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 September 28, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number: 0-27598
IRIDEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0210467
-------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
1212 TERRA BELLA AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043-1824
(Address of principal executive offices, including zip code)
(650) 940-4700
(Registrant's telephone number, including area code)
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.
(1) Yes [X] No [ ]; (2) Yes [X] No [ ]
The number of shares of common stock, $.01 par value, issued and outstanding as
of November 5, 2002 was 6,902,248.
IRIDEX Corporation
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 28, 2002
and December 29, 2001 3
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 28, 2002 and September 29, 2001 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 28, 2002 and September 29, 2001 5
Condensed Consolidated Statements of Comprehensive Income (Loss) for the
three and nine months ended September 28, 2002 and September 29, 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Signature 30
Certification under Section 302(a) of the Sarbanes-Oxley Act of 2002 30
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 28, 2002 DECEMBER 29, 2001
-------------------- -------------------
(unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents. . . . . . . . . . $ 7,375 $ 4,613
Available-for-sale securities. . . . . . . . 3,075 4,489
Accounts receivable, net . . . . . . . . . . 7,290 8,066
Inventories. . . . . . . . . . . . . . . . . 11,719 12,562
Prepaids and other current assets. . . . . . 428 599
-------------------- -------------------
Total current assets . . . . . . . . . . . 29,887 30,329
Property and equipment, net. . . . . . . . . 1,072 1,535
Deferred income taxes. . . . . . . . . . . . 2,479 1,924
-------------------- -------------------
Total assets . . . . . . . . . . . . . . . $ 33,438 $ 33,788
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable . . . . . . . . . . . . . . $ 795 $ 1,176
Accrued expenses . . . . . . . . . . . . . . 3,057 2,779
-------------------- -------------------
Total liabilities. . . . . . . . . . . . . 3,852 3,955
-------------------- -------------------
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . 70 69
Additional paid-in capital . . . . . . . . . 23,617 23,417
Accumulated other comprehensive income . . . 3 3
Treasury stock . . . . . . . . . . . . . . . (430) (430)
Retained earnings. . . . . . . . . . . . . . 6,326 6,774
-------------------- -------------------
Total stockholders' equity . . . . . . . . 29,586 29,833
-------------------- -------------------
Total liabilities and stockholders' equity $ 33,438 $ 33,788
==================== ===================
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Sales $ 6,717 $ 6,750 $ 21,113 $ 19,573
Cost of sales 3,705 3,252 11,895 10,015
--------------- --------------- --------------- ---------------
Gross Profit 3,012 3,498 9,218 9,558
--------------- --------------- --------------- ---------------
Operating expenses:
Research and development 919 1,196 3,384 3,684
Sales, general and administrative 2,098 2,309 6,897 7,731
--------------- --------------- --------------- ---------------
Total operating expenses 3,017 3,505 10,281 11,415
--------------- --------------- --------------- ---------------
Operating loss from continuing operations (5) (7) (1,063) (1,857)
Other income (expense), net (31) 88 66 348
--------------- --------------- --------------- ---------------
Income (loss) from continuing operations before benefit
from (provision for) income taxes . . . . . . . . . . . . . (36) 81 (997) (1,509)
Benefit from income taxes. . . . . . . . . . . . . . . . . 242 90 549 766
--------------- --------------- --------------- ---------------
Income (loss) from continuing operations . . . . . . . . . . 206 171 (448) (743)
Loss from discontinued operations (net of applicable
income tax benefit of $-, $-, $- and $542, respectively) - - - (893)
--------------- --------------- --------------- ---------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $ 206 $ 171 $ (448) $ (1,636)
=============== =============== =============== ===============
Income (loss) from continuing operations per common
share-basic . . . . . . . . . . . . . . . . . . . . . . . . $ 0.03 $ 0.03 $ (0.07) $ (0.11)
Loss from discontinued operations per common share-basic . . - - - (0.13)
--------------- --------------- --------------- ---------------
Net income (loss) per common share-basic . . . . . . . . . . $ 0.03 $ 0.03 $ (0.07) $ (0.24)
=============== =============== =============== ===============
Income (loss) from continuing operations per common
share-diluted . . . . . . . . . . . . . . . . . . . . . . . $ 0.03 $ 0.02 $ (0.07) $ (0.11)
Loss from discontinued operations per common share-diluted - - - (0.13)
--------------- --------------- --------------- ---------------
Net income (loss) per common share-diluted . . . . . . . . . $ 0.03 $ 0.02 $ (0.07) $ (0.24)
=============== =============== =============== ===============
Shares used in per common share basic calculations . . . . . 6,875 6,771 6,858 6,741
=============== =============== =============== ===============
Shares used in per common share diluted calculations . . . . 6,938 6,892 6,858 6,741
=============== =============== =============== ===============
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
--------------- ---------------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (448) $ (1,636)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 893
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 652 604
Provision for inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56) (31)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (555) -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 832 1,441
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825 (3,014)
Prepaids and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 171 258
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (381) (137)
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 (1,039)
--------------- ---------------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . 1,336 (2,657)
--------------- ---------------
Cash flows from investing activities:
Purchases of available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . . . (3,075) (4,496)
Proceeds from maturity of available-for-sale securities . . . . . . . . . . . . . . . . . 4,489 2,992
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . (189) (364)
--------------- ---------------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . 1,225 (1,868)
--------------- ---------------
Cash flows from financing activities:
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 291
Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (41)
--------------- ---------------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . 201 250
--------------- ---------------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . 2,762 (4,275)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . 4,613 9,998
--------------- ---------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 7,375 $ 5,723
=============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized losses on available-for-sale securities . . . . . . . . . . . . $ - $ (4)
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2002 2001 2002 2001
-------------- --------------- --------------- ---------------
Net income (loss) . . . . . . . . . . . $ 206 $ 171 $ (448) $ (1,636)
Other comprehensive income (loss):
Change in unrealized income (loss) on
available-for-sale securities . . . 5 (2) - (4)
-------------- --------------- --------------- ---------------
Comprehensive income (loss) . . . . . . $ 211 $ 169 $ (448) $ (1,640)
============== =============== =============== ===============
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
IRIDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
IRIDEX Corporation have been prepared in accordance with generally accepted
accounting principles in the United States of America for interim financial
information and pursuant to the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation
have been included. The condensed consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in our Annual Report on Form 10-K, which was
filed with the Securities and Exchange Commission on March 29, 2002 (as amended
on Form 10K/A on April 10, 2002). The results of operations for the three month
and nine month periods ended September 28, 2002 are not necessarily indicative
of the results for the year ending December 28, 2002 or any future interim
period.
2. INVENTORIES (IN THOUSANDS):
SEPTEMBER 28, DECEMBER 29,
2002 2001
--------------- -------------
(unaudited)
Raw materials and work in progress $ 7,196 $ 8,078
Finished goods . . . . . . . . . . 4,523 4,484
--------------- -------------
Total inventories. . . . . . . . . $ 11,719 $ 12,562
=============== =============
3. COMPUTATIONS OF NET INCOME (LOSS) PER COMMON SHARE:
Basic and diluted net income (loss) per share are computed by dividing net
income (loss) for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net income
(loss) per share excludes potential common stock if their effect is
anti-dilutive. Potential common stock consists of incremental common shares
issuable upon the exercise of stock options.
7
A reconciliation of the numerator and denominator of net income (loss) per
common share is as follows (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2002 2001 2002 2001
--------------- -------------- --------------- ---------------
(unaudited) (unaudited)
Numerator
Income (loss) from continuing operations. . . . . . . . . . . $ 206 $ 171 $ (448) $ (743)
Income (loss) from discontinued operations. . . . . . . . . . - - - (893)
--------------- -------------- --------------- ---------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 206 $ 171 $ (448) $ (1,636)
=============== ============== =============== ===============
Denominator - Basic
Weighted average common stock outstanding. . . . . . . . . . 6,875 6,771 6,858 6,741
=============== ============== =============== ===============
Basic income (loss) per share from continuing operations. . . $ 0.03 $ 0.03 $ (0.07) $ (0.11)
Basic income (loss) per share from discontinued operations. . - - - (0.13)
--------------- -------------- --------------- ===============
Basic income (loss) per share . . . . . . . . . . . . . . . . $ 0.03 $ 0.03 $ (0.07) $ (0.24)
=============== ============== =============== ===============
Denominator - Diluted
Weighted average common stock outstanding. . . . . . . . . . 6,875 6,771 6,858 6,741
Effect of dilutive securities
Weighted average common stock options. . . . . . . . . . . . 63 121 - -
--------------- -------------- --------------- ---------------
Total weighted average stock and options outstanding. . . . . 6,938 6,892 6,858 6,741
=============== ============== =============== ===============
Diluted income (loss) per share from continuing operations. . $ 0.03 $ 0.02 $ (0.07) $ (0.11)
Diluted income (loss) per share from discontinued operations. - - - (0.13)
=============== ============== =============== ===============
Diluted income (loss) per share . . . . . . . . . . . . . . . $ 0.03 $ 0.02 $ (0.07) $ (0.24)
=============== ============== =============== ===============
During the three months ended September 28, 2002 and September 29, 2001,
options to purchase 1,498,924 shares and 1,524,166 shares at weighted average
exercise prices of $5.61 and $5.82 per share were outstanding, but were not
included in the computations of diluted net income per common share because the
exercise price of the related options exceeded the average market price of the
common shares. For the nine months ended September 28, 2002 and September 29,
2001 options to purchase 1,751,893 shares and 1,720,660 shares at weighted
average prices of $5.15 and $5.31 per share were outstanding but not included in
the computations of diluted net loss per share because their effect was
antidilutive. These options could dilute earnings per share in future periods.
4. DISCONTINUED OPERATIONS
In April 2001, management decided to discontinue the Laser Research
segment. There were no revenues, costs or expenses for this segment for both
the three month periods ended September 28, 2002 and September 29, 2001,
respectively. The total loss on discontinued operations of $893,000 (net of a
$542,000 income tax benefit) was recorded in the first quarter of 2001. No
assets or liabilities of the Laser Research segment remain and no proceeds are
expected from the disposition of this segment.
The Laser Research segment conducted research and development under
research grants from the U.S. Federal Government and others. We discontinued
our Laser Research activities to better focus available resources on our medical
applications and products. The assets of the segment, primarily inventory, were
fully reserved and the liabilities were fully paid. The components of the
recorded loss were inventory costs
8
of $0.7 million, the loss on operations for the first quarter of 2001 of $0.3
million, sales return costs of $0.2 million, estimated costs for the phase-out
period of $0.1 million, purchase order commitments of $0.1 million offset by a
tax benefit of $0.5 million. In the fourth quarter of 2001, the accrued loss
for the discontinuation of the segment was adjusted to reflect fewer than
anticipated product returns.
5. BUSINESS SEGMENTS (UNAUDITED)
We operate in two reportable segments: the ophthalmology medical device
segment and the aesthetics medical device segment. In both segments, we
develop, manufacture and market medical devices. Our revenues arise from the
sale of consoles, delivery devices, disposables and service and support
activities.
Information on reportable segments for the three months ended September 28,
2002 and September 29, 2001 and for the nine months ended September 28, 2002 and
September 29, 2001 is as follows (in thousands):
Three Months Ended September 28, 2002 Three Months Ended September 29, 2001
-------------------------------------------- --------------------------------------------
Ophthalmology Aesthetics Total Ophthalmology Aesthetics Total
Medical Medical Medical Medical
Devices Devices Devices Devices
----------------- ------------- ---------- ----------------- ------------- ----------
Sales $ 5,416 $ 1,301 $ 6,717 $ 4,771 $ 1,979 $ 6,750
Direct Cost 1,713 562 2,275 1,562 816 2,378
of Goods
Sold
Direct 3,703 739 4,442 3,209 1,163 4,372
Gross
Margin
Total (4,478) (4,291)
Unallocated
Costs
Pre-tax (36) 81
income
(loss)
Nine Months Ended September 28, 2002 Nine Months Ended September 29, 2001
-------------------------------------------- -------------------------------- ----------
Ophthalmology Aesthetics Total Ophthalmology Aesthetics Total
Medical Medical Medical Medical
Devices Devices Devices Devices
----------------- ------------- ---------- ----------------- ------------- ----------
Sales $ 16,172 $ 4,941 $ 21,113 $ 14,845 $ 4,728 $ 19,573
Direct Cost 5,182 2,163 7,345 4,776 1,825 6,601
of Goods
Sold
Direct 10,990 2,778 13,768 10,069 2,903 12,972
Gross
Margin
Total (14,765) (14,481)
Unallocated
Costs
Pre-tax (997) (1,509)
income
(loss)
Indirect costs of manufacturing, research and development, and selling,
general and administrative costs are not allocated to the segments.
Our assets and liabilities are not evaluated on a segment basis.
Accordingly, no disclosure on segment assets and liabilities is provided.
6. RECENT ACCOUNTING PRONOUNCEMENTS
On April 30, 2002, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 145 (SFAS 145), Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections. FAS No. 145
rescinds both FASB Statement No. 4 (SFAS No. 4), Reporting Gains
9
and Losses from Extinguishment of Debt, and the amendment to FAS No. 4, FASB
Statement No. 64 (SFAS 64), Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. Through this rescission, FAS 145 eliminates the requirement (in
both SFAS No. 4 and SFAS No. 64) that gains and losses from the extinguishment
of debt be aggregated and, if material, classified as an extraordinary item, net
of the related income tax effect. However, an entity is not prohibited from
classifying such gains and losses as extraordinary items, so long as it meets
the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30,
Reporting the Results of Operations Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. Further, SFAS No. 145 amends paragraph 14(a) of FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the accounting for sale-leaseback transactions and certain lease modifications
that have economic effects that are similar to sale-leaseback transactions. The
amendment requires that a lease modification (1) results in recognition of the
gain or loss in the financial statements, (2) is subject to FASB Statement No.
66, Accounting for Sales of Real Estate, if the leased asset is real estate
(including integral equipment), and (3) is subject (in its entirety) to the
sale-leaseback rules of FASB Statement No. 98, Accounting for Leases:
Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real
Estate, Definition of the Lease Term, and Initial Direct Costs of Direct
Financing Leases. Generally, FAS 145 is effective for transactions occurring
after May 15, 2002. We do not expect that the adoption will have a material
effect on our financial performance or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS 146"). SFAS No. 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of SFAS No.
146 also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS No.
146 will be effective for exit or disposal activities that are initiated after
December 31, 2002 and early application is encouraged. We will adopt SFAS No.
146 during the first quarter of 2003. The provisions of EITF No. 94-3 shall
continue to apply for an exit activity initiated under an exit plan that met the
criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. The effect on
adoption of SFAS No. 146 will change on a prospective basis the timing of when
the restructuring charges are recorded from a commitment date approach to when
the liability is incurred.
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, such as statements relating to levels of future sales and operating
results, actual order rate and market acceptance of our new and existing
products; expectations for future sales growth, generally, and the potential for
production cost decreases and higher gross margins; levels of future investment
in research and development efforts; favorable Center for Medicare and Medicaid
coverage decisions regarding Age Related Macular Degeneration, or AMD,
procedures that use our products; results of clinical studies and risks
associated with bringing new products to market, general economic conditions and
levels of international sales. In some cases, forward-looking statements can be
identified by terminology, such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "intends," "potential,"
"continue," or the negative of such terms or other comparable terminology.
These statements involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to
differ materially from those expressed or implied by such forward-looking
statements, including as a result of the factors set forth in this Quarterly
Report under "Factors That May Affect Future Results" and other risks detailed
in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 29, 2002, as amended on Form 10K/A on April 10, 2002, and
detailed from time to time in our Company's reports filed with the Securities
and Exchange Commission. The reader is cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date of this Form 10-Q. We undertake no obligation to update such
forward-looking statements to reflect events or circumstances occurring after
the date of this report.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
sales for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
(unaudited) (unaudited)
Sales. . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . 55.2 48.2 56.3 51.2
-------------- -------------- -------------- --------------
Gross profit. . . . . . . . . . . . . . . 44.8 51.8 43.7 48.8
-------------- -------------- -------------- --------------
Operating expenses:
Research and development. . . . . . . . . 13.7 17.7 16.0 18.8
Sales, general and administrative . . . . 31.2 34.2 32.7 39.5
-------------- -------------- -------------- --------------
Total operating expenses. . . . . . . . 44.9 51.9 48.7 58.3
-------------- -------------- -------------- --------------
Operating loss from continuing operations (0.1) (0.1) (5.0) (9.5)
Other income (expense), net. . . . . . . . (0.4) 1.3 0.3 1.8
-------------- -------------- -------------- --------------
Income (loss) from continuing operations
before benefit from income taxes. . . . . (0.5) 1.2 (4.7) (7.7)
Benefit from income taxes. . . . . . . . . 3.6 1.3 2.6 3.9
-------------- -------------- -------------- --------------
Income (loss) from continuing operations . 3.1 2.5 (2.1) (3.8)
Loss from discontinued operations
(net of applicable income tax benefit). . 0.0 0.0 0.0 (4.6)
-------------- -------------- -------------- --------------
Net income (loss). . . . . . . . . . . . . 3.1% 2.5% (2.1)% (8.4)%
============== ============== ============== ==============
11
The following table sets forth for the periods indicated the amount of
sales (in thousands) for our operating segments and sales as a percentage of
total sales.
Three Months Ended Nine Months Ended
-------------------------------------------------- ---------------------------------------------------
September 28, 2002 September 29, 2001 September 28, 2002 September 29, 2001
----------------------- ------------------------- ------------------------ -------------------------
(unaudited) (unaudited)
Percentage Percentage Percentage Percentage
Amount of total sales Amount of total sales Amount of total sales Amount of total sales
------- -------------- -------- --------------- ------- --------------- -------- ---------------
Domestic $ 4,471 66.6% $ 4,264 63.2% $13,214 62.6% $ 11,424 58.4%
International 2,246 33.4% 2,486 36.8% 7,899 37.4% 8,149 41.6%
Total $ 6,717 100.0% $ 6,750 100.0% $21,113 100.0% $ 19,573 100.0%
Ophthalmology:
Domestic $ 3,175 47.3% $ 2,699 40.0% $ 9,212 43.6% $ 7,714 39.4%
International 2,241 33.3% 2,072 30.7% 6,960 33.0% 7,131 36.4%
Total $ 5,416 80.6% $ 4,771 70.7% $16,172 76.6% $ 14,845 75.8%
Aesthetics:
Domestic $ 1,296 19.3% $ 1,565 23.2% $ 4,002 19.0% $ 3,710 19.0%
International 5 .1% 414 6.1% 939 4.4% 1,018 5.2%
Total $ 1,301 19.4% $ 1,979 29.3% $ 4,941 23.4% $ 4,728 24.2%
Combined Ophthalmology and Aesthetics Sales
Sales for the three months ended September 28, 2002 and September 29, 2001
were $6.7 million. On a segment basis, the $0.6 million increase in sales of our
ophthalmology products was offset by a $0.7 million decrease in sales of
aesthetics products. Sales for the nine months ended September 28, 2002
increased 7.9% to $21.1 million from $19.6 million for the nine months ended
September 29, 2001. The overall increase for the nine month period was driven by
a $1.3 million increase in sales of our ophthalmology products and a $0.2
million increase in sales of our aesthetics products.
12
Ophthalmology Sales
Ophthalmology sales increased 13.5% to $5.4 million for the three months
ended September 28, 2002 from $4.8 million for the three months ended September
29, 2001. For the three month period ended September 28, 2002 domestic
ophthalmology sales increased 17.6% to $3.2 million from $2.7 million for the
comparable prior year three month period. Domestic ophthalmology sales
increased during this period mainly as a result of a $0.3 million increase in
unit sales of delivery devices and a $0.3 million increase in sales of laser
consoles, offset, in part, by lower domestic average selling prices of $0.1
million. International ophthalmology sales increased 8.2% to $2.2 million for
the three months ended September 28, 2002 from $2.1 million for the comparable
prior year three month period. International ophthalmology sales increased
during this period due to a $0.1 million increase in unit sales of laser
consoles and higher international average selling prices of $0.1 million.
For the nine months ended September 28, 2002, ophthalmology sales increased
8.9% to $16.2 million from $14.8 million for the comparable prior year nine
month period. Domestic ophthalmology sales during this period increased 19.4% to
$9.2 million from $7.7 million for the comparable prior year nine month period.
Domestic ophthalmology sales increased during this period due to a $0.8 million
increase in unit sales of delivery devices and a $0.8 million increase in unit
sales of laser consoles offset, in part, by lower domestic average selling
prices of $0.3 million. Our ophthalmic product sales have been impacted by
declining average selling prices that may also affect our level of sales in the
future due to changes in product mix, competitive pricing pressures, new product
introductions by us or our competitors or other factors. See "-Factors that May
Affect Future Results - If We Cannot Increase Our Sales Volumes, Reduce Our
Costs or Introduce Higher Margin Products to Offset Anticipated Reductions in
the Average Unit Selling Price of our Products, Our Operating Results May
Suffer." International ophthalmology sales during the nine month period ended
September 28, 2002 decreased 2.4% to $7.0 million from $7.1 million for the
comparable prior year nine month period. International ophthalmology sales
decreased during this period due primarily to a $0.2 million decrease in unit
sales of laser consoles.
Aesthetics Sales
Aesthetics sales decreased 34.3% to $1.3 million for the three months ended
September 28, 2002 from $2.0 million for the three months ended September 29,
2001. For the three month period ended September 28, 2002 domestic aesthetic
sales decreased 17.2% to $1.3 million from $1.6 million for the comparable prior
year three month period. Domestic aesthetic sales decreased during this period
due to a $0.3 million decrease in unit sales of the Apex 800 laser system and
lower domestic average selling prices of $0.1 million. The decrease in Apex
sales was due primarily to the backlog of orders that was shipped to launch the
product in July 2001. International aesthetic sales decreased to $5,000 for the
three months ended September 28, 2002 from $0.4 million for the comparable prior
year three month period. The decrease in international sales for this period
was due primarily to worldwide economic uncertainty. As a result, we are
reevaluating our international distribution channels for certain markets for our
aesthetic products.
For the nine months ended September 28, 2002 aesthetic sales increased 4.5%
to $4.9 million from $4.7 million for the comparable prior year nine month
period. Domestic aesthetic sales during this period increased 7.8% to $4.0
million from $3.7 million for the comparable prior year nine month period.
Domestic aesthetic sales increased during this period due to $0.4 million in
increased unit sales of Apex laser systems, offset, in part, by a $0.1 million
decrease in unit sales of DioLite laser systems and lower domestic average
selling prices of $0.1 million. International aesthetic sales during the nine
month period
13
ended September 28, 2002 decreased 7.8% to $0.9 million from $1.0 million for
the comparable prior year nine month period. International aesthetic sales
decreased during this period due to a $0.5 million decrease in unit sales of
DioLite laser systems offset, in part, by a $0.3 million increase in unit sales
of Apex laser systems. Our aesthetics product sales continue to be affected by
the current weak economic conditions and because aesthetic procedures are
typically elective procedures that are deferred by patients in difficult
economic times. See "-Factors that May Affect Future Results - Our Business has
been adversely Impacted by the Current Worldwide Economic Slowdown and Related
Uncertainties."
Gross Profit. Our gross profit decreased 13.9% to $3.0 million for the
three months ended September 28, 2002 compared to $3.5 million for the three
months ended September 29, 2001. Gross profit as a percentage of sales for the
three months ended September 28, 2002 decreased to 44.8% from 51.8% for the
comparable prior year three month period. Of the total 7.0% decrease in gross
profit as a percentage of sales during this period, 7.3% resulted from the
beneficial impact of updated manufacturing cost and inventory valuation
estimates during the three months ended September 29, 2001. These updated
estimates included 3.7% for inventory burden and 3.6% for inventory valuation.
Partially offsetting these impacts was a 0.3% increase in gross margin as a
percentage of sales related to factors occurring in the three-month period ended
September 28, 2002. These factors included an increase of 0.8% in gross margin
as a percentage of sales related to a higher proportion of sales with higher
profit margins, a 0.4% increase due to lower standard costs to build our
products and 0.4% due to various other factors offset, in part, by a 1.3%
decrease resulting from net lower average selling prices for our products.
For the nine-months ended September 28, 2002, gross profit decreased 3.6%
to $9.2 million compared to $9.6 million for the nine-months ended September 29,
2001. Gross profit as a percentage of sales for the nine-month period ended
September 28, 2002 decreased to 43.7% as compared to 48.8% for the comparable
prior year period. The total decrease in gross profit as a percentage of sales
during this period of 5.1% consisted of a 2.3% decrease due to the beneficial
impact of updated manufacturing cost and inventory valuation estimates during
the nine-months ended September 29, 2001, 1.8% from net lower average selling
prices of our products, 0.9% from the increase in warranty costs related to a
change in estimate, and 0.6% due to additional lower margin sales of the Apex
hair removal laser system offset, in part by a 0.5% increase due to lower
standard costs to build our products. The change in estimate related to warranty
costs resulted from the separation of manufacturing and service functions during
the three-month period ended June 29, 2002, which provided management with more
precise data upon which to determine warranty cost estimates. Although
increasing competition has continued to result in a downward trend in average
selling prices for some products, we intend to continue our efforts to reduce
the cost of components and manufacturing and thereby mitigate the impact of
price reductions on our gross profit. See "-Factors That May Affect Future
Results - If We Cannot Increase Our Sales Volumes, Reduce Our Costs or Introduce
Higher Margin Products to Offset Anticipated Reductions in the Average Unit
Selling Price of our Products, Our Operating Results May Suffer." We expect our
gross profit margins to continue to fluctuate due to changes in the relative
proportions of domestic and international sales, mix of sales of existing
products, pricing, product costs and a variety of other factors. See "-Factors
That May Affect Future Results - Our Operating Results Fluctuate from Quarter to
Quarter and Year to Year."
Research and Development. Our research and development expenses decreased
by 23.2% to $0.9 million for the three months ended September 28, 2002 from $1.2
million for the three months ended September 29, 2001. Research and development
expenses decreased as a percentage of sales to 13.7% for the three months ended
September 28, 2002 from 17.7% for the comparable prior year three-month period.
Research and development expenses decreased by 8.1% to $3.4 million for the nine
months ended
14
September 28, 2002 from $3.7 million for the nine months ended September 29,
2001. As a percentage of sales, research and development expense decreased to
16.0% for the nine months ended September 28, 2002 from 18.8% for the comparable
prior year nine month period. The decrease in research and development expense
in absolute dollars and as a percentage of sales for both the three and nine
month periods ended September 28, 2002 was due primarily to reductions in
headcount of $0.2 million and reductions in project spending of $0.1 million
primarily from the completion of development work on the Apex hair removal laser
system in 2001.
Sales, General and Administrative. Our sales, general and administrative
expenses decreased by 9.1% to $2.1 million for the three months ended September
28, 2002 from $2.3 million for the three months ended September 29, 2001. As a
percentage of sales, sales, general and administrative expenses decreased to
31.2% for the three months ended September 28, 2002 from 34.2% for the
comparable prior year three-month period. The decrease in sales, general and
administrative expense in absolute dollars and as a percentage of sales for the
three month period ended September 28, 2002 was due primarily to $0.2 million in
employee-related cost savings. For the nine months ended September 28, 2002,
sales, general and administrative expenses decreased by 10.8% to $6.9 million
from $7.7 million for the comparable period in 2001. Sales, general and
administrative expenses as a percentage of sales decreased to 32.7% for the nine
months ended September 28, 2002 from 39.5% for the comparable period in 2001.
The decrease in absolute dollars and as a percentage of sales for the nine month
period ended September 28, 2002 was due primarily to reduced spending on
marketing programs of $0.4 million, reduced headcount of $0.2 million and a
reduction in insurance and various other costs of $0.2 million.
Other Income(Expense). For the three months ended September 28, 2002 we had
net other expense of $0.03 million as compared with net other income of $0.09
million for the three months ended September 29, 2001. The change in other
income (expense) for this period was due primarily to the accrual of $0.09
million in interest expense on an accrued liability. For the nine months ended
September 28, 2002 net other income was $0.07 million as compared to net other
income of $0.30 million for the nine months ended September 29, 2001. The
decrease in net other income for this period was due primarily to a decrease in
interest income.
Income Taxes. The effective income tax rate for all periods presented is in
excess of statutory rates primarily due to the magnified impact of tax credits
as taxable income is near break-even levels.
Discontinued Operations. In April 2001, management decided to discontinue
the Laser Research segment. There were no revenues, costs or expenses for this
segment for either of the three month periods ended September 28, 2002 and
September 29, 2001, respectively. The total loss on discontinued operations of
$893,000 (net of a $542,000 income tax benefit) was recorded in the first
quarter of 2001. No assets or liabilities of the Laser Research segment remain
and no proceeds are expected from the disposition of this segment.
The Laser Research segment conducted research and development under
research grants from the U.S. Federal Government and others. We discontinued our
Laser Research activities to better focus available resources on our medical
applications and products. The assets of the segment, primarily inventory, were
fully reserved and the liabilities were fully paid. The components of the
recorded loss were inventory costs of $0.7 million, the loss on operations for
the first quarter of 2001 of $0.3 million, sales return costs of $0.2
15
million, estimated costs for the phase-out period of $0.1 million and purchase
order commitments of $0.1 million offset by a tax benefit of $0.5 million. In
the fourth quarter of 2001, the accrued loss for the discontinuation of the
segment was adjusted to reflect fewer than anticipated product returns.
LIQUIDITY AND CAPITAL RESOURCES
At September 28, 2002, our primary sources of liquidity included cash and
cash equivalents and available-for-sale securities in the aggregate amount of
$10.5 million. In addition, we have available $4 million under our unsecured
line of credit which bears interest at the bank's prime rate and expires in
October 2003. As of September 28, 2002, no borrowings were outstanding under
this credit facility. We expect to renew the line of credit in October 2003
assuming that the terms continue to be acceptable.
During the nine months ended September 28, 2002, we generated $2.8 million
in cash and cash equivalents. During this period, operating activities provided
$1.3 million of cash. Sources of cash from operating activities included a
decrease in net accounts receivable of $0.8 million, a decrease in net
inventories of $0.8 million, depreciation of $0.7 million, an increase in
accrued expenses of $0.3 million and a decrease in prepaid expenses of $0.2
million offset by uses of cash including an increase in the deferred income tax
asset of $0.5 million, a net loss of $0.4 million and a decrease in accounts
payable of $0.4 million. The decrease in accounts receivable resulted primarily
from increased collection efforts. The decrease in inventory and accounts
payable was due mainly to implementation of an inventory reduction program,
whereby inventory purchases were reduced.
Investing activities provided $1.2 million in cash and cash equivalents
during the nine months ended September 28, 2002, primarily due to net proceeds
from maturity of available for sale securities of $1.4 million offset by $0.2
million for the acquisition of property and equipment.
Net cash provided by financing activities during the nine months ended
September 28, 2002 was $0.2 million which consisted of the issuance of common
stock under employee stock option plans and the employee stock purchase plan.
We believe that, based on current estimates, our cash, cash equivalents and
available-for-sale securities together with cash generated from operations and
our credit facility will be sufficient to meet our anticipated cash requirements
for the next 12 months. However, if the current economic downturn remains
protracted, we may need to expend our cash reserves to fund our operations. Our
liquidity could be negatively affected by a continued decline in demand for our
products, the need to invest in new product development or reductions in
spending by our customers as a result of the continuing economic downturn or
other factors. There can be no assurance that additional debt or equity
financing will be available when required or, if available, can be secured on
terms satisfactory to us. See "-Factors That May Affect Future Results - We May
Need Additional Capital, which May Not Be Available, and Our Ability to Grow may
be Limited as a Result."
In December 1998, we instituted a stock repurchase program whereby up to
150,000 shares of our common stock may be repurchased in the open market. We
plan to utilize all of the reacquired shares for reissuance in connection with
employee stock programs. No shares were repurchased during the nine months ended
September 28, 2002. To date, we have purchased 103,000 shares of our common
stock under this program.
16
CRITICAL ACCOUNTING POLICIES
The preparation of our condensed consolidated financial statements in
conformity with United States Generally Accepted Accounting Principles (GAAP)
requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities, net sales and expenses, and the related disclosures. We
base our estimates on historical experience, our knowledge of economic and
market factors and various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. We believe the following critical
accounting policies are affected by significant estimates, assumptions and
judgments used in the preparation of our condensed consolidated financial
statements.
Revenue Recognition.
Revenue from product sales is recognized upon receipt of a purchase order
and product shipment provided no significant obligations remain and collection
of the receivables is deemed probable. Shipments are generally made with
Free-On-Board (FOB) shipping point terms, whereby title passes upon shipment
from our dock. Any shipments with FOB receiving point terms are recorded as
revenue when the shipment arrives at the receiving point. Up-front fees
received in connection with product sales are deferred and recognized over the
associated product shipments.
Sales Return Allowance and Allowance for Doubtful Accounts.
In the process of preparing financial statements we must make estimates and
assumptions that affect the reported amount of assets and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Specifically, we must estimate future product returns related to current period
product revenue. We analyze historical returns, current economic trends and
changes in customer demand and acceptance of our products when evaluating the
adequacy of the sales returns allowance and other allowances. Significant
management judgments and estimates must be made and used in connection with
establishing the sales returns and other allowances in any accounting period.
Material differences may result in the amount and timing of our revenue for any
period if management made different judgments or utilized different estimates.
Similarly our management must make estimates of the collectibility of our
accounts receivable. Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. Our
accounts receivable balance was $7.3 million, net of allowance for doubtful
accounts of $0.3 million as of September 28, 2002.
Inventories.
Inventories are stated at the lower of cost or market. Cost is determined
on a standard cost basis which approximates actual cost on a first-in, first-out
(FIFO) method. Lower of cost or market is evaluated by considering
obsolescence, excessive levels of inventory, deterioration and other factors.
Income Taxes.
Income taxes are accounted for under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred assets and liabilities are recognized for the
17
future consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
Warranty Reserves.
We provide reserves for the estimated costs of product warranties at the
time revenue is recognized. We estimate the costs of our warranty obligations
based on our historical experience of known product failure rates, use of
materials, labor and service delivery costs incurred in correcting product
failures. In addition, from time to time, specific warranty accruals may be
made if unforeseen technical problems arise. Should our actual experience
relative to these factors differ from our estimates, we may be required to
record additional warranty reserves. Alternatively, if we provide more reserves
than we need, we may reverse a portion of such provisions in future periods.
RECENT ACCOUNTING PRONOUNCEMENTS
On April 30, 2002, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 145 (SFAS 145), Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections. FAS No. 145
rescinds both FASB Statement No. 4 (SFAS No. 4), Reporting Gains and Losses from
Extinguishment of Debt, and the amendment to FAS No. 4, FASB Statement No. 64
(SFAS No. 64), Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. Through this rescission, FAS No. 145 eliminates the requirement
(in both SFAS No. 4 and SFAS No. 64) that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. However, an entity is
not prohibited from classifying such gains and losses as extraordinary items, so
long as it meets the criteria in paragraph 20 of Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. Further, SFAS No. 145 amends paragraph 14(a)
of FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency
between the accounting for sale-leaseback transactions and certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The amendment requires that a lease modification (1) results in
recognition of the gain or loss in the financial statements, (2) is subject to
FASB No. Statement No. 66, Accounting for Sales of Real Estate, if the leased
asset is real estate (including integral equipment), and (3) is subject (in its
entirety) to the sale-leaseback rules of FASB Statement No. 98, Accounting for
Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of
Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct
Financing Leases. Generally, FAS No. 145 is effective for transactions
occurring after May 15, 2002. We do not expect that the adoption will have a
material effect on its financial performance or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of SFAS
18
No. 146 also includes costs related to terminating a contract that is not a
capital lease and termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
SFAS No. 146 will be effective for exit or disposal activities that are
initiated after December 31, 2002 and early application is encouraged. We will
adopt SFAS No. 146 during the first quarter of 2003. The provision of EITF No.
94-3 shall continue to apply for an exit activity initiated under an exit plan
that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146.
The effect on adoption of SFAS No. 146 will change on a prospective basis the
timing of when the restructuring charges are recorded from a commitment date
approach to when the liability is incurred.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We Rely on Continued Market Acceptance of Our Existing Products. We
currently market visible and infrared light semiconductor-based photocoagulator
medical laser systems to the ophthalmic market. We also market a visible and
infrared light semiconductor-based photocoagulator medical laser system to the
aesthetics market. We believe that continued and increased sales, if any, of
these medical laser systems is dependent upon a number of factors including the
following:
- Product performance, procedures and price;
- Recommendations and opinions by ophthalmologists and
dermatologists;
- Performance of these laser systems and treatments which are a
beneficial alternative to competing technologies and treatments;
- The willingness of ophthalmologists and dermatologists to convert
to semiconductor-based or infrared laser systems from alternative
technologies; and
- The level of reimbursement for treatments administered with our
products.
Any significant decline in market acceptance of our products would have a
material adverse effect on our business, results of operations and financial
condition.
We Face Strong Competition in Our Markets and Expect the Level of
Competition to Grow in the Foreseeable Future. Competition in the market for
devices used for ophthalmic and aesthetics treatments is intense and is expected
to increase. This market is also characterized by rapid technological
innovation and change and our products could be rendered obsolete as a result of
future innovations. Our competitive position depends on a number of factors
including product performance, characteristics and functionality, ease of use,
scalability, durability and cost. Our principal competitors in ophthalmology
are Lumenis Ltd., Nidek, Inc., Carl Zeiss, Inc., Alcon International and
Quantel. All of these companies currently offer a competitive
semiconductor-based laser system in ophthalmology. Our principal competitors in
aesthetics are Lumenis Ltd., Laserscope, Candela Corporation and Altus Medical
Inc. Some competitors have substantially greater financial, engineering,
product development, manufacturing, marketing and technical resources than we
do. Some companies also have greater name recognition than we do and
long-standing customer relationships. In addition to other companies that
manufacture photocoagulators, we compete with pharmaceuticals, other
technologies and other surgical techniques. Some medical companies, academic
and research institutions, or others, may develop new technologies or therapies
that are effective in treating
19
conditions targeted by us or are less expensive than our current or future
products. Any such developments could have a material adverse effect on our
business, financial condition and results of operations.
Our Future Success Depends on Development of New Products and New
Applications. Our future success is dependent upon, among other factors, our
ability to develop, obtain regulatory approval of, manufacture and market, new
products. In October 2002, we announced the introduction of a number of new
products, specifically the OcuLight Symphony multi-wavelength laser delivery
system, an expanded EndoProbe product line and a 5 mm Large Spot Slit Lamp
Adapter. We also announced the Millenium EndoLase module, which we manufacture
to be included in Bausch & Lomb's Millenium Microsurgical System. Introduction
of these and other new products and new applications will require that we
effectively transfer production processes from research and development to
manufacturing and effectively coordinate with our suppliers. In addition, we
must successfully sell and achieve market acceptance of new products and
applications and enhanced versions of existing products. The extent of, and
rate at which, market acceptance and penetration are achieved by future products
is a function of many variables. These variables include price, safety,
efficacy, reliability, marketing and sales efforts, the development of new
applications for these products, the existence of competing products and general
economic conditions affecting purchasing patterns. Our ability to market and
sell new products may also be subject to government regulation, including
approval by the United States Food and Drug Administration, or FDA, and foreign
government agencies. Any failure in our ability to successfully develop and
introduce new products or enhanced versions of existing products and achieve
market acceptance of new products and new applications could have a material
adverse effect on our operating results and would cause our net revenues to
decline.
Our Business Has Been Adversely Impacted By the Worldwide Economic Slowdown
and Related Uncertainties. Weaker economic conditions worldwide, particularly
in the U.S., have contributed to the current slowdown in our business in
general. This has resulted in reduced demand for some of our products,
particularly in our aesthetics products, such as the Apex 800, excess
manufacturing capacity under current market conditions and higher manufacturing
overhead costs, as a percentage of revenue. In addition, these economic
conditions are making it very difficult for us, our customers and our
distributors to forecast and plan future business activities. This level of
uncertainty strongly challenges our ability to operate profitably
or grow our business. If the economic or market conditions continue or further
deteriorate, this may have a material adverse impact on our financial position,
results of operations and cash flows.
If We Cannot Increase Our Sales Volumes, Reduce Our Costs or Introduce
Higher Margin Products to Offset Anticipated Reductions in the Average Unit
Selling Price of our Products, Our Operating Results May Suffer. The average
selling price of our products may decrease in the future in response to changes
in product mix, competitive pricing pressures, new product introductions by us
or our competitors or other factors. For the nine months ended September 28,
2002 decreases in the average selling prices of our products impacted our level
of sales by $0.4 million from the comparable nine month period in 2001. If we
are unable to offset the anticipated decrease in our average selling prices by
increasing our sales volumes, our net revenues will decline. To maintain our
gross margins, we must continue to reduce the manufacturing cost of our
products. Further, should average selling prices of our current products
decline, we must develop and introduce new products and product enhancements
with higher margins. If we cannot maintain our gross margins, our business
could be seriously harmed, particularly if the average selling price of our
products decreases significantly without a corresponding increase in sales.
We Face Risks of Manufacturing. The manufacture of our infrared and
visible light photocoagulators and the related delivery devices is a highly
complex and precise process. We assemble critical subassemblies and the final
product at our facility in Mountain View, California. Although our OcuLight,
20
OcuLight Symphony, DioLite 532 and Apex 800 systems have been introduced, we
continue to face risks associated with manufacturing these products. Various
difficulties may occur despite testing. Furthermore, we may experience delays,
disruptions, capacity constraints or quality control problems in our
manufacturing operations and, as a result, product shipments to our customers
could be delayed, which would negatively impact our net revenues.
We Depend on Sole Source or Limited Source Suppliers. We rely on third
parties to manufacture substantially all of the components used in our products.
Some of our suppliers are sole or limited source. In addition, some of these
suppliers are relatively small private companies that may discontinue their
operations at any time. There are risks associated with the use of independent
suppliers, including unavailability of or delays in obtaining adequate supplies
of components, including optics, laser diodes, and crystals and potentially
reduced control of quality, production costs and timing of delivery. We may
experience difficulty identifying alternative sources of supply for certain
components used in our products. For example, we experienced delays in shipping
our green laser systems, such as the DioLite 532 for aesthetics and the OcuLight
GL and GLx for ophthalmology, during the first fiscal quarter of 2001 due to a
supply shortage of a key component. We qualified additional sources for this
component during the first fiscal quarter of 2001; however, the process of
qualifying suppliers is ongoing and may be lengthy, particularly as new products
are introduced. In addition, the use of alternate components may require design
alterations which may delay installation and increase product costs. We have
some long term or volume purchase agreements with our suppliers and currently
purchase components on a purchase order basis. These components may not be
available in the quantities required, on reasonable terms, or at all. Any
failures by such third parties to adequately perform may impair our ability to
offer our existing products, delay the submission of products for regulatory
approval, impair our ability to deliver products on a timely basis or otherwise
impair our competitive position. Establishing our own capabilities to
manufacture these components would be expensive and could significantly decrease
our profit margins. Our business, results of operations and financial condition
would be adversely affected if we were unable to continue to obtain components
in the quantity and quality desired and at the prices we have budgeted.
We Depend on International Sales for a Significant Portion of Our Operating
Results. We derive and expect to continue to derive a large portion of our
revenue from international sales. For the nine months ended September 28, 2002
and September 29, 2001, our international sales were $7.9 million and $8.1
million or 37% and 42%, respectively, of total sales. We anticipate that
international sales will continue to account for a significant portion of our
revenues in the foreseeable future. None of our international revenues and
costs have been denominated in foreign currencies. As a result, an increase in
the value of the U.S. dollar relative to foreign currencies makes our products
more expensive and thus less competitive in foreign markets. For example, a
high U.S. dollar relative value to the European currency (the Euro) would make
our products less competitive in Europe when compared to European competitors
and would negatively impact sales levels from the region. The factors stated
above could have a material adverse effect on our business, financial condition
or results of operations. Our international operations and sales are subject to
a number of risks including:
- longer accounts receivable collection periods;
- impact of recessions in economies outside of the United States;
- foreign certification requirements, including continued ability
to use the "CE" mark in Europe;
21
- reduced or limited protections of intellectual property rights;
- potentially adverse tax consequences; and
- multiple protectionist, adverse and changing foreign governmental
laws and regulations.
Any one or more of these factors stated above could have a material adverse
effect on our business, financial condition or results of operations. For
additional discussion about our foreign currency risks, see Item 3,
"Quantitative and Qualitative Disclosures About Market Risk."
We Depend on Third Party Coverage and Reimbursement Policies. Our
ophthalmology products are typically purchased by doctors, clinics, hospitals
and other users, which bill various third-party payers, such as governmental
programs and private insurance plans, for the health care services provided to
their patients. Third-party payers are increasingly scrutinizing and
challenging the coverage of new products and the level of reimbursement for
covered products. Doctors, clinics, hospitals and other users of our products
may not obtain adequate reimbursement for use of our products from third-party
payers. While we believe that the laser procedures using our products have
generally been reimbursed, payers may deny coverage and reimbursement for our
products if they determine that the device was not reasonable and necessary for
the purpose used, was investigational or was not cost-effective. For example,
during July 2000, the Center for Medicare and Medicaid Services, or CMS, advised
that claims for reimbursement for certain AMD procedures which use our OcuLight
SLx laser system would not be reimbursed by CMS. As a result, since July 2000,
sales of the OcuLight SLx laser system dropped significantly. In September
2000, CMS changed its position and advised that claims for reimbursement for two
of the AMD procedures can be submitted for reimbursement, with coverage and
payment to be determined by the local medical carriers at their discretion.
Sales of the OcuLight SLx continue, albeit at a lower level, because the
OcuLight SLx can also be used for other ophthalmic procedures with CMS
reimbursement. We believe domestic sales of the OcuLight SLx laser system will
continue at these lower levels until more local Medicare carriers reimburse for
performing such AMD procedures or until CMS advises that claims for these
procedures may be submitted directly to CMS at the national level. Two
carriers, Noridian Mutual Insurance, which is the CMS Part B Carrier for Alaska,
Arizona, Colorado, Hawaii, Iowa, Nevada, North Dakota, Oregon, South Dakota,
Washington and Wyoming, as well as Cigna, which is the carrier for North
Carolina, Tennessee and Idaho, have made coverage decisions approving the use of
the Transpupillary Thermotherapy, or TTT, protocol for the treatment of wet AMD.
We believe that more medical carriers will reimburse for these procedures when
they are further validated by clinical studies. We are supporting a randomized
clinical trial which may further validate the position TTT will have in the
overall treatment regimen of AMD.
Changes in government legislation or regulation or in private third-party
payers' policies toward reimbursement for procedures employing our products may
prohibit adequate reimbursement. Denial of coverage and reimbursement for our
products could have a material adverse effect on our business, results of
operations and financial condition. We are unable to predict what legislation or
regulation, if any, relating to the health care industry or third-party coverage
and reimbursement may be enacted in the future, or what effect such legislation
or regulation may have on us.
Our Operating Results Fluctuate from Quarter to Quarter and Year to Year.
Our sales and operating results may vary significantly from quarter to quarter
and from year to year in the future. Our operating results are affected by a
number of factors, many of which are beyond our control. Factors contributing to
22
these fluctuations include the following:
- General economic uncertainties and political concerns;
- The timing of the introduction and market acceptance of new
products, product enhancements and new applications;
- Changes in demand for our existing line of aesthetics and
ophthalmic products;
- The cost and availability of components and subassemblies,
including the ability of our sole or limited source suppliers to
deliver components at the times and prices that we have planned;
- Fluctuations in our product mix between aesthetic and ophthalmic
products and foreign and domestic sales;
- The effect of regulatory approvals and changes in domestic and
foreign regulatory requirements;
- Introduction of new products, product enhancements and new
applications by our competitors, entry of new competitors into
our markets, pricing pressures and other competitive factors;
- Our long and highly variable sales cycle;
- Decreases in the prices at which we can sell our products;
- Changes in customers' or potential customers' budgets as a result
of, among other things, reimbursement policies of government
programs and private insurers for treatments that use our
products; and
- Increased product development costs.
In addition to these factors, our quarterly results have been and are expected
to continue to be affected by seasonal factors.
Our expense levels are based, in part, on expected future sales. If sales
levels in a particular quarter do not meet expectations, we may be unable to
adjust operating expenses quickly enough to compensate for the shortfall of
sales, and our results of operations may be adversely affected. In addition, we
have historically made a significant portion of each quarter's product shipments
near the end of the quarter. If that pattern continues, any delays in shipment
of products could have a material adverse effect on results of operations for
such quarter. As a result of the above factors, sales for any future quarter
are not predictable with any significant degree of accuracy and operating
results in any period should not be considered indicative of the results to be
expected for any future period.
We Depend on Collaborative Relationships to Develop, Introduce and Market
New Products, Product Enhancements and New Applications. We have entered into
collaborative relationships with academic medical centers and physicians in
connection with the research and development and clinical testing of our
products. We plan to collaborate with third parties to develop and
commercialize existing and new products.
23
In May 1996, we executed an agreement with Miravant Medical Technologies, a
maker of photodynamic drugs, to collaborate on a device that emits a laser beam
to activate a photodynamic drug developed by Miravant for the treatment of wet
AMD. The Phase III clinical trial was fully enrolled in December 1999. In
January 2002, Miravant announced that the top line results of the trial
indicated that SnET2, the photodynamic drug developed, did not meet the primary
efficacy endpoint in the study population. As a result, the future place for
SnET2 in the treatment of wet AMD is unclear, although we do not expect to
commercialize a product for use with SnET2 in the forseeable future. In the
fourth quarter of 2001, we charged to expense $0.3 million of inventory related
to the laser used by Miravant in the Phase III clinical trials. In October
2002, we announced our collaboration with Bausch & Lomb to design and
manufacture a solid-state green wavelength (532nm) laser photocoagulator module,
to be called the Millennium EndoLase module. The Millennium EndoLase module is
designed to be a component of Bausch & Lomb's ophthalmic surgical suite product
offering and is not expected to be sold as a stand-alone product. Sales of the
Millenium EndoLase module are dependent upon the actual order rate from and
shipment rate to Bausch & Lomb. In addition, Bausch & Lomb awaits FDA 510(k)
premarket clearance in the United States and CE marking in Europe before
marketing the Millenium EndoLase. Additionally, our reliance on others for
clinical development, manufacturing and distribution of our products may result
in unforeseen problems. Further, our collaborative partners may develop or
pursue alternative technologies either on their own or in collaboration with
others. The failure of any current or future collaboration efforts could have a
material adverse effect on our ability to introduce new products or applications
and therefore could have a material adverse effect on our business, results of
operations and financial condition.
We Rely on Patents and Proprietary Rights. Our success and ability to
compete is dependent in part upon our proprietary information. We rely on a
combination of patents, trade secrets, copyright and trademark laws,
nondisclosure and other contractual agreements and technical measures to protect
our intellectual property rights. We file patent applications to protect
technology, inventions and improvements that are significant to the development
of our business. We have been issued thirteen United States patents and one
foreign patent on the technologies related to our products and processes. We
have approximately eleven pending patent applications in the United States and
six foreign pending patent applications that have been filed. Our patent
applications may not issue as patents, any patents now or in the future may not
offer any degree of protection, or our patents or patent applications may be
challenged, invalidated or circumvented in the future. Moreover, our
competitors, many of which have substantial resources and have made substantial
investments in competing technologies, may seek to apply for and obtain patents
that will prevent, limit or interfere with our ability to make, use or sell our
products either in the United States or in international markets.
In addition to patents, we rely on trade secrets and proprietary know-how
which we seek to protect, in part, through proprietary information agreements
with employees, consultants and other parties. Our proprietary information
agreements with our employees and consultants contain industry standard
provisions requiring such individuals to assign to us without additional
consideration any inventions conceived or reduced to practice by them while
employed or retained by us, subject to customary exceptions. Proprietary
information agreements with employees, consultants and others may be breached,
and we may not have adequate remedies for any breach. Also, our trade secrets
may become known to or independently developed by competitors.
The laser and medical device industry is characterized by frequent
litigation regarding patent and other intellectual property rights. Companies
in the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Numerous patents are held by others, including
academic institutions and our competitors. Because patent applications are
maintained in secrecy in the United States
24
until patents are issued and are maintained in secrecy for a period of time
outside the United States, we have not conducted any searches to determine
whether our technology infringes any patents or patent applications. We have
from time to time been notified of, or have otherwise been made aware of, claims
that we may be infringing upon patents or other proprietary intellectual
property owned by others. If it appears necessary or desirable, we may seek
licenses under such patents or proprietary intellectual property. Although
patent holders commonly offer such licenses, licenses under such patents or
intellectual property may not be offered or the terms of any offered licenses
may not be reasonable. This may adversely impact our operating results.
Any claims, with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel, cause
shipment delays or require us to develop noninfringing technology or to enter
into royalty or licensing agreements. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. An adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would have a material
adverse effect on our business, results of operations and financial condition.
Conversely, litigation may be necessary to enforce patents issued to us, to
protect trade secrets or know-how owned by us or to determine the
enforceability, scope and validity of the proprietary rights of others. Both
the defense and prosecution of intellectual property suits or interference
proceedings are costly and time consuming.
We Are Subject To Government Regulation. The medical devices that we
market and manufacture are subject to extensive regulation by the FDA and by
foreign and state governments. Under the FDA Act and the related regulations,
the FDA regulates the design, development, clinical testing, manufacture,
labeling, sale, distribution and promotion of medical devices. Before a new
device can be introduced into the market, the manufacturer must obtain market
clearance through either the 510(k) premarket notification process or the
lengthier premarket approval, or PMA, application process. Obtaining these
approvals can take a long time and delay the introduction of a product.
Noncompliance with applicable requirements, including Quality System
Regulations, or QSRs, can result in, among other things, fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals, and criminal
prosecution. The FDA also has the authority to request repair, replacement or
refund of the cost of any device we manufacture or distribute. Our failure to
obtain government approvals or any delays in receipt of such approvals would
have a material adverse effect on our business, results of operations and
financial condition.
In addition, we are also subject to varying product standards, packaging
requirements, labeling requirements, tariff regulations, duties and tax
requirements. As a result of our sales in Europe, we are required to have all
products "CE" registered, an international symbol affixed to all products
demonstrating compliance to the European Medical Device Directive and all
applicable standards. While currently all of our released products are CE
registered, continued registration is based on successful review of the process
by our European Registrar during their annual audit. Any loss of registration
would have a material adverse effect on our business, results of operations and
financial condition.
We Face Product Liability Risks that May Adversely Affect our Business or
Results of Operations. We may be subject to product liability claims in the
future. Our products are highly complex and some are used to treat extremely
delicate eye tissue and skin conditions on and near a patient's face. Although
we maintain product liability insurance with coverage limits of $11.0 million
per occurrence and an annual aggregate
25
maximum of $12.0 million, our coverage from our insurance policies may not be
adequate. Such insurance is expensive and in the future may not be available on
acceptable terms, if at all. A successful claim brought against us in excess of
our insurance coverage could have a material adverse effect on our business,
results of operations and financial condition.
If We Fail to Accurately Forecast Demand For Our Product and Component
Requirements For the Manufacture of Our Product, We Could Incur Additional Costs
or Experience Manufacturing Delays and May Experience Lost Sales or Significant
Inventory Carrying Costs. We use quarterly and annual forecasts based primarily
on our anticipated product orders to plan our manufacturing efforts and
determine our requirements for components and materials. It is very important
that we accurately predict both the demand for our product and the lead times
required to obtain the necessary components and materials. Lead times for
components vary significantly and depend on numerous factors, including the
specific supplier, the size of the order, contract terms and current market
demand for such components. If we overestimate the demand for our product, we
may have excess inventory, which would increase our costs. If we underestimate
demand for our product and, consequently, our component and materials
requirements, we may have inadequate inventory, which could interrupt our
manufacturing, delay delivery of our product to our customers and result in the
loss of customer sales. Any of these occurrences would negatively impact our
business and operating results.
If We Fail to Manage Growth Effectively, Our Business Could Be Disrupted
Which Could Harm Our Operating Results. We have experienced, and may continue to
experience growth in our business. We have made and, although we are currently
in a global economic downturn, expect to continue to make significant
investments to enable our future growth through, among other things, new product
development and clinical trial results for new applications and products. We
must also be prepared to expand our work force and to train, motivate and manage
additional employees as the need for additional personnel arises. Our personnel,
systems, procedures and controls may not be adequate to support our future
operations. Any failure to effectively manage future growth could have a
material adverse effect on our business, results of operations and financial
condition.
If Our Facilities Were To Experience Catastrophic Loss, Our Operations
Would Be Seriously Harmed. Our facilities could be subject to catastrophic loss
such as fire, flood or earthquake. All of our research and development
activities, manufacturing, our corporate headquarters and other critical
business operations are located near major earthquake faults in Mountain View,
California. Any such loss at any of our facilities could disrupt our operations,
delay production, shipments and revenue and result in large expense to repair
and replace our facilities.
We May Need Additional Capital, which May Not Be Available, and Our Ability
to Grow may be Limited as a Result. We believe that our existing cash balances,
available-for-sale securities, credit facilities and cash flow expected to be
generated from future operations, will be sufficient to meet our capital
requirements at least through the next 12 months. However, we may be required,
or could elect, to seek additional funding prior to that time. The development
and marketing of new products and associated support personnel requires a
significant commitment of resources. If cash from available sources is
insufficient, we may need additional capital, which may not be available on
favorable terms, if at all. If we cannot raise funds on acceptable terms, we
may not be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
Any inability to raise additional capital when we require it would seriously
harm our business.
26
Our Stock Price is Volatile. The trading price of our common stock has been
subject to wide fluctuations in response to a variety of factors , some of which
are beyond our control, including:
- Quarterly variations in operating results;
- Changes in financial estimates by securities analysts;
- Announcements by us or our competitors of new products or of
significant clinical achievements;
- Changes in market valuations of other similar companies; and
- Any deviations in our net sales or levels of profitability from
levels expected by securities analysts.
In addition, the stock market has recently experienced extreme volatility
that has often been unrelated to the performance of particular companies. These
broad market fluctuations could have a significant impact on the market price of
our common stock regardless of our performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
We are exposed to market risks inherent in our operations, primarily
related to interest rate risk and currency risk. These risks arise from
transactions and operations entered into in the normal course of business. We
do not use derivatives to alter the interest characteristics of our marketable
securities or our debt instruments. We have no holdings of derivative or
commodity instruments.
Interest Rate Risk. We are subject to interest rate risks on cash and cash
equivalents, available-for-sale marketable securities and any future financing
requirements. Interest rate risks related to marketable securities are managed
by managing maturities in our marketable securities portfolio. We have no
long-term debt as of September 28, 2002.
The fair value of our investment portfolio or related income would not be
significantly impacted by changes in interest rates since the marketable
securities maturities do not exceed fiscal year 2002 and the interest rates are
primarily fixed.
QUALITATIVE DISCLOSURES
Interest Rate Risk. Our primary interest rate risk exposures relate to:
- The available-for-sale securities will fall in value if market
interest rates increase.
- The impact of interest rate movements on our ability to obtain
adequate financing to fund future operations.
27
We have the ability to hold at least a portion of the fixed income
investments until maturity and therefore would not expect the operating results
or cash flows to be affected to any significant degree by a sudden change in
market interest rates on its short- and long-term marketable securities
portfolio.
Management evaluates our financial position on an ongoing basis.
Currency Rate Risk.
We do not hedge any balance sheet exposures against future movements in
foreign exchange rates. The exposure related to currency rate movements would
not have a material impact on future net income or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"), our President and Chief Executive Officer, who is our
principal executive officer, and our Chief Financial Officer and Vice President,
Administration, who is our principal financial officer, performed an evaluation
of the effectiveness of our "disclosure controls and procedures" (as defined in
Rules 13a-14(c) and 15(d)-14(c) of the Securities Exchange Act of 1934, as
amended). Based on that evaluation, our President and Chief Executive Officer
and our Chief Financial Officer and Vice President, Administration concluded
that, as of the Evaluation Date, our disclosure controls and procedures were
effective to ensure that material information about IRIDEX Corporation and our
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report was being
prepared.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures
subsequent to the Evaluation Date.
28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, the Registrant is
responsible for disclosing the non-audit services approved by the Company's
Audit Committee to be performed by PricewaterhouseCoopers LLP, the Company's
independent auditor. Non-audit services are defined in the law as services other
than those provided in connection with an audit or a review of the financial
statements of the Company. The additional engagement of PricewaterhouseCoopers
LLP for the matters listed below are each considered by the Company to be
audit-related services that are closely related to the financial audit process.
During the quarterly period covered by this filing, the Audit Committee approved
the additional engagements of PricewaterhouseCoopers LLP for certain tax and
sales tax matter consultations and for the review of the Company's filings under
the Securities Exchange Act of 1934, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K
None
29
SIGNATURE
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.
IRIDEX Corporation
(Registrant)
Date: November 12, 2002 By: /s/ Robert Kamenski
----------------------
Robert Kamenski
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
SECTION 13(A) OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Theodore A. Boutacoff, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IRIDEX Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
30
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
By: /s/ THEODORE A. BOUTACOFF
--------------------------------
Name: Theodore A. Boutacoff
Title: President and Chief Executive
Officer
(Principal Executive Officer)
I, Robert Kamenski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IRIDEX Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
31
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
By: /s/ ROBERT KAMENSKI
--------------------------------
Name: Robert Kamenski
Title: Chief Financial Officer and Vice
President, Administration
(Principal Financial
and Accounting Officer)
32