<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number: 0-27598
IRIDEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0210467
- --------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
1212 TERRA BELLA AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043-1824
(Address of principal executive offices, including zip code)
(650) 940-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock, $.01 par value, issued and outstanding as
of May 11, 1998 was 6,467,287.
<PAGE> 2
IRIDEX CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Income for the three months
ended March 31, 1998 and March 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and March 31, 1997 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE 18
INDEX TO EXHIBITS 19
</TABLE>
-2-
<PAGE> 3
IRIDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------- --------
ASSETS (unaudited) *
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,199 $ 9,900
Available-for-sale securities 2,548 3,588
Accounts receivable, net 7,072 6,057
Inventories 4,514 3,976
Prepaids and other current assets 492 451
Deferred income taxes 550 550
-------- --------
Total current assets 25,375 24,522
Property and equipment, net 2,331 2,133
Deferred income taxes 31 31
-------- --------
Total assets $ 27,737 $ 26,686
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 994 752
Accrued expenses 2,121 2,051
Capital lease obligations 2 3
-------- --------
Total liabilities 3,117 2,806
-------- --------
Stockholders' equity:
Common Stock, $.01 par value:
Authorized: 30,000,000 shares;
Issued and outstanding: 6,465,558 shares as of 3/31/98
and 6,455,483 shares as of 12/31/97 65 65
Additional paid-in capital 21,637 21,552
Unrealized losses on available-for-sale securities (2) (2)
Retained earnings 2,920 2,265
-------- --------
Total stockholders' equity 24,620 23,880
-------- --------
Total liabilities and stockholders' equity $ 27,737 $ 26,686
======== ========
</TABLE>
- ----------------------
*Derived from the 1997 audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
<PAGE> 4
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
------- -------
<S> <C> <C>
Sales $ 5,872 $ 3,320
Cost of sales 2,490 1,437
------- -------
Gross profit 3,382 1,883
------- -------
Operating expenses:
Research and development 546 421
Selling, general and administrative 1,975 1,324
------- -------
Total operating expenses 2,521 1,745
------- -------
Income from operations 861 138
Other income, net 131 155
------- -------
Income before provision for income taxes 992 293
Provision for income taxes (337) (108)
------- -------
Net income $ 655 $ 185
======= =======
Net income per common share $ 0.10 $ 0.03
======= =======
Net income per common share-assuming dilution $ 0.10 $ 0.03
======= =======
Shares used in per common share calculation 6,459 6,356
======= =======
Shares used in per common share-assuming dilution calculation 6,812 6,640
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
<PAGE> 5
IRIDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 655 $ 185
Adjustments to reconcile net income to net cash used in activities:
Depreciation 166 80
Provision for doubtful accounts (20) 25
Changes in operating assets and liabilities:
Accounts receivable (995) 412
Inventories (538) (191)
Prepaids and other current assets (41) (171)
Accounts payable 242 (94)
Accrued expenses 70 (792)
-------- --------
Net cash used in operating activities (461) (546)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (9,689) (4,810)
Proceeds from sale of available-for-sale securities 10,729 4,740
Acquisition of property and equipment (364) (64)
-------- --------
Net cash provided by (used in) investing activities 676 (134)
-------- --------
Cash flows from financing activities:
Payment on capital lease obligations (1) (2)
Issuance of common stock, net 85 1
-------- --------
Net cash provided by (used in) financing activities 84 (1)
-------- --------
Net increase (decrease) in cash and cash equivalents 299 (681)
Cash and cash equivalents at beginning of period 9,900 4,963
-------- --------
Cash and cash equivalents at end of period $ 10,199 $ 4,282
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-5-
<PAGE> 6
IRIDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at March 31, 1998 and for the
three month period then ended are unaudited (except for the balance sheet
information as of December 31, 1997, which is derived from the Company's audited
financial statements) and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
interim periods. The condensed consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto, together
with management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report on Form 10-K, which was
filed with the Securities and Exchange Commission on March 31, 1998. The results
of operations for the three month period ended March 31, 1998 are not
necessarily indicative of the results for the year ending December 31, 1998, or
any future interim period.
2. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation. The reclassification had no impact on previously reported
income from operations or net income.
3. INVENTORIES COMPRISE: (IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------ ------
(UNAUDITED)
<S> <C> <C>
Raw materials and work in progress $2,541 $2,579
Finished goods 1,973 1,397
------ ------
Total inventories $4,514 $3,976
====== ======
</TABLE>
4. COMPUTATION OF NET INCOME PER COMMON SHARE AND PER COMMON SHARE-ASSUMING
DILUTION
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, and the provisions of
the Securities and Exchange Commission Staff Accounting Bulletin No. 98 and,
accordingly, all prior periods have been restated. Net income per common share
is computed using the weighted average number of shares of common stock
outstanding. Net income per common share-assuming dilution is computed using the
weighted average number of shares of common stock and dilutive common equivalent
shares from stock options and preferred stock outstanding. The Company has
determined that no incremental shares should be included in the computations of
earnings per share and in accordance with Staff Accounting Bulletin No. 98.
-6-
<PAGE> 7
In accordance with the disclosure requirements of SFAS No. 128, a
reconciliation of the numerator and denominator of net income per common share
and net income per common share-assuming dilution is provided as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------ ------
(UNAUDITED)
<S> <C> <C>
Numerator -- Net income per common share and per common
share -- assuming dilution
Net income ............................................... $ 655 $ 185
====== ======
Denominator-- Net income per common share
Weighted average common stock outstanding .............. 6,459 6,356
------ ------
Net income per common share .............................. $ 0.10 $ 0.03
====== ======
Denominator -- Net income per common share-assuming dilution
Weighted average common stock outstanding .............. 6,459 6,356
Effect of dilutive securities
Weighted average common stock options .................. 353 284
------ ------
Total weighted average stock and options outstanding ..... 6,812 6,640
====== ======
Net income per common share-assuming dilution ............ $ 0.10 $ 0.03
====== ======
</TABLE>
During the three months ended March 31, 1998 and 1997, options to
purchase 138,394 and 222,925 shares, respectively, at weighted average exercise
prices of $9.93 and $7.91 per share, respectively, were outstanding, but were
not included in the computations of net income per common share-assuming
dilution because the exercise price of the related options exceeded the market
price of the common shares. These options could dilute earnings per share in
future periods.
5. ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of comprehensive
income, with reclassification of earlier financial statements for comparative
purposes. Comprehensive income generally represents all changes in stockholders'
equity except those resulting from investments or contributions by stockholders.
SFAS No. 130, which is effective for interim periods beginning after December
15, 1997, has been adopted by the Company. However, comprehensive income is
insignificant for all periods presented and, accordingly, no additional
disclosures have been presented in the accompanying financial statements.
-7-
<PAGE> 8
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 Operating Results" and other risks detailed in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 filed
with the Securities and Exchange Commission and detailed from time to time in
the Company's reports filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of certain
items in the Company's income statement for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Sales ................................... 100.0% 100.0%
Cost of sales ........................... 42.4 43.3
------- -------
Gross profit ....................... 57.6 56.7
------- -------
Operating expenses:
Research and development ............. 9.3 12.7
Sales, general and administrative .... 33.6 39.9
------- -------
Total operating expenses ........... 42.9 52.6
------- -------
Income from operations .................. 14.7 4.1
Other income, net ....................... 2.2 4.7
------- -------
Income before provision for
income taxes ......................... 16.9 8.8
Provision for income taxes .............. (5.7) (3.2)
------- -------
Net income .............................. 11.2% 5.6%
------- -------
</TABLE>
Sales. Sales increased 77% to $5.9 million for the three months ended
March 31, 1998 from $3.3 million for the three months ended March 31, 1997. The
growth in sales was primarily attributable to increased unit volume as the
Company expanded its product offerings and broadened its customer base. Domestic
sales of $3.7 million accounted for 63% of sales for the three months ended
March 31, 1998 compared to $1.6 million or 48% of sales in the comparable 1997
period. The increase in domestic sales was attributable primarily to sales of
the DioLite 532 dermatology laser introduced in the second quarter of 1997 and
an increase in domestic sales of most products for ophthalmology. In addition,
increased domestic sales result in higher average selling prices as domestic
sales are primarily sold by employee sales representatives at higher average
selling prices than to the Company's international distributors. International
sales of $2.2 million in the three months ended March 31, 1998 increased from
$1.7 million in the comparable 1997 period. The increase in international sales
was attributable to sales of the DioLite 532, offset somewhat by a reduction in
sales to many Asian countries which were recently impacted by currency
devaluations. Lower Asian sales have
-8-
<PAGE> 9
been mitigated by product sales in other regions and in the United States. The
Company expects revenues from international sales to continue to account for a
substantial portion of its sales. The Company expects future growth in sales to
be primarily derived from sales of the DioLite 532 and the OcuLight GL. There
can be no assurance that future currency fluctuations and other factors
discussed above will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Gross Profit. The Company's gross profit increased 80% to $3.4 million
for the three months ended March 31, 1998 from $1.9 million for the three months
ended March 31, 1997. Gross profit as a percentage of net sales for the three
months ended March 31, 1998 increased to 58%, compared to 57% for the three
months ended March 31, 1997, due primarily to increased domestic sales which are
primarily sold by employee sales representatives at higher average selling
prices than sales to the Company's international distributors, offset somewhat
by lower averge selling prices for the DioLite 532. The Company expects that the
percentage of international sales is likely to increase during the remainder of
1998, which would negatively impact average selling prices. In addition, ongoing
competitive pressure on the prices of the Company's products may result in a
decline in average selling prices. The Company intends to continue its efforts
to reduce the cost of components and the costs associated with new product
introductions, and expects its gross profit to continue to fluctuate due to
changes in the relative proportions of domestic and international sales, costs
associated with additional new product introductions, pricing and a variety of
other factors.
Research and Development. Research and development expenses increased by
30% to $0.5 million for the three months ended March 31, 1998 from $0.4 million
for the three months ended March 31, 1997, but decreased as a percentage of net
sales to 9% for the three months ended March 31, 1998 from 13% for the
comparable prior year three-month period. The increase in absolute dollars in
research and development expenses during this period was primarily attributable
to an increase in personnel as the Company strengthened its product development
efforts. The Company expects these expenses for research and development to
continue to increase in absolute dollars during the remainder of 1998 in
connection with new product development activities.
Sales, General and Administrative. Sales, general and administrative
expenses grew by 49% to $2.0 million for the three months ended March 31, 1998
from $1.3 million for the three months ended March 31, 1997, but decreased as a
percentage of net sales to 34% for the three months ended March 31, 1998 from
40% for the comparable prior year three-month period. The increase in absolute
dollars in sales, general and administrative expenses was primarily due to the
hiring of additional sales, marketing and administrative employees to address
new opportunities, to support expanding unit volumes and the expenses associated
with the OcuLight GL and DioLite 532. Furthermore, the increase in domestic
sales caused an associated increase in direct selling expenses. In addition,
during the three months ended March 31, 1998, the Company began full scale
implementation of a new company-wide enterprise resource planning ("ERP") system
and expects the implementation of this system to continue through September of
1998. The Company expects sales, general and administrative expenses to continue
to increase during the balance of 1998 to support the increasing unit shipment
volumes, additional employees and the implementation of the new ERP system.
Income Taxes. The Company's effective tax rate for the three months
ended March 31, 1998 was 34%. This rate differs from the federal statutory rate
primarily due to state income taxes, offset by the utilization of tax credits,
non-taxable available-for-sale security investments and tax benefits from the
Company's foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's primary sources of liquidity included
cash and cash equivalents and available-for-sale securities of $12.7 million.
During the three months ended March 31, 1998, the Company used $0.5 million in
operating activities. Sources of cash included net income of $0.7 million,
depreciation of
-9-
<PAGE> 10
$0.2 million and increases in accounts payable of $0.2 million, offset by
increases in accounts receivables of $1.0 million and inventories of $0.5
million. The increase in inventory is primarily due to increased finished goods
inventory. The Company generated $0.7 million in investing activities during the
three months ended March 31, 1998, primarily from the sales of $1.0 million of
available-for-sale securities offset by the acquisition of $0.4 million of
property and equipment. Net cash provided by financing activities during the
three months ended March 31, 1998 was $0.1 million, which consisted primarily of
issuance of stock. The Company believes that, based on current estimates, its
current cash and cash equivalents, and available-for-sale securities will be
sufficient to meet its anticipated cash requirements through 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments
of an Enterprise and Related Information. This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes Statement of Financial Accounting Standards
No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for fiscal years beginning after December 15, 1997,
and requires that comparative information from earlier years be restated to
conform to the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
FACTORS THAT MAY AFFECT FUTURE RESULTS
CONTINUED MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS. The Company
currently markets visible and invisible light semiconductor-based
photocoagulator medical laser systems to the ophthalmic market and a visible
light semiconductor-based photocoagulator medical laser system to the
dermatological market. The Company believes that continued and increased sales,
if any, of these medical laser systems is dependent upon the continued market
acceptance of these products. Medical equipment purchasing decisions and
continued market acceptance of the Company's products may in turn depend on
opinions of medical professionals, performance and price, product and treatment
familiarity, procedure reimbursement economics and other factors. The Company
believes that recommendations by ophthalmologists and dermatologists as to the
use of semiconductor-based laser systems is essential for the continued market
acceptance of the Company's products. Such medical professionals may not
recommend these laser systems or related treatments unless they conclude, based
on clinical data and other factors, that the performance of these laser systems
and treatments are a beneficial alternative to competing technologies and
treatments. Favorable recommendations from such medical professionals is
particularly important to the Company because the ophthalmic and dermatological
communities historically have used more established visible light, argon gas or
other ion-based photocoagulation laser systems. The Company's
semiconductor-based laser systems are relatively new to the marketplace. The
Company's infrared laser systems deliver invisible light to provide additional
and, in some instances, improved treatments. Because many ophthalmologists and
dermatologists have been trained in medical school using visible argon gas or
other ion-based laser systems, they may be reluctant or unwilling to convert to
semiconductor-based or infrared laser systems. In addition, ophthalmic
procedures are typically reimbursed by third party payers who are increasingly
scrutinizing the level of reimbursement for treatment procedures. Furthermore,
changes in government legislation or regulation could effect reimbursement
levels. A reduction in the level of reimbursement for treatments administered
with the Company's ophthalmic products would negatively impact the saleability
of such products. Dermatological procedures are typically paid for by the
treated patient. Any reduction in the perceived value of such treatments would
reduce the price level that dermatologists can charge and would negatively
impact the saleability of such products. There can be no assurance that the
Company's medical laser systems will continue to be accepted by the market. The
failure of medical professionals to recommend the Company's laser systems, the
introduction of improved alternative
-10-
<PAGE> 11
technologies or treatments, the reluctance or unwillingness of ophthalmologists
or dermatologists to convert to semiconductor-based laser systems or to infrared
laser systems, or reductions in treatment reimbursements would negatively impact
the market acceptance of the Company's products. Any significant decline in
market acceptance of the Company's products would have a material adverse effect
on the Company's business, results of operations and financial condition.
COMPETITION. Competition in the market for devices used for ophthalmic
and dermatological treatments is intense and may 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 other companies that manufacture
photocoagulators, the Company's products compete with pharmaceutical treatments,
other technologies and other surgical techniques. The Company's principal
competitors in ophthalmology are Coherent, Inc., Nidek, Inc. ("Nidek"), Carl
Zeiss, Inc. ("Zeiss"), Alcon International ("Alcon"), Keeler Instruments, Inc.
("Keeler") and HGM Medical Laser Systems, Inc. ("HGM"). Of these companies,
Nidek, Zeiss, Alcon and Keeler currently offer a semiconductor-based laser
system in ophthalmology, and other companies may introduce a semiconductor-based
laser system. The Company's principal competitors in dermatology are Laserscope
and HGM, neither of which currently offers a semiconductor-based laser system in
dermatology. Other competitors have substantially greater financial,
engineering, product development, manufacturing, marketing and technical
resources than the Company. Such companies may 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 and dermatological conditions targeted by
the Company or are less expensive than the Company's current or future products.
Moreover, there can be no assurance 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.
RISKS OF MANUFACTURING AND DEPENDENCE ON KEY MANUFACTURERS AND
SUPPLIERS. The manufacture of the Company's infrared and visible light
semiconductor-based photocoagulator medical laser systems and the related
delivery devices is a highly complex and precise process which requires the
integration of components with unique characteristics. Accordingly, problems may
occur in the manufacture of the Company's products which could prevent shipping
of some products or could 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. There can be no
assurance that the Company will be able to continue to manufacture its existing
products or future products on a cost-effective and timely basis. Although the
Company assembles critical subassemblies as well as the final product at its
facility in Mountain View, California, the Company relies on third parties to
manufacture substantially all of the components used in its products. There are
risks associated with the use of independent manufacturers, unavailability of or
delays in obtaining adequate supplies of components such as optics and laser
diodes 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. However, certain of the Company's products
remain significantly dependent on sole source suppliers. Certain diodes
purchased from SDL, Inc. ("SDL") were not readily available from other suppliers
until the second quarter of 1997. During 1996 and the first quarter of 1997, the
Company experienced delays in its manufacturing of the OcuLight GL because of
the inability of SDL to deliver components in volume and on a timely basis. The
Company continues to work with this supplier to ensure such difficulties do not
recur. During the first quarter of 1997, the Company qualified Opto Power as a
second source of this diode component. Because laser diode components are
extremely complex and difficult to manufacture, there can be no assurance that
the Company's suppliers of such components will be able to timely deliver
components in sufficient quantities to meet the Company's requirements. Similar
-11-
<PAGE> 12
manufacturing issues or delays in the delivery of other key components of the
Company's products could also have a material adverse impact on the Company. 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 inability to obtain
components as required at a reasonable cost, or at all, would have a material
adverse affect 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
1997 and 1996, the Company's international sales were $9.4 million and $6.1
million, representing 52% and 50%, respectively, of total sales. In addition,
for the three months ended March 31, 1998 and 1997, the Company's international
sales were $2.2 million and $1.7 million, representing 37% and 52% respectively,
of total sales. 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. The
recent currency devaluation in many Asian countries has had the effect of
significantly increasing the purchase price of the Company's products to the
Company's distributors and their customers in that region. Conversely, because
certain of the Company's competitors are based in Asia, the currency
devaluations may put additional downward pressures on the average selling prices
of the Company's products. Product sales were lower for the affected Asian
region during the first quarter of 1998 and the fourth quarter of 1997 primarily
as a result of the currency problem. The Company expects lower sales to the
Asian region to continue into 1998. The Company also expects revenues from
international sales to continue to account for a substantial portion of its
sales. Accordingly, if the Asian economic difficulties are prolonged, worsen or
otherwise negatively impact the saleability of the Company's product, these
difficulties could negatively impact the Company's business, results of
operations, and financial condition. While these currency factors and other
factors listed above have been mitigated by product sales in other regions and
in the United States, there can be no assurance that future currency
fluctuations or other factors discussed above will not have a material adverse
effect on the Company's business, financial condition or results of operations.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. Although the Company has
been profitable on an annual and quarterly basis for the last five 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'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, such as
the recent currency devaluation in Asia, and resulting changes in customers' or
potential customers' budgets and increased product development costs. For
example, the Company's gross profits as a percentage of sales have generally
declined in part as a result of increased competition which have led to
decreases in average selling prices, particularly with respect to the Company's
older products. Any inability to obtain adequate quantities of the critical
components used in the system products would adversely impact the Company's
ability to ship the OcuLight SL, OcuLight GL and the DioLite 532. In addition to
these factors, the Company's quarterly results have been and are expected to
continue to be affected by seasonal factors. For example, domestic sales often
decline slightly prior to the meeting of the American Academy of Ophthalmology
in the fourth quarter of the year. The Company manufactures its products to
forecast rather than to outstanding purchase orders, and products are typically
shipped
-12-
<PAGE> 13
shortly after receipt of a purchase order. While backlog increased in 1996 and
1997 and decreased during the three months ending March 31, 1998, 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'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.
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. Even if the Company's products achieve clinical acceptance,
there can be no assurance that the Company can successfully manage the
introduction of such products into the ophthalmic, dermatological or other
markets. 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 or new products would have a material adverse effect on the
Company's business, results of operations and financial condition.
MANAGEMENT OF GROWTH. With the introduction of new products, the Company
has recently experienced, and may continue to experience growth in production,
the number of employees, the scope of its business, 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 is in the process of
implementing a new enterprise resource planning ("ERP") system to run the
Company's business transaction processes. The Company expects that the
installation and implementation of this new system will continue through the
third quarter of 1998. The transition to the ERP system is a highly complex and
technical process, and it is not uncommon for companies engaged in such a
transition to experience unexpected delays and technical problems. Because the
Company's operations are currently dependent on its existing system and will be
dependent upon the new system once it comes on line, the failure of the Company
to successfully implement the ERP system or difficulties encountered in the
changeover to the new system may have a material adverse effect on the Company's
business and results of
-13-
<PAGE> 14
operations. There can be no assurance that the Company will be able to
successfully install and implement the ERP system, and failure to do so or
difficulties encountered in the implementation process could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company's future success will depend on the successful
installation of these systems 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.
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 Miravant Medical Technologies ("Miravant"), formerly known as
PDT, Inc.,a maker of photodynamic drugs, under which the Company and Miravant
have collaborated to develop a device that emits a laser beam to activate a
photodynamic drug developed by Miravant to achieve a desired therapeutic result
in the treatment of age-related macular degeneration. The development, clinical
testing and regulatory approval of this new photodynamic system will require
three to five 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 may 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.
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. 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
-14-
<PAGE> 15
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
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. Recently, a company has challenged one of the
patents held by Light Solutions Corporation, a wholly-owned subsidiary of
IRIDEX. The Company believes that this dispute will be settled without a
material adverse effect to the Company's business and financial condition.
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 noninfringing 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 Food and Drug
Administration ("FDA") and by foreign and state governments. Pursuant to the FDA
Act and the regulations promulgated thereunder, the FDA regulates the design,
development, 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 QSR,
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.
-15-
<PAGE> 16
PRODUCT LIABILITY AND INSURANCE. The Company may be subject to product
liability claims in the future. The Company's products are highly complex and
are used to treat extremely delicate eye tissue as well as to treat skin
conditions primarily on the face. The Company's products 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 products, the Company believes that
certain customers may nevertheless reuse these disposable products. Were such a
disposable product 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 $6.0
million per occurrence and an annual aggregate maximum of $7.0 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.
YEAR 2000 COMPLIANCE. The Company uses a significant number of computer
software programs and operating systems in its internal operations, including
applications for various financial, business and administrative functions. In
addition, many of the Company's suppliers use similar applications. These
applications may contain source code that is unable to properly interpret
calendar years beginning with the upcoming year 2000. Systems that do not
properly recognize such date-sensitive information may fail or create erroneous
results. Because there are no internal calendars embedded in any of the
Company's products, the Company does not anticipate any problems with its
products related to the Year 2000 problem will develop. The Company is currently
installing a new ERP system which it believes will be fully Year 2000 compliant.
Based on this and other information currently available to the Company, the
Company believes that its internal systems currently are, or will be by such
time as is necessary to avoid a material adverse impact on the Company, Year
2000 compliant. Also based on information thus far available to the Company, the
Company does not believe that it will incur expenditures in dealing with Year
2000 issues that will have a material adverse effect on the financial condition
of the Company. In addition to the risks from failure of the Company's own
internal systems, the Company may also be exposed to risks from computer systems
of parties with whom the Company transacts business. For example, if the
internal systems of one of the Company's key suppliers developed problems such
that the supplier could not deliver parts to the Company on a timely basis, the
Company's financial condition could be materially adversely affected. The
Company intends to work with its suppliers to ascertain what actions, if any,
are needed. There can be no assurances, however, that unknown costs necessary to
update the Company's systems or address potential system interruptions of the
Company's or its suppliers' systems will not have a material adverse effect on
the Company's business, financial condition or results of operations.
-16-
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the period for
which this report is filed.
-17-
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IRIDEX CORPORATION
(Registrant)
Date: May 15, 1998 By: /s/ Robert Kamenski
---------------------------------
Robert Kamenski
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
-18-
<PAGE> 19
INDEX TO EXHIBITS
EXHIBIT PAGE
27.1 Financial Data Schedule 20
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,199
<SECURITIES> 2,548
<RECEIVABLES> 7,357
<ALLOWANCES> (285)
<INVENTORY> 4,514
<CURRENT-ASSETS> 25,375
<PP&E> 3,428
<DEPRECIATION> (1,097)
<TOTAL-ASSETS> 27,737
<CURRENT-LIABILITIES> 3,117
<BONDS> 0
0
0
<COMMON> 21,702
<OTHER-SE> 2,918
<TOTAL-LIABILITY-AND-EQUITY> 27,737
<SALES> 5,872
<TOTAL-REVENUES> 5,872
<CGS> 2,490
<TOTAL-COSTS> 2,490
<OTHER-EXPENSES> 2,521
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 992
<INCOME-TAX> (337)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 655
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
