STAAR SURGICAL CO - Quarter Report: 2013 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

Form 10-Q

(Mark One)

Commission file number: 0-11634

________________

STAAR SURGICAL COMPANY

(Exact name of registrant as specified in its charter)

1911 Walker Avenue

Monrovia, California 91016

(Address of principal executive offices)

(626) 303-7902

(Registrant’s telephone number, including area code))

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes þ     No 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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

The registrant has 36,746,714 shares of common stock, par value $0.01 per share, issued and outstanding as of April 30, 2013.

STAAR SURGICAL COMPANY

INDEX

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

STAAR SURGICAL COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except par value amounts)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

STAAR SURGICAL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 29, 2013

(Unaudited)

Note 1 — Basis of Presentation and Significant Accounting Policies

The consolidated financial statements of the Company present the financial position, results of operations, and cash flows of STAAR Surgical Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Commission. In accordance with those rules and regulations certain information and footnote disclosures normally included in comprehensive financial statements have been condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet as of December 28, 2012 derives from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2012.

The condensed consolidated financial statements for the three months ended March 29, 2013 and March 30, 2012, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial condition and results of operations. The results of operations for the three months ended March 29, 2013 and March 30, 2012 are not necessarily indicative of the results to be expected for any other interim period or for the entire year.  

Each of the Company's reporting periods ends on the Friday nearest to the quarter ending date and generally consists of 13 weeks.  Unless the context indicates otherwise “we,” “us,” the “Company,” and “STAAR” refer to STAAR Surgical Company and its consolidated subsidiaries.

Note 2 — Inventories

Inventories, net are stated at the lower of cost, determined on a first-in, first-out basis, or market and consisted of the following (in thousands):

Note 3 — Prepaids, Deposits, and Other Current Assets

Prepaids, deposits, and other current assets consisted of the following (in thousands):

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 29, 2013

(Unaudited)

Note 4 — Property, Plant and Equipment

Property, plant and equipment consisted of the following (in thousands):

Note 5 – Amortizable Intangible Assets

Amortizable intangible assets consisted of the following (in thousands):

Note 6 – Other Current Liabilities

Other current liabilities consisted of the following (in thousands):

⁽¹⁾No item in “Other” above exceeds 5% of the total other current liabilities

Note 7 – Pension Plans

The following table summarizes the components of net periodic pension cost recorded for the Company’s defined benefit pension plans (in thousands):

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 29, 2013

(Unaudited)

During the three months ended March 29, 2013 and March 30, 2012, the Company made cash contributions totaling approximately $59,000 and $68,000 to its Swiss pension plan and expects to make additional cash contributions totaling approximately $176,000 during the remainder of 2013. The Company is not required to and does not make contributions to its Japan pension plan.

Note 8 — Basic and Diluted Income Per Share

The following table sets forth the computation of basic and diluted net income per share (in thousands except per share amounts):

The following tables sets forth (in thousands) the weighted average number of options to purchase shares of common stock and restricted stock, which were not included in the calculation of diluted per share amounts because the effects would be anti-dilutive.

Note 9 — Geographic and Product Data

The Company markets and sells its products in over 60 countries and has manufacturing sites in the United States, Switzerland and Japan. Other than the United States, Japan, Korea, China, and Spain the Company does not conduct business in any country in which its sales exceed 5% of consolidated sales. Sales are attributed to countries based on location of customers. The composition of the Company’s net sales to unaffiliated customers is set forth below (in thousands):

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 29, 2013

(Unaudited)

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 implantable Collamer lenses (“ICLs”) used in refractive surgery and intraocular lenses (“IOLs”) used in cataract surgery. The composition of the Company’s net sales by product line is as follows (in thousands):

The Company sells its products internationally, which subjects the Company to several potential risks, including fluctuating foreign currency 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 10 — Stock-Based Compensation

The cost that has been charged against income for stock-based compensation is set forth below (in thousands):

Stock Option Plans

The Amended and Restated 2003 Omnibus Equity Incentive Plan (“the Plan”) provides for various forms of stock-based incentives. To date, of the available forms of awards under the Plan, the Company has granted only stock options, restricted stock, unrestricted share grants, and may grant in the future performance contingent shares. Options under the plan are granted at fair market value on the date of 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. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plan). Pursuant to the Plan, options for 3,830,779 shares were outstanding at March 29, 2013 with exercise prices ranging between $0.95 and $11.02 per share. Restricted stock grants under the Plan generally vest over a period of one, three or four years. There were 309,500 shares of restricted stock outstanding at March 29, 2013. As of March 29, 2013, there were 274,035 shares authorized and available for grants under the Plan.

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 29, 2013

(Unaudited)

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 9.92% estimated forfeiture rate used in the model for fiscal year 2013 option grants based on historical forfeiture experience. The risk-free rate is based on the U.S. Treasury yield curve corresponding to the expected term at the time of the grant.

A summary of option activity under the Plan as of March 29, 2013 is presented below:

Note 11 — Manufacturing Consolidation Project and Tax Strategy

Since 2011 the Company devoted significant resources to two initiatives: a project to consolidate global manufacturing and product development as part of a strategy to optimize its global organization for tax purposes. The goal of both of these strategies is to continue the Company’s improvement in gross profit margin by reducing costs and to position the Company for future growth. STAAR currently manufactures its products in four facilities worldwide. It has developed a plan to substantially complete its consolidation of manufacturing in a single site at its Monrovia, California location by the end of 2013, which is expected subsequently to yield significant savings in cost of goods and to lower its global administrative and regulatory costs and reduce income taxes. Based on our efforts, we expect our effective tax rate to decline from approximately 50% in 2012 to 40% in 2013.

The Company expects these initiatives to cost approximately $6 million over a three-year period, of which it has incurred approximately $4.6 million to date. These expenses are included in “other general and administrative expenses” in consolidated statement of income for the period ended March 29, 2013. Expenses consisted of professional fees to advisors and consultants, travel, salaries and severance accrual. The Company expects to spend approximately $2.5 million in manufacturing consolidation expenses in 2013.

A summary of the activity for these initiatives is presented below as of March 29, 2013 (in thousands):

STAAR SURGICAL COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 29, 2013

(Unaudited)

Note 12 — New Accounting Pronouncements

During the three months ended March 29, 2013, there were no new accounting pronouncements that would have a material effect on our unaudited condensed consolidated financial statements. For a description of recent accounting pronouncements relevant to us, please refer “Recent Accounting Pronouncements” included in Note 1 of our Annual Report on Form 10-K for the year ended December 28, 2012.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The matters addressed in this Item 2 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. Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and STAAR can give no assurances that its expectations will prove to be correct. Actual results could differ materially from those described in this report because of numerous factors, many of which are beyond the control of STAAR. These factors include, without limitation, those described in our Annual Report on Form 10-K for the fiscal year ended December 28, 2012. STAAR undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

The following discussion should be read in conjunction with STAAR’s interim condensed financial statements and the related notes provided under “Item 1— Financial Statements” above.

Overview

STAAR Surgical Company (“we,” “us,” the “Company,” and “STAAR”) designs, develops, manufactures and sells implantable lenses for the eye and injector devices used to deliver these lenses into the eye through a small incision. We are the world’s leading manufacturer of intraocular lenses used in corrective or “refractive” surgery, and we also make lenses for use in surgery to treat cataracts. All of the lenses we make are foldable, which allows the surgeon to insert them into the eye through a small incision during minimally invasive surgery. Refractive surgery is performed to treat the type of visual disorders that have traditionally been corrected using eyeglasses or contact lenses. We refer to our lenses used in refractive surgery as “implantable Collamer® lenses” or “ICLs” and market them under the Visian® brand name. The field of refractive surgery includes both lens-based procedures, using products like the Visian ICL®, and laser-based procedures like LASIK. Successful refractive surgery can correct common vision disorders such as myopia, hyperopia and astigmatism. Astigmatism is a condition that causes blurred vision when an irregular shape of the cornea prevents light from focusing properly on the retina. Cataract surgery is a common outpatient procedure where the eye’s natural lens that has become cloudy with age is removed and replaced with an artificial lens called an intraocular lens (IOL) to restore the patient’s vision.

STAAR Surgical Company, Visian®, Collamer®, STAARVISC®, Elastimide®, nanoFLEX® nanoPOINT®, CentraFLOW™, AquaPORT™, Epiphany® and AquaFlow® 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.

Products

A detailed description of STAAR’s business appears in our Annual Report on Form 10-K for the fiscal year ended December 28, 2012, along with a glossary explaining many of the specialized terms used in describing our products and our business. We recommend that readers unfamiliar with STAAR refer to that description.

ICLs - Implantable Collamer Lenses for RefractiveSurgery. Sales of refractive lenses make up over half of our total sales. Made from our proprietary biocompatible Collamer material, highlights STAAR’s family of Visian ICL products are as follows:

IOLs - Intraocular Lenses for Cataract Surgery. Our range of foldable IOLs for patients undergoing cataract surgery includes the following:

Because most cataract patients are elderly, government agencies or government sponsored entities generally pay the cost of IOLs in our major markets, including the U.S. As a result, cataract procedure volumes will likely remain relatively stable even under adverse conditions in the general economy. However, changes in reimbursement policy under these agencies and entities can reduce our selling prices or reduce the volume of cataract procedures.

Other Surgical Products. We also sell other instruments, devices, and equipment used in cataract or refractive surgery, which we either manufacture or have manufactured for us. However, we have been deemphasizing these products since 2009 because of their lower overall gross profit margins.

Operations

STAAR operates its global administrative headquarters and a manufacturing facility in Monrovia, California, and also maintains manufacturing facilities in Nidau, Switzerland, Chiba Prefecture, Japan, and Aliso Viejo, California.

STAAR is implementing a project to consolidate its manufacturing into a single site at its Monrovia, California location by the end of 2013, which we expect to yield significant savings in cost of goods, lower our global administrative and regulatory costs and reduce income taxes. During the first quarter of 2013, all non-sterile silicone IOLs for Japan were manufactured in the U.S. The Company shipped the first Visian ICLs manufactured in the U.S. during the first quarter of 2013 to approved markets outside the U.S. This project, which is subject to significant risks, is further described under Note 12, “Manufacturing Consolidation Project and Tax Strategy.”

Strategy and Key Operational Metrics

STAAR’s strategy is to be valued as a leading global provider of innovative intraocular lens system technologies. STAAR employs a commercialization strategy that focuses on achieving sustainable profitable growth.

STAAR’s key operational metrics for 2013 are guided by two principal strategic goals: to achieve and maintain profitability and to lay the groundwork for further growth. In pursuit of these goals, STAAR has aligned its business initiatives during 2013 along four key operational metrics it uses to gauge its success during the year. Those metrics are as follows:

- As discussed below in “Results of Operations,” our total revenue increased by 16% in the first quarter of 2013.

- As discussed below in “Results of Operations,” our gross profit increased by 90 basis points in the first quarter of 2013 compared to full year 2012.and 250 basis points improvement when compared to fourth quarter of 2012.

- As discussed below in “Results of Operations,” we achieved net income of $0.5 million in the first quarter of 2013.

- The Company’s consolidation efforts are proceeding according to plans and the Company expects this to continue during the remainder of 2013.

Other Highlights

In the first quarter of 2013, ICLs grew in ten of our eleven targeted markets by 25%, with particular strength in Europe and the Middle East. The effect of foreign currency exchange, particularly the strength of the Japanese Yen compared to the U.S. Dollar, reduced total sales by $750,000 during the first quarter of 2013. We expect this trend to continue during the second quarter of 2013. We also reported a $1,034,000 charge for stock-based compensation. Seventy thousand warrants issued on March 21, 2007 to Broadwood Partners, L.P., expired on March 21, 2013, and were unexercised.

With the transition to a direct sales model in Spain, sales grew in Spain by 156%. As part of our early transition to a direct distribution model in Spain, we made $422,000 in payments to our former distributor. These payments ended in the first quarter of 2013 and will not impact expenses during the remainder of 2013. Backorders of our preloaded acrylic IOLs in Europe were $900,000 due to demand for our KS-SP and KS-X products and the supply constraints we continue to experience from a third party supplier. This backorder position is expected to continue to limit IOL sales for the entire year and we are evaluating potential options to meet this demand. STAAR continues its manufacturing consolidation efforts in the first quarter of 2013 in preparation of transferring Swiss and Japanese manufacturing activities to our Monrovia facility. Last year, as part of our manufacturing consolidation plan, we expanded into approximately 26,000 square feet of space contiguous to our Monrovia headquarters. In the first quarter of 2013, we incurred $550,000 in costs and we expect to spend an additional $264,000 during the remainder of 2013 to complete the build-out of this leased real property. Also, the Company launched the nanoFlex Toric IOL for Europe. In compliance with the Affordable Care Act, in the first quarter of 2013, the Company recorded $59,000 in Medical Device Excise Tax expense. On April 11, 2013, an FDA inspector performed an inspection of our Aliso Viejo, California facility. There were no findings issued on a Form 483 and the inspector indicated that we would receive a ‘no action indicated’ report.

Status of Regulatory Submissions. Regarding our PMA Supplement submission to the FDA seeking approval for the TICL, by a letter dated April 30, 2012 the FDA rejected our most recent proposed approach to respond to the FDA’s concerns regarding timing of follow-up visits for certain patients in the study cohort at certain sites. On November 15, 2012, STAAR submitted to the FDA (1) clinical data showing no statistical difference in the clinical outcomes with or without the patient data that was obtained outside the study windows, (2) engineering data regarding the lens design, and (3) a validation report for the Toric ICL power calculation software. STAAR remains in dialogue with the agency regarding our PMA Supplement, and has responded to a series of questions from the FDA in the first quarter of 2013. STAAR cannot predict when, or if, the FDA will grant approval of the TICL for use in the United States.

On October 9, 2012, STAAR submitted to the FDA a 180 day PMA Supplement regarding the V4c version of the Visian ICL. On February 12, 2013, in response to a request by the FDA, we submitted a Pre-Submission for the PMA Supplement. The FDA expects to respond to our proposal by the end of May 2013 due to an administrative oversight at the FDA. We’ll continue to seek approval for our key products in our target markets.

Critical Accounting Policies

This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses and analyzes data in our unaudited Condensed Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles. Preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual conditions may differ from our assumptions and actual results may differ from our estimates.

An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the three months ended March 29, 2013 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 28, 2012.

Results of Operations

The following table shows the percentage of our total sales represented by the specific items listed in our statements of operations for the periods indicated, and the percentage by which these items increased or decreased over the prior period.

* Denotes change is greater than +100%.

Net Sales

Net sales for the three months ended March 29, 2013 were $18.0 million, an increase of 16.1% compared with $15.5 million reported during the same period of 2012. Changes in currency had a $0.7 million unfavorable impact on net sales for the first quarter of 2013.

Total ICL sales for the three months ended March 29, 2013 were $10.6 million, an increase of 23.5% compared with $8.6 million reported during the same period of 2012. The increase in ICL sales is due to increased sales in the Company’s three geographic regions, Europe, Middle East, Africa and Latin America (EMEA), Asia Pacific (APAC) and North America. Sales in EMEA grew 59%, led by Spain which grew 156% and the Middle East, which grew 94%. Sales in APAC and North America each grew 11%, led by growth in the U.S. +11%, India +22%, Japan +14%, China and Korea (each +7%). ICL volume increased 18% and average selling prices (ASPs) increased 5%. The mix of ICL (59%) versus TICL (41%) was unchanged from the same prior year period. ICL sales represented 59.1% and 55.5% of the sales, respectively, for the three months ended March 29, 2013 and March 30, 2012.

Total IOL sales for the three months ended March 29, 2013 were $6.3 million, a decrease of 0.2% compared with $6.4 million reported during the same period of 2012. Although sales of our Preloaded acrylic IOL grew 84%, this growth was offset by decreased sales of Preloaded Silicone and Collamer IOLs. IOL sales were negatively impacted due to approximately $900,000 in backorders from the Company’s acrylic IOL supplier and the negative effect of foreign currency exchange which totaled $646,000. IOL sales represented 35.3% and 41.0% of total net sales respectively, for the three months ended March 29, 2013 and March 30, 2012.

Other product sales for the three months ended March 29, 2013 were $1.0 million, an increase of 87.4% compared with the $0.5 million reported during the same period of 2012. This increase was due to increased sales of acrylic preloaded injectors parts to the Company’s acrylic lens supplier to support the buildup of acrylic preloaded product supply.

Gross Profit

Gross profit for the first quarter was $12.7 million, or 70.3% of revenue, compared with $10.9 million, or 70.3% of revenue, in the prior year period. Gross margin expansion was limited primarily by a large increase in very low margin IOL injector systems sales to a third party supplier for the buildup of their acrylic preloaded product supply, which appears in Other Product sales category. The increase in sales of injector parts negatively impacted margins by approximately 170 basis points.

General and Administrative

General and administrative expenses for the quarter were $4.0 million, an increase of 2.5% when compared with $3.9 million reported last year. The increase is due primarily to an increase in stock based compensation expense. General and administrative expenses were favorably impacted by foreign currency exchange by approximately $70,000.

Marketing and Selling

Marketing and selling expenses for the quarter were $5.3 million, an increase of 13.4% when compared with $4.7 million reported last year. The increase is due primarily to increased expense associated with direct distribution transition in Spain and increased headcount globally. Transitional expenses in Spain, which totaled $442,000 for the quarter, ended at the beginning of March 2013. Marketing and selling expenses were favorably impacted by foreign currency exchange by approximately $197,000.

Research and Development

Research and development expense for the quarter were $1.4 million, a decrease of 11.6% when compared with $1.5 million reported last year. The decrease was primarily due to transfer of activities from Japan to the US which resulted in improved efficiencies. Research and development expenses were favorably impacted by foreign currency exchange by approximately $27,000.

Other General and Administrative Expenses

Other general and administrative expenses for the quarter were $0.9 million, compared with $0.6 million reported last year. The increase is due to costs associated with the wind up of manufacturing operations in Japan which should significantly decrease in the remaining months of the year, particularly in the second half. The Company expects to incur a total of approximately $2.5 million in manufacturing consolidation expenses in 2013. Other general and administrative expenses were favorably impacted by foreign currency exchange by approximately $57,000.

Other Income, (Expense) Net

* Denotes change is greater than +100%.

Other expense, for the quarter was $0.3 million compared to other income of $0.2 million in the first quarter of 2012. The year over year change in other income (expense), net for both periods is due to foreign currency exchange loss recorded in first quarter of 2013 compared to foreign currency exchange gain reported last year, and a decrease in other income resulting from the release of escrow funds in 2012 related to the sale of our former German distributor.

Liquidity and Capital Resources

STAAR’s liquidity requirements arise from the funding of our working capital needs, primarily inventory and accounts receivable. Our primary sources for working capital and capital expenditures are cash flows from operating activities, proceeds from the exercise of stock options, and borrowings under our credit facilities. Our liquidity also depends, in part, on customers paying within credit terms, and any extended delays in payments or changes in credit terms given to major customers may have an impact on STAAR’s cash flow. In addition, any abnormal product returns or pricing adjustments may also affect our short-term funding.

STAAR believes its current cash balances, coupled with cash flow from operating activities will be sufficient to meet its working capital requirements for the foreseeable future, including the estimated $6 million cost associated with the manufacturing consolidation plan previously discussed by us and further described in Note 11, “Manufacturing Consolidation Project and Tax Strategy.” If the need for financing arises, STAAR cannot assure that it will be available on acceptable terms, if at all. STAAR’s Japanese and Swiss subsidiaries have bank lines of credit in place for working capital purpose, but STAAR does not maintain such a credit line in the U.S.

STAAR’s cash balances have steadily increased over the last two years. To the extent STAAR’s cash balances exceed levels needed for working capital and as a cushion for unforeseen demands, STAAR intends to invest its cash in expanding and improving its business. It does not anticipate paying dividends from its earnings for the foreseeable future.

Overview of Changes in Cash and Cash Equivalents and Other Working Capital Accounts.

As of March 29, 2013 and December 28, 2012, respectively, STAAR had $19.2 million and $21.7 million, of cash and cash equivalents.

Net cash used in operating activities was $0.4 million for the three months ended March 29, 2013 and March 30, 2012 and consisted of net income of $0.5 million, plus $1.6 million in non-cash items, offset by $2.5 million decrease in working capital for the three months ended March 29, 2013.

Net cash used in investing activities was $1.2 million for the three months ended March 29, 2013, compared to $0.2 million in net cash provided by investing activities for the three months ended March 30, 2012. Net cash used in investing activities was mainly due to $1.2 million in acquisition of property, plant and equipment.

Net cash used by financing activities was $0.2 million for the three months ended March 29, 2013, compared with $0.6 million in net cash provided by financing activities for the three months ended March 30, 2012. The decrease in cash financing activities was due to decrease in proceeds from exercise of stock options.

Credit Facilities, Contractual Obligations and Commitments

Accrued Termination Benefits for Manufacturing Consolidations Project

The Company has accrued $0.6 million as of March 29, 2013 in termination benefit costs in connection with its manufacturing consolidation project. The accrual represents STAAR’s current best estimate of the termination benefits that will be paid to the eligible employees.

Lines of Credit

The Company’s wholly owned Japanese subsidiary, STAAR Japan, has an agreement, as amended on December 28, 2012, with Mizuho Bank, which provides for borrowings of up to 500,000,000 Yen (approximately $5.3 million based on the rate of exchange on March 29, 2013), at an interest rate equal to the Tokyo short-term prime interest rate (approximately 1.475% as of March 29, 2013). The Company had 500,000,000 Yen outstanding on the line of credit as of March 29, 2013 and December 28, 2012 (approximately $5.3 million and $5.8 million based on the foreign currency exchange rates on March 29, 2013 and December 28, 2012). As of March 29, 2013 there were no available borrowings under the line.

In August 2010, the Company’s wholly-owned Swiss subsidiary, STAAR Surgical AG, entered into a credit agreement with Credit Suisse (the “Bank”). The credit agreement provides for borrowings of up to 1,000,000 Swiss Francs (approximately $1.1 million at the rate of exchange on March 29, 2013), to be used for working capital purposes. There were no borrowings outstanding as of March 29, 2013 and the full amount of the line was available for borrowing.

Covenant Compliance

The Company is in compliance with the covenants of its credit facilities as of the date of this report. 

Capital Lease Obligations

STAAR leases certain property, plant, and equipment under non-cancelable capital lease agreements. These leases vary in amount, duration, and rates.

Estimated future minimum payments under capital lease obligations were as follows (in thousands):

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as that term is defined in the rules of the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company’s qualitative and quantitative market risk since the disclosure in the Company’s Annual Report on Form 10-K for the year ended December 28, 2012.

ITEM 4. CONTROLS AND PROCEDURES

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 CEO and CFO, of the effectiveness of the design and operation of the disclosure controls and procedures of STAAR Surgical Company and its subsidiaries (the “Company”). Based on that evaluation, our CEO and CFO concluded, as of the end of the period covered by this quarterly report on Form 10-Q, that our disclosure controls and procedures were effective. For purposes of this statement, the term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management, including the CEO and the CFO, do not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud or material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations on all internal control systems, our internal control system can provide only reasonable assurance of achieving its objectives and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and can provide only reasonable, not absolute, assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances, or the degree of compliance with the policies and procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 29, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time the Company may be subject to various claims and legal proceedings arising out of the normal course of our business. These claims and legal proceedings may relate to contractual rights and obligations, employment matters, or claims of product liability. STAAR maintains insurance coverage for product liability claims. While the Company does not believe that any of the 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.

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 and the risks and uncertainties described in “Part I—Item 1A—Risk Factors” of the Company’s Form 10-K for the fiscal year ended December 28, 2012. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

Not Applicable.

ITEM 6. EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.