income 2,741,192 2,894,875 5,474,691 5,613,417
----------- ----------- ----------- -----------
Other income (expense):
Equity in earnings of joint venture 226,000 50,400 376,054 119,347
Interest expense - net (112,955) (103,792) (296,828) (219,210)
Other income (expense) (165,773) 36,464 (230,715) (49,356)
----------- ----------- ----------- -----------
Total other expense - net (52,728) (16,928) (151,489) (149,219)
----------- ----------- ----------- -----------
Income before income taxes 2,688,464 2,877,947 5,323,202 5,464,198
Income tax provision 934,253 924,721 1,778,034 1,761,564
Minority interest 230,921 - 346,990 -
----------- ----------- ----------- -----------
Net income $ 1,523,290 $ 1,953,226 $ 3,198,178 $ 3,702,634
=========== =========== =========== ===========
Net income per share
Basic $ .11 $ .15 $ .24 $ .28
=========== =========== =========== ===========
Diluted $ .11 $ .14 $ .22 $ .27
=========== =========== =========== ===========
Weighted average number of shares outstanding
Basic 13,262,261 13,079,994 13,262,261 13,079,994
=========== =========== =========== ===========
Diluted 14,240,167 13,930,909 14,240,167 13,930,909
=========== =========== =========== ===========
2
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
------------------------------
JULY 3, JULY 4,
1998 1997
----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
Cash flows from operating
activities:
Net income $ 3,198,178 $ 3,702,634
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation of property and equipment 1,161,575 849,419
Amortization of intangibles 1,244,194 628,661
Change in deferred revenue (116,071) (486,000)
Minority interest 346,987 ---
Common stock issued for services --- 325,000
Equity in earnings of joint venture (376,054) (119,347)
Deferred income taxes 51,071 770,019
Change in operating working capital, excluding effects of
acquisitions (1,165,811) (2,258,232)
----------- -----------
Net cash provided by operating activities 4,344,069 3,412,154
----------- -----------
Cash flows from investing
activities:
Acquisition of property and equipment (1,331,677) (1,164,505)
Increase in patents and licenses (1,139,044) (2,145,642)
Acquisition of a foreign distributor, net of cash acquired (4,199,592) ---
Increase in other assets (1,028,386) (279,963)
Dividends received --- 60,414
----------- -----------
Net cash used in investing activities (7,698,699) (3,529,696)
----------- -----------
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 (1,158,555) (1,879,577)
Net payments under line of credit (1,779,396) (635,439)
Proceeds from the exercise of stock options 93,525 35,729
----------- -----------
Net cash provided by (used in) financing activities 1,530,736 (2,479,287)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (720,537) 139,997
----------- -----------
Decrease in cash and cash equivalents (2,544,431) (2,456,832)
----------- -----------
Cash and cash equivalents at beginning of period 6,279,136 6,469,515
----------- -----------
Cash and cash equivalents at end of period $ 3,734,705 $ 4,012,683
=========== ===========
3
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1998
1. BASIS OF PRESENTATION
The accompanying financial statements consolidate the accounts of the Company
its wholly-owned subsidiaries and its 60% owned foreign subsidiary. 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 six-months ended July 3, 1998 and
July 4, 1997, the net foreign translation (loss)/gain was ($720,537) and
$139,997 and net foreign currency transaction loss was $43,820 and $113,000.
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 six-months ended July 3, 1998 and July 4, 1997, the Company had
export sales primarily to Europe, South Africa, South America, Australia and
Southeast Asia of approximately $15,064,000 and $6,985,000. Of these sales,
approximately $12,645,000 and $4,209,000 were to Europe, which is the Company's
principal foreign market, for the six-months ended July 3, 1998 and July 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 July 3, 1998 and
January 2, 1998:
JULY 3, JANUARY 2,
1998 1998
----------- -----------
Raw materials and purchased parts $ 2,593,943 $ 1,976,467
Work in process 2,011,916 1,736,339
Finished goods 15,546,612 10,999,592
----------- -----------
$20,152,471 $14,712,398
=========== ===========
4. INTERIM FINANCIAL STATEMENTS
The financial statements for the six-months ended July 3, 1998 and July 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 six-months ended July 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
SIX MONTHS ENDED PERCENTAGE CHANGE
------------------- FOR SIX MONTHS
JULY 3, JULY 4, -----------------
1998 1997 1998 VS 1997
------- ------- -----------------
INCREASE (DECREASE)
Total revenues......................... 100.0% 100.0% 26.9%
Cost of sales.......................... 28.9 23.3 57.4
----- -----
Gross profit........................... 71.1 76.7 17.6
Costs and expenses:
General and administrative........ 12.0 14.1 7.7
Marketing and selling............. 32.7 28.0 48.3
Research and development.......... 7.0 9.3 (5.2)
----- -----
Total costs and expenses..... 51.6 51.4 27.5
Other expense, net..................... (0.5) (0.7) 1.5
----- -----
Income before income taxes............. 19.0 24.7 (2.6)
Income tax provision................... 6.3 8.0 .9
Minority interest...................... 1.2 -- 100.0
Net income.............. 11.4% 16.7% (13.6%)
===== =====
REVENUES
- --------
Revenues for the six-month period ended July 3, 1998 were $28.1 million,
which is 26.9% greater than the $22.1 million in revenues for the six-month
period ended July 4, 1997. The increase in revenues was attributable to an
increase in international sales of $8.8 million from foreign subsidiaries
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 six-months ended July 3,1998, the Company
recorded $370,000 less royalty revenue as compared to the same period of 1997.
COST OF SALES
- -------------
Cost of sales increased to 28.9% of revenues for the six-months ended
July 3, 1998 from 23.3% of revenues for the six-months ended July 4, 1997. The
increase as a percentage of revenue was due to higher cost of sales of non-
manufactured product from a new foreign subsidiary. As the subsidiary's
product mix changes to include more product manufactured by the Company, the
Company expects cost of sales as a percentage of revenue to decline.
6
GENERAL AND ADMINISTRATIVE
- --------------------------
General and administrative expense decreased to 12.0% of revenues for
the six-months ended July 3, 1998 from 14.1% of revenues for the six-months
ended July 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 32.7% of revenues for the six-
months ended July 3, 1998 compared to 28.0% of revenues for the six-months
ended July 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 7.0% of revenues for the
six-months ended July 3, 1998, compared to 9.3% of revenues for the six-months
ended July 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 EXPENSE, NET
- ------------------
Other expense, net for the six-months ended July 3, 1998 was ($151,000),
or (0.5%) of revenues, as compared to ($149,000), or (0.7%) of revenues, for the
six-months ended July 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 July 3, 1998 and July 4, 1997 was
33% and 32%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents for the six-months ended July 3, 1998 decreased
by approximately $2.5 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 and payments
made on notes payable and long-term debt.
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 subsidiary during the first quarter.
As of July 3, 1998, the Company had a current ratio of 2.8:1, net working
capital of $24.2 million and net equity of $47.4 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's management understands the importance of identifying and
addressing Year 2000 compliance issues and places a high priority on the
project. Accordingly, a task force has been established which is assessing
internal operations and the operations of significant suppliers, vendors, and
other providers of goods or services. Although the assessment of Year 2000
issues is not complete, the certification process has begun and based on
7
preliminary findings the Company expects internal systems to be compliant by the
Year 2000 without material impact to financial position, results of operations
or cash flows.
The Company is contacting certain suppliers, vendors, and other providers of
goods or services to determine their ability to do business upon the year 2000
and have included Year 2000 considerations in the vendor selection/certification
process. The Company is also developing contingency plans in the event that the
Year 2000 does impact critical suppliers or vendors. The Company believes with
proper planning, Year 2000 issues of suppliers and vendors should not have a
material affect on the operations of the Company.
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
- -----------------
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: August 11, 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