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 28, 2003
[ ] 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 5, 2003 was 6,919,285.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes [ ] No [X]
IRIDEX CORPORATION
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of June 28, 2003
and December 28, 2002 3
Condensed Consolidated Statements of Operations for the three
and six months ended June 28, 2003 and June 29, 2002 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 28, 2003 and June 29, 2002 5
Condensed Consolidated Statements of Comprehensive Loss for the
three and six months ended June 28, 2003 and June 29, 2002 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 26
ITEM 4. CONTROLS AND PROCEDURES 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 27
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 27
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 29
SIGNATURE 30
CERTIFICATION UNDER SECTION 302(A) OF SARBANES-OXLEY ACT OF 2002 30
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- --------------------------------------------------------
IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 28, DECEMBER 28,
------------ ------------
2003 2002
------------ -----------
(unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 8,121 $ 9,186
Available-for-sale securities . . . . . . . . 5,016 2,356
Accounts receivable, net. . . . . . . . . . . 6,389 8,037
Inventories . . . . . . . . . . . . . . . . . 10,404 10,725
Prepaids and other current assets . . . . . . 1,105 751
------------ -----------
Total current assets. . . . . . . . . . . . 31,035 31,055
Property and equipment, net . . . . . . . . . 729 950
Deferred income taxes . . . . . . . . . . . . 2,267 2,267
----------- ------------
Total assets. . . . . . . . . . . . . . . . $ 34,031 $ 34,272
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . $ 892 $ 657
Accrued expenses. . . . . . . . . . . . . . . 3,305 3,417
------------ -----------
Total liabilities . . . . . . . . . . . . . 4,197 4,074
------------ -----------
Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . . 70 70
Additional paid-in capital. . . . . . . . . . 23,652 23,631
Accumulated other comprehensive income (loss) (1) 3
Treasury stock. . . . . . . . . . . . . . . . (430) (430)
Retained earnings . . . . . . . . . . . . . . 6,543 6,924
------------ -----------
Total stockholders' equity. . . . . . . . . 29,834 30,198
------------ -----------
Total liabilities and stockholders' equity. $ 34,031 $ 34,272
============ ===========
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 28, JUNE 29, JUNE 28, JUNE 29,
2003 2002 2003 2002
------- ------- -------- --------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,435 $7,433 $14,661 $14,396
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . 4,315 4,312 8,303 8,190
------- ------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . 3,120 3,121 6,358 6,206
------- ------- -------- --------
Operating expenses:
Research and development. . . . . . . . . . . . . . . . . . . 1,047 1,320 1,997 2,465
Sales, general and administrative . . . . . . . . . . . . . . 2,564 2,512 5,028 4,799
------- ------- -------- --------
Total operating expenses . . . . . . . . . . . . . . . . . . . 3,611 3,832 7,025 7,264
------- ------- -------- --------
Loss from operations . . . . . . . . . . . . . . . . . . . . . (491) (711) (667) (1,058)
Interest and other income, net . . . . . . . . . . . . . 51 54 105 97
------- ------- -------- --------
Loss before benefit from income taxes. . . . . . . . . . . . . (440) (657) (562) (961)
Benefit from income taxes. . . . . . . . . . . . . . . . . . 141 210 181 307
------- ------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (299) $ (447) $ (381) $ (654)
======= ======= ======== ========
Net loss per common share-basic and diluted. . . . . . . . . . $(0.04) $(0.07) $ (0.06) $ (0.10)
======= ======= ======== ========
Shares used in per common share basic and diluted calculations 6,919 6,861 6,916 6,849
======= ======= ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 28, JUNE 29,
2003 2002
---------- ----------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (381) $ (654)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394 437
Provision for inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66) 70
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,648 1,114
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 654
Prepaids and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . (354) 57
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 (447)
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (112) (220)
---------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . 1,751 1,003
---------- ----------
Cash flows from investing activities:
Purchases of available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . . . (4,506) (2,555)
Proceeds from maturity of available-for-sale securities . . . . . . . . . . . . . . . . . 1,842 3,359
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . (173) (189)
---------- ----------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . (2,837) 615
---------- ----------
Cash flows from financing activities:
Issuance of common stock, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 120
---------- ----------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . 21 120
---------- ----------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . (1,065) 1,738
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . 9,186 4,613
---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 8,121 $ 6,351
========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized losses on available-for-sale securities $ (4) $ (5)
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net loss . . . . . . . . . . . . $ (299) $ (447) $ (381) $ (654)
Other comprehensive loss:
Change in unrealized gain on
available-for-sale securities (2) (3) (4) (5)
---------- ---------- ---------- ----------
Comprehensive loss . . . . . . . $ (301) $ (450) $ (385) $ (659)
========== ========== ========== ==========
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 ("the Company") 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 10-01 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 28, 2003. The results of
operations for the three and six month periods ended June 28, 2003 are not
necessarily indicative of the results for the year ending January 3, 2004 or any
future interim period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are disclosed in our Annual
Report on Form 10-K for the year ended December 28, 2002 which was filed with
the Securities and Exchange Commission on March 28, 2003. The Company's
significant accounting policies have not materially changed as of June 28, 2003.
3. WARRANTY
The Company accrues for an estimated warranty cost upon shipment of
products in accordance with SFAS No. 5, "Accounting for Contingencies." Actual
warranty costs incurred have not materially differed from those accrued. The
Company's warranty policy is effective for shipped products which are considered
defective or fail to meet the product specifications. Warranty costs are
reflected in the statement of operations as a cost of sales. A reconciliation
of the changes in the Company's warranty liability for the six months ending
June 28, 2003 follows (in thousands):
Balance at the beginning of the period $ 796
- -----------------------------------------------------------------
Accruals for warranties issued during the period 642
- -----------------------------------------------------------------
Settlements made in kind during the period (721)
- -----------------------------------------------------------------
Balance at the end of the period $717
- -----------------------------------------------------------------
7
4. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No.
148 "Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123."
Under APB 25, compensation expense for grants to employees is based on the
difference, if any, on the date of the grant, between the fair value of the
Company's stock and the option's exercise price. SFAS 123 defines a "fair value"
based method of accounting for an employee stock option or similar equity
investment. The pro forma disclosure of the difference between compensation
expense included in net loss and the related cost measured by the fair value
method is presented in the table at the end of this note. To comply with pro
forma reporting requirements of SFAS 123, compensation cost is also estimated
for the fair value of Employee Stock Purchase Plan ("ESPP") issuances, which are
included in the pro forma totals below.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than
Employees, or in Conjunction with Selling Goods and Services." Stock-based
compensation expense related to stock options granted to non-employees is
recognized on a straight-line basis as the stock options are earned. The
stock-based compensation expense will fluctuate as the deemed fair market value
of the common stock fluctuates. There were no equity instruments issued to
non-employees during the three and six months ended June 28, 2003.
The following table, pursuant to SFAS 123, provides a reconciliation of net
loss to pro forma net loss as if the fair value method had been applied to all
employee awards (in thousands, except per share data):
Three Months Ended Six Months Ended
------------------------ -----------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
- ------------------------------------- ---------- ------------ ---------- -----------
Net loss, as reported $ (299) $ (447) $ (381) $ (654)
- ------------------------------------- ---------- ------------ ---------- -----------
Add: Total stock based compensation
expense determined under fair value
based method for all awards to
employees (104) (104) (221) (279)
- ------------------------------------- ---------- ------------ ---------- -----------
Pro forma net loss $ (403) $ (551) $ (602) $ (933)
- ------------------------------------- ========== ============ ========== ===========
Basic and diluted net loss per share:
- -------------------------------------
As reported $ (0.04) $ (0.07) $ (0.06) $ (0.10)
- ------------------------------------- ========== ============ ========== ===========
Pro forma $ (0.06) $ (0.08) $ (0.09) $ (0.14)
- ------------------------------------- ========== ============ ========== ===========
8
The determination of fair value of all options granted by the Company
includes assumptions on expected volatility, risk free interest rate, expected
term and expected dividends.
5. INVENTORIES (IN THOUSANDS):
Inventories are stated at the lower of cost or market. Cost is based on
actual sales computed on a first in, first out basis. The components of
inventories consist of the following:
JUNE 28, DECEMBER 28,
2003 2002
------------ -------------
(unaudited)
Raw materials and work in progress . . . . . . $ 5,784 $ 6,511
Finished goods . . . . . . . . . . . . . . . . 4,620 4,214
------------ -------------
Total inventories. . . . . . . . . . . . . . . $ 10,404 $ 10,725
============ =============
6. COMPUTATIONS OF NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share are computed by dividing net
loss for the period by the weighted average number of shares of common stock
outstanding during the period. The calculation of diluted net loss per common
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. Basic and diluted net loss per common share are
equivalent for all periods presented due to the Company's net loss position.
During the three and six months ended June 28, 2003, options to purchase
1,837,487 shares at a weighted average exercise price of $5.27 per share were
outstanding, but were not included in the computations of diluted net loss per
common share because their effect was antidilutive. For the three and six month
periods ended June 29, 2002 options to purchase 1,614,037 shares at a weighted
average price of $5.29 per share were outstanding but not included in the
computations of diluted net loss per common share because their effect was
antidilutive. These options could dilute earnings per share in future periods.
7. BUSINESS SEGMENTS (UNAUDITED)
We operate in two reportable segments: the ophthalmology medical device
segment and the dermatology 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
28, 2003 and June 29, 2002 is as follows (in thousands):
9
Three Months Ended June 28, 2003 Three Months Ended June 29, 2002
--------------------------------------------- ---------------------------------------------
Ophthalmology Dermatology Ophthalmology Dermatology
Medical Medical Medical Medical
Devices Devices Total Devices Devices Total
- ------------ -------------- ------------ --------------- -------------- ------------ ---------------
Sales $ 6,019 $ 1,416 $ 7,435 $ 5,679 $ 1,754 $ 7,433
- ------------ -------------- ------------ --------------- -------------- ------------ ---------------
Direct Cost
of Goods
Sold 2,047 681 2,728 1,797 727 2,524
- ------------ -------------- ------------ --------------- -------------- ------------ ---------------
Direct
Gross
Margin 3,972 735 4,707 3,882 1,027 4,909
- ------------ -------------- ------------ --------------- -------------- ------------ ---------------
Total
Unallocated
Costs (5,147) (5,566)
- ------------ -------------- ------------ --------------- -------------- ------------ ---------------
Pre-tax
income
(loss) (440) (657)
- ------------ -------------- ------------ --------------- -------------- ------------ ---------------
Six Months Ended June 28, 2003 Six Months Ended June 29, 2002
------------------------------------------ ------------------------------------------------
Ophthalmology Dermatology Ophthalmology Dermatology
Medical Medical Medical Medical
Devices Devices Total Devices Devices Total
- ------------ -------------- ------------ --------------- -------------- ------------ ---------------
Sales $ 11,742 $ 2,919 $ 14,661 $ 10,756 $ 3,640 $ 14,396
- ------------ -------------- ------------ --------------- -------------- ------------ ---------------
Direct Cost
of Goods
Sold 4,014 1,387 5,401 3,469 1,601 5,070
- ------------ -------------- ------------ --------------- -------------- ------------ ---------------
Direct
Gross
Margin 7,728 1,532 9,260 7,287 2,039 9,326
- ------------ -------------- ------------ --------------- -------------- ------------ ---------------
Total
Unallocated
Costs (9,822) (10,287)
- ------------ -------------- ------------ --------------- -------------- ------------ ---------------
Pre-tax
income
(loss) (562) (961)
- ------------ -------------- ------------ --------------- -------------- ------------ ---------------
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.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. SFAS No. 150 is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the interim period of adoption. We do not
expect the adoption of SFAS No. 150 to have a significant impact on our
financial position 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 higher gross margins; our anticipated ability to contain costs and
results of asset management 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,
general economic conditions and levels of international sales. In some cases,
forward-looking statements can be identified by terminology, such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "intends," "potential," "continue," or the negative of such terms or
other comparable terminology. These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to differ materially from those expressed or implied by such
forward-looking statement, including 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 Form10-K filed with the Securities and Exchange Commission
on March 28, 2003 and detailed from time to time in our reports filed with the
Securities and Exchange Commission. The reader is cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date of this Form 10-Q. We undertake no obligation to
update such forward-looking statements to reflect events or circumstances
occurring after the date of this report.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
sales (unaudited) for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
2003 2002 2003 2002
---------- ---------- --------- ---------
Sales. . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . 58.0 58.0 56.6 56.9
---------- ---------- --------- ---------
Gross profit . . . . . . . . . . . 42.0 42.0 43.4 43.1
---------- ---------- --------- ---------
Operating expenses:
Research and development . . . . . 14.1 17.8 13.6 17.1
Sales, general and administrative 34.5 33.7 34.3 33.3
---------- ---------- --------- ---------
Total operating expenses . . . . 48.6 51.5 47.9 50.4
---------- ---------- --------- ---------
Loss from operations . . . . . . . . (6.6) (9.5) (4.5) (7.3)
Interest and other income, net . . 0.7 0.7 0.7 0.7
---------- ---------- --------- ---------
Loss before benefit from income taxes (5.9) (8.8) (3.8) (6.6)
Benefit from income taxes. . . . . . 1.9 2.8 1.2 2.1
---------- ---------- --------- ---------
Net loss . . . . . . . . . . . . . . (4.0)% (6.0)% (2.6)% (4.5)%
========== ========== ========= =========
11
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.
Three Months Ended Six Months Ended
-------------------------------------------- ----------------------------------------------
June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
--------------------- --------------------- --------------------- -----------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
of total of total of total of total
sales sales sales sales
-------- ----------- -------- ----------- -------- ----------- ---------- -----------
Domestic $ 4,680 62.9% $ 4,744 63.8% $ 9,220 62.9% $ 8,743 60.7%
- ----------------- -------- ----------- -------- ----------- -------- ----------- ---------- -----------
International 2,755 37.1% 2,689 36.2% 5,441 37.1% 5,653 39.3%
- ----------------- -------- ----------- -------- ----------- -------- ----------- ---------- -----------
Total $ 7,435 100.0% $ 7,433 100.0% $ 14,661 100.0% $ 14,396 100.0%
- ----------------- -------- ----------- -------- ----------- -------- ----------- ---------- -----------
Ophthalmology:
- ----------------- -------- ----------- -------- ----------- -------- ----------- ---------- -----------
Domestic $ 3,628 48.8% $ 3,220 43.3% $ 7,050 48.1% $ 6,037 41.9%
- ----------------- -------- ----------- -------- ----------- -------- ----------- ---------- -----------
International 2,391 32.2% 2,459 33.1% 4,692 32.0% 4,719 32.8%
- ----------------- -------- ----------- -------- ----------- -------- ----------- ---------- -----------
Total $ 6,019 81.0% $ 5,679 76.4% $ 11,742 80.1% $ 10,756 74.7%
- ----------------- -------- ----------- -------- ----------- -------- ----------- ---------- -----------
Dermatology:
- ----------------- -------- ----------- -------- ----------- -------- ----------- ---------- -----------
Domestic $ 1,052 14.1% $ 1,524 20.5% $ 2,170 14.8% $ 2,706 18.8%
- ----------------- -------- ----------- -------- ----------- -------- ----------- ---------- -----------
International 364 4.9% 230 3.1% 749 5.1% 934 6.5%
- ----------------- -------- ----------- -------- ----------- -------- ----------- ---------- -----------
Total $ 1,416 19.0% $ 1,754 23.6% $ 2,919 19.9% $ 3,640 25.3%
- ----------------- -------- ----------- -------- ----------- -------- ----------- ---------- -----------
Combined Ophthalmology and Dermatology
Sales
Sales for the three months ended June 28, 2003 were $7.4 million and at the
same level when compared to the corresponding three month period ended June 29,
2002. An increase in ophthalmology sales of $0.3 million was offset by a
decrease in dermatology sales of $0.3 million for the three months ended June
28, 2003. Sales for the six months ended June 28, 2003 increased 1.8% to $14.7
million from $14.4 million for the six months ended June 29, 2002. For the six
month period the overall increase was driven primarily by an increase in sales
of our ophthalmology products of $1.0 million offset by a $0.7 million decrease
in sales of our dermatology products.
Domestic sales were $4.7 million for the three month period ended June 28,
2003 and at approximately the same level as the three month period ended June
29, 2002. For the six months ended June 28, 2003 domestic sales increased
12
5.5% to $9.2 million from $8.7 million. The overall increase for the six month
period was driven mainly by $1.0 million in increased sales of our ophthalmology
products offset by a $0.5 million decrease in sales of our dermatology products.
International sales were $2.8 million for the three months ended June 28,
2003 and $2.7 million for the comparable prior year three-month period primarily
as a result of $0.1 million in increased sales of our dermatology products. For
the six months ended June 28, 2003 international sales decreased 3.8% to $5.4
million from $5.7 million for the six months ended June 29, 2002. The decrease
in international sales during this period was driven mainly by $0.2 million in
decreased sales of our dermatology products.
We continue to face challenges marketing and selling our products in the
current difficult economic environment, both domestically and internationally,
and expect to face these challenges for the foreseeable future. See "-Factors
That May Affect Future Results - Our Business has been Adversely Impacted by the
Worldwide Economic Slowdown and Related Uncertainties."
Ophthalmology Sales
Ophthalmology sales increased 6.0% to $6.0 million for the three months
ended June 28, 2003 from $5.7 million for the three months ended June 29, 2002.
For the six months ended June 28, 2003 ophthalmology sales increased 9.2% to
$11.7 million from $10.8 million for the comparable prior year six-month period.
Domestic ophthalmology sales increased 12.7% to $3.6 million for the three
months ended June 28, 2003 from $3.2 million for the comparable prior year
three-month period. The increase in domestic sales during this period occurred
mainly as a result of $0.3 million in increased unit sales of visible laser
systems, including the Millennium Endolase module, which is incorporated as a
component of Bausch and Lomb's Millennium Microsurgical System, and because of
an increase in service and delivery device revenue. For the six months ended
June 28, 2003 domestic ophthalmology sales increased 16.8% to $7.1 million from
$6.0 million for the comparable prior year six month period. Domestic
ophthalmology sales increased during this period mainly as a result of $1.0
million in increased unit sales of visible laser systems, including the
Millennium Endolase module. International ophthalmology sales decreased 2.8%
to $2.4 million for the three months ended June 28, 2003 from $2.5 million for
the comparable prior year three-month period. The decrease in international
ophthalmology sales for this period was due mainly to $0.2 million in decreased
unit sales of our infrared laser systems offset by $0.1 million in increased
unit sales of our visible laser systems. For the six month periods ended June
28, 2003 and June 29, 2002 international ophthalmology sales remained at the
same level at $4.7 million.
Dermatology Sales
Dermatology sales decreased 19.3% to $1.4 million for the three months
ended June 28, 2003 from $1.8 million for the three months ended June 29, 2002.
Domestic dermatology sales decreased 31% to $1.1 million for the three month
period ended June 28, 2003 from $1.5 million for the three month period ended
June 29, 2002. The decrease in domestic dermatology sales was due primarily to a
$0.3 million decrease in unit sales of products as well as a $0.2 million
decrease in average selling prices of dermatology products. International
dermatology sales increased from $0.2 million to $0.4 million for the three
months ended June 28, 2003. This increase in international dermatology sales for
this period was driven mainly by an increase of $0.2 million in unit sales of
dermatology products. For the six months ended June 28, 2003 dermatology sales
decreased 19.8% to $2.9 million from $3.6 million for the comparable prior year
six-month period. Domestic dermatology sales decreased 19.8% to $2.2 million for
the six months ended June 28, 2003 from $2.7 million for the comparable prior
year six-month period. The decrease in domestic dermatology sales for this
period was due mainly to a $0.2 million decrease in unit sales of products as
well as to a $0.3 million decrease in average selling prices of dermatology
products.
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International dermatology sales decreased by $0.2 million to $0.7 million for
the six months ended June 28, 2003 from $0.9 million for the comparable prior
six-month period. The decrease in international dermatology sales for the six
month period ended June 28, 2003 was driven mainly by decreased unit sales of
dermatology products.
Gross Profit. Our gross profit was $3.1 million, and 42% as a percentage of
net sales, for both of the three month periods ended June 28, 2003 and June 29,
2002. For the six months ended June 28, 2003, gross profit as a percentage of
net sales increased slightly to 43.4% as compared to 43.1% for the six months
ended June 29, 2002. For the six month period ended June 28, 2003, the increase
in gross profit as a percentage of net sales was primarily due to a beneficial
impact of 1.0% related to decreased direct product costs and product mix, a net
beneficial impact of 0.8% related to lower warranty charges, offset by 0.8% for
decreased average selling prices and increased overhead costs of 0.7%. Although
increasing competition has continued to result in reduced average selling prices
for some of our products, we intend to continue our efforts to reduce inventory
and the overall cost of manufacturing and thereby mitigate the impact of price
reductions on our gross profit. See "-Factors that May Affect Future Results -
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." Overall, 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 May Fluctuate from
Quarter to Quarter and Year to Year."
Research and Development. For the three months ended June 28, 2003, our
research and development expenses of $1.0 million decreased by $0.3 million or
20.7% from $1.3 million for the three months ended June 29, 2002. Likewise,
research and development expenses decreased as a percentage of net sales to
14.1% for the three months ended June 28, 2003 from 17.8% for the comparable
prior year three-month period. The decrease in research and development expense
in absolute dollars and as a percentage of net sales for the three month period
ended June 28, 2003 was due primarily to $0.2 million in reduced payroll costs
associated with a reduction in force in June 2002 and a $0.1 million decrease in
new project spending. For the six month period ended June 28, 2003 research and
development expense decreased 19.0% to $2.0 million from $2.5 million for the
comparable prior year six month period. As a percentage of net sales research
and development expense decreased to 13.6% from 17.1% for the comparable prior
year six month period. The decrease in research and development expense in
absolute dollars and as a percentage of sales for the six month period ended
June 28, 2003 was due primarily to $0.3 million of reduced payroll costs
associated with a reduction in force in June 2002, $0.1 million in decreased new
project spending and $0.1 million in decreased clinical spending.
Sales, General and Administrative. Our sales, general and administrative
expenses increased by 2.1% to $2.6 million for the three months ended June 28,
2003 from $2.5 million for the three months ended June 29, 2002. As a percentage
of net sales, sales, general and administrative expenses increased to 34.5% for
the three months ended June 28, 2003 from 33.7% for the comparable prior year
three-month period. The increase in sales, general and administrative expense in
absolute dollars and as a percentage of sales for the three month period ending
June 28, 2003 was due primarily to $0.1 million in increased non-commission
related selling activities, a $0.1 million net increase in administrative
spending, which included consulting, insurance and accounting fees, offset by a
$0.1 million decrease in marketing and administrative payroll costs associated
with a reduction in force in June 2002. For the six months ended June 28, 2003,
sales, general and administrative expenses increased by 4.8% to $5.0 million
from $4.8 million for the comparable period in 2002. Sales, general and
administrative expenses as a percentage of net sales increased to 34.3% for the
six months ended June 28, 2003 from 33.3% for the comparable period in 2002. The
increase in absolute dollars and as a percentage of net sales for the six month
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period ended June 28, 2003 was due primarily to $0.2 million in increased
non-commission related selling activities, a $0.2 million increase in
administrative spending associated with consulting, insurance and accounting
fees, offset by a $0.2 million decrease in reduced marketing and administrative
personnel costs associated with a reduction in force in June 2002.
Interest and Other Income, net. For the three months ended June 28, 2003,
we realized net interest and other income of $0.05 million, which was at the
same level as the comparable quarter in 2002. For the six months ended June 29,
2003, net interest and other income was $0.1 million and at approximately the
same level as the six month period ended June 29, 2002.
Income Taxes. The effective income tax rate for the three month periods
ending June 28, 2003 and June 29, 2002 was 32%. The tax rates for these periods
was lower than the Federal and State combined statutory rate of 40% because of
certain tax benefits associated with tax credits for research and development
activities.
LIQUIDITY AND CAPITAL RESOURCES
At June 28, 2003, our primary sources of liquidity included cash and cash
equivalents and available-for-sale securities in the aggregate amount of $13.1
million. In addition, we have available $4.0 million under our unsecured line
of credit which bears interest at the bank's prime rate and expires in October
2003. As of June 28, 2003, no borrowings were outstanding under this credit
facility. We expect to renew the line of credit in October 2003 assuming that
the terms continue to be acceptable.
During the six months ended June 28, 2003, we used $1.1 million in cash and
cash equivalents. During this period, operating activities provided $1.8
million of cash. Sources of cash from operating activities included a decrease
in net accounts receivable of $1.6 million, depreciation of $0.4 million, a
decrease in net inventories of $0.4 million and an increase in accounts payable
of $0.2 million, offset in part, by uses of cash including a net loss of $0.4
million, an increase in prepaid expenses of $0.3 million and a decrease in
accrued expenses of $0.1 million. The decrease in accounts receivable and
inventories resulted from focused asset management efforts to increase our cash
position. We will continue to place a high priority on our asset management
efforts to further increase our cash position. The increase in prepaid expenses
related to a prepayment to a supplier of a product that we distribute.
Investing activities used $2.8 million in cash and cash equivalents during
the six months ended June 28, 2003, primarily due to net purchases of available
for sale securities of $2.7 million and $0.2 million for the acquisition of
property and equipment.
Net cash provided by financing activities during the six months ended June
28, 2003 was $21,000 which resulted from 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
15
for the next 12 months. However, if the current economic downturn remains
protracted, we may need to expend our cash reserves to fund our operations. Our
liquidity could be negatively affected by a 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."
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are disclosed in our Annual
Report on Form 10-K for the year ended December 28, 2002 which was filed with
the Securities and Exchange Commission on March 28, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. SFAS No. 150 is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the interim period of adoption. We do not
expect the adoption of SFAS No. 150 to have a significant impact on our
financial position or results of operations
FACTORS THAT MAY AFFECT FUTURE RESULTS
We Rely on Continued Market Acceptance of Our Existing Products and Any
Decline in Sales of Our Existing Products Would Adversely Affect Our Business
and Results of Operations. We currently market visible and infrared light
semiconductor-based photocoagulator medical laser systems to the ophthalmic
market. We also market a visible and infrared light semiconductor-based
photocoagulator medical laser system to the dermatology market. We believe that
continued and increased sales, if any, of these medical laser systems is
dependent upon a number of factors including the following:
- Product performance, features, ease of use, scalability and
durability;
- Recommendations and opinions by ophthalmologists, dermatologists,
clinicians, plastic surgeons and their associated opinion
leaders;
- Price of our products and prices of competing products and
technologies;
- Availability of competing products, technologies and alternative
treatments;
- Willingness of ophthalmologists and dermatologists to convert to
semiconductor-based or infrared laser systems from alternative
technologies; and
16
- 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 dermatology treatments is intense and is
expected to increase. This market is also characterized by rapid technological
innovation and change and our products could be rendered obsolete as a result of
future innovations. Our competitive position depends on a number of factors
including product performance, characteristics and functionality, ease of use,
scalability, durability and cost. Our principal competitors in ophthalmology
are Lumenis Ltd., Nidek, Inc., Carl Zeiss, Inc., Alcon Inc. and Quantel. All of
these companies currently offer a competitive semiconductor-based laser system
in ophthalmology. Our principal competitors in dermatology are Lumenis Ltd.,
Laserscope, Candela Corporation and Altus Medical Inc and Palomar Technologies
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 more
effective in treating conditions targeted by us or are less expensive than our
current or future products. Any such developments could have a material adverse
effect on our business, financial condition and results of operations.
Our Future Success Depends on Our Ability to Develop and Successfully
Introduce New Products and New Applications. Our future success is dependent
upon, among other factors, our ability to develop, obtain regulatory approval
of, manufacture and market new products. In October 2002, we announced the
introduction of a number of new products, specifically the OcuLight Symphony
multi-wavelength laser delivery system, an expanded EndoProbe product line and a
5 mm Large Spot Slit Lamp Adapter. We also announced the Millennium Endolase
module, which we manufacture to be included in Bausch & Lomb's Millennium
Microsurgical System. Successful commercialization of these new products and
new applications will require that we effectively transfer production processes
from research and development to manufacturing and effectively coordinate with
our suppliers. In addition, we must successfully sell and achieve market
acceptance of new products and applications and enhanced versions of existing
products. The extent of, and rate at which, market acceptance and penetration
are achieved by future products is a function of many variables. These
variables include price, safety, efficacy, reliability, marketing and sales
efforts, the development of new applications for these products, the
availability of third-party reimbursement of procedures using our new products,
the existence of competing products and general economic conditions affecting
purchasing patterns. Our ability to market and sell new products may also be
subject to government regulation, including approval by the United States Food
and Drug Administration, or FDA, and foreign government agencies. Any failure in
our ability to successfully develop and introduce new products or enhanced
versions of existing products and achieve market acceptance of new products and
new applications could have a material adverse effect on our operating results
and would cause our net revenues to decline.
Our Business Has Been Adversely Impacted By the Worldwide Economic Slowdown
and Related Uncertainties. Weaker economic conditions worldwide have
contributed to the continued slowdown in our business in general. This has
resulted in reduced demand for some of our products, excess manufacturing
capacity under current market conditions and higher overhead costs, as a
percentage of revenue. In particular, demand for our dermatology products, such
17
as the Apex 800, has been impacted. Recent political and social turmoil in many
parts of the world may continue to adversely impact global economic conditions.
These political, social and economic conditions and related economic
uncertainties make it difficult for us, our customers and our distributors to
forecast orders and sales of our products and, accordingly, 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
to further deteriorate, this may have a material adverse impact on our financial
position, results of operation and cash flows.
If We Cannot Increase Our Sales Volumes, Reduce Our Costs or Introduce
Higher Margin Products to Offset Anticipated Reductions in the Average Unit
Price of Our Products, Our operating Results May Suffer. We have experienced
declines in the average unit price of our products and expect to continue to
suffer from declines in the future. The average unit price of our products may
decrease in the future in response to changes in product mix, competitive
pricing pressures, new product introductions by us or our competitors or other
factors. If we are unable to offset the anticipated decrease in our average
selling prices by increasing our sales volumes, our net revenues will decline.
In addition, to maintain our gross margins, we must continue to reduce the
manufacturing cost of our products and contain our operating costs. We will
continue to place a high priority on our cost containment and asset management
efforts. Additional measures to contain costs and reduce expenses may be
undertaken if revenues and market conditions do not improve. Further, should
average unit prices of our current products decline, we must develop and
introduce new products and product enhancements with higher margins. If we
cannot maintain our gross margins, our business could be seriously harmed,
particularly if the average selling price of our products decreases
significantly without a corresponding increase in sales. If we are unable to
contain costs and manage our assets, our operating results could be harmed and
our liquidity and capital resources adversely affected.
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 all of our
final products at our facility in Mountain View, California. We may experience
manufacturing difficulties, quality control issues or assembly constraints,
particularly with regard to new products that we may introduce. We may not be
able to manufacture sufficient quantities of our products, which may require
that we qualify other manufacturers for our products. We do not currently
intend to utilize any external manufacturers for our products. Furthermore, we
may experience delays, disruptions, capacity constraints or quality control
problems in our manufacturing operations and, as a result, product shipments to
our customers could be delayed, which would negatively impact our net revenues.
We Depend on Sole Source or Limited Source Suppliers. We rely on third
parties to manufacture substantially all of the components used in our products,
including optics, laser diodes and crystals. We have some long term or volume
purchase agreements with our suppliers and currently purchase components on a
purchase order basis. Some of our suppliers and manufacturers are sole or
limited source. In addition, some of these suppliers are relatively small
private companies that may discontinue their operations at any time. There are
risks associated with the use of independent manufacturers, including the
following:
- unavailability of, shortages or limitations on the ability to
obtain supplies of components in the quantities that we require;
- delays in delivery or failure of suppliers to deliver critical
components on the dates we require;
- failure of suppliers to manufacture components to our
specifications, and potentially reduced quality; and
- inability to obtain components at acceptable prices.
18
Our business and operating results may suffer from the lack of alternative
sources of supply for critical sole and limited source components. The process
of qualifying suppliers is complex, requiring extensive testing and
interoperability with our products, and may be lengthy, particularly as new
products are introduced. New suppliers would have to be educated in our
production processes. In addition, the use of alternate components may require
design alterations to our products and additional product testing under FDA and
relevant foreign regulatory agency guidelines, which may delay sales and
increase product costs. Any failures by our vendors to adequately supply
limited and sole source components may impair our ability to offer our existing
products, delay the submission of new products for regulatory approval and
market introduction, materially harm our business and financial condition and
cause our stock price to decline. Establishing our own capabilities to
manufacture these components would be expensive and could significantly decrease
our profit margins. We do not currently intend to manufacture any of these
components. Our business, results of operations and financial condition would
be adversely affected if we are unable to continue to obtain components in the
quantity and quality desired and at the prices we have budgeted.
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 three months ended June 28, 2003, our
international sales were $2.8million or 37.1% of total sales. We anticipate that
international sales will continue to account for a significant portion of our
revenues in the foreseeable future. None of our international revenues and costs
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. The factors stated above
could have a material adverse effect on our business, financial condition or
results of operations. Our international operations and sales are subject to a
number of risks including:
- longer accounts receivable collection periods;
- impact of recessions in economies outside of the United States;
- foreign certification requirements, including continued ability
to use the "CE" mark in Europe;
- reduced or limited protections of intellectual property rights in
jurisdictions outside the United States;
- potentially adverse tax consequences; and
- multiple protectionist, adverse and changing foreign governmental
laws and regulations.
Any one or more of these factors stated above could have a material adverse
effect on our business, financial condition or results of operations. For
additional discussion about our foreign currency risks, see Item 3,
"Quantitative and Qualitative Disclosures About Market Risk."
Our Operating Results May be Adversely Affected by Changes in Third Party
Coverage and Reimbursement Policies and any Uncertainty Regarding Healthcare
Reform Measures. Our ophthalmology products are typically purchased by doctors,
clinics, hospitals and other users, which bill various third-party payers, such
19
as governmental programs and private insurance plans, for the health care
services provided to their patients. Third-party payers are increasingly
scrutinizing and challenging the coverage of new products and the level of
reimbursement for covered products. Doctors, clinics, hospitals and other users
of our products may not obtain adequate reimbursement for use of our products
from third-party payers. While we believe that the laser procedures using our
products have generally been reimbursed, payers may deny coverage and
reimbursement for our products if they determine that the device was not
reasonable and necessary for the purpose used, was investigational or was not
cost-effective. In addition, third party payers may not initiate coverage of
new procedures using our products for a significant period. For example, in
September 2000, the Center for Medicare and Medicaid Services, or CMS, advised
that claims for reimbursement for certain age related macular degeneration (AMD)
procedures which use our OcuLight SLx laser system, could be submitted for
reimbursement, with coverage and payment to be determined by the local medical
carriers at their discretion. To date, only three 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; Cigna, which is the carrier for North Carolina, Tennessee and Idaho;
and National Heritage Insurance, which is the carrier for California-have made
coverage decisions approving the use of the Transpupillary Thermotherapy, or TTT
protocol for the treatment of wet AMD. No other carriers have approved
reimbursement of such AMD procedures using the OcuLight SLx, and domestic sales
of the OcuLight SLx laser system continue to be limited until more local medical
carriers reimburse for performing such AMD procedures or until CMS advises that
claims for these procedures may be submitted directly to CMS at the national
level.
Changes in government legislation or regulation or in private third-party
payers' policies toward reimbursement for procedures employing our products may
prohibit adequate reimbursement. There have been a number of legislative and
regulatory proposals to change the healthcare system, reduce the costs of
healthcare and change medical reimbursement policies. Doctors, clinics,
hospitals and other users of our products may decline to purchase our products
to the extent there is uncertainty regarding reimbursement of medical procedures
using our products and any healthcare reform measures. Further proposed
legislation, regulation and policy changes affecting third party reimbursement
are likely. We are unable to predict what legislation or regulation, if any,
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, or what effect such legislation or regulation may
have on us. However, denial of coverage and reimbursement of our products would
have a material adverse effect on our business, results of operations and
financial condition.
We are Dependent on the Successful Outcome of Clinical Trials of Our
Products and New Applications Using Our Products. Our success will depend in
part on the successful outcome of clinical trials of our products and new
applications using our products. Clinical trials are long, expensive and
uncertain processes. We are currently supporting several ongoing clinical
trials, including, for example, the TTT4CNV clinical trial. The TTT4CNV clinical
trial is a multi-center, prospective, placebo-controlled, randomized trial
conducted at 22 centers in the United States. This clinical trial is a post
marketing study performed within the FDA cleared indications of the OcuLight SLx
and is being conducted to determine whether TTT laser treatment using our
OcuLight SLx infrared laser system and Large Spot Slit Lamp Adapter can reduce
the risk of vision loss for patients with wet AMD. In order to successfully
commercialize the use of our OcuLight SLx for TTT procedures, we must be able
to, among other things, demonstrate with substantial evidence from
well-controlled clinical trials where TTT procedures using the Oculight SLx
product are both safe and effective. This process may take a number of years. In
March 2003, we announced that the Executive Committee for the TTT4CNV clinical
trial accepted the recommendations of the independent Data and Safety Monitoring
Committee that an adequate number of patients were enrolled to detect a
clinically relevant difference between outcomes in TTT-treated eyes and patients
20
not being treated. We cannot assure you that results from the TTT4CNV clinical
trial will prove to be successful. If the future results of the TTT4CNV clinical
trial or any other clinical trial regarding our products fails to validate the
safety and effectiveness of treatments using our products, our ability to
generate revenues from new products or new applications using our products would
be adversely affected and our business would be harmed.
Our Operating Result May Fluctuate from Quarter to Quarter and Year to
Year. Our sales and operating results may vary significantly from quarter to
quarter and from year to year in the future. Our operating results are affected
by a number of factors, many of which are beyond our control. Factors
contributing to these fluctuations include the following:
- General economic uncertainties and political concerns;
- The timing of the introduction and market acceptance of new products,
product enhancements and new applications;
- Changes in demand for our existing line of dermatology 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 dermatology and ophthalmic
products and foreign and domestic sales;
- The effect of regulatory approvals and changes in domestic and foreign
regulatory requirements;
- Introduction of new products, product enhancements and new
applications by our competitors, entry of new competitors into our
markets, pricing pressures and other competitive factors;
- Our long and highly variable sales cycle;
- Decreases in the prices at which we can sell our products;
- Changes in customers' or potential customers' budgets as a result of,
among other things, reimbursement policies of government programs and
private insurers for treatments that use our products; and
- Increased product development costs.
In addition to these factors, our quarterly results have been, and are expected
to continue to be, affected by seasonal factors.
Our expense levels are based, in part, on expected future sales. If sales
levels in a particular quarter do not meet expectations, we may be unable to
adjust operating expenses quickly enough to compensate for the shortfall of
sales, and our results of operations may be adversely affected. In addition, we
have historically made a significant portion of each quarter's product shipments
near the end of the quarter. If that pattern continues, any delays in shipment
of products could have a material adverse effect on results of operations for
such quarter. Due to these and other factors, we believe that quarter to
21
quarter and year to year comparisons of our past operating results may not be
meaningful. You should not rely on our results for any quarter or year as an
indication of our future performance. Our operating results in future quarters
and years may be below expectations, which would likely cause the price of our
common stock to fall.
We Rely on Our Direct Sales Force and Network of International Distributors to
Sell Our Products and any Failure to Maintain Our Direct Sales Force and
Distributor Relationships Could Harm Our Business. Our ability to sell our
products and generate revenue depends upon our direct sales force within the
United States and relationships with independent distributors outside the United
States. As of June 28, 2003 our direct sales force consisted of 15 employees
and we maintained relationships with 50 independent distributors internationally
selling our products into 107 countries. We generally grant our distributors
exclusive territories for the sale of our products in specified countries. The
amount and timing of resources dedicated by our distributors to the sales of our
products is not within our control. Our international sales are entirely
dependent on the efforts of these third parties. If any distributor breaches or
fails to generate sales of our products, we may be forced to replace the
distributor and our ability to sell our products into that exclusive sales
territory would be adversely affected.
We do not have any long-term employment contracts with the members of our direct
sales force. We may be unable to replace our direct sales force personnel with
individuals of equivalent technical expertise and qualifications, which may
limit our revenues and our ability to maintain market share. The loss of the
services of these key personnel would harm our business. Similarly, our
distributorship agreements are generally terminable at will by either party and
distributors may terminate their relationships with us, which would affect our
international sales and results of operations.
We Depend on Collaborative Relationships to Develop, Introduce and Market
New Products, Product Enhancements and New Applications. We have entered into
collaborative relationships with academic medical centers and physicians in
connection with the research and development and clinical testing of our
products. We plan to collaborate with third parties to develop and
commercialize existing and new products. In October 2002, we announced our
collaboration with Bausch & Lomb to design and manufacture a solid-state green
wavelength (532) nm) laser photocoagulator module, called the Millennium
Endolase module. The Millennium Endolase module is designed to be a component
of Bausch & Lomb's ophthalmic surgical suite product offering and is not
expected to be sold as a stand-alone product. Sales of the Millennium Endolase
module are dependent upon the actual order rate from and shipment rate to Bausch
& Lomb, which depends on the efforts of our partner and is beyond our control.
We cannot assure you that our relationship with Bausch & Lomb will result in
further sales of our Millennium Endolase module. Our collaborators may not
pursue further development and commercialization of products resulting from
collaborations with us or may not devote sufficient resources to the marketing
and sale of such products. Traditionally, our reliance on others for clinical
development, manufacturing and distribution of our products may result in
unforeseen problems. Further, our collaborative partners may develop or pursue
alternative technologies either on their own or in collaboration with others.
If a collaborator elects to terminate its agreement with us, our ability to
develop, introduce, market and sell the product may be significantly impaired
and we may be forced to discontinue altogether the product resulting from the
collaboration. We may not be able to negotiate alternative collaboration
agreements on acceptable terms, if at all. The failure of any current or future
collaboration efforts could have a material adverse effect on our ability to
introduce new products or applications and therefore could have a material
adverse effect on our business, results of operations and financial condition.
We Rely on Patents and Proprietary Rights to Protect our Intellectual
Property and Business. Our success and ability to compete is dependent in part
22
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
fourteen United States patents and two foreign patents on the technologies
related to our products and processes. We have approximately five pending patent
applications in the United States and six foreign pending patent applications
that have been filed. Our patent applications may not be approved. Any patents
granted now or in the future may offer only limited protection against potential
infringement and development by our competitors of competing products. Moreover,
our competitors, many of which have substantial resources and have made
substantial investments in competing technologies, may seek to apply for and
obtain patents that will prevent, limit or interfere with our ability to make,
use or sell our products either in the United States or in international
markets.
In addition to patents, we rely on trade secrets and proprietary know-how
which we seek to protect, in part, through proprietary information agreements
with employees, consultants and other parties. Our proprietary information
agreements with our employees and consultants contain industry standard
provisions requiring such individuals to assign to us without additional
consideration any inventions conceived or reduced to practice by them while
employed or retained by us, subject to customary exceptions. Proprietary
information agreements with employees, consultants and others may be breached,
and we may not have adequate remedies for any breach. Also, our trade secrets
may become known to or independently developed by competitors.
The laser and medical device industry is characterized by frequent
litigation regarding patent and other intellectual property rights. Companies
in the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Numerous patents are held by others, including
academic institutions and our competitors. Until recently patent applications
were maintained in secrecy in the United States until the patents issued.
Patent applications filed in the United States after November 2000 generally
will be published eighteen months after the filing date. However, since patent
applications continue to be maintained in secrecy for at least some period of
time, both within the United States and with regards to international patent
applications, we cannot assure you that our technology does not infringe any
patents or patent applications held by third parties. We have, from time to
time, been notified of, or have otherwise been made aware of, claims that we may
be infringing upon patents or other proprietary intellectual property owned by
others. If it appears necessary or desirable, we may seek licenses under such
patents or proprietary intellectual property. Although patent holders commonly
offer such licenses, licenses under such patents or intellectual property may
not be offered or the terms of any offered licenses may not be reasonable.
Any claims, with or without merit, and regardless of whether we are
successful on the merits, would be time-consuming, result in costly litigation
and diversion of technical and management personnel, cause shipment delays or
require us to develop noninfringing technology or to enter into royalty or
licensing agreements. An adverse determination in a judicial or administrative
proceeding and failure to obtain necessary licenses or develop alternate
technologies could prevent us from manufacturing and selling our products, which
would have a material adverse effect on our business, results of operations and
financial condition.
We Are Subject To Government Regulation Which May Cause Us to Delay or
Withdraw the Introduction of New Products or New Applications for Our Products.
The medical devices that we market and manufacture are subject to extensive
regulation by the FDA and by foreign and state governments. Under the Federal
Food, Drug and Cosmetic Act and the related regulations, the FDA regulates the
23
design, development, clinical testing, manufacture, labeling, sale, distribution
and promotion of medical devices. Before a new device can be introduced into
the market, the product must undergo rigorous testing and an extensive
regulatory approval process implemented by the FDA under federal law. A device
manufacturer must obtain market clearance through either the 510(k) premarket
notification process or the lengthier premarket approval application process.
Depending upon the type, complexity and novelty of the device and the nature of
the disease or disorder to be treated, the FDA process can take several years,
require extensive clinical testing and result in significant expenditures. Even
if regulatory approval is obtained, later discovery of previously unknown safety
issues may result in restrictions on the product, including withdrawal of the
product from the market. Other countries also have extensive regulations
regarding clinical trials and testing prior to new product introductions. Our
failure to obtain government approvals or any delays in receipt of such
approvals would have a material adverse effect on our business, results of
operations and financial condition.
The FDA imposes additional regulations on manufacturers of approved medical
devices. We are required to comply with the applicable FDA good manufacturing
practice regulations, which include quality control and quality assurance
requirements, as well as maintenance of records and documentation. Our
manufacturing facilities are subject to ongoing periodic inspections by the FDA
and corresponding state agencies, including unannounced inspections, and must be
licensed as part of the product approval process before being utilized for
commercial manufacturing. Noncompliance with the applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, withdrawal of
marketing approvals, and criminal prosecution. The FDA also has the authority to
request repair, replacement or refund of the cost of any device we manufacture
or distribute. Any of these actions by the FDA would materially and adversely
affect our ability to continue operating our business and the results of our
operations.
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 with the European Medical Device Directive and all
applicable standards. While currently all of our released IRIS Medical and
IRIDERM products are products are CE registered, continued registration is based
on successful review of the process by our European Registrar during their
annual audit. Any loss of registration would have a material adverse effect on
our business, results of operations and financial condition.
If Product Liability Claims are Successfully Asserted Against Us, We may
Incur Substantial Liabilities That May Adversely Affect Our Business or Results
of Operations. We may be subject to product liability claims in the future. Our
products are highly complex and 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. Product liability insurance is
expensive. We might not be able to obtain product liability insurance in the
future on acceptable terms or in sufficient amounts to protect us, if at all. A
successful claim brought against us in excess of our insurance coverage could
have a material adverse effect on our business, results of operations and
financial condition.
If We Fail to Accurately Forecast Demand For Our Product and Component
Requirements For the Manufacture of Our Product, We Could Incur Additional Costs
or Experience Manufacturing Delays and May Experience Lost Sales or Significant
Inventory Carrying Costs. We use quarterly and annual forecasts based primarily
on our anticipated product orders to plan our manufacturing efforts and
determine our requirements for components and materials. It is very important
24
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.
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 Has Been and May Continue to be Volatile and an Investment
in Our Common Stock Could Suffer a Decline in Value. The trading price of our
common stock has been subject to wide fluctuations in response to a variety of
factors, some of which are beyond our control, including quarterly variations in
our operating results, announcements by us or our competitors of new products or
of significant clinical achievements, changes in market valuations of other
similar companies in our industry and general market conditions. We receive only
limited attention by securities analysts and may experience an imbalance between
supply and demand for our common stock resulting from low trading volumes. In
addition, the stock market has experienced extreme volatility in the last few
years that has often been unrelated to the performance of particular companies.
These broad market fluctuations could have a significant impact on the market
price of our common stock regardless of our performance.
25
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 28, 2003.
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.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"), our President and Chief Executive Officer, who is our
principal executive officer, and our Chief Financial Officer and Senior Vice
President, Finance and Administration, who is our principal financial officer,
performed an evaluation
26
of the effectiveness of our "disclosure controls and procedures" (as defined in
Rules 13a-14(c) and 15(d)-14(c) of the Securities and Exchange Act of 1934, as
amended). Based on that evaluation, our President and Chief Executive Officer
and our Chief Financial Officer and Senior Vice President Finance and
Administration concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective to ensure that material information about
IRIDEX Corporation and our consolidated subsidiaries is made known to us by
others within those entities, particularly during the period in which this
quarterly report was being prepared.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
Evaluation Date, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on June 4, 2003 in Mountain
View, California. Of the 6,919,285 shares outstanding as of the record date,
6,386,168 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 5,864,360 521,808
James L. Donovan 5,864,360 521,808
John M. Nehra 5,903,060 483,108
Donald L. Hammond 5,963,660 422,508
Joshua Makower, M.D. 5,963,660 422,508
Robert K. Anderson 5,393,329 992,839
27
2. To approve an amendment to the 1998 Stock Plan to increase the number
of shares of common stock reserved for issuance thereunder from
1,230,000 shares to 1,500,000 shares.
Votes for: 2,721,044
Votes against: 1,591,431
Votes abstaining: 20,275
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 370,000 shares to 430,000 shares.
Votes for: 3,487,364
Votes against: 828,611
Votes abstaining: 16,775
4. To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Company for the fiscal year ending January 3, 2004.
Votes for: 6,374,988
Votes against: 6,745
Votes abstaining: 4,435
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 Company's
Audit Committee to be performed by PricewaterhouseCoopers LLP, the Company'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 Company. The additional engagement of
PricewaterhouseCoopers LLP for the matters listed below are each considered by
the Company 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 engagements of
PricewaterhouseCoopers LLP for certain tax matter consultations and for the
review of the Company's filings under the Securities Act of 1933, as amended.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Change of Control Agreement, effective as of May 19, 2003, entered
into by and between the Registrant and Larry Tannenbaum, Chief
Financial Officer
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
The Company filed a report on Form 8-K on May 13, 2003 relating to a press
release regarding the Company's financial results for the fiscal quarter ended
March 29, 2003.
The Company filed a report on Form 8-K on July 22, 2003 relating to a press
release regarding the Company's financial results for the fiscal quarter ended
June 28, 2003.
29
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 12, 2003 By: /s/ Larry Tannenbaum
-----------------------
Larry Tannenbaum
Chief Financial Officer, Senior Vice
President of Finance and
Administration and Secretary
(Principal Financial and
Accounting Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO
- --------------------------------------------------------------------------------
SECTION 13(A) OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------------------------------------------
AS ADOPTED PURSUANT TO
----------------------
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
---------------------------------------------
I, Theodore A. Boutacoff, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IRIDEX Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
30
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 12, 2003
By: /s/ Theodore A. Boutacoff
Name: Theodore A. Boutacoff
Title: President and Chief Executive Officer
(Principal Executive Officer)
I, Larry Tannenbaum, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IRIDEX Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to
make the statement made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
31
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 12, 2003
By: /s/ Larry Tannenbaum
Name: Larry Tannenbaum
Title: Chief Financial Officer, Senior Vice
President of Finance and
Administration and Secretary
(Principal Financial and Accounting Officer)
32