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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 2, 1998
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-11634
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STAAR SURGICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3797439
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1911 WALKER AVENUE, MONROVIA, CALIFORNIA 91016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(626) 303-7902
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this Chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 24, 1998 was approximately $174,200,000 based upon the
closing price per share of the Common Stock of $15.75 on that date.
The number of shares outstanding of the issuer's classes of Common Stock as
of March 24, 1998:
Common Stock, $.01 Par Value--13,278,342 shares
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III (Items 10, 11, 12 and 13) is incorporated
by reference to the Company's definitive proxy statement for its 1998 Annual
Meeting of Stockholders.
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TABLE OF CONTENTS
PAGE
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PART I................................................................... 1
ITEM 1. BUSINESS........................................................ 1
General......................................................... 1
Overview........................................................ 1
Development of Business Over Past Five Years and Relevant Prior
Events......................................................... 1
Financial Information About Industry Segments................... 2
Narrative Description of Business............................... 2
Background...................................................... 2
Markets......................................................... 2
Strategy........................................................ 4
Products........................................................ 4
Research and Development........................................ 6
Marketing, Selling and Distribution............................. 6
Competition..................................................... 7
Manufacturing and Suppliers..................................... 7
Licenses and Distribution Rights................................ 8
Subsidiaries.................................................... 8
Facilities...................................................... 8
Employees and Labor Relations................................... 8
Intellectual Property Rights.................................... 9
Regulatory Requirements......................................... 9
Financial Information About Foreign and Domestic Operations and
Export Sales................................................... 11
ITEM 2. PROPERTIES...................................................... 11
ITEM 3. PENDING LEGAL PROCEEDINGS....................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 11
PART II.................................................................. 12
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS................................................. 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................ 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 14
Overview........................................................ 14
Results of Operations........................................... 15
1997 Fiscal Year Compared to 1996 Fiscal Year................... 15
1996 Fiscal Year Compared to 1995 Fiscal Year................... 16
Liquidity and Capital Resources................................. 17
Other Matters................................................... 19
Foreign Exchange................................................ 19
Inflation....................................................... 19
Year 2000 Compliance............................................ 19
Uncertainties and Risk Factors.................................. 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 23
TABLE OF CONTENTS--(CONTINUED)
PAGE
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PART III.................................................................. 23
ITEMS 10., 11., 12. AND 13................................................ 23
PART IV................................................................... 24
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K..................................................... 24
ADVISEMENT
Certain Statements contained in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") which reflect the Company's
current expectations regarding the future results of operations, performance
and achievements of the Company, or industry results. The Company has tried,
wherever possible, to identify these forward looking statements by, among
other things, using words such as "anticipate," "believe," "estimate,"
"expect" and similar expressions. These statements reflect the current beliefs
of the Company and are based on information currently available to it.
Accordingly, these statements are subject to known and unknown risks,
uncertainties and other factors which could cause the actual results,
performance or achievements of the Company or the industry to differ
materially from those expressed in, or implied by these statements. The
Company is not obligated to update or revise these "forward looking"
statements to reflect new events or circumstances.
PART I
ITEM 1. BUSINESS
GENERAL
Overview
STAAR Surgical Company ("STAAR" or the "Company") is a publicly traded
(Nasdaq National Market symbol "STAA") developer, manufacturer and global
distributor of medical devices used in minimally invasive ophthalmic surgery.
The Company's products are designed to improve the quality of patient
outcomes, minimize patient risk and discomfort, and simplify ophthalmic
surgical procedures for the benefit of surgeons and patients. The Company's
primary products are its foldable intraocular lenses ("IOLs"), its Glaucoma
Wick(TM), a "wick" style glaucoma implant, its Implantable Contact Len(TM)
("ICL(TM)"), a deformable intraocular refractive corrective lens, and its
STAARVISC(TM) viscoelastic solution.
The Company's foldable IOLs are used as replacements for the natural lens
after its removal in cataract surgery. The ophthalmic surgeon can implant the
foldable IOL through an incision as small as two millimeters. This provides
numerous patient benefits including reduced risk of infection, decreased post-
operative pain and discomfort, and shorter hospitalization and recovery time.
The Glaucoma Wick(TM) is an innovative ocular device developed to provide a
more effective and longer-term solution for glaucoma, a leading cause of
blindness worldwide. The ICL(TM) is a deformable intraocular implant designed
to correct refractive disorders, such as myopia (near-sightedness), hyperopia
(far-sightedness) and potentially astigmatism. STAARVISC(TM) is a viscoelastic
solution used during IOL and ICL(TM) implant procedures.
The Company markets its IOLs, which accounted for 90% of its domestic
revenues and 74% of its international revenues in 1997, respectively. The
Company markets the Glaucoma Wick(TM), which the Company introduced in late
1995, and its ICLs(TM) and STAARVISC(TM) viscoelastic solution, which the
Company introduced in late 1996, in selected foreign countries.
Development of Business Over Past Five Years and Relevant Prior Events
The Company was incorporated in California in 1982 as a successor to a
partnership for the purpose of developing, producing and marketing IOLs and
other products for minimally invasive ophthalmic surgery. The Company was
reincorporated in Delaware in April 1986.
In 1982 and 1983 the Company's operations consisted mainly of research and
development and preliminary marketing and capital raising activities. In 1982
the Company commenced the development of foldable IOLs in association with Dr.
Thomas R. Mazzocco, M.D., who patented the concept of folding or otherwise
deforming an IOL or ICL(TM) for use in minimally invasive surgery. The Company
acquired Dr. Mazzocco's patent, and began production and sale of foldable IOLs
in 1986 for implantation in connection with clinical studies for such
1
products. In September 1991, the Company received United States Food and Drug
Administration ("FDA") pre-market approval for its foldable IOLs, which has
been the Company's principal product line to date. See "Intellectual Property
Rights" and "Products" in Item 1.
In May 1995 and January 1996, the Company acquired certain exclusive royalty
bearing licenses from Intersectoral Research and Technology Complex Eye
Microsurgery ("IRTC") related to its glaucoma device and implantable contact
lens. See "Licenses and Distribution Rights" and "Products" in Item 1.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Through 1997 the Company operated primarily within the cataract medical
device segment of the overall ophthalmic market. Information relating to the
Company's financial condition for the fiscal years ended January 2, 1998,
January 3, 1997 and December 29, 1995 is set forth in "Item 8--Financial
Statements and Supplementary Data." In late 1995 the Company introduced the
Glaucoma Wick(TM), and in late 1996 the Company introduced the ICL(TM) and
STAARVISC(TM) viscoelastic solution, for sale in selected foreign countries.
NARRATIVE DESCRIPTION OF BUSINESS
Background
The human eye is a specialized sensory organ capable of light reception and
able to receive 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 typically a spherically
shaped 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
which changes shape to better focus the 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 iris 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 low pressure in the anterior chamber of the eye by draining
excess aqueous humour.
The eye is affected by a number of ocular diseases, such as cataracts and
glaucoma, and by common visual refractive disorders, such as myopia, hyperopia
and astigmatism. Cataracts are an irreversible and progressive ophthalmic
condition wherein the eye's natural lens loses its usual transparency and
becomes opaque. Glaucoma results from the build-up of excessive intraocular
pressure, primarily due to poor drainage of the aqueous humor. The increase in
pressure slowly and progressively damages the optic disc, resulting in a
gradual loss of vision. Myopia and hyperopia are caused by an anatomical
imbalance between the shape of the eye and the resulting distance between the
cornea and the retina. Astigmatism is caused by irregularities in the
smoothness and curvature of the cornea, causing improper focusing of the
incoming light on the retina and consequential blurring of vision.
Markets
The market for ophthalmic products is a large and dynamic segment of the
healthcare industry. The major factors influencing this market are the aging
worldwide population, significant technological medical advancements which
have created cost effective treatments and therapies, the evolution toward
managed care and the growing importance of international markets. The
Company's products serve the following segments of the ophthalmic market:
Cataract Lenses. Cataracts occur in varying degrees in approximately one-
half of Americans between the ages of 65 and 75, and approximately 70% of
those over the age of 75. Approximately 20% to 25% of cataract patients have
pre-existing astigmatism. Industry sources estimate that approximately 2.3
million IOLs were
2
implanted in the United States in 1997, generating approximately $242 million
in sales. The Company believes approximately 2.5 million IOLs were implanted
outside the United States during 1997 (not including China and Russia, for
which no reliable data exists), generating an additional $350 million of
sales. The Company believes that approximately 65% of the domestic market for
IOLs in 1997 was held by foldable IOLs, compared to approximately 15% in 1992,
and that approximately 35% to 45% of the international market share is
presently held by foldable IOLs. The Company believes the share of the
worldwide market held by foldable IOLs will continue to increase by virtue of
the benefits of foldable IOLs over hard IOLs.
Glaucoma Treatments. This market encompasses drug therapies as well as
traditional and laser surgical procedures for use in mitigating the effects of
glaucoma. There is no known cure for glaucoma; the most commonly prescribed
glaucoma drugs either inhibit the build-up of intraocular fluid or promote
increased drainage, in either case reducing intraocular pressure and eye
damage. Traditional surgical procedures for glaucoma (trabeculectomies) 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 trabeculectomy or trabeculoplasty is,
in part, dependent upon the stage of the disease and the prevailing glaucoma
treatment used in the country in which the treatment is given.
The Company believes that glaucoma currently afflicts approximately three
million persons in the United States, and that the number of international
cases exceeds that of the United States. The worldwide market for glaucoma
drugs is approximately $850 million, including approximately $450 million from
the sale of a single glaucoma drug. It is estimated that 100,000
trabeculectomies and 300,000 laser trabeculoplasties were performed in the
United States alone in 1994, representing total expenditures of approximately
$400 million. The Company believes glaucoma surgery is more prevalent than
glaucoma drug therapy in certain foreign countries due to cost and other
considerations.
Refractive Vision Correction. The refractive vision correction market
includes corrective eyewear such as eyeglasses and external contact lenses and
traditional and laser surgical procedures. Approximately 50% of the world's
population is afflicted with common refractive vision disorders such as
myopia, hyperopia and astigmatism, and approximately 150 million people within
the United States currently use some form of eyewear to correct for these
disorders. In 1996, the vision correction market in the United States was
approximately $15 billion. This market includes corrective eyeglasses,
external contact lenses and various surgical procedures such as radial
keratotomy ("RK"), a conventional surgical technique, and photorefractive
keratectomy ("PRK") and laser in-situs keratomileusis ("LASIK"), surgical
techniques performed with the use of a laser. It is estimated that over one
million RK procedures have been performed in the United States, most of which
have occurred since 1989. In 1995, 350,000 RK procedures were performed, at an
average cost of $1,000 to $3,000 per procedure. Management believes that
surgeons have used PRK and LASIK, more recently developed refractive surgery
techniques, in an estimated one million procedures to date worldwide. The
procedure was approved in the United States in 1996. Laser procedures are
expected to gain market share from RK. Industry sources estimate that the
number of laser procedures in the United States could reach 300,000 in 1998,
representing a potential market of $450 million. Approximately seven million
people in the United States are afflicted with severe cases of myopia and
hyperopia of greater than seven diopters which are not currently addressed by
existing conventional or laser surgical procedures and frequently can be only
partially corrected with eyeglasses and external contact lenses.
Viscoelastic Solution Products. The viscoelastic solution market relates to
gel-like substances used during ophthalmic surgeries to maintain the space and
shape of the eye, to act as a buffer against cell damage and to otherwise act
as a lubricant for minimally invasive eye surgery. Industry studies indicate
that approximately 2.8 million units of viscoelastic solution were sold within
the United States in 1997, generating approximately $148 million in sales.
Management believes the international market for viscoelastic solution is at
least the size of the domestic market for this product.
3
Strategy
The Company's strategy is to increase its share of the worldwide market for
ophthalmic products through the development and marketing of innovative "next
generation" products and technologies which utilize minimally invasive
surgical procedures. The key elements of this strategy are to: (i) develop
products that deliver distinct clinical and economic benefits to patients and
surgeons; (ii) maintain a leading technological role in the industry; and
(iii) expand markets worldwide.
Products
The Company develops, manufactures and globally distributes medical devices
used in minimally invasive ophthalmic surgery. The Company's products are
designed to: (i) improve patient outcomes; (ii) minimize patient risk and
discomfort; and (iii) simplify ophthalmic procedures for the benefit of
surgeons and patients. The Company's principal customers are ophthalmologists,
surgical centers, hospitals, managed care providers, health maintenance
organizations and group purchasing organizations.
Intraocular Lenses (IOLs) and Related Cataract Products. The Company's
principal products are its foldable IOLs for use in minimally invasive
cataract surgical procedures. The Company's IOLs can be folded or otherwise
deformed, and therefore can be implanted into the eye through an incision as
small as 2 mm. Once inserted, the Company's IOL unfolds naturally into the
capsular bag which previously held the cataractous lens. The primary
advantages of using minimally invasive surgical procedures are:
. Fewer Surgical Complications. A smaller incision minimizes eye trauma
and the potential for infection. In addition, the Company's foldable IOL
can typically be implanted under topical anesthesia, thereby avoiding
complications associated with the administration of local anesthesia.
. Reduced Level of Surgically Induced Astigmatism. The ability to
eliminate sutures as a result of the smaller incision leads to a
reduction in the incidence of surgically induced astigmatism caused by
uneven healing of the surgical wound.
. Faster Recovery of Vision. Patients can typically recover their best
vision the same day the procedure is performed, as opposed to thirty- to
forty-five days following surgery in the case of hard IOLs.
. Enhanced Benefits to Surgeons. The use of foldable IOLs enables
ophthalmologists to more quickly perform surgical procedures at lower
cost, and with greater ease and consistently higher quality outcomes.
The Company's foldable IOLs come in two differently configured styles, the
advanced single-piece ELASTIC(TM) model, and the ELASTIMIDE(TM) model based
upon the traditional three-piece design. The selection of one model over the
other is primarily based upon the preference of the ophthalmologist, although
the Company believes more experienced ophthalmologists prefer the single-piece
ELASTIC(TM) model. Sales of foldable IOLs accounted for approximately 85% of
total revenues for its 1997 fiscal year, 91% of total revenues for its 1996
fiscal year, and 97% of the Company's total revenues for its 1995 fiscal year.
The Company has developed, and currently markets in selected foreign
countries, its TORIC(TM) IOL, a toric version of its ELASTIC(TM) IOL, which is
specifically designed for patients with pre-existing astigmatism. The Company
is the only IOL manufacturer to offer a product for astigmatism. In July 1997,
the Company received a CE Mark allowing it to sell its toric IOL in each of
the countries comprising the European Union. The Company has completed
clinical studies for the TORIC(TM) IOL, and filed a pre-market application to
market this product in the United States with the FDA. The pre-market
application has been approved by the FDA pending review and approval by the
FDA ophthalmic panel. The Company anticipates that the ophthalmic panel will
review the application in mid-1998 and, if the panel approves the application,
the FDA will grant final pre-market approval to market the TORIC(TM) IOL in
the United States shortly thereafter. No assurance can be given as to when or
if ophthalmic panel and/or FDA pre-market approval for this product will be
obtained.
4
As part of its approach to providing a complete line of complementary
products for use in minimally invasive cataract surgery, the Company also
markets several styles of lens injectors and sterile cartridges used to insert
its IOLs, a phacoemulsification machine used to remove the cataractous lens,
and several styles of disposable and reusable surgical packs and ultrasonic
cutting tips used with the Company's phacoemulsification machine.
Glaucoma Wick(TM). The Glaucoma Wick(TM) is a medical device surgically
implanted into the eye to reduce intraocular pressure ("IOP"). It is made of
biocompatible material which, through its porosity and hydrophilic properties,
promotes drainage of excess eye fluid. The Glaucoma Wick(TM) is specifically
designed for patients suffering from open-angled glaucoma, which is the most
prevalent type of glaucoma. In contrast to trabeculectomies and
trabeculoplasties, implantation of the Glaucoma Wick(TM) does not require
penetration of the anterior chamber of the eye. Instead, a small flap of the
outer eye tissue is folded back, the Glaucoma Wick(TM) is placed above the
trabecular meshwork and the outer flap is refolded into place. The Glaucoma
Wick(TM) swells to approximately five to ten times its original size, and is
absorbed within one to six months after implantation, creating a new drainage
pathway. The fifteen- to thirty-minute surgical procedure to implant the
Glaucoma Wick(TM) is performed under local or topical anesthesia, typically on
an outpatient basis.
Management believes the hydrophilic properties of the Glaucoma Wick(TM) and
the minimally invasive nature of the surgery offer several advantages over
existing surgical procedures, including: (i) greater efficacy, (ii) a longer-
term solution, (iii) reduced risk of surgical complications, and (iv) cost
effectiveness.
The Company believes the Glaucoma Wick(TM) is an attractive product for: (i)
managed care and health maintenance organizations and group purchasing
organizations who desire to control their costs and at the same time provide
their customers with a higher standard of health care; (ii) less developed
countries which lack the resources and infrastructure to provide continuous
treatments; and (iii) ophthalmic surgeons who have traditionally referred
their patients to glaucoma specialists. Adoption by ophthalmic surgeons,
however, will be dependent upon the rate at which they learn the advanced
surgical skills necessary to perform the implant or at which time
instrumentation is developed to simplify the procedure. The Company will
promote this product by educating surgeons through its highly trained
technical sales force. See "Uncertainties and Risk Factors--Risks Relating to
Commercialization of New Products" in Item 7.
The Company introduced the Glaucoma Wick(TM) in late 1995 for commercial
sale on a limited basis in South Africa and selected countries in Europe and
South America. In August 1997, the Company received a CE Mark allowing it to
sell the Glaucoma Wick(TM) in each of the countries comprising the European
Union. In November 1997, the FDA granted the Company an IDE permitting the
Company to conduct a single-phase clinical study allowing the Company to
implant the Glaucoma Wick(TM) in 175 patients. The Company would, after
concluding this study, submit a pre-market application to the FDA for approval
of the Glaucoma Wick(TM). No assurance can be given that the clinical study
will be successful and, if so, as to when or if FDA 510(k) clearance for this
product will be obtained. See "Uncertainties and Risk Factors--Government
Regulation and Uncertainty of Product Approval" in Item 7.
Implantable Contact Lenses(TM) (ICLs(TM)). ICLs(TM) are medical devices
implanted in the eye to permanently correct common refractive vision disorders
including myopia, hyperopia and potentially astigmatism. The ICL(TM) is
initially targeted to persons afflicted with severe hyperopia and myopia
(defined as more than seven diopters) which are not currently being addressed
through current traditional or laser surgical procedures, and frequently can
be only partially corrected with eyeglasses or external contact lenses. The
Company believes that these individuals, who suffer significant vision
impairment, are the most likely to seek surgical alternatives. The Company
also believes the ICL(TM) will be an attractive alternative for individuals
afflicted with moderate cases of myopia and hyperopia.
The Company's ICL(TM) is folded and implanted into the eye behind the iris
and in front of the normal lens using minimally invasive surgical techniques
similar to implanting an IOL during cataract surgery, except that the human
lens is not removed. The five- to twenty-minute surgical procedure to implant
the ICL(TM) is typically performed with topical anesthesia on an outpatient
basis.
5
Management believes the use of an ICL(TM) affords a number of advantages
over existing refractive surgical procedures, such as RK, PRK and LASIK,
including the following: (i) potentially corrects all levels of myopia and
hyperopia; (ii) may provide superior predictability of results; (iii) enables
faster recovery of vision and rehabilitation; and (iv) produces potentially
superior refractive results.
The Company commenced commercial sales of ICLs(TM) in late 1996 on a limited
basis in South Africa, China, and selected countries in Europe and South
America. In August 1997, the Company received a CE Mark allowing it to sell
the ICL(TM) in each of the countries comprising the European Union. In
February 1997, the FDA granted the Company an IDE to commence clinical studies
consisting of three distinct phases within the United States. The Company has
completed the first phase of the IDE, pursuant to which the Company has
implanted ten ICLs(TM) each for myopia and hyperopia, and is presently engaged
in the second phase of the IDE, pursuant to which the Company will implant 62
ICLs(TM) each for myopia and hyperopia. No assurance can be given as to the
ultimate results of the second phase of the clinical study, whether the FDA
will grant approval to expand the study to the third phase, or as to when or
if the FDA will grant pre-market approval for the ICL(TM). See "Uncertainties
and Risk Factors--Government Regulation and Uncertainty of Product Approval"
in Item 7.
Viscoelastic Solution Products. Viscoelastic solution is a gel-like
substance which can be used during IOL and ICL(TM) surgery to assist the
ophthalmic surgeon in establishing and maintaining the space and shape of the
anterior and posterior chambers of the eye. It also acts as a resilient buffer
to protect against inadvertent damage to the vital endothelial cells in the
eye. Viscoelastic solution is also effective as a lubricant for injection of
foldable IOLs and ICLs(TM) using minimally invasive surgical procedures. The
Company believes it can effectively market its STAARVISC(TM) hyaluronic acid-
based viscoelastic solution in conjunction with its foldable IOL and ICL(TM)
products.
The Company introduced its STAARVISC(TM) viscoelastic solution in late 1996
for commercial sale on a limited basis in Canada and selected countries in
Europe and South America. In August 1997, the Company received a CE Mark
allowing it to sell its STAARVISC(TM) viscoelastic solution in each of the
countries comprising the European Union. The only significant pending action
necessary to obtain FDA pre-market approval to commercially market
STAARVISC(TM) within the United States is satisfaction of FDA regulations
pertaining to Good Manufacturing Practices. The Company believes it has
addressed all matters raised by the FDA concerning Good Manufacturing
Practices and expects to receive FDA pre-market approval in the near future.
See "Uncertainties and Risk Factors--Government Regulation and Uncertainty of
Product Approval" in Item 7.
Research and Development
The Company is focused on furthering technological advancements in the
ophthalmic products industry through continuous development and innovation of
ophthalmic products and materials, and related surgical techniques to promote
these products. See "Business--Strategy" above. The Company maintains an
active internal research and development program comprised of over 25
employees. Over the past year, the Company has principally focused its
research and development efforts on: (i) developing the Company's ICLs,
Glaucoma Wick(TM) and TORIC(TM) IOL; (ii) improving insertion and delivery
systems for the Company's foldable IOLs; and (iii) generally improving the
manufacturing systems and procedures for all products to reduce manufacturing
costs. Research and development expenses amounted to approximately $3,936,000,
$4,085,000 and $3,254,000 for the Company's 1997, 1996 and 1995 fiscal years,
respectively.
Marketing, Selling and Distribution
The Company maintains a highly trained sales force that works closely with
its customers (primarily surgeons and other health care providers) to educate
them on the benefits of its products, and the skills and techniques needed to
perform minimally invasive surgical procedures. The Company supplements its
direct sales efforts through advertising in medical and trade journals and by
sponsoring surgical procedure courses, seminars and technical presentations
chaired by leading ophthalmologists.
6
The Company's products are sold domestically through a network of
independent regional manufacturers representatives and their territorial
representatives. International sales are primarily conducted through the
Company's subsidiaries that sell through independent sales representatives
engaged on a basis similar to that of sales representatives within the United
States. In countries where the Company's subsidiaries do not have a direct
presence, sales are conducted through country or area medical distributors.
Competition
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
the Company's products obsolete or less competitive. The Company will be
required to devote continued efforts and significant financial resources to
enhance its existing products and/or develop new products for the ophthalmic
industry. See "Uncertainties and Risk Factors--Highly Competitive Industry;
Rapid Technological Change" in Item 7.
The Company believes its primary competition for foldable IOLs includes
Bausch & Lomb Surgical ("Bausch & Lomb"), a subsidiary of Bausch & Lomb,
Incorporated; Allergan Medical Optics ("AMO"), a subsidiary of Allergan, Inc.
("Allergan"); Alcon Surgical, Inc. ("Alcon"), a subsidiary of Alcon
Laboratories, Inc.; Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn") and Mentor
Corporation ("Mentor"). Each of these competitors is a licensee of the
Company's foldable patents. Significant competitors in the hard IOL market are
believed to include Bausch & Lomb, AMO, Pharmacia & Upjohn, Alcon and Mentor.
The Company's primary competition for glaucoma products is from
pharmaceutical companies. The Company believes Merck & Company, Inc., Alcon,
Allergan and Bausch & Lomb are the largest providers of glaucoma drugs within
the United States, and CIBA Vision Corporation, a subsidiary of CIBA-GEIGY
Corporation, Pharmacia & Upjohn and Lederle Laboratories, a subsidiary of
American Home Products, are the largest internationally. The portion of this
market held by glaucoma devices is insignificant at present.
The Company will face significant competition for its ICLs(TM) generally
from manufacturers and distributors of corrective eyeglasses and external
contact lenses, and particularly from providers of conventional and laser
surgical procedures. The Company believes its primary competitors for laser
surgical procedures are Summit Technology, Inc. ("Summit"), VISX, Incorporated
("VISX"), Sunrise Medical, Bausch & Lomb and Nidek Co., Ltd. Summit's and
VISX's excimer lasers for PRK are the only products which have received pre-
market approval from the FDA for sale within the United States. KeraVision,
Inc. is developing the corneal ring.
Pharmacia & Upjohn, which distributes and manufactures a hyaluronic acid-
based viscoelastic solution known as Healon(TM), is the primary competitor for
this product. Other companies, such as AMO, Bausch & Lomb and Alcon, also sell
viscoelastic type products.
Manufacturing and Suppliers
The Company principally manufactures its IOLs at its facilities located in
California, and its Glaucoma Wick(TM) and ICLs(TM) at its facilities located
in Switzerland. Many components of the Company's products are purchased to its
specifications from suppliers or subcontractors. Most of these components are
standard parts available from multiple sources at competitive prices. The
Company presently has one supplier of silicone, the principal raw material for
its lenses, although it can purchase this raw material from several
distributors. Similarly, certain items used by the Company in its disposable
surgical packs are provided by a single supplier. The Company's PHACO XL(TM)
phacoemulsification machine is being manufactured for the Company by
unaffiliated third parties. If any of these supply sources becomes
unavailable, the Company believes that it would be able to secure alternate
supply sources within a short period of time and with minimal or no
disruption.
7
Licenses and Distribution Rights
The Company has granted licenses to certain of its patents, trade secrets
and technology, including its 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 AMO, Alcon, Bausch &
Lomb, Mentor and Canon STAAR, a joint venture owned equally by the Company and
Canon, Inc. and Canon Sales Co., Inc. Included in some of the licenses granted
are licenses to certain of the Company's foldable patents which were granted
on an exclusive basis to Canon STAAR (for Japan only), on a non-exclusive
basis to Alcon, Bausch & Lomb, Mentor and Canon STAAR (with respect to the
world other than Japan), and on a co-exclusive basis to AMO. At the time these
licenses were granted, the Company received substantial pre-payments of
royalties on all but one of the licenses. The pre-payment period on many of
these licenses have since lapsed or will lapse in the near future. The
Company's business strategy is not dependent upon realizing royalties from
these licenses in the future.
In May 1995, IRTC granted an exclusive royalty bearing license to STAAR
Surgical AG to manufacture, use and sell IRTC's glaucoma devices in the United
States, Europe, Latin America, Africa, Asia and Japan, and non-exclusive
rights with respect to the countries in the Commonwealth of Independent States
(or 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 ICLs(TM) using IRTC's biocompatible materials in the
United States, Europe, Latin America, Africa, Asia and Japan, and non-
exclusive rights with respect to the Commonwealth of Independent States. The
terms of these licenses extend for the life of the patents. In connection with
these licenses, IRTC also assigned its patent for its biocompatible material
for IOLs and ICLs(TM) to the Company. The Company has since adopted IRTC's
biocompatible material and glaucoma device design for the Company's Glaucoma
Wick(TM), and has incorporated IRTC's biocompatible materials for use with the
Company's proprietary ICL(TM) design.
Significant Subsidiaries
The Company's only significant subsidiary is STAAR Surgical AG, a wholly
owned subsidiary formed in Switzerland to develop, manufacture and distribute
worldwide certain of the Company's products, including its Glaucoma Wick(TM)
and ICLs(TM). The Company and STAAR Surgical AG have also formed or acquired a
number of directly or indirectly owned subsidiaries to distribute and market
the Company's products in selected foreign countries.
Facilities
The Company's executive and its principal manufacturing and warehouse
facilities are located in Monrovia, California. STAAR Surgical AG maintains
executive offices and manufacturing and warehouse facilities in Berne,
Switzerland The Company also maintains complete laboratory facilities in each
of its Monrovia and Berne facilities. Certain of the Company's distribution
subsidiaries also lease storage facilities to facilitate their distribution
activities. See "Item 2--Properties."
The Company believes that its existing facilities have been adequate for its
needs, and will continue to be adequate for existing levels of operations. The
Company expects no difficulties in renewing leases, or replacing or making
additions to its existing facilities or in establishing new facilities.
Employees and Labor Relations
The Company and its subsidiaries had a total of 269 employees as of January
2, 1998, including 54 in administration, 55 in marketing and sales, 26 in
research and development and technical services and 134 in manufacturing,
quality control and shipping. The Company and its subsidiaries are non-
unionized. The Company believes that its relations with its employees are
good.
8
Intellectual Property Rights
The Company and/or its licensors have pending patent applications and issued
patents in various countries relating specifically to the Company's products
or various aspects thereof, including the Company's core patent (the "Mazzocco
Patent") relating to methods of folding or deforming a foldable IOL or ICL(TM)
for use in minimally invasive surgery. The Mazzocco Patent was granted by the
United States Patent Office in March 1986 to Dr. Thomas Mazzocco, M.D., a
practicing ophthalmologist and a co-founder of the Company. The Company has
since obtained patent protection for the Mazzocco Patent or made application
for such protection in certain foreign countries. The Company has also
received an assignment from IRTC of its patents for glaucoma devices and
biocompatible material for IOLs.
The Company has obtained a registered trademark on the mark STAAR and
associated logo. The Company also has common law trademark rights to a number
of other marks and has also applied for registration for a number of these
marks.
An adverse decision from a Court of competent jurisdiction affecting the
validity or enforceability of the Company's patents (principally the Company's
core Mazzocco Patent) or proprietary rights owned by or licensed to the
Company could have, depending generally on the economic importance of the
country or countries to which such patents or proprietary rights relate, an
adverse effect on the Company and on its business prospects. Legal costs
relating to prosecuting or defending patent infringement litigation may be
substantial. Costs of litigation related to successful prosecution of patent
litigation are capitalized and amortized over the estimated useful life of the
relevant patent. There can be no assurance that the Company will be able to
successfully defend its patents and proprietary rights in the future. See
"Uncertainties and Risk Factors--Patents and Proprietary Rights" in Item 7.
Regulatory Requirements
The Company's products are subject to regulatory approval or clearance in
both the United States and in foreign countries. The following discussion
outlines the various kinds of reviews to which the Company's products or
facilities may be subject.
Clinical Regulatory Requirements Within the United States. Most of the
Company's products are subject to regulation as medical devices by the FDA,
requiring FDA approval or clearance before they can be sold within the United
States, and mandating continuous compliance of the Company's manufacturing
facilities and distribution procedures with FDA regulations, including "Good
Manufacturing Practices."
Initial approval or clearance of medical devices for sale is subject to
differing levels or types of FDA review and evaluation depending on the
classification of the device under the Food, Drug and Cosmetic Act
("FD&C Act") and whether the use of the medical device can be demonstrated to
be substantially equivalent to a directly related medical device in commerce
prior to May 1976 (the month and year of enactment of the FD&C Act).
Pursuant to the FD&C Act, medical devices are classified as either Class I,
Class II or Class III devices. If classified as a Class I device, the medical
device will be subject only to general controls which are applicable to all
devices. Such controls include regulations regarding FDA inspections of
facilities, "Good Manufacturing Practices," labeling, maintenance of records
and filings with the FDA. If classified as a Class II device, the medical
device must also meet general performance standards established by the FDA. If
classified as a Class III device, the applicant must present sufficient data
derived through clinical studies demonstrating the product's safety,
reliability and effectiveness.
FDA approval for a Class III device begins with the submission of an
application for an Investigational Device Exemption or IDE which, if granted,
will permit the implantation of a limited number of products (typically less
than 100) on a clinical study basis. Based upon the results from the initial
core population, the FDA will then allow one or more additional core studies
to be performed, typically 500 to 700 implants. The
9
complete clinical results will then be reviewed by an FDA advisory panel of
outside experts. If the advisory panel approves the product based upon the
results, the FDA will then generally grant pre-market approval assuming
satisfaction of its other requirements. The grant of an IDE, the performance
of clinical studies, the submission of an application for pre-market approval,
and advisory panel approval, may take three to ten years depending, in part,
upon the complexity and known attributes or history of the medical device.
A medical device that is substantially equivalent to a directly related
medical device previously in commerce may be eligible for abbreviated FDA pre-
market notification "510(k) review" process. 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 often take
significantly longer than 90 days. 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 Company's IOLs, ICLs(TM), Glaucoma Wick(TM) and STAARVISC(TM)
viscoelastic solution are Class III devices, and its phacoemulsification
equipment, lens injectors, ultrasonic cutting tips and surgical packs are
Class II devices. The Company has received FDA pre-market approval for its
IOLs (other than its TORIC(TM) IOL), and FDA 510(k) clearance for its
phacoemulsification equipment, lens injectors, ultrasonic cutting tips and
surgical packs. The Company is presently conducting clinical studies under an
IDE for its ICL(TM) (second of three phases) and its Glaucoma Wick(TM) (single
phase). The Company believes it has addressed all matters raised by the FDA
concerning its STAARVISC(TM) viscoelastic solution and expects to receive FDA
pre-market approval in the near future. The Company anticipates that the FDA's
ophthalmic panel will review the Company's pre-market application for the
TORIC(TM) IOL in mid-1998 and, if the panel approves the application, the FDA
will grant final pre-market approval to market the TORIC(TM) IOL in the United
States shortly thereafter.
The Company is also subject to mandatory Medical Device Reporting ("MDR")
regulations which obligate the Company to provide information to the FDA on
injuries alleged to have been associated with the use of a product or in
connection with certain product failures which could cause injury.
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 virtually no
requirements to a level comparable to or even greater than those of the FDA.
For example, many countries in South America have minimal regulatory
requirements, while many developed countries, such as Japan and Germany, have
conditions at least as stringent as those of the FDA. FDA acceptance is not
always a substitute for foreign government approval or clearance.
The member countries of the European Economic Union (the "Union") currently
permit, and by June 14, 1998 will require, all medical products sold within
their borders to carry a "CE" marking. The CE marking denotes that the
applicable medical device has been found to be in compliance with guidelines
concerning manufacturing and quality control, technical specifications and
biological/chemical and clinical safety. The CE marking supersedes all current
medical device regulatory requirements for Union countries. The Company has
obtained the CE mark for all of its principal products, including its IOLs
(including the TORIC(TM) IOL), ICLs(TM), Glaucoma Wick(TM) and STAARVISC(TM)
viscoelastic solution.
Other Regulatory Requirements. Sales of the Company's products may be
affected by health care reimbursement practices. For example, in January 1994,
the Health Care Financing Administration ("HCFA") adopted rules that limit
medicare reimbursement for IOLs implanted in ambulatory surgical centers to a
flat fee of $150. HCFA's medicare reimbursement rate for IOLs implanted in
hospitals was set at $150 plus 50% of cost.
The Company is also subject to various federal, state and local laws
applicable to its operations including, among other things, working
conditions, laboratory and manufacturing practices, and the use and disposal
of
10
hazardous or potentially hazardous substances used in connection with research
work. The extent of government regulation which might result from future
legislation or administrative action and their potential adverse impact on the
Company cannot be accurately predicted.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Approximately $30,397,000, $29,069,000 and $26,561,000 in the Company's
overall revenues were generated in the United States for its 1997, 1996 and
1995 fiscal years, respectively, constituting approximately 67%, 69% and 77%
of its overall revenues for such fiscal years, respectively. Europe, which is
the Company's principal foreign market, generated approximately $8,924,000,
$8,173,000 and $4,841,000 in revenues for the Company's 1997, 1996 and 1995
fiscal years, respectively, constituting approximately 20%, 19% and 14% of the
Company's overall revenues for such respective fiscal years. The balance of
the Company's foreign sales were distributed amongst the Asian/Pacific, Middle
Eastern, South African and South American geographic areas. Substantially all
products sold in 1997 were manufactured in the United States. See Note 16 to
the Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company's Monrovia, California, facilities consist of leased industrial
buildings of approximately 92,000 square feet. The leases expire between 1998
and 2002, and currently require aggregate payments of approximately $37,000
per month. STAAR Surgical AG's facilities in Berne, Switzerland, consist of a
leased industrial building of approximately 11,000 square feet. The lease
expires in 2000, and currently require payments of approximately $10,000 per
month. See "Narrative Description of Business--Facilities," in Item 1 above.
ITEM 3. PENDING LEGAL PROCEEDINGS
Not applicable.
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 2, 1998.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock is quoted on the National Association of
Securities Dealers Automatic Quotation ("Nasdaq") National Market under the
symbol "STAA." The following table sets forth the reported high and low sale
prices and volume of trading of the Common Stock as reported by Nasdaq for the
calendar periods indicated:
PERIOD HIGH LOW
------ ------- -------
1997:
Fourth Quarter............................................. $18.625 $14.375
Third Quarter.............................................. 18.125 10.500
Second Quarter............................................. 14.125 9.625
First Quarter.............................................. 14.125 9.875
1996:
Fourth Quarter............................................. $14.375 $10.375
Third Quarter.............................................. 16.500 11.875
Second Quarter............................................. 17.875 12.375
First Quarter.............................................. 14.750 9.875
1995:
Fourth Quarter $12.675 $ 9.875
Third Quarter.............................................. 12.750 8.250
Second Quarter............................................. 11.375 7.500
First Quarter.............................................. 13.125 7.875
The last reported sale price for the Company's Common Stock on the Nasdaq
National Market on March 24, 1998, was $15.75 per share. As of March 24, 1998,
there were approximately 1,206 record holders of the Common Stock.
The Company has not paid any cash dividends on its Common Stock since its
inception. The Company currently anticipates that all income will be retained
to develop further the Company's business and that no cash dividends on the
Common Stock will be declared in the foreseeable future.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company with respect to the Company's five most recent fiscal years ended
January 2, 1998, January 3, 1997, December 29, 1995, December 30, 1994 and
December 31, 1993. The selected consolidated statement of operations data set
forth below for each of the three fiscal years in the period ended January 2,
1998, and the selected consolidated balance sheet data set forth below at
January 2, 1998 and January 3, 1997, are derived from the Consolidated
Financial Statements of the Company 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 operations data set forth below for each of the two fiscal years
in the period ended December 30, 1994, and the consolidated balance sheet data
set forth below at December 29, 1995, December 30, 1994 and December 31, 1993,
are derived from the Company's audited consolidated financial statements not
included elsewhere in this Annual Report. The selected consolidated financial
data should be read in conjunction with the Consolidated Financial Statements
of the Company, 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
------------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 29, DECEMBER 30, DECEMBER 31,
1998 1997 1995 1994 1993
---------- ---------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Sales................... $42,480 $41,213 $34,180 $26,333 $19,603
Royalty income.......... 3,040 1,000 514 1,020 473
------- ------- ------- ------- -------
Total revenues...... 45,520 42,213 34,694 27,353 20,076
Cost of sales........... 10,262 10,196 8,441 6,059 3,980
------- ------- ------- ------- -------
Gross profit........ 35,258 32,017 26,253 21,294 16,096
Costs and expenses:
General and
administrative....... 6,334 5,628 5,000 4,365 4,907
Marketing and selling. 12,719 12,227 10,911 8,694 6,998
Research and
development.......... 3,936 4,085 3,254 2,718 2,260
------- ------- ------- ------- -------
Total costs and
expenses........... 22,989 21,940 19,165 15,777 14,165
Operating income........ 12,269 10,077 7,088 5,517 1,931
Other income (expense).. (579) 153 303 625 685
------- ------- ------- ------- -------
Income before income
taxes.................. 11,690 10,230 7,391 6,142 2,616
Income tax provision
(benefit)(1)........... 4,271 3,339 (91) (2,184) 81
------- ------- ------- ------- -------
Net income.............. $ 7,419 $ 6,891 $ 7,482 $ 8,326 $ 2,535
======= ======= ======= ======= =======
Basic net income per
share.................. $ 0.57 $ 0.53 $ 0.59 $ 0.67 $ 0.21
======= ======= ======= ======= =======
Diluted net income per
share.................. $ 0.53 $ 0.50 $ 0.55 $ 0.63 $ 0.20
======= ======= ======= ======= =======
Weighted average number
of basic shares........ 13,124 12,910 12,756 12,514 12,335
======= ======= ======= ======= =======
Weighted average number
of diluted shares...... 14,113 13,867 13,679 13,170 12,823
======= ======= ======= ======= =======
BALANCE SHEET DATA:
Working capital......... $24,936 $15,000 $16,335 $14,166 $ 7,354
Total assets............ 62,391 52,056 38,803 28,888 18,776
Notes payable and cur-
rent portion of long-
term debt.............. 1,608 8,193 4,029 1,792 1,634
Long-term debt.......... 5,750 844 1,212 572 0
Stockholders' equity.... 44,783 36,604 28,678 22,029 11,986
- --------
(1) Includes recognition of deferred tax asset of $2.4 million for 1994 and
$900,000 for 1995. See Note 7 to the Company's Consolidated Financial
Statements.
13
The following table sets forth unaudited operating data for each of the
specified quarters of fiscal years 1996 and 1997. This quarterly information
has been prepared on the same basis as the annual consolidated financial
statements and, in the opinion of management, contains all adjustments
necessary to state fairly the information set forth herein. The sum of the
four quarters earnings per share may not agree to the fiscal year earnings per
share due to rounding. The unaudited quarterly financial data presented below
has not been subject to a review by BDO Seidman, LLP, the Company's
independent certified public accountants.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
For the Fiscal Year Ended January 2, 1998
Revenues................................. $10,555 $11,584 $11,825 $11,556
Gross profit............................. $ 8,095 $ 8,889 $ 9,065 $ 9,209
Net income............................... $ 1,749 $ 1,953 $ 2,064 $ 1,653
Basic income per share................... $ 0.13 $ 0.15 $ 0.16 $ 0.13
Diluted income per share................. $ 0.13 $ 0.14 $ 0.14 $ 0.12
For the Fiscal Year Ended January 3, 1997
Revenues................................. $ 9,529 $10,327 $10,799 $11,557
Gross profit............................. $ 7,255 $ 7,885 $ 8,164 $ 8,713
Net income............................... $ 1,498 $ 1,745 $ 1,775 $ 1,873
Basic income per share................... $ 0.12 $ 0.13 $ 0.14 $ 0.14
Diluted income per share................. $ 0.11 $ 0.12 $ 0.13 $ 0.14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, manufactures and globally distributes medical devices
used in minimally invasive ophthalmic surgery. The Company's primary products
are its foldable IOLs, its Glaucoma Wick(TM), its ICLs(TM) and its
STAARVISC(TM) viscoelastic solution. The Company markets its principal
products, its IOLs, both domestically and in numerous foreign countries. IOL
sales accounted for 90% of the Company's domestic revenues and 74% of the
Company's international revenues in 1997, respectively. The Company markets
the Glaucoma Wick(TM), which the Company introduced in late 1995, and its
ICLs(TM) and STAARVISC(TM) viscoelastic solution, which the Company introduced
in late 1996, in selected foreign countries.
The Company has marketed its foldable IOLs internationally since 1986 and,
in September 1991, following a lengthy period of clinical studies, received
FDA pre-market approval to fully market the Company's ELASTIMIDE(TM) and
ELASTIC(TM) foldable IOL models within the United States. Since that time, the
Company's total revenues increased from $10.2 million in its 1992 fiscal year
to $45.5 million in its 1997 fiscal year, representing a compound annual
growth rate of 35%. The Company also receives royalty income with respect to
certain of its licensed technologies, although it does not consider the
royalty income to be material to its prospective financial condition.
International revenues represented 33.2% of total revenues for the 1997
fiscal year, up from 10.7% for the 1992 fiscal year. The mix of the Company's
revenues and profits, on both a product and geographic basis, will be affected
by the continued introduction and acceptance of the Company's Glaucoma
Wick(TM), ICLs(TM) and STAARVISC(TM) viscoelastic solution in various markets
worldwide, including the United States. Sales of the Company's Glaucoma
Wick(TM) and ICLs(TM) will be limited to international markets until such
products receive United States FDA pre-market approval. The Company's
objective is to increase international revenues to account for one-half of
total revenue.
The Company's principal customers are ophthalmologists, ambulatory surgical
centers, hospitals, managed care providers, health maintenance organizations
and group purchasing organizations. The Company generally
14
supplies a quantity of foldable IOLs with different specifications to customers
on a consignment basis and recognizes sales when an ophthalmic surgeon implants
the consigned foldable IOL. Sales to distributors are generally recognized upon
shipment. The Company typically does not have any backlog of orders for its
products. The Company's customers for foldable IOLs are generally eligible to
receive reimbursements from government or private third-party payors, such as
Medicare, subject to certain limitations and pricing pressures. The Company
does not expect that ICLs(TM) will be eligible for, and there can be no
assurance that the Glaucoma Wick(TM) will be eligible for, reimbursement by
government or private third-party payors.
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
PERCENTAGE OF TOTAL REVENUES CHANGE
---------------------------------- -----------
FISCAL
FISCAL YEAR ENDED YEAR ENDED
---------------------------------- -----------
1996 1995
JANUARY 2, JANUARY 3, DECEMBER 29, VS. VS.
1998 1997 1995 1997 1996
---------- ---------- ------------ ---- -----
Total revenues............. 100.0% 100.0% 100.0% 7.8% 21.7 %
Cost of sales.............. 22.5 24.2 24.3 0.7 20.8
----- ----- -----
Gross profit............... 77.5 75.8 75.7 10.1 22.0
Costs and expenses:
General and
administrative.......... 13.9 13.3 14.4 12.5 12.6
Marketing and selling.... 27.9 29.0 31.5 4.0 12.1
Research and development. 8.6 9.7 9.4 (3.6) 25.5
----- ----- -----
Total costs and
expenses.............. 50.5 52.0 55.3 4.8 14.5
Operating income........... 27.0 23.9 20.4 21.7 42.2
Other income (expense),
net....................... (1.3) 0.4 0.9 -- (49.6)
----- ----- -----
Income before income taxes. 25.7 24.2 21.3 14.3 38.4
Income tax provision (bene-
fit)...................... 9.4 7.9 (0.3) 27.9 --
----- ----- -----
Net income................. 16.3% 16.3% 21.6% 7.7% (7.9)%
===== ===== =====
1997 Fiscal Year Compared to 1996 Fiscal Year
Revenues. Revenues for the year ended January 2, 1998 were $45.5 million,
representing a 7.8% increase over $42.2 million in revenues for the prior year
ended January 3, 1997. The increase in revenues was principally attributable
to: (i) an increase in royalty payments, primarily due to a payment by a
licensee of past royalties; and (ii) increased sales of the Company's new
products and increased international sales of the Company's IOLs, partially
offset by domestic and international price decreases. Royalty revenues
increased from $1.0 million to $3.0 million. Revenues from the sale of the
Company's new products, principally its ICLs(TM), Glaucoma Wick(TM) and new IOL
products including the TORIC(TM) IOL, increased to $2.2 million in fiscal 1997
from $660,000 in fiscal 1996. International sales of IOLs in fiscal 1997
increased by 38% in unit volume, and by $1.6 million in dollar terms, over the
prior fiscal year. Total international sales increased to 35% of total sales
for the 1997 fiscal year, as compared to 30% of total sales for the prior
fiscal year, reflecting the Company's ongoing efforts to develop international
markets as well as the conversion of these markets to foldable IOLs. Increases
in sales of IOLs in unit volume were partially offset by an average price
decrease for IOLs of nearly 10%, as a result of competitive pressures, both
domestically and internationally.
15
Management anticipates that international sales revenues will continue to
increase at a rate significantly greater than domestic sales, reflecting: (i)
the Company's increased efforts to broaden its international distribution
channels and to promote its products internationally; (ii) increased IOL unit
volumes due to the continued conversion of international IOL markets to
foldable IOLs; and (iii) greater international awareness and acceptance of the
Company's ICLs(TM) and Glaucoma Wick(TM), particularly as ophthalmologists
continue to receive the surgical training required to implant these ocular
products, and the Company continues to proceed with its United States clinical
studies. Management also believes that it will continue to benefit from volume
increases attributable to the continuing conversion of the domestic cataract
market to foldable IOLs, albeit at a slower rate of increase due to the higher
rate of conversion to date of the domestic market to foldable IOLs. Management
believes that the prices of IOLs will continue to be affected by competition.
Cost of Sales. Due primarily to additional royalty income and also continued
manufacturing efficiencies, cost of sales as a percentage of revenues for the
year ended January 2, 1998 declined to 22.5% of revenues as compared to 24.2%
for the prior fiscal year. This reduction was effectuated notwithstanding price
decreases resulting from competitive pressures and a product mix change due to
an increased demand for the ELASTIMIDE(TM) IOL (which is relatively more
expensive to manufacture than the ELASTIC(TM) model).
General and Administrative. General and administrative expense for the year
ended January 2, 1998 was $6.3 million, or 13.9% of revenues, as compared to
$5.6 million, or 13.3% or revenues, for the prior fiscal year. The increase in
general and administrative expense, both in dollar terms and as a percentage of
revenues, was attributable to additional administrative infrastructure
expenditures required to support the increase in revenues and costs related to
investors relations.
Marketing and Selling. Marketing and selling expense for the year ended
January 2, 1998 was $12.7 million, or 27.9% of revenues, as compared to $12.2
million, or 29.0% of revenues, for the prior fiscal year. The decline in
marketing and selling expense as a percentage of revenues was attributable to
the significant growth in overall revenues permitting greater absorption of
fixed marketing and selling (i.e. non-commission) costs. The increase in
marketing and selling expense in dollar terms was principally attributable to
additional selling and marketing expenses arising from the operations of the
Company's new European distribution subsidiaries.
Research and Development. Research and development expense for the year ended
January 2, 1998 was $3.9 million, or 8.6% of revenues, as compared to $4.1
million, or 9.7% of revenues, for the prior fiscal year. These expenditures
were attributable to the Company's continued investment in developing new
products, manufacturing and distribution systems, cost reduction projects for
manufacturing and increased costs incurred conducting clinical studies in the
United States.
Other Expense or Income, Net. Other expense for the year ended January 2,
1998 was $579,000, or 1.3% of revenues, as compared other income of $153,000,
or 0.4% of revenues, for the prior fiscal year. The primary reasons for the
overall increase in other expenses over income were increased interest
expenses, and losses in translating foreign currency.
Income Tax Provision. Income taxes increased to a provision of $4.3 million
for the year ended January 2, 1998, as compared to a provision of $3.3 million
for the prior fiscal year. The Company's tax rate increased from a rate of
32.6% in fiscal 1996 to a rate of 36.5% for fiscal 1997, primarily due to a
greater percentage of income before taxes being subject to taxation at the
higher United States 40% combined federal and state marginal tax rate. During
fiscal 1997 the Company utilized all of its remaining tax operating loss
carryforwards for federal income tax purposes. See Note 7 to the Consolidated
Financial Statements.
As a result of the Company's positive operating results for each of the three
years ended January 2, 1998 the Company determined that deferred tax assets of
$1.2 million and $2.3 million should be recognized as of January 2, 1998 and
January 3, 1997. These amounts were based on a consideration of current and
future anticipated earnings. Future income levels should result and in full
recognition of the deferred tax assets. The
16
amount recorded as of January 3, 1997 includes the capitalization of the
remaining balance of the Company net operating loss carryforwards. Management
believes it is more likely than not that the deferred tax assets will be
realized in full.
1996 Fiscal Year Compared to 1995 Fiscal Year
Revenues. Revenues for the year ended January 3, 1997 were $42.2 million,
representing a 21.7% increase over $34.7 million in revenues for the prior year
ended December 29, 1995. The increase in revenues was principally attributable
to the continued growth in unit sales of the Company's primary products, its
foldable IOLs, in both the domestic and international markets, partially offset
by certain domestic price decreases due to competitive pressures. Increases in
unit volume are attributable, in significant part, to the continuing conversion
of the cataract market to foldable IOLs. Revenues from international sales
increased to 30% of total revenues for the year ended January 3, 1997, as
compared to 24% for the prior fiscal year, reflecting the Company's increased
efforts to develop international markets, as well as the conversion of these
markets to foldable IOLs. Also included in revenues for the year ended January
3, 1997 are international sales of $625,000 resulting from the commercial
introduction in selected foreign markets of the Company's Glaucoma Wick(TM) at
the end of 1995 and its ICLs(TM) and STAARVISC(TM) viscoelastic solution at the
end of fiscal 1996. Revenues from royalties also increased from $500,000 for
1995 to $1 million for fiscal 1996.
Cost of Sales. Cost of sales as a percentage of revenues for the year ended
January 3, 1997 declined slightly to 24.2% of revenues as compared 24.3% for
the prior fiscal year. The principal reasons for this slight decline were
increased operating efficiencies and economies of scale from increased sales
volume. These savings were offset by price decreases resulting from competitive
pressures and a product mix change due to an increased demand for the
ELASTIMIDE(TM) IOL, which is relatively more expensive to manufacture.
General and Administrative. General and administrative expense for the year
ended January 3, 1997 was $5.6 million, or 13.3% of revenues, as compared to $5
million, or 14.4% or revenues, for the prior fiscal year. The decline in
general and administrative expense as a percentage of revenues was attributable
to the significant growth in overall revenues permitting greater absorption of
general and administrative costs. The increase in general and administrative
expense in dollar terms was attributable to additional administrative
infrastructure expenditures required to support the increase in revenues.
Marketing and Selling. Marketing and selling expense for the year ended
January 3, 1997 was $12.2 million, or 29.0% of revenues, as compared to $10.9
million, or 31.5% of revenues, for the prior fiscal year. The decline in
marketing and selling expense as a percentage of revenues was attributable to
the significant growth in overall revenues permitting greater absorption of
fixed marketing and selling (i.e., non-commission) costs. The increase in
marketing and selling expense in dollar terms was principally attributable to
greater commissions paid arising from increased sales revenues.
Research and Development. Research and development expense for the year ended
January 3, 1997 was $4.1 million, or 9.7% of revenues, as compared to $3.3
million, or 9.4% of revenues, for the prior fiscal year. This increase was
attributable to the Company's continued investment in developing new products,
manufacturing systems and distribution systems, cost reduction projects for
manufacturing, and increased costs incurred conducting clinical studies in the
United States.
Other Income, Net. Other income for the year ended January 3, 1997 was
$153,000, or 0.4% of revenues, as compared to $303,000, or 0.9% of revenues,
for the prior fiscal year. The primary reasons for this decrease were increased
interest expenses, losses in translating foreign currency, and a decline in
deferred revenue arising from the sale of a license to the Canon STAAR joint
venture. The deferred revenue reported in fiscal 1996 is the last portion of
total deferred revenue realized with respect to the Canon STAAR license.
Income Tax Provision. Income taxes increased to a provision of $3.3 million
for the year ended January 3, 1997 from a benefit of $100,000 for the prior
fiscal year. Fiscal 1996 is the first year the Company has reported
17
an income tax provision without having offsets related to net operating loss
carryforwards. However, the Company will not pay any significant Federal
income taxes until it fully utilizes the remaining $2.5 million of net
operating loss carryforwards for tax purposes. The Company fully utilized its
net operating loss carryforwards for state taxes in 1995. The Company has
recorded a deferred tax asset of $1.3 million as of January 3, 1997.
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, and the exercise of
stock options and warrants.
The Company's principal domestic credit facility is a line of credit
originally entered into on a secured basis in June 1996, and refinanced on an
unsecured basis in June 1997, which currently allows the Company to borrow up
to $10.0 million on a revolving basis, at a rate of interest not to exceed the
prime interest rate, less 0.25% (or, at the election of the Company, if more
than $500,000 is outstanding, at a rate of interest equal to LIBOR, plus
1.75%). This line of credit expires in June 1999. The underlying loan
agreement requires the Company to satisfy certain financial tests, and limits
the amount of indebtedness the Company may incur to others. The refinance of
the line of credit in June 1997 resulted in a reclassification of debt from
short-term to long-term. Borrowings outstanding under this line of credit as
of January 2, 1998 were approximately $5.5 million.
In November 1997, the Company's domestic lender supplemented the Company's
domestic credit facility by committing through March 31, 1998 to make
additional advances to the Company of up to $5 million for business
acquisitions. Any principal amounts borrowed pursuant to this commitment would
be repaid in monthly installments of principal of $83,334 until such amounts
were repaid. Interest on any such principal amounts borrowed will be payable
monthly at a rate of interest not to exceed the prime interest rate, less
0.25% (or, at the election of the Company, if more than $100,000 is
outstanding, at a rate of interest equal to LIBOR, plus 1.75%). The underlying
loan agreement requires the Company to satisfy certain financial tests, and
limits the amount of indebtedness the Company may incur to others. No
borrowings under this commitment have been made as of January 2, 1998.
The Company's foreign credit facility consists of a separate revolving line
of credit and a term loan extended in May 1994 by a Swiss bank to the
Company's subsidiary, STAAR Surgical AG. The revolving line of credit facility
provides for borrowings up to $766,000 (1.1 million Swiss Francs) at a 5.5%
rate of interest as of January 2, 1998. A commission rate of 0.25% is payable
each quarter. The line of credit does not have a termination date and is
secured by a general assignment of claims. Borrowings outstanding as of
January 2, 1998 under the line of credit were approximately $926,000, which
balance exceeded the maximum allowable borrowings. The excess borrowings were
permitted by the lender due to adequate compensating cash balances. Under the
term loan, STAAR Surgical AG obtained a $766,000 (1.1 million Swiss Francs)
loan guaranteed partially by the Swiss government and partially by the
Company. Interest on this loan is 6.25%, which the Company shares on an equal
basis with the bank and the Swiss government. The principal amount of this
loan is required to be repaid in four equal annual installments, beginning in
December 1996. Borrowings by STAAR Surgical AG under this loan outstanding as
of January 2, 1998 were approximately $397,000.
As of January 2, 1998, the Company had net working capital of approximately
$24.9 million, as compared to $15.0 million and $16.3 million as of January 3,
1997 and December 29, 1995, respectively. The increase in net working capital
for the fiscal year ended January 2, 1998 was primarily attributable to a $1.2
million increase in accounts receivable, a $2.3 million increase in inventory,
a $3.25 million note receivable recorded in a settlement with a licensee, a
$6.5 million decrease in notes payable as a result of the full payment of a
$2.0 million note and the reclassification of debt from short-term to long-
term offset by a $3.3 million change in deferred income taxes. The decrease in
net working capital for the fiscal year ended January 3, 1997 was primarily
attributable to a $4.2 million increase in notes payable, $5.9 million
investment in patents and licenses, and $4.3 million expended to acquire
additional property and equipment, offset by a $2.8 million increase in
inventories and a $2.7 million increase in cash.
18
As of January 2, 1998, the Company had cash and cash equivalents of
approximately $6.3 million, as compared to $6.5 million and $3.8 million as of
January 3, 1997 and December 29, 1995, respectively. The slight decline in the
Company's cash position for the year ended January 2, 1998 was primarily
attributable to the increase in the effect of exchange rate changes in cash and
cash equivalents. The improvement in the Company's cash position for the year
ended January 3, 1997 was primarily attributable to net cash provided by
operating activities (approximately $9.3 million) and cash provided by
financing activities (approximately $4.5 million), partially offset by cash
used for the acquisition of property, plant and equipment to establish
production facilities for new products and to improve operations for current
products and reduce current manufacturing costs (approximately $4.3 million)
and to acquire patents and licenses and to fund patent litigation
(approximately $5.9 million).
Cash flows from operating activities for the year ended January 2, 1998 were
approximately $7.6 million, a decrease of approximately $1.7 million from the
prior fiscal year. The decrease in cash flow from operating activities was
principally attributable to a $3.9 million change in operating working capital
offset by a $550,000 increase in amortization of patents, licenses and other
intangibles, and a $1.3 million increase in deferred income taxes. Cash flows
from operating activities for the year ended January 3, 1997 were approximately
$9.3 million, an improvement of approximately $4.3 million from the prior
fiscal year. The increase in cash flow from operating activities was
principally attributable to the utilization of deferred tax asset of $2.9
million and an increase in depreciation and amortization of $1.5 million.
Cash used in investing activities for the year ended January 2, 1998, was
$7.4 million, representing a decrease of approximately $3.6 million relative to
the year ended January 3, 1997. This decrease was due primarily to a $1.4
million decrease in the acquisition of property, plant and equipment and a $2.7
million decrease in the acquisition of patents and licenses, partially offset
by a $590,000 increase in other assets. Cash used in investing activities for
the year ended January 3, 1997 was $11.0 million, representing an increase of
approximately $4.9 million relative to the year ended December 29, 1995. This
increase was due primarily to an increase of $792,000 in expenditures for
property and equipment and $4.0 million for patents and licenses.
Cash flows from financing activities for the year ended January 2, 1998 were
$122,751, representing a decrease of approximately $4.4 million relative to the
year ended January 3, 1997. This decrease was principally attributable to a
$2.4 million decrease in borrowings and a $2.1 million increase in payments on
notes payable and long-term debt. Cash flows from financing activities for the
year ended January 3, 1997 were $4.5 million, representing an increase of
approximately $2.9 million relative to the year ended December 29, 1995. This
increase was principally attributable to increased net borrowings of
approximately $1.4 million, increased exercises of stock options of $617,000,
and decreased expenditures to repurchase Common Stock (approximately $315,000,
as compared to $1.6 million for the prior fiscal year).
As of January 2, 1998, the Company had $396,000 due with respect to an open-
ended capital lease agreement wherein the Company leased $1.2 million in
surgical equipment. The Company's obligations under this lease agreement are
secured by a $300,000 letter of credit.
The Company's capital expenditures for the fiscal years ended January 2, 1998
and January 3, 1997 were approximately $2.8 million and $4.3 million,
respectively. These expenditures were used to upgrade existing production
equipment, set up new production facilities for new products, and reduce
current manufacturing costs. The Company's planned capital expenditures for
1998 are approximately $4.0 million, primarily to improve and expand the
Company's foldable IOL, ICL(TM) and Glaucoma Wick(TM) manufacturing capacity
and to reduce manufacturing costs.
Capitalized additions for patents and licenses for the fiscal years ended
January 2, 1998 and January 3, 1997 were approximately $3.2 million and $5.9
million, respectively. The Company capitalizes the costs of acquiring patents
and licenses as well as the legal costs of defending its rights to these
patents. The Company expects to spend approximately $2.0 million in 1998 for
patents and licenses.
19
Management believes that cash flow from operations and available credit
facilities, together with its current cash balances, will provide adequate
financial resources to finance an increase in the level of the Company's
operations, including some capital expenditures, and research and development
activities. Should additional funding be needed, such as for significantly
increased levels of operations, major capital expenditures or acquisitions,
the Company believes, so long as the financial position of the Company remains
constant, that these funds could be obtained through borrowings or a secondary
public offering.
OTHER MATTERS
New Accounting Standards
See "Recent Accounting Pronouncements" in the Consolidated Financial
Statements.
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. See "Uncertainties and
Risk Factors--Risks Associated with International Transactions" below.
Inflation
Management believes inflation has not had a significant impact on the
Company's operations during the past three years.
Year 2000 Compliance
Management has reviewed the Company's internal computer systems and software
products for Year 2000 problems and believes that such systems and products
are, or will soon be, Year 2000 compliant, and management therefore does not
expect Year 2000 considerations will materially impact the Company's internal
operations. Year 2000 considerations may have an affect on some of the
Company's customers and suppliers, and thus indirectly affect the Company. It
is not possible to quantify the aggregate cost to the Company with respect to
customers and suppliers with Year 2000 problems, although the Company does not
anticipate it will have a material adverse impact on its business.
UNCERTAINTIES AND RISK FACTORS
The Company may be subject to a number of significant uncertainties and
risks including, without limitation and without purporting to be a complete or
exhaustive list, those described below and those described elsewhere in this
Annual Report, which may ultimately affect the Company in a manner and to a
degree which cannot be foreseen at this time.
Risks Relating to Commercialization of New Products. The extent and pace of
market acceptance of the Company's new products, including its Glaucoma
Wick(TM), ICL(TM) and STAARVISC(TM) viscoelastic solution, will be a function
of many variables, in the following: the efficacy, performance and attributes
of such new products; the ability of the Company to obtain necessary
regulatory approvals to commercially market such new products; the
effectiveness of the Company's marketing and sales efforts, including
educating ophthalmologists and other potential customers as to the distinctive
characteristics and benefits of these new products; the rate at which
20
ophthalmologists attain the necessary surgical skills to implant these new
products; the ability of the Company to meet manufacturing and delivery
schedules; and product pricing. The extent and pace of market acceptance will
also depend upon general economic conditions affecting customers' purchasing
patterns. As the Glaucoma Wick(TM) and ICL(TM) are new medical devices, there
is a material risk that the marketplace may not accept, or be receptive to, the
potential benefits of these new products. Unless and until these new products
are accepted by the market and generating meaningful revenues and profits, the
Company's financial condition and prospects will continue to be solely
dependent upon its line of cataract products. See "Uncertainties and Risk
Factors--Government Regulation and Uncertainty of Product Approval" and
"Business--Products."
Highly Competitive Industry; Rapid Technological Change. Competition in the
ophthalmic industry is intense and characterized by extensive research and
development and rapid technological change. The Company has licensed certain of
its patents and technologies relating to its cataract products to competitors.
Many of the Company's current and prospective competitors have greater
financial, technical and marketing resources and trade name recognition than
the Company, which may enable them to successfully develop and/or market
products based on technologies or approaches similar to those of the Company,
or develop products based on other technologies or approaches, which are, or
may be, competitive with the Company's products. Development by competitors of
new or improved products, processes or technologies may make the Company's
products less competitive or obsolete. The Company will be required to devote
significant financial and other resources to enhance its existing products and
develop new products for the ophthalmic industry. Competitive pressures could
lead to a decline in sales volumes of existing products, the inability to
attain sufficient market penetration for new products, or price reductions, any
or all of which could adversely affect the Company's operating and financial
results. There can be no assurance that the Company will be able to compete
successfully in the industry, particularly in view of rapid technological
change. See "Business--Competition" and "Business--Licenses and Distribution
Rights" in Item 1.
Government Regulation and Uncertainty of Product Approval. The manufacture
and sale of the Company's products are subject to extensive international and
domestic regulation. In order to sell these products within the United States,
clearance or approval from the FDA is required. The FDA clearance or approval
process is expensive and time consuming, and no assurance can be given that any
of the Company's products which have not received FDA clearance or approval to
date will obtain such FDA clearance or approval on a timely basis or at all, or
without delays adversely affecting the marketing and sale of the Company's
products. Foreign regulatory requirements differ from jurisdiction to
jurisdiction and may, in some cases, be more stringent or difficult to obtain
than FDA clearance or approval. In order to sell products in the countries
comprising the European Economic Union (the "Union"), the Company must satisfy,
by no later than 1998, certain Union-wide regulatory requirements,
notwithstanding the Company's previous receipt of approvals from member
countries. No assurance can be given that the Company will obtain such
regulatory approvals on a timely basis or at all, or without delays adversely
affecting the marketing and sale of the Company's products. In addition,
clearances or approvals that have been or may be granted are subject to
continual review, which could result in product labeling restrictions,
withdrawal of products from the market or other adverse consequences.
To date, the Company has conducted clinical studies in certain foreign
countries, and is in the process of conducting clinical studies in the United
States, on the feasibility of (i) using the Glaucoma Wick(TM) for the treatment
of glaucoma, and (ii) using the ICL(TM) for the treatment of myopia and
hyperopia. There can be no assurance that the clinical trial results to date
from these studies are necessarily indicative of future clinical trial results
with respect to these new products. There can also be no assurance that long-
term safety and efficacy data, when collected, will be consistent with the
clinical results to date, and will demonstrate that (i) the Glaucoma Wick(TM)
can be used safely and successfully to treat glaucoma in a broad segment of the
patient population or on a long-term basis, or (ii) that the ICL(TM) can be
used safely and successfully to treat myopia or hyperopia on a long-term basis.
Furthermore, no assurance can be given that there will be no serious
complications or side effects, or that any such complications or side effects
will not impair or delay the Company's obtaining regulatory approval for these
new products in the United States and other key markets.
21
In addition to the review and approval process for its products, the Company
is also subject to government regulation of its manufacturing facilities and
procedures including "good manufacturing practice" regulations promulgated by
the FDA. The Company believes it is in compliance with all applicable
regulations. However, the FDA and comparable regulatory agencies in other
countries have substantial discretion in the interpretation and enforcement of
applicable regulations. There can be no assurance that future interpretations
made by any regulatory bodies, including the FDA, with possible retroactive
effect, will not adversely affect the Company. Moreover, the Company could
suffer a material adverse effect from a change in these regulations. The
Company cannot predict the extent or impact of future federal, state, local or
foreign legislation or regulation. See "Business--Regulatory Requirements" in
Item 1.
If, as a result of FDA inspections, MDR reports or other information, the FDA
believes that the Company is not in compliance with the law, the FDA can
institute proceedings to detain or seize products, enjoin future violations,
and/or assess civil or criminal penalties against the Company and its officers
or employees. Although the Company and its products have not been the subject
of any such FDA enforcement action, any such action by the FDA could result in
a disruption of the Company's operations for an undetermined time.
Patents and Proprietary Rights. The Company's ability to compete effectively
is materially dependent upon the proprietary nature of the designs, processes,
technologies and materials owned, used by or licensed to the Company. Although
the Company attempts to protect its proprietary property, technologies and
processes through a combination of patent law, trade secrets and non-disclosure
agreements, there is no assurance that any or all of these measures will prove
to be effective. For example, in the case of patents, there can be no assurance
that existing patents granted to the Company or its licensors will not be
invalidated, that patents currently or prospectively applied for by the Company
or its licensors will be granted, or that patents will provide significant
commercial benefits. Moreover, it is possible that competing companies may
circumvent patents the Company or its licensors have received or applied for by
developing products which closely emulate but do not infringe the Company's or
its licensor's patents, and thereby market products that compete with the
Company's products without obtaining a license from the Company. In addition to
patented or potentially patentable designs, technologies, processes and
materials, the Company also relies on proprietary designs, technologies,
processes and know-how not eligible for patent protection, and there is no
assurance that competitors may not independently develop the same or superior
designs, technologies, processes and know-how.
The Company believes that the international market for its products is as
important as the domestic market, and therefore seeks patent protection for its
products or those of its licensors in selected foreign countries. Because of
the differences in foreign patent and other laws concerning proprietary rights,
the Company's products may not receive the same degree of protection in certain
foreign countries as they would in the United States.
There can be no assurance that the Company will be able to successfully
defend its patents and proprietary rights. The invalidation or circumvention of
key patents (principally the Company's core patents for insertion of foldable
or deformable IOLs or ICLs through minimally invasive surgical techniques) or
proprietary rights owned by or licensed to the Company could have an adverse
effect on the Company and on its business prospects. There can be no assurance
that the Company will not be required to defend against litigation involving
the patents or proprietary rights of others, or that licenses under such rights
will be available. Legal and accounting costs relating to prosecuting or
defending patent infringement litigation may be substantial. See "Business--
Intellectual Property Rights" in Item 1.
Third-Party Reimbursement. The Company's ability to sell its products is, in
part, dependent upon policies of government or private third-party payors
regarding reimbursement to ophthalmic surgeons with respect to their use of the
Company's products. There can be no assurance that such third-party payors will
continue to authorize or otherwise budget reimbursement for use of the
Company's existing products (principally its IOLs) at current levels. For
example, reimbursement rates for IOLs, such as that of Medicare, have declined
in recent years. Changes in policies regarding reimbursement for ophthalmic
products or services could adversely affect the prospects for future sales of
the Company's products. The Company does not expect that ICLs(TM) will be
eligible
22
for reimbursement, and there can be no assurance that any of the Company's
other new products will be eligible for reimbursement by government or private
third-party payors.
Risks Associated with International Transactions. The Company sells its
products internationally which subjects it to several potential risks,
including 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. There can be no assurance
that any of the foregoing will not have a material adverse effect upon the
business of the Company. The Company has not previously engaged in activities
to mitigate the effects of foreign currency fluctuations, as the Company is
generally paid in U.S. dollars with respect to its international operations. If
earnings from international operations increase, the Company's exposure to
fluctuations in foreign currencies may increase, and the Company may utilize
forward exchange rate contracts or engage in other efforts to mitigate foreign
currency risks. If entered into, there can be no assurance as to the
effectiveness of such efforts in limiting any adverse effects of foreign
currency fluctuations on the Company's international operations and on the
Company's overall results of operations. See "Business" in Item 1 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Foreign Exchange" above.
Product Liability Claims; Insufficiency of Product Liability Insurance
Coverage; Product Recall Risks. As a supplier of products used in medical
treatments, the Company faces an inherent business risk of exposure to product
liability claims in the event the end use of its products results in
unanticipated adverse effects on patients, including serious personal injury or
death. Certain of the Company's new products, such as its Glaucoma Wick(TM) and
its ICL(TM), are based upon unique designs and materials. Product liability
risk is higher with respect to these products, as they have a limited history
of testing, use and performance, and unknown defects associated with such
products may only be identified through the passage of time. Potential negative
publicity concerning the defective product could also affect the Company's
other products. No assurance can be given that the Company will not experience
product liability claims in the future with respect to its established or new
products. Any product liability claim could have a material adverse effect on
the Company.
Any product liability claims will be subject to the uncertainties attendant
to litigation. The Company currently maintains product liability insurance
coverage. No assurance can be given that such insurance coverage is in an
amount sufficient to cover all possible liabilities, or one or more large
claims, or that the insurer will be solvent at the time of any covered loss.
Also, no assurance can be given that adequate product liability insurance will
continue to be available in the future or maintained at a reasonable cost to
the Company. In the event of a successful product liability suit against the
Company, lack or insufficiency of insurance coverage could have a material
adverse effect on the Company.
The Company may, in the event there are material deficiencies or defects in
the design or manufacture of any of its products, be required to recall such
defective products. In the event of a product recall, the cost to, and the
potential liability of, the Company could be significant and could have a
material adverse effect on the Company's business and operations, especially if
such liability relates to the recall of a product generating significant
revenues and earnings for the Company, such as its foldable IOLs. Potential
negative publicity from a recall could also adversely affect sales and/or
regulatory approvals of the Company's other products.
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.
23
PART III
ITEMS 10., 11., 12. AND 13.
Information required by Part III (Items 10, 11, 12 and 13) is incorporated by
reference to the Company's definitive proxy statement for its 1998 Annual
Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial statements required by Item B of this form are filed as a
separate part of this report following Part IV
PAGE
----
Report of Independent Certified Public Accountants........................ F-2
Consolidated Balance Sheets at January 2, 1998 and January 3, 1997........ F-3
Consolidated Statements of Income for the years ended January 2, 1998,
January 3, 1997 and December 29, 1995.................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
January 3, 1997, December 29, 1995 and December 30, 1994................. F-5
Consolidated Statements of Cash Flows for the years ended January 3, 1997,
December 29, 1995 and December 30, 1994.................................. F-6
Notes to Consolidated Financial Statements................................ F-11
(2) Schedules required by Regulation S-X are filed as an exhibit to this
report:
Independent Certified Public Accountants' Report on Schedules and Consent. F-23
II. Valuation and Qualifying Accounts and Reserves........................ F-24
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 notes thereto
(3) Exhibits
24
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation, as amended(1)
3.4 By-laws, as amended(8)
4.1 1990 Stock Option Plan(2)
4.2 1991 Stock Option Plan(3)
4.3 1995 STAAR Surgical Company Consultant Stock Plan(4)
4.4 1996 STAAR Surgical Company Non-Qualified Stock Plan(9)
4.5 1996 STAAR Surgical Company Non-Qualified Stock Plan(9)
4.6 Stockholders' Rights Plan, dated effective April 20, 1995(7)
10.1 Non-Exclusive License Agreement, dated March 13, 1986, between the
Company and CooperVision, Inc.(6)
10.2 Technology License Agreement And Option To Purchase Equity Interest,
dated March 13, 1986, between the Company and CooperVision, Inc.(6)
10.3 License Agreement, dated December 17, 1986, between the Company and
Optical Radiation Corporation(11)
10.4 Joint Venture Agreement, dated May 23, 1988, between the Company, Canon
Sales Co, Inc. and Canon, Inc.(5)
10.5 License Agreement, dated March 9, 1990, between Chiron Ophthalmics,
Inc. and the Company(6)
10.6 License Agreement, dated March 9, 1990, between Chiron Ophthalmics,
Inc. and the Company(6)
10.7 Promissory Note, dated February 28, 1991, from John R. Wolf to the
Company(9)
10.8 Stock Pledge/Security Agreement, dated February 28, 1991, between John
R. Wolf, the Company and Pollet & Associates(9)
10.9 Promissory Note, dated February 28, 1991, from William C. Huddleston to
the Company(9)
10.10 Stock Pledge/Security Agreement, dated February 28, 1991, between
William C. Huddleston, the Company and Pollet & Associates(9)
10.11 Amended and Restated Soft IOL License Agreement, restated as of January
31, 1992, between the Company, Softlensco, Inc., and Iolab
Corporation(9)
10.12 Promissory Note, dated May 26, 1992, from the Andrew F. Pollet and
Sally M. Pollet Revocable Trust dated March 6, 1990 (11)
10.13 Deed of Trust, dated August 1, 1997, by the Andrew F. Pollet and Sally
M. Pollet Revocable Trust dated March 6, 1990(10)
10.14 Promissory Note, dated July 3, 1992, from William C. Huddleston to the
Company(11)
10.15 Stock Pledge/Security Agreement, dated July 3, 1992, between William C.
Huddleston the Company and Pollet & Associates(11)
10.16 Lease, dated November 9, 1992, by and between Linda Lee Brown and
Phyllis Ann Bailey and the Company regarding real property located at
1941 Walker Avenue, Monrovia, California(11)
10.17 Indenture of Lease, dated October 20, 1983, by and between Dale E.
Turner and Frances R. Turner and the Company regarding real property
located at 1911 Walker Avenue, Monrovia, California, and all Lease
Additions thereto(11)
10.18 Patent License Agreement, dated May 24, 1995, with Eye Microsurgery
Intersectoral Research and Technology Complex(8)
10.19 Patent License Agreement, dated January 1, 1996, with Eye Microsurgery
Intersectoral Research and Technology Complex(9)
25
NUMBER DESCRIPTION
------ -----------
10.20 Promissory Note, dated March 18, 1993, from William C. Huddleston to
the Company(6)
10.21 Revolving Line of Credit Note, dated June 1, 1997, between STAAR
Surgical Company and Wells Fargo Bank(10)
10.22 Modification To Employment Agreement, dated December 20, 1994, between
the Company and John R. Wolf(6)
10.23 First Amendment To Sales Representative Agreement, dated December 20,
1994, between the Company and John R. Wolf(6)
10.24 Employment Agreement, dated March 1, 1994, between the Company and
Vladimir Feingold(6)
10.25 Modification To Employment Agreement, dated May 6, 1996, between the
Company and Vladimir Feingold(9)
10.26 Employment Agreement, dated March 1, 1994, between the Company and
William C. Huddleston(6)
10.27 Modification To Employment Agreement, dated May 6, 1996, between the
Company and William C. Huddleston(9)
10.28 Employment Agreement, dated March 1, 1994, between the Company and Carl
M. Manisco(6)
10.29 Modification To Employment Agreement, dated May 6, 1996, between the
Company and Carl M. Manisco(9)
10.30 Employment Agreement, dated March 1, 1994, between the Company and
Michael J. Lloyd(6)
10.31 Modification To Employment Agreement, dated May 6, 1996, between the
Company and Michael J. Lloyd(9)
10.32 Employment Agreement, dated March 1, 1994, between the Company and
Stephen L. Ziemba(6)
10.33 Modification To Employment Agreement, dated May 6, 1996, between the
Company and Stephen L. Ziemba(9)
10.34 Employment Contract, dated May 26, 1996, between the Company and Donald
Ferguson(9)
10.35 Amended IOL Supply Agreement, dated June 10, 1994, between the Company
and Chiron Vision Corporation(6)
10.36 Manufacturing Site Agreement, dated June 10, 1994, between the Company
and Chiron Vision Corporation(6)
10.37 Form of Non-Qualified Stock Option Agreements granted to Directors of
Company in June and August 1994(6)
10.38 Agreement For Purchase And Sale Of Assets, dated October 1, 1994,
between STAAR Surgical Australasia Pty. Ltd. and Bionica Pty. Ltd.(6)
10.39 Agreement, dated October 10, 1995, with China Eye Joint Venture(8)
21 List of Significant Subsidiaries(10)
24 Powers of Attorney(10)
27.1 Financial Data Schedule at and for the year ended January 2, 1998(11)
27.2 Restated Financial Data Schedule at and for the years ended January 3,
1997 and December 29, 1995(10)
27.3 Restated Financial Data Schedule at and for the periods ended September
27, 1996, June 28, 1996, and March 29, 1996(10)
27.4 Restated Financial Data Schedule at and for the periods ended October
3, 1997, July 4, 1997, and April 4, 1997(10)
26
- --------
(Footnotes to Exhibits):
(1) Incorporated by reference from the Company's Registration Statement on
Form S-18, File No. 2-83434, as filed on April 29, 1983
(2) Incorporated by reference from the Company's Registration Statement on
Form S-8, File No. 33-37248, as filed on October 11, 1990
(3) Incorporated by reference from the Company's Registration Statement on
Form S-8, File No. 33-76404, as filed on March 11, 1994
(4) Incorporated by reference from the Company's Registration Statement on
Form S-8, File No. 33-60241, as filed on June 15, 1995
(5) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1993, as filed on March 31, 1994
(6) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 30, 1994, as filed on March 30, 1995
(7) Incorporated by reference from the Company's Proxy Statement for its
Annual Meeting of Stockholders held on June 6, 1995, as filed on May 12,
1995
(8) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 29, 1995, as filed on March 28, 1996
(9) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended January 3, 1997, as filed on April 2, 1997
(10) Filed herewith
(11) Refiled herewith pursuant to Reg. (S)201.24
(b) Reports on Form 8-K. During the three months ended January 2, 1998 the
Company did not file any reports on Form 8-K.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 31, 1998.
STAAR SURGICAL COMPANY
/s/ John R. Wolf
By: _________________________________
John R. Wolf,
President and Chief Executive
Officer
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 on March 31, 1998 and in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ John R. Wolf President, Chief Executive Officer and
_____________________________________ Chairman
John R. Wolf
/s/ William C. Huddleston Vice President and Chief Financial
_____________________________________ Officer (principal accounting and
William C. Huddleston financial officer)
/s/ Peter J. Utrata, M.D.* Director
_____________________________________
Peter J. Utrata, M.D.
/s/ Donald R. Sanders* Director
_____________________________________
Donald R. Sanders
/s/ Andrew F. Pollet* Director
_____________________________________
Andrew F. Pollet
/s/ Michael R. Deitz, M.D.* Director
_____________________________________
Michael R. Deitz, M.D.
/s/ William C. Huddleston
*By: ________________________________
William C. Huddleston
(Attorney in Fact)
28
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
STAAR Surgical Company
We have audited the accompanying consolidated balance sheets of STAAR
Surgical Company and subsidiaries as of January 2, 1998, and January 3, 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended January 2, 1998.
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 generally accepted auditing
standards. 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 presentation of
the financial statements. 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 consolidated financial position
of STAAR Surgical Company and subsidiaries as of January 2, 1998 and January
3, 1997, and the results of their operations and their cash flows for each of
the three years in the period ended January 2, 1998, in conformity with
generally accepted accounting principles.
BDO Seidman, LLP
Los Angeles, California
March 6, 1998
F-2
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JANUARY 3, 1997
1997 1996
----------- -----------
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $ 6,279,136 $ 6,469,515
Accounts receivable, less allowance for doubtful
accounts
of $128,070 and $111,525 (Note 1)................. 7,983,399 6,827,250
Other receivable (Note 9).......................... 3,250,000 --
Inventories (Note 2)............................... 14,712,398 12,365,867
Prepaid, deposits and other current assets......... 2,006,075 1,676,611
Deferred income tax (Note 7)....................... 1,182,136 2,268,075
----------- -----------
Total current assets............................. 35,413,144 29,607,318
----------- -----------
Investment in joint venture (Note 4)............... 2,740,163 2,464,140
Property, plant and equipment, net (Note 3)........ 10,024,181 8,920,989
Patents and licenses, net of accumulated
amortization of $2,397,920 and $1,401,392 (Notes 8
and 9)............................................ 11,121,436 8,900,236
Other assets....................................... 3,091,957 2,163,336
----------- -----------
$62,390,881 $52,056,019
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable (Note 5)............................. $ 983,276 $ 7,489,549
Accounts payable................................... 1,528,436 1,605,026
Current portion of long-term debt (Note 6)......... 624,698 703,260
Deferred income tax (Note 7)....................... 3,174,000 937,000
Other current liabilities (Notes 11 and 12)........ 4,166,963 3,872,750
----------- -----------
Total current liabilities........................ 10,477,373 14,607,585
----------- -----------
Long-term debt (Note 6).............................. 5,750,478 844,050
Other long-term liabilities (Note 6)................. 1,380,246 207
----------- -----------
Total liabilities................................ 17,608,097 15,451,842
----------- -----------
Commitments and contingencies (Notes 11 and 13)
Stockholders' equity (Notes 10, 11 and 13):
Common stock, $.01 par value, 30,000,000 shares
authorized;
issued and outstanding 13,246,161 and 13,070,705.. 132,462 130,707
Capital in excess of par value..................... 42,810,700 41,518,049
Accumulated translation adjustment................. (695,502) (160,573)
Retained earnings (deficit)........................ 4,861,139 (2,557,991)
----------- -----------
47,108,799 38,930,192
Notes receivable (Note 10)....................... (2,326,015) (2,326,015)
----------- -----------
Total stockholders' equity....................... 44,782,784 36,604,177
----------- -----------
$62,390,881 $52,056,019
=========== ===========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
1997 1996 1995
----------- ----------- -----------
Sales................................... $42,480,014 $41,212,511 $34,180,420
Royalty income (Note 9)................. 3,039,571 1,000,000 514,000
----------- ----------- -----------
Total revenues...................... 45,519,585 42,212,511 34,694,420
Cost of sales........................... 10,261,748 10,195,396 8,441,099
----------- ----------- -----------
Gross profit........................ 35,257,837 32,017,115 26,253,321
----------- ----------- -----------
Selling, general and administrative
expenses:
General and administrative (Note 13).. 6,333,781 5,627,576 5,000,484
Marketing and selling................. 12,719,166 12,227,593 10,911,240
Research and development.............. 3,936,293 4,084,991 3,253,536
----------- ----------- -----------
Total selling, general and
administrative expenses............ 22,989,240 21,940,160 19,165,260
----------- ----------- -----------
Operating income.................... 12,268,597 10,076,955 7,088,061
----------- ----------- -----------
Other income (expense):
Equity in earnings of joint venture
(Note 4)............................. 336,437 486,398 517,507
Interest expense--net................. (595,810) (450,276) (265,645)
Other income (expense)................ (319,808) 116,563 51,145
----------- ----------- -----------
Total other income (expense)........ (579,181) 152,685 303,007
----------- ----------- -----------
Income before income taxes.............. 11,689,416 10,229,640 7,391,068
Income tax provision (benefit) (Note 7). 4,270,286 3,338,544 (90,652)
----------- ----------- -----------
Net income.............................. $ 7,419,130 $ 6,891,096 $ 7,481,720
=========== =========== ===========
Net income per share (Note 10):
Basic................................. $ 0.57 $ 0.53 $ 0.59
=========== =========== ===========
Diluted............................... $ 0.53 $ 0.50 $ 0.55
=========== =========== ===========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
CAPITAL IN RETAINED ACCUMULATED
COMMON EXCESS OF EARNINGS TRANSLATION NOTES
STOCK PAR VALUE (DEFICIT) ADJUSTMENT RECEIVABLE TOTAL
-------- ----------- ------------ ----------- ----------- -----------
Balance, at December 30,
1994................... $127,045 $41,158,736 $(16,930,807) $ - $(2,326,015) $22,028,959
Common stock issued upon
exercise of options
(Note 10).............. 872 399,902 -- -- -- 400,774
Common stock issued upon
exercise of warrants
(Note 10).............. 277 32,987 -- -- -- 33,264
Common stock issued as
payment for services
(Note 10).............. 511 432,302 -- -- -- 432,813
Common stock repurchased
and cancelled.......... (1,750) (1,626,980) -- -- -- (1,628,730)
Cash paid on common
stock issued for
cashless exercise of
138,026 options and
warrants............... 886 (71,660) -- -- -- (70,774)
Net income.............. -- -- 7,481,720 -- -- 7,481,720
-------- ----------- ------------ --------- ----------- -----------
Balance, at December 29,
1995................... 127,841 40,325,287 (9,449,087) -- (2,326,015) 28,678,026
Common stock issued upon
exercise of options
(Note 10).............. 2,266 983,926 -- -- -- 986,192
Common stock issued upon
exercise of warrants
(Note 10).............. 375 64,625 -- -- -- 65,000
Common stock issued as
payment for services
(Note 10).............. 444 458,492 -- -- -- 458,936
Common stock repurchased
and cancelled.......... (219) (314,281) -- -- -- (314,500)
Foreign currency
translation adjustment. -- -- -- (160,573) -- (160,573)
Net income.............. -- -- 6,891,096 -- -- 6,891,096
-------- ----------- ------------ --------- ----------- -----------
Balance, at January 3,
1997................... 130,707 41,518,049 (2,557,991) (160,573) (2,326,015) 36,604,177
Common stock issued upon
exercise of options
(Note 10).............. 1,607 1,020,886 -- -- -- 1,022,493
Common stock issued as
payment for services
(Note 10).............. 241 324,759 -- -- -- 325,000
Common stock repurchased
and cancelled.......... (93) (136,994) -- -- -- (137,087)
Stock-based compensation
(Note 10).............. -- 84,000 -- -- -- 84,000
Foreign currency
translation adjustment. -- -- -- (534,929) -- (534,929)
Net income.............. -- -- 7,419,130 -- -- 7,419,130
-------- ----------- ------------ --------- ----------- -----------
Balance, at January 2,
1998................... $132,462 $42,810,700 $ 4,861,139 $(695,502) $(2,326,015) $44,782,784
======== =========== ============ ========= =========== ===========
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 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1997 1996 1995
----------- ------------ -----------
Cash flows from operating activities:
Net income........................... $ 7,419,130 $ 6,891,096 $ 7,481,720
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation of property and
equipment......................... 1,742,737 1,720,379 1,159,610
Amortization of patents, licenses
and other intangibles............. 1,782,192 1,230,005 299,171
Provision for allowance for
doubtful accounts................. 16,545 111,525 111,512
Change in deferred revenue......... 210,432 485,998 --
Equity in earnings of joint
venture........................... (336,437) (486,398) (517,507)
Deferred income taxes.............. 3,322,939 1,992,649 (923,724)
Stock-based compensation expense... 84,000 -- --
Common stock issued for services... 325,000 458,936 432,813
Change in operating working capital
(Note 14)......................... (6,971,047) (3,068,022) (3,030,452)
----------- ------------ -----------
Net cash provided by operating
activities...................... 7,595,491 9,336,168 5,013,143
----------- ------------ -----------
Cash flows from investing activities:
Acquisition of property and
equipment........................... (2,845,929) (4,278,671) (3,486,744)
Increase in patents and licenses..... (3,217,728) (5,936,144) (1,980,211)
Increase in other assets............. (1,370,449) (780,275) (583,505)
Dividends received................... 60,414 -- --
----------- ------------ -----------
Net cash used in investing
activities...................... (7,373,692) (10,995,090) (6,050,460)
----------- ------------ -----------
Cash flows from financing activities:
Increase in borrowings under notes
payable and long-term debt.......... 1,109,480 2,133,077 794,199
Payments on other notes payable and
long-term debt...................... (2,679,075) (536,028) (11,128)
Net borrowings under line-of-credit.. 806,940 2,188,259 2,082,836
Proceeds from the exercise of stock
options............................. 1,022,493 1,051,191 434,107
Cash paid in lieu of exercise of
stock options and warrants.......... -- -- (70,774)
Payments for repurchase of common
stock............................... (137,087) (314,500) (1,628,799)
----------- ------------ -----------
Net cash provided by financing
activities...................... 122,751 4,521,999 1,600,441
----------- ------------ -----------
Effect of exchange rate changes on cash
and cash equivalents.................. (534,929) (160,573) --
(Decrease) increase in cash and cash
equivalents........................... (190,379) 2,702,504 563,124
Cash and cash equivalents at beginning
of year............................... 6,469,515 3,767,011 3,203,887
----------- ------------ -----------
Cash and cash equivalents at end of
year.................................. $ 6,279,136 $ 6,469,515 $ 3,767,011
=========== ============ ===========
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 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
ORGANIZATION AND DESCRIPTION OF BUSINESS
STAAR Surgical Company (the "Company") is a developer, manufacturer and
global distributor of medical devices used in minimally invasive ophthalmic
surgery. The Company was incorporated in California in 1982 as a successor to
a partnership for the purpose of developing, producing, and marketing
intraocular lenses ("IOLs") and other products for minimally invasive
ophthalmic surgery. The Company was reincorporated in Delaware in April 1986.
In 1982 and 1983, the Company's operations consisted mainly of research and
development and preliminary marketing and capital raising activities. In 1982,
the Company commenced the development of foldable IOLs, which are used as
replacements for the natural lens after its removal in cataract surgery, and
began production and sale of foldable IOLs in 1986 for implantation in
connection with clinical studies for such products. In September 1991, the
Company received United States Food and Drug Administration ("FDA") pre-market
approval for the Company's ELASTIMIDE(TM) and ELASTIC(TM) foldable IOL models,
which the Company now markets worldwide. The Company's other primary products,
developed more recently, are its "wick" style glaucoma implant (the "Glaucoma
Wick"), an ocular device developed to provide a more effective and longer-term
solution for glaucoma; the ICL(TM), a deformable intraocular refractive
corrective lens, designed to correct refractive disorders such as myopia
(near-sightedness), hyperopia (far-sightedness) and potentially astigmatism;
and its STARRVISC(TM) viscoelastic solution, used during IOL and ICL(TM)
surgery. The Company markets the Glaucoma Wick, which the Company introduced
in late 1995, its ICL(TM) and STAARVISC(TM) viscoelastic solution, which the
Company introduced in late 1996, on a limited basis in selected foreign
countries.
The Company's only significant subsidiary is STAAR Surgical AG, a wholly
owned subsidiary formed in Switzerland to develop, manufacture and distribute
worldwide certain of the Company's products, including its Glaucoma Wick(TM)
and ICL(TM)s. The Company and STAAR Surgical AG have also formed or acquired a
number of directly or indirectly owned subsidiaries to distribute and market
the Company's products in Canada, Australia, France, Austria, South Africa,
Germany, Sweden and Norway.
BASIS OF PRESENTATION
The accompanying financial statements consolidate the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Assets and
liabilities of foreign subsidiaries are translated at rates of exchange in
effect at the close of the period. Revenues and expenses are translated at the
weighted average of exchange rates in effect during the year. The resulting
gains and losses are deferred and are shown as a separate component of
stockholders' equity. During 1997 and 1996, the net foreign translation loss
was $534,929 and $160,573 and net foreign currency transaction loss was
$228,547 and $261,181, respectively. During 1995, foreign currency translation
and transaction gains and losses were not material. Investments in affiliates
and joint ventures are accounted for using the equity method of accounting.
The Company's fiscal year ends on the Friday nearest December 31. The year
ended January 3, 1997 included 53 weeks.
REVENUE RECOGNITION
The Company generally supplies a quantity of foldable IOLs with different
specifications to customers, generally ophthalmologists, surgical centers,
hospitals and other health providers, on a consignment basis, and recognizes
sales when an ophthalmic surgeon implants the consigned foldable IOL. Sales to
foreign distributors
F-7
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
are recognized upon shipment. Revenue from license and technology agreements
is recorded as income over the term of the respective agreement when the
Company has satisfied the terms of such agreements and is notified of the
amounts.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market
(net realizable value).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost.
Depreciation is provided on the straight-line method over the estimated
useful lives, which are generally not greater than ten years. Leasehold
improvements are amortized over the life of the lease or estimated useful
life, if shorter. Property, plant and equipment are reviewed each year to
determine whether any events or circumstances indicate that the carrying
amount of the assets may not be recoverable. Such review includes estimating
future cash flows. Property, plant and equipment costs are expensed when
determined not realizable.
PATENTS AND LICENSES
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 range from 8 to 17 years. Capitalized patent costs are reviewed
each year based on management's estimates of sales of the related products.
Patent and license costs are expensed when determined not realizable.
The Company's ability to compete effectively is materially dependent upon
the proprietary nature of the designs, processes, technologies and materials
owned, used by or licensed to the Company. The Company has been and will
continue to be involved in litigation to protect its copyrights, patents and
proprietary properties and technology.
START-UP COSTS
Included in Other Assets at January 2, 1998 and January 3, 1997 are start-up
costs of $1,642,429 and $1,010,903. These expenditures are directly related to
the start-up phase of the production of two new products: the ICL(TM), a
deformable intraocular refractive corrective lens, and hyaluronic acid. The
costs primarily consists of direct labor and overhead associated with the
start-up. The start-up costs are being amortized on a straight-line basis over
a period not to exceed three years. Recoverability of these costs are assessed
on an on-going basis. Amortization of start-up costs at January 2, 1998,
January 3, 1997 and December 30, 1995 were $315,307, $193,675 and $100,175,
respectively.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
contingent liabilities, revenues, and expenses at the date and for the periods
that the financial statements are prepared. Actual results could differ from
those estimates.
F-8
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, cash equivalents, accounts receivable, accounts
payable, and current notes payable approximate their fair values because of
the short maturity of these instruments. With respect to long-term debt, based
on the borrowing rates currently available to the Company for similar bank and
equipment loans and capitalized leases, the amounts reported approximate the
fair value of the respective financial instruments.
NET INCOME PER SHARE
As of January 2, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings per Share (SFAS 128). This pronouncement provides
a different method of calculating earnings per share than was used in
accordance with APB 15, Earnings per Share. SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing net income available to
common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could occur if securities or other contracts (such
as stock options or warrants) to issue common stock were exercised or
converted into common stock. All prior period weighted average and per share
information has been restated in accordance with SFAS 128. None of the
restated amounts were material.
STOCK BASED COMPENSATION
As of January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which
established a fair value method of accounting for stock-based compensation
plans. In accordance with SFAS 123, the Company has chosen to continue to
account for stock-based compensation utilizing the intrinsic value method
prescribed in APB 25. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock. Also, in accordance with SFAS 123, the Company has provided footnote
disclosure with respect to stock-based employee compensation. The cost of
stock-based employee compensation is measured at the grant date based on the
value of the award and recognizes this cost over the service period. The value
of the stock-based award is determined using a pricing model whereby
compensation cost is the excess of the fair market value of the stock as
determined by the model at grant date or other measurement date over the
amount an employee must pay to acquire the stock.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform with the 1997 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard No. 129, "Disclosure of
Information about Capital Structure," ("SFAS 129") issued by the FASB is
effective for financial statements ended after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The adoption of SFAS No. 129 did not have an
impact on the Company's financial position or results of operations.
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," ("SFAS 130") issued by the FASB is effective for financial statements
with fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company does not
expect adoption of SFAS 130 to have an
F-9
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
impact on its financial position or results of operations and any effect will
be limited to the form and content of its disclosures.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," ("SFAS 131") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 131 requires that public companies report certain
information about operating segments, products, services and geographical
areas in which they operate and their major customers. The Company does not
expect adoption of SFAS 131 to have an impact on its financial position or
results of operations. The Company believes it may have expanded disclosures
with respect to certain of these items.
F-10
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
NOTE 1--ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
1997 1996
---------- ----------
Domestic.............................................. $4,640,393 $4,718,142
Export................................................ 3,471,076 2,220,633
---------- ----------
8,111,469 6,938,775
Less allowance for doubtful accounts.................. 128,070 111,525
---------- ----------
$7,983,399 $6,827,250
========== ==========
NOTE 2--INVENTORIES
Inventories are summarized as follows:
1997 1996
----------- -----------
Raw materials and purchased parts................... $ 1,976,467 $ 1,518,819
Work in process..................................... 1,736,339 1,644,234
Finished goods...................................... 10,999,592 9,202,814
----------- -----------
$14,712,398 $12,365,867
=========== ===========
NOTE 3--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
1997 1996
----------- -----------
Machinery and equipment.............................. $11,890,362 $10,186,227
Furniture and fixtures............................... 4,896,349 4,460,082
Leasehold improvements............................... 3,240,727 2,550,049
----------- -----------
20,027,438 17,196,358
Less accumulated depreciation and amortization....... 10,003,257 8,275,369
----------- -----------
$10,024,181 $ 8,920,989
=========== ===========
F-11
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. ("Canon") and Canon Sales Co, Inc.
("Canon Sales"). The joint venture was formed to manufacture and sell the
Company's IOL products to Canon Sales or other distributors in Japan. The
Company sold CSC an exclusive license to manufacture and market its products
in Japan. The Company recorded $1,500,000 of deferred revenue on the sale of
the license, which was recognized over eight years through October 1996 on a
straight-line basis. The Company uses the equity method of accounting for this
investment. The financial statements of CSC include assets of approximately
$6,213,000 and $6,640,000, and liabilities of approximately $1,364,000 and
$1,381,000, as of January 2, 1998 and January 3, 1997, respectively.
The Company's equity in earnings of the joint venture is calculated as
follows:
1997 1996 1995
-------- -------- --------
Joint venture net income...................... $672,873 $685,296 $660,014
Equity interest............................... 50% 50% 50%
-------- -------- --------
Equity in net income.......................... 336,437 342,648 330,007
Recognition of deferred gain on sale of
license...................................... -- 143,750 187,500
-------- -------- --------
Equity in earnings of joint venture........... $336,437 $486,398 $517,507
======== ======== ========
The Company recorded sales of certain IOL products to CSC of approximately
$469,000, $845,000, and $171,000 in 1997, 1996 and 1995, respectively.
NOTE 5--NOTES PAYABLE
In February 1996, the Company refinanced and increased its domestic line of
credit, which allowed the Company to borrow up to $5 million on a revolving
basis, at a rate of interest not to exceed the prime interest rate. The loan
agreement required the Company to satisfy certain financial tests and limited
the amount of indebtedness the Company may have to others and the payment of
dividends. Borrowings were collateralized by substantially all of the assets
of the Company. The line of credit expired in June 1997 and was replaced with
long-term debt as described in Note 6. Borrowings outstanding as of January 3,
1997 were approximately $4,700,000.
In May 1994, the Company entered into a separate revolving credit facility
with a Swiss bank which provides for borrowings up to $766,401 (1,125,000
Swiss Francs at the exchange rate at January 2, 1998) at the interest rate of
5.5%. A commission rate of 0.25% is payable each quarter. The loan does not
have a termination date and is secured by a general assignment of claims.
Borrowings outstanding under this facility as of January 2, 1998 and January
3, 1997 were $926,112 (1,359,440 Swiss Francs) and $789,549 (1,072,997 Swiss
Francs), respectively. As of January 2, 1998, the balance exceeded the maximum
allowable borrowings. The excess borrowings were permitted due to adequate
compensating cash balances.
In 1996, the Company issued a note in the amount of $2,000,000 as partial
consideration for the acquisition of a license. The note was paid in equal
quarterly installments during 1997.
F-12
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--LONG-TERM DEBT
Long-term debt consists of the following:
1997 1996
---------- ----------
Note payable to bank, interest at a rate not to
exceed prime less .25% payable monthly, due June 1,
1999(1)............................................. $5,506,940 $ --
Note payable to bank, interest at 6.25%, payable in
four equal annual installments plus interest
beginning in December 1996, guaranteed by the Swiss
federal government and Canton of Bern............... 397,186 618,584
Note payable to equipment vendor, interest at 13%,
payable in monthly installments plus interest
through December 1999, secured by equipment......... 74,778 101,118
Obligations under capitalized leases (see Note 11)... 396,272 827,608
---------- ----------
6,375,176 1,547,310
Less current portion................................. 624,698 703,260
---------- ----------
Long-term debt due after one year.................... $5,750,478 $ 844,050
========== ==========
- --------
(1) In June 1997, the Company renegotiated its line-of-credit with its current
domestic lender. Under the new agreement, the Company may borrow up to
$10,000,000 on a revolving basis, at a rate of interest not to exceed the
prime interest rate (8.5% at January 2, 1998) less .25% (or, at the
election of the Company, if more than $500,000 is outstanding, at a rate
of interest equal to LIBOR, plus 1.75%). The loan agreement requires the
Company to satisfy certain financial tests and limits the amount of other
indebtedness the Company may incur. The line of credit expires June 1999.
Borrowings are not collateralized. The refinance of the line of credit
resulted in a reclassification of debt from short-term to long-term. The
Company was in compliance with restrictive covenants as of January 2,
1998.
In November 1997, the Company's domestic lender supplemented the Company's
domestic credit facility by committing through March 31, 1998 to make
additional advances to the Company of up to $5 million for business
acquisitions. No borrowings under this commitment have been made as of January
2, 1998.
Included in other long-term liabilities at January 2, 1998 is a note payable
of approximately $916,000 to the sellers of a corporation purchased by the
Company during 1997. The note carries an interest rate of 6% and is payable in
equal annual installments over a five year period. Also included in other long
term liabilities at January 2, 1998 is deferred revenue of approximately
$464,000. Other long-term liabilities at January 3, 1997 were not material.
F-13
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109
(SFAS 109) which requires the asset and liability method of accounting for
income taxes. In accordance with SFAS 109, the tax benefits of net operating
loss carryforwards utilized in 1995 are presented in the Consolidated
Statement of Income as reductions of the provisions for income tax.
The provision (benefit) for income taxes consist of the following:
1997 1996 1995
---------- ---------- ---------
Current tax provision
U.S. federal (net of $1,258,000, $2,006,000,
and 2,513,000 tax benefit from operating
loss carryforwards)......................... $ 245,000 $ 492,000 $ 149,000
State and local............................ 581,000 725,000 684,000
Non-U.S.................................... 121,357 128,544 --
---------- ---------- ---------
Total current provision...................... 947,357 1,345,544 833,000
---------- ---------- ---------
Deferred tax provision (benefit)
U.S. federal and state..................... 3,374,000 1,993,000 (924,000)
Non-U.S.................................... (51,071) -- --
Total deferred provision..................... 3,322,929 1,993,000 (924,000)
---------- ---------- ---------
Provision for income taxes................... $4,270,286 $3,338,544 $ (91,000)
========== ========== =========
The Company utilized all of its remaining tax net operating loss
carryforwards for federal income tax purposes during 1997. The Company
utilized all of its remaining tax loss carryforwards for California income tax
purposes during 1995.
Alternative minimum tax (AMT) credit carryforward at January 2, 1998 was
approximately $390,000. The AMT credit does not have an expiration date.
The provision (benefit) based on income before taxes differs from the amount
obtained by applying the statutory federal income tax rate to income before
taxes as follows:
1997 1996 1995
---- ----- -----
Computed provision for taxes based on income at
statutory rate......................................... 35 % 34.0 % 34.0 %
Permanent differences................................... (0.1) 1.5 0.2
State taxes, net of federal income tax benefit.......... 4.7 6.1 7.7
Tax benefit of net operating loss carryforward.......... -- (28.2)
Tax effect attributed to foreign operations............. (4.0) (10.1)
Reduction of valuation allowance........................ -- (18.5)
Other................................................... 0.9 1.1 3.8
---- ----- -----
Effective tax provision (benefit) rate.................. 36.5 % 32.6 % (1.0)%
==== ===== =====
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $3.1 million at January 2, 1998. Those 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
those 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-14
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 2, 1998 and
January 3, 1997 are as follows:
1997 1996
----------- ----------
Deferred tax assets:
Allowance for doubtful accounts................... $ 65,000 $ 57,000
Inventory reserves and uniform capitalization..... 341,000 307,000
Accrued vacation.................................. 130,000 114,000
State taxes....................................... 204,000 153,000
Net operating loss carryforwards.................. -- 732,000
Tax credit carryforwards.......................... 391,000 905,000
Deferred taxes on foreign operations.............. 51,000 --
----------- ----------
Total deferred tax assets........................... 1,182,000 2,268,000
----------- ----------
Deferred tax liabilities:
Amortization of deferred gain..................... (1,041,000) --
Depreciation and amortization..................... (2,133,000) (937,000)
----------- ----------
Total deferred tax liabilities...................... (3,174,000) (937,000)
----------- ----------
Net deferred tax (liability) assets................. $(1,992,000) $1,331,000
=========== ==========
As a result of the Company's positive operating results for each of the
three years ended January 2, 1998, the Company determined that deferred tax
assets of $1.2 million and $2.3 million should be recognized as of January 2,
1998 and January 3, 1997. These amounts were based on a consideration of
current and future anticipated earnings. Future income levels should result
and in full recognition of the deferred tax assets. The amount recorded as of
January 3, 1997 includes the capitalization of the remaining balance of the
Company net operating loss carryforwards. Management believes it is more
likely than not that the deferred tax assets will be realized in full.
NOTE 8--PATENTS
During 1995, the Company acquired from the Intersectoral Research and
Technology Complex Eye Microsurgery ("IRTC"), a Russian Federation located in
Moscow, Russia, exclusive patent rights to use and sell glaucoma devices in
the United States and certain foreign countries. During 1996, the Company
acquired from IRTC exclusive rights to several domestic and foreign patents
associated with the Company's implantable contact lenses (ICLs). The
transactions involve a specified amount for the patent rights and payments of
royalties over the life of the patents.
In 1996, the Company acquired a license, as part of the settlement of
litigation with Allergan Medical Optics, under U.S. Patent No. 4,681,102,
relating to an apparatus for insertion of an intraocular lens. The amount paid
has been included in patents in the accompanying balance sheet.
F-15
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--LICENSING AGREEMENTS
The Company has issued Allergan Medical Optics ("AMO"), Alcon Surgical, Inc.
(Alcon), Pharmacia & Upjohn, Bausch and Lomb Surgical and Mentor Corporation
with licenses to utilize certain of its patents involving foldable IOLs in the
United States and selected foreign countries. Each license has a certain
amount of prepaid royalties (which were received by the Company when the
license was issued) which will be utilized by that licensee as sales of the
licensed products are made. The Company recorded $3,040,000, $1,000,000 and
$514,000 of royalty income in 1997, 1996 and 1995, respectively, from these
licenses. See Note 17 with respect to royalty income recorded in 1997.
The Company was involved with certain litigation with Bausch and Lomb
(formerly Chiron) concerning the terms of the agreements entered into between
the companies in 1990. During the first quarter of 1998, the Company reached a
settlement with Bausch and Lomb.
NOTE 10--STOCKHOLDERS' EQUITY
COMMON STOCK
In 1995, the Company issued 51,111 shares to consultants for services
rendered to the Company. Also during 1995, the Company repurchased and
cancelled 175,000 shares and paid cash in lieu of exercise for 49,363 options
and warrants which were then cancelled. Total consideration paid for the
repurchased shares, options and warrants was $1,699,573.
In 1996, the Company issued 44,384 shares to consultants for services
rendered to the Company. Also during 1996, the Company repurchased and
cancelled 21,879 shares. Total consideration paid for the repurchased shares
was $314,500.
In 1997, the Company issued 24,074 shares to consultants for services
rendered to the Company. Also, during 1997, the Company repurchased and
cancelled 9,336 shares.
NOTES RECEIVABLE
As of January 2, 1998 and January 3, 1997, notes receivable from officers
and directors totalling $2,326,015, were outstanding. The notes were issued in
connection with purchases of the Company's common stock. The notes bear
interest at rates ranging between 6% and 8%, 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 May 1998.
F-16
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OPTIONS
The table below summarizes the transactions in the Company's several stock
option plans:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Balance at December 31, 1994............................. 1,318,754 $ 4.84
Options granted.......................................... 35,000 $ 4.67
Options exercised........................................ (116,192) $ 4.08
Options forfeited........................................ (9,808) $ 9.22
--------- ------
Balance at December 29, 1995............................. 1,227,754 $ 4.87
Options granted.......................................... 574,000 $12.50
Options exercised........................................ (226,552) $ 4.26
--------- ------
Balance at January 3, 1997............................... 1,575,202 $ 7.72
Options granted.......................................... 413,400 $10.94
Options exercised........................................ (160,719) $ 6.36
Options forfeited........................................ (5,108) $ 9.65
--------- ------
Balance at January 2, 1998............................... 1,822,775 $ 8.56
========= ======
Options exercisable (vested) at January 2, 1998.......... 1,273,441 $ 6.94
========= ======
NOTES RECEIVABLE
Included in the table above are options to purchase 12,695 shares of common
stock outstanding at January 2, 1998, with an exercise price of $2.50 per
share, which options were granted pursuant to the Company's 1990 Stock Option
Plan. 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 date of grant.
Under provisions of the Company's 1991 Stock Option Plan, 2,000,000 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 date of grant. Pursuant to this plan, options for
591,579 shares were outstanding at January 2, 1998, with exercise prices
ranging between $2.50 to $9.25 per share.
In 1995, officers, employees and others exercised options to purchase 91,192
shares of common stock granted under the 1990 and 1991 stock option plans, at
prices from $2.50 to $6.00, in exchange for cash of $354,776. Also in 1995,
the Company's former President exercised options to purchase 25,000 shares of
common stock, at a price of $4.75, resulting in cash proceeds of $118,750.
In 1996, the Board of Directors of the Company 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 date of grant.
Pursuant to this plan, options for 566,000 and 570,000 shares were outstanding
at January 2, 1998 and January 3, 1997, respectively, with an exercise price
of $12.50 per share.
F-17
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1996, the Company granted options to officers, directors and consultants
to purchase 574,000 shares of the Company's common stock at a price of $12.50,
the quoted market value at date of grant. Out of the above, 4,000 options were
issued under the 1991 stock option plan and 570,000 options were issued as
non-qualified stock options.
In 1996, officers, employees, and others exercised 226,550 options from the
1990, 1991 and non-qualified stock option plans at prices from $2.50 to $5.875
resulting in cash and stock proceeds totaling $966,191.
In 1997, the Company granted options to directors to purchase 240,000 shares
at $12.00 per share and 173,400 shares to consultants at varying amounts which
was then the fair market value.
In 1997, officers, employees and others exercised 160,719 options from the
1990, 1991 and non-qualified stock option plans at prices from $2.50 to $12.50
resulting in cash and stock proceeds totalling $1,022,493.
FASB 123, Accounting for Stock-Based Compensation, requires the Company to
provide pro forma information regarding net income and earnings per share as
if compensation cost for the Company's stock option plans had been determined
in accordance with the fair value based method prescribed in FASB 123. The
Company estimates the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1997: dividend yield of 0 percent;
expected volatility of 11 percent; risk free rate of 6.78 percent; and
expected lives of 5 years; and in 1996: dividend yield of 0 percent; expected
volatility of 11 percent; risk-free interest rate of 6.73 percent; and
expected lives of 7 years. Compensation cost computed pursuant to FASB 123 for
options granted in 1995 was not material.
The weighted average fair value of options granted during the year ended
January 2, 1998 and January 3, 1997 were $1.57 and $3.60, respectively.
Under the accounting provisions of FASB 123, the Company's net income and
earnings per share for 1997 and 1996 would have been reduced to the pro forma
amounts indicated below:
1997 1996
---------- ----------
Net income
As reported......................................... $7,419,000 $6,891,000
Pro forma........................................... $6,771,200 $6,705,000
Basic earnings per share
As reported......................................... $.57 $.53
Pro forma........................................... $.52 $.52
Diluted earnings per share
As reported......................................... $.53 $.50
Pro forma........................................... $.48 $.48
Due to the fact that the Company's stock option programs vest over many
years and additional awards are made each year, the above proforma numbers are
not indicative of the financial impact had the disclosure provisions of FASB
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 1995
through 1997.
F-18
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at January 2, 1998.
OPTIONS
OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED- --------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 1/2/98 CONTRACTUAL LIFE EXERCISE PRICE AT 1/2/98 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
$2.50
to $
4.00 185,195 3.9 years $ 2.88 185,195 $ 2.88
$4.75
to $
5.88 651,579 5.9 years $ 5.11 651,579 $ 5.11
$9.00
to
$12.50 986,000 7.7 years $11.91 436,667 $11.39
------ --------- --------- ------ --------- ------
$2.50
to
$12.50 1,822,774 6.7 years $ 8.56 1,273,441 $ 6.94
====== ========= ========= ====== ========= ======
WARRANTS
The table below summarizes the transactions related to the Company's
warrants to purchase common stock:
WEIGHTED-
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- ---------
Balance at December 31, 1994............................ 470,974 $2.05
Warrants exercised...................................... (136,747) $2.17
Warrants expired........................................ (49,833) $2.63
-------- -----
Balance at December 29, 1995............................ 284,394 $1.89
Warrants exercised...................................... (37,500) $1.73
-------- -----
Balance at January 3, 1997 and January 2, 1998.......... 246,894 $1.91
======== =====
All warrants are exercisable as of January 2, 1998.
In 1995, warrants to purchase 136,747 shares of common stock were exercised
at prices ranging from $0.60 to $4.24 per share resulting in cash and/or stock
(at market price effective on the date of exercise) proceeds in the amount of
$296,852. The stock paid to exercise the options was cancelled and shown as a
reduction in common stock and additional paid in capital on the balance sheet.
In 1996, warrants to purchase 37,500 shares of common stock were exercised
at prices ranging from $1.20 to $2.00 per share, resulting in proceeds of
$65,000.
NOTE 11--COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases certain property, plant and equipment under capital and
operating lease agreements. In the later part of 1995, the Company entered
into a capital lease agreement to finance surgical equipment that was sent to
China in consideration of a five year exclusive supply agreement with a
hospital in Hangzhou, China. The Company committed a $300,000 letter of credit
as further collateral for the lease.
F-19
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Annual future minimum lease payments under noncancellable capital and
operating lease commitments as of January 2, 1998 are as follows:
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- -------- ----------
1998................................................. $431,535 $ 674,410
1999................................................. -- 596,695
2000................................................. -- 490,026
2001................................................. -- 387,603
Thereafter........................................... -- 354,130
-------- ----------
Total minimum lease payments......................... 431,535 $2,502,864
==========
Imputed interest..................................... 35,263
--------
Present value of net minimum lease payments.......... $396,272
========
Rent expense was approximately $686,000, $700,000 and $606,000 for the years
ended January 2, 1998, January 3, 1997 and December 29, 1995, respectively.
LITIGATION AND CLAIMS
In February 1990, a plaintiff filed a $10,000,000 product liability claim
against a doctor and the Company arising from injuries purportedly suffered by
the plaintiff as a result of the implant of a purportedly defective lens
manufactured by Lynell, a subsidiary of the Company. The Company believes that
any liability was discharged as part of Lynell's reorganization under the
Federal Bankruptcy Code prior to the Company's acquisition of Lynell. In
addition, Lynell is being defended by its liability carrier. These proceedings
are presently administratively off the calendar as of August 1994. If the
lawsuit is reactivated, the Company believes that any liability that may
result will not be material to the consolidated financial position or results
of operations.
The Company is involved in other legal actions and claims arising in the
ordinary course of business. It is the opinion of management (based on advice
of legal counsel) that such litigation will be resolved without material
effect on the Company's financial position or results of operations.
OTHER COMMITMENTS
During 1993, the Company entered into consulting agreements with certain
individuals to assist the Company in the development of new products and the
promotion of its current products. Such agreements provide for payments of
cash and the issuance of shares of the Company's common stock and options to
purchase the Company's common stock, at $7 to $11 per share over a six year
period. All common stock was issued at fair market value.
The aggregate commitment under these agreements at January 2, 1998 is
approximately $15,000 in cash, $325,000 worth of common stock, 5,000 shares of
common stock, and options to purchase 132,500 shares of common stock. Included
in other current liabilities at January 2, 1998 and January 3, 1997, is
approximately $402,000 and $411,000, respectively, due to these consultants
payable in cash and shares of the Company's common stock.
NOTE 12--OTHER LIABILITIES
Included in other current liabilities at January 2, 1998 and January 3, 1997
are approximately $1,261,000 and $1,573,000 of commissions due to outside
sales representatives; income tax payable of $638,000 and $163,000; and
deferred revenue of $232,000 and $485,998, respectively.
F-20
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--RELATED PARTY TRANSACTIONS
The Company has had significant related party transactions as discussed in
Notes 4 and 10.
On February 29, 1996, the Company forgave a $120,000 note receivable from
one of the Company's officers in exchange for the officer's efforts in
obtaining certain patents.
During 1997, 1996 and 1995, a law firm, of which a partner is director and
stockholder of the Company, received approximately $280,000, $322,000 and
$256,000 for fees in connection with legal services performed on behalf of the
Company. As of January 2, 1998, included in prepaid, deposits, and other
current assets are $270,000 of prepaid legal fees.
The Company pays an override sales commission, based upon a percentage of
the Company's sales, to a corporation owned by an officer of the Company in
its capacity as a sales representative for the Company. This agreement relates
back to 1983, when the officer initially became associated with the Company in
a sales and marketing capacity. Commissions paid or accrued under this
arrangement totaled approximately $420,000, $412,000 and $322,000 during 1997,
1996 and 1995, respectively.
NOTE 14--STATEMENTS OF CASH FLOWS
Net cash provided by operating activities includes interest paid of
approximately $723,000, $557,000 and $419,000 for the years ended January 2,
1998, January 3, 1997 and December 29, 1995, respectively. Income taxes paid
amounted to approximately $315,000, $1,160,000 and $947,000 for the years
ended January 2, 1998, January 3, 1997 and December 29, 1995, respectively.
Changes in operating working capital as shown in the consolidated statements
of cash flows for the years ended January 2, 1998, January 3, 1997 and
December 29, 1995 are comprised of:
1997 1996 1995
----------- ----------- -----------
Decrease (increase) in:
Accounts receivable................... $(1,172,694) $ 584,675 $(2,222,700)
Other receivables..................... (3,250,000) -- --
Inventories........................... (2,346,531) (2,804,980) (1,086,795)
Prepaids, deposits and other current
assets............................... (673,300) (1,110,039) (308,272)
Increase (decrease) in:
Accounts payable...................... (76,590) 283,929 338,771
Other current liabilities............. 548,068 (21,607) 248,544
----------- ----------- -----------
Change in operating working capital..... $(6,971,047) $(3,068,022) $(3,030,452)
=========== =========== ===========
NOTE 15--NET INCOME PER SHARE
The following is a reconciliation of the weighted average number of shares
used to compute basic and diluted earnings per share:
1997 1996 1995
---------- ---------- ----------
Basic weighted average shares outstanding...... 13,123,950 12,909,506 12,756,183
Diluted effect of stock options and warrants... 989,133 957,602 922,699
---------- ---------- ----------
Diluted weighted average shares outstanding.... 14,113,083 13,867,108 13,678,882
========== ========== ==========
F-21
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--GEOGRAPHIC DATA AND EXPORT SALES
The Company's operations are conducted in the United States and
international markets, principally in Europe, South Africa, Australia and
Southeast Asia. Information about the Company's domestic and international
operations for each fiscal year is as follows:
UNITED
GEOGRAPHIC REGION STATES FOREIGN ELIMINATION CONSOLIDATED
- ----------------- ----------- ----------- ----------- ------------
1997
Sales to unaffiliated
customers.................... $27,843,000 $14,637,000 $ -- $42,480,000
Operating income.............. 11,304,000 1,409,000 (444,000) 12,269,000
Identifiable assets........... 48,260,000 14,131,000 -- 62,391,000
Capital expenditures.......... 1,978,000 868,000 -- 2,846,000
Depreciation and amortization. 2,915,000 610,000 -- 3,525,000
1996
Sales to unaffiliated
customers.................... $29,069,000 $12,143,000 $ -- $41,212,000
Operating income.............. 8,452,000 1,858,000 (233,000) 10,077,000
Identifiable assets........... 42,010,000 10,046,000 -- 52,056,000
Capital expenditures.......... 3,923,000 356,000 -- 4,279,000
Depreciation and amortization. 2,509,000 441,000 -- 2,950,000
The Company's foreign operations for the year ended December 29, 1995 were
not material.
The Company's operations are structured to achieve consolidated objectives.
As a result, significant interdependencies and overlaps exist among the
Company's operating units. Accordingly, the sales, operating income and
identifiable assets shown for each geographic area may not be indicative of
the amounts which would have been reported if the operating units were
independent of one another. Operating is net sales less related costs and
operating expenses, excluding interest.
During the fiscal years ended January 2, 1998, January 3, 1997 and December
29, 1995, the Company had export sales, primarily to Europe, South Africa,
Australia, and Southeast Asia, of approximately $14,637,000, $11,620,000 and
$8,133,000, respectively. Of these sales, approximately $8,438,000, $7,576,000
and $4,841,000 were to Europe, which has been the Company's principal foreign
market for the last three fiscal years.
The Company sells its products internationally, which subject the Company to
several potential risks, including fluctuating exchange rates (to the extent
the Company's transactions are not in U.S. dollars), regulation of fund
transfers by foreign governments, United States and foreign export and import
duties and tariffs and political instability.
NOTE 17--FOURTH QUARTER SIGNIFICANT ITEMS
During the fourth quarter of 1997, the Company recorded royalty income of
$2,554,000 which resulted from a settlement agreement totaling $3,250,000
relating to the use of certain of the Company's patents from 1986 through
1997. As of January 2, 1998, the Company has deferred revenue of $696,000
related to this transaction which will be recognized over the next three
years.
NOTE 18--SUBSEQUENT EVENT
On January 5, 1998 the Company acquired a 60% interest in a foreign
distributor of ophthalmic products. The distributor had 1997 sales of
approximately $15 million. The results of operations of the distributor are
not material as compared to the Company's results of operations.
F-22
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
ON SCHEDULE AND CONSENT
To the Board of Directors and Stockholders
STAAR Surgical Company and Subsidiaries
The audits referred to in our report dated March 6, 1998, included the
related financial statement schedule as of January 2, 1998, and for each of
the three years in the period ended January 2, 1998, included in the annual
report on Form 10-K of STAAR Surgical Company and subsidiaries. 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.
We consent to incorporation by reference in the Registration Statements (No.
33-37248) (No. 33-76404) and (No. 33-60241) on Form S-8 of STAAR Surgical
Company of our report dated March 6, 1998, relating to the consolidated
balance sheets of STAAR Surgical Company and subsidiaries as of January 2,
1998 and January 3, 1997 and the related consolidated statements of income,
stockholders' equity, and cash flows and related schedule for each of the
three years in the period ended January 2, 1998, which report appears in the
January 2, 1998 annual report on Form 10-K of STAAR Surgical Company and
subsidiaries.
BDO Seidman, LLP
Los Angeles, California
March 30, 1998
F-23
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
BEGINNING AT END
DESCRIPTION OF YEAR ADDITIONS DEDUCTIONS OF YEAR
----------- --------- --------- ---------- --------
1997
Allowance for doubtful accounts
deducted from accounts receivable in
balance sheet........................ $112,000 $ 16,000 $ -- $128,000
Reserve for obsolescence deducted from
inventories in balance sheet......... -- 131,000 -- 131,000
-------- -------- -------- --------
$112,000 $147,000 $ -- $259,000
======== ======== ======== ========
1996
Allowance for doubtful accounts
deducted from accounts receivable in
balance sheet........................ $119,000 $ $ 7,000 $112,000
Reserve for obsolescence deducted from
inventories in balance sheet......... 31,000 31,000
-------- -------- -------- --------
$150,000 $ $ 38,000 $112,000
======== ======== ======== ========
1995
Allowance for doubtful accounts
deducted from accounts receivable in
balance sheet........................ $307,000 $112,000 $300,000 $119,000
Reserve for obsolescence deducted from
inventories in balance sheet......... 105,000 74,000 31,000
-------- -------- -------- --------
$412,000 $112,000 $374,000 $150,000
======== ======== ======== ========
- --------
(1) Represents allowance for uncollectible receivables.
(2) Writeoffs.
(3) Obsolete inventory written down to zero value.
F-24