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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
.
COMMISSION FILE NUMBER 0-27598
IRIDEX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 77-0210467
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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340 PIONEER WAY, MOUNTAIN VIEW CA 94041
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES) (ZIP CODE)
(415) 962-8100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
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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 [X] No [ ]
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 28, 1997, was approximately $24,488,907 based on
the closing price reported for such date on the Nasdaq National Market System.
For purposes of this disclosure shares of Common Stock held by each executive
officer and director and by each holder of 5% or more of the outstanding shares
of Common Stock have been excluded from this calculation because such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 28, 1997, Registrant had 6,372,148 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference into Part III
of this Annual Report on Form 10-K.
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PART 1
ITEM 1. BUSINESS
GENERAL
IRIDEX Corporation ("IRIDEX" or the "Company") is the leading worldwide
provider of semiconductor-
based laser systems used to treat eye diseases, including the three leading
causes of irreversible blindness. The Company's current OcuLight SL, OcuLight
SLx and OcuLight GL Laser Photocoagulator systems (the "OcuLight System")
consist of a small, portable laser console and interchangeable delivery devices,
including disposable products. Since its first shipment in 1990, more than 1,300
OcuLight Systems have been sold worldwide, primarily to hospitals for use by
ophthalmic specialists. In the second half of 1996, the Company introduced the
OcuLight GL, a new semiconductor-based visible-light laser photocoagulator
system designed to appeal to the broader office-based ophthalmology market. The
Company believes that its systems are more portable, more economical and have a
greater degree of reliability and flexibility than competing photocoagulator
systems which use traditional vacuum tube-based technology.
IRIDEX Corporation was incorporated in California in February 1989 as IRIS
Medical Instruments, Inc., and changed its name to IRIDEX Corporation and
reincorporated in Delaware in January 1996. IRIDEX conducts most of its business
through its wholly-owned operating subsidiary, IRIS Medical Instruments, Inc.
The Company's executive offices are located at 340 Pioneer Way, Mountain View,
California 94041, and its telephone number is (415) 962-8100. As used in this
Form 10-K, the terms "Company" and "IRIDEX" refer to IRIDEX Corporation, a
Delaware corporation, and, when the context so requires, its wholly-owned
subsidiaries, IRIS Medical Instruments, Inc. and Light Solutions Corporation,
both California corporations.
THE IRIDEX STRATEGY
The Company's objective is to become a worldwide leader in developing,
manufacturing, marketing and selling innovative and cost-effective medical
products to detect and treat eye disease. The key elements of the Company's
strategy are:
Continue to Broaden Product Lines. In 1996, the Company introduced a new
visible layer system, the OcuLight GL, for ophthalmology, which significantly
expanded the market opportunity for the Company's products. In 1997, the Company
plans to introduce a new product, the DioLite 532, for dermatology. The
characteristics of both of these new products are similar to those which have
made the Company's previous products successful, such as low cost ownership,
reliability, and portability.
Develop and Validate New Applications. The Company is seeking to develop
and validate treatments that are less costly, reduce complications and achieve
better clinical results than existing treatments. The Company's products are
currently being used in multiple studies in the United States and
internationally to demonstrate the clinical benefits of its technology in
disease treatment. Examples of these studies include a multi-site program to
prophylactically treat age-related macular degeneration and an international
study which is evaluating the use of the Company's G-Probe as a primary
treatment for glaucoma.
Continue to Enhance Products. A core strength of the Company has been its
regular introduction of new delivery devices and product upgrades which have
enhanced the benefits of the Company's infrared laser system. The Company
intends to continue its investment in research and development to improve the
performance of its systems as well as to develop additional technologies which
can more cost effectively address the needs of the ophthalmic market. To enhance
the Company's research and development efforts, the Company collaborates with an
extensive network of ophthalmic academic leaders who provide input and advice,
as well as assist in validating the efficacy of new products and applications.
Provide Total Disease Management. The Company intends to pursue both
therapeutic and adjunctive diagnostic systems. An adjunctive diagnostic system
is used either to screen and identify more patients who require therapy or
objectively assess the adequacy of therapy. The Company believes that a
significant opportunity exists to provide diagnostic equipment to the ophthalmic
and optometric communities. The
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Company intends to pursue its entrance into this diagnostic market through both
internal development and selected acquisitions. By pursuing therapeutic and
diagnostic systems, the Company intends to provide total disease management.
Develop New Markets through Strategic Alliances. The Company intends to
establish strategic alliances in order to expedite and lower the cost of
developing and bringing to market new products, both to the ophthalmology market
and to markets not currently addressed by the Company's products. Through these
alliances, the Company will seek access to technologies that it does not
currently possess. In May 1996, the Company signed a Co-Development Agreement
with PDT, Inc., ("PDT") a company engaged in the development of photodynamic
drugs and applications, to provide lasers to activate certain photodynamic drugs
which are currently being developed by PDT.
PRODUCTS
The Company utilizes a systems approach to product design. Each system
includes a console, which generates the laser energy, and a number of
interchangeable peripheral delivery devices, including disposables, for use in
specific clinical applications. This approach allows customers to purchase a
basic system and add additional delivery devices as their needs expand or as the
Company develops new applications. This system approach also brings
economies-of-scale to the Company's product development and manufacturing
efforts since each application does not require the design and manufacture of
complete stand-alone products.
Consoles. The Company's laser consoles incorporate the economic and
technical benefits of semiconductor technology, which is the basis of the
Company's semiconductor-based laser systems.
Infrared Photocoagulator Console. These OcuLight photocoagulator
consoles are available in two infrared output power ranges: the OcuLight SL
at 2 Watts and the OcuLight SLx at 3 Watts. Each console weighs 14 pounds,
has dimensions of 4"H x 12"W x 12"D, draws a maximum of 60 Watts of wall
power, and requires no external air or water cooling. Consoles have United
States list prices ranging from $19,900 to $26,500.
Visible Photocoagulator Console: In September 1996, the Company
introduced a new semiconductor-
based photocoagulator which delivers visible laser light, the OcuLight GL.
This new console weighs 15 pounds, has dimensions of 6"H x 12"W x 12"D,
draws a maximum of 300 Watts of wall power and requires no external air or
water cooling. Consoles have a United States list price of $27,500.
Peripheral Delivery Devices. The Company's versatile family of consoles
and delivery devices has been designed to allow the addition of new capabilities
with a minimal incremental investment by simply purchasing a new interchangeable
delivery device. The Company has developed both disposable and nondisposable
delivery devices and expects to continue to develop additional devices.
TruFocus Laser Indirect Ophthalmoscope. The indirect ophthalmoscope
is worn on the physician's head and is used to treat peripheral retinal
disorders, particularly in infants or adults requiring treatment in the
supine position. This product can be used both for diagnosis and treatment
at the point-of-care and has a United States list price of $8,800.
Slit Lamp Adapter. These adapters allow the physician to utilize a
standard slit lamp for both diagnosis and treatment. A slit lamp adapter
can be installed by the doctor in several minutes converting any of the 42
variations of a standard diagnostic slit lamp into a therapeutic
photocoagulator delivery system. Slit lamp adapters are used for treatment
of both retinal and glaucomal diseases and have United States list prices
from $6,000 to $6,500.
Operating Microscope Adapter. These adapters allow the physician to
utilize a standard operating microscope for both diagnosis and treatment.
These devices are similar to slit lamp adapters except they are oriented
horizontally and therefore can be used to deliver retinal photocoagulation
to a supine patient. The United States list price of the adapter is $7,500.
EndoProbe. The EndoProbe is used for endophotocoagulation, a retinal
treatment performed in the hospital operating room or surgery center. These
sterile disposable probes are available in straight, tapered, angled and
fluted styles and have a United States list price of $150 to $185.
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G-Probe. The G-Probe is used to treat medically and surgically
uncontrolled glaucoma, in many instances replacing cyclocryotherapy, or
freezing of the eye. The G-Probe's non-invasive procedure takes about five
minutes, is done to an anesthetized eye in the doctor's office and results
in less pain and fewer adverse side effects than cyclocryotherapy. The
G-Probe is a sterile disposable product and has a United States list price
of $200.
DioPexy Probe. The DioPexy Probe is a hand-held instrument which is
used to treat retinal tears and breaks transsclerally noninvasively through
the sclera as an alternative method of attaching the retina. Advantages
include increased precision, less pain and less inflammation than
traditional cryotherapy. The DioPexy Probe has a United States list price
of $2,500.
The Company is currently developing a new system with PDT. This system will
emit a laser beam to activate a photodynamic drug being developed by PDT in
order to achieve a therapeutic result. PDT intends to enter into a strategic
alliance with a pharmaceutical company to assist in clinical studies,
commercialization and sale of their product. The Company expects that, if
successful, the development of this product and the receipt of the appropriate
regulatory approval thereof will take at least 3 years.
The following chart lists the eye diseases which can be treated using the
Company's photocoagulator systems, including the preferred delivery devices. The
selection of delivery device is often determined by the severity and location of
the disease.
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CONDITION PROCEDURE CONSOLE DELIVERY DEVICES
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AMD.......................... Retinal Infrared & Slit Lamp Adapter
Photocoagulation Visible
Diabetic Retinopathy
Macular Edema.............. Grid Retinal Infrared & Slit Lamp Adapter &
Photocoagulation Visible Operating Microscope
Adapter
Focal Retinal Visible Slit Lamp Adapter
Photocoagulation
Proliferative.............. Pan-Retinal Visible & Slit Lamp Adapter,
Photocoagulation Infrared Operating Microscope
Adapter, Laser Indirect
Ophthalmoscope, EndoProbe
Glaucoma
Primary Open-Angle......... Trabeculoplasty Visible Slit Lamp Adapter
Infrared
Angle-closure.............. Iridotomy(1) Visible & Slit Lamp Adapter
Infrared
Uncontrolled............... Transscleral Infrared G-Probe
Cyclophotocoagulation
Retinal Detachment........... Retinopexy Retinal Infrared & Slit Lamp Adapter, Laser
Photocoagulation Visible Indirect Ophthalmoscope,
Operating Microscope
Adapter, EndoProbe
Transcleral Retinal Infrared DioPexy Probe
Photocoagulation
Retinopathy of Prematurity... Retinal Infrared Laser Indirect
Photocoagulation Ophthalmoscope
Ocular Tumors Retinal........ Photocoagulation Infrared Slit Lamp Adapter,
Operating Microscope
Adapter, Laser Indirect
Ophthalmoscope
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(1) This indication is under an Investigational Device Exemption in the United
States.
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RESEARCH AND DEVELOPMENT
The Company's research and development activities are performed internally
by its research and development staff comprised of 11 individuals and is
supplemented by consultants with specialized expertise. Research and development
efforts are directed toward both development of new products and development of
new applications using existing products. Additionally, the Company is currently
developing a new product that will address the dermatology market. The Company's
expenditures for research and development totaled approximately $1,286,000,
$742,000 and $629,000 in 1996, 1995 and 1994, respectively. The Company has
close working relationships with ophthalmic researchers and clinicians around
the world who provide new ideas, test the feasibility of these new ideas, and
assist the Company in validating new products and new applications before they
are introduced.
The Company is supporting pre-clinical and clinical studies to develop new
photocoagulation treatments and applications. The objectives of developing new
applications are to expand the number of patients who can be treated, to more
effectively treat diseases, to treat earlier in the treatment regimen and to
reduce the side-effects of treatment. Examples include:
Age-Related Macular Degeneration. The Company is supporting a
multi-center clinical trial which is testing a prophylactic treatment of
age-related macular degeneration. This treatment involves the use of
infrared light that passes through the sensory retina without damaging it.
Favorable results would greatly expand the number of patients who can be
effectively treated.
Glaucoma. A preliminary study is underway which is evaluating the use
of the G-Probe as a first-line treatment modality for various glaucomas.
Favorable results from this study would indicate that the G-Probe may be
used earlier in the treatment regimen.
Diabetic Retinopathy. Studies are underway which treat diabetic
retinopathy with minimal impact photocoagulation without damaging the
sensory retina, with the objective of causing regression of the disease
with less loss of vision than argon-based laser therapy.
Ocular Tumors. Clinical studies are being conducted to treat ocular
tumors with infrared lasers which appear to result in fewer side effects
than with conventional therapies.
During 1996 the Company leveraged the technology used in the OcuLight GL
and developed a new product which is intended to be used in the dermatology
market to treat vascular and pigmented skin lesions, the DioLite 532. The
Company has submitted a 510(k) notification with the FDA for the DioLite 532.
The DioLite 532, will weigh 15 pounds with dimensions of 6"H x 12"W x 12"D, and
deliver up to 3 Watts of pulsed laser power through a variety of fiber optic
delivery device handpieces. See "-- Government Regulation."
CUSTOMERS AND CUSTOMER SUPPORT
The Company's products are currently sold to ophthalmologists including
glaucoma specialists, retinal specialists and pediatric ophthalmologists. Other
customers include research and teaching hospitals, government installations,
surgi-centers and hospitals with ophthalmic facilities. To a lesser extent,
these products are sold to general ophthalmologists. No customer or distributor
accounted for 10% or more of total sales in 1996, 1995 or 1994. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company is continuing its efforts to broaden its customer base through
the development of new products and new applications. The Company currently
estimates that there are approximately 15,000 ophthalmologists in the United
States and 45,000 internationally who are each potential customers.
Additionally, the Company estimates that there are approximately 4,800 and
18,000 hospitals in the United States and internationally, respectively, as well
as approximately 2,200 ambulatory surgical centers in the United States which
potentially represent multiple unit sales. Because independent ophthalmologists
frequently practice at their own offices as well as through affiliation with
hospitals or other medical centers, each independent ophthalmologist, hospital
and medical center is a potential customer for the Company's products. The
Company is seeking to broaden its customer base by developing new diagnostic
products directed at addressing the needs of the 30,000 optometrists in the
United States and 15,000 optometrists internationally.
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The Company seeks to provide superior customer support and service. A
24-hour, seven day a week, telephone service line is maintained to service
customers. If the problem cannot be diagnosed and resolved by telephone, a
replacement unit is shipped overnight to domestic customers and the problem unit
is returned to the Company. The small size and rugged design allows for
economical shipment and quick response to customers almost anywhere in the
world.
SALES AND MARKETING
To support its sales process, the Company conducts marketing programs which
include direct mail, trade shows, public relations, advertising in trade and
academic journals and newsletters. The Company annually participates in
approximately 50 trade shows or meetings in the United States and 65 trade shows
or meetings internationally. These meetings allow the Company to present its
products to existing as well as to prospective buyers. While the sales cycle
varies from customer to customer, it averages 12 months and typically ranges
from two to 24 months. The Company's sales and marketing organization is based
at the Company's corporate headquarters in Mountain View, California with area
sales managers located in Georgia, Massachusetts, Ohio, Texas, California and
Maryland.
International product sales represented 49.6%, 48.7% and 48.7% of the
Company's sales in fiscal 1996, 1995 and 1994, respectively. The Company's
products are sold internationally through its 39 independent distributors into
64 countries and in the United States through its direct sales force.
International sales are administered through the Company's corporate
headquarters in Mountain View, California, along with two area sales managers.
The Company's distribution agreements with its international distributors are
generally exclusive and typically can be terminated by either party without
cause on 90 days notice. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Future
Results -- Dependence on International Sales."
The Company believes that educating patients and physicians about the
long-term health benefits and cost-effectiveness of diagnosis and treatment of
diseases that cause blindness at an early stage is critical to market acceptance
of the Company's products. The Company believes that the trend toward management
of health care costs in the United States will lead to increased awareness of
and emphasis on disease prevention, and cost-effective treatments and, as a
result, will increase demand for its laser products as well as its prospective
diagnostic products. The Company works with its customers to enhance its ability
to identify new applications for its products, validate new procedures using its
products, respond more effectively to new ophthalmic procedures and expedite
regulatory approvals of new products and applications. Customers include key
opinion leaders who tend to be the heads of the ophthalmic departments or to be
associated with these universities in the capacity of professors. These
luminaries in the field of ophthalmology are key to the successful introduction
of new technologies and their subsequent acceptance by the general market.
Acceptance of the Company's products by these early adopters is key to the
Company's strategy in the validation of its technology. In addition, the Company
believes that widespread adoption of laser platforms based on infrared light by
general ophthalmologists will require educating them about the performance
characteristics of the infrared laser as compared to the argon laser.
COMPETITION
Competition in the market for devices used for ophthalmic treatments is
intense and is expected to increase. The principal competitive factors in the
Company's market include product performance characteristics and functionality,
ease of use, scalability, durability and cost. The Company's principal direct
competitors are Coherent, Inc., Nidek, Inc. ("Nidek"), HGM Medical Laser
Systems, Inc., Carl Zeiss, Inc. ("Zeiss") and Keeler Instruments, Inc.
("Keeler"). Of these companies, only Nidek, Zeiss and Keeler currently offer a
semiconductor-based photocoagulator system, and substantially all of them sell
argon-based lasers which are the predominant photocoagulator sold in the
ophthalmic market. All of the Company's competitors have substantially greater
financial, engineering, product development, manufacturing, marketing and
technical resources than the Company. Such companies also have greater
recognition and a larger installed base than the Company. In addition, these
companies have long-standing established relationships with current and
potential customers of the Company.
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OPERATIONS
A significant portion of the Company's manufacturing is subcontracted to
third parties, with the Company only performing value-added functions. Most of
these sub-contractors are located within 10 miles of the Company's Mountain
View, California facility. The Company is in the process of implementing
policies and procedures which are intended to allow the Company to receive ISO
9001 certification. ISO 9001 is an international series of standards dealing
with quality system requirements developed company-wide to demonstrate a
company's capability and commitment to quality and an assessment of that
capability by external parties.
The Company relies on third parties to manufacture substantially all of the
components used in the Company's products, although the Company assembles
critical subassemblies as well as the final product at its facility in Mountain
View. There are risks associated with the use of independent manufacturers,
including unavailability of or delays in obtaining adequate supplies of
components and potentially reduced control of quality, production costs and the
timing of delivery. Any failures by such third parties to adequately perform may
delay the submission of products for regulatory approval, impair the Company's
ability to deliver products on a timely basis, or otherwise impair the Company's
competitive position. Establishing its own capabilities to manufacture these
components would require significant scale-up expenses and additions to
facilities and personnel and could significantly decrease the Company's profit
margins.
The Company has qualified two or more sources for most of the components
used in its products. Certain semiconductor diodes purchased from SDL, Inc.
("SDL") for the OcuLight GL are not readily available from other suppliers.
During the second half of 1996, SDL was unable to meet the Company's delivery
requirements on a timely basis. These delays and delivery shortfalls have
continued through the first quarter of 1997. The Company has been actively
qualifying a second source for this product and expects to begin shipment of
products containing components from this second source in the second quarter of
1997. The Company has had to qualify new suppliers for other components as well.
The process of qualifying new suppliers may be lengthy, may often require
redesigning of the Companys' products and no assurance can be given that sources
would be available to the Company on a timely basis or on terms that are
acceptable. The Company does not have long-term or volume purchase agreements
with any of its suppliers and currently purchases components on a purchase order
basis. The Company's business, financial condition and results of operations
would be adversely affected if it is unable to obtain components (including
those provided by SDL) in the quantities required at a reasonable cost and on a
timely basis or if it could not expand manufacturing capacity to meet demand or
if operations at its single facility were disrupted.
International regulatory bodies often establish varying regulations
governing product standards, packaging requirements, labeling requirements,
tariff regulations, duties and tax requirements. As a result of the Company's
sales in Europe, the Company was required to receive a "CE" mark certification,
an international symbol of quality and compliance with applicable European
medical device directives. Although the Company has received a CE mark
certification for the OcuLight SL platform, and has self-certified CE compliance
for the OcuLight GL, there can be no assurance that the Company will be
successful in meeting new certification requirements in the future or in
obtaining such certifications for its new products. Any failure to obtain
required certifications would have a material adverse effect on the Company's
business, results of operations and financial condition.
PATENTS AND PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary information. The Company relies on a combination of patents, trade
secrets, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect its intellectual property rights.
The Company files patent applications to protect technology, inventions and
improvements that are significant to the development of its business. The
Company has been issued six United States patents on the technologies related to
its products and processes one of which it co-owns. The Company has applied for
two additional patents related to its solid state laser products. There can be
no assurance that any of the Company's patent applications will issue as
patents, that any patents now or hereafter held by the Company will offer any
degree of protection, or that the Company's patents or patent applications will
not be challenged, invalidated or circumvented in the future. Moreover, there
can be no assurance that the Company's competitors, many of
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which have substantial resources and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in international markets.
In addition to patents, the Company relies on trade secrets and proprietary
know-how which it seeks to protect, in part, through proprietary information
agreements with employees, consultants and other parties. The Company's
proprietary information agreements with its employees and consultants contain
industry standard provisions requiring such individuals to assign to the Company
without additional consideration any inventions conceived or reduced to practice
by them while employed or retained by the Company, subject to customary
exceptions. There can be no assurance that proprietary information agreements
with employees, consultant and others will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to or independently developed by competitors.
The laser and medical device industry is characterized by frequent
litigation regarding patent and other intellectual property rights and companies
in the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Numerous patents are held by others, including
academic institutions and competitors of the Company. Because patent application
are maintained in secrecy in the United States until patents are issued and
maintained in secrecy for a period of time outside the United States, the
Company has not conducted any searches to determine whether the Company's
technology infringes any patents or patent applications. The Company has from
time to time been notified of, or has otherwise been made aware of claims that
it may be infringing upon patents or other proprietary intellectual property
owned by others. If it appears necessary or desirable, the Company may seek
licenses under such patents or proprietary intellectual property. Although
patent holders commonly offer such licenses, no assurance can be given that
licenses under such patents or intellectual property will be offered or that the
terms of any offered licenses will be reasonable or will not adversely impact
the Company's operating results. Any claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause shipment delays or require the Company to develop
non-infringing technology or to enter into royalty or licensing agreements.
Although patent and intellectual property disputes in the medical device area
have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. An adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, results of operations and financial condition.
Conversely, litigation may be necessary to enforce patents issued to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. Both the defense and prosecution of intellectual property suits or
interference proceedings are costly and time consuming.
GOVERNMENT REGULATION
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by FDA and by foreign governments. Pursuant to
the Federal Food, Drug and Cosmetic Act of 1976, as amended, and the regulations
promulgated thereunder (the "FDA Act"), FDA regulates the clinical testing,
manufacture, labeling, distribution and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizures of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or approval for devices, withdrawal of marketing approvals, and
criminal prosecution. FDA also has the authority to request repair, replacement
or refund of the cost of any device manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes (Class I, II or III), on the basis of the controls deemed necessary by
FDA to reasonably assure their safety and effectiveness. Under FDA regulations,
Class I devices are subject to general controls (for example, labeling,
premarket notification and adherence to good manufacturing practices ("GMPs"))
and Class II devices are subject to general and special controls (for example,
performance standards, postmarket surveillance, patient registries, and FDA
guidelines). Generally, Class III devices are those which must receive premarket
approval (or "PMA") by the FDA to ensure their safety and effectiveness.
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Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through either a 510(k) premarket
notification or an application. A 510(k) clearance will be granted if the
submitted information establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or II medical device, or to a Class
III medical device for which the FDA has not called for a PMA. The FDA may
determine that a proposed device is not substantially equivalent to a legally
marketed device, or that additional information or data are needed before a
substantial equivalence determination can be made. A request for additional data
may require that clinical studies of the device's safety and efficacy be
performed.
Commercial distribution of a device for which a 510(k) notification is
required can begin only after FDA issues an order finding the device to be
"substantially equivalent" to a predicate device. The FDA has recently been
requiring a more rigorous demonstration of substantial equivalence than in the
past. It generally takes from four to twelve months from the date of submission
to obtain a 510(k) clearance, but it may take longer.
A "not substantially equivalent" determination, or a request for additional
information, could delay the market introduction of new products that fall into
this category and could have a materially adverse effect on the Company's
business, financial condition and results of operations. For any of the
Company's products that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect the safety or efficacy of the
device or that constitute a major change to the intended use of the device will
require new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class I device, or if it is a Class
III device for which FDA has called for PMAs. A PMA application must be
supported by valid scientific evidence which typically includes extensive data,
including human clinical trial data to demonstrate the safety and effectiveness
of the device. The PMA application must also contain the results of all relevant
bench test, laboratory and animal studies, a complete description of the device
and its components, and a detailed description of the methods, facilities and
controls used to manufacture the device. In addition, the submission may require
the proposed labeling, advertising literature and training methods.
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the PMA. An FDA review of a PMA application generally takes one to two years
from the date the PMA application is accepted for filing, but may take
significantly longer. The review time is often significantly extended by the FDA
asking for more information or clarification of information already provided in
the submission. During the review period, an advisory committee, typically a
panel of clinicians, will likely be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. FDA is not bound by the recommendations of the advisory
panel. Toward the end of the PMA review process, FDA generally will conduct an
inspection of the manufacturer's facilities to ensure that the facilities are in
compliance with applicable GMP requirements.
If FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, FDA will either issue an approval letter or an
approvable letter, which usually contains a number of conditions which must be
met in order to secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of FDA, the agency will issue a PMA
approval letter, authorizing commercial marketing of the device for certain
indications. IF FDA's evaluation of the PMA application or manufacturing
facilities are not favorable, FDA will deny approval of the PMA application or
issue a "no-approval letter." FDA may also determine that additional clinicals
trials are necessary, in which case PMA approval may be delayed for several
years while additional clinical trials are conducted and submitted in an
amendment to the PMA. The PMA process can be expensive, uncertain and lengthy
and a number of devices for which FDA approval has been sought by other
companies have never been approved for marketing.
If human clinical trials of a device are required in connection with either
a 510(k) notification or a PMA, and the device presents a "significant risk,"
the sponsor of the trial (usually the manufacturer or the distributor of the
device) is required to file an investigational device exemption ("IDE")
application prior to
8
<PAGE> 10
commencing human clinical trials. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is reviewed and approved by the FDA and one or more appropriate
institutional review boards ("IRBs"), human clinical trials may begin at a
specific number of investigational sites with a specific number of patients, as
approved by the FDA. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the clinical trial after obtaining approval for the
study by one or more appropriate IRBs.
The Company has obtained 510(k) clearance for its OcuLight SL, OcuLight SLx
and OcuLight GL consoles and a number of peripheral delivery devices including
the EndoProbe, the Laser Indirect Ophthalmoscope, the Slit Lamp Adapter, the
G-Probe and the DioPexy Probe, for photocoagulation of tissues and structures in
the eye in the treatment of various retinal and glaucoma diseases. The Company
has also made certain modifications to the Slit Lamp Adapter that the Company
has determined do not require the submission of a new 510(k) notification.
However, there can be no assurance that the FDA would agree with the Company's
determination that a 510(k) notification is not required for the Slit Lamp
Adapter modifications nor that FDA would not require the Company to submit a new
510(k) notification for the modification. If the FDA requires the Company to
submit a new 510(k) notification for the modified Slit Lamp Adapter, the Company
may be prohibited from marketing the modified device until the 510(k)
notification is cleared by the FDA.
In July 1991 the Company submitted a 510(k) notification to obtain
clearance for use of its Slit Lamp Adapter for use in iridectomy and other
indications. After conducting an initial review of the submission, the FDA
indicated that clinical data would be required in order for the agency to make a
substantial equivalence determination regarding use of the device for
iridectomy. As a result, the Company obtained FDA approval of an investigational
device exemption ("IDE") to conduct clinical studies of the Slit Lamp Adapter
for iridectomy. Although the Company obtained IDE approval in September 1992, to
date, no patients have been recruited for the study. There can be no assurance
that once clinical data are collected and submitted to the FDA, that they will
be adequate to establish substantial equivalence, that the FDA will not require
additional clinical data, or that the FDA will grant 510(k) clearance in a
timely manner, if at all.
The Company has also established a strategic alliance with PDT to
manufacture a device designed to photoactivate an ophthalmic drug currently
under development by PDT. PDT is responsible for obtaining the required
regulatory approvals. Under FDA's combination products policy, the ophthalmic
drug and photoactivating device may be considered a drug-device combination
product and, therefore, be required to undergo the new drug approval process.
The steps required before a new drug can be commercially distributed in the
United States include (1) conducting appropriate pre-clinical laboratory and
animal tests, (2) submitting to the FDA an application for an investigational
new drug ("IND"), which must become effective before clinical trials may
commence, (3) conducting well-controlled human clinical trials that establish
the safety and effectiveness of the drug, (4) filing with the FDA a new drug
application ("NDA") and (5) obtaining FDA approval of the NDA prior to any
commercial distribution of the drug. The new drug approval process is expensive,
lengthy and uncertain and many new drug products have never been approved for
marketing. There can be no assurance that an approved NDA would not be required
for the ophthalmic drug and photoactivating device as a combination product or,
if required, that such approval could be obtained. In addition, there can be no
assurance that the FDA would not require separate premarket clearance for the
photoactivating device through either a 510(k) notification or a PMA or, if
required, that such premarket clearance or approval could be obtained.
The Company has submitted a 510(k) notification for the DioLite 532, a new
product which is intended to be used in the dermatology market to treat vascular
and pigmented skin lesions. The DioLite 532 is a Class II medical device and
human clinical trials are not expected to be required in connection with the
510(k) notification, however, there can be no assurance that the FDA will not
require clinical data, or that the FDA will grant 510(k) clearance in a timely
manner, if at all.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
FDA, including recordkeeping requirements and reporting of adverse experiences
with the use of the device. Device manufacturers are required to register their
establishments and list their devices with FDA and certain state agencies, and
are subject to periodic
9
<PAGE> 11
inspections by FDA and certain state agencies. The FDA Act requires devices to
be manufactured in accordance with GMP regulations which impose certain
procedural and documentation requirements upon the Company with respect to
manufacturing and quality assurance activities. FDA has proposed changes to the
GMP regulations which, if finalized, would likely increase the cost of complying
with GMP requirements.
Labeling and promotion activities are subject to scrutiny by FDA and in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved uses. The Company
and its products are also subject to a variety of state laws and regulations in
those states or localities where its products are or will be marketed. Any
applicable state or local regulations may hinder the Company's ability to market
its products in those states or localities. Manufacturers are also subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. There can
be no assurance that the Company will not be required to incur significant costs
to comply with such laws and regulations now or in the future or that such laws
or regulations will not have a material adverse effect upon the Company's
ability to do business.
Exports of products that have market clearance from FDA do not require FDA
export approval. However, some foreign countries require manufacturers to
provide an FDA certificate for products for export ("CPE") which requires the
device manufacturer to certify to the FDA that the product has been granted
premarket clearance in the United States and that the manufacturing facilities
appeared to be in compliance with GMPs at the time of the last GMP inspection.
The FDA will refuse to issue a CPE if significant outstanding GMP violations
exist.
Exports of products subject to the 510(k) notification requirements, but
not yet cleared to market, are permitted without FDA approval provided certain
requirements are met. Unapproved products subject to the PMA requirements cannot
be exported unless approved by FDA for export. To obtain FDA export approval
certain requirements must be met and information must be provided to the FDA,
including documentation demonstrating that the product is approved for import
into the country to which it is to be exported and, in some instances, safety
data from animal or human studies. There can be no assurance that the FDA will
grant export approval when such approval is necessary, or that countries to
which the devices are to be exported will approve the devices for import.
Failure of the Company to obtain CPEs, meet FDA's export requirements, or obtain
FDA export approval when required to do so, could have a material adverse effect
on the Company's business, financial condition and results of operations.
The introduction of the Company's products in foreign markets will also
subject the Company to foreign regulatory clearances which may impose additional
substantial costs and burdens. International sales of medical devices are
subject to the regulatory requirements of each country. The regulatory review
process varies from country to country. Many countries also impose product
standards, packaging requirements, labeling requirements and import restrictions
on devices. In addition, each country has its own tariff regulations, duties and
tax requirements. Approval by the FDA and foreign government authorities is
unpredictable and uncertain, and no assurance can be given that the necessary
approvals or clearances will be granted on a timely basis or at all. Delays in
receipt of, or a failure to receive, such approvals or clearances, or the loss
of any previously received approvals or clearances, could have a material
adverse effect on the business, financial condition and results of operations of
the Company.
The Company's products are subject to continued and pervasive regulation by
FDA and other foreign an domestic regulatory authorities. Changes in existing
requirements or adoption of new requirements or policies could adversely affect
the ability of the Company to comply with regulatory requirements. Failure to
comply with regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will not be required to incur significant costs to
comply with laws and regulations in the future or that laws or regulations will
not have a material adverse effect upon the Company's business, financial
condition or results of operations.
10
<PAGE> 12
REIMBURSEMENT
The Company's products are typically purchased by doctors, clinics,
hospitals and other users, which bill various third-party payors, such as
governmental programs and private insurance plans, for the health care services
provided to their patients. Third-party payors carefully review and are
increasingly challenging the prices charged for medical products and services.
Reimbursement rates from private companies vary depending on the procedure
performed, the third-party payor, the insurance plan and other factors. Medicare
reimburses hospitals on a prospectively-determined fixed amount for the costs
associated with an in-patient hospitalization based on the patient's discharge
diagnosis, and reimburses physicians a prospectively-determined fixed amount
based on the procedure performed, regardless of the actual costs incurred by the
hospital or physician in furnishing the care and unrelated to the specific
devices used in that procedure. Third-party payors are increasingly scrutinizing
whether to cover new products and the level of reimbursement for covered
products. While the Company believes that the laser procedures using its
products have generally been reimbursed, payors may deny coverage and
reimbursement for the Company's products if they determine that the device was
not reasonable and necessary for the purpose for which used, was investigational
or not cost-effective. Additionally, there can be no assurance that PDT will be
able to obtain coverage for its use of drugs with the Company's OcuLight
Systems, or that the reimbursement will be adequate to cover the treatment
procedure. Failure by doctors, clinics, hospitals and other users of the
Company's products to obtain adequate reimbursement for use of the Company's
products from third-party payors, and/or changes in government legislation or
regulation or in private third-party payors' policies toward reimbursement for
procedures employing the Company's products could have a material adverse effect
on the Company's business, results of operations and financial condition.
Moreover, the Company is unable to predict what legislation or regulation, if
any, relating to the health care industry or third-party coverage and
reimbursement may be enacted in the future, or what effect such legislation or
regulation may have on the Company.
PRODUCT LIABILITY AND INSURANCE
The Company may be subject to product liability claims in the future. The
Company's products are highly complex, used to treat extremely delicate eye
tissue and are often used in situations where there is a high risk of serious
injury or adverse side effects. In addition, although the Company recommends
that its disposable products only be used once and so prominently labels these
disposables, the Company believes that certain customers may reuse these
disposables. Were such a disposable not adequately sterilized by the customer
between such uses, a patient could suffer serious consequences, possibly
resulting in a suit against the Company for damages. Accordingly, the
manufacture and sale of medical products entails significant risk of product
liability claims. Although the Company maintains product liability insurance
with coverage limits of $5.0 million per occurrence and an annual aggregate
maximum of $6.0 million, there can be no assurance that the coverage of the
Company's insurance policies will be adequate. Such insurance is expensive and
in the future may not be available on acceptable terms, if at all. A successful
claim brought against the Company in excess of its insurance coverage could have
a material adverse effect on the Company's business, results of operations and
financial condition. To date, the Company has not experienced any product
liability claims.
BACKLOG
The Company generally ships its products within a few days after acceptance
of a customer's purchase order. Accordingly, the Company does not believe that
its backlog at any particular time is indicative of future sales levels.
EMPLOYEES
At December 31, 1996, the Company had a total of 58 full time employees,
including 21 in operations, 20 in sales and marketing, 11 in research and
development and 6 in finance and administration. The Company also employs, from
time to time, a number of temporary and part-time employees as well as
consultants on a contract basis. At December 31, 1996, the Company employed
three such persons. The Company intends to hire additional personnel during the
next twelve months in each of these areas. The Company's future success will
depend in part on its ability to attract, train, retain and motivate highly
qualified employees, who are in
11
<PAGE> 13
great demand. There can be no assurance that the Company will be successful in
attracting and retaining such personnel. The Company's employees are not
represented by an collective bargaining organization, and the Company has never
experienced a work stoppage or strike. The Company considers its employee
relations to be good. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Future
Results -- Dependence on Key Personnel."
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of December 31,
1996 were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Theodore A. Boutacoff...................... 49 President, Chief Executive Officer and Director
James L. Donovan........................... 59 Chief Financial Officer and Director
Eduardo Arias.............................. 52 Senior Vice President, World-wide Sales
David M. Buzawa............................ 44 Vice President, Product Development
Robert Haddad.............................. 49 Vice President, Operations
</TABLE>
Mr. Boutacoff co-founded the Company with Messrs. Arias, Buzawa, Donovan
and Chang and, since February 1989, has served as its President, Chief Executive
Officer and a member of its Board of Directors. Prior to co-founding the
Company, Mr. Boutacoff held various positions, including Director of New
Business and Clinical Development, Director of Marketing and Director of
Regulatory Affairs, with the Medical Division of Coherent, Inc., a manufacturer
of laser systems for science, medicine and industry. Mr. Boutacoff holds a B.S.
degree in civil engineering from Stanford University.
Mr. Donovan co-founded the Company and, since February 1989, except in the
period June to November 1996, has served as its Chief Financial Officer and a
member of its Board of Directors. Prior to co-founding the Company, Mr. Donovan
served as General Manager of its Medical Division and Chief Financial Officer of
Coherent, Inc. Mr. Donovan holds a B.S. degree in business administration from
Southern Oregon State College.
Mr. Arias co-founded the Company and since April 1989 has served as Vice
President, Sales & Marketing until September 1991 when he was promoted to the
position of Senior Vice President, International Sales. Prior to co-founding the
Company, Mr. Arias held various positions, including Director of Marketing and
Sales, Medical Group and Director of International Operations, at Coherent, Inc.
Mr. Buzawa co-founded the Company in February 1989 and, since such date,
has managed the Company's Product Development group, serving since February 1993
as the Vice President, Product Development. Prior to co-founding the Company,
Mr. Buzawa held various positions, including Project Engineer, with Coherent,
Inc. Mr. Buzawa holds a B.A. degree in general science from the University of
Rochester.
Mr. Haddad joined the Company in March 1991 as Controller and was appointed
Vice President, Operations in April 1992. From March 1989 to February 1991, Mr.
Haddad served as Director of Operations of Abekas Video Systems, an electronic
design and manufacturing company. Mr. Haddad holds a B.S. degree in industrial
engineering from California State Polytechnic University and a M.B.A. degree in
finance from Sacramento State University. Mr. Haddad has indicated his intention
to leave the Company by March 31, 1997.
Additionally, Robert Kamenski joined the Company as Vice President, Finance
and Administration on March 12, 1997. Prior to joining the Company, Mr. Kamenski
was Chief Financial Officer and Vice President of Finance and Administration
with TeleSensory Corporation. Mr. Kamenski holds a B.B.A. degree in accounting
from the University of Wisconsin-Milwaukee and is a member of the American
Institute of CPAs.
ITEM 2. PROPERTIES
The Company is relocating its operating facilities and has entered into an
noncancelable operating lease commencing in March 1997 for 37,000 square feet of
space in Mountain View, California. These buildings will
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<PAGE> 14
house manufacturing, research and development and serve as the Company's
headquarter offices. The lease term expires in 2002 and contains a renewal
option.
Management believes that its new facilities will be adequate for its
current needs and that suitable additional space or alternative space will be
available in the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON EQUITY
The Company's Common Stock has been traded on the Nasdaq National Market
System under the symbol "IRIX" since the Company's initial public offering on
February 15, 1996. The following table sets forth for the periods indicated the
high and low closing prices for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1996
First Quarter (from February 15, 1996)................. $10.875 $ 9.750
Second Quarter......................................... $16.750 $10.250
Third Quarter.......................................... $15.500 $ 6.875
Fourth Quarter......................................... $ 9.500 $ 6.250
FISCAL 1997
First Quarter (through March 13, 1997)................. $ 8.250 $ 4.750
</TABLE>
On March 13, 1997 the closing price on the Nasdaq National Market for the
Company's Common Stock was $7.00 per share. As of December 31, 1996, there were
approximately 103 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future. In addition, the
payment of cash dividends by the Company to its stockholders is currently
prohibited by the Company's bank line of credit. See Note 4 of Notes to
Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the years
ended December 31, 1992, 1993, 1994, 1995 and 1996 have been derived from and
are qualified by reference to, the consolidated financial statements of the
Company audited by Coopers & Lybrand L.L.P., independent accountants. The
selected consolidated financial data as of December 31, 1992 and 1993 have been
derived from the Company's audited financial statements not included herein.
These historical results are not necessarily indicative of the results of
operations to be expected for any future period.
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<PAGE> 15
The data set forth below are qualified by reference to, and should be read
in conjunction with Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, and the consolidated financial statements
included in Item 8. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales........................................ $4,515 $5,564 $7,182 $8,801 $12,364
Cost of sales................................ 2,071 2,280 2,423 2,798 4,899
------ ------ ------ ------ -------
Gross profit............................... 2,444 3,284 4,759 6,003 7,465
------ ------ ------ ------ -------
Operating expenses:
Research and development................... 499 528 629 742 1,286
Selling, general and administrative........ 2,303 2,601 3,383 3,787 5,197
Nonrecurring charge for acquisition of
technology(1)........................... -- -- -- 80 --
------ ------ ------ ------ -------
Total operating expenses................ 2,802 3,129 4,012 4,609 6,483
------ ------ ------ ------ -------
Income (loss) from operations................ (358) 155 747 1,394 982
Other income (expense), net.................. (13) (24) (1) 58 699
------ ------ ------ ------ -------
Income (loss) before benefit from (provision
for) income taxes.......................... (371) 131 746 1,452 1,681
Benefit from (provision for) income taxes.... -- -- 1,039 (452) (676)
------ ------ ------ ------ -------
Net income (loss)............................ $ (371) $ 131 $1,785 $1,000 $ 1,005
====== ====== ====== ====== =======
Net income (loss) per share (2).............. $(0.27) $ 0.03 $ 0.40 $ 0.22 $ 0.16
====== ====== ====== ====== =======
Shares used in per share calculation(2)...... 1,374 4,521 4,515 4,630 6,478
====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and available-for-sale
securities................................. $ 483 $ 269 $ 684 $1,227 $15,114
Working capital.............................. $1,439 $1,554 $2,973 $4,339 $15,577
Total assets................................. $2,392 $2,603 $4,436 $6,395 $23,707
Total stockholders' equity................... $1,511 $1,642 $3,436 $4,685 $21,478
</TABLE>
- ---------------
(1) Reflects the write-off from the purchase of in process of research and
development. See Note 2 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used in per share calculation.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those set forth in such
forward looking statements as a result of the factors set forth under "Factors
That May Affect Future Results" and other risks detailed from time to time in
the Company's reports filed with the Securities and Exchange Commission.
OVERVIEW
The Company is the leading worldwide provider of semiconductor-based
photocoagulator systems used to treat eye diseases, including the three leading
causes of irreversible blindness. The Company's current OcuLight Systems consist
of a semiconductor-based infrared laser console (the "OcuLight SL" and "OcuLight
SLx") and a semiconductor-based visible laser console (the "OcuLight GL") along
with interchangeable delivery devices, including disposable products. The
OcuLight GL was first shipped for revenue in September 1996. Since 1990, when
its first FDA cleared infrared OcuLight SL System was shipped, more than 1,300
OcuLight Systems have been sold worldwide. During the past seven years, the
Company has steadily expanded its product line and has introduced new products
each year to address a broader segment of the ophthalmic market. These new
products have contributed to increased sales levels and expansion of its
customer base. As the installed base of its OcuLight consoles grows, the Company
expects that sales of its disposable products may increase.
The Company's sales consist of the purchase price of its OcuLight System
consoles and delivery devices, disposables and, to a lesser extent, revenues
from service and support activities. Revenue from product sales is generally
recognized at the time of shipment (net of allowances or discounts), while
revenue from services is recognized upon performance of the applicable services.
The Company's sales have increased primarily due to growth in unit sales,
including additional unit sales resulting from the introduction of the OcuLight
GL during the second half of 1996, greater market penetration and an expanded
product offering. The Company believes that future growth in unit sales will be
derived both from a growth in the market for photocoagulator products and from
the replacement of installed photocoagulators which use vacuum tube-based
technology.
Sales in the United States are derived from direct sales to end users and
internationally are derived from sales to 39 distributors who resell to
hospitals and physicians. Sales to international distributors are made on open
credit terms or letters of credit and generally are not subject to a right of
return unless the Company terminates a distributor. The Company believes its
distributors carry minimal inventory. Although sales of the Company's products
internationally currently are denominated in United States dollars,
international sales are subject to a variety of risks including fluctuations in
foreign currency exchange rates, shipping delays, generally longer receivables
collection periods, changes in applicable regulatory policies, international
monetary conditions, domestic and foreign tax policies, trade restrictions,
duties and tariffs and economic and political instability. These factors are
ameliorated somewhat because the Company has sold its products internationally
in 65 countries. Accordingly, to date, the Company has not experienced any
material impact on its results of operations due to fluctuations in currency
exchange rates or the other factors set forth above.
Cost of sales consists primarily of the cost of purchasing components and
sub-systems, assembling, packaging and testing components at the Company's
facility, and the direct labor and overhead associated therewith. Cost of
service and support consists of expenses related directly to service, support
and training activities. Product development expenses consist primarily of
personnel costs, materials and research support provided to clinicians at
medical institutions developing new applications which utilize the Company's
products. Research and development costs have been expensed as incurred. Sales,
general and administrative expenses consist primarily of costs of personnel,
sales commissions, travel expenses, advertising and promotional expenses,
facilities, legal and accounting, insurance and other expenses which are not
allocated to other departments.
Prior to 1995, the Company had not incurred any substantial income tax
liability because of its historical operating losses. However, during 1996, the
Company utilized its remaining net operating loss carryforwards and began
incurring income taxes at statutory tax rates.
15
<PAGE> 17
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Sales....................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 33.7 31.8 39.6
----- ----- -----
Gross profit.............................................. 66.3 68.2 60.4
----- ----- -----
Operating expenses:
Research and development.................................. 8.8 8.4 10.4
Sales, general and administrative......................... 47.1 43.1 42.0
Nonrecurring charge for acquisition of technology......... -- 0.9 --
----- ----- -----
Total operating expenses.................................. 55.9 52.4 52.4
----- ----- -----
Income from operations...................................... 10.4 15.8 8.0
Other income, net........................................... -- 0.7 5.6
----- ----- -----
Income before (provision for) benefit from income taxes..... 10.4 16.5 13.6
Benefit from (provision for) income taxes................... 14.5 (5.1) (5.5)
----- ----- -----
Net income.................................................. 24.9% 11.4% 8.1%
===== ===== =====
</TABLE>
Sales. Sales were $12.4 million, $8.8 million and $7.2 million in 1996,
1995 and 1994, respectively, representing increases of 40.5% from 1995 to 1996
and 22.5% from 1994 to 1995. The growth in sales in 1995 over 1994 was primarily
attributable to increased unit volume as the Company expanded its product
offering and broadened its customer base, offset somewhat by slight decreases in
average selling prices. The increase in 1996 over 1995 is attributable to the
same factors, with the addition that unit volume increase were primarily due to
the introduction of the OcuLight GL in the second half of the year.
International sales accounted for 49.6%, 48.7% and 48.7% in 1996, 1995 and 1994,
respectively. The Company expects revenues from international sales to continue
to account for a substantial portion of its sales. The lack of availability of a
critical component utilized in the manufacture of the OcuLight GL negatively
impacted 1996 sales. While supplies of this component have improved, delays in
delivery and short falls in quantities ordered by the Company are continuing to
negatively impact the Company's ability to ship its OcuLight GL product. The
Company is currently qualifying a second source for this component and expects
to commence shipments of products incorporating this alternative sourced
component in the second quarter of 1997.
Gross Profit. Gross profit was $7.5 million, $6.0 million and $4.8 million
in 1996, 1995 and 1994 representing 60.4%, 68.2% and 66.3% of sales in each of
such periods, respectively. Gross profit improved in 1995 as compared to 1994 in
absolute dollars and as a percentage of sales primarily due to higher sales
volume and improved economies of scale. The gross margins in 1996 compared to
1995 were higher in absolute dollars but lower as a percentage of sales
primarily due to the costs associated with starting up manufacturing of the new
OcuLight GL. Increasing competition has resulted in a downward trend in average
selling prices. The Company expects continued competitive pressure on the prices
of its products. The Company intends to continue its efforts to reduce the cost
of components and thereby mitigate the impact of price reductions on its gross
margin. Margins are also expected to increase as volumes increase, critical
components are received on schedule and costs are engineered out of the new
product. Gross margins will fluctuate due to changes in the relative proportions
of domestic and international sales, costs associated with future product
introductions and a variety of other factors.
Research and Development. Research and development expenses increased by
73.3% in 1996 to $1,286,000 and by 18.0% in 1995 to $742,000 from $629,000 in
1994, representing 10.4%, 8.4% and 8.8% of sales in these periods, respectively.
The increase in research and development expenses in 1995 as compared to 1994
was primarily attributable to an increase in personnel as the Company increased
its product development
16
<PAGE> 18
efforts. During 1996, a higher level of expense was incurred primarily in
connection with the development of the OcuLight GL and another new product
planned for introduction during 1997.
Sales, General and Administrative. Sales, general and administrative
expenses grew by 37.2% in 1996 to $5.2 million and by 11.9% to $3.8 million in
1995 from $3.4 million in 1994. The increases in sales, general and
administrative expenses were primarily due to the hiring of additional sales and
marketing employees to address new sales opportunities and to support expanding
unit volumes, higher sales commissions and the growth in the infrastructure of
the Company's finance, administrative and operations group which were necessary
to support the Company's expanded operations. Costs associated with the launch
of the OcuLight GL during 1996 also increased sale and marketing expenses during
this period. In addition, general and administrative expenses increased due to
recruiting and relocation costs associated with hiring a chief financial
officer, expenses related to the Company's initial public offering in February
1996 and the establishment of a returns and allowance reserve.
Nonrecurring Charge for Acquisition of Technology. In the fourth quarter
of 1995, the Company wrote off $80,000, or 0.9% of sales in 1995, of in-progress
research and development costs in connection with an acquisition.
Interest Income. Interest income, was $691,000, $64,000 and $22,000 in
1996, 1995 and 1994, respectively. This income was primarily from interest
earned on short-term investments. Increased interest income was primarily due to
increased levels of investments.
Income Taxes. The Company had an effective tax rate of 40%, 32% and (139%)
in 1996, 1995, and 1994, respectively. The rates for 1995 and 1994 differ from
the statutory rate of 40% primarily due to the utilization of net operating
losses. In addition, in 1995 and 1994, the Company reversed $280,000 and
$1,039,000 of its valuation allowance due to management's determination that it
was more likely than not that the related deferred tax assets would be utilized.
The Company utilized its entire remaining net operating loss carry forwards
during 1996.
17
<PAGE> 19
SELECTED QUARTERLY OPERATING RESULTS
The following table represents unaudited quarterly financial information
for the eight quarters ended December 31, 1996. Management believes this
information has been prepared on the same basis as the audited consolidated
financial statements appearing elsewhere in this Form 10-K and in management's
opinion includes all necessary adjustments (consisting only of normal recurring
adjustments) to present fairly the unaudited quarterly results when read in
conjunction with the audited financial statements of the Company and the notes
thereto appearing elsewhere in this Form 10-K. These operating results are not
necessarily indicative of results of any future period. See "-- Factors That May
Affect Future Results -- Fluctuations in Quarterly Operating Results."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
--------- -------- --------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.......................... $ 2,088 $2,166 $ 2,092 $2,455 $2,417 $2,486 $2,635 $4,826
Cost of sales.................. 692 745 647 714 932 948 968 2,051
------ ------ ------ ------ ------ ------ ------ ------
Gross profit................. 1,396 1,421 1,445 1,741 1,485 1,538 1,667 2,775
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and development..... 159 204 203 176 270 331 313 372
Sales, general and
administrative............. 865 905 891 1,126 1,056 1,109 1,177 1,855
Nonrecurring charge for
acquisition of
technology................. -- -- -- 80 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses... 1,024 1,109 1,094 1,382 1,326 1,440 1,490 2,227
------ ------ ------ ------ ------ ------ ------ ------
Income from operations......... 372 312 351 359 159 98 177 548
Other income, net.............. 12 5 15 26 92 206 226 175
------ ------ ------ ------ ------ ------ ------ ------
Income before provision for
income taxes................. 384 317 366 385 251 304 403 723
Provision for income taxes..... (161) (136) (147) (8) (26) (122) (161) (367)
------ ------ ------ ------ ------ ------ ------ ------
Net income..................... $ 223 $ 181 $ 219 $ 377 $ 225 $ 182 $ 242 $ 356
====== ====== ====== ====== ====== ====== ====== ======
Net income per share........... $ 0.05 $ 0.04 $ 0.05 $ 0.08 $ 0.04 $ 0.03 $ 0.04 $ 0.05
====== ====== ====== ====== ====== ====== ====== ======
Shares used in per share
calculation(1)............... 4,525 4,549 4,558 4,700 5,697 6,758 6,750 6,708
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................. 33.1 34.4 30.9 29.1 38.6 38.1 36.7 42.5
----- ----- ----- ----- ----- ----- ----- -----
Gross profit................. 66.9 65.6 69.1 70.9 61.4 61.9 63.3 57.5
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Research and development..... 7.6 9.4 9.7 7.2 11.2 13.3 11.9 7.7
Sales, general and
administrative............. 41.5 41.8 42.6 45.8 43.7 44.6 44.7 38.4
Nonrecurring charge for
acquisition of
technology................. -- -- -- 3.3 -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses... 49.1 51.2 52.3 56.3 54.9 57.9 56.5 46.1
----- ----- ----- ----- ----- ----- ----- -----
Income from operations......... 17.8 14.4 16.8 14.6 6.6 3.9 6.7 11.4
Other income, net.............. 0.6 0.2 0.7 1.1 3.8 8.3 8.6 3.6
----- ----- ----- ----- ----- ----- ----- -----
Income before provision for
income taxes................. 18.4 14.6 17.5 15.7 10.4 12.2 15.3 15.0
Provision for income taxes..... (7.7) (6.2) (7.0) (0.3) (1.1) (4.9) (6.1) (7.6)
----- ----- ----- ----- ----- ----- ----- -----
Net income..................... 10.7% 8.4% 10.5% 15.4% 9.3% 7.3% 9.2% 7.4%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) For an explanation of shares used in per share calculations, see Note 1 of
Notes to Consolidated Financial Statements.
18
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
In February 1996, the Company sold 1,982,500 shares of its Common Stock in
connection with its initial public offering ("IPO"). The net proceeds of this
offering were approximately $15.7 million after deducting underwriting discounts
and commissions and expenses of the offering. The Company has used a portion of
the net proceeds from the IPO for purchases of inventory, leasehold improvements
and payment of certain accrued liabilities.
From January 1994, the Company has funded the operations primarily from
cash generated from operations. Net cash provided from operations totaled
approximately $896,000 and $736,000 in 1995 and 1994, respectively, and net cash
used in operations totaled $1,256,000 in 1996. The Company used approximately
$10,790,000 in investing activities primarily for available-for-sale securities
in 1996 and approximately $235,000 and $32,000 in investing activities primarily
for the acquisition of fixed assets in 1995 and 1994, respectively. Net cash
provided by financing activities during 1996 was $15,782,000, which consisted
primarily of proceeds from the Company's IPO. Net cash used in financing
activities in 1995 and 1994 consisted of approximately $118,000 and $289,000,
respectively, primarily for the repayment of funds previously borrowed under the
Company's bank line of credit.
At December 31, 1996, the Company's primary sources of liquidity included
cash, cash equivalents and short term investments of $15.1 million. In addition,
the Company has available $1,000,000 under its unsecured line of credit which
bears interest at the bank's prime rate plus 0.75% and expires in September
1997. The Company believes that, based on current estimates, its current cash
balances, short term investments net cash provided by operating activities and
credit facility will be sufficient to meet its working capital and capital
expenditure requirements at least through 1997.
During the year ended December 31, 1996, the Company used $1.3 million in
operating activities. Sources of cash included net income of $1.0 million offset
by increases in inventories of $.603 million and increases in accounts
receivable of $2.9 million. The increase in inventories is primarily due to the
purchase of components for the OcuLight GL, shipments of which were unexpectedly
delayed in the third quarter due to delays in receipt of FDA approval, the
unavailability of a sole source component and to purchases of components for the
Company's other products. During 1996, while the Company waited for FDA approval
of the OcuLight GL, the Company built up its inventory of the OcuLight SL in
order to be able to allocate substantial manufacturing resources to producing
the OcuLight GL. When the introduction of the OcuLight GL was delayed due to
delays in FDA approval and the inability to obtain certain components, the
Company experienced increases in inventory levels and manufacturing labor
inefficiencies. The Company expects to continue to devote most of its
manufacturing capacity to the assembly of the OcuLight GL during the first half
of 1997. The Company expects to reduce inventory of the OcuLight SL over the
first half of 1997.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Dependence on Visible Photocoagulator. The Company introduced a new
semiconductor-based photocoagulator system, the OcuLight GL, in the second half
of 1996. The Company devoted significant resources to the development and
commercial introduction of the OcuLight GL. The Company believes that the
continued growth of its sales, if any, will be substantially dependent upon
sales of this visible light laser system. While the OcuLight GL has been
successfully introduced, the Company has continued to face risks associated with
developing and manufacturing a new product. For example, the Company experienced
delays in its manufacturing of the OcuLight GL due to the inability of a
supplier of a sole-source component to deliver components in volume and on a
timely basis. The Company has worked with this supplier to resolve these
difficulties and is also actively qualifying a second source for that component.
The Company expects to ship products incorporating components from this second
source by the second quarter of 1997. Other difficulties may occur, for example,
despite testing by the Company, quality and reliability problems may arise which
may result in reduced bookings, manufacturing rework costs, delays in collecting
accounts receivable, additional service and warranty costs and a decline in the
Company's competitive position. Moreover, the Company believes that
recommendations by ophthalmologists and clinicians for use of this laser will be
essential for its continued market acceptance. While the Company believes that
the OcuLight GL has been
19
<PAGE> 21
generally accepted by the market, ophthalmologists and clinicians may not
recommend this laser or related treatments unless they conclude, based upon
clinical data and other factors, that it is a beneficial alternative to other
technologies and treatments, including more established argon gas lasers. There
can be no assurance that the Company will be able to manufacture this visible
laser system has been on a cost-effective, timely basis or that it will achieve
widespread market acceptance. Additionally, the OcuLight GL competes directly
with established on-based and other photocoagulator systems currently sold by
the Company's competitors and new systems being introduced by competitors and
the Company expects to continue to experience significant competitive pressures.
Failure of the OcuLight GL system to achieve widespread market acceptance for
any reason would have a material adverse effect on the Company's business,
results of operations and financial condition.
Dependence on Continued Market Acceptance of Infrared
Photocoagulators. Prior to the third quarter of 1996, substantially all of the
Company's revenues had been derived from sales of its OcuLight Diode Laser
Photocoagulator system (the "OcuLight SL System"), an infrared, invisible light,
semiconductor-based laser console and interchangeable delivery devices, into the
ophthalmic medical device market. The ophthalmic community historically has used
argon-gas photocoagulators which produce visible light and the substantial
majority of photocoagulators sold for ophthalmic purposes are argon-gas. Because
sales of the Company's OcuLight SL System represent a significant portion of the
infrared laser market, increased sales of the Company's infrared system will
depend on the rate at which users convert to infrared photocoagulators.
Equipment purchasing decisions may be based on a number of factors, in addition
to price and performance. For example, many ophthalmologists have been trained
in medical school to use visible lasers and may be reticent to change to
infrared lasers. There can be no assurance that the OcuLight SL System will
continue to be accepted by the market or that other competitive treatments will
not be developed, and therefore that sales derived from the OcuLight SL System
will continue to grow at historical rates or be sustainable at current sales
levels. Any decline in the demand for the OcuLight SL System or any failure of
sales derived from such products to meet the Company's expectations would have a
material adverse effect on the business, results of operations and financial
condition of the Company.
Management of Growth. With the introduction of the OcuLight GL, the
Company has recently experienced, and may continue to experience growth in
production, the number of its employees, the scope of its operating and
financial systems and the geographic area of its operations. This growth has
resulted in new and increased responsibilities for management personnel and has
placed and continues to place a significant strain upon the Company's
management, operating, inventory and financial systems and resources. To
accommodate recent growth and to compete effectively and manage future growth,
if any, the Company has been required to continue to implement and improve
operational, financial and management information systems, procedures and
controls and to expand, train, motivate and manage its work force. The Company
has been implementing a new management information system in manufacturing and
expects to continue this implementation throughout the Company through 1997. The
Company's future success will depend on the successful installation of this
system as well as on the ability of its current and future executive officers to
operate effectively, both independently and as a group. There can be no
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's existing and future operations. Any failure to
implement and improve the Company's operational, financial and management
systems or to expand, train, motivate or manage employees could have a material
adverse effect on the Company's business, results of operations and financial
condition. Additionally, the Company is in the process of relocating to a larger
facility. There can be no assurance that the Company's operations will not be
disrupted during such move, possibly causing a material adverse effect on the
Company's results of operations.
Dependence on Development of New Products and New Applications. The
Company's future success is dependent upon, among other factors, its ability to
develop, obtain regulatory approval, manufacture and introduce on a timely and
cost-effective basis as well as successfully sell and achieve market acceptance
of new products and applications and enhanced versions of existing products. The
extent of, and rate at which, market acceptance and penetration are achieved by
future products, is a function of many variables, including price, safety,
efficacy, reliability, marketing and sales efforts, the development of new
applications for these products and general economic conditions affecting
purchasing patterns. In 1996, the Company developed a
20
<PAGE> 22
new product which is intended to be used in the dermatology market to treat
vascular and pigmented skin lesions. The new product, the DioLite 532 will
deliver pulsed laser power through a variety of fiber optic delivery device
handpieces. The Company has submitted a 510(k) notification for the DioLite 532.
There can be no assurance that the FDA will not require clinical data or that
the FDA will grant 510(k) clearance in a timely manner, if at all. Even if the
Company's products receive FDA clearance or approval, there can be no assurance
that such products will achieve clinical acceptance or that the Company can
successfully manage the introduction of such product into the dermatology
market, a market that the Company's products do not currently address and in
which the Company has no experience. The failure of the Company to successfully
develop and introduce new products or enhanced versions of existing products
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company is seeking to expand the market for
its existing and new products by working with clinicians and third parties to
identify new applications for its products, validating new procedures which
utilize its products and responding more effectively to new procedures. There
can be no assurance that the Company's efforts to develop new applications for
its products will be successful, that it can obtain regulatory approvals to use
its products in new clinical applications in a timely manner, or at all, or gain
satisfactory market acceptance for such new applications. Failure to develop and
achieve market acceptance of new applications would have a material adverse
effect on the Company's business, results of operations and financial condition.
Dependence on Key Manufacturers and Suppliers. The Company relies on third
parties to manufacture substantially all of the components used in its products,
although the Company assembles critical subassemblies as well as the final
product at its facility in Mountain View, California. There are risks associated
with the use of independent manufacturers, including unavailability of or delays
in obtaining adequate supplies of components and potentially reduced control of
quality, production costs and the timing of delivery. The Company has qualified
two or more sources for most of the components used in its products. Certain
semiconductor laser components purchased from SDL, Inc. ("SDL") are not readily
available from other suppliers. During last half 1996 and first quarter 1997 the
Company has experienced delays in its manufacturing of the OcuLight GL due to
the inability of SDL to deliver components in volume and on a timely basis. The
Company is working with this supplier to resolve these difficulties and is
actively working to qualify a second source for this component and other
components. The Company expects to commence products incorporating this
alternative sourced component in the second quarter of 1997. The process of
qualifying suppliers is ongoing, particularly as new products are introduced and
may be lengthy. The Company does not have long-term or volume purchase
agreements with any of its suppliers and currently purchases components on a
purchase order basis. No assurance can be given that these components will be
available in the quantities required by the Company, on reasonable terms, or at
all. Establishing its own capabilities to manufacture these components would
require significant scale-up expenses and additions to facilities and personnel
and could significantly decrease the Company's profit margins. The Company's
business, results of operations and financial condition would be adversely
affected if it is unable to continue to obtain components as required at a
reasonable cost
Fluctuations in Quarterly Operating Results. Although the Company has been
profitable on an annual and quarterly basis for the last four years, the
Company's sales and operating results have varied substantially on a quarterly
basis and such fluctuations are expected to continue in future periods. The
Company believes that its gross margins in 1997 will continue to be lower than
gross margins in 1996, primarily because of increases in fixed costs incurred to
support expansion of the Company's business, costs associated with the OcuLight
GL and the downward trend in average selling prices, primarily due to increased
competition. In addition, the Company expects international sales of the
OcuLight GL to exceed domestic sales of this product during the first quarter of
1997. The gross margins on international shipments of the OcuLight GL are
significantly lower than the gross margins on domestic shipments of the OcuLight
GL, primarily due distributor discounts. Additionally, the Company expects to
continue to incur increased operating expenses in the first half of 1997
associated with the introduction of the OcuLight GL. Such increases may result
in lower operating margins in the first half of 1997 slightly offset by a higher
percentage of sales to domestic customers. The ability of the Company to
increase its operating margins during the first half of 1997 and thereafter will
21
<PAGE> 23
depend primarily on continued receipt of sole source components and
qualification of a second source, successful and timely manufacturing of the
OcuLight GL and continued market acceptance of the OcuLight GL as well as
increased sales of the OcuLight SL Systems. The Company's operating results are
affected by a number of factors, many of which are beyond the Company's control.
Factors contributing to these fluctuations include the timing of the
introduction and market acceptance of new products or product enhancements by
the Company and its competitors, the cost and availability of components and
subassemblies, changes in pricing by the Company and its competitors, the timing
of the development and market acceptance of new applications for the Company's
products, the relatively long and highly variable sales cycle for the Company's
products to hospitals and other health care institutions, fluctuations in
economic and financial market conditions and resulting changes in customers' or
potential customers' budgets and increased product development costs. Any
inability to obtain adequate quantities of a sole-source component for the
OcuLight GL would adversely impact the Company's ability to ship the OcuLight
GL. In addition to these factors, the Company's quarterly results have been and
are expected to continue to be affected by seasonal factors. The Company
manufactures its products to forecast rather than to outstanding purchase
orders, and products are typically shipped shortly after receipt of a purchase
order. While backlog increased in 1996 because of manufacturing difficulties
associated with the Company's new product, the Company does not expect
significant backlog in the future and the amount of backlog at any particular
date is generally not indicative of its future level of sales. Although the
Company's manufacturing procedures are designed to assure rapid response to
customer orders, they may in certain instances create a risk of excess or
inadequate inventory levels if orders do not match forecasts. The Company
increased its inventory of the OcuLight SL system during the first three
quarters of 1996 in anticipation of allocating substantial manufacturing
resources to produce the OcuLight GL in the fourth quarter of 1996. The Company
expects to reduce inventory of the OcuLight SL through the second half of 1997.
The Company's expense levels are based, in part, on expected future sales. If
sales levels in a particular quarter do not meet expectations, the Company may
be unable to adjust operating expenses quickly enough to compensate for the
shortfall, and the Company's results of operations may be adversely affected. In
addition, the Company has historically made a significant portion of each
quarter's product shipments near the end of the quarter. If that pattern
continues, even short delays in shipment of products at the end of a quarter
could have a material adverse effect on results of operations for such quarter.
As a result of the above factors, sales for any future quarter are not
predictable with any significant degree of accuracy and operating results in any
period should not be considered indicative of the results to be expected for any
future period. There can be no assurance that the Company will remain profitable
in the future or that operating results will not vary significantly.
Competition. Competition in the market for devices used for ophthalmic
treatments is intense and is expected to increase. This market is also
characterized by rapid technological innovation and change and the Company's
products could be rendered obsolete as a result of future innovations. The
Company's competitive position depends on a number of factors including product
performance, characteristics and functionality, ease of use, scalability,
durability and cost. In addition to photocoagulators, the Company competes with
pharmaceuticals, other technologies and other surgical techniques. Although many
of the Company's current competitors do not currently sell semiconductor lasers
such as those used in the Company's products, such competitors could incorporate
these semiconductor lasers into their products in the future and compete
directly with the Company. The Company's principal competitors are Coherent,
Inc., Nidek, Zeiss, Keeler and HGM Medical Laser Systems, Inc. Of these
companies, only Nidek, Zeiss and Keeler currently offer a semiconductor-based
laser system. Other competitors have substantially greater financial,
engineering, product development, manufacturing, marketing and technical
resources than the Company. Such companies also have greater name recognition
than the Company and long-standing customer relationships. In addition, there
can be no assurance that other medical companies, academic and research
institutions or others will not develop new technologies or therapies, including
medical devices, surgical procedures or pharmacological treatments and obtain
regulatory approval for products utilizing such techniques that are more
effective in treating the ophthalmic conditions targeted by the Company or are
less expensive than the Company's current or future products, and that the
Company's technologies and products would not be rendered obsolete by such
developments. Any such developments could have a material adverse effect on the
business, financial condition and results of operations of the Company.
22
<PAGE> 24
Dependence on Collaborative Relationships. The Company has entered into
collaborative relationships with academic medical centers and physicians in
connection with the research and development and clinical testing of its
products. The Company plans to collaborate with third parties to develop and
commercialize existing and new products. In May 1996, the Company executed an
agreement with PDT, a maker of photodynamic drugs, under which the Company and
PDT will collaborate to develop a device which will emit a laser beam to
activate a photodynamic drug being developed by PDT to achieve a desired
therapeutic result. The development of this new photodynamic system will require
at least three years and significant financial and other resources. There can be
no assurance that this collaborative development effort will continue or that it
will result in the successful development and introduction of a photodynamic
system. The Company believes that these current and future relationships are
important because they would allow the Company greater access to funds, to
research, development and testing resources and to manufacturing, sales and
distribution resources. However, the amount and timing of resources to be
devoted to these activities are not within the Company's control. There can be
no assurance that such parties will perform their obligations as expected or
that the Company's reliance on others for clinical development, manufacturing
and distribution of its products will not result in unforeseen problems.
Further, there can be no assurance that the Company's collaborative partners
will not develop or pursue alternative technologies either on their own or in
collaboration with others, including the Company's competitors, as a means of
developing or marketing products for the diseases targeted by the collaborative
programs and by the Company's products. The failure of any current or future
collaboration efforts could have a material adverse effect on the Company's
ability to introduce new products or applications and therefore could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Dependence on International Sales. The Company derives, and expects to
continue to derive, a large portion of its revenue from international sales. In
1996, 1995 and 1994, the Company's international sales were $6.1 million, $4.3
million, and $3.5 million, or 49.6%, 48.7% and 48.7%, respectively, of total
sales. Therefore, a large portion of the Company's revenues will continue to be
subject to the risks associated with international sales, including fluctuations
in foreign currency exchange rates, shipping delays, generally longer
receivables collection periods, changes in applicable regulatory policies,
international monetary conditions, domestic and foreign tax policies, trade
restrictions, duties and tariffs, and economic and political instability. Each
of these factors could have a significant impact on the Company's ability to
deliver products on a competitive and timely basis.
Patents and Proprietary Rights. The Company's success and ability to
compete is dependent in part upon its proprietary information. The Company
relies on a combination of patents, trade secrets, copyright and trademark laws,
nondisclosure and other contractual agreements and technical measures to protect
its intellectual property rights. The Company files patent applications to
protect technology, inventions and improvements that are significant to the
development of its business. The Company has been issued six United States
patents on the technologies related to its products and processes. The Company
has applied for two additional patents related to its solid state laser
products. There can be no assurance that any of the Company's patent
applications will issue as patents, that any patents now or hereafter held by
the Company will offer any degree of protection, or that the Company's patents
or patent applications will not be challenged, invalidated or circumvented in
the future. Moreover, there can be no assurance that the Company's competitors,
many of which have substantial resources and have made substantial investments
in competing technologies, will not seek to apply for and obtain patents that
will prevent, limit or interfere with the Company's ability to make, use or sell
its products either in the United States or in international markets.
In addition to patents, the Company relies on trade secrets and proprietary
know-how which it seeks to protect, in part, through proprietary information
agreements with employees, consultants and other parties. The Company's
proprietary information agreements with its employees and consultants contain
industry standard provisions requiring such individuals to assign to the Company
without additional consideration any inventions conceived or reduced to practice
by them while employed or retained by the Company, subject to customary
exceptions. There can be no assurance that proprietary information agreements
with employees, consultant and others will not be breached, that the Company
would have adequate remedies for any breach,
23
<PAGE> 25
or that the Company's trade secrets will not otherwise become known to or
independently developed by competitors.
The laser and medical device industry is characterized by frequent
litigation regarding patent and other intellectual property rights and companies
in the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Numerous patents are held by others, including
academic institutions and competitors of the Company. Because patent
applications are maintained in secrecy in the United States until patents are
issued and are maintained in secrecy for a period of time outside the United
States, the Company has not conducted any searches to determine whether the
Company's technology infringes any patents or patent applications. The Company
has from time to time been notified of, or has otherwise been made aware of
claims that it may be infringing upon patents or other proprietary intellectual
property owned by others. If it appears necessary or desirable, the Company may
seek licenses under such patents or proprietary intellectual property. Although
patent holders commonly offer such licenses, no assurance can be given that
licenses under such patents or intellectual property will be offered or that the
terms of any offered licenses will be reasonable or will not adversely impact
the Company's operating results. Any claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause shipment delays or require the Company to develop
non-infringing technology or to enter into royalty or licensing agreements.
Although patent and intellectual property disputes in the medical device area
have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. An adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, results of operations and financial condition.
Conversely, litigation may be necessary to enforce patents issued to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. Both the defense and prosecution of intellectual property suits or
interference proceedings are costly and time consuming.
Government Regulation. The medical devices marketed and manufactured by
the Company are subject to extensive regulation by the FDA and, in some
instances, by foreign and state governments. Pursuant to the Federal Food, Drug
and Cosmetic Act of 1976, as amended, and the regulations promulgated
thereunder, the FDA regulates the clinical testing, manufacture, labeling, sale,
distribution and promotion of medical devices. Before a new device can be
introduced into the market, the manufacturer must obtain market clearance
through either the 510(k) premarket notification process or the lengthier
premarket approval ("PMA") application process. Obtaining these approvals can
take a long time and delay the introduction of a product. For example, the
introduction of the OcuLight GL in the United States was delayed about three
months from the Company's expectations due to the longer than expected time
period required to obtain FDA premarket clearance. Noncompliance with applicable
requirements, including good manufacturing practices ("GMP"), can result in,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or premarket approval for devices, withdrawal of
marketing approvals, and criminal prosecution. The FDA also has the authority to
request repair, replacement or refund of the cost of any device manufactured or
distributed by the Company. The failure of the Company to obtain government
approvals or any delays in receipt of such approvals would have a material
adverse effect on the Company's business, results of operations and financial
condition.
Reimbursement. The Company's products are typically purchased by doctors,
clinics, hospitals and other users, which bill various third-party payors, such
as governmental programs and private insurance plans, for the health care
services provided to their patients. Third-party payors carefully review and are
increasingly challenging the prices charged for medical products and services.
Reimbursement rates from private companies vary depending on the procedure
performed, the third-party payor, the insurance plan and other factors. Medicare
reimburses hospitals on a prospectively-determined fixed amount for the costs
associated with an in-patient hospitalization based on the patient's discharge
diagnosis, and reimburses physicians a prospectively-determined fixed amount
based on the procedure performed, regardless of the actual costs incurred by the
hospital or physician in furnishing the care and unrelated to the specific
devices used in that procedure. Third-party payors are increasingly scrutinizing
whether to cover new products and the level of
24
<PAGE> 26
reimbursement for covered products. While the Company believes that the laser
procedures using its products have generally been reimbursed, payors may deny
coverage and reimbursement for the Company's products if they determine that the
device was not reasonable and necessary for the purpose for which used, was
investigational or not cost-effective. Additionally, there can be no assurance
that PDT will be able to obtain coverage for its use of drugs with the Company's
OcuLight Systems, or that the reimbursement will be adequate to cover the
treatment procedure. Failure by doctors, clinics, hospitals and other users of
the Company's products to obtain adequate reimbursement for use of the Company's
products from third-party payors, and/or changes in government legislation or
regulation or in private third-party payors' policies toward reimbursement for
procedures employing the Company's products could have a material adverse effect
on the Company's business, results of operations and financial condition.
Moreover, the Company is unable to predict what legislation or regulation, if
any, relating to the health care industry or third-party coverage and
reimbursement may be enacted in the future, or what effect such legislation or
regulation may have on the Company.
Product Liability and Insurance. The Company may be subject to product
liability claims in the future. The Company's products are highly complex, used
to treat extremely delicate eye tissue and are often used in situations where
there is a high risk of serious injury or adverse side effects. In addition,
although the Company recommends that its disposable products only be used once
and so prominently labels these disposables, the Company believes that certain
customers may reuse these disposables. Were such a disposable not adequately
sterilized by the customer between such uses, a patient could suffer serious
consequences, possibly resulting in a suit against the Company for damages.
Accordingly, the manufacture and sale of medical products entails significant
risk of product liability claims. Although the Company maintains product
liability insurance with coverage limits of $5.0 million per occurrence and an
annual aggregate maximum of $6.0 million, there can be no assurance that the
coverage of the Company's insurance policies will be adequate. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful claim brought against the Company in excess of its insurance
coverage could have a material adverse effect on the Company's business, results
of operations and financial condition. To date, the Company has not experienced
any product liability claims.
Volatility of Stock Price. The trading price of the Company's Common Stock
has been subject to wide fluctuations in response to a variety of factors since
the Company's initial public offering in February 1996, including quarterly
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, developments in patents or other
intellectual property rights, general conditions in the ophthalmic laser
industry, revised earning estimates, comments or recommendations issued by
analysts who follow the Company, its competitors or the ophthalmic laser
industry and general economic and market conditions. Additionally, the stock
market in general, and the market for technology stocks in particular, have
experienced extreme price volatility in recent years. Volatility in price and
volume has had a substantial effect on the market prices of many technology
companies for reasons unrelated or disproportionate to the operating performance
of such companies. These broad market fluctuations could have a significant
impact on the market price of the Common Stock. See Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters-Market Information
for Common Equity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Balance sheets of the Company as of December 31, 1996 and 1995 and
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996, together with the related notes and
the report of Coopers & Lybrand L.L.P., independent accountants, are set forth
on the following pages. Other required financial information is set forth
herein, as more fully described in Item 14 hereof.
25
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
IRIDEX Corporation
Mountain View, California
We have audited the accompanying consolidated balance sheets of IRIDEX
Corporation and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on those financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
IRIDEX Corporation and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
San Jose, California
February 10, 1997
26
<PAGE> 28
IRIDEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 4,963 $1,227
Available-for-sale securities........................................... 4,951 --
Accounts receivable, net of allowance for doubtful accounts of $265 in
1996 and $383 in 1995................................................ 5,390 2,478
Inventories............................................................. 1,859 1,256
Prepaids and other current assets....................................... 122 285
Deferred income taxes................................................... 519 795
------- ------
Total current assets............................................ 17,804 6,041
Available-for-sale securities........................................... 5,200 --
Property and equipment, net............................................... 655 254
Deferred income taxes..................................................... 48 100
------- ------
Total assets.................................................... $23,707 $6,395
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 535 $ 293
Accrued expenses........................................................ 1,684 1,401
Current portion of capital lease obligations............................ 8 8
------- ------
Total current liabilities....................................... 2,227 1,702
Capital lease obligations, net of current portion......................... 2 8
------- ------
Total liabilities............................................... 2,229 1,710
------- ------
Commitments and contingencies (Note 5).
Stockholders' Equity:
Convertible Preferred Stock, $.01 par value:
Authorized: Series A through D1: 2,000,000 shares
Issued and outstanding: none in 1996 and 1,891,663 shares in 1995.... -- 19
(Liquidation value: $5,219)
Common Stock, $.01 par value:
Authorized: 30,000,000 shares;
Issued and outstanding: 6,350,180 shares in 1996 and 1,505,424 shares
in 1995............................................................. 63 15
Additional paid-in capital.............................................. 21,248 5,489
Retained earnings (deficit)............................................. 167 (838)
------- ------
Total stockholders' equity......................................... 21,478 4,685
------- ------
Total liabilities and stockholders' equity...................... $23,707 $6,395
======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
27
<PAGE> 29
IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Sales........................................................... $12,364 $8,801 $7,182
Cost of sales................................................... 4,899 2,798 2,423
------- ------ ------
Gross profit.......................................... 7,465 6,003 4,759
------- ------ ------
Operating expenses:
Research and development...................................... 1,286 742 629
Sales, general and administrative............................. 5,197 3,787 3,383
Nonrecurring charge for acquisition of technology............. -- 80 --
------- ------ ------
Total operating expenses.............................. 6,483 4,609 4,012
------- ------ ------
Income from operations................................ 982 1,394 747
Interest expense................................................ -- (16) (29)
Interest income................................................. 691 64 22
Other income.................................................... 8 10 6
------- ------ ------
Income before benefit from (provision for) income
taxes............................................... 1,681 1,452 746
Benefit from (provision for) income taxes....................... (676) (452) 1,039
------- ------ ------
Net income............................................ $ 1,005 $1,000 $1,785
======= ====== ======
Net income per share............................................ $ 0.16 $ 0.22 $ 0.40
======= ====== ======
Shares used in per share calculation............................ 6,478 4,630 4,515
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 30
IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
------------------- ------------------ PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- ------ --------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993....... 1,891,663 $ 19 1,108,625 $ 11 $ 5,235 $ (3,623) $ 1,642
Issuance of Common Stock under
stock option plan............ -- -- 56,192 1 8 -- 9
Net income...................... -- -- -- -- -- 1,785 1,785
---------- ---- --------- --- ------- ------- -------
Balances, December 31, 1994....... 1,891,663 19 1,164,817 12 5,243 (1,838) 3,436
Issuance of Common Stock........ -- -- 90,800 1 181 -- 182
Issuance of Common Stock under
stock option plan............ -- -- 249,807 2 65 -- 67
Net income...................... -- -- -- -- -- 1,000 1,000
---------- ---- --------- --- ------- ------- -------
Balances, December 31, 1995....... 1,891,663 19 1,505,424 15 5,489 (838) 4,685
Issuance of Common Stock........ -- -- 1,982,500 20 15,639 -- 15,659
Issuance of Common Stock under
stock option plan............ -- -- 9,096 -- 9 -- 9
Issuance of Common Stock under
Employee Stock Purchase
Plan......................... -- -- 15,665 -- 120 -- 120
Conversion of Preferred Stock... (1,891,663) (19) 2,837,495 28 (9) -- --
Net Income...................... -- -- -- -- -- 1,005 1,005
---------- ---- --------- --- ------- ------- -------
Balances, December 31, 1996....... -- $ -- 6,350,180 $ 63 $ 21,248 $ 167 $21,478
========== ==== ========= === ======= ======= =======
</TABLE>
Accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 31
IRIDEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- ------ -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 1,005 $1,000 $ 1,785
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation.................................................. 238 92 65
Provision for doubtful accounts............................... -- 20 292
Nonrecurring charge for acquisition of technology............. -- 80 --
Changes in operating assets and liabilities:
Accounts receivable......................................... (2,912) (548) (912)
Inventories................................................. (603) (350) 201
Prepaids and other current assets........................... 163 10 18
Deferred income taxes....................................... 328 144 (1,039)
Accounts payable............................................ 242 75 (65)
Accrued expenses............................................ 283 373 391
-------- ------ ------
Net cash provided by (used in) operating activities......... (1,256) 896 736
-------- ------ ------
Cash flows from investing activities:
Purchases of available-for-sale securities....................... (61,305) -- --
Proceeds from sale of available-for-sale securities.............. 51,154 -- --
Acquisition of property and equipment............................ (639) (235) (32)
-------- ------ ------
Net cash used in investing activities....................... (10,790) (235) (32)
-------- ------ ------
Cash flows from financing activities:
Proceeds from bank borrowings.................................... -- -- 252
Payment on bank borrowings....................................... -- (175) (547)
Payments of capital lease obligations............................ (6) (10) (3)
Issuance of Common Stock, net.................................... 15,788 67 9
-------- ------ ------
Net cash provided by (used in) financing activities......... 15,782 (118) (289)
-------- ------ ------
Net increase in cash and cash equivalents................ 3,736 543 415
Cash and cash equivalents, beginning of year....................... 1,227 684 269
-------- ------ ------
Cash and cash equivalents, end of year............................. $ 4,963 $1,227 $ 684
======== ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest...................................................... $ -- $ 16 $ 29
Income taxes.................................................. $ 24 $ 27 $ --
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Additions to property and equipment and capital lease
obligations................................................... $ -- $ -- $ 11
Issuance of Common Stock in connection with acquisition.......... $ -- $ 182 $ --
Assets acquired in connection with acquisition................... $ -- $ 549 $ --
Liabilities assumed in connection with acquisition............... $ -- $ 447 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 32
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
IRIDEX Corporation (the "Company") is a world-wide provider of
semiconductor-based photocoagulator systems used to treat eye disease, including
the three leading causes of irreversible blindness which are age-related macular
degeneration, diabetic retinopathy and glaucoma. The Company conducts its
business through its wholly-owned subsidiaries, IRIS Medical Instrument, Inc.
and Light Solutions Corporation.
Financial Statement Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of 90 days or less at the time of purchase to be cash equivalents.
Available-for-Sale Securities
All marketable securities as of December 31, 1996 are considered to be
available-for-sale and therefore are carried at fair value. Available-for-sale
securities classified as current assets have scheduled maturities of less than
one year, while available-for-sale securities classified as non current assets
have scheduled maturities of more than one year. When material, unrealized
holding gains and losses on such securities are reported net of related taxes as
a separate component of stockholders' equity and computed using the specific
identification cost method. Realized gains and losses on sales of all such
securities are reported in interest and other income and computed using the
specific identification cost method.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a standard cost basis which approximates the first-in, first-out (FIFO)
method. Appropriate consideration is given to obsolescence, excessive levels,
deterioration and other factors in evaluating lower of cost or market.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, which is generally three years.
Amortization of property and equipment under capital lease obligations is
computed using the straight-line method over the shorter of the remaining lease
term or the estimated useful life of the related assets, typically three years.
Revenue Recognition
The Company recognizes product sales upon shipment of product to the
customer, upon fulfillment of acceptance terms, if any, and when no significant
contractual obligations remain outstanding.
Research and Development
Research and development expenditures are charged to operations as
incurred.
Advertising
The Company expenses advertising costs as they are incurred. Advertising
expenses for 1996, 1995 and 1994 were $175,000, $49,000 and $52,000,
respectively.
31
<PAGE> 33
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (Statement 109). Under Statement
109, deferred assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
Computation of Net Income Per Share
Net income per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of stock options (using the treasury
stock method for all periods presented). For those periods prior to the initial
public offering date, pursuant to the Securities and Exchange Commission Staff
Accounting Bulletins, common and common equivalents shares issued at prices
below the public offering price during the 12 months immediately preceding the
offering date have been included in the calculation as if they were outstanding
for all periods presented (using the treasury stock method and the initial
public offering price).
Concentration of Credit Risk
The Company's cash and cash equivalents are deposited in three financial
institutions and comprise demand and money market accounts.
The Company markets it products to distributors and end-users throughout
the world. Sales to international distributors are generally made on open credit
terms. The Company also offers extended payment terms on selected sales
transactions. Management performs ongoing credit evaluations of the Company's
customers and maintains an allowance for potential credit losses, but
historically has not experienced any significant losses related to individual
customers or group of customers in any particular geographic area.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent accounting pronouncements
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," (SFAS 128) which specifies the
computation, presentation and disclosure requirements for Earnings Per Share.
SFAS 128 will become effective for the Company's 1997 fiscal year. The impact of
adopting SFAS 128 on the Company's financial statements has not yet been
determined.
Reclassifications
Certain amounts in the financial statements have been reclassified to
conform with the current year's presentation. The reclassification had no impact
on previously reported working capital, income from operations or net income.
32
<PAGE> 34
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITION
Effective October 27, 1995, the Company acquired the assets of Light
Solutions Corporation. Consideration paid consisted of the assumption of certain
liabilities and the issuance of 90,800 shares of the Company's Common Stock.
The acquisition has been accounted for as a purchase. The fair market value
of assets acquired, research and development acquired and liabilities assumed is
as follows (in thousands):
<TABLE>
<S> <C>
Liabilities assumed.................................................. $ 447
Common Stock issued.................................................. 182
Tangible assets acquired............................................. (318)
Contracts............................................................ (231)
Purchased in-process research and development........................ (80)
-----
$ --
=====
</TABLE>
The amount allocated to purchase in-process technology was expensed on the
acquisition date.
3. BALANCE SHEET DETAIL
Balance sheet detail comprised:
Available-for-sale securities:
Available-for-sale securities at December 31, 1996 consist of municipal
notes and corporate debt securities with fair value of $5,200 and $4,951
respectively. Municipal notes have scheduled maturities from November 2005
through January 2036; and all corporate debt securities have scheduled
maturities of less than one year. At December 31, 1996 unrealized holding gains
and losses were not significant and there were no realized gains or losses on
sale of available-for-sale securities.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials and work in process........................ $ 924 $ 614
Finished goods........................................... 935 642
------ ------
Total inventories................................ $1,859 $1,256
====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Property and Equipment:
Equipment................................................ $1,226 $ 587
Less accumulated depreciation and amortization........... (571) (333)
------ ------
Total property and equipment..................... $ 655 $ 254
====== ======
</TABLE>
33
<PAGE> 35
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accrued Expenses:
Accrued payroll and related expenses..................... $ 562 $ 560
Accrued Vacation......................................... 169 115
Distributor commissions.................................. 129 78
Accrued warranty......................................... 114 135
Income taxes payable..................................... 505 281
Other accrued expenses................................... 205 232
------ ------
Total accrued expenses........................... $1,684 $1,401
====== ======
</TABLE>
4. BANK BORROWINGS
The Company has a revolving line of credit agreement with a bank expiring
on October 1, 1997, which provides for borrowings of up to $1,000,000 at the
bank's prime rate plus 0.75% (9.0% at December 31, 1996). The agreement contains
restrictive covenants including prohibiting payment of dividends without the
bank's prior consent. The Company was in compliance with these requirements at
December 31, 1996. There were no borrowings against the credit line at December
31, 1996.
5. COMMITMENTS AND CONTINGENCIES
Lease Agreements
The Company is relocating its operating facilities and has entered into an
noncancelable operating lease commencing March 1, 1997. The lease expires in
2002 and contains a renewal option. Rent expense related to the old facility
lease was $108,000, $105,000 and $101,000 for the years ended December 31, 1996,
1995 and 1994, respectively. Rental income related to a facility sublease was
$7,000, $29,000 and $24,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
Future minimum lease payments under the new operating leases at December
31, 1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
---------------------------------------------------- ------
<S> <C>
1997.............................................. $ 363
1998.............................................. 491
1999.............................................. 509
2000.............................................. 531
2001.............................................. 554
2002.............................................. 93
------
$2,541
======
</TABLE>
License Agreements
The Company is obligated to pay royalties equivalent to 5% of sales from
certain products under certain license agreements. Royalty expense was $37,000,
$28,000 and $13,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
34
<PAGE> 36
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING AND REINCORPORATION
In February 1996, the Company was reincorporated from California into
Delaware, at which time each share of the Company's outstanding California
Common Stock was exchanged for one share of the Delaware Common Stock. Prior to
this, on January 10, 1996, the Company effected a 1-for-2 reverse stock split of
the Company's Common Stock. All Common and Common equivalent shares and per
share amounts in these financial statements have been adjusted retroactively to
give effect to the split.
In February 1996, the Company issued 1,600,000 shares of its Common Stock
in an initial public offering in which an additional 950,000 shares of Common
Stock were sold by existing stockholders. In March 1996, the Company issued an
additional 382,500 shares of its Common Stock pursuant to exercise of an over
allotment option granted to the underwriters in connection with the initial
public offering. In connection with the initial public offering and the
underwriters over allotment, the Company received proceeds of $15,659,000, net
of offering expenses of $2,184,000. In connection with the offering, all shares
of Convertible Preferred Stock totaling 1,891,663 were converted into 2,837,495
shares of Common Stock.
CONVERTIBLE PREFERRED STOCK
During 1996, the Company amended its Articles of Incorporation to authorize
2,000,000 shares of undesignated preferred stock. Preferred Stock may be issued
from time to time in one or more series. As of December 31, 1996, due to
conversion to Common Stock at initial public offering, the Company had no
preferred stock issued and outstanding. At December 31,1995, the details for
Series A, Series B, Series C and Series D Convertible Preferred Stock were (in
thousands):
<TABLE>
<CAPTION>
SHARES OF
SHARES COMMON STOCK PREFERENTIAL
SHARES ISSUED AND RESERVED FOR LIQUIDATION
SERIES AMOUNT AUTHORIZED OUTSTANDING CONVERSION VALUE
- ---------------------------------- ------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
A................................. $ 191 191 191 286 $ 191
B................................. 1,125 500 500 750 1,125
C................................. 1,403 432 432 648 1,403
D................................. 2,479 769 769 1,154 2,500
------ ----- ----- ----- ------
$5,198 1,892 1,892 2,838 $5,219
====== ===== ===== ===== ======
</TABLE>
STOCK OPTION PLANS
Amended and Restated 1989 Incentive Stock Plan
The Amended and Restated 1989 Plan (the "1989 Plan") provides for the
granting to employees (including officers and employee directors) of incentive
stock options and for the granting to employees (including officers and employee
directors) and consultants of nonstatutory stock options and stock purchase
rights ("SPRs"). The exercise price of incentive stock options and SPRs granted
under the 1989 Plan must be at least equal to the fair market value of the
shares at the time of grant. With respect to any recipient who owns stock
possessing more than 10% of the voting power of the Company's outstanding
capital stock, the exercise price of any option or SPR granted must be at least
equal to 110% of the fair market value at the time of grant. Options granted
under the 1989 Plan are exercisable at such times and under such conditions as
determined by the Administrator; generally over a four year period. The maximum
term of incentive stock options granted to any recipient must not exceed ten
years; provided, however, that the maximum term of an incentive stock option
granted to any recipient possessing more than 10% of the voting power of the
Company's outstanding capital stock must not exceed five years. In the case of
SPRs, unless the Administrator determines otherwise, the Company has a
repurchase option exercisable upon the voluntary or involuntary
35
<PAGE> 37
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
termination of the purchaser's employment with the Company for any reason
(including death or disability). Such repurchase option lapses at a rate
determined by the Administrator. The purchase price for shares repurchased by
the Company is the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company.
1995 Director Option Plan
In October 1995, the Company adopted the 1995 Director Option Plan (the
"Director Plan"), under which members of the Board of Directors are granted
options to purchase 11,250 shares upon the first to occur of their appointment
or the adoption of the Director Plan ("First Option") and an option to purchase
3,750 shares ("Subsequent Option") on July 1 of each year thereafter provided
that he or she has served on the Board for at least the preceding six months.
The options granted are at fair market value on the date of grant. The First
Option vests over a three year period, a twelfth on the last day of each
calendar quarter after the vesting start date. The Subsequent Option grants vest
over a one-year period, one fourth on the last day of each calendar quarter
after all previously granted options have become fully vested. Options granted
under the Director Plan have a term of ten years.
In the event of merger of the Company with or into another corporation,
resulting in a change of control, or the sale of substantially all of the assets
of the Company, each option becomes exercisable in full, shall be assumed by the
successor corporation, and shall be exercisable 30 days after written notice to
the holder of the event causing the change in control.
Unless terminated sooner, the plan will terminate in 2005. The Board has
authority to amend or terminate the Director Plan, provided no such amendment
may impair the rights of any optionee without the optionee's consent.
Information with respect to activity under these option plans are set forth
below:
<TABLE>
<CAPTION>
SHARES OUTSTANDING OPTIONS
AVAILABLE ---------------------------------------
FOR NUMBER PRICE PER AGGREGATE
GRANT OF SHARES SHARE PRICE
--------- --------- ---------------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993....................... 62,522 423,815 $0.166 - $1.00 124
Additional shares reserved..................... 150,000
Options granted................................ (119,500) 119,500 $1.00 119
Options exercised.............................. (56,192) $0.166 (9)
Options terminated............................. 5,563 (5,563) $0.166 - $1.00 (5)
-------- -------- ------
Balance, December 31, 1994....................... 98,585 481,560 $0.166 - $1.00 229
Additional shares reserved..................... 450,000 -- -- --
Options granted................................ (242,000) 242,000 $1.00 - $5.00 352
Options exercised.............................. (249,807) $0.166 - $1.00 (67)
Options terminated............................. 6,755 (6,755) $0.166 - $1.00 (5)
-------- -------- ------
Balance, December 31, 1995....................... 313,340 466,998 $0.166 - $5.00 509
Options granted................................ (275,850) 275,850 $6.00 - $14.88 2,127
Options exercised.............................. (9,096) $0.166 - $1.00 (8)
Options terminated............................. 100,508 (100,508) $0.166 - $14.75 (421)
-------- -------- ------
Balance, December 31, 1996....................... 137,998 633,244 $0.166 - $14.88 2,207
======== ======== ======
</TABLE>
At December 31, 1996, options to purchase 245,284 shares of the Company's
Common Stock were exercisable.
36
<PAGE> 38
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information with respect to stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- --------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE (YEARS) PRICE AT 12/31/96 PRICE
- ----------------- ----------- ------------------------ ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.166 - $ 0.166 78,203 3.91 $ 0.166 78,203 $0.166
$ 1.000 - $ 1.000 229,191 7.68 $ 1.000 144,709 $1.000
$ 2.000 - $ 2.000 101,000 8.79 $ 2.000 21,590 $2.000
$ 5.000 - $ 7.750 206,450 9.79 $ 7.229 782 $5.799
$14.750 - $14.880 18,400 9.46 $ 14.856 -- --
----------- -----------
$ 0.166 - $14.880 633,244 8.13 $ 3.490 245,284 $0.858
========= =========
</TABLE>
The following information concerning the Company's stock option and
employee stock purchase plans is provided in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company accounts for such plans
in accordance with APB No. 25 and related Interpretations.
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used grants in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------------- -----------------------------
GROUP A GROUP B GROUP A GROUP B
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Risk-free Interest Rates........... 5.76% - 6.70% 5.06% -6.64% 5.79% - 6.81% 5.69% - 7.62%
Expected Life from Date of
Vesting.......................... 3 years 2 years 3 years 2 years
Volatility......................... 0.00 - 0.62 0.00 - 0.62 -- --
Dividend Yield..................... -- -- -- --
</TABLE>
The weighted average expected life was calculated based on the exercise
behavior of each group. Group A represents officers and directors who are a
smaller group holding a greater average number of options than other option
holders and who tend to exercise later in the vesting period. Group B are all
other option holders, virtually all of whom are employees. This group tends to
exercise earlier in the vesting period. For the period up to the Company's
initial public offering, zero volatility was used in the calculation.
The weighted average fair value of those options granted in 1996 and 1995
was $4.42 and $0.37, respectively.
The Company has also estimated the fair value for the purchase rights
issued under the Company's Employee Stock Purchase Plan, above, under the
Black-Scholes valuation model using the following assumptions for 1996:
Risk-free Interest Rates 5.37%
Expected Life 0.5 year
Volatility 0.62
Dividend Yield --
The weighted average fair value of those purchase rights granted in 1996
was $3.08.
37
<PAGE> 39
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following proforma income information has been prepared following the
provisions of SFAS No. 123:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(amounts in thousands
except per share
data)
<S> <C> <C>
Net income -- as reported.............................................. $ 1,005 $ 1,000
Net income -- proforma................................................. $ 886 $ 988
Net income per share -- as reported.................................... $ 0.16 $ 0.22
Net income per share -- proforma....................................... $ 0.14 $ 0.21
</TABLE>
The above proforma effects on income may not be representative of the
effects on net income for future years as option grants typically vest over
several years and additional options are generally granted each year.
1995 Employee Stock Purchase Plan
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in October 1995. A total of 50,000 shares of
Common Stock are reserved for issuance under the Purchase Plan. The Purchase
Plan permits eligible employees (including officers and employee directors) to
purchase Common Stock through payroll deductions, which may not exceed 10% of an
employee's compensation. No employee may purchase more than $25,000 worth of
stock in any calendar year or more than 1,000 shares of Common Stock in any
twelve-month period. The price of shares purchased under the Purchase Plan is
85% of the lower of the fair market value of the Common Stock at the beginning
of the offering period or the end of the offering period. The Purchase Plan will
terminate in 2005, unless sooner terminated by the Board of Directors.
7. EMPLOYEE BENEFIT PLAN
The Company has a plan known as the IRIS Medical Instruments 401(k) trust
to provide retirement benefits through the deferred salary deductions for
substantially all employees. Employees may contribute up to 15% of their annual
compensation to the plan, limited to a maximum amount set by the Internal
Revenue Service. The plan also provides for Company contributions at the
discretion of the Board of Directors. No Company contributions have been made to
the plan since inception.
8. INCOME TAXES
The provision for (benefit from) income taxes includes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
---- ---- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $247 $ 39 $ --
State.................................................... 101 269 --
Deferred:
Federal.................................................. 258 148 (851)
State.................................................... 70 (4) (188)
---- ---- -------
Income tax provision (benefit)........................ $676 $452 $(1,039)
==== ==== =======
</TABLE>
38
<PAGE> 40
IRIDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax provision at statutory rate......................... 34% 34% 34%
Utilization of net operating loss.............................. -- (20) (34)
State income taxes, net of federal benefit..................... 6 8 4
Change in valuation allowances................................. -- -- (140)
Other.......................................................... 10 (3)
--
--- ----
Effective tax rate............................................. 40% 32% (139)%
== === ====
</TABLE>
The effective income tax rate in each year was impacted by a reduction in
the Company's valuation allowance against deferred tax assets of none, $280,000
and $1,039,000 for the year ended 1996, 1995 and 1994, respectively.
The tax effect of temporary differences and carry-forwards that give rise
to significant portions of the deferred tax assets are presented below (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
---- ----
<S> <C> <C>
Depreciation.......................................................... $ 48 $100
Accrued liabilities................................................... 226 193
Allowance for excess and obsolete inventories......................... 251 239
State tax............................................................. 42 59
Net operating loss carryforward....................................... -- 78
Tax credit carryforwards.............................................. -- 226
---- ----
Net deferred tax asset................................................ $567 $895
==== ====
</TABLE>
9. MAJOR CUSTOMERS AND BUSINESS SEGMENTS
The Company operates in a single industry segment encompassing the
development, manufacture, sales and support of medical devices for the treatment
of diseases that are the leading causes of blindness.
In the years ended December 31, 1996, 1995 and 1994, respectively, no
customer individually accounted for more than 10% of the Company's revenue.
Revenue information by geographic region is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
North America........................................... $ 6,351 $4,606 $3,752
Europe.................................................. 3,073 2,257 1,662
Central/South America................................... 697 446 626
Asia/Pacific Rim........................................ 2,243 1,492 1,142
------- ------ ------
$12,364 $8,801 $7,182
======= ====== ======
</TABLE>
39
<PAGE> 41
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is incorporated by reference
to "ELECTION OF DIRECTORS -Nominees" in the Company's Proxy Statement for the
Company's 1997 Annual Meeting of Stockholders. The information concerning
current executive officers of the Registrant found under the caption "Executive
Officers of the Registrant" in Part I hereof is also incorporated by reference
into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
"EXECUTIVE COMPENSATION" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The following documents are filed in Part II of this Annual Report on Form
10-K:
<TABLE>
<CAPTION>
PAGE IN
FORM 10-K
REPORT
---------
<S> <C> <C>
1. FINANCIAL STATEMENTS
Report of Independent Accountants........................................... 26
Consolidated Balance Sheets of the Company as of December 31, 1996 and
1995........................................................................ 27
Consolidated Statements of Income of the Company for the years ended
December 31, 1996, 1995, and 1994........................................... 28
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1996, 1995 and 1994..................................................... 29
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994............................................................... 30
Notes to Consolidated Financial Statements.................................. 31
2. FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule is included in Item 14(d):
Schedule II -- Valuation and Qualifying Accounts............................ 44
</TABLE>
Other schedules have been omitted because they are either not required,
applicable, or the required information is included in the consolidated
financial statements or notes thereto.
40
<PAGE> 42
3. EXHIBITS
Refer to (c) below
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS EXHIBIT TITLE
- -------- ---------------------------------------------------------------------------------
<C> <S>
3.1 (1) Amended and Restated Certificate of Incorporation of Registrant
3.2 (1) Bylaws of Registrant.
10.1 (1) Form of Indemnification Agreement with directors and officers.
10.2 (1) Amended and Restated 1989 Incentive Stock Plan and form of agreement thereunder.
10.3 (1) 1995 Employee Stock Purchase Plan and form of agreement thereunder.
10.4 (1) 1995 Director Option Plan and form of agreement thereunder.
10.5 (1) 1995 Profit Sharing Plan
10.6 (1) Third Restated Registration Rights Agreement dated as of October 27, 1995 by and
among Registrant and certain individuals and entities named therein.
10.7 (1) Lease Agreement dated February 12, 1991 by and between Proteus Industries Inc.
and the Registrant.
10.8 (1) Business Loan Agreement dated October 4, 1995 between Mid-Peninsula Bank and the
Registrant.
10.10(2)* Development and Distribution Agreement dated as of May 28, 1996 between PDT, Inc.
and the Company.
10.11 Lease Agreement dated December 6, 1996 by and between the Registrant and
Zappettini Investment Co.
11.1 Statement Regarding Computation of Per Share Earnings.
22.1 (1) Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (See page 42).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment has been granted with respect to certain portions of
this exhibit.
(1) Incorporated by reference to the like-numbered exhibits filed with the
Registration Statement on Form SB-2 (No. 333-00320-LA) which was declared
effective on February 15, 1996.
(2) Incorporated by reference to the exhibits in Registrant's Report on Form
10-Q for the quarter ended June 30, 1996.
41
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Santa Clara, State
of California, on 24th the day of March, 1997.
IRIDEX CORPORATION
By: /s/ THEODORE A. BOUTACOFF
------------------------------------
Theodore A. Boutacoff
President, Chief Executive Officer,
and Director
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Theodore A. Boutacoff and James L.
Donovan, jointly and severally, their attorney-in-fact, each with full power of
substitution, for him in any and all capacities, to sign on behalf of the
undersigned any amendments to this Report on Form 10-K, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, and each of the undersigned does hereby
ratifying and confirming all that each of said attorneys-in-fact, of his
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<C> <S> <C>
/s/ THEODORE A. BOUTACOFF President, Chief Executive Officer, and March 24, 1997
- ----------------------------------- Director (Principal Executive Officer)
(Theodore A. Boutacoff)
/s/ JAMES L. DONOVAN Chief Financial Officer and Director March 24, 1997
- ----------------------------------- (Principal Financial and Accounting
(James L. Donovan) Officer)
/s/ WILLIAM BOEGER, III Director March 24, 1997
- -----------------------------------
(William Boeger, III)
/s/ MILTON CHANG Director March 24, 1997
- -----------------------------------
(Milton Chang)
/s/ DONALD L. HAMMOND Director March 24, 1997
- -----------------------------------
(Donald L. Hammond)
/s/ JOHN M. NEHRA Chairman of the Board March 24, 1997
- -----------------------------------
(John M. Nehra)
</TABLE>
42
<PAGE> 44
INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE
Our report on the consolidated financial statements of IRIDEX Corporation
and subsidiaries is included on page 26 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedule listed in the index on page 40 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
San Jose, California
February 10, 1997
43
<PAGE> 45
SCHEDULE II
IRIDEX CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END OF
DESCRIPTION THE PERIOD EXPENSES DEDUCTIONS THE PERIOD
- ---------------------------------------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance for the year ended December 31, 1994:
Allowance for doubtful accounts receivable........ $ 80 $292 $ (7) $365
Balance for the year ended December 31, 1995:
Allowance for doubtful accounts receivable........ $365 $ 20 $ (2) $383
Balance for the year ended December 31, 1996:
Allowance for doubtful accounts receivable........ $383 $ -- $ (118) $265
</TABLE>
44
<PAGE> 1
EXHIBIT 10.11
[LOGO - Renault & Handley]
INDUSTRIAL & COMMERCIAL REAL ESTATE
THIS LEASE, executed in duplicate at Palo Alto, California,
this 6th day of December, by and between
PARTIES
Zappettini Investment Co.
and
Iridex Corporation
hereinafter called respectively Lessor and Lessee, without
regard to number or gender,
PREMISES 1. WITNESSETH: That Lessor hereby leases to Lessee, and
Lessee hires from Lessor, those certain premises, hereinafter
in this lease designated as "the Premises", with the
appurtenances, situated in the City of Mountain View, County
of Santa Clara, State of California, and more particularly
described as follows, to wit:
An approximate 37,166 square foot industrial building located
on 2.69 acre lot and commonly referred to as 1212 Terra Bella,
Mountain View, California.
USE 2. The Premises shall be used and occupied by Lessee for
design, testing, manufacturing, assembly, sales, office,
administration, research and development and other legal uses
ancillary thereto and for no other purpose without the prior
written consent of Lessor.
TERM 3. The term shall be for 5 (five) years, commencing on
the 1st day of March, 1997, (the "Commencement Date") and
ending on the 28th day of February, 2002.
RENTAL 4. Rent shall be payable to the Lessor without deduction
or offset at such place or places as may be designated from
time to time by the Lessor as follows:
Thirty Three Thousand One Hundred Eighty Two and 60/100ths
Dollars ($33,182.60) upon execution of this Lease representing
rental due March 1, 1997. $33,182.60 shall be due on April 1,
1997 and on the 1st day of each and every succeeding month
through August 1st 1997. Forty Thousand Eight Hundred Eighty
Two and 60/100ths (40,882.60) shall be due on September 1,
1997 and on the 1st day of each and every succeeding month
through February 1, 1999. Forty Two Thousand Seven Hundred
Forty and 90/100ths Dollars ($42,740.90) shall be due on March
1, 1999 and on the 1st day of each and every succeeding month
through February 1, 2000. Forty Four Thousand Five Hundred
Ninety Nine and 20/100ths Dollars ($4,599.20) shall be due on
March 1, 2000 and on the 1st day of each and every succeeding
month through February 1, 2001. Forty Six Thousand Four
Hundred Fifty Seven and 50/100ths Dollar ($46,457.50) shall be
due on March 1, 2001 and on the 1st day of each and every
succeeding month through February 1, 2002.
1 of 6
<PAGE> 2
SECURITY 5. Lessee has deposited with Lessor $46,457.50 as
DEPOSIT security for the full and faithful performance of each and
every term, provision, covenant and condition of this Lease.
In the event Lessee defaults in respect of any of the terms,
provisions, covenants or conditions of this Lease, including,
but not limited to the payment of rent, Lessor may use, apply
or retain the whole or any part of such security for the
payment of any rent in default or for any other sum which
Lessor may spend or be required to spend by reason of Lessee's
default. Should Lessee faithfully and fully comply with all of
the terms, provisions, covenants and conditions of this Lease,
the security of any balance thereof shall be returned to
Lessee or, at the option of Lessor, to the last assignee of
Lessee's interest in this Lease at the expiration of the term
hereof. Lessee shall not be entitled to any interest on said
security deposit.
POSSESSION 6. If Lessor, for any reason whatsoever, cannot deliver
possession of the Premises to Lessee at the commencement of
the said term, as hereinbefore specified, this Lease shall not
be void or voidable, nor shall Lessor, or Lessor's agents, be
liable to Lessee for any loss or damage resulting therefrom;
but in that event the commencement and termination dates of
the Lease and all other dates affected thereby shall be
revised to conform to the date of Lessor's delivery of
possession. *See Addendum attached.
ACCEPTANCE 7. By entry hereunder, the Lessee accepts the Premises
OF as being in good and satisfactory condition, unless within
PREMISES forty-five (45) days after such entry Lessee
AND shall give Lessor written notice specifying in reasonable
CONSENT TO detail the respects in which the Premises were not in
SURRENDER satisfactory condition.* The Lessee agrees on the last day of
the term hereof, or on sooner termination of this Lease,
to surrender the premises, together with all alterations,
additions, and improvements which may have been made in, to or
on the Premises by Lessor or Lessee, unto Lessor in the same
good condition as at Lessee's entry onto the Premises
excepting for such wear and tear as would be normal for the
period of the Lessee's occupancy. The Lessee, on or before the
end of the term or sooner termination of this Lease, shall
remove all Lessee's personal property and trade fixtures from
the premises and all property not so removed shall be deemed
to be abandoned by the Lessee. If the Premises be not
surrendered at the end of the term or sooner termination of
this Lease, the Lessee shall indemnify the Lessor against loss
or liability resulting from delay by the Lessee in so
surrendering the Premises including, without limitation, any
claims made by any succeeding tenant founded on such delay.
*See Addendum attached
USES 8. Lessee shall not commit, or suffer to be committed,
PROHIBITED any waste upon the Premises, or any nuisance, or other act or
thing which may disturb the quiet enjoyment of any other
tenant in or around the buildings in which the Premises may be
located, or allow any sale by auction upon the Premises, or
allow the Premises to be used for any improper, immoral,
unlawful or objectionable purpose, or place any loads upon the
floor, walls, or roof which endanger the structure, or place
any harmful liquids in the drainage system of the building. No
waste materials or refuse shall be dumped upon or permitted to
remain upon any part of the Premises outside of the building
proper. No materials, supplies, equipment, finished products
or semi-finished products, raw materials or articles of any
nature shall be stored upon or permitted to remain on any
portion of the Premises outside of the buildings proper.
ALTERATIONS 9. The lessee shall make no alterations, additions or
AND improvements to the Premises or any part thereof without first
ADDITIONS obtaining the prior written consent of the Lessor, which
consent shall not be unreasonably withheld or delayed. The
Lessor may impose as a condition to the aforesaid consent such
requirement as Lessor may deem necessary in Lessor's sole
discretion, including without limitation thereto, a right of
approval of the contractor by whom the work is to be
performed (which approval shall not be unreasonably withheld
or delayed), the times during which it is to be accomplished,
and the requirement that upon written request of Lessor
prior to the expiration or earlier termination of the Lease,
Lessee will remove any or all improvements or additions to
the Premises installed at Lessee's expense.* All such
alterations, additions or improvements not specified to be
removed shall at the expiration of earlier termination of
the lease become the property of the Lessor and remain upon
and be surrendered with the Premises. All movable furniture,
business and trade fixtures, and machinery and equipment
shall remain the property of the Lessee and may be removed
by the Lessee at any time during the Lease term when Lessee
is not in default hereunder. Items which are not to be
deemed as movable furniture, business and trade fixtures, or
machinery and equipment shall include heating, lighting,
electrical systems, air conditioning, permanent partitioning,
carpeting, or any other installation which has become an
integral part of the Premises.** The Lessee will at all
times permit notices of non-responsibility to be posted and
to remain posted until the completion of alterations or
additions which have been approved by the Lessor. * & ** See
Addendum attached
MAINTE- 10. Lessee shall, at Lessee's sole cost, keep and
NANCE OF maintain the Premisesand appurtenances and every part thereof,
PREMISES including but not limited to, glazing, sidewalks, parking
areas,* plumbing, electrical systems, heating and air
conditioning installations, any store front, roof
covering -- unless it is not feasible to repair the existing
roof covering and a new roof covering is required, and the
interior of the Premises in good order, condition, and repair.
Lessor at Lessor's sole cost and expense shall maintain the
exterior of the walls, and structural portions of the roof,
foundations, walls and floors except for any repairs caused by
the wrongful act of the Lessee and Lessee's agents. The Lessor
will replace the roof covering if repairs to said covering are
no longer economically feasible in the judgment of roofing
experts, and provided that said replacement is not made
necessary by acts of the Lessee and Lessee's agents. The
Lessee shall water, maintain and replace, when necessary, any
shrubbery and landscaping provided by the Lessor on the
Premises. The Lessee expressly waives the benefits of any
statute now or hereafter in effect which would otherwise
afford the Lessee the right to make repairs at Lessor's
expense or to termination this lease because of Lessor's
failure to keep the Premises in good order, conditions or
repair. *** See Addendum attached *including resealing the
parking lot approximately every three (3) years.
FIRE AND 11.
EXTENDED
COVERAGE
INSURANCE
AND
SUBROGATION
*Language indicated as being shown by strike out in the typeset document is
enclosed in brackets "[" and "]" in the electronic format.
Page 2 of 6
<PAGE> 3
SEE REVISED INSURANCE CLAUSE ATTACHED
ABANDON- 12. Lessee shall not vacate or abandon the Premises at
MENT any time during the term; and if Lessee shall abandon, vacate
or surrender the premises, or be dispossessed by process
of law, or otherwise, any personal property belonging to
Lessee and left on the Premises shall be deemed to be
abandoned, at the option of Lessor, [except such property as
may be] mortgaged to Lessor.
FREE FROM 13. Lessee shall keep the Premises and the property in
LIENS which the Premises are situated, free from any liens arising
out of any work performed, materials furnished, or
obligations incurred by Lessee.
COMPLIANCE 14. Lessee shall, at his sole cost and expense, comply
WITH with all of the requirements of all Municipal, State and
GOVERN- Federal authorities now in force, or which may hereafter
MENTAL be in force, pertaining to the Premises, and shall faithfully
REGULA- observe in the use of the Premises all Municipal ordinances
TIONS and State and Federal statutes now in force or which may
hereafter be in force. The judgment of any court of competent
jurisdiction, or the admission of Lessee in any action or
proceeding against Lessee, whether Lessor be a party thereto
or not, that Lessee has violated any such ordinance or statute
in the use of the Premises, shall be conclusive of that fact
as between Lessor and Lessee.* See Addendum attached
INDEMNI- 15. The Lessee, as a material part of the consideration
FICATION OF to be rendered to the Lessor, hereby waives all claims against
LESSOR AND the Lessor for damages to goods, wares and merchandise, and
LESSEE'S all other personal property in, upon, or about the Premises
LIABILITY and for injuries to persons in or about the premises, from
INSURANCE any cause arising at any time, excepting claims arising
from the Lessor's negligence and willful misconduct or breach
of this Lease and the Lessee will hold the Lessor exempt and
harmless from any damage or injury to any person, or to the
goods, wares and merchandise and all other personal property
of any person, arising from the use of the Premises by the
Lessee, or from the failure of the Lessee to keep the Premises
in good condition and repair, as herein provided.
SEE REVISED INSURANCE CLAUSE ATTACHED
ADVERTISE- 16. Lessee will not place or permit to be placed, upon or
MENTS AND about the Premises any unusual or extraordinary signs, or any
SIGNS signs not approved by the city or other governing authority.
The Lessee will not place, or permit to be placed, upon the
Premises, advertisements or notices without the written
consent of the Lessor first had and obtained.* Any sign so
placed on the Premises shall be so placed upon the
understanding and agreement that Lessee will remove same at
the termination of the tenancy herein created and repair any
damage or injury to the Premises caused thereby, and if not so
removed by Lessee, then Lessor may have same so removed at
Lessee's expense. *See Addendum attached
UTILITIES 17. Lessee shall pay for all water, gas, heat, light,
power, telephone service and all other service supplied to the
Premises.
ATTORNEY'S 18. In case suit should be brought for the possession of
FEES the Premises, for the recovery of any sum due hereunder, or
because of the breach of any other covenant herein, the
losing party shall pay to the prevailing party a reasonable
attorney's fee, which shall be deemed to have accrued on the
commencement of such action and shall be enforceable whether
or not such action is prosecuted to judgment.
DEFAULT 19. In the event of any breach of this Lease by the
Lessee, or an abandonment of the Premises by the Lessee, the
Lessor has the option of 1) removing all persons and property
from the Premises and repossessing the Premises in which case
any of the Lessee's property which the Lessor removes from the
Premises may be stored in a public warehouse or elsewhere at
the cost of, and for the account of Lessee, or 2) allowing the
Lessee to remain in full possession and control of the
Premises. If the Lessor chooses to repossess the Premises, the
Lease will automatically terminate in accordance with
provisions of the California Civil Code, Section 1951.2. In
the event of such termination of the Lease, the Lessor may
recover from the Lessee: 1) the worth at the time of award of
the unpaid rent which had been earned at the time of
termination including interest at 7% per annum; 2) the worth
at the time of award of the amount by which the unpaid rent
which would have been earned after termination until the time
of award exceeds the amount of such rental loss that the
Lessee proves could have been reasonably avoided including
interest at 7% per annum; 3) the worth at the time of award of
the amount by which the unpaid rent for the balance of the
term after the time of award exceeds the amount of such rental
loss that the Lessee proves could be reasonably avoided; and
4) any other amount necessary to compensate the Lessor for all
the detriment proximately caused by the Lessee's failure to
perform his obligations under the Lease or which in the
ordinary course of things would be likely to result therefrom.
If the Lessor chooses not to repossess the premises, but
allows the Lessee to remain in full possession and control of
the Premises, then in accordance with provisions of the
California Civil Code, Section 1951.4, the Lessor may treat
the Lease as being in full force and effect, and may collect
from the Lessee all rents as they become due through the
termination date of the lease as specified in the lease. For
the purposes of this paragraph, the following do not
constitute a termination of Lessee's right to possession:
*Language indicated as being shown by strike out in the typeset document is
enclosed in brackets "[" and "]" in the electronic format.
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<PAGE> 4
a) Acts of maintenance or preservation or efforts to
relet the property.
b) The appointment of a receiver on the initiative of
the Lessor to protect his interest in this Lease.*
*See Addendum attached
LATE 20. Lessee hereby acknowledges that late payment by
CHARGES Lessee to Lessor of rent and other sums due hereunder will
cause Lessor to incur costs not contemplated by this
lease, the exact amount of which will be extremely difficult
to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may
be imposed on Lessor by the terms of any mortgage or trust
deed covering the Premises. Accordingly, if any installment of
rent or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after such
amount shall be due, Lessee shall pay to Lessor a late charge
equal to seven and one half (7.5%) of such overdue amount.
The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur
by reason of late payment by Lessee. Acceptance of such late
charge by Lessor shall in no event constitute a waiver of
Lessee's default with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and
remedies granted hereunder.
SURRENDER 21. The voluntary or other surrender of this Lease by
OF LEASE Lessee, or a mutual cancellation thereof, shall not work a
merger, and shall, at the option of Lessor, terminate
all or any existing subleases or subtenancies, or may, at the
option of Lessor, operate as an assignment to him of any or
all such subleases or subtenancies.
TAXES 22. The Lessee shall be liable for all taxes levied
against personal property and trade or business fixtures. The
Lessee also agrees to pay, as additional rental, during the
term of this Lease and any extensions thereof, all real estate
taxes plus the yearly installments of any special assessments
which are of record or which may become of record during the
term of this lease. If said taxes and assessments are assessed
against the entire building and building site, and this Lease
does not cover the entire building or building site, the taxes
and assessment installments allocated to the Premises shall be
pro-rated on a square footage or other equitable basis, as
calculated by the Lessor. It is understood and agreed that the
Lessee's obligation under this paragraph will be pro-rated to
reflect the commencement and termination dates of this Lease.
Real estate taxes shall not include taxes assessed on the net
income of Lessor or any gift, franchise or inheritance taxes.
NOTICES 23. All notices to be given to Lessee may be given in
writing personally or by depositing the same in the United
States mail, postage prepaid, and addressed to Lessee at the
said Premises, whether or not Lessee has departed from,
abandoned or vacated the Premises.
ENTRY BY 24. Lessee shall permit Lessor and his agents to enter
LESSOR into and upon the Premises at all reasonable times for the
purpose of inspecting the same or for the purpose of
maintaining the building in which the Premises are situated,
or for the purpose of making repairs, alterations or additions
to any other portion of said building, including the erection
and maintenance of such scaffolding, canopies, fences and
props as may be required without any rebate of rent and
without any liability to Lessee for any loss of occupation or
quiet enjoyment of the Premises thereby occasioned; and shall
permit Lessor and his agents, at any time within ninety days
prior to the expiration of this Lease, to place upon the
Premises any usual or ordinary "For Sale" or "To Lease" signs
and exhibit the Premises to prospective tenants at reasonable
hours.
DESTRUCTION 25. In the event of a partial destruction of the Premises
OF during the said term from any cause, Lessor shall forthwith
PREMISES repair the same, provided such repairs can be made within one
hundred twenty (120) days under the laws and regulations of
State, Federal, County or Municipal authorities, but such
partial destruction shall in no way annul or void this lease,
except that Lessee shall be entitled to a proportionate
reduction of rent while such repairs are being made, such
proportionate reduction to be based upon the extent to which
the making of such repairs shall interfere with the business
carried on by Lessee in the Premises. If such repairs cannot
be made in one hundred twenty (120) [ninety (90)] days,
Lessor may, at his option, make same within a reasonable
time, this Lease continuing in full force and effect and the
rent to be proportionately reduced as aforesaid in this
paragraph provided. In the event that Lessor does not so
elect to make such repairs which cannot be made in one
hundred twenty (120) days, or such repairs cannot be made
under such laws and regulations, this Lease may be
terminated at the option of either party. In respect to any
partial destruction which Lessor is obligated to repair or
may elect to repair under the terms of this paragraph, the
provision of Section 1932, Subdivision 2, and of Section
1933, Subdivision 4, of the Civil Code of the State of
California are waived by Lessee. In the event that the
building in which the Premises may be situated be destroyed
to the extent of not less than 50 (fifty)% of the replacement
cost thereof, Lessor may elect to terminate this Lease,
whether the Premises be injured or not. A total destruction
of the building in which the Premises may be situated shall
terminate this Lease. In the event of any dispute between
Lessor and Lessee relative to the provisions of this
paragraph, they shall each select an arbitrator, the two
arbitrators so selected shall select a third arbitrator
and the three arbitrators so selected shall hear and
determine the controversy and their decision thereon shall
be final and binding upon both Lessor and Lessee, who shall
bear the cost of such arbitration equally between them.
ASSIGNMENT 26. The Lessee shall not assign, transfer or hypothecate
AND SUBLET- the leasehold estate under this Lease, or any interest
TING therein, and shall not sublet the Premises, or any part
thereof, or any right or privilege appurtenant thereto, or
suffer any other person or entity to occupy or use the
Premises, or any portion thereof, without, in each case, the
prior written consent of the Lessor.* As a condition for
granting its consent to any subletting the Lessor may require
the Lessee to agree to pay the Lessor, as additional rental
50% of all rents received by the Lessee from its Sublessee
after deductions for brokerage commissions which are in excess
of the amount payable by the Lessee to the Lessor hereunder.**
The Lessee shall, by thirty (30) days written notice, advise
the Lessor of its intent to sublet the Premises or any portion
thereof for any part of the term hereof. Within thirty
(30) days after receipt of Lessee's notice, Lessor shall
either give approval or disapproval to Lessee to sublease
the portion of the Premises described in Lessee's notice.
If the Lessor approves a subletting the Lessee may sublet
immediately after receipt of the Lessor's written approval.
In the event Lessee is allowed to assign, transfer or sublet
the whole or any part of the Premises, with the prior
written consent of Lessor, no assignee, transferee or
sublessee shall assign or transfer this Lease, either in
whole or in part, or sublet the whole or
*Language indicated as being shown by strike out in the typeset document is
enclosed in brackets "[" and "]" in the electronic format.
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<PAGE> 5
any part of the Premises, without also having obtained the
prior written consent of the Lessor. A consent of Lessor to
one assignment, transfer, hypothecation, subletting,
occupation or use by any other person shall not release Lessee
from any of Lessee's obligations hereunder or be deemed to be
a consent to any subsequent similar or dissimilar assignment,
transfer, hypothecation, subletting, occupation or use by any
other person. Any such assignment, transfer, hypothecation,
subletting, occupation or use without such consent shall be
void and shall constitute a breach of this Lease by Lessee and
shall, at the option of Lessor exercised by written notice to
Lessee, terminate this Lease. The leasehold estate under this
Lease shall not, nor shall any interest therein, be assignable
for any purpose by operation of law without the written
consent of Lessor. As a condition to its consent, Lessor may
require Lessee to pay all expense in connection with the
assignment, and Lessor may require Lessee's assignee or
transferee (or other assignees or transferees) to assume in
writing all of the obligations under this Lease.***
* Lessor agrees not to unreasonably withhold consent
to sublet or assign.
**See Addendum attached
*** See Addendum attached
CONDEM- 27. If any part of the premises shall be taken for any
NATION public or quasi-public use, under any statute or by right of
eminent domain or private purchase in lieu thereto, and
a part thereof remains which is susceptible of occupation
hereunder, this Lease shall, as to the part so taken,
terminate as of the date title shall vest in the condemnor or
purchaser, and the rent payable hereunder shall be adjusted so
that the Lessee shall be required to pay for the remainder of
the term only such portion of such rent as the value of the
part remaining after such taking bears to the value of the
entire Premises prior to such taking; but in such event Lessor
shall have the option to terminate this Lease as of the date
when title to the part so taken vests in the condemnor or
purchaser. If all of the premises, or such part thereto be
taken so that there does not remain a portion susceptible for
occupation hereunder, this Lease shall thereupon terminate. If
a part or all of the Premises be taken, all compensation
awarded upon such taking shall go to the Lessor and the Lessee
shall have no claim thereto, except that Lessee shall have the
right to receive that portion of the condemnation proceeds
based upon the value of all personal property that Lessee
shall have the right to remove from the Premises.
EFFECT OF 28. The term "Lessor" as used in this Lease, means only
CONVEYANCE the owner for the time being of the land and building
containing the Premises, so that, in the event of
any sale of said land or building, or in the event of a lease
of said building, the Lessor shall be and hereby is entirely
freed and relieved of all covenants and obligations of the
Lessor hereunder,* and it shall be deemed and construed,
without further agreement between the parties and the purchase
at any such sale, or the Lessee of the building, that the
purchaser or lessee of the building has assumed and agreed to
carry out any and all covenants and obligations of the Lessor
hereunder. If any security be given by the Lessee to secure
the faithful performance of all or any of the covenants of
this Lease on the part of the Lessee, the Lessor may transfer
and deliver the security, as such, to the purchaser at any
such sale or the lessee of the building, and thereupon the
Lessor shall be discharged from any further liability in
reference thereto. *provided that Lessor transfers the
security deposit to the transferee and the transferee assumes
in writing Lessor's obligations hereunder.
SUBORDI- 29. Lessee agrees that this Lease may, at the option of
NATION Lessor, be subject and subordinate to any mortgage, deed of
trust or other instrument of security which has been or
shall be placed on the land and building or land or building
of which the Premises form a part, and this subordination is
hereby made effective without any further act of Lessee. The
Lessee shall, at any time hereinafter, on demand, execute any
instruments, releases, or other documents that may be required
by any mortgagee, mortgagor, or trustor or beneficiary under
any deed of trust for the purpose of subjecting and
subordinating this Lease to the lien of any such mortgage,
deed of trust or other instrument of security, and the failure
of the Lessee to execute any such instruments, releases or
documents, shall constitute a default hereunder. Lessee shall
not be required to execute any documents subordinating this
Lease unless the holder of any such lien executed as a
Non-Disturbance Agreement in favor of Lessee.
WAIVER 30. The waiver by Lessor of any breach of any term,
covenant or condition, herein contained shall not be deemed to
be a waiver of such term, covenant or condition or any
subsequent breach of the same or any other term, covenant or
condition therein contained. The subsequent acceptance of rent
hereunder by Lessor shall not be deemed to be a waiver of any
preceding breach by Lessee of any term, covenant or condition
of this Lease, other than the failure of Lessee to pay the
particular rental so accepted, regardless of Lessor's
knowledge of such preceding breach at the time of acceptance
of such rent.
HOLDING 31. Any holding over after the expiration of the said
OVER term, with the consent of Lessor, shall be construed to be a
tenancy from month to month, at a rental to be negotiated
by Lessor and Lessee prior to the expiration of said term, and
shall otherwise be on the terms and conditions herein
specified, so far as applicable.
SUCCESSORS 32. The covenant s and conditions herein contained shall,
AND subject to the provisions as to assignment, apply to and bind
ASSIGNS the heirs, successors, executors, administrators and
assigns of all the parties hereto; and all of the parties
hereto shall be jointly and severally liable
hereunder.
TIME 33. Time is of the essence of this Lease.
MARGINAL 34. The marginal headings or titles to the paragraphs of
CAPTIONS this Lease are not a part of this Lease and shall have no
effect upon the construction or interpretation of any
part thereof. This instrument contains all of the agreements
and conditions made between the parties hereto and may not be
modified orally or in any other manner than by an agreement in
writing signed by all of the parties hereto or their
respective successors in interest.
PARAGRAPHS #35 AND #36 AND ADDENDUM ATTACHED ARE
HEREBY MADE A PART OF THIS LEASE.
THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY WHO WILL REVIEW THE DOCUMENT AND ASSIST YOU
TO DETERMINE WHETHER YOUR LEGAL RIGHTS ARE ADEQUATELY
PROTECTED. RENAULT & HANDLEY IS NOT AUTHORIZED TO
GIVE LEGAL AND TAX ADVICE. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY RENAULT & HANDLEY OR ITS
AGENTS OR EMPLOYEES AS TO LEGAL SUFFICIENCY, LEGAL
EFFECT OR TAX CONSEQUENCES OF THIS
*Language indicated as being shown by strike out in the typeset document is
enclosed in brackets "[" and "]" in the electronic format.
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<PAGE> 6
DOCUMENT OR ANY TRANSACTION RELATING THERETO. THESE
ARE QUESTIONS FOR YOUR ATTORNEY WITH WHOM YOU SHOULD
CONSULT BEFORE SIGNING THIS DOCUMENT.
IN WITNESS WHEREOF, Lessor and Lessee have executed
these presents, the day and year first above written.
<TABLE>
<CAPTION>
LESSOR LESSEE
<S> <C> <C>
ZAPPETTINI INVESTMENT CO. IRIDEX CORPORATION
/s/ George O. McKee /s/ Ted Boutacoff
------------------------- ------------------------
------------------------- ------------------------
------------------------- ------------------------
</TABLE>
*Language indicated as being shown by strike out in the typeset document is
enclosed in brackets "[" and "]" in the electronic format.
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<PAGE> 7
REVISED INSURANCE CLAUSE
This Lease Clause replaces the Insurance Clause (11.) in the Renault &
Handley Net Lease Form.
11. Lessee shall not use, or permit the Premises, or any part
thereof, to be used, for any purposes other than that for which the Premises
are hereby leased; and no use shall be made or permitted to be made on the
Premises, nor acts done, which will cause a cancellation of any insurance
policy covering said building, or any part thereof, nor shall Lessee sell or
permit to be kept,used or sold, in or about the Premises, any article which may
be prohibited by the standard form of fire insurance policies. Lessee shall, at
his sole cost and expense, comply with any and all requirements, pertaining to
the Premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance, covering said
building and appurtenances.
11.1 Lessee shall, at its expense, obtain and keep in force during
the term of this Lease a policy of comprehensive public liability insurance
insuring Lessee, Lessor, and any third parties named by Lessor which may
include Lessor's lender, against* arising out of the condition, use, occupancy
or maintenance of the Premises. Such insurance policy shall have a combined
single limit for both bodily injury and property damage in an amount not less
than One Million Dollars ($1,000,000.00). The limits of said insurance shall
not limit the liability of Lessee hereunder.
11.2 Lessee shall, at its expense, keep in force during the term of
this Lease, a policy of fire and property damage insurance in an "all risk"
form with a sprinkler leakage endorsement, insuring Lessee's inventory,
fixtures, equipment and personal property within the Premises for the full
replacement value thereof.
11.3 Lessor shall maintain a policy or policies of fire and property
damage insurance in an "all risk" form, with sprinkler and, at the option of the
Lessor, earthquake endorsements, covering loss or damage to the building,
including Lessee's leasehold improvements installed with the written consent of
the Lessor for the full replacement cost thereof.
11.4 Lessee shall pay to Lessor as additional rent, during the term
hereof, upon receipt of an invoice therefore, 100 percent of the premises for
any insurance obtained by Lessor pursuant to 11.3 above. Lessor may obtain such
insurance for the Building separately, or together with other buildings and
improvements which Lessor elects to insure together under blanket policies as
are allocable to the Premises. It is understood and agreed that Lessee's
obligation under this paragraph shall be prorated to reflect the Commencement
Date and Expiration Date of the Lease.**
___________________
* liability for personal injury, bodily injury, death and damage to property
** If Lessor carries earthquake insurance, Lessee's obligation to reimburse
Lessor for premiums shall not exceed $20,000.00 annually.
<PAGE> 8
11.5 Notwithstanding anything to the contrary in this Lease, Lessee
and Lessor each hereby waives any and all rights of recovery against the other,
or against the officers, directors, employees, partners, agents and
representatives of the other, for loss of or damage to the property of the
waiving party or the property of others under its control, to the extent such
loss or damage is insured against under any insurance policy carried by Lessor
or Lessee hereunder. Each party shall notify their respective insurance
carriers of this waiver.
<PAGE> 9
ADDITIONAL PARAGRAPHS
These additional paragraphs are hereby made a part of that certain
Lease dated December 6, 1996 by and between Zappettini Investment Co., Lessor,
and Iridex Corporation, Lessee, covering premises at 1212 Terra Bella, Mountain
View, California.
35. Options to Renew. Lessor grants to Lessee two successive two
year options to renew this Lease. The first two year option shall commence, if
at all, on the termination date of this Lease and will terminate on February
29, 2004. The second option period shall commence, if at all, on March 1, 2004
providing that the first option has been exercised and shall terminate on
February 28, 2006. In no event can the 2nd option to renew be exercised unless
the 1st option to renew has been exercised. The option terms shall be governed
by all the terms and conditions as are contained in the Lease excepting that
there shall be no additional options and also excepting the basic monthly
rental. The basic monthly rent for each of the option terms shall be negotiated
by lessor and Lessee at the time each option is exercised and shall be based on
98 percent of the then market rent for the Premises based on similar space
within a 1 mile radius of the subject property. In no event however, shall the
monthly rental for the first option term be less than $46,457.50 nor shall the
rental amount for the 2nd option term be less than that amount being paid for
the 1st option term. In order to exercise each option, the Lessee must give the
Lessor written notice a minimum of 90 days and a maximum of 120 days prior to
the termination of the immediately preceding term. At the option of the Lessor,
any of the above options to renew may be declared null and void if the Lessee
is in default under any of the terms or conditions of the Lease when said
option is exercised.
36. Lessor will indemnify, defend and hold Lessee harmless from and
against all costs of response, corrective action, remedial action, claims,
demands, losses and liabilities arising from any pre-existing environmental
contamination which may have occurred prior to the Lessee taking possession of
the Premises.
Lessee will only be responsible for contamination of the Premises or
the soils or ground water thereon or thereunder in violation of Hazardous
Materials Laws, that is caused by Lessee or Lessee's agents, contractors or
invitees during the term as may be extended. All hazardous materials and toxic
wastes that Lessee brings on the Premises shall be stored according to
Hazardous Materials' Law.
All hazardous materials and toxic wastes that Lessee brings on the site
shall be stored according to all local, state and national government
regulations. Hazardous Materials shall be defined as those substances that are
recognized as posing a risk of injury to health or safety by the Santa Clara
Fire Department, the Santa Clara County Health Department, the Regional Water
Quality Control Board, the State of California or the Federal Government.
Lessor hereby releases Lessee from and waives all claims, costs,
losses, damages and liabilities ("Claims") against Lessee, arising out of or in
connection with any Hazardous Material present at any time on, in, under or
about the Premises except to the extent that any such Claims results from the
release, disposal, emission or discharge of Hazardous Materials on or about the
Premises by Lessee
<PAGE> 10
by its agent, contractors or employees. In this regard, Lessor hereby waives
the benefits of California Civil Code Section 1542 which provides as follows:
"A general release does not extend to claims which the creditor does not know
or suspect to exist in his favor at the time of executing the release which if
known by him must have materially have affected his settlement with debtor."
<PAGE> 11
ADDENDUM
Added to the end of paragraph 6:
*Notwithstanding anything to the contrary in this Lease, (i) if
possession of the Premises has not been delivered to Lessee for any reason
whatsoever on or before March 1, 1997, Lessee shall not be obligated to pay
rent for that period of time after the Rent Commencement Date equal to the
number of days that possession of the Premises is delayed beyond March 1, 1997,
and (ii) if possession of the Premises is not delivered to Lessee for any
reason whatsoever on or before April 30, 1996 the Lessee may terminate this
Lease by written notice to Lessor, whereupon any monies previously paid to
Lessor by Lessee shall be reimbursed to Lessee and neither party shall have any
further obligation to each other.
Addition to paragraph 7:
*If Lessee notifies Lessor within such 45 day period that there are
structural defects in the Premises, Lessor shall, at its cost, repair such
structural defects.
Additions to paragraph 9:
*Upon request, Lessor shall advise Lessee in writing whether it
reserves the right to require Lessee to remove any such alterations, additions
or improvements from the Premises upon expiration or sooner termination of this
Lease. If Lessor elects not to reserve such right, then Lessee shall not be
required to remove the initial tenant improvements which Lessee intends to
construct in the Premises.
**; provided however, that Lessee shall have the right to remove at any
time any special purpose improvements installed in the Premises by Lessee at
Lessee's cost including, without limitation, supplementary heating,
ventilation and air conditioning systems and chillers for laboratory bench heat
exchange. Lessee shall, upon removal of such special purpose improvements,
return the Premises to its condition prior to their installation all patching,
cleaning and repainting if necessary.
Additions to paragraph 10:
***In the event of fire or other casualty, paragraph 25, rather than
this paragraph 10, shall govern the obligations of the parties with respect to
the repair, maintenance and replacement of the Premises. Notwithstanding
anything to the contrary in this Lease, Lessor, at its cost and expense, shall
make any repaid, maintenance or improvement (i) required as a result of a
construction defect in the Premises as of the Commencement Date, and (ii) for
which Lessor has a right of reimbursement from others (including, without
limitation, insurers). Lessee shall have the benefit of any construction and/or
equipment warranties existing in favor of Lessor that would assist Lessee in
discharging its obligations under this Lease.
<PAGE> 12
1. If Lessee is required to replace on HVAC unit, plumbing line,
main electrical panel or generator, it may instead elect to require Lessor to
perform such Capital Repair.
2. The cost of any of the above replacements performed by Landlord,
which is reimbursable by Lessee, shall be amortized over the useful life of the
Capital Repair determined in accordance with generally accepted accounting
principles with interest on the unamortized balance at the then prevailing
market rate Lessor would pay if it borrowed funds to replace these units from
an institutional lender. Lessor shall inform of the monthly amortization payment
required to so amortize such costs, and shall also provide lessee with the
information upon which such determination is made. Tenant shall pay such
amortized payment for each month during the term of the Lease after such
improvement is completed until the first to occur of (i) the resetting of rent
or the end of the term over which such costs were amortized. Such amortized
amount shall be due at the same time that rent is due.
3. The cost of any Capital Repair performed by Lessor shall be
shared by Lessee and Lessor as follows. Upon completion of the Capital Repair,
Lessor shall notify Lessee of the total cost incurred by Lessor to complete the
work and shall deliver to Lessee documentary support for such costs and lien
waivers (or lien release bonds) for such work. Lessee shall be responsible for
that portion of the cost incurred by Lessor for the Capital Repair times a
fraction, the numerator of which shall be equal to the lesser of the months in
the lease term (a) until the resetting of monthly rent for the Premises based
upon the fair market value of the Premises as so repaired or improved, or (b)
the useful life of the capital repairs and the denominator shall be the months
on the useful life of the capital repair.
4. For the purposes of this paragraph, a Capital Repair shall not
include the resealing of the parking lot.
ADDITION TO PARAGRAPH 16:
* which consent shall not be unreasonably withhold or delayed. Lessee
shall have the right to place signs displaying the name and logo of Lessee in
the present sign locations and on the entry doorways.
ADDITION TO PARAGRAPH 19.
* Notwithstanding anything to the contrary in this Lease, (i) Lessee
shall not be deemed to be in default or breach of this Lease on account of
Lessee's failure to pay money to Lessor unless Lessee's failure to pay
continues for ten (10) days after the first day of each month, and (ii) Lessee
shall not be in default or breach of this lease for failing to perform any
covenant of this Lease (other than a covenant to pay money to Lessor) unless
Lessee's failure to perform such covenant continues for a period of thirty (30)
days after Lessee's receipt of written notice of such failure, or such longer
time as may be reasonably required to cure the default so long as Lessee
commences to cure such failure within thirty (30) day period and diligently
prosecutes such cure to completion.
<PAGE> 13
ADDITION TO PARAGRAPH 24:
Lessor shall provide to Lessee twenty-four (24) hours' notice prior to
its entry onto the Premises (except in the event of an emergency) and such
entry shall be subject to Lessee's right to accompany Lessor at all times and
Lessee's reasonable security precautions. Lessor shall ensure that reasonable
access to the Premises is available to Lessee at all times and shall use
reasonable efforts to mitigate any interference with Lessee's business caused
by Lessor's entry and work.
ADDITION TO PARAGRAPH 25:
Landlord shall have the additional right to terminate the Lease in the
event of a casualty which is not required hereunder to be covered by insurance
or where insurance proceeds are not available to pay at least eighty percent
(80%) of the replacement cost of the Building. Tenant shall have the additional
right to terminate the Lease if restoration or repair of the Building would
take longer than one hundred twenty (120) days.
ADDITION TO PARAGRAPH 26:
* arising after the effective date of the transfer in question.
Notwithstanding anything to be contrary in this Lease, Lessee may, without
Lessor's prior written consent and without being subject to the terms of this
paragraph 26 including, without limitation, Lessor's right to recapture the
Premises and participate in assignment and subletting proceeds, sublease the
Premises or assign the Lease to: (i) a corporation controlling, controlled by
or under common control with Lessee; (ii) a successor corporation related to
Tenant by merger, consolidation or nonbankruptcy reorganization; or (iii) a
purchaser of substantially all of the assets of Lessee.
ADDITION TO PARAGRAPH 14:
If Lessee is required to make any capital repairs to this paragraph 14
then the provisions of paragraph 10 with regard to capital repairs shall apply.
The paragraph 14 shall not apply to any requirement regarding any Hazardous
Material.
<PAGE> 1
EXHIBIT 11.1
IRIDEX CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Weighted average shares outstanding
Common stock................................................... 5,165 1,276 1,118
Conversion of preferred stock.................................. 709 2,837 2,837
Common equivalent shares pursuant to Staff Accounting Bulletin
No. 83(2)................................................... 273 273 273
Conversion of stock options under the treasury stock method.... 331 244 287
------ ------ ------
Weighted average common shares and equivalents................... 6,478 4,630 4,515
====== ====== ======
Net income....................................................... $1,005 $1,000 $1,785
====== ====== ======
Net income per share............................................. $ 0.16 $ 0.22 $ 0.40
====== ====== ======
</TABLE>
- ---------------
(1) There is no difference between primary and fully diluted net income per
share.
(2) Pursuant to Securities & Exchange Commission's Staff Accounting Bulletin No.
83, all securities issued during the period from January 17, 1995 through
the filing date of the initial public offering (January 16,1996), are
included in the calculation of Common Stock equivalents as if outstanding
for all periods prior to the effective date of the initial public offering
(February 15, 1996), even if anti-dilutive. The Common Stock and stock
options are computed using the treasury stock method, using the estimated
initial public offering price and applicable exercise prices.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of IRIDEX Corporation and subsidiaries on Form S-8 (File No. 333-4264) of our
report dated February 10, 1997, on our audits of the consolidated financial
statements and financial statement schedule of IRIDEX Corporation and
subsidiaries as of December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, which report is included in this Annual
Report on Form 10-K.
/S/ COOPERS & LYBRAND L.L.P.
San Jose, California
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 9,914
<SECURITIES> 5,200
<RECEIVABLES> 5,730
<ALLOWANCES> (340)
<INVENTORY> 1,859
<CURRENT-ASSETS> 17,804
<PP&E> 1,226
<DEPRECIATION> (571)
<TOTAL-ASSETS> 23,707
<CURRENT-LIABILITIES> 2,229
<BONDS> 0
0
0
<COMMON> 63
<OTHER-SE> 21,415
<TOTAL-LIABILITY-AND-EQUITY> 23,707
<SALES> 12,364
<TOTAL-REVENUES> 12,364
<CGS> 4,899
<TOTAL-COSTS> 11,382
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,681
<INCOME-TAX> 676
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,005
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
