STAAR SURGICAL CO - Annual Report: 2009 (Form 10-K)
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
(Mark
One)
þ
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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 January 2, 2009
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or
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o
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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
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Commission
file number: 0-11634
STAAR SURGICAL COMPANY
(Exact
name of registrant as specified in its charter)
Delaware
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95-3797439
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(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 91016
Monrovia,
California
(Address
of principal executive offices)
(626) 303-7902
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act:
(Title of each class)
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(Name of each exchange on which
registered)
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Common
Stock, $0.01 par value
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Nasdaq
Global Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
o Large accelerated filer
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þ Accelerated filer
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o Non-accelerated filer
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o Smaller reporting company
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(Do
not check if a smaller reporting
company)
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o No þ
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 27, 2008, the last business day
of the registrant’s most recently completed second fiscal quarter, was
approximately $91,708,703 based on the closing price per share of $3.11 of the
registrant’s Common Stock on that date.
The
number of shares outstanding of the registrant’s Common Stock as
of March 30, 2009 was 30,018,013.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrant’s definitive
proxy statement relating to its 2009 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
Page
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PART I
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Item 1.
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Business
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3
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Item 1A.
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Risk
Factors
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15
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Item 1B.
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Unresolved
Staff Comments
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25
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Item 2.
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Properties
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25
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Item 3.
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Legal
Proceedings
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25
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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26
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PART II
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Item 5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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26
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Item 6.
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Selected
Financial Data
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29
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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30
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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52
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Item 8.
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Financial
Statements and Supplementary Data
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52
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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52
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Item 9A.
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Controls
and Procedures
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52
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Item 9B.
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Other
Information
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53
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PART III
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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53
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Item 11.
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Executive Compensation
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54
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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54
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence
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54
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Item 14.
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Principal
Accountant Fees and Services
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54
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PART IV
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Item 15.
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Exhibits
and Financial Statement Schedules
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55
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Signatures
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58
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PART I
This
Annual Report on Form 10-K contains statements that 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. Readers can recognize
forward-looking statements by the use of words like “anticipate,” “estimate,”
“expect,” “project,” “intend,” “plan,” “believe,” “will,” “target,” “forecast”
and similar expressions in connection with any discussion of future operating or
financial performance. STAAR Surgical Company cautions investors and prospective
investors 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 1A. Risk Factors.”
Item 1. Business
General
STAAR
Surgical Company develops, manufactures and sells innovative intraocular lenses,
or IOLs, implantable Collamer lenses, or ICLs, and other ophthalmic surgical
products, used primarily in cataract and refractive surgery. We manufacture
products in the U.S., Switzerland and Japan and distribute our products
worldwide.
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
Surgical Company, Visian® , Collamer®, STAARVISC®, Elastimide®, SonicWAVETM and
AquaFlowTM are
trademarks or registered trademarks of STAAR in the U.S. and other countries.
Collamer® is the brand name for STAAR’s proprietary collagen copolymer lens
material.
Intraocular
lenses. Most of our revenue is generated by manufacturing and
selling foldable intraocular lenses, known as IOLs. A foldable IOL is a
prosthetic lens used to replace a cataract patient’s natural lens after it has
been extracted in minimally invasive small incision cataract surgery. STAAR
makes IOLs out of silicone and out of Collamer®, STAAR’s proprietary
biocompatible collagen copolymer lens material. STAAR’s IOLs are available in
both three-piece and one-piece designs. Over the years, we have expanded our
range of IOLs to include the following:
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·
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The
silicone Toric IOL, used in cataract surgery to treat preexisting
astigmatism;
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The
Preloaded Injector, a three-piece silicone or acrylic IOL preloaded into a
single-use disposable injector;
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Aspheric
three-piece IOLs, available in silicone or Collamer, designed to provide a
clearer image than traditional spherical IOLs, especially in low
light.
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Implantable Collamer lenses.
Manufacturing and selling lenses used in refractive surgery is an
increasingly important source of revenue for STAAR. We have used our proprietary
biocompatible Collamer material to develop and manufacture implantable Collamer
lenses, or ICLs. STAAR’s VISIANTM ICL and
VISIANTM
Toric ICL, or TICLTM, 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 IOL, which replaces a cataract
patient’s cloudy lens, these products are designed to work with the patient’s
natural lens to correct refractive disorders. The surgeon implants the foldable
Visian lens through a tiny incision, generally under local anesthesia. STAAR
began selling the Visian ICL outside the U.S. in 1996 and inside the U.S. in
2006. STAAR began selling the Visian TICL outside the U.S. in 2002. These
products are sold in more than 45 countries. STAAR’s goal is to establish the
position of the ICL and TICL throughout the world as one of the primary choices
for refractive surgery.
Other Surgical
Products. As part of our strategic approach to provide
complementary products for use in ophthalmic 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, Cruise Control, a single-use
disposable filter which allows for a faster, cleaner phacoemulsification
procedure and is compatible with all phacoemulsification equipment, and the
AquaFlow Collagen Glaucoma Drainage Device, an implantable device used for the
surgical treatment of glaucoma. We also sell other related instruments, devices,
surgical packs and equipment that we manufacture or that are manufactured by
others.
3
Distribution.
STAAR’s wholly owned subsidiary, Domilens Vertrieb fuer medizinische Produkte
GmbH (“Domilens”) is a leading distributor of ophthalmic products in Germany.
Products sold by Domilens include implantable lenses, related surgical
equipment, consumables and other supplies. Domilens sells custom surgical kits
that incorporate a surgeon’s preferred supplies and consumables in a single
ready-to-use package, and services phacoemulsification and other surgical
equipment. In addition to distributing and servicing products of third party
manufacturers, Domilens distributes STAAR’s ICLs, IOLs, and Preloaded
Injectors.
Operations
STAAR has
significant operations both within and outside the U.S. Revenue from activities
outside the U.S. accounted for 75% of our total revenues in fiscal year 2008.
STAAR’s principal business units and their operations are as
follows:
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United
States. STAAR operates its global administrative
headquarters and a manufacturing facility in Monrovia, California. The
Monrovia manufacturing facility principally makes Collamer and silicone
IOLs and injector systems for IOLs and ICLs. STAAR also manufactures the
Collamer material in the U.S.
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·
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Switzerland. STAAR
operates an administrative and manufacturing facility in Nidau,
Switzerland under its wholly owned subsidiary, STAAR Surgical AG. The
Nidau manufacturing facility makes all of STAAR’s ICLs and TICLs and also
manufactures Collamer IOLs and the AquaFlow Device. STAAR Surgical AG
handles distribution and other administrative affairs for Europe and other
territories outside North America and
Japan.
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Japan. At
the beginning of fiscal year 2008, STAAR completed the acquisition of the
remaining 50% interest in its joint venture Canon Staar, Co., following
which the entity’s name was changed to STAAR Japan, Inc. (“STAAR
Japan”). STAAR Japan operates an administrative facility in
Shin-Urayasu, Japan and a manufacturing facility in Ichikawa City. All of
STAAR’s preloaded injectors are manufactured at the Ichikawa City
facility. STAAR Japan is also currently seeking approval from the Japanese
regulatory authorities to market in Japan STAAR’s Visian ICL and TICL,
Collamer IOL and AquaFlow Device.
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·
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Germany. Domilens,
a wholly owned subsidiary of STAAR Surgical AG, operates its distribution
business at facilities in Hamburg,
Germany.
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The
global nature of STAAR’s business operations subjects it to risks, including the
effect of changes in currency exchange rates, differences in laws, including
laws protecting intellectual property and regulating medical devices, political
risks and the challenge of managing foreign subsidiaries. See “ Item 1A. Risk
Factors — The global nature of our business may result in fluctuations
and declines in our sales and profits” and “ — The success of our
international operations depends on our successfully managing our foreign
subsidiaries.”
The
Human Eye
The
following discussion provides background information on the structure, function
and some of the disorders of the human eye to enhance the reader’s understanding
of our products described in this report. The human eye is a specialized sensory
organ capable of receiving visual images and transmitting them to the visual
center in the brain. Among the main parts of the eye are the cornea, the iris,
the lens, the retina, and the trabecular meshwork. The cornea is the clear
window in the front of the eye through which light 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 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 posterior chamber of the eye, located behind the iris and in
front of the natural lens, is filled with a watery fluid called the aqueous
humor, while the portion of the eye behind the lens is filled with a jelly-like
material called the vitreous humor. 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
humor.
4
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 disorder that involves the hardening and
loss of transparency of the natural crystalline lens, impairing visual
acuity.
Refractive
disorders, which are generally not age-related, include myopia, hyperopia, and
astigmatism. A normal, well functioning eye receives images of objects at
varying distances from the eye and focuses the images on the retina. Refractive
errors occur when the eye’s natural optical system does not properly focus an
image on the retina. Myopia, also known as nearsightedness, occurs when the
eye’s lens focuses images in front of the retina. Hyperopia, or farsightedness,
occurs when the eye’s lens focuses images behind the plane of the retina.
Individuals with myopia or hyperopia may also have astigmatism. Astigmatism is
blurred vision caused when an irregularly shaped cornea or, in some cases, a
defect in the natural lens, produces a distorted image on the retina. 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 its focus
for varying distances.
History
of STAAR
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 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 began selling the ICL outside the U.S. Made of STAAR’s proprietary
biocompatible Collamer lens material, the ICL is implanted behind the iris and
in front of the patient’s natural lens to treat refractive errors such as
myopia, hyperopia and astigmatism. The ICL received CE Marking in 1997,
permitting sales in countries that require the European Union CE Mark, and it
received FDA approval for the treatment of myopia in the U.S. in December 2005.
The ICL is now sold in approximately 50 countries and has been implanted in more
than 125,000 eyes worldwide.
Other
milestones in STAAR’s history include the following:
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·
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In
1998, STAAR introduced the Toric IOL, the first implantable lens approved
for the treatment of preexisting astigmatism. Used in cataract
surgery, the Toric IOL was STAAR’s first venture into the refractive
market in the United States.
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·
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In
2000, STAAR introduced an IOL made of the Collamer material, making its
clarity, refractive qualities, and biocompatibility available to cataract
patients and their surgeons.
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·
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In
2001, STAAR commenced commercial sales of its Visian Toric ICL or TICL,
which corrects both astigmatism and myopia, outside the U.S. In 2002
the TICL received CE Marking, allowing commercial sales in countries that
require the European Union CE Mark. Other significant markets for
the TICL include China, Korea, and Canada. The TICL is not yet
approved for commercial sale in the
U.S.
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·
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In
late 2003, STAAR Japan introduced the first preloaded IOL 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.
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|
·
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On
December 22, 2005, the FDA approved the ICL for the treatment of
myopia, making it the first, and to date only, small incision phakic
implant commercially available in the United
States.
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Financial
Information about Segments and Geographic Areas
STAAR’s
principal products are IOLs, ICLs, and other complementary products used in
ophthalmic surgery. Because 100% of STAAR’s sales are generated from the
ophthalmic surgical product segment, the Company operates as one operating
segment for financial reporting purposes. See Note 19 to the Consolidated
Financial Statements for financial information about product lines and
operations in geographic areas.
5
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.
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Minimally Invasive Intraocular
Lenses (IOLs). We produce and market a line of foldable IOLs
for use in minimally invasive cataract surgical procedures. Because they can be
folded, our IOLs can be implanted into the eye through an incision less than 3mm
in length, and for one model as small as 2.2 mm. Once inserted, the IOL unfolds
naturally to replace the cataractous lens.
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 TM loop
haptics. The selection of one style over the other is primarily based on the
preference of the ophthalmologist.
The
addition of aspheric optics to STAAR’s IOL designs has been a primary focus of
STAAR’s recent development efforts. Aspheric IOLs use advanced optical designs
intended to provide a clearer image than traditional spherical lenses,
especially in low light, which has led to significant market share gains for
aspheric designs. STAAR introduced its first aspheric IOLs made of
silicone and Collamer in 2007 and received New Technology IOL “NTIOL”
designation for both products in 2008 which qualify them for additional
reimbursement.
STAAR
Japan introduced the first Preloaded Injector in international markets in late
2003. The Preloaded Injector is a silicone or acrylic IOL packaged and shipped
in a pre-sterilized, disposable injector ready for use in cataract surgery. We
believe the Preloaded Injector offers surgeons improved convenience and
reliability. In 2006 STAAR Japan began selling in Japan an acrylic-lens-based
Preloaded Injector employing a lens supplied by Nidek Inc., a Japanese
ophthalmic company. Nidek also assembles and sells in Japan the acrylic
Preloaded Injector under its own brand, using injector parts purchased from
STAAR Japan. STAAR Japan’s agreement with Nidek provides for the sale of the
acrylic Preloaded Injector in additional territories by mutual agreement of the
two companies. The Preloaded Injector is not yet available for sale in the
U.S.
We have
developed and currently market, principally in the U.S., the Toric IOL, a toric
version of our single-piece silicone IOL, which is specifically designed for
cataract patients who also have pre-existing astigmatism. The Toric IOL is the
first refractive product we offered in the U.S.
Sales of
IOLs accounted for approximately 44% of our total revenues for the 2008 fiscal
year, 39% of total revenues for the 2007 fiscal year and 45% of total revenues
for the 2006 fiscal year.
Visian ICL (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 refractive errors over a
wide diopter range.
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 those
used to implant an IOL during cataract surgery, except that the natural lens is
not removed. The surgical procedure to implant the ICL is typically performed
with topical anesthesia on an outpatient basis. Visual recovery usually occurs
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
for myopia was approved by the FDA for use in the United States on December 22,
2005. The ICL and TICL are approved in countries that require the European Union
CE Mark, China, Canada, Korea and Singapore. Applications are pending in
Australia and Japan, and the Company is working to obtain new approvals for the
ICL and TICL in other countries. The Company submitted its application for U.S.
approval of the TICL to the FDA in 2006 (see “Regulatory Matters – Recent Correspondence with FDA
Regarding Clinical Oversight and TICL Approval”).
6
The
Hyperopic ICL is approved for use in countries that require the European Union
CE Mark and in China and Canada.
The ICL
is available for myopia in the United States in four lengths and 27 powers for
each length, and internationally in four lengths, with 41 powers for each
length, and for hyperopia in four lengths, with 37 powers for each length, which
equates to 420 inventoried parts. This requires the Company to carry a
significant amount of inventory to meet the customer demand for 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. Accordingly, the Toric ICL is often made to order.
Sales of
ICLs (including TICLs) accounted for approximately 25% of our total revenues
for the 2008 fiscal year, 26% in 2007 fiscal year and 21% of total
revenues for the 2006 fiscal year.
Other
Surgical Products
As part
of our strategic approach to provide complementary products for use in
ophthalmic 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, Cruise Control, a single-use disposable filter which allows for a
faster, cleaner phacoemulsification procedure and is compatible with all
phacoemulsification equipment, and the AquaFlow Collagen Glaucoma Drainage
Device, an implantable device used for the surgical treatment of glaucoma. We
also sell other related instruments, devices, surgical packs and equipment that
we manufacture or that are manufactured by others.
Sales of
other surgical products accounted for approximately 31% of our total revenues
for the 2008 fiscal year, 35% of total revenues for the 2007 fiscal year and 33%
of total revenues for the 2006 fiscal year.
German
Distribution Business
Domilens,
STAAR’s German subsidiary, is an ophthalmic distribution company. Domilens
principally resells and services products manufactured by third parties, along
with STAAR’s refractive products and Preloaded Injectors. Substantially all of
Domilens’ revenues are generated from the ophthalmic surgical products
market. Domilens reported sales of $25.1 million in fiscal year 2008,
$23.7 million in fiscal year 2007 and $21.1 million in fiscal year
2006.
Domilens
sells IOLs and other ophthalmic devices, sells and services phacoemulsification
systems and other surgical equipment, and sells instruments, supplies and
disposables. A significant part of Domilens business is the assembly of custom
surgical kits that package a surgeon’s preferred supplies and disposables in
convenient form for a single surgery. Domilens sells many of its third party
products under its own private label.
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.
Our
sources of supply for raw materials can be threatened by shortages of raw
materials and other market forces, by natural disasters, by the supplier’s
failure to maintain adequate quality or a recall initiated by the supplier. Even
when substitute suppliers are available, the need to certify regulatory
compliance and quality standards of substitute suppliers could cause significant
delays in production and a material reduction in our sales revenue. We try to
mitigate this risk by stockpiling raw materials when practical and identifying
secondary suppliers, but the risk cannot be entirely eliminated. For example,
the failure of one of our suppliers could be the result of an unforeseen
industry-wide problem, or the failure of our supplier could create an
industry-wide shortage affecting secondary suppliers as well.
7
In
particular, loss of our external supply source for silicone could cause us
material harm. In addition, 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 January 2, 2009, we owned approximately 242
United States and foreign patents and had approximately 94 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 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 and to manufacture the
collagen copolymer lens material. In developing its proprietary biocompatible
Collamer material STAAR developed and patented additional technology. STAAR has
also enhanced the originally licensed ICL design through patented features
designed to make it safer and more effective. 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 AquaFlow Device, our phacoemulsification
system, our insertion devices, and other technologies of the
Company.
Our
patent portfolio includes a significant group of patents granted or pending in
the U.S. and other countries and in Japan, that we acquired in connection with
the purchase of the remaining 50% interests in STAAR Japan in early fiscal 2008.
These include numerous patents covering our Preloaded Injector technology. Prior
to our acquisition, STAAR Japan held exclusive rights to these patents. STAAR
believes that STAAR Japan’s patents enable it to better capitalize on the
competitive advantage of our Preloaded Injector technology outside of
Japan.
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 patent proprietary elements 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 may result in the
loss of market exclusivity, we may continue to derive commercial benefits from
these products. Also, we may continue to enjoy market exclusivity if we have
maintained trade secrecy over the use of proprietary technology or if medical
device regulations require our competitors to conduct clinical research or
otherwise satisfy requirements before they can use the technology. We may
also be able to maintain exclusivity by patenting important improvements to the
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 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.
8
Seasonality
We
generally experience lower sales during the third quarter due to the effect of
summer vacations on elective procedures. In particular, because sales activity
in Europe drops dramatically in the summer months, and European sales have
recently accounted for a greater proportion of our total sales, this seasonal
variation in our results has become even more pronounced.
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 dependent upon a single or a few customers.
We
distribute products directly to the physician or facility in the United States,
Germany, and Australia, and rely primarily on local distributors in other
countries. In Japan we both sell directly and through a local
distributor. Where we distribute products directly, we rely on local sales
representatives to help generate sales by promoting and demonstrating our
products with physicians. In Germany, Japan and Australia, sales representatives
are primarily employed directly by us. In the U.S., we rely on both directly
employed representatives and independent sales representatives to sell our
products under the supervision of directly employed sales managers.
Our
internal marketing department develops the strategies to be employed by our
agents, employees and distributors through the activities of our internal
marketing department. The marketing department supports selling efforts by
developing and providing 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.
Competition
Competition
in the ophthalmic surgical product market 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. Accordingly, we must 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 competitors in the development and sale of products used to
surgically correct cataracts, specifically foldable IOLs, include Alcon
Laboratories (“Alcon”); Abbott Medical Optics, previously known as Advanced
Medical Optics (“AMO”); and Bausch & Lomb. According to a 2008 Market Scope
report, Alcon holds 57% of the U.S. IOL market, followed by AMO with 23% and
Bausch & Lomb with 15%. We hold approximately 4% 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, which is considered an
advanced material. Acrylic IOLs currently account for a 76% share of the U.S.
IOL market. We believe that we are positioned to compete effectively in the
advanced material market segment with the Collamer IOL. As part of our effort to
increase market uptake of our Collamer IOLs, we introduced an aspheric
three-piece Collamer IOL in November 2007 and introduced the nanoPOINT™
injector, which delivers STAAR’s single piece Collamer IOL through a 2.2 mm
incision. In 2009 STAAR expects to introduce an aspheric version of its
single-piece Collamer lens, which will also be deliverable through the nanoPOINT
injector, and an advanced injector system for the three-piece Collamer
lens.
9
The
addition of aspheric optics to STAAR’s IOL designs has been a primary focus of
STAAR’s recent development efforts. Aspheric IOLs use advanced optical designs
intended to provide a clearer image than traditional spherical lenses,
especially in low light, which has led to significant market share gains for
aspheric designs. In recognition of these advantages the Centers for Medicare
and Medicaid Services (“CMS”) grants New Technology IOL (“NTIOL”) status to
aspheric IOLs that can demonstrate improved visual performance over conventional
IOLs, allowing an extra $50 reimbursement per lens implanted in an ASC
(ambulatory surgical center). All of STAAR's aspheric lenses feature a
proprietary optical design (patent pending) that is optimized for the naturally
curved surface of the retina and certain other anatomical features of the human
eye, and provides outstanding image quality even if decentered. Because the
overwhelming majority of IOL purchases in the U.S. are implanted at ASCs and
reimbursed through Medicare, NTIOL status significantly increases STAAR’s
potential margin on qualifying lenses. During 2008 CMS granted NTIOL
status to STAAR’s single-piece and three-piece aspheric Collamer IOLs, and to
its three-piece silicone aspheric IOL. STAAR believes it is the first
company to be granted three NTIOL designations.
Although
the market for silicone IOLs, which currently account for 20% of the U.S. IOL
market, has declined in recent years, we believe they still provide an
opportunity for us as we continue to introduce improvements to the silicone IOL
technology and build awareness of our Collamer IOLs and improved injection
systems. In particular, we believe that our recently introduced aspheric
silicone three-piece lens and the expected 2009 introduction of preloaded
injectors to deliver this lens will enhance STAAR’s ability to maintain market
share within the silicone market sector.
Our ICL
faces significant competition in the marketplace from other products and
procedures that improve or correct refractive conditions, such as corrective
eyeglasses, external contact lenses, and conventional and laser refractive
surgical procedures. These products and procedures are long established in the
marketplace and familiar to patients in need of refractive vision correction. In
particular, eyeglasses and external contact lenses are much cheaper in the short
term and more easily obtained, because a prescription for the product 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 seeking surgery to correct
refractive conditions: AMO, Alcon, Bausch & Lomb, and Nidek. All of these
companies market Excimer lasers for corneal refractive surgery. Approval of
custom laser ablation, along with the addition of wavefront technology, has
increased awareness of corneal refractive surgery by patients and practitioners.
In the phakic implant market, there are only two approved phakic IOLs available
in the U.S., our Visian TM ICL and
the AMO Verisyse. In international markets, our ICL’s main competition is the
AMO Verisyse, which is also sold as the Ophtec Artisan IOL, although there are
several other phakic IOLs, manufactured by various companies, which are also
available.
Regulatory
Matters
Regulatory
Requirements
We must
secure and maintain regulatory approval to sell our products in the United
States and in most foreign countries. We are also subject to various federal,
state, local and foreign laws that apply 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 regulatory regimes that govern our
manufacturing and sale of our products.
Regulatory Requirements in the
United States. Under the federal Food, Drug & Cosmetic
Act, as amended (the “Act”), the FDA has the authority to adopt, and has
adopted, regulations that do the following:
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set
standards for medical devices,
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require
proof of safety and effectiveness prior to marketing devices that the FDA
believes require pre-market
approval,
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require
approval prior to clinical evaluation of human
use,
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permit
detailed inspections of device manufacturing
facilities,
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establish
“good manufacturing practices” that must be followed in device
manufacture,
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require
reporting of serious product defects, associated adverse events, and
certain recalls or field actions to the FDA,
and
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prohibit
the export of devices that do not comply with the Act unless they comply
with specified requirements, including but not limited to requirements
that exported devices comply with applicable foreign regulations, do not
conflict with foreign laws, and that the export not be contrary
to public health in the U.S. or the importing
country.
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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 establishment registration and
device listing with FDA, labeling and record-keeping requirements), Class II
(performance standards in addition to general controls) or Class III (pre-market
approval (“PMA”) required before commercial marketing). Class III devices are
the most extensively regulated because the FDA has determined they are
life-supporting, are of substantial importance in preventing impairment of
health, or present a potential unreasonable risk of illness or injury. The
effect of assigning a device to Class III is to require each manufacturer to
submit to the FDA a 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 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,
ICLs, and AquaFlow Devices are Class III devices, our surgical packs are Class
II devices, and our lens injectors are Class I devices. We have received FDA
pre-market approval for our IOLs, the ICL for the treatment of myopia, and
AquaFlow Device and 510(k) clearance for our lens injectors.
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. Our activities as a sponsor of clinical
research are subject to review by the Division of Bioresearch Monitoring
(“BIMO”) of the Office of Compliance in FDA’s Center for Devices and
Radiological Health.
Regulatory Requirements in Foreign
Countries. The
requirements for approval or clearance to market medical products in foreign
countries vary widely. 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
others, such as Japan, have requirements at least as stringent as those of the
FDA.
The
member countries of the European 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 the European Directives and associated guidelines concerning manufacturing
and quality control, technical specifications and biological or chemical and
clinical safety. We have obtained the CE Mark for all of our principal
products including our ICL and TICL, IOLs (excluding IOL’s with aspheric
optics), injectors and our AquaFlow Device.
11
FDA
Review of STAAR’s Quality Systems
The FDA’s
most recent general quality inspections of STAAR’s facilities were a regularly
scheduled inspection of the Monrovia, California facility, between February 23
and March 4, 2009, a post-market inspection of the Aliso Viejo,
California facility on August 7, 2006, and a post-market inspection of the
Nidau, Switzerland facility between September 26 and September 28, 2006. The
recent inspection of the Monrovia, California facility that concluded on March
4, 2009 resulted in the issuance of three observations by the investigators of
nonconformity on Form FDA-483. STAAR has agreed with the observations and
has completed and/or is implementing corrective actions to address each
observation. We have prepared a comprehensive response to the
investigators’ observations that we believe appropriately addresses each of the
issues raised on the Form FDA-483. The post-market inspections of Aliso
Viejo, California and Nidau Switzerland resulted in no observations of
noncompliance. Based in part on these inspections and the FDA inspections
conducted in 2005, STAAR believes that it is substantially in compliance with
the FDA’s Quality System Regulations and Medical Device Reporting
regulations.
STAAR’s
ability to continue its U.S. business depends on the continuous improvement of
its quality systems and its ability to demonstrate compliance with FDA
regulations. Accordingly, for the foreseeable future STAAR’s management expects
its strategy to include devoting significant resources and attention to those
efforts.
Status
of TICL Submission
STAAR’s
activities as a sponsor of biomedical research are subject to review by the FDA.
BIMO inspections are part of a program designed to ensure that data and
information contained in requests for Investigational Device Exemptions (IDE),
Premarket Approval (PMA) applications, and Premarket Notification submissions
(510k) are scientifically valid and accurate. Another objective of the program
is to ensure that human subjects are protected from undue hazard or risk during
the course of scientific investigations. While the past procedural violations
noted in the Warning Letter are serious in nature and required comprehensive
corrective and preventative actions, the Company does not believe that these
nonconformities undermine the scientific validity and accuracy of its clinical
data, or that human subjects were subjected to undue hazard or
risk.
Following
STAAR’s submission of a Pre-Market Approval application (PMA) supplement for the
TICL to the FDA on April 28, 2006, FDA’s BIMO conducted an inspection of STAAR’s
clinical study procedures, practices, and documentation related to the TICL
between February 15 and March 14, 2007. At the close of the inspection, STAAR
received eight inspectional observations on Form 483, to which it responded on
April 5, 2007. Notwithstanding the response, on June 26, 2007 the FDA’s BIMO
branch issued a Warning Letter to STAAR noting four areas of noncompliance
observed during the BIMO inspection. STAAR provided its written response to the
Warning Letter to the FDA on July 31, 2007.
On August
3, 2007 STAAR received a letter from the FDA Office of Device Evaluation (“ODE”)
notifying STAAR that the review of the TICL application would be placed on
integrity hold (i.e., halted) until STAAR completes specified actions
establishing the integrity and reliability of the clinical data under the TICL
application and the robustness of STAAR’s clinical trial procedures and systems.
Noting the same deficiencies cited in the June 26, 2007 Warning Letter from
BIMO, and other deficiencies noted in an audit of a clinical study site, ODE
requested that STAAR engage an independent third party auditor to conduct an
audit of patient records along with a clinical systems audit to ensure accuracy
and completeness of data before resubmitting the application.
STAAR’s
independent third party auditor has completed its audits, has reviewed and
certified the amended clinical data that is the source for the data to be
included in the resubmission of the TICL application, and has completed its
audit report on STAAR’s quality systems related to clinical oversight. The third
party auditor has submitted its findings directly to the FDA for its
examination. The submission of findings from the third party auditor to FDA was
in two audit reports, dated October 8, 2008 and December 15, 2008. The FDA
considers the October 8, 2008 report to be complete and has allowed the third
party auditor to release it to STAAR. In December 2008, the FDA allowed
the third party auditor to release a draft version of the December 15,
2008 report to STAAR. In mid February 2009 the FDA presented
the third party auditor with two questions related to the information in the
December 15, 2008 report and the third party auditor responded to the questions
on or about March 16, 2009. Upon final release of the December 15,
2008 third party audit report to STAAR, STAAR will prepare a corrective action
plan that addresses the findings of the third party auditor as reported to
FDA. STAAR has reviewed the corrective action plans developed in response
to the Warning Letter and the audit findings that the FDA has allowed the third
party auditor to release to date and will ensure that the corrective action plan
developed to address the independent third party auditor’s findings is fully
aligned with all of the auditor’s findings. If the FDA agrees with the
corrective action plan, then an inspection by the local office will be
scheduled. If the results of the inspection are satisfactory to FDA, the
inspector will forward a report to FDA headquarters and it is expected that the
FDA would then lift the integrity hold. After the hold is lifted, STAAR will be
permitted to resubmit the clinical data for the TICL application, as certified
by the third party auditor, and FDA will resume substantive review of the TICL
data. STAAR cannot assure investors that its corrective actions will be
satisfactory to FDA, that ODE will grant approval to the TICL, or that the scope
of requested TICL approval, if granted, would not be limited by the
FDA.
12
Acquisition
of Remaining Interests in Japanese Joint Venture
Early in
fiscal year 2008 STAAR completed the acquisition of the remaining interests in
its Japan-based joint venture, Canon Staar Co., Inc. (“Canon Staar”), which
manufactures the Preloaded Injector. Canon, Inc. and its affiliated marketing
company, Canon Marketing Japan Inc. (“CMJ”) collectively owned 50% of Canon
Staar prior to the closing of the acquisition on December 29, 2007, and STAAR
owned the other 50%. Following the acquisition, Canon Staar became a wholly
owned subsidiary of STAAR and changed its name to “STAAR Japan,
Inc.”
Total
consideration STAAR paid to Canon Inc. and CMJ (collectively referred to as the
“Canon companies” in this Report) consisted of $4 million in cash and the
issuance of 1.7 million shares of Series A Redeemable, Convertible Preferred
Stock (“Preferred Stock”). STAAR received in return all of the Canon companies’
shares of Canon Staar. Each share of the Preferred Stock issued to the Canon
companies is convertible for five years at the option of the holder into one
share of STAAR’s common stock, and will automatically convert after five years
into one share of STAAR’s common stock. The holders of the Preferred Stock may
redeem their shares at their option at a price of $4.00 per share (plus accrued
or declared but unpaid dividends) (“Redemption Price”) on the occurrence of a
change in control or liquidation of STAAR or at any time after the third
anniversary of the issuance date. STAAR can call the Preferred Stock at the
redemption price after the first anniversary of the issuance date.
Canon
Staar, renamed STAAR Japan, was created in 1988 pursuant to a Joint Venture
Agreement between STAAR and the Canon companies for the principal purpose of
designing, manufacturing, and selling in Japan intraocular lenses and other
ophthalmic products. STAAR Japan recorded worldwide sales of $12.7 million in
fiscal year 2008. In addition to the business of manufacturing the Preloaded
Injector, STAAR Japan is also seeking approval from the Japanese regulatory
authorities to market in Japan STAAR's Visian ICL and TICL, Collamer IOL and
AquaFlow Device. Prior to December 29, 2007, STAAR has reported its
interest in the joint venture under the equity method and did not consolidate
Canon Staar’s income, cash flow or balance sheet data with STAAR. STAAR Japan’s
results have been consolidated into STAAR financial statements beginning with
the first fiscal quarter of 2008.
The
general manager of Canon Staar for most of its history, Isamu Kamijo, agreed to
continue serving in this capacity and joined STAAR Japan, Inc. as its President
after the closing. He had previously been an employee of Canon Marketing Japan
serving at Canon Staar under a secondment arrangement.
Under the
agreements governing the joint venture, CMJ had been the exclusive distributor
of Canon Staar products in Japan. At the closing STAAR Japan assumed CMJ’s IOL
distribution business and purchased the remaining inventory of Canon Staar
products held by CMJ. Customers list and consignment inventories were
transferred to STAAR Japan and the sales staff employed by CMJ in its IOL
distribution business had been seconded to STAAR Japan for a period of one
year. As of December 31, 2008 this secondment agreement expired and the
sales staff covered under this agreement returned to CMJ.
As a
result of the acquisition, STAAR acquired a portfolio of 33 patents filed in
Japan, the U.S. and elsewhere in the world. These patents, which include claims
related to the Preloaded Injector, had previously been held exclusively by the
joint venture.
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 also includes clinical activities and regulatory
affairs and is comprised of 53 employees. In order to achieve our business
objectives, we will continue the investment in research and
development.
13
During
2008, research and development at STAAR resulted in the grant of NTIOL status
for the aspheric three-piece Collamer IOL in March, 2008; and the grant of NTIOL
status for the aspheric single-piece Collamer IOL and the aspheric three-piece
silicone IOL in July, 2008. The single-piece Aspheric Collamer IOL, which
can be delivered through the NanoPOINT injector, is expected to be introduced
the first half of 2009. In 2008 STAAR also completed development of an advanced
injector system for the three-piece Collamer IOL, which is expected to be
introduced in 2009 as well.
STAAR
Japan’s research and development department has been a leader in injector
technology, enabling that company to introduce the first Preloaded Injector to
international markets in late 2003. Since STAAR completed its acquisition
of the remaining 50% interest in STAAR Japan in early fiscal year 2008, STAAR
has incorporated the efforts of STAAR Japan’s research and development staff
into its global research and development strategy, which is expected to
accelerate STAAR’s efforts to improve its injector technology and bring
preloaded technology to more markets.
During 2009 we expect to continue our
focus on research and development in the following areas:
· Development
of a Collamer Toric IOL to complement our pioneering silicone Toric
IOL;
· Introduction
of the “Epiphany” injector system for the three piece Collamer IOL;
· Shelf
life studies to expand the shelf life for Collamer IOLs and ICLs;
· FDA
approval for the nanoPoint system to deliver the ICL products through a smaller
incision;
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Introduction
to the U.S. of preloaded injectors to deliver our aspheric, square-edged
three-piece silicone IOL.
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Also
during 2009 we plan to explore the accommodating effects of the Collamer single
piece IOL. Many surgeons have reported that their patients receiving the
Collamer single piece IOL have better near vision than patients implanted with
competitive IOLs. We have established the Collamer Accommodating Study
Team (CAST) made up of nine surgeons in the United States to study the
range of accommodation in their patients which have received a Collamer single
piece IOL. This will be valuable information for users of the current
product and will aid in design advancements for the platform.
Research
and development expenses were approximately $7,938,000, $6,711,000, and
$7,080,000 for our 2008, 2007 and 2006 fiscal years, respectively. STAAR expects
to invest approximately 7-10% of sales for research and development in
2009.
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 expect compliance with these laws to materially affect 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. In addition, we cannot
predict changes in environmental legislation or regulations that may be adopted
or enacted in the future and that may adversely affect us.
14
Significant
Subsidiaries
As of
April 1, 2009, the Company’s principal and wholly owned subsidiaries were STAAR
Surgical AG, STAAR Japan, Inc. and Domilens Vertrieb fuer medizinische Produkte
GmbH (a subsidiary of STAAR Surgical AG). The activities of each are described
above.
Employees
As of
April 1, 2009, we employed approximately 386 persons.
Code
of Ethics
STAAR has
adopted a Code of Ethics that applies to all of its directors, officers, and
employees. The Code of Ethics is posted on the Company’s website, www.staar.com — Investor Relations:
Corporate Governance.
Additional
Information
We make
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 100 F Street, NE, 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.
Item 1A. Risk
Factors
Our short
and long-term success is subject to many factors that are beyond our control.
Investors and prospective investors should consider carefully the following risk
factors, in addition to other information contained in this report. This Annual
Report on Form 10-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.
We have
reported losses in each of the last several fiscal years and have an accumulated
deficit of $125.9 million as of January 2, 2009. Although
the Company expects to achieve positive net earnings in 2009, STAAR’s history of
losses reflects a number of challenges that the Company must continue to
overcome and there can be no assurance that it will be successful in doing
so. Among the risks and uncertainties are those described in this
“Risk Factors”
section.
We
have only limited working capital and limited access to financing.
Our cash
requirements continue to exceed the level of cash generated by operations and we
expect to continue to seek additional resources to support and expand our
business, such as debt or equity financing. Because of our history of losses and
negative cash flows, our ability to obtain adequate financing on satisfactory
terms is limited. Our ability to raise financing through sales of equity
securities depends on general market conditions and the demand for STAAR’s
common stock. We may be unable to raise adequate capital through sales of equity
securities, and if our stock has a low market price at the time of such sales
our existing stockholders could experience substantial dilution. An inability to
secure additional financing could jeopardize our ability to continue
operations.
The
report of our Independent Registered Public Accounting Firm contains an
explanatory paragraph expressing substantial doubt about our ability to continue
as a “going concern.”
Because
of our limited capital resources and the $4.9 million judgment entered against
the Company in March 2009, coupled with a history of losses and negative cash
flows, our independent registered public accounting firm has modified its
opinion on our financial statements for fiscal year 2008 with a statement that
substantial doubt exists regarding STAAR’s ability to continue as a “going
concern.” While STAAR’s use of cash has declined in recent periods, and
the company believes it is close to generating sufficient cash from sales to
support its operations, its current cash resources are not sufficient to satisfy
the March 2009 court judgment or to provide reserves against other contingencies
that might arise in the next twelve months, especially if the global recession
causes sales to fall below projected levels.
15
Substantial
doubt about STAAR’s ability to continue as a going concern could affect our
relationships with suppliers or customers. In accordance with Generally
Accepted Accounting Principles in the U.S., STAAR’s balance sheet generally
states the book value of STAAR’s assets, which does not necessarily represent
the value that could be realized from the assets if STAAR could not continue as
a going concern.
We
are subject to a $4.9 million judgment and face additional
litigation.
On March
23, 2009, a California court entered judgment against STAAR for approximately
$2.2 million in compensatory damages and $2.7 million in punitive damages in
Parallax Medical Systems, Inc.
v. STAAR Surgical Company, a case alleging that STAAR willfully and
negligently interfered with the prospective business of a former regional
manufacturer’s representative. While STAAR intends to vigorously contest
this outcome through post-trial proceedings and, if necessary, appeal the cost
of satisfying the judgment or posting a bond for appeal exceeds STAAR’s current
capital resources. The court has stayed the execution of judgment and
collection of damages until after the completion of post-trial motions and the
deadline to file notice of appeal, which is a period of approximately three
months. If STAAR is unable to obtain additional capital to satisfy the judgment
or post an appeal bond before the expiration of the stay, STAAR could be
required to petition for protection under federal bankruptcy laws, which could
further impair its financial position and liquidity, and would likely result in
a default of its other debt obligations.
Another
lawsuit similar to the Parallax case, Moody v. STAAR Surgical
Company, is currently scheduled for trial in the Superior Court of
California, County of Orange, on May 25, 2009. STAAR believes that the
evidence to be presented in Moody does not support
liability for intentional or negligent interference, and some facts differ in
the two cases. However, the allegedly improper conduct of STAAR is the
same in the two cases and Moody will also be tried
before a jury. Moody is also seeking punitive damages. Accordingly, the
risk that a jury could render a verdict in Moody in a range similar to
or greater than the Parallax judgment cannot be
eliminated. An adverse judgment in the Moody case would further reduce
STAAR’s liquidity and capital resources. See “Item 3: Legal
Proceedings.”
Future
legal costs may be material.
In recent periods, STAAR has incurred
increased expenses for legal fees, in particular fees related to the
defense of the lawsuits by former regional manufacturers’ representatives and
STAAR’s related cross-complaints that are described under “Item 3: Legal
Proceedings.” While
STAAR maintains insurance coverage for a number of litigation risks, including
the cost of defending product liability claims, such insurance does not cover
those lawsuits or some other types of commercial disputes. The defense of
litigation, including fees of external legal counsel, expert witnesses and
related costs, is expensive and may be difficult to project accurately. In
general, such costs are unrecoverable even if STAAR ultimately prevails in
litigation, and could represent a significant portion of STAAR’s limited capital
resources. To defend lawsuits, STAAR also finds it necessary to divert officers
and other employees from their normal business functions to gather evidence,
give testimony and otherwise support litigation efforts. STAAR expects to
experience higher than normal litigation costs until the lawsuits by former
regional manufacturer’s representatives are decided, which could include the
need to appeal and defend a new trial.
STAAR may
also in the future find it necessary to file lawsuits to recover damages or
protect its interests. The cost of such litigation could also be significant and
unrecoverable, which may also deter STAAR from aggressively pursuing even
legitimate claims.
Default
under the Senior Promissory Note could result in an acceleration of our
indebtedness or increased interest costs or both.
Among the
events of default in the Senior Promissory Note (“the Note”) held by Broadwood
Partners, L.P. is any judgment in excess of $500,000 against the Company that
“shall remain unpaid.” Because STAAR is not required to pay the Parallax judgment until the
expiration of the stay 40 days after final judgment, and because the amount to
be paid pursuant to the judgment will not be fixed until final judgment is
rendered on or before May 22, 2009, STAAR believes that as of the date of this
Report the Parallax
judgment should not be deemed “unpaid” and that an event of default under
the Senior Promissory Note would not have occurred. To avoid dispute over this
matter and to secure the lender’s temporary waiver of remedies for an event of
default during the stay of the Parallax judgment, STAAR and
Broadwood entered into a Temporary Waiver Agreement on April 2,
2009.
Under the
Temporary Waiver Agreement, if, prior to the expiration of the stay, STAAR does
not satisfy the Parallax judgment or secure an additional stay pending appeal,
an event of default will occur under the Note. The event of default
would cause an increase of the interest rate from 7% to a maximum of 20% and, if
the holder delivers written notice of default, the entire $5 million principal
amount and accrued interest of the note will become immediately due and
payable. The Temporary Waiver Agreement also provides that if STAAR
secures a further stay of judgment pending appeal, but does not satisfy the
judgment before the expiration of the original stay period, the Note will not
become immediately due and payable but the increased default interest rate will
apply unless and until the Parallax judgment is
satisfied an all other pending and undecided material litigation is resolved. If
applicable, the increased interest rate will result in a $650,000 per year
increase in interest on the Note. An event of default under the Note
leading to either the increased rate of interest or to the Note becoming
immediately due and payable will harm STAAR’s financial condition and results of
operations.
16
We
may have limited ability to fully use our recorded tax loss
carryforwards.
We have
accumulated approximately $119.5 million of tax loss carryforwards as of January
2, 2009 to be used in future periods if we become profitable. If we were to
experience a significant change in ownership, Internal Revenue Code Section 382
may restrict the future utilization of these tax loss carryforwards even if we
become profitable and these tax loss carryforwards will begin to expire between
2020 and 2028.
FDA
compliance issues have harmed our reputation and we expect to devote significant
resources to maintaining compliance in the future.
The
Office of Compliance of the FDA’s Center for Devices and Radiological Health
regularly inspects STAAR’s facilities to determine whether we are in compliance
with the FDA Quality System Regulations relating to such things as manufacturing
practices, validation, testing, quality control, product labeling and complaint
handling, and in compliance with FDA Medical Device Reporting regulations and
other FDA regulations. The FDA also regularly inspects for compliance with
regulations governing clinical investigations.
Based on
the results of the FDA inspections of STAAR’s Monrovia, California facilities in
2005, 2006 and 2009, STAAR believes that it is substantially in compliance with
the FDA’s Quality System Regulations and Medical Device Reporting regulations.
However, between December 29, 2003 and July 5, 2005 we received Warning Letters
and other correspondence indicating that the FDA found STAAR’s Monrovia,
California facility in violation of applicable regulations, warning of possible
enforcement action and suspending approval of new implantable devices. The FDA’s
findings of compliance deficiencies during that period harmed our reputation in
the ophthalmic industry, affected our product sales and delayed FDA approval of
the ICL.
On June
26, 2007 STAAR received a Warning Letter from the FDA citing four areas of
noncompliance noted by the FDA’s Bioresearch Monitoring branch during its
inspection of STAAR’s clinical study procedures, practices, and documentation
related to the TICL. The Office of Device Evaluation cited the same
deficiencies in a letter placing an integrity hold on the TICL application.
While BIMO’s oversight covers clinical research, rather than the manufacturing,
quality and device reporting issues that have been STAAR’s greatest focus in its
recent compliance initiatives, STAAR believes that the negative publicity from
the BIMO observations and Warning Letter has made it more difficult for STAAR to
overcome the harm to its reputation resulting from past FDA
proceedings.
STAAR’s
ability to continue its U.S. business depends on the continuous improvement of
its quality systems and its compliance with FDA regulations. Accordingly, for
the foreseeable future STAAR’s management expects its strategy to include
devoting significant resources and attention to those efforts. STAAR cannot
ensure that its efforts will be successful. Any failure to demonstrate
substantial compliance with FDA regulations can result in enforcement actions
that terminate, suspend or severely restrict our ability to continue
manufacturing and selling medical devices. Please see the related risks
discussed under the headings “We are subject to extensive government
regulation, which increases our costs and could prevent us from selling our
products” and “We are subject to federal and state
regulatory investigations.”
FDA
Approval of the Toric ICL, which could have a significant U.S. market, has been
significantly delayed.
Part of
STAAR’s strategy to increase U.S. sales of refractive products has been a plan
to introduce the Toric ICL, or TICL, a variant of the ICL that corrects both
astigmatism and myopia in a single lens and that is currently marketed outside
the U.S. STAAR believes the TICL also has a significant potential market in the
U.S. and could accelerate growth of the overall refractive product line.
STAAR submitted a supplemental premarket approval application (PMA) for the TICL
in April 2006. In August 2007 the FDA placed an integrity hold on the PMA
and suspended its consideration of the PMA until STAAR completes specified
actions to satisfy FDA concerns regarding deficiencies in STAAR’s oversight of
past clinical activities. The actions include engaging an independent
third party auditor to conduct a 100% data audit of patient records along with a
clinical systems audit to ensure accuracy and completeness of data before
submitting amendments to the application for the FDA’s review. After
resubmission of the application, approval of the TICL will remains in the
discretion of the FDA. Neither the approval, nor its timing, is
certain. If STAAR is required to conduct additional clinical studies to
secure approval of the TICL, significant further delays and costs would likely
result.
17
Global
recession could reduce sales of our refractive products.
The
global economy is currently in recession. Since at least mid-2008 consumer
spending has decreased in the U.S. as credit has become less available,
unemployment has increased, and consumer confidence has declined.
Refractive
surgery is an elective procedure generally not covered by health
insurance. Patients must pay for the procedure, frequently through
installment financing arrangements. They can defer the choice to have
refractive surgery if they lack the disposable income to pay for it or do not
feel their income is secure in the current economic climate. Laser
refractive surgery has experienced a significant decrease in demand in the U.S.
beginning in the second quarter of 2008. Visian ICL sales have not been as
badly affected and generally increased during the 2008 fiscal year; however
during the fourth fiscal quarter of 2008 U.S. ICL sales were flat and
international Visian ICL and TICL sales declined slightly as compared to the
same period as prior year. If the global recession becomes more severe or
continues for a protracted period, Visian ICL sales could continue to grow
slowly or decline. Because the Visian ICL is STAAR’s fastest growing and
highest margin product, restricted growth or a decline in its sales could
materially harm STAAR’s business.
Because
cataracts generally affect the elderly, most sales of IOLs and other products
used in cataract surgery are reimbursed by government entities worldwide.
Accordingly, these sales are generally unaffected by economic downturns or
recessions. However, if the global recession becomes more severe or
continues for a protracted period, STAAR’s customers could slow their payments
or delay, reduce or forgo inventory purchases. If STAAR’s customers face
financial difficulty, they could further slow or default in payment, increasing
our collection risk.
Negative
publicity concerning complications of laser eye surgery could reduce the demand
for our refractive products as well.
Negative
publicity about laser eye surgery has recently appeared in the U.S. and some
other refractive surgery markets. For example, on April 25, 2008, the FDA
Ophthalmic Devices Panel held a public meeting to discuss reports of medical
complications and customer satisfaction following refractive surgery. The
resulting publicity broadened public awareness of the potential complications of
refractive surgery and potential patient dissatisfaction, in particular as a
result of LASIK and other corneal laser-based procedures. These concerns
may have been a factor in the steep decline in demand for such procedures during
2008. Concerns about
complications of refractive laser eye surgery could encourage more patients and
doctors to select the Visian ICL as an alternative, but could also decrease
patient interest in all refractive surgery, including Visian ICL. Depending on
the nature and severity of future negative publicity about refractive surgery,
the growth of ICL sales in the U.S. could be limited or sales could decline as a
result. Because nearly all candidates for refractive surgery can achieve
acceptable vision through the use of spectacles or contact lenses, for most
patients the decision to have refractive surgery is a lifestyle choice that
depends on high confidence in achieving a satisfactory
outcome.
Our
core domestic IOL business has suffered declining sales.
The
foldable silicone IOL was once our largest source of sales. Since we introduced
the product, however, competitors have introduced IOLs employing a variety of
designs and materials. Over the years these products have taken an increasing
share of the IOL market, while the market share for STAAR silicone IOLs has
decreased. In particular, many surgeons now choose lenses made of acrylic
material rather than silicone for their typical patients. In addition, our
competitors have begun to offer multifocal or accommodating lenses that claim to
reduce the need for cataract patients to use reading glasses; the market for
these “presbyopic” lenses is expected to grow as a segment of the cataract
market. Our competitors also introduced IOLs with advanced aspheric optics
earlier than STAAR. During fiscal year 2008 STAAR’s U.S. cataract sales declined
9% over the comparable period of the prior year. Our newer line of IOLs made of
our proprietary biocompatible Collamer material, and our newly introduced
aspheric lenses, while intended to reverse the trend of declining domestic
cataract product sales, may not permit us to recover the market share lost over
the last several years.
18
We
have restructured our U.S. sales force but the changes may not reverse the
decline in our U.S. sales of cataract products.
From 2007
through early 2009 STAAR comprehensively reorganized its U.S. sales force.
STAAR intends these changes to provide greater efficiency and better
coordination of its sales efforts as it seeks to reverse the long-term decline
in U.S. IOL sales by promoting its new lens designs and delivery systems.
In the fourth quarter of 2008 STAAR significantly reduced the rate of decline in
its U.S. IOL sales, but has not yet seen an increase in these sales. If
our restructured sales force does not perform as anticipated we may suffer
continued poor performance in U.S. sales and further harm to our business and
financial condition.
Strikes,
slow-downs or other job actions by doctors can reduce sales of cataract-related
products.
In many
countries where STAAR sells its products, doctors, including ophthalmologists,
are employees of the government, government-sponsored enterprises or large
health maintenance organizations. In recent years employed doctors who object to
salary limitations, working rules, reimbursement policies or other conditions
have sought redress through strikes, slow-downs and other job actions. These
actions often result in the deferral of non-essential procedures, such as
cataract surgeries, which affects sales of our products. For example, in fiscal
year 2006, strikes and slow-downs by doctors in Germany were partly responsible
for a drop in sales by our wholly owned subsidiary Domilens GmbH, which
distributes ophthalmic products in Germany. Such problems could occur again in
Germany or other regions and, depending on the importance of the affected region
to STAAR’s business, the length of the action and its pervasiveness, job actions
by doctors can materially reduce our sales revenue and earnings.
Our
sales are subject to significant seasonal variation.
We
generally experience lower sales during the third quarter due to the effect of
summer vacations on elective procedures. In particular, because sales activity
in Europe drops dramatically in July and August, and European sales have
recently accounted for a greater proportion of our total sales, this seasonal
variation in our results has become even more pronounced.
We
could experience losses due to product liability claims.
We have
been subject to product liability claims in the past and may experience such
claims in the future. Product liability claims against us may exceed the
coverage limits of our insurance policies or cause us to record a loss in excess
of our deductible. A 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.
We
compete with much larger companies.
Our
competitors, including Alcon, AMO, 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.
19
The
global nature of our business may result in fluctuations and declines in our
sales and profits.
Our
products are sold in approximately 50 countries. Sales from international
operations make up a significant portion of our total sales. For the fiscal year
ended January 2, 2009 sales from international operations were 75% of our total
sales. The results of operations and the financial position of certain of our
foreign 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 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 sales are
received. Our most significant currency exposures are to the Euro, the Swiss
Franc, the Australian dollar, and the Japanese Yen. The exchange rates between
these and other local currencies and the U.S. 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.
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
U.S. 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
sales. Inflation in emerging markets also makes our products more expensive
there and increases the credit risks to which we are exposed.
The
success of our international operations depends on our successfully managing our
foreign subsidiaries.
We
conduct most of our international business through wholly owned subsidiaries.
Managing distant subsidiaries and fully integrating them into STAAR’s business
is challenging. While STAAR seeks to integrate its foreign subsidiaries fully
into its operations, direct supervision of every aspect of their operations is
impossible, and as a result STAAR relies on its local managers and staff.
Cultural factors, language differences and the local legal climate can result in
misunderstandings among internationally dispersed personnel, and increase the
risk of failing to meet U.S. and foreign legal requirements, including with
respect to the Sarbanes-Oxley Act of 2002 and the U.S. Foreign Corrupt Practices
Act. These risks have increased now that we have completed the acquisition of
STAAR Japan, Inc. The risk that unauthorized conduct may go undetected will
always be greater in foreign subsidiaries.
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
sales.
We obtain
some of the components for our products from a single source. For example, only
one supplier produces our viscoelastic product. The loss or interruption of any
of these suppliers could increase costs, reducing our sales and profitability,
or harm our customer relations by delaying product deliveries. Even when
substitute suppliers are available, the need to certify regulatory compliance
and quality standards of substitute suppliers could cause significant delays in
production and a material reduction in our sales. Even when secondary sources
are available, the failure of one of our suppliers could be the result of an
unforeseen industry-wide problem, or the failure of our supplier could create an
industry-wide shortage affecting secondary suppliers as well.
Our
activities involve hazardous materials and emissions and may subject us to
environmental liability.
Our
manufacturing, research and development practices involve the use of hazardous
materials. We are subject to federal, state and local laws and regulations in
the various jurisdictions in which we have operations governing the use,
manufacturing, storage, handling and disposal of these materials and certain
waste products. 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 an
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.
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, motivate and retain other
highly skilled personnel. Failure to do so may adversely affect our
results.
20
Changes
in accounting standards could affect our financial results.
The
accounting rules applicable to public companies like STAAR are subject to
frequent revision. Future changes in accounting standards could require us to
change the way we calculate income, expense or balance sheet data, which could
result in significant change to our reported results of operation or financial
condition.
We
are subject to international tax laws that could affect our financial
results.
STAAR
conducts international operations through its subsidiaries. Tax laws affecting
international operations are highly complex and subject to change. STAAR’s
payment of income tax in the different countries where it operates depends in
part on internal settlement prices and administrative charges among STAAR and
its subsidiaries. These arrangements require judgments by STAAR and are subject
to risk that tax authorities will disagree with those judgments and impose
additional taxes, penalties or interest on STAAR. In addition, transactions that
STAAR has arranged in light of current tax rules could have unforeseeable
negative consequences if tax rules change.
If
we suffer loss to our facilities due to catastrophe, our operations could be
seriously harmed.
We depend
on the continuing operation of our manufacturing facilities in California, Japan
and Switzerland, which have little redundancy or overlap among their activities.
Our facilities are subject to catastrophic loss due to fire, flood, earthquake,
terrorism or other natural or man-made disasters. Our California and Japanese
facilities are in areas where earthquakes could cause catastrophic loss. If any
of these facilities were to experience a catastrophic loss, it could disrupt our
operations, delay production, shipments and revenue and result in large expenses
to repair or replace the facility. Our insurance for property damage and
business interruption may not be sufficient to cover any particular loss, and we
do not carry insurance or reserve funds for interruptions or potential losses
arising from earthquakes or terrorism.
Most
of our products have single-site manufacturing approvals, exposing us to risks
of business interruption.
We
manufacture all of our products at our facilities in California, Switzerland,
and Japan. 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.
If
we are unable to protect our information systems against data corruption,
cyber-based attacks or network security breaches, our operations could be
disrupted.
We are
significantly dependent on information technology networks and systems,
including the Internet, to process, transmit and store electronic information.
In particular, we depend on our information technology infrastructure for
electronic communications among our locations around the world and between our
personnel and our subsidiaries, customers, and suppliers. Security breaches of
this infrastructure can create system disruptions, shutdowns or unauthorized
disclosure of confidential information. If we are unable to prevent such
security breaches, our operations could be disrupted or we may suffer financial
damage or loss because of lost or misappropriated information.
21
Risks
Related to the Ophthalmic Products Industry
If
we recall a product, the cost and damage to our reputation could harm our
business.
Medical
devices must be manufactured to the highest standards and tolerances, and often
incorporate newly developed technology. From time to time defects or technical
flaws in medical devices may not come to light until after the products are sold
or consigned. In those circumstances, like others in our industry, we have
voluntarily recalled our products. Similar recalls could take place again.
We may also be subject to recalls initiated by manufacturers of products we
distribute. Courts or regulators can also impose mandatory recalls on us, even
if we believe our products are safe and effective. STAAR believes that in
recent years it has been less affected by recalls than most of its U.S.
competitors, but cannot eliminate the risk of a material recall in the
future. 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
professionals to discontinue using our products.
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 sales 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 superior product, or if we announce a new
product of our own. 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; 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.
Resources
devoted to research and development may not yield new products that achieve
commercial success.
We spent 11% of our sales on
research and development during the fiscal year ended January 2, 2009, and we
expect to spend approximately 7-10% of our sales for this purpose in future
periods. 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. Any of the products currently under
development may fail to become commercially successful.
Changes
in reimbursement for our products by third-party payors could reduce sales of
our products or make them less profitable.
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, Medicaid, or other governmental sponsored programs in the
U.S. and Europe. Third party payors in both government and the private sector
continue to seek to manage costs by restricting the types of procedures they
reimburse to those viewed as most cost-effective and by capping or reducing
reimbursement rates. Whether they limit reimbursement prices for our products or
limit the surgical fees for a procedure that uses our products, these policies
can reduce the sales volume of our reimbursed products, their selling prices or
both. For example, the Centers for Medicaid and Medicare have recently reduced
the reimbursement rate for glaucoma procedures such as the implantation of our
AquaFlow Device. In some countries government insurers have sought to control
costs by limiting the total number of procedures they will reimburse. The U.S.
Congress has considered legislative proposals that would significantly change
the system of public and private health care reimbursement, and will likely
consider such changes again in the future. We are not able to predict whether
new legislation or changes in regulations will take effect at the state or
federal level, but if enacted these changes could significantly and adversely
affect our business.
22
We
are subject to extensive government regulation, which increases our costs and
could prevent us from selling our products.
STAAR is
regulated by regional, national, state and local agencies, including the Food
and Drug Administration, the Department of Justice, the Federal Trade
Commission, the Office of the Inspector General of the U.S. Department of Health
and Human Services and other regulatory bodies, as well as governmental
authorities in those foreign countries in which we manufacture or distribute
products. The Federal Food, Drug, and Cosmetic Act, the Public Health Service
Act and other federal and state statutes and regulations govern the research,
development, manufacturing and commercial activities relating to medical
devices, including their pre-clinical and clinical testing, approval,
production, labeling, sale, distribution, import, export, post-market
surveillance, advertising, dissemination of information and promotion. We are
also subject to government regulation over the prices we charge and any rebates
we may offer to customers. Complying with government regulation substantially
increases the cost of developing, manufacturing and selling our
products.
In the
U.S., we must obtain approval from the FDA for each product that we market.
Competing in the ophthalmic products industry requires us to introduce new or
improved products and processes continuously, 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 are subject to periodic inspection
by the FDA and international regulators. An unfavorable outcome in an FDA
inspection may result in the FDA ordering changes in our business practices or
taking other enforcement action, which could be costly and severely harm our
business.
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 timely 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.
Investigations
and allegations, whether or not they lead to enforcement action or litigation,
can materially harm our business and our reputation.
Failure
to comply with the requirements of the FDA or other regulators can result in
civil and criminal fines, the recall of products, the total or partial
suspension of manufacture or distribution, seizure of products, injunctions,
whistleblower lawsuits, failure to obtain approval of pending product
applications, withdrawal of existing product approvals, exclusion from
participation in government healthcare programs and other sanctions. Any
threatened or actual government enforcement action can also generate adverse
publicity and require us to divert substantial resources from more productive
uses in our business. Enforcement actions could affect our ability to distribute
our products commercially and could materially harm our business.
From time
to time STAAR is subject to formal and informal inquiries by regulatory
agencies, which could lead to investigations or enforcement actions. Even when
an inquiry results in no evidence of wrongdoing, is inconclusive or is otherwise
not pursued, the agency generally is not required to notify STAAR of its
findings and may not inform STAAR that the inquiry has been
terminated.
STAAR
maintains a hotline for employees to report any violation of laws, regulations
or company policies anonymously, which is intended to permit STAAR to identify
and remedy improper conduct. Nevertheless, present or former employees may elect
to bring complaints including to regulators and enforcement agencies. The
relevant agency will generally be obligated to investigate such complaints to
assess their validity and obtain evidence of any violation that may have
occurred. In response to reports that its policies or applicable laws or
regulations have been violated, STAAR may find it necessary to conduct its own
intense investigations, which may be extensive. Even without a finding of
misconduct, negative publicity about investigations or allegations of misconduct
could harm our reputation with professionals and the market for our common
stock. Responding to investigations or conducting internal investigations can be
costly, time-consuming and disruptive to our business.
23
We
depend on proprietary technologies, but may not be able to protect our
intellectual property rights adequately.
We rely
on patents, trademarks, trade secrecy laws, contractual provisions and
confidentiality procedures and copyright 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. Any of our pending patent applications
may fail to result in an issued patent or fail to 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 open to dispute. Any litigation or claims
against us, whether or not successful, could result in substantial costs and
harm our reputation. Intellectual property litigation or claims could force us
to do one or more of the following:
|
·
|
cease
selling or using any of our products that incorporate the challenged
intellectual property, which would adversely affect our
sales;
|
|
·
|
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
|
|
·
|
redesign
our products to avoid infringing the intellectual property rights of a
third party, which may be costly and time-consuming or impossible to
accomplish.
|
We
may not successfully develop and launch replacements for our products that lose
patent protection.
Most of
our products are covered by patents that, if valid, 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 in the U.S. 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
reduce our prices to maintain sales of our products, which would make them 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
Our
charter documents 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. 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 could be deemed in the interest 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. Our bylaws contain other provisions that could have
an anti-takeover effect, including the following:
•
stockholders have limited ability to
remove directors;
• stockholders
cannot act by written consent;
• stockholders
cannot call a special meeting of stockholders; and
• stockholders
must give advance notice to nominate directors.
Anti-takeover
provisions of Delaware law could delay or prevent an acquisition of 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 prevent changes in our
management.
24
Future
sales of our common stock could reduce our stock price.
Our Board
of Directors could issue additional 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.
The
market price of our common stock is likely to be volatile.
Our stock
price has fluctuated widely, ranging from $1.16 to $5.98 per share during the
year ended January 2, 2009 and was $0.95 on March 30, 2009. Our stock
price could continue to experience significant fluctuations in response to
factors such as market perceptions, quarterly variations in operating results,
operating results that vary from the expectations of securities analysts and
investors, changes in financial estimates, changes in market valuations of
competitors, announcements by us or our competitors of a material nature,
additions or departures of key personnel, future sales of Common Stock and stock
volume fluctuations. Also, general political and economic conditions such as
recession or interest rate fluctuations may adversely affect the market price of
our stock.
Item 1B. Unresolved
Staff Comments
None.
Item 2. Properties
Our
operations are conducted in leased facilities throughout the world. Our
executive offices, manufacturing, warehouse and distribution, and primary
research facilities are located in Monrovia, California. STAAR Surgical AG
maintains office, manufacturing, 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.
STAAR Japan maintains executive offices and distribution facilities in
Shin-Urayasu, Japan and a manufacturing and R&D facility in Ichikawa City,
Japan. The Company leases additional sales and distribution facilities in
Germany and Australia. We believe our manufacturing facilities in the U.S.,
Switzerland and Japan are suitable and adequate for our current and future
planned requirements. The Company could increase capacity by adding additional
shifts at our existing facilities.
Item 3. Legal
Proceedings
Parallax Medical Systems, Inc. v.
STAAR Surgical Company (California Superior Court, County of Orange, Case
No. 07CC10136)). On March 2, 2009, following a jury trial in the Superior
Court of California, County of Orange, the jury awarded approximately $2.2
million in actual damages and $2.7 million in punitive damages to Parallax
Medical Systems, Inc. Parallax is a former independent regional
manufacturer’s representative (“RMR”) of STAAR. Parallax promoted sales of
STAAR products in the southeastern region of the U.S. under a contract that
expired on July 31, 2007. Parallax originally filed its complaint against
STAAR on September 21, 2007, claiming, among other things, that STAAR interfered
with Parallax’s prospective economic advantage when it informed a regional IOL
distributor that Parallax had a covenant restricting the sale of competing
products, and that STAAR interfered with Parallax’s contracts when STAAR caused
some of its current or former subcontractors to enter into new agreements to
represent STAAR products. STAAR filed a cross-complaint alleging breach of
contract and misappropriation of trade secrets; the jury found in favor of
Parallax on the cross-complaint. The complaint sought $48 million in
actual damages and unspecified punitive damages. On March 23, 2009, the
court entered judgment based on the verdict.
STAAR
believes that the Parallax case was incorrectly
decided as to liability, the amount of compensatory damages and the
appropriateness and amount of punitive damages. STAAR intends to
vigorously contest the outcome of this case through post-trial proceedings and,
if necessary, appeal. The court has stayed the execution of judgment and
collection of damages until after the completion of post-trial motions and the
deadline to file notice of appeal, which is a period of approximately three
months. Parallax
has notified STAAR that it intends to seek an award of attorney’s fees, which
STAAR will oppose on the ground that there is no legal or factual basis for such
an award. If the post-trial motions are unsuccessful and STAAR files an
appeal, it would need to obtain a surety bond of 1.5 times the judgment amount,
fully secured with cash collateral, unless the requirement is reduced by the
court, to avoid enforcement of the judgment pending resolution of the
appeal.
25
Moody v. STAAR Surgical Company;
(California Superior Court, County of Orange, Case No. 07CC10132).
Scott C. Moody, Inc., also a former RMR of STAAR, filed a complaint against
STAAR on the same day that Parallax filed its
complaint. Moody promoted sales of STAAR products in the southwestern
region of the U.S., under a contract that, like Parallax’s, expired on July 31,
2007. Like Parallax, Moody claims that STAAR interfered with Moody’s
prospective economic advantage when it informed a regional IOL distributor that
Moody had a covenant restricting the sale of competing products, and that STAAR
interfered with Moody’s contracts when STAAR engaged two sales representatives
who had previously contracted with Moody. The complaint seeks $32 million
in actual damages and unspecified punitive damages. STAAR has filed a
cross-complaint alleging breach of contract and misappropriation and trade
secrets.
The Moody case is currently
scheduled to be tried before a jury beginning on May 25, 2009, before a
different judge than the Parallax case. STAAR
believes that the evidence to be presented in Moody does not support liability
for interference with prospective business advantage or interference with
Moody’s contracts with former subcontractors, and does not support damages at a
level that is material to STAAR. While the Parallax and Moody cases have many facts
in common, significant factual differences exist. However, the plaintiffs
in both cases allege that the same conduct of STAAR interfered with the RMR’s
prospective business advantage, and Moody will also be tried
before a jury. Moody has also indicated it will seek punitive damages.
From time
to time the Company is subject 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. STAAR maintains insurance coverage for product liability
claims. While the Company does not know of any other claims likely to have a
material adverse effect on its financial condition or results of operations, new
claims or unexpected results of existing claims could lead to significant
financial harm.
Item 4. Submission
of Matters to a Vote of Security Holders
There
were no matters submitted to a vote of security holders during the quarter ended
January 2, 2009.
PART II
Item 5. Market
for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
Our
Common Stock is traded on the Nasdaq Global 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
|
||||||
2008
|
||||||||
Fourth
Quarter
|
$ | 4.710 | $ | 1.160 | ||||
Third
Quarter
|
5.980 | 2.980 | ||||||
Second
Quarter
|
3.890 | 2.230 | ||||||
First
Quarter
|
2.680 | 2.000 | ||||||
2007
|
||||||||
Fourth
Quarter
|
$ | 3.650 | $ | 2.170 | ||||
Third
Quarter
|
4.000 | 2.750 | ||||||
Second
Quarter
|
6.150 | 3.780 | ||||||
First
Quarter
|
7.320 | 5.300 |
On March
30, 2009, the closing price of the Company’s Common Stock was $0.95 per share.
Stockholders are urged to obtain current market quotations for the Common
Stock.
As of
April 1, 2009, there were approximately 518 record holders of our Common
Stock.
26
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
April 1, 2009, options to purchase 2,692,073 shares of Common Stock were
exercisable.
Stock
Performance Graph
The
following graph compares the yearly and cumulative return on an investment in
STAAR’s common stock over the last five fiscal years to the yearly and
cumulative return of the following over the same time period: (1) the composite
of all United States and foreign companies listed on the Nasdaq Stock Market
(the “Nasdaq Index”); and (2) the composite of all United States and foreign
companies listed on the Nasdaq Stock Market that operate in the surgical,
medical and dental instrument and supply industries (the “Peer Index”), based on
Standard Industrial Classification (“SIC”) codes in the range of 3840 through
3849. The Company’s SIC code is 3845. The comparison assumes $100 was invested
on January 2, 2004 in STAAR’s common stock and in each of those indices, and
that dividends were reinvested. The Center for Research in Security Prices of
the University of Chicago’s Graduate School of Business compiled the Peer Index
and produced the graph. The stock price performance on the following graph is
not necessarily indicative of future stock price performance.
In any of
our filings under the Securities Act or Exchange Act that incorporate this Proxy
Statement by reference, this graph will be considered excluded from the
incorporation by reference and it will not be deemed a part of any such other
filing unless we expressly state that the graph is so
incorporated.
27
Comparison
of Five-Year Cumulative Total Returns
![](https://www.sec.gov/Archives/edgar/data/0000718937/000114420409018646/graph.jpg)
CRSP
Total Returns Index for:
|
01/2004
|
12/2004
|
12/2005
|
12/2006
|
12/2007
|
1/2009
|
|||||
STAAR
SURGICAL CO
|
100.0
|
56.38
|
71.04
|
63.04
|
23.38
|
21.67
|
|||||
Nasdaq
Stock Market (US & Foreign)
|
100.0
|
108.52
|
110.99
|
122.42
|
136.46
|
67.16
|
|||||
NASDAQ
Stocks (SIC 3840 – 3849 US + Foreign) Surgical, Medical, and Dental
Instruments and Supplies
|
100.0
|
116.56
|
127.93
|
134.82
|
172.17
|
94.08
|
Notes:
|
A. The
lines represent monthly index levels derived from compounded daily returns
that include all dividends.
|
|
B. The
indexes are reweighted daily, using the market capitalization on the
previous trading day.
|
|
C. If
the monthly interval, based on the fiscal year-end, is not a trading day,
the preceding trading day is used.
|
|
D. The
index level for all series was set to $100.0 on January 2,
2004.
|
28
Item 6. Selected
Financial Data
The
following table sets forth selected consolidated financial data with respect to
the five most recent fiscal years ended January 2, 2009, December 28, 2007,
December 29, 2006, December 30, 2005 and December 31, 2004. The selected
consolidated statement of operations data set forth below for each of the three
most recent fiscal years, and the selected consolidated balance sheet data set
forth below at January 2, 2009 and December 28, 2007, are derived from our
consolidated financial statements, which have been audited by BDO Seidman, LLP,
independent registered public accounting firm, as indicated in their report,
modified to include an explanatory paragraph relating to the Company’s ability
to continue as a going concern, included in this Annual Report. The selected
consolidated statement of operations data set forth below for each of the two
fiscal years in the periods ended December 30, 2005 and December 31, 2004, and
the consolidated balance sheet data set forth below at December 29, 2006,
December 30, 2005 and December 31, 2004 are derived from audited consolidated
financial statements of the Company 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 in this Annual Report, and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in Item 7.
Fiscal Year Ended
|
||||||||||||||||||||
January 2,
2009
|
December 28,
2007
|
December 29,
2006
|
December 30,
2005
|
December 31,
2004
|
||||||||||||||||
(In
thousands except per share data)
|
||||||||||||||||||||
Statement
of Operations
|
||||||||||||||||||||
Net
sales
|
$ | 74,894 | $ | 59,363 | $ | 56,951 | $ | 51,303 | $ | 51,685 | ||||||||||
Cost
of sales
|
34,787 | 30,097 | 30,801 | 27,517 | 25,542 | |||||||||||||||
Gross
profit
|
40,107 | 29,266 | 26,150 | 23,786 | 26,143 | |||||||||||||||
Selling,
general and administrative expenses
|
||||||||||||||||||||
General
and administrative
|
15,730 | 12,951 | 10,891 | 9,727 | 9,253 | |||||||||||||||
Marketing
and selling
|
27,053 | 23,723 | 22,112 | 18,552 | 20,302 | |||||||||||||||
Research
and development
|
7,938 | 6,711 | 7,080 | 5,573 | 6,246 | |||||||||||||||
Other
expenses
|
9,773 | — | (331 | ) | 746 | 500 | ||||||||||||||
Total
selling, general and administrative expenses
|
60,494 | 43,385 | 39,752 | 34,598 | 36,301 | |||||||||||||||
Operating
loss
|
(20,387 | ) | (14,119 | ) | (13,602 | ) | (10,812 | ) | (10,158 | ) | ||||||||||
Total
other (expense) income, net
|
(1,285 | ) | (1,037 | ) | 95 | 854 | (88 | ) | ||||||||||||
Loss
before income taxes and minority interest
|
(21,672 | ) | (15,156 | ) | (13,507 | ) | (9,958 | ) | (10,246 | ) | ||||||||||
Income
tax provision
|
1,523 | 843 | 1,537 | 1,239 | 1,057 | |||||||||||||||
Minority
interest
|
— | — | — | (22 | ) | 29 | ||||||||||||||
Net
loss
|
$ | (23,195 | ) | $ | (15,999 | ) | $ | (15,044 | ) | $ | (11,175 | ) | $ | (11,332 | ) | |||||
Basic
and diluted net loss per share
|
$ | (0.79 | ) | $ | (0.57 | ) | $ | (0.60 | ) | $ | (0.47 | ) | $ | (0.58 | ) | |||||
Weighted
average number of basic and diluted shares
|
29,474 | 28,121 | 25,227 | 23,704 | 19,602 | |||||||||||||||
Balance
Sheet Data
|
||||||||||||||||||||
Working
capital
|
$ | 10,807 | $ | 21,006 | $ | 14,363 | $ | 22,735 | $ | 19,103 | ||||||||||
Total
assets
|
52,582 | 54,179 | 47,770 | 52,755 | 51,973 | |||||||||||||||
Notes
payable, net of discount
|
4,414 | 4,166 | 1,802 | 1,676 | 3,004 | |||||||||||||||
Stockholders’
equity
|
16,027 | 36,225 | 31,760 | 40,366 | 37,840 |
29
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The
matters addressed in Management’s Discussion and Analysis of Financial Condition
and Results of Operations that are not historical information 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. Readers can recognize forward-looking statements by the use of words
like “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,”
“will,” “target”, “forecast” and similar expressions in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to future actions, prospective products or product
approvals, future performance or results of current and anticipated products,
sales efforts, expenses, interest rates, foreign exchange rates, the outcome of
contingencies, such as legal proceedings, and financial results.
Although
the Company believes that the expectations reflected in these forward-looking
statements are reasonable, such statements are inherently subject to risks and
the Company can give no assurance that its expectations will prove to be
correct. Actual results could differ from those described in this report because
of numerous factors, many of which are beyond the control of the Company. These
factors include, without limitation, those described in this Annual Report in
“Item 1A — Risk Factors.” The Company undertakes no obligation to
update these forward-looking statements after the date of this report to reflect
future events or circumstances or to reflect actual outcomes.
The
following discussion should be read in conjunction with the audited consolidated
financial statements of STAAR, including the related notes, provided in this
report.
Overview
Strategy
During
2009, STAAR is focused on the following five strategic operational
goals:
|
·
|
to
improve cash flow;
|
|
·
|
to
increase gross profit margin;
|
|
·
|
to
continue cost reduction efforts;
|
|
·
|
to
secure key regulatory approvals;
|
|
·
|
to
increase the ICL’s share of the refractive market in key
territories.
|
Improve cash flow. For
several years STAAR has not generated enough cash to sustain its operations and
has relied on financing activity to supplement cash from operations.
Through a combination of cost cutting and increased sales STAAR has reduced its
use of cash significantly in recent periods and, if recent trends continue,
STAAR expects to generate positive cash flow from operations within 2009.
While STAAR’s goal is to achieve to profitability and generate positive earnings
per share, achievement of positive cash flow would be an important milestone for
the Company, would enhance its ability to obtain financing on favorable terms,
and would permit the Company to further invest in expansion of its
business.
STAAR
used $8.2 million of cash in operations during fiscal year 2008 compared to
$11.2 million of cash used during 2007. Approximately $3.2 million of the total
cash used in operating activities in 2008 was used by STAAR Japan in assuming
the IOL distribution business acquired from Canon Marketing Japan, Inc. and for
payments on inventory purchased from Canon Marketing. STAAR seeks to
reduce its use of cash both by cutting costs and by increasing revenue and
profit margin. Our strategy to increase profit margin is discussed in detail
under Increase Profit
Margins below.
30
Cost-cutting
has been an integral part of STAAR’s efforts to increase its cash
flow. STAAR’s cost-cutting efforts in the U.S. described in greater
detail under the heading “Continue Cost Reduction
Efforts” below, yielded savings of approximately $4.5
million. STAAR exited 2008 with approximately $5.0 million in cash
and cash equivalents, compared with $10.9 million at the end of fiscal year
2007.
During
fiscal year 2008 and early 2009 STAAR’s cash flow has been significantly
affected by the cost of defending two lawsuits brought by former regional
manufacturer’s representatives. On March 2, 2009, a jury verdict in
one of these cases was rendered against STAAR for a total of $4.9 million in
actual and punitive damages. Contesting this verdict, litigating the
second case, and either satisfying any final judgment or securing a bond for
appeal, will require significant additional cash and enhancement of STAAR’s
existing cash resources. Management is developing a strategy to meet
this extraordinary short-term need for cash, but at the same time is focusing on
cash management, increased revenue and improved profit margins as the keys to
its long-term success and as the most important factor in attracting future
investment. See “Liquidity and Capital
Resources” below.
STAAR
believes its cash management plans are achievable and continues to seek ways to
reduce spending; however, STAAR cannot provide assurance that it will achieve
the level of intended savings. STAAR’s cash management plans depend on the
ultimate payment, if any, required under to the Parallax judgment, increases in U.S. sales of
high-margin ICL and other refractive products as well as improvements in revenue
generated by U.S. sales of IOL and other cataract products. During 2008, STAAR
experienced an increase of 18% in U.S. sales of ICL products over fiscal year
2007. However, although the rate of decline has slowed, U.S. sales of IOL
products declined by 16% over 2007 compared to a 20% decrease when comparing
fiscal year 2007 versus 2006. If new cataract product introductions by STAAR do
not generate significant additional revenues, STAAR may be required to more
significantly reduce spending in its U.S. operations.
Increase gross profit
margins. In recent periods STAAR has generally experienced
increased sales in all products, except U.S. IOL sales. U.S. IOL
sales have been declining, but at a slower pace and, depending on the success of
planned product introductions, may resume growth in 2009. While
revenue growth remains a key goal, STAAR believes that the key to achieving
profitability is to increase its profit margin by the following
means:
|
·
|
Increasing ICL sales as a
percentage of STAAR’s overall product mix. ICLs and
TICLs generally yield high margins and are STAAR’s most profitable
product. ICLs continue to represent the fastest growing product
line of STAAR’s business and are the largest contributor to enhanced
profit margins. Bringing ICL and TICL to new markets, and
expanding market share in existing markets, will improve STAAR’s
profitability. This initiative is described in greater detail
under “Other Highlights
– ICL Sales” below.
|
|
·
|
Shifting to higher value IOLs.
In 2007 and 2008 STAAR began converting
its U.S. IOL product offering from lower value legacy products to newer
aspheric designs that are eligible for enhanced CMS reimbursement as
NTIOLs. While STAAR hopes to regain lost U.S. IOL market share
through new product introductions, the enhanced profitability of these
designs should significantly improve the performance of the U.S. IOL
business even if market share gains are minimal. Additionally,
STAAR believes continued growth of its high margin preloaded IOL offering
can contribute significantly to improvement in STAAR’s gross margins in
2009.
|
|
·
|
Improve product mix and
pricing of other surgical products. STAAR distributes a variety of complimentary
products used in ophthalmic surgery as a service to its
customers. In an effort to improve margins of other surgical
products, the Company is reviewing all pricing to determine if products
are priced appropriately and discontinuing product lines with lower than
average margins.
|
31
|
·
|
Implement Centers of
Excellence Program. STAAR believes that it has an
opportunity to reduce costs while continuing its history of innovation by
rationalizing its business among its worldwide operations through its
Centers of Excellence program. The first initiative in this
area will begin in 2009, as STAAR begins making its U.S. facility the
center of excellence for optical design and manufacturing of IOLs and
Japan the center of excellence for design and manufacturing of delivery
systems. By moving all IOL manufacturing to STAAR’s Monrovia
facility STAAR expects to significantly reduce costs by increasing volume
without significantly increasing fixed costs, and to supply IOLs to STAAR
Japan at a significant reduction to its current manufacturing
cost. Similarly, the transfer of delivery system development
and manufacturing to Japan is expected to lead to cost savings and a
greater focus on STAAR Japan’s more advanced lens injector
designs.
|
Continue Cost Reduction
Efforts. While STAAR’s international operations, outside of
Japan, have generally generated cash or been cash flow neutral in recent
periods, losses from U.S. operations have been the principal cause of cash use
on a consolidated basis. To reduce these losses, STAAR implemented cost-cutting
measures in the third fiscal quarter of 2007 and throughout 2008, including
targeted reductions in the U.S. workforce. Beginning in December 2007, STAAR
began a process to closely rationalize and evaluate its spending levels. This
evaluation identified opportunities by which STAAR sought to save approximately
$3.5 million in annualized costs in the U.S. These initiatives included
streamlining STAAR’s U.S. organization by reducing spending levels in all areas
of the business, renegotiating or eliminating certain obligations, and
eliminating all executive bonus opportunities until STAAR showed positive trends
toward achieving profitability. During 2008 these reductions in the U.S. totaled
$4.5 million, despite an approximate $750,000 increase in legal fees. However,
while STAAR has achieved these reductions in its U.S. operations, the reductions
have been offset, in part, by the need to increase expenses outside the U.S. to
support its 26% international ICL sales growth.
Secure Key Regulatory
Approvals. Regulatory approvals of high margin products in
significant markets can yield rapid growth in sales and improvements in
profitability. The principal approvals pursued by STAAR at this time
are the U.S. approval of the TICL and the approval of ICL, TICL, Collamer IOLs
and AquaFlow in Japan.
STAAR’s
TICL corrects both myopia and astigmatism, and has been shown to be highly
effective in treating individuals affected by both conditions. When STAAR has
introduced the TICL in international markets it has generally experienced rapid
growth, and the TICL may also lead to increased ICL sales by making the product
family a more complete solution that physicians can offer to
patients. STAAR has applied for approval of the TICL in the U.S., but
the FDA has suspended review of the application pending resolution of concerns
regarding STAAR’s oversight of the TICL clinical study. This agency action, and
STAAR’s progress in resolving it, is discussed below under the caption “Other Highlights: Medical Device
Regulatory Compliance, Clinical Oversight and TICL Approval.” Based on
experience in international markets, STAAR believes that U.S. sales of the ICL
will increase even if TICL approval continues to be delayed. Nevertheless, STAAR
believes that approval and introduction of the TICL would significantly enhance
refractive sales in the U.S. Obtaining approval remains a part of STAAR’s
long-term strategy.
Approval
of ICL, TICL, Collamer IOLs and AquaFlow by Japanese regulators is
pending. Like other Asian countries, Japan has a high mean rate of myopia,
which is often accompanied by astigmatism. As a result STAAR believes
that the Japanese market for ICL and TICL is promising. STAAR Japan’s
preloaded IOL injectors have established a presence in the Japanese cataract IOL
market that could also help establish a market for the Collamer
IOL.
32
Increase the ICL’s Share of the
Refractive Market in Key Territories. While the ICL and TICL
are approved for sale in over 40 countries, it has achieved significant sales
and a significant share of the refractive surgical market in a select number of
territories, including the following: U.S. Korea, China, India,
Spain, Germany, and Latin America. To date, the highest penetration
rate achieved by STAAR for ICL and TICL within the refractive surgery market has
been 5%. STAAR believes it has the opportunity to achieve significant
profits if it can achieve a 5% or greater penetration rate in these key markets,
and during 2009 will focus its international sales efforts on that
goal.
Other
Highlights
U.S. ICL
Sales. Notwithstanding strong and sustained growth
internationally, U.S. market growth is considered essential because of the size
of the U.S. refractive surgery market and the perceived leadership of the U.S.
in adopting innovative medical technologies. The Visian ICL was approved by the
FDA for treatment of myopia on December 22, 2005.
During
fiscal year 2008 STAAR’s U.S. sales of Visian ICLs increased 18% compared to
2007. STAAR believes this represents a trend to resumed growth in U.S.
refractive sales following 2007 sales levels that did not grow beyond those
reached in the first year of introduction. STAAR believes that the following are
among the factors that may have contributed to improved Visian ICL sales in
2008:
|
·
|
increasing
use of the ICL by a number of surgeons among STAAR’s established U.S.
customers as they have gained experience with the product and become more
skilled at identifying, attracting and supporting those patients most
likely to benefit from the ICL;
|
|
·
|
increased
patient awareness of the ICL as a result of favorable mass media exposure
for the ICL;
|
|
·
|
a
change in marketing focus as STAAR, in its third year of ICL marketing in
the U.S., has shifted from increasing its overall customer base to
devoting more attention to identifying and supporting those surgical
practices that show potential for significant repeat business through a
professional commitment to the ICL technology;
and
|
|
·
|
greater
stability and focus in STAAR’s refractive support team following its
reorganization in the second half of
2007.
|
To
achieve its plans, STAAR will need not only to sustain, but to increase this
rate of growth. STAAR believes that such an increase is achievable because,
among other things, the favorable media coverage for the ICL and the
implementation of STAAR’s revised marketing approach had only begun to have
their effect late in the first quarter or early in the second quarter. For
example, a segment of the NBC News Today show
featuring a successful live ICL surgery, aired on March 5, 2008, and a segment
featuring use of ICL aired on the CBS “Early Show” August 8, 2008. Those shows
and similar local television news segments resulted in increased consumer
interest in ICL, as measured by web traffic and inquiries received on web sites
maintained by STAAR and by the surgeons involved.
Notwithstanding
the increasing Visian ICL sales in 2008, STAAR will continue to face challenges
in marketing the ICL in the U.S., including the following:
|
·
|
the
U.S. refractive surgery market has been dominated by corneal laser-based
techniques, which unlike the Visian ICL are already well known to
potential refractive patients;
|
|
·
|
other
newly introduced surgical products will continue to compete with the
Visian ICL for the attention of surgeons seeking to add new, high value
surgical products, in particular multifocal and accommodating
IOLs;
|
|
·
|
the
recession has reduced refractive surgical volumes and thereby reduced the
number of patients to whom ICL is
offered;
|
33
|
·
|
negative
publicity about complications of LASIK could reduce interest in all
refractive surgical procedures; and
|
|
·
|
FDA
approval of the TICL, which STAAR sells in international markets for
treating patients severely affected by both myopia and astigmatism, has
been delayed.
|
Refractive
surgery is an elective procedure generally not covered by health insurance.
Patients must pay for the procedure, frequently through installment financing
arrangements. ICL sales continued to grow during 2008 despite worsening
conditions in the general economy. However, STAAR believes that the
recession has decreased the growth rate for U.S. ICL sales and likely
contributed to a flat rate of growth in the fourth quarter of
2008. U.S. ICL may be further affected if the U.S. recessions deepens
or continues for a prolonged period.
On April
25, 2008, the FDA Ophthalmic Devices Panel held a public meeting to discuss
issues of medical complications and customer satisfaction following refractive
surgery. While the panel also discussed phakic IOLs such as the Visian ICL, most
of its discussions centered on LASIK and testimony regarding customer
dissatisfaction following LASIK surgery. The Panel recommended enhanced patient
warnings of possible complications for LASIK and created a task force to study
methods of better identifying those patients who are more likely to have an
unsatisfactory outcome from laser vision correction. The proceedings of the
Panel were widely reported in the U.S. While it is difficult to assess precisely
the impact of the panel hearings on patient attitudes or the recommendations of
practicing surgeons, it is possible that reduced demand for laser eye surgery
observed in 2008 was caused in part by concerns regarding complications and
potential patient dissatisfaction. Patient concerns about LASIK could increase
interest in the Visian ICL as an alternative for patients who have a greater
risk of complications from LASIK. The fact that the Visian ICL is removable if a
patient is dissatisfied with the outcome may also be appealing to some patients
with new concerns about risks of refractive surgery. However, the negative
publicity concerning LASIK could decrease patient interest in all refractive
surgery, including Visian ICL. Because nearly all candidates for refractive
surgery can achieve acceptable vision through the use of spectacles or contact
lenses, for most patients the decision to have refractive surgery is a lifestyle
choice that depends on high confidence in achieving a satisfactory
outcome.
STAAR
makes the ICL available to selected surgeons only after completion of a training
program that includes proctoring of selected supervised surgeries. STAAR
believes that this carefully guided method of product release is essential to
help ensure the consistent quality of patient outcomes and the high levels of
patient satisfaction needed to establish wide acceptance of the ICL as a primary
choice for refractive surgery.
As STAAR
enters its fourth year of ICL marketing in the U.S., it is placing less emphasis
on increasing its overall customer base and devoting more attention to
identifying and supporting those practices that show potential for significant
repeat business through a professional commitment to the ICL technology. STAAR
will continue to provide training and proctoring to all qualified surgeons
seeking certification in the ICL.
Because
the refractive surgery market has been dominated by corneal laser-based
techniques, STAAR faces special challenges in introducing an intraocular
refractive implant. STAAR has developed a number of marketing tools and practice
support programs to increase the use of the ICL and awareness of its advantages
in refractive surgery centers throughout the U.S. and around the
world.
U.S. IOL
Sales. For several years STAAR has experienced a decline in
U.S. market share of IOL. U.S. IOL product sales declined 16% during fiscal year
2008 compared with the 2007 and 20% during 2007 compared with the
same period of 2006. Factors contributing to long term decline in U.S. IOL sales
include the slow pace of product improvement and enhancement during a period
when we devoted most of our research and development resources to introducing
the ICL and to resolving the regulatory and compliance issues raised by the FDA.
This long-term trend was intensified in 2007 by disruption in STAAR’s
independent sales force when STAAR was unable to reach a new contract with
regional manufacturer’s representatives, in the third quarter of 2007. In
addition the trend was exacerbated by STAAR's lagging behind its competitors in
the introduction of IOLs with advanced aspheric optics, and by the entry of
Alcon as a competitor in the Toric IOL market.
34
STAAR’s
strategy to achieve profitability in its U.S. IOL business is to rationalize its
product offering around its higher value products, including recently introduced
products and products planned for introduction in the near future. This has
included aspheric optics across all IOL platforms, approval of higher
reimbursement from Medicare for these lenses, improved delivery systems for
Collamer IOLs to broaden their appeal and preloaded delivery systems for
silicone lenses. Successful implementation of this strategy is subject to risks,
including the risk of delays in developing new products or securing regulatory
approval.
STAAR’s
initiatives to enhance its IOL product line have resulted in the following
recent developments:
|
·
|
The
introduction of STAAR’s aspheric three-piece Collamer IOL in April
2007;
|
|
·
|
The
introduction of STAAR’s aspheric three-piece silicone IOL November
2007;
|
|
·
|
The
April 2008 introduction of the nanoPOINT™ injector, which delivers STAAR’s
single piece Collamer IOL through a 2.2 mm
incision;
|
|
·
|
The
grant of New Technology IOL (“NTIOL”) status for the aspheric three-piece
Collamer IOL in March, 2008;
|
|
·
|
The
grant of NTIOL status for the aspheric single-piece Collamer IOL and the
aspheric three-piece silicone IOL in July,
2008.
|
The
addition of aspheric optics to STAAR’s IOL designs has been a primary focus of
STAAR’s recent development efforts. Aspheric IOLs use advanced optical designs
intended to provide a clearer image than traditional spherical lenses,
especially in low light, which has led to significant market share gains for
aspheric designs. In recognition of these advantages the Centers for Medicare
and Medicaid Services (“CMS”) will grant NTIOL status to aspheric IOLs that can
demonstrate improved visual performance over conventional IOLs, allowing an
extra $50 reimbursement per lens implanted in an ASC (ambulatory surgical
center). Because the majority of IOL purchases in the U.S. are implanted at ASCs
and reimbursed through Medicare, NTIOL status significantly increases STAAR’s
potential margin on qualifying lenses.
All of
STAAR's aspheric lenses sold in the U.S. feature a proprietary optical design
(patent pending) that is optimized for the naturally curved surface of the
retina and certain other anatomical features of the human eye, and provides
outstanding image quality even if decentered.
STAAR
intends to continue to focus on the following projects designed to make our IOL
product offering more competitive:
|
·
|
developing
a Collamer Toric IOL to complement our pioneering silicone Toric IOL and
better compete with the Alcon acrylic Toric
IOL;
|
|
·
|
introduction
of an aspheric single-piece Collamer IOL, which brings advanced aspheric
optics to the micro-incision nanoPOINT
platform;
|
|
·
|
introduction
of an all new injector system for the three-piece Collamer IOL;
and
|
|
·
|
adapting
our proprietary Preloaded Injector system for our new silicone aspheric
IOLs.
|
STAAR
cautions that the successful development and introduction of new products is
subject to risks and uncertainties, including the risk of unexpected
delays.
35
STAAR’s
development efforts aim to realize the full market potential for Collamer IOLs
by improving lens delivery systems and differentiating STAAR’s silicone IOL
offering through the Preloaded Injector. The majority of IOLs sold by STAAR in
the U.S. are made of silicone, which was the original material used for foldable
IOLs. However, physician preferences in the U.S. have strongly shifted to
acrylic IOLs which currently account for an approximately 76% share of the U.S.
IOL market. STAAR believes that its Collamer lenses have outstanding optical
qualities and superior biocompatibility, and should be capable of competing with
any of our competitor’s acrylic lens products in the advanced material sector.
In addition, increasing use of the ICL, which relies on the outstanding optical
properties of Collamer, has also introduced the advantages of the Collamer
material to a growing number of surgeons. However, growth of the Collamer IOL
market has been limited by the difficulty of perfecting delivery systems for the
soft Collamer material. Although acrylic lenses do not have the same level of
optical performance in the eye as Collamer and often introduce glare or
glistening into the visual field, the stiffness and toughness of the acrylic
material makes design of delivery systems simpler. STAAR has a number of
development projects in place intended to make Collamer lenses easier to deliver
and broaden customer appeal. The nanoPOINT injector system, which delivers the
one-piece Collamer IOL through a 2.2 mm incision, was the first of these
projects to reach market and was launched in April 2008.
While the
U.S. market share for silicone IOLs has been slowly declining overall, a
significant number of surgeons continue to select silicone lenses for their
patients. STAAR believes that its recently introduced aspheric, three–piece
silicone IOL offers outstanding optical performance and with its recently
granted NTIOL status could enable STAAR to retain or possibly increase its
market share within the silicone IOL sector, especially if STAAR’s efforts are
successful in securing FDA approval to make it available in a Preloaded
Injector.
We have
developed and currently market the Toric IOL, a toric version of our
single-piece silicone IOL, which is specifically designed for cataract patients
who also have pre-existing astigmatism. Until 2006 only STAAR sold Toric IOLs in
the U.S. because CMS allows cataract patients receiving reimbursement to pay a
premium for the correction of pre-existing astigmatism, while Medicare provides
the customary reimbursement for cataract surgery, Toric IOLs can be sold at a
higher price and higher profit margin than standard IOLs. CMS also permits the
patient to separately remunerate the surgeon for the significant additional
services needed to prescribe and implant a lens with toric correction for
astigmatism. The increased revenues and profit margin originally expected by
STAAR as a result of the CMS ruling have, to date, not been realized because of
the introduction of a competing acrylic toric IOL by Alcon Laboratories. In
particular, STAAR believes that in 2007 a number of customers who previously had
purchased STAAR’s Toric IOL but had otherwise been customers of Alcon’s
ophthalmic products, converted to use of the Alcon Toric IOL.
Reversing
the decline in U.S. IOL sales will require STAAR to overcome several short and
long-term challenges, including successfully meeting its objectives to develop
new and enhanced products, organizing, training and managing a specialized
cataract sales force, managing independent local sales representatives,
competing with much larger companies and overcoming reputational harm from the
FDA’s findings of compliance deficiencies. We cannot assure that this strategy
will ultimately be successful.
Reorganization of U.S. Sales
Force. STAAR comprehensively reorganized its U.S. sales force
in the latter part of 2007 and early 2008. STAAR now directly employs its
regional sales managers. At the local level STAAR continues to rely on
independent sales representatives as well as employees to promote sales and
demonstrate products. STAAR believes that its reorganized sales force will
position the company to capitalize on enhancements to its cataract product line
intended to make the line more competitive.
36
Medical Device Regulatory
Compliance, Clinical Oversight and TICL Approval. As
discussed above under the caption “Business — Regulatory
Matters,” STAAR’s ability to develop, manufacture and distribute its
products depends heavily on maintaining good standing with the FDA and other
regulatory agencies. Based on the results of the FDA inspections of STAAR’s
Monrovia, California facilities in 2005 and 2006, STAAR believes that it is
substantially in compliance with the FDA’s Quality System Regulations and
Medical Device Reporting regulations. STAAR has invested significant
resources in maintaining regulatory compliance and expects to continue to do so
in the future.
Notwithstanding
its success in overcoming past concerns regarding its quality systems, STAAR
believes that it has not yet fully overcome the reputational harm caused by the
FDA’s past findings of compliance deficiencies, which may continue to present a
challenge in increasing U.S. product sales. In the opinion of STAAR’s
management, the June 26, 2007 warning letter from the Bioresearch Monitoring
Program of the FDA Office of Regulatory Affairs (“BIMO”) and the integrity hold
placed on STAAR’s clinical activities by the Office of Device Evaluation,
although they concern STAAR’s oversight of clinical activities rather than its
quality systems, have perpetuated the reputational harm resulting from the
earlier FDA actions, and have made it more difficult for STAAR to regain its
former market share. STAAR believes that U.S. approval of the TICL,
if granted, and continued evidence of good standing with the FDA will
reduce and may eventually eliminate the reputational harm caused by past agency
actions.
Financing
Strategy
While
STAAR’s international business generates 75% of STAAR’s revenue, STAAR has
reported losses on a consolidated basis over the last several years due to a
number of factors, including eroding sales of cataract products in the U.S. and
FDA compliance issues that consumed additional resources while delaying the
introduction of new products in the U.S. market. In May 2007 STAAR raised net
proceeds of $16.6 million from the public offering and sale of common stock, the
proceeds of which were used to pay off the March 2007 $4.0 million Broadwood
note and for general working capital purposes. On December 14, 2007, STAAR also
borrowed $5 million from Broadwood Partners, L.P., at an interest rate of 7% per
annum, primarily to fund the acquisition of STAAR’s remaining interest in the
Canon Staar Joint Venture.
STAAR’s
management believes that its best prospect for achieving profitability in its
U.S. and consolidated operations is to significantly increase U.S. sales of the
ICL and to reduce operating expenses. In the longer term STAAR seeks to develop
and introduce products in the U.S. cataract market to stop further erosion of
its market share and resume growth in that sector.
The final
judgment expected to result from the $4.9 million Parallax verdict, and the
cost and exposure to a negative outcome in subsequent litigation, will exceed
STAAR’s current capital resources. Accordingly, STAAR expects to seek
additional equity or debt financing, to divest itself of non-strategic assets,
or pursue some combination of the foregoing to meet its need for working capital
in 2009. STAAR may also seek new capital to expand its business or
fund efforts to improve efficiency. However, STAAR does not expect to
require significant new working capital to support operations if its initiatives
for cash management and improved profitability continue in line with present
trends.
37
Results
of Operations
The
following table sets forth the percentage of total revenues represented by
certain items reflected in the Company’s consolidated statement of operations
for the period indicated and the percentage increase or decrease in such items
over the prior period.
Percentage of Net Sales
|
Percentage Change
|
|||||||||||||||||||
January 2,
2009
|
December 28,
2007
|
December 29,
2006
|
2008 vs.
2007
|
2007 vs.
2006
|
||||||||||||||||
Net
Sales
|
100.0 | % | 100.0 | % | 100.0 | % | 26.2 | % | 4.2 | % | ||||||||||
Cost
of sales
|
46.4 | % | 50.7 | % | 54.1 | % | 15.6 | % | (2.3 | )% | ||||||||||
Gross
profit
|
53.6 | % | 49.3 | % | 45.9 | % | 37.0 | % | 11.9 | % | ||||||||||
General
and administrative
|
21.0 | % | 21.8 | % | 19.1 | % | 21.5 | % | 18.9 | % | ||||||||||
Marketing
and selling
|
36.1 | % | 40.0 | % | 38.8 | % | 14.0 | % | 7.3 | % | ||||||||||
Research
and development
|
10.6 | % | 11.3 | % | 12.5 | % | 18.3 | % | (5.2 | )% | ||||||||||
Other
expenses
|
13.1 | % | — | (0.6 | )% | — | * | — | ||||||||||||
Operating
loss
|
(27.2 | )% | (23.8 | )% | (23.9 | )% | 44.4 | % | 3.8 | % | ||||||||||
Total
other (expense) income, net
|
(1.7 | )% | (1.7 | )% | 0.2 | % | 23.9 | % | — | |||||||||||
Loss
before income taxes
|
(28.9 | )% | (25.5 | )% | (23.7 | )% | 43.0 | % | 12.2 | % | ||||||||||
Provision
for income taxes
|
1.6 | % | 1.4 | % | 2.7 | % | 39.1 | % | — | |||||||||||
Net
loss
|
(30.5 | )% | (26.9 | )% | (26.4 | )% | 42.8 | % | 6.3 | % |
* Denotes
change is greater than 100%
2008
Fiscal Year Compared to 2007 Fiscal Year
Net
sales
Net sales
for the year ended January 2, 2009 (“fiscal 2008”) were $74,894,000, an increase
of 26.2% compared with net sales for the year ended December 28, 2007 (“fiscal
2007”) of $59,363,000. Changes in currency exchange rates had a favorable $1.6
million impact on net sales for fiscal 2008. During fiscal
2008, global sales of ICLs and TICLs grew 24.1% to $19,069,000 compared with
$15,368,000 in fiscal 2007; global sales of IOLs increased 40.8% to $32,926,000
compared with $23,379,000 in fiscal 2007 as a result of the acquisition of STAAR
Japan, which contributed $12,167,000 in 2008 in total IOL
sales. Sales of other surgical products, generally used during
cataract surgery, increased 11.1%.
U.S. net
sales for fiscal 2008 decreased 4.0% to $18,927,000 compared with fiscal 2007,
due to a 16.0% decrease in IOL sales which was largely offset by a 17.9%
increase in ICL sales and a 6.4% increase in other product
sales. Although IOL sales declined 16% for the full year, the year
over year rate of decline has slowed from 26% in the fourth quarter of 2007 to
5% in the fourth quarter of 2008.
International
net sales for fiscal 2008 were $55,967,000, an increase of 41.2% compared with
fiscal 2007. International IOL sales were $23,461,000, up 93.8%,
compared with $12,106,000 in 2007. The significant increase in IOL
sales is due to the acquisition of STAAR Japan at the beginning of 2008,
partially offset by a decrease in IOL sales in international markets outside of
Japan. During 2008, international sales of ICLs increased 26.3% to $14,207,000,
compared with $11,245,000 in fiscal 2007 and other surgical product sales
increased 12.3% to $18,299,000, compared with $16,291,000 in fiscal
2007.
38
Gross
profit margin
Gross
profit margin for the fiscal 2008 was 53.6% compared with 49.3% for fiscal 2007.
The increase in gross profit margin is due to sales of preloaded IOLs in Japan
which yield higher average selling prices than in other countries, increased
sales of ICLs, particularly in the U.S. where prices are higher, and increased
sales of TICLs. The improvement in gross profit margin was partially
offset by the STAAR Japan acquired inventory, which was recorded at fair value
in accordance with purchase accounting rules. This higher valued inventory was
sold during 2008 resulting in $1.5 million in additional cost of goods
sold.
The
Company expects gross profit margin to increase as sales of ICLs globally and
preloaded IOLs in Japan become a larger percentage of overall revenue mix and
sales of aspheric IOLs replace sales of non-aspheric IOLs in the
U.S.
General
and administrative
General
and administrative expenses for fiscal 2008 were $15,730,000, representing a 21%
increase over the $12,951,000 reported in fiscal 2007, entirely due
to $3,690,000 incurred by STAAR Japan, offset by $911,000 reduction
in the rest of the Company despite significant legal costs associated with the
sales representative litigation.
Marketing
and selling
Marketing
and selling expenses for fiscal 2008 were $27,053,000, representing a 14%
increase over the $23,723,000 reported in fiscal 2007. The increase in marketing
and selling expenses for fiscal 2008 was due to the $4,098,000 in costs
associated with STAAR Japan. Marketing and selling expenses in the
U.S. decreased $2,353,000 and this decrease was partially offset by a $1,586,000
increase in international expenses outside of Japan and the U.S. to support the
increase in ICL sales.
Research
and development
Research
and development expenses, including regulatory and clinical expenses, for fiscal
2008 were $7,938,000, representing an 18% increase over the $6,711,000 reported
in fiscal 2007. The increase is due to the $2,164,000 in costs associated with
STAAR Japan, offset by a decrease of $937,000 as a result of cost reduction
measures taken in the U.S. to improve cash flows. The Company expects
to spend approximately 7-10% of revenues in fiscal 2009 on its research and
development activities.
Other
operating expenses
Other operating expenses for fiscal
2008 were $9,773,000 and consisted of the following: 1) loss on
settlement of pre-existing distribution arrangement in the amount of
$3,850,000. The loss was recorded in connection with the Company’s
acquisition of STAAR Japan and represented the portion of the consideration paid
by STAAR for the termination of the pre-existing distribution arrangement that
was deemed unfavorable to STAAR Japan and to STAAR when compared to an at market
arrangement as of the closing date of the acquisition; 2) patent
impairment charges in the amount of $1,023,000. This non-cash expense
was recorded in connection with certain patents that were determined to have
minimal fair value to the Company pursuant to the annual impairment review; and
3) jury verdict in favor of Parallax Medical Systems, Inc. reached subsequent to
year end in the amount of $4,900,000 (see “Item 3 – Legal
Proceedings”).
Income
taxes
The
Company recorded an income tax provision of $1,523,000 and $843,000 for fiscal
2008 and 2007 respectively. The increase in the provision of $680,000 was
primarily due to increases in the Company’s current foreign tax provision of
$933,000 due to pre-tax profits generated by STAAR Surgical AG, offset by a
decrease in the foreign deferred tax provision of $255,000.
39
2007
Fiscal Year Compared to 2006 Fiscal Year
Net
sales
Net sales
for the year ended December 28, 2007 (“fiscal 2007”) were $59,363,000, an
increase of 4.2% compared with net sales for the year ended December 29, 2006
(“fiscal 2006”) of $56,951,000. Changes in currency exchange rates had a $2.2
million impact on net sales for fiscal 2007.
U.S. net
sales for fiscal 2007 decreased 13.4% to $19,721,000 compared with fiscal 2006,
primarily due to a 19.6% decrease in IOL sales and a 5.7% decrease in other
product sales mainly related to other refractive products. The
decline in cataract product sales is due, in part, to a shift in market
preference from spherical IOLs to aspheric IOLs. The Company introduced its
first aspheric IOL made of Collamer during the second quarter of 2007 which
should allow the Company to compete more effectively in this market segment. The
decrease in other refractive product sales is due primarily to decreased sales
of instruments used in ICL surgery. Sales of ICLs were essentially flat year
over year in the U.S.
International
net sales for fiscal 2007 were $39,642,000, an increase of 16% compared with
fiscal 2006. During 2007, international ICL and TICL sales increased 42% to
$11,245,000 compared with $7,922,000 in fiscal 2006 and a 13% increase in other
product sales mainly related to cataract surgeries. In fiscal 2006,
international cataract related sales were negatively impacted by doctor strikes
in Germany, one of STAAR’s largest cataract sales markets. These labor disputes
were subsequently settled in the same year. Sales of IOL were
essentially flat year over year internationally.
During
fiscal 2007, global sales of ICLs and TICLs grew 27% to $15,368,000 compared
with $12,093,000 in fiscal 2006.
Gross
profit margin
Gross
profit margin for fiscal 2007 was 49.3% compared with 45.9% for fiscal 2006. The
increase in gross profit margin is due to reduction in inventory reserves,
higher average selling prices of certain IOLs and TICLs, increased volume sales
of higher margin ICLs and TICLs and improved overall IOL costs partially offset
by an increase in manufacturing engineering costs. The gross profit for fiscal
2006 was impacted by obsolescence charges of $807,000 for certain IOL inventory
in anticipation of new product launches in 2007 and to a lesser degree slower
moving diopters of other lenses. This charge reduced 2006’s gross profit margin
by approximately 1.4%.
General
and administrative
General
and administrative expenses for fiscal 2007 increased 18.9% or $2,060,000 over
fiscal 2006. The increase was primarily due to costs associated with the
Domilens investigation of approximately $1,000,000, increased legal expenses of
$400,000, increased compensation expense associated with executive relocation
and other general cost increases.
Marketing
and selling
Marketing
and selling expenses for fiscal 2007 increased 7.3% or $1,611,000 compared with
fiscal 2006. The increase in marketing and selling expenses for fiscal 2007
primarily resulted from increased international costs to support the increase in
international sales and increased domestic costs from increased salaries, travel
and consulting fees partially offset by decreased commissions.
Research
and development
Research
and development expenses, including regulatory and clinical expenses, for fiscal
2007 decreased 5.2% or $369,000 compared with fiscal 2006. The decrease is due
to decreased legal fees and costs associated with new product
development.
40
Other
(expense) income, net
Other
expense, net for fiscal 2007 was $1,037,000, compared to net other income of
$95,000 for fiscal 2006. The increase in other expenses is due to 1) decreased
earnings from joint venture; 2) increased interest expense from financing
arrangements; 3) increased foreign exchange losses; 4) write-off of deferred
financing costs and losses from the extinguishment of the March 2007 $4.0
million Broadwood Note, partially offset by a fair value adjustment upon
revaluation of the March 2007 Broadwood warrant obligation at December 28,
2007.
Income
taxes
The
Company recorded a provision for income taxes of $843,000 for fiscal 2007 and
$1,537,000 for fiscal 2006. During fiscal 2007, the Company reached a settlement
with the German Ministry of Finance related to taxes assessed in connection with
unreported sales of a company controlled by the former President of Domilens,
GmbH. As a result of the settlement, the Company reversed approximately $460,000
in income tax expense originally recorded in the fourth quarter of 2006, based
on the best information available to management at that time.
Liquidity
and Capital Resources
Going
Concern
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of
business. For several years STAAR has incurred significant losses,
has not generated sufficient cash to sustain its operations, and has relied on
financing activity to supplement cash from operations. As of January
2, 2009, STAAR had approximately $5 million of cash and cash
equivalents. STAAR’s likely cash requirements rose considerably on
March 2, 2009, when an adverse verdict against STAAR in Parallax Medical Systems, Inc.
(“Parallax”) v. STAAR
Surgical Company, a case originally filed on September 21, 2007, resulted
in an award against STAAR of approximately $2.2 million in actual damages and
$2.7 million in punitive damages. The $4.9 million judgment appears
as “Other expenses” in total selling, general and administrative expenses in the
consolidated statements of operations for the year ended January 2, 2009 and in
“other current liabilities” on the consolidated balance sheets as of the year
then ended. The Parallax verdict, along with
STAAR’s history of recurring losses, negative cash flows and limited access to
capital, has raised substantial doubt regarding STAAR’s ability to continue as a
going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
STAAR
believes that the Parallax case was incorrectly
decided as to liability, the amount of compensatory damages and the
appropriateness and amount of punitive damages. As part of its
strategy to resolve doubt about its ability to continue as a going concern,
STAAR intends to vigorously contest the outcome of the Parallax case through
post-trial proceedings and, if necessary, appeal, in an effort to reduce the
amount of the judgment against STAAR.
STAAR
also seeks to overcome this substantial doubt concerning its ability to continue
as going concern by continuing to pursue its strategic operating goals for
enhanced profitability and by obtaining new debt and/or equity
financing. STAAR’s strategic operating goals include the
following:
·
|
Improve cash flow and continue
cost reduction efforts. In the latter part of 2007 and throughout
2008, STAAR implemented cost-cutting measures and began a process to
closely rationalize and evaluate its spending levels, which included a
targeted reduction in the U.S. workforce, streamlining the U.S.
organization by reducing spending levels in all areas of the business,
renegotiating or eliminating certain obligations, and eliminating all
executive bonus opportunities until STAAR showed positive trends toward
achieving profitability. Through these efforts STAAR has
significantly reduced its cash used in operating activities in 2008 as
compared to 2007 and, if recent operating trends continue, STAAR expects
to generate positive cash flows within
2009;
|
·
|
Increase gross profit
margins. In recent periods STAAR has experienced
increased sales in all products, except U.S. IOL sales. STAAR
believes that the key to achieving profitability is to increase profit
margins, primarily by increasing ICL sales as a percentage of STAAR’s
overall product mix. ICLs and TICLs generally yield higher
margins and continue to represent the fastest growing product line of
STAAR’s business. While the ICL and TICL are approved for sale
in over 40 countries, STAAR has achieved a significant sales and market
share of the refractive surgical market in a number of select countries,
including in the U.S., South Korea, China, India, Spain, Germany and Latin
America. Bringing ICL and TICL to new markets, and expanding
market share in existing markets, will improve STAAR’s profitability and
during 2009 STAAR will focus its sales efforts on this
goal;
|
·
|
Secure key regulatory
approvals. Regulatory approval of higher margin products
in significant markets can yield rapid sales growth and improve
profitability. The principal regulatory approvals pursued by
STAAR at this time are the U.S. approval of the TICL and the approval of
ICL and TICL in Japan. Although the timing of regulatory approval is
never certain, the Company believes approval of these products could be
granted in 2009.
|
In
addition, STAAR’s ability to overcome this substantial doubt concerning its
ability to continue as a going concern depends on several factors involving
certain current litigation matters. The Parallax court has stayed the
execution of judgment and collection of damages until after the completion of
post-trial motions and the deadline to file notice of appeal, which is a period
of approximately three months. If STAAR is unable to obtain additional capital
to satisfy the judgment or post an appeal bond before the expiration of the
stay, STAAR could be required to petition for protection under federal
bankruptcy laws, which could further impair its financial position and
liquidity, and would likely
result in a default of its other debt obligations. In addition, another
lawsuit similar to the Parallax case, Moody v. STAAR Surgical
Company, is currently scheduled for trial in the Superior Court of
California, County of Orange, on May 25, 2009 and could result in further
significant liability. As of the date of this report, STAAR believes
that the differences in the Moody case present uncertainties such that the
outcome is neither probable nor remote and therefore, STAAR cannot estimate the
amount or range of loss, if any, in the event of an unfavorable
outcome.
The
substantial doubt about STAAR’s ability to continue as a going concern could
also affect STAAR’s relationship with its trade suppliers and their willingness
to continue to conduct business with STAAR on terms consistent with historical
practice. These suppliers might respond to an apparent weakening of our
liquidity position and to address their own liquidity needs may request faster
payment of invoices, new or increased deposits or other
assurances. If this were to happen, the Company’s need for cash would
be intensified and we might be unable to make payments to our suppliers as they
become due.
41
Among the
events of default in the Senior Promissory Note (“the Note”) held by Broadwood
Partners, L.P. is any judgment in excess of $500,000 against the Company that
“shall remain unpaid.” Because STAAR is not required to pay the Parallax judgment until the
expiration of the stay 40 days after final judgment, and because the amount to
be paid pursuant to the judgment will not be fixed until final judgment is
rendered on or before May 22, 2009, STAAR believes that as of the date of this
Report the Parallax
judgment should not be deemed “unpaid” and that an event of default under
the Senior Promissory Note would not have occurred. To avoid dispute over this
matter and to secure the lender’s temporary waiver of remedies for an event of
default during the stay of the Parallax judgment, STAAR and
Broadwood entered into a Temporary Waiver Agreement on April 2,
2009.
If the
Company is unable to successfully appeal the judgment and/or is required to pay
the amount as awarded by the jury or some other amount and is unable to pay,
this could also constitute an event of default of the existing outstanding debt,
thereby potentially requiring the Company to seek relief under the U.S.
Bankruptcy Code.
Overview
of Changes in Cash and Cash Equivalents and Other Working Capital
Accounts.
·
|
Net
cash used in operating activities was $8.2 million, $11.2 million, and
$8.1 million for fiscal 2008, 2007, and 2006, respectively. For fiscal
2008 cash used in operations was the result of net losses, adjusted for
depreciation, amortization, stock-based compensation expense, loss on
settlement of preexisting distribution arrangements, and other
miscellaneous non-cash items, and net increases in working
capital. For fiscal 2007 cash used in operations was the result
of net losses, adjusted for depreciation, amortization, stock-based
compensation expense, and other miscellaneous non-cash items, and net
decreases in working capital. For fiscal 2006, cash used in operations was
the result of net losses, adjusted for depreciation, amortization,
stock-based compensation expense, and other miscellaneous non-cash items,
and net increases in working
capital.
|
·
|
Net
cash provided by investing activities was approximately $1.1 million in
fiscal 2008 compared to net cashed used of $4.7 million in
2007. In fiscal 2006 the net cash provided by investing
activities was approximately $140,000. In fiscal year 2008 the
net cash provided was due to $2.2 million of net cash acquired in the
STAAR Japan acquisition offset by $1.1 million of property and equipment
purchases. Included in cash used in investing activities for
fiscal 2007, was the $4.0 million advance payment toward the purchase
price for the 50% acquisition of Canon Staar and the acquisition of
$691,000 in property and equipment. Included in cash provided by investing
activities for fiscal 2006, was the receipt of $1.2 million in proceeds
from former officer’s notes partially offset by the acquisition of
$786,000 in property and
equipment.
|
·
|
Net
cash provided by financing activities was approximately $1.0 million,
$18.7 million, and $2.8 million for fiscal 2008, 2007, and 2006,
respectively. In 2008, cash provided by financing activities
resulted from net proceeds of $2.0 million from a line of credit in Japan
offset by $1 million in payments under capital lease lines of
credit. In 2007, cash provided by financing activities resulted
from the receipt of net proceeds of $16.6 million from a public offering
of 3.6 million shares of the Company’s common stock and $584,000 received
from the exercise of the stock options. Additionally in 2007 the Company
borrowed $9.0 million from Broadwood Partners, LP, $4 million of which was
repaid in the second quarter. The remaining $5.0 million was used to fund
the acquisition of the remaining 50% interest in the Canon joint venture
and related transaction costs. During 2007, the Company also repaid $1.8
million outstanding on its Swiss line of credit, paid a $972,000 note
related to the 2004 acquisition of the minority interest of our Australian
subsidiary, and made $692,000 in payments under capital lease lines of
credit. In 2006, cash provided by financing activities resulted from the
receipt of $2.9 million of proceeds from stock option
exercises.
|
·
|
Accounts
receivable was $8.4 million in 2008 and $6.9 million in 2007. The increase
in accounts receivable is due to the acquisition of STAAR
Japan. Receivables outside of Japan decreased $1.4
million. Days’ Sales Outstanding (“DSO”) were 42 days in 2008
and 40 days in 2007. The Company expects to maintain DSO within a range of
40 to 45 days during the course of fiscal
2009.
|
·
|
Inventories
at the end of fiscal 2008 and 2007 were $16.7 million and $12.7 million,
respectively. The increase in inventories is due to the
acquisition of STAAR Japan. Days’ inventory on hand were 154
days in 2008 and 125 days in
2007.
|
42
Credit
Facilities, Contractual Obligations and Commitments
Credit
Facilities
The
Company has credit facilities with different lenders to support operations in
the U.S., Germany, and Japan.
On
December 14, 2007, the Company borrowed $5 million from Broadwood Partners, L.P.
(“Broadwood”) pursuant to a Senior Promissory Note (the “Note”) between the
Company and Broadwood. The borrowed funds were used to finance the cash
consideration and related transaction costs in the Company’s purchase of the
remaining interests in its Canon Staar Co., Inc. joint venture. The Note has a
term of three years and bears interest at a rate of 7% per annum. Under the Note
a default, if not waived, would result in an escalation of the interest rate to
a maximum of 20% per annum. The Note is not secured by any
collateral, may be pre-paid by the Company at any time without penalty, and is
not subject to covenants based on financial performance or financial condition
(except for insolvency). The Note provides that, with certain exceptions, the
Company will not incur indebtedness senior to or at parity with its indebtedness
under the Note without the consent of Broadwood.
On March
2, 2009, a verdict was rendered in the case of Parallax Medical Systems, Inc. v.
STAAR Surgical Company whereby a jury awarded Parallax approximately $4.9
million, comprising of $2.2 million in actual damages and $2.7 million in
punitive damages. Among
the events of default in the Senior Promissory Note (“the Note”) held by
Broadwood Partners, L.P. is any judgment in excess of $500,000 against the
Company that “shall remain unpaid.” Because STAAR is not required to
pay the Parallax
judgment until the expiration of the stay 40 days after final judgment,
and because the amount to be paid pursuant to the judgment will not be fixed
until final judgment is rendered on or before May 22, 2009, STAAR believes that
as of the date of this Report the Parallax
judgment should not be deemed “unpaid” and that an event of default under
the Senior Promissory Note would not have occurred. To avoid dispute over this
matter and to secure the lender’s temporary waiver of remedies for an event of
default during the stay of the Parallax
judgment, STAAR and Broadwood entered into a Temporary Waiver Agreement on
April 2, 2009. The Temporary Waiver Agreement provides that any
event of default under the Note that occurs or may be deemed to have occurred as
a result of the Parallax
judgment will be waived for the shorter of the duration of the stay period and
July 6, 2009. At the expiration of the stay, if the Parallax
judgment has been satisfied any such default will be cured and the interest rate
will go back to 7%. If the Parallax judgment is not satisfied, but
STAAR secures an additional stay pending appeal, any such default will be deemed
partially cured and the Note will not be subject to acceleration; however,
interest under the Note will rise to the default rate of a maximum 20%, an
increase of $650,000 per year in interest expense unless and until the Parallax
judgment is satisfied and any other pending and undecided material litigation is
resolved. As consideration for Temporary Waiver Agreement, STAAR will
amend the Note to grant to Broadwood a security interest in all of STAAR’s
assets to secure STAAR’s obligations under the Senior Note. The
foregoing summary of the Temporary Waiver Agreement is qualified in its entirety
by reference to the complete text of that agreement, a copy of which is attached
to this Report as Exhibit 10.71.
As
additional consideration for the loan the Company also entered into a Warrant
Agreement (the “Warrant Agreement”) with Broadwood granting the right to
purchase up to 700,000 shares of Common Stock at an exercise price of $4.00 per
share, exercisable for a period of six years. The Note also provides that if the
Company has any indebtedness outstanding on the Note on June 29, 2009, it will
issue additional warrants on the same terms as set forth in the Warrant
Agreement in a number equal to 700,000 times the percentage of the original $5
million principal that remains outstanding. The Note also gives Broadwood the
right to participate on a pro rata basis in certain offerings of equity
securities until the Note is no longer outstanding.
Based on
representations made by Broadwood in the Promissory Note, on the date of the
transaction, Broadwood beneficially owned 4,396,231 shares of the Company’s
common stock, comprising 15% of the Company’s common stock as of December 14,
2007. Based on publicly available information filed by Broadwood, Neal Bradsher,
President of Broadwood Partners, L.P., may have been deemed to beneficially own
all of the 4,396,231 shares. Broadwood also holds a warrant to purchase 70,000
shares of Common Stock at an exercise price of $6.00 per share, which warrant
was issued in connection with a loan of $4 million by Broadwood under a
Promissory Note dated March 21, 2007. The March 21, 2007 Promissory Note was
repaid in full on June 20, 2007.
The
Company’s lease agreement with Farnam Street Financial, Inc., as amended on
October 9, 2006, provides for purchases of up to $1,500,000 of property, plant
and equipment. In accordance with the requirements of SFAS 13 “Accounting for
Leases,” purchases under this facility are accounted for as capital leases and
have a three-year term. Under the agreement, the Company has the option to
purchase any item of the leased property, at the end of the respective items
lease terms, at a mutually agreed fair value. On April 1, 2007, the Company
signed an additional leasing schedule with Farnam, which provides for additional
fixed assets purchases of $800,000. The terms of this new schedule
conform to the amended agreement dated October 9, 2006. Approximately $250,000
in borrowings were available under this facility as of January 2,
2009.
43
The
Company’s lease agreement with Mazuma Capital Corporation, as amended on August
16, 2006, provided for purchases of up to $301,000 of property, plant and
equipment. In accordance with the requirements of SFAS 13 “Accounting for
Leases,” purchases under this facility are accounted for as capital leases and
have a two-year term. The Company was required to open a certificate of deposit
as collateral in STAAR Surgical Company’s name at the underwriting bank for 50%
of the assets funded by Mazuma. As of December 28, 2007, the Company had a
certificate of deposit for approximately $150,000 recorded as “short-term
investment — restricted” with a 12-month term at a fixed interest
rate of 4.5%. During the third quarter of 2008 the Mazuma capital leases were
paid and the certificate of deposit was closed.
Lines
of Credit
The
Company’s German subsidiary, Domilens, entered into a credit agreement on August
30, 2005. The renewed credit agreement provides for borrowings of up to 100,000
EUR ($140,000 at the rate of exchange on January 2, 2009), at a rate of 8.5% per
annum and does not have a termination date. The credit agreement may be
terminated by the lender in accordance with its general terms and conditions.
The credit facility is not secured. There were no borrowings outstanding as of
January 2, 2009 and December 28, 2007 and the full amount of the line was
available for borrowing as of January 2, 2009.
The
Company’s Japanese subsidiary, STAAR Japan, has an agreement with Mizuho Bank
providing borrowings of up to 400,000,000 Japanese Yen (approximately $4.4
million based on the rate of exchange on January 2, 2009), at an interest rate
equal to the Tokyo short-term prime interest rate (approximately 1.675% fixed as
of January 2, 2009) and terminates on April 20, 2009, but may be renewed
annually. The credit facility is not collateralized. As of
January 2, 2009 the Company had 200,000,000 Japanese Yen outstanding on the line
of credit (approximately $2.2 million based on the rate of exchange on January
2, 2009).
The lines
of credit available to our subsidiaries are subject to various covenants, and we
risk defaulting on the terms of our lines of credit. Our limited
borrowing capacity could cause a shortfall in working capital or prevent us from
making expenditures to expand or enhance our business. Although we were
compliant with our line of credit covenants as of January 2, 2009, a default on
any of our lines of credit could cause an immediate termination and jeopardize
our ability to continue operations.
The
following table represents the Company’s known contractual obligations as of
January 2, 2009 (in thousands):
Payments Due by Period
|
||||||||||||||||||||
Contractual Obligations
|
Total
|
Less
Than
1 Year
|
1-3
Years
|
3-5
Years
|
More
Than
5 Years
|
|||||||||||||||
Note
payable
|
$ | 5,000 | $ | — | $ | 5,000 | $ | — | $ | — | ||||||||||
Interest
on Note payable*
|
700 | 350 | 350 | — | — | |||||||||||||||
Capital
lease obligations
|
2,503 | 1,163 | 1,104 | 236 | — | |||||||||||||||
Operating
lease obligations
|
9,855 | 2,592 | 3,665 | 3,170 | 428 | |||||||||||||||
Purchase
obligations
|
3,240 | 651 | 1,301 | 1,288 | — | |||||||||||||||
Pension
obligations
|
1,136 | 57 | 143 | 240 | 696 | |||||||||||||||
Open
purchase orders
|
618 | 618 | — | — | — | |||||||||||||||
Total
|
$ | 23,052 | $ | 5,431 | $ | 11,563 | $ | 4,934 | $ | 1,124 |
*Based on the current stated rate of 7%
per annum.
44
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 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 sales and expenses during
the reporting period. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition, allowances for doubtful accounts and sales
return, inventory reserves and income taxes, among others. Our
estimates are based on historical experiences, market trends and financial
forecasts and projections, and on various other assumptions that management
believes are reasonable under the circumstances and at that certain point in
time. Actual results may differ, significantly at times, from these if actual
conditions differ from our assumptions.
We
believe the following represent its critical accounting policies.
|
·
|
Revenue Recognition and
Accounts Receivable. We recognize 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 collectability is reasonably
assured in accordance with Staff Accounting Bulletin No. 104 “Revenue
Recognition” (“SAB 104”). The Company records revenue from
non-consignment product sales when title and risk of ownership has been
transferred, which is typically at shipping point, except for our STAAR
Japan subsidiary, which is typically at delivery to the customer, in which
STAAR Japan will defer the revenue until the product is delivered to the
customer. STAAR Japan does not have significant deferred
revenues as delivery to the customer is generally made within the same or
the next date of shipment. Our products are marketed to ophthalmic
surgeons, hospitals, ambulatory surgery centers or vision centers, and
distributors. IOLs may be offered to surgeons and hospitals on a
consignment basis. We maintain title and risk of loss of
consigned inventory. In accordance with SAB No. 104, we
recognize revenue for consignment inventory when the IOL is implanted
during surgery and not upon shipment to the surgeon. We believe our
revenue recognition policies are
appropriate.
|
|
ICLs
are sold only to certified surgeons who have completed requisite training.
We ship ICLs only for use by surgeons who have already been certified, or
for use in scheduled training
surgeries.
|
|
For
all sales, we are the Principal in the transaction in accordance with SAB
104 and Emerging Issues Task Force (“EITF”) Issue No. 99-19,
“Reporting Revenue Gross as a Principal versus Net as an Agent” as we,
among other factors, bear general inventory risk, credit risk, have
latitude in establishing the sales price and bear authorized sales returns
inventory risk and therefore, sales are recognized gross with
corresponding cost of sales. Cost of sales includes cost of
production, freight and distribution, royalties, and inventory provisions,
net of any purchase
discounts.
|
|
We
present sales tax we collect from our customers on a net basis (excluded
from our revenues), a presentation which is prescribed as one of two
methods available under EITF Issue No. 06-03, “How Sales Taxes
Collected from Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement (That Is, Gross Versus Net
Presentation).”
|
|
We
generally permit returns of product if the product is returned within the
time allowed by under our return policies, and in good condition. We
provide allowances for sales returns based on an analysis of our
historical patterns of returns matched against the sales from which they
originated. While such allowances have historically been within our
expectations, we cannot guarantee that we will continue to experience the
same return rates that we have in the past. Measurement of such
returns requires consideration of, among other factors, historical returns
experience and trends, including the need to adjust for current conditions
and product lines, the entry of a competitor, and judgments about the
probable effects of relevant observable data. We consider all available
information in our quarterly assessments of the adequacy of the allowance
for sales returns. Sales are reported net of
estimated returns. If the actual sales returns and allowances
are greater than estimated by management, additional expense may be
incurred.
|
45
|
We
maintain provisions for uncollectible accounts based on estimated losses
resulting from the inability of our customers to remit payments. If the
financial condition of customers were to deteriorate, thereby resulting in
an inability to make payments, additional allowances could be required. We
perform ongoing credit evaluations of our customers and adjust credit
limits based upon customer payment history and current creditworthiness,
as determined by our review of our customers’ current credit information.
We continuously monitor collections and payments from our customers and
maintain a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that have been
identified. Amounts determined to be uncollectible are written off against
the allowance for doubtful accounts. While such credit losses have
historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit
loss rates that we have in the past. Measurement of such losses requires
consideration of historical loss experience, including the need to adjust
for current conditions, and judgments about the probable effects of
relevant observable data, including present economic conditions such as
delinquency rates and financial health of specific customers. We consider
all available information in our assessments of the adequacy of the
reserves for uncollectible
accounts.
|
|
·
|
Stock-Based
Compensation. We account for the issuance of stock
options to employees and directors in accordance with SFAS No. 123R and
the issuance of stock options and warrants for services from non-employees
in accordance with SFAS No. 123, “Accounting for Stock-Based
Compensation,” and the Financial Accounting Standards Board (FASB)
Emerging Issues Task Force Issue (EITF) No. 96-18, “Accounting For Equity
Instruments That Are Issued To Other Than Employees For Acquiring Or In
Conjunction With Selling Goods Or Services,” by estimating the fair value
of options and warrants issued using the Black-Scholes pricing model. This
model’s calculations include the exercise price, the market price of
shares on grant date, risk-free interest rates, expected term of the
option or warrant, expected volatility of our stock and expected dividend
yield. The amounts recorded in the financial statements for share-based
expense could vary significantly if we were to use different
assumptions.
|
|
·
|
Accounting for
Warrants. We account for the issuance of Company
derivative equity instruments such as the warrants, in accordance with
Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s
Own Stock” (“EITF 00-19”). We agreed to use its best efforts to register
and maintain registration of the common shares underlying certain warrants
(the “Warrant Shares”) that were issued by us with debt instruments, so
that the warrant holder may freely sell the Warrant Shares if the warrant
is exercised, and we agreed that in any event we would secure effective
registration within a certain time period after issuance (typically up to
five months from issuance). In addition, while the relevant warrant
agreement does not require cash settlement if we do not maintain
continuous registration of certain Warrant Shares, the agreement does not
specifically preclude cash settlement. As a result EITF 00-19 requires us
to assume that in the absence of continuous effective registration we may
be required to settle some of these warrants for cash when they are
exercised. Accordingly, our agreement to register and maintain
registration of certain Warrant Shares without express terms for
settlement in the absence of continuous effective registration is presumed
to create a liability to settle these warrants in cash, requiring
liability classification. We have issued other warrants under another
agreement that expressly provides that if we fail to satisfy registration
requirements we will be obligated only to issue additional common stock as
the holder’s sole remedy, with no possibility of settlement in cash. In
this circumstance, we account for those warrants as equity because
additional shares are the only form of settlement available to the holder.
We use the Black-Scholes option pricing model as the valuation model to
estimate the fair value of those warrants. We evaluate the balance sheet
classification of the warrants during each reporting period. Expected
volatilities are based on historical volatility of our stock. The expected
life of the warrant is determined by the amount of time remaining on the
original six-year term of the relevant warrant agreement. The risk-free
rate of return for periods within the contractual life of the warrant is
based on the U.S. Treasury yield curve in effect at each reporting period.
Any gains or losses resulting from the changes in fair value of the
warrants classified as a liability from period to period are included as
an increase or decrease of other income (expense). The warrants that are
accounted for as equity are only valued on the issuance date and not
subsequently revalued.
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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 on 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 January
2, 2009, the valuation allowance fully offsets the value of deferred tax
assets on the Company’s balance sheet. Net increases to the valuation
allowance were $2,289,000, $4,983,000 and $6,774,000 in 2008, 2007 and
2006, respectively.
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We
expect to continue to maintain a full valuation allowance on future tax
benefits until, and if, 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.
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In
the normal course of business, the Company is regularly audited by
federal, state and foreign tax authorities, and is periodically challenged
regarding the amount of taxes due. These challenges include questions
regarding the timing and amount of deductions and the allocation of income
among various tax jurisdictions. We believe that our tax positions comply
with applicable tax law and intend to defend our positions. Our effective
tax rate in a given financial statement period could be impacted if we
prevailed in matters for which reserves have been established, or were
required to pay amounts in excess of established
reserves.
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Inventories. We
provide estimated inventory allowances for excess, slow moving and
obsolete inventory as well as inventory whose carrying value is in excess
of net realizable value. These reserves are based on current assessments
about future demands, market conditions and related management
initiatives. If market conditions and actual demands are less favorable
than those projected by management, additional inventory write-downs may
be required. We value our inventory at the lower of cost or net realizable
market values. We regularly review inventory quantities on hand and record
a provision for excess and obsolete inventory based primarily on the
expiration of products with a shelf life of less than four months,
estimated forecasts of product demand and production requirements for the
next twelve months. Several factors may influence the realizability of our
inventories, including decisions to exit a product line, technological
change and new product development. These factors could result in an
increase in the amount of obsolete inventory quantities on hand.
Additionally, estimates of future product demand may prove to be
inaccurate, in which case the provision required for excess and obsolete
inventory may be understated or overstated. If in the future, we determine
that our inventory was overvalued, we would be required to recognize such
costs in cost of sales at the time of such determination. Likewise, if we
determine that our inventory was undervalued, cost of sales in previous
periods could have been overstated and we would be required to recognize
such additional operating income at the time of sale. While such inventory
losses have historically been within our expectations and the provisions
established, we cannot guarantee that we will continue to experience the
same loss rates that we have in the past. Therefore, although we make
every effort to ensure the accuracy of forecasts of future product demand,
including the impact of planned future product launches, any significant
unanticipated changes in demand or technological developments could have a
significant impact on the value of our inventory and our reported
operating results.
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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. Certain factors
which may occur and indicate that an impairment exists include, but are
not limited to the following: significant underperformance relative to
expected historical or projected future operating results; significant
changes in the manner of the Company’s use of the underlying assets; and
significant adverse industry or market economic trends. In reviewing for
impairment, we compare the carrying value of such assets to the estimated
undiscounted future net cash flows expected from the use of the assets and
their eventual disposition. In the event that the carrying value of assets
is determined to be unrecoverable, we would estimate the fair value of the
assets and record an impairment charge for the excess of the carrying
value over the fair value. The estimate of fair value requires management
to make a number of assumptions and projections, which could include, but
would not be limited to, future revenues, earnings and the probability of
certain outcomes and scenarios. Our policy is consistent with current
accounting guidance as prescribed by SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. An assessment was completed under
the guidance of SFAS No. 144 for the year ended January 2, 2009, and based
on that assessment we determined that certain of our patents had
diminished in value or utility due to our discontinuance of certain
products or procedures underlying the patents, and therefore, we recorded
an impairment loss during the fourth quarter of fiscal year ended 2008
discussed under Definite-Lived Intangible
Assets below.
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Goodwill. Goodwill,
which has an indefinite life, is not amortized, but instead is subject to
periodic testing for impairment. Intangible assets determined to have
definite lives are amortized over their remaining useful lives. Goodwill
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. Certain factors which may occur
and indicate that an impairment exists include, but are not limited to the
following: significant underperformance relative to expected historical or
projected future operating results; significant changes in the manner of
our use of the underlying assets; and significant adverse industry or
market economic trends. In the event that the carrying value of assets is
determined to be unrecoverable, we would estimate the fair value of the
reporting unit and record an impairment charge for the excess of the
carrying value over the fair value. The estimate of fair value requires
management to make a number of assumptions and projections, which could
include, but would not be limited to, future revenues, earnings and the
probability of certain outcomes and scenarios, including the use of
experts. Our policy is consistent with current accounting
guidance as prescribed by SFAS No. 142, Goodwill and Intangible
Assets. During the fourth quarter of fiscal 2008, we performed our
annual impairment test using the methodology prescribed by SFAS No. 142
and determined that our goodwill was not impaired. As of January 2, 2009,
the carrying value of goodwill was $7.5
million.
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Definite-Lived Intangible
Assets. We also have other intangible assets mainly
consisting of patents and licenses, developed technologies and customer
relationships, with a gross book value of $13.5 million and accumulated
amortization of $7.9 million as of January 2, 2009. We capitalize the cost
of acquiring patents and licenses. We acquired certain customer
relationships and developed technologies in the acquisition of our STAAR
Japan subsidiary which was completed on December 29, 2007 (see note 2 to
the consolidated financial statements). Amortization is computed on the
straight-line basis over the estimated useful lives of the assets, since
the pattern in which the economic benefits realized cannot be reasonably
determined, which are based on legal, contractual and other provisions,
and range from 10 to 21 years for patents and licenses, 10 years for
customer relationships and 3 to 10 years for developed
technology. We review intangible assets for impairment in
the assessment discussed above regarding Impairment of Long-Lived
Assets. Based on this assessment we determined that certain of our
patents had diminished in value or utility due to our discontinuance of
certain products or procedures underlying the patents, and therefore, we
recorded a $1 million impairment loss during the fourth quarter of fiscal
year ended 2008 included in other expenses under selling, general and
administrative expenses.
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Employee Defined Benefit
Plans. We have historically maintained a passive pension plan (the
“Swiss Plan”) covering employees of its Swiss subsidiary. This
plan was previously classified and accounted for as a defined contribution
plan. Based on new guidance obtained in the fourth quarter of fiscal 2007
from the Swiss Auditing Chamber’s Auditing Practice Committee and its
Accounting Practice Committee with respect to a change in Swiss pension
law, the Company concluded that the features of the Swiss Plan now conform
to the features of a defined benefit plan. As a result, we
adopted the recognition and disclosure requirements of Statement of
Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans,” an amendment
of SFAS Nos. 87, 88, 106 and 132R (“SFAS 158”) on October 1,
2007. The effect of this adoption increased total liabilities
by $429,000, net of tax, with a corresponding decrease to stockholder’s
equity. See Note 13.
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In
connection with our acquisition of the remaining interest in STAAR Japan,
Inc., we assumed the net pension liability under STAAR Japan’s
noncontributory defined benefit pension plan substantially covering all of
the employees of STAAR Japan. STAAR Japan adopted the
recognition and disclosure requirements of SFAS No. 158 on December 29,
2007, the date of the
acquisition.
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SFAS
No. 158 requires recognition of the funded status, or difference between
the fair value of plan assets and the projected benefit obligations of the
pension plan on the statement of financial position as of January 2, 2009
and December 28, 2007, with a corresponding adjustment to accumulated
other comprehensive income. If the projected benefit obligation exceeds
the fair value of plan assets, then that difference or unfunded status
represents the pension liability. We record a net periodic pension cost in
the consolidated statement of operations. The liabilities and annual
income or expense of both plans are determined using methodologies that
involve several actuarial assumptions, the most significant of which are
the discount rate, and the expected long-term rate of asset return (based
on the market-related value of assets). The fair values of plan
assets are determined based on prevailing market prices. The
amounts recorded in the financial statements pertaining to our employee
defined benefit plans could vary significantly if we were to
use different
assumptions.
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In
September 2006, the FASB issued Statement No. 157, “Fair Value
Measurements” (“SFAS No. 157”), which clarifies the definition of fair
value, establishes a framework for measuring fair value and expands the
disclosures about fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. In February 2008, FASB issued FASB
Staff Position No. FAS 157-2 (As Amended) (FSP 157-2). This FSP
delays the effective date of SFAS No. 157 for nonfinancial assets and
nonfinancial liabilities, to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years for items within the
scope of this FSP, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually). The delay is intended to allow the FASB and
reporting entities additional time to consider the effect of various
implementation issues that have arisen, or that may arise, from the
application of SFAS No. 157. As such, the Company partially adopted SFAS
157 on December 29, 2007 for the measurement of the plan assets’ fair
value and disclosures relevant to our defined benefit plans which we have
made pursuant to SFAS No.
157.
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Redeemable, convertible
Preferred Stock: Under our Certificate of Incorporation we had
10,000,000 shares of “blank check” preferred stock, which our Board of
Directors is authorized to issue with such rights, preferences and
privileges as the Board may determine. On October 22, 2007, our
Board approved the designation of 1,700,000 shares of the preferred stock
as Series A Redeemable Convertible Preferred Stock (“Preferred Stock”) to
be issued in connection with the acquisition of the 50% interest in Canon
Staar Co., Inc. which was consummated on December 29, 2007. On
December 29, 2007, we issued the 1,700,000 shares of Preferred Stock
to the Canon companies as partial consideration for their shares of Canon
Staar Co., Inc. at an estimated fair value of $4.00 per share, or $6.8
million in the aggregate.
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The
fair value of the Preferred Stock was determined on the issuance date by
us with the assistance of a valuation specialist using the Binomial Tree
option valuation model. This model considers the Preferred
Stock to be a derivative asset of our common stock where the preferred
stockholder has options to choose certain payoffs that maximize returns
and therefore maximize the value of the preferred stock. The
payoff available to the preferred stockholder is contingent on the future
market value of our common stock. Therefore the model, based on
certain significant management assumptions, analyzes various payoff
patterns for different possible paths that might be followed by the common
stock price over the life of the Preferred Stock until the automatic
conversion on the fifth anniversary of the issuance date. The
amounts recorded in the consolidated financial statements for our
Preferred Stock could vary significantly if we were to use different
assumptions.
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Because
after the third anniversary of issuance the Preferred Stock is redeemable
at the option of the holders, which is not within our control, we have
presented the Preferred Stock in the mezzanine section of the consolidated
balance sheet in accordance with the provisions of EITF Abstracts, Topic
No. D-98 (“Topic D-98”), “Classification and Measurement of Redeemable
Securities.” Because the Preferred Stock fair value recorded on
the issuance date approximates the redemption price, no further
significant accretion will be required by us to redemption value and no
subsequent revaluation will be necessary so long as the Preferred Stock is
still considered a temporary equity
instrument.
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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 had
adversely affected our 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 could significantly affect our
operating results. We do not engage in hedging transactions to offset changes in
currency or fluctuations in foreign currencies.
Inflation
Management
believes inflation has not had a significant impact on our operations during the
past three years.
Recent
Accounting Pronouncements
On
December 30, 2008, FASB Staff Position (FSP) No. 132 (R) - 1 was issued and
amends SFAS No. 132 (R), Employer’s Disclosures about
Pensions and Other Postretirement Benefits, to provide guidance on an
employer’s disclosures about plan assets of a defined benefit pension (DBP)
or other postretirement plan. This FSP also includes certain
requirements for non public companies’ disclosures about net periodic pension
cost. The FASB broadened the scope of this FSP to require employers to
disclose information about fair value of measurements of plan assets that would
be similar to the disclosures about fair value measurements required by SFAS No.
157. The FSP was in response to concerns about the lack of transparency
surrounding the types of assets and associated risks in an employer’s defined
benefit plan and events in the economy and markets that could have a significant
effect on the value of plan assets. This FSP applies to an employer that
is subject to the disclosures requirements of SFAS 132 (R). The objectives
of the disclosures about plan assets in DBP plans include how investment
allocation decisions are made, including pertinent investment policies and
strategies, the major categories of plan assets, the inputs and valuation
techniques used to measure the fair value of plan assets, the effect of fair
value measurements using significant unobservable inputs (Level 3) on changes in
plan assets for the period, and significant concentration of risk within plan
assets. The disclosure requirements of this FSP are effective for fiscal
years ending after December 15, 2009, however earlier application is
permitted. The Company believes that the adoption of this FSP will not
have a significant impact on its consolidated financial statements.
In
April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position FAS 142-3, “Determination of Useful Life of Intangible Assets”
(“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing the renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FAS 142, “Goodwill and Other
Intangible Assets” and also requires expanded disclosure related to the
determination of intangible asset useful lives. FSP 142-3 intends to improve the
consistency between the useful life of a recognized intangible asset under FAS
142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS 141R, and other GAAP. FSP 142-3 is effective for fiscal years
beginning after December 15, 2008. Earlier adoption is not permitted. We
believe that the adoption of FSP 142-3 will not have a significant impact on our
consolidated financial statements.
50
In
March 2008, the FASB issued Statement No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an amendment of FASB Statement
No. 133” (“SFAS 161”). SFAS 161 requires entities to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments and
that the objectives for using derivative instruments be disclosed in terms of
underlying risk and accounting designation, (b) how derivative instruments
and related hedged items are accounted for under SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities” and its related
interpretations, including a tabular format disclosure of the fair values of
derivative instruments and their gains and losses and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. SFAS 161 encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. We believe that the adoption of SFAS 161 will not have a significant
impact on our consolidated financial statements.
In
December 2007, the SEC issued Staff Accounting Bulletin (“SAB”)
No. 110, “Share-Based Payment” (“SAB 110”), which became effective on
January 1, 2008. SAB 110 allows companies, under certain circumstances, to
continue using the “simplified” method of estimating the expected term of “plain
vanilla” share options discussed in SAB No. 107, “Share-Based Payment,” in
accordance with SFAS 123R. Under SAB 107, the SEC staff had previously indicated
that it would not expect companies to use the “simplified” method for share
option grants made after December 31, 2007, however the SEC staff
understands that such detailed information about employee exercise behavior may
not be available by December 31, 2007 and therefore, under certain
circumstances, the staff will continue to accept the use of the simplified
method beyond this date. We adopted SAB 110 on January 1, 2008 and it did
not have a significant impact on our consolidated financial
statements.
In
December 2007, the FASB issued Statement No. 141 (revised 2007),
“Business Combinations” (“SFAS 141R”), which replaces SFAS 141. SFAS 141R
retains the fundamental requirements in SFAS 141 and establishes principles and
requirements for (a) how an acquirer recognizes and measures the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquired business, (b) how an acquirer recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and (c) what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination.. SFAS 141R applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. We cannot
anticipate whether the adoption of SFAS 141R will have a material impact on our
results of operations and financial condition as the impact will depend on the
terms and nature of any business combination we enter into, if any, on or after
January 3, 2009.
In
December 2007, the FASB issued Statement No. 160, “Noncontrolling
Interests in Consolidated Financial Statements — an amendment to ARB
No. 51” (“SFAS 160”). SFAS 160 establishes the standards for accounting and
reporting of noncontrolling interests in subsidiaries, currently known as
minority interests, in consolidated financial statements. SFAS 160 also provides
guidance on accounting for changes in a parent’s ownership interest in a
subsidiary and establishes standards of accounting for the deconsolidation of a
subsidiary. SFAS 160 requires an entity to present minority interests as a
component of equity and to present consolidated net income attributable to the
parent and to the noncontrolling interest separately on the face of the
consolidated financial statements. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. We believe that the adoption of SFAS 160 will
not have a significant impact on our consolidated financial
statements.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities — including an amendment
of FASB Statement No. 115” (“SFAS 159”), which permits entities to choose
to measure many financial instruments and certain other assets and liabilities
at fair value on an instrument-by-instrument basis (the fair value option).
Unrealized gains and losses on items for which the fair value option has been
elected are to be recognized in earnings at each subsequent reporting date. SFAS
159 is effective for fiscal years beginning after November 15,
2007. We have not elected the fair value option for any of the
eligible financial assets or liabilities.
51
In
September 2006, the FASB issued Statement No. 157, “Fair Value
Measurements” (“SFAS 157”), which clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures
about fair value measurements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. On
February 12, 2008, the FASB issued FASB Staff Position FAS 157-2, which
delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial
liabilities, except for those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), to fiscal
years beginning after November 15, 2008 and interim periods within those
fiscal years. As such, we partially adopted SFAS 157 on December 29, 2007 and it
did not have a significant impact on our consolidated financial statements,
except for the measurement of the plan assets’ fair value and disclosures
relevant to our defined benefit plans which we have made pursuant to SFAS
157.
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.
As of January 2, 2009, STAAR had $2.2 million of foreign debt. Our
$2.2 million of foreign debt bears an interest rate that is equal to the Tokyo
prime interest rate and thus, our interest expense would fluctuate with any
change in the prime interest rate. If the Tokyo prime rate were to
increase or decrease by 1% for the year, our annual interest expense would
increase or decrease by approximately 2,000,000 Japanese yen or approximately
$22,000 based on the exchange rate in effect at January 2,
2009. STAAR’s $5 million principal amount of U.S. indebtedness under
the Broadwood note bears a fixed interest rate of 7% and may be prepaid without
penalty. Under the note a default, if not waived, would result in an
escalation of the stated interest rate to a maximum of 20%. If the
stated interest rate were to increase to 20%, our interest payments would
increase by approximately $650,000 per year.
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, Japanese Yen, Swiss Franc 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. 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 1A. — 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 Annual Report on 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 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. Page F-3 of this Annual Report on Form 10-K sets forth the
report of BDO Seidman, LLP, our independent registered public accounting firm,
regarding its audit of STAAR’s internal control over financial reporting. This
section should be read in conjunction with the certifications and the BDO
Seidman, LLP report for a more complete understanding of the topics
presented.
52
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in
Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of
the period covered by this Annual Report on 10-K, our disclosure controls and
procedures are effective in enabling us to record, process, summarize and report
information required to be included in our periodic SEC filings within the
required time period.
Management
Report on Internal Control over Financial Reporting
The
Company’s management, including our Chief Executive Officer and Chief Financial
Officer, is responsible for establishing and maintaining adequate internal
control over financial reporting (as such term is defined in Exchange Act Rule
13a-15(f) and 15d-15(f)) for STAAR Surgical Company and its subsidiaries (the
“Company”). The Company’s internal control system was designed to provide
reasonable assurance to the Company’s management and Board of Directors
regarding the preparation and fair presentation of published consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America.
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changing conditions, effectiveness of
internal control over financial reporting may vary over time. The Company’s
processes contain self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
Management
has assessed the effectiveness of the Company’s internal control over financial
reporting as of January 2, 2009, based on the criteria for effective internal
control described in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on
its assessment, management concluded that the Company’s internal control over
financial reporting was effective as of January 2, 2009.
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 on Form 10-K, was engaged to attest to and report on the
effectiveness of the Company’s internal control over financial reporting. Its
report is included herein.
Changes
in Internal Control over Financial Reporting
There was
no change during the fiscal quarter ended January 2, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other
Information
Compensatory Arrangements of
Certain Officers
STAAR
regards executive compensation as a key part of its business
strategy. As a major element of its compensation philosophy, STAAR
seeks to align the interests of its executives with the interests of its
stockholders and with the Company’s long-term objectives by providing
stock-based compensation and encouraging actual stock ownership by
executives. On March 30, 2009, as part of the annual executive
performance review process, STAAR’s Compensation Committee awarded stock grants
to certain executives. They included the following: Barry
G. Caldwell, President and CEO, 60,000 shares, Deborah Andrews, CFO, 25,000
shares, David Bailey, President of International Operations, 30,000 shares, Hans
Blickensdoerfer, Vice President of International Sales, 30,000 shares and Paul
Hambrick, Vice President of Operations, 10,000 shares. These grants
were part of a broad program of equity compensation based on annual performance
reviews, which awarded options and stock grants covering a total of 261,000
shares to 48 employees of STAAR.
Departure of Directors or
Certain Officers
Nicholas
Curtis, STAAR’s Senior Vice President of Sales, resigned from his position on
March 30, 2009, concurrently with his acceptance of employment as an
officer at another company. Mr. Curtis’ resignation will be
effective on April 3, 2009.
STAAR is providing the information included in this Item 9B in
accordance with Item 5.02(b) and Item 5.02(e) of Form 8-K.
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 2009 annual meeting of stockholders to
be filed with the Securities and Exchange Commission within 120 days of the
close of the fiscal year ended January 2, 2009.
53
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.
54
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 January 2, 2009 and at December 28,
2007
|
F-4
|
|||
Consolidated
Statements of Operations for the years ended January 2, 2009,
December 28, 2007, and December 29, 2006
|
F-5
|
|||
Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive Loss for
the years ended January 2, 2009, December 28, 2007, and
December 29, 2006
|
F-6
|
|||
Consolidated
Statements of Cash Flows for the years ended January 2, 2009,
December 28, 2007, and December 29, 2006
|
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-37
|
|||
II.
Schedule II — Valuation and Qualifying Accounts and
Reserves
|
F-38
|
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.
Any
representation, warranty or other statement of purported fact in any such
exhibit that is a contract, agreement or similar instrument may not be true or
complete, either at the date of such instrument or at any later time. Even
if such statements were accurate when made, they may not be accurate now.
The parties to such instruments did not intend such statements to establish any
facts, but intended such statements to allocate contractual risk between the
parties. Such instruments may be subject to standards of materiality that
differ from the standards applicable to this report. No one other than the
parties to the instrument is entitled to rely or should rely on any statement in
such instrument for any purpose. Such statements were provided for the
private purposes of the parties to the instruments and may have been qualified
by schedules and other disclosures that have not been filed with (or
incorporated by reference into) this or any other report or document. Only
the parties to any such instrument are entitled to enforce it.
(3) Exhibits
|
|
3.1
|
Certificate
of Incorporation, as amended to date
|
||||
3.2
|
By-laws,
as amended to date(2)
|
||||
4.1
|
Certificate
of Designation of Series A Convertible Preferred Stock (1)
|
||||
†4.2
|
1991
Stock Option Plan of STAAR Surgical Company(3)
|
||||
†4.3
|
1998
STAAR Surgical Company Stock Plan, adopted April 17, 1998(4)
|
||||
4.4
|
Form
of Certificate for Common Stock, par value $0.01 per share(5)
|
||||
†4.5
|
2003
Omnibus Equity Incentive Plan, as Amended, and form of Option
Grant and Stock Option Agreement(6)
|
||||
10.3
|
Indenture
of Lease dated September 1, 1993, by and between the Company and FKT
Associates and First through Third Additions Thereto(7)
|
||||
10.4
|
Second
Amendment to Indenture of Lease dated September 21, 1998, between the
Company and FKT Associates(7)
|
||||
10.5
|
Third
Amendment to Indenture of Lease dated October 13, 2003, by and
between the Company and FKT Associates(8)
|
||||
10.6
|
Fourth
Amendment to Indenture of Lease dated September 30, 2006, by and between
the Company and FKT Associates(1)
|
||||
10.7
|
Indenture
of Lease dated October 20, 1983, between the Company and Dale E.
Turner and Francis R. Turner and First through Fifth Additions
Thereto(9)
|
||||
10.8
|
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(8)
|
||||
10.9
|
Seventh
Lease Addition to Indenture of Lease dated September 30, 2006, by and
between the Company and Turner Trust UTD Dale E. Turner March 28,
1984(1)
|
||||
10.10
|
Amendment
No. 1 to Standard Industrial/Commercial Multi-Tenant Lease dated
January 3, 2003, by and between the Company and California Rosen
LLC(8)
|
||||
10.11
|
Lease
Agreement dated July 12, 1994, between STAAR Surgical AG and
Calderari and Schwab AG/SA(10)
|
||||
10.12
|
Supplement #1
dated July 10, 1995, to the Lease Agreement of July 12, 1994,
between STAAR Surgical AG and Calderari and Schwab AG/SA(10)
|
||||
10.13
|
Supplement #2
dated August 2, 1999, to the Lease Agreement of July 12, 1994,
between STAAR Surgical AG and Calderari and Schwab AG/SA(10)
|
55
10.14
|
Commercial
Lease Agreement dated November 29, 2000, between Domilens GmbH and
DePfa Deutsche Pfandbriefbank AG(10)
|
||||
10.15
|
Patent
License Agreement, dated May 24, 1995, with Eye Microsurgery
Intersectoral Research and Technology Complex(11)
|
||||
10.16
|
Patent
License Agreement, dated January 1, 1996, with Eye Microsurgery
Intersectoral Research and Technology Complex(12)
|
||||
†10.23
|
Stock
Option Plan and Agreement for Chief Executive Officer dated
November 13, 2001, between the Company and David Bailey(13)
|
||||
†10.24
|
Stock
Option Certificate dated August 9, 2001, between the Company and
David Bailey(10)
|
||||
†10.25
|
Stock
Option Certificate dated January 2, 2002, between the Company and
David Bailey(10)
|
||||
†10.27
|
Amended
and Restated Stock Option Certificate dated February 13, 2003,
between the Company and David Bailey(10)
|
||||
†10.36
|
Offer
of Employment dated July 12, 2002, from the Company to Nick
Curtis(10)
|
||||
†10.37
|
Amendment
to Offer of Employment dated February 14, 2003 from the Company to
Nick Curtis(10)
|
||||
†10.42
|
Form
of Indemnification Agreement between the Company and certain officers and
directors(10)
|
||||
†10.47
|
Employment
Agreement dated May 5, 2004, between the ConceptVision Australia Pty
Limited CAN 006 391 928 and Philip Butler Stoney(11)
|
||||
†10.48
|
Employment
Agreement dated May 5, 2004, between the ConceptVision Australia Pty
Limited CAN 006 391 928 and Robert William Mitchell(11)
|
||||
10.58
|
Loan
Agreement between Deutsche Postbank AG and Domilens GmbH dated
August 30, 2005(12)
|
||||
10.59
|
Standard
Industrial/Commercial Multi Tenant Lease — Gross dated
October 6, 2005, entered into between the Company and Z & M
LLC(12)
|
||||
10.61
|
Addendum
No. 1 to Commercial Leases between Domilens GmbH and DePfa Deutsche
Pfandbriefbank AG related to Domilens headquarters facilities, dated as of
December 13, 2005.
(13)
|
||||
10.63
|
Promissory
Note between STAAR Surgical Company and Broadwood Partners, L.P., dated
March 21, 2007. (14)
|
||||
10.64
|
Warrant
Agreement between STAAR Surgical Company and Broadwood Partners, L.P.,
dated March 21, 2007.
(14)
|
||||
10.65
|
Share
Purchase Agreement dated October 25, 2007 by and between Canon Marketing
Japan Inc. and Canon Inc. as Sellers and STAAR Surgical Company as
Buyer.
(15)
|
||||
†10.66
|
Executive
Employment Agreement by and between the Company and Barry G. Caldwell,
dated as of November 27, 2007.
(16)
|
||||
†10.67
|
Executive
Employment Agreement by and between the Company and David Bailey, dated as
of November 27, 2007.(16)
|
||||
10.68
|
Senior
Promissory Note between STAAR Surgical Company and Broadwood Partners,
L.P., dated December 14, 2007.
(17)
|
||||
10.69
|
Warrant
Agreement between STAAR Surgical Company and Broadwood Partners, L.P.,
dated December 14, 2007.(17)
|
||||
†10.70
|
Amended and Restated Executive Employment Agreement by and between the Company and Barry G. Caldwell, dated December 31, 2008(6) | ||||
10.71
|
Temporary Waiver Agreement, dated April 2, 2009, by and between Broadwood Partners, L.P. and the Company.* | ||||
14.1
|
Code
of Ethics(10)
|
||||
21.1
|
List
of Significant Subsidiaries*
|
||||
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*
|
56
*
|
Filed
herewith
|
†
|
Management
contract or compensatory plan or
arrangement
|
#
|
All
schedules and or exhibits have been omitted. Any omitted schedule or
exhibit will be furnished supplementally to the Securities and Exchange
Commission upon request.
|
(1)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K, for
the year ended December 28, 2007, as filed on March 12,
2008.
|
(2)
|
Incorporated by reference to the
Company’s Current Report on Form 8-K, as filed on May 23,
2006.
|
(3)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-8,
File No. 033-76404, as filed on March 11,
1994.
|
(4)
|
Incorporated
by reference to the Company’s Proxy Statement for its Annual Meeting of
Stockholders held on May 29, 1998, filed on May 1,
1998.
|
(5)
|
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.
|
(6)
|
Incorporated by reference to the
Company’s Current Report on Form 8-K filed on January 8,
2009.
|
(7)
|
Incorporated by reference to the
Company’s Annual Report on Form 10-K, for the year ended December 29,
2000, as filed on March 29,
2001.
|
(8)
|
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.
|
(9)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K, for the
year ended January 2, 1998, as filed on April 1,
1998.
|
(10)
|
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.
|
(11)
|
Incorporated
by reference to the Company’s Quarterly Report, for the period ended
April 2, 2004, as filed on May 12,
2004.
|
(12)
|
Incorporated
by reference to the Company’s Quarterly Report for the period ended
September 30, 2005, as filed on November 9,
2005.
|
(13)
|
Incorporated
by reference to the Company’s Quarterly Report for the period ended
March 31, 2006, as filed on May 10,
2006.
|
(14)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K filed on
March 21, 2007.
|
(15)
|
Incorporated by reference to the
Company’s Current Report on Form 8-K filed on October 31,
2007.
|
(16)
|
Incorporated by reference to the
Company’s Current Report on Form 8-K filed on December 4,
2007.
|
(17)
|
Incorporated by reference to the
Company’s Current Report on Form 8-K filed on December 19,
2007.
|
57
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
STAAR
SURGICAL COMPANY
|
||
By:
|
/s/
Barry G. Caldwell
|
|
Barry
G. Caldwell
|
||
President
and Chief Executive Officer
|
||
(principal
executive officer)
|
||
Date: April
2, 2009
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name
|
Title
|
Date
|
||
/s/
Barry G. Caldwell
|
President,
Chief Executive Officer and
|
April
2, 2009
|
||
Barry
G. Caldwell
|
Director
(principal executive officer)
|
|||
/s/
Deborah Andrews
|
Chief
Financial Officer (principal
|
April
2, 2009
|
||
Deborah
Andrews
|
accounting
and financial officer)
|
|||
/s/
Don Bailey
|
Chairman
of the Board, Director
|
April
2, 2009
|
||
Don
Bailey
|
||||
/s/
David Bailey
|
Director,
President, International
|
April
2, 2009
|
||
David
Bailey
|
Operations
|
|||
/s/
Donald Duffy
|
Director
|
April
2, 2009
|
||
Donald
Duffy
|
||||
/s/
John C. Moore
|
Director
|
April
2, 2009
|
||
John
C. Moore
|
||||
/s/
David Morrison
|
Director
|
April
2, 2009
|
||
David
Morrison
|
58
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
Years
Ended January 2, 2009,
December 28,
2007 and December 29, 2006
TABLE
OF CONTENTS
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
Consolidated
Balance Sheets at January 2, 2009 and at December 28,
2007
|
F-4
|
|
Consolidated
Statements of Operations for the years ended January 2, 2009,
December 28, 2007, and December 29, 2006
|
F-5
|
|
Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive Loss for
the years ended January 2, 2009, December 28, 2007, and
December 29, 2006
|
F-6
|
|
Consolidated
Statements of Cash Flows for the years ended January 2, 2009,
December 28, 2007, and December 29, 2006
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
Report
on Schedule II – Valuation and Qualifying Accounts and
Reserves
|
F-48
|
F-1
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
STAAR
Surgical Company
Monrovia,
California
We have
audited the accompanying consolidated balance sheets of STAAR Surgical Company
and Subsidiaries (“the Company”) as of January 2, 2009 and December 28, 2007,
and the related consolidated statements of operations, changes in stockholders’
equity and comprehensive loss, and cash flows for each of the fiscal years in
the three year period ended January 2, 2009. 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, 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 January 2, 2009 and December 28, 2007, and the
consolidated results of their operations and their cash flows for each of the
fiscal years in the three year period ended January 2, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations, negative
cash flows, accumulated deficit, and the adverse judgment raise substantial
doubt about its ability to continue as a going concern. Management’s plans in
regard to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As more
fully disclosed in Note 12 to the consolidated financial statements, effective
December 30, 2006, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109”. As more fully disclosed in Note 13 to the consolidated
financial statements, effective December 30, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 158 “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans — An Amendment of FASB Statements No. 87, 88, 106, and
132(R).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), STAAR Surgical Company and Subsidiaries’
internal control over financial reporting as of January 2, 2009, based on
criteria established in Internal
Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
April 2, 2009 expressed an unqualified opinion thereon.
/s/ BDO
Seidman, LLP
Los
Angeles, California
April 2,
2009
F-2
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
STAAR
Surgical Company
Monrovia,
California
We have
audited STAAR Surgical Company and Subsidiaries’ internal control over financial
reporting as of January 2, 2009, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). 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, included in the accompanying Item 9A
Management’s Report on
Internal control over Financial Reporting. Our responsibility is to
express an opinion on 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, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included 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, STAAR Surgical Company and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of January 2,
2009, based on the COSO criteria.
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 January 2, 2009 and December 28, 2007 and the related
consolidated statements of operations, changes in stockholders’ equity and
comprehensive loss, and cash flows for each of the fiscal years in the three
year period ended January 2, 2009, and our report dated April 2, 2009 expressed
an unqualified opinion thereon and contains an explanatory paragraph regarding
the Company’s ability to continue as a going concern.
/s/ BDO
Seidman, LLP
Los
Angeles, California
April 2,
2009
F-3
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
January 2,
2009 and December 28, 2007
2008
|
2007
|
|||||||
(In thousands, except
|
||||||||
par value amounts)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 4,992 | $ | 10,895 | ||||
Short-term
investments — restricted
|
179 | 150 | ||||||
Accounts
receivable trade, net
|
8,422 | 6,898 | ||||||
Inventories
|
16,668 | 12,741 | ||||||
Prepaids,
deposits and other current assets
|
2,009 | 1,610 | ||||||
Total
current assets
|
32,270 | 32,294 | ||||||
Property,
plant and equipment, net
|
5,974 | 5,772 | ||||||
Intangible
assets, net
|
5,611 | 3,959 | ||||||
Goodwill
|
7,538 | 7,534 | ||||||
Advance
payment for acquisition of Canon Staar (Note 2)
|
— | 4,000 | ||||||
Other
assets
|
1,189 | 620 | ||||||
Total
assets
|
$ | 52,582 | $ | 54,179 | ||||
LIABILITIES,
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Line
of credit
|
$ | 2,200 | $ | — | ||||
Accounts
payable
|
6,626 | 4,823 | ||||||
Deferred
income taxes — current
|
282 | 102 | ||||||
Obligations
under capital leases — current
|
989 | 822 | ||||||
Other
current liabilities
|
11,366 | 5,541 | ||||||
Total
current liabilities
|
21,463 | 11,288 | ||||||
Notes
payable — long-term, net of discount
|
4,414 | 4,166 | ||||||
Obligations
under capital leases — long-term
|
1,335 | 1,311 | ||||||
Deferred
income taxes — long-term
|
897 | 570 | ||||||
Other
long-term liabilities
|
1,678 | 619 | ||||||
Total
liabilities
|
29,787 | 17,954 | ||||||
Commitments,
contingencies and subsequent events (Notes 10, 12 and
18)
|
||||||||
Series
A redeemable convertible preferred stock $0.01 par value;
10,000 shares authorized; 1,700 and no shares issued and outstanding
at January 2, 2009 and December 28, 2007 respectively. Liquidation value
$6,800
|
6,768 | — | ||||||
Stockholders’
equity:
|
||||||||
Common
stock, $.01 par value; 60,000 shares authorized; issued and
outstanding 29,503 and 29,488 shares
|
295 | 295 | ||||||
Additional
paid-in capital
|
138,811 | 137,075 | ||||||
Accumulated
other comprehensive income
|
2,812 | 1,551 | ||||||
Accumulated
deficit
|
(125,891 | ) | (102,696 | ) | ||||
Total
stockholders’ equity
|
16,027 | 36,225 | ||||||
Total
liabilities, redeemable convertible preferred stock and stockholders’
equity
|
$ | 52,582 | $ | 54,179 |
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 January 2, 2009, December 28, 2007 and December 29,
2006
2008
|
2007
|
2006
|
||||||||||
(In thousands,
|
||||||||||||
except per share amounts)
|
||||||||||||
Net
sales
|
$ | 74,894 | $ | 59,363 | $ | 56,951 | ||||||
Cost
of sales
|
34,787 | 30,097 | 30,801 | |||||||||
Gross
profit
|
40,107 | 29,266 | 26,150 | |||||||||
Selling,
general and administrative expenses:
|
||||||||||||
General
and administrative
|
15,730 | 12,951 | 10,891 | |||||||||
Marketing
and selling
|
27,053 | 23,723 | 22,112 | |||||||||
Research
and development
|
7,938 | 6,711 | 7,080 | |||||||||
Other
expenses (Notes 8 & 20)
|
9,773 | — | (331 | ) | ||||||||
Total
selling, general and administrative expenses
|
60,494 | 43,385 | 39,752 | |||||||||
Operating
loss
|
(20,387 | ) | (14,119 | ) | (13,602 | ) | ||||||
Other
(expense) income:
|
||||||||||||
Equity
in operations of joint venture
|
— | (280 | ) | 114 | ||||||||
Interest
income
|
160 | 336 | 293 | |||||||||
Interest
expense
|
(901 | ) | (486 | ) | (261 | ) | ||||||
Loss
on foreign currency
|
(696 | ) | (295 | ) | (65 | ) | ||||||
Other
(expense) income, net
|
152 | (312 | ) | 14 | ||||||||
Total
other (expense) income, net
|
(1,285 | ) | (1,037 | ) | 95 | |||||||
Loss
before provision for income taxes
|
(21,672 | ) | (15,156 | ) | (13,507 | ) | ||||||
Provision
for income taxes
|
1,523 | 843 | 1,537 | |||||||||
Net
loss
|
$ | (23,195 | ) | $ | (15,999 | ) | $ | (15,044 | ) | |||
Loss
per share:
|
||||||||||||
Basic
and diluted
|
$ | (0.79 | ) | $ | (0.57 | ) | $ | (0.60 | ) | |||
Weighted
average shares outstanding
|
||||||||||||
Basic
and diluted
|
29,474 | 28,121 | 25,227 |
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
AND
COMPREHENSIVE LOSS
Years
Ended January 2, 2009, December 28, 2007, and December 29,
2006
Common
Stock
Shares
|
Common
Stock Par
Value
|
Additional
Paid-In
Capital
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Accumulated
Deficit
|
Notes
Receivable
|
Total
|
||||||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||||||
Balance,
at December 30, 2005
|
24,819
|
$
|
248
|
$
|
112,434
|
$
|
146
|
$
|
(71,653
|
)
|
$
|
(809
|
)
|
$
|
40,366
|
|||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
(15,044
|
)
|
—
|
(15,044
|
)
|
|||||||||||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
—
|
743
|
—
|
—
|
743
|
|||||||||||||||||||||
Total
comprehensive loss
|
(14,301
|
)
|
||||||||||||||||||||||||||
Common
stock issued upon exercise of options
|
753
|
8
|
2,882
|
—
|
—
|
—
|
2,890
|
|||||||||||||||||||||
Stock-based
consultant expense
|
—
|
—
|
1,996
|
—
|
—
|
—
|
1,996
|
|||||||||||||||||||||
Restricted
stock grants
|
46
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||
Proceeds
from notes receivable, net
|
—
|
—
|
—
|
—
|
—
|
1,181
|
1,181
|
|||||||||||||||||||||
Accrued
interest on notes receivable
|
—
|
—
|
—
|
—
|
—
|
(41
|
)
|
(41
|
)
|
|||||||||||||||||||
Notes
receivable reserve reversal
|
—
|
—
|
—
|
—
|
—
|
(331
|
)
|
(331
|
)
|
|||||||||||||||||||
Balance,
at December 29, 2006
|
25,618
|
256
|
117,312
|
889
|
(86,697
|
)
|
—
|
31,760
|
||||||||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
(15,999
|
)
|
—
|
(15,999
|
)
|
|||||||||||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
—
|
1033
|
—
|
—
|
1,033
|
|||||||||||||||||||||
Adoption
of SFAS No. 158
|
—
|
—
|
—
|
(371
|
)
|
—
|
—
|
(371
|
)
|
|||||||||||||||||||
Total
comprehensive loss
|
(15,337
|
)
|
||||||||||||||||||||||||||
Common
stock issued upon exercise of options
|
163
|
2
|
582
|
—
|
—
|
—
|
584
|
|||||||||||||||||||||
Restricted
stock cancelled
|
(9
|
)
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||
Issuance
of warrant - Broadwood
|
—
|
—
|
842
|
—
|
—
|
—
|
842
|
|||||||||||||||||||||
Common
stock issued as payment for services
|
47
|
—
|
125
|
—
|
—
|
—
|
125
|
|||||||||||||||||||||
Net
proceeds from public offering
|
3,600
|
36
|
16,577
|
—
|
—
|
—
|
16,613
|
|||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
1,637
|
—
|
—
|
—
|
1,637
|
|||||||||||||||||||||
Restricted
stock grants
|
69
|
1
|
—
|
—
|
—
|
—
|
1
|
|||||||||||||||||||||
Balance,
at December 28, 2007
|
29,488
|
295
|
137,075
|
1,551
|
(102,696
|
)
|
—
|
36,225
|
||||||||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
(23,195
|
)
|
—
|
(23,195
|
)
|
|||||||||||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
—
|
1,303
|
—
|
—
|
1,303
|
|||||||||||||||||||||
Pension
liability adjustment, net of tax
|
—
|
—
|
—
|
(42
|
)
|
—
|
—
|
(42
|
)
|
|||||||||||||||||||
Total
comprehensive loss
|
(21,934
|
)
|
||||||||||||||||||||||||||
Common
stock issued upon exercise of options
|
10
|
—
|
39
|
—
|
—
|
—
|
39
|
|||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
1,712
|
—
|
—
|
—
|
1,712
|
|||||||||||||||||||||
Restricted
stock cancelled
|
(2
|
)
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||
Preferred
stock amortization
|
—
|
—
|
(16
|
)
|
—
|
—
|
—
|
(16
|
)
|
|||||||||||||||||||
Unvested
restricted stock
|
(17
|
)
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||
Restricted
stock grants
|
24
|
—
|
1
|
—
|
—
|
—
|
1
|
|||||||||||||||||||||
Balance,
at January 2, 2009
|
29,503
|
$
|
295
|
$
|
138,811
|
$
|
2,812
|
$
|
(125,891
|
)
|
$
|
—
|
$
|
16,027
|
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 January 2, 2009, December 28, 2007 and December 29,
2006
2008
|
2007
|
2006
|
||||||||||
(In
thousands)
|
||||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$ | (23,195 | ) | $ | (15,999 | ) | $ | (15,044 | ) | |||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Depreciation
of property and equipment
|
2,797 | 2,001 | 1,889 | |||||||||
Amortization
of intangibles
|
843 | 481 | 481 | |||||||||
Impairment
loss on patents
|
1,023 | — | — | |||||||||
Amortization
of discount
|
248 | 26 | — | |||||||||
Deferred
income taxes
|
238 | 493 | 179 | |||||||||
Loss
on extinguishment of debt
|
— | 215 | — | |||||||||
Fair
value adjustment of warrant
|
(7 | ) | (182 | ) | — | |||||||
Pension
accounting
|
72 | 179 | — | |||||||||
Loss
on disposal of property and equipment
|
48 | 307 | 190 | |||||||||
Equity
in operations of joint venture
|
— | 280 | (114 | ) | ||||||||
Stock-based
compensation expense
|
1,513 | 1,456 | 1,856 | |||||||||
Common
stock issued for services
|
— | 125 | — | |||||||||
Notes
receivable reversal
|
— | — | (331 | ) | ||||||||
Loss
on settlement of pre-existing distribution arrangement
|
3,850 | — | — | |||||||||
Other
|
151 | 32 | (44 | ) | ||||||||
Changes
in working capital, net of business acquisition:
|
||||||||||||
Accounts
receivable
|
(891 | ) | (210 | ) | (1,233 | ) | ||||||
Inventories
|
1,125 | 861 | 2,502 | |||||||||
Prepaids,
deposits and other current assets
|
708 | 330 | (7 | ) | ||||||||
Accounts
payable
|
(1,870 | ) | (637 | ) | 926 | |||||||
Other
current liabilities
|
5,119 | (942 | ) | 681 | ||||||||
Net
cash used in operating activities
|
(8,228 | ) | (11,184 | ) | (8,069 | ) | ||||||
Cash
flows from investing activities:
|
||||||||||||
Acquisition
of property and equipment
|
(1,092 | ) | (691 | ) | (786 | ) | ||||||
Advance
payment on acquisition of Canon Staar Joint Venture
|
— | (4,000 | ) | — | ||||||||
Deferred
acquisition costs of Canon Staar
|
— | (197 | ) | — | ||||||||
Cash
acquired in acquisition of Canon Staar, net of acquisition
costs
|
2,215 | — | — | |||||||||
Proceeds
from the sale of property and equipment
|
167 | 72 | — | |||||||||
Dividends
received from joint venture
|
— | 117 | — | |||||||||
Net
change in other assets
|
43 | 24 | (105 | ) | ||||||||
Purchase
of short-term investments
|
(212 | ) | — | (193 | ) | |||||||
Sale
of short-term investments
|
— | — | 43 | |||||||||
Proceeds
from notes receivable
|
— | — | 1,181 | |||||||||
Net
cash provided by (used in) investing activities
|
1,121 | (4,675 | ) | 140 | ||||||||
Cash
flows from financing activities:
|
||||||||||||
Borrowings
under notes payable
|
— | 9,000 | — | |||||||||
Repayment
of notes payable
|
— | (4,000 | ) | — | ||||||||
Repayment
of note issued in connection with purchase minority interest in
subsidiary
|
— | (972 | ) | — | ||||||||
Borrowings
under lines of credit
|
3,880 | 1,812 | ||||||||||
Repayment
of lines of credit
|
(1,940 | ) | (3,610 | ) | (95 | ) | ||||||
Repayment
of capital lease lines of credit
|
(983 | ) | (692 | ) | — | |||||||
Proceeds
from the exercise of stock options and warrants
|
40 | 584 | 2,890 | |||||||||
Net
proceeds from public and private sale of equity securities
|
— | 16,613 | — | |||||||||
Net
cash provided by financing activities
|
997 | 18,735 | 2,795 | |||||||||
Effect
of exchange rate changes on cash and cash equivalents
|
207 | 261 | 184 | |||||||||
Increase
(decrease) in cash and cash equivalents
|
(5,903 | ) | 3,137 | (4,950 | ) | |||||||
Cash
and cash equivalents, at beginning of year
|
10,895 | 7,758 | 12,708 | |||||||||
Cash
and cash equivalents, at end of year
|
$ | 4,992 | $ | 10,895 | $ | 7,758 |
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 28, 2007 and December 29, 2006
Note 1 —
Significant Accounting Policies
Organization
and Description of Business
STAAR
Surgical Company and Subsidiaries (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), STAARVISC® II, a viscoelastic material,
and Cruise Control, a disposable filter which allows for a faster, cleaner
phacoemulsification procedure and is compatible with all phacoemulsification
equipment. Products sold by the Company for use in correcting refractive
conditions such as myopia (near-sightedness), hyperopia (far-sightedness) and
astigmatism include the Visian TM ICL
(“ICL”) and the Visian TM TICL
(“TICL”). The Company’s AquaFlow TM
Collagen Glaucoma Drainage Device is surgically implanted in the outer tissues
of the eye to maintain a space that allows increased drainage of intraocular
fluid thereby reducing intraocular pressure, which 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.
As of
January 2, 2009, the Company’s significant subsidiaries consisted of STAAR
Surgical AG, a wholly owned subsidiary formed in Switzerland to develop,
manufacture and distribute certain of the Company’s products worldwide,
including Collamer IOLs, the ICL and the AquaFlow device, Domilens GmbH, an
indirect wholly owned subsidiary, which distributes both STAAR products and
products from other ophthalmic manufacturers in Germany, and STAAR Japan, a
wholly owned subsidiary that was acquired in fiscal year 2008 that designs,
manufactures and sells IOLs and injectors systems which are sold as integrated
preloaded Injectors (See Note 2).
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned and majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of
business. For several years STAAR has incurred significant losses,
has not generated sufficient cash to sustain its operations, and has relied on
financing activity to supplement cash from operations. As of January
2, 2009, STAAR had approximately $5 million of cash and cash
equivalents. STAAR’s likely cash requirements rose considerably on
March 2, 2009, when an adverse verdict against STAAR in Parallax Medical Systems, Inc.
(“Parallax”) v. STAAR
Surgical Company, a case originally filed on September 21, 2007, resulted
in an award against STAAR of approximately $2.2 million in actual damages and
$2.7 million in punitive damages. The $4.9 million judgment appears
as “Other expenses” in total selling, general and administrative expenses in the
consolidated statements of operations for the year ended January 2, 2009 and in
“other current liabilities” on the consolidated balance sheets as of the year
then ended. The Parallax verdict, along with
STAAR’s history of recurring losses, negative cash flows and limited access to
capital, has raised substantial doubt regarding STAAR’s ability to continue as a
going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
F-8
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Going
Concern
STAAR
believes that the Parallax case was incorrectly
decided as to liability, the amount of compensatory damages and the
appropriateness and amount of punitive damages. As part of its
strategy to resolve doubt about its ability to continue as a going concern,
STAAR intends to vigorously contest the outcome of the Parallax case through
post-trial proceedings and, if necessary, appeal, in an effort to reduce the
amount of the judgment against STAAR.
STAAR
also seeks to overcome this substantial doubt concerning its ability to continue
as going concern by continuing to pursue its strategic operating goals for
enhanced profitability and by obtaining new debt and/or equity
financing. STAAR’s strategic operating goals include the
following:
·
|
Improve cash flow and continue
cost reduction efforts. In the latter part of 2007 and throughout
2008, STAAR implemented cost-cutting measures and began a process to
closely rationalize and evaluate its spending levels, which included a
targeted reduction in the U.S. workforce, streamlining the U.S.
organization by reducing spending levels in all areas of the business,
renegotiating or eliminating certain obligations, and eliminating all
executive bonus opportunities until STAAR showed positive trends toward
achieving profitability. Through these efforts STAAR has
significantly reduced its cash used in operating activities in 2008 as
compared to 2007 and, if recent operating trends continue, STAAR expects
to generate positive cash flows within
2009;
|
·
|
Increase gross profit
margins. In recent periods STAAR has experienced
increased sales in all products, except U.S. IOL sales. STAAR
believes that the key to achieving profitability is to increase profit
margins, primarily by increasing ICL sales as a percentage of STAAR’s
overall product mix. ICLs and TICLs generally yield higher
margins and continue to represent the fastest growing product line of
STAAR’s business. While the ICL and TICL are approved for sale
in over 40 countries, STAAR has achieved a significant sales and market
share of the refractive surgical market in a number of select countries,
including in the U.S., South Korea, China, India, Spain, Germany and Latin
America. Bringing ICL and TICL to new markets, and expanding
market share in existing markets, will improve STAAR’s profitability and
during 2009 STAAR will focus its sales efforts on this
goal;
|
·
|
Secure key regulatory
approvals. Regulatory approval of higher margin products
in significant markets can yield rapid sales growth and improve
profitability. The principal regulatory approvals pursued by
STAAR at this time are the U.S. approval of the TICL and the approval of
ICL and TICL in Japan. Although the timing of the regulatory approval
is never certain, the Company believes approval of these products could be
granted in 2009.
|
In
addition, STAAR’s ability to overcome this substantial doubt concerning its
ability to continue as a going concern depends on several factors involving
certain current litigation matters. The Parallax court has stayed the
execution of judgment and collection of damages until after the completion of
post-trial motions and the deadline to file notice of appeal, which is a period
of approximately three months. If STAAR is unable to obtain additional capital
to satisfy the judgment or post an appeal bond before the expiration of the
stay, STAAR could be required to petition for protection under federal
bankruptcy laws, which could further impair its financial position and
liquidity. In addition, another lawsuit similar to the Parallax case, Moody v. STAAR Surgical
Company, is currently scheduled for trial in the Superior Court of
California, County of Orange, on May 25, 2009 and could result in further
significant liability. As of the date of this report, STAAR believes
that the differences in the Moody case present uncertainties such that the
outcome is neither probable nor remote and therefore, STAAR cannot estimate the
amount or range of loss, if any, in the event of an unfavorable
outcome.
Among the
events of default in the Senior Promissory Note (“the Note”) held by Broadwood
Partners, L.P. is any judgment in excess of $500,000 against the Company that
“shall remain unpaid.” Because STAAR is not required to pay the Parallax judgment until the
expiration of the stay 40 days after final judgment, and because the amount to
be paid pursuant to the judgment will not be fixed until final judgment is
rendered on or before May 22, 2009, STAAR believes that as of the date of this
Report the Parallax
judgment should not be deemed “unpaid” and that an event of default under
the Senior Promissory Note would not have occurred. To avoid dispute over this
matter and to secure the lender’s temporary waiver of remedies for an event of
default during the stay of the Parallax judgment, STAAR and
Broadwood entered into a Temporary Waiver Agreement on April 2,
2009. See Notes 10 and 20.
The
substantial doubt about STAAR’s ability to continue as a going concern could
also affect STAAR’s relationship with its trade suppliers and their willingness
to continue to conduct business with STAAR on terms consistent with historical
practice. These suppliers might respond to an apparent weakening of our
liquidity position and to address their own liquidity needs may request faster
payment of invoices, new or increased deposits or other
assurances. If this were to happen, the Company’s need for cash would
be intensified and we might be unable to make payments to our suppliers as they
become due.
F-9
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Fiscal
Year and Interim Reporting Periods
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. The fiscal 2008 financial statements are based on a 53 week
period.
Foreign
Currency
The
functional currency of the Company and its subsidiaries is the local currency,
except for the Company’s Swiss subsidiary which is the U.S. dollar. In
accordance with SFAS No. 52, Foreign Currency Translation
, assets and liabilities of foreign subsidiaries are translated at rates of
exchange in effect at the close of the period. Sales and expenses are translated
at the weighted average of exchange rates in effect during the period. The
resulting translation gains and losses are deferred and are shown as a separate
component of stockholders’ equity as accumulated other comprehensive
income. During 2008, 2007 and 2006, the net foreign translation gains
were $1,303,000, $1,033,000 and $743,000 respectively, and net foreign currency
transaction losses, included in the consolidated statements of operations under
Other (expense) income, net, were ($696,000), ($295,000) and ($65,000)
respectively.
F-10
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
collectability is reasonably assured in accordance with Staff Accounting
Bulletin No. 104 “Revenue Recognition” (“SAB 104”). The Company
records revenue from non-consignment product sales when title and risk of
ownership has been transferred, which is typically at shipping point, except for
the STAAR Japan subsidiary, which is typically at delivery to the customer, in
which STAAR Japan will defer the revenue until the product is delivered to the
customer. STAAR Japan does not have significant deferred revenues as
of year ended January 2, 2009 as delivery to the customer is generally made
within the same or the next date of shipment.
The
Company’s products are marketed to ophthalmic surgeons, hospitals, ambulatory
surgery centers or vision centers, and distributors. IOLs may be offered to
surgeons and hospitals on a consignment basis. The Company maintains
title and risk of loss of consigned inventory. In accordance with SAB No. 104,
the Company recognizes revenue for consignment inventory when the IOL is
implanted during surgery and not upon shipment to the surgeon.
ICLs are
sold only to certified surgeons who have completed requisite training. STAAR
ships ICLs only for use by surgeons who have already been certified, or for use
in scheduled training surgeries. As a result, STAAR mitigates the risk that the
revenue it recognizes on shipment of ICLs could be reversed because of a
surgeon’s failure to qualify for its use.
For all
sales, the Company is considered the Principal in the transaction in accordance
with SAB 104 and Emerging Issues Task Force (“EITF”) Issue No. 99-19,
“Reporting Revenue Gross as a Principal versus Net as an Agent” as the Company,
among other factors, bears general inventory risk, credit risk, has latitude in
establishing the sales price and bears authorized sales returns inventory risk
and therefore, sales are recognized gross with a corresponding cost of
sales. Cost of sales includes cost of production, freight and
distribution, royalties, and inventory provisions, net of any purchase
discounts.
The
Company presents sales tax it collects from its customers on a net basis
(excluded from revenues), a presentation which is prescribed as one of two
methods available under EITF Issue No. 06-03, “How Sales Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross Versus Net Presentation).”
The Company has ongoing programs that,
under specified conditions, allow customers to return products and, in
accordance with SFAS No. 48, Revenue
Recognition When Right of
Return Exists, the Company
records an allowance for estimated returns at the time revenue is recognized.
The Company’s allowance for estimated returns considers historical trends and
experience, the impact of new product launches, the entry of a competitor,
product rationalization and the various terms and arrangements offered,
including sales with extended credit terms. Sales are reported
net of estimated returns. If the actual sales returns and allowances
are greater than estimated by management, additional expense may be
incurred.
The
Company maintains provisions for uncollectible accounts for estimated losses
resulting from the inability of its customers to remit payments. The Company
performs ongoing credit evaluations of its customers and adjusts credit limits
based on customer payment history and credit worthiness, as determined by the
Company’s review of its customers’ current credit information. The Company
continuously monitors collections and payments from customers and maintains a
provision for estimated credit losses based upon its historical experience and
any specific customer collection issues that have been identified. Amounts
determined to be uncollectible are written off against the allowance for
doubtful accounts.
F-11
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Use
of Estimates
The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and, as
such, include amounts based on informed estimates and judgments of management
with consideration given to materiality. For example, estimates are used in
determining valuation allowances for uncollectible trade receivables, obsolete
inventory, deferred income taxes and tax reserves. Estimates are also used in
the evaluation of asset impairment, in determining the useful life of
depreciable and definite-lived intangible assets, and in calculating stock-based
compensation. Actual results could differ materially from those
estimates.
Segment
Reporting
The
Company reports segment information in accordance with SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information” (“SFAS
131”). Under SFAS No. 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. Although the
Company has expanded its marketing focus beyond the IOL market to include the
ICL and other surgical products markets, the ophthalmic surgery market remains
its primary source of revenues and, accordingly, the Company operates as one
business segment (see Note 19).
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. The Company maintains cash deposits
with major banks which from time to time may exceed federally insured limits.
The Company periodically assesses the financial condition of the institutions
and believes that the risk of any loss is minimal.
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. One foreign customer accounted for approximately 10%
of the Company’s consolidated trade receivables balance as of January
2, 2009. 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.
Fair
Value of Financial Instruments
The
carrying values reflected in the consolidated balance sheets for cash and cash
equivalents, short-term investments, trade accounts receivable and accounts
payable approximate their fair values because of the short maturity of these
instruments.
Inventories
Inventories
are valued at the lower of cost, determined on a first-in, first-out basis, or
market. Inventories include the costs of raw material, labor, and manufacturing
overhead. The Company provides estimated inventory allowances for excess, slow
moving and obsolete inventory as well as inventory whose carrying value is in
excess of net realizable value to properly reflect inventory at the lower of
cost or market.
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 as noted below. Leasehold improvements are amortized over
the lesser of the estimated useful lives of the assets or the related lease
term. Major improvements are capitalized and minor replacements, maintenance and
repairs are charged to expense as incurred.
F-12
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Depreciation
is generally computed using the straight-line method over the estimated useful
lives of the assets:
Machinery
and equipment
|
10
years
|
||
Furniture
and equipment
|
7
years
|
||
Computer
and peripherals
|
3 – 5
years
|
||
Leasehold
improvements
|
(a)
|
(a)
|
Leasehold
improvements are depreciated over the shorter of the useful life of the
asset or the term of the associated
leases.
|
Demonstration
Equipment
In the
normal course of business, the Company maintains demonstration 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 accounts for goodwill in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and No. 142,
“Goodwill and Other Intangible Assets.”
Goodwill,
which has an indefinite life, is not amortized but instead is subject to
periodic testing for impairment. Intangible assets determined to have definite
lives are amortized over their remaining useful lives. Goodwill is tested for
impairment on an annual basis or between annual tests if an event occurs or
circumstances change that would indicate the carrying amount may be impaired.
Impairment testing for goodwill is done at the reporting unit level. Reporting
units are one level below the business segment level, but can be combined when
reporting units within the same segment have similar economic characteristics.
Under the criteria set forth by SFAS No. 142, the Company has determined that
its reporting units have similar economic characteristics and therefore, can be
combined into one reporting unit for the purposes of goodwill impairment
testing.
Certain
factors which may occur and indicate that an impairment exists include, but are
not limited to the following: significant underperformance relative to expected
historical or projected future operating results; significant changes in the
manner of the Company’s use of the underlying assets; and significant adverse
industry or market economic trends. In the event that the carrying value of
assets is determined to be unrecoverable, the Company would estimate the fair
value of the reporting unit and record an impairment charge for the excess of
the carrying value over the fair value. The estimate of fair value requires
management to make a number of assumptions and projections, which could include,
but would not be limited to, future revenues, earnings and the probability of
certain outcomes and scenarios.
During
the fourth quarter of fiscal 2008, the Company performed its annual impairment
test using the methodology prescribed by SFAS No. 142 and determined that its
goodwill was not impaired. As of January 2, 2009, the carrying value of goodwill
was $7.5 million. The change in the carrying value of goodwill as of
January 2, 2009 compared to the balance in the prior year is due to the effect
of foreign currency translation.
The
Company also has other intangible assets consisting of various patents and
licenses, customer relationships and developed
technologies. Amortization is computed on a straight-line basis over
the estimated useful lives, since the pattern in which the economic benefits
realized cannot be reasonably determined, which are based on legal and
contractual provisions. See Note 8 for results of the Company’s impairment
review pertaining to the intangible assets in which certain patents were deemed
to be impaired resulting in an impairment loss of $1,023,000 for the fourth
quarter and year ended January 2, 2009 included in “other expenses” as part of
total selling, general and administrative expenses.
F-13
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 (See Note 8).
Research
and Development Costs
Expenditures
for research activities relating to product development and improvement are
charged to expense as incurred.
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 in
accordance with SFAS No. 109 “Accounting for Income Taxes.” 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.
Basic
and Diluted Loss Per Share
The
consolidated financial statements include “basic” and “diluted” per share
information. Basic per share information is calculated by dividing net loss by
the weighted average number of shares outstanding. Diluted per share information
is calculated by also considering the impact of potential common stock on both
net income and the weighted number of shares outstanding. As the Company was in
a loss position, potential common shares of 6.0 million, 3.6 million, and 2.6
million for the fiscal years ended January 2, 2009, December 28, 2007, and
December 29, 2006, respectively, were excluded from the computation as the
shares would have had an anti-dilutive effect.
Employee
Defined Benefit Plans
The
Company has historically maintained a passive pension plan (the “Swiss Plan”)
covering employees of its Swiss subsidiary. This plan was previously
classified and accounted for as a defined contribution plan. Based on new
guidance obtained in the fourth quarter of fiscal 2007 from the Swiss Auditing
Chamber’s Auditing Practice Committee and its Accounting Practice Committee with
respect to a change in Swiss pension law, the Company concluded that the
features of the Swiss Plan now conform to the features of a defined benefit
plan. As a result, the Company adopted the recognition and disclosure
requirements of Statement of Financial Accounting Standards (“SFAS”) No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans,” an amendment of SFAS Nos. 87, 88, 106 and 132R (“SFAS 158”) on October
1, 2007.
In
connection with the Company’s acquisition of the remaining interest in STAAR
Japan, Inc., STAAR assumed the net pension liability under STAAR Japan’s
noncontributory defined benefit pension plan substantially covering all of the
employees of STAAR Japan. STAAR Japan adopted the recognition and
disclosure requirements of Statement of Financial Accounting Standards (“SFAS”)
No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans,” an amendment of SFAS Nos. 87, 88, 106 and 132R (“SFAS
158”) on December 29, 2007.
F-14
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SFAS No.
158 requires recognition of the funded status, or difference between the fair
value of plan assets and the projected benefit obligations of the pension plan
on the statement of financial position as of January 2, 2009, with a
corresponding adjustment to accumulated other comprehensive income. If the
projected benefit obligation exceeds the fair value of plan assets, then that
difference or unfunded status represents the pension liability. The Company
records a net periodic pension cost in the consolidated statement of operations.
The liabilities and annual income or expense of both plans are determined using
methodologies that involve several actuarial assumptions, the most significant
of which are the discount rate, and the expected long-term rate of
asset return (based on the market-related value of assets). The fair values of
plan assets are determined based on prevailing market prices (See Note
13).
In
September 2006, the FASB issued Statement No. 157, “Fair Value
Measurements” (“SFAS 157”), which clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures
about fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. In February 2008, FASB issued FASB Staff Position No. FAS
157-2 (As Amended) (FSP 157-2). This FSP delays the effective date of
SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal
years for items within the scope of this FSP, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The delay is intended to allow the FASB
and reporting entities additional time to consider the effect of various
implementation issues that have arisen, or that may arise, from the application
of SFAS No. 157. As such the Company partially adopted SFAS No. 157
on December 29, 2007 relating to the measurement of the plan assets’ fair value
and disclosures relevant to its defined benefit plans which it has made pursuant
to SFAS No. 157 (See Note 13).
Stock
Based Compensation
Effective
December 31, 2005 (fiscal 2006), the Company adopted the fair value recognition
provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”),
using the modified prospective transition method and therefore has not restated
results for prior periods. Under this transition method, stock-based
compensation expense for fiscal 2006 includes compensation expense for all
stock-based compensation awards granted prior to, but not yet vested as of
December 30, 2005, based on the grant date fair value estimated in accordance
with the original provision of SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). Stock-based compensation expense for all stock-based
compensation awards granted after December 30, 2005 is based on the grant-date
fair value estimated in accordance with the provisions of SFAS No. 123R. The
Company recognizes these compensation costs on a straight-line basis over the
requisite service period of the award, which is generally the option vesting
term of three to four years. Prior to the adoption of SFAS No. 123R, the Company
recognized stock-based compensation expense in accordance with Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”). In March 2005, the Securities and Exchange Commission
(the “SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the
SEC’s interpretation of SFAS No. 123R and the valuation of share-based payments
for public companies. The Company has applied the provisions of SAB No. 107 in
its adoption of SFAS No. 123R. (See Note 14)
The
Company also issues Restricted Stock which are unvested shares issued at fair
market value on the date of grant, typically vest over a service period ranging
between one and four years, and are subject to forfeiture until vested or the
service period is achieved and the restriction is lapsed or
terminated. The stock compensation expense is generally recognized by
the Company as the stock vests, based on the fair value of the stock on the
vesting date and the vested number of shares less any amounts paid for the stock
which is typically the par value of the shares.
The
Company accounts for options granted to persons other than employees and
directors under SFAS No. 123 and EITF No. 98-16, Accounting for Equity Investments That Are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods and
Services. As such, the fair value of such options is periodically
remeasured using the Black-Scholes option-pricing model and income or expense is
recognized over the vesting period.
F-15
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accounting
for Warrants
The
Company accounts for the issuance of Company derivative equity instruments in
accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock” (“EITF 00-19”). The Company has agreed to use its best
efforts to register and maintain registration of the common shares underlying
certain warrants (the “Warrant Shares”) that were issued by the Company with
debt instruments, so that the warrant holder may freely sell the Warrant Shares
if the warrant is exercised, and the Company agreed that in any event it would
secure and maintain effective registration within four months of
issuance. In addition, while the relevant warrant agreement does not
require cash settlement if the Company fails to register and maintain
registration of the Warrant Shares, it does not specifically preclude cash
settlement. As a result EITF 00-19 requires the Company to assume that in the
absence of continuous effective registration it may be required to settle the
these warrants for cash when they are exercised. Accordingly, the
Company’s agreement to register and maintain registration of the Warrant Shares
without express terms for settlement in the absence of continuous effective
registration is presumed to create a liability to settle these warrants in cash,
requiring liability classification. The Company has issued other warrants under
an agreement that expressly provides that if the Company fails satisfy
continuous registration requirements the Company will be obligated only to issue
additional common stock as the holder’s sole remedy, with no possibility of
settlement in cash. The Company accounts for those warrants as equity because
additional shares are the only form of settlement available to the holder. The
Company uses the Black-Scholes option pricing model as the valuation model to
estimate the fair value of those warrants. The Company evaluates the
balance sheet classification of the warrants during each reporting
period. Expected volatilities are based on historical volatility of
the Company’s stock. The expected life of the warrant is determined by the
amount of time remaining on the original six year term of the relevant warrant
agreement. The risk-free rate of return for periods within the contractual life
of the warrant is based on the U.S. Treasury yield curve in effect at each
reporting period. Any gains or losses resulting from the changes in fair value
of the warrants classified as a liability from period to period are included as
an increase or decrease of other income (expense). The warrants that are
accounted for as equity are only valued on the issuance date and not
subsequently revalued.
Comprehensive
Loss
The
Company presents comprehensive losses in its Consolidated Statement of Changes
in Stockholders’ Equity in accordance with SFAS No. 130, “Reporting
Comprehensive Income” (“SFAS 130”). Total comprehensive loss includes, in
addition to net loss, changes in equity that are excluded from the consolidated
statements of operations and are recorded directly into a separate section of
stockholders’ equity on the consolidated balance sheets.
Comprehensive
loss and its components consist of the following (in thousands):
2008
|
2007
|
2006
|
||||||||||
Net
loss
|
$ | (23,195 | ) | $ | (15,999 | ) | $ | (15,044 | ) | |||
Foreign
currency translation adjustment
|
1,303 | 1,033 | 743 | |||||||||
Pension
Liability adjustment, net of tax
|
(42 | ) | (371 | ) | — | |||||||
Comprehensive
loss
|
$ | (21,934 | ) | $ | (15,337 | ) | $ | (14,301 | ) |
Recent
Accounting Pronouncements
On
December 30, 2008, FASB Staff Position (FSP) No. 132 (R) - 1 was issued and
amends SFAS No. 132 (R), Employer’s Disclosures about
Pensions and Other Postretirement Benefits, to provide guidance on an
employer’s disclosures about plan assets of a defined benefit pension (DBP)
or other postretirement plan. This FSP also includes certain
requirements for non public companies’ disclosures about net periodic pension
cost. The FASB broadened the scope of this FSP to require employers to
disclose information about fair value of measurements of plan assets that would
be similar to the disclosures about fair value measurements required by SFAS No.
157. The FSP was in response to concerns about the lack of transparency
surrounding the types of assets and associated risks in an employer’s defined
benefit plan and events in the economy and markets that could have a significant
effect on the value of plan assets. This FSP applies to an employer that
is subject to the disclosures requirements of SFAS 132 (R). The objectives
of the disclosures about plan assets in DBP plans include how investment
allocation decisions are made, including pertinent investment policies and
strategies, the major categories of plan assets, the inputs and valuation
techniques used to measure the fair value of plan assets, the effect of fair
value measurements using significant unobservable inputs (Level 3) on changes in
plan assets for the period, and significant concentration of risk within plan
assets. The disclosure requirements of this FSP are effective for fiscal
years ending after December 15, 2009, however earlier application is
permitted. The Company believes that the adoption of this FSP will not
have a significant impact on its consolidated financial statements.
F-16
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In
April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position FAS 142-3, “Determination of Useful Life of Intangible Assets”
(“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing the renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FAS 142, “Goodwill and Other
Intangible Assets” and also requires expanded disclosure related to the
determination of intangible asset useful lives. FSP 142-3 intends to improve the
consistency between the useful life of a recognized intangible asset under FAS
142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS 141R, and other GAAP. FSP 142-3 is effective for fiscal years
beginning after December 15, 2008. Earlier adoption is not permitted. The
Company believes that the adoption of FSP 142-3 will not have a significant
impact on our consolidated financial statements.
In
March 2008, the FASB issued Statement No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an amendment of FASB Statement
No. 133” (“SFAS 161”). SFAS 161 requires entities to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments and
that the objectives for using derivative instruments be disclosed in terms of
underlying risk and accounting designation, (b) how derivative instruments
and related hedged items are accounted for under SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities” and its related
interpretations, including a tabular format disclosure of the fair values of
derivative instruments and their gains and losses and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. SFAS 161 encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The Company believes that the adoption of SFAS 161 will not have a
significant impact on our consolidated financial statements.
In
December 2007, the SEC issued Staff Accounting Bulletin (“SAB”)
No. 110, “Share-Based Payment” (“SAB 110”), which became effective on
January 1, 2008. SAB 110 allows companies, under certain circumstances, to
continue using the “simplified” method of estimating the expected term of “plain
vanilla” share options discussed in SAB No. 107, “Share-Based Payment,” in
accordance with SFAS 123R. Under SAB 107, the SEC staff had previously indicated
that it would not expect companies to use the “simplified” method for share
option grants made after December 31, 2007, however the SEC staff
understands that such detailed information about employee exercise behavior may
not be available by December 31, 2007 and therefore, under certain
circumstances, the staff will continue to accept the use of the simplified
method beyond this date. The Company adopted SAB 110 on January 1, 2008 and
it did not have a significant impact on its consolidated financial
statements.
In
December 2007, the FASB issued Statement No. 141 (revised 2007),
“Business Combinations” (“SFAS 141R”), which replaces SFAS 141. SFAS 141R
retains the fundamental requirements in SFAS 141 and establishes principles and
requirements for (a) how an acquirer recognizes and measures the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquired business, (b) how an acquirer recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and (c) what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141R applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company
cannot anticipate whether the adoption of SFAS 141R will have a material impact
on its results of operations and financial condition as the impact will depend
on the terms and nature of any business combination the Company enters into, if
any, on or after January 3, 2009.
F-17
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In
December 2007, the FASB issued Statement No. 160, “Noncontrolling
Interests in Consolidated Financial Statements — an amendment to ARB
No. 51” (“SFAS 160”). SFAS 160 establishes the standards for accounting and
reporting of noncontrolling interests in subsidiaries, currently known as
minority interests, in consolidated financial statements. SFAS 160 also provides
guidance on accounting for changes in a parent’s ownership interest in a
subsidiary and establishes standards of accounting for the deconsolidation of a
subsidiary. SFAS 160 requires an entity to present minority interests as a
component of equity and to present consolidated net income attributable to the
parent and to the noncontrolling interest separately on the face of the
consolidated financial statements. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company believes that the adoption of
SFAS 160 will not have a significant impact on its consolidated financial
statements.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities — including an amendment
of FASB Statement No. 115” (“SFAS 159”), which permits entities to choose
to measure many financial instruments and certain other assets and liabilities
at fair value on an instrument-by-instrument basis (the fair value option).
Unrealized gains and losses on items for which the fair value option has been
elected are to be recognized in earnings at each subsequent reporting date. SFAS
159 is effective for fiscal years beginning after November 15,
2007. The Company has not elected the fair value option for any of
the eligible financial assets or liabilities.
Prior
Year Reclassifications
Certain
reclassifications have been made to the prior financial statement information to
conform with current period presentation.
Note 2 —
Acquisition of STAAR Japan
On
December 29, 2007 (the “Closing Date”), during STAAR’s 2008 fiscal year, STAAR
acquired the remaining 50% of the shares of Canon Staar Co., Inc. (“Canon
Staar”) that had been owned previously by Canon Inc. and Canon Marketing Japan
Inc. (“Canon Marketing” and, collectively with Canon Inc., the “Canon
companies”). In the transaction (the “Acquisition”), STAAR obtained
100% ownership of Canon Staar, which was renamed STAAR Japan, Inc. (“STAAR
Japan”) as of the acquisition date. Prior to the Acquisition, Canon
Staar was a joint venture owned 50% by STAAR and 50% by the Canon companies and
operating under a Joint Venture Agreement since 1988. STAAR accounted for its
investment in Canon Staar as an equity method investor. As of the
closing date of the Acquisition, STAAR Japan became a wholly owned subsidiary of
STAAR, and its financial information was included in STAAR’s consolidated
financial statements as of that date. The functional currency of
STAAR Japan is the local currency, the Japanese yen. In accordance with
SFAS No. 52, “Foreign Currency Translation,” for purposes of consolidation with
the Company, assets and liabilities of STAAR Japan have been translated at rates
of exchange in effect at the end of the period, except for the acquisition date
translation of the assets acquired and liabilities assumed, which were
translated using the exchange rate in effect at the closing date of the
Acquisition. Sales and expenses of STAAR Japan were translated at the
weighted average of exchange rates in effect during the twelve months ended
January 2, 2009. The resulting translation gains and losses are included
in accumulated other comprehensive income on the consolidated balance sheets as
of January 2, 2009.
F-18
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
STAAR
Japan’s business consists of designing, manufacturing and selling IOLs and
injector systems, all of which are sold as integrated Preloaded
Injectors. STAAR Japan is also currently seeking approval from the
Japanese regulatory authorities to market in Japan STAAR’s Visian ICL, Collamer
IOL and the AquaFlow Device for treatment of glaucoma.
Through
the acquisition STAAR seeks to achieve the following goals:
|
·
|
to
better exploit the Japanese market for STAAR’s technology and the
worldwide market for the Preloaded Injector technology through greater
control of distribution;
|
|
·
|
to
re-acquire control of worldwide exclusive rights to STAAR’s technology,
especially the ICL and Collamer IOL, previously licensed to the joint
venture on a worldwide non-exclusive
basis;
|
|
·
|
to
eliminate the risk that Canon Staar could become a competitor of STAAR,
especially after a change in control of
STAAR;
|
|
·
|
to
increase access to the Preloaded Injector technology;
and
|
|
·
|
to
develop a more effective global R&D strategy by leveraging the
combined technical resources in Japan and the U.S. and taking advantage of
STAAR Japan’s proven expertise in injector
design.
|
The
aggregate consideration paid for the acquisition to the Canon companies was as
follows (in thousands):
Fair
value of redeemable, convertible preferred stock issued by STAAR as
consideration for Canon Staar common shares purchased (see Note
11)
|
$ | 6,800 | ||
Cash
consideration for Canon Staar common shares purchased
|
4,000 | |||
Transaction
costs
|
1,000 | |||
Total
acquisition consideration
|
$ | 11,800 |
STAAR
paid approximately 60% of the total consideration by issuing 1.7 million shares
of redeemable, convertible preferred stock on the Closing Date. The
fair value of the convertible preferred stock was determined by a valuation of
the instrument with the assistance of an appraiser (see Note 11). In
addition, STAAR paid the remaining 40% of the total consideration in cash, which
was placed on deposit with the Canon companies just prior to the Closing Date
and included in STAAR’s non-current assets on its consolidated balance sheet as
of fiscal year ended December 28, 2007. Application of the $4.0
million deposit to the purchase price was subject to numerous closing conditions
and the deposit was to be fully refunded by the Canon companies if those
conditions were not met. Upon completion of the Acquisition on the
Closing Date, the deposited funds were credited to the Canon companies as part
of the total consideration paid by STAAR. STAAR also incurred and
paid approximately $1 million in direct transaction and related
costs.
F-19
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
Acquisition was accounted for as a “step-acquisition” under EITF Abstracts,
Topic No. D-84, “Accounting for Subsequent Investments in an Investee After
Suspension of Equity Method Loss Recognition When an Investor Increases Its
Ownership Interest from Significant Influence to Control through a Market
Purchase of Voting Securities” (Topic No. D-84) and the provisions of SFAS No.
141, “Business Combinations”. The following table summarizes the
estimated fair values of the assets acquired and liabilities assumed on December
29, 2007 (in thousands):
December 29,
2007
|
Useful Lives
(years)
|
|||||||
Cash
|
$ | 3,018 | ||||||
Accounts
receivable
|
500 | |||||||
Inventories
|
4,252 | |||||||
Prepaid
expenses and other current assets
|
464 | |||||||
Property,
plant and equipment
|
728 | |||||||
Intangible
assets:
|
||||||||
Customer
relationships
|
1,389 | 10 | ||||||
Developed
technology
|
882 | 3 – 10 | ||||||
Patents
|
601 | 17 – 21 | ||||||
Total
intangible assets
|
2,872 | |||||||
Deposits
and other long-term assets
|
715 | |||||||
Total
assets acquired
|
12,549 | |||||||
Current
liabilities
|
(3,504 | ) | ||||||
Net
pension liability
|
(771 | ) | ||||||
Deferred
income taxes
|
(245 | ) | ||||||
Other
long-term liabilities
|
(79 | ) | ||||||
Total
liabilities assumed
|
(4,599 | ) | ||||||
Net
assets acquired
|
7,950 | |||||||
Loss
on settlement of pre-existing distribution arrangement
|
3,850 | |||||||
Total
acquisition consideration
|
$ | 11,800 |
Among the
assets of Canon Staar acquired in the Acquisition was cash in the amount of
approximately $3 million, which was reduced by $803,000 in transaction costs
paid during the twelve months ended January 2, 2009. The remaining $2.2 million
of net cash obtained in the acquisition is included in STAAR’s consolidated
statements of cash flows under investing activities for the twelve months ended
January 2, 2009.
In
determining the final purchase price allocation, STAAR considered, among other
factors, its intentions for the use of the acquired assets, historical demand
for STAAR Japan’s products, estimates of future demand for those products,
current selling prices of inventories (less estimated costs of completion,
disposal and normal profit), developed technologies incorporated in its
products, customer relationships, the revenue generating potential of patents
and lives of patents. The fair value of intangible assets was primarily
based on the income approach. The rate used to discount the net cash flows
to their present values was a 10.5% weighted average cost of capital for the
business as a whole, and from 12.5% to 14.0% for the individual intangible
assets depending on the risk associated with the assets’ potential to generate
revenue and its projected remaining useful economic life. The weighted
average cost of capital was determined after consideration of market rates of
return on debt and equity capital of comparable companies, the weighted average
return on invested capital and the risk associated with achieving forecast sales
related to technology and assets acquired from STAAR Japan. Property,
plant and equipment net book value was evaluated at approximate fair value on
the acquisition date due to the nature and relative age of the assets
acquired. The intangible assets and property, plant and equipment are
being amortized and depreciated based on the pattern in which the economic
benefits of these assets are being utilized, using the straight-line
method. There was no goodwill recorded in the Acquisition because the fair
value of the net assets acquired exceeded the price paid in the Acquisition by
approximately $4 million, net of deferred income taxes. This excess amount
was allocated on a pro rata basis to offset against the initially determined
fair value of intangible assets and property, plant and
equipment.
F-20
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In
connection with the Acquisition, STAAR also assumed the net pension liability
under STAAR Japan’s noncontributory defined benefit pension plan covering
substantially all of the permanent, full-time employees of STAAR Japan (see Note
13). Other liabilities assumed by STAAR in the Acquisition mainly
consisted of current trade payables and accrued liabilities and estimated
deferred tax liabilities, representing the differences between the assigned
values and the tax bases of the assets and liabilities recognized in the
Acquisition (see Note 12).
In
connection with the Acquisition, the material terms of the Joint Venture
Agreement and other documents governing the joint venture were
terminated. This included the termination of the pre-existing
distribution arrangement of Canon Staar under which Canon Marketing had the
exclusive right to distribute Canon Staar’s products in Japan prior to the
Acquisition. Under the provisions of EITF Abstracts Issue No. 04-1
(EITF 04-1), “Accounting for Preexisting Relationships between the Parties to a
Business Combination,” in a business combination between two parties that had a
pre-existing relationship, that relationship should be evaluated to determine
whether a settlement of that relationship exists. Any such settlement
requires accounting separate from the business combination. As a
result of such an assessment under EITF 04-1, STAAR Japan recorded an
approximate $3.9 million loss at the close of the Acquisition, which is included
in operating loss of STAAR’s consolidated statements of operations during the
twelve months ended January 2, 2009. This loss represents the portion
of the consideration paid by STAAR for the Acquisition that was deemed to
represent the settlement amount of the pre-existing relationship between Canon
Staar and the Canon companies, in particular for the termination of the
distribution arrangement that, when compared to a comparable at-market
arrangement as of the closing date, was deemed unfavorable to
STAAR. The amount of the loss was determined using the discounted
incremental cash flows income method from the distribution arrangement and a
discount rate of 12%.
Because
the Acquisition was completed on the first day of STAAR’s fiscal year 2008, the
results of STAAR Japan are included in the consolidated financial statements of
STAAR beginning in the first quarter of the fiscal year. The
following table summarizes unaudited pro forma financial information assuming
the Acquisition had occurred on December 30, 2006, in the corresponding period
of the fiscal year immediately preceding the Acquisition, that is, as if the
Acquisition was completed on STAAR’s first day of fiscal year
2007. This unaudited pro forma financial information does not
necessarily represent what would have occurred if the transaction had taken
place on December 30, 2006, and should not be taken as representative of STAAR’s
future consolidated results of operations or financial position.
(In thousands, except per share amount)
|
Year Ended
December 28,
2007
|
|||
Net
sales
|
$ | 65,194 | ||
Net
loss
|
$ | (18,368 | ) | |
Loss
per share – basic and diluted
|
$ | (0.65 | ) |
F-21
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At the
close of the Acquisition, the Canon companies and STAAR entered into a Current
Employees Secondment Agreement under which Canon Marketing agreed for a term of
two years to lease certain employees who had served as officers of Canon Staar
to STAAR Japan to serve in the same capacities after the
acquisition. STAAR Japan is required to make monthly payments to
Canon Marketing for the services provided by the seconded employees in an amount
equal to the costs of the employees’ salaries and benefits (“fee”) as calculated
by Canon Marketing, however, the fee may not exceed, as amended, 52 million
Japanese Yen (approximately $572,000 based on the rate of exchange on January 2,
2009) per annum in the aggregate. Similarly, Canon Marketing and STAAR entered
into a New Employees Secondment Agreement under which Canon Marketing agreed for
a term of one year to lease to STAAR Japan certain employees who previously
conducted the IOL distribution business of Canon Marketing. STAAR Japan was
required to make monthly payments to the Canon companies for the services
provided by the seconded employees in an amount equal to the costs of the
employees’ salaries and benefits as calculated by Canon
Marketing. The fees paid to the Canon companies were approximately
$1.8 million based on the average rate of exchange during the year ended January
2, 2009. As of December 31, 2008 this Secondment Agreement expired
and the sales staff covered under this agreement returned back to
CMJ.
Note 3 —
Short-Term Investments — Restricted
Short-term
investments at January 2, 2009, consist of an original maturity four-month
Certificate of Deposit at 7.5% held by our subsidiary in
Australia. The short-term investment at December 28, 2007 consisted
of a 12-month Certificate of Deposit with a 4.5% interest rate to
collateralize capital leases funded under a lease line of credit with Mazuma
Capital Corporation. During the third quarter of 2008, the Mazuma
capital leases were paid off and the deposit was transferred to our regular cash
account. The short-term investments are classified as held to
maturity, carried at amortized cost, and approximate fair value.
Note 4 —
Accounts Receivable — Trade, net
Accounts
receivable consisted of the following at January 2, 2009 and
December 28, 2007 (in thousands):
2008
|
2007
|
|||||||
Domestic
|
$ | 1,702 | $ | 2,116 | ||||
Foreign
|
7,566 | 5,466 | ||||||
9,268 | 7,582 | |||||||
Less
allowance for doubtful accounts and sales returns
|
846 | 684 | ||||||
$ | 8,422 | $ | 6,898 |
Note 5 —
Inventories
Inventories
consisted of the following at January 2, 2009 and December 28, 2007
(in thousands):
2008
|
|
2007
|
||||||
Raw
materials and purchased parts
|
$ | 1,462 | $ | 914 | ||||
Work
in process
|
3,028 | 2,035 | ||||||
Finished
goods
|
12,178 | 9,792 | ||||||
$ | 16,668 | $ | 12,741 |
Note 6 —
Prepaids, Deposits, and Other Current Assets
Prepaids,
deposits, and other current assets consisted of the following at January 2,
2009 and December 28, 2007 (in thousands):
2008
|
2007
|
|||||||
Prepaids
and deposits
|
$ | 1,703 | $ | 1,330 | ||||
Other
current assets
|
306 | 280 | ||||||
$ | 2,009 | $ | 1,610 |
F-22
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 7 —
Property, Plant and Equipment
Property,
plant and equipment consisted of the following at January 2, 2009 and
December 28, 2007 (in thousands):
2008
|
2007
|
|||||||
Machinery
and equipment
|
$ | 15,078 | $ | 14,250 | ||||
Furniture
and fixtures
|
8,358 | 6,491 | ||||||
Leasehold
improvements
|
5,419 | 4,998 | ||||||
28,855 | 25,739 | |||||||
Less
accumulated depreciation
|
22,881 | 19,967 | ||||||
$ | 5,974 | $ | 5,772 |
Depreciation
expense for the years ended January 2, 2009, December 28, 2007, and
December 29, 2006 was approximately $2.8 million, $2.0 million, and
$1.9 million respectively.
Note 8
– Intangible Assets, Net
Intangible
assets consisted of the following (in thousands):
January
2, 2009
|
December
28, 2007
|
|||||||||||||||||||||||
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
|||||||||||||||||||
Amortized
intangible assets:
|
||||||||||||||||||||||||
Patents
and licenses
|
$ | 10,739 | $ | (7,578 | ) | $ | 3,161 | $ | 11,489 | $ | (7,530 | ) | $ | 3,959 | ||||||||||
Customer
relationships
|
1,725 | (172 | ) | 1,553 | — | — | — | |||||||||||||||||
Developed
technology
|
1,096 | (199 | ) | 897 | — | — | — | |||||||||||||||||
Total
|
$ | 13,560 | $ | (7,949 | ) | $ | 5,611 | $ | 11,489 | $ | (7,530 | ) | $ | 3,959 |
During
2008, the Company acquired intangible assets through the acquisition of the
remaining interest in STAAR Japan, Inc. (See Note 2). As of January 2, 2009 the
gross carrying amount of the intangible assets acquired through the acquisition
had increased by $696,000 as a result of changes in the exchange rate of the
Japanese Yen. Amortization is computed on the straight-line basis
over the estimated useful lives of the assets, since the pattern in which the
economic benefits realized cannot be reasonably determined, which are based on
legal and contractual provisions, and range from 10 to 21 years for patents and
licenses, 10 years for customer relationships and 3 to 10 years for developed
technology. Aggregate amortization expense for amortized other
intangible assets was $843,000, $481,000 and $481,000 for the years ended
January 2, 2009, December 28, 2007 and December 29, 2006,
respectively
In performing the review of the
intangible assets in accordance with Statement of Financial Accounting Standards
No. 144 (“SFAS No. 144”), the Company determined that the value and utility of
certain of its patents had significantly diminished mainly due to the Company’s
decision to discontinue marketing and selling certain products underlying these
patents. Therefore, due to this decision, the Company believes that
the fair value of these patents is minimal and the entire $1,023,000 net
carrying value of the respective patents were considered to be impaired as of
fiscal year ended January 2, 2009. As such, the Company recorded a
$1,023,000 impairment loss for the fourth quarter and fiscal year ended 2008
which was included in Other expenses as part of operating loss in the
consolidated statements of operations. The fair value of these patents was
determined by management using a discounted net cash flows
method. The impairment adjustment also impacted the gross
carrying value of the impaired patents of $1,496,000 and accumulated
amortization of $473,000.
F-23
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
|
||||
2009
|
$ | 798 | ||
2010
|
698 | |||
2011
|
645 | |||
2012
|
558 | |||
2013
|
544 | |||
Thereafter
|
2,368 | |||
Total
|
$ | 5,611 |
Note 9 —
Other Current Liabilities
Other
current liabilities consisted of the following at January 2, 2009 and
December 28, 2007 (in thousands):
2008
|
2007
|
|||||||
Accrued
salaries and wages
|
$ | 2,467 | $ | 1,910 | ||||
Commissions
due to outside sales representatives
|
395 | 544 | ||||||
Accrued
audit expenses
|
413 | 542 | ||||||
Customer
credit balances
|
546 | 516 | ||||||
Accrued
income taxes
|
486 | 363 | ||||||
Accrued
legal
|
383 | 141 | ||||||
Accrued
insurance
|
380 | 334 | ||||||
Accrued
legal judgment (Note 15)
|
4,900 | — | ||||||
Other*
|
1,396 | 1,191 | ||||||
$ | 11,366 | $ | 5,541 |
*No item
in “Other” above exceeds 5% of total other current liabilities.
Note 10 —
Notes Payable
Broadwood
Loan Notes
On March
21, 2007, STAAR entered into a loan arrangement with Broadwood Partners, L.P.
(“Broadwood”). Pursuant to a Promissory Note (the “March 2007 Note”) between
STAAR and Broadwood, Broadwood loaned $4 million to STAAR. The March 2007 Note
had a term of three years and bore interest at a rate of 10% per annum, payable
quarterly. The March 2007 Note was not secured by any collateral, may be
pre-paid by STAAR at any time without penalty, and was not subject to covenants
based on financial performance or financial condition (except for insolvency).
The March 2007 Note was repaid by STAAR on June 27, 2007.
F-24
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As
additional consideration for the loan, STAAR also entered into a Warrant
Agreement (the “March 2007 Warrant Agreement”) with Broadwood granting the right
to purchase up to 70,000 shares of STAAR’s Common Stock at an exercise price of
$6.00 per share, exercisable for a period of six years, with additional warrants
issuable to Broadwood if the March 2007 Note remained outstanding beginning June
30, 2007. Due to the repayment of the March 2007 Note on June 27, 2007, no
additional warrants are issuable to Broadwood by STAAR. The warrant agreement
also provides that STAAR will register the shares underlying the warrant
agreement for resale with the SEC by a specified date and maintain
registration. The warrants were registered with the SEC on March 19,
2008, with an effective date of May 1, 2008. Accordingly, in
accordance with the provisions of Emerging Issues Task Force 00-19, “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock” (“EITF 00-19”), the warrant is accounted for as a liability
because the Company is required to assume that a warrant exercised if
registration requirements have not been satisfied may be settled in
cash. The warrant liability must be revalued at each reporting period
with changes in fair value being reflected in the consolidated statements of
operations. STAAR used the Black-Scholes valuation model to estimate the
warrant’s fair value as of and subsequent to the issuance date. As of March 21,
2007 the fair value of the warrant liability approximated $250,000 with the
residual amount of the total $4 million in proceeds, or $3.75 million being
allocated to the March 2007 Note. The $250,000 was treated as an additional
discount on the loan and the unamortized balance of $215,000 was written off and
included in other expenses, net, when the loan was paid off in June 2007. The
fair value of the warrant as of January 2, 2009 and December 28, 2007
approximated $61,000 and $68,000 respectively. The change
in fair value of ($7,000) and $182,000 for the year-ended January 2,
2009 and December 28, 2007 was recorded in other income and
expense.
The fair
value of the warrant was estimated on March 21, 2007 (issuance date), December
28, 2007 and January 2, 2009 using a Black-Scholes option valuation model
applying the assumptions noted in the following table. Expected volatilities are
based on historical volatility of the Company’s stock. The expected life of the
warrant is determined by the amount of time remaining on the original six year
term of the agreement. The risk-free rate for periods within the contractual
life of the warrant is based on the U.S. Treasury yield curve in effect at each
reporting period.
As
of
March 21, 2007
|
As
of
December 28, 2007
|
As
of
January 2, 2009
|
||||||||||
Expected
dividends
|
0 | % | 0 | % | 0 | % | ||||||
Expected
volatility
|
73.3 | % | 62.5 | % | 73.5 | % | ||||||
Risk-free
rate
|
4.45 | % | 3.77 | % | 1.72 | % | ||||||
Remaining
life (in years)
|
6.0 | 5.25 | 4.25 |
On
December 14, 2007, the Company borrowed $5 million from Broadwood Partners, L.P.
(“Broadwood”) pursuant to a Senior Promissory Note (the “Note”) between the
Company and Broadwood. The borrowed funds were used to finance the cash
consideration and related transaction costs in the Company’s purchase of the
remaining interests of the Canon companies in its Canon Staar Co., Inc. joint
venture. The Note has a term of three years and bears interest at a rate of 7%
per annum. The Note is not secured by any collateral, may be pre-paid by the
Company at any time without penalty, and is not subject to covenants based on
financial performance or financial condition (except for insolvency, as defined
in the agreement). The Note provides that, with certain exceptions,
the Company will not incur indebtedness senior to or at parity with its
indebtedness under the Note without the consent of Broadwood.
Based on
representations made by Broadwood in the Promissory Note, on the date of the
transaction, Broadwood beneficially owned 4,396,231 shares of the Company’s
common stock, comprising 15% of the Company’s common stock as of December 14,
2007. Based on publicly available information filed by Broadwood,
Neal Bradsher, President of Broadwood Partners, L.P., may have been deemed to
beneficially own all of the 4,396,231 shares.
F-25
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As
additional consideration for the loan, the Company also entered into a Warrant
Agreement (the “December 2007 Warrant Agreement”) with Broadwood granting the
right to purchase up to 700,000 shares of Common Stock at an exercise price of
$4.00 per share, exercisable for a period of six years. The December 2007 Note
also provides that if the Company has an indebtedness outstanding on June 29,
2009, it will issue additional warrants on the same terms as set forth in the
December 2007 Warrant Agreement in a number equal to 700,000 times the
percentage of the original $5 million principal that remains
outstanding. The December 2007 Warrant Agreement also provides that
the Company will register the underlying shares of the warrants covering the
resale of the warrant shares with the SEC within 150 days of issuance of the
warrants and maintain effective registration and if not registered by the
specified date, the Company is only obligated to issue additional 30,000
warrants per month for each month that the Company remains non compliant with
the registration requirement through the term of the warrants. On
April 22, 2008, the Company registered these warrants with the SEC however the
Company must maintain the registration of these warrants so long as they remain
outstanding (as of January 2, 2009, approximately 1,800,000 maximum warrants may
be issued if registration requirements are not maintained.) The
December 2007 warrant has been accounted for as an equity instrument in
accordance with the provisions of EITF 00-19. Additionally, in accordance with
Accounting Principles Board (“APB”) Opinion No. 14, “Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants,” the total $5 million
proceeds were allocated to the December 2007 Warrant and Note based on their
relative fair values, approximating $842,000 and $4.2 million on the issuance
date, respectively. The $842,000 was treated as an additional discount on the
loan and will be amortized using the effective interest method over the life of
the loan (which approximates an effective interest rate of 14% per
annum). During the year ended January 2, 2009, approximately $248,000
was amortized and included in interest expense. The Company believes that it is
not probable that it will issue any additional warrants related to the
aforementioned stock registration requirements and therefore no contingent
liability is accrued as of January 2, 2009 and as of December 28,
2007.
The fair
value of the warrant was estimated on December 14, 2007, issuance date, using a
Black-Scholes option valuation model applying the assumptions noted in the
following table. Expected volatilities are based on historical volatility of the
Company’s stock. The expected life of the warrant is determined by the amount of
time remaining on the original six year term of the agreement. The risk-free
rate for periods within the contractual life of the warrant is based on the U.S.
Treasury yield curve in effect at each reporting period.
As
of
December 14, 2007
|
||||
Expected
dividends
|
0 | % | ||
Expected
volatility
|
67.3 | % | ||
Risk-free
rate
|
3.88 | % | ||
Remaining
life (in years)
|
6.0 |
Capital
Lease Agreements
The
Company’s lease agreement with Farnam Street Financial, Inc., as amended on
October 9, 2006, provides for purchases of up to $1,500,000 of property, plant
and equipment. In accordance with the requirements of SFAS 13 “Accounting for
Leases,” purchases under this facility are accounted for as capital leases and
have a three-year term. Under the agreement, the Company has the option to
purchase any item of the leased property, at the end of the respective items
lease terms, at a mutually agreed fair value. On April 1, 2007, the Company
signed an additional leasing schedule with Farnam, which provides for additional
purchases of $800,000 during the next fiscal year. The terms of this new
schedule conform to the amended agreement dated October 9, 2006. Approximately
$250,000 in borrowings were available under this facility as of January 2,
2009.
The
Company’s lease agreement with Mazuma Capital Corporation, as amended on August
16, 2006, provides for purchases of up to $301,000 of property, plant and
equipment. In accordance with the requirements of SFAS 13 “Accounting for
Leases,” purchases under this facility are accounted for as capital leases and
have a two-year term. The Company was required to open a certificate of deposit
as collateral in STAAR Surgical Company’s name at the underwriting bank for 50%
of the assets funded by Mazuma. As of December 28, 2007, the Company had a
certificate of deposit for approximately $150,000 recorded as “short-term
investment — restricted” with a 12-month term at a fixed interest
rate of 4.5%. During the third quarter of 2008 the Mazuma capital leases were
paid off and the certificate of deposit was closed.
F-26
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Lines
of Credit
The
Company’s German subsidiary, Domilens, entered into a credit agreement on August
30, 2005. The renewed credit agreement provides for borrowings of up to 100,000
EUR ($140,000 at the rate of exchange on January 2, 2009), at a rate of 8.5% per
annum and does not have a termination date. The credit agreement may be
terminated by the lender in accordance with its general terms and conditions.
The credit facility is not secured. There were no borrowings outstanding as of
January 2, 2009 and December 28, 2007 and the full amount of the line was
available for borrowing as of January 2, 2009.
The
Company’s Japanese subsidiary, STAAR Japan, has an agreement with Mizuho Bank
providing borrowings of up to 400,000,000 Japanese Yen (approximately $4.4
million based on the rate of exchange on January 2, 2009), at an interest rate
equal to the Tokyo short-term prime interest rate (approximately 1.675% fixed as
of January 2, 2009) and terminates on April 20, 2009, but may be renewed
annually. The credit facility is not collateralized. As of
January 2, 2009 the Company had 200,000,000 Japanese Yen outstanding on the line
of credit (approximately $2.2 million based on the rate of exchange on January
2, 2009).
Covenant
Compliance
As fully
discussed in Note 20, on March 2, 2009, a verdict was rendered in the case of
Parallax Medical Systems, Inc. v. STAAR Surgical Company whereby a jury awarded
Parallax approximately $4.9 million, comprising of $2.2 million in actual
damages and $2.7 million in punitive damages. Among the
events of default in the Senior Promissory Note (“the Note”) held by Broadwood
Partners, L.P. is any judgment in excess of $500,000 against the Company that
“shall remain unpaid.” Because STAAR is not required to pay the Parallax judgment until the
expiration of the stay 40 days after final judgment, and because the amount to
be paid pursuant to the judgment will not be fixed until final judgment is
rendered on or before May 22, 2009, STAAR believes that as of the date of this
Report the Parallax
judgment should not be deemed “unpaid” and that an event of default under
the Senior Promissory Note would not have occurred. To avoid dispute over this
matter and to secure the lender’s temporary waiver of remedies for an event of
default during the stay of the Parallax judgment, STAAR and
Broadwood entered into a Temporary Waiver Agreement on April 2,
2009. The Temporary Waiver Agreement provides that any event of
default under the Note that occurs or may be deemed to have occurred as a result
of the Parallax
judgment will be waived for the shorter of the duration of the stay period and
July 6, 2009. At the expiration of the stay, if the Parallax judgment has been
satisfied any such default will be cured and the interest rate will go back to
7%. If the Parallax judgment is not satisfied, but STAAR secures an
additional stay pending appeal, any such default will be deemed partially cured
and the Note will not be subject to acceleration; however, interest under the
Note will rise to the default rate of a maximum 20%, an increase of $650,000 per
year in interest expense unless and until the Parallax judgment is satisfied and
any other pending and undecided material litigation is resolved. As
consideration for Temporary Waiver Agreement, STAAR will amend the Note to grant
to Broadwood a security interest in all of STAAR’s assets to secure STAAR’s
obligations under the Senior Note. The foregoing summary of the
Temporary Waiver Agreement is qualified in its entirety by reference to the
complete text of that agreement, a copy of which is attached to this Report as
Exhibit 10.71.
The
Company was in compliance with the covenants of the other remaining credit
facilities as of January 2, 2009.
Note
11 — Redeemable, Convertible Preferred Stock
Under its Certificate of
Incorporation the Company has had 10,000,000 shares of “blank check” preferred
stock, which the Board of Directors is authorized to issue with such rights,
preferences and privileges as the Board may determine. On October 22,
2007, the Board approved the designation of 1,700,000 shares of the preferred
stock as Series A Redeemable Convertible Preferred Stock (“Preferred Stock”) to
be issued in connection with the acquisition of the 50% interest in Canon Staar
Co., Inc. which was consummated on December 29, 2007 (see Note 2). On
December 29, 2007, the Company issued the 1,700,000 shares of Preferred
Stock to the Canon companies as partial consideration for their shares of Canon
Staar Co., Inc. at an estimated fair value of $4.00 per share, or $6.8 million
in the aggregate.
The
Preferred Stock is redeemable by the Company at any time on or after the first
anniversary of the issuance date at a price of $4.00 per share plus any accrued
or declared but unpaid dividends (“Redemption Price”). The holders of
the Preferred Stock have a right, exercisable at any time on or after the third
anniversary of the issuance date by a majority vote of the Preferred Stock
holders, to require the Company to redeem the Preferred Stock at the Redemption
Price.
The
Preferred Stock is convertible into shares of the Company’s common stock at any
time after the issuance date at a one-to-one conversion ratio that is adjustable
only for stock splits, combinations, subdivisions, dividends or
recapitalizations (“Conversion Ratio”). On the fifth anniversary of
the issuance date, the Preferred Stock expires and each share of Preferred Stock
will be automatically converted to common stock of the Company at the Conversion
Ratio.
F-27
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The fair
value of the Preferred Stock was determined on the issuance date by the Company
with the assistance of a valuation specialist using the Binomial Tree option
valuation model. This model considers the Preferred Stock to be a
derivative asset of the Company’s common stock where the preferred stockholder
has options to choose certain payoffs that maximize returns and therefore
maximize the value of the preferred stock. The payoff available to
the preferred stockholder is contingent on the future market value of the
Company’s common stock. Therefore the model, based on certain
significant management assumptions, analyzes various payoff patterns for
different possible paths that might be followed by the common stock price over
the life of the Preferred Stock until the automatic conversion on the fifth
anniversary of the issuance date.
The significant assumptions used in the
valuation were as follows:
Average
common stock price*
|
$ | 3.12 | ||
Expected
volatility
|
67.4 | % | ||
Expected
dividend yield
|
0 | % | ||
Risk-free
interest rate
|
3.43 | % | ||
Issuer’s
call price per share
|
$ | 4.00 | ||
Redemption
price per share
|
$ | 4.00 |
______________
* Average
common stock price used in the valuation represents the average closing market
price per share of the Company’s common stock a few days before and after the
announcement date of the Canon Staar acquisition.
The Company filed and secured
effectiveness of a registration statement with the SEC for the public resale of
the common stock issuable upon conversion of the Preferred Stock and must
maintain effectiveness for the remainder of the two-year period following
issuance, subject to permitted suspensions of thirty days up to twice a year
under specified circumstances. Other than such permitted suspensions,
if the Company fails to keep the registration statement effective for the
two-year period, as the holders’ sole remedy the Company will be obligated to
issue an additional 30,000 shares of common stock to the holders for each
calendar month that the Company does not meet this effectiveness requirement
(“Penalty Shares”). The Company does not consider the issuance of any
Penalty Shares to be likely.
The
rights, preferences and privileges of the Preferred Stock are specified in a
Certificate of Designation that the Company filed with the Delaware Secretary of
State on December 24, 2007. The Preferred Stock does not have
voting rights in the election of directors or any other matter, except as may be
required under the Delaware General Corporation. However, the Company
cannot, without the consent of at least two-thirds of the holders of the
Preferred Stock, authorize or issue any other equity security senior to or at
parity with the Preferred Stock as to dividend, conversion or redemption rights
or liquidation preferences.
The
Preferred Stock has the right to participate equally, on an as-converted basis,
in any dividend or distribution paid to the common stockholders.
On or
prior to the effective date of certain change in control or liquidation events
of the Company specified in the Certificate of Designation, the Preferred Stock
is redeemable at the option of the holder at the Redemption Price; however, the
holder will continue to have the right to convert the Preferred Stock into
common stock of the Company until the close of the second business day prior to
the effective date of such an event.
F-28
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In the
event of a liquidation of the Company, as defined in the Certificate of
Designation, the Preferred Stockholders have a right to receive a distribution
equal to the Redemption Price prior to the distribution of any funds to the
common stockholders. After payment of the Redemption Price the
Preferred Stockholders do not participate in the distribution of the remaining
proceeds of the liquidation, which will be distributed to the common
stockholders. However, until the effective date of any such
liquidation, each Preferred Stockholder may convert its shares to common stock
of the Company and participate in the proceeds of the liquidation to be paid to
common stockholders in lieu of the Redemption Price.
On
a liquidation or change in control of the Company, if a Preferred Stockholder
does not make a timely election to either receive the Redemption Price or
convert the Preferred shares to common stock, the Certificate of Designation
provides that the Preferred Stockholder will be deemed to have elected the
higher in value of the two alternatives, to be calculated as provided in the
Certificate of Designation.
Because
after the third anniversary of issuance the Preferred Stock is redeemable at the
option of the holders, which is not within the control of the Company, the
Company has presented the Preferred Stock in the mezzanine section of the
consolidated balance sheet in accordance with the provisions of EITF Abstracts,
Topic No. D-98 (“Topic D-98”), “Classification and Measurement of Redeemable
Securities.” Because the Preferred Stock fair value recorded on the
issuance date approximates the redemption price, no further accretion will be
required by the Company to redemption value and no subsequent revaluation will
be necessary so long as the Preferred Stock is still considered a temporary
equity instrument. However, issuance and registration costs of
approximately $48,000 were incurred related to the Preferred Stock, which were
offset against the fair value of the Preferred Stock on the issuance date and
are being accreted to the redemption value using the interest method with a
corresponding charge to Additional Paid-In Capital over a three-year
period.
Note 12 —
Income Taxes
The
provision for income taxes consists of the following (in
thousands):
2008
|
2007
|
2006
|
||||||||||
Current
tax provision:
|
||||||||||||
U.S. federal
|
$ | — | $ | — | $ | — | ||||||
State
|
8 | 6 | 17 | |||||||||
Foreign
|
1,277 | 344 | 1,341 | |||||||||
Total
current provision
|
1,285 | 350 | 1,358 | |||||||||
Deferred
tax provision:
|
||||||||||||
U.S. federal
and state
|
— | — | — | |||||||||
Foreign
|
238 | 493 | 179 | |||||||||
Total
deferred provision
|
238 | 493 | 179 | |||||||||
Provision
for income taxes
|
$ | 1,523 | $ | 843 | $ | 1,537 |
As of
January 2, 2009, the Company had $119.5 million of U.S. federal net operating
loss carryforwards available to reduce future income taxes. The net operating
loss carryforwards expire in varying amounts between 2020 and 2028.
The
Company had accrued income taxes payable of $486,000 and $363,000 at January 2,
2009 and December 28, 2007, respectively primarily due to taxes payable for
foreign jurisdictions. Included in the Company’s 2006 foreign tax
provision is approximately $700,000 in additional taxes that was assessed by the
German Ministry of Finance pursuant to the Domilens Investigation of which
$465,000 was reversed in 2007 following a final assessment.
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
(amounts in thousands):
F-29
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2008
|
2007 | 2006 | ||||||||||||||||||||||
Computed
provision for taxes based on income at statutory rate
|
34.0 | % | $ | (7,368 | ) | 34.0 | % | $ | (5,153 | ) | 34.0 | % | $ | (4,592 | ) | |||||||||
Increase
(decrease) in taxes resulting from:
|
||||||||||||||||||||||||
Permanent
differences
|
(0.2 | ) | 37 | (0.3 | ) | 46 | (1.6 | ) | 210 | |||||||||||||||
State
taxes, net of federal income tax benefit
|
— | 5 | — | 4 | (0.1 | ) | 11 | |||||||||||||||||
Tax
effect attributed to foreign operations
|
(7.6 | ) | 1,645 | 3.3 | (502 | ) | (5.4 | ) | 733 | |||||||||||||||
Previous
write-down of investment in foreign subsidiary
|
(2.4 | ) | 515 | — | — | — | — | |||||||||||||||||
Foreign
earnings previously considered permanently reinvested
|
(28.4 | ) | 6,163 | (12.4 | ) | 1,883 | — | — | ||||||||||||||||
Foreign
dividend withholding
|
(2.7 | ) | 591 | (3.8 | ) | 570 | — | — | ||||||||||||||||
Other
|
— | (2 | ) | (0.5 | ) | 67 | — | — | ||||||||||||||||
Valuation
allowance
|
0.3 | (63 | ) | (25.9 | ) | 3,928 | (38.3 | ) | 5,175 | |||||||||||||||
Effective
tax provision (benefit) rate
|
(7.0 | )% | $ | 1,523 | (5.6 | )% | $ | 843 | (11.4 | )% | $ | 1,537 |
Included
in the state tax provision is an increase to the state deferred tax asset and
corresponding increase to the valuation allowance of $1,583,000, $372,000 and
$1,256,000 for 2008, 2007 and 2006, respectively. This results in a total state
tax provision of $8,000, $6,000 and $17,000 for fiscal years ended 2008, 2007
and 2006, respectively.
During
the year ended December 28, 2007, the Company decided to adopt a plan to
repatriate earnings from certain foreign subsidiaries commencing during the 2008
fiscal year. These repatriated earnings were not expected to exceed
$11.4 million at that time. As of January 2, 2009, all earnings from
its subsidiaries are no longer considered to be permanently
reinvested. Thus, the Company has provided withholding and U.S. taxes
on the entire amount of unremitted foreign earnings.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets (liabilities) as of January 2, 2009 and December
28, 2007 are as follows (in thousands):
2008
|
2007
|
|||||||
Current
deferred tax assets (liabilities):
|
||||||||
Allowance
for doubtful accounts and sales returns
|
$ | 125 | $ | 77 | ||||
Inventories
|
600 | 881 | ||||||
Accrued
vacation
|
316 | 260 | ||||||
Pension
plan
|
— | 121 | ||||||
Other
|
(90 | ) | 25 | |||||
State
taxes
|
3 | 3 | ||||||
Accrued
legal judgment and other accrued expenses
|
2,091 | — | ||||||
Valuation
allowance
|
(3,327 | ) | (1,469 | ) | ||||
Total
current deferred tax liabilities
|
$ | (282 | ) | $ | (102 | ) | ||
Non-current
deferred tax assets (liabilities):
|
||||||||
Net
operating loss carryforwards
|
49,669 | 43,795 | ||||||
Stock-based
payments
|
1,574 | 1,098 | ||||||
Business,
foreign and AMT credit carryforwards
|
1,293 | 801 | ||||||
Capitalized
R&D
|
639 | 527 | ||||||
Reserve
for restructuring costs
|
— | 347 | ||||||
Contributions
|
162 | 164 | ||||||
Pensions
|
523 | — | ||||||
Depreciation
and amortization
|
(357 | ) | (51 | ) | ||||
Foreign
tax withholding
|
(1,251 | ) | (377 | ) | ||||
Foreign
earnings not permanently reinvested
|
(8,663 | ) | (2,924 | ) | ||||
Other
|
(105 | ) | — | |||||
Valuation
allowance
|
(44,381 | ) | (43,950 | ) | ||||
Total
non-current deferred tax liabilities
|
$ | (897 | ) | $ | (570 | ) |
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. Due to the
Company’s recent history of losses, the valuation allowance fully offsets the
value of U.S. deferred tax assets on the Company’s balance sheet as of January
2, 2009. Further, under Federal Tax Law Internal Revenue Code Section 382,
significant changes in ownership may restrict the future utilization of these
tax loss carry forwards.
F-30
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During
the year ended January 2, 2009, STAAR Japan incurred losses resulting in
additional net operating loss carryforwards available to offset against future
taxable income of this subsidiary. As discussed in Note 2, at the
time of the Acquisition, a net deferred tax liability was recorded representing
the difference between the assigned values and the tax bases of the assets and
liabilities recognized in the Acquisition, mainly due to the newly recognized
intangible assets and the step-up in the inventory value, both recognized for
book but not for tax. As a result of the losses generated by STAAR
Japan in 2008 which generated a deferred tax asset in excess of the net deferred
tax liability remaining from the Acquisition, STAAR Japan recorded a current tax
benefit of $268,000 in 2008 to the extent of that net deferred tax
liability. The remaining excess deferred tax assets generated in 2008
were offset with a full valuation allowance as it is more likely than not that
STAAR Japan will not realize the remaining net deferred tax assets.
Effective
December 30, 2006, the Company adopted Financial Accounting Standards Board
Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”,
an interpretation of Statement of Financial Accounting Standards No. 109. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements. The Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The
Company classifies any interest and penalties related to income taxes assessed
by a jurisdiction as part of income tax expense. The Company did not
incur significant interest and penalties during 2008. The adoption of
FIN 48 did not have a material impact on the Company’s Consolidated Financial
Statements.
The
following tax years remain subject to examination:
Significant Jurisdictions
|
Open Years
|
|
U.S.
Federal
|
2005
– 2007
|
|
California
|
2004
– 2007
|
|
Germany
|
2005
– 2007
|
|
Switzerland
|
2007
|
|
Japan
|
2005
–
2007
|
Loss
before provision for income taxes is as follows (in thousands):
2008
|
2007
|
2006
|
||||||||||
Domestic
|
$ | (19,552 | ) | $ | (17,418 | ) | $ | (15,824 | ) | |||
Foreign
|
(2,120 | ) | 2,262 | 2,317 | ||||||||
$ | (21,672 | ) | $ | (15,156 | ) | $ | (13,507 | ) |
Note
13 – Employee Benefit Plans
Adoptions
of SFAS No. 158:
The
Company has historically maintained a passive pension plan covering employees of
its Switzerland subsidiary (“Swiss Plan”) which was classified and accounted for
as a defined contribution plan. Based on changes in Swiss pension law, during
the fourth quarter of fiscal year 2007, the Company concluded that the features
of the Swiss Plan now conform to a defined benefit plan. As a result, the
Company adopted the recognition and disclosure requirements of Statement of
Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans”, an amendment of SFAS
Nos. 87, 88, 106 and 132R (“SFAS 158”) effective October 1,
2007.
F-31
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In
accordance with SFAS No. 158, the Company recorded a corresponding reduction of
$371,000 net of tax, to the December 28, 2007 balance of accumulated other
comprehensive income.
The incremental effect of applying SFAS
No. 158 is as follows:
(in
thousands)
|
Before adoption
of FAS 158
|
Adjustments
|
After
adoption of
FAS 158
|
|||||||||
Deferred
income taxes – long term
|
$ | (691 | ) | $ | 121 | $ | (570 | ) | ||||
Other
long-term liabilities
|
(69 | ) | (550 | ) | (619 | ) | ||||||
Total
liabilities
|
(17,525 | ) | (429 | ) | (17,954 | ) | ||||||
Accumulated
other comprehensive income
|
(1,922 | ) | 371 | (1,551 | ) | |||||||
Accumulated
deficit
|
102,638 | 58 | 102,696 | |||||||||
Total
stockholders’ equity
|
(36,654 | ) | 429 | (36,225 | ) | |||||||
Total
liabilities and stockholders’ equity
|
(54,179 | ) | — | (54,179 | ) |
Defined
Benefit Plan-Switzerland
In
Switzerland employers are required to provide a minimum pension plan for their
staff. The Swiss Plan is financed by contributions of both the
employees and employer. The amount of the contributions is defined by the plan
regulations and cannot be decreased without amending the plan regulations. It is
required that the employer pay at least as much as the employees.
The
funded status of the benefit plan at January 2, 2009 and December 28,2007 are as
follows:
2008
|
2007
|
|||||||
Change
in Projected Benefit Obligation:
|
||||||||
Projected
Benefit obligation, beginning of period
|
$ | 2,960 | $ | — | ||||
Service
cost
|
265 | 60 | ||||||
Interest
cost
|
114 | 26 | ||||||
Participant
contributions
|
232 | 46 | ||||||
Benefits
(paid) deposited
|
(359 | ) | 19 | |||||
Vested
benefit deposit (initial assessment, including foreign currency
impact)
|
— | 2,809 | ||||||
Actuarial
(gain) / loss on obligation
|
(191 | ) | — | |||||
Projected
Benefit obligation, end of period
|
$ | 3,021 | $ | 2,960 | ||||
Changes
in Plan Assets:
|
||||||||
Plan
assets at fair value, beginning of period
|
$ | 2,410 | $ | — | ||||
Actual
return on plan assets (including foreign currency impact)
|
(190 | ) | (416 | ) | ||||
Employer
contributions
|
232 | 46 | ||||||
Participant
contributions
|
232 | 46 | ||||||
Benefits
(paid) deposited
|
(359 | ) | 19 | |||||
Vested
benefit deposit (initial assessment)
|
— | 2,715 | ||||||
Plan
assets at fair value, end of period
|
$ | 2,325 | $ | 2,410 | ||||
Net
Amount Recognized in Consolidated Balance Sheets
|
||||||||
Funded
status (underfunded), end of year
|
$ | (696 | ) | $ | (550 | ) | ||
Other
long term liabilities
|
$ | (696 | ) | $ | (550 | ) | ||
Amount Recognized
in Accumulated Other Comprehensive Loss, net of tax
|
||||||||
Actuarial
loss on plan assets
|
$ | (582 | ) | $ | (371 | ) | ||
Actuarial
gain on benefit obligation
|
75 | — | ||||||
Actuarial
loss recognized in current year
|
19 | — | ||||||
Accumulated other
comprehensive loss
|
$ | (488 | ) | $ | (371 | ) | ||
Accumulated
benefit obligation at end of year
|
$ | (2,743 | ) | $ | (2,688 | ) |
The
underfunded balance of $696,000 and $550,000 was included in Other long-term
liabilities on the consolidated balance sheets as of January 2, 2009 and
December 28, 2007, respectively.
F-32
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Net
periodic pension cost associated with the Swiss Plan in the years ended January
2, 2009 and December 28, 2007 include the following components (in
thousands):
2008
|
2007
|
|||||||
Service
Cost
|
$ | 265 | $ | 60 | ||||
Interest
Cost
|
114 | 26 | ||||||
Expected
return on plan assets
|
(111 | ) | (31 | ) | ||||
Actuarial
loss recognized in current year
|
24 | — | ||||||
Net
periodic pension cost
|
$ | 292 | $ | 55 |
Changes
in other comprehensive loss (net of tax) associated with the Swiss Plan in the
year ended January 2, 2009 and December 28, 2007 include the following
components (in thousands):
2008
|
2007
|
|||||||
Actuarial
loss of current year
|
$ | (136 | ) | $ | (371 | ) | ||
Actuarial
loss recorded in current year
|
19 | — | ||||||
Change
in other comprehensive loss
|
$ | (117 | ) | $ | (371 | ) |
The amount in accumulated other
comprehensive loss as of January 2, 2009 that is expected to be recognized as a
component of the net periodic pension costs in the subsequent year is
$33,000.
Net
periodic pension cost and projected and accumulated pension obligation for the
Company’s Swiss Plan were calculated on January 2, 2009 and December 28, 2007
using the following assumptions:
2008
|
2007
|
|||||||
Discount
rate
|
3.25 | % | 3.75 | % | ||||
Salary
increases
|
2.00 | % | 2.00 | % | ||||
Expected
return on plan assets
|
3.50 | % | 4.50 | % | ||||
Expected
average remaining working lives in years
|
9.90 | 9.90 |
The
discount rates of 3.25% and 3.75% for the period ending January 2,
2009 and December 28, 2007 respectively, are based on an assumed pension benefit
maturity of 10 to 15 years. The rate was estimated using the rate of return for
high quality Swiss corporate bonds that mature in eight years. This maturity was
used as there are significant numbers of high quality Swiss bonds, but very few
bonds issued with maturities with longer lives. As of January 2, 2009 and
December 28, 2007, the rate for high quality Swiss corporate bonds was 3.17%
,and 3.45% respectively. In order to determine an appropriate discount rate, the
eight year rate of return was then extrapolated along the yield curve of Swiss
government bonds.
The
salary increase rate of 2% was based on the Company’s best assessment for
on-going increases over time.
The
expected long-term rate of return on plan assets is based on the expected asset
allocation and assumptions concerning long-term interest rates, inflation rates,
and risk premiums for equities above the risk-free rates of return. These
assumptions take into consideration historical long-term rates of return for
relevant asset categories.
Plan
assets categories in the Swiss Plan are comprised of the following:
2008
|
2007
|
|||||||
Bonds
& Loans
|
70 | % | 79 | % | ||||
Real
Estate (including real estate funds)
|
25 | % | 14 | % | ||||
Equity
securities
|
3 | % | 6 | % | ||||
Liquid
assets
|
2 | % | 1 | % | ||||
100 | % | 100 | % |
F-33
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In
accordance with SFAS 157 the assets above are measured at fair value and are
categorized into three different class levels. Level 1 assets are
those whose value is based on quoted prices in active markets. Level
2 assets are those whose values are based on direct or indirect observable
markets for similar assets. Level 3 assets are those whose values are
unobservable. Level 1assets in the Swiss Plan include bonds (61%),
equity (3%) and liquid assets (2%). Level 2 assets are comprised of
mortgages (11%) and loans (9%). Level 3 assets are mainly real estate
assets (14%).
The
Company has contracted with the Allianz Suisse Life Insurance Company’s BVG
Collective Foundation to manage the Swiss Plan. The investment
strategy is determined by the Swiss insurance company and applies to all members
of the collective foundation.
In fiscal
2009, the Company expects to make cash contributions totaling approximately
$232,000 to the Swiss Plan.
The estimated future benefit payments
for the Swiss Plan are as follows (in thousands):
Fiscal Year
|
||||
2009
|
$ | 45 | ||
2010
|
53 | |||
2011
|
61 | |||
2012
|
69 | |||
2013
|
78 | |||
2014
- 2018
|
530 |
Defined
Benefit Plan-Japan
As a
result of the purchase of the remaining interest in Canon STAAR at the beginning
of fiscal year 2008 (see Note 2), renamed STAAR Japan, the Company assumed the
noncontributory defined benefit plan (“Japan Plan”) that covers substantially
all of STAAR Japan’s employees. Benefits under the Japan Plan are
primarily based on the combination of years of service and
compensation. The mandatory retirement age limit is 60 years
old. The Company makes annual contributions to the Japan Plan equal
to the maximum amount that can be deducted for income tax purposes.
The
funded status of the benefit plan at January 2, 2009 is as
follows:
2008
|
||||
Change
in Projected Benefit Obligation:
|
||||
Projected
Benefit obligation, beginning of period
|
$ | 1,247 | ||
Service
cost
|
156 | |||
Interest
cost
|
27 | |||
Actuarial
Gain
|
(76 | ) | ||
Benefits
paid
|
(151 | ) | ||
Foreign
Exchange Adjustment
|
297 | |||
Projected
Benefit obligation, end of period
|
$ | 1,500 | ||
Changes
in Plan Assets:
|
||||
Plan
assets at fair value, beginning of period
|
$ | 476 | ||
Actual
return on plan assets
|
1 | |||
Employer
contributions
|
69 | |||
Benefits
paid
|
(82 | ) | ||
Foreign
Exchange Adjustment
|
114 | |||
Plan
assets at fair value, end of period
|
$ | 578 | ||
Net
Amount Recognized in Consolidated Balance Sheets
|
||||
Funded
status (underfunded), end of year
|
$ | (922 | ) | |
Other
long term liabilities
|
$ | (922 | ) | |
Amount Recognized
in Accumulated Other Comprehensive Income
|
||||
Transition
Obligation
|
$ | 24 | ||
Actuarial
gain
|
51 | |||
Accumulated Other
Comprehensive Income
|
$ | 75 | ||
Accumulated
benefit obligation at end of year
|
$ | (1,035 | ) |
F-34
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
underfunded balance of $922,000 was included in Other long-term liabilities on
the consolidated balance sheet as of January 2, 2009.
Net
periodic pension cost associated with the Japan Plan in the year ended January
2, 2009 includes the following components (in thousands):
2008
|
||||
Service
Cost
|
$ | 156 | ||
Interest
Cost
|
27 | |||
Expected return
on plan assets
|
(11 | ) | ||
Net
amortization of transition obligation
|
10 | |||
Net
periodic pension cost
|
$ | 182 |
Changes
in other comprehensive income associated with the Japan Plan in the year ended
January 2, 2009 include the following components (in thousands):
2008
|
||||
Amortization
of transitional obligation
|
$ | 24 | ||
Net
Actuarial gain of current year
|
65 | |||
Actuarial
gain recorded in current year
|
(14 | ) | ||
Change
in other comprehensive income
|
$ | 75 |
The amount in accumulated other
comprehensive income as of January 2, 2009 that is expected to be recognized as
a component of the net periodic pension costs in the subsequent year is
$7,000.
Net
periodic pension cost and projected and accumulated pension obligation for the
Company’s Japan Plan were calculated on January 2, 2009 using the following
assumptions:
2008
|
||||
Discount
rate
|
2.00 | % | ||
Salary
increases
|
2.00 | % | ||
Expected
return on plan assets
|
2.00 | % | ||
Expected
average remaining working lives in years
|
20.26 |
The
discount rate of 2.00% for the period ending January 2, 2009 is based on the
government bond rate with a term of 20 years.
The
salary increase average rate of 2% was based on the Company’s best assessment
for on-going increases over time.
The
expected long-term rate of return on plan assets is based on the defined yields
related to the life insurance general account, which makes up the major part of
the plan asset categories. These assumptions take into consideration
historical long-term rates of return for relevant asset categories.
Plan
assets’ categories in the Japan Plan are comprised of the
following:
2008
|
||||
Equity
|
19 | % | ||
Debt
instruments
|
55 | % | ||
Loans
receivable
|
16 | % | ||
Real
Estate
|
4 | % | ||
Other
|
6 | % | ||
100 | % |
F-35
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In
accordance with SFAS 157 the assets above are measured at fair value and are
categorized into three different class levels. Level 1 assets are
those whose value is based on quoted prices in active markets. Level
2 assets are those whose values are based on direct or indirect observable
markets for similar assets. Level 3 assets are those whose values are
unobservable. Level 1 assets are comprised of equity (19%) and debt
instruments (55%). Level 2 assets are comprised mainly of real estate
assets (4%). Level 3 assets are loan receivables (16%) and other
assets (6%).
The
Company has contracted with Dai-ichi Mutual Life Insurance Company to manage the
Japan Plan. The investment strategy is determined by the insurance
company.
In fiscal
2009, the Company expects to make cash contributions totaling approximately
$77,000 to the Japan Plan.
The estimated future benefit payments
for the Japan Plan are as follows (in thousands):
Fiscal Year
|
||||
2009
|
$ | 12 | ||
2010
|
14 | |||
2011
|
15 | |||
2012
|
76 | |||
2013
|
17 | |||
2014
- 2018
|
166 |
Defined
Contribution Plan
The
Company maintains a 401(k) profit sharing plan (“401(k) Plan”) for the benefit
of qualified employees in North America. During the fiscal year ended January 2,
2009, employees who participate may elect to make salary deferral contributions
to the 401(k) Plan up to the $15,500 of the employees’ eligible payroll subject
to annual Internal Revenue Code maximum limitations. The Company makes a
contribution of 50% of the employee’s contribution up to the first 2% of the
employee’s compensation, and 25% of the next 4% of compensation. In addition,
STAAR may make a discretionary contribution to qualified employees, in
accordance with the 401(k) Plan. During the years ended January 2,
2009, December 28, 2007 and December 29, 2006, the Company made contributions,
net of forfeitures, of $125,000, $132,000 and $122,000, respectively, to the
401(k) Plan.
Note 14 —
Stockholders’ Equity
Common
Stock
During
fiscal year 2008, the Company issued 137,821 shares of restricted stock to an
executive and two board members in consideration for services rendered to the
Company. As of January 2, 2009, 23,772 of the restricted shares were
vested.
During
2007, the Company completed a public offering with institutional investors of
3,600,000 shares of the Company’s common stock, for net proceeds of $16.6
million. Also during fiscal 2007, the Company issued 69,151 shares of restricted
stock to certain employees and a director and 47,000 shares of common stock to
an employee in consideration for services rendered to the Company. Stock
compensation expense of $125,000 was recorded during fiscal 2007 as a result of
the issuance of common stock. As of January 2, 2009, 65,817 of the restricted
shares were vested.
During
fiscal year 2006, the Company issued 47,264 shares of restricted stock to
certain employees and a consultant in consideration for future services to the
Company. As of January 2, 2009, 21,303 of the shares vested and
11,895 shares were forfeited.
F-36
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During
fiscal year 2005, the Company issued 13,000 shares to consultants for services
rendered to the Company. Also during 2005, the Company completed a private
placement with institutional investors of 4,100,000 shares of the Company’s
common stock, for net proceeds of $13.4 million. Also during 2005, the Company
issued 6,117 shares of restricted stock to certain employees and a consultant in
consideration for future services to the Company. As of January 2, 2009, 5,426
of the shares vested and 691 shares were forfeited.
Restricted
shares are issued at fair market value on the date of grant, vest over a period
of three or four years, and are subject to forfeiture until vested or the
service period is achieved and the restriction is lapsed or
terminated. Prior to 2006, the cost of the restricted stock was
recorded as deferred equity compensation in Additional Paid-in Capital and
amortized over the vesting period. Beginning in 2006, the
amortization is included in stock-based compensation.
Share-Based
Payments
The
Company has adopted Statement of Financial Accounting Standards No. 123
(revised) Share Based
Payment , (“SFAS 123R”) effective December 31, 2005 (fiscal 2006). The
Company previously applied APB Opinion No. 25 Accounting for Stock Issued to
Employees (“Opinion”) in accounting for stock option plans and in
accordance with the Opinion, no compensation cost has been recognized for
employee option grants for these plans in the prior period financial statements
because there was no difference between the exercise price and the market price
on the date of grant. The Company has elected to apply the Modified Prospective
Application (“MPA”) in its implementation of SFAS No. 123R and its subsequent
amendments and clarifications. Under this method, the Company has recognized
stock based compensation expense only for awards newly made or modified on or
after the effective date and for the portion of the outstanding awards for which
requisite service will be performed on or after the effective date. Expenses for
awards previously granted and earned have not been restated.
As of
January 2, 2009, the Company has multiple share-based compensation plans, which
are described below. The Company issues new shares upon option exercise once the
optionee remits payment for the exercise price. The compensation cost that has
been charged against income for the 2003 Omnibus Plan and the 1998 Stock Option
Plan is set forth below (in thousands):
Fiscal Year Ended
|
||||||||||||
January 2,
2009
|
December 28,
2007
|
December 29,
2006
|
||||||||||
SFAS
123R expense
|
$ | 1,198 | $ | 1,350 | $ | 1,634 | ||||||
Restricted
stock expense
|
256 | 92 | 91 | |||||||||
Consultant
compensation
|
59 | 14 | 116 | |||||||||
Total
|
$ | 1,513 | $ | 1,456 | $ | 1,841 |
There was
no net income tax benefit recognized in the consolidated statements of
operations for share-based compensation arrangements as the Company fully
offsets net deferred tax assets with a valuation allowance (see Note
12). In addition, the Company capitalized $199,000, $181,000 and
$155,000 of SFAS No. 123R compensation to inventory for the fiscal years ended
January 2, 2009, December 28, 2007 and December 29, 2006, respectively, and
recognizes those amounts as expense in Cost of Sales as the inventory is
sold.
F-37
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock
Option Plans
In fiscal
year 2003, the Board of Directors approved the 2003 Omnibus Equity Incentive
Plan (the “2003 Plan”) authorizing awards of equity compensation, including
options to purchase common stock and restricted shares of 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. Each year the number of shares reserved for issuance under the 2003
Plan has been increased as necessary to provide that 2% of the total shares of
common stock outstanding on the immediately preceding December 31 would be
reserved for issuance, up to a maximum of 1,586,371 additional shares, and a
maximum total of 6,500,000 shares reserved under the 2003 Plan and all of the
Restated Plans incorporated in it. The 6,500,000 maximum shares were reached on
January 1, 2007, of which approximately 735,000 are available to be issued as
incentives to employees without stockholder approval as of January 2, 2009.
Shares subject to grants under the 2003 Omnibus Plan that lapse or terminate in
accordance with their terms become available for new grants under the 2003
Omnibus Plan. As of January 2, 2009, approximately 735,000 shares were
authorized and available for grants under the 2003 Omnibus Plan. The 2003 Plan
provides for various forms of stock-based incentives. To date, of the
available forms of awards under the 2003 Plan, the Company has granted only
stock options and restricted stock. Options under the plan are granted at fair
market value on the date of grant, become exercisable generally over a three- or
four-year service period, or as determined by the Board of Directors, and expire
over periods not exceeding 10 years from the date of grant. Certain option and
share awards provide for accelerated vesting if there is a change in control (as
defined in the 2003 Plan). Restricted stock grants under the 2003 Plan generally
vest over a period of one, three or four years. Pursuant to the plan, options
for 2,639,000 shares were outstanding at January 2, 2009 with exercise prices
ranging between $1.56 and $10.60 per share. There were 131,450 shares of
restricted stock outstanding at January 2, 2009.
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 common stock or awards of common stock. The options under the plan were
granted at fair market value on the date of grant, are exercisable at any time
as they vested over a three-year period from the date of grant, and expire 10
years from the date of grant. Pursuant to this plan, options for
500,000 were outstanding at January 2, 2009, 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 options to purchase common stock or awards of 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 three-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 348,000 were outstanding at January 2, 2009 with exercise
prices ranging between $3.35 and $13.625 per share. No further awards
may be made under this plan.
In fiscal
year 1995, the Company adopted the 1995 Consultant Stock Plan, authorizing the
granting of options to purchase common stock or awards of common stock.
Generally, options under the plan were 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 45,000 shares were
outstanding at January 2, 2009 with an exercise price of $1.70 per
share. No further awards may be made under this plan.
Under
provisions of the Company’s 1991 Stock Option Plan, 2.0 million shares were
reserved for issuance. Generally, options under this plan were granted at fair
market value at the date of the grant, become exercisable over a three-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
60,000 shares were outstanding at January 2, 2009 with exercise prices ranging
from $9.56 to $10.18 per share. No further awards may be made under
this plan.
During
fiscal years 1999 and 2000, the Company issued non-qualified options to purchase
shares of its Common Stock to employees and consultants. Pursuant to these
agreements, options for 55,000 shares were outstanding at January 2, 2009 with
exercise prices ranging between $9.375 and $10.63.
F-38
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During
the fiscal year ended January 2, 2009, an outside consultant exercised 10,000
options from the 2003 Plan at an exercise price of $3.95 per option resulting in
net cash proceeds to the Company totaling $39,500.
During
the fiscal year ended December 28, 2007, officers, employees and others
exercised 163,000 options from the 1995, 1996, 1998, non-qualified and 2003
stock option plans at prices ranging from $2.96 to $4.88 resulting in net cash
proceeds to the Company totaling $584,000.
During
the fiscal year ended December 29, 2006, officers, employees and others
exercised 753,000 options from the 1995, 1996, 1998, non-qualified and 2003
stock option plans at prices ranging from $1.91 to $7.00 resulting in net cash
proceeds to the Company totaling $2,890,000.
Assumptions
The fair
value of each option award is estimated on the date of grant using a
Black-Scholes option valuation model applying the assumptions noted in the
following table. Expected volatilities are based on historical volatility of the
Company’s stock. The Company uses historical data to estimate option exercise
and employee termination behavior. The expected term of options granted is
derived from the historical exercise activity over the past 15 years, and
represents the period of time that options granted are expected to be
outstanding. The Company has calculated a 9.73% estimated forfeiture
rate used in the model for fiscal year 2008 option grants based on historical
forfeiture experience. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
Fiscal Year Ended
|
||||||||||||
January 2,
2009
|
December 28,
2007
|
December 29,
2006
|
||||||||||
Expected
dividend yield
|
0 | % | 0 | % | 0 | % | ||||||
Expected
volatility
|
62 | % | 69 | % | 73 | % | ||||||
Risk-free
interest rate
|
2.87 | % | 4.52 | % | 4.17 | % | ||||||
Expected
term (in years)
|
5.5 |
5.41&5.5
|
5.2&7
|
A summary
of option activity under the Plans as of January 2, 2009 is presented
below:
Options
|
Shares
(000’s)
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
(000’s)
|
||||||||||||
Outstanding
at December 28, 2007
|
3,717 | $ | 6.70 | |||||||||||||
Granted
|
680 | 2.52 | ||||||||||||||
Exercised
|
(10 | ) | 3.95 | |||||||||||||
Forfeited
or expired
|
(740 | ) | 6.71 | |||||||||||||
Outstanding
at January 2, 2009
|
3,647 | $ | 5.92 | 5.90 | $ | 112 | ||||||||||
Exercisable
at January 2, 2009
|
2,555 | $ | 6.90 | 4.72 | $ | 33 |
The
weighted-average grant-date fair value of options granted during the fiscal
years ended January 2, 2009, December 28, 2007, and December 29, 2006 was $1.45,
$2.94 and $4.96 per option respectively. The total fair value of
options vested during fiscal years ended January 2, 2009, December 28, 2007 and
December 29, 2006 was $1,716,000, $1,606,000 and $1,725,000, respectively. The
total intrinsic value of options exercised during the fiscal years ended January
2, 2009, December 28, 2007 and December 29, 2006 was $13,000, $296,000 and
$2,988,000, respectively.
F-39
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A summary
of the Company’s non-vested shares as of January 2, 2009 and changes during
the period is presented below:
Nonvested Shares
|
Shares
(000’s)
|
Weighted-
Average
Grant
Date
Fair Value
|
||||||
Nonvested
at December 28, 2007
|
1,055 | $ | 5.18 | |||||
Granted
|
680 | 1.45 | ||||||
Vested
|
(552 | ) | 3.11 | |||||
Forfeited
|
(91 | ) | 2.96 | |||||
Nonvested
at January 2, 2009
|
1,092 | $ | 2.25 |
As of
January 2, 2009, there was $1.5 million of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under the Plans. That cost is expected to be recognized over a
weighted-average period of 1.23 years.
The
following table summarizes information about stock options outstanding and
exercisable at January 2, 2009 (in thousands, except per share
data):
Range
of
Exercise
Prices
|
Number
Outstanding
at
January 2,
2009
|
Options
Outstanding
Weighted-Average
Remaining
Contractual
Life
|
Weighted-Average
Exercise
Price
|
Number
Exercisable
at
January 2,
2009
|
Weighted-Average
Exercise
Price
|
||||||||||||
$ 1.56 to
$ 2.30
|
469 |
8.5 years
|
$ | 2.17 | 53 | $ | 1.79 | ||||||||||
$ 2.45 to
$ 3.61
|
320 |
8.0 years
|
$ | 2.95 | 65 | $ | 3.22 | ||||||||||
$ 3.70 to
$ 5.39
|
1,386 |
6.7 years
|
$ | 4.33 | 1,077 | $ | 4.17 | ||||||||||
$ 5.62 to
$8.12
|
671 |
6.3 years
|
$ | 7.26 | 567 | $ | 7.28 | ||||||||||
$
8.80 to $11.24
|
751 |
1.8 years
|
$ | 10.78 | 743 | $ | 10.80 | ||||||||||
$13.21
to $13.63
|
50 |
1.4
years
|
$ | 13.63 | 50 | $ | 13.63 | ||||||||||
$ 1.56 to
$13.63
|
3,647 |
5.9 years
|
$ | 5.92 | 2,555 | $ | 6.90 |
Note 15 —
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. Current and long-term obligations under
capital leases are included in total current liabilities and total long-term
liabilities in the Company’s Consolidated Balance Sheets.
Estimated
future minimum lease payments under leases having initial or remaining
non-cancelable lease terms in excess of one year as of January 2, 2009 were
approximately as follows (in thousands):
Fiscal Year
|
Operating
Leases
|
Capital
Leases
|
||||||
2009
|
$ | 2,592 | $ | 1,163 | ||||
2010
|
2,148 | 811 | ||||||
2011
|
1,517 | 293 | ||||||
2012
|
1,586 | 172 | ||||||
2013
|
1,584 | 64 | ||||||
Thereafter
|
428 | — | ||||||
Total
minimum lease payments
|
$ | 9,855 | $ | 2,503 | ||||
Less
amounts representing interest
|
— | (179 | ) | |||||
$ | 9,855 | $ | 2,324 |
Rent
expense was approximately $2.5 million, $1.4 million and $1.2 million for
the years ended January 2, 2009, December 28, 2007 and
December 29, 2006, respectively.
F-40
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
Company had the following assets under capital lease at January 2, 2009 and
December 28, 2007 (in thousands):
2008
|
2007
|
|||||||
Machinery
and equipment
|
$ | 1,952 | $ | 2,484 | ||||
Furniture
and fixtures
|
1,510 | 212 | ||||||
Leasehold
improvements
|
103 | 148 | ||||||
3,565 | 2,844 | |||||||
Less
accumulated depreciation
|
1,328 | 607 | ||||||
$ | 2,237 | $ | 2,237 |
Depreciation
expense for assets under capital lease for each of the years ended
January 2, 2009, December 28, 2007, and December 29, 2006 was
approximately $856,000, $569,000 and $146,000, respectively.
Supply
Agreement
In
December 2000, the Company entered into a minimum purchase agreement with
another manufacturer for the purchase of viscoelastic solution. In January 2006,
the Company extended this agreement through December 31, 2008 and in December
2008 the Company extended the agreement through December 31, 2013 under the same
purchasing terms as the original contract. 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, excluding the U.S and Canada, as requested by the
Company. Purchases under the agreement for fiscal 2008, 2007, and 2006 were
approximately $722,000, $849,000, and $502,000, respectively.
As of
January 2, 2009, minimum future annual purchase commitments under this contract
for fiscal year 2009, and through the termination of the agreement is
approximately $600,000 per year.
Indemnification
Agreements
The
Company has entered into indemnification agreements with its directors and
officers that may require the Company: a) 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; b) to advance their expenses incurred as
a result of any proceeding against them as to which they could be indemnified;
and c) 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’ liability insurance through a third party
carrier.
Tax
Filings
The
Company’s tax filings are subject to audit by taxing authorities in
jurisdictions where it conducts business. These audits may result in assessments
of additional taxes that are subsequently resolved with the authorities or
potentially through the courts. Management believes the Company has adequately
provided for any ultimate amounts that are likely to result from these audits;
however, final assessments, if any, could be significantly different than the
amounts recorded in the consolidated financial statements.
Employment
Agreements
The
Company’s Chief Executive Officer and certain other officers have as provisions
of their employment agreements certain rights, including continuance of cash
compensation and benefits, upon a “change in control,” which may include an
acquisition of substantially all of its assets, or termination “without cause or
for good reason” as defined in the employment agreements.
F-41
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Litigation
and Claims
Parallax Medical Systems, Inc. v.
STAAR Surgical Company (California Superior Court, County of Orange, Case
No. 07CC10136). On March 2, 2009, following a jury trial in the
Superior Court of California, County of Orange, the jury awarded approximately
$2.2 million in actual damages and $2.7 million in punitive damages to Parallax
Medical Systems, Inc. Parallax is a former independent regional
manufacturer’s representative (“RMR”) of STAAR. Parallax promoted
sales of STAAR products in the southeastern region of the U.S. under a contract
that expired on July 31, 2007. Parallax originally filed its
complaint against STAAR on September 21, 2007, claiming, among other things,
that STAAR interfered with Parallax’s prospective economic advantage when it
informed a regional IOL distributor that Parallax had a covenant restricting the
sale of competing products, and that STAAR interfered with Parallax’s contracts
when STAAR caused some of its current or former subcontractors to enter into new
agreements to represent STAAR products. STAAR filed a cross-complaint
alleging breach of contract and misappropriation of trade secrets; the jury
found in favor of Parallax on the cross-complaint. The complaint
sought $48 million in actual damages and unspecified punitive
damages. On March 23, 2009, the court entered judgment based on the
verdict.
STAAR
believes that the Parallax case was incorrectly
decided as to liability, the amount of compensatory damages and the
appropriateness and amount of punitive damages. STAAR intends to
vigorously contest the outcome of this case through post-trial proceedings and,
if necessary, appeal. The court has stayed the execution of judgment
and collection of damages until after the completion of post-trial motions and
the deadline to file notice of appeal, which is a period of approximately three
months. Parallax has notified STAAR
that it intends to seek an award of attorney’s fees, which STAAR will oppose on
the ground that there is no legal or factual basis for such an
award. If the post-trial motions are unsuccessful and STAAR files an
appeal, it would need to obtain a surety bond of 1.5 times the judgment amount,
fully secured with cash collateral, unless the requirement is reduced by the
court, to avoid enforcement of the judgment pending resolution of the
appeal.
Moody v. STAAR Surgical Company;
(California Superior Court, County of Orange, Case No.
07CC10132). Scott C. Moody, Inc., also a former RMR of STAAR, filed a
complaint against STAAR on the same day that Parallax filed its
complaint. Moody promoted sales of STAAR products in the southwestern
region of the U.S., under a contract that, like Parallax’s, expired on July 31,
2007. Like Parallax, Moody claims that STAAR interfered with Moody’s
prospective economic advantage when it informed a regional IOL distributor that
Moody had a covenant restricting the sale of competing products, and that STAAR
interfered with Moody’s contracts when STAAR engaged two sales representatives
who had previously contracted with Moody. The complaint seeks $32
million in actual damages and unspecified punitive damages. STAAR has
filed a cross-complaint alleging breach of contract and misappropriation of
trade secrets.
The Moody case is currently
scheduled to be tried before a jury beginning on May 25, 2009, before a
different judge than the Parallax
case. STAAR believes that the evidence to be presented in
Moody does not support liability for interference with prospective business
advantage or interference with Moody’s contracts with former subcontractors, and
does not support damages at a level that is material to STAAR. While
the Parallax and Moody cases have many facts
in common, significant factual differences exist. However, the
plaintiffs in both cases allege that the same conduct of STAAR interfered with
the RMR’s prospective business advantage, and Moody will also be tried
before a jury. Moody has also indicated it will seek punitive
damages. Due to
the uncertainty of this case, the Company does not believe an unfavorable
outcome is neither probable nor remote and cannot estimate an amount or range of
loss from the outcome of this case.
From time
to time the Company is subject 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. STAAR maintains insurance coverage for product liability
claims. While the Company does not know of any other claims known is likely to
have a material adverse effect on its financial condition or results of
operations, new claims or unexpected results of existing claims could lead to
significant financial harm.
F-42
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 16 —
Related Party Transactions
The
Company has had significant related party transactions as discussed in Notes 10,
14, and 15.
In
addition to senior notes (see Note 10), the Company holds other various
promissory notes from employees 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 employees and included in prepaids,
deposits, and other current assets at January 2, 2009 and December 28, 2007 were
$15,000 and $81,000, respectively.
Note 17 —
Supplemental Disclosure of Cash Flow Information
Interest
paid was $609,000, $249,000 and $175,000 for the years ended January 2, 2009,
December 28, 2007, and December 29, 2006, respectively. Income taxes paid
amounted to approximately $598,000, $795,000 and $731,000 for the years ended
January 2, 2009, December 28, 2007, and December 29, 2006,
respectively.
The
Company’s non-cash investing and financing activities were as follows (in
thousands):
2008
|
2007
|
2006
|
||||||||||
Non-cash
investing activities and financing activities:
|
||||||||||||
Acquisition of Canon Staar
|
$ | 7,147 | $ | — | $ | — | ||||||
Applied 2007 advance payment on acquisition of Canon Staar
|
(4,000 | ) | — | — | ||||||||
Applied 2007 deferred acquisition costs
|
(197 | ) | — | — | ||||||||
Purchase of property and equipment on terms
|
1,014 | 1,210 | 1,228 | |||||||||
Issuance
of preferred stock
|
6,800 | — | — | |||||||||
Issuance
and registration costs of preferred stock included in accounts
payable and accrued liabilities
|
(17 | ) | — | — | ||||||||
Deferred
acquisition costs included in accounts payable
|
— | 187 | — | |||||||||
Notes receivable reserve
|
— | — | (331 | ) | ||||||||
Other charges
|
— | — | 331 | |||||||||
Warrants issued with Broadwood notes
|
— | 842 | — |
The
Company had classified the proceeds from loans to officers and directors in
fiscal years 2006 as an investing activity in the Company’s Consolidated
Statements of Cash Flows in accordance with paragraph 16 of Statement of
Financial Accounting Standard No. 95, Statement of Cash Flows (“SFAS 95”).
Alternatively, the Company could have classified the proceeds from loans to
officers and directors as a financing activity in accordance with paragraph 18
of SFAS No. 95. The Company chose the foregoing classification because it
believes that the presentation is more consistent with the position that the
notes are investments to be collected, and not vehicles used to fund issuances
of the Company’s common stock.
The
effect on investing and financing activities had the Company chosen the
alternative classification would have been as follows (in
thousands):
As Presented
|
Alternative
Presentation
|
|||||||
2006
|
2006
|
|||||||
Net
cash provided by (used in) investing activities
|
$ | 140 | $ | (1,041 | ) | |||
Net
cash provided by financing activities
|
2,795 | 3,976 |
During
2006, the Company settled the last of its notes receivables from a former
director. At January 2, 2009 and December 28, 2007, note receivable from a
former director was $0.
F-43
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 18 —
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):
2008
|
2007
|
2006
|
||||||||||
Basic
weighted average shares outstanding
|
29,474 | 28,121 | 25,227 | |||||||||
Diluted
effect of stock options and warrants
|
— | — | — | |||||||||
Diluted
weighted average shares outstanding
|
29,474 | 28,121 | 25,227 |
Potential
common shares of 6.0 million, 3.6 million, and 2.6 million for the fiscal years
ended January 2, 2009, December 28, 2007, and December 29, 2006, respectively,
were excluded from the computation as the shares would have had an anti-dilutive
effect.
Note 19 —
Geographic and Product Data
The
Company markets and sells its products in approximately 50 countries and has
manufacturing sites in the United States, Switzerland and Japan (see Note 2).
Other than the United States, Germany, Australia and Japan (for 2008 only), 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, Australia, Japan and
other locations for each year, is set forth below (in thousands):
2008
|
2007
|
2006
|
||||||||||
Net
sales to unaffiliated customers
|
||||||||||||
U.S.
|
$ | 18,927 | $ | 19,721 | $ | 22,778 | ||||||
Germany
|
25,124 | 23,731 | 21,135 | |||||||||
Australia
|
2,253 | 2,521 | 2,178 | |||||||||
Japan
|
13,485 | 423 | 295 | |||||||||
Other
|
15,105 | 12,967 | 10,565 | |||||||||
Total
|
$ | 74,894 | $ | 59,363 | $ | 56,951 |
100% of
the Company’s sales are generated from the ophthalmic surgical product segment
and, therefore, the Company operates as one operating segment for financial
reporting purposes. The Company’s principal products are IOLs used in cataract
surgery, ICLs used in refractive surgery and other surgical products used
primarily in cataract surgery. During 2008, the Company reclassified the
components of the segment from products used in cataract, refractive, and
glaucoma surgery to IOLs, ICLs and other surgical products as the Company
believes this classification provides more meaningful
information. The composition of the Company’s net sales by product
line is as follows (in thousands):
Net
Sales by Product Line
2008
|
2007
|
2006
|
||||||||||
IOLs
|
$ | 32,926 | $ | 23,379 | $ | 25,861 | ||||||
ICLs
|
19,069 | 15,368 | 12,093 | |||||||||
Other
Surgical Products
|
22,899 | 20,616 | 18,997 | |||||||||
Total
|
$ | 74,894 | $ | 59,363 | $ | 56,951 |
The
composition of the Company’s long-lived assets, consisting of property and
equipment, patents and licenses, customer relationships and developed
technologies between those in the United States, Germany, Switzerland, Japan,
Australia and other countries is set forth below (in thousands):
2008
|
2007
|
|||||||
Long-lived
assets
|
||||||||
U.S.
|
$ | 5,194 | $ | 7,697 | ||||
Germany
|
1,139 | 1,158 | ||||||
Switzerland
|
857 | 836 | ||||||
Japan
|
4,275 | — | ||||||
Australia
|
120 | 40 | ||||||
Total
|
$ | 11,585 | $ | 9,731 |
F-44
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 20 —
Subsequent Event
On March
2, 2009, a verdict was rendered in the case of Parallax Medical Systems, Inc. v.
STAAR Surgical Company (California Superior Court, County of Orange, Case No.
07CC10136). Parallax, a former regional manufacturer’s representative
of the Company, had sought $48 million in actual damages and unspecified
punitive damages for alleged willful and negligent interference with business
advantage. Parallax alleged that the Company interfered when it informed a
regional IOL distributor that Parallax’s contract had a covenant restricting the
sale of competing products. Following trial, a jury awarded Parallax
approximately $2.2 million in actual damages and $2.7 million in punitive
damages.
On March
23, 2009, a California court entered judgment against STAAR for $2.2 million in
compensatory damages and $2.7 million in punitive damages in Parallax Medical
Systems, Inc. v. STAAR Surgical Company, a case alleging that STAAR willfully
and negligently interfered with the prospective business of a former regional
manufacturer’s representative. While STAAR intends to vigorously
contest this outcome through post-trial proceedings and, if necessary, appeal,
the cost of satisfying the judgment or posting a bond for appeal exceeds STAAR’s
current capital resources. The court has stayed the execution of
judgment and collection of damages until after the completion of post-trial
motions and the deadline to file notice of appeal, which is a period of
approximately three months. If STAAR is unable to obtain additional capital to
satisfy the judgment or post an appeal bond before the expiration of any
discretionary stay of the court, STAAR could be required to petition for
protection under federal bankruptcy laws, which could further impair its
financial position and liquidity, and would likely result in a default of its
other debt obligations. Among the
events of default in the Senior Promissory Note (“the Note”) held by Broadwood
Partners, L.P. is any judgment in excess of $500,000 against the Company that
“shall remain unpaid.” Because STAAR is not required to pay the Parallax judgment until the
expiration of the stay 40 days after final judgment, and because the amount to
be paid pursuant to the judgment will not be fixed until final judgment is
rendered on or before May 22, 2009, STAAR believes that as of the date of this
Report the Parallax
judgment should not be deemed “unpaid” and that an event of default under
the Senior Promissory Note would not have occurred. To avoid dispute over this
matter and to secure the lender’s temporary waiver of remedies for an event of
default during the stay of the Parallax judgment, STAAR and
Broadwood entered into a Temporary Waiver Agreement on April 2,
2009.
F-45
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 21 —
Quarterly Financial Data (Unaudited)
Summary
unaudited quarterly financial data from continuing operations for fiscal 2008,
2007 and 2006 is as follows (in thousands except per share data):
January 2, 2009
|
1st Qtr.
|
2nd Qtr.
|
3rd Qtr.
|
4th Qtr.
|
||||||||||||
Revenues
|
$ | 17,960 | $ | 20,665 | $ | 18,112 | $ | 18,157 | ||||||||
Gross
profit
|
7,755 | 11,534 | 10,458 | 10,360 | ||||||||||||
Net
loss
|
(8,940 | ) | (2,545 | ) | (2,250 | ) | (9,460 | ) | ||||||||
Basic
and diluted loss per share
|
(0.30 | ) | (0.09 | ) | (0.08 | ) | (0.32 | ) |
December 28, 2007
|
1st Qtr.
|
2nd Qtr.
|
3rd Qtr.
|
4th Qtr.
|
||||||||||||
Revenues
|
$ | 14,917 | $ | 14,932 | $ | 13,629 | $ | 15,885 | ||||||||
Gross
profit
|
7,295 | 7,237 | 6,770 | 7,964 | ||||||||||||
Net
loss
|
(3,521 | ) | (4,357 | ) | (3,830 | ) | (4,291 | ) | ||||||||
Basic
and diluted loss per share
|
(0.14 | ) | (0.16 | ) | (0.13 | ) | (0.15 | ) |
December 29, 2006
|
1st Qtr.
|
2nd Qtr.
|
3rd Qtr.
|
4th Qtr.
|
||||||||||||
Revenues
|
$ | 13,465 | $ | 14,733 | $ | 13,313 | $ | 15,440 | ||||||||
Gross
profit
|
6,275 | 7,044 | 6,333 | 6,498 | ||||||||||||
Net
loss
|
(3,362 | ) | (3,218 | ) | (2,789 | ) | (5,675 | ) | ||||||||
Basic
and diluted loss per share
|
(0.14 | ) | (0.13 | ) | (0.11 | ) | (0.22 | ) |
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.
Significant
Fourth Quarter Adjustments
During
the fourth quarter of 2008, the Company recorded two significant
adjustments. First, the Company recorded an impairment loss of
$1,023,000 related to certain patents that the Company determined were impaired
pursuant to its review of long-lived assets under the provisions of SFAS No. 144
(see Note 8.) Second, the Company recorded a $4,900,000 loss related
to the March 2, 2009 Parallax verdict as discussed in Note 20. Both
fourth quarter adjustments are included in Other Expenses as part of total
operating loss on the consolidated statements of operations for the fiscal year
ended 2008.
F-46
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
REPORT
ON SCHEDULE
To the
Board of Directors
STAAR
Surgical Company
Monrovia,
California
The
audits referred to in our report dated April 2, 2009 relating to the
consolidated financial statements of STAAR Surgical Company and Subsidiaries,
which contains an explanatory paragraph regarding the Company’s ability to
continue as a going concern, and which is contained in Item 8 of this Form 10-K
also included the audit of the financial statement schedules listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.
In our
opinion such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
By: |
/s/ BDO
Seidman,
LLP
|
Los
Angeles, California
April 2,
2009
F-47
STAAR
SURGICAL COMPANY AND SUBSIDIARIES
SCHEDULE II —
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A
|
Column B
|
Column C
|
Column D
|
Column E
|
||||||||||||
Description
|
Balance
at
Beginning
of Year
|
Additions
|
Deductions
|
Balance
at
End
of
Year
|
||||||||||||
(In
thousands)
|
||||||||||||||||
2008
|
||||||||||||||||
Allowance
for doubtful accounts and sales returns deducted from accounts receivable
in balance sheet
|
$ | 684 | $ | 335 | $ | 173 | $ | 846 | ||||||||
Deferred
tax asset valuation allowance
|
45,419 | 2,289 | — | 47,708 | ||||||||||||
$ | 46,103 | $ | 2,624 | $ | 173 | $ | 48,554 | |||||||||
2007
|
||||||||||||||||
Allowance
for doubtful accounts and sales returns deducted from accounts receivable
in balance sheet
|
$ | 690 | $ | 132 | $ | 138 | $ | 684 | ||||||||
Deferred
tax asset valuation allowance
|
40,436 | 4,983 | — | 45,419 | ||||||||||||
$ | 41,126 | $ | 5,115 | $ | 138 | $ | 46,103 | |||||||||
2006
|
||||||||||||||||
Allowance
for doubtful accounts and sales returns deducted from accounts receivable
in balance sheet
|
$ | 480 | $ | 348 | $ | 138 | $ | 690 | ||||||||
Deferred
tax asset valuation allowance
|
33,662 | 6,774 | — | 40,436 | ||||||||||||
Notes
receivable reserve
|
1,246 | — | 1,246 | — | ||||||||||||
$ | 35,388 | $ | 7,122 | $ | 1,384 | $ | 41,126 |
F-48