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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1212 TERRA BELLA AVENUE, MOUNTAIN VIEW CA 94043-1824
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(650) 940-4700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes |X| No | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) Yes | | No |X|
The aggregate market value of the voting common equity held by
non-affiliates of the Registrant was approximately $ 10,005,735 ,as of June 28,
2002, the last business day of the Registrant's most recently completed second
fiscal quarter, based on the closing price reported for such date on the NASDAQ
National Market System. The registrant did not have any non-voting common equity
outstanding. For purposes of this disclosure, shares of common stock held by
each executive officer and director and by each holder of 5% or more of the
outstanding shares of common stock have been excluded from this calculation,
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 19, 2003, Registrant had 6,923,035 shares of common stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Proxy Statement for the Registrant's 2003 Annual
Meeting of Stockholders (the "Proxy Statement") are incorporated by reference
into Part III of this Annual Report on Form 10-K.
Table of Contents Page No.
Part I
Item 1. Business...................................................................... 1
Item 2. Properties.................................................................... 15
Item 3. Legal Proceedings............................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........................... 16
Part II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters......... 17
Item 6. Selected Financial Data....................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 21
Item 7A. Quantitative and Qualitative Disclosure about Market Risk..................... 39
Item 8. Financial Statements and Supplementary Data................................... 40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................... 63
Part III
Item 10. Directors and Executive Officers of the Registrant............................ 64
Item 11. Executive Compensation........................................................ 64
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters................................................... 64
Item 13. Certain Relationships and Related Transactions................................ 64
Item 14. Controls and Procedures....................................................... 64
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 65
Signatures...................................................................................... 68
PART I
This Annual Report on Form 10-K contains certain 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 products; opportunities in the
adjunctive visualization systems market and our efforts to provide total disease
management solutions; expectations for future sales growth, generally, including
expectations of additional sales from our new products and delivery devices and
new applications of our existing products; the potential for production cost
decreases and higher gross margins;our estimate of the size of our markets;
levels of future investment in research and development efforts; our ability to
develop and introduce new products through strategic alliances; favorable Center
for Medicare and Medicaid coverage decisions regarding AMD procedures that use
our products; expected reductions of employee-related costs as a result of our
reduction in force in the second quarter of 2002; 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. The reader is strongly urged to read the information
contained under the captions "Part I, Item 1, Business," and "Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Factors That May Affect Future Results" in this Annual Report for a
more detailed description of these significant risks and uncertainties. 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-K. We undertake no obligation to update such forward-looking statements
to reflect events or circumstances occurring after the date of this report.
ITEM 1. BUSINESS
GENERAL
IRIDEX Corporation is a leading worldwide provider of semiconductor-based
laser systems used to treat eye diseases in ophthalmology and skin afflictions
in dermatology (also referred to as aesthetics). Our products are sold in the
United States predominantly through a direct sales force and internationally
through 66 independent distributors into 107 countries.
Our ophthalmology products treat serious eye diseases, including the three
leading causes of irreversible blindness, age-related macular degeneration
(AMD), diabetic retinopathy and glaucoma. The current family of OcuLight laser
systems, used for ophthalmic applications, includes the IRIS Medical OcuLight
Symphony, OcuLight SL, OcuLight SLx, OcuLight GL and OcuLight GLx Laser
photocoagulation systems. In addition, in October 2002, we introduced the
Millennium Endolase green laser photocoagulator module, which we sell
exclusively to Bausch & Lomb for incorporation into their Millennium
Microsurgical System. Our ophthalmology products contributed $24.2 million,
$20.9 million and $27.1 million to our total revenues in 2002, 2001, and 2000,
respectively. Our aesthetics products treat skin conditions, primarily vascular
and pigmented lesions and remove unwanted hair. Our aesthetics laser systems are
the IRIDERM DioLite 532 and the Apex 800 systems. Our aesthetics products
contributed $6.5 million, $6.4 million and $5.8 million to our total revenues in
2002, 2001 and 2000, respectively. Each ophthalmic and aesthetics laser system
consists of a small, portable laser console and interchangeable delivery
devices, primarily for hospital and office-based use by ophthalmologists and
dermatologists. We believe that our semiconductor-based systems are more
portable, economical, reliable and flexible than competing systems. Since our
first shipment in 1990, more than 5,600 IRIDEX medical laser systems have been
sold worldwide.
-1-
IRIDEX Corporation was incorporated in California in February 1989 as IRIS
Medical Instruments, Inc. In 1996, we changed our name to IRIDEX Corporation and
reincorporated in Delaware. Our executive offices are located at 1212 Terra
Bella Avenue, Mountain View, California 94043-1824, and our telephone number is
(650) 940-4700. As used in this Form 10-K, the terms "Company," "IRIDEX," "we,"
"us" and "our" refer to IRIDEX Corporation, a Delaware corporation, and, when
the context so requires, our wholly owned subsidiaries, IRIS Medical
Instruments, Inc. and Light Solutions Corporation, both California corporations,
and IRIDEX Foreign Sales Corporation, a Barbados corporation, and our aesthetics
division, IRIDERM.
THE IRIDEX STRATEGY
We are one of the worldwide leaders in developing, manufacturing,
marketing and selling innovative and cost-effective medical laser systems. The
key elements of our strategy are:
Broaden Product Lines. One of our core strengths has been our regular
introduction of new laser systems, delivery devices and product upgrades to
enhance the benefits of our laser systems. We attempt to leverage our existing
products and technology when developing new products. In 1997, we introduced the
DioLite 532, based on the same visible light technology as the OcuLight GL, for
the aesthetics market. In 1998, we introduced the OcuLight GLx, a new version of
the OcuLight GL, with increased power and delivery device capability. In October
1999, we introduced the next generation of OcuLight SLx, which offers added
features to our OcuLight SL, such as LongPulse and MicroPulse operating modes.
These features enable the OcuLight SLx to perform the latest in clinical
infrared applications. In October 2000, we introduced the EasyFit family of
portable slit lamp adapters ( or SLAs), which allow for improved viewing clarity
of the retina by the physician. In 2001, we introduced the Apex 800, a high
powered infrared laser for hair removal for the aesthetics market. In October
2002, we introduced the OcuLight Symphony Laser Delivery System which combines
the clinical versatility and convenience of combined infrared and visible
photocoagulation consoles into one delivery device. We also introduced an
expanded EndoProbe product line and a 5 millimeter Large Spot Slit Lamp Adapter.
In December 2002, we commenced shipment of the Millennium Endolase module, which
we manufacture to be included in Bausch & Lomb's Millennium Microsurgical
System. The characteristics of these new products are similar to those which
have made our previous products successful, such as low cost ownership,
reliability and portability. We intend to continue our investment in research
and development to improve the performance of our systems. We also intend to
develop additional technologies which can more cost effectively address the
needs of the ophthalmic and aesthetics markets.
Develop and Validate New Applications. We seek to develop and validate
applications that are less costly, reduce side effects and achieve better
clinical results than existing treatments. The objectives of developing new
applications are to expand the number of patients who can be treated, to more
effectively treat diseases, to treat patients earlier in the treatment regimen,
and, to reduce the side-effects of treatment. An example of this is continued
development of Minimum Intensity Photocoagulation (MIP) protocols. MIP is a
laser treatment approach pioneered by IRIDEX, which uses our OcuLight SLX
infrared lasers to maximize preservation of sensitive retinal tissues while
stimulating a therapeutic effect. We believe that maintaining leadership in MIP
will allow us to make a substantial contribution in the treatment of serious eye
diseases such as age-related macular degeneration and diabetic retinopathy. Our
products are currently being used in multiple studies in the United States and
internationally to demonstrate the clinical benefits of MIP protocols. For
example, our OcuLight SLx laser is being used in several studies to treat the
various stages of both wet and dry forms of age-related macular degeneration (or
AMD). We announced in October 1999 that a pilot clinical study on occult wet AMD
produced results demonstrating that Transpupillary Thermotherapy ( or TTT) was
effective in improving or stabilizing vision in 75% of patients with a procedure
using our OcuLight infrared laser photocoagulator. In November 2001, we
announced that enrollment for the PTAMD study on dry AMD was stopped as
sufficient enrollment had been achieved to detect a clinically relevant
difference in the clinical outcomes of the study. In March 2003, we announced
that the Executive Committee for the TTT4CNV clinical trial, studying TTT as a
therapy for the treatment of wet AMD, accepted the recommendations of the
independent Data and Safety Monitoring Committee that adequate patient
enrollment in the study had been attained. We believe
-2-
that new applications increase laser usage and may ultimately increase the size
of the market for laser photocoagulators. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That May
Affect Future Results - We are Dependent on the Successful Outcome of Clinical
Trials of Our Products and New Applications Using Our Products."
Provide Total Disease Management. We intend to expand our product
offerings utilizing a total disease management approach. We pursue this on the
therapeutic side by increasing the number of delivery devices tailored to treat
specific diseases. We are also pursuing this on the diagnostic side by
developing adjunctive visualization systems which could be used to either
identify patients who require therapy, target laser therapy more accurately, or
assess the adequacy of therapy. Examples of products we have already introduced
which may be utilized for both visualization and treatment include our TruFocus
Laser Indirect Ophthalmoscope and our line of Slit Lamp Adapters. We believe
that a significant opportunity exists to provide additional therapeutic delivery
devices and adjunctive visualization systems. By pursuing both therapeutic and
visualization systems, we intend to provide total disease management solutions
for our customers.
Develop New Markets Through Strategic Alliances. We intend to establish
strategic alliances in order to expedite and lower the cost of developing and
bringing to market new products, both to the ophthalmology and aesthetics
markets and to markets not currently addressed by our products. Through these
alliances, we will seek access to technologies that we do not currently possess.
In October 2002, we announced our collaboration with Bausch & Lomb to design and
manufacture a solid-state green light laser photocoagulator module 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. We intend to pursue additional
strategic alliances in the future, which will provide access to new markets for
our products. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors That May Affect Future Results - We Depend
on Collaborative Relationships to Develop, Introduce and Market New Products,
Product Enhancements and New Applications."
PRODUCTS
We utilize a systems approach to product design. Each system includes a
console, which generates the laser energy, and a number of interchangeable
peripheral delivery devices, including disposable delivery devices, for use in
specific clinical applications. This approach allows our customers to purchase a
basic console system and add additional delivery devices as their needs expand
or as we develop new applications. We believe that this systems approach also
brings economies-of-scale to our product development and manufacturing efforts
since each application does not require the design and manufacture of complete
stand-alone products. Our primary non-disposable products range in price from
$2,000 to $75,000, and consist of laser consoles and peripheral delivery
devices.
Consoles: Our laser consoles incorporate the economic and technical benefits of
semiconductor laser technology.
Infrared Photocoagulator Consoles. These OcuLight photocoagulator
consoles, used by ophthalmologists, are available in two infrared (810nm)
output power ranges: the OcuLight SL at 2 Watts and the OcuLight SLx at 3
Watts. Each console weighs 14 pounds, has dimensions of 4"H x 12"W x 12"D,
draws a maximum of 60 Watts of wall power, and requires no external air or
water cooling. We also manufacture an aesthetics infrared laser product,
the Apex 800. The Apex console weighs 27 pounds, has dimensions of 6"H x
12"W x 17"D, draws 700 Watts of wall power and has a closed loop
integrated
-3-
water cooling system. We believe that the smaller overall sizes, lower
weights and low power requirements to operate represent distinct
advantages over competing products.
Visible Photocoagulator Consoles. Our OcuLight GL and OcuLight GLx
semiconductor-based photocoagulator consoles, used in opthalmology,
deliver visible (532nm) laser light. The OcuLight GLx has increased power
and delivery device capability. Our visible laser light aesthetics
product, the DioLite 532, is also based on semiconductor-based technology.
The OcuLight GL/GLx/DioLite consoles weigh 15 pounds, have dimensions of
6"H x 12"W x 12"D, draw a maximum of 300 Watts of wall power and require
no external air or water cooling. In December 2002, we commenced shipment
of the Millennium Endolase module, which is sold exclusively to Bausch &
Lomb for use with their Millennium Microsurgical System. It integrates
532nm photocoagulator capability into their array of microsurgical
capabilities. It is compatible with the IRIDEX EndoProbe handpieces and
Laser Indirect Ophthalmascope.
Combination Infrared/Visible Photocoagulator Consoles. The OcuLight
Symphony Laser Delivery System, which we introduced in October 2002, is
used by the opthalmologist and consists of an OcuLight SLx infrared
(810nm) laser console, OcuLight GLx green (532 nm) laser, multi-fiber slit
lamp adapter, slit lamp and a custom cart. It combines the clinical
versatility and convenience of a 532 nm, 810 nm and large spot 810 nm into
one delivery device for retinal photocoagulation and glaucoma procedures.
We believe that this product offers a unique value-added proposition and
the efficiency of multiple laser systems in a single product.
Peripheral Delivery Devices: Our versatile family of consoles and delivery
devices has been designed to accommodate the addition of new capabilities with a
minimal incremental investment. A user adds capabilities by simply purchasing a
new interchangeable delivery device. We have developed both disposable and
nondisposable delivery devices and expect to continue to develop additional
devices.
Ophthalmic Delivery Devices:
TruFocus Laser Indirect Ophthalmoscope. The indirect ophthalmoscope is
worn on the physician's head and is used to treat peripheral retinal
disorders, particularly in infants or adults requiring treatment in the
supine position. This product can be used both for diagnosis and treatment
at the point-of-care.
Slit Lamp Adapter. These adapters allow the physician to utilize a
standard slit lamp for both diagnosis and treatment. A slit lamp adapter
can be installed by the doctor in several minutes, converting over 50
variations of standard diagnostic slit lamps into a therapeutic
photocoagulator delivery system. Slit lamp adapters are used for treatment
of both retinal and glaucoma diseases. These devices are available in a
wide variety of spot diameters. In October 2002, we announced the
availability of our Large Spot Size (5 millimeter) Slit Lamp Adapter
designed for use with the OcuLight SLx and offering increased flexibility
to the physician when using the TTT protocol to treat wet AMD.
Operating Microscope Adapter. These adapters allow the physician to
utilize a standard operating microscope for both diagnosis and laser
treatment. These devices are similar to slit lamp adapters, except they
are oriented horizontally and therefore can be used to deliver retinal
photocoagulation to a supine patient.
-4-
EndoProbe. The EndoProbe is used for endophotocoagulation, a retinal
treatment performed in the hospital operating room or surgery center.
These sterile disposable probes are available in tapered, angled, fluted,
and illuminating styles. In October 2002, we introduced the BriteLight
Illuminating EndoProbe providing increased illumination compared to
existing devices.
G-Probe. The G-Probe is used to treat medically and surgically
uncontrolled glaucoma, in many instances replacing cyclocryotherapy, or
freezing of the eye. The G-Probe's non-invasive procedure takes about ten
minutes, is done to an anesthetized eye in the doctor's office and results
in less pain and fewer adverse side effects than cyclocryotherapy. The
G-Probe is a sterile disposable product.
DioPexy Probe. The DioPexy Probe is a hand-held instrument which is used
to treat retinal tears and breaks, noninvasively through the sclera, as an
alternative method of attaching the retina. Our DioPexy Probe results in
increased precision, less pain and less inflammation than traditional
cryotherapy.
Aesthetics Delivery Devices:
DioLite Handpiece. The DioLite Handpiece is a hand held instrument that is
used to treat vascular and pigmented skin lesions. These devices are
available in 200, 500, 700, 1000 and 1400 micron spot diameters.
ScanLite Scanner. The ScanLite is a computer pattern generator with
integrated controls designed to enhance the capabilities of the DioLite
532 laser system. It allows rapid and uniform treatment of large-area
vascular and pigmented skin lesions including port wine stains, matted
telangiectasia, and cafe au lait stains.
Apex 800 ColdTip Handpiece. The ColdTip Handpiece is a handheld instrument
used with the Apex 800 for hair removal. It offers subzero contact cooling
of the epidermis to allow the use of higher treatment fluences for
improved treatment effectiveness and patient comfort.
Apex 800 Varispot Handpiece. The VariSpot Handpiece is a hand held
instrument used with the Apex 800 for hair removal. It offers an aiming
beam which aids visualization of the target area allowing precise
treatment.
The following chart lists the eye diseases that can be treated using our
photocoagulator systems, including the console and delivery devices that we
offer to treat these diseases. The selection of delivery device is often
determined by the severity and location of the disease. The chart also lists the
skin diseases or conditions that can be treated with our aesthetics laser
systems.
Condition Procedure Console Delivery Devices
- -------------------------- --------------------- ---------- -----------------------
Ophthalmology Treatments:
Age-related Macular Retinal Infrared & Slit Lamp Adapter
Degeneration Photocoagulation Visible
Diabetic Retinopathy
Macular Edema Grid Retinal Infrared & Slit Lamp Adapter &
Photocoagulation Visible Operating Microscope
Adapter
Focal Retinal Visible Slit Lamp Adapter
Photocoagulation
-5-
Condition Procedure Console Delivery Devices
- -------------------------- --------------------- ---------- -----------------------
Proliferative Pan-Retinal Infrared & Slit Lamp Adapter,
Photocoagulation Visible Operating Microscope
Adapter, Laser Indirect
Ophthalmoscope,
EndoProbe
Glaucoma
Primary Open-Angle Trabeculoplasty Infrared & Slit Lamp Adapter
Visible
Angle-closure Iridotomy Infrared & Slit Lamp Adapter
Visible(1)
Uncontrolled Transscleral Infrared G-Probe
Cyclophotocoagulation
Retinal Detachment Retinopexy Retinal Infrared & Slit Lamp Adapter,
Photocoagulation Visible Laser Indirect
Ophthalmoscope,
Operating Microscope
Adapter, EndoProbe
Transscleral Retinal Infrared DioPexy Probe
Photocoagulation
Retinopathy of Prematurity Retinal Infrared Laser Indirect
Photocoagulation Ophthalmoscope
Ocular Tumors Retinal Infrared Slit Lamp Adapter,
Photocoagulation Operating Microscope
Adapter, Laser Indirect
Ophthalmoscope
Aesthetics Treatments:
Vascular Lesions Selective Visible DioLite Handpiece
Photothermolysis
Pigmented Lesions Selective Visible DioLite Handpiece
Photothermolysis
Hair Removal Selective Infrared Cold Tip Handpieces,
Photothermolysis Varispot Handpiece
- -------------------
(1) OcuLight GL/GLX is currently not cleared by the U.S. FDA for this
indication.
RESEARCH AND DEVELOPMENT
Our research and development activities are performed internally by our
research and development staff comprised of 17 individuals and is supplemented,
from time to time, by consultants with specialized expertise. Research and
development efforts are directed toward both development of new products and
development of new applications using existing products, as well as the
identification of markets not currently addressed by our products. Our
expenditures for research and development totaled approximately $4,315,000,
$4,808,000 and $5,265,000 in 2002, 2001 and 2000, respectively. We expect to
continue to devote a significant portion of our resources to our research and
development efforts for new products and new applications for existing products.
We have close working relationships with researchers, clinicians and practicing
physicians around the world who provide new ideas, test the feasibility of these
new ideas, and assist us in validating new products and new applications before
they are introduced.
We are continuing to develop Minimum Intensity Photocoagulation (MIP)
protocols. MIP is a laser treatment approach pioneered by IRIDEX, which uses
our OcuLight SLx infrared lasers to maximize preservation of sensitive retinal
tissues while stimulating a therapeutic effect. We believe that maintaining
leadership in MIP will allow us to make a substantial contribution in the
treatment of serious eye diseases such as age-related macular degeneration,
diabetic retinopathy, and glaucoma.
We are supporting pre-clinical and clinical studies to develop new
photocoagulation treatments and applications using MIP protocols. The objectives
of developing new applications are to expand the number of patients who can be
treated, to more effectively treat diseases, to treat patients earlier in the
treatment regimen and to reduce the side-effects of treatment. Examples of such
studies with regard to particular eye afflictions are included in the following
paragraphs.
-6-
Age-Related Macular Degeneration - Wet Form. AMD is a progressive disease
that damages the central vision and affects a person's ability to read,
see faces, and drive. About 50 million people worldwide have AMD and, of
these, about 5 million have the more severe wet form. Though the wet form
of AMD constitutes about 10% of all AMD, it accounts for about 80% of all
severe vision loss associated with AMD. We are pursuing several approaches
to treat wet AMD at different stages. All of these approaches close new
blood vessels in the eye's macula caused by wet AMD with less damage than
conventional laser treatments. One promising approach is Transpupillary
Thermotherapy (TTT). TTT is a Minimum Intensity Photocoagulation (MIP)
protocol that uses a milder form of retinal photocoagulation to treat wet
AMD while sparing the sensory retina, as compared to conventional laser
photocoagulation techniques. The protocol uses the OcuLight SLx laser and
Large Spot Slit Lamp Adapter to produce favorable therapeutic responses
with minimal side effects and preservation of vision in patients with
occult choroidal neovascularization (CNV) secondary to AMD. Favorable
results of a pilot TTT study were published in October 1999 and a
multi-center randomized trial called the TTT4CNV Trial, which we are
supporting, completed the required level of enrollment in March 2003. The
Data and Safety Monitoring Committee (DSMC) for the TTT4CNV clinical trial
meets semiannually to evaluate the status of the study.
Age-Related Macular Degeneration (AMD) - Dry Form. About 90% of AMD is the
dry form. Our approach to treatment of dry AMD is to preserve or improve
vision by following a MIP protocol using the OcuLight infrared laser to
cause resorption of dry AMD deposits (drusen) which have accumulated in
the macula and have impacted vision. We are supporting a multi-center
clinical trial which is testing a treatment of eyes with dry age-related
macular degeneration (PTAMD trial). In November 2001, we announced that
enrollment for the PTAMD trial was stopped as sufficient enrollment had
been achieved to detect a clinically relevant difference in the clinical
outcomes of the study. This trial treats patients with dry AMD using our
OcuLight infrared laser systems with the objective of determining whether
patient vision is better as a result of treatment compared to no
treatment; and secondarily, to determine whether treatment reduces the
rate of progression of the disease from the dry form of AMD to the wet
form of AMD.
Glaucoma. Preliminary studies are underway to evaluate the use of the
G-Probe as a primary surgical treatment modality for glaucoma in various
parts of the world.
Diabetic Retinopathy. Studies are underway to investigate the treatment of
diabetic retinopathy using the MicroPulse infrared photocoagulation
available in our OcuLight SLx product with the objective of causing
regression of the disease with less loss of vision than conventional
therapy.
Ocular Tumors. Clinical studies have reported successful treatment of
ocular tumors using OcuLight infrared lasers using the TTT approach.
CUSTOMERS AND CUSTOMER SUPPORT
Our products are currently sold to comprehensive ophthalmologists, as well
as those specializing in retina, glaucoma and pediatrics, dermatologists and
plastic surgeons. Other customers include research and teaching hospitals,
government installations, surgi-centers and hospitals. No customer or
distributor accounted for 10% or more of total sales in 2002, 2001 or 2000. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
We are continuing our efforts to broaden our customer base through the
development of new products and new applications for use by ophthalmologists and
dermatologists. We currently estimate that there are approximately 20,000
ophthalmologists in the United States and 50,000 internationally who are each
potential customers. We believe there are approximately 10,000 dermatologists
and approximately 9,000 plastic surgeons in the U.S. who are potential
customers. Additionally, we estimate that there are
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approximately 4,900 and 18,000 hospitals in the United States and
internationally, respectively, as well as approximately 2,300 ambulatory
surgical centers in the United States which potentially represent multiple unit
sales. Because independent ophthalmologists and dermatologists frequently
practice at their own offices as well as through affiliation with hospitals or
other medical centers, each independent ophthalmologist, dermatologist, plastic
surgeon, hospital and medical center is a potential customer for our products.
We are seeking to broaden our customer base by developing new products directed
at addressing the needs of ophthalmologists and dermatologists.
We seek to provide superior customer support and service and recently
restructured to create our Global Customer Care Group with the responsibility
for our customer requests and product repairs, which has resulted in a
significant improvement in our response times. We believe that our superior
customer service and technical support distinguish our product offerings from
those of our competitors. Our customer support representatives assists customers
with orders, warranty returns and other administrative functions. Our technical
support engineers provide customers with answers to technical and
product-related questions. We maintain an "around-the-clock" telephone service
line to service our customers. If a problem with a product cannot be diagnosed
and resolved by telephone, a replacement unit is shipped overnight to any
domestic customer and by the most rapid delivery means available to any
international customer, and the problem unit is returned to us. The small size
and rugged design of our products allows for economical shipment and quick
response to customers almost anywhere in the world.
SALES AND MARKETING
We market our products in the United States predominantly through our
direct sales force. As of December 28, 2002, our direct sales force consisted of
15 employees engaged in sales efforts within the United States. Our sales and
marketing organization is based at our corporate headquarters in Mountain View,
California with area sales managers located throughout the United States.
International product sales represented 36.1%, 41.3% and 35.6% of our
sales in 2002, 2001 and 2000, respectively. We believe that our international
sales will continue to represent a significant portion of our revenues for the
foreseeable future. Our international sales are made principally to customers in
Europe and the Asia/Pacific Rim region. Our products are sold internationally
through our 66 independent distributors into 107 countries. International sales
are administered through our corporate headquarters in Mountain View,
California, along with four international area sales managers. Our distribution
agreements with our international distributors are generally exclusive and
typically can be terminated by either party without cause on 90 days notice.
International sales may be adversely affected by the imposition of governmental
controls, restrictions on export technology, political instability, trade
restrictions, changes in tariffs and the economic condition in each country in
which we sell our products. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results--We Depend on International Sales."
To support our sales process, we conduct marketing programs which include
direct mail, trade shows, public relations, and advertising in trade and
academic journals and newsletters. We annually participate in approximately 76
trade shows or meetings in the United States and approximately 65 trade shows or
meetings internationally. These meetings allow us to present our products to
existing and prospective buyers.
We believe that educating patients and physicians at an early stage about
the long-term health benefits and cost-effectiveness of diagnosis and treatment
of diseases that cause blindness is critical to market acceptance of our
ophthalmic products. We believe that the trend toward management of health care
-8-
costs in the United States will lead to increased awareness of and emphasis on
disease prevention and cost-effective treatments and, as a result, will increase
demand for our ophthalmic products.
We work with our customers to enhance our ability to identify new
applications for our products, validate new procedures using our products, and
expedite regulatory approvals of new products and applications. Customers
include key opinion leaders who are often the heads of the departments or
professors at universities. We believe that these luminaries in the field of
ophthalmology and aesthetics are key to the successful introduction of new
products and their subsequent acceptance by the general market. Acceptance of
our products by these early adopters is key to our strategy in the validation of
our new products.
OPERATIONS
The manufacture of our infrared and visible light photocoagulators and the
related delivery devices is a highly complex and precise process. Completed
systems must pass quality control and reliability tests before shipment. Our
manufacturing activities consist of designing, assembling and testing of
components and certain subassemblies for assembly into our final product. As of
December 28, 2002, we had a total of 51 employees engaged in manufacturing
activities.
The medical devices manufactured by us are subject to extensive
regulation by numerous governmental authorities, including federal, state and
foreign governmental agencies. The principal regulator in the United States of
America is the Food and Drug Administration (or "FDA"). In April 1998, we
received certification for ISO 9001/EN 46001. ISO 9001/EN 46001 is a documented
international quality system demonstrating compliance to the European Medical
Device Directive.
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 these
suppliers and manufacturers are sole source. We have some long-term or volume
purchase agreements with our suppliers and currently purchase most 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 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. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results--We Face Risks of Manufacturing and We Depend on Key Manufacturers and
Suppliers."
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 products are CE registered. Continued
registration is based on successful review of the process by our European
Registrar during its annual audit. Any loss of registration would have a
material adverse effect on our business, results of operations and financial
condition. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future Results-We
Are Subject to Government Regulation."
-9-
COMPETITION
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 become 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. In addition to other companies that manufacture photocoagulators and
dermatological devices, we compete with pharmaceutical solutions, other
technologies and other surgical techniques available in both the dermatologic
and ophthalmic markets. Our principal competitors in ophthalmology are Lumenis
Ltd., Nidek, Inc., Carl Zeiss, Inc., Alcon Inc. and Quantel. All of these
companies currently offer a competitive, semiconductor-based laser system for
ophthalmology. Our principal competitors in aesthetics are Lumenis Ltd.,
Laserscope, Candela Corporation, Altus Medical Inc. and Palomar Medical
Technologies, 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 us
and long-standing customer relationships. In addition, other medical companies,
academic and research institutions, or others, may develop new technologies or
therapies, including medical devices, surgical procedures or pharmacological
treatments and obtain regulatory approval for products utilizing such techniques
that are more effective in treating the conditions targeted by us, or are less
expensive than our current or future products. Our technologies and products
could be rendered obsolete by such developments. Any such developments could
have a material adverse effect on our business, financial condition and results
of operations. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Affect Future Results--Our
Market is Competitive."
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 seven pending patent applications
in the United States and six foreign pending patent applications that have been
filed. Our patent applications may not be approved. Any patents granted now or
in the future may offer only limited protection against potential infringement
and development by competitors of competing products. 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 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. 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
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institutions and our competitors. Until recently, patent applications were
maintained in secrecy in the United States until the patents issued. Patent
applications filed in the United States after November 2000 generally will be
published eighteen months after the filing date. However, since patent
applications continue to be maintained in secrecy for at least some period of
time both within the United States of America and with regard to international
patent applications, we cannot assure you that our technology does not infringe
any patents or patent applications held by third parties. 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.
Any claims, with or without merit, and regardless of whether we are
successful on the merits, would be time-consuming, result in costly litigation
and diversion of technical and management personnel, cause shipment delays,
require us to develop noninfringing technology or require us to enter into
royalty or licensing agreements. An adverse determination in a judicial or
administrative proceeding and failure to obtain necessary licenses or develop
alternate technologies 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. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Affect Future Results - We Rely on Patents and
Proprietary Rights."
GOVERNMENT REGULATION
The medical devices to be marketed and manufactured by us are subject to
extensive regulation by numerous governmental authorities, including federal,
state, and foreign governmental agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act, as amended, and the regulations promulgated thereunder (the
"FDA Act"), the Food and Drug Administration (the "FDA") serves as the principal
federal agency within the United States with authority over medical devices and
regulates the research, clinical testing, manufacture, labeling, distribution,
sale, marketing and promotion of such devices. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizures of products, total or partial suspension of
production, failure of the government to grant premarket clearance or 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 manufactured or distributed by us.
In the United States, medical devices are classified into one of three
classes (Class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to Quality System Regulations
("QSRs") requirements). Class II devices are subject to general and special
controls (for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval (or "PMA") by the FDA to ensure their safety and
effectiveness.
Before a new Class III device can be introduced into the market, the
manufacturer must generally obtain marketing clearance through either a 510(k)
premarket notification or a PMA. A 510(k) clearance will be granted if the
submitted information establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or II medical device, or to a Class
III medical device for which the FDA has not called for a PMA. The FDA may
determine that a proposed device is not substantially equivalent to a legally
marketed device, or that additional information or data are needed before a
substantial equivalence determination can be made. A request for additional data
may require that clinical studies of the device's safety and efficacy be
performed.
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Commercial distribution of a device for which a 510(k) notification is
required can begin only after the FDA issues an order finding the device to be
"substantially equivalent" to a previously approved device. The FDA has recently
been requiring a more rigorous demonstration of substantial equivalence than in
the past. Even in cases where the FDA grants a 510(k) clearance, it can take the
FDA from four to twelve months from the date of submission to grant a 510(k)
clearance, but it may take longer.
A "not substantially equivalent" determination, or a request for
additional information, could delay the market introduction of new products that
fall into this category and could have a materially adverse effect on our
business, financial condition and results of operations. For any of our products
that are cleared through the 510(k) process, such as our Apex 800 system,
modifications or enhancements that could significantly affect the safety or
efficacy of the device or that constitute a major change to the intended use of
the device will require new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a Class
III device for which the FDA has called for PMAs. A PMA application must be
supported by valid scientific evidence which typically includes extensive data,
including human clinical trial data, to demonstrate the safety and effectiveness
of the device. The PMA application must also contain the results of all relevant
bench tests, laboratory and animal studies, a complete description of the device
and its components, and a detailed description of the methods, facilities and
controls used to manufacture the device. In addition, the submission may require
the applicant to detail the proposed labeling, advertising literature and
training methods.
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the PMA. An FDA review of a PMA application generally takes one to two years
from the date the PMA application is accepted for filing, but may take
significantly longer. The review time is often significantly extended by the FDA
asking for more information or clarification of information already provided in
the submission. During the review period, an advisory committee, typically a
panel of clinicians, will likely be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. The FDA is not bound by the recommendations of the advisory
panel. Toward the end of the PMA review process, the FDA generally will conduct
an inspection of the manufacturer's facilities to ensure that the facilities are
in compliance with applicable QSR requirements, which include good manufacturing
practices.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter or an
approvable letter, which may contain a number of conditions which must be met in
order to secure final approval of the PMA. When, and if, those conditions have
been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
approval letter, authorizing commercial marketing of the device for certain
indications. The FDA may also determine that additional clinical trials are
necessary or other deficiencies exist in the PMA, in which case PMA approval may
be delayed. The PMA process can be expensive, uncertain and lengthy, and a
number of devices for which the FDA approval has been sought by other companies
have never been approved for marketing.
If human clinical trials of a device are required in connection with
either a 510(k) notification or a PMA, and the device presents a "significant
risk," the sponsor of the trial (usually the manufacturer or the distributor of
the device) is required to file an investigational device exemption ("IDE")
application prior to commencing human clinical trials. The IDE application must
be supported by data, typically including the results of animal and laboratory
testing. If the IDE application is reviewed and approved by the FDA and one
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or more appropriate institutional review boards ("IRBs"), human clinical trials
may begin at a specific number of investigational sites with a specific number
of patients, as approved by the FDA. If the device presents a "nonsignificant
risk" to the patient, a sponsor may begin the clinical trial after obtaining
approval for the study by one or more appropriate IRBs.
All of our products have obtained either an independent 510(k) clearance
or are modifications of previously cleared 510(k) devices, which do not require
the submission of a new 510(k) notification. However, the FDA may not agree with
our determination that a 510(k) notification is not required for the modified
devices and require us to submit a new 510(k) notification for the modification.
If the FDA requires us to submit a new 510(k) notification for the modified
devices, we may be prohibited from marketing the modified device until the
510(k) notification is cleared by the FDA.
Any products manufactured or distributed by us pursuant to FDA clearances
or approvals are subject to pervasive and continuing regulation by the FDA,
including recordkeeping requirements and reporting of adverse experiences with
the use of the device. Device manufacturers are required to register their
establishments and list their devices with the FDA and certain state agencies,
and are subject to periodic inspections by the FDA and certain state agencies.
The FDA Act requires devices to be manufactured to comply with applicable QSR
regulations which impose certain procedural and documentation requirements upon
us with respect to manufacturing, design, development and quality assurance
activities.
Labeling and promotion activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved uses. We and our
products are also subject to a variety of state laws and regulations in those
states or localities where our products are or will be marketed. Any applicable
state or local regulations may hinder our ability to market our products in
those states or localities. Manufacturers are also subject to numerous federal,
state and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. We may be required to
incur significant costs to comply with such laws and regulations now or in the
future. Such laws or regulations may have a material adverse effect upon our
ability to do business.
Exports of our products are regulated by the FDA and are covered by the
Export Amendment of 1996, which greatly expanded the export of approved and
unapproved United States medical devices. However, some foreign countries
require manufacturers to provide an FDA certificate for products for export
("CPE") which requires the device manufacturer to certify to the FDA that the
product has been granted premarket clearance in the United States and that the
manufacturing facilities appeared to be in compliance with QSR at the time of
the last QSR inspection. The FDA will refuse to issue a CPE if significant
outstanding QSR violations exist.
The introduction of our products in foreign markets will also subject us
to foreign regulatory clearances which may impose additional substantial costs
and burdens. International sales of medical devices are subject to the
regulatory requirements of each country. The regulatory review process varies
from country to country. Many countries also impose product standards,
packaging, requirements, labeling requirements and import restrictions on
devices. In addition, each country has its own tariff regulations, duties and
tax requirements. The approval by the FDA and foreign government authorities is
unpredictable and uncertain. The necessary approvals or clearances may not be
granted on a timely basis, if at all. Delays in receipt of, or a failure to
receive, such approvals or clearances, or the loss of any previously received
approvals or clearances, could have a material adverse effect on our business,
financial condition and results of operations.
-13-
Changes in existing requirements or adoption of new requirements or
policies by the FDA or other foreign and domestic regulatory authorities could
adversely affect our ability to comply with regulatory requirements. Failure to
comply with regulatory requirements could have a material adverse effect on our
business, financial condition and results of operations. We may be required to
incur significant costs to comply with laws and regulations in the future. These
laws or regulations may have a material adverse effect upon our business,
financial condition or results of operations.
REIMBURSEMENT
The cost of a significant portion of medical care in the United States is
funded by government programs, health maintenance organizations and private
insurance plans. Our products are typically purchased by doctors, clinics,
hospitals and other users, which bill various third-party payers, such as
government programs and private insurance plans, for the health care services
provided to their patients. Government imposed limits on reimbursement of
hospitals and other health care providers have significantly impacted the
spending budgets of doctors, clinics and hospitals to acquire new equipment,
including our products. Under certain government insurance programs, a health
care provider is reimbursed for a fixed sum for services rendered in treating a
patient, regardless of the actual charge for such treatment. The Center for
Medicare and Medicaid Services (CMS) reimburses hospitals on a
prospectively-determined fixed amount for the costs associated with an
in-patient hospitalization based on the patient's discharge diagnosis. CMS
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. Reimbursement issues have affected sales of our ophthalmic
products to a greater extent than sales of our dermatologic products since
aesthetics procedures, in general, are not covered procedures under most
insurance programs and the cost of these procedures are paid for by the patient.
Private third-party reimbursement plans are also developing increasingly
sophisticated methods of controlling health-care costs through limitation on
reimbursable procedures and the exploration of more cost-effective methods of
delivering health care. In general, these government and private measures have
caused health care providers, including our customers, to be more selective in
the purchase of medical products. In addition, changes in government regulation
or in private third-party payers' policies may limit or eliminate reimbursement
for procedures employing our products, which could have a material adverse
effect on our business, results of operations and financial condition. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Affect Future Results - We Depend on Third Party
Coverage and Reimbursement Policies."
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 CMS advised that claims for reimbursement for certain AMD procedures that
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 have 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 retinal
procedures that are reimbursable by the CMS. Furthermore, since CMS advisories
are for domestic third party CMS payers, 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 medical carriers reimburse for
performing such AMD procedures or until CMS advises that claims for these
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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
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 (TTT4CNV) which may further validate the position TTT will have
in the overall treatment regimen of AMD.
PRODUCT LIABILITY AND INSURANCE
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. Our products are often used in
situations where there is a high risk of serious injury or adverse side effects.
In addition, although we recommend that our disposable products only be used
once and prominently label these disposables, we believe that certain customers
may nevertheless reuse these disposable products. If a disposable product is not
adequately sterilized by the customer between such uses, a patient could suffer
serious consequences, possibly resulting in a suit against us for damages.
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, the coverage of 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.
BACKLOG
We generally ship our products within a few days after acceptance of a
customer's purchase order. Accordingly, we do not believe that our backlog at
any particular time is indicative of future sales levels.
EMPLOYEES
At December 28, 2002, we had a total of 108 full-time employees, including
51 in operations, 29 in sales and marketing, 17 in research and development and
11 in finance and administration. We also employ, from time to time, a number of
temporary and part-time employees as well as consultants on a contract basis. At
December 28, 2002, we employed 2 such persons. We intend to hire additional
personnel during the next twelve months primarily in the direct sales and
production areas. Our future success will depend in part on our ability to
attract, train, retain and motivate highly qualified employees, who are in great
demand. We may not be successful in attracting and retaining such personnel. Our
employees are not represented by a collective bargaining organization, and we
have never experienced a work stoppage or strike. We consider our employee
relations to be good.
ITEM 2. PROPERTIES
Our operating facilities are located in 37,000 square feet of space in
Mountain View, California. This facility is being substantially utilized for all
of our manufacturing and research and development efforts and serves as our
headquarter offices. The lease agreement for this facility expires in February
2004.
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Management believes that our facility has capacity adequate for our
current needs and that suitable additional space or alternative space will be
available as needed in the future on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON EQUITY
Our common stock is quoted on NASDAQ National Market System under the
symbol "IRIX" since our initial public offering on February 15, 1996. The
following table sets forth for the periods indicated the high and low closing
prices for our common stock, as reported on the NASDAQ National Market.
HIGH LOW
------ ------
FISCAL 2003
First Quarter (through March 19, 2003) ... $4.100 $2.750
FISCAL 2002
First Quarter ............................ $6.050 $4.170
Second Quarter ........................... 4.690 3.400
Third Quarter ............................ 3.920 2.310
Fourth Quarter ........................... 4.020 2.780
FISCAL 2001
First Quarter ............................ $6.313 $4.125
Second Quarter ........................... 4.400 3.000
Third Quarter ............................ 4.250 3.250
Fourth Quarter ........................... 5.446 3.850
FISCAL 2003
On March 19, 2003, the closing price on the NASDAQ National Market for our
common stock was $3.770 per share. As of March 19, 2003, there were
approximately 87 holders of record of our common stock.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain any earnings for use in our business and do not anticipate paying cash
dividends in the foreseeable future. In addition, the payment of cash dividends
to our stockholders is currently prohibited by our bank line of credit. See Note
4 of Notes to Consolidated Financial Statements.
-17-
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
As of December 28, 2002, we had three equity compensation plans. These plans are the 1995 Employee
Stock Purchase Plan, 1995 Director Option Plan and 1998 Stock Option Plan, all of which have been
approved by our stockholders. The following table summarizes our equity compensation plans as of
December 28, 2002:
(c)
(b) Number of securities
(a) Weighted-average remaining available for
Number of securities to be exercise price of future issuance under
issued upon exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
Plan category warrants and rights and rights reflected in column (a))
Equity compensation
plans approved by
security holders 1,700,863 $5.11 399,747
Equity compensation
plans not approved
by security holders 0 0 0
--------- ----- -------
Total 1,700,863 $5.11 399,747
========= ===== =======
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of December 28, 2002
and December 29, 2001, and for the years ended December 28, 2002, December 29,
2001 and December 30, 2000, has been derived from, and are qualified by
reference to, our audited consolidated financial statements included herein. The
selected consolidated statement of operations data for the years ended January
2, 1999 and December 31, 1997 and the consolidated balance sheet data as of
December 30, 2000, January 1, 2000 and January 2, 1999 has been derived from our
audited financial statements not included herein. These historical results are
not necessarily indicative of the results of operations to be expected for any
future period.
The data set forth below (in thousands, except per share data) are
qualified by reference to, and should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and our consolidated financial statements, related financial
statement notes and other financial information included in Item 8, "Financial
Statements and Supplementary Data."
Fiscal Fiscal Fiscal Fiscal Fiscal
Year Year Year Year Year
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales ................................................. $ 30,634 $ 27,275 $ 32,838 $ 26,391 $ 22,338
Cost of sales ......................................... 17,046 14,205 14,506 11,669 9,915
-------- -------- -------- -------- --------
Gross profit ............................. 13,588 13,070 18,332 14,722 12,423
-------- -------- -------- -------- --------
Operating expenses:
Research and development .......................... 4,315 4,808 5,265 3,925 3,099
Selling, general and administrative ............... 9,454 10,251 10,747 9,224 8,358
-------- -------- -------- -------- --------
Total operating expenses ................. 13,769 15,059 16,012 13,149 11,457
-------- -------- -------- -------- --------
Income (loss) from operations ......................... (181) (1,989) 2,320 1,573 966
Interest and other income (expense), net .............. 122 426 569 556 511
-------- -------- -------- -------- --------
Income (loss) before provision for income taxes ....... (59) (1,563) 2,889 2,129 1,477
Benefit from (provision for) income taxes ............. 209 962 (809) (682) (369)
-------- -------- -------- -------- --------
Income (loss) from continuing operations .............. 150 (601) 2,080 1,447 1,108
Income (loss) from operations of discontinued Laser
Research segment (net of applicable income tax
benefit(provision) of $0, $124, $(131), $(80) and
$(213) respectively) .................................. 0 (204) 336 171 640
Income (loss) on disposal of Laser Research segment
(net of applicable income tax benefit of $0, $315,
$0, $0 and $0 respectively) ........................... 0 (468) 0 0 0
-------- -------- -------- -------- --------
Net income (loss) ..................................... $ 150 $ (1,273) $ 2,416 $ 1,618 $ 1,748
======== ======== ======== ======== ========
Basic net income (loss) per share:
Continuing Operations ................................. $ 0.02 $ (0.09) $ 0.31 $ 0.22 $ 0.17
Discontinued Operations ............................... 0.00 (0.10) 0.05 0.03 0.10
-------- -------- -------- -------- --------
Basic net income (loss) per common share .............. $ 0.02 $ (0.19) $ 0.36 $ 0.25 $ 0.27
======== ======== ======== ======== ========
Diluted net income (loss) per share:
Continuing Operations ................................. $ 0.02 $ (0.09) $ 0.29 $ 0.21 $ 0.16
Discontinued Operations ............................... 0.00 (0.10) 0.04 0.03 0.10
-------- -------- -------- -------- --------
Diluted net income (loss) per share ................... $ 0.02 $ (0.19) $ 0.33 $ 0.24 $ 0.26
======== ======== ======== ======== ========
Shares used in net income (loss) per common share
basic calculations .................................... 6,870 6,757 6,637 6,503 6,480
======== ======== ======== ======== ========
Shares used in net income (loss) per common share
diluted calculations .................................. 6,928 6,757 7,285 6,849 6,765
======== ======== ======== ======== ========
-19-
December 28, December 29, December 30, January 1, January 2,
2002 2001 2000 2000 1999
------------ ------------ ------------ ---------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
available-for-sale securities ...... $11,542 $ 9,102 $12,994 $13,148 $10,876
Working capital .................... 26,981 26,374 27,005 23,842 23,450
Total assets ....................... 34,272 33,788 35,025 32,763 28,377
Total stockholders' equity ......... 30,198 29,833 30,500 27,504 25,885
-20-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
IRIDEX Corporation is a leading worldwide provider of semiconductor-based
laser systems used to treat eye diseases in ophthalmology and skin afflictions
in aesthetics. Our products are sold in the United States predominantly through
a direct sales force and internationally through 66 independent distributors
into 107 countries.
Our revenues arise primarily from the sale of our IRIS Medical OcuLight
Systems, IRIDERM DioLite 532 and Apex 800 systems, delivery devices, disposables
and, to a lesser extent, revenues from service and support activities. Our
current family of OcuLight systems includes the IRIS Medical OcuLight Symphony,
OcuLight SL, OcuLight SLx, OcuLight GL and OcuLight GLx Laser photocoagulation
systems. In December 2002, we commenced shipment of the Millennium Endolase
module which is sold exclusively to Bausch & Lomb and incorporated into their
Millennium Microsurgical System. We believe that future growth in unit sales
will be derived from growth in sales of peripheral delivery devices, our new
product introductions and from the adoption of new procedures using our existing
products, such as Transpupillary Thermotherapy.
Sales to international distributors are made on open credit terms or
letters of credit. Sales of our products internationally currently are
denominated in United States dollars and, accordingly, are subject to risks
associated with international monetary conditions and currency fluctuations. In
general, strengthening of the U.S. dollar relative to a foreign currency
increases the cost of our product to our customers. Other risks that
international sales are subject to include shipping delays, generally longer
receivable collection periods, changes in applicable regulatory policies,
domestic and foreign tax policies, trade restrictions, duties and tariffs and
economic and political instability. Future currency fluctuations or other
factors discussed above may have a material adverse effect on our business,
financial condition or results of operation. See "--Factors That May Affect
Future Results--We Depend on International Sales for a Significant Portion of
Our Operating Results."
Cost of sales consists primarily of the cost of purchasing components and
sub-systems, assembling, packaging, shipping and testing components at our
facility, and the direct labor and associated overhead. Research and development
expenses consist primarily of personnel costs, materials and research support
provided to clinicians at medical institutions developing new applications which
utilize our products. Research and development costs have been expensed as
incurred. Sales, general and administrative expenses consist primarily of costs
of personnel, sales commissions, travel expenses, advertising and promotional
expenses, facilities, legal and accounting, insurance and other expenses which
are not allocated to other departments.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
sales for the periods indicated:
-21-
Fiscal Year Fiscal Year Fiscal Year
Ended 2002 Ended 2001 Ended 2000
---------- ---------- ----------
Sales .................................................. 100.0% 100.0% 100.0%
Cost of sales .......................................... 55.6 52.1 44.2
----- ----- -----
Gross profit ...................................... 44.4 47.9 55.8
----- ----- -----
Operating expenses:
Research and development .......................... 14.1 17.6 16.0
Sales, general and administrative ................. 30.9 37.6 32.7
----- ----- -----
Total operating expenses .......................... 45.0 55.2 48.7
----- ----- -----
Operating income (loss) from continuing operations ..... (0.6) (7.3) 7.1
Other income, net ...................................... 0.4 1.6 1.7
----- ----- -----
Income (loss) from continuing operations before
provision for income taxes ............................. (0.2) (5.7) 8.8
Benefit (provision) for income taxes ................... 0.7 3.5 (2.5)
----- ----- -----
Income (loss) from continuing operations ............... 0.5 (2.2) 6.3
Income (loss) from discontinued operations (net of tax). 0.0 (2.5) 1.0
----- ----- -----
Net income (loss) ...................................... 0.5% (4.7)% 7.3%
===== ===== =====
The following table sets forth for the periods indicated the amount of
sales for our operating segments and sales as a percentage of total sales.
Year Ending Year Ending Year Ending
December 28, 2002 December 29, 2001 December 30, 2000
------------------ ------------------ ------------------
Percentage Percentage Percentage
of total of total of total
Amount sales Amount sales Amount sales
------- ----- ------- ----- ------- -----
Domestic ........ $19,564 63.9% $16,004 58.7% $21,133 64.4%
International ... 11,070 36.1% 11,271 41.3% 11,705 35.6%
------- ----- ------- ----- ------- -----
Total .............. $30,634 100.0% $27,275 100.0% $32,838 100.0%
======= ===== ======= ===== ======= =====
Ophthalmology:
Domestic ........ $14,326 46.8% $10,976 40.2% $16,559 50.4%
International ... 9,843 32.1% 9,946 36.5% 10,506 32.0%
------- ----- ------- ----- ------- -----
Total .............. $24,169 78.9% $20,922 76.7% $27,065 82.4%
======= ===== ======= ===== ======= =====
Aesthetics:
Domestic ........ $ 5,238 17.1% $ 5,028 18.4% $ 4,574 13.9%
International ... 1,227 4.0% 1,325 4.9% 1,199 3.7%
------- ----- ------- ----- ------- -----
Total .............. $ 6,465 21.1% $ 6,353 23.3% $ 5,773 17.6%
======= ===== ======= ===== ======= =====
During fiscal 2002, we continued to face downturns in our market, which
started early in calendar year 2001, and are due to the worldwide economic
slowdown and related uncertainties. For several quarters during 2002, we
experienced reduced demand for our products as a result of these weakened
economic conditions.
-22-
Combined Ophthalmology and Aesthetics Sales
In 2002, sales increased by 12.3% to $30.6 million from $27.3 million in
2001. Domestic sales, which represented 63.9% of total sales, increased by $3.6
million or 22.2%. The increase in domestic sales was primarily a result of $2.6
million in unit sales improvements, particularly for visible lasers, including
sales of the new Millenium EndoLase module to Bausch & Lomb, a $1.2 million
increase in unit sales of delivery devices for our ophthalmology products, $0.2
million in increased domestic aesthetic sales and $0.1 million in increased
service revenue offset, in part, by $0.5 million in lower average selling
prices. International sales, which were 36.1% of total sales, decreased by $0.2
million or 1.8%. The decrease in international sales in 2002 was due mainly to
the strength of the U.S. dollar for most of 2002. This made our products cost
more in foreign markets, since sales of our products internationally are
denominated in U.S. dollars, thereby decreasing international sales by $0.2
million. We face challenges marketing and selling our products in the current
difficult economic environment, both domestically and internationally, and
expect to continue to face these challenges for the foreseeable future. See
"-Factors That May Affect Future Results - Our Business Has Been Adversely
Impacted by the Worldwide Economic Slowdown and Related Uncertainties."
In 2001, sales decreased by 16.9% to $27.3 million from $32.8 million in
2000 primarily as a result of decreased unit sales of our ophthalmology
products. Domestic sales which represented 58.7% of total sales, decreased by
$5.1 million or 24.3% primarily as a result of weakened economic conditions in
the United States of America and $0.2 million due to lower average selling
prices for aesthetics products. International sales, which were 41.3% of total
net sales, decreased by $0.4 million or 3.7% primarily as a result of the
strength of the U.S. dollar. To compensate, we lowered our average selling
prices for our ophthalmology products which resulted in $0.5 million less
international sales.
Ophthalmology Sales
Ophthalmology sales increased in 2002 by $3.2 million or 15.5% to $24.2
million. Domestic ophthalmology sales increased by $3.4 million or 30.5% to
$14.3 million. Domestic ophthalmology sales increased during this period mainly
as a result of $2.6 million in increased unit sales of visible laser consoles,
including the Millenium EndoLase module, $1.2 million in increased unit sales of
delivery devices and $0.1 million in increased service revenue offset, in part,
by a decrease in average selling prices of $0.5 million. International
ophthalmology sales decreased by $0.1 million or 1.0% to $9.8 million. The
decrease in international sales was due primarily to a $0.2 million decrease in
unit sales of infrared laser consoles, which resulted from the stronger U.S.
dollar in 2002, offset by a $0.1 million increase in combined unit sales of
visible laser consoles and delivery devices.
In 2001, ophthalmology sales decreased $6.1 million or 22.7% to $20.9
million. Domestic ophthalmology sales decreased $5.6 million or 33.7% to $11.0
million. International ophthalmology sales decreased by $0.6 million or 5.3% to
$9.9 million. The decrease in domestic sales was due primarily to weakened
economic conditions in the U.S. In addition, sales of our OcuLight SLx, in
particular, were impacted in the United States as a result of uncertainties
surrounding reimbursement by the Center for Medicare and Medicaid (CMS) for
certain procedures to treat age-related macular degeneration (AMD) using our
products. The decrease in international sales included a $0.5 million decrease
in average selling prices for our ophthalmology products.
Aesthetics Sales
Aesthetics sales increased in 2002 by $0.1 million or 1.8% to $6.5
million. Domestic aesthetics sales increased by $0.2 million or 4.2% to $5.2
million. The increase in domestic aesthetics sales was due mainly to a $0.4
million increase from 2001 to 2002 in unit sales of the Apex 800 laser system
which was introduced
-23-
in July 2001, a $0.1 million increase in unit sales of delivery devices and $0.1
million in increased service revenue offset, in part, by a $0.3 million decrease
in unit sales of the DioLite laser and a decrease in average selling prices of
$0.1 million. International aesthetics sales decreased by $0.1 million or 7.4%
to $1.2 million. Increases in international unit sales of the Apex 800 laser
system of $0.2 million and in delivery devices of $0.2 million were offset by a
$0.5 million decrease in unit sales of the DioLite 532. We expect that the
current economic slowdown will continue to adversely affect sales of our
aesthetic products, particularly the Apex 800 laser system, and to a greater
extent than sales of our ophthalmology products since aesthetic procedures are
typically elective and therefore can be deferred, while ophthalmology procedures
are typically not deferred. In addition, the continued political uncertainties
in the Middle East and any extended hostilities in Iraq, to the extent these
factors affect worldwide economic conditions, may adversely impact our
international sales. See "-Factors That May Affect Future Results - Our Business
Has Been Adversely Impacted by the Worldwide Economic Slowdown and Related
Uncertainties."
Aesthetics sales increased in 2001 by $0.6 million or 10.0% to $6.4
million. Domestic aesthetics sales increased by $0.5 million or 9.9% to $5.0
million. International aesthetics sales increased $0.1 million or 10.5% to $1.3
million. The overall increase in aesthetics sales in 2001 was due primarily to
sales of our Apex 800 laser system, which we introduced in July 2001. Included
in the increase in aesthetics sales from 2000 to 2001 was a $0.2 million
decrease in domestic average selling prices.
Gross Profit. Gross profit was $13.6 million in 2002, $13.1 million in
2001 and $18.3 million in 2000. Gross profit represented 44.4% of sales in 2002,
47.9% in 2001 and 55.8% in 2000. Gross profit as a percentage of sales decreased
in 2002 by 3.5% as compared to 2001. The decrease in gross profit as a
percentage of sales was due primarily to 1.5% for inventory related charges,
1.2% for increased warranty costs related to a change in estimate, 1.6% for
lower average selling prices offset, in part, by increased gross margin of 0.4%
associated with a reduction in direct inventory costs and 0.3% for increased
domestic sales which have a higher gross margin. We intend to continue our
efforts to reduce the cost of components and thereby mitigate the impact of
price reductions on our gross profit. We believe gross profit in dollars will
increase as volumes increase and unit production costs will decrease as costs
are engineered out of new products. However, gross margins as a percentage of
sales will continue to fluctuate due to changes in the relative proportions of
domestic and international sales, the mix of product sales, costs associated
with future product introductions and a variety of other factors. See "Factors
That May Affect Future Results - Our Operating Results May Fluctuate from
Quarter to Quarter."
Gross profit as a percentage of sales decreased 7.9% in 2001 as compared
to 2000. Of this decrease, 2.6% was due to decreased sales volume of the
OcuLight SLx, which has a relatively higher gross margin. In addition, fixed
manufacturing costs were spread over a lower sales volume and we experienced
higher initial production costs of our Apex 800 hair removal laser, which
decreased gross profit as a percentage of sales in 2001 as compared to 2000 by
4.1%. We also charged to expense $0.3 million of inventory related to the
OcuLight 664 which decreased gross profit by an additional 1.0%.
Research and Development. Research and development expenses decreased by
10.3% in 2002 to $4.3 million and decreased by 8.7% in 2001 to $4.8 million from
$5.3 million in 2000. These expenses were 14.1% of sales in 2002, 17.6% of sales
in 2001 and 16.0% of sales in 2000. The decrease in 2002, in absolute dollars,
consisted of $0.3 million in reduced personnel spending related to a reduction
in force in June 2002, $0.3 million in reduced spending due to the completion of
the Apex Hair Removal Laser system in 2001, offset, in part, by a $0.1 million
increase in clinical spending. The decrease in research and development expenses
in 2002, as a percentage of sales, was due to the decline in expenses in
absolute dollars and an increase in the level of sales exceeding the increase in
research and development expense. We expect to increase our research and
development expenditures in 2003 as we conduct additional development projects
with our existing research and development staff. The decrease in 2001, in
absolute dollars was primarily due to a reduction of expenses of $0.8 million
related to the completion of the Apex 800 and $0.2 million due to cost
containment measures, offset in part by a $0.6
-24-
million increase in other new project spending. The increase in research and
development expenses in 2001, as a percentage of sales, was driven by the
decrease in sales which exceeded the decrease in research and development costs.
Sales, General and Administrative. Sales, general and administrative
expenses decreased by 7.8% in 2002 to $9.5 million and decreased by 4.6% in 2001
to $10.3 million from $10.7 million in 2000. These expenses were 30.9% of sales
in 2002, 37.6% of sales in 2001 and 32.7% of sales in 2000. The decrease in
sales, general and administrative expenses, in absolute dollars, from 2001 to
2002 consisted of reduced marketing and administrative personnel spending of
$0.2 million related, in part, to the reduction in force in June 2002, $0.3
million in reduced spending on marketing programs, $0.2 million in reduced
insurance spending and $0.1 million of other cost containment actions targeted
at non-personnel expenses and resulting in reduced costs. The decrease, as a
percentage of net sales, from 2001 to 2002 was attributable to the decline in
expenses in absolute dollars and an increase in the level of sales exceeding the
increase in sales, general and administrative expense. From 2000 to 2001, sales,
general and administrative expenses, in absolute dollars, decreased as a result
of $0.2 million in lower commissions, $0.1 million from fewer marketing and
administrative personnel and $0.2 million of other cost containment actions. The
increase in sales, general and administrative expense, as a percentage of net
sales, from 2000 to 2001 was due to the decrease in the level of sales exceeding
the decrease in sales, general and administrative expense.
Other income, net. Other income, net consists primarily of interest
income. Interest income was $151,000, $378,000 and $552,000 in 2002, 2001 and
2000, respectively. This income was primarily from interest earned on
available-for-sale securities. Interest income decreased in both 2002 and 2001
compared with 2001 and 2000, respectively, because of lower interest rates in
2002 and 2001 and overall lower average cash balances in 2001.
Income Taxes. In 2002, our effective rate was a benefit of 360% primarily
as a result of pretax income nearing zero and the level of tax credits for
research and development activities relative to the loss for 2002. Our effective
tax rate for 2001 was a benefit of 62% and in 2000 it was 28%. The tax rate for
2001 and 2000 was lower than the Federal and State combined statutory rate of
40% because of certain tax benefits associated with tax-exempt interest on tax
preferred securities and with tax credits for research and development
activities.
Discontinued Operations. In April 2001, we discontinued our Laser Research
segment. In the first quarter of 2001, we recorded a loss of $893,000 (net of a
$542,000 tax benefit). In the fourth quarter of 2001, we adjusted the loss on
discontinued operations to $672,000 (net of a $439,000 income tax benefit).
Revenues for this segment were $599,000 for 2000. Costs and operating expenses
of the Laser Research segment were $132,000 for 2000. Sales, general and
administrative costs and indirect costs of manufacturing historically were not
allocated to the Laser Research 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, estimated sales return costs of $0.2
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.
-25-
Reduction in Force. During the quarter ended June 28, 2002, we reduced our
workforce by seventeen positions or approximately 12%. For the three months
ended June 28, 2002, we recorded restructuring charges totaling approximately
$150,000 that were related primarily to the severance costs associated with the
headcount reduction instituted in the second quarter of 2002. The reduction in
workforce is expected to reduce employee-related costs by $1.2 million annually
going forward.
LIQUIDITY AND CAPITAL RESOURCES
At December 28, 2002, our primary sources of liquidity included cash and
cash equivalents of $9.2 million and available-for-sale securities of $2.3
million, for a total of $11.5 million. In addition, we have available $4.0
million under our unsecured line of credit which bears interest at the bank's
prime rate and expires in October 2003. As of December 28, 2002, no borrowings
were outstanding under this credit facility. We expect to renew the line of
credit in October 2003 assuming that terms continue to be acceptable. We believe
that, based on current estimates, our current cash, available-for-sale
securities and the credit facility will be sufficient to meet our working
capital and capital expenditure requirements at least through the next twelve
months. However, we believe that the level of financial resources is a
significant competitive factor in our industry, and accordingly we may choose to
raise additional capital through debt or equity financing prior to the end of
2003.
We generated $4,613,000 in cash and cash equivalents during 2002. In 2001,
we used $5,385,000 in cash and cash equivalents. In 2000, we generated $353,000.
Net cash generated by operations in 2002 totaled $2,509,000 as compared
with $3,635,000 used in operations in 2001 and $74,000 used in operations in
2000. In 2002, sources of cash included decreases in net inventories of
$1,837,000, depreciation of $869,000, increases in accrued expenses of $638,000,
decreases in prepaid expenses of $359,000 and net income of $150,000. Uses of
cash in 2002 included decreases in accounts payable of $519,000, increases in
net accounts receivable of $482,000 and an increase in the deferred tax asset of
$343,000. The decrease in inventory and accounts payable was due mainly to
implementation of an inventory reduction program. The increase in accrued
expenses consisted mainly of $0.4 million for income tax payable, $0.1 million
for an increase in accrued warranty and $0.1 million for an accrued liability.
The decrease in prepaid expenses consisted primarily of $0.4 million for tax
receivable. In 2001, uses of cash included increases in net inventories of
$2,841,000, a net loss of $1,273,000, increases in deferred income taxes of
$332,000, decreases in accrued expenses of $338,000, decreases in net accounts
receivable of $56,000 offset by sources of cash from operations which included
depreciation of $859,000, tax benefit of employee stock option plans of $372,000
and decreases in prepaids and other current assets of $206,000. The increase in
inventory was due primarily to material purchases associated with the Apex 800
which commenced shipment in July 2001. The increase in deferred income taxes was
due primarily to the tax loss generated in 2001. The decrease in accrued
expenses resulted primarily from a decrease in accrued payroll. The decrease in
accounts payable related to a decreased level of inventory receipts at the end
of the year. Prepaid and other current assets decreased due to decreases in
accounts payable of $232,000 and decreased prepaid spending on trade shows.
We generated $1,849,000 for investing activities in 2002. We used
$1,991,000 and $133,000 of cash in 2001 and 2000 respectively. Net cash provided
by or used in investing activities was primarily due to the sale or purchase and
proceeds of available-for-sale securities and the acquisition of fixed assets.
Net cash provided by financing activities during 2002, 2001 and 2000 was
$205,000, $241,000 and $560,000, respectively, which consisted primarily of
issuance of stock in connection with our employee stock programs, offset in part
by purchase of treasury stock of $115,000 in 2001.
-26-
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 of our common stock from the open market were
purchased during 2000 and 2002. In 2001, we purchased 27,000 shares of our
common stock from the open market. As of December 28, 2002 we have repurchased
103,000 shares of common stock.
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 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.
Warranty
The Company accrues for estimated warranty costs upon shipment of products
in accordance with SFAS No. 5, "Accounting for Contingencies." Actual warranty
costs incurred have not materially differed from those accrued. The Company's
warranty policy is effective for shipped products which are considered defective
or fail to meet the product specifications. 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. Warranty
costs are reflected in the income statement as a cost of revenues.
Sales Returns 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.
The provision for sales returns amounted to $0.2 million in 2002. Similarly our
management must make estimates of the uncollectibility 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
-27-
accounts. Our accounts receivable balance was $8.0 million, net of allowance for
doubtful accounts of $0.3 million as of December 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 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. Changes in
estimate of future levels of taxable income or tax planning strategies could
result in the need to provide or increase the valuation allowance against the
net deferred tax assets which could materially impact earnings in the period of
change.
CONTRACTUAL OBLIGATIONS
The following table summarizes purchase commitments and minimum rentals
due for our facility and other leased assets under long-term, non-cancelable
operating leases as of December 28, 2002 (in thousands):
Payments Due by Period
----------------------
Contractual
Obligations Total Less than 1 Year 1 - 3 Years
----- ---------------- -----------
Operating Leases ... $ 824 $ 702 $122
Unconditional
Purchase
Obligations* ....... $ 389 $ 389 $ 0
----- ---------------- -----------
Total
Contractual
Cash Obligations ... $ 1,213 $ 1,091 $ 122
===== ================= ===========
*Contractual purchase obligations have varying cancellation terms.
-28-
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which eliminates inconsistencies between the required accounting
for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of SFAS
No. 145 are effective for fiscal years beginning after May 15, 2002 and for
transactions occurring after May 15, 2002. We do not expect the adoption of SFAS
No. 145 to have a material impact on our financial position or on our results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" which addresses the recognition, measurement, and reporting
of costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the EITF has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146
will be effective for exit or disposal activities that are initiated after
December 31, 2002. We do not expect the adoption of SFAS No. 146 to have a
material impact on our financial position or on our results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, or FIN 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of FIN 45
did not have a material impact on our financial position or on our results of
operations.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." EITF 00-21 establishes criteria for whether revenue on a
deliverable can be recognized separately from other deliverables in a multiple
deliverable arrangement. The criteria consider whether the delivered item has
standalone value to the customer, whether the fair value of the delivered item
can be reliably determined and the rights of returns for the delivered items.
EITF 00-21 is effective for revenue arrangements entered into in fiscal years
beginning June 15, 2003 with early adoption permitted. We do not expect that the
adoption of EITF 00-21 to have a material impact on our financial position or on
our results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation- Transition and Disclosure an amendment of FASB
Statement No. 123." SFAS No. 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also requires prominent disclosures of the
pro forma effect of using the fair value method of accounting for stock-based
employee compensation in both annual and interim financial statements. The
transition and annual disclosure requirements of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. The interim disclosure requirements
are effective for interim
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periods beginning after December 15, 2002. The adoption of SFAS No. 148 did not
have a material impact on our financial position or on our results of
operations.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest entities which
possess certain characteristics. The Interpretation requires that if a business
enterprise has a controlling financial interest in a variable interest entity,
the assets, liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with those of
the business enterprise. This Interpretation applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. We do not
have any ownership in any variable interest entities as of December 28, 2002. We
will apply the consolidation requirements of FIN 46 in future periods if we
should own any interest in any variable interest entity.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We Rely on Continued Market Acceptance of Our Existing Products and Any
Decline in Sales of Our Existing Products Would Adversely Affect our Business
and Results of Operations. 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, features, ease of use, scalability and
durability:
- Recommendations and opinions by ophthalmologists, dermatologists,
clinicians, and their associated opinion leaders;
- Price of our products and prices of competing products and
technologies:
- Availability of competing products, technologies and alternative
treatments;
- Willingness of ophthalmologists and dermatologists to convert to
semiconductor-based or infrared laser systems from alternative
technologies; and
- 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 aesthetic 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 Inc. and Quantel. All of
these companies currently offer a competitive, semiconductor-based laser system
in ophthalmology. Our principal competitors in aesthetics are
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Lumenis Ltd., Laserscope, Candela Corporation, Altus Medical Inc. and Palomar
Medical Technologies, 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 us 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 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.
Our Future Success Depends on Our Ability to Develop and Successfully
Introduce New Products and Applications. Our current products provide
applications in the fields of ophthalmology and aesthetics. We cannot assure you
that the market for these applications will continue to generate significant or
consistent demand for our products. Demand for our products could be
significantly diminished by new technologies or products that replace them or
render them obsolete. 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. Successful
commercialization of these 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 availability of third-party reimbursement of procedures
using our new 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 continued 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. Recent political and social turmoil
in many parts of the world, including terrorist and military actions, may
continue to adversely impact global economic conditions. These political, social
and economic conditions and related economic uncertainties are making it very
difficult for us, our customers and our distributors to forecast orders and
sales of our products and, accordingly, plan future business activities. In
addition, the continued political uncertainties in the Middle East and any
extended hostilities in Iraq, to the extent these factors affect worldwide
economic conditions, may adversely impact out international sales. 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 operation 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
Price of our Products, Our Operating Results May Suffer. We have experienced
declines in the average unit price of our products and expect to continue to
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suffer from declines in the future. The average unit 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. If we are unable to offset the anticipated decrease in our average
selling prices by increasing our sales volumes, our net revenues will decline.
In addition, to maintain our gross margins, we must continue to reduce the
manufacturing cost of our products. Further, should average unit 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
Systems, DioLite 532 and our Apex 800 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,
including optics, laser diodes and crystals. We have some long term or volume
purchase agreements with our suppliers and currently purchase components on a
purchase order basis. Some of our suppliers and manufacturers 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 manufacturers, including the
following:
- unavailability of, shortages or limitations on the ability to obtain
supplies of components in the quantities that we require;
- delays in delivery or failure of suppliers to deliver critical
components on the dates we require;
- failure of suppliers to manufacture components to our
specifications, and potentially reduced quality; and
- inability to obtain components at acceptable prices.
Our business and operating results may suffer from the lack of alternative
sources of supply for critical sole and limited source components. The process
of qualifying suppliers is complex, requiring extensive testing and
interoperability with our products, and may be lengthy, particularly as new
products are introduced. New suppliers would have to be educated in our
production processes. In addition, the use of alternate components may require
design alterations to our products and additional product testing under FDA and
relevant foreign regulator agency guidelines, which may delay sales and increase
product costs. Any failures by our vendors to adequately supply limited and sole
source components may impair our ability to offer our existing products, delay
the submission of new products for regulatory approval and market introduction,
materially harm our business and financial condition and cause our stock price
to decline. Establishing our own capabilities to manufacture these components
would be expensive and could significantly decrease our profit margins. We do
not currently intend to manufacture any of these components. Our business and
results of operations would be adversely affected if we are unable to continue
to obtain components in the quantity and quality desired and at the prices we
have budgeted.
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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. In 2002, 2001 and 2000, our international
sales were $11.1 million, $11.3 million and $11.7 million, or 36.1%, 41.3%, and
35.6%, 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 has 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. 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;
- reduced or limited protections of intellectual property rights in
jurisdictions outside the United States;
- 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 7A,
"Quantitative and Qualitative Disclosures About Market Risk."
Our Operating Results May be Adversely Affected by Changes in Third Party
Coverage and Reimbursement Policies and any Uncertainty Regarding Healthcare
Reform Measures. 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. In addition, third-party payers may not initiate coverage of new
procedures using our products for a significant period. For example, in
September 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, could be submitted for reimbursement, with coverage and
payment to be determined by the local medical carriers at their discretion. To
date, only 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. No other carriers have approved reimbursement of such AMD
procedures using the OcuLight SLx and domestic sales of the OcuLight SLx laser
system continue to be limited until more local medical carriers reimburse for
performing such AMD procedures or until CMS advises that claims foe these
procedures may be submitted directly to CMS at the national level.
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Changes in government legislation or regulation or in private third-party
payers' policies toward reimbursement for procedures employing our products may
prohibit adequate reimbursement. There have been a number of legislative and
regulatory proposals to change the healthcare system, reduce the costs of
healthcare and change medical reimbursement policies. Doctors, clinics,
hospitals and other users of our products may decline to purchase our products
to the extent there is uncertainty regarding reimbursement of medical procedures
using our products and any healthcare reform measures. Further proposed
legislation, regulation and policy changes affecting third-party reimbursement
are likely. 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. However, denial of coverage and reimbursement for our products would
have a material adverse effect on our business, results of operations and
financial condition.
We are Dependent on the Successful Outcome of Clinical Trials of Our
Products and New Applications using our Products. Our success will depend in
part on the successful outcome of clinical trials of our products and new
applications using our products. Clinical trials are long, expensive and
uncertain processes. We are currently supporting several ongoing clinical trials
including, for example, the TTT4CNV clinical trial. The TTT4CNV clinical trial
is a multi-center, prospective, placebo-controlled, randomized trial conducted
at 22 centers in the United States. This clinical trial is a post marketing
study performed within the FDA cleared indications of the OcuLight SLx and is
being conducted to determine whether TTT laser treatment using our OcuLight SLx
infrared laser system and Large Spot Slit Lamp Adapter can reduce the risk of
vision loss for patients with wet age-related macular degeneration (AMD)
compared to sham treated eyes. In order to successfully commercialize the use of
our OcuLight SLx for TTT procedures, we must be able to, among other things,
demonstrate with substantial evidence from well-controlled clinical trials where
TTT procedures using the OcuLight SLx product fits within the treatment regimen
of wet AMD. This process may take a number of years. In March 2003, we announced
that the Executive Committee for the TTT4CNV clinical trial accepted the
recommendations of the independent Data and Safety Monitoring Committee that an
adequate number of patients were enrolled to detect a clinically relevant
difference between outcomes in TTT-treated eyes and patients not being treated.
We cannot assure you that results from the TTT4CNV clinical trial will prove to
be successful. If the future results of the TTT4CNV clinical trial or any other
clinical trial regarding our products fails to validate the safety and
effectiveness of treatments using our products, our ability to generate revenues
from new products or new applications using our products would be adversely
affected and our business would be harmed.
Our Operating Results May 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 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 aesthetic 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;
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- 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. Due to these and other factors, we believe that quarter to quarter
and year to year comparisons of our past operating results may not be
meaningful. You should not rely on our results for any quarter or year as an
indication of our future performance. Our operating results in future quarters
and years may be below public market analysts' expectations, which would likely
cause the price of our common stock to fall.
We Rely on Our Direct Sales Force and Network of International Distributors
to Sell Our Products and any Failure to Maintain our Direct Sales Force and
Distributor Relationships Could Harm Our Business. Our ability to sell our
products and generate revenue depends upon our direct sales force within the
United States and relationships with independent distributors outside the United
States. As of December 28, 2002, our direct sales force consisted of 15
employees and we maintained relationships with 66 independent distributors
internationally selling our products into 107 countries. We generally grant our
distributors exclusive territories for the sale of our products in specified
countries. The amount and timing of resources dedicated by our distributors to
the sales of our products is not within our control. Our international sales are
entirely dependent on the efforts of these third parties. If any distributor
breaches or fails to generate sales of our products, we may be forced to replace
the distributor and our ability to sell our products in that exclusive sales
territory would be adversely affected.
We do not have any long-term employment contracts with the members of our
direct sales force. We may be unable to replace our direct sales force personnel
with individuals of equivalent technical expertise and qualifications, which may
limit our revenues and our ability to maintain market share. The loss of the
services of these key personnel would harm our business. Similarly, our
distributorship agreements are
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generally terminable at will by either party and distributors may terminate
their relationships with us, which would affect our international sales and
results of operations.
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 new
products. We plan to collaborate with third parties to develop and commercialize
existing and new products. In October 2002, we announced our collaboration with
Bausch & Lomb to design and manufacture a solid-state green wavelength (532 nm)
laser photocoagulator module, called the Millenium EndoLase module. The
Millenium 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, which depends on
the efforts of our partner and is beyond our control. We cannot assure you that
our relationship with Bausch & Lomb will result in sales of our Millenium
EndoLase module, if at all. Our collaborators may not pursue further development
and commercialization of products resulting from collaborations with us or may
not devote sufficient resources to the marketing and sale of such products.
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. If a collaborator elects to terminate
its agreement with us, our ability to develop, introduce, market and sell the
product may be significantly impaired and we may be forced to discontinue the
product resulting from the collaboration altogether. We may not be able to
negotiate alternative collaborative agreements on acceptable terms, if at all.
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 Other Proprietary Rights to Protect our
Intellectual Property and Business. 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 seven
pending patent applications in the United States and six foreign pending patent
applications that have been filed. Our patent applications may not be approved.
Any patents granted now or in the future may offer only limited protection
against potential infringement and development by our competitors of competing
products. 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.
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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. Until recently, patent applications
were maintained in secrecy in the United States until the patents issued. Patent
applications filed in the United States after November 2000 generally will be
published eighteen months after the filing date. However, since patent
applications continue to be maintained in secrecy for at least some period of
time, both within the United States and with regards to international patent
applications, we cannot assure you that our technology does not infringe any
patents or patent applications held by third parties. 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.
Any claims, with or without merit and regardless of whether we are
successful on the merits, would 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. An adverse determination in a judicial or administrative
proceeding and failure to obtain necessary licenses or develop alternate
technologies 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.
We Are Subject To Government Regulation Which May Cause Us to Delay or
Withdraw the Introduction of New Products or New Applications for Our Products.
The medical devices that we market and manufacture are subject to extensive
regulation by the FDA and foreign governments. Under the Federal Food, Drug and
Cosmetic 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 product must undergo rigorous testing and an extensive regulatory
approval process implemented by the FDA under federal law. A device manufacturer
must obtain market clearance through either the 510(k) premarket notification
process or the lengthier premarket approval, or PMA, application process.
Depending upon the type, complexity and novelty of the device and the nature of
the disease or disorder to be treated, the FDA approval process can take several
years, require extensive clinical testing and result in significant
expenditures. Even if regulatory approval is obtained, later discovery of
previously unknown safety issues may result in restrictions on the product,
including withdrawal of the product from the market. Other countries also have
extensive regulations regarding clinical trials and testing prior to new product
introductions. 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.
The FDA imposes additional regulations on manufacturers of approved
medical devices. We are required to comply with the applicable FDA good
manufacturing practice regulations, which include quality control and quality
assurance requirements, as well as maintenance of records and documentation. Our
manufacturing facilities are subject to ongoing periodic inspections by the FDA
and corresponding state agencies, including unannounced inspections, and must be
licensed as part of the product approval process before being utilized for
commercial manufacturing. Noncompliance with the applicable requirements, can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, 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. Any of these actions by the FDA would materially and adversely
affect our ability to continue operating our business and the results of our
operations.
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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 IRIS Medical and
IRIDERM 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.
If Product Liability Claims are Successfully Asserted Against Us, We may
Incur Substantial Liabilities 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 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 maximum of $12.0 million, our coverage from our insurance
policies may not be adequate. Product liability insurance is expensive. We might
not be able to obtain product liability insurance in the future on acceptable
terms or in sufficient amounts to protect us, 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 material
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 workforce 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 a 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.
-38-
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.
Our Stock Price Has Been and May Continue to be Volatile and an Investment
in Our Common Stock Could Suffer a Decline in Value. 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
our operating results, announcements by us or our competitors of new products or
of significant clinical achievements, changes in market valuations of other
similar companies in our industry and general market conditions. We receive only
limited attention by securities analyst and may experience an imbalance between
supply and demand for our common stock resulting from low trading volumes. In
addition, the stock market has experienced extreme volatility in the last few
years 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 December 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 2003 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.
-39-
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 its 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated balance sheets as of December 28, 2002 and December 29,
2001 and the consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows for each of the three years in the period
ended December 28, 2002, together with the related notes and the report of
PricewaterhouseCoopers LLP, independent accountants, are on the following pages.
Additional required financial information is described in Item 14.
-40-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of IRIDEX Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity, of cash flows
and of comprehensive income (loss) present fairly, in all material respects, the
financial position of IRIDEX Corporation and its Subsidiaries (the "Company") at
December 28, 2002 and December 29, 2001 and the results of their operations,
their cash flows and comprehensive income (loss) for each of the three years in
the period ended December 28, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index under 15(a)(2)
on page 65 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 27, 2003
-41-
IRIDEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 28, DECEMBER 29,
ASSETS 2002 2001
-------- --------
Current assets:
Cash and cash equivalents ......................................... $ 9,186 $ 4,613
Available-for-sale securities ..................................... 2,356 4,489
Accounts receivable, net of allowance for doubtful accounts of
$262 in 2002 and $318 in 2001 ..................................... 8,037 7,555
Inventories, net .................................................. 10,725 12,562
Prepaids and other current assets ................................. 751 1,110
-------- --------
Total current assets ......................................... 31,055 30,329
Property and equipment, net ....................................... 950 1,535
Deferred income taxes ............................................. 2,267 1,924
-------- --------
Total assets ................................................. $ 34,272 $ 33,788
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 657 $ 1,176
Accrued expenses .................................................. 3,417 2,779
-------- --------
Total liabilities ............................................ 4,074 3,955
-------- --------
Commitments and contingencies (Note 5)
Stockholders' Equity
Convertible Preferred Stock, $.01 par value:
Authorized: 2,000,000 shares;
Issued and outstanding: none ................................ -- --
Common Stock, $.01 par value:
Authorized: 30,000,000 shares;
Issued and outstanding: 6,905,998 shares in 2002 and
6,815,672 shares in 2001 ..................................... 70 69
Additional paid-in capital ........................................ 23,631 23,417
Accumulated other comprehensive income ............................ 3 3
Treasury Stock, at cost
Outstanding: 103,000 shares in 2002 and 2001 .................. (430) (430)
Retained earnings ................................................. 6,924 6,774
-------- --------
Total stockholders' equity ................................... 30,198 29,833
-------- --------
Total liabilities and stockholders'equity ............. $ 34,272 $ 33,788
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
-42-
IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2002 2001 2000
-------- -------- --------
Sales ................................................. $ 30,634 $ 27,275 $ 32,838
Cost of sales ......................................... 17,046 14,205 14,506
-------- -------- --------
Gross profit ..................................... 13,588 13,070 18,332
-------- -------- --------
Operating expenses:
Research and development ........................... 4,315 4,808 5,265
Sales, general and administrative .................. 9,454 10,251 10,747
-------- -------- --------
Total operating expenses ......................... 13,769 15,059 16,012
-------- -------- --------
Income (loss) from operations .................... (181) (1,989) 2,320
Interest income ....................................... 151 378 552
Other income (expense), net ........................... (29) 48 17
-------- -------- --------
Income (loss) before income taxes ................ (59) (1,563) 2,889
Benefit from (provision for) income taxes ............. 209 962 (809)
-------- -------- --------
Income (loss) from continuing operations ......... 150 (601) 2,080
Income (loss) from operations of discontinued
Laser Research segment (net of applicable
income tax benefit (provision) of $0, $124 and
$(131), respectively in 2002, 2001 and 2000) .... 0 (204) 336
Income (loss) on disposal of Laser Research
segment, (net of applicable income tax benefit
of $0, $315 and $0, respectively in 2002, 2001
and 2000) ........................................ 0 (468) 0
-------- -------- --------
Net income (loss) ..................................... $ 150 $ (1,273) $ 2,416
======== ======== ========
Basic net income (loss) per share:
Continuing operations ................................. $ 0.02 $ (0.09) $ 0.31
Discontinued operations ............................... 0.00 (0.10) 0.05
-------- -------- --------
Basic net income (loss) per common share .............. $ 0.02 $ (0.19) $ 0.36
======== ======== ========
Diluted net income (loss) per share:
Continuing operations ................................. $ 0.02 $ (0.09) $ 0.29
Discontinued operations ............................... 0.00 (0.10) 0.04
-------- -------- --------
Diluted net income (loss) per common share ............ $ 0.02 $ (0.19) $ 0.33
======== ======== ========
Shares used in net income (loss) per common share
basic calculations .................................... 6,870 6,757 6,637
======== ======== ========
Shares used in net income (loss) per common share
diluted calculations .................................. 6,928 6,757 7,285
======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
-43-
IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated
Other
Common Stock Additional Comprehensive
----------------------- Paid-in Treasury Income Retained
Shares Amount Capital Stock (Loss) Earnings Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances, January 1, 2000 ...... 6,540,358 $ 66 $ 22,124 $ (315) $ (2) $ 5,631 $ 27,504
Issuance of Common Stock
under Stock Option Plan .... 120,173 1 317 318
Issuance of Common Stock
under Employee Stock
Purchase Plan ............ 40,331 242 242
Stock compensation expense ..... 8 8
Change in unrealized gains on
available-for-sale
securities .................. 12 12
Net income ..................... 2,416 2,416
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances, December 30, 2000 .... 6,700,862 67 22,691 (315) 10 8,047 30,500
Issuance of Common Stock
under Stock Option Plan ..... 74,942 1 99 100
Issuance of Common Stock
under Employee Stock
Purchase Plan ............... 66,868 1 255 256
Purchase of Treasury Stock ..... (27,000) (115) (115)
Tax Benefit of Employee Stock
Option Plan ................. 372 372
Change in unrealized gains on
available-for-sale
securities .................. (7) (7)
Net loss ....................... (1,273) (1,273)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances, December 29,2001 ..... 6,815,672 69 23,417 (430) 3 6,774 29,833
Issuance of Common Stock
under Stock Option Plan ..... 36,930 78 78
Issuance of Common Stock
under Employee Stock
Purchase Plan ............... 53,396 1 126 127
Tax Benefit of Employee Stock
Option Plan ................. 10 10
Change in unrealized gains on
available-for-sale
securities .................. --
Net income ..................... 150 150
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances, December 28, 2002 .... 6,905,998 $ 70 $ 23,631 $ (430) $ 3 $ 6,924 $ 30,198
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
-44-
IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2002 2001 2000
------- ------- -------
Cash flows from operating activities:
Net income (loss) ............................................. $ 150 $(1,273) $ 2,416
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................. 869 859 893
Tax benefit of employee stock option plan ................. 10 372 --
Stock compensation expense ................................ -- -- 8
Provision for doubtful accounts ........................... (56) (163) 131
Provision for inventories ................................. 125 322 285
Deferred income taxes ..................................... (343) (332) (74)
Changes in assets and liabilities:
Accounts receivable .................................... (426) 107 74
Inventories ............................................ 1,712 (3,163) (2,750)
Prepaids and other current assets ...................... 359 206 (323)
Accounts payable ....................................... (519) (232) 280
Accrued expenses ....................................... 638 (338) (1,014)
------- ------- -------
Net cash provided by (used in) operating activities .... 2,519 (3,635) (74)
------- ------- -------
Cash flows from investing activities:
Purchases of available-for-sale securities .................... (2,356) (4,489) (3,856)
Proceeds from maturity of available-for-sale securities ....... 4,489 2,989 4,375
Acquisition of property and equipment ......................... (284) (491) (652)
------- ------- -------
Net cash provided by (used in) investing activities .... 1,849 (1,991) (133)
------- ------- -------
Cash flows from financing activities:
Purchase of treasury stock ................................ -- (115) --
Issuance of common stock under stock purchase and
option plans ............................................ 205 356 560
------- ------- -------
Net cash provided by financing activities .............. 205 241 560
------- ------- -------
Net increase (decrease) in cash and cash equivalents.. 4,573 (5,385) 353
Cash and cash equivalents, beginning of year ...................... 4,613 9,998 9,645
------- ------- -------
Cash and cash equivalents, end of year ............................ $ 9,186 $ 4,613 $ 9,998
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes .............................................. $ 8 $ 12 $ 2,244
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Change in unrealized gains (losses) on available-
for-sale securities ......................................... $ -- $ (7) $ 12
The accompanying notes are an integral part of
these consolidated financial statements.
-45-
IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2002 2001 2000
------- ------- -------
Net income (loss) ................................ $ 150 $(1,273) $ 2,416
Other comprehensive income (loss):
Changes in unrealized gains (losses) on
available-for-sale securities .......... -- (7) 12
------- ------- -------
Comprehensive income (loss) ...................... $ 150 $(1,280) $ 2,428
======= ======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
-46-
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Description of Business
IRIDEX Corporation is a leading worldwide provider of
semiconductor-based laser systems used to treat eye diseases in ophthalmology
and skin lesions in aesthetics.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The consolidated financial statements include our accounts and our
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents. The Company
invests primarily in money market funds and government paper; accordingly, these
investments are subject to minimal risks.
Available-for-Sale Securities
All marketable securities as of December 28, 2002 and December 29, 2001
are considered to be available-for-sale and therefore are carried at fair value.
Available-for-sale securities are classified as current assets when they have
scheduled maturities of less than one year. Available-for-sale securities are
classified as non current assets when they have scheduled maturities of more
than one year. Unrealized holding gains and losses on such securities are
reported net of related taxes as a separate component of stockholders' equity
until realized. Realized gains and losses on sales of all such securities are
reported in interest and other income and are computed using the specific
identification cost method.
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.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, which is generally three years.
Amortization of leasehold improvements and property and equipment is computed
using the straight-line method over the estimated useful life of the related
assets, typically three years.
-47-
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.
Warranty
The Company accrues for estimated warranty costs upon shipment of
products in accordance with SFAS No. 5, "Accounting for Contingencies." Actual
warranty costs incurred have not materially differed from those accrued. The
Company's warranty policy is effective for shipped products which are considered
defective or fail to meet the product specifications. 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.
Warranty costs are reflected in the income statement as a cost of revenues. A
reconciliation of the changes in the Company's warranty liability for the year
ending December 28, 2002 follows (in thousands):
Balance at the beginning of the year $ 582
Accruals for warranties issued during the year 463
Settlements made in kind during the year (249)
----
Balance at the end of the year $ 796
====
Research and Development
Research and development expenditures are charged to operations as
incurred.
Advertising
We expense advertising costs as they are incurred. Advertising expenses
for 2002, 2001 and 2000 were $242,000, $408,000 and $478,000, respectively.
Fair Value of Financial Instruments
Carrying amounts of our financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair values due to their short maturities. Estimated fair values for
available-for-sale securities, which are separately disclosed elsewhere, are
based on quoted market prices for the same or similar instruments.
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 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.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees"("APB 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"("SFAS 123").
Under APB 25, compensation expense for grants to employees is based on
the difference, if any, on the date of the grant, between the fair value of the
Company's stock and the option's exercise price. SFAS 123 defines a "fair value"
based method of accounting for an employee stock option or similar equity
investment. The pro forma disclosure of the difference between compensation
expense included in net loss and the related cost measured by the fair value
method is presented in Note 6.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than
Employees, or in Conjunction with Selling Goods and Services." Stock-based
compensation expense related to stock options granted to non-employees is
recognized on a straight line basis as the stock options are earned. The
stock-based compensation expense will fluctuate as the deemed fair market value
of the common stock fluctuates. There were no equity instruments issued to
non-employees in 2002, 2001 and 2000.
The following table provides a reconciliation of net income to pro forma
net loss as if the fair value method had been applied to all awards (in
thousands, except per share data):
Year Ended Year Ended Year Ended
December 28, December 29, December 30,
2002 2001 2000
------------ ------------ ------------
Net income (loss), as reported $ 150 $ (1,273) $ 2,416
Add: Total stock based compensation expense
determined under fair value based method for
all awards (438) (727) (776)
------------ ----------- -------------
Pro forma net loss $ (288) $ (2,000) $ 1,640
============ =========== =============
Basic net income (loss) per share:
As reported $ 0.02 $ (0.19) $ 0.36
============ =========== =============
Pro forma $ (0.04) $ (0.30) $ 0.25
============ =========== =============
Diluted net income (loss) per share:
As reported $ 0.02 $ (0.19) $ 0.33
============ =========== =============
Pro forma $ (0.04) $ (0.30) $ 0.23
============ =========== =============
-49-
Concentration of Credit Risk and Other Risks and Uncertainties
Our cash and cash equivalents are deposited in demand and money market
accounts of three financial institutions. Deposits held with banks may exceed
the amount of insurance provided on such deposits. Generally these deposits may
be redeemed upon demand and therefore, bear minimal risk.
We market our products to distributors and end-users throughout the
world. Sales to international distributors are generally made on open credit
terms and letter of credit. Management performs ongoing credit evaluations of
our customers and maintains an allowance for potential credit losses.
Historically, we have not experienced any significant losses related to
individual customers or group of customers in any particular geographic area.
For the years ended December 28, 2002, December 29, 2001 and December 30, 2000
no customer accounted for greater than 10% of revenue. As of December 28, 2002,
one customer accounted for 11% of accounts receivable. As of December 29, 2001
and December 30, 2000 no customer accounted for more than 10% of accounts
receivable.
Our products require approvals from the Food and Drug Administration and
international regulatory agencies prior to commercialized sales. Our future
products may not receive required approvals. If we were denied such approvals,
or if such approvals were delayed, it would have a materially adverse impact on
our business, results of operations and financial condition.
Reliance on Certain Suppliers
Certain components and services used by the Company to manufacture and
develop its products are presently available from only one or a limited number
of suppliers or vendors. The loss of any of these suppliers or vendors would
potentially require a significant level of hardware and/or software development
to incorporate the products or services into the Company's products.
Use of Estimates
Management makes estimates and assumptions to prepare the consolidated
financial statements in conformity with generally accepted accounting
principles. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current year's presentation. These reclassifications had no impact on prior year
stockholders' equity or results of operations. In addition, as a result of
IRIDEX's disposal of it's Laser Research segment in 2001, the Company's
previously reported consolidated financial statements for 2001 and 2000 have
been reclassified to present the discontinued Laser Research segment operations
separate from continuing operations. (See Note 12.)
Fiscal Year
Our fiscal year covers a 52 or 53 week period and ends on the Saturday
nearest December 31. Fiscal year 2000, 2001 and 2002 all included 52 weeks.
-50-
Net Income (loss) per Share
Basic and diluted net income 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.
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB
Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which eliminates inconsistencies between the required accounting
for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of SFAS
No. 145 are effective for fiscal years beginning after May 15, 2002 and for
transactions occurring after May 15, 2002. We do not expect the adoption of SFAS
No. 145 to have a material impact on our financial position or on our results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" which addresses the recognition, measurement, and reporting
of costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the EITF has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146
will be effective for exit or disposal activities that are initiated after
December 31, 2002. We do not expect the adoption of SFAS No. 146 to have a
material impact on our financial position or on our results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, or FIN 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of FIN 45
did not have a material impact on our financial position or on our results of
operations.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." EITF 00-21 establishes criteria for whether revenue on a
deliverable can be recognized separately from other deliverables in a multiple
deliverable arrangement. The criteria consider whether the delivered item has
standalone value to the customer, whether the fair value of the delivered item
can be reliably determined and the rights of returns for the delivered items.
EITF 00-21 is effective for revenue arrangements entered into in fiscal years
beginning June 15, 2003 with early adoption permitted. We do not expect that the
adoption of EITF 00-21 to have a material impact on our financial position or on
our results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation- Transition and Disclosure an amendment of FASB
Statement No. 123." SFAS No. 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
-51-
employee compensation. SFAS No. 148 also requires prominent disclosures of the
pro forma effect of using the fair value method of accounting for stock-based
employee compensation in both annual and interim financial statements. The
transition and annual disclosure requirements of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. The interim disclosure requirements
are effective for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 did not have a material impact on our financial
position or on our results of operations.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest entities which
possess certain characteristics. The Interpretation requires that if a business
enterprise has a controlling financial interest in a variable interest entity,
the assets, liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with those of
the business enterprise. This Interpretation applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. We do not
have any ownership in any variable interest entities as of December 28, 2002. We
will apply the consolidation requirements of FIN 46 in future periods if we
should own any interest in any variable interest entity.
3. BALANCE SHEET DETAIL
Available-for-sale securities (in thousands):
UNREALIZED ESTIMATED MATURITY
COST GAINS FAIR VALUE DATES
------ ---------- ---------- ------------
As of December 28, 2002, available-for-sale
securities consisted of the following:
Corporate notes ................................ $1,430 $ 2 1,432 4/03 - 12/03
Foreign debt securities ........................ 523 1 524 3/03
Government agencies ............................ 400 400 1/03
------ ------ ------
Total ......................................... $2,353 $ 3 $2,356
====== ====== ======
As of December 29, 2001, available-for-sale
securities consisted of the following:
Government agencies ............................ $4,486 $ 3 4,489 1/02 - 7/02
There were no realized capital gains or losses recognized in 2002, 2001 and 2000.
-52-
DECEMBER 28, DECEMBER 29,
2002 2001
------- -------
(IN THOUSANDS)
Inventories:
Raw materials and work in process................................... $ 6,511 $ 8,078
Finished goods...................................................... 4,214 4,484
------- -------
Total inventories................................................ $10,725 $12,562
======= =======
Property and Equipment:
Equipment........................................................... $ 3,306 $ 3,202
Leasehold improvements.............................................. 1,872 1,872
Less: accumulated depreciation and amortization..................... (4,228) (3,539)
------- -------
Property and equipment, net...................................... $ 950 $ 1,535
======= =======
Accrued Expenses:
Accrued payroll, vacation and related expenses...................... $ 824 $ 870
Accrued warranty.................................................... 796 582
Income taxes payable................................................ 425 -
Sales and use tax payable........................................... 325 266
Deferred revenue.................................................... 393 329
Other accrued expenses.............................................. 654 732
------- -------
Total accrued expenses........................................... $ 3,417 $ 2,779
======= =======
4. BANK BORROWINGS
We have a revolving line of credit agreement with a bank expiring on
October 5, 2003, which provides for borrowings of up to $4.0 million at the
bank's prime rate (4.25% at December 28, 2002). The agreement contains
restrictive covenants including prohibiting payment of dividends without the
bank's prior consent. There were no borrowings against the credit line at
December 28, 2002.
5. COMMITMENTS AND CONTINGENCIES
Lease Agreements
We lease our operating facilities under a noncancelable operating lease.
The lease, which expired in 2002, was renewed for two years. Rent expense, net
of sublease income, totaled $642,000, $498,000 and $289,000 for the years ended
December 28, 2002, December 29, 2001 and December 30, 2000 respectively. Rental
income related to a facility sublease was $0, $11,000 and $262,000 for the years
ended December 28, 2002, December 29, 2001 and December 30, 2000, respectively.
Future minimum lease payments under current operating leases at December
28, 2002 are summarized as follows (in thousands):
Fiscal Year Operating Lease Payments
----------- ------------------------
2003 702
2004 122
-----
$824
=====
-53-
License Agreements
The Company is obligated to pay royalties equivalent to 5% and 7.5% of
sales on certain products under certain license agreements. Royalty expense was
$105,000, $85,000 and $21,000 for the years ended December 28, 2002, December
29, 2001 and December 30, 2000, respectively.
Contingencies
From time to time, the Company may be engaged in certain administrative
proceedings, incidental to its normal business activities. Management believes
that liabilities resulting from such proceedings, or claims which are pending or
known to be threatened, are adequately covered by liability insurance and will
not have a material adverse effect on the Company's financial position or
results of operations.
6. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Our Articles of Incorporation authorize 2,000,000 shares of undesignated
preferred stock. Preferred Stock may be issued from time to time in one or more
series. As of December 28, 2002, we had no preferred stock issued and
outstanding.
TREASURY STOCK
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
our employee stock programs. In 2000 and 2002, no shares of Common Stock were
repurchased. In 2001, we repurchased 27,000 shares of Common Stock for $115,000.
As of December 28, 2002 we have repurchased 103,000 shares of common stock.
STOCK OPTION PLANS
Amended and Restated 1989 Incentive Stock Plan
The Amended and Restated 1989 Plan (the "1989 Plan") provided for the
grant of options and stock purchase rights to purchase shares of our Common
Stock to employees and consultants. The terms of the 1989 Plan, which expired in
August 1999, are substantially the same as the 1998 Plan described below.
1998 Stock Plan
The 1998 Stock Plan (the "1998 Plan") provides for the granting to
employees (including officers and employee directors) of incentive stock options
and for the granting to employees (including officers and employee directors)
and consultants of nonstatutory stock options and stock purchase rights
("SPRs"). The exercise price of incentive stock options and SPRs granted under
the 1998 Plan must be at least equal to the fair market value of the shares at
the time of grant. With respect to any recipient who owns stock possessing more
than 10% of the voting power of our outstanding capital stock, the exercise
price of any option or SPR granted must be at least equal to 110% of the fair
market value at the time of grant. Options granted under the 1998 Plan are
exercisable at such times and under such conditions as determined by the
Administrator; generally over a four year period. The maximum term of incentive
stock options granted to any recipient must not exceed ten years; provided,
however, that the maximum term of an incentive stock option granted to any
recipient possessing more than 10% of the voting power of our outstanding
capital stock must not exceed
-54-
five years. In the case of SPRs, unless the Administrator determines otherwise,
we have a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with us for any reason (including
death or disability). Such repurchase option lapses at a rate determined by the
Administrator. The purchase price for shares repurchased by us is the original
price paid by the purchaser. The form of consideration for exercising an option
or stock purchase right, including the method of payment, is determined by the
Administrator. The 1998 Plan expires in June 2008.
1995 Director Option Plan
In October 1995, we adopted the 1995 Director Option Plan (the "Director
Plan"), under which members of the Board of Directors are granted options to
purchase 11,250 shares upon the first to occur of their appointment or the
adoption of the Director Plan ("First Option") and an option to purchase 3,750
shares ("Subsequent Option") on July 1 of each year thereafter provided that he
or she has served on the Board for at least the preceding six months. The
options granted are at fair market value on the date of grant. The First Option
becomes exercisable as to one-twelfth (1/12) of the shares subject to the First
Option for each quarter over a three-year period. Each Subsequent Option becomes
exercisable as to one-fourth (1/4) of the shares subject to the Subsequent
Option for each quarter, commencing one quarter after the First Option and any
previously granted Subsequent Options have become fully exercisable. Options
granted under the Director Plan have a term of 10 years.
In the event of our merger with or into another corporation, resulting
in a change of control, or the sale of substantially all of our assets, each
Director Plan option becomes exercisable in full and shall be exercisable for 30
days after written notice to the holder of the event causing the change in
control.
Unless terminated sooner, the Director Plan will terminate in 2005. The
Board has authority to amend or terminate the Director Plan, provided no such
amendment may impair the rights of any optionee without the optionee's consent.
1995 Employee Stock Purchase Plan
Our 1995 Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors in October 1995. The total number of shares of common
stock reserved for issuance under the Purchase Plan at December 28, 2002 were
370,000. The Purchase Plan permits eligible employees (including officers and
employee directors) to purchase Common Stock through payroll deductions, which
may not exceed 10% of an employee's compensation. No employee may purchase more
than $25,000 worth of stock in any calendar year or more than 1,000 shares of
Common Stock in any twelve-month period. The price of shares purchased under the
Purchase Plan is 85% of the lower of the fair market value of the Common Stock
at the beginning of the offering period or the end of the offering period. The
Purchase Plan will terminate in 2005, unless terminated sooner by the Board of
Directors.
-55-
Information with respect to activity under these option plans are set
forth below (in thousands except share and per share data):
OUTSTANDING OPTIONS
------------------------------------------------------------------
SHARES
AVAILABLE NUMBER AGGREGATE WEIGHTED AVERAGE
FOR GRANT OF SHARES PRICE EXERCISE PRICE
--------- --------- ----------- ----------------
Balances, January 1, 2000 ....... 189,665 1,407,193 $ 6,076 $ 4.31
Additional shares reserved .... 260,000 -- -- --
Options granted ............... (384,700) 384,700 3,570 9.28
Options exercised ............. (120,173) (318) 2.64
Options cancelled ............. (82,560)
Options terminated ............ 181,407 (181,407) (1,036) 5.71
------- --------- ----------
Balances, December 30, 2000 ..... 163,812 1,490,313 $ 8,292 $ 5.56
Additional shares reserved .... 290,000 -- -- --
Options granted ............... (368,050) 368,050 1,512 4.11
Options exercised ............. (74,942) (100) 1.61
Options cancelled ............. (29,068)
Options terminated ............ 126,604 (126,604) (873) 7.07
------- --------- ----------
Balances, December 29, 2001 ..... 183,298 1,656,817 $ 8,831 $ 5.34
Additional shares reserved .... 300,000 -- -- --
Options granted ............... (229,400) 229,400 858 3.74
Options exercised ............. (36,930) (78) 2.08
Options cancelled ............. (2,575)
Options terminated ............ 148,424 (148,424) (924) 6.23
------- --------- ----------
Balances, December 28, 2002 ..... 399,747 1,700,863 $ 8,687 $ 5.11
======= ========= ==========
-56-
The following table summarizes information with respect to stock options
outstanding at December 28, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE
------------------------------------------ -------------------------
WEIGHTED AVERAGE
REMAINING
CONTRACTUAL WEIGHTED WEIGHTED
RANGE OF NUMBER LIFE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/28/02 (YEARS) PRICE AT 12/28/02 PRICE
------ ----------- ------- ----- ----------- --------
$1.00 - $3.50 286,808 6.70 $ 2.58 114,996 $ 1.25
$3.71 - $3.71 177,800 8.56 3.71 62,977 3.71
$3.90 - $3.94 15,500 8.43 3.90 1,944 3.91
$4.00 - $4.00 430,535 4.76 4.00 426,999 4.00
$4.01 - $4.88 186,370 7.09 4.36 127,039 4.38
$5.00 - $5.75 210,925 6.48 5.40 138,256 5.51
$6.25 - $8.88 189,500 5.33 8.25 172,989 8.24
$9.00 - $10.50 172,425 7.29 9.23 124,176 9.20
$12.19 - $12.75 23,500 7.50 12.55 7,929 12.38
$14.88 - $14.88 7,500 3.50 14.88 7,500 14.88
--------- ---------
$1.00 - $14.88 1,700,863 6.34 5.11 1,184,805 5.22
========= =========
The following table summarizes information with respect to stock options
outstanding at December 29, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE
------------------------------------------ -------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING LIFE EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/29/01 (YEARS) PRICE AT 12/29/01 PRICE
------ ----------- ------- ----- ----------- --------
$0.16 - $2.00 136,549 2.90 $ 1.17 136,549 $ 1.17
$3.71 - $3.71 203,800 9.55 3.71 0 0.00
$3.90 - $3.94 23,000 8.63 3.91 6,132 4.00
$4.00 - $4.00 457,086 5.77 4.00 387,425 4.00
$4.03 - $4.88 199,357 8.08 4.35 78,321 4.42
$5.00 - $5.75 178,925 6.99 5.46 110,825 5.55
$6.25 - $8.88 203,500 6.47 8.27 150,603 8.23
$9.00 - $9.25 189,600 8.29 9.09 80,246 9.10
$9.50 - $12.75 57,500 8.66 11.18 14,828 10.92
$14.88 - $14.88 7,500 4.50 14.88 7,500 14.88
--------- ---------
$0.16 - $14.88 1,656,817 6.92 5.34 972,249 5.08
========= =========
At December 29, 2001 and December 30, 2000 options to purchase 972,249
and 762,123 shares of Common Stock were exercisable at weighted average exercise
prices of $5.08 and $4.29, respectively.
The following information concerning our stock option and employee stock
purchase plans is provided in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation." We account for such plans in accordance with
Accounting Principles Board No. 25 and related Interpretations.
The fair value of each option grant has been estimated on the date of
grant using the Black-Scholes multiple option pricing model with the following
weighted average assumptions:
2002 2001 2000
GROUP A GROUP B GROUP A GROUP B GROUP A GROUP B
------- ------- ------- ------- ------- -------
Risk-free Interest Rates ............. 4.38% 4.38% 4.45% 4.40% 6.00% 6.19%
Expected Life from Date of Vesting ... 4 yrs. 2 yrs. 3 yrs. 2 yrs. 3 yrs. 2 yrs.
Volatility ........................... 0.84 0.84 0.90 0.90 0.78 0.78
Dividend Yield ....................... -- -- -- -- -- --
The weighted average expected life was calculated based on the exercise
behavior of each group. Group A represents officers and directors who are a
smaller group holding a greater average number of options than other option
holders and who tend to exercise later in the vesting period. Group B are all
other option holders, virtually all of whom are employees. This group tends to
exercise earlier in the vesting period.
The weighted average grant-date fair value per share of those options
granted in 2002, 2001 and 2000 was $2.48, $2.82 and $5.96, respectively.
We have also estimated the fair value for the purchase rights issued
under our 1995 Employee Stock Purchase Plan, under the Black-Scholes valuation
model using the following assumptions for 2001, 2000 and 1999:
2002 2001 2000
----------- ----------- -----------
Risk-free Interest Rates ... 2.01% 4.63% 5.67%
Expected Life .............. 0.5 year 0.5 year 0.5 year
Volatility ................. 0.85 0.90 0.78
Dividend Yield ............. -- -- --
-57-
The weighted average grant-date fair value per share of those purchase
rights granted in 2002, 2001 and 2000 was $1.31, $2.11 and $2.94, respectively.
7. EMPLOYEE BENEFIT PLAN
We have a plan known as the IRIS Medical Instruments 401(k) trust to
provide retirement benefits through the deferred salary deductions for
substantially all employees. Employees may contribute up to 15% of their annual
compensation to the plan, limited to a maximum amount set by the Internal
Revenue Service. The plan also provides for Company contributions at the
discretion of the Board of Directors. On April 1, 2000 the Company commenced a
Company match for the 401(k) in the amount of 50% of employee contributions up
to an annual maximum of $1,000 per year. The Company contributions totaled
$98,000 in 2002 and $99,000 in 2001. No contributions were made in fiscal 2000.
8. INCOME TAXES
The provision for income taxes includes:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2002 2001 2000
------------ ------------ ------------
(IN THOUSANDS)
Current:
Federal .................................. $ 121 $(750) $ 855
State .................................... 5 -- 28
----- ----- -----
126 (750) 883
----- ----- -----
Deferred:
Federal .................................. (231) (184) (96)
State .................................... (104) (28) 22
----- ----- -----
(335) (212) (74)
----- ----- -----
Income tax (benefit) provision ......... $(209) $(962) $ 809
===== ===== =====
-58-
The Company's effective tax rate differs from the statutory federal
income tax rate as shown in the following schedule:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2002 2001 2000
------------ ------------ ------------
Income tax provision (benefit) at statutory rate ..... (34%) (34%) 34%
State income taxes, net of federal benefit ........... (6%) (5%) 6%
Tax exempt interest .................................. 0% (3%) (3%)
Nondeductible permanent differences .................. 56% 4% 0%
Research and development credits ..................... (377%) (28%) (10%)
Other ................................................ 1% 4% 1%
---- ---- ----
Effective tax rate ................................... (360%) (62%) 28%
==== ==== ====
The tax effect of temporary differences and carry-forwards that give
rise to significant portions of the net deferred tax assets are presented below
(in thousands):
DECEMBER 28, DECEMBER 29,
2002 2001
------ ------
Fixed assets ...................................... $ 547 $ 304
Accrued liabilities ............................... 414 419
Allowance for excess and obsolete inventories ..... 366 287
Research credit ................................... 603 437
State tax ......................................... 1 1
Allowance for doubtful accounts ................... 104 127
Other ............................................. 232 349
------ ------
Net deferred tax asset ............................ $2,267 $1,924
====== ======
9. MAJOR CUSTOMERS AND BUSINESS SEGMENTS
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.
In the years ended December 28, 2002, December 29, 2001 and December 30,
2000, no customer individually accounted for more than 10% of our revenue.
Revenue information shown in thousands by geographic region is as
follows:
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2002 2001 2000
------- ------- -------
United States ......... $19,564 $16,004 $21,133
Europe ................ 5,429 5,530 5,475
Rest of Americas ...... 833 809 1,283
Asia/Pacific Rim ...... 4,808 4,932 4,947
------- ------- -------
$30,634 $27,275 $32,838
======= ======= =======
-59-
Revenues are attributed to countries based on location of customers.
In the years ended December 28, 2002, December 29, 2001 and December 30,
2000, no country individually accounted for more than 10% of our sales, except
for the United States, which accounted for 63.9% of sales in 2002, 58.7% in 2001
and 64.4% in 2000.
Information on reportable segments for the three years ended December
28, 2002, December 29, 2001 and December 30, 2000 is as follows:
YEAR ENDED DECEMBER 28, 2002 YEAR ENDED DECEMBER 29, 2001 YEAR ENDED DECEMBER 30, 2000
------------------------------------- ------------------------------------- -------------------------------------
Ophthalmology Aesthetics Ophthalmology Aesthetics Ophthalmology Aesthetics
Medical Medical Medical Medical Medical Medical
Devices Devices Total Devices Devices Total Devices Devices Total
------------- ---------- -------- ------------- ---------- -------- ------------- ----------- --------
Sales ....... $ 24,169 $ 6,465 $ 30,634 $ 20,922 $ 6,353 $ 27,275 $ 27,065 $ 5,773 $ 32,838
Direct Cost
of Goods Sold 7,917 2,844 10,761 6,772 2,595 9,367 7,796 2,051 9,847
-------- -------- -------- -------- -------- -------- -------- -------- --------
Direct Gross
Margin ...... 16,252 3,621 19,873 14,150 3,758 17,908 19,269 3,722 22,991
Total
Unallocated
Costs ....... -- -- 20,054 -- -- 19,897 -- -- 20,671
Income(loss)
from
operations .. $ (181) $ (1,989) $ 2,320
Indirect costs of manufacturing, research and development and selling,
general and administrative costs are not allocated to the segments.
The Company's assets and liabilities are not evaluated on a segment
basis. Accordingly, no disclosure on segment assets and liabilities is provided.
-60-
10. COMPUTATION OF NET INCOME PER COMMON SHARE AND PER DILUTED COMMON SHARE
A reconciliation of the numerator and denominator of net income (loss)
per common share and diluted net income (loss) per common share is provided as
follows (in thousands, except per share amounts):
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2002 2001 2000
------ ------- ------
Income (loss) from continuing operations........................... $ 150 $ (601) $2,080
Income (loss) from discontinued operations......................... 0 (672) 336
------ ------- ------
Net income (loss).................................................. $ 150 $(1,273) $2,416
====== ======= ======
Denominator--Net income (loss) per common share
Weighted average common stock outstanding..................... 6,870 6,757 6,637
====== ======= ======
Basic income (loss) per common share continuing operations......... $ 0.02 $ (0.09) $ 0.31
Basic income (loss) per common share discontinued operations....... 0 (0.10) 0.05
------ ------- ------
Net income (loss) per common share................................. $ 0.02 $ (0.19) $ 0.36
====== ======= ======
Diluted income (loss) per common share continuing operations....... $ 0.02 $ (0.09) $ 0.29
Diluted income (loss) per common share discontinuing operations.... 0 (0.10) 0.04
------ ------- ------
Diluted net income (loss) per common share......................... $ 0.02 $ (0.19) $ 0.33
====== ======= ======
Weighted average common stock outstanding..................... 6,870 6,757 6,637
Effect of dilutive securities
Weighted average common stock options......................... 58 -- 648
------ ------- ------
Total weighted average stock and options outstanding............... 6,928 6,757 7,285
====== ======= ======
In 2002 and 2000, there were 1,296,391 and 62,930 outstanding options to
purchase shares, respectively, at a weighted average exercise price of $5.97 and
$9.82 per share, respectively, that were not included in the computation of
diluted net income (loss) per common share since, in each case, the exercise
price of the options exceeded the market price of the common stock. In 2001,
there were 1,656,817 options outstanding at a weighted average exercise price of
$5.34 per share that were not included in the computation of dilutive net loss
per common share because their effect was anti-dilutive. These options could
dilute earnings per share in future periods.
-61-
11. SELECTED QUARTERLY FINANCIAL DATA, (UNAUDITED)
QUARTER
---------------------------------------------------
FIRST SECOND THIRD FOURTH
------- --------- --------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------------------
Year Ended December 28, 2002
Sales ................................................................. $ 6,963 $ 7,433 $ 6,717 $9,521
Gross profit .......................................................... $ 3,085 $ 3,121 $ 3,012 $4,370
Net income (loss) ..................................................... $ (207) $ (447) $ 206 $ 598
Net income (loss) per common share .................................... $ (0.03) $ (0.07) $ 0.03 $ 0.09
Diluted net income (loss) per common share ............................ $ (0.03) $ (0.07) $ 0.03 $ 0.09
Year Ended December 29, 2001
Sales ................................................................. $ 5,735 $ 7,088 $ 6,750 $7,702
Gross profit .......................................................... $ 2,363 $ 3,697 $ 3,498 $3,512
Income (loss) from continuing operations .............................. $ (924) $ 11 $ 171 $ 141
Income (loss) from discontinued operations ............................ $ (893) $ 0.00 $ 0.00 $ 221
Net income (loss) ..................................................... $(1,817) $ 11 $ 171 $ 362
Net income (loss) per common share .................................... $ (0.27) $ 0.00 $ 0.03 $ 0.05
Diluted income (loss) from continuing operations per common share ..... $ (0.14) $ 0.00 $ 0.02 $ 0.02
Diluted income (loss) from discontinued operations per common share ... $ (0.13) $ 0.00 $ 0.00 $ 0.03
Diluted net income (loss) per common share ............................ $ (0.27) $ 0.00 $ 0.02 $ 0.05
12. DISCONTINUED OPERATIONS
In April 2001, we discontinued our Laser Research segment. In the first
quarter of 2001, we recorded a loss of $893,000 (net of a $542,000 tax benefit).
In the fourth quarter of 2001, we adjusted the loss on discontinued operations
to $672,000 (net of a $439,000 income tax benefit). There were no revenues,
costs or operating expenses for the Laser Research segment in 2002 or 2001.
Sales, general and administrative costs and indirect costs of manufacturing
historically were not allocated to the Laser Research 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, estimated sales return costs of $0.2
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.
-62-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-63-
PART III
Certain information required by Part III has been omitted from this Form
10-K. This information is instead incorporated by reference to our definitive
Proxy Statement for our 2003 Annual Meeting of Stockholders , which we will file
within 120 days after the end of our fiscal year pursuant to Regulation 14A in
time for our Annual Meeting of Stockholders to be held June 4, 2003.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors is incorporated by reference to
"Election of Directors--Nominees" in our Proxy Statement for our 2003 Annual
Meeting of Stockholders. The information concerning our current executive
officers is incorporated by reference to "Executive Officers" in our Proxy
Statement for our 2003 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
"Executive Compensation" in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to
"Security Ownership of Certain Beneficial Owners and Management" in our Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
"Certain Relationships and Related Transactions" in our Proxy Statement.
ITEM 14. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this Annual Report on Form
10-K (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 annual
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.
-64-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE IN
FORM 10-K
REPORT
------
(a) The following documents are filed in Part II of this Annual Report
on Form 10-K:
1. FINANCIAL STATEMENTS
Report of Independent Accountants ...................................... 41
Consolidated Balance Sheets as of December 28, 2002 and
December 29, 2001 .................................................... 42
Consolidated Statements of Operations for the years ended
December 28, 2002, December 29, 2001 and December 30, 2000 ........... 43
Consolidated Statements of Stockholders' Equity for the years
ended December 28, 2002, December 29, 2001 and December 30, 2000 ..... 44
Consolidated Statements of Cash Flows for the years ended
December 28, 2002, December 29, 2001 and December 30, 2000 ........... 45
Consolidated Statements of Comprehensive Income (Loss) for the
years ended December 28, 2002, December 29, 2001 and
December 30, 2000 .................................................... 46
Notes to Consolidated Financial Statements ............................. 47
2. FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule of IRIDEX Corporation
for the years ended December 28, 2002, December 29, 2001 and
December 30, 2000 is filed as part of this Annual Report and should
be read in conjunction with the Consolidated Financial Statements of
IRIDEX Corporation.
Schedule II - Valuation and Qualifying Accounts ................ 67
Other schedules have been omitted because they are either not required,
not applicable, or the required information is included in the consolidated
financial statements or notes thereto.
3. EXHIBITS
Exhibits Exhibit Title
3.1(1) Amended and Restated Certificate of Incorporation of Registrant
3.2(2) Amended and Restated Bylaws of Registrant.
10.1(1) Form of Indemnification Agreement with directors and officers.
10.2(1) 1995 Employee Stock Purchase Plan, as amended and form of agreement thereunder.
10.3(1) 1995 Director Option Plan and form of agreement thereunder.
10.4(1) 1995 Profit Sharing Plan
10.5(1) Third Restated Registration Rights Agreement dated as of
October 27, 1995 by and among Registrant and certain
individuals and entities named therein.
10.6 Lease Agreement dated December 6, 1996 by and between
Zappettini Investment Co. and the Registrant, as amended.
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Exhibits Exhibit Title
10.7(3) 1998 Stock Option Plan, as amended
21.1(1) Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (See page 68).
99.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-------------------
(1) Incorporated by reference to the Exhibits filed with the
Registration Statement on Form SB-2 (No. 333-00320-LA) which
was declared effective on February 15, 1996.
(2) Incorporated by reference to the Exhibits in
Registrant's Report on Form 10-Q for the quarter ended
October 3, 1998.
(3) Incorporated by reference to the Exhibits in
Registrant's Proxy Statement for the Company's 1998
Annual Meeting of Stockholders which was filed April 30, 1998.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 2002.
TRADEMARK ACKNOWLEDGMENTS
IRIDEX, the IRIDEX logo, IRIS Medical, OcuLight, SmartKey, EndoProbe and
Apex are our registered trademarks. IRIDERM, G-Probe, DioPexy, DioVet, TruFocus,
TrueCW, UltraView, DioLite 532, Long Pulse, MicroPulse Scanlite Scanner, ColdTip
Handpiece, Varispot Handpiece and Easy Fit product names are our trademarks. All
other trademarks or trade names appearing in the Form 10-K are the property of
their respective owners.
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SCHEDULE II
IRIDEX CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END OF
DESCRIPTION THE PERIOD EXPENSES DEDUCTIONS THE PERIOD
- -------------------------------- ------------ ---------- ---------- ----------
Balance for the year ended
December 30, 2000:
Allowance for doubtful
accounts receivable $396 $ 131 $(46) $ 481
Provision for inventory $374 $ 285 $ -- $ 659
Balance for the year ended
December 29, 2001:
Allowance for doubtful
accounts receivable $481 $(163) $ -- $ 318
Provision for inventory $659 $ 322 $ -- $ 981
Balance for the year ended
December 28, 2002:
Allowance for doubtful
accounts receivable $318 $ (56) $ -- $ 262
Provision for inventory $981 $ 125 $ -- $1,106
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Mountain
View, State of California, on 28th day of March, 2003.
IRIDEX CORPORATION
By: /s/ Theodore A. Boutacoff
---------------------------------------
Theodore A. Boutacoff
President, Chief Executive Officer,
and Director
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Theodore A. Boutacoff and Robert
Kamenski, jointly and severally, their attorney-in-fact, each with full power of
substitution, for him in any and all capacities, to sign on behalf of the
undersigned any amendments to this Annual Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, and each of the undersigned does hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
/s/ Theodore A. Boutacoff President, Chief Executive Officer, and March 28, 2003
- ---------------------------------- Director (Principal Executive Officer)
(Theodore A. Boutacoff)
/s/ Robert Kamenski Chief Financial Officer and Vice March 28, 2003
- ---------------------------------- President, Administration (Principal
(Robert Kamenski) Financial and Accounting Officer)
/s/ James L. Donovan Vice President, Corporate Business March 28, 2003
- ---------------------------------- Development and Director
(James L. Donovan)
/s/ Robert K. Anderson Director March 28, 2003
- ----------------------------------
(Robert K. Anderson)
/s/ Donald L. Hammond Director March 28, 2003
- ----------------------------------
(Donald L. Hammond)
/s/ Joshua Makower Director March 28, 2003
- ----------------------------------
(Joshua Makower)
/s/ John M. Nehra Chairman of the Board March 28, 2003
- ----------------------------------
(John M. Nehra)
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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 annual report on Form 10-K of IRIDEX
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statement made, in light of the
circumstances under which such statement were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 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 annual
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 annual report
(the "Evaluation Date"); and
c) presented in this annual 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
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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 annual 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 regards to significant deficiencies and material
weaknesses.
Date: March 28, 2003
By: /s/ THEODORE A. BOUTACOFF
----------------------------------
Name: Theodore A. Boutacoff
Title: President and Chief Executive Officer
(Principal Executive Officer)
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I, Robert Kamenski, certify that:
1. I have reviewed this annual report on Form 10-K of IRIDEX
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statement made, in light of the
circumstances under which such statement were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 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 annual
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 annual report
(the "Evaluation Date"); and
c. presented in this annual 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 annual 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 regards to significant deficiencies and material
weaknesses.
-71-
Date: March 28, 2003
By: /s/ ROBERT KAMENSKI
----------------------------------
Name: Robert Kamenski
Title: Chief Financial Officer and Vice
President, Administration
(Principal Financial and Accounting Officer)
-72-
Index to Exhibits
Exhibits Exhibit Title
3.1(1) Amended and Restated Certificate of Incorporation
of Registrant
3.2(2) Amended and Restated Bylaws of Registrant.
10.1(1) Form of Indemnification Agreement with directors
and officers.
10.2(1) 1995 Employee Stock Purchase Plan, as amended and
form of agreement thereunder.
10.3(1) 1995 Director Option Plan and form of agreement
thereunder.
10.4(1) 1995 Profit Sharing Plan
10.5(1) Third Restated Registration Rights Agreement dated
as of October 27, 1995 by and among Registrant and
certain individuals and entities named therein.
10.6 Lease Agreement dated December 6, 1996 by and
between Zappettini Investment Co. and the
Registrant, as amended.
10.7(3) 1998 Stock Option Plan, as amended
21.1(1) Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
24.1 Power of Attorney (See page 68).
99.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference to the Exhibits filed with the
Registration Statement on Form SB-2 (No. 333-00320-LA) which was
declared effective on February 15, 1996.
(2) Incorporated by reference to the Exhibits in Registrant's Report
on Form 10-Q for the quarter ended October 3, 1998.
(3) Incorporated by reference to the Exhibits in Registrant's Proxy
Statement for the Company's 1998 Annual Meeting of Stockholders
which was filed April 30, 1998.
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