UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _______ to _______
Commission File Number: 0-27598
IRIDEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0210467
-------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
1212 TERRA BELLA AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043-1824
(Address of principal executive offices, including zip code)
(650) 940-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No [ ]; (2) Yes [X] No [ ]
The number of shares of common stock, $.01 par value, issued and outstanding as
of August 7, 2002 was 6,862,862.
IRIDEX CORPORATION
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of June 29, 2002
and December 29, 2001 3
Condensed Consolidated Statements of Operations for the three months
and six months ended June 29, 2002 and June 30, 2001 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 29, 2002 and June 30, 2001 5
Condensed Consolidated Statements of Comprehensive Income (Loss) for the
three and six months ended June 29, 2002 and June 30, 2001 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 26
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 27
ITEM 5. OTHER INFORMATION 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURE 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 29, DECEMBER 29,
------------ --------------
2002 2001
------------ --------------
(unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 6,351 $ 4,613
Available-for-sale securities . . . . . . . . 3,680 4,489
Accounts receivable, net. . . . . . . . . . . 6,952 8,066
Inventories . . . . . . . . . . . . . . . . . 11,838 12,562
Prepaids and other current assets . . . . . . 542 599
------------ --------------
Total current assets. . . . . . . . . . . . 29,363 30,329
Property and equipment, net . . . . . . . . . 1,287 1,535
Deferred income taxes . . . . . . . . . . . . 1,932 1,924
------------ --------------
Total assets. . . . . . . . . . . . . . . . $ 32,582 $ 33,788
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . $ 729 $ 1,176
Accrued expenses. . . . . . . . . . . . . . . 2,559 2,779
------------ --------------
Total liabilities . . . . . . . . . . . . . 3,288 3,955
------------ --------------
Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . . 70 69
Additional paid-in capital. . . . . . . . . . 23,536 23,417
Accumulated other comprehensive income (loss) (2) 3
Treasury stock. . . . . . . . . . . . . . . . (430) (430)
Retained earnings . . . . . . . . . . . . . . 6,120 6,774
------------ --------------
Total stockholders' equity. . . . . . . . . 29,294 29,833
------------ --------------
Total liabilities and stockholders' equity. $ 32,582 $ 33,788
============ ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,433 $ 7,088 $ 14,396 $ 12,823
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,312 3,391 8,190 6,763
---------- ---------- ---------- ----------
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,121 3,697 6,206 6,060
---------- ---------- ---------- ----------
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . 1,320 1,176 2,465 2,488
Sales, general and administrative. . . . . . . . . . . . . . . . . . . . . 2,512 2,624 4,799 5,422
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 3,832 3,800 7,264 7,910
---------- ---------- ---------- ----------
Operating loss from continuing operations. . . . . . . . . . . . . . . . . . (711) (103) (1,058) (1,850)
Other income, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 121 97 261
---------- ---------- ---------- ----------
Income (loss) from continuing operations before benefit from (provision for)
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (657) 18 (961) (1,589)
Benefit from (provision for) income taxes. . . . . . . . . . . . . . . . . 210 (7) 307 676
---------- ---------- ---------- ----------
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . (447) 11 (654) (913)
Loss from discontinued operations (net of applicable income tax benefit of
$-, $-, $- and $542, respectively) . . . . . . . . . . . . . . . . . . . . . - - - (893)
---------- ---------- ---------- ----------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (447) $ 11 $ (654) $ (1,806)
========== ========== ========== ==========
Income (loss) from continuing operations per common share-basic. . . . . . . $ (0.07) $ 0.00 $ (0.10) $ (0.14)
Loss from discontinued operations per common share-basic . . . . . . . . . . - - - (0.13)
---------- ---------- ---------- ----------
Net income (loss) per common share-basic . . . . . . . . . . . . . . . . . . $ (0.07) $ 0.00 $ (0.10) $ (0.27)
========== ========== ========== ==========
Income (loss) from continuing operations per common share-diluted. . . . . . $ (0.07) $ 0.00 $ (0.10) $ (0.14)
Loss from discontinued operations per common share-diluted . . . . . . . . . - - - (0.13)
---------- ---------- ---------- ----------
Net income (loss) per common share-diluted . . . . . . . . . . . . . . . . . $ (0.07) $ 0.00 $ (0.10) $ (0.27)
========== ========== ========== ==========
Shares used in per common share basic calculations . . . . . . . . . . . . . 6,861 6,742 6,849 6,727
========== ========== ========== ==========
Shares used in per share diluted calculations. . . . . . . . . . . . . . . . 6,861 6,874 6,849 6,727
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
1
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 29, JUNE 30,
2002 2001
---------- ----------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (654) $ (1,806)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 564
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 437 421
Provision for inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 140
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,114 1,141
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654 (1,544)
Prepaids and other current assets . . . . . . . . . . . . . . . . . . . . . . . 57 212
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (447) 94
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (220) (991)
---------- ----------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . 1,003 (1,769)
---------- ----------
Cash flows from investing activities:
Purchases of available-for-sale securities. . . . . . . . . . . . . . . . . . . . . (2,555) (1,367)
Proceeds from maturity of available-for-sale securities . . . . . . . . . . . . . . 3,359 1,089
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . (189) (328)
---------- ----------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . 615 (606)
---------- ----------
Cash flows from financing activities:
Issuance of common stock, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 133
---------- ----------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . 120 133
---------- ----------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . 1,738 (2,242)
Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . . . . 4,613 9,998
---------- ----------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . . . . . . . $ 6,351 $ 7,756
========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized losses on available-for-sale securities $ (5) $ (2)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . $ (447) $ 11 $ (654) $ (1,806)
Other comprehensive loss:
Change in unrealized loss on
available-for-sale securities (3) (5) (5) (2)
---------- ---------- ---------- ----------
Comprehensive income (loss) . . . $ (450) $ 6 $ (659) $ (1,808)
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
IRIDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
IRIDEX Corporation have been prepared in accordance with generally accepted
accounting principles in the United States of America for interim financial
information and pursuant to the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation
have been included. The condensed consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in our Annual Report on Form 10-K, which was
filed with the Securities and Exchange Commission on March 29, 2002 (as amended
on Form 10K/A on April 10, 2002). The results of operations for the three month
and six month periods ended June 29, 2002 are not necessarily indicative of the
results for the year ending December 28, 2002 or any future interim period.
2. INVENTORIES (IN THOUSANDS):
JUNE 29, DECEMBER 29,
2002 2001
------------ -------------
(unaudited)
Raw materials and work in progress. . . . . $ 7,310 $ 8,078
Finished goods. . . . . . . . . . . . . . . 4,528 4,484
------------ -------------
Total inventories . . . . . . . . . . . . . $ 11,838 $ 12,562
============ =============
3. COMPUTATIONS OF NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted net income (loss) per share are computed by dividing net
income (loss) for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net income
(loss) per share excludes potential common stock if their effect is
anti-dilutive. Potential common stock consists of incremental common shares
issuable upon the exercise of stock options.
7
A reconciliation of the numerator and denominator of net income per common
share is as follows (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2002 2001 2002 2001
---------- --------- ---------- ----------
(unaudited) (unaudited)
Numerator
Income (loss) from continuing operations. . . . . . . . . . . $ (447) $ 11 $ (654) $ (913)
Income (loss) from discontinued operations. . . . . . . . . . - - - (893)
---------- --------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ (447) $ 11 $ (654) $ (1,806)
========== ========= ========== ==========
Denominator - Basic
Weighted average common stock outstanding . . . . . . . . . 6,861 6,742 6,849 6,727
========== ========= ========== ==========
Basic income (loss) per share from continuing operations. . . $ (0.07) $ 0.00 $ (0.10) $ (0.14)
Basic income (loss) per share from discontinued operations. . 0.00 0.00 0.00 (0.13)
========== ========= ========== ==========
Basic income (loss) per share . . . . . . . . . . . . . . . . $ (0.07) $ 0.00 $ (0.10) $ (0.27)
========== ========= ========== ==========
Denominator - Diluted
Weighted average common stock outstanding . . . . . . . . . 6,861 6,742 6,849 6,727
Effect of dilutive securities
Weighted average common stock options . . . . . . . . . . . - 132 - -
---------- --------- ---------- ----------
Total weighted average stock and options outstanding. . . . . 6,861 6,874 6,849 6,727
========== ========= ========== ==========
Diluted income (loss) per share from continuing operations. . $ (0.07) $ 0.00 $ (0.10) $ (0.14)
Diluted income (loss) per share from discontinued operations. 0.00 0.00 0.00 (0.13)
========== ========= ========== ==========
Diluted income (loss) per share . . . . . . . . . . . . . . . $ (0.07) $ 0.00 $ (0.10) $ (0.27)
========== ========= ========== ==========
During the three and six months ended June 29, 2002, options to purchase
1,614,037 shares a weighted average exercise price of $5.29 per share were
outstanding, but were not included in the computations of diluted net income
(loss) per common share because their effect was antidilutive. For the six
months ended June 30, 2001 options to purchase 1,525,889 shares at a weight
average price of $4.68 per share were outstanding but not included in the
computations of diluted net income per common share because their effect was
antidilutive. For the three months ended June 30, 2001 options to purchase
849,821 shares at a weighted average exercise price of $7.39 were outstanding
but were not included in the computations of diluted net income per common share
because the exercise price of the related options exceeded the average market
price of the common shares. These options could dilute earnings per share in
future periods.
4. DISCONTINUED OPERATIONS
In April 2001, management decided to discontinue the Laser Research
segment. There were no revenues, costs or expenses for this segment for both
the three month periods ended June 29, 2002 and June 30, 2001, respectively.
The total loss on discontinued operations of $893,000 (net of a $542,000 income
tax benefit) was recorded in the first quarter of 2001 and consisted primarily
of inventory and sales returns costs. No assets or liabilities of the Laser
Research segment remain and no proceeds are expected from the disposition of
this segment.
8
5. BUSINESS SEGMENTS (UNAUDITED)
We operate in two reportable segments: the ophthalmology medical device
segment and the aesthetics medical device segment. In both segments, we develop,
manufacture and market medical devices. Our revenues arise from the sale of
consoles, delivery devices, disposables and service and support activities.
Information on reportable segments for the three and six months ended June 29,
2002 and June 30, 2001 is as follows (in thousands):
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 29, 2002 Three Months Ended June 30, 2001 Six Months Ended June 29, 2002
- --------------------------------------------------------------------------------------------------------------------------
Ophthalmology Aesthetics Total Ophthalmology Aesthetics Total Ophthalmology Aesthetics
Medical Medical Medical Medical Medical Medical
Devices Devices Devices Devices Devices Devices
- --------------------------------------------------------------------------------------------------------------------------
Sales $ 5,679 $ 1,754 $ 7,433 $ 5,444 $ 1,644 $ 7,088 $ 10,756 $ 3,640
- --------------------------------------------------------------------------------------------------------------------------
Direct Cost 1,797 727 2,524 1,732 565 2,297 3,469 1,601
of Goods
Sold
- --------------------------------------------------------------------------------------------------------------------------
Direct 3,882 1,027 4,909 3,712 1,079 4,791 7,287 2,039
Gross
Margin
- --------------------------------------------------------------------------------------------------------------------------
Total (5,566) (4,773)
Unallocated
Costs
- --------------------------------------------------------------------------------------------------------------------------
Pre-tax (657) 18
income
(loss)
- --------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------
Six Months Ended June 30, 2001
- ----------------------------------------------------------------
Total Ophthalmology Aesthetics Total
Medical Medical
Devices Devices
- ----------------------------------------------------------------
Sales $ 14,396 $ 10,074 $ 2,749 $ 12,823
- ----------------------------------------------------------------
Direct Cost 5,070 3,214 1,008 4,222
of Goods
Sold
- ----------------------------------------------------------------
Direct 9,326 6,860 1,741 8,601
Gross
Margin
- ----------------------------------------------------------------
Total (10,287) (10,190)
Unallocated
Costs
- ----------------------------------------------------------------
Pre-tax (961) (1,589)
income
(loss)
- ----------------------------------------------------------------
Indirect costs of manufacturing, research and development, and selling,
general and administrative costs are not allocated to the segments.
The Company's assets and liabilities are not evaluated on a segment basis.
Accordingly, no disclosure on segment assets and liabilities is provided.
6. RECENT ACCOUNTING PRONOUNCEMENTS
On April 30, 2002, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 145 (SFAS 145), Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections. FAS 145
rescinds both FASB Statement No. 4 (SFAS 4), Reporting Gains and Losses from
Extinguishment of Debt, and the amendment to FAS 4, FASB Statement No. 64 (SFAS
64), Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Through
this rescission, FAS 145 eliminates the requirement (in both SFAS 4 and SFAS 64)
that gains and losses from the extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect. However, an entity is not prohibited from classifying such gains and
losses as extraordinary items, so long as it meets the criteria in paragraph 20
of Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
Further, SFAS 145 amends paragraph 14(a) of FASB Statement No. 13, Accounting
for Leases, to eliminate an inconsistency between the accounting for
sale-leaseback transactions and certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The amendment requires
that a lease modification (1) results in recognition of the gain or loss in the
9
financial statements, (2) is subject to FASB Statement No. 66, Accounting for
Sales of Real Estate, if the leased asset is real estate (including integral
equipment), and (3) is subject (in its entirety) to the sale-leaseback rules of
FASB Statement No. 98, Accounting for Leases: Sale-Leaseback Transactions
Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease
Term, and Initial Direct Costs of Direct Financing Leases. Generally, FAS 145 is
effective for transactions occurring after May 15, 2002. We do not expect that
the adoption of SFAS 145 will have a material effect on our financial
performance or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS 146"). SFAS 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146
also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS 146
will be effective for exit or disposal activities that are initiated after
December 31, 2002 and early application is encouraged. We will adopt SFAS 146
during the first fiscal quarter of 2003. The provisions of EITF No. 94-3 shall
continue to apply for an exit activity initiated under an exit plan that met the
criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The effect on
adoption of SFAS 146 will change on a prospective basis the timing of when the
restructuring charges are recorded from a commitment date approach to when the
liability is incurred. The Company does not expect that the adoption will have a
material effect on its financial performance or results of operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, such as statements relating to levels of future sales and operating
results; actual order rate and market acceptance of our products; expectations
for future sales growth, generally, and the potential for production cost
decreases and our ability to continue our efforts to reduce the cost of
components to offset anticipated decreases in our average selling prices; the
impact of the current difficult economic environment on levels of sales;
expectations of decreased levels of employee-related costs as a result of the
recently completed reduction-in force; levels of future investment in research
and development efforts; favorable Center for Medicare and Medicaid coverage
decisions regarding AMD procedures that use our products; results of clinical
studies and risks associated with bringing new products to market, and levels of
international sales. In some cases, forward-looking statements can be identified
by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "intends," "potential,"
"continue," or the negatives of such terms or other comparable terminology.
These statements involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to
differ materially from those expressed or implied by such forward-looking
statements, which reflect management's analysis only as of the date of this Form
10-Q. We undertake no obligation to update the results of any revision of these
forward-looking statements as a result of the factors set forth under "Factors
That May Affect Future Operating Results" and other risks detailed in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March
29, 2002 and detailed from time to time in the reports that we file with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
sales for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2002 2001 2002 2001
(UNAUDITED) (UNAUDITED)
--------- --------- --------- ---------
Sales. . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . . . . 58.0 47.8 56.9 52.7
--------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . 42.0 52.2 43.1 47.3
--------- --------- --------- ---------
Operating expenses:
Research and development . . . . . . . . . . . 17.8 16.6 17.1 19.4
Sales, general and administrative. . . . . . . 33.7 37.0 33.3 42.3
--------- --------- --------- ---------
Total operating expenses . . . . . . . . . . 51.5 53.6 50.4 61.7
--------- --------- --------- ---------
Operating loss from continuing operations. . . . (9.5) (1.4) (7.3) (14.4)
Other income, net. . . . . . . . . . . . . . . . 0.7 1.7 0.7 2.0
--------- --------- --------- ---------
Income (loss) from continuing operations before
benefit from (provision for) income taxes. . . . (8.8) 0.3 (6.6) (12.4)
Benefit from (provision for) income taxes. . . . 2.8 (0.1) 2.1 5.3
--------- --------- --------- ---------
Income (loss) from continuing operations . . . . (6.0) 0.2 (4.5) (7.1)
Income (loss) from discontinued operations (net
of applicable income tax benefit). . . . . . . . 0.0 0.0 0.0 (7.0)
--------- --------- --------- ---------
Net income (loss). . . . . . . . . . . . . . . . (6.0)% 0.2% (4.5)% (14.1)%
========= ========= ========= =========
The following table sets forth for the periods indicated the amount of
sales for our operating segments and sales as a percentage of total sales (in
thousands).
11
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
- ---------------------------------------------------------------------------------------------------------
June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
(UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
of total of total of total of total
sales sales sales sales
- ---------------------------------------------------------------------------------------------------------
Domestic $ 4,744 63.8% $ 4,038 57.0% $ 8,743 60.7% $ 7,160 55.8%
- ---------------------------------------------------------------------------------------------------------
International 2,689 36.2% 3,050 43.0% 5,653 39.3% 5,663 44.2%
- ---------------------------------------------------------------------------------------------------------
Total $ 7,433 100.0% $ 7,088 100.0% $14,396 100.0% $12,823 100.0%
- ---------------------------------------------------------------------------------------------------------
Ophthalmology:
- ---------------------------------------------------------------------------------------------------------
Domestic $ 3,220 43.3% $ 2,813 39.7% $ 6,037 41.9% $ 5,015 39.1%
- ---------------------------------------------------------------------------------------------------------
International 2,459 33.1% 2,631 37.1% 4,719 32.8% 5,059 39.5%
- ---------------------------------------------------------------------------------------------------------
Total $ 5,679 76.4% $ 5,444 76.8% $10,756 74.7% $10,074 78.6%
- ---------------------------------------------------------------------------------------------------------
Aesthetics:
- ---------------------------------------------------------------------------------------------------------
Domestic $ 1,524 20.5% $ 1,225 17.3% $ 2,706 18.8% $ 2,145 16.7%
- ---------------------------------------------------------------------------------------------------------
International 230 3.1% 419 5.9% 934 6.5% 604 4.7%
- ---------------------------------------------------------------------------------------------------------
Total $ 1,754 23.6% $ 1,644 23.2% $ 3,640 25.3% $ 2,749 21.4%
- ---------------------------------------------------------------------------------------------------------
Combined Ophthalmology and Dermatology Sales
Sales for the three months ended June 29, 2002 increased 4.9% to $7.4
million for the three months ended June 29, 2002 from $7.1 million for the three
months ended June 30, 2001. Sales for the six months ended June 29, 2002
increased 12.3% to $14.4 million from $12.8 million for the six months ended
June 30, 2001. For both the three and six month periods the overall increase was
driven primarily by increased unit sales of our ophthalmology products and sales
of the Apex hair removal laser system for aesthetics, which was introduced in
July 2001, offset by a decrease in average selling prices.
Domestic sales increased by 17.5% to $4.7 million from $4.0 million for the
comparable prior year three-month period. For the six months ended June 29, 2002
domestic sales increased 22.1% to $8.7 million from $7.2 million. For both the
three and six month periods, the increase was due mainly to increased unit sales
of our ophthalmology delivery devices and laser systems as well as unit sales of
the Apex hair removal laser system for aesthetics offset by decreased average
selling prices for domestic products.
International sales decreased 10.0% to $2.7 million for the three months
ended June 29, 2002 from $3.0 million for the comparable prior year three-month
period, primarily as a result of decreased unit sales of our ophthalmology
visible laser systems and net decreases in average selling prices offset, in
part, by increased sales of ophthalmology delivery devices and sales of the Apex
hair removal laser system. For the six months ended June 29, 2002 international
sales remained constant at 5.7 million.
12
Ophthalmology Sales
Ophthalmology sales increased to $5.7 million for the three months ended
June 29, 2002 from $5.4 million for the three months ended June 30, 2001. For
the six months ended June 29, 2002 ophthalmology sales increased to $10.8
million from $10.1 million for the comparable prior year six-month period.
Domestic ophthalmology sales increased to $3.2 million for the three months
ended June 29, 2002 from $2.8 million for the comparable prior year three-month
period. For the six months ended June 29, 2002 domestic ophthalmology sales
increased to $6.0 million from $5.0 million for the comparable prior year
six-month period. For both the three and six month periods domestic
ophthalmology sales increased mainly as a result of increased sales of delivery
devices and laser systems. International ophthalmology sales decreased to $2.5
million for the three months ended June 29, 2002 from $2.6 million for the
comparable prior year three-month period. For the six months ended June 29, 2002
international ophthalmology sales decreased to $4.7 million from $5.1 million
for the prior six-month period. For both the three and six month periods, the
decrease in international ophthalmology sales was due to decreased sales of
visible laser systems offset, in part, by increases in sales of delivery
devices.
Aesthetics Sales
Aesthetics sales increased to $1.8 million for the three months ended June
29, 2002 from $1.6 million for the three months ended June 30, 2001. The second
quarter of 2001 included approximately $0.4 million of DioLite laser system
shipments delayed from the first quarter of 2001 as a result of a key component
delay. See "- Factors that Hay Affected Future Results - We Depend on Sole
Source Limited Source Suppliers." For the six months ended June 29, 2002
aesthetics sales increased to $3.6 million from $2.7 million for the comparable
prior six-month period. Domestic aesthetics sales increased to $1.5 million for
the three months ended June 29, 2002 from $1.2 million for as compared to the
comparable prior year three-month period. For the six months ended June 29, 2002
domestic aesthetics sales increased to $2.7 million from $2.1 million. For both
the three and six month periods, the increase in domestic aesthetics sales was
driven by sales of the Apex hair removal laser system which commenced shipment
in July 2001. International aesthetics sales decreased by $0.2 million to $0.2
million for the three months ended June 29, 2002 from $0.4 million for the
comparable prior three-month period due to the impact of the DioLite system
shipments delayed from the first quarter of 2001 which more than offset
international sales of the Apex hair removal laser system in the second quarter
of 2002. For the six months ended June 29, 2002 international aesthetics sales
increased to $0.9 million from $0.6 million mainly as a result of sales of the
Apex hair removal laser system. Our aesthetics products sales continue to be
affected by the current weak economic conditions, particularly in the United
States, and because hair removal procedures completed using our Apex 800 laser
system are typically elective procedures that are differed by patients in
difficult economics times, See "-Factors That Hay Affect Future Results - Our
Business has been adversely Impacted by the Current Worldwide Economic Slowdown
and Related Uncertainties."
Gross Profit. Our gross profit decreased 15.6% to $3.1 million for the
three months ended June 29, 2002 compared to $3.7 million for the three months
ended June 30, 2001. Gross profit as a percentage of net sales for the three
months ended June 29, 2002 decreased to 42.0%, compared to 52.2% for the three
months ended June 30, 2001. For the six months ended June 29, 2002, gross profit
as a percentage of net sales decreased to 43.1% as compared to 47.3% for the six
months ended June 30, 2001. For both the three and six month periods ended June
29, 2002, the decrease in gross profit was primarily due to increased overhead
costs related mainly to reorganization of our manufacturing and service
functions and inventory related charges, lower average selling prices, the
addition of lower margin sales of the Apex hair removal laser system and to the
reduction in workforce. For the three and six months ended June 29, 2002 the
reorganization of our manufacturing and services functions and inventory related
charges resulted in a decrease in gross profit of approximately $0.3 million
while lower average selling prices resulted in a decrease of approximately $0.3
million. Although, increasing competition has continued to result in a downward
trend in average selling prices for some products, we intend to continue our
efforts to reduce the cost of components and manufacturing and thereby mitigate
the impact of price reductions on our gross profit. See "-Factors That Hay
Affect Future Results - If We Cannot Increase Our Sales Volumes, Reduce Our
Costs or Introduce Higher Margin Products to Offset Anticipated Reduction in the
Average Unit Selling Price of our Products, Our Operating Results May Suffer.
Additionally, a portion of our manufacturing costs in the second quarter of 2002
related to reorganization of the manufacturing function and to reduction in
force and are not expected to recur. Overall, however, we expect our gross
profit margins to continue to fluctuate due to changes in the relative
proportions of domestic and international sales, mix of sales of existing
products, pricing, product costs and a variety of other factors. See "-Factors
That May Affect Future Results - Our Operating Results Fluctuate from Quarter to
Quarter and Year to Year
Research and Development. Our research and development expenses increased
by 12.2% to $1.3 million for the three months ended June 29, 2002 from $1.2
million for the three months ended June 30, 2001. Research and development
expenses increased as a percentage of net sales to 17.8% for the three months
ended June 29, 2002 from 16.6% for the comparable prior year three-month period.
The increase in research and development expense in absolute dollars and as a
percentage of sales for the three month period ended June 29, 2002 was due
primarily to the launch of new development projects and restructuring charges
related to a reduction in work force during the second quarter of 2002.
Restructuring charges accounted for approximately $60,000 of the overall
increase in research and development expense while the launch of new development
projects accounted for the remainder of the increase. For the six month periods
ended June 29, 2002 and June 30, 2001, research and development expenses
remained relatively constant at approximately $2.5 million. The increase in
costs in 2002 due to new development projects and restructuring charges was
offset by costs in 2001 associated with the completion of development work on
the Apex 800 hair removal laser system. Research and development expenses as a
percentage of net sales decreased during the period to
13
17.1% for the six months ended June 29, 2002 from 19.4% for the comparable 2001
period mainly as a result of increased sales in the second half of 2002. The
reduction in workforce is expected to reduce research and development
employee-related costs by going forward.
Sales, General and Administrative. Our sales, general and administrative
expenses decreased by 4.3% to $2.5 million for the three months ended June 29,
2002 from $2.6 million for the three months ended June 30, 2001. As a percentage
of net sales, sales, general and administrative expenses decreased to 33.7% for
the three months ended June 29, 2002 from 37.0% for the comparable prior year
three-month period. For the six months ended June 29, 2002, sales, general and
administrative expenses decreased by 11.5% to $4.8 million from $5.4 million for
the comparable period in 2001. Sales, general and administrative expenses as a
percentage of net sales decreased to 33.3% for the six months ended June 29,
2002 from 42.3% for the comparable period in 2001. The decrease in absolute
dollars and as a percentage of net sales for both the three and six month
periods ended June 29, 2002 was due primarily to a net decrease in various
support related expenses offset by reduction in force related costs in the
second quarter of 2002. For both the three and six month periods ended June 29,
2002 the reduction in force related costs were approximately $60,000 while the
decrease in various support related expenses made up the remainder of the net
decrease in selling, general and administrative expenses. As part of the
restructuring during the second quarter of 2002, the ophthalmology and aeshetics
product development and marketing functions were combined, allowing for a
reduction in operating expenses for these functions. The reduction in workforce
is expected to reduce research and development employee-related costs by going
forward.
Discontinued Operations. In April 2001, management decided to discontinue
the Laser Research segment. There were no revenues, costs or expenses for this
segment for either of the three month periods ended June 29, 2002 and June 30,
2001, respectively. The total loss on discontinued operations of $893,000 (net
of a $542,000 income tax benefit) was recorded in the first quarter of 2001 and
consisted primarily of inventory and sales returns costs. No assets or
liabilities of the Laser Research segment remain and no proceeds are expected
from the disposition of this segment.
Reduction in Force. During the quarter ended June 29, 2002, we reduced our
workforce by approximately 12%. For the three months ended June 29, 2002, we
recorded restructuring charges totaling approximately $150,000 that were related
primarily to the severance costs associated with headcount reduction instituted
in the second quarter. The reduction in workforce is expected to reduce
employee-related costs by $1.2 million annually going forward. As of June 29,
2002, we had a total headcount of 110 full-time employees after the reduction in
force.
LIQUIDITY AND CAPITAL RESOURCES
At June 29, 2002, our primary sources of liquidity included cash and cash
equivalents and available-for-sale securities in the aggregate amount of $10.0
million. In addition, we have available $4 million under our unsecured line of
credit which bears interest at the bank's prime rate and expires in October
2002. As of June 29, 2002, no borrowings were outstanding under this credit
facility. We expect to renew the line of credit in October 2002 assuming that
the terms continue to be acceptable.
During the six months ended June 29, 2002, we generated $1.7 million in
cash and cash equivalents. During this period, operating activities provided
$1.0 million of cash. Sources of cash from operating activities included a
decrease in net accounts receivable of $1.1 million, a decrease in net
inventories of $0.7 million and depreciation of $0.4 million, partially offset
by uses of cash including a net loss of $0.7 million, a decrease in accounts
payable of $0.4 million and a decrease in accrued expenses of $0.2 million.
We implemented procedures to reduce overall inventory levels and accounts
receivable balances and will continue these asset management efforts to help
increase our cash position.
Investing activities provided $0.6 million in cash and cash equivalents
during the six months ended June 29, 2002, primarily due to net proceeds from
maturity of available for sale securities of $0.8 million offset by $0.2 million
for the acquisition of property and equipment.
14
Net cash provided by financing activities during the six months ended June
29, 2002 was $0.1 million which consisted of the issuance of common stock.
We believe that, based on current estimates, our cash, cash equivalents and
available-for-sale securities together with cash generated from operations and
our credit facility will be sufficient to meet our anticipated cash requirements
for the next 12 months. However, if the current economic downturn remains
protracted, we may need to expand our cash reserves to fund our operations. Our
liquidity could be negatively affected by a continued decline in demand for our
products, the need to invest in new product development or reductions in
spending by our customers as a result of the continuing economic downturn or
other factors. There can be no assurance that additional debt or equity
financing will be available when required or, if available, can be secured on
terms satisfactory to us. See "-Factors That May Affect Future Results - We May
Need Additional Capital, which May Not Be Available, and Our Ability to Grow may
be Limited as a Result."
In December 1998, we instituted a stock repurchase program whereby up to
150,000 shares of our Common Stock may be repurchased in the open market. We
plan to utilize all of the reacquired shares for reissuance in connection with
employee stock programs. No shares were repurchased during the six months ended
June 29, 2002. To date, we have purchased 103,000 shares of our Common Stock
under this program.
CRITICAL ACCOUNTING POLICIES
The preparation of our condensed financial statements in conformity with
United States Generally Accepted Accounting Principles (GAAP) requires us to
make estimates and judgments that affect the reported amounts of assets and
liabilities, net sales and expenses, and the related disclosures. We base our
estimates on historical experience, our knowledge of economic and market factors
and various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
are affected by significant estimates, assumptions and judgments used in the
preparation of our condensed consolidated financial statements.
Revenue Recognition.
Revenue from product sales is recognized upon receipt of a purchase order
and product shipment provided no significant obligations remain and collection
of the receivables is deemed probable. Up-front fees received in connection with
product sales are deferred and recognized over the associated product shipments.
Sales Return Allowance and Allowance for Doubtful Accounts.
In the process of preparing financial statements we must make estimates and
assumptions that affect the reported amount of assets and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Specifically, we must estimate future product returns related to current period
product revenue. We analyze historical returns, current economic trends and
changes in customer demand and acceptance of our products when evaluating the
adequacy of the sales returns allowance and other allowances. Significant
management judgments and estimates must be made and used in connection with
establishing the sales returns and other allowances in any accounting period.
Material differences may result in the amount and timing of our revenue for any
period if management made different judgments or utilized different estimates.
Similarly our management must make estimates of the uncollectibility of our
accounts receivable. Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. Our
accounts receivable balance was $7.0 million, net of allowance for doubtful
accounts of $0.2 million as of June 29, 2002.
15
Inventories.
Inventories are stated at the lower of cost or market. Cost is determined
on a standard cost basis which approximates actual cost on a first-in, first-out
(FIFO) method. Lower of cost or market is evaluated by considering obsolescence,
excessive levels of inventory, deterioration and other factors.
Income Taxes.
Income taxes are accounted for under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
Warranty Reserves.
We provide reserves for the estimated cost of product warranties at the
time revenue is recognized. We estimate the costs of our warranty obligations
based on our historical experience of known product failure rates, use of labor,
materials and service delivery costs incurred in correcting product failures. In
addition, from time to time, specific warranty accruals may be made if
unforeseen technical problems arise. Should our actual experience relative to
these factors differ from our estimates, we may be required to record additional
warranty reserves. Alternatively, if we provide more reserves than we need, we
may reverse a portion of such provision in future periods.
RECENT ACCOUNTING PRONOUNCEMENTS
On April 30, 2002, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 145 (SFAS 145), Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections. FAS 145
rescinds both FASB Statement No. 4 (SFAS 4), Reporting Gains and Losses from
Extinguishment of Debt, and the amendment to FAS 4, FASB Statement No. 64 (SFAS
64), Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Through
this rescission, FAS 145 eliminates the requirement (in both SFAS 4 and SFAS 64)
that gains and losses from the extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect. However, an entity is not prohibited from classifying such gains and
losses as extraordinary items, so long as it meets the criteria in paragraph 20
of Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
Further, SFAS 145 amends paragraph 14(a) of FASB Statement No. 13, Accounting
for Leases, to eliminate an inconsistency between the accounting for
sale-leaseback transactions and certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The amendment requires
that a lease modification (1) results in recognition of the gain or loss in the
financial statements, (2) is subject to FASB Statement No. 66, Accounting for
Sales of Real Estate, if the leased asset is real estate (including integral
equipment), and (3) is subject (in its entirety) to the sale-leaseback rules of
FASB Statement No. 98, Accounting for Leases: Sale-Leaseback Transactions
Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease
Term, and Initial Direct Costs of Direct Financing Leases. Generally, FAS 145 is
effective for transactions occurring after May 15, 2002. We do not expect that
the adoption of SFAS 145 will have a material effect on our financial
performance or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS 146"). SFAS 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146
also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS 146
will be effective for exit or disposal activities that are initiated after
December 31, 2002 and early application is encouraged. We will adopt SFAS 146
during first quarter of 2003. The provision of EITF No. 94-3 shall continue to
apply for an exit activity initiated under an exit plan that met the criteria of
EITF No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS
146 will change on a prospective basis the timing of when the restructuring
charges are recorded from a commitment date approach to when the liability is
incurred. The Company does not expect that the adoption will have a material
effect on its financial performance or results of operations.
16
FACTORS THAT MAY AFFECT FUTURE RESULTS
We Rely on Continued Market Acceptance of Our Products. We currently market
visible and infrared light semiconductor-based photocoagulator medical laser
systems to the ophthalmic market. We also market a visible and infrared light
semiconductor-based photocoagulator medical laser system to the aesthetics
market. We believe that continued and increased sales, if any, of these medical
laser systems is dependent upon a number of factors including the following:
- Product performance, procedures and price;
- Recommendations and opinions by ophthalmologists and
dermatolgists;
- Performance of these laser systems and treatments which are a
beneficial alternative to competing technologies and treatments;
- The willingness of ophthalmologists and dermatologists to convert
to semiconductor-based or infrared laser systems from alternative
technologies; and
- The level of reimbursement for treatments administered with our
products.
Any significant decline in market acceptance of our products would have a
material adverse effect on our business, results of operations and financial
condition.
We Face Strong Competition in Our Markets and Expect the Level of
Competition to Grow in the Foreseeable Future. Competition in the market for
devices used for ophthalmic and dermatological treatments is intense and is
expected to increase. This market is also characterized by rapid technological
innovation and change and our products could be rendered obsolete as a result of
future innovations. Our competitive position depends on a number of factors
including product performance, characteristics and functionality, ease of use,
scalability, durability and cost. Our principal competitors in ophthalmology are
Lumenis Ltd., Nidek, Inc., Carl Zeiss, Inc., Alcon International and Quantel.
All of these companies currently offer a competitive semiconductor-based laser
system in ophthalmology. Our principal competitors in aesthetics are Lumenis
Ltd., Laserscope, Candela Corporation and Altus Medical Inc. Some competitors
have substantially greater financial, engineering, product development,
manufacturing, marketing and technical resources than we do. Some companies also
have greater name recognition than we do and long-standing customer
relationships. In addition to other companies that manufacture photocoagulators,
we compete with pharmaceuticals, other technologies and other surgical
techniques. Some medical companies, academic and research institutions, or
others, may develop new technologies or therapies that are effective in treating
conditions targeted by us or are less expensive than our current or future
products. Any such developments could have a material adverse
effect on our business, financial condition and results of operations.
Our Future Success Depends on Development of New Products and New
Applications. Our future success is dependent upon, among other factors, our
ability to develop, obtain regulatory approval of, manufacture and market, new
products. Introduction of new products and new applications will require that
17
we effectively transfer production processes from research and development to
manufacturing and effectively coordinate with our suppliers. In addition, we
must successfully sell and achieve market acceptance of new products and
applications and enhanced versions of existing products. The extent of, and
rate at which, market acceptance and penetration are achieved by future products
is a function of many variables. These variables include price, safety,
efficacy, reliability, marketing and sales efforts, the development of new
applications for these products and general economic conditions affecting
purchasing patterns. Any failure in our ability to successfully develop and
introduce new products or enhanced versions of existing products and achieve
market acceptance of new products and new applications could have a material
adverse effect on our operating results and would cause our net revenues to
decline.
Our Business Has Been Adversely Impacted By the Worldwide Economic Slowdown
and Related Uncertainties. Weaker economic conditions worldwide, particularly in
the U.S., have contributed to the current slowdown in our business in general.
This has resulted in reduced demand for some of our products, particularly in
our aesthetics products, such as the Apex 800, excess manufacturing capacity
under current market conditions and higher overhead costs, as a percentage of
revenue. In addition, these economic conditions are making it very difficult for
us, our customers and our distributors to forecast and plan future business
activities. This level of uncertainty strongly challenges our ability to operate
profitably or grow our business. If the economic or market conditions continue
or further deteriorate, this may have a material adverse impact on our financial
position, results of operation and cash flows.
We Face Risks of Manufacturing. The manufacture of our infrared and
visible light photocoagulators and the related delivery devices is a highly
complex and precise process. We assemble critical subassemblies and the final
product at our facility in Mountain View, California. Although our OcuLight,
DioLite 532 and Apex 800 systems have been introduced, we continue to face risks
associated with manufacturing these products. Various difficulties may occur
despite testing. Furthermore, we may experience delays, disruptions, capacity
constraints or quality control problems in our manufacturing operations and, as
a result, product shipments to our customers could be delayed, which would
negatively impact our net revenues.
We Depend on Sole Source or Limited Source Suppliers. We rely on third
parties to manufacture substantially all of the components used in our products.
Some of our suppliers are sole or limited source. In addition, some of these
suppliers are relatively small private companies that may discontinue their
operations at any time. There are risks associated with the use of independent
suppliers, including unavailability of or delays in obtaining adequate supplies
of components, including optics, laser diodes, and crystals and potentially
reduced control of quality, production costs and timing of delivery. We may
experience difficulty identifying alternative sources of supply for certain
components used in our products. For example, we experienced delays in shipping
our green laser systems (such as the DioLite 532 for aesthetics and the OcuLight
GL and GLx for ophthalmology) during the first fiscal quarter of 2001 due to a
supply shortage of a key component. We qualified additional sources for this
component during the first fiscal quarter of 2001; however, the process of
qualifying suppliers is ongoing and may be lengthy, particularly as new products
are introduced. In addition, the use of alternate components may require design
alterations which may delay installation and increase product costs. We have
some long term or volume purchase agreements with our suppliers and currently
purchase components on a purchase order basis. These components may not be
available in the quantities required, on reasonable terms, or at all. Financial
or other difficulties faced by our suppliers or significant changes in demand
for these components or materials could limit their availability. Any failures
by such third parties to adequately perform may impair our ability to offer our
existing products, delay the submission of products for regulatory approval,
impair our ability to deliver products on a timely basis or otherwise impair our
competitive position. Establishing our own capabilities to manufacture these
components would be expensive and could significantly decrease our profit
margins. Our business, results of operations and financial condition would be
adversely affected if we were unable to continue to obtain components in the
quantity and quality desired and at the prices we have budgeted.
We Depend on International Sales for a Significant Portion of Our Operating
Results. We derive and expect to continue to derive a large portion of our
revenue from international sales. For the six months ended June 29, 2002 and
June 30, 2001, our international sales were $5.7 million for both periods,
representing 39% and 44%, respectively, of total sales. We anticipate that
international sales will
18
continue to account for a significant portion of our revenues in the foreseeable
future. None of our international revenues and costs have been denominated in
foreign currencies. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies makes our products more expensive and thus less
competitive in foreign markets. For example, the current high U.S. dollar
relative value to the European currency (the Euro) is making our products less
competitive in Europe when compared to European competitors and could negatively
impact future sales levels from the region. The factors stated above could have
a material adverse effect on our business, financial condition or results of
operations. Our international operations and sales are subject to a number of
risks including:
- longer accounts receivable collection periods;
- impact of recessions in economies outside of the United States;
- foreign certification requirements, including continued ability
to use the "CE" mark in Europe;
- reduced or limited protections of intellectual property rights;
- potentially adverse tax consequences; and
- multiple protectionist, adverse and changing foreign governmental
laws and regulations.
Any one or more of these factors stated above could have a material adverse
effect on our business, financial condition or results of operations. For
additional discussion about our foreign currency risks, see Item 3,
"Quantitative and Qualitative Disclosures About Market Risk."
We Depend on Third Party Coverage and Reimbursement Policies. Our
ophthalmology products are typically purchased by doctors, clinics, hospitals
and other users, which bill various third-party payers, such as governmental
programs and private insurance plans, for the health care services provided to
their patients. Third-party payers are increasingly scrutinizing and
challenging the coverage of new products and the level of reimbursement for
covered products. Doctors, clinics, hospitals and other users of our products
may not obtain adequate reimbursement for use of our products from third-party
payers. While we believe that the laser procedures using our products have
generally been reimbursed, payers may deny coverage and reimbursement for our
products if they determine that the device was not reasonable and necessary for
the purpose used, was investigational or was not cost-effective. For example,
during July 2000, the Center for Medicare and Medicaid Services (CMS) advised
that claims for reimbursement for certain AMD procedures which use our OcuLight
SLx laser system would not be reimbursed by CMS. As a result, since July 2000,
sales of the OcuLight SLx laser system dropped significantly. In September
2000, CMS changed its position and advised that claims for reimbursement for two
of the AMD procedures can be submitted for reimbursement, with coverage and
payment to be determined by the local medical carriers at their discretion.
Sales of the OcuLight SLx continue, albeit at a lower level, because the
OcuLight SLx can also be used for other ophthalmic procedures with CMS
reimbursement. We believe domestic sales of the OcuLight SLx laser system will
continue at these lower levels until more local Medicare carriers reimburse for
performing such AMD procedures or until CMS advises that claims for these
procedures may be submitted directly to CMS at the national level. Two
carriers, Noridian Mutual Insurance, which is the CMS Part B Carrier for Alaska,
Arizona, Colorado, Hawaii, Iowa, Nevada, North Dakota, Oregon, South Dakota,
Washington and Wyoming, as well as Cigna, which is the carrier for North
Carolina, Tennessee and Idaho, have made coverage decisions approving the use of
the TTT protocol for the treatment of wet AMD. We believe that more medical
carriers will reimburse for these procedures when they are further validated by
clinical studies. We are sponsoring a randomized clinical trial which may
further validate Transpupillary thermotherapy, the most significant of the
subject AMD procedures.
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Changes in government legislation or regulation or in private third-party
payers' policies toward reimbursement for procedures employing our products may
prohibit adequate reimbursement. Denial of coverage and reimbursement for our
products could have a material adverse effect on our business, results of
operations and financial condition. We are unable to predict what legislation or
regulation, if any, relating to the health care industry or third-party coverage
and reimbursement may be enacted in the future, or what effect such legislation
or regulation may have on us.
Our Operating Results Fluctuate from Quarter to Quarter and Year to Year.
Our sales and operating results may vary significantly from quarter to quarter
and from year to year in the future. Our operating results are affected by a
number of factors, many of which are beyond our control. Factors contributing to
these fluctuations include the following:
- General economic uncertainties both preceding and following the
terrorist attacks on September 11, 2001;
- The timing of the introduction and market acceptance of new products,
product enhancements and new applications;
- Changes in demand for our existing line of dermatological and
ophthalmic products;
- The cost and availability of components and subassemblies, including
the ability of our sole or limited source suppliers to deliver
components at the times and prices that we have planned;
- Fluctuations in our product mix between dermatolgical and ophthalmic
products and foreign and domestic sales;
- The effect of regulatory approvals and changes in domestic and foreign
regulatory requirements;
- Introduction of new products, product enhancements and new
applications by our competitors, entry of new competitors into our
markets, pricing pressures and other competitive factors;
- Our long and highly variable sales cycle;
- Decreases in the prices at which we can sell our products;
- Changes in customers' or potential customers' budgets as a result of,
among other things, reimbursement policies of government programs and
private insurers for treatments that use our products; and
- Increased product development costs.
In addition to these factors, our quarterly results have been and are expected
to continue to be affected by seasonal factors.
Our expense levels are based, in part, on expected future sales. If sales
levels in a particular quarter do not meet expectations, we may be unable to
adjust operating expenses quickly enough to compensate for the shortfall of
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sales, and our results of operations may be adversely affected. In addition, we
have historically made a significant portion of each quarter's product shipments
near the end of the quarter. If that pattern continues, any delays in shipment
of products could have a material adverse effect on results of operations for
such quarter. As a result of the above factors, sales for any future quarter
are not predictable with any significant degree of accuracy and operating
results in any period should not be considered indicative of the results to be
expected for any future period.
We Depend on Collaborative Relationships to Develop, Introduce and Market
New Products, Product Enhancements and New Applications. We have entered into
collaborative relationships with academic medical centers and physicians in
connection with the research and development and clinical testing of our
products. We plan to collaborate with third parties to develop and commercialize
existing and new products. In May 1996, we executed an agreement with Miravant
Medical Technologies, a maker of photodynamic drugs, to collaborate on a device
that emits a laser beam to activate a photodynamic drug developed by Miravant
for the treatment of wet AMD. The Phase III clinical trial was fully enrolled in
December 1999. In January 2002, Miravant announced that the top line results of
the trial indicated that SnET2, the photodynamic drug developed, did not meet
the primary efficacy endpoint in the study population. As a result, the future
place for SnET2 in the treatment of wet AMD is unclear and we cannot assure you
that SnET2 will be timely or successfully pursued through clinical trials by
Miravant. In the fourth quarter of 2001, we charged to expense $0.3 million of
inventory related to the laser used by Miravant in the Phase III clinical
trials. Additionally, our reliance on others for clinical development,
manufacturing and distribution of our products may result in unforeseen
problems. Further, our collaborative partners may develop or pursue alternative
technologies either on their own or in collaboration with others. The failure of
any current or future collaboration efforts could have a material adverse effect
on our ability to introduce new products or applications and therefore could
have a material adverse effect on our business, results of operations and
financial condition.a
We Rely on Patents and Proprietary Rights. Our success and ability to
compete is dependent in part upon our proprietary information. We rely on a
combination of patents, trade secrets, copyright and trademark laws,
nondisclosure and other contractual agreements and technical measures to protect
our intellectual property rights. We file patent applications to protect
technology, inventions and improvements that are significant to the development
of our business. We have been issued thirteen United States patents and one
foreign patent on the technologies related to our products and processes. We
have approximately eight pending patent applications in the United States and
six foreign pending patent applications that have been filed. Our patent
applications may not issue as patents, any patents now or in the future may not
offer any degree of protection, or our patents or patent applications may be
challenged, invalidated or circumvented in the future. Moreover, our
competitors, many of which have substantial resources and have made substantial
investments in competing technologies, may seek to apply for and obtain patents
that will prevent, limit or interfere with our ability to make, use or sell our
products either in the United States or in international markets.
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In addition to patents, we rely on trade secrets and proprietary know-how
which we seek to protect, in part, through proprietary information agreements
with employees, consultants and other parties. Our proprietary information
agreements with our employees and consultants contain industry standard
provisions requiring such individuals to assign to us without additional
consideration any inventions conceived or reduced to practice by them while
employed or retained by us, subject to customary exceptions. Proprietary
information agreements with employees, consultants and others may be breached,
and we may not have adequate remedies for any breach. Also, our trade secrets
may become known to or independently developed by competitors.
The laser and medical device industry is characterized by frequent
litigation regarding patent and other intellectual property rights. Companies
in the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Numerous patents are held by others, including
academic institutions and our competitors. Because patent applications are
maintained in secrecy in the United States until patents are issued and are
maintained in secrecy for a period of time outside the United States, we have
not conducted any searches to determine whether our technology infringes any
patents or patent applications. We have from time to time been notified of, or
have otherwise been made aware of, claims that we may be infringing upon patents
or other proprietary intellectual property owned by others. If it appears
necessary or desirable, we may seek licenses under such patents or proprietary
intellectual property. Although patent holders commonly offer such licenses,
licenses under such patents or intellectual property may not be offered or the
terms of any offered licenses may not be reasonable. This may adversely impact
our operating results.
Any claims, with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel, cause
shipment delays or require us to develop noninfringing technology or to enter
into royalty or licensing agreements. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. An adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would have a material
adverse effect on our business, results of operations and financial condition.
Conversely, litigation may be necessary to enforce patents issued to us, to
protect trade secrets or know-how owned by us or to determine the
enforceability, scope and validity of the proprietary rights of others. Both
the defense and prosecution of intellectual property suits or interference
proceedings are costly and time consuming.
We Are Subject To Government Regulation. The medical devices that we
market and manufacture are subject to extensive regulation by the FDA and by
foreign and state governments. Under the FDA Act and the related regulations,
the FDA regulates the design, development, clinical testing, manufacture,
labeling, sale, distribution and promotion of medical devices. Before a new
device can be introduced into the market, the manufacturer must obtain market
clearance through either the 510(k) premarket notification process or the
lengthier premarket approval ("PMA") application process. Obtaining these
approvals can take a long time and delay the introduction of a product. For
example, the introduction of the OcuLight GL in the United States was delayed
about three months from our expectations due to the longer than expected time
period required to obtain FDA premarket clearance. Noncompliance with
applicable requirements, including Quality System Regulations ("QSRs"), can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
22
withdrawal of marketing approvals, and criminal prosecution. The FDA also has
the authority to request repair, replacement or refund of the cost of any device
we manufacture or distribute. Our failure to obtain government approvals or any
delays in receipt of such approvals would have a material adverse effect on our
business, results of operations and financial condition.
In addition, we are also subject to varying product standards, packaging
requirements, labeling requirements, tariff regulations, duties and tax
requirements. As a result of our sales in Europe, we are required to have all
products "CE" registered, an international symbol affixed to all products
demonstrating compliance to the European Medical Device Directive and all
applicable standards. While currently all of our released products are CE
registered, continued registration is based on successful review of the process
by our European Registrar during their annual audit. Any loss of registration
would have a material adverse effect on our business, results of operations and
financial condition.
We Face Product Liability Risks that May Adversely Affect our Business or
Results of Operations. We may be subject to product liability claims in the
future. Our products are highly complex and some are used to treat extremely
delicate eye tissue and skin conditions on and near a patient's face. Although
we maintain product liability insurance with coverage limits of $11.0 million
per occurrence and an annual aggregate maximum of $12.0 million, our coverage
from our insurance policies may not be adequate. Such insurance is expensive and
in the future may not be available on acceptable terms, if at all. A successful
claim brought against us in excess of our insurance coverage could have a
material adverse effect on our business, results of operations and financial
condition.
If We Cannot Increase Our Sales Volumes, Reduce Our Costs or Introduce
Higher Margin Products to Offset Anticipated Reductions in the Average Unit
Selling Price of our Products, Our Operating Results May Suffer. The average
selling price of our products may decrease in the future in response to changes
in product mix, competitive pricing pressures, new product introductions by us
or our competitors or other factors. If we are unable to offset the anticipated
decrease in our average selling prices by increasing our sales volumes, our net
revenues will decline. In addition, to maintain our gross margins, we must
continue to reduce the manufacturing cost of our products. Further, should
average selling prices of our current products decline, we must develop and
introduce new products and product enhancements with higher margins. If we
cannot maintain our gross margins, our business could be seriously harmed,
particularly if the average selling price of our products decreases
significantly without a corresponding increase in sales.
If We Fail to Accurately Forecast Demand For Our Product and Component
Requirements For the Manufacture of Our Product, We Could Incur Additional Costs
or Experience Manufacturing Delays and May Experience Lost Sales or Significant
Inventory Carrying Costs. We use quarterly and annual forecasts based primarily
on our anticipated product orders to plan our manufacturing efforts and
determine our requirements for components and materials. It is very important
that we accurately predict both the demand for our product and the lead times
required to obtain the necessary components and materials. Lead times for
components vary significantly and depend on numerous factors, including the
specific supplier, the size of the order, contract terms and current market
demand for such components. If we overestimate the demand for our product, we
may have excess inventory, which would increase our costs. If we underestimate
demand for our product and, consequently, our component and materials
requirements, we may have inadequate inventory, which could interrupt our
manufacturing, delay delivery of our product to our customers and result in the
loss of customer sales. Any of these occurrences would negatively impact our
business and operating results.
23
If We Fail to Manage Growth Effectively, Our Business Could Be Disrupted
Which Could Harm Our Operating Results. We have experienced, and may continue to
experience growth in our business. We have made and, although we are currently
in a global economic downturn, expect to continue to make significant
investments to enable our future growth through, among other things, new product
development and clinical trials for new applications and products. We must also
be prepared to expand our work force and to train, motivate and manage
additional employees as the need for additional personnel arises. Our personnel,
systems, procedures and controls may not be adequate to support our future
operations. Any failure to effectively manage future growth could have a
material adverse effect on our business, results of operations and financial
condition.
If Our Facilities Were To Experience Catastrophic Loss, Our Operations
Would Be Seriously Harmed. Our facilities could be subject to catastrophic loss
such as fire, flood or earthquake. All of our research and development
activities, manufacturing, our corporate headquarters and other critical
business operations are located near major earthquake faults in Mountain View,
California. Any such loss at any of our facilities could disrupt our operations,
delay production, shipments and revenue and result in large expense to repair
and replace our facilities.
We May Need Additional Capital, which May Not Be Available, and Our Ability
to Grow may be Limited as a Result. We believe that our existing cash balances,
available-for-sale securities, credit facilities and cash flow expected to be
generated from future operations, will be sufficient to meet our capital
requirements at least through the next 12 months. However, we may be required,
or could elect, to seek additional funding prior to that time. The development
and marketing of new products and associated support personnel requires a
significant commitment of resources. If cash from available sources is
insufficient, we may need additional capital, which may not be available on
favorable terms, if at all. If we cannot raise funds on acceptable terms, we
may not be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
Any inability to raise additional capital when we require it would seriously
harm our business.
Our Stock Price is Volatile. The trading price of our Common Stock has been
subject to wide fluctuations in response to a variety of factors , some of which
are beyond our control, including:
- Quarterly variations in operating results;
- Changes in financial estimates by securities analysts;
- Announcements by us or our competitors of new products or of
significant clinical achievements;
- Changes in market valuations of other similar companies; and
- Any deviations in our net sales or levels of profitability from
levels expected by securities analysts.
In addition, the stock market has recently experienced extreme volatility
that has often been unrelated to the performance of particular companies. These
broad market fluctuations could have a significant impact on the market price of
our common stock regardless of our performance.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
We are exposed to market risks inherent in our operations, primarily
related to interest rate risk and currency risk. These risks arise from
transactions and operations entered into in the normal course of business. We
do not use derivatives to alter the interest characteristics of our marketable
securities or our debt instruments. We have no holdings of derivative or
commodity instruments.
Interest Rate Risk. We are subject to interest rate risks on cash and cash
equivalents, available-for-sale marketable securities and any future financing
requirements. Interest rate risks related to marketable securities are managed
by managing maturities in our marketable securities portfolio. We have no
long-term debt as of June 29, 2002.
The fair value of our investment portfolio or related income would not be
significantly impacted by changes in interest rates since the marketable
securities maturities do not exceed fiscal year 2002 and the interest rates are
primarily fixed.
QUALITATIVE DISCLOSURES
Interest Rate Risk. Our primary interest rate risk exposures relate to:
- The available-for-sale securities will fall in value if market
interest rates increase.
- The impact of interest rate movements on our ability to obtain
adequate financing to fund future operations.
We have the ability to hold at least a portion of the fixed income
investments until maturity and therefore would not expect the operating results
or cash flows to be affected to any significant degree by a sudden change in
market interest rates on its short- and long-term marketable securities
portfolio.
Management evaluates our financial position on an ongoing basis.
Currency Rate Risk
We do not hedge any balance sheet exposures against future movements in
foreign exchange rates. The exposure related to currency rate movements would
not have a material impact on future net income or cash flows.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on June 5, 2002 in San Jose,
California. Of the 6,862,862 shares outstanding as of the record date,
6,573,518 were present or represented by proxy at the meeting. The results of
the voting on the matters submitted to the stockholders are as follows:
1. To elect six (6) directors to serve for the ensuing year or until
their successors are duly elected and qualified.
Name Votes For Votes Withheld
-------------------- --------- --------------
Theodore Boutacoff 6,068,255 505,263
James L. Donovan 6,068,255 505,263
John M. Nehra 6,172,055 401,463
Donald L. Hammond 6,168,480 405,038
Joshua Makower, M.D. 6,175,030 398,488
Robert K. Anderson 6,175,055 398,463
2. To approve an amendment to the 1998 Stock Plan to increase the number
of shares of common stock reserved for issuance thereunder from
930,000 shares to 1,230,000 shares.
Votes for: 5,702,036
Votes against: 12,490
Votes abstaining: 858,992
3. To approve an amendment to the 1995 Employee Stock Purchase Plan to
increase the number of shares of common stock reserved for issuance
thereunder from 340,000 shares to 370,000 shares.
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Votes for: 6,059,886
Votes against: 9,100
Votes abstaining: 504,532
4. To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Registrant for the fiscal year ending December 28,
2002.
Votes for: 6,566,118
Votes against: 4,900
Votes abstaining: 2,500
ITEM 5. OTHER INFORMATION
In accordance with Section 10A(i)(2) of the Securities Exchange Act of
1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, the
Registrant is responsible for disclosing the non-audit services approved by
the Registrant's Audit Committee to be performed by PricewaterhouseCoopers
LLP, the Registrant's independent auditor. Non-audit services are defined
in the law as services other than those provided in connection with an
audit or a review of the financial statements of the Registrant. The
additional engagement of PricewaterhouseCoopers LLP for the matters listed
below are each considered by the Registrant to be audit-related services
that are closely related to the financial audit process. During the
quarterly period covered by this filing, the Audit Committee approved the
additional engagement of PricewaterhouseCoopers LLP for certain tax matter
consultations and for the review of the Registrant's filings under the
Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IRIDEX Corporation
(Registrant)
Date: August 13, 2002 By: /s/ Robert Kamenski
-------------------------------
Robert Kamenski
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
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