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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment No. 1
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number: 0-11634
STAAR SURGICAL COMPANY
(Exact name of registrant as specified in its charter)
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Delaware
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95-3797439 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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1911 Walker Avenue
Monrovia, California
(Address of principal executive offices) |
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91016
(Zip Code) |
(626)303-7902
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of
July 2, 2004, the last business day of the
registrant’s most recently completed second fiscal quarter,
was approximately $153,394,326 based on the closing price per
share of $7.51 of the registrant’s Common Stock on that
date.
The number of shares outstanding of the registrant’s Common
Stock as of March 25, 2005 was 20,690,638.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement
relating to its 2005 annual meeting of stockholders, which will
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days of the close of the
registrant’s last fiscal year, are incorporated by
reference into Part III of this report.
TABLE OF CONTENTS
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EXPLANATORY NOTE
STAAR Surgical Company (the “Company”) is filing this
Amendment No. 1 to its Annual Report on Form 10-K for
the year ended December 31, 2004 (the “Report”)
to update the financial statements and related disclosures to
reflect the Company’s receipt, on April 4, 2005, of
$13.5 million in net proceeds from the private placement of
shares of the Company’s common stock (the “Private
Placement”). As a result of the Private Placement, the
Company’s independent registered public accounting firm has
re-issued its opinion on the Company’s financial statements
to remove a qualifying paragraph that expressed substantial
doubt about the Company’s ability to continue as a going
concern. The financing is described in this Amended Report under
“Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and
in the “Notes to Consolidated Financial
Statements — Note 19- Subsequent Event.”
The following sections of the Amended Report have been revised
or added to reflect the removal of the independent registered
public accounting firm’s qualification:
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Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations; |
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Report of Independent Registered Public Accounting Firm; |
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Note 1 to Consolidated Financial Statements of the Company; |
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Note 19 to Consolidated Financial Statements of the
Company; and |
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Independent Registered Public Accounting Firm Report on Schedule. |
Additionally, on April 14, 2005, the SEC announced a new
rule that delays the implementation of FASB Statement
No. 123 (revised 2004), Share-Based Payment, to the
beginning of fiscal 2006. Descriptions of this new accounting
pronouncement included in “Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the “Notes to
Consolidated Financial Statements —
Note 1 — Significant Accounting
Policies” have been updated to reflect this change.
While the remainder of the report is unchanged, the Company is
reproducing the Report in its entirety to provide a complete
presentation to the reader. This Amendment No. 1 speaks as
of the original date of the filing date of the Report, except
for certifications, which speak as of their respective dates and
the filing date of this Amendment No. 1. Except as
specifically indicated, the Report has not been updated to
reflect events occurring subsequently to the original filing
date.
PART I
This Annual Report on Form 10-K contains statements
which constitute “forward-looking statements” within
the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended. These statements include comments regarding
the intent, belief or current expectations of the Company and
its management. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual
results may differ materially from those projected in the
forward-looking statements. See “Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Risk Factors.”
General
STAAR Surgical Company develops, manufactures and distributes
worldwide products used by ophthalmologists and other eye care
professionals to improve or correct vision in patients with
cataracts, refractive conditions, and glaucoma. Originally
incorporated in California in 1982, STAAR Surgical Company
reincorporated in Delaware in 1986. Unless the context indicates
otherwise “we,” “us,” “the
Company,” and “STAAR” refer to STAAR Surgical
Company and its consolidated subsidiaries.
Cataract Surgery. Our main products are foldable silicone
and Collamer® intraocular lenses (“IOLs”) used
after minimally invasive small incision cataract extraction.
Over the years, we have expanded our range of products for use
in cataract surgery to include:
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the Preloaded Injector, a three-piece silicone IOL preloaded
into a single-use disposable injector, |
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toric silicone IOLs to treat astigmatic abnormalities, |
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STAARVISCtm II,
a viscoelastic material which is used as a tissue protective
lubricant and to maintain the shape of the eye during surgery, |
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STAAR
SonicWAVEtm
Phacoemulsification System, which is used to remove a cataract
patient’s cloudy lens and has low energy and high vacuum
characteristics, and |
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Cruise Control, a disposable filter which allows for a
significantly faster, cleaner phacoemulsification procedure and
is compatible with all phacoemulsification equipment utilizing
Venturi and peristaltic pump technologies. |
Currently, the majority of our revenues are generated from these
products.
Refractive Surgery. In the area of refractive surgery, we
have used our biocompatible Collamer material to develop and
manufacture the
Visiantm
ICL (“ICL”) and the
Visiantm
TICL (“TICL”) to treat refractive disorders such as
myopia (near-sightedness), hyperopia (far-sightedness) and
astigmatism. These disorders of vision affect a large proportion
of the population. Unlike the intraocular lens
(“IOL”), which replaces a cataract patient’s
cloudy lens, these products are designed to work with the
patient’s natural lens to correct refractive errors. The
Company’s goal is to establish the ICL and TICL as the next
paradigm shift in refractive surgery, making the products
significant revenue generators for the Company over the next
four to five years.
The ICL and TICL have not yet been approved for use in the
United States. If approved, we believe that the ICL will have a
significant market as an alternative to LASIK and other
available refractive surgical procedures and could replace
cataract surgery products as STAAR’s largest source of
revenue. The ICL is approved for use in the European Union and
in Korea and Canada. The TICL is approved for use in the
European Union. For a discussion of the status of the FDA review
of the ICL, see “— Regulatory Matters —
FDA Review of the ICL.”
Glaucoma Surgery. We have also developed the
AquaFlowtm
Collagen Glaucoma Drainage Device (the “Aqua Flow
Device”), as an alternative to current methods of treating
open-angle glaucoma. The
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AquaFlow Device is implanted in the sclera (the white of the
eye), using a minimally invasive procedure, for the purpose of
reducing intraocular pressure.
Within each of these segments, we also sell other instruments,
devices and equipment that we manufacture or that are
manufactured by others in the ophthalmic industry. In general,
these products complement STAAR’s proprietary product range
and allow us to compete more effectively.
Recent Developments
For a description of financial and other recent developments,
see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Overview.”
Strategy
Our mission is to develop, manufacture and distribute worldwide
visual implants and other ophthalmic products that improve the
vision of patients with cataracts, refractive conditions and
glaucoma. The key elements of the Company’s strategy are as
follows:
Expanding the market for the ICL. We are seeking to
expand the market for our ICL and TICL by the following means:
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obtaining the approval of the FDA to market the ICL and the TICL
in the United States; |
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obtaining the approval of the ICL and the TICL in new
international markets; and |
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expanding the market share of the ICL and the TICL in existing
international markets. |
Revitalizing our IOL business. We are seeking to rebuild
the market share of our IOLs in the United States by the
following means:
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increasing the awareness of ophthalmologists of the advantages
of our proprietary Collamer material as an alternative to either
silicone or acrylic for the manufacture of IOLs; |
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improving the injector systems for our lenses; and |
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obtaining U.S. approval for our preloaded injector
technology and expanding it to all of our lenses. |
Improving regulatory compliance. We are seeking to
improve our quality systems to correct any deficiencies
identified in the FDA’s December 22, 2003 Warning
Letter and the 483 Observations. For a description of these
regulatory issues, see “— Regulatory
Matters — Warning Letters and the 483
Observations.”
Reducing operating expenses and seeking additional
financing. During late 2004 and early 2005, we took steps to
reduce our operating expenses by, among other things, reducing
our use of independent consultants and reducing our direct sales
force. In addition, we are seeking additional financing. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Risk
Factors — We have only limited working capital”
and “— We have only limited access to
financing.”
Financial Information about Segments and Geographic Areas
The Company has expanded its marketing focus beyond the cataract
surgery market to include the refractive surgery and glaucoma
markets. However, during 2004 the cataract segment accounted for
90.4% the majority of the Company’s revenues and, thus, the
Company operates as one business segment for financial reporting
purposes. See Note 17 to the Consolidated Financial
Statements for financial information about product lines and
operations in geographic areas.
Background
The human eye is a specialized sensory organ capable of
receiving visual images that are transmitted to the visual
center in the brain. The main parts of the eye are the cornea,
the iris, the lens, the retina, and the
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trabecular meshwork. The cornea is the clear window in the front
of the eye through which light first passes. The iris is a
muscular curtain located behind the cornea which opens and
closes to regulate the amount of light entering the eye through
the pupil, an opening at the center of the iris. The lens is a
clear structure located behind the iris that changes shape to
better focus light to the retina, located in the back of the
eye. The retina is a layer of nerve tissue consisting of
millions of light receptors called rods and cones, which receive
the light image and transmit it to the brain via the optic
nerve. The anterior chamber of the eye, located in front of the
iris, is filled with a watery fluid called the aqueous humour,
while the portion of the eye behind the lens is filled with a
jelly-like material called the vitreous humour. The trabecular
meshwork, a drainage channel located between the iris and the
surrounding white portion of the eye, maintains a normal
pressure in the anterior chamber of the eye by draining excess
aqueous humour.
The eye can be affected by common visual disorders, disease or
trauma. The most prevalent ocular disorders or diseases are
cataracts and glaucoma. Cataract formation is generally an age
related situation that involves the hardening and loss of
transparency of the natural crystalline lens, impairing visual
acuity.
Glaucoma is a progressive ocular disease that manifests itself
through increased intraocular pressure. This, in turn, may
result in damage to the optic disc and a decrease of the visual
field. Untreated, progressive glaucoma can result in blindness.
Refractive disorders include myopia, hyperopia, astigmatism and
presbyopia. Myopia and hyperopia are caused by either overly
curved or flat corneas which result in improper focusing of
light on the retina. They are also known as near-sightedness and
far-sightedness, respectively. Astigmatism is characterized by
an irregularly shaped cornea resulting in blurred vision.
Presbyopia is an age related condition caused by the loss of
elasticity of the natural crystalline lens, reducing the
eye’s ability to accommodate or adjust for varying
distances.
Principal Products
Our products are designed to:
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Improve patient outcomes, |
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Minimize patient risk and discomfort, and |
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Simplify ophthalmic procedures or post-operative care for the
surgeon and the patient. |
Intraocular Lenses (IOLs) and Related Cataract Treatment
Products. We produce and market a line of foldable IOLs for
use in minimally invasive cataract surgical procedures. Our IOLs
can be folded, and therefore can be implanted into the eye
through an incision as small as 2.8 mm. Once inserted, the IOL
unfolds naturally to replace the cataractous lens.
In late 2003, we introduced, through our joint venture company,
Canon Staar, the first preloaded lens injector system in
international markets. We believe the Preloaded Injector offers
surgeons improved convenience and reliability. The Preloaded
Injector is not yet available in the U.S.
Currently, our foldable IOLs are manufactured from both our
proprietary Collamer material and silicone. Both materials are
offered in two differently configured styles, the single-piece
plate haptic design and the three-piece design where the optic
is combined with polyimide loop haptics. The selection of one
style over the other is primarily based on the preference of the
ophthalmologist. The Collamer IOL is offered in a single-piece
design. A redesign of the three-piece version of the lens has
been completed along with a dedicated injection system which is
in the final stages of development.
We have developed and currently market globally the Toric IOL, a
toric version of our single-piece silicone IOL, which is
specifically designed for patients with pre-existing
astigmatism. The Toric IOL is the first refractive product we
offered in the U.S.
Sales of foldable IOLs accounted for approximately 56% of our
total revenues for the 2004 fiscal year, 61% of total revenues
for the 2003 fiscal year and 65% of total revenues for the 2002
fiscal year.
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As part of our approach to providing complementary products for
use in minimally invasive cataract surgery, we also market
STAARVISC II, a viscoelastic material which is used as a
protective lubricant and to maintain the shape of the eye during
surgery, the STAAR SonicWAVE Phacoemulsification System, which
is used to remove a cataract patient’s cloudy lens and has
low energy and high vacuum characteristics, and Cruise Control,
a single-use disposable filter which allows for a significantly
faster, cleaner phacoemulsification procedure and is compatible
with all phacoemulsification equipment utilizing Venturi and
peristaltic pump technologies. We also sell other related
instruments, devices, surgical packs and equipment that we
manufacture or that are manufactured by others. Sales of other
cataract products accounted for approximately 32% of our total
revenues for the 2004 fiscal year, 29% of total revenues for the
2003 fiscal year and 26% of total revenues for the 2002 fiscal
year.
AquaFlow Collagen Glaucoma Drainage Device. Our AquaFlow
Device is surgically implanted in the outer tissues of the eye
to maintain a space that allows increased drainage of
intraocular fluid so as to reduce intraocular pressure. It is
made of collagen, a porous material that is compatible with
human tissue and facilitates drainage of excess eye fluid. The
AquaFlow Device is specifically designed for patients with
open-angled glaucoma, which is the most prevalent type of
glaucoma. In contrast to conventional and laser glaucoma
surgeries, implantation of the AquaFlow Device does not require
penetration of the anterior chamber of the eye. Instead, a small
flap of the outer eye is folded back and a portion of the sclera
and trabecular meshwork is removed. The AquaFlow Device is
placed above the remaining trabecular meshwork and
Schlemm’s canal and the outer flap is refolded into place.
The device swells, creating a space as the eye heals. It is
absorbed into the surrounding tissue within six months to nine
months after implantation, leaving the open space and possibly
creating new fluid collector channels. The 15 to 45 minute
surgical procedure to implant the AquaFlow Device is performed
under local or topical anesthesia, typically on an outpatient
basis.
While we believe the glaucoma market is very conservative, there
is a continuing interest in learning the surgical procedure to
implant the AquaFlow Device. Adoption by ophthalmic surgeons,
however, will be dependent upon the rate at which they learn to
perform the surgical procedure or the development of
instrumentation to simplify the procedure. Sales of AquaFlow
Devices accounted for approximately 2% of our total revenues in
each of the 2004, 2003, and 2002 fiscal years.
Refractive Correction — Visian
ICLtm
(ICLs). ICLs are implanted into the eye in order to
correct refractive disorders such as myopia, hyperopia and
astigmatism. Lenses of this type are generically called
“phakic IOLs” or “phakic implants” because
they work along with the patient’s natural lens, or
phakos, rather than replacing it. The ICL is capable of
correcting a wide range of refractive disorders from low to
severe conditions.
The ICL is folded and implanted into the eye behind the iris and
in front of the natural crystalline lens using minimally
invasive surgical techniques similar to implanting an IOL during
cataract surgery, except that the human lens is not removed. The
surgical procedure to implant the ICL is typically performed
with topical anesthesia on an outpatient basis. Visual recovery
is within one to 24 hours.
We believe the ICL will complement current refractive
technologies and allow refractive surgeons to expand their
treatment range and customer base.
The ICL and TICL have not yet been approved for use in the
United States. The ICL for myopia is approved for use in the
European Union and in Korea and Canada, and applications are
pending in Australia. The TICL is approved for use in the
European Union, and applications are pending in Australia, Korea
and Canada. The Company has completed enrollment in the
U.S. clinical trials for the TICL and expects to file its
submission with the FDA in late 2005. For a discussion of the
status of the FDA review of the ICL, see
“— Regulatory Matters — FDA Review of
the ICL.”
The Hyperopic ICL is approved for use in the European Union and
in Canada, and is currently in clinical trials in the United
States.
The ICL is available internationally for myopia in five lengths,
with 41 powers for each length, and for hyperopia in five
lengths, with 38 powers for each length, which equates to
approximately 400 inventoried parts. This requires the Company
to carry a significant amount of inventory to meet the customer
demand for
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rapid delivery. The Toric ICL is available for myopia in the
same powers and lengths but carries additional parameters of
cylinder and axis with 11 and 180 possibilities, respectively.
As such, the Toric ICL is made to order.
Sales of ICLs accounted for approximately 8% of our total
revenues for the 2004 fiscal year, 6% of total revenues for the
2003 fiscal year and 5% of total revenues for the 2002 fiscal
year.
Sources and Availability of Raw Materials
The Company uses a wide range of raw materials in the production
of our products. Most of the raw materials and components are
purchased from external suppliers. Some of our raw materials are
single-sourced due to regulatory constraints, cost
effectiveness, availability, quality, and vendor reliability
issues. Many of our components are standard parts and are
available from a variety of sources although we do not typically
pursue regulatory and quality certification of multiple sources
of supply. With the exception of our silicone material, we do
not believe that the loss of any existing external supply source
would have material adverse effect on us.
The proprietary collagen-based raw material used to manufacture
our IOLs, ICLs and the AquaFlow Device is internally
sole-sourced from one of our facilities in California. If the
supply of these collagen-based raw materials is disrupted we
know of no alternative supplier, and therefore, any such
disruption could result in our inability to manufacture the
products and would have a material adverse effect on the Company.
Patents, Trademarks and Licenses
We strive to protect our investment in the research,
development, manufacturing and marketing of our products through
the use of patents, licenses, trademarks, and copyrights. We own
or have rights to a number of patents, licenses, trademarks,
copyrights, trade secrets and other intellectual property
directly related and important to our business. As of
December 31, 2004, we owned approximately 84 United States
and foreign patents and had approximately 66 patent applications
pending.
We believe that our patents are important to our business. Of
significant importance to the Company are the patents, licenses,
and technology rights surrounding our Visian ICL
(“ICL”) and Collamer material. In 1996, we were
granted an exclusive royalty- bearing license to manufacture,
use, and sell ICLs in the United States, Europe, Latin America,
Africa, and Asia using the uniquely biocompatible Collamer
material. The Collamer material is also used in certain of our
IOLs. We have also acquired or applied for various patents and
licenses related to our Aqua Flow Device, our
phacoemulsification system, our insertion devices, and other
technologies of the Company.
Patents for individual products extend for varying periods of
time according to the date a patent application is filed or a
patent is granted and the term of patent protection available in
the jurisdiction granting the patent. The scope of protection
provided by a patent can vary significantly from country to
country.
Our strategy is to develop patent portfolios for our research
and development projects in order to obtain market exclusivity
for our products in our major markets. Although the expiration
of a patent for a product normally results in the loss of market
exclusivity, we may continue to derive commercial benefits from
these products. We routinely monitor the activities of our
competitors and other third parties with respect to their use of
intellectual property, including considering whether or not to
assert our patents where we believe they are being infringed.
Worldwide, all of our major products are sold under trademarks
we consider to be important to our business. The scope and
duration of trademark protection varies widely throughout the
world. In some countries, trademark protection continues only as
long as the mark is used. Other countries require registration
of trademarks and the payment of registration fees. Trademark
registrations are generally for fixed but renewable terms.
We protect our proprietary technology, in part, through
confidentiality and nondisclosure agreements with employees,
consultants and other parties. Our confidentiality agreements
with employees and consultants
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generally contain standard provisions requiring those
individuals to assign to STAAR, without additional
consideration, inventions conceived or reduced to practice by
them while employed or retained by STAAR, subject to customary
exceptions.
Seasonality
We experience some seasonality in demand for our products with
sales in the third quarter generally being the lowest due to the
impact of summer vacations on elective surgeries.
Distribution and Customers
We market our products to a variety of health care providers,
including surgical centers, hospitals, managed care providers,
health maintenance organizations, group purchasing organizations
and government facilities. The primary user of our products is
the ophthalmologist. No material part of our business, taken as
a whole, is dependant upon a single or a few customers.
We maintain direct distribution to the physician or facility in
the United States, Canada, Germany and Australia. Sales efforts
in Germany and Australia are primarily supported through a
direct sales force. Sales efforts in the United States and
Canada are primarily supported through a network of independent
manufacturers’ representatives. The independent
representatives are compensated through the payment of
commissions based on sales and may represent manufacturers other
than STAAR, although not in competing products. In all other
countries where we do business, we sell principally through
independent distributors.
We support the sales efforts of our agents, employees and
distributors through the activities of our internal marketing
department. Sales efforts are supplemented through the use of
promotional materials, educational courses, speakers programs,
participation in trade shows and technical presentations.
The dollar amount of the Company’s backlog orders is not
significant in relation to total annual sales. The Company
generally keeps sufficient inventory on hand to ship product
when ordered.
Competitive Conditions
Competition in the ophthalmic medical device field is intense
and characterized by extensive research and development and
rapid technological change. Development by competitors of new or
improved products, processes or technologies may make our
products obsolete or less competitive. We will be required to
devote continued efforts and significant financial resources to
enhance our existing products and to develop new products for
the ophthalmic industry.
We believe our primary competition in the development and sale
of products used to surgically correct cataracts, namely
foldable IOLs and phacoemulsification machines, includes Alcon
Laboratories, Advanced Medical Optics (“AMO”), and
Bausch & Lomb. Currently, Alcon holds 48.2% of the
U.S. IOL market, followed by AMO with 30.4% and
Bausch & Lomb with 10.7%. We hold approximately 6.1% of
the U.S. IOL market. Our competitors have been established
for longer periods of time than we have and have significantly
greater resources than we have, including greater name
recognition, larger sales operations, greater ability to finance
research and development and proceedings for regulatory
approval, and more developed regulatory compliance and quality
control systems.
In the U.S. market, physicians prefer IOLs made out of
acrylic. Acrylic IOLs currently account for a 53.8% share of the
U.S. IOL market. We believe that we are positioned to
compete effectively in this market segment with the Collamer
IOL, and that the introduction of the three-piece Collamer IOL
will strengthen our position and allow for a gain in overall IOL
market share. Silicone IOLs, which currently account for 42% of
the U.S. market, also provide an opportunity for us as we
introduce improvements in silicone IOL technology and Collamer
IOL injection systems to facilitate delivery of the IOL.
Our primary competition in the development and sale of products
used to treat glaucoma is from pharmaceutical companies,
primarily because drug therapy is, and for years has been, the
accepted treatment for glaucoma. The portion of this market held
by medical devices used to treat glaucoma is insignificant at
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present. We believe that Merck & Company, Pfizer,
Novartis, Alcon, Allergan and Bausch & Lomb are the
largest providers of drugs used to treat glaucoma. There are
also devices under development by others to be used in
conjunction with a non-penetrating deep sclerectomy for the
surgical management of glaucoma.
Our ICL will face significant competition in the marketplace
from products that improve or correct refractive conditions,
such as corrective eyeglasses, external contact lenses, and
conventional and laser refractive surgical procedures. These are
products long established in the marketplace and familiar to
patients in need of refractive correction. Furthermore,
corrective eyeglasses and external contact lenses are more
easily obtained, in that a prescription is usually written
following a routine eye examination in a doctor’s office,
without admitting the patient to a hospital or surgery center.
We believe that the following providers of laser surgical
procedures comprise our primary competition in the marketplace
for patients requiring refractive corrections: Alcon,
Bausch & Lomb, VISX, Nidek and Wave Light all market
Excimer lasers for corneal refractive surgery. Approval of
custom ablation, along with the addition of wavefront
technology, has increased awareness of corneal refractive
surgery by patients and practitioners. Conductive Keratoplasty
(CK) by Refractec competes for the hyperopic market for
+1.0 to +3.0 diopters. In the phakic IOL market, the ICL faces
the Ophtec Verisyse or Artisan IOL, distributed in the United
States by AMO, IOLTech’s PRL, as well as phakic IOLs under
investigation by Ophthalmic Innovations International, Tekia,
Alcon, Vision Membrane and ThinOptX.
Regulatory Matters
Our products are subject to regulatory approval in the United
States and in foreign countries. We are also subject to various
federal, state, local and foreign laws applicable to our
operations including, among other things, working conditions,
laboratory and manufacturing practices, and the use and disposal
of hazardous or potentially hazardous substances.
The following discussion outlines the various kinds of reviews
to which our products or production facilities may be subject.
Regulatory Requirements in the United States. Under the
federal Food, Drug & Cosmetic Act as amended by the
Food and Drug Administration Modernization Act of 1997 (the
“Act”), the FDA has the authority to adopt regulations
that:
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set standards for medical devices, |
| |
| |
• |
require proof of safety and effectiveness prior to marketing
devices which the FDA believes require pre-market clearance, |
| |
| |
• |
require test data approval prior to clinical evaluation of human
use, |
| |
| |
• |
permit detailed inspections of device manufacturing facilities, |
| |
| |
• |
establish “good manufacturing practices” that must be
followed in device manufacture, |
| |
| |
• |
require reporting of serious product defects to the FDA, and |
| |
| |
• |
prohibit device exports that do not comply with the Act unless
they comply with established foreign regulations, do not
conflict with foreign laws, and the FDA and the health agency of
the importing country determine export is not contrary to public
health. |
Most of our products are medical devices intended for human use
within the meaning of the Act and, therefore, are subject to FDA
regulation.
The FDA establishes procedures for compliance based upon
regulations that designate devices as Class I (general
controls, such as labeling and record-keeping requirements),
Class II (performance standards in addition to general
controls) or Class III (pre-market approval
(“PMA”) before commercial marketing). Class III
devices are the most extensively regulated because the FDA has
determined they are life-supporting,
8
are of substantial importance in preventing impairment of
health, or present a potential unreasonable risk of illness or
injury. The effect of assigning a device to Class III is to
require each manufacturer to submit to the FDA a PMA that
includes information on the safety and effectiveness of the
device.
A medical device that is substantially equivalent to a directly
related medical device previously in commerce may be eligible
for the FDA’s pre-market notification “510(k)
review” process. FDA 510(k) clearance is a
“grandfather” process. As such, FDA clearance does not
imply that the safety, reliability and effectiveness of the
medical device has been approved or validated by the FDA, but
merely means that the medical device is substantially equivalent
to a previously cleared commercial medical device. The review
period and FDA determination as to substantial equivalence
generally is made within 90 days of submission of a 510(k)
application, unless additional information or clarification or
clinical studies are requested or required by the FDA. As a
practical matter, the review process and FDA determination may
take longer than 90 days.
Our IOLs and ICLs are Class III devices, our AquaFlow
Devices, phacoemulsification equipment, ultrasonic cutting tips
and surgical packs are Class II devices, and our lens
injectors are Class I devices. We have received FDA
pre-market approval for our IOLs (including the toric and the
Collamer IOLs) and AquaFlow Device and 510(k) clearance for our
phacoemulsification equipment, lens injectors, and ultrasonic
cutting tips.
As a manufacturer of medical devices, our manufacturing
processes and facilities are subject to continuing review by the
FDA and various state agencies to ensure compliance with quality
system regulations. These agencies inspect our facilities from
time to time to determine whether we are in compliance with
various regulations relating to manufacturing practices,
validation, testing, quality control and product labeling.
Regulatory Requirements in Foreign Countries. There is a
wide variation in the approval or clearance requirements
necessary to market medical products in foreign countries. The
requirements range from minimal requirements to requirements
comparable to those established by the FDA. For example, many
countries in South America have minimal regulatory requirements,
while many developed countries, such as Japan, have requirements
at least as stringent as those of the FDA. Foreign governments
do not always accept FDA approval as a substitute for their own
approval or clearance procedures.
As of June 1998, the member countries of the European Union (the
“Union”) require that all medical products sold within
their borders carry a Conformite’ Europeane Mark (“CE
Mark”). The CE Mark denotes that the applicable medical
device has been found to be in compliance with guidelines
concerning manufacturing and quality control, technical
specifications and biological or chemical and clinical safety.
The CE Mark supersedes all current medical device regulatory
requirements for Union countries. We have obtained the CE Mark
for all of our principal products including our ICL and TICL,
IOLs (including the Toric IOL and Collamer IOL), SonicWAVE
Phacoemulsification System and our AquaFlow Device.
|
|
|
Warning Letters and the 483 Observations |
The Company received a Warning Letter issued by the FDA, dated
December 22, 2003 which outlined deficiencies related to
the manufacturing and quality assurance systems of its Monrovia,
California facility. To assist it in correcting the issues
raised in the Warning Letter, the Company engaged the services
of Quintiles Consulting (“Quintiles”), a well regarded
consulting organization that specializes in FDA related
compliance matters. The Company, with Quintiles’ help,
assessed the state of its quality system in light of the
FDA’s concerns, developed an improvement plan, and took
corrective actions to improve the Company’s processes,
procedures, and controls.
The Company received a second Warning Letter from the FDA dated
April 26, 2004, which outlined deficiencies noted in an
audit by the FDA in December 2003. The Company provided the FDA
with its planned corrective actions to the issues raised, and in
a letter dated July 1, 2004, the FDA responded that they
found the corrective and preventative action plans described in
the Company’s response “adequate.”
On June 17, 2004, the FDA completed an audit of the
Company’s Nidau, Switzerland manufacturing facility. The
FDA did not observe any violations of quality system
requirements during this audit.
9
On September 23, 2004, as a follow-up to the
December 22, 2003 Warning Letter, the FDA completed a
re-audit of the Company’s Monrovia, California
manufacturing facility. At the conclusion of the audit, the FDA
issued a form “FDA 483 Inspectional Observations”
described more fully in the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission
on September 29, 2004 (the “483 Observations”).
The Company delivered its response to the FDA on
November 5, 2004. On January 27, 2005, the Company and
its representatives met with the FDA to update them on the
corrective actions taken by the Company in response to the 483
Observations. During the meeting, the FDA gave no indication of
the status of their review of the response or the nature or
timing of future communications to the Company. However,
subsequent to the meeting the FDA confirmed with the
Company’s regulatory counsel, with respect to issues
relating to the Collamer material addressed in the 483
Observations, that “materials issues with regard to
stability have been addressed to the FDA’s
satisfaction.”
Until the FDA is satisfied with the adequacy of the
Company’s corrective actions, it may take further actions
which could include conducting another inspection, seizure of
the Company’s products, injunction of the Monrovia facility
to compel compliance (which may include suspension of production
operations and/or recall of products), or other actions. Such
actions could have a material adverse effect on the
Company’s established lines of business, results of
operations and liquidity.
The Company is not able to predict whether the FDA will conclude
that the Company’s corrective actions to date or those
included in its response to the 483 Observations satisfactorily
resolve its concerns. Nor can the Company predict the
likelihood, nature of, or timing of any additional action by the
FDA or the impact of any other FDA action on the Company’s
established lines of business, results of the operations or
liquidity or the approval of the ICL for the United States
market.
On October 3, 2003, the FDA Ophthalmic Devices Panel
recommended that, with certain conditions, the FDA approve the
ICL for use in correcting myopia in the range of -3 to -15
diopters and reducing myopia in the range of - 15 to -20
diopters. However, until the FDA is satisfied with the
Company’s corrective actions to the deficiencies identified
in the December 22, 2003 Warning Letter and the 483
Observations, it is unlikely to grant the Company approval to
market the ICL in the United States.
On December 16, 2004, the Company submitted to the FDA a
supplement to the Company’s investigational device
exemptions application for the ICL. The supplement requested
permission for each of the active clinical centers to continue
enrollment of eyes in the ICL clinical investigation while the
pre-market approval is pending with the FDA so that the
physicians may continue to expand on their clinical experience
with implantation of the ICL. On January 14, 2005, the FDA
approved the supplement allowing 18 investigational sites to
enroll a combined total of 75 additional eyes each month.
Research and Development
We are focused on furthering technological advancements in the
ophthalmic products industry through the development of
innovative ophthalmic products and materials and related
surgical techniques. We maintain an active internal research and
development program which includes research and development,
clinical activities, and regulatory affairs and is comprised of
23 employees. In order to achieve our business objectives, we
will continue the investment in research and development. Over
the past year, we have principally focused our research and
development efforts on:
|
|
|
| |
• |
improving regulatory and compliance systems and procedures, |
| |
| |
• |
obtaining approval for the ICL, |
| |
| |
• |
completing enrollment in the U.S. clinical trials for the
TICL, |
| |
| |
• |
redesigning the three-piece Collamer IOL, |
| |
| |
• |
designing an insertion system for the three-piece Collamer IOL, |
| |
| |
• |
improving insertion and delivery systems for our other foldable
products, |
10
|
|
|
| |
• |
improving manufacturing systems and procedures for all products
to reduce manufacturing costs and improve yields, and |
| |
| |
• |
developing products and extending foreign registrations. |
Research and development expenses were approximately $6,246,000,
$5,120,000, and $4,016,000 for our 2004, 2003 and 2002 fiscal
years, respectively.
Environmental Matters
The Company is subject to federal, state, local and foreign
environmental laws and regulations. We believe that our
operations comply in all material respects with applicable
environmental laws and regulations in each country where we do
business. We do not anticipate that compliance with these laws
will have any material impact on our capital expenditures,
earnings or competitive position. We currently have no plans to
invest in material capital expenditures for environmental
control facilities for the remainder of our current fiscal year
or for the next fiscal year. We are not aware of any pending
actions, litigation or significant financial obligations arising
from current or past environmental practices that are likely to
have a material adverse impact on our financial position.
However, environmental problems relating to our properties could
develop in the future, and such problems could require
significant expenditures. Additionally, we are unable to predict
changes in legislation or regulations that may be adopted or
enacted in the future and that may adversely affect us.
Significant Subsidiaries
The Company’s only significant subsidiary is STAAR Surgical
AG, a wholly owned entity incorporated in Switzerland. This
subsidiary develops, manufactures and distributes products
worldwide including Collamer IOLs, ICLs, TICLs, and the AquaFlow
Device. STAAR Surgical AG also controls 100% of Domilens GmbH, a
European sales subsidiary that distributes both STAAR products
and products from other ophthalmic manufacturers.
Canon Staar Joint Venture
In 1988, the Company entered into a joint venture with Canon
Inc. and Canon Sales Co., Inc. for the principal purpose of
designing, manufacturing, and selling in Japan intraocular
lenses and other ophthalmic products. The joint venture will
market its products worldwide through Canon, Canon Sales or
STAAR or such other distributors as the Board of Directors of
the joint venture may approve. The terms of any distribution
arrangement will require the unanimous approval of the Board of
Directors of the joint venture. Each joint venture party is
entitled to appoint one member of the Board of Directors of the
joint venture. Certain matters require the unanimous approval of
the directors. Upon the occurrence of certain events, including
the merger, sale of substantially all of the assets or change in
the management of one of the parties, any of the other parties
may have the right to acquire the first party’s interest in
the joint venture at book-value. The Company also granted to the
joint venture a perpetual exclusive license under the Licensed
Technology (as defined in the license agreement) to make and
sell any products in Japan, and a perpetual non-exclusive
license to do so in the rest of the world.
In 2001, the parties entered into a settlement agreement whereby
(i) they reconfirmed the joint venture agreement and the
license agreement, (ii) they agreed that the Company would
promptly commence the transfer of the Licensed Technology to the
joint venture, (iii) the Company granted the joint venture
an exclusive license to make any products in China and sell such
products in Japan and China (subject to the existing rights of
third parties), (iv) the Company agreed to provide the
joint venture with raw materials, (v) the joint venture
granted Canon Sales Co., Inc. the right to distribute its
products in Japan on specified terms, and (iv) the parties
settled certain patent disputes.
The foregoing description of the joint venture agreement,
technical assistance and license agreement and settlement
agreement is qualified in its entirety by the full text of such
agreements, which have been filed as exhibits or incorporated by
reference to this report. See “Management’s Discussion
and Analysis of Financial
11
Condition and Results of Operations — Risk
Factors — We have licensed our technology to our joint
venture company and have granted certain rights to the partners
that could be exercised in the event of a change in control of
the Company.”
Employees
As of February 25, 2005, we employed approximately 247
persons.
Additional Information
The Company makes available free of charge through our website,
www.staar.com, our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) of the Securities Exchange Act of
1934, as soon as reasonably practicable after those reports are
filed with or furnished to the Securities and Exchange
Commission (“SEC”).
The public may read any of the items we file with the SEC at the
SEC’s Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information about
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other
information regarding the Company and other issuers that file
electronically with the SEC at http://www.sec.gov.
Our operations are conducted in leased facilities throughout the
world. Our executive offices, manufacturing, warehouse and
distribution, and primary research facilities are located in
Monrovia, California. STAAR Surgical AG maintains office,
manufacturing, and warehouse and distribution facilities in
Nidau, Switzerland. The Company has one additional facility in
Aliso Viejo, California for raw material production and research
and development activities. The Company leases additional sales
and distribution facilities in Germany and Australia. We believe
our manufacturing facilities in the U.S. and Switzerland are
suitable and adequate for our current and future planned
requirements. The Company could increase capacity by adding
additional shifts at our existing facilities. However, the
Company is at capacity in the U.S. and Switzerland in the area
of administration. The Company would require additional space to
support growth in those areas, although this is not anticipated
for 2005.
|
|
| Item 3. |
Legal Proceedings |
We are currently party to various claims and legal proceedings
arising out of the normal course of our business. These claims
and legal proceedings relate to contractual rights and
obligations, employment matters, and claims of product
liability. We do not believe that any of the claims known to us
is likely to have a material adverse effect on our financial
condition or results of operations.
Since September 1, 2004, multiple class action lawsuits
have been filed in the United States District Courts for the
Central District of California and the District of New Mexico
against the Company and its Chief Executive Officer on behalf of
all persons who acquired the Company’s securities during
various periods between April 3, 2003 and
September 28, 2004. On December 15, 2004, the Court
ordered consolidation of the complaints that had been filed in
the United States District Court for the Central District of
California and directed that the plaintiffs file a consolidated
complaint as soon as practicable. The plaintiffs have proposed a
stipulation pursuant to which they would file a consolidated
amended complaint on or about April 29, 2005. The New
Mexico action was voluntarily dismissed on January 28,
2005. The lawsuits generally allege that the defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated thereunder, by
issuing false and misleading statements regarding intraocular
lenses and implantable lenses, and failing timely to disclose
significant problems with the lenses, as well as the existence
of serious injuries and/or malfunctions attributable to the
lenses, thereby artificially inflating the price of the
Company’s Common Stock. The plaintiffs generally seek to
recover compensatory damages, including interest. The Company
intends to vigorously defend the consolidated lawsuits.
12
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
There were no matters submitted to a vote of security holders
during the quarter ended December 31, 2004.
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters, and Issuer Purchases of Equity
Securities |
Our Common Stock is quoted on the Nasdaq National Market under
the symbol “STAA.” The following table sets forth the
reported high and low bid prices of the Common Stock as reported
by Nasdaq for the calendar periods indicated:
| |
|
|
|
|
|
|
|
|
|
| Period |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
2005
|
|
|
|
|
|
|
|
|
| |
First Quarter (through March 25, 2005)
|
|
$ |
7.300 |
|
|
$ |
3.830 |
|
|
2004
|
|
|
|
|
|
|
|
|
| |
Fourth Quarter
|
|
$ |
6.400 |
|
|
$ |
3.500 |
|
| |
Third Quarter
|
|
|
7.480 |
|
|
|
2.880 |
|
| |
Second Quarter
|
|
|
9.730 |
|
|
|
6.250 |
|
| |
First Quarter
|
|
|
11.260 |
|
|
|
7.230 |
|
|
2003
|
|
|
|
|
|
|
|
|
| |
Fourth Quarter
|
|
$ |
12.000 |
|
|
$ |
8.360 |
|
| |
Third Quarter
|
|
|
15.440 |
|
|
|
9.750 |
|
| |
Second Quarter
|
|
|
15.250 |
|
|
|
5.050 |
|
| |
First Quarter
|
|
|
6.550 |
|
|
|
3.050 |
|
On March 25, 2005, the closing price of the Company’s
Common Stock was $3.95. Stockholders are urged to obtain current
market quotations for the Common Stock.
As of March 25, 2005, there were approximately 565 record
holders of our Common Stock.
We have not paid any cash dividends on our Common Stock since
our inception. We currently expect to retain any earnings for
use to further develop our business and not to declare cash
dividends on our Common Stock in the foreseeable future. The
declaration and payment of any such dividends in the future
depends upon the Company’s earnings, financial condition,
capital needs and other factors deemed relevant by the Board of
Directors and may be restricted by future agreements with
lenders.
As of March 25, 2005, options to
purchase 2,719,379 shares of Common Stock were
exercisable.
Recent Sales of Unregistered Securites
On June 10, 2004, the Company sold 2,000,000 shares of
Common Stock at a price per share of $6.25. The Company sold the
shares of Common Stock directly, without the services of an
underwriter, in a private placement made in reliance on
Rule 506 of Regulation D under the Securities Act of
1933. The purchasers were all “accredited investors”
within the meaning of Regulation D. The Company received
proceeds, net of placement agent fees and other expenses, of
approximately $11,646,000.
We also entered into a Registration Rights Agreement with the
purchasers, in which we agreed to file a “shelf”
registration statement under the Securities Act of 1933
providing for the public resale of their shares, and to keep the
registration statement effective for up to two years. After the
expiration of that two-year period, to the extent any of the
investors have shares purchased in the 2004 private placement
that are not eligible for public sale under Rule 144 or
Regulation S, the investors may have a right under the
Registration Rights Agreement to “piggyback” on other
registered offerings of the Company to resell those shares.
13
|
|
| Item 6. |
Selected Financial Data |
The following table sets forth selected consolidated financial
data with respect to the five most recent fiscal years ended
December 31, 2004, January 2, 2004, January 3,
2003, December 28, 2001, and December 29, 2000. The
selected consolidated statement of income data set forth below
for each of the three most recent fiscal years, and the selected
consolidated balance sheet data set forth below at
December 31, 2004 and January 2, 2004, are derived
from the consolidated financial statements which have been
audited by BDO Seidman, LLP, independent certified public
accountants, as indicated in their report which is included
elsewhere in this Annual Report. The selected consolidated
statement of income data set forth below for each of the two
fiscal years in the periods ended December 28, 2001, and
December 29, 2000, and the consolidated balance sheet data
set forth below at January 3, 2003, December 28, 2001
and December 29, 2000 are derived from the Company’s
audited consolidated financial statements not included in this
Annual Report. The selected consolidated financial data should
be read in conjunction with the consolidated financial
statements of the Company, and the Notes thereto, included
elsewhere in this Annual Report, and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” in Item 7.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
December 31, | |
|
January 2, | |
|
January 3, | |
|
December 28, | |
|
December 29, | |
| |
|
2004 | |
|
2004 | |
|
2003 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands except per share data) | |
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
51,685 |
|
|
$ |
50,409 |
|
|
$ |
47,880 |
|
|
$ |
50,237 |
|
|
$ |
53,986 |
|
|
Royalty and other income
|
|
|
— |
|
|
|
49 |
|
|
|
368 |
|
|
|
549 |
|
|
|
448 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
51,685 |
|
|
|
50,458 |
|
|
|
48,248 |
|
|
|
50,786 |
|
|
|
54,434 |
|
|
Cost of sales
|
|
|
25,542 |
|
|
|
22,621 |
|
|
|
24,099 |
|
|
|
28,203 |
|
|
|
26,329 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
26,143 |
|
|
|
27,837 |
|
|
|
24,149 |
|
|
|
22,583 |
|
|
|
28,105 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
9,253 |
|
|
|
9,343 |
|
|
|
8,959 |
|
|
|
8,746 |
|
|
|
8,593 |
|
|
Marketing and selling
|
|
|
20,302 |
|
|
|
19,509 |
|
|
|
16,833 |
|
|
|
20,043 |
|
|
|
21,254 |
|
|
Research and development
|
|
|
6,246 |
|
|
|
5,120 |
|
|
|
4,016 |
|
|
|
3,800 |
|
|
|
4,215 |
|
|
Other charges
|
|
|
500 |
|
|
|
390 |
|
|
|
1,454 |
|
|
|
7,780 |
|
|
|
15,276 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses
|
|
|
36,301 |
|
|
|
34,362 |
|
|
|
31,262 |
|
|
|
40,369 |
|
|
|
49,338 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,158 |
) |
|
|
(6,525 |
) |
|
|
(7,113 |
) |
|
|
(17,786 |
) |
|
|
(21,233 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(88 |
) |
|
|
(637 |
) |
|
|
(785 |
) |
|
|
(724 |
) |
|
|
(4,630 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and minority interest
|
|
|
(10,246 |
) |
|
|
(7,162 |
) |
|
|
(7,898 |
) |
|
|
(18,510 |
) |
|
|
(25,863 |
) |
|
Income tax provision (benefit)
|
|
|
1,057 |
|
|
|
1,127 |
|
|
|
8,805 |
|
|
|
(3,649 |
) |
|
|
(6,758 |
) |
|
Minority interest
|
|
|
29 |
|
|
|
68 |
|
|
|
75 |
|
|
|
139 |
|
|
|
87 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(11,332 |
) |
|
$ |
(8,357 |
) |
|
$ |
(16,778 |
) |
|
$ |
(15,000 |
) |
|
$ |
(19,192 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$ |
(0.58 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.98 |
) |
|
$ |
(0.88 |
) |
|
$ |
(1.25 |
) |
|
Diluted net loss per share
|
|
$ |
(0.58 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.98 |
) |
|
$ |
(0.88 |
) |
|
$ |
(1.25 |
) |
|
Weighted average number of basic shares
|
|
|
19,602 |
|
|
|
17,704 |
|
|
|
17,142 |
|
|
|
17,003 |
|
|
|
15,378 |
|
|
Weighted average number of diluted shares
|
|
|
19,602 |
|
|
|
17,704 |
|
|
|
17,142 |
|
|
|
17,003 |
|
|
|
15,378 |
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
19,103 |
|
|
$ |
15,883 |
|
|
$ |
7,095 |
|
|
$ |
16,780 |
|
|
$ |
24,153 |
|
|
Total assets
|
|
|
51,973 |
|
|
|
47,376 |
|
|
|
45,220 |
|
|
|
64,650 |
|
|
|
79,745 |
|
|
Notes payable and current portion of long-term debt
|
|
|
3,004 |
|
|
|
2,950 |
|
|
|
5,845 |
|
|
|
8,216 |
|
|
|
7,944 |
|
|
Stockholders’ equity
|
|
|
37,840 |
|
|
|
35,219 |
|
|
|
30,551 |
|
|
|
46,142 |
|
|
|
58,060 |
|
14
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Except for the historical information contained in this
Annual Report, the matters discussed in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” are forward-looking statements, the accuracy of
which is necessarily subject to risks and uncertainties. Actual
results may differ significantly from the discussion of such
matters in the forward-looking statements. See “Risk
Factors.”
In the discussion of the material changes in our financial
condition and results of operations between the reporting
periods in the consolidated financial statements, management has
sought to identify and, in some cases, quantify, the factors
that contributed to such material changes. However, quantifying
these factors may involve the presentation of numerical measures
that exclude amounts that are included in the most directly
comparable measure calculated and presented in accordance with
accounting principles generally accepted in the United States
(“GAAP”). Management uses this information to assess
material changes in our financial condition and results of
operations and is providing it to assist investors and potential
investors to understand these assessments. In each instance,
such information is presented immediately following (and in
connection with an explanation of) the most directly comparable
financial measure calculated in accordance with GAAP, and
includes other material information necessary to reconcile the
information with the comparable GAAP financial measure.
Overview
STAAR Surgical Company develops, manufactures and distributes
worldwide visual implants and other ophthalmic products to
improve or correct the vision of patients with cataracts,
refractive conditions, and glaucoma. Originally incorporated in
California in 1982, STAAR Surgical Company reincorporated in
Delaware in 1986. Unless the context indicates otherwise
“we,” “us,” the “Company,” and
“STAAR” refer to STAAR Surgical Company and its
consolidated subsidiaries.
|
|
|
| |
• |
STAAR developed, patented, and licensed the first foldable
intraocular lens, or IOL, for cataract surgery. Made of pliable
material, the foldable IOL permitted surgeons for the first time
to replace a cataract patient’s natural lens with minimally
invasive surgery. The foldable IOL quickly became the standard
of care for cataract surgery throughout the world. STAAR
introduced its first versions of the lens, made of silicone, in
1991. |
| |
| |
• |
In 1996, STAAR commenced commercial sales of its
VISIANtm
ICL (“ICL”) in certain foreign countries, and in 1997,
the ICL received CE Marking which allowed STAAR to market the
product in the European Union. Using the unique biocompatible
properties of the Collamer material, the ICL is implanted in
front of the patient’s natural lens to treat refractive
errors, such as myopia (nearsightedness) and hyperopia
(farsightedness). In 2003, the ICL became the first phakic IOL
to receive an “approvable” recommendation from the
FDA’s Ophthalmic Devices Panel. Currently, the ICL is
approved for sale in 38 countries and has been implanted in
approximately 40,000 eyes worldwide. |
| |
| |
• |
In 1998, STAAR introduced the Toric IOL, the only implantable
lens approved for the treatment of astigmatism. The Toric IOL
was STAAR’s first venture into the refractive market in the
United States. |
| |
| |
• |
In 2000, STAAR introduced an IOL made of our proprietary
Collamer® lens material, a unique biocompatible polymerized
collagen. Collamer mimics the clarity and refractive qualities
of the natural human lens better than acrylic lens materials,
and is better tolerated by the eye than either silicone or
acrylic. |
| |
| |
• |
In 2001, STAAR commenced commercial sales of its
VISIANtm
Toric ICL (“TICL”) on a limited basis in certain
foreign countries, and in 2002, the TICL received CE Marking
which allowed STAAR to market the product in the European Union. |
| |
| |
• |
In 2004, STAAR, through its joint venture company, Canon Staar,
introduced the first preloaded lens injector system in
international markets. The Preloaded Injector offers surgeons
improved convenience and reliability. The Preloaded Injector is
not yet available in the U.S. |
15
Cataract Surgery. The production and sale of IOLs for use
in cataract surgery remains our core business. Our products for
cataract surgery include the following:
|
|
|
| |
• |
Silicone IOLs, in both three-piece and one-piece designs; |
| |
| |
• |
Silicone Toric IOLs, used in cataract surgery to treat
astigmatism; |
| |
| |
• |
Collamer® IOLs, in a one-piece design, with a three-piece
redesigned lens scheduled for introduction in the second quarter
of 2005; |
| |
| |
• |
the Preloaded Injector, a three-piece silicone IOL preloaded
into a single-use disposable injector; |
| |
| |
• |
STAARVISCtm II,
a viscoelastic material, which is used as a tissue protective
lubricant and to maintain the shape of the eye during surgery; |
| |
| |
• |
SonicWAVEtm
Phacoemulsification System, which is used to remove a cataract
patient’s cloudy lens and has low energy and high vacuum
characteristics; |
| |
| |
• |
Cruise Control, a disposable filter used to increase safety and
control during phacoemulsification; and |
| |
| |
• |
Other auxiliary products for cataract surgery, manufactured by
others, which strengthen our ability to offer an expanded range
of procedural products. |
Sales of cataract surgery products accounted for approximately
90% of our total revenues for the year ended December 31,
2004 and 92% for the 2003 fiscal year.
Refractive Surgery. We have used our unique biocompatible
Collamer material to develop and manufacture lenses to treat
refractive disorders such as myopia (near-sightedness),
hyperopia (far-sightedness) and astigmatism. These include the
VISIANtm
ICL, or ICL®, and the Toric
VISIANtm
TICL, or TICL®. Lenses of this type are generically called
“phakic IOLs” or “phakic implants” because
they work along with the patient’s natural lens, or
phakos, rather than replacing it.
The ICL and TICL have not yet been approved for use in the
United States. The ICL is approved for use in the European Union
and in Korea and Canada. The TICL completed enrollment in
clinical trials in the United States in early 2005, and is
approved for use in the European Union.
Glaucoma Surgery. We have developed the
AquaFlowtm
Collagen Glaucoma Drainage Device, also referred to as the
AquaFlow Device, as an alternative to current methods of
treating open angle glaucoma. The AquaFlow Device is implanted
in the sclera (the white of the eye), using a minimally invasive
procedure, for the purpose of reducing intraocular pressure.
|
|
|
Significant Factors Affecting Our Business and Recent
Highlights |
Changing Focus of Research and Development. STAAR’s
executive management was completely replaced commencing in 2001.
The new management team assumed control of a company with a long
record of innovation in ophthalmology, but one that had failing
financial results and was expending cash at a significant rate.
STAAR was also embroiled in several legal actions which affected
our cash reserves. The new management implemented significant
restructuring and other cost-cutting measures in 2001 to
conserve our cash resources. Despite these cutbacks, STAAR has
continued to devote a significant amount of its resources to
developing and introducing the ICL.
Because of its significant investment in ICL technology, STAAR
had limited resources for further developing its mature and well
accepted IOL products for cataract treatment. Nevertheless, in
the fourth quarter of 2003, the Company introduced the first
preloaded injector system which was developed by its joint
venture company in Japan, Canon Staar. Management believes,
however, that during the long process of developing and seeking
approval for the ICL, STAAR overall failed to match some of its
competitors’ improvements to IOL technology and standard
delivery systems resulting in a loss of U.S. market share.
As U.S. approval of the ICL appeared more likely in late
2003, and the focus of the ICL project shifted from development
to marketing, management began to devote research and
development resources to making STAAR’s IOL delivery
systems more competitive. In an effort to strengthen the areas
of research and
16
development, we separated our research and development function
from our regulatory and compliance function and hired Tom Paul,
PhD as Vice President, Research and Development and James
Farnworth as Vice President, Regulatory and Quality Assurance.
The resources for these efforts were made available by
STAAR’s 2003 private sale of Common Stock, the proceeds of
which were intended to fund the launching and marketing of the
ICL.
The Warning Letter received from the FDA on December 29,
2003 caused STAAR to accelerate its efforts to improve its
quality and regulatory compliance systems. The delay in the
approval of the ICL until compliance issues were resolved
further accelerated the need to invest in improvements to its
IOL delivery systems in order to maintain its core cataract
business.
As a result of the above factors and the receipt of a second
Warning Letter, 2004 saw significant new investments in the
restructuring of STAAR’s quality assurance and regulatory
compliance functions, and in improving IOL technology,
particularly lens delivery systems. While some R&D expense
is directly attributable to the response to the FDA’s
Warning Letters and related audits of STAAR’s facilities,
the bulk of the expense results from systemic changes intended
to produce a permanent improvement in the areas of research and
development and quality assurance and regulatory compliance.
As described below, the initiative to improve IOL delivery
technology resulted in progress towards the completion of an
improved one-piece Collamer IOL injector, continuous improvement
efforts to cartridge injector components for all lenses and a
redesigned three-piece Collamer IOL injector. The continuous
effort to improve cartridges resulted in supply problems,
particularly in the second quarter of 2004. The timing of this
interruption in supply, which coincided with increased R&D
expenditures and a decline in sales of silicone IOLs,
contributed to the drop in earnings in the second quarter. The
decision to upgrade our three-piece Collamer lens design to
coincide with the introduction of the first dedicated injector
for this lens, coupled with a revised quality system, have
resulted in the combined introduction being delayed.
Contraction of Silicone IOL Market. Our market share for
silicone IOLs has steadily decreased over the last several
years, as many surgeons now choose lenses made of acrylic
material rather than silicone for their patients. Management
believes that Collamer lens material will ultimately be
competitive with acrylic, but to date sales of Collamer IOLs
have only partially offset declining sales of silicone IOLs.
Redesign of Injectors and Three-Piece Collamer IOL. In an
effort to improve the competitiveness of our lens injection
systems for Collamer IOLs, during 2004 we devoted significant
resources to improving the injector for the one-piece Collamer
IOL and redesigning the three-piece Collamer injector. The
redesign of the three-piece Collamer injector resulted in a
hiatus in three-piece Collamer lens production, which STAAR took
as an opportunity to make minor improvements and enhancements to
the lens design. As a result of these efforts, three-piece
Collamer IOLs had limited availability during 2004.
Decline in U.S. Sales of IOLs. During the year ended
December 31, 2004, decreasing sales of silicone IOLs were
further intensified by the negative perception in the
marketplace caused by the Warning Letters and recalls described
below, resulting in a 14% decline in U.S. silicone IOL
sales compared to fiscal 2003. The market’s reaction to the
compliance issues, along with an interruption in the supply of
cartridges, also resulted in a decline in sales of Collamer
IOLs. In contrast to recent periods in which improving sales of
Collamer IOLs partially offset declining sales of silicone IOLs,
sales of Collamer IOLs declined 8% in 2004 compared to fiscal
2003, worsening overall results for the U.S. cataract
business and resulting in an overall decline of 7.8% in
U.S. sales in 2004 compared to fiscal 2003.
Growth in International Sales of VISIAN ICLs and Preloaded
Silicone IOLs. The decline in the U.S. cataract
business during 2004 was offset in part by a 37.6% increase in
international sales of the VISIAN ICL and TICL. In addition, our
preloaded silicone lens injector system, newly launched in
international markets, experienced strong sales. This growth in
the business resulted in an increase in international sales of
11.5% in 2004 compared to 2003.
FDA Warning Letters and the 483 Observations. In 2004, we
received Warning Letters and 483 Observations issued by the FDA,
which outlined deficiencies related to our manufacturing and
quality assurance systems in our Monrovia, California facility.
For a discussion of the Warning Letters and 483
17
Observations, see “Business — Regulatory
Matters — Warning Letters and the 483
Observations.” Costs associated with the preparation for
these FDA inspections, and the improvements made to the quality
assurance and regulatory compliance functions, contributed to
the 22% increase in our research and development expenses (which
included regulatory and quality assurance expenses) for fiscal
2004, compared to fiscal 2003. Additionally, the Warning Letters
and 483 Observations have affected the Company’s reputation
in the ophthalmic market and have adversely affected product
sales for fiscal 2004. Until the FDA is satisfied with the
Company’s response, it is unlikely to grant the Company
approval to market the ICL in the United States. See “Risk
Factors — We have received 483 Inspectional
Observations and Warning Letters from the FDA, which until
resolved to the satisfaction of the FDA will continue to delay
approval of the ICL and could limit our existing business in the
United States.” and “— Our success depends
on the ICL, which has not been approved for use in the United
States.”
Foreign Currency Fluctuations. Our products are sold in
more than 45 countries. For the year ended December 31,
2004, revenues from international operations were 58% of total
revenues. The results of operations and the financial position
of certain of our offshore operations are reported in the
relevant local currencies and then translated into
U.S. dollars at the applicable exchange rates for inclusion
in our consolidated financial statements, exposing us to
currency translation risk. For the year ended December 31,
2004, currency exchange rates had a favorable impact on product
sales of approximately $2.2 million, and an adverse impact
on our marketing and selling expenses of approximately $777,000.
Product Recalls. During 2004, we initiated several
voluntary recalls of STAAR manufactured product including 33
lots of IOL cartridges, three lots of injectors, and 529 lenses.
In an action considered a recall, but with no requirement for
product to be returned to us, we issued letters to healthcare
professionals advising them of the potential for a change in
manifest refraction over time in rare cases involving the
single-piece Collamer IOL. Although the direct costs associated
with recalls have not been material, we believe recalls have
adversely affected our revenues from product sales, although the
amount of the impact cannot be determined.
Gross Profit. Our gross profit margin decreased to 50.6%
in fiscal 2004 from 55.2% in fiscal 2003. Among the factors
contributing to the decline in our gross profit margin were
increased expenses associated with manufacturing engineering and
quality control and assurance, an increase in inventory
provisions, higher unit costs due to process changes and reduced
volumes, and a shift in geographical and product mix.
Research and Development. We spent 12.1% of our revenue
on research and development (which includes regulatory and
quality assurance expenses) for the year ended December 31,
2004, and we expect to spend approximately 10% of our revenue on
an annual basis in the future. For the year ended
December 31, 2004, research and development expenses
increased 22% compared to 2003. This was primarily due to our
increased investment in injection systems, the redesign of the
Collamer three-piece IOL and injector and preparation for the
FDA audit of our facilities in Nidau, Switzerland and Monrovia,
California, described above. Increases in research and
development expense were partially offset by decreased expenses
at subsidiaries, as all research and development efforts were
consolidated into one location.
Private Placement. Due to the issues raised the
FDA’s Warning Letters and the delay in the FDA approval of
the ICL, we sought additional cash to invest in research and
development, regulatory and compliance, and manufacturing
engineering and to support other operating activities. This was
accomplished through the private placement of
4,100,000 shares of our Common Stock on April 4, 2005,
which generated net proceeds of $13.5 million and
2,000,000 shares of our Common Stock on June 10, 2004
which generated net proceeds of $11.6 million.
Cash Flow. During fiscal 2004, we used $8.8 million
in cash for operating activities and $1.7 million for
property plant and equipment, ending fiscal 2004 with
$9.3 million in cash and cash equivalents and short-term
investments compared to $7.3 million in cash and cash
equivalents at the end of fiscal 2003. We used $2.5 million
in cash in the fourth quarter of 2004 and expect to use
$3.5 million in the first quarter of 2005. During the
fourth quarter of 2004, we took steps to reduce operating
expenses by reducing our reliance on outside consultants. This
reduction in spending is expected to result in savings of
approximately $1.0 million annually. In early February
2005, we implemented additional cost reduction strategies,
including the reduction
18
in size of our direct sales force, which are expected to result
in another $1.0 million in annualized cost savings. We will
continue to pursue other cost savings opportunities with the
goal of realizing a total of $3.0 million in annual cost
savings. We do not expect to realize significant benefits from
the cost reductions in the first quarter of 2005 and while the
benefit of the cost reductions will be fully implemented in the
second quarter, a continued decline in U.S. sales could
offset some of the savings for future periods. The Company
expects operating losses and negative cash flows to continue
until such time as the issues presented in the FDA Warning
Letter dated December 22, 2003 and the 483 Observations are
resolved and the ICL is approved for sale in the United States.
Retention of Morgan Stanley. In December 2004, we engaged
Morgan Stanley to assist our Board of Directors in a review of
the strategic and financial options available to us.
Litigation. During 2004, multiple class action lawsuits,
which were subsequently consolidated, were filed against the
Company and its Chief Executive Officer on behalf of all persons
who acquired the Company’s securities during various
periods between April 3, 2003 and September 28, 2004.
See “Item 3. Legal Proceedings.”
Purchase of Minority Interest. In May 2004, we entered
into an agreement for the purchase of the 20% minority interest
of an 80% owned subsidiary, ConceptVision Australia Pty Limited,
in exchange for cash of $768,000 and a long-term note in the
amount of $542,000 due on November 1, 2007. The transaction
resulted in the recording of goodwill of $1.1 million.
Results of Operations
The following table sets forth the percentage of total revenues
represented by certain items reflected in the Company’s
income statement for the period indicated and the percentage
increase or decrease in such items over the prior period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Percentage of Total Revenues | |
|
Percentage Change | |
| |
|
| |
|
| |
| |
|
December 31, | |
|
January 2, | |
|
January 3, | |
|
2004 vs. | |
|
2003 vs. | |
| |
|
2004 | |
|
2004 | |
|
2003 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Total revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
2.4 |
% |
|
|
(4.6 |
)% |
|
Cost of sales
|
|
|
49.4 |
% |
|
|
44.8 |
% |
|
|
49.9 |
% |
|
|
12.9 |
% |
|
|
(6.1 |
)% |
|
Gross profit
|
|
|
50.6 |
% |
|
|
55.2 |
% |
|
|
50.1 |
% |
|
|
(6.1 |
)% |
|
|
15.3 |
% |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
General and administrative
|
|
|
17.9 |
% |
|
|
18.5 |
% |
|
|
18.6 |
% |
|
|
(1.0 |
)% |
|
|
4.3 |
% |
| |
Marketing and selling
|
|
|
39.3 |
% |
|
|
38.7 |
% |
|
|
34.9 |
% |
|
|
4.1 |
% |
|
|
15.9 |
% |
| |
Research and development
|
|
|
12.1 |
% |
|
|
10.1 |
% |
|
|
8.3 |
% |
|
|
22.0 |
% |
|
|
27.5 |
% |
| |
Other charges
|
|
|
1.0 |
% |
|
|
0.8 |
% |
|
|
3.0 |
% |
|
|
28.2 |
% |
|
|
(73.2 |
)% |
| |
|
Total costs and expenses
|
|
|
70.3 |
% |
|
|
68.1 |
% |
|
|
64.8 |
% |
|
|
5.6 |
% |
|
|
9.9 |
% |
|
Operating loss
|
|
|
(19.7 |
)% |
|
|
(12.9 |
)% |
|
|
(14.7 |
)% |
|
|
55.7 |
% |
|
|
(8.3 |
)% |
|
Other expense, net
|
|
|
(0.1 |
)% |
|
|
(1.3 |
)% |
|
|
(1.7 |
)% |
|
|
(86.2 |
)% |
|
|
(18.9 |
)% |
|
Loss before income taxes
|
|
|
(19.8 |
)% |
|
|
(14.2 |
)% |
|
|
(16.4 |
)% |
|
|
43.1 |
% |
|
|
(9.3 |
)% |
|
Income tax provision (benefit)
|
|
|
2.0 |
% |
|
|
2.2 |
% |
|
|
18.2 |
% |
|
|
(6.2 |
)% |
|
|
(87.2 |
)% |
|
Minority interest
|
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
(57.4 |
)% |
|
|
(9.3 |
)% |
|
Net loss
|
|
|
(21.9 |
)% |
|
|
(16.5 |
)% |
|
|
(34.8 |
)% |
|
|
35.6 |
% |
|
|
(50.2 |
)% |
2004 Fiscal Year Compared to 2003 Fiscal Year
Revenues. Product sales for the years ended
December 31, 2004 (“fiscal 2004”) and
January 2, 2004 (“fiscal 2003”) were
$51.7 million and $50.4 million, respectively. Changes
in currency exchange rates had a favorable impact on product
sales of approximately $2.2 million for fiscal 2004. The
primary reason for the decrease in product sales, excluding the
impact of exchange rates, was a decrease in U.S. IOL sales
due to (i) the decline in the silicone IOL market as many
surgeons now choose lenses made of acrylic material,
(ii) the Company’s failure to match competitors’
improvements to IOL technology, (iii) the market response
to the Company’s compliance issues with the FDA and
(iv) the lack of competitive lens delivery systems. The
19
Company also experienced decreased sales of distributed products
as it concentrates on the distribution of its higher margin
proprietary products. The decreases in U.S. IOL sales and
sales of distributed products were partially offset by increased
sales of the Company’s
Visiantm
ICL (“ICL”) and
Visiantm
TICL (“TICL”) in international markets, sales of the
newly launched preloaded IOLs in international markets, and
increased sales of Cruise Control.
Total revenues for 2003 included $49,000 in royalties from
technology licenses that terminated in 2003.
Gross profit. Gross profit margin decreased to 50.6% of
revenues for fiscal 2004, from 55.2% of revenues for fiscal
2003. The most significant impact on gross margins resulted from
increased expenses associated with manufacturing engineering and
quality control and assurance, an increase in inventory
provisions, higher unit costs due to process changes and reduced
volumes, and a shift in geographical and product mix.
Marketing and selling expenses. Marketing and selling
expenses for fiscal 2004 increased $793,000, or 4%, over fiscal
2003. The increase is principally due to fluctuations in foreign
exchange rates which negatively impacted marketing and selling
expenses by $777,000. International sales and marketing expenses
increased due to increased salaries, travel, and commissions.
Headcount in the U.S. increased due to the addition of
direct sales representatives for a newly established sales
territory in the Pacific Northwest Region and as a result of the
addition of proctors-trainers used principally to train
physicians in the ICL implantation technique. These increases
were offset by decreased promotional activities, primarily in
response to the delay in the launch of the
Visiantm
ICL in the U.S. and the cost savings realized from the closure
of a subsidiary.
Research and development expenses. Research and
development expenses for the fiscal 2004, increased $1,127,000,
or 22%, compared to fiscal 2003. This was primarily due to our
increased investment in insertion systems, the redesign of the
Collamer three-piece IOL and injector and preparation for the
FDA audit of our facilities in Nidau, Switzerland and Monrovia,
California. Increases in research and development expense were
partially offset by decreased research and development expenses
of subsidiaries, as all research and development efforts were
consolidated into one location.
Other charges. Other charges for fiscal 2004 were
$500,000 compared to $390,000 in fiscal 2003. During fiscal
2004, the Company recorded a $500,000 reserve against the notes
of a former director of the Company which total
$1.8 million including accrued interest. The notes are
collateralized by 120,000 shares of the Company’s
Common Stock and a second mortgage on a home in Florida. The
current value of the collateral is approximately
$1.3 million. The amount of the reserve is based on the
difference between the note amount and the collateral value.
Other expense, net. Other expense for fiscal 2004
decreased $549,000 over fiscal 2003. Included in other expense
for fiscal 2003 was the write-off of a note receivable in the
amount of $430,000. During fiscal 2004, the Company recovered
$200,000 of the note and recorded the cash received as other
income. These increases in other income were partially offset by
losses recorded in 2004 by the Company’s joint venture,
Canon Staar.
Income taxes. For each of fiscal 2004 and fiscal 2003,
the Company recorded income taxes of $1.1 million primarily
based on the income of the Company’s German subsidiary.
In 1995, a subsidiary of the Company obtained retroactively to
1993, a ten-year tax holiday for the payment of federal,
cantonal and municipal income taxes in Switzerland. As such,
Swiss income taxes were not due on the operations of this
subsidiary for the ten-year period that ended on
December 31, 2002. For 2004 and 2003, as the tax holiday
from Swiss taxes has expired, the appropriate federal, cantonal
and municipal income taxes have been included in the foreign tax
provision.
Negotiations to extend the Swiss tax holiday are ongoing. The
Swiss tax authorities are considering granting an extension of
the tax holiday with respect to “new” products
including the ICL, the Toric ICL and the AquaFlow Device. If the
tax holiday is extended, it will likely be applied prospectively.
2003 Fiscal Year Compared to 2002 Fiscal Year
Revenues. Revenues for fiscal 2003 increased over the
year ended January 3, 2003 (“fiscal 2002”) by
4.6% or $2,210,000 due to the favorable impact of foreign
exchange on sales of other ophthalmic products
20
distributed in international markets. Excluding the favorable
impact of foreign exchange, sales decreased 2%. The decrease in
sales is due primarily to a decrease in unit volume of the
Company’s single and three-piece silicone IOL, primarily in
the U.S. market, due to a decline in competitiveness of the
Company’s lens delivery systems and believed contraction of
this market segment. The decrease in sales of silicone IOLs was
partially offset by increased sales in the U.S. of Collamer
IOLs (28% increase in volume partially offset by a 6% decrease
in average selling price “ASP”). As a result of the
decreased silicone IOL sales in the U.S., overall sales in that
market declined 3%. Sales of the AquaFlow Device decreased 19%
(15% decrease in volume and a 5% decrease in ASP) over 2002.
This sales decrease was also realized in the U.S. and was the
result of sales and marketing resources which have been diverted
from AquaFlow proctoring and training to surgical evaluations of
silicone lens injection systems and preparation for possible FDA
approval of the ICL.
The decreases in single and three-piece silicone IOL and
AquaFlow sales were further offset by increased sales of ICLs,
Toric IOLs, STAARVisc, and Cruise Control. Sales of ICLs in
international markets increased 31% due to a 26% increase in
units and a 4% increase in ASP. Sales of STAARVisc increased 17%
on a 25% increase in volume partially offset by a 7% decrease in
ASP. Sales of Toric IOLs increased 3% due to a 10% increase in
volume partially offset by a 6% decline in ASP. Sales in
international markets decreased 2% (excluding the impact of
exchange) due to a decrease in equipment sales in Australia.
Gross profit. Gross profit for fiscal 2003 was 55.2% of
revenues compared to fiscal 2002 when it was 50.1% of revenues.
The improvement in gross profit margin is the result of
successfully increasing standard margins across all of our
primary product lines through reduced cost structures resulting
from better yields, efficiencies and volume, and reducing other
costs of sales through better management of excess and obsolete
inventories. Additionally, the Company streamlined its
phacoemulsification manufacturing and repair division, during
the year, resulting in lower costs and improved gross profit for
this product line.
Marketing and selling expenses. Marketing and selling
expenses for fiscal 2003 increased $2.7 million, or 16%,
over fiscal 2002. Marketing and selling expense in the
U.S. increased by $1.7 million as a result of
marketing and promotional costs which increased, as planned, in
preparation for the launch of the ICL and increased headcount
and associated recruiting costs in preparation for launch of the
ICL in the U.S., the addition of direct sales representatives
for a newly established Pacific Northwest Region, increased
travel expenses and increased salaries. Marketing and selling
expense increased internationally by $1.0 million primarily
due to the unfavorable impact of exchange rates partially offset
by reduced expenses of subsidiaries which were closed in 2002
and 2003.
Other charges. Other charges for fiscal 2003 were
$390,000 compared to fiscal 2002 when they were
$1.5 million. The charges in 2003 related to the write-down
of $2.1 million (net book value) in capitalized patent
costs in connection with the Company’s routine evaluation
of such costs in accordance with Statement of Financial
Accounting Standards No. 144
(“SFAS 144”) — “Accounting for the
Impairment of Long-Lived Assets.” The write-down related to
patents acquired in 1999 in the purchase of the Company’s
majority interest in Circuit Tree Medical, a developer and
manufacturer of phacoemulsification equipment, whose ongoing
operations were moved to the Company’s Monrovia, California
facility. The $2.1 million charge was partially offset by
the reversal of $1.7 million of reserves against former
officers’ notes which were paid during the year.
Other expense, net. Other expense for fiscal 2003
decreased $148,000 over fiscal 2002. The decreased expense is
due to decreased interest expense and foreign exchange losses
partially offset by decreased interest income from
officers’ notes that were paid in full and a $430,000
reserve on a note receivable the Company recorded during the
year.
Income taxes. Income taxes for fiscal 2003 decreased
$7.7 million over the fiscal 2002. The high provision for
income taxes in 2002 was the result of a valuation allowance of
$9.0 million recorded against the Company’s deferred
tax assets, partially offset by an income tax benefit of
approximately $1.0 million related to a federal carryback
claim filed in 2002. The tax refund from the carryback claim was
received in 2003.
In 1995, a subsidiary of the Company obtained retroactively to
1993, a ten-year tax holiday for the payment of federal,
cantonal and municipal income taxes in Switzerland. As such,
Swiss income taxes were
21
not due on the operations of this subsidiary for the ten-year
period that ended on December 31, 2002. For 2003, as the
tax holiday from Swiss taxes has expired, the appropriate
federal, cantonal and municipal income taxes have been included
in the foreign tax provision.
Negotiations to extend the Swiss tax holiday are ongoing. The
Swiss tax authorities are considering granting an extension of
the tax holiday with respect to “new” products
including the ICL, the Toric ICL and the AquaFlow Device. If the
tax holiday is extended, it will likely be applied prospectively.
Liquidity and Capital Resources
The Company has funded its activities over the past several
years principally from cash flow generated from operations,
credit facilities provided by institutional domestic and foreign
lenders, the private placement of Common Stock, the repayment of
former officers’ notes, and the exercise of stock options.
Net cash provided by (used in) operating activities was
($8.8) million, ($4.1) million, and $0.6 million
for fiscal 2004, 2003, and 2002, respectively. For fiscal 2004,
cash used in operations was the result of the net loss, adjusted
for depreciation, amortization, and other non-cash charges, and
increases in working capital — primarily accounts
receivable, inventory, accounts payable and other current
liabilities. For fiscal 2003, cash used in operations was the
result of the net loss, adjusted for depreciation, amortization,
the write-off of patents, and other non-cash charges. For fiscal
2002, cash provided by operations was the result of the net
loss, adjusted for depreciation, amortization, deferred income
taxes, and other non-cash charges, and decreases in working
capital — primarily accounts receivable, inventory,
and accounts payable.
Accounts receivable was $6.2 million in 2004,
$5.7 million in 2003, and $6.0 million in 2002. The
increase in accounts receivable is due to increased sales, the
write-off of a receivable, reserved in the previous year, of a
distributor that discontinued its operations and a slight
increase in day’s sales outstanding (“DSO”).
Although DSO improved from 45 days in 2002 to 39 days
in 2003 it increased slightly, as expected, to 41 days in
2004. The Company expects DSO to continue in the 40-43 day
range for 2005.
Inventory at year-end 2004, 2003, and 2002 was
$15.1 million, $12.8 million, and $11.8 million,
respectively. Day’s inventory on hand increased from
176 days in 2002 to 204 days in 2003, and decreased to
186 days in 2004. Although inventory units have decreased
overall from 2003 to 2004, the decrease was more than offset by
higher cost inventory that was produced during the year as a
result of lower than planned production volume resulting in an
increase in inventory of $2.3 million in 2004 over 2003.
Inventory, at the end of 2003, increased $1.0 million over
2002 levels due to the build-up of ICL inventory in preparation
of the launch of the product in the U.S. and increased collamer
IOL inventory based on increased demand for the product. High
cost inventory, built in 2001, was sold during 2002 and replaced
with lower cost inventory resulting in an overall decrease in
inventory at the end of 2002 of $3.5 million over 2001.
Net cash provided by (used in) investing activities was
approximately ($7,294,000), $2,151,000, and ($406,000) for
fiscal 2004, 2003, and 2002, respectively. During 2004, the
Company invested $8.0 million of the proceeds of a private
placement in taxable auction-rate securities which are
classified as available for sale investments and sold
$2.9 million of the investment during the year to provide
cash for operations. Also during 2004, the Company purchased the
20% minority interest in an 80% owned subsidiary in exchange for
cash of $768,000 and a long-term note in the amount of $542,000
due on November 1, 2007. The transaction resulted in the
recording of goodwill of $1.1 million. Proceeds from the
payment of notes of former officers were the primary source of
cash provided by investing activities in 2003. The principal
investments of the Company are in property and equipment.
Investments in property and equipment were $1.7 million,
$1.3 million, and $874,000 for fiscal 2004, 2003, and 2002,
respectively. The investments are generally made to upgrade and
improve existing production equipment and processes. The Company
expects to spend approximately $1.0 million on property and
equipment in 2005.
Net cash provided by (used in) financing activities were
approximately $12,547,000, $7,589,000, and ($592,000) for fiscal
2004, 2003, and 2002, respectively. In 2004, cash provided by
financing activities resulted from the receipt of net proceeds
of $11.6 million from a private placement of
2.0 million shares of the Company’s Common Stock and
$829,000 received from the exercise of stock options. In 2003,
cash provided
22
by financing activities is primarily the result of net proceeds
of $8.9 million from a private placement of the
Company’s Common Stock and $1.6 million received from
the exercise of stock options. The Company used approximately
$2.1 million of the proceeds to pay off the note to its
domestic lender and $812,000 to pay down other notes payable. In
2002, the Company used $592,000 in cash to pay down notes
payable.
Subsidiaries of the Company have foreign credit facilities with
different banks to support operations in Switzerland and Germany.
The Swiss credit agreement, as amended on August 2, 2004,
provides for borrowings of up to 3.75 million Swiss Francs
“CHF” (approximately $3.3 million based on the
rate of exchange on December 31, 2004), and permits either
fixed-term or current advances. The interest rate on current
advances was 6.0% per annum at both December 31, 2004
and January 2, 2004, plus a commission rate of 0.25%
payable quarterly. There were no current advances outstanding at
December 31, 2004 or January 2, 2004. The base
interest rate for fixed-term advances follows Euromarket
conditions for loans of a corresponding term and currency, plus
an individual margin (4.5% at December 31, 2004 and 4.2% at
January 2, 2004). Borrowings outstanding under the facility
were CHF 3.4 million at December 31, 2004
(approximately $3.0 million based on the rate of exchange
at December 31, 2004) and CHF 3.7 million at
January 2, 2004 (approximately $3.0 million based on
the rate of exchange on January 2, 2004). The credit
facility is secured by a general assignment of claims and
includes positive and negative covenants which, among other
things, require the maintenance of a minimum level of equity of
at least $12.0 million and prevents the Swiss subsidiary
from entering into other secured obligations or guaranteeing the
obligations of others. The agreement also prohibits the sale or
transfer of patents or licenses without the prior consent of the
lender and the terms of intercompany receivables may not exceed
90 days.
The Swiss credit facility is divided into two parts. Part A
provides for borrowings of up to CHF 3.0 million
($2.7 million based on the exchange rate on
December 31, 2004) and does not have a termination date.
Part B presently provides for borrowings of up to CHF
750,000 ($662,000 based on the exchange rate on
December 31, 2004). The loan amount under Part B of
the agreement is reduced by CHF 250,000 ($220,000 based on the
exchange rate on December 31, 2004) semi-annually.
The German credit agreement, entered into during fiscal 2003,
provides for borrowings of up to 210,000 EUR ($286,000 based on
the exchange rate on December 31, 2004), at a rate of
8.5% per annum and renews automatically each November. The
agreement prohibits our German subsidiary from paying dividends
and is personally guaranteed by the president of the subsidiary.
There were no borrowings outstanding as of December 31,
2004 or January 2, 2004.
The Company was in compliance with the covenants of these credit
facilities as of December 31, 2004.
23
The following table represents the Company’s known
contractual obligations included in the Company’s balance
sheet as of December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
| |
|
|
| |
|
|
|
Less | |
|
|
|
More |
| |
|
|
|
Than | |
|
1-3 | |
|
3-5 | |
|
Than |
| Contractual Obligations |
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years |
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
|
(In thousands) |
|
Notes payable
|
|
$ |
3,004 |
|
|
$ |
3,004 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Capital lease obligations
|
|
|
105 |
|
|
|
92 |
|
|
|
11 |
|
|
|
2 |
|
|
|
— |
|
|
Operating lease obligations
|
|
|
2,286 |
|
|
|
927 |
|
|
|
1,307 |
|
|
|
52 |
|
|
|
— |
|
|
Purchase obligations
|
|
|
1,222 |
|
|
|
1,022 |
|
|
|
200 |
|
|
|
— |
|
|
|
— |
|
|
Open purchase orders
|
|
|
1,212 |
|
|
|
1,212 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other long-term liabilities
|
|
|
542 |
|
|
|
— |
|
|
|
542 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
8,371 |
|
|
$ |
6,257 |
|
|
$ |
2,060 |
|
|
$ |
54 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table presented above excludes the following information:
(a) interest due on notes payable under the Swiss credit
agreement and (b) employment agreements for the two
previous minority owners of our Australian subsidiary. See
Note 9 to the Consolidated Financial Statements.
Due to a continued decline in U.S. sales, lower gross
profit, and increased operating expenses the Company sustained
significant losses and negative cash flows from operations for
the year ended December 31, 2004. In order to fund its
current operations including its research and development and
regulatory and compliance efforts, the Company has relied on
cash provided by private placements of its Common Stock, which
generated net proceeds of $13.5 million on April 4,
2005 and $11.6 million on June 10, 2004. The Company
believes that as a result of these financings, it currently has
sufficient cash to meet its funding requirements over the next
year. However, the Company expects operating losses and negative
cash flows to continue until such time as the issues presented
in the FDA Warning Letter dated December 22, 2003 and the
483 Observations are resolved and the ICL is approved for
sale in the U.S. To reduce operating losses and negative
cash flows for the year ended December 30, 2005, the
Company expects to take the following actions: (1) continue
to aggressively address the issues presented in the FDA Warning
Letter of December 22, 2003 and the 483 Observations;
(2) work closely with the independent sales force and
ophthalmic community to reverse the negative perceptions and
sales trends of the Company’s existing lines of business;
(3) further reduce discretionary spending; and
(4) explore other strategic and financial options. However,
there can be no assurance that the Company will be successful in
executing its strategies.
The Company’s liquidity requirements arise from the funding
of its working capital needs, primarily inventory,
work-in-process and accounts receivable. The Company’s
primary sources for working capital and capital expenditures are
cash flow from operations, proceeds from the private placement
of Common Stock, proceeds from option exercises, debt repayments
by former officers, and borrowings under the Company’s
foreign bank credit facilities. Any withdrawal of support from
its banks could have serious consequences on the Company’s
liquidity. The Company’s liquidity is dependent, in part,
on customers paying within credit terms, and any extended delays
in payments or changes in credit terms given to major customers
may have an impact on the Company’s cash flow. In addition,
any abnormal product returns or pricing adjustments may also
affect the Company’s short-term funding.
The business of the Company is subject to numerous risks and
uncertainties that are beyond its control, including, but not
limited to, those set forth above and in the other reports filed
by the Company with the Securities and Exchange Commission. Such
risks and uncertainties could have a material adverse effect on
the Company’s business, financial condition, operating
results and cash flows. See “Risk Factors.”
Critical Accounting Policies
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the
24
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate
our estimates, including those related to revenue recognition,
allowance for doubtful accounts, inventory reserves and income
taxes, among others. Our estimates are based upon historical
experiences, market trends and financial forecasts and
projections, and upon various other assumptions that management
believes to be reasonable under the circumstances and at that
certain point in time. Actual results may differ, significantly
at times, from these estimates under different assumptions or
conditions.
The Company believes the following represent its critical
accounting policies.
|
|
|
| |
• |
Revenue Recognition and Accounts Receivable. The Company
recognizes revenue when realized or realizable and earned, which
is when the following criteria are met: persuasive evidence of
an arrangement exists; delivery has occurred; the sale price is
fixed and determinable; and collectibility is reasonably
assured. We record revenue from product sales when title and
risk of ownership has been transferred to the customer, which is
typically upon delivery to the customer. The exception to this
recognition policy is revenue from IOLs distributed on a
consignment basis, which is recognized upon notification of
implantation in a patient. |
|
|
| |
The Company may bundle the sale of phacoemulsification equipment
to customers with multi-year agreements to purchase minimum
quantities of foldable IOLs. The Company recognizes the revenue
from the equipment based on monthly purchases of minimum
quantities of IOLs over the life of the agreement. |
| |
| |
Revenue from license and technology agreements is recorded as
income, when earned, according to the terms of the respective
agreements. |
| |
| |
The Company generally permits returns of product if such product
is returned within the time allowed by the Company, and in good
condition. Allowances for returns are provided for based upon an
analysis of our historical patterns of returns matched against
the sales from which they originated. To date, historical
product returns have been within the Company’s estimates. |
| |
| |
The Company maintains provisions for uncollectible accounts for
estimated losses resulting from the inability of its customers
to remit payments. The Company continuously monitors collections
and payments from its customers and maintains a provision for
estimated credit losses based upon its historical experience and
any specific customer collection issues that have been
identified. |
|
|
|
| |
• |
Stock-Based Compensation. We measure stock-based
compensation for option grants to employees and members of the
Board of Directors using the intrinsic value method. The fair
value of each option grant for determining the pro forma impact
of stock-based compensation expense is estimated on the date of
grant using the Black-Scholes option-pricing model with weighted
average assumptions. These assumptions consist of expected
dividend yield, expected volatility, expected life, and
risk-free interest rate. If the assumptions used to calculate
the value of each option grant do not properly reflect future
activity, the weighted average fair value of our grants could be
impacted. |
| |
| |
• |
Income Taxes. We account for income taxes under the asset
and liability method, whereby deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply in the years
in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. We evaluate the
need to establish a valuation allowance for deferred tax assets
based upon the amount of existing temporary differences, the
period in which they are expected to be recovered and expected
levels of taxable income. A valuation allowance to reduce
deferred tax assets is established when it is “more likely
than not” that some or all of the deferred tax assets will
not be realized. As of the years ended December 31, 2004
and January 2, 2004, the valuation allowance fully offsets
the value of deferred tax assets on the Company’s balance
sheet. |
25
|
|
| |
We expect to continue to maintain a full valuation allowance on
future tax benefits until an appropriate level of profitability
is sustained, or we are able to develop tax strategies that
would enable us to conclude that it is more likely than not that
a portion of our deferred tax assets would be realizable. |
|
|
|
| |
• |
Inventories. Inventories are valued at the lower of
first-in, first-out cost or market. On a regular basis, we
evaluate inventory balances for excess quantities and
obsolescence by analyzing estimated demand, inventory on hand,
sales levels and other information. Based on these evaluations,
inventory balances are reduced, if necessary. |
| |
| |
• |
Impairment of Long-Lived Assets. Intangible and other
long lived-assets are reviewed for impairment whenever events
such as product discontinuance, plant closures, product
dispositions or other changes in circumstances indicate that the
carrying amount may not be recoverable. In reviewing for
impairment, the Company compares the carrying value of such
assets to the estimated undiscounted future cash flows expected
from the use of the assets and their eventual disposition. When
the estimated undiscounted future cash flows are less than their
carrying amount, an impairment loss is recognized equal to the
difference between the assets’ fair value and their
carrying value. |
| |
| |
• |
Goodwill. Goodwill, which has an indefinite life and was
previously amortized on a straight-line basis over the periods
benefited, is no longer amortized to earnings, but instead is
subject to periodic testing for impairment. Intangible assets
determined to have definite lives are amortized over their
remaining useful lives. Goodwill of a reporting unit is tested
for impairment on an annual basis or between annual tests if an
event occurs or circumstances change that would reduce the fair
value of a reporting unit below its carrying amount. As provided
under SFAS No. 142, an annual assessment was completed
during 2004, and no impairment was identified. As of
December 31, 2004, the carrying value of goodwill was
$7.5 million. |
| |
| |
• |
Patents and Licenses. The Company also has other
intangible assets consisting of patents and licenses, with a
gross book value of $11.5 million and accumulated
amortization of $6.1 million as of December 31, 2004.
Amortization is computed on the straight-line basis over the
estimated useful lives, which are based on legal and contractual
provisions, and range from 10 to 20 years. |
Risk Factors
Our short and long-term success is subject to many factors that
are beyond our control. Stockholders and prospective
stockholders in the Company should consider carefully the
following risk factors, in addition to other information
contained in this report. This Annual Report on Form l0-K
contains forward-looking statements, which are subject to a
variety of risks and uncertainties. Our actual results could
differ materially from those anticipated in these
forward-looking statements as a result of various factors,
including those set forth below.
Risks Related to Our
Business
|
|
|
We have a history of losses and anticipate future
losses. |
We have reported losses in each of the last three fiscal years
and have an accumulated deficit of $60.5 million as of
December 31, 2004. There can be no assurance that we will
report net income in any future period.
|
|
|
We have only limited working capital. |
Our current sources of working capital are sufficient to satisfy
our anticipated working capital requirements for fiscal 2005.
However, the issues resulting from the Warning Letter of
December 22, 2003 and the 483 Observations raise
uncertainties about the sufficiency of our working capital for
future years and we may have to consider alternative sources of
funding. There can be no assurance as to the availability of
such funding or the terms upon which it might be available.
26
|
|
|
We have limited access to credit and could default on the
terms of our loan agreement. |
As of December 31, 2004, we have outstanding balances on
the credit facility of a European subsidiary of approximately
$3.0 million, based on exchange rates on that date. If our
losses continue, we risk defaulting on the terms of our credit
facility, particularly as it relates to the maintenance of
minimum levels of equity and the payment of intercompany
receivables.
|
|
|
We have only limited access to financing. |
Because of our history of losses, we may not be able to obtain
future financing on satisfactory terms or at all. Any such
financing may involve substantial dilution to existing
shareholders.
|
|
|
We have received 483 Inspectional Observations and Warning
Letters from the FDA, which until resolved to the satisfaction
of the FDA will continue to delay approval of the ICL and could
limit our existing business in the United States. |
On December 29, 2003 and April 26, 2004, we received
Warning Letters issued by the FDA. A copy of the first Warning
Letter is attached as Exhibit 99.1 to our Current Report on
Form 8-K filed with the Securities and Exchange Commission
on January 9, 2004, and a copy of the second Warning Letter
is attached as Exhibit 99.1 to our Current Report on
Form 8-K filed with the Securities and Exchange Commission
on May 6, 2004.
On September 23, 2004, the FDA completed a re-audit of our
Monrovia, California manufacturing facility. At the conclusion
of the audit, the FDA issued a form “FDA 483 Inspectional
Observations” described more fully in our Current Report on
Form 8-K filed with the Securities and Exchange Commission
on September 29, 2004.
The Warning Letters and 483 Observations have adversely affected
our reputation in the ophthalmic industry and our product sales.
Until the FDA is satisfied with our response, it is unlikely to
grant us approval to market the ICL and the TICL in the United
States and may place restrictions on our domestic lines of
business. See “Business — Regulatory
Matters — Warning Letters and the 483
Observations.”
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Our success depends on the ICL, which has not been
approved for use in the United States. |
We have devoted significant resources and management attention
to the development and introduction of our ICL and TICL.
Management believes that the future success of STAAR depends on
the approval of the ICL for sale in the United States by the
FDA. The ICL is already approved for use in the European Union
and Canada and in parts of Asia. The TICL is approved for use in
the European Union. In October 2003, the FDA Ophthalmic Devices
Panel recommended that the FDA approve, with conditions,
specified uses of the ICL. The FDA has not yet acted on this
recommendation, and it could decide to reject the Ophthalmic
Devices Panel recommendations. Until the FDA is satisfied with
our response to its Warning Letter dated December 22, 2003
and its 483 Observations issued on September 23, 2004, it
is unlikely to grant us approval to market the ICL and the TICL
in the United States. If the FDA does not grant approval of the
ICL, or significantly delays its approval, whether because of
the issues contained in the Warning Letter, the 483 Observations
or otherwise, our prospects for success will be severely
diminished.
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Our future success depends on the successful marketing of
the ICL in the United States market. |
Even if it is approved by the FDA for sale in the United States,
the ICL will not reach its full sales potential unless we
successfully plan and execute its launch and marketing in the
United States. This will present new challenges to our sales and
marketing staff and to our independent manufacturers’
representatives. In countries where the ICL has been approved to
date, our sales have grown steadily, but slowly. In the United
States in particular, patients who might benefit from the ICL
have already been exposed to a great deal of advertising and
publicity about laser refractive surgery, but have little if any
awareness of the ICL. As a result, we expect to make extensive
use of advertising and promotion targeted to potential patients
through providers, and to carefully manage the introduction of
the ICL. We do not have significant resources and we cannot
27
predict whether the particular marketing, advertising and
promotion strategies we pursue will be as successful as we
intend. If we do not successfully market the ICL in the United
States, we will not achieve our planned profitability and growth.
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Our core domestic business has suffered declining sales,
which sales of new products have only partially offset. |
STAAR pioneered the foldable IOL for use in cataract surgery,
and the foldable silicone IOL is one of our largest sources of
revenue. Since we introduced the product, however, competitors
have introduced IOLs employing a variety of designs and
materials. Over the years these products have gradually taken a
larger share of the IOL market, while the market share for our
IOLs has decreased. In particular, many surgeons now choose
lenses made of acrylic material rather than silicone for their
typical patients. In an effort to maintain our competitive
position we have introduced a new biocompatible lens material,
Collamer, to our line of IOLs. We have also introduced new IOL
designs, such as the Toric IOL, and have continued to improve
and refine the silicone IOL. Sales of these new products,
however, have only partially offset declining sales of our
silicone IOLs.
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We depend on independent manufacturers’
representatives. |
In an effort to manage costs and bring our products to a wider
market, we have entered into long-term agreements with certain
independent regional manufacturers’ representatives, who
introduce our products to eye surgeons and provide the training
needed to begin using some of our products. Under our agreements
with these representatives, each receives a commission on all of
our sales within a specified region, including sales on products
we sell into their territories without their assistance. Because
they are independent contractors, we have a limited ability to
manage these representatives or their employees. In addition, a
representative may represent manufacturers other than STAAR,
although not in competing products. We have been relying on the
independent representatives to introduce our new products like
Collamer IOLs, Toric IOLs and the AquaFlow Device, and we will
rely on them, in part, to help introduce the ICL if it is
approved. If our independent manufacturers’ representatives
do not devote sufficient resources to marketing our products, or
if they lack the skills or resources to market our new products,
our new products will fail to reach their full sales potential
and sales of our established products could decline.
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Product recalls have been costly and may be so in the
future. |
Medical devices must be manufactured to the highest standards
and tolerances, and often incorporate newly developed
technology. Despite all efforts to achieve the highest level of
quality control and advance testing, from time to time defects
or technical flaws in our products may not come to light until
after the products are sold or consigned. In those
circumstances, we have previously made voluntary recalls of our
products. During 2004, we initiated several voluntary recalls of
STAAR manufactured product including 33 lots of IOL cartridges,
three lots of injectors, and 529 lenses, and in February 2004,
in an action considered a recall but with no requirement for
product to be returned to us, we issued a letter to healthcare
professionals advising them of the potential for a change in
manifest refraction over time in rare cases involving the
single-piece Collamer IOL. Similar recalls could take place
again. Courts or regulators can also impose mandatory recalls on
us, even if we believe our products are safe and effective.
Recalls can result in lost sales of the recalled products
themselves, and can result in further lost sales while
replacement products are manufactured, especially if the
replacements must be redesigned. If recalled products have
already been implanted, we may bear some or all of the cost of
corrective surgery. Recalls may also damage our professional
reputation and the reputation of our products. The inconvenience
caused by recalls and related interruptions in supply, and the
damage to our reputation, could cause some professionals to
discontinue using our products.
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We could experience losses due to product liability
claims. |
We have in the past been, and continue to be, subject to product
liability claims. As part of our risk management policy, we have
obtained third-party product liability insurance coverage.
Product liability claims against us may exceed the coverage
limits of our insurance policies or cause us to record a
self-insured loss. A
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product liability claim in excess of applicable insurance could
have a material adverse effect on our business, financial
condition and results of operations. Even if any product
liability loss is covered by an insurance policy, these policies
have retentions or deductibles that provide that we will not
receive insurance proceeds until the losses incurred exceed the
amount of those retentions or deductibles. To the extent that
any losses are below these retentions or deductibles, we will be
responsible for paying these losses. The payment of retentions
or deductibles for a significant amount of claims could have a
material adverse effect on our business, financial condition,
and results of operations.
Any product liability claim would divert managerial and
financial resources and could harm our reputation with
customers. We cannot assure you that we will not have product
liability claims in the future or that such claims would not
have a material adverse effect on our business.
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We compete with much larger companies. |
Our competitors, including Alcon, Advanced Medical Optics, and
Bausch & Lomb, have much greater financial resources
than we do and some of them have large international markets for
a full suite of ophthalmic products. Their greater resources for
research, development and marketing, and their greater capacity
to offer comprehensive products and equipment to providers, make
it difficult for us to compete. We have lost significant market
share to some of our competitors.
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Most of our products have single-site manufacturing
approvals, exposing us to risks of business interruption. |
We manufacture all of our products either at one of our
facilities in California or at our facility in Switzerland. Most
of our products are approved for manufacturing only at one of
these sites. Before we can use a second manufacturing site for
an implantable device we must obtain the approval of regulatory
authorities. Because this process is expensive we have generally
not sought approvals needed to manufacture at an additional
site. If a natural disaster, fire, or other serious business
interruption struck one of our manufacturing facilities, it
could take a significant amount of time to validate a second
site and replace lost product. We could lose customers to
competitors, thereby reducing sales, profitability and market
share.
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The global nature of our business may result in
fluctuations and declines in our sales and profits. |
Our products are sold in more than 45 countries. Revenues from
international operations make up a significant portion of our
total revenue. For the year ended December 31, 2004
revenues from international operations were 58% of total
revenues. The results of operations and the financial position
of certain of our offshore operations are reported in the
relevant local currencies and then translated into United States
dollars at the applicable exchange rates for inclusion in our
consolidated financial statements, exposing us to translation
risk. In addition, we are exposed to transaction risk because
some of our expenses are incurred in a different currency from
the currency in which our revenues are received. Our most
significant currency exposures are to the Euro, the Swiss Franc,
and the Australian dollar. The exchange rates between these and
other local currencies and the United States dollar may
fluctuate substantially. We have not attempted to offset our
exposure to these risks by investing in derivatives or engaging
in other hedging transactions. Fluctuations in the value of the
United States dollar against other currencies have not had a
material adverse effect on our operating margins and
profitability in the past.
Economic, social and political conditions, laws, practices and
local customs vary widely among the countries in which we sell
our products. Our operations outside of the United States are
subject to a number of risks and potential costs, including
lower profit margins, less stringent protection of intellectual
property and economic, political and social uncertainty in some
countries, especially in emerging markets. Our continued success
as a global company depends, in part, on our ability to develop
and implement policies and strategies that are effective in
anticipating and managing these and other risks in the countries
where we do business. These and other risks may have a material
adverse effect on our operations in any particular country and
on our business as a whole. We price some of our products in
U.S. dollars, and as a result changes in exchange rates can
make our products more expensive in some offshore markets and
reduce our revenues. Inflation in
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emerging markets also makes our products more expensive there
and increases the credit risks to which we are exposed.
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We obtain some of the components of our products from a
single source, and an interruption in the supply of those
components could reduce our revenue. |
We obtain some of the components for our products from a single
source. For example, only one supplier produces our viscoelastic
product. Although we believe we could find alternate supplies
for any of these components, the loss or interruption of any of
these suppliers could increase costs, reducing our revenue and
profitability, or harm our customer relations by delaying
product deliveries.
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Our activities involve hazardous materials and emissions
and may subject us to environmental liability. |
Our manufacturing, research and development practices involve
the controlled use of hazardous materials. We are subject to
federal, state, local and foreign laws and regulations in the
various jurisdictions in which we have operations governing the
use, manufacturing, storage, handling and disposal of these
materials and certain waste products. Although we believe that
our safety and environmental procedures for handling and
disposing of these materials comply with legally prescribed
standards, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. Remedial
environmental actions could require us to incur substantial
unexpected costs, which would materially and adversely affect
our results of operations. If we were involved in a major
environmental accident or found to be in substantial
non-compliance with applicable environmental laws, we could be
held liable for damages or penalized with fines.
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We risk losses through litigation. |
Since September 1, 2004, multiple class action lawsuits
have been filed in the United States District Courts for the
Central District of California and the District of New Mexico
against the Company and its Chief Executive Officer on behalf of
all persons who acquired the Company’s securities during
various periods between April 3, 2003 and
September 28, 2004. On December 15, 2004, the Court
ordered consolidation of the complaints that had been filed in
the United States District Court for the Central District of
California and directed that the plaintiffs file a consolidated
complaint as soon as practicable. The plaintiffs have proposed a
stipulation pursuant to which they would file a consolidated
amended complaint on or about April 29, 2005. The New
Mexico action was voluntarily dismissed on January 28,
2005. The lawsuits generally allege that the defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated thereunder, by
issuing false and misleading statements regarding intraocular
lenses and implantable lenses, and failing timely to disclose
significant problems with the lenses, as well as the existence
of serious injuries and/or malfunctions attributable to the
lenses, thereby artificially inflating the price of the
Company’s Common Stock. The plaintiffs generally seek to
recover compensatory damages, including interest. While we
intend to vigorously defend the consolidated lawsuit, the
lawsuit will require significant attention of management and
could result in substantial costs and harm our reputation.
We are currently party to various claims and legal proceedings
arising out of the normal course of our business. These claims
and legal proceedings relate to contractual rights and
obligations, employment matters, and claims of product
liability. While we do not believe that any of the claims known
to us is likely to have a material adverse effect on our
financial condition or results of operations, new claims or
unexpected results of existing claims could lead to significant
financial harm.
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We depend on key employees. |
We depend on the continued service of our senior management and
other key employees. The loss of a key employee could hurt our
business. We could be particularly hurt if any key employee or
employees went to work for competitors. Our future success
depends on our ability to identify, attract, train and motivate
other highly skilled personnel. Failure to do so may adversely
affect future results.
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We have licensed our technology to our joint venture
company and have granted certain rights to the partners that
could be exercised in the event of a change in control of the
Company. |
We have granted to the Canon Staar joint venture, a perpetual
exclusive license under the Licensed Technology (as defined in
the license agreement) to make and sell our products in Japan,
and to make our products in China and to sell such products in
Japan and China. In addition, we have granted Canon Staar a
perpetual non-exclusive license under the Licensed Technology to
make and sell our products in the rest of the world. Subject to
the approval of the Board of Directors of the joint venture,
such licenses may allow the Canon Staar joint venture to sell
products in the rest of the world or grant others the right to
do so. The term “Licensed Technology” includes any
intellectual property owned or controlled by STAAR.
Upon the occurrence of certain events, including the merger,
sale of substantially all of the assets or change in the
management of any party to the Canon Staar joint venture, any
joint venture partner may have the right to acquire the first
party’s interest in the joint venture at book value,
without terminating the licenses under the Licensed Technology.
The joint venture agreement, license agreement and settlement
agreement relating to Canon Staar have been filed or
incorporated by reference to this Annual Report.
Risks Related to the Ophthalmic
Products Industry
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If we fail to keep pace with advances in our industry or
fail to persuade physicians to adopt the new products we
introduce, customers may not buy our products and our revenue
may decline. |
Constant development of new technologies and techniques,
frequent new product introductions and strong price competition
characterize the ophthalmic industry. The first company to
introduce a new product or technique to market usually gains a
significant competitive advantage. Our future growth depends, in
part, on our ability to develop products to treat diseases and
disorders of the eye that are more effective, safer, or
incorporate emerging technologies better than our
competitors’ products. Sales of our existing products may
decline rapidly if one of our competitors introduces a
substantially superior product, or if we announce a new product
of our own. Similarly, if we fail to make sufficient investments
in research and development or if we focus on technologies that
do not lead to better products, our current and planned products
could be surpassed by more effective or advanced products.
In addition, we must manufacture these products economically and
market them successfully by persuading a sufficient number of
eye care professionals to use them. For example, glaucoma
requires ongoing treatment over a long period of time; thus,
many doctors are reluctant to switch a patient to a new
treatment if the patient’s current treatment for glaucoma
remains effective. This has been a challenge in selling our
AquaFlow Device.
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Resources devoted to research and development may not
yield new products that achieve commercial success. |
We spent 12.1% of our revenue on research and development
(including regulatory and quality assurance expenses) for the
year ended December 31, 2004, and we expect to spend
between 10-11% of our revenue on an annual basis in the future.
Development of new implantable technology, from discovery
through testing and registration to initial product launch, is
expensive and typically takes from three to seven years. Because
of the complexities and uncertainties of ophthalmic research and
development, products we are currently developing may not
complete the development process or obtain the regulatory
approvals required for us to market the products successfully.
It is possible that few or none of the products currently under
development will become commercially successful.
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Failure of users of our products to obtain adequate
reimbursement from third-party payors could limit market
acceptance of our products, which could affect our sales and
profits. |
Many of our products, in particular IOLs and products related to
the treatment of glaucoma, are used in procedures that are
typically covered by health insurance, HMO plans, Medicare or
Medicaid. These third-
31
party payors have recently been trying to contain costs by
restricting the types of procedures they reimburse to those
viewed as most cost-effective and capping or reducing
reimbursement rates. These policies could adversely affect sales
and prices of our products. Physicians, hospitals and other
health care providers may be reluctant to purchase our products
if third-party payors do not adequately reimburse them for the
cost of our products and the use of our surgical equipment. For
example:
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Major third-party payors for hospital services, including
government insurance plans, Medicare, Medicaid and private
health care insurers, have substantially revised their payment
methodologies during the last few years, resulting in stricter
standards for reimbursement of hospital and outpatient charges
for some medical procedures, including cataract procedures and
IOLs; |
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Numerous legislative proposals have been considered that, if
enacted, would result in major reforms in the United
States’ health care system, which could have an adverse
effect on our business; |
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Our competitors may reduce the prices of their products, which
could result in third-party payors favoring our competitors; |
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There are proposed and existing laws and regulations governing
maximum product prices and the profitability of companies in the
health care industry; and |
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There have been recent initiatives by third-party payors to
challenge the prices charged for medical products. Reductions in
the prices for our products in response to these trends could
reduce our revenues. Moreover, our products may not be covered
in the future by third-party payors, which would also reduce our
revenues. |
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We are subject to extensive government regulation, which
increases our costs and could prevent us from selling our
products. |
Government regulations and agency oversight apply to every
aspect of our business, including testing, manufacturing, safety
and environmental controls, efficacy, labeling, advertising,
promotion, record keeping, the sale and distribution of products
and samples. We are also subject to government regulation over
the prices we charge and the rebates we offer to customers.
Complying with government regulation substantially increases the
cost of developing, manufacturing and selling our products.
In the United States, we must obtain approval from the FDA for
each product that we market. Competing in the ophthalmic
products industry requires us to continuously introduce new or
improved products and processes, and to submit these to the FDA
for approval. Obtaining FDA approval is a long and expensive
process, and approval is never certain. In addition, our
operations in the United States are subject to periodic
inspection by the FDA. Such inspection may result in the FDA
ordering changes in our business practices, which changes could
be costly and have a material adverse effect on our business and
results of operations. In particular, we received Warning
Letters from the FDA on December 29, 2003 and
April 26, 2004, and FDA 483 Inspectional Observations on
September 23, 2004, requiring us to take corrective action
as discussed elsewhere in this report.
Products distributed outside of the United States are also
subject to government regulation, which may be equally or more
demanding. Our new products could take a significantly longer
time than we expect to gain regulatory approval and may never
gain approval. If a regulatory authority delays approval of a
potentially significant product, the potential sales of the
product and its value to us can be substantially reduced. Even
if the FDA or another regulatory agency approves a product, the
approval may limit the indicated uses of the product, or may
otherwise limit our ability to promote, sell and distribute the
product, or may require post-marketing studies. If we cannot
obtain regulatory approval of our new products, or if the
approval is too narrow, we will not be able to market these
products, which would eliminate or reduce our potential sales
and earnings.
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We depend on proprietary technologies, but may not be able
to protect our intellectual property rights adequately. |
We have numerous patents and pending patent applications. We
rely on a combination of contractual provisions, confidentiality
procedures and patent, trademark, copyright and trade secrecy
laws to protect the proprietary aspects of our technology. These
legal measures afford limited protection and may not prevent our
competitors from gaining access to our intellectual property and
proprietary information. Any of our patents may be challenged,
invalidated, circumvented or rendered unenforceable.
Furthermore, we cannot be certain that any pending patent
application held by us will result in an issued patent or that
if patents are issued to us, the patents will provide meaningful
protection against competitors or competitive technologies.
Litigation may be necessary to enforce our intellectual property
rights, to protect our trade secrets and to determine the
validity and scope of our proprietary rights. Any litigation
could result in substantial expense, may reduce our profits and
may not adequately protect our intellectual property rights. In
addition, we may be exposed to future litigation by third
parties based on claims that our products infringe their
intellectual property rights. This risk is exacerbated by the
fact that the validity and breadth of claims covered by patents
in our industry may involve complex legal issues that are not
fully resolved.
Any litigation or claims against us, whether or not successful,
could result in substantial costs and harm our reputation. In
addition, intellectual property litigation or claims could force
us to do one or more of the following: to cease selling or using
any of our products that incorporate the challenged intellectual
property, which would adversely affect our revenue; to negotiate
a license from the holder of the intellectual property right
alleged to have been infringed, which license may not be
available on reasonable terms, if at all; or to redesign our
products to avoid infringing the intellectual property rights of
a third party, which may be costly and time-consuming or
impossible to accomplish.
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We may not successfully develop and launch replacements
for our products that lose patent protection. |
Most of our products are covered by patents that give us a
degree of market exclusivity during the term of the patent. We
have also earned revenue in the past by licensing some of our
patented technology to other ophthalmic companies. The legal
life of a patent is 20 years from application. Patents
covering our products will expire from this year through the
next 20 years. Upon patent expiration, our competitors may
introduce products using the same technology. As a result of
this possible increase in competition, we may need to charge a
lower price in order to maintain sales of our products, which
could make these products less profitable. If we fail to develop
and successfully launch new products prior to the expiration of
patents for our existing products, our sales and profits with
respect to those products could decline significantly. We may
not be able to develop and successfully launch more advanced
replacement products before these and other patents expire.
Risks Related to Ownership of
Our Common Stock
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Our Certificate of Incorporation could delay or prevent an
acquisition or sale of our company. |
Our Certificate of Incorporation empowers the Board of Directors
to establish and issue a class of preferred stock, and to
determine the rights, preferences and privileges of the
preferred stock. We also have a Stockholders’ Rights Plan,
which could discourage a third party from making an offer to
acquire us. These provisions give the Board of Directors the
ability to deter, discourage or make more difficult a change in
control of our company, even if such a change in control would
be in the interest of a significant number of our stockholders
or if such a change in control would provide our stockholders
with a substantial premium for their shares over the
then-prevailing market price for the common stock.
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Our bylaws contain other provisions that could have an
anti-takeover effect, including the following: |
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only one of the three classes of directors is elected each year; |
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stockholders have limited ability to remove directors; |
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stockholders cannot call a special meeting of
stockholders; and |
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stockholders must give advance notice to nominate directors. |
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Anti-takeover provisions of Delaware law could delay or
prevent an acquisition of our company. |
We are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. These provisions could
discourage potential acquisition proposals and could delay or
prevent a change in control transaction. They could also have
the effect of discouraging others from making tender offers for
our Common Stock or preventing changes in our management.
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Future sales of our Common Stock could reduce our stock
price. |
Our Board of Directors could issue shares of common or preferred
stock, to raise additional capital or for other corporate
purposes without stockholder approval. In addition, the Board of
Directors could designate and sell a class of preferred stock
with preferential rights over the Common Stock with respect to
dividends or other distributions. Sales of common or preferred
stock could dilute the interest of existing stockholders and
reduce the market price of our Common Stock. Even in the absence
of such sales, the perception among investors that additional
sales of equity securities may take place could reduce the
market price of our Common Stock.
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The market price of our Common Stock is likely to be
volatile. |
Our stock price has fluctuated widely, ranging from $2.88 to
$11.26 during the year ended December 31, 2004. Our stock
price could continue to experience significant fluctuations in
response to factors such as quarterly variations in operating
results, operating results that vary from the expectations of
securities analysts and investors, changes in financial
estimates, changes in regulatory status, changes in market
valuations of competitors, announcements by us or our
competitors of a material nature, additions or departures of key
personnel, future sales of Common Stock and stock volume
fluctuations. Also, general political and economic conditions
such as recession or interest rate fluctuations may adversely
affect the market price of our stock.
Foreign Exchange
Management does not believe that the fluctuation in the value of
the dollar in relation to the currencies of its suppliers or
customers in the last three fiscal years has adversely affected
the Company’s ability to purchase or sell products at
agreed upon prices. No assurance can be given, however, that
adverse currency exchange rate fluctuations will not occur in
the future, which would affect the Company’s operating
results.
Inflation
Management believes inflation has not had a significant impact
on the Company’s operations during the past three years.
New Accounting Pronouncements
In October 2004, the American Jobs Creation Act of 2004
(“Act”) became effective in the U.S. Two
provisions of the Act may impact the Company’s provision
(benefit) for income taxes in future periods, namely those
related to the qualified production activities deduction
(“QPA”) and foreign earnings repatriation
(“FER”).
The QPA will be effective for the Company’s
U.S. federal tax return year beginning after
December 31, 2004. In summary, the Act provides for a
percentage deduction of earnings from qualified production
activities, as defined, commencing with an initial deduction of
3 percent for tax years beginning after 2009, with the
result that the statutory federal tax rate currently applicable
to the Company’s qualified production activities of
35 percent could be reduced initially to 33.95 percent
and ultimately to 31.85 percent. However, the Act also
provides for the phased elimination of the extraterritorial
income exclusion provision of the Internal Revenue Code, which
have previously resulted in tax benefits to the Company. Due to
the interaction
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of the law provisions noted above as well as the particulars of
the Company’s tax position, the ultimate effect of the QPA
on the Company’s future provision (benefit) for income
taxes has not been determined at this time. The Financial
Accounting Standards Board (“FASB”) issued FASB Staff
Position FAS 109-1, “Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduction
on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004” (“FSP 109-1”), in December
2004. FSP 109-1 requires that tax benefits resulting from the
QPA should be recognized no earlier than the year in which they
are reported in the entity’s tax return, and that there is
to be no revaluation of recorded deferred tax assets and
liabilities as would be the case had there been a change in an
applicable statutory rate.
The FER provision of the Act provides generally for a one-time
85 percent dividends received deduction for qualifying
repatriations of foreign earnings to the U.S. Qualified
repatriated funds must be reinvested in the U.S. in certain
qualifying activities and expenditures, as defined by the Act.
In December 2004, the FASB issued FASB Staff Position
FAS 109-2, “Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004” (“FSP 109-2”). FSP 109-2
allows additional time for entities potentially impacted by the
FER provision to determine whether any foreign earnings will be
repatriated under this provision. At this time, the Company has
not undertaken an evaluation of the application of the FER
provision and any potential benefits of effecting such
repatriations under this provision. Numerous factors, including
previous actual and deemed repatriations under federal tax law
provisions, are factors impacting the availability of the FER
provision to the Company and its potential benefit to the
Company, if any. The Company intends to examine the issue and
will provide updates in subsequent periods.
In November 2004, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 151,
“Inventory Costs.” This statement amends the guidance
in ARB No. 43, Chapter 4, “Inventory
Pricing,” to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted
materials (spoilage). SFAS No. 151 requires that those
items be recognized as current-period charges. In addition, this
statement requires that allocation of fixed production overheads
to costs of conversions be based upon the normal capacity of the
production facilities. The provisions of SFAS No. 151
are effective for inventory cost incurred in fiscal years
beginning after June 15, 2005. As such, the Company is
required to adopt these provisions at the beginning of fiscal
2006. The adoption of this pronouncement is not expected to have
a material effect on the Company’s financial statements.
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment.” This statement is a revision of
SFAS No. 123, “Accounting for Stock-Based
Compensation,” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and its
related implementation guidance. SFAS No. 123R
addresses all forms of share-based payment (“SBP”)
awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation
rights. Under SFAS No. 123R, SBP awards result in a
cost that will be measured at fair value on the awards’
grant date, based on the estimated number of awards that are
expected to vest. This statement is effective for public
entities as of the beginning of the next fiscal year that begins
after June 15, 2005. The Company has not quantified the
potential effect of adoption of SFAS No. 123R, but
believes that the adoption of this statement will result in a
decrease to earnings.
In December 2004, the FASB issued SFAS No. 153,
“Exchange of Nonmonetary Assets.” This statement
amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
The provisions of this statement are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after
June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods
beginning after December 16, 2004. The provisions of this
statement should be applied prospectively. The adoption of this
pronouncement is not expected to have a material effect on the
Company’s financial statements.
35
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
In the normal course of business, our operations are exposed to
risks associated with fluctuations in interest rates and foreign
currency exchange rates. The Company manages its risks based on
management’s judgment of the appropriate trade-off between
risk, opportunity and costs. Management does not believe that
these market risks are material to the results of operations or
cash flows of the Company, and, accordingly, does not generally
enter into interest rate or foreign exchange rate hedge
instruments.
Interest rate risk. Our $3.0 million of debt is
based on the borrowings of our international subsidiaries. The
majority of our international borrowings bear an interest rate
that is linked to Euro market conditions and, thus, our interest
rate expense will fluctuate with changes in those conditions. If
interest rates were to increase or decrease by 1% for the year,
our annual interest rate expense would increase or decrease by
approximately $30,000.
Foreign currency risk. Our international subsidiaries
operate in and are net recipients of currencies other than the
U.S. dollar and, as such, our revenues benefit from a
weaker dollar and are adversely affected by a stronger dollar
relative to major currencies worldwide (primarily, the Euro and
Australian dollar). Accordingly, changes in exchange rates, and
particularly the strengthening of the US dollar, may negatively
affect our consolidated sales and gross profit as expressed in
U.S. dollars. Additionally, as of December 31, 2004,
all of our debt is denominated in Swiss Francs and as such, we
are subject to fluctuations of the Swiss Franc as compared to
the U.S. dollar in converting the value of the debt to
U.S. dollars. The U.S. dollar value of the debt is
increased by a weaker dollar and decreased by a stronger dollar
relative to the Swiss Franc.
In the normal course of business, we also face risks that are
either non-financial or non-quantifiable. Such risks include
those set forth in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Risk Factors.”
|
|
| Item 8. |
Financial Statements and Supplementary Data |
Financial Statements and the Report of Independent Registered
Public Accounting Firm are filed with this Annual Report on
Form 10-K in a separate section following Part IV, as
shown on the index under Item 15 of this Annual Report.
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
Not applicable.
|
|
| Item 9A. |
Controls and Procedures |
Attached as exhibits to this Form 10-K are certifications
of STAAR’s Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), which are required in
accordance with Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). This
“Controls and Procedures” section includes information
concerning the controls and controls evaluation referred to in
the certifications. The section following Part IV of this
Form 10-K sets forth the report of BDO Seidman LLP, our
independent registered public accounting firm, regarding its
audit of STAAR’s consolidated financial statements included
in this Form 10-K and its attestation of management’s
assessment of internal control over financial reporting set
forth below in this section. This section should be read in
conjunction with the certifications and the BDO Seidman report
for a more complete understanding of the topics presented.
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer, David Bailey, and
Chief Financial Officer, John Bily, with the participation of
the Company’s management, carried out an evaluation of the
effectiveness of the Company’s disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(b). Based
upon that evaluation, the Chief Executive Officer and the Chief
Financial Officer believe that, as of the end of the period
covered by this report, the Company’s disclosure controls
and procedures are effective in making known to them material
36
information relating to the Company (including its consolidated
subsidiaries) required to be included in this report.
Changes in Internal Control over Financial Reporting
There was no change during the fiscal quarter ended
December 31, 2004, known to the Chief Executive Officer or
the Chief Financial Officer, that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
Management Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Exchange Act Rule 13a-15(f).
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2004, the end
of our fiscal year. Management based its assessment on criteria
established in Internal Control–Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
Based on this assessment, management has concluded that our
internal control over financial reporting was effective as of
the end of the fiscal year ended December 31, 2004.
BDO Seidman LLP, the independent registered public accounting
firm that audited and reported on the consolidated financial
statements of the Company contained in this report, has issued
an attestation report on management’s assessment of our
internal control over financial reporting, which follows
Part IV of this Form 10-K.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including the CEO and CFO, does
not expect that our Disclosure Controls or our internal control
over financial reporting will prevent or detect all error and
all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. The
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that misstatements due
to error or fraud will not occur or that all control issues and
instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Controls can also
be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in
part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls
effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions
or deterioration in the degree of compliance with policies or
procedures.
|
|
| Item 9B. |
Other Information |
Not applicable.
PART III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
The information in Item 10 is incorporated herein by
reference to the section entitled
“Proposal One — Election of Directors”
contained in the proxy statement (the “Proxy
Statement”) for the 2005 annual meeting
37
of stockholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year
ended December 31, 2004.
|
|
| Item 11. |
Executive Compensation |
The information in Item 11 is incorporated herein by
reference to the section entitled
“Proposal One — Election of Directors”
contained in the Proxy Statement.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information in Item 12 is incorporated herein by
reference to the section entitled “General
Information — Security Ownership of Certain Beneficial
Owners and Management” and
“Proposal One — Election of Directors”
contained in the Proxy Statement.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The information in Item 13 is incorporated herein by
reference to the section entitled
“Proposal One — Election of Directors”
contained in the Proxy Statement.
|
|
| Item 14. |
Principal Accountant Fees and Services |
The information in Item 14 is incorporated herein by
reference to the section entitled
“Proposal Two — Ratification of the
Appointment of Independent Registered Public Accounting
Firm” contained in the Proxy Statement.
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
| |
|
|
|
|
| |
|
|
|
Page |
| |
|
|
|
|
|
(1)
|
|
Financial statements required by Item 15 of this form are
filed as a separate part of this report following Part IV |
|
|
| |
|
Report of Independent Registered Public
Accounting Firm |
|
F-2 |
| |
|
Report of Independent Registered Public Accounting Firm |
|
F-3 |
| |
|
Consolidated Balance Sheets at
December 31, 2004 and January 2, 2004 |
|
F-4 |
| |
|
Consolidated Statements of Operations for
the years ended December 31, 2004, January 2, 2004,
and January 3, 2003 |
|
F-5 |
| |
|
Consolidated Statements of Changes in
Stockholders’ Equity for the years ended December 31,
2004, January 2, 2004, and January 3, 2003 |
|
F-6 |
| |
|
Consolidated Statements of Cash Flows for
the years ended December 31, 2004, January 2, 2004,
and January 3, 2003 |
|
F-7 |
| |
|
Notes to Consolidated Financial
Statements |
|
F-8 |
|
(2)
|
|
Schedules required by Regulation S-X are filed as an
exhibit to this report: |
|
|
| |
|
I.
Independent Registered Public Accounting Firm Report on
Schedule |
|
F-31 |
| |
|
II.
Schedule II — Valuation and Qualifying Accounts
and Reserves |
|
F-32 |
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable
or is shown in the financial statements and the notes thereto.
(3) Exhibits
| |
|
|
|
|
| |
3 |
.1 |
|
Certificate of Incorporation, as amended(8) |
| |
| |
3 |
.2 |
|
By-laws, as amended(9) |
38
| |
|
|
|
|
| |
| |
†4 |
.1 |
|
1991 Stock Option Plan of STAAR Surgical Company(2) |
| |
| |
†4 |
.2 |
|
1995 STAAR Surgical Company Consultant Stock Plan(3) |
| |
| |
†4 |
.3 |
|
1996 STAAR Surgical Company Non-Qualified Stock Plan(4) |
| |
| |
4 |
.4 |
|
Stockholders’ Rights Plan, dated effective April 20,
1995(9) |
| |
| |
†4 |
.5 |
|
1998 STAAR Surgical Company Stock Plan, adopted April 17,
1998(5) |
| |
| |
4 |
.6 |
|
Form of Certificate for Common Stock, par value $0.01 per
share(14) |
| |
| |
†4 |
.7 |
|
2003 Omnibus Equity Incentive Plan and form of Option Grant and
Stock Option Agreement(13) |
| |
| |
4 |
.8 |
|
Amendment No. 1 to Stockholders’ Rights Plan, dated
April 21, 2003(15) |
| |
| |
4 |
.9 |
|
Registration Rights Agreement, dated June 4, 2004(19) |
| |
| |
10 |
.1 |
|
Joint Venture Agreement, dated May 23, 1988, among the
Company, Canon Sales Co, Inc. and Canon, Inc., and
Exhibit B, Technical Assistance and License Agreement,
dated September 6, 1988, between the Company and Canon
Staar Co., Inc.(7) |
| |
| |
10 |
.2 |
|
Settlement Agreement among the Company, Canon, Inc., Canon Sales
Co., Inc., and Canon Staar Company, Inc. dated
September 28, 2001(10) |
| |
| |
10 |
.3 |
|
Indenture of Lease dated September 1, 1993, between the
Company and FKT Associates and First through Third Additions
Thereto(9) |
| |
| |
10 |
.4 |
|
Second Amendment to Indenture of Lease dated September 21,
1998, between the Company and FKT Associates(9) |
| |
| |
10 |
.5 |
|
Third Amendment to Indenture of Lease dated October 13,
2003, by and between the Company and FKT Associates(17) |
| |
| |
10 |
.6 |
|
Indenture of Lease dated October 20, 1983, between the
Company and Dale E. Turner and Francis R. Turner and First
through Fifth Additions Thereto(6) |
| |
| |
10 |
.7 |
|
Sixth Lease Addition to Indenture of Lease dated
October 13, 2003, by and between the Company and Turner
Trust UTD Dale E. Turner March 28, 1984(17) |
| |
| |
10 |
.8 |
|
Standard Industrial/ Commercial Multi-Tenant Lease-Gross dated
April 5, 2000, entered into between the Company and Kilroy
Realty, L.P.(9) |
| |
| |
10 |
.9 |
|
Amendment No. 1 to Standard Industrial/ Commercial
Multi-Tenant Lease dated January 3, 2003, by and between
the Company and California Rosen(17) |
| |
| |
10 |
.10 |
|
Lease Agreement dated July 12, 1994, between STAAR Surgical
AG and Calderari and Schwab AG/ SA(22) |
| |
| |
10 |
.11 |
|
Supplement #1 dated July 10, 1995, to the Lease Agreement
of July 12, 1994, between STAAR Surgical AG and Calderari
and Schwab AG/SA(22) |
| |
| |
10 |
.12 |
|
Supplement #2 dated August 2, 1999, to the Lease Agreement
of July 12, 1994, between STAAR Surgical AG and Calderari
and Schwab AG/SA(22) |
| |
| |
10 |
.13 |
|
Commercial Lease Agreement dated November 29, 2000, between
Domilens GmbH and DePfa Deutsche Pfandbriefbank AG(22) |
| |
| |
10 |
.14 |
|
Patent License Agreement, dated May 24, 1995, with Eye
Microsurgery Intersectoral Research and Technology Complex(16) |
| |
| |
10 |
.15 |
|
Patent License Agreement, dated January 1, 1996, with Eye
Microsurgery Intersectoral Research and Technology Complex(9) |
| |
| |
†10 |
.16 |
|
Promissory Note dated June 16, 1999, from Peter J. Utrata
to the Company(8) |
| |
| |
†10 |
.17 |
|
Stock Pledge Agreement dated June 16, 1999, by Peter J.
Utrata in favor of the Company(8) |
| |
| |
†10 |
.18 |
|
Promissory Note dated June 2, 2000, from Peter J. Utrata to
the Company(9) |
| |
| |
†10 |
.19 |
|
Stock Pledge Agreement dated June 2, 2000, between the
Company and Peter J. Utrata(9) |
| |
| |
†10 |
.20 |
|
Mortgage dated July 16, 2004, between the Company and Peter
J. Utrata(22) |
| |
| |
†10 |
.21 |
|
Forbearance Agreement dated July 22, 2004, between the
Company and Peter J. Utrata(22) |
| |
| |
†10 |
.22 |
|
Employment Agreement dated December 19, 2000, between the
Company and David Bailey(9) |
| |
| |
†10 |
.23 |
|
Stock Option Plan and Agreement for Chief Executive Officer
dated November 13, 2001, between the Company and David
Bailey(10) |
39
| |
|
|
|
|
| |
| |
†10 |
.24 |
|
Stock Option Certificate dated August 9, 2001, between the
Company and David Bailey(22) |
| |
| |
†10 |
.25 |
|
Stock Option Certificate dated January 2, 2002, between the
Company and David Bailey(22) |
| |
| |
†10 |
.26 |
|
Stock Option Certificate dated February 14, 2003, between
the Company and David Bailey(22) |
| |
| |
†10 |
.27 |
|
Amended and Restated Stock Option Certificate dated
February 12, 2003, between the Company and David Bailey(22) |
| |
| |
†10 |
.28 |
|
Stock Option Certificate dated May 9, 2000, between the
Company and Volker Anhaeusser(22) |
| |
| |
†10 |
.29 |
|
Stock Option Certificate dated May 31 2000, between the
Company and Volker Anhaeusser(22) |
| |
| |
†10 |
.30 |
|
Stock Option Certificate dated May 30, 2002, between the
Company and Volker Anhaeusser(22) |
| |
| |
†10 |
.31 |
|
Stock Option Agreement dated November 13, 2001, between the
Company and David R. Morrison(10) |
| |
| |
†10 |
.32 |
|
Stock Option Certificate dated February 13, 2003, between
the Company and Donald Duffy(22) |
| |
| |
†10 |
.33 |
|
Employment Agreement dated January 3, 2002, between the
Company and John Bily(11) |
| |
| |
†10 |
.34 |
|
Stock Option Certificate dated January 18, 2002, between
the Company and John C. Bily(22) |
| |
| |
†10 |
.35 |
|
Amended and Restated Stock Option Certificate dated
February 12, 2003, between the Company and John C. Bily(22) |
| |
| |
†10 |
.36 |
|
Offer of Employment dated July 12, 2002, from the Company
to Nick Curtis(22) |
| |
| |
†10 |
.37 |
|
Amendment to Offer of Employment dated February 14, 2003
from the Company to Nick Curtis(22) |
| |
| |
†10 |
.38 |
|
Stock Option Certificate dated February 14, 2003, between
the Company and Nicholas Curtis(22) |
| |
| |
†10 |
.39 |
|
Amended and Restated Stock Option Certificate dated
February 12, 2003, between the Company and Nicholas
Curtis(22) |
| |
| |
†10 |
.40 |
|
Employment Agreement dated March 18, 2005, between the
Company and Tom Paul(22) |
| |
| |
†10 |
.41 |
|
Employment Agreement dated March 18, 2005, between the
Company and James Farnworth(22) |
| |
| |
†10 |
.42 |
|
Form of Indemnification Agreement between the Company and
certain officers and directors(22) |
| |
| |
†10 |
.43 |
|
Managing Director’s Contract of Employment, dated
June 22, 1993, between Domilens and Guenther Roepstorff(22) |
| |
| |
†10 |
.44 |
|
Supplementary Agreement #1 to the Managing Director’s
Contract of Employment, dated November 25, 1997, between
STAAR Surgical AG and Guenther Roepstorff(22) |
| |
| |
†10 |
.45 |
|
Supplementary Agreement #2 to the Managing Director’s
Contract of Employment dated January 1, 1998, between
Domilens and Guenther Roepstorff(22) |
| |
| |
†10 |
.46 |
|
Supplementary Agreement #3 to the Managing Director’s
Contract of Employment dated January 1, 2003, between
Domilens and Guenther Roepstorff(22) |
| |
| |
†10 |
.47 |
|
Employment Agreement dated May 5, 2004, between the
ConceptVision Australia Pty Limited ACN 006 391 928 and Philip
Butler Stoney(18) |
| |
| |
†10 |
.48 |
|
Employment Agreement dated May 5, 2004, between the
ConceptVision Australia Pty Limited ACN 006 391 928 and Robert
William Mitchell(18) |
| |
| |
#10 |
.49 |
|
Assignment Agreement of the Share Capital of Domilens Vertrieb
fuer medizinische Produkte GmbH dated January 3, 2003,
between STAAR Surgical AG and Guenther Roepstorff(12) |
| |
| |
10 |
.50 |
|
Assignment Agreement of the Share Capital of ConceptVision
Australia Pty Limited ACN 006 391 928, dated May 5, 2004,
between the Company and Philip Butler Stoney and Robert William
Mitchell(18) |
| |
| |
10 |
.51 |
|
Addendum to the Assignment Agreement of the Share Capital of
ConceptVision Australia Pty Limited ACN 006 391 928, dated
May 5, 2004, between the Company and Philip Butler Stoney
and Robert William Mitchell(18) |
| |
| |
10 |
.52 |
|
Form of Purchase Agreement dated June 11, 2003, entered
into between the Company and Crestwood Capital Partners, LP;
Crestwood Capital International, Ltd; Crestwood Capital Partners
II, LP; RS Emerging Growth Pacific Partners Master Fund Unit
Trust; RS Emerging Growth Pacific Partners LP, Prism Partners I,
LP; Prism Partners II Offshore Fund; Prism Partners Offshore
Fund; Vertical Ventures Investments, LLC; Smithfield Fiduciary,
LLC, individually(21) |
40
| |
|
|
|
|
| |
| |
10 |
.53 |
|
Stock Purchase Agreement dated June 4, 2004, between the
Company and Andesite Management, L.P., Colonial Fund LLC,
Domain Public Equity Partners, L.P., Fortis L Fund Equity
Pharma World, Fortis L Fund Opportunity World, Heartland
Group, Inc., ProMed Offshore Fund, Ltd., ProMed Partners, L.P.,
ProMed Partners II, L.P., Sagitta Asset Management Ltd., SF
Capital Partners, Ltd., Special Situations Cayman
Fund L.P., Special Situations Fund III, L.P., Special
Situations Private Equity Fund, L.P., Ursus Capital, L.P., Ursus
Offshore, Ltd., Zeke, LP(19) |
| |
| |
10 |
.54 |
|
Master Credit Agreement dated August 2, 2004, between STAAR
Surgical AG and UBS AG(20) |
| |
| |
10 |
.55 |
|
Credit Agreement effective January 13, 2003, between
Domilens Gmbh and Postbank(12) |
| |
| |
†10 |
.56 |
|
Promissory Note dated March 29, 2002, between the Company
and Pollet & Richardson(22) |
| |
| |
†#10 |
.57 |
|
Security Agreement dated March 29, 2002, between the
Company and Pollet & Richardson(12) |
| |
| |
14 |
.1 |
|
Code of Ethics(22) |
| |
| |
21 |
.1 |
|
List of Significant Subsidiaries(22) |
| |
| |
23 |
.1 |
|
Consent of BDO Seidman, LLP** |
| |
| |
31 |
.1 |
|
Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002** |
| |
| |
31 |
.2 |
|
Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002** |
| |
| |
32 |
.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350,
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002** |
|
|
|
| |
† |
Management contract or compensatory plan or arrangement |
|
|
|
| |
# |
All schedules and or exhibits have been omitted. Any omitted
schedule or exhibit will be furnished supplementally to the
Securities and Exchange Commission upon request |
|
|
| (2) |
Incorporated by reference from the Company’s Registration
Statement on Form S-8, File No. 033-76404, as filed on
March 11, 1994. |
| |
| (3) |
Incorporated by reference from the Company’s Registration
Statement on Form S-8, File No. 033-60241, as filed on
June 15, 1995. |
| |
| (4) |
Incorporated by reference from the Company’s Annual Report
on Form 10-K, for the year ended January 3, 1997, as
filed on April 2, 1997. |
| |
| (5) |
Incorporated by reference from the Company’s Proxy
Statement, for its Annual Meeting of Stockholders held on
May 29, 1998, as filed on May 1, 1998. |
| |
| (6) |
Incorporated by reference from the Company’s Annual Report
on Form 10-K, for the year ended January 2, 1998, as
filed on April 1, 1998. |
| |
| (7) |
Incorporated by reference from the Company’s Annual Report
on Form 10-K, for the year ended January 1, 1999, as
filed on April 1, 1999. |
| |
| (8) |
Incorporated by reference from the Company’s Annual Report
on Form 10-K, for the year ended December 31, 1999, as
filed on March 30, 2000. |
| |
| (9) |
Incorporated by reference from the Company’s Annual Report
on Form 10-K, for the year ended December 29, 2000, as
filed on March 29, 2001. |
|
|
| (10) |
Incorporated by reference to the Company’s Annual Report on
Form 10-K, for the year ended December 28, 2001, as
filed on March 28, 2002. |
| |
| (11) |
Incorporated by reference to the Company’s Quarterly
Report, for the period ended June 28, 2002, as filed on
August 12, 2002. |
| |
| (12) |
Incorporated by reference to the Company’s Annual Report on
Form 10-K, for the year ended January 3, 2003, as
filed on April 3, 2003. |
| |
| (13) |
Incorporated by reference from the Company’s Proxy
Statement, for its Annual Meeting of Stockholders held on
June 18, 2003, as filed on May 19, 2003. |
41
|
|
| (14) |
Incorporated by reference to Exhibit 4.1 to Amendment
No. 1 to the Company’s Registration Statement on
Form 8-A/ A, as filed on April 18, 2003. |
| |
| (15) |
Incorporated by reference to the Company’s Quarterly
Report, for the period ended April 4, 2003, as filed on
May 19, 2003. |
| |
| (16) |
Incorporated by reference from the Company’s Annual Report
on Form 10-K/ A, for the year ended December 29, 2000,
as filed on May 9, 2001. |
| |
| (17) |
Incorporated by reference to the Company’s Annual Report on
Form 10-K, for the year ended January 2, 2004, as
filed on March 17, 2004. |
| |
| (18) |
Incorporated by reference to the Company’s Quarterly
Report, for the period ended April 2, 2004, as filed on
May 12, 2004. |
| |
| (19) |
Incorporated by reference to the Company’s Current Report
on Form 8-K, as filed on June 9, 2004. |
| |
| (20) |
Incorporated by reference to the Company’s Quarterly
Report, for the period ended October 1, 2004, as filed on
November 10, 2004. |
| |
| (21) |
Incorporated by reference to the Company’s Current Report
on Form 8-K, as filed on June 13, 2003. |
| |
| (22) |
Incorporated by reference to the Company’s Annual Report on
Form 10-K, for the year ended December 31, 2004, as
filed on March 30, 2005. |
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this Amendment No. 1 to its Annual Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
| |
|
| |
David Bailey |
| |
President and Chief Executive Officer |
| |
(principal executive officer) |
| |
| |
Date: April 20, 2005 |
43
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004,
JANUARY 2, 2004 AND JANUARY 3, 2003
F-1
STAAR SURGICAL COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
STAAR Surgical Company
Monrovia, CA
We have audited the accompanying consolidated balance sheets of
STAAR Surgical Company and subsidiaries as of December 31,
2004 and January 2, 2004, and the related consolidated
statements of operations, stockholders’ equity, and cash
flows for each of the three years in the period ended
December 31, 2004. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of STAAR Surgical Company and
subsidiaries as of December 31, 2004 and January 2,
2004, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with standards of the Public
Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 16, 2005
expressed an unqualified opinion thereon.
Los Angeles, California
March 16, 2005, except for Note 19
which is as of April 4, 2005.
F-2
STAAR SURGICAL COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
STAAR Surgical Company
Monrovia, CA
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control over
Financial Reporting included in Item 9A, that STAAR
Surgical Company maintained effective internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). STAAR Surgical Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the
company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that STAAR Surgical
Company maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all
material respects, based on criteria established in COSO. Also
in our opinion, STAAR Surgical Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria
established in COSO.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of STAAR Surgical Company as of
December 31, 2004 and January 2, 2004 and the related
consolidated statements of income, changes in stockholders’
equity, and cash flows for each of the three years in the period
ended December 31, 2004, and our report dated
March 16, 2005, except for Note 19 which is as of
April 4, 2005, expressed an unqualified opinion thereon.
Los Angeles, California
March 16, 2005
F-3
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and January 2, 2004
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, except | |
| |
|
par value amounts) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
4,187 |
|
|
$ |
7,286 |
|
| |
Short-term investments
|
|
|
5,125 |
|
|
|
— |
|
| |
Accounts receivable, less allowance for doubtful accounts and
sales returns
|
|
|
6,217 |
|
|
|
5,675 |
|
| |
Inventories
|
|
|
15,084 |
|
|
|
12,802 |
|
| |
Prepaids, deposits and other current assets
|
|
|
1,969 |
|
|
|
2,001 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
32,582 |
|
|
|
27,764 |
|
| |
|
|
|
|
|
|
|
Investment in joint venture
|
|
|
125 |
|
|
|
397 |
|
|
Property, plant and equipment, net
|
|
|
6,163 |
|
|
|
6,638 |
|
|
Patents and licenses, net of accumulated amortization of $6,089
and $5,583
|
|
|
5,400 |
|
|
|
6,059 |
|
|
Goodwill
|
|
|
7,534 |
|
|
|
6,427 |
|
|
Other assets
|
|
|
169 |
|
|
|
91 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
51,973 |
|
|
$ |
47,376 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Notes payable
|
|
$ |
3,004 |
|
|
$ |
2,950 |
|
| |
Accounts payable
|
|
|
5,313 |
|
|
|
4,544 |
|
| |
Other current liabilities
|
|
|
5,162 |
|
|
|
4,387 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
13,479 |
|
|
|
11,881 |
|
|
Other long-term liabilities
|
|
|
632 |
|
|
|
72 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
14,111 |
|
|
|
11,953 |
|
| |
|
|
|
|
|
|
|
Minority interest
|
|
|
22 |
|
|
|
204 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Preferred stock, $.01 par value, 10,000 shares
authorized, none issued
|
|
|
— |
|
|
|
— |
|
| |
Common stock, $.01 par value; 30,000 shares
authorized; issued and outstanding 20,664 and 18,403 shares
|
|
|
207 |
|
|
|
184 |
|
| |
Additional paid-in capital
|
|
|
98,691 |
|
|
|
85,948 |
|
| |
Accumulated other comprehensive income
|
|
|
1,024 |
|
|
|
572 |
|
| |
Accumulated deficit
|
|
|
(60,478 |
) |
|
|
(49,146 |
) |
| |
|
|
|
|
|
|
| |
|
|
39,444 |
|
|
|
37,558 |
|
|
Notes receivable from officers and directors
|
|
|
(1,604 |
) |
|
|
(2,339 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
37,840 |
|
|
|
35,219 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
51,973 |
|
|
$ |
47,376 |
|
| |
|
|
|
|
|
|
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-4
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2004, January 2, 2004 and
January 3, 2003
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, | |
| |
|
except per share amounts) | |
|
Sales
|
|
$ |
51,685 |
|
|
$ |
50,409 |
|
|
$ |
47,880 |
|
|
Royalty and other income
|
|
|
— |
|
|
|
49 |
|
|
|
368 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total revenues
|
|
|
51,685 |
|
|
|
50,458 |
|
|
|
48,248 |
|
|
Cost of sales
|
|
|
25,542 |
|
|
|
22,621 |
|
|
|
24,099 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Gross profit
|
|
|
26,143 |
|
|
|
27,837 |
|
|
|
24,149 |
|
| |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
General and administrative
|
|
|
9,253 |
|
|
|
9,343 |
|
|
|
8,959 |
|
| |
Marketing and selling
|
|
|
20,302 |
|
|
|
19,509 |
|
|
|
16,833 |
|
| |
Research and development
|
|
|
6,246 |
|
|
|
5,120 |
|
|
|
4,016 |
|
| |
Other charges
|
|
|
500 |
|
|
|
390 |
|
|
|
1,454 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total selling, general and administrative expenses
|
|
|
36,301 |
|
|
|
34,362 |
|
|
|
31,262 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Operating loss
|
|
|
(10,158 |
) |
|
|
(6,525 |
) |
|
|
(7,113 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Equity in earnings of joint venture
|
|
|
(191 |
) |
|
|
11 |
|
|
|
36 |
|
| |
Interest income
|
|
|
219 |
|
|
|
256 |
|
|
|
361 |
|
| |
Interest expense
|
|
|
(215 |
) |
|
|
(322 |
) |
|
|
(579 |
) |
| |
Other income (expense)
|
|
|
99 |
|
|
|
(582 |
) |
|
|
(603 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Total other expense, net
|
|
|
(88 |
) |
|
|
(637 |
) |
|
|
(785 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and minority interest
|
|
|
(10,246 |
) |
|
|
(7,162 |
) |
|
|
(7,898 |
) |
|
Provision for income taxes
|
|
|
1,057 |
|
|
|
1,127 |
|
|
|
8,805 |
|
|
Minority interest
|
|
|
29 |
|
|
|
68 |
|
|
|
75 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(11,332 |
) |
|
$ |
(8,357 |
) |
|
$ |
(16,778 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic and diluted
|
|
$ |
(0.58 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.98 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic and diluted
|
|
|
19,602 |
|
|
|
17,704 |
|
|
|
17,142 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-5
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
Years Ended December 31, 2004, January 2, 2004 and
January 3, 2003
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
| |
|
Common | |
|
Common | |
|
Additional | |
|
Other | |
|
|
|
|
|
|
| |
|
Stock | |
|
Stock Par | |
|
Paid-In | |
|
Comprehensive | |
|
Accumulated | |
|
Notes | |
|
|
| |
|
Shares | |
|
Value | |
|
Capital | |
|
Income (Loss) | |
|
(Deficit) | |
|
Receivable | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance, at December 28, 2001
|
|
|
17,158 |
|
|
$ |
172 |
|
|
$ |
75,573 |
|
|
$ |
(1,728 |
) |
|
$ |
(24,011 |
) |
|
$ |
(3,864 |
) |
|
$ |
46,142 |
|
|
Common stock issued upon exercise of options
|
|
|
5 |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
Common stock issued as payment for services
|
|
|
39 |
|
|
|
— |
|
|
|
120 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
120 |
|
|
Common stock issued pursuant to employment contract
|
|
|
3 |
|
|
|
— |
|
|
|
12 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12 |
|
|
Stock-based consultant expense
|
|
|
— |
|
|
|
— |
|
|
|
236 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
236 |
|
|
Treasury stock acquired in satisfaction of note receivable
|
|
|
(243 |
) |
|
|
(3 |
) |
|
|
(970 |
) |
|
|
— |
|
|
|
— |
|
|
|
2,129 |
|
|
|
1,156 |
|
|
Proceeds from notes receivable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
96 |
|
|
|
96 |
|
|
Accrued interest on notes receivable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(242 |
) |
|
|
(242 |
) |
|
Reversal of notes receivable reserve
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,814 |
) |
|
|
(1,814 |
) |
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,617 |
|
|
|
— |
|
|
|
— |
|
|
|
1,617 |
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(16,778 |
) |
|
|
— |
|
|
|
(16,778 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, at January 3, 2003
|
|
|
16,962 |
|
|
|
169 |
|
|
|
74,977 |
|
|
|
(111 |
) |
|
|
(40,789 |
) |
|
|
(3,695 |
) |
|
|
30,551 |
|
|
Common stock issued upon exercise of warrants
|
|
|
387 |
|
|
|
4 |
|
|
|
1,549 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,553 |
|
|
Common stock issued as payment for services
|
|
|
54 |
|
|
|
1 |
|
|
|
278 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
279 |
|
|
Stock-based consultant expense
|
|
|
— |
|
|
|
— |
|
|
|
206 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
206 |
|
|
Net proceeds from private placement
|
|
|
1,000 |
|
|
|
10 |
|
|
|
8,938 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,948 |
|
|
Proceeds from notes receivable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,270 |
|
|
|
3,270 |
|
|
Accrued interest on notes receivable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(118 |
) |
|
|
(118 |
) |
|
Reversal of notes receivable reserve
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,796 |
) |
|
|
(1,796 |
) |
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
683 |
|
|
|
— |
|
|
|
— |
|
|
|
683 |
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8,357 |
) |
|
|
— |
|
|
|
(8,357 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, at January 2, 2004
|
|
|
18,403 |
|
|
|
184 |
|
|
|
85,948 |
|
|
|
572 |
|
|
|
(49,146 |
) |
|
|
(2,339 |
) |
|
|
35,219 |
|
|
Common stock issued upon exercise of options
|
|
|
250 |
|
|
|
3 |
|
|
|
826 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
829 |
|
|
Common stock issued as payment for services
|
|
|
11 |
|
|
|
— |
|
|
|
60 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
60 |
|
|
Stock-based consultant expense
|
|
|
— |
|
|
|
— |
|
|
|
231 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
231 |
|
|
Net proceeds from private placement
|
|
|
2,000 |
|
|
|
20 |
|
|
|
11,626 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,646 |
|
|
Proceeds from notes receivable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
330 |
|
|
|
330 |
|
|
Accrued interest on notes receivable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(95 |
) |
|
|
(95 |
) |
|
Notes receivable reserve
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
500 |
|
|
|
500 |
|
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
452 |
|
|
|
— |
|
|
|
— |
|
|
|
452 |
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11,332 |
) |
|
|
— |
|
|
|
(11,332 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, at December 31, 2004
|
|
|
20,664 |
|
|
$ |
207 |
|
|
$ |
98,691 |
|
|
$ |
1,024 |
|
|
$ |
(60,478 |
) |
|
$ |
(1,604 |
) |
|
$ |
37,840 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-6
STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, January 2, 2004 and
January 3, 2003
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
$ |
(11,332 |
) |
|
$ |
(8,357 |
) |
|
$ |
(16,778 |
) |
| |
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation of property and equipment
|
|
|
2,005 |
|
|
|
1,950 |
|
|
|
2,171 |
|
| |
|
Amortization of intangibles
|
|
|
688 |
|
|
|
952 |
|
|
|
933 |
|
| |
|
Write-off of patents
|
|
|
— |
|
|
|
2,102 |
|
|
|
— |
|
| |
|
Loss on disposal of fixed assets
|
|
|
175 |
|
|
|
159 |
|
|
|
— |
|
| |
|
Equity in earnings of joint venture
|
|
|
191 |
|
|
|
(11 |
) |
|
|
(36 |
) |
| |
|
Deferred income taxes
|
|
|
— |
|
|
|
— |
|
|
|
9,132 |
|
| |
|
Stock-based consultant expense
|
|
|
231 |
|
|
|
206 |
|
|
|
236 |
|
| |
|
Common stock issued for services
|
|
|
60 |
|
|
|
279 |
|
|
|
132 |
|
| |
|
Non-cash restructuring and inventory write-down
|
|
|
— |
|
|
|
— |
|
|
|
1,225 |
|
| |
|
Net change in notes receivable reserve
|
|
|
500 |
|
|
|
(1,364 |
) |
|
|
— |
|
| |
|
Other
|
|
|
(95 |
) |
|
|
(124 |
) |
|
|
(226 |
) |
| |
|
Minority interest
|
|
|
21 |
|
|
|
104 |
|
|
|
144 |
|
| |
Changes in working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable
|
|
|
(542 |
) |
|
|
474 |
|
|
|
1,462 |
|
| |
|
Inventories
|
|
|
(2,282 |
) |
|
|
(1,041 |
) |
|
|
3,108 |
|
| |
|
Prepaids, deposits and other current assets
|
|
|
32 |
|
|
|
380 |
|
|
|
(232 |
) |
| |
|
Accounts payable
|
|
|
769 |
|
|
|
351 |
|
|
|
(966 |
) |
| |
|
Other current liabilities
|
|
|
775 |
|
|
|
(206 |
) |
|
|
264 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by (used in) operating activities
|
|
|
(8,804 |
) |
|
|
(4,146 |
) |
|
|
569 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Acquisition of property and equipment
|
|
|
(1,705 |
) |
|
|
(1,309 |
) |
|
|
(874 |
) |
| |
Acquisition of patents and licenses
|
|
|
(16 |
) |
|
|
(75 |
) |
|
|
(75 |
) |
| |
Purchase of short-term investments
|
|
|
(8,000 |
) |
|
|
— |
|
|
|
— |
|
| |
Sale of short-term investments
|
|
|
2,875 |
|
|
|
— |
|
|
|
— |
|
| |
Purchase of minority interest in subsidiary
|
|
|
(768 |
) |
|
|
— |
|
|
|
— |
|
| |
Proceeds from notes receivable and other
|
|
|
330 |
|
|
|
3,270 |
|
|
|
10 |
|
| |
Change in other assets
|
|
|
(91 |
) |
|
|
189 |
|
|
|
493 |
|
| |
Dividends received from joint venture
|
|
|
81 |
|
|
|
76 |
|
|
|
40 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by (used in) investing activities
|
|
|
(7,294 |
) |
|
|
2,151 |
|
|
|
(406 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net borrowings (payments) under notes payable and long-term
debt
|
|
|
72 |
|
|
|
(2,912 |
) |
|
|
(2,598 |
) |
| |
Restricted cash
|
|
|
— |
|
|
|
— |
|
|
|
2,000 |
|
| |
Proceeds from the exercise of stock options and warrants
|
|
|
829 |
|
|
|
1,553 |
|
|
|
6 |
|
| |
Net proceeds from private placement
|
|
|
11,646 |
|
|
|
8,948 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by (used in) financing activities
|
|
|
12,547 |
|
|
|
7,589 |
|
|
|
(592 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
452 |
|
|
|
683 |
|
|
|
585 |
|
| |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(3,099 |
) |
|
|
6,277 |
|
|
|
156 |
|
|
Cash and cash equivalents, at beginning of year
|
|
|
7,286 |
|
|
|
1,009 |
|
|
|
853 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of year
|
|
$ |
4,187 |
|
|
$ |
7,286 |
|
|
$ |
1,009 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-7
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and January 2,
2004
|
|
| Note 1 — |
Significant Accounting Policies |
Organization and Description of Business
STAAR Surgical Company (the “Company”), a Delaware
corporation, was incorporated in 1982 for the purpose of
developing, producing, and marketing intraocular lenses
(“IOLs”) and other products for minimally invasive
ophthalmic surgery. The Company has evolved to become a
developer, manufacturer and global distributor of products used
by ophthalmologists and other eye care professionals to improve
or correct vision in patients with cataracts, refractive
conditions and glaucoma. Products sold by the Company for use in
restoring vision adversely affected by cataracts include its
line of silicone and Collamer IOLs, the Preloaded Injector, a
three-piece silicone IOL preloaded into a single-use disposable
injector, the
SonicWAVEtm
Phacoemulsification System,
STAARVISCtm II,
a viscoelastic material, and Cruise Control, a disposable filter
which allows for a significantly faster, cleaner
phacoemulsification procedure and is compatible with all
phacoemulsification equipment utilizing Venturi and peristaltic
pump technologies. Products sold by the Company for use in
correcting refractive conditions such as myopia
(near-sightedness), hyperopia (far-sightedness) and astigmatism
include the
VISIANtm
ICL (“ICL”) and the
VISIANtm
TICL (“TICL”). The Company’s
AquaFlowtm
Collagen Glaucoma Drainage Device is surgically implanted in the
outer tissues of the eye to maintain a space that allows
increased drainage of intraocular fluid thereby reducing
intraocular pressure, which otherwise may lead to deterioration
of vision in patients with glaucoma. The Company also sells
other instruments, devices and equipment that are manufactured
either by the Company or by others in the ophthalmic products
industry.
The Company’s only subsidiary is STAAR Surgical AG, a
wholly owned subsidiary formed in Switzerland to develop,
manufacture and distribute certain of the Company’s
products worldwide, including the ICL and the AquaFlow device.
STAAR Surgical AG also controls a major European sales
subsidiary that distributes both the Company’s products and
products from various other manufacturers. Investment in the
subsidiary was increased from 80% to 100% during the fourth
quarter of 2002, when STAAR Surgical AG purchased the remaining
shares of the subsidiary (see Note 9).
|
|
|
Canon Staar Joint Venture |
In 1988, the Company entered into a joint venture with Canon
Inc. and Canon Sales Co., Inc. for the principal purpose of
designing, manufacturing, and selling in Japan intraocular
lenses and other ophthalmic products. The joint venture will
market its products worldwide through Canon, Canon Sales or
STAAR or such other distributors as the Board of Directors of
the joint venture may approve. The terms of any distribution
arrangement will require the unanimous approval of the Board of
Directors of the joint venture. Each joint venture party is
entitled to appoint one member of the Board of Directors of the
joint venture. Certain matters require the unanimous approval of
the directors. Upon the occurrence of certain events, including
the merger, sale of substantially all of the assets or change in
the management of one of the parties, any of the other parties
may have the right to acquire the first party’s interest in
the joint venture at book-value. The Company also granted to the
joint venture a perpetual exclusive license under the Licensed
Technology (as defined in the license agreement) to make and
sell any products in Japan, and a perpetual non-exclusive
license to do so in the rest of the world.
In 2001, the parties entered into a settlement agreement whereby
(i) they reconfirmed the joint venture agreement and the
license agreement, (ii) they agreed that the Company would
promptly commence the transfer of the Licensed Technology to the
joint venture, (iii) the Company granted the joint venture
an exclusive license to make any products in China and sell such
products in Japan and China (subject to the existing rights of
third parties), (iv) the Company agreed to provide the
joint venture with raw materials, (v) the joint venture
granted Canon Sales Co., Inc. the right to distribute its
products in Japan on specified terms, and (iv) the parties
settled certain patent disputes.
F-8
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company, its wholly owned and its majority owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Assets and
liabilities of foreign subsidiaries are translated at rates of
exchange in effect at the close of the year. Revenues and
expenses are translated at the weighted average of exchange
rates in effect during the year. The resulting translation gains
and losses are deferred and are shown as a separate component of
stockholders’ equity as accumulated other comprehensive
income (loss). During 2004, 2003 and 2002, the net foreign
translation gain was $452,000, $683,000 and $585,000,
respectively, and net foreign currency transaction loss was
$190,000, $107,000 and $458,000, respectively.
Investment in the Company’s joint venture, Canon Staar Co.,
Inc., is accounted for using the equity method of accounting
(see Note 6).
The Company’s fiscal year ends on the Friday nearest
December 31 and each of the Company’s quarterly
reporting periods generally consists of 13 weeks.
F-9
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Revenue Recognition
The Company recognizes revenue when realized or realizable and
earned, which is when the following criteria are met: persuasive
evidence of an arrangement exists; delivery has occurred; the
sale price is fixed and determinable; and collectibility is
reasonably assured. We record revenue from product sales when
title and risk of ownership has been transferred to the
customer, which is typically upon delivery to the customer. The
exception to this recognition policy is revenue from intraocular
lenses distributed on a consignment basis, which is recognized
upon notification of implantation in a patient.
The Company may bundle the sale of phacoemulsification equipment
to customers with multi-year agreements to purchase minimum
quantities of foldable IOLs. The Company recognizes the revenue
from the equipment based on monthly purchases of minimum
quantities of IOLs over the life of the agreement.
Revenue from license and technology agreements is recorded as
income, when earned, according to the terms of the respective
agreements.
The Company generally permits returns of product if such product
is returned within the time allowed by the Company, and in good
condition. Allowances for returns are provided for based upon an
analysis of our historical patterns of returns matched against
the sales from which they originated. To date, historical
product returns have been within the Company’s estimates.
The Company maintains provisions for uncollectible accounts for
estimated losses resulting from the inability of its customers
to remit payments. The Company continuously monitors collections
and payments from its customers and maintains a provision for
estimated credit losses based upon its historical experience and
any specific customer collection issues that have been
identified.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
credit risk principally consist of trade receivables. This risk
is limited due to the large number of customers comprising the
Company’s customer base, and their geographic dispersion.
Ongoing credit evaluations of customers’ financial
condition are performed and, generally, no collateral is
required. The Company maintains reserves for potential credit
losses and such losses, in the aggregate, have not exceeded
management’s expectations.
Income Taxes
The Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and
the tax basis of the Company’s assets and liabilities along
with net operating loss and credit carryforwards. A valuation
allowance is recognized if, based on the weight of available
evidence, it is more likely than not that some portion or all of
the deferred tax asset may not be realized. The impact on
deferred taxes of changes in tax rates and laws, if any, are
applied to the years during which temporary differences are
expected to be settled and reflected in the financial statements
in the period of enactment.
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Short-Term Investments
Short-term investments are classified as available for sale and
are reported at fair value. Unrealized holding gains and losses,
if any, net of the related income tax effect, are excluded from
income and are reported in other comprehensive income. Realized
gains and losses are included in income on the specific
identification method.
F-10
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Inventories
Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market. Inventory costs are
comprised of material, direct labor, and overhead. The Company
records inventory provisions, based on a review of forecasted
demand and inventory levels.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation
on property, plant, and equipment is computed using the
straight-line method over the estimated useful lives of the
assets, generally ranging from 3 to 10 years. Major
improvements are capitalized and minor replacements, maintenance
and repairs are charged to expense as incurred.
Demonstration Equipment
In the normal course of business, the Company maintains
demonstration and bundled equipment, primarily
phacoemulsification surgical equipment, for the purpose and
intent of selling similar equipment or related products to the
customer in the future. Demonstration equipment is not held for
sale and is recorded as property, plant and equipment. The
assets are amortized utilizing the straight-line method over
their estimated economic life not to exceed three years.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the
fair value of identifiable net assets acquired in business
combinations accounted for as purchases. The Company adopted
Statement of Financial Accounting Standards (“SFAS”)
No. 141, “Business Combinations,” and
No. 142, “Goodwill and Other Intangible Assets,”
on December 29, 2001.
Goodwill, which has an indefinite life and was previously
amortized on a straight-line basis over the periods benefited,
is no longer amortized to earnings but instead is subject to
periodic testing for impairment. Intangible assets determined to
have definite lives are amortized over their remaining useful
lives. Goodwill of a reporting unit is tested for impairment on
an annual basis or between annual tests if an event occurs or
circumstances change that would reduce the fair value of a
reporting unit below its carrying amount. As provided under
SFAS No. 142, an annual assessment was completed
during fiscal year 2004 and no impairment was identified. As of
December 31, 2004, the carrying value of goodwill was
$7.5 million.
The Company also has other intangible assets consisting of
patents and licenses, with a gross book value of
$11.5 million and accumulated amortization of
$6.1 million as of December 31, 2004. The Company
capitalizes the costs of acquiring patents and licenses.
Amortization is computed on the straight-line basis over the
estimated useful lives, which are based on legal and contractual
provisions, and range from 10 to 20 years. Aggregate
amortization expense for amortized other intangible assets was
$688,000, $952,000 and $933,000 for the years ended
December 31, 2004, January 2, 2004 and January 3,
2003, respectively.
F-11
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table shows the estimated amortization expense for
these assets for each of the five succeeding years (in
thousands):
| |
|
|
|
|
|
| Fiscal Year |
|
|
| |
|
|
|
2005
|
|
$ |
481 |
|
|
2006
|
|
|
479 |
|
|
2007
|
|
|
479 |
|
|
2008
|
|
|
479 |
|
|
2009
|
|
|
478 |
|
| |
|
|
|
| |
Total
|
|
$ |
2,396 |
|
| |
|
|
|
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, “Accounting for
the Impairment of Long-Lived Assets,” intangible and other
long lived-assets are reviewed for impairment whenever events
such as product discontinuance, plant closures, product
dispositions or other changes in circumstances indicate that the
carrying amount may not be recoverable. In reviewing for
impairment, the Company compares the carrying value of such
assets to the estimated undiscounted future cash flows expected
from the use of the assets and their eventual disposition. When
the estimated undiscounted future cash flows are less than their
carrying amount, an impairment loss is recognized equal to the
difference between the assets’ fair value and their
carrying value.
During the year ended January 2, 2004, the Company wrote
down $2.1 million (net book value) in capitalized patent
costs in connection with its routine evaluation of patent costs.
The write-down related to patents acquired in the purchase of
its majority interest in Circuit Tree Medical, a developer and
manufacturer of phacoemulsification equipment, whose ongoing
operations were moved to the Company’s Monrovia, CA
facility during the quarter. The Company believes the write-down
was necessary based upon the subsidiary’s historical losses
and management’s uncertainty about whether the Company will
be able to recover the cost. There were no impairments of
long-lived assets identified during the year ended
December 31, 2004.
Accounting Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
footnotes thereto. Actual results may materially differ from
those estimates.
Fair Value of Financial Instruments
The carrying values reflected in the consolidated balance sheets
for cash and cash equivalents, accounts receivable, accounts
payable, and notes payable approximate their fair values because
of the short maturity of these instruments.
Loss Per Share
The Company presents loss per share data in accordance with the
provision of SFAS No. 128, “Earnings per
Share,” which provides for the calculation of basic and
diluted earnings per share. Loss per share of common stock is
computed by using the weighted average number of common shares
outstanding during the period. Common stock equivalents are not
included in the determination of the weighted average number of
shares outstanding, as they would be antidilutive. For the years
ended December 31, 2004, January 2, 2004, and
January 3, 2003, 3.1 million, 3.2 million, and
3.1 million options to purchase shares of the
Company’s common stock, respectively, were excluded from
the computation.
F-12
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock Based Compensation
The Company accounts for stock-based compensation in accordance
with Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”), and has adopted the
disclosure provisions of SFAS No. 123,
“Accounting for Stock Based Compensation”
(“SFAS 123”). SFAS 123 defines a fair value
based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt
that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by
APB 25. If the APB 25 intrinsic value method of
accounting is used, SFAS 123 requires pro forma disclosures
of net income and earnings per share as if the fair value based
method of accounting for stock based compensation had been
applied. The Company records expense in an amount equal to the
excess of the quoted market price on the grant date over the
option price. Such expense is recognized at the grant date for
options fully vested. For options with a vesting period, the
expense is recognized over the vesting period.
SFAS 123, “Accounting for Stock-Based
Compensation” requires the Company to provide pro forma
information regarding net income and earnings per share as if
compensation expense for the Company’s stock option plans
had been determined in accordance with the fair value based
method. The fair value of each stock option grant is estimated
on the grant date using the Black-Scholes option-pricing model
with the following assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
Expected volatility
|
|
|
72 |
% |
|
|
69 |
% |
|
|
66 |
% |
|
Risk-free interest rate
|
|
|
4.22 |
% |
|
|
4.37 |
% |
|
|
4.50 |
% |
|
Expected holding period (in years)
|
|
|
4.2 |
|
|
|
4.8 |
|
|
|
5.4 |
|
The weighted average fair value of options granted during the
year ended December 31, 2004, January 2, 2004 and
January 3, 2003 was $2.14 to $4.55, $1.91 to $7.10 and
$1.27 to $2.44, respectively.
Pro forma net loss and loss per share for fiscal years 2004,
2003 and 2002, had the Company accounted for stock options
issued to employees and others in accordance with the fair value
method of SFAS 123, are as follows (in thousands, except
per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
(11,332 |
) |
|
$ |
(8,357 |
) |
|
$ |
(16,778 |
) |
|
Add: Stock-based employee compensation expense included in
reported net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
|
|
|
(739 |
) |
|
|
(1,563 |
) |
|
|
(1,679 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Pro forma
|
|
$ |
(12,071 |
) |
|
$ |
(9,920 |
) |
|
$ |
(18,457 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
(0.58 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.98 |
) |
| |
Pro forma
|
|
$ |
(0.62 |
) |
|
$ |
(0.56 |
) |
|
$ |
(1.08 |
) |
Comprehensive Loss
The Company presents comprehensive losses in its Consolidated
Statement of Changes in Stockholders’ Equity in accordance
with SFAS No. 130, “Reporting Comprehensive
Income” (“SFAS 130”). Total comprehensive
loss includes, in addition to net loss, changes in equity that
are excluded from the consolidated
F-13
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
statements of operations and are recorded directly into a
separate section of stockholders’ equity on the
consolidated balance sheets.
Comprehensive loss and its components consist of the following
(in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net loss
|
|
$ |
(11,332 |
) |
|
$ |
(8,357 |
) |
|
$ |
(16,778 |
) |
|
Foreign currency translation adjustment
|
|
|
452 |
|
|
|
683 |
|
|
|
1,617 |
|
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$ |
(10,880 |
) |
|
$ |
(7,674 |
) |
|
$ |
(15,161 |
) |
| |
|
|
|
|
|
|
|
|
|
Segments of an Enterprise
The Company reports segment information in accordance with
SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information”
(“SFAS 131”). Under SFAS 131 all publicly
traded companies are required to report certain information
about the operating segments, products, services and
geographical areas in which they operate and their major
customers. While the Company has expanded its marketing focus
beyond the cataract market to include the refractive and
glaucoma markets, the cataract market remains its primary source
of revenues and, accordingly, the Company operates as one
business segment (Note 17).
Research and Development Costs
Expenditures for research activities relating to product
development and improvement are charged to expense as incurred.
Reclassifications
Certain reclassifications have been made to the prior year
consolidated financial statements to conform to the 2004
presentation.
New Accounting Pronouncements
In October 2004, the American Jobs Creation Act of 2004
(“Act”) became effective in the U.S. Two
provisions of the Act may impact the Company’s provision
(benefit) for income taxes in future periods, namely those
related to the qualified production activities deduction
(“QPA”) and foreign earnings repatriation
(“FER”).
The QPA will be effective for the Company’s
U.S. federal tax return year beginning after
December 31, 2004. In summary, the Act provides for a
percentage deduction of earnings from qualified production
activities, as defined, commencing with an initial deduction of
3 percent for tax years beginning after 2009, with the
result that the statutory federal tax rate currently applicable
to the Company’s qualified production activities of
35 percent could be reduced initially to 33.95 percent
and ultimately to 31.85 percent. However, the Act also
provides for the phased elimination of the extraterritorial
income exclusion provision of the Internal Revenue Code, which
have previously resulted in tax benefits to the Company. Due to
the interaction of the law provisions noted above as well as the
particulars of the Company’s tax position, the ultimate
effect of the QPA on the Company’s future provision
(benefit) for income taxes has not been determined at this time.
The Financial Accounting Standards Board (“FASB”)
issued FASB Staff Position FAS 109-1, “Application of
FASB Statement No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004” (“FSP
109-1”), in December 2004. FSP 109-1 requires that tax
benefits resulting from the QPA should be recognized no earlier
than the year in which they are reported in the entity’s
tax return, and that there is to be no revaluation of recorded
deferred tax assets and liabilities as would be the case had
there been a change in an applicable statutory rate.
F-14
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The FER provision of the Act provides generally for a one-time
85 percent dividends received deduction for qualifying
repatriations of foreign earnings to the U.S. Qualified
repatriated funds must be reinvested in the U.S. in certain
qualifying activities and expenditures, as defined by the Act.
In December 2004, the FASB issued FASB Staff Position
FAS 109-2, “Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004” (“FSP 109-2”). FSP 109-2
allows additional time for entities potentially impacted by the
FER provision to determine whether any foreign earnings will be
repatriated under this provision. At this time, the Company has
not undertaken an evaluation of the application of the FER
provision and any potential benefits of effecting such
repatriations under this provision. Numerous factors, including
previous actual and deemed repatriations under federal tax law
provisions, are factors impacting the availability of the FER
provision to the Company and its potential benefit to the
Company, if any. The Company intends to examine the issue and
will provide updates in subsequent periods.
In November 2004, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 151,
“Inventory Costs.” This statement amends the guidance
in ARB No. 43, Chapter 4, “Inventory
Pricing,” to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted
materials (spoilage). SFAS No. 151 requires that those
items be recognized as current-period charges. In addition, this
statement requires that allocation of fixed production overheads
to costs of conversions be based upon the normal capacity of the
production facilities. The provisions of SFAS No. 151
are effective for inventory cost incurred in fiscal years
beginning after June 15, 2005. As such, the Company is
required to adopt these provisions at the beginning of fiscal
2006. The adoption of this pronouncement is not expected to have
a material effect on the Company’s financial statements.
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment.” This statement is a revision of
SFAS No. 123, “Accounting for Stock-Based
Compensation,” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and its
related implementation guidance. SFAS No. 123R
addresses all forms of share-based payment (“SBP”)
awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation
rights. Under SFAS No. 123R, SBP awards result in a
cost that will be measured at fair value on the awards’
grant date, based on the estimated number of awards that are
expected to vest. This statement is effective for public
entities as of the beginning of the next fiscal year that begins
after June 15, 2005. The Company has not quantified the
potential effect of adoption of SFAS No. 123R, but
believes that the adoption of this statement will result in a
decrease to earnings.
In December 2004, the FASB issued SFAS No. 153,
“Exchange of Nonmonetary Assets.” This statement
amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
The provisions of this statement are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after
June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods
beginning after December 16, 2004. The provisions of this
statement should be applied prospectively. The adoption of this
pronouncement is not expected to have a material effect on the
Company’s financial statements.
F-15
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 2 — |
Short-Term Investments |
Short-term investments consisted of the following at
December 31, 2004 and January 2, 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 |
| |
|
| |
|
|
| |
|
|
|
Market | |
|
|
|
Market |
| |
|
Cost | |
|
Value | |
|
Cost |
|
Value |
| |
|
| |
|
| |
|
|
|
|
|
Auction rate securities
|
|
$ |
5,125 |
|
|
$ |
5,125 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
5,125 |
|
|
$ |
5,125 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The short-term investments are comprised solely of taxable
auction-rate securities within a closed-end fund with no stated
maturity date. Due to the fact that these investments have
frequent interest rate resets, the Company did not have any
gross unrealized gains or losses at December 31, 2004 or
January 2, 2004. The Company classifies the securities as
available for sale investments.
|
|
| Note 3 — |
Accounts Receivable |
Accounts receivable consisted of the following at
December 31, 2004 and January 2, 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Domestic
|
|
$ |
2,602 |
|
|
$ |
2,834 |
|
|
Foreign
|
|
|
4,075 |
|
|
|
3,575 |
|
| |
|
|
|
|
|
|
| |
|
|
6,677 |
|
|
|
6,409 |
|
|
Less allowance for doubtful accounts and sales returns
|
|
|
460 |
|
|
|
734 |
|
| |
|
|
|
|
|
|
| |
|
$ |
6,217 |
|
|
$ |
5,675 |
|
| |
|
|
|
|
|
|
Inventories consisted of the following at December 31, 2004
and January 2, 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Raw materials and purchased parts
|
|
$ |
985 |
|
|
$ |
830 |
|
|
Work in process
|
|
|
2,253 |
|
|
|
1,273 |
|
|
Finished goods
|
|
|
11,846 |
|
|
|
10,699 |
|
| |
|
|
|
|
|
|
| |
|
$ |
15,084 |
|
|
$ |
12,802 |
|
| |
|
|
|
|
|
|
|
|
| Note 5 — |
Property, Plant and Equipment |
Property, plant and equipment consisted of the following at
December 31, 2004 and January 2, 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Machinery and equipment
|
|
$ |
12,388 |
|
|
$ |
12,791 |
|
|
Furniture and fixtures
|
|
|
4,378 |
|
|
|
3,808 |
|
|
Leasehold improvements
|
|
|
4,826 |
|
|
|
4,608 |
|
| |
|
|
|
|
|
|
| |
|
|
21,592 |
|
|
|
21,207 |
|
|
Less accumulated depreciation and amortization
|
|
|
15,429 |
|
|
|
14,569 |
|
| |
|
|
|
|
|
|
| |
|
$ |
6,163 |
|
|
$ |
6,638 |
|
| |
|
|
|
|
|
|
F-16
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Depreciation expense for the years ended December 31, 2004,
January 2, 2004, and January 3, 2003 was
$2.0 million, $2.0 million and $2.2 million,
respectively.
|
|
| Note 6 — |
Investment in Joint Venture |
The Company owns a 50% equity interest in a joint venture, the
Canon Staar Co., Inc. (“CSC”), with Canon Inc. and
Canon Sales Co, Inc., together the “Canon Companies”
(see Note 1). The investment in the Japanese joint venture
is accounted for using the equity method of accounting except
for the nine months ended September 29, 2001 when income
was recorded on a cash basis due to disputes between the Company
and the Canon Companies which were resolved during the fourth
quarter of 2001. Dividends received, relating to periods when
the Company accounted for its investment on a cash basis, were
charged to earnings on a cash basis. For all other periods,
dividends are recorded under the equity method as a reduction to
the investment.
The financial statements of CSC include the following
information:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Current assets
|
|
$ |
6,237 |
|
|
$ |
7,728 |
|
|
Non-current assets
|
|
|
1,402 |
|
|
|
3,297 |
|
|
Current liabilities
|
|
|
1,238 |
|
|
|
1,881 |
|
|
Non-current liabilities
|
|
|
807 |
|
|
|
829 |
|
|
Net sales
|
|
|
10,908 |
|
|
|
9,273 |
|
|
Gross profit
|
|
|
4,572 |
|
|
|
3,237 |
|
|
Income from operations
|
|
|
6,163 |
|
|
|
122 |
|
|
Net loss
|
|
$ |
(304 |
) |
|
$ |
22 |
|
The Company’s equity in earnings (loss) of the joint
venture is calculated as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Joint venture net income (loss)
|
|
$ |
(382 |
) |
|
$ |
22 |
|
|
$ |
(8 |
) |
|
Equity interest
|
|
|
50 |
% |
|
|
50 |
% |
|
|
50 |
% |
| |
|
|
|
|
|
|
|
|
|
|
Total joint venture net income (loss)
|
|
|
(191 |
) |
|
|
11 |
|
|
|
(4 |
) |
|
Cash basis dividends
|
|
|
— |
|
|
|
— |
|
|
|
40 |
|
| |
|
|
|
|
|
|
|
|
|
|
Equity in earnings (loss) of joint venture
|
|
$ |
(191 |
) |
|
$ |
11 |
|
|
$ |
36 |
|
| |
|
|
|
|
|
|
|
|
|
The Company received dividends of $81,000, $76,000 and $40,000
during 2004, 2003 and 2002, respectively.
The Company recorded sales of certain IOL products to CSC of
approximately $185,000, $66,000 and $142,000 in 2004, 2003 and
2002, respectively.
The Company purchased preloaded injectors from CSC in the amount
of $1.7 million, $239,000, and $0 in 2004, 2003, and 2002,
respectively.
The Company had a $7 million line of credit with a domestic
lender which was amended and restated from time to time during
fiscal 2003 and 2002. The Company’s obligation to the
lender was secured by a first priority lien on substantially all
of the Company’s assets and included certain financial
covenants. The note carried an interest rate equal to the prime
rate (4.25% at January 3, 2003), plus interest margin and
commitment fees of 5% and 1.25% per annum, respectively.
Borrowings outstanding under the note as of January 3, 2003
were approximately $2.9 million, with total borrowings of
up to $3.7 million available under
F-17
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the line of credit. During 2003, the note, which was originally
due March 31, 2003, was extended one year to March 31,
2004. In June 2003, the Company paid off the note and canceled
the line of credit.
Subsidiaries of the Company have foreign credit facilities with
different banks to support operations in Switzerland and Germany.
The Swiss credit agreement, as amended on August 2, 2004,
provides for borrowings of up to 3.75 million Swiss Francs
“CHF” (approximately $3.3 million based on the
rate of exchange on December 31, 2004), and permits either
fixed-term or current advances. The interest rate on current
advances is 6.0% per annum at December 31, 2004 and
January 2, 2004, respectively, plus a commission rate of
0.25% payable quarterly. There were no current advances
outstanding at December 31, 2004 or January 2, 2004.
The base interest rate for fixed-term advances follows
Euromarket conditions for loans of a corresponding term and
currency, plus an individual margin (4.5% at December 31,
2004 and 4.2% at January 2, 2004). Borrowings outstanding
under the facility were CHF 3.4 million at
December 31, 2004 (approximately $3.0 million based on
the rate of exchange at December 31, 2004) and CHF
3.7 million at January 2, 2004 (approximately
$3.0 million based on the rate of exchange on
January 2, 2004). The credit facility is secured by a
general assignment of claims and includes positive and negative
covenants which, among other things, require the maintenance of
a minimum level of equity of at least $12.0 million and
prevents the Swiss subsidiary from entering into other secured
obligations or guaranteeing the obligations of others. The
agreement also prohibits the sale or transfer of patents or
licenses without the prior consent of the lender and the terms
of intercompany receivables may not exceed 90 days.
The Swiss credit facility is divided into two parts. Part A
provides for borrowings of up to CHF 3.0 million
($2.7 million based on the exchange rate on
December 31, 2004) and does not have a termination date.
Part B presently provides for borrowings of up to CHF
750,000 ($662,000 based on the exchange rate on
December 31, 2004). The loan amount under Part B of
the agreement reduces by CHF 250,000 ($220,000 based on the
exchange rate on December 31, 2004) semi-annually.
The German credit agreement, entered into during fiscal year
2003, provides for borrowings of up to 210,000 EUR ($286,000
based on the exchange rate on December 31, 2004), at a rate
of 8.5% per annum and renews automatically each November.
The agreement prohibits our German subsidiary from paying
dividends and is personally guaranteed by the president of the
subsidiary. There were no borrowings outstanding as of
December 31, 2004 or January 2, 2004.
The Company was in compliance with the covenants of credit
facilities as of December 31, 2004.
The provision (benefit) for income taxes consists of the
following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Current tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. federal
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(995 |
) |
| |
State
|
|
|
— |
|
|
|
— |
|
|
|
(74 |
) |
| |
Foreign
|
|
|
1,057 |
|
|
|
1,127 |
|
|
|
742 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total current provision (benefit)
|
|
|
1,057 |
|
|
|
1,127 |
|
|
|
(327 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. federal and state
|
|
|
— |
|
|
|
— |
|
|
|
9,021 |
|
| |
Foreign
|
|
|
— |
|
|
|
— |
|
|
|
111 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
— |
|
|
|
— |
|
|
|
9,132 |
|
| |
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$ |
1,057 |
|
|
$ |
1,127 |
|
|
$ |
8,805 |
|
| |
|
|
|
|
|
|
|
|
|
F-18
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Legislation enacted on March 9, 2002 (HR 3090) enabled the
Company to carryback a portion of the federal 2001 net
operating loss to 1996, 1997 and 1998. Since this legislation
was not enacted as of the end of fiscal year 2001, the benefit
of $959,000 from this carryback was recorded in 2002. As of
December 31, 2004, the Company had $63.6 million of
federal net operating loss carryforwards available to reduce
future income taxes. The net operating loss carryforwards expire
in varying amounts between 2020 and 2024.
The Company has net income taxes payable at December 31,
2004 and January 2, 2004 of $420,000 and $416,000,
respectively.
The provision (benefit) for income before taxes differs from the
amount computed by applying the statutory federal income tax
rate to income before taxes as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Computed provision for taxes based on income at statutory rate
|
|
$ |
(3,484 |
) |
|
|
34.0 |
% |
|
$ |
(2,435 |
) |
|
|
34.0 |
% |
|
$ |
(2,685 |
) |
|
|
34.0 |
% |
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Write down of investment in Circuit Tree Medical Inc.
|
|
|
— |
|
|
|
— |
|
|
|
715 |
|
|
|
(10.0 |
) |
|
|
— |
|
|
|
— |
|
| |
Permanent differences
|
|
|
36 |
|
|
|
(0.3 |
) |
|
|
23 |
|
|
|
(0.3 |
) |
|
|
38 |
|
|
|
(0.5 |
) |
| |
State taxes, net of federal income tax benefit
|
|
|
— |
|
|
|
(0.0 |
) |
|
|
— |
|
|
|
(0.0 |
) |
|
|
1,305 |
|
|
|
(16.5 |
) |
| |
Tax effect attributed to foreign operations
|
|
|
158 |
|
|
|
(1.5 |
) |
|
|
107 |
|
|
|
(1.5 |
) |
|
|
(1,245 |
) |
|
|
15.8 |
|
| |
Other
|
|
|
7 |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Valuation allowance
|
|
|
4,340 |
|
|
|
(42.4 |
) |
|
|
2,717 |
|
|
|
(37.9 |
) |
|
|
11,392 |
|
|
|
(144.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax provision (benefit) rate
|
|
$ |
1,057 |
|
|
|
(10.3 |
)% |
|
$ |
1,127 |
|
|
|
(15.7 |
)% |
|
$ |
8,805 |
|
|
|
(111.5 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings of the Company’s foreign
subsidiaries amounted to approximately $12.1 million at
December 31, 2004. Undistributed earnings are considered to
be indefinitely reinvested and, accordingly, no provision for
United States federal and state income taxes has been provided
thereon. Upon distribution of earnings in the form of dividends
or otherwise, the Company would be subject to both United States
income taxes (subject to an adjustment for foreign tax credits)
and withholding taxes payable to the various foreign countries.
Determination of the amount of unrecognized deferred United
States income tax liability is not practicable because of the
complexities associated with its hypothetical calculation.
F-19
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Company’s deferred tax assets (liabilities) as of
December 31, 2004 and January 2, 2004 are as follows
(in thousands):
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts and sales returns
|
|
$ |
143 |
|
|
$ |
114 |
|
| |
Inventory
|
|
|
475 |
|
|
|
611 |
|
| |
Accrued vacation
|
|
|
171 |
|
|
|
156 |
|
| |
State taxes
|
|
|
3 |
|
|
|
3 |
|
| |
Deferred revenue
|
|
|
79 |
|
|
|
6 |
|
| |
Accrued expenses
|
|
|
21 |
|
|
|
— |
|
| |
Valuation allowance
|
|
|
(892 |
) |
|
|
(890 |
) |
| |
|
|
|
|
|
|
| |
|
Total current deferred tax assets (liabilities)
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Non-current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
| |
Net operating loss and capital loss carryforwards
|
|
|
25,508 |
|
|
|
19,141 |
|
| |
Business, foreign and AMT credit carryforwards
|
|
|
880 |
|
|
|
876 |
|
| |
Depreciation and amortization
|
|
|
(54 |
) |
|
|
194 |
|
| |
Notes receivable
|
|
|
207 |
|
|
|
— |
|
| |
Reserve for restructuring costs
|
|
|
450 |
|
|
|
429 |
|
| |
Subpart F income
|
|
|
— |
|
|
|
267 |
|
| |
Capitalized R&D
|
|
|
252 |
|
|
|
246 |
|
| |
Contributions
|
|
|
37 |
|
|
|
32 |
|
| |
Valuation allowance
|
|
|
(27,280 |
) |
|
|
(21,185 |
) |
| |
|
|
|
|
|
|
| |
|
Total non-current deferred tax assets (liabilities)
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
SFAS No. 109, “Accounting for Income Taxes”
(“SFAS 109”) requires that a valuation allowance
be established when it is more likely than not that all or a
portion of a deferred tax asset may not be realized. Cumulative
losses weigh heavily in the assessment of the need for a
valuation allowance. In 2002, due to the Company’s recent
history of losses, an increase to the valuation allowance was
recorded as a non-cash charge to tax expense in the amount of
$9.0 million. As a result, the valuation allowance fully
offsets the value of deferred tax assets on the Company’s
balance sheet as of December 31, 2004. Under
Section 382 of the Internal Revenue Code, significant
changes in ownership may restrict the future utilization of
these tax loss carry forwards.
In 1995, a subsidiary of the Company obtained retrospectively to
1993, a ten-year tax holiday for the payment of federal,
cantonal and municipal income taxes in Switzerland. As such,
Swiss income taxes were not due on the operations of this
subsidiary for the ten year period that ended on
December 31, 2002. As the tax holiday from Swiss taxes has
expired, the appropriate federal, cantonal and municipal income
taxes have been included in the foreign tax provision.
Income (loss) before income taxes are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Domestic
|
|
$ |
(12,887 |
) |
|
$ |
(10,163 |
) |
|
$ |
(14,066 |
) |
|
Foreign
|
|
|
2,641 |
|
|
|
3,001 |
|
|
|
6,168 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
(10,246 |
) |
|
$ |
(7,162 |
) |
|
$ |
(7,898 |
) |
| |
|
|
|
|
|
|
|
|
|
F-20
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 9 — |
Business Acquisitions |
During the year ended December 31, 2004, the Company
purchased the remaining 20% interest in its Australian
subsidiary for $1.3 million, in exchange for $768,000 in
cash and a long-term note in the amount of $542,000 due on
November 1, 2007. The transaction resulted in the recording
of goodwill of $1.1 million. The Company also entered into
employment agreements with the previous minority owners of the
subsidiary. The employment agreements expire on November 1,
2007 and include clauses to not compete for a period of one year
after termination for any cause, except in the event of a change
in control.
Pro forma amounts for the acquisition are not included, as the
effect on operations is not material to the Company’s
consolidated financial statements.
During the year ended January 3, 2003, the Company acquired
the remaining 20% interest in its German subsidiary at its book
value of $426,000, from the subsidiary’s president in
exchange for cancellation of amounts due from the
subsidiary’s president of $955,000 less bonuses due to the
subsidiary’s president of $87,000, resulting in goodwill of
$442,000. The terms of the agreement also provided for the
cancellation of 75,000 unexercised stock options previously
issued to the subsidiary’s president and an agreement not
to compete with the Company for a period of ten years.
Pro forma amounts for the acquisition are not included, as the
effect on operations is not material to the Company’s
consolidated financial statements.
|
|
| Note 10 — |
Stockholders’ Equity |
Common Stock
During fiscal year 2004, the Company issued 11,000 shares
to consultants for services rendered to the Company. Also during
2004, the Company completed a private placement with
institutional investors of 2 million shares of the
Company’s common stock, for net proceeds of
$11.6 million.
During fiscal year 2003, the Company issued 11,000 shares
to consultants for services rendered to the Company and
43,000 shares, in lieu of bonuses earned, to an officer and
director of the Company. Also during 2003, the Company completed
a private placement with institutional investors of
1 million shares of the Company’s common stock, for
net proceeds of $8.9 million.
During fiscal year 2002, the Company issued 39,000 shares
to consultants for services rendered to the Company and
3,000 shares to an employee relating to an employment
contract. Also during 2002, the Company acquired
243,000 shares of treasury stock from a former officer in
settlement of notes receivable.
Receivables from Officers
and Directors
As of December 31, 2004 and January 2, 2004, notes
receivable (excluding reserves) from former officers and
directors totaling $2.1 million and $2.3 million,
respectively, were outstanding. The notes were issued in
connection with purchases of the Company’s common stock and
bear interest at rates ranging between 1.98% and 6.40% per
annum, or at the lowest federal applicable rate allowed by the
Internal Revenue Service. The notes are secured by stock pledge
agreements and other assets and mature on various dates through
June 1, 2006.
During the year ended December 31, 2004, the Company
entered into a forbearance agreement with a former director of
the Company whereby the due date of the $1.2 million note
receivable was extended from June 15, 2004 to
March 15, 2005 and the interest rate was reduced to 1.986%,
which was the lowest applicable federal rate at the date of the
agreement.
During the year ended December 31, 2004, the Company
recorded a $500,000 reserve against the notes of a former
director of the Company which total $1.8 million including
accrued interest. The notes are
F-21
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
collateralized by the Company’s common stock and a second
mortgage on a home in Florida. The current value of the
collateral is approximately $1.3 million. The amount of the
reserve is based on the difference between the note amount and
the collateral value.
During the year ended January 3, 2003, the Company entered
into a promissory note in the amount of $560,000 pursuant to the
terms of a settlement agreement with a law firm, of which a
principal was a former officer, director and stockholder of the
Company. Terms of the note, secured by trade accounts receivable
of the law firm, include interest at the rate of 5% with monthly
payment of principal and interest due beginning July 1,
2002 through June 1, 2006. During the years ended
December 31, 2004 and January 2, 2004, payments
against the note were received in the amount of $180,000 and
$100,000, respectively.
Also during the year ended January 3, 2003, the Company
entered into a second promissory note in the amount of
$2.2 million, pursuant to the terms of the same settlement
agreement, with the former officer’s widow. Terms of the
note, secured by a stock pledge agreement, included interest at
the rate of 5% with principal and interest due on or before
March 29, 2006. The note also provided for escalation in
the interest rate to 9.75% if the bid price of the
Company’s common stock traded at $8.00 or greater on any
public stock exchange for a period of 20 consecutive trading
days, or if the stock permanently ceased to trade on any public
stock exchange. Additionally, the note provided an acceleration
of payment in the event the closing bid price of the common
stock of the Company traded at $10.00 or greater on any public
stock exchange for a period of 20 consecutive trading days. The
note was paid in full in July 2003.
Options
The table below summarizes the transactions in the
Company’s stock option plans (in thousands except per share
data):
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted | |
| |
|
|
|
Average | |
| |
|
Number of | |
|
Exercise | |
| |
|
Shares | |
|
Price | |
| |
|
| |
|
| |
|
Balance at December 28, 2001
|
|
|
2,911 |
|
|
$ |
8.85 |
|
|
Options granted
|
|
|
972 |
|
|
$ |
3.73 |
|
|
Options exercised
|
|
|
— |
|
|
$ |
— |
|
|
Options forfeited/ cancelled
|
|
|
(746 |
) |
|
$ |
10.55 |
|
| |
|
|
|
|
|
|
|
Balance at January 3, 2003
|
|
|
3,137 |
|
|
$ |
6.86 |
|
|
Options granted
|
|
|
553 |
|
|
$ |
4.52 |
|
|
Options exercised
|
|
|
(387 |
) |
|
$ |
4.03 |
|
|
Options forfeited/ cancelled
|
|
|
(84 |
) |
|
$ |
5.89 |
|
| |
|
|
|
|
|
|
|
Balance at January 2, 2004
|
|
|
3,219 |
|
|
$ |
6.84 |
|
|
Options granted
|
|
|
531 |
|
|
$ |
7.76 |
|
|
Options exercised
|
|
|
(250 |
) |
|
$ |
3.32 |
|
|
Options forfeited/ cancelled
|
|
|
(348 |
) |
|
$ |
8.27 |
|
| |
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
3,152 |
|
|
$ |
7.12 |
|
| |
|
|
|
|
|
|
|
Options exercisable (vested) at December 31, 2004
|
|
|
2,535 |
|
|
$ |
7.27 |
|
| |
|
|
|
|
|
|
In fiscal year 2003, the Board of Directors approved the 2003
Omnibus Equity Incentive Plan (the “2003 Plan”)
authorizing the granting of options to purchase or awards of the
Company’s common stock. The 2003 Plan amends, restates and
replaces the 1991 Stock Option Plan, the 1995 Consultant Stock
Plan, the 1996 Non-Qualified Stock Plan and the 1998 Stock
Option Plan (the “Restated Plans”). Under provisions
of the 2003 Plan, all of the unissued shares in the Restated
Plans are reserved for issuance in the 2003 Plan. In addition,
2% of the total shares of common stock outstanding on the
immediately preceding December 31 will be reserved for
issuance under the 2003 Plan. Options under the plan are granted
at fair market value on the
F-22
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
date of grant, become exercisable over a 3-year period, or as
determined by the Board of Directors, and expire over periods
not exceeding 10 years from the date of grant. Pursuant to
the plan, options for 522,000 and 83,000 shares were
outstanding at December 31, 2004 and January 2, 2004,
respectively, with exercise prices ranging between $3.00 and
$11.24 per share.
In fiscal year 2000, the Board of Directors approved the Stock
Option Plan and Agreement for the Company’s Chief Executive
Officer authorizing the granting of options to purchase or
awards of the Company’s common stock. The options under the
plan are granted at fair market value on the date of grant,
become exercisable over a 3-year period, and expire
10 years from the date of grant. Pursuant to this plan,
options for 500,000 were outstanding at December 31, 2004,
January 2, 2004, and January 3, 2003, respectively,
with an exercise price of $11.125.
In fiscal year 1998, the Board of Directors approved the 1998
Stock Option Plan, authorizing the granting of incentive options
and/or non-qualified options to purchase or awards of the
Company’s common stock. Under the provisions of the plan,
1.0 million shares were reserved for issuance; however, the
maximum number of shares authorized may be increased provided
such action is in compliance with Article IV of the plan.
During fiscal year 2001, pursuant to Article IV of the
plan, the stockholders of the Company authorized an additional
1.5 million shares. Generally, options under the plan are
granted at fair market value at the date of the grant, become
exercisable over a 3-year period, or as determined by the Board
of Directors, and expire over periods not exceeding
10 years from the date of grant. Pursuant to the plan,
options for 1.6 million, 1.9 million and
1.5 million shares were outstanding at December 31,
2004, January 2, 2004, and January 3, 2003,
respectively, with exercise prices ranging between $2.00 and
$13.875 per share.
In fiscal year 1996, the Board of Directors approved the 1996
Non-Qualified Stock Plan, authorizing the granting of options to
purchase or awards of the Company’s common stock. Under
provisions of the Non-Qualified Stock Plan, 600,000 shares
were reserved for issuance. Generally, options under the plan
are granted at fair market value at the date of the grant,
become exercisable over a 3-year period, or as determined by the
Board of Directors, and expire over periods not exceeding
10 years from the date of grant. Pursuant to this plan,
options for 146,000, 146,000, and 170,000 shares were
outstanding at December 31, 2004, January 2, 2004, and
January 3, 2003, respectively. The options were originally
issued with an exercise price of $12.50 per share. During
fiscal year 1998 the exercise price was reduced to
$6.25 per share by action of the Board of Directors.
In fiscal year 1995, the Company adopted the 1995 Consultant
Stock Plan, authorizing the granting of options to purchase or
awards of the Company’s common stock. Generally, options
under the plan are granted at fair market value at the date of
the grant, become exercisable on the date of grant and expire
10 years from the date of grant. Pursuant to this plan,
options for 165,000, 330,000, and 545,000 shares were
outstanding at December 31, 2004, January 2, 2004, and
January 3, 2003, respectively, with exercise prices ranging
from $1.70 to $3.99 per share.
Under provisions of the Company’s 1991 Stock Option Plan,
2.0 million shares were reserved for issuance. Generally,
options under this plan are granted at fair market value at the
date of the grant, become exercisable over a 3-year period, or
as determined by the Board of Directors, and expire over periods
not exceeding 10 years from the date of grant. At
December 31, 2004, January 2, 2004, and
January 3, 2003, options for 163,000, 220,000, and
379,000 shares were outstanding, with exercise prices
ranging from $9.56 to $11.25 per share.
In fiscal year 2004, officers, employees and others exercised
250,000 options from the 1995, 1998 and 2003 stock option plans
at prices ranging from $1.90 to $4.65 resulting in cash proceeds
totaling $829,000.
In fiscal year 2003, officers, employees and others exercised
387,000 options from the 1991, 1996 and 1998 stock option plans
at prices ranging from $2.00 to $9.56 resulting in cash proceeds
totaling $1.6 million.
F-23
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In fiscal year 2002, no options were exercised from any of the
Company’s stock option plans.
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2004 (in
thousands, except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Options | |
|
|
|
|
|
|
| |
|
|
|
Outstanding | |
|
|
|
|
|
|
| |
|
Number | |
|
Weighted-Average | |
|
|
|
Number | |
|
|
| Range of | |
|
Outstanding at | |
|
Remaining | |
|
Weighted-Average | |
|
Exercisable at | |
|
Weighted-Average | |
| Exercise Prices | |
|
12/31/04 | |
|
Contractual Life | |
|
Exercise Price | |
|
12/31/04 | |
|
Exercise Price | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
|
|
|
|
(In thousands) | |
|
|
| |
$ 1.70 to $ 2.15 |
|
|
|
160 |
|
|
|
3.1 years |
|
|
$ |
1.93 |
|
|
|
160 |
|
|
$ |
1.93 |
|
| |
$ 2.96 to $ 4.30 |
|
|
|
1,037 |
|
|
|
4.1 years |
|
|
$ |
3.54 |
|
|
|
821 |
|
|
$ |
3.52 |
|
| |
$ 4.62 to $ 6.25 |
|
|
|
402 |
|
|
|
0.8 years |
|
|
$ |
5.61 |
|
|
|
365 |
|
|
$ |
5.64 |
|
| |
$ 7.00 to $10.19 |
|
|
|
620 |
|
|
|
6.2 years |
|
|
$ |
8.75 |
|
|
|
314 |
|
|
$ |
9.67 |
|
| |
$10.60 to $13.88 |
|
|
|
933 |
|
|
|
3.9 years |
|
|
$ |
11.54 |
|
|
|
875 |
|
|
$ |
11.58 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
$ 1.70 to $13.88 |
|
|
|
3,152 |
|
|
|
4.0 years |
|
|
$ |
7.12 |
|
|
|
2,535 |
|
|
$ |
7.27 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Note 11 — |
Commitments and Contingencies |
Lease Obligations
The Company leases certain property, plant and equipment under
capital and operating lease agreements. These leases vary in
duration and many contain renewal options and/or escalation
clauses.
Estimated future minimum lease payments under leases having
initial or remaining non-cancelable lease terms in excess of one
year as of December 31, 2004 were approximately as follows
(in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Operating | |
|
Capital | |
| Fiscal Year |
|
Leases | |
|
Leases | |
| |
|
| |
|
| |
|
2005
|
|
$ |
927 |
|
|
$ |
92 |
|
|
2006
|
|
|
435 |
|
|
|
6 |
|
|
2007
|
|
|
435 |
|
|
|
3 |
|
|
2008
|
|
|
437 |
|
|
|
2 |
|
|
2009
|
|
|
52 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$ |
2,286 |
|
|
$ |
105 |
|
|
Less amounts representing interest
|
|
|
— |
|
|
|
(8 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
2,286 |
|
|
$ |
97 |
|
| |
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$ |
86 |
|
|
Long-term
|
|
|
|
|
|
|
11 |
|
| |
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$ |
97 |
|
| |
|
|
|
|
|
|
Rent expense was approximately $1.2 million,
$1.2 million, and $1.1 million for each of the years
ended December 31, 2004, January 2, 2004 and
January 3, 2003, respectively.
Supply Agreement
In May 1999, the Company entered into a license and supply
agreement with another manufacturer to license and re-sell one
of the manufacturer’s products. Under the terms of the
agreement, the Company was committed to purchase the specified
product for a total sum of $3.2 million over
18 months. In September 2001, the supply agreement was
amended reducing the minimum contractual amount that the Company
is
F-24
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
obligated to purchase from the manufacturer to $2.5 million
over a 24-month period commencing September 1, 2001. The
agreement, which was cancelable upon four months written
notice, was terminated during the quarter ended January 2,
2004 at no additional expense. Purchases under the agreement for
fiscal 2004 and 2003 were approximately $0 and $954,000,
respectively.
In December 2000, the Company entered into a minimum purchase
agreement with another manufacturer for the purchase of
viscoelastic solution. In addition to the minimum purchase
requirement, the Company is also obligated to pay an annual
regulatory maintenance fee. The agreement contains provisions to
increase the minimum annual purchases in the event that the
seller gains regulatory approval of the product in other
markets, as requested by the Company. Purchases under the
agreement for fiscal 2004 and 2003 were approximately $644,000
and $568,000, respectively.
As of December 31, 2004, estimated annual purchase
commitments under these contracts are as follows (in thousands):
| |
|
|
|
|
|
| Fiscal Year |
|
|
| |
|
|
|
2005
|
|
$ |
1,022 |
|
|
2006
|
|
|
200 |
|
| |
|
|
|
| |
Total
|
|
$ |
1,222 |
|
| |
|
|
|
FDA Warning Letters and 483
Observations
The Company received a Warning Letter issued by the FDA, dated
December 22, 2003 which outlined deficiencies related to
the manufacturing and quality assurance systems of its Monrovia,
California facility. To assist it in correcting the issues
raised in the Warning Letter, the Company engaged the services
of Quintiles Consulting (“Quintiles”), a well regarded
consulting organization that specializes in FDA related
compliance matters. The Company, with Quintiles’ help,
assessed the state of its quality system in light of the
FDA’s concerns, developed an improvement plan, and took
corrective actions to improve the Company’s processes,
procedures, and controls.
The Company received a second Warning Letter from the FDA dated
April 26, 2004, which outlined deficiencies noted in an
audit by the FDA in December 2003. The Company provided the FDA
with its planned corrective actions to the issues raised, and in
a letter dated July 1, 2004, the FDA responded that they
found the corrective and preventative action plans described in
the Company’s response “adequate.”
On June 17, 2004, the FDA completed an audit of the
Company’s Nidau, Switzerland manufacturing facility. The
FDA did not observe any violations of Quality System and Good
Manufacturing Practices requirements during this audit.
Costs associated with the preparation for these FDA inspections,
and the improvements made to the quality assurance and
regulatory compliance functions, contributed to the 22% increase
in research and development expenses (which included regulatory
and quality assurance expenses) for the year ended
December 31, 2004, compared to fiscal 2003. Additionally,
the Warning Letters and 483 Observations have affected the
Company’s reputation in the ophthalmic market and have
adversely affected product sales for the year ended
December 31, 2004.
Until the FDA is satisfied with the adequacy of the
Company’s corrective actions, it may take further actions
which could include conducting another inspection, seizure of
the Company’s products, injunction of the Monrovia facility
to compel compliance (which may include suspension of production
operations and/or recall of products), or other actions. Such
actions could have a material adverse effect on the
Company’s established lines of business, results of
operations and liquidity. Furthermore, until the FDA is
satisfied with the Company’s response, it is unlikely to
grant the Company approval to market the ICL in the United
States.
F-25
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company is not able to predict whether the FDA will conclude
that the Company’s corrective actions to date or those
included in its response to the 483 Observations satisfactorily
resolve its concerns. Nor can the Company predict the
likelihood, nature of, or timing of any additional action by the
FDA or the impact of other FDA action on the Company’s
established lines of business, results of the operations or
liquidity or the approval of the ICL for the United States
market.
Indemnification
Agreements
The Company has entered into indemnification agreements with its
directors and officers that may require the Company: to
indemnify them against liabilities that may arise by reason of
their status or service as directors or officers, except as
prohibited by applicable law; to advance their expenses incurred
as a result of any proceeding against them as to which they
could be indemnified; and to make a good faith determination
whether or not it is practicable for the Company to obtain
directors’ and officers’ insurance. The Company
currently has directors’ and officers’ insurance.
Litigation and Claims
Since September 1, 2004, multiple class action lawsuits
have been filed in the United States District Courts for the
Central District of California and the District of New Mexico
against the Company and its Chief Executive Officer on behalf of
all persons who acquired the Company’s securities during
various periods between April 3, 2003 and
September 28, 2004. On December 15, 2004, the Court
ordered consolidation of the complaints that had been filed in
the United States District Court for the Central District of
California and directed that the plaintiffs file a consolidated
complaint as soon as practicable. The plaintiffs have proposed a
stipulation pursuant to which they would file a consolidated
amended complaint on or about April 29, 2005. The New
Mexico action was voluntarily dismissed on January 28,
2005. The lawsuits generally allege that the defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated thereunder, by
issuing false and misleading statements regarding intraocular
lenses and implantable lenses, and failing timely to disclose
significant problems with the lenses, as well as the existence
of serious injuries and/or malfunctions attributable to the
lenses, thereby artificially inflating the price of the
Company’s Common Stock. The plaintiffs generally seek to
recover compensatory damages, including interest. Although the
Company intends to vigorously defend the consolidated lawsuit,
the lawsuit will require significant attention of management and
could result in substantial costs and harm our reputation.
The Company is currently party to various claims and legal
proceedings arising out of the normal course of our business.
These claims and legal proceedings relate to contractual rights
and obligations, employment matters, and claims of product
liability. While we do not believe that any of the claims known
to us is likely to have a material adverse effect on our
financial condition or results of operations, new claims or
unexpected results of existing claims could lead to significant
financial harm.
|
|
| Note 12 — |
Other Liabilities |
Other Current
Liabilities
Included in other current liabilities at December 31, 2004
and January 2, 2004 are approximately $1,868,000 and
$1,534,000 of accrued salaries and wages and $808,000 and
$959,000 of commissions due to outside sales representatives,
respectively.
F-26
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 13 — |
Related Party Transactions |
The Company has had significant related party transactions as
discussed in Notes 6, 9 and 10.
The Company issues options to purchase 60,000 shares
of its common stock at fair market value on the date of grant to
each member of its Board of Directors upon election or
reelection for services provided as Board members.
In addition to secured notes (see Note 10), the Company
holds other various promissory notes from former officers and
directors of the Company. The notes, which provide for interest
at the lowest applicable rate allowed by the Internal Revenue
Code, are due on demand. Amounts due from former officers and
directors and included in prepaids, deposits, and other current
assets at December 31, 2004 and January 2, 2004 were
$104,000 and $98,000, respectively.
In March 2001, the Company entered into a consulting agreement
with one of the members of its Board of Directors. In exchange
for services, the Company issued an option to
purchase 20,000 shares of the Company’s common
stock at fair market value on the date of grant, in addition to
a monthly retainer of $6,000, and a per-diem rate after six days
worked of $1,000. Upon the mutual consent of the parties, the
agreement was cancelled in July 2003. However, the Company has
continued to pay the Board member for consulting services.
Amounts paid to during the year ended December 31, 2004,
January 2, 2004, and January 3, 2003, were $13,000,
$50,000, and $73,000, respectively.
|
|
| Note 14 — |
Supplemental Disclosure of Cash Flow Information |
Interest paid was $159,000, $255,000 and $580,000 for the years
ended December 31, 2004, January 2, 2004 and
January 3, 2003, respectively. Income taxes paid amounted
to approximately $1,602,000, $1,477,000 and $719,000 for the
years ended December 31, 2004, January 2, 2004 and
January 3, 2003, respectively. Income taxes paid in 2003
were partially offset by the receipt of $962,000 in
U.S. federal tax refunds related to a carryback claim filed
in 2002 (see Note 8).
The Company’s non-cash investing and financing activities
were as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Notes receivable from officers and directors (Note 8)
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(2,129 |
) |
| |
Notes receivable reserve
|
|
|
500 |
|
|
|
1,713 |
|
|
|
1,814 |
|
| |
Prepaids, deposits and other current assets
|
|
|
— |
|
|
|
— |
|
|
|
(658 |
) |
| |
Treasury stock acquired
|
|
|
— |
|
|
|
— |
|
|
|
973 |
|
| |
Other charges
|
|
|
(500 |
) |
|
|
(1,713 |
) |
|
|
— |
|
|
Acquisition of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Minority interest acquired
|
|
$ |
203 |
|
|
$ |
— |
|
|
$ |
426 |
|
| |
Goodwill
|
|
|
1,107 |
|
|
|
— |
|
|
|
442 |
|
| |
Note payable
|
|
|
(542 |
) |
|
|
— |
|
|
|
(868 |
) |
| |
Cash paid
|
|
|
(768 |
) |
|
|
— |
|
|
|
— |
|
|
Patent impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Patents
|
|
$ |
— |
|
|
$ |
(2,438 |
) |
|
$ |
— |
|
| |
Accumulated amortization
|
|
|
— |
|
|
|
336 |
|
|
|
— |
|
| |
Other charges
|
|
|
— |
|
|
|
2,102 |
|
|
|
— |
|
F-27
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During the year ended December 31, 2004, the Company
recorded a $500,000 reserve against the notes of a former
director of the Company which total $1.8 million including
accrued interest. The notes are collateralized by the
Company’s common stock and a second mortgage on a home in
Florida. The current value of the collateral is approximately
$1.3 million. The amount of the reserve is based on the
difference between the note amount and the collateral value.
During 2003, the Company recorded $390,000 in other charges. The
amount includes a charge of $2.1 million relating to the
write-down of capitalized patent costs acquired in the purchase
of the Company’s majority interest in Circuit Tree Medical,
a developer and manufacturer of phacoemulsification equipment,
and was partially offset by the reversal of $1.7 million in
reserves previously recorded against notes receivable from
officers and directors which the Company has settled.
In connection with its business strategy to reduce operating
expenses, announced during the third quarter of 2001, the
Company completed the sale of its South African subsidiary and
closure of its Swedish and Canadian subsidiaries during the year
ended January 3, 2003. As a result of these transactions
the Company recorded $1.2 million of subsidiary closure
charges. The charges were primarily related to the recognition
of deferred losses resulting from the translation of foreign
currency statements into U.S. dollars (previously included
in equity in the balance sheet in accordance with
SFAS No. 52). Since the charges had been included in
equity their subsequent recognition, while impacting retained
earnings, had no impact on total stockholders’ equity.
Also included in other charges at January 3, 2003 is
$230,000 in employee separation costs.
|
|
| Note 16 — |
Net Loss Per Share |
The following is a reconciliation of the weighted average number
of shares used to compute basic and diluted loss per share (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Basic weighted average shares outstanding
|
|
|
19,602 |
|
|
|
17,704 |
|
|
|
17,142 |
|
|
Diluted effect of stock options and warrants
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
19,602 |
|
|
|
17,704 |
|
|
|
17,142 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Note 17 — |
Geographic and Product Data |
The Company markets and sells its products in over 45 countries
and has manufacturing sites in the United States and
Switzerland. Other than the United States and Germany, the
Company does not conduct business in any country in which its
sales in that country exceed 5% of consolidated sales. Sales are
attributed to countries based on location of customers. The
composition of the Company’s sales to unaffiliated
customers between those in the United States, Germany, and other
locations for each year, is set forth below (in thousands).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Sales to unaffiliated customers
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S.
|
|
$ |
21,643 |
|
|
$ |
23,464 |
|
|
$ |
24,082 |
|
| |
Germany
|
|
|
22,128 |
|
|
|
19,840 |
|
|
|
16,081 |
|
| |
Other
|
|
|
7,914 |
|
|
|
7,105 |
|
|
|
7,717 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
51,685 |
|
|
$ |
50,409 |
|
|
$ |
47,880 |
|
| |
|
|
|
|
|
|
|
|
|
F-28
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company develops, manufactures and distributes medical
devices used in minimally invasive ophthalmic surgery.
Substantially, all of the Company’s revenues result from
the sale of the Company’s medical devices. The Company
distributes its medical devices in the cataract, refractive and
glaucoma segments within ophthalmology. While the Company has
expanded its marketing focus beyond the cataract market to
include the refractive and glaucoma markets, the cataract market
remains the Company’s primary source of revenues and,
therefore, the Company operates as one business segment for
financial reporting purposes.
The cataract product line includes intraocular lenses,
phacoemulsification equipment, viscoelastics, and other products
used in cataract surgery. During the years presented, revenues
from the refractive and glaucoma product lines were 9% or less
of total revenue. Accordingly, the difference is not significant
enough for the Company to account for these products separately
and, therefore, those products are combined as other products in
the following table.
Net Sales by Product Line
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cataract
|
|
$ |
46,772 |
|
|
$ |
46,409 |
|
|
$ |
44,349 |
|
|
Other
|
|
|
4,913 |
|
|
|
4,000 |
|
|
|
3,531 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
51,685 |
|
|
$ |
50,409 |
|
|
$ |
47,880 |
|
| |
|
|
|
|
|
|
|
|
|
The composition of the Company’s long-lived assets between
those in the United States, Germany, Switzerland, and other
countries is set forth below (in thousands).
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Long-lived assets
|
|
|
|
|
|
|
|
|
| |
U.S.
|
|
$ |
9,035 |
|
|
$ |
10,181 |
|
| |
Germany
|
|
|
6,799 |
|
|
|
6,511 |
|
| |
Switzerland
|
|
|
2,010 |
|
|
|
2,220 |
|
| |
Other
|
|
|
1,253 |
|
|
|
212 |
|
| |
|
|
|
|
|
|
| |
|
Total
|
|
$ |
19,097 |
|
|
$ |
19,124 |
|
| |
|
|
|
|
|
|
The Company sells its products internationally, which subjects
the Company to several potential risks, including fluctuating
exchange rates (to the extent the Company’s transactions
are not in U.S. dollars), regulation of fund transfers by
foreign governments, United States and foreign export and import
duties and tariffs, and political instability.
|
|
| Note 18 — |
Quarterly Financial Data (Unaudited) |
Summary unaudited quarterly financial data from continuing
operations for fiscal 2004 and 2003 is as follows (in thousands
except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2004 |
|
1st Qtr. | |
|
2nd Qtr. | |
|
3rd Qtr. | |
|
4th Qtr. | |
| |
|
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
$ |
13,569 |
|
|
$ |
12,024 |
|
|
$ |
12,140 |
|
|
$ |
13,952 |
|
|
Gross profit
|
|
|
7,317 |
|
|
|
6,150 |
|
|
|
6,097 |
|
|
|
6,579 |
|
|
Net loss
|
|
|
(1,299 |
) |
|
|
(3,380 |
) |
|
|
(2,268 |
) |
|
|
(4,385 |
) |
|
Basic and diluted loss per share
|
|
|
(.07 |
) |
|
|
(.18 |
) |
|
|
(.11 |
) |
|
|
(.21 |
) |
F-29
STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| January 2, 2004 |
|
1st. Qtr. | |
|
2nd Qtr. | |
|
3rd Qtr. | |
|
4th Qtr. | |
| |
|
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
$ |
12,826 |
|
|
$ |
12,951 |
|
|
$ |
11,927 |
|
|
$ |
12,754 |
|
|
Gross profit
|
|
|
6,979 |
|
|
|
7,056 |
|
|
|
6,587 |
|
|
|
7,215 |
|
|
Net loss
|
|
|
(958 |
) |
|
|
(1,169 |
) |
|
|
(2,710 |
) |
|
|
(3,520 |
) |
|
Basic and diluted loss per share
|
|
|
(.06 |
) |
|
|
(.07 |
) |
|
|
(.15 |
) |
|
|
(.19 |
) |
Quarterly and year-to-date computations of loss per share
amounts are made independently. Therefore, the sum of the per
share amounts for the quarters may not agree with the per share
amounts for the year.
NOTE 19 — SUBSEQUENT EVENT
On April 4, 2005, the Company completed a private placement
of 4,100,000 shares of its Common Stock, at a price of $3.50 per
share, resulting in net proceeds of $13.5 million. The
proceeds will be used to fund the Company’s working capital
requirements over the next 12 months.
F-30
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT ON SCHEDULE
To the Board of Directors
STAAR Surgical Company
The audits referred to in our report dated March 16, 2005,
except for Note 19 which is as of April 4, 2005,
relating to the consolidated financial statements of STAAR
Surgical Company and Subsidiaries, which is contained in
Item 8 of this Annual Report on Form 10-K included the
audit of Schedule II, Valuation and Qualifying Accounts and
Reserves as of December 31, 2004, and for each of the three
years in the period ended December 31, 2004. This financial
statement schedule is the responsibility of the Company’s
management. Our responsibility is to express an opinion on this
financial statement schedule based on our audit.
In our opinion, such financial statement schedule presents
fairly, in all material respects, the information set forth
therein.
Los Angeles, California
March 16, 2005, except for Note 19 which is as of
April 4, 2005.
F-31
STAAR SURGICAL COMPANY AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Column A |
|
Column B | |
|
Column C | |
|
Column D | |
|
Column E | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
Balance at | |
|
|
|
|
|
Balance at | |
| |
|
Beginning | |
|
|
|
|
|
End of | |
| Description |
|
of Year | |
|
Additions | |
|
Deductions | |
|
Year | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts and sales returns deducted from
accounts receivable in balance sheet
|
|
$ |
734 |
|
|
$ |
236 |
|
|
$ |
510 |
|
|
$ |
460 |
|
| |
Deferred tax asset valuation allowance
|
|
|
22,075 |
|
|
|
6,097 |
|
|
|
— |
|
|
|
28,172 |
|
| |
Notes receivable reserve
|
|
|
— |
|
|
|
500 |
|
|
|
— |
|
|
|
500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
22,809 |
|
|
$ |
6,833 |
|
|
$ |
510 |
|
|
$ |
29,132 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts and sales returns deducted from
accounts receivable in balance sheet
|
|
$ |
805 |
|
|
$ |
108 |
|
|
$ |
179 |
|
|
$ |
734 |
|
| |
Deferred tax asset valuation allowance
|
|
|
18,607 |
|
|
|
3,468 |
|
|
|
— |
|
|
|
22,075 |
|
| |
Notes receivable reserve
|
|
|
1,795 |
|
|
|
— |
|
|
|
1,795 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
21,207 |
|
|
$ |
3,576 |
|
|
$ |
1,974 |
|
|
$ |
22,809 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts and sales returns deducted from
accounts receivable in balance sheet
|
|
$ |
768 |
|
|
$ |
1,186 |
|
|
$ |
1,149 |
|
|
$ |
805 |
|
| |
Accrued restructuring costs
|
|
|
100 |
|
|
|
— |
|
|
|
100 |
|
|
|
— |
|
| |
Deferred tax asset valuation allowance
|
|
|
4,288 |
|
|
|
14,319 |
|
|
|
— |
|
|
|
18,607 |
|
| |
Notes receivable reserve
|
|
|
3,609 |
|
|
|
— |
|
|
|
1,814 |
|
|
|
1,795 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
8,765 |
|
|
$ |
15,505 |
|
|
$ |
3,063 |
|
|
$ |
21,207 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
F-32