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 2, 1999
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 14,081,930 shares of common stock, par value $0.01 per share,
issued and outstanding as of August 10, 1999.
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 2, 1999 and
January 1, 1999................................................................. 1
Condensed Consolidated Statements of Income - Three and Six Months Ended
July 2, 1999 and July 3, 1998................................................... 2
Condensed Consolidated Statements of Cash Flows - Six Months Ended
July 2, 1999 and July 3, 1998................................................... 3
Notes to Condensed Consolidated Financial Statements ............................. 4
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 5
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
July 2, January 1,
1999 1999
ASSETS (Unaudited) (Note)
------ ----------- -----------
Current assets:
Cash and cash equivalents $ 3,986,590 $ 4,689,574
Accounts receivable, less allowance for doubtful accounts 11,071,520 10,167,449
Inventories 19,678,037 20,139,979
Other receivables 1,386,830 1,386,830
Prepaids, deposits and other current assets 5,378,629 3,624,390
Deferred income tax 1,108,761 1,108,761
----------- -----------
Total current assets 42,610,367 41,116,983
----------- -----------
Investment in joint venture 3,160,550 3,178,477
Property, plant and equipment, net 10,848,917 10,379,997
Patents and licenses, net 12,055,343 12,038,023
Goodwill, net 4,815,166 5,047,982
Other assets 1,477,163 1,528,150
----------- -----------
Total assets $74,967,506 $73,289,612
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable $ 777,062 $ 1,034,801
Accounts payable 4,501,347 4,975,222
Current portion of long-term debt 1,235,914 1,277,474
Deferred income tax 2,822,706 2,822,706
Other current liabilities 4,778,667 4,081,885
----------- -----------
Total current liabilities 14,115,696 14,192,088
----------- -----------
Long-term debt, net of current portion 10,597,267 10,021,287
Other long-term liabilities 361,970 513,699
----------- -----------
Total liabilities 25,074,933 24,727,074
----------- -----------
Minority interest 1,131,424 856,039
----------- -----------
Stockholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized;
issued and outstanding 14,098,343 at July 2, 1999 and
13,994,593 at January 1, 1999 140,983 139,946
Capital in excess of par value 46,651,390 46,039,428
Accumulated other comprehensive income (1,038,887) (536,491)
Retained earnings 8,667,450 7,317,778
----------- -----------
54,420,936 52,960,661
Notes receivable from officers and directors (5,659,787) (5,254,162)
----------- -----------
Total stockholders' equity 48,761,149 47,706,499
----------- -----------
$74,967,506 $73,289,612
=========== ===========
Note: The amounts presented in the January 1, 1999 balance sheet are derived
from the audited financial statements for the year ended January 1, 1999.
See accompanying notes to the condensed consolidated financial statements.
1
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
July 2, July 3, July 2, July 3,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Sales $14,701,167 $13,924,807 $29,426,270 $27,967,640
Royalty and other income 72,610 58,035 130,646 116,071
----------- ----------- ----------- -----------
Total revenues 14,773,777 13,982,842 29,556,916 28,083,711
Cost of sales 5,488,408 3,827,952 11,233,078 8,111,641
----------- ----------- ----------- -----------
Gross profit 9,285,369 10,154,890 18,323,838 19,972,070
----------- ----------- ----------- -----------
Selling, general and administrative expenses:
General and administrative 1,749,299 1,680,681 3,491,078 3,362,644
Marketing and selling 5,041,478 4,795,034 9,887,964 9,180,033
Research and development 1,005,204 937,983 2,067,620 1,954,702
----------- ----------- ----------- -----------
Total selling, general and administrative expenses: 7,795,981 7,413,698 15,446,662 14,497,379
----------- ----------- ----------- -----------
Operating income 1,489,388 2,741,192 2,877,176 5,474,691
----------- ----------- ----------- -----------
Other income (expense):
Equity in earnings of joint venture 70,000 226,000 169,243 376,054
Interest expense - net (181,191) (112,955) (381,374) (296,828)
Other income (expense) (157,053) (165,773) (185,840) (230,715)
----------- ----------- ----------- -----------
Total other expense - net (268,244) (52,728) (397,971) (151,489)
----------- ----------- ----------- -----------
Income before income taxes and minority interest 1,221,144 2,688,464 2,479,205 5,323,202
Income tax provision 434,327 934,253 854,148 1,778,034
Minority interest 109,896 230,921 275,385 346,990
----------- ----------- ----------- -----------
Net income $ 676,921 $ 1,523,290 $ 1,349,672 $ 3,198,178
=========== =========== =========== ===========
Net income per share:
Basic $ .05 $ .11 $ .10 $ .24
=========== =========== =========== ===========
Diluted $ .05 $ .11 $ .09 $ .22
=========== =========== =========== ===========
Weighted average number of shares outstanding:
Basic 14,093,495 13,262,261 14,093,495 13,262,261
=========== =========== =========== ===========
Diluted 14,607,783 14,240,167 14,607,783 14,240,167
=========== =========== =========== ===========
2
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
-------------------------------
July 2, July 3,
1999 1998
----------- -----------
Cash flows from operating activities:
Net income $ 1,349,672 $ 3,198,178
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property and equipment 750,320 1,161,575
Amortization of intangibles 1,038,793 1,244,194
Change in deferred revenue (116,071) (116,071)
Minority interest 275,385 346,987
Equity in earnings of joint venture (169,243) (376,054)
Deferred income taxes --- 51,071
Change in operating working capital, excluding effects of acquisitions (1,973,463) (1,165,811)
----------- -----------
Net cash provided by operating activities 1,155,393 4,344,069
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,219,240) (1,331,677)
Increase in patents and licenses (643,914) (1,139,044)
Acquisition of a foreign distributor, net of cash acquired --- (4,199,592)
Increase in other assets (128,396) (1,028,386)
Dividends received from joint venture 187,171 ---
----------- -----------
Net cash used in investing activities (1,804,379) (7,698,699)
----------- -----------
Cash flows from financing activities:
Increase in borrowings under notes payable and long-term debt 4,000,000 4,375,162
Payments on other notes payable and long-term debt (865,672) (1,158,555)
Net payments under line-of-credit (2,893,304) (1,779,396)
Proceeds from the exercise of stock options 207,374 93,525
----------- -----------
Net cash provided by financing activities 448,398 1,530,736
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (502,396) (720,537)
----------- -----------
Decrease in cash and cash equivalents (702,984) (2,544,431)
Cash and cash equivalents, at beginning of period 4,689,574 6,279,136
----------- -----------
Cash and cash equivalents, at end of period $ 3,986,590 $ 3,734,705
=========== ===========
3
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 2, 1999
1. Basis of Presentation
The accompanying financial statements consolidate the accounts of the Company
and its wholly and majority 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
translation gains and losses are deferred and are shown as a separate component
of stockholders' equity. During the six-months ended July 2, 1999 and July 3,
1998, the net foreign translation loss was $502,396 and $720,537 and net foreign
currency transaction gain/loss was 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. Foreign Sales
During the six-months ended July 2, 1999 and July 3, 1998, the Company had
foreign sales primarily to Europe, South Africa, Australia and Southeast Asia of
approximately $16,652,000 and $15,064,000. Of these sales, approximately
$12,599,000 and $12,645,000 were to Europe, which has been the Company's
principal foreign market, for the quarters ended July 2, 1999 and July 3, 1998.
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 2, 1999 and
January 1, 1999:
July 2, January 1,
1999 1999
----------- -----------
Raw materials and purchased parts..... $ 2,138,942 $ 2,189,154
Work in process....................... 2,226,730 2,279,002
Finished goods........................ 15,312,365 15,671,823
----------- -----------
$19,678,037 $20,139,979
=========== ===========
4. Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial statements for the three and six-months
ended July 2, 1999 and July 3, 1998, 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 and six-months ended
July 2, 1999 are not necessarily indicative of the results to be expected for
any other interim period or the entire year.
5. Reclassifications
Certain reclassifications may have been made to the 1998 consolidated
financial statements to conform with the 1999 presentation.
4
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 Percentage change
Months Ended for Six Months
-------------------- ----------------
July 2, July 3,
1999 1998 1999 vs 1998
-------- -------- ----------------
Increase (Decrease)
Total revenues.......................... 100.0% 100.0% 5.2%
Cost of sales........................... 38.0 28.9 38.5
----- -----
Gross profit............................ 62.0 71.1 (8.3)
Costs and expenses:
General and administrative......... 11.8 12.0 3.8
Marketing and selling.............. 33.5 32.7 7.7
Research and development........... 7.0 7.0 5.8
----- -----
Total costs and expenses...... 52.3 51.6 6.5
Other expense, net...................... (1.3) (0.5) (162.7)
----- -----
Income before income taxes.............. 8.4 19.0 (53.4)
Income tax provision.................... 2.9 6.3 (52.0)
Minority interest....................... .9 1.2 (20.6)
Net income............... 4.6% 11.4% (57.8)%
===== =====
Revenues
- --------
Revenues for the six-month period ended July 2, 1999 were $29.6 million,
which is 5.2% greater than the $28.1 million in revenues for the six-month
period ended July 3, 1998. The increase in revenues was attributable to an
increase in sales of the Company's refractive products, primarily the
Implantable Contact Lens(TM), a deformable intraocular refractive corrective
lens, and the Toric(TM) intraocular lens. Additionally, increased sales of the
Company's intraocular lenses (IOL's) were partially offset by lower average
selling prices for IOL's due to competitive pressures.
Cost of Sales
- -------------
Cost of sales increased to 38.0% of revenues for the six-months ended
July 2, 1999 from 28.9% of revenues for the six-months ended July 3, 1998. The
increase as a percentage of revenue was due to lower average selling prices for
IOL's and higher unit costs of IOL's produced in 1998, due to lower production
volume, and sold in 1999.
General and Administrative
- --------------------------
General and administrative expense decreased slightly to 11.8% of
revenue for the six-months ended July 2, 1999 from 12.0% of revenues for the
six-months ended July 3, 1998. While actual expense increased 3.8% over the
same period last year, the decrease as a percent of revenues was due to the
increase in revenues.
5
Marketing and Selling
- ---------------------
Marketing and selling expense increased to 33.5% of revenues for the six-
months ended July 2, 1999 compared to 32.7% of revenues for the six-months
ended July 3, 1998. The increase in marketing and selling expense as a
percentage of revenues was attributable to marketing and selling expenses of the
product launch for the Toric(TM) intraocular lens and to increased product
management expenses.
Research and Development
- ------------------------
Research and development expense for the quarters ending July 2, 1999 and
July 3, 1998 were 7.0% of revenues. Actual expense increased 5.8% over the same
period last year due to increased costs of managing clinical trials.
Other Expense, Net
- ------------------
Other expense, net for the quarter ended July 2, 1999 was ($398,000), or
(1.3%) of revenues, as compared to ($151,000), or (0.5%) of revenues, for the
quarter ended July 3, 1998. The primary reasons for this change were increased
interest expenses, offset by decreased losses in foreign currency transactions,
and a decrease 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 2, 1999 increased to 34.5%
as compared to July 3, 1998 when it was 33.4%.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents for the quarter ended July 2, 1999 decreased by
approximately $0.7 million relative to the fiscal year ended January 1, 1999.
This decrease was principally due to purchases of property and equipment and
acquisition of patents partially offset by cash provided by financing
activities.
As of July 2, 1999, the Company had a current ratio of 3.0:1, net working
capital of $28.5 million and net equity of $48.8 million compared to January 1,
1999 when the Company's current ratio was 2.9:1, its net working capital was
$26.9 million, and its net equity was $47.7 million.
During the quarter, the Company renegotiated its credit facility with its
current lender. The new agreement supplements the Company's $10 million line-of-
credit with a $4 million term note.
During the first quarter, an officer of the Company exercised options for
70,000 shares of the Company's common stock in exchange for a note in the
amount of $405,625. The note bears interest at a rate of 7%, or at the lowest
applicable rate allowed by the Internal Revenue Service. The note is secured by
a stock pledge agreement and matures on September 4, 2003.
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.
Year 2000 Compliance
- --------------------
The Company's management understands the importance of identifying and
addressing Year 2000 compliance issues and has placed a high priority on this
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 up of designees from 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.
The Company has developed a comprehensive plan for achieving Year 2000
compliance that is consistent with the
6
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 - Fixing any problems.
. Validation - Testing and certification.
. Implementation - Implementation of validated systems.
The Company's principal computer hardware used by its business application
systems has been certified to be Year 2000 compliant by the vendor, Hewlett-
Packard. The Company's principal internal operating systems are UNIX/Unidata
based. These systems use a sequentially incremented integer to store the date
beginning with a day 1 of January 1, 1968. Therefore, the date logic of these
systems had few Year 2000 related problems, the vendor has addressed such
problems and the Company has upgraded its systems to a Year 2000 certified
version. The Company's principal business application software is a modified
version of one purchased from a third party. The Company's personnel have
assessed, modified and installed the modified programs into a test environment.
Testing by the Company's information system personnel is complete, including
advancing the system date to the Year 2000, and all programs functioned as
expected. The Company has successfully completed user testing of all mission
critical programs and the Year 2000 compliant programs have been installed
domestically. These same systems and programs are used by the majority of the
Company's subsidiaries and those installations are scheduled to be complete
during the third quarter of 1999. In general, the Company is ahead of its
schedule for this project and has met all internal milestones. For those
subsidiaries using other systems, either those systems have been certified as
Year 2000 compliant or plans are in place to upgrade or replace with the
Company's principal system.
In addition to reviewing its internal systems, the Company is contacting
certain 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 and 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 conditions 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 services 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.
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: August 13, 1999 By: /s/ WILLIAM C. HUDDLESTON
---------------------------------
William C. Huddleston
Chief Financial Officer and
Duly Authorized Officer
(principal accounting and financial
officer for the quarter)
9