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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 3, 2003
or
[_] 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: 0-11634
STAAR SURGICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-3797439
(State or other (I.R.S. Employer
jurisdiction of
incorporation or Identification No.)
organization)
1911 Walker
Avenue Monrovia,
California 91016
(Address of principal (Zip Code)
executive offices)
(626) 303-7902
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
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 ((S) 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. [_]
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 and non-voting stock held by
non-affiliates of the registrant as of June 28, 2002 was approximately
$69,658,578 based upon the closing price per share of the Common Stock of
$4.120 on that date.
The number of shares outstanding of the registrant's Common Stock as of
March 13, 2003 was 17,244,800.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to its 2003
annual meeting of stockholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days of the close of
the registrant's last fiscal year, are incorporated by reference into Part III
of this report.
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PART I
This Annual Report on Form 10-K contains statements which constitute
"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. These statements include comments regarding the
intent, belief or current expectations of the Company and its management.
Prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those projected in the
forward-looking statements. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Factors That May Affect
Future Results."
ITEM 1. BUSINESS
STAAR Surgical Company was incorporated in California in 1982 as a successor
to a partnership that was created for the purpose of developing, producing, and
marketing Intraocular Lenses ("IOLs") and other products for minimally invasive
ophthalmic surgery. We reincorporated in Delaware in April 1986. We have
evolved to become a developer, manufacturer and global distributor of products
used by ophthalmologists and other eye care professionals to improve or correct
vision in patients with refractive conditions, cataracts and glaucoma. Unless
the context indicates otherwise, when this document refers to "we," "us" or
"the Company," it is referring to STAAR Surgical Company and its consolidated
subsidiaries.
STAAR operates in three business segments all within ophthalmology: cataract
surgery, glaucoma surgery and most important for the Company's future,
refractive surgery. Our overall mission is to develop, manufacture and market
high margin visual implants that improve a patient's quality of vision.
Refractive Surgery. In the area of refractive surgery, the Company has used
its uniquely biocompatible Collamer material to develop and manufacture the
Implantable Contact Lens(TM) (ICL)(TM) and the Toric Implantable Contact Lens
(TICL) to treat refractive disorders such as myopia (near-sightedness),
hyperopia (far-sightedness) and astigmatism. These disorders of vision affect a
large proportion of the population. The Company's goal is to establish the
custom made ICL and TICL as the next paradigm shift in refractive surgery,
making the products the dominant revenue generators for the Company over the
next four to five years.
Cataract Surgery. Initially, the Company's main product was foldable
implants for use after small incision cataract extraction. Since that time we
have expanded our range of products for use during cataract surgery to include
silicone and Collamer lenses to treat spherical and astigmatic abnormalities,
STAARVISC(TM) II, a viscoelastic material, the SonicWAVE(TM)
Phacoemulsification System having unique low energy and high vacuum
characteristics and UltraVac(TM) V1 tubing for use with certain Venturi-type
Phacoemulsification machines. This gives us a rounded portfolio of products to
meet the needs of the cataract surgeon. Currently, the majority of revenues are
generated from these products.
Glaucoma Surgery. For use in glaucoma surgery, the Company developed the
AquaFlow(TM) Collagen Glaucoma Drainage Device (the "Aqua Flow Device"), an
alternative to current methods of treating open angle glaucoma and received FDA
approval of the device in July 2000. The AquaFlow Device is implanted in the
eye using a minimally invasive procedure for the purpose of reducing
intraocular pressure.
Within each of these segments, the Company also sells other instruments,
devices and equipment that we manufacture or that are manufactured by others in
the ophthalmic industry. In general, such products complement STAAR's
proprietary product range and allow us to compete more effectively.
2
Strategy
The Company has spent the past two years strengthening and improving the
organization. This was achieved through the execution of a series of key
strategies that included:
. Strengthening management at both the Executive and Board levels
. Improving cash flow
. Reducing costs
. Improving gross margins
. Closing unprofitable subsidiaries
. Settling multiple lawsuits
With a strong foundation firmly in place, the Company can focus on the
strategies that are the future of the Company and will provide maximum
stockholder value. Those strategies include:
. Obtaining U.S. FDA approval of the ICL
. Obtaining approvals for the ICL in key new international markets
. Improving lens insertion technology which will allow the Company to
expand its U.S. customer base for IOLs
. Growing the market for the Company's AquaFlow Device
. Developing and introducing effective marketing strategies
. Strengthening global training programs which form the basis of new
product introductions and physician acceptance
2002 Financial and Other Information Highlights
. In August 2002, STAAR continued to strengthen its senior management with
the appointment of Nick Curtis, Senior Vice President of Sales and
Marketing.
. The Company continued to strengthen its Board of Directors with the
appointment of Don Duffy, retired Chief Financial Officer of Johnson &
Johnson's former ophthalmic affiliate, Iolab, to the Board as Chair of
the Board's Audit Committee and designated financial expert.
. The Company finalized the closure of subsidiaries in Canada and South
Africa.
. Other charges of $1.5 million were recorded related to the recognition of
deferred losses resulting from the translation of foreign currency
statements into U.S. dollars for subsidiaries that were closed, and
employee severance costs.
. The Company continued its cost containment efforts during 2002 reducing
sales and marketing expenses by $3.2 million. $1.7 million of the
reduction was realized in the U.S. due to overall expense reductions and
$1.5 million of the reduction was primarily the result of subsidiaries
that were closed during 2002 and 2001.
. The Company recorded a valuation allowance of $9.2 million against its
deferred tax assets in the fourth quarter of 2002. This non-cash charge
increased the valuation allowance which now fully reserves the value of
the deferred tax assets on the Company's balance sheet.
. The Company and John R. Wolf, its former Chief Executive Officer, settled
all legal actions between them as memorialized in a Settlement Agreement
and Mutual General Release dated November 12, 2002.
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. The Company acquired the remaining 20% of its German subsidiary in a
cashless transaction involving the transfer of share ownership in
exchange for the cancellation of outstanding loans owed to the Company.
. Revenues for 2002 were $48.2 million, a decrease of $2.5 million, or 5%,
from 2001. Net loss for 2002 amounted to $17.2 million, or $1.00 per
share, compared to a net loss of $14.8 million, or $0.87 per share,
reported in 2001. Significant operational matters that affected net
earnings for 2002 included non-recurring charges totaling $1.5 million
and a $9.2 million valuation allowance recorded against the Company's
deferred tax assets. Excluding the impact of these charges, the net loss
for 2002 was $6.5 million or $0.38 per share, compared to the $4.5
million net loss, or $0.26 per share, reported for 2001.
Financial Information about Industry Segments
Beginning in 1998, the Company expanded its marketing focus beyond the
cataract surgery segment to include the refractive and glaucoma markets.
However, during 2002 the cataract segment accounted for approximately 95% of
the Company's revenues and thus, the Company operates as one business segment
for financial reporting purposes. See Note 15 to the Consolidated Financial
Statements for the geographic distribution of the Company's products.
Background
The human eye is a specialized sensory organ capable of receiving visual
images that are transmitted to the visual center in the brain. The main parts
of the eye are the cornea, the iris, the lens, the retina, and the trabecular
meshwork. The cornea is the clear window in the front of the eye through which
light passes. The iris is a muscular curtain located behind the cornea which
opens and closes to regulate the amount of light entering the eye through the
pupil, an opening at the center of the iris. The lens is a clear structure
located behind the iris that changes shape to better focus light to the retina,
located in the back of the eye. The retina is a layer of nerve tissue
consisting of millions of light receptors called rods and cones, which receive
the light image and transmit it to the brain via the optic nerve. The anterior
chamber of the eye, located in front of the iris, is filled with a watery fluid
called the aqueous humour, while the portion of the eye behind the lens is
filled with a jelly-like material called the vitreous humour. The trabecular
meshwork, a drainage channel located between the cornea and the surrounding
white portion of the eye, maintains a normal pressure in the anterior chamber
of the eye by draining excess aqueous humour.
The eye can be affected by common visual defects, disease and/or trauma. The
most prevalent ocular diseases are cataracts and glaucoma. Cataract formation
is generally an age related situation that involves the hardening and loss of
transparency of the natural crystalline lens, impairing visual acuity.
Glaucoma is a progressive ocular disease that manifests itself through
increased intraocular pressure. This, in turn, results in a decrease of the
visual field and damage to the optic disc. Untreated, glaucoma can result in
blindness.
Refractive disorders include myopia, hyperopia, astigmatism and presbyopia.
Myopia and hyperopia are caused by either flat or overly curved corneas which
result in improper focusing of light on the retina. They are also known as
near-sightedness and far-sightedness, respectively. Astigmatism is
characterized by an irregularly shaped cornea resulting in blurred vision.
Presbyopia is an age related condition caused by the loss of elasticity of the
natural crystalline lens, reducing the eye's ability to accommodate or adjust
for varying distances.
4
Industry
According to industry analysts, the global market for ophthalmic surgery
products is approximately $3.5 billion worldwide. The major factors influencing
this market are:
. the introduction of new methods of correcting vision problems and
advances in medical technology,
. an aging worldwide population,
. the importance of reimbursement, both government and private, and
. the growing importance of international markets.
Our products serve the following sectors of the ophthalmic market.
Cataract Treatment. The occurrence of cataracts is directly associated with
the aging process. Favorable demographics indicate that the number of Americans
older than 65 has increased tenfold since 1900, and according to the U.S.
Census Bureau, currently represent approximately 13% of the total population. A
cataract usually results from the slow opacification of the crystalline lens,
resulting in reduced vision. Once past the age of 65, 50% of the population
develops cataracts. Cataract extractions are accompanied by the insertion of an
IOL. Industry sources estimate that approximately 2.4 million IOLs were
implanted in the United States in 2002, generating approximately $260 million
in sales. We believe that a similar number of IOLs were implanted outside the
United States (excluding China and Russia, for which no reliable data exists),
generating an additional $250 million in sales. We believe that approximately
90% of the domestic market for IOLs in 2002 was held by foldable IOLs, compared
to approximately 15% in 1992, and that approximately 60% of the international
market share is presently held by foldable IOLs. We believe the share of the
worldwide market held by foldable IOLs will continue to increase due to the
benefits of foldable IOLs over non-foldable IOLs.
Glaucoma Treatment. The treatment for glaucoma encompasses drug therapies
as well as traditional and laser surgical procedures. There is no known cure
for glaucoma. The most commonly prescribed glaucoma drugs either inhibit the
production of intraocular fluid or promote increased drainage of intraocular
fluid, in either case reducing intraocular pressure and the potential for optic
nerve damage. Traditional surgical procedures for glaucoma (trabeculectomies
and shunts) and laser surgical procedures for glaucoma (trabeculoplasties)
remove a portion of the trabecular meshwork to create a channel for fluid to
drain from the eye. The selection of drug treatment over a surgical or laser
procedure is, in part, dependent upon the stage of the disease and the
prevailing glaucoma treatment used in the country in which the treatment is
prescribed.
While we believe that glaucoma currently afflicts approximately 2 million
persons in the U.S., only about 50% of those persons have actually been
diagnosed with the disease. Industry analysts estimate that approximately 67
million people worldwide have glaucoma. The worldwide market for glaucoma drugs
is approximately $2 billion. We estimate that 125,000 conventional surgical
procedures and 250,000 laser surgeries were performed in the U.S. alone in
2000, which we believe represents total expenditures of approximately
$750 million.
Glaucoma drugs are prescribed for patients to control the production of
intraocular fluid and the corresponding increase in intraocular pressure. In
some cases, patients build up a tolerance to the medications and they must be
changed or combined to improve response. Patients may experience side effects
that range from burning and stinging eyes to allergies or more serious systemic
problems. For many patients, the symptoms of glaucoma are not readily apparent,
which may cause the patients to fail to adhere to the drug regimen.
Conventional surgical and laser procedures for glaucoma create a channel for
fluid to drain from the eye. According to one study, conventional and laser
surgery for glaucoma has an estimated initial success rate within one to two
years of only 70% to 80%, with the success rate decreasing to 46% within five
years.
5
Refractive Vision Correction. It is estimated that 52% of the U.S.
population or 162 million people are in need of some form of vision correction.
Of this group, the Company's target market has been defined as those people
between 18 and 55 years of age and within a socioeconomic bracket where
elective surgery is affordable. The target market is estimated at 54.4 million
people. Of the target market, approximately 3 million people (5.4%) have severe
myopia (which is defined as greater than 7.5 diopters) and approximately 4.6
million people (8.4%) have moderate myopia (which is defined from 4.0 to 7.0
diopters). Approximately 1.6 million people have severe hyperopia (which is
defined as greater than 3.0 diopters). In addition, it is estimated that 20% of
the total population has some form of astigmatism, although in the Company's
target population, the percentage of those with astigmatism is believed to be
significantly higher than in the general population. The market outside the
U.S. is larger than the U.S. market. It is estimated that approximately 50% of
the world's population needs some form of vision correction.
In the U.S., refractive surgery volumes have declined approximately 1% in
2002 (1.316 million procedures) over 2001 (1.324 million procedures). This
downward trend is expected to improve in 2003 as wavefront technology is
introduced thereby re-energizing the laser vision correction market. SG Cowan
estimates a 14% growth rate in domestic refractive procedures as improved
technologies generate renewed interest in quality of vision.
We believe that this focus on improvement in quality of vision will provide
the perfect atmosphere for the introduction of phakic IOLs as the quality of
vision with these lenses is superior to laser vision correction.
Principal Products
Our products are designed to:
. Improve patient outcomes,
. Minimize patient risk and discomfort, and
. Simplify ophthalmic procedures and/or post-operative care for the surgeon
and the patient.
We sell our products worldwide, principally to ophthalmologists, surgical
centers, hospitals, managed care providers, health maintenance organizations,
group purchasing organizations and government facilities. Demand for our
products is not seasonal.
Intraocular Lenses (IOLs) and Related Cataract Treatment Products. We
produce and market a line of foldable IOLs for use in minimally invasive
cataract surgical procedures. Our IOLs can be folded or otherwise deformed, and
therefore can be implanted into the eye through an incision as small as 2.65
mm. Once inserted, the IOL unfolds naturally into the capsular bag that
previously held the cataractous lens.
Our foldable IOLs are manufactured from both our proprietary Collamer
material and silicone. Both materials are offered in two differently configured
styles, the single-piece plate haptic design and the three-piece design where
the optic is combined with polyimide loop haptics. During 2001, the Company
recalled its three-piece Collamer lens. The Company reintroduced the lens in
September 2002. The selection of one style over the other is primarily based on
the preference of the ophthalmologist. Sales of foldable IOLs accounted for
approximately 66% of our total revenues for the 2002 fiscal year, 73% of total
revenues for the 2001 fiscal year and approximately 69% of total revenues for
the 2000 fiscal year.
We have developed and currently market globally the Toric IOL, a toric
version of our single-piece silicone IOL, which is specifically designed for
patients with pre-existing astigmatism. The Toric IOL is the only IOL that has
FDA approval to include in its labeling that it improves uncorrected visual
acuity. The Toric IOL is the first refractive product we offered in the U.S.,
and is a significant addition to our line of cataract products. In May 2000,
the Health Care Financing Administration, now known as the Centers for Medicare
and Medicaid
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(CMS), granted our application to have the Toric IOL designated as a "new
technology". The "new technology" designation allows ambulatory surgical
centers to receive an additional $50 per lens above the standard Medicare
reimbursement rate through May 2005. Furthermore, CMS granted our application
for "pass-through" status for our Toric IOL which, until April 1, 2002, allows
hospitals to pay us our list price for the lenses and pass through the total
amount to CMS for reimbursement. Pass-through status may last for a period of
two to three years, although re-evaluation and adjustment is possible in
January of each year. The adjustment announced for 2002 significantly changes
the impact of pass-through status in that it reimburses only a percentage of
the invoiced amount. We anticipate that this change may have a negative effect
on the pricing of our Toric IOLs to hospitals, although the full impact of the
adjustment will not be known until the final regulations are issued.
In April 2000, we received approval from the FDA for our single-piece
Collamer IOL for cataract surgery, allowing us to market the lens throughout
the United States. The Collamer IOL was approved for use in Canada and the
European Union during 1999. We believe that the Collamer material, which is a
biomaterial, is superior to other materials used in the manufacture of IOLs in
the marketplace because collagen is incorporated into it.
Phacoemulsification (phaco) machines are used during cataract surgery to
remove the patient's cataractous lens, usually through a small incision. The
most desired equipment will improve surgical outcomes and make cataract surgery
simpler for the physician and safer for the patient. There are approximately
1,000 to 1,500 phaco machines sold annually at prices ranging from $20,000 to
$85,000. The market for this equipment ranges from $50 million to $100 million
annually and the market for accessories such as hand pieces, surgical packs,
and phaco tips ranges from $50 million to $75 million annually. During 1998 we
introduced the WAVE Phacoemulsification Machine, the precursor to our SonicWAVE
Phacoemulsification System, launched in October 2000, which we believe
represents the next generation of this product. The SonicWAVE
Phacoemulsification System offers physicians the ability to use standard
ultrasound as well as sonic technology, which removes cataract material by
using low frequency sonic pulses. Sonic pulses avoid the generation of heat at
the surgery site, thereby reducing the risk of burns to the cornea. The
SonicWAVE Phacoemulsification System has 510(k) approval. We received CE Mark
in April 2001, allowing us to sell in the European community and began
international shipments of this product on April 16, 2001.
In August 2001 the Company entered into an agreement with Surgin Surgical
Instruments, Inc. to distribute UltraVac V1 phaco packs for certain
Venturi-type phaco systems. The UltraVac V1 coiled tubing allows surgeons to
operate more efficiently at potentially higher levels of vacuum with the
assurance of greater anterior chamber stability.
As part of our approach to providing a complete line of complementary
products for use in minimally invasive cataract surgery, we also market several
styles of lens injectors and sterile cartridges used to insert our IOLs and
several styles of disposable and reusable surgical packs and ultrasonic cutting
tips to be used with the SonicWAVE Phacoemulsification System.
AquaFlow Collagen Glaucoma Drainage Device. Our AquaFlow Device is
surgically implanted in the outer tissues of the eye to maintain a space that
allows increased drainage of intraocular fluid so as to reduce intraocular
pressure. It is made of collagen, a porous material that is compatible with
human tissue and facilitates drainage of excess eye fluid. The AquaFlow Device
is specifically designed for patients with open-angled glaucoma, which is the
most prevalent type of glaucoma. In contrast to conventional and laser glaucoma
surgeries, implantation of the AquaFlow Device does not require penetration of
the anterior chamber of the eye. Instead, a small flap of the outer eye is
folded back and a portion of the sclera and trabecular meshwork is removed. The
AquaFlow Device is placed above the remaining trabecular meshwork and Schlemm's
canal and the outer flap is refolded into place. The device swells, creating a
space as the eye heals. It is absorbed into the surrounding tissue within six
months to nine months after implantation, leaving the open space and possibly
creating new fluid collector channels. The 15 to 45 minute surgical procedure
to implant the AquaFlow Device is performed under local or topical anesthesia,
typically on an outpatient basis.
7
We believe that the compatibility of the human eye with the material from
which the AquaFlow Device is made and the minimally invasive nature of the
surgery offer several advantages over existing surgical procedures, including:
. reduced risk of surgical complications compared to trabeculectomy,
. a longer-term solution than medications,
. predictable outcomes, making case management easier and less time
consuming,
. less need for pressure-reducing medications,
. enabling the patient to have minimally invasive laser surgery if further
pressure reduction becomes necessary over the long term, and
. cost effectiveness compared to surgical and medication alternatives.
We believe the AquaFlow Device is an attractive product for:
. ophthalmic surgeons who have traditionally referred their patients to
glaucoma specialists;
. managed care and health maintenance organizations and group purchasing
organizations that desire to control their costs and at the same time
provide their customers with a higher standard of health care; and
. less developed countries which lack the resources and infrastructure to
provide the continuous treatments mandated by drug therapy.
While we believe this market is very conservative, there is a continuing
interest in learning the surgical procedure to implant the AquaFlow Device.
Adoption by ophthalmic surgeons, however, will be dependent upon the rate at
which they learn to perform the surgical procedure or the development of
instrumentation to simplify the procedure. Our trained technical sales staff
and several surgical specialists educate surgeons on implanting the AquaFlow
Device. We have also established regional Centers of Excellence, where surgeons
are successfully implanting the AquaFlow Device, to assist in training new
surgeons and in promoting the product.
We introduced the AquaFlow Device in late 1995 for commercial sale on a
limited basis in South Africa and selected countries in Europe and South
America. In August 1997, we received CE Mark for the AquaFlow Device, allowing
us to sell it in each of the countries comprising the European Union. In
January 2000, the Canadian government, through Health Canada, issued a Medical
Device License, allowing us to sell the AquaFlow Device in Canada. In July
2001, we received pre-market approval for the AquaFlow Device from the FDA.
Refractive Correction--Implantable Contact Lenses (ICLs). ICLs are lenses
implanted into the eye in order to correct refractive disorders such as myopia,
hyperopia and astigmatism. The ICL is capable of correcting a wide range of
refractive disorders from low to severe conditions.
The ICL is folded and implanted into the eye behind the iris and in front of
the natural lens using minimally invasive surgical techniques similar to
implanting an IOL during cataract surgery, except that the human lens is not
removed. The surgical procedure to implant the ICL is typically performed with
topical anesthesia on an outpatient basis. Visual recovery is within one to 24
hours.
We believe the use of an ICL will afford a number of advantages over
existing refractive surgical procedures, because:
. The ICL provides superior quality of vision compared to currently
available refractive procedures.
. The ICL provides superior predictability of surgical outcomes.
8
. The ICL can correct significantly greater levels of myopia, hyperopia and
astigmatism than other procedures.
. The ICL decreases the risk of loss of best corrected vision as a result
of complications.
. The ICL can correct or improve other vision problems, such as amblyopia
(lazy eye) and keratoconus (a condition causing marked astigmatism) and
provide an alternative to corneal refractive surgery.
. The ICL is implanted through an astigmatically neutral incision.
. The ICL enables faster recovery of vision.
. The ICL produces superior optical correction, ensuring clear vision.
We commenced commercial sales of ICLs in late 1996 on a limited basis in
South Africa, China, and selected countries in Europe and South America. In
August 1997, we received CE Mark allowing us to sell the ICL in each of the
countries comprising the European Union. In February 1997, the FDA granted us
an investigational device exemption (IDE) to begin clinical studies consisting
of three distinct phases within the U.S. We have completed enrollment of Phase
III of the IDE clinical trials for the correction of myopia and we are
presently engaged in completing enrollment of Phase III of the IDE for the
correction of hyperopia. We anticipate filing a pre-market approval application
for the ICL correcting myopia in the second quarter of 2003. The ICL received
approval in Canada in July 2001 and in Korea in April 2002. The Company has
submitted for registration in Taiwan and approval is pending for Australia. The
Canon-STAAR Company in Japan will begin clinical trials of the ICL in the
second quarter of 2003.
In January 2002, the FDA conditionally approved an IDE for the Toric ICL,
allowing us to begin clinical investigation on the lens in the United States
with patients having myopia in the range of -3.0 diopters to -20.0 diopters and
astigmatism in the range of +1.0 diopters to +4.0 diopters. Enrollment began in
August 2002 with six investigational sites. Industry sources estimate 20% of
the population requiring vision correction have astigmatism with the percentage
higher in severe myopia.
Distribution and Customers
We market our products to a variety of health care providers, including
surgical centers, hospitals, managed care providers, health maintenance
organizations, group purchasing organizations and government facilities. The
primary user of our products is the ophthalmologist. No material part of our
business, taken as a whole, is dependant upon a single or a few customers.
STAAR maintains direct distribution in the United States and Canada. Sales
efforts are supported through a network of independent manufacturers'
representatives. The representatives are compensated via commissions based on
annual sales volumes and targets. International sales are conducted through a
series of independent distributors.
STAAR supports the efforts of its agents and distributors through the
marketing efforts of its internal marketing departments. Sales efforts are
supplemented via promotional materials, educational courses, speakers programs
and technical presentations.
Sources and Availability of Raw Materials
Our IOLs, ICLs, and our AquaFlow glaucoma devices are manufactured in
facilities located in California and Switzerland. Our SonicWAVE
Phacoemulsification System is manufactured by our subsidiary, Circuit Tree
Medical, Inc., also located in California. The components used in the
manufacture of the SonicWAVE System are available from multiple sources.
9
Manufacturing is currently outsourced for our viscoelastic, custom procedure
packs and phaco packs. Many of our raw material components are purchased to our
specifications from suppliers. Most of these components are standard parts and
available from multiple sources. Although we presently have one supplier for
silicone, the principal raw material for our silicone IOL is available from
several other sources. We recently validated a new supplier of polypropylene
plastic resin for our lens delivery systems which is readily available in the
marketplace. The proprietary collagen-based raw material used to manufacture
IOLs, ICLs, and the Aqua Flow Device is internally sole-sourced at one of our
facilities in California. If the supply of these collagen-based raw materials
is interrupted we know of no alternate supplier, and therefore, any such supply
interruption could result in our inability to manufacture these products.
Patents, Trademarks and Licenses
We or our licensors have pending patent applications and issued patents in
various countries relating specifically to our products or various aspects of
them, including our core patent (the "Mazzocco Patent") relating to methods of
folding or deforming an IOL or ICL for use in minimally invasive surgery. The
Mazzocco Patent was granted by the United States Patent Office in March 1986 to
Thomas Mazzocco, M.D., who was a practicing ophthalmologist and a co-founder of
the Company. The Mazzocco Patent will expire in the year 2003. We do not derive
significant revenues from this patent, and we do not believe that its
expiration is of material importance in relation to our overall sales. We have
also acquired or applied for several patents for insertion devices, glaucoma
devices and other products for ophthalmic use.
In May 1995, Intersectional Research and Technology Complex Eye Microsurgery
("IRTC") granted an exclusive royalty-bearing license to our subsidiary, STAAR
Surgical AG, to manufacture, use and sell IRTC's glaucoma devices in the United
States, Europe, Latin America, Africa, and Asia, and non-exclusive rights with
respect to the countries in the Commonwealth of Independent States (the former
Union of Soviet Socialists Republic) and China. In January 1996, IRTC granted
an exclusive royalty bearing license to STAAR Surgical AG to manufacture, use
and sell implantable contact lenses using IRTC's biocompatible materials in the
United States, Europe, Latin America, Africa, and Asia, and non-exclusive
rights with respect to the Commonwealth of Independent States. The terms of
these licenses extend for the lives of the patents. In connection with these
licenses, IRTC also assigned to us its patent for its biocompatible material,
which we use in manufacturing our ICLs and some of our IOLs. We have since
adopted IRTC's biocompatible material and glaucoma device design for our
AquaFlow Device, and have incorporated IRTC's biocompatible materials for use
with our proprietary ICL design. These patents and the technology rights are of
material importance to our refractive products market segment. Each of these
patents will expire in the year 2009. We are continuing to expand our patent
portfolios of refractive and glaucoma products so that we do not become
dependent on the protection of any single patent.
In connection with our acquisition of a majority of the outstanding shares
of Circuit Tree Medical, Inc., in December 1999, we acquired patents relating
to the SonicWAVE Phacoemulsification System and other related technologies.
We have registered the mark "STAAR" and our associated logo with the United
States Patent and Trademark Office. We also have common law trademark rights to
other marks and we have applied for registration for some of these marks.
We have granted licenses to certain of our patents, trade secrets and
technology, including our foldable technology, to other companies for use in
connection with their cataract products. The licenses under the patents extend
for the life of the patents. The licensees include Allergan Medical Optics
("AMO"), Alcon Surgical, Inc. ("Alcon"), Bausch & Lomb Surgical ("Bausch &
Lomb"), CIBA Vision, Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn") and
Canon-STAAR Company, Inc., a joint venture we own with Canon, Inc. and Canon
Sales Co., Inc. We licensed certain of our patented foldable technology on an
exclusive basis to Canon-STAAR Company, Inc. (for Japan only), on a
non-exclusive basis to Alcon, Bausch & Lomb, CIBA Vision and Canon-STAAR
Company, Inc. (with respect to the world other than Japan), and on a
co-exclusive basis to AMO. At the
10
time these licenses were granted, we received substantial pre-payments of
royalties on all but one of the licenses. We expect to receive continuing
revenues from only one of these licenses through March 2003. Our business
strategy is not dependent upon realizing royalties from these licenses in the
future.
Competitive Conditions
Competition in the medical device field is intense and characterized by
extensive research and development and rapid technological change. Development
by competitors of new or improved products, processes or technologies may make
our products obsolete or less competitive. We will be required to devote
continued efforts and significant financial resources to enhance our existing
products and to develop new products for the ophthalmic industry.
We believe our primary competition in the development and sale of products
used to surgically correct cataracts, namely foldable IOLs and
phacoemulsification machines, includes Bausch & Lomb, AMO, Alcon, Pharmacia &
Upjohn, Inc. and CIBA Vision. Each of these competitors is a licensee of our
foldable technology. Significant competitors in the hard IOL market include
Bausch & Lomb, AMO, Pharmacia & Upjohn, Inc., Alcon and CIBA Vision. These
competitors have been established for longer periods of time than we have and
have significantly greater resources than we have, factors that give them the
advantages of greater name recognition, larger sales operations and greater
ability to finance research and development and proceedings for regulatory
approval.
Our primary competition in the development and sale of products used to
treat glaucoma is from pharmaceutical companies, primarily because drug therapy
is, and for years has been, the accepted treatment for glaucoma. The portion of
this market held by medical devices used to treat glaucoma is insignificant at
present. We believe that Merck & Company, Inc., Pharmacia, Novartis, Alcon,
Allergan and Bausch & Lomb are the largest providers of drugs used to treat
glaucoma within the United States, and CIBA Vision Corporation, Pharmacia &
Upjohn, Inc. and Lederle Laboratories, a subsidiary of American Home Products,
are the largest internationally. There are other devices under development to
be used in conjunction with a non penetrating deep sclerectomy for the surgical
management of glaucoma. These devices are manufactured by Alcon, Corneal,
Optonol and Glaukos.
Our ICL will face significant competition in the marketplace from products
that improve or correct refractive conditions, such as corrective eyeglasses
and external contact lenses, and particularly from providers of conventional
and laser surgical procedures. These are products long established in the
marketplace and familiar to patients in need of refractive correction.
Furthermore, corrective eyeglasses and external contact lenses are more easily
obtained, in that a prescription is usually written following a routine eye
examination in a doctor's office, without admitting the patient to a hospital
or surgery center. We believe that the following providers of laser surgical
procedures comprise our primary competition in the marketplace for patients
requiring refractive corrections: Alcon, Bausch & Lomb, VISX, Nidek and Laser
Sight all market Excimer lasers for corneal refractive surgery. The expected
approval of custom ablation, along with the addition of wavefront technology,
will increase awareness of corneal refractive surgery by patients and
practitioners. Conductive Keratoplasty (CK) by Refractec will compete for the
hyperopic market for +1.0 to +3.0 diopters. In the phakic IOL market, the ICL
faces Ophtec (to be distributed in the United States by Advanced Medical
Optics), Bausch & Lomb and CIBA, all with phakic IOLs under investigation.
Regulatory Requirements
Our products are subject to regulatory approval in the United States and in
foreign countries. The following discussion outlines the various kinds of
reviews to which our products or production facilities may be subject.
11
Clinical Regulatory Requirements within the United States. Under the
Federal Food, Drug & Cosmetic Act as amended by the "Food and Drug
Administration Modernization Act of 1997 ("The Act"), the FDA has the authority
to adopt regulations that:
. set standards for medical devices,
. require proof of safety and effectiveness prior to marketing devices
which the FDA believes require pre-market clearance,
. require test data approval prior to clinical evaluation of human use,
. permit detailed inspections of device manufacturing facilities,
. establish "good manufacturing practices" that must be followed in device
manufacture,
. require reporting of serious product defects to the FDA, and
. prohibit device exports that do not comply with the Act unless they
comply with established foreign regulations, do not conflict with foreign
laws, and the FDA and the health agency of the importing country
determine export is not contrary to public health.
Most of our products are "medical devices intended for human use" within the
meaning of the Act and are, therefore, subject to FDA regulation.
The FDA establishes complex procedures for compliance based upon regulations
that designate devices as Class I (general controls, such as compliance with
labeling and record-keeping requirements), Class II (performance standards in
addition to general controls) or Class III (pre-market approval application
("PMAA") before commercial marketing). Class III devices are the most
extensively regulated because the FDA has determined they are life-supporting,
are of substantial importance in preventing impairment of health, or present a
potential unreasonable risk of illness or injury. The effect of assigning a
device to Class III is to require each manufacturer to submit to the FDA a PMAA
that includes information on the safety and effectiveness of the device.
A medical device that is substantially equivalent to a directly related
medical device previously in commerce may be eligible for the FDA's abbreviated
pre-market notification "510(k) review" process. FDA 510(k) clearance is a
"grandfather" process. As such, FDA clearance does not imply that the safety,
reliability and effectiveness of the medical device has been approved or
validated by the FDA, but merely means that the medical device is substantially
equivalent to a previously cleared commercially-related medical device. The
review period and FDA determination as to substantial equivalence should be
made within 90 days of submission of a 510(k) application, unless additional
information or clarification or clinical studies are requested or required by
the FDA. As a practical matter, the review process and FDA determination may
take longer than 90 days.
Our IOLs and ICLs are Class III devices, and our AquaFlow Devices, lens
injectors, phacoemulsification equipment, ultrasonic cutting tips and surgical
packs are Class II devices. We have received FDA pre-market approval for our
IOLs (including the Toric and the Collamer IOLs) and AquaFlow Device and FDA
510(k) clearance for our phacoemulsification equipment, lens injectors,
ultrasonic cutting tips and surgical packs. We have completed the enrollment
for Phase III of the clinical study of the ICL that corrects myopia and we
continue to enroll patients in Phase III of the clinical study of the ICL that
corrects hyperopia. In September 2001, we applied for an investigation device
exemption (IDE) for a toric version of the ICL. In January 2002, the FDA
conditionally approved an IDE for the Toric ICL. We expect to submit an
application to the FDA for pre-market approval of our ICL to correct myopia in
the second quarter of 2003.
As a manufacturer of medical devices, our manufacturing processes and
facilities are subject to continuing review by the FDA and various state
agencies to ensure compliance with good manufacturing practices. These agencies
inspect our facilities from time to time to determine whether we are in
compliance with various regulations relating to manufacturing practices,
validation, testing, quality control and product labeling.
12
We are also subject to regulation by the local Air Pollution Control
District and the United States Environmental Protection Agency as a result of
some of the chemicals used in our manufacturing processes.
Medical device laws and regulations similar to those described above are
also in effect in some of the countries to which we export our products. These
range from comprehensive device approval requirements for some or all of our
medical device products to requests for product data or certifications.
Clinical Regulatory Requirements In Foreign Countries. There is a wide
variation in the approval or clearance requirements necessary to market
products in foreign countries. The requirements range from minimal requirements
to a level comparable to the FDA. For example, many countries in South America
have minimal regulatory requirements, while many developed countries, such as
Japan, have requirements at least as stringent as those of the FDA. FDA
acceptance is not always a substitute for foreign government approval or
clearance.
As of June 1998, the member countries of the European Union (the "Union")
require that all medical products sold within their borders carry a Conformite'
Europeene Mark ("CE Mark"). The CE Mark denotes that the applicable medical
device has been found to be in compliance with guidelines concerning
manufacturing and quality control, technical specifications and biological or
chemical and clinical safety. The CE Mark supersedes all current medical device
regulatory requirements for Union countries. We have obtained the CE Mark for
all of our principal products including our ICL and TICL, IOLs (including the
Toric IOL and Collamer IOL), SonicWAVE Phacoemulsification System and our
AquaFlow Device.
Other Regulatory Requirements. Sales of our products may be affected by
health care reimbursement practices. For example, in January 1994, the Health
Care Financing Administration adopted rules that limit Medicare reimbursement
for IOLs implanted in Medicare patients to a flat fee of $150.
We are also subject to various federal, state and local laws applicable to
our operations including, among other things, working conditions, laboratory
and manufacturing practices, and the use and disposal of hazardous or
potentially hazardous substances.
Research and Development
We are focused on furthering technological advancements in the ophthalmic
products industry through continuous innovative development of ophthalmic
products and materials and related surgical techniques. We maintain an active
internal research and development program which activities includes research
and development, clinical, and regulatory affairs and is comprised of 28
employees. Over the past year, we have principally focused our research and
development efforts on:
. developing our Toric ICL, and developing new material IOLs (including a
reintroduction of the three-piece Collamer IOL in the U.S.) and ICLs for
the correction of presbyopia,
. improving insertion and delivery systems for our foldable products,
including a successful design and launch of the environmentally
controlled cartridge,
. generally improving the manufacturing systems and procedures for all
products to reduce manufacturing costs resulting in yield increases for
Collamer products in 2002,
. improving the SonicWAVE Phacoemulsification System and obtaining FDA
510(k) approval for the Cruise Control device, and
. developing products and extending foreign registrations for the
refractive market.
Research and development expenses were approximately $4,016,000, $3,800,000,
and $4,215,000 for our 2002, 2001 and 2000 fiscal years, respectively.
13
Environmental Matters
The Company is subject to federal, state, local and foreign environmental
laws and regulations. We believe that our operations comply in all material
respects with applicable environmental laws and regulations in each country
where we have a business presence. We do not anticipate that compliance with
these laws will have any material impact on our capital expenditures, earnings
or competitive position. We currently have no plans to invest in material
capital expenditures for environmental control facilities for the remainder of
our current fiscal year or for the next fiscal year. We are not aware of any
pending litigation or significant financial obligations arising from current or
past environmental practices that are likely to have a material adverse impact
on our financial position. However, environmental problems relating to our
properties could develop in the future, and such problems could require
significant expenditures. Additionally, we are unable to predict changes in
legislation or regulations that may be adopted or enacted in the future and
that may adversely affect us.
Significant Subsidiaries
The Company's only significant subsidiary is STAAR Surgical AG, a wholly
owned entity incorporated in Switzerland. This subsidiary develops,
manufactures and distributes products worldwide including Collamer IOLs, ICLs
and the AquaFlow Device. STAAR Surgical AG also controls 100% of Domilens GMBH,
a European sales subsidiary that distributes both STAAR products and products
from various competitors.
Employees
Together with our subsidiaries, we had a total of 237 employees as of
February 18, 2003, including 36 in administration, 78 in marketing and sales,
28 in research and development and technical services and 95 in manufacturing,
quality control and shipping.
Financial Information about Foreign and Domestic Operations
Approximately $24,450,000, $27,558,000 and $30,986,000 of our overall
revenues were generated in the United States for the 2002, 2001 and 2000 fiscal
years, respectively, constituting approximately 51%, 54% and 57% of overall
revenues for those years. We believe that international markets represent a
significant opportunity for continued growth. Europe, which is our principal
foreign market, generated approximately $19,409,000, $19,572,000 and
$19,101,000 in revenues for the 2002, 2001 and 2000 fiscal years, respectively,
constituting approximately 40%, 39% and 35% of overall revenues for those
fiscal years. The remaining foreign sales were attributed to the Canadian,
Asian/Pacific, South African, Australian and South American geographic areas.
Most all products sold in 2002 were manufactured in the United States and
Switzerland. See Note 15 to the Consolidated Financial Statements.
A significant portion of our revenues relate to our international sales and
operations. We expect this to continue to be the case in the future. Our
international sales and operations subject us to several potential risks,
including:
. loss of distribution of third-party lines,
. risks associated with fluctuating exchange rates,
. the regulation of fund transfers by foreign governments,
. United States and foreign export and import duties and tariffs, and
. political instability.
The occurrence of any of the foregoing could materially and adversely affect
our business. We have not previously engaged in activities to mitigate the
effects of foreign currency fluctuations, because historically we have been
generally paid in U.S. dollars with respect to our international operations. As
earnings from
14
international operations increase, our exposure to fluctuations in foreign
currencies may increase, and we may utilize forward exchange rate contracts or
engage in other efforts to mitigate foreign currency risks.
Although our continued growth is in part dependent on the expansion of
international sales of our products, this expansion will involve operations in
markets where we may not be experienced. We may not be successful in capturing
a significant portion of these markets for many reasons, including unsuccessful
distribution efforts and an inability to obtain regulatory approvals.
Additional Information
During the second quarter of 2003, the Company expects to make available
free of charge through its website, www.staar.com, its Annual Report on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Securities Exchange Act of 1934, as soon as reasonably practicable after those
reports are filed with the Securities and Exchange Commission.
ITEM 2. PROPERTIES
Our operations are conducted in leased facilities throughout the world. Our
executive offices, manufacturing, warehouse and distribution, and primary
research facilities are located in Monrovia, California. STAAR Surgical AG
maintains office, manufacturing, warehouse and distribution, and research
facilities in Nidau, Switzerland. The Company has two additional facilities in
California, one for raw material support and another for research and
manufacturing. Outside the United States, the Company leases facilities in
Germany, Australia, Switzerland, France, and Austria. The Company will exit its
France facility in 2003. We believe our manufacturing facilities in the U.S.
and Switzerland are suitable and adequate for our current and future planned
requirements since manufacturing runs only one shift. However, the Company is
at capacity in the U.S. and Switzerland in the areas of distribution and
administration. The Company would require additional space to support growth in
those areas, although this is not anticipated for 2003.
ITEM 3. LEGAL PROCEEDINGS
We are party to various claims and legal proceedings arising out of the
normal course of our business. These claims and legal proceedings relate to
contractual rights and obligations, employment matters, and claims of product
liability. In addition to legal proceedings arising out of the normal course of
our business, on January 3, 2003 we were named as a party in the following
pending actions.
Mario Pelegrina v. Andrew F. Pollet, John R. Wolf, Peter J. Utrata, Volker
D. Anhaeusser, Joseph Priske, William Huddleston, Carl Manisco, individuals,
Pollet & Richardson, a California corporation, and Iotech, Inc., a California
corporation, Defendants, and STAAR Surgical Company, Nominal Defendant, Court
of Chancery of the State of Delaware, Case No. 18556. In December 2000, Mario
Pelegrina filed this shareholder derivative suit against us and certain named
directors and officers. Mr. Pelegrina alleges that these directors and officers
breached their fiduciary duties by engaging in self-dealing and waste of our
assets. Because this is a shareholder derivative action, we are a putative
plaintiff and stand to receive any damages that may be awarded. Mr Pelegrina
took no steps to prosecute the action until May 2002, when the Court of
Chancery requested a status report on the litigation. On October 9, 2002, we
filed a motion to dismiss the action and began preparing a brief in support of
the motion. The briefing has been stayed since December 2002, with Mr.
Pelegrina's consent, to enable us to discuss a potential voluntary dismissal of
the action.
Richard Leza v. STAAR Surgical Company, Pollet & Richardson, Los Angeles
Superior Court, Case Number BC257159: This action was filed on August 30, 2001.
Plaintiff Richard Leza was the Company's former Vice President of Finance,
Business Development and Corporate Strategy. He was terminated on November 1,
2000. Mr. Leza alleged that no cause existed for his termination, that he was
entitled to acceleration of an option
15
to purchase 50,000 shares of the Company's Common Stock, that a loan in the
amount of $120,000 made to him by the Company should have been forgiven, and
that he is entitled to a severance payment of $130,000. Mr. Leza also alleged
that the Company breached the implied covenant of good faith and fair dealing
and terminated him in violation of public policy. On February 27, 2003, the
Company and Mr. Leza settled their disputes. Pursuant to the settlement, the
Company agreed to pay Mr. Leza monthly payments totaling $180,000 over a
15-month period. The Company also agreed to issue Mr. Leza an option to
purchase 75,000 shares of the Company's Common Stock and forgave a note
receivable of $120,000.
John R. Wolf v. STAAR Surgical Company, Los Angeles Superior Court; Case No.
BC235396. On November 12, 2002, the Company and its former Chief Executive
Officer, John R. Wolf, settled their disputes resulting in the dismissal of all
legal actions between them. The settlement provided for completion of
Mr. Wolf's transfer of 243,000 shares of the Company's Common Stock pursuant to
the Form 4 executed May 9, 2000, in satisfaction of $2.1 million in promissory
notes executed by Mr. Wolf in favor of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended January 3, 2003.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock is quoted on the National Association of Securities Dealers
Automatic Quotation System National Market under the symbol "STAA." The
following table sets forth the reported high and low bid prices of the Common
Stock as reported by NASDAQ for the calendar periods indicated:
Period High Low
------ ------- ------
2003
First Quarter (through April 1, 2003). $ 6.550 $3.050
2002
Fourth Quarter........................ $ 4.580 $2.100
Third Quarter......................... 4.200 1.710
Second Quarter........................ 6.020 3.750
First Quarter......................... 5.440 3.500
2001
Fourth Quarter........................ $ 4.250 $1.700
Third Quarter......................... 5.250 1.550
Second Quarter........................ 5.500 2.000
First Quarter......................... 13.875 3.563
On April 1, 2003, the closing price of the Company's Common Stock was $5.95.
Stockholders are urged to obtain current market quotations for the Common Stock.
As of March 13, 2003, there were approximately 615 record holders of our
Common Stock.
We have not paid any cash dividends on our Common Stock since our inception.
We currently anticipate that any earnings will be retained to further develop
our business and that no cash dividends on the Common Stock will be declared in
the foreseeable future. Furthermore, pursuant to its domestic credit facility,
the Company cannot declare or pay any dividend to its stockholders. The
declaration and payment of any such dividends in the future would not only be
subject to approval by the Company's lender, but would also depend upon the
Company's earnings, financial condition, capital needs and other factors deemed
relevant by the Board of Directors.
During the three years ended December 31, 2002, the Company issued an
aggregate of 191,766 shares of Common Stock (the "Shares") without registration
under the Securities Act of 1933, as amended (the "Act"), to 8 directors,
officers, employees and consultants (the "Participants") under its 1996 STAAR
Surgical Company Stock Option Plan and 1998 STAAR Surgical Company Stock Option
Plan (the "Plans") for an aggregate cash consideration of $1,650,955. The
Company sold the Shares directly, without the services of an underwriter, in
reliance upon Rule 506 of Regulation D promulgated under Section 4(2) of the
Act. The Company believes that each Participant who purchased Shares was an
"accredited investor" within the meaning of Regulation D.
During such three year period, granted but unexercised options (the
"Options") to purchase shares of the Company's Common Stock without
registration under the Act totaled 1,823,298 to 49 Participants under the
Plans. The average exercise price of the Options is $7.15, and the Options
become exercisable in installments. As of April 1, 2003, Options to purchase
1,198,457 shares of Common Stock were exercisable. The Company granted the
Options directly, without the services of an underwriter. No Options have been
exercised, and the Company intends to register under the Act the shares of
Common Stock issuable upon exercise of the Options before the exercise thereof.
17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data with
respect to the five most recent fiscal years ended January 3, 2003, December
28, 2001, December 29, 2000, December 31, 1999, and January 1, 1999. The
selected consolidated statement of income data set forth below for each of the
three most recent fiscal years, and the selected consolidated balance sheet
data set forth below at January 3, 2003 and December 28, 2001, are derived from
the Consolidated Financial Statements which have been audited by BDO Seidman,
LLP, independent certified public accountants, as indicated in their report
which is included elsewhere in this Annual Report. The selected consolidated
statement of income data set forth below for each of the two fiscal years in
the periods ended December 31, 1999 and January 1, 1999, and the consolidated
balance sheet data set forth below at December 29, 2000, December 31, 1999, and
January 1, 1999 are derived from the Company's audited consolidated financial
statements not included in this Annual Report. The selected consolidated
financial data should be read in conjunction with the Consolidated Financial
Statements of the Company, and the Notes thereto, included elsewhere in this
Annual Report, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7.
Fiscal Year Ended
(in thousands except per share data)
-----------------------------------------------------------
January 3, December 28, December 29, December 31, January 1,
2003 2001 2000 1999 1999
---------- ------------ ------------ ------------ ----------
Statement of Operations
Sales..................................................... $ 47,880 $ 50,237 $ 53,986 $58,955 $54,244
Royalty and other income.................................. 368 549 448 253 899
-------- -------- -------- ------- -------
Total revenues............................................ 48,248 50,786 54,434 59,208 55,143
Cost of sales............................................. 24,099 28,203 26,329 22,935 18,533
-------- -------- -------- ------- -------
Gross profit.............................................. 24,149 22,583 28,105 36,273 36,610
-------- -------- -------- ------- -------
Selling, general and administrative expenses
General and administrative................................ 8,959 8,746 8,593 7,939 6,770
Marketing and selling..................................... 16,833 20,043 21,254 19,879 18,709
Research and development.................................. 4,016 3,800 4,215 4,338 3,570
Other charges............................................. 1,454 7,780 15,276 -- --
-------- -------- -------- ------- -------
Total selling, general and administrative expenses........ 31,262 40,369 49,338 32,156 29,049
-------- -------- -------- ------- -------
Operating income (loss)................................... (7,113) (17,786) (21,233) 4,117 7,561
-------- -------- -------- ------- -------
Total other expense, net.................................. (1,011) (455) (4,162) (682) (763)
-------- -------- -------- ------- -------
Income before income taxes, minority interest and
cumulative effect of change in accounting method......... (8,124) (18,241) (25,395) 3,435 6,798
Income tax provision (benefit)............................ 8,959 (3,547) (6,580) 862 1,999
Minority interest......................................... 75 139 87 419 662
-------- -------- -------- ------- -------
Net income (loss) before accounting change................ (17,158) (14,833) (18,902) 2,154 4,137
Cumulative effect of accounting change.................... -- -- -- -- 1,680
-------- -------- -------- ------- -------
Net income (loss)......................................... $(17,158) $(14,833) $(18,902) $ 2,154 $ 2,457
======== ======== ======== ======= =======
Diluted income (loss) per share before effect of change in
accounting method........................................ $ (1.00) $ (0.87) $ (1.23) $ 0.15 $ 0.29
Basic net income (loss) per share......................... $ (1.00) $ (0.87) $ (1.23) $ 0.15 $ 0.18
Diluted net income (loss) per share....................... $ (1.00) $ (0.87) $ (1.23) $ 0.15 $ 0.17
Weighted average number of basic shares................... 17,142 17,003 15,378 14,157 13,542
Weighted average number of diluted shares................. 17,142 17,003 15,378 14,756 14,268
Balance Sheet Data
Working capital........................................... $ 6,792 $ 16,780 $ 23,960 $25,590 $26,925
Total assets.............................................. 45,220 64,804 79,250 85,273 73,290
Notes payable and current portion of long-term debt....... 5,845 8,216 7,944 2,691 2,312
Long-term debt............................................ -- -- -- 13,673 10,021
Stockholders' equity...................................... $ 30,551 $ 46,296 $ 58,315 $52,684 $47,706
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained in this Annual Report, the
matters discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are forward-looking statements, the
accuracy of which is necessarily subject to risks and uncertainties. Actual
results may differ significantly from the discussion of such matters in the
forward-looking statements. See "Factors That May Affect Future Results of
Operations."
Results of Operations
The following table sets forth the percentage of total revenues represented
by certain items reflected in the Company's income statement for the period
indicated and the percentage increase or decrease in such items over the prior
period.
Percentage of Total Revenues Percentage Change
---------------------------------- ---------------
January 3, December 28, December 29, 2002 vs. 2001 vs.
2003 2001 2000 2001 2000
---------- ------------ ------------ -------- --------
Total revenues...................... 100.0% 100.0% 100.0% (5.0)% (6.7)%
Cost of sales....................... 49.9% 55.5% 48.4% (14.6)% 7.1%
Gross profit........................ 50.1% 44.5% 51.6% 6.9% (19.6)%
Costs and expenses:
General and administrative....... 18.6% 17.2% 15.8% 2.4% 1.8%
Marketing and selling............ 34.9% 39.5% 39.0% (16.0)% (5.7)%
Research and development......... 8.3% 7.5% 7.7% 5.7% (9.8)%
Other charges.................... 3.0% 15.3% 28.1% (81.3)% (49.1)%
Total costs and expenses..... 64.8% 79.5% 90.6% (22.6)% (18.2)%
Operating loss...................... (14.7)% (35.0)% (39.0)% (60.0)% (16.2)%
Other expense, net.................. (2.1)% (0.9)% (7.6)% 122.2% (89.1)%
Loss before income taxes............ (16.8)% (35.9)% (46.6)% 55.5% (28.2)%
Income tax provision (benefit)...... 18.6% (7.0)% (12.1)% 352.6% (46.1)%
Minority interest................... 0.2% 0.3% 0.2% (46.0)% 59.8%
Net loss............................ (35.6)% (29.2)% (34.7)% (15.7)% (21.5)%
2002 Fiscal Year Compared to 2001 Fiscal Year
Revenues. Revenues for the year ended January 3, 2003 decreased over the
year ended December 28, 2001 by 5.0% or $2,538,000. The decrease in revenues
was due primarily to a 14% decrease in IOL sales primarily in the United
States. Approximately 66% of the decrease in IOL sales was the result of a
decline in unit volume and 34% of the decrease was the result of a decline in
average selling price ("ASP"). The decrease in IOL sales were partially offset
by an 11% increase in sales in international markets of distributed products
and a 33% increase in ICL sales. Unit volume of ICLs increased 34%, partially
offset by a 1% decline in ASP. Sales of STAARVisc increased 205% on increased
volume and Aquaflow sales increased 54% on increased volume and ASP. The
Company expects sales of IOLs in the U.S. to increase in 2003 as a result of
tighter management of the Company's independent sales force and the
introduction of improved lens delivery systems.
Gross profit. Gross profit for the year ended January 3, 2003 was 50.1% of
revenues compared to the year ended December 28, 2001 when it was 44.5% of
revenues (including other charges of $5.6 million related to inventory
write-offs primarily as the result of voluntary product recalls). Excluding the
other charges, gross profit for the year ended December 28, 2001 was 57.0%. The
lower gross profit for the current year compared to the previous year
(excluding other charges) is due to the high unit costs of IOL inventory
manufactured last year during a period of low production volumes. Gross profit
for the year was also impacted by a shift in product mix from IOLs with a
higher gross profit margin to equipment and other distributed product with a
lower gross profit
19
margin. Gross profit margin has improved sequentially each quarter since the
second quarter of 2002. The Company expects gross profit to continue to improve
as the high cost inventory is depleted and the Company's strategy to improve
efficiency yields additional cost savings.
Marketing and selling expenses. Marketing and selling expenses for the year
ended January 3, 2003 were 34.9% of revenues compared to 39.5% of revenues for
the year ended December 28, 2001. In terms of dollars, marketing and selling
expenses for 2002 decreased $3.2 million or 16.0% over 2001 due to cost
containment measures which have reduced overall spending in the U.S. and the
approximate $1.6 million in cost savings the Company has realized as a result
of subsidiary closures in the previous year.
Other charges. Other charges for the year ended January 3, 2003 were
approximately $1.5 million compared to the year ended December 28, 2001 when
other charges were $7.8 million. The $1.5 million in charges taken during 2002
related to the recognition of deferred losses resulting from the translation of
foreign currency statements into U.S. dollars of subsidiaries that were closed
and employee separation.
Other expense, net. Other expense, net for the year ended January 3, 2003
increased $556,000 over the year ended December 28, 2001. This increase was due
to decreased income from the Company's joint venture with Canon-STAAR,
decreased interest income, and increased foreign exchange losses.
Income taxes. During the year ended January 3, 2003, the Company recorded a
valuation allowance of $9.2 million against its deferred tax assets. This
non-cash charge reduced the deferred tax assets on the balance sheet to zero.
The assets were created as a result of income tax benefits that were recorded
on U.S. operating losses incurred during the restructuring and reorganization
accomplished in 2000 and 2001. No deferred tax benefits were recorded on
operating losses in 2002. Current accounting standards place significant weight
on a history of recent cumulative losses in determining whether or not a
valuation allowance is necessary. Forecasts of future taxable income are not
considered sufficient positive evidence to outweigh a history of losses.
Accordingly, the assets were reserved in full. The Company's federal net
operating loss carryforwards are not impacted and can continue to be utilized
for up to 20 years.
Legislation enacted on March 9, 2002 (HR 3090) enabled the Company to
carryback a portion of the federal 2001 net operating loss to 1996, 1997 and
1998. Since this legislation was not enacted as of the end of fiscal year 2001,
the benefit of $959,000 from this carryback was recorded in 2002.
2001 Fiscal Year Compared to 2000 Fiscal Year
Revenues for the year ended December 28, 2001 were $50.8 million,
representing a 6.7% decrease over the $54.4 million in revenues for the year
ended December 29, 2000. The decrease in revenues resulted primarily due to
decreased sales of the Company's Elastic(TM) and Elastimide(TM) silicone
intraocular lenses due to the impact of a voluntary product recall in the
second quarter of 2001. The decrease in silicone IOL sales was partially offset
by increased sales of the Company's Collamer, Toric, and acrylic IOLs. The
Company experienced a continued shift in product mix in fiscal 2002. Revenues
also decreased in 2001 for sales in 2000 of subsidiaries that were closed in
the same year and sales of the Company's SonicWAVE Phacoemulsification System
also decreased. This decrease was due to the elimination of a dedicated sales
force as a result of cost containment measures taken during fiscal 2001 and a
general decline in the economy resulting in a decline in capital equipment
spending. In addition to increased sales of Collamer, Toric and acrylic IOLs,
sales of the Company's AquaFlow Device, which was approved for sale in the
United States in the third quarter of fiscal 2001 and STAARVISC II also
increased.
The Company is expanding its market focus beyond the cataract market to also
include the refractive and glaucoma markets. The Company anticipates that its
growth in the refractive and glaucoma product markets will
20
increase significantly as the Company's refractive lenses (ICL and Toric IOL)
and its AquaFlow Device continue to gain market acceptance and regulatory
approvals. The Company believes its sales of products used for the treatment of
cataracts will grow with the introduction or reintroduction of various products
including the Collamer three-piece IOL, STAARVISC II, UltraVac V1 tubing and
the SonicWAVE Phacoemulsification System.
Cost of sales. Cost of sales were $28.2 million or 55.5% of revenue for the
year ended December 28, 2001 compared to $26.3 million or 48.4% of revenue for
the year ended December 29, 2000. The increase in cost of sales resulted from a
23% increase in inventory write-offs over the prior year, primarily relating to
voluntary product recalls. Excluding the impact of inventory write-offs, cost
of sales as a percent of revenues increased from 38.9% in fiscal 2000 to 43.0%
in fiscal 2001. This increase was primarily due to increased unit costs of
silicone IOLs and a change in product mix. Silicone IOL unit costs increased
significantly due to lower production levels necessitated by reduced sales
demand and improved inventory management.
General and administrative. General and administrative expense for the year
ended December 28, 2001 was $8.7 million, or 17.2% of revenue, as compared to
$8.6 million, or 15.8% of revenue for the year ended December 29, 2000. The
primary reason for the increase as a percent of revenue was due to decreased
revenues. The slight increase in dollars is primarily attributable to
relocation costs of executive management, increased administrative salaries,
and increased professional fees offset by decreased expenses from a subsidiary
that was closed in the prior year.
Marketing and selling. Marketing and selling expense for the year ended
December 28, 2001 was $20.0 million or 39.5% of revenue, as compared to $21.3
million or 39.0% of revenue for the year ended December 29, 2000. The primary
reason for the increase as a percent of revenue was due to decreased revenues.
Actual expense decreased by $1.2 million due to decreased commissions,
decreased costs from a subsidiary that was closed in fiscal 2000 and cost
containment measures taken during fiscal 2001.
Research and development. Research and development expense for the year
ended December 28, 2001 was $3.8 million, or 7.5% of revenue as compared to
$4.2 million or 7.7% of revenue for the year ended December 29, 2000. Research
and development expense decreased over the prior year due primarily to
decreased staffing during the first six months of 2001.
Other charges. In June 2001 management completed an extensive operational
review of the Company. Based upon that review, in August 2001 the Company
implemented a plan that management believes will allow it to become profitable.
As a result of implementing the plan, the Company significantly changed its
manufacturing processes and locations, including consolidating lathing activity
into the Swiss manufacturing site from the current dual site operations and
reducing molded lens capacity at the California site. The Company also reduced
its workforce and closed certain overseas operations. In conjunction with the
implementation of the plan, the Company recorded pretax charges of
approximately $7.8 million in the third and fourth quarters of the 2001 fiscal
year. Planned charges included approximately $3.7 million in fixed asset
write-offs, $0.3 million in severance and employee relocation costs, and $1.0
million for subsidiary closures. Additionally, the Company reserved $2.1
million of notes receivable from former officers and directors of the Company
and paid $0.7 million for the early termination of a consulting contract with
the president of one of the Company's European subsidiaries.
The Company also wrote off $6.4 million of inventory related to voluntary
product recalls and excess and obsolete inventory in the second and fourth
quarters of 2001. The amount is included in cost of sales at December 28, 2001.
Other expense, net. Other expense, net for the year ended December 28, 2001
was approximately $0.5 million or 0.9% of revenues as compared to approximately
$4.2 million or 7.6% of revenues for the year ended December 29, 2000. This
decrease resulted from decreased interest expense and amounts written off in
fiscal 2000 related to the Company's joint venture with Canon-STAAR Co., Inc.
21
Income tax benefit. The income tax benefit was $3.5 million for the year
ended December 28, 2001 as compared to a benefit of $6.6 million for the year
ended December 29, 2000. The primary reason for this decrease relates to
decreased U.S. losses over the prior fiscal year resulting in a lower overall
tax benefit. The tax benefit for fiscal 2001 was further reduced by
approximately $2.8 million in valuation allowances that were recorded against
the Company's deferred tax assets.
2000 Fiscal Year Compared to 1999 Fiscal Year
Revenues. Revenues for the year ended December 29, 2000 were $54.4 million,
representing an 8.1% decrease over the $59.2 million in revenues for the year
ended December 31, 1999. The primary reasons for the decrease in revenues were
the reduced U.S. dollar amounts recorded by international subsidiaries due to
the strength of the U.S. dollar as compared to foreign currencies, most
specifically the German Mark, decreased sales to the Company's joint venture,
Canon-STAAR Company, Inc., the continuing decline in sales of the Company's
silicone IOLs in Europe and lower average selling prices on international sales
of the Company's ICLs due to the change from direct selling to selling through
international distributors. These decreases were offset by increased sales of
the SonicWAVE Phacoemulsification System, which was introduced in the third
quarter, increased revenue from the sales of the Collamer single piece IOL,
approved for sale in April 2000, increased revenues from sales of the Toric IOL
and increased revenues from a full year of sales of custom surgical packs to
our U.S. customers, which began in mid-year 1999. Other revenue in 2000
increased over 1999 by $195,000.
Cost of sales. Cost of sales increased to 48.4% of revenue for the year
ended December 29, 2000 from 38.7% of revenue for the year ended December 31,
1999. The primary reasons for this 14.8% increase relates to an inventory
write-off of $5.2 million, recorded during the second quarter of 2000, of
various items that no longer fit the Company's future direction. Additionally,
despite higher average selling prices for IOLs, higher average unit cost caused
the cost of sales as a percentage of revenue exclusive of the above-mentioned
write-off to increase slightly to 38.8%. The increase in average selling price
was due to the change in product mix to the Company's premium priced IOLs
(Toric and Collamer). The higher average cost of IOLs was due principally to
the changes in product mix to the Collamer IOL and, to a lesser extent;
increased unit cost due to lower manufacturing activity levels which resulted
in the units produced carrying a higher per unit cost from absorption of fixed
expenses. Additionally, the full year of sales of custom surgical packs in the
U.S. have a higher cost of sales as a percentage of sales when compared to the
other products the Company offers.
General and administrative. General and administrative expense for the year
ended December 29, 2000 was $8.6 million, or 15.8% of revenue, as compared to
$7.9 million, or 13.4% of revenue for the year ended December 31, 1999. This
increase in dollars was primarily attributable to increases in expenditures for
professional service fees, expenses recorded in the second quarter at the time
of the Company's restructuring plan, and increased expenses year over year from
subsidiaries acquired or created in late 1999. The increase as a percent of
revenues was due to the expenses increasing at a rate greater than the current
growth rate of revenues.
Marketing and selling. Marketing and selling expense for the year ended
December 29, 2000 was $21.3 million or 39.0% of revenue, as compared to $19.9
million or 33.6% of revenue for the year ended December 31, 1999. The primary
reasons for this increase was the compensation and travel costs of direct sales
management hired in late 1999 and 2000 to sell IOLs and the Company's SonicWAVE
Phacoemulsification Systems, increased commissions generated by the graduated
commission schedule which has higher percentage rates as IOL sales prices
increase, and average selling price increases over 1999 due to the change in
IOL mix to the Company's proprietary IOLs. Additionally, the Company has
continued to increase the expenses for product management to prepare for
broader entry into the refractive and glaucoma markets. These increases were
offset, in part, as a result of the reduced U.S. dollar amounts recorded by
international subsidiaries due to the strength of the U.S. dollar as compared
to foreign currencies, most specifically, the German Mark.
Research and development. Research and development expense for the year
ended December 29, 2000 was $4.2 million, or 7.7% of revenue as compared to
$4.3 million or 7.3% of revenue for the year ended
22
December 31, 1999. Research and development expense decreased slightly over the
prior year due to a reduction in research and development staffing offset by
increased spending related to the monitoring of clinical trials for the ICL for
the correction of myopia, the ICL for the correction of hyperopia, and the
AquaFlow Device. Additionally, expenses relating to the development and
improvement of the Company's SonicWAVE Phacoemulsification System increased.
Other charges. On June 22, 2000 the Company announced the details of its
plan of restructuring. In conjunction with the implementation of the plan, the
Company recorded a pre-tax charge to earnings of $13.8 million in the second
quarter of fiscal 2000. The charges include approximately $0.9 million for
restructuring of certain subsidiaries, approximately $4.0 million to write-off
patents that were considered questionable in providing future value to the
Company, approximately $1.9 million of costs incurred by the Company relating
to activities that were abandoned, approximately $4.1 million relating to
severance and other employee separation costs, approximately $1.9 million
relating to the disposition of investment and assets related to the Company's
abandoned entry into the Lasik market, and approximately $1.0 million relating
to the closure of a foreign subsidiary. 19 employees were laid-off, terminated
or resigned as part of the Company's restructuring plan. Also included is a
$1.5 million charge related to a note receivable from a former officer, which
is currently under-collateralized.
Other expense, net. Other expense, net for the year ended December 29, 2000
was approximately $4.2 million or 7.6% of revenues as compared to approximately
$0.7 million or 1.2% of revenues for the prior year. The primary reason for
this increase was a $4.7 million charge the Company recorded relating to the
write-off of its Japanese joint venture.
Income tax provision. Income tax benefit was $6.6 million for the year
ended December 29, 2000 as compared to a provision of $0.9 million for the year
ended December 31, 1999. The reasons for the change relate to the dramatic
reduction in income before income taxes, which was due primarily to the charges
taken in the second quarter totaling $24 million before income taxes. During
2000, the Company recorded a deferred tax asset that resulted from the losses
recorded for the year. The Company would have been profitable in the 2000
fiscal year with the exclusion of charges relating to the restructuring plan
and the reserve for notes receivable.
Liquidity and Capital Resources
The Company has funded its activities over the past several years
principally from cash flow generated from operations, credit facilities
provided by institutional domestic and foreign lenders, the private placement
of Common Stock and the exercise of stock options and warrants.
Net cash provided by (used in) operating activities was $0.6 million, ($2.5)
million, and ($5.0) million for fiscal 2002, 2001, and 2000, respectively. For
fiscal 2002, cash provided by operations was the result of the net loss,
adjusted for depreciation, amortization, deferred income taxes, and other
non-cash charges, and decreases in working capital--primarily accounts
receivable, inventory, and accounts payable. For fiscal 2001, cash used in
operations was the net loss, adjusted for depreciation, amortization, deferred
income taxes, and non-cash restructuring and inventory write-downs. For fiscal
2000, cash used in operations was the net loss, adjusted for depreciation,
amortization, the write-down of the Company's investment in its Japanese joint
venture, deferred income taxes, and non-cash restructuring and inventory
write-downs partially offset by changes in working capital--primarily accounts
receivable, inventories and accounts payable.
Accounts receivable was $6.0 million in 2002, $7.5 million in 2001, and $9.7
million in 2000 due to lower sales but also due to increased collection
efforts. Day's sales outstanding (DSO) improved from 64 days in 2000; to 54
days in 2001; to 45 days in 2002. The Company does not believe that the trend
of lower DSO will continue in 2003 below the 45 days realized in 2002.
Inventory in 2002, 2001, and 2000 was $11.8 million, $15.2 million, and
$20.8 million, respectively. Day's inventory on hand decreased from 285 days in
2000; to 195 days in 2001; to 176 days in 2002. Decreases in
23
inventory in 2000 and 2001 totaling $5.2 million and $6.4 million,
respectively, were the result of write-offs of excess and obsolete inventory
and inventory related to voluntary product recalls. The decrease in inventory
in 2001 was partially offset by higher cost inventory that was produced during
the year as a result of decreased production volume. This high cost inventory
was sold during 2002 and replaced with lower cost inventory resulting in an
overall decrease in inventory of $3.4 million over 2001. The Company expects
that for 2003, the value of its inventory will remain approximately $12.0
million and that the trend of decreasing inventory will not continue.
Accounts payable in 2002, 2001, and 2000 was $4.6 million, $5.6 million, and
$6.2 million, respectively. The decreases in 2000 and 2001 were the result of
companywide cost savings measures implemented during those years. The benefits
of those cost savings measures continued into 2002. However, the decrease at
January 3, 2003 is principally due to plant shutdowns during the Christmas
holidays which resulted in a change in the timing of payments.
Net cash used in investing activities was approximately $406,000, $705,000,
and $4.1 million for fiscal 2002, 2001, and 2000, respectively. The principal
investments of the Company are in property and equipment. Investments in
property and equipment were $874,000, $1.2 million, and $3.3 million for fiscal
2002, 2001, and 2000, respectively. The investments are generally made to
upgrade and improve existing production equipment and processes. In fiscal
2000, additional expenditures were made to set up or expand production
facilities in the U.S. and in Switzerland for new products. The Company expects
to spend approximately $1.0 million on property and equipment in 2003.
Net cash (used in) provided by financing activities were approximately
($592,000), ($1.7 million), and $12.2 million for fiscal 2002, 2001, and 2000,
respectively. The Company had a $7.0 million line of credit with a domestic
lender which matured on March 29, 2002, and was amended and restated from time
to time during the year ended January 3, 2003. The line of credit, as modified,
extends the maturity date to March 31, 2003, included the release of restricted
cash in the amount of $2.0 million in order to pay down the note and provides
for monthly decreases in availability through February 2003 totaling $4.0
million. The Company's obligation to the lender is secured by a first priority
lien on substantially all of the Company's assets and bears interest at a rate
equal to the prime rate (4.25% at January 3, 2003) plus an applicable interest
margin from 1% to 5% which is based on the Company's ratio of funded debt to
earnings before interest, taxes, depreciation, and amortization (EBITDA) at
each fiscal quarter on a trailing 12-month basis. In addition, the Company is
required to pay a commitment fee .25% to 1.25% of the unused amount of the line
of credit also based on a ratio of funded debt to EBITDA. Since the Company
reported losses throughout 2002, it was charged the maximum total interest rate
allowed under the agreement of prime plus a 5% margin (9.25%) and the maximum
commitment fee of 1.25% at January 3, 2003.
The agreement also requires the Company to satisfy certain financial tests,
which include positive and negative covenants such as the maintenance of
certain levels of liquidity, operating cash flows, tangible net worth, and
operating income. As of January 3, 2003, the Company was not in compliance with
the tangible net worth covenants of the agreement due to the valuation
allowance recorded against the Company's deferred tax assets. The Company has
obtained a waiver from the lender who agreed to waive the events of default
resulting from the covenant violations. Borrowings outstanding under the note
as of January 3, 2003 and December 28, 2001, were approximately $2.8 million
and $5.7 million, respectively. As of January 3, 2003 and December 28, 2001,
the note provided for borrowings of up to $3.7 million and $7.0 million,
respectively.
On March 26, 2003, the Company and its domestic lender executed an agreement
to extend the maturity date of the Company's $3.0 million line-of-credit for
one year to March 31, 2004. The line-of-credit bears interest at a rate equal
to the prime rate (4.25% at January 3, 2003) plus an interest margin of 5%. In
addition, the Company is required to pay a commitment fee of 1.25% per annum of
the unused amount of the line-of-credit. All other terms and conditions are
generally unchanged except that the cash flow and operating income covenants of
the agreement do not commence until the third quarter of 2003 and minimum
tangible net worth covenants were reduced.
24
A subsidiary of the Company has a revolving credit facility with a Swiss
bank, which as amended in fiscal 2001, provides for borrowings of up to 4.5
million Swiss Francs "CHF" ($3.2 million based on the exchange rate on January
3, 2003). The credit facility is divided into two parts: Part A provides for
borrowings of up to CHF 3.0 million ($2.1 million based on the exchange rate on
January 3, 2003) and does not have a termination date; Part B provides for
borrowings of up to CHF 1.5 million ($1.1 million based on the exchange rate on
January 3, 2003). The loan amount under Part B of the agreement reduces by CHF
250,000 ($178,000 based on the exchange rate on January 3, 2003) semi-annually
beginning June 30, 2002. The credit facility is secured by a general assignment
of claims.
The loan agreement provides for borrowings on a current or fixed-term basis.
The interest rate on current advances is 6.5% per annum at January 3, 2003 plus
a commission rate of 0.25%, payable each quarter. The base interest rate for
fixed-term advances follows Euromarket conditions for loans of a corresponding
term and currency plus an individual margin. The fixed-term rate at January 3,
2003 was 4.6%. Borrowings outstanding under the current account as of January
3, 2003 were CHF 90,000 ($64,000 based on the exchange rate on January 3,
2003). Fixed term advances at January 3, 2003 were CHF 4.1 million ($2.9
million based on the exchange rate on January 3, 2003).
A subsidiary of the Company has a revolving credit facility with a German
bank that provides for borrowings of up to approximately 200,000 EUR ($207,000
at the exchange rate on January 3, 2003) at an interest rate of 8.5%. The loan,
originally due February 28, 2003, was extended on October 8, 2002 to August 31,
2003. Payments in the amount of 50,000 EUR ($52,000 at the exchange rate on
January 3, 2003) were due monthly beginning December 31, 2001. The amended
agreement reduced the monthly payment to 25,000 EUR ($26,000 at the exchange
rate on January 3, 2003). The bank also agreed to waive the September 2002 and
October 2002 payments. There were no other changes to the original terms of the
agreement. The loan is secured by an assignment of the subsidiary's accounts
receivable and inventory and is personally guaranteed by the subsidiary's
president. There are no financial covenants included in the agreement and no
borrowings outstanding as of January 3, 2003.
The subsidiary of the Company negotiated another credit facility with a
different German bank to replace the one that expires on August 31, 2003. The
new agreement, effective January 13, 2003, provides for borrowings of up to
210,000 EUR ($199,000 at the exchange rate on the date of the agreement) at an
interest rate of 8.5%. The note is due November 30, 2003 and is personally
guaranteed by the subsidiary's president. The agreement includes a covenant
which prevents the subsidiary from paying dividends.
The following table represents the Company's known contractual obligations
at January 3, 2003.
Payments Due by Period
- ----------------------------------
Less More
Than 1-3 3-5 Than
Contractual Obligations Total 1 Year Years Years 5 Years
----------------------- ------ ------ ------ ----- -------
(In thousands)
Long-term debt Obligations. $ -- $ -- $ -- $ -- $ --
Capital Lease Obligations.. -- -- -- -- --
Operating Lease Obligations 1,647 713 879 55 --
Purchase Obligations....... 2,865 1,065 1,800 -- --
Other long-term liabilities 89 -- 89 -- --
------ ------ ------ ---- ----
Total................... $4,601 $1,778 $2,768 $ 55 $ --
====== ====== ====== ==== ====
The Company depends on external sources (banks and capital markets) for the
funding it needs to operate the business. Unexpected conditions have arisen and
can continue to arise that could cause the Company to be in violation of its
lender's financial covenants. The Company believes it has sufficient cash
available through its bank credit facilities and cash from operations to fund
existing operations and that it could obtain alternate
25
financing, if necessary, although this is not certain. The decision of any one
of the Company's lenders not to renew its line of credit could have a material
adverse affect on the Company and the costs associated with obtaining alternate
financing could be significant.
Critical Accounting Policies
The Company believes the following represent its critical accounting
policies.
. Revenue Recognition. In general, the Company supplies foldable IOLs on a
consignment basis to customers, primarily ophthalmologists, surgical
centers, hospitals and other eye care providers and recognizes sales when
the IOLs are implanted. Sales of all other products, including sales to
foreign distributors, are generally recognized upon shipment.
Revenue from license and technology agreements is recorded as income,
when earned, according to the terms of the respective agreements.
. Impairment of Long-Lived Assets. Intangible and other long lived-assets
are reviewed for impairment whenever events such as product
discontinuance, plant closures, product dispositions or other changes in
circumstances indicate that the carrying amount may not be recoverable.
In reviewing for impairment, the Company compares the carrying value of
such assets to the estimated undiscounted future cash flows expected from
the use of the assets and their eventual disposition. When the estimated
undiscounted future cash flows are less than their carrying amount, an
impairment loss is recognized equal to the difference between the assets'
fair value and their carrying value.
Goodwill, which has an indefinite life and was previously amortized on a
straight-line basis over the periods benefited, is no longer amortized to
earnings, but instead is subject to periodic testing for impairment.
Intangible assets determined to have definite lives are amortized over
their remaining useful lives. Goodwill of a reporting unit is tested for
impairment on an annual basis or between annual tests if an event occurs
or circumstances change that would reduce the fair value of a reporting
unit below its carrying amount. As provided under SFAS 142, the initial
testing of goodwill for possible impairment was completed within the
first six months of 2002 and no impairment has been identified. As of
January 3, 2003, the carrying value of goodwill was $6.4 million.
The Company also has other intangible assets consisting of patents and
licenses, with a gross book value of $14.0 million and accumulated
amortization of $5.0 million as of January 3, 2003. The Company
capitalizes the costs of acquiring patents and licenses as well as the
legal costs of successfully defending its rights to these patents.
Amortization is computed on the straight-line basis over the estimated
useful lives, which are based on legal and contractual provisions, and
range from 10 to 20 years.
. Deferred Taxes. The Company recognizes deferred tax assets and
liabilities for temporary differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities along
with net operating loss and credit carryforwards. A valuation allowance
is recognized if, based on the weight of available evidence, it is more
likely than not that some portion or all of the deferred tax asset may
not be realized. The impact on deferred taxes of changes in tax rates and
laws, if any, are applied to the years during which temporary differences
are expected to be settled and reflected in the financial statements in
the period of enactment.
In 2002, due to the Company's recent history of losses, an increase to
the valuation allowance was recorded as a non-cash charge to tax expense
in the amount of $9.2 million. As a result, the valuation allowance fully
offsets the value of deferred tax assets on the Company's balance sheet
as of January 3, 2003. If in the future, the Company determines it will
be able to utilize all or part of the deferred tax assets which have a
valuation allowance of $18.2 million at January 3, 2003, we would reverse
the valuation allowance, which would result in an income tax benefit.
26
Factors That May Affect Future Results of Operations
Our short and long-term success is subject to many factors that are beyond
our control. Stockholders and prospective stockholders in the Company should
consider carefully the following risk factors, in addition to other information
contained in this report. This Annual Report on Form l0-K contains
forward-looking statements, which are subject to a variety of risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors
including those set forth below.
The Company may not be able to fund its future growth or react to competitive
pressures if it lacks sufficient funds.
The Company depends on external sources (banks and capital markets) for the
funding it needs to operate the business. Unexpected conditions have arisen and
can continue to arise that could cause the Company to be in violation of its
lender's financial covenants. The Company believes it has sufficient cash
available through its bank credit facilities and cash from operations to fund
existing operations and that it could obtain alternate financing, if necessary,
although this is not certain. The decision of any one of the Company's lenders
not to renew its line of credit could have a material adverse affect on the
Company and the costs associated with obtaining alternate financing could be
significant.
We have a history of losses.
We have reported losses in each of the last three fiscal years and have an
accumulated deficit of $41.4 million as of January 3, 2003. If losses from
operations continue, they could adversely affect the market price for our
common stock, and our ability to maintain existing financing and obtain new
financing. Despite our restructuring efforts, there can be no assurance that we
will receive the intended benefits from these changes or that we will be
successful in restoring the profitability of the Company.
We risk losses through litigation.
We are party to various claims and legal proceedings arising out of the
normal course of our business. These claims and legal proceedings relate to
contractual rights and obligations, employment matters, stockholder suits, and
claims of product liability. While there can be no assurance that an adverse
determination of any such matters could not have a material adverse impact in
any future period, we do not believe, based upon information known to us, that
the final resolution of any of these matters will have a material adverse
effect upon our consolidated financial position or results of operations and
cash flows.
We have been in default of the terms of our domestic loans and have been
required to reduce our principal balances, limiting our access to credit.
During recent periods, we have failed to comply with some of the covenants
in our principal domestic loan, including covenants that we maintain minimum
levels of operating income, cash flow and tangible net worth. Accordingly, we
have had to seek waivers from our lender or modifications of our lending
agreement. Among other things, we have agreed to monthly reductions of the
balance of our principal domestic loan which reduces it from $7.0 million to
$3.0 million when it is due on March 31, 2003. As of January 3, 2003, the
principal balance of the loan was approximately $2.8 million. If we fail to
meet the covenants in our loans in the future, we may not be able to secure
further waivers or amendments from our lenders, who may instead seek payment on
their loans and, if we fail to pay, to foreclose on the collateral for their
loans. We have pledged substantially all of our assets as security for our
existing loans. Our collateral pledge may make it more difficult for us to
obtain additional financing on advantageous terms, if at all.
27
If we fail to keep pace with advances in our industry or fail to persuade
physicians to adopt the new products we introduce, customers may not buy our
products and our revenue may decline.
Constant development of new technologies and techniques, frequent new
product introductions and strong price competition characterize the ophthalmic
industry. The first company to introduce a product to market usually gains a
significant competitive advantage. Our future growth depends, in part, on our
ability to develop products to treat diseases and disorders of the eye that are
more effective, safer, or incorporate emerging technologies better than our
competitors' products. In addition, we must manufacture these products
economically and market them successfully by persuading a sufficient number of
eye care professionals to use them. For example, glaucoma requires ongoing
treatment over a long period of time; thus, many doctors are reluctant to
switch a patient to a new treatment if the patient's current treatment for
glaucoma remains effective. Sales of our existing products may decline rapidly
if one of our competitors introduces a substantially superior product, or if we
announce a new product of our own. Similarly, if we fail to make sufficient
investments in research and development or if we focus on technologies that do
not lead to better products, our current and planned products could be
surpassed by more effective or advanced products.
Resources devoted to research and development may not yield new products that
achieve commercial success.
We devote substantial resources to research and development. The research
and development process is expensive, prolonged and entails considerable
uncertainty. Development of new implantable technology, from discovery through
testing and registration to initial product launch, typically takes between
three and seven years. This period varies considerably from product to product
and country to country. Because of the complexities and uncertainties
associated with ophthalmic research and development, products we are currently
developing may not complete the development process or obtain the regulatory
approvals required for us to market such products successfully. These may take
longer and cost more to develop and may be less successful than we currently
anticipate. It is possible that few or none of the products in our development
pipeline will become commercially successful.
Failure of users of our products to obtain adequate reimbursement from
third-party payors could limit market acceptance of our products, which could
impact our sales and profits.
Many of our products, in particular IOLs and products related to the
treatment of glaucoma, are used in procedures that are typically covered by
health insurance, HMO plans, Medicare or Medicaid. These third-party payors
have recently been trying to contain costs by restricting the types of
procedures they reimburse to those viewed as most cost-effective and capping or
reducing reimbursement rates. These polices could adversely affect sales and
prices of our products. Physicians, hospitals and other health care providers
may be reluctant to purchase our products if third-party payors do not
adequately reimburse them for the cost of our products and the use of our
surgical equipment. For example:
. Major third-party payors for hospital services, including government
insurance plans, Medicare, Medicaid and private health care insurers,
have substantially revised their payment methodologies during the last
few years, resulting in stricter standards for reimbursement of hospital
and outpatient charges for some medical procedures, including cataract
procedures and IOLs;
. Numerous legislative proposals have been considered that, if enacted,
would result in major reforms in the United States' health care system,
which could have an adverse effect on our business;
. Our competitors may reduce the prices of their products, which could
result in third-party payors favoring our competitors;
. There are proposed and existing laws and regulations governing product
prices and the profitability of companies in the health care industry; and
. There have been recent initiatives by third-party payors to challenge the
prices charged for medical products, which could affect our profitability.
28
Reductions in the prices for our products in response to these trends could
reduce our profits. Moreover, our products may not be covered in the future by
third-party payors. The failure of our products to be so covered could cause
our profits to decline.
Economic conditions and price competition may cause sales of our products
used in elective surgical procedures to decline and reduce our profitability.
Some of our products are used in purely elective procedures. For example,
many patients with refractive errors that could be successfully treated with
ICLs can also obtain satisfactory vision with eyeglasses or conventional
contact lenses. Except in cases where ICLs offer the only acceptable outcome,
it is likely that insurers, HMOs and government payors generally will not pay
for ICL implantation and that the patient will bear the full cost of the
procedure. Individuals may be less willing to incur the costs of these
procedures in weak or uncertain economic conditions, which could lead to a
decline in the number of these procedures.
Product recalls have been costly and may be so in the future.
Implantable medical devices must be manufactured to the highest standards
and tolerances, and often incorporate newly developed technology. Despite all
efforts at quality control and advance testing, from time to time defects or
technical flaws in our products may not come to light until after the products
are sold or consigned. In such circumstances, the Company has previously made
voluntary recalls of its products. Such voluntary recalls may take place again
in the future. Mandatory recalls can also take place if regulators or courts
require them, even if the Company believes its products are safe and effective.
Recalls result in lost sales of the recalled products themselves, and can
result in further lost sales while replacement products are manufactured,
especially if the replacements must be redesigned. If recalled products have
already been implanted, we may bear some or all of the cost of corrective
surgery. Recalls also damage our reputation. The inconvenience caused by
recalls and related interruptions in supply, and the damage to our reputation,
could cause some providers to discontinue using our products. The costs of
recalls have severely impacted our revenues in recent periods.
We are subject to extensive government regulation, which increases our costs
and could prevent us from selling our products.
The research, development, testing, manufacturing and marketing of our
products are subject to extensive governmental regulation. Government
regulation includes inspection of and controls over testing, manufacturing,
safety and environmental controls, efficacy, labeling, advertising, promotion,
record keeping, the sale and distribution of pharmaceutical products and
samples and electronic records and electronic signatures. We are also subject
to government regulation with respect to the prices we charge and the rebates
we offer to customers. Government regulation substantially increases the cost
of developing, manufacturing and selling our products.
In the United States, we must obtain approval from the FDA for each product
that we market. The FDA approval process is typically lengthy and expensive,
and approval is never certain. Products distributed outside of the United
States are also subject to government regulation, which may be equally or more
demanding. Our new products could take a significantly longer time than we
expect to gain regulatory approval and may never gain approval. If a regulatory
authority delays approval of a potentially significant product, our market
value and operating results may decline. Even if the FDA or another regulatory
agency approves a product, the approval may limit the indicated uses for a
product, may otherwise limit our ability to promote, sell and distribute a
product or may require post-marketing studies. If we are unable to obtain
regulatory approval of our products, we will not be able to market these
products, which would result in a decrease in our sales. Currently, we are
actively pursuing approval for a number of our products from regulatory
authorities in a number of countries, including, among others, the United
States, Egypt, Taiwan, China, and the United Arab Emirates. Continued growth in
our sales and profits will depend, in part, on the timely and successful
introduction and marketing of some or all of these products.
29
The clinical trials required to obtain regulatory approvals are complex and
expensive and their outcomes are uncertain. We incur substantial expense for,
and devote significant time to, clinical trials, yet cannot be certain that the
trials will ever result in the commercial sale of a product. Positive results
from pre-clinical studies and early clinical trials do not ensure positive
results in later clinical trials that form the basis of an application for
regulatory approval. We may suffer significant setbacks in clinical trials,
even after earlier clinical trials show promising results. Any of our products
may produce undesirable side effects that could cause us or regulatory
authorities to interrupt, delay or halt clinical trials of a pharmaceutical or
medical device candidate. We, the FDA or another regulatory authority may
suspend or terminate clinical trials at any time if they or we believe the
trial participants face unacceptable health risks.
Noncompliance with applicable United States regulatory requirements can lead
to fines, injunctions, penalties, mandatory recalls or seizures, suspensions of
production, denial or withdrawal of pre-marketing approvals, recommendations by
the FDA against governmental contracts and criminal prosecution. The FDA also
has authority to request repair, replacement or refund of the cost of any
device we manufacture or distribute. Regulatory authorities outside of the
United States may impose similar sanctions for noncompliance with applicable
regulatory requirements.
We face strong competition.
Our competitors, including Bausch & Lomb, AMO, Alcon, Pharmacia & Upjohn,
Inc. and CIBA Vision, have much greater financial resources than we do and some
of them have large international markets for a full suite of ophthalmic
products. Their greater resources for research, development and marketing, and
their greater capacity to offer comprehensive products and equipment to
providers, make it difficult for us to compete. In recent periods, the Company
has lost significant market share to some of its competitors.
The global nature of our business may result in fluctuations and declines in
our sales and profits.
Our products are sold in more than 39 countries. Revenues from international
operations make up a significant portion of our total revenue, reaching 49% for
the year ended January 3, 2003. The results of operations and the financial
position of our offshore operations are generally reported in the relevant
local currencies and then translated into United States dollars at the
applicable exchange rates for inclusion in our consolidated financial
statements, exposing us to translation risk. In 2002, our most significant
currency exposures were to the Euro, the Swiss Franc, and the Australian
Dollar. The exchange rates between these and other local currencies and the
United States dollar may fluctuate substantially. In addition, we are exposed
to transaction risk because some of our expenses are incurred in a different
currency from the currency in which our revenues are received. Fluctuations in
the value of the United States dollar against other currencies have had in the
past, and may have in the future, a material adverse effect on our operating
margins and profitability.
Economic, social and political conditions, laws, practices and local customs
vary widely among the countries in which we sell our products. Our operations
outside of the United States are subject to a number of risks and potential
costs, including lower product margins, less stringent protection of
intellectual property and economic, political and social uncertainty in some
countries, especially in emerging markets. Our continued success as a global
company depends, in part, on our ability to develop and implement policies and
strategies that are effective in anticipating and managing these and other
risks in the countries where we do business. These and other risks may have a
material adverse effect on our operations in any particular country and on our
business as a whole. We price all of our products in U.S. dollars, and as a
result changes in exchange rates can make our products more expensive in some
offshore markets and reduce our revenues. Inflation in emerging markets also
makes our products more expensive there and increases the credit risks to which
we are exposed. We have experienced currency fluctuations, inflation and
volatile economic conditions, which have impacted our profitability in the past
in several markets, including Germany, Austria, South Africa, France, Sweden,
Norway, Canada and Australia, and we may experience such impacts in the future.
30
We depend on proprietary technologies, but may not be able to protect our
intellectual property rights adequately.
We have numerous patents and pending patent applications. We rely on a
combination of contractual provisions, confidentiality procedures and patent,
trademark, copyright and trade secrecy laws to protect the proprietary aspects
of our technology. These legal measures afford limited protection and may not
prevent our competitors from gaining access to our intellectual property and
proprietary information. Any of our patents may be challenged, invalidated,
circumvented or rendered unenforceable. Furthermore, we cannot assure you that
any pending patent application held by us will result in an issued patent or
that if patents are issued to us, the patents will provide meaningful
protection against competitors or competitive technologies. Litigation may be
necessary to enforce our intellectual property rights, to protect our trade
secrets and to determine the validity and scope of our proprietary rights. Any
litigation could result in substantial expense, may reduce our profits and may
not adequately protect our intellectual property rights. In addition, we may be
exposed to future litigation by third parties based on claims that our products
infringe their intellectual property rights. This risk is exacerbated by the
fact that the validity and breadth of claims covered by patents in our industry
may involve complex legal issues that are not fully resolved.
Any litigation or claims against us, whether or not successful, could result
in substantial costs and harm our reputation. In addition, intellectual
property litigation or claims could force us to do one or more of the
following: to cease selling or using any of our products that incorporate the
challenged intellectual property, which would adversely affect our revenue; to
obtain a license from the holder of the intellectual property right alleged to
have been infringed, which license may not be available on reasonable terms, if
at all; or to redesign our products to avoid infringing the intellectual
property rights of a third party, which may be costly and time-consuming or
impossible to accomplish.
We obtain some of the components of our products from a single source, and an
interruption in the supply of those components could reduce our revenue.
We obtain some of the components for our products from a single source. The
loss or interruption of any of these suppliers could cause our revenue and
profitability to decline and harm our customer relations.
Most of our products have single- site manufacturing approvals, exposing us
to risks of business interruption.
The validation of a second manufacturing site is expensive both in terms of
time and money and, therefore, has not been done. If there were to be a natural
disaster, fire, or other serious business interruption at one of our
manufacturing facilities, it could take a significant amount of time to
validate a second site and replace lost product. We could lose customers to
competitors, thereby reducing sales and profitability.
We may not successfully develop and launch replacements for our products that
lose patent protection.
Most of our products are covered by patents that give us a degree of market
exclusivity during the term of the patent. We also earn revenue by licensing
some of our patented technology to other ophthalmic companies. The legal life
of a patent is 20 years from application. Patents covering our products will
expire within the next 1 to 15 years. Upon patent expiration, our competitors
may introduce products using the same technology. As a result of this possible
increase in competition, we may need to charge a lower price in order to
maintain sales of our products, which could make these products less
profitable. If we fail to develop and successfully launch new products prior to
the expiration of patents for our existing products, our sales and profits with
respect to those products could decline significantly. We may not be able to
develop and successfully launch more advanced replacement products before these
and other patents expire.
31
The Company depends on key employees.
The Company depends on the continued service of its senior management and
other key employees. The loss of a key employee could hurt the business. The
Company could be particularly hurt if key employees went to work for
competitors. The Company's future success depends on its ability to identify,
attract, train and motivate other highly skilled personnel. Failure to do so
may adversely affect future results.
The Company's Certificate of Incorporation and Bylaws could delay or prevent
an acquisition or sale of the Company.
The Company's Certificate of Incorporation empowers the Board of Directors
to establish and issue a class of preferred stock, and to determine the rights,
preferences and privileges of the preferred stock. This gives the Board of
Directors the ability to deter, discourage or make more difficult a change in
control of the Company, even if such a change in control would be in the
interest of a significant number of our stockholders or if such a change in
control would provide our stockholders with a substantial premium for their
shares over the then-prevailing market price for the common stock.
The Company's Bylaws contain other provisions that could have an
anti-takeover effect, including the following:
. only one of the three classes of directors is elected each year,
. Stockholders have limited ability to remove directors;
. Stockholders cannot call a special meeting of stockholders; and
. Stockholders must give advance notice to nominate directors.
Anti-takeover provisions of Delaware law could delay or prevent an
acquisition of the Company.
The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which regulates corporate acquisitions. These
provisions could discourage potential acquisition proposals and could delay or
prevent a change in control transaction. They could also have the effect of
discouraging others from making tender offers for the Company's common stock or
preventing changes in its management.
Our activities involve hazardous materials and emissions and may subject us
to environmental liability.
Our manufacturing, research and development practices involve the controlled
use of hazardous materials. We are subject to federal, state and local laws and
regulations in the various jurisdictions in which we have operations governing
the use, manufacturing, storage, handling and disposal of these materials and
certain waste products. Although we believe that our safety and environmental
procedures for handling and disposing of these materials comply with legally
prescribed standards, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. Remedial environmental actions
could require us to incur substantial unexpected costs, which would materially
and adversely affect our results of operations. If we were involved in a major
environmental accident or found to be in substantial non-compliance with
applicable environmental laws, we could be held liable for damages or penalized
with fines.
The market price of our common stock is likely to be volatile.
Our stock price could be subject to significant fluctuations in response to
factors such as quarterly variations in operating results, operating results
which vary from the expectations of securities analysts and investors, changes
in financial estimates, changes in market valuations of competitors,
announcements by us or our competitors of a material nature, additions or
departures of key personnel, future sales of common stock and stock volume
fluctuations. Also, general political and economic conditions such as recession
or interest rate fluctuations may adversely affect the market price of our
stock.
32
Foreign Exchange
Management does not believe that the fluctuation in the value of the dollar
in relation to the currencies of its suppliers or customers in the last three
fiscal years has adversely affected the Company's ability to purchase or sell
products at agreed upon prices. No assurance can be given, however, that
adverse currency exchange rate fluctuations will not occur in the future, which
would affect the Company's operating results.
Inflation
Management believes inflation has not had a significant impact on the
Company's operations during the past three years.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 requires the fair value of a
liability for an asset retirement obligation to be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated retirement costs are capitalized as part of the carrying amount of
the long-lived asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The Company's adoption of SFAS No. 143 did not have a
material impact on its operations or financial position.
In May 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 eliminates Statement 4 (and Statement 64, as it amends Statement
4), which requires gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, and thus,
also the exception to applying Opinion 30 is eliminated as well. This statement
is effective for years beginning after May 2002 for the provisions related to
the rescission of Statements 4 and 64, and for all transactions entered into
beginning May 2002 for the provision related to the amendment of Statement 13.
The Company's adoption of SFAS No. 145 did not have a material impact on its
operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will
adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized
at the date of a company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amount recognized.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others," an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of
the interpretation are applicable to guarantees issued or modified after
December 31, 2002 and are not expected to have a material effect on the
Company's operations or financial position. The disclosure requirements are
effective for financial statements of interim and annual periods ending after
December 31, 2002. Significant guarantees that have been entered into by the
Company as of January 3, 2003 are disclosed in Note 9 to the consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation".
33
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. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent and more frequent disclosures in
financial statements of the effects of stock-based compensation. The transition
guidance provisions of SFAS No. 148 are effective for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a
material impact on the Company's financial position or results of operations.
The Company will provide the interim disclosures required by SFAS No. 148
beginning in the first quarter of 2003.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities," an interpretation of Accounting Research
Bulletins ("ARB") No. 51, Consolidated Financial Statements ("FIN 46"). FIN 46
clarifies the application of ARB No. 51 to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. The Company does not believe the adoption of FIN 46 will have a
material impact its financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the normal course of business, our operations are exposed to risks
associated with fluctuations in interest rates and foreign currency exchange
rates. The Company manages its risks based on management's judgment of the
appropriate trade-off between risk, opportunity and costs. Management does not
believe that market risks are material to the results of operations or cash
flows of the Company, and, accordingly, does not generally enter into interest
rate or foreign exchange rate hedge instruments.
Interest rate risk. Our $5.8 million of debt is split between domestic
borrowings of $2.8 million and borrowings of our international subsidiaries of
$3.0 million. Our domestic borrowings are linked to the prime interest rate
and, thus, our interest rate expense will fluctuate with rate changes in the
U.S. The majority of our international borrowings bear an interest rate that is
linked to Euro market conditions and, thus, our interest rate expense will
fluctuate with changes in those conditions. If interest rates were to increase
or decrease by 1% for the year, our annual interest rate expense would increase
or decrease by approximately $60,000.
Foreign currency risk. Our international subsidiaries operate in and are
net recipients of currencies other than the U.S. dollar and, as such, we
benefit from a weaker dollar and are adversely affected by a stronger dollar
relative to major currencies worldwide (Euro and Australian dollar).
Accordingly, changes in exchange rates, and particularly the strengthening of
the US dollar, may negatively affect our consolidated sales and gross profit as
expressed in U.S. dollars. Additionally, approximately 51% of our debt is
denominated in Swiss Francs and as such, we are subject to fluctuations of the
Swiss Franc as compared to the U.S. dollar in converting the value of the debt
in U.S. dollars. The U.S. dollar value of the debt is increased by a weaker
dollar and decreased by a stronger dollar relative to the Swiss Franc.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements and the Report of Independent Certified Public
Accountants are filed with this Annual Report on Form 10-K in a separate
section following Part IV, as shown on the index under Item 14(a) of this
Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in Item 10 is incorporated herein by reference to portions
of the Proxy Statement for the Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission within 120 days of the close of the
fiscal year ended January 3, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The information in Item 11 is incorporated herein by reference to portions
of the Proxy Statement for the Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission within 120 days of the close of the
fiscal year ended January 3, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in Item 12 is incorporated herein by reference to portions
of the Proxy Statement for the Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission within 120 days of the close of the
fiscal year ended January 3, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in Item 13 is incorporated herein by reference to portions
of the Proxy Statement for the Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission within 120 days of the close of the
fiscal year ended January 3, 2003.
ITEM 14. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to the filing date of this report, the Chief
Executive Officer and the Chief Financial Officer of the Company, with the
participation of the Company's management, carried out an evaluation of the
effectiveness of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer believe that, as of the date of the
evaluation, the Company's disclosure controls and procedures are effective in
making known to them material information relating to the Company (including
its consolidated subsidiaries) required to be included in this report.
Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an entity's
disclosure objectives. The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These include
the fact that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human failures such as
simple errors or mistakes or intentional circumvention of the established
process.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls, known to the
Chief Executive Officer or the Chief Financial Officer, subsequent to the date
of the evaluation.
35
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Page
-----
(a)(1) Financial statements required by Item 14 of this form are filed as a separate part of this report
following Part IV
Report of Independent Certified Public Accountants................................................. F-2
Consolidated Balance Sheets at January 3, 2003 and December 28, 2001............................... F-3
Consolidated Statements of Operations for the years ended January 3, 2003, December 28, 2001,
and December 29, 2000.............................................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the
years ended January 3, 2003, December 28, 2001, and December 29, 2000.............................. F-5
Consolidated Statements of Cash Flows for the years ended January 3, 2003, December 28,
2001, and December 29, 2000........................................................................ F-6
Notes to Consolidated Financial Statements......................................................... F-13
(2) Schedules required by Regulation S-X are filed as an exhibit to this
report:
I. Independent Certified Public Accountants' Report on Schedule
II. Independent Certified Public Accountants' Consent
III. Valuation and Qualifying Accounts and Reserves
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements and the notes thereto.
(3) Reports on Form 8-K
On December 6, 2002 the Company filed a Current Report on Form 8-K
disclosing the Settlement Agreement and Mutual General Release entered into
between the Company and John R. Wolf the former Chief Executive Officer of the
Company.
On March 31, 2003 the Company filed a Current Report on Form 8-K reporting
that the Company and Wells Fargo Bank executed an agreement on March 26, 2003,
extending the maturity date of the Company's $3.0 million line-of-credit for
one year to March 31, 2004.
(4) Exhibits
3.1 Certificate of Incorporation, as amended(8)
3.2 By-laws, as amended(9)
+ 4.1 1990 Stock Option Plan(1)
+ 4.2 1991 Stock Option Plan(2)
+ 4.3 1995 STAAR Surgical Company Consultant Stock Plan(3)
+ 4.4 1996 STAAR Surgical Company Non-Qualified Stock Plan(4)
4.5 Stockholders' Rights Plan, dated effective April 20, 1995(9)
+ 4.6 1998 STAAR Surgical Company Stock Plan, adopted April 17, 1998(5)
10.1 Joint Venture Agreement, dated May 23, 1988, between the Company, Canon Sales Co, Inc. and
Canon, Inc.(7)
+10.2 Promissory Note dated February 28, 1991, from John R. Wolf to the Company(4)
36
+ 10.3 Stock Pledge/Security Agreement, dated February 28, 1991, between John R. Wolf, the Company and
Pollet & Associates(4)
+ 10.4 Promissory Note dated February 28, 1991, from William C. Huddleston to the Company(4)
+ 10.5 Modification dated August 21, 2000 to Promissory Note dated February 28, 1991, from William C.
Huddleston to the Company(9)
+ 10.6 Stock Pledge/Security Agreement, dated February 28, 1991, between William C. Huddleston, the
Company and Pollet & Associates(4)
+ 10.7 Promissory Note, dated May 26, 1992, from the Andrew F. Pollet and Sally M. Pollet Revocable Trust
dated March 6, 1990(6)
+ 10.8 Deed of Trust, dated September 21, 1992, by the Andrew F. Pollet and Sally M. Pollet Revocable
Trust dated March 6, 1990(6)
+ 10.9 Promissory Note dated July 3, 1992, from William C. Huddleston to the Company(6)
+10.10 Modification dated August 21, 2000, to Promissory Note dated July 3, 1992, from William C.
Huddleston to the Company(9)
+10.11 Stock Pledge/Security Agreement dated July 3, 1992, between William C. Huddleston the Company
and Pollet & Associates(6)
10.12 Lease, dated November 9, 1992, by and between Linda Lee Brown and Phyllis Ann Bailey and the
Company regarding real property located at 1911 Walker Avenue, Monrovia, California(6)
10.13 Indenture of Lease dated September 1, 1993, between the Company and FKT Associates(9)
10.14 Second Amendment to Indenture of Lease dated September 21, 1998, between the Company and FKT
Associates(9)
10.15 Indenture of Lease dated October 20, 1983, between Dale E. Turner and Francis R. Turner(6)
+10.16 Promissory Note dated March 18, 1993, from William C. Huddleston to the Company(9)
+10.17 Modification dated August 21, 2000 to Promissory Note dated March 18, 1993, from William C.
Huddleston to the Company(9)
10.18 Patent License Agreement, dated May 24, 1995, with Eye Microsurgery Intersectoral Research and
Technology Complex(9)
10.19 Patent License Agreement, dated January 1, 1996, with Eye Microsurgery Intersectoral Research and
Technology Complex(9)
10.20 Agreement dated December 31, 1997, between the Company and Mentor Corporation(7)
+10.21 Promissory Note dated September 4, 1998, from John R. Wolf to the Company(7)
+10.22 Stock Pledge Agreement, dated September 4, 1998, between the Company and John R. Wolf(7)
+10.23 Stock Pledge Agreement dated September 4, 1998, between the Company and William C.
Huddleston(7)
+10.24 Promissory Note dated September 4, 1998, from Andrew F. Pollet to the Company(7)
+10.25 Stock Pledge Agreement dated September 4, 1998, between the Company and Andrew F. Pollet(7)
10.26 License and Supply Agreement dated May 6, 1999, between LensTec Incorporated, Lenstec Barbados
Inc., STAAR Surgical AG and the Company(8)
10.27 Equipment Purchase and Sale Agreement dated May 6, 1999, between Lenstec, Incorporated and the
Company(8)
+10.28 Employment Agreement dated April 28, 1999, between the Company and John Santos(9)
+10.29 Modification to Employment Agreement dated May 31, 2000, between the Company and John
Santos(9)
37
+10.30 Second Modification to Employment Agreement dated September 5, 2000, between the Company and
John Santos(9)
+10.31 Promissory Note dated June 16, 1999, from Peter J. Utrata, M.D. to the Company(8)
+10.32 Stock Pledge Agreement dated June 16, 1999, by Peter J. Utrata, M.D. in favor of the Company(8)
+10.33 Promissory Note dated November 11, 1999, from Peter J. Utrata, M.D. to the Company(8)
+10.34 Promissory Note dated November 12, 1999, from John R. Wolf to the Company(8)
+10.35 Promissory Note dated November 17, 1999, from William C. Huddleston to the Company(8)
10.36 Standard Industrial/Commercial Multi-Tenant Lease-Gross dated April 5, 2000, entered into between
the Company and Kilroy Realty, L.P.(9)
+10.37 Promissory Note dated April 7, 2000, from William C. Huddleston to the Company(9)
+10.38 Modification dated August 21, 2000, to Promissory Note dated April 7, 2000, from William C.
Huddleston to the Company(9)
+10.39 Description of oral agreement between John R. Wolf and the Company dated April 18, 2000(9)
+10.40 Promissory Note dated June 2, 2000, from Peter J. Utrata, M.D. to the Company(9)
+10.41 Stock Pledge Agreement dated June 2, 2000, between the Company and Peter J. Utrata, M.D.(9)
+10.44 Promissory Note dated September 5, 2000, from Andrew F. Pollet to the Company(9)
10.45 Deed of Trust dated September 5, 2000, against real property commonly known as 10934 Alto Court,
Oak View, California executed in favor of the Company by Andrew F. Pollet and Sally M. Pollet, as
individuals and as trustees of the Andrew F. and Sally M. Pollet Revocable Trust dated March 6,
1990(9)
10.47 Form of Purchase Agreement entered into between the Company and Fortis Advantage Portfolios,
Inc.--Capital Appreciation Portfolio(9)
10.48 Form of Purchase Agreement entered into between the Company and Fortis Series Fund,
Inc.--Aggressive Growth Series(9)
10.49 Form of Purchase Agreement entered into between the Company and Phoenix Edge Series Fund
Engemann Small & Mid Cap Growth Series(9)
10.50 Form of Purchase Agreement entered into between the Company and Phoenix-Engemann Small Cap
Fund(9)
10.51 Form of Purchase Agreement entered into between the Company and Phoenix-Engemann Small &
Mid-Cap Growth Fund(9)
10.52 Form of Purchase Agreement entered into between the Company and Pequot Scout Fund, L.P.(9)
10.53 Form of Purchase Agreement entered into between the Company and Pequot Navigator Offshore
Fund, Inc.(9)
10.54 Form of Purchase Agreement entered into between the Company and Baystar International, Ltd.(9)
10.55 Form of Purchase Agreement entered into between the Company and Baystar Capital, L.P.(9)
10.56 Form of Purchase Agreement entered into between the Company and Invesco Global Health Sciences
Fund(9)
+10.57 Promissory Note dated October 23, 2000, from Andrew F. Pollet to the Company(9)
10.59 Letter Agreement between the Company and Wells Fargo Bank, National Association and Revolving
Line of Credit Note(9)
+10.60 Promissory Note dated November 1, 2000, from Andrew F. Pollet to the Company(9)
10.61 Settlement Agreement and Mutual Release dated December 19, 2000, between the Company and
William C. Huddleston(9)
38
+ 10.62 Employment Agreement dated December 20, 2000, between the Company and David Bailey(9)
+ 10.63 Stock Option Agreement dated December 20, 2000, between the Company and David Bailey(9)
10.64 Letter Amendment dated December 22, 2000, between the Company and Wells Fargo Bank, N.
A.(10)
+ 10.65 Consulting Agreement dated March 1, 2001, between the Company and DRM Strategic Services,
Ltd.(10)
10.66 Letter Agreement dated April 1, 2001, between the Company and Wells Fargo Bank, N.A.(10)
10.67 Letter Amendment dated July 1, 2001, between the Company and Wells Fargo Bank, N.A.(10)
10.68 Letter Agreement dated July 1, 2001, between the Company and Wells Fargo Bank, N.A.(10)
+ 10.69 Severance and Release Agreement dated August 21, 2001, between the Company and Thomas J.
Chambers (including Consulting Agreement dated August 9, 2001)(10)
10.70 Settlement Agreement between the Company, Canon, Inc., Canon Sales Co., Inc., and Canon-
STAAR Co. Inc. dated September 28, 2001(10)
10.71 Fifth Amendment to Credit Agreement dated October 1, 2001, between the Company and Wells
Fargo Bank, N.A.(10)
10.72 Settlement and Release Agreement dated October 5, 2001, between the Company and Gunther
Roepstorff(10)
10.73 Stock Option Agreement dated November 13, 2001, between the Company and David Bailey(10)
10.74 Stock Option Agreement dated November 13, 2001, between the Company and David R.
Morrison(10)
10.75 Stock Option Certificate dated November 13, 2001, between the Company and Richard D.
Simmons(10)
10.76 Sixth Amendment to Credit Agreement dated December 20, 2001, between the Company and
Wells Fargo Bank, N.A.(10)
10.77 Letter Agreement dated January 25, 2002, between the Company and Wells Fargo Bank, N.A.(10)
10.78 Second Amendment to the Amended and Restated Credit Agreement dated October 25, 2002,
between the Company and Wells Fargo Bank, N.A.(12)
+ 10.79 Settlement Agreement and Mutual General Release between John R. Wolf and the Company dated
November 12, 2002(13)
+ 10.80 Employment Agreement dated January 3, 2002, between the Company and John Bily(11)
+ 10.81 Employment Agreement dated January 22, 2002, between the Company and Helene Lamielle(11)
*10.82 Master Credit Agreement dated December 15, 2000, between STAAR Surgical AG and UBS AG
*#10.83 Amended and Restated Credit Agreement dated March 29, 2002, between the Company and Wells
Fargo Bank
*+10.84 Settlement Agreement and General Release dated March 29, 2002, among the Company, Sally M.
Pollet, Pollet and Richardson, and the Estate of Andrew F. Pollet
*+10.85 Settlement Note dated March 29, 2002, from Sally M. Pollet to the Company
*+#10.86 Stock Pledge Agreement dated March 29, 2002, between the Company and Sally M. Pollet
*+10.87 Promissory Note dated March 29, 2002 from, Pollet & Richardson to the Company
*+#10.88 Security Agreement dated March 29, 2002, between the Company and Pollet & Richardson
*#10.89 First Amendment to the Amended and Restated Credit Agreement dated July 31, 2002, between
the Company and Wells Fargo Bank.
*10.90 Third Amendment to the Amended and Restated Credit Agreement dated November 25, 2002,
between the Company and Wells Fargo Bank, N.A.
39
*#10.91 Assignment Agreement of the Share Capital of Domilens Vertrieb fuer medizinische Produkte
GmbH dated January 3, 2003, between Staar Surgical AG and Guenther Roepstorff
*10.92 Credit Agreement effective January 13, 2003, between Domilens Gmbh and Postbank.
*10.93 Settlement Agreement and Mutual General Release dated February 27, 2003, by and between the
Company and Richard Leza
*10.94 Waiver of Certain Covenant Violations dated February 27, 2003, between the Company and Wells
Fargo Bank
#10.95 Second Amended and Restated Credit Agreement dated March 26, 2003, between the Company and
Wells Fargo Bank(14)
*21. List of Significant Subsidiaries
*99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- --------
* Filed herewith
+ Management contract or compensatory plan or arrangement
# All schedules and or exhibits have been omitted. Any omitted schedule or
exhibit will be furnished supplementally to the Securities and Exchange
Commission upon request
(1) Incorporated by reference from the Company's Registration Statement on
Form S-8, File No. 033-37248, as filed on October 11, 1990.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-8, File No. 033-76404, as filed on March 11, 1994.
(3) Incorporated by reference from the Company's Registration Statement on
Form S-8, File No. 033-60241, as filed on June 15, 1995.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K,
File No. 0-11634, for the year ended January 3, 1997, as filed on April 2,
1997.
(5) Incorporated by reference from the Company's Proxy Statement, File No.
0-11634, for its Annual Meeting of Stockholders held on May 29, 1998, as
filed on May 4, 1999.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K,
File No. 0-11634, for the year ended January 1, 1998, as filed on April 1,
1998.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K,
File No. 0-11634, for the year ended January 1, 1999, as filed on April 1,
1999.
(8) Incorporated by reference from the Company's Annual Report on Form 10-K,
File No. 0-11634, for the year ended December 31, 1999, as filed on March
30, 2000.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K,
File No. 0-11634, for the year ended December 29, 2000, as filed on March
29, 2001.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K,
File No. 0-11634, for the year ended December 28, 2001, as filed on March
28, 2002.
(11) Incorporated by reference to the Company's Quarterly Report, File No.
0-11634, for the period ended June 28, 2002, as filed on August 12, 2002.
(12) Incorporated by reference to the Company's Quarterly Report, File No.
0-11634, for the period ended September 27, 2002, as filed on November 12,
2002.
(13) Incorporated by reference to the Company's Current Report on Form 8-K,
File No. 0-11634, filed on December 6, 2002.
(14) Incorporated by reference to the Company's Current Report on Form 8-K,
File No. 0-11634, filed on March 31, 2003.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
STAAR SURGICAL COMPANY
By: /s/ DAVID BAILEY
-----------------------------
David Bailey
President and Chief Executive
Officer
(principal executive officer)
Date: April 2, 2003
-----------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ DAVID BAILEY President, Chief Executive April 2, 2003
- ----------------------------- Officer, Chairman and
David Bailey Director (principal
executive officer)
/s/ JOHN BILY Chief Financial Officer April 2, 2003
- ----------------------------- (principal accounting and
John Bily financial officer)
/s/ JOHN R. GILBERT Director April 2, 2003
- -----------------------------
John R. Gilbert
/s/ DONALD DUFFY Director April 2, 2003
- -----------------------------
Donald Duffy
/s/ DAVID MORRISON Director April 2, 2003
- -----------------------------
David Morrison
/s/ VOLKER ANHAEUSSER Director April 2, 2003
- -----------------------------
Volker Anhaeusser
41
Certifications
I, David Bailey, certify that:
1. I have reviewed this annual report on Form 10-K of STAAR Surgical
Company;
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 statements made, in light of the circumstances under which such
statements 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 regard to significant deficiencies and material
weaknesses.
Date: April 2, 2003 By: /s/ DAVID BAILEY
----------------------------------
David Bailey
President, Chief Executive
Officer, Chairman and
Director (principal executive
officer)
42
Certifications
I, John Bily, certify that:
1. I have reviewed this annual report on Form 10-K of STAAR Surgical
Company;
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 statements made, in light of the circumstances under which such
statements 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 regard to significant deficiencies and material
weaknesses.
Date: April 2, 2003 By: /s/ JOHN BILY
----------------------------------
John Bily
Chief Financial Officer
(principal accounting and
financial officer)
43
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 3, 2003,
DECEMBER 28, 2001 AND DECEMBER 29, 2000
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
STAAR Surgical Company
We have audited the accompanying consolidated balance sheets of STAAR
Surgical Company and subsidiaries as of January 3, 2003 and December 28, 2001,
and the related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for each of the three years in the period
ended January 3, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of STAAR
Surgical Company and subsidiaries as of January 3, 2003 and December 28, 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended January 3, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in the Summary of Accounting Policies to the consolidated
financial statements, effective December 29, 2001, STAAR Surgical Company and
subsidiaries adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets".
/s/ BDO SEIDMAN, LLP
Los Angeles, California
February 21, 2003
(except for Note 18 which is dated March 26, 2003)
F-2
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 3, 2003 and December 28, 2001
2002 2001
-------- --------
(In thousands, except
par value amounts)
ASSETS
------
Current assets:
Cash and cash equivalents...................................................... $ 1,009 $ 853
Restricted cash................................................................ -- 2,000
Accounts receivable, less allowance for doubtful accounts...................... 5,992 7,542
Inventories.................................................................... 11,761 15,231
Prepaids, deposits and other current assets.................................... 2,510 3,660
Deferred income tax, current................................................... -- 5,304
-------- --------
Total current assets....................................................... 21,272 34,590
-------- --------
Investment in joint venture....................................................... 462 466
Property, plant and equipment, net................................................ 7,438 8,742
Patents and licenses, net of accumulated amortization of $4,967 and $4,034........ 9,038 9,896
Goodwill.......................................................................... 6,427 5,985
Deferred income tax, non-current.................................................. -- 3,982
Other assets...................................................................... 583 1,143
-------- --------
Total assets............................................................... $ 45,220 $ 64,804
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable.................................................................. $ 5,845 $ 8,216
Accounts payable............................................................... 4,556 5,594
Other current liabilities...................................................... 4,079 4,000
-------- --------
Total current liabilities.................................................. 14,480 17,810
Other long-term liabilities....................................................... 89 316
-------- --------
Total liabilities.......................................................... 14,569 18,126
-------- --------
Minority interest................................................................. 100 382
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized, none issued......... -- --
Common stock, $.01 par value; 30,000 shares authorized; issued and outstanding
17,205 and 17,158 shares..................................................... 172 172
Additional paid-in capital..................................................... 75,947 75,573
Accumulated other comprehensive loss........................................... (111) (1,728)
Accumulated deficit............................................................ (41,421) (24,263)
-------- --------
34,587 49,754
Treasury stock, at cost (243 and 0 shares)..................................... (972) --
-------- --------
33,615 49,754
Notes receivable from officers and directors...................................... (3,064) (3,458)
-------- --------
Total stockholders' equity................................................. 30,551 46,296
-------- --------
Total liabilities and stockholders' equity................................. $ 45,220 $ 64,804
======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 3, 2003, December 28, 2001 and December 29, 2000
2002 2001 2000
-------- -------- --------
(In thousands,
except per share amounts)
Sales......................................................... $ 47,880 $ 50,237 $ 53,986
Royalty and other income...................................... 368 549 448
-------- -------- --------
Total revenues......................................... 48,248 50,786 54,434
Cost of sales................................................. 24,099 28,203 26,329
-------- -------- --------
Gross profit........................................... 24,149 22,583 28,105
-------- -------- --------
Selling, general and administrative expenses:
General and administrative................................. 8,959 8,746 8,593
Marketing and selling...................................... 16,833 20,043 21,254
Research and development................................... 4,016 3,800 4,215
Other charges.............................................. 1,454 7,780 15,276
-------- -------- --------
Total selling, general and administrative expenses..... 31,262 40,369 49,338
-------- -------- --------
Operating loss......................................... (7,113) (17,786) (21,233)
-------- -------- --------
Other income (expense):
Equity in operations of joint venture...................... 36 389 (4,698)
Interest income............................................ 135 270 1,294
Interest expense........................................... (579) (640) (1,496)
Other income (expense)..................................... (603) (474) 738
-------- -------- --------
Total other expense, net............................... (1,011) (455) (4,162)
-------- -------- --------
Loss before income taxes and minority interest................ (8,124) (18,241) (25,395)
Provision (benefit) for income taxes.......................... 8,959 (3,547) (6,580)
Minority interest............................................. 75 139 87
-------- -------- --------
Net loss...................................................... $(17,158) $(14,833) $(18,902)
======== ======== ========
Loss per share:
Basic and diluted.......................................... $ (1.00) $ (0.87) $ (1.23)
======== ======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
LOSS
Years Ended January 3, 2003, December 28, 2001 and December 29, 2000
Accumulated
Additional Other Retained
Common Paid-In Comprehensive Earnings Treasury Notes
Stock Capital Loss (Deficit) Stock Receivable Total
------ ---------- ------------- --------- -------- ---------- --------
(In thousands)
Balance, at December 31, 1999............. $147 $51,205 $(1,281) $ 9,472 $ -- $(7,009) $ 52,534
Common stock issued upon exercise of
options.................................. 5 3,519 -- -- -- (1,167) 2,357
Common stock issued upon exercise of
warrants................................. 1 171 -- -- -- -- 172
Common stock issued as payment for
services................................. 1 1,486 -- -- -- -- 1,487
Common stock issued in private
placement................................ 15 18,666 -- -- -- -- 18,681
Proceeds from notes receivable............ -- -- -- -- -- 788 788
Notes receivable reserve.................. -- -- -- -- -- 1,500 1,500
Foreign currency translation adjustment... -- -- (301) -- -- -- (301)
Net loss.................................. -- -- -- (18,902) -- -- (18,902)
---- ------- ------- -------- ----- ------- --------
Balance, at December 29, 2000............. 169 75,047 (1,582) (9,430) -- (5,888) 58,316
Common stock issued upon exercise of
options.................................. 1 62 -- -- -- -- 63
Common stock issued as payment for
services................................. 2 411 -- -- -- -- 413
Stock-based compensation expense.......... -- 53 -- -- -- -- 53
Proceeds from notes receivable............ -- -- -- -- -- 321 321
Notes receivable reserve.................. -- -- -- -- -- 2,109 2,109
Foreign currency translation adjustment... -- -- (146) -- -- -- (146)
Net loss.................................. -- -- -- (14,833) -- -- (14,833)
---- ------- ------- -------- ----- ------- --------
Balance, at December 28, 2001............. 172 75,573 (1,728) (24,263) -- (3,458) 46,296
Common stock issued upon exercise of
warrants................................. -- 6 -- -- -- -- 6
Common stock issued as payment for
services................................. -- 120 -- -- -- -- 120
Common stock issued pursuant to
employment contract...................... -- 12 -- -- -- -- 12
Stock-based compensation expense.......... -- 236 -- -- -- -- 236
Treasury stock acquired in satisfaction of
note receivable.......................... -- -- -- -- (972) 2,128 1,156
Proceeds from notes receivable............ -- -- -- -- -- 80 80
Notes receivable reserve.................. -- -- -- -- -- (1,814) (1,814)
Foreign currency translation adjustment... -- -- 1,617 -- -- -- 1,617
Net loss.................................. -- -- -- (17,158) -- -- (17,158)
---- ------- ------- -------- ----- ------- --------
Balance, at January 3, 2003............... $172 $75,947 $ (111) $(41,421) $(972) $(3,064) $ 30,551
==== ======= ======= ======== ===== ======= ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 3, 2003, December 28, 2001 and December 29, 2000
2002 2001 2000
-------- -------- --------
(In thousands)
Cash flows from operating activities:
Net loss............................................................ $(17,158) $(14,833) $(18,902)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation of property and equipment.......................... 2,171 2,364 2,140
Amortization of intangibles..................................... 933 1,259 1,590
Write-off of accounts receivable................................ -- -- 449
Deferred revenue................................................ -- -- (448)
Equity in operations of joint venture........................... (36) (746) 3,577
Deferred income taxes........................................... 9,286 (4,435) (6,632)
Stock-based compensation expense................................ 236 53 --
Common stock issued for services................................ 132 413 1,224
Non-cash restructuring and inventory write-down................. 1,225 13,230 18,029
Minority interest............................................... 144 178 (332)
Changes in working capital:
Accounts receivable............................................. 1,462 1,697 (759)
Inventories..................................................... 3,108 (1,316) (4,020)
Prepaids, deposits and other current assets..................... (232) 2,619 (301)
Accounts payable................................................ (966) (573) (1,249)
Other current liabilities....................................... 264 (2,450) 605
-------- -------- --------
Net cash provided by (used in) operating activities.......... 569 (2,540) (5,029)
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment............................... (874) (1,180) (3,339)
Acquisition of patents and licenses................................. (75) (245) (775)
Proceeds from notes receivable and other............................ 10 321 789
Change in other assets.............................................. 493 119 (817)
Dividends received from joint venture............................... 40 280 --
-------- -------- --------
Net cash used in investing activities........................ (406) (705) (4,142)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (payments) under notes payable and long-term debt.... (2,598) 276 414
Payments on notes payable and long-term debt........................ -- -- (9,400)
Restricted cash..................................................... 2,000 (2,000) --
Proceeds from the exercise of stock options and warrants............ 6 63 2,520
Proceeds from private placement..................................... -- -- 18,681
-------- -------- --------
Net cash provided by (used in) financing activities.......... (592) (1,661) 12,215
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents........... 585 (328) (301)
-------- -------- --------
Increase (decrease) in cash and cash equivalents....................... 156 (5,234) 2,743
Cash and cash equivalents, at beginning of year........................ 853 6,087 3,344
-------- -------- --------
Cash and cash equivalents, at end of year.............................. $ 1,009 $ 853 $ 6,087
======== ======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Years Ended January 3, 2003, December 28, 2001 and December 29, 2000
Organization and Description of Business
STAAR Surgical Company (the "Company"), a Delaware corporation, was
incorporated in 1982 for the purpose of developing, producing, and marketing
Intraocular Lenses ("IOLs") and other products for minimally invasive
ophthalmic surgery. The Company has evolved to become a developer, manufacturer
and global distributor of products used by ophthalmologists and other eye care
professionals to improve or correct vision in patients with refractive
conditions, cataracts and glaucoma. Products manufactured by the Company for
use in correcting refractive conditions such as myopia (near-sightedness),
hyperopia (far-sightedness) and astigmatism include the Implantable Contact
Lens ("ICL(TM)"), the Toric ICL ("TICL(TM)") and the Toric IOL. Products
manufactured by the Company for use in restoring vision adversely affected by
cataracts include its line of IOLs, the SonicWAVE(TM) Phacoemulsification
System, STAARVISC(TM) II, a viscoelastic material and the UltraVac(TM) V1
tubing, used with certain Venturi-type Phacoemulsification machines. The
Company's AquaFlow(TM) Collagen Glaucoma Drainage Device is surgically
implanted in the outer tissues of the eye to maintain a space that allows
increased drainage of intraocular fluid thereby reducing intraocular pressure,
which may lead to deterioration of vision in patients with glaucoma. The
Company also sells other instruments, devices and equipment that are
manufactured either by the Company or by others in the ophthalmic products
industry.
The Company's most significant subsidiary is STAAR Surgical AG, a wholly
owned subsidiary formed in Switzerland to develop, manufacture and distribute
certain of the Company's products worldwide, including the ICL and its AquaFlow
Device. STAAR Surgical AG also controls a major European sales subsidiary that
distributes both the Company's products and products from various other
manufacturers. Investment in the subsidiary was increased from 80% to 100%
during the fourth quarter of 2002, when Staar Surgical AG purchased the
remaining shares of the subsidiary (see Note 17).
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company, its wholly and its majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Assets and liabilities of foreign subsidiaries are translated at rates of
exchange in effect at the close of the year. Revenues and expenses are
translated at the weighted average of exchange rates in effect during the year.
The resulting translation gains and losses are deferred and are shown as a
separate component of stockholders' equity as accumulated other comprehensive
loss. During 2002, 2001 and 2000, the net foreign translation gain (loss) was
$585,000, $(328,000) and $(301,000), respectively and net foreign currency
transaction loss was $458,000, $204,000 and $182,000, respectively.
Investment in the Japanese joint venture is accounted for using the equity
method of accounting except for the nine-months ended September 29, 2001 and
the year ended December 28, 2000 when the investment was written off and
earnings were recognized on a cash basis (see Note 4).
The Company's fiscal year ends on the Friday nearest December 31 and each of
the Company's quarterly reporting periods generally consist of 13 weeks.
Summary of Significant Accounting Policies
Revenue Recognition
In general, the Company supplies foldable IOLs on a consignment basis to
customers, primarily ophthalmologists, surgical centers, hospitals and other
eye care providers and recognizes sales when the IOLs are
F-7
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Years Ended January 3, 2003, December 28, 2001 and December 29, 2000
implanted. Sales of all other products, including sales to foreign
distributors, are generally recognized upon shipment.
Revenue from license and technology agreements is recorded as income, when
earned, according to the terms of the respective agreements.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities along with net operating loss and credit
carryforwards. A valuation allowance is recognized if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax asset may not be realized. The impact on deferred taxes of changes
in tax rates and laws, if any, are applied to the years during which temporary
differences are expected to be settled and reflected in the financial
statements in the period of enactment.
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Restricted cash is
invested in money market accounts, which mature within one year (see Note 5.)
Inventories
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. Inventory costs are comprised of material, direct
labor, and overhead. The Company records inventory provisions, based on a
review of forecasted demand and inventory levels.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation on
property, plant, and equipment is computed using the straight-line method over
the estimated useful lives of the assets, generally ranging from 5 to 10 years.
Major improvements are capitalized and minor replacements, maintenance and
repairs are charged to expense as incurred.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of
identifiable net assets acquired in business combinations accounted for as
purchases. The Company adopted Statement of Financial Accounting Standards,
("SFAS") No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets," on December 29, 2001.
Goodwill, which has an indefinite life and was previously amortized on a
straight-line basis over the periods benefited, is no longer amortized to
earnings but instead is subject to periodic testing for impairment. Intangible
assets determined to have definite lives are amortized over their remaining
useful lives. Goodwill of a reporting unit is tested for impairment on an
annual basis or between annual tests if an event occurs or circumstances change
that would reduce the fair value of a reporting unit below its carrying amount.
As provided under
F-8
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Years Ended January 3, 2003, December 28, 2001 and December 29, 2000
SFAS 142, the initial testing of goodwill for possible impairment was completed
within the first six months of 2002 and no impairment has been identified. As
of January 3, 2003, the carrying value of goodwill was $6.4 million.
In accordance with SFAS 142, prior period amounts were not restated. The net
loss for the years ended December 28, 2001 and December 29, 2000, adjusted for
the exclusion of amortization of goodwill, would have been $375,000 and
$254,000 less than reported and the loss per share would have decreased by
$0.02 and $0.02, respectively.
The Company also has other intangible assets consisting of patents and
licenses, with a gross book value of $14.0 million and accumulated amortization
of $5.0 million as of January 3, 2003. The Company capitalizes the costs of
acquiring patents and licenses as well as the legal costs of successfully
defending its rights to these patents. Amortization is computed on the
straight-line basis over the estimated useful lives, which are based on legal
and contractual provisions, and range from 10 to 20 years. Aggregate
amortization expense for amortized other intangible assets was $933,000,
$884,000 and $1.3 million for the years ended January 3, 2003, December 28,
2001 and December 29, 2000, respectively.
The weighted average amortization period for other intangible assets is
approximately 15 years. The following table shows the estimated amortization
expense for these assets for each of the five succeeding years (in thousands):
Fiscal Year
2003.......... $ 676
2004.......... 676
2005.......... 676
2006.......... 676
2007.......... 676
------
Total..... $3,380
======
Impairment of Long-Lived Assets
Intangible and other long lived-assets are reviewed for impairment whenever
events such as product discontinuance, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. In reviewing for impairment, the Company compares the carrying
value of such assets to the estimated undiscounted future cash flows expected
from the use of the assets and their eventual disposition. When the estimated
undiscounted future cash flows are less than their carrying amount, an
impairment loss is recognized equal to the difference between the assets' fair
value and their carrying value. No impairment was recognized for the year ended
January 3, 2003.
The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("SFAS 144"), which supersedes SFAS 121, "Accounting for
Long-Lived Assets and for Long-lived Assets to be Disposed of," during the
first quarter of 2002. SFAS 144 addresses financial accounting and reporting
requirements for the impairment or disposal of long lived-assets. This
statement also expands the scope of a discontinued operation to include a
component of an entity, and eliminates the current exemption to consolidation
when control over a subsidiary is likely to be temporary. The Company's
adoption of SFAS 144 did not have a material impact on its financial position
or results of operations.
F-9
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Years Ended January 3, 2003, December 28, 2001 and December 29, 2000
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and footnotes thereto. Actual results may
materially differ from those estimates.
Fair Value of Financial Instruments
The carrying values reflected in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable, and notes payable
approximate their fair values because of the short maturity of these
instruments.
Loss Per Share
The Company presents loss per share data in accordance with the provision of
SFAS No. 128, "Earnings per Share" ("SFAS 128"), which provides for the
calculation of Basic and Diluted earnings per share. Loss per share of common
stock is computed by using the weighted average number of common shares
outstanding during the period. Common stock equivalents are not included in the
determination of the weighted average number of shares outstanding, as they
would be antidilutive. For the years ended January 3, 2003, December 28, 2001,
and December 29, 2000, 0, 5,000, and 5,000 warrants and 3.1 million, 2.9
million, and 1.9 million options to purchase shares of the Company's common
stock, respectively, were outstanding.
Stock Based Compensation
The Company accounts for stock-based compensation in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and has
adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). SFAS 123 defines a fair value based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by APB 25. If the APB 25 intrinsic value
method of accounting is used, SFAS 123 requires pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
for stock based compensation had been applied. The Company records expense in
an amount equal to the excess of the quoted market price on the grant date over
the option price. Such expense is recognized at the grant date for options
fully vested. For options with a vesting period, the expense is recognized over
the vesting period.
Comprehensive Loss
The Company presents comprehensive losses in its Consolidated Statement of
Changes in Stockholders' Equity in accordance with SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). Total comprehensive loss includes, in
addition to net loss, changes in equity that are excluded from the consolidated
statements of operations and are recorded directly into a separate section of
stockholders' equity on the consolidated balance sheets.
F-10
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Years Ended January 3, 2003, December 28, 2001 and December 29, 2000
Comprehensive loss and its components consist of the following (in
thousands):
2002 2001 2000
-------- -------- --------
Net loss............................... $(17,158) $(14,833) $(18,902)
Foreign currency translation adjustment 585 (328) (301)
-------- -------- --------
Comprehensive loss..................... $(16,573) $(15,161) $(19,203)
======== ======== ========
Segments of an Enterprise
The Company reports segment information in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," ("SFAS
131"). Under SFAS 131 all publicly traded companies are required to report
certain information about the operating segments, products, services and
geographical areas in which they operate and their major customers. While the
Company has expanded its marketing focus beyond the cataract market to include
the refractive and glaucoma markets, the cataract market remained its primary
source of revenues and accordingly operates as one business segment. See Note
15, Geographic and Product Data for geographic information.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the 2002 presentation.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 requires the fair value of a
liability for an asset retirement obligation to be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated retirement costs are capitalized as part of the carrying amount of
the long-lived asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The Company's adoption of SFAS No. 143 did not have a
material impact on its operations or financial position.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates Statement 4 (and Statement 64, as it
amends Statement 4), which requires gains and losses from extinguishments of
debt to be aggregated and, if material, classified as an extraordinary item,
and thus, also the exception to applying Opinion 30 is eliminated as well. This
statement is effective for years beginning after May 2002 for the provisions
related to the rescission of Statements 4 and 64, and for all transactions
entered into beginning May 2002 for the provision related to the amendment of
Statement 13. The Company's adoption of SFAS No. 145 did not have a material
impact on its operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will
adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized
at the date of a
F-11
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Years Ended January 3, 2003, December 28, 2001 and December 29, 2000
company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amount recognized.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34," ("FIN 45"). This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of
the interpretation are applicable to guarantees issued or modified after
December 31, 2002 and are not expected to have a material effect on the
Company's operations or financial results. The disclosure requirements are
effective for financial statements of interim and annual periods ending after
December 31, 2002. Significant guarantees that have been entered into by the
Company as of January 3, 2003 are disclosed in Note 9 to the consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation". 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. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require more prominent
and more frequent disclosures in financial statements of the effects of
stock-based compensation. The transition guidance provisions of SFAS No. 148
are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 is not expected to have a material impact on the
Company's consolidated balance sheet or results of operations. The Company will
provide the interim disclosures required by SFAS No. 148 beginning in the first
quarter of 2003.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of Accounting Research
Bulletins ("ARB") No. 51, Consolidated Financial Statements," ("FIN 46"). FIN
46 clarifies the application of ARB No. 51 to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. The Company does not believe the adoption of FIN 46 will have a
material impact on its financial position or results of operations.
F-12
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 2003, December 28, 2001
NOTE 1--ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at January 3, 2003 and
December 28, 2001 (in thousands):
2002 2001
------ ------
Domestic............................ $3,435 $4,791
Foreign............................. 3,362 3,519
------ ------
6,797 8,310
Less allowance for doubtful accounts 805 768
------ ------
$5,992 $7,542
====== ======
NOTE 2--INVENTORIES
Inventories consisted of the following at January 3, 2003 and December 28,
2001 (in thousands):
2002 2001
------- -------
Raw materials and purchased parts $ 710 $ 1,610
Work in process.................. 798 3,252
Finished goods................... 10,253 10,369
------- -------
$11,761 $15,231
======= =======
NOTE 3--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at January 3, 2003
and December 28, 2001 (in thousands):
2002 2001
------- -------
Machinery and equipment....................... $14,147 $11,116
Furniture and fixtures........................ 5,378 7,639
Leasehold improvements........................ 4,577 4,480
------- -------
24,102 23,235
Less accumulated depreciation and amortization 16,664 14,493
------- -------
$ 7,438 $ 8,742
======= =======
Depreciation expense for the years ended January 3, 2003, December 28, 2001 and
December 29, 2000 was $2.2 million, $2.4 million and $2.1 million, respectively.
NOTE 4--INVESTMENT IN JOINT VENTURE
The Company owns a 50% equity interest in a joint venture, the CANON-STAAR
Company, Inc. ("CSC"), with Canon Inc. and Canon Sales Co, Inc., together the
"Canon Companies." The Company sold CSC an exclusive license to manufacture,
market and sell the Company's IOL products in Japan. The investment in the
Japanese joint venture is accounted for using the equity method of accounting
except for the nine-months ended September 29, 2001 and the year ended December
28, 2000 when the Company's investment of $3.6 million was
F-13
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
written off, due to disputes between the Company and the Canon Companies.
During the fourth quarter of fiscal year 2001, the Company executed an
agreement with the Canon Companies resolving all claims between the parties and
reaffirming the partnering arrangement to manufacture and distribute ophthalmic
products based on the Company's technology.
The financial statements of CSC include assets of approximately $9.1 and
$8.7 million, and liabilities of approximately $1.7 million and $1.8 million,
as of January 3, 2003 and December 28, 2001, respectively.
The Company's equity in operations of the joint venture is calculated as
follows (in thousands):
2002 Q4 2001 2000
---- ------- -------
Joint venture net income (loss)............. $(8) 134 $ --
Equity interest............................. 50% 50% 50%
--- ---- -------
Total joint venture net income (loss)....... (4) 67 --
Charge related to write-off of joint venture -- -- (4,698)
--- ---- -------
Equity in operations of joint venture....... $(4) $ 67 $(4,698)
=== ==== =======
The Company received dividend income of $40,000 during 2002 and $322,000 in
2001 when it also reversed $170,000 of excess accrued legal fees upon
settlement of the Company's disputes with Canon.
The Company recorded sales of certain IOL products to CSC of approximately
$142,000, $118,000 and $344,000 in 2002, 2001 and 2000, respectively.
NOTE 5--NOTES PAYABLE
The Company had a $7.0 million line of credit with a domestic lender which
matured on March 29, 2002, and was amended and restated from time to time
during the year ended January 3, 2003. The line of credit, as modified, extends
the maturity date to March 31, 2003, included the release of restricted cash in
the amount of $2.0 million in order to pay down the note and provides for
monthly decreases in availability through February 2003 totaling $4.0 million.
The Company's obligation to the lender is secured by a first priority lien on
substantially all of the Company's assets and bears interest at a rate equal to
the prime rate (4.25% at January 3, 2003) plus an applicable interest margin
from 1% to 5% which is based on the Company's ratio of funded debt to earnings
before interest, taxes, depreciation, and amortization (EBITDA) at each fiscal
quarter on a trailing 12-month basis. In addition, the Company is required to
pay a commitment fee of .25% to 1.25% of the unused amount of the line of
credit also based on a ratio of funded debt to EBITDA. Since the Company
reported losses throughout 2002, it was charged the maximum total interest rate
allowed under the agreement of prime plus a 5% margin (9.25%) and the maximum
commitment fee of 1.25% at January 3, 2003.
The agreement also requires the Company to satisfy certain financial tests,
which include positive and negative covenants such as the maintenance of
certain levels of liquidity, operating cash flows, tangible net worth, and
operating income. As of January 3, 2003, the Company was not in compliance with
the tangible net worth covenants of the agreement. The Company has obtained a
waiver from the lender who agreed to waive the events of default resulting from
the covenant violations. Borrowings outstanding under the note as of January 3,
2003 and December 28, 2001, were approximately $2.8 million and $5.7 million,
respectively. As of January 3, 2003 and December 28, 2001, the note provided
for borrowings of up to $3.7 million and $7.0 million, respectively.
On March 26, 2003, the Company and its domestic lender executed an agreement
to extend the maturity date of the Company's $3.0 million line-of-credit for
one year to March 31, 2004. The line-of-credit bears interest at a rate equal
to the prime rate (4.25% at January 3, 2003) plus an interest margin of 5%. In
addition, the Company is required to pay a commitment fee of 1.25% per annum of
the unused amount of the line-of-credit. All other terms and conditions are
generally unchanged except that the cash flow and operating income covenants of
the agreement do not commence until the third quarter of 2003 and minimum
tangible net worth covenants were reduced.
F-14
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A subsidiary of the Company has a revolving credit facility with a Swiss
bank, which as amended in fiscal 2001, provides for borrowings of up to 4.5
million Swiss Francs "CHF" ($3.2 million based on the exchange rate on January
3, 2003). The credit facility is divided into two parts: Part A provides for
borrowings of up to CHF 3.0 million ($2.1 million based on the exchange rate on
January 3, 2003) and does not have a termination date; Part B provides for
borrowings of up to CHF 1.5 million ($1.1 million based on the exchange rate on
January 3, 2003). The loan amount under Part B of the agreement reduces by CHF
250,000 ($178,000 based on the exchange rate on January 3, 2003) semi-annually
beginning June 30, 2002. The credit facility is secured by a general assignment
of claims.
The loan agreement provides for borrowings on a current or fixed-term basis.
The interest rate on current advances is 6.5% per annum at January 3, 2003 plus
a commission rate of 0.25%, payable each quarter. The base interest rate for
fixed-term advances follows Euromarket conditions for loans of a corresponding
term and currency plus an individual margin. The fixed-term rate at January 3,
2003 was 4.6%. Borrowings outstanding under the current account as of January
3, 2003 were CHF 90,000 ($64,000 based on the exchange rate on January 3,
2003). Fixed term advances at January 3, 2003 were CHF 4.1 million ($2.9
million based on the exchange rate on January 3, 2003).
A subsidiary of the Company has a revolving credit facility with a German
bank that provides for borrowings of up to approximately 200,000 EUR ($207,000
at the exchange rate on January 3, 2003) at an interest rate of 8.5%. The loan,
originally due February 28, 2003, was extended on October 8, 2002 to August 31,
2003. Payments in the amount of 50,000 EUR ($52,000 at the exchange rate on
January 3, 2003) were due monthly beginning December 31, 2001. The amended
agreement reduced the monthly payment to 25,000 EUR ($26,000 at the exchange
rate on January 3, 2003). The bank also agreed to waive the September 2002 and
October 2002 payments. There were no other changes to the original terms of the
agreement. The loan is secured by an assignment of accounts receivable and
inventory. There were no borrowings outstanding as of January 3, 2003.
The subsidiary negotiated another credit facility with a different German
bank to replace the one that expires on August 31, 2003. The new agreement,
effective January 13, 2003, provides for borrowings of up to 210,000 EUR
($199,000 at the exchange rate on the date of the agreement) at an interest
rate of 8.5%. The note is due November 30, 2003 and is personally guaranteed by
the subsidiary's president. The agreement includes a covenant which prevents
the subsidiary from paying dividends.
NOTE 6--INCOME TAXES
Income tax provision (benefit) (in thousands)
2002 2001 2000
------ ------- -------
Current
U.S. federal............... $ (995) $ 484 $ (393)
State...................... (74) 146 18
Foreign.................... 742 258 317
------ ------- -------
(327) 888 (58)
------ ------- -------
Deferred......................
U.S. federal and state..... 9,175 (4,435) (6,522)
Foreign.................... 111 -- --
------ ------- -------
9,286 (4,435) (6,522)
------ ------- -------
Income tax provision (benefit) $8,959 $(3,547) $(6,580)
====== ======= =======
F-15
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Included in the fiscal year 2000 current United States federal net tax
benefit is the carryback of a portion of 2000 net taxable loss to 1998. This
carryback resulted in a refund of $839,000 of taxes previously paid.
Legislation enacted on March 9, 2002 (HR 3090) enabled the Company to carryback
a portion of the federal 2001 net operating loss to 1996, 1997 and 1998. Since
this legislation was not enacted as of the end of fiscal year 2001, the benefit
of $959,000 from this carryback was recorded in 2002. Total federal net
operating loss carryforward as of January 3, 2003 is $37.3 million expiring
between 2020 and 2022.
The Company has net income taxes payable at January 3, 2003 and December 28,
2001 of $171,000 and $239,000, respectively, $440,000 and $0 is classified as
prepaids, deposits and other current assets and $611,000 and $239,000,
primarily related to foreign income taxes, is classified as other current
liabilities.
The provision (benefit) for income taxes is different from that which would
be obtained by applying the statutory Federal income tax rate to loss before
income taxes. The items causing this difference are as follows (in thousands):
2002 2001 2000
--------------- -------------- -------------
Computed tax provision (benefit) on losses at statutory
rate................................................. $(2,762) 34.0 % $(6,211) 34.0% $(8,664) 34.0%
Increase (decrease) in taxes resulting from:
Permanent differences............................... 38 (0.4) 39 (0.3) 73 (0.3)
State taxes, net of federal income tax benefit...... 1,296 (16.0) (743) 4.1 (572) 2.3
Tax effect attributed to foreign operations......... (1,245) 15.3 (345) 1.9 505 (2.0)
Loss related to previously excluded foreign
earnings.......................................... -- -- -- -- 706 (2.8)
Valuation allowance................................. 11,632 (143.2) 3,713 (20.3) 1,372 (5.4)
------- ------ ------- ----- ------- ----
Effective tax provision (benefit) and rate............. $ 8,959 (110.3)% $(3,547) 19.4% $(6,580) 25.8%
======= ======= =======
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $9.7 million at January 3, 2003. Undistributed earnings are
considered to be indefinitely reinvested and, accordingly, no provision for
United States federal and state income taxes has been provided thereon.
Upon distribution of earnings in the form of dividends or otherwise, the
Company would be subject to both United States income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries. Determination of the amount of unrecognized deferred
United States income tax liability is not practicable because of the
complexities associated with its hypothetical calculation.
F-16
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets (liabilities) as of January 3, 2003 and
December 28, 2001 are as follows (in thousands):
2002 2001
-------- -------
Current deferred tax assets (liabilities):
Allowance for doubtful accounts............................. $ 131 $ 174
Inventory reserves and uniform capitalization............... 576 2,478
Accrued vacation............................................ 153 177
State taxes................................................. 3 14
Deferred revenue............................................ 33 87
Reserve for restructuring costs............................. -- 2,387
Other accruals.............................................. -- (13)
Valuation allowance......................................... (896) --
-------- -------
Total current deferred tax assets (liabilities)......... $ -- $ 5,304
======== =======
Non-current deferred tax assets (liabilities):
Net operating loss and capital loss carryforwards........... $ 15,044 $ 6,025
Business, foreign and AMT credit carryforwards.............. 1,132 885
Depreciation and amortization............................... (781) (447)
Reserve for notes receivable................................ 744 1,405
Reserve for restructuring costs............................. 1,573 402
Subpart F income............................................ 103 --
Capitalized R&D............................................. 136 --
Valuation allowance......................................... (17,951) (4,288)
-------- -------
Total non-current deferred tax assets (liabilities)..... $ -- $ 3,982
======== =======
SFAS No. 109, "Accounting for Income Taxes," ("SFAS 109") requires that a
valuation allowance be established when it is more likely than not that all or
a portion of a deferred tax asset may not be realized. Cumulative losses weigh
heavily in the assessment of the need for a valuation allowance. In 2002, due
to the Company's recent history of losses, an increase to the valuation
allowance was recorded as a non-cash charge to tax expense in the amount of
$9.2 million. As a result, the valuation allowance fully offsets the value of
deferred tax assets on the Company's balance sheet as of January 3, 2003.
NOTE 7--BUSINESS ACQUISITIONS
During the year ended January 3, 2003, the Company acquired the remaining
20% interest in its German subsidiary at its book value of $426,000, from the
subsidiary's president in exchange for cancellation of amounts due from the
subsidiary's president of $955,000 less bonuses due to the subsidiary's
president of $87,000, resulting in goodwill of $442,000. The terms of the
agreement also provided for the cancellation of 75,000 unexercised stock
options previously issued to the subsidiary's president and an agreement not to
compete with the Company for a period of ten years. For the year ended January
3, 2003, the Company reflected the activity as a wholly owned subsidiary,
whereas for the years ended December 28, 2001 and December 29, 2000, the 20%
interest that was not owned was reflected as a minority interest on the
consolidated statement of operations.
F-17
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma amounts for the acquisition are not included, as the effect on
operations is not material to the Company's consolidated financial statements.
NOTE 8--STOCKHOLDERS' EQUITY
Common Stock
In fiscal year 2000, the Company issued 143,000 shares to consultants for
services rendered to the Company. Also, during 2000, the Company completed a
private placement with institutional investors of 1.5 million shares of the
Company's common stock, for net proceeds of $18.7 million.
In fiscal year 2001, the Company issued 192,000 shares to consultants for
services rendered to the Company.
During fiscal year 2002, the Company issued 39,000 shares to consultants for
services rendered to the Company and 3,000 shares to an employee relating to an
employment contract. Also during 2002, the Company acquired 243,000 shares of
treasury stock from a former officer in settlement of notes receivable (See
Note 17).
Receivables from Officers and Directors
As of January 3, 2003 and December 28, 2001, notes receivable from former
officers and directors totaling $4.9 million and $7.1 million, respectively,
were outstanding. The notes were issued in connection with purchases of the
Company's common stock and bear interest at rates ranging between 3.69% and
9.75% per annum, or at the lowest federal applicable rate allowed by the
Internal Revenue Service. The notes are secured by stock pledge agreements and
mature on various dates through June 1, 2006.
As of January 3, 2003 and December 28, 2001 reserves against notes
receivable from officers and directors were $1.8 million and $3.6 million,
respectively.
During fiscal year 2002, the Company and its former Chief Executive Officer,
John R. Wolf, dismissed all legal actions between them pursuant to a settlement
agreement dated November 12, 2002. The agreement provided for completion of Mr.
Wolf's transfer of 243,000 shares of Company stock pursuant to the Form 4
executed May 9, 2000, in satisfaction of $2.1 million in promissory notes
executed by Mr. Wolf in favor of the Company.
Also during the year ended January 3, 2003, the Company entered into a
promissory note in the amount of $560,000 pursuant to the terms of a settlement
agreement with a law firm, of which a principal was a former officer, director
and stockholder of the Company. Terms of the note, secured by trade accounts
receivable of the law firm, include interest at the rate of 5% with monthly
payment of principal and interest due beginning July 1, 2002 through June 1,
2006. During the year ended January 3, 2003 payments against the note were
received in the amount of $80,000.
The Company entered into a second promissory note in the amount of $2.2
million, pursuant to the terms of the same settlement agreement, with the
former officer's widow. Terms of the note, secured by a stock pledge agreement,
includes interest at the rate of 5% with principal and interest due on or
before March 29, 2006. The note also provides for escalation in the interest
rate to 9.75% if the bid price of the Company's common stock trades at $8.00 or
greater on any public stock exchange for a period of 20 consecutive trading
days, or if the stock permanently ceases to trade on any public stock exchange.
Additionally, the note provides an acceleration of payment in the event the
closing bid price of the common stock of the Company trades at $10.00 or
greater on any public stock exchange for a period of 20 consecutive trading
days.
F-18
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options
The table below summarizes the transactions in the Company's stock option
plans (in thousands except per share data):
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Balance at December 31, 1999................... 1,460 $ 7.75
Options granted................................ 1,604 $10.35
Options exercised.............................. (498) $ 7.03
Options forfeited / cancelled.................. (674) $ 8.05
----- ------
Balance at December 29, 2000................... 1,892 $ 9.95
Options granted................................ 1,114 $ 6.98
Options exercised.............................. (18) $ 3.57
Options forfeited / cancelled.................. (77) $ 9.77
----- ------
Balance at December 28, 2001................... 2,911 $ 8.85
Options granted................................ 972 $ 3.73
Options exercised.............................. -- $ --
Options forfeited / cancelled.................. (745) $10.55
----- ------
Balance at January 3, 2003..................... 3,138 $ 6.86
===== ======
Options exercisable (vested) at January 3, 2003 2,405 $ 7.43
===== ======
Under provisions of the Company's 1991 Stock Option Plan, 2.0 million shares
were reserved for issuance. Generally, options under this plan are granted at
fair market value at the date of the grant, become exercisable over a 3-year
period, or as determined by the Board of Directors, and expire over periods not
exceeding 10 years from the date of grant. At January 3, 2003, December 28,
2001, and December 29, 2000 options for 379,000, 384,000 and 434,000 shares
were outstanding, with exercise prices ranging between $2.50 to $14.50 per
share.
In fiscal year 1995, the Company adopted the 1995 Consultant Stock Plan,
authorizing the granting of options to purchase or awards of the Company's
common stock. Generally, options under the plan are granted at fair market
value at the date of the grant, become exercisable on the date of grant and
expire 10 years from the date of grant. Pursuant to this plan, options for
545,000, 472,000 and 279,000 were outstanding at January 3, 2003, December 28,
2001, and December 29, 2000, respectively.
In fiscal year 1996, the Board of Directors approved the 1996 Non-Qualified
Stock Plan, authorizing the granting of options to purchase or awards of the
Company's common stock. Under provisions of the Non-Qualified Stock Plan,
600,000 shares were reserved for issuance. Generally, options under the plan
are granted at fair market value at the date of the grant, become exercisable
over a 3-year period, or as determined by the Board of Directors, and expire
over periods not exceeding 10 years from the date of grant. Pursuant to this
plan, options for 170,000, 170,000 and 175,000 shares were outstanding at
January 3, 2003, December 28, 2001 and December 29, 2000, respectively. The
options were originally issued with an exercise price of $12.50 per share.
During fiscal year 1998 the exercise price was reduced to $6.25 per share by
action of the Board of Directors.
In fiscal year 1998, the Board of Directors approved the 1998 Stock Option
Plan, authorizing the granting of incentive options and/or non-qualified
options to purchase or awards of the Company's common stock. Under the
F-19
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
provisions of the plan, 1.0 million shares were reserved for issuance; however,
the maximum number of shares authorized may be increased provided such action
is in compliance with Article IV of the Plan. During fiscal year 2001, pursuant
to Article IV of the Plan, the stockholders of the Company authorized an
additional 1.5 million shares. Generally, options under the plan are granted at
fair market value at the date of the grant, become exercisable over a 3-year
period, or as determined by the Board of Directors, and expire over periods not
exceeding 10 years from the date of grant. Pursuant to the plan, options for
1.5 million, 1.4 million and 810,000 shares were outstanding at January 3,
2003, December 28, 2001 and December 29, 2000, respectively, with exercise
prices ranging between $2.00 and $15.75 per share.
In fiscal year 2001, the Board of Directors approved the Stock Option Plan
and Agreement for the Company's Chief Executive Officer authorizing the
granting of options to purchase or awards of the Company's common stock.
Generally, options under the plan are granted at fair market value at the date
of grant, become exercisable over a 3-year period, or as determined by the
Board of Directors, and expire 10 years from the date of grant. Pursuant to
this plan, options for 500,000 were outstanding at January 3, 2003, December
28, 2001, and December 29, 2000, respectively, with an exercise price of
$11.125.
In fiscal year 2000, officers, employees and others exercised 498,000
options from the 1990, 1991, 1996, 1998 and non-qualified stock option plans at
prices ranging from $2.50 to $13.63 resulting in cash and note proceeds
totaling $3.5 million.
In fiscal year 2001, officers, employees and others exercised 18,000 options
from the 1991 and 1996 stock option plans at prices ranging from $2.50 to $6.25
resulting in cash proceeds totaling $62,000.
In fiscal year 2002, no options from any of the Company's stock option plans
were exercised.
SFAS No. 123, "Accounting for Stock-Based Compensation" requires the Company
to provide pro forma information regarding net income and earnings per share as
if compensation expense for the Company's stock option plans had been
determined in accordance with the fair value based method. The fair value of
each stock option grant is estimated on the grant date using the Black-Scholes
option-pricing model with the following assumptions:
2002 2001 2000
------ ------ ------
Dividend yield.................... 0% 0% 0%
Expected volatility............... 66% 64% 42%
Risk-free interest rate........... 4.50% 4.50% 4.50%
Expected holding period (in years) 1 to 3 1 to 3 1 to 5
The weighted average fair value of options granted during the year ended
January 3, 2003, December 28, 2001 and December 29, 2000, were $1.27 to $2.44,
$0.55 to $3.72 and $1.32 to $4.55, respectively.
F-20
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma net loss and loss per share for fiscal year 2002, 2001 and 2000
had the Company accounted for stock options issued to employees and others in
accordance with the fair value method of SFAS 123 are as follows (in thousands,
except per share data):
2002 2001 2000
-------- -------- --------
Net loss
As reported............................................... $(17,158) $(14,833) $(18,902)
Add: Stock-based employee compensation expense included in
reported net loss, net of related tax effects........... -- -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects.............................. (1,326) (1,488) (1,597)
-------- -------- --------
Pro forma................................................. $(18,484) $(16,321) $(20,499)
======== ======== ========
Basic and diluted loss per share
As reported............................................... $ (1.00) $ (0.87) $ (1.23)
Pro forma................................................. $ (1.08) $ (0.96) $ (1.33)
Due to the fact that the Company's stock option programs vest over many
years and additional awards are made each year, the above pro forma numbers are
not indicative of the financial impact had the disclosure provisions of SFAS
123 been applicable to all years of previous option grants. The above numbers
do not include the effect of options granted prior to 1995 that vested in 1996
through 2002.
The following table summarizes information about stock options outstanding
and exercisable at January 3, 2003 (in thousands, except per share data):
Options
Outstanding
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 1/03/03 Contractual Life Exercise Price at 01/03/03 Exercise Price
- --------------- -------------- ---------------- ---------------- -------------- ----------------
(in thousands) (in thousands)
$1.70 to $2.50 259 4.3 years $ 1.97 213 $ 1.94
$2.82 to $4.12 956 4.8 years $ 3.44 544 $ 3.39
$4.45 to $6.60 643 3.1 years $ 5.67 497 $ 5.93
$7.50 to $11.25 1,110 6.0 years $10.61 1,009 $10.64
$11.38 to $15.75 170 7.3 years $13.63 142 $13.63
- ---------------- ----- --------- ------ ----- ------
$1.70 to $15.75 3,138 5.0 years $ 6.86 2,405 $ 7.43
================ ===== ========= ===== ===== =====
Warrants
The table below summarizes the transactions related to warrants to purchase
the Company's common stock:
Number Weighted Average
of Shares Exercise Price
--------- ----------------
Balance at December 28, 2001 and December 29, 2000 5,000 $1.20
Warrants exercised................................ (5,000) $1.20
------ -----
Balance at January 3, 2003........................ 0 $ 0
====== =====
F-21
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases certain property, plant and equipment under capital and
operating lease agreements.
Annual future minimum lease payments under non-cancelable operating lease
commitments as of January 3, 2003 are as follows (in thousands):
Fiscal Year
-----------
2003........ $ 713
2004........ 348
2005........ 299
2006........ 232
2007........ 55
------
Total... $1,647
======
Rent expense was approximately $1.1 million for each of the years ended
January 3, 2003, December 28, 2001 and December 29, 2000, respectively.
Supply Agreement
In May 1999, the Company entered into a license and supply agreement with
another manufacturer to license and re-sell one of the manufacturer's products.
Under the terms of the agreement, the Company was committed to purchase the
specified product for a total sum of $3.2 million over 18 months. In September
2001, the supply agreement was amended reducing the minimum contractual amount
that the Company is obligated to purchase from the manufacturer to $2.5 million
over a 24 month period commencing September 1, 2001. The agreement, as amended,
can be cancelled at the end of the 24 month period by either party upon four
months written notice. Purchases under the agreement for fiscal 2002 and 2001
were approximately $1.3 million and $735,000, respectively.
In December 2000, the Company entered into a minimum purchase agreement with
another manufacturer for the purchase of viscoelastic solution. In addition to
the minimum purchase requirement, the Company is also obligated to pay an
annual regulatory maintenance fee. The agreement contains provisions to
increase the minimum annual purchases in the event that the Seller gains
regulatory approval of the product in other markets, as requested by the
Company. Purchases under the agreement for fiscal 2002 and 2001 were
approximately $383,000 and $184,000, respectively.
As of January 3, 2003 estimated annual purchase commitments under these
contracts are as follows (in thousands):
Fiscal Year
-----------
2003........ $1,065
2004........ 600
2005........ 600
2006........ 600
------
Total... $2,865
======
F-22
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Litigation and Claims
The Company is party to various claims and legal proceedings arising out of
the normal course of its business. These claims and legal proceedings relate to
contractual rights and obligations, employment matters, stockholder suits and
claims of product liability. While there can be no assurance that an adverse
determination of any such matters could not have a material adverse impact in
any future period, management does not believe, based upon information known to
it, that the final resolution of any of these matters will have a material
adverse effect upon the Company's consolidated financial position and annual
results of operations and cash flows.
NOTE 10--OTHER LIABILITIES
Other Current Liabilities
Included in other current liabilities at January 3, 2003 and December 28,
2001 are approximately $1.3 million and $1.4 million of commissions due to
outside sales representatives and accrued salaries and wages of $805,000 and
$940,000, respectively.
NOTE 11--RELATED PARTY TRANSACTIONS
The Company has had significant related party transactions as discussed in
Notes 4, 7 and 8.
The Company issues options to purchase 60,000 shares of its common stock at
fair market value on the date of grant to members of its Board of Directors
upon election or reelection for services provided as Board members.
In addition to notes secured by stock pledge agreements (see Note 8), the
Company holds other various promissory notes from current and former officers
and directors of the Company. The notes, which provide for interest at the
lowest applicable rate allowed by the Internal Revenue Code, are due on demand.
Amounts due from officers and directors and included in prepaids, deposits, and
other current assets at January 3, 2003 and December 28, 2001 were $158,000 and
$460,000, respectively.
In March 2001, the Company entered into a consulting agreement with one of
the members of its Board of Directors. In exchange for services, the Company
issued an option to purchase 20,000 shares of the Company's common stock at
fair market value on the date of grant, in addition to a monthly retainer of
$6,000, and a per-diem rate after six days worked of $1,000. Amounts paid under
the agreement during the year ended January 3, 2003 and December 28, 2001 were
$73,000 and $93,000, respectively.
The Company had a consulting contract with a corporation owned by an
employee of one of its foreign subsidiaries. The consulting contract, which
began October 1, 1999 and ending October 1, 2005, provided for monthly payments
of $20,000 in exchange for specified services. During fiscal year 2001, the
parties agreed to terminate the contract at a discount in exchange for cash and
forgiveness of a note receivable due the subsidiary from the employee. Debt
forgiveness totaled $658,000 (1.4 million DM at the exchange rate in effect on
the settlement date). During fiscal year 2002, 2001, and 2000, amounts paid or
accrued under the contract totaled $0, $180,000, and $240,000, respectively.
During the year ended January 3, 2003, a pension obligation in the amount of
$257,000, which was included in other long-term liabilities at December 28,
2001, was paid to the employee. Amounts due from the employee and included in
prepaids, deposits, and other current assets at December 28, 2001 were $523,000
(1.2 million DM at the exchange rate on December 28, 2001). Additional amounts
due were cancelled during the year ended January 3, 2003 in exchange for the
purchase of the remaining 20% interest of the subsidiary (see Note 7).
F-23
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal year 2001 and 2000, a law firm, of which a principal was an
officer, director and stockholder of the Company, received approximately $1.5
million and $2.0 million, respectively, for fees in connection with legal
services performed on behalf of the Company.
NOTE 12--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid was $580,000, $640,000 and $1.5 million for the years ended
January 3, 2003, December 28, 2001 and December 29, 2000, respectively. Income
taxes paid amounted to approximately $719,000, $479,000 and $648,000 for the
years ended January 3, 2003, December 28, 2001 and December 29, 2000,
respectively.
2002 2001 2000
------- ---- ------
Non cash financing activities:
Notes receivable from officers and directors (Note 8). $(2,128) $ -- $1,167
Notes receivable reserve.............................. 1,814 -- --
Prepaids, deposits and other current assets........... (658) -- --
Treasury stock acquired............................... 972 -- --
Acquisition of business:
Minority interest acquired............................ $ 426 $ -- $ --
Goodwill.............................................. 442 -- --
Cancellation of amounts receivable.................... (868) -- --
NOTE 13--OTHER CHARGES
On June 22, 2000, the Company announced the details of its plan of
restructuring. In conjunction with the implementation of the plan, the Company
recorded a pretax charge to earnings of approximately $13.8 million in the
second quarter of fiscal year 2000. The charges include approximately $900,000
for restructuring of certain subsidiaries, approximately $4.0 million to
write-off patents that were determined to have no future value to the Company,
approximately $l.9 million of costs incurred by the Company relating to
activities that were abandoned, approximately $4.1 million relating to
severance and other employee separation costs, approximately $1.9 million
relating to the disposition of investment and assets related to the Company's
abandoned entry into the Lasik market, and approximately $1.0 million relating
to the closure of a foreign subsidiary. As part of the restructuring plan, a
total of 19 employees were laid-off, terminated or resigned.
In addition, the Company wrote-off approximately $5.2 million in inventory
that no longer fit the Company's future direction and recorded an approximate
$4.7 million charge related to the write-off of its Japanese joint venture. At
December 28, 2001, the Company had approximately $100,000 of accrued
restructuring charges consisting of future payments to former employees and
lease obligations.
In June 2001 management completed an extensive operational review of the
Company. Based upon that review, in August 2001 the Company implemented a plan
that management believes will allow the Company to become profitable. As a
result of implementing the plan, the Company significantly changed its
manufacturing processes and location including consolidating lathing activity
into the Swiss manufacturing site from the current dual site operations and
reducing molded lens capacity at the California site. The Company also reduced
its workforce and closed certain overseas operations. In conjunction with the
implementation of the plan, the Company recorded pretax charges of
approximately $7.8 million in the third and fourth quarters of fiscal year
2001. Planned charges include approximately $3.7 million in fixed asset
write-offs, $300,000 in severance and employee relocation costs, and $1.0
million for subsidiary closures. Additionally, the Company reserved
$2.1 million of notes receivable from former officers and directors of the
Company and paid $700,000 in consideration for the early termination of a
consulting contract with the president of the Company's German subsidiary.
F-24
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also wrote off $6.4 million of inventory related to voluntary
product recalls and excess and obsolete inventory in the second and fourth
quarters of 2001. The amount is included in cost of sales at December 28, 2001.
In connection with its business strategy to reduce operating expenses,
announced during the third quarter of 2001, the Company completed the sale of
its South African subsidiary and closure of its Swedish and Canadian
subsidiaries during the year ended January 3, 2003. As a result of these
transactions the Company recorded $1.2 million of subsidiary closure charges.
The charges were primarily related to the recognition of deferred losses
resulting from the translation of foreign currency statements into U.S. dollars
(previously included in equity in the balance sheet in accordance with SFAS No.
52). Since the charges had been included in equity their subsequent
recognition, while impacting retained earnings, had no impact on total
stockholders' equity. The Company will continue its presence in the South
African and Swedish markets by selling through distributors and in the Canadian
market by selling through independent sales representatives.
Also included in other charges at January 3, 2003 is $230,000 in employee
separation costs.
NOTE 14--NET LOSS PER SHARE
The following is a reconciliation of the weighted average number of shares
used to compute basic and diluted loss per share (in thousands):
2002 2001 2000
------ ------ ------
Basic weighted average shares outstanding... 17,142 17,003 15,378
Diluted effect of stock options and warrants -- -- --
------ ------ ------
Diluted weighted average shares outstanding. 17,142 17,003 15,378
====== ====== ======
NOTE 15--GEOGRAPHIC AND PRODUCT DATA
The Company develops, manufactures and distributes medical devices used in
minimally invasive ophthalmic surgery. Substantially all of the Company's
revenues result from the sale of the Company's medical devices. The Company
distributes its medical devices in the cataract, refractive and glaucoma
segments within ophthalmology. During the years presented, revenues from the
refractive and glaucoma segments were 5% or less of total revenue. Accordingly,
the difference is not significant enough for the Company to account for these
products separately or to justify segmented reporting by product type.
The Company markets and sells its products in over 39 countries and has
manufacturing sites in the United States and Switzerland. Other than the United
States and Germany, the Company does not conduct business in any country in
which its sales in that country exceed 5% of consolidated sales. Sales are
attributed to countries based on location of customers. The composition of the
Company's sales to unaffiliated customers between those in the United States,
Germany, and those in other locations for each year, is set forth below (in
thousands).
2002 2001 2000
------- ------- -------
Sales to unaffiliated customers
U.S......................... $24,082 $27,465 $29,501
Germany..................... 16,081 14,907 14,182
Other....................... 7,717 7,865 10,303
------- ------- -------
Total................... $47,880 $50,237 $53,986
======= ======= =======
F-25
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The composition of the Company's property, plant and equipment between those
in the United States, Switzerland, and those in other countries is set forth
below (in thousands).
2002 2001
------ ------
Property, Plant and Equipment
U.S....................... $5,221 $6,316
Switzerland............... 1,844 2,123
Other..................... 373 303
------ ------
Total................. $7,438 $8,742
====== ======
The Company sells its products internationally, which subjects the Company
to several potential risks, including fluctuating exchange rates (to the extent
the Company's transactions are not in U.S. dollars), regulation of fund
transfers by foreign governments, United States and foreign export and import
duties and tariffs and political instability.
NOTE 16--QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary unaudited quarterly financial data from continuing operations for
fiscal 2002 and 2001 is as follows (in thousands except per share data):
January 3, 2003 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
--------------- -------- -------- -------- --------
Revenues........................ $11,731 $12,088 $11,201 $ 13,228
Gross profit.................... 5,712 6,024 5,620 6,793
Net loss........................ (997) (3,909) (2,144) (10,108)
Basic and diluted loss per share (.06) (.23) (.12) (.59)
December 28, 2001 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
----------------- -------- -------- -------- --------
Revenues........................ $13,001 $12,890 $12,154 $ 12,741
Gross profit.................... 7,822 1,865 6,688 6,208
Net loss........................ (230) (4,177) (1,991) (8,435)
Basic and diluted loss per share (.01) (.25) (.12) (.49)
Quarterly and year-to-date computations of loss per share amounts are made
independently. Therefore, the sum of the per share amounts for the quarters may
not agree with the per share amounts for the year.
NOTE 17--FOURTH QUARTER SIGNIFICANT ITEMS
On November 12, 2002, the Company and its former Chief Executive Officer,
John R. Wolf, settled all legal actions between them (see Note 8).
During the quarter ended January 3, 2003, the Company acquired the remaining
20% interest of its German subsidiary from the subsidiary's president (see Note
7).
During the quarter ended January 3, 2003, the Company recorded a $9.2
million increase in its deferred tax asset valuation allowance (see Note 6).
F-26
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 18--SUBSEQUENT EVENTS
The Company negotiated a credit facility with a German bank to replace the
credit facility that expires on August 31, 2003. The new credit facility,
effective January 13th, 2003, provides for borrowings of up to $210,000 EUR
($199,000 at the exchange rate on the date of the agreement) at an interest
rate of 8.5%. The note is due on November 30, 2003 and is personally guaranteed
by the subsidiary's president. The agreement includes a covenant which prevents
the subsidiary from paying dividends.
On February 27, 2003, the Company and Richard Leza, former Vice President of
Finance, Business Development and Corporate Strategy, settled their disputes.
Pursuant to the settlement, the Company agreed to pay Mr. Leza monthly payments
totaling $180,000 over a 15-month period. The Company also agreed to issue Mr.
Leza an option to purchase 75,000 shares of the Company's common stock and
forgave a note receivable of $120,000.
On March 26, 2003, the Company and its domestic lender executed an agreement
to extend the maturity date of the Company's $3.0 million line-of-credit from
one year to March 31, 2004. The line-of-credit bears interest at a rate equal
to the prime rate (4.25% at January 3, 2003) plus an interest margin of 5%. In
addition, the Company is required to pay a commitment fee of 1.25% per annum of
the unused amount of the line-of-credit. All other terms and conditions are
generally unchanged except that the cash flow and operating income covenants of
the agreement do not commence until the third quarter of 2003 and minimum
tangible net worth covenants were reduced.
F-27
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'
REPORT ON SCHEDULE
To the Board of Directors
STAAR Surgical Company
The audits referred to in our report dated February 21, 2003 (except for
Note 18 which is dated March 26, 2003), relating to the consolidated financial
statements of STAAR Surgical Company and Subsidiaries, which is contained in
Item 8 of this 10-K included the audit of Schedule II, Valuation and Qualifying
Accounts and Reserves as of January 3, 2003, and for each of the three years in
the period ended January 3, 2003. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audit.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
Los Angeles, California
February 21, 2003
(except for Note 18 which is dated March 26, 2003)
F-28
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' CONSENT
To the Board of Directors
STAAR Surgical Company
We consent to incorporation by reference in the Registration Statement
(No. 333-45810), (No. 333-51064), (No. 333-52096), (No. 333-60241), and
(No. 333-90018) on Form S-8 and (No. 333-47820) on Form S-3 of STAAR Surgical
Company of our report dated February 21, 2003 (except for Note 18 which is
dated March 26, 2003) relating to the consolidated balance sheets of STAAR
Surgical Company and Subsidiaries as of January 3, 2003 and December 28, 2001
and the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows and related schedule for each of the three
years in the period ended January 3, 2003, which report appears in the January
3, 2003 annual report on Form 10-K of STAAR Surgical Company and subsidiaries.
BDO SEIDMAN, LLP
Los Angeles, California
April 2, 2003
F-29
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
-------- ---------- --------- ---------- ----------
Balance at Balance at
Beginning End of
Description of Year Additions Deductions Year
----------- ---------- --------- ---------- ----------
(In thousands)
2002
Allowance for doubtful accounts deducted from accounts
receivable in balance sheet.......................... $ 768 $ 1,186 $1,149 $ 805
Accrued restructuring costs............................ 100 -- 100 --
Deferred tax asset valuation allowance................. 4,288 14,559 -- 18,847
Notes receivable reserve............................... 3,609 -- 1,814 1,795
------ ------- ------ -------
$8,765 $15,745 $3,063 $21,447
====== ======= ====== =======
2001
Allowance for doubtful accounts deducted from accounts
receivable in balance sheet.......................... $ 781 $ -- $ 13 $ 768
Accrued restructuring costs............................ 2,236 100 2,236 100
Deferred tax asset valuation allowance................. 1,511 2,777 -- 4,288
Notes receivable reserve............................... 1,500 2,109 -- 3,609
------ ------- ------ -------
$6,028 $ 4,986 $2,249 $ 8,765
====== ======= ====== =======
2000
Allowance for doubtful accounts deducted from accounts
receivable in balance sheet.......................... $ 373 $ 408 $ -- $ 781
Accrued restructuring costs............................ -- 4,236 2,000 2,236
Deferred tax asset valuation allowance................. -- 1,511 -- 1,511
Notes receivable reserve............................... -- 1,500 -- 1,500
------ ------- ------ -------
$ 373 $ 7,655 $2,000 $ 6,028
====== ======= ====== =======
F-30