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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 June 30, 2001
[ ] 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 August 6, 2001 was 6,753,126 .
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IRIDEX CORPORATION
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2001
and December 30, 2000 3
Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 2001 and July 1, 2000 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and July 1, 2000 5
Condensed Consolidated Statements of Comprehensive Income (Loss) for
the three and six months ended June 30, 2001 and July
1, 2000 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURE 21
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 30,
2001 2000
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 7,756 $ 9,998
Available-for-sale securities..................................... 3,272 2,996
Accounts receivable, net.......................................... 6,861 8,010
Inventories....................................................... 10,451 9,721
Prepaids and other current assets................................. 590 805
------------ ------------
Total current assets.......................................... 28,930 31,530
Property and equipment, net....................................... 1,782 1,903
Deferred income taxes............................................. 1,592 1,592
----------- -----------
Total assets ................................................. $ 32,304 $ 35,025
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 1,570 $ 1,408
Accrued expenses.................................................. 1,909 3,117
----------- -----------
Total liabilities............................................. 3,479 4,525
----------- -----------
Stockholders' equity:
Common stock...................................................... 68 67
Additional paid-in capital........................................ 22,823 22,691
Accumulated other comprehensive income............................ 8 10
Retained earnings................................................. 5,926 7,732
----------- -----------
Total stockholders' equity ................................... 28,825 30,500
----------- -----------
Total liabilities and stockholders' equity.................... $ 32,304 $ 35,025
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JULY 1, JUNE 30, JULY 1,
2001 2000 2001 2000
-------- -------- -------- --------
Sales ............................................................. 7,088 $ 8,785 $ 12,823 $ 16,781
Cost of sales ..................................................... 3,391 3,636 6,763 6,975
-------- -------- -------- --------
Gross Profit ............................................. 3,697 5,149 6,060 9,806
-------- -------- -------- --------
Operating expenses:
Research and development ...................................... 1,176 1,362 2,488 2,580
Sales, general and administrative ............................. 2,624 2,828 5,422 5,505
-------- -------- -------- --------
Total operating expenses .......................................... 3,800 4,190 7,910 8,085
-------- -------- -------- --------
Operating income (loss) from continuing operations ................ (103) 959 (1,850) 1,721
Other income, net ............................................. 121 140 261 276
-------- -------- -------- --------
Income (loss) before benefit from (provision) for income taxes .... 18 1,099 (1,589) 1,997
Benefit from (provision) for income taxes .................... (7) (352) 676 (639)
-------- -------- -------- --------
Income (loss) from continuing operations .......................... 11 747 (913) 1,358
-------- -------- -------- --------
Income (loss) from discontinued operations (net of applicable
income tax benefit (provision) of $-, $15, $542 and $(32),
respectively) ..................................................... 0 (31) (893) 69
-------- -------- -------- --------
Net income (loss) ................................................. $ 11 $ 716 $ (1,806) $ 1,427
======== ======== ======== ========
Income (loss) from continuing operations per common share-basic ... $ 0.00 $ 0.11 $ (0.14) $ 0.21
Income (loss) from discontinued operations per common share-basic . 0.00 0.00 (0.13) 0.01
-------- -------- -------- --------
Net income (loss) per common share-basic .......................... $ 0.00 $ 0.11 $ (0.27) $ 0.22
======== ======== ======== ========
Income (loss) from continuing operations per common
share-diluted ................................................ $ 0.00 $ 0.10 $ (0.14) $ 0.18
Income (loss) from discontinued operations per common
share-diluted ................................................ 0.00 0.00 (0.13) 0.01
-------- -------- -------- --------
Net income (loss) per common share-diluted ........................ $ 0.00 $ 0.10 $ (0.27) $ 0.19
======== ======== ======== ========
Shares used in per common share basic calculations ................ 6,742 6,638 6,727 6,610
======== ======== ======== ========
Shares used in per share-assuming dilution calculations ........... 6,874 7,360 6,727 7,348
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, JULY 1,
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) ............................................................. $ (1,806) $ 1,427
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Discontinued operations ................................................... 564 --
Depreciation and amortization ............................................. 421 462
Provision for inventories ................................................. 140 --
Provision for sales returns ............................................... -- 100
Changes in operating assets and liabilities:
Accounts receivable ..................................................... 1,141 (592)
Inventories ............................................................. (1,544) (1,070)
Prepaids and other current assets ....................................... 212 (56)
Accounts payable ........................................................ 94 894
Accrued expenses ........................................................ (991) (595)
-------- --------
Net cash provided by (used in) operating activities ....................... (1,769) 570
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities ................................... (1,367) (1,837)
Proceeds from maturity of available-for-sale securities ...................... 1,089 3,505
Acquisition of property and equipment ........................................ (328) (443)
Net cash provided by (used in) investing activities ....................... (606) 1,225
-------- --------
Cash flows from financing activities:
Issuance of common stock, net ................................................ 133 254
-------- --------
Net cash provided by financing activities ................................. 133 254
-------- --------
Net increase (decrease) in cash and cash equivalents .................... (2,242) 2,049
Cash and cash equivalents at beginning of period .................................. 9,998 9,645
-------- --------
Cash and cash equivalents at end of period ........................................ $ 7,756 $ 11,694
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized (losses) on available-for-sale securities $ (2) $ --
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JULY 1, JUNE 30, JULY 1,
2001 2000 2001 2000
------- ------- ------- -------
Net income (loss) ........................... $ 11 $ 716 $(1,806) $ 1,427
Other comprehensive income (loss):
Change in unrealized gain (loss) on
available-for-sale securities ....... (5) 1 (2) --
------- ------- ------- -------
Comprehensive income (loss) ................. $ 6 $ 717 $(1,808) $ 1,427
======= ======= ======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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 30, 2001. The results
of operations for the three month and six month periods ended June 30, 2001 are
not necessarily indicative of the results for the year ending December 29, 2001
or any future interim period.
2. INVENTORIES COMPRISE (IN THOUSANDS):
JUNE 30, DECEMBER 30,
2001 2000
------- -------
(unaudited)
Raw materials and work in progress .......... $ 6,077 $ 6,168
Finished goods .............................. 4,374 3,553
------- -------
Total inventories ........................... $10,451 $ 9,721
======= =======
3. COMPUTATIONS OF NET INCOME (LOSS) PER COMMON SHARE AND DILUTED 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.
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A reconciliation of the numerator and denominator of net income per common
share and diluted net income per common share is as follows (in thousands,
except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JULY 1, JUNE 30, JULY 1,
2001 2000 2001 2000
----------- ----------- ---------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
Numerator
Income (loss) from continuing operations ................... $ 11 $ 747 $ (913) $ 1,358
Income (loss) from discontinued operations ................. -- (31) (893) 69
------ ------- ------- -------
Net income (loss) .......................................... $ 11 $ 716 $(1,806) $ 1,427
====== ======= ======= =======
Denominator -- Basic
Weighted average common stock outstanding .............. 6,742 6,638 6,727 6,610
====== ======= ======= =======
Basic income (loss) per share from continuing operations ... $ 0.00 $ 0.11 $ (0.14) $ 0.21
Basic income (loss) per share from discontinued operations . 0.00 0.00 (0.13) 0.01
====== ======= ======= =======
Basic income (loss) per share .............................. $ 0.00 $ 0.11 $ (0.27) $ 0.22
====== ======= ======= =======
Denominator -- Diluted
Weighted average common stock outstanding .............. 6,742 6,638 6,727 6,610
Effect of dilutive securities
Weighted average common stock options .................. 132 722 -- 738
------ ------- ------- -------
Total weighted average stock and options outstanding ....... 6,874 7,360 6,727 7,348
====== ======= ======= =======
Diluted income (loss) per share from continuing operations . $ 0.00 $ 0.10 $ (0.14) $ 0.18
Diluted income (loss) per share from discontinued operations 0.00 0.00 (0.13) 0.01
====== ======= ======= =======
Diluted income (loss) per share ............................ $ 0.00 $ 0.10 $ (0.27) $ 0.19
====== ======= ======= =======
During the three months ended June 30, 2001 and July 1, 2000, options to
purchase 849,821 and 31,397 shares at weighted average exercise prices of $7.39
and $14.65 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
respective periods. For the six months ended June 30, 2001 and July 1, 2000
options to purchase 723,808 and 23,090 shares at weighted average exercise
prices of $8.01 and $14.74 per share were outstanding but 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.
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 for this segment for both the three month
periods ended July 1, 2000 and June 30, 2001, respectively. Costs and operating
expenses of this segment totaled $46,000 for the three months ended July 1,
2000. There were no costs or operating expenses for this segment for the three
months ended June 30, 2001. 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 and consisted primarily of inventory and sales returns costs. No
assets or liabilities of the Laser Research segment remain and no proceeds are
expected from the disposition of this segment.
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5. INCOME TAXES
The Company uses the liability method to account for income taxes.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. The provision for income taxes
for the three and six month periods ended July 1, 2000 was based on an estimated
effective income tax rate of 32% for the fiscal year ended December 30, 2000.
For the three and six month periods ended June 30, 2001, the effective tax rate
for continuing operations was 40% and 42%, respectively.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations," which establishes financial accounting and reporting
for business combinations and supersedes APB Opinion No. 16, Business
Combinations, and FASB Statement No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. It requires that all business
combinations in the scope of this Statement are to be accounted for using one
method, the purchase method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001, and also applies to all
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001, or later. The Company believes that adoption of
the standard will not have a material effect on the financial position or
results of operations of the Company.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets," which establishes financial accounting
and reporting for acquired goodwill and other intangible assets and supersedes
APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that
are acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in financial
statements upon their acquisition, and after they have been initially recognized
in the financial statements. The provisions of this Statement are effective
starting with fiscal years beginning after December 15, 2001. The Company
believes that SFAS No. 142 will not have a material effect on the financial
position or results of operation of the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations 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 those relating to the level of international sales,
including the impact of the decline in the value of the Euro on international
sales; future sales growth, including potential increased sales of our
ophthalmology products and the Apex 800; resolution of Medicare reimbursement
issues; anticipated increases in manufacturing, research and development and
sales, general and administrative expenses; anticipated decreases and
fluctuations in gross margins; and future liquidity. Actual results could differ
materially from those set forth in such forward-looking statements as a result
of the factors set forth under "Factors That May Affect Future Operating
Results" and other risks detailed in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission and detailed from time to time
in the Company's reports filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of certain items
in our statement of operations for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JULY 1, JUNE 30, JULY 1,
2001 2000 2001 2000
-------- ------- -------- -------
Sales ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ................................ 47.8 41.4 52.7 41.6
----- ----- ----- -----
Gross profit ............................. 52.2 58.6 47.3 58.4
----- ----- ----- -----
Operating expenses:
Research and development ................. 16.6 15.5 19.4 15.4
Sales, general and administrative ........ 37.0 32.2 42.3 32.8
----- ----- ----- -----
Total operating expenses ............. 53.6 47.7 61.7 48.2
----- ----- ----- -----
Operating income (loss) from continuing
operations .............................. (1.4) 10.9 (14.4) 10.2
Other income, net ............................ 1.7 1.6 2.0 1.7
----- ----- ----- -----
Income (loss) from continuing operations
before provision for income taxes ....... 0.3 12.5 (12.4) 11.9
Benefit (provision) for income taxes ......... (0.1) (4.0) 5.3 (3.8)
----- ----- ----- -----
Income (loss) from continuing operations ..... 0.2 8.5 (7.1) 8.1
Income (loss) from discontinued operations
(net of tax) ............................ 0.0 (0.4) (7.0) 0.4
----- ----- ----- -----
Net income (loss) ............................ 0.2% 8.1% (14.1)% 8.5%
===== ===== ===== =====
Sales. Our sales decreased 19% to $7.1 million for the three months ended
June 30, 2001 from $8.8 million for the three months ended July 1, 2000.
Overall, the decrease in our sales was due to decreased unit sales, primarily
for the ophthalmology OcuLight SLx infrared products, as a result of weakened
economic conditions in the United States of America. More specifically, sales of
our OcuLight SLx products decreased as a result of uncertainties surrounding
Medicare reimbursement for certain AMD procedures using our products.
Additionally, during the second quarter of 2000, the Company made sales of the
OcuLight 664 in connection with studies evaluating the effectiveness of
photodynamic therapy for the treatment of age related macular
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degeneration (AMD). In the second quarter of 2001, we made no such sales. The
decreased sales of ophthalmology products was offset, in part, by increased
sales of dermatology products, primarily the DioLite 532. Part of the increase
was due to shipments of orders received in the first quarter of 2001 that were
delayed to the second quarter of 2001 due to a key component supply issue. The
key component supply issue was resolved in the second quarter of 2001. In
addition, orders for the DioLite 532 increased in the second quarter of 2001
compared to the corresponding 2000 quarter. Domestic sales of $4.0 million
accounted for 57% of sales for the three months ended June 30, 2001, compared to
$5.9 million, or 68% of sales in the comparable 2000 period. The decrease in
domestic sales in absolute dollars was due to decreases in ophthalmology product
sales offset, in part, by increases in dermatology product sales. International
sales of $3.0 million accounted for 43% of sales for the three months ended June
30, 2001, compared to $2.8 million, or 32% of sales in the comparable 2000
period. The increase in international sales was primarily due to increases in
dermatology product sales, offset by a slight decrease in ophthalmology sales.
The overall increase in international sales occurred primarily in Europe. We
expect revenues from international sales to continue to account for a
substantial portion of our sales. We expect future growth in sales to be
primarily derived from sales of ophthalmology products and related delivery
devices, and the Apex 800 hair removal laser systems for dermatology. We
commenced revenue shipments of the Apex 800 in the third quarter of 2001.
Gross Profit. Our gross profit decreased 28% to $3.7 million for the three
months ended June 30, 2001 compared to $5.1 million for the three months ended
July 1, 2000. Gross profit as a percentage of net sales for the three months
ended June 30, 2001 decreased to 52.2%, compared to 58.6% for the three months
ended July 1, 2000, primarily due to the decreased sales volume of the OcuLight
SLx which has a relatively higher gross margin. In addition, a higher percentage
of international product sales, which have lower average sales prices as they
are transacted through independent distributors, had the impact of lowering our
gross profit as a percentage of revenue. For the six months ended June 30, 2001,
our gross profit decreased 38.2% to $6.1 million as compared to $9.8 million for
the comparable period in 2000. Gross profit as a percentage of net sales for the
six months ended June 30, 2001 decreased to 47.3%, compared to 58.4% for the six
months ended July 1, 2000. The decrease in gross profit for the six months ended
July 1, 2000 was due primarily to the decreased sales volume of the OcuLight
SLx. For the balance of 2001, we expect manufacturing costs to increase in
absolute dollars to support increasing unit shipment volumes of existing
products. In addition, we commenced revenue shipments of the Apex 800 hair
removal laser system in the third quarter of 2001. We expect the gross profit
margin to drop slightly during the third quarter of 2001, as compared to the
second quarter of 2001, due to higher initial production costs for the Apex 800.
We also 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.
Research and Development. Our research and development expenses decreased
by 13.7% to $1.2 million for the three months ended June 30, 2001 from $1.4
million for the three months ended July 1, 2000. Research and development
expenses increased as a percentage of net sales to 16.6% for the three months
ended June 30, 2001 from 15.5% for the comparable prior year three-month period.
For the six months ended June 30, 2001, research and development expenses
decreased 3.6% to $2.5 million as compared to $2.6 million for the six months
ended July 1, 2000. Research and development expenses as a percentage of net
sales increased during the period to 19.4% for the six months ended June 30,
2001 from 15.4% for the comparable 2000 period. The decrease in research and
development expense in absolute dollars for both the three and six month periods
was due primarily to the completion of development work on the Apex 800 hair
removal laser system during the second quarter of 2001. The increase as a
percentage of sales for both the three and six month periods was driven
primarily by the decrease in sales which exceeded the decrease in research and
development expense. We expect expenses for research and development to increase
in absolute dollars during the remainder of 2001 as compared to the second
quarter of 2001 in connection with activities related to new products and
clinical treatment development, such as the Transpupillary thermotherapy (TTT)
for Age-related Macular Degeneration (AMD) study that commenced in March 2000.
Sales, General and Administrative. Our sales, general and administrative
expenses decreased by 7.2% to $2.6 million for the three months ended June 30,
2001 from $2.8 million for the three months ended July 1, 2000. The decrease in
absolute dollars was due primarily to decreased selling expenses related to
lower sales levels.
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Sales, general and administrative expenses increased as a percentage of net
sales to 37.0% for the three months ended June 30, 2001 from 32.2% for the
comparable prior year three-month period. For the six months ended June 30,
2001, sales, general and administrative expenses decreased by 1.5% to $5.4
million from $5.5 million for the comparable period in 2000. Sales, general and
administrative expenses as a percentage of net sales increased during this
period to 42.3% for the six months ended June 30, 2001 from 32.8% for the
comparable period in 2000. The decrease in absolute dollars in sales, general
and administrative expenses for both the three and six month periods is due
primarily to the decrease in commissions related to decreased revenue. The
increase as a percentage of net sales for both the three and six month periods
is due to the decrease in revenue relative to the decrease in sales, general and
administrative expenses. We expect sales, general and administrative expenses as
a percentage of net sales to decrease during the balance of 2001, as compared to
the second quarter of 2001, as revenues increase.
Discontinued Operations. In April 2001, management decided to discontinue
the Laser Research segment. There were no revenues for this segment for either
of the three month periods ended July 1, 2000 and June 30, 2001, respectively.
Costs and operating expenses of this segment totaled $46,000 for the three
months ended July 1, 2000. There were no costs or operating expenses for this
segment for the three months ended June 30, 2001. 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 and consisted primarily of inventory and sales returns
costs. No assets or liabilities of the Laser Research segment remain and no
proceeds are expected from the disposition of this segment.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, our primary sources of liquidity included cash and cash
equivalents and available-for-sale securities in the aggregate amount of $11.0
million. In addition, we have available $2 million under our unsecured line of
credit which bears interest at the bank's prime rate and expires in September
2001. As of June 30, 2001, no borrowings were outstanding under this credit
facility.
During the six months ended June 30, 2001, we used $2.2 million in cash and
cash equivalents. During this period, operating activities used $1.8 million of
cash. Uses of cash from operating activities included a net loss of $1.8
million, a decrease in accounts payable and accrued expenses of an aggregate of
$0.9 million and an increase in net inventories of $1.4 million, partially
offset by sources of cash including a decrease in accounts receivable of $1.1
million, discontinued operations of $0.6 million, depreciation of $0.4 million
and a decrease in prepaids and other current assets of $0.2 million.
We consumed $0.6 million in cash and cash equivalents with investing
activities during the six months ended June 30, 2001, primarily due to the
acquisition of $0.3 million of property and equipment and net purchases of $0.3
million of available-for-sale securities.
Net cash provided by financing activities during the six months ended June
30, 2001 was $0.1 million which consisted of the issuance of common stock.
We believe that, based on current estimates, our cash, cash equivalents and
available-for-sale securities together with operating cash flows will be
sufficient to meet our anticipated cash requirements for the next 12 months.
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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 six months ended
June 30, 2001. To date, we have purchased 76,000 shares of our Common Stock
under this program.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations," which establishes financial accounting and reporting
for business combinations and supersedes APB Opinion No. 16, Business
Combinations, and FASB Statement No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. It requires that all business
combinations in the scope of this Statement are to be accounted for using one
method, the purchase method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001, and also applies to all
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001, or later. The Company believes that adoption of
the standard will not have a material effect on the financial position or
results of operation of the Company.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets," which establishes financial accounting
and reporting for acquired goodwill and other intangible assets and supersedes
APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that
are acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in financial
statements upon their acquisition, and after they have been initially recognized
in the financial statements. The provisions of this Statement are effective
starting with fiscal years beginning after December 15, 2001. The Company
believes that SFAS No. 142 will not have a material effect on the financial
position or results of operation of the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We Rely on Continued Market Acceptance of Our 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 dermatology
market. We believe the continued and increased sales, if any, of these medical
laser systems is dependent upon the following factors:
o Product performance, procedures and price;
o Opinions of medical advisors and associates;
o Recommendations by ophthalmologists, dermatologists, clinicians, and
their associated opinion leaders;
o Performance of these laser systems and treatments which are a
beneficial alternative to competing technologies and treatments;
o The level of reimbursement for treatments administered with our
products; and
o Our ability to introduce new products into these markets.
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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 commenced revenue shipments of the Apex 800 hair removal laser
system in the third quarter of fiscal 2001. Our stated expectations for future
sales growth depends on market acceptance of this product. If the Apex 800 does
not receive the level of market acceptance that we anticipate, our results of
operations could be materially and adversely effected. See "--We Depend on Third
Party Coverage and Reimbursement Policies" and "--We Depend on Development of
New Products and New Applications."
Our Market is Competitive. Competition in the market for devices used for
ophthalmic and dermatological 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
(formerly ESC Medical, combined with Coherent Medical), Nidek, Inc., Carl Zeiss,
Inc., Quantel and Alcon International and our principal competitors in
dermatology are Lumenis, Candela Corporation, Cynosure, Inc., Laserscope and
HGM. Some competitors have substantially greater financial, engineering, product
development, manufacturing, marketing and technical resources than we do. In
addition to other companies that manufacture photocoagulators, we compete with
pharmaceutical solutions, other technologies and other surgical techniques. Some
medical companies, academic and research institutions or others may develop new
technologies or therapies that are more effective in treating 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.
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. Although our OcuLight Systems, DioLite 532 and Apex 800 have
been successfully introduced, we continue to face risks associated with
manufacturing these products. Various difficulties may occur despite testing.
Furthermore, we depend on third parties to manufacture substantially all of the
components used in our products and have in the past experienced delays in
manufacturing when a sole source supplier was unable to deliver components in
volume and on a timely basis. Such a problem may reoccur. See "--We Depend on
Key Manufacturers and Suppliers." As a result of these factors, we may not be
able to continue to manufacture our existing products or future products on a
cost-effective and timely basis.
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,
although we assemble critical subassemblies and the final product at our
facility in Mountain View, California. Some of our suppliers are relatively
small private companies that may discontinue their operations at any time. There
are risks associated with the use of independent manufacturers, 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 dermatology 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. The key component supply shortage was resolved
in the second quarter of 2001. The key component supply shortage was resolved in
the second quarter of 2001. The process of qualifying suppliers is ongoing and
may be lengthy, particularly as new products are introduced. However, we have
qualified two or more sources for most of the components used in our products.
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. Financial or other
difficulties faced by our suppliers or significant changes in demand for these
components or materials could limit their availability. Any failures by
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such third parties to adequately perform may 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 as required at a reasonable cost.
We Depend on International Sales. We derive and expect to continue to
derive a large portion of our revenue from international sales. In 2000 and
1999, our international sales were $11.7 million and $10.2 million, or 35% and
38%, respectively, of total sales. For the six months ended June 30, 2001 and
July 1, 2000, our international sales were $5.7 million and $5.6 million,
representing 44% and 32%, respectively, of total sales. Therefore, a large
portion of our revenues will continue to be subject to the risks associated with
international sales. 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, the current high U.S.
dollar relative value to the European currency (the Euro) is making our products
less competitive in Europe when compared to European competitors and could
negatively impact future sales levels from the region. The factors stated above
could have a material adverse effect on our business, financial condition or
results of operations.
We Depend on Third Party Coverage and Reimbursement Policies. Our products
are typically purchased by doctors, clinics, hospitals and other users, which
bill various third-party payors, such as governmental programs and private
insurance plans, for the health care services provided to their patients.
Third-party payors carefully review and are increasingly challenging the prices
charged for medical products and services products and services. Reimbursement
rates paid by third-party payors may vary depending on the procedure performed,
the third-party payor, the insurance plan and other factors. Medicare reimburses
hospitals on a prospectively determined fixed amount for the costs associated
with an in-patient hospitalization based on the patient's discharge diagnosis.
Medicare reimburses physicians a prospectively-determined fixed amount based on
the procedure performed, regardless of the actual costs incurred by the hospital
or physician in furnishing the care and regardless of the specific devices used
in that procedure. Third-party payors are increasingly scrutinizing whether to
cover 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 payors. Payors
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,
Medicare advised that claims for reimbursement for certain AMD procedures that
use our OcuLight SLx laser system would not be reimbursed. In September 2000,
Medicare changed its position and advised that claims for reimbursement for
these AMD procedures can be submitted for reimbursement, with coverage and
payment to be determined by the local Medicare carriers at their discretion. As
a result, since July 2000, sales of the OcuLight SLx laser system have dropped
significantly. Sales of the OcuLight SLx continue, albeit at a lower level,
because the OcuLight SLx can also be used for other ophthalmic procedures with
Medicare reimbursement. Furthermore, since Medicare policies apply only to third
party Medicare payors, they are not likely to affect international sales. We
believe domestic sales of the OcuLight SLx laser system will continue at these
lower levels until more local Medicare carriers elect to cover and reimburse for
performing such AMD procedures or until Medicare advises that claims for these
procedures are covered and reimbursable. We believe that more Medicare carriers
will reimburse for these procedures or Medicare will allow national standardized
reimbursement for them when they are further validated by clinical studies. The
Company is supporting a randomized clinical trial which may further validate
Transpupillary thermotherapy, the most significant of the subject AMD
procedures.
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We have developed a new laser system with Miravant, the OcuLight 664.
Miravant may not be able to obtain coverage for its use of drugs with our
OcuLight systems, or the reimbursement may not be adequate to cover the
treatment procedure.
Changes in government legislation or regulation or in private third-party
payors' 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.
Most of the treatment procedures for dermatology using our DioLite 532
laser systems are billed to private-pay customers. Accordingly, reimbursement
issues for our dermatology systems are insignificant.
Our Operating Results Fluctuate from Quarter to Quarter. Our sales and
operating results have varied substantially on a quarterly basis and may
continue to vary in the future. Our operating results are affected by a number
of factors, many of which are beyond our control. Factors contributing to these
fluctuations include the following:
o The timing of the introduction and market acceptance of new products,
product enhancements and new applications;
o The cost and availability of components and subassemblies;
o Changes in our pricing and our competitors;
o Our long and highly variable sales cycle;
o Changes in customers' or potential customers' budgets; and
o 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. There can be no assurance that we will remain profitable in
the future or that operating results will not vary significantly.
We Depend 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, such as the Apex
800 hair removal laser system. In addition, we must successfully sell and
achieve market acceptance of new products and applications and enhanced versions
of existing products. The extent of,
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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 and general economic conditions affecting
purchasing patterns. Any failure in our ability to successfully develop and
introduce new products, such as the Apex 800, or enhanced versions of existing
products, could have a material adverse effect on our business, operating
results and financial condition. We are seeking to expand the market for our
existing and new products by working with clinicians and third parties to
identify new applications and procedures for our products. Failure to develop
and achieve market acceptance of new applications or new products would have a
material adverse effect on our business, results of operations and financial
condition.
We Must Manage Growth. We have experienced, and may continue to experience
growth in production, the number of employees, the scope of our business, our
operating and financial systems and the geographic area of our operations. This
growth has resulted in new and increased responsibilities for management
personnel and our operating, inventory and financial systems. To effectively
manage future growth, if any, we have been required to continue to implement and
improve operational, financial and management information systems, procedures
and controls. We implemented a new enterprise-wide management information system
in 1998. We must also expand, train, motivate and manage our work force. Our
personnel, systems, procedures and controls may not be adequate to support our
existing and future operations. Any failure to implement and improve our
operational, financial and management systems or to expand, train, motivate or
manage employees could have a material adverse effect on our business, results
of operations and financial condition.
We Depend on Collaborative Relationships. 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. 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 development and support of this new
photodynamic system will require significant financial and other resources. This
collaborative development effort may not continue or it may not result in the
successful development and introduction of a photodynamic system and the amount
and timing of resources to be devoted to these activities are not within our
control. 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 eleven United States patents on the
technologies related to our products and processes. 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.
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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 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 ("PMA") application process. Obtaining these approvals can
take a long time and delay the introduction of a product. For example, the
introduction of the OcuLight GL in the United States was delayed about three
months from our expectations due to the longer than expected time period
required to obtain FDA premarket clearance. Noncompliance with applicable
requirements, including Quality System Regulations ("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.
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International regulatory bodies often establish 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. In July 1998, we received CE registration under Annex II
guidelines, the most stringent path to CE registration. With Annex II CE
registration, we have demonstrated our ability to both understand and comply
with all applicable European standards. This allows us to register any product
upon our internal verification of compliance to all applicable European
Standards. Currently all released IRIDEX 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. We may be subject to product liability
claims in the future. Our products are highly complex and are used to treat
extremely delicate eye tissue and skin conditions on and near a patient's face.
Product defects or the improper use of our products could cause blindness,
eyesight damage or skin damage. In addition, although we recommend that our
disposable products only be used once and so prominently label these
disposables, we believe that certain customers may nevertheless reuse these
disposable products. Accordingly, the manufacture and sale of medical products
entails significant risk of product liability claims. Although we maintain
product liability insurance with coverage limits of $11.0 million per occurrence
and an annual aggregate 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.
To date, we have not experienced any product liability claims which would result
in payments in excess of our policy limits.
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 since our
initial public offering in February 1996. Volatility in price and volume has had
a substantial effect on the market prices of many technology companies for
reasons unrelated or disproportionate to the operating performance of such
companies. These broad market fluctuations could have a significant impact on
the market price of our Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For the three and six month periods ended June 30, 2001, there has been no
material change to the disclosure made in the 2000 Form 10-K.
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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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K on April 5, 2001 with the
Securities and Exchange Commission to report the issuance of a press
release announcing lower than expected earnings for our first quarter
of 2001.
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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: August 14, 2001 By: /s/ Robert Kamenski
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Robert Kamenski
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer
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