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 1, 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 14,168,541 shares of common stock, par value $0.01 per
share, issued and outstanding as of October 19, 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 - October 1, 1999 and
January 1, 1999.................................................................... 1
Condensed Consolidated Statements of Operations - Three and Nine Months Ended
October 1, 1999 and October 2, 1998................................................ 2
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
October 1, 1999 and October 2, 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
Item 6 - Exhibits and Reports on Form 8-K...................................................... 8
Signature Page........................................................................ 9
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
October 1, January 1,
1999 1999
ASSETS (Unaudited) (Note)
------ --------------- ------------
Current assets:
Cash and cash equivalents $ 3,718,583 $ 4,689,574
Accounts receivable, less allowance for doubtful accounts 10,404,345 9,501,149
Inventories 22,074,505 20,139,979
Other receivables 1,386,830 1,386,830
Prepaids, deposits and other current assets 6,897,077 4,290,690
Deferred income tax 1,108,761 1,108,761
--------------- -------------
Total current assets 45,590,101 41,116,983
--------------- -------------
Investment in joint venture 3,353,237 3,178,477
Property, plant and equipment, net 10,507,277 10,379,997
Patents and licenses, net 12,160,316 12,038,023
Goodwill, net 4,794,556 5,047,982
Other assets 2,434,985 1,528,150
--------------- -------------
Total assets $78,840,472 $73,289,612
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable $ 758,320 $ 1,034,801
Accounts payable 6,046,745 4,975,222
Current portion of long-term debt 1,236,996 1,277,474
Deferred income tax 2,822,706 2,822,706
Other current liabilities 4,445,389 4,081,885
--------------- ------------
Total current liabilities 15,310,156 14,192,088
--------------- ------------
Long-term debt, net of current portion 12,271,771 10,021,287
Other long-term liabilities 315,696 513,699
-------------- ------------
Total liabilities 27,897,623 24,727,074
-------------- ------------
Minority interest 1,235,384 856,039
-------------- ------------
Stockholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized;
issued and outstanding 14,121,705 at October 1, 1999 and
13,994,593 at January 1, 1999 141,217 139,946
Capital in excess of par value 46,653,121 46,039,428
Accumulated other comprehensive income (749,161) (536,491)
Retained earnings 9,194,576 7,317,778
-------------- ------------
55,239,753 52,960,661
Notes receivable from officers and directors (5,532,288) (5,254,162)
-------------- ------------
Total stockholders' equity 49,707,465 47,706,499
-------------- ------------
$78,840,472 $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 OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
------------------------------- -----------------------------------
October 1, October 2, October 1, October 2,
1999 1998 1999 1998
---------------- ------------ --------------- ----------------
Sales $13,759,585 $12,843,472 $43,185,855 $40,811,112
Royalty income 64,678 58,036 195,324 174,107
---------------- ------------ --------------- ----------------
Total revenues 13,824,263 12,901,508 43,381,179 40,985,219
Cost of sales 4,977,947 4,578,228 16,211,025 12,689,869
---------------- ------------ --------------- ----------------
Gross profit 8,846,316 8,323,280 27,170,154 28,295,350
---------------- ------------ --------------- ----------------
Selling, general and administrative expenses:
General and administrative 2,032,937 1,741,204 5,524,015 5,103,848
Marketing and selling 4,430,985 4,362,354 14,318,949 13,542,387
Research and development 1,059,008 858,710 3,126,628 2,813,412
---------------- ------------ --------------- ----------------
Total selling, general and administrative expenses: 7,522,930 6,962,268 22,969,592 21,459,647
---------------- ------------ --------------- ----------------
Operating income 1,323,386 1,361,012 4,200,562 6,835,703
---------------- ------------ --------------- ----------------
Other income (expense):
Equity in earnings of joint venture 192,687 (11,385) 361,930 364,669
Interest expense - net (230,153) (190,698) (611,527) (487,526)
Other expense - net (277,732) (240,473) (463,572) (471,188)
---------------- ------------ --------------- ----------------
Total other expense - net (315,198) (442,556) (713,169) (594,045)
---------------- ------------ --------------- ----------------
Income before income taxes, minority interest and
cumulative effect of change in accounting method 1,008,188 918,456 3,487,393 6,241,658
Income tax provision 377,102 406,546 1,231,250 2,184,580
Minority interest 103,960 113,702 379,345 460,692
---------------- ------------ --------------- ----------------
Income before cumulative effect of change in
accounting method 527,126 398,208 1,876,798 3,596,386
Cumulative effect of change in accounting
method, writeoff of start-up costs -- (1,680,813) -- (1,680,813)
---------------- ------------ --------------- ----------------
Net income (loss) $ 527,126 $(1,282,605) $ 1,876,798 $ 1,915,573
================ ============ =============== ================
Basic earnings (loss) per share:
Income before cumulative effect of change in
accounting method $ 0.04 $ 0.03 $ 0.13 $ 0.27
Cumulative effect of change in accounting
method, writeoff of start-up costs -- $ (0.13) -- $ (0.13)
---------------- ------------ --------------- ----------------
Net income (loss) $ 0.04 $ (0.10) $ 0.13 $ 0.14
================ ============ =============== ================
Weighted average number of shares outstanding 14,093,495 13,349,654 14,093,495 13,349,654
================ ============ =============== ================
Dilutive earnings (loss) per share:
Income before cumulative effect of change in
accounting method $ 0.04 $ 0.03 $ 0.13 $ 0.25
Cumulative effect of change in accounting
method, writeoff of start-up costs -- $ (0.13) -- $ (0.12)
---------------- ------------ --------------- ----------------
Net income (loss) $ 0.04 $ (0.10) $ 0.13 $ 0.14
================ ============ =============== ================
Weighted average number of shares outstanding 14,693,478 13,349,654 14,693,478 14,175,556
================ ============ =============== ================
2
STAAR SURGICAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-------------------------------------------
October 1, October 2,
1999 1998
--------------------- ------------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 1,876,798 $ 1,915,573
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property and equipment 1,072,008 1,697,467
Amortization of intangibles 1,537,089 1,889,268
Change in deferred revenue (174,107) (174,107)
Minority interest 379,345 460,692
Equity in earnings of joint venture (361,931) (364,669)
Other -- 201,071
Change in operating working capital, excluding effects of acquisitions (4,009,082) (4,071,068)
--------------------- ------------------
Net cash provided by operating activities 320,120 1,554,227
--------------------- ------------------
Cash flows from investing activities:
Purchase of property and equipment (1,199,288) (1,439,794)
Increase in patents and licenses (1,080,061) (1,694,208)
Acquisition of a foreign distributor, net of cash acquired -- (4,396,562)
(Increase) decrease in other assets (1,232,730) 532
Dividends received from joint venture 187,171 ---
--------------------- ------------------
Net cash used in investing activities (3,324,908) (7,530,032)
--------------------- ------------------
Cash flows from financing activities:
Increase in borrowings under notes payable and long-term debt 4,000,000 4,605,748
Payments on other notes payable and long-term debt (1,341,499) (1,385,225)
Net payments under line-of-credit (748,872) (228,056)
Proceeds from the exercise of stock options 336,838 156,024
--------------------- ------------------
Net cash provided by financing activities 2,246,467 3,148,491
--------------------- ------------------
Effect of exchange rate changes on cash and cash equivalents (212,670) (212,088)
--------------------- ------------------
Decrease in cash and cash equivalents (970,991) (3,039,402)
Cash and cash equivalents, at beginning of period 4,689,574 6,279,136
--------------------- ------------------
Cash and cash equivalents, at end of period $ 3,718,583 $ 3,239,734
===================== ==================
3
STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 1, 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
accumulated and other comprehensive income as a separate component of
stockholders' equity. During the nine-months ended October 1, 1999 and October
2, 1998, the net foreign translation loss was $212,670 and $212,088 and net
foreign currency transaction loss was $146,613 and $198,847. 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 nine-months ended October 1, 1999 and October 2, 1998, the
Company had foreign sales primarily to Europe, South Africa, South America,
Australia and Southeast Asia of approximately $21,683,000 and $22,453,000. Of
these sales, approximately $17,374,000 and $17,669,000 were to Europe, which has
been the Company's principal foreign market, for the nine-months ended October
1, 1999 and October 2, 1998.
The Company sells its products internationally. International transactions
subject the Company to several potential risks, including fluctuating exchange
rates (to the extent the Company's transactions are not in U.S. dollars),
regulation of fund transfers by foreign governments, United States and foreign
export and import duties and tariffs and possible political instability.
3. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market (net realizable value) and consisted of the following at October 1, 1999
and January 1, 1999:
October 1, January 1,
1999 1999
------------ ------------
Raw materials and purchased parts..$ 2,400,877 $ 2,189,154
Work in process.................... 3,645,378 2,279,002
Finished goods..................... 16,028,250 15,671,823
------------ ------------
$22,074,505 $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
nine-months ended October 1, 1999 and October 2, 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 nine-months ended October 1, 1999 are not necessarily indicative of
the results to be expected for any other interim period or the entire year.
5. Reclassifications
Certain reclassifications 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 Nine Percentage change
Months Ended for Nine Months
--------------------------- ---------------------------
October 1, October 2,
1999 1998 1999 vs 1998
----------- ----------- ---------------------------
Increase (Decrease)
Total revenues........................................ 100.0% 100.0% 5.8%
Cost of sales......................................... 37.4 31.0 27.7
----- -----
Gross profit.......................................... 62.6 69.0 (4.0)
Costs and expenses:
General and administrative....................... 12.7 12.5 8.2
Marketing and selling............................ 33.0 33.0 5.7
Research and development......................... 7.2 6.9 11.1
----- -----
Total costs and expenses.................... 52.9 52.4 7.0
Other expense, net.................................... (1.6) (1.4) 20.1
----- -----
Income before income taxes............................ 8.0 15.2 (44.1)
Income tax provision.................................. 2.8 5.3 (43.6)
Minority interest..................................... .9 1.1 (17.7)
Cumulative effect of change in accounting method...... - (4.1) (100.0)
Net income............................. 4.3% 4.7% (2.0)%
===== =====
Revenues
- --------
Revenues for the nine-month period ended October 1, 1999 were $43.4
million, which is 5.8% greater than the $41.0 million in revenues for the nine-
month period ended October 2, 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, the Toric(TM) intraocular lens, and from the Company's newly formed
subsidiary, Laser and Implant Technology Centers (LITC). 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. Revenue also
increased in the third quarter as the Company began distribution of custom
surgical supply packs in the United States.
Cost of Sales
- -------------
Cost of sales increased to 37.4% of revenues for the nine-months ended
October 1, 1999 from 31.0% of revenues for the nine-months ended October 2,
1998. The increase as a percentage of revenue was primarily 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. Cost of sales also increased due to a
shift in IOL product mix to the Company's three-piece lens which by design has a
higher manufacturing cost and the introduction of custom surgical supply packs
which also have higher costs.
General and Administrative
- --------------------------
General and administrative expense increased slightly to 12.7% of revenues
for the nine-months ended October 1, 1999 from 12.5% of revenues for the nine-
months ended October 2, 1998. The increase as a percentage of revenue was
primarily due to an increase in professional fees.
5
Marketing and Selling
- ---------------------
Marketing and selling expense was 33.0% of revenues for the nine-months
ended October 1, 1999 and October 2, 1998.
Research and Development
- ------------------------
Research and development expense increased to 7.2% of revenues for the
nine-months ended October 1, 1999 compared to 6.9% of revenues for the
nine-months ended October 2, 1998. The increase was due to increased costs of
managing clinical trials.
Other Expense, Net
- ------------------
Other expense, net for the nine-months ended October 1, 1999 was
$713,000, or 1.6% of revenues, as compared to $594,000, or 1.4% of
revenues, for the nine-months ended October 2, 1998. The primary reason for this
change was increased interest expense.
Income Tax Provision (Income Taxes)
- ----------------------------------
The Company's effective income tax rate at October 1, 1999 and October 2,
1998 was 35.0%.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents for the quarter ended October 1, 1999 decreased
by approximately $1.0 million relative to the fiscal year ended January 1, 1999.
This decrease was principally due to a decrease in cash provided by operating
activities.
The increases in inventory, prepaids, and property and equipment are due to
the addition of new products lines and the related costs of technology.
As of October 1, 1999, the Company had a current ratio of 3.0:1, net
working capital of $30.3 million and net equity of $49.7 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. Cash provided by financing activities
was primarily spent on property and equipment, patents and licenses, and other
assets.
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.
6
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 - 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 have begun and are scheduled to
be complete during the fourth 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: November 15, 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