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 2, 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 13,458,110 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE,
ISSUED AND OUTSTANDING AS OF NOVEMBER 12, 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 - October 2, 1998 and
January 3, 1998............................................................. 1
Condensed Consolidated Statements of Operations - Three and Nine Months Ended
October 2, 1998 and October 3, 1997......................................... 2
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
October 2, 1998 and October 3, 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)
OCTOBER 2, JANUARY 2,
ASSETS 1998 1998
---------- ------------ ------------
Current assets:
Cash and cash equivalents $ 3,239,734 $ 6,279,136
Accounts receivable, less allowance for doubtful accounts 9,690,018 7,983,399
Other receivable --- 3,250,000
Inventories 20,673,202 14,712,398
Prepaid, deposits and other current assets 3,721,494 2,006,075
Deferred income tax 1,131,065 1,182,136
------------ ------------
Total current assets 38,455,513 35,413,144
------------ ------------
Investment in joint venture 3,104,832 2,740,163
Property, plant and equipment, net 10,275,624 10,024,181
Patents and licenses, net 11,951,158 11,121,436
Goodwill, net 4,989,343 967,789
Other assets 1,484,383 2,124,168
------------ ------------
Total assets $ 70,260,853 $ 62,390,881
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable $ 829,003 $ 983,276
Accounts payable 4,834,099 1,528,436
Current portion of long-term debt 289,015 624,698
Deferred income tax 3,174,000 3,174,000
Other current liabilities 2,738,156 4,166,963
------------ ------------
Total current liabilities 11,864,273 10,477,373
------------ ------------
Long-term debt 9,634,654 5,750,478
Other long-term liabilities 1,218,100 1,380,246
------------ ------------
Total liabilities 22,717,027 17,608,097
------------ ------------
Minority interest 751,533 -
Stockholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized;
issued and outstanding 13,994,593 at October 2, 1998 and
13,246,161 at January 2, 1998 139,946 132,462
Capital in excess of par value 46,037,388 42,810,700
Accumulated translation adjustment (907,590) (695,502)
Retained earnings 6,776,712 4,861,139
------------ ------------
52,046,456 47,108,799
Notes receivable (5,254,163) (2,326,015)
------------ ------------
Total stockholders' equity 46,792,293 44,782,784
------------ ------------
$ 70,260,853 $ 62,390,881
============ ============
1
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Sales $ 12,843,472 $ 11,574,698 $ 40,811,112 $ 33,227,477
Royalty income 58,036 250,000 174,107 736,000
------------ ------------ ------------ ------------
Total revenues 12,901,508 11,824,698 40,985,219 33,963,477
Cost of sales 4,578,228 2,759,685 12,689,869 7,914,549
------------ ------------ ------------ ------------
Gross profit 8,323,280 9,065,013 28,295,350 26,048,928
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
General and administrative 1,741,204 1,542,404 5,103,848 4,663,330
Marketing and selling 4,362,354 3,212,657 13,542,387 9,400,875
Research and development 858,710 963,715 2,813,412 3,025,069
------------ ------------ ------------ ------------
Total selling, general and administrative expenses: 6,962,268 5,718,776 21,459,647 17,089,274
------------ ------------ ------------ ------------
Operating income 1,361,012 3,346,237 6,835,703 8,959,654
------------ ------------ ------------ ------------
Other income (expense):
Equity in earnings of joint venture (11,385) 52,427 364,669 171,774
Interest expense - net (190,698) (200,048) (487,526) (419,258)
Other expense - net (240,473) (153,528) (471,188) (202,884)
------------ ------------ ------------ ------------
Total other (expense) - net (442,556) (301,149) (594,045) (450,368)
------------ ------------ ------------ ------------
Income before income taxes, minority interest and
cumulative effect of change in accounting method 918,456 3,045,088 6,241,658 8,509,286
Income tax provision 406,546 981,108 2,184,580 2,742,672
Minority interest 113,702 - 460,692 -
------------ ------------ ------------ ------------
Income before cumulative effect of change in
accounting method 398,208 2,063,980 3,596,386 5,766,614
Cumulative effect of change in accounting
method, writeoff of start-up costs (1,680,813) - (1,680,813) -
------------ ------------ ------------ ------------
Net income (loss) $ (1,282,605) $ 2,063,980 $ 1,915,573 $ 5,766,614
============ ============ ============ ============
Basic earnings (loss) per share:
Income before cumulative effect of change in
accounting method $ 0.03 $ 0.16 $ 0.27 $ 0.43
Cumulative effect of change in accounting
method, writeoff of start-up costs $ (0.13) $ - $ (0.13) $ -
------------ ------------ ------------ ------------
Net income (loss) $ (0.10) $ 0.16 $ 0.14 $ 0.43
============ ============ ============ ============
Weighted average number of shares outstanding 13,349,654 13,293,084 13,349,654 13,293,084
============ ============ ============ ============
Dilutive earnings (loss) per share:
Income before cumulative effect of change in
accounting method $ 0.03 $ 0.15 $ 0.25 $ 0.41
Cumulative effect of change in accounting
method, writeoff of start-up costs $ (0.13) $ - $ (0.12) $ -
------------ ------------ ------------ ------------
Net income (loss) $ (0.10) $ 0.15 $ 0.14 $ 0.41
============ ============ ============ ============
Weighted average number of shares outstanding 13,349,654 14,030,662 14,175,556 14,030,662
============ ============ ============ ============
2
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
--------------------------------
OCTOBER 2, OCTOBER 3,
1998 1997
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income $ 1,915,573 $ 5,766,614
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property and equipment 1,697,467 1,308,940
Amortization of intangibles 1,889,268 1,001,684
Change in deferred revenue (174,107) (486,000)
Minority interest 460,692 ---
Common stock issued for services 127,501 325,000
Stock based compensation expense 85,000 ---
Equity in earnings of joint venture (364,669) (171,773)
Deferred income taxes 51,071 1,295,983
Change in operating working capital, excluding effects of acquisition (4,071,068) (3,515,284)
----------- -----------
Net cash provided by operating activities 1,616,728 5,525,164
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,439,794) (1,671,050)
Increase in patents and licenses (1,694,208) (2,674,283)
Acquisition of a foreign distributor, net of cash acquired (4,396,562) ---
Decrease (increase) in other assets 532 (158,710)
Dividends received --- 60,414
----------- -----------
Net cash used in investing activities (7,530,032) (4,443,629)
----------- -----------
Cash flows from financing activities:
Increase in borrowings under notes payable and long-term debt 4,605,748 ---
Payments on other notes payable and long-term debt (1,385,225) (1,975,384)
Net payments under line of credit (228,056) (2,164,868)
Proceeds from the exercise of stock options 93,523 518,449
----------- -----------
Net cash provided by (used in) financing activities 3,085,990 (3,621,803)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (212,088) (259,860)
----------- -----------
Decrease in cash and cash equivalents (3,039,402) (2,800,128)
Cash and cash equivalents at beginning of period 6,279,136 6,469,515
----------- -----------
Cash and cash equivalents at end of period $ 3,239,734 $ 3,669,387
=========== ===========
3
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 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 nine-months ended October 2, 1998
and October 3, 1997, the net foreign translation (loss)/gain was ($212,088) and
($259,860) and net foreign currency transaction loss was ($198,847) and
($177,182). 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 2, 1998 and October 3, 1997, the
Company had export sales primarily to Europe, South Africa, South America,
Australia and Southeast Asia of approximately $22,453,000 and $11,207,000. Of
these sales, approximately $17,669,000 and $6,788,000 were to Europe, which is
the Company's principal foreign market, for the nine-months ended October 2,
1998 and October 3, 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 October 2, 1998 and
January 2, 1998:
OCTOBER 2, JANUARY 2,
1998 1998
------------ ------------
Raw materials and purchased parts............................... $ 2,237,340 $ 1,976,467
Work in process................................................. 2,793,602 1,736,339
Finished goods.................................................. 15,642,260 10,999,592
------------ ------------
$ 20,673,202 $ 14,712,398
============ ============
4. INTERIM FINANCIAL STATEMENTS
The financial statements for the nine-months ended October 2, 1998 and
October 3, 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 nine-months ended October 2,
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 were not material as compared to the Company's results of
operations.
7. START-UP COSTS
During the quarter ended October 2, 1998, the Company adopted Statement of
Position 98-5 "Reporting on the Costs of Start-up Activities" (SOP 98-5) issued
by the American Institute of Certified Public Accountants. SOP 98-5 requires
that the costs of start-up activities, including organization costs, be expensed
as incurred. Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, initiating a new process in an existing facility, or
commencing some new operation.
Although SOP 98-5 is effective for fiscal years beginning after December
15, 1998, earlier application is encouraged. Accordingly, the Company elected to
write-off the $1.7 million (net of tax benefit) of start-up costs that had been
previously capitalized. In accordance with SOP 98-5, the write-off of such costs
are being reported as a cumulative effect of change in accounting method. Also,
in accordance with SOP 98-5, prior periods have not been restated.
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 statement of operations
for the period indicated and the percentage increase or decrease in such items
over the prior period.
PERCENTAGE OF
TOTAL REVENUES FOR NINE PERCENTAGE CHANGE
MONTHS ENDED FOR NINE MONTHS
------------------------ ------------------
OCTOBER 2, OCTOBER 3,
1998 1997 1998 VS 1997
---------- ---------- ------------------
INCREASE (DECREASE)
Total revenues 100.0% 100.0% 20.7%
Cost of sales 31.0 23.3 60.3
----- -----
Gross profit 69.0 76.7 8.6
Costs and expenses:
General and administrative 12.5 13.7 9.4
Marketing and selling 33.0 27.7 44.1
Research and development 6.9 8.9 (7.0)
----- -----
Total costs and expenses 52.4 50.3 25.6
Other expense, net (1.4) (1.3) 31.9
----- -----
Income before income taxes 15.2 25.1 (26.6)
Income tax provision 5.3 8.1 (20.3)
Minority interest........................... 1.1 -- 100.0
Cumulative effect of change in accounting
method..................................... (4.1) -- 100.0
Net income 4.7% 17.0% (66.8)%
===== ===== =====
REVENUES
- - --------
Revenues for the nine-month period ended October 2, 1998 were $41.0
million, which is 20.7% greater than the $34.0 million in revenues for the nine-
month period ended October 3, 1997. The increase in revenues was attributable to
an increase in international sales of $13.3 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 AquaFlo, collagen
glaucoma drainage device. 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 nine-months ended
October 2, 1998, the Company recorded $562,000 less royalty revenue as compared
to the same period of 1997.
COST OF SALES
- - -------------
Cost of sales increased to 31.0% of revenues for the nine-months ended
October 2, 1998 from 23.3% of revenues for the nine-months ended October 3,
1997. The increase as a percentage of revenue was due to higher cost of sales
of non-manufactured product from new foreign subsidiaries. As the
subsidiaries' 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 12.5% of revenues for the
nine-months ended October 2, 1998 from 13.7% of revenues for the nine-months
ended October 3, 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 33.0% of revenues for the nine-
months ended October 2, 1998 compared to 27.7% of revenues for the nine-months
ended October 3, 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 6.9% of revenues for the
nine-months ended October 2, 1998, compared to 8.9% of revenues for the nine-
months ended October 3, 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 nine-months ended October 2, 1998 was ($594,000)
or (1.4%) of revenues, as compared to ($450,000) , or (1.3%) of revenues, for
the nine-months ended October 3, 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 October 2, 1998 and October 3,
1997 was 35% and 32%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
Cash and cash equivalents for the nine-months ended October 2, 1998
decreased by approximately $3.0 million relative to the fiscal year ended
January 2, 1998.
The Company increased its inventories, primarily internationally, to
support the rollout of new products and to stock the new distributors.
Prepaid, deposit and other curent assets, goodwill, accounts payable, and
long-term debt increased significantly with the addition of a foreign subsidiary
during the first quarter.
During the third quarter, 4 officers and a director exercised 563,342
previously issued stock options at various prices in exchange for notes totaling
$2,928,148.
As of October 2, 1998, the Company had a current ratio of 3.2:1, net
working capital of $26.6 million and net equity of $46.8 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.
YEAR 2000 COMPLIANCE
- - --------------------
The Company's management understands the importance of identifying and
addressing Year 2000 compliance issues and places a high priority on the
project. Accordingly, the Company's Year 2000 efforts are guided by a special
Year 2000 Steering Committee which reports to the President of the Company. The
Steering committee is made of up of designees of each department within the
Company and includes representatives of its foreign subsidiaries. The Committee
meets on a regular basis to discuss the progress of each department in achieving
its Year 2000 goals and to discuss new information.
7
The Company has developed a comprehensive plan for achieving Year 2000
compliance that is consistent with the five-step process prescribed by federal
regulators as follows:
. AWARENESS - Creating and maintaining awareness of the Company's Year 2000
effort at all levels of the organization.
. ASSESSMENT - Determining which computers, operating systems, applications,
machinery and equipment and facilities are impacted and prioritizing the
remediation effort.
. RENOVATION - This is the actual "fix it" phase, which is now under way.
. VALIDATION - The testing and certification phase is expected to be
completed by April 1999.
. IMPLEMENTATION - Implementation of validated systems is expected to be
completed by June 1999.
In addition to reviewing its internal systems, the Company is contacting
suppliers, vendors, and other providers of goods and services to determine their
ability to do business in the Year 2000 and have included Year 2000
considerations in the vendor selection/certification process. The Company
expects this process to be ongoing as companies progress with their own Year
2000 issues. In any event, contingency plans are being developed in the event
that the Year 2000 does impact critical suppliers or vendors.
The Company's costs of achieving Year 2000 compliance to date have been
immaterial to financial position, results of operations or cash flows. The
Company does not anticipate that additional amounts incurred in connection with
its Year 2000 compliance program will be material to its financial condition or
results of operations.
Due to the uncertainties involved, the Company cannot predict the impact of
the Year 2000 on its operations. Achieving Year 2000 compliance is dependent on
many factors, some of which are not within the Company's control, including
without limitation, the continuity of service provided by the government,
utilities, transportation industry and other service providers. Should one of
these systems fail, or should the Company's internal systems or the internal
systems of one or more significant vendors or suppliers fail to achieve Year
2000 compliance, the Company's business and its results of operations could be
adversely affected.
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: November 12, 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